The fundamental credit outlook for the Omani banking system is stable, primarily reflecting the relative remoteness from the global economy, but also the resilience of the country's economy to the global recession, says Moody's Investors Service in its new Banking System Outlook on Oman.
Moody's stable outlook for the Omani banking system expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.
"The system's stable outlook reflects the resilience and continued growth of the Omani non-oil economy, the still adequate domestic liquidity in the banking sector and the strong financial ratios of Omani banks," says Elena Panayiotou, Moody's lead analyst for the Omani banking system. Moody's adds that the country's non-oil economy should be spared the worst effects of the global financial crisis over the short to medium term.
The system's fundamental credit conditions face some downward pressure that could arise from a continued severity of the financial crisis, a deepening slowdown in global and local economies and a possible drop in oil prices. "However, despite the macroeconomic slowdown, and in line with Moody's base-case scenario, we believe that sustained domestic demand and continued capital expenditure should continue to support operating conditions, at least over the short to medium term," explains Christos Theofilou, Moody's back-up analyst for the Omani banking system.
Large Omani banks have well-established franchises that underpin their BFSRs. Moody's expects the likely slower economic growth in the short to medium term to lead to lower credit growth, while tighter liquidity conditions are expected to shift franchise development efforts towards deposit mobilisation. In the medium to long term, the rating agency expects the government's diversification strategy to continue to boost economic activity in the country and to create further growth opportunities for the banking sector.
In terms of risk positioning, Moody's notes the Omani banks' weak but improving corporate governance standards as well as the low independence of the banks' respective board members. Other constraining factors are the sizeable credit risk concentrations in the banks' books and their rising levels of credit risk. However, in Moody's view, liquidity management among Omani banks is gradually improving and is satisfactory overall. Combined with the willingness and ability of the authorities to support the banking system, these liquidity levels should help to ease any short-term pressure. Moreover, given the rising foreign participation in Omani banks, the rating agency expects further gradual improvements in this area.
Omani banks have managed to sustain strong and stable recurring earnings power in the past, and this is supporting their BFSRs. Looking ahead, however, Moody's expects profitability metrics to come under increasing pressure due to increased competition, lower interest rates and the existing interest rate caps. "Moody's believes that the more challenging credit environment will lead to lower volume growth and higher loan loss and other provisioning. However, this should not lead to adverse pressure on Omani banks' ratings, unless it results in a substantial weakening of franchises," explains Mr. Theofilou.
The high credit risks faced by the six Moody's-rated Omani banks should continue to constrain their ratings. Although the system's credit quality metrics are improving, thereby alleviating pressure on some banks' ratings, they remain poor compared with those of banks in other GCC countries. In addition, Moody's notes that Oman's rapid credit expansion in recent years raises concerns about the future performance of loans under less favourable economic conditions. However, given the rating agency's assumptions, the impact of this should be moderate, limited to individual borrowers and somewhat offset by recoveries and write-offs. Should the macroeconomic environment deteriorate, Moody's expects stress on riskier and more leveraged sectors of the economy to exert pressure on asset quality.
Adequate capitalisation levels remain a key strength of the Omani banking system, providing a buffer to absorb future unforeseen losses. Moody's recently conducted stress tests which have demonstrated the ability of the six rated Omani banks to absorb losses under a worst-case scenario. Although the rating agency expects banks' capital ratios to remain under pressure due to market conditions, it does not anticipate any adverse stress on ratings to stem from their capital adequacy.
