May 8, 2017 / 4:27 PM / 2 months ago

Fitch: Omani Banks Overcome Liquidity Crunch; Profitability Down

11 Min Read

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Omani Banks - Results Dashboard here DUBAI, May 08 (Fitch) Fitch Ratings says Omani banks have overcome a liquidity crunch but an increase in funding costs and impairment charges has lowered performance ratios. Funding costs continued to rise in 2016, putting pressure on most banks' operating profitability metrics. The main causes are Omani banks' reliance on corporate and government-related interest-bearing time deposits and lower liquidity in the system due to lower oil prices. The banks have repriced their corporate loan books to compensate for higher funding costs, although there is limited upside on retail lending due to the regulatory caps on this asset class and the run-off of older high-yield retail loans. The Omani banks have reined in operating expenses and the sector average cost/income ratio has reduced slightly. Asset-quality metrics remained strong in 2016 but there was pressure in retail, oil and gas, and real estate. The government has cut spending and this led to layoffs, which have affected retail portfolios. Impaired loan ratios still compare well with other Gulf Cooperation Council (GCC) markets and exclude an increasing number of loans that are past due but not impaired or restructured due to the more challenging operating environment. Loan-loss reserves are adequate as a proportion of impaired loans (130%) but low as a proportion of gross loans (3.5%). Funding and liquidity pressures have stabilised in the banking sector since mid-2016 and banks have been actively managing their loan/deposit ratios, but this is being balanced against the costs. Foreign-currency deposits, as reported by the central bank, peaked in July 2016, but these have since returned to their normal relatively low levels (about 12% of total deposits) compared with GCC peers. Term government and corporate customer deposits remain the main source of funding (about 60% of total deposits), followed by retail deposits (about 30%). Liquidity remains adequate to anticipate funding maturities. Omani banks have maintained adequate capital ratios, despite strong loan growth of 10% in 2016, through retained earnings, small rights issues or additional Tier 1 capital issuance (not included as part of Fitch Core Capital). Fitch expects lower margins to be the new norm and asset-quality metrics to remain under pressure. Fitch expects a mild increase in provisioning in anticipation of the implementation of IFRS 9 on 1 January 2018. This should be manageable for all Omani banks due to the levels of collective provisions required by the central bank. Nevertheless, the full impact is not known. Fitch believes loan growth will be in the high single digits in 2017 due to continued pressure on the operating environment from lower oil prices. However, government spending on strategic projects is likely to remain strong. Liquidity is set to ease further in 2017 as the recent government issuances get further deployed into the economy. We expect debt issuance to be slightly stronger than in the past two years as banks look to extend their maturity profiles and lock in favourable rates. More information is available in "Omani Banks - Results Dashboard", available at www.fitchratings.com or by clicking the link above. Contact: Redmond Ramsdale Senior Director +971 1 424 1202 Fitch Ratings Limited Al Thuraya Tower 1 Office 1805 Dubai Media City Gilbert Hobeika Associate Director +44 20 3530 1004 Fitch Ratings Limited 30 North Colonnade London E14 5GN Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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