A rebound in Oman's economy on the back of the rising oil prices will support stronger deposit and asset growth this year for the sultanate’s lenders, who also stand to benefit from a rise in interest rates, BMI Research said.
Higher prices of hydrocarbons, sale of which accounts for the bulk of revenues for the government, will help add liquidity into the system. Together with expected monetary tightening, deposits are expected to grow by 6 per cent in 2018, up from 1.9 per cent in 2017, BMI, a unit of Fitch Ratings, said in its latest report on Oman’s banking system.
“This will help Omani banks deleverage, underpinning their resilience to macroeconomic shocks, such as a renewed oil price slump,” according to the report.
Economic growth in Oman is expected to accelerate this year and next, as the biggest Middle Eastern oil producer outside Opec boosts oil and gas exports. Real gross domestic product - GDP adjusted for inflation - is projected to expand by 3.2 per cent in 2018 and 3.6 per cent in 2019, from an estimated 0.6 per cent last year.
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Meanwhile, oil prices, which are a major determinant of economic activity in Oman, will continue to rise, with Brent, the benchmark for about half of the world’s crude, averaging $67 per barrel in 2018 and $75 per barrel in 2019, up from $54.8 last year, according to the report.
Weak economic activity weighed on credit demand, and lending remained sluggish in 2017. However, the improvement in the macro-economic picture will boost consumer confidence, supporting increased demand for personal credit, which makes up the lion’s share of bank lending. It will also buoy rising investment and will spur an increase in business lending.
“Overall, we forecast total asset growth of 7 per cent in 2018, up from 3.3 per cent in 2017," BMI said.
Asset quality, which remained under pressure as non-performing loans spiked during the three-year oil price slump, is also expected to improve this year. NPLs as a share of total loans hit 2.4 per cent in September 2017, up from 1.8 per cent in December 2015. However, Oman’s ratio of bad loans remains in line with many developed markets, and far below some of its regional peers.
“The high proportion of household debt - personal loans accounted for 4 per cent of outstanding bank credit at the end of 2017 - exposes banks to economic downturns, and they will need to account for this risk going forward, especially as interest rates rise over the coming quarters” BMI said.
The banking system’s capital adequacy ratio (CAR) has remained stable over the past two years, at about 16 per cent. While this is below some regional peers - Bahrain’s CAR stood at 20.3 per cent in March 2017 - it is still well above the 10.5 per cent required under the Basel III banking rules, the report noted.
