Mubasher: Moody’s has changed its outlook on Oman's banking system to negative from stable, according to a report issued on Tuesday.
This is reflecting a reduction in the government's capacity to support the country's banks, as well as softer economic growth and tight liquidity conditions.
The report noted that the Omani government's reduced capacity to support banks in case of need, owing to fiscal deterioration, was reflected in Moody's July 28, 2017 downgrade and negative outlook on the government credit rating.
"We expect a softening in Oman's operating environment, with fiscal consolidation amid prolonged oil price weakness weighing on economic growth," said Mik Kabeya, an analyst at Moody's.
"This will weigh on credit growth, which we forecast to fall to 5% in 2017, down from 10.1% in 2016 and 12.0% in 2015," the analyst added.
The key points behind the rating is the slower economic growth that will drive a marginal weakening in problem loans to around 3.0% of gross loans in 2017-18, from 2.1% at end-March 2017.
Moody's also forecasts system-wide tangible common equity (TCE) to range between 12%-14% of risk-weighted assets over the next 12 to 18 months, and even under the rating agency's low probability stress test scenario, the TCE ratio would remain a solid 10.3%, the report indicated.
The profitability will decline slightly, as net interest margins will likely remain stable at around 2.4% over the outlook horizon, as higher lending rates offset increasing funding costs, while loan loss provisioning will increase somewhat as problem loans rise.
Moody’s expects Omani banks liquid resources to decline, but remain adequate, at above 20% of their tangible banking assets.
Nonetheless, the government's international bond issuances, slower credit growth and higher oil prices will moderate the pressure, according to the ratings agency.
“Although the government's capacity to support banks if needed will reduce, the rating agency notes that willingness to provide support will remain very high,” the report concluded.
