Thursday 25 / April / 2024
Muscat: Omani banks are expected to face pressure in maintaining net profits in the aftermath of rising interest rates.
This follows a growth in policy rates and interbank rates in Oman, after Federal Reserve took a lead, according to the financial stability report released by the Central Bank of Oman (CBO).
The rising policy rates have also been partially passed through to the retail deposit and lending rates, the report said.
“However, the stress testing exercise shows that the interest rate risk in banks is within reasonable limits if they face a 200 basis point adverse movement in interest rates,” the report added.
The CBO report also stated that the sectoral distribution of credit, particularly in the household loan segment, highlights credit risk concentration in banking sector. Banks also have substantial direct and indirect exposure to the real-estate sector. “At present, overall, household credit risk indicators remain at low levels and there are no signs of significant stress in the Omani real estate market. Moreover, the prudent regulations on lending are expected to keep the risks in these sectors at manageable levels.”
Liquidity situation
Amid a growing loan portfolio, the banks on an average, comfortably maintained the cash reserve requirements without significant signs of strains. The liquidity conditions in Oman tightened because of the budgetary needs of the government and lower inflows due to depressed oil prices.
However, accommodating regulatory changes and external funding have kept sufficient liquidity in the domestic market, the CBO report noted.
Banks operating in Oman have traditionally low reliance on wholesale markets. Government deposits, however, have remained an important source of funding for the banks.
“The high level of public sector deposits, combined with the reduced cash-flows of the government in the wake of dwindling oil revenues could pose a covert yet potent risk of significant withdrawal of deposits from the banking sector,” the report said, adding; “However, the risk of withdrawal is not imminent as the government has resorted to borrowing from international markets to finance its budget deficit. Moreover, the stress tests showed that the banks operating in Oman have remained fairly resilient to the assumed deposit runoffs.”
The banks have remained adequately capitalised as the benchmark capital to risk weighted assets ratio of the banking sector increased to 16.8 per cent at the end of 2016, from 16.5 a year ago.
Profitability
Also, despite challenging macroeconomic conditions, stringent prudential norms for credit, rising funding costs, and declining net interest margin, the banks maintained their profitability. The banks netted over OMR438 million in pre-tax profits in 2016, against OMR439 million in the previous year. The healthy bottom line of the banks not only reinforced their buffers, but also enhanced their ability to support future growth.
“Despite the prevailing macroeconomic challenges, the banks remained resilient to stressed scenarios at the aggregate level. Results of different solvency stress tests did not flag an increased vulnerability of solvency in the banks, mainly due to their high capital adequacy ratio, as well as their limited exposure to equity and forex. “The robustness of the banking sector is also echoed in the macro-financial stress tests, where banks on average remained solvent even in the severe scenario,” the report stated.
When assessed with respect to the international benchmarks, all of the banks were found to be in a comfortable position to face the liquidity shocks under the assumed stress scenarios.
At the end December 2016, the banking system as a whole would be able to sustain a liquidity shock for an average of 18 days with only cash and a total of 20 days with cash and securities.
Despite some slowdown in the economic activities, the banking sector has continued to expand with a strong credit offtake. Total net assets of the banking sector exceeded OMR29 billion at the end of 2016, registering a growth of 6 per cent.
