Asset quality of Oman’s banking sector strong

Muscat: Asset quality of Oman’s banking sector remains strong after the implementation of exit strategy from loan deferment scheme, the Central Bank of Oman (CBO) said in its latest Financial Stability Report (FSB) 2023.

“In response to the exit strategy from the loan deferment scheme outlined by the CBO, banks effectively managed the deferred loans by implementing mechanisms for restructuring/rescheduling options for the affected borrowers.”

“As of December 2022, a substantial portion of loans, amounting to OMR2 billion (38 percent), have been regularised,” the report further added. Additionally, OMR3.2 billion (60 percent) have undergone or are currently undergoing the restructuring process, while a minor percentage of 2.2 percent (OMR117.8 million) has been downgraded to Stage 3 or non-performing loans (NPLs).

At the end of 2022, the stock of gross NPLs amounted to OMR1.3 billion (2021: OMR1.2 billion) or 4.4 percent (2021: 4.2 percent) of the banks’ gross loans.

The asset quality of the Islamic banking financing portfolio also remained strong with a non-performance financing (NPF) ratio of 2.1 percent at the end of December 2022, which is among the lowest in the region. 

The CBO report further elaborated that credit risk remained a crucial component in the risk profile of the banking sector with the credit risk-weighted assets forming around 90 percent of the total risk-weighted assets.

Credit risk remained a crucial component in the risk profile of the banking sector with the credit risk-weighted assets forming around 90 percent of the total risk-weighted assets.

Asset quality remained well-contained with a low NPL ratio and adequate provision coverage.

Liquidity ratios

The banks in Oman continued to maintain strong prudential liquidity ratios. “The lending ratio of banks stood at 80.7 percent at the end of 2022 against the ceiling of 92.5 percent and the banks’ Liquidity Coverage Ratio (190.2 percent) and Net Stable Funding Ratio (115.1 percent) remained well above the regulatory requirements (100%) during the year 2022. Liquidity stress tests also highlight the resilience of the banks against assumed deposit run-off and higher haircuts for liquid assets,” the FSR said.

The average daily excess cash reserves in the banking system were OMR542 million (2021: OMR536 million) in 2022.

The excess reserves net of CBO facilities was OMR360 million and OMR320 million in 2022 and 2021, respectively. Since the start of the rate hike in early 2022, there has been a slight increase in the use of CBO liquidity facilities.

The total value of repos (secured borrowing by banks from CBO) was OMR2.3 billion in 2022 as compared to OMR2.5 billion in 2021 (2020: OMR1.9 billion). “Nevertheless, the total value of repo transactions remains well above the pre-pandemic period,” the central bank’s FSR said.

At the end of 2022, banks in Oman held over OMR2 billion in unencumbered government bills and bonds that can be used to avail liquidity from CBO. The potential volume of liquidity available against government securities appears to be large considering that the reserve requirements of the banking sector are in the range of OMR1.4 billion. Other than repos against eligible government securities, banks can also avail additional liquidity by discounting treasury bills, and rediscounting commercial papers (i.e- promissory notes, and bills of exchange).