Muscat: Omani banks will be in a favourable position to borrow funds from their counterparts in overseas markets with Moody’s Investors Service raising outlook of the banking system in the country to stable from negative on Tuesday.
The ‘stable outlook’ reflects Moody's expectation that Omani banks' credit profiles will remain broadly stable over the outlook horizon, as increased government borrowing and higher hydrocarbon output will support a level of public spending that will help stabilise the softened economy, following a prolonged period of decline in oil prices.
“When they saw the performance of Omani banks, which was consistent, they raised the rating to stable,” said HunainaBanatwala, head of institutional sales at Gulf Baader Capital Markets. “If Omani banks want to borrow money by way of bonds or go for credit line from overseas banks, it will help them to get favourable terms.”
The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Oman over the next 12 to 18 months, according to a press release from the rating agency on Tuesday.
“The Omani government will help cushion the economic impact of low oil prices by maintaining high levels of public spending despite its lower oil related revenues," said MikKabeya, analyst at Moody's.
“The government's countercyclical spending policy will bolster the resilience of the banks' asset quality, profitability and capital metrics, while funding and liquidity will weaken moderately," it said.
Commenting on the Moody’s rating upgradation, Suresh Kumar, head of research at Al Maha Financial Services said: “We don’t expect a substantial decline in the profitability of major Omani banks in the coming year.”
“It gives a confidence among investors in banking stocks. This is what we are seeing on the Muscat bourse today. Almost all banking shares are up today,” added Suresh Kumar.
Real economic growth
Moody's expects real gross domestic product growth (or economic growth) to slow gradually to 1.7 per cent in 2016 and 2 per cent in 2017, from 3.3 per cent in 2015. Subsequently, credit growth will decelerate to an average of 7-9 per cent over 2016-2017, from 12 per cent in 2015, according to the rating agency.
“While we expect problem loans to increase modestly over the outlook period as the expected economic slowdown pressures corporate profits and household finances, loan performance for Oman's banks will remain fairly resilient,” noted the press release.
The rating agency in its report entitled ‘Banking System Outlook - Oman: Stable Outlook Reflects Expected Creditworthiness Resilience,’ forecasts problem loans to increase to around 3 per cent of gross loans by end 2017, from a low 2.1 per cent at June 2016.
Further, profitability of Omani banks will also remain healthy despite a marginal decline, with Moody's forecasting net interest margins to decline marginally to 2.2-2.4 per cent over the outlook horizon (2.5 per cent in 2015), affected by increasing funding costs. Moreover, higher provisioning charges will also weigh somewhat on the profitability.
On the funding side, while the banks will remain predominantly deposit funded, increased domestic government borrowing and slower growth in deposit flows from the government and government related issuers (34 per cent of deposits as of June 2016) will pressure the system's liquidity. This will marginally increase the banks' reliance on confidence sensitive wholesale markets, added Moody’s in its report.
Moody's expects Omani authorities' willingness to provide financial support to the local banks to remain 'very high', in line with the government's long history of supporting the country's banks.