Moody's reports: Omani banks enjoy strong earnings and growing franchises, but face high credit risk in a concentrated environment

The stable outlook on the bank financial strength ratings (BFSRs) of these institutions captures their good franchise development in recent years but also the challenging and increasingly competitive operating environment in Oman. It also recognises that the improved financial performance of recent years has been partly driven by the positive economic cycle.

In addition to the Banking System Outlook, which focuses on performance measures and forward-looking rating drivers for the Omani banking
system, Moody's has also published a 'Banking System Profile' report for Oman. The Profile forms part of a new series of reports on banking systems throughout the world, which are designed to complement Moody's Banking System Outlook reports by serving as descriptive reference guides to key structural factors that are reflected in Moody's bank credit ratings.

Despite improvements in domestic conditions, Omani banks continue to operate in a challenging and highly concentrated economy that constrains
the upside potential to their ratings. Oman still relies heavily on hydrocarbon exports, which results in considerable cyclicality in the operating environment, which in turn affects the performance of the banks. However, given the current strength in oil prices, hydrocarbon
exports are contributing positively to Oman's economic up-cycle.

"We expect that the government's ongoing strategy to diversify and expand the non-oil segment of the economy to continue to boost economic activity in the country and create further growth opportunities for the Omani banking sector. In addition, the major Omani commercial banks have achieved a balanced franchise development across segments, which has entailed both strong growth in personal lending and continued growth in corporate and commercial banking," says Elena Panayiotou, a Moody's Analyst and author of the report.

Moody's recognises that the banks continue to generate strong earnings, mostly due to their low cost structures and the healthy albeit declining interest margins earned on their growing business volumes. However, it cautions that, given the increasingly competitive nature of the Omani banking market, the banks need to strengthen their non-interest-related income in order to offset the pressure on margins and sustain their profitability at the current levels.

Another constraint to the Omani banks' ratings is the high credit risk they continue toace. "Although the system's asset quality has improved in recent years, mainly due to improved credit risk management policies, much of the improvement reflects Oman's favourable economic environment, which may not be sustainable through a cycle. Moreover, the rapid credit expansion in the past two years raises concerns over the performance of these loans once they start to season," Ms Panayiotou explains.

Moody's regards bank governance standards in Oman as moderate but gradually improving as the level of foreign direct investment in the
country rises and as foreign investors raise their participation in the banking system. In addition, the regulatory and supervisory framework is still evolving but is currently of adequate quality with a good level of transparency and formalisation of procedures and rules. The rating agency also views favourably the steps being taken by the Central Bank of Oman to enhance its supervisory techniques and oversight and welcomes its plan to adopt risk-based consolidated supervision.

Moody's generally views Omani banks as operating in a high-support system based both on the importance of the banking sector to the payment system but also the past behaviour of government intervention in cases where institutions were faced with financial distress.