Oman's brighter banking sector

Oman's financial sector has been considerably strengthened and transformed in recent years leading to a modern financial system consisting of commercial banks, specialized banks and other financial intermediaries.

Out of the 14 commercial banks, 5 are locally incorporated and 9 are the local branches of foreign banks. Together they operate a branch network of 330.

The banking sector however is dominated by three local banks (Bank Muscat, National Bank of Oman, and Oman International Bank) accounted for 69% of total banking assets, 65% of total deposits and 70% of total banking credits as of end 2002. These banks also dominate the Muscat Securities Market trading index.

The financial sector in Oman is supervised by the Central Bank of Oman (CBO) which was established in 1974 to act as the central bank and the depository agency for the government. The banking law was amended in 2002. The functions of CBO include issuing the national currency Omani Rial, act as the government's banker, supervise commercial banks operating in the country, formulate and implement the monetary policy and ensure the soundness of the financial system.

In addition to the above mentioned traditional functions, the CBO also act as the advisor to the Government in economic matters in general and monetary and financial matters in particular. The CBO has been urging the local banks to enhance their financial position and introduced new international accounting standards and corporate governance principles to reduce fraud and malpractices.

The mandatory application of International Accounting Standards (IAS 39) for the year 2001 required banks to set aside provisions for bad loans and the stringent provisioning policy has set the stage for comparatively better results in the subsequent years. Banks are also following new corporate governance principles by revealing related party transactions and balance sheet details.

The cumulative assets of Omani commercial banks have recorded a growth of 4.3% (CAGR) during the four years period 1999-2002 with most of the growth coming from the credit issues to the domestic private sector. In 2002, cumulative assets of banks increased by about 1.5% over the previous year. Total credit to private and public enterprises stood at RO3.27bn in 2002, an increase of 0.9% over previous year.

Amounts related to "due from banks abroad" showed the highest growth of 60.6% at RO325.2mn in 2002. Total securities, both domestic and foreign, accounted for about 10% of the total assets of banks in 2002. In the first nine months of 2003, total bank assets increased by 1.2% over 2002. During the period, securities held by the banks showed a growth of 15.4% over 2002.

On the liabilities side, total deposits, which consist of deposits from public and private sectors, have grown at a CAGR of over 5.7% during the four years period 1999-2002. In 2002 total deposits grew by 3.5% over the previous year, largely driven by deposits from the private sector which was higher by 4.1% over 2001.

Demand and Savings deposits exhibited a healthy growth of 18.9% and 21.3% respectively in 2002 which were largely offset by the time deposits which fell by 7.7%. The deposits of public enterprises grew the most, at a CAGR of about 23.5% during the period 1999-2002 to RO 229mn in 2002.

Oman witnessed rapid credit expansion between 1995 and 1999 both in domestic and corporate accounts. The distribution of credit facilities by sector shows that Personal loans constituted about 36%, Import trade 9.6% and Manufacturing 8.8% of the total credit of commercial banks at the end of 2002.

After 2000, the loan growth in Oman has slowed down considerably and has averaged 4.6% per annum between 2000 and 2002. This is partly because of asset quality problems that have surfaced in the corporate sector over this period - a fallout of the 1998 stock market crash and a weak macroeconomic environment.

At the same time, restrictions imposed by the Central Bank of Oman (CBO) on personal lending also contributed to the sluggish loan growth during this period. In early 1999 the CBO restricted the banks' personal lending capacity by directing them to limit personal loans to 30% of their respective loan books in an attempt to reduce the concentration of the banks' credit risk to the personal credit sector. Personal lending growth dropped substantially as a result of this ceiling.

In view of requests from the banking and business community, CBO raised the personal loans ceiling to 35% in August 2000. In Dec 2001, CBO further enhanced the personal loan limit to 40% thereby allowing banks additional room to originate high yielding personal loans, which had become even more attractive due to the record low interest rates. This change had a noticeable impact in 2001 as the personal lending regained momentum and as a result the personal loan stock consisted of 36% of the total banking loans portfolio in 2002.

Notwithstanding the current low interest rate environment, the recovery in corporate loan volumes will be slow because the sector remains stretched in terms of liquidity and the major players are expected to focus more on managing credit risk than growing their loan portfolio.

However, the domestic loans which have been growing at a rate of over 9% since 2000, would continue to drive the overall loan growth in the industry. Considering the fact that Oman is one of the lowest penetrated markets in the GCC region in terms of credit as a percentage of GDP, the overall commercial and domestic credit would grow in the medium term, albeit slowly due to the various structural issues.

Bank Muscat (BM), the largest bank in Oman, has a substantial presence in corporate and retail banking and is considered a leader in Project Finance activities. It also has the largest retail franchise with 90 counters spread throughout the country and also operates one of the largest ATM networks in Oman with over 150 machines.

In the recent past, BM substantially increased its market share through mergers and acquisitions combined with impressive organic growth. It has acquired the Commercial Bank of Oman, ABN Amro's Bahrain operations, Industrial Bank of Oman and Al Ahlia securities.

Realizing the potential of the domestic market, the bank is actively pursuing a regional growth strategy. In 2001, BM took over the Bahrain operations of ABN-Amro which gave it access to the Bahraini financial market where it is focusing on deposit mobilization projects to increase its base.

It has also taken a strategic 26% stake in Centurion Bank - a new private bank in India. The bank is focusing on non-interest income sectors such as trade financing as potential areas to focus outside Oman.

In July 2003, Bank Muscat issued a 10-year corporate bond issue for RO10mn, the first one in GCC with a 10-year tenure at 7% fixed rate with an option to retain additional RO15mn over subscription. BM has been adjudged as "the best bank" in the country by major international banking and financial publications such as Global Finance, Euromoney and FT.

National Bank of Oman(NBO), the second largest bank in Oman, operates a network of 50 branches in Oman with 5 branches in Egypt and one in UAE. NBO has a strong franchise in Oman banking sector with a sizeable presence in corporate and retail banking and strong deposit base. It also has got the maximum NPA exposure in and outside Oman.

The bank's net profit for the first 3 quarters of 2003 reported RO482mn, a sharp fall from the RO1,124mn reported for the same period in 2002. However, the combination of high provision requirements against bad loans and the classification (NPAs) of loans negatively affected the Capital Adequacy Ratio(CAR) of the bank.

This deterioration in assets due to high provisioning requirement most probably prompted the Suhail Bahwan Group to inject RO24mn into NBO's paid-up capital in October 2003 taking it's total stake in NBO to 34.5%.

The bank was particularly hit in Egypt where an economic downturn combined with currency devaluation put a negative impact on the Egyptian asset quality and hence the loan book. However, despite its Egyptian glooms, NBO continues to be the most efficient bank in Oman with the lowest cost to income ratio.

Oman International Bank (OIB) , the other big bracket bank of the country, operates with a domestic network of 82 branches. Its loan book comprises of accounts from as far and diverse as countries in GCC, India, Pakistan and other OECD countries.

After the bad-loan crisis that hit the industry in 1999, OIB has been playing defensive and trying to improve its risk profile by reducing its exposure in foreign markets. It is also curtailing its domestic corporate exposure.

As a result of this portfolio restructuring, the loan books continued to fall resulting in a loss of its market share in terms of loans. However, the bank has been successful in increasing its non-interest income through higher fees and commission incomes from its retail business and corporate banking.

The other big leaguer, Bank Dhofar Al Omani Al Fransi (BDOF) was a relative latecomer to the Omani banking scene, and was founded as recently as 1990 when Banque Paribas branches were acquired and converted in Muscat and Salalah. From the outset, therefore, Bank Dhofar had to search for viable branch locations that were not already served by the other well-entrenched competitors.

So, as late comers to the market, organic growth was never going to be an easy option for BDOF and it looked into mergers and acquisitions as their best expansion strategy. In 1992, BDOF acquired 12 domestic branches of the now defunct Bank of Credit & Commerce International (BCCI), together with all the disclosed assets and liabilities of those branches.

Then again, in 2001, BDOF acquired 16 branches from the Commercial Bank of Oman and so increased its branch network to 45 branches and 58 ATMs. The total assets of the bank grew by 24% in 2001; a considerable feat considering the overall growth figure for the banking industry in 2001 was just 9%.

BDOF again took the M&A route and acquired Majan International Bank in a deal that was completed in March 2002 after two years of negotiations. So far this M&A strategy has worked well for the young bank, now the fourth largest in the Sultanate in terms of assets.

Recent reports emanating from Muscat depict a rosier picture for the country's banking sector with regards to consolidation and turnaround. After about three years of bad-loan pains that had been significantly eroding the banking-sector profitability since 1999, evidences indicate that the banking sector is really poised to rebound in 2004.

The banking sector profitability (net of provisions and tax) for the year 2000, 2001 and 2002 stood at RO51.9mn, RO4.9mn and RO61.9mn, respectively. In the last few years, year 2001 was the worst hit following large non-performing loans and the subsequent provisioning (as a consequence of financial failures of a few business entities).

The local banks are now adopting high-tech banking with the introduction of internet banking and smart card technology in a big way with a view to keep themselves ready from the overseas competition in view of Oman joining the WTO. They also perceive increased competition from the strong GCC banks after the creation of GCC common market.

The new breed of online banks from Europe and America pose another potential challenge to local banks. As the local market is not big enough, to increase the capital base and to strengthen their financial viability, local banks are trying to become stronger through mergers, acquisitions, overseas expansion and diversification.