Moody's cuts Omani banking system ratings

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Moody's cuts Omani banking system ratings

Sep 5, 2017 7:17 PM

Moody s Investors Service has downgraded its outlook on Oman s banking system to negative from stable thus reflecting a reduction in the government s capacity to support the country s banks as well as...

Moody's Investors Service has downgraded its outlook on Oman's banking system to negative from stable, thus reflecting a reduction in the government's capacity to support the country's banks, as well as softer economic growth and tight liquidity conditions.

The Omani government's reduced capacity to support banks in case of need - owing to fiscal deterioration - was reflected in Moody's July 28, downgrade and negative outlook on the government credit rating, said the ratings agency in its report, entitled "Banking System Outlook: Oman - Weaker operating environment and government fiscal capacity drive outlook change to negative."

Moody's said the outlook expresses its expectation of how bank creditworthiness will evolve in Oman over the next 12-18 months.

"We expect a softening in Oman's operating environment, with fiscal consolidation amid prolonged oil price weakness weighing on economic growth," stated Mik Kabeya, analyst at Moody's.

"This will weigh on credit growth, which we forecast to fall to 5 per cent in 2017, down from 10.1 per cent in 2016 and 12 per cent in 2015," he noted.

Slower economic growth will drive a marginal weakening in problem loans to around 3 per cent of gross loans in 2017-18, from 2.1 per cent at end-March 2017, according to the rating agency.

Moreover, high concentrations of loans to single borrowers and to the real-estate sector pose downside risks to asset quality. However, Moody's expects capital to remain sound, providing strong loss absorbency.

Moody's forecasts system-wide tangible common equity (TCE) to range between 12 to 14 per cent of risk-weighted assets over the next 12 to 18 months. Even under the rating agency's low probability "stress test" scenario, the TCE ratio would remain a solid 10.3 per cent.

The ratings agency pointed out that profitability will decline slightly. "Net interest margins will likely remain stable at around 2.4 per cent over the outlook horizon (2.4 per cent in 2016) as higher lending rates offset increasing funding costs, while loan loss provisioning will increase somewhat as problem loans rise.

Funding and liquidity conditions will remain tight, as high domestic government borrowing limits funds available to lend to the wider economy. Nonetheless, the government's international bond issuances, slower credit growth and higher oil prices will moderate the pressure, said the report.

Finally, although the government's capacity to support banks if needed will reduce, the rating agency notes that willingness to provide support will remain very high, it added.-TradeArabia News Service