Moody’s downgrades outlook on Oman’s banking system to negative

Rating agency Moody’s Investors Service has changed its outlook on Oman’s banking system to negative from stable because of a weaker operating environment.

The report attributed the change to the Omani government’s reduced capacity to support banks in case of need – owing to fiscal deterioration.

The latest move comes after Moody’s downgraded the Omani government’s outlook to negative from stable in late July. The agency blamed the downgrade on Oman’s continuing reliance on the oil sector, which has continued to remain depressed over the last few years.

Read more: Ratings agency Moody’s downgrades Oman’s outlook to negative

Referring to the change in the banking outlook, Moody’s said softer economic growth and tight liquidity conditions were also to blame.

“We expect a softening in Oman’s operating environment, with fiscal consolidation amid prolonged oil price weakness weighing on economic growth,” said 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.”

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.

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

Profitability is anticipated to decline slightly. But net interest margins will likely remain stable at around 2.4 per cent over the outlook horizon as higher lending rates offset increasing funding costs, while loan loss provisioning will increase somewhat as problem loans rise, said Moody’s.

Funding and liquidity conditions will remain tight, as high domestic government borrowing limits funds available to lend to the wider economy.

However, the government’s international bond issuances, slower credit growth and higher oil prices will moderate the pressure.

“Although the government’s capacity to support banks if needed will reduce, willingness to provide support will remain very high,” the report added.