Omani banking sector ripe for further mergers

October 7, 2024, 8:29 AM

Bank Dhofar has almost OMR5 billion of assets

Mergers could benefit Omani banks
May struggle to finance state projects
Some banks contstrained by size

Oman’s banking sector has more than doubled in size since 2013 but may lack the scale to meet state financing needs. Lenders are already stretched in terms of their loan-to-deposit ratios, and further sector consolidation is probably needed along with borrowing on international bond markets.

Bank Muscat is Oman’s largest with assets of OMR13.7 billion ($35.6 billion) at 2023-end. Sohar International Bank – created in 2023 through a merger of Bank Sohar and HSBC Oman – is second, with assets of OMR6.9 billion.

National Bank of Oman and Bank Dhofar are third and fourth with assets worth OMR4.8 billion and OMR4.7 billion respectively, S&P Global data shows.

“Omani banks are small, even Bank Muscat,” says Andrew Cunningham, managing director of London’s Darien Analytics. “That will make it challenging for them to finance Oman’s major projects, so it’s likely there will be further mergers among Omani banks.

"For decades, Oman has been good at merging banks and absorbing those who are struggling in a way that other Gulf banking systems have not done.”

On September 27, S&P Global upgraded its credit rating on Oman following the sultanate’s efforts to reduce the borrowings of government-related entities (GREs). The ratio of GREs’ debt to Oman’s GDP ratio fell to 30 percent in June 2024 from a peak of 41 percent in 2021.

Once Oman lowers its debts to a more sustainable level, the government will reorientate spending to large-scale projects, says Neetika Gupta, vice-president and head of research at Ubhar Capital in Muscat.

Such investment would support Oman’s Vision 2040 economic diversification programme.

“This will drive credit growth and will be reflected in the banking sector’s performance eventually,” says Gupta. “Government spending will be directed towards construction and manufacturing.”

Oman’s economic growth is ebbing. According to the International Monetary Fund, real GDP will rise 1.2 percent in 2024, its smallest expansion since pandemic-hit 2020, as a result of oil production cuts under an Opec+ agreement.

That could further pressure banks, with the sector’s loan-to-deposit ratio at 99.7 percent last year; for every 1 rial received in deposits, banks have lent 0.97 rials.

The banking sector’s total assets doubled to OMR42.2 billion in 2023 from OMR21.2 billion a decade earlier, S&P Global data shows.

“The room for more lending by some banks is limited,” says Cunningham. “Omani banks are constrained by their size. They’re well capitalised, but they can only lend out a certain multiple of their capital. So, if you're a small bank, your ability to lend is constrained.”

Banks have some options to increase their ability to lend, he says. One is to merge with rival lenders. Another is to raise debt, although banks are likely to wait for Oman’s credit ratings to improve further.

Oman has a rating of BBB- with S&P. A rating of BBB and above is classified as “investment grade”. In 2015, Oman had an A credit rating, but suffered successive ratings downgrades because of weakening government finances.

“If Oman becomes investment grade [again], it becomes cheaper and easier for banks to raise money on the international bond markets,” says Cunningham.

Higher oil prices would boost government revenue and “that additional money will find its way into the banking system”, and so would be another means to ease banks’ lending constraints, adds Cunningham.