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Omani banks look to state spending to boost credit growth

Despite a range of announced construction projects, Omani banks say there has been little 'on the ground' progress Reuters
Despite a range of announced construction projects, Omani banks say there has been little 'on the ground' progress
  • State spending could boost Omani banks
  • Loan book growth of 6%
  • Record net profit nearly double that of 2020

Lower interest rates should increase borrowing demand in Oman although the sultanate’s banks are waiting for a meaningful expansion in government infrastructure spending for credit growth to accelerate.

Bank Muscat is Oman’s largest bank, reporting a 2023 net annual profit that was greater than those of the next four commercial banks combined, S&P Global data shows.

Bank Muscat’s earnings in 2024 have also been steady. It made a half-year net profit of OMR112.1 million ($291.2 million), up 7.5 percent year on year as investment income soared. However net interest income, the most important revenue source for banks, rose only 5.2 percent. 

Bank Muscat’s loan book was OMR8.66 billion as of June 30, up 4 percent year on year.

“All the banks have been quite vocal that while there have been many construction projects announced little is happening on the ground, and that’s why credit growth has not been as high as it should be,” says Neetika Gupta, vice-president and head of research at Ubhar Capital in Muscat.

The Omani banking sector’s loan book will on average expand by 6 percent annually from 2024 to 2028, Ubhar Capital estimates.

The industry’s net profit was a record OMR506 million in 2023 – up 17 percent versus 2022 and nearly double that of pandemic-hit 2020.

Yet the sector’s net interest margin is in decline, falling to 2.67 percent in 2023, down 5 basis points versus 2022 as funding costs rose, S&P data shows.

At Bank Muscat, for example, cost of funds were 2.68 percent in 2023, up 65 basis points year on year and the highest since at least 2011.

This is a result of customers switching money from low- or zero-interest current and savings accounts to higher-yielding term deposits accounts to take advantage of historically high interest rates. Such accounts typically have a lock-up period of one to two years.

On September 19 Oman cut its benchmark borrowing rate to 5.5 percent from 6 percent after the Federal reserve reduced the US interest rate. Oman follows Fed rate moves because of the rial’s dollar peg.

Around 40 percent of Bank Muscat’s loans are to consumers, Gupta estimates. These loans are at fixed interest rates for their duration, so will remain unchanged despite the benchmark rate reductions.

Also housing and personal loan rates are capped at 6 percent, while corporate loans are on floating rates without any cap.

“Interest rate cuts will be positive for banks’ margins because their cost of funds will fall,” says Gupta.

“That’s why we favour banks with a higher proportion of personal loans, which are fixed rate and so their margins will improve by a bigger degree.”

Yet according to Andrew Cunningham, managing director of London’s Darien Analytics, lower interest rates will be broadly negative for Omani banks. That is because a sizeable chunk of their deposits are held in non-interest bearing sharia-compliant accounts that allow for customers’ religious considerations, he explains.

A lower benchmark rate will pressure banks to cut the interest rates on existing variable rate loans and new fixed-rate loans, thereby reducing their margins, he says.

However, reduced interest costs will make borrowing more affordable and so should boost credit demand, adds Cunningham.

Lower borrower costs should also help the banking sector’s non-performing loan ratio improve. This was 4.12 percent in both 2022 and 2023, its highest level since at least 2010, S&P data shows.

“That reflects the high-interest rate environment, which stresses corporate borrowers,” adds Gupta.

“But non-performing loans are still low, and banks have adequate buffers, plus lower rates should ease the stresses on corporate borrowers and so the NPL ratio should fall.”

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