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14 May 2008
Moody's reports: Omani banks enjoy strong earnings and growing franchises, but face high credit risk in a concentrated environment
Limassol, May 14, 2008 -- The rated Omani banks continue to enjoy well-established domestic
franchises, strong earning-generating capability despite
pressure on interest rate margins and good capital levels, says
Moody's Investors Service in its latest 'Banking System Outlook'
report for Oman. The stable outlook on the bank financial strength
ratings (BFSRs) of these institutions captures their good franchise development
in recent years but also the challenging and increasingly competitive
operating environment in Oman. It also recognises that the improved
financial performance of recent years has been partly driven by the positive
In addition to the Banking System Outlook, which focuses on performance
measures and forward-looking rating drivers for the Omani banking
system, Moody's has also published a 'Banking System
Profile' report for Oman. The Profile forms part of a new
series of reports on banking systems throughout the world, which
are designed to complement Moody's Banking System Outlook reports by serving
as descriptive reference guides to key structural factors that are reflected
in Moody's bank credit ratings.
Despite improvements in domestic conditions, Omani banks continue
to operate in a challenging and highly concentrated economy that constrains
the upside potential to their ratings. Oman still relies heavily
on hydrocarbon exports, which results in considerable cyclicality
in the operating environment, which in turn affects the performance
of the banks. However, given the current strength in oil
prices, hydrocarbon exports are contributing positively to Oman's
"We expect that the government's ongoing strategy to diversify
and expand the non-oil segment of the economy to continue to boost
economic activity in the country and create further growth opportunities
for the Omani banking sector. In addition, the major Omani
commercial banks have achieved a balanced franchise development across
segments, which has entailed both strong growth in personal lending
and continued growth in corporate and commercial banking,"
says Elena Panayiotou, a Moody's Analyst and author of the
Moody's recognises that the banks continue to generate strong earnings,
mostly due to their low cost structures and the healthy albeit declining
interest margins earned on their growing business volumes. However,
it cautions that, given the increasingly competitive nature of the
Omani banking market, the banks need to strengthen their non-interest-related
income in order to offset the pressure on margins and sustain their profitability
at the current levels.
Another constraint to the Omani banks' ratings is the high credit
risk they continue to face. "Although the system's
asset quality has improved in recent years, mainly due to improved
credit risk management policies, much of the improvement reflects
Oman's favourable economic environment, which may not be sustainable
through a cycle. Moreover, the rapid credit expansion in
the past two years raises concerns over the performance of these loans
once they start to season," Ms Panayiotou explains.
Moody's regards bank governance standards in Oman as moderate but
gradually improving as the level of foreign direct investment in the country
rises and as foreign investors raise their participation in the banking
system. In addition, the regulatory and supervisory framework
is still evolving but is currently of adequate quality with a good level
of transparency and formalisation of procedures and rules. The
rating agency also views favourably the steps being taken by the Central
Bank of Oman to enhance its supervisory techniques and oversight and welcomes
its plan to adopt risk-based consolidated supervision.
Moody's generally views Omani banks as operating in a high-support
system based both on the importance of the banking sector to the payment
system but also the past behaviour of government intervention in cases
where institutions were faced with financial distress.
The two reports -- "Banking System Outlook: Oman"
and "Banking System Profile: Oman" -- are available
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Moody's Investors Service Cyprus Limited
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