Omani banks face growing squeeze on profits

The three largest Omani banks – BankMuscat, Bank Dhofar and National Bank of Oman – face pressure on profitability from slowing economic growth and increased demand for Islamic finance, Moody’s warned on Tuesday.

Growing appetite for Islamic finance is intensifying competition for products and placing the banks under pressure, a report from the rating agency argued.

However, it added that BankMuscat, Oman’s largest bank by assets, was the best positioned of the three to withstand such pressures and cope with slowing credit demand.

It is expected to benefit from an anticipated higher proportion of private financing for government projects given its larger capital base and solid expertise.

The bank also has the lowest asset risk because of its exposure primarily to government-related entities, large corporates and the public sector workforce – although its exposure to Saudi Arabia poses downside risks, Moody’s added.

Overall, however, BankMuscat is also likely to demonstrate better earnings stability than its peers, as its higher fee income generation ability helps to moderate interest income pressures from lower credit growth.

Bank Dhofar’s loan book has the highest exposure to the cyclical construction sector of all the three banks, exposing it to higher provisioning charges, the report said.

Dubai-based Moody’s analyst Mik Kabeya said: “Low oil prices are continuing to pressure government revenues and weigh on business and consumer confidence.

“This will lead to lower public and private spending in Oman and will slow economic and credit growth.

“In addition, the rapid penetration of Islamic banking assets constrains the three banks’ conventional lending growth.”

The report – entitled ‘BankMuscat, Bank Dhofar and National Bank of Oman; Peer Comparison: BankMuscat is Best Positioned to Withstand Slower Economy and Islamic Finance Penetration’ – predicted that Bank Dhofar and BankMuscat’s fast growing Islamic windows would help them to manage the penetration from Islamic finance.

Meanwhile, National Bank of Oman’s cross-border expansion in the UAE and solid domestic conventional credit growth, will support its asset base despite a smaller Islamic finance window, the report said.