Moody's: Changes outlook on Oman banking system to negative from stable amid weaker operating environment and government capacity for support

Moody's Investors Service is changing its outlook on Oman's banking system to negative from stable, reflecting a reduction in the government's capacity to support the country's banks, as well as softer economic growth and tight liquidity conditions.

The Omani government's reduced capacity to support banks in case of need -- owing to fiscal deterioration -- was reflected in Moody's July 28, 2017 downgrade and negative outlook on the government credit rating.

Moody's report, entitled "Banking System Outlook: Oman - Weaker operating environment and government fiscal capacity drive outlook change to negative", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Oman over the next 12-18 months.

"We expect a softening in Oman's operating environment, with fiscal consolidation amid prolonged oil price weakness weighing on economic growth," says Mik Kabeya, Analyst at Moody's. "This will weigh on credit growth, which we forecast to fall to 5% in 2017, down from 10.1% in 2016 and 12.0% in 2015."

Slower economic growth will drive a marginal weakening in problem loans to around 3.0% of gross loans in 2017-18, from 2.1% at end-March 2017, according to the rating agency. Moreover, high concentrations of loans to single borrowers and to the real-estate sector pose downside risks to asset quality.

However, Moody's expects capital to remain sound, providing strong loss absorbency. Moody's forecasts system-wide tangible common equity (TCE) to range between 12%-14% of risk-weighted assets over the next 12 to 18 months. Even under the rating agency's low probability "stress test" scenario, the TCE ratio would remain a solid 10.3%.

Profitability will decline slightly. Net interest margins will likely remain stable at around 2.4% over the outlook horizon (2.4% in 2016) as higher lending rates offset increasing funding costs, while loan loss provisioning will increase somewhat as problem loans rise.

Funding and liquidity conditions will remain tight, as high domestic government borrowing limits funds available to lend to the wider economy. Nonetheless, the government's international bond issuances, slower credit growth and higher oil prices will moderate the pressure.

Finally, although the government's capacity to support banks if needed will reduce, the rating agency notes that willingness to provide support will remain very high.