Announcement: Moody's: Omani banks face profitability pressures from slower economy and Islamic finance penetration

The three largest Omani banks -- BankMuscat S.A.O.G. (BankMuscat), Bank Dhofar SAOG (Bank Dhofar) and National Bank of Oman Limited (SAOG) (National Bank of Oman) -- are facing dual profitability pressures from slowing economic growth and the rapid penetration of Islamic finance, which is intensifying competition for financial products. Moody's considers, however, that BankMuscat, Oman's largest bank by assets, is the best positioned of the three to withstand these pressures.

Moody's report, entitled "BankMuscat, Bank Dhofar and National Bank of Oman; Peer Comparison: BankMuscat is Best Positioned to Withstand Slower Economy and Islamic Finance Penetration", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. Please note that this report does not constitute a rating action.

"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", says Mik Kabeya. "In addition, the rapid penetration of Islamic banking assets constrains the three banks' conventional lending growth."

BankMuscat, however, will likely cope the best with slowing credit demand; as we expect it to benefit the most from an expected higher proportion of private financing for government projects, given its larger capital base and solid expertise. Moody's also says that BankMuscat will likely exhibit better earnings stability than its peers, as its higher fee income generation ability helps moderate interest income pressures from lower credit growth.

Moody's expects both Bank Dhofar and BankMuscat's fast growing Islamic windows to help them to manage the penetration from Islamic finance. In contrast, National Bank of Oman's cross-border expansion in the United Arab Emirates and its solid domestic conventional credit growth, will support its asset base despite its smaller Islamic window.

Finally, Bank Dhofar's loan book composition, with the highest exposure to the cyclical construction sector, exposes it to higher provisioning charges. BankMuscat, on the other hand, has the lowest asset risk given its exposure primarily to government-related entities, large corporates and the public sector workforce, although its Saudi Arabia exposure poses downside risks.

Despite slowing credit growth, Moody's expects a continued rapid penetration of Islamic banking assets in the country, as their growth continues to outpace that of conventional loans - albeit from a low base. The rating agency expects Islamic banking to reach 12%-15% of Omani banking assets by 2020 (versus 2% as of March 2013 and 10% as of November 2016).