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High government borrowings to crowd out private sector credit

Higher loan-loss provisioning charges, as delinquencies are likely to rise in the slowing economy

Gulf News

Dubai: Rising government borrowings in Oman the context of low global oil prices are expected to reduce the capacity of banks to fund private sector.

Continued high domestic borrowing by the government in order to maintain public spending will constrain the amount of funds in the banking system available for lending to the wider private sector economy.

“We expect a moderate decline in the level of liquid assets at Omani banks, combined with an ongoing change in the composition of those assets. We expect Omani banks liquid resources to decline, but remain adequate, at above 20 per cent of their tangible banking assets,” said Mik Kabeya, an analyst at Moody’s.

As of March 2017, their liquid assets accounted for 22.1 per cent of their tangible banking assets, down from 26.9 per cent at end-2014, the year the oil price weakened. Omani banks’ liquid assets are much lower than other GCC members, where liquid assets range between 25 per cent and 35 per cent of banking assets. However, these remain higher than the banks’ modest market funding liabilities.

Analysts expect banks to continue to increase their exposure to the Omani government through their investments in government securities. Banks are likely to hold a larger proportion of their liquid assets in the form of long-term government deposits, as opposed to Certificate of Deposits (CD) from the central bank, or cash. The fact that banks invest an increasing portion of their balance sheet in government debt securities increases the correlation of bank ratings with the credit rating of the weakening sovereign.

Credit quality

Government Development Bonds (GDBs), sukuk and Treasury bills issued by the Omani government increased to 6 per cent of total banking assets as of May 2017, from 2 per cent as of December 2014. Omani banks have large loan concentrations to single borrowers and to the real estate sector, and we expect this to continue, given the country’s limited economic diversification.

Bank’s top 20 exposures ranged at high levels comparable with other GCC banking system. However, the counterparty quality moderates the risk, with creditworthy government-related institutions accounting for a large portion of the top 20 exposures at most banks. Banks’ exposure to the construction and real-estate sectors, which exhibit higher-than-average delinquency levels, are expected to keep risks on loan quality at elevated levels.

While provisioning charges are expected to increase moderately, expenses will remain stable. Higher loan-loss provisioning charges, as delinquencies are likely to rise in the slowing economy and because of a new central bank circular requiring provisions to be set aside to cover all restructured loans.

Funding weakness

Oman bank are likely to remain primarily deposit funded, with modest market funding reliance. The current funding structure reflects the continued availability of large government-related deposit balances in the system. The government and its related institutions remain the largest depositors in the banking system, with 35 per cent of deposits at the end of June.

“We expect Omani banks’ funding structure to remain characterised by sound funding quality mainly in the form of stable deposits and equity. Funding weaknesses include limited diversity, given large volumes of government-related deposits; term structure challenges, given the short term nature of deposits and the longer term nature of their loans; an and limited historical use of international capital markets,” said Kabeya.