Putting comparisons of its fellow GCC members’ banking magnitude aside, the bite-sized banking sector of Oman is performing exceptionally well. Oman acts as a front-runner in attracting foreign direct investment (FDI), as the financial sector is determined to renovate the Omani economy from a mainly oil-producing and exporting economy to one of a diversified, non-oil based nature. Diversification of its economic base is one of Oman’s great successes, as its Seventh Five-Year Development Plan aims at sustaining long-term development, enhancing contribution to GDP of the non-oil sectors, and improving employment opportunities for Oman’s fast growing population.
Although oil production has been declining, recent economic growth is still accredited to high oil prices. The sultanate’s Ministry of Information (MOI) believes “apart from phenomenal growth in oil income, a strong local demand and improvement in non-oil exports contributed to the better performance of the economy.” The ministry predicts a 5.5% growth in the oil sector, “despite a 3.7% fall in crude oil production in 2007.”
Presently, Oman’s economy is witnessing intense growth, which, despite high inflation levels, the banking sector is embracing with open arms. Unlike every other GCC member, Oman completely prohibits Islamic banking operations throughout the sultanate. In an interview with Middle East Economic Digest (MEED), Executive President of the Central Bank of Oman (CBO) Hamood Sangour al-Zadjali boldly stated, “We shall not allow [Islamic banking]. We believe that banks should be universal. We won’t allow specific banks.” Regardless of the many Islamic banks operating throughout the GCC, Omani banking seems to be doing fine without sharia-compliant services for the moment.
In its latest report, Moody’s Investors Service underlined the contributing factors in the generation of strong earnings as amelioration in domestic operating conditions: the government’s diversification strategy, sustained high oil prices and amplified levels of liquidity. The openness of Oman’s banking sector allows it to flourish, enhancing its outlook in terms of risk management and corporate governance practices. Moody’s also emphasized the assets of the sector are gradually improving, underlined by a decline in non-performance loans and improved provisioning coverage.
Oman’s banking sector has witnessed several mergers in recent years, enabling commercial banks to better handle large operations. MOI boasts that the Omani banking sector “is stable, highly efficient and able to respond to regional and international developments, including the growing trend towards freeing up financial services within the framework of the [WTO].” The ministry further vaunts that “the banking sector is a model of successful Omanization[, with the] College of Banking and Financial Studies playing a vital role in preparing nationals for banking careers.” Most Omani banks are investing funds to train and recruit nationals, and thus improve the scope of the banking sector.
Moody’s says “Omani banks continue to operate in a challenging and highly concentrated economy that constraints 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.” On a rather optimistic note, Moody’s concludes that, “given the current strength in oil prices, hydrocarbon exports are contributing positively to Oman’s economic up cycle.”
The sultanate’s young and expanding population, along with rising per capita income and major investments, present immense opportunities. Despite all the good news for Omani banking, Oxford Business Group (OBG) believes that “the question on everyone’s minds is if Omani banks, small by regional standards, can meet demand on an unprecedented scale.”
Total assets of Omani banks ($ billions)
Bank performance
In 2007 Omani banks recorded a strong year, possessing a 35.3% rise in total assets to $25.5 billion, with foreign assets comprising $5.1 billion (20%) of this total. According to OBG, deposits also surged by 32.5% totaling $16.12 billion. Private sector deposits represented 81.4% of total deposits, and foreign deposits accounted for 18%. The IMF believes that Oman’s “economy withstood well the impact of the June cyclone and real GDP grew by 6.4 percent.” Also, OBG reports that in 2007 combined profits of all banks were sound, experiencing a 26.4% year-on-year increase, totaling $460 million. OBG holds that during 2003-06 period bank profits grew at a CAGR of 39%, and believes profits “are expected to remain strong in 2008.”
The Omani banking sector is comprised of six national banks, 10 foreign banks, and three specialized banks. Four domestic banks — namely BankMuscat (BM), Oman International Bank (OIB), National Bank of Oman (NBO), and Bank Dhofar — rule the industry. Combined, these top banks account for 78% of total commercial banking assets and 75% of total branches. In 2007 Bank Sohar became the latest domestic addition since 1990 to Oman’s banking sector. Foreign investment is highly encouraged in the banking sector, as the Omani government diligently persists to implement liberalization policies. Blatant proof of such liberalization is the increasing presence of new foreign banks entering the playing field; the latest foreign newcomer to the sector is Qatar National Bank, which opened its first branch in Muscat in December 2007.
While liberalization trends continue, national banks yearn to improve their services and draw more customers in order to maintain a larger market share. OBG finds that “banks are working aggressively to gain clients through various means including building [more] branches, creating new products and services, and even expanding operations abroad.” BM, for example, already has branches in Kenya and India, and premiered its first branch in Riyadh last year. BM allegedly has plans to expand further into neighboring GCC countries as well.
As the leading bank of Oman, BankMuscat’s total assets at last year’s end stood at $11 billion. In the first quarter of 2008, BM announced that its profit climbed 39.4% due to increased earnings from lending, as reported by Bloomberg. Oman’s largest bank also witnessed a robust net income increase from $49.3 million to $68.8 million just from earlier this year. In addition, net interest income also increased 31.2% to a considerable $96.1 million. Operating revenue rose by 45% from earlier in the year, totaling $142.9 million. Chairman of BM AbdulMalik bin Abdullah al-Khalili noted that “the most significant development that took place in the first quarter of the year 2008 was the bank’s acquiring a major stake (35%) in Saudi Pak Commercial Bank in Pakistan.” BM boasts its strong presence with over 100 branches, a representative office in Dubai, and a branch in Saudi Arabia. The bank owns a 43% stake in the Mangal Keshav Group, noted as one of the most respected security houses in India’s fast growing equity market. The Banker has voted BM the “Best Bank in Oman” fives times in a row, Euromoney has voted it the best bank six times consecutively and Global
Finance Inc seven times. The list of awards is lengthy and clearly indicating BM’s domination of the Omani banking sector.
Coming in second place, the National Bank of Oman (NBO)’s total assets for Q4 2007 rang in at $3.8 billion. The first quarter of 2008 recorded net profits of $28.3 million, while operating profits grew by 49% from the same period of 2007, to $33 million. Such profit accelerations proves NBO’s continuous success via its growth strategy. “The results for the first three months of 2008 continue to reflect a growth trend across all our businesses. Net advances and deposits crossed the RO 1 billion [$2.6 billion] mark with the increase of RO 109 million [$283.1 million] and RO 123 million [$319.5 million] respectively during the quarter. Net interest income grew by over 8% to RO 10.1 million [$26.2 million] and non-interest income climbed by 81% to RO 9.6 million [$24.9 million],” explained NBO Chairman Sheikh Suhail Salim Bahwan. The bank insists that it will go on to “invest in people, process, and brands which will support the bank’s progress towards achieving sustainable value for its stakeholders.” NBO affirms it is “focused on new and improved ways to serve its customers,” as its “non-performing loans have now [been] reduced to 5.6% of total loans and nearly 95% of these covered by provisions.” In 2005, CBO purchased a 35% share in NBO. Regarding Basel II, NBO states: “The capital adequacy ratio based on the regulatory capital was at a healthy 14.57% well above the mandated requirement of 10% under Basel II norms.” The bank’s CEO Murray Sims said that “the growth in operating profit over the last year has been very encouraging. The outlook for the bank’s principal markets is positive.” Sims went on to say that the inspiring outlook “combined with committed and engaged employees, loyal customers and continued enhancement of the strategic alliance with Commercial Bank of Qatar will augur well for continuation of the trend.” The CEO also said NBO has determined plans for growth, that distinguish the numerous opportunities present “in terms of the pace and depth of economic expansion in Oman today.” NBO insists customers are their priority, and will continue to be as the bank “seeks opportunities to grow their business further” to insure the improved quality of their service offerings.
Oman’s third leading bank is Oman International Bank (OIB). Last year, the bank’s total assets accumulated to $2.8 billion. In 1984, OIB became the first fully Omani-owned commercial bank in the sultanate. OIB now has 82 branches throughout the state, as well as 4 branches abroad (Mumbai, Kochi, Karachi, and Lahore respectively). OIB prides itself as “an innovative bank with a long list of firsts to its name, the first bank in the Gulf region to offer mobile banking service, the first Omani bank to issue a Visa Card, and the only bank in Oman currently offering unique Phone Banking service. Also being the only bank at present in Oman which enjoys the advantages of having a fully automated branch network.” Acting CEO Nani B. Janveri explained that OIB’s strategy is “to focus on quality and not quantity, in both assets and liabilities… Rather than looking to increase profitability through higher net interest income, we are looking to generate more fees from new banking and expanded services in the areas of treasury, investment banking, private banking, credit cards etc.”
At present, the IMF trusts that the “banking sector remains sound… as the banks are profitable and well-capitalized, and nonperforming loans are being reduced.” Javeri noted that the “policies of the CBO are fundamentally sound and designed to maintain the financial strength of the banking system.” Moody’s Investors Service also expects that Omani banks will continue to prosper and bask in heaps of abundant capital ratios and strong earnings.
Active banks 2007
Fighting Inflation
By March 2008 inflation had hit an 18-year high at a staggering 11.5%. The country’s inflation is likely caused by government spending, increasing rent prices, and the soaring cost of food. The government of Oman is implementing prudent monetary and fiscal policies to curb such swelling inflation in its $40.3 billion economy. In his own attempt to ease inflation pain this year Sultan Qaboos bin Said ordered a 43% increase in state worker’s wages, as well as a 5%-35% increase for state pensioners.
Like many other GCC states, Oman pegs its currency to the waning US dollar. This forces the CBO to track US monetary policies set up by the Federal Reserve. Despite this peg the banking sector has been unfazed by the US subprime mortgage crisis. Yet, OBG notes that, “Oman’s continued pegging of its currency with the US dollar has been a force behind rising inflation, pushing up the costs of imports, in particular foodstuffs.” The central bank is prepared to once again tighten lending curbs so to control credit growth.
In December 2007, the sultanate raised the reserve requirement for banks from 3% to 5% of total deposits, in order to prevent lower borrowing costs from driving inflation. According to a Reuters December 2007 poll, Oman’s inflation could fall to 3.9% by the end of this year. With high rents, accelerated food costs, and increased government spending, whether or not this figure actually materializes is rather questionable.
Basel II
Since January 2007, Basel II regulations have been implemented and followed by Omani banks. “In fact,” states OBG, “the minimum capital adequacy is above the coverage mandated by Basel II, even after the CBO reduced the requirement from 12% to 10%.” In a bid to improve Basel II implementation, BankMuscat teamed up with Edutech Middle East to create an e-learning solution to help train BM employees meet the accord’s compliance. AbdulRazak Ali Issa, CEO of BM believes that, “Basel II is a significant development in the global banking industry, which is continuously evolving with the emergence and improvement of new and existing standards to protect clients’ finances.” Issa emphasized that BM’s partnership with Edutech will allow the staff “to keep at pace with rapid developments being undertaken by international financial organizations.” Overall, the application of Basel II will help Omani banks govern risk and capital management issues.
Forecast
Based on the bank financial strength ratings, Moody’s predicts a poised outlook for the Omani banking sector. Similarly, Gulf Investment House reported that they “expect the banking industry to capitalize on [credit growth] through actively participating in the financing of many of [infrastructure] projects.”
Elena Panayiotou, a Moody’s analyst expects “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 growth opportunities for the Omani banking sector.” Panayiotou went on to warn that banks are in need of beefing up their non-interest related income so to ease pressure on margins, and thus sustain profitability at current levels.
Popular consensus finds that the sector has become more competitive in recent years, and will continue to do so. Even with problems of inflation and a limited local market, the banking sector of Oman is undoubtedly on the rise. Taqi Ali Sultan, General Manager of NBO, explained, “We’re seeing new entrants from the Gulf, and local banks are expanding as well. But I think there are real growth prospects, so there is sufficient room for every player.” OBG adds that, “Omani bankers are confident the country’s strong economic forecast will translate into increased lending improvements and better asset quality.”
In brief it is fair to say that despite its relatively small size, the Omani banking sector is performing remarkably well. Although inflation rates are uncomfortably high, banks in Oman are coping well and functioning soundly. With FDI emphatically encouraged, liberalization is greatly aiding the growth of the sultanate’s banking sector. With Basel II and other monetary regulations in place and inflows of foreign investment, the Omani banking sector is set to perform at stellar levels in the coming year. GCC banks should keep an eye out for the expansion of Omani banks, as banking prospects can only go up from here on out.
Country forecast
