Monday 25 January 2021

Oman's stimulus may weaken banks’ credit profile: Moody’s

MANAMA, March 24, 2020

The Oman’s RO8 billion ($21 billion) stimulus package will limit the economic blow of the coronavirus outbreak on the economy, but weaken banks’ credit profiles, a credit negative, said Moody’s in a new report.

The stimulus package contains several measures. It reduces banks' capital conservation buffer (CCB), allows deferment of loan instalments for hard-hit borrowers, postpones for six months the risk classification of loans related to government projects and eases access to repo operations and foreign currency swaps for the banks, added the latest Sector Comment.

The central bank has also increased the regulatory cap on banks’ loans-to-financing ratio. System-wide banking system assets in Oman (Ba2 stable) were $91 billion as of January 2020.

The central bank's reduction in CCB buffers is credit negative for Omani banks because it lowers their minimum regulatory solvency capital requirements during a difficult time. Nonetheless, the lower regulatory buffers give banks greater flexibility to support borrowers facing temporary liquidity issues.

In addition, Omani banks' regulatory capital requirements will remain high. They must hold a minimum 11.5 per cent Tier 1 capital ratio, including a 7 per cent minimum CET1 capital ratio, 200 basis point (bp) maximum in Additional Tier 1 capital and a 250 bp CCB in the form of CET1 capital. The stimulus package allows banks to reduce their CCB by half to 125 bp.

The deferment of loan instalments for affected borrowers, as well as the six-month delay in the risk classification of loans for government projects, will reduce banks' immediate recognition of problem loans arising from coronavirus-related disruption. Should the measure remain in place over the long term, it would lower transparency of the extent of problem loans in the banking system and reduce forecasting visibility regarding the banks' credit profiles.

“We expect Omani banks’ asset quality to materially deteriorate in the current difficult environment. The stimulus package will mitigate the extent of the deterioration by keeping some borrowers' liquidity issues from becoming solvency issues,” Moody’s said in the comment.

“The package will not fully offset loan quality challenges, particularly if the pandemic persists for longer than a few months. Systemwide, problem loans were 3.2 per cent of gross loans as of December 2019. We expect borrowers in the tourism, transportation, trade, real estate and construction sectors to be the most affected by the coronavirus outbreak, and small and medium enterprises to be particularly vulnerable to economic shocks. As of December 2019, credit to the trade sector (import, export, wholesale and retail) accounted for 8.9 per cent of systemwide lending; credit to the transport and communication sectors was 5.0 per cent; and credit to the construction sector was 9.2 per cent.

“Even before the outbreak, we expected some asset-quality deterioration in Oman because low oil prices have dented government spending and led to delayed payments for construction and other public work, with a knock-on effect through the economy. The pandemic will exacerbate the deterioration. The recent sudden drop in oil prices will be another headwind.

“Oman’s economy is highly dependent on the oil and gas sector, accounting for 34 per cent of GDP and over 68 per cent of total merchandise exports in 2019. Nonetheless, Omani banks benefit from strong solvency buffers, including strong capital (14.4 per cent tangible common equity to risk weighted assets, as of December 2019) and healthy problem loan coverage (94 per cent loan loss reserves to problem loans). In addition, the strong and conservative regulatory framework in Oman supports banks’ credit profiles, with strict limits on cross-border exposure, foreign-currency exposure, retail lending exposure, debt burden ratios, balance-sheet mismatch and cash dividend distribution.

“The central bank’s financial support package will support Omani banks’ liquidity by providing access to cheap funding in order to meet cash calls from affected borrowers. The central bank reduced the interest rate on repo operations by 75 bp to 0.5 per cent, increased the tenor of repo operations up to a maximum period of three months, reduced the interest rate on discounting of Oman Government Treasury bills by 100 bp to 1.0 per cent, reduced the interest rate on foreign currency swap operations by 50 bp and increased the tenor of the swap facility up to a maximum period of six months. The central bank also reduced the interest rate on rediscounting of bill of exchanges and promissory notes.

“The increased regulatory cap on banks’ lending to financing ratio will also allow banks to meet cash calls from affected borrowers more easily. The central bank has increased the regulatory cap by five percentage points to 92.5 per cent from 87.5 per cent,” Moody’s explained in the comment. – TradeArabia News Service


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