Muscat: The banking sector in the Sultanate of Oman continues to report robust earnings, strong capital positions, ample liquidity, and sufficient provisions for loan losses, according to a new report.

“The non-performing loans (NPLs) rate remained low, while various stress tests indicate that banks are capable of withstanding a variety of potential shocks,” Central Bank of Oman said in its latest Financial Stability Report (FSR) 2024. “The prudential liquidity indicators consistently remained well-above Basel requirements and thus, the Omani banking system remained well-positioned to leverage its strength to support businesses and households in the event of any unforeseen shocks,” the report further added.

Credit Conditions Survey

The FSR report further elaborated that the 2023 Credit Conditions Survey indicates a significant rise in demand for loans by households. This trend is expected to continue into 2024, driven by economic growth, increased consumer confidence, and affordable lending rates.

Credit for households

Credit availability for households in 2023 remained consistent with the previous three years, although mortgage lending terms were stricter.

Corporate lending demand also increased in 2023, for both working capital and capital expenditures, with further increases anticipated in 2024 by the survey respondents.

However, credit availability for corporates somewhat tightened in 2023, with expectations of continued stringent lending standards in 2024, particularly concerning collateral, service-ability standards, loan covenants, and risk pricing.

Banking sector showed resilience

The stress tests conducted using data from December 2023 revealed that, under the assumed adverse macroeconomic scenarios, all banks would withstand such shocks without breaching the CBO’s minimum required Capital to Risk-weighted Assets Ratio (CRAR) of 13.5 percent.

“Despite facing a significant rise in credit provisioning expenses due to the increase in their Non-Performing Loans (NPLs) ratio under adverse scenario, banks would manage to cover these losses and maintain profitability during the stress horizon,” the FSR report said.

“Similarly, the Reverse Stress Tests demonstrated banks’ ability to absorb a substantial increase in Non-Performing Loans (NPLs) without compromising their solvency,” the report added. 

The Liquidity Stress Tests conducted as of December 2023 indicated that all banks could uphold a 100 percent Liquidity Coverage Ratio (LCR) under stress testing.

Furthermore, system-wide liquidity analysis revealed that the banking system possesses ample counterbalancing capacity to endure persistently simulated cash outflows over the six-month reference period.

The year 2023 has remained fraught with significant challenges, including geopolitical tensions, disruptions in global trade, and some lingering effects of the COVID-19 pandemic, the FSR report said.

“Geopolitical risks have intensified following recent events in the Middle East besides the protracted Russia-Ukraine war, exacerbating uncertainty regarding the economic outlook, particularly in relation to commodity prices, energy markets, and global value chains,” the report added.

These factors have tested the resilience of the financial sector, and any further escalation of geopolitical uncertainty could lead to adverse spillovers, dampen economic activity, elevate inflation, depress asset prices, and increase financial market volatility.

Interest rates in the US and other advanced economies have gradually become less accommodative since March 2022. Given the fixed exchange rate of the Omani Rial against the USD, the US policy stance is fully reflected in Oman’s policy rates. The ensuing tightening of financial conditions carries implications for the stability of the financial system manifesting as pressures on an array of financial and real assets, an increased materialisation of credit risk, and challenges regarding debt affordability by businesses and households.

At present, financial markets do not anticipate any additional increase in the policy rate, but interest rates will likely need to remain elevated to ensure the sustained decline of inflation. Should interest rates remain elevated for a prolonged period beyond current market expectations, it could compound existing strains in the debt-servicing capacities of households and businesses and weaken the economic outlook. The perception or realization of potential losses by banks could exacerbate the tightening of financing conditions, potentially exerting further pressure on economic activity.

Omani economy remains robust

Despite formidable headwinds stemming from deteriorating geopolitical conditions, elevated interest rates, and persistent global inflation, the higher oil prices and fiscal discipline have served as a source of fiscal buffer for Oman against these challenges.

The ongoing fiscal consolidation and structural reforms are expected to improve the sustainability of public expenditure, further supporting financial stability. Initiatives aimed at enhancing the business environment, such as streamlining regulations and promoting private sector development, are likely to attract FDI and stimulate economic activity. Moreover, Oman’s non-hydrocarbon activities are poised for growth, driving economic diversification efforts and reducing reliance on oil revenues. The plan to implement Personal Income Tax underscores the government’s commitment to fiscal reforms and economic diversification.

“The banking sector continues to demonstrate resilience as evidenced by recent stress tests attesting to the ability of the financial system to navigate potential risks. The stress tests show that banks are well-positioned to withstand adverse shocks,” the FSR report pointed out.

“Despite some bank failures in the US and Europe that occurred at the beginning of 2023, Oman’s banking sector has remained stable as Omani banks must adhere to stringent prudential limits on maturity mismatches between assets and liabilities, thereby mitigating their exposure to fluctuations in interest rates,” the report added.

Additionally, Oman has not experienced the correction in the real estate prices witnessed in several advanced economies.

The FSR report elaborated that the participants of the latest Systemic Risk Survey also showed high confidence in the Omani macro-financial system. On balance, the risks to the outlook for financial stability in Oman are low in the near term, but it remains sensitive to global development. Thus, going forward, the monetary policy stance of the US Fed, geopolitical developments in Europe and the Middle East, and the future trajectory of the Opec+ agreement will remain pivotal in shaping the macroeconomic and financial stability outcomes in Oman. However, the Omani banking system can leverage its strength to support businesses and households in the event of any unforeseen shocks.