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Omani banks look to projects for growth

12 December 2023

 

As government spending on infrastructure projects ramps up, Omani lenders are poised to expand their loan books in 2024, following a year of stability that saw most banking metrics improve gradually, in line with the economy’s steady recovery from the pandemic.

Banks are looking to sink their teeth into fresh opportunities emerging from Vision 2040 diversification projects. In doing so, they will benefit from their relatively captive market for corporate credit, since – unlike in other regional states with deeper capital markets – Omani companies have limited access to alternative funding sources beyond the banking sector.

Not that banks in Muscat have it easy. This year, profits have been subdued by weaker net interest margins. Lending was also modest in the first three quarters of 2023, at 4.4 per cent, according to Fitch Ratings, which is essentially the same level as in 2022.

However, the ratings agency sees large government-backed projects, particularly infrastructure schemes, leading credit growth to accelerate to 6-7 per cent in 2024.

Jamal el-Mellali, a director at Fitch Ratings, says one aspect unique to Oman is that the government-related entities (GREs) – to which banks are highly exposed – have made some large early repayments.

“They have taken advantage of the high oil prices to pay down debt. And we have seen the same trend for the sovereign itself,” he says.

According to Fitch, Omani banks benefit very little from higher interest rates as local-currency long-term loans do not reprice with changes in the Central Bank of Oman’s (CBO’s) benchmark rate and competitive pressures limit banks’ repricing abilities.

“One aspect that is unique in the GCC is that Omani banks do not benefit to a great extent from higher interest rates,” says El-Mellali.

“That is because long-term lending in Omani rials, which represent the bulk of the lending, is not driven by the benchmark rate set by the CBO. So even though the CBO has increased rates by a cumulative 550 basis points since March 2022, the average net interest margin for the banks has only increased by 20 bps.”

This striking figure reflects Oman’s highly competitive banking sector, where banks lend to the same large corporate clients, mostly GREs.

Asset quality and impairment

Asset quality is not a major challenge in the sultanate. Loan impairment charges will continue to rise in line with banks’ conservative provisioning policies, but this should be balanced by stronger non-interest income and cost discipline, notes Fitch. Loan quality should continue to recover in 2024, reflecting more supportive macroeconomic conditions.

“Asset quality has been fairly stable again, compared with last year, with an impairment loss ratio for the sector of 4.4 per cent in the first nine months of 2023,” says El-Mellali.

“That’s unchanged compared with 2022. And this is because we are seeing a slow recovery from the sectors that were impacted by the pandemic, namely real estate and hospitality, and the construction sector.”

Lower provisions should also help banks with profit generation. However, the expectation is that any improvement to net income in 2024 will be modest because banks do not see much benefit from higher rates. On top of that, interest rates may have peaked.

“Our base case is that the Fed will start cutting rates in the second half of next year, and because the Omani rial is pegged to the dollar, the CBO will certainly follow any changes in the Fed funds rate. So from that front, we don’t see any improvement in banks’ net interest margins in 2024,” says El-Mellali.

Islamic banking and consolidation

One area of Oman’s banking system that has seen rapid growth in recent years is the Islamic sector. The latest CBO figures show that the total assets of Islamic banks and banks with Islamic windows increased by 12.7 per cent to RO7.2bn ($18.7bn), constituting about 17.6 per cent of the banking system’s assets at the end of September 2023.

Islamic banking entities’ financing of RO5.9bn ($15.3bn) at the end of September 2023 represents healthy growth of 11.6 per cent in year-on-year terms. 

Although still small relative to the conventional sector, the Islamic sector in Oman is likely to continue growing, following reforms such as the introduction in 2022 of the wakala money market instrument. This allows Islamic lenders to place remunerative deposits with the Central Bank for up to a maximum of three months.

“We will continue to see a very high growth in the next year in the Islamic banking segment, especially since banks have ramped up the distribution capabilities of their Islamic windows,” says El-Mellali.

Although the past year has seen some merger and acquisition (M&A) activity, with HSBC Bank Oman gaining approval in August for its merger with Sohar International Bank – and an abortive attempt from the country’s second-biggest lender, Bank Dhofar, for Ahli Bank – the scope for further consolidation may be limited.

With less than 20 banks, Oman’s banking sector is already more concentrated than others. As Fitch notes, the three largest banks already control almost 50 per cent of total assets, which is considered a high level. That means the Central Bank has to be more careful when approving M&A deals.

Rather than inorganic growth, Omani lenders may be more inclined to grow by organic means. And with a host of new projects gaining traction, the next year should provide some new avenues for productive lending.

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James Gavin

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    In a region where geopolitical turbulence has amplified by an order of magnitude, Jordan is managing to stand out as a beacon of relative stability, with the Hashemite kingdom’s banking sector acting as a case in point.

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    The IMF took care to note an increase in credit to the private sector in its latest Article IV assessment of Jordan, standing at 80.1% of GDP at end-2024, compared to just 66.6% 10 years earlier.

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    Liquidity banked

    Jordan’s banks look able to withstand further shocks, given solid capital positions and relatively strong earnings performances. Arab Bank, the largest lender, saw net profits grow 12% last year to $1.13bn, despite a highly charged geopolitical situation across Jordan and the neighbouring Palestinian territories.

    As Moody’s notes, Jordanian banks’ funding base remains stable, with banks mainly deposit-funded – with deposits at 67% of total assets as of December 2025 – mostly comprising well-diversified retail deposits. The ratings agency noted that banks retain the capacity to increase lending without relying on more volatile and costly external funding, as indicated by the 72% loan-to-deposit ratio.

    The earnings outlook in Jordan may be better than other banking sectors in the immediate region, but this does not translate into a picture of booming profits going forward.

    “Profits should remain resilient, but we’re not expecting any significant improvement,” says Theofilou. “We have the challenging operating conditions, and the lower interest rates that have come down over the past few years. On the other hand, banks have had lower provisioning in the past 12 to 18 months compared to the period prior to that.”

    Asset quality remains a strong point, despite some weakening over recent years. Moody’s sees non-performing loans (NPLs) falling below 5.5% this year from 5.8% in June 2025.

    However, the continuing Iran conflict and its deleterious regional impacts – including on the West Bank, where about 9% of Jordanian banks’ loans are located – suggest that bank exposures to troubled sectors will require focus.

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    The real estate exposures are meaningful, but Moody’s views overall concentration risk as more material rather than real estate risk per se.

    “So, on the one hand, Jordanian banks have real estate loans, both commercial and residential, slightly below a fifth of the total credit facilities,” says Theofilou. “Banks also face challenges in quickly disposing of properties, but within the context of a relatively lengthy foreclosure process. On the flipside, we see Jordanian banks having fairly high collateralisation, so they do hold a lot of collateral against the real estate exposures.”

    The CBJ has earned plaudits for its regulatory oversight, with the IMF lauding its strengthening of the Financial Stability Committee, while refocusing its role on macroprudential policies and systemic risks. 

    Jordanian banks’ brisk uptake of digital technologies has also been a positive.

    Last year, digital payment systems in Jordan recorded over 184 million digital transactions, exceeding $38bn in value. The CBJ has introduced an AI regulatory framework for the sector and the authorities are now working to burnish the country’s credentials as a fintech hub, based on a 90% plus internet penetration. 

    In the year ahead, Jordanian banks will be looking to find exposures to new lending opportunities, given the past risk aversion that has prevented them from building stronger growth avenues.

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    “If we see a lot of these infrastructure projects requiring financing coming to the market, then we could see a bit of a pickup in lending growth as well,” says Theofilou.

    New lending opportunities will come from large corporates and infrastructure-related lending. Those will play the key role in any significant pickup in credit growth, says the Moody’s analyst, in contrast to the small- and medium-enterprise (SME) sector, which poses a different challenge for banks.

    “The SME segment does represent a potential growth opportunity and it’s supported by policy focus, however its expansion is constrained by the operating environment. The sector is exposed to high overall credit risks, and when conditions are challenging, banks tend to be more cautious in lending to the SME markets,” says Theofilou.

    So long as the regional conflict persists, banks will be inclined more towards caution than exuberance in their lending approaches. And yet that strong and stable inclination may be what serves them best in a notably turbulent year in the Middle East’s recent history.

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