Banks’ profitability to revive market confidence

The Omani financial institutions have recorded good balance sheet in 2017 that would spur growth in the local investments and trades. Local banks have proved that, despite the low oil prices that prevailed last year, their collective income still reflect a good growth. Lending is the vital part of any economy in any country and the willingness for local banks to extend loans is commendable in 2017.

The official statistics in the Central Bank of Oman prove it, too.

In 2017, banks have increased its lending ratio by more than 9 per cent compared to a year earlier. This clearly shows that the financial institutions were still willing to take business risks to spur growth.

The cost-to-income ratio of local banks remained relatively healthy rising from 23.2 per cent to 23.8 per cent. It clearly shows banks continued to manage their cost portfolio well. 6 of the top banks reduced their loan risks provisions compared to the second quarter of 2017. Overall cost of risk declined, driven by lower provisioning and increased loan portfolios. Only three banks actually increased their cost of risk. Lending increased as a result of higher levels of interest income and increased income margins and leverage.

This clearly shows that Omani banks successfully adapted to the severe market conditions created by a lower oil price environment, growing their loan books and are continuing to manage their costs sensibly.

The robust improvement in performance with overall profitability and return on equity shows a key performance metrics in the financial market. This will encourage banks to improve their lending portfolio as oil prices start to pick up in 2018. Last year, the average oil prices were recorded at $52 per barrel.

So far this year, the average of oil prices is at $63 per barrel, which is about 10 per cent higher.

With the expected increased earnings for the government, more projects will be awarded this year and that would put more cash in the market. The banks would consolidate the market push to increase its reach.

The areas local banks targeted last year was the successfully service and manufacturing sectors. The real estate market was the biggest recipient and manufacturers received a boost as well.

Local banks this year are positioning themselves in other areas that were deprived in the past. The free trade zones (FTZ) in Salalah, Duqm and Suhar are set to benefit from the credit the banks have already braced themselves to extend. With the new Chinese City, the refinery, and car manufacturing unit in Duqm, banks have already started sounding both local and foreign investors.

In Suhar, the logistics projects will take off this year and the new mining companies.

The long-shelved expansion of the Salalah free zone will be revived this year as the Ministry of Transport Communications starts to pull in foreign investors. All these projects will pave the way for the financial breakthrough the local banks are well equipped to extend credit.

With the government providing incentives in the Small to Medium Enterprising (SME) projects, banks are aligning themselves to extend credits to new aspiring owners of smaller trades. Statistics also show that banks funded over 600 such projects in 2017, a three per cent increase compared to a year earlier.

A modest increase but with better financial environment this year, the banks are set to make a bigger wave in SME lending to reach the government’s set targets.

Although banks still rely heavily in lending of personal loans, there is every indication that the trend will reduce in 2018. Last year, there was a markedly 7 per cent decline in personal loans compared to 2016 with banks concentrating more in investments credit.

Overall, the financial market in the Sultanate is set to scale a new height in 2018 with the private sector expected to benefit more from the renewed lending vigour from the local banks.