Fuelled by oil prices and rising gas revenues, Muscat is waking up after a difficult period when scandals and bad management decisions affected the performance of several major banks. Consolidation driven by the Central Bank of Oman (CBO) is no longer the dominant theme in Oman’s banking sector.
Healthy bank profits, the prospect of more foreign competition as Oman awaits ratification of its free trade agreement with the US, an ambitious economic diversification drive and a new real estate market are among factors forcing change through the industry. In this traditionally quiet banking market, there is talk of increased competition while local banks are extending their horizons to take on big-ticket financings outside the region.
Oman’s commercial banks are bulging, thanks to a robust macroeconomic environment that has strengthened their combined balance sheet throughout the year. Results for end-May 2006 show that Omani banks’ total credit, foreign assets, total deposits as well as core capital and reserves are all growing substantially.
Sound fundamentals
Total outstanding credit increased by 16.9% over the 12-month period to May to reach Or4bn ($10.3bn). Credit to the private sector – which accounted for 95% of total credit – rose by 18.2% in the five months to end-May. Commercial banks continued to build up foreign assets to reach Or1.04bn at end-May – 20.8% more than the previous year.
Significant growth is also noticeable on the liabilities side, with the customer deposit base increasing by 17.8% to reach Or4.1bn in the 12 months to end-May. Core capital and reserves of commercial banks grew from Or552.1m to Or719.6m over the same period.
Highly liquid money market conditions have prompted the CBO to continue absorbing surpluses by issuing certificates of deposit (CDs), occasionally re-injecting short-term liquidity through repos. Due to Oman’s fiscal surplus and the lack of need for the government to issue treasury bills, demand for CDs has been high, the CBO says. Banks invested Or301.9m in CBO CDs in May, compared with Or258.9m in May 2005.
The fallout from embarrassing affairs, such as the collapse of Ali Redha Darwish al-Lawati’s trading empire, has passed over. The high level of consumer loans remains one of the few concerns impacting on the banking sector, prompting the CBO in March to try to strengthen commercial banks’ loan books by restructuring consumer loan portfolios, at the same time giving a boost to the nascent business of real estate financing.
The consumer loan ceiling was reduced from 42.5% to 40% but banks can now grant 5% of total loans as personal housing loans. Because the housing loans are collateralised, this new arrangement should strengthen banks’ loan books.
Responding to calls to improve credit risk management systems and reduce bad loans, BankMuscat, has launched a social awareness programme to promote sensible borrowing. BankMuscat, the sultanate’s biggest bank, is the first in Oman to introduce such a programme, which is endorsed by CBO and the ministry of social development.
“As the nation’s largest bank, we believe it is our responsibility to society and the people whom we serve, to create awareness of the dangers that may arise out of indiscriminate loan taking,” Abdul Razak Ali Issa, BankMuscat chief executive, said as the programme was launched.
It will use a wide range of mass media tools to reach out to would-be borrowers. Bank officials said a series of internally-focused initiatives at the bank would explain the benefits of moderated borrowing.
Strong performances
BankMuscat remains the sultanate’s largest bank in several areas. It maintains a dominant position in corporate banking, retail banking, treasury, investment banking, private banking and asset management. It has a market share of 37.8% in terms of total assets, 37.9% of total credit, 35.1% of customer deposits and 38.6% of savings deposits, as at December 31, 2005.
This year has also started brightly. The bank reported a first quarter net profit of Or13.25m compared with Or10.34m in the first quarter of 2005, an impressive growth rate of 28%. For the financial year ending December 2005, BankMuscat reported profits of Or45.4m, up 33.1% on 2004.
Other banks to report strong performance in 2005 included Oman International Bank (OIB), which all but doubled its profits to Or22m, and Bank Dhofar, which boosted its profits by 27% to Or14m. National Bank of Oman (NBO) – which not so long ago was deeply troubled by the Ali Redha affair and an injudicious expansion into Egypt and the United Arab Emirates (UAE) – followed suit. It reported a fourfold profits increase to Or20.2m, apparently confirming that it is recovering from the consequences of its poor lending decisions, which emerged about four years ago.
Oman’s banks have participated in several mergers since the 1990s so the number of commercial banks stood at 13 at end-2005, of which five were locally incorporated and eight are branches of foreign banks, together boasting a network of 329 branches. Locally incorporated commercial banks – BankMuscat, NBO, OIB, Oman Arab Bank (OAB) and Bank Dhofar – have been joined by an increasing number of foreign banks. These are HSBC Bank Middle East, Standard Chartered Bank, Habib Bank, Bank Melli Iran, Saderat Iran, National Bank of Abu Dhabi, Bank of Baroda and State Bank of India.
Oman also has three specialist banks: Oman Housing Bank and Oman Development Bank, which are both state-owned, and the privately-owned Alliance Housing Bank.
Newcomers expected
By end-2006 Oman will probably host more foreign banks, while existing institutions are expanding and a brand new local bank is likely to open.
Underlining the sultanate’s Indian connections, India’s State Bank of Travancore (SBT) is planning to open its first branch in Oman. “We are exploring the options of opening a branch in Muscat, provided there is business potential,” says the Kerala-based bank’s chief general manager, Pradeep Shankar. SBT established its presence in Oman in 2002, when it opened its Global Money Exchange Company to enable expatriates in Oman to send remittances to 300 or so major SBT branches.
Reflecting the growing regional ambitions of Lebanese banks, the CBO has this year given the green light to Bank of Beirut to open a branch in the country.
Meanwhile, global giant HSBC, which has a long-standing Muscat operation, is aiming to fit in with Oman’s economic development plans by opening up in the northern city of Sohar, where some of the sultanate’s most ambitious industrial development projects are emerging.
One of the more exciting prospects in the banking sector is the anticipated opening by the end of this year of a brand new bank. The planned Bank Sohar will have capital of Or50m, making it larger than some of the sultanate’s other locally incorporated banks, such as OAB and Bank Dhofar. Their capital is less than the Or50m minimum capital recently demanded by the CBO in a bid to boost depositor confidence. The previous requirement was Or20m.
Bank Sohar’s anticipated start date is conditional on the promoters’ submission of a detailed business plan that is acceptable enough to obtain a licence from the CBO, which has already approved the bank in principle.
The CBO is keen to see a spread of shareholders in the new bank. Although 60% of Bank Sohar’s equity is expected to come from individual, institutional and government pension fund investors, the balance would be held over for an initial public offering, subject to Capital Market Authority permission, perhaps after the bank has been in operation for three years.
Increased competition
The admission of new foreign banks and a probable new local player in Oman signals stronger competition at home, and has prompted highly liquid local banks into new and wider markets. Among other things, they are taking experience gained in project financings at home to other emerging markets. BankMuscat, along with SBI Capital Investments of India, had been appointed an adviser to Botswana Power Corporation for its $600m expansion of the Morupule power station, for example.
Through its stake holding in other banks, BankMuscat operates in Bahrain and India and on its own, through a representative office, in the UAE. It is actively pursuing regional expansion in other Gulf countries such as Qatar and Kuwait. And it is expected to start operations in Saudi Arabia in the near future.
The sector still needs some external support to help strengthen even the biggest Omani banks and upgrade a business environment in which job-creation for locals – enshrined in the “Omanisation” process – remains a critical issue.
IFC steps in
BankMuscat is being helped to strengthen its capacity in Oman by the International Finance Corporation (IFC), via the latter’s largest investment in the Middle East and north Africa region to date. A long-term subordinated loan of $100m has been committed by the IFC, the World Bank Group’s private sector arm, to strengthen BankMuscat’s capital adequacy and support the growth of its long-term mortgage financing and its small and medium-sized enterprise (SME) portfolio.
In addition to the loan, the IFC is providing technical assistance to help BankMuscat to grow its SME business. This will help the bank to “develop financial products and services for smaller businesses, which typically have difficulty obtaining loans”, says Michael Essex, director of the IFC’s Middle East and North Africa (Mena) department. “As the private sector in Oman expands, this sector will become an important engine for job creation.”
BankMuscat chairman Sheikh AbdulMalik bin Abdullah Al-Khalili foresees more deals with the IFC: “We are sure… this will only be the start of a long and mutually beneficial relationship between our two organisations.”
IFC officials seem to agree. Jyrki Koskelo, director of the IFC’s global financial markets department, says it is the beginning of a relationship with a reputable bank that could become a valuable partner in the IFC’s initiatives in the Mena region.
New markets
The IFC is now keen to be seen supporting Gulf Co-operation Council (GCC) economies’ efforts to become less dependent on oil-related revenues, and it is keen to foster the development of a viable housing finance market in Oman and other GCC countries.
“There is a great demand for affordable, quality housing in Oman, especially for the middle-income group,” according to Mr Essex – and banks are lining up to meet the financing requirements of Oman’s mushrooming property market.
NBO recently launched the Al-Manzel housing loan product, which offers loans for up to 25 years to customers to build or purchase homes, purchase land or make improvements to their existing homes.
OIB – which, along with BankMuscat and NBO, dominates the local banking scene in terms of share of banking assets, deposits and credit – is one of eight banks to have joined one of a slew of massive financings in Oman’s economic diversification programme. The $1.46bn Sohar Aluminium financing recently raised a further $250m in general syndication, with OIB, NBO and foreign banks BayernLB, Qatar National Bank, Natexis, SanPaolo IMI, British
Arab Commercial Bank and Bank Dhofar joining the 17 senior lenders.
There will be more project financings to come as Oman pursues its ambitious economic diversification programme, taking full advantage of high oil prices to finance its non-oil economy.
“To reduce the nation’s dependence on oil, the government has been pursuing a policy of economic diversification,” Bank Muscat’s Mr Ali Issa told The Banker earlier this year. “This has been encapsulated in the ‘Vision 2020’ programme [which envisages a $10bn spend on infrastructure, development and tourism projects]. The economic prospects of the country therefore look bullish in the short term.”
A slew of prospective projects involving large scale investment in areas such as fertilisers, petrochemicals, aluminium, power, infrastructure, tourism and real estate are expected to contribute significantly to the diversification of the economy in the long term. For the time being, however, with today’s favourable oil price scenario, the hydrocarbons sector remains the critical contributor to Oman’s gross domestic product (49% of the total in 2005, according to CBO data), exports (84.2%) and fiscal revenue (79%).
With their fortunes looking up, Omani banks and foreign entrants can make a major contribution to Oman’s non-oil economy. Diversification is under way – a work in progress that is made more urgent by the demands of the youthful majority in the sultanate’s two million-plus population.
