Credit profiles of Omani banks to face pressure during 2021, says Fitch

The ratings agency said it expects the sector’s stage 3 loans ratio to increase from 4.4 percent at end-2020 as borrower support measures expire and loan classification normalises.

The proportion of restructured loans – 4 percent at end-2020 – is also likely to rise, it added in a statement.

Fitch said corporate loan deferrals are significant and, unless extended, will pose sizeable risks to asset quality when they expire in September.

Total loan deferrals, either during or at the end of 2020, varied significantly among banks, ranging from 6-50 percent of gross loans, based on outstanding principal and related balances.

The sector’s expected credit losses increased to 4.1 percent of gross loans at the end of 2020 as banks front-loaded provisions.

However, some banks’ loan impairment charges appear low given widespread payment deferrals and the likely extent of GDP contraction. Underlying profitability should improve modestly in 2021 due to a gradual pick-up in lending, but the slow economic recovery and the still-high cost of risk will limit the upside, Fitch added.

“We expect regulatory capital ratios to be stable in 2021, reflecting modest credit growth and prudent shareholder distributions. The sector’s common equity Tier 1 and total capital ratios of 13.8 percent and 18.4 percent, respectively, at end-2020 indicate generally adequate buffers to absorb additional losses,” the agency noted.

“Liquidity tightened in 2020 but we believe the need for the authorities to withdraw deposits from the banking system has decreased due to the rebound in oil prices, the recent introduction of VAT, and the sizeable sovereign issuance planned for 2021. Nevertheless, deposit outflows, combined with the normalisation of savings rates as economic activity picks up, could put pressure on banks’ liquidity,” it added.

The Fitch report comes a month after Oman approved a new economic stimulus plan (ESP) which aims to put the sultanate’s economy back on track after the impact of the coronavirus.

The ESP, approved by Oman’s Sultan Haitham bin Tarik (pictured above), is based on five main axes and includes incentives pertaining to taxes and fees, incentives to improve business and investment environment and incentives to boost small and medium enterprises.

It also includes incentives for the labour market and employment and the banking sector.