Omani banks are witnessing a stable credit outlook amid challenging environment, according to a Moody’s report.

The stability in credit outlook reflect their continued franchise development amid a competitive and somewhat concentrated operating environment, the ratings agency said in a statement.

It also recognises that the improved financial performance in recent years has been partly driven by the positive economic cycle, says Moody's Investors Service in its new Banking System Outlook for Oman.

The banks' weighted average bank financial strength rating (BFSR) is C-, reflecting their good franchises in the Sultanate of Oman, robust profitability and good capitalisation levels.

'The rated Omani banks' franchise development has been relatively balanced across segments and has entailed not only strong growth in personal lending but also continued growth in corporate and commercial banking. We expect the development of major infrastructure projects to contribute to the government's diversification efforts while further boosting corporate activity in the country and thus the banks' corporate lending,' says Elena Panayiotou, a Moody's associate analyst and author of the report.

Omani banks generate robust profitability levels thanks to their low cost bases and healthy interest margins. Nevertheless, their quality of earnings remains weak in terms of diversity of income streams, with the bulk of the profits being generated from interest-related activities.

As the Omani banking sector becomes increasingly competitive and overcrowded, Moody's believes the banks should strengthen their fee-generating capabilities to offset the pressure on the profitability from compressed interest margins and sustain their earning power at the current levels.

Despite some improvements, Omani banks continue to operate in a challenging and rather concentrated economy that constrains their ratings' upside potential, according to the statement.

Although Moody's recognises the success of the government's efforts to expand economic activity beyond oil-related business, Oman continues to rely heavily on hydrocarbon exports, which results in considerable cyclicality in the operating environment, which in turn affects the performance of the banks.

'Another factor constraining the ratings of Omani banks is their tight liquidity positions. Although liquidity in Oman has improved considerably over recent years as a result of high oil prices, Omani banks continue to display tight liquidity levels by international standards that somewhat constrain their BFSRs,' said Panayiotou.

Omani banks also continue to face high credit risk. Despite some improvements in the system's asset quality metrics over recent years due to generally improved credit risk management policies and good supervision, Moody's cautions that the current asset quality benefits from a favourable economic environment and may not prove sustainable through the cycle. – TradeArabia News Service