An eye on fundamentals: Solid growth in the conventional segment and the introduction of Islamic financial services bode well for the sector

Backed up by strong macroeconomic fundamentals and the sultanate’s reputation for stability and sound financial management, Oman’s banking sector is now starting a period of substantial change. In 2012-13, Islamic banks will enter the field for the first time, bringing heightened competition for deposits and loans, while also bringing wider choice for Omani individuals and businesses. Meanwhile, financing a programme of major government-backed infrastructure projects will keep bankers busy for many years to come, while the sultanate’s growing significance as a centre for international trade will likely spread the sector’s reach far beyond its traditional frontiers. “The banking sector has been very resilient despite regional and global market instability,” Abdul Kader Askalan, the CEO of Oman Arab Bank (OAB), told OBG. “Oman has seen steady growth and the financial sector will continue to play a key role in its continued success.”

The Major Players 

The main regulator for the banking sector is the Central Bank of Oman (CBO). The institution came into being in 1974, emerging out of the Muscat Currency Authority and the Oman Currency Board. The CBO is headed by its seven-member Board of Governors, appointed by the sultan, with the Deputy Chairman, Ali bin Mohammed bin Moosa, currently chairing regular board meetings. The CBO also has an executive president, a post currently held by Hamood bin Sangour bin Hashim Al Zadjali.

The CBO regulates according to the provisions of the Banking Law. This was originally passed back in 1974, then amended in 2000 via Royal Decree 114/2000. A further amendment to this is due, with a future royal decree establishing the rules for Islamic Banks. This is likely to be laid out before the end of 2012. The CBO also periodically releases circulars, as and when the need arises, to address specific issues.

The CBO also works closely with other financial sector bodies, such as the Capital Markets Authority (CMA), which has responsibility not only for regulating capital markets, but also for the insurance sector.

The CBO also works with government departments, such as the Ministry of Commerce and Industry and the Ministry of Finance, as well as with professional bodies, such as the Omani Banks Association (OBA).

Banks In Operation

The OBA is a new sector body that was formed in February 2012 when representatives of 19 banks came together in Muscat to sign its founding agreement. The OBA thus represents all of the banks operating in Oman. The 19 entities included the seven local banks registered at the CBO at the start of 2012: Bank Dhofar, Bank Muscat, the National Bank of Oman (NBO), the Oman Arab Bank, Oman International Bank (OIB), Bank Sohar and Ahli Bank.

In addition, two local Islamic banks – Bank Nizwa and Al Izz Islamic Bank– are likely to begin operations in 2013. All the conventional banks have opened Islamic windows, with these taking the form of separate brands, albeit still under the control of their conventional parent companies (see analysis).

Foreign Banks

The foreign banks present in Oman in early 2012 were Bank Melli Iran, Bank of Baroda, Bank Saderat Iran, Habib Bank, the National Bank of Abu Dhabi (NBAD), Standard Chartered Bank, the State Bank of India, Bank of Beirut, Qatar National Bank (QNB), and HSBC Bank Middle East. The last of these merged with OIB later in the year. The new entity, known as HSBC Bank Oman, was given final approval by the MCI to begin operations in June 2012 and thereby became a local bank.

There are also two specialised banks in Oman: the Oman Housing Bank, which supports housing development; and the Oman Development Bank, which finances corporations, small and medium-sized enterprises (SMEs) and additional projects in various sectors. As of the end of the second quarter of 2012, CBO quarterly figures showed a total of 519 authorised bank offices in Oman and 483 operating offices, with local banks accounting for 454 of the former and 427 of the latter. The foreign banks accounted for 42 and 34 offices, respectively, with the remainder belonging to the development banks. Among the local banks, Bank Muscat had the largest branch network, with 133 authorised offices and 130 operational ones, while among the foreign lenders, NBAD had the largest network, with 10 authorised and eight operational offices.

Sector Profits 

Operating within the context of a growing economy, and benefitting from high oil prices and strong government-backed investment drives, Oman’s banking system is robust. The sector serves an expanding population, many of whom were given a strong boost in income by way of pay increases in 2011. For a number of years, the sector has shown strong liquidity, low levels of provisioning and healthy deposit, loan and net profit expansion.

Indeed, according to CBO figures from the first half of 2012, the sector’s commercial banks had combined total assets of OR19.7bn ($51.3bn), up on OR18.4bn ($47.6bn) recorded at year-end 2011 and OR16.3bn ($42.48bn) at the end of the first half of 2011. This included total credit of OR11.45bn ($29.8bn) at end of the first half of 2011, rising to OR12.51bn ($32.6bn) at year-end 2011 and then OR13.67bn ($35.6bn) at end of the first half of 2012.

Most of this credit went to the private sector, which took a total of OR11.92bn ($31.1bn) at the end of the first half of 2012, while public enterprises took OR1.53bn ($3.99bn) and the government OR33m ($86m), with the remainder going to non-residents. In terms of long-term trends, the public enterprises have taken a gradually increasing proportion of the total since 2008. Meanwhile, total liabilities rose from OR16.35bn ($42.6bn) for the first half of 2011 to OR18.41bn ($48bn) at the end of the year and rose again to OR19.7bn ($51.3bn) at end of the first six months of 2012. These figures included total deposit growth from OR11.15bn ($29.1bn) in the first half of 2011 to OR12.57bn ($32.8bn) in the end of 2011, to OR13.54bn ($35.3bn) for the first half of 2012.

Breaking down the total deposit numbers, the majority were again held by the private sector – OR8.73bn ($22.7bn) of the first half of 2012. Public enterprises held OR869.6m ($2.27bn), the government OR3.74bn ($9.75bn) and non-residents OR205.8m ($536m). The long-term trend with deposits has also been one of an increasing government share.

Deposit Ratios

The overall credit-to-deposit ratio for the first half of 2012 was 101, up from 99.5 at the end of 2011 and down from 103.7 at the first half of 2011. The percentage of foreign assets among the total has remained relatively constant over the past few years, standing at 12.8% for the first half of 2012, 12.6% at the end of 2011 and 10.6% at the first half of 2011. The provisions and reserve interest to total credit ratio has also been drifting generally downwards, from 4.0 at the first half of 2011, to 3.6 at year-end 2011, though up slightly to 3.7 at the first half of 2012. Capital and reserves to total deposits has long been high by international standards and requirements too, with this figure moving from 18.2% to 18.3% and then 16.9% over the three periods. The CBO has requested that all Omani banks meet all of the Basel III standards by the end of 2013, with few doubting that this will be achieved.

Total assets, loans and deposits have shown some remarkable growth since the global financial crisis hit in 2008, a considerable achievement. Oman’s local banking sector was also well isolated from the direct effects of this, given low international exposure. Oman has a reputation for having a conservative banking culture, with changes coming in a measured and incremental fashion. This stood the sector in good stead in 2008-09, as the economy had not developed any of the speculative bubbles found elsewhere.

Back On Track 

Indirect effects of the crisis were felt, though, as international funds dried up and foreign participation slowed. This produced another measured response from the Omani government, with projects cut back or frozen while banks adjusted accordingly. As the effects of the crisis wore off, these projects were restarted or rejuvenated, with a number of major projects now under way or in the pipeline.

The eighth five-year plan, which runs from 2011-15, involves some $4.23bn in projects for 2012 alone, with these in addition to some $17.9bn in projects already under way. Most of the spend is in construction, with infrastructure in transport, utilities, education, health and tourism all to be financed.

Similarly, in 2011 the Arab Spring had only limited direct impact on Oman and on the sector. Indeed, the period was followed in the sultanate by an increase in many salaries and an expansion of public sector employment – a target of 56,000 new jobs was set – both of which are good for retail banking in particular. The period also demonstrated the stability of the country and the widespread support for the sultan and his government. “The banking sector has been very resilient, despite regional and global market instability,” Askalan told OBG. Oman has seen steady growth and the financial sector will continue to play a key role in its continued success going forward.

The impact of the eurozone crisis has also been limited to an indirect one, as foreign banking players with European exposures have been weakened. Local Omani banks, however, have had little exposure to the main eurozone problem economies.

Local Leaders 

Out of the seven conventional local banks, six are listed on the MSM. The seventh, Oman Arab Bank, informed OBG in late September 2012 that it planned to list as soon as market conditions would allow, given that it had already received approval from the market authorities and had agreed a 25% share listing with the CMA, rather than the usual 40%. The Islamic Bank Nizwa held its IPO in May 2012 and attracted some OR681m ($1.77bn) in bids, making it 11.3 times oversubscribed. In September 2012 the second Islamic bank, Al Izz International, raised almost $120m in bids and was oversubscribed 1.15 times in its IPO, according to Reuters.

Bank Muscat 

The largest of the listed Omani banks has long been Bank Muscat, which is also one of the longest established. It benefits from being 24.83% owned by the Omani government, via the Royal Court Affairs. The Dubai Financial Group is another major shareholder, holding a 14.74% stake.

The bank’s latest figures showed net profit up from OR87.13m ($227m) in the third quarter of 2011 to OR104.19m ($271.5m) a year later. Customer deposits – including Certificates of Deposit (CDs) – similarly increased during the same period, from OR4.72bn ($12.3bn) to OR4.96bn ($12.9bn).

The bank had earlier reported $19.2bn in assets as of June 30, 2012. This was a 37.22% market share, according to the Bank’s own data, making it the largest bank by assets in the sultanate. In terms of market capitalisation, as of that date, this stood at $2.75bn, with the bank having some 1.18m retail customers, an impressive total given that the population of Oman stood at 2.77m at the last census, conducted in 2010. Bank Muscat had total customer deposits of $13.2bn (including CDs) at the end of the first half of 2012, with net loans and advances totalling $13.5bn.

Bank Muscat has some 3104 employees working in its 130 branches, making it by far the largest bank in terms of employees and branch network. It is also present overseas, with regional offices in Dubai and Singapore and branches set up in Saudi Arabia and Kuwait. In Saudi Arabia, it also has a subsidiary, known as the Muscat Securities House.

Given its healthy fundamentals, the bank had its Along-term issuer default rating (IDR) re-affirmed by Fitch in late September 2012, with the long term IDR outlook stable. Earlier long term credit ratings from S&P’s and Moody’s in June 2012 had placed the bank at A- and A1, respectively.

Diverse Portfolio 

Bank Muscat also has a healthily diverse portfolio. As of the first half of 2012, data from the bank shows net profit dividing up 34.4% corporate, 28.8% wholesale, 38.5% consumer and the remainder from international. Likewise its assets divided up 38.4% corporate, 24.7% wholesale, 30% consumer and 6.9% international.

This division points to the bank not only being the largest in the retail segment, but also being a major leader in corporate banking. In the latter segment, figures from the bank show that in 2011, operating income stood at OR81.9m ($213.4m), up from OR79.5m ($207.2m) in 2010 and OR68m ($177.3m) in 2009. Over the same period, total assets grew from OR2.19bn ($5.7bn) to OR2.74bn ($7.14m).

Bank Muscat’s retail banking operations, meanwhile, saw operating income rise from OR115.5m ($300m) in 2009 to OR137.4m ($358m) in 2011, while total assets grew from OR1.9bn ($4.6bn) to OR2.35bn ($6.12bn) . In wholesale, the respective performance indicators were a rise from OR42.6m ($111m) to OR66.3m ($172.8m) in operating income and from OR1.4bn ($3.6bn) to OR1.78bn ($4.6bn) in total assets.

The bank’s loans and advances also spread across many sectors, with the majority in personal and housing loans, which accounted for 40.5% of the total at the end of the first half of 2012. Other big segments of the loans portfolio were services, at 11.7%, mining and quarrying, at 7.9%, and real estate sector and manufacturing sector shares of 5.6% each.

Deposits, meanwhile, divided up at 36% from government ministries and organisations, the same proportion as individuals and others, while the private commercial sector accounted for 27% and the remainder financial institutions.

The bank has also moved in a major way into the sultanate’s nascent Islamic banking sector. With a paid up capital of some OR150m ($391m) – equal to the capital bases of each of the two purely Islamic banks – Bank Muscat launched Meethaq Islamic Banking in 2012. This is the bank’s Islamic window, yet it is to operate through seven dedicated branches with a full range of Islamic banking products when up and running, likely in 2013. Indeed, while some other conventional local banks have launched their Islamic windows largely as a defensive strategy to retain customers, Meethaq has adopted a much more aggressive strategy designed to bring in new customers by leveraging on the bank’s well-known name.

National Bank Of Oman 

Also with a large asset base is National Bank of Oman (NBO), which reported total assets of OR2.49bn ($6.47bn) at the end of the first half of 2012. This was up on OR2.02bn ($5.3bn) at the same time in 2011, and OR2.23bn ($5.8bn) at the end of the first half of 2010.

NBO’s major shareholders include the Commercial Bank of Qatar, which holds a 34.85% stake, Suhail Bahwan Group (Holding), one of Oman’s largest business houses, with 14.74%, and the Omani Ministry of Defence Pension Fund, with 7.66%. The bank had 65 branches operating at the start of 2012.

The banks’ total liabilities stood at OR2.16bn ($5.63bn) at end of the first half of 2012, according to the bank’s unaudited mid-year report, up from OR1.72bn ($4.48bn) a year before.

Customers’ deposits accounted for OR1.83bn ($4.77bn) of these, up from OR1.46bn ($3.8bn) at end of the first half of 2011, while operating income rose from OR45.66m ($119m) to OR50.64m ($132m). Loans and advances grew from OR1.55bn ($4bn) at end of the first half of 2011 to OR1.86bn ($4.84bn) a year later, while net profit rose from OR17.07m ($44.5bn) to OR19.92m ($52m).

Early third-quarter 2012 results from the bank also showed a nine-month net profit of OR30.5m ($79.5m), up 12% over the same period of 2011. In terms of ratings, Fitch gave the bank’s long-term IDR a BBB+, as did Capital Intelligence in September 2011. Moody’s, meanwhile, gave the bank an A3 for its deposits and a D+ for financial strength, with a stable outlook.

Bank Dhofar

Bank Dhofar, meanwhile, reported in its initial figures for the third quarter of 2012 that its net profits had risen from OR5.7m ($14.9m) in the first nine months of 2011 to OR28.7m ($74.8m) for the same period of 2012. The bank’s consolidated statement for the first half of 2012, meanwhile, showed that its total assets had reached some OR2.1bn ($5.5bn) by then, up 26.51% from OR1.66bn ($4.3bn) at the end of the first half of 2011.

The bank began operations in 1990 as Bank Dhofar Al Omani Al Fransi, taking on the assets and liabilities of Banque Paribas’ Oman operations. Its name was then shortened in 2003, after a 2002 merger with Majan International Bank had been approved. The bank had 58 operating branches at the start of 2012.

The figures from the bank for the first six months of 2012 also showed loans and advances to customers had grown 23.85% since the first half of 2011, from OR1.3bn ($3.39bn) to OR1.61bn ($4.2bn), while customer deposits expanded 29.84%, from OR1.24bn ($3.2bn) to OR1.61bn ($4.2bn). Net profit moved from a net loss of OR4.55m ($11.9m) in the first half of 2011, to a net profit of OR19.46m ($15.7m). That shift into the red had been a result of legal action by OIB in 2011 in a share ownership dispute, with Bank Dhofar eventually winning the case in early 2012. Operating profit was also up between the first half of 2011 and the first half of 2012, climbing 15.07% from OR21.9m ($57.1m) to OR25.2m ($65.7m).

In ratings, Bank Dhofar’s long-term IDR was affirmed by Fitch at BBB+ in August 2012, with a stable outlook. Fitch drew attention to the bank’s high customer deposit ratio at in first-half 2011, at 90% of non-equity funding, while noting that a large proportion was from the government or government-related firms. This can be a blessing – as with many such Omani banks with strong government deposits – as it underscores the sovereign’s interest in maintaining the bank’s health; it also exposes the bank to government’s own fortunes, notably with international oil and gas prices.

HSBC Bank Oman

The third major bank in the country is the OIB-HSBC merger, HSBC Bank Oman. Indeed, the merged entity inherited 85 operating branches from OIB, plus six from HSBC Middle East, making it the second-largest network in the sultanate. In June 2012 the bank’s new board announced at a press conference that its assets were “in excess of OR2bn ($5.2bn)”, with the authorised capital of the bank increased to OR750m ($1.95bn).

The merger was largely viewed as mutually advantageous, with OIB benefitting from HSBC’s global profile, expertise and resources, and HSBC using OIB’s extensive in-country knowledge and branch network. Indeed, Fitch promptly awarded the new bank a long-term IDR of A+, up from OIB’s former BBB+ rating.

Given the merger, first-half 2012 results were not available for OIB, but year-end 2011 results showed total assets of OR1.49bn ($3.9bn), up from OR1.15bn ($3bn) in 2010. The bank reported total deposits of OR997.95m ($2.6bn), 25% up on 2010’s total of OR796.96m ($2bn). Loans and advances stood at OR686.57m ($1.79bn) at year-end 2011, up 7.4% on year-end 2010, when they had totalled OR639.1m ($1.7bn). The bank made a net profit of OR16.5m ($43m) in 2011, down from OR17.6m ($45.9m) in 2010, mainly as a result of a decrease in recoveries, though provisions for loan impairment were also down.

Bank Sohar

Bank Sohar, meanwhile, reported total assets of OR1.71bn ($6.5bn) at the end of the first half of 2012, including OR1.1bn ($2.9bn) in net loans and advances, up from OR1.02bn ($2.7bn) at the end of 2011. Deposits also increased over that six-month period, from OR1.17bn ($3.05bn) to OR1.3bn ($3.4bn). Net profit was up from OR6.93bn ($18.2bn) at the first half of 2011 to OR10.36bn ($27bn) a year later, a 49.55% increase. The bank had 25 local branches at end-2011, and was in an advanced stage with its Islamic window, working with the Dubai-based Dar Al Sharia, a subsidiary of Dubai Islamic Bank, to ensure its Islamic banking services are compliant and reliable.

AHLI Bank

Meanwhile, Ahli Bank came into existence in its present form in 2008. This was when the Alliance Housing Bank, Ahli United Bank (AUB) and the International Finance Corporation (IFC) partnered to form Ahli. AUB took a 35% share and the IFC 9.9%.

The bank’s total assets grew 20% between the end of the first half of 2011 and the end of the first half of 2012, from OR880m ($2.3bn) to OR1.05bn ($2.7bn), while loans and advanced grew 21% over the same period, from OR730m ($1.9bn) to OR887m ($2.3bn). Customer deposits grew 14% over this period, from OR679m ($1.77bn) to OR771m ($2bn), while net operating income was up 37% from OR16.67m ($43.4m) to OR22.79m ($59.4m). Net profit rose 36%, from OR8.7m ($22.7m) to OR11.84m ($30.9m).

The bank had 13 branches in operation at year-end 2011, with its new Islamic window, Al Hilal, likely to begin with four dedicated branches, according to statements by bank officials to the local press in July 2012. The bank had transferred some OR20m ($52m) in capital to set up Al Hilal.

Oman Arab Bank

Finally, OAB, which is a subsidiary of the Oman International Development and Investment Company (Ominvest), is likely to be listed in the 2012-13 period, with an offering of 25% of its shares. OAB represented approximately 54% of Ominvest’s total capital at year-end 2011.

Ominvest reported OAB’s total assets at OR1.1bn ($2.87bn) at the end of 2011 of in its annual report. This was up from OR953m ($2.5bn) at the end of 2010. The bank’s figures also showed net profit up from OR23.17m ($60.38m) to OR23.2m ($60.46m) over the two-year period, while gross loans and advances grew from OR682m ($1.78bn) to OR857m ($2.23bn). Customer deposits also increased by 18% year-on-year to reach OR910m ($2.37bn).

Outlook

With a range of major new projects in the sultanate requiring finance, the banking sector should be kept very busy in the years ahead. In this area though, Omani banks will face stiff competition from overseas players, as large projects require large asset bases. In the past, Omani banks have overcome this obstacle via syndication, with this likely to continue.

The introduction of Islamic banking will have major effects in the year ahead, although the extent is unclear. Much will depend on pricing, with the newcomers having to compete with the Islamic windows of established banks. “Islamic financial instruments will be an alternative and complementary segment of the banking sector in Oman,” said Abdul Aziz Al Balushi, the CEO of Ahli Bank. “The market is not big enough for it to become dominant. Islamic finance here should not rush its growth but rather focus on quality and the right types of services.”

Competition for loans and deposits is also set to rise (see analysis), with spreads falling and capital being raised to further boost capacity for loans.

Fundamentally, the sector has many strengths that it can continue to play on in the years ahead. Banks have shown their resilience, and the next few years are likely to bring continued growth on several levels.

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The Report: Oman 2013

Banking & Islamic Finance chapter from The Report: Oman 2013

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