Recent changes in the sultanate’s banking landscape have increased competition for loans, with banks now also switching some of their emphasis from retail to corporate. These moves come ahead of an expected acceleration in competition overall, as Islamic banks and banking windows enter the market operationally in late 2012-13, and a range of major government-backed projects begin looking for financing.

This brings benefits for Omani bank customers via a narrowing of interest rate spreads, while a boost in services and product types is also being offered. The impact of these moves on banks’ bottom lines remains unclear, though given the robust status of the sultanate’s lenders, there are few concerns that these developments will have a serious impact on profitability. Instead, a period of more bullish behaviour may lie ahead for Oman’s traditionally conservative lenders.

Capital Building 

The Central Bank of Oman (CBO) reduced the interest rate ceiling on personal loans from 8% to 7%, with an aim to tackle debt risk and rechannel bank loan emphasis from retail to corporate. This later strategy was deemed necessary given the large number of major projects either ongoing or in the pipeline, all requiring financing.

Indeed, Reuters reported in September 2012 that the government planned to hike spending in its 2013 budget by around 10% to help fund infrastructure projects. This would mark another year of fiscal expansion by the authorities, with the 2012 budget outlining some OR10bn ($26.06bn) in expenditure based on a $75 per barrel assumption about oil prices. This gave a 2012 budget deficit forecast of OR1.2bn ($3.13bn), although, given that oil prices have been much higher during the year – reaching over $110 a barrel in September – a budget surplus will be the more likely year-end 2012 result. Indeed, for the January-July 2012 period alone, the budget surplus had already reached around OR2bn ($5.2bn).

This substantial financing for major infrastructure projects – roads, railways, airports, ports, hospitals and schools are all listed – has created a significant challenge for Omani banks. As of the first half of 2012, the commercial banking sector’s total assets stood at around OR19.7bn ($51.3bn), with the largest, Bank Muscat, accounting for around OR7.4bn ($19.3bn).

Three others had asset bases of more than OR2bn ($5.21bn) – National Bank of Oman, Bank Dhofar and the newly formed HSBC Bank Oman.

Thus, to finance some of these major infrastructure projects, the local banks may need to both form syndicates and expand their capital to back up an expansion in risk-weighted assets. This has mainly resulted from new credit extensions to corporate parties anxious to take a slice of this infrastructure project pie.

“Banks need to increase their ability to lend,” Ammar Salim, a senior analyst for research at Oman Arab Bank, told OBG. “They need to strengthen their capital to do this – although of course, there is no harm in strengthening your capital at any time.”

Thus the banks – and their competitors in Oman’s leasing and finance companies – have been expanding their capital bases throughout 2012. To do this, they have adopted a number of strategies, the most prevalent of which has been to use a rights issue.

Rights Issues 

Indeed, by the start of August, data from the Muscat Securities Market (MSM) showed that some OR203.7m ($530.9m) in rights issues had taken place since the start of the year, with 76% of those made by banks and finance and leasing companies.

That figure then surged again, when later in August Bank Muscat made a OR96.7m ($252m) rights issue, which was 127.5% covered by investors.

The bank stated that the issue was to assist in planned credit growth, as well as to help cover the establishment of the bank’s Islamic window. This buildup of base capital has indeed also coincided with an expected hike in competition, as two Islamic banks – Bank Nizwa and Al Izz – gear up to enter the field. Conventional banks have responded by opening Islamic windows, with an additional capital requirement of OR10m ($26m) set by the CBO to allow such a window to happen. OAB, Bank Sohar and Bank Dhofar also made rights issues in 2012 with these goals in mind.

Boosting Capital 

As far as the leasing and finance companies are concerned, their demand for capital is also being fed by CBO regulations, which have placed a minimum capital requirement of OR25m ($65m) on them, to be achieved by 2016. As of August 2012 this meant around half the listed leasing and finance companies on the MSM needed to boost their capital. This also followed a June 2012 deadline by which these companies were required to reach a OR20m ($52m) minimum capital requirement level.

Most of the capital raised via these methods has been highly liquid and therefore low-yielding. This has put further pressure on the banks to boost their higher-yielding loan books to avoid suffering the opportunity cost of lower-yielding investments or overnight interbank loans. Overnight interbank loans, for example, were around 0.12-0.15% at the end of the first half of 2012, while normal loan rates averaged 4. 7-4.8%. Indeed, very little activity on the interbank market occurred in Oman in 2012.

In terms of investments, in the first half of the year many banks looked to foreign securities to soak up liquidity, with the CBO reporting commercial banks’ investment in foreign securities up 136% year-on-year in July 2012. Short-term US Treasury stocks were particular favourites, given their high security and ability to be liquidated quickly.

The reduction in interest rates imposed by the CBO in April also has an impact, though the reduction was on the personal loans side, rather than on corporates. Indeed, CBO figures for March 2012, before the rate ceiling, showed a weighted average lending rate of 6.085%. This had fallen from 6.704% a year earlier and was part of a pattern of declining rates, which was also evident on the deposits side. In March 2011, the weighted average deposit rate (which includes deposits, savings and time deposits) stood at 1.509% in March 2011, falling to 1.318% in March 2012. This meant the interest rate spread – the difference between lending and deposit rates – also fell, from 5.195% to 4.767% over the same period.

The spread then continued to shrink. CBO figures for June 2012 showed the deposit rate averaging 1.301%, while the average weighted loan rate was 5.896%, giving a spread of 4.595%.

Thus the banks have made borrowing from them a lot more attractive in recent times, a move that heralds the beginning, many in the sector told OBG, of major competition between the banks to sign customers up for new loans, while also competing to keep market share in the face of some expected migration to the Islamic banks and windows, as well as new Islamic customer entrance.

Loan Growth

Indeed, the effects of these changes are already beginning to show. Figures for the first half of 2012 show overall loan growth of some 19.9% year-on-year amongst the listed Omani banks, excluding HSBC Bank Oman. Around 81.7% of these loans were extended by the big three banks – Bank Muscat, Bank Dhofar and NBO – according to a research note from Al Maha Financial Services. The expectation is that this might slow down slightly in the second half of 2012, as the first-half figures include retail lending before the ceiling was introduced.

Corporate sector portfolio growth may make up for the decline in any case. The effects of this were still too early to see in the figures available as The Report was going to press, but construction was widely favoured as an area that might see such growth. “We are very much focused on the construction side and this is moving very much,” the director-general for marketing at OAB, Michel Andre Le Fur, told OBG. “We are focusing on the contractors, a major area for us and pretty good business.”


CBO figures for the second quarter of 2012 showed that construction took some 9.4% of all loans extended in Oman in that quarter, the largest proportion aside from personal loans, which took 41%. Thus, a more bullish and more risk-taking attitude may be on the way for Oman’s banks in the year ahead. Yet this will likely be tempered by the customary caution of such institutions.

While loan growth may now be more favoured, this is coming on the back of some very promising projects, supported, at least indirectly, by the government and a robust economy with high oil prices. This is, therefore, far from any high-risk strategy. Oman’s banks also have low non-performing loan ratios, with good quality assets to back them up.

The strong government budget plans may also be beneficial to foreign banks in the sultanate, as well as locals, as foreign outfits may be able to leverage wider resources elsewhere to finance large projects. Indeed, those with large exposure in areas such as the eurozone may also begin to look more closely at investing in Oman, given a dearth of spending back home, likely causing competition between local and foreign banks to tighten as they vie for the larger contracts.