Omani banks’ profitability will soften on rising funding costs: Moody’s
Higher funding costs will soften Omani banks’ profitability as rising US interest rates will outweigh higher lending rates from banks’ loan repricing, Moody’s Investor Service said.
In its Oman banking system outlook report, Moody’s said Omani banks’ funding costs will continue to increase due to a combination of higher US interest rates and competition for deposits.
‘Higher US rates increase the cost of money in local currency deposits because interest rates in Oman will have to keep pace due to the rial’s peg with US dollar. But the cost of US dollar denominated funding will also rise, as banks refinance their long-term debt and raise hybrid funding on international markets’, the ratings agency said.
Moody’s said lending rates in Oman will increase gradually as banks gradually reprice their loans following interest rate hikes. ‘In addition, banks’ continuous investment in government debt securities will provide them with increasingly higher yields, as the global cost of US dollar liquidity continues to increase’.
The New York-based ratings agency expects Omani banks’ net interest margins to soften, to around 2.2 per cent over next 12 to 18 months, compared to 2.3 per cent in 2017 and 2.4 per cent in 2016. ‘The marginal decline in net interest margins in Oman will continue to reflect the faster pace of repricing of banks’ liability side (given higher US rates and deposit competition amid robust credit growth) compared to banks’ asset side’.
Moody’s maintained its negative outlook for Oman’s banking system, reflecting the diminishing capacity of the government to support the country’s banks in case of need. The negative outlook also reflects banks’ softening asset quality and relatively tight funding, the ratings agency said.
Moody’s said that project financing will support solid credit growth in Oman’s banking sector. It projects overall credit growth to be between six-seven per cent in 2018 and 2019, compared to 6.4 per cent in 2017 and 10.1 per cent in 2016.
‘Most lending by Omani banks is to corporates. We expect growth in corporate lending to primarily reflect the funding of project finance transactions as the fiscally constrained authorities increasingly turn to the banks to help finance projects of national importance. We expect such government-initiated projects in the utilities sector, the petrochemical sector, infrastructure, manufacturing, tourism and hospitality, among others’.
Moody’s said in retail segment, growth in housing mortgages will remain solid, but limited job growth and a rising cost of living will weigh on demand for unsecured personal lending. ‘In addition, higher funding costs for some banks will gradually curb their appetite for retail loans, whose pricing is capped by local regulation’, it added.