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Margin squeeze seen choking banking sector

Muscat - 

The profitability of Omani banks is expected to come under pressure in 2013 due to margin squeeze from intensifying competition, retail credit growth constraints and large capital infusion in the sector this year.

A research report, released recently by bank muscat's investment banking division, said that banking stocks continue to remain under pressure as investors' concerns over intensifying competition eventually challenge earnings growth in 2013.

We expect sector profitability to come under pressure given the margin squeeze triggered by the  intensifying competition, retail credit growth constraints and the large capital infusion in the sector. While we expect a muted earnings growth in 2013, we opine current valuation has priced in the negatives and offers a favourable risk-reward ratio.

On the retail-loan growth, the report said, Reflective of the regulatory tightening of retail lending, post introduction of the debt service burden cap, third quarter of 2012 registered a slowdown in retail disbursements to RO119mn against an average disbursement of RO244mn over the last five quarters. We maintain our view that high-yielding retail loan growth will remain subdued during 2013, with the proposed new job creations the key catalyst for this segment.

The report said that tender-award flows in the sultanate remained low at RO1.36bn as of the first 11 months of 2012, compared to average of RO2.8bn per annum over the last four years.

Expansionary fiscal policy should provide the needed thrust to economic activity and could revive tender awards and stimulate credit demand. We stick to our base case credit growth expectation of 12 per cent for 2013, with higher corporate-to-retail mix.

The report said that an uptick on return on assets (ROA) is unlikely as competition intensifies with huge equity infusion in the banking sector.

The intensifying competition and the deployment urgency post the huge equity infusion, in addition to slower retail segment could squeeze net interest margins, which is the key driver of ROA. This could also impact fee income, as witnessed in the third quarter 2012, which saw a sharp decline in fee income. Further, we expect the rollout of Islamic windows to prevent any softening of operating expense, it added.

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