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Omani banks face rising bad loans amid slow recovery: Fitch

1 May 2021

Omani banks’ intrinsic credit profiles face pressure throughout 2021 due to economic disruption caused by the pandemic and the government’s restrictive fiscal policy, Fitch Ratings has said.

‘We expect the sector’s Stage 3 loans ratio to increase by 100 basis points (bps)-150bps from 4.4 per cent at end-2020 as borrower support measures expire and loan classification normalises. The proportion of restructured loans (4 per cent at end-2020) is also likely to rise,’ Fitch said in a report.

It said corporate loan deferrals are significant and, unless extended, will pose sizeable risks to Omani banks’ asset quality when they expire in September. 

Total loan deferrals, either during or at the end of 2020, varied significantly among banks, ranging from 6 per cent to 50 per cent of gross loans, based on outstanding principal and related balances.

According to Fitch, the banking sector’s expected credit losses increased to 4.1 per cent of gross loans at end-2020 as banks front-loaded provisions. ‘However, some banks’ loan impairment charges appear low given widespread payment deferrals and the likely extent of GDP contraction. Underlying profitability should improve modestly in 2021 due to a gradual pick-up in lending, but the slow economic recovery and the still-high cost of risk (loan impairment charges/gross loans) will limit the upside.’

Fitch expects Omani banks’ regulatory capital ratios to be stable in 2021, reflecting modest credit growth and prudent shareholder distributions. 

‘The sector’s common equity Tier 1 and total capital ratios of 13.8 per cent and 18.4 per cent, respectively, at end-2020 indicate generally adequate buffers to absorb additional losses.’

‘Liquidity tightened in 2020 but we believe the need for the authorities to withdraw deposits from the banking system has decreased due to the rebound in oil prices, the recent introduction of VAT, and the sizeable sovereign issuance planned for 2021.’

‘Nevertheless, deposit outflows, combined with the normalisation of savings rates, could put pressure on banks’ liquidity.’

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