Muscat – Omani banks’ credit fundamentals are recovering as pressures on the operating environment have eased and economic activity is gradually picking up amid higher oil prices, Fitch Ratings said on Tuesday.

In a new report on Oman’s banking sector, Fitch Ratings said that Omani banks have been fairly resilient to the pandemic shock which caused a 3.2 per cent GDP contraction in 2020.

‘Omani banks’ performance metrics recovered substantially in 2021 and this is expected to continue in 2022, supported by higher interest rates. Capital metrics will remain reasonably sound, while pressures on Omani banks’ funding and liquidity profiles have eased. This has been underpinned by the government support measures combined with the recent rebound in oil prices,’ Fitch Ratings said.

Recently, another global credit ratings agency Moody’s also revised up its outlook for the Omani banking system to ‘stable’ from ‘negative’ due to an improvement in the banks’ operating environment.

‘We have changed our outlook for the Omani banking system to stable from negative to reflect a recovery in the challenging operating conditions facing the banks,’ Moody’s said in a report published on April 26.

Fitch Ratings upgraded the outlook on all Omani banks’ operating environment factor scores to ‘stable’ from ‘negative’ in January to reflect improved operating conditions.

The ratings agency, however, noted that Omani banks are highly exposed to the sovereign through lending to the government and government-related entities (GREs), holdings of Omani government securities, as well as high reliance on GRE deposits.

‘Exposures to the sovereign also considers banks’ exposures to public sector employees through their retail loan books,’ Fitch Ratings added.

Commenting on Omani banks’ asset quality, Fitch Ratings said asset quality will remain a key risk in 2022 with the run-off of payment holidays and a rising interest rate environment which could undermine borrowers’ debt servicing capacities.

‘Asset quality risks will remain in 2022 due to modest credit growth and the run off of payment holidays, but this should be manageable for the banks, in our view,’ the ratings agency said.

Pressure on asset quality will arise from Omani banks’ exposure to vulnerable sectors, particularly real estate, contracting and hospitality, the ratings agency noted.

‘Banks remain exposed to event risk due to high single-obligor and sector concentrations, which is largely unavoidable given the narrow nature of the domestic economy. However, we believe the (asset quality) impact on the banks’ financial profiles will be contained and manageable at their current rating levels,’ Fitch Ratings added.