Muscat – Moody’s Ratings has recently revised its outlook for the Omani banking sector to positive from stable, citing improving operating conditions and loan quality in the sultanate’s banks.

In a report, Moody’s stated that strong business and consumer confidence, along with a pipeline of projects, will continue to drive non-oil business activity for Omani banks. It said, ‘Along with business and consumer confidence, strong momentum in tourism and a pipeline of projects in manufacturing, transportation, and renewable energy will help boost economic activity in the non-oil sectors, where banks conduct most of their business.’

The rating agency expects Oman’s non-hydrocarbon GDP growth to be around 3.0% in 2025-2026, slightly lower than 4.0% in 2024, when growth was supported by the commissioning of a refinery project and an uptick in trade. Moody’s also forecasts that Oman’s real GDP growth will accelerate to 2.4% in 2025, up from an estimated 1.7% in 2024, aided by a slight recovery in oil production compared to 2024, in line with the current OPEC+ agreement.

Moody’s expects Omani banks’ loan quality to improve, as economic growth will strengthen borrowers’ repayment capacity. It also anticipates that banks will continue delivering steady profitability while maintaining solid capital buffers.

‘Problem loans will likely decrease further in 2025-2026, down from 3.6% of the sector’s loan book as of September 2024, as economic growth supports borrowers’ repayment capacity. We also expect single-digit lending growth in a supportive operating environment,’ the rating agency said.

However, Omani banks’ loan books remain exposed to concentration risk due to large borrowers and single-sector exposure, reflecting the country’s limited but improving economic diversification. This creates vulnerabilities to individual defaults or sector-specific stresses, as noted by Moody’s.

According to Moody’s, Omani banks’ capital levels remain well above regulatory requirements, with strong earnings and good profit retention helping to sustain these levels. It expects tangible common equity (TCE) to risk-weighted assets to remain around 13%-14% over the next 12 to 18 months (compared to 13% as of September 2024).

Moody’s projects that Omani banks’ net income will remain broadly stable at around 1.1% of tangible assets in 2025. A lower cost of risk is expected to offset the impact of rising operating expenses, as banks continue to invest in digitalisation and technology, while growth in branch networks will remain limited.

‘Lending growth of around 5% in 2025 will help keep operating income stable. However, lower yields on US dollar-denominated loans, as interest rates decline, and slightly reduced yields on Omani rial loans over the next 12 to 18 months will result in a modest decline in margins,’ Moody’s added.