The financial sector has stood its ground despite strong headwinds emanating from the macro economic environment
The ongoing economic slowdown did not have much of an impact on the financial sector as Omani banks are expected to achieve a modest growth in both credit and net earnings this year. Of course, a gradual increase in interest rate and shortage of liquidity are affecting the local financial institutions to a limited extent. The performance of banks were mixed in the first quarter, which reflects the overall situation in the financial sector. Although the growth in net earnings of the banking sector slowed down, the financial position of the banks in Oman in terms of asset quality, provision coverage and capital adequacy remained sound. The drop in oil prices since the second half of 2014 had put the brakes on economies and squeezed growth opportunities for their banking systems within the region, including the Sultanate.
The international credit rating agency Standard and Poor’s sees banks becoming more cautious and selective in chasing high-quality lending opportunities, triggering stiffer competition. Omani banks, including Islamic institutions, have achieved a year-on-year credit growth of 8.1 per cent at RO22.2 billion by the end of February 2017, over the same period in 2016.
Credit to the private sector alone increased by 9.5 per cent to RO20.1 billion as at the end of February 2017, the Central Bank of Oman said in its monthly report. Of the total credit to the private sector, the household sector stood at 46.2 per cent closely followed by the non-financial corporate sector at 45.8 per cent, financial corporations at five per cent and other sectors the remaining three per cent. Total deposits of banks registered a growth of 7.1 per cent to RO20.8 billion as at the end of February 2017.
The banking sector remained resilient supporting the economic diversification initiatives and credit needs. As some of the projects have reached the stage of funding, growth in demand for credit is expected to continue, probably at a slower pace this year, compared to 2016. These projects are either state-owned entities or private sector projects. Several projects, which are in different stages of planning and development in Duqm, will help strengthen demand for project finance. These projects include a $7 billion-refinery, a methanol project, a massive crude storage facility, a fishing harbour, a coal-fired power project, an automobile unit, a desalination plant, a solar panel project, and an integrated fishing harbour.
A major chunk of these investments, estimated at $3.1 billion, are committed by Chinese investors, who will depend on local banks for project finance. The private sector, along with an active participation of investment funds, are also establishing several major projects, which include a dairy venture, a poultry project and steel unit. These are in addition to a series of tourism projects, especially hotels and resorts, planned in different parts of the country. The Omani listed banks—Bank Muscat, BankDhofar, National Bank of Oman, HSBC Bank Oman, Ahli Bank and Bank Sohar—had a combined net loan of RO17.70 billion by the end of March 2017.
Conventional banks, which are listed on the Muscat Securities Market, have achieved RO733.15 million in incremental growth (equivalent to 4.41 per cent) in customer deposits for the 12 month period ending March, 2017. Total net customer deposits of these banks stood at RO17.36 billion by the end of March 2017. The liquidity situation in the financial system was tight in 2016, as several government entities withdrew their deposits. However, the cash flow is improving since the beginning of the year.
Since Oman government and state-owned entities like the Petroleum Development Oman (PDO) are relying heavily on overseas markets for their funding requirements, the pressure on liquidity within the domestic market was less. For instance, Oman government raised $5 billion by way of a bond issue in early 2017, besides a $2 billion sukuk issue from overseas markets in May 2017. In addition, PDO had raised as much as $4 billion for funding various projects in 2016, resulting in less reliance on domestic market for raising funds. State-owned electricity firms, including Electricity Holding Company, have also raised more than $1 billion for funding its expansion programmes. However, the Oman government has raised debt funds from the domestic market by way of development bond issues in the recent past to partially meet the budget deficit. This is expected to take away a portion of liquidity from the financial system, in general, and the banking sector, in particular.
Oman’s central bank plans to float RO450 million worth of government development bonds in separate issues to partly cover the deficit of the nation’s budget for 2017 and repay a maturing bond issue. This is in addition to a RO150 million bond issue recently, which takes the total issue size to RO600 million in 2017.
Such government development bonds in Oman are generally subscribed by institutional investors, especially pension funds, banks and high net worth individuals. Oman’s bank interest rates have shown a substantial year-on-year increase due to the tight liquidity situation in the financial system. In recent months, the weighted average interest rate of the Omani rial lending and deposits have shown a growth, mainly on account of the light liquidity situation in the market. The overnight rial Omani domestic inter-bank lending rate also hardened in 2017. The net earnings growth of Omani banks were moderate in the first quarter of 2017. An important reason for a slow growth in net earnings of banks, like any other company, was a higher corporate income tax, which was increased from 12 per cent to 15 per cent in February 2017.
The six listed banks have achieved a 1.73 per cent growth in combined net earnings of RO87.43 million for the first quarter of 2017, against RO85.94 million for the same period of 2016. This is against the overall trend in corporate profit in the first quarter of 2017, which showed a marked decline.
Within a short span of four years, Islamic institutions have emerged as one of the fastest growing segments within the financial services industry in Oman. Also, Islamic banks are trying to strengthen their position by expanding branch network and with new products and better services. Islamic financial institutions, including window operations of conventional banks, have more than 10 per cent share in total bank assets in the country.
Of late, Islamic financial institutions are floating new instruments to achieve a fast growth. For instance, Bank Muscat has launched its maiden sukuk issue for RO25 million, with a green shoe option of another RO25 million, in case of oversubscription. The RO25 million sukuk issuance from Meethaq is part of a larger RO100 million sukuk programme for retail and institutional investors.
NBFC: Braving challenges
The slowdown in government expenditure and a fall in demand for vehicles have resulted in a lower demand for funds from leasing firms. As the market conditions are challenging, two leading leasing firms have decided to go for a merger.
National Finance Company is trying to acquire Oman Orix Leasing Company by way of a cash buyout. The company will pay little higher than RO45 million to the shareholders of Oman Orix to acquire the firm. National Finance will raise RO45.8 million by way of a rights issue and a perpetual bond issue to raise fund for its ‘cash buyout’ of the Oman Orix Leasing Company. The board is floating a rights issue of RO27.6 million and another RO18.2 million perpetual bond issue as private placement.
National Finance’s proposed cash offer equivalent to 1.2 multiples of the book value of Oman Orix at the end of March 2017, which was equivalent to approximately 173 baisas per share. Oman Orix has a net worth or total equity of RO37.8 million, while its paid-up capital was RO26.11 million at the end of March 2017.
The rights issue of RO27.6 million will be carried out by offering 217.60 million shares to the existing shareholders at a price of 127 baisas per share, which include 2 baisas per share as issue expenses.
National Finance is also raising its authorised capital to RO75 million from RO30 million. Once the merger is complete, the merged entity will be the largest leasing and leasing company in Oman, with a combined net worth of RO81.14 million and a network of 21 branches. The merger will help the consolidation, in terms of size and scale, thereby allowing both companies to benefit from economies of scale.
National Finance, which holds RO190.69 million in net investments in finance activities, has reported a net profit of RO1.48 million in the first quarter of this year, reflecting an increase of 3.28 per cent. National Finance has a net worth of RO43.34 million, while Oman Orix’s net worth by March-end stood at RO37.8 million. Oman Orix Leasing, which has RO184.79 million in net investments in finance activities, saw a two per cent growth in net profits to RO1.34 million for the first quarter of 2017.
In FY 2016, the NBFC sector witnessed a challenging year as the tightening of liquidity in the market raised the cost of short-term funding for financial institutions and also raised the fears about steep hike in interest rates amidst the prevailing economic environment. Oman has six non-banking finance companies, with a wide network of branches spread across the country.
Despite being hit hard by tightening liquidity conditions, all the six NBFCs were able to maintain profitability and post moderate growth during the year.
All the six NBFCs in Oman posted moderate growth in 2016. Oman ORIX Leasing Company achieved the highest profit and business volumes in its history during the year. Profit after tax grew by 5 per cent and reached RO5.53 million compared to RO5.27 million in 2015.
2016 was a reasonably good year for National Finance as it closed the year with a net profit of RO6.35 million as against RO6.02 million in 2015 representing 5.4 per cent increase and the highest ever in absolute terms in company’s history.
Muscat Finance was able to achieve a net profit after tax of RO 5.138 million, a growth of 18 per cent over 2015. Al Omaniya Financial Services’ total revenues stood at RO 18.9 million. The pre-tax profit was RO 6.3 million, while net profit stood at RO 5.311 million. The company has provided RO 1.601 million as provision for doubtful debts.
Taageer Finance reported asset growth of 20.19 per cent despite stiff competition in the industry and the banks. The company achieved a net profit of RO 4.474 million for the year 2016 as against a net profit of RO 4.421 million for the year 2015 thereby registering a growth of 1.20 per cent.
As part of its five-year business strategy plan, Taageer Finance will introduce new products and services in 2017. “The outlook for the year 2017 present quite a few challenges in view of low liquidity, slowdown in economy and higher default rate. The fall in oil prices have widened budget deficit. However, Taageer Finance is confident about the future of this industry and will continue to contribute positively in supporting the government initiatives for SME sector”, says CEO, Mohammed Redha A Jawad.
United Finance Company registered a modest performance during 2016 given the subdued and adverse market conditions. The company recorded a net profit of RO 4.50mn for the year 2016 as against RO 5.24mn for the previous year.
There will be higher stress on the NBFCs to sustain the earnings and profitability with the increase in non-performing assets, shortage of talent and increase in staffing costs.
The stress on the net margin of NBFCs due to the liquidity crunch in the local market and the consequent increase in the cost of funds coupled with the increase in FED rates is another major cause for concern. Lower oil prices and budget deficits will impose significant challenges during the year 2017. Only companies with a sustainable business model with an emphasis on higher efficiency, risk diversification, prudence and innovation will succeed in the long run.