Central bank of Oman rate cut to put pressure of commercial banks

Published on April 3, 2012 by Oman - Jamshad Attar   ·   No Comments

The recent decision of the Central Bank of Oman to reduce interest rate ceiling on personal loans to 7 percent is seen to put pressure on the profit margin of the commercial banks in the Sultanate.

The new rates will be applicable for fresh loan disbursements starting April 2012. The last revision in the personal lending interest rate was done in June 2008.

“The decline in lending rates is expected to put pressure on the margins of banks with the re-pricing of loans at lower rates in the coming quarters. Over the medium term, we expect the lending rates to remain soft along with the recent implication of fall in personal loan rates”, say analysts at Gulf Baader Capital Markets in a research report.

During the last six months, the Oman banking sector has seen pricing pressure on personal loans due to strong competition among the existing banks.

“Over the medium term, the banks will tend to manage their book growth and also lower the cost of funding to maintain the margins, which will be critical. We see that the local banks follow an aggressive growth strategy during the coming quarters. On the whole, we see the introduction of the new regulation having a short to medium term impact on the profitability and margins of the banks”, the analysts say.

Currently, the effective corporate lending rate (average) stands at around 4 percent levels. Despite the lowering of personal rates, the gap still remains around 3 percent levels.

“The profitability impact ranges from 2 percent to 4 percent levels, which we believe is minimal. We also feel that the market has already priced in the effects”, adds the report.

At the same time, the credit growth of Omani banking sector is expected to remain steady at 15 percent levels on the back of stronger project financing activities in the domestic market.

The credit demand is estimated to show a combined annual growth rate of about 12 percent over the next three years. Adding to the growth is the government and quasi government investment worth RO 12 billion in pipeline for the next five years.

With stronger liquidity prevailing in the market, the banking sector deposit addition continued to remain robust over the years. Customer deposits registered a growth of about 15 percent in line with the sector credit addition during the current fiscal.

“Both lending and the deposit rates of the local banks have been softening since 2010 thanks to ample liquidity in the banking sector and the achievement of increasing surpluses in public finance. The lending rates which peaked during 2009 had been showing declining trend over the last six quarters”, say the analysts.

As at end of 2011, the total commercial banking sector credit in Oman stood at RO 12.515 billion. The total personal lending of the sector was estimated at RO 5.027 billion, forming around 40 percent of the banking sector credit. Of this, the total listed banks portfolio of personal loans is around RO 4.462 billion.

During 2011, the personal loans segment in Oman banking grew by 17.3 percent year on year basis. The listed banks reported a 16.9 percent growth in its personal loan book.

According to the Central Bank regulations, commercial banks can have a total exposure of about 40 percent in personal loans. Added further 10 percent exposure can be in the housing sector.

Among the listed banks, the personal and housing loan contributed about 41 percent which is well below the personal cum housing sector combined limit of 50 percent.

Of the lot at the end 2011, ahlibank, National Bank of Oman and BankDhofar had higher proportion of personal cum housing loans in their loan book.

Ahlibank has around 47 percent, NBO about 45 percent and BankDhofar 44 per cent levels. Oman International Bank has about 40 percent, while Bank Sohar has 36 percent. The banking sector major, BankMuscat has around 39 percent of its loan book in personal and housing sector.

Oman banking sector has been an underperformer in the Muscat Securities Market since the beginning of the year on the expectations of lowering margins (pressure on interest spread), impending competition from Islamic banks and the negativism on the over capitalisation levels of the banks.