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Sun 15 Nov 2009 01:34 PM

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Banking on growth

Oliver Cornock says Oman's banking sector has weathered the financial storm better than most.

Having weathered the financial storm better than most, Oman's banks are reassessing their strategies and looking for new sources of growth.

Through the global financial crisis, Omani banks have proved remarkably resilient, due to adequate provisioning and low exposure to the toxic assets that caused such turmoil elsewhere.

The banking sector has a largely domestic and regional focus, sparing most institutions from the effects of collapses in North America and Europe. The cautious policy of the Central Bank of Oman regarding asset/liability management and funding, as well as its quick fire-fighting work as the effects economic crisis began to be felt, has helped shore up the system.

The banking sector's transparency has long been seen as one of the its strong suits, and Omani banks have set a regional example in their clarity about exposure to bad assets, David Murray Sims, CEO of The National Bank of Oman (NBO), told OBG.

Oman is not unscathed; some key projects, most notably in hydrocarbon extraction, were put on hold as liquidity dried up. The Duqm Refinery and Petrochemicals Complex, for example, has been frozen, though recent reports suggest that it may be restarted in the near future. Banks have also become somewhat more cautious.

"The global economic downturn has led a lot of institutions to review what they are doing," Sims said. "Institutions are indeed more careful about how they are lending and this is a worldwide phenomenon. Banks are going back to the basics where they do the proper due diligence before lending."

Nonetheless, initial nine-month results from those banks that have announced them suggest that, while profits have been trimmed, they remain healthy.

NBO, the country's second largest bank, posted net profit of RO19.6m ($50.9m) for the first nine months of 2009, local press reported on October 27. NBO's loan book increased 12 percent to RO1.38bn ($3.58bn), with deposits totalling RO1.24bn ($3.22bn), up 7 percent.

Bank Muscat, which has substantial operations abroad, including Saudi Arabia and Bahrain, made a third-quarter profit of RO19.96m ($50.6m), down 38 percent on the same period of 2008. Three-quarter net profit totalled RO80.4m ($208.8m), compared to RO90.1m ($234m) last year.

On October 26, Oman International Bank announced a net profit of RO15.6m ($40.5m) for the first three quarters, down 27 percent from 2008. Third-quarter profits were estimated at RO5.9m ($15.3m) by news agency Reuters, slightly above analysts' forecasts.

Meanwhile, Bank Dhofar made a nine-month profit of RO21.5m ($55.8m), down slightly from RO22.2m ($57.6m) in 2008.

Sector insiders remain confident that the long-term outlook is very positive. Oman is relatively under-banked, with only one branch per 7000 people in 2008, and substantial scope for growth in both personal and commercial lending, as well as deposits.

Rapid income growth and a young population bode well, while the effects of the credit crunch and recession are causing both consumers and banks alike to reassess their strategies, to the industry's benefit.

"There is a demand for personal borrowing that has not abated," Sims told OBG. "Over time, we will see a more structured approach to lending. Pay raises in recent years have created more opportunities to save more, but also to spend more. Consumers still need to learn the benefits of saving for a rainy day."

Banks have been showing particular interest in lending to small and medium-sized enterprises (SMEs), which make up more than 90 percent of all Omani companies, but account for only 1-2% of loans, according to Salah bin Hilal Al Maawali, the director-general of SMEs at the Ministry of Commerce and Industry. With lower funding needs than big-ticket projects, smaller firms are an attractive proposition for banks.

Over the longer term, institutions may look to reinforce their positions with cross-border mergers.

On November 2, the Central Bank executive president, Hamood Sangour Al Zadjali, told Reuters that he was in favour of regional consolidation to strengthen the Gulf's banks in the aftermath of the credit crunch.

If mergers and acquisitions come about, Oman's well-capitalised and regulated banks could be in a strong position to expand.

Oliver Cornock is Middle East specialist, Oxford Business Group's Regional Editor in the GCC.

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Tristan de Ferluc 10 years ago

This could be the quick qualification of the Oman banking sector, ranked 6th in the GCC with 2008 cumulated income of $1.3bn and $0.6bn cumulated net profits. Bank operations are globally local, Bank Muscat being an exception with presence in 6 countries either through branches, representative offices or stakes. But Oman market has a specificity, with no real equivalent in the region although it is changing : a number of specialized financing companies with key knowledge and experience in leasing, factoring, … The Oman healthy market and the potential has already attracted some regional key players : Ahli United Bank from Bahrain, Commercial Bank of Qatar, Dubai Financial Group and Arab Bank from Jordan especially. This reduces the room for consolidation for the time being bearing in mind the market still offers potential for development. On the opposite, the small specialized financing companies could represent good opportunities for external players who could capitalize on their specific experience to satisfactorily develop similar businesses in the region. The other possibility is for these companies to export their know-how through the opening of new operations but this would require significant funding in comparison to their current size.