The OER-Gulf Baader Capital Markets survey, ‘Best Banks in Oman’ reflects the steady performance of banking sector in Oman. Mayank Singh reports.

The OER-Gulf Baader Capital Markets survey, ‘Best Banks in Oman’ has been an almanac on the performance of the Sultanate’s banking sector for over the last six years. It mirrors the strengths and areas of improvement for various banks and is seen by them as a strategic input. Institutions get ranked on a cross section of parameters, and are given a chance to see how they stack up against competition. The survey ranks the seven commercial banks on their three year cumulative financials, to neutralise one-off performance or gains. This model also helps in separating consistent performers from the rest. Based on industry feedback, we have also done a one-year ranking of the banks to give them a different perspective.
Ahlibank continues its winning streak on the survey, as the No. 1 bank on the survey – third year in a row. The bank has exhibited exemplary results on parameters like sustainability, asset quality, productivity and efficiency. And the bank is not resting on its laurel, says Lloyd Maddock, CEO, Ahlibank. “We will continue to grow the business in a prudent and sustainable manner, while seeking to retain our status as Oman’s fastest growing bank. We will strive to again achieve the metrics upon which we challenge ourselves, which include balance sheet growth of above 20 per cent; NPL ratio below one per cent, cost to income ratio below 35 per cent and return on equity above 13 per cent.”
Bank Muscat, Oman’s biggest bank follows on the heels of Ahlibank, giving a good account of itself on sustainability, productivity and efficiency parameters. Given its size, fast paced growth remains a challenge. The bank has identified Omanisation as a key area of focus and AbdulRazak Ali Issa, chief executive, Bank Muscat says, “Bank Muscat recognises that its employees are the mainstay to meeting strategic objectives. The bank is focused on continuously enhancing the capabilities of its human resources and 2014 witnessed some very significant and strategic projects towards this endeavour.”
Bank Sohar has been a prudent player in the market. The bank has stuck to core competencies, without trying to overreach itself. As a result its asset quality is the best in the market. Says Rashad Ali Al Musafir, Acting CEO, Bank Sohar, “In Bank Sohar we were fortunate as there were no restrictions on growing our retail book. If you see the portfolio of other banks, their retail book was close to the CBO cap of 40 per cent or it had already hit that level and their challenge is to either bring down the retail component of their portfolio, either by growing their overall book size, so that personal loans remain within the 40 per cent limit, or to shrink the size of their retail lending. As this is difficult to achieve most banks go aggressively after corporate loans. We are fortunate as we have always been running a conservative ratio in terms of retail lending, with our retail ratio being 30 per cent.”
BankDhofar sees itself not just as a commercial entity, creating shareholder value, but one which can contribute to the larger interests of the country. Says Abdul Hakeem Omar al Ojaili, acting CEO, BankDhofar, “We strongly believe in our role and the weight of BankDhofar as a key player in the Omani private sector development and the growth of the national economy. In fact, BankDhofar was one of the first banks to introduce SME related solutions, products and services. Despite the fact that the SME term was relatively new to the Omani market, we have been working for years to nurture and promote good business ideas generated in this sector, providing financial solutions and strategic guidance to entrepreneurs under our corporate banking umbrella.”
Oman Arab Bank (OAB) has always been a strong player in the corporate finance space. The bank has contributed to various infrastructure and big ticket projects in the Sultanate. While it continues to be a strong player in that space it is also enhancing its retail operations. Amin Al Husseini, CEO, Oman Arab Bank avers, “OAB is rolling out a number of initiatives aimed at enhancing its retail customer experience such as instant debit issuance at branches, streamlining loan origination and approval process to dramatically decrease turnaround time, achievement of ISO certification in Total Quality Management at its call centre and our retail sales unit further enhancing our retail banking proposition.”
National Bank of Oman (NBO) has prided itself as the National bank of the country. The bank has strong brand equity in the market built over the last 40 years. A pioneering bank it boasts of a loyal customer base. The bank has shown remarkable improvement across parameters like efficiency and sustainability in the last year. While this is more apparent in the one year rankings, it is just a matter of time before this gets reflected on the three-ear survey as well.
HSBC Bank Oman has negotiated the merger between Oman International Bank and HSBC Oman well. With the integration process done, the bank is looking at bringing its strengths and capabilities to the table. Says Andrew Long, CEO, HSBC Bank Oman, “The HSBC Group is one of the leading project finance and financial advisory providers globally, and the top rated advisory for Sukuk issuance. HSBC Bank Oman works closely with the group to bring this expertise to Oman and has played a leading advisory role in key transactions in 2014.”
Sector performance
Oman’s banking sector comprises seven local commercial banks, nine foreign banks, two specialised banks and two full-fledged Islamic banks together with six local commercial banks operating separate Islamic windows for banking operations. According to a 2015 Central Bank of Oman report, at the end of 2013, the commercial banks had 493 branches and 1,100 ATMs. The financial health of banks in terms of assets quality, provision coverage, capital adequacy and profitability remained strong. During the year 2014, the balance sheet of commercial banks strengthened further due to the robust growth in deposits and credit. The total assets of the commercial banks increased in September 2014 compared to a year ago. Total credit and total deposits expanded by 8.8 per cent and 13.5 per cent, respectively, in September 2014 as compared to September 2013. The core capital and reserves of commercial banks increased by eight per cent during the period to RO2.9bn, while supplementary capital elements was augmented by 10.1 per cent to reach RO0.7bn as at the end of September 2014.
CBO advised banks to formulate a liberal lending policy for the SME segment and mandated that they should allocate at least five per cent of their total credit to SMEs and this target is to be achieved latest by December 2015. The prudential requirements for banks to lend to SMEs have also been relaxed in terms of general provisioning requirements and risk weightage. There are also efforts in terms of capacity building of prospective entrepreneurs, identifying key areas for SME finance and facilitating public-private cooperation. Given the concerted efforts of the government and CBO, it is expected that banks will be able to turn the lending option to SMEs commercially attractive so that there is an added incentive on the part of the banks to lend to this sector.
Banks are also efficiently and effectively building up their capacity in terms of higher capital, exposure and leveraging abilities, technological capabilities and foreign currency funding sources all of which play an important catalytic role in promoting sustainable growth. The CBO too has defined exposures of banks to joint ventures of national importance in a liberal way. Thus, banks are playing an active role in promoting government investment programmes and financing infrastructure projects. The CBO also provides an efficient and reliable payment and settlement system by relying on the latest technology, which supports business activities in Oman.
Islamic banking
A notable development and an important milestone in the banking sector in the recent period was the introduction of Islamic banking in Oman since December 2012. The government and the CBO have since then vigorously pursued to promote Islamic banking in the Sultanate. Within the short span of issuing legal and regulatory requirements in December 2012, two full-fledged Islamic banks have commenced operations in the Sultanate. Out of the seven local banks, six of them have established windows for practicing Islamic banking.
In the last few years, the most significant achievement has been an improvement in the financial health of banks in terms of asset quality, provision coverage, capital adequacy, and profitability. Despite an increase in the size of the balance sheets, the gross non-performing loans (NPLs) continued to remain low. The NPLs as percentage of total credit at the end of 2013 stood at 2.1 per cent same as in the year 2012. The ratio of NPLs to total loans stood at 2.2 per cent in September 2014. The capital adequacy ratio stood at 15.1 per cent of risk-weighted assets in September 2014, which was higher than the minimum regulatory requirement of 12 per cent prescribed by CBO. The banking sector’s outlook remains positive, supported by large expenditures planned by the government as part of the eighth five-year plan. With greater participation of commercial banks in the development process together with large investments, the balance sheets of commercial banks are expected to remain healthy. One must add a caveat here – the slide in oil prices since the last quarter of 2014 has necessitated banks to be more prudent in their lending.
Policy formulations
In its capacity as the country’s monetary agency, as well as the regulator and supervisor of its financial institutions, the CBO has been in the forefront in promoting the financial sector. The CBO has put in place appropriate prudential and regulatory framework, instilling confidence in the banking sector and promoting economic growth and development in the economy. As part of the ongoing efforts to strengthen the banking system and bringing about greater financial inclusion, CBO initiated various measures in the recent period in line with international norms and best practices. These measures have helped improve the efficiency of the Sultanate’s financial system in general and the banking sector in particular. In order to provide thrust and rigor to the supervision process of the banks, all onsite bank examinations done by CBO are now undertaken using the more risk sensitive, risk-based supervision methodology.
As regards regulation of banks, the CBO is well ahead in the implementation of Basel III framework. As in other cases, the CBO has followed a consultative approach in the implementation of this framework. The CBO had issued the roadmap for implementation of Basel III framework in August 2012. The final guidelines for implementation of Basel III framework were issued in November 2013. According to these guidelines prescribed by CBO, the minimum common equity Tier 1 ratio has been prescribed at seven per cent of risk weighted assets, while minimum Tier 1 capital ratio has been prescribed at nine per cent of risk weighted assets and the minimum total capital adequacy ratio has been prescribed at 12 per cent of risk weighted assets. The norms outlined for the banks through this framework are in line with international best practices prescribed by Basel III.