Oman's macro-economy continues to remain strong with a positive outlook owing to its stable fundamentals and expansive policies to support growth of both oil and non-oil sectors.
Although there is presence of foreign banks in Oman, the six listed conventional banks form the significant chunk of the country's banking sector with a credit base of RO 15.2 billion against deposits of RO 15.8 billion contributing nearly 88 per cent and 96 per cent of the total commercial banks' credit and deposit respectively in the Sultanate as on June 30, 2014.
Total loans of the banks registered an increase of 12.8 per cent in the twelve months until June 2014 which was in line with the increase in deposit base during the same period.
According to the Central Bank of Oman (CBO), the Sultanate's economic growth prospects are encouraging for the coming years and the World Bank has projected Oman's real GDP growth at 4.9 per cent in 2014 and 5 per cent in 2015.
Supported by the steady economic advancement, Oman's banking sector too is witnessing healthy growth in lending, deposits and earnings.
The widening gap between credits and deposits narrowed compared to the previous quarter as deposit growth slowed and loan growth remained healthy for the banks over the last one year.
In terms of market share, Bank Muscat continues to be the market leader accounting for around 44.2 per cent of the total gross loans and advances and 41.2 per cent of the total deposits by the six banks as on 30 June 2014.
Amongst the listed conventional banks offering Islamic products too, Bank Muscat remains the market leader with 56.6 per cent of the Islamic finance market share and 64.1 per cent of the Islamic deposits market share.
Over the last one year Islamic banking activity is picking up pace as the banks expand their network of Islamic windows and introduce various Sharia compliant products.
The second quarter of this year witnessed a substantial increase in both credit and deposits to reach combined Islamic receivables of RO 634 million and Islamic deposits of RO 279 million by the five listed conventional banks (excluding HSBC Bank Oman). As banks' lending and Islamic banking activity grew, the combined income and profits of the six listed conventional banks too witnessed steady growth.
Hence although faced with stiff competition that marginally impacted the average interest spread and net interest margin, the six banks registered an increase of 6.7 per cent year-on-year in their operating income and 7 per cent year-on-year in their net profit to reach a total net profit of RO 155.4 million for the first half of the year.
The banks also managed to control their overall costs, supporting their bottom line growth and return to equity holders.
Combined return on average equity of banking thus remained steady above 12 per cent.
Based on the improving performance of banks and supported by positive market outlook, the average gain of the six banking stocks has been more than 20 per cent this year so far significantly outperforming the broad market index gain of 9.4 per cent. However, despite the recent run-up, banking stocks trade at average PE (TTM) of 12.2x and PBV of 1.4x which is at a discount to the GCC banks' valuations.
Compared to their GCC peers, Omani banks also have a better asset quality and higher capital adequacy mainly attributable to prudent market regulations.
Going forward, although the cap on personal loans portfolio and interest rate would temporarily impact the retail lending of banks and their interest margins, the corporate and Islamic business as well as buoyant market scenario would mitigate its impact and maintain the resilience of the sector.
Also as the sustainable economic development continues, Oman's banking sector would continue to benefit from the same and expand further also supported by the favourable demographics.
Hence the outlook continues to be encouraging for the banking stocks that are currently trading at attractive valuations compared to their GCC peers and the broader market.
As the six banks together constitute almost 40 per cent weight of the MSM 30 Index, a re-rating in banking valuations would also have a positive impact on the market, further boosting investor confidence and overall activity going forward.
Disclaimer: The views and opinions expressed in this article are solely those of the authors and do not reflect the opinion of the Observer.
© Oman Daily Observer 2014
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