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24 March 2020

Oman’s stimulus package will weaken banks credit profiles, Moody’s

Moody’s expects Omani banks’ asset quality to materially deteriorate in the current difficult environment

The Sultanate’s stimulus package allows banks to reduce their CCB by half to 125 bp/Bloomberg

by Kudakwashe Muzoriwa

Moody’s said that Oman’s OMR 8 billion ($21 billion) stimulus package will limit the economic blow of the coronavirus outbreak on the economy, but weaken banks’ credit profiles, a credit negative.

Oman announced plans to reduce spending by five per cent in response to COVID-19 and the plunge in oil prices, a day after the Sultanate unveiled a $20 billion incentive package for financial institutions to combat the impact of the pandemic on the economy.

The stimulus package contains several measures such as reduction of banks’ capital conservation buffer (CCB), allows deferment of loan instalments for hard-hit borrowers, postpones for six months the risk classification of loans related to government projects and eases access to repo operations and foreign currency swaps for the banks.

The central bank also increased the regulatory cap on banks’ loans-to-financing ratio1. According to Moody’s, the Central Bank of Oman’s (CBO) reduction in CCB buffers is credit negative for banks because it lowers their minimum regulatory solvency capital requirements during a difficult time.

Furthermore, Omani banks’ regulatory capital requirements will remain high. Moody's stated that the lenders are required to hold a minimum 11.5 per cent Tier 1 capital ratio, 200 basis point (bp) maximum in Additional Tier 1 capital and a 250 bp CCB in the form of CET1 capital.

The Sultanate’s stimulus package allows banks to reduce their CCB by half to 125 bp.

The deferment of loan instalments for affected borrowers as well as the six-month delay in the risk classification of loans for government projects is expected to reduce banks’ immediate recognition of problem loans arising from COVID-19-related disruption.

Moody’s said that should the measure remain in place for a long term, it would lower transparency of the extent of problem loans in the banking system and reduce forecasting visibility regarding the banks' credit profiles.

However, the stimulus package will mitigate the extent of the deterioration by keeping some borrowers’ liquidity issues from becoming solvency issues but it will not fully offset loan quality challenges if coronavirus persists for longer than a few months.

The rating agency expects borrowers in the tourism, transportation, trade, real estate and construction sectors to be the most affected by COVID-19 outbreak and SMEs to be particularly vulnerable to economic shocks.






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