Oman banks well-provisioned for bad loans

BUSINESS REPORTER

MUSCAT, Oct 30

Conventional and Islamic banks in the Sultanate of Oman are adequately-provisioned to tackle risks stemming from non-performing loans (NPLs) – a concern exacerbated by the economic downturn and the pandemic, the Central Bank of Oman (CBO) has stressed.

The apex bank noted in its latest Financial Stability report that, despite the overall challenging economic environment, the risks to asset quality of commercial banks remained largely well-contained with low NPLs and adequate provisions. However, it cautioned that the moratorium on loan repayments allowed by CBO since March 2020 has “somewhat obscured the visibility of problem loans”.

At the end of 2020, the stock of gross NPLs (Stage 3 loans since the implementation of IFRS 9 in 2018) amounted to RO 1.111 billion (2019: RO 890 million) or 4.2 per cent (2019: 3.5 per cent) of the banks’ gross loans.

The asset quality of the Islamic banking financing portfolio also remained strong with a non-performance financing (NPF) ratio of 1.9 per cent at the end of December 2020, which is among the lowest in the region, it pointed out.

Net NPLs of the banking sector amounted to RO 406 million or 1.6 per cent of the net loans at the end of 2020. “This reflects that the existing loan portfolio of banks is well covered against expected credit losses through adequate provisions with the coverage ratio (Stage 3 provisions to NPLs) of 63.4 per cent (102 per cent including Stage 1 & 2 provisions),” it stated.

Measures taken by CBO, such as deferment of loan installments and putting off changes in risk classifications for the borrowers availing deferments, have increased the resilience of the borrowers to the pandemic-led deterioration in operating conditions. To avert the worsening of a looming downturn, such regulatory measures were imperative to support viable borrowers facing a temporary liquidity crunch.

“Considering that the pandemic may have a long-lasting impact on some borrowers affecting their viability, once these relaxations expire the NPL portfolio may grow from the current levels. This underscores the need to carefully monitor the developments in the credit portfolios of banks in the period ahead,” the apex bank stated.

Stage 2 and restructured loans signal looming difficulties in borrowers’ ability to pay their debt on time. In addition, a large volume of Stage 2 loans and a rising portfolio of restructured loans underscore the risk of deterioration in the asset quality indicators, as adverse business conditions may push these fragile loans down to the impaired category.

The total restructured loans in 2020 rose to RO 1.144 billion (2019: RO 970 million; 2018 RO 564 million). Moreover, the restructured loans classified as performing loans were RO 919 million or 3.5 per cent of gross loans. At the end of 2020, Stage 2 loans amounted to RO 5.4 billion (2019: RO 5.2 billion), forming 20.2 percent of the banks’ credit portfolio.

“Given the large volume and rising portfolio of Stage 2 and restructured loans, due attention and concerted efforts are warranted to monitor and manage these loans. Nevertheless, the stress tests indicate that banks remain resilient to a battery of rigorous shocks to their credit portfolio,” the CBO report added.