News Column

Jobs, pay boost to fuel loan rise by OMR500m

February 11, 2014

A E James

Muscat: Thousands of young Omanis joining the country's workforce and public sector employees flush from recent pay rise are expected to push the Sultanate's personal loan spending up by more than OMR500 million this year.

Oman's banking sector is poised for higher growth in the personal loan portfolio this year, thanks to better demand for funds from the thousands of new recruits in the job market and the salary revision in public sector following standardisation of grades.

Bankers and stock market analysts expect the consumer loan and mortgage finance to grow slightly over 10 per cent in 2014, taking the value of all consumer loans in the Sultanate to more than OMR6.3 billion.

This is compared to 8.9 per cent growth or OMR470 million incremental loan disbursed by Omani banks last year.

"We are estimating a better growth in the portfolio this year owing to the increased borrowing power of customers, primarily from the government sector employees as a result of recent salary hikes," said Joice Mathew, head of research at United Securities.

"It is roughly estimated that as many as 60,000 locals will join the workforce this year, if last year's trend is any indication. Last year, Oman government had said it would employ 20,000 youths in the public sector and would create 36,000 jobs in the private sector. The government has to allocate an additional OMR900 million for salary revision in the public sector this year.

"Additionally, the two-year moratorium on personal loan top ups will be fully over in the first quarter of the year, which should help in incremental disbursement," added Mathew.

By the end of 2013, listed banks had a combined gross exposure of OMR5.75 billion to the personal and housing loan portfolio, constituting 41 per cent of the combined gross loan book of banks.

Echoing a similar view, Ahmed M Al Abri, chief operating officer of Bank Muscat, recently said that the young Omanis joining the workforce and salary hikes are major factors that would drive demand for consumer loan this year.

"Those who joined (the workforce) last year will borrow from banks this year. The next growth will come from increase in salaries," he added.

Omanis primarily borrow money to meet their basic personal needs such as housing, vehicle and lifestyle products, which include consumer electronics and white goods.

However, Sankar Kailasam, head of Asset Management, Gulf Baader Capital Markets, has a different view. "It will be more or less same as last year, which was lower than the growth witnessed in 2012," he said.

Low interest regime

"Lower interest rates creates affordability of loans, and hence can also be viewed as a factor responsible for better demand for personal loan," added Murad Ansari, director bank research EFG Hermes.

The Central Bank of Oman brought down the interest ceiling on personal of commercial banks to six per cent from seven per cent for reducing the debt burden of bank borrowers. The apex bank also decided to bring down the upper ceiling of personal loan portfolio of commercial banks to 35 per cent from 40 per cent of a bank's total credit, while increasing the housing loan limit to 15 per cent from 10 per cent.

However, the CBO decided to implement it from June this year on requests from commercial banks. Other major restrictions brought in by CBO on consumer loan front last year include introduction of debt burden ratio (the portion of salary that goes as loan repayment) of 50 per cent and 60 per cent for personal and housing loans, respectively. Also, there were some other restrictions on top up of existing loans.

Salary hikes

"Despite the elevated borrowing power of customers as a result of salary hikes, the new debt burden ratio regulation combined with restrictions on loan top up had restricted the personal loan growth in 2013. In 2014, we expect the banks to capitalise on the increased borrowing power, but the lowered interest rates resulting in slower growth of interest income growth (of banks)," noted Mathew.

"With the new restrictions, the risk of retail loan non-performing assets will be minimal," added Kailasam.

Agreeing with Kailasam, Suresh Kumar, head of Research at Al Maha Financial Services said that the reduction in debt burden ratio will help banks to improve the quality of loans and thereby keep their balance sheets clean in the long-run, "although it affects the loan growth in the short-run."

Market share

Among various banks, Bank Muscat is the market leader with 43 per cent share of the combined personal and housing finance exposure of all listed banks followed by National Bank of Oman (NBO) with a market share of 18 per cent in the retail space. Bank Sohar and BankDhofar had the fastest growth in their personal loan portfolios, which grew by 12.8 per cent and 10.2 per cent, respectively.

In fact, the personal and housing loan portfolios of some of the listed banks have limited room for growth as a result of CBO lowering the bank's maximum limit on personal loan portfolio.

"However, we expect those banks who have more room for growth in personal loan portfolios to seize more market share in 2014. Bank Sohar stands to be the major beneficiary of such a scenario. It's personal and housing loan portfolio comprises only 33 per cent of the total loan book," noted Mathew.

Owing to the relatively higher yields, personal loans are a major contributor to the banks' interest income.

The CBO decision to lower interest rate ceiling to 6 per cent will be affecting the interest income growth of the banks. However, the impact will be minimal in the immediate term as the 6 per cent interest rate cap will be applicable on new loans only.

"We have observed that the average time taken by the banking system to fully reflect interest rate ceiling cuts has been around 4-5 years. We estimate the overall interest yield on loan book of listed banks to get reduced by 16 bps in 2014 as a result of this decision. But we expect banks to try neutralising the impact of this development on their profitability with increased volume growth over the long term," added Mathew.

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Source: Times of Oman

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