Do Omani banks need to downsize?

Oman’s financial environment has for many years been dictated by five big financial institutions but they are currently facing a systemic risk of having large liabilities that cannot be sustained.
With the completion of the round up of their balance sheets for 2015, the management teams of the BIG FIVE are now taking a hard look at the dramatic business model changes in 2016 and beyond. They have many options but at the moment, none of them are attractive enough. Downsizing is one of them. To take a closer look, each of them has too many branches scattered around the country that will start to eat away their profitability. With current large capitals that will be difficult to translate to business growth in the current situation, banks will soon find it challenging to sustain the business models.
These banks have relied too much on debt to finance their lending. That debt depends heavily on wholesale market financing and customer deposits. With the roof of debt starting to show cracks and the floor of lending feeling the weight of the pressure, the local big banks will be forced to go through restructuring. With large assets that have been built over the years not hitting the targeted mark, the financial institutions will need to trim to avoid the financial crunch.
Credit growth will certainly get weaker as both the government and private sector have already started to cut back. This will force banks to draw from their own internal funds but the reserves are too shallow to keep them afloat for long. The managements will hope that the poor credit growth is cyclical and recovery will be swift. Even when the credit demands pick up, it is required to be matched by loan supply for the recovery to start kick in. This economical cycle that will bring back the credit growth is unpredictable and banks cannot just hold on and wait for it happen.
Large enough
Shareholders who are used to good returns, will see their earnings eroding while they have to finance large operations that are surplus to the requirements. The question is that are local banks large enough to see them through bad times? Corporate loans have never hit the level of supporting the banks in the past. It is personal loans and small businesses that have been keeping these banks afloat for many years. The reasons that their bad loan provisioning has been adequate to absorb the losses it is because Oman has always been a consumer society. However, we now see a shift of consumerism as consumers are adjusting to the economic realities.
In the past, the big banks have simply taken growth for granted by expanding very fast. The sector that grew too fast in the last decade is property construction. With the current business realities, the real estate activity that has supported the banks for years, is on the verge of decline. The private sector is forced to cut down growth or simply downsize its operations by employing less expatriates. It is no secret that over 70 per cent of the build-to-rent properties are supported by foreign workers. With less credit demand in construction, consumerism and a freeze in new business ventures, banks will be forced to look at their business risk portfolio.
Reason to be optimistic
Smaller banks, contrary to the wide belief, are coping better simply because their operations are conservative. They are good on the balance act of matching supply and demand. The sizes of the operations and business expectations are catalysts to their long-term survival. Again contrary to a popular belief that small banks need to be bailed out by going through mergers with big banks, such thinking is not justified. The reason is that small banks have always been realistic while big ones almost reckless in their expansion plans. Having said that, there is every reason to be optimistic but local big banks need to look deep within themselves and consider a major revamp in operations to stay afloat in the current hard times.