Ahli Bank SAOG (ABOB) Earnings Call Transcript & Summary

Okay. Good afternoon. And welcome to Ahli Bank discussion session for the first half of 2024. This session will be divided into 2 parts. At the first part, we will be presenting a few slides on the bank's performance. And later on, we'll be happy to take your questions and queries. I'm joined today with the management team, and on my right hand is Bilal Anwar, who is the Deputy CEO Business Group. Next to him is Habib Al Hamaid. He is the Investor Relations Officer. This side is Hanaa Al Kharusi, Senior GM, Wholesale Banking. And Mr. Sriram Bala is our CFO. This disclaimer is an administrative matter, and I would request all attendees to take note of it. Okay. So listen, today, we'll be providing a comprehensive overview on the macroeconomic environment and our financial performance and key strategic initiatives as well as we move on. So let me start with the macroeconomic overview. Just let's have a quick look on the macroeconomic environment that has shaped our strategies and the outcome for this period. Globally, the economy has experienced moderate growth with world GDP projected to hold steady at around 3% in 2024. The Middle East region is also expected to grow at 2.5%, while Oman GDP is anticipated to increase by around 1.2%. The growth rate for Oman is reflective of the country's broadened fiscal policy aimed at reducing public debts and attracting foreign direct investments. In terms of the fiscal performance, Oman medium-term fiscal plan 2024 has provided a clear path towards greater sustainability. The fiscal surplus as of June 2024 stood at around OMR 390 million, which is slightly a decrease from the previous years, due to lower oil prices and lower oil production as well. However, despite all these challenges, the government's prudent fiscal policy has successfully reduced the debt-to-GDP ratio to around 35%, which is a quite comfortable level at this range. So the credit agencies responded positively to these developments and, whether it's S&P, Fitch and Moody's, all of them, they have upgraded Oman rating. And we are expecting the next upgrade to bring Oman credit rating to an investment grade [Foreign Language]. However, Oman continued to make strides in its diversification of efforts in many fronts, including the renewable energy. These initiatives, together with different policies are crucial to position Oman among the leading countries in sustainable development within the region. Now we'll move to the operating environment. As I said last time, the Oman banking sector has continued to exhibit resilience and steady growth throughout the challenging time that we have witnessed over the last 2 years. And the total banking asset expanded during this period to reach OMR 43.5 billion, reflecting a compounded annual growth of around 8% since 2022. Also, the customer deposit has seen substantial growth and stood at OMR 30 billion in June 2024, making a growth of around 11% or 11.7% over the past 2 years. This growth has been particularly robust in the Islamic banking sector or segment rather, which has continued to attract deposits at accelerated pace. The -- it's important to know that the growth in the deposit is critical and important in supporting the sector liquidity and has provided solid foundation for sustaining lending activities going forward. Looking on the lending side, the total loans and advances reached OMR 31.4 billion in June 2024, with a growth of around 5% since 2022. That's the average growth. This growth is again reflective of the credit expansion within the banking sector in Oman and mainly attributed to the stable economic conditions supported by, of course, a steady oil prices and improved business environment. And we have seen this improvement across various sectors of the economy. And again, it's providing a conducive environment for lending opportunities going forward. The third element is the liquidity, and it remains strong in the banking sector. And that's a result of the significant growth, as I mentioned, in the customer deposit. The increase in deposits has also contributed to an improved position not only in the sector but maybe across various aspects of the economy. And also, this will -- going forward, will support the banks and bring its role in providing a credit to various sector in the economy. The fourth element is the interest rate and the interest rate environment remains very challenging. The average Omani lending rate increased to 5.6% in June 2023. Also, the overnight interbank borrowing has remained stable at 5.4%, and this is closely mirroring basically the CBO repo rate in the market, which is hovering us around the 6%. However, looking ahead and with the anticipated cut in the fed rate in the September 2024 meeting, we do see the interest rate to soften and start declining towards the end of 2024. And hopefully, we will start the 2025 at a better environment when it comes to the interest rate. The other element is the capitalization, and the capitalization level within the sector remains strong again. The capital adequacy ratio across banks stood at 18% as of the first quarter of 2024. This strong capital position is a cornerstone of the sector's resilience, ensuring that it can withstand the economic fluctuations and continue to support the broader economy. Last but not least, it's a topic that we have discussed over the last few sessions, which is the asset quality and maintaining high asset quality is a priority for the sector. And this again, reflects the -- reflected in the nonperforming loans ratio, which remains stable despite all the challenges in the past at around 4.5 as of the first quarter of the 2024. This stability in asset quality again underscore the broadened lending practices adopted by the various banks within the sector, and also in line with the intra-bank guidance in this area. Moving on, maybe Sriram will take the next part and then the financial performance for the first half of 2024. Sriram?

Thank you. Thank you, Said, for setting the background. We'll start with the strategic objectives of Ahli Bank. In aligning with our vision, mission and values of Ahli Bank, we have talked 4 strategic objectives on the top side of the table, as you see. Asset growth, the Ahli Bank continues to grow the assets on a prudent risk-based approach, focusing on the sunrise sectors and diversifying the growth in various economic sectors across the [indiscernible]. On the other objective is deposit diversification. The bank continues to strive to achieve the low cost of funding by improving our retail contribution to the overall deposits. Also, we -- I mean we are striving to diversify our customer base, reduce the concentration and increase our physical branch presence. The third strategic objective is to enhance the fee income. The bank continues to work on increasing our operating -- other operating income as a percentage of total operating income. We do this by focusing on alternative streams of income, including the wealth management, investment banking, bancassurance, increasing the credit card part of it. Operational efficiency is our fourth strategic objective on which we continue to achieve operational efficiency through all the process efficiency by using RPA, robotic process automation, continue to deliver digital transformation projects on time, enhancing the customer touch points, enhancing efficiency -- internal efficiency through automation in various services and our internal processes. So the second part of the slide shows various strategic priorities, since the bank is using in order to achieve strategic objectives, also its long-term vision and mission. Moving on. Ahli Bank -- just to give an overview of Ahli Bank, Ahli Bank started its commercial operations -- commercial banking operations in 2007 and rebranded from Erstwhile Alliance Housing Bank as Ahli Bank. And currently operates through 48 branches, including 24 Islamic branches and 3 state-of-art our digital branches. The bank has got a strong institutional shareholding support. The market share of loans as of 30 June 2024 was around 9.5% and deposits were around close to 9%, 8.7%. The rating for the bank -- credit rating for the bank was BB with a stable outlook. During the last 1.5 years since 2022, the bank grew it's assets by 7.8%, similar to the market levels. Deposits grew at 9% CAGR and loan grew by 8%. During this period, the bank increased its network from 42 branches to 48 branches as of 30 June 2024. The key highlights were total assets crossed 3.4 billion as of 30 June 2024. The bank also continued to have one of the lowest NPL ratio amongst the peers. During 2024, the bank issued mandatory convertible bonds in lieu of dividends of 4.5 bz per share. It also exercised its call option of AT1 Capital raised in 2019 on its first call option date. And completed a fresh issuance of around 40 million during the period. The bank also launched new funds and also Sharia-compliant investment and financial solutions for its private banking customers. Bank continued to participate in many greenfield loans and financing. It continues to performance digital transformation journey, achieving many milestones as per the set timelines. The Omanization ratio was 94.2% and female staff by around 40.5% of its total strength. Moving on the bank continues to have a solid track record of superior and sustainable shareholders return. It has paid a consistent dividend of over 50% dividend payout ratio. ROE was 11% and -- and it has a robust business model with efficient operating model with a cost-to-income ratio of 42.5% -- 42.4%, while bank continued to invest in digital transformation, people and its branch network. NPL ratio continues to be 4.1%, one of the lowest among its peers. The bank has a strong institutional shareholding as displayed in the chart below. Also, bank distributed 9 bz per share as dividend for 2023, out of which 4.5 bz was paid as a cash dividend, and the remaining was through mandatory convertible bonds. The MCBs carry a coupon of 6% and we will convert it through a CET1 at the end of 2 years. Ahli Bank's journey since its inception, can be divided to 5 phases. The phase 2007 to '13 was the inception and expansion phase, that's when housing bank was converted to a full-fledged commercial bank and rebranded to Ahli Bank. But the Ahli Bank started expanding its branch work then on and launched subsequently the brokerage and asset management services. Also in 2013, it's launched its Islamic window with 7 branches during the year. During 2013, the bank built its iconic head office building. The second phase was of consolidating for growth. During this period, the bank further expanded its branch network to around 20 branches, introduced a lot of services, including mobile banking, e-wallet, wealth management services to its clients, private and premium banking services and also introduced many products like Signature and Infinity cards and launched its graduate development program called Himam. And during this period, the bank also raised its first AT1 Tier capital of OMR 50 million. The next phase was the diversification and strategic growth phase from 2018 to '20, during which the bank launched a full-fledged investment banking, including corporate advisory, asset management and brokerage services. The bank had a retail business transformation and the network of branches expanded to 40 branches across the Sultanate. The bank during this phase embarked on the digital transformation roadmap and also rebranded its Islamic window to Ahli Islamic. During the next phase, which is 2021 to 2022, it was an expansion and transformation phase, where it started its digital transformation journey and launched Ahli Express, which is MFKs the first -- it was also the first bank to provide 1:1 IPO financing through mobile app. It launched as Tamkeen, crowd funding, it launched digital branches, and the Phase 2 of the iconic head office building was completed during this period with a lot of service centers for our private and corporate customers. Phase 2023, this phase is the bank is moving towards becoming the partner in excellence to all its stakeholders. It's continued it's digital journey, launching SIP in mobile banking, enhancing its mobile banking services to its retail clients, enhancing its B2B application to corporate customers, it launched e-IPO for the Islamic customers. It also crossed a milestone of 1 billion deposits in retail banking and launched corporate credit cards and launch of Sharia-compliant wealth management services. The bank's financial track record continues. The total assets grew by 7.8% CAGR since 2022 to reach OMR 3.43 billion as of 30 June '24. It was same in the line with the market. Loans and advances grew by 8% CAGR and ended up at OMR 2.805 billion as of 30th June 2024. During this period, the incremental market share of Ahli Bank in loans was 14%. Deposit grew by 9% CAGR to reach around OMR 2.612 billion as of 30th June 2024, slightly lower than the market growth. Moving on, Ahli Bank has 2 major business segments, the wholesale banking. Ahli Bank Wholesale Banking segment consists of corporate banking and SME, Treasury and FI and the investment banking teams. Corporate banking teams -- corporate banking team provides full value of services through center-specific teams, which includes the government banking, corporate liability team and e-channels team. This team strives continuously to focus on various sectors that form part of the Vision 2040. The segment continued to support SMEs through its crowd funding platform, Tamkeen, both in the conventional and Islamic side. As part of the long-term strategy, the bank continues to strengthen its funding to various ESG projects, some of them being syndicated term facility lending to a power generation company for a 500-megawatt solar power project. Also, it was -- Ahli Bank was involved in a financing specialized water utility services and industrial effluent treatment company. The Treasury and FI team provides a comprehensive package of services to corporate, commercial and government institutions. The FI team access a global relationship to all the financial institutions across the world. The investment banking team provides full array of services of corporate advisory, asset management and brokerage services. It has acted as an issue manager for many IPOs, including one of the biggest IPOs in Sultanate. The Asset Management division offers a diverse range of investment solutions to its institutional and high net worth clients, including mutual funds and advisory -- investment advisory services across various subclasses. The brokerage division is a leading player in the Sultanate Muscat Stock Exchange, serving a broad range of institutional and retail clients. The wholesale banking assets reached to OMR 2.66 billion as of 30 June 2024 and contributed around 2/3 of the operating income of the bank at around OMR 32.7 million for the 6 months of 2024. Moving on. Retail Banking consists of specialized teams to handle the retail premium and private banking clients and provide wealth management services to its high net worth client and also has Ahli Islamic window for handling it's Islamic banking customers. The retail team offers its services through 48 branches across the Sultanate including 24 Islamic branches. The bank started its first MFK in 2022 Ahli Express. And as of 30th June, we have 12 MFKs operational. The bank continues to focus on expansion of retail network, including through digital mode in order to widen its customer base both under conventional and Islamic banking. The wealth management team provides comprehensive services to its high net worth client and have a dedicated wealth management app for its clients. Retail banking assets reached to $784 million as of 30 June 2024 and contributed around 1/3 of the operating income of the bank at OMR 17.9 million for 6 months ended 30th June 2024. Moving on. Islamic window -- Ahli Islamic since its launch of -- launch in 2013, offers a unique Sharia-compliant product and services through 24 dedicated branch catering to all customer segments, institutional, corporate, SME and retail. It was the first Islamic bank in Oman to digitally onboard customers through mobile banking platform and it also is the fast Islamic bank in Oman to offer IPO leverage. Ahli Islamic continue to expand its customer base, physical presence, including digital branches with focus on deposit mobilization. Financing of Ahli Islamic totaled to OMR 607 million as of 30th June 2024, and the customer deposits was OMR 661 million from Ahli Islamic. Thus Ahli Islamic was fully self-funded. Ahli Islamic contributes to about 17% of the overall operating income of the bank. Moving on. On the financial performance, total assets of Ahli Bank grew by 3.8% around OMR 125 million in the first 6 months to reach OMR 3.443 billion. Net loan grew by 4.1% to reach OMR 2.805 billion in the 6 months. Customer deposits grew by 5.5%, around OMR 136 million in the 6-month period to reach 2.612 billion. Equity grew by 4.4% to reach OMR 544 million as of 30th June. During this first 6 months, operating income increased by 3.2% to reach OMR 50.63 million. In spite of the pressure on the cost of funds, operating expenses increased by 9.7% as the bank continue to invest in digital transformation, people and the branch network. Profit after tax grew by 1.5% to reach 20.2 million for the first -- first half of 2024. ROE was at 11%, higher by -- higher from 10.7% as of December 2023. ROA was 1.2%. Overall, capital adequacy was at 16.6%, and NPL remained at same level at 4.1%. Moving on. Overall operating income continue to grow and reached OMR 50.6 million during the last 1.5, 3 years split. In spite of the pressure on the cost of funds and deposits. Other operating income as a percentage of total income increased to 27.2% from 19.2% as of end of 2022. NII spread fell to around 1.7% from 2.2% at end of 31st December 2022 due to the increase in cost of funds and deposits. Cost-to-income ratio was 42.4% with continued investment in digital transformation, people and branch network. ROE reached to 11% as of 30th June, ROA reached to 1.2% as of 30th June 2024. On the asset side, the loan -- focus on asset quality remains one of the top priority of bank, and it continues to have the lowest NPLs in the industry. The loan grew by almost CAGR of 8.2% to reach OMR 2.91 billion. But the bank's NPL ratio remained one of the lowest at 4.1%. The total stage-wise exposure of Stage 1 assets was around 81.5%. Stage 2 assets were 15% and Stage 3 around 3.4% as of 30 June. The overall coverage ratio was 92.8% as of 30 June 2024. The loans were well balanced and distributed amongst various sectors as displayed in the chart below. Moving on. On the funding side. The customer deposits grew at 8.9% in the last 2.5 years to reach -- sorry, 1.5 years to reach OMR 2.6 billion. The retail segment share grew to 47% of the total deposit with corporate contributing 32% and institution deposit contributing to 21% of the total deposits of Ahli Bank. CAR ratio was 16.6%, and the CET1 ratio was at 10.6%. Net loan-to-deposit ratio remains stable around 107%. LCR and SFR were well above the regulatory levels at 167% and 113%, respectively. The bank has a won several accolades for its performance during the years, including some of them in 2024 on excellence in private banking, excellence in corporate banking, excellence in digital transformation and MENA Corporate Bank of the Year. With this, we come to the end of this presentation. Now if you...

[Operator Instructions] Yes, [ Joey ].

I have one question on your other operating income during this quarter and this year has been phenomenally well. Could you please explain the reason why the foreign exchange came and the dividend income has been on the higher side, especially during the second quarter of this year.

Okay. Joey, thank you. I mean one of the key focus areas of the bank was to increase the other operating income of the bank. So the bank continues to increase its -- I mean, various other revenues, including health management, bancassurance, trading income and also various investments on -- so this has led to the increase in operating income during the period. So the bank is -- one of the key strategic priorities have been to increase its other operating income.

It's well diversified, Joey. It's not coming from one specific area. It's across the field. It comes from private banking, wealth management, ForEx and treasury has been a good quarter for us in making -- I mean, some good money from there. We have some good investments, which are also yielding good results, both on the [ FTPL ] side as well as what you call on the dividend side. So we have a good dividend income also in the June quarter. So all that has duct-in in a substantially good second quarter, as you rightly pointed out.

So, if is this a sustainable level of income that we are seeing, especially on the ForEx and dividend income?

I think this ForEx income is, I believe, is sustainable because most of it comes from our core corporate customer. We have enhanced our penetration with our large corporate. We've also established SME business significantly, where though the volume may be relatively less, but the margins are probably on the higher side. So we are focusing -- with our increased branch network. We've been able to attract ForEx business even from areas which were traditionally not being catered to. So all that has resulted into a more sustainable and a long-term business model, at least that we would like to believe, and we are confident about it. We'll see in the next few quarters how it pans out. But at this point of time, we're pretty confident about it.

I see Vishal.

This is [ Vishal ] from Capital. Just a couple of queries. Just want to tie in your CASA and your NIMs. We've seen CASA sort of in the 45% range, 47% range for the bank. What's the strategy to increase that more towards the sector average. And if I look at your [Technical Difficulty] you've seen a sort of drastic drop -- you've seen across the sector. And you've seen that especially with Ahli Bank over the last 3 quarters. So if you could just -- once interest rates drop, how do you see that sort of panning out? Can you just give your comments on that?

Yes. Thank you, Vishal. Yes, you're absolutely right, and that's our biggest challenge, and that keeps us awake in the night if you ask me what keeps us awake in the night? So the drop are in the NIM or a significant increase in the interest cost, which has not been able to pass on to the customers is significant, what you call concern. But as Said initially mentioned that with the expected -- benign the softening interest rate scenario in the next few quarters, in months and years, we believe that what has been a bit painful for us, we'll start to work on our side, and we'll start gaining a bit good traction when it comes to the reduction of the cost of fund. The CASA, as you said, is good at 45, 47 but we appreciate lot of it CASA is also having some interest rates component in it in terms of call account and those government institutions are asking for their -- I mean, our big corporate customers right now ask for their pound of flesh in the interest rate, when we know the markets are at a very high rate. So but as we know, I may as move forward in Q3 and Q4, and in the Q1 and Q2, we should get a significant some sort of kickback in terms of the interest rate reduction, which will subsequently improve our NIM.

Right. Now on the loan book side, you have the highest ratio of corporate to retail at 73%-27% compared to the sector at 65%-35%. So when these interest rate cuts happen, you would also see a repricing on the corporate book side. So that would actually counter some of this cost of funding pressure that you face. So if you could just give a comment on that?

Absolutely right. I mean, that will happen. I mean no questions about it. But as per our own calculation and assessment done by the CFO and our team, our asset liability position, the gain which we should make from the reduction in the cost of fund should be much more than what we will have a reduction in the corporate book. So because, as you know, our corporate book also -- I mean, we have not been able to reprice because they became some transaction, which was at 6% 2 years back, though our cost of fund has gone by 2%. They've not been able to reach [ 58% ] I mean if you look at it, theoretically 6% should become 8%. So it has not become 8%, it has becomes 7%. So 7% will not go to 5%, it will go to 6%, if what you call the interest reduction starts happening. So you're right, there will be always this I mean, the play between the reduction in the corporate interest rate versus the reduction in the deposit rate, and that's where the management and the people within the system and our employees come into play to see that -- to ensure that we get the right balance.

And my last query is on the capital adequacy side. Is that a comfortable level where you stand at 11% for CET1, and overall capital adequacy? What are your thoughts on the same?

Okay. So see, we have -- this year, we have started a dividend distribution to 50% out of the dividends through the MCBs. So this, in turn, will protect -- this will go flow into the CET1 after 2 years. So we will probably -- I mean, adopt the same metrology for a few years, still we reach a comfortable level. So we don't go back again to the shareholders for further raising share capital.

Having said that, I mean, our shareholders are very, what you call, I mean, institutional shareholders if the business and situation warrants and there is a business case where we can give them a decent return on equity, we are pretty confident that we'll be able to raise capital from the market, if it's still warrants.

Noted. Now on the cost of risk side, we've seen net provisions come down. We've seen that across the sector, but especially for Ahli Bank. How do you see the credit cycle panning out in terms of the sort of discussions you're having with your top clients, the overall book sort of the systemic risk and specific to Ahli Bank, how do you see that panning out?

I mean yes, you're right, the last 6 months across the industry, the cost of risk has gone down. I would believe that a lot of it has -- we have moved a lot from the 2020, and 2020 first quarter, the COVID when the uncertainty were there, restructuring were there and lot of cash flow uncertainties were there. We have moved on quite significantly from there. A situation is, of course, not as grave or as, I mean, however as it was 3 years back, but still some headwinds are continuing to go there. I mean, especially the interest rate scenario in the last 1, 1.5, 2 years haven't helped that cause. But the situation is, of course, much better than it was 2 years back. You will continue to have a much higher cost of risk compared to pre-2020 era, but probably it will not touch the same what it was during 2021, '22, which was a more difficult in tumultuous time for the industry.

Okay. On the provision coverage ratio, I believe Ahli Bank is at 94%. Is that correct?

93%. Yes.

Right. So what would be our target provision coverage ratio? Would you look at building it up to 100% by being more prudent? Or you think it's a comfortable level for yourself?

See, Vishal. There's no target ratio because it all depends upon what the NPAs we are having and what collaterals we are having, what securities we are having under those NPLs. If we end up having NPLs, then the chance of recovery is pretty low, you will see a much larger coverage ratio. But if we are sitting on a high level of collateral and securities and we believe that in terms of NPL and our auditors and Central Bank because all this is audited by Auditors, Central Bank, I mean, and all the processes. If you believe we are sitting on a good security, good type of mitigants in terms of collaterals, then through audit it will be on the lower side. So every quarter depending upon what our NPL position is and what levels we are in, it will keep moving.

Okay, point well noted. And the last point is you mentioned about being able to mobilize money from the market in terms of rights issue or a perpetual bond, depending on the ROE. So we witnessed that the bank has done well to grow its bottom line over the years. But if I look at the ROE, and I'm talking about the adjusted ROE after paying a perpetual interest because that's an explicit cost, it's still among the lower sort of lower banking in this sector. So sort of how do you see that improving with time? What are the aspirations to reach a double-digit ROE over the like, let's say, next 2 to 3 years?

Yes. I mean, yes, aspiration, and we think somewhere in the middle, if I'm not wrong, in terms of adjusted ROE what you are suggesting...

Just in the middle.

Yes, we're just in the middle. I mean, we are not the lowest. But having said that, we do agree that we need to improve and we should improve, and all our efforts are there to improve it. And as we move on and make more profits every year, I'm sure this ROE also will move on and become a bit better.

And any sort of target number you have in mind? I understand it's not easy. I'm not asking for a guidance, but do you think a double-digit currently -- there are 2 players, almost 3 that meet a double-digit ROE? Do you think that's sort of realistic over the next 2 to 3 years?

Again, I will not give any specific number. But as I said, all our [indiscernible] that we improve our ROE, so that next time when we come to you as investors and shareholders, and we are in a better shape. So we will continue to put all our efforts. But as we said, the market interest rates, for example, if the interest rates were not moving in the way it moved and our NIM would not have come down to 1.7, you would have seen a much significantly improved ROE. So these are things which depends upon year-to-year, what market dynamics we are navigating. If the market is not favorable, if things are much more controlled, of course, we will what you call increase our ROE. But if we get another headwind, we will be still challenging, and we'll try to work it out.

Any other questions? Okay. I don't see any raised hands, will give another 5 seconds if want to ask any questions. Okay. All right then, thank you very much for attending the session.

Sorry, one last query from my side. The dividend we saw announced this year was a combination of an upfront cash component as well as a sort of longer payment -- longer duration bond, right?

It's 2 years bond.

Yes. No, is that a policy the bank would adopt going forward as well? Or was this sort of a onetime and next time, you will be sort of try and stick to this cash dividend. I just want to understand the policy of strategy over there?

It is short to midterm policy as mentioned by Sriram. I mean, we are slightly below the market [indiscernible], when come to the CET. So this is a sustainable way of enhancing our capital base, and this is a short term, as I said, to midterm program. And then we are adequately, I would say, capitalized when it's come to the CET level. So you would most likely would see this year as well, if that's what...

Subject to Board approvals let me qualify -- this is just a statement.

So we are coming to the end of this session.

Okay. Thank you.

Thank you very much. See you next in the next session.

Thank you, everybody.