Bank Muscat SAOG (BKMB) Earnings Call Transcript & Summary

[Foreign Language] Good morning, everybody. Thank you very much for joining us today. I want to take the opportunity to welcome all of you. This session is going to be an hour long. The first part of it is going to be a presentation and the second part will be our questions and answers. Of course, I will introduce my colleagues with me around the table. My colleague, our Chief Operating Officer, Sheikha Al Farsi, is with us today; and my colleague Ganesh, he's also with us, our Chief Financial Officer, with us today. [Foreign Language] Of course, if we start -- we'll go to the next slide. Okay. The first is just an administrative slide. This is -- these are all -- obviously, we have to make the statement that we would not be able to give any forward-looking statement, but we will be sharing historical data during this session, and we will be addressing any questions that you may have on our historical performance and give certain perspective on what we think some of the future aspects are, wherever possible. [Foreign Language] Okay. [Foreign Language] Next slide, please. In terms of the contents of the presentation, I will be talking about the operating environment as well as the banking sector and then move on to Bank Muscat and its strategy, and definitely the key financial highlights for the first 6 months ending June 30. [Foreign Language] For months and economic recovery, in fact, has been -- as it's been evident for all of us, has been gaining quite traction in 2023. There has been, of course, we've witnessed fiscal surplus the year before, due to higher energy prices and this has made -- am I -- I'm getting interrupted. Is that...

They're coming in.

This has benefited, of course, the Oman's economic prospects, supporting its external and domestic finances. Of course, in addition to that, the government throughout these past few years has undertaken several reformative measures to support and diversify the economy, increasing public revenue, rationalizing public spend and reducing the debt. Further, the government has reinforced its focus on sectors like manufacturing, tourism and logistics, agriculture and fisheries. And in order to enable these different sectors to grow, a number of initiatives have been taken by the governments, including changing and producing new legislations and promoting foreign direct investments into the country. During the first quarter of 2023, the real GDP grew at an annual rate of about 4.7%. This is according to the data released by the National Centre for Statistics and Information, NCSI. And as per the preliminary report, it reached about OMR 8.7 billion for the first quarter compared to OMR 8.3 billion recorded last year. The fiscal positions continued with a surplus of about OMR 0.7 billion in the first half of 2023. This is on the backdrop of higher oil prices and higher current revenues and a decrease in the public spending. Consumer price inflation has largely remained muted, around 2% in comparison to the global inflation average nearing around 9%. The government also was able to utilize the excess surplus in repaying the debt and reducing costs associated with the debt servicing. Debt-to-GDP ratio reduced from 61% in '21 to 40% in '22. And in the first half of 2023, the government has repaid over OMR 1.5 billion in debt which further improved its debt-to-GDP position. These additional revenues have also supported the government in deferring the planned -- any planned withdrawals from the country's reserve. The medium-term fiscal plan in Oman's Vision 2040 definitely provides a firm positive anchor in the direction of the economic diversification as well as sustainable private sector growth. The budget 2023 is also seen as growth positive and expansionary budget. It's definitely focusing on large investment layouts, covering a number of different projects across variety of core sectors supporting the economy. And focusing also on public and private partnership projects, which are going to be a key focus in the coming period. The momentum in the economy has definitely helped the upgrades and the sovereign ratings by the various rating agencies with a favorable economic outlook. [Foreign Language] Next slide. Now I will be moving to talk about -- briefly about the banking sector in general. It has been performing relatively well during the challenging times in the past few years. In fact, some of the growth parameters, which are shown in the next slide, shows that sectoral performance has been good in the last 4 years. The banking sector has been supporting different business segments in Oman through credit support. The key sectors -- key parameters, which include liquidity, capital adequacy, asset quality are relatively at healthy levels. Starting from 2022 and continuing on through the first half of 2023, the sector did witness quite a good momentum. This was obviously supported by the economic recovery and the positive macro outlook. In May 2023, the sector credit portfolio grew by about OMR 1.8 billion, giving a growth of about 6.4% year-on-year compared to May '22. Deposits have also matched that growth, growing by about OMR 1.5 billion, i.e., around 6% for the same period. Net profits for the banks have almost reached the prepandemic levels. And as I have discussed earlier, the budget of 2023, promoting expansionary investments in key sectors of the economy and lifting -- of course, lifting of the pandemic-related restrictions and the government focus on the reforms and development strategies, this, we expected to be providing a very much needed booster for sectoral growth and helping it in also achieving improved financial performance and strong financial position for all Omani banks in the coming [indiscernible] for '24 and beyond. [Foreign Language] In this slide, we can see the stable growth of the key parameters of the banking sector. Loan growth is around 4.7% compounded annual growth. Since 2017, up to about -- up to May '23, is quite healthy, ensuring that the growth is also matched with customer deposit growth of about 4.5%. Year-on-year, we can see some clear momentum, gaining traction in credit growth after 2 years of subdued economic activities due to the pandemic. Of course, the profitability of the sector was relatively stable until 2019. But in 2020, banks globally have witnessed a sharp decline in net profits. And Oman, of course, was not an exception. In Oman, after seeing a 25% reduction in net profits for banks, this has significantly improved by about almost 18% rebound in 2022. And in June 2023, we see also profits improving by around 17% compared to June of last year. So the momentum is gaining positive traction for all banks. In terms of growth over the coming terms, it's expected to be around single -- mid-single digits in terms of credit and deposit growth going forward, similar to what we have been witnessing. Obviously, these have to be prudently managed. And given the positive economic outlook, we expect that these impacts are going to be mitigated to some extent. Naturally, also the global geopolitical scene and interest rate situation is going to have an impact on any future outlook. And the banks would require to be tactically managing its liquidity. But in the medium term, we expect a stable performance. [Foreign Language] [Technical Difficulty] productivity and innovation. These are strategic pillars that we wholeheartedly believe in. Our strategic focus, our strategic initiatives stem from these strategic pillars. We are definitely focusing on our -- serving our stakeholders better every day. And we continue to focus on our strong branch value, our strong financial position, our strong human resources to deliver the best values for our stakeholders and the betterment of every day. [Foreign Language] This is a quick snapshot of the various business lines in the bank. As you all know, the bank does provide all banking services with well-established business lines, including corporate banking, personal banking, wholesale banking and Islamic banking services. These business lines have been performing well over the last few years, providing healthy profit contributions to the overall bank. In general, corporate banking, personal banking and wholesale banking contribute around 25% to 35% each and Islamic banking around 6% to 7% contribution to the bottom line. Our overseas operations have contributed about 2.5% to our bottom line. Islamic banking -- our Islamic banking window, Meethaq, continues to have the highest market share in terms of assets in Oman [Technical Difficulty] government and private sector deployment. [Foreign Language] Now I'll be talking about some of the key financial highlights. And as you can see, the bank's top line performance was strong in spite of the continuing global and regional challenges. Net profit was higher by 5.1% over June of last year with healthy business growth and prudence on credit costs. Nonfunded income also improved in June '23 by about 5% after excluding the one-off investment of last year -- one-off investment income of last year. And operating expenses increased by about 5.6% relative because of the growth in the business and administrative activities and infrastructure expansion. Bank portfolio has also shown a growth of 9.7% year-on-year. Deposit portfolio has also shown a growth of 2.8%. [Foreign Language] This slide provides a snapshot of our operating performance over the past few years. As you can see, the bank's NIMs have been quite stable over the last 5 years. Bank has been able to manage the yield and the funding cost to maintain the NIMs. Bank's fee-based income was also quite stable and quite impressive actually at 31% to 35% of total income throughout this period. Our cost-to-income ratio reached 38% compared to 39% in June, and that is due to moderating costs, managing costs and any increases there are actually maxed with even higher increases on the top line, thereby making sure that our cost is maintained within efficient levels. Profitability of the bank has also witnessed a significant improvement from the lower levels of 9% in 2020, about 12.5% in June '23. The current period ROE has improved due to the higher profits and also reflected the positive impacts of the capital structure optimization that we have completed last year. Bank's ROA continued the healthy momentum, growing and reaching 1.6%, the highest when compared to the levels seen in fact in the last 5 years, after reaching a low of 1.3% in 2020 during the pandemic. [Foreign Language] This slide talks about the asset quality and the asset trend over the last 5 years. You can see that the bank has been able to maintain an NPL ratio of around 3% to 4% throughout the period. The coverage ratio continues to be at a much higher level ranging between 125% to 163% in the last 5 years, reflecting the bank's prudent policies. The gross loan portfolio is also well diversified, well managed, with a prudent credit policy. The bank was able to grow gross loans by about 5% during June '23 after growing the base by 3.3% the previous year. The bank continued its prudent provisioning policy and credit policy, make sure that our performance for the coming period remain as stable and with a positive momentum as has been in the past. [Foreign Language] Sorry, this is the last slide I will be having and then I will open it for questions and answers. Here, we talk about funding and the liquidity situation of the bank. Bank has been well balanced in terms of our funding mix with around 70% of the funding coming from customer deposits and the balances through interbank borrowings and equity. This has been quite a stable and a healthy position for the bank over the last few years. The bank also continues to hold high level of liquidity assets over the last 5 years. These assets are in the form of very high liquid assets. As I mentioned earlier, the bank's capital position is one of the highest amongst Omani peers and one of the strongest amongst GCC peers as well. The capital position is largely, as you will see, driven by core equity capital along with retained profits after paying healthy dividends over the past several and many years. Of course, due to the global challenges, including supply chain issues, high inflation in many markets, rapidly [Technical Difficulty] liquidity management and interest rate management that is going to ensure the sustainability of the profits and the performance of the bank moving forward. [Foreign Language] Now we can start the questions and answers. [Operator Instructions]

[indiscernible] has a question. [Operator Instructions]

[Foreign Language]

[Foreign Language]

Ms. Sumaya has a question as well. [Operator Instructions]

[Foreign Language] Can you hear me?

Yes.

[Foreign Language] This is Sumaya from SICO Bank. I have a few questions, if you don't mind. I'm going to ask them in English. So first of all -- yes. So first of all, regarding your fee income in the first half of 2023, there has been growth, but relative to last year, the average quarterly fee income recorded is lower. Is there a reason behind that? [Foreign Language] And regarding the -- your loan growth, which has been healthy and relatively in line with the sectoral growth. However, we've seen a bit of a slower growth in 2Q '23 versus the first quarter. So that could be attributed...

Sorry, which one? Accelerated, you said?

[Foreign Language] And the growth in the first half has been generally healthy, in line with sectoral average. But [Foreign Language] into first Q '23 and second quarter. The second quarter saw a bit of a slowdown. Is this attributed to seasonality [Foreign Language]or -- yes. And going forward, you mentioned that you expect the general sectoral growth in Oman to be in line with GDP growth around 4% to 5%.

Yes.

And I'm presuming that's non-oil GDP growth. But [Foreign Language] can we expect Bank Muscat's growth to be in that -- in those levels? And the third question is regarding your -- so there has been a lot of talk in Oman about lowering the debt and the government has been focusing on that. And the debt-to-GDP ratios have gone down significantly. Does this mean that in the next period, you are expecting the government's focus to shift? Because they've been talking about that. The first focus was lowering debt and then to support the non-oil GDP growth. Is that going to translate into stronger corporate lending to semi government more projects? Or are you already seeing that? [Foreign Language]

Welcome, Sumaya. Thank you. Welcome from SICO Bank. Let me take some of the questions, maybe not in the same order. Loan growth, that's purely client-driven mainly in terms of some disbursements were delayed compared to others. So I would not really read too much into it vis-a-vis, what could be the balance of 2023, the slowdown or the uptick again. But we need to take the full year into account and what our envisioning for the full year. And that is still single to -- yes, mid-single digits for in terms of loan growth. But it's just purely client-driven. Certain disbursements were delayed, certain repayments were made and so on and so forth. Nothing fundamental per se, we still expect a good momentum moving forward. In terms of growth in the economy -- and I will also ask my colleague, Ganesh, our Chief Financial Officer, to chip in whenever he wants after I give my little spiel. In terms of anticipated growth and the government spending and its direction of repaying debt previously, yes, I think that it is going to happen. But the focus is more on public-private partnerships. I think more than the government infusing more money into infrastructure. So GREs, yes, are expected to be growing and especially in terms of the offtake of credit as well as PPPs that are coming into the pipeline. We hear -- we are -- we see that there are certain movements taking shape, whether it's in the health sector in terms of PPP; educational sector, in terms of PPP. And other also infrastructure sectors, in addition to the other sectors in agriculture and fisheries and logistics that have been already focused on in the past. So while I think moderating debt is going to continue, and not necessarily -- I don't see from my personal view where I'm sitting that further debt reduction may take shape. But I think there's going to be a moderation in terms of the offtake for the government in terms of any new debt and so on. But that's just my own personal perspective. In terms of growth for us as a banking sector, yes, we are and as a result of what I have just talked about in terms of the government's outlook -- outlook on the government spending and its direction and focus in the year 2023 and 2024 and 2040 in particular. We see that there is a good momentum, and we are seeing it. We're seeing it in our results. We're seeing it in our activities. We're seeing it in terms of how -- when we're talking to clients that the positive momentum is there. Ganesh, I think I forgot the fee income.

Yes. Sure.

If you have anything to add.

Yes. Sure. Thank you, Sumaya, for those questions. Maybe I'll cover the fee income and then give some perspective on other aspects as well. From a fee income perspective, you see the overall total income coming from various fee-based activities. We had a decent growth year-on-year. Last year, if you recollect, we had a one-off investment income from sale of particular investment in Q2, and that was substantial as a one-off item. So as a result, we had lower fee income in general for Q2 of 2023. But if you look at certain components of fee income, we had a very strong growth, over 5% to 6% in different components. So that's on the fee income perspective. From our credit growth, Q1 to Q2, as Sheikh Waleed talked about, there are specific transaction. Large value transaction could drive growth in a particular quarter. And second quarter, you will see moderate regular organic growth type of growth rate on loan. So in Q1 this year, yes, obviously, we had a very strong growth driven by corporate lending. Q2 as well, we continue to get momentum, but the lower rate compared to Q1. But as we've been talking about the guidance for the whole year, we are looking at a mid-single digit to maybe elevated single-digit level of growth. But the year-on-year growth was quite strong at 9.7% compared to last year, June 2022.

Neetika has a question. [Operator Instructions]

This is Neetika Gupta from Ubhar Capital. So I have two questions. One is that we have observed the CASA ratio. It has sort of declined a little in the second quarter from 66% in 1Q to 60% in the second quarter. So while this is sort of normal because high interest rate environment, so we would expect some sort of customization. But my question is, is that the sustainable level for the full year? Or would you expect some more migration to happen considering the interest rate environment still remains. Secondly, on the -- my second question is on the cost-to-income ratio. It has been quite reasonably good levels in -- even Q2 -- Q1 and Q2, 38.8%, which is a very good level of a bank -- for a bank of this scale. So is that a sort of seasonable level we should expect going forward? Or is it just a temporary seasonality?

Thank you, Neetika. In terms of CASA, it represents 2 elements. One is the current accounts and the other one is the savings accounts. And obviously, with the increased economic activity and momentum after the pandemic -- because the pandemic has seen significant levels of increases in CASA. So now that -- those funds are being spent. And so we're coming back slowly to the normal levels that we have seen before the pandemic. Yes, higher interest rates are going to have an impact and competition is going to have an impact, but we remain focused, very focused on ensuring that we continue our strategies to have a high level of CASA moving forward. Whether it is through our branch networks, whether it is through our technology in terms of systems for corporates and our mobile and Internet banking, enhancements of services there, customer acquisitions and so on. So we'll continue to focus on that. But as of now, we don't see the drop as a major calls for alarm other than the fact that it might have, of course, a cost to us and the different banks in order to actually maintain certain levels of where we want them to be. The cost-to-income ratio, this is a bit -- yes, we're quite proud of the levels that it is at. But I think -- yes, and if we are talking about the 40% to 41% levels is really what the norm should be. Notwithstanding that, of course, we're always going to be cost prudent. But we also have to continue to invest. We have to continue to invest in our infrastructure. We have to continue to invest in our expansion of branches. We have to continue to invest very importantly in our technology. And upgrading the technology and acquiring new technology. And we're working quite hard in terms of ensuring that we transfer a lot of our branch services into our technology platforms and technology channels. So we expect that there is going to be some uptick in the CapEx at least in terms of -- and if there is any uptick in OpEx and so on, that has to also be maxed with higher revenue. But that's generally where I can put it.

[indiscernible] has a question. [Operator Instructions]

[Foreign Language]

[Foreign Language]

I have a follow-up question on your growth outlook. It was a very strong year that we had. And you are very confident about continuing with this positive momentum. So can you throw some light on which are the areas or which are the sectors that you see will be driving demand over the short to medium term?

We can definitely see in the retail sector, there is good momentum and good growth. We can definitely see also the medium to large corporates, there is a good sector -- good potential growth. The oil and gas, hydrogen sector, downstream oil and gas, tourism is a good potential for growth, and we are seeing that. And also the [Technical Difficulty] we are seeing some transactions being discussed now in those areas. And different -- like I said, education, health care, logistics and so on and so forth. So we see quite a bit of momentum there. The key aspect is, to all of this, is obtaining funding at the right cost so we can pass on that right cost to all of these different opportunities. And that's what's going to be important for all banks in Oman. It's a challenge now because banks from outside Oman can compete with a lower funding cost for all of these different opportunities that are here. But nevertheless, those who are able to obtain optimized cost funding are going to be able to also partake and participate in a number of these different opportunities.

[indiscernible] has another question. [Operator Instructions]

[Foreign Language]

[Foreign Language] And I want to highlight that the market has already opened. So we need to please keep this brief and finish in the next -- because we have allocated an hour. If we can -- I know there are still some participants that are interested. So I would kindly request you to please be brief with your question, and I will be brief with my answer, so that I can take the maximum -- how many do we have so far? I will take the max -- the 4 that are there. Please keep it brief. Thank you so much. And then I'm closing after that. Thank you.

[ Vishal ] has a question. [Operator Instructions]

Just one quick brief question. We've seen the NPA levels and the restructured loans for the banking sector build up, what are your thoughts on the cost of risk or the risk that remains in the system? We've seen loan growth. We've seen profitability at very good levels, prepandemic levels, as you said, dividend payments are strong. But how do you see risk evolving? And do you think it will still take time for the pain to sort of phase out? Or is it something you've seen a considerable improvement, sir?

Thank you. It will hold. Depends on the fundamentals of each and every different institutions and how their risk measures, and risk management have actually started with -- vis-a-vis what they already have in terms of their own portfolios. But overall, I think given the positive economic momentum, I think we should be able -- from Bank Muscat we're quite capable of handling. And yes, there are going to be -- like I said in my presentation, there are going to be some challenges in the short term and the possible medium term. But those are going to be managed and mitigated through the higher levels of provisions that we have, and that's just natural. We don't see any major surprises, god forbid, unless any geopolitical situations or global market dynamics shift differently and -- over the coming period. I'm not -- I don't really foresee any major change moving forward vis-a-vis the cost of risk, albeit we have to keep watching it and see how this momentum can actually mitigate some of the challenges that were there and created due to the pandemic.

Sumaya has another question. [Operator Instructions]

Just one last question, Sheikh Waleed, regarding the NPL ratio and write-off in this period. Do you expect to now -- things are normalizing, to go back to pre-COVID levels, that 3% level? Or is the new norm going to be around hovering near 4% levels? And regarding the write-off, I've noticed that you've written off nearly [ OMR 6 million ] by June 2023. So are these write-offs mostly corporate, SME or retail loans? And is there an expectation of a pickup in write-off in the next period as well?

Thanks, Sumaya. From an NPL ratio perspective, it's been about 3.7% for the last 2 years. I think it will remain around those levels for the near future because we've just come out of pandemic and the restructuring of facilities. We need to wait and see how the economic pickup and the business performance in general. According to that NPL ratio just for the system is going to be around these levels, and it could get elevated, specific cases for specific banks. From a write-off perspective, these are very normal usual write-off what you'll see based on the cases which have gone through legal or settlement. As and when that materializes, that goes through, there would be 2 components where you see the provisioning movement, so write-off and write-back. We also have a large level of recoveries. We do about [ OMR 40 million ] plus per annum write-back. So those components are part of the provisioning movement. These are very normal for the business.

[indiscernible] has the final question. [Operator Instructions]

My question is on your investment in Salam Bank. You are the majority shareholders, and we are seeing -- we have been seeing steady improvement in the performance there. And also, recently, we have seen the prices also reaching decade highs. Can you please tell us what is your strategy on this investment?

[Foreign Language] We continue to have different -- we are invested in Oman quite heavily, 95% almost of our businesses in Oman. And we have [Technical Difficulty] investments. We're quite satisfied with where they are. They were not at that level 7 or 8 years ago, but have turned around [indiscernible]. So it's quite a good contribution to our performance. Thank you. That was the last question. Thank you very much, everybody. We really appreciate this interactive session. I hope it was useful to you as it was indeed very useful for us. I wish you all the best today and a very nice weekend. [Foreign Language]