Bank Muscat SAOG (BKMB) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, everybody. [Foreign Language] Good afternoon, everybody. I would like to welcome all of you for this session on our results for 2023. Thank you very much for taking the time to join us today. And there are also the thanks for Muscat Exchange for giving us this opportunity. Colleagues here with me are Ahmed Al Balushi, Chief Banking Officer; Ganesh, who is our Chief Finance Officer; and Sheikha, Chief Operating Officer, are with me today. First is, of course, the disclaimer. This is the usual disclaimer that this is all based on available information and it's not an invitation to buy the shares of Bank Muscat, but more of a discussion session. [Foreign Language] So I'm going to take the opportunity to go through this session by going through the operating environment first and then the banking sector in Oman. Then I will talk about the Bank Muscat strategy and business lines very briefly. Then I will move into the financial highlights and the results for 2023. Following all of this, we will open it for questions and answers. And I will be shifting between English and Arabic as I have done in the past in each slide. The first piece is talking about Oman's economic environment, and we're quite pleased to see that the recovery is continuing to gain traction in 2023 which is supported by improving economic and business conditions, and that's mainly coming through from increase in oil prices as well as consecutive years of budget surpluses resulting from the government's progressive vision and bold fiscal and economic structural reforms. Also, the elevated levels of hydrocarbon prices during 2022 and 2023, which were averaging between $80 to $95 have remained much higher than the benchmark budget prices. The efforts also in terms of the government trying to diversify the economy and increasing non-hydrocarbon contribution and the revenues, also rationalizing public spend and reducing the public debt. All of these have done well to stimulate economic recovery and helping the government and also enhancing its social spending. The government was able to, in fact, utilize oil revenue surpluses generated in the last few years and paying off the public debt and reducing the impact on the current rising interest rate scenarios, so debt-to-GDP ratio reduced from 61% in '21 to 40% in 2022 and further to around 35% in 2023. The healthy fiscal position has also resulted in an upgrade of the sovereign ratings, which is now just one notch below investment grade. Sovereign spreads have also become nearly at par with average GCC countries and well below some of those -- some of that of the -- some of the emerging markets. Also non-hydrocarbon growth accelerated from about 1.2% in 2022 to 2.7% in 2023, and inflation has receded from about 2.8% in 2022 to 1.3% from January to September 2023. In 2024, the government estimates the economy to grow by about 3% while continuing to maintain the annual inflation at moderated levels. 2024 budget, in fact, signifies economic activity, including development and investment expenditure and various strategic projects along with social and spending in key sectors such as education, health, social welfare and housing. I'll switch to Arabic. [Foreign Language] Now we move to the banking sector. The Omani banking sector has continued to expand, and it's playing quite a pivotal role in supporting the economy. The banks have demonstrated sound asset quality and that is quite evident in the low nonperforming loans ratios and also maintaining quite strong capital buffers. The -- also the prudential liquidity indicators show that the banking system continued to maintain sufficient short-term and long-term liquidity buffers. So all of these robust financial indicators as well as regulatory oversight and guidance have bolstered the sector's resilience and shielding it from the adverse impacts experienced externally and globally. In fact, starting from 2022, and continuing in 2023, the sector witnessed good growth momentum, which is supported by the economic recovery and the positive macroeconomic outlook. During '23, the sector credit portfolio increased by about 4.3% compared to 4.8% in 2022. Conventional banks grew by 2.5%, but Islamic banking entities, in fact, recorded even a better growth rate of about 11% for the -- 11.8% for the same period. Deposits have also increased by around 12.4% after a modest growth in 2022 of 1%. Compared to conventional deposits, again, here, Islamic banks have also grew at a higher rate of 12.8%. We've also seen the bank-wide net profits, clearly surpassing the pre pandemic levels. And as I have discussed earlier on the backdrop of Budget 2024, which is promoting expansionary investments in several key sectors of the economy as well as the elevated levels of oil prices, the positive macroeconomic outlook and the government's concerted efforts on reforms and developmental strategies. We expect that it will provide the much-needed booster for sector growth in helping it achieve better financial performance and strong financial position for all Omani banks in the coming years. [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 annually since 2017, which is quite healthy, ensuring good growth in customer deposits also up 4.8% year-on-year. Profitability of the sector was relatively stable until 2019 and 2020. Obviously, banks globally have witnessed a decline in net profit. And Oman was no exception. After witnessing around 30% reduction in net profits for the top 7 Omani banks, that has significantly improved by 20% to 24% during '21 and '22. Further, during '23, we witnessed profit improving by around 11%. We expect the sector to grow at mid-single digits in terms of credit and deposit growth going forward. There could be some short-term impact on asset quality and collective provisions mainly as a result of the COVID era, but also -- and also due to the global geopolitical reasons and the interest rate scenario banks would always have to tactfully and tactically manage their liquidity. But in the medium term, we expect that the performance will be quite stable. [Foreign Language] In terms of the bank's business lines, the bank's vision is clearly and continues to focus on key strategic pillars, which are customer centricity, market leadership, efficiency and productivity and innovation. These are our focus and in terms of also making us focus on serving our stakeholders better and stakeholders are everyone from customers, employees, shareholders and all the societies we work in. Of course, the bank continues to focus on leveraging its strong brand value, its financial position and HR strength to deliver the best possible value to our stakeholders and strive to be better every day. This is a quick snapshot of various business lines in the bank. As you know, the bank provides 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 by improving healthy profit contribution. In general, corporate banking, personal banking and wholesale banking contribute about 25% to 35% each and Islamic banking around 4% to 6%. Our overseas operations have contributed 1.4% to our bottom line. Islamic banking successfully continues to have the highest market share in terms of asset in Oman and has shown quite a robust growth since inception. The bank has a well-diversified portfolio as shown in the graph. On the right side, also the deposit portfolio is quite strong, driven by retail deposits and supported by government and private sector deposit. [Foreign Language] This slide talks about the bank's financial performance for the period ending December '23. As you can see, the bank's top line performance was strong in spite of continuing global and regional challenges. The bank had quite an agile approach on the balance sheet management and funding dynamic which helped us post a healthy net interest income. Net profit was higher by close to 6% over December '22 with healthy business growth and prudent also on the credit cost. Non-funded income improved in '23 by around 8.6%. And operating expenses increased moderately by around 6% relative to the growth in the business and administrative activities as well as some infrastructure expansion. Bank's loan portfolio showed a growth of 4.9% on a year-on-year basis, deposit portfolio also showed a growth of 9.1%. [Foreign Language] This slide provides a quick snapshot of the operating performance of the bank over the past few years. As you can see, the bank's NIM has been stable over the last 5 years. The bank in fact has been able to manage the yield and funding costs to maintain these NIMs. The bank's fee-based income was stable around 31% to 35% of total income throughout this period. And for the year 2023, cost-to-income ratio marginally reduced to 38.3%. And in terms of the ROE of the bank, the bank has also witnessed the second improvement in terms of -- from the lower levels of 9% in 2020 to reach around 12.7% in 2023. Current ROE has improved due to higher profits and also reflected the positive impact of the capital structure optimization that the bank completed in 2022. Bank's ROA also continued the healthy momentum and reached around 1.6%, the highest when compared to the levels seen in the last 5 years and after reaching a low of 1.3% in 2020, during the pandemic. [Foreign Language] In terms of asset quality, this is what this slide discusses. As you can see, the bank has been able to maintain an NPL ratio of around 3% to 4%; however, the coverage ratio continues to be at a much higher level, ranging between 125% to 163% for the last 5 years, which is the highest in the sector. And this reflects the bank's prudent policies. As I mentioned earlier, the bank's growth portfolio is well diversified and well managed with prudent credit policy. The bank was able to grow the portfolio by around 4.7% during '23 after growing the base by 3.3% during the year before that and we continue our prudent provision and credit policy to ensure that our performance continues to be stable and robust for the years to come. [Foreign Language] In this slide, we talk about the funding and the liquidity position of the bank. The bank has a well-balanced funding mix with around 70% of the funding coming from customer deposits and the balance through interbank borrowings and equity. This has been quite a stable position, in fact, for the bank for the last few years, and it continues to hold the high level of liquid assets that has continued in the last 5 years. These assets are in the form of very high-quality liquid assets. As I mentioned earlier, also the bank's capital position is one of the highest amongst Omani peers and one of the strongest also amongst GCC peers. And the capital position is largely driven by core equity capital along with retained profits after paying healthy dividends over the past many years. And of course, due to global challenges including supply chain issues, high inflation in many markets, rapidly increasing interest rate scenarios, the bank is tactically working towards liquidity management and interest rate management throughout the period, the coming period. [Foreign Language] I have reached the conclusion of my presentation. I want to thank the Muscat Exchange for this opportunity, and thank you for joining us. I will open it now for any questions from your side. [Foreign Language] Do you have any questions, please.

Yes, please.

So first of all, congratulations on a good set of results. So my question is more from a macro perspective and then boiling down to Bank Muscat. We've seen the deposit growth rate has far exceeded the credit growth in this year in particular and also for Bank Muscat. So what I'm trying to understand is what do you see that when is the credit offtake growth going to pick up significantly, which far exceeds the deposit growth?

Thank you. This deposit growth rate exceeding credit growth rates has been a phenomenon in fact, in Oman, and especially when oil prices rise. This is the trend that is quite normal for us because there is quite a bit of dependence in terms of the government. The 1/3 of bank, all bank deposits are coming from the government. So when there is excess liquidity due to higher oil prices, this does happen. But I'll answer your second question, which is when do you expect more growth in terms of the credit growth? Now we have seen quite challenging years when it came to COVID. But we also saw 2022, some decent credit growth and then also in 2023 and we expect also 2024 to be not an exception to that. There are a number of projects that are being executed or in the plans that are going to see the light in terms of 2024 and those that have already been sanctioned in 2023, the drawdowns are also happening in 2024, but some green hydrogen projects, the Vulcan Green Steel project in Duqm, certain logistics projects like road -- several road projects, housing, Sultan Haitham City. And we expect also growth to come from the retail sector and the housing loans, certain social projects and PPP projects, especially in the school. These are just examples of some of the projects that we expect. So the momentum is there. So I think that's what's most important. In terms of deposit growth, it's quite good also because it helps us moderate the rise in interest rates and, therefore, manage our NIMs accordingly. So it -- in Omani riyals. So if deposit rates are higher than growth rates are higher than the loan rate, that also helps us in that particular area. Any other question?

Sorry, I had a follow-up on this. So just -- is there any time line you're looking at for this momentum to pick up and actually reflect in numbers?

We have momentum that has already started in 2023. So that momentum is continuing. In terms of this particular momentum, I think for your -- to answer your question in a slightly different way, we expect the same similar growth rates to what we have seen in 2023, in 2024, which is a combination of both momentum that is continuing from '23 as well as that, which will hopefully start from mid '24 onwards. Now there is a caveat to this, and that is interest -- global interest rate scenario and how that might delay certain projects depending on how that scenario pans out and what we see and what we hear from the Fed actually possibly even indicating one more rate hike during this year. But then if I -- if you ask me and I look pragmatically at what happened in '23, there were a number of rate hikes in '23, yet, we've still seen some projects come on stream and developments continue. So I expect it to -- for the 2024 projects, and this is what it will have. But from an average impact, I expect us to be doing the same as what we have done in -- at least that's what we are striving for, what we have done in 2023.

[ Yousuf Al Manhar ] [Foreign Language]

Yousuf. Yes, please, Yousuf.

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And then, Sumaya Ali Aljazeer.

Sumaya. [Foreign Language]. Yes, who is this?

This is Bishen Bhalla from Vision Capital. Just a couple of queries. I wanted to talk about the restructured loan book. Now we've seen moderate improvement in the restructured book for bank Muscat. You had a 12% overall restructured loan book as a percentage of gross loans, which has come down to 10.6%. Given the improving credit cycle and improving economic scenario, how do you see the restructured loan book going forward over the next 12 to 18 months if we can start with that, please?

Yes. And you have a follow-up question after that, right?

Yes, sir.

Okay. So just so that I keep you in the queue. In terms of the restructured loans, indeed, we had -- the way we approach this is, we work with our clients to identify their cash flow cycles over the coming period or the coming years in order to restructure. So we take into account where their cash flows are going to be and we study them quite carefully, and we work with them case by case to reach to a proper repayment schedule. Now I'm happy to report that about 70% of that entire restructured portfolio has already started repayment. The second piece is the balance 30% is not necessarily default, but it's based on cash flow projections and where their cash flows are, they are probably more delayed and more deferred. So from that kind of a percentage, I think, we're doing quite well on the restructured portfolio. So I have full confidence in terms of its health and in terms of its recoverability. Now again, I take things with precaution depending on where the geopolitical scenario is going to take us, where the economy is going to go, where the interest rates are going to go, all of these factors. But from the science right now, I'm quite comfortable in terms of where we see things are going with the restructured portfolio. Does that answer?

Yes sir, that answers it well. The next question would be with regards to what view do you have on your spreads and NIMs? And have you been able to pass on the entire interest cost to your clients? If you could just comment on that?

Sure. There will always -- I mean, this is a natural phenomenon, especially during these times. And we have been tactfully managing -- tactically managing this in terms of our liquidity management, in terms of our funding and in terms of making sure that those are well matched so that we don't have excess liquidity, so we are able to achieve the right NIMs. NIMs are going to continue to be -- I wouldn't say under pressure, but there are -- these are factors that are important for us to keep watching over the coming period. Omani riyal funding costs have not relented and they are continuing to rise. There has been some recovery in terms of the other side on the loan side, in terms of also matching the yield with the cost to some extent. On the dollar side, yes, on the dollar side, we're able because those are floating and naturally floating with -- in terms of our funding and borrowing -- our own borrowing as well as the lending that we do. So on a combination, we have been able to recover in terms of and pass on the credit -- the deposit cost and the funding cost. It's from a number of factors. One is this because we can't also -- we have to be -- we have to factor in competitive factors in terms of pricing and growth plans that we have. But we also have to manage liquidity quite tactically to make sure that we squeeze everything that we can from the liquidity that we have so that it doesn't become a burden on us in terms of funding cost.

Got it. And one last question, if I may, please. We've seen the cost of risk remains stable at the 65, 70 bps level for the last 3 years, at least before it peaked in 2020. Do you see it returning to the sort of historic levels of 45 to 50 or, let's say, the 40 bps that we used to witness before 2018? Or are you comfortable with this sort of current level and you see that going forward?

I would see us being comfortable with this level going forward. If it moderates itself, given the economic scenarios, it might fall 5, 7 bps, but I think being a prudent bank and being the largest bank in the country, it's very important to make sure that we have the adequate buffers there to make sure that our performance is sustainable for the future. These types of levels, I think, at 70 is adequate for us. If they improve, it's due to significant improvement in economic conditions and so on. Sumaya, please?

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I'll be asking my questions in English so that everyone can get on board and try to be quick with them. So going through since you're discussing the loan book following on the previous question, loan book growth. And then you mentioned that you expect the momentum to continue and then there is also promising projects in 2024. Having said that, I still found that the corporate loan growth at 3%, which is lower than the retail book. Retail book has outpaced. And so it is a healthy growth, but it seems to me a bit modest. So are you expecting to see, that you mentioned now there are more drawdowns, further pickup in the corporate lending book, so that towards mid or higher single digits in 2024. That is one. And then pertaining to also competition and going back to also funding and government projects, we have recently seen an announcement that Oman has established Oman Investment Bank and it's fully owned by the government and it's going to be specialized investing in the country. So is there any competition coming from there? I know there wasn't a lot of details on that per se, but maybe if you could shed light on that. One more question, if you may. I've noticed and maybe that could be, I mean, directed towards Ganesh because it's quite technical. I've noticed the some restatement in 2022 numbers, especially in the expenses and then the other income. So just any reason why and what's going on there.

Can you repeat the last question, please?

I noticed restatements of some figures in 2022. I think it was within the expense lines and other income lines. So I just wanted to clarify that.

Thank you, Sumaya. This is Ganesh here. The restatement with regard to expansion in fee income is with respect to credit card expenses, which were netted off against the credit card fee income in the financial, which was a restated for 2022 as well.

Yes. Thanks, Sumaya. In terms of the growth, we expected to be in the mid-single digits. I don't -- on average, in terms of for the sector. For us, also around similar mid-single digits growth and there are going to be a number of IPOs that are being proposed. So that could bring in certain possible financing growth. Also, like the different projects that I have talked about. Retail is really also going to be a key, especially housing -- retail housing growth. Ahmed, you know if anything else that you wanted to add for Sumaya.

A few infrastructure projects, especially the hydrogen and the Green Steels, 2 of them are coming up in Duqm and there's an oil and gas solar renewable for the JVs with the Total is coming in. We are in advanced level, all the lenders are in advance level discussion with them. The other one is the IPOs of OQ, at least 2 the largest IPO companies, there will be a financial engineering related to the debt and equity ratios before the IPO. And the Etihad Rail from Al-Ain to Sohar, that is already in the bidding stage of the debt. Those are like the key. Then real estate projects, especially the Sultan Haitham City is required a lot of housing from retail in the contractors. Standard government infrastructure projects like roads and hospitals are already announced. Oman Cultural Centers are already been awarded and is already in progress. So this is what has been announced and what is in the progress.

And in terms of -- sorry, you wanted to say something?

No, go ahead. I have a follow-up question just after you.

Yes. In terms of Oman Investment Bank, yes, obviously, any bank that -- new bank that comes in forms a new competitive dynamic. And we are watching what sort of business this new bank will be getting into and there are -- I think their main aim, as they have said, there are a number of green hydrogen projects initiatives that the government wants to undertake. And they're looking at an investment bank to support them or be one of supporting banks for them in addition to the existing banks that are in Oman. This is how we are looking at it. But we'll see how that develops and pans out. Obviously, every new entrant will have its own competitive dynamics for sure. Hopefully, it will be with an increased pie rather than all of them focusing on the same pie.

Okay. Perfect. Just one follow-up question, if you may. Going back to fee income that was just mentioned. The loan book growth was healthy in 2023, an average 5% but that hasn't translated into fee income growth. Fee income wasn't in line. It was very, very modest. So what happened there? Are there still fee waivers that have continued from the COVID times? Or can you just shed more light on that?

Sumaya, if you look at -- in 2022, we had a one-off investment income. If you exclude that, our overall fee income growth was about 8%, 8.6%, to be precise. But it has come across different areas, treasury, corporate, retail and so on, wholesale and so on. But within some of the areas, trade finance has not really picked up because not many large projects have happened in the past 3, 4 years. So there are maturing transactions, but that is not getting replaced with new transaction. The trade finance fee income, core fee income has been muted, I would say. But for that, rest of the areas, treasury, card side, retail across different areas, our growth rate has been over 5% to 6%.

And the fee income generated from those?

Yes.

Joice Mathew, United Securities.

I have basically 3 questions. The first one is on the liquidity position of the bank. Could you please share some more insights on the bank's liquidity position? What I mean is, you had a good 10% growth in deposits during the year. So how do you see the trend in deposits going this year? What's your outlook for deposits? And also, coupled with that, when we look at the liquidity ratios, we are seeing the LCR coming down from 268% in 2021, and it has reached almost 195% in 2023. So my question is what should be an ideal LCR ratio that we should be looking at for Bank Muscat?

Joice, this is Ganesh here. I'll take those 2 questions. Thank you for those questions. From a liquidity perspective, as you said, we had a very good deposit growth of around 9% to 10% in 2023. And this was supported with the growth in both CASA as well as term deposits. Our liquidity position across the last 3, 4 years have been very strong and robust. We haven't had any change in the funding mix. Pretty much about 70% is core customer deposits, supported by about 8% to 9% of interbank and rest come from equity base. In terms of outlook for deposit growth, I think generally, we feel the liquidity in Oman is going to be -- in the banking sector is going to be quite comfortable. The question is at what pricing, that's the important aspect. And second is what are the deployment opportunities? I think briefly, Sheikh Waleed touched upon earlier in terms of credit growth and deposit growth rate. So if there are right opportunities at the right pricing, yes, we would continue to mobilize deposits at the level we had seen in '23. Otherwise, we would be moderating the deposit growth. But from a liquidity perspective, we are quite comfortable as always. Looking at the LCR. LCR is what you see is as of that particular day position. So our minimum required by Central Bank of Oman is 100% against which we've been running somewhere between 200 to 300 level. So we would continue to be around between 200 to 300 level. At any particular day, it can come down due to some of the liabilities maturing within the 1-month bucket. So that's more of a rollover plan issue rather than a fundamental liquidity-related issues. But our levels would be 200 to 300 plus range. Hope that clarifies, Joice.

Very much. The second question is on your Islamic banking side. The results has been very disappointing this year. The profit registered OMR 9 million compared to OMR 13 million last year. And it's not just because of any issue with the asset quality. But what I'm seeing is I'm seeing decline starting from the operating income level itself. And there has been a big deterioration in asset quality during this year, the NPL ratio jumped from -- 75 bps to 2.75% during this year. So could you please explain the reasons behind this? And how do you see Meethaq results going forward? When will it be able to recoup and reach new highs and will it be possible in the near future? And what's the way forward for Meethaq?

Sure, Joice, I'll take that. See, as you mentioned, the Islamic banking results year-on-year had a decline. Large portion of that was contributed due to one-off sort of provisions we made in Islamic. As you know, it's a much smaller asset base. There are pockets of risk sitting. We, as a conservative bank tried to build up provisions over a period of time. So as part of that strategy, we created more than OMR 5 million additional provisions over and above what was being done on an annual basis, which had an impact on Meethaq results. In addition, there has been a number of general impacts arising from high interest rate because this Meethaq book is much smaller compared to the larger Bank Muscat book in terms of funding mix. The institutional deposits contribute a larger portion of funding mix compared to what we see in Bank Muscat. So when there is a funding cost escalation that will eat up the margins, which we have seen across banking industry, except 1 or 2 banks, including Bank Muscat conventional. We didn't see much impact. So that was natural expected. But as the rates expected to moderate in 2024 and beyond, we will see margins improving for Meethaq as well. I think these were the 2 fundamental issues we had encountered in 2023. The top line issue would be more of an external factor. And the bottom line due to higher credit provision is due to our own conservative approach, Joice.

Okay. My last question is on your recent announcement of your strategic investment portfolio. You mentioned that you are marking almost OMR 150 million for targeting GCC banks. So will it be possible for you to share your investment strategy for this portfolio? And how are you planning to deploy this fund? And what are the target markets that you're looking at and possibly what's the target return that you might be looking at? Also, I would also appreciate if you can discuss this with the backdrop that the CBO regulation, which prevents banks from owning more than 5% in a single entity.

Sure, Joice. As we disclosed, the portfolio is largely focused in GCC banks, listed banks to be precise. The size we've -- you talked about OMR 150 million, and it's not an immediate sort of portfolio building strategy. It's over a period of time. The whole idea is to have a portfolio built up over a period of time, which are invested for 10 years, 5 to 10 years and beyond, with an objective of dividend yield and the capital appreciation over a period of time. So specifically, GCC banks, listed banks. When we say GCC, it's going to be outside Oman because we cannot invest in other banks in Oman. And as you rightly said, yes, within the banking regulations, we will be capped with the 5% in any bank investment.

So we don't have any exception from CBO regarding going beyond 5%. So it has to be -- basically, it has to be a portfolio.

It is a portfolio approach. Yes, the approval is for the portfolio approach, not a single investment approach.

Okay. And the reason why I asked this question is primarily because we have one associate bank, which is Al Salam Bank, and that is -- the price of which has appreciated and that is very much reflected in the equity of Bank Muscat. So will you be looking at additional stake in that bank, for Al Salam Bank, in the future?

No. I think we are the largest shareholder there at 14.7% shareholding, and that's good enough for us.

I have one final question please, and then we will close the session after this. So who do we have? [Foreign Language]

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[Foreign Language] Thank you very much, everybody, for this great session of discussion. Wishing everybody all the best, and we should close it now. Thank you.