Bank Muscat SAOG (BKMB) Earnings Call Transcript & Summary

[Interpreted] Welcome, everybody. Thank you very much for joining us today in this discussion session where we talk about the results of the half year 2024. I also want to thank Muscat Exchange for giving us this opportunity and again, welcome. First slide, just administrative matters in terms of disclaimer that this is based on available information that has been disclosed previously. In terms of the contents, I will be talking about the operating environment, I will also be talking about the banking sector, the bank's different business plans and then I will get into the key financial highlights and the results for the 6 months ended June and we will be taking questions following the presentation. In terms of the macro overview, Oman's economy has continued to expand in the first half of 2024. Of course, in terms of the OPEC+ oil production cuts, the region's GDP also grew at about 1.3% in 2023, driven by the expansion in nonhydrocarbon activities. Favorable oil prices were also a factor and they have sustained. And there are also sustained reform efforts and they continue to support the country's fiscal and external position. These include efforts to improve the business environment, supporting the role of the small and medium enterprises in the economy and accelerating investments in renewable energy and green hydrogen projects. The commitment of the government in diversifying Oman's economy also definitely highlights its strategic approach to make sure that it's fostering resilience and a sustainable development during a very volatile global economic period. Economic growth is expected to remain moderate in 2024, on the back of extended oil production cuts for the first half of this year, before accelerating to above 4% in 2025, supported, of course, by a rebound in hydrocarbon activity. Inflation levels in the economy reflects continued easing of core food and transport inflation. In terms of the public debt management front, the government was able to utilize the oil revenue surplus that was generated in the last few years in repaying of outstanding debt and reducing the impact of rising interest rates on loan repayments. Debt-to-GDP ratio, in fact, reduced from 61% in 2021 to 40% in 2022 and further to 35% in 2023. The additional revenues also supported the government in deferring some planned withdrawals from the country's reserve and this healthy fiscal position resulted in an upgrade of sovereign rating, which is now just 1 notch below the investment grade. In terms of the 2024 budget highlights, it highlights significant economic activity, including development and investment expenditure in several strategic projects, along with social and basic spending in key sectors of education, health care, social welfare and housing. Government has clearly reinforced its focus on sectors like manufacturing, tourism, logistics, agriculture and fisheries. In terms of the banking sector, it has continued to expand and it is playing quite a vital role in supporting the country's economy. The robust financial indicators, coupled with the regulatory oversight and prudential guidance, have bolstered the sector's resilience and it's also shielding it from adverse impacts that have been experienced externally and globally. The recently released Financial Stability Report by the Central Bank of Oman highlighted the country's robust financial system, despite the global challenges such as the geopolitical tensions and tightened monetary policies. The Central Bank has stated that while global inflation and economic uncertainties persist, Oman's financial sector has shown resilience, which is definitely supported by the higher oil prices and the fiscal discipline. And, also, the banking sector has, in fact, reported strong earnings, solid capital position, excellent liquidity and low nonperforming loans. In fact, in the last few years, banks have invested heavily also in technology, repositioning their offerings and digitizing their operations, while also increasing their physical branches. In the first 6 months of '24, the sector witnessed a good growth momentum, which was supported by economic recovery and positive macroeconomic outlook. Sectoral credit increased to up to OMR 31.4 billion, which has witnessed a growth of OMR 1.7 billion, i.e., close to 4% over the level achieved in the first half of 2023. Deposits have also increased quite well to OMR 30.7 billion, about 11.6%, which is an annual growth of $3.2 billion. Islamic financing and customer deposits have also contributed around 20% of the total sector and annually they grew by about 10% and 15%, respectively. Of course, as I have mentioned earlier, on the backdrop of budget '24, which does promote expansionary investments in key sectors in the economy and the elevated levels of oil prices, the positive macroeconomic outlook and the government's focus on reforms and developmental strategy, we do expect that it will provide a much-needed booster for further sectoral growth and helping it in achieving better financial performance and strong financial position for Omani banks in the coming years. In terms of this slide, we can see a stable growth of key parameters of the banking sector, the compounded annual credit growth of about 4.2% was registered in sectoral credit portfolio over the last 5 years and this definitely reflects a healthy position, including and taking account of the disruption created by the pandemic during this period. Similarly, 5.2% compounded annual growth rate for customer deposits in the last 5 years and after recovering back to pre-pandemic levels with 21% growth in '22 and 11% growth in '23, the profits of the top 7 Omani banks showed further improvements in the first half of '24 of about 12.3%. We expect that the sector is likely to grow at mid-single digits in terms of credit and deposit growth going forward, where there may be some short-term impact on asset quality and collective provisions and also due to global geopolitical reasons and interest rate situations, the banks would definitely require to maneuver and tactically manage liquidity. But in the medium term, stable performance is expected. In terms of the bank, the bank continues on its focus on its key strategic pillars, which are our customer centricity, market leadership, efficiency and productivity and innovation. These are our guiding pillars in all our strategies and initiatives. And we continue to focus on our strong brand and our strong branch value and financial position and definitely our human resource strength to deliver the best possible value for our stakeholders. In terms of a quick snapshot of the business lines of the bank, the bank provides all banking services with well-established business lines, including corporate, personal, wholesale banking and Islamic banking. These business lines have been performing well over the past few years and are showing healthy profit contributions and well diversified, in fact. Corporate banking, personal banking and wholesale banking contribute around 25% to 35% each and Islamic banking of around 3% to 4% and our overseas operations have also contributed around 5% to our bottom line in June '24. Islamic banking does continue to have the highest market share in terms of assets in Oman and the bank has, like I said, a well-diversified portfolio, as we are showing in the graphs on the right side. The deposit portfolio is also quite strong, driven by retail deposits and supported by government and private sector deposits. In terms of some of the key financial highlights for the 6 months ended in June 30, '24, you can see the bank's top line performance was strong. This is in spite of the continuing global and regional challenges. The bank's also agile approach and balance sheet management and funding dynamics did help us quite a bit to achieve a healthy net interest income. Net profit was higher by 7.5% in June '24 compared to last year, with healthy business growth and prudence on credit costs. Nonfunded income has also improved in June '24 by about 13%. Operating expenses increased by about 4.8% relative to the growth in the business and also certain administrative activities and some infrastructure expansions. The bank's loan portfolio showed a growth of 3.3% year-on-year. Deposit portfolio has shown a growth of 5.3%. In terms of asset quality, total provisions stood at 1.6x of the NPL of the bank, reflecting healthy provision levels. In terms of operating performance and profitability, the slide provides a quick snapshot of that. You can see the bank's NIM has been very stable over the last 5 years. The bank had been able to manage risk, the yield and the funding cost, to maintain the NIMs through efficient and agile balance sheet and liquidity management, timely portfolio repricing and also deploying certain agile hedging strategies. The bank's fee-based income was also stable around 31% to 35% of the total income throughout this period. In June '24, cost-to-income ratio also reduced to 38.4% compared to 38.8% in the previous year. And that is because the costs have been moderated compared to the healthy income increase. The ROE of the bank has also witnessed a significant improvement from the lower levels of 9% in 2020 to reach 12.5% in June '24. ROE has improved due, of course, to higher profits and also reflected the positive impact of the capital structure optimization of the bank that was completed in 2022. The bank's ROA also continued the healthy momentum and reached 1.6%. This is the highest when compared to the levels seen in the last 5 years after reaching lows of 1.3% in 2020. In terms of asset quality, as you can see, the bank has been able to maintain the NPL ratio around 3% to 4%. The coverage ratio continues to be strong, ranging between 135% to 164% for the last 5 years, reflecting the bank's prudent policies. As I have mentioned earlier, the bank's gross loan portfolio is well diversified and well-managed with a prudent credit policy. The bank was also able to grow the gross loan portfolio by 3.5% during the first half and it continues its prudent provisioning and credit policy to ensure a stable and robust performance. In terms of funding and liquidity, 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 stable for the last few years, also continues to hold a high level of liquid assets over the last 5 years. These assets are in the form of very high-quality liquid assets. And as I mentioned earlier, the bank's capital position is one of the highest amongst -- it's the highest amongst Omani peers and one of the strongest amongst the GCC peers as well. Capital position is largely driven by core equity capital, along with the retained profits. And of course, due to global challenges, including supply chain issues, high inflation in several markets and the increasing interest rate scenario, the bank is definitely tactically working towards its liquidity management and interest rate management. We have reached the last slide. And thank you very much for taking the time to listen to me. We can take your questions now.

If anybody has a question, you can use the raise hand on the application page. Yes, Joice.

Sheikh Waleed, I just wanted to check, I know you mentioned in your -- during your presentation that you are looking at short-term volatility in the asset quality -- is expected in your outlook. So could you please elaborate a little bit more on that? Because when I see your financials, I'm seeing the coverage on Stage 3 accounts has come down a little bit compared to June of last year. So I was trying to connect the dots there. So if you can help me out there, that would be much appreciated.

Sure. Thank you, Joice. Our expectations is that the economic scenario has improved significantly over the past period. But in terms of the pandemic and the impacts of the pandemic, there are still pockets where we see some pressure and challenges. Notwithstanding that, our position is that we are well-provisioned. And when we say in the short term, we're talking about over the next 6 months to 1 year. And these are just, more or less, being prudent in terms of addressing it, because certain corporates and private sector entities have still not shown the cash flows that we expect over the coming period. 70%, in fact, of our restructured book has already started repayment. The 30% balance is not necessarily defaulting. It is not. But it's still to start repayment in the coming period. And hence, we're sort of seeing that as possible but not necessarily something that we are greatly worried about. That's as far as the pandemic. But looking at the future, we don't anticipate the credit costs to be higher moving forward.

So if you can give us some kind of an indication where we are looking at it for the next -- for 2024 and 2025. Because 2023-'22, we have been very stable at 60 bps in terms of credit growth. So -- and in the first half, we are talking about 50 bps. So where do you see that for ending this year and probably next year, how is it, do you think, panning out?

We're comfortable to actually, even though I don't like to give forward-looking statements but we do not see any reason why this, as far as where we are sitting now, this would increase beyond the 0.5% that you have indicated, which we have so far. We don't see any reasons at this moment that it's going to increase much beyond that.

Sheikh Waleed, another question that I have is on your outlook in terms of the loan growth and the deposit growth. You mentioned about mid-single digits is what you are targeting over the medium term. So when we look at the medium term, probably we are coming out from a -- we are on a recovery path. So when you say, for the entire banking sector we are looking at mid-single digit, is it because of a high base impact or is it because we are expecting only a very gradual recovery of -- economic recovery in the coming couple of years or over the medium term?

We will be growing in line with the growth of the economy that we expect. And given the positive outlook that we have for the economy, we expect also that these mid-single digits to be achieved throughout the banking sector. Like I said, there are a number of different initiatives that are being taken and done by the government, whether it's in terms of, for example, the retail lending, we expect some good growth over the coming period. Also, in terms of the renewable energy area, privatization of schools, a number of projects in terms of hydrogen and also Sultan Haitham City and the Oman-Etihad Railway. So there are a number of areas where we see -- and also the listing and IPOs that are coming up by certain large [ GREs ], where they are also increasing their leverage and this is an opportunity for the banks to participate in. So we expect the momentum to be positive and the mid-single digits is expected to be moving gradually towards that.

Sheikh Waleed, it has been a while, I think. Nice to catch you up after a while.

Thank you, Sundar.

Yes, I think I have 3 questions. The first is on your Islamic banking. Islamic banking, despite showing a strong growth, of the total assets, you have around 13% of assets. But if you are looking at a profitability perspective, the business has been not on par. Any specific reason? Because I have seen the net income from Islamic financing, as compared to last year also, it has come down. The assets remain the same but your margins are lower. Any specific reason where you see this Islamic banking issues because your profitability is down, the margins are down? That's my first question. And on the second question, I just want to understand your international operations. If you look at the international operations, this year has been a pretty good year. I could see you've been doing pretty well in terms of the commission fee and income, which has boosted and also the impairment that has been reversed. Any specific reason for this? Because your profitability of international banking has moved up from OMR 2.6 million last year to OMR 5.5 million, which is pretty strong. Any reason for this international banking business, any turnaround, or is this going to be the new phenomena? That's my second question. And my last question is on your -- the strategic investment portfolio, the portfolio which you got approval in the beginning of the year to invest OMR 150 million in the GCC banks. Are you completed this program, or what stage we are in? And is this portfolio will be reflecting in the form of -- what kind of accounting treatment will be there? Is this -- will be a [ PPPL ] or because we -- I'm not part of the earlier calls in the earlier quarters, I just want to understand any impact or how much you have invested in this strategic investment portfolio? These are my questions.

Thanks, Sundar. First, in terms of the Islamic banking profitability, we believe that this is a situation -- most Islamic banks in Oman rely quite heavily in terms of -- on its deposit and funding on institutional deposits. And those come at a higher cost and repricing them and adjusting them to market conditions becomes a challenge. So that's where one significant impact has on Islamic's top line. Because of the rising interest rate scenario, that's one challenge that they had. So the top line and the margins have been under pressure. Similarly, also certain one-off provisioning that was done on some corporate exposure. And also given some refinancing and repayments that were done by some large corporates as well, that has impacted. So we see this as sort of a challenge in the short term because of certain fundamentals within the Islamic banking business. But we don't expect it to be something that cannot be managed over the medium term. It's more or less situational, I think, transactional rather than a core fundamental issue with the business. In terms of international operations, yes, you are right. The business had turned around, specifically in Saudi Arabia. And also, our investments in Al Salam Bank and SICO Bank in Bahrain have also yielded good results for us in terms of dividend distribution. But more importantly Saudi, Saudi is on a good trajectory and we have been able to turn it around and we see some good business potential coming through that in the future. So we expect this -- the international story -- we have almost exited Kuwait. So we don't expect any negative impact that can come from that. And we are still on our time line to exit it completely by early or during 2025. So hopefully, we do expect the international portfolio to be making good value for us in the medium term. And hopefully, this trend will continue. That is our expectation. In terms of the strategic investment portfolio, we just started in July. In fact, our activities in it, it's not completed yet. We will be completing it within a period of 3 years in terms of our total investment and possible leverage. But we have already started investing in it and it will come as a fair value to P&L. That's the treatment that it will be done at. Joice Mathew, again. You have another question, Joice?

Yes. Sheikh, this is regarding the cost-to-income ratio. You have one of the best quarters or even 6 months during this year where the efficiency has been at the peak. So how much further room do we have in terms of improving the cost-to-income ratio? We are -- right now we're staying somewhere around 38%.

Yes, you see, I know where you're going with this, Joice. No, we have to be fair to the business. In order for us to grow organically and what has been supporting us is our infrastructure, whether it is the digital infrastructure or the branch infrastructure. And our customer base has increased substantially over the past few years, mainly because of that. Now, we have to continue to invest in our infrastructure. And while these -- this is mainly a -- this drop in cost-to-income ratio is mainly a factor of the higher top line, we do -- we don't see that this is going to be our sweet spot to remain in. I think there will be some cost increase in the future due to our continued investment in our infrastructure, which will also support the top line. So we look at 39% to 40% as a good place to sort of be in and budget on. But that is still much, much below our peers in Oman. Is that a fair answer, Ganesh?

Absolutely.

Joice, Sundar. I will give Joice, if he has a follow-on and then we'll go to Sundar. Sundar?

Hi, because I couldn't unmute. Sorry, I think I cut off. Thank you, Waleed, for the previous answers. Couple of follow up on this. Just want to understand, because we know the competition from the regional banks is also there. You talked about several large projects like railway, another bigger project, green energy and other stuff. Do you think -- how competitive are the local banks? Is it price-wise, we are competitive? We just want to understand that competitive scenario, especially from the larger regional banks. That's my one question. And the second is on the -- follow-up on the, we have gone through the interest rate cycle, which is on the uptrend for last couple of years. We are going to have a downtrend in the interest rate, which is where we are aiming for. Starting next month, we are talking about rate cuts. How well Bank Muscat, in terms of -- I know you are one of the banks which has the largest CASA. Do you see any impact on the margin? How fast do you see the provision of the funding impact and the margins, how do you see that as yours -- as a bank perspective?

Thanks. Yes. In terms of competition, that's a reality, both local Omani banks as well as the regional banks. And I think the main factor that helps us in terms of this particular scenario is our diversified funding source and our cost of funds and how we are able to mobilize the CASA, as you rightly said, through our wide branch network, giving us a favorable cost of funds. And that will make us more agile to handle the competition from the regional players as well as from the Omani players. Nevertheless, it is definitely going to have an impact on margins moving forward. And that's something that we have recognized from previous. We've said before that competition will always continue to have a pressure on our margins. But we have to make sure that we are agile in handling our cost of funds. And that's what we have been able to prove in the past several years to make sure that our margins, our NIMs remain intact and robust. And that's something that we envision will continue for the future. In terms of the rate cuts, you see, for us, the dollar piece, this is matched by the same way that -- this is matched by repricing of variable rates on our dollar lending. So whatever happens on the liability side will also be matched on the asset side. So we expect that we are able to hedge that quite well and moving forward. Also, in terms of the Omani rial piece, we're seeing interest rates dropping, which will also help us in terms of the cost of funds and help improve, hopefully, maybe the margins over the coming period. So that's really when it comes to the global scenario on dollars. We're quite well hedged in terms of the liabilities and the assets.

Thank you, Waleed, for all your answers. All the best for you.

Thank you very much, Sundar. Sumaya?

[Foreign Language] I just have 1 question, actually, because you guys touched upon everything I was looking into. But it's regarding the Iskan program that was launched by the government of Oman in 2024. And I see Bank Muscat not being a participating bank, your competitors are. So I was wondering what the rationale for that is and would we be expecting you to participate? Do you see that it could provide you with further stimulus via retail book? Yes. Just if you could touch upon that, please.

Yes, sure. This is Ahmed Faqir, Chief Banking Officer [indiscernible]. So yes, we were the part among the banks. We discussing the Iskan programs in Oman. And the main issues of the Iskan programs, while we're trying to get in, is a long-term commitment from the bank. So we need the terms and conditions from the whole stakeholders, whether it is customers or the bank. And the Oman Housing Bank, it should be looking at long term rather than the short term. So we're having a few rounds of the discussion. It's still -- we're in the discussion to be a part of the Iskan program. So that is the mismatches between the short terms and the long terms, entering such a program.

And Sumaya, there are a number of different opportunities where we are already in, aside from Iskan, when it comes to Sultan Haitham City and the large potential there. And we are there on the forefront. And as Ahmed said, there are some areas that we are discussing with Iskan program in terms of matching our expectations of the structure. But there are also a number of different opportunities that are available for us on the mortgage lending space. Thank you very much, everybody. We really appreciate you attending with us today. And look forward to, inshallah, more future sessions with you. So have a good afternoon and all the best. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]