Bank Muscat SAOG (BKMB) Earnings Call Transcript & Summary

Good afternoon, everybody. Thank you very much for joining us today in this session where we are going to be talking about the financial performance and results of the bank over the last period of 2026. With me here today are my colleagues, Sheikha Al Farsi, Deputy CEO, Operations; and my colleague, Ganesh, the Deputy CEO, Investment Banking and Finance. [Foreign Language] The first slide is our regular administrative slide in terms of disclaimers and so on that this is a session for exchange of information. It's not an invitation to invest or take any decisions on investments. In terms of how I will be taking this forward, I will first talk about the operating environment in Oman. I will then move on to the banking sector and metrics within that. Then I will talk about Bank Muscat and its business lines and then do a slight deep dive into some of the key financial highlights for the 6 months ending June 2026. [Foreign Language] This slide, as we move through 2026, it's very pleasing and very encouraging to see that Oman does continue to demonstrate remarkable macroeconomic resilience. And this is despite the uncertainties that are there because of the regional conflicts and geopolitical events, as well as the global environment. What is particularly encouraging is that the country's resilience is now increasingly underpinned by structural reforms rather than commodity prices alone. IMF, in fact, has also acknowledged that the continued strength of Oman's macroeconomic fundamentals are supported by prudent fiscal management, low inflation, declining public debt and very much sustained progress in economic diversification. The quality of economic growth has evolved over these past few years. Hydrocarbon production continues -- while it continues to be influenced by OPEC commitments, et cetera, but non-hydrocarbon sectors, and this is the encouraging factor, continue to expand also at a healthy pace, and these are led by logistics, tourism, construction, manufacturing, agriculture, renewable energy and other infrastructure projects. Also equally important, I think the reformed agenda does continue to broaden. Beyond that fiscal consolidation that we have seen some years back, we are now seeing tangible progress in financial sector development, improvement in the business environment. The digital transformation is making good headway, investments in renewable energy, other areas as well. So it's all -- these are all very positive factors that we are seeing in terms of the development of Oman's economy. Alongside, of course, all these fundamental developments, Oman continues to deepen its capital markets. The MSX is progressing very well on several initiatives to broaden market participation, attract international investors. Also, the restoration of investment-grade sovereign ratings have enhanced investor confidence, improved country's access to international capital markets, all very positive dynamics. Same time, implementation of the 11th 5-year strategic -- 11th 5-year development plan, continued infrastructure investments, renewable energy, increasing private sector participation. All of these factors are expected to generate new investment opportunities and support actually the financial sector sustainable credit demand over the medium term. We do all, of course, have to remain mindful of the external risks, but we do derive strong comfort that Oman enters this phase from a position of strength. Sound economic fundamentals, robust regulatory framework, well-capitalized banking system. And all of this provides a strong foundation for sustained economic growth and also financial sector growth. [Foreign Language] This next slide is going to be about the banking sector. Of course, the most encouraging development during 2026 has been the broad-based acceleration in banking activity. Credit growth has continued to be robust across both corporate and the retail segments, which reflects a healthy business confidence and continued infrastructure investments and also the growing private sector participation. At the same time, deposit growth has also remained equally strong, which provides the bank with a very healthy, a very stable funding base and excellent liquidity levels to support future lending. Another important trend in the banking sector is the continued growth of Islamic banking. It now represents around 1/5 of the financial sector in Oman, and it continues to gain good market share through healthy growth in both financing and deposits, which also reflects the customer confidence in Islamic banking, the customer acceptance and product diversification. This growth in the financial sector has been achieved actually without compromising the strength of the banking system. Asset quality, in fact, remains resilient. Capital adequacy continues to be at good and comfortable levels above the regulatory requirements and liquidity across the sector remains strong. While we look ahead, we also expect that the regulatory landscape will continue to evolve. The Central Bank has already initiated several prudential enhancements, including strengthened expectations around credit risk management, provisioning, governance, climate risk management. All of these, we expect are measures to be further reinforcing the resilience of the banking sector as well as aligning the regulatory framework with the evolving international standards. And from an industry perspective, continued economic diversification, increasing private sector investments, digital transformation and the progressive development in the capital markets are expected to create new opportunities, obviously, for banks to support future growth while also diversifying the revenue streams. This slide highlights the stable and resilient performance of the banking sector over the past few years. Throughout the period between 2020 and to the second half -- to the first half of '26, the sector has delivered consistent expansion growth. Total sector credit registered a compounded annual growth of about 6.4%, reflecting stable, sustainable lending activity across different market cycles. And that's important to highlight. Customer deposits showed also stronger growth, registering close to about 8% compounded annual growth rate over the same period, underscoring ongoing public confidence in the banking system and the highly favorable funding base. Profitability has also tracked an upward trajectory that's supported by very good double-digit growth in recent years. The combined profits of the top 7 Omani banks rose by roughly 10.6% in 2025 and maintain that same 10.6% year-on-year growth during the first half of 2026, which reflects strong operating momentum as well as disciplined balance sheet management. While we also look forward, we expect the banking sector's credit and deposits to continue expanding at the high single-digit rates, moving in step with the overall economic growth. Although short-term fluctuations in the global interest rates and the geopolitical events could affect asset quality trends and provisioning needs, the system remains absolutely well capitalized and prudently managed. Overall, the banking sector growth trajectory remains stable. It's supported by an excellent and robust macroeconomic framework and sustained operational momentum. [Foreign Language] The next slide, I'm going to be talking about the bank and bank-specific operations. So we continue with our strategy and vision in terms of our key strategic pillars, which are customer centricity and market leadership and also efficiency and productivity and innovation. All of these pillars are focused on serving our stakeholders. The bank will continue to focus on leveraging its strong branch value, its strong financial position as well as its strong human resources to deliver the best possible values to all our stakeholders. [Foreign Language] This slide provides an overview of the bank's diversified business model and the contribution of our key segments. Our diversified business verticals have consistently contributed very well to our earnings and stability and growth. Our corporate banking division remains a foundational pillar for the bank. It represents around 1/3 of total assets, while it also maintains a similar share of the overall profitability. This segment continues to capitalize on its deep expertise in project finance and strong relationships with our corporate clients. Personal banking is also another primary contributor, which accounts for about 26% of the bank's assets. It generates also around 34% of total profits. We have the largest retail distribution network in Oman and a very strong customer franchise, and this segment continues to be a key driver of the bank's profitability. Wholesale banking contributes around 25% of both total assets and profits, providing an absolutely important balance and diversification in our revenue streams. Our Islamic banking segment also continues to have the highest market share in terms of banking assets in Oman, which demonstrates steady and healthy expansion since its launch. Our international operations now continue to be a segment that, while relatively it is smaller in terms of total assets, has contributed to around 7% of our net profit during the first 6 months of 2026, also contributing to a highly diversified portfolio, which the bank is very much focused on. Our funding base also, as you can see on the right side below, is also quite robust. It's driven by a strong retail deposit base, and it's supported by corporate and institutional deposits as well. [Foreign Language] In terms of the key financial highlights for the period ending June 30, this slide summarizes the bank's financial performance for the 6 months ending June '26. The bank continued to build on its strong momentum. It delivered resilient financial performance while successfully executing also its long-term strategic priorities. Our top line performance remained strong despite all of the ongoing global and regional challenges. Overall, the bank delivered a strong performance with net profit increasing by about 9.3%, OMR 137.5 million for the half year, which reflects healthy business growth and also disciplined credit management. Revenue growth remained steady with noninterest income recording a very strong growth of 12.7%, mainly due to growth in our business as well as higher investment income. Revenue was also firmly supported by net interest income and Islamic financing income. Operating expenses increased by about 5.8% relative and contributing to the growth of business, which is mainly in terms of expansion in our administrative and activities and infrastructure expansion as well as technology investments. The bank's loan portfolio expanded by about 6.3%, while the deposit portfolio registered a growth of 13.2%. In terms of asset quality, total provision coverage stands at 170% of the nonperforming loans. Net impairment charges, in fact, during the first half have reduced by around 20% compared to the previous year. Overall, the bank's agile approach in balance sheet management, strong funding dynamics, growing contribution from a diversified income streams have definitely enabled us to deliver these strong results for the period ending 30 June. [Foreign Language] This slide just provides a quick overview of the bank's operating performance over the past few years. You can see that it has maintained a stable net interest margin over the past few years. Operating income has also continued to grow steadily with nonfunded income contribution to total income of around 30%, while we have also maintained an excellent cost discipline with the cost-to-income ratio at 37.8%. The ROE of the bank has also witnessed significant improvements from the lower level of 10.5% in '22 to reach 13.5% as at June '26. Similarly, for the same period, the bank's ROA continued its positive trajectory, reaching about 1.75%. [Foreign Language] This slide provides an overview of the bank's asset quality trends which I have already also talked about. It is well disciplined, well managed. The gross loan portfolio increased by 6.1% after growing the base by 4.5% in 2025. The NPL ratio have, in fact, remained at around 3% to 4%, while the coverage ratio continues to be at higher, at the range of 160% to 174% during the last 5 years. [Foreign Language] This is the last slide, highlighting the funding and liquidity position of the bank. It has a well-balanced funding mix of around 70% to 72% coming from customer deposits and the balance after the 72% comes from interbank borrowings and equity. This structure has remained consistent and highly stable over the past few years. High level of liquid assets over the last 5 years. And the capital position is also one of the highest amongst Omani peers and one of the strongest also amongst the GCC peers as well. [Foreign Language] This brings us to the end of our slide. We will now move to the Q&A session.

If you have a question, please use the raise hand functionality and we shall unmute you. I take this opportunity to thank you all for participating with us and wish everyone the best. [Foreign Language]

[Foreign Language] And obviously, congratulations on a really good quarter. My question is regarding the fee income, which has been very robust, and I've discussed this earlier as well with the Deputy CEO. But just wanted to make sure, going forward, not looking here at guidance, just to get a sense that is this the expected run rate for the second half at this point to see such levels of fee income growth? And I mean, I've noticed that consistently it always sit around the 17%, 18% of revenue. So is that safe to expect going forward? And then regarding the loan growth, which has been solid and 6% year-to-date, heading into the second half, do you think that Bank Muscat can close the year at a high single-digit loan growth? And would that imply a bit of a slower half versus the first half?

Thank you. Okay. I will try to answer with the best of prudence. And in terms of -- I'll answer the second one. In terms of loan growth, I don't think there are dynamics that give us whether the first half is stronger or the second half will be stronger. But what I can say is that we have a decent pipeline for the second half that we have already, we are seeing it quite clearly. In terms of growth, I can expect between 6% to 7% probably over the second half, if all goes well and the geopolitical situation doesn't impact significantly certain plans, also the view on interest rates is a factor. But all else being equal, I think we're seeing -- we have visibility on some pipeline deals, and we expect it to be better, if not as -- it's at or better. As to the...

I'm so sorry, but [indiscernible] you said 6% to 7% over the second half. That's like -- are we talking about an additional 6% or we're talking about that's the range for the year?

I will give this to Ganesh. [indiscernible].

Thank you. Thank you, Sumaya. I think what Mr. Waleed meant is for the year-on-year growth. The 6% we have seen from last year June. But full year, I think we expect to be a little elevated than the 6% level based on the pipeline deals what we have, so. And also just to touch upon the fee income question you had raised earlier. In terms of the growth, yes, we have been doing on the higher end of the single-digit or double-digit type of growth which is contributed from multiple areas. We expect fee income to outperform the NII growth. However, double digit or a high single digit depends on a number of factors, including the market factors because as you have been tracking, we have the core income, commission and fees, transaction-based treasury related and the investment book, which also significantly contributed over the last 2 to 3 years. So our endeavor is to have high single-digit growth on the fee income. Contribution of fee income to total income would be in that range of what you have been seeing, around 30%.

Congratulations on the good set of numbers. It is very exhaustive. But 2 questions. One is on the regulatory changes that has happened during the last 6 months. One, CBO has asked banks to spin off their Islamic banking windows. So what are your thoughts on this? And basically, you being the owner of the franchisee, the largest franchisee of Islamic banking in Oman. And I would like to pick your brain on what are your thoughts on the sector as a whole? How do you see this panning out? And is there any time line -- specific time lines suggested by CBO for completing this process? The second one is on the regulatory changes, but that's more related to the FSA, which is asked in the new rules. They have asked banks to spin off their investment banking activities. So how do you see these 2 developments panning out over the coming 2, 3 years?

Okay. Thank you very much. Very important questions. And the key thing is, one thing is for sure is that both the sector as well as observers to the sector have seen this coming for a number of different -- number of years now. So it's not like it's coming as a surprise, both of these, the FSA and the CDO. So it's always been in the back of our minds that this is coming. It's not -- what is good actually now is that the time lines give enough planning and execution stages for the banking sector to deliver on these mandates. In terms of Islamic banking and the mandate to spin off the windows, again, it's also something that has been in the pipeline for the regulators for quite some time. They have given a time line, which extends up to -- this is not confidential, is it?

Circular, but in the public domain, we don't know.

Anyway...

No, it's not confidential if you're talking about December 31, it's not.

Okay. Sorry, but it gives enough time. Let me put it this way. It gives a decent time for all banks to plan, capitalize, and it's not going to be done over a very short period. The Central Bank has been very prudent in giving this because they are very clear on wanting it to succeed. And the aim of this, in my view, and I believe also several of my colleagues in the sector is to actually strengthen the Islamic banking sector and to provide more diversity for customers. So I am absolutely positive about this. And as a bank, we're absolutely positive about it. And so it really, on a number of fronts it gives a level of development for the sector that has not been seen before. It diversifies also the revenue base for the banks and a number of different factors. I see it as definitely a positive. Initially -- and we have to be also clear that initially there will be certain trade-offs because obviously the cost base will increase. But I think this will all be augmented by better operating results moving forward after that in terms of the medium to long term. So it's overall a positive story. The FSA spin-off, it is, I believe, still in a draft state. It has not been fully published. But also that is a very positive development in terms of asking banks to spin off certain activities of investment banking and to retain some. This is -- was always there in discussion forums between banks and FSA. So it's not really a surprise. I think putting a framework for it is also a positive development. And the time lines, I believe, give also a good opportunity for the banks to plan and execute in a manner that actually looks after its interests and its shareholders' interest. Does that answer your question, [ Joyce ]?