National Bank of Oman SAOG (CBQK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for joining on this call at short notice. I'm Zubair Chaiwalla, Head of Capital Management and Investor Relations. And on the call, we have Joseph Abraham, the Group Chief Executive Officer of Commercial Bank; Rehan Khan, the CFO; as well as Fahad Badar, EGM International Banking. You will be put on mute for the entire duration of this call when the speakers are speaking, and I will get back to you for the Q&A. Joseph Abraham, over to you, please.

Thank you, Zubair. Good afternoon, everyone. Thank you for joining us today. The objective of the call today was to give you some background on the announcement that was made this morning about Commercial Bank's offer to the shareholders of NBO to acquire a maximum of 15.2% of the shareholding, which would, if successful, take us to controlling interest of 50.1% of NBO. The background to this is, as you know, during our analyst calls, I've always said that we are long-term investors in both Turkey and Oman. And so this is a continuation of that approach. NBO is a very good bank with a very good franchise in Oman, and therefore, we see this as meeting our strategic objectives in terms of the strong links between Qatar and Oman and also having stake in a strong bank with a very good franchise. The reason why we would like to go to 50.1% is that we believe strategically, and I'm a firm believer, that it is always better if you're going to make overseas investments to have a controlling stake for a number of reasons. And most important of that is to ensure that the appropriate controls, risk management and other good practices are made and there's alignment across the 2 entities and also to leverage the cross-border trade flows, investment flows. So the combination arrive for overall better management and better risk profile of the entity. So that's really the rationale for this. I would point out that this is offered to the shareholders of a maximum of 15.2%. Commercial Bank has the right, if that level is not achieved, to withdraw the offer or it can keep what it has received. And I would say that this, therefore, depends on the response from the shareholders, which will be known after the closure of the offer period, which is in early July. So I'll now hand over to Rehan, who will give you some color on the actual impacts it will have on capital and other financial metrics, if it is successfully executed by appropriate response from their shareholders. Rehan?

Thanks. Thanks, Joseph. So look, NBO has been a very good investment for us over the years. We initially invested in 2005. We have, on average, around a 10% return per annum on that investment and a yield -- average yield of about 5.3% over that period. So it's been a successful investment for us. As with this announcement, it will go from an associate to a subsidiary, so we would expect to be consolidating from Q3 onwards, subject to successful completion of this transaction. Now it's -- the offer is at OMR 0.2 per share, which equates to QAR 490 million. This would be a cash payment. There -- the impacts we will see is approximately a QAR 200 million per annum increase in profitability on an annualized basis. There will be a capital impact initially of about 1.1% on CET1. We will then expect to build that up over a year to 18 months with the profits retained stroke dividends paid out. Now in terms of balance sheet, this will equate to approximately QAR 30 billion of increase in assets, total assets of the bank post completion of this exercise. We don't expect any impact in terms of immediate from a P&L point of view in terms of the associate becoming subsidiary. One of the side impacts of this we've talked about in previous calls, that we've set aside QAR 400 million for impairment. One of the impacts will be that there will be no impairment as it moves from an associate to a subsidiary. We've been working with our auditors over the last couple of months on this transaction, making sure we fully understand and appreciate all the implications. So that's one -- not [Technical Difficulty] the reason why we're doing this transaction, but one of the side effects of this transaction. But as you know, once an entity becomes a subsidiary, a purchase price allocation exercise is done. And that basically determines the fair value of the asset that you're purchasing versus the price that you're paying for it. And based on that, the intangibles are amortized over a period of time. So that will be established once the transaction is completed and an independent company is listed [Technical Difficulty]. So hopefully that gives you a little brief on the... [Audio Gap]

[Operator Instructions] We do have our first question now, Rahul Bajaj.

I have a few actually. So I'll go through them one by one. The first, as Rehan just mentioned, that the QAR 400 million number that you previously guided to for impairment for 2021, the upper end of the guidance, will not be applicable now. So just wanted to understand, does that mean that there will be no impairment from the UAE business as well. So that QAR 400 million would not be applicable at all? Or there could be something coming in from UAB, which is maybe already baked in that QAR 400 million? So that's my first question. The second question is around areas for improvement. So Joseph mentioned about aligning of risk and several management sort of initiatives between the 2 banks. But just wanted to understand from a kind of numbers point of view, where do you see the most areas for improvements in terms of synergies or profitability expansion? I was just looking through some of the recent financials for NBO. And I kind of realize there are areas where probably CBQ's full control could help the business. So just wanted to understand what your thinking is around that. And my final question is not related to NBO, actually UAB. Now that both your international operations are kind of -- if the transaction goes through under full control, what would be your kind of outlook or kind of thinking around the UAE business, which has been kind of struggling in a while? And what's kind of -- you've never said that that's core to you. So I just wanted to understand what's the latest thinking is now.

Thank you, Rahul. Let me answer those. So firstly, in terms of impairment, UAB would still be subject to an impairment exercise that will be done Q3/Q4 of this year. So NBO will not be part of that once this transaction is completed, but UAB will still be subject to that. So that will still be -- need to be assessed. So certainly, we expect QAR 400 million to be excessive in that case, but certainly, there will be some impairment we expect to happen on UAB. As far as your second question on areas of improvement, look, NBO is, as we said previously, a strong franchise, has delivered good returns for us. We see areas of improvement in terms of cost-income ratio, for a start, will be an area where we will focus on. Just having that controlling stake now, I think, will help us deliver on some of those key areas for NBO. So their cost-income ratio is just over 50% right now. We expect to help the NBO drive that down. They are looking very seriously at their retail franchise. And that's something I think they will work hard on over the coming periods. And also on cost of risk, I think that's something where, last year, they've taken increased provisioning, primarily as a result of the pandemic, and we expect that cost of risk to start coming down over the coming periods as well. So I think lots of areas where we can help them and where we expect NBO to achieve growth and improvement in their financials. Your last question was on outlook for UAB. So look, UAB, obviously, the first quarter you've seen, they've made a modest profit. We expect that turnaround to continue over the coming periods. We're working with them on their own 5-year plan. And of course, the fact that we have taken those impairments over the last couple of years means that the fair value and the book value are much closer to each other now. And that means that all options are available to us, and we'll see how that develops over the coming periods.

Just again, Rahul, to just reiterate what we said and discussed earlier, we spent a lot of time working with the UAB team and they've cleaned up. And as Rehan says, the first quarter showed a small profit. So we expect -- and that's the focus of our attention to really continue to turn around UAB and work with the teams there. That said, we had written down the value of UAB, and therefore, as I said earlier, this gives us a little bit of flexibility. It's not our prime objective. But like I said, if someone came and I think this gives us that flexibility to look at it because it's much closer to [ realistic ] valuations.

Our next question is from screen name, JM. [Operator Instructions]

This is Joice Mathew from United Securities in Muscat. I have 3 questions. I'll just go one by one. This is regarding your pricing of the offer. Your offer is around 25% discount to NBO's current book value and possibly a higher discount to the forward book value. If you're looking at the pure valuation, other banks like Bank Muscat, Ahlibank and Bank Nizwa are trading at similar valuations. So a big question is, why didn't you consider offering a controlled premium when you were offering to acquire controlling stake in the bank? That is my first question. Second question is that I think you've already had discussions with the other major shareholders who own almost 40% of the total stake -- total NBO. There are 4 shareholders who own -- or combinedly own 40%. So do you have any feelers or indications from them regarding their participation and any feelers on their reactions to the offer price? The third question is what will happen if you're unable to obtain the targeted 14% shares. Will you be considering a higher bid? Or will it go -- or will you completely cancel the offer?

Yes. Look, thank you for those questions. Look, in terms of the specifics of the transaction, of course, we cannot get into that kind of detail nor what the large shareholders may or may not do. As outlined, regarding your third question, of course, Commercial Bank has the right to withdraw at any time during this transaction if it doesn't look like it will be successful. So we have some options going forward on this transaction. But obviously, the information has just been released. So we will see how the reaction is over the coming period.

Our next question is from Chiro Ghosh.

Just a couple of quick questions. The first one is related to the Oman business per se. So I want to get a sense, are we optimistic on the Omani economy per se? Or you just saw it as a good opportunity to -- what is the strategy behind this. And second is expansion of Rahul's question previously asked. So is there a possibility that in future you might even look at taking more than 50% stake in UAB?

Thank you for that. As we have said before, Chiro, that we are long-term investors in 2 countries: Turkey and Oman. And so this is a continuation of that strategy. We see -- and the reason that is, is because we have very strong strategic links between Qatar and Turkey and Oman, and there's a flow of investments, trade, which we anticipate will continue to grow and increase over the years. So that is why we are long-term investors on Oman and Turkey despite what maybe is a current -- maybe some economic challenges. But we remain positive on the long-term outlook for both these countries. And as investors, and we are comfortable with this position that we will have or will develop after this offer. With regard to the point about UAB, as we said, we've always said these are long term. We have a position in UAB where we are comfortable with where we are. And our continued focus is on actually improving the performance of UAB, and that will continue to be the focus. We don't see any increase in stake as an immediate opportunity or a priority.

Our next question is from Vikram.

My question is on the carrying value. The carrying value of the NBO investment is higher than the offer price that you made. Shouldn't that lead to a revaluation of the carrying value and therefore an impairment going to the income statement?

No, Vikram. As I said, we have had extensive discussions with our auditors. So the way the accounting works when an associate becomes a subsidiary is there are 2 independent transactions: one is effectively a sale, and the other is effectively a purchase. Now the purchase is regarded at as a bargain price and the sale is on the carrying value. So the actually net off is what we have seen on the various scenarios, working with Ernst & Young. So there's no immediate impact at all for this transaction when an associate becomes a subsidiary. As I did say, though, that there is a purchase price allocation exercise. So that is done subsequent to the completion of the transaction, and that will show what amortization, if any, we need to do over a period of time on the intangibles. And we did this exactly with Alternatif as well.

Right. My second question is on the capital impact. You said that this transaction will have a capital impact of 120 basis points. Is this a cumulative capital impact? Is this -- does it include the combination of higher goodwill, higher risk-weighted assets and everything else, which comes from this transaction?

Yes. Vikram, so there is an impact on capital as we take on the RWAs of NBO onto our balance sheet. So initially, that will be a 1.1% impact on our CET1, so 12.2 -- 12% that we have currently goes down by 1.1%. But then that gets built up again as profits are recognized over a period. There is an improvement on return on equity on an annualized basis of about 0.3%. And we expect that the CET1 will be brought back up within 1 calendar year to the level that has been decreased by this transaction.

Perfect. My last question is on the dividends. The dilution of the capital, which is going to happen in the near term. Does it have any impact on the way you're thinking about dividends for 2021?

Dividends are finally a decision of the Board. But as we've always guided, we have sort of objective of paying out no more than 50% of earnings as dividends, and there's no change to that approach.

Our next question is from Ahmed Abdel Rahman from Ajeej Capital.

I still can't seem to understand how there will be an impact on CET1 by 1.1% while there is no immediate impact from reclassifying the associate to a subsidiary effectively. Though we understand it is the associate is being taken at 100% risk-weighted asset, now you're consolidating both bank capitals, so it's going to be an aggregate of these so the impact should be positive, unless there's an impact from the associate itself being written down or reclassified lower. So can you just walk me through exactly how that 1.1% drop comes into place?

Yes. Actually, the way the accounting works for an associate is fairly complicated in terms of the impact, both at CET1 and at Tier 1. And so we're happy to take you through the calculations off-hand. But basically, what happens is that associates comes out, but the impact of NBO's full RWAs comes into the balance sheet of Commercial Bank. And that's why there is an overall impact of 1.1%. We can show you the calculation and walk you through that on a one-to-one basis.

Yes. If you [ can send me ] just a quick overview or rundown of the calculations that will be...

Sure, sure, sure. Because the associate comes at various lines you see, whereas the RWAs only comes in at CET1. So there will be a difference between total capital and CET1 as an associate and total and CET1 as a subsidiary.

Our next question is from Edmond Christou. Edmond, can you unmute and ask your question, please?

Can you hear me now?

Yes, we can.

This is Edmond Christou from Bloomberg Intelligence. My question is regarding the PPA exercise. Clearly, there will be goodwill. And just my understanding is what way it can be used to improve your NPL of NBO. The NPL is around 5.5%. So there will be some cleanup to the book. And is it correct to expect after the clean-up [indiscernible] to improve the entity? That's one. The other one is what type of revenue synergy we should expect from the cross-border transaction or the trade flow happening between Qatar and Oman. Where do you see the revenue synergy coming through? And the last one is CET1 will be a bit soft after this transaction. Does it have any implication on the strategy that you are running to product currently? So I understand you are nearly seeing real estate improving your exposure to government. But do you see any hinder in terms of gross opening because of the CET1 impact?

Thank you, Edmond. Let me take that. First of all, NBO is also in -- does have a 5-year strategy of its own, which it completed formulating last year. They have a new CEO, new CFO. So they've been working on that 5-year strategy. And that obviously projects various improvements over the next few years, including cost of risk. So that will help bring down the NPL ratio of NBO itself and, therefore, of Commercial Bank on a consolidated basis. Your second question in terms of trade flows, that's at so many different levels. And maybe I can ask Fahad to talk about that in a minute. But just on your -- on the CET1, we're obviously comfortably above minimum level. So we don't expect any impact on growth that we have factored in at Qatar or at any other level because of this transaction. We expect to continue. And in fact, as you will have seen from our Q1 results, our net interest margins are improving. As we still are moving into more and more government business, we expect that to continue. That is not harming our net interest margins at all. And in fact, we see that trend continuing going forward as well. So I don't think there will be any impact in terms of our growth aspirations and projections as a result of this transaction. Just going back to the trade flows, Fahad, would you like to comment on that?

We have been already working very closely with National Bank of Oman in the past as an associate in term of capturing trade flows between Oman and Qatar. And I think with the stake increase, if successful, this will increase the interaction between us and National Bank of Oman overall. And both governments, Qatar and Oman, have very close relationships. So we see that to be increased with the success of the acquisition. Thank you.

Thanks, Fahad.

Thank you, Edmond. We do not have any more questions now. Joseph, any closing remarks?

Thank you very much for joining us. As always, Rehan and team are available for any further clarifications. Thank you for joining us today. Wish you a good afternoon and weekend. Thank you.

Thank you. Bye, everyone.