Sohar International Bank SAOG (BKSB) Earnings Call Transcript & Summary

[Foreign Language] I would like to thank MSX for giving us the opportunity for the investor discussion for 2024. I would like to introduce our team with me. I have Craig, the CFO of the bank; and Mr. Fahad Akbar, the Chief Islamic Banking Officer. We'd like to thank all the investors, shareholders, stakeholders, who supported us during last year to achieve this wonderful results. And I hope through this presentation, we will provide you an oversight about what happened last year and an overview about the Omani economy. We have this disclaimer. I hope all the investors and audience they read it. So Oman enjoyed very healthy economy in the last few years, supported with the good oil prices and low inflation. The inflation is second lowest in the GCC and the fifth worldwide. The GDP per capita is around above $20,000, which is almost 50% above the average worldwide. And Oman enjoyed also a good surplus in the current account, about 2.3%, and overall surplus of around 5%. The budget for 2025 shows a deficit. However, as you can see that Oman enjoyed a surplus in their fiscal budget for 2024 and 2023. Last year, the surplus was around OMR 1.4 billion and the year before was OMR 2.4 billion. You can see also that the revenue of the Omani economy showed a stable growth on non-oil revenue. It's worth to mention that the breakeven for the Omani physical budget is about $65, which is very healthy rate as compared with the other oil producing companies. And that's very healthy also as compared to what was the breakeven in 2016, which was above $100. The budget of 2025 also showed very diversified investment spending between non-oil investment in Oman Investment Authority and the energy development of Oman of around OMR 1.5 billion, and other development projects of around OMR 1.1 billion. Regardless of this spending, the Ministry of Finance and Ministry of Economy could balance that the deficit will not be more than OMR 0.6 billion and keep the healthy breakeven -- oil breakeven for the physical budget. We'll go to Sohar International, but the bank started in 2007. We merged with HSBC in 2023. We have more than 500,000 customers and more than 1,500 employees. We enjoy a good distribution of branches between Islamic and conventional, around 74 branches and 6 service centers. So with the service center, we will have around 80 channels to serve the customers. We are proud that our branches are the northest branches in Oman in Khasab, and the southest branches in Oman in Al-Mazunah [indiscernible]. We are available in all the Omani cities. We have the best distribution of the branches across all the remote areas and the capital city. The share prices since the merger went up by around 25% from OMR 0.108 to OMR 0.135. The bank has also developed strength. The main strength is our diversified shareholders and strong shareholders who support us all the time; the good and strong Board of Directors and one of the best management team in the region. We have strongest liquidity in Omani market and one of the strongest liquidity among all the GCC. Loan-to-deposit ratio of around 70%, which is very healthy, and solid growth -- sustainable growth in our financial performance. Both mergers, the table on the left shows the growth in both mergers between 2022 to 2024. So the deposit grew by 126%, while the CASA grew by 142%, which is faster than the growth of our customer deposit. Total asset grew by 78%, and we were very wise and conservative in our loan growth by 46% as compared with our deposit growth. Our profit grew by 187%. That's not only because of the merger, but also because of the synergies between us and HSBC and the value which we proposed because of that synergy. We have the financial overview. I will leave it to Craig to go ahead and present it.

Thank you, Abdul Wahid. I'd like to pick up firstly where Abdul Wahid finished in terms of talking about what we've seen in 2024 post the merger with HSBC. It's a story of synergies. It's a story of achieving a record profitability. But more importantly, it's a story about the healthiness of our balance sheet. That has been very fundamental to the bank in terms of building a strong balance sheet for 2 main reasons: Clearly, our international ambitions; our branch in Saudi Arabia, which we see has tremendous growth opportunity; and also inorganic growth and organic growth, both domestically and internationally, and position the balance sheet so we can take opportunities as and when we see those arise. If we look at those key headline metrics, those are outcomes; your return on equity for 2024, return on assets, cost-to-income ratio. Those are important in context because 2024 was the first year of the full impact of the HSBC merger. So when you're comparing the P&L metrics for 2023, you're not necessarily comparing like-for-like. So the metrics really tell the story. If we look at the results as of December 2024, I mentioned on the profitability, you're not necessarily comparing like-for-like, because you're only including 4.5 months effectively of 2023 consolidated profits. The balance sheet becomes a very interesting discussion point around our growth of 10%. And if you look and dive into those numbers, I'd like to talk about, firstly, the net loans, the 9% growth. The growth of 9% represents OMR 350 million. 2% of that growth has come from our Saudi operation and a further 4% of that growth has come from our Islamic business, which continues to be a very profitable and promising area of growth for the bank. On the deposit side, this is a very strong story and tells a very large part of our story. On balance sheet growth, 13% or OMR 700 million growth. That has come across the board through savings accounts, OMR 200 million; time deposits of OMR 300 million, and demand deposits of OMR 200 million, a very diversified and growing CASA base, very diversified. So if we then look at -- I want to stress a point here around post-merger activity. If we used June 2023 as a proxy and looking at the growth in our deposits, we've grown OMR 3.1 billion in our deposits, of which we acquired OMR 1.7 billion from HSBC, and we've organically grown OMR 1.4 billion in deposits. It's a very strong story on the deposit base. What have we done with those deposits? We have invested in securities. We made some significant investments in short-term treasury securities and managed to take benefit from the increased global rates to optimize the profitability for the bank, which is reflected in our results for 2024. On the capital side, the bank took the opportunity to repay the Tier 1 securities. We have increased our common equity Tier 1 through 130 million rights issue, which is very successful. So we have the strongest CET1 as of December, CET1 ratio in the market. Again, just focusing on those ratios you see on the screen. We have the highest NPL coverage. Our NPL ratio overall is in line with market. I mentioned our CET1 being the strongest. Our total capital ratio is the second strongest in the market. Our liquidity, aligned with most of the banking industry, is very strong, and we have the lowest loan-to-deposit ratio. So the bank is very well positioned to accelerate its asset growth going forward. CASA, as we mentioned, is very strong, and we've the strongest CASA ratio in the market. I've covered a number of these points. This shows you the trends for the profit growth on the year. Return on equity. 12.5% is a record return on equity for the bank. And the capital ratio, as I've mentioned, has been very strong and provides strength for the bank moving forward in terms of its execution of its strategy. I've talked about the profit for comparables. It's difficult to compare, but my focus places on the metrics, the outcomes of cost-to-income, return on assets, equity and cost of risk. On the balance sheet, I highlighted there the movements, in particular, the deposit story. And then the other key items in the balance sheet are the investment securities and the loans and advances as explained. Credit quality. The bank, as I mentioned, has a very strong coverage ratio, highest in the market of 158%. That reflects the bank's and management's conservative approach to provisioning. Our cost of risk last year was 0.9%, down from a high of December '23, where we increased the management overlays. And the nonperforming loans are pretty much in line with market around 4.7%. Capital and leverage. The market will be aware that Sohar International has been designated a domestically systemically important bank. The bank is fully compliant with all regulatory ratios, well positioned to meet any increases in the requirements, minimum ratios, and we'll be putting together recovery resolution plans, advanced stress testing in order to comply with the requirements of a domestically systemically important bank. And just finally, just to reinforce the strength of the bank's liquidity, placing the bank in a good position to move forward with its strategic initiatives. I'll pause there, Abdul Wahid. That's an overview of the presentation for the financials.

And we'll be glad to have your questions and to clarify anything you would like to ask us.

Congratulations on good set of numbers. This is Joice Mathew from United Securities. And Mr. Abdul Wahid, congratulations on your new position. I wish you all the best on this role. My first question is on your most recent announcement on the merger with Ahlibank. You just completed one acquisition, and right now you are going for further consolidation in the banking sector in Oman. Could you please walk us through what are the reasons that led to this decision? And what are your aspirations in terms of consolidating the banking sector?

Thank you, Joice. We believe that the consolidation of the banking system in Oman is a requirement to have banks with bigger balance sheet and bigger net worths, so we can compete even with regional banks and to expand also either inside Oman or outside Oman. And we believe there will be a good synergy with Ahlibank, which will maximize the value for both shareholders -- the shareholders of both banks. Yes.

What are the potential synergy opportunities that you see from this merger?

Just looking to the balance sheet, you can figure out a lot of synergy on the balance sheet level itself in terms of our loan to deposit, their loan to deposit. A lot of synergy could be done in terms of optimizing the consolidated balance sheet for the new entity if the merger will be approved by all the regulators and shareholders.

Okay. Got it. And regarding the swap ratio, you mentioned that 31st December will be the basis for calculating the swap ratio. But just 1 day before your announcement, Ahlibank came up with a rights issue and record date was established. So I just wanted to check how this rights issue will affect any potential swap ratio calculations?

Yes. So any swap ratio will have the fair, value and any consideration either the right issue or others will be considered if it happened.

All right. So will this be included in your calculations in the swap ratio, because OMR 50 million is coming in terms of capital.

We will leave it to the advisers who will be appointed and they will decide their fair value.

So just to add to that, as you understand, of course, there is a full due diligence process underway by both parties. There will be a number of matters that will need to be addressed, obviously, as part of that merger by incorporation. And the points you raised are very valid, and those will all need to be addressed. We can't obviously comment on the actions to be taken by Ahlibank in relation to their announcement of rights issue. And we need to just give that some time in terms of how we move forward. Again, as part of the due diligence process, that's a legal as well as accounting, all those matters will be addressed and announced to the market appropriately.

Okay. Got it. One last question on this merger process. When are you planning to conclude this merger process? If everything goes well, what's your target for conclusion of this merger process?

We will announce it in MSX website and to the [indiscernible] on a timely basis.

All right. If you can take some questions from me, I have something on the performance of the bank. Can I?

Sure, please.

Sure.

Could you please walk us through the margins of the bank? You started the year at around 2.7% in 2023. And during the year, we saw a continuous decline in the margins. And at the end of the year, margins were down by almost 23 bps, and reached almost 2.5%. Can you please explain what has led to this margin erosion? And where do you think the margins will be in 2025?

So again, some context on your numbers when you look at the net interest margin. For Sohar, our net interest margin was 2.43% for December '23 year-to-date compared to 2.55% for December '24. So I'm only talking about our bank relatively. We are seeing some margin compression coming into the end of the year first quarter. And I gave you some highlights as to potentially why that can be the case as we've been investing in high-yield investment securities. So there's some aspect of margin compression as the rates drop. There's also -- you still have a very competitive market in Omani rial. So there's pricing pressures in terms of local market liquidity. And of course, now with the falling rates, there are some challenges to the extent to which we can reprice assets. So again, with the global markets, the stability of the global markets, the potential drop in rates, that is obviously going to put pressure on margins.

And the next one is you've been maintaining a very, very strong liquidity position in your balance sheet. You have highlighted that in your presentation as well. And at the same time, your investments are around 30% of the total assets. This is never the case for banks, so I can understand this is primarily because of the flood of liquidity that has come into the balance sheet after the merger with HSBC. But one question is, this 30% investments, is it a change in strategy? Should we read it as a change in strategy? Or is it because you don't see enough demand for credit offtake in the domestic market?

No, no change in strategy. Mainly, we are looking for lending opportunity, quality lending opportunity. And we have a healthy business in the pipeline, which we will deploy it. So the strategy is the same, and we'll continue lending and investing and optimizing also the balance sheet for the best benefit of all the shareholders.

Okay. Got it. And we have seen a major improvement in your cost-to-income ratio from 47% last year and reaching 41%. And this is very much expected after the reorganization. So where do you see the cost-to-income ratio going to during 2025? And what's your long-term target for the cost-to-income ratio?

We don't give forward-looking projections. Shall I jump in here? Look, sorry, just to answer your first question, there were some very powerful synergies with the HSBC merger, because a lot of their cost base was actually offshore. And so when we absorbed the local teams, we were able to realize those synergies very effectively. And we've obviously continued to utilize the resources effectively within our organization. So as we've been growing, our headcount is flat with the post-merger. So we've managed to maintain a very flat headcount relatively. As the bank grows, we're able to redeploy, retrain the staff. Staff costs obviously being nearly 60% of your cost base if it's fully loaded. So we've done very well in that area. Other synergies around IT systems. We brought on the entire balance sheet of HSBC using our own systems. There are no systems that we bought on from HSBC. So we managed to realize a number of very effective synergies. Likewise, rationalization as we can of the branch networks, the size of the branches, the nature of the branches. So it's been a great success story. And we can continue to see those opportunities. Likewise, in the event of the merger with Ahlibank going ahead, we will look into, again, those synergies. So that's on the cost side. And in terms of forecasting, again, there's 2 sides to the equation here. As you're aware, it's the numerator, denominator; numerator being revenues and the expense base. So we are seeing some pressure on the revenue base, as I mentioned, around the NIM. But we also see some tremendous opportunities for the bank going forward in terms of lending opportunities. We have a strong asset base -- sorry, liquidity base, so we are well positioned to increase our lending. But as Abdul Wahid mentioned, we're looking at very quality assets, and we're looking at assets that will enable us to cross-sell our products and services more than we have to date, and that's something we'll be able to leverage off to improve the profitability going forward.

Joice, if I may add that we are not in cost-cutting strategy. We will invest as required to enhance our revenue and our income.

Craig, you mentioned about the pressure in net interest income and margins. But at the same time, I have noticed that there is a significant contribution to the noninterest income from the ForEx gains. Could you throw some light on this? What are the sources of this income? Are there any interest rate swaps, one-off items that are coming into it? And could you please tell us if this level of ForEx income is sustainable for banks over the long term?

I can't obviously give you too much details. But if you look at the history of the foreign exchange, you'll see that it can be quite lumpy by quarter. So where we see opportunities, we see a number of flows, large flows. We can benefit from those flows. So I wouldn't put it down to any particular strategy or product flow. No, it's not coming through derivatives. We don't take proprietary positions. So it's very much flow-based business, and we have some very strong flow business, which has accelerated post merger with HSBC. So I wouldn't refer to it as one-off, because we always have one-off opportunities, which we continue to see and hope to continue to see.

Okay. The next question that I have is on your Saudi operations. I'm seeing that...

I think you have so many questions. So I hope this is the last one.

I'm sorry. This was the last one, but I will stop here. I'll take a pause here. I'll give opportunity to others.

No, no. Ask the last question, the Saudi one.

I'm seeing that there is very strong growth momentum in Saudi, primarily because the base is low, and we have added almost OMR 20 million in Q4 alone. But at the same time, the Saudi operations are not just picking up, incurred a loss of OMR 1 million. So when do you think that this branch will be profitable? And could you please tell us what kind of growth numbers are we expecting from Saudi? And what's the breakeven asset size of the Saudi operations? So basically, an overall overview of your Saudi operations and how do you see those operations panning out?

As Craig said, we cannot give a forecast for the numbers. However, I can tell you that we have very good ambitions in Saudi. We have very good business in the pipeline. And the expectation is really good in Saudi for the business to grow with solid customers and high-quality customers.

I think also you'll understand that to build the base framework in Saudi Arabia is very reflective within the cost ratio that you currently see. And you'll also know, obviously, the balance sheet has not yet grown to the levels which we are planning. And once that does actually grow, we'll be looking for that profitability.

Okay. Perfect. Congratulations on obviously highest ROE generating bank in the sector. I have a question regarding that merger announcement that you made earlier. As per the information published or the disclosure, it has been mentioned that the swap ratios will be based on the book values as on 31st December 2024. Just from my understanding, does this imply that both the banks would be valued at onetime price to book or the multiple will obviously be decided on or calculated later?

As disclosed and as per the disclosure, it will be as per the book value for both banks.

Right. And the valuation would be -- would it be onetime price to book or it can be something different?

The valuation and the book value will be subject to due diligence, of course, but it will be applied on the book value of both banks.

Right. Okay. And the bank would be valued precisely at that book value. I mean, there wouldn't be any discount or premium for any of the banks?

It will be difficult to decide any discount or premium for it.

Yes. I just have another question regarding your investments. There's a sizable investment on your balance sheet, obviously, due to the available liquidity. And first, my question is what is your view on the interest rates? And secondly, how does the bank manage this interest rate risk in the event that we foresee a decline in interest rates going forward? How do your liabilities reprice? Obviously, the 0 cost deposits would remain there. I'm assuming that your loans would be linked to some kind of an interest rate number and then a spread. So your yield on advances or yield on investments would come down. How does the bank plan to keep their ROE at the current levels and keep their NIMs managed?

Good question. See, interest rate risk is one of the major risk for the banking sector overall, either in Oman or outside Oman. And we are working in all conditions, either in increasing interest rate environment or decreasing interest rate environment to optimize the value and the profitability for our shareholders.

Maybe just to elaborate. So interest rate risk management is fundamental to the bank's framework. We assess, we stress our interest rate scenarios. We may, from time to time, consider to take out hedges, interest rate swaps once we identify any fixed rate liabilities, assets. So it's a very dynamic assessment of our interest rate risk and how we want to manage that. So yes, there's multiple ways of managing that.

Banking sector depends on the liquidity risk and interest rate risk. So that's something which we are working to optimize in all the environment, either interest rates is going up or down.

And I guess what your point is, in a falling rate environment, there tend to be more challenges rather than in a rising rate environment, where spreads tend to be higher.

Yes. Specifically given the fact that you have sizable investments on your balance sheet, now I'm assuming that those would be hit instantly as soon as the interest rates go down and obviously, your liabilities go down.

Again, we are aware of our position. And therefore, we look at alternative investments in terms of strengthening the yields and in terms of hedging the cost of funds. So of course, we are aware of the positioning of the bank.

This is [indiscernible] from Sohar International. I have 2 questions. The first one is that looking to the new merger announcement with Ahlibank, what are the global opportunities do you see for Sohar International in terms of expansion or partners for cross-border services, especially in light of increasing the regional integration and demands growing that global economy presents. And the second question is, how does the bank plan to engage and upskill the staff in light of future strategic shift of this merger?

Sure. All the announcements about the merger will be announced on time for all the shareholders and stakeholders, including our staff. Second, synergies opportunity, either inside Oman or outside Oman, or optimizing the balance sheet will be there. I don't think so this is the right forum to present all the opportunities. However, we can confirm that we study all the opportunities and all the synergies between the 2 banks, which will enhance the value for the shareholders of both banks.

Some questions, if I can continue?

Please.

Okay. So I just want to understand what is the outlook on the medium-term loan growth in Oman and where do you see Bank Sohar positioned in this?

We are always looking for quality lending opportunities in Oman and Saudi, and that's our strategy. And maybe the things what we can clarify that we are lending to do business, so always we are looking for the opportunities beyond the lending and not to make money from the lending; however, to make money from other related income, which will come from this lending.

Okay. Also with regard to the new banking law and regulations, can you explain how do you think it would impact Bank Sohar? And what opportunities and challenges do you see?

Sorry, what specific aspect of the banking law are you referring to? There are a number of them.

There's a CPO circular on priority sector lending.

Yes. So...

So that will free part of our capital. So whenever we are lending for -- and that's our strategy, frankly. That's when we are looking for economical sectors like mining, green energy, etc., we'll have a better return on equity, and we will have more capital to invest on all of those investment activity. And also that we can invest bigger tickets on those investment activities without worry about our capital adequacy requirement. And also, that will free some of our equity for the SME and other activities.

Okay. Understood. Also in terms of Islamic banking, the landscape, have you thought about considering Bank Nizwa takeover?

I cannot comment on that. I think everything was disclosed and announced to the market on a timely basis about Bank Nizwa. I think the last disclosure was 2023, correct?

I think you're right, it was '23.

So everything was announced and disclosed in the market. So I think there is no more questions, and we'd like -- if any questions, please go ahead. Otherwise, we'd like to thank you for your time and for your support. And we'd like to thank all the stakeholders from the shareholders, employees, suppliers, and all other stakeholders' support as to reach our mission, and we'll continue growing in the market. And thank you.

Thank you very much.