United Finance Company SAOG (UFCI) Earnings Call Transcript & Summary

[Foreign Language] Good morning. We are pleased to welcome you for today's discussions on our audited financials for the year ending 31st December 2024. On my right, I have Abdul Aziz Aal Abdulsalam; the Chief Transformation Officer; and Mr. Indika Perera, our Financial Manager. To start, we'll do a presentation with you by my colleague, Abdul Aziz. And thereafter, we'll go for questions and answers with you. Before we start, some disclaimer. This presentation relates to National Finance business, financial condition and results of operations from published information. Any statement or comment which has a meaning of future prospects and is forward-looking are only predictions and are not guarantee of future performance and does not constitute any solicitations to buy or sell any product, service stocks, bond or to engage in any trading strategy and should not be relied upon and/or considered as advice for making any investment decision. Due caution must be exercised that any such forward-looking statements or comments are and will be subject to both known and unknown risks, uncertainties and factor relating to the operations and business environment of the company that may cause the actual result of the company to be materially different from any future result expressed or implied in such forward-looking statement. By accepting delivering this presentation, the recipient agreed to accept and be bound by the statement, restriction and limitation set. Thank you. So the agenda today will present introductions. We'll give a company overview, the core focus area, leadership team and the financial performance for 2024. Okay. Aziz?

[Foreign Language] And good afternoon. Thank you all for joining us today at the investor discussion session. We're pleased to walk you through United Finance's audited financial performance for 2024, a year that reflects solid growth, operational resilience and strengthening fundamentals. The results we'll share today highlight not only our financial progress but also the strategic transformation we've undertaken to position ourselves for sustainable long-term value creation. As an introduction overview, United Finance Company has been serving Oman's retail and corporate customers since 1997, with a 9% market share among finance and leasing companies. We've been listed on the Muscat Stock Exchange since 2002 and operates from our head office in Muscat with over 150 staff and 90% Omanization. Our core offerings include retail lending, vehicle, consumer, durables, corporates and SME financing, such as equipment, working capital, bill discounting and corporate deposits. Our shareholding is diversified led by Oman hotels, followed by financial -- global financial investments and others. We were recognized for excellence with awards like Best Performing Company, Top Omani Brand and Best Emerging CEO in Retail Finance. So now I will take you through the core focus area where our transformation centers around the customer, with 6 focus areas driving impact. People, we have new leadership teams, strong performance management and focus on talent and engagement. Processes, streamlined loan origination, automation and better customer resolution. System, paperless office, seamless digital experience and efficient content management. Financials, portfolio growth, new products, fee income and strong dealership, relationship. Collection, we've seen sharper focus on recoveries, team reorganization and daily performance reviews. Branches, refreshed branch look and feel, marketing engagement and superior service and connectivity with our customers. All these initiatives together enhance service, improve collections and support our growth strategy. So I'll touch upon each of these areas. The people at UFC, our people are the core of our transformation journey. We've prioritized developing internal talent and building future-ready teams, rolled out structured training programs across all levels, implemented a robust performance management system and proudly maintained over 90% Omanization. On the customers front, at United Finance, customer remains at the heart of everything that we do. In 2024, we've achieved a 94% customer satisfaction rate based on feedback from nearly 500 customers through surveys, follow-up calls and complaints tracking. We've actively captured the voice of the customers to enhance service delivery, from loan processing time to staff attitude and overall experience. Additionally, we've built strong engagement through social media, growing our reach, gathering feedback and reinforcing our brand as a customer-focused and responsive company. And this is just a snippet of the new brand strategy that we had as our promise to achieve more, and that's what we convey to our customers today. Touching on the systems and processes. We've invested in new technologies and core system upgrades along with mobile services to drive greater efficiency and customer convenience. Through process improvements, we've significantly reduced turnaround times, now targeting same-day loan approvals and same-day dealer payments, which has enhanced our overall service speed across not only our customers but also our partners and dealers. Lastly, data analytics is now central to our operations, allowing us to track performance in real time, identify risk early and gain deeper insights into customer behavior and needs. We've taken strong, multilayered actions to improve our NPA performance. First, we strengthened credit underwriting by introducing smart scoring models and stricter borrowing profiling to ensure only high-quality loans are originated. Our collection efforts are more focused, with dedicated teams using early interventions and restructuring strategies to recover overdue accounts. We've also diversified our portfolio, reducing exposure to higher-risk sectors and expanding into safer areas like equipment leasing. Through real-time slippage monitoring, we are now able to flag potential delinquencies early and act fast to prevent loans from turning nonperforming. And finally, we've enhanced customer engagement, offering flexible repayment and settlement plans to stressed clients, helping reduce defaults and support recoveries. And our network spans across the country, Sultanate of Oman, with 8 branches and over 10,000 active customers and 150-plus employees. And the plan is to expand even further as we move on. A brief introduction to our Board, starting our Chairman, Mr. Mohamed Al Khonji; followed by our Deputy Chairman, His Excellency Hassan Ihsan; followed by our Board member, Hussam Bostami; followed by other Board member, Waseem Qaraeen; followed by Mr. Fariborz Vessali; followed by Mr. Salman Al-Lawati; and followed by Mr. Mohamed Al-Raise. And a brief introduction to our senior management and executive team, starting with Mr. Nasser Al Rashdi, our Chief Executive Officer; followed by Aziz Al Mahrizi, our Chief Operating Officer; followed by Fawaz Al Riyami, our Chief Business Officer; followed by myself, Aziz Aal Abdulsalam, Chief Transformation Officer; followed by Mr. Mahmood Al Hadi, our AGM HR and Admin, who's been the longest-standing employee of the organization; followed by Mr. Nandakumar, our AGM Risk Management; and our Head of Compliance, Ms. Maisa Al Lamki; and our Head of Finance, Mr. Indika Roshan. So we'll touch upon the financial performance snapshot. In 2024, United Finance delivered strong financial results. Our total income reached to OMR 11 million, up 10% year-on-year, and net profit grew by 18% (sic) [ 16% ] to OMR 2 million. This drove saw a solid net profit margin of 18%, with improvements in both return on equity and return on capital. Our loan book expanded to over OMR 104 million, with total assets crossing OMR 110 million, marking 6.6% growth. We maintained a healthy cost-to-income ratio of 55%. While improving asset quality, our NPL ratio dropped to 15.3%, and provision coverage increased to 66%. These numbers reflect disciplined growth, strong risk controls and continued focus on delivering value to shareholders and customers alike. Our 5 years statistics, our performance over the past 5 years highlight consistent and sustainable growth. Looking at finance income, we've seen a steady increase from OMR 7.5 million in 2020 to OMR 9.6 million in 2024, driven by portfolio growth and better yield management. On the net income side, we've also maintained an upward trajectory, moving from OMR 5 million in 2020 to OMR 6.4 million in 2024. This growth reflects both operational efficiency and strong risk management, underpinning our strategy to deliver long-term shareholder value. And our operating profit has also seen steady growth over the last 3 years, reaching OMR 3.4 million in 2024, up from OMR 2.4 million in 2022. This reflects better cost control and strong revenue generation. On the net profit side, we've seen a consistent upward trend over the past 5 years. From OMR 780,000 in 2020, we've more than doubled to OMR 2 million in 2024. These results highlight the resilience of our business model and ability to deliver sustainable profitability through both economic recovery and growth phases. Our net finance debtors have grown consistently over the past 3 years, hitting a new high of OMR 104 million in 2024 compared to OMR 85 million in 2020. This reflects strong portfolio expansion, especially in retail and SME lending. At the same time, we've managed to control credit risk effectively. Our impairment provision has come down from OMR 1.5 million in 2020 to OMR 1.03 million in 2024, showing stable and improved asset quality. This combination of portfolio growth and reduced provision underlines the strength of our credit processes and risk management. Now touching on the highlights in 2024, we delivered a strong year-on-year growth across all key metrics. Interest income rose to OMR 9.6 million, up 9.4% while fees and other income grew nearly 13%. Driven by recoveries and additional income streams, our operating income also saw a 8.9% increase, reaching to OMR 3.4 million. On the cost side, we managed to reduce ECL provisions by 5.4%, supporting profitability. Our net loan book grew by 7.1%, and net profit increased by 16.2% to OMR 2 million. This performance reflects well in our return on equity and return on capital improvements, both of which increased notably year-on-year, signaling stronger returns and efficiency gains. Our 2024 income statement shows strong year-on-year performance. Installment finance income grew by 9.4%, reaching OMR 9.6 million, while interest expenses rose by 15.4%, in line with portfolio growth. This resulted in a net installment finance income increase of 6.7%. Other income grew 12.9%, supported by recoveries and fee-based revenue. Operating income rose by 8.9% to OMR 3.4 million despite moderate increase in costs, including staff and depreciation expenses. Most importantly, though, we achieved OMR 2.08 million in total comprehensive income, a 16.2% growth versus last year, highlighting efficient operations and improved bottom line performance. Our balance sheet reflects consistent asset growth over the last 4 years, reaching OMR 110 million in 2024, up from OMR 84 million in 2021. Key drivers include a 7.1% year-on-year increase -- go back please. Key drivers include a 7.1% year-on-year increase in finance receivables, with installment finance debtors crossing OMR 104 million. We also saw growth in investment securities, which rose to OMR 831,000 partly due to the revaluation of [ Azure ] investments, adding OMR 116,000 to asset value. Cash and cash equivalents also improved to OMR 1.2 million, ensuring a healthy liquidity overall. The balance sheet shows a strong and stable financial position supporting future growth. Our loan book composition has been strategically shift. We've seen a strategic shift in 2024. Last year, our portfolio was 62% retail and 38% corporate in 2024. This reflects our focus on derisking the corporate book while expanding in retail financing, which offers higher yields and broader market reach. The goal is to ensure diversified, stable growth and improved asset quality and balanced risk. Our portfolio quality has shown clear consistent improvements since 2021. Total performing assets grew by OMR 98 million in 2024, with Stage 1 assets increasing and Stage 2 asset decreasing, a sign of healthy credit quality. Our NPA dropped from OMR 17 million -- to OMR 17 million, and NPL ratio declined steadily from 26% in 2021 to 15% in 2024. We also rolled off OMR 1.2 million bad debt this year, cleaning up legacy exposure. Most importantly though, our provision coverage has improved to 66%, enhancing our resilience and reflecting stronger risk management and recovery efforts. Our total -- next slide. Our total equity rose to OMR 49.9 million in 2024, reflecting strong retained earnings of OMR 4.7 million and a legal reserve transfer of OMR 210,000. We also saw a revaluation gain of OMR 116,000 from investments, contributing to equity and recognized a deferred tax liability. On the liability side -- sorry, go on. Yes, I didn't touch it. On the liability side, bank borrowings increased to OMR 46 million, and corporate deposits grew 18% year-on-year to OMR 7.7 million, supporting our funding base. Total liabilities reached OMR 60 million, bringing the total equity and liability to OMR 110 million, highlighting a balanced, well-capitalized structure for continued growth. Our key financial ratios reflect continuous improvement in both operational efficiency and asset quality. Leverage and gearing remained healthy at 1.4 and 1.09, supporting growth while maintaining control over risk. Our cost-to-income ratio improved 55%, and gross NPLs dropped 15.3%, continuing the downwards trend. Most importantly, our ECL coverage strengthened to 66%, providing robust protection against credit risks. Return on equity and capital also improved to 4.2% and 5.9% while our Omanization ratio reached 92%, showcasing our commitment to developing local talent in line with Vision 2040. Together, these ratios highlight strong governance, discipline and improved returns. And in closing, United Finance has demonstrated consistent growth, strengthened asset quality and solid returns underpinned by a clear transformation strategy in disciplined execution. We are all well positioned for the future, and we look forward to having you, inshallah, join us in this journey of sustainable value creation. We're ready to take any questions right now. Thank you.

Thank you. Now that's the end of our presentation. We welcome for any questions you may have on our performance for 2024. Yes, Mr. Shaoor?

I just had a couple of questions. One, a quick understanding question. So when you mentioned that your NPL ratio is 15.32% gross NPL ratio now, is that on the gross loans? Or is that on loans after the gross loans number after deducting the unearned financing? I'm just trying to understand what number is this ratio applied.

15% is on gross loans. So if you look at the total NPA, total book size, asset size includes NPA. So if you take the total NPA [ formula ] of the total NPA compared to the total asset, we are now at 15.33% as of December 31, yes. So it has been consistently coming down from a peak of about 27%. And that's a combination between cash recovery from our NPA, and we had a small write-off portfolio for legacy accounts in December, yes.

Okay. So this 15.33% number is multiplied by the OMR 139 million gross lease amount, right? Because that would return your total NPLs at OMR 22.7 million, whereas I think the number that we've showed in the presentation was a different one than this.

Can we request for the rest to mute their mic because we can't hear Mr. Shaoor?

Yes. Okay. So what I'm saying is when you apply this 15.32% NPL ratio to your total gross leases or gross finance lease of OMR 139 million, you get a number of OMR 21.2 million, whereas I'm looking at a number of OMR 17.9 million. So I'm just trying to figure out the difference in my understanding here.

No, no, this -- our total asset, this -- you have to divide this OMR 17 million from our total portfolio. So our portfolio comes to around OMR 117 million, so out of which OMR 17 million comes to 15.32%.

Can you see the slides, which we're presenting there?

Yes, yes, sir. Okay. So that was my question that the number -- this 15% number is not on the gross. I think it's after taking out the unearned values of [ OMR 32 million ], right? Yes. Okay. Perfect. Now that's clear. My second question is on the developing interest rate scenario, so the markets and the economists expecting a decline in interest rate. We don't know the quantum or the size or the frequency of it, but surely, interest rates cuts are in sight. Now with these cuts in line, do you think that your loan portfolio would be impacted? And if so, what would be the repricing impact on both your asset and liability side?

Can you repeat it, the question properly?

Yes, sure. Okay. So I was saying that the interest rates are expected to come down in the near future, right? So how are your assets and liabilities going to reprice in that relation?

So we are well -- we have enough facility from the banks. The reduction in interest rate over a period of time will have a positive [ impact ] in our net interest margin.

Okay. So you expect your NIMs to continue -- your net interest margin to continue with the [indiscernible] last year?

We expect when the interest come down -- actually, globally, if you look at the Fed rate, the rate has come down, but the same has not been reflected in local here, but we do have [indiscernible] the current year. Borrowing rates will go down, which will positively impact the net interest margin.

Okay. Okay. So you're saying that the impact of decline of interest rates is more on your borrowing, and it's not -- it's relatively less on the finance lease or your loans that you give out to customers. Okay, so...

Yes. On a portfolio basis, that's -- yes, you're right to say that. However, we have to continue to be prudent in the lending side and having -- attracting good customer at reasonable interest rates.

Yes. Okay. So a declining interest rate scenario would mean good for the leasing [indiscernible], right? Okay.

Yes.

All right, sir. Now obviously, you have mentioned that your coverage ratio is hovering around 55%, 56%. Do you have any plans of taking it up? Or do you think that a coverage ratio at this level is -- you're comfortable with this level?

So the coverage ratio as of December is 66.33%, which is coming up from 50% in December '22. And the provision coverage depends on the ECL model, which is implemented in the company and is validated by the external auditors and independent validation. So it's all based on the model, but we continue to be prudent in improving our provision coverage in line with the model.

Yes. The model has been valid by external consultant and also as per CBO requirements. This year also, there was an independent valuation by the independent consultant, and we have given the report to the CBO. So this is an outcome from the model.

All right. Okay. Because I had an understanding of the -- in between the loss given default that there's some sort of discussion with the company that is applied to it. I'm not sure if my understanding is correct. But okay, fair enough. It seems that the company, the management is happy with the current provision coverage levels, and it is expected to remain that way. Okay, fine. Great. That's all.

You can see historically from '22 -- from this slide, from '22 to '24 how the coverage improved.

Yes, it has improved significantly, and that seems right.

Do you have any other questions? Yes, Joice Mathew? Yes, Joice, go ahead.

Just a few questions, basically follow-up questions. But the first one is on your market growth. What's your outlook for the next year? This year, we have seen the leasing companies are performing very well, but at the same time, the growth was very much skewed to just 2 companies, while the other 3 companies lost a significant market share. So how do you see the competition going forward? And what's your strategies to counter this higher competition from the big players?

So our strategy on very high level, we want to sustain our business performance. While some other 2 companies have shown tremendous growth, you can see the impact on that growth in the provision which they have taken for the year. We want to be prudent in line with our long-term strategy and delivering shareholders' return. That is, in a nutshell, what we are doing. We'll continue to grow in line with our business plan and gain market share. Importantly, we are focusing on delivering the profitability, the net profit target, which we have, which will give the good shareholders' return over periods of time.

So how do you see the market growth this year, sir, and for United Finance? Because 2023, you had a 10% growth in assets and -- which came down to 7% in 2024. So how -- what's your growth outlook for this year?

Yes. See, there are 2 components on the growth. One is recovering the NPL. As you see, we have had before a large NPL portfolio. We are continuing to recover the NPL and bringing down -- getting back this money. This is owed to the company by the customers. With the number, you can also look at these numbers from the other competitor where the NPL has actually grown over a period of time. So the growth comes in the 2 ways. One is growing the performing portfolio. And we think that the portfolio -- the size of the growth in the market will be in the range of 10% 2025, and we should be in line with that growth. That is our target. However, the major impact comes is where we want to reduce the NPL, recovery in cash, and that obviously has an impact on the overall portfolio size. But it has a positive impact where provision is reversed back and other income increases.

So you had almost OMR 700,000 bad debt recovery during this year. So how do you see the trend -- that's the past trend as well as how do you see the recovery trends going forward? Do you think there is further room for -- there is still room left for further recovery during 2025 and '26?

We have a -- we still have a large portfolio size in the written-off portfolio. And you can see from this slide, we still have an NPA of OMR 17.8 million. They are -- we are pursuing all the legal actions and negotiations to bring this further down. There's still good room for showing good results in '24, '25 and thereafter. As you know, majority of the cases are legal, and the legal process take quite a long time from primary case to appeal, to executions, and we are pushing all our partners, legal partners to bring results for the company. And you can see from 2021 to 2024, the -- some of -- there have been quite good results in the last 4 years, and the trend will continue because that is our -- one of our main objective is to revive and push for collection recovery.

Okay. So when you look at further recoveries down the line and when I look at your provision coverage ratio, what I see is we had a better coverage ratio in 2021 -- '20 and '21. I'm talking about Stage 3 provisions of 60% or 62%, while I'm seeing right now, we are just stuck around 55% or below 60%, 58% this year, in 2024. And you just indicated that you are happy with this kind of a coverage ratio. Why do you think so? Do you think there will be further new Stage 3 loans and new slippages that will come into the book?

Okay. Just -- I'll explain. Our current provision coverage is 66.33%.

Yes, that's on the total one.

December 2024. In 2021, it was 69.3%. And then it came down to 50% in 2022. I think for the sake of the presentation today, I assume that December '22 is a starting point because in December '21 -- '22, we had to write off quite a certain size of the old portfolio, OMR 8 million, which was due -- this portfolio size that became NPL in 2020 -- 2014, 2015, 2016. So we cleaned up the book. After cleaning up the book, the provision coverage came down to 50.7%. From 50.7%, the provision coverage now is up to 66.33%. And the 66.33%, this is a model-based provision, ECL model, which we are applying in the company. And this has been developed by an independent party in 2021, and it has been further validated by another independent party in 2024 to see that we align -- we are in line with the assumptions for the model. So provision will keep going up. It's good for the company. We'll continue to bring -- to build a buffer for the future NPL, if any, and provided for the existing OMR 17 million -- OMR 17.8 million portfolio, will have an impact on year-to-year because the much -- all of them have security coverage and all depends on the precision model that you bring in the ECL model.

So what's your outlook for the NPL ratio and the coverage? You're saying that this is based on model. Yes, I agree. But at the same time, do you have any idea or any targets that you want to reach that maybe at a certain level, we will be happy and we can sleep peacefully at a certain level of provisions?

On the provision, I think we sleep peacefully on the provision because we have provision cover -- enough provision coverage, and we have a tangible security, which cover the balance of roughly 33.7% is covered by tangible security. Thus, we sleep peacefully, alhamdulillah. Our aim is to further bring down the 15.3% provision, the NPL to bring it further down. At 15.3%, we are slightly below the market average. We are slightly below the market average as of December 2023. And we'll continue to push because that has a positive impact on the bottom line of the company.

Okay. The next question that I have is on the yields and spreads that we have. So what we are seeing right now is for the second half of the year, the yields have almost reached -- looks like it has reached a peak. And at the same time, I'm seeing the cost of funds going up a little bit, inching up higher, which is resulting in the spreads getting skews a little bit. So what's your outlook on your yields? And at the same time, we are seeing that your leverage ratios are going up a little bit, and you're funding your growth by further borrowing. So what's the kind of impact that you see on the spreads and the margins?

So the interest rate outlook is positive. So we expect the rates -- borrowing rates to come further down during this year. It has been very slow in 2024, but inshallah, this 2025, we expect some improvement in the yield. We've already seen in the past quarter, there's a good -- some improvement there, and we are pushing and negotiating with the banks and depositors to bring down the borrowing rates. The -- further, the yields on the portfolio, we're pushing the yield up. In our strategy, we have -- we are targeting a segment that is a good creditworthy segment for the company, and that will sustain our future profitability. So we are continuing to improve the yield on the assets, and we continue to negotiate with the banks and the depositor on the cost of deposit. As I said, for quarter 1 this year, we have seen a slight improvement, and we expect more improvement for the remaining year. And this all depends on the liquidity, local liquidity in the rial Omani with the banks and the markets.

Okay. See, what will be your strategy on funding? Primarily because your gearing has reached from 0.80% to 1.1x now. So will you be looking at borrowed funds again? Or will you be looking at any bond issuance in the near future? Or will there be any rights issues?

Yes. Our gearing ratio is about 1.3, and that compared to market 2.75x. So the -- our financial position is very strong, and we have enough banking lines for funding our future growth. We are also having a strategy to diversify our source of funding to go for deposits, and we look at other instruments to raise long-term debt this year.

Okay. So you will be looking at other instruments for long-term debt?

Yes, yes. We need to have a diversified source of funding for the -- for funding our long-term plan. And our -- the strength of our balance sheet is very -- is there. You can notice how it is. And we have quite good feedback from the market, from the banks and the institutional investors for funding our future growth.

Got it. Got it. And on talking about corporate deposits, I'm seeing that there is some improvement in -- or some growth in the corporate deposits. So will you be considering this as another serious avenue for sourcing your funds?

Yes, yes. That is part of our strategy because in the same time, we are offering the depositor different options of enhancing the yield and the placing in the banks, placing with the finance companies or any other avenue. So we have -- we're very positive for that. Depositor are there. We have continued to grow. It's an area of focus for us on the deposits. We were at about OMR 4 million 3 years ago. Now we are about OMR 8 million this year, and there will be further growth in the current year. And that is in line with our strategy to diversify our source of funding.

Okay. So could you please give some color on what's the average maturity period on these deposits as well as what's the cost of these deposits that you're offering?

See, the -- as per the central bank regulation, the deposit maturity has to be minimum 3 month. We don't take any deposit less than 3 month. So we have -- on average, if you look at portfolio average, maturity is 1 year.

Okay. And what's the kind of cost that we are incurring on these deposits?

It's around 6.5%.

Any more questions? Okay. So thank you so much for joining us today. Since there's no more questions, this will come -- bring to an end our presentation for the financial year-end 2024, and we invite you to attend our AGM tomorrow. We have our AGM for approving the financials and the dividend. Thank you.