Welcome everybody. Thank you very much for joining us today in this discussion session where we talk about the results of the half year 2024. I also want to thank Muscat Stock Exchange for giving us this opportunity. Again, welcome. First slide. Just administrative matters in terms of disclaimer that this is based on available information that has been disclosed previously. [Foreign language]. In terms of the content, I will be talking about the operating environment. I will also be talking about the banking sector, the bank's different business lines, and then I will get into the key financial highlights and the results for the six months ended June. We will be taking questions following the presentation.
[Non-English content ] In terms of the macro overview, Oman's economy has continued to expand in the first half of 2024. Of course, in terms of the OPEC+ oil production cuts, the real GDP also grew at about 1.3% in 2023, driven by the expansion in non-hydrocarbon activities. Favorable oil prices were also a factor. There are also sustained reform efforts, and they continue to support the country's fiscal and external position. These include efforts to improve the business environment, supporting the role of the small and medium enterprises in the economy, and accelerating investments in renewable energy and green hydrogen projects.
The commitment of the government in diversifying Oman's economy also definitely highlights its strategic approach to make sure that it's fostering resilience and a sustainable development during a very volatile global economic period. Economic growth is expected to remain moderate in 2024 on the back of extended oil production cuts for the first half of this year, before accelerating to above 4% in 2025, supported, of course, by a rebound in hydrocarbon activity. Inflation levels in the economy reflect the continued easing of core food and transport inflation. In terms of the public debt management front, the government was able to utilize the oil revenue surplus that was generated in the last few years in repaying outstanding debt and reducing the impact of rising interest rates on loan repayments. Debt to GDP ratio, in fact, reduced from 61% in 2021 to 40% in 2022, and further to 35% in 2023.
The additional revenues also supported the government in deferring some planned withdrawals from the country's reserve. This healthy fiscal position resulted in an upgrade of sovereign rating, which is now just one notch below the investment grade. In terms of the 2024 budget highlights, it highlights significant economic activity, including development and investment expenditure in several strategic projects, along with social and basic spending in key sectors of education, health care, social welfare, and housing. Government has clearly reinforced its focus on sectors like manufacturing, tourism, logistics, agriculture, and fisheries.
[Non-English content]
In terms of the banking sector, it has continued to expand and it is playing quite a vital role in supporting the country's economy. The robust financial indicators, coupled with the regulatory oversight and prudential guidance, have bolstered the sector's resilience, and it's also shielding it from adverse impacts that have been experienced externally and globally. The recently released financial stability report by the Central Bank of Oman highlighted the country's robust financial system despite the global challenges such as geopolitical tensions and tightened monetary policies.
The Central Bank has stated that while global inflation and economic uncertainties persist, Oman's financial sector has shown resilience, which is definitely supported by the higher oil prices and the fiscal discipline. The banking sector has in fact reported strong earnings and a solid capital position, excellent liquidity and low non-performing loans. In fact, in the last few years, banks have invested heavily also in technology, repositioning their offerings and digitizing their operations while also increasing their physical branches. In the first six months of 2024, the sector witnessed a good growth momentum, which was supported by economic recovery and positive macroeconomic outlook. Sectoral credits increased to OMR 31.4 billion, which has witnessed a growth of OMR 1.7 billion, close to 4% over the level achieved in the first half of 2023.
Deposits have also increased quite well to OMR 30.7 billion, about 11.6%, which is an annual growth of OMR 3.2 billion. Islamic financing and customer deposits have also contributed around 20% of the total sector, and annually they grew by about 10% and 15% respectively. Of course, as I have mentioned earlier on the backdrop of budget 2024, which does promote expansionary investments in key sectors in the economy and the elevated levels of oil prices, the positive macroeconomy outlook and the government's focus on reforms and developmental strategy, we do expect that it will provide a much-needed booster for further sectoral growth and helping it in achieving better financial performance and a strong financial position for Omani banks in the coming years.
[Non-English content ]
In terms of this slide, we can see a stable growth of key parameters of the banking sector. The compounded annual credit growth of about 4.2% was registered in sectoral credit portfolio over the last five years. This definitely reflects the healthy position including and taking account of the disruption created by the pandemic during this period. Similarly, 5.2% compounded annual growth rate for customer deposits in the last five years and after recovering back to pre-pandemic levels with 21% growth in 2022 and 11% growth in 2023.
The profits of the top seven Omani banks showed further improvements in the first half of 2024 of about 12.3%. We expect that the sector is likely to grow at mid-single digits in terms of credit and deposit growth going forward, where there may be some short-term impact on asset quality and collective provisions, and also due to global geopolitical reasons and interest rate situations. The banks would definitely require to maneuver and tactically manage liquidity, but in the medium term, stable performance is expected.
[Non-English content]
In terms of the bank, the bank continues on its focus on its key strategic pillars, which are our customer centricity, market leadership, efficiency, and productivity and innovation. These are our guiding pillars in all our strategies and initiatives. We continue to focus on our strong brand and our strong branch value and financial position and definitely our human resource strength to deliver the best possible value for our stakeholders.
[Non-English content].
In terms of a quick snapshot of the business lines of the bank, the bank provides all banking services with well-established business lines including corporate, personal, wholesale banking, and Islamic banking. These business lines have been performing well over the past few years and are showing healthy profit contributions and are well diversified, in fact. Corporate banking, personal banking, and wholesale banking contribute around 25% - 35% each and Islamic banking around 3% - 4%.
Our overseas operations have also contributed around 5% to our bottom line in June 2024. Islamic banking does continue to have the highest market share in terms of assets in Oman. The bank has, like I said, a well-diversified portfolio as we are showing in the graph on the right side. The deposit portfolio is also quite strong, driven by retail deposits and supported by government and private sector deposits.
[Non-English content]
In terms of some of the key financial highlights for the six months ended in June 30, 2024, you can see the bank's top-line performance was strong. This is in spite of the continuing global an d regional challenges. The bank's agile approach and balance sheet management and funding dynamics did help us quite a bit to achieve a healthy net interest income. Net profit was higher by 7.5% in June 2024 compared to last year, with healthy business growth and prudence on credit costs. Non-funded income has also improved in June 2024 by about 13%.
Operating expenses increased by about 4.8% relative to the growth in the business and also certain administrative activity and some infrastructure expansions. The bank's loan portfolio showed a growth of 3.3% year-on-year. Deposit portfolio has shown a growth of 5.3%. In terms of asset quality, total provisions stood at 1.6 times of the NPL of the bank, reflecting a healthy provision level. [Non-English content].
In terms of operating performance and profitability, the slide provides a quick snapshot of that. You can see Bank NIMs have been very stable over the last five years. Bank Muscat has been able to manage this, the yield and the funding cost to maintain the NIMs through efficient and agile balance sheet and liquidity management, timely portfolio repricing, and also deploying certain agile hedging strategies. Bank 's fee-based income was also stable around 31%-35% of the total income throughout this period. In June 2024, cost-to-income ratio also reduced to 38.4% compared to 38.8% in the previous year, and that is because the costs have been moderated compared to the healthy income increase.
The ROE of the bank has also witnessed a significant improvement from the lower levels of 9% in 2020 to reach 12.5% in June 2024. ROE has improved due of course to higher profits and also reflected the positive impact of the capital structure optimization of the bank that was completed in 2022. The bank's ROA also continued healthy momentum and reached 1.6%. This is the highest when compared to the levels seen in the last five years after reaching lows of 1.3% in 2020. [Non-English content] .
In terms of asset quality, as you can see, the bank has been able to maintain the NPL ratio around 3% - 4%. The coverage ratio continues to be strong, ranging between 135% - 164% for the last five years, reflecting the bank's prudent policy. As I have mentioned earlier, the bank's gross loan portfolio is well diversified and well managed with a prudent credit policy. The bank was also able to grow the gross loan portfolio by 3.5% during the first half. It continues its prudent provisioning and credit policy to ensure a stable and robust performance. [Non-English content]
In terms of funding and liquidity, the Bank has a well-balanced funding mix with around 70% of the funding coming from customer deposits and the balance through interbank borrowings and equity. This has been quite stable for the last few years. Also, it continues to hold high levels of liquid assets over the last five years. These assets are in the form of very high-quality liquid assets. As I mentioned earlier, Bank 's capital position is the highest among Omani peers and one of the strongest among the GCC peers as well. The capital position is largely driven by Common Equity Tier 1 capital along with retained profits.
Due to global challenges, including supply chain issues, high inflation in several markets, and the increasing interest rate scenarios, Bank Muscat is definitely tactically working towards its liquidity management and interest rate management. [Non-English content]. We have reached the last slide, and thank you very much for taking the time to listen to me. We can take your questions now. If anybody has a question, you can raise their hand. If anybody has a question, you can use the raise hand on the application, please.
Good afternoon, Sheikh Waleed and the Bank Muscat team, and thank you very much for the presentation. Sheikh Waleed, I just wanted to check. I know you mentioned during your presentation that you are looking at short-term volatility in the asset quality is expected in your outlook. Could you please elaborate a little bit more on that? Because when I see your financials, I am seeing the coverage on stage three accounts has come down a little bit compared to June of last year. I was trying to connect the dots there. If you can help me out there, that would be much appreciated.
Sure. Thank you, Joice. Our expectation is that the economic scenario has improved significantly over the past period. In terms of the pandemic and the impact of the pandemic, there are still pockets where we see some pressure and challenges. Notwithstanding that, our position is that we are well-provisioned. When we say in the short term, we are talking about over the next six months to one year.
These are just more or less being prudent in terms of addressing it, because certain corporates and private sector entities have still not shown the cash flows that we expect over the coming period. 70%, in fact, of our restructured books had already started repayment. The 30% balance is not necessarily defaulting. It is not. It is still to start repayment in the coming period. Hence, we are sort of seeing that as possible, but not necessarily something that we are greatly worried about. That is as far as the pandemic. Looking at the future, we do not anticipate the credit cost to be higher moving forward.
If you can give us some kind of an indication where we are looking at it for 2024 and 2025. Because 2023, 2022, we have been very stable at 60 basis points in terms of credit growth. In first half, we are talking about 50 basis points. Where do you see that for ending this year and probably next year? How is this getting panned out?
We are comfortable to actually, even though I do not like to give forward-looking statements, but we do not see any reason why this, as part of where we are sitting now, this would increase beyond the 0.5% that you have indicated, which we have so far. We do not see any reasons at this moment that it is going to increase much beyond that.
Perfect. Thank you very much for that, Waleed. Waleed, another question that I have is on your outlook in terms of the loan growth and the deposit growth. You mentioned about mid-single digits is what you are targeting over the medium term. When we look at the medium term, probably we are coming out from, we are on a recovery path. When you say for the entire banking sector, we are looking at mid-single digits. Is it because of high base impact, or is it because we are expecting only a very gradual recovery of economic recovery in the coming couple of years or over the medium term?
We will be growing in line with the growth of the economy that we expect. Given the positive outlook that we have for the economy, we expect also that these mid-single digits to be achieved throughout the banking sector. Like I said, there are a number of different initiatives that are being taken and done by the government, whether it is in terms of, for example, the retail lending, we expect some good growth over the coming period.
Also, in terms of the renewable energy area, privatization of schools, a number of projects in terms of hydrogen, and also Sultan Haitham City and the Oman-Etihad Rail way. There are a number of areas where we see. Also the listing and IPOs that are coming up by certain large GREs, where they are also increasing their leverage. This is an opportunity for the banks to participate in. We expect the momentum to be positive, and the mid-single digits is expected to be moving gradually towards that.
Okay. Thank you for that answer, Sheikh Waleed.
Thank you, Joice. Sunder?
Hi. Good afternoon, Sheikh Waleed. It has been a while, I think. Nice to catch you up after a while.
Thank you, Sunder.
I think I have three questions. The first is on your Islamic banking. Islamic banking, despite showing a strong growth, of the total assets, you have around 13% of assets. But if you are looking at a profitability perspective, the business is not on par. Any specific reason? Because I have seen the net income from Islamic financing as compared to last year also, it has come down. The assets remain the same, but your margins are lower. Any specific reason where you see this Islamic banking issues because your profitability is down, the margins are down? That is my first question. On the second question, I just want to understand your international operations. If you look at the international operations, this year has been a pretty good year.
I could see you have been doing pretty well in terms of the commission fee and income, which has boosted, and also the impairment that has been reversed. Any specific reason for this? Because your profitability of international banking has moved up from OMR 2.6 million last year to OMR 5.5 million, which is pretty strong. Any reason for this international banking business? Any turnaround, or is this going to be the new phenomena? That is my second question.
My last question is on the strategic investment portfolio. The portfolio which you got approval in the beginning of the year to invest OMR 150 million in the GCC banks. Have you completed this program, or what stage we are in? Is this portfolio will be reflecting in the form of What kind of accounting treatment will be there? This will be a FVTPL or, because I am not part of the earlier calls in the earlier quarters, I just want to understand any impact or how much you have invested in this strategic investment portfolio. These are my questions. Thank you. Thank you, Waleed.
Thank you. Thanks, Sunder. 1st, in terms of the Islamic banking profitability, we believe that this is situational. Most Islamic banks in Oman rely quite heavily in terms of, on its deposits and funding on institutional deposits. Those come at a higher cost. Repricing them and adjusting them to market conditions becomes a challenge. That is where one significant impact has on Islamic's top line. Because of the rising interest rate scenario, that is one challenge that they had. The top line and the margins have been under pressure. Similarly, also, certain one-off provisioning that was done on some corporate exposure, and also given some refinancing and repayments that were done by some large corporates as well, that has impacted. We see this as sort of a challenge in the short term because of certain fundamentals within the Islamic banking business.
We don't expect it to be something that cannot be managed over the medium term. It is more or less situational, I think, transactional rather than a core fundamental issue with the business. In terms of international operations, yes, you are right. The business has turned around, specifically in Saudi Arabia. Also our investments in Al Salam Bank and SICO Bank in Bahrain have also yielded good results for us in terms of dividend distribution. More importantly, Saudi is on a good trajectory, and we have been able to turn it around, and we see some good business potential coming through that in the future. We expect the international story, we have almost exited Kuwait, so we don't expect any negative impact that can come from that. We are still on our timeline to exit it completely by early or during 2025.
Hopefully, we do expect the international portfolio to be making good value for us in the medium term. Hopefully this trend will continue. That is our expectation. In terms of the strategic investment portfolio, we have just started in July. In fact, our activities in it is not completed yet. We will be completing it within a period of three years in terms of our total investment and possible leverage. We have already started investing in it, and it will come as a fair value to P&L. That is the treatment that it will be done at. Joi ce Mathew again. You have another question, Joice?
Yes.
Yes.
Sheikh, this is regarding the cost to income ratio. You have one of the best quarters or even six months during this year where the efficiency has been at the peak. How much further room do we have in terms of improving the cost to income ratio? Right now, we are staying somewhere around 38%.
Yeah. You see, I know where you're going with this, Joice. We have to be fair to the business. In order for us to grow organically, and what has been supporting us is our infrastructure, whether it is the digital infrastructure or the branch infrastructure. Our customer base has increased substantially over the past few years, mainly because of that. We have to continue to invest in our infrastructure. While this drop in cost to income ratio is mainly a factor of the higher top line, we do not see that this is going to be our sweet spot to remain in.
I think there will be some cost increase in the future due to our continued investment in our infrastructure, which will also support the top line. So we look at 39%-40% as a good place to sort of be in and budget on. But that is still much, much below our peers in Oman. Is that a fair answer, Ganesh? Okay. Joice, Sunder. I will give Joice if he has a follow-on, and then we will go to Sunder.
Thank you very much for that answer, Sheikh. That is very clear.
Okay, thank you.
Thank you.
Thank you. Sunder?
Yeah. Thank you.
Hi. Because I couldn't unmute. Sorry, I think I cut off. Thank you, Waleed, for the previous answers.
Yeah.
A couple of follow-up on this. Just want to understand, because we know the competition from the regional bank is also there. You talked about several large projects like railway and other bigger projects, green energy, and other stuff. How competitive are the local banks? Is it price-wise we are competitive? We just want to understand that competitive scenario, especially from the larger regional banks. That's my one question.
The second is on the follow-up on the, we have gone through the interest rate cycle, which is on the uptrend for last couple of years. We are going to have a downtrend in the interest rate, which is where we are aiming for. Starting next month, we are talking about rate cuts. How well are Bank Muscat in terms of I know you are one of the banks which has the largest CASA. Do you see any impact on the margin? How fast do you see the provision of the funding impact and the margin? How do you see that at the bank perspective? Thank you.
Thanks. Yes. In terms of competition, that is a reality, both local Omani banks as well as the regional banks. I think the main factor that helps us in terms of this particular scenario is our diversified funding source and our cost of funds and how we are able to mobilize the CASA, as you rightly said, through a wide branch network, giving us a favorable cost of funds, and that will make us more agile to handle the competition from the regional players as well as from the Omani players. Nevertheless, it is definitely going to have an impact on margins moving forward, and that is something that we have recognized from previous. We have said before that competition will always continue to have a pressure on our margins.
We have to make sure that we are agile in handling our cost of funds, and that is what we have been able to prove in the past several years, to make sure that our margins, our NIMs remain intact and robust. That is something that we envision will continue for the future. In terms of the rate cuts, you see, for us, the dollar piece, it is matched by repricing or variable rates on our dollar lending. So whatever happens on the liability side will also be matched on the asset side.
So we expect that we are able to hedge that quite well and moving forward. Also, in terms of the Omani rial piece, we are seeing interest rates dropping, which will also help us in terms of the cost of funds and help improve, hopefully, maybe the margins over the coming period. So that is really when it comes to the global scenario on dollars. We are quite well hedged in terms of the liabilities and the assets.
Good. Thank you. Thank you, Waleed, for all your answers. All the best for you.
Thank you very much, Sunder. Sumaya.
Sheikh Waleed. Good afternoon.
Welcome.
Thank you. Good afternoon to you and to the whole management. Thank you for the presentation. I just have one question, actually, because you guys touched upon everything I was looking into. It is regarding the Iskan program that was launched by the Government of Oman in 2024, and I see Bank Muscat not being a participating bank. Your competitors are. I was wondering what the rationale for that is, and would we be expecting you to participate? Do you see that it could provide you with further stimulus via retail book? Just if you could touch upon that, please. Thank you.
Yeah, sure.
Sure. This is Ahmed, C hief Banking Officer of Bank Muscat. Yes, we were the part among the banks who've been discussing the Iskan programs in Oman. The main issues with Iskan programs while we're trying to get in is a long-term commitment from the bank. We need the terms and conditions from the whole stakeholders, whether it's the customers or the bank and the Oman Housing Bank. It should be looking at a long-term rather than the short-term. We're having a few rounds of the discussion. It's still we end the discussion to be a part of the Iskan program. That is the mismatching between the short-term and the long terms, entering such a program.
Sumaya, there are a number of different opportunities where we are already in, aside from Iskan, when it comes to Sultan Haitham City and the large potential there. We are there on the forefront. As Abu Ahmed said, there are some areas that we are discussing with Iskan program, in terms of matching our expectations of the structure. There are also a number of different opportunities that are available for us on the mortgage lending space.
Okay, perfect. Thank you, guys.
You're welcome. Thank you very much, everybody. We really appreciate your attending with us today and look forward to, Inshallah, more future sessions with you. Have a good afternoon and all the best. Thank you.