Good afternoon, everybody. I would like to welcome all of you for this session on our results for 2023. Thank you very much for taking the time to join us today. Also, thanks to Muscat Stock Exchange for giving us this opportunity. Colleagues here with me are Ahmed Al Bulushi, Chief Banking Officer, Ganesh, who is our Chief Finance Officer, and Sheikha, Chief Operating Officer, are with me today. First is, of course, the disclaimer. This is the usual disclaimer: that this is all based on available information, and it is not an invitation to buy the shares of Bank Muscat, but more of a discussion session. [Non-English content]
[Non-English content] I am going to take the opportunity to go through this session by going through the operating environment first and then the banking sector in Oman. Then I will talk about the Bank Muscat strategy and business lines very briefly. Then I will move into the financial highlights and the results for 2023. Following all of this, we will open it for questions- and- answers, and I will be shifting between English and Arabic as I have done in the past in each slide.
The first piece is talking about Oman's economic environment, and we are quite pleased to see that the recovery is continuing to gain traction in 2023, which is supported by improving economic and business conditions. That is mainly coming through from an increase in oil prices, as well as consecutive years of budget surpluses resulting from the government's progressive vision and bold fiscal, economic, and structural reforms. Also, the elevated levels of hydrocarbon prices during 2022 and 2023, which were averaging between $80 - $95, have remained much higher than the benchmark budget prices. The efforts also in terms of the government trying to diversify the economy and increasing non-hydrocarbon contribution and the revenues, also rationalizing public spends and reducing the public debt. All of these have done well to stimulate economic recovery and helping the government in also enhancing its social spending.
The government was able to, in fact, utilize oil revenue surpluses generated in the last few years in paying off the public debt and reducing the impact on the current rising interest rate scenarios. So, debt-to-GDP ratio reduced from 61% in 2021 to 40% in 2022, and further to around 35% in 2023. The healthy fiscal position has also resulted in an upgrade of the sovereign ratings, which is now just one notch below investment grade. Sovereign spreads have also become nearly at par with average GCC countries and well below some of the emerging markets. Also, non-hydrocarbon growth accelerated from about 1.2% in 2022 to 2.7% in 2023, and inflation has receded from about 2.8% in 2022 to 1.3% from January to September 2023. In 2024, the government estimates the economy to grow by about 3% while continuing to maintain the annual inflation at moderated levels.
2024 budget, in fact, signifies economic activity, including development and investment expenditure in various strategic projects, along with social spending in key sectors such as education, health, social welfare, and housing. Now I switch to Arabic. [Non-English content]
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[Non-English content] Now we move to banking sector. Your money banking sector has continued to expand in the pivotal role in supporting the economy. The banks have demonstrated sound asset quality and that is quite evident in the low non-performing loans, ratios, and also maintaining quite strong capital buffers. Also the prevention in the quality indicates show that the banking system continued to maintain sufficient short-term and long-term liquidity buffers.
All of these robust financial indicators, as well as regulatory oversight and guidance, have bolstered the sector's resilience and shielding it from the adverse impacts experienced externally and globally. In fact, starting from 2022 and continuing in 2023, the sector witnessed good growth momentum, which is supported by the economic recovery and the positive macroeconomic outlook. During 2023, the sector credit portfolio increased by about 4.3% compared to 4.8% in 2022. Conventional banks grew by 2.5%, but Islamic banking entities, in fact, recorded even a better growth rate of about 11.8% for the same period. Deposits have also increased by around 12.4% after a modest growth in 2022 of 1%. Compared to conventional deposits, again here, Islamic banks have also grown at a higher rate of 12.8%. We have also seen the bank's wide net profits clearly surpassing the pre-pandemic levels.
As I have discussed earlier, on the backdrop of Budget 2024, which is promoting expansionary investments in several key sectors of the economy, as well as the elevated levels of oil prices, the positive macroeconomic outlook, and the government's concerted efforts on reforms and developmental strategies, we expect that it will provide the much-needed booster for sector growth in helping it achieve better financial performance and a stronger financial position for all Omani banks in the coming years. [Non-English content]
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[Non-English content ] In this slide we can see the stable growth of the key parameters of the banking sector. Loan growth is around 4.7% compounded annually since 2017, which is quite healthy, ensuring good growth in customer deposits also of 4.8% year-on-year. Profitability of the sector was relatively stable until 2019 and 2020. Obviously, banks globally have witnessed a decline in net profits, and Oman was no exception after witnessing around 30% reduction in net profits for the top seven Omani banks. That has significantly improved by 20% - 24% during 2021 and 2022. Further, during 2023, we witnessed profit improving by around 11%.
We expect the sector to grow at mid-single digits in terms of credit and deposit growth going forward. There could be some short-term impact on asset quality and collective provisions, mainly as a result of the COVID era, and also due to the global geopolitical reasons and the interest rate scenario. Banks would always have to tactfully and tactically manage their liquidity, but in the medium term, we expect that the performance will be quite stable. [Non-English content]
These are our focus in terms of also making us focus on serving our stakeholders better, and stakeholders are everyone from customers, employees, shareholders, and all the societies we work in. Of course, the bank continues to focus on leveraging its strong brand value, its financial position, and HR strength to deliver the best possible value to our stakeholders and strive to be better every day. This is a quick snapshot of various business lines in the bank . As you know, the bank provides all banking services with well-established business lines, including corporate banking, personal banking, wholesale banking, and Islamic banking services. These bank business lines have been performing well over the last few years by proving healthy profit contributions. In general, corporate banking, personal banking, and wholesale banking contribute about 25% - 35% each, and Islamic banking around 4% - 6%.
Our overseas operations have contributed 1.4% to our bottom line. Islamic banking successfully continues to have the highest market share in terms of assets in Oman and has shown quite a robust growth since inception. The bank has a well-diversified portfolio, as shown in the graph. On the right side also, the deposit portfolio is quite strong, driven by retail deposits and supported by government and private sector deposits. [Non-English content]
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Operating expenses increased moderately by around 6% relative to the growth in the business and administrative activities, as well as some infrastructure expansion. The bank's loan portfolio showed a growth of 4.9% on a year-on-year basis. The deposit portfolio also showed a growth of 9.1%. [Non-English content].
This slide provides a quick snapshot of the operating performance of the bank over the past few years. As you can see, the bank's NIMs has been stable over the last five years. The bank, in fact, has been able to manage the yield and funding costs to maintain these NIMs. The bank's fee-based income was stable around 31% - 35% of total income throughout this period. For the year 2023, cost-to-income ratio marginally reduced to 38.3%. In terms of the ROE of the bank, the bank has also witnessed a significant improvement in terms of from the lower levels of 9% in 2020 to reach around 12.7% in 2023. Current ROE period has improved due to higher profits and also reflected the positive impact of the capital structure optimization that the bank completed in 2022.
Bank's ROA also continued the healthy momentum and reached around 1.6%, the highest when compared to the levels seen in the last five years and after reaching a low of 1.3% in 2020 during the pandemic. [Non-English content]
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We continue our prudent provision and credit policy to ensure that our performance continues to be stable and robust for the years to come. [Non-English content].
In this slide, we talk about the funding and the liquidity position of the bank. The bank has a well-balanced funding mix with around 70% of the funding coming from customer deposit and the balance through interbank borrowings and equity. This has been quite a stable position, in fact, for the bank for the last few years, and it continues to hold a high level of liquid assets that has continued in the last five years. These assets are in the form of very high-quality liquid assets. As I mentioned earlier also, the bank's capital position is one of the highest amongst Omani peers and one of the strongest also amongst GCC peers. The capital position is largely driven by core equity capital, along with retained profits after paying healthy dividends over the past many years.
Due to global challenges, including supply chain issues, high inflation in many markets, rapidly increasing interest rate scenarios, the bank is tactically working towards liquidity management and interest rate management throughout the coming period. [Non-English content].
[Non-English content] I have reached the conclusion of my presentation. I want to thank the Muscat Stock Exchange for this opportunity and thank you for joining us. I will open it now for any questions from your side. [Non-English content] If any questions please. Yes, please.
Yes. Hi. Good afternoon, and thanks for taking my question. First of all, congratulations on a good set of results. My question is more from a macro perspective and then boiling down to Bank Muscat. We've seen the deposit growth rate has far exceeded the credit growth in this year in particular, and also for Bank Muscat. What I'm trying to understand is what do you see that, when is the credit offtake growth going to pick up significantly, which far exceeds the deposit growth?
Thank you. This deposit growth rate exceeding credit growth rates has been a phenomenon, in fact, in Oman, especially when oil prices rise. This is the trend that is quite normal for us. Because there is quite a bit of dependence in terms of the government, 1/3 of all banks' deposits are coming from the government. When there is excess liquidity due to higher oil prices, this does happen. I will answer your second question, which is, "when do you expect more growth in terms of the credit growth?" We have seen quite challenging years when it came to COVID. We also saw 2022 with some decent credit growth, and then also in 2023, and we expect also 2024 to be not an exception to that.
There are a number of projects that are being executed or in the plans that are going to see the light in terms of 2024 and those that have already been sanctioned in 2023. The drawdowns are also happening in 2024. Some green hydrogen projects, the Vulcan Green Steel project in Duqm, certain logistics projects like several road projects, housing, Sultan Haitham City. We expect also growth to come from the retail sector and the housing loans, certain social projects and PPP projects, especially in the school. These are just examples of some of the projects that we expect. The momentum is there. I think that is what is most important. In terms of deposit growth, it is quite good also because it helps us moderate the rise in interest rates and therefore manage our NIMs accordingly in Omani rials.
If deposit rates are higher than growth rates are higher than the loan rates, that also helps us in that particular area. Any other question? Tell me.
Sorry, I had a follow-up on this.
Yes.
Yes.
Okay.
So, is there any timeline you are looking at for this momentum to pick up and actually reflect the numbers?
We have momentum that has already started in 2023. So that momentum is continuing. In terms of this particular momentum, I think to answer your question in a slightly different way, we expect the same similar growth rates to what we have seen in 2023, in 2024. Which is a combination of both momentum that is continuing from 2023, as well as that which will hopefully start from mid-2024 onwards. Now, there is a caveat to this, and that is global interest rate scenario and how that might delay certain projects, depending on how that scenario pans out and what we see and what we hear from the Fed, actually, possibly even indicating one more rate hike during this year.
If you ask me, and I look pragmatically at what happened in 2023, there were a number of rate hikes in 2023, yet we have still seen some projects come on stream and developments continue. So I expect it to, for the 2024 projects, and this is what it will have. From an average impact, I expect us to be doing the same as what we have done in, at least that is what we are striving for, what we have done in 2023.
Got it. Thank you very much.
You are welcome. Who is there? Yousuf. Yes, please, Yousuf.
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Hello.
Hi, yes. Who is this?
Good afternoon. This is Bishen Bhalla from Vision Capital. My mic was unmuted, so can I proceed, or should I wait for—
Yes. No, please. Please. Go ahead.
—thank you so much, sir. Thank you for the presentation and for the answers so far. Just a couple of queries. I want to talk about the restructured loan book. We have seen moderate improvement in the restructured book for Bank Muscat. You had a 12% overall restructured loan book as a percentage of gross loans, which has come down to 10.6%. Given the improving credit cycle and improving economic scenario, how do you see the restructured loan book going forward over the next 12 - 18 months? If you can start with that, please.
Yes. You have a follow-up question after that, right?
Yes, sir.
Yeah, okay. Just so that I keep you in the queue. In terms of the restructured loans, the way we approach this is we work with our clients to identify their cash flow cycles over the coming period or coming years in order to restructure. We take into account where their cash flows are going to be, and we study them quite carefully, and we work with them case by case to reach to a proper repayment schedule. I am happy to report that about 70% of that entire restructured portfolio has already started repayment. The second piece is the balance 30% is not necessarily default, but it is based on cash flow projections and where their cash flows are, they are probably more delayed and more deferred. From that kind of a percentage, I think we are doing quite well on the restructured portfolio.
I have full confidence in terms of its health and in terms of its recoverability. Again, I take things with precaution, depending on where the geopolitical scenario is going to take us, where the economy is going to go, where the interest rates are going to go, all of these factors. From the signs right now, I am quite comfortable in terms of where we see things are going with the restructured portfolio. Does that answer?
Sorry, I went on mute. Yes, that answers it well. Thank you for that.
Okay.
The next question would be with regards to what view do you have on your spreads and NIMs, and have you been able to pass on the entire interest cost to your clients? If you could just comment on that.
Sure. This is a natural phenomenon, especially during these times. We have been tactfully managing, tactically managing this in terms of our liquidity management, in terms of our funding, and in terms of making sure that those are well-matched so that we do not have excess liquidity, so that we are able to achieve the right NIMs. NIMs are going to continue to be, I would not say under pressure, but these are factors that are important for us to keep watching over the coming period. Omani rial funding costs have not relented, and they are continuing to rise. There has been some recovery in terms of the other side, on the loan side, in terms of also matching the yield with the cost to some extent.
On the dollar side, yes, on the dollar side, we are able because those are floating and naturally floating in terms of our funding and borrowing, our own borrowing, as well as the lending that we do. So, on a combination, we have been able to recover in terms of, and pass on the credit, the deposit cost and the funding cost. But it is from a number of factors. One is this, because we cannot also, we have to factor in competitive factors in terms of pricing and growth plans that we have. But we also have to manage liquidity quite tactically to make sure that we squeeze everything that we can from the liquidity that we have so that it does not become a burden on us in terms of funding costs.
Noted. One last question, if I may, please.
Yes.
We have seen the cost of risk remain stable at the 65 bps-70 bps level for the last three years, at least before it peaked in 2020. Do you see it returning to the sort of historic levels of 45 bps-50 bps, or let us say the 40 bps that we used to witness before 2018? Or are you comfortable with this sort of current level, and you see that going forward?
I would see us being comfortable with this level going forward. If it moderates itself, given the economic scenarios, it might fall 5 bps, 7 bps. But I think being a prudent bank and being the largest bank in the country, it is very important to make sure that we have the adequate buffers there to make sure that our performance is sustainable for the future. But these types of levels, I think at 70 is adequate for us. If they improve, it is due to significant improvement in economic conditions and so on.
All right, noted. Thank you so much, and wish you all the best.
Thank you very much. Sumaya, please.
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It is good to hear from you. Thanks to you—
Thank you.
—the team and management for hosting this call. I will be asking my questions in English just so that everyone can get on board, and try to be quick with them. Going to, since you are discussing the loan book, following on the previous questions, loan book growth, you mentioned that you expect the momentum to continue, and there is also promising projects in 2024. Having said that, I still found that the corporate loan growth at 3%, which is lower than the retail book. Retail book is outpaced. It is a healthy growth, but it seems to me a bit modest. Are you expecting to see that you mentioned now there are more drawdowns, further pickup in the corporate lending book, so that towards mid or higher single digits in 2024? That is one.
Pertaining to also competition, and going back to also funding and government projects. We have recently seen an announcement that Oman has established an Oman Investment Bank, and it is wholly owned by the government, and it is going to be in specialized investing in the country. Is there any competition coming from there? There wasn't a lot of details on that per se, so maybe if you could shed light on that. One more question, if you may. I have noticed, and maybe that could be referred also, directed towards Ganesh because it is quite technical. I noticed a slight restatement in 2022 numbers, especially in the expenses and the other income. Just any reason why and what is going on there?
Can you repeat the last question, please?
I noticed restatement of some figures—
Restatement.
—in 2022. I think it was within the expense lines and other income lines. I just wanted to clarify that.
You want to take that in?
Yeah, sure.
Okay.
Thank you, Sumaya. This is Ganesh here. The restatement with regard to expense and fee income is with respect to credit card expenses, which were netted off against the credit card fee income in the financial, which was restated for 2022 as well.
Okay. Perfect.
Thanks, Sumaya. In terms of the growth, we expect it to be in the mid-single digits, on average, in terms of for the sector. For us also around the similar mid-single digits growth. There are going to be a number of IPOs that are being proposed. So that could bring in certain possible financing growth. Also, like the different projects that I have talked about. Retail is really also going to be a key, especially retail housing growth. Ahmed, do you know of anything else that you want to add for Sumaya?
A few infrastructure projects, especially the hydrogens and the green steels, two of them are coming up in Duqm. There is oil and gas, solar renewable for with the JVs, with the Total are coming in. We are in advanced level. All the lenders are advanced level in discussion with them. The other one is the IPOs of OQ, at least two, the largest IPO companies. There will be a financial engineering related to the debt- and- equity ratios before the IPO. The Etihad Rail from Al Ain to Sohar, that is already in the bidding stage of the debt. Those are like a key. Then real estate projects, especially the Sultan Haitham City, is required a lot of housing from retail in the contractors. Standard government infrastructure projects like roads and hospitals are already announced. Oman culture centers have already been awarded and is already in progress.
This is what has been announced and what is in the progress.
Sorry, you wanted to say something?
No, go ahead. I have a follow-up question just after you continue.
Yeah. In terms of Oman Investment Bank, yes, obviously any new bank that comes in forms a new competitive dynamic, and we are watching what sort of business this new bank will be getting into. I think their main aim, as they have said, there are a number of green hydrogen projects initiatives that the government wants to undertake and they are looking at an investment bank to support them or be one of the supporting banks for them, in addition to the existing banks that are in Oman. This is how we are looking at it. But we will see how that develops and pans out. Obviously, every new entrant will have its own competitive dynamics for sure. Hopefully, it will be with an increased pie rather than—
Yeah.
—all of them focusing on the same pie.
Okay, perfect. Just one follow-up question, if you may. Going back to fee income that was just mentioned. The loan book growth was healthy in 2023, an average 5%, but that hasn't translated into fee income growth. Fee income wasn't in line. It was very modest. So what happened there? Are there still fee waivers that have continued from the COVID times, or can you just shed more light on that?
If you look at in 2022, we had a one-off investment income. If you exclude that, our overall fee income growth was about 8%, 8.6% to be precise. But it has come across different areas, treasury, corporate, retail, and so on, wholesale and so on. But within some of the areas, trade finance has not really picked up because not many large projects have happened in the past three, four years. So there are maturing transactions, but that is not getting replaced with new transaction. Maybe the trade finance fee income, core fee income, has been muted, I would say. But for that, rest of the areas, treasury, card side, retail, across different areas, our growth rate has been over 5%-6%.
The fee income generated from those?
Yeah.
Okay, perfect. Thank you so much. [Non-English content] Sheikh Waleed. [Non-English content]
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Joice Mathew, United Securities.
Yes, Joice, please.
Hi. Good afternoon, Sheikh Waleed, and good afternoon, gentlemen.
Good afternoon.
Thank you very much for the presentation and answering the questions. I have basically three questions. The first one is on the liquidity position of the bank. Could you please share some more insights on the bank's liquidity position? What I mean is, you had a good 10% growth in deposits during the year. How do you see the trend in deposits going this year? What is your outlook for deposits? Coupled with that, when we look at the liquidity ratios, we are seeing the LCR coming down from 268% in 2021, and it has reached almost 195% in 2023. My question is, what should be an ideal LCR ratio that we should be looking at for Bank Muscat?
Joice, this is Ganesh here. I will take those two questions. Thank you for those questions. From a liquidity perspective, as you said, we had a very good deposit growth of around 9%-10% in 2023. This was supported with the growth in both CASA as well as term deposits. Our liquidity position across the last three, four years have been very strong and robust. We have not had any change in the funding mix. Pretty much about 70% is our core customer deposits, supported by about 8%-9% of interbank, and the rest comes from equity base. In terms of outlook for deposit growth, I think generally we feel the liquidity in Oman is going to be, in the banking sector, is going to be quite comfortable. The question is, at what pricing? That is the important aspect. Second is, what are the deployment opportunities?
I think briefly, Sheikh Waleed touched upon earlier in terms of credit growth and deposit growth rate. If there are right opportunities at the right pricing, yes, we would continue to mobilize deposits at the level we had seen in 2023. Otherwise, we would be moderating the deposit growth. From a liquidity perspective, we are quite comfortable as always. Looking at the LCR is what you see is as of that particular day position. Our minimum required by Central Bank of Oman is 100%, against which we have been running somewhere between 200 - 300 level. We would continue to be around between 200 - 300 level. At any particular day, it can come down due to some of the liabilities maturing within the one-month bucket. That is more of a rollover plan issue rather than a fundamental liquidity related issues.
Our levels would be 200 - 300 + range. Hope that clarifies, Joice.
Very much. Very much, Ganesh. Thank you very much. The second question is on your Islamic banking side. The results has been very disappointing this year. The profit reached OMR 9 million compared to OMR 13 million last year. It is not just because of any issue with the asset quality, but what I am seeing is, I am seeing decline starting from the operating income level itself. There has been a deterioration in asset quality during this year. The NPL ratio jumped from 75 bps to 2.75% during this year. Could you please explain the reasons behind this and how do you see Meethaq results going forward? When will it be able to recoup and reach new highs? Will it be possible in the near future? What is the way forward for Meethaq?
Sure. Joice, I will take that. As you mentioned, yes, Islamic banking results year on year had a decline. Large portion of that was contributed due to one-off sort of provisions we made in Islamic. As you know, it is a much smaller asset base. If there are pockets of risk sitting, we, as a conservative bank, try to build up provisions over a period of time. As part of that strategy, we created more than OMR 5 million additional provisions over and above what was being done on an annual basis, which had an impact on Meethaq results. In addition, there has been a number of general impacts arising from high interest rate because Meethaq book is much smaller compared to the larger Bank Muscat book in terms of funding mix. The institutional deposits contribute larger portion of funding mix compared to what we see in Bank Muscat.
When there is a funding cost escalation, that will eat up the margins, which we have seen across banking industry except one or two banks, including Bank Muscat Conventional. We did not see much impact. That was naturally expected. As the rates are expected to moderate in 2024 and beyond, we will see margins improving for Meethaq as well. I think these were the two fundamental issues we had encountered in 2023. The top-line issue would be more of external factor, and the bottom line due to higher credit provision is due to our own conservative approach, Joice.
Okay. Thank you, Ganesh. My last question is on your recent announcement of your strategic investment portfolio. You mentioned that you are marking almost OMR 150 million for targeting GCC banks. Will it be possible for you to share your investment strategy for this portfolio? How are you planning to deploy this fund and what are the target markets that you are looking at? Possibly, what is the target return that you might be looking at? I would also appreciate if you can discuss this with the backdrop that the CBO regulation, which prevents banks from owning more than 5% in a single entity.
Sure, Joice. As we have disclosed, the portfolio is largely focused in GCC banks, listed banks, to be precise. The size you talked about, OMR 150 million, and it is not an immediate portfolio-building strategy. It is over a period of time. The whole idea is to have a portfolio built up over a period of time, which are invested for 5 - 10 years and beyond, with an objective of dividend yield and the capital appreciation over a period of time. Specifically GCC banks, listed banks. When we say GCC, it is going to be outside Oman because we cannot invest in other banks in Oman. As you rightly said, yes, within the banking regulations, we will be capped with the 5% in any bank investment.
We do not have any exception from CBO regarding going beyond 5%. Basically, it has to be a portfolio.
It is a portfolio approach, yeah. The approval is for portfolio approach, not a single investment approach.
Okay. The reason why I ask this question is primarily because we have one associate bank, which is Alizz Islamic Bank, and the price of which has appreciated, and that is very much reflected in the equity of Bank Muscat. Will you be looking at additional stake in that bank for Alizz Islamic Bank in the future?
No, I think we are the largest shareholder there at 14.7% shareholding, and that's good enough for us as our strategy.
Okay. Thank you, Ganesh. Thank you very much. Wish you all the best.
Thank you.
Thanks. I have one final question, please, and then we will close the session after this. Who do we have?
Jasim.
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[Non-English content] Thank you very much, everybody, for this great session of discussion. Wishing everybody all the best, and we shall close it now. Thank you.