Good morning, everybody. Thank you very much for joining us today. I want to take the opportunity to welcome all of you. This session is going to be an hour long. The first part of it is going to be a presentation, and the second part will be our questions and answers. Of course, I will introduce my colleagues with me around the table. My colleague, our Chief Operating Officer, Sheikha Al Farsi, is with us today. My colleague, Ganesh, he is also with us, our Chief Financial Officer with us today.
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Of course, if we start, can we go to the next slide? The first is just an administrative slide.
Obviously, we have to make this statement that we would not be able to give any forward-looking statement, but we will be sharing historical data during this session, and we will be addressing any questions that you may have on our historical performance and give certain perspective on what we think some of the future aspects are wherever possible.
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Next slide, please. In terms of the contents of the presentation, I will be talking about the operating environment, as well as the banking sector, and then move on to Bank Muscat and its strategy, and definitely the key financial highlights for the first six months ending June 30th.
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Oman's economic recovery, in fact, as it has been evident for all of us, has been gaining quite a traction in 2023. There has been, of course, we have witnessed fiscal surplus the year before due to higher energy prices.
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Am I. I am getting interrupted. Is there.
They are coming in.
This has benefited, of course, Oman's economic prospects, supporting its external and domestic finances. Of course, in addition to that, the government, throughout these past few years, has undertaken several reformative measures to support and diversify the economy, increasing public revenue, rationalizing public spends, and reducing the debt. Further, the government has reinforced its focus on sectors like manufacturing, tourism and logistics, agriculture and fisheries. In order to enable these different sectors to grow, a number of initiatives have been taken by the governments, including changing and introducing new legislations and promoting foreign direct investments into the country. During the first quarter of 2023, the real GDP grew at an annual rate of about 4.7%. This is according to the data released by the National Center for Statistics and Information, NCSI.
As per the preliminary report, it reached about OMR 8.7 billion for the first quarter, compared to OMR 8.3 billion recorded last year. The fiscal positions continued with a surplus of about OMR 0.7 billion in the first half of 2023. This is on the backdrop of higher oil prices and relatively higher current revenues and a decrease in the public spending. Consumer price inflation has largely remained muted around 2% in comparison to the global inflation average nearing around 9%. The government also was able to utilize the excess surplus in repaying the debt and reducing costs associated with debt servicing. Debt-to-GDP ratio reduced from 61% in 2021 to 40% in 2022. In the first half of 2023, the government has repaid over OMR 1.5 billion in debt, which further improved its debt-to-GDP position.
These additional revenues have also supported the government in deferring any planned withdrawals from the country's reserve. The medium-term fiscal plan and Oman Vision 2040 definitely provide a firm positive anchor in the direction of economic diversification as well as sustainable private sector growth. The budget 2023 is also seen as a growth positive and expansionary budget. It's definitely focusing on large investment layouts, covering a number of different projects across a variety of core sectors supporting the economy and focusing also on public-private partnerships projects, which are going to be a key focus in the coming period. The momentum in the economy has definitely helped the upgrades in the sovereign ratings by the various rating agencies with a favorable economic outlook.
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Now, I will be moving to talk briefly about the banking sector in general. It has been performing relatively well during the challenging times in the past few years. In fact, some of the growth parameters, which are shown in the next slide, show that sectoral performance has been good in the last four years. The banking sector has been supporting different business segments in Oman through credit support. The key sector's key parameters, which include liquidity, capital adequacy, asset quality, are relatively at healthy levels. Starting from 2022 and continuing on through the first half of 2023, the sector did witness a quite good momentum. This was obviously supported by the economic recovery and the positive macro outlook.
In May 2023, the sector credit portfolio grew by about OMR 1.8 billion, giving a growth of about 6.4% year-on-year compared to May 2022. Deposits have also matched that growth, growing by about OMR 1.5 billion, around 6% for the same period. Net profits for the banks have almost reached the pre-pandemic levels. As I had discussed earlier, the budget of 2023 promoting expansionary investments in key sectors of the economy and, of course, the lifting of the pandemic-related restrictions and the government focus on reforms and development strategies. This, we expected to be providing a very much needed booster for sectoral growth and helping it in also achieving improved financial performance and a strong financial position for all Omani banks in the coming for 2024 and beyond.
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In this slide, we can see the stable growth of the key parameters of the banking sector. Loan growth is around 4.7% compounded annual growth since 2017 up to May 2023. It is quite healthy, ensuring that the growth is also matched with customer deposits growth of about 4.5%. Year-on-year, we can see some clear momentum gaining traction in credit growth after two years of subdued economic activities due to the pandemic. Of course, the profitability of the sector was relatively stable until 2019, but in 2020, banks globally have witnessed a sharp decline in net profits, and Oman, of course, was not an exception.
In Oman, after seeing a 25% reduction in net profits for banks, this has significantly improved by about almost 18% rebound in 2022. In June 2023, we see also profits improving by around 17% compared to June of last year. So the momentum is gaining positive traction for all banks. In terms of growth over the coming terms, it is expected to be around mid-single digits in terms of credit and deposit growth going forward, similar to what we have been witnessing. Obviously, these have to be prudently managed, and given the positive economic outlook, we expect that these impacts are going to be mitigated to some extent. Naturally, also, the global geopolitical scene and interest rate situation is going to have an impact on any future outlooks, and the banks would require to be tactically managing its liquidity. But in the medium term, we expect a stable performance.
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Efficiency, productivity, and innovation, these are strategic pillars that we wholeheartedly believe in. Our strategic focus, our strategic initiatives stem from these strategic pillars. We are definitely focusing on serving our stakeholders better every day. We continue to focus on our strong branch value, our strong financial position, our strong human resources to deliver the best values for our stakeholders and the betterment of every day.
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This is a quick snapshot of the various business lines in the bank. As you all know, the bank does provide all banking services with well-established business lines, including corporate banking, personal banking, wholesale banking, and Islamic banking services. These business lines have been performing well over the last few years, providing healthy profit contributions to the overall bank. In general, corporate banking, personal banking, and wholesale banking contribute around 25%-35% each, and Islamic banking around 6%-7% contribution to the bottom line. Our overseas operations have contributed about 2.5% to our bottom line. Our Islamic banking window, Meethaq, continues to have the highest market share in terms of assets in Oman and has government and private sector deposits. [Foreign language]
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Now, I'll be talking about some of the key financial highlights. As you can see, the bank's top-line performance was strong in spite of the continuing global and regional challenges. Net profit was higher by 5.1% over June of last year, with healthy business growth and prudence on credit costs. Non-funded income also improved in June 2023 by about 5% after excluding the one-off investment income of last year. Operating expenses increased by about 5.6% relative because of the growth in the business and administrative activities and infrastructure expansion. Bank's portfolio has also shown a growth of 9.7% year- on- year. Deposit portfolio has also shown a growth of 2.8%.
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This slide provides a snapshot of our operating performance over the past few y ears . As you can see, the bank's NIMS have been quite stable over the last five years. Bank has been able to manage the yield and the funding cost to maintain the NIMS. Bank's fee-based income was also quite stable and quite impressive, actually, at 31%-35% of total income throughout this period. Our cost-to-income ratio reached 38% compared to 39% in June, and that is due to moderating costs, managing costs, and any increases there are actually maxed with even higher increases on the top line, thereby making sure that our cost is maintained within efficient levels. The ROE of the bank has also witnessed a significant improvement from the lower levels of 9% in 2020 to reach about 12.5% in June 2023.
The current period ROE has improved due to the higher profits and also reflected the positive impacts of the capital structure optimization that we have completed last year. Bank's ROA continued the healthy momentum growing and reaching 1.6%, the highest when compared to the levels seen, in fact, in the last five years after reaching a low of 1.3% in 2020 during the pandemic.
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This slide talks about asset quality and the asset trend over the last five years. You can see that the bank has been able to maintain an NPL ratio of around 3%- 4% throughout the period. The coverage ratio continues to be at a much higher level, ranging between 125% to 163% in the last five years, reflecting the bank's prudent policies. The gross loan portfolio is also well-diversified, well-managed with a prudent credit policy. The bank was able to grow gross loans by about 5% during June 2023 after growing the base by 3.3% the previous year. The bank continues its prudent provisioning policy and credit policy, make sure that our performance for the coming periods remain as stable and with a positive momentum as has been in the past.
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Sorry, this is the last slide I will be having and then I will open it for questions and answers. Here, we talk about funding and the liquidity situation of the bank. The bank has been well-balanced in terms of a funding mix with around 70% of the funding coming from customer deposits and the balances through interbank borrowings and equity. This has been quite a stable and healthy position for the bank over the last few years. The bank also continues to hold high levels of liquidity assets over the last five years. These assets are in the form of very high liquid assets.
As I mentioned earlier, the bank's capital position is one of the highest amongst Omani peers and one of the strongest amongst GCC peers as well. The capital position is largely, as you will see, driven by core equity capital along with retained profits after paying healthy dividends over the past several and many years. Of course, due to the global challenges, including supply chain issues, high inflation in many markets, rapidly increasing liquidity management and interest rate management that is going to ensure the sustainability of the profits and the performance of the bank moving forward.
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Now we can start the questions and answers. If you have a question, please do the raise hand click and we will call and unmute you for your question.
Mr. [Yusuf] has a question. Please, Mr. [Yusuf], unmute yourself.
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Yes.
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Miss Sumaya has a question as well. Can you unmute yourself, Miss Sumaya?
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Waleed, good morning to everybody. Thank you for the presentation. This is Sumaya from SICO Bank. I have a few questions, if you don't mind. I am going to ask them in English. First of all, regarding your fee income in this first half of 2023, there has been growth, but relative to last year, the average quarterly fee income recorded is lower. Is there a reason behind this? [Non-English content ]. Regarding your loan growth, which has been healthy and relatively in line with the sectoral growth. However, we have seen a bit of a slower growth in 2Q23 versus the first quarter. That could be attributed-
Sorry. Which one? Accelerated, you said?
[Non-English content]. The growth in the first half has been generally healthy in line with sectoral average. [Non-English content ] into first Q 2023 and second quarter, the second quarter saw a bit of a slowdown. Is this attributed to seasonality [Non-English content ]?
Okay.
Going forward, you mentioned that you expect the general sectoral growth in Oman to be in line with GDP growth around 4%-5%?
Yes.
And I'm presuming that's non-oil GDP growth. [Non-English content] can we expect Bank Muscat growth to be in those levels? The third question is regarding your, so, t here has been a lot of talk in Oman about lowering the debt, and the government has been focusing on that, and the debt-to-GDP ratio has gone down significantly. Does this mean that in the next period, you are expecting the government's focus to shift? Because they've been talking about that. The first focus was lowering debt and then to support the non-oil GDP growth. Is that going to translate into stronger corporate lending to semi-government, more projects, or are you already seeing that? [Non-English content].
[Non-English content] Sumaya. Thank you. Welcome from SICO Bank, Bahrain. Let me take some of the questions, maybe not in the same order. Loan growth, that's purely client-driven, mainly in terms of some disbursements were delayed compared to others. I would not really read too much into it vis-à-vis what could be the balance of 2023. The slowdown or the uptick again. But we need to take the full year into account and what our envisioning for the full year. That is still mid-single digits in terms of loan growth. But it's just purely client-driven. Certain disbursements were delayed, certain repayments were made, and so on and so forth. Nothing fundamental per se. We still expect a good momentum moving forward.
In terms of growth in the economy, and I will also ask my colleague, Ganesh, our Chief Financial Officer, to chip in whenever he wants after I give my little spiel. In terms of anticipated growth and the government spending and its direction of repaying debt previously, yes, I think that it is going to happen. But the focus is more on public-private partnerships, I think, more than the government infusing more money into infrastructure. GREs, yes, are expected to be growing, and especially in terms of their offtake of credit, as well as PPPs that are coming into the pipeline.
We see that there are certain movements taking shape, whether it's in the health sector in terms of PPP, educational sector in terms of PPP, and other also infrastructure sectors, in addition to the other sectors in agriculture and fisheries and logistics that have been already focused on in the past. While I think moderating debt is going to continue, and not necessarily, I don't see from my personal view where I'm sitting, that further debt reduction may take shape. But I think there's going to be a moderation in terms of the offtake for the government in terms of any new debt and so on. But that's just my own personal perspective.
In terms of growth for us as a banking sector, yes, we are, and as a result of what I have just talked about in terms of the government's outlook, the outlook on the government spending and its direction and focus vis-à-vis 2023 and 2024, and 2014 in particular, we see that there is a good momentum, and we are seeing it. We are seeing it in our results, we are seeing it in our activities. We are seeing it in terms of how when we are talking to clients, that the positive momentum is there. Ganesh, I think I forgot the fee income.
Yeah, sure.
You take that.
Yeah, sure.
The other ones, if you have anything to add.
Yeah, sure. Thank you, Sumaya, for those questions. Maybe I will cover the fee income and then give some perspective on other aspects as well. From a fee income perspective, if you see the overall total income coming from various fee-based activities, we had a decent growth year-on-year. Last year, if you recollect, we had a one-off investment income from sale of a particular investment in Q2, and that was substantial as a one-off item. As a result, we had lower fee income, in general, for Q2 of 2023. But if you look at certain components of fee income, we had a very strong growth, over 5%-6% in different components. So that is on the fee income perspective. From a credit growth, Q1 to Q2, as Sheikh Waleed talked about, there are specific transaction, large value transaction could drive a growth in a particular quarter.
The second quarter, we will see moderate, regular organic growth type of growth rate on loan. So in Q1 this year, yes, obviously, we had a very strong growth driven by corporate lending. Q2 as well, we continued that momentum, but the lower rate compared to Q1. But as we have been talking about the guidance for the whole year, we are looking at a mid-single digit to maybe elevated single-digit level growth. But the year-on-year growth was quite strong at 9.7%, compared to last year, June 2022.
Neetika has a question. Can you unmute yourself?
Yes. Hi, good morning. This is Neetika Gupta from Ubhar Capital. Thank you for taking my questions. I have two questions. One is, that we've observed the CASA ratio, it has sort of declined a little in the second quarter from 66% in 1Q to 60% in the second quarter. While this is sort of normal because high interest rate environment, we would expect some sort of CASA migration. But my question is that the sustainable level for the full year, or would you expect some more migration to happen considering the interest rate environment still remains? Secondly, my second question is on the cost-to-income ratio. It has been quite reasonably good levels in even Q1 and Q2, 38.8%, which is very good level for a bank of this scale.
Is that a sort of reasonable level we should expect going forward, or is it just a temporary seasonality? Thank you.
Thank you, Neetika. In terms of CASA, it represents two elements. One is the current accounts, and the other one is the savings accounts. Obviously, with the increased economic activity and momentum, and after the pandemic, because the pandemic had seen significant levels of increases in CASA. Now, those funds are being spent, and so we're coming back slowly to the normal levels that we have seen before the pandemic. Yes, higher interest rates are going to have an impact, and competition is going to have an impact. But we remain focused, very focused, on ensuring that we continue our strategies to have a high level of CASA moving forward, whether it is through our branch network, whether it is through our technology in terms of systems for corporates and our mobile and Internet banking, enhancements of services there, customer acquisitions and so on.
We'll continue to focus on that. But as of now, we don't see the drop as a major cause for alarm other than the fact that it might have, of course, a cost to us and the different banks in order to actually maintain certain levels of where we want them to be. The cost-to-income ratio. Yes, we're quite proud of the levels that it is at. But I think if we are talking about the 40%-41% levels is really what the norm should be. Notwithstanding that, of course, we're always going to be cost-prudent. But we also have to continue to invest. We have to continue to invest in our infrastructure. We have to continue to invest in our expansion of branches. We have to continue to invest, very importantly, in our technology and upgrading the technology and acquiring new technology.
We are working quite hard in terms of ensuring that we transfer a lot of our branch services into our technology platforms and technology channels. We expect that there is going to be some uptick in the CapEx, at least in terms of. If there is any uptick in OpEx and so on, that has to also be matched with higher revenue. That is generally where I can put it.
Mr. [Jassim] has a question. Mr. [Jassim], can you unmute yourself?
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Can you unmute yourself?
Thank you for the presentation. I have a follow-up question on your growth outlook. It was a very strong year that we had, and you are very confident about continuing with this positive momentum. Can you throw some light on which are the areas or which are the sectors that you see will be driving demand over the short to medium term?
We can definitely see in the retail sector there is good momentum and good growth. We can definitely see also the medium to large corporates, there is a good potential growth. The oil and gas, hydrogen sector, downstream oil and gas, tourism is a good potential for growth and we are seeing that. We are seeing some transactions being discussed now in those areas, in different, like I said, education, healthcare, logistics, and so on and so forth. So we see quite a bit of momentum there. The key aspect to all of this is obtaining funding at the right cost so we can pass on that right cost to all of these different opportunities. That's what's going to be important for all banks in Oman.
This is a challenge now because banks from outside Oman can compete with the lower funding costs for all of these different opportunities that are here. Nevertheless, those who are able to obtain optimized cost funding are going to be able to also partake and participate in a number of these different opportunities.
Mr. [Jassim] has another question. Mr. [Jassim], can you unmute yourself?
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[Non-English content] I want to highlight that the market has already opened. We need to please keep this brief and finish in the next, because we have allocated an hour. If we can, I know there are still some participants that are interested. So I would kindly request you to please be brief with your question, and I will be brief with my answer so that I can take the maximum. How many do we have so far? I will take the four that are there. Please keep it brief. Thank you so much. And then I am closing after that. Thank you.
[Bishan] has a question. [Bishan], can you unmute yourself?
Hello.
Yes, please go ahead.
Good morning, Sheikh Waleed. Thank you so much for the presentation and patiently answering our questions. Just one quick, brief question. We have seen the NPL levels and the restructured loans for the banking sector build up. What are your thoughts on the cost of risk or the risk that remains in this system? We have seen loan growth, we have seen profitability at very good levels, pre-pandemic levels. As you said, dividend payments are strong. How do you see risk evolving? Do you think it would still take time for the pain to sort of phase out? Or is it something you have seen considerable improvements of?
Thank you. It will all depend on the fundamentals of each different institutions, and how their risk measures and risk management have actually started with vis-à-vis what they already have in terms of their own portfolios. Overall, I think given the positive economic momentum, I think we should be able, from Bank Muscat, we are quite capable of handling. Yes, there are going to be, like I said in my presentation, there are going to be some challenges in the short term and the possible medium term. But those are going to be managed and mitigated through the higher levels of provisions that we have, and that's just natural. We do not see any major surprises, God forbid, unless any geopolitical situations or global market dynamics shift differently over the coming period. I do not really foresee any major change moving forward vis-à-vis the cost of risk.
Albeit we have to keep watching it and see how this momentum can actually mitigate some of the challenges that were there and created due to the pandemic.
Sumaya has another question. Can you unmute yourself, please?
Just one last question, Sheikh Waleed. Regarding the NPL ratio and write-off in this period, do you expect now, things are normalizing, to go back to pre-COVID levels at 3% levels? Or is the new norm going to be around hovering near 4% levels? Regarding the write-offs, I've noticed that you've written off nearly OMR 6 million by June 2023. Are these write-offs mostly corporate, SME, or retail loans? Is there an expectation of a pickup in write-offs in the next period as well?
Hi. Thanks, Sumaya. From an NPL ratio perspective, it's been about 3.7% for the last two years. I think it will remain around those levels for the near future because we've just come out of pandemic and the restructuring of facilities. We need to wait and see how the economic pickup and the business performance in general. According to that, NPL ratio just for the system is going to be around these levels, and it could get elevated, specific cases for specific banks. From a write-off perspective, these are very normal, usual write-off what you see based on the cases which have gone through legal or settlement. As and when that materializes, that goes through. There would be two components when you see the provisioning movement, so write-off and the write back. We also have a large level of recoveries.
We do about OMR 40+ million per annum write- back. So those components are part of the provisioning movement. These are very normal for the business.
Mr. [Joyce] has the final question. Can you unmute yourself again?
Thank you. My question is on your investment in Salam Bank. You are the majority shareholders, and we have been seeing steady improvement in the performance there. Also recently, we have seen the prices also reaching decade highs. Can you please tell us what is your strategy on this investment?
It's simple. We continue to have different, w e are invested in Oman quite heavily, 95% almost of our business is in Oman. We have investments. We are quite satisfied with where they are. They were not at that level seven or eight years ago, but have turned around beautifully. So it's quite a good contribution to our performance. Thank you. That was the last question. Thank you very much, everybody. We really appreciate this interactive session. I hope it was useful to you, as it was indeed very useful for us. I wish you all the best today and a very nice weekend.