GROWTH IS THE KEY
The OER-Gulf Baader Capital Markets survey underlines the strengths and challenges facing the biggest Omani banks in the Sultanate

The middle of a global financial crisis is an interesting time to conduct a banking survey. While the period under review 2005-2008 – in which the economy has performed exceptionally well does not take into account the travails that the banking industry has undergone in the last two to three quarters, it provides a useful context to assess the outlook and challenges facing the industry.

On an initial reading, there appears to be few causes for serious concern. Growth has been robust, asset quality has been very good, productivity and efficiency measures have been strongly positive. Regulatory barriers have worked well in keeping the sector insulated from the troubles faced by the financial sector globally. “Banks in Oman have done well and have not been impacted by the global economic crisis,” says AbdulAziz M Al Balushi, CEO, Ahli Bank.

Most Omani Banks have established a strong franchise to raise low cost deposits. The ability to grow that base is critical to their effective management of the balance sheet for maintaining adequate liquidity, lower their cost of borrowing and subsequent higher net interest margins and finally for establishing a diversified risk based asset product portfolio. In the next few years, banks need to concentrate on effective channel management, offering value added services, building brand recall and recognition to support their growth.

Banking sector’s resilience
The ability of Omani banks to remain resilient to the global meltdown deserves kudos. At a time when banks around the globe have collapsed, or have been resurrected, banks in Oman have stood tall. The banking sector in general has shown good growth in net profits and deposits, despite prevailing economic conditions.

According to Global Investment House, the combined profits of all listed banks in Oman, increased by 9.2 per cent in 2008, from RO179.7mn in 2007 to RO195.9mn. This is despite the GCC region witnessing a sharp downturn in performance from banks. According to the monthly bulletin, published by the CBO, credit growth in 2008, moved-up sharply to RO9.25bn, as against RO6.51bn for 2007.

The credit growth in 2008 clearly suggests that banks are not wary to lend and the growth of the economy would continue, riding piggy-back on such lending. Interestingly banks in Oman have no exposure to the US mortgage market and are well capitalised to brace the economic storm. A large part of the credit for this must go to the Central Bank of Oman (CBO), for ensuring that stringent guidelines are in place. “I think it has been a case of adopting prudent measures by the CBO, and at the same time ensuring compliance,” says Dr Mohamed Abdulaziz Kalmoor, CEO, Bank Sohar.

The Central Bank often intervenes to ensure sufficient liquidity in the system, as also ensuring that banks meet the guidelines in terms of capital adequacy and other provisioning. At the end of December 2008, the aggregate deposits of commercial banks increased by 32.1 per cent to RO8.6bn.

It’s the economy
The global slowdown has led to a moderation of expectations on all fronts: consumption, corporate earnings and investment. The good news is that Oman’s economy will continue to grow at a good rate compared to the rest of the region and this augurs well for banks. All in all, according to analysis done by OER, banks in Oman have been resilient and doing well compared to peers in the region. And, if banks have done well during difficult times, they are sure to witness buoyant times, when global recovery happens.

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Safe, Sound…and SURGING
The banking sector in Oman, a bulwark of the economy, has remained insulated from the global turmoil. HE Hamood Sangour Al Zadjali, Executive President of Central Bank of Oman reveals the measures taken and the robustness of the banking sector in Oman

How has the banking sector performed in Oman during the last year?
The Omani banking industry is adequately capitalised, has exhibited healthy growth in assets, improvement in asset quality, higher provision coverage and increasing level of profits. The performance of the banking sector during the year 2008 witnessed growth in all major banking aggregates. Total assets of commercial banks, increased by 33.9 per cent to reach RO13.8bn as at the end of December 2008, year-on-year.

The fast expansion in assets was driven by 42.3 per cent growth in credit seen predominantly in construction, manufacturing and the services sector. Total credit stood at RO9.3bn as at the end of December 2008. On the liabilities side, aggregate deposits increased by 32.1 per cent to RO8.6bn. Commercial banks core capital and reserves stood at RO1.56bn and the Basel II capital adequacy ratio for banks in Oman averaged 14.7 per cent 2008, which is significantly higher than the mandated 10 per cent.

Provisional figures for net profits of commercial banks for the year 2008 stood at RO236.4mn, a rise of 10.6 per cent over the profit level in the previous year.

CBO has relaxed lending norms for banks in the last few months. What prompted CBO to take this step?
In view of the difficult conditions facing the global financial markets and in particular the credit squeeze experienced in certain countries, central banks all over have adopted an easy monetary stance. Given the possibility of some indirect effects on liquidity and to ensure greater flexibility for banks in their credit deployment, the CBO reduced the reserve requirement for banks from 8 per cent of deposit liabilities to 5 per cent. The CBO also eased the lending ratio limitation for banks from 85 per cent to 87.5 per cent with effect from January 1, 2009, to avoid the possibility of any regulatory induced credit contraction.

Have banks in Oman been affected by the global financial crisis?
The global financial crisis, which started in mid-2007, has magnified into a global systemic crisis and several countries in the world are either directly or indirectly facing the challenges of the contagion. Given the generally adverse outlook of a significant slowdown in global growth in 2009, every country is trying to figure out what could be the magnitude of impact on their national economy.

Oman as an open economy, could be expected to be affected, though moderately, with the international developments on certain fronts. Sharp corrections in stock markets all around the world have also seen some corrections taking place in the MSM. The large decline in oil prices from $147 per barrel in July 2008 to about $45 currently will result in corresponding decline in the country’s oil revenue, exports and GDP. With an international credit freeze, access to credit from global markets will be limited for banks and corporates.

Different channels as outlined above suggests that a country like Oman, despite having strong fundamentals, sound banking system, and an appropriate policy environment, cannot be fully shielded from the effects of the ongoing financial and growth crisis. At the same time, there is nothing alarming and certain preemptive steps have already been put in place by the authorities.

The government has already revised the assumed oil price for the 2009 budget to a conservative figure of $45 per barrel, in contrast to the earlier assumed price of $55 per barrel and intends to keep the development projects fully ongoing and on track.

Oman’s financial system, which is largely bank dominated, remains insulated from the direct effects of the global financial crisis, since our banks are neither exposed to the toxic financial assets nor to the distressed global financial institutions.

The global financial crisis, and its manifestation in the form of a global credit squeeze, has, however, some indirect effects on liquidity, which the CBO recognised and responded proactively with appropriate liquidity enhancing policy measures.

On receiving feedback from some of the commercial banks about possible tightening access to US dollar liquidity in international markets, and the associated concerns about rollover of short term US dollar liabilities, the CBO opened two windows in consultation with the government ensuring access to dollar liquidity of up to $2bn to the local banks. While the first window is in the form of a swap, the second window is in the form of direct lending against eligible promissory notes.

Further, to ensure greater flexibility for banks in their liquidity management and credit deployment, the CBO also reduced the reserve requirement for banks from 8 per cent of deposit liabilities to 5 per cent. The CBO decided to ease the lending ratio limitation for banks from 85 per cent to 87.5 per cent with effect from January 1, 2009, to avoid the possibility of any regulatory induced credit contraction in particular towards the productive sector, so that the economic growth remains unhampered. The liquidity situation in the market is being constantly monitored and necessary measures, both prudential and regulatory, will be taken by the CBO as and when needed, depending on development in the overall economic conditions.

How do you see Oman’s banking sector performing in 2009?
The fundamentals of the economy in terms of the overall economic structure and the soundness of policies, remain unchanged, even though external developments, particularly the sharp fall in oil prices and the slowdown in global economic activity, could influence the banking outlook in 2009.

However, it must be noted that the banking sector in Oman, had hardly any exposure to the toxic assets and the crisis affected financial institutions of the advanced countries. As a result, there has been no direct adverse effect on our banks from the global financial crisis. Global credit freeze and increased risk aversion, however, imply that access to foreign capital may not be as easy as it used to be before the crisis.

As outlined earlier, the CBO took proactive measures to ensure US dollar liquidity access for our local banks.

The CBO is optimistic that our banks will continue to perform well in 2009, although the focus of the banks may shift from fast expansion to consolidation, with greater emphasis on risk management and asset quality.

How we did it
A look at the methodology used to rank the banks in the survey

We have considered growth and sustainability parameters for ranking of commercial banks in Oman. The ranking was done among leading banks which includes Bank Muscat, National Bank of Oman, Oman Arab Bank, Bank Dhofar, and Oman International Bank.

We have taken the period 2005 to 2008 to rank them on the set parameters for growth and sustainability. Ahli Bank has seen a transition from being a housing bank to commercial bank during this period because of which we have excluded the bank in our ranking.

Meanwhile, the newly established Bank Sohar also has been excluded. The data was sourced from the published financial statements of the banks, CBO reports and other published reports. Ranking based on growth is done by calculating the CAGR growth of gross loans, customer deposits, networth, fee income, operating profit and pet profit during the period 2005 to 2008. Ranking for sustainability was done by finding out the four year average of three major factors, asset quality, productivity and efficiency. Asset quality was ranked based on non performing assets to the gross loan amount (NPA/GL) and loan provisions to non performing assets (provision coverage).

Productivity is ranked based on operating profit of the bank to its no. of branches and no. of employees. Efficiency considers net interest margins (net interest income/average interest bearing assets), cost to income ratio, return on average assets and return on average equity. In Cost to Income ratio, we have excluded the depreciation expenses. The rankings have been done on each of the parameters to arrive at the sum of ranks for growth and sustainability. Sustainability includes the sum of ranks in asset quality, productivity and efficiency. The final rank has been arrived by adding the growth and sustainability scores. In case of equal rankings the bank with larger asset size has been given better rank.

Notes:
In case of BankMuscat we have excluded the fair value gain from its investments in HDFC Bank (RO68.8mn) from its asset and liability as on 31st December 2008.

In Bank Dhofar RO70mn raised through its rights issue during 2008 has been excluded.

Disclaimer
This document contains data sourced by Gulf Baader Capital Markets SAOC, on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all care has been taken to ensure that the facts stated are accurate, neither Gulf Baader Capital Markets SAOC nor any employee shall be in anyway responsible for the contents. The Company may have a position and may perform buying/selling for itself or its clients in any security mentioned in this report. This is not an offer to buy or sell the stock/investments referred therein.

 A million and more
The market leader by a stretch, BankMuscat has set its sights on getting a million customers by 2010. Sunil Fernandes reports

Strategic initiatives and qualitative achievements over the years have enabled BankMuscat to maintain its leading position in the Sultanate. The bank is renowned for adopting innovative ways to raise capital and enhancing stakeholder value. It has now launched myriad initiatives to maintain the tempo.

“BankMuscat has identified its people (staff members) as its most important asset. Aimed at low-cost deposit mobilisation, the launch of the new al Mazyona Savings scheme with two daily prizes totalling RO11,000 was a major initiative in 2009. BankMuscat recently launched a series of Certificates of Deposit (CD) auction targeting to raise RO250mn over a one-year time-frame. So far, it has  successfully raised RO75.4mn in the first five CD issues. The Corporate Finance and Advisory unit (CFA), which conceptualised and placed the Oman Integrated Tourism Projects Fund, achieved its final close at $259mn against the targeted fund size of $200mn. This is the largest Oman-centric fund by a long distance,” says AbdulRazak Ali Issa, Chief Executive Officer of the bank.

Outlining the other initiatives Issa says, “BankMuscat is currently the only acquiring bank on the national e-payment gateway launched by the Information Technology Authority. With a major focus of change, the bank resources were directed towards the rollout of Temenos T24 core banking system.”

Posting good numbers
The bank’s diversified income and asset base from corporate banking, consumer banking, wholesale banking and international operations contributed to the strong performance. Explaining the other reasons for a stellar performance Issa says, “The bank was successful in attracting low-cost deposits. It also launched several innovative services for the largest banking family in Oman. We launched priority banking service to meet the special needs of customers in this segment. In 2008, the focus was to improve the reach of channels to all customers. To this end, the bank expanded its mobile banking services to customers of both the telecom service providers in the country. The bank undertook two major initiatives during 2008 to participate in the government’s vision to promote e-services in the country. The bank is focused on its vision of attracting over one million satisfied customers by 2010.”

In project finance, BankMuscat has played an integral part in several large-scale financial closures. These include projects in key sectors such as oil and gas, LNG and chemical carriers, petrochemicals, power and water and tourism projects. In addition, the bank has also participated in several overseas syndicated transactions, which has increased its profile in the market.

BankMuscat views industrial development of Sohar and Salalah as strategic opportunities. In Salalah, the bank has been mandated for financing the expansion of the port and is involved with two large projects in the free zone.

“The major projects in Sohar in which BankMuscat is involved are Oman Gas Company, Oman Refinery and Petrochemicals, Sohar Power, Aromatics Oman, Sohar Aluminium, Oman Aluminium, Oiltanking Odfjell Terminals and GIPI Steel pipe project. BankMuscat has been the lead arranger/underwriter of senior debt facilities as well as performance bond provider, the onshore security agent, the onshore account bank and working capital bank,” says Issa.

Project finance
The Corporate Finance and Advisory unit (CFA) has had a superlative performance. This unit of the bank emerged as the leading regional infrastructure advisor, cementing its league table rankings during 2008. For the first half of 2008, for advisory mandates won, Infrastructure Journal ranked the Bank 20th globally, third in Africa and Middle East and third in the oil and gas sector globally.

The Oman Integrated Tourism Projects Fund, conceptualised by CFA with an initial closing of $135mn in 2007, achieved its final close at $259mn against the targeted fund size of $200mn. This is the largest Oman-centric fund by long distance. In Jordan, the bank won the financial advisory mandate to advise the Government-owned Aqaba Water Company on the first Independent Water Project in the country.

The CFA unit also won its second advisory mandate in the UAE from a leading India-based cement manufacturer for setting up their 2.5 mtpa cement plant. The team continued its association in the government-owned Botswana Power Corporation’s 600 MW power project. The bank also won the mandate to advise the Oman Power and Water Procurement Company on an Independent Power and Water Project in North Oman. These four projects amount to a total of approximately $3.5bn.

Retail is the key
On the retail front the bank is doing its utmost and has a target to reach every household. “The vision to reach every household in the country has helped the bank to grow its customer base to exceed 750,000 customers, mainly by growing the number of retail customers. Several product innovations were launched during the year, chiefly deposit units under the brand name ‘Sanadat Al Edhekar’ and now the new Al Mazyona savings scheme offering daily prizes of RO11,000,” says Issa.

The bank launched for the first time in the country an installment facility on credit cards. Instead of the usual minimum balance payment collection on the amount spent through the card, the bank collects the total purchase amount of select items in equal installments, thereby providing customers the ability to plan their cash flows. “To meet the specialised needs of different segment of home loan customers, variants of the home loan product was also launched. A significant re-launch was car loan under the brand name ‘Sayyarati’. To complement the popular Hayatuna family protection plan, motor insurance was re-launched through a tie-up with a new insurance partner with several enhancements to the product features and delivery mechanisms,” says Issa while outlining the other retail initiatives of the Bank.

While clearly, BankMuscat has had a splendid performance over the years, the clear vision and strategy is expected to ensure a dominant position. 

Prudence pays in good measure
A conservative approach towards lending and a good knowledge of project finance has made Oman Arab Bank a robust and efficient organisation. Mayank Singh reports

Oman Arab Bank has made steady progress in its business over the years. Says Abdul Kader Askalan, CEO, OAB, “We intend to increase our capital base from RO60mn to RO75mn this year, this will be done by  preferential shares worth RO12mn and by issuing bonus shares worth RO3mn.” The increase in the bank’s capital will strengthen the banks financial structure and enable it to lend more, improving its single borrowing limit. The eventual aim of the bank is to ramp up its capital base to RO100mn by 2010.

Leaders in project finance
OAB prides itself as the first choice for project finance. The bank has developed a strong corporate finance model over the years. For example, it starts gathering information about a company which may require project finance. Executives from the bank approach such companies trying to guage their requirements. It then offers them a host of services. For example for Sohar Aluminium it set up an onsite branch for the project. The bank has the unique distinction of financing 90 per cent of the projects in Sohar. It recently lent Renaissance Services a huge sum of loan. “Our association with Arab Bank (its parent company) and our relationship with international banks helps us to offer our clients the best service.”

Retail focus
The bank has strengthened its presence in retail banking over the last couple of years by offering loans a portfolio of offerings like – Al Madmoon education loans, Al Dar home loans, Markabatti car loans, bankassurance etc. OAB is gearing up to increase its lending to small and medium enterprises. The bank is drawing up a programme for SME banking and hopes to get cracking on this front this year. Despite such efforts the bank is conscious about its social responsibilities. “We do not market personal loans as aggressively as other banks as we believe that people should borrow money prudently against their salary,” says Askalan.  As a result the bank’s retail loans as a percentage of its total lending is lower than other banks.

In hindsight, the policy has paid off for the bank, as in these troubled times, the bank is sitting pretty. Its non-performing assets (NPA’s) for 2008 stood at 1.6 per cent. The bank takes 10 per cent of its profit and puts it in the general reserve fund and 10 per cent in the legal reserve fund.

Taking into account the macro picture, Askalan says, “There is no serious situation in Oman. There are certain banks which have been affected, as they have invested outside, but not to a serious extent.” Probably, international banks can take a leaf out of OAB’s banking model.

Smart Growth
Bank Dhofar has undertaken many initiatives in the last few years, which have aided growth and catapulted the bank, to a significant player in the industry. The bank has adopted a conservative approach, even while growing assets substantially. Sunil Fernandes reports on the bank’s reasons for success and the challenges ahead

Bank Dhofar has been performing reasonably well, and has firmly established itself among the top players in the banking industry. Putting in place the right staff and introducing the right products have helped meet growth at the bank. Kris Babicci, CEO of Bank Dhofar, while outlining some of the reasons for success says: “We have completed a bank-wide review, introduced a new organisational structure, a five-year strategic plan (2008 – 2012) and a rights issue raising RO70.8mn. Bank Dhofar adopted a new five-year corporate strategy in 2008, an affirmation of its commitment to our customers. We brought in the right staff to help us implement the plan. The implementation of our strategy is being carried out by our people, it is through their efforts that we are moving forward and meeting the needs of all the stakeholders in our organisation.” The bank achieved good results during the year 2008 despite the global financial crisis, witnessed in the last quarter.

Sound financials
Its total assets increased from RO955.13mn at the end of 2007 to RO1,323.82mn in December 2008, a growth of 39 per cent. The gross loans and advances improved by a healthy 42 per cent, from RO750.04mn at the end 2007 to reach RO1,068.77mn at the end of 2008. Also, the customer deposits raised by the bank recorded an impressive growth of 44 per cent and increased from RO674.50mn at the end of 2007 to RO971.60mn at the end of 2008.

“Bank Dhofar is a well-positioned bank, has a competent management team, the support of the Board of Directors and shareholders and a staff committed to deliver the best to our customers,” says Babicci.

The last few years have seen Bank Dhofar having a significant presence in project finance. It has already funded projects like Mirabat Beach, Octal etc. Going forward, the bank plans to increase its presence, as and when opportunities arise. “Over the past five years project financing has been on the increase in Oman as well as the rest of GCC. Recognising this, Bank Dhofar has created a specialised department to deal in this niche segment early on and thus had participated in major project/infrastructural financing in the country. Currently, project finance/syndicated loans forms a substantial part of our total corporate lending. Bank Dhofar by virtue of an increased capital base and the expertise built over the years, is now in a position to lead arrange the financing for medium size projects,” says Babicci.

According to him, the advantage Bank Dhofar has over large foreign banks lies primarily in the understanding of the local environment, local laws and regulations and other peculiarities of the market. For project finance, Bank Dhofar will look at opportunities in the oil and gas, tourism and construction sectors. “Going forward, over the long term we envisage a host of lending opportunities in the infrastructure, oil and gas, construction and tourism sectors taking into account the large government sponsored projects on the anvil as well as those privately sponsored. However, against the backdrop of the current global economic and financial crisis we expect a slowdown in the launching of new projects especially in the first half of the year,” says Babicci.

Retail focus
On the retail front, the bank will continue to grow its network and garner low cost deposits. Bank Dhofar already has 52 branches and products that are tailor-made to meet customer requirements. The future emphasis would be on people, processes and technology.

“We are now continuously working on enhancing our customer service and therefore to deliver this we are focusing on our People, Process and Technology. We have enhanced our Human Resource management and improved their capabilities through training and development.  We are simultaneously improving our business process and hence are in the process of a comprehensive “process re-engineering” project, to enhance our service quality. We are currently improving our technology via implanting a new core banking system to provide a faster turnaround time to our customers,” disclosed Babicci.

To augment resources, Bank Dhofar in December 2008, raised money through a rights issue and the bank’s capital has gone up to RO188.43mn. The enhanced capital is expected to enable the bank to strengthen operations and provide for growth. “We have an ambitious strategic plan and this additional capital is part of that strategy. The bank visualises a significant expansion in the economy and credit creation. This fund-raising exercise will enable the bank to play a vital role in this process thereby increasing the asset base, strengthening the capital adequacy and improving the profitability,” says Babicci.

The banking sector, has been one of the worst effected in the present global economic crisis. However, according to Babicci, the banking sector in Oman continues to be resilient. He attributes the soundness to prudent measures introduced by the Central Bank of Oman, though he admits that there are some challenges. “The current slowdown is a challenge not only for Bank Dhofar, but the country and the world,” says Babicci.

Beating recession with aggression
National Bank of Oman has undertaken a slew of measures to grow business recently. From technology initiatives to growth in branch network to a rebranding, NBO has been in the news more than ever before. Mayank Singh reports

National Bank of Oman (NBO) is witnessing an aggressive growth on all fronts, at a time when the banking industry around the globe, is reeling under the effects of an economic recession. The main initiatives at the bank have been to significantly improve and deepen its footprint in the business.  In the recent past, the bank had opened very few new branches and this has been radically addressed during the course of 2008 and the early part of 2009 by the opening of eight branches to-date, with a further four scheduled early this year.  This represents a 20 per cent increase in distribution capability, and clearly highlights the bank’s significant investment in distribution, in order to serve customers better.

“We recognise that for many of our customers or potential customers, bricks and mortar still represent a preferable distribution point to access financial products and services.  As well as this, the bank has also invested heavily in technology and, in the course of the next few months, will be launching a completely revised call centre and interactive voice response system and a new branch front end system with anti-money laundering capability and Customer Relationship Management. In addition, the bank has been upgrading significantly its Disaster Recovery and Business Continuity systems and processes in order to ensure that our service to customers is maintained 24 x 7 in the event of any physical dislocation in communications, for example,” says Murray Sims, Chief Executive Officer of the bank.

NBO has also invested in its International Banking division by supplementing its research and brokerage capabilities and has launched a suite of new products in retail banking such as the region’s first vertical Platinum Card; revised Al Kanz Savings Scheme; Bancassurance products; a dedicated telesales and direct sales channel; launch of Service Quality as a major service initiative of the bank; launch of Tijarati Micro Finance product and launch of Sadara, a high end Wealth Management service with three distribution points opening in the next few months.  NBO continues to invest heavily in its national staff and has been the recipient of a number of awards, most lately being recognised by the GCC Ministers of Labour and Social Development in their 25th Session in Doha, Qatar, at which the bank was honoured as the leading banking institution in the Sultanate for Omanisation and Human Resource Development. “This continues to be a focus of key attention. With the assistance of our strategic partner, Commercial Bank of Qatar, the bank has also significantly upgraded its risk management processes and systems and late last year, the bank was the recipient of the Hawkamah Union of Arab Banks’ Award for Best Regional Bank in Corporate Governance,” adds Sims.

NBO has posted good financials in 2007 and 2008.  According to the CEO, some of the reasons for the growth, include the fact that the bank has increased significantly its lending, both in personal and corporate terms, on the basis of sustained effort and customer relationship management and also taking advantage of the buoyant economic conditions experienced in the Sultanate during the period.  “There has been an intense focus on all key business income drivers, which has reaped rewards in the improvements noted at the operating profit level,” he says.

During the course of 2008, NBO participated successfully in a number of syndicated projects. However, with the recent global slowdown and the very limited availability of dollars for long term financing, it has been more challenging for the bank to actively assist in providing long term infrastructural dollar based syndicated or other types of financing.  “As markets return to stability and with the continuing support of the regulator, Central Bank of Oman, who have taken a number of proactive measures in this regard, we see Project Finance as being an important continuing source of both fee and interest income for the bank, in the years to come,“ says Sims.

NBO plans to take advantage of the demographics of the Sultanate of Oman to continue to grow. “Approximately 50 per cent of the population is aged 21 or less. We see this as a very positive factor. When these individuals come on to the job market, it will lead to increased demand for retail financial services across the spectrum.  The investments that we have made in distribution, sales, marketing, products, wealth management etc., are all indicators of the very considerable importance that the bank places in this area,” he adds. According to Sims the recent rebranding of the bank has been well received by all stakeholders of the bank – from the staff to the customers to the regulators and shareholders of the bank.  “This also clearly highlights the importance that we now place on developing our business within the Sultanate of Oman and where we see the bank enjoying its best competitive advantage as opposed to overseas,” he says.

The bank has geared itself to meet the challenges of difficult economic conditions witnessed the world over. “Recessionary market forces whenever experienced will always represent a challenge for a financial institution.  At NBO, we are reacting to these changed market circumstances by significantly increasing our focus on risk management, but at the same time, making sure that we are there for our longstanding, loyal customers to assist them through potentially difficult times ahead,” Sims reveals.

NBO has over the years, given good returns to shareholders. In fact, with the exception of the performance over the last six months, NBO has been amongst the top tier performers in Oman from a shareholder value perspective. Despite the current correction in the overall market, the cumulative return over three years (Dec 31, 2005 to Dec 31, 2008) is 18.84 per cent.

Time to get going
OIB has a number of strengths like a large network and great recall, now it needs to leverage them to good effect. An OER report

Oman International Bank (OIB) has had a long-standing track record in the Banking sector in Oman. Established in 1984, it was the first 100 per cent Omani owned commercial bank in the Sultanate. OIB has been innovative, with a long list of firsts to its name. It was the first bank in the Gulf region to offer mobile banking service; the first Omani bank to issue a Visa Card; and also the first to offer phone banking service. The bank has a very large presence in Oman with as many 83 branches in the country and five branches abroad. Financials of the bank have been mixed, with main concerns on the non-performing assets front.

For the financial year 2008, OIB reported a net profit of RO29.474mn, as against RO 28.076mn for the financial year 2008.

Clocking good numbers
Net profits in the last four years (2005 to 2008) have grown by 10.2 per cent, while customer deposits during the same period have witnessed a growth rate of 3.4 per cent. The bank’s fee income in the last four years has grown by a healthy 14.6 per cent, on compounded annual growth rate basis. The average non-performing assets to gross loans, during the four year period have been around 11.6 per cent.  The bank, over the last few years, has shown resolve to improve asset quality and thereby reduce the provision for loan impairment.

The net interest margin for OIB has come down to 3.34 per cent in 2008, from 3.65 per cent in 2007, showing a marginal decline. All in all, it seems a steady performance over the last few years. The bank is continuing to reduce its non-performing assets, and the same has witnessed a decrease in 2008, as compared to the previous year. With a very large branch network in Oman, OIB is expected to continue to have a strong presence in the country.

OIB has been conservative in its lending policy and probably it can look at loosening its purse strings.

A time for consolidation
Bank Sohar is making a mark, despite being a fledgling in the banking sector in Oman. Mayank Singh and Sunil Fernandes report on the reasons for success and the bank’s strategy going forward

Bank Sohar has shown good growth on various parameters, since augmenting resources, through an initial public offering in January 2007. Deposit, branches, ATMs have all expanded phenomenally, in the last couple of years, not to mention the growing fraternity of Bank Sohar customers. The Bank has chalked a clear strategy to consolidate, while maintaining a thrust on being a good corporate citizen.

“The founding fathers were adamant that we build a solid and robust institution, one that serves the local economy. The first thing that we had to do was to chalk out a distinctive strategy. Within that strategy we had to achieve the overarching objectives, while taking into consideration the gaps in the market. To remain competitive and penetrate the market one needs to identify such gaps and opportunities, along with the customers needs and requirements,” says Dr Mohamed Abdulaziz Kalmoor, CEO, Bank Sohar. 

Frantic growth
Bank Sohar has penetrated the market with a sense of urgency and Dr Kalmoor explains: “It was important to do so for a number of reasons. We carefully studied the experience of other banks in Oman and noted that those banks which did not develop beyond their infancy stage had difficulty in withstanding competition. They ended-up being acquired by other banks.”

Therefore, as a fledgling in the banking sector, Bank Sohar, had a two-phased strategy to brace competition. The first was to achieve a minimum size and the second was to consolidate its position. “There has to be a minimum critical mass, for both operations and scope. This helps a bank like us, to establish a footprint from a competitive standpoint. This results in much needed economies of scale and scope,” he says.

According to Dr Kalmoor, the achieved scale of operations have also helped build confidence of investors, bankers and customers within the country, as well as players outside. While clearly, achieving economies was one of the objectives, the moot question for Bank Sohar, would be whether it has achieved that critical mass. “We believe that we have achieved the critical mass. We are now number four, across the banking sector for loans and branches and number five as far as assets are concerned. We were able to achieve this within a short period of time,” says the CEO.

On solid ground
During 2008, the bank built a total customer credit exposure of RO644mn and customer deposits of RO638mn servicing a total of 42,571 customers. The savings deposits have built up to RO74mn. Bank Sohar was able to increase its market share consistently during the year and has closed the year with 6.64 per cent of private sector credit and 6.77 per cent of private sector deposits as computed with industry data for November 2008. The reasons for a good financial performance, has been manifold. These include: a right strategy, right people and a customer driven attitude. “Everything starts with strategy. We understood the market dynamics, the landscape within which we were operating and then positioned ourselves, in a manner that enabled us to achieve our objectives.  Also, we had the right people, with the right expertise and right mindset. We went in for products that were in line with the desire of the customers,” says Dr Kalmoor. 

Consolidation mode
While clearly, the phase of achieving economies of scale and scope at Bank Sohar has been completed, the bank is now looking at consolidation and other areas of operations. “It’s not that size is not important, but we are now looking at diversity. Our attention now is towards that,” says Dr Kalmoor. The bank is looking at a host of areas to grow. On the liability side, it is focusing on the composition of deposits, particularly low cost ones.

Banks need to balance high risk and returns, to save against a deterioration in the quality of assets. However, the Bank Sohar CEO is confident with the present quality of assets. “Our assets quality remains healthy. On the corporate side, it was not a question of going in for customers who did not find any lenders. Our portfolio is mostly populated with high networth customers and large corporate. We have never compromised with credit risks. Unfortunately, people think that because we grew very fast, we must have taken high risk assets. I don’t understand why that should be the case.  Why can’t one take the view that growth and penetration can be had on the back of competitive advantages. It is possible to penetrate the market, without compromising on risks,” says Dr Kalmoor.

The last two years, have seen a sharp growth. However, the bank does not intend to match the same growth in the years to come. “This is a year of consolidation. We do not wish to see the same growth that took place in the initial two years. We started from zero, in order to achieve the critical mass that was needed. Growth this year will be  more tempered,” Dr Kalmoor states.

Challenges ahead
While, the global economic conditions remain precarious, Bank Sohar is expected to withstand the challenges. The CEO remains optimistic that Bank Sohar would report net profits this year. “In Oman, we have been impacted relatively less. I think the issues facing the Omani economy, has been the twin markets of real estate and stock markets. The real estate market had shot-up, owing to speculation. The international environment also punctured the real estate and the stimulus from private players, has thereby weakened,” says Dr Kalmoor. According to him, the impact on banks has been in terms of impairment of investments; and local banks reliance on foreign banks for dollar funding, which has dried-up.

Clearly, Bank Sohar has had a good performance, considering that it has been a newcomer to the market. With a clear strategy on consolidation, the bank is expected to continue its strong presence.

A Paradigm Shift
Ahli Bank has negotiated its transition from a mortgage bank to a commercial bank with panache. Sunil Fernandes and Mayank Singh report

From merely a mortgage bank, to a full-fledged commercial bank – it’s been a metamorphosis of sorts at Ahli Bank. Alliance Housing Bank, as Ahli Bank was called before its transformation on January 5, 2008, operated merely as a housing bank, with the balance sheet on the assets side hardly diversified. Understanding the systematic risks associated with merely one area of operation, the bank decided to convert itself into a full-fledged commercial bank and rechristened itself as Ahli Bank. As a consequence, Ahli United Bank BSC picked a 35 per cent equity stake in the bank.

“A few years back, as Alliance Housing Bank, we appointed KPMG to help analyse planned diversification. We had different options, like continuing as a mortgage bank, or a full-fledged commercial bank without a strategic partner or conversion to a commercial bank with a strategic partner. After careful consideration the board decided to choose the latter, after thwarting a takeover bid from BankMuscat,” says AbdulAziz M Al Balushi, Chief Executive Officer of Ahli Bank.

According to Al Balushi, there were several reasons for choosing Ahli United Bank. 

“At that point in time, the board looked at all options. Firstly, Ahli United Bank made the best possible offer. Moreover, if we were to merge with BankMuscat, there would be no fresh liquidity into the system. Ahli United Bank brought fresh liquidity and along with it fresh employment opportunities and a wider array of products to the market,” he says. While Ahli United Bank has a 35 per cent stake in the bank, the remaining 9.99 per cent is held by IFC Washington.

The initial challenges
The last couple of years have seen several challenges at Ahli Bank. Since June of last year all the products and processes have changed and the bank has geared itself, to meet the challenges of the market place. “We had many challenges during the initial phase of business activities. The challenge was in systems, procedures, people, adding more banking products, rebranding and addition of branches. For a new bank it is even easier. For us, we had to interface existing products and transfer data. Some banks take two years to do it, we took only three months,” says Al Balushi.

Pertinently, despite the transition the bank has reported a sharp growth in net profits, especially considering it is a fledgling to commercial banking products and services. Not only has net profits catapulted in comparison to previous years, the asset portfolio has been balanced and the non-performing assets are down to negligible levels. Net profits for the year ended 31st December 2008 have grown by a whopping 167 per cent, while loans and advances for the same period grew by a robust 57 per cent. The commendable financial performance has been attributed to several reasons. 

 “We realised that there was a mismatch between deposits and advances. We grew deposits by 110 per cent, while simultaneously adopting prudent measures. We were allowed to invest in equity and real estate, but we decided to stay away. As of today, we do not have any exposure in equity – direct or indirect. We were also conservative in lending to non residents. Within one year we changed our portfolio from merely mortgage loans, which was 100 per to about 40 per cent; as such we diversified our risk,” says Al Balushi.

Among the other aspects that led to the stellar financial performance was a change in the systems. The bank has also managed to grow its fee based income, which would remain a key area going forward. 

“Our strategy was to grow the fee based income which should not be less than 30 per cent of total income. Last year the fee based income has grown substantially. Our non performing assets (NPA) were the best, if not in the Middle East, then at least in the GCC region. NPA’s were 0.19 per cent which is almost negligible. We are conservative as a bank, but, when I say conservative, I do not mean that we don’t lend. We look at opportunities, while weighing risks,” he says.

And sure enough the bank is conservative, as can be gauged from their investment portfolio which is strongly aligned towards risk free investments. Presently, 95 per cent of investments comprise sovereign instruments and the remaining five per cent fixed income securities.

According to Al Balushi, the exposure to other forms of assets may increase, however, for that to happen the bank would wait for an opportune time. Besides, investments in high risk-reward instruments would happen in proportion to increase in the size of its balance sheet.

 
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Going forward
The management of the bank is clear on where the future lies and the areas for sustained growth and profitability. “Every business to be successful has to have a strategy and mission. What is important for us, three years down the line, is to achieve 10 to 15 per cent market share, while ensuring that the return to shareholders is not less than 20 per cent. While on the non financial side we want customers to consider us as the best bank in Oman. In terms of employees the attrition rate should be zero for performing employees. As far as service is concerned we would like to have the best possible products,” says Al Balushi.

With the challenges of deteriorating economic conditions around the globe, problems are manifold, and Oman is not completely decoupled from the global problems. “The big thing is to mitigate risks as far as possible. It may be some problem elsewhere that might surface. But we are not an island, and it could boil down to us,” says Al Balushi.

According to him, the other challenge would be to grow the deposit base. The erstwhile Alliance Housing Bank had no deposits and depended on the interbank market. “We have already witnessed a sharp increase in our deposit base. A challenge would be to continue to grow this deposit base substantially,” says Al Balushi.

One of the advantages that Ahli Bank does possess in meeting challenges, is the strong promoters in Ahli United Bank, which has a good presence in the Middle East Region. In the past, the promoters have helped in adding new systems and bringing on loads of expertise to Ahli Bank. Going forward,  the bank is able to use the synergy that might arise in underwriting deals for cross border transactions etc. 

While clearly, Ahli Bank is a novice as far as full-fledged commercial banking operations is concerned, it’s been a commendable performance since transformation. With strong promoters and a sound management team, the bank is expected to perform well in the coming years. 
 

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