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Middle EastAugust 1 2004

Rebuilding confidence

After some difficult years, most Omani banks are reporting a significant upturn following efforts to improve discipline. Meanwhile the stock market shows signs of growth and project finance deals are picking up. Ben Wilkinson reports.
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Omani banks reported significantly improved results in 2003 and they expect to consolidate this situation in 2004. This is good news for the Sultanate following the volatile business conditions and embarrassing payment failures that dented confidence in 2001-02, when the local equities market declined sharply and banking scandals undermined some of Muscat’s oldest and best-known institutions. Since then, the Omani authorities have been working to tighten up financial sector governance, whose failings have become only too apparent through episodes such as the collapse of the high-flying Ali Redha Trading Group.

The Central Bank of Oman (CBO) now demands capital adequacy levels above 12% – compared to Basel I’s 8% provisioning – and has introduced tougher fines for institutions that breach its rules. Quarterly inspections of accounts by CBO inspectors have been initiated to increase discipline and transparency and, as part of a wider tightening of the Muscat market’s regulatory structures and lending habits, only 5% of an Omani bank’s total lending may now be extended to non-national borrowers. This move is a clear reflection of the troubles that hit many local institutions during the boom time, when CBO’s limit was 15% of total lending to any single foreign client.

After a flamboyant period when its financial institutions sought to cut loose, with ventures abroad and new products to tempt new investors, the Sultanate’s innate conservatism is being reflected in the ever more cautious approach of its regulators and senior bank management. Thus, while a buoyant oil price has helped stimulate the domestic economy, breathing new life into bank deposits and the Muscat stock exchange, caution remains the watchword.

With oil output down due to declining mature fields, there remain some concerns about economic performance, despite the oil price and the undoubted success of Oman’s investment in natural gas developments. French credit insurer Coface, in April, downgraded its rating for the Sultanate’s payments risk under its @rating methodology “due to a sharper-than-expected growth slowdown”. Coface commented: “With its ageing oil fields… the investments needed to restore oil production entail high costs that continue to weigh on external and public sector accounts also affected by the decline of oil revenues.” In this context, “Oman has no choice other than to accelerate the economic diversification process, notably in the gas sector, which will necessitate new investments and take time”.

That much-needed oil field upgrade is now under way, with the Shell-led Petroleum Development Oman investing heavily in enhanced oil recovery and other work. Meanwhile, economic diversification means another big investment in downstream gas production and gas-related industries, especially in the fast-growing industrial city of Sohar.

Improved performance

Most Omani banks reported stronger figures in 2003, when overall, the value of deposits in the banking system rose by 2.7%. BankMuscat and Bank Dhofar performed especially well, as all banks improved their provisioning levels and reported higher profits. Market leader BankMuscat’s loan/loss provisions stood at 102% on March 31, compared to 83.9% 12 months previous.

BankMuscat continues to expand, acquiring Citibank’s personal loan portfolio when Citigroup pulled out of Oman in line with its wider regional shake-out. The Sultanate’s biggest bank is expanding abroad, among other things obtaining approval to start operations in Saudi Arabia, while remaining a star performer on the reviving Muscat Securities Market (MSM). BankMuscat has steadily extended its reach, with a representative office in Dubai – which it intends to expand into a full branch – and Bahrain banking operations, which were boosted when in 2002 it acquired ABN AMRO’s Manama-based full-service bank, which had been an established presence in Bahrain for over 25 years. A formal announcement on the Saudi banking licence is awaited. Further mergers and acquisitions to expand the BankMuscat franchise in the GCC area are not ruled out.

Indian links

Oman’s close relations with India are reflected in BankMuscat’s investment in a 26% stake in Centurion Bank, which the Omani institution described as “a new generation private sector bank in India with whom [BankMuscat] has also merged its current India operations”. Those operations include a flourishing Bangalore branch, whose activities point to the extent of non-resident Indian (NRI) activity now being serviced by the more proactive Gulf-based banks.

BankMuscat is looking to the tie-up to produce increased Gulf/India trade finance and NRI business – both major growth areas – and investment flows. The tie-up “will allow Indians across the GCC to access the Centurion Bank footprint in India, through the BankMuscat network in the Gulf” says Abdulrazak Ali Issa, BankMuscat’s chief executive. “We intend to work very closely… to develop products and services that emerge out of our mutual and keen understanding of the needs of the Indian diaspora, both here and across the Indian subcontinent.”

An amalgam of several Omani institutions that have been acquired and merged over the past decade, BankMuscat is very much a reflection of the society in which it operates, being both outward-looking and deeply rooted in the Sultanate. Its major shareholders include government department Royal Court Affairs and French bank Société Générale, both of which are represented on the main board. According to Moody’s Investors Service, “the bank’s franchise is enhanced by its relationship with the Royal Court Affairs… which provides the bank with easy access to both government and private business”.

Bank Dhofar, led by general manager Ahmed Ali Al Shanfari, is also growing with the completion of its merger with Majan International Bank, increasing assets by OR96.6m ($251m) in 2003. Further growth is essential if Bank Dhofar is to achieve its ambition of catching up with the main players. To make progress towards this aim, its international debut syndication to fund long-term dollar lending secured $75m from Sumitomo Mitsui Banking, Bank of Tokyo-Mitsubishi and National Bank of Abu Dhabi at the head of a group of 10 regional and foreign banks.

NBO’s gradual recovery

Weak points, however, continued to cause concern, with the Sultanate’s oldest and second largest bank, National Bank of Oman (NBO), recording its third year of loss after a decade of profits in 2003. NBO was particularly hard-hit by the Ali Redha affair, and made more big provisions last year totalling OR70.7m, mainly because of potential losses at its foreign branches, in Egypt and the UAE. By the end of 2003, NBO had some OR273m-worth of non-performing loans on its books, equivalent to 37.5% of its total credit portfolio. NBO reported a loss of OR51.8m for 2003, compared to OR7.45m in 2001 and OR0.26m in 2002.

However, under new management the bank faces better times ahead. NBO announced a OR3.04m net profit for the first half of 2004, compared to OR0.36m in the corresponding period of 2003 and a big loss in the second half of 2003. The upturn was put down to sound revenue generation from corporate and consumer business, with a contribution from the embryonic project finance business.

Announcing its first half results on July 12, NBO said it “continued to take provisions, albeit at a welcome more moderate level, for both the consumer and corporate portfolios as part of the ongoing prudent approach towards increasing the aggregate level of provisioning coverage”. Additional provisions of OR7m were taken in January-June 2004, compared to OR12.6m in first half 2003. Of this, OR2.3m was provisioned on a portfolio basis against programme consumer lending and OR4.7m was against specific advances to corporate clients. NBO observed that “90% of these provisions related to further deterioration in long-standing legacy exposures”. On the plus side, it added: “Credit quality in the progressively growing new business segment continues to remain strong with little evidence of any deterioration.” Efforts to collect non-performing assets “have continued to intensify”.

There have been some very significant changes in the bank’s board and senior management. Last October, a major local conglomerate, Suhail Bahwan Group, agreed to take a 34.6% stake, injecting OR24.2m into NBO by way of a capital increase (bringing paid-up capital to OR70m). This was followed in May by Suhail Bahwan himself being appointed chairman.

On 14 July, NBO announced a new CEO to replace veteran banker John Finigan. The former Qatar National Bank boss had been brought in to see the bank over an extremely difficult transition period following the hasty departure of the mercurial Aubyn Hill in 2001. Indian banker B Vasanthan’s “primary focus will be to build the corporate and consumer business of the bank and enhance focus on customer service”, NBO said in a statement. “In addition, he will place emphasis on the recovery process which has been initiated this year.” Mr Vasanthan spent 33 years with Syndicate Bank, before joining Andhra Bank in Hyderabad, which, according to the statement, “he successfully led through five consecutive years of record profits”.

Securities market up

There has also been a much improved performance by the MSM, whose slump after a late 1990s boom inflicted considerable pain on local individual and institutional investors. Trading volumes – and prices – have picked up significantly in 2004, as local liquidity has been attracted back into equities. The benchmark MSM index rose by more than 15% in the first half of 2004.

BankMuscat and other bank shares – including Oman International Bank (OIB) and Oman International Development and Investment Company (Ominvest), whose largest holding is its 51% stake in the well-regarded Oman Arab Bank (OAB) (alongside Arab Bank with 49%) – have helped boost the market.

This performance should be boosted further as the MSM returns to form with a series of IPOs planned. The signal that IPOs were back came in March, when Al Maha Petroleum Products Marketing Company (created from Oman Refinery Company’s old marketing division) was listed to investor acclaim in an operation structured by the local Al Mawarid Securities Company. Prior to the IPO, Al Maha was 65% government-owed, with the remaining 35% held by Abu Dhabi’s ABS on a management contract, but in the first quarter of 2004 the government floated 60% of its share in a move to privatise the company.

Project finance potential

Bankers see considerable potential for local banks and their international counterparts to participate in new project financings and major corporate issues. In one long-awaited deal, HSBC is leading the advisory team – which includes BankMuscat – working on the sale of a 20% stake in Oman Telecommunications Company (Omantel), scheduled the latter end of 2004. This transaction will do much to revive the government’s privatisation programme, as will long-anticipated plans to float stakes in the Al-Kamil and Barka power plant holding companies. There was a further boost for the revived divestment programme when, on 14 July, Sultan Qaboos bin Saeed issued Royal Decree No. 77/2004 promulgating the privatisation law, affecting public utilities.

Among project financings, the recent $908m Sohar Refinery deal showed that banks retained a keen appetite when it closed over-subscribed in December 2003. This has been followed by energetic bidding for the Sohar independent power and water project (IWPP), which was expected to close this summer.

According to one banker based in Dubai, the Dhofar bank deal and support for project financings shows that “banking appetite for Oman is good… [even though] the market still lacks decent secondary support”. While the Middle East retail syndications market had experienced a downturn after 9/11, Oman has been helped by the willingness of local banks to finance domestic projects, he argues.

Oman’s good borrowing profile allows it to draw on support from export credit agencies (ECAs). For the Sohar Refinery deal, Muscat tapped ECA support worth $261.9m from Japan’s Nippon Export and Investment Insurance (NEXI) agency. This deal was tightly priced, moving from 90 basis points for the first 42 months up to 160bp for the tail. This provided a market benchmark, with risk perceptions aided by the project’s oil export capacity, sovereign completion guarantee and fixed tolling structure that removed any market performance risk. According to one London-based banker, upcoming Gulf project financings are “highly unlikely to come in lower than Sohar refinery”.

After the Sohar IWPP, the next major deal will be for the third train of the Oman LNG project, the Qalhat liquefied natural gas facility. This is unlikely to come to the market before 2005, but three major Japanese buyers – Itochu, Mitsubishi Corporation and Osaka Gas – have already agreed to buy Qalhat’s LNG, as has a partner in the scheme, Spain’s Union Fenosa group.

The government has also talked of extending project finance into ports, telecoms and a range of private/public partnerships. These deals will be structured by groupings including local banks. Oman has embarked on another, potentially profitable learning curve.

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