Oman LNG’s emergence as a major liquefied natural gas producer, the continuing interest in exploration from independent international oil companies and an upturn in the Muscat Securities Market (MSM) after some difficult years all point to a more buoyant atmosphere in the Omani market. Local banks are also enjoying a growth spurt, some having emerged from the turmoil with new shareholders.
After the failed merger earlier this year of the sector’s two biggest players, BankMuscat and National Bank of Oman (NBO), there was much speculation that NBO would offer an attractive point of entry into the Omani market for an ambitious regional player, through a purchase of shares in the Sultanate’s second largest bank.
This has proved to be the case. An extraordinary meeting of NBO shareholders in late June approved the acquisition by Commercial Bank of Qatar (Commercialbank) of a 12.5% equity stake by means of a capital increase. NBO was to issue 10 million additional shares, taking its capital to $205.1m from $179.5m (with Commercialbank paying $11.41 a share).
The Qatari bank also entered into a three-year management agreement with NBO. This confirmed one of the worst-kept secrets in the usually discreet Omani financial services centre, that the management put into NBO by majority shareholder and entrepreneur Sheikh Suhail Bahwan, after expatriate general manager John Finigan left in 2004, was only an interim measure, pending more radical change.
Then on July 6, Commercialbank and NBO signed a deal for the Qatari private sector bank to acquire an even larger stake, 34.9%, which increased shareholders’ equity to OR150m ($389.7m) from OR105.5m. According to NBO’s chairman Sheikh Suhail Bahwan, once Commercialbank had enhanced its stake to 35%, it could nominate four directors.
Commercialbank is a strong player in the booming Qatari market – where the proceeds of the peninsula’s emergence as a global-scale gas play are creating huge liquidity. Moody’s Investors Service upgraded the bank’s financial strength rating (FSR) in December 2004 to C-, stable outlook, from D+. According to Moody’s, the rating reflected Commercialbank’s consistently strong financial performance. Despite NBO’s well-documented problems, Moody’s did not foresee any impact on Commercialbank’s ratings from its effective takeover.
In April, Moody’s rated NBO at D- FSR with a negative outlook, reflecting the fact that questions still remained about the bank. Its balance sheet has not yet recovered from the late 1990s and the scandal involving disgraced commodities trader Ali Redha Darwish al-Lawati, whose credit-fuelled fall from grace hurt most Omani banks, and NBO in particular. Although its stock of non-performing loans (NPLs) is declining, and despite adding provisions of OR30m in 2004, NBO’s loan-loss reserves still covered only 81% of its NPLs at the end of 2004, when the uncovered portion of gross NPLs represented about 47% of equity.
Stable outlook
Soon after these events, Moody’s confirmed BankMuscat’s D+ FSR with a stable outlook, which the agency said reflected its view that BankMuscat had emerged stronger from the failed merger. Indeed, in a frank assessment, Moody’s said: “NBO’s extensive asset quality problems would very likely have imposed a significant provisioning burden on the resulting entity, challenging profitability in the near-term, and potentially weakening the combined entity.”
The failed merger with BankMuscat had been expected to consolidate the Sultanate’s largest bank’s hold on the market – it was effectively another takeover for the acquisitive BankMuscat, helping to create a major bank that could serve as a ‘national champion’ – but in the final analysis, the deal was not sufficiently attractive to tempt Sheikh Bahwan to sell.
Interest from regional banks since seems to confirm he was right to hang on. Among those also taking an interest were Dubai-based private equity funds Abraaj Capital and Shuaa Capital (the latter already linked into the Sultanate via a stake in Onic Holding), as well as several regional banks, said to include Mashreq Bank and Bahrain-based Al-Ahli United Bank. Under group chief executive Adel el-Labban, the latter has committed itself to having a presence in each Gulf Co-operation Council state.
Other Muscat banks are looking on with interest. According to Oman International Bank (OIB) deputy general manager and head of retail banking Khalfan Rashid al-Taley: “Probably there are some banks in the region that would like to take interests in other banks in Oman as well.” However, he told The Banker: “The situation of NBO is completely different, but competition will dictate and some banks will probably want to expand and increase their capital base. So, in that sense, Omani banks will welcome other banks in the region coming in to take some stakes in local institutions.”
Market murmurs
The Muscat rumour mill suggested that the Bahwan group had been pressured into a merger at a price it did not like, although its chairman has consistently denied coming under any pressure to act on this.
Talks broke down in late February, after which BankMuscat chairman Sheikh Abdelmalik Bin Abdallah al-Khalili said the deal was formally called off “following NBO expressing its reluctance to continue with the merger process”.
Observers of the Omani scene – who declined to be quoted on the record – note that NBO’s management seemed more intent on cleaning up the bank’s balance sheet to make it more saleable than in drawing up a long-term strategy to take what is still Oman’s second largest bank, with an impressive branch network, into a new phase.
For NBO, as for other Omani banks, 2004-05 is a period of improving results, reflecting the oil price boom. At NBO’s AGM in April, Sheikh Bahwan announced a 2004 operating profit of OR16.2m and a net profit of OR5.2m, which “reflected a significant turnaround from the net loss of OR51.7m declared in 2003”.
NBO announced a net profit of OR3.02m for Q1 2005 (compared with OR1.3m for Q1 2004), partly due to effective cost control, with an 18% drop in first-quarter 2005 operating costs to OR4.3m. One analyst noted that considerable savings had been made with the departure of veteran banker Mr Finigan (a respected former head of Qatar National Bank) and his team, and their replacement with a new management under Indian banker Bellikoth Vasanthan, who had led Syndicate Bank and the Hyderabad-based Andhra Bank. In its Q1 05 results statement, NBO said: “The focus on cost control is expected to continue.”
Commercialbank’s acquisition and welcome cash injection is a much-needed signal of confidence in NBO’s future, just as the Suhail Bahwan Group’s decision to take a 34.6% stake in October 2003 was an important step in nursing this important bank back to health.
BankMuscat, the Sultanate’s biggest bank, confirmed its strong position in its announcement of a OR10.3m net profit in Q1 2005, against OR7m in Q1 04. About OR2.8m of the figure came from the disposal of its Bahrain branch subsequent to the incorporation of the new Bank Muscat International (BMI) entity in Bahrain, from January 1.
BankMuscat holds 49% of BMI’s paid-up share capital, with the rest held by other regional investors – including Oman’s Royal Court Affairs department (22%), Société Générale (10%), the Ministry of Defence Pension Fund (8.36%), Bahrain’s Overseas Investment, the UAE’s Istithmar and Kuwait’s Global Investment House. The bank’s close relationship with the Royal Court Affairs – a financial vehicle of the Palace and ruled by Sultan Qaboos bin Saeed al-Said – has been noted by rating agencies as a positive element. Moody’s commented: “It provides the bank with easy access to both government and private business.” In buoyant mood, BankMuscat listed 8,972,000 new bonus shares for 2004, on the MSM on May 8.
Improved OIB
OIB also announced net profit of OR6.52m for Q1 2005, compared with OR3.08m in Q1 04. A statement released by OIB said: “Our focus on increasing the revenue while controlling the operating expenses resulted in the cost to income ratio improving from 47.2 to 42.7%.”
“This year will be a good year,” Mr al-Taley told The Banker. “So far, we have reported above-planned profits and we expect the trend to continue for the rest of year. OIB made OR48m last year and this year we expect more.”
Such has been the upturn that on June 7 the MSM closed at an all-time high, buoyed by regional investors entering the bourse, when the MSI 30-share index closed at 5170.37 points. The previous record high was 5098.3 in February 1998. At that stage, the MSM was 53% up on the year.
A return of confidence to the financial services sector is essential as the government seeks to bring in more investment.
Much attention was paid to the long-anticipated initial public offering (IPO) in June of 30% of the state-owned Oman Telecommunications Company (Omantel), which aimed to raise fresh capital for expansion, while stimulating the MSM. This aroused considerable interest, if not the massive oversubscription that market bulls initially projected.
Five groups of local and international banks bid for the contract to advise the government on the Omantel divestment, with the BankMuscat/HSBC grouping winning. The other bidders, indicating the balance of power in the Omani market, were: Global Financial Investments with Global Investment House; NBO with Global Investment Corporation; Oman Arab Bank with Arab Banking Corporation and BNP Paribas; and OIB with Citigroup.
Local banks have been active in project finance, led by BankMuscat. Mr al-Taley says: “Omani banks participate to the level they are able, which is dictated by the size of capital.” By and large, “they do participate at the syndication stage in the big deals”, he adds.
International banks continue to dominate, in a Gulf market that still draws on considerable export credits – as in the facility signed in late April, when the Suhail Bahwan-controlled Sohar International Urea and Chemical Industries signed a $440m loan with a consortium of The Japan Bank for International Cooperation, using official Japanese export credit, HSBC, supported by Nippon Export and Investment Insurance.
Mr al-Taley says: “Banking is growing in Oman – it’s now a sector which is profitable, and banks are making good profits and continue to grow both in terms of corporate and personal lending.” Indeed, “most banks in Oman are retail banks”, and although some institutions will increase their project finance and corporate banking strength, retail banking is expected to continue to dominate the local business scene.
TOUGH GOVERNANCE
Questions of corporate governance and official control remain high on the agenda in Oman, following the weaknesses in the Muscat Securities Market and the Ali Redha and other affairs.
Omani institutions have learned useful lessons. The Ali Redha affair was an experience for all banks in Oman, says Oman International Bank’s deputy general manager and head of retail banking, Khalfan Rashid al-Taley. “The banks have become more careful in terms of lending with security – risk lending. You don’t see that [Ali Redha] happening now. You don’t see name lending happening now. Banks had concentrated on recovery of their non-performing loans and OIB managed to collect a lot of NPLs. Other banks are the same: last year, National Bank of Oman managed to be in profit because of its collections.”
Since embarrassing episodes in 2001-02, when payment failures and banking scandals undermined respected institutions, the authorities have tightened up financial sector governance. Central Bank of Oman (CBO) demanded capital adequacy levels above 12%, more than Basel I’s 8% provision. In June, it said banks were “eager” to implement Basel II by January 2007 and would begin new capital accord calculations from January 2006.
CBO executive president Hamood bin Sangour al-Zadjali says the bank has formed a Basel II implementation group, with local and foreign bank representation, to create a schedule. The group has recommended the adoption of the standardised and basic indicator approaches for determining regulatory capital for credit and operational risks by January 1, 2007, with the parallel calculation from January 1, 2006, he says.
“The implementation of Basel II is going to be one of the major challenges for the banks and the CBO. A smooth migration into the framework will, however, promote sound risk management practices and financial stability, and improve banks’ competitive positions. The new accord will further strengthen the integrity of the domestic financial system.”
