Sohar International Bank SAOG (BKSB) Earnings Call Transcript

Our esteemed shareholders, analysts, dear colleagues [Foreign Language] and welcome for our investors presentation for June 2026. After the disclaimers, we'd like to present our economical -- the economical and sectorial outlook for Oman and which, as you know, that Omani economy continue to have a stable growth and the expected the growth in 2026 is around 3.5% despite all the issues happening in the region. The government continue their efforts to reduce their debt to GDP, which show a drop by 47% from 61% or 62% in 2021 to around 32% -- 32.7% in 2026. A further drop of 3% expected between 2025 to 2026 would show that the government and the economy commitment to control the debt. The government revenues show a stable growth in revenue despite the volatility in the oil prices, and that's clear from the growth, stable growth in the non-oil, non-hydrocarbon revenue, which reached $9.7 billion, sorry, as compared to $7.7 billion in 2021. That $2 billion growth is not easy in this environment right now, putting in mind the current volatility, which we faced in the region and in the world from 2021 until 2026. MSX show very stable growth one of the best performing market in the world, not only in the region despite all the volatility happening in the other stock exchange, which show that investors trust in Omani economy and in the Omani company and also the attractive valuation for MSX companies. including the banking sectors and the other surface and industrial companies. Also, the new IPOs, which was presented or was offered in the market since 2023 till 2026 in different sectors, at more liquidity, trust and also insight to the market. We need to add here also, there is a growing global interest in the Omani economy and MSX and thus a result of the good economical growth, the diversification of the economy and the stable credit rating of the countries by all the 3 rating agencies. Sohar International, established in 2007, one of the youngest bank in Oman and maybe in the region, with a total asset currently of around $27 billion. We had more -- with HSBC operation in Oman in August 2023. And we have more than 1,750 stock and more than 650,000 customers. We operate and serve all of those customers through 76 branches between conventional and Islamic, in addition to our plant in Saudi Arabia, and our expected rep office in Hong Kong. We are the fastest growing bank in Oman and maybe in the region and the second largest bank in Oman. We have -- we are the third highest market cap in MSX after OQEP and Bank Muscat. Through our operation in Oman and Saudi, we have 4 main streams: one, the wholesale banking, which represent 67%. Of course, the Saudi operation of 8% also above the wholesale banking to reconsolidate the financial; and we have the retail operation of retail banking, which represents 14% of the total asset and Islamic banking, which is also the 11%, which is mainly our retail operation and wholesale banking. Our market share of the total asset is 21%, but our marginal growth of the market share or the market share of the marginal growth is the highest in the market. And our market cap is $3.6 billion as at 3rd of August. We have diversified shareholders in which more than 50% of the shares after we diversify across more than 6,000 shareholders. Our performance, we continue to grow our return on equity. So our return on equity grew from 10.9% in last year, June last year, to 11.1%, boosted by the growth in assets high-quality asset. Maybe I will return on that. However, all of those assets with lower risk-weighted capital allocation, and thus help us to enhance our return on equity. Cost-to-income ratio increased from 44% to 46% and thus reflect our vision to invest more in people and technology to continue our growth. Our loan-to-deposit ratio increased from 84% to 87% or 88%, and thus for a better utilization of our liquidity and optimize the utilization of our deposit and liquidity. For the last 5 years or 6 years, we show very stable growth in all lines, either total asset of loans or deposits, between 21% to 28%. So it is not only 1 year growth. However, that growth, which is above 20%, is a sustainable growth for the last 6 years. We have the financial overview, in which I will ask my colleague, Craig, to present it.

Great. Thank you, Abdul Wahid. Thank you very much. Just leading off on the comments from Abdul Wahid around the compounded annual growth rate. You can see these growth rates are translated into the bank's growth in operating income, operating profit and also the continued growth, accelerated growth in our net loans, matched by growth also in total deposits, which I'll discuss shortly. And likewise, the key ratios, I'll dig into those in some substance. If we look at the profit and loss account, referring to the net interest income. The growth in the balance sheet has driven the volume variance, creating that positive OMR 14.6 million. There is a slightly negative price variance within that. The bank's NIM is dubbed around 2% compared to where some levels back in December and down from where we were a year before. We do see a drop in our cost of funds, but also we see lower yields. There's 2 sides to that. One is we will see using the balance sheet to grow quality credits. But on the positive side, the operating income has continued to accelerate. The ancillary income we're generating from our relationships. We're seeing positive growth in the foreign exchange as well as some significant fees through our business advisory services and growth in trade. In fact, we see growth across all our operating income streams. Abdul Wahid alluded to the investing that we have technology, people. This is driving the operating expense base, but also important to note that within that operating expense base, $5 million is related to people, $10 million is related to other operating expenses but a significant part of the operating expense growth is related to volume. So as we see the increase in our volumes, we're seeing increases in transaction costs, withholding tax, VAT, and this is one of the drivers. We also see a significant investment this year coming in from the back of last year in marketing. You'll see our profile is very prominent in the market, and our marketing expenses are cut across multiple areas of the Omani sectors, supporting our businesses. If we look at the impairment charges, we'll see that has increased, but the percentage is in line with last period. Commenting there, I mentioned the net interest margin of 2%, but also I referenced the other operating income growth, which remains high. particularly as a percentage of our total income. The balance sheet story is dominated by the growth in our loans. And from a funding perspective, we've continued to fund that through our customer deposits as well as interbank borrowing as well as the support from the perpetual AT1 of OMR 200 million back in September. Our capital story post the rights issue, very successful rights issue. We've demonstrated here the pro forma post rights issue, capital ratios using June '26 as the baseline, showing a 14.4% CET1 ratio of 17.8% Tier 1 and 18.5% total capital ratio, which places us very high in terms of the banking sector here in Oman. And more importantly, it positions the bank to continue with its growth story and it's strategic investments, including our branch in KSA. On the funding and liquidity side, noting the increase in our customer deposits to support the majority of the funding of our growth in loan book. We maintain a strong liquidity coverage ratio. We have seen some pressure on the net stable funding ratio, which we continue to monitor. But noting the volatility of interest rates in the market and globally, we're looking at opportunities to how to -- we will continue to manage that ratio, noting, as I say, the increasing volatility in rates and determining how best to fund that. And finally, just a note on credit quality. The cost of risk for the bank is at a similar level to where we were in 31 December at 47 basis points. We have seen an increase in our nonperforming loans. That has resulted in a reduction in our coverage ratio. Coverage ratio is well above 100. That is by design. We continue to balance the use of some management overlays with our cost of risk. Our restructured loans as a percentage of the total loan book is reduced. But in absolute terms, it has increased. And this is one of the reasons why we continue to maintain a strong coverage ratio for the bank. We'll now open the discussion up for Q&A.

This is [ Sundar ] here. I have a few questions. I'll stop with a couple of questions and then come back to you. One thing on what is your views on the latest regulation, which came from the -- both in terms of -- two regulations. One is on the CBO for the Islamic Windows Segregation. And what's your long-term views in terms of so far Islamic is one of the growing sectors. What are your views in terms of the segregation of the Islamic banking as a separate entity? And also the investment banking activity, which also has to be segregated as a separated -- this is an FSA one? And what are your thoughts? And what kind of steps Sohar is looking at as a strategy in terms of going forward? This is my first question. And my second question is on the Saudi growth. I think congratulations, I think, phenomenal growth the bank has achieved. This is one of the kind of fastest growth we have seen and you already made good in terms of bottom line contribution was also pretty strong. We just want to understand from the strategy perspective of Saudi because this is one of the markets which has gone through different cycles because the previously the all the banks from Oman and including certain banks had faced issues. Do you see a different strategy, which kind of sectors you're looking at in terms of KSA or a bit more? Because we just want to understand from the perspective of how the risk management goes through because the bank is following a bit more different aggressive kind of strategy in terms of growth. That's my second question. I'll stop here, and I'll have more questions, but I'll ask -- I'll keep that as two parts and then come back to you.

Thank you, Sundar. I believe regarding the regulation, I believe that both regulations and regulators looking for better departments and better stability and long-term for both regulation, either about investment banking or Islamic, will ensure a better performance and sustainability for both lines of business. Of course, we will continue investing in both of them until the segregation. What will happen in 3 years as we'll disclose about it at that time. About Saudi, myself, I was 11 years in Saudi. Craig, you were 18?

3 years.

3 years. So we know the Saudi market very well. As economy, I believe that Saudi was one of the most stable economy. All the banks and Saudi were performing very well at the return on equity, I think about 15% to 18%. A lot of projects, a lot of economical projects and growth is there in Saudi. I don't -- we believe that if you apply the ABCD in banking and you apply the right risk management supervision, which we do closely from Oman and in Saudi with our monthly visit, myself and the CRO, to the Saudi branch and having the right team, you would achieve the right results, which is our ultimate result is to enhance return on equity from the Saudi operation to take up the return of the consolidated balance sheet. I hope that's answered your question.

Yes. One thing I wanted to just check on that aspect of -- because the market share gain like the CFO was also seeing, pretty strong for the bank in the last 1 year, the growth rate has been pretty high. But if you see the reflection on the margins, it's not coming in, though you're gaining market share, the margins are under pressure. What is your kind of take on this because margin compression and your loan-to-deposit ratio is also moving to 88%. Previously, you had that lower levels. How do you see that? Because the market is also going through a kind of pace where still the economy is going through kind of set and stress because of the conflict. How do you see that, whether this kind of growth will have a kind of I know you've been saying on the quality side, I just want to understand from your strategy on market share growing and the margin compression a bit. How do you see that? And will this continue and you will take up the loan-to-deposit to more than 100% or what's the kind of growth you're looking at in terms of the next couple of years?

I think the answer is, clearly, our objective is to enhance and increase the return on equity. The return on it is very critical for us, but if we will have a lower margin with very high-quality assets, which will consume lower capital from us. What we are looking mainly is high return on equity and optimization of the our -- the optimization of our equity and capital. Regarding our growth, we'll continue our growth, either through Oman operation, the net in the deposit side in which we are doing that through more marketing and sponsorship and attracting more customers to us. all through the whole banking by lending the quality asset, diversified quality asset, either in Oman or Saudi.

Congratulations on a good set of numbers and very fantastic market share gains, and that has been a story for Bank Sohar for several -- a couple of years now. So just picking up on the previous question, could you tell us what are your thoughts on the general market outlook in terms of credit growth? We have seen the market picking up in that over the last 1.5 years. So do you see the momentum continues in terms of credit market growth? And where do you see yourself in terms of the market positioning both in terms of the credit growth as well as on the funding side?

Sure. I think our growth strategy is mainly going with the Vision 2040, in which the vision is to attract more FDI and that's -- in which we play a strong role there to attract more FDI to other countries and more investment to the country. So we try to be pioneer, finding those credit opportunity or even the depositors before they come to Oman and even to attract them and find them the right business opportunity to operate. And thus, going along with the Vision 2040 and we've also focused clearly on the sectors with the vision are focusing on. And we create a near economical report about east sectors and the forecast and the major players who should come and play a role in the Omani market.

I think it may have been in the previous presentation up to what we discussed some of the successes we've had internationally such as the transactions out of Brazil. the bank has ventured. We had a rep profits in Hong Kong that is there to support cross-border facilitation, customer taking the best of Oman to the world and the best of the world to Oman. So these international objectives are also money centric, not just so international centric.

Hong Kong operations, the best employees, everything is ready. The official opening revenue will be in September. But from now, we have almost 6 life transactions coming from Hong Kong in which investors from the world up coming to Oman, and we are working with them for different projects. And there's another 13 projects, for example, in Dubai. So thus maybe can reflect the growth which we are looking for above the normal growth, which you see in the market.

So how do you see the overall market growth going forward probably for the next 1.5, 18 months to 24 months?

See, in terms of numbers, I cannot disclose it. However, in terms of the economical growth, we believe there is a very strong pipeline investors coming to the Omani market. A lot of projects are planned in the Omani market, and thus, supported by the Vision 2040 and vision support them, so it is vice versa. And our role to maximize our input to those projects and also maximize the output of those going through the project.

Okay. Okay. And another question that I have is when you say that your strategy is ROE expansion, we have noticed that despite the fast growth in assets, we are not seeing this growth getting converting into the margins. The scalability of operations are not margin accretive. NIMs are on a continuously declining part. So could you please discuss the reasons for this lower NIMs? And where do you see the margins settling over the short to medium term?

Maybe we'll answer the same way. See, mainly our growth focus on very high-quality assets with lower capital allocation cost weighted asset and those asset normally will require lower margin. And that showed us our growth is mainly on a quality asset sustainable income. And all of that contributed to increase our return on equity. I believe we have a healthy growth in the NIM, but also a few units does our NBA increased by almost OMR 100 million mania in the last 12 months -- 18 months, sorry, and all of that reduced the interest income which booked in our profit and loss. So if you add the -- can you do your analysis, you will find that we have a healthy NIM and a healthy growth in the net interest income.

And also maybe to give another overlay to that from a perspective is the funding costs and KSA because we've done obviously have a retail operation there is one estimate. Also the general rapid growth in the bank. It takes some time to grow the retail base, which is obviously very reliable, sticky deposits and enhance the NIM. So as we move forward, we are seeing very positive growth in our retail deposits, but at the little of scale, it doesn't match the current level of loan growth. So what you're seeing is reflection of the bank's growth and the need for us to gradually catch up through that retail base. And we also do still see some, to an extent, some drop in the yields on some of our ultra treasury book, but it's now start to normalize. There was a story we had back in 2024. So there's some other dynamics within the drivers of that NIM, but over the longer term, we expect the NIM to improve.