BusinessToday’s Banking Survey 2005 throws up some surprising results but overall it proved to be year of growth
BusinessToday Reports

It is that time of the year when we look back at the banking sector in detail in the year gone by. The year 2005 proved to be an eventful one for the sector, with each bank having its own story. BankMuscat got its GDR listed on the London Stock Exchange and looked at expanding beyond the shores of the sultanate, National Bank of Oman (NBO) shrugged off the disappointment of the failed merger with BankMuscat and moved ahead with the Commercial Bank of Qatar taking a 34.9 per cent stake and the bank embarking on a restructuring exercise. Riding the boom in industrial and infrastructure projects, Oman Arab Bank (OAB) consolidated its position as the preferred choice for project financing. Oman International Bank (OIB) strengthened its retail efforts and for Bank Dhofar it was a year of consolidating its marketing.

The big picture
The big news of the survey is the emergence of a new numero uno on the charts. OAB displaces BankMuscat from the number one spot to make it to the top – a jump of one spot since last year. BankMuscat slips two places on the charts to number three. OIB moves up two places from number four in 2004 to occupy the runner-up position this year. NBO’s restructuring efforts helped it climb one place from number five to number four and Bank Dhofar fell from number three to number five. Overall, 2005 proves to be a year of turbulence and change for the banking industry as erstwhile winners make way for new ones.

Abdul Kader Askalan, CEO, OAB, gives an insight into the bank’s values, “If you rise rapidly, your fall will also be equally rapid, so we follow a policy of reasonable growth and are keen to keep our financial position strong.” Slow and steady seems to be OAB’s credo.

And it seems to have paid off wonderfully for the bank.

We take a closer look at the performance of the banks by classifying the ranking parameters under asset quality, capitalisation, profitability, efficiency and growth indicators. The results throw up some interesting surprises.

Profitability indicators
It is all about the bottomline, a line that is bound to be familiar to anyone who is even remotely associated with the corporate sector. And it is true that the touchstone of the success of a business lies in its profitability. The survey takes earnings per share (EPS), return on equity (ROE), return on capital (ROC), return on assets (ROA) and interest spreads to gauge the profitability quotient of banks. OAB maintains its lead on the charts, and that too by a comfortable margin. It comes up trumps with 110 points, 29 points ahead of OIB, the number two bank on the profitability charts.

OAB tops the charts on ROE, ROA and interest spread. BankMuscat’s EPS of RO0.642 is the highest amongst all banks, followed by OAB’s RO0.456. BankMuscat’s ROC is also the highest amongst all banks.

Capitalisation indicators
The total assets of a bank and its growth in deposits indicate its capitalisation. OAB maintains its winning streak here as well with a 14.76 growth in deposits in 2005.

This is closely followed by OIB, whose deposits grew by 14.70 per cent. All banks except Bank Dhofar see their deposits growing in double digits.

BankMuscat, the biggest bank in Oman, is way ahead of the other banks in terms of total assets with an asset base of RO1993.81mn. This is followed by NBO with an asset base of RO869.86mn. OAB, the number one bank, surprisingly has the smallest asset base of RO40.03mn amongst all banks.

All banks are well capitalised and are in line with Basel II norms. Compared to an eight per cent capital adequacy ratio (CAR) stipulated by Basel II, the Central Bank of Oman stipulates banks to have a CAR of 12 per cent. Most banks have sufficient capital and good risk management systems in place.

Efficiency indicators
This shows how efficiently a bank deploys resources at its disposal. A tabulation of a bank’s operating expenses to its net operating income and its net profit per employee shows us how efficient a bank’s operations are.

OIB emerges as the most efficient on this count, followed by OAB. NBO comes at the bottom of the table, showing that the bank still needs to catch up. OAB’s operating expenses to its operating income of 42.49 per cent is the lowest amongst all banks, while NBO’s 50.50 per cent is the highest.

BankMuscat’s utilisation of manpower is the best in the industry with its net profit per employee being the highest, followed by OIB. OAB cuts a sorry figure on this count with its net profit per employee being low.

Growth indicators
A bank’s success is largely the result of its core banking activity and its growth. We pick up growth in loans, growth in net profits and growth in non-performing loans (NPLs) from the ranking parameters to give us a measure of a bank’s growth. The parameters throw up some interesting surprises. Bank Dhofar, with a 14.75 per cent growth in loan books, is the number one bank on this count, followed by OIB and OAB. NBO experiences a negative growth in loans to come at the bottom of the table.

NBO, however, puts up a brave perfor-mance when it comes to net profit growth which jumps by a phenomenal 289.3 per cent in 2005. OIB’s net profit jumps by 64.7 per cent. All banks except Bank Dhofar see a negative growth in their NPLs, with NBO leading the pack with a -56.40 per cent growth in NPLs. The strategy of banks to write off some bad loans and their efforts at recovering other bad loans seems to be paying off well. NBO’s strong showing makes it the number one bank on the growth indicator chart.

Asset quality
A bank’s quality of assets and its capital base are closely linked entities. The quality of assets of a bank can be seen by seeing the ratio of its NPLs as a proportion of its gross loans. Thus a high NPL shows a poor quality of assets and vice versa. BankMuscat has the best asset quality with a 6.52 per cent NPL to gross loan ratio. This is followed by OAB and Bank Dhofar. NBO is at the rock bottom with a 17.57 per cent NPL to gross loan ratio. So while NBO may have started the recovery process, it still has some work to do on this count.

Overall, 2005 proved to be a good year for the sector. High crude oil prices and the attendant liquidity in the system combined with big-ticket infrastructure projects ensured good business for banks. Says Sulaiman al Kindy, deputy general manager and head of retail banking, OIB, “The banking industry in Oman is in good shape and banks are performing their task of nation building. Strong economic growth and infrastructure growth will help banks to do well in the coming years.”

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#1 Oman Arab Bank
Conservatism pays

“We have pursued a policy of reasonable but steady growth,” says Abdul Kader Askalan, CEO, Oman Arab Bank (OAB). The policy seems to have paid off for the bank as OAB emerges as the numero uno in BusinessToday’s banks survey for 2005. The bank has been a steady performer on the charts and owes its success to its approach to business. “We are a very conservative bank. We do not like to give facilities which are either not clean or do not have enough security,” says Askalan.

This approach has led OAB to concentrate its energies on project finance. For it, financing big-ticket projects is not merely a transaction but a minutely executed marketing exercise. The bank starts to touch base with contractors (in an effort to know them) when the project is on the drawing board stage itself. Contacting all the bidders and offering them the bank’s services follow this.

The bank goes out of its way to offer companies facilities, which other institutions would hardly consider. To take a few examples, OAB set up a temporary branch at the Oman LNG site when the project was under construction for the benefit of the site workers, contractors and the company. It has done the same for the Oman-India Fertiliser Plant at Sur and the Port of Sohar. Once the project is executed, the bank withdraws its facility. “We give customers the most comprehensive service. The effort is to give them the confidence that we can serve them in a better way.”

The bank has financed 90 per cent of the industrial projects being executed in the Batinah region and the Sohar Industrial Area. OAB was the local banker of Barr al Jissah resort project and underwrote US$175mn to Sohar Aluminium. In case its lending starts hitting the single borrower limit set by the Central Bank of Oman (CBO), it asks Arab Bank, its parent bank, to step in as a guarantor so that it can fulfil the capital requirements of its clients. Moody’s Investors Service upgraded OAB’s foreign currency deposit ratings to Baa/Prime 2 in 2005. Meanwhile, Fitch upgraded it’s long term rating to BBB.

The bank is the preferred choice of traders in the sultanate as it has simplified processes like opening letter of credits (LOCs) and extending credit guarantees. Thus commercial loans make up 70 per cent of OAB’s lending portfolio while personal loans account for 30 per cent. This despite the fact that personal loans give banks a better return of around nine per cent compared to the six to seven per cent return that project finance fetches.

However, the difference is minimised when we factorise the commission on exchange of currency and interest. Askalan underlines the bank’s ethos. “The real role of banks is to participate in the development of the nation and not just give money to persons for non-productive purposes.”

This is not to say that OAB is unconcerned about retail finance. The bank follows a policy of opening one or two branches every year. “The most important thing is to make a customer feel that you are a friend rather than a banker.” The bank has started offering investment and portfolio management services for customers. OAB realises that its interest income in the long run is not enough to cover costs. It is therefore training its sights on fee-based income. Human resource is seen as a key factor at the bank. It conducted 79 training courses for 643 employees in 2005, with a participation ratio of 122 per cent.

In 2006, OAB plans to increase its capital base by RO8mn to reach the RO50mn mandatory requirement stipulated by CBO. This is sure to strengthen the asset base of the bank.

#2 Oman INTERNATIONAL Bank
Retail thrust

If project financing has been OAB’s forte, Oman International Bank (OIB) owes its success to its retail strategy. The bank was the first to start a prize money scheme about 20 years back. It followed this up by branding it and Mandoos was born. The success of the scheme has seen almost all banks in Oman following OIB’s lead and floating their own versions of Mandoos. “The Mandoos scheme is well spread with a lot of winners. The scheme is flexible, as any customer who saves RO100 has a chance to win the prize. It also guarantees a prize for every 50th customer,” says Sulaiman al Kindy, deputy general manager and head of retail banking, OIB.

While Mandoos has been the flagship of the bank’s retail strategy, the other contributor has been its geographical coverage. “We have very good representation. OIB has a presence in places like Tiwi, Musana’a, Firq, Wadi bani Khalid and Diba, where no other bank has a presence,” says V S M Raju, assistant general manager, finance, OIB.
Spotting opportunities, the bank has been quick to introduce new products like education loans, bancassurance et al. Aman bancassurance makes OIB a one-stop-shop for all personal financial requirements, including insurance within its existing relationship. The bank customises loans to suit a customer’s paying capacity. “With the economy doing well, a lot of people have a need for loans and we capture them as customers,” says Raju. The bank is looking at non-interest based activities to earn fee-based income.

With CBO stipulating a 42.5 per cent cap on personal loans by a bank, OIB is looking at increasing project financing. It created a corporate cell to target this growing segment three years back. And the initiative has paid off with the bank financing a large number of infrastructure projects. Kindy says, “We are associated with almost all the projects which have come up in Sur, Salalah and Sohar.” Most of these have been in projects which have a predominantly government holding, ensuring the repayment quality of such loans.

While the bank has done well, there are a few concerns. And one of them has been its tardy pace of bringing down NPLs. The bank comes fourth on the charts in terms of bringing down NPLs. Reacting to the charge, Raju says, “The incremental growth in our NPLs has been lower than earlier years. Secondly, we do not write off any bad loans on our books as other banks. We make all possible efforts to recover such loans. So, even though as ratio our NPLs may appear high, we are well provisioned for such loans.” The argument seems to be valid. The bank has been following a strategy of adding loans with a better collateral security and better cost control in the last three to four years, helping it improve the quality of its loan book.

Human resource development has been a guiding light for the bank, keeping with the vision of its founder H E Dr Omar Zawawi. It recruited 35 employees at various levels in 2005. Job opportunities were offered to young and talented Omani graduates. The bank maintained its ISO 9001:2000 international certification for 2005. OIB implemented the CBO sponsored real time gross settlement system (RTGS) in 2005. In addition, the bank implemented a treasury quartz package, including asset liability management.

OIB’s strategies on various fronts have helped the bank register its best performance on the charts in the last four years, claiming the number two spot in the overall rankings. The bank is looking at consolidating its position in both retail and project finance in 2006. And as the bank’s tag line says: ‘You can win’, OIB will surely hope to do the same.

#3 BankMUSCAT
A pie in the sky

Despite having slipped by two places on the charts, BankMuscat continued its strong showing. The bank has been a trendsetter for the banking sector in Oman for the last few years and 2005 was no different. The bank also became the first bank in the Gulf region to get its Global Depository Receipts (GDR) initiative listed on the London Stock Exchange fetching it US$163mn in 2005. It introduced a new electronic queue management system and increased its ATM strength to over 170. The bank has been one of the first ones to introduce the Central Bank of Oman-mandated real time gross settlement system (RTGS), which would expedite fund transfer between banks, leading to enhanced liquidity management.

Says Abdulrazak Ali Issa, chief executive, BankMuscat, “Our strategy in Oman revolves around our striving to become the undisputed leader in every business segment we operate in. We are focused on reaching out and touching every family in Oman with at least one of our products.”

BankMuscat is the only bank in Oman, which is aggressively looking at growing beyond the shores of Oman. In pursuance of this strategy it has established a presence in Bahrain through BankMuscat International, for which it got a licence in 2005, and in India through its acquisition of Centurion Bank. The bank is working on its proposed plan to start operations in Saudi Arabia in the second half of 2006.

“For our operations overseas, we would like to take on a more conservative approach: we would like to enter each of our target geographies with a clear focus on asset and service quality. We would look to establish the BankMuscat brand name in each of these markets by virtue of offering superior quality customer service first and then riding on the resulting equity of this initiative to build a formidable asset base,” says Issa. The bank is looking at providing customers, irrespective of geography, with the finest products, services and banking solutions from across the world.

And it seems to be getting there. The New York-based Global Finance, a reputed financial publication, declared the bank the best forex bank in Oman last year.

During 2005, the bank continued to build on its strong foundations. The bank posted a net profit of RO45.4mn for the 2005 as against a net profit of RO34.1mn for 2004, an increase of 33 per cent. Strong all-round performance across the bank’s business lines in Oman and international operations helped achieve this.

On the domestic front, the bank focused on quality lending in project finance and corporate loans coupled with a strong thrust on retail portfolio growth, particularly in retail customer deposits. Fee-based income through the bank’s various business lines, including treasury, trade finance, investment banking and corporate advisory services also added significantly to the bottom line. BankMuscat was the lead manager for Omantel and Taageer Finance.

Speaking about the bank’s future direction, Issa says, “We have often shared our vision of becoming a leading regional bank by the turn of the decade. Our goals for the current year are derived from that vision. During FY2006 we plan to refocus our business lines in line with emerging market and customer trends, re-examine many of our current systems and procedures, and introduce more and more initiatives that are focused on our becoming an increasingly sales-oriented organisation from our current service-focused stand.” And if the bank’s past record is anything to go by one can be sure about BankMuscat moving on to greater heights.

#4 NATIONAL BANK OF OMAN
Making a mark

The year 2005 has been a remarkable one for National Bank of Oman (NBO). The bank reported its highest ever net profit at RO20.32mn for the year ended December 2005, since its inception in 1973. NBO seems well poised to architect its comeback, especi-ally with its main bugbear, non-performing loans (NPLs) reined in. While the numbers are still substantial with NPL at RO111.70mn in 2005, it is less than half of the previous year’s figure of RO250mn. CEO Andrew Duff is qui-etly confident. “There is a cycle that we are going through and by 2008 our provisions will exceed our revenues.” High levels of provisioning will help the bank use a higher level of their income to earn profits.

Having brought its NPLs down to 15-16 per cent, the bank has trained its sights higher this year. Says Duff, “The acceptable norm for NPLs internationally is eight per cent. In the Middle East, however, banks look at maintaining it at below 10 per cent of their gross business. At NBO we want NPLs to be no greater than seven to eight per cent in 2006.”

As it stands today, NBO is one of the largest banks in Oman with a paid up capital of RO80mn and a market capitalisation of RO384mn (as on March 6, 2006). Overall it holds a 13 per cent weightage on the MSM index. NBO has identified three priority areas for sustained growth: chalking and implementing a growth strategy, developing human resources and creating and tapping into new opportunities.

Having borne the brunt of bad loans, the bank is conscious about the need to put in place a good risk management system. The bank is looking at putting together a risk management structure in place by the end of 2006. The structure will take into account credit risk, market risk and operational risks and endeavour to manage them. For a start, the bank has tightened its credit policy. In addition to Basel II, NBO is also implementing the Balance Scorecard model devised by Robert Kaplan of Harvard Business School. Says Duff, “The scorecard will analyse all our processes and help us to bring down our elapsed time and mistakes by 90 per cent in the first phase.”

On growth opportunities, NBO is clear that it will be looking at only organic growth for now. The bank is confident of the existing opportunities in Oman and the UAE and is looking forward to capitalise on them.

Looking at the macro economic picture, Duff says, “We expect Oman to grow rapidly and as oil and gas income increases, the government spending on infrastructure will grow. Secondly, Oman is working on opening its borders under the Seventh Five Year Plan, and as economic activity picks up we are well positioned to participate in it.” As infrastructure projects take off in a big way, NBO has reasons to be pleased.

In addition to project finance, the bank is bullish about its prospects in the UAE. NBO has a branch in Abu Dhabi. “Though we have had a banking license in the UAE for the last 25 years, we have not optimised it, but we will now be investing capital and resources.”

“The major challenge that we face is that the bank has been inwardly focused for the past three years on preserving capital. And of course that’s an entirely appropriate thing to do when you are suffering from a higher than normal level of NPLs. But what we now need to do is to reverse that culture and get the bank looking outwards,” says Duff. Sensing numerous opportunities in areas like mortgages, credit cards, wealth management, investment sales and bancassurance, NBO is working on offering innovative and interesting products to customers.

#5 BANK DHOFAR
Losing steam

Bank Dhofar comes at number five on the charts. It was the number one bank on the survey in 2003, but has slipped since then. Despite a fall, the bank has a lot of strengths and is lik-ely to come out of its cyclical downturn soon. The bank boasts of a good asset quality and its NPLs to gross loans percentage is a healthy 7.68 per cent. Its net profits in 2005 stood at RO14.19mn, up from RO11.07mn in 2004. The bank also has a good level of provisions.

The focus areas of the bank in 2005 have been enhancing and developing value-added deposits, credit and investment products and services. The expansion and diversification of its distribution channels helped it move closer to customers and provide convenient, fast and customer friendly services. The bank’s call centre Wisal is all about giving customers better service 24/7.

With infrastructure projects picking up, it is striving to become the preferred bank for corporate customers in Oman and serve as a one-stop shop for all their banking requi-rements and services. Project financing is seen as an input in nation building. Bank Dhofar has been associated with a large number of projects like the refinancing of Salalah Port Services, Barr al Jissah resort, Sohar Power, Sohar Refinery, Oman India Fertiliser Company, power projects being set up by Al Kamil, AES Barka, Dhofar Power, Oman LNG and Oman Gas.

In order to generate fee based income, the bank is looking at offering investment banking and structured finance services like bancassurance. The bank already has bancassurance products. It has constantly striven to upgrade technology for excellence in services and to enhance the skill sets of its staff.

Says Ahmed Ali al Shanfari, CEO, Bank Dhofar, “It has been our strategy to move forw-ard with our customers and stakeholders. We are committed to constant growth by adapting to market dynamics. We focus on customer satisfaction and have a clear vision of being the best in the banking industry in Oman.” Bank Dhofar has consistently aimed at achieving ambitious growth in its business, but at the same time adapting prudent measures to maintain its asset quality intact. It introduced a new version of Al Hesson savings scheme in 2005. “Developing and introducing value-added products, expanding and diversifying the distribution channels to remain closer to the customers, active marketing of products and services and constantly upgrading the technology and staff skills to achieve excellence in delivery are the measures adapted in achieving business growth,” says Shanfari.

Bank Dhofar has a web-based trade finance system ‘eZtrade’, which allows its corporate customers to enter requests and track their letter of credits, bank guarantees, export and export bills et al on the Internet. In 2006, the bank is looking at stepping up efforts to bring in value-added products. The bank is looking at entering the mortgage loan sector. Marketing and image building – a process which started two years ago will continue to be a priority for the bank. “We are looking at streamlining delivery channels to enhance our efficiency levels, optimising e-banking strategies and to strengthen investment banking and structured finance, direct sales unit and call centre services.”

Bank Dhofar is also looking to expand beyond the shores of Oman. For starters, it wants to leverage its arrangement with ICICI Bank in India and then follow this up by opening new branches and realigning a few existing ones. Upgrading the skills of its HR is also a concern for the bank. Hopefully these measures should help it regain its rightful place on the charts.