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promising start

Bank Sohar, a new player in the banking arena, may change the way the industry operates
Mayank Singh

Ten weeks may be too short a time to judge an institution, more so a bank, but the first quarter financial results of Bank Sohar has forced people to sit up and take notice. The bank has posted an impressive array of numbers – its total assets from April 9 to June 30, 2007 are RO173.39mn, its operating profits RO455,000. Says Hari Kumar Varma, vice president - research, Vision Securities, "Their asset growth has been impressive. This shows that they are leveraging their capital base well." Starting with a capital base of RO50mn, the bank can write assets up to RO500mn, ten times its capital base as per the Central Bank of Oman (CBO) rules.

Without taking anything away from the financials, the story at Bank Sohar is more about the intangibles like the best practices that the institution is bringing to the table. These have the potential to redefine the banking landscape in the sultanate. Though new, the bank does not see itself as a small bank and has aspirations of becoming one of the premier banks in the country. It plans to get there not by the conventional route but by being a player who changes the game. Says Nani Javeri, CEO, Bank Sohar, "Ten weeks is too short a time to say that one has achieved an outstanding financial result. It has been a satisfying result, but more important from our perspective is the infrastructure that we have built and the platform that we are building for future growth." A better than expected initial response has emboldened the bank to accelerate a number of its investments upfront.

Novel approach
Technology and using it to steal a march is a recurring theme in any conversation at the bank. Says Raman Kaicker, CFO, Bank Sohar, "The terra firma is going to change because of technology." Unencumbered by any legacy, the bank is using technology to improve its network, reach and operations. For instance, its ATMs will give customers facilities like depositing US dollars and withdrawing rials. It is also looking at using SMS imaginatively to service customers rather than merely sending out alerts. "There is going to be an evolution of the customer’s banking habits. His neighbourhood banker is going to be represented by his mobile phone," says Kaicker.

Technology is also being used to keep costs down. Instead of having 40-50 people manning each branch, Bank Sohar will have 12 people managing a big branch and six running a smaller one. This will help the bank cut its operational cost. The bank is also breaking new ground in the way it services the SME segment. As a rule of thumb, if a large corporate house is charged around nine per cent interest per annum on a loan, most banks end up charging 12-13 per cent interest rate from SMEs. The bank feels that this is unfair and is working towards at bringing in a level playing field. "Just because they are small does not mean that they need to be overcharged, price is a function of risk and if the risk is small then there is no reason for overcharging them," says Javeri.

In a market where SMEs are being wooed increasingly – BankMuscat launched Al Wathbah, a specialised SME credit and marketing department in 2006, NBO has an SME unit within its corporate banking division – Bank Sohar feels better pricing, along with a knowledge based approach, as in giving them the right advice and partnership, will be their differentiator in the market. Going hand-in-hand is the policy of being transparent. The bank claims to be open with customers, sharing information and having no hidden charges. Says Kaicker, "Our fine print is our broad print."

With the GDP growing at 15 per cent in 2006 and all round economic activity and confidence peaking, the bank could not have opted for a better time to commence operations. "If we had come in during 1999-2000, things would have been different," says Javeri.

The flip side
Despite a promising showing, analysts are quick to point out concern areas regarding the bank. It is a two-branch operation, compared to BankMuscat's 100 and Oman International Bank's 82 branches. A bigger footprint translates into an ability to access low priced funds as the interest on prize driven savings schemes is trivial. For example, BankMuscat boasted of customer loans worth RO1817.10mn in 2006, giving them access to a big source of low priced funds. Says Varma, "A small network will means a much higher cost of funding." The bank agrees. "Till we have that kind of distribution reach, the core deposits available to other banks will not be available to us in the same numbers, but we will have other ways of compensating. Two years from now we will have a fairly sizeable core deposit," says Javeri. The bank is opening a branch in Nizwa apart from two new branches in Muscat. This will be upgraded to a 15-20 branch network by 2008.

An equity research manager at a rival bank points out the low interest income at Bank Sohar. The bank earned an interest of 6.09 per cent on net loans and advances of RO100.33mn. Average yields of the established banks range from 8-9 per cent. Says Javeri, "Margins are a relative issue, few countries work on the kind of margins that Omani banks work with. Interest margins are under some kind of pressure, but they are nowhere close to international standards." Pressure on interest income is an issue facing all banks. Multinational companies like Alcan or LG can negotiate rock bottom rates. As local firms get stronger their bargaining power goes up. It is no secret that this has led to most banks looking at fee-based income and transaction banking as alternative revenue sources.

Says Varma, "The bank has not given out a clear-cut strategy whether it will focus on retail or on corporate loans." Looking at Bank Sohar's balance sheet, one finds that close to 68 per cent of the bank's loans and advances are personal loans. The bank says that it will look after the interest of all segments – retail as well as corporate.

As per CBO guidelines, of the total loan portfolio of a bank, personal loans can go up to 55 per cent, corporate loans 40 per cent and housing loans five per cent. The bank has got an exemption for now but it is working towards fulfilling the regulatory parameters by the end of 2007. Bank officials point out that this is nothing out of the ordinary as CBO gives such exemptions at times. When CBO introduced a one per cent provision for personal and two per cent for corporate loans, banks were given three years to meet the requirement.

Some analysts feel that it is too early to take a call on Bank Sohar as a bank needs to go through one credit cycle before it stabilises. "That's not true. What is tested in a credit cycle is your risk management policies. At Bank Sohar, we lay considerable stress on quality of the credit and have robust risk mitigation mechanisms in place," says Javeri. The bank has been conscious about not writing assets that are dodgy and sub-standard. Moreover, it has been making adequate provisions from day one. These stood at RO1.7mn at the end of June.

With Bank Sohar off to a promising start and new banks like Al Ahli United and National Bank of Abu Dhabi set to enter the market, is the sultanate’s banking business in for a fundamental change? "Competition wakes everybody up and there are signs of that everywhere," says Javeri.