Ahlibank reported a 36 per cent growth in net profit for the first half of this year. Recently the bank completed a rights issue to raise RO25mn for its venture into Islamic banking and boosting its Tier 1 capital.
In an interview to Muscat Daily, chief executive AbdulAziz al Balushi speaks about the bank's financial performance, the outlook for Islamic banking and the bank’s market position in the sultanate.
Ahlibank recently completed a rights issue of RO25mn. How are you going to use the proceeds from the issue? How much will the bank’s capital be after the issue?
The bank's current capital is RO95mn, which will rise to RO120mn after the successful completion of the rights issue. The RO25mn in proceeds will be part of our Tier I capital.
We floated the rights issue to comply with Central Bank of Oman (CBO) regulations in terms of minimum capital requirement, which is now RO100mn.
Out of the RO25mn from the rights issue, as much as RO20mn would be assigned to the Islamic banking window, subject to necessary approvals. So the capital for conventional banking would finally be RO100mn, with RO20mn going to Islamic banking.
The minimum capital requirement for an Islamic banking window is RO10mn, but we believe that is not enough to support the business. But I think RO20mn is reasonable enough in the beginning. We intend, and we are determined, to become a leading player in Islamic banking.
Earlier this year, Ahlibank acquired Middle East Brokerage Company (MEBC). What type of investment banking services are you offering and are there plans to introduce new products?
We started investment banking operations from the day we acquired the licence of MEBC without any interruption. At present we are offering only brokerage services which include buying and selling of listed securities on the Muscat Securities Market (MSM).
Our strategy is to allow clients to trade online not only in the Oman market but also in other GCC markets. This will be introduced in the near future.
You are planning to launch between four-ten Islamic banking branches over a year. What are your expectations from Islamic banking in the first year of operations?
I think that during the initial two-three months, Islamic banking windows will be involved in handling a lot of enquiries on Sharia-compliant products. We expect many of our existing clients to migrate from conventional banking to Islamic banking, before we land new clients.
Oman is going to be more conservative in terms of Islamic banking and when you are conservative you cannot offer all the products. I do not expect huge growth in this area.
In my view, simple consumer lending will not be a part of Islamic banking as the regulatory limit on consumer loans has already been reached. Mortgage loans and other asset-based activity will be a main part of Islamic banking in Oman.
I expect Islamic banking to account for five-ten per cent of total banking activity in the first two years.
Do you anticipate a slowdown in conventional banking activity due to the launch of Sharia banking?
As I said, there is not much scope for growth on the lending side of consumer banking due to CBO regulations. We will not see any significant growth in consumer loans, even in conventional banking, and the situation is going to be similar for Islamic banking.
Even new Islamic banks will find it difficult to get consumer lending business unless they innovate.
On the other hand, there will be tough competition in the mortgage loan business. As all conventional banks are planning Islamic windows, a lot of customers are likely to switch from conventional to Islamic banking for mortgage loans.
There is going to be a lot of competition for deposits as well. Many people like to park their money without earning interest. So deposits will migrate to Islamic banking and the competition for low-cost deposits is going to be tough.
How do you evaluate Ahlibank's first-half financial performance? What has been the impact of new regulations on retail lending?
We have seen good growth in all our segments in the first half of 2012. Loan growth of over 21 per cent has been established with a prudent risk-management approach and in a diversified manner.
However, we anticipate growth on the retail side to slow down because of the new regulations on debt burden ratio and the tenor of retail loans.
I believe CBO's retail-lending regulation was required in the country. If it was not managed, as it is today, it would have gone out of control in the future. However, there will be a slowdown in retail lending which is a challenge for banks, but it was a necessary step. It is good for the country in the long run.
What is your asset quality like? What is the level of non-performing loans (NPLs)?
We still have the lowest NPL level in the banking industry. Our loan book continues to be of a very high quality as reflected in our NPL ratio of 0.98 per cent as of June 30, 2012.
In the corporate segment, which is a large loan book, we consistently have had zero NPL for the last five years. We have had only three NPLs in the SME segment, out of which one has been fully settled and two were restructured.
From the beginning we have been proactive in account management, which has helped us maintain good asset quality. We do not anticipate any major increase in NPLs even next year.
“If we look at their flour-mill business, the government is compensating them for any rise in raw material prices. So profit margins will remain stable going forward and revenue will also increase from the expansion of industrial bakery operations.”
(Muscatdaily.Com / 05 August 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com