Chairman's report 2010

Chairman's Report 2010

Dear Shareholders,

I am glad to share with you the encouraging results achieved by the Bank during 2010. Amid the challenging global economic and financial situation, the key business lines of the Bank recorded healthy performance on expected lines.

Oman's Economy

The Sultanate's focus on diversifying the economy away from its reliance on the hydrocarbons sector and creating employment for the young and fast-expanding population was much in evidence in line with the 3.8 per cent real GDP growth forecast for 2010. The expansionary financial, economic and monetary policies were on track, providing a sustained catalyst for development in Oman. In view of higher oil production and prices, the current account recorded surpluses. The banking and financial sector witnessed healthy performance in tandem with the economic recovery led by sustained consumer demand and public sector activities.

Financial Overview

The Bank achieved a net profit of RO 101.6 million for the year ended 31 December 2010 as against a net profit of RO 73.7 million reported in 2009, an increase 37.8%. The net profit for the year ended 31 December 2009 included RO 53.2 million of post-tax gain on sale of HDFC Bank investment, RO 10 million losses on available-for-sale investment portfolio and around RO 60 million of provision for credit losses towards Saudi branch exposures. Excluding these one-off items, the adjusted net profit for the year 2009 was RO 90.5 million. Thus, on a like to like comparison, the net profit for the year ended 31 December 2010 showed an increase of 12.3 per cent over the year 2009.

Net interest income increased by 7.3% from RO 174.4 million in 2009 to RO 187.2 million in 2010 supported by combination of improvement in net interest margin and asset growth. Non-interest income was RO 78.3 million in 2010 as against RO 116.7 (including gain on sale of HDFC investment) million in 2009. Non-interest income was higher by 22% compared to the year 2009, excluding the gain on HDFC Bank investment and realised losses on Available-for-Sale investment.

Operating expenses for the year ended 31 December 2010 was at RO 102.9 million, an increase of 25.3% as compared to 2009. The increase in operating expense is attributable to the long-term vision and strategy to develop the banking infrastructure by way of technology investments, expansion of business and delivery channel network to provide better service and maintain the leadership position. The Cost to Income ratio for the year 2010 was 38.7% as compared to 35.6% for the year 2009 excluding the gain on HDFC Bank investment.

Impairment for credit losses for the year ended 31 December 2010 was RO 46.6 million as against RO 98.2 million in 2009. During the year 2010, the Bank recovered RO 13.6 million from impairment for credit losses compared to RO 10.6 million in 2009. The Bank holds a non-specific loan loss provision of RO 56.1 million as at 31 December 2010 as per the requirements of Central Bank of Oman. Share of loss from associates was RO 12.6 million for in 2010 as against RO 10.5 million in 2009. Higher share of loss from associates was driven by net loss from BMI Bank due to higher credit losses.

The Bank's net loans and advances portfolio grew by RO 169 million or 4.4% to RO 4,008 million as at 31 December 2010 compared to RO 3,838 million as at 31 December 2009. Customer deposits as at 31 December 2010 was RO 3,527 million as compared to RO 3,068 million as at 31 December 2009, higher by RO 14.9% mainly due to increase in demand deposits and savings deposits as the Bank continued its efforts to mobilize low cost deposits. The Bank's savings deposits grew by 12.8% from RO 817 million as at 31 December 2009 to RO 922 million as at 31 December 2010 and demand deposits grew by 28.1% from RO 964 million in 2009 to RO 1,235 million as at 31 December 2010.

The return on average assets improved from 1.2% in 2009 to 1.74% in 2010. The return on average equity was 14.6% in 2010 as compared to 10.9% in 2009. The basic earnings per share was RO 0.075 in 2010 as against RO 0.068 in 2009. The Bank's capital adequacy ratio stood at 15.4% as on 31 December 2010 before the appropriation for dividend for the year 2010 against the minimum required level of 12% by the Central Bank of Oman.

For the year 2010, the Board of Directors has proposed a dividend of 45%, 30% in the form of cash and 15% in the form of bonus shares. Thus shareholders would receive cash dividend of RO 0.030 per ordinary share of RO 0.100 each aggregating to RO 40.39 million on the Group's existing share capital. In addition, they would receive bonus shares in the proportion of one share for every 6.666 ordinary shares aggregating to 201,962,571 shares of RO 0.100 each amounting to RO 20.196 million. The proposed cash dividend and issuance of bonus shares are subject to formal approval of the shareholders at the Annual General Meeting.

Strategic initiatives

·; Commemorating 40 years of the glorious Renaissance march under the leadership of His Majesty Sultan Qaboos, BankMuscat launched a major national campaign envisaging year-long celebratory initiatives, programmes and activities in 2010. Titled 'Oman Celebrates', the objective of the campaign was to initiate programmes that celebrate and mark the country's achievements during the last 40 years. 

·; The Kuwait operations of BankMuscat were launched with a state-of-the-art branch. The new branch marked the Bank's extension of footprint in the GCC region, covering all six countries through direct and indirect network entities. The branch currently offers corporate banking, trade and treasury services. The focus is to support the growth of the Kuwait economy, particularly investment and trade flows between Kuwait and Oman.

·; Muscat Capital, the investment banking subsidiary of BankMuscat was launched in Saudi Arabia. Licensed to offer full securities service in Saudi Arabia, Muscat Capital aims to recreate the Bank's success story in the areas of investment banking, brokerage and wealth management in Saudi Arabia.

·; BankMuscat launched and raised RO 105 million of commitments from local and regional investors for the Oman Fixed Income Fund (OMFI). OMFI is the largest fund of its kind and the first such fund dedicated for investing in subordinated debt issuances.

·; BankMuscat introduced, for the first time in Oman, the book-building route for the initial public offering (IPO) of leading Omani-Qatari telecom company Nawras. This was the largest IPO that was successfully closed in the GCC region in 2010 and also the first IPO in nearly two years in Oman.

·; Oman came under the spotlight as a model for sustainable development as BankMuscat hosted the advisory board meeting of Vale Columbia Centre on Sustainable International Investment, a global think-tank on sustainable foreign direct investment. The meeting on the theme 'Partnering for Progress', hosted at the landmark new headquarters of BankMuscat, marked a new beginning for Oman in attracting sustainable foreign direct investment (FDI).

·; The landmark new headquarters of BankMuscat was dedicated to the nation at a grand celebration coinciding with the 40th National Day celebrations. The occasion marked a milestone, highlighting the 28-year progress and achievements of the leading financial services provider in the Sultanate. The state-of-the-art headquarters ushers in a new beginning for the Bank and establishes its position among the premier banking establishments across the world.

Awards and accolades

The Bank won prestigious global, regional and local awards in 2010. The notable accolades included the Asian Banker Leadership Achievement Award conferred on Sheikh AbdulMalik bin Abdullah Al Khalili, Chairman of BankMuscat, and the Strongest Bank in Oman Award. The Bank achieved a rare distinction, becoming the first and only corporate entity from Oman to be listed in The Forbes Global 2000 featuring the biggest and most powerful listed companies of the world. The Bank won for the eighth consecutive year the Bank of Year - Oman Award by The Banker (Financial Times, London), besides the prestigious Hawkamah-UAB Corporate Governance Award. Further raising the bar as the employer of choice, the Bank won Asia's Best Employer Brand Award and Asia's Best Brand Award. The Bank also won the JP Morgan Quality Recognition Award for Operational Excellence for the 10th consecutive year. In 2010, the Bank has been ranked 16th in the global league tables published by Project Finance International (PFI) for global advisory mandates closed in 2010, continuing its run as a top 20 Global Advisor.

The Year Ahead

The overall economic outlook for 2011 remains positive with the real GDP growth expected to gain momentum due to sustained oil demand and accommodative government policies. Oman's real GDP growth is forecast to accelerate further to 4.1 per cent in 2011.

The Bank has strong reputation and is confident of retaining its leading position in the country. With robust policies and procedures on cross-border country/bank exposures to effectively mitigate future challenges, the Bank pursues global best practices in the field of risk management. Key lessons learnt from the global financial crisis will ensure in making risk management practices followed by the Bank more relevant and up to date.

In Conclusion

On behalf of the Board of Directors, I take this opportunity to thank the banking community, both in Oman and overseas, for the confidence reposed in the Bank. I would also like to thank the Management Team and all our employees for their dedication and commitment to press ahead amid the challenging situation to reach higher levels of excellence.

The Board of Directors welcomes and supports the measures taken by the Central Bank of Oman and the Capital Market Authority to strengthen the financial market in the Sultanate. The foresight and market-friendly policies adopted by His Majesty's Government have helped the Bank to record encouraging results.

The Board of Directors is deeply grateful to His Majesty Sultan Qaboos Bin Said for his vision and guidance, which has helped the country along its path of growth and prosperity during the last 40 years.

AbdulMalik bin Abdullah Al Khalili