- aofsoman@omantel.net.om
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MANAGEMENT DISCUSSION AND ANALYSIS REPORT
OVERVIEW
Al Omaniya Financial Services (AOFS) has completed 26 years of successful operations as a Non-Banking Financial Institution, offering a comprehensive range of financial products. Over its tenure of more than two and half decades, the company has established a strong market presence with robust systems and processes and has crossed many significant milestones. The following discussion and analysis provide information that the management believes, is useful in understanding AOFS’s operating results and financial position. The discussion is based on AOFS’s continuing operations and should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. Certain statements in the MD&AR describing the company’s views, objectives, projections, estimates, expectations, etc. may be extrapolative within the ambit of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors like changes in government regulations, tax laws, interest rates in the domestic and international markets, demand and supply of capital goods, etc. may influence the company’s operating results.
WORLD ECONOMIC OUTLOOK
As we usher into the year 2023, the world economy continues to show fragility with global growth slackening in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine. The IMF has forecasted 2.9% growth for 2023 as against 3.4% growth last year. The IMF sees the pace of global growth falling this year compared with 2022, but by a smaller margin than it predicted in October 2022 The US central bank has slowed the pace of its interest rate hikes but opines there will be ongoing increases as it continues to battle inflation. The Federal Reserve has recently increased its benchmark overnight interest rate by a quarter of a percentage point, taking it to a range of 4.50-4.75%. This follows six larger rises in a row. The FED Chair is of the opinion that though inflation has begun to slow, we can expect a couple of more rate hikes, though not very sharp, in the months ahead and we do not see the Fed cutting rates this year. The risks to the outlook remain tilted to the downside, even if adverse risks have moderated since October 2022 and some positive factors gained in relevance.
DOMESTIC ECONOMY
The sultanate adopted various fiscal measures over the past couple of years to support the economy including interest-free emergency loans, tax and fee reductions / waivers, the flexibility to pay taxes in instalments, a Job Security Fund to support citizens who lost their jobs and deferment of loan repayments as the economy was hit by a dual shock of the pandemic and a collapse in oil prices
Oman is on the path to moderate growth since October 2022, primarily driven by higher crude oil and gas prices and production coupled with increased tax collection. Oman recorded a budget surplus of RO 1.146 bn for the year 2022. The additional financial revenues enabled the government to pay off part of the public debt. Oman’s 2023 budget is based on a prudent average oil price of US$55 per barrel while the actual average for 2022 was above $94 per barrel. The oil price is expected to be stable in 2023. Also, the Omani government has been taking steps to diversify its economy away from its heavy reliance on oil by investing in sectors such as tourism, logistics, and manufacturing and these efforts are expected to bear fruit in 2023 and beyond. All these have prompted the major rating agencies to upgrade the credit rating of Oman resulting in enhanced confidence of foreign investors, corroborating the accomplishment of Oman’s financial & economic policies. However, there are significant works that still needs to be done to navigate through the existing challenges to put Oman on a more sustainable path.
The tightening of liquidity in the market leading to an unprecedented increase in the cost of funding could dent the economic growth prompting mainly the distressed borrowers opting for borrowing at these rates which would not only create immense pressure on the borrowers but may also result in higher delinquencies.
Opportunities and Threats
While the economy appears to have entered into a subdued recovery mode, policymakers still face daunting challenges - in debt management, liquidity management, budget policies, public health, central banking and structural reforms. The company has followed a prudent approach in writing new businesses with focus on maintaining the asset quality besides scouting for quality assets, keeping the non-performing loans under control. As the oil price continues to be stable, we can expect the authorities to pump in the necessary liquidity to ensure that the economy gains traction and gets the much-needed impetus for robust growth. The company has focussed and succeeded in rationalising costs and improved collection mechanisms leading to the achievement of lowest NPA ratio in the industry.
The company has over the years, planned the necessary human resources, enhanced the capital base and is continuously seeking to upgrade and develop IT system to address the need of the hour. The Company is upgrading its security aspects, hardware infrastructure and data-base and is in the process of diversifying its distribution channel through Mobile APP.
The company follows a prudent provisioning policy and this has given it an advantageous NPA coverage of 464% (including the specific reserve for non-performing assets) which will help the company to tide over any unforeseen losses. The company shall continue to maintain its provisioning stance subject to behaviour of the debt.
The company is proactive, confident, and properly geared up to meet challenges and exploit available opportunities for a profitable and sustainable growth both in the short as well as long run without compromising on the asset quality.
Product Wise Performance
The company with its existing product lines of project funding through consortium financing, working capital funding, asset financing, bills discounting and debt factoring, including its ‘Lifeline’ and ‘Lifestyle’ segments has managed to retain quality assets.
The retail asset financing product under the brand name ‘Lifeline’ offers a variety of specialised finance products for the self-employed, salaried individuals, transport operators, small and large businesses, etc. The ‘Lifestyle’ loan segment (micro credit program) continues to do exceedingly where the company has a good network through its branches and employer tieups.
Our service has the unique attributes of speed, transparency, quick response, empathy, understanding customer concerns and ethical fair practices. We endeavour to build products and services around customer needs. Our deliverables of simple documentation, quick credit approvals, competitive interest rates and other value-added services have created a large, satisfied clientele for the company.
Business Continuity Plan
Based on the Board approved Business Continuity Plan (BCP), and based on Business Impact analysis, the company has tested the BCP successfully from its BCP site at Nizwa on the 15 December 2022.
The company has the necessary BCP set up at its alternate site at Nizwa and back up and disaster recovery operations for its IT Systems were tested and found robust. The company has the capacity to continue major operational activities in the unfortunate event of major disruptions with minimum down time.
Risks and Concerns
Managing risks means understanding the static and dynamic risks involved in our businesses and assessing the potential impacts and likelihood of each risk. The overall risk governance framework of the company includes strong corporate oversight, independent internal audit function and well laid down policies and processes. The company is exposed to strategic risk, credit risk, liquidity risk and interest rate risk.
Strategic Risk
Strategic risk is the potential for loss arising from ineffective business strategies, the absence of integrated business strategies, the inability to implement integrated business strategies, and the inability to adapt the strategies to changes in the business environment.
The company’s overall strategy is established and approved by the Board in consultation with the Management and the Senior Executive Team. The most significant strategic risks faced by the company are identified, assessed, managed, and mitigated by Senior Management, with oversight by the Board.
Credit Risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and will cause the other party to incur a financial loss. The company attempts to control credit risk by setting limits for individual borrowers, monitoring credit exposures, limiting transactions with specific counter parties, and assessing continually the creditworthiness of counter parties.
The default risk for the company is at an acceptable level. The company has substantially low NPA levels and highest NPA Coverage in the industry.
Liquidity Risk
Liquidity risk is the risk that the company will be unable to meet its liabilities as and when they fall due. The business of lending has an inherent risk of liquidity arising from the mismatch of tenure of funds borrowed vis a vis lent, in addition to unforeseen adverse recovery patterns.
To limit the liquidity risk, the Management through their carefully drawn up strategies, resorts to diversified sources of funds, avoids undue concentration on a single lender, periodically reviews cash flows and manages its collection in a systematic manner. Since March 2022, the FED has undertaken their most aggressive monetary tightening in decades in response to soaring inflation. Rial Omani being pegged to USD, the local rates, as expected, mirrored the FED hike. Anticipating this, the company has settled all its unhedged USD term loans on their respective earliest reset dates. The company has taken appropriate treasury management actions to effectively optimise the cost of funds for 2023. The company has built up deposits over past several years and the deposits are placed with local commercial banks which provide ample liquidity buffer for effective treasury management.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The company is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or re-price in a given period. The company manages this risk by matching the re-pricing of assets and liabilities through risk management strategies.
Internal Control and Adequacy
The company believes that Internal Control is a necessary concomitant of the principle of governance and has made conscious efforts to instil effective Internal Control and processes.
The company has Board committees and Management committees, which are involved in strategic decision making, ensuring efficient and effective operations of the company and incorporating good corporate governance policies in line with the regulatory requirements. The company has a well-defined organization structure, clearly defined authority levels well documented policies and guidelines approved by the Board and robust IT systems to ensure process efficiency.
The company has put in place a mechanism to minimize operational risk by way of effective Internal Controls, Systems Reviews and an on–going Internal Audit program. The company has an in-house Internal Audit department, and the internal auditor undertakes comprehensive audits and reports directly to the Audit Committee of the Board. The Audit Committee of the Board reviews the internal audit reports, the adequacy of the internal controls and reports on the same to the Board.
Financial Performance 2022
Operational Performance
The year 2022 was a year of moderate recovery for the world economy as a whole. The company managed to grow modestly while maintaining its asset quality. Looking back, we take pride in the achievements of the company as a leading player in the industry in maintaining quality assets and lowest NPA. Today’s position has been achieved with careful planning and clear strategies, supported by sound vision and guidance by the Board. The company has successfully overcome the liquidity stress by maintaining a prudent mix of short-term vs long term borrowing, local and offshore.
The non-performing loans of the company are under control and the company’s existing estimated credit loss level of RO 13.795 million (excluding ECL on deposits). The non-performing assets coverage including the specific reserve for non-performing assets stands at 464%.
The Loan Book stands at stands at RO 119 million as against the last year level of RO 105.6 million at the year end. The net operating income stood at RO 10.36 million as compared to RO 10.96 million in the previous year. The company was able to register a net profit of RO 2.75 million for the year 2022 against RO 2.56 million for 2021.
For all the regulatory purposes, the company’s net worth stands at RO 69.905 million. The Book Value / Net Asset Value of the company’s share stands at RO 0.219. The company has proposed a dividend of 12.25% for the year 2022 which is subject to approval of CBO and at the AGM. This would take the total pay-out since inception to 478.58%.
Human Resources
Employees are a critical part of our competitive advantage. We have sound Human Resource policies, on and off the job training, counselling and a scientifically designed reward system, which helps us to create a dependable, highly skilled and motivated work force. During the year the company has increased its Omanisation percentage and it is in the process of recruiting more number of nationals in 2023.
Our customer</div><div>AOFS is committed to delivering superior value through a powerful, distinctive branding which ensures better customer retention, better value and increased business with each customer. Our huge client base stands testimony to this fact.
Capital Structure
The Company’s objective of the capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholder value. The company manages its capital structure and makes adjustments to it in the light of changes in business conditions. No changes were made in the objectives, policies or processes during the current year
The Company’s lead regulator Central Bank of Oman sets and monitors capital requirement as a whole. The Company’s current paid up capital is RO 30.321 million which is well above the regulatory requirement of RO 25 million. One of our existing convertible bonus stock bonds (listed in 2017) got converted to Equity Shares in May 2022. Another lot of the existing convertible bonus stock bonds (listed in 2018) will be converted to Equity Shares in 2023 resulting in further Capital enhancement.
Future Outlook
The company has reached its healthy position in the industry today after undergoing many business cycles under challenging economic circumstances. The company has also capitalized every single growth opportunity with its enviable strengths namely
• Sound and innovative capital structure.
• Superior service to its loyal customers.
• Novel and valuable integrated business model.
• Lesser delinquency ratio due to very effective collection mechanism.
• Good provisioning for impairment.
• Timely product diversification.
• Consistent earnings.
• Highly automated IT real time systems and processes.
We remain focused on maintaining quality assets with the objective of consistent returns for all our stakeholders.</div><div>Our priorities for the coming year are:
• Cautious lending policies in all existing product lines.
• Products structuring &amp;amp;amp;amp; better packaging to suit the market demand.
• Manage liquidity and costs judiciously ensuring sustainable earnings and profitability.
• Continue our leadership excellence and continue training and retaining the highly skilled and diverse work force.
• Offer superior delivery mechanism and personalised customer service to build customer loyalty and superior brand positioning.
From inception till date the company has been delivering on its commitment of increasing shareholders’ wealth in its relentless pursuit of excellence. Our endeavor is to constantly seek out new processes, products and efficiencies aimed at making things better for our customers. Our success is attributable to the dedication of our employees and our continued focus on keeping commitments to our stakeholders. The management continues to closely monitor economic conditions and indicators including interest rates, delinquency and capital markets. The sound guidance and encouragement from our Board of Directors has played a significant role in maintaining the asset quality and profitability. Our aim is to build on our heritage of success and to make AOFS, an outstanding and illustrious financial service provider for today and the next generation.
Chief Executive Officer