Staying resilient

Muscat Finance’s performance was muted in keeping with a cautious approach towards lending in a stressed economic situation

In 2017, Muscat Finance came out as a more resilient entity. The company continued to maintain a cautious approach to asset growth, and the net loans and advances shrunk by RO6.33mn during the year. As the government borrowings increased to finance the government’s growth plans due to the low oil prices, liquidity was constrained resulting in a sharp increase in borrowing costs. The payments cycle remained slow, especially in the contracting segment, which resulted in increased delinquencies. To absorb this effect, the company continued to increase the provisions, and the provision cover now stands at 80 per cent for its non-performing loans.

Although Muscat Finance shrunk its debtors’ portfolio owing to the increase in the macroeconomic risks, it was able to achieve a net profit after tax of RO4.048mn. During the year, the company decreased its provision charge to the profits by 9 per cent. Incremental provisions for the year after write offs, comprised of almost RO1.2mn and cumulative provisions, including reserve interest, reached RO16.55mn, representing 11.66 per cent of net assets.

Overall, the performance was muted in keeping with a cautious approach towards lending in a stressed economic situation.

Business Development

During the nearly three decades of its operations, the company has set up a large customer database comprising of almost 100,000 customers. This has enabled the company to obtain a substantial share of repeat business. In addition, the six branches, and vehicle dealers serve as a source point of service and new business referrals.

An independent rating agency, Capital Intelligence, completed its review of the company in December 2017, and has re-calibrated its ratings of Muscat Finance to ‘omA-’ Long term and ‘omA2’ Short term, with a stable outlook. This has been an upward recalibration indicating the relative strength of Muscat Finance as a financial institution within Oman.

Opportunities

The government’s emphasis on diversifying the economy, driven by the Tanfeedh initiative, and the stable oil prices are expected to provide more opportunities for the leasing sector as a whole. The company is planning to support the SME sector with a focus on factoring, warehouse financing and increasing its focus on LCs and guarantees. Muscat Finance will continue to diversify its sources of funding and look at innovative funding opportunities, both onshore and offshore.

The urgency with which the government is encouraging the employment of recent graduates will certainly provide a boost to car ownership and create a more sustainable market going forward.

Challenges

All banks and FLCs are expected to adopt IFRS 9 reporting standards from 2018. This may require additional provisioning for impairment and could impact profit margins in the future. Increased cost of borrowings owing to tight liquidity conditions in the market may impact net interest income and profits. If the cash flow situation remains difficult in the first half of the year, then there will be an increase in non-performing loans with subsequent impact on provisioning and profits.


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