Introduction
The bank of Dhofar was started with only two branches, One in Salalah and another one in Muscat, and was first incorporated in January 1990 as a public joint stock company in Oman to conduct banking activities for the investment, retail and corporate sectors. At its inception, the bank had the name Bank Dhofar Al Omani al Fransi, which was changed to the current name in 2003 after the bank met all approval requirements. Before the name change, Bank Dhofar Al Omani al Fransi had merged with the Majan International Bank in 2002. Over the years, the bank has stepped up its operations and expanded its presence in the country to sixty-seven branches and numerous ATM points. (Bankdhofar.com, 2015)
The current advanced state of the bank has been achieved by the concerted efforts by the banks management to simplify banking for its clients. The bank offers various banking services to corporate and consumer clients as well as small and medium-sized enterprises. The bank, for instance, in 2013 introduced Maisarah Islamic banking services meant for the Islamic clientele. Being among the fastest expanding banks in the Oman Sultanate, Dhofar is ranked the second largest banking institution regarding market value, with an asset base exceeding 3.6 billion and takes pride in a super reputation for continuous growth and commitment to performance. To offer the best services to its clients, the bank has invested in multiple e- banking services which include internet banking (Real time), Phone and SMS banking, as well as payment machines. These modern banking services have been adopted as strategic approaches to survive in the dynamic banking industry that is currently characterized by the intensive application of technology. (Bankdhofar.com, 2015)
This paper seeks to conduct an in-depth analysis of the institution in a bid to assess the internal and external risk factors facing the firm, do an objective financial statement analysis, and evaluate its creditworthiness. The report herein will be based on information contained in the annual financial statements for the bank for the years 2014 and 2015.
Just like any other profit making entity, Bank Dhofar is faced with numerous risks that are inevitable in the volatile banking business environment. Such risks emanate from inside or outside the firm and pose a potential threat to the success and existence of the bank. In a bid to reduce and manage the risks, the bank has put in place the Risk Management Division, which is made up of highly skilled professionals tasked with the role of ensuring that there exist a stable risk management structures across all sections of the bank.
Credit risk
The credit risk is the probability that any individual will default or breach the agreed terms of trade, hedging, borrowing or other financial transactions with the bank. If the clients and other business partners fail to honor their credit obligations to the bank, it’s faced with the risk of financial and cash flow challenges which are deterrent to business success. In a bid to mitigate the possible damage posed by this risk, the conducts thorough creditworthiness assessment for all clients who wish to borrow as well as obtaining guarantees for all monies lend out. The credit policy adopted by the bank is continually reviewed on a regular basis to increase its objectivity. The bank also operates a credit rating system to ascertain the credit worthiness of any client or potential partner.
Operational risk
This is the possibility of business failure of loss emanating from the insufficiency or complete failure of internal business systems. Such failures can occur if there are no active internal control measures in the bank. They may include a high rate of staff turnover, boycotts and go-slow's on the part of the staff, lack of motivation and insider trading.
The bank has set up various internal committees and frameworks to ensure that these risks are minimized to the lowest possible level. These initiatives include the Risk Control and Self-Assessment, Operational Risk Management, and Loss Data Management frameworks. These structures work together to identify and assess the flaws in any operational process and highlight the potential threats posed by the same to the business. (Bankdhofar.com, 2015)
Competition from foreign banks
Being a local bank, the institution is faced with the stiff competition from foreign banks operating in Oman. The aggressive and dynamic strategies adopted by these foreign banks such as the Habib Bank, Bank Melli Iran, the Bank of Baroda and the State Bank of India have served as a significant risk factor for the survival and success of Bank Dhofar. The foreign banks have significantly reshaped the banking sector in Oman at the expense of the local banks. The foreign banks have offered attractive investment opportunities alongside competitive prices as informed by their large economies of scale. (Business Today Oman, 2014)
Country risk
These are the market fluctuations occasioned by the variations in the given country business environmental conditions. These conditions may include the political, economic as well as natural events. A change in one or a combination of these factors has the potential of affecting the business operations and overall performance of the bank.
Economic risks such as instability of exchange rates will have a direct impact on the bank's transactions in foreign currencies. Recent global financial crises like that of 2008 and inflation have a negative impact on the bank's performance. Devaluation of currency and globalization of economic transactions pose the risk of dismal performance to the bank as clients tend to shift to banks operating in more globalized and stable operations. The intensity of economic fluctuations is entrenched in the fact that the bank has no influence on global economic conditions and trends but a mere victim. Any unfavorable economic situations have a direct impact on the bank. The bank has however established a country risk assessment methodology meant to assess and grade the risk profiles of different countries and an office to monitor such risks and recommend the appropriate adjustment measures. (Bankdhofar.com, 2015)
The political changes witnessed in the Arab region in the recent past have served as a deterrent to the success of the Oman banks. The banking sector requires a peaceful and secure environment to operate optimally. Any slight tension serves to the detriment of the bank in that clients lack trust in the bank and seek other banking alternatives. (Batainah, 2015)
The market risk is posed by the unexpected fluctuations in the prices of financial products. These changes are evidenced in the interest rates, bonds, foreign exchange rates as well as critical commodities such as oil. The bank faces a major exposure risk to such fluctuations in the interest rates, capital, and currencies. Some products like the Maisarah expose the bank to the rate of return risks due to the unprecedented changes in the prevailing rates of return in the market.
Liquidity risk
This is the underlying inability of the bank to default or fail to meet its obligations to other parties as they mature. In the event of other perils which could trigger cash flow issues to the bank, its ability to fulfill its financial obligations would be crippled. The bank has however established the Asset-Liability Management Committee to set the regulations for the efficient management of this risk in the bank’s operations. (Bankdhofar.com, 2015)
Financial condition of the firm
Various trends in the bank’s financial condition can be derived from the financial analysis of the figures reported in its annual reports for the two years under review. A close view of the balance sheet indicates that the total amount of cash balances held at the Central Bank of Oman reduced from $ 115,612,000 in 2014 to $ 79,122,000 in 2015. Murabaha receivables also decline from $ 52,759,000 in 2014 to $ 33,387,000 in 2015. The Mudaraba financing, investments through equity, diminishing Mushaka financing and Ijarah Muntahia Bittamleek alternatively rise from $ 5,860,000, $ 43,099,000, $391,039,000, and $ 84,257,000 in 2015 respectively. The total assets held by the bank notably increase from $ 498,136,000 in 2014 to $ 777,673,000 in 2015. The total liabilities owing to the company, on the other hand, declined from $ 23,974,000 in 2014 to $ 20,849,000 in 2015. The bank also experiences a significant increase in the total owners’ equity over the two years from $ 60,325,000 to $ 106,041,000. (Bankdhofar.com, 2015)
The income generated by the business also experiences growth from $ 10,732,000 in 2014 to $ 21,501,000 in 2015. The total revenue generated by the business increases from $ 11,158,000 to $ 17,922,000 in 2014 and 2015 respectively while the net profits before taxations increase by a great proportion from $ 597,000 to $ 6,673,000 across the two consecutive years. The bank also increases its operating expenses from $ 10,561,000 in 2014 to $ 11,249,000 in 2015. (Bankdhofar.com, 2015)
The increase in total assets held by the bank, in turn, presents itself in an increase in the depreciation charge from $3,079,000 in 2014 to $ 3,192,000 in 2015 while the influx in profits earned boosts the total cash generated from operations from $ 7,332,000 in 2014 to $ 12,961,000 in 2015. New investments, responsible for the increase in equity, totaled to $ 42,504,000 in 2015 against zero in 2014. The total change in cash and its equivalents at the end of both years increased from $ 8,874,000 in 2014 to $ 27,491,000 in 2015.
The net profit ratio for the bank can be calculated as follows for both years:
Net profit margin = Net profitRevenue
2014 = 105,073/256,755 = 0.406
2015 = 121,467/299,288 =0.406
The analysis of the financial statements shows slight fluctuation in the profitability, liquidity, asset quality and capital adequacy over the two years as follows. (Bankdhofar.com, 2015)
Creditworthiness
The figures and trends illustrated by the financial statements show relative creditworthiness on the part of the bank. The bank has a relatively stable asset base with positive returns on such assets over the two years: 1.4% in 2014 and 1.38% in 2015. Despite the slight fluctuation, the bank is still stable in assets. All the profitability and liquidity ratios also increase from 2014 to 2014 as evidenced in the table above a clear indication for the business viability.
Financial and accounting control procedures
The Islamic Banking Regulatory indicates that all conventional banks operating domestically shall maintain a minimum allocated capital of OMR 40 million. The Basel II, Basel III, and Islamic Banking Regulations define the modes of operation for the bank and its competitors in the region. For instance, Basel II requires that the bank maintains a minimum capital adequacy ratio of 12%, and such capital adequacy returns are filed with the CBO on a quarterly basis. Basel III dictates the operation mode for those industry players with Common Equity Tier as the primary form of equity. It requires that such banks should maintain a CAR of 12.65% at the minimum. Islamic banking regulatory framework applies to the bank's product called Maisarah.
Distress analysis
Financial distress involves all the events and occurrences that precede and include a financial institution’s bankruptcy and violation of all borrowing terms. Distress analysis is necessitated by the constant fluctuations in the cost of capital, the differences in systematic and unsystematic causes of financial distress and the usefulness of such risk in deriving a clear image of the adverse practices in a distressed entity. Distress usually occurs when business entities reach a certain high level of leverage, but the economic and environmental conditions deter such firms from performing as per their plans of activities. In such a case, the victim entities stand on the verge of dismal performance and the slightest variation in the value of such entity causes a rapid impairment of the entity's equity structure.
A good example of distress is what hit the commercial entities after the economic crises of 2000-2001. Investors shifted to massive investments and those whose business performances did not turn out as they expected, ran into indebtedness and future financial distress. The Euro crisis is another instance of distress. (Www1.unisg.ch, 2016)
References
Business Today Oman. (2014). Evolving to survive. [online] Available at
http://www.businesstoday.co.om/Issues/ROADMAP-FOR-REVIVAL/Evolving-to- survive [Accessed 18 Jul. 2016].
Www1.unisg.ch. (2016). [online] Available at: http://www1.unisg.ch/ [Accessed 18 Jul. 2016].
Batainah, L. (2015). Challenges of the Arab banking sector in 2015. [online] Oman Observer.
Available at: http://omanobserver.om/challenges-of-the-arab-banking-sector-in-2015/ [Accessed 18 Jul. 2016].
Bankdhofar.com. (2015). [online] Available at: http://bankdhofar.com/ [Accessed 18 Jul. 2016].
Bankdhofar.com. (2015). BankDhofar - Financial Statements. [online] Available at:
http://bankdhofar.com/en-GB/Financial_Statements.aspx [Accessed 18 Jul. 2016].
