BANK MUSCAT SAOG (BKMB - GulfBase.com · BANK MUSCAT SAOG The composition of the loan book for Bank...

ANALY

Anil KuVice PEmail: Tel: (+9 GauravAsst. VEmail: Tel: (+9

INVES

YSTS

umar, CAIA resident - Reanilkumar@f

968) 2481665

v Ramaiya Vice Presiden

gaurav@finc968) 2481665

TMENT RE

CO

U

M

esearch fincorp.org

55 Ext. 340

nt - Researchcorp.org 55 Ext. 320

SEARCH

OMPANY

UPDATE

May 11,

2010

BANK

A mild

drop in

earning

substan

opportu

RECOM

CMP (06

TARGET

VARIAN

INVE

Oman’s

financia

recover

likely to

manage

demand

The ban

growth

interest

QoQ as

margina

remaine

sharp r

advanta

BKMB m

headwa

deposit

Q1 2010

million

ratio wa

108%.

We fore

loans &

prudent

MUSCAT

revival in cr

n provision

gs in 201

ntial market

unity to accu

MMENDATION

6‐MAY‐ 2010

T PRICE

NCE

STMENT

s banking se

al crisis, look

ry gains mom

o be one o

ement optim

d for project

nk posted a n

compared

t income gre

s deposits gr

ally by 0.8%

ed conservat

ise in depos

age of a reviv

maintained i

ay to increas

s base, resu

0. Impairme

but substant

as around 5.

ecast a net p

& advances,

t cost contro

SAOG (BK

redit growth

s set to b

0. In our

t decline pro

umulate this

N :

0) :

:

:

OPINION

ector, which

ks set to se

mentum help

f the prima

mistic of a 10

financing as

net profit of

to Q1 2009

ew 11.9% Yo

rew 13.1% Q

% QoQ to RO

tive in lendin

sits during t

val in credit g

its net inter

e the propor

lting in cost

ent for credit

tially lower c

1% at the en

profit of RO

a stable n

ol measures a

KMB.MSM

h and a sha

boost BKMB

r view, a

ovides a go

s stock.

BUY

RO 0.889

RO 1.093

23%

N

h remained

e renewed

ped by gover

ary beneficia

‐12% credit

s well as corp

RO 24.5 mill

9 (after excl

oY in Q1 201

QoQ to RO

O 3.81 billio

ng during the

the quarter

growth later

rest margin

rtion of lowe

of funds de

t losses incre

compared to

nd of Q1 201

105 million i

net interest

and a return

M)

arp

B’s

any

od

relatively r

credit growt

nment spend

aries of this

growth durin

porate loans

lion in Q1 20

uding impac

10 to RO 44.

3.63 billion,

on. While t

e first quarte

allows the

r this year.

at 3.5% in

er cost curren

eclining from

eased margi

o Q4 2009. T

10 while NPL

in FY 2010, a

margin, im

to normal le

CMP (6‐M

MCAP (R

EPS 201

BV 2010

P/E (201

P/BV (2

ROAA (2

ROAE (2

LOANS/

TOTAL A

NETWO

Source:

resilient thro

th in 2010 a

ding. Bank M

economic

ng the year f

.

010, registeri

ct of one‐tim

.4 million, b

, while its lo

this indicate

er of the yea

bank to bra

Q1 2010 as

nt and saving

m 2.1% in Q4

nally by 5.4%

The bank’s N

L coverage r

assuming a 9

mproving fee

evel of provi

FINANCIAL

May‐2010)

RO MN)

10E (RO)

0E (RO)

10E)

010E)

2010E)

2010E)

/DEPOSIT (Q1 2

ASSETS, Q1 201

ORTH, Q1 2010 (

Company Finan

ough the re

as the econ

Muscat (BKM

growth, wit

fuelled by ro

ing an 18.9%

me items).

ut declined

oan book sh

es that the

r, we believe

ace itself to

s the bank m

gs accounts

4 2009 to 2.0

% YoY to RO

NPL / Gross L

atio improve

9% growth in

e‐based inco

sions.

L INDICATORS

2010)

10 (RO Mn)

(RO Mn)

ncial Statement

ecent

omic

MB) is

h its

obust

% YoY

Net

6.8%

hrunk

bank

e the

take

made

in its

0% in

11.8

Loans

ed to

n net

ome,

0.889

1,197

0.078

0.591

11.4

1.5

1.69%

13.94%

105%

6,101

715

ts

F I N C O R P I N V E S T M E N T R E S E A R C H

BANK MUSCAT SAOG

Downside risks to our estimates can result from lower than anticipated credit growth during the year as well as

a higher credit impairment than expected .

In terms of valuation, BKMB current trades at a P/E multiple of 11.4x its FY 2010 (E) EPS of RO 0.078 and P/BV

multiple of 1.5x its Dec 31, 2010E book value of RO 0.591. Based on a combination of three valuation

methodologies, as explained in the valuation section of this report, we estimate a fair value of RO 1.093 for

the stock achievable by the end of 2010. We therefore recommend a BUY on the stock at or below its

current market price.

BUSINESS MODEL

Bank Muscat SAOG (BKMB), is Oman’s largest bank in terms of total assets, with a strong presence in areas

such as Corporate Banking, Retail Banking, Investment Banking, Treasury, Private Banking and Asset

Management. The bank has the country’s largest network of 125 branches with 362 ATMs, 112 CDMs and

4200 PoS terminals, with presence in Saudi Arabia and Kuwait, and a representative office in Dubai. BKMB’s

market capitalization approximates RO 1.19 billion with a total asset base of RO 6.1 billion as of Mar 31, 2010.

The bank’s capital adequacy ratio remained healthy at 15.2% as at the end of Dec 2009.

Bank Muscat owns 49% of BMI Bank B.S.C, an independent bank in the Kingdom of Bahrain, a 43% stake in the

Mangal Keshav Group, one of the oldest and most respected securities houses in the fast‐growing Indian

equities market, besides holding a stake in Silkbank Ltd. in Pakistan.

BKMB’s gross loan book approximated RO 4.03 billion as of Q1 2010, shrinking a marginal 0.5% QoQ compared

to RO 4.05 billion at year end 2009, as the global financial crisis resulted in banks tightening lending growth.

Corporate loans made up 61% of the bank’s loan book in FY 2009, while the remaining 39% was contributed by

personal and housing loans. The bank’s deposit base witnessed a 13.0% QoQ growth in Q1 2010 to RO 3.63

billion compared to RO 3.21 billion in Q4 2009. A higher proportion of the more expensive time deposits in a

bank’s funding structure, as compared to lower cost savings deposits, make it more vulnerable to pressure on

net interest margins in an increasing interest rate environment. Bank Muscat has been making efforts to

reduce the proportion of these higher cost deposits in its deposit base, which has resulted in the proportion of

time deposits reducing from 48% of total deposits in FY 2008 to 43% in Q1 2010.

Services19%

Mining & Quarrying

14%

Manuftr.11%

Real Estate10%

Wholesale & Retail9%

Import Trd.8%

Financial Inst.6%

Utilities6%

Transp.5% Constrc.

4%Govt.1%

Agricultr.0%

Export Trd.0%

Others8%

Figure 1: BKMB corporate loan book (2009)

Source: Company Financial Statements

Deposit Accounts43.1%

Savings Accounts23.1%

Current Accounts25.8%

Call Accounts7.5%

Margin Accounts0.5%


Figure 2: BKMB Deposits Base (Q1 2010)


BANK MUSCAT SAOG

In terms of its NPL / Gross Loans, BKMB is in line with peers like NBO and Bank Dhofar with its NPL / Gross

Loans ratio at 5.13% at the end of Mar 2010 compared to 4.89% and 4.97% for the two peers respectively.

BKMB maintains an adequate level of provisions against bad loans, with a loan loss coverage ratio of 108% at

the end of Mar 31, 2010.

Major shareholders in Bank Muscat continue to be The Royal Court of Affairs with a 24.8% stake and Dubai

Financial Group with a 15.0% stake.

Q1 2010 PERFORMANCE

Bank Muscat reported a 11.9% YoY growth in its net interest income in Q1 2010 to RO 44.4 million. On a

sequential basis however, net interest income declined 6.8% as the loan book shrunk marginally and average

yield on loans and advances declined from 5.9% in Q4 2009 to 5.6% in Q1 2010. Net interest margin dipped

from 3.9% in Q4 2009 to 3.6% in Q1 2010.

The pressure on net interest margin due to a decline in the average yield has been mitigated slightly by a

decline in average cost of funds. On a YoY basis, the bank has been able to lower its cost of funds from 2.7% in

Q1 2009 to 2.0% in Q1 2010. On a sequential basis also, cost of funds was lower compared to 2.1% in Q4

2009. This lower cost of funds has been a result of the pro active efforts of the bank to increase the proportion

of lower cost savings and current accounts in its deposit base.

Q1 2010 results indicate that most banks in Oman have remained conservative in lending during the first

quarter, with the exception of Ahli Bank and Bank Sohar, which witnessed a 13.9% and 4.3% QoQ growth in

their net loans and advances respectively. Bank Muscat witnessed a marginal QoQ decline of 0.8% in its net

loans & advances in Q1 2010, which indicates that the bank has remained conservative in lending during the

first quarter of this year. While that poses a risk to net interest margins going forward, we remain relatively

confident that the bank should be able to achieve a 8‐9% growth in its loan book in the coming quarters as the

economy recovers and sustained government spending improves demand for credit in the domestic market.

3.6%

2.7%

2.3%

2.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2007 2008 2009 Q1 2010

CASA / Time Deposits Average cost of funds

Figure 3: BKMB ‐ Trend of CASA vs. Cost of Funding



BANK MUSCAT SAOG

The composition of the loan book for Bank Muscat has remained very stable over the last five quarters, with

corporate loans making up around 60% of gross loans, while 40% is made up of personal and housing loans.

As shown in Table 2 below, Bank Sohar and Ahli Bank had the lowest NPL ratios among banks in Oman at the

end of December 2009. NPL exposure for Bank Muscat appears in line with peers like NBO and Bank Dhofar

around 5.0%, while OIB’s NPL ratio remained an outlier in the sector at 10.7%. Bank Muscat’s NPL coverage at

the end of Q1 2010 remained comfortable at 108% while capital adequacy ratio has been healthy at 15.2%,

giving the bank an adequate cushion against business risk.

TABLE 2: NPL/GROSS LOANS

Q2 09 Q3 09 Q4 09 Q1 10 AVERAGE

BANK SOHAR 0.33% 0.27% 0.24% 0.35% 0.32%

BANK MUSCAT 4.76% 5.01% 4.98% 5.13% 4.39%

NATIONAL BANK OF OMAN 4.68% 4.81% 5.02% 4.89% 4.74%

AHLI BANK ‐ ‐ 0.32% ‐ 0.32%

BANK DHOFAR 3.76% 3.77% 4.81% 4.97% 3.95%

OMAN INTERNATIONAL BANK 9.11% 10.11% 10.54% 10.76% 9.73%


5.65% 5.66% 5.69%

5.81%

5.51%

5.35%

5.40%

5.45%

5.50%

5.55%

5.60%

5.65%

5.70%

5.75%

5.80%

5.85%

0%

20%

40%

60%

80%

100%

120%

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010

Personal & Housing Corporate & Other Average yield on loans


Figure 4: BKMB ‐ Loan Book Composition (Q1 09 ‐ Q1 10)

TABLE 1 : INCREMENTAL LOAN GROWTH

Q2 09 Q3 09 Q4 09 Q1 10 AVERAGE

BANK SOHAR 8.6% 2.4% 3.9% 4.3% 4.8%

BANK MUSCAT 0.9% ‐2.2% 3.0% ‐0.8% 0.2%

NATIONAL BANK OF OMAN ‐1.6% ‐1.0% ‐1.2% 1.4% ‐0.6%

AHLI BANK 0.5% 11.0% 9.3% 13.9% 8.7%

BANK DHOFAR 4.4% 4.4% 2.4% 0.5% 2.9%

OMAN INTERNATIONAL BANK 2.0% 2.6% ‐5.7% ‐0.5% ‐0.4%



BANK MUSCAT SAOG

Bank Muscat witnessed the highest growth in deposits during Q1 2010, compared to peers, with total deposits

growing 13.1% QoQ to RO 3.63 billion. This aggressive growth in its deposit base is likely an attempt by the

bank to prepare for a recovery in the domestic credit market during 2010, which bodes well for earnings going

forward. Management has indicated that it expects credit growth in 2010 between 10‐12%, fuelled by robust

demand for project finance lending, while continuing to focus on lending to key sectors like Power, Oil & Gas

and Telecoms.

Non‐interest income of RO 17.3 million in Q1 2010 was 15.0% higher compared to Q1 2009, after excluding the

RO 35.3 million post‐tax gain on sale HDFC Bank investment and RO 7.5 million realised losses on Available‐for‐

Sale investments last year. On a QoQ basis, non‐interest income grew 2.7% from RO 16.9 million. Fee based

income in Q1 2010 was RO 13.7 million or approximately 22% as a percentage of total operating income. Fee

income has historically averaged 20‐22% of total operating income for BKMB, dipping to 17% in FY 2009 due to

the economic slowdown, but managing to recover to 22% in Q1 2010. We expect the bank to achieve a similar

proportion of fee income during FY 2010 and through FY 2012.

Operating expenses increased 15.5% YoY and 37.3% QoQ driven by the expansion in the banks delivery

channels, investment in technology and increase in manpower costs. Cost to income ratio increased from

35.6% in FY 2009 to 39.9% in Q1 2010 as a result of the increase in operating expenses. This resulted in a

20.5% decline in operating profit on QoQ basis from RO 46.5 million to RO 37 million. Impairment for credit

losses increased marginally by 5.4% YoY to RO 11.8 million, while registering a sharp 68.7% decline compared

to Q4 2009 when the bank took its major provisions last year.

Net profit in Q1 2010 approximated RO 24.5 million, registering an 18.9% growth compared to Q1 2009, after

excluding the above mentioned one‐time items.

TABLE 3 : INCREMENTAL DEPOSIT GROWTH

Q2 09 Q3 09 Q4 09 Q1 10 AVERAGE

BANK SOHAR 15.5% ‐1.4% 17.5% ‐6.5% 6.3%

BANK MUSCAT ‐0.4% 2.6% ‐2.7% 13.1% 3.2%

NATIONAL BANK OF OMAN ‐8.1% ‐4.9% 1.3% 8.9% ‐0.7%

AHLI BANK ‐3.4% 13.7% 28.2% 4.3% 10.7%

BANK DHOFAR 0.4% 6.0% 5.0% 6.9% 4.6%

OMAN INTERNATIONAL BANK ‐2.4% 0.4% 2.0% ‐0.9% ‐0.2%


TABLE 4: CONSOLIDATED BALANCE SHEET AT A GLANCE

IN (RO ‘000) Q1 2010 Q4 2009

NET LOANS AND ADVANCES 3,808 3,838

INCREMENTAL CHANGE (QoQ) ‐0.8% 3.0%

TOTAL DEPOSITS 3,628 3,208

LOANS/DEPOSITS RATIO 105% 120%

NPL/GROSS LOANS 5.13% 4.98%

DUE FROM BANKS/DUE TO BANKS 82% 73%

SHARE CAPITAL 135 108

RETAINED EARNINGS 97 121

TOTAL SHAREHOLDER’S EQUITY 715 711

BOOK VALUE PER SHARE (RO) 0.531 0.660

Source: Company financial statements


BANK MUSCAT SAOG

STOCK PRICE PERFORMANCE

BKMB has clearly outperformed the MSM 30 index with a one year return of 58% as against 29% from the

Index as of May 6, 2010.

FINANCIAL FORECAST (2010E – 2012E)

29%

58%

‐30.0%

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

6‐May‐09 18‐Jul‐09 29‐Sep‐09 11‐Dec‐09 22‐Feb‐10 6‐May‐10

Source: MSM

MSM 30 INDEX BKMB

Figure 5: One year performance BKMB vs MSM Index (May 6, 2009 ‐May 6 2010)

INCOME STATEMENT(RO millions) FY 2007 FY 2008 FY 2009 Q1 10 Q2 10 (E) Q3 10 (E) Q4 10 (E) FY 2010 (E) FY 2011 (E) FY 2012 (E)

Interest income 218 263 280 68 70 71 73 282 336 403

Interest expense (93) (101) (105) (23) (24) (24) (25) (97) (125) (162)

Net interest income 125 162 174 44 45 47 48 185 212 241

Incremental change (%) 25% 30% 8% ‐7% 2% 4% 3% 6% 15% 14%

Fees and commissions (net) 38 55 50 14 14 14 14 56 61 67

% of total operating income 22% 23% 17% 22% 22% 21% 21% 22% 21% 20%

Investment gains 2 8 53 0.0 0.2 0.5 0.5 1.2 3.0 4.0

Other operating income 9 12 13 4 4 4 4 16 19 23

Total operating income 173 237 291 62 63 65 67 257 295 336

Operating expenses (66) (78) (76) (23) (20) (21) (21) (85) (94) (108)

Depreciation (4) (6) (7) (2) (2) (2) (2) (8) (9) (10)

Cost to income ratio 40.7% 35.6% 35.6% 39.9% 35.0% 35.0% 35.0% 36.2% 35% 35%

Provisions for credit losses (18) (25) (98) (12) (13) (12) (12) (49) (48) (38)

Provisions for investment impairments 0 (11) (3) (0.1) 0 0 0 (0) 0 0

Recoveries from provisions 8 13 11 3 0 0 0 3 0 0

Share of profit (loss) from associates 5 (3) (10) 1 1 1 1 4 4 5

Impairment of associates 0 (14) (20) 0 0 0 0 0 0 0

Other items 0 (5) 0 0 0 0 0 0 0 0

Profit before tax 98 108 88 29 30 31 32 122 148 186

Tax expense (13) (15) (14) (4) (4) (4) (4) (17) (20) (25)

Effective tax rate 13.8% 13.5% 16.2% 15.1% 13.5% 13.5% 13.5% 13.9% 13.5% 13.5%

Net profit 84 94 74 24 26 27 28 105 128 161

Earnings Per Share (EPS) 0.090 0.087 0.068 0.018 0.019 0.020 0.021 0.078 0.095 0.118


BANK MUSCAT SAOG

BALANCE SHEET(RO millions) FY 2007 FY 2008 FY 2009 Q1 10 Q2 10 (E) Q3 10 (E) Q4 10 (E) FY 2010 (E) FY 2011 (E) FY 2012 (E)

Net Loans and advances 2,687 3,728 3,838 3,808 3,957 4,070 4,188 4,188 4,674 5,384

Incremental change 46% 39% 3% ‐1% 4% 3% 3% 9% 12% 15%

Total deposits 2,336 3,235 3,208 3,628 3,646 3,664 3,682 3,682 4,235 4,870

Incremental change 26% 38% ‐1% 13% 0.5% 0.5% 0.5% 15% 15% 15%

Cash & bank balances 488 453 608 873 897 923 950 950 1,035 1,147

Placements with banks 588 1,078 1,016 1,006 1,006 1,006 1,006 1,006 1,006 1,006

Investments ‐ AFS 86 217 120 122 122 122 122 122 122 122

Investments ‐ Held to maturity 32 162 24 23 23 23 23 23 23 23

Total assets 4,218 6,028 5,851 6,101 6,274 6,414 6,558 6,558 7,129 7,950

Deposits from banks 663 1,413 1,396 1,233 1,233 1,233 1,233 1,233 1,233 1,233

Total liabilities 3,590 5,313 5,139 5,385 5,533 5,646 5,762 5,762 6,245 6,953

Share capital 108 108 108 135 135 135 135 135 135 137

Share premium 302 302 302 302 302 302 302 302 302 316

Mandatory convertible bonds 0 0 32 32 32 32 32 32 32 16

General reserve 56 56 56 56 56 56 56 56 56 56

Legal reserve 36 36 36 36 36 36 36 36 36 36

Revaluation reserve 4 4 4 4 4 4 4 4 4 4

Subordinated loan reserve 3 24 48 48 48 48 70 70 107 144

Cumulative changes in fair value 10 69 5 6 6 6 6 6 6 6

Foreign current translation reserve 0 (9) (1) (1) (1) (1) (1) (1) (1) (1)

Retained earnings 109 125 121 97 123 150 156 156 207 284

Total shareholder's equity 628 715 711 715 741 768 796 796 884 997

Book Value Per Share (BV) 0.583 0.664 0.660 0.531 0.550 0.570 0.591 0.591 0.656 0.730

KEY RATIOS & METRICS(Per share data in RO) FY 2007 FY 2008 FY 2009 Q1 10 Q2 10 (E) Q3 10 (E) Q4 10 (E) FY 2010 (E) FY 2011 (E) FY 2012 (E)

Average yield on loans 7.4% 6.3% 5.6% 5.5% 5.6% 5.6% 5.6% 5.6% 6.1% 6.6%

Average cost of funds 3.6% 2.7% 2.3% 2.0% 2.0% 2.0% 2.0% 2.0% 2.4% 2.8%

Net interest margin 3.8% 3.6% 3.3% 3.5% 3.6% 3.6% 3.6% 3.6% 3.7% 3.8%

Cost / Income ratio 40.7% 35.6% 35.6% 39.9% 35.0% 35.0% 35.0% 36.2% 35.0% 35.0%

Loans / Deposits ratio 115% 115% 120% 105% 109% 111% 114% 114% 110% 111%

Due from banks / Due to banks 89% 76% 73% 82% 82% 82% 82% 82% 82% 82%

NPL / Gross loans 2.7% 2.3% 5.0% 5.1% 5.0% 4.8% 4.5% 4.5% 4.0% 3.0%

NPL Coverage 146% 139% 106% 108% 113% 120% 130% 130% 155% 202%

Provisions for credit losses / NPL 24% 27% 49% 6% 6.0% 6.0% 6.0% 24% 24.0% 22.0%

ROAA (%) 2.3% 1.8% 1.2% 0.8% 1.1% 1.1% 1.7% 1.7% 1.9% 2.1%

ROAE (%) 17.8% 14.0% 10.3% 7.1% 8.9% 9.5% 13.9% 13.9% 15.3% 17.1%

Earnings per share (EPS) ‐ Diluted 0.090 0.087 0.067 0.018 0.019 0.020 0.021 0.078 0.095 0.118

Book value per share (BV) 0.583 0.664 0.660 0.531 0.550 0.570 0.591 0.591 0.656 0.730

Cash dividend per share (DPS) 0.050 0.020 0.020 ‐ ‐ ‐ ‐ 0.030 0.035 0.035


BANK MUSCAT SAOG

VALUATION

Residual Income Model

The Residual Income approach to valuation is based on adding the discounted sum of excess return over its

cost of equity for each year in the future to its present shareholders net worth.

This approach, is based on the concept of economic profit, which assumes that excess earnings generated by a

company over its cost of equity will dimish over time as the firm’s competitive advantage is lost and the return

on equity generated will decline closer to the firms cost of equity in the long run.

For BKMB, on a conservative basis, we forecast ROE to peak at 22% in 2014, 2015 and thereafter gradually

decline closer to its cost of equity of 11.1% by 2019. Based on this approach, we arrive at a discounted value

of residual earnings of approximately RO 698 million. Total equity value is estimated to be RO 1.413 billion

after including the current networth of RO 715 million, impliying a target price estimate of RO 1.049.

Relative Valuation

Despite a sharp runup in price in recent weeks, Bank Muscat still trades significantly below the average P/BV

multiple of 2.09x for the Omani banking sector at 1.67x its book value at the end of Q1 2010. We

conservatively estimate the bank to report a book value of RO 0.591 and RO 0.655 at end of 2010 and 2011

which implies forward multiples of 1.5x and 1.4x respectively.

Applying the average P/BV multiple of 2.09x to its 2010E estimated book value of RO 0.591, we arrive at a

target price of RO 1.236 for BKMB.

TABLE 5: RESIDUAL INCOME MODEL9mn 2010 (E) FY 2011 (E) FY 2012 (E) FY 2013 (E) FY 2014 (E) FY 2015 (E) FY 2016 (E) FY 2017 (E) FY 2018 (E) FY 2019 (E)

Net profit 81 128 161 249 352 451 512 525 502 444

ROE 14% 15% 16% 20% 22% 22% 20% 17% 14% 11%

Ending book value 796 884 997 1,247 1,598 2,049 2,561 3,086 3,588 4,032

Cost of equity 11.1% 11.1% 11.1% 11.1% 11.1% 11.1% 11.1% 11.1% 11.1% 11.1%

Equity charge (63) (94) (105) (125) (159) (203) (257) (315) (372) (425)

Residual income 17 35 56 124 193 247 255 210 130 19

Discounted value 16 29 42 84 117 135 125 92 52 7

Current BV 715

Disc. Res. Inc. 698

Equity value 1,413

Value / share (RO) 1.049

Source: FINCORP Investment Research


BANK MUSCAT SAOG

TABLE 6: RELATIVE VALUATION

INDICATORS BKMB BKDB NBOB OIBB ABOB BKSB AVERAGE

P/E 2010 Ann 12.20 18.61 13.97 11.87 16.05 21.02 15.62

P/BV (Q1 2010) 1.67 3.26 1.51 1.70 2.22 2.19 2.09

DIV YIELD 2.3% 1.9% 3.5% 7.5% 2.5% 0.0% 2.9%

Mcap/Net loans 0.31 0.55 0.27 0.44 0.40 0.29 0.38

ROE (TTM) 7.0% 13.7% 8.3% 14.3% 11.3% 10.7% 10.9%


Justified Price‐to‐Book Value Multiple

The Justified P/BV valuation approach estimates a fair P/BV multiple for the

investment, based on forecasted fundamentals of the operating business.

This fair P/BV multiple is used as a basis for the target price estimate of the

stock.

In case of BKMB, we forecast long‐term sustainable ROE of 15% assuming a

5.5% growth rate and cost of equity at 11.15%. Based on these fundamental

forecasts, we estimate a justified P/BV multiple of 1.68x for the stock, which

implies a target price of RO 0.994.

As seen in table 8 below, based on the three valuation approaches, our overall target price estimate for BKMB

works out to RO 1.093, implying a 23% upside from the current market price of RO 0.889 as of May 6, 2010.

TABLE 8: TARGET PRICE

Method Weight Fair Value

Residual Income Model 33% 1.049

Relative Valuation (P/BV) 33% 1.236

Justified P/BV 33% 0.994

Expected Fair Value Per Share (RO) 1.093


TABLE 7: JUSTIFIED P/BV

Sustainable ROE 15.00%

Growth rate (g) 5.5%

Cost of equity (Ke) 11.15%

Beta 1.05

Rm ‐ Rf 6.08%

Rf 4.77%

Justified P/BV 1.68

BV 2010 0.591

Target Price 0.994



BANK MUSCAT SAOG

COMPARATIVE FINANCIALS

Bank credit in Oman continued to grow in 2009 despite the global economic slowdown posting a 6.2%

increase to RO 9.83 billion from RO 9.25 billion at the end of December 2008. We analyze below the relative

performance of banks in our peer group comprising of Bank Muscat, NBO, Bank Dhofar, OIB, Oman Arab

Bank, Bank Sohar and Ahli Bank on key banking parameters

During the past four quarters, Ahli Bank reported the highest average incremental growth in loan book of

8.7% in our peer group while it posted a QoQ growth of 13.9% in Q1 2010. Its closest competitor Bank Sohar

reported an average incremental loan growth of 4.8% in the past four quarters and a 4.3% QoQ growth in Q1

2010. Among larger banks, BKDB has seen an average incremental loan book growth of 2.9% in the

preceding four quarters while industry leader BKMB’s loan book grew at just 0.2%.

Bank Muscat led the sector in terms of both loans and deposits with a market share of 44% and 39%

respectively at the end of 2009. NBO and Bank Dhofar are placed close to each other with market shares of

15% and 14% respectively by loans while in terms of deposits they commanded a share of 15% and 13%

respectively.

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Q1 09 Q2 09 Q3 09 Q4 09 Q1 2010


Figure 6: Incremental loan growth

ABOB BKDB BKMB BKSB NBOB OAB OIBB


BANK MUSCAT SAOG

In terms of average incremental deposit growth during the past four quarters, Bank Sohar leads the sector

with a growth rate of 10.9% followed closely by Ahli Bank at 10.7%. Customer deposits held by Bank Muscat

grew at an average rate of 3.2% while NBO reported a 0.7% average sequential decline in deposits in the

past four quarters.

In terms of loans‐to‐deposit ratio, Bank Muscat topped the sector with 119.7% at the end of 2009 while

Oman Arab Bank has been the most conservative in lending with a ratio of 81.3%. The average loans‐to‐

deposit ratio for the Omani banking sector stood at 98.1%

ABOB5%

BKDB14%

BKMB44%

BKSB9%

NBOB15%

OAB6%

OIBB7%

Figure 7: Market share by loans and advances in Q4 2009


ABOB6%

BKDB13%

BKMB39%

BKSB10%

NBOB15%

OAB8%

OIBB9%

Figure 8: Market share by customer deposits in Q4 2009


-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Q1 09 Q2 09 Q3 09 Q4 09 Q1 2010


Figure 9: Incremental deposit growth

ABOB BKDB BKMB BKSB NBOB OAB OIBB


BANK MUSCAT SAOG

BKMB enjoyed the lowest cost‐to‐income ratio in the sector at 35.6% In 2009 (excluding one‐time realized

investment gains/losses) followed closely by Bank Dhofar at 36.4% while at the other end of the spectrum

are placed Bank Sohar at 59.1% and OIB at 45.1%. The average cost‐to‐income ratio for the sector in 2009

was 42.6% ,

The average net interest spread for the sector in 2009 was 4.2% led by Oman Arab Bank at 5.7% and

followed by OIB at 5.4%. Ahli Bank had the lowest spread at 3.2%. The six listed banks in Oman had an

average return on equity of 10.1% at the end of 2009. BKDB and OIBB delivered a high ROE in excess of 12%

while Bank Sohar was at the bottom at 7.6%.

119.7%

108.4% 107.9%

95.0%90.3%

84.2% 81.3%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

BKMB BKDB NBOB ABOB BKSB OIBB OAB

Figure 10: Loans/Deposits Ratio 2009


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

BKMB BKDB NBOB OIBB ABOB BKSB


Figure 11: Cost to Income Ratio, Net Interest Spread and ROE

Cost to income Ratio (RHS) Net interest spread (LHS) ROE (LHS)


BANK MUSCAT SAOG

INVESTMENT RESEARCH

CONTACT DETAILS Anil Kumar, CAIA VP – Research (+968) 24816655 Ext: 340 [email protected] Gaurav Ramaiya AVP (+968) 24816655 Ext: 320 [email protected]

Mable Pereira Analyst (+968) 24816655 Ext: 323 [email protected] Sarah Al Siyabi Analyst (+968) 24816655 Ext: 318 [email protected]

BROKERAGE/CUSTOMER CARE

CONTACT DETAILS Issam Ali Baqer Broker (+968) 24822300 Ext: 332 Fax: (+968) 24822390 Abdul Kareem Online trading (+968) 24822300 Ext: 306 [email protected]

Disclaimer

The research team of The Financial Corporation, SAOG (hereto referred as FINCORP) has prepared the information, analysis and

expressed its opinion on the subject matter of this report. The information contained has been obtained from sources believed to be

reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above

report, FINCORP makes no guarantee, representation or warranty, whether express or implied, and accepts no responsibility or liability

as to its accuracy or completeness of the data, being provided. All investment information and opinions are subject to change without

notice. The investor will indemnify FINCORP and its directors, officers, and employees against any loss or damage or other liabilities

(including costs), which they may suffer as a result of reliance on this report. This report is not to be relied upon in substitution for the

exercise of independent judgment.

Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes

only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. FINCORP will not be liable for any

direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their

own risk. FINCORP and its affiliates or their officers, directors and employees may own or have positions in any investment mentioned

herein or any investment related thereto and from time to time add to or dispose of any such investment. FINCORP and its affiliates

may act as market maker or assume an underwriting position in the securities of banking companies discussed herein (or investments

related thereto), and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform

investment banking or underwriting services for or relating to those banking companies. Authors or contributors of this report could

have direct interest in the capital market or in the securities mentioned herein.

The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own

investment decisions based on their specific investment objectives and financial position, and using such independent advisors, as they

believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either

directly or indirectly, may fall or rise against the interest of investors. This document is strictly for the use of recipients only. None of

the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever

without the prior and explicit written permission of FINCORP.

BANK MUSCAT SAOG (BKMB - GulfBase.com · BANK MUSCAT SAOG The composition of the loan book for Bank...

Documents

Transcript of BANK MUSCAT SAOG (BKMB - GulfBase.com · BANK MUSCAT SAOG The composition of the loan book for Bank...