Oman Banking 062011

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Global Research

Sector - Banking

June 22, 2011

Oman Banking Sector

Profitability expected to grow at 10% in 2011

Interest rates expected to climb up by the end of 2011 New chapter in Omani Banking

Neutral on Oman banking sector

Profitability expected to grow at 10% in 2011Omani banking sector profitability in 2010 witnessed improvement, unlike 2008 and 2009which were the worst years in Omani banking performance due to the crisis. However, 2010and the 1Q11 performances indicate that Omani banks have entered a stable phasegrowing 4%QoQ and 9%YoY. The National Bank of Oman was the best performer in 1Q11showing 41%QoQ growth followed by Bank Dhofar showing a profitability growth o19%QoQ. On the other end of the spectrum is Oman was Bank Muscat and OmanInternational Bank showing a decline in net profit of 5%QoQ and 4%QoQ respectively.

Interest rates expected to climb up by the end of 2011In 1Q11, Omani banking spreads have improved by 53bps due to reduction in the cost offunds. All Omani banks have either reduced or maintained their cost of funds which resultedin better spreads. On the other hand, the yield on assets has increased by 15bps. Ourexpectation on the interest rates are based on US Fed rates as the Omani interest ratemoves in tandem with the US interest rate, given that the Omani Rial is pegged to the dollar.

New chapter in Omani BankingRecently Central Bank of Oman approved the establishing of the first Islamic bank, NizwaBank, and allowed Islamic finance products. This will open new doors for commercial banksand widen their horizon. However, we believe that the picture of Islamic banking in Omanwill be clearer towards the end the year which is the expected time for the Central Bank ofOman to put in place new rules and regulations to accommodate the Sharia-complian

products. In our view we will not witness the launch of any full-fledged Islamic bank duringthis year.

Neutral on Oman banking sectorWe are neutral on Oman banking sector as there is a very low visibility on loan growth. Webelieve that loans from private sector companies, account for 67.5%, will slowdown as theyhold back their investments in Oman considering the political risk associated with the regionWe recommend Hold on Bank Muscat, National Bank of Oman and Ahli Bank and Sell onboth Bank Dhofar and Oman International Bank.

Name CMP Mkt Cap P/E P/BV ROE Div Target Upside Ratin

OMR OMR mn 2011 2011 2011 Yield

Bank Muscat 0.750 1,161 10.4 1.3 13.2% 2.7% 0.805 7.4% Ho

National Bank of Oman 0.321 347 11.9 1.3 11.7% 5.2% 0.324 1.1% HoBank Dhofar 0.627 574 15.0 2.2 15.7% 2.6% 0.361 -42.4% Se

Ahli Bank 0.273 216 10.8 1.8 17.9% 3.2% 0.258 -5.3% Ho

Oman International Bank 0.255 247 12.9 1.3 10.4% 3.0% 0.214 -16.2% Se

Source: Bloomberg, Global Research

M arket data and derived ratio s are as of 20June 2011

OmanBanking

Faisal Hasan, CFA

Head of [email protected]: (965) 2295-1270

Lamya HayatSenior Financial [email protected]: (965) 2295-1203

Global Investment Housewww.globalinv.net

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Global Research Oman Banking Sector

June 2011 2

Valuation & Recommendation

Valuation methodology

For arriving at the fair value of our banks, we have used a blend of two valuation methods:

1. Cash flow approach represented by the Dividend Discounting Model.2. Market valuation using peer group P/BV multiple

Dividend Discounting Model - DDM

The DDM is based on a 4-year forecast of dividends as cash flows (2011-14). The terminal is calculated using the multiples

approach. Long-term justified P/BV multiple is derived on the basis of an adaptation of the Gordon Growth Model. This method

uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the

target P/BV of the bank using the formula:

P/BV = (ROE - g) / (COE - g)

The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total

net present value (NPV) of the company.

Cost of Equity is derived using the Capital Asset Pricing Model (CAPM) using:

1. Yield of the government long term bond (10 years) as the risk free rate.2. Market risk premium of 7.5%.3. Beta of 5 years monthly figures. If the actual beta of the bank is less than 1, to more appropriately reflect associated risk,

we have taken it as 1.

Market valuation using weighted P/BV multiple of the peer group

In order to incorporate the impact of market forces into our valuation we have introduced using the weighted P/BV multiple of the

peer group as an indicator for price movement. This weighted P/BV is then multiplied with the BV/share of the bank at the next

year end, in our case the BV/share at December 31, 2011 to arrive at the fair value of the bank over a medium term investment

horizon.

Blended Price

The blended price is then calculated after applying weight of 80% to the value from DDM and 20% to the value from peer group

P/BV method.

OMR mn BM NBO BD OIB Ahli

Rating Hold Hold Sell Sell Hold

Upside Potential/(Downside) 7.4% 1.1% -42.4% -16.2% -5.3%

Fair Value: 0.81 0.32 0.36 0.21 0.26Fair Value - DDM (weight: 80%) 0.80 0.31 0.35 0.19 0.27

Fair Value - Peer Group P/BV (weight: 20% 0.85 0.38 0.42 0.29 0.23

Current Price 0.75 0.32 0.63 0.26 0.27

Valuations

Source: GlobalResearch

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June 2011 3

Bank Muscat

NBO Bank Dhofar

Ahli Bak

OIB

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

7.5 9.5 11.5 13.5 15.5 17.5

2011eROE

2011e P/BV

DDM BM NBO BD OIB Ahli

PV of dividends (OMR mn) 211,480 16,767 59,986 30,323 27,305

Yr 1 36,057 16,767 14,328 7,618 6,627

Yr 2 49,614 17,124 13,903 7,309 6,865

Yr 3 59,080 19,648 15,447 7,527 6,872

Yr 4 66,729 21,350 16,307 7,869 6,942

Terminal 1,598,798 407,601 401,290 230,074 289,756

Terminal Assumptions:

LT - ROE 18.0% 15.5% 15.0% 14.0% 20.0%

Perpetual growth rate (g) 3.0% 3.0% 3.0% 3.0% 3.0%

LT- P/BV Multiple (x) 1.4 1.2 1.2 1.06 1.6

Source: GlobalResearch Peer Group P/BV BM NBO BD OIB Ahli

Peer Group P/BV multiple (x) 1.5 1.5 1.5 1.5 1.5

BV/share - 2011 0.6 0.3 0.3 0.2 0.2

COE: 13.6% 13.4% 13.4% 13.4% 13.4%

Rf 5.9% 5.9% 5.9% 5.9% 5.9%

Risk Premium 7.5% 7.5% 7.5% 7.5% 7.5%

Beta 1.02 1.00 1.00 1.00 1.00

Source: GlobalResearch Industry Multiples

Bank Mkt Cap Equity Profit P/BV P/E

(OMR mn) 2011e 2011eBank Muscat 1,161.3 889.7 111.4 1.31 10.4

National Bank of Oman 347.0 277.5 29.9 1.25 11.6

Bank Dhofar 573.9 260.9 38.3 2.20 15.0

Ahli Bank 216.4 123.9 20.2 1.75 10.7

Oman International Bank 246.9 179.1 18.1 1.38 13.6

Industry 2,545.4 1,731.0 218 1.47 11.7

Source: GlobalResearch

Relative Valuation P/BV vs. ROE

Source: Global Research

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June 2011 4

Sensitivity Analysis

1.0% 2.0% 3.0% 4.0% 5.0% 16.0% 17.0% 18.0% 19.0% 20.0%

11.6% 0.919 0.944 0.975 1.014 1.065 11.6% 0.883 0.929 0.975 1.021 1.06712.6% 0.844 0.861 0.881 0.907 0.939 12.6% 0.801 0.841 0.881 0.921 0.961

13.6% 0.781 0.792 0.805 0.822 0.842 13.6% 0.735 0.770 0.805 0.841 0.876

14.6% 0.727 0.735 0.743 0.753 0.765 14.6% 0.681 0.712 0.743 0.774 0.805

15.6% 0.682 0.686 0.691 0.697 0.704 15.6% 0.635 0.663 0.691 0.719 0.746

1.0% 2.0% 3.0% 4.0% 5.0% 13.5% 14.5% 15.5% 16.5% 17.5%

11.4% 0.372 0.379 0.388 0.400 0.414 11.4% 0.347 0.368 0.388 0.409 0.429

12.4% 0.343 0.348 0.353 0.359 0.368 12.4% 0.318 0.335 0.353 0.371 0.388

13.4% 0.319 0.322 0.324 0.328 0.332 13.4% 0.294 0.309 0.324 0.340 0.35514.4% 0.299 0.300 0.301 0.303 0.304 14.4% 0.274 0.287 0.301 0.315 0.328

15.4% 0.281 0.281 0.282 0.282 0.282 15.4% 0.257 0.269 0.282 0.294 0.306

1.0% 2.0% 3.0% 4.0% 5.0% 13.0% 14.0% 15.0% 16.0% 17.0%

11.4% 0.418 0.426 0.435 0.447 0.463 11.4% 0.386 0.410 0.435 0.460 0.484

12.4% 0.384 0.389 0.394 0.401 0.409 12.4% 0.351 0.373 0.394 0.416 0.437

13.4% 0.357 0.359 0.361 0.365 0.369 13.4% 0.324 0.343 0.361 0.380 0.399

14.4% 0.333 0.334 0.334 0.335 0.337 14.4% 0.301 0.318 0.334 0.351 0.368

15.4% 0.313 0.312 0.312 0.311 0.311 15.4% 0.282 0.297 0.312 0.327 0.341

1.0% 2.0% 3.0% 4.0% 5.0% 18.0% 19.0% 20.0% 21.0% 22.0%

11.4% 0.295 0.305 0.319 0.335 0.357 11.4% 0.290 0.304 0.319 0.333 0.347

12.4% 0.269 0.276 0.285 0.296 0.311 12.4% 0.260 0.273 0.285 0.298 0.310

13.4% 0.247 0.252 0.258 0.266 0.276 13.4% 0.237 0.247 0.258 0.269 0.280

14.4% 0.228 0.232 0.236 0.242 0.248 14.4% 0.217 0.227 0.236 0.246 0.256

15.4% 0.213 0.215 0.218 0.222 0.226 15.4% 0.201 0.210 0.218 0.227 0.235

1.0% 2.0% 3.0% 4.0% 5.0% 12.0% 13.0% 14.0% 15.0% 16.0%

11.4% 0.248 0.251 0.256 0.261 0.268 11.4% 0.225 0.240 0.256 0.271 0.287

12.4% 0.229 0.230 0.232 0.235 0.238 12.4% 0.206 0.219 0.232 0.246 0.259

13.4% 0.212 0.213 0.214 0.214 0.215 13.4% 0.190 0.202 0.214 0.225 0.237

14.4% 0.199 0.198 0.198 0.198 0.197 14.4% 0.177 0.188 0.198 0.209 0.219

15.4% 0.187 0.186 0.185 0.184 0.183 15.4% 0.167 0.176 0.185 0.195 0.204

Terminal growth vs. COE ROE vs. COE

Oman International Bank

COE

g ROE

COE

g

C

OE

ROE

C

OE

Bank Dhofar

g

COE

ROE

COE

ROE

Ahli Bank

g

COE

COE

ROE

g

Bank Muscat

National Bank of Oman


COE

COE

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June 2011 5

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12

US LIBOR

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

LIBOR Oman Intra Rate

Oman Banking Sector Outlook

Profitability expected to grow at 10% in 2011Omani banking sector profitability in 2010 witnessed improvement, unlike 2008 and 2009 which were the worstyears in Omani banking performance due to the crisis. However, 2010 and the 1Q11 performances indicate thatOmani banks have entered a stable phase, growing 4%QoQ and 9%YoY. The National Bank of Oman was the bestperformer in 1Q11 showing 41%QoQ growth followed by Bank Dhofar showing a profitability growth of 19%QoQ.

On the other end of the spectrum is Oman was Bank Muscat and Oman International Bank showing a decline in netprofit of 5%QoQ and 4%QoQ respectively.

Profitability Growth

(OMR mn) 2009 2010 YoY 1Q10 4Q10 1Q11 YoY QoQ

Bank Muscat 73.7 101.6 38% 24.5 29.4 27.8 14% -5%

National Bank of Oman 21.1 27.2 29% 6.6 5.5 7.7 18% 41%

Bank Dhofar 25.4 33.3 31% 8.8 7.9 9.4 6% 19%

Ahli Bank 8.5 14.1 65% 3.2 3.7 3.9 24% 5%

Oman International Bank 21.5 17.6 -18% 3.6 4.6 4.4 24% -4%

150.3 193.7 29% 46.6 51.2 53.3 14% 4%

Source: Company Reports & Global Research

We expect the growth of the aggregated net profit of the Omani banks to be limited to 10%-12% in 2011. We expectthis profitability to be driven by decline in provisioning and growth in NII as we are expecting the pressure onspreads to ease toward the end of 2011.

Interest rates expected to climb by the end of 2011In 1Q11, Omani banking spreads have improved by 53bps due to reduction in the cost of funds. All Omani bankshave either reduced or maintained their cost of funds which resulted in better spreads. On the other hand, the yieldon assets has increased by 15bps. Our expectation on the interest rates are based on US Fed rates as the Omaniinterest rate moves in tandem with the US interest rate, given that the Omani Rial is pegged to the dollar.

Benchmark Interest Rates

Source: Bloomberg & Global Research

The historical pattern shows that LIBOR and Oman Intra Rate are fairly linked. Accordingly we base our interestrate projections on Bloomberg LIBOR forecast. As a result, we are assuming that the interest rates remain atcurrent levels for the next two quarters and will start picking up from there onward.

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June 2011 6

New chapter in Omani BankingRecently Central Bank of Oman approved the establishing of the first Islamic bank, Nizwa Bank, and allowedIslamic finance products. This will open new doors for commercial banks and widen their horizon. However, webelieve that the picture of Islamic banking in Oman will be clearer towards the end the year which is the expectedtime for the Central Bank of Oman to put in place new rules and regulations to accommodate the Sharia-compliantproducts. In our view we will not witness the launch of any full-fledged Islamic bank during this year.

We believe that this new era in the Omani banking sector will affect the current commercial banks positively. Weare expecting to see the first Islamic product to be launched by the current banks. All banks are currently preparingan Islamic banking model, as all banks want to take the lion share in this USD6bn industry, as estimated by E&Y.

We are expecting banks that have alliances with other Islamic banks in the region to be the first to launch Islamicproducts. Bank Muscat, which already has Islamic operations in Saudi Arabia, and NBO, using the expertise of itsmajor shareholder Commercial Bank of Qatar, is highly likely to benefit from their relationships and gain the highestmarket share by being pioneers in launching Islamic products.

Operating Cost constant increaseIn 1Q11, the aggregate operating cost increased by 6%QoQ and 21%YoY. Oman has a very high cost to incomeratio of 42% in 1Q11 compared to other GCC countries. Salary increases have been a common phenomenon inOman since the political instability. It is possible that is was a respond to protestors claim. We believe that the

banks are under pressure to increase the salary levels. Most of Omani banks have taken action with regards to thisissue in 4Q10 and 1Q11.

We are expecting growth of 9%YoY in operating expenses driven mainly by salary increases which will cause a risein cost to income ratio by 18.2bps reaching 43.9%. Going forward we are assuming the banks will manage theircost effectively which will be reflected in the cost to income ratio.

1Q11- Cost to income

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

UAE Kuwait KSA Oman Qatar


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June 2011 7

(OMR mn) Bank Muscat NBO Bank Dhofar Ahli Bak OIB Total

Gross Loans- 1Q11 4,197 1,485 1,409 659 706 8,455

Retail Loans - 1Q11 1,695 645 366 315 279 3,299

As a % of Gross loans 40.4% 43.4% 25.9% 47.7% 39.4% 39.0%Source: Company Reports & Global Research

Slow credit growthIn 1Q11, Omans aggregate credit showed a minor growth of 1.4%QoQ. Bank Dhofar and NBO have managed 6%and 4% QoQ increase respectively. As for Bank Muscat, this has a 50% market share of the Omani credit, loansgrowth stayed flat in 1Q11.

1Q11- Credit mix

Gov24%

PublicEnterprise

8%PrivateSectors

67%

Non Res1%


Loans from private sector account for 67.5% which explains the slowdown in the credit growth. We believe thatmost of the private sector companies will hold back their investments in Oman considering the political riskassociated with the region. Next comes the governmental loans, which represent 24% of the total Omani credit.This depends on the future development plan in Oman which, in our view, will be held back for some time as it isnot the governments focus in the meantime. However, we are expecting some changes in the credit mix of theOmani banking sector based on consumer lending growth considering the increase in salaries and thegovernments efforts to improve the standard of living for its citizens.

Personal lending regulationFollowing the steps of Qatar and UAE, Oman may introduce a strict personal lending regulation. Currently thepersonal lending regulation in Oman is very loose; each bank has its own policy. The only regulation that restricts

personal loans by CBO is a burden rate of 65% (UAE 50%, Kuwait 40%, and Qatar 50%) other than that personallending can vary between 50 and 68 times an individual's salary, with some banks offering the loan over arepayment period of 180 months. The UAE Central Bank announced new laws capping personal loans at 20 timesthe monthly income of an individual with a repayment period set at 48 months. It is still not clear if Oman is going tointroduce such regulation. In our view this will eventually result in better assets quality. However, such regulationswill have a negative impact on the top line of all Omani banks as it will reduce personal loans which represent 39%of the total loan book in Oman unlike UAE and Qatar where personal loans represent 30% and 18% respectively.
http://www.zawya.com/cm/profile.cfm/cid406672http://www.zawya.com/cm/profile.cfm/cid406672

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June 2011 8

Return Ratios Top-line Growth & Recurring Income

Profitability Cost Efficiency

Loans & Deposits Growth Assets Quality


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

2009

2010

2011e

2012e

2013e

2014e

ROAA (LHS) ROAE (RHS)

-30%

-20%

-10%

0%

10%

20%

30%

40%

-

50

100

150

200

250

300

350

400

2009

2010

2011e

2012e

2013e

2014e

OMRmn

Net Profit Growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2009

2010

2011e

2012e

2013e

2014e

Cos t I ncom e rat io (LHS) OPEX/ Average Asset s (RHS)

-25%

-20%

-15%

-10%

-5%

0%

0%

1%

2%

3%

4%

5%

6%

2009

2010

2011e

2012e

2013e

2014e

NPLs Rat io (LHS) Provis ioning/ total I ncome (RHS)

60%

62%

64%

66%

68%

70%72%

74%

76%

-5%

0%

5%

10%

15%

20%

2009

2010

2011e

2012e

2013e

2014e

NII (LHS) Total Income (LHS)

NII/Total Income (RHS)

65%

70%

75%

80%

85%90%

95%

100%

105%

110%

115%

-

2,000

4,000

6,000

8,000

10,000

12,000

2009

2010

2011e

2012e

2013e

2014e

OMR

mn

Loans (LHS) Deposits (LHS) LDR (RHS)

Oman Banking Universe Aggregate Forecast

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June 2011 9

Comparative Charts

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June 2011 10

GDP GCC Population

M2 Assets

Loans Deposits


All figures are as of 2010

SaudiArabia44%

UAE25%

Kuwait13%

Qatar13%

Oman5%

SaudiArabia65%

UAE13%

Kuwait9%

Qatar5% Oman

8%

SaudiArabia39%

UAE

33%

Kuwait14%

Qatar11%

Oman3%

SaudiArabia33%

UAE

38%

Kuwait13%

Qatar13%

Oman3%

SaudiArabia30%

UAE41%

Kuwait

13%

Qatar12%

Oman4%

SaudiArabia35%

UAE38%

Kuwait13%

Qatar11%

Oman3%

Banking and Economic Statistics Oman vs GCC

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June 2011 11

M2/GDP Loans/GDP

Loans per capita Deposits per capita

ROAA ROAE

Source: Glob al Research

All figures are as of 2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SaudiArabia

UAE Kuwait Qatar Oman GCC0%

20%

40%

60%

80%

100%

120%

SaudiArabia

UAE Kuwait Qatar Oman GCC

0.0

10.0

20.0

30.0

40.0

50.0

60.0

SaudiArabia


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

SaudiArabia


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

SaudiArabia


0%

5%

10%

15%

20%

25%

SaudiArabia


Banking and economic Statistic Oman vs GCC

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June 2011 12

Assets Deposits

Gross Loans NPLs

ROAA ROAE

Source: Company Reports & Glob al Research

All figures are as of 1Q11

BKMB51%

NBO17%

BKDB15%

ABOB7%

OIB10%

BKMB47%

NBO18%

BKDB16%

ABOB8%

OIB11%

BKMB50%

NBO17%

BKDB17%

ABOB8%

OIB8%

BKMB50%

NBO13%

BKDB16%

ABOB1%

OIB20%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

BKMB NBO BKDB ABOB OIB

0%

2%

4%

6%

8%

10%

12%

14%

16%


Peer Group Comparison

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June 2011 13

Assets Quality Provisioning Requirements

Yield on Assests,Cost of funds & Spreads Cost to Income

Non intrest income to total income LTD


All figures are as of 1Q11

0%

2%

4%

6%

8%

10%

12%

-

20

40

60

80

100

120

140

160

180

200


NPLs NPLs ratio

0%

20%

40%

60%

80%

100%

120%

140%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%


Prov/Total Income Coverage ratio

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

3.6%

3.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%


Yield on assets CoF Spreads

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


0%

20%

40%

60%

80%

100%

120%

140%


Peer Group Comparison

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June 2011 14

Average ROE Top-line Growth

Profit Growth Cost Efficiency

Loan Growth Cost of risk -2011


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%14.0%

16.0%

18.0%

20.0%


2008-2011a 2011-2014e

0%

5%

10%

15%

20%

25%

30%

35%

40%


2011e 2010-2014e CAGR

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


2011e 2010-2014e CAGR

0%

10%

20%

30%

40%

50%

60%


2008-2010a 2011-2014e CAGR

0%

2%

4%6%

8%

10%

12%

14%

16%

18%


2011e 2010-2014e CAGR

-

10

20

30

40

50

60

70

80

90


Oman Banking Universe Forecast

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June 2011 15

Company Profiles

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Global Research - Oman Banking Secto

Bank Muscat

June 2011 1

Market Data

Bloomberg Code: BKMB OM

Reuters Code: BMAO.OMCMP (20 June 2011): OMR 0.750

O/S (mn) 1,346

Market Cap (OMR mn): 1,161.3

Market Cap (USD mn): 3,016.3

P/E 2011e (x): 10.4

P/Bv 2011e (x): 1.3

Price Performance 1-Yr

High (OMR): 0.90

Low (OMR): 0.67

Average Volume: (000) 1,048.5

1m 3m 12m

Absolute (%) 3.4 9.5 16.2

Relative (%) 5.1 9.4 12.8

Price Volume Performance

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Volume ('000) BKMB (OMR)

Lamya HayatSenior Financial [email protected].: (965) 22951203

Profitability exceeded our expectations

Net interest income grew; jump in non-interest income Expecting credit to growth at 6% in 2011

Disappointment in associate continues

Profitability exceeded our expectationsBank Muscat reported OMR27.8mn for 1Q11, representing a decrease of 5.4%QoQand an increase of 13.7%YoY. The increase in profitability was a result of animprovement in the top line while non interest income remained on the high side. Thebanks net profit in 1Q11 was affected by losses from associates amounting toOMR1.8mn and high provisioning in the first quarter. In 2011, we expect the neprofit to be OMR111mn representing 9.7% growth as compared to 37.8%, assumingthe bank profit will be pressured by losses from BMI and staff cost increase.

Net Interest Income grew; jump in non-interest income

In 1Q11, the NII grew by 24.1%QoQ and 12.4%YoY. Though the growth in 1Q11 wasrelatively high, we expect NII to lose momentum in 2011, growing at 0.7% and at aCAGR of 14.5% for the period 2011-2014 assuming the LTD ratio will improve.

Though the banks non-interest income witnessed a decrease of 16.0%QoQ, it is stilconsidered to be on the higher side compared to last years performance showing anincrease of 30.5%YoY. The dividend income and profit on sales of investmentsincreased this quarter supporting the non interest income to maintain its high levelsGiven that the dividends are seasonal in nature, we do not expect this performance tocontinue for the remainder of the year.

Expecting credit to growth at 6% in 2011Gross loans remained stagnate in 1Q11. Surprisingly, Bank Muscats credit additionwas low comparing gross loans growth to the Omani banking sector We expect lowgrowth in Omani banking sector credit on the back of less appetite for credit from

private investors having their confidence shaken by the current political events in theregion. We would also expect some delays in implementing the governmendevelopment plan. On a conservative basis we have assumed the banks gross loansto grow at 6% which is slightly lower than the Omani banking sector.

Customer deposits grew by 3.4%QoQ in 1Q11 outperforming the sectors depositsgrowth of 1.7%. This might raise concern of an increase in the cost of deposits goingforward, however the bank illustrated their cost management proves through the pasttwo years giving a level of comfort that the deposits added are low cost.

Investment Indicators

2010 2011e 2012e 2013e 2014e

Net Profit Growth 37.8% 9.7% 18.1% 20.7% 21.6%

NII Growth 7.4% 0.7% 12.6% 15.7% 15.3%

Loan Growth 3.5% 5.9% 9.3% 12.1% 12.5%

Deposits Growth 31.5% 16.4% 18.0% 17.0% 15.0%

Adjusted EPS (OMR) 0.1 0.1 0.1 0.1 0.1

Adjusted BVPS (OMR) 0.6 0.6 0.6 0.7 0.7

ROE 13.5% 13.2% 14.2% 15.9% 17.8%

Dividend Yield 2.4% 2.7% 3.3% 5.1% 6.8%

P/E Ratio (x)* 10.9 10.4 8.8 7.5 6.2

P/BV Ratio (x)* 1.4 1.3 1.2 1.1 1.1


* Market price for 2011 and subsequent years as per closing prices on MSM on 20 June 2011.

BUYTarget Price

OMR0.805

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June 2011 17

Bank Muscat - 1Q11 Result Summary

OMR mn 1Q10 4Q10 1Q11 QoQ YoY

Income Statement

Interest Income 67.7 67.2 66.6 -1% -2%

Interest Expense 23.3 20.2 12.9 -36% -45%

Net Interest Income 44.4 47.0 53.8 14% 21%

Net Fee & Commission Income 13.7 12.9 14.4 11% 5%

Non-interest Income 17.3 26.9 22.6 -16% 30%

Total Operating Income 61.7 73.9 76.3 3% 24%

Operating Expenses 25 27 31 15% 28%

Provision (Loan Loss) 12 9 14 47% 14%

Net Profit 24 29 28 -5% 14%

Balance Sheet

Net loans 4,032 4,194 4,197 0% 4%

Deposits 3,628 3,527 3,646 3% 0%

Assets 6,101 5,851 5,827 0% -4%

Source : Company Financials & Global Research

Spreads to remain stagnantWe believe that the banks spread improve gradually in 2011. We are expecting that cost if funds will increase gradually intandem with the interest yield leading to an increase in spread.

Disappointment in associates continuesBank Muscat has been witnessing year on year increase in losses from associate, for the past three years. In 1Q11, the lossfrom associates reached OMR1.835mn. We are not expecting any profits from its associates till 2013.

High cost to income ratioIn 1Q11, total operating expenses increased by 14%QoQ resulting in higher cost to income ratio of 40% compared to 39% in4Q10. Part of this increase is a result of the banks expansion plan which includes strategy to develop the banking infrastructure

by way of technology investments, expansion of business and delivery channel network to provide better service. We areexpecting the cost of expenses to grow at 7% in 2011 and then stabilizing in 2012.

Estimates Revision- 2011

OMRmn Earlier Estimates Revised Estimates % change

Gross Loans 4,629 4,443 -4.0%

Deposits 3,890 3,864 -0.7%

NII 188 189 0.3%

Operating Income 259 264 2.1%

Provisions for credit loss (32) (32) 1.4%

Net Profit 108 111 3.2%Source: Global Research

Valuation updateBy the virtue of its size, the bank is expected to hold a lions share in any business development opportunity. Using DDM andP/BV multiple as our valuation methodology, we arrived at a fair value of OMR0.805, Offering an upside potential of 7.4% on theclosing price (as of 20 June 2011) of OMR0.750. Therefore we maintain our recommendation at Hold

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June 2011 18

Financial Statements(OMR m n) 2008 2009 2010 2011e 2012e 2013e 2014e

Interest/Financing Income 263 280 275 277 308 353 405

Interes t Expens e/Paym ent to Depos itors (101) (105) (88) (88) (95) (107) (122)

Net Interest/Financing Income 162 174 187 189 212 246 283

Fee & Commission Income 55 50 52 57 63 69 76

Investment Income 8 53 1 3 3 3 4Other Income 9 3 13 13 18 21 24

Total Non-Interest/Financing Income 71 106 66 70 81 91 100

Total Operating Income 237 291 265 264 295 336 381

Provisions expense (12) (88) (33) (19) (21) (26) (31)

Operating Expenses (84) (82) (103) (110) (120) (126) (129)

Profit Before Taxation 108 88 118 130 153 185 225

Taxation & Minority Interest (15) (14) (16) (18) (21) (26) (31)

Net Profit Attributable to Parent 94 74 102 111 132 159 193

Cash Balances 453 608 726 783 659 552 522

Deposits with Banks & FIs 1,078 1,016 550 578 607 637 669

Investment Securities 379 144 267 275 285 291 298

Gross Loans & Financings 3,853 4,052 4,194 4,443 4,858 5,446 6,126

Loan Loss Reserve (126) (214) (186) (219) (254) (294) (339)

Net Loans & Financings 3,979 4,266 4,380 4,662 5,112 5,740 6,465Investment in Associates 93 67 55 53 49 47 45

Investment Properties - - - - - - -

Net Fixed Assets 22 26 75 84 86 80 78

Other Assets 277 151 170 187 178 169 160

Total Assets 6,028 5,851 5,851 6,185 6,467 6,928 7,560

Deposits from Banks & FIs 1,413 1,396 760 684 568 494 469

Deposits from Customers 3,173 3,068 3,527 3,864 4,188 4,635 5,191

Other Borrowings 342 398 408 393 400 407 415

Other Liabilities 360 246 327 318 308 305 302

Paid-up Capital 108 108 135 155 155 155 155

Retained Earnings 116 120 129 201 272 349 437

Other Reserves 120 145 190 190 190 190 190

Shareholders' Equity 715 711 796 890 961 1,038 1,127

Minority Interest - - - - - - -Total Equity & Liability 6,028 5,851 5,851 6,185 6,467 6,928 7,560

Return on Average Assets 1.8% 1.2% 1.7% 1.9% 2.1% 2.4% 2.7%

Return on Average Equity 14.9% 10.3% 13.5% 13.2% 14.2% 15.9% 17.8%

Net Interest Income/Operating Income 68.5% 59.9% 70.5% 71.3% 72.0% 73.2% 74.3%

Recurring Income/Operating Income 91.6% 77.0% 90.1% 93.0% 93.4% 93.9% 94.3%

Interest Earning/Financing Assets Yield 5.6% 5.0% 5.3% 5.5% 5.6% 5.8% 6.0%

Cost of Funds 2.5% 2.1% 1.8% 1.8% 1.9% 2.0% 2.1%

Net Spread 3.1% 2.9% 3.5% 3.6% 3.7% 3.8% 3.9%

Cost to Income Ratio 35.6% 28.2% 38.8% 41.8% 40.5% 37.6% 33.7%

OPEX/Average Assets 1.0% 1.4% 1.8% 1.8% 1.9% 1.9% 1.8%

Net Loans to Customer Deposits 125.4% 139.0% 124.2% 120.7% 122.1% 123.8% 124.5%

Non Performing Loans 90 202 176 169 170 180 190

Loan Loss Reserve 126 214 186 219 254 294 339

NPLs to Gross Loans 2.3% 5.0% 4.2% 3.8% 3.5% 3.3% 3.1%

NPL Coverage 138.8% 106.0% 105.9% 129.5% 149.5% 163.5% 178.3%Cost of Risk (bps) 36.2 221.8 79.9 76.3 40.7 41.3 44.2

Equity to Gross Loans 18.5% 17.5% 19.0% 20.0% 19.8% 19.1% 18.4%

Equity to Total Assets 11.9% 12.2% 13.6% 14.4% 14.9% 15.0% 14.9%

Dividend Payout Ratio 49.2% 36.5% 38.0% 30.0% 30.0% 30.0% 30.0%

Adjusted EPS (OMR) 0.09 0.07 0.08 0.07 0.08 0.10 0.12

Adjusted BVPS (OMR) 0.66 0.82 0.59 0.57 0.62 0.67 0.73

Market Price (OMR) * 0.80 0.82 0.83 0.75 0.75 0.77 0.77

Dividend Yield 6.3% 2.4% 2.4% 2.7% 3.3% 5.1% 6.8%

P/E Ratio (x) 9.2 12.0 10.9 10.4 8.8 7.5 6.2

P/BV Ratio (x) 1.2 1.0 1.4 1.3 1.2 1.1 1.1


* Market price for 2011 and sub sequent years as per closing prices on MSM on June 20, 2011

IncomeStateme

nt

BalanceSheet

Rat

ioAnalysis

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June 2011 19

Bank Muscat Charts galleryTop-line Growth & Recurring Income Profitabil ity


Spreads Cost efficiency


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Global Research Oman Banking Secto

National Bank of Oman

June 2011 2

Market Data

Bloomberg Code: NBOB OM

Reuters Code: NBO.OMCMP (20 June 2011): OMR 0.321

O/S (mn) 1,081.0

Market Cap (OMR mn): 347

Market Cap (USD mn): 901

P/E 2011e (x): 11.9

P/Bv 2011e (x): 1.3


High (AED): 0.37

Low (AED): 0.30

Average Volume: (000) 313.0

1m 3m 12m

Absolute (%) 3.6 10.0 2.4

Relative (%) 5.2 10.0 -1.1


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Volume ('000) NBOB (OMR)

Net Profit growth to flatten in 2011

Low visibility on the top line Operating expenses is weighing heavy profits

NBO provisions should be on the watch

Net Profit growth to flatten in 2011National Bank of Omans profit was inline with our estimate of OMR7.6mn deviatingby 0.9%. NBOs profitability increased by 41%QoQ and 18%YoY. The increase inprofitability was mainly due to 90%QoQ improvement in non-interest income onaccount of 212% increase in dividend income. Given that it is seasonal in nature, weare not expending the same growth to continue in the next three quarters.Recoveries from provision for credit loss have supported the net profit growth. In2011, we expect net profit to be OMR30mn assuming the pressure on yields toease.

Low visibility on the top lineThe net interest income did not contribute to the bottom line growth in 1Q11, itdecreased by 2.3%QoQ and 2.2%YoY. We assumed that the NII will grow at 6.4%in 2011.

Operating expenses is weighing heavy profitsIn 1Q11, NBO managed to decrease its operating expenses by 1.8%QoQ. The costto income ratio has decreased marginally by 10bps however the banks cost toincome ratio remained highest among its peers. The increase in costs was due toincremental employee cost and higher depreciation.

NBO provisions should be on the watchSurprisingly NBOs provisions on credit loss showed a major increase of 40%QoQand 36%YoY. However, this amount was offset by an increase in recoveries from

provisions for credit loss. In general, it is normal for Omani banks to expect such ahike in provisions in the first quarter. Most of Omani banks experienced the sameincrease out of being conservative.


2010 2011e 2012e 2013e 2014e


NII Growth -2.1% 6.4% 12.4% 11.4% 14.9%

Loan Growth 0.2% 7.9% 7.3% 10.4% 11.3%

Deposits Growth 31.5% 16.4% 18.0% 17.0% 15.0%

Adjusted EPS (OMR) 0.0 0.0 0.0 0.0 0.0


ROE 11.2% 11.7% 13.0% 14.8% 17.2%

Dividend Yield 4.6% 5.2% 6.0% 7.8% 9.6%

P/E Ratio (x)* 13.0 11.9 10.2 8.5 6.9P/BV Ratio (x)* 1.3 1.3 1.2 1.1 1.0


* Market price for 2011 and subsequent years as per closing prices on MSM on 20 June 2011


HoldTarget Price

OMR0.324

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June 2011 21

NBO - 1Q11 Result Summary


Income Statement

Interest Income 23.8 23.4 22.3 -4% -6%

Interest Expens e 9.7 9.7 9.0 -8% -8%

Net Interest Income 14.0 13.7 13.4 -2% -5%


Non-interest Income 6.2 4.0 7.6 90% 23%


Operating Expenses 9.0 10.6 10.4 -2% 16%

Provision (Loan Loss) 5.3 5.2 7.3 40% 36%

Net Profit 6.6 5.5 7.7 41% 18%

Balance Sheet

Gross loans 1,451 1,432 1,485 4% 2%

Deposits 1,373 1,325 1,355 2% -1%

Assets 1,890 1,805 1,869 4% -1%


Estimates Revision - 2011e

OMRmn Earlier Est imates Revised Estimates % change

Gross Loans 1,521 1,545 1.6%

Deposits 1,408 1,431 1.6%

NII 56 59 5.7%

Operating Income 82 85 3.9%

Provisions for credit loss (14) (14) -0.7%

Net Profit 31 30 -3.6%Source: Global Research

Valuation updateNBO has seen high attrition in its high ranked cadres which is a challenge that needs to be tackled. Top line deterioration andfluctuation raises concerns of the consistency in the banks core business. Using Dividend Discount Module and P/BV as ourvaluation methodology, we have arrived at a fair value of OMR0.324 per share; offering an upside of 1% at the closing price (ason 20 June 2011) of OMR0.321 per share. Therefore, we maintain our recommendation at Hold.

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June 2011 22



Interes t Expens e/Paym ent to Depos itors 43 46 40 40 44 50 56






Provisions expense 1 (18) (7) (7) (7) (5) (5)





Cash Balances 263 184 228 243 254 219 188

Deposits with Banks & FIs 199 167 84 111 122 134 147




Net Loans & Financings 1,401 1,361 1,363 1,462 1,753 1,937 2,154Investment in Associates - - - - - - -


Net Fixed Assets 10 13 22 21 19 18 16

Other Assets 78 26 44 60 62 63 64

Total Assets 1,981 1,798 1,805 1,970 2,102 2,253 2,444

Deposits from Banks & FIs 277 220 132 169 161 156 164

Deposits from Customers 1,342 1,261 1,325 1,431 1,549 1,679 1,835



- - - - - - -

Paid-up Capital 108 108 108 108 108 108 108


Other Reserves 49 45 55 53 53 53 53

Shareholders' Equity 242 250 266 277 294 315 339

Minority Interest - - - - - - -Total Equity & Liability 1,981 1,798 1,805 1,970 2,102 2,253 2,444






Cost of Funds 3.0% 2.9% 2.6% 2.6% 2.6% 2.8% 2.9%

Net Spread 3.4% 3.5% 3.6% 3.7% 3.9% 3.9% 4.0%







NPL Coverage 100.1% 103.2% 111.5% 127.8% 152.7% 162.6% 188.9%Cost of Risk (bps) (0.0) 49.2 26.4 21.2 18.7 11.0 8.7




Adjusted EPS (OMR) 0.04 0.02 0.03 0.03 0.03 0.04 0.05


Market Price (OMR) * 0.37 0.32 0.33 0.32 0.32 0.32 0.32

Dividend Yield 4.8% 3.7% 4.6% 5.2% 6.0% 7.8% 9.6%

P/E Ratio (x) 9.5 16.4 13.0 11.9 10.2 8.5 6.9

P/BV Ratio (x) 1.8 1.5 1.3 1.3 1.2 1.1 1.0



IncomeStatement

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June 2011 23

National Bank of Oman Charts galleryTop-line Growth & Recurring Income Profitabil ity




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Global Research - Oman Banking Secto

Bank Dhofar

June 2011 2

Market Data

Bloomberg Code: BKDB OM

Reuters Code: BDOF.OMCMP (20 June 2011): OMR0.63

O/S (mn) 813


Market Cap (USD mn): 1,491

P/E 2011e (x): 15.0

P/Bv 2011e (x): 2.2


High (AED): 0.70

Low (AED): 0.54

Average Volume: (000) 62

1m 3m 12m

Absolute (%) -3.5 -5.14 10.7

Relative (%) -1.9 -5.2 7.5


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Profitability to increase by 15% in 2011

Pressure to ease on yields in 2011

High assets quality to continue

Very low credit growth is expected

Profitability to increase by 15% in 2011

In 1Q11, Bank Dhofars net profit was OMR9.4mn for 1Q11, representing anincrease of 19.1%QoQ and an increase of 6.2%YoY. This increase was not drivenby the banks top line as it was stagnant during 1Q11. The profitability of the bankwas supported by lower provisioning and increase in the fees and commission. Weare expecting profitability to increase by 15%YoY in 2011.

Pressure to ease on yields in 2011Bank Dhofar NII was stagnant in 1Q11 at OMR14.8mn which was a result of loweryield. As we are assuming that the yield of the Omani banking sector will increasetoward the end of 2011. And it is expected that the bank will manage to get low costdeposit decreasing its cost of fund which will result in an increase in the top line of9.5% in 2011.

High growth in Fees and commissionIn 1Q11, net fees and commission stood at OMR1.9mn representing an increase of45.6%QoQ and 53.8%YoY. This high growth was a result of the bank implementingAutomated Fees system which showed a positive result from the first quarter.. In ourview the fees and commission growth will normalize in the coming quarters to reach30%YoY growth in 2011.

High Assets Quality to continueIn 1Q11, provisioning for loan losses stood at OMR1.9mn representing a decreaseof 33.3%QoQ. Bank Dhofar enjoyed high quality of assets which we believe will

continue in 2011.


2010 2011e 2012e 2013e 2014e


NII Growth 16.3% 9.5% 11.7% 9.5% 15.1%

Loan Growth 6.0% 5.8% 10.2% 12.2% 13.2%

Deposits Growth 31.5% 16.4% 18.0% 17.0% 15.0%

Adjusted EPS (OMR) 0.0 0.0 0.0 0.1 0.1


ROE 15.5% 15.7% 15.4% 15.7% 17.0%

Dividend Yield 2.1% 2.6% 2.5% 3.2% 3.8%

P/E Ratio (x)* 16.2 15.0 13.6 12.2 10.2

P/BV Ratio (x)* 2.4 2.2 2.0 1.8 1.7Source: Company Reports & Global Research

* Market price for 2011 and sub sequent years as per closing prices on MSM on 20June 2011.


SellTarget Price

OMR0.361

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June 2011 25

Bank Dhofar - 1Q11 Result Summary


Income Statement

Interest Income 20.3 20.6 20.2 -11.8% 10.9%

Interest Expens e 6.3 5.9 5.4 -32.3% -24.7%



Non-interest Income 2.7 5.5 4.9 -10% 85%

Total Operating Income 16.6 20.2 19.7 -2% 19%


Provision (Loan Loss) 1 3 2 -33% 178%

Net Profit 9 8 9 19% 6%

Balance Sheet

Gross loans 1,266 1,333 1,409 6% 11%

Deposits 1,177 1,250 1,261 1% 7%

Assets 1,546 1,664 1,696 2% 10%


Very low credit growth is expectedBank Dhofar exhibited 5.7%QoQ gross loan growth in 1Q11. We dont believe that we are going to more than 6%YoY in 2011.We have revised our expected gross loans to OMR 1,411mn representing 8.5% decrease. In 1Q11, corporate loans represented51.6% of the loan portfolio. This gives an indication that the bank loan growth might get effected by the low growth of corporateloan in Oman in 2011.

Estimates Revision-2011e


Gross Loans 1,542 1,411 -8.5%

Deposits 1,344 1,307 -2.8%NII 66 63 -5.6%

Operating Income 86 80 -7.4%


Net Profit 46 38 -17.1%Source: Global Research

Valuation updateBank Dhofar currently is trading at very high multiples of P/BV 2.2x and P/E 15. Using Dividend Discount Module and P/BV asour valuation methodology, we have arrived at a fair value of OMR0.361 per share; offering downside of 42.2% on the closingprice (as on 20 June 2011) of OMR0.627 per share. Therefore, we downgrade our recommendation at Sell.

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June 2011 26









Provisions expense (8) (12) (4) (4) (4) (4) (3)





Cash Balances 116 182 214 236 246 251 261





Net Loans & Financings 1,018 1,194 1,262 1,333 1,471 1,656 1,880Investment in Associates


Net Fixed Assets 5 5 9 10 11 12 13

Other Assets 10 35 43 59 63 67 67

Total Assets 1,324 1,509 1,664 1,780 1,943 2,140 2,379


Deposits from Customers 972 1,101 1,250 1,307 1,434 1,601 1,805



Paid-up Capital 71 74 81 92 92 92 92


Other Reserves 84 95 106 108 109 111 113


Minority Interest - - - - - - -

Total Equity & Liability 1,324 1,509 1,664 1,780 1,943 2,140 2,379






Cost of Funds 2.5% 2.4% 1.9% 1.9% 1.9% 2.0% 2.1%

Net Spread 3.9% 3.5% 3.6% 3.8% 3.9% 3.9% 4.1%







NPL Coverage 138.3% 108.0% 116.1% 138.1% 144.1% 137.6% 129.8%

Cost of Risk (bps) 149.3 106.2 32.4 30.0 25.1 21.5 18.3




Adjusted EPS (OMR) 0.03 0.03 0.04 0.04 0.05 0.05 0.06


Market Price (OMR) * 0.37 0.73 0.66 0.63 0.63 0.63 0.63

Dividend Yield 6.8% 2.1% 2.1% 2.6% 2.5% 3.2% 3.8%

P/E Ratio (x) 11.1 21.3 16.2 15.0 13.6 12.2 10.2

P/BV Ratio (x) 1.4 2.7 2.4 2.2 2.0 1.8 1.7



IncomeStateme

nt

BalanceSheet

Ratio

Analysis

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June 2011 27

Bank Dhofar Charts galleryTop-line Growth & Recurring Income Profitabil ity




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Ahli Bank

June 2011 2

Market Data

Bloomberg Code: ABOB OM

Reuters Code: ABOB.OMCMP (20 June 2011): OMR0.273

O/S (mn) 712



P/E 2011e (x): 10.8

P/Bv 2011e (x): 1.8


High (OMR): 0.30

Low (OMR): 0.22


1m 3m 12m

Absolute (%) 1,9 -1.6 23.8

Relative (%) 3.5 -1.3 20.3


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Volume ( '000) ABOB (OMR)

Profitability growth to see momentum

Top line exhibited weakness The loan book continues to be of high quality

Impressive credit growth in 2010

Profitability growth to see momentumAhli bank announced OMR4.03mn net profit representing growth of 5%QoQ and24%YoY growth. This was supported by a cut down in operating cost and a majoincrease in the non interest income. Though profitability was not backed up by the NIperformance we still believe that the banks in it growth momentum phase. We areexpecting the same high growth ratio for the bottom line assuming it will grow at45.3%YoY in 2011 and it will normalize going forward.

Top line exhibited weakness

For the first time, since the conversion of Ahli bank to commercial banking, iwitnessed a decline in the top line of 1.6%QoQ in the first quarter. This was on theback of the decrease in both gross loan and customer deposits. Loans decrease wasvery minimal in 1Q11 of 0.15%QoQ but deposits decreased by 2.7%QoQ.

The decrease in deposit during the first quarter was a part of management plan toreduce their cost of fund as much as possible to maintain their spreads at the samelevels and minimize the decline in NII as much as possible. We believe that the bankeffective strategy will continue going forward and NII will grow a slower rate in 2011.

Impressive credit growth in 2010In 2010, the bank increased its gross loans by 47.8%YoY. This level of growth wasonly witnessed in Ahli bank of Oman and this was mainly due to the bank growthmomentum and trying to gain market share and compete with its peers. We believethat bank has the ability to enhance its credit position and gain an extra 1% markets

share during 2011. We are expecting credit growth to reach 11.1%YoY in 2011.


2010 2011e 2012e 2013e 2014e


NII Growth 41.6% 36.8% 15.6% 16.9% 17.9%

Loan Growth 47.8% 11.1% 16.4% 18.3% 15.8%

Deposits Growth 31.5% 16.4% 18.0% 17.0% 15.0%

Adjusted EPS (OMR) 0.0 0.0 0.0 0.0 0.0


ROE 14.5% 17.9% 18.0% 18.2% 18.5%

Dividend Yield 2.4% 3.2% 3.8% 4.3% 4.9%

P/E Ratio (x)* 13.8 10.8 9.2 8.1 7.1

P/BV Ratio (x)* 1.9 1.8 1.6 1.4 1.2


* Market price for 2011 and subsequent years as per closing prices on MSM on 20 June 201


HoldTarget Price

OMR0.258

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June 2011 29

The loan book continues to be of high qualityIn 1Q11, the banks provision increased by 31%, this was mainly due to the provisioning for some of the small and mediumenterprises. The NPL ratio remained at low levels of As a result of 0.58%. We believe it will slightly increase with the growth ofthe normal course of business.

Ahli Bank - 1Q11 Result Summary


Income Statement

Interest Income 7.8 9.1 9.7 -11.8% 10.9%

Interest Expens e 3.8 3.8 4.1 -32.3% -24.7%





Net Profit 3 4 4 5% 24%

Balance Sheet

Gross loans 508 660 659 0% 30%

Deposits 487 632 615 -3% 26%Assets 622 806 800 -1% 29%


Estimates Revision - 2011e


Gross Loans 485 733 51.2%

Deposits 507 698 37.8%

NII 18 26 44.9%

Operating Income 44 34 -22.2%


Net Profit 13 20 61.1%Source: Global Research

Valuation updateWe believe that the bank is going to witness double digit growth in 2011. However, the current market price captures this growthresulting in very limited upside potential. Ahli banks shares are trading at P/BV 2.0x which higher than the industry average.Using Dividend Discount Module and P/BV as our valuation methodology, we have arrived at a fair value of OMR0.258 pershare; offering a downside of 5.3% on the closing price (as on 20 June 2011) of OMR0.273 per share. Therefore, we maintainour recommendation at Hold.

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June 2011 30






Investment Income - - - - - - -Other Income 1 0 0 0 1 1 1



Provisions expense 0 (0) (0) (1) (1) (1) (1)





Cash Balances 15 109 66 77 74 71 86



Gross Loans & Financings 378 447 660 733 854 1,010 1,169


Net Loans & Financings 375 444 656 729 849 1,004 1,163Investment in Associates - - - - - - -


Net Fixed Assets 8 9 8 9 9 10 11

Other Assets 1 5 5 5 6 7 7

Total Assets 455 616 806 896 1,022 1,181 1,355


Deposits from Customers 319 467 632 698 805 944 1,098



- - - - - - -

Paid-up Capital 65 68 71 80 80 80 80


Other Reserves 7 13 17 17 17 17 17


Minority Interest - - - - - - -Total Equity & Liability 458 616 806 896 1,022 1,181 1,355






Cost of Funds 2.0% 3.3% 2.7% 2.6% 2.7% 2.7% 2.8%

Net Spread 4.3% 2.7% 3.1% 3.2% 3.2% 3.2% 3.3%







NPL Coverage 386.8% 292.2% 132.4% 160.5% 185.8% 218.5% 218.7%

Cost of Risk (bps) (2.79) 6.45 9.02 8.9 8.1 8.1 8.0




Adjusted EPS (OMR) 0.01 0.01 0.02 0.03 0.03 0.03 0.04


Market Price (OMR) * 0.14 0.22 0.27 0.27 0.27 0.27 0.27

Dividend Yield N/A 2.3% 2.4% 3.2% 3.8% 4.3% 4.9%

P/E Ratio (x) 15.5 17.2 13.8 10.8 9.2 8.1 7.1

P/BV Ratio (x) 1.0 1.6 1.9 1.8 1.6 1.4 1.2


* Market price for 2011 and sub sequent years as per closing prices on MSM on Februa ry 20, 2011

IncomeStateme

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BalanceSheet

RatioAnalysis

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June 2011 31

Ahli Bank Charts galleryTop-line Growth & Recurring Income Profitabil ity




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Oman International Bank

June 2011 3

Market Data

Bloomberg Code: OIBB OM

Reuters Code: OIB.OMCMP (20 June 2011): OMR0.255

O/S (mn) 200



P/E 2011e (x): 12.9

P/Bv 2011e (x): 1.3


High (OMR): 0.27

Low (OMR): 0.24


1m 3m 12m

Absolute (%) -1.2 9.9 3.2

Relative (%) 0.5 9.8 0.2


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Net profit will remain flat in 2011

Provisions should be on the watch in 2011 Very low LTD ratio in 1Q11

Net profit will remain flat in 2011Oman International Bank reported OMR4.4mn for 1Q11, representing a decrease o

4%QoQ and a decrease of 22%YoY. The decrease in profitability was mainly on the

back of the increase in provisioning. The bank tried to minimize the decline by cutting

operational by 3%. All other income statement items have remained. We believe ne

profit for 2011 will remain flat at OMR18mn.

Provisions should be on the watch in 2011Provision almost doubled in 1Q11, reaching OMR1.35mn in 1Q11 form OMR0.47mn

in 1Q10; representing 187.2%YoY increase. However, in 1Q11 recoveries and write

backs offset 58.7% from of provisioning which decreased the pressure on the bottomline. Going forward we assumed that recoveries will decrease gradually.

Very low LTD ratio in 1Q11OIB reported interest income of OMR7.5mn; NII remained stagnant for the past two

quarters. This is was on the back of deposits addition in1Q11 of 5.7%QoQ. Due to

that the LTD ratio has further decreased by 93bps in 1Q11 to 84% from 90% in

4Q10. This level of LTD ratio is the lowest compared to other banks is Oman. We

believe going forward the loan growth will pick up starting the second quarter and it

will reach 5%YoY by end of 2011. On the deposit side we expect the bank to

replace its high cost deposits with low cost deposits


2010 2011e 2012e 2013e 2014e

Net Profit Growth -18.3% 2.9% 8.8% 16.8% 18.6%

NII Growth -6.3% 3.1% 11.9% 16.3% 17.8%

Loan Growth 4.5% 4.7% 8.5% 15.1% 14.3%

Deposits Growth 31.5% 16.4% 18.0% 17.0% 15.0%

Adjusted EPS (OMR) 0.02 0.02 0.02 0.03 0.03


ROE 10.3% 10.4% 10.7% 11.7% 13.0%

Dividend Yield 5.2% 3.0% 3.3% 3.8% 4.6%

P/E Ratio (x)* 15.3 12.9 11.8 10.1 8.5

P/BV Ratio (x)* 1.6 1.3 1.2 1.1 1.

Source: Company Reports & Global Research* Market price for 2011 and subsequent years as per closing prices on MSM on 20 June 201

SellTarget Price

OMR0.214


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OIB - 1Q11 Result Summary


Income Statement

Interest Income 9.1 9.2 9.0 -2% -1%

Interest Expens e 1.6 1.7 1.5 -11% -5%





Operating Expenses 4.7 5.6 5.4 -3% 16%

Net Profit 5.7 4.6 4 -4% -22%

Balance Sheet

Gross loans 683 717 706 -1% 3%

Deposits 724 797 842 6% 16%

Assets 1,053 1,156 1,120 -3% 6%

Source : Company Financials & Global Research Valuation updateIn our view assets quality will remain a concern. Using Dividend Discount Module and P/BV as our valuation methodology, wehave arrived at a fair value of OMR0.214 per share; offering a downside of 16.2% on the closing price (as on 20 June 2011) ofOMR0.255 per share. Therefore, our recommendation is Sell.

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June 2011 3

Financial Statements(OMR mn) 2008 2009 2010 2011e 2012e 2013e 2014e








Provisions expense 7 1 1 (0) (0) (1) (1)





Cash Balances 131 107 127 122 130 123 115



Gross Loans & Financings 690 686 717 750 814 937 1,070


Net Loans & Financings 627 615 639 669 729 848 977

Investment in Associa tes


Net Fixed Assets 30 30 31 35 40 46 52

Other Assets 11 52 105 116 127 140 154

Total Assets 1,018 1,039 1,156 1,217 1,325 1,481 1,651


Deposits from Customers 729 730 797 834 914 1,041 1,176

Other Borrowings - - - - - - -


Paid-up Capital 91 91 91 91 91 91 91


Other Reserves 55 58 58 60 62 64 67

Shareholders' Equity 173 171 169 179 190 203 218Minority Interest - - - - - - -

Total Equity & Liability 1,018 1,039 1,156 1,217 1,325 1,481 1,651






Cost of Funds 1.7% 1.0% 0.8% 0.8% 0.9% 1.0% 1.0%

Net Spread 3.3% 3.7% 3.2% 2.9% 3.0% 3.0% 3.1%







NPL Coverage 103.3% 102.8% 108.4% 114.1% 116.0% 105.3% 96.3%

Cost of Risk (bps) (68.6) (2.9) (2.4) 0.1 1.4 2.0 2.9




Adjusted EPS (OMR) 0.03 0.02 0.02 0.02 0.02 0.03 0.03


Market Price (OMR) * 0.22 0.30 0.30 0.26 0.26 0.26 0.26

Dividend Yield 8.7% 6.2% 5.2% 3.0% 3.3% 3.8% 4.6%

P/E Ratio (x) 6.8 12.6 15.3 12.9 11.8 10.1 8.5

P/BV Ratio (x) 1.2 1.6 1.6 1.3 1.2 1.1 1.1


* Market price for 2011 and sub sequent years as per closing prices on MSM on February 20, 2011

IncomeStateme

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RatioA

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June 2011 4

Top-line Growth & Recurring Income Profitability




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OIB Charts gallery

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June 2011 5

DisclosureThe following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevantdisclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

Disclosure Checklist

RecommendationBloomberg

TickerReuters

Ticker Price DisclosureCompany

Bank Muscat Buy BKMB OM BKMAO.OM OMR 0.750 1,10National Bank of Oman Hold NBOB OM NBO.OM OMR0.321 1,10

Bank Dhofar Sell BKDB OM BDOF.OM OMR 0.627 1,10

Ahli Bank Hold ABOB OM ABOB.OM OMR 0.273 1,10

Oman International Bank Sell OIBB OM OIB.OM OMR 0.255 1,10

1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for thepreparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.3. Global Investment House makes a market in securities issued by this company.4. Global Investment House acts as a corporate broker or sponsor to this company.5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct

ownership position in securities issued by this company.

6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which itreceived fees.

8. Global Investment House has received compensation from this company for the provision of investment banking or financialadvisory services within the past year.

9. Global Investment House expects to receive or intends to seek compensation for investment banking services from thiscompany in the next three month.

10. Please see special footnote below for other relevant disclosures.

Global Research: Equity Ratings Definitions

Global Rating Definition

STRONG BUY Fair value of the stock is >20% from the current market price

BUY Fair value of the stock is between +10% and +20% from the current market price

HOLD Fair value of the stock is between +10% and -10% from the current market price

SELL Fair value of the stock is < -10% from the current market price

Disclaimer

This material was also produced by Global Investment House KSCC (Global),a firm regulated by the Central Bank of Kuwait. This document is

not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent

permitted by law, participate or invest in other financing transactionswith the issuers of the securities (securities), perform services for or solicit

business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted

by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to

recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global

has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and

no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document.

Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Thisdocument is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability

whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person

and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this

document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions

and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This

document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained

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Global Investment HouseWebsite: www.globalinv.net

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ResearchFaisal Hasan, CFA(965) [email protected]

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Global KuwaitTel: (965) 2 295 1000Fax: (965) 2 295 1005P.O.Box 28807 Safat, 13149Kuwait

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Global Wealth Manager

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Oman Banking 062011

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