124431banking Sector - Performance Overview - 25 Dec 2011

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Banking Sector Performance Overview

Nine months ended September 2011
Banking Sector - Performance Overview Al Maha Research Content

25 December 2011
Omani Banking Sector... 3 Performance Overview... 4 Profitability... 4 Shift in Income Pattern. 4 Operating Efficiency. 6 Interest Spread.. 6 Net Interest Margin.. 7 Returns.... 8 Market Share.. 10 Credit - Deposit Movement of Listed Banks . 12 Growth in Corporate and Consumer loans. 13 Liability Mix. 14 Valuations & Outlook. 15
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Page 2 of 17
Banking Sector - Performance Overview Al Maha Research Omani Banking Sector

Banking sector enjoys a dominant position in the Muscat Securities Market. The six listed banks namely Bank Muscat, Bank Dhofar, National Bank of Oman, Oman International Bank, Ahli Bank and Bank Sohar together have more than 45% weightage on the benchmark MSM-30 General Index. Also, these six banks account for around 48% of the total market capitalization of the Index. Of the overall banking universe which comprise of a total of 17 players including the seven local and ten foreign banks, these six listed banks act as a true representative of the sector. Supported by the accommodative monetary situation, increase in government spending and mega projects in the pipeline, banking sector demonstrated a robust performance during the nine months ended 30 September 2011.The total assets of the commercial banks increased by 9.5 percent to reach RO 17,203.6 million as on 30 September 2011 compared to RO 15,705.3 million, a year ago. The overall banking sector witnessed a healthy credit growth of 12.4% yearon-year to reach RO 11,882.2 million at the end of September 2011. In order to support funding and strengthen asset growth banks are increasing their capital. Bank Muscat recently announced its plan to raise RO100 million through a rights issue in the second quarter of next year. Similarly, Bank Dhofar has raised RO50 million subordinated loan for a tenor of 5 years and one month. The new capital will help the banks to expand their loan portfolio and meet the high demand for credit coming from big projects. Rating agency Standard & Poor's has recently upgraded Oman's Banking Industry Country Risk Assessment (BICRA) rating to Group 4 from Group 5. Group 1 is the lowest-risk banking system, as per the agency. Hence, after the upgrade, Oman stands with Brazil, Kuwait, Malaysia, South Africa and Taiwan in Group 4. The rating agency also upgraded Oman's economic risk score to 4 from 6 and assigned an overall industry score of 4. The up gradation of Omans ratings indicates a good track record of the regulator, adequate regulation and supervision gradually aligning with international standards. This rating upgrade is expected to be a confidence builder for the players and attract local as well as foreign investors. Recently, Oman has opened its doors to Islamic Banking. Introduction of Islamic Banking services provides opportunity for banks to introduce a larger variety of products and services to customers. Leading players like Bank Muscat and Bank Sohar have started developing the necessary frameworks and training their employees for introduction of Islamic Banking windows. Two new banks, Bank Nizwa and Al Izz International Bank, also are expected to enter this space by floating their initial public offering (IPO) early next year.
25 December 2011
Page 3 of 17
Banking Sector - Performance Overview Al Maha Research Performance Overview

Profitability Omani banks showed an impressive performance in the first nine months of this financial year by improving their profitability. The six listed Omani banks together have achieved a year-on-year growth of 19% in net profits in the first nine months of this year. Total profits of the listed banks reached RO179.6 million during the nine months ended 30 September 2011 from RO 150.8 million reported during the same period last year. Also, all the three quarters of this year witnessed better profitability compared to their respective quarters in the last year. We expect the banking sector to maintain double digit growth for FY 2011.
25 December 2011
70,000 60,000 in OMR '000s 50,000 40,000
Net Profit of Listed Omani Banks
56,491 30,000 20,000
63,389 49,845
59,725 49,455
51,529
10,000
Quarter 1 Quarter 2 2010 2011 Quarter 3
Source: Company Financials, Al Maha Research
Shift in Income Pattern Banking sector witnessed a shift in the contribution of interest and non interest incomes towards the total operating income during nine months ended 30 September 2011 compared to corresponding period last year. Non-interest income accounted for 22% of the banks total income for the nine months period ended September 2011, against its contribution of 18% for the first nine months of the last year.
Page 4 of 17
Banking Sector - Performance Overview Al Maha Research

Income Pattern - Banking
9Months 2010 9Months 2011
25 December 2011
18% 82%
22% 78%
Interest Income
Non-Interest Income
Interest Income
Non-Interest Income
The total income of the six listed banks showed an increase of 3.7% y-o-y to reach RO 550 million for 9M11 from RO 530 million in 9M10. Of the total income, interest income of the banks showed a marginal decline of 1.2% y-o-y during 9M11 to reach RO 429 million from RO 434 million recorded during 9M10. However, the non interest income demonstrated a significant increase of 26% y-o-y for 9M11 to reach RO 121 million as compared to RO 96 million for 9M 10. Rise in investment and dividend income due to better management of investments has resulted in the increase of non-interest income. However, most of the banks reported a year-on-year decline in Fees and Commission income for 9M 2011 as market activity remained subdued during the period.
Change in market share of the non-interest income component of listed banks during the above timeline is as below.
Market Share of Non Interest Income
9Months 2010
OIBB ABOB BKSB 8% 5% 3%
9Months 2011
BKDB 11%
NBOB 19%
BKDB 12%
OIBB ABOB 7% 5%
BKSB 5% NBOB 21%
BKMB 54%
BKMB 50%
Page 5 of 17

Operating Efficiency Banking sector showed improvement in operational efficiency during the first nine months period of this year leading to increase in overall profitability. Interest Spread The banking space witnessed marginal improvement in the interest spread irrespective of the drop in yield, as a result of the decline in interest rate. Cost of funds also showed a drop during the first nine months of this financial year compared to the same period last year as a result of banks endeavor to access low cost funds. This has resulted in improvement of the spread from 2.73% in 9M 10 to 2.85% in 9M 11.
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 9M 2010 Yield on Interest Earning Assets
25 December 2011
Interest Spread - Banking Sector

4.2% 2.73% 3.9% 2.85%
1.4%
1.1% 9M 2011 Cost of Funds Spread
Interest Spread = Yield Cost of funds Yield = Interest Income / Average Interest Earnings Assets Cost of Funds = Interest Expense / Average Interest Bearing Liabilities
Bank Muscat recorded the highest interest spread of 3.2% for the period followed by National Bank of Oman at 2.8%. The lower cost of funds owing to the government deposits has helped Bank Muscat to record the highest spread. Interest yields of the six listed banks ranged between 3.1% and 4.4% during the nine month period ended 30 September 2011. National Bank of Oman recorded the highest interest yield of 4.4% during the above period, followed by Bank Muscat with its yield of 4%.
Page 6 of 17
25 December 2011
Cost of funds of the two emerging banks, Ahli Bank and Bank Sohar were relatively higher compared to the other banks.
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% ABOB 9M 2010 2.4%2.2%
Interest Spreads - Listed Omani Banks
2.3%2.1%
2.5%2.8%
3.0%3.2%
2.7%2.7%
2.6%2.6%
BKSB 9M 2011
NBOB
BKMB Sector 9M 2010
BKDB
OIBB Sector 9M 2011
Net Interest Margin The net interest margin of the banking sector remained flat at 2.67% for the nine months ended 30 September 2011 compared to 2.68% for the corresponding period last year.
Net Interest Margin - Banking Sector
12 In OMR Billions 9 6 3 0.28 0 9M 2010 Average Interest Earning Assets 9M 2011 Net Interest Income Net Interest Margin(RHS) 0.30 10.4 11.3 2.68% 2.8% 2.67% 2.7% 2.6% 2.5% 2.4% 2.3% 2.2%
Net Interest Margin = Net Interest Income/ Average Interest Earnings Assets
Page 7 of 17
25 December 2011
Among the listed players, Bank Muscat stood ahead of its peers in terms of net interest margin by showing an improvement to 3% during the first nine months of FY 2011, from 2.8% for the same period last year. It was followed by Bank Dhofar with its net interest margin of 2.85%. Bank Sohar recorded the lowest net interest margin of around 2.2% which is below the peer average of 2.67%.
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

ABOB
Net Interest Margin - Listed Omani Banks
BKSB
NBOB
BKMB
BKDB
OIBB
9M 2010
9M 2011
Sector 9M 2010
Sector 9M 2011
Returns The banking sector witnessed increase in returns during the nine months period ending September 11 as compared to the same period last year. The return on average assets improved from 1.24% in 9M10 to 1.35% during 9M11, while the return on average equity of the sector showed a significant improvement from 9.6% to 10.5% during the same period. The increase in returns was a result of improved profitability and better efficiency.
Page 8 of 17

Returns Banking Sector
Return on Avg. Assets 1.4%
11.0% 10.5% 10.0%
25 December 2011
Return on Avg. Equity
1.3% 1.35% 1.2% 1.24% 1.1% 9M 2010 9M 2011
10.5%
9.5%
9.6%
9.0% 9M 2010 9M 2011
Returns on Average equity (ROAE) and average assets (ROAA) of the six listed banks during the nine month periods ending September 2010 and 2011 are as below.
Returns Listed Omani Banks
Return on Avg. Equity
16% 12% 8% 0.8% 4% 0% ABOB BKSB NBOB BKMB BKDB 9M 2011 Sector 9M 2011 OIBB 0.4% 0.0% ABOB BKSB NBOB BKMB BKDB OIBB 2.0% 1.6% 1.2%
Return on Avg. Assets
9M 2010 Sector 9M 2010
9M 2010 Sector 9M 2010
9M 2011 Sector 9M 2011
Excluding the one-off impact of the loss from the legal case, Bank Dhofar achieved the highest returns on average equity and average assets of 12.9% and 1.7% respectively during the nine months ended September 2011. The growth in operating income leading to improved profitability has been translated into high returns by the Bank.
Page 9 of 17
25 December 2011
The return on average equity of Ahli Bank was 12.3% for 9M11 which is above the peer group average of 10.5%. Though the return on average assets was almost flat over the period at 1.6%, it remained above the peer group average of 1.35%. Bank Muscat witnessed an improvement in its returns and was also marginally above the sector average. The return on average equity increased from 9.8% in 9M10 to 10.7% in 9M 11 and return on average assets of the bank improved from 1.2% in 9M10 to 1.38% in 9M 11. The returns on average equity of National Bank of Oman showed a rise from 8.5% in 9M10 to 10.1% for 9M11. The banks return on average assets grew from 1.18% in 9M10 to 1.40% for 9M11 which again was above the peer group average. Though Bank Sohar showed an increasing trend in its returns on a y-o-y basis, it remained below the sector average. The return on equity of the bank improved significantly from 7.5% in 9M10 to 9.3% for 9M11. The return on assets of Bank Sohar showed a similar trend, increasing from 0.75% in 9M10 to 0.86% for 9M11. Oman International Bank is the only listed bank which showed a decline in both RoAE and RoAA on a y-o-y basis. The return on average equity of the bank dropped from 7.7% in 9M10 to 7.3% during 9M11 and the return on assets declined from 1.26% of 9M10 to 1.07% for 9M11.
Market Share The four matured banks namely Bank Muscat, Bank Dhofar, National Bank of Oman and Oman International Bank, together witnessed a minor decline in the market share in terms of gross loans to 83.1% as on September 11, as compared to 83.9% as on September 10. The emerging banks, Ahli Bank and Bank Sohar have improved their combined market share from 16.1% to 16.9% during the same period. However, an opposite trend was seen in the case of customer deposits including certificates of deposits. The matured banks increased their market share to 83% as on September 11 from 82.5%, a year ago while the share of emerging banks dropped from 17.5% to 17% during the same period. Loans & Advances The total loans and advances of the six listed banks stood at RO 10.363 billion as on September 2011 as compared to RO 9.07 billion a year ago, registering an increase of 14.2% year on year.
Page 10 of 17

25 December 2011
Bank Muscat continued to remain as the market leader in terms of gross loans and advances. The banks market share grew from 45.3% as on September 10 to 45.8% as on September 11. Oman International Bank underwent a challenging phase during this time with its market share declining to 7% from 7.65% a year ago. Change in market share of listed banks during the one year is as shown below.
Market Share of Omani Banks Loans & Advances
As on 30 September 2010
7.65% 14.41% 16.53% 45.30% 6.38%
As on 30 June 2011
7.1% 13.9% 16.3% 45.1% 7.4% 10.1%
9.74%
7.0% 7.2% 14.4%
9.7% 16.0%
45.8%
Deposits The customer deposits, including certificates of deposits, of the six listed banks stood at RO 10.24 billion as on September 2011 from RO 8.22 billion a year ago, showing a growth of 24.6% year on year. Bank Muscat maintained its position as the market leader in terms deposits. The bank improved its market share from 42.8% as on September 10 to 46.8% as on September 11. Change in market share of listed banks in terms of deposits collected during this period is as shown below.
Page 11 of 17

Market Share of Omani Banks Deposits
As on 30 September 2010 8.9% 14.3% 16.3% 42.7%
46.0%
25 December 2011
As on 30 June 2011
7.1% 8.3% 12.9% 10.4% 15.2%
7.8% 13.2% 15.1% 46.8% 6.8% 10.2%
6.4% 11.3%
Credit - Deposit Movement of Listed Banks The total credit of listed Omani banks outpaced deposits continuously in the last seven quarters. The total credit of listed banks registered a growth of 14.2%, y-o-y to reach RO 10.363 billion as on September 2011 whereas the deposits grew at a higher rate of 24.6% y-o-y to reach RO 10.240 billion at the end of September 2011. In the last two quarters, the gap between the credit and deposits narrowed as deposits increased at a higher pace, as a result of banks efforts to build a stable low cost deposit base.
Credit - Deposit Movement of Listed Omani Banks

12 10 In OMR Billions 8 6 4 2 Mar'10 June'10 Sept'10 Credit
8.77
8.87 8.14
9.07 8.22
9.26 9.20
9.40 8.87
9.89
10.36
9.56
10.24
8.27
Dec'10 Deposit
Mar'11
June'11
Sept'11
Page 12 of 17

25 December 2011
Majority of the listed banks were aggressive in lending with their credits exceeding the deposits. Credit to Deposit Ratio - Listed Omani Banks
6 5 In OMR Billions 4
1.07 0.96 1.07 1.10 0.99 0.91
1.20 1.00 0.80
3
2 1
0.8 0.7 1.0 1.0 1.7 1.5 4.7 4.8
0.60
0.40
1.5 1.4
0.20
0.7 0.8
0 ABOB BKSB Credit

0.00 NBOB Deposits BKMB BKDB OIBB
Credit to deposit (RHS)
Growth in Corporate and Consumer loans The loan book of the banking sector witnessed a healthy growth, both in the corporate and consumer segments, during the last one year. The corporate credit grew by 16.5% y-o-y from RO 5.22 billion as of 30 September 10 to RO 6.08 billion as of 30 September 11, with major companies like Oman Cement, Raysut Cement, Renaissance Services, A Saffa Foods availing credit to fund their capex programmes. The consumer segment witnessed a growth of 12.9%, yo-y to reach RO 4.28 billion as on September 2011. The increase in disposable incomes owing to the hike in remunerations of employees was one of the major drivers for the incremental demand in the retail segment. Corporate & Consumer Loans - Banking Sector
7 6 5 4 3 2 1 0 6.08 5.22 3.79 4.28
In OMR Billions
Sept '10
Sept '11
Sept '10
Sept '11
Corporate Loans
Consumer Loans
Page 13 of 17

Liability Mix The liability mix of Omani banks constitutes of customer deposits, certificate of deposits, due to banks, other borrowed funds and other liabilities. The total liabilities of the banks increased by 12.3% y-o-y to reach RO 12.2 billion as of September 11 from RO 10.9 billion a year ago.
Liability Mix Banking Sector
9M 2010
2% 17%
25 December 2011
9M 2011 1% 82% 8% 1% 8%
7%
73% 2%
Customer deposits remain as the major constituent of the liability mix with 82% of the total share as on September 11. The customer deposits of the six listed banks grew from RO 7.96 billion as at the end of September 10 to RO 10.05 billion as of a year ago, registering an increase of 26.3% y-o-y and thus making the banks less dependent on borrowings from other banks. The certificates of deposit showed a decline of 40% y-o-y to reach RO 116 million as on 30 September 11 from RO 194 million a year ago. The borrowings from other banks dropped 48% y-o-y mainly due to an increase in deposits. The borrowings from other banks declined from RO 1.85 billion as on 30 September 10 to RO 0.96 billion as on 30 September 11. Although other borrowed funds like subordinated loans, bonds etc constituted to approximately the same 1% of the total liabilities, in terms of value it declined by 4% yo-y to reach RO 159 million as on 30 September 11. The other liabilities of the banks including subordinated liabilities and taxation showed an increase of 31% y-o-y to reach RO 935 million as on 30 September 11. The other liabilities constituted around 8% of the liabilities mix as on 30 September 11 from 7% as on 30 September 11.
Page 14 of 17
Banking Sector - Performance Overview Al Maha Research Valuations & Outlook

We find the valuations of banks attractive in relative terms. The trend of Sector valuations in terms of PE and PBV during the last four quarters reflects the underperformance of the sector. With the expected earnings growth rate of more than 10%, leading players like Bank Muscat and National Bank of Oman command PE/G ratios below one, suggesting their undervaluation. We are of the opinion that the current market prices of the listed banks do not reflect the true potential of dominant players in the banking sector.
Figures in RO '000 except per share data
25 December 2011
CMP Stock Bank Muscat Ahli Bank National Bank of Oman Bank Sohar Bank Dhofar Oman International Bank Sector Average 21-Dec-11 0.720 0.265 0.317 0.155 0.523 0.282
Share Capital 154,838 80,143 108,100 100,000 91,524 96,805
PE annualized as on Mcap 1,114,834 212,379 342,677 155,000 478,671 272,990 ####### Dec '10 11.0 15.1 12.6 15.2 14.4 15.5 12.6
PBV as on June '11 Sept '11 1.4 1.9 1.3 1.3 2.3 1.7 1.54 1.3 1.8 1.25 1.31 2.2 1.6 1.49
Mar '11 June '11 Sept '11 Dec '10 Mar '11 10.0 13.2 11.1 12.7 12.8 15.4 11.4 9.7 12.2 10.0 11.2 11.1 16.3 10.7 9.6 11.9 9.4 10.6 12.5 16.8 10.8 1.4 2.0 1.3 1.4 2.1 1.7 1.57 1.4 2.0 1.3 1.4 2.1 1.7 1.57
Going forward
We expect the banking sector to continue to demonstrate its robust performance driven by growth in loan book and other businesses. Spending on mega projects such as Sohar Refinery, Sohar Aluminum, Oman Polypropylene and Aromatic, Duqm Airport, is expected to support the credit expansion. With over RO10.4billion investment planned in construction sector by 2014 and oil & gas projects worth RO386 million in pipeline, banks would comfortably show healthy loan books. We believe that favourable demographics would continue to act as a key driver for growth in consumer lending segment and expect the banks to benefit from the higher disposable income levels of the youth population. The year 2012 is likely to be challenging for the banking space as two new banks are expected to start Islamic Banking services early next year. However, Banks are gearing up and take this as an opportunity to offer new variety of products and services. Though the expected reduction in the interest rates and the ceiling on consumer loans are likely to impact the banks interest income, it is likely to help the banks to minimize the default risk and in turn improve the asset quality. Half of the listed banks are expected to raise new capital in order to comply with the regulatory capital requirement of RO 100 million. The banks are also likely to raise additional capital through other means such as rights issue, private placements and subordinated debt to fund the growing credit demand.
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25 December 2011

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Contacts Research:
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E-mail
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25 December 2011
DISCLAIMER: The research report has been prepared by Al Maha Financial Services LLC for private circulation amongst selected clientele for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe any investment. This Report is not directed to, or intended to be used by, any person or entity who (or which) is a citizen of (or domiciled) in any jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the company to any registration or licensing requirements within such jurisdiction. Al Maha Financial Services LLC 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. Al Maha Financial Services LLC and its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to companies mentioned herein or inconsistent with any recommendation and related information and opinions. Al Maha Financial Services LLC and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. The information contained in this report has been obtained from the 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, Al Maha Financial Services LLC makes no guarantee, representation or warranty, whether expressed or implied, and accepts no responsibility or liability to its accuracy and completeness of the data, being provided. Opinion expressed is our current opinion as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors must take their own decision 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 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 Al Maha Financial Services LLC.
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124431banking Sector - Performance Overview - 25 Dec 2011

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Banking Sector Performance Overview

Banking Sector - Performance Overview Al Maha Research Content

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Banking Sector - Performance Overview Al Maha Research Omani Banking Sector

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research Performance Overview

70,000 60,000 in OMR '000s 50,000 40,000

Net Profit of Listed Omani Banks

56,491 30,000 20,000

Source: Company Financials, Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

Source: Company Financials, Al Maha Research

BKSB 5% NBOB 21%

Source: Company Financials, Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

Interest Spread - Banking Sector

1.1% 9M 2011 Cost of Funds Spread

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

Interest Spreads - Listed Omani Banks

BKMB Sector 9M 2010

OIBB Sector 9M 2011

Source: Company Financials, Al Maha Research

Source: Company Financials, Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Net Interest Margin - Listed Omani Banks

Source: Company Financials, Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

Return on Avg. Equity

1.3% 1.35% 1.2% 1.24% 1.1% 9M 2010 9M 2011

Source: Company Financials, Al Maha Research

Return on Avg. Assets

9M 2010 Sector 9M 2010

9M 2010 Sector 9M 2010

9M 2011 Sector 9M 2011

Source: Company Financials, Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

7.0% 7.2% 14.4%

Source: Company Financials, Al Maha Research

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

Source: Company Financials, Al Maha Research

Credit - Deposit Movement of Listed Omani Banks

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research

1.20 1.00 0.80

0 ABOB BKSB Credit

0.00 NBOB Deposits BKMB BKDB OIBB

Credit to deposit (RHS)

Al Maha Financial Services LLC

Banking Sector - Performance Overview Al Maha Research