124431banking sector - performance overview_25 dec 2011

7/29/2019 124431Banking Sector - Performance Overview_25 Dec 2011

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Banking Sector

Performance Overview

Nine months ended September 2011

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Banking Sector - Performance Overview25 December 2011

Al Maha Financial Services LLC

Content

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1213

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Liability Mix.

Valuations & Outlook.

Performance Overview...

Profitability...

Shift in Income Pattern

Operating Efficiency.

Interest Spread

Net Interest Margin

Omani Banking Sector...

Returns.

Market Share

Credit - Deposit Movement of Listed Banks .

Growth in Corporate and Consumer loans.


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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, AhliBank 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% year-

on-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 RiskAssessment (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 tocustomers. 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.


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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 netprofits in the first nine months of this year.

Total profits of the listed banks reached RO179.6 million during the nine months ended30 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 theirrespective quarters in the last year.

We expect the banking sector to maintain double digit growth for FY 2011.

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 tocorresponding 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.

Source: Company Financials, Al Maha Research

51,529 49,845 49,455

56,491 63,389 59,725

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Quarter 1 Quarter 2 Quarter 3

inOMR'000s

Net Profit of Listed Omani Banks

2010 2011


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Al Maha Research




The total income of the six listed banks showed an increase of 3.7% y-o-y to reach RO550 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-yfor 9M11 to reach RO 121 million as comparedto RO 96 million for 9M 10.

Rise in investment and dividend income due to better management of investments hasresulted in the increase of non-interest income.

However, most of the banks reported a year-on-year decline in Fees and Commissionincome 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

82%

18%

9Months 2010

Interest Income Non-Interest Income

78%

22%

9Months 2011

Interest Income Non-Interest Income

ABOB

5%BKSB

3%NBOB

19%

BKMB

54%

BKDB

11%

OIBB

8%

9Months 2010

ABOB

5%BKSB

5%NBOB

21%

BKMB

50%

BKDB

12%

OIBB

7%

9Months 2011

Source: Com an Financials Al Maha Research


Income Pattern - Banking


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Al Maha Research




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.

Interest Spread = YieldCost 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 byNational 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 ninemonth 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%.

4.2% 3.9%

1.4% 1.1%

2.73% 2.85%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

9M 2010 9M 2011

Interest Spread - Banking Sector

Yield on Interest Earning Assets Cost of Funds Spread



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Al Maha Research




Cost of funds of the two emerging banks, Ahli Bank and Bank Sohar were relativelyhigher compared to the other banks.

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 = Net Interest Income/ Average Interest Earnings Assets

2.4% 2.3%2.5%

3.0%2.7% 2.6%

2.2% 2.1%

2.8%3.2%

2.7% 2.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

ABOB BKSB NBOB BKMB BKDB OIBB

Interest Spreads - Listed Omani Banks

9M 2010 9M 2011 Sector 9M 2010 Sector 9M 2011


10.4 11.3

0.28 0.30

2.68%2.67%

2.2%

2.3%

2.4%

2.5%

2.6%

2.7%

2.8%

0

3

6

9

12

9M 2010 9M 2011

InOMRBillions

Net Interest Margin - Banking Sector

Average Interest Earning Assets Net Interest Income Net Interest Margin(RHS)



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Al Maha Research




Among the listed players, Bank Muscat stood ahead of its peers in terms of net interestmargin 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 thepeer average of 2.67%.

Returns

The banking sector witnessed increase in returns during the nine months period ending

September11 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.

0.0%

0.5%

1.0%

1.5%2.0%

2.5%

3.0%

3.5%


Net Interest Margin - Listed Omani Banks

9M 2010 9M 2011 Sector 9M 2010 Sector 9M 2011



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Al Maha Research




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.

Excluding the one-off impact of the loss from the legal case, Bank Dhofar achieved thehighest 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.

0%

4%

8%

12%

16%


Return on Avg. Equity

9M 2010 9M 2011

Sector 9M 2010 Sector 9M 2011

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%


Return on Avg. Assets

9M 2010 9M 2011

Sector 9M 2010 Sector 9M 2011

1.24%

1.35%

1.1%

1.2%

1.3%

1.4%

9M 2010 9M 2011

Return on Avg. Assets

9.6%

10.5%

9.0%

9.5%

10.0%

10.5%

11.0%

9M 2010 9M 2011

Return on Avg. Equity



Returns Banking Sector

Returns Listed Omani Banks


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Al Maha Research




The return on average equity of Ahli Bank was 12.3% for9M11 which is above the peergroup 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 thesector 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 bankimproved 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% in9M10 to 10.1% for 9M11. The banks return on average assets grew from 1.18% in

9M10 to 1.40% for9M11 which again was above the peer group average.

Though Bank Sohar showed an increasing trend in its returns on a y-o-y basis, itremained 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 RoAEand 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.


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Al Maha Research




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 BanksLoans & Advances

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.

6.38%9.74%

16.53%

45.30%

14.41%

7.65%

As on 30 September 2010

7.4%10.1%

16.3%

45.1%

13.9%

7.1%

As on 30 June 2011

7.2%9.7%

16.0%

45.8%

14.4%

7.0%




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Al Maha Research




Market Share of Omani BanksDeposits

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.

8.77 8.87 9.07 9.269.40 9.89

10.36

8.27 8.14 8.229.20 8.87

9.5610.24

-

2

4

6

8

10

12

Mar'10 June'10 Sept'10 Dec'10 Mar'11 June'11 Sept'11

InOMRBillions

Credit - Deposit Movement of Listed Omani Banks

Credit Deposit


6.4% 11.3%

16.3%

42.7%

14.3%

8.9%


7.1%

10.4%

15.2%

46.0%

12.9%8.3%

As on 30 June 2011

6.8% 10.2%

15.1%

46.8%

13.2%

7.8%




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Al Maha Research




Majority of the listed banks were aggressive in lending with their credits exceeding the deposits.

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 September11, 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%, y-

o-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.

0.8 1.01.7

4.7

1.50.70.7 1.0

1.5

4.8

1.4 0.8

1.07

0.96

1.07

0.99

1.10

0.91

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0

1

2

3

4

5

6


InOMRBillions

Credit to Deposit Ratio - Listed Omani Banks

Credit Deposits Credit to deposit (RHS)


5.22

6.08

3.794.28

0

1

2

3

4

5

6

7

Sept '10 Sept '11 Sept '10 Sept '11

Corporate Loans Consumer Loans

In

OMRBillions

Corporate & Consumer Loans - Banking Sector



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Al Maha Research




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 ofSeptember 11 from RO 10.9 billion a year ago.

Customer deposits remain as the major constituent of the liability mix with 82% of thetotal 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 indeposits. The borrowings from other banks declined from RO 1.85 billion as on 30

September 10 to RO 0.96billion as on 30 September 11.

Although other borrowed funds like subordinated loans, bonds etc constituted toapproximately the same 1% of the total liabilities, in terms of value it declined by 4% y-

o-y to reach RO 159 million as on 30 September 11.

The other liabilities of the banks including subordinated liabilities and taxation showedan 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.


73%

2%

17%

2%

7%

9M 2010

82%

1%

8%

1%

8%

9M 2011

Liability MixBanking Sector


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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.

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, OmanPolypropylene 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 forgrowth 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 areexpected 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 loansare likely to impact the

banks interest income, it is likely to help the banks to minimizethe 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 theregulatory 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.

CMP

21-Dec-11 Dec '10 Mar '11 June '11 Sept '11 Dec '10 Mar '11 June '11 Sept '11

Bank Muscat 0.720 154,838 1,114,834 11.0 10.0 9.7 9.6 1.4 1.4 1.4 1.3

Ahli Bank 0.265 80,143 212,379 15.1 13.2 12.2 11.9 2.0 2.0 1.9 1.8

National Bank of Oman 0.317 108,100 342,677 12.6 11.1 10.0 9.4 1.3 1.3 1.3 1.25

Bank Sohar 0.155 100,000 155,000 15.2 12.7 11.2 10.6 1.4 1.4 1.3 1.31

Bank Dhofar 0.523 91,524 478,671 14.4 12.8 11.1 12.5 2.1 2.1 2.3 2.2

Oman International Bank 0.282 96,805 272,990 15.5 15.4 16.3 16.8 1.7 1.7 1.7 1.6

Sector Average ####### 12.6 11.4 10.7 10.8 1.57 1.57 1.54 1.49

PBV as on

Figures in RO '000 except per share data

StockShare

Capital

PE annualized as on

Mcap


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Al Maha Research




Contacts Telephone E-mail

Research:

Suresh Kumar 24827137 [email protected]

Radhika Gadhia 24827138 [email protected]

Khushboo Badlani 24827140 [email protected]

Portfolio Management :

S.V. Uppiliappan 24827169 [email protected]

Institutional Sales:

A. S. Kedarnath 24827181 [email protected]

Brokerage:

Abdullah Al Hinai 24827188 [email protected]

Mahmoud Al Hamsaidi 24827144 [email protected]

Nasser Al Banna 24827177 [email protected]

Operations & Customer service :

Zakia Al Ghammari 24827134 [email protected] Al Hashmi 24827139 [email protected]

Al Maha Financial Services LLCPO Box 1065 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: 00 968 2482 7171, Fax: 00968 24827121

Award Winner 2010Excellence in Brokerage Business

Awarded for Research Promotion and Website Content

ByMuscat Securities Market


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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 offerto 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 suchjurisdiction. 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 LLCand its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, havelong 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 interestwith 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, butwhich may not be verified independently. While utmost care has been taken in preparing the above report, Al MahaFinancial 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 viewsexpressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors musttake 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 whichthis report relates, either directly or indirectly, may fall against the interest of investors. This document is strictly for the useof recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold ordistributed in any manner whatsoever without the prior and explicit written permission of Al Maha Financial Services LLC.

124431banking sector - performance overview_25 dec 2011

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