National Bank of Oman

Transcription

1 Global Research Oman Investment Update Market Data Bloomberg Code: NBOB OM Reuters Code: NBO.OM CMP (6 November 2010): RO0.361 O/S (mn): 1,081 Mkt Cap (ROmn): Mkt Cap (US$mn): 1, P/E 2011e (x): 12.1 P/Bv 2011e (x): 1.4 Price Performance 1Yr High /Low (RO): / Average Volume: 511,331 1m 3m 12m Absolute (%) Relative (%) NBO Price Volume Performance 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Nov09 Source: Zawya Jan10 Mar10 May10 Volume ('000) Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone: Lamya Hayat Financial Analyst lhayat@global.com.kw Phone: Jul10 Sep10 Nov10 Price (RO) National Bank of Oman Following a conservative strategy Profitability will show a healthy growth of 33.4% despite Dubai World provisioning Valuation offers limited upside potential of 4.8% Hold Target Price RO Profitability will show a healthy growth of 33.4% despite Dubai World provisioning We believe that the net profit will grow at 33.4% YoY in 2010 growth is mainly due to a major slow down on the provisioning, despite assuming 2 provisioning for Dubai World exposure of RO8.7mn. Slow growth in the Bank s top line We have estimated the NII to increase by 0.2% in 2010, followed by a 4 years CAGR of 12.8%. Assuming that the earning yield of the bank will remain under pressure for the upcoming two quarters and the bank will maintain its spreads through replacing high cost deposit with a lower cost deposits. Both loans and deposits are expected to grow in line with the market Loans are expected to grow in line with the market, supported by the market demand. We believe that the bank s loans will grow at 7.7% for 2010 and a CAGR of 11.2% for the 4 years of projection. On the deposits sides we believe that going forward the bank will maintain their strategy of replacing high cost deposits with low cost deposits which will result in an increase of 10. by the end of 2010 while the 4year CAGR will be 13.7%. Valuations Hold with an upside potential of 4.8% Based on future earnings projections, the DDM value of National Bank of Oman comes out to be RO 0.377/share. While on the basis of the GGM the company s stock valuation comes to RO 0.382/share. Hence the value of National Bank of Oman derived from the weighted average of the DDM and the GGM is QR0.378/share. It is worth mentioning that NBO is trading at its 52 weeks highest. Investment Indicators e 2011e 2012e 2013e Net Interest Income Net Profit EPS (RO) BVPS (RO) P/E (x) P/BV (x) *Historical P/E & P/BV multiples pertain to respective yearend prices, while those for future years are based on market price in the MSM as on November 6,

2 Valuation & Recommendation For arriving at the fair value of National Bank of Oman shares, we have used two valuations methods (DDM and GGM) Dividend Discounting Model DDM Our use of DDM valuation is based on a 4 years forecast of dividends as cash flows (201013). We have used the following assumptions in order to arrive at equity value of the bank: Cost of Equity (COE) derived using capital Asset Pricing Model (CAPM) is estimated to be 13. based on the following assumption: Risk free rate of 5.8% Market risk premium of 6. Beta of 1.17 (based on 5 years monthly date from Bloomberg). Terminal growth rate (g) of 3. DDM Valuation 2010e 2011e 2012e 2013e Terminal Value Expected dividends NPV of expected dividends 94.1 NPV of terminal value Estimated equity value Number of shares outstanding (mn) 1,081.0 DDM value per share (RO) Source: Global Research Sensitivity Analysis We have also prepared a sensitivity analysis for the estimated fair price of the share based on various terminal growth rate and COE. Sensitivity AnalysisDDM Cost of Equity Source: Global Research Terminal Growth rate % % % % % National Bank of Oman October 2010

3 Gordon Growth Model GGM The adaptation of Gordon growth model uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth earnings (g) to calculate the target P/BV of the bank. Under this methodology, we have used the following assumption to arrive at the fair value of the bank: Sustainable ROE derived from ROAE of the forecasted 4 years. Cost of Equity derived using CAPM, using the same assumption as in the DDM Terminal growth rate of 3., similar to the DDM. Gordon Growth Model GGM Valuation Sustainable ROE 17.5% COE 12.8% Perpetual growth rate (g) 3. Target P/BV multiple for 2011e 1.5x 2011e book value per share (RO) Value per Share (RO) using P/BV Source: Global Research Sensitivity Analysis This sensitivity analysis shows the movement in fair value as a consequence of different ROE and COE assumptions. Sensitivity Analysis GGM Cost of Equity ROE % 16.5% 17.5% 18.5% 19.5% 10.8% % % % % Source: Global Research 3 National Bank of Oman October 2010

4 Valuation Based on current market price of RO (as on November 6, 2010), the bank is traded at 2011E P/E and P/BV multiple of 12.1x and 1.4x respectively. Valuation Summary Valuation Method Value per share (RO) Weight Weighted Value per Share (RO) DDM GGM Target Price Source: Global Research According to our estimated fair value of NBO at RO per share, the banking scrip offers a upside of 4.8% on the closing price (as on November 6, 2010) of RO per share. Therefore, we give a Hold recommendation on NBO. 4 National Bank of Oman October 2010

5 National Bank of Oman Financial Update and Forecasts In 9M2010, the bank reported net profit of RO21.7mn, representing an increase of 10.8% YoY and a decrease of 11.6% QoQ. Unlike the 2Q2010, National Bank of Oman (NBO) did not outperform its peers. This is mainly due to major decline in non operating income, representing 16.9% QoQ coupled with a decline in recoveries which witnessed a decrease of 29.7% QoQ, unlike last quarter, where recoveries supported the bottom line with 85.2% QoQ. We expect a minor growth in the last quarter of 2010, resulting in a net profit of RO28.2mn which represents a growth 33.4% YoY and a CAGR of 22.3% over the projection years Profitability Performance Banking Spreads (5.0) (10.0) (15.0) (20.0) (25.0) e 2011e 2012e 2013e NII (LHS) Net Operating Income (LHS) Net Profit (LHS) Net Provisions (RHS) e 2011e 2012e 2013e Yield on Earning Assets Cost of Fund Spreads Banks spreads In 9M2010, the bank s interest yield decreased coupled with a drop in cost of funds however the decrease in the interest yield was higher than the cost of fund which resulted in the NII decreasing by 1.1% YoY and 0.3% QoQ. We expect the interest yield of the bank to remain under pressure for the upcoming quarter and the bank will maintain its spreads through replacing high cost deposit with lower cost deposits which will lead. We have estimated the NII to increase by 0.2% in 2010, and at a 4 years CAGR of 12.7%. Noninterest income and expense performance On a quarterly basis, NBO s noninterest income declined sharply by 16.9% QoQ to reach RO5.6mn. We expect that the fees and commission will show growth in the last quarter of 2010 which will result in an increase of 15. for 2010; and a CAGR of 10. over the 4 years of projection. On a quarterly basis, the bank s operating expenses increased by 11.1% QoQ to reach RO10.3mn. Out of the total increase of operation expenses, depreciation expenses witnessed a 43.2% QoQ increase and staff expenses have increase by 7.8% QoQ due to quality hiring. Due to the increase in operating expenses the cost to income ratio has increased by 500bps to 47.3% from 42.3% in 9M National Bank of Oman October 2010

6 Noninterest Income Performance Expenses Performance e 2011e 2012e 2013e e 2011e 2012e 2013e Total non interest income (LHS) Fees and commission to total operating income (RHS) Total Expenses (LHS) Cost to Income (RHS) Total Expenses Growth (RHS) Credit Volume On a quarterly basis, the bank has witnessed 1.1% QoQ increase in gross loans reaching RO1,499mn. Gross loans increased by RO67mn in 9M2010, representing a growth of 4.8% YTD. Currently the bank is growing inline with the Omani credit market. According to the Central Bank of Oman, the Omani credit market grew at 5.6% during 8M2010 and we are expecting this pace to continue through the year to reach 8% growth rate. Loans are expected to grow with a slower rate than the market maintaining their current market share. We believe that the bank s loans will grow at 5.2% for 2010 and a CAGR of 12.4% for the 4 years of projection. In 3Q2010, the deposits grew by 2.5% QoQ, unlike 2Q2010 where it witnessed a decrease of 4.8% QoQ. For the 9M2010, the YTD growth stood at 6.6%. These fluctuations in deposits growth are mainly due to the bank s strategy of reducing its high cost deposits and replacing these with low cost ones. We believe that going forward the bank will maintain its strategy which will result in an increase of 11.4% by the end of 2010 while the 4year CAGR is forecasted at 11.4%. Loans and Deposits Base Funding Base 2,500 2,000 1,500 1, e 2011e 2012e 2013e e 2011e 2012e 2013e Gross Loans (LHS) Gross Loans Growth (RHS) LTD ratio (RHS) Deposits (LHS) Deposits Growth (RHS) Deposits/assets (LHS) Assets Growth (RHS) Equity/Assets (LHS) 6 National Bank of Oman October 2010

7 Asset Quality In 3Q2010, NBO was the only Omani bank that witnessed a decline in its NPLs decrease by 1.8% QoQ and 9.8% YTD which resulted in a decrease in the NPLs to Gross loan ratio from 4.5% in 2Q2010 to 4.3% in 3Q2010. This brings us to the conclusion that the assets quality of the bank has shown a noticeable improvement in the 9M2010. Asset Quality Jun05 30Jun05 1Jul e 2011e 2012e 2013e NPLs/Gross Loans NPL Coverage Ratio In 9M2010, Net provisions and impairment losses on available for sale investments declined by 41.2% YoY this is mainly due to an increase of 27.8% YoY in recoveries. We expect this trend to continue through the projection years. However, we have kept in mind that NBO still has exposure of RO8.7mn to Dubai World. Following the recent news on Dubai World restructuring agreement we believe that NBO will have to provisions, for 152 of its total exposure by the end of Opportunistic Lending Activities Along with the slowdown in the loans growth in general in Omani banking sector, NBO like any other bank is highly concerned about its assets quality after going through a rough period. These two factors will affect the growth of the gross loans of the bank going forward. We are expecting loans to grow comparably faster in years following 2010; however it will still be considered a slow growth if we compare it to 2007 and 2008 levels. On the other hand, we believe that a lot of opportunities will rise in this front especially looking at the government announced projects. It appears that Omani government is moving ahead with important infrastructure projects, this will enable all banks to benefit from those massive projects. We are expecting deposits to grow in line with the market. All in all, the NBO is expected to grow in a steadier and slower speed being conservative and less risky to secure a growth in the bottom line. 7 National Bank of Oman October 2010

8 Peers Comparison Profit Growth Gross Loans Growth Deposit Growth ,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 4 35% 3 25% 2 15% 1 5% 5% 4,000 3,500 3,000 2,500 2,000 1,500 1, % 4 35% 3 25% 2 15% 1 5% 9M2009 9M2010 Growth 9M2009 9M2010 Growth 9M2009 9M2010 Growth NPL Ratio and growth LTD Ratio Cost to Income 12% % 6% 4% % M2009 9M2010 Growth 9M2009 9M2010 9M2009 9M2010 Average ROA Average ROE NII Growth % 1.6% 1.4% 1.2% % 0.6% 0.4% 0.2% 16% 14% 12% 1 8% 6% 4% 2% M2009 9M2010 9M2009 9M2010 9M2009 9M2010 Growth 8 National Bank of Oman October 2010

9 INCOME STATEMENT National Bank of Oman S.A.O.G RO ' e 2011e 2012e 2013e Interest Income 77,266 90, ,361 97, , , ,842 Interest Expense (36,234) (42,687) (45,539) (40,603) (45,491) (51,736) (59,081) Net interest income 41,032 47,533 56,822 56,954 61,421 69,265 81,761 Add : Fees and commission 7,519 10,047 9,100 10,465 11,773 12,950 13,922 Add : Foreign exchange gains 2,300 2,907 2,250 2,475 2,723 2,859 3,002 Add: Profit on sale of investments 1,310 6,436 2,510 1,323 1,455 1,572 1,698 Add : Dividend income ,178 1,354 1,558 1,791 Add: Income from Tbills & GDBs ,018 Add : Miscellaneous Income 11,531 16,137 9,708 10,436 11,219 11,780 12,369 Less: Provision for credit losses (7,857) (15,581) (28,449) (21,755) (19,439) (14,933) (12,711) Less: Recoveries and release from provision for credit losses 9,128 8,551 7,036 6,344 5,710 5,139 5,293 Less: Provision for impairment of due from banks (450) Less: Directors Renumeration (137) (132) Net Operating Income 65,771 77,283 60,454 68,213 77,088 91, ,141 Less : Staff wages and salaries (15,608) (19,570) (20,505) (22,248) (24,473) (26,920) (29,612) Less : Operating & Admin Costs (8,585) (9,674) (11,439) (12,583) (13,841) (15,225) (16,748) Less : Establishment costs (2,232) (2,673) Less: Depreciation (1,641) (1,805) (2,840) (5,339) (5,606) (5,886) (6,180) Recoveries from debts writtenoff 12,708 8,094 3,465 3,946 3,551 3,196 2,877 Unrealized gains/(losses) on investments available for sale (3,703) (4,121) Net Operating Expenses (15,358) (29,331) (35,440) (36,224) (40,368) (44,835) (49,664) Profit before Taxation 50,413 47,952 25,014 31,990 36,720 46,296 58,477 Taxation (5,797) (6,275) (3,909) (3,839) (4,406) (5,556) (7,017) Net Profit from ordinary activities 44,616 41,677 21,105 28,151 32,314 40,740 51,460 9 National Bank of Oman October 2010

10 BALANCE SHEET National Bank of Oman S.A.O.G RO ' e 2011e 2012e 2013e Assets Cash & balances with Central Banks 245, , , , , , ,354 Investments held for trading ,384 17,384 17,429 17,474 17,519 Due from banks and other market placements 202, , , , , , ,860 Loans and advances (Gross) 975,963 1,465,464 1,429,117 1,539,585 1,690,325 1,866,683 2,118,484 Provisions & reserved interest (69,198) (64,246) (68,120) (89,875) (109,313) (124,247) (136,958) Other assets 69,674 77,765 25,736 46,325 49,568 51,550 52,066 Non trading investments 45,459 30,845 30,060 51,207 58,888 67,721 77,879 Premises and equipment 27,249 31,861 36,820 53,389 56,058 58,861 61,804 less: accumulated depreciation (20,486) (22,291) (24,057) (29,396) (35,002) (40,888) (47,068) Tangible net fixed assets 6,763 9,570 12,763 23,993 21,057 17,973 14,736 Deferred tax asset 61 Total Assets 1,476,625 1,980,777 1,798,213 1,941,304 2,128,594 2,355,734 2,632,940 Liabilities Due to banks and other money market deposits 215, , , , , , ,424 Deposits from customers 936,023 1,341,755 1,260,768 1,387,014 1,565,116 1,777,794 2,037,004 Other liabilities 74,154 84,896 34,700 55,520 63,848 70,233 73,744 Taxation 5,668 7,313 5,082 5,692 6,375 7,140 7,997 Deferred tax liability Subordinated private placements 12,500 28,600 27,600 30,600 30,600 30,600 30,600 Owner's Equity Share Capital 92, , , , , , ,100 Share Premium 34,465 34,465 34,465 34,465 34,465 34,465 34,465 Legal Reserve 26,026 30,564 32,675 32,675 32,675 32,675 32,675 Other Nondistributable Reserves 34,833 14,469 8,008 7,211 7,211 7,211 7,211 General Reserve 4,419 4,419 4,419 4,419 4,419 4,419 4,419 Proposed Dividends & Director's Remuneration 16,100 18,918 12,972 18,298 24,235 32,592 43,741 Proposed Stock Dividends 16,100 Retained Earnings 8,844 31,117 49,752 59,605 67,683 75,831 83,550 Total Liabilities & Equity 1,476,625 1,981,147 1,798,213 1,941,304 2,128,594 2,355,734 2,632, National Bank of Oman October 2010

11 FACT SHEET National Bank of Oman S.A.O.G F 2011F 2012F 2013F Profitability Return on Average Assets 3.5% 2.4% 1.1% 1.5% 1.6% 1.8% 2.1% Return on Average Equity % 11.6% 12.9% 15.8% 19.3% Net interest income/ Total Op. Income % 69.4% 68.1% 67.6% 68.6% 70.8% Noninterest income/ Total Op. Income % 30.6% 31.9% 32.4% 31.4% 29.2% Dividend payout ratio 36.1% 45.4% 61.5% Margins Net income/ revenues 57.7% 46.2% 20.6% 28.9% 30.2% 33.7% 36.5% Operating profit / revenues 85.1% 85.7% 59.1% 69.9% 72.1% 75.3% 76.8% Interest Expense/ Interest Income 46.9% 47.3% 44.5% 41.6% 42.6% 42.8% 41.9% Interest Income/ Average Interest Earning Assets 7.4% 6.5% 6.4% 6.1% 6.2% 6.4% 6.7% Interest Expense/ Average Interest Bearing Liabilities 3.6% % 2.6% 2.7% 2.8% 2.8% Net Spread 3.8% 3.4% 3.5% 3.5% 3.5% 3.7% 3.9% Net Interest Margin 3.8% 3.3% 3.5% 3.5% 3.5% 3.6% 3.8% Efficiency Cost to Total Op Income 43.1% 39.9% 42.5% % 47.6% 45.5% Staff Expense to Total Op Income % % 26.9% 26.7% 25.6% Cost to Average Total Assets 2.2% % 1.9% Liquidity Loans to Interest Earning Assets 79.8% 86.5% 87.9% 88.4% 88.6% 88.6% 88.7% Loans to Customer Deposits 104.3% 109.2% 113.4% Customer Deposits to Equity 402.1% 554.3% 503.5% 523.9% 561.4% % Due from Banks to Due to Banks 93.8% 71.8% % 99.3% 112.7% Credit Quality Provisions to Total Op Income 12.6% 20.2% 47.1% 31.9% 25.2% 16.4% 11.8% Provisions to Average loans 0.9% 1.3% % 1.2% 0.8% 0.6% Non Performing Loans (ROmn) Loan Loss Reserve (RO) NPL's to Gross Loans 7.7% 4.4% 4.6% 4.3% 4.2% 3.8% 3.4% NPL's to (Equity+Loan loss reserve) % 18.8% 18.3% 16.9% 16. Loan Loss Reserve to Gross Loans 7.1% 4.4% 4.8% 5.8% 6.5% 6.7% 6.5% NPL Coverage 91.7% 100.1% 103.2% 135.1% % 190.1% Capital Adequacy Equity to Total Assets 15.8% 12.2% 13.9% 13.6% 13.1% 12.5% 11.9% Equity to Gross Loans 23.9% 16.5% 17.5% 17.2% 16.5% 15.8% 14.8% Operating Performance Change in Net Interest Income 16.8% 15.8% 19.5% 0.2% 7.8% 12.8% 18. Change in Fees and Commission 38.6% 26.4% 22.6% Change in Investment Income 30.8% 189.1% % 11.8% 10.6% 10.7% Change in Fx Income 38.6% 26.4% 22.6% Change in Other Income 38.6% 39.9% 39.8% 7.5% 7.5% RATIO'S USED FOR VALUATION Shares in Issue (mn) 92 1,081 1,081 1,081 1,081 1,081 1,081 Basic EPS (RO) Book Value Per Share (RO) Market Price (RO) Market Cap () P/E (x) P/BV (x) *Historical P/E & P/BV multiples pertain to respective yearend prices, while those for future years are based on market price in the MSM as on November 6, National Bank of Oman October 2010

12 The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Ticker Price Disclosure National Bank of Oman Hold NBOB OM NBO.OM did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in. 3. makes a market in securities issued by this company. 4. 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 serves on the board of directors of this company. 7. Within the past year, has managed or comanaged a public offering for this company, for which it received fees. 8. has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition Buy Fair value of the stock is >1 from the current market price Hold Fair value of the stock is b/w +1/1 from the current market price Reduce Fair value of the stock is b/w 1/2 from the current market price Sell Fair value of the stock is < 2 from the current market price This material was produced by 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 transactions with 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. This document 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 herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitation. 12 National Bank of Oman October 2010

13 Brokerage Fouad Fahmi Darwish (965) Wealth Management Kuwait Rasha AlQenaei (965) Research Faisal Hasan, CFA (965) Wealth Management International Fahad AlIbrahim (965) Website: Global Tower Sharq, AlShuhada Str. Tel. + (965) Fax. + (965) P.O. Box: Safat, Kuwait Index Rasha AlHuneidi (965) huneidi@global.com.kw Global Kuwait Tel: (965) Fax: (965) P.O.Box Safat, Kuwait Global Abu Dhabi Tel: (971) Fax: (971) /4 P.O.Box Abu Dhabi, UAE Global Egypt Tel: (202) /06 Fax: (202) Cleopatra St., Heliopolis, Cairo Global Wealth Manager contactus@global.com.kw Tel: (804242) Global Bahrain Tel: (973) Fax: (973) P.O.Box 855 Manama, Bahrain Global Saudi Arabia Tel: (966) Fax: (966) P.O. Box Riyadh 11586, Kingdom of Saudi Arabia Global Jordan Tel: (962) Fax: (962) P.O.Box 3268 Amman 11180, Jordan Global Dubai Tel: (971) Fax: (971) P.O.Box Dubai, UAE Global Qatar Tel: (974) Fax: (974) P.O.Box Doha, Qatar Disclaimer This document and its contents are prepared for your personal use for information purposes only and is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. The information and any views expressed are given as at the date of writing and subject to change. While the information has been obtained from sources believed to be reliable we do not represent that it is accurate or complete and it should not be relied on as such., its affiliates and subsidiaries can accept no liability for any direct or consequential loss arising from use of this document or its contents. At any time, or its employees may have a position, subject to change, in any securities or instruments referred to, or provide services to the issuer of those securities or instruments.