Oman. Hold. National Bank of Oman S.A.O.G. Investment Update. Investment Summary. Fair Value: RO CMP: RO0.334 (As at 6 th Sep, 2009)

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1 Investment Update Oman Tickers: NBO.OM (Reuters) NBOB OM (Bloomberg) Listing: Muscat Stock Market Fair Value: RO0.360 CMP: RO0.334 (As at 6 th Sep, 2009) September, 2009 Hold Investment Summary National Bank of Oman (NBO) displayed strong balance sheet growth in 2008 with the total assets increasing by 34.4% to RO1,984.5mn during the year. The bank was ranked second in terms of market share of Omani banks aggregate loans and advances and customer deposits in Of the Omani banks aggregate credit in 2008, it captured 15.6% share or RO1,341.8mn. In 2008, NBO s net profit remained almost same, increasing marginally from RO44.6mn in 2007 to RO45.4mn in The profits were largely impacted by significant provisioning due to the deteriorating macro environments and falling stock markets. The total provisioning during 2008 stood at RO15.6mn against RO7.9mn in Coupled with this, recoveries from loans and advances written off declined to RO8.1mn in 2008 from Ro12.7mn in Collectively the two had an impact of RO12.3mn on 2008 profitability. Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone No:(965) Digvijay Tanwar, CFA Financial Analyst dtanwar@global.com.kw Phone No:(965) Naveed Ahmed Financial Analyst nahmed@global.com.kw Phone No:(965) NBO s net interest income was up by 15.8%, from RO41.0mn in 2007 to RO47.5mn in 2008 mainly because of increased volume. With Oman s US dollar peg standing, the CBO had to mirror the US fed rate cuts from time to time that forced the banks in Oman to take a hit on the margins. Despite that, NBO posted a decent spread of 3.4% in 2008 compared to 3.8% in The income yield of 6.5% in relation to the commission expense rate of 3.0% resulted in the banking spread of 3.4%. Going forward, we expect the net spreads to remain at similar levels only to grow marginally to 3.5% in 2011 and Operating income was up by 23.1%, from RO65.8mn in 2007 to RO81.0mn in Part of this was attributable to the increase in NII due to increased volumes. At the same time, the 33.6% increase in Fees & commission income, which increased from RO7.5mn in 2007 to RO10.0mn in 2008 and multi-fold jump in profit on available for sale investments to RO10.1mn in 2008 from RO1.3mn in 2007 added to the growth. Return ratios took a significant hit with the return on average assets declining to 2.6% in 2008 from 3.5% in 2007 and return on average equity coming down to 20.5% in 2008 from 23.0% in We believe, the provisioning provided will be higher in 2009 and consequently the bank s profitability would likely to take a hit. Nonetheless, we expect a growth in profitability beginning

2 The net profit for 1H-2009 stood at RO13.45mn as compared to RO22.58mn for the same period in Net interest income grew by 25% to RO27.8mn from RO22.2mn in 1H- 08 while operating income has grown by 2% over 1H-08. During the half year, total assets of the bank declined by 5.7% and stood at RO1.9bn as compared to RO1.98bn at the end of Dec-08. Deposits and advances remained stable. However, savings deposits registered a growth of 36% as compared to year end In Sep 08, Moody s has rated the bank financial strength rating at D+. The local currency deposit rating assigned is A3/P-2. The foreign currency deposit rating is unchanged at A3/P-2. The outlook on all ratings is stable. We are neutral on the Omani-banking sector in the near term, as it is a proxy to the economy and believe that though it has the capability to weather the current crisis, profitable growth would not be forthcoming as easily as it did in the past few years. Based on the current market price of RO0.334/share (as on Sep 6, 2009), NBO is trading at a 2009E P/E and P/BV multiple of 11.1x and 1.5x respectively. Our estimated value for this banking scrip works out to be RO0.360 per share based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value computation, this banking scrip offers an upside of 7.8% on the closing price of RO0.334 per share (as on Sep 6, 2009); we therefore recommend a HOLD on the scrip. Table 01: Investment Indicator Price (RO as at Sep 06, 2009) Year Shares in issue (mn) Market Cap (RO mn) 52 - week price range , Operating income (RO mn) Net Profit (RO mn) EPS baisas BVPS baisas ROAE (%) P/E (x) P/BVPS (x) 2010F F A A Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based on closing prices on the BSE as of Sep 06, Figure 01: Performance of NBO vs MSM-30 Index 6, , Points 5,500 5, RO 4, , Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 MSM-30 (Points) NBO (RO) 2

3 Analysis of Financial Performance Balance Sheet - National Bank of Oman (NBO) displayed strong balance sheet growth in 2008 with the total assets increasing by 34.4% to RO1,984.5mn during the year. The bank was ranked second in terms of market share of Omani banks aggregate loans and advances and customer deposits in Figure 2: Assets Growth 2, % 34.4% 40.0% RO 'mn 2,000 1,500 1, % 24.4% 30.0% 20.0% % Loans and advances (Gross) Total Assets Assets Growth 0.0% - The analysis of the lending pattern of the bank over the last two years indicates that Business and government loans were the segment of focus accounting for 50% of the total lending. However during 2008, lending to the real estate sector more than doubled to RO173.1mn and accounted for 11.8% of the total lending as against 8.4% in Lending in Oman has increased by 58.4% from RO847.2mn in 2007 to RO1,342.3mn in 2008 while the exposure to Egypt has come down. The gross lending in Egypt has reduced from RO19.3mn in 2007 to RO15.2mn in Table 2: Loans and Advances Sectoral & Geographic Distribution Consumer & Business & Real Estate Personal Loans Government & Others Total 2008 Oman 37.9% 43.0% 10.8% 91.6% UAE 0.3% 4.4% 1.1% 5.8% Egypt 0.1% 1.0% 0.0% 1.0% Others 0.0% 1.6% 0.0% 1.6% Total 38.2% 50.0% 11.8% 100.0% 2007 Oman 39.0% 40.3% 7.5% 86.8% UAE 1.4% 6.1% 0.9% 8.4% Egypt 0.2% 1.8% 0.0% 2.0% Others 0.0% 2.8% 0.0% 2.8% Total 40.6% 51.0% 8.4% 100.0% 3

4 - Of the gross advances in 2008, about 90% was loans and the remaining 10% was distributed as overdrafts (5.1%), loans against trust receipts (4.4%) and bills discounted (0.5%). Table 3: Composition of Gross Advances Overdrafts 6.7% 5.0% 4.9% 5.1% Personal Loans 43.8% 40.9% 40.6% 38.2% Other Loans 46.2% 48.8% 50.4% 51.8% Loans Against Trust Receipts 3.2% 4.9% 3.6% 4.4% Bills Discounted 0.0% 0.4% 0.5% 0.5% Total advances (RO mn) , Share of Personal loans has come down as compared to 2007 as a result of a 40% upper cap on these imposed by the CBO. - Non Performing Loans (NPLs) have decreased from RO75.5mn in 2007 to RO64.2mn in The coverage ratio increased from 91.7% in 2007 to 100.1% in 2008 because of lower NPLs to the tune of RO64.2mn in 2008 as compared to RO75.5mn in During the year, allowances for credit loss worth RO11.9mn were written-off while RO5.5mn was recovered. Consequently, the NPL to Gross loans reduced from 7.7% in 2007 to 4.4% in However, the provisioning of RO5.3mn in the fourth quarter of 2008 and again RO7.9mn during 1H-09 indicate that the quality of the bank s loans has deteriorated. Figure 3: Credit Quality % % RO mn 100.1% % Non Performing Loans Loan Loss Reserve Coverage Ratio 105.0% 100.0% 95.0% 90.0% 85.0% - We believe, there would be a jump in NPLs in 2009 as a result of which NPL ratio may rise upto 6.0% in 2009 and then remaining high in the range of around 5.5% for the projected period. - The total sources of banks funding including equity and customers deposits increased at a CAGR of 26.5% during the period The bank captured 15.6% market share in terms of customer deposits that were up by 43.3% from RO936.0mn in 2007 to RO1,341.8mn in 2008 representing a CAGR of 29.6% during

5 Figure 4: Deposits Growth RO 'mn 1,400 1,200 1, % 30.1% 14.6% 43.3% 50.0% 40.0% 30.0% 20.0% 10.0% Customer Deposits Growth 0.0% - This growth has been achieved mainly due to tapping of term deposits, which have a high cost, as is evident from the deposit mix. The high cost term deposits increased from 56% of total deposits in 2007 to 62% in 2007 while low cost savings account proportion decreased to 17% in 2008 from 22% in Figure 5: Customer Deposits Deposits Profile (2007) Deposits Profile (2008) Certificate of Deposits, 5% Current Accounts, 17% Certificate of Deposits, 4% Current Accounts, 17% Savings Accounts, 22% Savings Accounts, 17% Term Deposits, 56% Term Deposits, 62% - The shareholder s equity to total assets ratio declined from 15.8% in 2007 to 12.4% in 2008 signaling a lower growth rate in equity as compared to the growth in total assets. NBO is adequately capitalized, however its risk weighted assets increased over the period and the Tier-I capital ratio declined from 14.1% in 2007 to 12.4% in Figure 6: Capital Adequacy 25.0% 23.4% 20.0% 15.0% 10.0% 5.0% 19.3% 16.8% 17.1% 14.1% 13.0% 15.8% 12.4% 0.0% Equity to total assets Tier-I Capital ratio 5

6 Income Statement - NBO s net profit remained almost same, increasing marginally from RO44.6mn in 2007 to RO45.4mn in The profits were largely impacted by significant provisioning due to the deteriorating macro environments and falling stock markets. The total provisioning during 2008 stood at RO15.6mn against RO7.9mn in Coupled with this, recoveries from loans and advances written off declined to RO8.1mn in 2008 from Ro12.7mn in Collectively the two had an impact of RO12.3mn on 2008 profitability. Table 4: Income Statement Highlights RO mn Interest Income Y-o-y increase 5.9% 24.0% 30.3% 16.8% Interest expense Y-o-y increase -6.5% 37.7% 50.0% 17.8% Commission income Y-o-y increase -2.8% 14.9% 115.6% 33.6% Operating Income Y-o-y increase 71.6% 26.0% 18.6% 23.1% Net Income Y-o-y increase 289.3% 49.7% 46.6% 1.7% - NBO s net interest income was up by 15.8%, from RO41.0mn in 2007 to RO47.5mn in 2008 mainly because of increased volume. With Oman s US dollar peg standing, the CBO had to mirror the US fed rate cuts from time to time that forced the banks in Oman to take a hit on the margins. Despite that, NBO posted a decent spread of 3.4% in 2008 compared to 3.8% in The income yield of 6.5% in relation to the commission expense rate of 3.0% resulted in the banking spread of 3.4%. Going forward, we expect the net spreads to remain at similar levels only to grow marginally to 3.5% in 2011 and Figure 7: Spread Analysis 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 4.3% % 3.8% 3.4% Interest Income/ Average Interest Earning Assets Interest Expense/ Average Interest Bearing Liabilities Net Spread - Despite narrowing spreads, operating income was up by 23.1%, from RO65.8mn in 2007 to RO81.0mn in Part of this was attributable to the increase in NII due to increased volumes. At the same time, the 33.6% increase in Fees & commission income, which increased from RO7.5mn in 2007 to RO10.0mn in 2008 and multi-fold jump in profit 6

7 on available for sale investments to RO10.1mn in 2008 from RO1.3mn in 2007 added to the growth. The fee & commission income increased because of increased activity on the bourses in 2008 and the banks participation in the same. Miscellaneous income also increased by 39.9% from RO11.5mn in 2007 to RO14.5mn in 2008 on account of incidental income reflecting growth in the loan book. - The operating expenses increased significantly from RO15.4mn during 2007 to RO29.3mn in The jump was majorly due to lower recoveries of debt written off to the tune of RO8.1mn in 2008 compared to RO12.7mn in Staff wages and salaries increased by 25.4% reaching RO19.6mn in 2008 compared to RO15.6mn during the previous year. Administrative expenses registered a YoY increase of 12.7% over the 2007 levels of RO8.6mn to reach RO9.7mn in Figure 8: ROAA and ROAE 25.0% 23.0% ROAE 20.0% 15.0% 10.0% 18.6% 15.7% 2.5% 3.1% 3.5% 20.5% 2.6% 5.0% 0.0% Return on Average Equity Return on Average Assets 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% ROAA - For 2008, the bank registered a marginal increase of 1.7%, in its net income mainly on account of the RO15.6mn of provisioning during 2008 as compared to RO7.9mn in With total assets increasing by a third and shareholder equity increasing by 5.2%, the return ratios took significant hit with the return on average assets declining to 2.6% in 2008 from 3.5% in 2007 and return on average equity coming down to 20.5% in 2008 from 23.0% in We believe, the provisioning provided will be higher in 2009 and consequently the bank s profitability would likely to take a hit. Nonetheless, we expect a growth in profitability beginning

8 Analysis of Financial Performance 1H/09 - National Bank of Oman (NBO) announced 1H-2009 net profit after tax of RO13.45mn for the period ended in June 2009 compared to RO22.58mn for the same period in Net interest income grew by 25% to RO27.8mn from RO22.2mn in 1H-08 while operating income has grown by 2% over 1H The results were impacted by provisions against investments of RO2.9mn and by a provision of RO2.1mn against three specific interbank exposures totaling RO8.9mn. While the debt restructuring process for these banks has not yet been completed and although the amounts were not overdue, the bank has on a prudent and conservative basis, provided a minimum of 25% in each case. - At the end of 1H-09, NPL coverage ratio stood at 102% up from 95% at the end of 1H-08 while the NPL ratio came down to 3.8% from 4.9% at the end of 1H The bank had earlier disclosed interbank exposure totaling RO6.5mn (US$16.89mn) to Bahrain-based The International Banking Corp. and Awal Bank. However, the bank said it has no exposure to other companies related to troubled Saudi conglomerates Saad Group and Al Gosaibi Group. Table 5: National Bank of Oman - Interim Results RO mn 1Q-09 2Q-09 Q-o-Q Change 1H-08 1H-09 Y-o-Y Change Net Interest Income % % Operating Income % % Operating Expense % % Operating Profit % % Net Profit after Tax % % - During the half year, total assets of the bank declined by 5.7% and stood at RO1.9bn as compared to RO1.98bn at the end of Dec-08. Deposits and advances remained stable. However, savings deposits registered a growth of 36% as compared to year end The bank shareholder s equity as at June 30, 2009 was RO243mn and the capital adequacy ratio based on the regulatory capital was 15.2%, well above the minimum mandated regulatory requirement of 10%. 8

9 Outlook - The Omani banking sector has done well in 2008 in terms of asset growth due to higher lending to support increased economic activities resulting from high oil prices in the first three quarters of The government s extensive offshore financial assets will enable it to provide fiscal stimulus and fund projected deficits without resorting to debt accumulation, at least over the short to medium term. These assets & reserves amounted to around 75% of GDP at the end of 2008, while the government s debt remained minimal. This was reflected by Moody s reiterating their stable outlook on Oman s A2 investmentgrade sovereign rating. - Beginning fourth quarter of 2008 and beyond, the global economic slowdown and steep correction in oil prices severely dented the operating conditions in the GCC region, compressing margins and deteriorating asset quality. Credit growth is difficult to come by with the total credit growth of all Commercial banks in Oman growing only 4.2% in the first half of Nonetheless, efforts have been taken by the Central Bank to revive growth. Beginning 1st January 2009, the Central Bank has increased the lending ratio to 87.5% of the deposit base. With the lending ratio standing at 81.1% at the end of June 2008, there remains a scope for the commercial banks to re-start lending. - Oil prices have gone up and with reviving capital markets world-over, expectations from the second half are relatively positive. The confidence building measures by the CBO & CMA should go a long way in supporting the stock market and this could help the fee income of these players. We expect that the credit growth in 2009 would be in the range of 15% to 25%. Nonetheless, spreads are expected to remain tight. - We are neutral on the Omani-banking sector in the near term, as it is a proxy to the economy and believe that though it has the capability to weather the current crisis, profitable growth would not be easily forthcoming as it did in the past few years. In the medium term however, we are positive on the sector considering its relative insulation to the real estate sector exposure and lower loan losses unlike its counterparts in the GCC region. 9

10 Valuation & Recommendation For arriving at the fair value of the banks under review, we have used two valuation methods: 1. Cash flow approach represented by the Dividend Discounting Model and 2. Target P/BV multiple approach using an adaptation of the Gordon Growth Model Dividend Discounting Model - DDM The valuation per DDM method is based on a 4-year ( ) dividends forecast used as cash flows. We have discounted the dividends for the forecast period and the terminal value using the cost of equity to arrive at the total net present value (NPV) of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of the bank: 1. Cost of Equity derived using Capital Asset Pricing Model. a. Risk free rate of 5.5% (yield of Qatari Government bond maturing in 2019) b. Market risk premium of 6.0% c. We have considered the value of beta as one to reflect the market risk appropriately, as the beta of 5 years monthly stock returns figures is less than one. 2. A terminal growth rate of 3.0% The value per share per DDM method is RO Table 6: DDM Valuation RO mn 2008E 2009E 2010E 2011E Terminal Value Expected dividends NPV of expected dividends 86.4 NPV of terminal value Estimated equity value Number of shares outstanding (mn) 1,081.0 DDM value per share (RO) Sensitivity DDM The table below displays the sensitivity analysis for the estimated fair value per share based on various terminal growth rates and COE. Table 7: DDM Sensitivity Cost of Equity Terminal Growth rate 1.0% 2.0% 3.0% 4.0% 5.0% 9.5% % % % %

11 Gordon Growth Model - GGM The adaptation of the Gordon Growth model 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) This P/BV is then multiplied with the BVPS of the bank at the next full year, in our case the BVPS at December 31, 2008 to arrive at the fair value of the bank over a medium term investment horizon. In our calculations, we have made the following assumptions in order to arrive at the equity value of the bank: 1. Sustainable ROE calculated as the average ROAE of the forecasted 4 years. 2. Cost of Equity derived using Capital Asset Pricing Model taking the same assumptions as in the DDM method. 3. Terminal growth rate of 3.0%, similar to the DDM method. The value per share using GGM method of valuation is RO Table 8: Valuation per GGM Sustainable ROE 16.4% COE 11.5% Perpetual growth rate (g) 3.0% Target P/BV multiple for x 2009E book value per share (RO) Value per Share (RO) using P/BV Sensitivity GGM The table below displays the sensitivity analysis for the estimated fair value per share based on various terminal growth rates and COE. Table 9: GGM Sensitivity Cost of Equity Terminal Growth rate 1.0% 2.0% 3.0% 4.0% 5.0% 9.5% % % % %

12 The following sensitivity shows the movement in fair value per share because of different ROE and COE assumptions. Table 10: GGM Sensitivity ROE vs. COE Cost of Equity ROE 14.4% 15.4% 16.4% 17.4% 18.4% 9.5% % % % % This sensitivity shows the movement in fair value per share because of different ROE and various terminal growth rates. Table 11: GGM Sensitivity ROE vs. Terminal Growth Rate ROE Weighted Price Terminal Growth rate 1.0% 2.0% 3.0% 4.0% 5.0% 14.4% % % % % As the book value multiples vary with time and are dependent on several factors such as market sentiment and other qualitative factors, we have provided 20% weight to the P/BV multiple and 80% to the DDM method. Table 12: Valuation Valuation Method Value per share (RO) Weight Weighted Value per Share (RO) DDM % GGM % Target Price Based on the current market price of RO0.334/share (as on Sep 6, 2009), NBO is trading at a 2009E P/E and P/BV multiple of 11.1x and 1.5x respectively. Our estimated value for this banking scrip works out to be RO0.360 per share based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value computation, this banking scrip offers an upside of 7.8% on the closing price of RO0.334 per share (as on Sep 6, 2009); we therefore recommend a HOLD on the scrip. 12

13 BALANCE SHEET Amounts in RO E 2010E 2011E 2012E Assets Cash & balances with Central Banks 102, , , , , , ,366 Investments held for trading Due from banks and other market placements 184, , , , , , ,569 Loans and advances (Gross) 788, ,963 1,465,464 1,509,428 1,615,088 1,776,597 1,954,256 Provisions & reserved interest (84,347) (69,198) (64,246) (84,395) (102,161) (122,592) (145,066) Other assets 44,119 69,674 77,765 42,771 47,048 50,341 53,865 Total Current Assets 1,034,491 1,424,403 1,944,004 1,922,492 2,075,757 2,228,281 2,391,211 Non trading investments 40,697 45,459 30,845 38,556 44,340 50,991 58,639 Premises and equipment 25,465 27,249 31,861 38,233 40,145 42,152 44,260 less: accumulated depreciation (19,580) (20,486) (22,291) (24,585) (26,994) (29,523) (32,178) Tangible net fixed assets 5,885 6,763 9,570 13,648 13,151 12,629 12,081 Deferred tax asset 1, Total Assets 1,082,443 1,476,625 1,984,480 1,974,761 2,133,317 2,291,976 2,462,012 Liabilities Due to banks and other money market deposits 17, , , , , , ,101 Deposits from customers 816, ,023 1,341,755 1,395,425 1,507,059 1,620,089 1,741,595 Other liabilities 49,867 74,154 84,896 59,427 71,313 82,010 94,311 Taxation 1,596 5,668 7,313 8,191 9,173 10,274 11,507 Total Current Liabilities 885,366 1,231,338 1,710,495 1,698,094 1,834,349 1,971,517 2,119,515 Subordinated private placements 12,500 12,500 28,600 17,600 17,600 17,600 17,600 Owner s Equity Share Capital 80,000 92, , , , , ,100 Share Premium 34,465 34,465 34,465 34,465 34,465 34,465 34,465 Legal Reserve 21,564 26,026 30,564 33,824 37,847 42,410 47,580 Other Non-distributable Reserves 14,739 34,833 14,469 4,469 6,969 9,469 11,969 General Reserve 4,419 4,419 4,419 4,419 4,419 4,419 4,419 Proposed Dividends & Director s Remuneration 14,000 16,100 18,918 17,930 24,139 29,659 36,188 Proposed Stock Dividends 12,000 16, Retained Earnings 3,390 8,844 34,450 55,860 65,429 74,337 82,176 Total Shareholder s Equity 184, , , , , , ,897 Total Liabilities & Equity 1,082,443 1,476,625 1,984,480 1,974,761 2,133,317 2,291,976 2,462,012 13

14 INCOME STATEMENT Amounts in RO E 2010E 2011E 2012E Interest Income 59,293 77,266 90, , , , ,044 Interest Expense (24,153) (36,234) (42,687) (54,367) (64,116) (72,449) (78,563) Net interest income 35,140 41,032 47,533 56,586 60,381 66,876 75,482 Add : Fees and commission 3,487 7,519 10,047 8,841 10,168 11,439 12,868 Add : Foreign exchange gains 1,660 2,300 2,907 2,326 2,558 2,814 3,095 Add: Profit on sale of investments 1,382 1,310 10,139 5,070 5,576 6,134 6,748 Add : Dividend income Add: Income from T-bills & GDBs 2, Add : Miscellaneous Income 8,317 11,531 16,137 13,716 14,745 15,851 17,040 Less: Release of / (Provision for) on BCCI receivables (450) Less: Provision for credit losses (10,642) (7,857) (15,581) (16,604) (17,766) (20,431) (22,474) Less: Recoveries and release from provision for credit losses 14,204 9,128 8,551 5,131 6,157 6,772 7,450 Less: Provision for impairment of due from banks - (450) - (3,545) Less: Directors Remuneration (147) (137) (132) (133) (133) (134) (135) Net Operating Income 55,479 65,771 80,986 72,967 83,028 90, ,773 Less : Staff wages and salaries (13,011) (15,608) (19,570) (21,527) (23,680) (26,048) (28,652) Less : Operating & Admin Costs (6,204) (8,585) (9,674) (10,448) (11,284) (12,186) (13,161) Less : Establishment costs (2,064) (2,232) (2,673) (2,767) (2,863) (2,964) (3,067) Less: Depreciation (1,689) (1,641) (1,805) (2,294) (2,409) (2,529) (2,656) Recoveries from debts written-off 2,188 12,708 8,094 5,261 4,998 4,748 4,511 Unrealized gains/(losses) on investments available for sale - - (3,703) (4,147) (2,074) - - Net Operating Expenses (20,780) (15,358) (29,331) (35,922) (37,311) (38,979) (43,026) Profit before Taxation 34,699 50,413 51,655 37,046 45,717 51,852 58,747 Taxation (4,273) (5,797) (6,275) (4,445) (5,486) (6,222) (7,050) Net Profit for the year 30,426 44,616 45,380 32,600 40,231 45,630 51,697 P&L Appropriation Account Opening Balance of Retained Earnings 4,507 3,390 8,844 34,450 43,360 52,929 61,837 Net Profit for the year 30,426 44,616 45,380 32,600 40,231 45,630 51,697 Transfer to legal reserve (3,043) (4,462) (4,538) (3,260) (4,023) (4,563) (5,170) Transfer to subordinated loan reserve (2,500) (2,500) (2,500) (2,500) (2,500) (2,500) (2,500) Transferred from non-distributable res - - 6, Proposed dividend (14,000) (16,100) (18,918) (17,930) (24,139) (29,659) (36,188) Proposed bonus shares (12,000) (16,100) Closing Balance of Retained Earnings 3,390 8,844 34,450 43,360 52,929 61,837 69,676 14

15 CASH FLOW STATEMENT Amounts in RO E 2010E 2011E 2012E Operating Activities Net Profit after taxation 30,426 44,616 45,380 32,600 40,231 45,630 51,697 Adjustments for Depreciation 1,689 1,641 1,805 2,294 2,409 2,529 2,656 Provision for impairment in investment (805) - 3,703 4,147 2, Provision for credit losses (10,071) (15,149) 15,581 16,604 17,766 20,431 22,474 Operating profit before changes in op assets and liabilities 17,183 26,422 66,469 59,190 62,480 68,590 76,827 Due from banks and other money market placements (10,854) (17,872) 3,466 (9,931) (20,854) (22,940) (25,234) Loans and advances (152,258) (187,849) (489,501) (43,964) (105,660) (161,509) (177,660) Other assets 3,385 (25,555) (8,091) 34,994 (4,277) (3,293) (3,524) Customer s deposits 200, , ,732 53, , , ,507 Due to banks and other money market deposits 6, ,237 61,038 (41,480) 11,753 12,340 12,957 Other liabilities (1,352) 28,359 12,387 (24,591) 12,868 11,798 13,534 Others (4,056) (3,282) (33) 3,486 (60) (50) (50) Cash from operations 63, ,522 51,467 27,830 67,884 17,966 18,358 Income taxes paid (119) (348) Net Cash from/(used in ) operating activities 63, ,174 51,467 27,830 67,884 17,966 18,358 Investing Activities Purchase of non-trading investments (27,929) (4,762) 14,614 (11,859) (7,857) (6,651) (7,649) Proceeds from sale of non-trading investments 19,350 18, Purchase of premises and equipment (950) (1,784) (4,612) (6,372) (1,912) (2,007) (2,108) Others 2,624 1, Net Cash from investing activities (6,905) 13,156 10,002 (18,231) (9,769) (8,658) (9,756) Financing Activities Repayment of subordinated loans (8,838) - 16,100 (11,000) Dividends & BoD payments (12,110) (14,000) (16,100) (18,918) (17,930) (24,139) (29,659) Net cash from financing activities (20,948) (14,000) - (29,918) (17,930) (24,139) (29,659) Increase/Decrease in Cash and cash equivalents 35, ,330 61,469 (20,319) 40,185 (14,831) (21,058) Cash/cash equivalents at the beginning of the year 78, , , , , , ,424 Cash equivalents excluding cash at central bank (11,312) 2,191 (40,918) Cash at the end of the year 102, , , , , , ,366 15

16 FACT SHEET National bank of Oman S.A.O.G E 2010E 2011E 2012E Profitability - Return on Avg Assets 3.1% 3.5% 2.6% 1.6% 2.0% 2.1% 2.2% - Return on Avg Equity 18.6% 23.0% 20.5% 13.9% 16.1% 17.2% 18.4% - Net interest income/ Total Op. Income 63.3% 62.4% 58.7% 77.5% 72.7% 73.6% 74.2% - Non-interest income/ Total Op. Income 31.3% 36.6% 50.2% 43.2% 41.4% 41.6% 40.7% - Non-interest expense/ Total Op. Income 41.4% 42.7% 41.6% 50.8% 48.5% 48.1% 46.7% - Dividend payout ratio 46.0% 36.1% 50.0% 55.0% 60.0% 65.0% 70.0% Margins - Net income/ revenues 51.3% 57.7% 50.3% 29.4% 32.3% 32.8% 33.6% - Operating profit / revenues 93.6% 85.1% 89.8% 65.8% 66.7% 65.2% 66.1% - Interest Expense/ Interest Income 40.7% 46.9% 47.3% 49.0% 51.5% 52.0% 51.0% - Interest Income/ Avg Interest Earning Assets 7.1% 7.4% 6.5% 6.7% 7.2% 7.4% 7.5% - Interest Expense/ Avg Interest Bearing Liabilities 3.2% 3.6% 3.0% 3.3% 3.8% 4.0% 4.0% - Net Spread 3.9% 3.8% 3.4% 3.4% 3.4% 3.5% 3.5% - Net Interest Margin 4.3% 4.1% 3.5% 3.5% 3.6% 3.6% 3.7% Efficiency -Cost to Total Op Income 41.4% 42.7% 41.6% 50.8% 48.5% 48.1% 46.7% - Staff Expense to Total Op Income 23.5% 23.7% 24.2% 29.5% 28.5% 28.7% 28.2% - Cost to Avg Total Assets 2.4% 2.2% 1.9% 1.9% 2.0% 2.0% 2.0% Liquidity - Loans to Interest Earning Assets 77.8% 79.8% 86.5% 85.9% 85.5% 85.4% 85.3% - Loans to Customer Deposits 96.5% 104.3% 109.2% 108.2% 107.2% 109.7% 112.2% - Customer Deposits to Equity 442.4% 402.1% 546.8% 538.6% 535.6% 534.9% 536.0% - Due from Banks to Due to Banks % 93.8% 71.8% 88.7% 92.9% 97.4% 102.0% Credit Quality - Provisions to Total Op Income 20.0% 12.6% 19.2% 27.6% 21.4% 22.5% 22.1% - Provisions to Avg loans 1.6% 0.9% 1.3% 1.4% 1.1% 1.2% 1.2% - Non Performing Loans (RO mn) Loan Loss Reserve (RO) NPL s to Gross Loans 11.3% 7.7% 4.4% 6.0% 5.8% 5.5% 5.5% - NPL s to (Equity + Loan loss reserve) 33.0% 25.0% 20.7% 26.4% 24.4% 23.0% 22.9% - Loan Loss Reserve to Gross Loans 10.7% 7.1% 4.4% 5.6% 6.3% 6.9% 7.4% - NPL Coverage 95.0% 91.7% 100.1% 93.2% 109.1% 125.5% 135.0% Capital Adequacy - Equity to Total Assets 17.1% 15.8% 12.4% 13.1% 13.2% 13.2% 13.2% - Equity to Gross Loans 23.4% 23.9% 16.7% 17.2% 17.4% 17.0% 16.6% Constitution of Total Income - Net Interest Income to Total Op Income 68.9% 63.6% 50.0% 57.0% 58.7% 58.6% 59.4% - Fees & Comm. to Total Op. Income 6.3% 11.4% 12.4% 12.1% 12.2% 12.6% 12.6% - Investment Income to Total Op Income 7.0% 4.1% 14.2% 9.1% 8.3% 8.4% 8.3% - FX Income to Total Op. Income 3.0% 3.5% 3.6% 3.2% 3.1% 3.1% 3.0% - Other Income to Total Op. Income 15.0% 17.5% 19.9% 18.8% 17.8% 17.5% 16.7% RATIO S USED FOR VALUATION - Shares in Issue (mn) ,081 1,081 1,081 1,081 1,081 - Basic EPS (RO) Book Value Per Share (RO) Market Price (RO)* Market Cap (RO mn) P/E (x)* P/BV (x)* *Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Muscat Stock Market as on Sep 6,

17 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 NBO.OM (Reuters) NBOB OM (Bloomberg) RO , 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 co-managed 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 Hold Reduce Sell Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% 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 judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission 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 limitations. 17