Bank Dhofar. GBCM Research INVESTMENT NOTE. Bank Dhofar Page 1

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1 INVESTMENT NOTE Bank Dhofar BUY Share Data CMP (RO) MSM code BKDB Bloomberg code BKDB OM Market Cap (RO 000s) 323,200 Issued Shares (000 s) 739,959 Key ratios E 2010E EPS-RO Book Value -RO PE (X) PBV (X) Div. Yield (%) 3.5% 4.2% 5.1% High level of capital adequacy (15.8%) and lower levels of nonperforming assets of Bank Dhofar provides low risk profile in current scenario. Strategic initiatives to scale up operations of the Bank to provide momentum in terms of asset build up. We have built in asset addition with a 4 year CAGR of 18.4%. After lower level of spreads from core operations and drop in noncore contribution, earnings growth is estimated at 21.6% to RO million for year 2009 with provision coverage of 114%. On weighted basis (50%-DDM & 50% ERR Model), the long term fair value works to RO 0.505, which provides upside potential of 15.6% from current market price of RO Both the model considers a cost of equity of 10.5% and terminal growth of 5%. We maintain our positive outlook on the Bank on back of restructuring initiatives in addition to the asset quality and provisioning levels. On the last traded price of RO 0.437, the earnings multiple on FY09E is 11.9X & FY10E is 9.8X. On PBV the stock is trading at 1.6X (FY09E). Major shareholders (%) DIDIC SAOG : 31.0% Civil Services Emp. Pension Fund : 10.0% Stock Performance Bank Dhofar: Financial highlights E 2010E Net Interest Income 30,356 39,899 45,487 54,165 YoY growth -(%) 15.7% 31.4% 14.0% 19.1% Operating profit 28,457 36,670 35,245 42,130 YoY growth -(%) 26.8% 28.9% -3.9% 19.5% Net Profit 22,790 23,686 27,081 33,095 YoY growth -(%) 13.2% 3.9% 14.3% 22.2% Source: Bloomberg Total Assets 955,127 1,323,820 1,507,290 1,752,276 YoY growth -(%) 37.5% 38.6% 13.9% 16.3% Gross Loans 750,040 1,068,767 1,282,520 1,513,374 YoY growth -(%) 26.1% 42.5% 20.0% 18.0% Total customer deposits 674, ,596 1,065,742 1,257,759 YoY growth -(%) 35.7% 44.0% 9.7% 18.0% Networth 110, , , ,114 YoY growth -(%) 18.5% 70.5% 8.4% 7.7% Source: Company Reports; GBCM Research Bank Dhofar Page 1

2 Q Performance Highlights As at end of Q1FY09, the gross loans and advances of the bank stood at RO billion, reporting a growth of 31% YoY. However the growth has moderated to 5% QoQ and the bank has added RO million as gross loans during the quarter, which is on the back of the lower credit disbursals and concentration of quality assets. On the customer deposit side, the bank has reported a marginal growth of 1.4% QoQ to RO million, an addition of RO million for the quarter. With this growth, the credit to deposit ratio has increased to 108.7% as compared to 104.8% as at end of FY08. Balance Sheet Highlights In RO 000s Q1FY09 Q1FY08 YoY (% Chg) FY08 QoQ (% Chg) Gross loans & advances 1,122, , % 1,068, % Net Loans and Advances 1,070, , % 1,018, % Total customer deposits 985, , % 971, % Total Shareholders Equity 183, , % 188, % Credit to Deposit Ratio 108.7% 104.1% 104.8% Source: Company reports, GBCM Research Bank Dhofar has reported its net interest income of RO million, reporting a growth of 29.4% YoY. However the other operating income declined by 7.8% YoY on the back of lower fee and commission income and realized loss on investments. Operating profit for the period has increased by 13.3% YoY to RO million. On the back of increased provision towards available for sale investments and loan losses, the bank has reported net profit of RO million, an increase of 5% YoY. Income Statement Highlights In RO 000s Q1FY09 Q1FY08 YoY (% Chg) Q4FY08 QoQ (% Chg) Net Interest Income 10,959 8, % 10, % Other operating income 3,806 4, % 3, % Operating profit 9,249 8, % 8, % Provision for loan Impairment 1,194 1, % 1, % Net Profit After Tax 6,546 6, % 1, % Source: Company reports, GBCM Research During the quarter the NPA s have increased by 2.7% YoY to RO million. The bank has continued to increase its provisioning requirements wherein the total provisioning has increased by 10.7% YoY to RO million. The bank has continued to perform better in asset quality with NPA s as percentage of Gross loan for the quarter stood at 3.5%, which is lower as compared to 4.4% levels in Q1FY08. As at end of March 09, the provision coverage ratio of the bank increased to 133.3% as compared to 123.6% in the same period last year. Credit Quality Q1FY09 Q1FY08 YoY (% Chg) FY08 QoQ (% Chg) NPA's (RO 000s) 38,904 37, % 38, % NPA to GL 3.5% 4.4% 3.6% Total Provisions (RO 000s) 51,856 46, % 50, % Provision Coverage 133.3% 123.6% 131.6% Source: Company reports, GBCM Research Bank Dhofar Page 2

3 Investment Rationale Higher level of capital adequacy and lower level of NPA s provides comfort Capital adequacy improves to 16.6% and NPA s to Gross Loans falls to 3.6% Post rights issue RO 70 Million, the capital adequacy has improved to 16.6% by end of year 2008 as against 14.9% on end of year We believe this provides the bank scope for asset build up in the near term. On the asset quality front, NPA s to Gross Loan has come down to 3.6% (end of year 2008) as against 4.9% by the end of We believe the loan mix favours the bank in terms of very low exposure to foreign books and sectoral exposures. The Bank has maintained coverage in excess of 100% historically (End of %). We strongly believe this would act as a cushion in the event of increase in NPA s. For the next four year period we have assumed NPA to GL of 4.0%, higher than 2008 levels and we believe the Bank to maintain the coverage in excess of 100%. Bank s see comfort on liquidity Reduction in reserve requirement and increase in permitted lending to release est. RO 550 million With effect from January 09, the Central Bank has reverted back on its reserve requirement of 5% and increased permitted lending ratio to 87.5%. This is estimated to release RO 550 million into the banking system addressing local currency liquidity. In addition to this, the Central Bank is supporting dollar liquidity through its US$ 2 billion facility of swaps and direct lending. We strongly believe Omani banks have adequate liquidity in terms of prudent asset build up and performance would be more inclines towards quality of assets and would favour banks with adequate provision levels. Bank Dhofar is well placed in this basket providing comfort for asset growth in the current scenario. Five year strategic plan aims at consistent improvement in growth & profitability Bank has embarked on a transformational process aiming at core banking platform and other initiatives with focus on longer term sustainable growth The Bank has embarked on a five year strategic plan with an aim to scale up its operations. This aims at consistent improvement in terms of growth and profitability along with organization restructuring. Top management is well placed to take the bank through this growth in line with its long term vision. The Bank has appointed a GM, Mr. Christopher De Ath. He with his team in Strategy & Planning is responsible for taking this plan forward. Also, effective 4th June 2008, Mr. Kris Babicci, was appointed as Chief Executive Officer. Recently, the Bank has selected Finacle Universal Banking Solution from Infosys for its transformation initiative. Infosys will implement Finacle core banking, Customer Relationship Management (CRM), treasury, e-banking and mobile banking applications for the bank s operations. This shows Banks initiatives in this transformation process to fulfill its long term vision, in terms of technological platform. Bank Dhofar Page 3

4 Strain in terms of core operations to ease with drop in interest rates Spreads for 09E assumed at 3.0%, 20 bps lower to 08. Spread likely to ease in H2 09 due to lower interest rates We expect spreads to remain contracted for H1 09 while with a lag impact of lower FED rates, Oman interest rates are likely to move down in a comfortable liquidity scenario by H2 09. Meanwhile, for the short term, cost of funds is most likely to remain at higher levels and expected to put pressure on spreads for year 2009 (effective spread 2008: 3.2%, 2009E: 3.0%). Comfort will be the corporate book repricing which again is expected to be done on a prudent basis. After this we believe this pressure to trickle down to contribution from core operations. At the same time, the other operating income, we expect a drop in contribution due to current market conditions and the contribution would be highly skewed towards its core growth. Fresh capital injection and scale up of operations to generate RoAE of 16.3% (avg. 09E- 12E) Rights issue and strategic plan expected to scale up shareholder returns Capital infusion would enable the bank to support its scale of operations and growth. After considering for lower spreads and we have estimated 3.9% lower operating profits for the year However later part of the year would ease out some pressure and eventually margin improvement is expected from year The bank is estimated to scale up the RoAE to levels of 18.3% by year 2012 which we believe builds in the conservative approach due to current market conditions. In terms of Avg. RoAA for the period 09E- 12E, it is estimated to be at 2.1%. Valuation & Recommendation On weighted basis (50%-DDM & 50% ERR Model), the long term fair value works to RO 0.505, which provides upside potential of 15.6% from current market price of RO Both the model considers a cost of equity of 10.5% and terminal growth of 5%. Outlook We maintain our positive outlook on the Bank on back of restructuring initiatives in addition to the asset quality and provisioning levels. On the last traded price of RO 0.437, the earnings multiple on FY09E is 11.9X & FY10E is9.8x. On PBV the stock is trading at 1.6X (FY09E) Bank Dhofar: Weighted Fair Value In RO Fair Value Weight DDM % Excess Return Model % Weighted fair Value Bank Dhofar Page 4

5 Bank Dhofar: Income Statement Highlights ( RO '000s) E 2010 E 2011 E 2012 E Interest Income 51,610 63,671 83,338 99, , ,876 Interest expense 21,254 23,772 37,850 45,247 51,816 57,681 Net Interest Income 30,356 39,899 45,487 54,165 61,433 68,194 Other operating income 13,684 16,265 12,803 13,373 16,943 18,833 Net operating income 44,040 56,164 58,290 67,538 78,376 87,027 Administrative Cost 7,095 6,960 10,260 12,107 13,923 16,568 Operating profit 28,457 36,670 35,245 42,130 50,615 56,061 Depreciation 1,381 1,611 1,692 1,777 1,866 1,960 Earnings Before Provisions, Recoveries & Write offs 27,076 35,059 33,553 40,353 48,748 54,101 Provision for loan Impairment 3,263 5,470 5,344 5,771 5,675 5,221 Profit Before Tax 25,355 27,077 30,774 37,608 46,554 52,778 Tax 2,565 3,391 3,693 4,513 5,586 6,333 Net Profit After Tax 22,790 23,686 27,081 33,095 40,967 46,445 Source: Company Reports; GBCM Research Bank Dhofar: Balance Sheet Highlights Assets E 2010 E 2011 E 2012 E Liquid assets 119, ,249 85, , , ,992 Held to Maturity Instruments 71, , , , , ,468 Total Interbank Assets 29,187 37,586 44,462 49,558 55,171 57,657 Inv. at fair value through P&L (Gov Bonds) 2,515 2,519 2,519 2,519 2,519 2,519 Available for Sale Investments 17,175 16,306 16,833 17,387 17,968 18,579 Gross loans & advances 750,040 1,068,767 1,282,520 1,513,374 1,740,380 1,949,226 Net Loans and Advances 704,643 1,018,441 1,224,029 1,446,423 1,665,817 1,868,634 Fixed assets 4,413 4,597 4,828 5,071 5,326 5,594 Other assets 4,957 6,202 7,439 8,778 10,094 11,306 Total assets 955,127 1,323,820 1,507,290 1,752,276 1,994,698 2,216,200 Liabilities E 2010 E 2011 E 2012 E Total Interbank liabilities 93,494 89, , , , ,290 Total customer deposits 674, ,596 1,065,742 1,257,759 1,448,537 1,624,899 Total Other liabilities 30,771 35,628 40,697 47,311 53,857 59,837 Total Tier two capital 45,862 38,500 38,500 38,500 38,500 - Total Liabilities 844,629 1,135,387 1,302,370 1,530,810 1,752,748 1,951,027 Share capital 53,082 70,774 73,959 73,959 73,959 73,959 Total Tier 1 capital 110, , , , , ,173 Total Liabilities 955,127 1,323,820 1,507,290 1,752,277 1,994,698 2,216,200 Source: Company Reports; GBCM Research Bank Dhofar Page 5

6 Ratio Analysis E 2010E 2011E 2012E Per Share Analysis (RO) Earnings Per Share (Reported) Dividend Per Share Book Value Per Share Profitability& Return Measures (On Adj.) (%) Return on Equity 20.6% 12.6% 13.2% 14.9% 16.9% 17.5% Return on Average Equity 22.4% 15.8% 13.8% 15.5% 17.7% 18.3% Return on Assets 2.4% 1.8% 1.8% 1.9% 2.1% 2.1% Return on Average Assets 2.8% 2.1% 1.9% 2.0% 2.2% 2.2% Net Interest Income / Avg. Assets 3.7% 3.5% 3.2% 3.3% 3.3% 3.2% Operating Profit / Avg. Assets 3.4% 3.2% 2.5% 2.6% 2.7% 2.7% Cost to Income 35.4% 34.7% 39.5% 37.6% 35.4% 35.6% Spreads (%) Yield on Interest bearing assets 6.8% 6.5% 6.0% 6.2% 6.2% 6.2% Cost of Funds 3.3% 3.3% 3.0% 3.1% 3.1% 3.1% Interest Spread 3.5% 3.2% 3.0% 3.1% 3.1% 3.1% Liquidity Measures (%) Liquid Assets / Total Assets 12.5% 8.8% 5.7% 5.7% 5.8% 5.9% Net Loans / Deposits 104.5% 104.8% 114.9% 115.0% 115.0% 115.0% Customer Deposits / Total Liability 70.6% 73.4% 70.7% 71.8% 72.6% 73.3% Credit Quality Indicators (%) Total Provisions / Gross Loans 6.1% 4.7% 4.6% 4.4% 4.3% 4.1% Provision Coverage 124.0% 131.6% 114.0% 110.6% 107.1% 103.4% NPA's / Gross Loans 4.9% 3.6% 4.0% 4.0% 4.0% 4.0% NPA's / Total Assets 3.8% 2.9% 3.4% 3.5% 3.5% 3.5% Source: Company Reports; GIS Research Bank Dhofar Page 6

7 Disclaimer: This document has been prepared and issued by Gulf Baader Capital Markets SAOC ("the Company") on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all care has been taken to ensure that the facts stated are accurate and the opinions given are reasonable, neither Gulf Baader Capital Markets SAOC nor any employee shall be in anyway responsible for the contents of this report. The Company may have a position and may perform buying/selling for itself or its clients in any security mentioned in this report. This is not an offer to buy or sell the investments referred therein. Bank Dhofar Page 7