Jun 17 BANK MUSCAT. Ready to face challenges, adequately capitalized, trades at compelling valuations

Transcription

1 Jun 17 BANK MUSCAT Ready to face challenges, adequately capitalized, trades at compelling valuations

2 Bank Muscat Ready to face challenges, adequately capitalized, trades at compelling valuations Closing Price: RO Rating: BUY Fair Value: Strong domestic franchise, the market leader in Oman: Bank Muscat maintains dominant share in the Omani banking sector in terms of all key parameters like total assets, loan book and customer deposits (with c. 36% share, end Q1 2017). Established in 1982, Bank Muscat with stable and experienced management team has grown through a combination of organic and inorganic means over the last thirty five years of operations. The bank remains as the most profitable bank in Oman and also reported stable profitability trend over the years. The operating income of the bank has revealed compounded annual growth rate (CAGR) of 7.2% during and the net profit has shown CAGR of 8.5% over the same period. Proxy to the local economy: Bank Muscat has consolidated its leadership position in Oman by capitalizing on the growth opportunities in Oman. The bank has participated in major infrastructure projects and in the Government efforts towards economic diversification. The presence of strong network of branches (4 branches, end Q1 2017) and other delivery channels has helped the bank to leverage on continuing level of retail growth along with favorable demographics. The bank operates predominantly in Oman and around 95% of its operating income is generated in Oman. We believe the bank would be the major beneficiary on the upcoming infrastructure and industrial projects aiming towards diversification (Tanfeedh and Duqm Projects) going forward and also in the initiatives towards privatization. Prudent regulatory environment: The Oman Banking sector is considered as one of the well regulated industries within the GCC region. The regulator, the Central Bank of Oman (CBO) has maintained cautious and prudent approach towards the sector growth, which has lead to stability over the years. The local banking sector had gone through crisis over the years including the 2008 global financial crisis on a healthier note without any major issues seen in the system. Oman has developed more stringent capital requirements as compared to the Basel III regulations (from Jan 2014), which would augment the local banking system going forward. In their advisory towards IFRS 9 implementation, the regulator has also adopted a cautious approach. Diversified funding and liquidity position remain stable: Bank Muscat has a well diversified and also a stable funding mix as compared to the local and regional peer group banks. Historically the bank has maintained higher levels of stable and low cost domestic deposits coming majorly from retail, government and public entities. Of the total deposits, retail sector form 40% and ministries, Government organizations form 36%. On the loans and advances front, the bank has a diversified asset mix across various segments with personal segment forming 30% of the total and mortgage contributes c. 11% of total. Well capitalized bank, Stable asset quality: The presence of strong capitalization levels offers enough room for stable growth going forward. Bank Muscat is comfortable in terms of both liquidity (credit to deposit ratio at 105%) and in capital adequacy (Est. 18.2% levels post recent AET1 issuance). We don t see any Tier 1 issuance from the bank till 2019E. We believe Bank Muscat is well positioned to withstand the prevailing challenging macro environment. The bank follows conservative lending policy along with strong risk management policies, this has enabled them to maintain stable asset quality trend historically. Despite weakening economic environment and the estimated impact of deterioration in asset quality, the bank remains adequately capitalized and also maintaining sufficient provision coverage levels to mitigate the expected loan losses. The bank follows conservative provisioning policy as stated in IFRS or CBO requirements; this in turn has helped them to maintain asset quality. Demanding valuations, the cheapest bank in Oman and in the region: On the valuations front, the stock trades at PE (2017E) of 6.5X and PBV (2017E) of 0.65X, revealing steep discount to the average PBV TTM of Omani Banks at 1X and average PBV TTM of GCC Banks is at 1.3X. We estimate the RoAE of the bank to be c. 10.4% levels during We recommend a Buy rating on the stock with 12 month fair value of The stock also provides dividend yield of 6.2% levels The stock continued to trade at considerable discount (c. 35% discount to book value) on prevailing macroeconomic challenges in Oman and the selling pressure seen from the foreign investors (since Q4 2014). As of now, the foreign ownership in Bank Muscat has halved to 12.1% levels as compared to the levels of c. 24% (end 2014), this clearly points out to the selling pressure seen in this stock over last two years. 2 Page Omani Equities Research

3 Key Investment Highlights Bank Muscat remains as dominant banking franchise and the market leader in Oman with 36% market share in terms of Banking assets, loans and customer deposits The bank has consolidated its leadership position in Oman and remains as a proxy to the local economy by capitalizing on the growth opportunities. The bank has been able to reveal stable growth leveraging upon the network of branches and to cross sell opportunities across business divisions. Meethaq (Islamic Banking) remain as the market leader in the Shariah space in Oman through offering wide variety of products and services through their extensive network. The bank has strong shareholder base with the highest Government ownership as compared to the other Omani Banks. Royal Court Affairs own 23.6% stake and other Government entities (inc. Pension Funds) own 35%. Bank Muscat has a well diversified and a stable funding mix as compared to the local and regional peer group. Higher levels of stable & low cost domestic deposits. Of the total deposits, retail sector form 40% and ministries, Government organizations form 36%. Bank Muscat remains comfortably placed in terms of both liquidity (credit to deposit ratio at 105%) and in capital adequacy (18% levels post recent AET1 issuance). The presence of strong capitalization levels offers enough room for stable growth going forward. Despite economic slowdown, the bank has maintained stable asset quality. We have seen the bank maintaining lower levels of NPA/ Gross Loans over the years amid robust risk management policies. Bear Base Bull (BBB) Case approach Scenarios Key Assumptions Bear Case Economic situation to remain under stress till H Anticipate NIMs to remain under pressure on increase in funding costs. Asset quality to deteriorate further, NPA to GL to increase to 4% levels and RoE to decline to 9 9.5% levels. WACC Increased to 12% levels. Our Fair Value on Bear Case works out to be RO Base Case We have assumed economic conditions to improve in 2018 on diversification efforts, stable oil prices and on Government Project spending. Cost of Funding to remain stable. NPA to GL to remain at 3.1% levels assuming Government payment cycle to improve during H RoE is estimated at % levels going forward. WACC is estimated to 11% levels Our Fair Value on Base Case is RO Bull Case Economic scenario to improve starting H and the lending growth to remain strong. NIM to expand by 20 bps over the next two years amid increase in US Fed rates. Focus remains on increase in non interest income and cost rationalization efforts. NPA to GL to remain at 3.1% levels. RoE to improve to 11 12% levels. Fair value on Bull case is RO Valuation Scenarios Base Case Methodology Fair Value (In RO) Fair value Excess Return Model Fair value Price /Adj. Book Value Estimates Key Ratios Base Case E 2018E 2019E Price to Earnings Ratio** Price to Book Ratio Dividend Yield 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Return on Average Equity 14.1% 14.4% 13.4% 12.9% 13.0% 12.0% 10.4% 10.1% 10.2% Return on Average Assets 1.8% 1.8% 1.9% 1.8% 1.6% 1.5% 1.5% 1.5% 1.5% NPA's / Gross Loans 3.0% 3.0% 2.6% 2.8% 2.7% 2.9% 3.1% 3.2% 3.2% Provision Coverage 118.4% 121.4% 129.2% 129.4% 142.1% 130.6% 132.9% 137.5% 146.4% Estimates 3 Page Omani Equities Research

4 Bank Muscat BBB Scenarios Find below the table with the valuation details of the company in different scenarios Bear Case Base Case Bull Case Key Ratios 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Price to Earnings Ratio Price to Book Ratio Dividend Yield 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Return on Average Equity 10.3% 9.4% 9.7% 10.4% 10.1% 10.2% 10.8% 11.0% 11.5% Return on Average Assets 1.5% 1.4% 1.4% 1.5% 1.5% 1.5% 1.6% 1.6% 1.7% NPA's / Gross Loans 3.5% 3.5% 3.5% 3.1% 3.2% 3.2% 3.1% 3.2% 3.2% Provision Coverage 117.2% 127.2% 137.5% 132.9% 137.5% 146.4% 132.0% 134.6% 139.6% Fair Value (In RO) RO RO RO Estimates Oman Banking Sector Peer Group Analysis Find below the table with the details for you reference. Omani Banks Closing Price YTD (% Chg) PE TTM PBV Latest Div. Yield TTM RoE LF RoA LF NIM LF Adj. RoE (5 Year avg) Bank Muscat (11.0) Bank Dhofar National Bank Of Oman (0.3) Ahli Bank (8.2) Bank Sohar HSBC Bank Oman Bank Nizwa NM 1.2 NA NM NM 3.8 NA Al Izz Islamic Bank NA 1.1 NA NM NM NM NA Oman Banks Average Source: Company Report, Bloomberg, Based on closing price as on 6 Jun Page Omani Equities Research

5 GCC Banking Sector Peer Group Analysis Investment Update YTD Div. Adj. RoE Closing Price (% Chg) PE TTM PBV Latest Yield TTM RoE LF RoA LF NIM LF (5 Year avg) National Commercial Bank Al Rajhi Bank Samba Financial Group Riyad Bank Saudi British Bank NA.3 Banque Saudi Fransi NA 13.3 Alinma Bank Arab National Bank Alawwal Bank NA Bank Albilad Saudi Banks Average Qatar National Bank Masraf Al Rayan Qatar Islamic Bank Commercial Bank NM 0.7 NA Doha Bank Qatar International Islamic Al Ahli Bank Al Khalij Commercial Bank Qatar Banks Average RAK Bank United Arab Bank NA 0.9 NA NM NM National Bank Of Fujairah Commercial Bank Int NM 1.3 NA NM NM Sharjah Islamic Bank NA Bank Of Sharjah Emirates Nbd Dubai Islamic Bank Commercial Bank Of Dubai Mashreq Bank UAE Banks Average National Bank Of Kuwait Kuwait Finance House Ahli United Bank B.S.C Boubyan Bank K.S.C Commercial Bank Of Kuwait Burgan Bank Kuwait Banks Average Ahli United Bank B.S.C National Bank Of Bahrain Bsc Bbk Bsc Al Salam Bank Bahrain Islamic Bank Bahrain Banks Average GCC Average Source: Company Report, Bloomberg, Based on closing price as on 6 Jun 2017 GCC 5 Banking Page sector trades at average PE TTM of 14X and PBV (latest) of 1.3X. Average RoE of the regional Omani banks Equities is at 13% Research levels

6 Bank Muscat Q Earnings Review The bank continued its steady growth in credit revealing CAGR of 9.2% over amid demand from both Corporate and Retail sector. During 20, the bank reported 8.4% growth in credit and this lowered to c. 5.6% YoY during Q We estimate the credit growth to remain at c. 6 7% over the next three years primarily driven by Government and private sector demand. Loan Book Growth Quarterly Trend since Q % 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1.0% 5.6% 4.0% 3.4% 2.9% 2.9% 2.8% 2.3% 1.8% 1.7% 0.2% 0.6% 0.6% 0.7% Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY Q2FY Q3FY Q4FY Q1 20 Q2 20 Q3 20 Q4FY Q1FY17 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Thousands Loans and advances (Net) QoQ (% Chg) Deposit Growth Quarterly Trend since Q During Q1 2017, the customer deposits grew by 1.8% QoQ after reporting decline for the previous three quarters. The loans to deposits (LD) of the bank improved to 105.4% levels (end Q1) as compared to 106.7% levels at the end of 20. We estimate the LD ratio to be c. 106% levels over the next three years. Amid the significant level of Government external borrowing program during 2017 (Jan to May) to fund the fiscal deficit, we see the current year banking liquidity would ease out a bit and this should be supportive for the margins of the banks with larger low cost deposits, we see Bank Muscat to benefit on this aspect. 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 9.1% 6.1% 3.5% 3.5% 0.4% 2.7% 1.8% 0.6% 0.1% 1.0% 1.1% 2.0% 2.0% Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY Q2FY Q3FY Q4FY Q1 20 Q2 20 Q3 20 Q4FY Q1FY17 7,200 7,000 6,800 6,600 6,400 6,200 6,000 5,800 5,600 Thousands Customer deposits, including CDs (RO 000s) QoQ (% Chg) 6 Page Omani Equities Research

7 Resilient performance seen since 2014 During the last two years, the margins of the Omani banks remained under pressure amid increase in cost of funds. Bank Muscat has been relatively able to withstand the margins pressure due to the presence of stable funding profile and also increase in the lending rates. We saw resilient margins for the bank during the last three quarters. Net Interest Income Quarterly Trend since Q % 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 72, % 70,000 68,000 66, % 1.8% 0.1% 64, % 2.1% 1.5% 62, % 2.3% 1.1% 60, % 58, % 56, % 54,000 52,000 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY Q2FY Q3FY Q4FY Q1 20 Q2 20 Q3 20 Q4FY Q1FY17 Net interest income Combined (RO 000s) QoQ (% Chg) The impairment trend of the bank remains volatile since beginning of 2014 with higher provisioning charges reported during Q4 for every fiscal year. The cost of risk has increased to c basis points amid prevailing economic slowdown and the cautionary provisioning policy followed by the bank. We estimate the cost of risk to increase to c. 60 basis points in 2018E. Impairment Provisions for Credit losses Quarterly Trend since Q (5,000) Impairment for credit losses (RO 000s) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY Q2FY Q3FY Q4FY Q1 20 Q2 20 Q3 20 Q4FY Q1FY17 (10,000) (,000) (20,000) (10,208) (17,149) (13,348) (12,837) (14,764) (,136) (,949) (,773) (14,240) (18,339) (25,000) (23,625) (23,326) (30,000) (35,000) (29,247) Impairment for credit losses (RO 000s) 7 Page Omani Equities Research

8 Key Investment Highlights Amid continued efforts taken by the Government toward economic diversification, we estimate annual credit growth to be c. 6 7% over E. The credit to deposit ratio is assumed at 106% levels during the projected period. Since 2011, the yield on interest bearing assets declined from 4.8% levels to 3.4% levels in 20 and improved to 3.58% in 20. We estimate the net asset yield to improve to 3.64% levels in 2019E. We also estimate the cost of funds to reveal marginal increase over the projected period. We estimate the net interest margins (NIMs) of the bank to increase to 2.53% levels in 2017E and to remain at these levels till 2019E. Yield on Interest Bearing Assets and Net Interest Margins Trend 6.00% 5.00% 4.00% 4.82% 4.62% 4.42% 4.08% 3.43% 3.58% 3.60% 3.62% 3.64% 3.00% 2.00% 3.46% 3.23% 3.03% 2.80% 2.44% 2.44% 2.53% 2.53% 2.52% 1.00% 0.00% E 2018E 2019E Yield on Interest bearing assets Net Interest Margins Amid challenging market conditions and the estimated increase in provisioning levels and corporate tax revision, the net profit of the bank for 2017E is estimated to decline 4.5% YoY to RO million and then to increase 5% YoY in 2018E. Amid increase in equity base and lower profits, the return on equity (RoE) of the bank is estimated to average c. 10.2% over the next three years. While the return on assets to remain at 1.5% levels over the projected period. Return Ratios Trend.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 14.1% 14.4% 13.4% 12.9% 13.0% 1.8% 1.8% 1.9% 12.0% 1.8% 10.4% 10.1% 10.2% 1.6% 1.5% 1.5% 1.5% 1.5% E 2018E 2019E 2.1% 1.9% 1.7% 1.5% 1.3% 1.1% 0.9% 0.7% 0.5% Return on Average Equity Return on Average Assets 8 Page Omani Equities Research

9 Since 2011, the NPA to Gross Loans ratio revealed declining trend, the same revealed marginal uptick during 20 to 2.9% levels amid economic slowdown. We estimate further increase in the NPA during the projected period with NPA/ GL to remain at 3.2%. We see stress in Contracting, Real Estate, SME and retail loans during the coming quarters. We saw delayed Government payment over the last three quarters; this may increase the NPA trend going forward. The bank continues to maintain stable asset quality and conservative provision policy over the years. Non Performing Loans Trend NPA's / Gross Loans 3.5% 3.0% 3.0% 3.1% 3.2% 3.2% 2.8% 2.6% 2.7% 2.9% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% E 2018E 2019E NPA's / Gross Loans The provision coverage ratio of the bank showed increased from 118% levels in 2011 to c. 142% levels in 20 and declined to 131% in 20. We estimate the coverage levels to increase over the projected period to c. 146% levels in As per the bank, the implementation of IFRS 9 may not impact the Oman banking system negatively. Provision Coverage Trend Provision Coverage 0.0% 140.0% 120.0% 118.4% 121.4% 129.2% 129.4% 142.1% 130.6% 132.9% 137.5% 146.4% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% E 2018E 2019E Provision Coverage 9 Page Omani Equities Research

10 Capital adequacy levels of the bank remain strong c..9% levels (end 20) and the same is estimated to increase to c. 18.2% levels post the recent issuance of AET1 capital. The bank remains strongly capitalized with no major concerns seen in Tier 1 and this would give strong room to grow its loan book for the next three years. Despite the bank being the only one to be designated as D SIB, the bank remains well capitalized. With stronger capital adequacy levels, we estimate the bank to continue with the similar dividend payout policy going forward. At the current levels, the sustainable dividend yield works out to be 6.2% levels. Capital Adequacy Ratio levels since % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%.9% 17.0%.4%.9%.1%.9% 18.2% 4.6% 3.7% 3.3% 2.9% 2.6% 2.2% 1.8% 11.4% 13.3% 13.1% 13.0% 13.5% 14.7%.4% Q Est. (Post AET 1) Total Tier I capital as % of RWA Total Tier II capital as % of RWA IFRS 9 Implementation Conservative approach to be followed As per the CBO, considering that IFRS 9 introduces an expected credit loss model approach to provisioning, the level of provisioning would be higher than that under the IAS 39. During the initial stages of IFRS 9 implementation, the CBO proposes a two track approach, one based on the IFRS 9 expected credit loss methodology and the others would be based on the CBO total provisioning for non performing loans and restructured loans. In the first year of implementation, if the provision as per the CBO requirements is higher than the impairment allowance under IFRS 9, then the difference (net of tax), should be transferred to an impairment reserve (not available for payment of dividends or for inclusion in regulatory capital) as an appropriation from the net profit after taxes. During the subsequent years, where the impairment loss together with reserve interest as per CBO is higher than the impairment charges under IFRS 9, the difference should be transferred to the impairment reserve. In cases where impairment losses as per CBO is higher than that computed under IFRS 9, the payout ratio for determining the maximum dividend payable will be based on the reduced net profit if additional provisions as per the CBO norms had been made. This clearly points out to the conservative approach followed by the Central Bank. With the prevailing higher level of general provisioning (as per CBO), the implementation of IFRS 9 may not have significant negative impact to the Omani Banks as per our view. 10 Page Omani Equities Research

11 Outlook Priced in for worst case scenario: We remain positive on the stock looking at medium to long term perspective on factors which includes stronger capital adequacy levels (estimated above 18%), stable CASA deposits and diversified funding mix, ability to participate in the Government/ Quasi Government projects and also on conservative provisioning policy. We do also expect the local market liquidity position to improve with the latest Government borrowing program (USD 10 billion raised over last three months); this would benefit the overall local banking system. Compelling valuations seen: On the valuations front, the stock trades at PE (2017E) of 6.5X and PBV (2017E) of 0.65X and provides dividend yield of 6.2% levels. We estimate the RoAE of the bank to be c. 10.4% levels during We recommend a Buy rating on the stock with 12 month fair value of O The stock continued to trade at considerable discount (c. 35% discount to book value) on prevailing macroeconomic challenges in Oman and the selling pressure seen from the foreign investors (since Q4 2014). As of now, the foreign ownership in Bank Muscat has halved to 12.1% levels as compared to the levels of c. 24% (end 2014), this clearly points out to the selling pressure in this stock over last two years. We can expect to see this trend reversal later this year. We do see limited downside in the stock from the current levels, while the trigger for upside could come from improvement in oil prices, increase in the asset yield along with the US Fed rate increase and the commencement of new project cycle in Oman (Duqm related investments, Focus on Tourism, Industrial and Logistics sector projects). Market seems pessimistic on the stock assuming increase in NPA: Bank Muscat currently trades at distress Valuations and takes into consideration of a scenario where the NPA/ GL ratio increasing to 7% levels, which we think as an extreme case. On our assumption of NPA/ GL at 3.1% levels, the adjusted Book Value works out to be RO If the NPA to GL ratio increasing to c. 5% levels (seen in 2009), then the adj. book value would be c. RO Scenario Analysis NPA (In RO 000s) NPA to Gross Loans (%) 2017E Adj. Networth (In RO 000s) Adj. Book Value (In RO) Base Case 271, % 1,425, Stress Case Scenario 1 350, % 1,346, Stress Case Scenario 2 438, % 1,259, Stress Case Scenario 3 526, % 1,171, Source: GBCM Research Estimates Valuation Methodologies Weighted Fair Value at RO Find below the detailed table with our valuation methodologies used. Valuation Methodology Key Assumptions Fair Value (In RO) Weightage Fair value Excess Rate of Return Methodology Fair value Price to Adj. Book Value Source: GBCM Research Estimates Cost of Equity assumed at 10.9% levels and terminal growth at 2% Book Value taking into consideration of adjusted RoE (Base case scenario) Weighted Average Fair Value Closing Price Upside Potential 30.5% % % 11 Page Omani Equities Research

12 Oman Banking Sector Credit growth to continue, liquidity to improve post Govt. borrowing program Despite prevailing economic slowdown, the credit book of Omani banks continued to grow at high single digits over the last two years driven by growth coming from the productive sectors of the economy, retail demand and the opportunities seen in the non oil diversification projects. We estimate the credit growth of the local banking system to lower from the current levels and to reveal mid to high single digits (6 to 7% annual growth) increase over the next three years. The Government remained focus on priority projects especially related to Tanfeedh initiatives which includes Industrial, Tourism, Logistics, Fisheries and Mining sectors. More emphasis is given on the Duqm related investments with the proposal of Duqm Refinery and allied investments, Development of China Oman Industrial City along with other developments in the Oil and Gas investments to augment growth going forward. Credit Growth Trend 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Total Credit MoM (%) 25, ,000.0, , , % 14 Jan Feb Mar Apr May June July Aug Sep Oct Nov Jan Feb Mar Apr May June July Aug Sep Oct Nov Source: CBO, GBCM Research Government spending on income generating projects to act as cushion for growth On back of continuance of Government fiscal spending and the benefits of increasing investment opportunities in non oil sector towards diversifying the income base, we anticipate focus on projects spend to remain intact. We believe there is strong potential towards the development of the existing and new free zones areas to attract foreign investments majorly attractive foreign direct investments in the industrial and the services sectors. This along with the presence of favorable demographics in Oman and the efforts taken towards job creation makes a case of growth opportunities in the banking sector over the long term perspective. Deposit addition remains challenging, liquidity pressure eased out on Government external borrowing. With the tightened liquidity in the market due to the current low oil price environment, the banking sector deposit addition remained challenging during 20, but lately the liquidity situation improved on Government external borrowing program. During Jan Mar 2017, the overall deposit addition of the banking sector is at about RO 978 million, an increase of 7.5% YoY and +4.8% for the year. The total Government deposits increased.7% YoY during the same period. We anticipate the liquidity pressure to ease out in Oman banking sector and this would mean stable cost of funding over the short to medium term for the local banks. End Mar 2017, the broad money supply (M2) growth has increase 3.1% on a YoY basis. On the other hand, M1 has declined 5.5% YoY amid tightness revealed in the local liquidity on the prevailing low oil price environment. Overnight Interbank lending rates continue to remain stable over the last six months (end Mar 2017 at 0.443% per annum). 12 Page Omani Equities Research

13 Deposit Growth Trend 6.0% Total Deposits MoM (%) 21, % 20, % 3.0% 2.0% 1.0% 0.0% 1.0% 20, , , , , , , % 14 Jan Feb Mar Apr May June July Aug Sep Oct Nov Jan Feb Mar Apr May June July Aug Sep Oct Nov,500.0 Source: CBO, GBCM Research Challenges to remain Asset Quality Despite the current challenging economic environment, the overall provisioning levels of the banks in Oman have remained stable over the last two years as compared to increase in provisioning requirements during 2009 post default from the Saudi groups namely SAAD and Al Gosaibi. We saw the total specific provisioning requirements of the banking sector increasing 7.3% YoY as at end of 20 as against the levels of c. 8% during 20. During 20, the total specific and general provisioning requirements have increased by 8.5% YoY. The total general provisioning has increased 10% for the same period amid stable credit growth. The specific provisioning has shown a volatile trend with slippages seen in certain sectors like construction, Oil and Gas, trading etc. We anticipate the sector asset quality to remain under stress during the coming quarters, we would watch out this trend during H2 2017E. Specific Provisions Trend 4.0% Specific Provisions MoM (%) % % % % % % 14 Jan Feb Mar Apr May June July Aug Sep Oct Nov Jan Feb Mar Apr May June July Aug Sep Oct Nov Source: CBO, GBCM Research 13 Page Omani Equities Research

14 Income Statement Highlights Bank Muscat: Income Statement E 2018E 2019E Total Interest Income Conv. 286, , , , , , , , ,893 YoY (% Chg) 4.3% 11.7% 0.3% 1.6% 2.4% 18.2% 4.3% 8.8% 8.2% Interest expense Conv 74,839 90,063 96,878 97,660 90, , , , ,830 YoY (% Chg).0% 20.3% 7.6% 0.8% 7.2% 31.3% 12.9% 9.8% 9.7% Net Inv. Income Conv. and Islamic 212, , , , , , , , ,063 YoY (% Chg) 13.3% 8.6% 2.1% 3.5% 6.9% 5.2% 0.6% 8.4% 7.7% Other operating income 82,125 93, , , , , ,047 5,728 3,1 YoY (% Chg) 4.9% 13.5% 12.4% 33.0% 5.6% 3.5% 4.9% 4.5% 4.7% Net operating income 294, , ,6 383, ,736 4, , , ,179 YoY (% Chg) 10.8% 10.0% 5.1% 12.6% 6.4% 2.1% 1.3% 7.0% 6.7% Operating expenses 109, , , ,686 9,871 1,357 6, , ,335 YoY (% Chg).6% 12.5% 7.5% 10.6% 9.0% 0.9% 3.0% 5.3% 4.2% Operating Profit (EBIT) 173, , , , , , , , ,055 YoY (% Chg) 6.6% 9.1% 3.9% 14.6% 5.1% 2.3% 0.2% 8.4% 8.5% Gain or (loss) from associate (3,529) (3,418) 1,304 1,5 2,561 1,727 1,623 1,705 1,790 Provisions for credit losses (56,5) (57,898) (50,462) (64,330) (71,984) (70,288) (76,922) (85,921) (91,936) YoY (% Chg) 20.5% 3.1% 12.8% 27.5% 11.9% 2.4% 9.4% 11.7% 7.0% Recoveries from credit losses 25,554 33,511 32,528 26,063 35,879 36,240 35,333 34,523 33,727 YoY (% Chg) 87.2% 31.1% 2.9% 19.9% 37.7% 1.0% 2.5% 2.3% 2.3% Profit before taxation 136,209 6, , , , , , , ,037 Taxation 18,663 17,549 22,701 23,043 22,067 27,813 29,765 31,282 33,606 Net Profit 117, ,206 2,192 3, , ,560 8, , ,431 Net Profit After Extraordinary 117, ,206 2,192 3, , ,560 8, , ,431 YoY (% Chg).7% 18.4% 9.3% 7.3% 7.5% 0.6% 4.5% 5.1% 7.4% Estimates 14 Page Omani Equities Research

15 Balance Sheet Highlights Balance Sheet E 2018E 2019E Assets Cash & CBO Balances 825, , , ,944 2,412,052 1,041, ,879 1,046,611 1,083,145 Held to Maturity 67, , , ,196 1,022, , , , ,601 Interbank Payments 869, , ,981 1,038, , ,6 1,031,509 1,197,3 1,294,287 Investments 275, , , , , , , , ,212 Inv. in Associates 49,595 45,941 36,547 47,449 47,746 48,074 48,061 48,073 48,112 Gross Loans Combined 4,995,926 5,811,780 6,360,418 7,044,809 7,627,922 8,271,220 8,767,493 9,381,218 10,037,903 YoY (% Chg) 19.1%.3% 9.4% 10.8% 8.3% 8.4% 6.0% 7.0% 7.0% Net Loans 4,819,432 5,600,952 6,142,846 6,785,9 7,330,2 7,957,330 8,406,2 8,968,419 9,567,796 Fixed Assets 71,792 69,263 66,651 71,864 76,621 74,232 76,459 78,753 81,1 Other Assets 249, , , ,550 8,020 2, , , ,758 Total Assets 7,228,001 7,913,669 8,486,450 9,728,318 12,544,529 10,820,070 11,524,423 12,533,137 13,304,027 Liabilities Total Interbank 730, , , ,819 2,859, , ,749 1,214,868 1,264,776 Total deposits Conv and Islamic 4,749,489 5,324,0 5,645,870 6,582,109 7,363,448 7,457,727 7,930,392 8,460,773 9,026,223 YoY (% Chg) 34.7% 12.1% 6.0%.6% 11.9% 1.3% 6.3% 6.7% 6.7% CD's, Bonds & FRNs 1, ,403 76,803 46,000 Total Other liabilities 380, , , , , , , , ,895 Total Tier two capital 334, , , , ,450 5,450 5,450 5,450 5,450 Shareholders Equity 870,582 1,056,464 1,212,294 1,312,067 1,396,959 1,546,740 1,697,446 1,806,975 1,929,673 YoY (% Chg) 9.3% 21.4% 14.8% 8.2% 6.5% 10.7% 9.7% 6.5% 6.8% Total Liabilities 7,228,001 7,913,669 8,486,450 9,728,318 12,544,529 10,820,070 11,524,423 12,533,137 13,304,027 YoY (% Chg) 23.5% 9.5% 7.2% 14.6% 28.9% 13.7% 6.5% 8.8% 6.2% Estimates Page Omani Equities Research

16 Ratio Analysis Key Ratios E 2018E 2019E Per Share Analysis (RO) Earnings Per Share (Reported) Dividend Per Share Book Value Per Share Valuation Ratios Price to Earnings Ratio Price to Book Ratio Dividend Yield 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Profitability& Return Measures (%) Return on Equity 13.5% 13.2% 12.6% 12.4% 12.6% 11.4% 9.9% 9.8% 9.9% Return on Average Equity 14.1% 14.4% 13.4% 12.9% 13.0% 12.0% 10.4% 10.1% 10.2% Return on Assets 1.6% 1.8% 1.8% 1.7% 1.4% 1.6% 1.5% 1.4% 1.4% Return on Average Assets 1.8% 1.8% 1.9% 1.8% 1.6% 1.5% 1.5% 1.5% 1.5% Net Interest Income / Avg. Assets 3.2% 3.0% 2.9% 2.7% 2.3% 2.3% 2.4% 2.5% 2.5% Operating Profit / Avg. Assets 2.8% 2.6% 2.5% 2.6% 2.2% 2.2% 2.3% 2.3% 2.3% Cost to Income 41.1% 41.6% 42.2% 41.2% 42.0% 41.8% 42.5% 41.7% 40.8% Spreads (%) Yield on Interest bearing assets 4.82% 4.62% 4.42% 4.08% 3.43% 3.58% 3.60% 3.62% 3.64% Cost of Funds 1.40% 1.45% 1.46% 1.35% 1.01% 1.% 1.19% 1.21% 1.23% Interest Spread 3.42% 3.17% 2.96% 2.73% 2.42% 2.43% 2.41% 2.41% 2.41% Net Interest Margins 3.46% 3.23% 3.03% 2.80% 2.44% 2.44% 2.53% 2.53% 2.52% Capital Adequacy (%) Equity / Assets 12.0% 13.3% 14.3% 13.5% 11.1% 14.3% 14.7% 14.4% 14.5% Equity / Gross Loans 17.4% 18.2% 19.1% 18.6% 18.3% 18.7% 19.4% 19.3% 19.2% Liquidity Measures (%) Liquid Assets / Total Assets 12.4% 12.2% 9.6% 12.9% 27.4% 14.8% 11.9% 13.0% 12.6% Bank Borrowings / Total Assets 10.1% 9.5% 7.9% 9.1% 22.8% 7.7% 7.6% 9.7% 9.5% Net Loans / Deposits 101.5% 105.2% 108.8% 103.1% 99.5% 106.7% 106.0% 106.0% 106.0% Customer Deposits / Total Liability 65.7% 67.3% 66.5% 67.7% 58.7% 68.9% 68.8% 67.5% 67.8% Credit Quality Indicators (%) Total Provisions / Gross Loans 3.5% 3.6% 3.4% 3.7% 3.9% 3.8% 4.1% 4.4% 4.7% Provision Coverage 118.4% 121.4% 129.2% 129.4% 142.1% 130.6% 132.9% 137.5% 146.4% NPA's / Gross Loans 3.0% 3.0% 2.6% 2.8% 2.7% 2.9% 3.1% 3.2% 3.2% NPA's / Total Assets 2.1% 2.2% 2.0% 2.1% 1.7% 2.2% 2.4% 2.4% 2.4% NPA's / Net Worth 17.1%.4% 13.9%.3%.0%.5%.0%.6%.6% Cost of Risk (Net Provisions to Avg. Net Loans) 0.69% 0.47% 0.31% 0.59% 0.51% 0.45% 0.51% 0.59% 0.63% Estimates Page Omani Equities Research

17 Stock Rating Methodology: Buy Upside more than 20% Accumulate Upside between 10% and 20% Neutral Upside or downside less than 10% Reduce Downside between 10% and 20% Sell Downside more than 20% Not Rated Stocks not in regular research coverage Time Horizon LT Long Term rating with a 12 to 18 month horizon ST Short Term rating with a 3 to 6 month horizon 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. 17 Page Omani Equities Research