Oman Banking Efg

oman banking sector 22 June 2010
slower growth, but lower risk
sector note banks │ oman Murad Ansari

+9661 279 8649
mansari@efg-hermes.com
Low Risk, High Transparency, But At a Discount
Gigi Tharian Varghese
With strong balance sheets, better transparency, low asset quality risk and higher
+968 247 6 0023
earnings visibility, we believe that the current valuation discount of Bank Muscat and
gvarghese@efg-hermes.com
National Bank of Oman (NBO) to their regional peers is unjustified. Compared to an
estimated 2010 average P/BV of 1.8x for MENA banks, Bank Muscat and NBO are CONTENTS
trading at an estimated 2010 P/BV of 1.42x and 1.38x, respectively – almost a 20%
discount. We are of the view that the high transparency of the Omani banks EXECUTIVE SUMMARY 3
compensates for the higher risk assigned to Oman for the government’s relatively less I. OMAN BANKS – DISCOUNT IS
strong financial position compared to other GCC countries. We believe that stabilising UNJUSTIFIED 5
asset quality trends and improved investor risk appetite should lead to a narrowing of II. LOAN GROWTH TO REMAIN
the existing valuation gap. We reiterate our Buy rating on Bank Muscat and NBO, which SLUGGISH IN THE NEAR TERM 8
offer 29% and 18% upside potential, respectively, to our fair values of 1.05/share and III. LIQUIDITY IMPROVES, BUT
DEPLOYMENT IS A NEAR-TERM
0.39/share, respectively. CHALLENGE 12
IV. ASSET QUALITY TRENDS
Loan Growth Recovery is Likely to be Slow
STABILISING 15
Excluding Qatar, loan growth in 1Q2010 amongst the GCC banks has declined to low
BANKS
single digits. In Oman, net loans of the banking sector grew by 5.7% Y-o-Y in 1Q2010,
BANK MUSCAT 17
which although slow compared to historical rates, is one of the strongest among the
NATIONAL BANK OF OMAN 21
GCC countries. We expect a slow recovery in loan growth in the near term due to
BANK DHOFAR 25
project delays and lower demand from the private sector. However, we believe that
BANK SOHAR 29
with a strong project pipeline and continued government spending, the question is not
“if”, but “when” credit demand will recover. We expect net loans of the Omani banks to
grow by 9% in 2010, before rising to 14% in 2011.
To vote for EFG Hermes Research in the Euromoney’s
Middle East Survey 2010, please go to
Making Progress on Funding Cost Improvements www.euromoney.com/middleeast2010.
Oman banks spent most of 2009 managing their balance sheet liquidity and improving Thank you for your support and we hope we continue
the sources of their funding. As of 1Q2010, customer deposits accounted for almost to meet your expectations.
83% of total funding compared to 78% at the end of 2008, while the loans-to-deposit
ratio declined to 104% in 1Q2010 from 110% in 4Q2008. The banks’ funding profile
has also improved, with banks now able to raise deposits with maturities of more than
one year from the domestic market at competitive rates. We believe that the locking in
of longer-dated deposits indicates at current low rates is likely to lead to higher net
interest spreads on an uptick in interest rates. We expect liquidity and cost
management to continue in the near term as banks work towards maintaining spreads.
BANKS ANALYSED IN THIS REPORT

Price* FV Rating P/E (x) P/B (x) ROE Div
Yield
OMR OMR 09a 10e 11e 09a 10e 11e 10e 11e 10e
Bank Muscat 0.815 1.050 Buy 14.9 9.8 7.7 1.6 1.4 1.2 15.3% 17.2% 2.5%
Nat. Bank of Oman 0.331 0.390 Buy 17.0 11.8 9.9 1.5 1.4 1.3 12.2% 13.4% 3.6%
Bank Dhofar 0.667 0.530 Sell 20.8 14.9 12.6 2.6 2.5 2.2 16.9% 18.5% 2.7%
Bank Sohar 0.218 0.220 Neu. 27.2 17.1 11.6 2.1 1.8 1.6 11.4% 14.7% 0.0%
*Price as at 21 June 2010
Source: Banks, EFG Hermes estimates
1 / 34 pages kindly refer to the important disclosures and disclaimers on back page
slower growth, but lower risk 22 June 2010
banks │ oman
FIGURE 1: EFG HERMES MENA COVERAGE UNIVERSE

EFG M. Cap. P/E (x) P/B (x) ROE (%) Div Yield
RIC Price FV Rating (USD mn) 09a 10e 11e 09a 10e 11e 09a 10e 11e 10e
Oman
Bank Muscat BMAO.OM 0.82 1.05 Buy 2,850 14.9 9.8 7.7 1.6 1.4 1.2 10.7% 15.3% 17.2% 2.5%
Nat. Bank of Oman NBO.OM 0.33 0.39 Buy 929 17.0 11.8 9.9 1.5 1.4 1.3 9.1% 12.2% 13.4% 3.6%
Bank Dhofar BDOF.OM 0.67 0.53 Sell 1,410 20.8 14.9 12.6 2.6 2.5 2.2 12.9% 16.9% 18.5% 2.7%
Bank Sohar BKSB.OM 0.22 0.22 Neutral 566 27.2 17.1 11.6 2.1 1.8 1.6 7.9% 11.4% 14.7% 0.0%
Average 17.3 11.7 9.3 1.8 1.6 1.4 10.8% 14.3% 15.5% 2.5%
Saudi Arabia
Al Rajhi 1120.SE 79.00 81.50 Neutral 31,598 18.4 17.9 14.3 4.5 4.1 3.7 24.6% 22.8% 25.5% 3.6%
Al Bilad 1140.SE 20.70 15.50 Sell 1,656 N/M 35.3 21.5 2.1 1.9 1.8 -8.3% 5.5% 8.4% 0.0%
Al Jazira 1020.SE 17.05 18.50 Neutral 1,364 193.6 29.4 10.8 1.1 1.1 1.0 0.6% 3.7% 9.4% 2.9%
Saudi British 1060.SE 44.00 51.40 Buy 8,800 18.2 13.3 10.0 2.5 2.2 1.9 13.9% 16.6% 18.6% 2.3%
Saudi Fransi 1050.SE 46.00 52.10 Buy 8,871 13.5 13.2 10.6 2.3 2.0 1.8 16.7% 15.5% 17.1% 3.0%
ANB 1080.SE 42.50 44.60 Neutral 7,366 13.7 12.6 10.9 2.0 1.8 1.6 14.6% 14.3% 14.8% 2.4%
Samba 1090.SE 59.75 71.00 Buy 14,339 12.2 11.3 9.1 2.5 2.1 1.8 20.3% 19.0% 20.1% 2.7%
Saudi Hollandi 1040.SE 33.50 37.50 Neutral 2,955 160.8 12.6 9.9 2.0 1.7 1.5 1.2% 13.8% 15.7% 1.6%
Riyad 1010.SE 29.10 32.50 Buy 11,639 14.8 14.2 11.4 1.6 1.5 1.5 10.9% 10.9% 13.0% 4.6%
Saudi Inv. Bank 1030.SE 19.70 21.00 Neutral 2,364 18.2 13.5 8.6 1.2 1.1 1.0 6.6% 8.2% 11.6% 0.7%
Average 16.7 14.5 11.4 2.5 2.3 2.0 15.6% 16.3% 18.7% 3.1%
UAE
ENBD ENBD.DU 2.69 3.20 Neutral 4,070 4.5 7.0 4.9 0.6 0.5 0.5 12.5% 7.5% 9.9% 5.3%
NBAD NBAD.AD 10.95 13.48 Buy 7,130 7.2 7.9 6.2 1.3 1.4 1.2 18.6% 17.7% 19.6% 3.4%
DIB DISB.DU 2.06 1.93 Sell 2,130 6.2 7.1 6.7 0.9 0.9 0.9 14.2% 12.7% 12.9% 10.9%
FGB FGB.AD 15.20 18.08 Neutral 6,207 7.5 8.1 5.4 1.2 1.1 1.0 16.1% 14.0% 18.3% 2.2%
ADCB ADCB.AD 1.58 1.72 Neutral 2,407 N/M 7.2 4.7 0.6 0.5 0.5 -3.7% 7.5% 10.7% 4.2%
CBD CBD.DU 3.05 3.80 Neutral 1,465 6.8 7.2 5.4 1.1 1.0 0.9 15.7% 13.2% 16.0% 4.3%
ADIB ADIB.AD 2.58 3.10 Buy 1,661 78.2 6.8 4.6 1.3 1.2 1.0 1.6% 17.2% 22.4% 6.1%
Average 8.4 7.5 5.5 1.0 0.9 0.8 12.0% 12.3% 15.5% 4.4%
Kuwait
NBK NBKK.KW 1.20 1.15 Neutral 13,518 13.5 14.1 12.3 2.3 2.4 2.2 17.3% 16.8% 17.5% 3.1%
Burgan BURG.KW 0.33 0.47 Buy 1,569 53.3 26.2 8.0 1.0 1.0 1.0 1.9% 4.0% 12.1% 1.1%
CBK CBKK.KW 0.89 0.67 Sell 3,899 N/M 179.3 14.4 2.6 2.5 2.3 -0.7% 1.4% 16.1% 0.0%
KFH KFIN.KW 0.99 1.39 Neutral 7,861 18.2 14.0 9.5 1.8 1.7 1.5 10.1% 12.2% 16.1% 2.8%
Average 19.8 16.7 11.3 2.2 2.0 1.8 11.4% 12.6% 17.0% 2.4%
Qatar
QNB QNBK.QA 138.00 130.26 Neutral 14,841 12.9 11.6 12.1 3.0 2.6 2.4 23.4% 22.6% 19.5% 3.8%
CBQ COMB.QA 67.00 113.55 Buy 4,175 10.0 8.7 7.0 1.4 1.4 1.3 13.7% 15.7% 18.4% 9.1%
QIB QISB.QA 73.80 108.79 Buy 3,992 12.1 11.4 9.7 2.0 2.0 1.9 16.7% 17.6% 19.9% 8.3%
Average 11.9 10.7 10.1 2.3 2.1 1.9 21.3% 20.4% 20.1% 5.7%
Egypt
CIB* COMI.CA 72.04 85.34 Buy 3,732 13.9 11.7 9.6 3.3 2.7 2.3 23.8% 23.5% 23.6% 2.3%
CAE CIEB.CA 12.01 16.36 Buy 610 10.1 9.0 7.9 1.9 1.8 1.6 18.8% 19.6% 20.6% 7.1%
NSGB** NSGB.CA 34.49 41.82 Buy 2,036 7.7 8.5 7.7 2.5 2.0 1.7 32.0% 24.0% 22.5% 3.3%
Average 10.7 10.2 8.7 2.8 2.4 2.0 28.6% 25.1% 24.8% 3.1%
Morocco
Attijariwafa Bank ATW.CS 312.10 309.82 Buy 6,846 18.7 17.3 15.8 3.0 2.6 2.3 15.8% 15.2% 14.8% 1.6%
BMCE Bank BMCE.CS 226.30 150.34 Sell 4,083 44.8 40.8 35.9 5.3 4.9 4.5 11.7% 12.0% 12.7% 1.2%
BCP BCP.CS 310.00 296.92 Buy 2,329 15.6 14.0 13.5 2.9 2.4 2.1 18.8% 17.3% 15.8% 1.9%
Average 21.9 20.0 18.4 3.4 3.0 2.7 16.7% 16.0% 15.4% 1.5%
Lebanon
Banque Audi AUSR.BY 8.20 N/R N/R 2,763 10.3 9.8 8.2 1.4 1.4 1.2 13.7% 14.2% 15.3% 3.2%
BLOM BLBDF.BY 90.30 104.20 Buy 2,167 8.1 7.8 6.9 1.6 1.4 1.2 20.0% 17.8% 17.8% 4.2%
Bank Byblos BYB.BY 1.79 2.60 Buy 757 7.4 7.4 6.4 1.0 1.0 0.9 13.2% 13.1% 13.5% 8.1%
Average 8.9 8.6 7.3 1.4 1.3 1.2 17.3% 15.8% 16.8% 4.2%
MENA Average 13.8 12.1 9.5 1.9 1.8 1.6 14.9% 15.3% 17.6% 3.5%
*CIB's Book Value excludes goodwill
**NSGB's Book Value excludes goodwill and earnings exclude goodwill amortisation (2010 is the last year goodwill will be amortised)
Source: Banks, EFG Hermes estimates
2 / 34 pages
banks │ oman
EXECUTIVE SUMMARY
HIGHER VISIBILITY, BETTER TRANSPARENCY

We believe that while a recovery in loan growth remains a timing issue, Oman banks offer
attractive valuations even after accounting for a slow loan growth environment. Asset quality
trends are stabilising, NPL coverage remains high and balance sheet liquidity has improved.
Against this backdrop, we believe that the current valuation gap between Oman banks and
their regional peers is unjustified. Indeed, Oman’s macro fundamentals do not match those of
Qatar and Saudi Arabia. However, we contend that with increased transparency, lower balance
sheet risks and earnings visibility, Bank Muscat and NBO compare favourably to their regional
peers.
FIGURE 2: MENA BANKS ESTIMATED 2010E P/BV

6.0
5.0
4.0
3.0
2.0
1.0
0.0
Sohar
Byblos
Muscat
Attijariwafa
BCP
Albilad
Dhofar
NBAD
Riyad
Burgan
Samba
QIB
CBD
KFH
NBO
BMCE
CIB
Aljazira
BLOM
ENBD
SABB
NBK
Al Rajhi
CAE
ADCB
DIB
CBQ
QNB
BSF
CBK
ADIB
NSGB
ANB
FGB
SAIB
SHB
Audi
*CIB's Book Value excludes goodwill

**NSGB's Book Value excludes goodwill and earnings exclude goodwill amortisation (2010 is the last year goodwill will be
amortised)
Source: EFG Hermes estimates
FUNDING ISSUES HAVE BEEN ADDRESSED

A slowing loan growth environment has allowed Oman banks to concentrate on improving
their funding profile. The loans-to-deposit ratio improved to 104% in 1Q2010 from 112% in
4Q2008, customer deposits constituted 83% of total interest bearing liabilities in 1Q2010
versus 78% in 4Q2008, and demand and saving deposits accounted for 46% of total deposits
in 1Q2010 versus 41% in 4Q2008. These improvements have allowed the banks to improve
their funding costs and increase their net interest spreads.
LOAN GROWTH CONTINUES, BUT AT A SLOWER PACE

Net loans grew by 5.7% Y-o-Y in 1Q2010, sharply lower than the 43% Y-o-Y growth seen in
2008, but remained one of the strongest amongst the GCC countries in 1Q2010. While we do
not expect a quick return to high double-digit loan growth, we believe that a gradual increase
in corporate credit demand on the back of continued government spending, along with a
steady increase in consumer loans, is likely to support 9% Y-o-Y growth in net loans in 2010.
3 / 34 pages
banks │ oman
FORECAST CHANGES
We lower our loan growth expectations for the Oman banking sector to 9% in 2010 from our
previous 14% growth estimate. We also tweak our net interest spread estimates for 2010, and
expect them to be broadly stable as banks continue to take advantage of lower interest rates
and the slow loan growth environment to improve funding costs.
FIGURE 3: SUMMARY FORECAST CHANGES

In OMR million, unless otherwise stated
Fair Value 2010e Earnings 2011e Earnings
Rating New Old New Old Change New Old Change
Bank Muscat Buy 1.050 1.050 112 111 0.6% 142 133 6.9%
National Bank of Oman Buy 0.390 0.410 30 39 -22.4% 36 46 -21.3%
Bank Dhofar Sell 0.530 0.480 35 30 18.0% 42 36 16.2%
Bank Sohar Neutral 0.220 0.200 13 12 6.3% 19 19 -1.1%

4 / 34 pages
banks │ oman
I. OMAN BANKS – DISCOUNT IS UNJUSTIFIED
BANK MUSCAT AND NBO - THE INVESTMENT CASE

Bank Muscat and NBO With balance sheet growth likely to remain subdued in the near term, we believe that
are trading at a discount investors should focus on valuations. Both Bank Muscat and NBO are trading at attractive
to domestic and regional valuations and offer decent upside potential from current levels, in our view. Current
peers valuations for Bank Muscat (estimated 2010 P/BV of 1.42x) and NBO (estimated 2010 P/BV of
1.38x) are at a discount to both domestic and regional peers, which, in our view, is unjustified.
In our opinion, strong and clean balance sheets, a downward-trending provisioning cycle and
higher earnings visibility make a strong investment case for Bank Muscat and NBO.
Strong Balance Sheet Fundamentals: Over the last 12 months, Bank Muscat and NBO’s
balance sheet fundamentals have maintained an improving trend. Balance sheet liquidity has
improved, concerns on sources of funding and costs have been addressed, and the NPL
coverage has remained strong despite significant asset quality deterioration.
Downward-Trending Provisioning Cycle: Recent results confirm that the bulk of the
provisioning has been absorbed in 2009. Although write-offs, driven by sub-commercial rates
offered on the restructuring of Dubai World’s debts, have yet to come through, we believe that
they will likely be negligible given the small exposures of Omani banks to DW. We highlight
that provisioning by Oman banks was aggressive in 2009, therefore, the potential for write
backs going forward exists.
More Earnings Visibility: We believe that defensive balance sheets largely comprised of
domestic assets and the peak of the provisioning cycle provide more earnings visibility for
Bank Muscat and NBO. We expect earnings to recover strongly in 2010, mainly supported by
stable spreads and falling provisioning levels.
Loan Growth is the Missing Element, For Now: With a strong pipeline of projects, the
question is more of “when” and not “if” loan growth will recover. We believe that continued
government spending will eventually start having trickle-down effects, and corporate credit
demand should start recovering over the next 6-12 months. On the other hand, stabilising
macro conditions could also encourage banks to continue lending in the consumer segment.
AT A DISCOUNT TO LOCAL AND REGIONAL BANKS

NBO and Bank Muscat trade at a discount to their peers both in Oman and the region, which
is unjustified, in our view. While regional banks have bounced back to higher valuation
multiples, NBO and Bank Muscat continue to trade at the lower end of the range compared to
their regional peers, despite their better transparency. We expect the valuation gap to narrow
and the re-rating of the valuations for NBO and Bank Muscat to continue.
5 / 34 pages
banks │ oman
FIGURE 4: MENA BANKS COMPARATIVE VALUATION

2.5
Attijariwafa QNB
CIB
BCP NBK Samba
2.0
SABB QIB
SHB BSF
NSGB
ANB KFH
1.5 Riyad CBQ
Bank Muscat
NBO NBAD
Audi
1.0 BLOM FGB
DIB Byblos
0.5 ADCB ENBD
0.0
0% 5% 10% 15% 20% 25%
STOCK SUMMARIES - BANK MUSCAT & NBO ARE OUR TOP PICKS
Bank Muscat - Fair Value OMR1.05/share, Buy, Upside Potential of 29%

With clean and solid balance sheet, lower risks and dominance in the domestic market makes
Bank Muscat our top pick in the Omani banking sector. The stock trades at an estimated 2010
P/BV of 1.42x and P/E of 9.82x, which is at a discount to both domestic and regional peers. We
reiterate our Buy rating with a fair value (FV) of OMR1.05/share implying 29% upside
potential. Normalisation of the provisioning cycles is likely to be the largest driver for earnings
growth in the near term, while balance sheet growth momentum is expected to start picking
up towards the end of 2H2010.
National Bank of Oman - Fair Value OMR0.39/share, Buy, Upside Potential of 18%
We look at NBO as a restructuring play since the slowing loan growth environment has
allowed the bank to focus on improving its deposit franchise. Historically, NBO has maintained
a lower share of low-cost deposit mix compared to its peers, which has led to relatively lower
net interest spreads. Although the bank made significant progress in 2009 by launching the Al
Kanz deposit scheme, the success was not followed up with the launch of similar deposit
products. Management, however, is now re-focusing its attention on building up its deposit
franchise, which, in our view, could bear fruit in the form of improved net interest spreads. We
reiterate our Buy on NBO with our FV of OMR0.39/share suggesting 18% upside potential
6 / 34 pages
banks │ oman
Bank Dhofar - Fair Value OMR0.53/share, Sell, Downside Potential of 26%

Limited free float and low liquidity continues to keep Bank Dhofar at expensive levels, which
trades at an estimated 2010 P/BV of 2.5x. Although the stock has historically had a limited
free float, inclusion of Bank Dhofar in the MSM30 Index last year has meant that the majority
of the limited fee float has been picked up by fund managers tracking the MSM30 Index. While
the bank has delivered a strong 2009 performance, with asset quality deterioration contained,
we believe that this is already incorporated into the price. We have a Sell rating on Bank
Dhofar as the stock trades at a 26% premium to our FV of OMR0.53
Bank Sohar - Fair Value of OMR0.22/share, Neutral, Upside Potential of 1%

After achieving critical mass (almost 9% of market share on most balance sheet measures), we
believe that Bank Sohar’s focus is likely to shift on improving revenue and cost efficiencies.
Indeed, we have seen net interest spreads almost double to 2.03% in 2009. While we expect
balance sheet growth to remain strong in 2010, we believe that the pace of growth is likely to
be more measured going forward. This is partly driven by the bank’s relatively low total CAR of
13%. While we expect the bank to be able to raise Tier II capital, it is likely to limit the ability
to improve its spreads. We maintain our Neutral rating on Bank Sohar as our FV of
OMR0.22/share suggests only 1% upside potential from the current price.
7 / 34 pages
banks │ oman
II. LOAN GROWTH TO REMAIN SLUGGISH IN THE NEAR TERM
A SLOWER RECOVERY IN THE NEAR TERM

Banks focusing on only In line with the MENA region, loan growth in Oman, although positive, slowed down
high quality credit for considerably in 2009. The impact of the global economic slowdown, the fall in capacity
now utilisation rates led by lower demand, and battered business confidence have led to lower
credit demand from the private sector. The initial slowdown in credit growth was driven by the
risk-averse attitude of the banks and constraints on long-term funding. However, it is now
driven by a combination of lack of opportunities as well as focus of banks on only high quality
credit.
FIGURE 5: LOAN GROWTH TRENDS ACROSS THE MENA REGION

Y-o-Y growth, unless otherwise stated
51%
60% 2008 2009 1Q2010

42%
50%
38%
35%
40%
26%
24%
23%
20%
30%
19%
17%
14%
12%
20%
6%
4%
10%
1%
0%
0%
-10%
Qatar Oman Kuwait KSA UAE Egypt* Lebanon Morocco
*Egypt data is average of CIB, CAE and NSGB
Source: Central Banks, EFG Hermes estimates
Expecting loan growth In our overall view, growth is likely to remain sluggish in 2010. We expect net loans of the
of 9% in 2010 and 14% Oman banking sector to grow by 9% in 2010 before recovering to 14% in 2011. We believe
in 2011 that the recent regulation introduced by the Central Bank of Oman (CBO), which requires
banks to maintain a higher capital adequacy level, is likely to keep loan growth in check in the
medium- to long term.
The start of 2010 has been sluggish. Net loans have grown by 5.7% Y-o-Y in 1Q2010, and we
expect 2Q2010 to depict a similar trend. However, we believe that increased government
spending and improved private sector confidence should start translating into a pick-up in loan
growth momentum towards the end of 2010.
8 / 34 pages
banks │ oman
FIGURE 6: OMAN BANKS: LOAN GROWTH OUTLOOK

Y-o-Y Growth, unless otherwise stated
50% Corporate & Commercial Consumer

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2004a 2005a 2006a 2007a 2008a 2009a 2010e 2011e 2012e 2013e
Source: Central Bank of Oman (CBO), EFG Hermes estimates
AXIS OF GROWTH - OIL PRICES, GOVERNMENT SPENDING & PRIVATE SECTOR

Oil prices key Given its relatively smaller fiscal surplus, in our opinion, government spending is inextricably
determinant of linked to oil prices. While government spending remains stable for now, we believe that the
government spending direction of oil prices will be the key determinant of the continuation of the momentum in
momentum government spending, since, in our view, volatile oil prices impact the government’s
aggressiveness. With the private sector pausing for breath, we believe that government
spending will be the key drivers for growth in the domestic economy.
FIGURE 7: OIL PRICES AND GOVERNMENT SPENDING

Oil Price in USD (LHS), In OMR million (RHS)
160 Government Expenditure (RHS) WTI (LHS) 1,600

140 1,400
120 1,200
100 1,000
80 800
60 600
40 400
20 200
0 0
01-Jul-07
01-Jul-08
01-Jul-09
01-Jan-07
01-Jan-08
01-Jan-09
01-Jan-10
01-Nov-07
01-Nov-08
01-Nov-09
01-May-07
01-May-08
01-May-09
01-Mar-07
01-Mar-08
01-Mar-09
01-Mar-10
01-Sep-07
01-Sep-08
01-Sep-09
Source: Bloomberg, Central Bank of Oman (CBO)
PLENTY ON THE TABLE, BUT EXECUTION IS KEY RISK

Loan growth momentum A glance at the list of projects announced by the government over the last year clearly
expected to pick up in indicates that there is a lot in store as far as the potential sources of credit demand are
end of 2010 concerned; however, the timing and execution of these projects is critical. At this stage, the
government appears to be moving ahead with important infrastructure projects, while slowing
the execution of the more ambitious projects. While the exact timing of the execution of these
projects is difficult to predict, we expect the pace to start gradually picking up towards the end
of 2010.
9 / 34 pages
banks │ oman
FIGURE 8: PROJECTS ANNOUNCED DURING LAST 12 MONTHS FIGURE 9: PROJECTS UNDER EXECUTION BY VALUE
In USD million, unless otherwise stated In USD billion, unless otherwise stated
Project Amount 12
Total Project Value = USD 28.3bn
Mirbat Beach Development 2,598 10
Muscat & Salalah International Airport Expansion 1,300 8
Sohar IPP 1,000 6
Redevelopment of Salalah International Airport 712 4
Batinah Coast Road Project 712 2
Batinah Housing Project 385 0
Construction
Pipeline
Infrastructure
Power
Industrial
Water & Waste
Gas Processing
Metal
Oil / Gas
Ras Al Hadd Airport 104
Source: MEED Projects Source: MEED Projects
CORPORATE LOAN GROWTH - WAITING FOR THE TRICKLE DOWN

Private sector credit As the private sector continues to digest the impact of the economic slowdown, and as
demand remains muted oversupply in the UAE continues to impact Oman’s industrial sector expansion plans, credit
for now demand from the private sector remains muted. For now, government spending remains
centred on infrastructure projects (roads, air and sea ports, etc.). However, the pace of these
projects appears to be relatively slow and has yet to result in any meaningful credit demand
from the corporate sector.
FIGURE 10: BANKING SECTOR: CHANGE IN CREDIT STOCK IN 2009

500
400
300
200
100
0
(100)
(200)
Construction
Wholesale & Retail
Financials
Manufacturing
Consumer
Int'l Trade
Others
Services
Source: Central Bank of Oman (CBO)
CONSUMER LOAN GROWTH - SLOW BUT STEADY

Banks are opening up to Lending to the consumer segment, although tightened, continues to play an important role in
consumer lending but the overall loan growth of the banking sector. Based on our discussion with the banks, we
remain selective believe that Oman banks are generally opening up to lending in the consumer segment,
although they continue to remain selective.
10 / 34 pages
banks │ oman
FIGURE 11: CONSUMER LOAN GROWTH FIGURE 12: CONSUMER LOANS/TOTAL LOANS
In OMR million (LHS); Q-o-Q Growth (RHS)
Consumer Loans (LHS) 1Q09 1Q10
4,000 14% 70%
Q-o-Q Growth (RHS)
3,500 12% 60%
3,000 10% 50%
2,500
8% 40%
2,000
6% 30%
1,500
1,000 4% 20%
500 2% 10%
0 0% 0%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
Sohar
Muscat
Dhofar
OIB
NBO
Ahli
Bank
Source: Central Bank of Oman (CBO) Source: Company accounts
We highlight that consumer loan growth continues to remain tied to the overall loan book
expansion owing to the regulatory caps imposed by the Central Bank of Oman – consumer
loans cannot exceed 40% of total loans and mortgages are capped at 10% of the total loan
book. Consumer and mortgage loans combined are capped at 50% of the loan book. With
most of the banks still comfortably below the regulatory cap, we believe that consumer
lending will continue to record high single-digit growth in 2010.
11 / 34 pages
banks │ oman
III. LIQUIDITY IMPROVES, BUT DEPLOYMENT IS A NEAR-TERM CHALLENGE
IMPROVED LIQUIDITY
Government deposits Over the last six months, liquidity in the banking sector has generally improved and has led to
have increased by 17.2% relatively strong deposit growth numbers witnessed across the banking sector. We believe that
Q-o-Q in 1Q2010 the majority of the bank sector’s incremental deposit growth has been driven by excess
liquidity within government institutions, which have received funding, but have yet to deploy
these funds into projects. In our view, the incremental liquidity accumulated by the banks over
the last six months is to: i) improve the asset liability mismatches, and ii) lock in long-term
deposits to benefit from any upward movement in interest rates.
DEPOSIT FOCUS - LOW COST & LONGER TERM

Demand deposits A large portion of the incremental deposit growth has come in the form of demand deposits,
accounted for 88% of which comprised almost 88% of the incremental deposit flow in 1Q2010. We believe that
incremental deposits in increased liquidity in the market is allowing the banks to raise low-cost demand and saving
1Q2010 accounts to replace relatively high-cost deposits and borrowings. Indeed, total time deposits of
the sector have remained unchanged over the last quarter, while interbank borrowing has
declined by almost 11% Q-o-Q in 1Q2010, or OMR200 million in absolute terms.
FIGURE 13: DEPOSIT SPLIT BY TYPE FIGURE 14: DEPOSIT SPLIT BY SOURCE
In % unless otherwise stated In OMR million (LHS), Y-o-Y Growth (RHS)
Demand & Savings Private (LHS)
Time & Others Government (LHS)
100% 12,000 Y-o-Y Growth 14%
10,000 12%
80%
10%
8,000
60%
8%
6,000
40% 6%
56.4%
54.9%
54.6%
52.4%
52.3%
4,000
4%
20%
2,000 2%
0%
0 0%
1Q09 2Q09 3Q09 4Q09 1Q10
1Q09 2Q09 3Q09 4Q09 1Q10
Source: Central Bank of Oman (CBO) Source: Company accounts
MANAGING LIQUIDITY PROVING CHALLENGING FOR SPREADS

Banks are shedding high Slower loan growth and improved market liquidity has led to the consistently declining lending
cost deposits to protect ratio of the banking sector. The increased flow of deposits has prompted the banks to shed
spreads some of high-cost interbank borrowing to protect their spreads. However, with loan growth
expected to remain sluggish in the near term, we expect this excess liquidity to start exerting
pressure on the banks’ net interest spreads. We expect banks to manage their funding costs by
shedding high cost deposits should loan growth remain sluggish.
12 / 34 pages
banks │ oman
FIGURE 15: OMAN BANKING SECTOR LENDING FIGURE 16: OMANI BANKS NET INTEREST
RATIO SPREADS
82%
3.3%
81%
3.2%
80%
79% 3.1%
78% 3.0%
77% 2.9%
76% 2.8%
75% 2.7%
74%
2.6%
73%
2.5%
Jul-08
Jul-09
Jan-08
Jan-09
Jan-10
Nov-08
Nov-09
May-08
May-09
Mar-08
Mar-09
Mar-10
Sep-08
Sep-09
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
Source: Central Bank of Oman (CBO) Source: Company accounts, EFG Hermes estimates
DEPRESSED INVESTMENT YIELDS

Yield on investment On the asset deployment side, investment opportunities are relatively limited and offer
securities remains low significantly lower returns. Treasury bills and placement with the CBO are offering negligible
returns. Hence, the incremental return opportunity, even on zero-cost deposits, is insignificant.
FIGURE 17: OMAN: INTERBANK LENDING RATES FIGURE 18: CBO CERTIFICATE OF DEPOSIT RATES
0.10% 0.30%
0.09%
0.08% 0.25%
0.07% 0.20%
0.06%
0.05% 0.15%
0.04%
0.03% 0.10%
0.02%
0.05%
0.01%
0.00% 0.00%
Jul-09
Jan-09
Jan-10
Nov-09
May-09
Mar-09
Mar-10
Sep-09
Nov-09
May-09
Mar-09
Mar-10
Jul-09
Sep-09
Jan-09
Jan-10
Source: Central Bank of Oman (CBO) Source: Central Bank of Oman (CBO)
REGULATORY CHANGES - RAISING CAR REQUIREMENTS

Higher CAR requirement The Central Bank of Oman has recently announced some regulatory changes. The most
could constrain loan significant of these relates to the minimum capital adequacy that banks are required to
growth in medium to maintain, which has been raised to 12% from 10%, effective 31 December 2010. Although
longer term most of the banks under our coverage universe meet the requirement, we believe that Bank
Sohar will have to raise further capital - most likely through a issuance of Tier II debt - to meet
the regulatory requirements and maintain its loan growth momentum.
13 / 34 pages
banks │ oman
FIGURE 19: OMANI BANKS: CAPITAL ADEQUACY (31 DECEMBER 2009)

20% Tier II Tier I
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Ahli NBO OIB Bank Muscat Dhofar Sohar
Source: Company accounts
We believe that a higher CAR requirement would also constrain the growth prospect and
profitability of the banking sector in the medium term as banks would be required to assign
more capital to meet the requirements of the CBO.
14 / 34 pages
banks │ oman
IV. ASSET QUALITY TRENDS STABILISING
PROVISIONING CYCLE - ON A GRADUAL DOWNTREND

Provisions drop after a We expect provisioning charges to decline by 53% Y-o-Y in 2010 as the bulk of asset quality
surge, but run-rate deterioration was provided for in 2009. However, we believe that run-rate provisions, driven by
provisions to continue the ageing cycle of the domestic loan portfolio, are likely to continue reflecting in relatively
higher provisioning charges in 2010.
FIGURE 20: OMANI BANKS: PROVISIONING CYCLE

In OMR million (LHS), in bps (RHS)
140 Credit Provisions (LHS) Credit Provision Charge (RHS) 400
120 350
300
100
250
80
200
60
150
40
100
20 50
0 0
2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010e 2011e 2012e
Source: Company accounts, EFG Hermes estimates
Provisions will be remain Asset quality deterioration on the domestic portfolio continued throughout 2009, and we
higher due to NPL ageing believe that the ageing cycle - which requires NPLs to be 100% provisioned by 360 days - is
cycle likely to keep provisioning charges elevated until the end of 2010. As NPLs move from one
bucket to the other (based on the ageing cycle), banks will be required to set aside higher
provisions against these NPLs. With the NPL cycle reaching its peak around 4Q2009, we
believe that the provisioning cycle is likely to start tapering off by the end of 2010.
FIGURE 21: OMANI BANKS - IMPAIRED LOANS (AS AT 31 DECEMBER 2009)

Bank Muscat Bank Dhofar Bank Sohar NBO
Substandard 31.0 17.1 0.5 24.5
Doubtful 39.9 5.0 0.9 7.5
Loss 139.9 38.1 0.5 39.6
Source: Company accounts
ASSET QUALITY DETERIORATION - WORST IS BEHIND US

Provisioning required on After a strong deterioration in 2009 - NPL ratio rose to 4.7% in 4Q2009 from 3.2% in 4Q2008
Dubai World exposure is - asset quality indicators appear to be stabilising. The only imminent threat to provisioning
manageable charges, in our view, remains the banking sector’s exposure to Dubai World (DW), which we
believe is very manageable. Any further deterioration in asset quality from here on is likely to
be contained, in our opinion. Furthermore, banks have aggressively provisioned for the asset
quality deterioration in 2009, and therefore we expect provisioning charges to decline sharply
on a Y-o-Y basis.
15 / 34 pages
banks │ oman
FIGURE 22: SECTOR NPL & COVERAGE FIGURE 23: BANKS: NPL RATIO & COVERAGE
In OMR million (LHS), unless otherwise stated
500 NPLs (LHS) 180% 12% NPL Ratio (LHS) 550%
450 NPL Coverage (RHS) 160% Coverage (RHS)
400 140% 10% 450%
350 120% 8% 350%
300
100%
250 6% 250%
80%
200
150 60%
4% 150%
100 40%
50 20% 2% 50%
0 0%
0% -50%
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
BM
OIB
BS
BD
NBO
Ahli
Source: Company accounts, EFG Hermes estimates Source: Company accounts
PINCHED BY CONSUMER & INTERNATIONAL EXPOSURE

Saudi exposure The largest dent to asset quality accrued through the banks’ exposure to Saad and Algosaibi
accounted for almost Groups, which alone accounted for almost one-third of the asset quality deterioration in 2009.
one-third of incremental Based on company disclosures, the total direct exposure of Oman banks to the two Saudi
NPLs groups (combined) is OMR59.3 million, which has been largely provisioned against. The other
major potential source of provisioning could be on banks' exposure to Dubai World, once its
lenders reach a settlement on the restructuring terms. Based on company disclosures, the total
exposure of banks to DW is OMR29.5 million, which constitutes only 0.3% of the total loans
of the banking sector.
FIGURE 24: OMANI BANKS - EXPOSURE TO SAAD, ALGOSAIBI AND DUBAI WORLD
Direct Exposures DW Exposure to:

Saad & Dubai Total Total Total 10e Pre-
Algosaibi World Loans Assets Equity Provision Profit
Bank Muscat 49.0 19.3 0.5% 0.3% 2.7% 11.4%
National Bank of Oman 6.5 8.7 0.6% 0.5% 3.5% 7.2%
Bank Dhofar 3.8 0.0 0.0% 0.0% 0.0% 0.0%
Bank Sohar 0.0 1.6 0.2% 0.2% 1.5% 8.7%
Oman International Bank 0.0 0.0 0.0% 0.0% 0.0% 0.0%
Ahli Bank 0.0 0.0 0.0% 0.0% 0.0% 0.0%
Source: Company disclosures, EFG Hermes estimates
On the domestic front, consumer loans have been the key driver for asset quality
deterioration. Although not disclosed separately, we believe that almost half of the
incremental domestic NPLs in 2009 were driven by the banks’ consumer loan books.
16 / 34 pages
bankname]
[stock muscat
rating [recommend.]
A Strong Franchise With Low Risks
banks │ oman 22 June 2010
A Clean and Solid Balance Sheet BUY

High transparency, dominance in the domestic market and a clean, solid balance sheet
make Bank Muscat our top pick in the Oman banking sector. The stock trades at an Price OMR0.815*
estimated 2010 P/BV of 1.4x and P/E of 9.8x, which is at a discount to the Oman banks’ Fair Value OMR1.050
average P/BV of 1.6x and P/E of 11.7x as well as to the MENA average P/BV of 1.8x and Last Div / Ex. Date OMR0.02 on 21 Mar 10
P/E of 12.1x. Historical valuations indicate that Muscat Bank is trading at the lower end Mkt. Cap / Shares (mn) OMR1,097 / 1346.4
of its historical P/BV trading range, and with ROE expected to recover to 17% by 2011, Av. Mthly Liqdty (mn) OMR17.9
we believe that valuations should also re-rate as loan growth momentum starts to pick 52-Week High / Low OMR0.902 / OMR0.490
up towards the end of 2010. Our fair value (FV) of OMR1.05/share suggests an Bloomberg / Reuters BKMB OM / BMAO.OM
estimated target 2011 P/BV of 1.6x, which is not demanding, in our view. We adjust our Est. Free Float 46.7%
provisioning forecasts for 2011 and maintain our FV to OMR1.05/share, which suggests
29% upside potential from current levels. We maintain our Buy rating on the stock. SHARE PRICE PERFORMANCE RELATIVE
TO MSM30 (REBASED)
Well-Positioned to Benefit From An Upturn
With strong balance sheet liquidity (loans-to-resources ratio estimated at 80% as at Price (OMR)
1.0
1Q2010 versus the Central Bank of Oman’s proposed ceiling of 87.5%), capital MSM30 (Rebased)
0.9
adequacy of 15%, and an increasing proportion of low-cost demand and saving deposits
(49% of total deposits at the end of 1Q2010), Bank Muscat is well-positioned to benefit 0.8
from an uptick in loan growth momentum and rising interest rates. Increased liquidity in 0.7
the domestic market is enabling the bank to raise relatively long-term time deposits at 0.6
fixed rates, which could lead to an improvement in net interest spreads as interest rates
0.5
start to rise.
0.4
21-Dec-09
21-Mar-10
21-Jun-09
21-Jun-10
21-Sep-09
Earnings to Recover Strongly in 2010
We expect Bank Muscat’s earnings to rise by 52% in 2010 and to grow at a three-year
CAGR of 32%. The earnings recovery is likely to become more pronounced in 2H2010
as provisioning charges normalise, in our view. The bank has provisioned against most of
the asset quality deterioration in 2009 (primarily Saad and Algosaibi). While Dubai
World’s (DW) restructuring could potentially require the realisation of an upfront hair
cut (approximately OMR4million), Bank Muscat’s exposure of OMR19.5 million to DW
is very manageable, in our view. Additionally, we expect fewer pains from the bank’s
international subsidiary in Bahrain (BMI) and its investment in Pakistan (Silk Bank).
KEY FINANCIAL HIGLIGHTS

December Year End (OMR mn) 2009a 2010e 2011e 2012e
Total Banking Income 291 254 283 324
Pre-provision Income 209 166 188 220
Attributable Income 74 112 142 171
EPS (OMR) 0.05 0.08 0.11 0.13
P/E* (x) 14.9 9.8 7.7 6.4
Dividend Yield* 2.0% 2.5% 3.0% 3.1%
P/BV* (x) 1.6 1.4 1.2 1.1
ROAE 10.7% 15.3% 17.2% 18.0%
Murad Ansari
Capital Adequacy 15.2% 15.2% 15.6% 15.8%
+9661 279 8649
Provisions / NPLs 106.0% 104.2% 104.7% 104.3% mansari@efg-hermes.com
Source: Bank Muscat, EFG Hermes estimates
+968 247 6 0023
17 / 34 pages kindly refer to the important disclosures and disclaimers on back page gvarghese@efg-hermes.com
bank muscat 22 June 2010
banks │ oman
FINANCIAL FORECASTS
FIGURE 25: INCOME STATEMENT (DECEMBER YEAR END)

2008a 2009a 2010e 2011e 2012e

Interest Income 263 280 293 320 364
Interest Expense (101) (105) (110) (115) (128)
Net Interest Income 162 174 183 205 236
Fees from Banking Services, Net 55 50 54 61 69
Foreign Exchange Income 7 9 10 11 12
Investments Income, Net 10 55 3 3 3
Other Operating Income 3 3 3 3 3
Total Non-interest Income 75 117 71 78 88
Total Banking Income 237 291 254 283 324
Operating Expenses (84) (82) (88) (95) (104)
Income before Provisions 153 209 166 188 220
Credit & Investment Provisions (41) (110) (39) (26) (25)
Pre-tax Profits 112 98 126 161 194
Taxation (15) (14) (17) (21) (26)
Net Profit from Operations 97 84 110 140 169
Income from Associates (3) (10) 2 2 2
Attributable Income 94 74 112 142 171
FIGURE 26: BALANCE SHEET (DECEMBER YEAR END)

2008a 2009a 2010e 2011e 2012e

Cash an Central Bank Deposits 453 608 637 722 815
Due from Banks 1,078 1,016 1,013 933 915
Investments, Net 472 212 287 339 372
Loans & Advances, Net 3,728 3,838 4,165 4,757 5,539
Fixed Assets, Net 22 26 31 36 40
Other Assets 277 151 160 173 187
Total Assets 6,028 5,851 6,293 6,960 7,868
Customer Deposits 3,173 3,068 3,375 3,814 4,348
Due to Banks 1,474 1,535 1,572 1,680 1,893
Term Loan (Debt) 280 259 259 243 243
Other Liabilities 408 299 315 340 364
Total Liabilities 5,335 5,161 5,520 6,077 6,849
Shareholders' Equity 693 690 773 882 1,019
Total Liabilities & Shareholders' Equity 6,028 5,851 6,293 6,960 7,868
18 / 34 pages
banks │ oman
FIGURE 27: VALUATION METRICS

2008a 2009a 2010e 2011e 2012e
Per Share Data (OMR)
EPS 0.07 0.05 0.08 0.11 0.13
DPS 0.02 0.02 0.02 0.02 0.03
Payout Ratio 23% 29% 25% 23% 20%
BVPS 0.51 0.51 0.57 0.66 0.76
BVPS (Tangible) 0.51 0.51 0.57 0.66 0.76
Valuation
P/E (x) 11.7 14.9 9.8 7.7 6.4
Dividend Yield 2.0% 2.0% 2.5% 3.0% 3.1%
P/BV (x) 1.6 1.6 1.4 1.2 1.1
P/Tangible BV (x) 1.6 1.6 1.4 1.2 1.1
Market Cap / Deposits 34.6% 35.8% 32.5% 28.8% 25.2%
FIGURE 28: DUPONT ANALYSIS

As a % of average assets, unless otherwise stated
2008a 2009a 2010e 2011e 2012e

Net Interest Income 3.16% 2.94% 3.01% 3.09% 3.18%
Non-interest Income 1.46% 1.96% 1.16% 1.18% 1.19%
Operating Expenses -1.64% -1.38% -1.44% -1.44% -1.41%
Other Revenue / Expenses -0.06% -0.18% 0.03% 0.03% 0.03%
Total Provisioning -0.80% -1.86% -0.65% -0.40% -0.34%
Taxation -0.29% -0.24% -0.27% -0.32% -0.34%
ROAA 1.83% 1.24% 1.84% 2.15% 2.30%
Gearing (Assets / Equity) 7.8 8.6 8.3 8.0 7.8
ROAE 14.2% 10.7% 15.3% 17.2% 18.0%
FIGURE 29: PROFITABILITY ANALYSIS

2008a 2009a 2010e 2011e 2012e
Yield on Earning Assets 5.6% 5.0% 4.9% 5.0% 5.1%
Cost of Funds 2.5% 2.2% 2.3% 2.2% 2.2%
Net Interest Spread 3.0% 2.7% 2.7% 2.8% 2.9%
Net Interest Margin 3.4% 3.1% 3.1% 3.2% 3.3%
Non-interest Income / Total Banking Income 31.5% 40.1% 27.8% 27.7% 27.2%
Cost to Income 35.6% 28.2% 34.6% 33.7% 32.2%
Tax Rate 13.1% 14.5% 13.2% 13.2% 13.1%
ROAA 1.8% 1.2% 1.8% 2.1% 2.3%
ROAE 14.2% 10.7% 15.3% 17.2% 18.0%
19 / 34 pages
banks │ oman
FIGURE 30: ASSET QUALITY AND CAPITAL RATIOS

2008a 2009a 2010e 2011e 2012e
Asset Quality
NPL Ratio 2.3% 5.0% 5.5% 5.3% 5.0%
Provisions / NPLs 139% 106% 104% 105% 104%
Provisioning to Average Gross Loans (bps) 36 222 93 56 46
(NPLs-provisions) / Equity -5.1% -1.8% -1.3% -1.4% -1.2%
Provisions / Pre-provisions Profit 27.4% 55.7% 23.5% 13.9% 11.4%
Capital
Core Tier-1 10.7% 11.6% 12.0% 12.1% 12.3%
Tier-1 10.7% 11.6% 12.0% 12.1% 12.3%
CAR 13.0% 15.2% 15.2% 15.6% 15.8%
RWAs / Total Assets 91.3% 92.2% 92.9% 92.0% 91.7%
FIGURE 31: GROWTH RATIOS

2008a 2009a 2010e 2011e 2012e
Loans 38.7% 3.0% 8.5% 14.2% 16.4%
Deposits 36.6% -3.3% 10.0% 13.0% 14.0%
Assets 42.9% -2.9% 7.6% 10.6% 13.0%
RWAs 44.1% -2.2% 8.5% 9.5% 12.7%

Fee Income 45.8% -9.1% 9.0% 12.0% 14.0%
Non Interest Income 55.3% 56.2% -39.6% 11.1% 12.3%
Total Banking Income 36.9% 22.9% -12.9% 11.7% 14.5%
Operating Expenses 19.8% -2.5% 6.8% 8.6% 9.6%
Pre-provision Profits 38.1% 32.9% -15.5% 13.1% 16.8%
Net Attributable Income 11.2% -21.4% 51.5% 27.3% 20.1%
FIGURE 32: BALANCE SHEET STRUCTURE AND OTHER RATIOS

2008a 2009a 2010e 2011e 2012e
Loans / Deposits 117.5% 125.1% 123.4% 124.7% 127.4%
Loans / Assets 61.8% 65.6% 66.2% 68.4% 70.4%
Net Interbank / Assets -6.6% -8.9% -8.9% -10.7% -12.4%
Investments / Assets 7.8% 3.6% 4.6% 4.9% 4.7%
Deposits / Assets 52.6% 52.4% 53.6% 54.8% 55.3%
Borrowings / Liabilities 5.2% 5.0% 4.7% 4.0% 3.6%
20 / 34 pages
national
[stock bank of[recommend.]
name] rating oman (nbo)
Focusing on the Deposit Franchise
Lowering Estimates and Fair Value; Valuation Still Attractive BUY

Trading at an estimated 2010 P/BV of 1.4x, NBO continues to look attractive, in our
view. Stabilising asset quality trends and a potential improvement in net interest Price OMR0.331*
spreads are key reasons for our conviction in NBO. We see early signs of success in the
Fair Value OMR0.390
bank’s deposit franchise improvement drive, and believe that there still exists significant
Last Div / Ex. Date OMR0.012 on 29 Mar 10
room for improvement. We, however, lower our 2010-2012 earnings estimates by an
Mkt. Cap / Shares (mn) OMR358 / 1,081
average of 20% to incorporate relatively slower loan growth compared to our previous
Av. Mthly Liqdty (mn) OMR4.9
forecasts (3-year CAGR of 12% versus our earlier estimate of 15%) and build in a
52-Week High / Low OMR0.357 / OMR0.267
slower improvement in net interest spreads. We lower our fair value (FV) to OMR Bloomberg / Reuters NBOB OM / NBO.OM
0.390/share from OMR0.410/share, but maintain our Buy rating on the stock as it offers Est. Free Float 33.3%
18% upside potential to our FV.
Geographical Footprint Expansion Shows Early Signs of Success SHARE PRICE PERFORMANCE RELATIVE
TO MSM30 (REBASED)
The rebranding and remodelling of NBO’s existing branch network coupled with the
expansion of its geographical footprint in Oman (164 branches in 2009 versus 154 Price (OMR)
branches in 2008) is showing early signs of paying off. During 2009, NBO's saving 0.39
MSM30 (Rebased)
deposits grew by 26% Y-o-Y, while the proportion of low cost current and saving 0.37
accounts increased to 41.5% of total deposits in 2009 versus 35.3% in 2008. With loan 0.35
growth expected to remain slow in the near term, NBO continues to focus on improving 0.33
the deposit franchise. We however highlight that the strong improvement in 1Q2010 0.31
deposit mix – low cost saving deposit mix increased to 48.7% of total deposits – was 0.29
partially driven by one off receipts collected by NBO (similar to 2009), which will be 0.27
0.25
gradually released over the course of the year.
21-Sep-09
21-Mar-10
21-Jun-09
21-Dec-09
21-Jun-10
Asset Quality Deterioration Offset by Recoveries
NBO’s NPL ratio increased to 5.0% in 2009 versus 4.4% in 2008. Though NPL ratio is
relatively higher compared to peers, we highlight that this is largely driven by the bank's
legacy portfolio mainly comprising of the bank's Egypt exposure. The bank continues to
book recoveries on this - OMR7.0 million in 2009 – though we believe that the pace of
recoveries is likely to slow going forward. We expect provisioning charges to remain
slightly higher than normalized levels in the near term on the ageing of the domestic
NPLs.
KEY FINANCIAL HIGHLIGHTS

EPS (OMR) 0.02 0.03 0.03 0.04
P/E* (x) 17.0 11.8 9.9 8.1
Dividend Yield* 3.6% 3.6% 3.6% 4.3%
P/BV* (x) 1.5 1.4 1.3 1.1
ROAE 9.1% 12.2% 13.4% 14.9%
Capital Adequacy 17.6% 16.2% 15.5% 15.1% Murad Ansari
+9661 279 8649
Provisions / NPLs 95.0% 102.4% 104.2% 105.1%
mansari@efg-hermes.com
Source: National Bank of Oman (NBO), EFG Hermes estimates
+968 24760023
national bank of oman (nbo) 22 June 2010
banks │ oman
FINANCIAL FORECASTS

2008a 2009a 2010e 2011e 2012e

Non-interest Income 41 25 26 29 33
Total Operating Expenses (34) (35) (37) (40) (44)
Pre-tax Profits 52 25 34 41 50
Taxation (6) (4) (4) (5) (6)
Net Income 45 21 30 36 44

2008a 2009a 2010e 2011e 2012e

Cash and Central Bank Deposits 266 184 183 187 171
Due from Banks 199 167 149 171 173
Investment Securities, Net 31 47 44 50 58
Net Loans 1,401 1,361 1,478 1,697 1,970
Other Assets 78 26 38 42 46
Total Assets 1,984 1,798 1,914 2,173 2,446
Customer Deposits 1,288 1,197 1,305 1,475 1,681
Due to Banks 277 220 209 265 303
Term Loan (Debt) 82 91 82 89 82
Shareholders' Equity 226 237 259 283 311
22 / 34 pages
banks │ oman

2008a 2009a 2010e 2011e 2012e
EPS 0.04 0.02 0.03 0.03 0.04
DPS 0.02 0.01 0.01 0.01 0.01
Payout Ratio 42% 61% 43% 35% 35%
BVPS 0.21 0.22 0.24 0.26 0.29
BVPS (Tangible) 0.21 0.22 0.24 0.26 0.29
Valuation
P/E (x) 7.9 17.0 11.8 9.9 8.1
Dividend Yield 5.3% 3.6% 3.6% 3.6% 4.3%
P/BV (x) 1.6 1.5 1.4 1.3 1.1
P/Tangible BV (x) 1.6 1.5 1.4 1.3 1.1

2008a 2009a 2010e 2011e 2012e

Operating Expenses 1.96% 1.84% 2.01% 1.97% 1.90%
Other Revenue / Expenses 0.00% 0.00% 0.00% 0.00% 0.00%
Provisioning Charge 4.86% 46.87% 25.37% 23.34% 21.15%
Tax Rate 12.15% 15.63% 12.00% 12.00% 12.00%
ROA 2.62% 1.12% 1.63% 1.77% 1.92%
ROE 20.48% 9.10% 12.19% 13.37% 14.91%
FIGURE 37: PROFITABILITY ANALAYSIS

2008a 2009a 2010e 2011e 2012e
Cost of Funds 3.0% 2.9% 2.7% 2.7% 2.6%
Cost to Income 38.4% 42.5% 44.7% 42.8% 40.7%
Tax Rate 12.1% 15.6% 12.0% 12.0% 12.0%
ROAA 2.6% 1.1% 1.6% 1.8% 1.9%
ROAE 20.5% 9.1% 12.2% 13.4% 14.9%
23 / 34 pages
banks │ oman

2008a 2009a 2010e 2011e 2012e
Asset Quality
NPL Ratio 4.4% 5.0% 5.0% 5.0% 4.9%
Provisions/NPLs 100.1% 95.0% 102.4% 104.2% 105.1%
Provisioning to Average Gross Loans (bps) 57.6 92.9 78.2 74.8 69.8
(NPLs-provisions) / Equity 0.0% 1.5% -0.7% -1.3% -1.7%
Capital
Core Tier-1 12.0% 14.9% 14.6% 14.1% 13.8%
Tier-1 12.0% 14.9% 14.6% 14.1% 13.8%
CAR 13.9% 17.6% 16.2% 15.5% 15.1%

2008a 2009a 2010e 2011e 2012e
Loans 54.5% -2.9% 8.6% 14.8% 16.1%
Deposits 45.0% -7.0% 9.0% 13.0% 14.0%
Assets 34.4% -9.4% 6.4% 13.6% 12.6%
RWAs 43.3% -10.0% 5.9% 12.7% 12.5%

Fee Income 57.4% -9.4% 12.0% 16.0% 16.0%
Non-interest Income 56.4% -38.3% 2.9% 12.0% 12.8%
Total Banking Income 35.4% -7.1% 1.7% 12.7% 14.7%
Pre-provision Profits 49.0% -13.3% -2.2% 16.5% 18.9%
Net Attributable Income 1.7% -53.5% 43.3% 19.7% 22.3%

2008a 2009a 2010e 2011e 2012e
Loans / Deposits 108.8% 113.7% 113.3% 115.1% 117.2%
Loans / Assets 70.6% 75.7% 77.2% 78.1% 80.5%
Deposits / Assets 64.9% 66.6% 68.2% 67.9% 68.7%
24 / 34 pages
bankname]
[stock dhofar
rating [recommend.]
Premium Valuation on Lower Liquidity
Raising Estimates and Fair Value; Maintain Sell Recommendation SELL

We raise our 2010-2012 earnings estimates for Bank Dhofar by an average of 15% to
incorporate relatively stronger net interest spreads. The rights issue at the end of 2008 Price OMR0.667*
has enhanced Bank Dhofar’s ability to grow its balance sheet at a lower cost. We, Fair Value OMR0.530
however, maintain our Sell rating on the bank as it is trading at an almost 26% Last Div / Ex. Date OMR0.02 on 29 Mar 10
premium to our revised fair value (FV) of OMR0.530/share (up from OMR0.480/share). Mkt. Cap / Shares (mn) OMR543 / 813.6
Trading at an estimated 2010 P/BV of 2.5x and P/E of 14.9x, we find Bank Dhofar’s Av. Mthly Liqdty (mn) OMR3.4
valuations to be demanding. Although the bank’s estimated 2010 ROE of 17% is 52-Week High / Low OMR0.855 / OMR0.484
slightly better than the Oman banking sector average of 15%, it trades at a significant Bloomberg / Reuters BKDB OM / BDOF.OM
premium to the sector average 2010 P/BV of 1.6x and sector average 2010 P/E of 11.7x. Est. Free Float 29.1%
A Solid Performer, But Expensive Valuation SHARE PRICE PERFORMANCE RELATIVE

An 18% Y-o-Y growth in loans, 13% Y-o-Y growth in deposits, and 7% Y-o-Y growth in TO MSM30 (REBASED)
net profits have clearly made Bank Dhofar the strongest performer in 2009 when
compared to its similar-sized peers. Although asset quality deterioration was strong – Price (OMR)
0.90 MSM30 (Rebased)
NPLs almost doubled in absolute terms in 2009 – the bank was able to absorb the
impact through historical provisions without significantly impacting its profitability. 0.80
However, we believe that most of this is already reflected in the stock's premium
0.70
valuation.
0.60
Free Float Reduced On Index Inclusion 0.50
With the inclusion of the stock in the MSM30 Index in 2009, we believe that stock’s
0.40
free float has reduced. With an 8% weight in the MSM30 Index, the stock’s limited free
21-Jun-09
21-Sep-09
21-Dec-09
21-Mar-10
21-Jun-10
float of 29% has been further lowered, in our view, as fund managers tracking the
MSM30 Index have mopped up the remaining float to bring their portfolios in line with
their benchmarks. We believe that this has contributed significantly to the run-up in
Bank Dhofar’s stock price. Based on last year’s trading volume patterns, we also
highlight that there has been significant activity in the stock on a periodic basis, which
could suggest accumulation. We believe that the limited free float has largely
contributed to the strong price performance of Bank Dhofar, which now trades at
significantly higher valuations compared to its peers in Oman.

EPS (OMR) 0.03 0.04 0.05 0.06
P/E* (x) 20.8 14.9 12.6 10.9
Dividend Yield* 2.1% 2.7% 3.2% 3.7%
P/BV* (x) 2.6 2.5 2.2 2.0
ROAE 12.9% 16.9% 18.5% 19.2%
Murad Ansari
+9661 279 8649
Source: Bank Dhofar, EFG Hermes estimates
+968 24760023
bank dhofar 22 June 2010
banks │ oman
FINANCIAL FORECASTS

2008a 2009a 2010e 2011e 2012e

Total Operating Expenses (21) (24) (27) (29) (32)
Pre-tax Profits 27 29 40 48 56
Taxation (3) (4) (5) (6) (7)
Net Income 24 25 35 42 49

2008a 2009a 2010e 2011e 2012e

Due from Banks 38 33 60 69 59
Investments, Net 137 60 60 69 79
Loans & Advances, Net 1,018 1,194 1,303 1,503 1,741
Total Assets 1,324 1,487 1,641 1,910 2,182
Customer Deposits 972 1,101 1,244 1,431 1,646
Due to Banks 90 100 93 143 165
Term Loan (Debt) 39 39 39 39 39
26 / 34 pages
banks │ oman

2008a 2009a 2010e 2011e 2012e
EPS 0.03 0.03 0.04 0.05 0.06
DPS 0.01 0.01 0.02 0.02 0.02
Payout Ratio 46% 44% 40% 40% 40%
BVPS 0.23 0.25 0.26 0.29 0.33
BVPS (Tangible) 0.23 0.25 0.26 0.29 0.32
Valuations
P/E (x) 22.3 20.8 14.9 12.6 10.9
Dividend Yield 2.1% 2.1% 2.7% 3.2% 3.7%
P/BV(x) 2.8 2.6 2.5 2.2 2.0
P/Tangible BV (x) 2.9 2.6 2.5 2.2 2.0

2008a 2009a 2010e 2011e 2012e

Provisioning Charge -0.70% -0.88% -0.38% -0.33% -0.35%
Tax Rate -0.30% -0.26% -0.32% -0.34% -0.34%
ROA 2.08% 1.81% 2.26% 2.36% 2.37%
ROE 15.85% 12.94% 16.95% 18.47% 19.16%

2008a 2009a 2010e 2011e 2012e
Cost of Funds 2.5% 2.4% 2.3% 2.2% 2.2%
Cost to Income 37.6% 36.4% 36.5% 35.3% 33.8%
Tax Rate 12.5% 12.5% 12.5% 12.5% 12.5%
ROAA 2.1% 1.8% 2.3% 2.4% 2.4%
ROAE 15.8% 12.9% 16.9% 18.5% 19.2%
27 / 34 pages
banks │ oman

2008a 2009a 2010e 2011e 2012e
Asset Quality
NPL Ratio 3.4% 4.8% 4.6% 4.4% 4.2%
Provisions / NPLs 138% 105% 111% 110% 110%
(NPLs-Provisions) / Equity -7.4% -1.5% -3.3% -3.0% -2.8%
Capital
Core Tier-1 13.60% 12.54% 12.95% 12.58% 12.35%
Tier-1 13.60% 12.54% 12.95% 12.58% 12.35%
CAR 16.64% 14.83% 15.26% 14.70% 14.37%

2008a 2009a 2010e 2011e 2012e

Loans 44.5% 17.3% 9.1% 15.4% 15.8%
Deposits 44.0% 13.3% 13.0% 15.0% 15.0%
Assets 38.6% 12.3% 10.4% 16.4% 14.3%
RWAs 44.0% 17.8% 10.4% 15.0% 14.3%

Fee Income 53.0% 10.3% 12.0% 14.0% 16.0%
Non-interest Income 18.9% -3.5% 2.0% 6.1% 12.4%
Total Banking Income 27.5% 15.8% 12.5% 13.4% 14.0%
Pre-provision Profits 29.5% 18.0% 12.2% 15.6% 16.6%
Net Attributable Income 3.9% 7.2% 39.4% 18.1% 16.1%

2008a 2009a 2010e 2011e 2012e
Loans / Deposits 104.8% 108.4% 104.7% 105.0% 105.8%
Loans / Assets 76.9% 80.3% 79.4% 78.7% 79.8%
Deposits / Assets 73.4% 74.1% 75.8% 74.9% 75.4%
28 / 34 pages
bankname]
[stock sohar
rating [recommend.]
Time for Consolidation
Raising Estimates and Fair Value, Maintaining Neutral Rating NEUTRAL

Bank Sohar's balance sheet growth and improved net interest spreads have continued to
positively surprise throughout 2009. We raise our 2010-2012 earnings estimates by an Price OMR0.218*
average of 12%, which increases our fair value (FV) to OMR0.220/share (from Fair Value OMR0.220
OMR0.200/share). We, however, maintain our Neutral rating on the stock, which trades Last Div / Ex. Date N/A
at a 1% discount to our revised FV. Bank Sohar’s valuation remain demanding at an Mkt. Cap / Shares (mn) OMR218 / 1,000
estimated 2010 P/BV of 1.8x and P/E of 17.1x, with ROE expected to rise to14.7% by Av. Mthly Liqdty (mn) OMR4.3
2011. We believe that balance sheet growth rates are likely to fall in line with sector 52-Week High / Low OMR0.248 / OMR0.155
averages, while the ageing of the bank’s loan portfolio could lead to incremental NPLs. Bloomberg / Reuters BKSB OM / BKSB.OM
Est. Free Float 45.0%
More Capital, at a Cost, to Sustain Growth Momentum
With total capital adequacy at 13% as at the end of 1Q2010, we believe that Bank
SHARE PRICE PERFORMANCE RELATIVE
Sohar needs to raise additional capital to both maintain its growth momentum and TO MSM30 REBASED
remain above the revised minimum CAR of 12% by the end of December 2010,
prescribed by the Central Bank of Oman. While the bank could raise Tier II capital to Price (OMR)
0.26 MSM30 (Rebased)
meet the CBO’s minimum requirement, there will be a cost associated with the
0.24
incremental capital. On the funding side, deposit mobilisation continues to be an area
0.22
of focus – Bank Sohar’s customer deposits grew by 54% Y-o-Y in 2009, largely coming 0.20
through time deposits, which accounted for 68% of total deposits. 0.18
0.16
Time to focus on Profitability & Efficiency 0.14
0.12
Within three years of commencing operations, Bank Sohar has become the fourth 0.10
largest bank in Oman, with an almost 9% market share on most balance sheet
21-Sep-09
21-Jun-09
21-Dec-09
21-Jun-10
21-Mar-10
measures. Bank Sohar reported its first profitable year in 2009. Although ROE remain
low at this stage (8% in 2009), we believe that the bank is likely to focus on improving
its profitability. Signs of this are visible, with net interest spreads almost doubling to
2.03% in 2009 from 1.22% in 2008, which has led to improved revenue and a decline in
the cost-to-income ratio to 59% in 2009 from 71% in 2008. While Bank Sohar’s net
interest spreads remain low compared to peers (2.03% versus 3.1% sector average), we
believe that incremental improvement is likely to be gradual.

EPS (OMR) 0.01 0.01 0.02 0.03
P/E* (x) 27.2 17.1 11.6 8.7
Dividend Yield* 0.0% 0.0% 0.0% 2.3%
P/BV* (x) 2.1 1.8 1.6 1.4
ROAE 7.9% 11.4% 14.7% 17.1%
Murad Ansari
+9661 279 8649
Source: Bank Sohar, EFG Hermes estimates
+968 24760023
bank sohar 22 June 2010
banks │ oman
FINANCIAL FORECASTS

2008a 2009a 2010e 2011e 2012e

Operating Expenses (13) (17) (19) (22) (24)
Pre-tax Profits (3) 9 15 21 29
Taxation 0 (1) (2) (3) (4)
Net Income (2) 8 13 19 25

2008a 2009a 2010e 2011e 2012e

Due from Banks 69 20 48 44 37
Investments, Net 26 62 58 70 81
Loans & Advances, Net 634 787 937 1,136 1,327
Total Assets 843 1,025 1,193 1,390 1,603
Customer Deposits 548 832 950 1,093 1,257
Due to Banks 90 21 48 66 75
Term Loan (Debt) 90 39 48 60 75
Total Liabilities 746 919 1,075 1,253 1,446
Total Liabilities & Shareholders' Equity 843 1,025 1,193 1,390 1,603
30 / 34 pages
banks │ oman

2008a 2009a 2010e 2011e 2012e
EPS 0.00 0.01 0.01 0.02 0.03
DPS 0.00 0.00 0.00 0.00 0.01
Payout Ratio 0% 0% 0% 0% 20%
BVPS 0.10 0.11 0.12 0.14 0.16
BVPS (Tangible) 0.10 0.11 0.12 0.14 0.16
Valuation
P/E (x) N/M 27.2 17.1 11.6 8.7
Dividend Yield 0.0% 0.0% 0.0% 0.0% 2.3%
P/BV (x) 2.3 2.1 1.8 1.6 1.4
P/Tangible BV (x) 2.3 2.1 1.8 1.6 1.4

DuPont Analysis 2008a 2009a 2010e 2011e 2012e

Provisioning Charge -1.23% -0.30% -0.30% -0.27% -0.23%
Tax Rate 0.06% -0.12% -0.16% -0.21% -0.24%
ROA -0.36% 0.86% 1.15% 1.45% 1.68%
ROE -3.11% 7.95% 11.41% 14.72% 17.07%

2008a 2009a 2010e 2011e 2012e
Cost of Funds 4.1% 3.7% 3.3% 3.1% 3.0%
Cost to Income 71.0% 59.1% 51.8% 46.3% 42.9%
Tax Rate -14.1% -11.9% -12.5% -12.5% -12.5%
ROAA -0.4% 0.9% 1.2% 1.5% 1.7%
ROAE -3.1% 7.9% 11.4% 14.7% 17.1%
31 / 34 pages
banks │ oman

2008a 2009a 2010e 2011e 2012e
Asset Quality
NPL Ratio 0.12% 0.24% 0.35% 0.35% 0.35%
Provisions / NPLs 1273% 656% 476% 478% 480%
(NPLs-provisions) / Equity -9.4% -10.2% -10.6% -11.2% -11.4%
Capital
Core Tier-1 12.5% 11.6% 11.3% 11.3% 11.3%
Tier-1 12.5% 11.6% 11.3% 11.3% 11.3%
CAR 13.7% 12.9% 12.5% 12.3% 12.2%

2008a 2009a 2010e 2011e 2012e

Loans 112.2% 24.0% 19.1% 21.3% 16.8%
Deposits 125.6% 51.9% 14.1% 15.0% 15.0%
Assets 100.5% 21.6% 16.5% 16.4% 15.3%
RWAs 104.3% 17.8% 14.6% 16.4% 14.3%

Fee Income 45.6% -14.7% 15.0% 20.0% 20.0%
Non Interest Income 47.0% -9.3% 17.3% 19.0% 19.1%
Total Banking Income 110.4% 64.3% 27.5% 25.1% 20.8%
Pre-provision Profits 79.7% 131.5% 50.3% 39.2% 28.5%
Net Attributable Income -8.9% N/M 59.0% 47.3% 33.6%

2008a 2009a 2010e 2011e 2012e
Loans / Deposits 115.8% 94.5% 98.6% 104.0% 105.6%
Loans / Assets 75.2% 76.8% 78.5% 81.8% 82.8%
Net Interbank / Assets -2.5% -0.1% 0.0% -1.5% -2.4%
Deposits / Assets 65.00% 81.2% 79.6% 78.6% 78.4%
32 / 34 pages
EGYPT SALES TEAM UAE SALES TEAM KSA SALES TEAM RESEARCH MANAGEMENT
Local call center 16900 call center call center Cairo General + 20 2 35 35 6140
cc-hsb@efg-hermes.com +971 4 306 9333 +800 123 4566 UAE General + 971 4 363 4000
uaerequests@efg-hermes.com RiyadhCallCenter@efg-hermes.com efgresearch@efg-hermes.com
RiyadhTraders@efg-hermes.com
Head of Western Institutional Sales Western Institutional Sales Deputy Head of Gulf Sales Head of Research
Mohamed Ebeid Julian Bruce Ahmed Sharawy Wael Ziada
+20 2 35 35 6054 +971 4 363 4092 +9661 279 8677 +20 2 35 35 6154
mebeid@efg-hermes.com jbruce@efg-hermes.com asharawy@efg-hermes.com wziada@efg-hermes.com
Local Institutional Sales Head of GCC Institutional Sales Head of Publ. and Distribution
Amr El Khamissy Amro Diab Rasha Samir
+20 2 35 35 6045 +971 4 363 4086 +20 2 35 35 6142
amrk@efg-hermes.com adiab@efg-hermes.com rsamir@efg-hermes.com
Gulf HNW Sales

Chahir Hosni
+971 4 363 4090
chosni@efg-hermes.com
UAE Retail Sales

Reham Tawfik
+971 4 306 9418
rtawfik@efg-hermes.com
DISCLOSURES
We, Murad Ansari and Gigi Varghese, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and
companies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities
that are traded in Muscat Securities Market. EFG Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are
the subject of this report.
Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, "EFG Hermes") for third parties may own the securities that are the
subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report
may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no
discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the
subject of this report or are mentioned in this report.
DISCLAIMER
This Research has been sent to you as a client of one of the entities in the EFG Hermes group. This Research must not be considered as advice nor be acted upon by
you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement.
Our investment recommendations take into account both risk and expected return. We base our fair value estimate on a fundamental analysis of the company's
future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fair
value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG Hermes
believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant,
either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG
Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection
therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions
and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general
circulation to the clients of EFG Hermes and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to
the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this
report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.
GUIDE TO ANALYSIS
EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and
regional economic environment.
Effective 16 December 2009, EFG Hermes changed its investment rating approach to a three-tier, long-term rating approach, taking total return potential together
with any applicable dividend yield into consideration.
In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the
corresponding fair value.
For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:
Rating Potential Upside (Downside) %
Buy Above 15%
Neutral (10%) and 15%
Sell Below (10%)
EFG Hermes policy is to update research reports when appropriate based on material changes in a company’s financial performance, the sector outlook, the general
economic outlook, or any other changes which could impact the analyst’s outlook or rating for the company. Share price volatility may cause a stock to move
outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock
immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to
review the rating.
COPYRIGHT AND CONFIDENTIALITY

No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to
any other person if and until EFG Hermes has made the information publicly available.
CONTACTS AND STATEMENTS

Background research prepared by EFG Hermes KSA. Report prepared by EFG Hermes Holding SAE (main office), Building No. B129, Phase 3, Smart Village, KM 28,
Cairo-Alexandria Desert Road, Egypt 12311, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP 1,939,320,000.
Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number
1010226534, and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this
document is directed only at institutional investors. If you are not an institutional investor you must not act on it.
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oman banking sector 22 June 2010

slower growth, but lower risk

sector note banks │ oman Murad Ansari

BANKS ANALYSED IN THIS REPORT

FIGURE 1: EFG HERMES MENA COVERAGE UNIVERSE

HIGHER VISIBILITY, BETTER TRANSPARENCY

FIGURE 2: MENA BANKS ESTIMATED 2010E P/BV

*CIB's Book Value excludes goodwill

FUNDING ISSUES HAVE BEEN ADDRESSED

LOAN GROWTH CONTINUES, BUT AT A SLOWER PACE

FIGURE 3: SUMMARY FORECAST CHANGES

National Bank of Oman Buy 0.390 0.410 30 39 -22.4% 36 46 -21.3%

Bank Dhofar Sell 0.530 0.480 35 30 18.0% 42 36 16.2%

Bank Sohar Neutral 0.220 0.200 13 12 6.3% 19 19 -1.1%

I. OMAN BANKS – DISCOUNT IS UNJUSTIFIED

BANK MUSCAT AND NBO - THE INVESTMENT CASE

AT A DISCOUNT TO LOCAL AND REGIONAL BANKS

FIGURE 4: MENA BANKS COMPARATIVE VALUATION

0.5 ADCB ENBD

Source: EFG Hermes estimates

Bank Muscat - Fair Value OMR1.05/share, Buy, Upside Potential of 29%

Bank Dhofar - Fair Value OMR0.53/share, Sell, Downside Potential of 26%

Bank Sohar - Fair Value of OMR0.22/share, Neutral, Upside Potential of 1%

II. LOAN GROWTH TO REMAIN SLUGGISH IN THE NEAR TERM

A SLOWER RECOVERY IN THE NEAR TERM

FIGURE 5: LOAN GROWTH TRENDS ACROSS THE MENA REGION

60% 2008 2009 1Q2010

FIGURE 6: OMAN BANKS: LOAN GROWTH OUTLOOK

50% Corporate & Commercial Consumer

Source: Central Bank of Oman (CBO), EFG Hermes estimates

AXIS OF GROWTH - OIL PRICES, GOVERNMENT SPENDING & PRIVATE SECTOR

FIGURE 7: OIL PRICES AND GOVERNMENT SPENDING

160 Government Expenditure (RHS) WTI (LHS) 1,600

Source: Bloomberg, Central Bank of Oman (CBO)

PLENTY ON THE TABLE, BUT EXECUTION IS KEY RISK

Batinah Housing Project 385 0

Source: MEED Projects Source: MEED Projects

CORPORATE LOAN GROWTH - WAITING FOR THE TRICKLE DOWN

FIGURE 10: BANKING SECTOR: CHANGE IN CREDIT STOCK IN 2009

Wholesale & Retail

Source: Central Bank of Oman (CBO)

CONSUMER LOAN GROWTH - SLOW BUT STEADY

III. LIQUIDITY IMPROVES, BUT DEPLOYMENT IS A NEAR-TERM CHALLENGE

DEPOSIT FOCUS - LOW COST & LONGER TERM

Source: Central Bank of Oman (CBO) Source: Company accounts

MANAGING LIQUIDITY PROVING CHALLENGING FOR SPREADS

DEPRESSED INVESTMENT YIELDS

REGULATORY CHANGES - RAISING CAR REQUIREMENTS

FIGURE 19: OMANI BANKS: CAPITAL ADEQUACY (31 DECEMBER 2009)

Source: Company accounts

IV. ASSET QUALITY TRENDS STABILISING

PROVISIONING CYCLE - ON A GRADUAL DOWNTREND

FIGURE 20: OMANI BANKS: PROVISIONING CYCLE

Source: Company accounts, EFG Hermes estimates

FIGURE 21: OMANI BANKS - IMPAIRED LOANS (AS AT 31 DECEMBER 2009)

ASSET QUALITY DETERIORATION - WORST IS BEHIND US

PINCHED BY CONSUMER & INTERNATIONAL EXPOSURE

Direct Exposures DW Exposure to:

A Strong Franchise With Low Risks

banks │ oman 22 June 2010

A Clean and Solid Balance Sheet BUY

KEY FINANCIAL HIGLIGHTS