• Global values OIB stock at RO4.570 and recommends ‘Buy’ on the stock
Global Investment House – Kuwait - Oman International Bank SAOG –Result Update – June 2008- Oman International Bank SAOG (OIB) posted a solid 77.8% QoQ growth in net profit for 1Q08 at RO9.2mn compared to RO5.2mn in 1Q07. As a result of pressure on yields, the net interest income was down by 7% in 1Q08 as compared to 1Q07, however fees and commission income was the driver of this surge in profit. The fee and commission income was up by 39% increasing from RO1.1mn in 1Q07 to RO1.6mn in 1Q08. OIB’s balance sheet size increased from RO960.8mn in 1Q07 to RO1,138.6mn in 1Q08 posting an 18.5% QoQ growth. Loans and advances were up by 16.3% from RO573.4mn in 1Q07 to RO666.7mn in 1Q08.
Our estimated value for this banking scrip works out to be RO4.570 per share based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value computation, this banking scrip offers an upside of 11.4% on the closing price of RO4.103 per share (as of June 04, 2008); we therefore maintain a “BUY” recommendation on the scrip.
Financial Performance -FY07OIB registered a net profit of RO28.1mn in 2007, up by 7.2% from RO26.2mn in 2006. Though, the interest income increased by 7.7% to reach RO56.6mn in 2007 from RO52.5mn in 2006, the increasing pressure of higher interest cost deflated the net interest income. The interest expenses were up by 32.9% from RO17.8mn in 2006 to reach RO23.7mn in 2007 due to increase in interest rate on customer deposits. Also, the decreasing investments during 2007 added up to the woes reducing the interest income from the previous year levels.
Although the asset growth was at 7.9% on a YoY basis as compared to the 1.3% YoY registered in 2006, OIB has to focus on increasing the size of its loan book to boost its income growth in future. OIB’s net interest income declined by 5.3% from RO34.7mn in 2006 to RO32.8mn in 2007 on account of increased interest expenses. The commission income registered a YoY increase of 25.6% increasing from RO4.8mn in 2006 to RO6.1mn in 2007. OIB had posted a decent spread of 3.3% in 2007. The income yield of 6.1% in relation to the interest expense rate of 2.8% translated into the banking spread of 3.3%.
The operating income was up by 3.9%, from RO47.2mn in 2006 to RO49.1mn in 2007. This resulted from a 39% YoY increase in recoveries, a 25.6% YoY increase in Fees & commission income that increased from RO4.8mn in 2006 to RO6.1mn in 2007 and foreign exchange gains that increased by 33.6% from RO1.3mn in 2006 to RO1.8mn in 2007. The increase in fee & commission income was as a result of increased activity on the bourses in 2007 and the banks participation in the same. The operating expenses declined by 1.2% from RO17.6mn in 2006 to RO17.4mn during 2007. This decline was majorly due to recoveries on fixed assets disposals. Staff wages and salaries increased by 3.4% reaching RO9.6mn in 2007 compared to RO9.3mn during 2006.
OIB’s EPS diluted on account of lower profits for the year and bonus issues resulting in a 2.6% YoY decline in EPS from RO0.347 in 2006 to RO0.338 in 2007. The subtle performance in terms of absolute profitability resulted in a drop in ROAA and ROAE as asset growth outpaced growth in profitability. The ROAA declined from 3.2% in 2006 to 2.8% in 2007. Also, the ROAE increased from 21.9% in 2006 to 19.5% in 2007.
Of the aggregate credit in 2007, it captured 8.6% share claiming the 4th position amongst Omani banks registering a value of RO811.7mn and its total assets increased at a 4-year (2003-07) CAGR of 13.5%. Also, the gross loans and advances during the same period increased at a CAGR of 8.9%. It captured 15.3% market share in terms of customer deposits claiming the 3rd position in terms of ranking, increasing by 18.5% from RO684.8mn in 2006 to RO811.7mn in 2007 representing a 4-year (2003-07) CAGR of 14.5%.
OIB has displayed its focus on lending to the manufacturing sector; as the proportion of lending to this sector in aggregate advances has increased consistently over the last couple of years from 10.9% in 2005 to 11.9% in 2006 and finally increasing to 17.2% of the total lending pie in 2007. Also, OIB has attempted to reduce the exposure to riskier personal loans from 40.2% in 2006 to 35.5% in 2007.
The NPLs have increased from RO75.1mn in 2006 to RO77.1mn in 2007. However, as a % of Gross loans they have dropped consistently. The Coverage ratio increased from 101.0% in 2006 to 103.2% in 2007 on account of higher provisions to the tune of RO79.5mn in 2007 as compared to RO75.9mn in 2006.
Financial Performance -1Q08The bank achieved a net profit of RO9.2mn for 1Q08 as against a net profit of RO5.2mn reported during 1Q07, thereby displaying a robust QoQ growth of 77.8%. Though OIB witnessed a 16.3% YoY growth in loans & advances in 1Q08, the net interest income declined by 7% on a YoY basis. Fees & commission income increased by 39% in 1Q08 reaching RO1.6mn in 1Q08 as compared to RO1.1mn in 1Q07. Operating income for the quarter increased by 50.7% to record RO9.2mn from RO6.1mn registered in 1Q07. Operating expenses increased by 4.5% on a YoY basis mainly reflecting the increase in manpower cost.
OIB has done reasonably well to increase its asset base in 1Q08. Its assets registered an YTD growth of 5.3%, majority of this arising out of a 19.3% YTD growth in net loans & advances that increased from RO559.9mn as at end of Dec’07 to RO666.7mn at the end of 1Q08. Also, the customer deposits were up by 4.6% in the quarter increasing from RO811.7mn as at end of Dec’07 to RO849.3mn as at the end of 1Q08. We expect that the bank is on its path of incremental growth after having a not so encouraging performance in 2007.
We believe that the increased participation in capital market activities and non-fund based activities should help enhance the non-interest income. With the increased influx of foreign banks and competition from local banks in the Omani banking arena, the spreads have taken a hit in 2007. However, with improving economic environment, we believe the banks should be able to achieve stability in it medium term yields.