Global Investment House – Bank Muscat – Results Update Report – Bank Muscat performed in-line with our projections made earlier in the investment update in May 2005. The variation in net profit was at 3.8% and the variation in total assets was at 0.5%. Primarily owing to higher recoveries from impairment of credit losses, and higher share of profits from associates, Bank Muscat reported a net profit of RO45.4mn during FY2005. This represents a whopping 33.2% growth when compared to the corresponding period in the previous fiscal. We have revised upwards our earlier projections due to the excellent performance displayed by Bank Muscat so far by 1Q2006. We estimate a price target of RO1.020, which is 12.1% higher than the current market price. We upgrade our recommendation on the stock to BUY.
Valuation:
Bank Muscat went in for a 10:1 stock split in 1Q2006 thereby bringing down the par value of the stock to 100 Baisas. The bank also announced 10% stock dividends to its shareholders for the year 2005, thereby increasing the total number of shares outstanding to 832.3mn. With this the paid-up capital also increased to RO83.2mn. Bank Muscat reported an annualized basic and diluted EPS of RO0.642 during FY05, an increase of 30% over the basic and diluted EPS recorded for the corresponding period last year.
In this current equity research report, we have assumed higher growth rates for gross loans and customer deposits going forward. Our assumed growth rates are based on the premise of a solid fundamental growth of the Omani economy and the virtuous effect it will have on the banking sector. Being the biggest bank in the country, Bank Muscat would have significant exposure to all the leading project and infrastructure finance opportunities in the country thus benefiting it immensely. We have assumed the gross loan book to expand at a CAGR of 15% and the customer deposits to grow at a CAGR of 17% during 2006-09.
The estimated fair value of Bank Muscat’s stock works out to RO1.020 based on DDM and relative valuation method, which represents a 12.1% upside potential from the current market price of RO0.910. Currently the stock is trading at 2006 earnings (forecast) multiple of 14.1x and at 2.36x its 2006 book value (forecast). We upgrade our recommendation on Bank Muscat from Hold to Buy with a target price of RO1.020.
Analysis of FY2005 Results
Bank Muscat disposed off its Bahrain branch to Bank Muscat International in 2005. Accordingly, the results of Bahrain operations are not consolidated line-by-line in 2005 whereas the 2004 numbers included the Bahrain results. The interest income of the bank increased by 10.8% during the FY2005 to reach RO116.01mn as compared to RO104.67mn over the corresponding period last year. The interest expense on funding base including tier-II capital witnessed a significant increase of 29% to reach RO37.9mn during the same period. As a result, the net interest income during the period increased by 3.8% to RO78.06mn as against RO75.23mn in 2004. When compared to Omani operations only, the net interest income grew by 9.1%. This improvement materialized on the back of an increasing interest rate trend primarily owing to ,both, increase in interest earning assets and growth in low cost deposit base of the bank. The net profit after providing for taxation was substantially higher at RO45.44mn, a 33% increase over the corresponding period last year.
Bank Muscat’s total assets increased to RO1.993bn at the end of FY05, representing an increase of 4.9% over the previous year. The growth in assets was mainly due to an increase in loans and advances portfolio and placements with banks. As compared to Omani operations, total assets witnessed an increase of 15.6%. The bank’s gross loan book growth during the year was relatively flat at 3.2% and it reached RO1.48bn at the end of FY05. However, the loan growth was 12.9% when compared to Omani operations alone. Personal loans constituted 41.1% of total gross loan book while the remainder was in corporate and other loans. NPLs declined from RO104.83mn to RO96.68mn during this period. The loan loss coverage has increased to 113% as of the end of FY05.
Total deposits from customers increased by 16% to reach RO1.29bn as of end 2005. Deposits from private sector constituted 79% of total deposits and the remaining 21% was received from ministries and other government organizations. More than 97% of deposit base was sourced from Oman.
Performance in 1Q2006
Bank Muscat achieved a net profit of RO13.25mn during 1Q2006, witnessing a growth of 28% against the corresponding quarter in 2005. Net interest income increased by 25% y-o-y to RO21.68mn for the 1Q2006. Non-interest income grew by 53% to RO7.92mn for the first quarter of 2006 driven by higher fees and commissions. The operating expenses also saw an increase of 22% y-o-y mainly due to increase in staff expenses and are expected to be in the rising trend considering the bank’s proposed establishment in Saudi Arabia in 2006.
Net Loan book grew by 22% to RO1.478bn. Customer deposits grew by 25% to RO1.439bn as of March 31, 2006. We expect sustained growth in both sides of balance sheet going forward. Accordingly, our forecasts incorporate CAGRs of 15% and 17% for loan book growth and customer deposit growth for 2006-09E.
