Global Research Upgrades its Recommendation on Bank Dhofar and the intrinsic value is RO0.451.

Published April 26th, 2006 - 01:43 GMT

Global Investment House – Kuwait –Equity Results Update on Bank Dhofar - Bank Dhofar's net interest income grew by 5% to RO24.39mn in FY05 from RO23.26mn in FY04. Interest income grew by 16% y-o-y while interest expense increased by 53% y-o-y. Margins for all Omani banks were under strain in 2005, primarily due to rising cost of funds. The bank's net interest margin stood at 4.61% in FY05 down from 4.77% in FY04. Net profit stood at RO14.19mn growing by 28% y-o-y compared to RO11.07mn in FY04.

Loan book grew by 14.7% y-o-y in FY05 to reach RO515.3mn on the back of a booming economy. The Sultanate's economy is growing and diversifying with many mega projects in the pipeline requiring large sums of investments. Bank Dhofar is planning to capitalize on this through actively participating in the finance of many of these projects. Over the years the bank has participated in several projects including the projects of Sohar Refinery, Oman India Fertilizer Company, Sohar Power, Dhofar Power, AES Barka, Oman LNG, Oman Gas, and Salalah Port etc. Going forward, we believe that the bank has ample lending opportunities considering the government's investment budget estimated at RO1.1bn in the year 2006.

Bank Dhofar currently trades at around RO0.360, which implies that the value arrived at using the weighted average method which is R0.451, is around 25.3% higher than the current market price. We upgrade our recommendation on the stock from "Hold" to "Buy".

Recent Developments

On October 31st 2005, Fitch upgraded its long term rating for Bank Dhofar from BBB- to BBB.

During the last AGM & EGM, the bank decided to increase its authorized capital from RO50mn to RO100mn. The bank has also decided to distribute bonus shares of RO4.196mn, representing 10% of share capital, thereby increasing its paid in capital from RO41.962mn to RO46.158mn. The CBO decided in December 2005 to increase the minimum capital requirement for local banks from RO20mn to RO50mn by the end of 2008. We believe that the risk of equity dilution is low as the bank's capital is already close to the minimum capital requirement.

The bank has effected a 1:10 stock split, bringing down the par value to RO0.100 (one hundred Baisas) from RO1.0 (One Omani Riyal). Currently, the outstanding number of shares of the bank stands at 461.580mn shares.

Recently, the cap imposed by the CBO on personal loans has been reduced from 42.5% to 40% of a bank's total lending. The CBO has also introduced a new cap of 5% for housing loans which were formerly included in the 42.5% cap. Accordingly, the total cap on personal loan portfolio has been increased to 45% (40% for personal loans and 5% for housing loans).


Financial Performance Review - 2005

The bank’s net interest income grew by 5% to RO24.39mn in FY05 from RO23.26mn in FY04. Interest income grew by 16% y-o-y while interest expense increased by 53% y-o-y. Margins for all Omani banks were under strain in 2005, primarily due to rising cost of funds. The bank's net interest margin stood at 4.61% in FY05 down from 4.77% in FY04. The bank's future strategy will be focused on attracting low cost deposits.

One of the main reasons behind the 28.2% jump in net profit in FY05 was the decrease in provisions for loan impairment from RO5.3mn in FY04 to RO2.7mn in FY05. Gross NPL ratio decreased from 8.3% in FY04 to 7.7% in FY05. Non performing loans witnessed a 6.3% y-o-y increase to reach RO39.57mn in FY05.

Fees & commissions income jumped by 20.3% from RO1.82mn in FY04 to RO2.19mn in FY05.  The bank is planning to continue aggressively on the retail side with more innovative products and services such as smart cards, personal loans, and cash deposits machines. During 2005, the bank has expanded its ATM branch network, enhanced its "Al Heson" cash prize saving scheme, and introduced the first interest free credit card in Oman, "Al Noor". To further enhance the marketing and distribution of its products, the bank signed in 2005 a "Co-operation and Distribution Agreement" with ICICI Bank, which is the second largest bank in India.

The Bank had raised a syndicated loan of US$75mn (RO28.8mn) in the second quarter of 2005, and has recently signed a US$100mn (RO38.5mn) medium-term syndicated loan agreement with a consortium of international banks. Dresdner Bank, Natexis Banques Populaires and Standard Chartered Bank were the lead arrangers. The loan was over-subscribed with a diverse syndicate of 20 participating banks from five regions.

 


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