Global Investment House – Results Update Report on Oman International Bank - OIB performed well in FY2005 with a reported net profit of RO22mn, a 26.6% variation from the projected net profit of RO17.4mn in our previous equity research report on OIB in June'05. The variation in bottom line came on the back of higher than expected recoveries which stood at RO7.6mn in FY 2005 against our projected recoveries of RO3.6mn in our previous report on OIB. We believe that the bank will continue to perform well on the back of recoveries and better asset quality supported by Oman's strong macroeconomic performance. We have revised the fair value of OIB's stock to RO4.048 which represents an upside potential of 19.6% over the current market price of RO3.385. We upgrade our recommendation on the stock from "HOLD" to "BUY".
Recent Developments
Moody's upgraded the long and short term foreign currency deposit rating for OIB to Baa1/P-2 from Baa/P-3. The D financial strength rating remains unchanged. Fitch has also upgraded its long term rating for OIB from BBB- to BBB.
OIB's general assembly has agreed to make amendments to the bank's articles of association, augmenting the foreigners' ownership from 25% to 35%.
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
OIB exhibited strong bottom line performance in FY 2005, with a 64.7% y-o-y increase in net profit, which stood at RO22mn. The increase in net profit was due to improved operating performance on the back of a 18.25% y-o-y increase in net interest income of RO32.5mn coupled with significant recoveries from non-performing loans. Oman's strong economic performance has contributed to higher recoveries from non performing loans which was one the main reasons behind the bank's strong performance in FY05. The impact of recoveries stood at RO7.6mn in FY05 compared to RO3.2mn in FY04. We believe that FY05 was an exceptional year in terms of high recoveries. Going forward we expect high recoveries in 2006, and 2007, though it may not match last year's levels.
The bank's net interest margin (based on year end balances) decreased to 4.34% in FY05 compared to 4.46% in FY04 due to the rise in the cost of funds; however, going forward, we believe that the bank's margin will not be pressured since the bank will continue to rely heavily on low cost deposits for funding.
Fees and commissions income witnessed a marginal y-o-y increase of 2%. Foreign exchange income decreased slightly by 3.5% as a result of reduced overseas business opportunities. In FY04, other income included a one-off income, accordingly, other income dropped by 10.4% in FY05 compared to FY04.
OIB's operational efficiency was remarkable in FY05, with a cost to income ratio declining substantially from 53.4%in FY04 to 41.4% in FY05. Going forward we expect cost to income ratio to improve further as the bank is keen on improving its cost structure.
In 2004, the CBO has introduced a general provision requirement of 1% of performing corporate loans and 2% of all performing retail loans, a requirement that has to be fulfilled by the end of 2006. To meet the central bank's requirement, general loan loss provisions increased from RO2.19mn in FY04 to 2.78mn in FY05.
The Sultanate's burgeoning economy had also a positive impact on the bank's asset quality. Gross NPL ratio declined from 14.4% in FY04 to 12.6% in FY05. NPL coverage ratio increased to 98.8% in FY05 compared to 91.2% in FY04. As a result of better asset quality, provision for loan impairment decreased by 20% to reach RO3.5mn in FY05 compared to RO4.4mn in FY04. Total Provisions decreased by 4.46% y-o-y to reach RO6.3mn. Provisions to average loans ratio stood at 13.2% in FY05 compared to 14.1% in FY04.
Total loan portfolio grew by 11.4% y-o-y to reach RO583.3mn in FY05, with 42.8% concentrated in the personal lending category, and the balance is in corporate lending. The bank's loan portfolio is mainly concentrated in Oman, capturing 96.9% of the bank's portfolio, and the balance is in India, Pakistan, and other GCC countries. The bank has a branch network of 82 branches in the country and 4 overseas branches at Mumbai and Cochin in India and Karachi and Lahore in Pakistan. Corporate loans portfolio grew by 10.5% y-o-y to reach RO333.5mn in FY05, with the manufacturing segment being the highest contributor, constituting 11% of the total corporate portfolio in FY05 as compared to 7% in FY04. We believe the growth in the bank's loan book will be sustained by further exposure in corporate lending which has a strong potential in Oman's current economic boom, and the increased projects expenditures underlying the government's aggressive diversification plan. The growth in corporate credit will also sustain the growth in the personal loans category which is currently capped at 40% of total loans.
Capital adequacy ratio stood at 21.1% in FY05 as compared to 22.26% in FY04.
