Global: Omani banks- growing in tandem with the economy

<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Global Investment House – Kuwait – Oman Banking Sector – The Omani banking industry has grown in tandem with economy growth. Preliminary figures indicate that nominal GDP grew by 17% as against 24% in 2005 to reach RO13.3bn. The strong macro-economic performance witnessed in 2006 was mainly spurred by high oil prices, rising per capita income, widening surpluses in fiscal and balance of payments accounts, modest domestic inflation, rising public and private sector investments, and most importantly the notable expansion in hydrocarbon exports boosted by the start-up of the third LNG train in the Sultanate in 2006. Reflecting the healthy macroeconomic conditions in the Sultanate, the cumulative assets of Omani commercial banks grew at a CAGR of 17% during 2003-06. Credit off-take in Oman has expanded rapidly especially in the past couple of years, growing by 11% in 2005, and 21% in 2006. It grew at a CAGR of 12% during 2003-06.

Other factors that contributed to banks' growth were the government's proactive measures with regard to diversification, privatization; and foreign direct investments (FDI); coupled with strong population growth and high percentage of youth which boded well for the growth in consumer lending. The growth of the Omani banking sector have attracted many foreign banks into the Sultanate such as Bank of Beirut, Qatar National Bank, and Gulf Merchant Group. In addition, a new local bank, Bank Sohar launched its operations in 2007.

In addition, Alliance Housing Bank, one of the oldest and established specialized housing banks in Oman, has recently been given "in principle" approval to convert into a full fledged commercial bank. The bank has conducted a study through an external consultant, and the board will take a decision shortly on whether to convert or expand the existing business model. On May 9^th,2007, Bank Muscat submitted an offer to merge with Alliance Housing Bank. The offer price was RO0.375 per share. However, on May 10, 2007, Alliance Housing Bank declined the offer and announced that it is currently evaluating its strategic options and offers.

Currently, the banking sector in Oman consists of 18 banks, divided into 6 local commercial banks, 9 foreign commercial banks and 3 specialized local banks. All Omani banks operate under the supervision of the CBO, which is the sole regulatory of the banking industry in the Sultanate. The banks under our coverage includes five local banks namely Bank Muscat (BM), National Bank of Oman (NBO), Oman International Bank (OIB), Bank Dhofar (BDOF) and Alliance Housing Bank (AHB) which collectively accounted for 81% of the total assets of commercial banks in 2006, 83% of deposits, and 87% of total credit disbursed. 

During the period 2003-06, Gross loans of the five listed banks under review grew at a CAGR of 11% to reach RO4bn. Total non-performing loans of the banks under review amounted to RO300mn in 2006 which represented 5.2% of the banks' aggregate loan portfolio at the end of 2006. In 2006, the average coverage ratio for the banks under review (PLLs-to-NPLs) was 107.3%.

Going forward, we expect the consolidated loans to grow at a CAGR of 20% for the period 2006-10E. We believe that growth prospects are high for both corporate and consumer lending. Also, the outlook for consumer lending is very bright with enhanced per capita income, strong population growth, and favorable demographics.

Customer Deposits for the banks under review grew at CAGR of 16% during the period 2003-06 to reach RO3.9bn in 2006. Going forward, we expect the consolidated customer deposits to grow at a CAGR of 22% for the period 2006-10E.

All Omani banks exhibited healthy performance in FY06 with average ROAE and ROAA for the banks under review stood at 21% and 2.8% respectively in 2006. Profits for the banks under review grew at a CAGR of 39% for the period 2003-06 to reach RO141mn in 2006. Going forward, we expect profits of these banks to grow at CAGR of 23% for the period 2006-10E to reach RO328mn in 2010.

Omani Banks have been in full compliance with Basel II capital adequacy minimum requirement since January 2007. To further enhance the capital base the Central Bank of Oman requires a minimum capital adequacy ratio of 10% which is above the one mandated by Basel II. All the banks under our coverage are adequately capitalized with a capital adequacy ratios that are well above the minimum 10% required by the CBO.

On March 25th, 2007, the CBO decided to double the minimum capital requirement of new commercial banks to RO100mn from RO50mn, and to increase the minimum capital requirement of new branches of foreign banks to RO20mn from RO10mn. However, this capital requirement are not applicable to existing banks, including branches of foreign banks. Therefore, we don’t believe that the new requirement will impact existing banks, though it might limit the number of banks applying for a banking license in Oman.

The Sultanate's economy is growing and diversifying with many mega projects in the pipeline such as Sohar Refinery, Sohar Aluminum, Oman Polypropylene and Aromatic. We expect the banking industry to capitalize on this through actively participating in the financing of many of these projects. Going forward, we believe that there will be ample lending opportunities in Oman, and thus we expect credit to expand further.

Table 01: "Global" Valuation Matrix

Source: Global Research, Market prices as on April 30, 2007.

* Based on 2007E.