• Global values NBO stock at RO0.848 and recommends ‘Hold’ on the stock
Global Investment House – Kuwait - National Bank of Oman (NBO)- Investment Update- displayed a strong performance in 2007. It claimed the second spot in terms of market share with a 13.9% share of total banking assets and 17.6% share of Omani banks’ deposits. In 2007, despite of US credit meltdown the Omani banking sector was unaffected and saw a surge in asset growth and posted higher profits compared to 2006. In 2007, NBO recorded a net profit of RO44.6mn (our forecast RO40.2mn) compared to RO30.4mn in 2006 registering a robust YoY growth of 46.6%. This increase was driven by increase in fee and commission income. The bank earned RO6.4mn (our forecast RO4.9mn) as fee and commission income in 2007 against RO3.5mn in the previous year thereby increasing by 83.0% on a YoY basis. In 1Q08 results, we note that the net profit has registered a YoY increase of 14.2% from RO9.6mn in 1Q07 to reach RO10.9mn in 1Q08. This increase resulted from a 95.4% QoQ growth in fee and commission income from RO1.2mn in 1Q07 to reach RO2.4mn in 1Q08.
Based on the current market price of RO0.828 per share (as on June 08, 2008), NBO is trading at a 2008E P/E and P/BV multiple of 17.6x and 3.8x respectively. Our estimated value for this banking scrip works out to be RO0.848 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 2.4% on the closing price of RO0.828 per share (as on June 08, 2008); we therefore recommend a “HOLD” on the scrip with a medium term perspective.
Financial Performance –FY07
In 2007, NBO recorded a net profit of RO44.6mn (our forecast RO40.2mn) compared to RO30.4mn in 2006 registering a robust YoY growth of 46.6%. This increase was driven by increase in fee and commission income. The bank earned RO6.4mn (our forecast RO4.9mn) as fee and commission income in 2007 against RO3.5mn in the previous year thereby increasing by 83.0% on a YoY basis.
The bank witnessed a period of vigorous asset growth in 2007. Of the aggregate credit in 2007, NBO captured 13.9% share or RO906.8mn and its total assets increased at a CAGR of 16.0% during 2003-2007 registering a value of RO1,476.6mn in 2007 against our forecast of RO1,398.8mn. Also, the loans and advances during the same period increased at a CAGR of 14.5%. Geographically, it has reduced its exposure to Egypt following recovery issues. The gross lending in Egypt has reduced from RO23.1mn in 2006 to RO19.3mn in 2007.
In addition, even though the bank had reduced the high cost deposit component from 61% in 2006 to 56% in 2007, we believe that there is scope for further improvement in the form of reduction of dependence on high cost deposits. Operating expenses in 2007 were lower by 26.1% at RO15.4mn (our forecast RO23.4mn) compared to RO20.8mn in 2006. This was mainly on account of one time recovery of RO4.1mn on account settlement of BCCI litigation.
Despite of narrowing spreads, increasing profits backed by superior fee and commission income has resulted in improvement in the ROAA that has increased from 3.12% in 2006 to 3.49% in 2007. The EPS for 2007 was RO0.048, up by 27.5% from RO0.038 in 2006. The shareholder’s equity to total assets ratio declined from 17.1% in 2006 to 15.8% in 2007 signaling a shortfall in equity. The equity was up by 26.1% in 2007, increasing to RO232.8mn from RO184.6mn in 2006 with a CAGR of 24.4% during the period 2003-07. NBO is adequately capitalized, however its risk weighted assets increased over the period, as the Tier-I capital ratio declined from 16.8% in 2006 to 15.2% in 2007.
Financial Performance –1Q08
The bank’s net profit registered a YoY increase of 14.2% from RO9.6mn in 1Q07 to reach RO10.9mn in 1Q08. This increase resulted from a 95.4% Q-o-Q growth in fee and commission income from RO1.2mn in 1Q07 to reach RO2.4mn in 1Q08. The bank’s balance sheet size was up by 6.3% in 1Q08, reaching RO1,570.0mn from RO1,476.6mn as at the end of Dec’07. Loans and advances increased at a YTD growth rate of 20.2% in 1Q08 registering a value of RO1,089.8mn as compared to RO906.8mn at the end of Dec’07.
We believe that the successful partnership with Commercial Bank of Qatar has helped NBO to gain mandates on the corporate lending front. We believe that the bank’s growing corporate mandates should allow it to tap increasing opportunities in corporate finance and investment banking activities thereby providing a boost to its fee income and enhance its near term profitability.
