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sector note

Low Risk, High Transparency, But At a Discount

With strong balance sheets, better transparency, low asset quality risk and higherearnings visibility, we believe that the current valuation discount of Bank Muscat andNational Bank of Oman (NBO) to their regional peers is unjustified. Compared to anestimated 2010 average P/BV of 1.8x for MENA banks, Bank Muscat and NBO aretrading at an estimated 2010 P/BV of 1.42x and 1.38x, respectively almost a 20%discount. We are of the view that the high transparency of the Omani bankscompensates for the higher risk assigned to Oman for the governments relatively less

strong financial position compared to other GCC countries. We believe that stabilisingasset quality trends and improved investor risk appetite should lead to a narrowing ofthe existing valuation gap. We reiterate our Buy rating on Bank Muscat and NBO, whichoffer 29% and 18% upside potential, respectively, to our fair values of 1.05/share and0.39/share, respectively.

Loan Growth Recovery is Likely to be Slow

Excluding Qatar, loan growth in 1Q2010 amongst the GCC banks has declined to lowsingle digits. In Oman, net loans of the banking sector grew by 5.7% Y-o-Y in 1Q2010,which although slow compared to historical rates, is one of the strongest among theGCC countries. We expect a slow recovery in loan growth in the near term due to

project delays and lower demand from the private sector. However, we believe thatwith a strong project pipeline and continued government spending, the question is notif, but when credit demand will recover. We expect net loans of the Omani banks togrow by 9% in 2010, before rising to 14% in 2011.

Making Progress on Funding Cost Improvements

Oman banks spent most of 2009 managing their balance sheet liquidity and improvingthe sources of their funding. As of 1Q2010, customer deposits accounted for almost83% of total funding compared to 78% at the end of 2008, while the loans-to-depositratio declined to 104% in 1Q2010 from 110% in 4Q2008. The banks funding profilehas also improved, with banks now able to raise deposits with maturities of more thanone year from the domestic market at competitive rates. We believe that the locking in

of longer-dated deposits indicates at current low rates is likely to lead to higher netinterest spreads on an uptick in interest rates. We expect liquidity and costmanagement to continue in the near term as banks work towards maintaining spreads.

BANKS ANALYSED IN THIS REPORTPrice* FV Rating P/E (x) P/B (x) ROE Div

YieldOMR OMR 09a 10e 11e 09a 10e 11e 10e 11e 10e

Bank Muscat 0.815 1.050 Buy 14.9 9.8 7.7 1.6 1.4 1.2 15.3% 17.2% 2.5%

Nat. Bank of Oman 0.331 0.390 Buy 17.0 11.8 9.9 1.5 1.4 1.3 12.2% 13.4% 3.6%

Bank Dhofar 0.667 0.530 Sell 20.8 14.9 12.6 2.6 2.5 2.2 16.9% 18.5% 2.7%

Bank Sohar 0.218 0.220 Neu. 27.2 17.1 11.6 2.1 1.8 1.6 11.4% 14.7% 0.0%*Price as at 21 June 2010Source: Banks, EFG Hermes estimates

Murad Ansari

+9661 279 8649

[email protected]

Gigi Tharian Varghese

+968 247 6 0023

[email protected]

CONTENTS

EXECUTIVE SUMMARY 3

I. OMAN BANKS DISCOUNT IS

UNJUSTIFIED 5II. LOAN GROWTH TO REMAINSLUGGISH IN THE NEAR TERM 8III. LIQUIDITY IMPROVES, BUTDEPLOYMENT IS A NEAR-TERMCHALLENGE 12IV. ASSET QUALITY TRENDS

STABILISING 15BANKS

BANK MUSCAT 17

NATIONAL BANK OF OMAN 21

BANK DHOFAR 25

BANK SOHAR 29

To vote for EFG Hermes Research in the EuromoneysMiddle East Survey 2010, please go towww.euromoney.com/middleeast2010.

Thank you for your support and we hope we continueto meet your expectations.

oman banking sector 22 June 2010

slower growth, but lower risk

banks oman


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slower growth, but lower risk 22 June 2010

banks oman

FIGURE 1: EFG HERMES MENA COVERAGE UNIVERSEEFG M. Cap. P/E (x) P/B (x) ROE (%) Div YieldRIC Price FV Rating (USD mn) 09a 10e 11e 09a 10e 11e 09a 10e 11e 10e

OmanBank Muscat BMAO.OM 0.82 1.05 Buy 2,850 14.9 9.8 7.7 1.6 1.4 1.2 10.7% 15.3% 17.2% 2.5%Nat. Bank of Oman NBO.OM 0.33 0.39 Buy 929 17.0 11.8 9.9 1.5 1.4 1.3 9.1% 12.2% 13.4% 3.6%Bank Dhofar BDOF.OM 0.67 0.53 Sell 1,410 20.8 14.9 12.6 2.6 2.5 2.2 12.9% 16.9% 18.5% 2.7%Bank Sohar BKSB.OM 0.22 0.22 Neutral 566 27.2 17.1 11.6 2.1 1.8 1.6 7.9% 11.4% 14.7% 0.0%

Average 17.3 11.7 9.3 1.8 1.6 1.4 10.8% 14.3% 15.5% 2.5%Saudi ArabiaAl Rajhi 1120.SE 79.00 81.50 Neutral 31,598 18.4 17.9 14.3 4.5 4.1 3.7 24.6% 22.8% 25.5% 3.6%Al Bilad 1140.SE 20.70 15.50 Sell 1,656 N/M 35.3 21.5 2.1 1.9 1.8 -8.3% 5.5% 8.4% 0.0%Al Jazira 1020.SE 17.05 18.50 Neutral 1,364 193.6 29.4 10.8 1.1 1.1 1.0 0.6% 3.7% 9.4% 2.9%Saudi British 1060.SE 44.00 51.40 Buy 8,800 18.2 13.3 10.0 2.5 2.2 1.9 13.9% 16.6% 18.6% 2.3%Saudi Fransi 1050.SE 46.00 52.10 Buy 8,871 13.5 13.2 10.6 2.3 2.0 1.8 16.7% 15.5% 17.1% 3.0%

ANB 1080.SE 42.50 44.60 Neutral 7,366 13.7 12.6 10.9 2.0 1.8 1.6 14.6% 14.3% 14.8% 2.4%Samba 1090.SE 59.75 71.00 Buy 14,339 12.2 11.3 9.1 2.5 2.1 1.8 20.3% 19.0% 20.1% 2.7%Saudi Hollandi 1040.SE 33.50 37.50 Neutral 2,955 160.8 12.6 9.9 2.0 1.7 1.5 1.2% 13.8% 15.7% 1.6%Riyad 1010.SE 29.10 32.50 Buy 11,639 14.8 14.2 11.4 1.6 1.5 1.5 10.9% 10.9% 13.0% 4.6%Saudi Inv. Bank 1030.SE 19.70 21.00 Neutral 2,364 18.2 13.5 8.6 1.2 1.1 1.0 6.6% 8.2% 11.6% 0.7%

Average 16.7 14.5 11.4 2.5 2.3 2.0 15.6% 16.3% 18.7% 3.1%UAEENBD ENBD.DU 2.69 3.20 Neutral 4,070 4.5 7.0 4.9 0.6 0.5 0.5 12.5% 7.5% 9.9% 5.3%NBAD NBAD.AD 10.95 13.48 Buy 7,130 7.2 7.9 6.2 1.3 1.4 1.2 18.6% 17.7% 19.6% 3.4%DIB DISB.DU 2.06 1.93 Sell 2,130 6.2 7.1 6.7 0.9 0.9 0.9 14.2% 12.7% 12.9% 10.9%FGB FGB.AD 15.20 18.08 Neutral 6,207 7.5 8.1 5.4 1.2 1.1 1.0 16.1% 14.0% 18.3% 2.2%ADCB ADCB.AD 1.58 1.72 Neutral 2,407 N/M 7.2 4.7 0.6 0.5 0.5 -3.7% 7.5% 10.7% 4.2%CBD CBD.DU 3.05 3.80 Neutral 1,465 6.8 7.2 5.4 1.1 1.0 0.9 15.7% 13.2% 16.0% 4.3%ADIB ADIB.AD 2.58 3.10 Buy 1,661 78.2 6.8 4.6 1.3 1.2 1.0 1.6% 17.2% 22.4% 6.1%

Average 8.4 7.5 5.5 1.0 0.9 0.8 12.0% 12.3% 15.5% 4.4%

KuwaitNBK NBKK.KW 1.20 1.15 Neutral 13,518 13.5 14.1 12.3 2.3 2.4 2.2 17.3% 16.8% 17.5% 3.1%Burgan BURG.KW 0.33 0.47 Buy 1,569 53.3 26.2 8.0 1.0 1.0 1.0 1.9% 4.0% 12.1% 1.1%CBK CBKK.KW 0.89 0.67 Sell 3,899 N/M 179.3 14.4 2.6 2.5 2.3 -0.7% 1.4% 16.1% 0.0%KFH KFIN.KW 0.99 1.39 Neutral 7,861 18.2 14.0 9.5 1.8 1.7 1.5 10.1% 12.2% 16.1% 2.8%

Average 19.8 16.7 11.3 2.2 2.0 1.8 11.4% 12.6% 17.0% 2.4%QatarQNB QNBK.QA 138.00 130.26 Neutral 14,841 12.9 11.6 12.1 3.0 2.6 2.4 23.4% 22.6% 19.5% 3.8%CBQ COMB.QA 67.00 113.55 Buy 4,175 10.0 8.7 7.0 1.4 1.4 1.3 13.7% 15.7% 18.4% 9.1%QIB QISB.QA 73.80 108.79 Buy 3,992 12.1 11.4 9.7 2.0 2.0 1.9 16.7% 17.6% 19.9% 8.3%

Average 11.9 10.7 10.1 2.3 2.1 1.9 21.3% 20.4% 20.1% 5.7%EgyptCIB* COMI.CA 72.04 85.34 Buy 3,732 13.9 11.7 9.6 3.3 2.7 2.3 23.8% 23.5% 23.6% 2.3%CAE CIEB.CA 12.01 16.36 Buy 610 10.1 9.0 7.9 1.9 1.8 1.6 18.8% 19.6% 20.6% 7.1%NSGB** NSGB.CA 34.49 41.82 Buy 2,036 7.7 8.5 7.7 2.5 2.0 1.7 32.0% 24.0% 22.5% 3.3%

Average 10.7 10.2 8.7 2.8 2.4 2.0 28.6% 25.1% 24.8% 3.1%MoroccoAttijariwafa Bank ATW.CS 312.10 309.82 Buy 6,846 18.7 17.3 15.8 3.0 2.6 2.3 15.8% 15.2% 14.8% 1.6%BMCE Bank BMCE.CS 226.30 150.34 Sell 4,083 44.8 40.8 35.9 5.3 4.9 4.5 11.7% 12.0% 12.7% 1.2%BCP BCP.CS 310.00 296.92 Buy 2,329 15.6 14.0 13.5 2.9 2.4 2.1 18.8% 17.3% 15.8% 1.9%

Average 21.9 20.0 18.4 3.4 3.0 2.7 16.7% 16.0% 15.4% 1.5%LebanonBanque Audi AUSR.BY 8.20 N/R N/R 2,763 10.3 9.8 8.2 1.4 1.4 1.2 13.7% 14.2% 15.3% 3.2%BLOM BLBDF.BY 90.30 104.20 Buy 2,167 8.1 7.8 6.9 1.6 1.4 1.2 20.0% 17.8% 17.8% 4.2%Bank Byblos BYB.BY 1.79 2.60 Buy 757 7.4 7.4 6.4 1.0 1.0 0.9 13.2% 13.1% 13.5% 8.1%

Average 8.9 8.6 7.3 1.4 1.3 1.2 17.3% 15.8% 16.8% 4.2%

MENA Average 13.8 12.1 9.5 1.9 1.8 1.6 14.9% 15.3% 17.6% 3.5%*CIB's Book Value excludes goodwill**NSGB's Book Value excludes goodwill and earnings exclude goodwill amortisation (2010 is the last year goodwill will be amortised)

Source: Banks, EFG Hermes estimates


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banks oman

EXECUTIVE SUMMARYHIGHER VISIBILITY, BETTER TRANSPARENCY

We believe that while a recovery in loan growth remains a timing issue, Oman banks offerattractive valuations even after accounting for a slow loan growth environment. Asset qualitytrends are stabilising, NPL coverage remains high and balance sheet liquidity has improved.Against this backdrop, we believe that the current valuation gap between Oman banks andtheir regional peers is unjustified. Indeed, Omans macro fundamentals do not match those ofQatar and Saudi Arabia. However, we contend that with increased transparency, lower balancesheet risks and earnings visibility, Bank Muscat and NBO compare favourably to their regionalpeers.

FIGURE 2: MENA BANKS ESTIMATED 2010E P/BV

*CIB's Book Value excludes goodwill**NSGB's Book Value excludes goodwill and earnings exclude goodwill amortisation (2010 is the last year goodwill will beamortised)

Source: EFG Hermes estimates

FUNDING ISSUES HAVE BEEN ADDRESSEDA slowing loan growth environment has allowed Oman banks to concentrate on improvingtheir funding profile. The loans-to-deposit ratio improved to 104% in 1Q2010 from 112% in4Q2008, customer deposits constituted 83% of total interest bearing liabilities in 1Q2010versus 78% in 4Q2008, and demand and saving deposits accounted for 46% of total depositsin 1Q2010 versus 41% in 4Q2008. These improvements have allowed the banks to improve

their funding costs and increase their net interest spreads.

LOAN GROWTH CONTINUES, BUT AT A SLOWER PACENet loans grew by 5.7% Y-o-Y in 1Q2010, sharply lower than the 43% Y-o-Y growth seen in2008, but remained one of the strongest amongst the GCC countries in 1Q2010. While we donot expect a quick return to high double-digit loan growth, we believe that a gradual increasein corporate credit demand on the back of continued government spending, along with asteady increase in consumer loans, is likely to support 9% Y-o-Y growth in net loans in 2010.

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banks oman

FORECAST CHANGESWe lower our loan growth expectations for the Oman banking sector to 9% in 2010 from ourprevious 14% growth estimate. We also tweak our net interest spread estimates for 2010, andexpect them to be broadly stable as banks continue to take advantage of lower interest ratesand the slow loan growth environment to improve funding costs.

FIGURE 3: SUMMARY FORECAST CHANGES

In OMR million, unless otherwise stated

Fair Value 2010e Earnings 2011e Earnings

Rating New Old New Old Change New Old ChangeBank Muscat Buy 1.050 1.050 112 111 0.6% 142 133 6.9%

National Bank of Oman Buy 0.390 0.410 30 39 -22.4% 36 46 -21.3%

Bank Dhofar Sell 0.530 0.480 35 30 18.0% 42 36 16.2%

Bank Sohar Neutral 0.220 0.200 13 12 6.3% 19 19 -1.1%



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banks oman

I.OMAN BANKS DISCOUNT IS UNJUSTIFIED

BANK MUSCAT AND NBO - THE INVESTMENT CASE

With balance sheet growth likely to remain subdued in the near term, we believe thatinvestors should focus on valuations. Both Bank Muscat and NBO are trading at attractivevaluations and offer decent upside potential from current levels, in our view. Currentvaluations for Bank Muscat (estimated 2010 P/BV of 1.42x) and NBO (estimated 2010 P/BV of1.38x) are at a discount to both domestic and regional peers, which, in our view, is unjustified.In our opinion, strong and clean balance sheets, a downward-trending provisioning cycle andhigher earnings visibility make a strong investment case for Bank Muscat and NBO.

Strong Balance Sheet Fundamentals: Over the last 12 months, Bank Muscat and NBOs

balance sheet fundamentals have maintained an improving trend. Balance sheet liquidity hasimproved, concerns on sources of funding and costs have been addressed, and the NPLcoverage has remained strong despite significant asset quality deterioration.

Downward-Trending Provisioning Cycle: Recent results confirm that the bulk of theprovisioning has been absorbed in 2009. Although write-offs, driven by sub-commercial ratesoffered on the restructuring of Dubai Worlds debts, have yet to come through, we believe thatthey will likely be negligible given the small exposures of Omani banks to DW. We highlightthat provisioning by Oman banks was aggressive in 2009, therefore, the potential for writebacks going forward exists.

More Earnings Visibility: We believe that defensive balance sheets largely comprised ofdomestic assets and the peak of the provisioning cycle provide more earnings visibility forBank Muscat and NBO. We expect earnings to recover strongly in 2010, mainly supported bystable spreads and falling provisioning levels.

Loan Growth is the Missing Element, For Now: With a strong pipeline of projects, thequestion is more of when and not if loan growth will recover. We believe that continuedgovernment spending will eventually start having trickle-down effects, and corporate creditdemand should start recovering over the next 6-12 months. On the other hand, stabilisingmacro conditions could also encourage banks to continue lending in the consumer segment.

AT A DISCOUNT TO LOCAL AND REGIONAL BANKS

NBO and Bank Muscat trade at a discount to their peers both in Oman and the region, whichis unjustified, in our view. While regional banks have bounced back to higher valuationmultiples, NBO and Bank Muscat continue to trade at the lower end of the range compared totheir regional peers, despite their better transparency. We expect the valuation gap to narrowand the re-rating of the valuations for NBO and Bank Muscat to continue.

Bank Muscat and NBOare trading at a discount

to domestic and regionalpeers


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banks oman

FIGURE 4: MENA BANKS COMPARATIVE VALUATION


STOCK SUMMARIES - BANK MUSCAT & NBO ARE OUR TOP PICKS

Bank Muscat - Fair Value OMR1.05/share, Buy, Upside Potential of 29%With clean and solid balance sheet, lower risks and dominance in the domestic market makesBank Muscat our top pick in the Omani banking sector. The stock trades at an estimated 2010P/BV of 1.42x and P/E of 9.82x, which is at a discount to both domestic and regional peers. Wereiterate our Buy rating with a fair value (FV) of OMR1.05/share implying 29% upside

potential. Normalisation of the provisioning cycles is likely to be the largest driver for earningsgrowth in the near term, while balance sheet growth momentum is expected to start pickingup towards the end of 2H2010.

National Bank of Oman - Fair Value OMR0.39/share, Buy, Upside Potential of 18%We look at NBO as a restructuring play since the slowing loan growth environment hasallowed the bank to focus on improving its deposit franchise. Historically, NBO has maintaineda lower share of low-cost deposit mix compared to its peers, which has led to relatively lowernet interest spreads. Although the bank made significant progress in 2009 by launching the AlKanz deposit scheme, the success was not followed up with the launch of similar depositproducts. Management, however, is now re-focusing its attention on building up its depositfranchise, which, in our view, could bear fruit in the form of improved net interest spreads. We

reiterate our Buy on NBO with our FV of OMR0.39/share suggesting 18% upside potential

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Bank MuscatNBO

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AudiBLOM

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Bank Dhofar - Fair Value OMR0.53/share, Sell, Downside Potential of 26%Limited free float and low liquidity continues to keep Bank Dhofar at expensive levels, whichtrades at an estimated 2010 P/BV of 2.5x. Although the stock has historically had a limitedfree float, inclusion of Bank Dhofar in the MSM30 Index last year has meant that the majorityof the limited fee float has been picked up by fund managers tracking the MSM30 Index. Whilethe bank has delivered a strong 2009 performance, with asset quality deterioration contained,we believe that this is already incorporated into the price. We have a Sell rating on BankDhofar as the stock trades at a 26% premium to our FV of OMR0.53

Bank Sohar - Fair Value of OMR0.22/share, Neutral, Upside Potential of 1%After achieving critical mass (almost 9% of market share on most balance sheet measures), webelieve that Bank Sohars focus is likely to shift on improving revenue and cost efficiencies.Indeed, we have seen net interest spreads almost double to 2.03% in 2009. While we expect

balance sheet growth to remain strong in 2010, we believe that the pace of growth is likely tobe more measured going forward. This is partly driven by the banks relatively low total CAR of13%. While we expect the bank to be able to raise Tier II capital, it is likely to limit the abilityto improve its spreads. We maintain our Neutral rating on Bank Sohar as our FV ofOMR0.22/share suggests only 1% upside potential from the current price.


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II.LOAN GROWTH TO REMAIN SLUGGISH IN THE NEAR TERM

A SLOWER RECOVERY IN THE NEAR TERM

In line with the MENA region, loan growth in Oman, although positive, slowed downconsiderably in 2009. The impact of the global economic slowdown, the fall in capacityutilisation rates led by lower demand, and battered business confidence have led to lowercredit demand from the private sector. The initial slowdown in credit growth was driven by therisk-averse attitude of the banks and constraints on long-term funding. However, it is nowdriven by a combination of lack of opportunities as well as focus of banks on only high qualitycredit.

FIGURE 5: LOAN GROWTH TRENDS ACROSS THE MENA REGIONY-o-Y growth, unless otherwise stated

*Egypt data is average of CIB, CAE and NSGBSource: Central Banks, EFG Hermes estimates

In our overall view, growth is likely to remain sluggish in 2010. We expect net loans of theOman banking sector to grow by 9% in 2010 before recovering to 14% in 2011. We believethat the recent regulation introduced by the Central Bank of Oman (CBO), which requiresbanks to maintain a higher capital adequacy level, is likely to keep loan growth in check in themedium- to long term.

The start of 2010 has been sluggish. Net loans have grown by 5.7% Y-o-Y in 1Q2010, and we

expect 2Q2010 to depict a similar trend. However, we believe that increased governmentspending and improved private sector confidence should start translating into a pick-up in loangrowth momentum towards the end of 2010.

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Qatar Oman Kuwait KSA UAE Egypt* Lebanon Morocco

2008 2009 1Q2010

Banks focusing on onlyhigh quality credit for

now

Expecting loan growthof 9% in 2010 and 14%

in 2011


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banks oman

FIGURE 6: OMAN BANKS: LOAN GROWTH OUTLOOKY-o-Y Growth, unless otherwise stated

Source: Central Bank of Oman (CBO), EFG Hermes estimates

AXIS OF GROWTH - OIL PRICES, GOVERNMENT SPENDING & PRIVATE SECTOR

Given its relatively smaller fiscal surplus, in our opinion, government spending is inextricablylinked to oil prices. While government spending remains stable for now, we believe that thedirection of oil prices will be the key determinant of the continuation of the momentum ingovernment spending, since, in our view, volatile oil prices impact the governmentsaggressiveness. With the private sector pausing for breath, we believe that governmentspending will be the key drivers for growth in the domestic economy.

FIGURE 7: OIL PRICES AND GOVERNMENT SPENDING

Oil Price in USD (LHS), In OMR million (RHS)

Source: Bloomberg, Central Bank of Oman (CBO)

PLENTY ON THE TABLE, BUT EXECUTION IS KEY RISKA glance at the list of projects announced by the government over the last year clearlyindicates that there is a lot in store as far as the potential sources of credit demand areconcerned; however, the timing and execution of these projects is critical. At this stage, thegovernment appears to be moving ahead with important infrastructure projects, while slowingthe execution of the more ambitious projects. While the exact timing of the execution of theseprojects is difficult to predict, we expect the pace to start gradually picking up towards the endof 2010.

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2004a 2005a 2006a 2007a 2008a 2009a 2010e 2011e 2012e 2013e

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Government Expenditure (RHS) WTI (LHS)

Oil prices keydeterminant of

government spendingmomentum

Loan growth momentumexpected to pick up in

end of 2010


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FIGURE 8: PROJECTS ANNOUNCED DURING LAST 12 MONTHSIn USD million, unless otherwise stated FIGURE 9: PROJECTS UNDER EXECUTION BY VALUEIn USD billion, unless otherwise stated

Project Amount

Mirbat Beach Development 2,598

Muscat & Salalah International Airport Expansion 1,300

Sohar IPP 1,000

Redevelopment of Salalah International Airport 712

Batinah Coast Road Project 712

Batinah Housing Project 385

Ras Al Hadd Airport 104

Source: MEED Projects Source: MEED Projects

CORPORATE LOAN GROWTH - WAITING FOR THE TRICKLE DOWN

As the private sector continues to digest the impact of the economic slowdown, and asoversupply in the UAE continues to impact Omans industrial sector expansion plans, creditdemand from the private sector remains muted. For now, government spending remainscentred on infrastructure projects (roads, air and sea ports, etc.). However, the pace of theseprojects appears to be relatively slow and has yet to result in any meaningful credit demandfrom the corporate sector.

FIGURE 10: BANKING SECTOR: CHANGE IN CREDIT STOCK IN 2009


Source: Central Bank of Oman (CBO)

CONSUMER LOAN GROWTH - SLOW BUT STEADY

Lending to the consumer segment, although tightened, continues to play an important role inthe overall loan growth of the banking sector. Based on our discussion with the banks, webelieve that Oman banks are generally opening up to lending in the consumer segment,although they continue to remain selective.

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Construction

Infrastructure

Oil/Gas

Water&Waste

Power

Metal

GasProcessing

Industrial

Pipeline

Total Project Value = USD 28.3bn

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Int'lTrade

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Private sector creditdemand remains muted

for now

Banks are opening up toconsumer lending but

remain selective


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banks oman

FIGURE 11: CONSUMER LOAN GROWTHIn OMR million (LHS); Q-o-Q Growth (RHS) FIGURE 12: CONSUMER LOANS/TOTAL LOANS

Source: Central Bank of Oman (CBO) Source: Company accounts

We highlight that consumer loan growth continues to remain tied to the overall loan bookexpansion owing to the regulatory caps imposed by the Central Bank of Oman consumerloans cannot exceed 40% of total loans and mortgages are capped at 10% of the total loanbook. Consumer and mortgage loans combined are capped at 50% of the loan book. Withmost of the banks still comfortably below the regulatory cap, we believe that consumerlending will continue to record high single-digit growth in 2010.

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O

IB

1Q09 1Q10


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banks oman

III.LIQUIDITY IMPROVES, BUT DEPLOYMENT IS A NEAR-TERM CHALLENGE

IMPROVED LIQUIDITY

Over the last six months, liquidity in the banking sector has generally improved and has led torelatively strong deposit growth numbers witnessed across the banking sector. We believe thatthe majority of the bank sectors incremental deposit growth has been driven by excessliquidity within government institutions, which have received funding, but have yet to deploythese funds into projects. In our view, the incremental liquidity accumulated by the banks overthe last six months is to: i) improve the asset liability mismatches, and ii) lock in long-termdeposits to benefit from any upward movement in interest rates.

DEPOSIT FOCUS - LOW COST & LONGER TERM

A large portion of the incremental deposit growth has come in the form of demand deposits,which comprised almost 88% of the incremental deposit flow in 1Q2010. We believe thatincreased liquidity in the market is allowing the banks to raise low-cost demand and savingaccounts to replace relatively high-cost deposits and borrowings. Indeed, total time deposits ofthe sector have remained unchanged over the last quarter, while interbank borrowing hasdeclined by almost 11% Q-o-Q in 1Q2010, or OMR200 million in absolute terms.

FIGURE 13: DEPOSIT SPLIT BY TYPE

In % unless otherwise stated

FIGURE 14: DEPOSIT SPLIT BY SOURCE

In OMR million (LHS), Y-o-Y Growth (RHS)

Source: Central Bank of Oman (CBO) Source: Company accounts

MANAGING LIQUIDITY PROVING CHALLENGING FOR SPREADSSlower loan growth and improved market liquidity has led to the consistently declining lendingratio of the banking sector. The increased flow of deposits has prompted the banks to shedsome of high-cost interbank borrowing to protect their spreads. However, with loan growthexpected to remain sluggish in the near term, we expect this excess liquidity to start exertingpressure on the banks net interest spreads. We expect banks to manage their funding costs byshedding high cost deposits should loan growth remain sluggish.

52.3%

54.6%

52.4%

54.9%

56.4%

0%

20%

40%

60%

80%

100%

1Q09 2Q09 3Q09 4Q09 1Q10

Demand & SavingsTime & Others

0%

2%

4%

6%

8%

10%12%

14%

0

2,000

4,000

6,000

8,000

10,000

12,000

1Q09 2Q09 3Q09 4Q09 1Q10

Private (LHS)Government (LHS)Y-o-Y Growth

Government depositshave increased by 17.2%

Q-o-Q in 1Q2010

Demand depositsaccounted for 88% of

incremental deposits in1Q2010

Banks are shedding highcost deposits to protect

spreads


13/34

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banks oman

FIGURE 15: OMAN BANKING SECTOR LENDINGRATIO FIGURE 16: OMANI BANKS NET INTERESTSPREADS

Source: Central Bank of Oman (CBO) Source: Company accounts, EFG Hermes estimates

DEPRESSED INVESTMENT YIELDSOn the asset deployment side, investment opportunities are relatively limited and offersignificantly lower returns. Treasury bills and placement with the CBO are offering negligiblereturns. Hence, the incremental return opportunity, even on zero-cost deposits, is insignificant.

FIGURE 17: OMAN: INTERBANK LENDING RATES

FIGURE 18: CBO CERTIFICATE OF DEPOSIT RATES

Source: Central Bank of Oman (CBO) Source: Central Bank of Oman (CBO)

REGULATORY CHANGES - RAISING CAR REQUIREMENTS

The Central Bank of Oman has recently announced some regulatory changes. The mostsignificant of these relates to the minimum capital adequacy that banks are required tomaintain, which has been raised to 12% from 10%, effective 31 December 2010. Althoughmost of the banks under our coverage universe meet the requirement, we believe that BankSohar will have to raise further capital - most likely through a issuance of Tier II debt - to meetthe regulatory requirements and maintain its loan growth momentum.

73%

74%

75%

76%

77%

78%

79%

80%

81%

82%

Jan-08

M

ar-08

May-08

Jul-08

Sep-08

No

v-08

Jan-09

M

ar-09

May-09

Jul-09

Sep-09

No

v-09

Jan-10

M

ar-10 2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

0.08%

0.09%

0.10%

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

Jan-09

Mar-09

May-09

Jul-09

Se-09

Nov-09

Jan-10

Mar-10

Yield on investmentsecurities remains low

Higher CAR requirementcould constrain loangrowth in medium to

longer term


14/34

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banks oman

FIGURE 19: OMANI BANKS: CAPITAL ADEQUACY (31 DECEMBER 2009)

Source: Company accounts

We believe that a higher CAR requirement would also constrain the growth prospect andprofitability of the banking sector in the medium term as banks would be required to assignmore capital to meet the requirements of the CBO.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Ahli NBO OIB Bank Muscat Dhofar Sohar

Tier II Tier I


15/34

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banks oman

IV.ASSET QUALITY TRENDS STABILISING

PROVISIONING CYCLE - ON A GRADUAL DOWNTREND

We expect provisioning charges to decline by 53% Y-o-Y in 2010 as the bulk of asset qualitydeterioration was provided for in 2009. However, we believe that run-rate provisions, driven bythe ageing cycle of the domestic loan portfolio, are likely to continue reflecting in relativelyhigher provisioning charges in 2010.

FIGURE 20: OMANI BANKS: PROVISIONING CYCLEIn OMR million (LHS), in bps (RHS)

Source: Company accounts, EFG Hermes estimates

Asset quality deterioration on the domestic portfolio continued throughout 2009, and webelieve that the ageing cycle - which requires NPLs to be 100% provisioned by 360 days - islikely to keep provisioning charges elevated until the end of 2010. As NPLs move from onebucket to the other (based on the ageing cycle), banks will be required to set aside higherprovisions against these NPLs. With the NPL cycle reaching its peak around 4Q2009, webelieve that the provisioning cycle is likely to start tapering off by the end of 2010.

FIGURE 21: OMANI BANKS - IMPAIRED LOANS (AS AT 31 DECEMBER 2009)

Bank Muscat Bank Dhofar Bank Sohar NBO

Substandard 31.0 17.1 0.5 24.5

Doubtful 39.9 5.0 0.9 7.5

Loss 139.9 38.1 0.5 39.6Source: Company accounts

ASSET QUALITY DETERIORATION - WORST IS BEHIND US

After a strong deterioration in 2009 - NPL ratio rose to 4.7% in 4Q2009 from 3.2% in 4Q2008- asset quality indicators appear to be stabilising. The only imminent threat to provisioningcharges, in our view, remains the banking sectors exposure to Dubai World (DW), which webelieve is very manageable. Any further deterioration in asset quality from here on is likely tobe contained, in our opinion. Furthermore, banks have aggressively provisioned for the assetquality deterioration in 2009, and therefore we expect provisioning charges to decline sharplyon a Y-o-Y basis.

0

50

100

150

200

250

300

350

400

0

20

40

60

80

100

120

140

2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010e 2011e 2012e

Credit Provisions (LHS) Credit Provision Charge (RHS)

Provisions drop after asurge, but run-rate

provisions to continue

Provisions will be remainhigher due to NPL ageing

cycle

Provisioning required onDubai World exposure is

manageable


16/34

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banks oman

FIGURE 22: SECTOR NPL & COVERAGEIn OMR million (LHS), unless otherwise stated FIGURE 23: BANKS: NPL RATIO & COVERAGE

Source: Company accounts, EFG Hermes estimates Source: Company accounts

PINCHED BY CONSUMER & INTERNATIONAL EXPOSUREThe largest dent to asset quality accrued through the banks exposure to Saad and AlgosaibiGroups, which alone accounted for almost one-third of the asset quality deterioration in 2009.Based on company disclosures, the total direct exposure of Oman banks to the two Saudigroups (combined) is OMR59.3 million, which has been largely provisioned against. The othermajor potential source of provisioning could be on banks' exposure to Dubai World, once itslenders reach a settlement on the restructuring terms. Based on company disclosures, the total

exposure of banks to DW is OMR29.5 million, which constitutes only 0.3% of the total loansof the banking sector.

FIGURE 24: OMANI BANKS - EXPOSURE TO SAAD, ALGOSAIBI AND DUBAI WORLD


Direct Exposures DW Exposure to:

Saad &Algosaibi

Dubai

World

Total

Loans

Total

Assets

Total

Equity

10e Pre-Provision Profit

Bank Muscat 49.0 19.3 0.5% 0.3% 2.7% 11.4%

National Bank of Oman 6.5 8.7 0.6% 0.5% 3.5% 7.2%

Bank Dhofar 3.8 0.0 0.0% 0.0% 0.0% 0.0%

Bank Sohar 0.0 1.6 0.2% 0.2% 1.5% 8.7%

Oman International Bank 0.0 0.0 0.0% 0.0% 0.0% 0.0%

Ahli Bank 0.0 0.0 0.0% 0.0% 0.0% 0.0%

Source: Company disclosures, EFG Hermes estimates

On the domestic front, consumer loans have been the key driver for asset qualitydeterioration. Although not disclosed separately, we believe that almost half of theincremental domestic NPLs in 2009 were driven by the banks consumer loan books.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0

50

100

150

200

250

300

350

400

450

500

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

NPLs (LHS)

NPL Coverage (RHS)

-50%

50%

150%

250%

350%

450%

550%

0%

2%

4%

6%

8%

10%

12%

OIBBMBD

NBOAhli BS

NPL Ratio (LHS)

Coverage (RHS)

Saudi exposureaccounted for almost

one-third of incrementalNPLs


17/34

[stock name] rating [recommend.]


A Clean and Solid Balance SheetHigh transparency, dominance in the domestic market and a clean, solid balance sheetmake Bank Muscat our top pick in the Oman banking sector. The stock trades at anestimated 2010 P/BV of 1.4x and P/E of 9.8x, which is at a discount to the Oman banksaverage P/BV of 1.6x and P/E of 11.7x as well as to the MENA average P/BV of 1.8x andP/E of 12.1x. Historical valuations indicate that Muscat Bank is trading at the lower endof its historical P/BV trading range, and with ROE expected to recover to 17% by 2011,we believe that valuations should also re-rate as loan growth momentum starts to pickup towards the end of 2010. Our fair value (FV) of OMR1.05/share suggests an

estimated target 2011 P/BV of 1.6x, which is not demanding, in our view. We adjust ourprovisioning forecasts for 2011 and maintain our FV to OMR1.05/share, which suggests29% upside potential from current levels. We maintain our Buy rating on the stock.

Well-Positioned to Benefit From An Upturn

With strong balance sheet liquidity (loans-to-resources ratio estimated at 80% as at1Q2010 versus the Central Bank of Omans proposed ceiling of 87.5%), capitaladequacy of 15%, and an increasing proportion of low-cost demand and saving deposits(49% of total deposits at the end of 1Q2010), Bank Muscat is well-positioned to benefitfrom an uptick in loan growth momentum and rising interest rates. Increased liquidity inthe domestic market is enabling the bank to raise relatively long-term time deposits atfixed rates, which could lead to an improvement in net interest spreads as interest rates

start to rise.

Earnings to Recover Strongly in 2010We expect Bank Muscats earnings to rise by 52% in 2010 and to grow at a three-yearCAGR of 32%. The earnings recovery is likely to become more pronounced in 2H2010as provisioning charges normalise, in our view. The bank has provisioned against most ofthe asset quality deterioration in 2009 (primarily Saad and Algosaibi). While DubaiWorlds (DW) restructuring could potentially require the realisation of an upfront haircut (approximately OMR4million), Bank Muscats exposure of OMR19.5 million to DWis very manageable, in our view. Additionally, we expect fewer pains from the banksinternational subsidiary in Bahrain (BMI) and its investment in Pakistan (Silk Bank).

Murad Ansari+9661 279 8649

[email protected]

Gigi Tharian Varghese+968 247 6 0023

[email protected]

KEY FINANCIAL HIGLIGHTS

December Year End (OMR mn) 2009a 2010e 2011e 2012e

Total Banking Income 291 254 283 324

Pre-provision Income 209 166 188 220

Attributable Income 74 112 142 171

EPS (OMR) 0.05 0.08 0.11 0.13

P/E* (x) 14.9 9.8 7.7 6.4

Dividend Yield* 2.0% 2.5% 3.0% 3.1%

P/BV* (x) 1.6 1.4 1.2 1.1

ROAE 10.7% 15.3% 17.2% 18.0%

Capital Adequacy 15.2% 15.2% 15.6% 15.8%

Provisions / NPLs 106.0% 104.2% 104.7% 104.3%

*Price as at 21 une 2010Source: Bank Muscat, EFG Hermes estimates

BUY

Price OMR0.815*

Fair Value OMR1.050

Last Div / Ex. Date OMR0.02 on 21 Mar 10

Mkt. Cap / Shares (mn) OMR1,097 / 1346.4

Av. Mthly Liqdty (mn) OMR17.9

52-Week High / Low OMR0.902 / OMR0.490

Bloomberg / Reuters BKMB OM / BMAO.OM

Est. Free Float 46.7%

SHARE PRICE PERFORMANCE RELATIVETO MSM30 (REBASED)

bank muscat

A Strong Franchise With Low Risks

banks oman 22 June 2010

0.40.5

0.6

0.7

0.8

0.9

1.0

21-Jun-09

21-Sep-09

21-Dec-09

21-Mar-10

21-Jun-10

Price (OMR)

MSM30 (Rebased)


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bank muscat 22 June 2010

banks oman

FINANCIAL FORECASTS

FIGURE 25: INCOME STATEMENT (DECEMBER YEAR END)


2008a 2009a 2010e 2011e 2012e

Interest Income 263 280 293 320 364

Interest Expense (101) (105) (110) (115) (128)

Net Interest Income 162 174 183 205 236

Fees from Banking Services, Net 55 50 54 61 69

Foreign Exchange Income 7 9 10 11 12

Investments Income, Net 10 55 3 3 3

Other Operating Income 3 3 3 3 3

Total Non-interest Income 75 117 71 78 88

Total Banking Income 237 291 254 283 324

Operating Expenses (84) (82) (88) (95) (104)

Income before Provisions 153 209 166 188 220

Credit & Investment Provisions (41) (110) (39) (26) (25)

Pre-tax Profits 112 98 126 161 194

Taxation (15) (14) (17) (21) (26)

Net Profit from Operations 97 84 110 140 169

Income from Associates (3) (10) 2 2 2

Attributable Income 94 74 112 142 171

Source: Bank Muscat, EFG Hermes estimates

FIGURE 26: BALANCE SHEET (DECEMBER YEAR END)


2008a 2009a 2010e 2011e 2012e

Cash an Central Bank Deposits 453 608 637 722 815

Due from Banks 1,078 1,016 1,013 933 915

Investments, Net 472 212 287 339 372

Loans & Advances, Net 3,728 3,838 4,165 4,757 5,539

Fixed Assets, Net 22 26 31 36 40

Other Assets 277 151 160 173 187

Total Assets 6,028 5,851 6,293 6,960 7,868

Customer Deposits 3,173 3,068 3,375 3,814 4,348Due to Banks 1,474 1,535 1,572 1,680 1,893

Term Loan (Debt) 280 259 259 243 243

Other Liabilities 408 299 315 340 364

Total Liabilities 5,335 5,161 5,520 6,077 6,849

Shareholders' Equity 693 690 773 882 1,019

Total Liabilities & Shareholders' Equity 6,028 5,851 6,293 6,960 7,868



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banks oman

FIGURE 27: VALUATION METRICS2008a 2009a 2010e 2011e 2012e

Per Share Data (OMR)

EPS 0.07 0.05 0.08 0.11 0.13

DPS 0.02 0.02 0.02 0.02 0.03

Payout Ratio 23% 29% 25% 23% 20%

BVPS 0.51 0.51 0.57 0.66 0.76

BVPS (Tangible) 0.51 0.51 0.57 0.66 0.76

Valuation

P/E (x) 11.7 14.9 9.8 7.7 6.4

Dividend Yield 2.0% 2.0% 2.5% 3.0% 3.1%

P/BV (x) 1.6 1.6 1.4 1.2 1.1

P/Tangible BV (x) 1.6 1.6 1.4 1.2 1.1

Market Cap / Deposits 34.6% 35.8% 32.5% 28.8% 25.2%


FIGURE 28: DUPONT ANALYSIS

As a % of average assets, unless otherwise stated

2008a 2009a 2010e 2011e 2012e

Net Interest Income 3.16% 2.94% 3.01% 3.09% 3.18%

Non-interest Income 1.46% 1.96% 1.16% 1.18% 1.19%

Operating Expenses -1.64% -1.38% -1.44% -1.44% -1.41%

Other Revenue / Expenses -0.06% -0.18% 0.03% 0.03% 0.03%Total Provisioning -0.80% -1.86% -0.65% -0.40% -0.34%

Taxation -0.29% -0.24% -0.27% -0.32% -0.34%

ROAA 1.83% 1.24% 1.84% 2.15% 2.30%

Gearing (Assets / Equity) 7.8 8.6 8.3 8.0 7.8

ROAE 14.2% 10.7% 15.3% 17.2% 18.0%


FIGURE 29: PROFITABILITY ANALYSIS

2008a 2009a 2010e 2011e 2012e

Yield on Earning Assets 5.6% 5.0% 4.9% 5.0% 5.1%

Cost of Funds 2.5% 2.2% 2.3% 2.2% 2.2%Net Interest Spread 3.0% 2.7% 2.7% 2.8% 2.9%

Net Interest Margin 3.4% 3.1% 3.1% 3.2% 3.3%

Non-interest Income / Total Banking Income 31.5% 40.1% 27.8% 27.7% 27.2%

Cost to Income 35.6% 28.2% 34.6% 33.7% 32.2%

Tax Rate 13.1% 14.5% 13.2% 13.2% 13.1%

ROAA 1.8% 1.2% 1.8% 2.1% 2.3%

ROAE 14.2% 10.7% 15.3% 17.2% 18.0%



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banks oman

FIGURE 30: ASSET QUALITY AND CAPITAL RATIOS2008a 2009a 2010e 2011e 2012e

Asset Quality

NPL Ratio 2.3% 5.0% 5.5% 5.3% 5.0%

Provisions / NPLs 139% 106% 104% 105% 104%

Provisioning to Average Gross Loans (bps) 36 222 93 56 46

(NPLs-provisions) / Equity -5.1% -1.8% -1.3% -1.4% -1.2%

Provisions / Pre-provisions Profit 27.4% 55.7% 23.5% 13.9% 11.4%

Capital

Core Tier-1 10.7% 11.6% 12.0% 12.1% 12.3%

Tier-1 10.7% 11.6% 12.0% 12.1% 12.3%

CAR 13.0% 15.2% 15.2% 15.6% 15.8%

RWAs / Total Assets 91.3% 92.2% 92.9% 92.0% 91.7%


FIGURE 31: GROWTH RATIOSY-o-Y growth, unless otherwise stated

2008a 2009a 2010e 2011e 2012e

Loans 38.7% 3.0% 8.5% 14.2% 16.4%

Deposits 36.6% -3.3% 10.0% 13.0% 14.0%

Assets 42.9% -2.9% 7.6% 10.6% 13.0%

RWAs 44.1% -2.2% 8.5% 9.5% 12.7%


Fee Income 45.8% -9.1% 9.0% 12.0% 14.0%

Non Interest Income 55.3% 56.2% -39.6% 11.1% 12.3%

Total Banking Income 36.9% 22.9% -12.9% 11.7% 14.5%

Operating Expenses 19.8% -2.5% 6.8% 8.6% 9.6%

Pre-provision Profits 38.1% 32.9% -15.5% 13.1% 16.8%

Net Attributable Income 11.2% -21.4% 51.5% 27.3% 20.1%


FIGURE 32: BALANCE SHEET STRUCTURE AND OTHER RATIOS

2008a 2009a 2010e 2011e 2012e

Loans / Deposits 117.5% 125.1% 123.4% 124.7% 127.4%

Loans / Assets 61.8% 65.6% 66.2% 68.4% 70.4%

Net Interbank / Assets -6.6% -8.9% -8.9% -10.7% -12.4%

Investments / Assets 7.8% 3.6% 4.6% 4.9% 4.7%

Deposits / Assets 52.6% 52.4% 53.6% 54.8% 55.3%

Borrowings / Liabilities 5.2% 5.0% 4.7% 4.0% 3.6%



21/34



Lowering Estimates and Fair Value; Valuation Still Attractive

Trading at an estimated 2010 P/BV of 1.4x, NBO continues to look attractive, in ourview. Stabilising asset quality trends and a potential improvement in net interestspreads are key reasons for our conviction in NBO. We see early signs of success in thebanks deposit franchise improvement drive, and believe that there still exists significantroom for improvement. We, however, lower our 2010-2012 earnings estimates by anaverage of 20% to incorporate relatively slower loan growth compared to our previousforecasts (3-year CAGR of 12% versus our earlier estimate of 15%) and build in aslower improvement in net interest spreads. We lower our fair value (FV) to OMR

0.390/share from OMR0.410/share, but maintain our Buy rating on the stock as it offers18% upside potential to our FV.

Geographical Footprint Expansion Shows Early Signs of Success

The rebranding and remodelling of NBOs existing branch network coupled with theexpansion of its geographical footprint in Oman (164 branches in 2009 versus 154branches in 2008) is showing early signs of paying off. During 2009, NBO's savingdeposits grew by 26% Y-o-Y, while the proportion of low cost current and savingaccounts increased to 41.5% of total deposits in 2009 versus 35.3% in 2008. With loangrowth expected to remain slow in the near term, NBO continues to focus on improvingthe deposit franchise. We however highlight that the strong improvement in 1Q2010deposit mix low cost saving deposit mix increased to 48.7% of total deposits was

partially driven by one off receipts collected by NBO (similar to 2009), which will begradually released over the course of the year.

Asset Quality Deterioration Offset by Recoveries

NBOs NPL ratio increased to 5.0% in 2009 versus 4.4% in 2008. Though NPL ratio isrelatively higher compared to peers, we highlight that this is largely driven by the bank'slegacy portfolio mainly comprising of the bank's Egypt exposure. The bank continues tobook recoveries on this - OMR7.0 million in 2009 though we believe that the pace ofrecoveries is likely to slow going forward. We expect provisioning charges to remainslightly higher than normalized levels in the near term on the ageing of the domesticNPLs.


[email protected]

Gigi Tharian Varghese+968 24760023

[email protected]

KEY FINANCIAL HIGHLIGHTS





EPS (OMR) 0.02 0.03 0.03 0.04

P/E* (x) 17.0 11.8 9.9 8.1

Dividend Yield* 3.6% 3.6% 3.6% 4.3%

P/BV* (x) 1.5 1.4 1.3 1.1

ROAE 9.1% 12.2% 13.4% 14.9%


Provisions / NPLs 95.0% 102.4% 104.2% 105.1%

*Price as at 21 June 2010Source: National Bank of Oman (NBO), EFG Hermes estimates

BUY

Price OMR0.331*

Fair Value OMR0.390


Mkt. Cap / Shares (mn) OMR358 / 1,081



Bloomberg / Reuters NBOB OM / NBO.OM



national bank of oman (nbo)

Focusing on the Deposit Franchise


0.250.27

0.29

0.31

0.33

0.35

0.37

0.39

21-Jun-09

21-Sep-09

21-Dec-09

21-Mar-10

21-Jun-10

Price (OMR)MSM30 (Rebased)


22/34

22 / 34 pages

national bank of oman (nbo) 22 June 2010

banks oman

FINANCIAL FORECASTS



2008a 2009a 2010e 2011e 2012e








Non-interest Income 41 25 26 29 33


Total Operating Expenses (34) (35) (37) (40) (44)



Pre-tax Profits 52 25 34 41 50

Taxation (6) (4) (4) (5) (6)

Net Income 45 21 30 36 44

Source: National Bank of Oman (NBO), EFG Hermes estimates


In OMR million, unless otherwise stated2008a 2009a 2010e 2011e 2012e

Cash and Central Bank Deposits 266 184 183 187 171

Due from Banks 199 167 149 171 173

Investment Securities, Net 31 47 44 50 58

Net Loans 1,401 1,361 1,478 1,697 1,970


Other Assets 78 26 38 42 46

Total Assets 1,984 1,798 1,914 2,173 2,446

Customer Deposits 1,288 1,197 1,305 1,475 1,681

Due to Banks 277 220 209 265 303

Term Loan (Debt) 82 91 82 89 82Other Liabilities 111 53 58 62 69


Shareholders' Equity 226 237 259 283 311




23/34

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banks oman



EPS 0.04 0.02 0.03 0.03 0.04

DPS 0.02 0.01 0.01 0.01 0.01

Payout Ratio 42% 61% 43% 35% 35%

BVPS 0.21 0.22 0.24 0.26 0.29

BVPS (Tangible) 0.21 0.22 0.24 0.26 0.29

Valuation

P/E (x) 7.9 17.0 11.8 9.9 8.1

Dividend Yield 5.3% 3.6% 3.6% 3.6% 4.3%

P/BV (x) 1.6 1.5 1.4 1.3 1.1

P/Tangible BV (x) 1.6 1.5 1.4 1.3 1.1





2008a 2009a 2010e 2011e 2012e



Operating Expenses 1.96% 1.84% 2.01% 1.97% 1.90%

Other Revenue / Expenses 0.00% 0.00% 0.00% 0.00% 0.00%Provisioning Charge 4.86% 46.87% 25.37% 23.34% 21.15%

Tax Rate 12.15% 15.63% 12.00% 12.00% 12.00%

ROA 2.62% 1.12% 1.63% 1.77% 1.92%


ROE 20.48% 9.10% 12.19% 13.37% 14.91%


FIGURE 37: PROFITABILITY ANALAYSIS

2008a 2009a 2010e 2011e 2012e





Cost to Income 38.4% 42.5% 44.7% 42.8% 40.7%

Tax Rate 12.1% 15.6% 12.0% 12.0% 12.0%

ROAA 2.6% 1.1% 1.6% 1.8% 1.9%

ROAE 20.5% 9.1% 12.2% 13.4% 14.9%



24/34

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banks oman


Asset Quality

NPL Ratio 4.4% 5.0% 5.0% 5.0% 4.9%

Provisions/NPLs 100.1% 95.0% 102.4% 104.2% 105.1%

Provisioning to Average Gross Loans (bps) 57.6 92.9 78.2 74.8 69.8

(NPLs-provisions) / Equity 0.0% 1.5% -0.7% -1.3% -1.7%


Capital

Core Tier-1 12.0% 14.9% 14.6% 14.1% 13.8%

Tier-1 12.0% 14.9% 14.6% 14.1% 13.8%

CAR 13.9% 17.6% 16.2% 15.5% 15.1%



FIGURE 39: GROWTH RATIOSY-o-Y growth, unless otherwise stated

2008a 2009a 2010e 2011e 2012e

Loans 54.5% -2.9% 8.6% 14.8% 16.1%

Deposits 45.0% -7.0% 9.0% 13.0% 14.0%

Assets 34.4% -9.4% 6.4% 13.6% 12.6%

RWAs 43.3% -10.0% 5.9% 12.7% 12.5%


Fee Income 57.4% -9.4% 12.0% 16.0% 16.0%

Non-interest Income 56.4% -38.3% 2.9% 12.0% 12.8%

Total Banking Income 35.4% -7.1% 1.7% 12.7% 14.7%


Pre-provision Profits 49.0% -13.3% -2.2% 16.5% 18.9%

Net Attributable Income 1.7% -53.5% 43.3% 19.7% 22.3%



2008a 2009a 2010e 2011e 2012e

Loans / Deposits 108.8% 113.7% 113.3% 115.1% 117.2%

Loans / Assets 70.6% 75.7% 77.2% 78.1% 80.5%



Deposits / Assets 64.9% 66.6% 68.2% 67.9% 68.7%




25/34



Raising Estimates and Fair Value; Maintain Sell Recommendation

We raise our 2010-2012 earnings estimates for Bank Dhofar by an average of 15% toincorporate relatively stronger net interest spreads. The rights issue at the end of 2008has enhanced Bank Dhofars ability to grow its balance sheet at a lower cost. We,however, maintain our Sell rating on the bank as it is trading at an almost 26%premium to our revised fair value (FV) of OMR0.530/share (up from OMR0.480/share).Trading at an estimated 2010 P/BV of 2.5x and P/E of 14.9x, we find Bank Dhofarsvaluations to be demanding. Although the banks estimated 2010 ROE of 17% isslightly better than the Oman banking sector average of 15%, it trades at a significant

premium to the sector average 2010 P/BV of 1.6x and sector average 2010 P/E of 11.7x.

A Solid Performer, But Expensive Valuation

An 18% Y-o-Y growth in loans, 13% Y-o-Y growth in deposits, and 7% Y-o-Y growth innet profits have clearly made Bank Dhofar the strongest performer in 2009 whencompared to its similar-sized peers. Although asset quality deterioration was strong NPLs almost doubled in absolute terms in 2009 the bank was able to absorb theimpact through historical provisions without significantly impacting its profitability.However, we believe that most of this is already reflected in the stock's premiumvaluation.

Free Float Reduced On Index Inclusion

With the inclusion of the stock in the MSM30 Index in 2009, we believe that stocksfree float has reduced. With an 8% weight in the MSM30 Index, the stocks limited freefloat of 29% has been further lowered, in our view, as fund managers tracking theMSM30 Index have mopped up the remaining float to bring their portfolios in line withtheir benchmarks. We believe that this has contributed significantly to the run-up inBank Dhofars stock price. Based on last years trading volume patterns, we alsohighlight that there has been significant activity in the stock on a periodic basis, whichcould suggest accumulation. We believe that the limited free float has largelycontributed to the strong price performance of Bank Dhofar, which now trades atsignificantly higher valuations compared to its peers in Oman.


[email protected]


[email protected]






EPS (OMR) 0.03 0.04 0.05 0.06

P/E* (x) 20.8 14.9 12.6 10.9

Dividend Yield* 2.1% 2.7% 3.2% 3.7%

P/BV* (x) 2.6 2.5 2.2 2.0

ROAE 12.9% 16.9% 18.5% 19.2%


Provisions / NPLs 105.2% 111.3% 110.3% 109.9%

*Price as at 21 June 2010Source: Bank Dhofar, EFG Hermes estimates

SELL

Price OMR0.667*

Fair Value OMR0.530


Mkt. Cap / Shares (mn) OMR543 / 813.6



Bloomberg / Reuters BKDB OM / BDOF.OM

Est. Free Float 29.

1%


bank dhofar

Premium Valuation on Lower Liquidity


0.40

0.50

0.60

0.70

0.80

0.90

21-Jun-09

21-Sep-09

21-Dec-09

21-Mar-10

21-Jun-10

Price (OMR)

MSM30 (Rebased)


26/34

26 / 34 pages

bank dhofar 22 June 2010

banks oman

FINANCIAL FORECASTS



2008a 2009a 2010e 2011e 2012e










Total Operating Expenses (21) (24) (27) (29) (32)



Pre-tax Profits 27 29 40 48 56

Taxation (3) (4) (5) (6) (7)

Net Income 24 25 35 42 49

Source: Bank Dhofar, EFG Hermes estimates

FIGURE 42: BALANCE SHEET (DECEMBER YEAR END)In OMR million, unless otherwise stated

2008a 2009a 2010e 2011e 2012e


Due from Banks 38 33 60 69 59

Investments, Net 137 60 60 69 79

Loans & Advances, Net 1,018 1,194 1,303 1,503 1,741



Total Assets 1,324 1,487 1,641 1,910 2,182

Customer Deposits 972 1,101 1,244 1,431 1,646

Due to Banks 90 100 93 143 165

Term Loan (Debt) 39 39 39 39 39







27/34

27 / 34 pages


banks oman



EPS 0.03 0.03 0.04 0.05 0.06

DPS 0.01 0.01 0.02 0.02 0.02

Payout Ratio 46% 44% 40% 40% 40%

BVPS 0.23 0.25 0.26 0.29 0.33

BVPS (Tangible) 0.23 0.25 0.26 0.29 0.32

Valuations

P/E (x) 22.3 20.8 14.9 12.6 10.9

Dividend Yield 2.1% 2.1% 2.7% 3.2% 3.7%

P/BV(x) 2.8 2.6 2.5 2.2 2.0

P/Tangible BV (x) 2.9 2.6 2.5 2.2 2.0





2008a 2009a 2010e 2011e 2012e




Other Revenue / Expenses 0.00% 0.00% 0.00% 0.00% 0.00%Provisioning Charge -0.70% -0.88% -0.38% -0.33% -0.35%

Tax Rate -0.30% -0.26% -0.32% -0.34% -0.34%

ROA 2.08% 1.81% 2.26% 2.36% 2.37%


ROE 15.85% 12.94% 16.95% 18.47% 19.16%



2008a 2009a 2010e 2011e 2012e





Cost to Income 37.6% 36.4% 36.5% 35.3% 33.8%

Tax Rate 12.5% 12.5% 12.5% 12.5% 12.5%

ROAA 2.1% 1.8% 2.3% 2.4% 2.4%

ROAE 15.8% 12.9% 16.9% 18.5% 19.2%



28/34

28 / 34 pages


banks oman


Asset Quality

NPL Ratio 3.4% 4.8% 4.6% 4.4% 4.2%

Provisions / NPLs 138% 105% 111% 110% 110%


(NPLs-Provisions) / Equity -7.4% -1.5% -3.3% -3.0% -2.8%


Capital

Core Tier-1 13.60% 12.54% 12.95% 12.58% 12.35%

Tier-1 13.60% 12.54% 12.95% 12.58% 12.35%

CAR 16.64% 14.83% 15.26% 14.70% 14.37%



FIGURE 47: GROWTH RATIOS

Y-o-Y growth, unless otherwise stated

2008a 2009a 2010e 2011e 2012e

Loans 44.5% 17.3% 9.1% 15.4% 15.8%

Deposits 44.0% 13.3% 13.0% 15.0% 15.0%

Assets 38.6% 12.3% 10.4% 16.4% 14.3%

RWAs 44.0% 17.8% 10.4% 15.0% 14.3%


Fee Income 53.0% 10.3% 12.0% 14.0% 16.0%

Non-interest Income 18.9% -3.5% 2.0% 6.1% 12.4%

Total Banking Income 27.5% 15.8% 12.5% 13.4% 14.0%


Pre-provision Profits 29.5% 18.0% 12.2% 15.6% 16.6%

Net Attributable Income 3.9% 7.2% 39.4% 18.1% 16.1%



2008a 2009a 2010e 2011e 2012eLoans / Deposits 104.8% 108.4% 104.7% 105.0% 105.8%

Loans / Assets 76.9% 80.3% 79.4% 78.7% 79.8%



Deposits / Assets 73.4% 74.1% 75.8% 74.9% 75.4%




29/34



Raising Estimates and Fair Value, Maintaining Neutral Rating

Bank Sohar's balance sheet growth and improved net interest spreads have continued topositively surprise throughout 2009. We raise our 2010-2012 earnings estimates by anaverage of 12%, which increases our fair value (FV) to OMR0.220/share (fromOMR0.200/share). We, however, maintain our Neutral rating on the stock, which tradesat a 1% discount to our revised FV. Bank Sohars valuation remain demanding at anestimated 2010 P/BV of 1.8x and P/E of 17.1x, with ROE expected to rise to14.7% by2011. We believe that balance sheet growth rates are likely to fall in line with sectoraverages, while the ageing of the banks loan portfolio could lead to incremental NPLs.

More Capital, at a Cost, to Sustain Growth Momentum

With total capital adequacy at 13% as at the end of 1Q2010, we believe that BankSohar needs to raise additional capital to both maintain its growth momentum andremain above the revised minimum CAR of 12% by the end of December 2010,prescribed by the Central Bank of Oman. While the bank could raise Tier II capital tomeet the CBOs minimum requirement, there will be a cost associated with theincremental capital. On the funding side, deposit mobilisation continues to be an areaof focus Bank Sohars customer deposits grew by 54% Y-o-Y in 2009, largely comingthrough time deposits, which accounted for 68% of total deposits.

Time to focus on Profitability & Efficiency

Within three years of commencing operations, Bank Sohar has become the fourthlargest bank in Oman, with an almost 9% market share on most balance sheetmeasures. Bank Sohar reported its first profitable year in 2009. Although ROE remainlow at this stage (8% in 2009), we believe that the bank is likely to focus on improvingits profitability. Signs of this are visible, with net interest spreads almost doubling to2.03% in 2009 from 1.22% in 2008, which has led to improved revenue and a decline inthe cost-to-income ratio to 59% in 2009 from 71% in 2008. While Bank Sohars netinterest spreads remain low compared to peers (2.03% versus 3.1% sector average), webelieve that incremental improvement is likely to be gradual.


[email protected]


[email protected]






EPS (OMR) 0.01 0.01 0.02 0.03

P/E* (x) 27.2 17.1 11.6 8.7

Dividend Yield* 0.0% 0.0% 0.0% 2.3%

P/BV* (x) 2.1 1.8 1.6 1.4

ROAE 7.9% 11.4% 14.7% 17.1%


Provisions / NPLs 655.6% 475.5% 477.8% 480.5%

*Price as at 21 une 2010Source: Bank Sohar, EFG Hermes estimates

NEUTRAL

Price OMR0.218*

Fair Value OMR0.220

Last Div / Ex. Date N/A

Mkt. Cap / Shares (mn) OMR218 / 1,000



Bloomberg / Reuters BKSB OM / BKSB.OM


SHARE PRICE PERFORMANCE RELATIVETO MSM30 REBASED

bank sohar

Time for Consolidation


0.100.12

0.14

0.16

0.18

0.20

0.22

0.24

0.26

21-Jun-09

21-Sep-09

21-Dec-09

21-Mar-10

21-Jun-10

Price (OMR)

MSM30 (Rebased)


30/34

30 / 34 pages

bank sohar 22 June 2010

banks oman

FINANCIAL FORECASTS



2008a 2009a 2010e 2011e 2012e









Operating Expenses (13) (17) (19) (22) (24)



Pre-tax Profits (3) 9 15 21 29

Taxation 0 (1) (2) (3) (4)

Net Income (2) 8 13 19 25

Source: Bank Sohar, EFG Hermes estimates



2008a 2009a 2010e 2011e 2012e


Due from Banks 69 20 48 44 37

Investments, Net 26 62 58 70 81

Loans & Advances, Net 634 787 937 1,136 1,327



Total Assets 843 1,025 1,193 1,390 1,603

Customer Deposits 548 832 950 1,093 1,257

Due to Banks 90 21 48 66 75

Term Loan (Debt) 90 39 48 60 75


Total Liabilities 746 919 1,075 1,253 1,446


Total Liabilities & Shareholders' Equity 843 1,025 1,193 1,390 1,603



31/34

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banks oman



EPS 0.00 0.01 0.01 0.02 0.03

DPS 0.00 0.00 0.00 0.00 0.01

Payout Ratio 0% 0% 0% 0% 20%

BVPS 0.10 0.11 0.12 0.14 0.16

BVPS (Tangible) 0.10 0.11 0.12 0.14 0.16

Valuation

P/E (x) N/M 27.2 17.1 11.6 8.7

Dividend Yield 0.0% 0.0% 0.0% 0.0% 2.3%

P/BV (x) 2.3 2.1 1.8 1.6 1.4

P/Tangible BV (x) 2.3 2.1 1.8 1.6 1.4





DuPont Analysis 2008a 2009a 2010e 2011e 2012e




Other Revenue / Expenses 0.00% 0.00% 0.00% 0.00% 0.00%Provisioning Charge -1.23% -0.30% -0.30% -0.27% -0.23%

Tax Rate 0.06% -0.12% -0.16% -0.21% -0.24%

ROA -0.36% 0.86% 1.15% 1.45% 1.68%


ROE -3.11% 7.95% 11.41% 14.72% 17.07%



2008a 2009a 2010e 2011e 2012e





Cost to Income 71.0% 59.1% 51.8% 46.3% 42.9%

Tax Rate -14.1% -11.9% -12.5% -12.5% -12.5%

ROAA -0.4% 0.9% 1.2% 1.5% 1.7%

ROAE -3.1% 7.9% 11.4% 14.7% 17.1%



32/34

32 / 34 pages


banks oman


Asset Quality

NPL Ratio 0.12% 0.24% 0.35% 0.35% 0.35%

Provisions / NPLs 1273% 656% 476% 478% 480%


(NPLs-provisions) / Equity -9.4% -10.2% -10.6% -11.2% -11.4%


Capital

Core Tier-1 12.5% 11.6% 11.3% 11.3% 11.3%

Tier-1 12.5% 11.6% 11.3% 11.3% 11.3%

CAR 13.7% 12.9% 12.5% 12.3% 12.2%



FIGURE 55: GROWTH RATIOS

Y-o-Y growth, unless otherwise stated

2008a 2009a 2010e 2011e 2012e

Loans 112.2% 24.0% 19.1% 21.3% 16.8%

Deposits 125.6% 51.9% 14.1% 15.0% 15.0%

Assets 100.5% 21.6% 16.5% 16.4% 15.3%

RWAs 104.3% 17.8% 14.6% 16.4% 14.3%


Fee Income 45.6% -14.7% 15.0% 20.0% 20.0%

Non Interest Income 47.0% -9.3% 17.3% 19.0% 19.1%

Total Banking Income 110.4% 64.3% 27.5% 25.1% 20.8%


Pre-provision Profits 79.7% 131.5% 50.3% 39.2% 28.5%

Net Attributable Income -8.9% N/M 59.0% 47.3% 33.6%



2008a 2009a 2010e 2011e 2012eLoans / Deposits 115.8% 94.5% 98.6% 104.0% 105.6%

Loans / Assets 75.2% 76.8% 78.5% 81.8% 82.8%

Net Interbank / Assets -2.5% -0.1% 0.0% -1.5% -2.4%


Deposits / Assets 65.00% 81.2% 79.6% 78.6% 78.4%




33/34

EGYPT SALES TEAMLocal call center 16900

[email protected]

Head ofWestern Institutional Sales

Mohamed Ebeid

+20 2 35 35 [email protected]

Local Institutional Sales

Amr El Khamissy


UAE SALES TEAMcall center

+971 4 306 9333

[email protected]

Western Institutional Sales

Julian Bruce+971 4 363 [email protected]

Head of GCC Institutional Sales

Amro Diab+971 4 363 [email protected]

Gulf HNW Sales

Chahir Hosni+971 4 363 [email protected]

UAE Retail Sales

Reham Tawfik+971 4 306 [email protected]

KSA SALES TEAMcall center

+800 123 4566

[email protected]

[email protected]

Deputy Head of Gulf Sales

Ahmed Sharawy+9661 279 [email protected]

RESEARCH MANAGEMENTCairo General + 20 2 35 35 6140

UAE General + 971 4 363 4000

[email protected]

Head of Research

Wael Ziada


Head of Publ. and Distribution

Rasha Samir


DISCLOSURES

We, Murad Ansari and Gigi Varghese, hereby certify that the views expressed in this document accurately reflect our personal views about the securities andcompanies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securitiesthat are traded in Muscat Securities Market. EFG Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that arethe subject of this report.

Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, "EFG Hermes") for third parties may own the securities that are thesubject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this reportmay own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have nodiscretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the

subject of this report or are mentioned in this report.

DISCLAIMER

This Research has been sent to you as a client of one of the entities in the EFG Hermes group. This Research must not be considered as advice nor be acted upon byyou unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement.

Our investment recommendations take into account both risk and expected return. We base our fair value estimate on a fundamental analysis of the company'sfuture prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fairvalue estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG Hermesbelieves to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant,either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFGHermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connectiontherewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinionsand estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for generalcirculation to the clients of EFG Hermes and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to

the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive thisreport. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.


34/34

GUIDE TO ANALYSIS

EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and

regional economic environment.

Effective 16 December 2009, EFG Hermes changed its investment rating approach to a three-tier, long-term rating approach, taking total return potential togetherwith any applicable dividend yield into consideration.

In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to thecorresponding fair value.

For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:

Rating Potential Upside (Downside) %

Buy Above 15%

Neutral (10%) and 15%

Sell Below (10%)

EFG Hermes policy is to update research reports when appropriate based on material changes in a companys financial performance, the sector outlook, the generaleconomic outlook, or any other changes which could impact the analysts outlook or rating for the company. Share price volatility may cause a stock to moveoutside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stockimmediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged toreview the rating.

COPYRIGHT AND CONFIDENTIALITY

No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed toany other person if and until EFG Hermes has made the information publicly available.

CONTACTS AND STATEMENTS

Background research prepared by EFG Hermes KSA. Report prepared by EFG Hermes Holding SAE (main office), Building No. B129, Phase 3, Smart Village, KM 28,Cairo-Alexandria Desert Road, Egypt 12311, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP 1,939,320,000.

Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number

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