Bank Muscat (BM), the largest bank in Oman, is expected to benefit significantly from the robust growth in Oman and USD48 bn of projects that are currently underway. With a domestic market share of over two and half times of its next competitor, BM is aggressively expanding to Saudi Arabia, India, Bahrain and Qatar with the aim of increasing the contribution of international business from 7% to 25% of net income by 2011.

BM stands out as a well managed bank with healthy operational parameters and impressive growth prospects.

Despite aggressive competition and a sharp rise in global rates, the bank has managed to protect Net interest margins which have fallen just 76 bps from its peak to 3.78% in 2007E. We expect NIMs to stabilise helping a 27.6% rise in loan book to drive Net Interest Income 25.1% p.a. over our forecast horizon.

Non-interest income have been witnessing robust (sustainable) growth and expected to contribute as much as 22% of operating income by 2011.

Gross NPAs at 4.8% in 2006 were the lowest among peers, with provision coverage already in excess of 120%.
Rapid growth in assets led to the bank’s capital adequacy dropping to 11.4% in H1-07, necessitating fresh capital to help sustain the banks growth ambitions. A proposed private placement in favour of Dubai Financial Group, making it the bank’s second largest shareholder, will result in a 15% dilution of equity but a steep 68% hike in net worth.

Net income expanded at 51% p.a. over the last five years, helping the bank improve ROE from 12.8% to 20.1%. Despite the proposed capital infusion, we estimate ROE will rise to 21.7% by 2011 driven by a 27% CAGR in net income.

With plans to build a 15-strong branch network over the next five years, BM recently set up a branch in Saudi Arabia, a market 12 times bigger than Oman. The bank also applied for an investment banking license. Our forecasts assume that by the end of FY11, BM would secure a market share of 0.5% in credit and advances in the Saudi market, contributing approximately 6% to its net interest income.

BM currently trades at a P/E of 18.8x its forecasted earnings for 2007 (a 43% premium to the peer average of 13.1x). However earnings are expected to grow at a CAGR of 27% over the next 5 years dropping its P/E to 14.6x for 2008E Including BM’s unrealised gains of RO101.5 mn on its stake in CBoP drops its P/Adj BV to 2.0x 2008E.

We initiate coverage on BM with an overweight rating and a fair price of RO1.679 (an upside of 18.7 %). Our rating reflects BM’s strong fundamentals and the bank’s new growth impetus due to the additional capital being introduced. We believe BM’s entry into the lucrative Saudi Arabian market would add significant value and believe the bank deserves to trade at a premium to peers.

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