• Dubai Financial Group to sell stake in Bank MuscatDubai Financial Group, which currently hold c12% stake of Bank Muscat, is in talks to sell its stake. News reports suggest that sale has attracted interest from pension funds and family offices in Oman. At the current price, Bank Muscat is trading at 0.6x 2016 book value, which is at a steep discount to local and regional peers. Should the stake sale materialise at a price higher than the current market price, it could provide some uplift to the stock’s valuation. We tweak our earnings estimates for 2016 in view of recent results. While valuations remain attractive, we do not see a near-term rerating catalyst.
• 2Q16 results – weaker top line cushioned by lower provisions Bank Muscat’s 2Q16 earnings were cushioned by a sharp decline in credit costs from a high base in the previous two quarters. We estimate that the bank’s credit costs almost halved Q-o-Q, primarily helped by the continuation of strong recoveries from previously classified NPLs. Revenue was however weak, driven by spread compression and a decline in non-interest income. Forex income almost halved Q-o-Q, albeit from a high base in 1Q16 which was driven by one-offs. Net interest spreads remained under pressure, down a further 5bps Q-o-Q. Since the end of 2015, Bank Muscat’s spreads have contracted by 18bps, this was partly due to excess liquidity that it is carrying. We see the potential for a slight uptick in spreads should the bank optimise its balance sheet liquidity.
• Asset quality shows some signs of deterioration Bank Muscat’s non-performing loans rose by 16% Q-o-Q, with the bank’s NPL ratio rising 43bps Q-o-Q to 3.2%. NPL coverage also slipped to 115% in 2Q16 from 130% in 1Q16, suggesting that asset quality deterioration was partially absorbed through existing provision reserves. While the bank is confident that asset quality issues will remain manageable, it remains a key source of risk to our earnings estimates.

Murad Ansari