• Adjusting estimates for bond conversion, stock dividend Bank Muscat announced the conversion of its mandatory bonds in to shares, leading to an incremental issue of 89.84 million shares. As per the terms, the bond was converted at OMR0.337, a 20% discount to the average stock price over the preceding 90 days. The shares are likely to be transferred to investor accounts within the next two to three weeks, and we expect some selling pressure in the short term. Bank Muscat has two more mandatory convertible bonds outstanding, maturing in 2017 (amounting to OMR31.96 million) and in 2018 (OMR32.42 million). We also adjust our fair value, due to the 5% stock dividend announced along with 2015 results, to OMR0.49 and reiterate our Buy rating on the stock.
• Valuation is undemanding; steep discount to peers Bank Muscat’s valuation – 2016e P/E of 6.3x and P/BV of 0.7x – is at a steep discount to domestic and regional peers (MENA banks avg. 2016 P/E of 9.2x and P/BV of 1.3x). We believe its 30% discount to BV is unjustified for Oman’s dominant deposit franchise. The steep discount largely prices in the anticipated pressure on asset quality from a slowing macro environment, in our view. The bank is well capitalised, has strong balance sheet liquidity, and the highest breakeven cost of risk amongst Omani banks.
• Well positioned to face macro headwinds The bank is well capitalised (CET1 of 13.5% and total CAR of 16.1%), has strong balance sheet liquidity (LDR of 100% versus sector average of 110%), and the highest breakeven cost of risk (421bps) amongst Omani banks. While asset quality trends have remained manageable, the current economic slowdown is likely to test the banks’ risk management capabilities. Over the past two years, the construction segment has been the biggest recipient of incremental credit from banks. Amongst the Omani banks, Bank Muscat has the lowest exposure to the construction segment at 4% of total loans as of Dec 2015.

Murad Ansari