16-Aug-2017
Oman Banks - The forgotten banks
Buy Bank Muscat, hold NBO and sell the rest
Omani banks have become the forgotten banks in MENA and for a good reason as the weak macro picture has cast a shadow over growth and profitability (earnings to fall 1% Y-o-Y in 2017 and ROE down 164bps to 10%). We expect this negative sentiment to sustain given continued weak growth, NIM pressure, and credit quality stress and as we don’t foresee any turnaround in the macro outlook. While Omani banks trade at a steep discount to regional peers (2017e P/BV of 0.7x vs. avg.1.4x for MENA banks), this is not enough, in our view, to attract investors. We raise our CoE by 100bps to 13.5% to reflect the Sovereign downgrade. While we are negative on most stocks, we reiterate our BUY call on Bank Muscat (BM) as we see it as the best placed to face current challenges due to its dominant position, quality mgmt., defensive play (high CAR, provision buffer & solid risk mgmt.) and offers deep value (P/BV of 0.6x).
Sohar and Dhofar adjusting post-merger fall-out
Sohar & Dhofar aggressively pushed for balance sheet growth during their 3-year merger standstill, but at the detriment of profitability (2017e ROE of 8% for Dhofar & 9% for Sohar). Since the merger talks ended in Oct-16, they have shifted their focus to improving balance sheet utilisation but rebuilding profitability looks challenging in the ST. We reiterate our Sell on Sohar and downgrade Dhofar to Sell. We reiterate our Neutral call on NBO, as we believe the current valuation adequately reflects its decent franchise.
Next 12 months look challenging:
- Subdued loan growth: we expect mid-single-digit loan growth in 2017-18e. A lack of appetite and regulatory caps weigh on retail loan growth. Weak macro and competition from foreign banks is curtailing corporate loan growth. Islamic lending is a bright spot, and is faring well, but is a small contributor (12% of loans)
- Credit quality to deteriorate: aggregate NPL ratio rose 15bps Q-o-Q to 2.9% in 2Q and coverage fell 5ppt to 128%. NPL formation should continue particularly in the retail and construction segments. While we expect a slight decline (-3bps) in cost of risk in 2017 to 40bps due to recoveries (legacy NPLs for BM and relaxed contractors’ provisioning rules for Dhofar & Sohar), we raise CoR in 2018e to 43bps
- But NIM pressure to recede: improved liquidity and reduced competition from smaller banks should alleviate pressure on funding costs. Moreover, banks will be able to pass on some of the costs to borrowers
- Sluggish fee income: we expect flattish aggregate fees in 2017 following a decline of 5% Y-o-Y in 2016. Fees were hit by regulatory restrictions on some retail products in 2016 and should remain subdued on weak volume growth
Rajae Aadel
Murad Ansari
Omani banks have become the forgotten banks in MENA and for a good reason as the weak macro picture has cast a shadow over growth and profitability (earnings to fall 1% Y-o-Y in 2017 and ROE down 164bps to 10%). We expect this negative sentiment to sustain given continued weak growth, NIM pressure, and credit quality stress and as we don’t foresee any turnaround in the macro outlook. While Omani banks trade at a steep discount to regional peers (2017e P/BV of 0.7x vs. avg.1.4x for MENA banks), this is not enough, in our view, to attract investors. We raise our CoE by 100bps to 13.5% to reflect the Sovereign downgrade. While we are negative on most stocks, we reiterate our BUY call on Bank Muscat (BM) as we see it as the best placed to face current challenges due to its dominant position, quality mgmt., defensive play (high CAR, provision buffer & solid risk mgmt.) and offers deep value (P/BV of 0.6x).
Sohar and Dhofar adjusting post-merger fall-out
Sohar & Dhofar aggressively pushed for balance sheet growth during their 3-year merger standstill, but at the detriment of profitability (2017e ROE of 8% for Dhofar & 9% for Sohar). Since the merger talks ended in Oct-16, they have shifted their focus to improving balance sheet utilisation but rebuilding profitability looks challenging in the ST. We reiterate our Sell on Sohar and downgrade Dhofar to Sell. We reiterate our Neutral call on NBO, as we believe the current valuation adequately reflects its decent franchise.
Next 12 months look challenging:
- Subdued loan growth: we expect mid-single-digit loan growth in 2017-18e. A lack of appetite and regulatory caps weigh on retail loan growth. Weak macro and competition from foreign banks is curtailing corporate loan growth. Islamic lending is a bright spot, and is faring well, but is a small contributor (12% of loans)
- Credit quality to deteriorate: aggregate NPL ratio rose 15bps Q-o-Q to 2.9% in 2Q and coverage fell 5ppt to 128%. NPL formation should continue particularly in the retail and construction segments. While we expect a slight decline (-3bps) in cost of risk in 2017 to 40bps due to recoveries (legacy NPLs for BM and relaxed contractors’ provisioning rules for Dhofar & Sohar), we raise CoR in 2018e to 43bps
- But NIM pressure to recede: improved liquidity and reduced competition from smaller banks should alleviate pressure on funding costs. Moreover, banks will be able to pass on some of the costs to borrowers
- Sluggish fee income: we expect flattish aggregate fees in 2017 following a decline of 5% Y-o-Y in 2016. Fees were hit by regulatory restrictions on some retail products in 2016 and should remain subdued on weak volume growth
Rajae Aadel
Murad Ansari