bdof update aug 08 - up.m-e-c.bizup.m-e-c.biz/up/mohcine/report/bankdhofar0808.pdf · - also, in...

Ticker:BDOF.OM (Reuters)BKDB OM (Bloomberg)

Listing:Muscat Stock Market

Current Market Price:CMP: RO0.660 (as at 31st Aug‘08)

August, 2008

BUY

Bank DhofarSteady growth…

Bank Dhofar 1

Global Research - Oman

Om

an

Omar M. El-Quqa, CFAExecutive Vice [email protected] No:(965) 2951110

Faisal Hasan, CFAHead of [email protected] No:(965) 2951270 Abeer GoudaSenior Financial [email protected] No:(965) 295 1272

Vinod ShenoyFinancial [email protected] No:(965) 295 1274

Results Update

increased from RO20.1mn in 2006 to RO22.8mn in 2007. However, as a result of narrowing spreads the bank’s ROAA declined from 3.1% in 2006 to 2.8% in 2007. Also, the ROAE decreased from 23.3% in 2006 to 22.4% in 2007.

- BDOF is adequately capitalized, however its risk weighted assets increased over the period, as the Tier-I capital ratio declined from 15.6% in 2006 to 10.1% in 2007. The shareholder’s equity to total assets ratio declined from 13.4% in 2006 to 11.6% in 2007.

- The bank achieved a net profit of RO14.7mn for 1H08 as against a net profit of RO9.0mnreported during 1H07, thereby displaying a robust growth rate of 63.4%. The bank has registered a double digit growth in its asset base in 1H08. Its assets registered a YTD growth of 15.7%, majority of this arising out of a 24.4% YTD growth in net loans & advances that increased from RO733.8mn as at Dec’07 to RO912.5mn as at end of Jun’08.

- Also, in Jun’08 the Central Bank of Oman (CBO) relaxed the upper cap on housing loans (real estate & project financing) from 5% to 10% of the total lending portfolio which weconsider as a definite positive factor for the bank.

Key Data

CMP (RO) # 0.660

EPS (RO) * 0.052

BVPS (RO) * 0.241

P/E (x) 12.8

P / BV (x) 2.7

12M Avg.vol. 214,562

52 week Low / Hi (RO) 0.556/1.096Source: Global Research

#As on Aug 31, 2008

*2008 Estimate

Highlights

- Bank Dhofar (BDOF) was ranked third in terms of market share of aggregate loans and advances and fourth in terms of market share of customer deposits in 2007. Of the aggregate credit in 2007, it captured 10.8% share or RO704.6mn and its total assets increased at a 4-year (2003-07) CAGR of 19.1%.

- BDOF evidenced a double digit YoY growth of 13.2% in net profit in 2007. The net profit

Global Research - Oman Global Investment House

2 Bank Dhofar

- However, the CBO raised the Cash reserve ratio from 5.0% to 8.0% requiring the banks to maintain higher balances with the CBO reducing its effective yield and reduced the lending ratio from 87.5% to 82.5% thereby squeezing the credit volumes in a phased manner starting from Aug’08 hence reducing the funds available to lend. We believe that even though the overall cap arising out of hike in Cash reserve ratio should limit its ability to lend to a limited extent, relaxation in housing loans should help it to keep up the momentum displayed in 2007.

- Based on the current market price of RO0.660 per share (as at 31st Aug 08), BDOF is trading at a 2008E P/E & P/BV multiple of 12.8x & 2.7x and a 2009E P/E and P/BV multiple of 11.5x and 2.5x respectively. Our estimated fair value for this banking scrip works out to RO0.813 per share based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip reflects an upside of23.1% on closing price of RO0.660 per share (as at 31st Aug‘08); hence we maintain our earlier “BUY” recommendation on the scrip.

Recent Developments:

- In Jun’08, BDOF board proposed a rights issue of RO70mn in rights issue of shares. However, the same is subject to the shareholders’ and regulatory authority approval. The bank stated that the purpose of capital increase is to fund the its growth needs.

- In Jun’08, BDOF appointed Kris Babicci as the new CEO. He has an overall international banking experience of about 30 years including a stint at Standard Chartered Bank Qatar.

- In Aug’07, the bank added various services to its customer service portfolio, namely home banking services, cheque/cash deposits machines and utility payment machines at various points across Oman to facilitate customer service.

Rating Updates

- In May’08, Moody’s maintained its earlier rating on the bank’s financial strength ratingat D+. The local currency deposit rating assigned is A3/P-2. The foreign currency deposit rating is unchanged at A3/P-2. The outlook on all ratings is stable.

- In Apr’08, Fitch released the long term issuer default rating of BDOF as BBB+ with a stable outlook. The short term issuer default rating was reconfirmed as F2 with a stable outlook.

Analysis of Financial Performance – 2007

Balance Sheet

- BDOF was ranked third in terms of market share of aggregate loans and advances and fourth in terms of market share of customer deposits in 2007. Of the aggregate credit in 2007, it captured 10.8% share or RO704.6mn and its total assets increased at a 4-year (2003-07) CAGR of 19.1%. Also, the loans and advances during the same period increased at a CAGR of 17.7%.


3Bank Dhofar

Table 1: Balance Sheet Highlights

RO mn 2004 2005 2006 2007Cash & Balances with CBO 125.9 133.9 136.9 248.0

Y-o-Y increase 24.3% 6.3% 2.2% 81.2%Non-trading Investments 18.9 13.4 9.1 2.5

Y-o-Y increase 236.3% -29.0% -32.1% -72.4%Net Loans & Advances 406.5 470.9 548.8 704.6

Y-o-Y increase 10.7% 15.9% 16.5% 28.4%Total Assets 551.3 618.2 694.8 955.1 Y-o-Y increase 16.3% 12.1% 12.4% 37.5%% composition

Cash & Balances with CBO 22.8% 21.7% 19.7% 26.0%

Non-trading Investments 3.4% 2.2% 1.3% 0.3%

Net Loans & Advances 73.7% 76.2% 79.0% 73.8%Total Assets 100.0% 100.0% 100.0% 100.0%Customer Deposits 421.1 452.1 497.1 674.5

Y-o-Y increase 20.9% 7.4% 10.0% 35.7%Shareholders’ Equity 67.8 79.4 93.3110.5

Y-o-Y increase 7.4% 17.2% 17.5% 18.5%Other Liabilities 62.4 86.7 104.4 170.1

Y-o-Y increase -0.4% 38.9% 20.4% 63.0%Total Liabilities & Equity 551.3 618.2 694.8 955.1 Y-o-Y increase 16.3% 12.1% 12.4% 37.5%% composition

Customer Deposits 76.4% 73.1% 71.6% 70.6%

Shareholders’ equity 12.3% 12.8% 13.4% 11.6%

Other Liabilities 11.3% 14.0% 15.0% 17.8%Total Liabilities & equity 100% 100% 100% 100% Source: Bank Reports & Global Research

- It captured 12.7% market share in terms of customer deposits that were up by 35.7% from RO497.1mn in 2006 to RO674.5mn in 2007 representing a 4-year (2003-07) CAGR of 18.0%.

Table 2: Segmental distribution of assets (2007)

RO mn % composition

Retail Banking 280.8 29.4%

Corporate Banking 469.2 49.1%

Treasury & Investments 205.1 21.5%Total assets 955.1 100.0%Source: Bank Reports & Global Research

- Corporate lending amounting to RO469.2mn claimed the majority of BDOF’s assets in 2007 comprising about 49.1% of the total assets. Lending to retail sector was RO280.8mn accounting for about 29.4% of the total assets. The remaining 21.5% of the assets were represented by investments to the tune of RO205.1mn.


4 Bank Dhofar

- Of the total assets in 2007, majority contribution was in the form of net loans (73.8%) and the remaining 12.5% were balances with central bank.

Table 3: Composition of Assets2004 2005 2006 2007

Cash & balances with CB 6.9% 13.6% 12.2% 12.5%Treasury Bills 9.2% 0.0% 0.0% 7.5%Placements with banks 3.4% 4.2% 4.2% 3.1%Loans and advances (Net) 73.7% 76.2% 79.0% 73.8%Other assets 0.7% 0.8% 0.6% 0.5%Trading investments 3.4% 2.2% 1.3% 0.3%Non trading investments 1.2% 1.8% 1.6% 1.5%Tangible net fixed assets 0.6% 0.6% 0.6% 0.5%Intangible assets 0.8% 0.6% 0.6% 0.4%Total Assets (RO ‘000s) 551,293 618,225 694,799 955,127 Source: Bank Reports & Global Research

- Within gross loans & advances, commercial loans increased from RO471.1mn in 2006 to RO621.8mn in 2007 on the back of project financing mandates received by the bank. Thegrowth in other segments was flat or marginal declining.

Table 4: Loans & Advances CompositionRO mn 2004 2005 2006 2007Overdrafts 55.1 62.7 75.3 73.1 Loans 362.4 414.3 471.1 621.8 Loans against trust receipts 16.7 22.7 33.4 38.2 Bills Discounted 4.7 4.2 1.5 3.2 Advance against Credit Cards 4.2 4.2 4.2 4.7 Others 6.0 7.3 9.3 9.0 Total advances 449.1 515.3 594.7 750.0 Source: Bank Reports & Global Research

- The NPLs have decreased from RO35.3mn in 2006 to RO34.9mn in 2007. The Coverage ratio remained flat at 130.1% between 2006 and 2007 as a result of proportionately lowerprovisioning.

Figure 1: Credit Quality

Source: Bank Reports & Global Research

50.045.040.035.030.025.020.015.010.0

5.0-

2003 2004 2005 2006 2007

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

Loan Loss Reseve Non Performing Loane Coverage Ratio

(RO mn)

106.1%

37.6 35.4

42.637.2

44.4

39.6

45.9

35.3

45.4

34.9

114.3% 112.1%130.1% 130.1%


5Bank Dhofar

- The total sources of banks funding including equity and customers deposits increased at a 5-year (2003-07) CAGR of 13.8%. The customer deposits were up by 35.7%, from RO497.1mn in 2006 to RO674.5mn in 2007. BDOF had tapped low cost deposits in the form of current and savings accounts as it was evident from the deposit mix. The low cost term deposits increased from 38.2% of total deposits in 2006 to 47.6% in 2007.

Figure 2: Customer Deposits Profile


- The shareholder’s equity to total assets ratio declined from 13.3% in 2006 to 11.6% in 2007. The equity was up by 18.5% in 2007, increasing to RO110.5mn from RO93.3mn in 2006 at a 5-year (2003-07) CAGR of 15.0%.

Figure 3: Capital Adequacy


- BDOF is adequately capitalized, however its risk weighted assets increased over the period, as the Tier-I capital ratio declined from 15.6% in 2006 to 10.1% in 2007.

Income Statement

- BDOF evidenced a double digit YoY growth of 13.2% in net profit in 2007. The net profit

100%

80%

60%

40%

20%

0%2003 2004 2005 2006 2007

Savings Accounts CDs Time DepositsMargin Accounts Current Accounts

18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%2003 2004 2005 2006 2007

Equity to Total Assets Tier-I Capital Ratio

13.3% 12.3% 12.8% 13.4% 11.6%

10.1%11.7%

15.3%15.3%15.6%


6 Bank Dhofar

increased from RO20.1mn in 2006 to RO22.8mn in 2007. It increased at a 4 - year (2003-07) CAGR of 22.4% during the period. On the back of hyper growth in the economy and specifically the real estate sector, the income from lending as well as other fee basedincome has increased considerably over the last few years contributing to the bottom line of the leading Omani banks. Not only have the banks displayed good performance in the core business but also in the fee income on account of brisk activity on the bourses in 2007.

- BDOF’s net interest income increased by 15.7% from RO26.2mn in 2006 to RO30.4mn in 2007. The commission income registered a YoY increase of 36.7% increasing from RO2.2mn in 2006 to RO3.0mn in 2007.

Table 5: Income Statement Highlights

RO mn 2004 2005 2006 2007Interest Income 30.0 34.7 42.3 51.6

Y-o-Y increase 8.5% 15.7% 21.7% 22.0%Interest expense (6.8) (10.3) (16.0) (21.3)

Y-o-Y increase 7.7% 53.1% 55.1% 32.5%Commission income 1.8 2.2 2.2 3.0

Y-o-Y increase 26.0% 20.3% -1.8% 36.7%Operating Income 25.1 29.3 35.6 42.3

Y-o-Y increase 11.8% 16.8% 21.5% 18.9%Net Income 11.1 14.2 20.1 22.8

Y-o-Y increase 9.1% 28.2% 41.8% 13.2%Source: Bank Reports & Global Research

- As a result of US dollar peg, the CBO’s decision to mirror the US fed rate cuts from time to time has forced the banks in Oman to take a hit on the margins. BDOF had posted a decent spread of 4.3% in 2007. The income yield of 7.4% in relation to the commission expense rate of 3.1% resulted in the banking spread of 4.3%. The interest rate scenario is expected to be even more challenging with the US contemplating of further rate cuts and having implemented one in 1Q08 and the CBO mirroring the same.

Figure 4: Spread Analysis


9.0%8.0%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%

2003 2004 2005 2006 2007

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

7.5%

Interest Income/ Average Interest Earning AssetsInterest Expense/ Average Interest Bearing LiabilitiesSpread

1.9%

6.5%

1.6% 2.1%

6.9% 7.7%

2.9%

7.4%

3.1%

5.7%4.9% 4.8% 4.8%

4.3%


7Bank Dhofar

- Despite of narrowing spreads the operating income was up by 18.9%, from RO35.6mn in 2006 to RO42.3mn in 2007. This was as a result of 36.7% YoY increase in Fees & commission income that increased from RO2.2mn in 2006 to RO3.0mn in 2007, foreign exchange gains that increased 50.0% from RO0.8mn in 2006 to RO1.1mn in 2007 and investment income that increased 31.3% from RO3.6mn in 2006 to RO4.7mn in 2007. The increase in fee & commission income was as a result of increased activity on the bourses in 2007.

Figure 5: Operating Efficiency


- The operating expenses increased by 24.6% from RO13.6mn in 2006 to RO16.9mn during 2007. This increase was majorly due to higher administrative expenses which registered a YoY increase of 42.0% over the 2006 levels of RO5.0mn to reach RO7.1mn in 2007. Staff wages and salaries also increased by 13.6% reaching RO8.5mn in 2007 compared to RO7.5mn in 2006.

- BDOF registered an EPS of RO0.043 in 2007 as compared to RO0.044 in 2006. Even though the net income increased in 2007, the EPS declined as a result of capital increase. The EPS (adjusted for capital increase) for 2006 was RO0.038 compared to the 2007 EPS of RO0.043. The bank’s ROAA declined from 3.1% in 2006 to 2.8% in 2007. Also, the ROAE decreased from 23.3% in 2006 to 22.4% in 2007.

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%2003 2004 2005 2006 2007

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

49.1%

Cost to Total Operating Income Cost to Average Total Assets

49.8% 44.9% 38.3% 40.1%

2.7%2.4%

2.3%2.2%

2.1%


8 Bank Dhofar

Analysis of Financial Performance – 1H08

- The bank achieved a net profit of RO14.7mn for 1H08 as against a net profit of RO9.0mnreported during 1H07, thereby displaying a robust growth rate of 63.4%.

Table 6: Income Statement Highlights

RO mn 1H07 1H08 YoY change 2008

Interest income 23.6 29.4 24.3%

Interest expense (9.5) (10.5) 10.7%Net interest income 14.1 18.9 33.5%

Fees & commission 4.5 9.6 115.6%Operating income 18.6 28.5 53.2%

Operating expenses (7.9) (10.2) 28.7%Net profit 9.0 14.7 63.4%Source: Bank Reports & Global Research

- As a result of a 24.4% YoY growth in loans & advances, the net interest income increased by 33.5% in 1H08. Fees & commission income increased by 115.6% in 1H08 reaching RO9.6mn in 1H08 as compared to RO4.5mn in 1H07. Operating income for the 6M period increased by 53.2% to RO28.5mn from RO18.6mn registered in 1H07. Operating expenses have increased by RO2.3mn in 1H08 as compared to the same period in 2007 mainly due to increase in manpower and other administrative costs.

Table 7: Balance Sheet Highlights

RO mnAs at

Dec’07As at

Mar’08As at

Jun’08Change in 2Q08

YTD Change 2008

Cash & Balances with CBO 119.4 166.6 57.9 -65.2% -51.5%

Non-trading investments 71.4 40.9 100.9 146.7% 41.4%

Loans & Advances 733.8 842.5 912.5 8.3% 24.4%

Other Assets 30.5 33.4 33.9 1.6% 11.1%Total Assets 955.1 1,083.3 1,105.2 2.0% 15.7%

Customers’ Deposits 674.5 777.7 800.8 3.0% 18.7%

Other Liabilities 170.1 202.4 191.7 -5.3% 12.7%

Total Shareholders’ Equity 110.5 103.2 112.8 9.2% 2.1%Total Liabilities & Shareholders’ Equity 955.1 1,083.3 1,105.2 2.0% 15.7%Source: Bank Reports & Global Research

- The bank has registered a double digit growth in its asset base in 1H08. Its assets registered a YTD growth of 15.7%, majority of this arising out of a 24.4% YTD growth in net loans & advances that increased from RO733.8mn as at Dec’07 to RO912.5mn as at end of Jun’08. Also, the customer deposits were up by 18.7% in the 6M period increasing from RO674.5mn as at Dec’07 to RO800.8mn as at end of Jun’08.

- The low cost current deposits were up by 18.2% in 1H08 reaching RO210.6mn from RO178.1mn as at Dec’07. Savings deposits registered a higher YTD growth of 23.2% to reach RO176.0mn as at end of Jun’08 as compared to RO142.9mn as at Dec’07.


9Bank Dhofar

Outlook & Valuation

- BDOF have performed well in 2007 and increased its lending portfolio by displaying growth in the overseas lending and projects finance/syndicated loans. The government ofOman is continuing with its stated policy of wider and larger participation of the private sector in various spheres of economic activities, which were hitherto in its domain. Consequently, a number of large projects of national importance, requiring considerable sums of investments are being implemented at a rapid pace. BDOF has taken a conscious decision to actively participate in the financing of these projects within its prudentialexposure norms.

- Over the years the bank has participated in several important local projects including the projects of Sohar Refinery LLC, Oman India Fertilizer Company LLC, Sohar Aluminum,Oman LNG, Oman Gas, Salalah Port, Oman Refinery (expansion) and the four power andwater projects. The Bank has increased its participation in respect of cross-border deals within the permitted regulatory ceiling.

- The future unveils various lending opportunities in the infrastructure, oil & gas, construction and tourism sectors taking into account the large government sponsored projects on the anvil as well as those privately sponsored. The 7th Five Year Plan (2005-2010), which is currently in its third year of implementation, envisages a Governmental & Private investment program of RO13.2bn over the 5-year period. Of this, Oil & gas-related investments aggregate RO7.3bn while investment in tourism projects is slated at RO958mn. Investments in other mega-projects and in private sector projects aggregate to RO2.9bn. The state budget for 2008 increased spending on development projects by RO2.4bn to reach a level of RO5.4bn.

- Also, in Jun’08 the Central Bank of Oman (CBO) relaxed of upper cap on housing loans (real estate & project financing) from erstwhile 5% to revised 10% of the total lendingportfolio which we consider as a definite positive factor for the bank.

- However, the CBO raised the Cash reserve ratio from 5% to 8% requiring the banks to maintain higher balances with the CBO reducing its effective yield and reduced the lending ratio from 87.5% to 82.5% thereby squeezing the credit volumes in a phased manner starting from Aug’08 hence reducing the funds available to lend; however the proposed rights issue of RO70mn should provide some liquidity. We believe that even though the overall cap arising out of hike in Cash reserve ratio should limit its ability to lend to a limited extent, relaxation in housing loans should help it to keep up the momentum displayed in 2007.

- Based on the current market price of RO0.660 per share (as at 31st Aug 08), BDOF is trading at a 2008E P/E & P/BV multiple of 12.8x & 2.7x and a 2009E P/E and P/BV multiple of 11.5x and 2.5x respectively.


10 Bank Dhofar

Table 8: Valuation

Valuation MethodValue per

share (RO)Weight

Weighted Valueper Share (RO)

DDM 0.836 80% 0.669

GGM 0.717 20% 0.143Target Price 0.813Source: Global Research

- Our estimated fair value for this banking scrip works out to RO0.813 per share based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip reflects an upside of 23.1% on closing price of RO0.660 pershare (as at 31st Aug‘08); hence we maintain our earlier “BUY” recommendation on the scrip.


11Bank Dhofar

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nd r

eser

ve 4

,416

5

,888

9

,929

1

7,62

9 2

5,32

9 3

3,02

9 3

8,50

0

Ret

aine

d ea

rnin

gs 1

5,45

2 2

3,70

5 2

6,32

7 2

6,80

5 3

0,50

9 3

3,13

0 3

8,06

6

Inv

estm

ent R

eval

uatio

n R

eser

ve 4

,289

2

,231

3

,582

7

,247

9

,080

1

1,09

5 1

3,31

3

Tot

al S

hare

hold

er‘s

Equ

ity

79,

405

93,

281

110

,498

1

27,8

86

141

,123

1

53,4

59

166

,083

Tot

al L

iabi

litie

s &

Equ

ity

618

,225

6

94,7

99

955

,127

1

,231

,556

1

,362

,470

1

,499

,142

1

,613

,433


12 Bank Dhofar

INC

OM

E S

TA

TE

ME

NT

Ban

k D

hofa

r

RO

’000

2005

A20

06A

2007

A20

08E

2009

E20

10E

2011

E

Inte

rest

inco

me

34,

738

42,

287

51,

610

69,

836

86,

205

103

,244

1

14,3

32

Inte

rest

exp

ense

(10

,342

) (

16,0

42)

(21

,254

) (

29,6

80)

(38

,361

) (

48,0

08)

(54

,308

)

Net

inte

rest

inco

me

24,

396

26,

245

30,

356

40,

155

47,

844

55,

235

60,

024

Fees

and

com

mis

sion

s 2

,198

2

,159

2

,952

4

,871

6

,089

7

,306

8

,402

Fore

ign

exch

ange

gai

ns 5

66

752

1

,128

1

,579

1

,777

1

,954

2

,101

Inve

stm

ent I

ncom

e 1

,256

3

,551

4

,662

5

,273

4

,640

3

,828

3

,509

Oth

er o

pera

ting

inco

me

1,5

64

2,2

13

4,9

42

5,1

89

5,4

49

5,7

21

6,0

07

Prov

isio

n fo

r in

vest

men

ts -

-

5

1 -

-

-

-

Prov

isio

n fo

r lo

an im

pair

emen

t (

2,78

1) (

2,64

6) (

3,26

3) (

5,62

5) (

5,36

3) (

5,15

6) (

4,51

1)

Rec

over

ies

from

pro

visi

on f

or p

ossi

ble

cred

it lo

sses

2,1

20

3,5

17

1,5

15

2,2

70

2,2

96

2,2

55

2,1

54

Impa

irm

ent

(18

) (

201)

(24

) -

-

-

-

Net

Ope

rati

ng I

ncom

e 2

9,30

1 3

5,59

0 4

2,31

9 5

3,71

2 6

2,73

1 7

1,14

5 7

7,68

6

Staf

f ex

pens

es (

6,83

4) (

7,47

5) (

8,48

8) (

11,0

34)

(13

,793

) (

16,5

52)

(19

,034

)

Adm

inis

trat

ive

expe

nses

(5,

270)

(4,

996)

(7,

095)

(9,

578)

(11

,973

) (

14,3

67)

(15

,804

)

Dep

reci

atio

n (

1,06

6) (

1,14

3) (

1,38

1) (

1,96

7) (

2,21

3) (

2,43

4) (

2,67

7)

Ope

rati

ng e

xpen

ses

(13

,170

) (

13,6

14)

(16

,964

) (

22,5

79)

(27

,978

) (

33,3

53)

(37

,516

)

Net

pro

fitbe

fore

tax

16,

131

21,

976

25,

355

31,

133

34,

752

37,

792

40,

170

Inco

me

tax

expe

nse

(1,

932)

(1,

846)

(2,

565)

(3,

736)

(4,

170)

(4,

535)

(4,

820)

Net

Pro

fit 1

4,19

9 2

0,13

0 2

2,79

0 2

7,39

7 3

0,58

2 3

3,25

7 3

5,35

0

P&

L A

ppro

pria

tion

Acc

ount

:

Ope

ning

Bal

ance

of

Ret

aine

d E

arni

ngs

10,

439

15,

452

23,

705

26,

327

26,

805

30,

509

33,

130

N

et P

rofit

for

the

year

14,

199

20,

130

22,

790

27,

397

30,

582

33,

257

35,

350

L

egal

Res

erve

s (

1,42

0) (

2,01

3) (

2,27

9) (

5,54

5) -

-

-

S

ubor

dina

ted

Bon

d R

eser

ve (

1,47

2) (

1,47

2) (

4,04

1) (

7,70

0) (

7,70

0) (

7,70

0) (

5,47

1)

B

onus

sha

res

Issu

ed -

(

4,19

6) (

6,92

4) -

-

-

-

D

ivid

ends

Pai

d (

6,29

4) (

4,19

6) (

6,92

4) (

13,6

74)

(19

,178

) (

22,9

37)

(24

,943

)

Clo

sing

Bal

ance

of

Ret

aine

d E

arni

ngs

15,

452

23,

705

26,

327

26,

805

30,

509

33,

130

38,

066


13Bank Dhofar

CA

SH F

LO

W S

TA

TE

ME

NT

Ban

k D

hofa

rR

O ‘

000

2005

A20

06A

2007

A20

08E

2009

E20

10E

2011

EO

pera

ting

Act

ivit

ies

(a)

13,

294

29,

164

28,

508

34,

989

38,

158

40,

846

42,

538

I

nter

est &

com

mis

sion

rec

eipt

s 3

9,40

0 5

0,03

0 6

4,63

4 3

1,13

3 3

4,75

2 3

7,79

2 4

0,17

0

Int

eres

t pay

men

ts (

9,02

8) (

13,9

58)

(18

,242

) 1

,967

2

,213

2

,434

2

,677

Cas

h pa

ymen

t to

supp

liers

and

em

ploy

ees

(15

,532

) (

5,17

8) (

16,1

68)

5,6

25

5,3

63

5,1

56

4,5

11

I

ncom

e ta

x (

1,54

6) (

1,73

0) (

1,71

6) (

3,73

6) (

4,17

0) (

4,53

5) (

4,82

0)W

orki

ng C

apit

al (

b) 4

4,65

3 (

20,9

44)

(23

,172

) 2

,283

(

82,1

56)

(38

,040

) (

37,3

42)

D

ec/(

inc.

) in

loan

s an

d ad

vanc

es to

ban

ks 2

,167

2

,086

2

,079

(

2,18

9) (

1,56

9) (

1,64

7) (

1,73

0)

Dec

/ (in

c) lo

ans

and

adva

nces

to c

usto

mer

s (

65,1

43)

(78

,753

) (

154,

076)

(22

5,01

2) (

170,

634)

(14

3,21

1) (

128,

890)

D

ec/ (

inc)

in o

ther

ass

ets

-

-

-

(99

1) (

595)

(49

1) (

528)

P

urch

ase

of tr

easu

ry b

ills

(8,

850)

-

(71

,353

) (

35,6

77)

(26

,757

) (

16,7

23)

(7,

526)

D

ec/ (

inc)

in tr

adin

g in

vest

men

ts -

-

-

(

252)

(27

7) (

304)

(33

5)

Pro

ceed

s fr

om S

ale

of tr

easu

ry b

ills

59,

700

-

-

-

-

-

-

I

nc/(

dec)

in d

ue to

ban

ks

25,

740

10,

713

22,

818

28,

020

24,

303

21,

873

16,

769

I

nc/(

dec)

of

depo

sits

fro

m c

usto

mer

s 3

1,03

9 4

5,01

0 1

77,3

60

236

,076

9

1,05

8 1

00,1

64

82,

635

I

nc/(

dec)

oth

er li

abili

ties

-

-

-

2,3

08

2,3

16

2,3

01

2,2

62

Tot

al c

ash

flow

from

oper

atin

gac

tivi

ties

57,

947

8,2

20

5,3

36

37,

272

(43

,998

) 2

,807

5

,197

In

vest

ing

Act

ivit

ies

C

apex

(c)

(1,

473)

(1,

484)

(1,

826)

(2,

138)

(2,

049)

(1,

844)

(2,

028)

I

nves

tmen

ts in

com

e 6

16

498

3

17

-

-

-

-

P

urch

ase

of in

vest

men

ts (

2,01

6) (

4,06

6) (

8,53

8) -

-

-

-

Pro

ceed

s fr

om s

ale

of ta

ngib

le fi

xed

asse

ts 4

8 1

01

224

-

-

-

-

Pro

ceed

s fr

om s

ale

of in

vest

men

t 6

,512

6

,565

9

,980

-

-

-

-

T

otal

cas

h flo

wfr

omin

vest

ing

acti

viti

es 3

,687

1

,614

1

57

(2,

138)

(2,

049)

(1,

844)

(2,

028)

Fin

anci

ng A

ctiv

itie

s

Div

iden

d pa

id to

sha

reho

lder

s (

6,29

4) (

4,19

6) (

6,92

4) (

13,6

74)

(19

,178

) (

22,9

37)

(24

,943

)

Sub

ordi

nate

d lia

bilit

ies

paid

-

0

38,

500

(7,

362)

0

0

0

Tot

al c

ash

flow

from

finan

cing

acti

viti

es (

6,29

4) (

4,19

6) 3

1,57

6 (

21,0

36)

(19

,178

) (

22,9

37)

(24

,943

)

Net

Cha

nge

in C

ash

55,

340

5,6

38

37,

069

14,

098

(65

,225

) (

21,9

74)

(21

,774

)N

et C

ash

at b

egin

ning

47,

149

102

,489

1

08,1

27

145

,196

1

59,2

94

94,

070

72,

096

Net

Cas

h at

end

102

,489

1

08,1

27

145

,196

1

59,2

94

94,

070

72,

096

50,

322

Dep

osits

with

CB

O (

500)

(50

0) (

500)

(50

0) (

500)

(50

0) (

500)

Loa

ns &

adv

ance

s to

ban

ks 1

9,12

0 2

4,76

9 2

6,64

6 2

6,64

6 2

6,64

6 2

6,64

6 2

6,64

6 D

epos

its w

ith C

BO

(47

5) (

581)

(37

8) (

378)

(37

8) (

378)

(37

8)C

ash

at th

e en

d of

the

year

102

,489

1

08,1

27

145

,196

1

59,2

94

94,

070

72,

096

50,

322


14 Bank Dhofar

Fact SheetBank Dhofar

2005A 2006A 2007A 2008E 2009E 2010E 2011EProfitability Return on Average Assets 2.4% 3.1% 2.8% 2.5% 2.4% 2.3% 2.3% Return on Average Equity 19.3% 23.3% 22.4% 23.0% 22.7% 22.6% 22.1% Net interest income/ Total Operating Income 73.8% 66.3% 64.0% 64.3% 67.7% 70.4% 71.5% Non-interest income/ Total Operating Income 19.1% 24.4% 32.3% 31.5% 28.6% 26.4% 25.8% Non-interest expense/ Total Operating Income 44.9% 38.3% 40.1% 42.0% 44.6% 46.9% 48.3% Fees & Commissions/ Total Operating Income 7.5% 6.1% 7.0% 9.1% 9.7% 10.3% 10.8% Dividend payout ratio 44.3% 20.8% 30.4% 49.9% 62.7% 69.0% 70.6%

Margins Interest Expense/ Interest Income 29.8% 37.9% 41.2% 42.5% 44.5% 46.5% 47.5% Interest Income/ Average Interest Earning Assets 6.91% 7.71% 7.40% 7.46% 7.42% 7.72% 7.71% Interest Expense/ Average Interest Bearing Liabilities 2.11% 2.93% 3.06% 3.15% 3.40% 3.85% 4.00% Net Spread 4.81% 4.78% 4.34% 4.31% 4.02% 3.87% 3.71% Net Interest Margin 4.6% 4.5% 4.1% 4.1% 3.9% 4.0% 3.9% Efficiency Cost to Total Operating Income 44.9% 38.3% 40.1% 42.0% 44.6% 46.9% 48.3% Staff Expense to Total Operating Income 23.3% 21.0% 20.1% 20.5% 22.0% 23.3% 24.5% Cost to Average Total Assets 2.3% 2.2% 2.1% 2.1% 2.2% 4.9% 5.0%

Liquidity Loans to Interest Earning Assets 91.1% 92.3% 86.4% 85.9% 85.8% 86.0% 86.4% Loans to Customer Deposits 114.0% 119.6% 111.2% 107.1% 114.4% 117.0% 119.7% Customer Deposits to Equity 569.4% 533.0% 610.4% 712.0% 709.8% 718.0% 713.2% Due from Banks to Due to Banks 183.4% 160.6% 235.3% 223.8% 161.2% 138.0% 118.7%

Credit Quality Provisions to Total Operating Income 2.3% -1.9% 4.1% 6.2% 4.9% 4.1% 3.0% Provisions to Average loans 0.1% -0.2% 0.3% 0.4% 0.3% 0.5% 0.4% Non Performing Loans (RO) 39,575 35,285 34,893 34,127 34,371 35,445 37,571 Loan Loss Reserve (RO) 44,364 45,897 45,397 51,022 56,385 61,541 66,052 NPL’s to Gross Loans 7.7% 5.9% 6.3% 3.5% 3.0% 2.8% 2.7% NPL’s to (Equity+Loan loss reserve) 32.0% 25.4% 22.4% 19.1% 17.4% 16.5% 16.2% Loan Loss Reserve to Gross Loans 8.6% 7.7% 6.1% 5.2% 4.9% 4.8% 4.7% NPL Coverage 112.1% 130.1% 130.1% 149.5% 164.1% 173.6% 175.8%

Capital Adequacy Equity to Total Assets 12.8% 13.4% 11.6% 10.4% 10.4% 10.2% 10.3% Equity to Gross Loans 15.4% 15.7% 14.7% 13.1% 12.3% 11.9% 11.7%

Constitution of Total Income Net Interest Income to Total Operating Income 73.7% 65.7% 64.1% 64.3% 67.7% 70.4% 71.5% Fees & Comm. to Total Operating Income 7.5% 6.1% 7.0% 9.1% 9.7% 10.3% 10.8% Investment Income to Total Operating Income 4.3% 10.0% 11.0% 9.8% 7.4% 5.4% 4.5% FX Income to Total Operating Income 1.9% 2.1% 2.7% 2.9% 2.8% 2.7% 2.7% Other Income to Total Operating Income 5.3% 6.2% 11.7% 9.7% 8.7% 8.0% 7.7%

Operating Performance Change in Interest Income 15.7% 21.7% 22.1% 35.3% 23.4% 19.8% 10.7% Change in Fees and Commission 20.3% -1.8% 36.7% 65.0% 25.0% 20.0% 15.0% Change in Investment Income -16.7% 182.7% 31.3% 13.1% -12.0% -17.5% -8.3% Change in Fx Income 22.8% 32.9% 50.0% 40.0% 12.5% 10.0% 7.5% Change in Other Income 12.4% 41.5% 123.3% 5.0% 5.0% 5.0% 5.0%

Valuation Ratios Shares in Issue (000s) 530,819 530,819 530,819 530,819 530,819 530,819 530,819 EPS (RO) 0.027 0.038 0.043 0.052 0.058 0.063 0.067 Book Value Per Share (RO) 0.150 0.176 0.208 0.241 0.266 0.289 0.313 Market Price Year End (RO) 0.322 0.319 0.672 0.660 0.660 0.660 0.660 Market cap (RO mn) 170.9 169.3 356.7 350.3 350.3 350.3 350.3 P/E (x) 12.0 8.4 15.7 12.8 11.5 10.5 9.9 P/BV (x) 2.2 1.8 3.2 2.7 2.5 2.3 2.1


15Bank Dhofar

This Page is Intentionally Left Blank

The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.3. Global Investment House makes a market in securities issued by this company.4. Global Investment House acts as a corporate broker or sponsor to this company.5. The author of or an individual who assisted in the preparation of this report (or a member of his/her

household) has a direct ownership position in securities issued by this company.6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year , Global Investment House has managed or co-managed a public offering for

this company, for which it received fees.8. Global Investment House has received compensation from this company for the provision of

investment banking or financial advisory services within the past year.9. Global Investment House expects to receive or intends to seek compensation for investment banking

services from this company in the next three month.10. Please see special footnote below for other relevant disclosures.

This material was produced by Global Investment House KSCC (‘Global’),a firm regulated by the CentralBank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities (‘securities’), perform servicesfor or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, norepresentation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

Disclosure Checklist

Bank Dhofar

Company Recommendation Ticker Price Disclosure

BUY BDOF.OM (Reuters)BKDB OM (Bloomberg)

RO0.660 1,10

Global Research: Equity Ratings DefinitionsGlobal Rating DefinitionBuy Fair value of the stock is >10% from the current market priceHold Fair value of the stock is between +10% and -10% from the current market priceReduce Fair value of the stock is between -10% and -20% from the current market priceSell Fair value of the stock is < -20% from the current market price

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