Organizational Profile
Global Investment House - Kuwait - Initial Equity Research on Bank Dhofar - Bank Dhofar started operations in 1990, by acquiring the Muscat branch of BNP-Paribas, and was established as an Omani commercial bank. In 1998, it divested 40% of its share in a public offer and got listed in the Muscat Securities Market and got converted into a SAOG company - Bank Dhofar Al Omani Al Fransi SAOG. With successive years of consistent growth through organic and inorganic strategies, Bank Dhofar has accumulated a critical mass with an impressively expanding network of 48 operational branches and 66 ATMs. The authorized share capital of the bank consists of 50,000,000 shares of RO1 each. Dhofar International Development and Investment Company owns the largest individual shareholding with 30% stake in the bank, while the Civil Service Pension Fund holds 10%.

Bank Dhofar adopted a new five-year strategic plan which recommended a panned growth in cross-border exposure, increased lending to emerging enterprises, envisaged the launch of at least three new independent business units (investment banking, private banking and structured finance) and several new retail products. Moreover, the Bank decided that such large-scale changes warranted a new corporate identity as well and thereby rechristened itself from the former "Bank Dhofar Al Omani Al Fransi" to "Bank Dhofar".

Income & profitability
Earnings of the bank has been consistently on an upward trend during the last 5 years. Bank Dhofar reported a net income of RO10.15mn for the year 2003 as compared to RO6.13mn for the year 2001, which represented a CAGR 28.6%. This increase was mainly a result of the bank's expansion in the retail business, which resulted in a sharp increase in commission earnings from a consistently growing loan book. Commission earnings grew at a CAGR of 17.9% during the said period. The bank's RoAA increased from 2.01% in 2001 to 2.44% and 2.48% in 2002 and 2003 respectively. This was a result of the increase in net income at a higher pace than the increase in average total assets. Bank Dhofar's RoAE also increased from 14.87% in 2001 to 18.38% in 2003. The earnings per share (EPS) of the bank increased from RO0.235 in FY2002 to RO0.252 in FY2003. Based on 9-month results, the annualized EPS for 2004 increased to RO0.265. The bank proposed to distribute a cash dividend of RO0.156 per share in FY2003 which translated to a dividend yield of 5.2% considering the year end price of RO3.000.

Spreads & Margins
The net spread of Bank Dhofar remained steady at close to 5% in the past 2 years. Interest income to average interest earning assets followed a downward trend from a high of 9.1% observed in 2001 to 6.8% in 2003 whereas interest expense to average interest bearing liabilities declined from 4.5% to 1.8% during the same period following the low interest rate environment prevailing in the markets. The bank enjoyed a net interest margin of 5.46% during 2003.

Asset Structure and Asset Quality
During the past 3 years Bank Dhofar has consistently increased its book size. Bank Dhofar's total assets at the end of FY2003 amounted to RO474.08mn, compared with RO344mn in FY2002, a whopping growth of 37.8%. Bank Dhofar acquired the Majan International Bank in March 2003 which helped the bank to augment its asset size by RO96.5mn. Over 2001-2003, the balance sheet composition has remained more or less consistent with respect to its various components. Loans and Advances to customers as a % of total assets remained in the range of 77% to 78% during this period. Reliance on T-bills however declined from 9.7% in 2001 to about 7% in 2003 and further to 5.4% in 3Q04. Analysis of maturity profile of the asset base indicate that short-term assets maturing upto 1 year comprised 56.7% of total assets in 2003, a significant increase from 39.7% observed in 2002. Medium term exposures ranging between 1 to 5 years declined from 40.2% in 2002 to 31.7% in 2003. Long-term assets with maturity periods over 5 years decreased from 11.4% in 2002 to 3.8% in 2003. In the Omani banking sector, Bank Dhofar held 10.3% of the market share in terms of total assets in 3Q2004, a marginal decrease from 10.49% recorded in December 2003. At the end of September 2004, about 8.2% of bank's assets were in liquid instruments such as cash and cash equivalents and T-bills which carry lower yields as compared to lending rates. Therefore, in an expected rising interest rate environment, a portion of this liquidity is likely to be utilized for funding its loan book growth which will help the bank to maintain its lending spreads and other profitability ratios. The non performing loans (NPL) of the bank increased in FY2003. The NPLs increased from RO15.11mn in 2002 to reach RO35.41mn in 2003, a growth of 2.34 times. This sharp rise in NPL can be attributed to the effects of the loan book of Majan bank which Bank Dhofar acquired in 2003. The NPL coverage was at 106.1% at the end of 2003.

Funding Structure and Capital Adequacy
The funding mix of Bank Dhofar has remained mostly in favor of customer deposits (75.6%), deposits from banks (5.6%) and share capital (8.8%). The customer deposits of the bank has remained the prime funding source to finance the credit growth of the bank and has increased by an admirable 29.2% over the previous year to stand at RO358.3mn at the end of 2003. Over RO58mn of this growth were acquired from Majan Bank which Bank Dhofar acquired in 2003. At the end of 3Q04, customer deposits declined marginally to RO356.1mn.

Given a competitive domestic market in Oman for customer deposits where Bank Dhofar competes with other commercial banks, we believe that Bank Dhofar has to bring out innovative and differentiated products and service offerings to maintain higher rates of growth in customer deposits in future years. Analysis of maturity profile of the deposit base indicate that short-term liabilities maturing upto 1 year comprised 52.2% of total liabilities in 2003, a decline from 61.5% observed in 2002. Medium term deposits ranging between 1 to 5 years declined from 13.4% in 2002 to 3.6% of total liabilities in 2003. Non-interest bearing deposits in 2003 were at RO162.4mn and as a percentage of total liabilities remained steady at over 34% of total liabilities in 2003. The interest expense for Bank Dhofar declined at a CAGR of nearly 20.7% over 2000-2003. This is also evident in the interest expense to interest income ratio which steadily declined from 53.6% in FY2000 to 22.7% in FY2003. As of end 2003, the gross loans to total deposits (including all borrowings) stood at 103.2% which reduced to just over 100% at the end of 3Q04.

The bank's capital position continued to remain strong. Total shareholder's equity increased by a healthy 33.1% during 2003 to reach RO63.1mn mainly because of an increase in retained earnings and the RO5.4mn share premium offered to the shareholders of erstwhile Majan Bank which Bank Dhofar acquired. The bank also transferred RO1.74mn, an amount equivalent to 20% of the subordinated bonds each year to a subordinated bond reserve till the bonds mature. At the end of 2003, the capital adequacy ratio stood at 15.6% which was calculated using the total capital base.

Analysis of 3Q2004 Results:
The interest income of the bank increased by 9.6% during the first nine months of 2004 to reach RO22.3mn as compared to RO20.3mn over the corresponding period last year. The interest expense also increased by 5.3% to reach RO4.89mn during the same period. As a result, the net interest income during the period increased by 10.8% to RO17.4mn as against RO15.7mn in the first nine months of the previous fiscal. The non-interest income grew from RO2.81mn for the nine months of 2003 to RO3.58mn for the nine months of 2004, a growth of 27%. During the first 9 months of 2004, Bank Dhofar generated RO1.34mn in fees & commissions income from various banking activities and other off-balance sheet commitments. Investment income also increased by 57% to reach RO1.1mn during the same period. The bank's focus on improving the asset quality had a positive impact on the provision for possible credit losses, which decreased marginally by 0.7% to reach RO2.41mn at the end of 3Q2004 as compared to RO2.43mn for the first nine months of 2003. The net profit after providing for taxation was higher at RO8.35mn, a 17.8% increase over the corresponding period last year. Bank Dhofar reported an annualized EPS of RO0.265 during the first nine months of the current fiscal, an increase of 10.5% over the EPS as compared to the corresponding period in 2003. Bank Dhofar's total assets increased substantially to RO485.2mn at the end of Sept 2004, representing an increase of 2.3% over FY2003. The bank's loan book growth witnessed a 3.7% growth over Dec 2003 to reach RO419.6mn at the end of 3Q04. Total deposits from customers increased by a marginal 1.1% to reach RO356.1mn as of September end 2004, while deposits from banks increased by 128% to reach RO352.2mn during the same period. Capital adequacy ratio declined from 15.6% in December end 2003 to 15.1% in September 2004.

Future Strategies and Prospects
Bank Dhofar is in the very first year of the new five-year strategic plan which was launched in late 2003. The plan envisaged panned cross-border exposure, increased lending to emerging enterprises, the launch of at least three new business divisions (investment banking, private banking and structured finance) and several new retail products. We believe that with the revamped and reorganized divisions, Bank Dhofar is now poised to play an even more vital role in the Omani banking sector. Bank Dhofar has been making conscious efforts to increase its market share in the retail banking business especially in the high-margin consumer financing arena. The bank, as all other Omani banks, is concentrating on getting the maximum chunk of the lucrative retail banking segment which will grow at a strong pace in the coming years. Bank Dhofar, given its comparatively smaller branch network in Oman , has resorted to increasing its presence on the internet and is likely to activate the internet banking platform in the first quarter of 2005.

Bank Dhofar's thrust seems to be on managing the profitability combined with increasing the market share of the banking assets. The bank's strategy is to increase the fee-based income through the investment banking and advisory services combined with funds management. The bank has one of the best spreads among the conventional banks in Oman and with the ongoing thrust on retail banking activities, we expect the spreads to widen in next couple of years. The outlook for 2004-2005 is quite positive for the banks in Oman and the GCC region. Oil revenues will be much better than forecasted which will result in a huge inflow of liquidity. Also, the banks' credit portfolio is likely to increase as the corporates take advantage of the current low cost of borrowings. We believe that the expanding Omani economy will provide the banking sector a healthy backdrop in which banks such as Bank Dhofar will thrive. We believe that Bank Dhofar will continue to take a prominent role in the country's burgeoning utilities and infrastructure financing business. Reforms in the Omani economy will provide the banking sector with growth opportunities and we believe that Bank Dhofar is well positioned to take advantage of this opportunity.

Valuation and Recommendation
While valuing the banks we have consistently been using the dividend discounting method in our earlier researches as we believe it is the most suitable method to value banks because of the nature of banking business. We have also included a comparative valuation method (Price to Book Value) which will more accurately reflect the current market conditions. Therefore combination of both the methods suggests a price of around RO4.226. The stock currently trades at around RO3.750, which implies that the value arrived by using the weighted average method is 12.6% higher than the current market price. Currently, Bank Dhofar is trading at a price-earnings multiple of 12.5x of its forecasted FY2004 earnings. We expect the bank to post a healthy operating performance in 2004 and maintain its earnings performance in the short to medium term. Hence, we believe that the stock is undervalued at the current price and recommend a BUY on the stock with a medium term perspective.

-Ends-

© Press Release 2004

 

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