‘If merged, Bank Dhofar-NBO to be Oman’s second largest bank’

Muscat: If merged, the combined entity of Bank Dhofar and NBO would be the second largest bank in terms of net profit. Both banks have good quality assets as reflected by their low NPL ratio of ~ four per cent  and superior provision coverage ratio.

“Bank Dhofar has a relatively low capital ratio, which it is trying to improve by a rights issue of RO40 million soon, and we expect that to result in good capital position for the merged entity,” says an analysis by United Securities Oman (USOman).

Bank Dhofar had earlier made an attempt to merge with Bank Sohar, but was unsuccessful due to resistance from the board and the management. However, in this case, we assume there had been some initial discussions between the boards of both the banks and an in principle agreement to consider the proposal has been arrived, which indicate that board and major shareholder resistance, if any, may not be as severe as it was between Bank Dhofar and Bank Sohar, said USOman.

“We also feel that the management of both the banks are likely to take the merger in a positive sense as a successful completion of the potential merger offers significant synergies and economies of scale for both the banks. Oman has a highly concentrated banking sector with the largest player controlling close to 35 per cent of the total banking assets in the country. Bank Muscat, NBO, and Bank Dhofar together account for 60 per cent of total banking assets in 1H18,” it said.

The quest to build scale, increase customer base, and competitive pricing are driving banks in Oman to scale-up through merger. Moreover, the declining credit growth rate, deposit squeeze, higher cost of funds, and deteriorating asset qualities are additional factors that we consider builds up a favourable case for merger.

Bank Dhofar has been trying to enhance its capital to manage growth and meet the regulatory ratios. Merger to result in creation of Oman’s second largest bank – If the potential merger materializes, the resulting entity would have credit market share of 24 per cent, and deposit market share of 25 per cent.

Strong synergy opportunities: We see significant synergy opportunities and potential for shareholder wealth creation in case of banking consolidation in the market. For example, NBO has 60% of its deposits coming from low cost CASA, while it is only 40 per cent for Bank Dhofar, USOman said.

The strong retail franchise of NBO should help in mobilizing low cost deposits while the government relations and loyal set of HNI customer base of Bank Dhofar is expected to add to the longevity of its deposit base.

“Historically Bank Dhofar had a better asset growth than the rest of the market, and we think this trend can be maintained by the combined entity in a better manner. NBO’s higher proportion of noninterest income from retail and investment banking segment is giving them an edge in terms of achieving higher efficiency than Bank Dhofar. A merger of both the entities should help boosting the fee income leading to higher ROE and shareholder returns. A merger should enable Bank Dhofar to leverage on NBO’s regional presence as well, which should help in enhancement of the synergies,” it said.

USOman added, “NBO’s cheap valuations attractive for new investors: We hope that this news could rekindle the interest of investors in the highly depressed banking space. Omani banking sector is trading at FY18E p/e of 6.5x, p/b of 0.75x, and offers dividend yield of 6.5%. NBO shares are being traded at further discounted valuation of 5.6x, 0.65x p/b, and offers dividend yield of 7.7%. We believe that the final swap ratios would be arrived after considering the potential synergy contributions of NBO, which are significant in our view. As such our initial calculations suggest a favourable swap ratio at the current prices of NBO, and feel that the market haven’t priced this at the current levels. We are remain positive on the share price performance of NBO and suggest to play the merger story with NBO rather than Bank Dhofar.”