IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

IPO Note - Bank Nizwa (Under formation) Subscribe for listing gains, hold for long term gains…

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Offer Details Offer price Face value Offer size Offered shares Break up of Offer Authorized share capital Issued and Paid up Capital (Post IPO) Offer period Expected Listing date on MSM

RO 0.102 RO 0.100 RO 60 million 600 million Retail - 60% and Institutional - 40% RO 300 million RO 150 million 23rd April 2012 to 22nd May 2012 12th June 2012

Use of the Proceeds of the Offer Bank Nizwa is under formation. The proceeds of the offer will be used for:   

Setting up the Bank and costs relating execution of its business plan Building infrastructure and acquiring assets General business operations of the Bank

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Investment Rationale 

Track record of listing gains of Initial Public Offerings on the Muscat Securities Market… MSM has a track record of offering listing gains in all the Initial Public Offerings (IPO) in the last seven years irrespective of the market conditions. After its steep fall 16% in the last year, the market shows signs of recovery with a positive year to date returns of 2%. The upward trend shown by the market, coupled with increasing trading volumes signals improved investor confidence and it is likely to act as an impetus for the success of this offering. Initial Public Offerings on MSM: 2005-2011 Year

IPO

2005 2007 2007 2008 2008 2010 2011

Omantel Bank Sohar* Galfar Engineering & Contracting Voltamp Energy Sohar Power Nawras SMN Power

Face Value 0.100 1.000 0.100 0.100 1.000 0.100 1.000

Issue Size (RO mn) 288 20 60 13.55 13.33 182 24.59

Issue Price 1.280 0.520 0.602 0.542 1.370 0.702 3.520

Opening Price on listing 2.800 0.765 0.952 1.250 1.950 0.735 3.620

Listing gains 119% 47% 58% 131% 42% 5% 3%

Market Trend during the offer Positive Bullish Bullish Bullish Bullish Positive Negative

Source : MSM, Al Maha Financial * Partly paid up at the time of issue, now fully paid and split into 100 baisas

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IPO Note – Bank Nizwa 9 May 2012

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

Success story of the preceding bank IPO, a confidence builder… Bank Sohar, the latest listed bank on MSM also was under formation at the time of its IPO in which the shares were offered at face value. At the current stock price of RO 0.153, the bank offers a return of more than 50% for an investor who subscribed to the issue and is holding presently. The stock presently outperforms the MSM 30 Index, which appreciated by only 1% during the post IPO period. Moreover, Bank Sohar stock has also touched its all time high of RO 0.249, yielding more than 100% to investors who subscribed to the IPO. The success story the Bank Sohar IPO issue is likely to act as confidence builder for the current issue.



Positive outlook on Omani Banking Sector, supported by strong macroeconomic fundamentals… Banking is one of the fastest growing sectors in the Sultanate. The sector is expected to continue to demonstrate robust growth under the Eighth five year plan and the Vision 2020 plan backed by government’s spending on mega infrastructure development projects. The banks are well poised to show healthy credit growth from planned investments of RO 10.4 billion in the construction sector by 2014 and oil and gas projects worth RO 386 millions in pipeline. In the consumer segment, favorable demographics in the Sultanate and increase in disposable income of youth population is expected to drive the demand for credit in this segment. Oman’s banking sector is underpenetrated compared to other GCC countries, with assets, deposits and credit to GDP ratios below GCC Average. This offers opportunity to the banks to tap the growth potential in the Sultanate’s banking sector.

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research



Bank Nizwa to capitalize opportunity to cater the unmet demand for Shari’a compliant products… The Islamic banking has shown an impressive growth in the GCC countries in the last few years. The Islamic banking industry has demonstrated a higher growth rate compared to that of conventional banking in all the GCC countries except the UAE. The asset growth of the Islamic and Conventional Banking in the GCC is as shown below: Asset Growth of Conventional & Islamic Banking - GCC (2006-2010) Asset Growth (CAGR 2006-2010) Saudi Arabia

14%

Kuwait

19%

13%

Bahrain

40%

20%

16%

UAE

52%

Qatar

235%

28%

10%

-38%

26% 22%

7%

0%

Growth Relative to conventional banks

20%

Conventional Banking

30%

41%

39%

40%

50%

Islamic Banking

Source : Ernst & Young Report, Al Maha Financial

Oman has only recently opened its doors to Islamic banking, helping the banks to capitalize the unmet demand for the Shari’a compliant banking in the region. With this the local banks are expected to replicate the performance of the Islamic banking industry in other GCC countries.With large Muslim population following Islamic traditions in Oman, Bank Nizwa is likely to attract customers who are more conservative and may believe a Shari’a compliant bank to be an acceptable guardian of their savings. Al Maha Financial Services LLC

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research



Bank expected to demonstrate healthy performance… Bank Nizwa is expected to turn profitable from FY 2014 onwards, after showing a loss in the initial year of operation. Going forward, improving operational efficiency will lead to higher profitability for the bank. The net profit margin of the Bank is expected to double and return on average equity is expected grow three folds in the subsequent three years. Margins - Bank Nizwa (2014E-2017E)

Returns - Bank Nizwa (2014E-2017E)

50% 40% 30%

14.8%

16% 36.3%

38.0%

39.7%

12.6% 12%

10.5%

25.0% 26.7%

20%

25.0%

27.3%

8% 4.4%

13.3%

4%

10%

1.6%

1.7%

1.8%

0.7% 0%

0% 2014E

2015E Operating Margin

2016E

2017E

2014E

2015E

Return on Avg. Equity

Net Margin

2016E

2017E

Return on Avg. Assets

Source : Bank Nizwa IPO Prospectus, Al Maha Financial

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Bank Nizwa (Under formation) – The First of its kind Bank Nizwa will be the first fully Shari’a compliant bank in Oman. The Bank plans to capitalize the uncatered demand for Shari’a compliant products. The Bank’s offerings will range from Equipment financing to stock financing and Equity & Sukuk investments, meeting the strong demand for non-conventional banking in the Sultanate. At the launch, Bank Nizwa’s target customers would be Omani individuals and large corporations. The Bank aims to offer high quality of service by implementing latest technology & systems that will enhance customer experience. Bank Nizwa (Under formation) will be incorporated under the Commercial Companies Law of the Sultanate of Oman as public joint stock company, listed on the Muscat Securities Market. The bank will offer 40% of its share capital to the public. The principal activity of Bank Nizwa will be to provide all banking services permitted for Shari’a compliant banks by laws and regulations of the Sultanate.

Share capital Structure – Pre IPO Bank Nizwa is being promoted by a group of 93 founder shareholders. Sheikh Saud Bin Ali Al Khalili is the Primary Promoter and Founding Investor of the Bank. The Founder shareholders have subscribed to 900 million shares at a price of RO 0.102 per share totaling to a capital of RO 90 million. Diwan of Royal Court Pension Fund and Sheikh Saud Bin Ali Al Khalili hold 8.33% and 6.67% respectively of the Pre IPO share capital.

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IPO Note – Bank Nizwa 9 May 2012

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Islamic Banking – An Overview 

Islamic banking system is structured in accordance to the principles of the Shari’a (Islamic) law. The basic principle of Shari’a is the sharing of profit and loss and the prohibition of riba (interest) unlike conventional banking where the banks lend funds and accept deposits for a specific interest rate. The conventional banks make profits from the spread between the borrowing and lending rates of interest.



Islamic Finance has become one of the fatest growing segments in the financial markets across the globe especially in regions like Asia, Africa and Europe as borrowers seek alternative avenues for financing.



Since the 1990s, the rate of growth of the Islamic banking system has been increasing by 25 percent each year. Islamic banks are expected to continue their robust growth with assets doubling within five years. According to a report by Deutsche Bank, the global Islamic banking assets are expected to reach US$ 1.8 trillion by the end of 2016 from US$ 939 billion in 2010.



In the recent years, Islamic banking is gaining momentum in the MENA region as the Muslim population is actively adopting Islamic Banking as their preferred mode of financing. The Islamic banks in the MENA region have achieved rapid growth during the years 2007 to 2010 with a CAGR of 41% in assets. The MENA Islamic banking industry is projected to be worth US$ 990 billion by 2015 as compared to US$ 416 billion backed by increasing acceptance of Islamic banking products by the non Muslim population and as new countries in the region open up doors to Islamic banking.



In May 2011, the Central Bank of Oman approved establishment of Islamic banks in the Sultanate. The decision aims to open the financial niche markets and to tap the demand for Shari’a compliant products in the country.

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Challenges & Concerns 

Bank yet to show convincing performance The Bank has no prior operating history or track record as it is presently under formation and will commence operations only by June 2012. More over, any adverse developments during or after the incorporation could impact the performance of the Bank.



Intensifying competition in banking space to pose challenges The competition in the banking space is intensifying with bigger banks gearing up to open Islamic banking windows and new banks adopting similar Islamic banking practices. Entry of new Islamic banks may pose challenges in the growth trajectory of the Bank.

Dividends The Bank is under formation and will not be paying dividends in the initial years. As per the disclosures, Bank Nizwa has proposed to pay dividends 5% and 10% of its share capital for the years 2016 and 2017 respectively. However, the actual dividends may differ from the projected dividends based on the bank’s performance, working capital requirements, future prospects, general market conditions etc.

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Regional Peer Valuations We have carried out a comparable analysis of valuations of the peer Islamic Banks in the GCC region, operating under the Shari’a law. The Price to earnings (TTM) of the peers was found to be in the range of 7.2x to 28.75x whereas the Price to book values found ranging from 0.51x to 3.58x. Bank Dubai Islamic Bank Sharjah Islamic Bank Qatar Islamic Bank Qatar International Islamic Bank Al Ahli United Bank of Kuwait Kuwait Finance House Al Rajhi Bank Al Jazirah Average Median

Country UAE UAE Qatar Qatar Kuwait Kuwait Saudi Arabia Saudi Arabia

PE (TTM) 7.20 8.27 12.68 11.47 28.75 26.48 14.78 20.64 16.29 13.73

PBV 0.83 0.51 1.74 1.70 3.58 1.11 3.49 1.67 1.83 1.69

Source : Bloomberg, Al Maha Financial

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Valuation The Omani banking sector currently trades at 1.4 times the latest book value which is at a discount to the leading banks in the GCC region. Moreover, the average and median Price to book value of the peer banks stay at 1.8 and 1.7 respectively. Bank Nizwa being a new bank with no proven track record of operational performance is likely to command a lower valuation as compared to its major listed peers. However, considering its growth potential, we opine that the valuation based on the expected book value of 2013 on a PBV range of 1.2x to 1.4x is justifiable, implying a fair value range of RO 0.110 - RO 0.134 for the Bank.

Price to Book Multiple

Sensitivity

0.088

Book Value per share (2013E) 0.090 0.092 0.094 0.096

0.098

0.100

1.1

0.097

0.099

0.101

0.103

0.106

0.108

0.110

1.2

0.106

0.108

0.110

0.113

0.115

0.118

0.120

1.3

0.114

0.117

0.120

0.122

0.125

0.127

0.130

1.4

0.123

0.126

0.129

0.132

0.134

0.137

0.140

1.5

0.132

0.135

0.138

0.141

0.144

0.147

0.150

We recommend to subscribe to the issue for listing gains based on the track record of the previous IPOs. Investors may also hold for long term gains in view of the upside potential of the stock.

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Financial Projections Figures in RO ‘000s

Income Statement 2013E

2014E

2015E

2016E

2017E

19,254 6,012

37,172 5,694

45,828 5,898

68,069 6,282

83,875 6,385

(11,440) (710) 13,116 1,516

(13,551) (841) 28,474 3,858

14,632

1,286 33,618

(16,051) (996) 34,679 6,207 1,035 2,276 44,197

(22,591) (1,342) 50,418 8,922 1,487 3,271 64,098

(26,759) (1,590) 61,911 10,831 1,805 3,971 78,518

(8,843) (6,064) (2,147)

(12,860) (6,430) (2,347)

(12,931) (6,207) (2,816)

(18,588) (8,922) (3,138)

(22,565) (10,831) (2,702)

Operating profit Provisions for financing losses Profit (Loss) before tax Taxation

(2,422) (4,695) (7,117)

11,981 (5,590) 6,391

22,243 (4,243) 18,000 (1,621)

33,450 (8,470) 24,980 (2,994)

42,420 (9,304) 33,116 (3,970)

Profit (Loss) for the year

(7,117)

6,391

16,379

21,986

29,146

Profit income: Profit income from customers Profit income from managing residual funds Distribution to depositors: Profit distribution to customers Profit distribution to inter-bank Net financing income Banking fees and commission Foreign exchange income Other income Operating income Operating expenses: Staff costs Other operating expenses Depreciation

Source : Bank Nizwa IPO Prospectus

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research Figures in RO ‘000s

Balance Sheet 2013E Assets: Cash and balances with Central Bank Treasury bills and government securities Investment securities Due from banks Financing to customers (net) Premises and equipment Other assets Total Assets Equity and Liabilities: Liabilities Due to banks Customer deposits Other liabilities Tax payable Total Liabilities Shareholder's Equity Share capital Share premium Legal reserve Proposed cash dividend Retained earnings (losses) Total Shareholder's Equity Total Equity and Liabilities

2014E

2015E

2016E

2017E

355,444 67,500 37,500 40,627 308,305 12,218 9,949 831,543

211,865 67,500 37,500 48,123 577,433 11,120 11,785 965,326

235,134 67,500 37,500 57,002 711,891 11,238 13,959 1,134,224

261,099 67,500 37,500 76,809 1,022,374 10,120 18,810 1,494,212

276,241 63,101 37,500 90,980 1,259,778 7,800 22,280 1,757,680

39,438 626,000 25,040

46,713 741,497 29,660

690,478

817,870

55,333 878,303 35,132 1,621 970,389

74,560 1,183,496 47,340 2,994 1,308,390

88,316 1,401,853 56,074 3,970 1,550,213

150,000 1,919

150,000 1,919 639

150,000 1,919 2,277

(10,854) 141,065

(5,102) 147,456

9,639 163,835

150,000 1,919 4,476 7,500 21,927 185,822

150,000 1,919 7,390 15,000 33,158 207,467

1,134,224

1,494,212

1,757,680

831,543

965,326

Source : Bank Nizwa IPO Prospectus

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Key Ratios

Earnings Per Share Book Value Per Share Dividend Per Share PE PBV

2013

2014

2015

2016

2017

-0.005

0.004

0.011

0.015

0.019

0.094 -

0.098 -

0.109 -

0.124 0.005

0.138 0.010

1.08

23.94 1.04

9.34 0.93

6.96 0.82

5.25 0.74

-

4.4%

10.5%

12.6%

14.8%

-

0.7%

1.6%

1.7%

1.8%

-9.0% -26.6%

25.0% 13.3%

36.3% 26.7%

38.0% 25.0%

39.7% 27.3%

-

-

-

34.1%

51.5%

Return on Avg. Equity Return on Avg. Assets Operating Margin Net Margin Dividend Payout

Source: Bank Nizwa IPO Prospectus, Al Maha Financial

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

Al Maha Financial Services LLC PO Box 1065 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: 00 968 2482 7171, Fax: 00968 24827121

Contacts Research: Suresh Kumar Radhika Gadhia Khushboo Badlani

Telephone 24827137 24827138 24827140

E-mail [email protected] [email protected] [email protected]

Portfolio Management : S.V. Uppiliappan

24827169

[email protected]

24827188 24827144 24827177

[email protected] [email protected] [email protected]

Brokerage: Abdullah Al Hinai Mahmoud Al Hamsaidi Nasser Al Banna

Operations & Customer service : Zakia Al Ghammari Muna Al Hashmi Al Maha Financial Services LLC

24827134 24827139

[email protected] [email protected]

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IPO Note – Bank Nizwa 9 May 2012

Al Maha Research

DISCLAIMER: The research report has been prepared by Al Maha Financial Services LLC for private circulation amongst selected clientele for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe any investment. This Report is not directed to, or intended to be used by, any person or entity who (or which) is a citizen of (or domiciled) in any jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the company to any registration or licensing requirements within such jurisdiction. Al Maha Financial Services LLC will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. Al Maha Financial Services LLC and its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to companies mentioned herein or inconsistent with any recommendation and related information and opinions. Al Maha Financial Services LLC and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. The information contained in this report has been obtained from the sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, Al Maha Financial Services LLC makes no guarantee, representation or warranty, whether expressed or implied, and accepts no responsibility or liability to its accuracy and completeness of the data, being provided. Opinion expressed is our current opinion as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors must take their own decision based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of Al Maha Financial Services LLC.

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