Tuesday, September 16, 2008

What's the story with Bank Muscat?

I know this MSM stuff is getting a little boring for many of you. Sorry. So I'll just note how the market fell again ~3% today to less than 7900, as markets in the region and world wide continued to drop by large amounts.

But, on top of the overall doom and gloom on the markets in general, something very strange is happening to one of Oman's largest companies: Bank Muscat.
In the last 3 weeks the share price has plummeted almost 40%, now down to around 1.12 rial from a peak a few months ago over 2.13 rial. Ouch. The French bank Societe Generale were certainly right to bail out of their 15% shareholding at around 1.82. The Royal Court, as holders of ~40% of the shares after they picked up the French's share, must have lost (on paper) about US$1 billion in the past few months.

The price/earnings ratio is now about 10, assuming they can still maintain a ~100 million profit this year.

Why such a huge drop? Does anyone have a view? [Muscati??]

Is there some hidden liability to Leman Brothers or the other sub-prime meltdowns? Or is it just the implication for profits from the expected increase in loan defaults as the MSM market tanks and, along with it, the fall in the prices of Omani land and houses (also severely over-inflated)? Many people are having to sell property to cover margin calls on the falling market, or even sell out to limit the losses. And a big structural problem for Banks in Oman is the mis-match between the term of their liabilites (many short term deposits) and their assets (long term loans and other assets). Is Bank Muscat bleeding cash as the market falls?

Curious. I don't know if there's an official deposit insurance scheme for Omani banks, but there is NO WAY the Government would allow BM to fail.


  1. well according to my boss who does lot of valuation considers BM is worth 1.200 to 1.300..so according to him it is trading at a right price...

    what i mean by valuation here is, if the company closes down today..what as a shareholder you will get...

    as far as BM share goes, bank Muscat MF holds say 15% ..so i always feel MF artificially boosts or rather dont allow the price to quote at a low level....i think most of the people will be exiting the fund and so they may be forced to dilute..a wild guess?

    plus as you rightly said, most of them deal with borrowings..so when the market comes down, everybody is in panic to sell...so naturally the price comes down....since BM is a favourite shares for many, it burnt the most...

  2. Your share market analysis is always welcome.

    It seems most expats are not putting their their money in MSM. Indian stock markets are now fully computerised and there are many companies doing much better and giving better returns, which is why you are not getting much responses to MSM blogs, probably.

    The graph would have been more clearer if you had plotted MSM trend line also together with BM share movement.

    I believe there is indeed deposit insurance.

    Major chunk of Omani Banks's profit is from personal loans. They pay nothing for keeping money in SB account promising lottery. The basis on which the lottery winner is selected is not disclosed. Once CBO chairman himself said that it is tilted towards people who keep large amount. In any case Omani Banks doesn't have any cost for these funds, whereas they give personal loans at high interest rate, which gives them a big spread.

    After NBO's bad loans to Egypt and their CEO running away (hope you are aware of this story), Banks have put proper systems to prevent such incidents.

    Hopefully we may not see a repeat.

  3. The views that bank muscat's assets and liabilities are imbalanced is indeed an amateur's work. World wide among banks the disparity between the longevity of deposits (liabilities) and advances (assets) are immensely in favour of asserts. U dont expect someone or a company to keep deposits for 5 or 10 or 15 yrs.I think bank muscat is capable to maintain the sustanability of its deposits and develop it further as is the case now. Secondly, bank muscat is strongly supported by a healthy treasuries of the goverment.

    I think the hidden liabilty of bank muscat emanates from its management. The supervision of top management is very weak and almost non-existence. The free officers are capable of a coup with little planning. In other words the bank is managed by people who can disappear suddenly and it would be impossible to be accounted for anything if required.

  4. Whither Bank Muscat?

    ...the events of the past year (in the US financial markets) are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms (Goldman, Merrill, Lehman, Bear Stearns [Blue City Bond holder], and Morgan Stanley) legally violate pre-existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

    Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

    Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

    The proof is in the pudding — three of the five broker-dealers have blown up.

    Lehman's fall shows the downside of using borrowed money. Even though Lehman has a 158-year-old name, it's actually a 14-year-old company that was spun off by American Express in 1994. AmEx had gobbled it up 10 years earlier, and it wasn't in prime shape when AmEx spat it out. To compensate for its relatively small size and skinny capital base, Lehman took risks that proved too large. To keep profits growing, Lehman borrowed huge sums relative to its size. Its debts were about 35 times its capital, far higher than its peer group's ratio. And it plunged heavily into real estate ventures that cratered.

    Here's how leverage works in reverse. When things go well, as they did until last year, Lehman is immensely profitable. If you borrow 35 times your capital and those investments rise only 1%, you've made 35% on your money. If, however, things move against you — as they did with Lehman — a 1% or 2% drop in the value of your assets puts your future in doubt. The firm increasingly relied on investments in derivatives to produce profits, in essence creating a financial arms race with competitors like Goldman Sachs. Even though the Fed had set up a special borrowing program for Lehman and other investment banks after the forced sale of Bear Stearns to JPMorgan Chase in March, the market ultimately lost faith in Lehman.

    Mad for it, just mad for it. And this in a mature financial market.

    MSM anyone?

    Willie Dryer

  5. It is such a reach to tie the drop in BankMuscat's stock price to Lehman Bros and the sub-prime meltdown. Omani banks are extremely limited in their investment options. The CBO limits the kind of investments they are allowed to make and doesn't allow them to lock up more than a small amount of their capital in investments. CBO is one hell of a conservative regulator. I am sure that one the first day that the first article that mentioned the word "sub-prime" it sent circulars to all banks in Oman asking them declare if they have any exposure to it.

    The whole stock market is down. BankMuscat is the biggest company in the market, so it dropped harder than the other. The only other company which is comparable is Omantel, and that stock is propped up currently because investors are waiting to find out who government is going to sell the strategic stake to, and at what price. If it wasn't for that Omantel would have fallen as well and that would have made the market fall even harder.

    Societe Generale sold its share in BankMuscat because it was in desperate need of profits to cover its huge losses from earlier in the year. All the press reports on SG's second quarter profit mentioned the income from the sale of the BankMuscat shares.

    Yes there has been an exodus of foreign funds from the GCC market (all of the emerging markets in fact), and it's all for reasons similar to SG. These large banks are in deep trouble and they need to close out their positions all around the world so that they can concentrate on their troubles in their home markets.

    I've said it before (I think on this very blog), and I'll say it again, there is little or no risk of loan defaults from the drop in the stock market. Banks' exposure t MSM investments is limited to large investment companies and large investors. As per the CBO's rules, loans backed by shares have to have a minimum of 200% cover. That means even with a 50% drop in share prices the banks are still covered. I am quite confident that there is very little bank borrowing to every day Joe's who borrowed money to invest in the MSM. And even if there was, it would be backed by salaries since banks in Oman rarely ever lend money to individuals without securing it against the borrower's salary.

    The mismatch between assets and liabilities which you mention is not just limited to Oman. That's how all banks are around the world. Do you think banks that give 25 year mortgages have 25 year deposits to back them? And if asset/liability mismatch was a big concern, then BankMuscat would be the only bank in Oman which you wouldn't look at because it is the only bank which uses medium to long term bonds and subordinated debt, not to mention certificates of deposits, to improve it's asset to liability cover.

    The one thing that will affect all banks in Oman this year is the CBO's tightening of lending norms. The CBO has increased the deposit ratio so now banks need to raise 1.2 rials of deposits for every 1 rial they lend. It has also increased the reserve ratio, so now banks have to keep 8% of the money that their customers deposit with them as interest-free deposits at the CBO. As a result banks are going after deposits big time and interest rates on deposits have sky rocketed. I am sure you read about BankMuscat's certificate of deposit auction last week in which 1 year CDs went for 5.2%. As a result of this liquidity crunch, interest rates on loans will increase, but not on personal loans since the CBO has capped those at 8%.

    I don't think these new challenges will affect banks by much in 2008 since they only came into effect in August. 2009 will be a challenge for some banks. But anyone who has been following the banking sector in Oman for the past 10 years would know, the one bank that has always overcome challenges like these is BankMuscat. And it's the one bank with the most stable core management team. The only other bank that comes close in the stability of the management is OAB, but that bank is very conservative.

    If I had money to invest right now, I'd put it all in BankMuscat's shares. A couple years ago, I lost a few thousand rials on Oman and Emirates and Renaissance. I sold both shares and put the entire amount on BankMuscat, back when it was close 11 rials a share. The stock fell, and fell. I rode it out. It split 10 to 1, and then it began a slow and steady increase. Over the course of about 8 months it went from about 800 baisas to 1.3 rials. I sold at 1.3 because it covered my losses from all my stock market adverntures and I needed to finish my house. The stock continued its climb till earlier this year at 2.3 and at the same time gave some excellent dividends and even bonus shares. I think the current price is a great entry point. It can easily double over the course of the next year- and that without ever going to crazy PE levels like some other banks.

    Sorry for the long post.

  6. Thanks for the interest, and for the long posts WD and Muscati.

    Pity I can't buy call options on BM...

  7. Unlike the USA, Oman banks are highly regulated and controlled. Controls were tightned ever further after the NBO debarcle a few years ago.
    The recent panic on the Oman Stock market is reactionary while at the same time created a needed correction. In my opinion, if you have spare cash and time to wait, now is the time to buy BM or Gulfar stock while its still cheap. Bad time for some and opportunity for others, that's why Warren Buffett and the likes are investing in selected blue chip equities while others are running


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