National Bank of Oman 2008 Preliminary Earnings Announcement - 42.5% Lower Than 2008

You've probably seen the press headlines that NBO's 2009 earnings were 42.5% lower than 2008.  But probably not much more than the headline.

While the announcement on the Muscat Exchange is  naturally brief (this is an announcement of preliminary results after all), we can look at earlier quarterly reports  on NBO's website to get sufficient information to make an informed guess about the full year's results. 

At 30 September 2009, NBO's net income was OR 26.1 million which was down some 43.8% from the comparable nine month period in 2008.  For the full year (FYE) net profit was down 42.5%.

What drove this decline?  Without the 4Q09 numbers, we don't know for certain, but with the 3Q09 financials we can infer the difference. 

First, Operating Profit (profit before provisions and taxes) was down some 4.9% at 3Q09.  At FYE 2009 it was down 13.3%.  That implies some deterioration in 4Q09 but not sufficient to cause the 42.5% drop in net income.

Second, the major culprit in depressing 3Q09 net income were expenses related to loan losses.  Provisions were OR10.4 million a whisker higher than 2008. So the culprits are in recoveries on previous provisions, charegoffs as well as other items.

Here are the details- again for the first nine months of the year:

1. Net recoveries of OR4.7 million versus OR12.9 million - a difference of OR8.2 million.
2. OR3.1 million in impairment losses on available for sale investments versus zero the year before.
3. OR4 million in credit loss expense for bank loans versus zero the year before. 

The total is OR15.3 million in additional expenses in 2009.

We can expect a similar pattern to hold in 4Q09 with net income in that period an additional OR6 million (which appears to be the average run rate per quarter for the year).

Two more observations.

First, if we look at comprehensive income (which includes changes in fair value that did not pass through the income statement), NBO's (comprehensive) income for the first nine months was OR22.5 million versus OR30.2 million for 2008.  On this basis the decline is only 25.5%.

Some additional information on the additional credit loss expense.  The bank loans comprise OR1.9 to a bank in Kazakhstan (my guess is Alliance but it may be BTA).  And OR6.6 million in exposure to Awal Bank and The International Banking Corporation.  NBO took a 50% provision on the Saudi Group exposure and 37.5% on the Kazakh bank. 

Update:  While I haven't been following Kazakhstan, I suspect 37.5% may be a bit light for a provision.  As to Awal and TIBC, this provision is probably light as well.  The Governor of the Central Bank of the UAE is on record as requiring his banks to provision 100%.  According to the press reports, he is quoted as saying this level is on par with local and international regulators' views. Earlier post here.