Omani Islamic Banking Sector

We initiate coverage on Bank Nizwa and Alizz Islamic Bank with BUY ratings on both Bank Nizwa BUY names, with fair values of OMR 0.114 per share and OMR 0.103 per share, respectively. Alizz Islamic Bank BUY Bank Nizwa and Alizz Islamic Bank are relatively new players in the Omani Banking sector, with operations commencing in 2013, when the Government of Oman mandated them to operate as exclusive Islamic Banks, along with license grants to six conventional banks to operate Islamic windows in the nascent Islamic banking industry in Oman.

Islamic banking has achieved remarkable growth in Oman Islamic banking in Oman is growing at a faster rate than conventional banking segment, with Islamic banking assets up more than 62% YoY at the end of Feb, according to a report issued by the Central Bank of Oman (CBO). Total assets held by Islamic banks and the Islamic banking windows of conventional lenders in Feb’17 amounted to OMR3.27bn, compared to OMR2.43bn a year earlier. This took the Islamic banking’s market share from 5.1% of the banking system’s overall assets in 2015 to 10.8% by Feb’17.

Teething problems of newly established Islamic banks appear to be over We expect both banks to curtail any upward pressure on their costs in a tight operating

environment, especially now that their initial investments in infrastructure & human

resource development appear to be over. We expect these banks to be able to

sequentially bring their operating cost-to-income ratio down to the likes of other Omani

banks (~40%), resulting in operating profits to increase at a CAGR of 10% for BKNZ and

14% for BKIZ during the forecast period (2017-2021). Furthermore, we do not expect cost of risk to rise as NPLs remain very low (very much lower than entire banking sector at 2.1% of total Loans) at 0.3% for BKNZ and 0.21% for BKIZ.

Deferred tax amortization to have an uncertain effect on earnings Both Bank Nizwa & Alizz Islamic Bank have taxable losses available for offset against future taxable profits, which can be utilized prior to their expiry. The banks must utilize the deferred tax asset within five years of creation of that asset. For BKNZ, a total of OMR 2.94mn while for BKIZ, a total of OMR 2.53mn of deferred tax asset is available for amortization as at the end of FY16. There will be further creation of such an asset in the next two years for BKIZ where the bank is expected to make losses. In our model- building process, we have assumed a 50% amortization p.a. of the asset sequentially until it is fully exhausted. Nonetheless, in the absence of guidance on asset amortization, our estimates might vary from the actuals.

Fair Values offer upsides of 24% for BKNZ and 27% for BKIZ Hettish Karmani Our fair value for BKNZ offers an upside of 24% compared to the current market price Head of Research of OMR 0.092/share. The bank is trading at an attractive PBv multiple of 1.07x for 2017 [email protected] compared to industry average of 1.28x. Our target price for BKIZ offers an upside of Tel: +968 24 94 90 34 27% compared to the current market price of OMR 0.081/share. The stock has

Ayisha Zia consistently been rising over the last three months but we believe there is potential for Research Analyst more due to the upcoming OMR 30mn additional Tier 1 capital issuance (Sukuk). The [email protected] bank is trading at a PBv multiple of 0.75x for 2017 (including Tier 1 Capital), which in Tel: +968 24 94 90 36 our view is unjustified given the peer-group average PB x of 1.28.

Valuation Methodology

We have applied Excess Returns methodology to derive fair value of OMR 0.114/share for BKNZ and OMR 0.103/share for BKIZ. We have used 2.3% US risk-free rate, 7.3% US market risk premium, a 3-Yr weekly adjusted Beta of 0.840 for BKNZ and 0.758 for BKIZ (Source: Bloomberg), and a terminal growth rate of 3.6%. For BKIZ, we have assumed a successful completion of raising OMR 30mn Tier 1 perpetual Sukuk at an assumed interest rate of 8%.

Excess Returns Valuation Bank Nizwa OMR '000 FY-17 FY-18 FY-19 FY-20 FY-21

Beginning book value of Equity invested currently 127,760 Net Income 2,178 3,215 4,366 4,501 5,544 Less: Equity Cost 11,682 12,001 12,434 12,881 13,431 Excess Return to Equity (9,504) (8,786) (8,068) (8,380) (7,887) Present value of Excess Equity Return (9,024) (7,652) (6,445) (6,140) (5,301) Sum of present value of Excess Return (34,561)

Terminal Value Assumptions Book value of equity at start of year 6 148,845 Risk-free rate (US 10-Yr) 2.3% Net income in stable period 19,499 Risk premium (US 10-Yr) 7.3% Less: Equity Cost 13,431 Country Risk 0.76% Excess Return to Equity 6,068 Beta 0.840 Terminal Value 115,902 Cost of Equity 9.0% PV of Terminal Value 77,893 Terminal RoE 13.1% Total Equity Value 171,092 Terminal growth rate 3.6% Total shares out, '000 1,500,000 Target price, OMR 0.114 Current price, OMR 0.091 Upside 25% Rating BUY Source: U Capital Research

Excess Returns Valuation Alizz Islamic Bank OMR'000 FY-17 FY-18 FY-19 FY-20 FY-21

Beginning book value of Equity invested currently 110,510 Net Income (372) 252 441 810 1,208 Less: Interest on Tier 1 Perpetual Bonds (@8% of OMR 30mn) 2,400 2,400 2,400 2,400 2,400 Less: Equity Cost 9,071 8,892 8,731 8,605 8,516 Excess Return to Equity (11,844) (11,039) (10,691) (10,195) (9,707) Present value of Excess Equity Return (11,286) (9,708) (8,676) (7,636) (6,709) Sum of present value of Excess Return (44,015)

Terminal Value Assumptions Book value of equity at start of year 6 101,829 Risk-free rate (US 10-Yr) 2.3% Net income in stable period 13,340 Risk premium (US 10-Yr) 7.3% Less: Interest on Tier 1 Perpetual Bonds (@8% of OMR 30mn) 2,400 Country Risk 0.8% Less: Equity Cost 8,516 Beta 0.758 Excess Return to Equity 2,424 Cost of Equity 8.4% Terminal Value 52,726 Terminal RoE 13.1% PV of Terminal Value 36,440 Terminal growth rate 3.6% Total Equity Value 102,935 Total shares out, '000 1,000,000 Target price, OMR 0.103 Current price, OMR 0.081 Upside 27% Rating BUY Source: U Capital Research

Sensitivity Analysis BKNZ Stable Period ROE Growth Rate 0.114 11% 12% 13% 14% 15% 0.114 2.6% 3.1% 3.6% 4.1% 4.6% 7.0% 0.146 0.172 0.202 0.238 0.281 7.0% 0.171 0.185 0.202 0.226 0.259 8.0% 0.110 0.128 0.148 0.171 0.198 8.0% 0.132 0.139 0.148 0.159 0.173 9.0% 0.086 0.099 0.114 0.130 0.149 9.0% 0.106 0.109 0.114 0.120 0.126 10.0% 0.069 0.079 0.091 0.103 0.117 10.0% 0.086 0.088 0.091 0.094 0.097

Cost Equity of 11.0% 0.057 0.065 0.074 0.083 0.094 Cost Equity of 11.0% 0.072 0.073 0.074 0.075 0.077

BKIZ Stable Period ROE Growth Rate 0.103 11.1% 12.1% 13.1% 14.1% 15.1% 0.103 2.6% 3.1% 3.6% 0.5% 0.5% 6.4% 0.142 0.171 0.199 0.228 0.257 6.4% 0.165 0.180 0.199 0.131 0.131 7.4% 0.098 0.118 0.138 0.158 0.179 7.4% 0.123 0.130 0.138 0.106 0.106 8.4% 0.072 0.088 0.103 0.118 0.134 8.4% 0.096 0.099 0.103 0.088 0.088 9.4% 0.056 0.068 0.080 0.092 0.104 9.4% 0.077 0.079 0.080 0.074 0.074

Cost Equity of 10.4% 0.044 0.054 0.064 0.074 0.084 Cost Equity of 10.4% 0.063 0.064 0.064 0.063 0.063 Source: U Capital Research

Peer-Group Comparison

BBG Ticker Name Price P/E (x) P/B(x) ROE, % EIB UH Equity EMIRATES ISLAMIC 7.500 135.63 5.91 4.7 MARK QD Equity MASRAF AL RAYAN 43.900 16.14 2.81 3.8 DIB UH Equity DUBAI ISLAMIC 5.800 8.00 1.81 11.2 QIBK QD Equity QATAR ISLAMIC BA 102.100 11.75 1.76 6.0 MASQ UH Equity MASHREQBANK 76.000 6.95 0.73 -22.6 ADIB UH Equity ABU DHABI ISLAMI 3.600 6.53 1.11 1.6 QIIK QD Equity QATAR INTERNATIO 60.500 11.47 1.32 1.3 KCBK QD Equity AL KHALIJ BANK 14.500 12.04 0.74 -35.4 NBS UH Equity SHARJAH ISLAMIC 1.370 7.50 0.73 -44.1 AJMANBAN UH Equity AJMAN BANK PJSC 1.190 16.35 1.02 2.8 ALMUTAHE KK Equity AHLI UNITED BANK 430.000 17.74 1.88 -24.5 SALAM BI Equity AL-SALAM BANK 0.095 12.77 0.64 58.6 BKNZ OM Equity BANK NIZWA 0.092 212.47 1.08 - BISB BI Equity BAHRAIN ISLAMIC 0.145 19.48 1.31 -19.0 BKIZ OM Equity AL IZZ ISLAMIC B 0.081 NM 1.00 14.0 Average ex-EIB 27.63 1.28 Source: Bloomberg *Price in each country's respective currency

Oman’s Islamic Banking Industry

A brief history…

In May 2011, a royal decree authorizing Islamic finance in Oman was issued. Subsequently, in December 2012, the government decreed an Islamic Banking Regulatory Framework, which serves as a guide to the regulation of the emerging Islamic finance and banking industry in Oman. In April of 2013, the Central Bank of Oman followed suit with the creation of a team of bankers dedicated to overseeing the Islamic finance and banking sector in Oman. In 2014, Oman set up a centralized Shariah board with five members who have direct oversight of Islamic banking institutions similar to the arrangement in Pakistan, Malaysia, Morocco and Nigeria. The High Shariah Supervisory Authority convened for the first time in March 2015.

As of date, Oman has granted licenses for Islamic banking to Bank Nizwa and Alizz Islamic Bank. Currently, there are six Islamic banking windows in Oman, including Al Yusr (operated by Oman Arab Bank), Meethaq Islamic Banking (Bank Muscat), Sohar Islamic (Bank Sohar), Muzn Islamic Banking (National Bank of Oman), Al Hilal Islamic Banking (Ahli Bank) and Maisarah Islamic Banking Services (Bank Dhofar).

Omani Islamic Banking -Credit Pie Omani Islamic Banking -Deposit Share OAB-Al Yusr, OAB-Al Yusr, NBO - 5% ABOB -Al ABOB -Al NBO - 2% Muzn , 4% Hilal, 9% Hilal, 8% Muzn , 6% BKSB -Sohar BKSB -Sohar Alizz Islamic Alizz Islamic Islamic, 6% Islamic, 4% Bank, 13% Bank, 13%

Bank Nizwa, Bank Nizwa, BKMB - 16% 16% Meethaq, BKMB - 35% Meethaq, 35% BKDB - BKDB - Maisarah, Maisarah, 14% 13% Source: Company Financials, U Capital Research

The GCC region is the largest market for Islamic Banking Industry Date of Authorized Operating and Shariah-compliant assets representing a significant portion Establishment Offices Offices of total banking assets. Islamic banking has a sizable market Bank Nizwa 2012 11 11 1 Alizz Islamic Bank 2013 8 6 share of more than 25% in the GCC indicating the importance BKMB -Meethaq 2013 16 16 of the sector to the overall economy. Saudi Arabia dominates NBOB -Muzn 2013 6 6 the region with an Islamic banking market share of 51.2 % in BKDB -Maisarah 2013 10 5 terms of total banking assets, followed by Kuwait at 45.2%. In OAB -Al Yusr 2013 5 5 UAE, Qatar and Bahrain, Islamic banks’ market share stood ABOB -Al Hilal 2013 7 7 BKSB -Sohar Islamic 2013 5 4 between 20-30% of gross assets, according to each country’s Total 68 60 central banks’ latest banking statistics. Source: CBO In Oman, within a span of four years from introduction, the Islamic banking segment has reached OMR 3.07bn in gross assets with a market share of 10.8% as of Feb’17. Bank Nizwa along with Alizz Islamic Bank and Islamic windows of six

1 World Islamic Banking Competitiveness Report 2016 - EY 5

conventional bank are the players in Oman’s emerging Islamic banking sector with a footprint of 60 branches across the Sultanate as of the end of 2016.

The Islamic finance sector in Oman has witnessed unparalleled growth over the last four years. With two full-fledged Islamic banks and six Islamic windows, Shariah-compliant financing portfolio accounted for 11% of Oman’s total banking finance as of December 2016. The financing assets of Islamic Banks have grown to OMR 2.42bn (+36%YoY) in 2016 and deposits have grown to OMR2.17bn, an increase of 41%YoY.

Islamic Banking -Credit Islamic Banking -Deposits

3,000 160% 2,500 350% 140% 300%

2,500 2,000 Millions Millions 120% 250% 2,000 100% 1,500 200% 1,500 80% 150% 60% 1,000 1,000 40% 100% 500 500 20% 50% - 0% - 0% 2013 2014 2015 2016 2013 2014 2015 2016

Total Credit YoY Total Deposits YoY

Source: CBO, U Capital Research

Challenges that have been overcome…

A key challenge facing Islamic Banks in Oman was the lack of understanding of Shariah-based financing options as well as higher costs for staffing and training specialized human resources. Standalone Islamic banks also needed to build a large deposit base and develop infrastructure from scratch in order to compete with the established conventional banks offering Islamic products through their Islamic windows. Another challenge was a relatively smaller capital base which hindered their ability to finance large infrastructure projects.

Generally, early years are challenging for every business and same stood true for Islamic Banks in Oman as well. Generation of profits for depositors while investing in the development of a broad offering of Shariah-compliant products, and to offer competitive pricing to customers in a country where Shariah-compliant products were less understood, continues to remain a challenge.

Quick review of Operational Performance of Islamic Banks & Windows

All the Islamic Banking windows of listed conventional banks have achieved operational profitability. Bank Nizwa achieved operational profitability in 2016, however, BKIZ continues to remain in losses at operating level.

Operating Income Operating Profit 30 20 15 25

10 Millions Millions 20 5 15 - 10 (5) (10) 5 (15) - BKMB - NBO - BKDB - ABOB -Al BKSB - BKNZ BKIZ Meethaq Muzn Maisarah Hilal Sohar Islamic 2013 2014 2015 2016 2013 2014 2015 2016 Operating Pofit Margin, FY16 Return on Equity, FY16

BKIZ BKIZ BKNZ BKNZ NBO -Muzn NBO -Muzn BKSB -Sohar Islamic BKSB -Sohar Islamic BKDB -Maisarah BKDB -Maisarah BKMB -Meethaq BKMB -Meethaq ABOB -Al Hilal ABOB -Al Hilal

-50% 0% 50% 100% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Source: Company Financials, U Capital Research

In terms of operating profit margins, Islamic Windows have an advantage over full-fledged Islamic banks in terms of cost efficiencies, even though CBO mandated each conventional bank to open exclusive Islamic banking branches. However, the windows benefited from existing support services network e.g. HR & IT. As for the full-fledged newly established Islamic banks, they had to invest heavily in the first few years in developing human resource aside from other capex.

Islamic Banks & Windows’ Performance & Financial Position…in charts

Total Assets, FY16 Owners' Equity, FY16

1,200 140 1,000 120

800 100 OMR mn OMR OMR mn OMR 80 600 60 400 40 200 20 - -

Share Capital, FY16 Capital Adequacy Ratio (CAR), FY16

160 140 24.51% 23.65% 120

OMR mn OMR 100 80 15.80% 15.66% 15.28% 14.23% 60 40 20 -

BKIZ BKNZ NBO -Muzn ABOB -Al BKSB - BKMB - Hilal Sohar Meethaq Islamic

Murabaha Market Share FY16 Musharaka Market Share FY16 BKMB - BKSB -Sohar Meethaq BKNZ BKIZ Islamic 13% 0% 1% 2% BKIZ NBO -Muzn 21% 1% ABOB -Al Hilal BKDB - 5% Maisarah 12% BKDB - Maisarah ABOB -Al Hilal 23% 15% BKMB - Meethaq 68% BKNZ NBO -Muzn BKSB -Sohar 35% 1% Islamic 3% Source: Company Financials, U Capital Research

Ijara Muntahia Bittamleek, FY16 Customer Accounts & Wakala, FY16 BKMB - Meethaq 350 9% BKIZ 300 23% NBO -Muzn 11% 250 OMR mn OMR 200 BKDB - 150 Maisarah 100 4% 50 ABOB -Al - Hilal BKNZ 16% 29% BKSB -Sohar Islamic 8% Equity of Unrestricted Investment Account Interest Income, FY16 holders, FY16 40 35 600 30 500 OMR mn OMR 25

400 20 OMR mn OMR 300 15 200 10 100 5 - -

Interest Expense, FY16 Other Operating Income, FY16

- 4.5 (2) 4.0 3.5

(4) 3.0 OMR mn OMR OMR mn OMR (6) 2.5 (8) 2.0 (10) 1.5 1.0 (12) 0.5 (14) 0.0

Source: Company Financials, U Capital Research

Sector Outlook

We believe that key drivers for growth of Islamic Banking are the same as those for the banking sector as whole: (1) Economic sectors to be promoted under the Government-backed USD20bn Tanfeedh Program which is to be funded through Public-Private Partnership initiatives (2) Government spending on mega projects such as the Sohar Refinery and Duqm Airport; (3) Favorable demographics of Oman (~43% working age population -aged 25 to 54 years)2 as a key driver for growth in the consumer lending segment and higher disposable incomes of the youth population.

However, slower economic growth will subdue credit demand, thereby softening credit growth to 8 -10% in 2017. Overall, the banking system is well-positioned for sustained growth in the future and will benefit from the Sultanate’s systematic shift towards a more diversified economy. Increasing Appetite for Islamic financial products in Oman

Appetite for Islamic finance products was underlined by the success of two Takaful insurer IPOs at the end of 2013. The share offerings in Al Madina and Takaful Oman were both heavily oversubscribed, raising between them nearly OMR 59mn. In terms of Sukuk, the Omani government also issued its debut sovereign Sukuk of OMR 200mn in 2015.

A recently-announced Sukuk from Golden Group, which has interests in construction, real estate, hospitality and logistics, would be only the third corporate Sukuk in Oman. Previously, conglomerate MB Holding Co issued USD 76mn through a privately placed Sukuk, while real estate firm Tilal Development Co sold the country's first Sukuk worth OMR 50mn in 2013. In April 2017, the Islamic banking unit of Bank Muscat received regulatory approval for OMR 100mn Sukuk Program, while the Omani government is also planning to issue a dollar-denominated Sukuk in the near-term.

Conducive regulatory environment

CBO has supportive policy for Islamic banks & windows, which initially have a higher ceiling for investing in foreign- currency denominated assets as well as retail financing segment.

The government is also expected to cushion the impact of low oil prices on the economic growth by maintaining high levels of public spending despite its lower oil related revenues. Consequently, we expect real GDP growth to improve gradually to 0.38%3 in 2017 and 3.83%4 in 2018.

2 CIA World Fact book, July 2016 est. 3 IMF estimate 4 IMF estimate 10

Bank Nizwa TP: OMR 0.114 / share

Recommendation Buy We arrive at a target price of OMR 0.114 per share for Bank Nizwa and initiate Bloomberg Ticker BKNZ OM on the bank with a BUY rating. Bank Nizwa is Oman’s first dedicated Islamic bank, Current Market Price (OMR) 0.092 with fully Sharia-compliant products and services. It is a publicly held 52wk High / Low (OMR) 0.100/0.070 shareholding company listed on the Muscat Securities Market (MSM). Bank 12m Average Vol. (000) 1,679.5 Nizwa had the second largest market share of Islamic Banking credit pie as well Mkt. Cap. (USD/OMR mn) 358.44/138 as Islamic deposits, at 16% each as at the end of FY16.

Shares Outstanding (mn) 1,500.0 Stellar loan-book growth Free Float (%) 80% The bank’s total assets grew by 49%YoY to reach OMR 516mn as at the end of FY16, while 3m Avg Daily Turnover (000) 123.9 total net loans increased by 48%YoY to reach OMR 397.8mn, showing significant growth 6m Avg Daily Turnover (000) 148.3 despite a challenging operating environment. As at Q1’17, total net loans have grown by PE 2017e (x) 63.4 12%QoQ and 43% YoY to reach OMR 446.8mn. We expect the total assets of the bank to PBv 2017e (x) 1.1 grow at CAGR of 13% over the next five years on account of increasing loan book Dividend Yield '17e (%) 0.0% (expected CAGR of 12% over 2016-2021e).

Price Performance: Operating income to grow at a CAGR of 10% 1 month (%) (1.08) Operating income of the bank is expected to increase from OMR 17.4mn in 2016 to OMR 3 month (%) 1.10 27.8mn in 2021, growing at a CAGR of 10%. Revenue growth will be primarily driven by 12 month (%) 19.48 improving Net Interest Margins (NIMs) as well as new loan origination fee as loan-book Source: Bloomberg expands.

Price Volume Performance: Operating costs and cost of risk to remain under control We expect the bank to be able to sequentially reduce its operating cost-to-income ratio 20000 0.100 as operations normalize and operating income growth continues its upward trend, 18000 resulting in operating profit before provisions to increase at a CAGR of 45% during the 0.095 16000 forecast period. Furthermore, we expect cost of risk to remain low as current asset quality is maintained over the forecast horizon. 14000 0.090 AED Thousands AED 12000 TP offers an upside of 24%; CMP: OMR 0.092/share 10000 0.085 Our target price offers an upside of 24% compared to the current market price of OMR 8000 0.092/share. The bank is trading at an attractive PBv multiple of 1.07x for 2017 compared 0.080 to industry average of 1.28x. Furthermore, the bank is expected to benefit from 6000 sequentially reducing its deferred tax asset from its loss-making years, where it has 5 4000 0.075 years to amortize the asset from the date of creation. This might result in higher or lower 2000 earnings than our forecast, based on 50% asset amortization per year. 0 0.070 Key Indicators

Jul-16 FY'15 FY16 FY17e FY18e FY19e FY20e

Jan-17

Sep-16

Nov-16 Mar-17 May-16 Net Loans, OMR'000 268,986 397,807 466,702 522,402 573,212 630,767 Customer Deposits, OMR '000 189,387 352,268 436,782 504,151 557,877 618,957 Vol ('000) Px-BKNZ (OMR) Operating Income, OMR '000 11,913 17,379 22,167 23,162 24,371 26,132 Operating Profit, OMR '000 (5,468) 110 1,566 2,787 3,917 5,050

Net Profit, OMR '000 (5,260) 110 2,178 3,215 4,366 4,501 EPS, OMR -0.0035 0.0001 0.0015 0.0021 0.0029 0.0030 Ayisha Zia BVPS, OMR 0.084 0.085 0.086 0.089 0.092 0.095 Research Analyst P/E (x) NM 1134.7 63.4 42.9 31.6 30.7 [email protected] P/BVPS (x) 0.83 0.98 1.07 1.04 1.00 0.97 Tel: +968 24 94 90 36 Source: Company Financials, U Capital Research NM = Not meaningful

Stellar loan-book growth

The bank’s total assets grew by 49%YoY to reach OMR 516mn as at the end of FY16, while total net loans increased by 48%YoY to reach OMR 397.8mn, showing significant growth despite a challenging operating environment. As at Q1’17, total net loans have grown by 12%QoQ and 43% YoY to reach OMR 446.8mn. We expect the total assets of the bank to grow at CAGR of 13% over the next five years on account of increasing loan book (expected CAGR of 12% over 2016-2021e). BKNZ: Asset Mix , FY16 BKNZ: Net Loans, OMR mn Cash & Cash Balances 800 120% Other assets with CBO 3% 100% Investments 2% Inter-Bank 600 9% Wakala & Millions 80% Due from other Fis 400 60% 9% 40% 200 20% - 0% Net Loans FY'15 FY16 FY17e FY18e FY19e FY20e FY21e 77% Net Loans YoY

Source: Company Financials, U Capital Research

Robust Deposit growth

Customer deposits of the bank increased by 86%YoY to reach OMR 352mn, showing significant growth in

the face of difficult economic circumstances.

BKNZ: Liability Mix , FY16 BKIZ: Customer Deposit s, OMR mn Inter-bank Total owners' Wakala 800 120% equity 4% 100% 25% Customers' 600 Millions 80% Wakala 24% 400 60% 40% Equity of Customers' 200 20% unrestricte accounts Other d inv 13% - 0% liabilities acctholders' FY'15 FY16 FY17e FY18e FY19e FY20e FY21e 31% 3% Customers' Deposits YoY

Source: Company Financials, U Capital Research

As at Q1’17, the bank has mobilized OMR 44mn worth of new deposits, making total customer deposits reach OMR 396.7mn (+13%QoQ; 82%YoY). We believe that customer deposits will increase at a CAGR of 11% over the forecast horizon.

Solid Operational Performance

Bank Nizwa marked a significant milestone in 2016 by achieving net profit in the fourth year of its operations. Its operating income for the year rose by 46%YoY, while its operating expenses increased only by 3%YoY, reflecting successful cost management. As a result, cost-to-income ratio declined to below 91%, allowing the bank to achieve its first net profit since its inception in 2013.

The bank strengthened its position in wholesale and retail banking. During the year, the bank’s retail banking customer deposit accounts increased to 69,000. The wholesale banking group was restructured in 2016. A dedicated team for corporate client services was established to ensure speedy services, quick turnaround time and interdepartmental coordination. In addition, the project finance and syndication department merged with the team catering to large corporates to ensure synergy, efficient risk appraisals and coordination.

We expect the operating income of the bank to grow at a CAGR of 10% over 2016-2021F, which together with controlled costs, is expected to boost net profit at a CAGR of 21% over 2016-2021F.

BKNZ: Revenue and Profit BKNZ: Net Profit and Cost to Income

30 6,000 100.0%

20 5,000 90.0% 4,000 10 80.0%

000 3,000 0 70.0%

OMRmn 2,000 (10) OMR' 1,000 60.0% (20) 0 50.0% FY'13 FY'14 FY'15 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 FY21 Total revenue Profit / (Loss) for the period before tax Net profit Cost to Income

Source: Company Financials, U Capital Research

Low-risk Government Deposit Concentration

The bank is heavily supported by Government deposits which constitute 32% of the bank’s liabilities as of FY16. We view this as low-risk given the Government’s commitment to support the banking sector, especially under the current macroeconomic scenario.

On the asset side, the bank is heavily invested in retail portfolio, which is once again low risk in our view, as it is mostly asset-backed investments.

BKNZ: Economic sector concentrations - BKNZ: Economic sector concentrations - Assets Liabilities

Others Others 26% Other 18% Personal services 30% 2% Other services 2% Personal Government Government 54% 2% 32% Financial Construction services Manufacturin 7% 9% g Construction Financial services Manufacturing 5% 0% 7% 6%

Source: Company Financials, U Capital Research

Superior Asset Quality

The bank has been able to maintain its non-performing assets (NPAs) at a very low % (0.03% in FY16) of total finance assets as compared to the Omani Banking Sector at ~2% of total.

Its NPA stood at OMR 5.3mn at the end of FY16, up by 36%YoY, and representing 0.03% of the total gross loans. But this rise is not alarming as NPA to gross loans actually came off from 0.05% in FY15. NPL coverage is more than ample as provisions are made as per CBO guidelines, since NPLs remain extremely low. Cost of risk also declined from 78bps in FY15 to 37 bps in FY16. We have been conservative in our estimates, and therefore we have increased cost of risk sequentially over the forecast horizon, given the current weak macroeconomic environment.

BKNZ: Cost of Risk, bps BKNZ: Credit Quality & Provision Coverage 100 0.06% 4500.0%

80 0.04% 4000.0% 60 0.02% 3500.0% 40

20 0.00% 3000.0% 2013 2014 2015 2016e 2017e 0 - NPLs to Gross Loans - NPL Coverage FY-13 FY-14 FY-15 FY-16 FY-17e FY-18e FY-19e

Source: Company Financials, U Capital Research

Robust Capital Buffers albeit expected to decline

Bank Nizwa maintains capital adequacy ratio that vastly exceeds the required levels as per Basel committee, which is 8%, and Central Bank of Oman’s requirement of 12%. However, the bank’s capital adequacy levels have been declining as the bank takes on more risk, down from 26.5% as at the end of 2015 to 22.3% at the end of 2016.

We expect this ratio to continue to decline over the forecast period, as the bank grows its net loans at a faster pace, increasing RWAs, despite shoring up capital through increasing earnings and no dividend payouts.

The bank has brought its Net Loan-to-Deposit ratio down from highs of 140% to 113% in FY16. We are expecting the ratio to come down to 107% in FY17 but continue to remain above 100% over the forecast period as liquidity comes under pressure once again post-2018 on persistent low oil prices.

BKNZ: Capital Adequacy Ratio (CAR) BKNZ: Loan-to-Deposit Ratio

72.67%

144% 142% 46.37% 113% 103% 109% 107% 104% 35.79%

23.65% 20.96% 19.32% 18.52%

FY'13 FY'14 FY'15 FY16 FY17e FY18e FY19e FY'13 FY'14 FY'15 FY16 FY17e FY18e FY19e

Source: Company Financials, U Capital Research

Dividend Payout Policy

We believe that the bank will not pay any dividends until accumulated losses in equity have been replenished with sequential profits. However, the bank maintains adequate capital buffers as well as good liquidity levels, and hence might decide to start paying out some part of earnings post-2018. In our model building process, we have assumed zero payout in the first five years, and 70% payout once earnings stabilize.

About Bank Nizwa

The formation of Bank Nizwa came about with the Central Bank of Oman granting its initial approval to the licensing of the Bank to Sheikh Saud bin Ali Al Khalili. Sheikh Saud and a further 92 other Omani individuals, companies and pension funds constitute the founder shareholders of the Bank.

Bank Nizwa is Oman’s first dedicated Islamic bank, with fully Shariah compliant products and services. The Bank offers an entire portfolio of commercial banking services, in accordance with the license issued by the Central Bank of Oman (CBO) and the Banking Law promulgated by the Royal Decree No. 114/2000.

Shareholding Structure (Source Bloomberg) The Founders appointed a Founding Committee to represent them and to help manage the establishment Civil Pension Fund, 6.9% of the Bank as a licensed Shariah compliant commercial Diwan of bank. The Founding Committee consisted of five Royal Court, individuals including the Chairman of the Founding 5.0% Committee, Ahmed bin Saif Al Rawahi. Since launching its operations in January 2013, the bank now provides a Al Ghadeer Investments, full range of banking solutions to individuals, small and 8.0% medium size enterprises, corporations and government institutions. IT aims to be the bank of choice for the Others, people of Oman. Bank Nizwa is equipped with state-of- 80.1% the-art banking systems and software which are driven to offer customers the best Islamic Banking experience. Currently with 11 branches the bank will expand its branch network extensively over the next five years as part of its strategic plan to grow the bank.

Board of Directors Shariah Supervisory Board Members

. Sayyid Amjad bin Mohammed bin Ahmed Al Busaidi (Chairman) . Dr. Abdul Sattar Abu Ghudah (Chairman) . Sheikh Ahmed bin Saif bin Musalam Al Rawahi (Vice Chairman) . Sheikh Ibrahim bin Nasir Al Sawafi . Hussain bin Yousif bin Dawood Al Shalwani . Dr. Mohammed bin Rashid Al Gharbi . Sheikh Muadh bin Salim Al Ghazali . Musabah bin Saif bin Musabah Al Mutairi . Sheikh Saif bin Hilal bin Nasser Al Mawali . Sheikh Abdulaziz bin Khalifa bin Abdullah Al Saadi . Sheikh Khalid bin Abdullah bin Ali Al Khalili Source: Bank website

The successful implementation of the Islamic Banking model depends on the absolute adherence to Shariah principles. The Shariah Supervisory Board of Bank Nizwa provides this strong underpinning and comprises of highly qualified and world renowned Shariah advisors. The role of the Shariah Supervisory Board is to provide opinion and validation of the bank’s compliance to Islamic banking principles in all operational and financial aspects.

The authorized share capital of the bank is OMR 300mn and the issued and paid up capital is OMR 150mn divided into 1.5bn shares of a nominal value of OMR 0.100 each. At 31 December 2016, no shareholders’ of the bank owned 10% or more of the bank’s paid up capital.

Financial Statements (OMR '000) 2014 2015 2016 2017e 2018e 2019e 2020e Income Statement Financing Income 5,537 10,063 17,982 25,074 28,184 31,069 34,340 Payment to Depositors (426) (1,313) (4,480) (7,910) (10,619) (12,891) (15,009) Net Interest/Financing Income 5,111 8,751 13,502 17,165 17,565 18,178 19,331 Fee & Commission Income 747 1,377 1,922 2,480 2,775 3,070 3,371 Investment Income 1,620 1,685 1,744 2,250 2,518 2,785 3,059 Other Income 40 100 211 273 305 337 371 Total Non-Interest/Financing Income 2,407 3,162 3,877 5,002 5,598 6,193 6,801

Total Operating Income 7,518 11,913 17,379 22,167 23,162 24,371 26,132 Provisions expense (1,494) (2,005) (1,415) (1,759) (2,077) (2,419) (2,790) Operating Expenses (14,769) (15,377) (15,854) (18,842) (18,298) (18,035) (18,292) Profit Before Taxation (8,745) (5,468) 110 1,566 2,787 3,917 5,050

Taxation 1,037 208 - 611 428 449 (549) Net Profit (7,709) (5,260) 110 2,178 3,215 4,366 4,501 Balance Sheet Cash Balances 25,092 14,626 16,600 51,946 72,697 90,076 113,039 Deposits with Banks & FIs 2,929 3,315 4,920 4,117 4,518 4,318 4,418 Investment Securities 9,440 25,012 29,360 31,595 34,055 36,761 39,737 Sales receivables & other receivables -net 51,152 75,758 100,103 113,117 125,560 138,116 151,927 Ijara Muntahia Bittamleek -net 59,339 155,580 234,054 269,162 296,078 325,686 358,254 Wakala Bel Istithmar -net 17,672 37,648 62,851 81,706 98,047 107,852 118,637 Other Assets 105,155 71,803 130,960 143,219 164,759 179,096 196,813 Total Assets 253,106 346,094 515,995 613,156 697,667 774,052 864,188

Deposits from Banks & FIs 16,902 16,940 23,233 31,863 43,700 59,934 82,198 Deposits from Customers 51,440 115,043 193,294 245,729 302,197 330,130 361,513 Other Liabilities 10,304 13,093 13,433 15,055 16,823 18,445 20,286 Equity of unrestricted inv acctholders & owners' equity 42,417 74,344 158,974 191,052 201,954 227,747 257,444 Paid-up Capital 150,000 150,000 150,000 150,000 150,000 150,000 150,000 Retained Earnings / (Accumulated Losses) (20,014) (25,274) (25,175) (22,997) (19,783) (15,416) (10,916) Other Reserves 2,057 1,948 2,226 2,226 2,226 2,226 2,226 Shareholders' Equity 132,043 126,674 127,061 129,457 132,993 137,796 142,747 Total Equity & Liability 253,106 346,094 515,995 613,156 697,667 774,052 864,188 Cash Flow Statement Cash from operations (53,788) 4,622 5,475 23,925 22,677 19,544 25,628 Cash from investing activities (50,572) 14,979 3,779 (11,204) 2,247 2,602 3,116 Cash from financing 640 (109) 278 218 321 437 450 Net changes in cash (2,576) (10,466) 1,974 35,346 20,752 17,379 22,963 Cash at the end of period 25,092 14,626 16,600 51,946 72,697 90,076 113,039 Key Ratios Return on Average Assets -3.4% -1.8% 0.0% 0.4% 0.5% 0.6% 0.5% Return on Average Equity -5.7% -4.1% 0.1% 1.7% 2.4% 3.2% 3.2% Recurring Income/Operating Income 83.6% 96.0% 114.5% 124.3% 133.7% 140.1% 144.3% Profit Yield 3.3% 3.9% 4.7% 5.1% 5.2% 5.1% 5.2% Profit Paid -0.5% -0.8% -1.5% -1.9% -2.1% -2.2% -2.3% Net Spread 3.9% 4.7% 6.3% 7.0% 7.2% 7.3% 7.4% Cost to Income Ratio 196.5% 129.1% 91.2% 85.0% 79.0% 74.0% 70.0% Net Loans to Customer Deposits 61.8% 90.7% 86.3% 90.4% 90.5% 90.6% 90.7% NPLs to Gross Loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NPL Coverage 1.3% 1.4% 1.3% 1.3% 1.3% 1.4% 1.4% Cost of Risk (bps) 90.1 77.7 37.4 36.0 38.0 40.0 42.0 Equity to Gross Loans 95.4% 44.4% 30.2% 26.3% 24.1% 22.7% 21.4% Equity to Total Assets 52.2% 36.6% 24.6% 21.1% 19.1% 17.8% 16.5% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Adjusted EPS (OMR) (0.005) (0.004) 0.000 0.001 0.002 0.003 0.003 Adjusted BVPS (OMR) 0.088 0.084 0.085 0.086 0.089 0.092 0.095 Market Price (OMR) * 0.080 0.070 0.083 0.092 0.092 0.092 0.092 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% P/E Ratio (x) NM NM 1,134.7 63.4 42.9 31.6 30.7 P/BV Ratio (x) 0.91 0.83 0.98 1.07 1.04 1.00 0.97 Source: Company Financials, U Capital Research * Market price for 2017 and subsequent years as per latest closing price of 25-May-17 **NM = not meaningful 17

Alizz Islamic Bank TP: OMR 0.103 / share Recommendation BUY We arrive at a fair value of OMR 0.103 per share for Alizz Islamic Bank (BKIZ) and Bloomberg Ticker BKIZ OM initiate on the bank with a BUY rating. The stock price has increased by over 30% Current Market Price (OMR) 0.081 in last twelve months, and we believe that it has potential for another 30% 52wk High / Low (OMR) 0.080/0.060 upside, on the back of Tier 1 Perpetual Sukuk worth OMR 30mn, which will vastly 12m Average Vol. (000) 346.4 improve its financial position. BKIZ is a dedicated Islamic bank, with fully Sharia- Mkt. Cap. (USD/OMR mn) 210.39/81 compliant products and services. It is a publicly held shareholding company listed on the Muscat Securities Market (MSM). Shares Outstanding (mn) 1,000.0

Free Float (%) 48% Operational profitability expected by the end of 2018 3m Avg Daily Turnover (000) 9.9 Currently the bank has still not turned profitable at the operational level. As per 6m Avg Daily Turnover (000) 14.5 management guidance, the bank is expected to surpass operational break-even PE 2017e (x) NM by 2018. Operating income of the bank is expected to increase from OMR 8.8mn PBv 2017e (x) 0.75 in 2016 to OMR 19.7mn in 2021, growing at a CAGR of 20%. Revenue growth will Dividend Yield '17e (%) 0.0% be primarily driven by improving Net Interest Margins (NIMs) on a growing loan-

Price Performance: book as well as new loan origination fee.

1 month (%) 15.71 Operating costs and cost of risk to remain under control 3 month (%) 15.71 We expect the bank to reach optimal operating cost structure within the next 12 month (%) 39.66 two years. We expect this to result in operating profit before provisions to Source: Bloomberg increase at a CAGR of 40% during the forecast period post-2018. Furthermore, Price Volume Performance: we expect cost of risk to remain low as current asset quality is maintained over the forecast horizon (FY16 Non-performing asset (NPA) at 0.21% of net loans). 6000 0.080 TP offers 30% upside; CMP: OMR 0.103/share 5000 0.075 Our target price offers a 30% upside compared to the current market price of OMR 0.081/share. However, the bank is expected to benefit from sequentially 4000 0.070

AED Thousands AED reducing its deferred tax asset from its loss-making years, where it has 5 years to amortize the asset from the date of creation, which could potentially inflate 3000 0.065 earnings over the next few years. Currently there is no guidance available on how this asset will be amortized. However, we believe that this fluctuation in net 2000 0.060 profit will not affect our valuation of the bank significantly. Additionally, the new 1000 0.055 capital will significantly boost loan growth and hence profitability over the next few years. 0 0.050 Key Indicators

FY'15 FY16 FY17e FY18e FY19e FY20e

Jul-16

Jan-17

Sep-16

Nov-16 Mar-17

May-16 Net Loans, OMR'000 199,442 312,796 390,729 466,021 515,554 570,772 Customer Deposits, OMR '000 161,382 291,029 375,150 441,001 498,854 549,018 Vol ('000) Px-BKIZ (OMR) Operating Income, OMR '000 5,995 8,971 13,008 15,175 16,625 18,123 Operating Profit, OMR '000 (6,181) (5,315) (1,928) (618) 6 697 Net Profit, OMR '000 (5,356) (4,725) (372) 252 441 810 EPS*, OMR -0.0054 -0.0047 -0.0028 -0.0021 -0.0020 -0.0016 BVPS**, OMR 0.086 0.081 0.108 0.106 0.104 0.103 P/E (x) NM NM NM NM NM NM Ayisha Zia P/BVPS (x) 0.81 1.02 0.75 0.76 0.78 0.79 Research Analyst Source: Company Financials, U Capital Research [email protected] NM = not meaningful Tel: +968 24 94 90 36 *EPS after assumed Interest expense @ 8% on upcoming Tier 1 perpetual Sukuk **Includes upcoming OMR 30 mn Tier 1 Sukuk

Exceptional Loan-book growth

The bank’s total assets grew by 22%YoY to reach OMR 381.6mn as at the end of FY16, while total net loans increased by 57%YoY to reach OMR 312.8mn, showing significant growth in the face of difficult economic circumstances. As at the end of Q1’17, total net loans have grown by 15%QoQ and 57% YoY to reach OMR 361.2mn.

We expect the total assets of the bank to grow at CAGR of 14% over the next five years on account of increasing loan book (expected CAGR of 13% over 2016-2021e).

BKIZ: Asset Mix , FY16 BKIZ: Net Loans, OMR mn Cash & Cash Investments Balances 700 60% 2% Other assets with CBO 600 3% 50% 4% Inter-Bank 500 Wakala & Millions 40% Due from 400 other Fis 30% 9% 300 20% 200 100 10% - 0% Net Loans FY16 FY17e FY18e FY19e FY20e FY21e 82% Net Loans YoY Source: Company Financials, U Capital Research

Robust Deposit growth

Customer deposits of the bank increased by 80%YoY in FY16 to reach OMR 291mn, showing significant growth in the face of difficult economic circumstances.

BKIZ: Liability Mix , FY16 BKIZ: Customer Deposits, OMR mn

Inter-bank 700 100% Total owners' equity Wakala 600 21% 1% 80%

500 Millions Equity of 60% unrestricted 400 inv 300 acctholders' 40% 17% Customers' 200 Wakala 20% 100 Other 54% liabilities Customers' - 0% accounts 1% FY16 FY17e FY18e FY19e FY20e FY21e 6% Customers' Deposits YoY

Source: Company Financials, U Capital Research

As at Q1’17, the bank has mobilized OMR 83mn worth of new deposits, making total customer deposits reach OMR 374mn (+29%QoQ; 82%YoY). We expect the bank to be able to grow its deposits at a CAGR of 10% over 2016-2020F.

Promising Operational Performance

BKIZ has shown a promising operational performance in its initial years, whereby its operating income for the year FY16 rose by 50%YoY, while its operating expenses increased by 19%YoY, reflecting prudent cost controls. As a result, cost-to-income ratio declined to 177%, from a whopping 550% upon its inception in 2013. Nonetheless, we expect the operating income of the bank to grow at a CAGR of 10% over 2016-2020F, which together with controlled costs, is expected to make the bank post its first net profit in 2019, henceforth growing at a CAGR of 20% over 2019-21F.

BKIZ: Revenue and Profit BKIZ: Net Profit, OMR mn

25 2 150.0% 20 130.0% 15 0 10 Millions FY16 FY17e FY18e FY19e FY20e FY21e 110.0% 5 (2) 90.0%

Millions 0 (4) (5) 70.0% (10) FY'13 FY'14 FY'15 FY16 FY17e FY18e FY19e FY20e (6) 50.0% Total revenue Profit / (Loss) for the period before tax Net profit Cost to Income

Source: Company Financials, U Capital Research

Well-diversified financing portfolio

On the asset side, the bank is heavily invested in retail portfolio (FY’16: 49%), which is low risk in our view, as it is mostly asset-backed investments.

BKIZ: Economic sector concentrations -Assets BKIZ: Economic sector concentrations -Assets

Other Government 1% Government services 2% 22%

Financial Personal services 49% 0% Corporate Personal 50% Trading & 49% Manufacturi ng 7% Construction 20%

Source: Company Financials, U Capital Research

Excellent Asset Quality

The bank has been able to maintain its non-performing assets (NPLs) at a very low % (0.21% in FY16) of total finance assets as compared to the Omani Banking Sector at ~2.1% of total. Its NPLs stood at OMR 0.65mn at the end of FY16, representing 0.21% of the total gross loans. NPL coverage is fairly large as provisions are made as per CBO regulations. Cost of risk also declined from 96bps in FY15 to 57 bps in FY16. We have been conservative in our estimates, and therefore we have increased cost of risk sequentially over the forecast horizon, after an initial decline in FY17, given the current weak macroeconomic environment.

BKIZ: Cost of Risk, bps BKIZ: Credit Quality & Provision Coverage 0.26% 620.0% 97 96 0.24% 600.0% 57 0.22% 50 52 54 580.0% 0.20%

5 0.18% 560.0% FY-16 FY-17e FY-18e FY-19e - NPLs to Gross Loans - NPL Coverage FY-13 FY-14 FY-15 FY-16 FY-17e FY-18e FY-19e

Source: Company Financials, U Capital Research

Deferred Tax Amortization to have an uncertain effect on Earnings

The Bank has assessed that following taxable losses available for offset against future taxable profits which can be utilized prior to their expiry:

Deadline Tax Benefit (OMR) Available until 31 December 2018 (declared) 3,568,508 Available until 31 December 2019 (declared) 7,543,788 Available until 31 December 2020 (declared) 6,678,921 Available until 31 December 2021 (estimated) 5,091,716 Source: Company Financials

For the purpose of determining the taxable result of the year, the accounting loss has been adjusted for tax purposes. None of the assessments of the bank have been agreed by the tax authorities. The islamic finance regulations relating to tax treatment of various products are also currently awaited. Thus based on the current regulations governing taxation in Oman, deferred tax asset on taxable losses net of timing differences arising on property and equipment and intangibles has been recorded in these financial statements at the current applicable tax rate of 12%, until FY16. From Q1’17 onwards, a tax rate of 15% is applicable.

In our model-building process, we have assumed 50% deferred tax amortization over the next few years until 5 years of first taxable profit. Therefore, actual reported net profit / (loss) might be significantly different from our estimates.

Adequate Capital Buffers; expected to further improve with OMR 30mn Tier 1 Sukuk Issuance on the way

BKIZ’s capital adequacy ratio (CAR) declined to 24.5% in FY16 as RWAs grew with normal loan book expansion. However, it is still higher than the required levels as per Basel committee, which is 8%, and Central Bank of Oman’s requirement of 12%.

We expect this ratio to continue to marginally decline over the forecast period after a boost in FY17 on the back of additonal Tier 1 Sukuk issuance, as the bank grows its net loans at a faster pace, increasing RWAs, in spite of shoring up capital through increasing earnings post-2010 and no dividend payouts. There is a Tier 1 capital issuance on the way as well.

The bank has brought its Net Loan-to-Deposit ratio down from highs of 124% in FY15 to 107% in FY16. We are expecting the ratio to come down to 103% in FY17 but continue to remain above 100% over the forecast period as liquidity comes under pressure once again post-2018 on persistent low oil prices.

BKIZ: Capital Adequacy Ratio (CAR) BKIZ: Loan-to-Deposit Ratio

97.07% 96.30% 124%

107% 35.20% 106% 105% 28.41%

24.51% 25.48% 24.01% 104% 103% 104%

FY16

FY'14 FY'15

FY'13 FY'15 FY16 FY17e FY18e FY19e FY20e FY21e

FY18e FY19e FY17e Source: Company Financials, U Capital Research

Dividend Payout Policy

Future Outlook

BKIZ has been granted a license to perform Investment Banking activities and is currently working on some of the big ticket projects in the Omani market. In collaboration with some of the biggest regional and global players, the bank intends to establish its name in the regional Investment banking landscape. The bank aims to significantly enhance its fee based business lines. The Bank has already started offering investment banking activities especially corporate finance and financing advisory services.

In retail banking, the bank continues to partner with various government and private institutions to provide financial solutions for their employees. In the coming years, Alizz Islamic Bank will expand its distribution network by opening new branches, enhancing its online and mobile banking platform and establishing a strong sales network. While in corporate banking, its primary focus is on large, mid-sized corporates and the SME sector.

About Alizz Islamic Bank

Alizz Islamic Bank (SAOG) (BKIZ) was established in accordance to Royal Decree No. 69/2012 which amended the banking law to include Islamic banking at licensed banks through either specialized banks or independent entities at the existing commercial banks.

Founded in November 2012, Alizz Islamic Bank provides retail and corporate finance through branches, online (alizzislamic.com), and mobile devices. Alizz Islamic Bank provides Shariah compliant financial solutions. The banks has a network of 7 branches.

Board of Directors Shariah Supervisory Board Members . H.H. Sayyid Taimur Bin As'ad Bin Tarik Al Said (Chairman) . Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama (Chairman) . Mr. Mohammed Shukri Ghanem (Vice Chairman) . Sheikh Dr. Osama Mohammed Saad Bahar . Mr. Ahmed Al Khonji . Sheikh Nasser bin Yousef Al Azri . Mr. Shabib Al Darmaki . Mr. Mohamed Rashed Al Hurr Al Suwaidi . Mr. Obaid Hilal Obaid Mohamed Al Kaabi . Mr. Saleh bin Nasser Al Araimi Source: Bank website

An independent Shariah Supervisory Board approves all Alizz Islamic Banking products and services. The members of Shariah Committee are the scholars with knowledge and expertise in Islamic jurisprudence. No funds pertaining to Alizz Islamic Bank will be invested in non Shariah compliant assets or taken from any non Shariah compliant sources. Alizz Islamic Bank offers you peace of mind with each product or service offered through a Fatwa certificate, which is signed by the Shariah Board (SSB). The General Assembly appoints the SSB based on the Board of Directors nomination, consists of not less than three members. BKIZ: Shareholding Structure Huriah Company The total paid up capital of BKIZ is Others , LLC, 10% OMR 100mn of which 40% was 40.0% raised from public investors during Aabar the Initial Public Offering (IPO). Investments 60% was contributed by the bank's PJS, 20% Promoters who come from diverse yet complementary backgrounds, and share extensive experience in leadership roles, all of which Tasameem contribute to establishing a solid Real Estate First Energy Company Oman, 15% foundation for BKIZ. LLC, 15%

Source: Company Financials

Financial Statements (OMR '000) 2014 2015 2016 2017e 2018e 2019e 2020e Income Statement Financing Income 1,417 6,088 12,529 18,829 22,592 25,237 28,008 Payment to Depositors (6) (1,171) (4,998) (7,674) (9,608) (11,114) (12,652) Net Interest/Financing Income 1,411 4,917 7,531 11,155 12,985 14,123 15,356 Fee & Commission Income 146 844 1,154 1,484 1,754 2,003 2,216 Investment Income 376 235 287 369 436 498 551 Other Income ------Total Non-Interest/Financing Income 521 1,078 1,440 1,853 2,191 2,502 2,767

Total Operating Income 1,932 5,995 8,971 13,008 15,175 16,625 18,123 Provisions expense (850) (1,532) (1,635) (1,930) (2,424) (2,874) (3,297) Operating Expenses (7,700) (10,644) (12,651) (13,005) (13,370) (13,744) (14,129) Profit Before Taxation (6,617) (6,181) (5,315) (1,928) (618) 6 697

Taxation 1,118 825 591 1,556 870 434 113 Net Profit before Interest on Tier 1 Sukuk (5,499) (5,356) (4,725) (372) 252 441 810 Balance Sheet Cash Balances 14,561 6,063 12,484 42,906 27,652 29,759 18,423 Deposits with Banks & FIs 19,088 31,255 32,648 35,912 39,504 43,454 47,799 Investment Securities 7,447 5,483 9,218 10,140 11,154 12,270 13,496 Sales receivables & other receivables -net ------Ijara Muntahia Bittamleek -net 51,832 130,090 184,411 230,513 276,616 304,278 334,705 Wakala Bel Istithmar -net - 25,312 55,289 71,876 86,251 94,876 104,363 Other Assets 26,690 79,837 142,886 175,233 205,189 227,621 253,083 Total Assets 119,619 252,728 381,646 494,704 560,115 617,381 667,508

Deposits from Banks & FIs 5,000 1,925 3,658 4,023 4,426 4,868 5,355 Deposits from Customers 11,323 140,515 226,492 288,790 330,074 362,363 398,086 Other Liabilities 7,889 3,485 5,716 7,059 8,364 9,249 10,235 Equity of unrestricted inv acctholders & owners' equity 4,032 20,868 64,537 86,361 110,927 136,492 150,932 Paid-up Capital 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Retained Earnings / (Accumulated Losses) (8,900) (14,256) (18,981) (21,754) (23,901) (25,861) (27,451) Other Reserves 275 (98) (64) (64) (64) (64) (64) Shareholders' Equity 91,374 85,936 81,244 108,472 106,324 104,409 102,900 Total Equity & Liability 119,619 252,728 381,646 494,704 560,115 617,381 667,508 Cash Flow Statement Cash from operations 16,385 (10,441) 9,724 3,779 (11,804) 5,615 (7,753) Cash from investing activities 4,730 (2,025) 3,337 957 1,050 1,151 1,263 Cash from financing 84 (82) 33 27,600 (2,400) (2,356) (2,319) Net changes in cash 11,739 (8,498) 6,421 30,422 (15,254) 2,107 (11,336) Cash at the end of period 14,561 6,063 12,484 42,906 27,652 29,759 18,423 Key Ratios Return on Average Assets -5.0% -2.9% -1.5% -0.1% 0.0% 0.1% 0.1% Return on Average Equity -5.8% -6.0% -5.7% -0.4% 0.2% 0.4% 0.8% Recurring Income/Operating Income 80.9% 115.6% 152.5% 156.2% 160.4% 163.9% 166.8% Profit Yield 1.6% 3.8% 4.3% 4.9% 4.8% 4.7% 4.8% Profit Paid -0.1% -1.3% -2.2% -2.3% -2.3% -2.3% -2.4% Net Spread 1.7% 5.1% 6.5% 7.2% 7.2% 7.1% 7.1% Cost to Income Ratio 398.5% 177.6% 141.0% 100.0% 88.1% 82.7% 78.0% Net Loans to Customer Deposits 58.2% 86.5% 90.5% 91.6% 92.2% 92.2% 92.3% NPLs to Gross Loans 0.0% 0.0% 0.2% 0.2% 0.2% 0.2% 0.3% NPL Coverage 1.3% 0.9% 1.5% 1.2% 1.3% 1.4% 1.4% Cost of Risk (bps) 96.6 95.8 56.8 50.0 52.0 54.0 56.0 Equity to Gross Loans 366.4% 32.6% 29.9% 26.5% 21.8% 19.3% 17.2% Equity to Total Assets 76.4% 34.0% 21.3% 21.9% 19.0% 16.9% 15.4% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Adjusted EPS (OMR) (0.005) (0.005) (0.005) (0.003) (0.002) (0.002) (0.002) Adjusted BVPS (OMR) 0.091 0.086 0.081 0.108 0.106 0.104 0.103 Market Price (OMR) * 0.080 0.070 0.083 0.081 0.081 0.081 0.081 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% P/E Ratio (x)* NM NM NM NM NM NM NM P/BV Ratio (x)** 0.88 0.81 1.02 0.75 0.76 0.78 0.79 Source: Company Financials, U Capital Research *EPS after assumed interest on upcoming Tier 1 Perpetual Bonds **Book Value including upcoming Tier 1 Perpetual Bonds ***Market price for 2017 and subsequent years as per latest closing price of 25-May-17

Recommendation BUY Greater than 20% ACCUMULATE Between +10% and +20% HOLD Between +10% and -10% REDUCE Between -10% and -20% SELL Lower than -20%

Ubhar Capital SAOC (U Capital)

Website: www.u-capital.net PO Box 1137 PC 111, Sultanate of Oman Tel: +968 2494 9000 Fax: +968 2494 9099 Email: [email protected]

Disclaimer: This report has been prepared by research department in Ubhar Capital SAOC (U Capital), and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such, and the bank accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. All opinions and estimates included in this document constitute U Capital’s Research department judgment as of the date of production of this report, and are subject to change without notice. This report may not be reproduced, distributed or published by any recipient for any purpose.