The transaction essentially sees Bank Muscat acquiring the troubled NBO, which has suffered from bad loans problems for several years and has recently replaced its entire management team. The merged institution will still be called Bank Muscat and Abdulrazak Ali Issa will remain as chief executive.

Eighty-five per cent of NBO's shares will be converted to Bank Muscat shares at a rate of one for every 2.25 held. The remaining 15 per cent will be converted to subordinated loan bonds, carrying a nominal face value of RO 2.75 ($7.1), paying 6.25 per cent and with a tenor of five years and one month.

The merger will allow Bank Muscat to take over NBO's operations in Abu Dhabi, fitting in with the strategy of regional expansion. Bank Muscat already has operations in Bahrain, has received preliminary approval for a licence in Saudi Arabia, is planning a financing venture in Dubai and is the largest shareholder in India's Centurion Bank. 'With the added strength that would result from the merger, Bank Muscat will be comparable in size to many GCC banks,' chairman AbdulMalik bin Abdullah al-Khaili said in a statement, with the implication that the bank will now be better placed to fulfil its ambition to become a regional heavyweight.

NBO made a loss of RO 51 million ($131 million) in 2003 as a result of heavy provisioning for a legacy of non-performing loans largely extended abroad in the late 1990s and early years of this decade, although the bank has made slim profits in the first two quarters of 2004. In October 2003, the local Suhail Bahwan Groupacquired a 34.6 per cent stake in NBO and Sheikh Suhail Bahwan took over as chairman. In July, chief executive John Finigan was replaced by Bellikoth Vasanthan and earlier in September, general manager Steven Davies was replaced by Abdul-aziz al-Balushi and Vivek Kudva, as general managers for credit and operations and for banking respectively (MEED 10:9:04).

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