islami bank bangladesh limited rating ... - brac · pdf fileislami bank bangladesh limited...

Md. Monirul Islam, ACA (Bank Analyst) [email protected]

Md. Ashfaque Alam (Associate) [email protected]

ISLAMI BANK BANGLADESH LIMITEDISLAMI BANK BANGLADESH LIMITED 16 January 201116 January 2011

Rating: OUTPERFORMRating: OUTPERFORM Fair value: BDT 950Fair value: BDT 950

Islami Bank Bangladesh Limited (IBBL) started operations in 1983. At that time there was a demand for Shariah-compliant banking in the country and no other bank was available to provide these services. IBBL was the first of its kind in Southeast Asia. It is committed to conducting its banking and investment activities on the basis of interest-free profit-loss sharing system.

Because of its first-mover advantage in the market, relationship with global Islamic banking institution and the backing of one of the largest Islamic social/political group in the country, it enjoys a near-monopoly in Islamic banking. It has a large following among clients that do not want to participate in interest-based lending. Consequently, it has a large and loyal client-base that does not move with small changes in deposit or lending rates. Currently IBBL is the largest private sector bank in the country.

IBBL has achieved strong growth in loan portfolio, total assets and fee income while maintaining capital adequacy, asset quality, sound management and profitability. IBBL has diversified its business over the past years and offered different types of commercial banking, retail, treasury and capital market services. The bank has significant non-funded income (36% of total operating income).

IBBL has achieved five-year Cumulative Annual Growth Rate (CAGR) of 24.00% in loans & advances. The bank achieved average ROE and ROA of 19.90% and 1.3% respectively in the last five years. Although there are banks that achieved higher growth and profitability, none has the large franchise, loyal client base or financing flexibility that IBBL has. Also, the bank has a lower risk profile than its peers.

Rating Our previous rating considered 2011E EPS and BVPS, the 2011 outlook for the banking sector and other related factors. Considering the estimated EPS of BDT 77.52 for 2011, we estimate a fair value of BDT 950.00 with an OUTPERFORM rating. This fair value implies a 12.5x P/E and 2.5x P/B of the company’s EPS of BDT 77.52 and BVPS of 388.51 for 2011E.

Table 1: 10 largest banks by M cap, BDT MM

Source: BRAC EPL Research and DSE web

Graph 1: Close price and volume traded over a year

Source: DSE web as on January 16, 2011

0

200000

400000

600000

800000

1000000

1200000

1400000

400

450

500

550

600

650

700

750

Vo

lum

e

Pric

e,

BD

T

Volume Close

Operating Income BDT MM 2009 2010 E 2011 E

Net Interest Income 8,293.5 9,855.5 12,969.5

Investment Income 115.2 640.4 832.5

Commission, fees, brokerage 3,437.2 3,952.8 4,545.7

Other operating income 481.0 625.2 750.3

Total 12,326.9 15,073.9 19,098.0

Efficiency & return 2009 2010 E 2011 E

Operating efficiency 36.88% 33.52% 32.65%

Loan/Deposit 87.85% 91.51% 95.33%

ROE 19.92% 20.24% 21.79%

ROA 1.34% 1.46% 1.57%

Growth 2009 2010 E 2011 E

Growth in Interest Income 9.35% 10.67% 24.76%

Growth in Loans and advan. 19.20% 25.00% 25.00%

Growth in Investments 47.85% 30.00% 30.00%

Growth in Deposits 21.94% 20.00% 20.00%

Earnings growth 27.25% 30.98% 28.90%

Per Share 2009 2010 E 2011 E

EPS 45.91 60.14 77.52

BVPS 271.22 323.02 388.51

Cash dividend per share 10.00 12.03 15.50

Company Summary

52-week Price Range (BDT) 430 - 879

Current Price 711.5

12-month Target Price 950

Cash Dividend 12.03

Total Return 35%

Number of Shares MM 74.1

Market Cap BDT MM 52,744.3

Float (% of shares) 61%

Name Price Mcap P/E P/B

National Bank 171.0 75,447.4 36.24x 8.45x

Islami Bank 711.5 52,744.3 15.50x 2.62x

Dutch-Bangla Bank 1975.5 39,510.0 34.73x 9.08x

AB Bank 1411.8 36,200.8 10.77x 3.59x

Pubali Bank 91.6 35,009.5 16.73x 3.68x

Eastern Bank 108.6 31,720.0 21.81x 3.76x

Southeast Bank 523.0 24,165.5 12.92x 2.13x

IFIC Bank 1262.8 22,020.6 33.50x 6.89x

Mercantile Bank 497.3 20,249.0 25.08x 4.71x

BRAC Bank 739.3 19,789.4 14.41x 2.24x

ISLAMI BANK BANGLADESH LIMITED (DSE, CSE: IBBL BANK)

Islami Bank Bangladesh Limited– an overview

IBBL has the largest franchise among the private commercial banks. Apart from the state-owned banks, it has the largest asset base and highest earnings. IBBL has the largest countrywide distribution system, reaching mostly all growth areas in the country.

Because of its Shariah-compliant banking business, it has a monopoly among devout clients who do not want to partici-pate in interest-based lending. Consequently, it has a large following that does not move with small changes in rates.

Because of its profit sharing rather than interest differential based banking business, it can adjust its cost of funds ac-cording to the prevailing macroeconomic scenario. It runs lower risk of an interest-rate mismatch.

Product and services snapshot– well diversified investments (loans) and deposit mix

IBBL has a wide range of deposit scheme, investment (loan) product, SME and capital market services. Currently it has 11 types of islami banking deposit schemes, 10 types of special scheme and 7 types of investment (loan) product. In SME, IBBL has 3 types of product including “Women Entrepreneur Investment Scheme”. IBBL introduced a special scheme named Rural Development Scheme for the rural people. Under this scheme small investment is allowed without security. It also has capital market operation through its merchant banking and brokerage services.

Branch network and distribution channel-the largest among private sector banks in Bangladesh

Currently the bank has 234 branches all over the country of which 195 are online and 39 branches are money market authorized dealer of Central Bank. IBBL opened 92 out of 200 branches in rural areas in Bangladesh. It has 20 SME units in different zones in Bangladesh. IBBL has plans to open another 10 SME units this year. The bank is planning to set 200 own ATM booths and 500 POS in the various zones of the country. Currently it has 27 shared and 50 own ATMs.

Source: Company annual report published as on July 15, 2009

8%4%

10%1%1%

76%

Shareholding structure

Islamic Development Bank, Kingdom of Saudi Arabia (KSA)

Kuwait Aokaf Public

Foundation, Kuwait

Al-Rajhi Company for Industry &

Trade, KSA

IBN Sina Group, Bangladesh

ICB,Maruf Foundation & Bangladesh Islamic Centre

General Public including local sponsors

Shareholding structure

IBBL’s shareholding composition is backed by both institutional and individual shareholders. As on July 2009, the gen-eral public held 76%, foreign institutional shareholders held 22% of total shares and local institutional shareholders held rest of the 2%. The following pie chart shows a clear picture of IBBl’s shareholding pattern. There was no major share transfer by institutional shareholders during the last twelve months. The institute backed Board of Directors rep-resents the good corporate governance.


3% 3%

80%

5%9%

Sources of fund

Paid up Capital

Reserve and Surplus

Deposits

Borrowing from Banks

Other liabilities

31%

6%

41%

14%8%

IBBL's market share of total deposits

Nationalised Bank

Specialised Bank

Private sector bank(Other than IBBL)

Islami Bank (IBBL)

Foreign Banks

Market share of total deposits

As on 30 June 2008, Islami Bank held 14% of total depos-its of banking sector in Bangladesh. The largest portion is held by Private sector Banks excluding Islami Bank (41% as on 30.06.08). Nationalized banks in total held 31% of total deposits.

Source: Company Annual Report & Central Bank web

.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

300,000.0

350,000.0

400,000.0

Total assets Total Investments(loan portfolio) Total deposits

Source: Company Annual Report

Trend of total assets, total investments (loan portfo-lio) and total deposits

IBBL’s total assets, total investments and total deposits show a upward trend over the years. We are expecting that IBBL will be able maintain this upward trend in com-ing years with its large distribution network.


Funding source

The main funding source of IBBL is deposits collected from customers. 80% of total fund comprises of various islamic banking deposits. Borrowings from other banks and paid up capital comprise 8% of total fund. In terms of deposit collection IBBL is the leader among the private sector banks. IBBL has a positive advantage of large distri-bution network with the shariah complaint Islamic bank-ing.

24%

8%

43%

17%8%

IBBL's market share of total Investments(loan portfolio)

Nationalised Bank

Specialised Bank

Private sector bank(Other than IBBL)

Islami Bank (IBBL)

Foreign Banks

Source: Company Annual Report & Central Bank web

Market share of total investment (loan portfolio)

Islami Bank is the largest in private sector in terms of total assets, total investment (loan portfolio) and market cap. IBBL holds 17% of total investment (loan portfolio) of banking sector in Bangladesh (as on 30 June 2008). The largest portion is held by Private sector Banks excluding Islami Bank (43% as on 30.06.08). Nationalized banks in total hold 24% of investment (loan portfolio). In 2008, IBBL alone captured 8.41% of total new investment (loan portfolio).


Balance sheet growth

In the last five years, assets, loans and advances, and deposits grew on average by 23.09%, 25.00% and 23.43% respec-tively. IBBL’s total assets stood at BDT 320.0 billion at period ended 30 September 2010. In the first nine months of 2010, assets increased by BDT 42 billion or 15.10%. Loans and advances increased by BDT 29 billion and stood at BDT 245.3 billion at period end on 30 September 2010. Nine months’ growth rate was 14.5%. Total deposit grew by BDT 35.5 billion at the period ended 30 September 2010with a nine months growth rate of 14.54%.

26%

27%12%6%

8%

3% 1% 16%

1%

Equity component

Paid up Capital

Statutory reserve

Provision for unclassified investments

Reserve for asset valuation

Undistributed profit



Application of fund

70% of the fund has been utilized for investments (loans and advances) and 10% to investment in government securities & capital markets. Fixed assets absorbed 12% of the total fund. Rest of the 12% was captured by other assets.

70%

10%

4%1%

3% 0%12%

Application of fund

Investment (Loans and Adv) Investments

Money at call Fixed Assets

Other assets Non banking assets

Cash and balance with other banks

Equity component

Paid up capital and statutory reserve constitute 53% of the total equity. 12% of the equity component is provi-sion for classified investments (loans and advances) under Central Bank’s guidelines.



95%

5%

Investment mix

Government

Others



Loan portfolio diversification

IBBL has a well diversified investment (loan) portfolio. Currently 55% of investment portfolio is exposed to industrial sector. 29% of investment portfolio is commercial credit. Real estate, agricultural and transport sectors cover 16%.

Product wise investment classification

53% of its loan portfolio is Bi-Murabaha. Hire purchase under ‘shirkatul mulk’ consists of 35% and rest of the 12% con-sist of ‘Bi– Muajjal’, ‘Bi-as-sarf’ and ‘korjayu hasna’. All the products are backed by assets and on profit-loss sharing prin-ciples. (Please see Annexure 1 for common Islamic banking terminology)

Outstanding deposits growth: despite decline in inter-est rates

The bank has achieved a five-year CAGR of 23.00% in deposits. Deposit growth was 20.45% in 2009. Customer deposits consist over 95% of total deposits. 39% of its total deposits is ‘Mudaraba Savings Deposits’. We expect 15%-20% growth in next three years. Currently about 48% of total deposits is low cost (CASA). Recently the bank launched a deposit product named ‘Mudaraba For-eign Currency Deposit Scheme’ to offer investment oppor-tunity to wage earners and other private foreign currency account holders.

Investment mix

IBBL’s investment portfolio consists more than 90% in government securities but it has also investment in capital markets through its merchant banking operation. Income from investment for the first three quarters of 2009 was BDT 66.57 million which was only 21% of the same peri-od of previous year. Considering the capital market sce-nario, we are expecting growth in investment income from capital markets operation. Merchant banking divi-sion and ‘Islami Bank Brokerage House’ are the added advantage.

53%35%

4%2% 2% 2% 2%

Product wise investment (loan portfolio)classification

Bi-Murabaha

Hire purchase under shirkatul mulk

Bi-Muajjal

Bi-as-sarf(FDB/FCD)

Korjay hasana


9%2%

39%

18%

32%

Deposit mix

Current & others account

Bills payable

Mudaraba savings deposits

Mudaraba term deposits

Others mudaraba deposits

0%

28%

14%

3%

2%1%2%

50%

Sectorwise investment (loan portfolio)

Sectorwise Investment (loan portfolio)

Industrial

Commercial

Real estate investment

Agricultural sector

Trasport sector




Operating income and expenses per employee has been increasing for the last five years and it was BDT3.5 MM & BDT1.0 MM respectively in 2008. Operating income & ex-penses per employee is increasing because of recruiting of new employees, opening up new branches, booths etc. However, the growth in operating income is much higher than growth in operating expenses. Operating expenses as a percentage of total revenue remained stable at a very low level of 17%-19%. This shows efficient control over operat-ing expenses.

Non-funded income as a % of total operating income

Non funded income arises mainly from commission, ex-change, brokerage and other operating income. IBBL has competitive advantages over other banks in Bangladesh because of their largest distribution network. It has also competitive advantages over other banks due to their trade and foreign remittance related business. Currently IBBL is handling 25% of total remittance of the country. IBBL has huge reserve of foreign currency due to their largest distri-bution network and worldwide correspondence banking. Due to their foreign currency reserve, the bank can operate its export/import business smoothly. It has BDT 60.60 billion off balance sheet exposure as at 30 September 2009 which was 6% higher than last reporting date (31 Decem-ber 2008). The bank has been earning 30%-35% range of non funded income for the last five years. Significant portion of non funded income arises from the operation of urban branches. Since 92 branches of the bank are in rural areas, we expect a down trend in non funded income in next two years.

Earnings growth

IBBL achieved a CAGR of 29.84% in operating income in the past five years. In the first nine months of 2009, total operating income decreased by 1.20% and total operating expenses increased by 14.78% from the same period of previous year. Operating income decreased due to income from investment in shares, commission, fees and brokerage etc. Operating expenses increased mainly for incremental salary and allowance expenses. However, EPS increased by 3.59% from the same period in 2008. EPS for the first three quarters in 2009 was BDT 40.35. We are expecting 21.78% earnings growth in 2010 .

Operating ratio has been decreasing since 2006 but re-mained at moderate level of 32%-34% over the last three years. We expect Islami Bank to increase this ratio in com-ing years.


.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

2006 2007 2008 2009E 2010E 2011E

Operating income & operating exp. per employee

operating income per employee operating expense per employee

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

2006 2007 2008 2009E 2010E 2011E

Operating effeciency

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2006 2007 2008 2009E 2010E 2011E

Non funded income as % of total op. income

Non funded income as % of total op. income


Source: Company Annual Report and Brac EPL Research

Asset Quality

IBBL had a NPL ratio of 2.39% at the end of 2008 which is impressive comparative to industry average NPL ratio of 13%. NPL ratio has been decreasing over the years because of management efficiency in managing non-performing in-vestments (loans).

Allowance for classified investments ( loans and advances)

The provision against classified investments (loans) of IBBL increased during the year 2008. Ratio of total provision to required provision maintained was 56.51% in the year 2008 before considering the value of eligible securities.

Table 2: Allowances for classified investments (loans)

Table 3: Classification status of loans & advances and provision requirement

Source: Company Annual Report and BRAC EPL Research

Table-2&3 shows the allowances for classified investments (loans) and classification status of total classified investment (loans) of Islami Bank. The required provision without considering the eligible securities was higher than the provision kept by the bank. We calculate the amount based on Central Bank’s circular for required provision of loans and advances (without the value of eligible securities). IBBL kept 56.51% provision against the classified investment (loans) based on that circular. It seems only 56.61% of classified loans and advances since we did not consider the value of eligible securi-ty.

Asset quality 2006 2007 2008

Total Investment (loans and adv) MM 113,575.1 144,920.6 180,053.9

Off-balance sheet exposure MM 37,862.4 59,272.1 57,138.0

Total investment (loans and adv) including off b/s items MM 151,437.5 204,192.7 237,191.9

Provision for investment ( loans and adv) including off b/s items MM 3,032.7 4,000.0 4,770.0

Classified investment (loans and adv) MM 3,897.6 4,246.0 4,311.1

Required provision MM (See Table 3) 2,983.1 3,178.5 3,332.3

Provision for classified investment (loans) (See Table 3) 1,463.7 1,703.1 1,883.4

Provision adequacy 49.00% 53.58% 56.51%

% NPL/ total investment (loans and advances) 3.43% 2.93% 2.39%

Industry average NPL 12% 13%

Classification status 2006 2007 2008 % of provision*

Special Mention Account (SMA) 1,228.3 2,140.0 2,629.8 5%

Substandard (SS) 898.1 1,261.3 1,199.3 20%

Doubtful 515.1 331.1 301.7 50%

Bad/Loss 2,484.5 2,653.7 2,810.1 100%

Total classified loans MM 5,126.0 6,386.1 6,940.9

SMA 61.4 107.0 131.5

SS 179.6 252.3 239.9

Doubtful 257.5 165.5 150.9

Bad/Loss 2,484.5 2,653.7 2,810.1

Required provision MM ** 2,983.1 3,178.5 3,332.3

Provision maintained MM 1,463.7 1,703.1 1,883.4

Total value of total eligible securities 233,343.6 274,371.0 291,791.0

Provision adequacy 49.00% 53.58% 56.51%

* As per Central Bank's guidelines

** Without considering eligible securites


Capital adequacy position and Basel II

Basel II accord to be implemented from 2010(parallel 2009), places heavy reliance on the internal risk assessment and management technique for the purpose of quantifying and allocating capital for credit, market and operational risks. To cope with this new change IBBL has already formed a committee for implementation of Basel II Capital Accord.

IBBL’s total risk weighted assets (RWAs) and core capital stood BDT 173,289.4 and BDT 18,572 million respectively as at 31 December 2008. The bank attained adequate capital level of 10.72% (regulatory requirement is 10% of RWAs) as at 31 December 2008. IBBL has BDT 10,600 million surplus over BDT 4,000 in capital proposed by Central Bank to be maintained by the Banks By August 2010 (Initial estimation under Basel II). Since IBBL has already BDT10,600 MM surplus over BDT4,000 MM capital to be maintained by August 2010 (an initial estimate by the Central Bank). We esti-mate no capital shortfall under new Basel II Capital Accord.

Table 4: Capital adequacy

Source: Company Annual Report and BRAC EPL Research

Remittance Business : global presence and correspondence banking

IBBL has achieved 67% growth in remittance business in 2008. The bank’s inward remittance was 22.01% of total re-mittance of 2008 in Bangladesh. IBBL has taken a number of steps to expand its remittance business. As part of this, the bank launched a deposit product named ‘Mudaraba Foreign Currency Deposit Scheme’ to offer investment opportunity to the wage earners and other private foreign currency account holder. It has agreement with 80 exchange houses of 15 countries and correspondence banking with 919 banks/financial institution of 117 countries across the globe. It has a special service named “spot cash” to boost up its remittance business.

Automation of IBBL

IBBL is going to make all of its branch and SME service centers online. Currently its 109 (out of 200) branches are online and it has different banking module to provide any branch banking service to its customers.

Capital Market Operation

IBBL performs capital market operation through its merchant banking department and brokerage house. In 2010 IBBL has decided to form two fully owned subsidiary companies "Islami Bank Securities Limited " and "Islami Bank Capital Management Limited" . This will add value to their investment and non funded income in coming years.

Corporate social responsibility

The prime concern of the foreign and local institute backed board is to ensure the overall activities of the business and focus on long-term value creation. Since inception the bank has paid attention to Corporate Social Responsibility (CSR) activities to create positive public perception. Islami Bank formed Islami Bank Foundation for smooth operation of their social activities. The foundation has different activities in Education, health care and community development sector. Among the local banks IBBL has achieved the ‘Best Bank Award’ from various local and international Institute.


Table 5: Residual Income Method (in BDT)

Table 6: Comparative Information (in BDT)

Residual Income Method

Our residual income method of valuation estimates a value of BDT 865.25. We assume 22% ROE for the years of 2013-2016 (based on historical ROE), risk free rate of 9 % (average Gov. Securities rate), cost of equity of 16% and a ter-minal growth rate of 6%.

VALUATION

Relative valuation

In valuing Islami Bank, we compared ten largest banks listed on the DSE and found average trailing/actual P/E and P/B ratios of 17.00x and 3.62x respectively. At current price, Islami Bank trades at 15.50x P/E (trailing) and 2.62x (trailing). Using a 12.5x P/E multiple over 2011E earnings of 77.52, we deter-mine a price target of BDT 969. Using a 2.50x P/B multiple over 2011E book value of 388.51, we calculate a target price of BDT 971. We estimate a fair price of BDT 950 for Islami Bank that implies forward P/E and P/B ratios of 12.50x and 2.5x respectively.

Please see Table 1 for trailing and forward P/E of top 10 banks in terms of market capitalization.

Table 7: Relative valuation

Residual Income 2009 2010 2011 2012 2013 2014 2015 2016

ROE 20.24% 21.79% 23.19% 22.00% 22.00% 21.00% 21.00%

EPS 45.913 60.14 77.52 99.89 104.04 126.92 147.81 178.85

BVPS 271.22 323.02 388.51 472.89 576.93 703.86 851.67 1030.52

EQUITY CHARGE 42.31 50.39 60.61 73.77 90.00 109.80 132.86

RESIDUAL INCOME 17.83 27.13 39.28 30.27 36.92 38.01 45.99

TERMINAL VALUE 479.06

CASH FLOWS 17.83 27.13 39.28 30.27 36.92 517.07 45.99

RF 9%

Implied Beta 1.1

ERP 6%

Cost of Equity 16%

Terminal Growth 6%

Value/Share 865.25

ISLAMIBANK EPS BVPS

2011 estimates 77.52 388.51

Multiple 12.50x 2.50x

Target price 969 971

Current Price (16.01.11) 711.5

Average Valuation Price* 935

Fair value (12 months forward) 950

Dividend 12.03

Dividend yield 2%

Total return 35%

*Average valuation price derived from residual income method and relative valuation

Domestic banks Price EPS P/E BVPS P/B

Islami Bank 711.50 45.9 15.50x 271.2 2.62x

Prime Bank 75.90 61.1 1.24x 255.3 0.30x

Pubali Bank 91.60 5.5 16.73x 24.9 3.68x

National Bank 171.00 4.7 36.24x 20.2 8.45x

Southeast Bank 523.00 40.5 12.92x 245.2 2.13x

NCC Bank 59.20 38.2 1.55x 134.1 0.44x

Eastern Bank 108.60 5.0 21.81x 28.9 3.76x

BRAC Bank 739.25 51.3 14.41x 329.9 2.24x

Dutch-Bangla Bank 1975.50 56.9 34.73x 217.6 9.08x

The Premier Bank 55.50 3.7 14.87x 15.9 3.49x

Average 17.00x 3.62x

As on 16 January 2011


Table 8: Comparative Information of nine South East Asian Banks

In conducting a valuation for Islami Bank, we have also looked at the trading prices of some of the leading banks in the region of Gulf/Asia. These banks are in mostly mature banking markets, and have an average growth prospect whereas Bangladeshi banks routinely achieve 30% growth in assets and deposits. On the other hand, these banks are also better managed with superior asset quality and risk management practices.

This group of peer banks trades at an average of 12.85x P/E and 1.26x P/B (trailing).

Table 9: Comparative Information of four Islami banks of South East Asia and Middle East Banks

In conducting a valuation for Islami Bank, we have looked at the trading prices of some of the leading banks in the re-gion. These banks are in mid-income countries with mostly mature banking markets, and have a slower growth pro-spect. Whereas Bangladeshi banks routinely achieve 30% growth in assets and deposits, growth rate in these markets have stabilized at around 10%. On the other hand, these banks are also better managed with superior asset quality and risk management practices.

These group of peer banks trade at an average of 19.52x P/E and 2.73x P/B (trailing).

Regional banks Country Currency Price EPS P/E BVPS P/B

ICICI India INR 1,167 41.93 27.83 466.3 2.50

HDFC India INR 2,367 68.82 34.39 470.3 5.03

State Bank of India India INR 3,116 184.82 16.86 1309.4 2.38

HABIB BANK LTD Pakistan PKR 107 13.36 7.97 83.2 1.28

BANGKOK BANK PUBLIC CO LTD Thailand THB 149 13.12 11.32 103.6 1.43

BANK OF AYUDHYA PCL Thailand THB 23 1.35 17.26 15.1 1.54

PUBLIC BANK BERHAD Malaysia MYR 13 0.83 15.47 3.1 4.09

HATTON NATIONAL BANK PLC Sri Lanka LKR 403 20.13 20.02 137.9 2.92

COMMERCIAL BANK OF CEYLON Sri Lanka LKR 275 11.20 24.53 81.3 3.38

Average 19.52 2.73

Source: http://investing.businessweek.com

as at 01/12/10

Regional Islami Bank Country Currency Price EPS P/E BVPS P/B

Meezan Bank Ltd Pakistan PKR 16 2.50 6.20 14.2 1.09

Dubai Islamic Bank Dubai AED 2 0.22 10.23 2.4 0.95

Abu Dhabi Islamic Bank Dubai AED 3 0.12 24.67 2.1 1.38

Jordan Islamic Bank Jordan JOD 3 0.28 10.36 1.8 1.65

Source: http://investing.businessweek.com 01/12/2010 12.85 1.26


Graph: Close price and volume traded of 5 islami banks in Bangladesh

0

5000000

10000000

15000000

20000000

25000000

30

40

50

60

70

80

90

100

Vo

lum

e

Pric

e,

BD

T

Volume Close

Graph 5: Al Arafa islami Bank

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

40

50

60

70

80

90

100

110

Vo

lum

e

Pri

ce,

BD

T

Volume Close

Graph 2: Islami Bank Bangladesh Limited

Graph 3: Exim Bank

Graph 6: Social Islami Bank

0

5000000

10000000

15000000

20000000

25000000

30000000

20

25

30

35

40

45

50

55

60

Vo

lum

e

Pric

e,

BD

T

Volume Close

Graph 4: First Security Islami Bank

The following few graphs shows the 52 weeks price and volume traded of 5 Islami banks listed in Dhaka Stock Exchange. Among the following 5 Islami banks, IBBL’s price and volume performance is relatively better and stable.

Source: BRAC EPL Research and DSE web

Table: 10 Comparative information of 5 Islamic banks

0

2000000

4000000

6000000

8000000

10000000

12000000

15

20

25

30

35

40

45

50

55

Vo

lum

e

Pric

e,

BD

T

Volume Close

0

200000

400000

600000

800000

1000000

1200000

1400000

400

450

500

550

600

650

700

750

Vo

lum

e

Pri

ce,

BD

T

Volume Close

Domestic Islamic Bank

M Cap, MM Total As-sets, MM

Price P/E P/B

Islami Bank BD 53,189.1 230,879.10

717.50 15.6x 2.6x

Exim Bank 44,888.0 68,446.50 65.70 26.7x 5.0x Al-Arafa Islami Bank 34,190.9 39,158.40 73.10 39.8x 5.8x

social Islami Bank 15,925.1 29,808.90 53.30 36.9x 4.5x First Security Islami Bank 13,540.6 31,239.40 44.60 41.4x 4.0x


Table 11: Balance Sheet

Source: BRAC EPL estimates and company annual reports

Table 12: Income Statement


Balance Sheet, MM BDT 2007 2008 2009 2010 E 2011 E 2012 E

Property & Assets:

Cash 17,076.5 31,330.3 37,485.7 34,272.9 27,890.5 16,967.3

Balance with Other Banks & F.I 4,012.3 5,623.2 7,678.4 7,678.4 7,678.4 7,678.4

Money at call .0 .0 .0 .0 .0 .0

Investment 20,365.7 7,532.6 11,136.6 14,477.6 18,820.9 24,467.1

Loan & Advance 144,920.6 180,053.9 214,615.8 268,269.8 335,337.2 419,171.5

Fixed Assets 3,987.2 4,407.2 6,512.4 6,790.2 6,961.7 7,173.6

Other Assets 1,000.0 1,931.9 874.0 961.4 1,057.6 1,163.3

Total Assets 191,362.3 230,879.1 278,302.8 332,450.2 397,746.2 476,621.2

Liabilities & Equities:

Liabilities:

Mudaraba Perpetual Bond 3,000.0 3,000.0 3,000.0 3,000.0 3,000.0 3,000.0

Deposits 166,325.3 200,343.4 244,292.1 293,150.6 351,780.7 422,136.8

Other Liability 10,817.4 13,475.2 10,905.2 12,353.8 14,164.6 16,428.2

Total Liabilities 180,142.7 216,818.6 258,197.3 308,504.4 368,945.3 441,565.0

Shareholder's Equity:

Paid-up 3,801.6 4,752.0 6,177.6 7,413.1 7,413.1 7,413.1

Statutory reserve 3,670.9 4,940.5 6,244.0 6,244.0 6,244.0 6,244.0

Other Reserve 2,796.7 2,942.4 5,830.6 5,830.6 5,830.6 5,830.6

Retained Earning 950.4 1,425.6 1,853.3 4,458.1 9,313.1 15,568.5

Total Equity 11,219.6 14,060.5 20,105.5 23,945.9 28,800.9 35,056.2 Total Liabilities & Equities 191,362.3 230,879.1 278,302.8 332,450.2 397,746.2 476,621.2

Income Statement, MM BDT 2007 2008 2009 2010 E 2011 E 2012 E

Interest/Investment Income 14,572.2 19,543.8 21,370.5 23,650.3 29,505.3 36,824.0

Interest/profit paid on deposit and borrowing etc 9,410.6 12,162.1 13,077.0 13,794.8 16,535.7 19,824.9

Net Interest Income 5,161.6 7,381.7 8,293.5 9,855.5 12,969.5 16,999.1

Income from investments in securities/Shares 284.0 408.8 115.2 640.4 832.5 1,082.2

Commission, Exchange & Brokerage 2,579.0 3,337.5 3,437.2 3,952.8 4,545.7 5,227.6

Other Income 264.3 940.2 481.0 625.2 750.3 900.4

Total Operating Income 8,288.9 12,068.2 12,326.9 15,073.9 19,098.0 24,209.2

Operating Expense 3,126.6 4,115.8 4,546.0 5,052.0 6,235.9 7,706.0

Profit Before Provision 5,162.4 7,952.4 7,780.9 10,021.9 12,862.1 16,503.3

Provision 1,381.5 1,604.6 1,263.2 1,448.7 1,810.8 2,263.5

Pre-Tax Profit 3,780.8 6,347.8 6,517.7 8,573.2 11,051.3 14,239.7

Tax 2,353.5 3,673.0 3,114.1 4,115.1 5,304.6 6,835.1 Profit After Tax 1,427.4 2,674.8 3,403.6 4,458.1 5,746.7 7,404.7


Table 13: Cash Flow Statement


Table 14: Growth indicators

Table 15: Margins and Efficiency & other information


Cash-flow statement 2007 2008 2009 2010 E 2011 E 2012 E

Operating cash

Net income 4,458.1 5,746.7 7,404.7

Non-cash items 1,726.5 2,153.8 2,687.4

Operating cashflow 3,323.5 6,596.2 4,952.6 6,184.6 7,900.5 10,092.0

Increase/decrease in operating assets and liabilities

Investments (3,341.0) (4,343.3) (5,646.3)

Loans and advances (53,654.0) (67,067.4) (83,834.3)

Deposits and other accounts 48,858.4 58,630.1 70,356.1

Operating cashflow 7,371.4 (3,101.1) 6,581.4 (8,223.9) (12,876.7) (19,230.2)

Investing cashflow

Investment in fixed and intangible assets (555.7) (514.5) (635.7)

Investing cashflow (435.8) 12,369.6 (3,323.5) (555.7) (514.5) (635.7)

Financing cashflow

Increase/(reduction) in debt .0 .0 .0

Dividend payment (617.8) (891.6) (1,149.3)

Financing cashflow 2,481.6 .0 .0 (617.8) (891.6) (1,149.3)

Beginning cash balance 23,770.1 17,076.5 31,330.3 37,485.7 34,272.9 27,890.5

Other Adjustments (19,434.4) (1,610.9) (2,055.2) .0 .0 .0

Change in cash 12,740.7 15,864.7 8,210.5 (3,212.8) (6,382.4) (10,923.2)

Ending cash balance 17,076.5 31,330.3 37,485.7 34,272.9 27,890.5 16,967.3

Growth 2009 2010 E 2011 E

Growth in Interest Income 9.35% 10.67% 24.76%

Growth in Loans and advances 19.20% 25.00% 25.00%

Growth in Investments 47.85% 30.00% 30.00%

Growth in Deposits 21.94% 20.00% 20.00%

Earnings growth 27.25% 30.98% 28.90%

Efiiciency & return 2009 2010 E 2011 E

Operating efficiency 36.88% 33.52% 32.65%

Loan/Deposit 87.85% 91.51% 95.33%

ROE 19.92% 20.24% 21.79%

ROA 1.34% 1.46% 1.57%


Common Islamic banking terminology used by shariah based Islamic banking Musharaka 'Musharaka' in Arabic literally means sharing. Since Islam has prohibited interest it cannot be used for providing funds

of any kind. Musharaka is an ideal alternative for interest-based financing playing a vital role in an economy based upon

Islamic principles.

Bi-Muajjal

A sale in which the parties agree that the payment will be deferred and made by prefixed date.

Shirkatul Mulk

Signifies a situation where two persons become partners by agreeing to work jointly and to share their earnings in part-

nership.

Ijara (Lease)

"Ijara" is a term of Islamic Fiqh. Literally, it means 'to give something on rent'. In Islamic jurisprudence, the term 'Ijarah'

is used for two different situations. "T o employ the services of a person on wages given to him as a consideration for his

hired services." The second type of Ijarah is generally used as a form of investment, and also as a mode of financing. The

difference between Ijarah and a sale is that in the latter case the majority of the property is transferred to the purchaser.

Murabaha In modern Islamic banking, the term refers to a buying and selling transaction between the bank (or financial institu-

tion) and the customer, whereby the former buys a property (or an asset, e.g. a house) at the prevailing market price and

sells it to the customer at a mark-up price where payments are made by installments over a period of time agreed upon

by both parties

Mudaraba

Refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one

who provides the funds and the other who provides the expertise and who agrees to the division of any profits made in

advance.

Mudarib

In a Mudaraba contract, the expert who manages the investment is known as Mudarib .

Glossary of Islamic terms used in Islamic banking

baitul mal = treasury fiqh = jurisprudence halal = lawful haram = unlawful ijara = leasing mudaraba = profit-sharing mudarib = entrepreneur-borrower murabaha = cost-plus or mark-up musharaka = equity participation riba = usury Shari'a = Islamic law

Annexure: 1


IMPORTANT DISCLOSURES

Analyst Certification: Each research analyst and research associate who authored this document and whose name appears herein certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe. Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, BRAC-EPL may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which BRAC-EPL is registered and any distribution outside those jurisdictions is strictly prohibited. Compensation of Analysts: The compensation of research analysts is intended to reflect the value of the services they provide to the clients of BRAC-EPL. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to specific corporate finance transaction. General Risk Factors: BRAC-EPL will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks that can impact future operational and financial performance: (1) Industry fundamentals with respect to customer demand or product / service pricing could change expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes; (3) Unforeseen developments with respect to the management, financial condition or accounting policies alter the prospective valuation; or (4) Interest rates, currency or major segments of the economy could alter investor confidence and investment prospects.

BRAC EPL Stock Brokerage Capital Markets Group

Aminul Haque Head of Capital Markets [email protected] 01730317802

Md. Monirul Islam Research Analyst [email protected] 01730357150

Parvez Morshed Chowdhury Research Analyst [email protected] 01730357154

Ali Imam Investment Analyst [email protected] 01730357153

Asif Khan Investment Analyst [email protected] 01730357158

Md. Ashfaque Alam Research Associate [email protected] 01671020956

Khandakar Safwan Saad Research Associate [email protected] 01911420549

BRAC EPL Research www.bracepl.com WW Tower (7th Floor) 68 Motijheel C/A, Dhaka-1000 Phone: +880 2 9514721-30 Fax: +880 2 955 3306 E-Mail: [email protected]

mailto:[email protected]







http://www.bracepl.com/


islami bank bangladesh limited rating ... - brac · pdf fileislami bank bangladesh limited...

Documents