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Global Research April 2008 Banking Qatar Banking Sector Qatar Growth, Value, Quality !

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Qatar Banking Sector.inddGrowth, Value, Quality !
Global Investment House KSCC Banking Research Souk Al-Safat Bldg., 2nd Floor P.O. Box 28807 Safat 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: [email protected] http://www.globalinv.net
Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB
Omar M. El-Quqa, CFA Executive Vice President [email protected] Phone No:(965) 2400551 Ext.104
Faisal Hasan, CFA Head of Research [email protected] Phone No:(965) 2400551 Ext.304
Chandresh Bhatt Assistant Vice President [email protected] Phone No:(965) 2400551 Ext. 270
Bikash Rout Senior Financial Analyst [email protected] Phone No:(965) 2400551 Ext. 254
Table of Contents
Investment Summary 1
Qatar Economy 4
Valuation and Recommendation 19
Doha Bank 40
Ahli Bank 74
Global Research - Qatar Global Investment House
1Qatar Banking SectorApril 2008
Investment Summary
• The economy of Qatar has maintained its upward momentum till 2006 as it registered a staggering growth of 33.7% and 33.8% in 2006 and 2005 respectively, however, in 2007 the GDP growth had been slowed down to 12.5% which was its slowest pace in last five years. As per the recently released preliminary estimates by the Statistics Department of the Planning Council, Qatar's gross domestic product (GDP) at current prices rose by 12.5% to QR232.5bn (US$63.8bn) in 2007 as against QR206.6bn (US$56.8bn) recorded in the previous year.
• The economic growth has been reinforced with proactive macroeconomic initiatives. With respect to the policy initiatives, Qatar continued to adopt new laws and regulations with a view to make its investment environment more investor friendly. Qatar has taken several steps to attract foreign investors. Towards this end it has set up an international financial center, Qatar Financial Center (QFC), which is aimed to attract international financial institutions and multi-national corporations to set up their offices and to forge closer partnerships with international business houses.
• To further boost the economic growth, the government is keenly focusing on developing other economic sectors, apart from the oil & gas sector, which will further bolster economic growth of the country.
• The banking penetration in the country has been increasing over the last few years. The ratio of credit deployment to GDP for Qatar has grown to 49.6% at the end of 2006 from 42.8% at end 2004 and in 2007 it is estimated to have reached to 69.1%, mainly because of slowdown in the growth rate of GDP. The penetration level in terms of deposit to GDP ratio has also been increasing which has grown to 58.3% in 2006 from 52.6% in 2004 and in 2007 it is estimated to have reached to 71.9%.
• The credit to the private sector grown to QR73.2bn in 2006 from QR29.8bn at the end of 2004 and it increased further to QR100.2bn at the end of Q3-2007. The private sector credit as a percentage of total domestic credit increased to 77.3% in 2006 from 61.8% in 2004 and at the end of Q3-2007 it was at 72.9%. Until now public sector was the largest borrower in the country which accounted for 46.7% of the total domestic credit of the banking sector in 2002 which reduced gradually to 22.7% in 2006. At the end of Q3- 2007, public sector borrowing accounted for 27.1% of the total domestic credit.
• During the period 2002-06, total credit facilities of the sector grew at a CAGR of 29.7% to reach QR102.5bn, while total domestic credit grew by 27.4% to QR94.8bn. Almost all the sectors have witnessed double digit CAGR in their credit off-take, during 2002-2006, except credit to public sector which witnessed a marginal growth of 6.4%. During first 9M of 2007, total credit facilities grew by 46.4% on y-t-d basis to reach at QR150.2bn.
• The growing importance of Islamic finance, especially in the GCC region, have encouraged many Qatari banks to venture into Islamic banking as a window within the conventional bank. In 2005, all the three major banks, namely Qatar National Bank, Doha Bank and Commercial Bank started Islamic banking. During 2006, Ahli Bank started its Islamic
Global Research - Qatar Global Investment House
2 Qatar Banking Sector April 2008
banking operations. So effectively, all the seven leading banks in Qatar are now providing Islamic banking products.
• All the leading Qatari banks have announced their plans to expand in GCC. In 2007, Qatar National Bank opened two new branches in the region, in Oman and Kuwait. Doha Bank is also planning to open a branch in Kuwait in 2008, it already got an approval in this regard from regulatory authorities. Commercial Bank of Qatar has 34.85% stake in National Bank of Oman. Recently, it also acquired 40% stake in United Arab Bank P.J.S.C., a bank based in United Arab Emirates. The newly entered, Al Khaliji Commercial Bank is also acquiring the BLC Bank’s banking operations in the United Arab Emirates.
• In 2007, all the listed banks in Qatar had reported a significant growth in their balance sheet size. The aggregate balance sheet of all the listed banks grew by 61% in 2007 to QR252bn from QR157bn in 2006. The total deposits of the listed banks registered a growth of 45.8% to reach at QR161bn and gross loans & advances grew by 51.4% to reach at QR147.7bn. The combined net profit of the banks under review grew by 56% y-o-y in 2007, from QR5.2bn in 2006 to QR8.1bn in 2007.
• In Q1-2008, aggregate assets of all the listed banks witnessed a y-t-d growth of 15.1% to QR290.4bn from QR252.4bn at the end of 2007. The combined net profit of the banks under review grew by 54.2% y-o-y in Q1-2008, from QR1.6bn in Q1-2007 to QR2.5bn in Q1-2008.
• Over the last few years, banks in Qatar have extensively focused on improving their quality of assets which resulted into substantial improvement in the quality of their loan portfolio. In 2007, the total NPLs of the listed banks amounted to QR1.83bn which represented 1.2% of the banks’ aggregate loan portfolio at the end of 2007. We believe that going forward quality of the loan book are likely to remain sound, however, steep growth in loan book needs to be watched with caution. At the same time, the loan portfolio of some of the banks requires diversification as it is highly concentrated mainly to two sectors, Personal and Real Estate. In certain cases these two sectors account for more than 50% of total loan book.
• All the banks under our coverage are adequately capitalized with capital adequacy ratios that are well above the minimum 10% required by the Qatar Central Bank. Qatari banks are focusing on expanding their capital base as many banks have announced their plans to come out with rights issues in 2008 and 2009. This measure will help the banks to shore- up their capital adequacy ratio and to leverage their balance sheet and will help the banks to tap lending opportunities the country would offer in the coming years.
• The region as well as the country have huge investment potential. Multi-billion-dollar projects are in the pipeline or in drawing board at various stages from various sectors apart from the hydrocarbon sector. Qatar has launched an impressive domestic investment program aimed at diversifying its economic base from the hydrocarbon sector. It is likely to spend about US$140bn on different projects over the next five to six years to continue this diversification strategy. We believe that the banking sector would be one of the major beneficiaries of this scale of projects and regional diversification program.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 3
Table 01: “Global” Valuation Matrix
Price
(QR)
Target
Disc./
Prem.
BVPS*
(QR)
EPS*
(QR)
P/BV
(x)
P/E
(x)
Qatar National Bank 230.0 267.0 Buy 16.1% 71.3 14.8 3.2 15.5
Commercial Bank of Qatar 161.2 184.8 Buy 14.7% 34.3 11.1 4.7 14.5
Doha Bank 75.7 85.8 Buy 13.3% 27.5 6.6 2.8 11.5
Qatar Islamic Bank 121.6 137.4 Buy 13.0% 31.8 9.0 3.8 13.5
Masraf Al Rayan Bank 22.3 25.0 Buy 12.2% 7.0 1.4 3.2 15.4
Al Khaliji Commercial Bank 13.3 11.5 Reduce -13.4% 6.5 0.3 2.0 42.7 * Based on 2008E.
Source: Global Research, Market prices as on April 27, 2008.
Global Research - Qatar Global Investment House
4 Qatar Banking Sector April 2008
Qatar Economy
The economy of Qatar has maintained its upward momentum till 2006 as it registered a staggering growth of 33.7% and 33.8% in 2006 and 2005 respectively, however, in 2007 the GDP growth had been slowed down to 12.5% which was its slowest pace in last five years. As per the recently released preliminary estimates by the Statistics Department of the Planning Council, Qatar’s gross domestic product (GDP) at current prices rose by 12.5% to QR232.5bn (US$63.8bn) in 2007 as against QR206.6bn (US$56.8bn) recorded in the previous year. Its GDP per capita is estimated to have reached to a record level of $72,444 in 2007 from US$67,740 in 2006.
The contribution of oil and gas sector to the GDP increased from QR118.4bn in 2006 to QR129.5bn in 2007. The sector accounted for 55.7% of the GDP in 2007 and it represented a 9.3% growth over the previous year. The non-oil sectors achieved a growth rate of 16.8% in 2007. The sector contributed a total of QR103bn or 44.3% to the GDP. In terms of its relative contribution to the GDP, it improved from 42.7% in 2006 to 44.3% in 2007.
Table 02: Gross Domestic Product
(in QR mn) 2004 2005 2006 2007
Oil & Gas Sector 62,922 92,071 118,443 129,452
as % of GDP 54.5% 59.6% 57.3% 55.7%
Non-oil GDP 52,590 62,493 88,201 103,033
as % of GDP 45.5% 40.4% 42.7% 44.3%
GDP 115,512 154,564 206,644 232,485
Growth Rate 34.8% 33.8% 33.7% 61.0% Source: Qatar Central Bank, Planning Council and Global Research
Over the last few years, the economy of Qatar witnessing the effect of high economic growth and strong liquidity in terms of high inflationary pressures. The Consumer Price Index (CPI) has been witnessing double digit growth rate since last two years, 11.8% in 2006 and 19.6% in 2007. In 2007, the CPI reached to 159.34 as compared to 133.23 in 2006. The main contributor to this was the soaring property rents in the country, which is the major cause of concern. This has been further intensified by the weakness of the US dollar, putting upward pressure on prices of imported goods and commodities. Apart from that, it also seems that consumer spending has gone up in Qatar mainly due to the increased liquidity.
The country has huge investment potential. Qatar has launched an impressive domestic investment program aimed at diversifying its economic base from the hydrocarbon sector. An estimated US$140bn worth of projects are planned over the next five to six years to continue this diversification strategy. If we talk of only construction sector, it has multi-billion-dollar development projects in the pipeline. Qatar’s construction sector is expanding rapidly, driven by the country’s strong economic base, a flourishing real estate sector and strong tourist inflow. Among the renowned projects are the US$5.5bn New Doha International Airport;: the US$5bn Lusail real estate project; a US$5bn tourist project in al-Khor; the US$2.5bn Energy City; the US$2.5bn man-made Pearl Island; a US$2bn causeway linking Qatar and neighboring Bahrain and a US$1.2bn leisure city in the capital Doha.
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April 2008 Qatar Banking Sector 5
The economic growth has been reinforced with proactive macroeconomic initiatives. With respect to the policy initiatives, Qatar continued to adopt new laws and regulations with a view to make its investment environment more investor friendly. Qatar has taken several steps to attract foreign investors. Towards this end it has set up an international financial center, Qatar Financial Center (QFC), which is aimed to attract international financial institutions and multi-national corporations to set up their offices and to forge closer partnerships with international business houses. All companies setting up their offices at the centre are entitled to a three-year tax holiday, full repatriation of profits and 100% foreign ownership.
On the back of Qatar’s strong finances and ongoing reforms, international rating agency Standard and Poor’s has upgraded Qatar’s sovereign rating to ‘AA-’ from ‘A+’.
Among the other major developments for the capital market was implementation of buy-back rule effective from July 4, 2006. The companies listed on the Doha Securities Market can buy back their own listed shares subject to a cap of 10%. At the same time, Qatar Financial Markets Authority was established in 2006 to regulate the securities market. Now Qatar is planning to bring its financial system under single integrated financial regulatory body. With this initiative, Qatar follows an international trend towards an integrated approach to the regulation of different financial services products and activities.
To further boost the economic growth, the government is keenly focusing on developing other economic sectors, apart from the oil & gas sector, which will further bolster economic growth of the country.
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6 Qatar Banking Sector April 2008
Qatar Banking Sector
Qatar has a developed banking sector consists of 17 banks, out of which nine are Qatari owned institutions comprised of six commercial banks and three Islamic banks. The six Qatari owned commercial banks are Qatar National Bank (QNB), Commercial Bank of Qatar, Doha Bank, Ahli Bank, Al Khalij Commercial Bank and International Bank of Qatar while three Islamic banks are Qatar Islamic Bank, Qatar International Islamic Bank and Masraf Al Rayan. The seven foreign banks operating in Qatar include the Arab Bank, Mashreq Bank, HSBC, BNP Paribas, Standard Chartered Bank, United Bank and Bank Saderat Iran. The specialized government owned institution is Qatar Industrial Development Bank, which provides financing to the small and medium scale industries.
The financial sector including the banking sector is supervised by the Qatar Central Bank (QCB). The QCB has introduced several regulations which are in line with the international standards (based on the Basle Accord) for banking supervision and regulations.
Qatar Financial Centre (QFC) Qatar’s economy is expanding at an unprecedented rate and is set to continue on this trajectory in the years ahead. Economic growth has naturally brought increasing demand for financial products and services. Responding to this demand, and conscious of the role financial services can play in driving economic diversification, the Government of Qatar in 2005 created the Financial Centre (QFC). The QFC has attracted world-class financial institutions through a combination of modern laws and a highly regarded and expert judiciary, an internationally recognized regulator operating a best practices, principles based regime, and a strong and supportive business services environment. At the same time, Qatar Financial Markets Authority was established in 2006 to regulate the securities market. Building on these recent accomplishments, work is now underway to ensure all financial institutions active in Qatar can operate in a high-quality legal and financial services environment, benchmarked to international standards. To achieve this objective, Qatar is to establish a single integrated financial regulatory body that will oversee all banking, insurance, securities, asset management and other financial services. This new regulator will bring together the staff resources currently dispersed amongst the Qatar Central Bank Department of Banking Supervision and its Banking Consumer services Unit, the Qatar Financial Markets Authority and the QFC Regulatory Authority, thus, creating a single organization and, in due course, one set of high standard rules will be applicable to all financial institutions.
With this initiative, Qatar follows an international trend towards an integrated approach to the regulation of different financial services products and activities. The Qatari government anticipates significantbenefitsfromthismove, includinggreater transparencyandpredictability given a simplified institutional landscape, greater efficiency through the pooling of scarce regulatory staff, and the ability to take a comprehensive view of financial institutions that are active across different lines of financial activity (banking, insurance, securities trading etc.).
The banking penetration in the country has been increasing over the last few years. The ratio of credit deployment to GDP for Qatar has grown to 49.6% at the end of 2006 from 42.8% at end 2004 and in 2007 it is estimated to have reached to 69.1%, mainly because of slowdown in the growth rate of GDP. The credit to the private sector has grown to QR73.2bn in 2006 from QR29.8bn at the end of 2004 and it increased further to QR100.2bn at the end of Q3-
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 7
2007. The private sector credit as a percentage of total domestic credit increased to 77.3% in 2006 from 61.8% in 2004 and at the end of Q3-2007 it was at 72.9%. The penetration level in terms of deposit to GDP ratio has also been increasing which has grown to 58.3% in 2006 from 52.6% in 2004 and in 2007 it is estimated to have reached to 71.9%.
Chart 1: Banking Penetration
Source: Qatar Central Bank and Global Research
Until now public sector was the largest borrower in the country which accounted for 46.7% of the total domestic credit of the banking sector in 2002 which reduced gradually to 22.7% in 2006. At the end of Q3-2007, public sector borrowing accounted for 27.1% of the total domestic credit.
Asset and Liability Composition During the period 2004-2006, total assets of the commercial banking sector grew at a CAGR of 43.5% to QR189.5bn in 2006 from QR92.0bn in 2004 and in 2006 the asset base witnessed a growth of 45.4%. A major portion of this growth in the asset base was funded through the inflow of funds from resident deposits as it accounted for more than 63.0% of the total liabilities at the end of 2006.
Table 03: Consolidated Balance Sheet of Commercial Banks in Qatar
(in QR mn) 2003 2004 2005 2006 9M- 2007
Total Assets 76,101.6 92,026.2 130,300.6 189,482.0 252,082.7
Cash in Q.R. 452.4 528.9 665.4 1,110.9 1,075.9
Due from QCB 1982.5 2,868.1 4,516.1 5,029.2 5,924.9
Foreign Assets 19464.9 27,756.4 41,647.5 66,310.5 78,389.7
Domestic Assets 54201.8 60,872.8 83,471.6 117,031.4 166,692.2
Total Liabilities 76,101.6 92,026.2 130,300.6 189,482.0 252,082.7
Foreign Liabilities 4,103.9 8,169.2 10,407.2 24,754.0 47,124.9
Domestic Liabilities 71,997.7 83,857.0 119,893.4 164,728.0 204,957.8 Source: Qatar Central Bank
During 2006, the foreign assets grew at a steep rate of 59.2% to QR66.3bn and increased its share to 35.0% of the total banking assets from 32.0% in 2005. The major constituent of the
2004 2005 2006
Global Research - Qatar Global Investment House
8 Qatar Banking Sector April 2008
foreign assets are due from banks abroad, credit outside Qatar and investments abroad. The banking sectors’ domestic credit portfolio accounted for 50.0% of the total banking assets and it grew by 40.7% to QR94.8bn in 2006. Keeping in line with the lackluster trend prevailed in the local stock market the commercial banks’ domestic investments grew marginally by 5.7% in 2006 to QR11.4bn.
On the liabilities side, the commercial banks dependence on domestic liabilities declined in 2006 as its share in the total liabilities declined to 86.9% from 92.0% in 2005. As a As a result, the share of foreign liabilities have increased to 13.1% in 2006 from 8.0% in 2005.
Foreign banks’ dues from Qatari banks increased by a whopping 113% in 2006 to QR20.5bn from QR9.6bn in 2005, which shows the kind of interest the foreign banks have in Qatar’s flourishing economy. Apart from this the commercial banks have also raised foreign debts of QR3.1bn in 2006 which was nil in 2005. The major constituents of the domestic liabilities are resident deposits and capital accounts. In 2006, the banks dependence on customer deposits have declined as its share of resident deposits in total liabilities was at 64.9% in 2005 which declined to 63.0% in 2006. The resident deposits of the commercial banking sector increased by 40.9% in 2006 to QR119.3bn.
At the same time, the banks have shored up their capital accounts in 2006 as also in 2005 especially to increase their capital adequacy ratio and to increase their leverage. The share of capital accounts in total liabilities increased to 12.3% in 2006 which was at 11.2% in 2005. At the end of 2006, it was at QR23.3bn. Total provisions of the banking sector has been declining which is despite the growth in loan portfolio, which indicates that the banking sector has strong quality of assets. In 2006, provisions of the commercial banks declined by 6.3% to QR2.9bn.
During first 9-months of 2007, total assets of the commercial banking sector grew to QR252.1bn registered a y-t-d growth of 33%. Among the major components, domestic credit witnessed a growth of 45% to QR137.4bn and total domestic assets grew by 42.4% to QR166.7bn. Foreign assets of the banks stood at QR78.4bn with a growth of 18.2%. Among the components of liabilities, resident deposits grew by 21.7% on y-t-d basis to QR145.1bn. The commercial bank’s total domestic liabilities stood at QR204.9bn, registered a y-t-d growth of 24.4%. On the back of increased borrowings from banks in international as well as domestic markets, the Qatari banks’ funds due to foreign banks grew by 95.9% to QR40.2bn and funds due to domestic banks grew by 125% to QR11.2bn.
Trend in Credit Facilities During the period 2002-06, total credit facilities grew at a CAGR of 29.7% to reach QR102.5bn, while total domestic credit grew by 27.4% to QR94.8bn. Almost all the sectors have witnessed double digit CAGR in their credit off-take, during 2002-2006, except credit to public sector which witnessed a marginal growth of 6.4%. During first 9M of 2007, total credit facilities grew by 46.4% on y-t-d basis to reach at QR150.2bn.
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April 2008 Qatar Banking Sector 9
Table 04: Trends in Credit Facilities of the Banking Sector
(in QR mn) 2002 2003 2004 2005 2006 9M-2007 CAGR (%)
(2002-06)
Industry 936.7 750.4 1,059.9 2,418.8 2,078.0 3,101.8 22.0%
Contractors 246.5 1,433.7 1,658.1 3,357.7 5,120.7 7,429.9 113.5%
Land & Housing 1,040.7 1,893.5 4,053.6 6,183.2 10,624.2 17,320.4 78.7%
Consumption 9,639.9 11,503.1 14,085.3 24,730.9 35,177.1 44,143.0 38.2%
Services 812.4 1,865.1 2,383.5 2,942.1 7,245.9 9,696.6 72.8%
Others 1,749.9 437.2 467.5 899.8 1,437.1 2,223.9 -4.8%
Total Domestic 35,967.4 43,346.0 48,293.8 67,366.3 94,773.0 137,431.0 27.4%
Outside Qatar 246.6 441.5 1,189.1 2,367.5 7,774.8 12,758.8 137.0%
Total 36,214.0 43,787.5 49,482.9 69,733.8 102,547.8 150,189.8 29.7% Source: Qatar Central Bank
Sectors which saw their share increase as a percentage of the total credit off-take, during 2002- 2006, were credit facilities granted to land & housing, personal and services. While credit granted to public sector, merchandise, industrial and others declined during this period.
During 2006, total credit facilities of the banking sector grew by 47.1% to reach QR102.5bn from QR69.7bn at the year end 2005. During 2006, the share of the public sector in the total credit facilities declined to 21% from 26.7% in 2005, which shows the diversification of lending to other businesses/sectors. The public sector witnessed a growth of 15.5% in credit off-take in 2006 which is low as compared to growth registered by other economic sectors which further points towards diversification of lending to other sectors of the economy. The credit to the public sector was at QR21.5bn in 2006. As a percentage of total credit facilities, the share of public sector declined further to 24% in first 9M of 2007.
The personal segment, which had the highest share in the total credit off-take, witnessed a growth of 42.2% in 2006 to QR35.2bn. During 9M of 2007, credit facilities to personal segment grew by 35.1% on y-t-d basis to reach at QR441bn. For the last few years banks have witnessed significant growth in credit off-take to personal segment due to the increased focus on consumer loans as part of their thrust on retail banking. This was a trend not only in Qatar but in the whole of the Gulf region. In June 2007, the Qatar Central Bank has issued a directive, to all banks operating in the country, on personal loans. The circular was issued on June 11 and is to come into effect 30 days from its issuance i.e. on July 11. As per the directives, the maximum amount to be given out as loans will be QR2.5mn and the repayment period not to be more than seven years. Repayments of loans will now be restricted to 70% of one’s salary whereas earlier it used to be 75% and perhaps even more.
The highest growth in credit facilities was witnessed by the service sector, credit facilities granted to the sector grew by 146.3% in 2006 to QR7.2bn. Among the other sectors real estate, merchandise and others have also witnessed a significant growth in their credit off-take at 71.8%, 41.2% and 59.7% respectively. As part of diversification of the lending portfolio, majority of the banks in Qatar have increased their focus on regional lending by participation in syndications. Therefore, in 2006, the external credit of the commercial banks grew by a robust 228.4% to QR7.8bn. This has increased significantly in 9M of 2007 by 64.1% to QR12.7bn.
Global Research - Qatar Global Investment House
10 Qatar Banking Sector April 2008
Interest Rate Trend QCB interest rate framework embraces three policy rates: QCB Deposit Rate (QCBDR), QCB Lending Rate (QCBLR), and QCB Repurchase Rate (QCB Repo or QCBRR). QCBDR and QCBLR are the interest rates announced by QCB on overnight deposit and loan transactions between QCB and local banks through the Qatar Money Market Rate Standing Facility (QMR), respectively. The interest rates in Qatar follow closely those prevailing in the United States. Therefore, in the last two years, interest rates in Qatar witnessed an upward trend, which can be gauged from the movements in Qatar Central Bank’s Monetary Rates (QMR) on lending and borrowing, both of which have almost doubled over the last one year. The QCB lending rate is the key rate used by QCB to convey signals to the market revealing adjustments to its monetary policy stance. QMR on lending witnessed its last increase in July 2006 to 5.5% which was at 4.5% in the beginning of 2006. QMR’s rate on deposit moved along the line of rates on lending, which moved up from 4.4% in Jan. 2006 to 5.15% in Dec. 2006. In 2007 till Sept. the QCB kept its QMR on lending unchanged at 5.5% and reduced the QMR on deposit in Sept. 2007 by 65 basis points to 4.5%. In Jan. 2008, the QCB made two cuts on QMR on deposit rate of 50 basis points each and reduced it to 3% and kept its QMR on lending unchanged at 5.5%. In March 2008, it again cut the deposit rate by 75 basis points to 2.25% and kept its lending rate unchanged.
Chart 2: Trend in Qatar Central Bank’s Monetary Rates
Source: Qatar Central Bank
On the lending front, interest rate on bank overdraft moved up from 6.87% in Dec. 2005 to 7.56% at the end of 2006. It started the year 2007 at 7.9% and touched to 7.96% in June and at the end of Sept. it softened to 7.37%.
Interest on bills discounted declined from 7.77% in Dec. 2005 to 7.46% in Dec. 2006. It increased to 8.91% in June 2006 and at the end of the year 2007 it was at 7.51%. Interest rate on car loans increased to 8.61% in Dec. 2006 from 7.44% in Dec. 2005. However, in 2007 it moved up to 9.77% in June and declined to 8.23% at the end of Sept. Interest rate on credit cards moved up to 20% in Dec. 2006 from 18.14% in Dec. 2005, and declined to 19.35% at the end of Sept. 2007.
6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00%
6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00%
Repo Lending Deposit
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April 2008 Qatar Banking Sector 11
Interest on personal loans, due in less than one year increased from 6.35% in Dec. 2005 to 7.33% in Dec. 2006 and in 2007 at the end of Sept. it was at 7.3%. Interest on loans which are due in less than three years declined to 9.15% at the end of 2006 from 9.48% at the end of 2005. In 2007 it declined further and at the end of Sept. 2007 it was 8.14%. In case of loans which are due for more than three years interest rate moved up to 8.52% in Dec. 2006 from 8.32% in Dec. 2005 and at the end of Sept.2007 it declined to 8.28%.
On the deposit front, interest on demand deposits moved up from 1.88% in Dec. 2005 to 2.67% in Dec. 2006. At the end of Sept. 2007 it was at 2.42%. In case of saving deposits, rates moved from 1.03% in Dec. 2005 to 1.49% in Dec. 2005 and it was at 1.40% in Sept 2007. In case of 1 year time deposits, rate moved up from 3.76% in Dec. 2005 to 4.38% in Dec. 2006 and in Sept. 2007 it was at 4.41%.
Conventional banks ventured in Islamic Banking The growing importance of Islamic finance, especially in the GCC region, have encouraged many Qatari banks to venture into Islamic banking as a window within the conventional bank. In 2005, all the three major banks, namely Qatar National Bank, Doha Bank and Commercial Bank started Islamic banking. During 2006, Ahli Bank started its Islamic banking operations.
So effectively, all the seven leading banks in Qatar are now providing Islamic banking products. However, we believe that old Islamic banks will continue to dominate the Islamic banking segment and new conventional banks will face tough competition among themselves to have a pie of the Islamic banking sector. The new Islamic bank, Masraf Al Rayan is the largest Islamic bank with a capital of QR7.5bn (US$2.06bn).
Qatari banks expanding in GCC All the leading Qatari banks have announced their plans to expand in GCC. In 2007, Qatar National Bank opened two new branches in the region, in Oman and Kuwait. Doha Bank is also planning to open a branch in Kuwait in 2008, it already got an approval in this regard from regulatory authorities. Commercial Bank of Qatar has 34.85% stake in National Bank of Oman (NBO). Commercial Bank has entered into a separate management agreement with NBO and is responsible for the day to day management of NBO affairs subject to the overall supervision of NBO Board. Recently, Qatar Central Bank and Central Bank of United Arab Emirates had given their approvals to the Commercial Bank of Qatar for the acquisition of up to 40% stake in United Arab Bank P.J.S.C. (UAB), a bank based in United Arab Emirates. On 24 December 2007, the Commercial Bank successfully acquired 4.692% stake in UAB. Subsequent to the financial year ended 31 December 2007, the bank increased its stake in UAB to 35% and in February 2007, it further raised its stake in UAB by 3.46% to 38.16%. Al Khaliji Commercial Bank is also acquiring the branches of a banking operations in the United Arab Emirates. In October 2007, Al Khaliji has signed the Sale and Purchase Agreement (SPA) with BLC Bank (France) SA to acquire the banking business conducted by BLC in UAE. BLC Bank has branch presence in four emirates Abu Dhabi, Dubai, Sharjah and Ras Al Khaimah.
Global Research - Qatar Global Investment House
12 Qatar Banking Sector April 2008
Peer Group Comparison
The peer group comparison is done on all the eight listed banks, namely Qatar National Bank, Commercial Bank of Qatar, Doha Bank, Qatar Islamic Bank, Ahli Bank, Qatar International Islamic Bank, Masraf Al Rayan and Al Khalij Commercial Bank. These banks together accounted for about 85% of the total assets of commercial banks in 2007 and 92% of total credit disbursed.
Table 05: Key Indicators of Listed Banks - 2007
Source: Banks’ Annual Reports and Global Research
Balance Sheet Size In 2007, all the listed banks in Qatar have reported a significant growth in their balance sheet size. The aggregate balance sheet of all the listed banks grew by 61% in 2007 to QR252bn from QR157bn in 2006. Ahli Bank recorded the highest growth in its balance sheet among its peers as it grew by 63% in 2007. The sector’s largest bank, Qatar National Bank’s assets grew by 59.6% in 2007, followed by Commercial Bank (49.5%), Qatar Islamic Bank (43.3%), Doha Bank (38.7%) and Qatar International Islamic Bank (18.5%).
Chart 3: Market Share of Total Assets – 2007 Chart 4: Growth in Balance Sheet
Source: Banks’ Annual Reports and Global Research
in QR Mn Qatar
Total Assets 114,361 45,397 30,088 21,336 9,951 15,576 10,191 5,151
Gross Loans & Advances 66,472 25,224 19,729 13,294 10,246 5,082 6,891 769
Total Deposits 79,364 25,796 20,033 12,201 7,218 11,494 4,943 -
Paid-up Capital 1,825 1,402 1,248 1,193 701 508 3,750 3,600
Equity Capital 12,945 5,667 3,120 4,390 2,356 1,422 4,409 4,561
Net Profit 2,506 1,391 926 1,255 480 303 1,192 74
Commercial Bank of Qatar 18.0%
Qatar Islamic Bank 8.5%
Ahli Bank 6.2% Al-Khalij Commercial Bank 2.0%
Masraf Al-Ryan 4.2%
Doha Bank 11.9%
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April 2008 Qatar Banking Sector 13
In terms of market share of loans & advances, Qatar National Bank has by far the highest market share of system loans and deposits. In 2007, it accounted for 45% share of loans & advances and 49.3% of deposits among listed banks. Commercial Bank of Qatar held second position with a market share of 17.1% of loans and 6% of deposits. Doha Bank’s share was at 13.4% of loans and 12.4% of deposits. Three Islamic banks, namely Qatar Islamic Bank, Qatar International Islamic Bank and Masraf Al Rayan accounted for 9%, 3.4% and 4.7%, respectively, of the market share of loans & advances and in terms of deposits, their respective share was at 7.6%, 4.5% and 3.1% among listed banks. Ahli Bank’s market share was at 6.9% of loans and 7.1% of deposits. The newly established Al Khaliji Commercial Bank’s share was at 0.5% of loans and its deposit base was nil at the end of 2007.
In terms of the growth in loans and advances in 2007, two banks namely, Ahli Bank and Qatar Islamic bank have performed exceptionally well by achieving a growth of 59.1% and 57.3%. The largest bank in terms of size, Qatar National Bank has achieved a growth of 42.3% in 2007. In case of Qatar International Islamic Bank the growth in loan book was lowest among its peers at 19.3% for the year.
Source: Banks’ Annual Reports and Global Research
In terms of the growth in customer deposits in 2007, Ahli Bank has achieved significant growth of 68.4%. Commercial Bank of Qatar was at second position with a growth of 49.9% and the largest bank, Qatar National Bank has achieved a growth of 42.3%. In case of Qatar International Islamic Bank the growth in loan book was lowest among its peers at 7.8% for the year.
Chart 7: Market Share of Deposits – 2007 Chart 8: Growth in Deposits
Source: Banks’ Annual Reports and Global Research
Chart 5: Market Share of Loans & Advances – 2007 Chart 6: Growth in Loans & Advances
Commercial Bank of Qatar 17.1%
Qatar Islamic Bank 9.0%
Ahli Bank 6.9%
0
2006 2007 Growth Rate
Qatar Islamic Bank 7.6%
Masraf Al-Ryan 3.3%Ahli Bank of Qatar 7.2%
Doha Bank 12.4%
0
75%
60%
45%
30%
15%
0%
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14 Qatar Banking Sector April 2008
Asset Quality Over the last few years Qatari banks have extensively focused on improving their quality of assets which resulted in substantial improvement in the quality of their assets portfolio. Especially, Ahli Bank and Doha Bank have witnessed significant improvement in the quality of their loan portfolio since last few years. In the sector, Doha Bank had the highest NPLs to gross loans ratio at 3.2% at the end of 2007, which was followed by Qatar International Islamic Bank at 2.4%. Two banks, namely Qatar National Bank and Commercial Bank have less than 1% of NPL to gross loans, at 0.7% and 0.8% respectively. In case of Ahli Bank and Qatar Islamic Bank this ratio was at 1.5% and 2.1%, respectively.
Most of the banks in Qatar have adequately provided for their NPLs in FY2007. Qatar Islamic Bank was at the forefront in providing for its NPLs as it provided 99.1%. It was followed by Commercial Bank with 96.8% coverage. Qatar International Islamic Bank had the lowest NPL coverage of 63.4%.
Chart 9: Quality of Loan Portfolio
Source: Banks’ Annual Reports and Global Research
Capital Adequacy Ratio (CAR) In Qatar, the minimum capital adequacy ratio is 10% as per the Qatar Central Bank requirements and as per the Basel Committee on banking supervision requirements it is 8%. Looking at this standards banks in Qatar are well capitalized. In terms of comparison, barring two new banks, Qatar International Islamic Bank had the highest CAR of 25.07% at the end of 2007, which was followed by Qatar Islamic Bank 19.78%, Qatar National Bank 16.3%, Doha Bank 15.54%, Ahli Bank 12.9% and Commercial Bank has 11.85% CAR. As the two new banks, Masraf Al Rayan and Al Khaliji, have just initiated their operations they have very high CAR of 46.7% and 119.8%, respectively.
Qatari banks are focusing on expanding their capital base as many banks have announced their plans to come out with rights issues in 2008 and 2009. This measure will help the banks to shore-up their CAR and to leverage their balance sheet.
3.8% 3.0% 2.3% 1.5% 0.8% 0.0%
NPLs - 2007 NPLs to Gross Loans
2.0
1.5
1.0
0.5
0.0
Source: Banks’ Annual Reports
In terms of revenue in the sector, other income or non-interest revenue are keeping pace with the core earnings for almost all the banks. In many banks such as Qatar National Bank, Commercial Bank, Qatar Islamic Bank and Masraf Al Rayan non-interest revenue accounted for significant portion of the total revenue of the bank for the year 2007. In case of Qatar International Islamic Bank, Ahli Bank and Doha Bank core earnings have driven the growth in total operating revenue of the bank.
Contraction in Margin and Spreads In 2007, except Doha Bank, all the banks under review have witnessed contraction in their net interest margin (NIM) and net spread. Qatar Islamic Bank witnessed significant decline in its NIM and net spread which declined from 5.2% and 4.2% to 3.8% and 2.6%, respectively. The only exception was Doha Bank which witnessed expansion in its margin as well as spread which improved to 3.5% and 3.2% from 3.1% and 2.7% respectively. Table 06: Net Interest Margin and Net Spread
Net Interest Margin Net Spread
2006 2007 2006 2007
Commercial Bank 3.2% 2.9% 2.8% 2.7%
Doha Bank 3.1% 3.5% 2.7% 3.2%
Qatar Islamic Bank 5.2% 3.8% 4.2% 2.6%
Qatar International Islamic Bank 5.4% 4.7% 5.0% 4.3%
Ahli Bank 3.3% 2.6% 2.8% 2.1%
Masraf Al Rayan - 3.7% - 2.6%
Al Khalij Commercial Bank - 4.1% - 3.7% Source: Banks’ Annual Reports and Global Research
The combined net profit of the banks under review grew by 56% y-o-y in 2007, from QR5.2bn in 2006 to QR8.1bn in 2007. Among the banks under review, Commercial Bank of Qatar reported 61.2% increase in net profit, the highest among the listed banks. Following Commercial Bank, Ahli Bank recorded the second highest increase in net profit, increasing by 49.6%, followed by Qatar National Bank with a 25.4% increase, Qatar Islamic Bank
Al-Khalij Commercial Bank Commercial Bank
Ahli Bank Doha Bank
0% 20% 40% 60% 80% 100% 120% 140%
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16 Qatar Banking Sector April 2008
25.2%, Doha Bank 24.5% and Qatar International Islamic Bank recorded 20.3% growth in net profit in 2007.
Chart 11: Net Profit
Source: Banks’ Annual Reports and Global Research
Return on Assets and Equity In terms of return on equity and return on average assets, the banks have shown mixed trend in 2007. Among the banks under review, barring Commercial Bank of Qatar, all the banks witnessed a decline in heir return on assets. In case of Commercial Bank of Qatar RoAA improved from 3.3% in 2006 to 3.7% in 2007. In terms of return on average equity, Commercial Bank, Doha Bank and Ahli Bank reported improved returns in 2007 while Qatar National Bank, Qatar Islamic Bank and Qatar International Islamic Bank reported decline in their returns.
Table 07: Return Ratios
Commercial Bank 3.3% 3.7% 17.3% 27.0%
Doha Bank 4.0% 3.6% 29.1% 31.8%
Qatar Islamic Bank 8.2% 6.9% 37.6% 32.2%
Qatar International Islamic Bank 5.4% 5.2% 34.6% 25.4%
Ahli Bank 2.6% 2.4% 18.4% 23.8%
Masraf Al Rayan - 5.9% - 13.6%
Al Khalij Commercial Bank - 1.4% - 1.6% Source: Banks’ Annual Reports and Global Research
Qatar Islamic Bank posted the highest returns on equity and also on assets as it reported RoAE of 32.2% and RoAA of 6.9%. Masraf Al Rayan was at second position for RoAA with a return of 5.9% and in terms of RoAE Doha Bank was at the second position with a return of 31.8%. Masraf Al Rayan reported the lowest RoAE of 13.6% while Ahli Bank reported the lowest return on assets of 2.4%. The return ratios of Al Khaliji are not comparable to other banks as the bank has just initiated its operations.
3000
2500
2000
1500
1000
500
0
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April 2008 Qatar Banking Sector 17
Q1-2008 Performance In Q1-2008, the aggregate assets of all the listed banks witnessed a y-t-d growth of 15.1% to QR290.4bn from QR252.4bn at the end of 2007. The combined net profit of the banks under review grew by 54.2% y-o-y in Q1-2008, from QR1.6bn in Q1-2007 to QR2.5bn in Q1-2008.
Table 08: Performance of Listed Banks in Q1-2008
Assets (in bn) Net Profit (in mn)
2007 Q1-2008 Y-T-D
Commercial Bank 45.4 48.8 7.4% 266.4 436.4 63.8%
Doha Bank 30.1 33.1 10.1% 223.4 274.1 22.7%
Qatar Islamic Bank 21.3 30.0 40.4% 270.2 455.6 68.6%
Qatar International Islamic Bank 10.0 10.9 9.5% 105.6 135.4 28.2%
Ahli Bank 15.6 15.3 -2.0% 65.7 85.6 30.3%
Masraf Al Rayan 10.6 15.4 45.8% 43.5 217.8 400.7%
Al Khalij Commercial Bank 5.2 7.0 36.3% 12.6 7.1 -43.9%
Total 252.4 290.4 15.1% 1,640.1 2,529.1 54.2% Source: Bank Results and Global Research
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18 Qatar Banking Sector April 2008
Qatar Banking Sector Outlook
The economy of Qatar is registering a strong growth over the last few years and on the back of this, activities are flourishing in almost every sector of the economy and banking sector would be one of the major beneficiaries of this economic boom.
The region as well as the country have huge investment potential. Multi-billion-dollar projects are in the pipeline or in drawing board at various stages from various sectors apart from the hydrocarbon sector. As mentioned earlier, Qatar has launched an impressive domestic investment program aimed at diversifying its economic base from the hydrocarbon sector. It is likely to spend about US$140bn on different projects over the next five to six years to continue this diversification strategy. The banking sector would be one of the major beneficiaries of this scale of projects and regional diversification program.
The structure of the banking sector in Qatar has changed further as earlier conventional banks ventured into Islamic banking and the sector has also witnessed entry of two new banks in the recent past. Now to face the changing industry dynamics in the domestic market many local banks are focusing on regional expansion through acquisitions and opening branches in the region. Qatar National Bank and Doha Bank are focusing on regional branch expansion whereas Commercial Bank of Qatar and the newly established, Al Khaliji Commercial Bank are focusing on acquisition strategy to increase their foothold in the region. We consider this strategy as in right direction as it will bring diversification in asset class of Qatari banks.
Over the last few years, banks in Qatar have extensively focused on improving their quality of assets which resulted into substantial improvement in the quality of their loan portfolio. We believe that going forward quality of the loan book are likely to remain sound, however, steep growth in loan book needs to be watched with caution. At the same time, the loan portfolio of some of banks requires diversification as it is highly concentrated mainly to two sectors, Personal and Real Estate. In certain cases these two sectors account for more than 50% of total loan book. Qatari banks are focusing on expanding their capital base as many banks have announced their plans to come out with rights issues in 2008 and 2009. This measure will help the banks to shore-up their CAR and to leverage their balance sheet and will help the banks to tap profitable lending opportunities the country would offer in the coming years.
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April 2008 Qatar Banking Sector 19
Valuation & Recommendation
For arriving at the fair value of the banks under review, we have used two valuation methods: 1. Cash flow approach represented by the Dividend Discount Model.
2. Market approach represented by the Peer Group valuation.
Dividend Discounting Model - DDM The DDM model constructed is based on a 4-year forecast of dividends as cash flows (2008- 11E). The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total NPV of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:
1. Risk free rate of 5.75%.
2. Equity risk premium of 5%
3. We have taken Beta of 1.026 for Qatar Islamic Bank, and for Qatar National Bank, Commercial Bank and Doha Bank we have taken Beta of 1 since their calculated Beta value is less than 1. In case of Masraf Al Rayan and Al Khalij Commercial Bank we have taken Beta of 1 as these are newly listed stocks and therefore sufficient stock price history is not available to calculate their Beta.
4. Cost of equity for Qatar Islamic Bank woks out to 10.88% and in case of remaining five banks it stood at 10.75%.
5. Terminal growth rate of 4%.
Table 09: Value as per DDM approach
QR DDM Value
Doha Bank 86.1
Al Khaliji Commercial Bank 9.4 Source: Global Research.
Peer Group Valuation The peer group valuation is done by comparing the price to book value (P/BV) multiples enjoyed by the banks under our coverage.
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20 Qatar Banking Sector April 2008
Table 10: Companies average P/BV ratios for the banks under coverage
Equity 2008 BV/Share Price P/BV
(QR mn) (QR) (QR) (x)
Qatar National Bank 17,173.5 71.3 230.0 3.2
Commercial Bank of Qatar 6,243.5 34.3 161.2 4.7
Doha Bank 4,732.1 27.5 75.7 2.8
Qatar Islamic Bank 6265.9 31.8 121.6 3.8
Masraf Al Rayan Bank 5,218.0 7.0 22.30 3.2
Al Khaliji Commercial Bank 8,550.0 6.5 13.3 2.0
Total / Average 48,183.0 3.1 Source: Global Research, Market prices as on April 27, 2008
As indicated in table 10, the expected average P/BV multiple for the banks under coverage is around 3.1x. Therefore, on the basis of this industry average of 3.1x, the value of the banks under review is given in the table below. Table 11: Value as per Market approach
QR P/BV Value
Doha Bank 84.4
Al Khaliji Commercial Bank 19.9 Source: Global Research.
To arrive at fair value, we have provided 80% weightage to DDM valuation and 20% to the peer group valuation.
Table 12: Valuation
Qatar National Bank 279.0 219.1 267.0
Commercial Bank of Qatar 204.7 105.3 184.8
Doha Bank 86.1 84.4 85.8
Qatar Islamic Bank 147.3 97.8 137.4
Masraf Al Rayan Bank 25.9 21.4 25.0
Al Khaliji Commercial Bank 9.4 19.9 11.5 Source: Global Research.
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April 2008 Qatar Banking Sector 21
Table 13: “Global” Valuation Matrix
Price
(QR)
Target
(QR)
Prem.
BVPS*
(QR)
EPS*
(QR)
P/BV
(x)
P/E
(x)
Qatar National Bank 230 267.0 Buy 16.1% 71.3 14.8 3.2 15.5
Commercial Bank of Qatar 161.2 184.8 Buy 14.7% 34.3 11.1 4.7 14.5
Doha Bank 75.7 85.8 Buy 13.3% 27.5 6.6 2.8 11.5
Qatar Islamic Bank 121.6 137.4 Buy 13.0% 31.8 9.0 3.8 13.5
Masraf Al Rayan Bank 22.3 25.0 Buy 12.2% 7.0 1.4 3.2 15.4
Al Khaliji Commercial Bank 13.3 11.5 Reduce -13.4% 6.5 0.3 2.0 42.7 * Based on 2008E.
Source: Global Research, Market prices as on April 27, 2008.
Global Research - Qatar Global Investment House
22 Qatar Banking Sector April 2008
Qatar National Bank Tickers: QNBK.QA (Reuters) QNBK QD (Bloomberg)
Listing: Doha Securities Market
Key Data
BVPS* (QR) 71.3 52 week Hi / Lo 230.30 / 145.49
P/E (x) 15.5 Market Cap (QR mn) 55,406.2
P/BV (x) 3.2 Target Price (QR) 267 Source: Global Research
* Projected (2008)
Background • QNB was established in 1964 as the country's first Qatari-owned commercial bank, with
an ownership structure split between Qatar Investment Authority (50%) and the private sector (50%).
• QNB has the largest distribution network of 42 branches and offices (including 3 mobile branches), in addition to 11 Islamic branches and offices, and 130 Automated Teller Machines (ATMs).
• QNB offers a full range of retail, corporate, investment, treasury, wealth management, and Islamic banking products and services for individuals, corporate institutions and government entities.
• QNB’s wealth Management and private banking subsidiary, Ansbacher, the London-based operates in Switzerland, Channel Islands, the Bahamas, Dubai International Financial Center and Qatar Financial Center. Ansbacher was the first financial institution to be granted a license to operate at Qatar Financial Centre providing a wide range of wealth management services in Qatar and the region.
Recent Developments • In 2007 QNB had made significant expansion in terms of its overseas representation. It
opened three new branches during the year in Yemen, Oman and Kuwait increasing the number of overseas branches to five. It already has branches in London and Paris. Apart from Iran, two additional representative offices were opened in Libya and Singapore for a total of three.
• As part of its expansion plan, QNB acquired 30.5% stake in the Jordan-based. The
Recommendation
BUY
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 23
Housing Bank for Trade and Finance (HBTF). The bank has operations in Palestine, Bahrain, Algeria, Syria, UAE, Libya and Iraq, in addition to Jordan.
• QNB has signed an agreement with other Syrian private and public sectors institutions to jointly establish the Qatar National Bank-Syria with 49% stake.
• Another major accomplishment is the successful completion of the largest and most competitive syndicated loan in the region that amounted to US$1.85bn, in which a large number of major financial institutions participated.
• During 2007, QNB launched a group of various products and services. This included its new priority banking service, "QNB First" and "business banking services" where customer needs are pursued on daily bases. The Bank also launched a promotional campaign that go along with its services and products. It also launched a new service EAZYLife that include a range of e-banking services available 24 hours a day through the internet.
• During October 2007, QNB decided to increase its share capital through the issuance of a rights issue that began for two weeks starting from November 4th. The first phase of the rights issue included the issuance of 1 share for every 8 shares held (12.5% of share capital) at a price of QR120 per share that includes the nominal share price of QR10 per share and a premium of QR110. The second rights issue commenced in April 2008. During the second phase of the rights issue, the bank will issue one share for every 10 shares held (10% of capital), at a price of QR120 per share, which includes a nominal share price of QR10 and a premium of QR110 per share.
• The bank has also issued 20% bonus shares for the year 2007, therefore, with the bonus issue and second rights issue the bank’s equity capital will increase to QR2.41bn.
• QNB has the highest credit rating. It has been assigned ‘A+’ rating by Standard & Poor's. Fitch, Capital Intelligence and Moody's have rated it as ‘Aa3’.
Analysis of 2007 and Q1-2008 Financial Results • The total assets of the bank grew by 59.6% in 2007 to QR114.4bn. Among the major asset
components, gross loans & advances grew by 42.3% to QR66.5bn. Out of the total loan portfolio of QR66.5bn, QR4.5bn accounted by Islamic financing. activities which were at QR2.0bn in 2006. Funds with banks & FIs increased significantly during the year by more than 66.7% to QR21.3bn. Net loans & advances accounted for 66.3% of the total assets.
• Among the components of liabilities, the share of customer deposits (including unrestricted investment accounts) in total liabilities declined to 69.4% in 2007 from 77.8% in the preceding year and it registered a y-o-y growth of 42.3% to QR79.4bn. Unrestricted investment accounts stood at QR5.2bnn, registered a growth of 35.1%. The amount due to banks & other FIs increased by 58.7% to QR9.9bn. The bank also has borrowings to the tune of QR6.7bn which represents loan secured by the bank through a syndicated loan facility. The contribution of shareholders’ equity in total liabilities grew marginally to 12.1% from 11.8% to QR13.8bn.
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24 Qatar Banking Sector April 2008
• During 2007, the bank continued its focus to diversify its loan portfolio in favor of other sectors and reduced its exposure to the government sector. The bank’s exposure to the government sector declined by 22.6% to QR7.1bn from QR9.1bn in 2006. At the same time, the bank’s lending to government agencies increased to QR19.9bn from QR6.0bn in 2006. This segment alone accounted for 30% of the total loan portfolio of the bank. Its exposure to Industrial and Commercial sectors grew by 35.1% and 128.9% to QR3.9bn and QR2.3bn respectively. Personal loans segment was the second highest contributor to the total loan portfolio, its share increased to 24% in 2007 from 22% in 2006. The y-o-y growth in the segment was 52.9% to QR15.8bn. This segment will continue to maintain its growth momentum going forward. Exposure to the Real Estate segment stood at QR8.1bn with a growth of 3.7%.
Chart 1: Sectoral Distribution of QNB’s Loan Portfolio
Source: QNB Annual Reports and Global Research
• The bank’s NPLs as a percentage of gross loans have been declining over the last few years, which was despite the growing loan book and declining exposure to the government sector. Its NPLs declined by 18.4% to QR451.1mn in 2007 from QR553mn in 2006. NPLs as a percentage of gross loans declined to 0.7% in 2007 from 1.2% in 2006. The bank has sufficient coverage to its NPLs at 90.5% in 2007, which increased from 85.9% in 2006.
Chart 2: Quality of Loan Portfolio
100%
80%
60%
40%
20%
Government Commercial Real Estate
Government agencies Services Personal
2.45%
2.15%
1.18%
0.68%
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April 2008 Qatar Banking Sector 25
• During 2007, the total interest income of the bank from conventional banking activities grew by 36.1% to QR4,622.7mn. Among the major components of gross interest income, interest from loans & advances grew by 41.5% to QR3,649.6mn and interest on funds due from banks & other FIs increased by 21.1% to QR591.8mn, while interest income from debt securities increased by 24.9% to QR345.9mn. The bank’s total interest cost grew by 59.1% to QR2,855.2mn and net intrerest income from conventional banking activities grew by 10.3% to QR1,767.6mn.
• In 2007, the bank’s non-interest income grew significantly by 51.5% as against 14% growth achieved in 2006. Its non-interest income was at QR1,537.1mn in 2007 as compared to QR1,014.7mn in 2006. Among the major components of non-interest revenue, the bank registered a y-o-y growth of 60.2% in fees & commission income, gain from investments went up by 11.9% and dividend income witnessed a growth of 40.7%.
Chart 3: Growth in Non-Interest Income
Source: QNB Annual Reports and Global Research
• In 2007, the bank’s effective interest rates on loans & advances and also on funds due from banks increased at lower rate as compared to its cost of funds from customer deposits and due to banks. Therefore, its net spread and net interest margin came under pressure to 2.3% and 2.4% from 2.9% and 3.1% respectively.
• Over the last few years the bank’s cost to total income ratio has been on decline, which improved to 24.2% in 2007 from 27% in 2006. Total operating expenses of the bank grew by 36.3% in 2007 to QR181.9mn over QR133.4mn reported in 2006.
Chart 4: Cost to Total Income
Source: QNB Annual Reports and Global Research
2004 2005 2006 2007
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26 Qatar Banking Sector April 2008
• QNB registered a y-o-y growth of 25.4% in its bottomline to QR2.5bn over QR2.0bn reported in 2006. During 2007, the bank also realized some of its bad debts which led to net reversal of provisions for loans and advances to the extent of QR19.7mn whereas last year the net reversal of provision was at QR139.2mn.
• The bank’s Return on Average Equity (RoAE) and Return on Average Assets (RoAA) declined to 24.3% and 2.7% in 2007 which were at 25.6% and 3.3% respectively in 2006.
• At the end of 2007, the bank reported Tier 1 capital ratio of 13.7% and total capital ratio of 16.3% as against 14.5% and 16.8% respectively for the year 2006. These ratios are likely to improve with the further raising of capital through rights issue in 2008.
• During Q1-2008, interest income grew by 42.1% y-o-y to QR1,416.2mn while interest expense registered a steep y-o-y growth of 65.9% to QR903.3mn. With this the net interest income of the bank registered a y-o-y growth of 13.4% to QR512.9mn. The bank reported a y-o-y growth of 40.5% in its net profit to QR917.3mn as compared to QR652.8mn reported in Q1-2007. On the balance sheet side, on a y-t-d basis, total assets registered a growth of 13.7% to QR130bn, loans & advances grew by 17.1% to QR77.4bn and customer deposits increased marginally by 0.2% to QR79.5bn.
Outlook and Valuation • QNB is considered as one of the best banks in Qatar considering its sound assets portfolio.,
which we believe that will continue to remain its main focus area despite significant growth in its loan portfolio over the last few years. Apart from its strong presence in home turf, we believe that its expansion strategy to having its presence in Oman, Kuwait, Yemen, Jordan, Iran, Libya, Singapore are in right direction.
• At the same time the bank’s capital expansion through the recent rights issues will allow the bank to leverage its balance sheet. This will help the bank to finance its regional expansion plan and ensure that it is adequately capitalized at all times to meet the diverse needs of its rapidly expanding business at home and overseas.
• At the current market price of QR230 (April 27, 2008), the bank trades at 15.5x and 12x of its earnings and 3.2x and 2.9x of its book value for FY2008E and FY2009E respectively. The estimated fair value for QNB works out to QR267 based on the DDM and peer group valuation methods, which is 16.1% above the market price on April 27, 2008. Hence we reiterate our earlier rating on the stock and recommend a “BUY”.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 27
BALANCE SHEET
Qatar National Bank
Amount in Qatari Riyal ‘000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Assets
Due from Banks and Other FIs 7,499,202 12,780,711 21,302,608 30,249,703 39,929,608 49,512,715 59,415,257
Loans and advances (Gross) 32,113,501 46,701,646 66,472,455 105,026,479 134,433,893 164,009,350 193,531,032
Other assets 571,762 674,889 1,381,387 2,072,081 3,108,121 4,351,369 5,656,780
Less : provisions (636,001) (475,036) (408,318) (513,345) (600,727) (707,333) (833,128)
Total Current Assets 41,954,791 62,163,428 99,696,701 143,929,376 182,181,006 222,058,620 261,931,115
Financial Invetsments 7,585,486 8,877,702 11,308,925 14,635,445 17,942,674 21,475,725 25,726,127
Investment in associates 52,460 32,810 2,703,546 2,818,131 2,818,131 2,818,131 2,818,131
gross fixed assets 855,599 1,042,822 1,167,579 1,401,095 1,541,204 1,664,501 1,797,661
less: accumulated depreciation (388,180) (453,729) (516,083) (588,940) (669,853) (757,239) (851,617)
net fixed assets 467,419 589,093 651,496 812,155 871,351 907,261 946,044
Total Assets 50,060,156 71,663,033 114,360,668 162,195,108 203,813,162 247,259,736 291,421,417
Liabilities
Due to banks and other FIs 2,598,708 6,254,842 9,928,352 12,906,858 16,778,915 20,470,276 24,564,331
Repurchase agreements - - 2,495,142 2,869,413 3,299,825 3,695,804 4,139,301
Deposits from customers 36,457,014 51,930,594 74,180,689 109,045,613 139,578,384 171,681,413 203,442,474
Other Borrowings - - 6,714,819 7,722,042 8,803,128 10,035,566 11,440,545
Other liabilities 2,046,368 1,183,866 2,000,110 2,740,151 3,452,590 3,935,953 4,486,986
Proposed dividend 778,656 778,656 912,487 1,961,305 3,003,114 4,171,886 5,339,429
Total Liabilities 41,880,746 60,147,958 96,231,599 137,245,382 174,915,957 213,990,897 253,413,066
Unrestricted investment accounts 249,151 3,836,397 5,183,192 7,774,788 10,107,224 12,937,247 16,171,559
Minority interest - - 505 1,457 3,999 7,143 10,911
Owner’s Equity
Share Premium - - - 2,408,967 2,408,967 2,408,967 2,408,967
Other reserve 1,775,457 1,760,004 1,751,616 1,751,616 1,751,616 1,751,616 1,751,616
Risk reserve 169,422 444,072 783,072 630,159 806,603 984,056 1,161,186
Fair value reserve 2,549,232 1,099,895 2,346,658 2,346,658 2,346,658 2,346,658 2,346,658
Proposed bonus shares 259,552 324,440 364,995 - - - -
Proposed transfer to statutory reserve 259,552 324,440 567,770 - - - -
Retained earnings 840,627 1,130,306 1,453,562 3,206,620 4,642,677 6,003,691 7,327,994
Total Shareholder’s Equity 7,930,258 7,678,677 12,945,371 17,173,480 18,785,982 20,324,448 21,825,881
Total Liabilities & Shareholders’ Equity 50,060,156 71,663,033 114,360,668 162,195,108 203,813,162 247,259,737 291,421,418
Global Research - Qatar Global Investment House
28 Qatar Banking Sector April 2008
OPERATING STATEMENT
Qatar National Bank
Amount in Qatari Riyal ‘000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Interest Income 2,172,318 3,397,013 4,622,719 5,901,382 7,304,106 8,778,812 10,215,376
Interest Expense (887,507) (1,794,624) (2,855,168) (3,688,364) (4,820,710) (5,925,698) (6,844,302)
Net interest income 1,284,811 1,602,389 1,767,551 2,213,018 2,483,396 2,853,114 3,371,074
Add: Income from Islamic financing and investing activities
14,304 277,834 417,586 756,191 1,088,915 1,328,476 1,654,690
Add : Fees and commission 387,993 453,273 726,300 1,053,135 1,421,732 1,777,165 2,221,457
Add : Net Gains from Dealing in Foreign Currencies
64,646 117,913 175,173 206,704 243,911 287,815 339,622
Add: Gain from Investments 340,940 334,503 374,470 499,539 782,860 1,258,575 1,575,388
Add: Gain / (Loss) from Investments in Associates
3,750 - 122,895 309,994 338,176 338,176 338,176
Add : Dividend Income 68,709 86,717 122,048 220,229 231,550 316,452 417,717
Add : Other Operating Income 23,698 22,267 16,233 20,291 23,335 26,602 30,326
Total Non-Interest Income 889,736 1,014,673 1,537,119 2,309,893 3,041,564 4,004,784 4,922,685
Total Operating Income 2,188,851 2,894,896 3,722,256 5,279,102 6,613,875 8,186,374 9,948,449
Less: Recoveries / (Provision) for Impairment of Loans & Advances
76,457 139,194 19,709 (105,026) (87,382) (106,606) (125,795)
Add: Recovery of Provision/(Provision) for Properties Acquired against Settlement of Debts
4,020 5,271 - - - - -
Operating Income (net of provisions) 2,275,992 2,981,272 3,679,915 5,107,918 6,452,353 7,996,225 9,733,144
Less : Staff Expenses (384,622) (457,398) (540,744) (689,569) (758,151) (939,556) (1,240,976)
Less: Employees’ Termination Benefits - - - - - - -
Less: Other Expenses (250,288) (270,943) (301,551) (408,633) (516,188) (639,698) (778,651)
Less: Depreciation (56,071) (53,025) (57,293) (72,857) (80,913) (87,386) (94,377)
Less: Goodwill Impairment (40,378) - (1,860) - - - -
Less: Unrestricted Investment Account Holders’ Share of Profit
(798) (193,476) (253,009) (342,091) (439,664) (562,770) (711,549)
Profit Before Taxes 1,543,835 2,006,430 2,525,458 3,594,768 4,657,436 5,766,814 6,907,591
Less : Taxes (7,023) (8,567) (19,339) (28,758) (37,259) (51,901) (62,168)
Net Profit 1,536,812 1,997,863 2,506,119 3,566,010 4,620,176 5,714,912 6,845,422
P&L Appropriation Account:
Net Profit for the year 1,536,812 1,997,863 2,507,508 3,566,010 4,620,176 5,714,912 6,845,422
Proposed Dividend (778,656) (778,656) (912,487) (1,961,305) (3,003,114) (4,171,886) (5,339,429)
Director Fees (4,560) (6,450) - (4,560) (4,560) (4,560) (4,560)
Proposed Issue of Bonus Shares (259,552) (324,440) (364,995) - - - -
Net Movement in Risk Reserve (20,452) (274,198) (339,000) 152,913 (176,444) (177,453) (177,130)
Trfr to Statutory Reserve (259,552) (324,440) (567,770) - - - -
Cl Balance of Retained Earnings 840,627 1,130,306 1,453,562 3,206,620 4,642,677 6,003,691 7,327,994
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 29
CASH FLOW STATEMENT
Qatar National Bank
Amount in Qatari Riyal '000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Operating
Profit for the Year (Before Taxes) 1,543,835 2,006,430 2,525,458 3,594,768 4,657,436 5,766,814 6,907,591
Provision for impairment of loans & advances (76,457) (139,194) (19,709) 105,026 87,382 106,606 125,795
Provision for Legal cases 12,388 794 3,954 - - - -
Depreciation 56,071 53,025 57,293 72,857 80,913 87,386 94,377
Directors fees - - - (4,560) (4,560) (4,560) (4,560)
Provision / (release) of provision for impairment of investments
(9,071) 66,449 61,957 66,157 74,140 83,543 89,511
Release of staff indemnity provision (5,441) (39,915) (4,478) - - - -
Provision for property acquired against settlement of debts
(4,020) (5,271) - - - - -
Goodwill impairment 40,378 - 1,860 - - - -
3,205 3,389 4,242 - - - -
Gain from investment in associates (3,750) - (122,895) - - - -
Net Increase/Decrease in Operating Activities (1,309,706) 1,828,027 8,222,052 (5,635,252) (1,162,157) 334,381 759,301
Inc./(Dec.) in due to banks 445,325 3,656,134 3,673,510 2,978,506 3,872,057 3,691,361 4,094,055
Dec/(Inc.) in due from banks (5,153,266) (5,281,509) (8,521,897) (8,947,095) (9,679,905) (9,583,106) (9,902,543)
Repurchase agreements - - 2,495,142 374,271 430,412 395,979 443,497
Inc. in customer deposits 7,092,332 19,083,898 22,250,095 34,864,924 30,532,772 32,103,028 31,761,061
Inc. in unrestricted investment accounts - - 1,346,795 2,591,596 2,332,436 2,830,023 3,234,312
Dec./(Inc.) in loans and advances (4,810,060) (14,609,916) (19,817,818) (38,554,024) (29,407,414) (29,575,456) (29,521,683)
(Inc.) / Dec. in other assets 150,639 (117,480) (719,368) (690,694) (1,036,040) (1,243,248) (1,305,411)
Inc./(Dec.) in other liabilities 965,324 (903,100) 800,774 740,041 712,439 483,363 551,033
(Inc.) / Dec. in other borrowings - - 6,714,819 1,007,223 1,081,086 1,232,438 1,404,979
Total Operating (113,363) 3,412,490 10,344,509 (1,829,762) 3,695,894 6,322,269 7,909,846
Investing
Purchase of fixed assets and property (42,352) (123,643) (114,190) (233,516) (140,109) (123,296) (133,160)
Sale of fixed assets and property 24,326 32,689 1,149 - - - -
Total Investing 1,260,732 (2,420,904) (3,506,611) (3,740,778) (3,521,478) (3,739,891) (4,473,073)
Financing
Proceeds from Rights Issue - - 2,433,298 2,627,964 - - -
Minority interest - - - 952 2,541 3,145 3,767
Total Financing (617,384) (771,976) 1,653,410 1,716,429 (1,958,764) (2,999,969) (4,168,119)
Net Change in Cash 529,985 219,610 8,491,308 (3,854,111) (1,784,348) (417,591) (731,346)
Exchange rate differences 175,973 (144,719) (23,957) - - - -
Net Cash at beginning 1,700,369 2,406,327 2,481,218 10,948,569 7,094,458 5,310,110 4,892,519
Net Cash at end 2,406,327 2,481,218 10,948,569 7,094,458 5,310,110 4,892,519 4,161,173
Global Research - Qatar Global Investment House
30 Qatar Banking Sector April 2008
Ratios
Qatar National Bank
2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Profitability
- Return on Average Assets 3.4% 3.3% 2.7% 2.6% 2.5% 2.5% 2.5%
- Return on Average Equity 22.2% 25.6% 24.3% 23.7% 25.7% 29.2% 32.5%
- Net interest income/ Op. Income (net of provisions)
60% 59% 49% 41% 37% 34% 33%
- Non-interest income/ Op. Income (net of provisions)
39% 32% 40% 44% 46% 49% 50%
Margins
- Interest Expense to Interest Income 40.6% 54.1% 61.7% 60.5% 62.7% 64.2% 63.7%
- Interest Income to Interest Earning Assets 5.6% 6.8% 6.4% 5.6% 5.1% 5.0% 4.9%
- Interest Expense to Interest Bearing Liabilities 2.5% 3.9% 4.1% 3.7% 3.6% 3.5% 3.4%
- Net Spread 3.1% 2.9% 2.3% 1.9% 1.6% 1.5% 1.5%
- Net Interest Margin 3.3% 3.1% 2.4% 2.2% 1.9% 1.8% 1.8%
Efficiency
- Cost to Total Income 31.6% 27.0% 24.2% 22.2% 20.5% 20.4% 21.2%
- Cost to Op Income 30.4% 26.2% 24.4% 22.9% 21.0% 20.8% 21.7%
- Staff Expense to Total Op Income 16.9% 15.3% 14.7% 13.5% 11.8% 11.8% 12.8%
Liquidity
- Loans to Interest Earning Assets 74% 72% 71% 73% 73% 73% 73%
- Loans to Customer Deposits 85.8% 82.9% 83.2% 89.5% 89.4% 88.5% 87.7%
- Customer Deposits to Equity 460% 676% 573% 635% 743% 845% 932%
- Due from Banks to Due to Banks 289% 204% 215% 234% 238% 242% 242%
Credit Quality
- Non Performing Loans (QR '000) 690,700 553,000 451,100 840,212 1,209,905 1,640,093 2,032,076
- Loan Loss Reserve (QR '000) 636,001 475,036 408,318 513,344 600,727 707,333 833,128
- NPLs to Gross Loans 2.2% 1.2% 0.7% 0.8% 0.9% 1.0% 1.1%
- NPLs to (Equity+Loan loss reserve) 9% 8% 4% 5% 7% 8% 10%
- Loan Loss Reserve to Gross Loans 2.0% 1.0% 0.6% 0.5% 0.4% 0.4% 0.4%
- NPL Coverage 92% 85.9% 90.5% 61.1% 49.7% 43.1% 41.0%
Capital Adequacy
- Equity to Total Assets 16% 11% 11% 11% 9% 8% 7%
- Equity to Gross Loans 25% 16% 19% 16% 14% 12% 11%
Constitution of Total Income
- Interest Income to Total Op Income 60.6% 67.9% 59.9% 56.1% 54.0% 51.0% 50.3%
- Fees & Comm. to Total Op. Income 17.0% 15.2% 19.7% 20.6% 22.0% 22.2% 22.8%
- Investment Income to Total Op Income 18.5% 12.2% 15.1% 18.9% 19.8% 22.9% 23.0%
- FX Income to Total Op. Income 2.8% 4.0% 4.8% 4.0% 3.8% 3.6% 3.5%
- Other Income to Total Op. Income 1.0% 0.7% 0.4% 0.4% 0.4% 0.3% 0.3%
Operating Performance
- Change in Interest Income 56% 47% 9% 30% 22% 17% 20%
- Change in Fees and Commission 136% 17% 60% 45% 35% 25% 25%
- Change in Investment Income 471% 3% 18% 45% 41% 55% 27%
- Change in Fx Income 68% 82% 49% 18% 18% 18% 18%
- Change in Other Income 180% -6% -27% 25% 15% 14% 14%
RATIO'S USED FOR VALUATION
- EPS (QR) 14.8 15.4 13.7 14.8 19.2 23.7 28.4
- Book Value Per Share (QR) 76.4 59.2 70.9 71.3 78.0 84.4 90.6
- Market Price Year End (QR) 183.45 145.95 174.93 230.00 230.00 230.00 230.00
- P/E 12.4 9.5 12.7 15.5 12.0 9.7 8.1
- P/BV 2.4 2.5 2.5 3.2 2.9 2.7 2.5
* Market price for 2008 and subsequent years are as per closing price on DSM on April 27, 2008.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 31
Commercial Bank of Qatar Tickers: COMB.QA (Reuters) CBQK QD (Bloomberg)
Listing: Doha Securities Market
Key Data
BVPS* (QR) 34.3 52 week Hi / Lo 173.5 / 70.77
P/E (x) 14.5 Market Cap (QR mn) 29,371.5
P/BV (x) 4.7 Target Price (QR) 184.8 Source: Global Research
* Projected (2008)
Background • Commercial Bank of Qatar was incorporated in the State of Qatar in 1975. The bank and
its subsidiaries (together the Group) are engaged in conventional commercial banking, Islamic banking services and credit card business and operates through its Head Office and branches established in Qatar.
• The bank also acts as a holding company for its subsidiaries engaged in credit card business in several Middle East countries.
• In Qatar, the bank has a network of 22 full-fledged conventional branches, 5 Islamic branches, 95 ATMs, 6 pavilions and 25 deposit machines. It is one of the leading card provider in Qatar with 51% market share.
Recent Developments • In 2007, Qatar Central Bank and Central Bank of United Arab Emirates had given their
approvals to Commercial Bank of Qatar for the acquisition of up to 40% stake in United Arab Bank (UAB), a bank based in United Arab Emirates. The shares of UAB are listed on the Abu Dhabi Securities Market. On 24 December 2007, the bank concluded the acquisition of 246.9mn shares of UAB at a price of AED 7.75 per share, which is equivalent to 34.692% of its issued share capital. Subsequent to the financial year ended 31 December 2007, the Commercial Bank acquired an additional 2mn shares of UAB in the open market at a price of AED7.34 per share, increasing its stake in UAB to 35% and in February 2007, it further raised its stake in UAB by 3.46% to 38.16%. In April 2008, Commercial Bank of Qatar announced that its shareholding in UAB reached to 40%.
• In April 2007, Commercialbank raised syndicated loan for an amount of QR2,366mn (US$650mnn) for five years period to refinance two short term loans totaling
Recommendation
BUY
Global Research - Qatar Global Investment House
32 Qatar Banking Sector April 2008
QR1,783.6mn (US$490mn), that were fully repaid in January 2007. This is an unsecured bullet repayment loan facility with a floating rate of interest linked to US$ LIBOR plus a margin of 27.5 basis point per annum. The fair value of the loan as at 31 December 2007 is QR2,372.04mn (US$651.66mn).
• In November 2007, the Commercial Bank raised QR2,912mn (US$800mn) in the form of a term loan facility for general funding purposes, including the financing of a strategic investment in United Arab Bank, UAE. This is an unsecured bullet repayment loan facility with a tenor of 6 months and an option to extend up to 1 year and has a floating rate of interest linked to US$ LIBOR plus a margin of 20 basis point per annum. The fair value of the loan as at 31 December 2007 was QR2,899.3mn (US$796.51mn).
• To fund further growth both organically and through acquisition, Commercialbank intends to raise additional capital in 2008 and 2009 through a rights issue to the existing shareholders. The issue price will be announced on a later date. These issues will take place in two phases, 10% of the capital will be raised in 2008 and a further 10% of the capital will be raised in 2009. With the issue of these shares, the share capital will be increased by 10% from QR1.82bn to QR2bn in 2008 and it will increase further by 10% in 2009 to stand at QR2.2bn.
• The bank has been rated as ‘A1’ by Moody’s, ‘A’ by Fitch and ‘A-’ by Standard & Poor's. Moody's assigned a bank financial strength rating (BFSR) of C- to Commercial Bank of Qatar, which translates into a Baseline Credit Assessment of Baa1. The rating derives from the bank's strong financial metrics including a low level of non-performing loans (NPLs) and strong profitability, efficiency, capital adequacy and liquidity indicators - and a defendable franchise within Qatar's domestic banking system as the second-largest bank with a 16% market share. CBQ's long-term global local currency (GLC) deposit rating is set at A1, a three-notch uplift from the bank's Baa1 Baseline Credit Assessment.
Analysis of 2007 and Q1-2008 Financial Results • The total assets of the bank grew by 49.5% in 2007 to QR45.4bn. Among the major asset
components, gross loans & advances grew by 44.1% to QR25.2bn. Out of the total loan portfolio QR920.8mn accounted by Islamic financing activities which were at QR385mn in 2006. Funds with banks & FIs increased by 64.2% to QR9bn. Net loans & advances accounted for 55.1% of the total assets.
• Among the components of liabilities, in 2007, the share of customer deposits (including unrestricted investment accounts) in total liabilities remained almost same as in 2006 at 56.7% which was at 56.8% in 2006. It registered a y-o-y growth of 49.9% to reach at QR25.8bn. Unrestricted investment deposits increased during the year by 124.4% to stood at QR1.14bn. The amount due to banks & other FIs increased by 82.1% to QR4.9bn. The bank also has borrowings to the tune of QR7.6bn which represents subordinated notes, raised during 2004 to 2007, and also Euro Medium Term Notes. The contribution of shareholders’ equity in total liabilities declined to 12.5% from 15.3% to reach at QR5.7bn.
• The bank’s loan portfolio is highly diversified as compared to other banks in Qatar. Its exposure to the government sector declined during the year to QR575.4mn from QR1.1bn in 2006 and its contribution to the total loan portfolio declined to 2.3% in 2007 from
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 33
6.1% in 2006. The bank has increased its focus on government agencies as this segment has witnessed a growth of 57.5% in 2007 to reach at QR2.7bn and its share in total loan portfolio reached to 10.6%. Personal loans segment has highest contribution to the total loan portfolio, its share was at 25.6% in 2007. The y-o-y growth in the segment was 26.3% to QR6.5bn. The bank’s exposure to Commercial sector accounted for 15.6% of the total loan portfolio and it grew by 111% to QR3.9bn. Its exposure to the Real Estate segment stood at QR3.3bn, witnessed a growth of 47.6% and accounted for 13% of the total loan portfolio.
Chart 1: Sectoral Distribution of Commercial Bank’s Loan Portfolio
Source: Commercial Bank Annual Reports and Global Research
• The bank’s NPLs as a percentage of gross loans have been declining over the last few years, which was despite the growing loan book. NPLs as a percentage of gross loans declined to 0.83% in 2007 from 0.81% in 2006. Its NPLs increased by 47.2% to QR209mn in 2007 from QR142mn in 2006. The bank has sufficient coverage to its NPLs at 96.8% in 2007, which was at 99% in 2006.
Chart 2: Quality of Loan Portfolio
Source: Commercial Bank Annual Reports and Global Research
• During 2007, the total interest income of the bank from conventional banking activities grew by 59.6% to QR2,244.1mn. Among the major components of gross interest income, interest from loans & advances grew by 62.5% to QR1,775.9mn and interest on funds due from banks & other FIs increased by 62.3% to QR275.1mn, while interest income
100%
80%
60%
40%
20%
Government Commercial Real Estate
Government agencies Services Personal
Gross Loans NPLs to Gross Loans
1.8%
Global Research - Qatar Global Investment House
34 Qatar Banking Sector April 2008
from investment securities increased by 34.8% to QR193mn. The bank’s total interest cost grew by 87.3% to QR1,368.1mn and net interest income from conventional banking activities grew by 29.7% to QR876mn.
• The bank’s non-interest income grew by 61% in 2007 to reach at QR1,013.5mn as compared to QR629.5mn in 2006. Among the major components of non-interest revenue, the bank registered a y-o-y growth of 72.6% in fees & commission income and profits from investments increased by 35.4%.
Chart 3: Growth in Non-Interest Income
Source: Commercial Bank Annual Reports and Global Research
• In 2007, the bank’s net spread and net interest margin declined to 2.7% and 2.9% from 2.8% and 3.2% respectively.
• The bank’s cost to total income ratio has been increasing over the last few years, which was at 32.6% in 2007 from 27.8% and 22.6% in 2006 and 2005 respectively. Total operating expenses of the bank grew by 63.4% in 2007 to QR487.4mn over QR298.3mn reported in 2006. Among the major cost components in 2007, its staff cost went up by 51.9% to QR215.6mn, other expenses grew by 81% to QR238.1mn and depreciation charges grew by 35.4% to QR33.7mn.
Chart 4: Cost to Total Income
Source: Commercial Bank Annual Reports and Global Research
1200
1000
800
600
400
200
0
(in Q
R M
37.1%
40.0%
35.0%
30.0%
25.0%
29.0%
33.0%
27.4%
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 35
• Commercial Bank registered a y-o-y growth of 61.2% in its bottomline to QR1,390.7mn over QR862.7mn reported in 2006. The bank’s Return on Average Equity (RoAE) improved to 27% from 17.3% in 2006 whereas its Return on Average Assets (RoAA) increased to 3.7% in 2007 from 3.3% in 2006.
• At the end of 2007, the bank reported Tier 1 capital ratio of 10.93% and total capital ratio of 11.85% as against 14.69% and 15.27% respectively for the year 2006. These ratios are likely to improve with the planned further raising of capital through rights issue in 2008 and 2009.
• During Q1-2008, interest income grew by 35.4% y-o-y to QR615.2mn while interest expense registered a steep y-o-y growth of 54.8% to QR392.8mn. With this the net interest income of the bank registered a y-o-y growth of 10.9% to QR222.4mn. The bank reported a y-o-y growth of 63.8% in its net profit to QR436.4mn as compared to QR266.4mn reported in Q1-2007. On the balance sheet side, on a y-t-d basis, total assets registered a growth of 7.4% to QR48.8bn, loans & advances grew by 9.6% to QR27.4bn and customer deposits increased by 10.2% to QR28.4bn.
Outlook and Valuation • Commercial Bank of Qatar is the second largest bank in Qatar and having sound assets
portfolio and going forward we believe that the bank will be able to maintain its market share in its domestic market. The bank’s strategy of acquiring stakes in UAB and NBO will prove to be crucial for its further expansion plans. Over a period of time, Commercial Bank of Qatar will continue to execute its strategy of complementing its profitable organic growth with strategic acquisitions to diversify its business and presence in GCC.
• At the same time the bank’s capital expansion through the rights issues will allow the bank to leverage its balance sheet. This will help the bank to finance its regional expansion plan and ensure that it is adequately capitalized at all times to meet the diverse needs of its rapidly expanding business at home and overseas.
• At the current market price of QR161.2 (April 27, 2008), the bank trades at 14.5x and 11.3x of its earnings and 4.7x and 4.2x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Commercial Bank of Qatar works out to QR184.8 based on the DDM and peer group valuation methods, which is 14.7% above the market price on April 27, 2008. Hence we reiterate our earlier rating on the stock and recommend a “BUY”.
Global Research - Qatar Global Investment House
36 Qatar Banking Sector April 2008
BALANCE SHEET Commercial Bank of Qatar
Amount in Qatari Riyal ‘000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Assets
Cash & balances with Qatar Central Bank 648,290 1,017,893 2,248,858 1,289,300 1,159,962 1,095,749 1,278,871
Due from Banks and FIs 5,352,434 5,493,323 9,019,483 14,431,173 16,307,225 19,242,526 22,321,330
Loans and advances (Gross) 10,967,262 17,500,396 25,223,762 34,304,316 43,909,525 52,691,430 61,648,973
Less : provision (83,124) (140,648) (202,275) (361,174) (544,197) (754,451) (999,539)
Investment Securities 3,380,992 4,321,380 4,664,672 5,364,373 6,008,098 6,729,069 7,536,558
Investment in associate 1,251,304 1,285,158 3,329,900 3,564,258 3,564,258 3,564,258 3,564,258
Property, furniture & equipment 475,954 754,056 969,728 1,192,765 1,431,319 1,688,956 1,959,189
less: accumulated depreciation (158,006) (195,843) (248,335) (318,112) (401,844) (500,648) (615,260)
net fixed assets 317,948 558,213 721,393 874,654 1,029,475 1,188,308 1,343,928
Other assets 346,437 322,220 391,486 477,613 582,688 699,225 839,070
Total Assets 22,181,543 30,357,935 45,397,279 59,944,512 72,017,034 84,456,115 97,533,449
Liabilities
Due to banks and FIs 1,704,233 2,694,520 4,907,743 5,791,137 6,717,719 7,725,376 8,729,675
Deposits from customers 13,056,421 16,701,103 24,656,692 33,286,534 40,609,572 47,919,295 55,586,382
Borrowing under repurchase agreement - - - 1,104,046 1,214,450 1,335,895 1,469,485
Other borrowed funds 1,092,000 4,135,688 7,623,105 8,766,571 9,643,228 10,607,551 11,668,306
Other liabilities 470,033 687,439 842,275 1,027,576 1,233,091 1,479,709 1,664,672
Proposed dividend 373,754 981,106 560,632 1,445,852 1,894,084 2,384,298 2,911,855
Total Liabilities 16,696,441 25,199,856 38,590,447 51,421,715 61,312,143 71,452,124 82,030,374
Unrestricted investment deposits owners’ equity 181,757 507,779 1,139,647 2,279,294 3,760,835 5,265,169 6,844,720
Owner’s Equity
Legal reserve 2,915,499 2,915,499 2,915,602 2,915,602 2,915,602 2,915,602 2,915,602
General reserve 26,500 26,500 26,500 26,500 26,500 26,500 26,500
Fair value reserve 500,559 1,624 188,426 188,426 188,426 188,426 188,426
Risk reserves 87,200 176,200 346,300 346,300 346,300 346,300 346,300
Other reserves 45,010 84,549 171,903 171,903 171,903 171,903 171,903
Retained earnings 326,998 44,349 196,401 772,720 1,473,271 2,268,038 3,187,571
Proposed issue of bonus shares 467,193 - 420,474 - - - -
Total Shareholder’s Equity 5,303,345 4,650,300 5,667,185 6