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Global Research
April 2008
Banking
Qatar Banking SectorQat
ar
Growth, Value, Quality !
Global Investment House KSCCBanking ResearchSouk Al-Safat Bldg., 2nd FloorP.O. Box 28807 Safat13149 KuwaitTel: (965) 240 0551Fax: (965) 240 0661Email: [email protected]://www.globalinv.net
Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB
Omar M. El-Quqa, CFAExecutive Vice [email protected] No:(965) 2400551 Ext.104
Faisal Hasan, CFAHead of [email protected] No:(965) 2400551 Ext.304
Chandresh BhattAssistant Vice [email protected] No:(965) 2400551 Ext. 270
Bikash RoutSenior Financial [email protected] No:(965) 2400551 Ext. 254
Table of Contents
Investment Summary 1
Qatar Economy 4
Qatar Banking Sector 6
Peer Group Comparison 12
Qatar Banking Sector Outlook 18
Valuation and Recommendation 19
Players Profile 22
Qatar National Bank 22
Commercial Bank of Qatar 31
Doha Bank 40
Qatar Islamic Bank 50
Masraf Al-Rayan 59
Al Khalij Commercial Bank 67
Ahli Bank 74
Qatar International Islamic Bank 82
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 fiveyears. 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 internationalfinancial institutions and multi-national corporations to set up their offices and to forgecloser 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 first9M 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 encouragedmany 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 balancesheet 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 banksunder 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 twosectors, 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 continuethis diversification strategy. We believe that the banking sector would be one of the majorbeneficiaries of this scale of projects and regional diversification program.
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April 2008 Qatar Banking Sector 3
Table 01: “Global” Valuation Matrix
Price
(QR)
Target
(QR) Reco.
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.
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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 fiveyears. 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 upwardpressure 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 continuethis diversification strategy. If we talk of only construction sector, it has multi-billion-dollardevelopment 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 touristinflow. 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 institutionsand multi-national corporations to set up their offices and to forge closer partnerships withinternational business houses. All companies setting up their offices at the centre are entitledto 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 agencyStandard 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. Withthis 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 rolefinancial services can play in driving economic diversification, the Government of Qatarin 2005 created the Financial Centre (QFC). The QFC has attracted world-class financialinstitutions 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 institutionsactive 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 thestaff 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 governmentanticipates significantbenefitsfromthismove, includinggreater transparencyandpredictabilitygiven a simplified institutional landscape, greater efficiency through the pooling of scarceregulatory staff, and the ability to take a comprehensive view of financial institutions that areactive 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 CompositionDuring 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 totalliabilities 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
165.0%
145.0%
125.0%
105.0%
85.0%
65.0%
45.0%
25.0%2007
52.6% 55.3%58.3%
71.9%
42.8%45.1%
49.6%
69.1%
Loans to GDP Ratio Deposits to GDP Ratio
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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 ofQR3.1bn 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 toQR252.1bn 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 FacilitiesDuring 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, totalcredit 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-2007CAGR (%)
(2002-06)
Public Sector 16,814.8 19,931.5 18,469.5 18,650.2 21,536.8 37,233.8 6.4%
General Trade 4,726.5 5,531.5 6,116.4 8,183.6 11,553.2 16,281.6 25.0%
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 oflending 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. Thecredit 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 increasedfocus 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-takeat 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.
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10 Qatar Banking Sector April 2008
Interest Rate TrendQCB 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 encouragedmany 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 GCCAll 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 inUAB 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 SizeIn 2007, all the listed banks in Qatar have reported a significant growth in their balance sheetsize. 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
National
Bank
Commercial
Bank of
Qatar
Doha
Bank
Qatar
Islamic
Bank
Qatar
International
Islamic Bank
Ahli
Bank
Masraf Al
Rayan
Al Khalij
Commercial
Bank
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 Bankof Qatar 18.0%
Qatar Islamic Bank 8.5%
Qatar InternationalIslamic Bank 3.9%
Ahli Bank 6.2%Al-Khalij CommercialBank 2.0%
Masraf Al-Ryan 4.2%
Doha Bank 11.9%
Qatar NationalBank 45.3%
140120100
80604020
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75%
50%
25%
0%
2006 2007 Growth Rate
Qat
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Ban
k
Com
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Ban
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Doh
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ank
Qat
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Ahl
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Mas
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Al-K
halij
Com
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Ban
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59.6%
49.5%
38.7%43.3%
18.5%
63.0%
(in Q
R b
n)
Global Research - Qatar Global Investment House
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 growthof 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 Bankof Qatar 17.1%
Qatar IslamicBank 9.0%
Qatar InternationalIslamic Bank 3.4%
Ahli Bank 6.9%
Al-Khalij CommercialBank 0.5%
Masraf Al-Ryan 4.7%
Doha Bank 13.4%
Qatar NationalBank 45.0%
Qat
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Mas
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Al-K
halij
Com
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Ban
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70605040302010
0
75%60%45%30%15%0%
2006 2007 Growth Rate
42.3%44.1%
38.8%57.3%
59.1%
19.3%
(in Q
R b
n)
Commercial Bankof Qatar 15.4%
Qatar IslamicBank 7.6%
Qatar InternationalIslamic Bank 4.5%
Masraf Al-Ryan 3.3%Ahli Bank of Qatar 7.2%
Doha Bank12.4%
Qatar NationalBank 49.5%
Qat
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Al-K
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907560453015
0
75%
60%
45%
30%
15%
0%
2006 2007 Growth Rate
42.3%
49.9%
32.0%
38.9%
68.4%
(in Q
R b
n)
Global Research - Qatar Global Investment House
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 qualityof 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
(in Q
R M
n)
Qat
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Com
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Ban
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Ahl
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Sect
or
0.45
0.7% 0.210.8%
0.63
3.2%2.1%
0.290.11
2.4%
0.15
1.5%
1.2%
1.83
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 15
Chart 10: Total Capital Adequacy Ratio
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 QatarInternational Islamic Bank, Ahli Bank and Doha Bank core earnings have driven the growth in total operating revenue of the bank.
Contraction in Margin and SpreadsIn 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 inits 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
Qatar National Bank 3.1% 2.4% 2.9% 2.3%
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, fromQR5.2bn 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. FollowingCommercial Bank, Ahli Bank recorded the second highest increase in net profit, increasingby 49.6%, followed by Qatar National Bank with a 25.4% increase, Qatar Islamic Bank
Al-Khalij Commercial BankCommercial Bank
Ahli BankDoha Bank
Qatar National BankQatar Islamic Bank
Qatar International Islamic BankMasraf Al-Rayan
0% 20% 40% 60% 80% 100% 120% 140%
Global Research - Qatar Global Investment House
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 EquityIn 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
RoAA RoAE
2006 2007 2006 2007
Qatar National Bank 3.3% 2.7% 25.6% 24.3%
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
(in Q
R m
n)
2006 2007
CommercialBank ofQatar
AhliBank
QatarNational
Bank
QatarIslamicBank
QatarIntl.
IslamicBank
MasrafAl-Rayan
Al-KhalijComm.Bank
862.7
1,390.7
302.7202.2
1,997.9
2,506.1
1,255.41,003.0
744.0926.5
480.0399.0
1,192.5
74.3
DohaBank
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 17
Q1-2008 PerformanceIn 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 banksunder 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 Q1-2008Y-T-D
Change Q1-2007 Q1-2008 Y-o-Y
Change
Qatar National Bank 114.4 130.0 13.7% 652.8 917.3 40.5%
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
Global Research - Qatar Global Investment House
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 sectorwould 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 sixyears to continue this diversification strategy. The banking sector would be one of the majorbeneficiaries 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 twosectors, 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.
Global Research - Qatar Global Investment House
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 - DDMThe 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 historyis not available to calculate their Beta.
4. Cost of equity for Qatar Islamic Bank woks out to 10.88% and in case of remaining fivebanks it stood at 10.75%.
5. Terminal growth rate of 4%.
Table 09: Value as per DDM approach
QR DDM Value
Qatar National Bank 279.0
Commercial Bank of Qatar 204.7
Doha Bank 86.1
Qatar Islamic Bank 147.3
Masraf Al Rayan Bank 25.9
Al Khaliji Commercial Bank 9.4Source: Global Research.
Peer Group ValuationThe peer group valuation is done by comparing the price to book value (P/BV) multiples enjoyed by the banks under our coverage.
Global Research - Qatar Global Investment House
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 3.1Source: 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
Qatar National Bank 219.1
Commercial Bank of Qatar 105.3
Doha Bank 84.4
Qatar Islamic Bank 97.8
Masraf Al Rayan Bank 21.4
Al Khaliji Commercial Bank 19.9Source: 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
QR DDM Value P/BV Value Weighted Price
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 11.5Source: Global Research.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 21
Table 13: “Global” Valuation Matrix
Price
(QR)
Target
(QR)
Reco. Disc./
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 BankTickers: QNBK.QA (Reuters)QNBK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR230 (April 27, 2008)
Key Data
EPS* (QR) 14.8 Avg. daily vol. ('000) 88.1
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) 267Source: 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 mobilebranches), in addition to 11 Islamic branches and offices, and 130 Automated TellerMachines (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 begranted 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. Apartfrom Iran, two additional representative offices were opened in Libya and Singapore fora 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 ofthe 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 atQR2.0bn in 2006. Funds with banks & FIs increased significantly during the year by morethan 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.
Global Research - Qatar Global Investment House
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%
0%2004 2005 2006 2007
GovernmentCommercialReal Estate
Government agenciesServicesPersonal
IndustryContractingOthers
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-2004 2005 2006 2007
Gross Loans NPLs to Gross Loans
2.45%
2.15%
1.18%
0.68%
(in Q
R M
n)
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Global Research - Qatar Global Investment House
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% growthachieved 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
40.5%
(in Q
R M
n)
1,750
1,500
1,250
750
500
250
-
250.0%
200.0%
150.0%
100.0%
50.0%
0.00%
283
8901,015
1,537214.0%
14.0%
51.5%
Non-Interest Income Growth Rate
2004 2005 2006 2007
28.1%
35.0%
32.0%
29.0%
26.0%
23.0%
20.0%
31.6%
27.0%
24.2%
Global Research - Qatar Global Investment House
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 QR652.8mnreported 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 significantgrowth 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 regionalexpansion 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
Cash & balances with banks 2,406,327 2,481,218 10,948,569 7,094,458 5,310,110 4,892,519 4,161,173
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
Paid-up equity capital 1,038,208 1,297,760 1,824,975 2,408,967 2,408,967 2,408,967 2,408,967
Statutory reserve 1,038,208 1,297,760 3,852,723 4,420,493 4,420,493 4,420,493 4,420,493
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 andinvesting 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 - - - - -
Less: Other (Provisions) / Recoveries (2,407) 8,360 (93) - - - -
Less: Net impairment losses of financialinvestments
9,071 (66,449) (61,957) (66,157) (74,140) (83,543) (89,511)
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: Provision for Pension Fund - - - - - - -
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:
Retained Earnings Broght Forward 626,587 840,627 1,130,306 1,453,562 3,206,620 4,642,677 6,003,691
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
Operating Activities 1,196,343 1,584,463 2,122,457 3,805,490 4,858,051 5,987,888 7,150,545
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) - - - - -
Profit on sale of financial investments (340,940) (334,503) (374,470) - - - -
Goodwill impairment 40,378 - 1,860 - - - -
Amortisation of premium or discount on investments
3,205 3,389 4,242 - - - -
(Profit)/loss on sales of fixed assets (12,443) (12,812) (170) - - - -
Taxes Paid (7,412) (13,929) (10,585) (28,758) (37,259) (51,901) (62,168)
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 investments (1,007,361) (5,573,810) (6,583,801) (3,392,678) (3,381,369) (3,616,594) (4,339,913)
Sale / Redemption of investments 2,334,829 3,243,860 5,745,028 - - - -
Sale / (Purchase) of Associates (48,710) - (2,554,797) (114,585) - - -
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
Dividend paid to shareholders (617,384) (771,976) (779,888) (912,487) (1,961,305) (3,003,114) (4,171,886)
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
- Shares in Issue 103,820,772 129,776,000 182,497,500 240,896,700 240,896,700 240,896,700 240,896,700
- 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 QatarTickers: COMB.QA (Reuters)CBQK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR161.2 (April 27, 2008)
Key Data
EPS* (QR) 11.1 Avg. daily vol. ('000) 216.0
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 Officeand 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 Islamicbranches, 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 ended31 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 amargin 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$800mn) in the form of a term loan facility for general funding purposes, including the financing of a strategicinvestment in United Arab Bank, UAE. This is an unsecured bullet repayment loan facility with a tenor of 6 months and an option to extend up to 1 year and has a floating rate ofinterest linked to US$ 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 ofQatar, 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 - anda 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 QR385mnin 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. Itsexposure 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%
0%2004 2005 2006 2007
GovernmentCommercialReal Estate
Government agenciesServicesPersonal
IndustryContractingOthers
30.0
25.0
20.0
15.0
10.0
5.0
0.02004 2005 2006 2007
Gross Loans NPLs to Gross Loans
1.8%
(in Q
R b
n)
2.0%
1.5%
1.0%
0.5%
0.0%
1.1%
0.8% 0.8%
25.2
17.5
11.0
6.8
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 profitsfrom 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
2004 2005 2006 2007Non-Intrest Income Growth Rate
(in Q
R M
n)
180.0%
150.0%
120.0%
90.0%
60.0%
30.0%
0.0%
212
533629
1014
129.6%
151.5%
18.0%
61.0%
2004 2005 2006 2007Cost to Total Income
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 QR266.4mnreported 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 organicgrowth 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 planand 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 SHEETCommercial 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
Paid-up equity capital 934,386 1,401,579 1,401,579 1,822,053 1,822,053 1,822,053 1,822,053
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 6,243,504 6,944,055 7,738,822 8,658,355
Total Liabilities & Shareholders’ Equity 22,181,543 30,357,935 45,397,279 59,944,512 72,017,034 84,456,115 97,533,449
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 37
OPERATING STATEMENT
Commercial Bank of Qatar
Amount in Qatari Riyal '000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
OPERATING STATEMENT 152,844 203,248 200,768 222,274 212,348 216,184 344,696
Interest Income 804,283 1,405,690 2,244,106 2,852,730 3,404,284 4,017,983 4,798,792
Interest Expense (332,272) (730,431) (1,368,079) (1,754,429) (2,093,634) (2,491,149) (2,927,263)
Net interest income 472,011 675,259 876,027 1,098,301 1,310,649 1,526,833 1,871,529
Add: Investment income from Islamic exposures
8,731 49,979 83,664 153,852 253,856 381,725 496,242
Add : Fees and commission 214,695 386,073 666,217 1,032,636 1,394,059 1,742,574 2,091,089
Add: Dividend on shares and investmentfund units
10,550 16,855 38,943 39,009 48,279 54,073 65,608
Add: Profits from investments 249,685 151,984 205,772 273,583 324,437 383,557 452,193
Add : Foreign Exchange Gain 36,384 55,517 83,754 103,017 126,711 155,855 191,702
Add: Other Operating Income 21,980 19,030 18,860 30,176 39,531 51,785 67,838
Total Non-Interest Income 533,294 629,459 1,013,546 1,478,422 1,933,018 2,387,844 2,868,431
Total Income 1,014,036 1,354,697 1,973,237 2,730,576 3,497,523 4,296,402 5,236,202
Less: Provision for Impairment of Loans & Advances
7,305 (5,538) (48,034) (58,317) (65,864) (79,037) (92,473)
Less: Provision for Impairment of Investments (19,638) (97,797) (85,904) (100,582) (117,158) (131,217) (152,615)
Less: Impairment losses on other assets (11,034) - - - -
Operating Income (net of provisions) 1,001,703 1,251,362 1,828,265 2,571,676 3,314,501 4,086,148 4,991,113
Less : Staff Expenses (150,450) (258,118) (286,672) (334,318) (397,740) (463,778) (561,500)
Less: General & Administration (109,279) (150,877) (201,253) (262,311) (334,765) (418,830) (521,571)
Less: Depreciation (34,062) (37,832) (52,492) (69,777) (83,732) (98,804) (114,613)
Net Profit from operations 707,912 804,535 1,287,848 1,905,271 2,498,264 3,104,736 3,793,429
Share of results of associate net of tax (estimated)
45,002 79,094 133,492 178,213 196,034 213,855 222,766
Less: Unrestricted investment deposit owners' share of profit
(3,396) (20,943) (30,625) (61,313) (99,662) (139,527) (184,807)
Net Profit 749,518 862,686 1,390,715 2,022,170 2,594,636 3,179,065 3,831,388
P&L Appropriation Account: -
Retained Earnings Broght Forward 46,336 326,998 44,349 196,401 772,720 1,473,271 2,268,038
Dividend received from associates - 39,548 46,138 - - - -
Net Profit for the year 749,518 862,686 1,390,715 2,022,170 2,594,636 3,179,065 3,831,388
Proposed Dividend (373,754) (981,106) (560,632) (1,445,852) (1,894,084) (2,384,298) (2,911,855)
Director Fees (9,000) (28,683) - - - - -
Proposed Issue of Bonus Shares - - (420,474) - - - -
Trfr to Statutory Reserve - - (103) - - - -
Trfr to Risk Reserve (35,100) (89,000) (170,100) - - - -
Cont. for Social Responsibilities (6,000) (7,000) - - - - -
Share of profit from associates (45,002) (79,094) (133,492)
Cl Balance of Retained Earnings 326,998 44,349 196,401 772,720 1,473,271 2,268,038 3,187,571
Global Research - Qatar Global Investment House
38 Qatar Banking Sector April 2008
CASH FLOW STATEMENT
Commercial Bank of Qatar
Amount in Qatari Riyal '000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Operating
Operating Activities 494,038 766,162 1,207,494 1,977,264 2,536,953 3,104,566 3,738,895
Net Profit for the Year 749,518 862,686 1,390,715 2,022,170 2,594,636 3,179,065 3,831,388
Provision for impairment of loans and advances
- - - 58,317 65,864 79,037 92,473
Depreciation 34,062 41,083 59,105 69,777 83,732 98,804 114,613
Provision / (release) of provision for impairment of investments
19,822 97,797 85,904 100,582 117,158 131,217 152,615
Impairment loss on other assets - - 11,034 - - - -
Profit from sale of propertry, furniture andequipment
(14,677) (4,326) - - - - -
Profit on sale of investments and securities (249,685) (151,984) (205,772) (273,583) (324,437) (383,557) (452,193)
Share of results of associate net of tax (45,002) (79,094) (133,492) - - - -
Net Increase/Decrease in Operating Activities 230,941 (1,458,993) (300,346) (2,636,142) (1,539,256) (1,643,965) (1,606,702)
Inc./(Dec.) in due to banks 951,637 990,287 2,213,223 883,394 926,582 1,007,658 1,004,299
Dec/(Inc.) in due from banks (1,461,315) (146,714) (3,524,857) (5,411,690) (1,876,052) (2,935,301) (3,078,804)
Balances with banks & FIs (509,678) 843,573 (1,311,634) - - - -
Inc. in customer deposits 4,930,645 3,974,100 8,587,457 9,769,489 8,804,579 8,814,057 9,246,638
Borrowing under repurchase agreement - - - 1,104,046 110,405 121,445 133,590
Dec./(Inc.) in loans and advances (4,168,915) (6,475,610) (7,661,739) (9,080,554) (9,605,209) (8,781,905) (8,957,543)
(Inc.) / Dec. in other assets (198,802) 20,617 (69,266) (86,127) (105,075) (116,538) (139,845)
Inc./(Dec.) in other liabilities 177,691 178,327 154,836 185,301 205,515 246,618 184,964
Total Operating 724,979 (692,831) 907,148 (658,878) 997,698 1,460,600 2,132,193
Investing
Purchase of Investments (2,215,363) (2,473,227) (1,844,980) (699,701) (643,725) (720,972) (807,488)
Investment in associate (1,203,413) - (1,899,882) (234,358) - - -
Dividend received from associate - 39,548 46,138 - - - -
Proceeds from sale / maturity of investments / dividend from associate
816,384 1,099,571 1,738,862 273,583 324,437 383,557 452,193
Acquisition of plant & equipment incl. subsidiary assets
(93,466) (278,102) (216,073) (223,037) (238,553) (257,637) (270,233)
Proceeds from disposals of assets 79,769 4,336 - - - - -
Total Investing (2,616,089) (1,607,874) (2,175,935) (883,513) (557,841) (595,052) (625,528)
Financing
Proceeds from borrowed funds 109,200 3,044,037 5,264,404 1,143,466 876,657 964,323 1,060,755
Repayment of borrowed funds - - (1,783,600) - - - -
Proceeds from rights issue 2,242,527 - - - - - -
Dividend paid to shareholders (213,574) (373,754) (981,106) (560,632) (1,445,852) (1,894,084) (2,384,298)
Total Financing 2,138,153 2,670,283 2,499,698 582,834 (569,195) (929,762) (1,323,543)
Net Change in Cash 247,043 369,578 1,230,911 (959,558) (129,338) (64,213) 183,122
Exchange rate differences 30 25 54 - - - -
Net Cash at beginning 401,217 648,290 1,017,893 2,248,858 1,289,300 1,159,962 1,095,749
Net Cash at end 648,290 1,017,893 2,248,858 1,289,300 1,159,962 1,095,749 1,278,871
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 39
Ratios
Commercial Bank of Qatar2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Profitability
- Return on Average Assets 4.3% 3.3% 3.7% 3.8% 3.9% 4.1% 4.2%
- Return on Average Equity 19.4% 17.3% 27.0% 34.0% 39.3% 43.3% 46.7%
- Net interest income/ Op. Income(net of provisions)
48% 54% 45% 40% 38% 35% 36%
- Non-interest income/ total Op. Income 51% 42% 51% 54% 55% 55% 54%
Margins
- Interest Expense to Interest Income 41.3% 51.6% 60.1% 60.4% 60.0% 59.8% 58.8%
- Interest Income to Interest Earning Assets 5.4% 6.6% 7.3% 6.7% 6.3% 6.2% 6.4%
- Interest Expense to Interest Bearing Liabilities
2.6% 3.8% 4.6% 4.3% 4.2% 4.3% 4.4%
- Net Spread 2.8% 2.8% 2.7% 2.4% 2.1% 2.0% 2.0%
- Net Interest Margin 3.2% 3.2% 2.9% 2.6% 2.5% 2.5% 2.6%
Efficiency
- Cost to Total Income 29.0% 33.0% 27.4% 24.4% 23.3% 22.8% 22.9%
- Cost to Op Income 29% 36% 30% 26% 25% 24% 24%
- Staff Expense to Total Op Income 15% 21% 16% 13% 12% 11% 11%
- Cost to Average Total Assets 1.7% 1.7% 1.4% 1.3% 1.2% 1.3% 1.3%
Liquidity
- Loans to Interest Earning Assets 60% 68% 67% 65% 68% 69% 69%
- Loans to Customer Deposits 82% 101% 97% 95% 98% 98% 97%
- Customer Deposits to Equity 246% 359% 435% 533% 585% 619% 642%
- Due from Banks to Due to Banks 314% 204% 184% 249% 243% 249% 256%
Credit Quality
- Non Performing Loans (QR'000) 126,000 142,000 209,000 343,043 483,005 605,951 739,788
- Loan Loss Reserve (QR'000) 83,124 140,648 202,275 361,174 544,197 754,451 999,539
- NPL's to Gross Loans 1.1% 0.8% 0.8% 1.0% 1.1% 1.2% 1.2%
- NPL's to (Equity+Loan loss reserve) 2.4% 3.1% 3.8% 5.8% 7.5% 8.7% 9.7%
- Loan Loss Reserve to Gross Loans 0.8% 0.8% 0.8% 1.1% 1.2% 1.4% 1.6%
- NPL Coverage 66.0% 99.0% 96.8% 105.3% 112.7% 124.5% 135.1%
Capital Adequacy
- Equity to Total Assets 24% 15% 12% 10% 10% 9% 9%
- Equity to (Total Assets + Cont. Liabilities) 17% 10% 8% 7% 6% 6% 6%
- Equity to Gross Loans 48% 27% 22% 18% 16% 15% 14%
Constitution of Total Income
- Interest Income to Total Op Income 48.7% 57.5% 49.9% 46.4% 45.2% 44.8% 45.6%
- Fees & Comm. to Total Op. Income 21.4% 30.9% 36.4% 40.2% 42.1% 42.6% 41.9%
- Investment Income to Total Op Income 24.0% 5.7% 8.7% 8.2% 7.7% 7.5% 7.3%
- FX Income to Total Op. Income 3.6% 4.4% 4.6% 4.0% 3.8% 3.8% 3.8%
- Other Income to Total Op. Income 2.2% 1.5% 1.0% 1.2% 1.2% 1.3% 1.4%
Operating Performance
- Change in Interest Income 46% 47% 27% 31% 26% 22% 24%
- Change in Fees and Commission 77% 80% 73% 55% 35% 25% 20%
- Change in Investment Income 335% -35% 45% 28% 19% 17% 18%
- Change in Fx Income 39% 53% 51% 23% 23% 23% 23%
- Change in Other Operating Income 365% -13% -1% 60% 31% 31% 31%
RATIO'S USED FOR VALUATION
- Shares in Issue 93,438,600 140,157,900 140,157,900 182,205,300 182,205,300 182,205,300 182,205,300
- EPS (QR) 8.02 6.16 9.92 11.1 14.24 17.45 21.03
- Book Value Per Share (QR) 56.8 33.2 40.4 34.3 38.1 42.5 47.5
- Market Price Year End (QR) 117.79 75.5 143.7 161.2 161.2 161.2 161.2
- P/E 14.7 12.3 14.5 14.5 11.3 9.2 7.7
- P/BV 2.1 2.3 3.6 4.7 4.2 3.8 3.4
* Market price for 2008 and subsequent years are as per closing price on DSM on April 27, 2008.
Global Research - Qatar Global Investment House
40 Qatar Banking Sector April 2008
Doha Bank
Tickers: DOBA.QA (Reuters) DHBK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR75.7 (April 27, 2008)
Key Data
EPS* (QR) 6.6 Avg. daily vol. (‘000) 281.8
BVPS* (QR) 27.5 52 week Hi / Lo 86.08 / 60.08
P/E (x) 11.5 Market Cap (QR mn) 13,039.2
P/BV (x) 2.8 Target Price (QR) 85.8Source: Global Research
* Projected (2008)
Background• Doha Bank was incorporated in 1979 and is engaged in commercial and Islamic
banking activities and operates through its network of head office in Doha and 32 localbranches, overseas branches in the United States of America and United Arab Emirates and representative offices in Singapore, Turkey, China and Japan. In addition, the Bankowns 100% of the issued share capital of Doha Bank Assurance Company W.L.L, an insurance company registered under the Qatar Financial Centre and Dbank Tech L.L.C, an information technology company with operations in United Arab Emirates.
• In Qatar the bank has a network of 28 full-fledged conventional branches, 4 Islamic branches,8 pay offices and 10 State of art electronic branches. Doha Bank has also installed 10 newATM machines during 2007, taking the total numbers of ATM installations above 100.
Recent Developments • In January 2008, Doha Bank has signed a Memorandum of Understanding (MoU) with
Cooperative and Credit Agricultural Bank (CAC Bank) of Yemen for three pronged investments. This includes acquiring a strategic stake in the capital of CAC Bank, taking equal participation in the capital of a newly proposed Islamic Bank in the Republic of Yemen and to form a joint venture for promoting insurance and related products in the Republic of Yemen. These investment proposals are subject to necessary regulatory approvals.
• In January 2008, Doha Bank has launched its fully owned insurance subsidiary “Doha Bank Assurance Company LLC” (DBAC), first of its kind in Middle Eastern Region,where a Bank will be running Insurance Company. Doha Bank Assurance Company has been licensed to operate under Qatar Financial Centre Regulatory Authority, authorized to underwrite all classes of General Insurance business.
Recommendation
BUY
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 41
• With regard to its overseas branch expansion plans, during 2008 it will open a branch in Kuwait. The bank has already got the approval from respective authorities. In addition, it opened a representative office in Bucharest, Romania, which will take the tally of itsdirect presence to eight countries.
• In 2007, Doha Bank has entered Indian brokerage sector with a strategic investment in Investnet; an India based brokerage company. The bank has taken equity stake in Select Securities Ltd., the holding company for Select group of companies, which owns the brokerage network under the brand name Investnet. The company has been renamed to Doha Brokerage & Financial Services Limited (DBFS) and Doha Bank owns 49% equity stake in the company.
• In 2007, Doha Bank successfully completed its borrowing of US$350mn syndicated loan in August 2007. The facility was oversubscribed by 46.14% against the launch amount of US$350mn. The five year facility has been provided to finance Doha Bank'sgeneral corporate purposes with an interest margin of 26 bps above LIBOR and with bullet repayment. This is the second international syndicated loan for Doha Bank. It may be recalled that Doha Bank had successfully completed its debut subordinated bond (EMTN) issue of US$340mn in 2006, which was the first international subordinated bondby any bank in the State of Qatar.
• Standard & Poor's Rating Services have assigned it's "A-/A-2 " long and short-term counterparty credit ratings to Doha Bank. S & P has quoted the bank’s outlook as 'stable'.
• The bank issed 20% bonus shares for the year 2007, therefore, with the proposed bonus issue the bank’s equity capital will increase to QR1.5bn. The bank has also proposed to increase its capital during 2008 and 2009 by way of rights issue in two phases, 15% of the capital will be raised in phase I and another 15% will be raised in Phase II. The firstphase of the rights issue opened in April 2008 and the offer price is set at QR50 per share (including premium of QR40 per share). The share offer price and issuance time of phase II will be decided at a later date.
Analysis of 2007 and Q1-2008 Financial Results• Doha Bank outperformed our earnings estimates for 2007. The reported profit for the
year 2007 stood at QR926.5mn against our estimate of QR852.3mn, higher by 8.6% compared to our estimate. The deviation in our earnings forecast was mainly because of the strong growth achieved by the bank in non-core banking activities such as gains on financial instruments and gain on foreign exchange activities. Net interest income fromconventional banking activities for 2007 reached QR683.8mn as against our estimate of QR691.8mn, lower by 1.2% as compared to our estimates.
• The bank’s balance sheet size was lower by 2.5% than our estimate of QR30.9bn for 2007. Net loan portfolio was lower by 4.2% as compared to our estimate to reach at QR19.2bn. The aggregate of customer deposits and absolute investment depositors' accounts were higher by 4.2% as compared to our estimate to reach at QR20bn for the year 2007.
Global Research - Qatar Global Investment House
42 Qatar Banking Sector April 2008
• The total assets of the bank grew by 38.7% in 2007 to QR30.1bn. Among the major asset components, gross loans & advances grew by 38.8% to QR19.7bn. Out of the total loan portfolio QR2.2bn accounted by Islamic financing activities which were at QR1.1bn in2006. Funds with banks & FIs increased by 17.1% to QR5.2bn. Net loans & advances accounted for 64% of the total assets.
• Among the components of liabilities, the share of customer deposits (including unrestricted investment accounts) in total liabilities declined marginally in 2007 to 66.6% from 70% in the preceding year and it registered a y-o-y growth of 32% to QR20bn. Unrestricted investment declined during the year by 38.4% to stood at QR356.4mn. The amount due to banks & other FIs increased by 124% to QR4.4bn. The bank also has borrowings to the tune of QR1.2bn which represents subordinated notes raised by the bank in 2006. The notes have maturity of 10 years from the date of issue. The contribution of shareholders’ equity in total liabilities declined to 10.4% from 12.5% to reach at QR3.1bn.
• The bank’s loan portfolio is highly concentrated to three sectors, namely Personal, Commercial and Real Estate. Its exposure to the government sector has been declining since last few years and its contribution to the total loan portfolio declined to 0.3% in 2007 from 17.3% in 2004. Personal loans segment has highest contribution to the total loan portfolio, its share was at 46.1% in 2007. The y-o-y growth in the segment was 31% to QR9.2bn. The bank needs to diversify its exposure as the segment alone accounting for almost 50% of its loan portfolio. The bank’s exposure to Commercial sector accounted for 18.4% of the total loans portfolio and it grew by 121.2% to QR3.7bn. Its exposure to the Real Estate segment stood at QR2.9bn witnessed a growth of 88.3% and accounted for 14.7% of the total loan portfolio.
Chart 1: Sectoral Distribution of Doha Bank’s Loan Portfolio
Source: Doha 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. Its NPLs declined by 2.7% to QR626mn in 2007 from QR609.5mn in 2006. NPLs as a percentage of gross loans declined to 3.2% in 2007 from 4.3% in 2006. The bank has sufficient coverage to its NPLs at 89.3% in2007, which was at 96.4% in 2006.
2004 2005 2006 2007
100%
80%
60%
40%
20%
0%
GovernmentCommercialReal Estate
Government agenciesServicesPersonal
IndustryContractingOthers
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 43
Chart 2: Quality of Loan Portfolio
Source: Doha Bank Annual Reports and Global Research
• During 2007, the total interest income of the bank from conventional banking activities grew by 57.7% to QR1,677mn. Among the major components of gross interest income, interest from loans & advances grew by 57.9% to QR1,267.8mn and interest on funds due from banks & other FIs increased by 74.1% to QR277.3mn, while interest income from bonds increased by 27.9% to QR119.4mn. The bank’s total interest cost grew by 83.9% to QR993.2mn and among the major constituents, interest expense on customer deposits grew by 53.3% to QR734.8mn while that on borrowings from banks witnessed a growth of 120% to reach at QR123.3mn. The net interest income from conventional banking activities grew by 30.6% to reach at QR683.8mn.
• The bank’s non-interest income grew by 22.8% in 2007 to reach at QR632.3mn as compared to QR515.1mn in 2006. Among the major components of non-interest revenue, the bank registered a y-o-y growth of 26.1% in fees & commission income and gain from investments declined by 3.1%.
Chart 3: Growth in Non-Interest Income
Source: Doha Bank Annual Reports and Global Research
• In 2007, the bank’s net spread and net interest margin improved to 3.2% and 3.5% from 2.7% and 3.1% respectively.
25.0
20.0
15.0
10.0
5.0
-
2004 2005 2006 2007Gross Loans NPLs to Gross Loans
6.2
14.2%
(in Q
R b
n)
15.0%
12.0%
9.0%
6.0%
3.0%
0.0%
9.1
14.2
19.7
8.9%
4.3%3.2%
700
600
500
400
300
200
100
02004 2005 2006 2007
Non-Interest Income Growth Rate
(in Q
R M
n)
160.0%
130.0%
100.0%
70.0%
40.0%
10.0%
-20.0%
-50.0%
56.1%
146.0%
-12.5%
22.8%
Global Research - Qatar Global Investment House
44 Qatar Banking Sector April 2008
• 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: Doha Bank Annual Reports and Global Research
• Doha Bank registered a y-o-y growth of 24.5% in its bottomline to QR926.5mn over QR743.9mn reported in 2006. During 2007, the bank made provisions for loans and advances to the extent of QR13.8mn whereas last year due to recovery of bad loans there was a net reversal of provisions which was at QR34.5mn. The bank’s Return on Average Equity (RoAE) improved to 31.8% from 29.1% in 2006 whereas its Return on Average Assets (RoAA) declined marginally to 3.6% in 2007 from 4% in 2006.
• At the end of 2007, the bank reported Tier 1 capital ratio of 10.05% and total capital ratio of 15.54% as against 11.8% and 18.47% respectively for the year 2006. These ratios are likely to improve with the planned further raising of capital through rights issues in 2008 and 2009.
• During Q1-2008, interest income grew by 33.4% y-o-y to QR475.3mn while interest expense registered a y-o-y growth of 29.4% to QR259.5mn. With this the net interest income of the bank registered a y-o-y growth of 38.6% to QR215.8mn. The bank reported a y-o-y growth of 22.7% in its net profit to QR274mn as compared to QR223.4mn reportedin Q1-2007. On the balance sheet side, on a y-t-d basis, total assets registered a growth of 10% to QR33.1bn, net loans & advances grew by 8% to QR20.7bn and customer deposits increased by 7.9% to QR21.6bn.
Outlook and Valuation• We believe that Doha Bank’s growth strategies, which encompass expanding domestic
network, pursuing growth opportunities in other emerging markets and also raising of funds through international borrowings are in right direction.
• 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
35.0%
32.0%
29.0%
26.0%
23.0%
20.0%
2004 2005 2006 2007
30.4%
22.6%
27.8%
32.6%
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 45
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 QR75.7 (April 27, 2008), the bank trades at 11.5x and 9.5x of its earnings and 2.8x and 2.5x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Doha Bank works out to QR85.8 based on the DDM and peer group valuation methods, which is 13.3% above the market price on April 27, 2008. Hence we revise our earlier rating on the stock and recommend a “BUY”.
Global Research - Qatar Global Investment House
46 Qatar Banking Sector April 2008
BALANCE SHEETDoha Bank
Amount in Qatari Riyal ‘000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Assets
Cash & deposits with Central Banks 469,213 647,621 1,883,708 1,882,367 1,870,335 1,690,325 1,675,949
Due from Banks and Other FIs 3,702,958 4,466,222 5,228,040 6,953,293 8,274,419 9,598,326 11,134,058
Loans and advances (Gross) 9,064,829 14,217,687 19,729,170 25,845,213 31,918,838 38,302,605 44,622,535
Provisions (770,111) (587,628) (559,256) (591,563) (639,441) (706,470) (795,715)
Other assets 117,549 173,514 393,536 511,597 654,844 818,555 1,023,194
Investment securities - Debt 1,669,318 1,681,633 2,060,289 2,380,671 2,690,159 3,012,978 3,344,405
Investment securities - Others 859,811 915,987 1,043,585 1,281,900 1,448,547 1,622,373 1,800,834
Financial Investments 2,529,129 2,597,620 3,103,874 3,662,571 4,138,706 4,635,350 5,145,239
Investment in associate company - - 10,256 15,678 10,256 10,256 10,256
gross fixed assets 249,885 338,555 489,582 621,769 758,558 910,270 1,092,324
less: accumulated depreciation (133,223) (157,331) (190,798) (237,431) (295,081) (365,172) (448,189)
net fixed assets 116,662 181,224 298,784 384,338 463,477 545,098 644,135
Total Assets 15,230,229 21,696,260 30,088,112 38,663,494 46,691,434 54,894,044 63,459,650
Liabilities
Customer deposits 11,023,760 14,602,291 19,676,657 25,186,121 31,230,790 37,476,948 44,222,799
Due to banks & other financialinstitutions
1,383,996 1,950,984 4,370,915 5,201,389 6,033,611 6,697,308 7,233,093
Subordinated debt - 1,231,910 1,231,317 1,231,500 1,231,500 1,231,500 1,231,500
Other liabilities 396,552 564,173 833,842 1,209,071 1,511,339 1,843,833 2,101,970
Proposed dividends - 62,408 499,270 622,161 794,979 994,771 1,148,216
Total Liabilities 12,804,308 18,411,766 26,612,001 33,450,242 40,802,219 48,244,361 55,937,578
Absolute Investment Depositors’ Accounts 25,085 578,908 356,409 481,152 601,440 721,728 851,639
Owner’s Equity
Paid-up equity capital 693,430 1,248,175 1,248,175 1,722,481 1,722,481 1,722,481 1,722,481
Statutory reserve 439,466 1,244,967 1,248,175 1,474,415 1,723,110 1,723,110 1,723,110
Share Premium - - - 898,686 898,686 898,686 898,686
Risk reserve 80,614 146,532 273,397 273,397 273,397 273,397 273,397
Fair value reserve 425,723 65,912 52,834 52,834 52,834 52,834 52,834
Proposed bonus shares 554,745 - 249,635 - - - -
Retained earnings 47,206 - 47,486 310,287 617,266 1,257,447 1,999,925
Total Shareholder’s Equity 2,400,836 2,705,586 3,119,702 4,732,100 5,287,775 5,927,955 6,670,433
Total Liabilities & Shareholders’ Equity 15,230,229 21,696,260 30,088,112 38,663,494 46,691,434 54,894,044 63,459,650
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 47
OPERATING STATEMENT
Doha Bank
Amount in Qatari Riyals '000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Interest Income 676,042 1,063,259 1,676,990 2,111,744 2,550,201 2,889,578 3,236,913
Interest Expense (255,797) (539,803) (993,163) (1,245,929) (1,504,619) (1,697,627) (1,901,687)
Net interest income 420,245 523,456 683,827 865,815 1,045,583 1,191,951 1,335,227
Add: Income from Islamic financing andinvestment activities
4,898 34,572 178,116 247,540 346,556 501,268 629,927
Add: Fees and commission 176,433 235,896 297,454 362,894 428,215 505,293 586,140
Add: Profit on Foreign Exchange 16,702 35,100 74,999 93,749 112,499 134,998 159,298
Add: Net Premium 79 474 616 832 1,123
Add: Net gains on financial instruments 378,949 217,535 210,756 235,455 273,045 307,092 342,321
Add: Income from associate company 444 555 722 974 1,315
Add: Dividend Income 10,084 9,349 22,353 26,920 28,971 32,447 36,017
Add: Net gain on derivatives 3,324 676
Add: Other income 6,313 13,864 25,562 33,742 41,165 50,221 61,270
Total Non-Interest Income 588,481 515,068 632,323 753,789 885,232 1,031,858 1,187,484
Total Operating Income 1,013,624 1,073,096 1,494,266 1,867,144 2,277,370 2,725,078 3,152,638
Less: Provision for loan losses (6,214) 34,540 (13,787) (32,307) (47,878) (67,030) (89,245)
Less: Impairment losses on financialinvestments
(1,733) (43,375) (37,236) (51,276) (57,942) (60,839) (67,531)
Add: Non-operating Income(Recoveries from BCCI)
14,196 - - - - - -
Operating Income (net of provisions) 1,019,873 1,064,261 1,443,243 1,783,561 2,171,550 2,597,209 2,995,861
Less: Staff Cost (113,069) (141,877) (215,576) (288,474) (355,270) (431,925) (507,575)
Less: General and Administrative Expenses (96,594) (131,570) (238,077) (280,072) (341,606) (381,511) (425,606)
Less: Depreciation (18,970) (24,890) (33,712) (46,633) (57,650) (70,091) (83,017)
Less: Absolute investment depositors'
share of profit and risk reserve
(508) (21,434) (29,083) (33,681) (42,101) (50,521) (59,615)
Net Profit Before Taxation 790,732 744,490 926,795 1,134,703 1,374,924 1,663,162 1,920,049
Taxation (865) (521) (331) (3,500) (4,270) (5,209) (6,355)
Net Profit 789,867 743,969 926,464 1,131,203 1,370,654 1,657,952 1,913,694
P&L Appropriation Account:
Retained Earnings Broght Forward 6,970 47,206 - 47,486 310,287 617,266 1,257,447
Net Profit for the year 789,867 743,969 926,464 1,131,203 1,370,654 1,657,952 1,913,694
Proposed Dividend - (62,408) (499,270) (622,161) (794,979) (994,771) (1,148,216)
Dividend Proposed by way of bonus share issue
(554,745) - (249,635) - - - -
Director Fees (2,800) (14,000) - (16,000) (16,000) (18,000) (18,000)
Social contributions (2,000) (3,000) - (4,000) (4,000) (5,000) (5,000)
Net movement in fair value reserve (32,113) - - - - - -
Net movement in risk reserve - (65,918) (126,865) - - - -
Trfr to Statutory Reserve (157,973) (645,849) (3,208) (226,241) (248,695) - -
Trfr (to)/from General Reserve - - - - - - -
Cl Balance of Retained Earnings 47,206 - 47,486 310,287 617,266 1,257,447 1,999,925
Global Research - Qatar Global Investment House
48 Qatar Banking Sector April 2008
CASH FLOW STATEMENT
Doha Bank
Amount in Qatari Riyal '000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Operating
Operating Activities 432,653 539,801 795,647 1,190,142 1,456,182 1,772,073 2,062,955
Profit Before Taxation 790,732 744,490 926,795 1,134,703 1,374,924 1,663,162 1,920,049
Provision for imapirment of loans & advances 6,214 (34,540) 20,885 32,307 47,878 67,030 89,245
Profit on sale of property, furnitureandequipment
(39) (98) (12,216) - - - -
Profit on sale of financial investments (373,548) (217,535) (209,611) - - - -
(Gain) loss on revaluation of investments and derivatives
(7,059) (3,312) (1,589) - - - -
Provision for impairment of investments 3,048 43,375 37,236 - - - -
Depreciation 18,970 24,890 33,712 46,633 57,650 70,091 83,017
Amortisation of financing cost - 52 766 - - - -
Income Tax Settled (865) (521) (331) (3,500) (4,270) (5,209) (6,355)
Director Fees (2,800) (14,000) - (16,000) (16,000) (18,000) (18,000)
Social contributions paid (2,000) (3,000) - (4,000) (4,000) (5,000) (5,000)
Net Increase/Decrease in Operating Activities (732,103) (1,255,236) 998,887 (1,119,447) (238,551) (508,748) (390,618)
(Inc.) / Dec. in loans and advances to customers
(2,864,111) (5,300,805) (5,560,740) (6,116,043) (6,073,625) (6,383,768) (6,319,930)
(Inc.) / Dec. in due from banks and other financial institutions
(1,255,128) (763,264) (761,818) (1,725,253) (1,321,126) (1,323,907) (1,535,732)
Inc. / (Dec.) in Due to banks 268,076 566,988 2,419,931 830,474 832,222 663,697 535,785
Increase in customer deposits 2,980,711 4,132,354 4,851,867 5,634,207 6,164,957 6,366,446 6,875,762
(Inc.) / Dec. in other assets (43,713) (58,506) (220,022) (118,061) (143,247) (163,711) (204,639)
Inc./ (Dec.) in other liabilities 182,062 167,997 269,669 375,229 302,268 332,494 258,137
Net cash from operatig activities (299,450) (715,435) 1,794,534 70,695 1,217,631 1,263,325 1,672,338
Investing activites
Net movement in investments (916,207) (1,781,203) (4,845,011) (558,697) (476,134) (496,645) (509,889)
Investment in associate Company - - - (5,422) 5,422 - -
Proceeds from sale of financial Investments(net)
1,406,446 1,527,065 4,425,620 - - - -
Acquisition of property, plants & equipment (39,795) (89,452) (153,570) (132,187) (136,789) (151,712) (182,054)
Proceeds from sale of property, plants & equipment
218 98 14,514 - - - -
Proceeds from disposal of derivatives 5,477 - - - - -
Total Investing 450,662 (338,015) (558,447) (696,306) (607,501) (648,356) (691,943)
Financing activities
Net proceeds from subordinated debt issued 1,231,858 - 183 - - -
Dividend paid - - - (499,270) (622,161) (794,979) (994,771)
Proceeds from Rights Issue 1,123,357 - - -
Total Financing - 1,231,858 - 624,270 (622,161) (794,979) (994,771)
Net Change in Cash 151,212 178,408 1,236,087 (1,341) (12,031) (180,011) (14,376)
Opening Cash balance 318,001 469,213 647,621 1,883,708 1,882,367 1,870,335 1,690,325
Net Cash at end 469,213 647,621 1,883,708 1,882,367 1,870,335 1,690,325 1,675,949
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 49
Ratios
Doha Bank
2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Profitability Ratios
- Return on Average Assets 6.02% 4.0% 3.6% 3.3% 3.2% 3.3% 3.2%
- Return on Average Equity 39.5% 29.1% 31.8% 28.8% 27.4% 29.6% 30.4%
- Net interest income/ Op. Income(net of provisions)
42.0% 52.4% 46.4% 46.7% 45.9% 43.3% 41.6%
- Non-interest income/ Total Op. Income 57.7% 48.4% 43.8% 42.3% 40.8% 39.7% 39.6%
Margins
- Interest Expense to Interest Income 37.6% 51.1% 55.1% 54.2% 53.4% 51.6% 50.7%
- Interest Income to Average Interest Earning Assets
5.4% 6.3% 7.8% 7.6% 7.4% 7.2% 7.0%
- Interest Expense to Average Interest Bearing Liabilities
2.4% 3.6% 4.6% 4.4% 4.3% 4.1% 3.9%
- Net Spread 3.1% 2.7% 3.2% 3.2% 3.1% 3.1% 3.1%
- Net Interest Margin 3.4% 3.1% 3.5% 3.5% 3.5% 3.5% 3.5%
Efficiency
- Cost to Total Income 22.6% 27.8% 32.6% 32.9% 33.1% 32.4% 32.2%
- Cost to Op Income 22.4% 28.0% 33.8% 34.5% 34.7% 34.0% 33.9%
- Staff Cost to Total Op. Income 11.1% 13.3% 14.9% 16.2% 16.4% 16.6% 16.9%
Liquidity
- Loans to Interest Earning Assets 63% 70% 73% 73% 74% 75% 76%
- Loans to Customer Deposits 75% 90% 96% 98% 98% 98% 97%
- Due from Banks to Due to Banks 268% 229% 120% 134% 137% 143% 154%
Credit Quality
- Non Performing Loans (QR'000) 809,850 609,500 626,000 769,980 962,475 1,203,094 1,503,867
- Loan Loss Reserve (QR'000) 770,111 587,628 559,256 591,563 639,441 706,470 795,715
- NPL's to Gross Loans 8.9% 4.3% 3.2% 3.0% 3.0% 3.1% 3.4%
- NPL's to (Equity+Loan loss reserve) 25.5% 18.5% 17.0% 14.5% 16.2% 18.1% 20.1%
- Loan Loss Reserve to Gross Loans 8.5% 4.1% 2.8% 2.3% 2.0% 1.8% 1.8%
- NPL Coverage 95.1% 96.4% 89.3% 76.8% 66.4% 58.7% 52.9%
Capital Adequacy
- Equity to Total Assets 16% 12% 10% 12% 11% 11% 11%
- Equity to Gross Loans 26% 19% 16% 18% 17% 15% 15%
Constitution of Total Income
- Interest Income to Total Op Income 42.3% 51.6% 56.2% 57.7% 59.2% 60.3% 60.4%
- Fees & Comm. to Total Op. Income 17.3% 22.2% 20.6% 20.3% 19.7% 19.5% 19.6%
- Investment Income to Total Op Income 38.1% 21.3% 16.2% 14.7% 13.9% 13.1% 12.6%
- FX Income to Total Op. Income 1.6% 3.3% 5.2% 5.3% 5.2% 5.2% 5.3%
- Other Income to Total Op. Income 0.6% 1.6% 1.8% 1.9% 1.9% 1.9% 2.0%
- Net Premium to Total Op. Income 0.00% 0.00% 0.01% 0.0% 0.0% 0.0% 0.0%
- Income Associate Co. to Total Op. Income 0.00% 0.00% 0.03% 0.0% 0.0% 0.0% 0.0%
Operating Performance
- Change in Interest Income 38.9% 41.4% 43.1% 27.5% 24.3% 21.0% 15.4%
- Change in Fees and Commission 121% 34% 26% 22% 18% 18% 16%
- Change in Investment Income 186% -43% -3% 12% 16% 12% 11%
- Change in Other Income 26% 120% 84% 32% 22% 22% 22%
Shareholder's Data
- Shares in Issue ('000) 69,343 124,818 124,818 172,248 172,248 172,248 172,248
- EPS (QR) 11.4 6.0 7.4 6.6 8.0 9.6 11.1
- Book Value Per Share (QR) 34.6 21.2 21.0 27.5 30.7 34.4 38.7
- Market Price Year End (QR) 145.93 82.92 71.42 75.7 75.7 75.7 75.7
- P/E 12.8 13.9 9.6 11.5 9.5 7.9 6.8
- P/BV 4.2 3.9 3.4 2.8 2.5 2.2 2.0
* Market price for 2008 and subsequent years are as per closing prices on DSM on April 27, 2008.
Global Research - Qatar Global Investment House
50 Qatar Banking Sector April 2008
Qatar Islamic BankTickers:QISB.QA (Reuters)QIBK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR121.6 (April 27, 2008)
Key Data
EPS* (QR) 9.0 Avg. daily vol. ('000) 415.4
BVPS* (QR) 31.8 52 week Hi / Lo 125 / 63.4
P/E (x) 13.5 Market Cap (QR mn) 23,944.4
P/BV (x) 3.8 Target Price (QR) 137.4Source: Global Research
* Projected (2008)
Background• Qatar Islamic Bank (QIB) was incorporated in 1982 as the first Islamic bank in Qatar. The
bank operates through 18 local branches and its has international operations in Malaysia, Lebanon, Bahrain, Yemen and UK. The activities of the bank are conducted in accordance with the Islamic Shari’a principles, as determined by the Shari’a Committee of the Bank.
• The bank provides a wide range of retail, commercial, corporate, investment, treasury and private banking services through various Islamic modes of financing such as Murabaha,Mudaraba, Musharaka, Musawama, Istisna and others. It also carries out investment activities for its own account and on behalf of its customers.
• In 2006 the bank has launched the first full fledged Islamic investment bank, QINVEST,licensed from the Qatar Financial Centre. This was jointly established by QIB and Gulf Finance House.
Recent Developments • In Feb. 2008, Qatar Islamic Bank’s European subsidiary, European Finance House
(EFH), has received authorisation from the Financial Services Authority to operate as an Islamic investment bank in the United Kingdom. The European Financial House will provide Shari'ah compliant financial services to corporate clients, primarily in the UK andContinental Europe, as well as clients in the GCC.
• In March 2007, the bank opened the Asian Finance Bank in Malaysia and this will serve as an arm of QIB to reach and service the South East Asian market.
• In 2007, QIB led a consortium of investors to establish an Islamic bank on Pakistan with a capital of US$100mn.
Recommendation
BUY
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 51
• During 2007 the bank concluded the first ever Islamic financing in Qatar in the aviationindustry which was an Airbus 340-600 for Qatar Airways. It is also acted as the mandated lead arranger and investment agent for a US$150mn Sukuk mandate from Al Salam Bounian. QIB was the first bank in the GCC to prepare for a securitization transactionregarding its property finance portfolio. QIB also acted as the MLA and security agent fora US$200mn Master Murabaha facility in US$1.8bn Al Waab City project.
• In 2007, QIB launched two new investment funds under the name 'Al Sanabel A & B' (for
Qatari and non Qatari investors respectively), with a capital of QR2bn. The two funds, proposed for trading in Sharia’a compliant Qatari stocks and supervised by QIB Sharia’a supervisory board. The funds are being managed by Kuwait-based Global Investment House.
• QIB’s foreign currency rating was raised in 2007 to A- from BBB+ (long term) and to A2 (short term) by Capital Intelligence. At the same time the financial strength rating israised to A- from BBB+. Fitch also upgraded its rating from BBB+ to A-.
• The bank issed 50% bonus shares for the year 2007, therefore, with the issue of bonus shares the bank’s equity capital increased to QR1.8bn. The bank has also proposed to increase its capital by way of rights issue in two phases, 10% of the capital will be raised in 2008 and another 10% will be raised in 2009. The first rights issue was in March 2008. The shareoffer price and issuance time for the second rights issue will be announced on a later date.
Analysis of 2007 and Q1-2008 Financial Results• The bank’s profit for the year 2007 stood at QR1,255.4mn against QR1003mn reported
for 2006, a growth of 25.2%. The bank’s balance sheet size grew by 43.3% to QR21.3bn as compared to QR14.9bn in the previous year.
• The total assets of the bank grew by 43.3% in 2007 to QR21.3bn. Among the major asset components, due from financing activities (gross) grew by 57.3% to QR13.3bn. Fundswith banks & FIs declined by 12.5% to QR3.4bn. Net financing activities accounted for54.7% of the total assets.
• Among the components of liabilities, the share of customer deposits (including unrestricted investment accounts) in total liabilities declined marginally in 2007 to 57.2% from 59% in the preceding year and it registered a y-o-y growth of 38.9% to QR12.2bn. Unrestricted investment accounts increased during the year by 21.7% to stood at QR7.8bn and customers’ accounts grew by 85.5% to QR4.4bn. The amount due to banks & other FIs increased by 214.2% to QR3.6bn. The contribution of shareholders’ equity in total liabilities declined to 20.6% from 22.9% to reach at QR4.4bn.
• The bank’s loan portfolio is highly concentrated to three sectors, namely Trading, Consumer Financing and Housing. Housing loans segment has highest contribution to the total loan portfolio, its share was at 32.1% in 2007. The y-o-y growth in the segment was 17.8% to QR4.3bn. The bank reduced its exposure to this segment as its share in total loan portfolio declined to 32.1% in 2007 from 42.9% in 2006. The bank’s exposure to Trading sector accounted for 26.4% of the total loan portfolio and it grew by 159.3% to QR3.5bn. Its exposure to Consumer Financing segment stood at QR3.2bn, witnessed a growth of 46.8% and accounted for 24.1% of the total loan portfolio.
Global Research - Qatar Global Investment House
52 Qatar Banking Sector April 2008
Chart 1: Sectoral Distribution of QIB’s Loan Portfolio
Source: QIB Annual Reports and Global Research
• The bank’s NPLs as a percentage of gross financings have been declining over the lastfew years, which was despite the growing loan book. Its NPLs declined by 15.7% to QR285mn in 2007 from QR338mn in 2006. NPLs as a percentage of gross loans declined to 2.1% in 2007 from 4% in 2006. The bank has sufficient coverage to its NPLs at 99.1%in 2007, which was at 87.6% in 2006.
Chart 2: Quality of Loan Portfolio
Source: QIB Annual Reports and Global Research
• During 2007, income from financing activities grew by 17.4% to QR911.3mn. Amongthe major components of this, Murabaha & Musawama grew by 21.1% to QR499.1mn, Istisna increased by 35.7% to QR123.2mn, Mudaraba income increased by 88.2% to QR84.6mn, income from Ijara financing grew by 138.1% to QR132.2mn and incomefrom investments with banks & FIs declined by 51.8% to QR72.2mn. The depositors’ profit sharing grew by 48.9% to QR342.8mn from QR230.1mn in 2006. The net profitsharing witnessed a growth of 4.1% to reach at QR568.5mn.
• The bank’s non-interest income grew by 3.5% in 2007 to reach at QR783.2mn as compared to QR756.7mn in 2006. Among the major components of non-interest revenue, the bank registered a significant decline of 79.3% in fees & commission income to QR87.8mn andincome from investments grew by 114.5% to QR668.9mn.
100%
80%
60%
40%
20%
0%2004 2005 2006 2007
GovernmentContracting
Semi-GovernmentConsumer Financing
IndustryHousing
TradingOthers
2004 2005 2006 2007
(in Q
R b
n)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
7.0%
6.0%
5.0%
3.0%
2.0%
1.0%
0.00%
4.9
6.1%
Gross Financings NPLs to Gross Financings
6.9
8.4
13.3
6.4%
4.0%
2.1%
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 53
Chart 3: Growth in Non-Interest Income
Source: QIB Annual Reports and Global Research
• In 2007, the bank’s cost to total income ratio increased to 23.5% from 15.7% in 2006. Total operating expenses of the bank grew by 55.4% in 2007 to QR317.8mn over QR204.5mn reported in 2006. Among the major cost components in 2007, its staff cost went up by 60.5% to QR184.6mn, other expenses grew by 56.5% to QR121.9mn and depreciation charges grew declined by 3.1% to QR11.3mn.
Chart 4: Cost to Total Income
Source: QIB Annual Reports and Global Research
• QIB registered a y-o-y growth of 25.2% in its net profit to QR1,255.4mn over QR1,003mn
reported in 2006. In 2007, the bank accounted for QR306.3mn of income from dilution of interest in a subsidiary, which boosted its profit otherwise the profit shows a declineof 5.4% for the year. During 2007, the bank made less provisions for loans and advances which was at QR1.4mn as against QR68.4mn provided in 2006. This was mainly because of recoveries of bad loans. The bank also made provisions for other investments to the tune of QR12.1mn. The bank’s Return on Average Equity (RoAE) declined to 32.2% from 37.6% in 2006 whereas its Return on Average Assets (RoAA) declined to 6.9% in 2007 from 8.2% in 2006.
• At the end of 2007, the bank reported Tier 1 capital ratio of 18.34% and total capital ratio of 19.78% as against 21.57% and 22.05% 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.
2004 2005 2006 2007
(in Q
R M
n)750
600
450
300
150
0
150.0%
120.0%
90.0%
60.0%
30.0%
0.0%
Non-Interest Income Growth Rate
139.4%
70.0%
144.6%
3.5%
2004 2005 2006 2007
26.1%30.0%
26.0%
22.0%
18.0%
14.0%
18.6%
15.7%
23.5%
Global Research - Qatar Global Investment House
54 Qatar Banking Sector April 2008
• During Q1-2008, income from financing activities grew by 53.1% y-o-y to QR254.1mnwhereas income from investing activities registered a steep y-o-y growth of 88.2% to QR353.7mn. Total income from financing & investing activities grew by 71.7% on y-o-y basis to QR607.8mn and total operating income grew by 86.5% to QR698mn. The bank reported a y-o-y growth of 68.6% in its net profit to QR455.6mn as compared toQR270.2mn reported in Q1-2007. On the balance sheet side, on a y-t-d basis, total assets registered a growth of 40.4% to QR30bn, due from financing activities (net) grew by24.5% to QR14.5bn and customer deposits increased by 19.6% to QR14.6bn.
Outlook and Valuation• The bank’s strategic to expand through QINVEST will definitely help in pursuing Islamic
investment banking opportunities in Qatar as well as in the region. We believe that QIB’s growth strategies, which encompass expanding its presence in UK through EFH is right move considering presence of Islamic financial market in Europe. Apart from this, itsforay in counties like Malaysia and Pakistan will help in pursuing growth opportunities in these emerging markets. The bank has plans to expand its operations in 16 countries by 2010.
• 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 andensure 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 QR121.6 (April 27, 2008), the bank trades at 13.5x and 10.9x of its earnings and 3.8x and 3.5x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Qatar Islamic Bank works out to QR137.4 based on the DDM and peer group valuation methods, which is 13% above the market price on April 27, 2008. Hence we initiate our coverage on the stock with a “BUY” recommendation.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 55
BALANCE SHEETQatar Islamic Bank
Amount in QR’000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Assets
Cash & balances with Central banks 514,525 400,449 1,256,826 1,415,348 1,298,125 1,194,065 1,019,205
Due from and investments with banks & FIs 1,166,924 3,843,401 3,364,522 5,282,300 6,761,343 8,992,587 11,060,882
Due from financing activities 5,972,902 7,156,007 11,679,082 19,893,948 25,913,951 30,851,884 35,788,196
Financial investments 1,001,484 1,506,326 2,116,803 3,132,868 3,822,099 4,510,077 5,231,690
Investment in associates 65,745 420,972 862,887 1,198,097 1,198,097 1,198,097 1,198,097
Other investments 484,026 1,016,424 1,222,315 1,503,447 1,774,068 2,057,919 2,346,028
gross fixed assets 155,828 213,137 206,051 243,140 272,317 299,549 329,504
less: accumulated depreciation (94,940) (105,257) (104,294) (118,275) (133,933) (151,906) (171,676)
net fixed assets 60,888 107,880 101,757 124,866 138,384 147,643 157,828
Other assets 285,062 437,057 731,576 1,097,364 1,316,837 1,514,362 1,696,086
Total Assets 9,551,556 14,888,516 21,335,768 33,648,237 42,222,905 50,466,634 58,498,010
Liabilities
Due to banks & FIs 26,024 1,147,242 3,604,378 4,865,910 5,644,456 6,434,680 7,335,535
Customers’ accounts 2,212,422 2,363,719 4,384,352 7,672,616 10,358,032 13,154,700 15,917,187
Payable to unrestricted investment accounts 51,845 - - - - - -
Other liabilities 454,714 630,366 783,428 979,285 1,175,142 1,386,668 1,636,268
Proposed dividend 165,750 835,380 238,680 1,156,170 1,544,747 1,943,549 2,301,742
Total Liabilities 2,910,755 4,976,707 9,010,838 14,673,982 18,722,376 22,919,596 27,190,732
Unrestricted investment accounts 4,653,808 6,422,049 7,816,480 12,506,368 16,258,278 19,509,934 22,436,424
Monority interest 56,957 79,602 118,168 201,982 318,129 468,951 657,309
Equity
Paid-up equity capital 663,000 1,193,400 1,193,400 1,969,110 1,969,110 1,969,110 1,969,110
Legal reserve 677,307 1,870,707 1,858,850 1,969,110 1,969,110 1,969,110 1,969,110
Share Premium - - - 1,074,060 1,074,060 1,074,060 1,074,060
General reserve 90,215 90,215 109,964 109,964 109,964 109,964 109,964
Risk reserve 33,356 51,073 92,246 92,246 92,246 92,246 92,246
Retained earnings 7,849 152,590 523,549 1,035,842 1,694,059 2,338,090 2,983,482
Fair value reserve 126,809 52,173 15,573 15,573 15,573 15,573 15,573
Proposed bonus shares 331,500 - 596,700 - - - -
Total Shareholder’s Equity 1,930,036 3,410,158 4,390,282 6,265,905 6,924,122 7,568,153 8,213,545
Total Liabilities & Shareholders’ Equity 9,551,556 14,888,516 21,335,768 33,648,237 42,222,905 50,466,634 58,498,010
Global Research - Qatar Global Investment House
56 Qatar Banking Sector April 2008
OPERATING STATEMENTQatar Islamic Bank
Amount in QR’ 000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Income from financing and investments withbanks and FIs
549,944 775,993 911,289 1,375,875 1,874,612 2,241,694 2,705,278
Depositors profit sharing (139,510) (230,135) (342,801) (505,634) (693,606) (840,635) (1,028,006)
Net profit sharing 410,434 545,858 568,488 870,241 1,181,006 1,401,059 1,677,273
Add: Income from investments 269,862 311,895 668,913 1,282,342 1,503,042 1,717,441 1,880,901
Add : Fees and commission 41,721 423,040 87,770 188,706 288,719 389,771 495,009
Add : Net Gains from Dealing in Foreign Currencies
(2,683) 2,205 5,030 50,300 35,210 45,773 57,216
Add: Other operating income 434 19,535 21,480 10,740 12,029 13,593 15,496
Total Non-Interest Income 309,334 756,675 783,193 1,532,088 1,839,000 2,166,578 2,448,622
Total Operating Income 719,768 1,302,533 1,351,681 2,402,329 3,020,006 3,567,637 4,125,894
Less: Provision for impairment of receivables and financing activities
(47,132) (68,390) (1,416) (30,310) (42,030) (53,142) (65,271)
Less: Porvision for financials investments - - (4,000) - - - -
Less: Provision for other investments (917) - (12,138) (15,034) (17,741) (20,579) (23,460)
Less: Recovery from properties acquired against settlement of debt
11,479 - - - - - -
Less: Other Provisions (6,075) - - - - - -
Operating Income (net of provisions) 677,123 1,234,143 1,334,127 2,356,984 2,960,235 3,493,916 4,037,163
Less : Staff Expenses (78,657) (114,966) (184,563) (288,279) (370,029) (436,739) (514,738)
Less: Other Expenses (39,665) (77,849) (121,861) (192,186) (251,620) (296,983) (363,345)
Less: Depreciation & amoritzations (10,780) (11,707) (11,341) (13,981) (15,658) (17,973) (19,770)
Less: Other operating expenses (4,533) - - - - - -
Add: Non operating income 1,679 - - - - - -
Add: Income from dilution of interest in a subsidiary
- - 306,354 - - - -
Profit Before Minority Interest 545,167 1,029,621 1,322,716 1,862,538 2,322,928 2,742,221 3,139,310
Minority Interest (33,915) (26,582) (67,312) (83,814) (116,146) (150,822) (188,359)
Net Profit 511,252 1,003,039 1,255,404 1,778,724 2,206,781 2,591,399 2,950,952
P&L Appropriation Account:
Retained Earnings Broght Forward 17,940 7,849 152,590 523,549 1,035,842 1,694,059 2,338,090
Net Profit for the year 511,252 1,003,039 1,255,404 1,778,724 2,206,781 2,591,399 2,950,952
Proposed Dividend (165,750) (835,380) (238,680) (1,156,170) (1,544,747) (1,943,549) (2,301,742)
Director Fees (3,482) (5,400) - - (3,818) (3,818) (3,818)
Proceeds from sale of share fractions ofright and bonus shares
- 199 - - - - -
Proposed Issue of Bonus Shares (331,500) - (596,700) - - - -
Trfr to legal reserve (9,893) - - (110,260) - -
Trfr to risk reserve (4,600) (17,717) (41,173) - - - -
Trfr to reserves - - - - - - -
Adjustments (6,118) - - - - - -
Share of profit from associate - - (28,029) - - - -
Sale of Al Jazeera Islamic Co. - - 20,137 - - - -
Cl Balance of Retained Earnings 7,849 152,590 523,549 1,035,842 1,694,059 2,338,090 2,983,482
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 57
CASH FLOW STATEMENTQatar Islamic Bank
Amount in QR’000 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)OperatingOperating Activities 520,589 1,081,203 966,348 2,412,463 3,074,222 3,653,971 4,252,357 Profit for the year before share of profit
for unrestricted investment account holders
& minority interest
688,816 1,259,756 1,665,517 2,368,172 3,016,534 3,582,856 4,167,316
Adjustments For: Provision for impairment of receivables and financing activities
47,132 - -
Depreciation on fixed assets 10,780 11,707 11,342 13,981 15,658 17,973 19,770 Depreciation provision for other investments
917 - -
Provision for financial investments 2,728 97,586 (1,151) 30,310 42,030 53,142 65,271 Provision for other investments (2,600) - 12,138 - - - - Share of profit from associate - (781) (30,098) - - - - Profit from investment revaluation - - (6,984) - - - - Profit on foreign exchange - - (66,651) - - - - Provision for other assets (11,479) - - - - - - Provision for end of service indemnity 4,644 - - - - - - Profit on sale of financial investments (145,433) (85,329) (141,189) - - - - Profit on dilution of interest in susbsidiary - - (306,354) - - - - Gain on sale of other investments (80,973) (201,616) (170,208) - - - - Gain on sale of fixed assets (18) (120) (14) - - - - Other provision 6,075 - - - - - - Net increase (decrease) in Operating Assets (1,188,091) (4,011,577) (4,313,468) (10,528,741) (7,760,551) (7,419,843) (7,251,601) Balances with banks & FIs 720,195 (2,676,477) 478,879 (1,917,778) (1,479,044) (2,231,243) (2,068,295) Due from financing activities (1,811,516) (1,183,105) (4,523,075) (8,245,176) (6,062,034) (4,991,075) (5,001,582) Other assets (96,770) (151,995) (269,272) (365,788) (219,473) (197,526) (181,723)Net Increase (decrease) in liabilities 1,030,199 1,437,707 4,584,765 4,745,653 3,659,818 3,798,418 3,912,942 Current accounts from banks & FIs 5,508 1,121,218 2,457,136 1,261,532 778,546 790,224 900,855 Customers current accounts 889,388 151,297 2,020,633 3,288,264 2,685,416 2,796,669 2,762,487 Other liabilities 135,303 165,192 106,996 195,857 195,857 211,526 249,600 Total Operating 362,697 (1,492,667) 1,237,645 (3,370,625) (1,026,510) 32,545 913,699 Payment for staff indemnity (2,556) - - - - - - Payment for pension fund (1,140) - - - - - - Payment to unrestricted investment account holders
(98,488) (229,012) (297,870) (505,634) (693,606) (840,635) (1,028,006)
Net Cash Used in Operating Activities 260,513 (1,721,679) 939,775 (3,876,259) (1,720,116) (808,090) (114,307)Cash flow from investing activitiesPurchase of financial investments (657,733) (1,368,133) (1,437,490) (1,016,065) (689,231) (687,978) (721,612)Additional investment in associate co. - - (364,000) (335,210) - - - Proceeds from sale of financial investments 754,068 421,952 845,315 - - - - Proceeds from dilution of interest in subsdiary
- 390,000 - - - -
Purchase of other investments (557,645) (973,899) (925,848) (281,132) (270,621) (283,851) (288,109)Proceeds from sale of other investments 236,657 642,515 852,177 - - - - Dividend received from associate co. - - 2,000 - - - - Purchase of fixed assets (6,117) (58,209) (28,164) (37,089) (29,177) (27,232) (29,955)Proceeds from sale of fixed assets 32 232 23,561 - - - - Net cash (used in) investing activities (230,738) (1,335,542) (642,449) (1,669,497) (989,028) (999,060) (1,039,676)Cash flow from financing activitiesIncrease in share capital - 1,392,499 - 1,253,070 - - - Increase in unrestricted investment accounts 154,623 1,716,396 1,394,431 4,689,888 3,751,910 3,251,656 2,926,490 Dividend distributed - (165,750) (835,380) (238,680) (1,156,170) (1,544,747) (1,943,549)Directors remuneration paid (3,482) - - - (3,818) (3,818) (3,818)Net cash from financing activities 151,141 2,943,145 559,051 5,704,278 2,591,922 1,703,091 979,123 Net increase / (decrease) in cash and cash equivalents
180,916 (114,076) 856,377 158,522 (117,223) (104,060) (174,860)
Cash and cash equivalents - Beginning of the year
333,609 514,525 400,449 1,256,826 1,415,348 1,298,125 1,194,065
Cash and cash equivalents - End ofthe year
514,525 400,449 1,256,826 1,415,348 1,298,125 1,194,065 1,019,205
Global Research - Qatar Global Investment House
58 Qatar Banking Sector April 2008
RatiosQatar Islamic Bank
2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Profitability
- Return on Average Assets 5.9% 8.2% 6.9% 6.8% 6.1% 5.9% 5.8%
- Return on Average Equity 29.8% 37.6% 32.2% 35.0% 35.2% 37.8% 39.8%
- Net profit sharing income/ Total Op.Income (net of provisions)
54% 39% 43% 36.9% 39.9% 40.1% 41.5%
- Non-profit sharing income/ Total Op.Income (net of provisions)
46% 61% 59% 64% 61% 61% 59%
Margins
- Depositors Profit Sharing to Profit SharingIncome
25.4% 29.7% 37.6% 36.8% 37.0% 37.5% 38.0%
- Profit Sharing Income to Profit SharingIncome Earning Assets
7.0% 7.2% 5.9% 6.3% 6.0% 5.8% 5.8%
- Depositors Profit Sharing to DepositorsProfit Sharing Liabilities
2.2% 2.9% 3.3% 3.1% 3.0% 2.8% 2.9%
- Net Spread 4.8% 4.2% 2.6% 3.2% 3.0% 2.9% 2.9%
- Net Interest Margin 5.4% 5.2% 3.8% 4.0% 3.8% 3.6% 3.6%
Efficiency
- Cost to Total Income 18.6% 15.7% 23.5% 20.6% 21.1% 21.1% 21.8%
- Staff Expense to Total Income 10.9% 8.8% 13.7% 12.0% 12.3% 12.2% 12.5%
Liquidity
- Loans to Customer Deposits 87.0% 81.4% 95.7% 98.6% 97.4% 94.5% 93.3%
- Customer Deposits to Equity 356% 258% 278% 322% 384% 432% 467%
Credit Quality
- Non Performing Loans (QR’000) 445,270 338,000 285,000 474,859 617,317 750,237 888,406
- Loan Loss Reserve (QR’000) 238,828 295,920 282,522 312,832 354,862 408,004 473,275
- NPL’s to Gross Loans 6.4% 4.0% 2.1% 2.4% 2.4% 2.4% 2.5%
- NPL’s to (Equity+Loan loss reserve) 26% 11% 7% 8% 9% 10% 11%
- Loan Loss Reserve to Gross Loans 3.5% 3.5% 2.1% 1.5% 1.4% 1.3% 1.3%
- NPL Coverage 53.6% 87.6% 99.1% 65.9% 57.5% 54.4% 53.3%
Capital Adequacy
- Equity to Total Assets 20% 23% 21% 19% 16% 15% 14%
- Equity to Gross Loans 28% 40% 33% 31% 26% 24% 23%
Constitution of Total Income
- Net Profit Sharing Income to Total Op Income 54.5% 38.7% 42.5% 35.6% 38.5% 38.6% 39.9%
- Fees & Comm. to Total Op. Income 6.2% 34.3% 6.6% 8.0% 9.8% 11.2% 12.3%
- Investment Income to Total Op Income 39.7% 25.3% 48.9% 0.5% 0.4% 0.4% 0.4%
- FX Income to Total Op. Income -0.4% 0.2% 0.4% 2.1% 1.2% 1.3% 1.4%
- Other Income to Total Op. Income 0.1% 1.6% 1.6% 0.0% 0.0% 0.0% 0.0%
Operating Performance
- Change in Net Profit Sharing Income 55% 29% 19% 48% 36% 18% 20%
- Change in Fees and Commission 66% 914% -79% 115% 53% 35% 27%
- Change in Investment Income 90% 16% 109% -50% 12% 13% 14%
- Change in Fx Income -117% -182% 128% 900% -30% 30% 25%
RATIO’S USED FOR VALUATION
- Shares in Issue 66,300,000 119,340,000 119,340,000 196,911,000 196,911,000 196,911,000 196,911,000
- EPS (QR) 7.7 8.4 10.5 9.0 11.2 13.2 15.0
- Book Value Per Share (QR) 29.1 28.6 36.8 31.8 35.2 38.4 41.7
- Market Price Year End (QR) 160.84 86.47 104.60 121.60 121.60 121.60 121.60
- P/E 20.9 10.3 9.9 13.5 10.9 9.2 8.1
- P/BV 5.5 3.0 2.8 3.8 3.5 3.2 2.9
* Market price for 2008 and subsequent years are as per closing prices on DSM on April 27, 2008.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 59
Masraf Al RayanTickers:MARK.QA (Reuters) MARK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR22.3 (April 27, 2008)
Key Data
EPS* (QR) 1.4 Avg. daily vol. ('000) 3,807.5
BVPS* (QR) 7.0 52 week Hi / Lo 24.6 / 13.8
P/E (x) 15.4 Market Cap (QR mn) 16,723.6
P/BV (x) 3.2 Target Price (QR) 25Source: Global Research
* Projected (2008)
Background• Masraf Al Rayan (Al Rayan) was incorporated as Qatari Shareholding Company in
January 2006. Masraf operates through its head office located on Grand Hamad Street inDoha and two local branches, all operating in the State of Qatar. The bank commenced its activities in October 2006, through its first branch in Al Sadd Street.
• Al Rayan is engaged in banking, financing and investing activities in accordance with its
Articles of Incorporation, Islamic Shari’a principles and regulations of the Qatar Central Bank.
• The bank came out with its IPO in January 2006. It floated 412.5mn shares through the IPOat a nominal value of QR10 per share. The authorized share capital of the bank is QR7.5bn divided into 750mn shares. At the end of 2007, the issued and paid up capital of the bank is QR3.75bn divided into 749.9mn shares with a paid-up value of QR5 per share.
Recent Developments • In July 2007, the bank opened its second branch in Grand Hamad Street. The bank’s plans
are to open 3 new branches during 2008.
• In April 2007, the banks launched Al Rayan Investment, the first Islamic financialinstitution issued a license to operate within the Qatar Financial Centre. The Al Rayan owns 100% of the issued share capital of Al Rayan Investment Co. It has an authorized and paid-up share capital of US$100mn and it will commence operations during the current year.
• In May 2007, the bank entered into QR1.93bn Mudharaba contract with Barwa Real Estate. The deal is to finance Barwa’s acquisition of the the Convention Hall in Paris. Previouslyalso Al Rayan entered into number of financing deals with Barwa Real Estate.
Recommendation
BUY
Global Research - Qatar Global Investment House
60 Qatar Banking Sector April 2008
• In second quarter of 2007, Al Rayan established a 75% owned ‘Lusail Waterfront Company’ through in kind capital contribution of a land. This land is located in Lusail project and was purchased from a founder shareholder, Qatari Diar Real Estate investment Company for an amount of QR129.2mn. Subsequently, Al Rayan sold its entire holding in Lusail Waterfront Company for an amount of QR965.6mn which resulted in a profit ofQR836.4mn.
• In October 2007, Al Rayan announced that it obtained a license to operate SR1.2bn consumer finance company in the Kingdom of Saudi Arabia. The company is named asKirnaf Instalment Company will offer services such as home, car and goods financing toconsumers. Masraf Al Rayan is the majority shareholder with a 20% stake and it also has a seat on the board.
• As part of its associate companies the bank has 20% holding in Pak Qatar Takaful General Co. and Pak Qatar Takaful Family Co. These companies were incorporated in August 2007 to conduct Sharia compliant Takaful business.
• The bank has paid dividend of 20% for the year 2007, out this 10% was cash dividend and the remaining 10% credited to the share capital towards the uncalled share capital, therefore, with the this the bank’s equity capital increased to QR4.12bn from QR3.75bn.
Analysis of 2007 and Q1-2008 Financial ResultsThe financial statements for the year 2007 is the first financial statements of the bank sinceits inception on January 4, 2006.
• At the end of 2007, the total assets of the bank was QR10.2bn. Among the major asset components, due from financing activities (gross) was at QR6.9bn and funds with banks& FIs was at QR2.3bn. Net financing activities accounted for 66.1% of the total assets.
• Among the components of liabilities, the share of customer deposits (including unrestricted investment accounts) in total liabilities was at QR4.9bn. Unrestricted investment accounts accounted for 44.5% of the total liabilities while customers’ current accounts accounted for 4% of the liabilities. The contribution of shareholders’ equity in total liabilities stood at 43.3% to QR4.4bn.
• The bank’s loan portfolio is highly concentrated to two sectors, Government Institutions and Real Estate sector. In 2007, Government Institution was having the highest contribution to the total loan portfolio, its share was at 55.1% of the total loan portfolio and it was at QR3.8bn. The bank’s exposure to Real Estate sector accounted for 39.9% of the total loan portfolio and it stood at QR2.7bn. Other sectors such as Government, Contracting and Consumers accounted for less than 1% of the total loan portfolio. At the end of 2007 the NPL level of the bank was nil.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 61
Chart 1: Sectoral Distribution of Al Rayan Loan Portfolio - 2007
Source: Al Rayan’s Annual Reports and Global Research
• During 2007, income from financing activities was at QR573.3mn. Among the majorcomponents of this, Murabaha was at QR50.2mn, Istesna was at QR2.3mn, Mudaraba was at QR123.1mn and income from Ijara financing was at QR80.4mn and income frominvestments with banks & FIs was at QR317.3mn. The depositors’ profit sharing was atQR169.5mn in 2007 and the net profit sharing reached to QR403.8mn.
• The bank’s non-interest income stood at QR972.8mn in 2007. Among the major components of non-interest revenue, income from investments accounted for 88.8% of total non-interest income which was mainly because of a profit of QR836.4mn made onselling of its holding in Lusail Waterfront Company. Fees & commission income was at QR85.5mn and gain on foreign exchange operations was at QR23mn.
• In 2007, the bank’s cost to total income ratio was at 13.4%. Among the major cost components, its staff cost was at QR64.7mn, other expenses was at QR113.9mn and depreciation charges stood at QR5.4mn.
• Al Rayan reported a net profit of QR1,192.4mn. As mentioned earlier, in 2007 thebank accounted for QR836.4mn of profit from selling of its stake in Lusail Waterfront.The bank’s annualized Return on Average Equity (RoAE) was at 13.6% whereas its Annualized Return on Average Assets (RoAA) was 5.9% in 2007.
• At the end of 2007, the bank reported Tier 1 capital ratio of 45.7% and total capital ratio of 46.7%.
• During Q1-2008, income from financing activities grew by 8.7 times to QR96mn whereasincome from investing activities registered a y-o-y growth of 180% to QR144.2mn. Total income from financing & investing activities grew by 284.2% on y-o-y basis toQR240.1mn and total operating income grew by 381.3% to QR314mn. The bank reported a net profit of QR217.8mn in Q1-2008 as compared to QR43.5mn reported in Q1-2007.On the balance sheet side, on a y-t-d basis, total assets registered a growth of 45.8% to QR15.4bn and customer deposits increased by 80.9% to QR9.6bn. Due from financingactivities (net) was at QR6.6bn as compared to QR6.7bn reported at the end of 2007.
60.0%52.5%45.0%37.5%30.0%22.5%15.0%
7.5%0.0%
(as a
% o
f tot
al lo
an p
ortfo
lio)
0.6%
Government Governmentinstitutions
RealEstate
Contracting Consumer Others
55.1%
39.9%
0.3% 0.4%3.7%
Global Research - Qatar Global Investment House
62 Qatar Banking Sector April 2008
Outlook and Valuation• The bank is expanding its operations gradually. It has opened two branches so far and for
the year 2008 it has plans to add three more branches. Apart from focusing on its regular banking operations, the opening of an Islamic financial institution, Al Rayan Investment,will definitely help in further leveraging its business operations. Apart from expanding itsoperations in domestic market, the bank’s move to foray in consumer financing in SaudiArabia and holding equity stake in Pak Qatar Takaful General Co. and Pak Qatar Takaful Family Co. will is in further leverage its business operations.
• The bank is well capitalized to further expand its operations and leverage its balance sheet.
• At the current market price of QR22.3 (April 27, 2008), the bank trades at 15.4x and 11.3x of its earnings and 3.2x and 2.9x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Masraf Al Rayan works out to QR25 based on the DDM and peer group valuation methods, which is 12.2% above the market price on April 27, 2008. Hence we initiate our coverage on the stock with a “BUY” recommendation.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 63
BALANCE SHEETMasraf Al Rayan
Amount in QR’000 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Assets
Cash & balances with Central banks 456,775 2,675,267 1,531,726 2,151,519 2,153,680
Balances and investments with banks & FIs 2,324,288 4,997,219 7,495,829 9,369,786 11,712,233
Receivables & balances from financing activities 6,890,674 13,781,348 19,293,887 23,152,665 27,783,198
Less: Unearned profit (152,837) - - - -
Less : provisions - (34,453) (82,688) (140,570) (210,028)
Investment securities - debt 469,625 813,698 992,712 1,171,400 1,358,824
Investment securities - equity 80,171 203,425 248,178 292,850 339,706
Investment in subsidiary 364,050 364,050 364,050 364,050 364,050
Investment in associates 9,502 9,290 9,290 9,290 9,290
gross fixed assets 55,802 117,184 164,058 205,072 246,087
less: accumulated depreciation (5,441) (16,925) (33,003) (52,485) (75,863)
net fixed assets 50,361 100,259 131,055 152,588 170,224
Other assets 62,911 84,930 101,916 117,203 131,268
Total Assets 10,555,520 22,995,032 30,085,955 36,640,781 43,812,444
Liabilities
Current accounts from banks & FIs - 950,000 1,567,500 2,116,125 2,581,673
Customers’ current accounts 405,834 629,043 849,208 1,053,017 1,274,151
Other liabilities 89,916 107,899 129,479 152,785 180,287
Proposed dividend 749,938 651,487 887,787 1,217,566 1,535,318
Total Liabilities 1,245,688 2,338,429 3,433,974 4,539,493 5,571,428
Unrestricted investment accounts 4,901,152 15,438,629 20,842,149 25,635,843 31,019,370
Equity
Paid-up equity capital 3,749,685 4,124,654 4,124,654 4,124,654 4,124,654
Legal reserve 453,612 670,774 966,704 1,341,339 1,799,643
Risk reserve 93,592 93,592 93,592 93,592 93,592
Retained earnings 110,431 327,593 623,523 904,499 1,202,397
Fair value reserve 1,360 1,360 1,360 1,360 1,360
Total Shareholder’s Equity 4,408,680 5,217,974 5,809,832 6,465,444 7,221,646
Total Liabilities & Shareholders’ Equity 10,555,520 22,995,032 30,085,955 36,640,781 43,812,444
Global Research - Qatar Global Investment House
64 Qatar Banking Sector April 2008
OPERATING STATEMENTMasraf Al Rayan
Amount in QR’ 000 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Income from financing and investments withbanks and FIs
573,262 1,170,002 1,578,633 1,955,062 2,396,742
Depositors profit sharing (169,497) (526,501) (741,958) (918,879) (1,126,469)
Net profit sharing 403,765 643,501 836,676 1,036,183 1,270,273
Add: Income from investments 864,213 518,528 741,495 926,868 1,158,586
Add : Fees and commission 85,528 239,478 347,244 468,779 581,286
Add : Gain from foreign exchange operations 23,028 31,088 40,414 52,538 65,673
Total Non-Interest Income 972,769 789,094 1,129,153 1,448,186 1,805,544
Total Operating Income 1,376,534 1,432,595 1,965,828 2,484,369 3,075,818
Less: Provision for impairment of receivables and financing activities
- (34,453) (48,235) (57,882) (69,458)
Operating Income (net of provisions) 1,376,534 1,398,141 1,917,593 2,426,487 3,006,360
Less : Staff Expenses (64,673) (179,074) (249,287) (315,443) (405,859)
Less: Other Expenses (113,969) (121,771) (172,583) (218,384) (285,604)
Less: Depreciation & amoritzations (5,441) (11,484) (16,078) (19,482) (23,378)
Net Profit 1,192,451 1,085,812 1,479,645 1,873,178 2,291,519
P&L Appropriation Account:
Retained Earnings Broght Forward - 110,431 327,593 623,523 904,499
Net Profit for the year 1,192,451 1,085,812 1,479,645 1,873,178 2,291,519
Proposed Dividend (749,938) (651,487) (887,787) (1,217,566) (1,535,318)
Trfr to legal reserve - (217,162) (295,929) (374,636) (458,304)
Trfr to risk reserve - - - - -
Trfr to reserves (332,082) - - - -
Share of profit from associate - - - - -
Cl Balance of Retained Earnings 110,431 327,593 623,523 904,499 1,202,397
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 65
CASH FLOW STATEMENT
Masraf Al Rayan
Amount in QR'000 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Operating
Operating Activities 355,142 1,658,251 2,285,915 2,869,420 3,510,824
Profit for the year before share of profit for unrestricted
investment account holders and & minority interest
1,192,451 1,612,313 2,221,603 2,792,057 3,417,988
Adjustments For:
Depreciation 5,441 11,484 16,078 19,482 23,378
Provision for financial investments - 34,453 48,235 57,882 69,458
Gain on sale of financial investments (6,350) - - - -
Gain on sale of investment in susbsidiary (836,400) - - - -
Net increase (decrease) in Operating Assets (6,871,949) (9,738,461) (8,028,135) (5,748,022) (6,987,044)
Balances with banks & FIs (71,201) (2,672,931) (2,498,610) (1,873,957) (2,342,447)
Due from financing activities (6,737,837) (7,043,511) (5,512,539) (3,858,777) (4,630,533)
Other assets (62,911) (22,019) (16,986) (15,287) (14,064)
Net Increase (decrease) in liabilities 495,750 1,191,192 859,245 775,741 714,183
Current accounts from banks & FIs - 950,000 617,500 548,625 465,548
Customers current accounts 405,834 223,209 220,165 203,810 221,134
Other liabilities 89,916 17,983 21,580 23,306 27,501
Total Operating (6,021,057) (6,889,019) (4,882,975) (2,102,860) (2,762,038)
Payment to unrestricted investment account holders - (526,501) (741,958) (918,879) (1,126,469)
Net Cash Used in Operating Activities (6,021,057) (7,415,519) (5,624,932) (3,021,740) (3,888,506)
Cash flow from investing activities
Purchase of financial investments (507,815) (467,327) (223,767) (223,360) (234,280)
Additional investment in associate company (9,502) 212 - - -
Proceeds from sale of financial investments 34,958 - - - -
Proceeds from sale of subsdiary 965,575 - - - -
Purchase of investments properties (198,295) - - - -
Purchase of fixed assets (55,802) (61,382) (46,874) (41,014) (41,014)
Net cash (used in) investing activities 229,119 (528,497) (270,641) (264,375) (275,294)
Cash flow from financing activities
Proceeds from issue of share capital 4,005,512 - - - -
Equity transaction costs (40,705) - - - -
Increase in unrestricted investment accounts 4,536,993 10,537,477 5,403,520 4,793,694 5,383,527
Dividend distributed - (374,969) (651,487) (887,787) (1,217,566)
Net cash from financing activities 8,501,800 10,162,508 4,752,033 3,905,907 4,165,961
Net increase / (decrease) in cash and cash equivalents 2,709,862 2,218,492 (1,143,541) 619,793 2,161
Cash and cash equivalents - Beginning of the year - 456,775 2,675,267 1,531,726 2,151,519
Cash and cash equivalents - End of the year 2,709,862 2,675,267 1,531,726 2,151,519 2,153,680
Global Research - Qatar Global Investment House
66 Qatar Banking Sector April 2008
Ratios
Masraf Al Rayan
2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Profitability
- Return on Average Assets 5.7% 6.5% 5.6% 5.6% 5.7%
- Return on Average Equity 13.6% 22.6% 26.8% 30.5% 33.5%
- Net profit sharing income/ Total Op. Income (net ofprovisions)
29.3% 46.0% 43.6% 42.7% 42.3%
- Non-profit sharing income/ Total Op. Income (netof provisions)
70.7% 55.1% 57.4% 58.3% 58.7%
Margins
- Depositors Profit Sharing to Profit Sharing Income 29.6% 45.0% 47.0% 47.0% 47.0%
- Profit Sharing Income to Profit Sharing IncomeEarning Assets
5.0% 8.0% 6.7% 6.4% 6.4%
- Depositors Profit Sharing to Depositors ProfitSharing Liabilities
2.4% 4.9% 3.9% 3.8% 3.8%
- Net Spread 2.6% 3.1% 2.7% 2.6% 2.6%
- Net Interest Margin 3.7% 4.4% 3.5% 3.4% 3.4%
Efficiency
- Cost to Total Income 13.4% 21.8% 22.3% 22.3% 23.2%
- Staff Expense to Total Income 4.7% 12.5% 12.7% 12.7% 13.2%
Liquidity
- Loans to Customer Deposits 127.0% 85.6% 88.6% 86.2% 85.4%
- Customer Deposits to Equity 120.4% 307.9% 373.4% 412.8% 447.2%
Credit Quality
- Non Performing Loans (QR'000) - 323,862 463,053 567,240 680,688
- Loan Loss Reserve (QR'000) - 34,453 82,688 140,570 210,028
- NPL's to Gross Loans - 2.4% 2.4% 2.5% 2.5%
- NPL's to (Equity+Loan loss reserve) - 6.2% 8.1% 9.0% 9.7%
- Loan Loss Reserve to Gross Loans - 0.3% 0.4% 0.6% 0.8%
- NPL Coverage - 10.6% 17.9% 24.8% 30.9%
Capital Adequacy
- Equity to Total Assets 41.8% 22.7% 19.3% 17.6% 16.5%
- Equity to Gross Loans 64.0% 37.9% 30.1% 27.9% 26.0%
Constitution of Total Income
- Net Profit Sharing Income to Total Op Income 29.3% 43.6% 41.1% 40.3% 39.9%
- Fees & Comm. to Total Op. Income 6.2% 17.1% 18.1% 19.3% 19.3%
- Investment Income to Total Op Income 62.8% 37.1% 38.7% 38.2% 38.5%
- FX Income to Total Op. Income 1.7% 2.2% 2.1% 2.2% 2.2%
Operating Performance
- Change in Net Profit Sharing Income - 50.8% 29.5% 24.1% 22.7%
- Change in Fees and Commission - 180.0% 45.0% 35.0% 24.0%
- Change in Investment Income - -40.0% 43.0% 25.0% 25.0%
- Change in Fx Income - 35.0% 30.0% 30.0% 25.0%
RATIO'S USED FOR VALUATION
- Shares in Issue 749,937,000 749,937,091 749,937,091 749,937,091 749,937,091
- EPS (QR) 1.6 1.4 2.0 2.5 3.1
- Book Value Per Share (QR) 5.9 7.0 7.7 8.6 9.6
- Market Price Year End (QR) 22.90 22.30 22.30 22.30 22.30
- P/E 14.4 15.4 11.3 8.9 7.3
- P/BV 3.9 3.2 2.9 2.6 2.3
* Market price for 2008 and subsequent years are as per closing prices on DSM on April 27, 2008.
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 67
Al Khalij Commercial BankTickers:KCBK.QA (Reuters) KCBK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR13.3 (April 27, 2008)
Key Data
EPS* (QR) 0.31 Avg. daily vol. ('000) 2,101.8
BVPS* (QR) 6.5 52 week Hi / Lo 15.2 / 10.25
P/E (x) 42.7 Market Cap (QR mn) 9,576.0
P/BV (x) 2.0 Target Price (QR) 11.5 Source: Global Research
* Projected (2008)
Background• Al Khalij Commercial Bank (Al Khaliji) was incorporated as a Qatari Shareholding
Company on January 9, 2007 with its registered office in Doha.
• Al Khaliji is engaged in commercial banking activities in accordance with its memorandum and articles of incorporation and operates from its head office in Doha.
• The bank is establishing branches in Qatar and also negotiating to acquire the branches of a banking operation in the United Arab Emirates.
Recent Developments • In January 2008, Al Khaliji announced its first Islamic banking transaction with other
international banks in a major financing for Barwa Real Estate Company. The deal wasfor US$700mn Murabaha syndicated facility for which Al Khaliji is one of the mandated lead arrangers, providing the equivalent of US$75mn. The transaction finances Barwa'sgeneral requirements for its regional and international projects.
• 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.
• In 2007, the bank acted as a mandated lead arranger for US$2.5bln syndicated term loan for QTel. The bank contributed US$135mln in the syndication.
• The bank came out with its IPO in April 2007. It floated 120mn shares through the IPOat a nominal value of QR10 per share. The IPO was oversubscribed by 2.28 times. The authorized share capital of the bank is QR7.2bn divided into 720mn shares. At the end of
Recommendation
REDUCE
Global Research - Qatar Global Investment House
68 Qatar Banking Sector April 2008
2007, the issued and paid up capital of the bank is QR3.6bn divided into 720mn shares with a paid-up value of QR5 per share.
Analysis of 2007 and Q1-2008 Financial ResultsThe financial statements for the year 2007 is the first financial statements of the bank for theperiod from January 9, 2007 to December 31, 2007.
• At the end of 2007, the total assets of the bank was QR5.2bn. Among the major asset components, cash and due from banks was at QR4.2bn and loans to customers was at QR769.4mn. Other assets were at QR134.1mn and net fixed assets were at QR49.6mn.
• Among the major components of liabilities, shareholders’ equity accounted for 88.6% of total liabilities to QR4.6bn. The borrowings were at QR500mn, Accounts payable was at QR69.5mn and Other liabilities was at QR20mn.
• The bank’s loan portfolio was consisted mainly of two sectors, Telecommunication and Commercial accounted for 60.3% and 39.1% respectively. The share of Others was miniscule at 0.5% . At the end of 2007 the NPL level of the bank was nil.
Chart 1: Sectoral Distribution of Al Khaliji’s Loan Portfolio - 2007
Source: Al Khaliji’s Annual Report and Global Research
• During 2007, interest income was at QR205.6mn. Among the major components of this, interest on funds due from banks was at QR193.9mn and interest on loans to customers was at QR11.7mn. The interest expense was at QR2.2mn. This was mainly because majority of the bank’s assets were financed by shareholders’ equity. The net interestincome stood at QR203.4mn.
• The bank’s non-interest income stood at QR2.83mn in 2007. Among the major components of non-interest revenue, commission income accounted for 98.3% of total non-interest income which was at QR2.78mn. Gain on foreign exchange and other income were at QR24,000 and QR25,000 respectively.
• In 2007, the bank’s cost to total income ratio was at 64%, this was mainly because low income base in the initial year. Among the major cost components, its staff cost was at QR52mn, general & administration expenses was at QR75.7mn and depreciation charges stood at QR4.2mn.
70.0%60.0%50.0%40.0%30.0%20.0%10.0%
0.0%
(as
a %
of t
otal
loan
por
tfol
io)
60.3%
Telecommunication Commercial Others
39.1%
0.5%
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 69
• Al Khaliji reported a net profit of QR74.3mn. The bank’s Return on Average Equity(RoE) was at 1.6% whereas its Return on Assets (RoA) was 1.4% in 2007.
• At the end of 2007, the bank’s Tier 1 capital ratio and total capital ratio were same at 119.8% as it does not have tier 2 capital. The ratio is high due to initial years of operation of the bank.
• During Q1-2008, interest income grew by 40.3% y-o-y to QR79.9mn while interest expense was at QR12.3mn which was nil in Q1-2007. With this the net interest income of the bank registered a y-o-y growth of 18.6% to QR67.6mn. The bank reported a y-o-y decline of 43.9% in its net profit to QR7.1mn as compared to QR12.6mn reported in Q1-2007. On the balance sheet side, on a y-t-d basis, total assets registered a growth of 36.3% to QR7bn, loans & advances grew by 6.6% to QR819.8mn.
Outlook and Valuation• The bank is expanding its operations gradually. In Qatar, the bank plans to ramp up its
activities in the retail and small and medium sized business segments. We expect that by the end of this year the bank will make significant strides in terms of expanding itsnetwork in Qatar. The bank’s acquisition of BLC’s UAE banking business marks the beginning of Al Khaliji’s planned expansion across the Gulf.
• The bank is well capitalized to further expand its operations and leverage its balance sheet.
• At the current market price of QR13.3 (April 27, 2008), the bank trades at 42.7x and 27.5x of its earnings and 2.05x and 2.01x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Al Khaliji works out to QR11.5 based on the DDM and peer group valuation methods, which is 13.4% less than the market price on April 27, 2008. Hence we initiate our coverage on the stock with a “REDUCE” recommendation.
Global Research - Qatar Global Investment House
70 Qatar Banking Sector April 2008
BALANCE SHEETAl Khaliji Commercial Bank
Amount in Qatari Riyal ‘000 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Assets
Cash & deposits with Central Banks 30,430 1,393,784 853,554 1,134,804 1,250,696
Due from Banks and Other FIs 4,167,304 4,375,669 5,163,290 6,867,175 8,721,313
Loans and advances (Gross) 769,370 1,238,519 2,229,333 3,165,653 4,241,975
Provisions - (16,720) (46,816) (83,221) (132,004)
Other assets 134,079 281,566 394,192 492,740 615,925
Investment securities - Debt - 715,000 858,000 1,098,240 1,460,659
Investment securities - Others - 385,000 462,000 591,360 786,509
gross fixed assets 53,734 201,503 272,028 329,154 401,568
less: accumulated depreciation (4,181) (24,331) (50,174) (79,798) (115,939)
net fixed assets 49,553 177,171 221,854 249,356 285,629
Total Assets 5,150,736 8,549,989 10,135,407 13,516,108 17,230,703
Liabilities
Customer deposits - 1,672,000 2,508,000 3,561,360 4,985,904
Due to banks and other financial institutions 500,000 2,000,000 2,500,000 2,775,000 2,969,250
Accounts Payable 69,463 62,517 68,768 75,645 75,645
Other liabilities 20,011 30,017 37,521 45,775 52,184
Proposed dividends - 112,097 260,820 398,423 550,253
Total Liabilities 589,474 3,876,630 5,375,109 6,856,203 8,633,235
Owner’s Equity
Paid-up equity capital 3,600,000 3,600,000 3,600,000 5,400,000 7,200,000
Statutory reserve 886,953 931,792 1,001,344 1,100,949 1,238,513
Retained earnings 74,309 141,567 158,955 158,955 158,955
Total Shareholder’s Equity 4,561,262 4,673,359 4,760,299 6,659,905 8,597,467
Total Liabilities & Shareholders’ Equity 5,150,736 8,549,989 10,135,407 13,516,108 17,230,703
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 71
OPERATING STATEMENTAl Khaliji Commercial Bank
Amount in Qatari Riyals ‘000 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Interest Income 205,599 471,886 646,901 812,317 1,021,850
Interest Expense (2,243) (165,160) (231,267) (288,373) (357,648)
Net interest income 203,356 306,726 415,634 523,945 664,203
Add: Fees and commission 2,782 125,000 168,750 261,838 371,809
Add: Profit on Foreign Exchange 24 10,000 12,000 15,000 19,500
Add: Net gains on financial instruments - 28,875 69,878 110,603 155,010
Add: Dividend Income - 8,085 9,240 11,827 15,730
Add: Other income 25 15,000 18,300 22,326 27,238
Total Non-Interest Income 2,831 186,960 278,168 421,594 589,287
Total Operating Income 206,187 493,686 693,802 945,538 1,253,490
Less: Provision for loan losses - (16,720) (30,096) (36,405) (48,783)
Less: Impairment losses on financial investments - (15,400) (18,480) (22,176) (29,494)
Operating Income (net of provisions) 206,187 461,566 645,226 886,957 1,175,213
Less: Staff Cost (51,954) (118,485) (167,553) (226,929) (278,902)
Less: General and Administrative Expenses (75,728) (98,737) (104,070) (132,375) (172,355)
Less: Depreciation (4,196) (20,150) (25,843) (29,624) (36,141)
Net Profit 74,309 224,194 347,760 498,029 687,816
P&L Appropriation Account: -
Retained Earnings Broght Forward - 74,309 141,567 158,955 158,955
Net Profit for the year 74,309 224,194 347,760 498,029 687,816
Proposed Dividend - (112,097) (260,820) (398,423) (550,253)
Trfr to Statutory Reserve - (44,839) (69,552) (99,606) (137,563)
Cl Balance of Retained Earnings 74,309 141,567 158,955 158,955 158,955
Global Research - Qatar Global Investment House
72 Qatar Banking Sector April 2008
CASH FLOW STATEMENTAl Khaliji Commercial Bank
Amount in Qatari Riyal ‘000 2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Operating
Operating Activities 80,829 261,064 403,698 564,058 772,739
Profit for the year 74,309 224,194 347,760 498,029 687,816
Provision for imapirment of loans & advances - 16,720 30,096 36,405 48,783
Profit or loss on sale of fixed assets 96 - - - -
Profit on sale of financial investments - - - - -
(Gain) loss on revaluation of investments and derivatives
- - - - -
Provision for impairment of investments - - - - -
Depreciation 4,181 20,150 25,843 29,624 36,141
Finance charges 2,243 - - - -
Social contributions paid - - - - -
Net Increase/Decrease in Operating Activities (4,483,522) 2,350,059 (541,306) (1,395,262) (1,428,442)
(Inc.) / Dec. in loans and advances to customers (769,370) (469,149) (990,815) (936,320) (1,076,322)
(Inc.) / Dec. in due from banks and other financial institutions
(4,167,304) (208,365) (787,620) (1,703,886) (1,854,137)
Inc. / (Dec.) in Due to banks - 1,500,000 500,000 275,000 194,250
Increase in customer deposits - 1,672,000 836,000 1,053,360 1,424,544
(Inc.) / Dec. in other assets (134,079) (147,487) (112,626) (98,548) (123,185)
Borrowings 500,000 - - - -
Accounts Payable 69,463 (6,946) 6,252 6,877 -
Inc./ (Dec.) in other liabilities 17,768 10,006 7,504 8,255 6,409
Net cash from operatig activities (4,402,693) 2,611,123 (137,608) (831,205) (655,703)
Investing activites
Net movement in investments - (1,100,000) (220,000) (369,600) (557,568)
Proceeds from sale of financial Investments (net) - - - - -
Acquisition of fixed assets (53,830) (147,769) (70,526) (57,126) (72,414)
Capital work in progress - - - -
Total Investing (53,830) (1,247,769) (290,526) (426,726) (629,982)
Financing activities
Net proceeds from issue of share capital 4,486,953 - - 1,800,000 1,800,000
Dividend paid - - (112,097) (260,820) (398,423)
Total Financing 4,486,953 - (112,097) 1,539,180 1,401,577
Net Change in Cash 30,430 1,363,354 (540,230) 281,250 115,892
Opening Cash balance - 30,430 1,393,784 853,554 1,134,804
Net Cash at end 30,430 1,393,784 853,554 1,134,804 1,250,696
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 73
RatiosAl Khaliji Commercial Bank
2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Profitability Ratios
- Return on Average Assets 1.4% 3.3% 3.7% 4.2% 4.5%
- Return on Average Equity 1.6% 4.9% 7.4% 8.7% 9.0%
- Net interest income/ Op. Income (net of provisions) 98.6% 62.8% 59.8% 55.0% 52.4%
- Non-interest income/ Total Op. Income 1.4% 40.5% 43.1% 47.5% 50.1%
Margins
- Interest Expense to Interest Income 1.1% 35.0% 35.8% 35.5% 35.0%
- Interest Income to Average Interest Earning Assets 4.2% 8.4% 8.9% 8.4% 8.0%
- Interest Expense to Average Interest Bearing Liabilities 0.4% 4.0% 5.3% 5.1% 5.0%
- Net Spread 3.7% 4.4% 3.5% 3.3% 3.0%
- Net Interest Margin 4.1% 5.4% 5.7% 5.4% 5.2%
Efficiency
- Cost to Total Income 64.0% 48.1% 42.9% 41.1% 38.9%
- Cost to Op Income 64.0% 51.4% 46.1% 43.8% 41.5%
- Staff Cost to Total Op. Income 25.2% 25.7% 26.0% 25.6% 23.7%
Liquidity
- Loans to Interest Earning Assets 16% 20% 27% 28% 29%
- Loans to Customer Deposits - 73% 87% 87% 82%
- Due from Banks to Due to Banks 833% 219% 207% 247% 294%
Credit Quality
- Non Performing Loans (QR’000) - 4,335 10,032 20,577 42,420
- Loan Loss Reserve (QR’000) - 16,720 46,816 83,221 132,004
- NPL’s to Gross Loans - 0.35% 0.45% 0.65% 1.00%
- NPL’s to (Equity+Loan loss reserve) - 0.1% 0.2% 0.3% 0.5%
- Loan Loss Reserve to Gross Loans - 1.4% 2.1% 2.6% 3.1%
- NPL Coverage - 385.7% 466.7% 404.4% 311.2%
Capital Adequacy
- Equity to Total Assets 89% 55% 47% 49% 50%
- Equity to Gross Loans 593% 377% 214% 210% 203%
Constitution of Total Income
- Interest Income to Total Op Income 98.6% 59.5% 56.9% 52.5% 49.9%
- Fees & Comm. to Total Op. Income 1.3% 27.1% 26.2% 29.5% 31.6%
- Investment Income to Total Op Income - 8.0% 12.3% 13.8% 14.5%
- FX Income to Total Op. Income - 2.2% 1.9% 1.7% 1.7%
- Other Income to Total Op. Income - 3.2% 2.8% 2.5% 2.3%
Operating Performance
- Change in Interest Income - 42.6% 32.9% 26.5% 26.2%
- Change in Fees and Commission - 4393% 35% 55% 42%
- Change in Investment Income - - 142% 58% 40%
- Change in Other Income - 59900% 22% 22% 22%
Shareholder’s Data
- Shares in Issue (‘000) 720,000 720,000 720,000 720,000 720,000
- EPS (QR) 0.1 0.3 0.5 0.7 1.0
- Book Value Per Share (QR) 6.3 6.5 6.6 9.2 11.9
- Market Price Year End (QR) 14.6 13.3 13.3 13.3 13.3
- P/E 141.5 42.7 27.5 19.2 13.9
- P/BV 2.3 2.05 2.01 1.4 1.1
* Market price for 2008 and subsequent years are as per closing prices on DSM on April 27, 2008.
Global Research - Qatar Global Investment House
74 Qatar Banking Sector April 2008
Ahli BankTickers: AABQ.QA (Reuters) ABQK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR69 (April 27, 2008)
Key Data
EPS* (QR) 6.0 Avg. daily vol. ('000) 18.2
BVPS* (QR) 28.0 52 week Hi / Lo 75.65 / 59.3
P/E (x) 11.5 Market Cap (QR mn) 4,029.5
P/BV (x) 2.5 Source: Global Research
*Actual- 2007
Background• Ahli Bank was incorporated in 1983 and is engaged in commercial, Islamic and retail
banking services and operates through its registered head office located in Doha and 11branches established in the State of Qatar.
• In 2004, Ahli United Bank (AUB) Bahrain acquired a 40% stake in Ahli Bank. The acquisition was through 100% participation in capital increase in a transaction worth US$201mn. In addition to equity participation, AUB also signed a ten-year management agreement, on a renewable basis, to oversee the running of the bank and ensure a focused implementation of a growth strategy. As part of the agreement Al-Ahli Bank of Qatar QSC was renamed Ahli Bank QSC.
• In June 2006, the bank made successful venture into Islamic banking as a window within conventional banking.
• In 2007, the bank raised QR182mn (US$50mn) as Subordinated Medium Term Notes. This represents the first tranche of QR800mn debt raising programme planned by thebank. This notes will qualify as tier II capital and will be matured in December 2017.
Analysis of 2007 and Q1-2008 Financial Results• The bank’s balance sheet size of the bank grew by 63% to QR15.6bn as compared to
QR9.6bn in the previous year. The bank’s profit for the year 2007 stood at QR302.6mnagainst QR202.2mn reported for 2006, a growth of 49.6%. Net interest income from conventional banking activities in 2007 grew by 10.9% to QR263.7mn as compared to QR237.8mn reported in 2006.
• The total assets of the bank grew by 63% in 2007 to QR15.6bn. Among the major asset components, gross loans & advances grew by 59.1% to QR10.2bn. Out of the total loan
Recommendation
Not Rated
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 75
portfolio QR865.4mn accounted by Islamic financing activities which were at QR118.8mnin 2006. Funds with banks & FIs increased by 99.5% to QR3.3bn. Net loans & advances accounted for 64.9% of the total assets.
• Among the components of liabilities, the share of customer deposits (including unrestricted investment accounts) in total liabilities increased in 2007 to 73.8% from 71.4% in the preceding year and it registered a y-o-y growth of 68.4% to QR11.5bn. Unrestricted investment accounts grew significantly during the year to reach at QR990.3mn fromQR4.8mn in 2006. The amount due to banks & other FIs increased by 45.1% to QR2bn. The bank also has borrowings to the tune of QR182mn which represents subordinated debt raised by the bank in 2007. This borrowing will be matured after 10 years from the date of issue. The contribution of shareholders’ equity in total liabilities declined to 9.1% from 11.7% to reach at QR1.4bn.
• The bank’s loan portfolio is highly concentrated to three sectors, namely Commercial, Personal, and Real Estate. Its exposure to the government sector has been declining since last few years and its contribution to the total loan portfolio declined to 1.8% in 2007 from 16.5% in 2004. Commercial loans segment has highest contribution to the total loan portfolio; its share was at 33% in 2007. The y-o-y growth in the segment was 183% to QR3.4bn. The bank’s exposure to Personal sector accounted for 32.5% of the total loans portfolio and it grew by 78% to QR3.3bn. The bank needs to diversify its exposure to other sectors as these two segments, Commercial and Personal, together accounting for more than 65% of its loan portfolio. The bank’s exposure to the Real Estate segment stood at QR1.2bn, witnessed a growth of 109.9% and accounted for 12% of the total loan portfolio.
Chart 1: Sectoral Distribution of Ahli Bank’s Loan Portfolio
Source: Ahli 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. Its NPLs declined by 5.9% to QR154.6mn in 2007 from QR164.2mn in 2006. NPLs as a percentage of gross loans declined to 1.5% in 2007 from 2.6% in 2006. The bank has sufficient coverage to its NPLs at 90.9% in 2007which was at 88.9% in 2006.
GovernmentServices
Government agenciesContracting
Industry/ManufacturingReal Estate
CommercialPersonal
2004 2005 2006 2007
100.0%90.0%80.0%70.0%60.0%50.0%40.0%30.0%20.0%10.0%0.0%
Global Research - Qatar Global Investment House
76 Qatar Banking Sector April 2008
Chart 2: Quality of Loan Portfolio
Source: Ahli Bank Annual Reports and Global Research
• During 2007, the total interest income of the bank from conventional banking activities grew by 53.2% to QR793.3mn. Among the major components of gross interest income, interest from loans & advances grew by 61.3% to QR659.3mn and interest on funds due from banks & other FIs increased by 51.4% to QR90.5mn, while interest income from debt securities declined by 11.7% to QR43.5mn. The bank’s total interest cost grew by 89.3% to QR529.6mn and among the major constituents, interest expense on customer deposits grew by 88.8% to QR456.6mn while that on borrowings from banks & FIs witnessed a growth of 91.7% to reach at QR73mn. The net interest income from conventional banking activities grew by 10.9% to QR263.7mn.
• The bank’s non-interest income grew by 101.9% in 2007 to reach at QR195mn as compared to QR96.6mn in 2006. Among the major components of non-interest revenue, the bank registered a y-o-y growth of 37% in fees & commission income.
Chart 3: Growth in Non-Interest Income
Source: Ahli Bank Annual Reports and Global Research
• In 2007, the bank’s net spread and net interest margin declined to 2.1% and 2.6% from 2.8% and 3.3% respectively.
12.0
10.0
8.0
6.0
4.0
2.0
-2004 2005 2006 2007
Gross Loans NPLs to Gross Financings
(in Q
R b
n)
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
22.3%
1.8
3.8
6.4
10.2
9.4%
2.6%1.5%
250
200
150
100
50
02004 2005 2006 2007
Non-Intrest Income Growth Rate
(in Q
R M
n)
200%
150%
100%
50%
0%
-50%-23.2%
165.1%
1.6%
101.9%
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 77
• The bank’s cost to total income ratio has been declining over the last few years, which declined to 30% in 2007 from 37.7% and 38.1% in 2006 and 2005 respectively. Total operating expenses of the bank grew by 9.4% in 2007 to QR137.8mn over QR126mn reported in 2006. Among the major cost components in 2007, its staff cost went up by 12.2% to QR76.6mn, other expenses declined by 4.7% to QR49.4mn and depreciation charges grew by 100.5% to QR11.9mn.
Chart 4: Cost to Total Income
Source: Ahli Bank Annual Reports and Global Research
• Ahli Bank registered a y-o-y growth of 49.6% in its bottomline to QR302.6mn over QR202.2mn reported in 2006. During 2007, the bank made provisions for loans and advances to the extent of QR9mn whereas last year due to recovery of bad loans there was a net reversal of provisions which was at QR1.5mn. The bank’s Return on Average Equity (RoAE) improved to 23.8% from 18.4% in 2006 whereas its Return on Average Assets (RoAA) declined marginally to 2.4% in 2007 from 2.6% in 2006.
• At the end of 2007, the bank reported Tier 1 capital ratio of 9.23% and total capital ratio of 12.9% as against 11.57% and 13.15% respectively for the year 2006.
• During Q1-2008, interest income grew by 28.8% y-o-y to QR218mn while interest expense registered a y-o-y growth of 47% to QR150.1mn. With this the net interest income of the bank registered a marginal y-o-y growth of 1.2% to QR67.8mn. The bank reported a y-o-y growth of 30.3% in its net profit to reach QR85.6mn as compared toQR65.7mn reported in Q1-2007. On the balance sheet side, on a y-t-d basis, total assets declined by 2% to QR15.3bn, net loans & advances grew by 11.3% to QR11.2bn and customer deposits declined marginally by 0.05% to QR11.5bn.
2004 2005 2006 2007
55.0%
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
Global Research - Qatar Global Investment House
78 Qatar Banking Sector April 2008
BALANCE SHEET
Ahli Bank
Amount in Qatari Riyal '000 2005 2006 2007
Assets
Cash & balances with banks 147,095 241,349 470,566
Due from Banks and Other FIs 1,335,735 1,646,426 3,285,049
Loans and advances (Gross) 3,826,277 6,440,344 10,246,327
Other assets 46,380 81,249 232,660
Less : provisions (336,136) (145,972) (140,542)
Total Current Assets 5,019,351 8,263,396 14,094,060
Investment securities - debt 754,246 875,140 873,739
Investment securities - equity 332,398 301,484 484,376
gross fixed assets 122,932 170,145 189,666
less: accumulated depreciation (47,894) (53,805) (65,460)
net fixed assets 75,038 116,340 124,206
Total Assets 6,181,033 9,556,360 15,576,381
Liabilities
Due to banks and other FIs 441,330 1,347,340 1,955,160
Deposits from customers 4,530,465 6,822,507 10,503,900
Subordinated debt - - 182,000
Other liabilities 134,080 199,203 421,135
Proposed dividend - 60,938 101,562
Total Liabilities 5,105,875 8,429,988 13,163,757
Unrestricted investment accounts - 4,840 990,339
Owner's Equity
Paid-up equity capital 304,688 406,250 507,812
Statutory reserve 410,027 410,027 470,557
Risk reserve 34,937 76,994 147,104
Fair value reserve 202,051 110,122 209,785
Proposed bonus shares 101,562 101,562 76,172
Retained earnings 21,893 16,577 10,855
Total Shareholder's Equity 1,075,158 1,121,532 1,422,285
Total Liabilities & Shareholders' Equity 6,181,033 9,556,360 15,576,381
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 79
OPERATING STATEMENT
Ahli Bank
Amount in Qatari Riyal '000 2005 2006 2007
Interest Income 267,775 517,674 793,282
Interest Expense (132,169) (279,864) (529,600)
Net interest income 135,606 237,810 263,682
Add : Fees and commission 71,738 76,359 104,584
Add : Net Gains from Dealing in Foreign Currencies 9,554 14,354 15,402
Add: Gain from Investments 11,102 (5,025) 11,151
Add: Gain / (Loss) from Investments in Associates - - -
Add : Dividend Income 2,560 5,148 12,770
Add: Income from Islamic financing and investing activities - 5,746 35,993
Add : Other Operating Income 81 - 15,080
Total Non-Interest Income 95,035 96,582 194,980
Total Operating Income 230,641 334,392 458,662
Less: Recoveries / (Provision) for Impairment of Loans & Advances 5,254 21,691 1,300
Less: Other (Provisions) / Recoveries (6,360) 1,487 (9,000)
Less: Provisions for available for sale investments - (29,196) (150)
Operating Income (net of provisions) 229,535 328,374 450,812
Less : Staff Expenses (49,751) (68,257) (76,559)
Less: Expenditure on Bank's Community Support Programme - - -
Less: Other Expenses (29,431) (51,808) (49,372)
Less: Depreciation (8,732) (5,912) (11,856)
Less: Unrestricted Investment Account Holders' Share of Profit - (156) (10,373)
Net Profit 141,621 202,241 302,652
P&L Appropriation Account:
Retained Earnings Broght Forward 3,940 18,893 16,577
Net Profit for the year 141,621 202,241 302,652
Proposed Dividend - (60,938) (101,562)
Director Fees (2,250) - -
Settlement of Qatar Central Bank Support
Distribution from retained earnings
Proposed Issue of Bonus Shares (101,562) (101,562) (76,172)
Net Movement in Risk Reserve (19,856) (42,057) (70,110)
Trfr to Statutory Reserve - - (60,530)
Cl Balance of Retained Earnings 21,893 16,577 10,855
Global Research - Qatar Global Investment House
80 Qatar Banking Sector April 2008
CASH FLOW STATEMENT
Ahli Bank
Amount in Qatari Riyal '000 2005 2006 2007
Operating
Operating Activities 133,693 222,076 292,565
Profit for the Year 141,621 202,241 302,652
Provision for impairment of loans and advances 25,389 15,427 48,835
Provision for Legal cases - (1,487) 9,000
Depreciation 8,732 5,912 11,856
Provision for available for sale investments - 29,196 150
Provision no longer required (30,643) (37,118) (50,135)
Profit on sale of property, plant and equipment (95) (7,997)
Unrealised gain on option (209)
Other provisions - -
Provision for staff indemnity service - 2,880 3,531
Provision for property acquired against settlement of debts - - -
Profit on sale of financial investments (11,102) 5,025 (11,151)
Payments made on legal claims (12,817)
Payments made relating to staff indemnity service (1,359)
Net Increase/Decrease in Operating Activities (351,271) 135,583 (101,859)
Inc./(Dec.) in due to banks (128,545) 906,010 607,820
Dec/(Inc.) in due from banks 16,339 (317,566) (1,638,624)
Inc. in customer deposits 1,786,685 2,296,943 4,666,892
Options derivatives - - -
Dec./(Inc.) in loans and advances (2,056,994) (2,775,665) (3,810,113)
(Inc.) / Dec. in other assets (20,704) (34,869) (151,411)
Inc./(Dec.) in other liabilities 51,948 60,730 223,577
Total Operating (217,578) 357,659 190,706
Investing
Purchase of investments (173,818) (288,627) (120,571)
Redemption of held to maturity investments - - -
Sale / Redemption of investments 550,300 72,500 49,745
Purchase of fixed assets and property (56,606) (47,278) (21,308)
Proceeds from disposal of property, plant and equipment 261 - 9,583
Total Investing 320,137 (263,405) (82,551)
Financing
Capital increase -
Repayment of Qatar Central Bank support -
Subordinated debt 182,000
Dividend paid to shareholders (57,129) - (60,938)
Directors' remuneration paid (2,250) - -
Total Financing (59,379) - 121,062
Net Change in Cash 43,180 94,254 229,217
Net Cash at beginning 103,915 147,095 241,349
Net Cash at end 147,095 241,349 470,566
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 81
Ratios
Ahli Bank
2005 2006 2007
Profitability
- Return on Average Assets 2.7% 2.6% 2.4%
- Return on Average Equity 14.8% 18.4% 23.8%
- Net interest income/ Op. Income (net of provisions) 61% 79% 59%
- Non-interest income/ Op. Income (net of provisions) 39% 21% 41%
Margins
- Interest Expense to Interest Income 49.4% 53.5% 65.1%
- Interest Income to Interest Earning Assets 5.20% 7.04% 7.10%
- Interest Expense to Interest Bearing Liabilities 3.19% 4.26% 4.99%
- Net Spread 2.01% 2.78% 2.10%
- Net Interest Margin 2.64% 3.27% 2.56%
Efficiency
- Cost to Total Income 38.1% 37.7% 30.0%
- Staff Expense to Total Income 21.6% 20.4% 16.7%
Liquidity
- Loans to Interest Earning Assets 65% 72% 71%
- Loans to Customer Deposits 84.5% 94.3% 89.1%
- Customer Deposits to Equity 421% 608% 739%
- Due from Banks to Due to Banks 303% 122% 168%
Credit Quality
- Non Performing Loans (QR'000) 359,658 164,249 154,554
- Loan Loss Reserve (QR'000) 336,136 145,972 140,542
- NPL's to Gross Loans 9.4% 2.6% 1.5%
- NPL's to (Equity+Loan loss reserve) 49% 17% 12%
- Loan Loss Reserve to Gross Loans 8.8% 2.3% 1.4%
- NPL Coverage 93.5% 88.9% 90.9%
Capital Adequacy
- Equity to Total Assets 17% 12% 9%
- Equity to Gross Loans 28% 17% 14%
Constitution of Total Income
- Interest Income to Total Op Income 61.4% 80.8% 66.8%
- Fees & Comm. to Total Op. Income 31.3% 23.3% 23.2%
- Investment Income to Total Op Income 3.2% -8.4% 3.3%
- FX Income to Total Op. Income 4.2% 4.4% 3.4%
- Other Income to Total Op. Income 0.0% 0.0% 3.3%
Operating Performance
- Change in Interest Income 66% 88% 13%
- Change in Fees and Commission 162% 6% 37%
- Change in Investment Income 583% -99% 19348%
- Change in Fx Income 91% 50% 7%
- Change in Other Income -94% -100% -
RATIO'S USED FOR VALUATION
- Shares in Issue 30,468,800 40,625,000 50,781,200
- EPS (QR) 4.6 5.0 6.0
- Book Value Per Share (QR) 35.3 27.6 28.0
- Market Price Year End (QR) 60.00 59.13 75.65
- P/E 12.9 11.9 12.7
- P/BV 1.7 2.1 2.7
* Market price for 2007 and previous years are closing prices at the end of the year
Global Research - Qatar Global Investment House
82 Qatar Banking Sector April 2008
Qatar International Islamic BankTickers: QISB.QA (Reuters) QIIK QD (Bloomberg)
Listing:Doha Securities Market
CMP:QR82.7 (April 27, 2008)
Key Data
EPS* (QR) 6.8 Avg. daily vol. ('000) 616.4
BVPS* (QR) 33.6 52 week Hi / Lo 84.8 / 46.5
P/E (x) 12.2 Market Cap (QR mn) 10,431.8
P/BV (x) 2.5 Source: Global Research
* Actual (2007)
Background• Qatar International Islamic Bank (QIIB) was incorporated under Amiri Decree No. 52 of
1990. The bank operates through its head office located on Grand Hamad Street in Dohaand 10 local branches.
• The Bank is engaged in banking, financing and investing activities in accordance with itsArticles of Incorporation, Islamic Shari’a principles and regulations of Qatar Central Bank.
• The bank provides a wide range banking services through various Islamic modes of financing such as Murabaha, Mudaraba, Musharaka, Musawama, Istesna and others. Italso carries out investment activities for its own account.
Analysis of 2007 and Q1-2008 Financial Results• The bank’s profit for the year 2007 stood at QR480mn against QR399mn reported for
2006, a growth of 20.3%. The bank’s balance sheet size grew by 18.5% to QR9.9bn as compared to QR8.4bn in the previous year.
• The total assets of the bank grew by 18.5% in 2007 to QR9.9bn. Among the major asset components, due from financing activities (gross) grew by 19.3% to QR5.1bn. Fundswith banks & FIs grew by 3.5% to QR3.7bn. Net financing activities accounted for 44.1%of the total assets.
• Among the components of liabilities, the share of customer deposits (including unrestricted investment accounts) in total liabilities declined in 2007 to 72.5% from 79.7% in the preceding year and it registered a y-o-y growth of 7.8% to QR7.2bn. Unrestricted investment accounts increased during the year by 2.3% to stood at QR5.2bn and customers’ accounts grew by 25.1% to QR2bn. The amount due to banks & other
Recommendation
Not Rated
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 83
FIs declined by 46.4% to QR54.5mn. The contribution of shareholders’ equity in total liabilities increased to 23.7% from 17% to reach at QR9.9bn.
• The bank’s loan portfolio is highly concentrated to three sectors, namely Trade, Consumer Financing and Housing. Consumer loans segment has highest contribution to the total loan portfolio, its share was at 32.1% in 2007. The y-o-y growth in the segment was 2.5% to QR1.6bn. The bank reduced its exposure to this segment as its share in total loan portfolio declined to 32.1% in 2007 from 37.4% in 2006. The bank’s exposure to Trade sector accounted for 28% of the total loan portfolio and it declined by 6.5% to QR1.4bn. Its exposure to Housing segment stood at QR1.2bn, witnessed a growth of 163.8% and accounted for 24.4% of the total loan portfolio.
Chart 1: Sectoral Distribution of QIIB’s Loan Portfolio
Source: QIIB Annual Reports and Global Research
• The bank’s NPLs as a percentage of gross financings have been declining over the last fewyears, which was despite the growing loan book. However, in 2007 it grew marginally. In 2007, its NPLs grew by 8.3% to QR106.8mn from QR98.6mn in 2006. NPLs as a percentage of gross loans grew marginally to 2.4% in 2007 from 2.3% in 2006. The bank has sufficient coverage to its NPLs at 63.4% in 2007, which was at 68.8% in 2006.
Chart 2: Quality of Loan Portfolio
Source: QIIB Annual Reports and Global Research
2004 2005 2006 2007
100.0%90.0%80.0%70.0%60.0%50.0%40.0%30.0%20.0%10.0%
0.0%
GovernmentSemi-Government
IndustryTrade
CotractingConsumer
HousingOthers
6.0
5.0
4.0
3.0
2.0
1.0
-2004 2005 2006 2007
(in Q
R b
n)
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
3.0
2.7% 4.0 4.3
5.13.3%
2.3%2.4%
Gross Financings NPLs to Gross Financings
Global Research - Qatar Global Investment House
84 Qatar Banking Sector April 2008
• During 2007, Income from financing activities grew by 9.1% to QR586.5mn. Among themajor components of this, Murabaha & Musawama grew by 9.2% to QR330.8mn, Istesna increased by 21.8% to QR27.8mn, Mudaraba income declined by 8.8% to QR5.3mn, income from Ijara financing grew by 81% to QR33.9mn and income from investmentswith banks & FIs increased by 18.7% to QR188.6mn. The depositors’ profit sharinggrew by 11% to QR198mn from QR178.4mn in 2006. The net profit sharing witnessed agrowth of 8.1% to reach at QR388.5mn.
• The bank’s non-interest income grew by 54.2% in 2007 to reach at QR219.5mn as compared to QR142.4mn in 2006. Among the major components of non-interest revenue, the bank registered a decline of 14.8% in fees & commission income to QR59.8mn and income from investments grew by 142.5% to QR146.8mn.
Chart 3: Trend in Non-Interest Income
Source: QIIB Annual Reports and Global Research
• In 2007, the bank’s cost to total income ratio declined to 16.6% from 18.4% in 2006. Total operating expenses of the bank grew by 9.3% in 2007 to QR101.2mn over QR92.5mn reported in 2006. Among the major cost components in 2007, staff cost went up by 10.3% to QR57.6mn, other expenses grew by 11.3% to QR36.4mn and depreciation charges declined by 5.4% to QR7.1mn.
Chart 4: Cost to Total Income
Source: QIIB Annual Reports and Global Research
2004 2005 2006 2007
(in Q
R M
n)
500450400350300250200150100
500
39.4
Non-Interest Income
432.6
142.4
219.5
2004 2005 2006 2007
39.0%
45.0%40.0%35.0%30.0%25.0%20.0%15.0%10.0%
5.0%0.0%
13.8%
18.4%
16.6%
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 85
• QIIB registered a y-o-y growth of 20.3% in its net profit to QR480mn over QR399mnreported in 2006. During 2007, the bank did not make any provision for loans and advances which was at QR10.6mn in 2006. The bank also made provisions for financialinvestments to the tune of QR26.7mn. The bank’s Return on Average Equity (RoAE) declined to 25.4% from 34.6% in 2006 whereas its Return on Average Assets (RoAA) declined to 5.2% in 2007 from 5.4% in 2006.
• At the end of 2007, the bank reported Tier 1 capital ratio of 24.62% and total capital ratio of 25.07% as against 24.08% and 25.58% respectively for the year 2006. These ratios are likely to improve with the planned further raising of capital through rights issue in 2008.
• During Q1-2008, income from financing activities grew by 6.2% y-o-y to QR104.9mnwhereas income from investing activities registered a y-o-y growth of 42.3% to QR87.1mn. Total income from financing & investing activities grew by 20% on y-o-y basis to QR192mn. The bank reported a y-o-y growth of 28.2% in its net profit toQR135.4mn as compared to QR105.6mn reported in Q1-2007. Total assets registered a y-t-d growth of 9.5% to QR10.9bn.
Global Research - Qatar Global Investment House
86 Qatar Banking Sector April 2008
BALANCE SHEET
Qatar International Islamic Bank
Amount in Qatari Riyal '000 2005 2006 2007
Assets
Cash & balances with Central banks 320,376 272,595 431,483
Balances and investments with banks & other FIs 1,952,745 3,592,570 3,718,681
Recceivables & balances from financing activities (Gross) 4,004,259 4,259,121 5,082,431
Deferred income (544,987) (564,369) (618,642)
Profit in suspense (5,098) (7,126) (7,417)
Less : provisions (57,588) (67,871) (67,744)
Investment securities - debt 268,916 407,883 536,328
Investment securities - equity 231,580 182,422 410,784
Investment in associates - 135,777 157,690
Investment properties 54,256 53,342 142,209
gross fixed assets 81,996 86,416 92,355
less: accumulated depreciation (45,780) (52,159) (57,965)
net fixed assets 36,216 34,257 34,390
Other assets 74,972 99,333 131,016
Total Assets 6,335,647 8,397,934 9,951,209
Liabilities
Current accounts from banks & FIs 108,737 101,749 54,513
Customers'current accounts 1,653,835 1,625,773 2,033,327
Accounts payable 83,742 - -
Other liabilities 184,140 174,785 322,434
Proposed dividend - - -
Total Liabilities 2,030,454 1,902,307 2,410,274
Holders of unrestricted investment deposits' accounts 3,422,904 5,070,434 5,184,551
Equity
Paid-up equity capital 203,125 424,224 700,782
Legal reserve 171,399 413,463 800,130
General reserve 210,974 210,974 210,974
Retained earnings 2,275 101,532 16,637
Fair value reserve 57,234 23,646 45,211
Risk reserve 11,880 17,760 22,024
Equalisation reserve 22,277 - -
Foreign currency revalution reserve - - -
Proposed bonus shares 203,125 233,594 560,626
Total Shareholder's Equity 882,289 1,425,193 2,356,384
Total Liabilities & Shareholders' Equity 6,335,647 8,397,934 9,951,209
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 87
OPERATING STATEMENT
Qatar International Islamic Bank
Amount in Qatari Riyal '000 2005 2006 2007
Income from financing and investments with banks and FIs 319,059 537,610 586,491
Depositors profit sharing (161,545) (178,365) (198,031)
Net profit sharing 157,514 359,245 388,460
Add : Fees and commission 28,263 70,190 59,784
Add : Net Gains from Dealing in Foreign Currencies (1,614) 11,641 12,901
Add: Income from Investments 405,989 60,532 146,796
Total Non-Interest Income 432,638 142,363 219,481
Total Operating Income 590,152 501,608 607,941
Less: Provision for impairment of receivables and financing activities (18,466) (10,555) -
Less: Porvision for impairment of financials investments - (11,047) (26,752)
Less: Provision (recovery) of other provisions 1,828 11,555 -
Less: Provision for credit cards / ATM commitments - - -
Operating Income (net of provisions) 573,514 491,561 581,189
Less : Staff Expenses (41,368) (52,271) (57,636)
Less: Other Expenses (32,716) (32,755) (36,454)
Less: Depreciation & amoritzations (7,478) (7,511) (7,104)
Profit Before Share of Unrestricted investment account holders inthe Risk Reserve and Equalisation Reserve
491,952 399,024 479,995
Less: Equalisation reserve (26,328) - -
Net Profit 465,624 399,024 479,995
P&L Appropriation Account:
Retained Earnings Broght Forward 1,500 2,275 101,532
Net Profit for the year 465,624 399,024 479,995
Proposed Dividend - - -
Director Fees (1,500) (2,275) -
Proposed Issue of Bonus Shares (203,125) (233,594) (560,626)
Recovery of eualisation reserver - 22,277 -
Trfr to reserves (260,224) (86,175) (4,264)
Cl Balance of Retained Earnings 2,275 101,532 16,637
Global Research - Qatar Global Investment House
88 Qatar Banking Sector April 2008
CASH FLOW STATEMENT
Qatar International Islamic Bank
Amount in Qatari Riyal '000 2005 2006 2007
Operating
Operating Activities 104,146 386,270 418,889
Net Profit for the Year 465,624 399,024 479,995
Provision for impairment of receivables and financing activities 17,892 10,283 (127)
Depreciation & amortisation 7,478 7,511 7,104
Loss from impairment of financial investments - 11,047 26,752
Provision for other investments (1,828) (11,555) -
Provision for credit card/ATM commitments - - -
Gain on sale of investment in associate bank - - (5,462)
Gain on sale of investment property - - (4,724)
Gain on sale of investments (385,020) (30,040) (84,649)
Net increase (decrease) in Operating Activities 22,438 (365,082) (334,342)
Balances with banks & FIs (25,596) (62,862) (41,753)
Receivables and balances from financing activities (793,398) (245,009) (768,873)
Other assets (40,460) (24,361) (31,683)
Net Increase (decrease) in liabilities
Current accounts from banks & FIs 65,500 (6,988) (47,236)
Customers current accounts 699,441 (28,062) 407,554
Accounts payable and other liabilities 116,951 2,200 147,649
Total Operating 126,584 21,188 84,547
Cash from Investing Activities
Purchase of financial investments (89,246) (231,867) (784,990)
Proceeds from repayment and sale of financial investments 613,518 95,575 517,272
Purchase of investment properties (33,440) - (101,587)
Proceeds from sale of investment properties 47,258 - 16,531
Purchase of properties, euipment, furniture & fixture for branches (3,005) (4,640) (6,377)
Procceds from sale of fixed assets 6 2 -
Investments in associates - (135,777) (51,450)
Proceeds from sale of investment in an associate bank - - 41,877
Total Investing 535,091 (276,707) (368,724)
Cash from Financing Activities
Net increase in holders unrestricted investment deposits accounts 14,206 1,595,676 97,791
Dividends paid (15,625) (2,275) -
Payments toward the increase in share capital - 179,743 429,632
Total Financing (1,419) 1,773,144 527,423
Net Change in Cash 660,256 1,517,625 243,246
Net Cash at beginning 1,493,898 2,154,154 3,671,779
Net Cash at end 2,154,154 3,671,779 3,915,025
Global Research - Qatar Global Investment House
April 2008 Qatar Banking Sector 89
Ratios
Qatar International Islamic Bank
2005 2006 2007
Profitability
- Return on Average Assets 8.2% 5.4% 5.2%
- Return on Average Equity 71.4% 34.6% 25.4%
- Net profit sharing income/ Total Op. Income (net of provisions) 24% 71% 66.8%
- Non-profit sharing income/ Total Op. Income (net of provisions) 73% 28% 36%
Margins
- Depositors Profit Sharing to Profit Sharing Income 50.6% 33.2% 33.8%
- Profit Sharing Income to Profit Sharing Income Earning Assets 6.4% 8.0% 7.1%
- Depositors Profit Sharing to Depositors Profit Sharing Liabilities 3.4% 3.0% 2.8%
- Net Spread 2.9% 5.0% 4.3%
- Net Interest Margin 3.1% 5.4% 4.7%
Efficiency
- Cost to Total Income 13.8% 18.4% 16.6%
- Staff Expense to Total Income 7.0% 10.4% 9.5%
Liquidity
- Loans to Customer Deposits 78.9% 63.6% 70.4%
- Customer Deposits to Equity 575% 470% 306%
Credit Quality
- Non Performing Loans (QR'000) 132,800 98,600 106,800
- Loan Loss Reserve (QR'000) 57,588 67,871 67,744
- NPL's to Gross Loans 3.3% 2.3% 2.4%
- NPL's to (Equity+Loan loss reserve) 16% 7% 5%
- Loan Loss Reserve to Gross Loans 1.4% 1.6% 1.3%
- NPL Coverage 43.4% 68.8% 63.4%
Capital Adequacy
- Equity to Total Assets 14% 17% 24%
- Equity to Gross Loans 22% 33% 46%
Constitution of Total Income
- Net Profit Sharing Income to Total Op Income 24.6% 73.3% 66.8%
- Fees & Comm. to Total Op. Income 4.9% 14.3% 10.3%
- Investment Income to Total Op Income 70.8% 10.1% 20.7%
- FX Income to Total Op. Income -0.3% 2.4% 2.2%
Operating Performance
- Change in Net Profit Sharing Income 29% 151% 11%
- Change in Fees and Commission 20% 148% -15%
- Change in Investment Income 2662% -84% 144%
- Change in Fx Income -262% -821% 11%
RATIO'S USED FOR VALUATION
- Shares in Issue 20,312,500 42,422,400 70,078,200
- EPS (QR) 22.9 9.4 6.8
- Book Value Per Share (QR) 43.4 33.6 33.6
- Market Price Year End (QR) 97.4 51.6 61.4
- P/E 4.2 5.5 9.0
- P/BV 2.2 1.5 1.8
Company
Qatar National BankCommercial Bank of QatarDoha BankQatar Islamic BankMasraf Al Rayan BankAl Khaliji Commercial Bank
Recommendation
BUYBUYBUYBUYBUY
Reduce
Reuters Ticker
QNBK.QA COMB.QA DOBA.QA QISB.QA MARK.QA KCBK.QA
Price (Rs.)
230 161.2 75.7
121.6 22.3 13.3
Disclosure
1,10 1,10 1,10 1,10 1,10 1,10
Disclosure Checklist
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