bank muscat

KSA Research

Investment Banking Division August 2010 Equity Research 1

BANQUE SAUDI FRANSI (BSFR)

August 3, 2010 CMP: SAR 45.6

Sound fundamentals and growth at discount Banque Saudi Fransi (BSFR) has established itself as a niche corporate bank in the country and is an associate company of the Credit Agricole Group. It is the 4th largest bank with a market share of 12% in Total Assets and 11% in terms of credit. Investment Highlights • We are bullish on Saudi Fransi and believe that its credit growth could continue on

back of: − Re-positioning itself from Niche to Mass Bank – This would widen its client

base and offer cross-selling opportunities. − Strong presence in project finance – It enjoys a strong corporate finance

franchise which in our view would be beneficial in 2011e − Renewed focus on retail banking – a key positive – BSFR was virtually non-

existent in the retail space and thus offers tremendous scope of growth • Fee Income drivers in place; positive for bottom-line – We opine that fee income

should benefit from increased focus on retail banking and rising POS transactions; overall positive trend for trade related activities and due to its strong franchise in corporate finance and equity markets

• Cost Management is much better – BSFR has been a very efficient bank with its

cost-to-income ratio being the lowest among its local peers which gives it an edge in terms of profitability

Key Negatives • Retail to shape up a muted NPL trend– With increased retail focus and absence of

any one-off corporate defaults, we believe that going forward, NPL’s could remain flat primarily driven by retail segment, under the assumption that retail book will be grown diligently.

• Declining Asset Yields should offset the low funding cost advantage thereby keeping

margins flat

Initiate with BUY rating; Target price SAR 56.00 We initiate on Banque Saudi Fransi with a BUY rating and use residual income method to value it at SAR 56.00 per share. At 2010e, PB of 1.9x the stock trades at par to its local peers, but in our view should trade at a premium primarily because of its higher profitability, better cost control and relatively better asset quality.

Report Purpose Coverage Initiation

Recommendation Target Price: SR 56.0

BUY

Stock Details Exchange / Code TASI / 1050 Bloomberg Code BSFR AB

Equity Capital SAR 7.23bn Face Value SAR 10

52-Week H/L SAR 48.50 / 38.00 Market Cap SAR 32.98bn

Shareholding Pattern Calyon 31.11%

GOSI 12.84% Rashed Abdul Rahman Al

Rashed and Sons Company 9.83%

Mohammed Ibrahim Mohammed Al Issa

5.02%

Public 41.2%

Vishal Gupta [email protected]

+968 24767158

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BSFR TASI

KSA Research


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Movement in BSFR's credit book during 2009 (SAR mn)

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Movement in credit during 2009 for the sector (SAR mn)

Investment Summary Credit outlook positive Saudi Fransi reported a modest growth in loans as it ended H1’10 with a loan book of SAR 82bn translating to 4.7% growth on YTD basis. This compares favorably to the industry, which saw its credit, grow by 3.1% (until June) as per SAMA. We are bullish on Saudi Fransi’s credit growth outlook due to the following factors: Re-positioning itself from Niche to Mass Bank Historically, Banque Saudi Fransi (BSFR) has maintained its image as a niche service provider for the corporate sector. However, our recent interaction with the management makes us believe that the bank is trying to re-position itself from being a niche corporate bank to a more mass oriented bank on both corporate and retail side. The bank seems to be eyeing cross selling opportunities through its existing strong corporate relationships. Moreover, the management seems to have made inroads into tapping the second rung of Saudi Corporate sector and thus lending width to its client base. This in our view would further enable it to rebalance its credit portfolio and accordingly capitalize on growth across different sectors. We take support from the fact that in 2009, though total corporate credit declined by 2.9%, we observe that while the bank has seen a decline in recession prone sectors such as commerce (decline of 9% Y-o-Y) and building & construction (decline of 22.5% Y-o-Y), it managed to successfully grow its presence in other sectors such as transport & communications (Y-o-Y growth of 20%); utilities & healthcare sectors (38.8% Y-o-Y); and Mining & Quarrying sector (88% Y-o-Y). Saudi Fransi bank captured 62% of total net adds to Mining & Quarrying sector; 24% of net adds to Utilities and Healthcare segments and outstripped the industry level growth to Transport & Communications segment.

Source: Company Reports; SAMA; BankMuscat Equity Research As we had mentioned earlier (in our Saudi Banking Initiation report dated 26 May, 2010) around 3/4th of total corporate credit in the system is short-term in nature representing core business loans to finance working capital needs of the corporate sector. Credit book for Saudi Fransi is similarly skewed towards working capital finance driven corporate demand with short-term loans forming 62% of total corporate book (as at end of 2009). We continue to believe that as the upfront payments made by government to the contractors/developers involved in key projects are utilized the contractors and developers could again start approaching banks to re-finance their working capital needs to ensure the timely completion of these key strategic projects thereby driving credit growth in 2010e. Strong presence in project finance As per MEED estimates, the total project finance market in Saudi should be around SAR 113bn and taking cues from the pipeline of financial closure deals in the country we believe that project finance could be the main demand driver for medium to long term credit growth (Please refer to our Saudi banking Initiation report dated 26 May, 2010 for a more detailed discussion). Saudi Fransi has remained active in the project finance market benefitting from its parent – “Credit Agricole’s” strong corporate finance franchise. We thus opine that the bank is in an advantageous position to play out its strengths going forward and thus forecast a corporate credit growth for BSFR of 7.7% in 2010e and 9.5% for 2011e.

KSA Research


Renewed focus on retail banking – a key positive Saudi Fransi has predominantly operated as a corporate bank which is evident from the credit portfolio mix which is corporate heavy with an average contribution of 92% to total loan book over the last 5 years. Additionally, corporate banking forms 58% of total assets in Q1’10, 29% contribution was from Treasury segment while retail banking contributed 10%. In our view this offers a tremendous scope for the bank to expand its retail franchise in the country.

Source: Company Reports; SAMA; BankMuscat Equity Research

BSFR has recently revamped its branches and in our view is well placed to capitalize on its strong brand recognition to successfully tap in to the retail segment. With an aggressive capex plan of expanding its branch network by 14% to 90 by end of 2011e from the current 79 branches, in our view should be seen in positive light. We believe that overall Saudi market offers tremendous scope of growth in retail banking on back of attractive demographics, increasing income levels and relatively low retail penetration (among GCC countries) and thus are bullish on retail banking prospects in the country. (Please refer to our Saudi Banking Initiation report dated 26 May, 2010 for a more detailed discussion).

Source: Company Reports; Central Bank Publications; BankMuscat Equity Research

We would like to point out that while total loan book for BSFR declined by 2.6% in 2009, consumer loans grew by 22% Y-o-Y over the same period thereby mitigating the impact of declining corporate book. Additionally, retail banking seems to be more profitable as despite its low share in total assets, it contributes 31% to Total Operating Income (as at end of Q1’10) as compared to corporate banking’s share of 45%. Moreover, retail segment enjoys relatively higher ROA of 4.0% (as of Q1’10) as against corporate segment’s ROA of 2.2%.

92.4

%

92.7

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93.9

%

92.3

%

7.6%

7.3% 6.1%

7.7%

70%

75%

80%

85%

90%

95%

100%

FY06 FY07 FY08 FY09

Breakdown of Net Loans

Corporate Retail

Retail10%

Corporate58%

Treasury29%

IB & Brokerage

3%

Breakdown of Total Assets - Q1'10

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100

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20

60

100

140

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220

BSFR SHB RIBL ANB SABB

Retail Loans per Branch (FY09)

No. of Branches - (LHS) CL/Branch (SAR mn) - (RHS)

0.0%

4.0%

8.0%

12.0%

16.0%

50

60

70

80

90

100

2005

2006

2007

2008

2009

May

-10

2011

e

BSFR expanding its retail network

BSFR (No of Branches) Growth (%)

QatarKSA

Oman

UAE

KuwaitBahrain

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Ret

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-20

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Retail Loan Growth - 2009

KSA has the least retail penetration in the region

-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%50.0%

100 150 200 250 300 350 400

2005

2006

2007

2008

2009

May

-10

BSFR expanding its ATM network

No of ATM's (BSFR) Growth (%)

KSA Research


Retail31%

Corporate45%

Treasury21%

IB & Brokerage3%

Breakdown of Total Income - Q1'10

Retail31%

Corporate46%

Treasury19%

IB & Brokerage4%

Breakdown of Net Special Commission Income - 2009

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

FY05 FY06 FY07 FY08 FY09

Retail loans steadily rising

Retail (Y-o-Y) Corporate (Y-o-Y)

2.1% 1.

9%

1.8% 2.2%

7.3% 4.

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3.7% 4.0%

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FY07 FY08 FY09 Q110

Retail Banking more profitable - yields higher ROA

Corporate Retail

Source: Company Reports; BankMuscat Equity Research We thus remain bullish on Saudi Fransi’s efforts to aggressively grow its retail presence and forecast BSFR to achieve 25% growth in retail credit in 2010e and 27.8% in 2011e. Our growth assumptions translate to total credit growth of 9% for 2010e and 10.5% for 2011e for Banque Saudi Fransi. Deposits need to grow in-line with loans A faster sequential growth of 4.9% in deposits as compared to 3.0% Q-o-Q growth in loans marginally improved the LTD ratio to 89.1% from 90.7% in Q110 which continues to remain higher than its local peers which average around 87% for Q210. Moreover, on YTD basis, while deposit base grew only 0.8%, loan growth of 4.7% outpaced deposit growth. However, we opine that with increased retail focus and funding costs being at an all time low, the bank could look to hoard liquidity in order to secure growth going forward and thus estimate deposits to grow at a faster rate than loans in H2’10 and 2011e. Thus, our assumptions translate to deposit growth of 7.5% for 2010e and 11% for 2011e. NPL’s to be driven by retail but at a much lower pace In 2009, Saudi Fransi too was a victim of twin defaults from SAAD and AHAB groups, which surged the gross provisioning charges to SAR 621mn (up 220% Y-o-Y). Though NPLs also saw a similar trend but the quantum of increase was much lower (compared to provisioning charges) at 32% Y-o-Y increasing from SAR 764mn in 2008 to SAR 1,008mn in 2009. As a result, coverage ratio improved from 111% in 2008 to 127% as at end of 2009. Saudi Fransi has one of the best asset book quality among its peers (under our coverage) and ended 2009 with a NPL/GL ratio of 1.3% as compared to 5.9% for Saudi Hollandi bank; 4.5% for Saudi British bank and 1.2% for Riyad Bank. Moreover, its coverage continued to remain healthy at 127% second only to Riyad Bank’s coverage of 141%.

KSA Research


Source: Company Reports; BankMuscat Equity Research

However, we believe that this asset quality deterioration from the corporate book was more one-off and believe that asset quality should improve going forward. We take support from the fact that the bank has aggressively reduced its corporate exposure to relatively riskier and recession prone sectors such as commerce (where NPL/GL averaged at 1.3%); Building & Construction sectors (where NPL/GL averaged at around 3.4%) and Services sector (where NPL/GL averaged at 2.0%). Moreover, BSFR diverted its resources to more stable and low risk sectors such as Transport & Communications (Where NPL/GL averaged at around 0.5%); Utilities & Healthcare sector (which has average NPL/GL of 0%) and Mining & Quarrying sector (where NPL/GL averaged at 0.6%). We thus believe that going forward; quantum of corporate NPLs should be lower due to the reallocation of sector exposure. Consumer loans have seen an average NPL/GL of 2.8% that increased to 3.2% during the financial turmoil. With increased focus on retail banking, we could see incrementally higher NPLs coming from retail segment (in absolute terms) but we anticipate an overall improvement in asset quality on back of improving spending power and macro conditions and thus forecast declining NPL/GL for retail segment. Historically, retail NPLs have contributed to around 20% of total NPLs and we assume this to increase to 22.4% over the next 3 years.


We thus, estimate the growth rate of NPLs to slow down going forward from 32% in 2009 to 12% in 2010e and further to 7% in 2011e. As a result, we expect the NPL/GL ratio to peak at 1.30% in 2010e and marginally improve thereafter to 1.26% and 1.20% in 2011e and 2012e respectively.

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BSFR - Coverage remains healthy

NPL/GL (LHS) Cost of Risk (LHS) Coverage (RHS)

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BSFR - NPL/GL ratio among the best

BSFR RIBL SABB SHB

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BSFR - Coverage adequate

BSFR RIBL SABB SHB

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BSFR - Increase in LLP manageable

BSFR RIBL SABB SHB

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BSFR increased exposure to lower risk sectors

Credit Y-o-Y (%) - (LHS) Avg NPL/GL (RHS)

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FY08 FY09 FY10e FY11e FY12e

NPL/GL (%) - LHS NPL (Y-o-Y %) - RHS

KSA Research


Credit impairment charges in 2009 increased 5x over 2008 levels to SAR 575mn thereby mirroring the trend of NPLs. As a result, cost of risk (net of recoveries) increased from 0.12% in 2008 to 0.72% in 2009. While in 2008, retail segment dominated the credit impairment charges, the trend reversed in 2009 with corporate sector forming the bulk of the charges. While the retail’s average quarterly rate of LLP charges increased from SAR 31mn in 2008 to SAR 38mn in 2009, it was the corporate sector, which went from net recoveries of SAR 8.7mn in 2008 to provisions of SAR 105mn in 2009. This was primarily due to the twin corporate defaults of SAAD and AHAB groups. Looking at Q1’10, segmental information, we find that contribution of retail book (at SAR 31mn) to total credit impairment charges increased from 27% for 2009 to 58% in Q1’10 but remained lower than average quarterly rate of 2009. On the other hand, share of corporate sector of SAR 22.5mn declined from 73% in 2009 to 42% in Q1’10 and was much lower than average quarterly rate for 2009. This is in-line with our view that NPLs and provisioning should be retail driven going forward. However, absence of one-off charges such as SAAD and AHAB exposures and a healthy coverage ratio could see the cost of risk declining from 0.8% in 2009 to 0.6% in 2010e and 0.5% in 2011e.


Two Opposing forces to keep margins flattish BSFR’s average effective cost of funds have been on a declining trend as it declined from 2.6% in 2008 to 1.0% in 2009 primarily driven by reducing interest rates and improving deposit mix. During 2009, Saudi Fransi improved its deposit mix as it increased its Demand and Savings Deposits by 19% and 14% respectively while focusing on drawing down its time and other deposits, which declined by 9% and 43% respectively. As a result, proportion of demand deposits improved from 31% in 2008 to 37% in 2009. While the proportion of time deposits reduced from 65% to 60%. This further helped BSFR to reduce its funding costs to 0.5% in Q110. Moreover, the proportion of free funds increased from 28% in 2008 to 39% in 2009. We thus believe that despite an overall higher pace of deposit growth the overall low costs could keep costs under check.


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LLP charges - Retail vs. Corporate

Retail (LLP Charges) Corporate (LLP Charges)

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FY08 FY09 FY10e FY11e FY12e

Credit Losses (net) - SAR (mn)

Credit Losses, Net (SAR mn) - (LHS) Cost of Risk (%) - (RHS)

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100%

FY06 FY07 FY08 FY09

BSFR Deposit mix improved in 2009

Demand Savings Time Other

30.6%27.9%

38.8%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

FY07 FY08 FY09

Proportion of free funds increased

KSA Research


On the other hand, asset yields have also experienced a downhill journey as they declined from 5.3% in 2008 to 3.8% in 2009 and further to 3.1% in Q110. Our analysis reveals that in addition to lower investment yields in general, downward re-pricing of loan book could be the main reason for this. We are of the view that as increased lending goes towards relatively safer government backed projects, improving yields may not be easy. We thus forecast margins to remain flat in 2010e as lower asset yields offset the low cost benefit. However, we believe that as interest rates start moving up by H2’11, BSFR could benefit on back of its asset yields moving up faster than its costs thereby expanding margins and we thereby forecast margins to gradually improve from 2011e onwards.


Fee Income drivers in place; positive for bottom-line Almost a third of total income comes from fee and investment income for Saudi Fransi bank out of which fee income contributes around 82.5% (average of last 5 quarters) and the remaining is investment income. Moreover, majority of its fee income comes from Trade Finance, Corporate Finance & Advisory Services and Share trading & Fund Management activities contributing 27%, 25% and 23% respectively to gross Fee income from banking services. We are optimistic for fee income on back of improving trade activities, rising POS transactions and a strong 2011e outlook for project financing activities.

Source: SAMA; BankMuscat Equity Research

Fee income should benefit from increased focus on retail banking and rising POS transactions As per SAMA data, point of sale transactions and value continued to show an uptrend clocking the highest quarterly growth of 9.4% and 15.1% respectively in Q2’10. Moreover, as mentioned earlier in the report with its increased focus on retail banking, we believe that Saudi Fransi bank is well placed to benefit from this trend. Overall LC’s trend remains positive Though the new LC’s opened for the month of Jun 2010, declined (M-o-M basis) but the overall trend during the year has remained positive thereby reflecting an overall improvement in trade related activities. Moreover, on back of buoyant macro environment, ongoing government spending and a vibrant construction sector could further enhance the demand for Bank Guarantees and LC’s which in turn would act as a driver for bank’s fee income.

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FY07 FY08 FY09 FY10e FY11e FY12e

Margins Trend

Effective Asset Yield Effective Cost of Funds

0.0%

5.0%

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1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

FY07 FY08 FY09 FY10e FY11e FY12e

Net special commission income - Trend

NII (LHS) - SAR mn Y-o-Y (%) - RHS

-15.0%-10.0%

-5.0%0.0%

5.0%

10.0%15.0%

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10,000 15,000 20,000 25,000 30,000 35,000 40,000

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8

Q30

8

Q40

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9

Q20

9

Q30

9

Q40

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Q11

0

Q21

0

POS Transactions picking up

POS Transactions (mn) Q-o-Q (%) - RHS

-20.0%

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10.0%

20.0%

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Q30

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Q21

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POS Sales increasing

POS Sales (SAR mn) Q-o-Q (%)-LHS

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0.0%

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40.0%

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Q30

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Q40

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Q20

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Q30

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Q40

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Q11

0

Q21

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Trade Activity seems to be picking up

New LC's Opened (SARmn) - (LHS)Q-o-Q (%) - RHS

KSA Research


Strong franchise in corporate finance and equity markets Corporate finance and advisory (CFA) has been a forte for Saudi Fransi bank and as a result, fee income from CFA activities grew by 28% in 2009 despite an overall poor market in 2009. Additionally, as mentioned earlier, project financing activity in the country in our view should remain strong over the medium to long term, which makes us optimistic on BSFR to generate strong investment banking fee income. Saudi Fransi also enjoys a strong franchise in the brokerage activities with a market share ranging between 9% - 10.5% over the last few months. It has consistently remained in the top-five brokerage houses in Saudi in terms of both volumes and value traded. Though the equity markets in Saudi Arabia have remained lower on a Y-o-Y basis, but it continues to remain a steady source of income for the bank contributing around 23% of total fee income in 2009. Moreover, the IPO and Sukuk markets are expected to remain strong in Saudi with estimated SAR 2.6bn worth of IPO’s and SAR 2.1bn worth of Sukuk issues being still in the pipeline. We thus remain optimistic on fee income growth on back of above-mentioned factors together with the loan and banking services linked portion of fees and commission and forecast fee income to grow at a healthy pace for BSFR at 10% and 11% for 2010e and 2011e respectively.


Cost Management is much better Banque Saudi Fransi has always managed to control its operating costs better than its peers which is evident from its relatively lower cost-to-income ratio which has averaged around 27.2% over the last five quarters as compared to 33.5% for is comparable peers. We are bullish on overall efficiency of the bank and thus opine that despite the incremental capex required to ramp up its branch network and enhance its retail presence, the bank would ensure the cost-to-income ratio to remain well under control and thus retain its competitiveness and efficiency.


25%

27%25%

11%12%

BSFR - Breakdown of Fee Income

Share trading andfund managementTrade finance

Corporate financeand advisoryCards products

Other banking services

0%

20%

40%

60%

80%

100%

FY07

FY08

FY09

FY10

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FY11

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FY12

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Fee income drives Non-Int Income

Fee Based Income Investment & Trading Income

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-10.0%

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20.0%

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500

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FY08

FY09

FY10

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FY11

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FY12

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Non-Interest Income growth Trend

Total Non-Interest Income

20.0%

23.0%

26.0%

29.0%

32.0%

35.0%

38.0%

Q109 Q209 Q309 Q409 Q110 Q210e

BSFR's cost management is better

Consolidated Saudi Fransi

KSA Research


RIBL

SABBBSFR

SHB

BKDB

NBOB

OIBBBKSB

ABOB

10.0%

12.5%

15.0%

17.5%

20.0%

1.0x 1.3x 1.5x 1.8x 2.0x 2.3x 2.5x

2011e ROE - P/B Mapping

56.00 16.0% 18.0% 20.0% 22.0% 24.0%11.2% 51.04 57.41 63.78 70.14 76.51 11.7% 48.10 53.84 59.57 65.31 71.05 12.2% 45.62 50.81 56.00 61.19 66.38 12.7% 43.53 48.24 52.95 57.65 62.36 13.2% 41.76 46.04 50.33 54.61 58.89

Terminal Return on Equity

Cos

t of E

quity

Initiate with BUY; Target price at SAR 56.00 We value Banque Saudi Fransi (BSFR) using a residual income approach in which the intrinsic value of a bank is the sum of current NAV and the present value of future excess earnings. We use a risk free rate of 5%, risk premium of 7.5% and a beta of 0.96 (which is calculated over the last 3 years) to arrive at a cost of equity of 12.2%. We further assume a terminal ROE of 20% and thus value BSFR at SAR 56.0 per share translating to an implied PB 2010e of 2.4x and 2011e PB of 2.1x. At 2010e PB of 1.9x the stock trades at par to its local peers, however due to higher 2010e ROE expectation of 17.7% (as compared to local peer group average of 12.6%) together with better cost control and superior asset quality, we feel that the stock should trade at a premium to its peers. We therefore, initiate BSFR with a BUY rating. Moreover, if we compare the 2011e ROE vs. P/B parameters for all the banks under our coverage, we find that BSFR, which trades at par with other banks, offers the maximum ROE and thus supports our BUY rating on the stock. Our sensitivity analysis of our target price by varying the terminal ROE with the cost of equity yields the most probable price range of SAR 48.24 – 65.31 per share.

Source: Bloomberg Consensus Estimates; BankMuscat Equity Research Note: 2010e and 2011e numbers for Omani Banks (excl. BKMB); SABB; RIBL and SHB are our estimates while others are consensus estimates

Source: Bloomberg Consensus Estimates; BankMuscat Equity Research

2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011eQat. National Bank 10.5x 8.9x 2.4x 2.1x 23.8% 23.3% Bank Muscat 10.4x 8.1x 1.4x 1.3x 14.6% 15.7%Qat. Islamic Bank 9.1x 7.7x 1.9x 1.7x 17.9% 20.0% Bank Dhofar 17.2x 15.1x 2.6x 2.3x 15.0% 15.4%Comm. Bank Of Qatar 9.2x 7.6x 1.3x 1.2x 13.9% 15.9% Nat. Bk. Of Oman 9.9x 8.5x 1.4x 1.3x 14.3% 15.5%Rayan 12.1x 10.7x 1.5x 1.5x 13.7% 14.2% Oman Int. Bk. 11.5x 11.0x 1.5x 1.5x 12.9% 13.4%Doha Bank 8.1x 6.7x 1.5x 1.3x 17.7% 19.5% Bank Sohar 17.9x 14.4x 1.9x 1.7x 11.2% 12.5%Intl. Islamic Bank 9.6x 7.7x 1.6x 1.5x 16.6% 19.8% Ahli Bank 15.2x 12.7x 1.9x 1.8x 13.2% 14.8%Mean 9.8x 8.2x 1.7x 1.6x 17.3% 18.8% Mean 13.7x 11.6x 1.8x 1.6x 13.5% 14.6%Median 9.4x 7.7x 1.6x 1.5x 17.2% 19.7% Median 13.4x 11.9x 1.7x 1.6x 13.8% 15.1%

2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011eAl Rajhi Bank 16.5x 13.1x 3.9x 3.4x 23.6% 26.7% National Bank of AD 7.9x 6.5x 1.4x 1.2x 18.4% 18.9%Samba Financial Group 11.4x 9.6x 2.1x 1.9x 19.5% 20.0% First Gulf Bank 5.9x 4.6x 0.9x 0.9x 16.1% 18.7%Riyad Bank 13.9x 12.5x 1.4x 1.3x 10.6% 10.9% Emirates NBD 5.8x 3.6x 0.5x 0.4x 7.6% 12.0%The Saudi British Bank 15.2x 12.4x 2.3x 2.1x 16.1% 17.7% Dubai Islamic Bank 8.0x 6.3x 0.8x 0.7x 11.0% 11.2%Banque Saudi Fransi 11.4x 9.9x 1.9x 1.7x 17.7% 18.2% AD Commercial Bank - 5.5x 0.6x 0.6x 0.3% 8.3%Arab National Bank 11.5x 9.7x 1.6x 1.5x 15.2% 15.5% Union National Bank 5.8x 4.6x 0.7x 0.6x 12.8% 13.8%Saudi Hollandi Bank 20.3x 16.5x 1.9x 1.7x 9.6% 11.0% AD Islamic Bank 6.9x 4.6x 1.0x 0.9x 15.2% 20.6%The Saudi Investment Bank 18.6x 11.6x 1.2x 1.1x 6.7% 10.1% Mean 6.7x 5.1x 0.8x 0.8x 11.6% 14.8%Bank AlBilad 46.4x 23.6x 1.9x 1.7x 4.2% 7.6% Median 6.4x 4.6x 0.8x 0.7x 12.8% 13.8%Bank AlJazira 32.8x 13.3x 1.1x 1.0x 3.4% 8.0%Mean 19.8x 13.2x 1.9x 1.7x 12.6% 14.6%Median 15.9x 12.5x 1.9x 1.7x 12.9% 13.2% 2010e 2011e 2010e 2011e 2010e 2011e

Ahli United Bank 11.5x 8.9x 1.4x 1.3x 12.4% 14.8%National Bank of Bahrain 9.8x 9.2x 2.0x 1.8x 18.9% 18.4%

2010e 2011e 2010e 2011e 2010e 2011e Bahrain Islamic Bank 18.2x 9.4x 0.8x 0.8x 4.0% 7.2%National Bank Of Kuwait 12.5x 11.0x 2.0x 1.8x 16.5% 18.3% Gulf Finance House - - 0.7x 0.7x -5.0% -1.5%Commercial Bank Of Kuwait 37.8x 15.2x 2.4x 2.2x 4.3% 13.9% Mean 13.2x 9.2x 1.2x 1.1x 7.6% 9.7%Al-Ahli Bank Of Kuwait 16.3x 13.6x 1.6x 1.5x 11.4% 11.3% Median 11.5x 9.2x 1.1x 1.0x 8.2% 11.0%Burgan Bank 17.0x 11.1x 1.1x 1.0x 7.2% 9.5%Kuwait International Bank 30.3x 17.8x 1.2x 1.1x 4.5% 7.2%Mean 22.8x 13.8x 1.7x 1.5x 8.8% 12.0% Combined Mean 14.8x 10.4x 1.6x 1.4x 12.3% 14.4%Median 17.0x 13.6x 1.6x 1.5x 7.2% 11.3% Combined Median 11.5x 9.7x 1.5x 1.4x 13.4% 14.8%

ROE %

ROE %ROE %PE PB PE PBOMAN BANKS

PE PB ROE %UAE BANKS

QATAR BANKS

SAUDI BANKS PE PB

ROE %

KUWAIT BANKS PE PB ROE %

BAHRAIN BANKS PE PB

KSA Research


Income Statement (SAR mn) FY08 FY09 FY10e FY11e FY12eSpecial commission income 5,298 4,089 3,667 4,447 5,372 Y-o-Y Growth 7.2% -22.8% -10.3% 21.2% 20.8%Special commission expense 2,478 1,039 528 869 1,285 Y-o-Y Growth -6.3% -58.1% -49.1% 64.5% 47.8%Net special commission income 2,821 3,050 3,139 3,577 4,088 Y-o-Y Growth 22.8% 8.1% 2.9% 14.0% 14.3%

Fee Based Income 1,125 1,036 1,132 1,251 1,387 Y-o-Y Growth 3.2% -7.9% 9.3% 10.5% 10.8%Fees from banking services, net 834 840 916 1,012 1,123 Exchange income, net 241 186 205 225 247 Other operating income 50 10 12 14 17

Investment & Trading Income 446 208 240 273 306 Y-o-Y Growth 41.8% -53.3% 15.1% 14.0% 12.0%Income (Loss) from FVIS financial instruments, net - - - - - Trading income, net 500 210 241 275 308 Dividend income 2 0 0 0 0 Gains (Losses) on non-trading investments, net (56) (2) (2) (2) (2) Total Non-Interest Income 1,571 1,245 1,372 1,525 1,693 Y-o-Y Growth 11.8% -20.8% 10.2% 11.1% 11.0%

Total Income 4,392 4,295 4,511 5,102 5,780 Y-o-Y Growth 18.7% -2.2% 5.0% 13.1% 13.3%

Total Operating Expenses 1,096 1,158 1,272 1,458 1,710 Y-o-Y Growth 15.6% 5.7% 9.9% 14.6% 17.3%

Total Operating Income 3,296 3,137 3,239 3,644 4,070 Y-o-Y Growth 19.7% -4.8% 3.2% 12.5% 11.7%

Share in earnings of associates 12 (27) (0) 1 1 Profit before LLP and Inv Impairments 3,308 3,109 3,239 3,644 4,072 Y-o-Y Growth 20.2% -6.0% 4.2% 12.5% 11.7%

Provision for credit losses, net 94 575 338 321 306 Impairment of other financial assets 410 67 - - - PBT 2,804 2,468 2,900 3,323 3,766 PAT 2,804 2,468 2,900 3,323 3,766 Y-o-Y Growth 3.4% -12.0% 17.5% 14.6% 13.3%Shares 563 723 723 723 723 EPS 4.98 3.41 4.01 4.60 5.21

Balance Sheet (SAR mn) FY08 FY09 FY10e FY11e FY12eCash and balances with SAMA 5,773 12,631 15,367 16,914 18,316 Due from banks and other financial institutions 4,246 7,111 6,044 6,346 6,854 Investments, net 27,710 17,481 18,749 20,277 22,203 Y-o-Y Growth 23.2% -36.9% 7.3% 8.1% 9.5%Loans and advances, net 80,866 78,315 85,270 94,250 105,662 Y-o-Y Growth 35.1% -3.2% 8.9% 10.5% 12.1%Investment in associates 177 144 144 145 147 Property and equipment, net 591 606 618 631 643 Other assets 6,502 4,284 5,226 6,272 7,401 Total assets 125,865 120,572 131,419 144,834 161,225

Due to banks and other financial institutions 8,402 4,832 4,928 5,249 5,642 Customer deposits 92,791 91,237 98,080 108,869 122,477 Y-o-Y Growth 25.4% -1.7% 7.5% 11.0% 12.5%Debt securities in issue - - 2,421 2,421 2,421 Term Loans 4,927 4,946 4,946 4,946 4,946 Other liabilities 5,675 3,806 3,939 3,919 3,860 Total liabilities 111,796 104,821 114,315 125,404 139,348

Total shareholders’ equity 14,047 15,733 17,085 19,411 21,859 Total liabilities and shareholders’ equity 125,865 120,572 131,419 144,834 161,225

Ratios FY08 FY09 FY10e FY11e FY12eCapital AdequacyEquity/Assets 11.2% 13.0% 13.0% 13.4% 13.6%Equity/Average Net Loans 20.0% 19.8% 20.9% 21.6% 21.9%EarningsROAA 2.5% 2.0% 2.3% 2.4% 2.5%ROAE 22.2% 16.6% 17.7% 18.2% 18.2%NIM 2.8% 2.8% 2.9% 3.1% 3.2%LiquidityLTD Ratio 87.1% 85.8% 86.9% 86.6% 86.3%Customer Deposits/Equity 6.6x 5.8x 5.7x 5.6x 5.6xCustomer Deposits/Total assets 73.7% 75.7% 74.6% 75.2% 76.0%Net Loans / Total Assets 64.2% 65.0% 64.9% 65.1% 65.5%Liquid Assets / Total Assets 26.6% 25.0% 26.0% 25.7% 25.1%Due from Banks/Due to Banks 50.5% 147.2% 122.6% 120.9% 121.5%EfficiencyCost to Income 25.0% 27.0% 28.2% 28.6% 29.6%Non-Interest Income/Total Income 35.8% 29.0% 30.4% 29.9% 29.3%Fee Income/Non-Interest Income 71.6% 83.3% 82.5% 82.1% 81.9%Credit QualityNPL/Gross Loans 0.9% 1.3% 1.3% 1.3% 1.2%Provision Coverage Ratio 111.0% 126.6% 131.6% 133.6% 132.3%LLP Charges, Net / Gross Loans 0.1% 0.7% 0.4% 0.3% 0.3%Provisions / Gross Loans 1.0% 1.6% 1.7% 1.7% 1.6%ValuationP/E 11.4x 9.9x 8.8xP/BV 1.9x 1.7x 1.5xImplied P/E 14.0x 12.2x 10.8xImplied P/BV 2.4x 2.1x 1.9x

Financial Statements


KSA Research


Disclosure The author(s) certifies(y) that the opinion(s) on the subject security (ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. We also certify that neither the analyst nor his/her spouse or dependants (if relevant) hold any beneficial interest in the security (ies) mentioned in this report.

Disclaimer This report is not directed to, or intended to or use by, any person or entity who is a citizen of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject BankMuscat (SAOG) to any registration or licensing requirements within such jurisdiction. This report is provided for information purposes only. The report is based on information generally available and is deemed reliable but no assurance is given as to its accuracy or completeness. BankMuscat (SAOG) is not accountable for any decision based on the contents of this report. The investor will indemnify BankMuscat and its directors, officers, employees and staff against any loss or damage or other liabilities (including costs), which they may suffer as a result of reliance on such reports. Neither the information nor the opinions contained are to be construed as an offer to buy and sell securities mentioned above. This report is not to be relied upon in substitution for the exercise of independent judgment. Investors should judge the suitability of the securities to their needs. BankMuscat makes no representation that the preparation or distribution of this report is in compliance with the legal requirements or regulations of any jurisdiction, and it disclaims all liability in case the preparation or distribution of this report is found to be non-compliant with any such legal requirements or regulations. BankMuscat (SAOG), may to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of these securities referred to in this report, perform services for or solicit business from such issuers, and/or have position or effect transactions in the securities or option thereon. In addition, it may make markets in the securities mentioned in the material presented in the report. BankMuscat (SAOG) may, to the extent permitted by law, act upon or use the information or opinions presented herein, or the research or analysis on which they are based, before the material is published. BankMuscat (SAOG) may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the companies mentioned in this report.

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