qatar banks sector note 5 jul 2011 - gulfbase.com · 2012-11-27 · qatar stands out on its...

Sector note

Qatar banks Banks | Qatar MENA research

Reinvesting strong liquidity positions We remain bullish on Qatar on the back of increasing construction

momentum, further supported by solid fundamentals

Banks enjoy stronger investment income due to T‐bills and investments in central bank sukuk; QNB is well placed to benefit from this

QNB (our top pick) and Masraf Al Rayan (initiate with an OW) are the best positioned for growth; we also see good value in CBQ and Doha Bank; include CBQ in our preferred financials portfolio, replacing NBAD

Qatar stands out on its long‐term growth prospects, which are underpinned by robust public spending. The 2022 FIFA World Cup, along with an expanding economy (average real GDP growth of 7% during 2011–16e), gives Qatar an edge over the rest of the MENA region, offering an environment very conducive to growth for banks. All our Qatari banks expect loan growth of 15%–20% in the next few years. We estimate 16% loan growth in Qatar stemming from mega projects alone in the next 4 years. 1Q has not yet shown increased commercial momentum, with asset yields under pressure, but earnings remain intact. QIB lost significant market share in the public sector to CBQ, QNB, and Masraf Al Rayan (MARK). Outstanding credit in Qatar fell 0.3% sequentially in 1Q, bringing y‐o‐y growth down to just 8.5%, though this accelerated to 9.2% in May. Simultaneously, asset yields have come down as loans were repriced or swapped into USD.

We lower full year loan growth and NIMs slightly, but increase income from investments. We lower average loan growth to 14% from 17% on the back of a lackluster 1Q. However, investments in sukuk and T‐bills should more than offset this pressure (QNB and CBQ have particularly strong cash balances to invest in more T‐bills). We reduce our through the cycle loan loss forecasts on the back of very high public sector exposures. We expect deposit remuneration to fall further, supporting net interest margins in the next few quarters, while public lending may shift back to local currency with wider margins, particularly for MARK.

The impact of central bank regulations may be lower than our initial assessment. In anticipation of rapid macroeconomic and banking growth, the central bank has brought about changes in the retail and Islamic banking spheres, among others. The impact of the cap on retail loans works out to be smaller than we initially calculated, while we expect Islamic windows to be phased out gradually or converted to conventional (QNB).

QNB and MARK should be the principal beneficiaries due to their already high exposure to the state. Deriving c40%–50% of their loan books from the government, MARK and QNB are well positioned to benefit from the expected growth. We prefer QNB over MARK as it has the better capital base and liquidity position and is also less affected by normalization of loan loss charges.

Overweight

QNB Overweight

Target price (QAR) 183 Current price (QAR) 141.2Potential return 29%Bloomberg code QNBK QD

CBQ Overweight

Target price (QAR) 95 Current price (QAR) 70.8Potential return 35%Bloomberg code CBQK QD

QIB Overweight

Target price (QAR) 97 Current price (QAR) 78.8Potential return 23%Bloomberg code QIBK QD

Doha Bank Overweight

Target price (QAR) 65 Current price (QAR) 50.8Potential return 28%Bloomberg code DHBK QD

MARK (Initiate) Overweight

Target price (QAR) 28.1 Current price (QAR) 23.2Potential return 21%Bloomberg code MARK QDNote: All prices as of 30 June 2011

5 July 2011

Jaap Meijer, MBA, CFA Head of Financials Team

+971 4 293 5383 jaap.meijer@hc‐si.com

Janany Vamadeva Analyst

+971 4 293 5384 janany.vamadeva@hc‐si.com

Please refer to importantdisclosures and analyst

certifications on pages 75–78of this report.

Qatar banks Sector note 5 July 2011

2

Table of contents Investment case Valuation: Average despite growth Qatar’s growth story remains unchanged Recent changes in regulatory regime milder than expected Net interest margins under moderate pressure Loan losses to shift to mid cycle levels Strong liquidity positions for all but a few banks Robust capital positions even under Basel III Profitability rankings: QNB and Al Rajhi the best 1Q earnings: Rivalry for government loans Earnings revisions post 1Q11 2Q11e earnings: We forecast double‐digit y‐o‐y earnings growth for all banks The HC valuation and capital approach Key downside risks Companies section QNB: Strongest from every angle CBQ: Upgrade on valuation grounds QIB: Giving up market share Doha Bank: Most affected by regulation MARK: Well positioned to benefit from the key growth drivers in Qatar Disclaimer

2 9 12 19 25 28 31 33 35 37 42 45 47 48 49 50 55 60 65 70 75


3

Investment case Qatar is the best growth story in MENA from all perspectives – in terms of its

macroeconomic environment, political stability, regulatory framework, and banking fundamentals – despite slightly disappointing 1Q loan growth

Public sector is key growth engine, with private sector to follow on spillover

We favor banks with strong ties to the state and with growth supported by strong capital and liquidity positions; QNB remains our top pick in Qatar as well as the broader region; we initiate on MARK with an Overweight; we include CBQ in our preferred financials portfolio – replacing NBAD – on its very cheap valuation

Strong credit expansion supported by infrastructure projects; QNB and MARK key beneficiaries Barring any political hiccups, Qatar’s growth story remains intact, underpinned by the broader scheme of the Qatar National Vision 2030 (QNV 2030). As Qatar’s 20‐year hydrocarbon investment program tapers off, the QNV 2030 is intended to diversify the economy, with the 2022 FIFA World Cup being instrumental in bringing about the changes. Gross domestic investment is estimated at cQAR820bn during 2011–16e. We expect the Qatari banking sector to benefit from robust public spending, which should filter through the economy as contracts are awarded to the private sector – loan growth of 20% (of which 16% is to come from mega projects on our estimates) in the next 4 years and 12% in 10–20 years, and deposit growth of 17%–18%, driven by the very high national savings ratio of c50%. Most public spending will focus on infrastructure and tourism as there is still an oversupply of commercial office and residential real estate. Qatar National Bank (QNB) is the key beneficiary with its already strong sovereign ties supported by its size and strong capital and liquidity. Commercial Bank of Qatar (CBQ), seen as a corporate bank, has been realigning its business model since last year to tap the public sector growth. Its 1Q numbers (4% sequential loan growth versus 6% for FY10) stand as a testament to the success of its adaptation, which we expect to continue to work in CBQ’s favor. Qatar Islamic Bank (QIB) and Masraf Al Rayan (MARK) would benefit from their Islamic franchises, though we remain less bullish on QIB following the 16% sequential contraction in its financing portfolio as it gave up public sector loans. We remove it from our preferred financials portfolio but maintain our Overweight rating. Doha Bank and QIB may be the most affected by the retail caps, which went into effect as of 10 April this year.

Qatari banks valuation summary

Bank TP

(QAR) Upside Rating

P/E 2012e

P/tNAV 2011e

ROE 2011e

Yield Investment case

QNB 183 29% OW 11.3x 2.2x 19.6% 2.5% Best growth story and capital position, strong liquidity, and highest returnsCBQ 95 35% OW 8.7x 1.2x 13.2% 8.5% Earnings benefitting from business realignment and attractive valuations QIB 97 23% OW 10.5x 1.6x 14.4% 6.3% Strong growth stemming from Islamic franchise Doha 65 28% OW 10.0x 1.4x 16.2% 9.8% Most affected by changes in regulatory environment MARK 28.1 21% OW 9.9x 2.0x 17.2% 0.0% Best play on Islamic financing and the public sector

Source: Bloomberg, HC


4

With asset yields under pressure, 1Q has not yet shown increased commercial momentum, but has not dented earnings either. QIB lost significant market share in the public sector to CBQ, QNB, and MARK. Outstanding credit in Qatar fell 0.3% sequentially, bringing y‐o‐y growth down to just 8.5%. Qatar’s outstanding loans experienced m‐o‐m growth of 1.1% in May (public sector loans grew 0.8% and private sector 1%), following a m‐o‐m expansion of 1.3% in April. This takes y‐t‐d loan growth to 2.1% and y‐o‐y growth to 9.2%. Deposit growth continued unabated, increasing 3.7% sequentially, taking y‐o‐y growth to 26.7%. M‐o‐m deposit growth slowed to 0.5% in May after a jump of 7.8% the previous month. This takes y‐t‐d deposit growth to 9.2% and y‐o‐y growth to 21.9%. Nevertheless, we expect credit penetration to increase significantly to c100% by 2030e from 76% in 2009, underpinned by the QNV 2030, with growth driven by both the public and private (contracting) sectors. We consider retail a saturated market in Qatar, and the recent regulations further support our view. Given their solid ties with the government, we expect QNB, MARK, and QIB to see the highest growth in our universe with a 2011–14e CAGR of >20% versus 15% for CBQ, 16% for Doha Bank, and 22% for the sector as a whole.

Loan growth Deposit growth

Source: Company data, HC Source: Company data, HC

Potential NIM compression as competition increases in lending market and share of public sector loans increases, though likely to be mitigated by improving funding costs and increased investment yields Even before the rate cuts came into effect, we were expecting margin compression as (1) competition increases in the lending market as risk appetite improves among banks and (2) the share of loans to the public sector rises. Qatar Central Bank’s recent rate cut (lending rate reduced to 5.0% from 5.5%) and the cap of 6.5% on retail loans against salaries (banks used to charge c9%–9.5%) are likely to put further pressure on margins. That said, we think this should be offset by improving liquidity in the market (Qatar Central Bank also cut the overnight deposit rate 50 bps to 1.0%). Moreover, we gather banks have already been adjusting their pricing accordingly and have also been able to readjust the remuneration of their deposit base. We also expect to see a positive impact from investments in sukuk (support of 7–70 bps) and treasury bills (support of 7–20 bps). We reduce our NIM estimates across the board to factor in the rate cap on loans against salaries (existing and new).

‐10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011e 2012e 2013e 2014e

CBQ Doha MARK QIB QNB‐20%

0%

20%

40%

60%

80%

100%

120%

2007 2008 2009 2010 2011e 2012e 2013e 2014e

CBQ Doha MARK QIB QNB


5

Net interest margin evolution 2010–12e

Bank Impact of rate cut

Impact of investment in sukuk

Impact of investment in T‐bills

Impact of regulation

Loan/ deposit repricing

Total impact on NIM

(2010–12e)

Net interest margin

1Q11 2Q11e 1Q11 2Q11e 2010 2012e

QNB 0.02% 0.01% 0.24% 0.06% 0.20% ‐0.07% ‐0.45% 0.02% 2.94% 2.96% CBQ ‐0.03% 0.09% 0.11% 0.03% 0.11% ‐0.07% ‐0.45% ‐0.21% 3.29% 3.08% QIB 0.12% ‐0.18% 0.49% 0.11% 0.00% ‐0.17% ‐0.94% ‐0.55% 3.27% 2.72% Doha Bank 0.08% ‐0.11% 0.06% 0.01% 0.07% ‐0.12% ‐0.04% ‐0.05% 3.38% 3.33% MARK 0.08% ‐0.03% N/R(1) 0.17% 0.08% ‐0.01% ‐1.49% ‐1.21% 3.71% 2.50%

Source: HC Note: (1) Included in investment income

Impact of retail caps smaller than expected The new retail regulation prohibits banks from charging fees on new retail lending, but the impact is less than we previously calculated as the lending rate cap only applies to credit cards and loans against salaries. We calculate a negative effect on earnings of 0.5% for MARK, 3.3% for QNB, 3.4% for CBQ, 7.1% for QIB, and 7.2% for Doha Bank. Fee income to witness strong growth as lending and trade finance activities increase We reduce our fee income to factor in the rate cap on loans against salaries and the removal of fees on new retail lending. We cut fee income 5%–12%, with QNB at the lower end of the range and QIB at the higher end. With the vast majority of fee income arising from lending activities, banks should enjoy strong fee growth in the medium term on the back of the expected expansion in credit and in the current macro environment (trade finance activities). The resumption of brokerage activities is likely to lift fee income as well, though the impact is not significant – an increase of less than 5% in fee income growth – while brokerage will also add to the cost base. Investment income to pick up after banks were allowed to invest in the local market last year, further aided by a rising stock market 1Q11 numbers show that investment income is picking up in Qatar, with banks in our coverage universe seeing 43% growth sequentially and 10% y‐o‐y. Qatari banks bought QAR50bn in sukuk at an attractive yield of 5% to park the excess liquidity from the recent capital increases. Furthermore, we believe banks could make use of the lifting of the ban on investing in the local market and are likely to see better investment income in a rising stock market, with a possible MSCI upgrade to emerging market status providing further impetus.


6

Asset quality has remained relatively benign in Qatar, even during the financial crisis, and the retail regulation should improve it further Qatar’s NPL ratio remains the lowest in the region at 2.0% in 2010 versus 9.7% in Kuwait and 5.9% in the UAE. Since growth is driven mainly by the public sector, and even private sector growth (real estate and contracting) is backed by public spending, we expect an average loan loss charge of 85 bps for Qatar against 241 bps for the UAE during 2011–14e. We lower the probability of default for consumer loans due to the implementation of the retail caps. Nevertheless, loan loss charges (except for MARK’s) started to normalize in 1Q to near mid cycle levels. QNB has the lowest credit costs (annual loan loss of 81 bps) stemming from its public sector tilt, while MARK should have the highest through the cycle loss ratio (102 bps) due to its real estate tilt.

Loan loss charges as a percentage of total loan book Non‐performing loan ratio

Source: Company data, HC Source: Company data, HC Note: (1) Relate to 2010 whereas the rest relate to 2009

No concerns about liquidity in Qatar Deposit rates have dropped 1%–1.5% over the past year (average fixed deposit remuneration is currently c4%–4.5% versus 5%–5.5% previously). Qatari banks already meet the Basel III requirements, with NSFRs of 113%–167% and LCRs of 98%–233% (QNB best). To park liquidity in the banking system, capital raised through the hikes has been invested mainly in Qatar Central Bank’s QAR50bn sukuk issuance that took place at the beginning of this year. QNB and CBQ have the highest cash balances available to invest in treasury bills.

0.0% 0.5% 1.0% 1.5%

CBQ

Doha

MARK

QIB

QNB

2009 2010 2011e 2012e 2013e 2014e

2.0%3.3% 3.3% 3.9% 4.4% 4.8% 4.8%

5.9%

7.9%9.7%

12.1%13.4%

21.8%

0%

5%

10%

15%

20%

25%

Qatar(1)

Oman(1)

KSA

Bahrain

Lebanon

Morocco(1)

Syria

UAE(1)

Jordan(1)

Kuwait

Tunisia(1)

Egypt

Algeria


7

Net stable funding ratio Liquidity coverage ratio


QIA capital injection and rights issues by banks – partly due to stricter regulatory regime in Qatar – strengthen capital base to unlock construction growth potential In anticipation of strong growth and Basel III, banks have been raising capital via rights issues and subscribing to the Qatar Investment Authority (QIA) capital injection. Though not a member of the Bank for International Settlements (BIS) – Saudi Arabia is the only BIS member in the GCC region – Qatar was the first country in the region that explicitly stated its intention to implement Basel III by 2013. Qatar Central Bank (QCB) recently changed the limit on loan portfolios’ real estate exposure, limiting real estate loans to 150% of Tier 1 capital, very recently increased from 100%. Before that, the limit was computed as the lower of 150% of equity or 15% of deposits; the removal of the deposit factor means banks need not chase deposits now – a positive in terms of margins. After the capital increase, we expect 2011e common equity Tier 1 under Basel III to come in at a whopping 23.7% for QNB, followed by 18.8% for QIB, 16.5% for MARK, 15.9% for Doha Bank, and 12.9% for CBQ, all well ahead of both Basel’s minimum of 7%–9.5% and our own threshold of 11%.

Potential MSCI upgrade in December We expect mainly the banking sector to benefit if the MSCI upgrade to emerging market status goes through (all banks under our coverage meet the criteria to be included in the index if the upgrade takes place). We think Qatar has a 50/50 chance of being upgraded by the end of this year.

113% 115%120%

155%167%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

CBQ QIB Doha MARK QNB

2009 2010

98% 98%111%

199%

233%

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100%

150%

200%

250%

Doha QIB MARK QNB CBQ

2009 2010


8

We revise estimates in light of the recent regulatory changes and 1Q numbers We lower average loan growth to 14% from 17% on the back of a lackluster 1Q. We cut retail margins 1%–2% and reduce fees and commissions to take the retail caps into account. However, the investments in the sukuk should more than offset this pressure. We have reduced our through the cycle loan loss forecasts on the back of very high public sector exposures. We expect deposit remuneration to fall further, supporting net interest margins in the next few quarters, while public lending may shift back to local currency with wider margins, particularly for MARK. We adjust reported net income for the 2.5% social contribution levy banks take via their equity statements.

EPS estimate revisions (QAR)

Bank 2011e 2012e

New Old % ∆ Consensus New Old % ∆ Consensus

CBQ 7.30 7.62 ‐4% 7.62 8.11 8.36 ‐3% 8.49 Doha Bank 5.22 4.96 5% 5.85 5.09 5.51 ‐8% 6.62 QIB 6.46 6.54 ‐1% 7.13 7.52 8.95 ‐16% 8.76 QNB 10.38 10.06 3% 11.24 12.48 11.72 7% 12.98 MARK 1.84 Initiation Initiation 1.93 2.33 Initiation Initiation 2.47


Rating and target price revisions

Bank Rating Target price (QAR/share)

New Old New Old % ∆

CBQ Overweight Overweight 95 94 1% Doha Bank Overweight Overweight 65 63 3% QIB Overweight Overweight 97 115 ‐16% QNB Overweight Overweight 183 183 0% MARK Overweight Initiation 28.1 Initiation Initiation

Source: HC


9

Valuation: Average despite growth Qatari banks are trading slightly above the sector average at 10.7x on 2012e P/E

and 1.8x on P/tNAV11e despite their rock solid fundamentals (capital, liquidity, and returns) and strong growth

Our TPs, which value underlying returns and include the banks’ surplus capital, point to 28% upside on average

QNB, which finished its rights offering on 8 May, remains our top pick, followed by

CBQ The MENA sector offers decent upside with 19% on average, but we see much more upside in selected names. In Qatar, we see 28% upside on average. Share prices have been held back by recent turmoil in the MENA region and dilution from the capital increases. After the completion of QNB’s capital increase, we see only Doha Bank increasing its capital base this year to position itself for future growth. We are not overly concerned about dilution from the capital increases. We believe they ensure strong cash dividend payouts and loan growth in the foreseeable future, while dilution is kept to a minimum thanks to attractive opportunities to invest in sukuk and treasury bills (Qatar plans to sell QAR2bn per month). We see the lackluster share price performance as an excellent entry point into the Qatari names.

Relative total shareholder return (1 year) Relative total shareholder return (5 year)

Source: Bloomberg, HC Source: Bloomberg, HC

We initiate coverage on MARK, an Islamic bank, with a TP of QAR28.1, offering 21% upside. We think the market is not fully factoring in MARK’s growth potential, which benefits from its public sector exposure and Islamic franchise. We forecast a sequential improvement in earnings, as we expect asset yields to improve as USD denominated public sector loans have been converted to local currency. However a normalization of loan loss charges may be a drag on earnings growth going forward, despite the high share of public sector loans. We see significant upside and find the current valuation compelling (2012e P/E of 9.9x and 2011e P/tNAV of 2.0x).

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QNB QIB Doha CBQ MARK

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QNB QIB Doha CBQ MARK


10

P/B versus ROE (FY12e) FY11e P/E versus FY11–14e EPS CAGR


QNB remains our top pick in the region and commands the strongest fundamentals (best capital position, very robust liquidity, very strong growth due to public sector tilt, and highest RORWA). We also add CBQ to our preferred financials portfolio, replacing NBAD (still Overweight). CBQ has underperformed its peers while its outlook has improved on the back of increased public sector lending. To arrive at our valuations, (1) we value unleveraged returns (with various adjustments for factors such as social contribution levies, goodwill amortization, and returns on capital surplus) and growth; (2) we value surplus capital (our core capital ratios deviate from those published by the banks as we include hidden reserves, such as general banking reserves, AFS reserves, and special reserves, and include the current year’s earnings); (3) we adjust for other hidden balance sheet strengths and weaknesses. For the calculation of the banks’ individual target prices, please refer to the company section.

CBQ

Doha Bank

QIB

QNB

MARK

UAE

Egypt

Lebanon

Saudi Arabia

Qatar

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

10% 12% 14% 16% 18% 20% 22%

P/B (x)

ROE

CBQ

Doha Bank

QIB

QNB

MARK

UAE

Egypt

Lebanon

Saudi Arabia

Qatar

6

7

8

9

10

11

12

13

14

15

16

5% 10% 15% 20% 25% 30%

FY11e P/E

FY11–14e EPS growth


11

MENA bank valuation screen

Rec Mcap

(USDm) Curr

Current

price

Target

price Upside

P/E (x) Target

P/E 12e

CAGR

11–14e

P/tNAV (x) ROE Dividend yield P/PPP (x)

10 11e 12e 10 11e 12e 10 11e 12e 10 11e 12e 10 11e 12e

ADCB UW 3,932 AED 3.0 2.5 ‐17% 37.9 6.7 9.7 8.1 9.1% 0.9 1.0 0.9 0.9% 11.7% 6.9% 0.0% 1.3% 2.2% 4.3 3.9 3.5 ADIB N 2,121 AED 3.3 3.3 0% 7.6 10.5 9.7 9.7 24.1% 1.3 1.4 1.2 17.1% 13.0% 12.6% 6.7% 2.2% 2.4% 4.4 4.9 4.7 CBD OW 1,576 AED 3.0 3.7 24% 7.0 7.7 7.4 9.2 8.5% 1.0 0.9 0.9 14.6% 12.5% 12.0% 6.7% 3.9% 4.1% 4.3 4.5 4.5 DIB N 2,080 AED 2.0 2.1 4% 9.5 12.2 11.7 12.2 32.8% 0.8 0.8 0.7 8.7% 6.3% 6.3% 5.0% 2.5% 2.6% 3.0 3.7 3.5 ENBD OW 6,285 AED 4.2 4.0 ‐4% 9.9 5.3 7.2 7.0 4.8% 1.0 0.8 0.8 7.2% 13.0% 8.4% 4.8% 4.5% 4.4% 3.5 3.6 3.4 FGB OW 7,282 AED 17.8 22.5 26% 7.8 8.1 7.5 9.5 14.3% 1.6 1.2 1.1 16.5% 14.4% 14.0% 3.4% 2.9% 3.1% 5.1 5.2 4.9 NBAD OW 8,602 AED 11.0 12.9 17% 8.6 8.3 7.6 9.0 8.5% 1.6 1.3 1.2 19.5% 16.7% 15.9% 2.7% 2.3% 2.5% 6.3 6.3 5.8 UNB OW 2,463 AED 3.6 4.5 24% 6.7 7.8 7.3 9.1 16.1% 0.9 0.9 0.8 13.6% 10.1% 10.0% 2.8% 2.9% 3.1% 4.9 4.1 4.0 Shuaa UW 272 AED 0.9 1.0 6% (4.5) (66.2) 35.1 37.3 ‐285.9% 0.7 0.7 0.7 ‐14.1% ‐1.0% 1.9% 0.0% 0.0% 2.9% (12) (5) 36.5 Tamweel OW 232 AED 0.9 1.42 67% 32.7 8.8 7.1 11.8 30.3% 0.4 0.4 0.4 ‐0.3% 2.9% 3.9% 0.0% 0.0% 0.0% 4.6 3.6 3.3 UAE 34,845 11% 10.0 7.8 8.3 9.3 1.2 1.0 0.9 11.1% 12.8% 10.9% 3.4% 2.8% 3.1% 4.6 4.6 4.3 CBQ OW 4,901 QAR 70.8 95 34% 9.8 9.7 8.7 11.8 11.4% 1.3 1.2 1.2 12.8% 13.2% 13.5% 9.9% 8.5% 8.5% 9.0 9.3 8.7 Doha OW 2,919 QAR 50.8 65 28% 9.1 9.7 10.0 12.8 7.8% 1.6 1.4 1.4 17.3% 16.2% 13.3% 9.8% 9.8% 9.8% 6.8 8.1 8.0 QIB OW 5,076 QAR 78.8 97 23% 12.8 12.2 10.5 14.0 13.0% 1.9 1.6 1.5 14.0% 14.4% 14.7% 6.3% 6.3% 6.3% 12.2 10.5 8.9 QNB OW 24,641 QAR 141.2 183 30% 13.5 13.6 11.3 14.7 18.9% 3.2 2.2 1.9 25.4% 19.6% 17.4% 2.5% 2.5% 3.4% 12.6 12.4 10.4 MARK OW 4,788 QAR 23.2 28.1 21% 14.3 12.6 9.9 12.3 16.5% 2.4 2.0 1.7 17.7% 17.2% 18.0% 0.0% 0.0% 4.3% 15.3 12.6 9.4 Qatar 42,326 28% 12.8 12.6 10.7 13.9 2.6 1.8 1.7 19.0% 17.0% 16.1% 3.6% 4.0% 5.0% 13.0 11.2 9.6 CAE N 516 EGP 10.3 15.0 46% 6.6 7.8 6.2 11.7 22.9% 1.4 1.2 1.0 20.6% 15.6% 17.3% 11.7% 7.1% 8.9% 5.0 4.9 4.1 CIB UW 3,081 EGP 28.3 35.9 27% 8.3 11.2 8.8 12.8 27.1% 2.1 1.8 1.5 25.7% 16.0% 17.8% 3.5% 2.7% 3.4% 7.0 7.4 6.1 HDB N 343 EGP 16.9 23.9 42% 9.6 9.9 6.1 12.9 25.0% 0.8 0.8 0.7 10.2% 7.9% 11.8% 0.0% 4.0% 6.5% 6.8 4.2 3.1 NSGB UW 2,315 EGP 36.3 41.5 14% 9.9 10.0 7.5 14.7 26.7% 2.0 1.7 1.5 21.6% 18.2% 20.7% 3.4% 3.5% 4.7% 8.8 6.4 5.2 EFG UW 1,350 EGP 19.9 21.6 8% 10.9 11.6 10.0 12.1 22.2% 1.3 1.3 1.2 8.0% 7.6% 8.7% 15.1% 5.0% 2.2% 13.3 12.5 9.4 Egypt 7,605 22% 10.0 11.5 8.9 13.7 1.7 1.5 1.4 16.1% 12.5% 14.6% 5.8% 3.6% 4.0% 8.1 7.2 5.8 Audi N 2,408 USD 6.9 8.2 18% 7.3 8.0 7.1 8.4 16.4% 1.1 1.0 0.9 15.5% 12.2% 12.5% 5.5% 5.0% 5.6% 5.2 5.8 5.1 BLOM OW 1,823 USD 8.5 12.1 43% 5.7 6.1 5.8 8.2 9.3% 1.1 1.0 0.9 20.7% 17.1% 16.0% 5.3% 5.0% 5.2% 4.3 4.8 4.4 Byblos N 1,006 USD 1.7 1.9 13% 5.4 8.0 7.8 8.8 11.0% 0.8 0.7 0.7 17.5% 9.8% 9.3% 7.4% 5.0% 5.1% 3.8 5.3 5.0 Lebanon 5,237 26% 6.4 7.3 6.8 8.5 1.1 1.0 0.9 17.7% 13.3% 13.0% 5.7% 4.9% 5.3% 4.6 5.4 4.9 ANB UW 6,744 SAR 29.7 30.5 3% 13.2 11.8 10.6 10.9 13.6% 1.7 1.5 1.4 12.9% 13.5% 13.7% 2.6% 2.7% 2.7% 8.8 8.7 8.1 Al Rajhi OW 29,600 SAR 74.0 94.0 27% 17.0 16.4 16.4 20.8 18.7% 3.7 3.2 2.9 20.4% 23.7% 24.6% 2.0% 3.7% 3.7% 12.8 11.9 10.4 BSFR N 8,524 SAR 44.2 48.8 10% 11.4 11.0 9.3 10.3 14.3% 1.8 1.6 1.4 15.1% 15.4% 16.3% 2.3% 2.3% 3.4% 10.2 9.6 8.0 Riyad N 9,600 SAR 24.0 24.8 3% 12.7 14.5 11.6 12.0 18.8% 1.2 1.2 1.1 9.6% 8.3% 10.0% 5.4% 5.4% 5.4% 9.8 10.2 8.5 Samba OW 12,180 SAR 50.8 68.9 36% 10.3 10.7 9.8 13.3 13.2% 1.8 1.6 1.4 18.0% 15.7% 15.3% 3.3% 3.3% 3.3% 9.2 9.4 8.6 SABB N 8,380 SAR 41.9 40.0 ‐5% 12.4 20.6 22.2 21.2 25.0% 2.1 1.8 1.6 11.8% 14.8% 16.9% 1.6% 1.6% 1.6% 10.1 9.6 8.0 KSA 75,028 18% 13.4 14.0 12.9 15.2 2.1 1.9 1.7 14.7% 14.6% 15.6% 2.7% 3.4% 3.5% 10.6 10.3 9.0 MENA 165,040 19% 12.7 11.2 10.2 12.2 1.8 1.6 1.4 14.4% 14.3% 13.9% 3.3% 3.5% 3.9% 8.3 8.0 7.1



12

Qatar’s growth story remains unchanged We continue to believe Qatar will witness robust growth – the highest in the region

– driven by a favorable economic environment; public spending is the key growth engine in the medium term

Deposit growth should remain very high as well, supported by a high national savings ratio and high convergence ratio

We believe QNB and MARK are the best positioned but anticipate double‐digit

growth for all banks, including CBQ and Doha Bank

Our economist expects headline economic growth to come in at 19.3% in 2011e and 8.1% in 2012e Increasing oil prices along with volume expansion continue to underpin Qatar’s growth momentum. Our economist forecasts growth of 19.3% this year and 8.1% next year. This compares with the International Monetary Fund’s estimate that real GDP growth will accelerate to 20.0% this year from 16.3% last year. Though growth is expected to slow down to the single digits starting next year, the IMF average during the 2011–16e time period is a decent c7%. Economic diversification initiatives embarked on by the Qatari government (via QNV 2030) provide further impetus to the economy, ensuring sustainability. As the right chart below illustrates, the contribution from oil is forecast to fall to 12% by 2016e from 22% in 2009, while the contribution from the service sector is expected to rise to 40% from 36% and from gas to 29% from 25% during the same period, according to estimates from the General Secretariat for Development Planning.

Real and nominal GDP growth forecasts Economic diversification: 2009 versus 2016e

Source: IMF, HC Source: General Secretariat for Development Planning, HC

18.6%

26.8%

25.4%

8.6%

16.3%

20.0%

7.1%3.9% 4.1% 4.3% 4.3%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e 2016e

Real GDP growth Nominal GDP growth

22%

25%

7%9%

36%

Oil 12%

Gas29%

Construction8%

Manufacturing10%

Services40% 2016e

2009


13

Growth momentum driven by government spending on infrastructure The government has budgeted a total of USD125bn in project spending for 2011–22e but has only awarded USD6.2bn (5%) of it. Infrastructure stands out, as shown in the graph below, representing c50% of the budgeted spending, thanks to the FIFA World Cup. As for the recent developments regarding the World Cup bid, we do not expect a revote and, as such, we continue to expect that Qatar will host the event. Project spending is further supported by the fact that Qatar has a low gross debt/GDP ratio (the IMF estimates it at 17.8% at the end of 2010). Most public spending will focus on infrastructure and tourism as there is still an oversupply of commercial office and residential real estate. Since direct government funding (for projects) is limited in Qatar, banks are well placed to ride the economic boom. The public sector should drive growth as more projects are awarded, with the corporate sector following suit.

2011–22e projects in Qatar: Budgeted versus awarded (USDm)

Dissection of aggregated gross domestic investment (QAR820bn) during 2011–16e

Source: MEED Projects, HC Source: General Secretariat for Development Planning, HC

Credit penetration to reach almost 100% by 2030e with corporate credit/GDP at c50% Qatar’s credit penetration stood at c70% at the end of 2010, providing ample room for credit to expand along with the economy. Retail penetration remains low at 12%, but we expect it to increase only slightly in the medium term due to the small population of already highly leveraged nationals. As such, we forecast retail penetration to fall to 10% this year and remain unchanged until 2014e. Corporate penetration currently stands at 34% and we expect it to drop slightly to 31% this year (as the public sector gains prominence) but to increase to 33% next year and reach c50% in 2030e. Public loans/GDP should also rise as government spending remains the key near‐term growth engine in Qatar, and corporates fall late in the cycle. In conclusion, we forecast 100% credit penetration by 2030e (versus 70% currently), driven primarily by the public and corporate sectors. This implies credit expansion of 2% ahead of already high GDP growth.

24,787

700

8,350

58,198

1,000

50

2,960

14,050

100

10,830

1,650

2,634

0 20,000 40,000 60,000

Construction

Fertilizer

Gas processing

Infrastructure

LNG

Metal

Oil & gas

Petrochemical

Pipeline

Power

Refining

Water & waste

Budgeted Awarded

Central government

42%

Hydrocarbon10%

Non‐hydrocarbon

47%


14

Credit/GDP ratio

Source: QCB, IMF, HC

We estimate sustainable loan growth of 13% for the sector We use real GDP growth of 7%, inflation of 4%, and an increase in credit penetration of 2% to arrive at a sustainable growth level of 13% during the 2011–30e time period. For this year, we forecast sector loan growth of 14%, to increase to 21% in 2012e as project spending is expected to accelerate from next year onwards. Although corporate loans represent almost half of the sector loan portfolio, the public sector’s share is likely to rise in the near term – we forecast growth of 18% in the public sector and 14% in the corporate sector this year.

Loan growth Sector loan composition

Source: Company data, HC Source: QCB, HC

0%

20%

40%

60%

80%

100%

120%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2020e 2030e

Total Retail Corporate Public

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011e

2012e

2013e

2014e

2020e

2030e

Sector Retail Corporate Public

Public32%

Retail20%

Corporate48%

Total domestic loans of cQAR299bn as of Apr 2011


15

Project spending results in a 2011–14e loan CAGR of 16% on our computations The bulk of the volume growth in Qatar is underpinned by infrastructure spending as the government tries to diversify away from the hydrocarbon sector and prepare for the World Cup. Below, we present our computation of loan growth as a consequence of project spending. We use data from MEED Projects to gauge the total budgeted project spending during the 2011–14e time period – cQAR581bn. Based on the government’s capital expenditure in past fiscal budgets, we assume that 40% of project spending will be funded directly by the government – a major positive point for Qatar compared with Saudi Arabia and Kuwait. They are also spending rather impressive amounts on infrastructure and other projects, but with less benefit to banks. This leaves a funding gap of QAR350bn, some of which we believe would be financed via the wholesale debt market. We expect banks to finance 75% of the funding gap – cQAR263bn – which translates to a CAGR of 16% during the 2011–14e time period. Hence, non‐project related CAGR amounts to 6.5% on our estimates.

Estimation of the amount of project spending to translate to bank lending in Qatar (QARbn)

Total budgeted projects 2011–14e 580.8 Estimated total budgeted government development expenditure 2011–14e 230.9 Share paid directly out of budget by government 40% Funding gap 350.0 Funding via banks 75% Funding via corporates 25% Funding via banks 262.5 Banking sector loan book YE2010 315.4 Projected sector loan book YE2014e 577.9 CAGR 16% Estimated non‐project related loan growth (6.5% per annum) 82 Total outstanding loans YE2014e 665 Breakdown of loan book 2010 301.8 Foreign banks 13.6 Qatari banks 230.9

Source: QCB, IMF, HC

Most growth to go to banks under our coverage despite foreign banks increasing their market share As of the end of last year, banks under our coverage held 81% market share, which we expect to fall slightly to 78% by 2014e. We forecast that QNB’s market share will increase to 43% from 42% stemming from its strong ties with the state, size, and solid balance sheet. MARK’s market share should remain at 8%, benefitting from the same factors. However, we expect CBQ and Doha Bank to lose some market share (‐2%) as Doha Bank prefers to play on margins rather than volume and as CBQ is affected by the recent Islamic banking regulations discussed in the next section.


16

Market share of banks under coverage based on the above lending growth analysis and our forecasts

2010 2014e % ∆

CAGR 2010–14e Loans (QARbn) Market share Loans (QARbn) Market share

QNB 133.3 42% 285.4 43% 1% 21% CBQ 34.5 11% 57.3 9% ‐2% 13% Doha Bank 28.0 9% 47.6 7% ‐2% 14% QIB 33.7 11% 70.7 11% 0% 20% MARK 25.1 8% 53.7 8% 0% 21% Market share of banks under HC coverage 254.6 81% 514.7 78% ‐3% 19% Market share of foreign banks 13.6 4% 46.9 7% 3% Market share of other Qatari banks 47.1 15% 98.3 15% 0% Total 315.3 100% 659.9 100% 0%

Source: Company data, QCB, HC

Strong deposit growth helped by high national savings rate of 50% We use an economic model to forecast deposit growth based on domestic savings ratios and historical conversion ratios (i.e. how much of domestic savings translates to net new deposits – 18% on average). Underpinned by strong economic growth and a high savings ratio – more than a whopping 50% during our forecast period – we expect deposit growth to remain in the double digits. We forecast growth of 18% this year and 17% next year.

Deposit growth vs savings/GDP and investment/GDP Sector deposit composition

Source: IMF, QCB, HC Source: QCB, HC

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

10%

20%

30%

40%

50%

60%

70%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11e'12e'13e'14e'15e

Gross national savings/GDP (LHS) Investment/GDP (LHS)

Deposit growth (RHS)

Public26%

Retail32%

Corporate42%

Total resident deposits of cQAR311bn as of Apr 2011


17

Deposit growth to further support lending Strong deposit growth will consequently support lending activities, as shown in the charts below. We expect deposit growth of 17%–18%, driven by the high national savings rate and convergence ratio (i.e. how much of savings translates into deposits – 26%). 2010–14e loan growth is almost in line with their deposit growth for most of the banks under our coverage. Banks with overseas operations have an edge as they can utilize deposits from their international branches. QNB is the key beneficiary in this respect, and also exhibits the lowest loan/deposit ratio in our coverage universe. QNB has benefitted from its international deposits in the past when liquidity was tight in the Qatari market during the crisis. Another interesting phenomenon is that, contrary to the general trend of low loan/deposit ratios among most Islamic banks in the UAE and Saudi Arabia, QIB (the biggest Islamic bank in Qatar) looks pretty stretched with a loan/deposit ratio of more than 100%.

2010–14e loan CAGR versus deposit CAGR Loan/deposit ratio


QNB and MARK are well poised for growth In conclusion, we find QNB and MARK to show the highest growth, followed by QIB, benefitting from the economic prospects in Qatar. MARK and QNB can leverage their already strong ties with the government. CBQ and Doha Bank should also see double‐digit growth as CBQ tries to diversify its product portfolio and penetrate the public sector, while Doha Bank is likely to be the laggard as it waits for the corporate sector to feel the growth in order to maintain its margins.

13%

14%

21%

20%

21%

15%

14%

23%

20%

20%

0% 5% 10% 15% 20% 25%

CBQ

Doha

MARK

QIB

QNB

Deposit CAGR Loan CAGR

97%

91%

88%

112%

83%

104%

91%

93%

112%

81%

0% 20% 40% 60% 80% 100% 120%

CBQ

Doha

MARK

QIB

QNB

2010 2014e


18

Loan growth of banks under our coverage Loan portfolio composition

Source: HC Source: Company data, HC

0%

5%

10%

15%

20%

25%

30%

MARK QNB CBQ Doha QIB

2011e 2012e

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CBQ QNB MARK Doha QIB

Public Retail Corporate


19

Recent changes in regulatory regime milder than expected It appears that Qatar Central Bank will water down the Islamic regulation, no longer

requiring conventional banks to wind down their Islamic windows by year‐end

Retail regulation capping interest rates and eliminating fee charges should have smaller impact than previously believed as improving deposit market mitigates negative consequences

Overall, we believe potential volume growth will make up for almost all lost

revenue; adjust loan growth and margin estimates in light of recent developments

QCB likely to take a generous stance: Conventional banks buying time Qatar Central Bank instructed conventional banks in February to shut down their Islamic finance windows by the end of this year. Banks were required to desist from new Sharia compliant lending /deposit taking with immediate effect, but were given a deadline of December 2011 to close their operations down completely. QCB’s decision was based on the premise that Islamic financing is riskier than conventional financing and a clear distinction between them is therefore needed to ensure proper risk management. However, the QCB circular allows banks to retain their Islamic loans until maturity. Some banks (like QNB) have already indicated that they will try to keep their Islamic loans, thus avoiding drastic drops in their overall loan books. The main issue then is on the deposit side, stemming from the short‐term nature of deposits (3 months on average). As a result, Islamic deposits will mature significantly earlier than loans, giving rise to Sharia compliance issues as Sharia loans need to be funded by Sharia deposits. We gather that banks are negotiating with QCB to work this out. We believe a favorable solution is likely to be reached before the end of this year. That said, the problem seems less serious than previously anticipated as most customers now seem to be opting for conversion to conventional deposits – including retail customers, who we earlier thought would be hard to convince. Islamic depositors are choosing to stay with conventional banks, underpinned by their strong franchises, long‐term relationships, and service differentiation, according to Fitch. It is further confirmed by bank management that Sharia depositors are willing to switch to conventional deposits in order to ensure continued high‐quality service.


20

Contribution of Islamic operations to loans, deposits, and assets of conventional banks in Qatar

Source: Company data, HC

Gradual conversion seems the most plausible solution now; hence, little change expected in loan/deposit growth of conventional and Islamic banks Given the relaxation of QCB and customers’ preferences/attitudes, we believe the regulation that came out in February is not likely to have a pronounced impact on the loan/deposit growth of conventional banks and thus of Islamic banks as well. QNB management has been quite optimistic from the beginning about the possibility of holding on to its Sharia compliant activities, and now it seems more likely that all banks will carry their loan books to maturity and manage to convert their Islamic deposits to conventional deposits. We raise loan growth for QNB, CBQ, and Doha Bank, but cut QIB’s In light of the recent positive developments, we raise the loan growth of QNB, CBQ, and Doha Bank while cutting that of QIB – which we initially considered the key beneficiary. Likewise, we increase deposit growth for all conventional banks.

0%

5%

10%

15%

20%

25%

QNB ABQ Doha CBQ KCB

% of loan % of deposit % of asset


21

Market share of conventional and Islamic banks in Qatar


Nevertheless, if Islamic banks capture roughly half of conventional banks’ market share in Islamic banking, it would boost their loan books almost 25%. On the other hand, QCB intends to raise capital requirements for Islamic banks, which could reduce QIB’s growth and capital flexibility, enhancing the prospects for conventional banks instead, particularly QNB.

Market share of Islamic loans Market share of Islamic deposits


Retail cap anticipated by banks: A matter of timing QCB issued the long‐awaited regulations on retail lending on 10 April, capping the interest rate on new and existing loans against salaries at 6.5% (overnight lending rate plus a spread of 1.5%) and reducing credit card interest rates to 12% (from 21%). The new regulations also reduce the maturity of personal loans and limit the borrowing capacity of individuals. All in all, we believe QCB wants to pass the reduction in funding costs through to the retail segment while ensuring cautious/reasonable growth, taking asset quality into consideration.

29%

26% 27%

10%

3% 3%2%

0%

35%

24%

21%

13%

3% 3%1% 1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

QIB MARK QNB QIIB CBQ DHB ABQ KCB

Market share of loans Market share of assets Market share of deposits

Conventional banks34%

Islamic banks66%

Conventional banks36%

Islamic banks64%


22

Though the rate cut initially seemed to be a surprise, we gather banks had already been working towards it and some banks (QNB and Doha Bank) announced their compliance with the regulation sooner than expected. The central bank had been working on a set of rules to regulate retail lending for a while. It was actually the timing that was a surprise as banks were in the process of adjusting to the anticipated new regulations. The new regulation bases retail lending on the lending rate set by the central bank and thus visibility is now better in terms of pricing, with a spread of 150 bps going forward. This is likely to have an indirect negative impact on the corporate book as well, however, since corporate customers are likely to compare the spread between their rates and retail’s. Since banks were already adjusting for the rate cut, and as it affects only loans against salaries and not the entire retail book, the impact is likely to be smaller than expected. As for retail volume, we never expected retail to be a growth engine as the segment continues to be highly leveraged – we see it as a saturated market. We expect any loss in volume stemming from the limit on retail lending to be more than offset by the public and corporate sectors. All in all, the negative impact is likely to be less than initially expected. Negative impact on NIMs We update our assessment of the impact on the banks under our coverage. We assume only half of the unsecured loan book is affected and that the lending rate falls to 6.5% from 9.3%. As QIB has the highest exposure to unsecured lending, its NIM would be hit hard (17 bps), followed by Doha Bank’s (12 bps). CBQ (7 bps), QNB (7 bps), and MARK (1 bp) are least affected due to their low exposure to this segment and lower estimated average margins on consumer loans. We do not include any positive offsets from lower deposit remuneration in this assessment.

Impact of NIM compression arising from the interest rate cap

Bank Unsecured loans as a % of total loans 2011e

% of retail book affected

Total loans 2011e (QARbn)

Assumed reduction in NIM

Impact on net income 2011e Impact on NIM 2011e QARm %

CBQ 8% 50% 38.0 2.8% ‐42 ‐2.3% ‐0.07% Doha 14% 50% 30.8 2.8% ‐59 ‐4.8% ‐0.12% QIB 17% 50% 36.8 2.8% ‐86 ‐5.6% ‐0.17% QNB 8% 50% 155.9 2.5% ‐156 ‐2.4% ‐0.07% MARK 1% 50% 30.6 2.8% ‐4.2 ‐0.3% ‐0.01%

Source: HC

Reduced fees The new regulation would reduce QIB’s fee income 14%, Doha Bank’s 12%, QNB’s 8%, CBQ’s 5%, and MARK’s only 1%.


23

Impact of lower fee and commission income: 1%–2% of non‐mortgage loan book

Bank Assumed % reduction in fee income from consumer credit

Non‐mortgage loans as a % of total loans

% of retail book

affected

Total loans 2011e

(QARbn)

Impact on net income 2011e Impact on fee income 2011e

QARm %

CBQ 2.0% 8% 50% 38.0 ‐28 ‐1.5% ‐5.0% Doha Bank 2.0% 14% 50% 30.8 ‐42 ‐3.4% ‐11.5% QIB 1.0% 17% 50% 36.8 ‐39 ‐2.5% ‐14.1% QNB 1.5% 8% 50% 155.9 ‐94 ‐1.4% ‐8.3% MARK 2.0% 1% 50% 30.6 ‐3 ‐0.2% ‐1.0%

Source: HC

Credit costs to fall to 123 bps from 175 bps The drop in net interest and fee income, however, should be partly offset by lower credit costs on the back of tightened lending regulations. We use an average total loan loss of 700 bps for unsecured credit, or 175 bps per annum, but we now expect that to fall to 123 bps as we lower probability of default (PD) to 7% from 10%.

Impact of improvement in credit costs on the back of tighter regulations

Bank Annual loan loss charge Unsecured loans as a

% of total loan book % of retail

book affected Total loans

2011e (QARbn)

Impact on net income 2011e

Old New QARm %

CBQ 1.75% 1.23% 8% 50% 38.0 11 0.6% Doha Bank 1.75% 1.23% 14% 50% 30.8 16 1.3% QIB 1.75% 1.23% 17% 50% 36.8 23 1.5% QNB 1.75% 1.23% 8% 50% 155.9 47 0.7% MARK 1.75% 1.23% 1% 50% 30.6 1 0.1%

Source: HC

Retail banks affected the most The total negative impact of the interest rate cap and fee change on the bottom line after adjusting for the lower credit costs should be the smallest for MARK (QAR6m, ‐0.5%), QNB (QAR218m, ‐3.3%), and CBQ (QAR61m, ‐3.4%) and the largest for QIB (QAR108m, ‐7.1%) and Doha Bank (QAR90m, ‐7.2%) – the retailers. These pure retail stories now look less attractive.

Net impact (total impact adjusted for falling credit costs)

Bank Net interest margin

(QARm) Fees & commissions

(QARm) Loan loss charges

(QARm)

Impact on net income 2011e

QARm %

CBQ ‐42 ‐28 8 ‐61 ‐3.4% Doha Bank ‐59 ‐42 11 ‐90 ‐7.2% QIB ‐86 ‐39 16 ‐108 ‐7.1% QNB ‐156 ‐94 32 ‐218 ‐3.3% MARK ‐4 ‐3 1 ‐6 ‐0.5%

Source: HC


24

Summary of the impact of the new regulations on net income (2011e)

Bank NIM reduction Fee income reduction Improvement in credit costs Net impact

CBQ ‐0.07% ‐4.99% 0.44% ‐3.4% Doha Bank ‐0.12% ‐11.46% 0.90% ‐7.2% QIB ‐0.17% ‐14.07% 1.07% ‐7.1% QNB ‐0.07% ‐8.34% 0.49% ‐3.3% MARK ‐0.01% ‐0.99% 0.06% ‐0.5%

Source: HC


25

Net interest margins under moderate pressure We expect interest charges on outstanding loans and advances to fall due to a 50

bps reduction by the central bank and increased willingness to lend by banks

We do not anticipate a contraction in NIMs as banks are reducing deposit rates; additionally, banks enjoy increased investment opportunities in sukuk (QAR50bn issued by QCB at 5%) and treasury bills (QAR2bn issued per month at c4.2%)

QNB and CBQ have the strongest net cash positions and are able to invest in treasury bills at a higher rate to offset pressure on asset yields (impacts of 30 bps and 17 bps respectively), while QIB has fully invested its net cash position

A little help from Qatar Central Bank sukuk The Qatari banks have been able to invest their very strong cash positions in sukuk issued by QCB. On 17 January, QCB put QAR50bn worth of bonds and sukuk on the market. We calculate a substantial benefit for the banks in 1Q11 and expect some further benefit from these investments in 2Q11e. We calculate a positive impact of 61 bps for QIB, 30 bps for QNB, and 14 bps for CBQ, which mitigated an underlying deterioration in lending margins. We expect a further positive impact of 1–17 bps in 2Q11e. QNB, MARK, and QIB have been the largest buyers with QAR20bn, QAR10bn, and QAR9bn, respectively.

Margin support from investment in sukuk (QAR50bn) issued by the Qatar Central Bank

Bank Additional

investments (QARbn) Yield

pickup Net interest

income (QARm) Total NIM expansion

NIM improvement in 1Q11

Expected NIM improvement in 2Q11e

QNB 20 3.5% 703 0.30% 0.24% 0.06% CBQ 2 3.5% 82 0.14% 0.11% 0.03% QIB 9 3.5% 315 0.61% 0.49% 0.12% Doha Bank 1 3.5% 38 0.08% 0.06% 0.02% MARK 10 3.5% 349 0.89% 0.72% 0.17%

Source: HC

Net cash positions have come down as a result of sukuk Following these purchases, however, net cash positions, which were very strong as of YE2010, have deteriorated from as high as 17.5% of total assets to 8.9%. QNB remains the most liquid bank even prior to its rights issue, which should bring the ratio back up to 18.6% from 13.4%. QIB, on the other hand, has a negative net cash position.


26

Net cash as a percentage of total assets Asset mix as of 1Q11

Source: Company data, HC Source: HC

But QNB should be able to buy T‐bills to support its NIM QCB plans to sell QAR2bn in treasury bills every month. We expect this to be a very attractive investment opportunity given that the treasury bonds/bills attract no risk weighted assets and thus are not punitive from a liquidity point of view either (5% weighting in net stable funding ratio). We expect QNB to be the largest buyer of T‐bills (60% of the total), while we think QIB is unable to use any more of its cash balances. We expect the largest pickup for QNB (30 bps), followed by CBQ (17 bps), whereas the impact on NIMs is insignificant for the other banks.

Impact on margins stemming from potential investment in treasury bills

Bank Treasury bills (QARbn) Yield pickup Net interest income (QARm) Net interest margin

QNB 15 3.2% 480 0.30% CBQ 2 3.2% 64 0.17% QIB 0 3.2% 0 0.00% Doha Bank 1 3.2% 32 0.10% MARK 1 3.2% 32 0.10%

Source: HC

Short‐term help from rate cuts for most as deposits become cheaper We expect some short‐term help as a result of QCB’s 5 April rate cut of 50 bps. Qatari banks should be helped by lower rates in the short term, particularly in the first year after the cut, while the benefit tapers off in the longer term. The liabilities (debt and deposits) of Qatari banks reprice more quickly than their assets (loans and investments). QIB benefits most, followed by Doha Bank.

‐5%

0%

5%

10%

15%

20%

25%

QNB CBQ QIB Doha MARK

2010 1Q11

58%

50%57%

56% 63%

18%29%

20% 14%

29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

QNB QIB CBQ Doha MARK

Cash Loan Investment Interbank Other


27

NIM evolution 2Q11e versus 1Q11


in 2Q11e Impact of investment

in sukuk in 2Q11e Impact of investment

in T‐bills Loan/deposit

Total impact on NIM (2Q11e vs 1Q11)

QNB 0.01% 0.06% 0.20% ‐0.22% 0.06% CBQ 0.09% 0.03% 0.11% ‐0.20% 0.03% QIB ‐0.18% 0.11% 0.00% 0.03% ‐0.03% Doha Bank ‐0.11% 0.01% 0.07% ‐0.14% ‐0.16% MARK ‐0.03% 0.17% 0.08% 1.13% 1.35%

Source: HC

Net interest margin evolution 2010–12e


Impact of investment in sukuk

Impact of investment in T‐bills

Impact of regulation

Loan/ deposit repricing

Total impact on NIM

(2010–12e)

Net interest margin

1Q11 2Q11e 1Q11 2Q11e 2010 2012e

QNB 0.02% 0.01% 0.24% 0.06% 0.20% ‐0.07% ‐0.45% 0.02% 2.94% 2.96% CBQ ‐0.03% 0.09% 0.11% 0.03% 0.11% ‐0.07% ‐0.45% ‐0.21% 3.29% 3.08% QIB 0.12% ‐0.18% 0.49% 0.11% 0.00% ‐0.17% ‐0.94% ‐0.55% 3.27% 2.72% Doha Bank 0.08% ‐0.11% 0.06% 0.01% 0.07% ‐0.12% ‐0.04% ‐0.05% 3.38% 3.33% MARK 0.08% ‐0.03% N/R(1) 0.17% 0.08% ‐0.01% ‐1.49% ‐1.21% 3.71% 2.50%



28

Loan losses to shift to mid cycle levels We calculate loan loss levels of just 85 bps per annum on a through the cycle basis

We expect the lowest loan loss charges for QNB We expect the biggest negative impact for MARK from a normalization in risk charges

We use a very detailed granular approach, with loan books divided into 5 categories: property and construction (P&C) lending, non‐P&C corporate lending, SME lending, mortgages, and non‐mortgage retail loans (unsecured credit, car loans, etc). We estimate the probability of default (PD) and loss given default (LGD) for each category, and forecast expected losses (EL). We expect cumulative NPLs of 10%–12.5% for P&C lending, 6.5%–7.5% for non‐P&C corporate lending, 11%–12% for SME lending, and 5.5%–7% for mortgages, while we reduce NPLs for non‐mortgage retail loans to 7% from 10% due to the recently introduced retail caps. With respect to the loss in case of default, we use a relatively conservative 40% for P&C lending (due to the slump in real estate prices), 43% for non‐P&C corporate lending, 50% for SME lending, 40% for mortgages, and 70% for non‐mortgage retail loans, in line with or above historical averages gathered by the Basel Committee. All in all, this translates to a yearly average cost of risk of 85 bps for private sector loans. We continue to expect the lowest loan loss charges for QNB (81 bps), with the highest for MARK due to its rapid growth and high exposure to commercial real estate. We leave our asset quality assumptions largely unchanged but reduce our loan loss charges based on the high share of public sector loans.

Property and construction screen (QARm)

Bank Private credit

Corporate loans

Corporate loans as a % of total loans

P&C loans P&C loans as a % of

corporate loans PD LGD

Total EL (bps)

EL from P&C

QNB 60,251 44,318 74% 18,002 41% 10.0% 40% 400 720 QIB 23,270 11,367 49% 2,146 19% 12.5% 40% 500 107 Doha Bank 24,867 15,376 62% 7,236 47% 10.0% 40% 400 289 CBQ 29,791 23,515 79% 10,046 43% 10.0% 40% 400 402 MARK 14,575 13,871 95% 9,780 71% 10.0% 40% 400 391

Source: HC


29

Non‐P&C corporate screen (QARm)

Bank Private credit

Corporate loans

Corporate loans as a % of total loans

Non‐P&C loans

Non‐P&C loans as a % of corporate loans

PD LGD Total EL

(bps) EL from

non‐P&C

QNB 60,251 44,318 74% 25,815 58% 6.5% 43% 276 713 QIB 23,270 11,367 49% 8,961 79% 7.5% 43% 319 286 Doha Bank 24,867 15,376 62% 8,140 53% 7.0% 43% 298 242 CBQ 29,791 23,515 79% 13,308 57% 7.0% 43% 298 396 MARK 14,575 13,871 95% 2,086 15% 7.0% 43% 298 62

Source: HC

SME screen (QARm)

Bank Private credit SME loans SME loans as a % of total loans PD LGD Total EL (bps) EL from SME

QNB 60,251 500 1% 11.0% 50% 550 28 QIB 23,270 260 1% 12.0% 50% 600 16 Doha Bank 24,867 0 0% 12.0% 50% 600 0 CBQ 29,791 160 1% 12.0% 50% 600 10 MARK 14,575 2,006 14% 12.0% 50% 600 120

Source: HC

Non‐mortgage retail screen (QARm)

Bank Private credit

Retail loans

Retail loans as a % of total loans

Non‐mortgage loans

PD LGD Total EL

(bps) EL from

non‐mortgage

QNB 60,251 15,934 26% 4,934 7.0% 70.0% 490 242 QIB 23,270 11,902 51% 4,012 7.0% 70.0% 490 197 Doha Bank 24,867 9,492 38% 3,492 7.0% 70.0% 490 171 CBQ 29,791 6,277 21% 2,277 7.0% 70.0% 490 112 MARK 14,575 704 5% 202 7.0% 70.0% 490 10

Source: HC

Mortgage screen (QARm)

Bank Private credit

Retail loans

Retail loans as a % of total loans

Mortgage loans

Mortgage loans as a % of retail loans

PD LGD Total EL

(bps) EL from

mortgage

QNB 60,251 15,934 26% 11,000 69% 5.5% 40% 220 242 QIB 23,270 11,902 51% 7,890 66% 7.0% 40% 280 221 Doha Bank 24,867 9,492 38% 6,000 63% 5.5% 40% 220 132 CBQ 29,791 6,277 21% 4,000 64% 5.5% 40% 220 88 MARK 14,575 704 5% 502 71% 5.5% 40% 220 11

Source: HC


30

Asset quality screen summary (QARm)

Private credit

EL from P&C

EL from non‐P&C corporate

EL from SME

EL from m

ortgages

EL from non‐m

ortgage

retail

Total EL 2010–13e

Total EL 2010–13e (bps)

Average

EL 2010–13e (bps)

Stock of provisions at YE2009

NPLs remaining after deducting

EL for existing NPLs

EL to be covered 2010–13e

Provisions in 2010

Remaining provisions 2011–13e

Forecast provisions 2011–13e

Add to/ded

uct from valuation

QNB 60,251 720 713 28 242 242 1,944 323 81 924 516 1,428 538 890 2,788 1,897 QIB 23,270 107 286 16 221 197 826 355 89 264 114 712 50 662 789 127 Doha Bank 24,867 289 242 0 132 171 835 336 84 717 30 804 312 493 746 253 CBQ 29,791 402 396 10 88 112 1,006 338 84 722 250 757 167 591 739 149 MARK 14,575 391 62 120 11 10 595 408 102 12 4 590 1 589 355 ‐233



31

Strong liquidity positions for all but a few banks Ample short‐term liquidity for Qatari banks; strongest for CBQ and QNB

QNB is the best positioned in the medium term, CBQ is the worst

High loan/deposit ratios not an issue; liquidity should not stand in the way of credit

expansion Basel introduced 2 important new ratios The Basel Committee introduced 2 new ratios: (1) the 30‐day liquidity coverage ratio (LCR) to make banks more resilient to potential short‐term disruptions in access to funding and (2) the net stable funding ratio (NSFR) to address longer‐term structural liquidity mismatches in banks’ balance sheets. Short‐term liquidity coverage ratio: Qatari banks are very liquid, particularly QNB The LCR requires banks to have sufficient high‐quality liquid assets to withstand a stressed funding scenario. The short‐term LCR identifies the amount of unencumbered, high‐quality liquid assets a bank needs to hold in order to offset the net cash outflows it would encounter in an acute short‐term stress scenario. CBQ has the highest ratio (233%), followed by QNB (199%) and MARK (111%), helped by their strong cash balances. QIB (due to low cash balances and limited T‐bill investments) and Doha Bank have LCRs of only 98% according to our calculations.

Net stable funding ratio Liquidity coverage ratio


113% 115%120%

155%167%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

CBQ QIB Doha MARK QNB

2009 2010

98% 98%111%

199%

233%

0%

50%

100%

150%

200%

250%

Doha QIB MARK QNB CBQ

2009 2010


32

Net stable funding ratio: MENA banks are more liquid than most global banks The short‐term LCR is complemented by the NSFR, which is a longer‐term structural ratio designed to address liquidity mismatches. It covers the entire balance sheet and provides incentives for banks to use stable sources of funding. The standard specifies a minimum required amount of funding that is expected to be stable over a 1‐year horizon based on liquidity risk factors assigned to assets and off balance sheet liquidity exposure.

We calculate the net stable funding ratios (available funding/required funding) as of the end of 2009 and 2010 based on the banks’ asset and liability maturity profiles. We calculate NSFRs of 113%–167% for Qatari banks (QNB best, CBQ worst), which compare favorably with those of European, US, and Asian peers (according to an IMF study) and the Basel Committee’s latest quantitative impact study (average NSFR of 93% for large banks, 103% for small banks). No large mismatch positions We have also looked in detail at the published liquidity gaps (a more traditional liquidity tool), which may give us further insight into banks’ liquidity positions, although its importance is likely to dwindle as the 2 new Basel ratios become key. Generally, most banks have very sound matches between their assets and liabilities, although all banks tend to have more long‐term assets than liabilities and are therefore by nature short on liquidity and vulnerable to sudden outflows.

Maturity mismatch of Qatari banks (cumulative liquidity gap as a percentage of total assets)


‐40%

‐35%

‐30%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

1M 3M 3‐12M

CBQ QNB Doha QIB MARK


33

Robust capital positions even under Basel III Qatari banks should be extremely well capitalized after their capital hikes in 2011

QNB is the best capitalized bank and CBQ is the worst as it deducts only 50% for

associates from Tier 1 capital

This allows high dividend payouts and very robust loan growth

Basel III to negatively affect Qatari, UAE, and Lebanese capital ratios We expect Saudi Arabia (as a member of Basel) and Qatar (at the indication of its central bank) to be the first in the MENA region to adopt Basel III, the new set of solvency rules introduced by the Bank for International Settlements (BIS). We expect banks to report their Basel III solvency ratios to their regulators as early as 2013, while the investment community should be pushing for earlier disclosure of solvency ratios according to the improved solvency framework. BIS also said banks should be pushed to meet the higher capital requirements before a series of deadlines starting in 2013. Basel III increases capital requirements for banks, including a more comprehensive coverage of risks, especially those related to capital market activities, which particularly affects QIB. Basel III should also reduce banks’ available capital. For Qatari banks, this mainly affects their investments in associates, which is especially significant for CBQ. The Basel Committee has increased the minimum solvency ratio to 4.5% and the capital conservation buffer to 2.5%, making the new effective minimum 7%. On top of that, the Basel Committee has agreed upon additional loss absorbency requirements of 1%–2.5% depending on a bank’s systemic importance. This puts the effective minimum at 9.5%. To provide a disincentive for banks facing the highest charge to materially increase their global systemic importance in the future, an additional 1% surcharge would be applied. However, we do not believe any bank under our coverage is systemically important from a global perspective, but some are systemically important from a national perspective. We do not believe market participants will agree to nonsystemic banks having lower capital ratios than banks that are systemically important, particularly because nonsystemic banks are less likely to receive support from their governments. We already use an effective minimum capital requirement of 11% for common equity Tier 1 under Basel III, given the higher risks for emerging markets.


34

Basel III implementation framework

2013 2014 2015 2016 2017 2018 As of 1 Jan 2019

Min common equity capital ratio (CECR) 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5% Capital conservation buffer 0.63% 1.25% 1.88% 2.5% Min common equity capital ratio plus conservation buffer 3.5% 4% 4.5% 5.13% 5.75% 6.38% 7% Conservation buffer for systemic banks 2.5% Min CECR plus conservation buffer for systemic banks 9.5% Min Tier 1 capital 4.5% 5.5% 6% 6% 6% 6% 6% Min Tier 1 capital plus conservation buffer 8.5% Min Tier 1 capital plus conservation buffer for systemic banks 11% Min total capital 8% 8% 8% 8% 8% 8% 8% Min total capital plus conservation buffer 8% 8% 8% 9% 9% 10% 11% Min total capital plus conservation buffer for systemic banks 13.5% Capital instruments that no longer qualify as noncore Tier 1 or 2 Phased out over 10 years

Source: BIS, HC

Capital ratios under Basel III

Tier 1 Tier 1/core Tier 1 RWA increase

2010e 2011e

QNB 14.4% 23.7% ‐2.1% 2.0% Doha Bank 10.3% 15.9% ‐0.1% 2.0% QIB 14.6% 18.8% 0.0% 16.3% CBQ 11.8% 12.9% ‐20.8% 7.8% MARK 17.9% 16.5% 0.0% 5.7% Qatar ‐4.6%

Source: HC


35

Profitability rankings: QNB and Al Rajhi the best Qatari banks are the most profitable, with QNB best in class UAE banks are the least profitable (low margins and high cost of risk), followed by

Lebanese banks, in our view

Investments in associates weigh on profitability as they inflate the denominator

RORWA to remain high despite Basel III and increased cost of risk We prefer to focus on RORWA (net profit divided by risk weighted assets) rather than ROE, which could easily be manipulated by taking on additional leverage by lowering the common equity/risk weighted assets ratio. Our RORWA rankings reveal that QNB and Al Rajhi should consistently be the most profitable franchises under our coverage, with RORWA in excess of 4%. For QNB, this is helped by its very low cost base and government guaranteed lending, while Al Rajhi enjoys an extremely cheap deposit base, although conventional banks are increasingly targeting the public sector as well. Nevertheless, RORWA is still distorted by contributions from associates that do not generate risk weighted assets but are deducted from capital ratios. We have therefore grossed up interest in associates into risk weighted assets in the RORWA chart on the next page, making QNB somewhat less profitable (adjusted RORWA of 3.3%) than Al Rajhi (4.1%). QNB is followed by MARK (2.9%), Doha Bank (2.4%), QIB (2.0%), and CBQ (1.6%).

Revenue/RWA 2011e Costs/RWA 2011e


Comparing countries, it is clear that the Qatari banks are doing the best, followed by the Egyptian banks despite the sharp increase in the cost of risk that we anticipate for 2011e, although we do continue to see downside risk in that respect.

0% 2% 4% 6% 8% 10% 12% 14%

TamweelBSFRRiyadMARKUNB

ByblosADCBANBDIB

ENBDSambaNBADFGBAudiSABBCBQHDB BLOMADIBCBDDohaShuaaQIBQNB

Al RajhiCIB

NSGBCAEEFG

0% 2% 4% 6% 8% 10%

EFGShuaaCAECIB

NSGBAudiHDB

ByblosBLOMADIB

Al RajhiDohaDIB

SABBCBDANBCBQ

NBADRiyadENBDQIB

SambaADCBQNBUNBBSFRFGB

TamweelMARK


36

The least profitable markets are the UAE (due to lower net interest margins and the highest cost of risk) and Lebanon (due to sharply increased capital requirements for treasury bonds in foreign currencies).

PPP/RWA 2011e Cost of risk/RWA 2011e


RORWA(1) 2012e

Source: Company data, HC Note: (1) Risk weighted assets adjusted for associates

‐1% 0% 1% 2% 3% 4% 5% 6%

ShuaaByblosRiyadAudi

TamweelBSFRDIBANBHDB ADCBUNBENBDBLOMADIBSABBMARKSambaNBADEFGCBQDohaCBDFGBQIBCAECIB

NSGBAl Rajhi

QNB

0.0% 0.5% 1.0% 1.5% 2.0%

MARKShuaaBLOMAudi

ByblosBSFR

SambaCBQQIBEFG

RiyadDohaQNBHDB ANB

NBADSABBCIB

Al RajhiCAE

NSGBUNB

TamweelFGBCBDADIBDIB

ENBDADCB

4.1%

3.3% 3.2%

2.9%2.7% 2.7%

2.4% 2.4%2.2% 2.2% 2.1% 2.1% 2.0% 1.9% 1.9%

1.8% 1.7% 1.6% 1.5% 1.5% 1.5%1.3%

1.2% 1.1% 1.1% 1.0%0.8%

0.7%0.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Al Rajhi

QNB

NSG

B

MARK

CAE

CIB

Doha

SABB

Samba

NBAD

BSFR

BLO

M

QIB

FGB

CBD

ANB

Riyad

CBQ

EFG

UNB

Audi

HDB

ENBD

ADIB

Tamweel

Byblos

ADCB

Shuaa DIB


37

1Q earnings: Rivalry for government loans Sector loan growth flat sequentially, while banks compete against each other,

particularly in the public sector; deposit growth continues unabated, though

Earnings were protected by investments in sukuk – utilized to park excess liquidity – and improving deposit remuneration

Normalization in loan loss charges in line with or still below mid cycle levels 1Q net income rose 15.4% q‐o‐q and 22.3% y‐o‐y, 16.5% ahead of our estimates

Banks under our coverage (including MARK) reported double‐digit earnings growth, helped by rising revenue (+29% y‐o‐y), mainly on investment income from sukuk, which helped offset the increase witnessed in loan loss charges (+c124% y‐o‐y). QNB saw the highest y‐o‐y earnings growth at 34.8%, driven primarily by core revenue, while Doha Bank reported the highest sequential growth, supported by benign credit costs and noninterest income. After a decline in earnings in 1Q10 (except for QNB) and lackluster growth throughout the past year, Qatari banks are exhibiting some earnings momentum in 1Q11. This is still in an early stage, however, as growth is expected to accelerate starting in 2H11/1H12e as project spending kicks off. Loan growth is finally showing signs of improvement, but their increasing lending appetite should cause banks to compete for market share until the expected spending takes off next year, expanding sector volume

Sector loan book fell slightly sequentially in 1Q11 (‐0.3%), but outstanding loans experienced m‐o‐m growth of 1.1% in May (public sector loans grew 0.8% and private sector 1%), following a m‐o‐m expansion of 1.3% in April. This takes y‐t‐d loan growth to 2.1% and y‐o‐y growth to 9.2%. For banks under our coverage, sequential growth stood at 2.4% – higher than the sector average. Given the flat sector loan growth and a 15% sequential drop in QIB’s loan book, we believe that real underlying growth has been minimal during the quarter. QNB and MARK benefitted from their solid ties to the state, capturing the government loans that left QIB. CBQ is also increasingly targeting the public sector for growth. Doha Bank and QIB are focusing on margins rather than volume and saw their books fall sequentially. Improved liquidity and lending appetite among banks are likely to translate into competition until demand takes off, underpinned by the expected robust project spending.

Investment in government sukuk in January has helped utilize excess liquidity and mitigate margin compression

The QAR50bn 3‐year sukuk with a coupon of 5% issued by the central bank at the beginning of this year helped banks deploy their excess liquidity, supporting margins in our view. Stemming from its size, QNB’s investment was the largest (QAR20bn) as its investment portfolio rose to QAR44bn from QAR24bn in the previous quarter. We believe this has helped margins as all the excess liquidity would otherwise have been sitting idle as the central bank stopped offering interest on excess reserves parked with it. All banks but MARK include the interest income from these sukuk in net interest income.


38

The additional investments in sukuk (supporting NIMs by 6–49 bps) and lowering of deposit rates (helped by rate cuts last August and this April) could partly offset the lowered lending rates, which manifested particularly in the public sector, as illustrated in the table below. Nevertheless, NIMs fell sequentially.

Investment portfolio (QARbn) Asset yield

Source: Company data, HC Source: Company data, HC Note: (1) Asset yield is calculated only on MARK’s financing portfolio as MARK includes income from sukuk in investment income

Net interest margin compression in 1Q11 partly offset by rate cuts and investments in sukuk


in 1Q11 Impact of investment

in sukuk in 1Q11 Impact of investment

in T‐bills in 1Q11 Loan/deposit

Total impact on NIM vs 4Q10

QNB 0.02% 0.24% 0.00% ‐0.41% ‐0.15% CBQ ‐0.03% 0.11% 0.00% ‐0.15% ‐0.07% QIB 0.12% 0.49% 0.00% ‐0.24% 0.37% Doha Bank 0.08% 0.06% 0.00% ‐0.14% 0.00% MARK 0.08% N/R

(1) 0.00% ‐3.01% ‐2.94%


Banks let expensive deposits go amid ample liquidity Deposits increased 3.7% sequentially, taking y‐o‐y growth to 26.7% for the banks under our coverage. M‐o‐m deposit growth slowed to 0.5% in May after a jump of 7.8% the previous month. This takes y‐t‐d deposit growth to 9.2% and y‐o‐y growth to 21.9%. With adequate liquidity in the system and funding costs expected to fall further, we believe some banks have been getting rid of costly deposits as they wait for demand (lending) to pick up. Banks that witnessed soft growth shed deposits, while QNB and MARK took more as they expanded their loan books. This trend may reverse if lending picks up, but deposit growth should remain high in the next few years thanks to the high national savings ratio. Falling deposit rates are already helping margins and we expect this to continue, further supported by the recent central bank overnight deposit rate cut.

24

10

35

2

44

1214

6

12

0

5

10

15

20

25

30

35

40

45

50

QNB CBQ QIB DHB MARK

1Q10 4Q10 1Q11

8.4%8.7%

4.4%

9.3%

7.4%7.1%

7.8%

6.4%

9.0%

4.3%

0%

2%

4%

6%

8%

10%

12%


1Q10 4Q10 1Q11


39

Sequential balance sheet growth: Loan versus deposit Interest expense as a percentage of deposits


MARK’s net interest income down slightly q‐o‐q due to a one‐off event Though up y‐o‐y, MARK’s net interest income fell 63% q‐o‐q due mainly to margin compression. We understand that this is a one‐off and do not expect a repeat. MARK held part of its government lending portfolio in USD in 1Q, which affected margins due to the low interest rate on USD lending. However, management affirmed that its lending will be in local currency going forward and margins are therefore expected to expand. Apart from CBQ, other banks benefitted from growth in net interest income, with QIB seeing the highest sequential growth at 16.3% (helped by interest on investments). Investment income to improve in the coming quarters Investment income rose significantly y‐o‐y and q‐o‐q, due in our view to banks making use of the lifting of the sanction on trading on the local exchange. In MARK’s case, the increase is misleading as it includes the income from the sukuk issued by the central bank at the start of this year. We factor in capital gains of 5% on equity portfolios but do not include realized bonds gains, even though they may appear, particularly if interest rates drop. Credit costs move toward normalization Loan loss charges as a percentage of total loan book moved up across the board as credit costs started to normalize. However, as depicted in the chart below, credit costs are still well below the average our asset quality screen suggests for 2011–14e. Credit costs have fallen compared with levels in the previous quarter, attributable largely to seasonality as banks typically tend to take a hit in the last quarter.

6.9%

3.8%

‐15.0%

‐2.9%

5.8%

8.7%

‐9.0%

‐15.1%

‐9.2%

24.9%

‐20% ‐10% 0% 10% 20% 30%

QNB

CBQ

QIB

DHB

MARK

Deposit Loan

2.8%

3.4%

1.3%

2.5%2.4%

1.8%

3.3%

2.2%2.5%

2.1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%


1Q10 4Q10 1Q11


40

Loan loss charges as a percentage of loan book (bps) Non‐performing loan ratio


Comparison of 1Q11 earnings of Qatari banks under our coverage

1Q11 1Q10 4Q10 1Q11e ∆ y‐o‐y ∆ q‐o‐q Dev vs 1Q11e

Net interest income (QARm) QNB 1,707 1,189 1,652 1,704 43.6% 3.4% 0.2% CBQ 445 409 470 458 8.7% ‐5.4% ‐2.9% QIB 317 322 273 363 ‐1.4% 16.3% ‐12.5% Doha Bank 441 328 452 454 34.4% ‐2.6% ‐2.9% MARK 112 242 306 ‐53.6% ‐63.2% Sector 3,022 2,490 3,152 2,977 21.4% ‐4.1% 1.5% Noninterest income (QARm) QNB 244 209 160 211 16.5% 52.2% 15.6% CBQ 196 95 251 130 106.9% ‐21.9% 50.7% QIB 160 167 106 111 ‐4.0% 51.7% 44.1% Doha Bank 280 40 45 606.1% 527.9% MARK 1,383 921 1,021 850 50.1% 35.4% 62.6% Sector 244 209 160 211 16.5% 52.2% 15.6% Revenue (QARm) QNB 2,210 1,600 2,111 2,102 38.1% ‐24.2% 0.4% CBQ 688 618 630 669 11.4% ‐1.9% ‐5.8% QIB 513 417 524 493 23.2% ‐20.4% 6.3% Doha Bank 601 495 558 565 21.4% ‐11.3% ‐1.2% MARK 393 282 350 39.4% ‐19.5% Sector 4,405 3,411 4,173 3,828 29.1% ‐18.3% 9.0% Operating expenses (QARm) QNB 364 299 360 371 21.7% 1.1% ‐1.9% CBQ 206 196 209 205 5.1% ‐1.7% 0.3% QIB 137 99 146 111 37.8% ‐6.1% 23.4% Doha Bank 186 162 226 209 14.9% ‐17.6% ‐10.9% MARK 84 69 42 20.2% 100.7% Sector 976 826 983 896 18.2% ‐0.7% 9.0%

5059

39

66

2

80 83 87 82102

‐100

‐50

0

50

100

150

200

250


1Q10 4Q10 1Q11 HC asset quality screen

1.0%

3.2%

4.4%

1.9%

1.0%

3.2%

3.9%

1.8%

0% 1% 2% 3% 4% 5%

QNB

CBQ

Doha

Sector

4Q10 1Q10 1Q11


41

Comparison of 1Q11 earnings of Qatari banks under our coverage (continued)

1Q11 1Q10 4Q10 1Q11e ∆ y‐o‐y ∆ q‐o‐q Dev vs 1Q11e

Loan loss charges (QARm) QNB 177 92 230 110 92.1% ‐23.0% 60.9% CBQ 53 12 110 51 341.5% ‐51.7% 4.1% QIB 28 17 ‐65 23 64.6% ‐143.1% 22.9% Doha Bank 45 15 157 52 202.6% ‐71.6% ‐14.0% MARK 2 0 0 2726% ‐1020% Sector 304 136 432 236 123.7% ‐29.5% 29.2% Net income (QARm) QNB 1,707 1,266 1,550 1,624 34.8% 10.1% 5.1% CBQ 446 410 309 450 8.9% 44.6% ‐0.8% QIB 326 300 428 352 8.6% ‐23.9% ‐7.5% Doha Bank 363 315 159 294 15.2% 128.4% 23.6% MARK 328 302 300 8.7% 9.4% Sector 3,170 2,593 2,746 2,720 22.3% 15.4% 16.5% Loan loss as a % of loan portfolio (bps) QNB 50 29 69 CBQ 59 15 127 QIB 39 25 ‐77 Doha Bank 66 22 225 MARK 2 0 0 Loan portfolio (QARbn) QNB 142.5 126.6 133.3 145.4 12.6% 6.9% ‐2.0% CBQ 35.9 32.4 34.5 34.9 10.8% 3.8% 2.8% QIB 28.7 27.4 33.7 35.4 4.8% ‐15.0% ‐19.1% Doha Bank 27.2 26.8 28.0 27.5 1.2% ‐2.9% ‐1.2% MARK 26.5 20.5 25.1 29.1% 5.8% Sector 260.7 233.7 254.6 243.2 11.6% 2.4% 7.2% Deposits (QARbn) QNB 179.9 131.9 165.5 173.7 36.4% 8.7% 3.5% CBQ 30.3 28.8 33.3 33.9 5.1% ‐9.0% ‐10.8% QIB 25.7 25.3 30.3 31.5 1.5% ‐15.1% ‐18.4% Doha Bank 28.0 27.2 30.8 31.7 2.9% ‐9.2% ‐11.8% MARK 33.7 21.6 27.0 56.5% 24.9% Sector 297.6 234.8 286.8 270.9 26.7% 3.7% 9.8% NPL ratio QNB 1.0% 0.7% 1.0% 47.8% 3.5% CBQ 3.2% 2.4% 3.2% 33.0% 2.4% Doha Bank 4.4% 3.7% 3.9% 16.4% 10.4% Sector 1.9% 1.4% 1.8% 28.9% 3.6% Coverage QNB 121% 117% 118% 4.0% 3.1% CBQ 92% 96% 90% ‐3.9% 2.6% Doha Bank 89% 67% 92% 32.0% ‐3.6% Sector 102% 92% 101% 11.2% 1.2%



42

Earnings revisions post 1Q11 We lower 2011e loan growth to 14% from 17% after the lackluster 1Q

We reduce asset yields but increase the contribution from investment securities;

we also see potential benefit from lower deposit costs

Loan loss charges were in line with the results of our asset quality screen; NPLs remain well contained

QNB: Lower fee income but cut credit costs We reduce QNB’s 2011e gross loan growth only slightly to 17% from 18% while cutting credit costs (loan loss charge/total loan portfolio) to 50 bps for 2012–14e from 60 bps for 2012e, 70 bps for 2013e, and 80 bps for 2014e. Following the recent fee caps, we also cut fee income 15% this year and 21% next year. We also cut margins 8 bps for 2011e and 9 bps for 2012e and 2013e. We reduce this year’s deposit growth to 14% from 15% but raise it to 20% from 18% next year on the back of better growth. All in all, we raise earnings 3% for 2011e and 6% for 2012e, helped by benign loan loss charges more than offsetting the drop in fee income. QIB: Significantly cut loan growth forecasts and margins Following the significant drop in the value of QIB’s loan book (15% sequentially), we cut loan growth to 10% from 35% for 2011e and to 21% from 35% for 2012e. We believe the lender is focusing on margins rather than volume, which is likely to soften credit expansion until increased lending filters through the economy. We leave our gross loan growth for 2012e and 2013e virtually unchanged. We maintain our loan loss assumptions for 2011e and 2012e as the bank took higher than expected provisions in 1Q11. However, we slightly cut 2013e credit cost as a percentage of loan book 10 bps. We also cut fee income 24% for 2011e and 28% for 2012e. However, we raise our investment income estimates throughout our forecast period as we now include contribution from associates under this line. On the whole, we cut net profit 1% for 2011e, 16% for 2012e, and 22% for 2013e. CBQ: Reduce earnings only 4% for 2011e and 3% for 2012e CBQ’s strategy of penetrating the public sector, started last year, has begun to show in its loan book. We raise this year’s loan growth to 10% from the previous 7%. Meanwhile, we cut deposit growth to 6% from 9% as the lender attempts to effectively manage its funding cost, as reflected in the 9% sequential contraction in deposits witnessed in 1Q11. Following the recent rate cuts, we lower margins 5 bps to 3.11% for 2011e and 7 bps to 3.08% for 2012e even though we think CBQ can lower the remuneration of its deposits and invest more in treasury bills. We also reduce fee income 5% for 2011e and 8% for 2012e. Finally, we lower our earnings estimates 4% for 2011e and 3% for 2012e.


43

Doha Bank: Margins improve as it emphasizes spreads rather than volume Given its retail tilt, we cut Doha Bank’s fee income 16% for 2011e and 19% for 2012e. We raise margins (18 bps to 3.6%) this year as we feel the lender avoids sacrificing margins for volume. Nonetheless, as the recent rate cuts play out along with pricing pressure in the market, we expect margins to come under pressure in 2012e. As such, we lower margins 16 bps for 2012e and 24 bps for 2013e. All in all, we revise earnings 5% upward this year, helped by margin expansion, but we lower 2012e earnings 8%.


44

Earnings revisions (QARm)

2011e 2012e 2013e

New Old % ∆ New Old % ∆ New Old % ∆

QNB Revenue 8,763 8,728 0% 10,504 10,386 1% 12,309 12,518 ‐2% Operating expenses 1,547 1,547 0% 1,883 1,883 0% 2,295 2,295 0% Operating profit 7,216 7,182 0% 8,621 8,503 1% 10,014 10,223 ‐2% Loan loss charges 791 948 ‐17% 958 1,304 ‐27% 1,174 1,731 ‐32% Net profit 6,591 6,390 3% 7,922 7,439 6% 9,235 8,868 4% EPS (QAR) 10.4 10.1 3% 12.5 11.7 6% 14.5 14.0 4% Net loan growth 17% 11% 6% 20% 18% 2% 23% 28% ‐5% Deposit growth 14% 15% ‐1% 20% 18% 2% 22% 26% ‐4% QIB Revenue 2,335 2,357 ‐1% 2,747 3,057 ‐10% 3,117 3,732 ‐16% Operating expenses 558 555 1% 647 636 2% 746 729 2% Operating profit 1,777 1,802 ‐1% 2,099 2,421 ‐13% 2,371 3,003 ‐21% Loan loss charges 205 319 ‐36% 269 417 ‐36% 371 714 ‐48% Net profit 1,524 1,544 ‐1% 1,776 2,114 ‐16% 1,941 2,475 ‐22% EPS (QAR) 6.5 6.5 ‐1% 7.5 9.0 ‐16% 8.2 10.5 ‐22% Net loan growth 10% 35% ‐25% 21% 35% ‐14% 29% 31% ‐2% Deposit growth 9% 16% ‐7% 22% 46% ‐24% 27% 25% 2% CBQ Revenue 2,723 2,736 0% 2,939 3,010 ‐2% 3,282 3,389 ‐3% Operating expenses 836 836 0% 923 923 0% 1,019 1,019 0% Operating profit 1,887 1,900 ‐1% 2,016 2,087 ‐3% 2,263 2,370 ‐5% Loan loss charges 246 215 14% 241 243 ‐1% 304 304 0% Net profit 1,806 1,885 ‐4% 2,006 2,071 ‐3% 2,227 2,327 ‐4% EPS (QAR) 7.3 7.6 ‐4% 8.1 8.4 ‐3% 9.0 9.4 ‐4% Net loan growth 10% 7% 3% 12% 13% ‐1% 16% 15% 1% Deposit growth 6% 9% ‐3% 16% 12% 4% 20% 19% 1% Doha Bank Revenue 2,300 2,230 3% 2,378 2,460 ‐3% 2,685 2,775 ‐3% Operating expenses 803 803 0% 876 876 0% 980 980 0% Operating profit 1,497 1,427 5% 1,502 1,584 ‐5% 1,705 1,795 ‐5% Loan loss charges 257 248 4% 293 275 7% 340 357 ‐5% Net profit 1,239 1,179 5% 1,208 1,309 ‐8% 1,365 1,437 ‐5% EPS (QAR) 5.2 5.0 5% 5.09 5.5 ‐8% 5.7 6.1 ‐5% Net loan growth 11% 7% 4% 15% 12% 3% 16% 16% 0% Deposit growth 10% 6% 4% 13% 10% 3% 17% 17% 0%

Source: HC


45

2Q11e earnings: We forecast double‐digit y‐o‐y earnings growth for all banks

We expect the banks to report y‐o‐y earnings growth of 12%–17%

Earnings helped across the board by volume growth – 4% q‐o‐q and 14% y‐o‐y; QNB to see the highest q‐o‐q growth

Bottom line in 2Q11e should be more or less in line with the solid performance

recorded in 1Q11

2Q11e earnings estimates (QARm)

HC 2Q11e 2Q10 ∆ y‐o‐y Consensus 2Q11e Dev HC 2Q11e vs cons. 1Q11 ∆ q‐o‐q

QNB (reports on 6 July) Net interest income 1,711 1,374 25% 1,707 0% Noninterest income 465 428 8% 502 ‐8% Total income 2,176 1,802 21% 2,210 ‐2% Operating expenses 387 306 26% 364 6% Operating profit 1,789 1,496 20% 1,846 ‐3% Provisions 198 118 68% 178 11% ‐ Loan loss 175 97 81% 177 ‐1% ‐ Other 22 21 6% 0 N/R Net income 1,633 1,438 14% 1,764 ‐7% 1,707 ‐4% Cost/income 18% 17% 16% Loan/deposit 79% 91% 79% Gross loans (QARbn) 149.6 127.1 18% 142.5 5% Deposits (QARbn) 188.9 139.2 36% 179.9 5% CBQ (reports on 27 July) Net interest income 460 432 6% 445 3% Noninterest income 218 193 13% 244 ‐10% Total income 678 625 9% 688 ‐2% Operating expenses 201 188 7% 206 ‐2% Operating profit 477 437 9% 483 ‐1% Provisions 62 75 ‐18% 76 ‐19% ‐ Loan loss 52 49 7% 53 ‐1% ‐ Other 9 26 ‐64% 23 ‐60% Net income 457 408 12% 468 ‐2% 446 2% Cost/income 30% 30% 30% Loan/deposit 119% 112% 118% Gross loans (QARbn) 36.8 34.2 8% 35.9 2% Deposits (QARbn) 30.9 30.4 2% 30.3 2%


46

2Q11e earnings estimates (continued)

HC 2Q11e 2Q10 ∆ y‐o‐y Consensus 2Q11e Dev HC 2Q11e vs cons. 1Q11 ∆ q‐o‐q

QIB (reports on 20 July) Net interest income 344 348 ‐1% 317 8% Noninterest income 205 142 44% 191 7% Total income 549 490 12% 508 8% Operating expenses 137 113 22% 137 0% Operating profit 412 378 9% 371 11% Provisions 51 72 ‐29% 49 5% ‐ Loan loss 41 72 ‐42% 28 48% ‐ Other 10 0 N/R 21 ‐53% Net income 353 301 17% 347 2% 321 10% Cost/income 25% 23% 27% Loan/deposit 114% 131% 112% Gross loans (QARbn) 29.8 33.2 ‐10% 28.7 4% Deposits (QARbn) 26.2 25.4 3% 25.7 2% Doha Bank (reports on 19 July) Net interest income 463 359 29% 441 5% Noninterest income 138 205 ‐33% 160 ‐14% Total income 602 564 7% 601 0% Operating expenses 190 155 23% 186 2% Operating profit 411 409 1% 415 ‐1% Provisions 66 108 ‐39% 51 31% ‐ Loan loss 56 91 ‐38% 45 25% ‐ Other 10 17 N/R 6 67% Net income 345 300 15% N/A 363 ‐5% Cost/income 32% 27% 31% Loan/deposit 96% 100% 97% Gross loans (QARbn) 27.8 27.4 2% 27.2 2% Deposits (QARbn) 28.9 27.2 6% 28.1 3% MARK (reports on 2 August) Net interest income 227 253 ‐10% 112 102% Noninterest income 195 112 74% 280 ‐31% Total income 422 364 16% 393 7% Operating expenses 70 60 17% 84 ‐16% Operating profit 352 304 16% 309 14% Provisions 5 2 188% 2 190% ‐ Loan loss 5 2 188% 2 190% ‐ Other 0 0 N/R 0 N/R Net income 351 303 16% N/A 328 7% Cost/income 17% 17% 21% Loan/deposit 79% 95% 79% Gross loans (QARbn) 27.6 20.9 32% 26.5 4% Deposits (QARbn) 34.7 22.1 58% 33.7 3%



47

The HC valuation and capital approach We value unleveraged returns (with various adjustments for social contribution

levies, goodwill amortization, returns on capital surplus, etc) and growth

We value capital surpluses (our core capital ratios deviate from those published by the banks as we include hidden reserves, such as general banking reserves, AFS reserves, and special reserves, and include the current year’s earnings)

We adjust for other hidden balance sheet strengths and weaknesses

Our valuations are made up of 3 core elements: (1) Valuing the banking operations. We start by valuing the core operations of the bank. We adjust net earnings for distributions that are not subtracted from reported earnings (such as social contribution levies), then add noncash amortizations (such as goodwill amortization). We do not include realized bond gains in our forecasts. We use a discount of c11% for the Qatari banks, representing a risk‐free rate of 5% and an equity risk premium of 6%. We use a base perpetual growth rate of 5% for the banks and add an extra 1% for those exposed to the public sector (QNB, MARK) or Islamic finance (MARK, QIB). We calculate earnings based on a normalized capital structure (11% of risk weighted assets plus investments in financial associates). The returns on excess capital or the capital deficit are added to/subtracted from the earnings to arrive at an underlying earnings pattern given an adequate capital base. (2) Valuing the capital surplus/deficit. We calculate available capital as follows: (1) we calculate the common equity of the bank; (2) we add minorities as they are part of the capital structure; (3) we deduct all intangibles and goodwill; (4) we deduct all non‐common equity elements such as preferred shares, convertibles, subordinate debt, and other bridge capital; (5) we include mandatory convertibles; (6) we do not deduct deferred tax assets as they represent cash flows for shareholders; and (7) we do not deduct positive available‐for‐sale reserves as these are easy to free up by selling the positions. We calculate capital requirements as follows: (1) we estimate the risk weighted assets under Basel III; (2) we set a minimum core Tier 1 of 11%; and (3) we include all financial associates (we do not use the 10% threshold the Basel Committee has agreed upon). All Qatari banks are overcapitalized, allowing for substantial cash dividend payouts or substantial growth. (3) Adding or subtracting other elements such as provisioning needs that are above and beyond those in our 4‐year forecast period and stem from our asset quality screen, and potential losses on associates and other investments (real estate, equities, structured credit, and level 3 assets). QNB has substantial level 3 assets, but most are held‐to‐maturity treasury bonds and only QAR834m relate to mutual funds. All in all, our target prices provide a very informed view of the most important value drivers of a bank, such as its returns and capital strength.


48

Key downside risks The key risks for all banks under our coverage remain the GDP growth assumption and the regulatory framework. Significantly lower than expected economic growth during our forecast horizon and further tightening of regulatory requirements are the main overall downside risks. In addition, key stock specific downside risks include: Qatar National Bank: (1) a reduction in government spending or a decision by the government to increase its share of direct spending in projects, (2) a significant deterioration in the political/economic environments where QNB has international operations, and (3) an inability to convert/retain any of its Islamic operations. Commercial Bank of Qatar: (1) a further significant reduction in deposit rates in the Qatari market, placing CBQ at a disadvantage as it has already introduced medium‐term funding at a higher fixed rate, (2) corporate customers demanding similar rate cuts on their loans following the retail cuts, even though they were offered 2 rate cuts in 2010, and (3) intense competition in the public sector preventing CBQ from achieving its growth targets in this segment. Qatar Islamic Bank: (1) a further deterioration in the Qatari real estate market, (2) the quality of new management yet to be appointed, and (3) lower than expected growth in the Islamic segment. Masraf Al Rayan: (1) a reduction in government spending or a decision by the government to increase its share of direct spending in projects, (2) lower than expected growth in the Islamic segment, and (3) further margin compression if the lender is unable to convert its loan book into QAR denominated loans. Doha Bank: (1) a delay in the private sector spillover effect impacting growth prospects in contracting, Doha Bank’s key focus segment, (2) worsening asset quality, and (3) an inability to convert/retain its Islamic operations.


49

Companies section


50

QNB: Strongest from every angle Loan CAGR of up to 21%; closing Islamic window is a hiccup

Highest RORWA in the sector; Qatar National Bank can reinvest its

strong cash position, supporting NIM

Best capitalized MENA bank after its completed rights issue

QNB is generating the sector’s highest returns, helped by its focus on the public sector and efficient cost structure: QNB’s reported ROE may fall to c20% due to its strong capital base. However, its RORWA should exceed 4% going forward (3.3% when adjusted for the gross up for associates), thanks to high exposure to government guaranteed loans and a very low cost structure. Earnings growth high at 18%: We expect continued strong earnings growth, with income growth of 19% (doubling revenues in 2010–14e) and cost growth slightly outpacing strong revenue growth (2010–14e CAGR of 21.8%), but loan loss charges are likely to increase from the very low levels recorded recently. QNB expects accelerating loan growth of at least 17.5% in the next 5 years. The public sector would be the main growth driver and we believe QNB is best positioned in that regard. The closure of QNB’s Islamic finance windows is likely to have only a slight negative impact in the near term. Low cost of risk: Our asset quality screen suggests cumulative losses of just 323 bps over the next 4 years, or 81 bps per year. QNB has relatively low exposure to the retail market and lends mainly to the public sector. Its NPL ratio is expected to stand at 1.20%–1.25% by the end of this year. Strongest capital base within the MENA region; common equity Tier 1 (CET1) of 23.7% by YE2011e, thanks to the rights issue, well ahead of its target of 13%–15%. It should be the best capitalized MENA bank. Strongest liquidity helping NIM: We compute a NSFR of 167% as of YE2010 and a very robust LCR of 199%. The capital increase should substantially raise the ratios. We think QNB can use its very robust net cash position of 13.4% of assets (prior to the capital increase) to invest in higher‐yielding T‐bills. Higher valuation justified: Although QNB is trading at rich valuation multiples (2012e P/E of 11.3x and 2011e P/tNAV of 2.2x), this is fully warranted by its exceptionally strong capital (YE2011e CET1 of 23.7%) and liquidity position, very high returns (RORWA in excess of 4%), and extremely high growth (2010–14e loan growth of 19%).

Key indicators 2010 2011e 2012e 2013e

P/E 13.5x 13.6x 11.3x 9.7x P/tNAV 3.2x 2.2x 1.9x 1.7x


Price performance

Overweight Target price (QAR) 183 Current price (QAR) 141.2Potential return 29%

Listed on DSMBloomberg QNBK QDReuters QNBK.QA

GDR code N/AGDR ratio N/A

Market cap (QARm) 89,693Market cap (USDm) 24,641Number of shares (m) 636

Foreign ownership limit 25%Foreign ownership level 5%

Daily volume (QARm) 35.8Daily volume (USDm) 9.8

Shareholder structure Qatar Investment Authority 50% Public 50%

Note: All prices as of 30 June 2011, shareholder structure from Zawya Dow Jones

70

90

110

130

150

170

F M A M J J A S O N D J F M A M J

QNB DSM


51

QNB snapshot


10%

18%

1%

24%

47%

Loan portfolio (as of 1Q11)cQAR143bn

Retail Property and construction SME Corporate: other Government

7%

2%

13%

58%

18%

1%Total assets (as of 1Q11)cQAR243bn

Cash Associates Interbank Loan Investment securities Other

2.24%

2.35%

2.94% 2.92% 2.96%2.91%

2.87%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

2008 2009 2010 2011e 2012e 2013e 2014e

Net interest margin

52%

8%

21%

17%20%

23% 24%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011e 2012e 2013e 2014e


4.01% 4.06%

5.45% 5.33% 5.31% 5.18% 5.15%

0.39% 0.34%0.54% 0.58% 0.59% 0.61% 0.64%

3.80% 3.90%

4.99%4.75% 4.76% 4.65% 4.63%

0%

1%

2%

3%

4%

5%

6%

2008 2009 2010 2011e 2012e 2013e 2014e

PPP/RWA Cost of risk/RWA RORWA

80%

85%

90%

95%

100%

105%

110%

115%

120%

125%

0.5%

1.0%

1.5%

2.0%

2008 2009 2010 2011e 2012e 2013e 2014e

NPL ratio (LHS) Coverage (RHS)

13.71% 13.2%

15.3%

26.0%25.0%

23.5%22.0%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

2008 2009 2010 2011e 2012e 2013e 2014e

Tier I CAR

10.95% 11.1% 11.1%

15.9%

15.1%

13.9%

12.9%

10%

11%

12%

13%

14%

15%

16%

17%

2008 2009 2010 2011e 2012e 2013e 2014e

Tangible equity to assets


52

QNB valuation (QARm)

2010 2011e 2012e 2013e 2014e Perp. Subtotal % total

DCF Net profit 5,704 6,591 7,922 9,235 11,082 11,082 Other adj (comprehensive inc and GW amrt) 118 165 198 231 277 277 Less: Excess return on surplus capital 308 1,019 1,176 1,324 1,496 1,496 Risk‐free rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tax shelter 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Adjusted net profit 5,278 5,408 6,548 7,680 9,309 9,309 Capital requirements 18,598 21,211 23,886 27,310 31,685 31,685 Return on economic capital 28.4% 25.5% 27.4% 28.1% 29.4% 29.4% Cost of capital 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% Capital charge 2,046 2,333 2,627 3,004 3,485 3,485 Economic profit 3,232 3,075 3,921 4,676 5,824 5,824 Discount factor 0.000 1.000 0.901 0.812 0.731 0.731 NPV of economic profit 0 3,075 3,532 3,795 4,258 4,258 DCF EVA forecast period 14,661 12.6% Perpetual growth rate (nominal GDP) 6.0% Terminal value 85,169 Discounted terminal value 62,275 53.6% Required capital 18,598 16.0% Value of bank operations 95,534 82.2% Capital surplus/deficit Available capital Shareholder equity 2010 24,793 41,685 47,514 53,920 61,755 Minorities Less: Goodwill and intangibles Less: Non‐equity elements reported in equity Less: Associates Tangible equity 24,793 41,685 47,514 53,920 61,755 Capital needs RWA (Basel I in 2011, Basel II/III starting 2012) 112,003 135,276 162,368 193,492 233,270 RWA (Basel III) 114,300 138,050 162,368 193,492 233,270 Equity as a percentage of RWA 11% 11% 11% 11% 11% Financial stakes 6,025 6,025 6,025 6,025 6,025 Capital requirements 18,598 21,211 23,886 27,310 31,685 Surplus capital 6,194 20,474 23,628 26,611 30,069 6,194 5.3% Capital increase 12,700 10.9% Other adjustments Real estate losses Corporate bond fair value losses Equity investment losses Under/overprov not covered in forecast period 1,897 Level 3 assets ‐83.4 Total adjustments 1,814 1.6% Total fair value YE2011e 116,243 100% Number of shares 636 Fair value/share (QAR) 183 Current share price (QAR) 141.2 Potential return 29% Implied P/E 18.1x 15.0x Implied P/B 2.8x 2.5x

Source: HC


53

QNB financial statements (QARm)

2008 2009 2010 2011e 2012e 2013e 2014e

Income statement Interest income 6,853 7,296 9,932 12,621 15,062 18,228 22,427 Interest expense 3,998 3,569 4,257 5,775 6,794 8,373 10,486 Net interest income 2,856 3,726 5,675 6,845 8,268 9,855 11,941 Fees and commissions 976 968 1,121 1,132 1,325 1,590 1,907 Forex income 330 305 359 412 495 594 713 Investment income 569 142 175 275 271 115 117 Other income 246 237 63 98 146 156 166 Noninterest income 2,121 1,652 1,718 1,918 2,236 2,454 2,903 Total income 4,977 5,379 7,393 8,763 10,504 12,309 14,845 Total operating expenses 1,126 1,107 1,292 1,547 1,883 2,295 2,842 Income before provisions 3,850 4,272 6,101 7,216 8,621 10,014 12,003 Loan loss provision charges 378 359 600 791 958 1,174 1,504 Associate and other income 200 293 216 199 299 442 639 Pretax income 3,672 4,206 5,718 6,625 7,962 9,281 11,138 Income tax 20 17 16 33 40 46 56 Net income after tax 3,653 4,188 5,702 6,591 7,922 9,235 11,082 Minority interest ‐ (13) (2) ‐ ‐ ‐ ‐ Reported net income 3,653 4,202 5,704 6,591 7,922 9,235 11,082 Social contribution levy ‐ 95.8 118.0 164.8 198.0 230.9 277.1 Adjusted net income 3,652.5 4,105.9 5,586.3 6,426.6 7,723.9 9,004.2 10,805.3 Balance sheet Assets Cash and due from CB 6,270 9,880 33,912 24,171 37,537 52,601 76,459 Due from banks 27,044 30,181 24,687 31,497 37,796 46,489 57,647 Investments 11,815 23,333 24,048 44,621 45,671 46,489 47,078 Gross loans 101,932 109,707 133,268 155,924 187,109 230,144 285,379 Provisions 625 924 1,572 2,258 3,178 4,312 5,789 Net loans 100,053 108,783 131,696 153,666 183,931 225,832 279,590 Other assets 6,173 6,439 8,124 7,612 9,134 15,109 18,735 Net fixed assets 618 713 915 908 900 891 882 Total assets 151,974 179,329 223,382 262,474 314,969 387,412 480,391 Liabilities Total deposits 104,253 125,872 165,470 189,229 227,074 278,159 343,090 Due to banks 21,989 20,794 12,160 14,165 28,770 42,729 61,032 Borrowings 6,719 6,724 12,136 12,136 5,421 5,421 5,421 Other liabilities 2,370 6,063 8,823 5,260 6,189 7,182 9,093 Total liabilities 135,330 159,453 198,590 220,790 267,455 333,492 418,637 Shareholder equity 16,643 19,876 24,793 41,685 47,514 53,920 61,755



54

QNB financial ratios

2008 2009 2010 2011e 2012e 2013e 2014e

Profitability ratios Net interest margin 2.24% 2.35% 2.94% 2.92% 2.96% 2.91% 2.87% Cost/income 22.6% 20.6% 17.5% 17.7% 17.9% 18.6% 19.1% Net interest income/average earning assets 2.2% 2.3% 2.9% 2.9% 3.0% 2.9% 2.9% Noninterest income/average earning assets 1.7% 1.0% 0.9% 0.8% 0.8% 0.7% 0.7% Net interest income/total income 57.4% 69.3% 76.8% 78.1% 78.7% 80.1% 80.4% Noninterest income/total income 42.6% 30.7% 23.2% 21.9% 21.3% 19.9% 19.6% Fees and commissions/total operating income 19.6% 18.0% 15.2% 12.9% 12.6% 12.9% 12.8% Trading gains/total operating income 14.2% 6.5% 2.9% 3.9% 3.7% 1.9% 1.6% Total income/average earning assets 3.9% 3.4% 3.8% 3.7% 3.8% 3.6% 3.6% Noninterest expenses/total operating income 22.6% 20.6% 17.5% 17.7% 17.9% 18.6% 19.1% ROA 2.7% 2.5% 2.8% 2.6% 2.7% 2.6% 2.5% ROE 24.0% 22.6% 25.4% 19.6% 17.4% 17.9% 18.8% Revenue/RWA 5.18% 5.11% 6.60% 6.48% 6.47% 6.36% 6.36% Costs/RWA 1.17% 1.05% 1.15% 1.14% 1.16% 1.19% 1.22% PPP/RWA 4.01% 4.06% 5.45% 5.33% 5.31% 5.18% 5.15% Cost of risk/RWA 0.39% 0.34% 0.54% 0.58% 0.59% 0.61% 0.64% RORWA 3.80% 3.90% 4.99% 4.75% 4.76% 4.65% 4.63% Asset quality ratios Non‐performing loans/total loans 0.72% 0.77% 1.00% 1.20% 1.60% 1.90% 2.00% Loan loss provisions/total loans 0.6% 0.8% 1.2% 1.4% 1.7% 1.9% 2.0% Coverage 85% 109% 118% 121% 106% 99% 101% Loan loss provision charge/total loans 0.3% 0.3% 0.4% 0.5% 0.5% 0.5% 0.5% Loan loss provision charge/operating income 6.4% 6.6% 8.8% 9.7% 10.9% 11.5% 12.4% Funding and liquidity ratios Deposits/liabilities 77% 79% 83% 86% 85% 83% 82% Core deposits/loans 102% 115% 124% 121% 121% 121% 120% Loans/deposits 98% 87% 81% 82% 82% 83% 83% Capital and leverage ratios Tier 1 ratio 13.7% 13.2% 15.3% 26.0% 25.0% 23.5% 22.0% Total capital ratio 13.9% 13.2% 15.3% 26.0% 25.0% 23.5% 22.0% Tangible equity/assets 11.0% 11.1% 11.1% 15.9% 15.1% 13.9% 12.9% Total equity/total liabilities 12.3% 12.5% 12.5% 18.9% 17.8% 16.2% 14.8% Growth Asset growth 33% 18% 25% 18% 20% 23% 24% Earning asset growth 32% 19% 24% 18% 20% 22% 24% Net loan asset growth 51% 9% 21% 17% 20% 23% 24% Deposit growth 31% 21% 31% 14% 20% 22% 23% Net income growth 46% 15% 36% 16% 20% 17% 20%



55

CBQ: Upgrade on valuation grounds

Loan growth should accelerate but remain less strong than peers’ Weakest return profile; should focus on public sector to capture

growth

Capital base weakest of Qatari banks but still more than adequate Medium return bank: CBQ is the least profitable bank, with a RORWA of 1.6% when adjusted for the gross up for associates. It is less cost efficient than QIB and QNB and its returns should remain lower due to its corporate sector tilt. It has hardly any exposure to North Africa (<1% of assets). 12% earnings CAGR: We expect earnings growth to accelerate to c12% in the next few years from 3% in 2010. We forecast loan growth to increase to 10% in 2011e, 12% in 2012e, and 16% in 2013e and 2014e (after 6% y‐o‐y growth in 2010 on early repayments), but it should underperform its peers. NPLs edging up slightly: Our asset quality screen suggests cumulative losses of just 338 bps over the next 4 years, or 84 bps per year. NPLs rose to 3.24% (on 90‐day NPLs) in 1Q11 versus 3.02% in 1Q10 and 3.16% at YE2010. Adequate capital base: We expect CBQ’s common equity Tier 1 to stand at 12.9%, the lowest among Qatari banks, by the end of 2011e, but the bank also has some substantial available‐for‐sale reserves, which can be freed up by realizing the gains. The common equity Tier 1 is affected by the increase in the deduction for associates to 100% from 50%. Strong liquidity despite high L/D ratio: We calculate a NSFR, the new medium‐term liquidity ratio set by the Basel Committee, of 113%, which is 13% above the minimum. We also calculate a LCR of 233% (up from 155% at YE2009), helped by strong improvement in the loan/deposit ratio (down to 104% from 124% at YE2009), and, as such, CBQ is in a better position than before to grow or invest more in treasury bills. Cheapest Qatari stock: CBQ is trading at below average valuation multiples compared with other Qatari banks (2012e P/E of 8.7x and 2011e P/tNAV of 1.2x) after a derating. However, CBQ’s fundamentals are weaker than its peers’ (less capital strength, lower growth outlook, unproven track record in public sector), in our view, but its strong 1Q11 has been ignored by the market. Our TP offers 35% upside over the next 12 months.




Price performance


Listed on DSM, LSEBloomberg CBQK QDReuters COMB.QA

GDR code CBQS LIGDR ratio 1:4




Shareholder structure Qatar Investment Authority 9% Qatar National Bank 3% Deutsche Bank AG 3% Qatar Insurance Company 2% Others – private 5% Public 78%


50

60

70

80

90

100


CBQ DSM


56

CBQ snapshot


13%

10%

28%

1%

30%

Loan portfolio (as of 1Q11)QAR35.9bn

Mortgage Retail: non‐mortgageProperty and construction SMECorporate: other

4% 6%9%

57%

20%

4%

Total assets (as of 1Q11)QAR60.8bn


2.67%

3.08%

3.29%

3.11%3.08%

3.03%2.99%

2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

2008 2009 2010 2011e 2012e 2013e 2014e

Net interest margin

36%

‐4%

6%10%

12%16% 16%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

2008 2009 2010 2011e 2012e 2013e 2014e


3.17%

4.18%

3.56%3.33%

3.06% 3.07% 3.14%

0.82%

1.34%

0.59%0.43% 0.37% 0.41% 0.50%

2.68%

3.16% 3.14% 3.11% 2.97% 2.94% 2.94%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2008 2009 2010 2011e 2012e 2013e 2014e


85%

90%

95%

100%

105%

110%

115%

120%

125%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011e 2012e 2013e 2014e


17.2%

16.6%

18.5%

17.4%

15.9%

14.9%

18.9%18.5%

19.2%

18.0%

16.5%

15.4%

14%

15%

16%

17%

18%

19%

20%

2009 2010 2011e 2012e 2013e 2014e

Tier I CAR

16.28%

21.0%

20.0%

20.6%

19.1%

17.4%

16.0%

14%

15%

16%

17%

18%

19%

20%

21%

22%

2008 2009 2010 2011e 2012e 2013e 2014e



57

CBQ valuation (QARm)


DCF Net profit 1,635 1,806 2,006 2,227 2,496 2,496 Other adj (comprehensive inc and GW amrt) 71 45 50 56 62 62 Less: Excess return on surplus capital 123 166 169 165 168 168 Risk‐free rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tax shelter 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Adjusted net profit 1,441 1,595 1,787 2,006 2,265 2,265 Capital requirements 9,972 10,785 11,260 12,137 13,129 13,129 Return on economic capital 14.5% 14.8% 15.9% 16.5% 17.3% 17.3% Cost of capital 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% Capital charge 1,097 1,186 1,239 1,335 1,444 1,444 Economic profit 344 408 548 671 821 821 Discount factor 0.000 1.000 0.901 0.812 0.731 0.731 NPV of economic profit 0 408 494 545 600 600 DCF EVA forecast period 2,047 8.7% Perpetual growth rate (nominal GDP) 5.0% Terminal value 10,001 Discounted terminal value 7,313 31.0% Required capital 9,972 42. 2% Value of bank operations 19,332 81. 8% Capital surplus/deficit Available capital Shareholder equity 2010 12,500 14,196 14,735 15,521 16,583 Minorities Less: Goodwill and intangibles Less: Non‐equity elements reported in equity Less: Associates Tangible equity 12,500 14,196 14,735 15,521 16,583 Capital needs RWA (Basel I in 2011, Basel II/III starting 2012) 49,821 56,633 65,784 73,755 82,777 RWA (Basel III) 54,077 61,471 65,784 73,755 82,777 Equity as a percentage of RWA 11% 11% 11% 11% 11% Financial stakes 4,024 4,024 4,024 4,024 4,024 Capital requirements 9,972 10,785 11,260 12,137 13,129 Surplus capital 2,528 3,410 3,476 3,384 3,454 2,528 10.7% Capital increase 1,615 Other adjustments Real estate losses Corporate bond fair value losses Equity investment losses Under/overprov not covered in forecast period 149 Level 3 assets Total adjustments 149 0.6% Total fair value YE2011e 23,623 100% Number of shares 247 Fair value/share (QAR) 95 Current share price (QAR) 70.8 Potential return 34.8% Implied P/E 13.4x 12.1x Implied P/B 1.7x 1.6x

Source: HC


58

CBQ financial statements (QARm)

2008 2009 2010 2011e 2012e 2013e 2014e

Income statement Interest income 2,873 3,117 2,989 3,099 3,426 3,906 4,537 Interest expense 1,581 1,456 1,211 1,261 1,418 1,650 1,951 Net interest income 1,292 1,661 1,778 1,839 2,007 2,255 2,586 Fees and commissions 943 679 526 553 586 644 715 Forex income 131 120 123 135 148 163 180 Investment income 276 37 64 78 66 75 87 Other income 126 282 72 119 132 144 160 Noninterest income 1,477 1,117 784 885 931 1,027 1,141 Total income 2,769 2,778 2,562 2,723 2,939 3,282 3,727 Total operating expenses 750 759 787 836 923 1,019 1,126 Income before provisions 2,019 2,018 1,775 1,887 2,016 2,263 2,601 Loan loss provision charges 524 648 295 246 241 304 417 Associate and other income 208 153 155 165 231 268 311 Pretax income 1,702 1,524 1,635 1,806 2,006 2,227 2,496 Income tax ‐ ‐ ‐ ‐ ‐ ‐ ‐ Net income after tax 1,702 1,524 1,635 1,806 2,006 2,227 2,496 Minority interest ‐ ‐ ‐ ‐ ‐ ‐ ‐ Reported net income 1,702 1,524 1,635 1,806 2,006 2,227 2,496 Social contribution levy ‐ ‐ 71 45 50 56 62 Adjusted net income 1,702 1,524 1,564 1,761 1,956 2,171 2,433 Balance sheet Assets Cash and due from CB 3,015 4,374 8,703 5,222 5,755 6,838 8,158 Due from banks 14,316 5,644 4,238 6,877 7,702 8,935 10,364 Investments 4,775 9,747 10,024 12,379 13,864 16,083 18,656 Gross loans 34,184 32,652 34,546 38,001 42,561 49,371 57,270 Provisions 287 722 980 939 923 1,119 1,398 Net loans 33,898 31,929 33,567 37,062 41,638 48,252 55,872 Other assets 4,162 4,593 4,920 5,502 6,162 7,148 8,292 Net fixed assets 1,136 1,030 1,069 1,730 1,903 2,093 2,303 Total assets 61,302 57,317 62,520 68,772 77,025 89,349 103,644 Liabilities Total deposits 32,186 26,272 33,281 35,374 41,087 49,164 59,038 Due to banks 11,704 7,391 3,553 4,674 6,340 9,456 12,418 Borrowings 6,096 9,924 10,994 12,994 12,994 12,994 12,994 Other liabilities 1,337 1,720 2,193 1,535 1,869 2,215 2,612 Total liabilities 51,323 45,307 50,020 54,576 62,289 73,828 87,061 Shareholder equity 9,978 12,010 12,500 14,196 14,735 15,521 16,583



59

CBQ financial ratios

2008 2009 2010 2011e 2012e 2013e 2014e

Profitability ratios Net interest margin 2.67% 3.08% 3.29% 3.11% 3.08% 3.03% 2.99% Cost/income 27.1% 27.3% 30.7% 30.7% 31.40% 31.0% 30.2% Net interest income/average earning assets 2.7% 3.1% 3.3% 3.1% 3.1% 3.0% 3.0% Noninterest income/average earning assets 3.0% 2.1% 1.4% 1.5% 1.4% 1.4% 1.3% Net interest income/total income 46.7% 59.8% 69.4% 67.5% 68.3% 68.7% 69.4% Noninterest income/total income 53.3% 40.2% 30.6% 32.5% 31.7% 31.3% 30.6% Fees and commissions/total operating income 34.1% 24.4% 20.5% 20.3% 19.9% 19.6% 19.2% Trading gains/total operating income 11.4% 3.6% 2.9% 4.9% 4.5% 4.6% 4.7% Total income/average earning assets 5.7% 5.2% 4.7% 4.6% 4.5% 4.4% 4.3% Noninterest expenses/total operating income 27.1% 27.3% 30.7% 30.7% 31.4% 31.0% 30.2% ROA 3.2% 2.6% 2.6% 2.7% 2.7% 2.6% 2.5% ROE 21.0% 13.9% 12.8% 13.2% 13.5% 14.4% 15.2% Revenue/RWA 4.35% 5.76% 5.14% 4.81% 4.47% 4.45% 4.50% Costs/RWA 1.18% 1.57% 1.58% 1.48% 1.40% 1.38% 1.36% PPP/RWA 3.17% 4.18% 3.56% 3.33% 3.06% 3.07% 3.14% Cost of risk/RWA 0.82% 1.34% 0.59% 0.43% 0.37% 0.41% 0.50% RORWA 2.68% 3.16% 3.14% 3.11% 2.97% 2.94% 2.94% Asset quality ratios Non‐performing loans/total loans 0.85% 2.22% 3.16% 2.50% 2.00% 2.00% 2.00% Loan loss provisions/total loans 0.8% 2.2% 2.8% 2.5% 2.2% 2.3% 2.4% Coverage 99% 100% 90% 99% 108% 113% 122% Loan loss provision charge/total loans 0.2% 1.4% 0.5% 0.6% 0.6% 0.6% 0.7% Loan loss provision charge/operating income 2.9% 22.8% 9.4% 11.1% 11.6% 13.1% 15.7% Funding and liquidity ratios Deposits/liabilities 63% 58% 67% 65% 66% 67% 68% Core deposits/loans 94% 80% 96% 93% 97% 100% 103% Loans/deposits 106% 124% 104% 107% 104% 100% 97% Capital and leverage ratios Tier 1 ratio 15.2% 17.2% 16.6% 18.5% 17.4% 15.9% 14.9% Total capital ratio 15.7% 18.9% 18.5% 19.2% 18.0% 16.5% 15.4% Tangible equity/assets 16.3% 21.0% 20.0% 20.6% 19.1% 17.4% 16.0% Total equity/total liabilities 19.4% 26.5% 25.0% 26.0% 23.7% 21.0% 19.0% Growth Asset growth 35% ‐6% 9% 10% 12% 16% 16% Earning asset growth 37% ‐8% 9% 9% 12% 16% 16% Net loan asset growth 35% ‐6% 5% 10% 12% 16% 16% Deposit growth 25% ‐18% 27% 6% 16% 20% 20% Net income growth 22% ‐11% 7% 10% 11% 11% 12%



60

QIB: Giving up market share QIB gave up significant market share in the public sector and deposits

Growth should recover – though not as much as previously expected –

as conventional banks wind down Islamic loans

Second best capitalized after 10% capital hike

Medium return bank, helped by Islamic windows: QIB, which has a market share of 44% in Islamic finance among Islamic banks, has an average return profile with an adjusted RORWA of 2.0%. Historical earnings were distorted until 2009 by relatively high investment income. QIB, together with Doha Bank, should be the most affected by the rate caps for retail loans. Lost market share in public sector, but benefits from Islamic finance: We expect earnings growth to accelerate to 19% in the next few years from almost flat earnings previously. However, outstanding loans contracted in 1Q as QIB lost market share in the public sector. It also recently lost its CEO. We continue to expect QIB to benefit from an increase in its share of Islamic finance. If even half of the Islamic loans of conventional banks migrate to Islamic lenders, and if QIB is able to capture enough of those loans just to maintain its 44% market share, it could boost its loan book 23%. Solid asset quality: Our asset quality screen suggests cumulative losses of just 355 bps over the next 4 years, or 89 bps per year. QIB has relatively high exposure to the retail market. Second strongest capital base in the MENA region: We expect QIB’s common equity to come in at 18.8% by the end of this year (1) as it is already deducting almost 100% of its investments in associates and (2) helped by the capital hike. Negative cash after purchases of sukuk: We calculate a net stable funding ratio of 115%, which is 15% above the minimum. We also compute a LCR of 98% versus 66% at YE2009. However, QIB’s net cash position has become negative, and as a result we do not see much room for the bank to buy T‐bills. Higher premium warranted: QIB is trading at attractive multiples (2012e P/E of 10.5x and 2011e P/tNAV of 1.6x) that do not fully reflect its strong capital base (common equity Tier 1 of 18.9%), liquidity position, and decent returns. However, its growth outlook has become more uncertain after the disappointing 1Q11. Our TP offers 23% upside.




Price performance


Listed on DSMBloomberg QIBK QDReuters QISB.QA







60

70

80

90

100

110


QIB DSM


61

QIB snapshot


33%

17%3%

1%

35%

Loan portfolio (as of 2010)QAR33.7bn


4%

2%

9%

50%

29%

7%



3.77%

4.00%

3.27%

2.78%2.72% 2.68% 2.67%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

2008 2009 2010 2011e 2012e 2013e 2014e

Net interest margin

60%

21%

31%

9%

25%

24% 24%

5%

15%

25%

35%

45%

55%

65%

2008 2009 2010 2011e 2012e 2013e 2014e


5.13%

3.66% 3.74%4.05%

3.32% 3.31% 3.29%

0.05%0.34%

0.11%0.47% 0.42% 0.52% 0.57%

0%

1%

2%

3%

4%

5%

6%

2008 2009 2010 2011e 2012e 2013e 2014e


75%

80%

85%

90%

95%

100%

105%

110%

115%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2008 2009 2010 2011e 2012e 2013e 2014e


16.35%17.3% 17.4%

25.8%

19.8%

17.8%

15.7%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

2008 2009 2010 2011e 2012e 2013e 2014e

Tier I CAR

21.97%

23.4%

18.0%

19.4%

17.2%

15.7%

14.4%

12%

14%

16%

18%

20%

22%

24%

2008 2009 2010 2011e 2012e 2013e 2014e



62

QIB valuation (QARm)


DCF Net profit 1,335 1,524 1,776 1,941 2,200 2,200 Other adj (comprehensive inc and GW amrt) 66 38 44 49 55 55 Less: Excess return on surplus capital 142 231 207 209 206 206 Risk‐free rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tax shelter 2.5% 0.0% 0.0% 0.0% 0.0% 0.0% Adjusted net profit 1,126 1,255 1,525 1,684 1,939 1,939 Capital requirements 6,425 7,256 8,480 9,398 10,684 10,684 Return on economic capital 17.5% 17.3% 18.0% 17.9% 18.2% 18.2% Cost of capital 10.9% 10.9% 10.9% 10.9% 10.9% 10.9% Capital charge 699 789 922 1,022 1,162 1,162 Economic profit 428 466 603 661 778 778 Discount factor 0.000 1.000 0.902 0.813 0.734 0.734 NPV of economic profit 0 466 544 538 570 570 DCF EVA forecast period 2,118 9.6% Perpetual growth rate (nominal GDP) 6.0% Terminal value 11,702 Discounted terminal value 8,585 38.9% Required capital 6,425 29.1% Value of bank operations 17,128 77.6% Capital surplus/deficit Available capital Shareholder equity 2010 9,333 11,880 12,610 13,574 14,804 Minorities Less: Goodwill and intangibles Less: Non‐equity elements reported in equity Less: Associates Tangible equity 9,333 11,880 12,610 13,574 14,804 Capital needs RWA (Basel I in 2011, Basel II/III starting 2012) 37,523 43,888 63,232 71,581 83,274 RWA (Basel III) 44,552 52,109 63,232 71,581 83,274 Equity as a percentage of RWA 11% 11% 11% 11% 11% Financial stakes 1,524 1,524 1,524 1,524 1,524 Capital requirements 6,425 7,256 8,480 9,398 10,684 Surplus capital 2,908 4,623 4,130 4,176 4,120 2,908 13.2% Capital increase 1,900 8.6% Other adjustments Real estate losses Corporate bond fair value losses Equity investment losses Under/overprov not covered in forecast period 127 Level 3 assets Total adjustments 127 0.6%

Total fair value YE2011e 22,063 100%

Number of shares 227 Fair value/share (QAR) 97 Current share price (QAR) 78.8 Potential return 23.1% Implied P/E 15.4x 13.2x Implied P/B 2.0x 1.9x

Source: HC


63

QIB financial statements (QARm)

2008 2009 2010 2011e 2012e 2013e 2014e

Income statement Interest income 1,286 1,788 1,810 2,002 2,359 2,789 3,312 Interest expense 389 510 471 557 671 820 988 Net interest income 898 1,278 1,339 1,445 1,688 1,970 2,324 Fees and commissions 223 259 289 275 316 363 418 Forex income (81) 45 26 30 36 43 52 Investment income 549 254 143 485 617 644 699 Other income 577 56 84 100 89 97 106 Noninterest income 1,268 613 542 889 1,058 1,148 1,275 Total income 2,166 1,891 1,882 2,335 2,747 3,117 3,599 Total operating expenses 444 487 479 558 647 746 860 Income before provisions 1,722 1,404 1,402 1,777 2,099 2,371 2,739 Loan loss provision charges 17 131 40 205 269 371 471 Associate and other income ‐ ‐ ‐ ‐ ‐ ‐ ‐ Pretax income 1,705 1,273 1,362 1,571 1,831 2,001 2,269 Income tax ‐ (11) ‐ ‐ ‐ ‐ ‐ Net income after tax 1,705 1,284 1,362 1,571 1,831 2,001 2,269 Minority interest 62 (27) 27 47 55 60 68 Reported net income 1,643 1,311 1,335 1,524 1,776 1,941 2,200 Social contribution levy ‐ ‐ 66 38 44 49 55 Adjusted net income 1,643 1,311 1,268 1,486 1,731 1,892 2,145 Balance sheet Assets Cash and due from CB 1,023 1,338 1,875 2,598 3,804 6,168 8,498 Due from banks 6,368 8,903 12,431 6,117 8,809 8,662 10,308 Investments 2,947 1,819 3,488 15,905 15,782 14,725 15,461 Gross loans 21,235 25,734 33,746 36,783 45,979 57,014 70,698 Provisions 234 264 363 529 782 1,152 1,623 Unearned profit 2,135 2,807 4,031 4,017 6,308 5,887 8,537 Net loans 18,866 22,663 29,352 32,238 38,889 49,975 60,538 Other assets 4,079 4,251 4,324 3,918 5,709 6,659 7,821 Net fixed assets 260 299 371 396 412 430 450 Total assets 33,543 39,273 51,840 61,171 73,406 86,619 103,076 Liabilities Total deposits 16,592 20,361 30,258 32,842 39,982 50,906 63,123 Due to banks 8,697 8,691 8,412 12,160 12,884 13,965 13,670 Borrowings ‐ ‐ 2,713 2,713 6,713 6,713 9,713 Other liabilities 886 1,022 1,124 1,576 1,216 1,461 1,765 Total liabilities 26,174 30,074 42,507 49,292 60,796 73,045 88,272 Shareholder equity 7,369 9,199 9,333 11,880 12,610 13,574 14,804



64

QIB financial ratios

2008 2009 2010 2011e 2012e 2013e 2014e

Profitability ratios Net interest margin 3.77% 4.00% 3.27% 2.78% 2.72% 2.68% 2.67% Cost/income 20.5% 25.8% 25.5% 23.9% 23.6% 23.9% 23.9% Net interest income/average earning assets 3.8% 4.0% 3.3% 2.8% 2.7% 2.7% 2.7% Noninterest income/average earning assets 5.3% 1.9% 1.3% 1.7% 1.7% 1.6% 1.5% Net interest income/total income 41.4% 67.6% 71.2% 61.9% 61.5% 63.2% 64.6% Noninterest income/total income 58.6% 32.4% 28.8% 38.1% 38.5% 36.8% 35.4% Fees and commissions/total operating income 10.3% 13.7% 15.4% 11.8% 11.5% 11.7% 11.6% Trading gains/total operating income 51.4% 16.0% 12.1% 24.2% 24.8% 23.0% 21.7% Total income/average earning assets 9.1% 5.9% 4.6% 4.5% 4.4% 4.2% 4.1% Noninterest expenses/total operating income 20.5% 25.8% 25.5% 23.9% 23.6% 23.9% 23.9% ROA 6.0% 3.6% 2.8% 2.6% 2.6% 2.4% 2.3% ROE 27.9% 16.2% 14.0% 14.4% 14.7% 15.1% 15.8% Revenue/RWA 6.45% 4.94% 5.01% 5.32% 4.34% 4.36% 4.32% Costs/RWA 1.32% 1.27% 1.28% 1.27% 1.02% 1.04% 1.03% PPP/RWA 5.13% 3.66% 3.74% 4.05% 3.32% 3.31% 3.29% Cost of risk/RWA 0.05% 0.34% 0.11% 0.47% 0.42% 0.52% 0.57% RORWA 4.89% 3.42% 3.38% 3.39% 2.74% 2.64% 2.58% Asset quality ratios Non‐performing loans/total loans 1.38% 1.15% 0.96% 1.36% 1.71% 2.06% 2.41% Loan loss provisions/total loans 1.1% 1.0% 1.1% 1.4% 1.7% 2.0% 2.3% Coverage 80% 90% 112% 105% 99% 98% 95% Loan loss provision charge/total loans ‐0.3% 0.1% 0.2% 0.45% 0.6% 0.7% 0.7% Loan loss provision charge/operating income ‐2.8% 2.2% 3.6% 9.3% 12.0% 15.6% 17.2% Funding and liquidity ratios Deposits/liabilities 63% 68% 71% 67% 66% 70% 72% Core deposits/loans 78% 79% 90% 89% 87% 89% 89% Loans/deposits 128% 126% 112% 112% 115% 112% 112% Capital and leverage ratios Tier 1 ratio 16.4% 17.3% 17.4% 25.8% 19.8% 17.8% 15.7% Total capital ratio 17.0% 17.3% 17.4% 26.5% 20.4% 18.4% 16.3% Tangible equity/assets 22.0% 23.4% 18.0% 19.4% 17.2% 15.7% 14.4% Total equity/total liabilities 28.2% 30.6% 22.0% 24.1% 20.7% 18.6% 16.8% Growth Asset growth 57% 17% 32% 18% 20% 18% 19% Earning asset growth 59% 19% 36% 21% 18% 18% 19% Net loan asset growth 62% 20% 30% 10% 21% 29% 21% Deposit growth 36% 23% 49% 9% 22% 27% 24% Net income growth 31% ‐20% 2% 14% 17% 9% 13%



65

Doha Bank: Most affected by regulation Regulation to impact Doha Bank most, through retail caps and

phasing out of Islamic windows

Retail tilt translates into weakest quality, though pre‐provisioning supports loss absorption capacity

Reasonable valuation, but not best vehicle for growth

Medium returns: Like its peers CBQ and QIB, Doha Bank, the third largest bank in Qatar on assets, is generating average RORWA (in a Qatari banking context) of 2.4% and attractive net interest margins of c3.4%. However, it is also the least cost efficient bank, driven by its focus on retail, in our view, and it, along with QIB, should be the most affected by the retail cap. 2011–14e net earnings CAGR of 10%: We expect net income growth to accelerate to 12% in the next few years from 8% in 2010. We expect Doha Bank’s loan growth to accelerate over the next 2 years (10% in 2011e and 14% in 2012e) despite the impact of new regulation on its Islamic finance book; after that, loan growth should increase to 16%–17% (after increasing only 4% in 2010), but we expect slower growth than at QNB and QIB. Weakest asset quality: Our asset quality screen suggests cumulative losses of 336 bps over the next 4 years, or 84 bps per year (driven by its high real estate exposure and unsecured retail loans), which Doha Bank can easily absorb from its pre‐provisioning profits. NPLs rose to 3.9% in 2010 from 3.1% previously, while coverage improved to 92% from 84%. Adequate capital base: We expect Doha Bank’s common equity to come in at 15.9% by year‐end, the second lowest among the Qatari banks, but the bank has some available‐for‐sale reserves. Its common equity Tier 1 is helped by the 10% increase in capital subscribed to by the QIA and a further 15% planned capital increase. Strong liquidity coverage ratio despite L/D ratio remaining above 100%: We calculate a NSFR, the new medium‐term liquidity ratio set by the Basel Committee, of 120%, which is 20% above the minimum. We also calculate a LCR of 98%. In 2010, the bank’s L/D ratio improved to 91% from 96%. Cheap, but less growth than QIB and QNB: Doha Bank is trading at below average multiples versus Qatari peers (2012e P/E of 10.0x and 2011e P/tNAV of 1.4x), justified by its lower growth. Our TP of QAR65 offers 28% upside.




Price performance


Listed on DSMBloomberg DHBK QDReuters DOBK.QA







40

45

50

55

60

65

70

75


Doha DSM


66

Doha Bank snapshot


24%

8%

30%

0%

32%



8%

0%

19%

56%

14%3%


Cash T‐bills/bonds Interbank Loan Investment securities Other

3.30%

3.00%

3.38%

3.60%

3.43%

3.36%3.32%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

3.6%

3.7%

2008 2009 2010 2011e 2012e 2013e 2014e

Net interest margin

24%

8%

4%

10%

14%

16% 17%

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010 2011e 2012e 2013e 2014e


2.95%

3.77%3.36% 3.37%

3.00% 2.95% 2.95%

0.49%

1.12%0.85%

0.58% 0.57% 0.57% 0.62%

2.46%2.65%

2.44%2.72%

2.37% 2.32% 2.26%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2008 2009 2010 2011e 2012e 2013e 2014e


60%

80%

100%

120%

140%

160%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2008 2009 2010 2011e 2012e 2013e 2014e


11.07% 11.5% 11.0%

16.2%

14.5%

13.0%

11.8%

13.48%

14.4%13.6%

18.8%

16.7%

14.9%

13.5%

10%

12%

14%

16%

18%

20%

2008 2009 2010 2011e 2012e 2013e 2014e

Tier I CAR

12.60% 12.7% 12.8%

17.1%

15.1%

13.5%

12.1%11%

12%

13%

14%

15%

16%

17%

18%

2008 2009 2010 2011e 2012e 2013e 2014e



67

Doha Bank valuation (QARm)


DCF Net profit 1,054 1,239 1,208 1,365 1,550 1,550 Other adj (comprehensive inc and GW amrt) 26 31 30 34 39 39 Less: Excess return on surplus capital 63 188 156 123 90 90 Risk‐free rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tax shelter 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Adjusted net profit 965 1,020 1,022 1,207 1,421 1,421 Capital requirements 4,735 5,003 5,719 6,612 7,713 7,713 Return on economic capital 20.4% 20.4% 17.9% 18.3% 18.4% 18.4% Cost of capital 11.3% 11.3% 11.3% 11.3% 11.3% 11.3% Capital charge 533 563 643 744 868 868 Economic profit 432 457 379 463 553 553 Discount factor 0.000 1.000 0.899 0.808 0.726 0.726 NPV of economic profit 0 457 341 374 402 402 DCF EVA forecast period 1,574 10.2% Perpetual growth rate (nominal GDP) 5.5% Terminal value 6,990 Discounted terminal value 5,077 32.9% Required capital 4,735 30.7% Value of bank operations 11,387 73.7% Capital surplus/deficit Available capital Shareholder equity 2010 6,034 8,859 8,916 9,141 9,565 Minorities Less: Goodwill and intangibles Less: Non‐equity elements reported in equity Less: Associates Tangible equity 6,034 8,859 8,916 9,141 9,565 Capital needs RWA (Basel I in 2011, Basel II/III starting 2012) 42,074 44,457 51,857 59,979 69,989 RWA (Basel III) 42,915 45,346 51,857 59,979 69,989 Equity as a percentage of RWA 11% 11% 11% 11% 11% Financial stakes 14 14 14 14 14 Capital requirements 4,735 5,003 5,719 6,612 7,713 Surplus capital 1,299 3,857 3,197 2,529 1,852 1,299 8.4% Capital increase 2,500 16.2% Other adjustments Real estate losses Corporate bond fair value losses Equity investment losses Under/overprov not covered in forecast period 254 Level 3 assets Total adjustments 254 1.6% Total fair value YE2011e 15,439 100% Number of shares 238 Fair value/share (QAR) 65 Current share price (QAR) 50.8 Potential return 28.0% Implied P/E 12.8x 13.1x Implied P/B 1.7x 1.7x

Source: HC


68

Doha Bank financial statements (QARm)

2008 2009 2010 2011e 2012e 2013e 2014e

Income statement Interest income 2,239 2,474 2,549 2,421 2,559 2,921 3,396 Interest expense 1,132 1,233 1,017 691 764 897 1,064 Net interest income 1,107 1,241 1,532 1,729 1,795 2,024 2,332 Fees and commissions 340 412 395 363 385 442 509 Forex income 56 75 82 86 90 97 106 Investment income 108 221 38 33 11 13 15 Other income 64 96 92 89 97 108 121 Noninterest income 568 804 607 570 583 660 750 Total income 1,675 2,045 2,139 2,300 2,378 2,685 3,082 Total operating expenses 540 659 723 803 876 980 1,095 Income before provisions 1,136 1,386 1,415 1,497 1,502 1,705 1,986 Loan loss provision charges 188 411 359 257 293 340 436 Associate and other income (0) (1) 0 0 0 0 0 Pretax income 947 975 1,056 1,240 1,209 1,365 1,551 Income tax 0 1 2 1 1 1 1 Net income after tax 947 974 1,054 1,239 1,208 1,365 1,550 Minority interest ‐ ‐ ‐ ‐ ‐ ‐ ‐ Reported net income 947 974 1,054 1,239 1,208 1,365 1,550 Social contribution levy ‐ ‐ 26.4 31.0 30.2 34.1 38.8 Adjusted net income 946.5 973.6 1,027.9 1,208.2 1,178.3 1,330.5 1,511.5 Balance sheet Assets Cash and due from CB 2,552 10,754 10,379 11,496 12,985 15,148 17,812 Due from banks 7,950 4,414 3,634 5,195 5,923 6,870 8,038 Investments 3,380 3,825 5,217 4,156 4,738 5,496 6,431 Gross loans 24,813 26,882 27,987 30,786 35,096 40,712 47,632 Provisions 564 717 1,002 1,067 1,013 1,098 1,269 Net loans 23,966 25,896 26,547 29,442 33,820 39,308 46,006 Other assets 660 551 716 899 965 1,051 1,230 Net fixed assets 496 570 737 765 795 829 865 Total assets 39,003 46,010 47,230 51,953 59,226 68,702 80,381 Liabilities Total deposits 23,277 27,890 30,822 33,758 38,026 44,374 52,211 Due to banks 8,161 10,489 8,683 7,034 9,504 12,037 15,005 Borrowings 1,232 825 768 768 768 768 768 Other liabilities 1,421 955 922 1,533 2,012 2,382 2,833 Total liabilities 34,090 40,159 41,195 43,093 50,310 59,561 70,816 Shareholder equity 4,913 5,851 6,034 8,859 8,916 9,141 9,565



69

Doha Bank financial ratios

2008 2009 2010 2011e 2012e 2013e 2014e

Profitability ratios Net interest margin 3.30% 3.00% 3.38% 3.60% 3.33% 3.26% 3.21% Cost/income 32.2% 32.2% 33.8% 34.9% 36.8% 36.5% 35.5% Net interest income/average earning assets 3.3% 3.0% 3.4% 3.6% 3.3% 3.3% 3.2% Noninterest income/average earning assets 1.7% 1.9% 1.3% 1.2% 1.1% 1.1% 1.0% Net interest income/total income 66.1% 60.7% 71.6% 75.2% 75.5% 75.4% 75.7% Noninterest income/total income 33.9% 39.3% 28.4% 24.8% 24.5% 24.6% 24.3% Fees and commissions/total operating income 20.3% 20.2% 18.4% 15.8% 16.2% 16.5% 16.5% Trading gains/total operating income 7.3% 12.9% 2.6% 1.9% 0.9% 1.0% 1.0% Total income/average earning assets 5.0% 4.9% 4.7% 4.8% 4.4% 4.3% 4.2% Noninterest expenses/total operating income 32.2% 32.2% 33.8% 34.9% 36.8% 36.5% 35.5% ROA 2.7% 2.3% 2.2% 2.4% 2.1% 2.1% 2.0% ROE 22.2% 18.1% 17.3% 16.2% 13.3% 14.7% 16.2% Revenue/RWA 4.36% 5.56% 5.08% 5.17% 4.59% 4.48% 4.40% Costs/RWA 1.40% 1.79% 1.72% 1.81% 1.69% 1.63% 1.57% PPP/RWA 2.95% 3.77% 3.36% 3.37% 2.90% 2.84% 2.84% Cost of risk/RWA 0.49% 1.12% 0.85% 0.58% 0.57% 0.57% 0.62% RORWA 2.46% 2.65% 2.44% 2.72% 2.27% 2.22% 2.16% Asset quality ratios Non‐performing loans/total loans 2.95% 3.20% 3.94% 3.00% 2.50% 2.50% 2.50% Loan loss provisions/total loans 2.3% 2.7% 3.6% 3.5% 2.9% 2.7% 2.7% Coverage 78% 84% 92% 116% 115% 108% 107% Loan loss provision charge/total loans 0.9% 0.7% 1.4% 0.7% 0.7% 0.7% 0.8% Loan loss provision charge/operating income 5.0% 9.1% 22.0% 14.4% 16.4% 16.7% 18.7% Funding and liquidity ratios Deposits/liabilities 68% 69% 75% 78% 76% 75% 74% Core deposits/loans 94% 104% 110% 110% 108% 109% 110% Loans/deposits 107% 96% 91% 91% 92% 92% 91% Capital and leverage ratios Tier 1 ratio 11.1% 11.5% 11.0% 16.2% 14.4% 12.8% 11.5% Total capital ratio 13.5% 14.4% 13.6% 18.8% 16.6% 14.7% 13.2% Tangible equity/assets 12.6% 12.7% 12.8% 17.1% 15.1% 13.3% 11.9% Total equity/total liabilities 14.4% 14.6% 14.6% 20.6% 17.7% 15.3% 13.5% Growth Asset growth 30% 18% 3% 10% 14% 16% 17% Earning asset growth 29% 19% 2% 10% 14% 16% 17% Net loan asset growth 25% 8% 3% 11% 15% 16% 17% Deposit growth 16% 20% 11% 10% 13% 17% 18% Net income growth 2% 3% 8% 18% ‐2% 13% 14%



70

MARK: Well positioned to benefit from the key growth drivers in Qatar Loan growth should accelerate and should be among the highest given

its Islamic and public sector tilt

NIM should improve from very weak 1Q11 as government loans are swapped back into local currencies

Well capitalized despite absence of capital increase

High return bank: MARK, a bank focused mainly on Islamic finance, the public sector, and construction in Qatar, is generating the second highest RORWA (just after QNB) despite its low NIM. Earnings CAGR of 17%: We expect net income growth to remain very high despite some pressure on net interest margins. We expect MARK’s loan growth to amount to c20%, and it is one of the best positioned for growth given its public sector and Islamic finance tilt. Normalization of credit costs yet to happen: Our asset quality screen suggests cumulative losses of just 408 bps over the next 4 years, or 102 bps per year. So far, the cost of risk has remained virtually nil due to the absence of any corporate default. Solid capital base: We expect MARK’s common equity Tier 1 to come in at 16.5% despite its strong growth and the absence of a capital increase in 2011e. MARK already deducts 100% of its investments in associates, while risk weighted assets may go up only moderately under Basel III. Strong liquidity, but less free cash to increase NIM: We calculate a net stable funding ratio, the new medium‐term liquidity ratio set by the Basel Committee, of 155%. We also calculate a liquidity coverage ratio of 111%. MARK has less free cash to invest in higher‐yielding assets, though. Average valuation: MARK is trading at average valuation multiples compared with other Qatari banks (2012e P/E of 9.9x and 2011e P/tNAV of 2.0x). However, MARK’s fundamentals are solid (strong capital and growth outlook), in our view. Our TP of QAR28.1/share offers 21% upside over the next 12 months.




Price performance

Overweight Target price (QAR) 28.1 Current price (QAR) 23.2Potential return 21%

Listed on DSMBloomberg MARK QDReuters MARK.QA





Shareholder structure Qatar Investment Authority 10% Qatar Special Projects 2% Others – private 12% Public 76%


0

5

10

15

20

25

30


MAR DSM


71

MARK snapshot


1%

39%

8%10%

42%


Retail Property and construction SME Corporate: other Government

3% 2%1%

63%

29%

2%Total assets (as of 1Q11)QAR42.2bn

Cash Property investment Interbank Loan Investment securities Other

2.34%

3.43%

3.71%

2.00%

2.50% 2.49% 2.53%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2008 2009 2010 2011e 2012e 2013e 2014e

Net interest margin

98%

33%41%

22%

18%22% 22%

0%

20%

40%

60%

80%

100%

120%

140%

2008 2009 2010 2011e 2012e 2013e 2014e


6.47%

3.95%3.38%

2.97%3.41% 3.37% 3.44%

0.48%0.19%

‐0.24%0.07% 0.23% 0.32% 0.44%

5.99%

3.76%3.46%

2.90%3.16% 3.03% 2.98%

‐1%

0%

1%

2%

3%

4%

5%

6%

7%

2008 2009 2010 2011e 2012e 2013e 2014e


40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2009 2010 2011e 2012e 2013e 2014e


31.85%

24.07%19.14% 19.46% 19.14% 18.71% 18.29%

15%

20%

25%

30%

35%

2008 2009 2010 2011e 2012e 2013e 2014e

Tier I CAR

33.96%

24.71%

20.55%

18.17%19.09%

18.11%17.08%

15%

20%

25%

30%

35%

2008 2009 2010 2011e 2012e 2013e 2014e



72

MARK valuation (QARm)


DCF Net profit 1,211 1,383 1,747 1,919 2,188 2,188 Other adj (comprehensive inc and GW amrt) 52 35 44 48 55 55 Less: Excess return on surplus capital 136 128 192 209 229 229 Risk‐free rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tax shelter 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Adjusted net profit 1,023 1,220 1,511 1,663 1,904 1,904 Capital requirements 4,328 5,948 6,421 7,315 8,420 8,420 Return on economic capital 23.6% 20.5% 23.5% 22.7% 22.6% 22.6% Cost of capital 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Capital charge 465 639 690 786 905 905 Economic profit 557 581 821 876 999 999 Discount factor 0.000 1.000 0.903 0.815 0.736 0.736 NPV of economic profit 0 581 741 714 735 735 DCF EVA forecast period 2,772 13.2% Perpetual growth rate (nominal GDP) 6.0% Terminal value 15,481 Discounted terminal value 11,396 54.1% Required capital 4,328 20.5% Value of bank operations 18,495 87.8% Capital surplus/deficit Available capital Shareholder equity 2010 7,127 8,572 10,356 11,593 13,117 Minorities Less: Goodwill and intangibles Less: Non‐equity elements reported in equity Less: Associates Tangible equity 7,127 8,572 10,356 11,593 13,117 Capital needs RWA (Basel I in 2011, Basel II/III starting 2012) 33,453 46,486 53,938 61,846 71,655 RWA (Basel III) 35,828 49,786 53,938 61,846 71,655 Equity as a percentage of RWA 11% 11% 11% 11% 11% Financial stakes 386 472 488 512 538 Capital requirements 4,328 5,948 6,421 7,315 8,420 Surplus capital 2,799 2,624 3,935 4,278 4,697 2,799 13.3% Other adjustments Real estate losses Corporate bond fair value losses Equity investment losses Under/overprov not covered in forecast period ‐234 Level 3 assets Total adjustments ‐234 ‐1.1% Total fair value YE2011e 21,061 100% Number of shares 750 Fair value/share (QAR) 28.1 Current share price (QAR) 23.2 Potential return 21.2% Implied P/E 15.6x 12.4x Implied P/B 2.5x 2.0x

Source: HC


73

MARK financial statements (QARm)

2008 2009 2010 2011e 2012e 2013e 2014e

Income statement Interest income 561 1,117 1,636 1,376 1,920 2,248 2,721 Interest expense 255 437 571 589 706 832 1,000 Net interest income 306 680 1,064 787 1,213 1,415 1,721 Fees and commissions 97 194 95 309 356 409 483 Forex income 1 28 37 42 47 53 61 Investment income 768 31 69 521 541 566 615 Other income 3 199 104 8 11 12 13 Noninterest income 869 452 305 880 954 1,040 1,171 Total income 1,174 1,131 1,369 1,667 2,167 2,456 2,892 Total operating expenses 184 206 237 287 326 374 429 Income before provisions 991 926 1,132 1,380 1,841 2,081 2,463 Loan loss provision charges 73 45 (81) 31 126 198 318 Associate and other income (1) (0) (2) 33 32 36 43 Pretax income 917 881 1,211 1,383 1,747 1,919 2,188 Income tax ‐ ‐ ‐ ‐ ‐ ‐ ‐ Net income after tax 917 881 1,211 1,383 1,747 1,919 2,188 Minority interest ‐ ‐ ‐ ‐ ‐ ‐ ‐ Reported net income 917 881 1,211 1,383 1,747 1,919 2,188 Social contribution levy ‐ ‐ 52 35 44 48 55 Adjusted net income 917 881 1,159 1,348 1,703 1,871 2,133 Balance sheet Assets Cash and due from CB 501 716 1,482 1,356 2,486 3,636 4,782 Due from banks 1,286 4,257 4,989 943 1,627 1,280 2,304 Investments 912 945 2,206 12,264 12,042 13,122 14,210 Gross loans 13,326 17,759 25,076 30,592 36,099 44,041 53,730 Provisions ‐ 8 12 42 169 367 685 Net loans 13,326 17,750 25,064 30,550 35,930 43,674 53,045 Other assets 659 372 856 1,902 1,989 2,110 2,264 Net fixed assets 85 83 87 154 170 187 205 Total assets 16,769 24,124 34,683 47,169 54,245 64,009 76,811 Liabilities Total deposits 10,898 17,831 27,017 35,901 42,216 50,188 61,016 Due to banks ‐ ‐ ‐ ‐ ‐ ‐ ‐ Borrowings ‐ ‐ ‐ 2,500 2,500 3,000 3,500 Other liabilities 177 331 540 196 (827) (772) (823) Total liabilities 11,075 18,162 27,557 38,597 43,889 52,415 63,693 Shareholder equity 5,694 5,962 7,127 8,572 10,356 11,593 13,117



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MARK financial ratios

2008 2009 2010 2011e 2012e 2013e 2014e

Profitability ratios Net interest margin 2.34% 3.43% 3.71% 2.00% 2.50% 2.49% 2.53% Cost/income 15.6% 18.2% 17.3% 17.2% 15.0% 15.2% 14.8% Net interest income/average earning assets 2.3% 3.4% 3.7% 2.0% 2.5% 2.5% 2.5% Noninterest income/average earning assets 6.7% 2.3% 1.1% 2.2% 2.0% 1.8% 1.7% Net interest income/total income 26.0% 60.1% 77.7% 47.2% 56.0% 57.6% 59.5% Noninterest income/total income 74.0% 39.9% 22.3% 52.8% 44.0% 42.4% 40.5% Fees and commissions/total operating income 8.3% 17.2% 7.0% 18.6% 16.4% 16.7% 16.7% Trading gains/total operating income 65.4% 3.0% 5.1% 31.4% 25.2% 23.3% 21.5% Total income/average earning assets 9.0% 5.7% 4.8% 4.2% 4.5% 4.3% 4.3% Noninterest expenses/total operating income 15.6% 18.2% 17.3% 17.2% 15.0% 15.2% 14.8% ROA 6.8% 4.3% 3.9% 3.3% 3.4% 3.2% 3.0% ROE 16.9% 15.1% 17.7% 17.2% 18.0% 17.1% 17.3% Revenue/RWA 7.67% 4.83% 4.09% 3.59% 4.02% 3.97% 4.04% Costs/RWA 1.20% 0.88% 0.71% 0.62% 0.60% 0.60% 0.60% PPP/RWA 6.47% 3.95% 3.38% 2.97% 3.41% 3.37% 3.44% Cost of risk/RWA 0.48% 0.19% ‐0.24% 0.07% 0.23% 0.32% 0.44% RORWA 5.99% 3.76% 3.46% 2.90% 3.16% 3.03% 2.98% Asset quality ratios Non‐performing loans/total loans 0.06% 0.05% 0.50% 0.70% 1.10% 1.60% Loan loss provisions/total loans 0.0% 0.0% 0.1% 0.5% 0.8% 1.3% Coverage 76% 101% 28% 67% 76% 80% Loan loss provision charge/total loans 0.1% 0.0% 0.1% 0.4% 0.5% 0.6% Loan loss provision charge/operating income 0.9% 0.1% 2.2% 6.9% 9.5% 12.9% Funding and liquidity ratios Deposits/liabilities 98% 98% 98% 93% 96% 96% 96% Core deposits/loans 82% 100% 108% 117% 117% 114% 114% Loans/deposits 122% 100% 93% 85% 86% 88% 88% Capital and leverage ratios Tier 1 ratio 31.9% 24.1% 19.1% 19.5% 19.1% 18.7% 18.3% Total capital ratio 33.1% 24.7% 19.2% 19.5% 19.1% 18.7% 18.3% Tangible equity/assets 34.0% 24.7% 20.5% 18.2% 19.1% 18.1% 17.1% Total equity/total liabilities 51.4% 32.8% 25.9% 22.2% 23.6% 22.1% 20.6% Growth Asset growth 65% 44% 44% 36% 15% 18% 20% Earning asset growth 59% 48% 43% 34% 15% 18% 20% Net loan asset growth 98% 33% 41% 22% 18% 22% 21% Deposit growth 120% 64% 52% 33% 18% 19% 22% Net income growth ‐23% ‐4% 38% 14% 26% 10% 14%



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Disclaimer HC Brokerage, which is an affiliate of HC Securities & Investment (referred to herein as “HC”) – a full‐fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services – is exclusively responsible for the content of this report. JonesTrading Institutional Services LLC (“JonesTrading”), a member of SIPC/FINRA, has not had any input informing or determining the content of this report. The information used to produce this document is based on sources that HC believes to be reliable and accurate. This information has not been independently verified and may be condensed or incomplete. HC does not make any guarantee, representation, or warranty and accepts no responsibility or liability for the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and the use of specific financial techniques that reflect the personal opinion of the authors of the commentary and is subject to change without notice. The information in these materials reflects HC’s equity rating on a particular stock. HC, its affiliates, and/or their employees may publish or otherwise express other viewpoints or trading strategies that may conflict with the views included in this report. Please be aware that HC and/or its affiliates, and the investment funds and managed accounts they manage, may take positions contrary to the included equity rating. This material is for informational purposes only and is not an offer to sell or the solicitation of an offer to buy. Ratings and general guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment, or other objectives or needs of, and may not be suitable for, any particular investor or client. Investors and clients should consider this only a single factor in making their investment decision, while taking into account the current market environment. Foreign currency‐denominated securities are subject to fluctuations in exchange rates, which could have an adverse effect on the value or price of, or income derived from, the investment. Investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. Neither HC nor any officer or employee of HC accepts liability for any direct, indirect, or consequential damages or losses arising from any use of this report or its contents. Copyright No part or excerpt of this research report’s content may be redistributed, reproduced, or conveyed in any form, written or oral, to any third party without prior written consent of the firms. The information within this research report must not be disclosed to any other person until HC has made its information publicly available. Issuer of report: HC Brokerage Building F15‐B224, Smart Village KM28 Cairo‐Alexandria Desert Road 6 October 12577, Egypt Telephone: +202 3535 7666 Fax: +202 3535 7665 Website: www.hc‐si.com Pursuant to Rule 15a‐6, this report is only available in the United States to Major US Institutional Investors and is being distributed pursuant to an agreement between JonesTrading and HC. The Alembic Global Advisors trade name is licensed by JonesTrading. Brokerage services in the United States are made available through JonesTrading.

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IMPORTANT DISCLOSURES Analyst certification: The analysts preparing and contributing to this report are not associated persons of JonesTrading, are not registered/qualified as research analysts with FINRA, and are not subject to the NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. We, Jaap Meijer and Janany Vamadeva, certify that the views expressed in this document accurately reflect our personal views about the subject securities and companies. We also certify that we do not hold a beneficial interest in the securities traded. Analyst disclosures: The analyst or a member of the analyst’s household does not have a financial interest in the securities of the subject company (including, without limitation, any option, right, warrant, future, long or short position). The analysts or a member of the analysts’ household do not serve as an officer, director, or advisory board member of the subject company. The analysts’ compensation is not based upon HC’s investment banking revenues and is also not from the subject company in the past 12 months. HC disclosures:

Company name: Qatar National Bank Disclosure: None

Company name: Commercial Bank of Qatar Disclosure: None

Company name: Qatar Islamic Bank Disclosure: None

Company name: Doha Bank Disclosure: None

Company name: Masraf Al Rayan Disclosure: None

1. HC or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company. 2. HC or its affiliates have managed or co‐managed a public offering of securities for the subject company in the past 12 months. 3. HC or its affiliates have received compensation for investment banking services from the subject company in the past 12 months. 4. HC or its affiliates expect to receive or intend to seek compensation for investment banking services from the subject company in the next 3

months. 5. HC has received compensation for products or services other than investment banking services from the subject company in the past 12 months. 6. The subject company currently is, or during the 12 month period preceding the date of distribution of this research report was, a client of HC. 7. HC makes a market in the subject company’s securities at the time this report was published. The HC Rating System consists of 3 separate ratings: Overweight, Neutral, and Underweight. The appropriate rating is determined based on the estimated total return of the stock over a forward 12 month period, including both share appreciation and anticipated dividends. Overweight rated stocks include a published 12 month target price. The target price represents the analysts’ best estimate of the market price in a 12 month period. HC cautions that target prices are based on assumptions related to the company, industry, and investor climate. As such, target prices remain highly subjective. The definition of each rating is as follows: Overweight (OW): Estimated total potential return greater than or equal to 20% Neutral (N): Estimated total potential return greater than or equal to 0% and less than 20% Underweight (UW): Estimated total potential return less than 0% NR: Not Rated SP: Suspended Stocks rated Overweight are required to have a published 12 month target price, while it is not required on stocks rated Neutral and Underweight.

Distribution of HC ratings

Rating Count Percent Percent provided investment banking services in past 12 months

Overweight (OW) 37 50.00 0.00 Neutral (N) 26 35.14 0.00 Underweight (UW) 11 14.86 0.00


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Qatar National Bank as of 26/06/2011 Commercial Bank of Qatar as of 26/06/2011

Date Recommendation Target price Date Recommendation Target price

02/06/2009 Neutral QAR135.76 02/06/2009 Overweight QAR95.18 13/10/2009 Neutral QAR160.50 19/07/2009 Overweight QAR91.78 17/03/2011 Overweight QAR183.00 25/01/2010 Overweight QAR80.60 05/07/2011 Overweight QAR183.00 20/04/2010 Overweight QAR90.80 17/03/2011 Overweight QAR94.00 05/07/2011 Overweight QAR95.00

Qatar Islamic Bank as of 26/06/2011 Doha Bank as of 26/06/2011

Date Recommendation Target price Date Recommendation Target price

27/07/2009 Overweight QAR102.69 02/06/2009 Overweight QAR63.77 18/10/2009 Neutral QAR98.59 22/07/2009 Overweight QAR64.60 31/01/2010 Overweight QAR89.70 28/01/2010 Overweight QAR60.80 15/04/2010 Overweight QAR89.20 17/03/2011 Overweight QAR63.00 17/03/2011 Overweight QAR115.00 05/07/2011 Overweight QAR65.00 05/07/2011 Overweight QAR97.00

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All HC employees and its associate persons, including the analyst(s) responsible for preparing this research report, may be eligible to receive non‐product or service specific monetary bonus compensation that is based upon various factors, including total revenues of HC and its affiliates, as well as a portion of the proceeds from a broad pool of investment vehicles consisting of components of the compensation generated by directors, analysts, or employees and may affect transactions in and have long or short positions in the securities (options or warrants with respect thereto) mentioned herein. Although the statements of fact in this report have been obtained from and are based upon recognized statistical services, issuer reports or communications, or other sources that HC believes to be reliable, we cannot guarantee their accuracy. All opinions and estimates included constitute the analysts’ judgment as of the date of this report and are subject to change without notice. HC may affect transactions as agent in the securities mentioned herein. This report is offered for information purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited. Additional information available upon request.

qatar banks sector note 5 jul 2011 - gulfbase.com · 2012-11-27 · qatar stands out on its...

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