GCC Banking. GCC Banking Sector Quarterly 2Q13. Global Research Sector-Banking September 2013

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1 213e ROE 3-yr Earnings CAGR GCC Banking Global Research Sector-Banking September 213 GCC Banking Sector Quarterly GCC banks report double-digit YoY growth in profitability, with leading Growth in net interest income remains stable due to easing margin pressure Non-interest income surges on non-recurring items Increasing provisions put pressure on bottom line GCC banks report double-digit growth in profitability Net profits of GCC banks under our coverage increased 11.YoY to USD4.8bn in. On a YoY basis, net profits of banks in surged 23., while those of banks in the, Qatar, and KSA increased 2., 13., and 3., respectively. Strong growth in loan books, margin pressure eases Loan book growth among GCC banks continues to remain strong; it increased 13.9%YoY to USD631.2bn in. Banks in Qatar registered the highest growth of 23.YoY, followed by those in (18.YoY) and KSA (13.YoY). Due to gradual easing of margin pressure, net interest income (NII) of GCC banks rose 12.9%YoY. Robust loan book expansion supported top-line growth. NII growth was led by Qatar-based banks (up 3.YoY), followed by those in (18.YoY) and the (1.YoY). Significant growth in non-interest income on one-off gains Improved performance of GCC capital markets as well as winding up hedging positions (in case of banks) led to an increase in non-interest income during the quarter. The segment grew 14.YoY, with fee income rising 8.YoY. Banks in Qatar registered the strongest growth in non-interest income (up 29.YoY), followed by those in the (22.YoY) and (21.YoY). Asset base records double-digit growth The asset base of GCC banks expanded 14.YoY to USD994.8bn in with all the countries witnessing double-digit YoY growth. Increase in loan book supported the overall asset growth. Relative positioning of banking sectors of GCC countries Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone: Naveed Ahmed, CFA Manager nahmed@global.com.kw Phone: Global Investment House Qatar 2. KSA e P/BV Source: Company Financials, Global Research 2 Qatar KSA e P/E

2 Banking Universe Data Set Name Country Mkt. Cap Stock Performance** P/E P/BV ROE ROA Earnings Growth Current US$ mn 1m 3m 12m 213e 214e 213e 214e 213e 214e 213e 214e 213e 214e Price* National Bank of 14, Finance House 9, % 23.7% % Commercial Bank of 3, % % nm Burgan Bank 3, % Al Rajhi Bank KSA 3, Samba Financial Group KSA 12, % Riyad Bank KSA 1, % 15.7% % % 25.3 Saudi British Bank KSA 1, % % Arab National Bank KSA 7, % Banque Saudi Fransi KSA 8, % 1.9% Saudi Hollandi Bank KSA 3, % 4.7% % 1.9% Abu Dhabi Commercial Bank 7, Emirates NBD 8,322..9% % 9...9% First Gulf Bank 13, % National Bank of Abu Dhabi 15, % % Union National Bank 3, % % Qatar National Bank Qatar 32, % 15.7% 31.9% % % Commercial Bank of Qatar Qatar 4, % Doha Bank Qatar 3,81 1.9% % Qatar Islamic Bank Qatar 4, % Al Rayan Bank Qatar 5, % Bank Muscat Oman 3, % % % Source: Global Research, Bloomberg Note: All figures in local currency unless mentioned otherwise * Closing prices on respective exchanges as on 29 August 213 ** Stock Performance is total retrun adjusted for cash dividends *** nm - not meaningful September 213 2

3 USD mn Global Research - GCC GCC banks report double-digit profit growth driven by higher operating income Net earnings of GCC banks under our coverage increased 11.YoY to USD4.8bn in, mostly due to higher NII and non-interest income. Profits of GCC banks rose, with those in witnessing the strongest growth (up 23.YoY), followed by banks in the (2.YoY). Profitability of banks in Qatar and KSA increased 13.YoY and 3.YoY, respectively. Movement of Quarterly Profits (banks under coverage) 6, 5, 4, 3, 2, 1, Source: Global Research Among -based banks, net profit of Commercial Bank of (CBK) increased significantly to KWD7.mn in from KWD.1mn in, mainly due to 24.YoY decline in provisions. Net profit of Finance House (KFH) rose 21.YoY driven by 13.YoY growth in net financing/interest income and 13.9%YoY decline in provisions. National Bank of (NBK) registered net profit growth of 18.7%YoY during the quarter driven by strong capital gains. Among banks, Emirates NBD witnessed a robust 49.9%YoY growth in bottom line, ascribed to a 16.7%YoY rise in NII and 14.YoY increase in non-interest income. Other GCC banks that reported strong growth in net profit include Qatar National Bank (up 23.YoY), Abu Dhabi Commercial Bank (18.YoY), and National Bank of Abu Dhabi (15.YoY). Profit Drivers YoY NII NFI Provisions OPEX Profit GCC KSA Qatar QoQ NII NFI Provisions OPEX Profit GCC KSA Qatar Source: Global Research 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 September 213 3

4 Banks whose profitability declined include Burgan Bank (down 1.YoY), Commercial Bank of Qatar (CBQ: down 5.YoY), and Qatar Islamic Bank (QIB: down 2.9%YoY). Burgan Bank s net profit fell due to significant increase in provisions (up 87.9%YoY) and operating expenses (57.YoY) during the quarter. CBQ s provisions also grew significantly due to a herculean build up in its non-performing assets. The bank s NPL ratio increased to 3.49% in from.8 in and 1.39% in due to a newly provisioned domestic loan of QAR1.1bn. Despite provisions falling considerably, QIB reported a decline in bottom line due to a 12.YoY decrease in its top-line. Key Indicators (banks under coverage) YoY NII NFI Provisions OPEX Profit GCC 12.9% % 1.7% % 37.9% 23. KSA % 3. Qatar QoQ NII NFI Provisions OPEX Profit GCC % % % % -23. KSA Qatar 25.9% 78.7% Source: Global Research Strong growth in loans; margins show some recovery The loan book of GCC banks grew 13.9%YoY to USD631.2bn in. Net interest margin remained flat on a YoY basis; however, it improved 18bps QoQ. Loan book growth continues to remain strong across GCC markets, with banks in Qatar witnessing the highest increase of 23.YoY, and KSA (13.YoY). Albeit the loans of i banks under coverage were up by 18.YoY, it was driven by the consolidation of acquisitions. Qatar-based banks maintained their loan growth momentum due to an increase in public sector spending as the country is preparing to host the FIFA World Cup in 22. Acquisition made by QNB and CBQ during the year also propelled loans growth considerably. Among Qatar-based banks, Qatar National Bank and Doha Bank registered higher growth in loan book of 26.YoY and 21.9%YoY, respectively. Economic expansion and huge capital investments, particularly in the infrastructure and manufacturing sectors, remain growth drivers for the loan book of KSAs banks. Furthermore, backed by the recently implemented mortgage lending law, KSA banks registered a double-digit growth in loan book. Saudi Hollandi Bank recorded the highest growth in loan book (up 24.YoY) due to strong SME lending, followed by the Saudi British Bank (11.9%YoY) driven by stable corporate lending. Within, Burgan Bank recorded the highest growth in loan book (up 31.YoY) driven by sound performance of its international operations and consolidation of Turkish subsidiary Eurobank Tefken (acquired in December 212), followed by National Bank of (22.), supported by consolidation of its acquisition, Boubyan Bank into its book since unlike the practice in the previous year. The loan book of banks grew moderately vis-à-vis regional peers, increasing just 7.7%YoY despite recovery in the real estate sector and overall economic growth. The moderate growth can be ascribed to high credit penetration levels and absence of quality lending opportunities. September 213 4

5 USD mn USD mn The net interest income of GCC banks increased 12.9%YoY and 1. QoQ. The NII of banks in Qatar grew the most (up 3.YoY), followed by that of banks in (18.YoY) and the (1.YoY). Among Qatar-based banks, Qatar National Bank witnessed a robust growth of 46.YoY in NII driven by consolidation of the bank s Egypt-based subsidiary National Societe Generale Bank-Egypt (NSGB). Masraf-Al-Rayan s NII rose 4.9%YoY due to a 28bps YoY improvement in NIM. Among -based banks, Burgan Bank s NII grew 43.YoY due to significant exposure to international markets and the acquisition synergy of Turkish bank Eurobank Tefken. Among banks, Emirates NBD s NII grew 16.7%YoY due to 18bps YoY improvement in NIM, supported by lower cost of fund. KSA banks reported a 4.YoY growth in NII due to the sluggish interest rate environment in the Kingdom. Continued growth in non-interest income boosts profitability Non-interest income of GCC banks increased 14.YoY during the quarter on higher investment income and fee income as well as on one-off gains. Fee income increased 8.YoY among GCC banks, with banks in Qatar leading (up 43.YoY), followed by those in (up 17.YoY). Qatar National Bank registered a 69.YoY growth in non-interest income due to a 91.YoY rise in fee income and 13.YoY increase in investment gains. Burgan Bank s non-interest income grew 54.YoY on one-off gains in forex and investments. National Bank of s non-interest income rose 46.7%YoY in, primarily on account of non-recurring advancement of investment income. Some banks booked income from winding up hedges reportedly linked to Ministry of Finance deposits. Abu Dhabi Commercial Bank s non-interest income increased 39.YoY during the quarter. Saudi banks lagged behind, posting a.yoy decline in non-interest income; Saudi Hollandi Bank showed a reverse trend, recording a 33.YoY growth in non-interest income due to strong fee income supported by volumetric growth. Provisions remain high, put pressure on bottom line Provision expenses of our GCC coverage increased 6.YoY during, mainly due to significant increase in provisions of Qatar-based banks. During, Commercial Bank of Qatar s provisions for impaired loans increased to QAR134mn from a reversal of QAR13mn in. The increase is primarily on account of prudential provision taken on a domestic real estate loan. Qatar National Bank also registered an 89.7%YoY rise in provisions due to growth in its overall loan portfolio after the NSGB acquisition. Conversely, the provision expenses of KSA and banks declined 6. and 1.9%, respectively, on a YoY basis on improved asset quality. On a QoQ basis, provisions of GCC banks increased 24. led by (up 85.) and Qatar (63.). Burgan Bank and National Bank of contributed significantly to the higher provisions of based banks due to their recent acquisitions. Incremental contribution to provision in QoQ Source: Global Research 234 (53) (6) KSA Oman Qatar GCC Incremental contribution to provision in YoY September (1) (19) KSA Oman Qatar GCC

6 Growth in asset base led by strong loan book expansion Total assets of GCC banks under our coverage expanded 14.YoY to USD994.8bn in. Qatar-based banks witnessed the strongest growth in total assets (up 23.YoY to USD196.bn), followed by banks in (19.YoY), the (1.YoY), and KSA (1.YoY). Expansion in asset base was supported by double-digit growth in loan book. However, on a QoQ basis, asset growth was sluggish due to marginal increase in loan book. Among the individual banks, Qatar National Bank led with a 3.YoY growth in asset base, followed by Burgan Bank (up 28.YoY), National Bank of (25.YoY), Saudi Hollandi Bank (23.YoY), and National Bank of Abu Dhabi (21.YoY). Asset growth of these banks was largely supported by increase in their respective loan books. Balance Sheet Growth (banks under coverage) YoY Assets Deposits Loans GCC % % % 18. KSA Qatar QoQ Assets Deposits loans GCC % % KSA % Qatar % 1. Source: Global Research September 213 6

7 OMR bn BHD bn AED bn KWD bn SAR bn QAR bn Money Supply (M2) Saudi Arabia Qatar 1,4 1,2 1, % % % % 1.7% Oman Bahrain % % % Source: Central Banks, Global Research September 213 7

8 OMR bn BHD bn AED bn KWD bn 1Q11 2Q11 QAR bn SAR bn Deposits Saudi Arabia Qatar 1,4 1,2 1, % % 1.7% % % 9.9% % ,3 1,25 1,2 1,15 1,1 1,5 1, % % 95 - Oman Bahrain % % % 1.9% Source: Central Banks, Global Research September 213 8

9 OMR bn BHD bn AED bn KWD bn QAR bn SAR bn Loans Saudi Arabia Qatar 1,2 1, % % 4.7% ,16 1,14 1,12 1,1 1,8 1,6 1,4 1, % %. 1.7% % %... Oman Bahrain % Source: Central Banks, Global Research September 213 9

10 QoQ Growth LTD Ratio QoQ Growth LTD Ratio QoQ Growth LTD Ratio QoQ Growth LTD Ratio QoQ Growth LTD Ratio QoQ Growth LTD Ratio Liquidity (Loans/Deposits ratio) Saudi Arabia Qatar Loans/Deposits Deposits Loans % Loans/Deposits Deposits Loans Loans/Deposits (RHS) Deposits Loans Loans/Deposits Deposits Loans Oman 7% % 9 97% 9 9 Bahrain % 4 47% Loans/Deposits Deposits Loans Loans/Deposits Deposits Loans Source: Central Banks, Global Research September 213 1

11 Interest rates (Interbank 1 year) Saudi Arabia Qatar Oman Bahrain (6-month) Source: Central Banks, Global Research September

12 NBK KFH CBK Burgan RJHI ANB BSF RIBL SABB SAMBA SHB NBAD ENBD FGB UNB ADCB QNB CBQ Doha Bank QIB MAR Bank Muscat NBK KFH CBK Burgan RJHI ANB BSF RIBL SABB SAMBA SHB NBAD ENBD FGB UNB ADCB QNB CBQ Doha Bank QIB MAR Bank Muscat NBK KFH CBK Burgan RJHI ANB BSF RIBL SABB SAMBA SHB NBAD ENBD FGB UNB ADCB QNB CBQ Doha Bank QIB MAR Bank Muscat GCC Banks Comparative Standing LTD Cost Income Ratio Provisions to Total Income Source: Financial Accounts, & Global Research September

13 3-yr Earnings CAGR 213e ROE GCC Banks Relative Valuation P/BV vs ROE 2 QNB 2 QIB Doha Bank FGB CBQ SABB 1 ANB SHB NBAD MARK SAMBA UNB BSF Bank Muscat ADCB RIBL NBK 1 ENBD KFH e P/BV P/E vs Earnings Growth Doha Bank 1 Bank Muscat CBQ MARK ANB 1 UNBQIB RIBL FGB ENBD RJHI BSF NBAD NBK e P/E Source: Bloomberg, & Global Research September

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