Qatar Banking. Qatar Banks - Result Update 3Q11. Global Research Sector - Banking Equities - Qatar December 7, 2011

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1 Qatar Banking Global Research Sector - Banking Equities - Qatar December 7, 2011 Qatar Banks - Result Update 3Q11 Profitability jumps by 17%YoY and 3% QoQ in 3Q11 Top-line grows on account of volume growth and improved spreads Asset quality improves, coverage increases Buy: CBQ, QNB; Hold: Doha, QIB and MAR Profitability jumps by 17%YoY and 3% QoQ in 3Q11 Qatar banks under our coverage performed well during 3Q11 with profits rising by 22% YoY and 3% QoQ. Both QNB and CBQ, in line with our expectation, posted strong profitability growth with their bottom lines expanding by 5% QoQ and 8% QoQ respectively. However, QIB profitability results came as a positive surprise with the bank recording a growth of 6% QoQ. MAR and Doha were the only banks that witnessed a QoQ decline in profits (down 12%QoQ and 7%QoQ respectively) and were marginally off our expectation. Net Profit QAR mn 3Q10 2Q11 3Q11 QoQ YoY QNB 1,451 1,809 1,901 5% 31% CBQ % 9% Doha % 10% QIB % 34% MAR % 5% Total 2,851 3,395 3,489 3% 22% Source : Company Financials & Global Research Top-line grows on account of volume growth and improved spreads The strong profitability growth was driven by a 10% QoQ increase in the top line {net interest income (NII)/ net profit sharing (NPS)} of the banks under our coverage. The surge in the top line was on account of both volume growth as well as improved spreads. Both Islamic banks did significantly well in this regard with a QoQ jump of 22% and 19% respectively. While QIB s performance was driven by a 9% expansion in its loan portfolio and a 30bps jump in its spreads, MAR did well on shedding some of its high cost funds. Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) Digvijay Tanwar, CFA Senior Financial Analyst dtanwar@global.com.kw Tel: (965) Global Investment House Net Interest Income/ Profit Sharing Income QAR mn 3Q10 2Q11 3Q11 QoQ YoY 3Q11 QoQ YoY QNB 1,461 1,751 1,935 10% 32% 168,121 12% 36% CBQ % 9% 41,472 4% 20% Doha % 9% 28,361 2% 6% QIB % -6% 26,862 9% 0% MAR % -24% 28,735 1% 19% Total 2,980 3,137 3,442 10% 16% 293,552 8% 24% Source : Company Financials & Global Research Net Lending/ Financing Among the conventional banks, QNB recorded the highest jump in NII with a 10% QoQ growth, followed by CBQ at 6% QoQ. However, Doha Bank suffered on account of lower yield on its assets following the capping of interest rates on retail loans. Non-interest income remained almost stagnant (QoQ) declining in the case of MAR While NII income of the banks remained strong, non-interest income for most banks remained stagnant on a quarterly basis. All the banks recorded a minor jump/decline in their non-interest income with the exception of MAR whose results were impacted due to an inclusion of one-off gain in 2Q11. Had it not been for this one-off gain, MAR would have recorded a QoQ growth of 2.8%.

2 QNB was the outperformer and managed to grow its non-interest income by 1.5% QoQ largely driven by a 34% QoQ jump in forex gains and a 4% QoQ increase in fee income. However, CBQ was just able to maintain its non-interest income despite a 10% QoQ decline in fee income. Doha and QIB were the only banks that witnessed a QoQ decline in non-interest income (down 4%QoQ and 1%QoQ respectively). While Doha s non-interest income was impacted by a decline in forex and investment income, QIB suffered on account of forex losses. Strong Balance sheet growth (up 5% QoQ) Balance sheet growth was strong (up 5% QoQ) with aggregate lending increasing by 8% while deposit base remained unchanged. Balance sheet growth was strongest in the case of QNB, with its total assets increasing by 6.2% QoQ. This was followed by QIB and CBQ at 5.1% QoQ and 4% QoQ respectively. Lending as a whole for the quarter was strong, mainly for real estate and construction, although demand from public sector as well remained high. QNB, once again was the top performer with a 12% QoQ increase in lending, followed by QIB at 8% QoQ and CBQ at 4% QoQ. Deposit mobilization, however, was mixed. While QNB and MAR s deposits contracted by 0.5% QoQ and 2.4% QoQ respectively, CBQ, Doha and QIB were able to grow their deposit base by 6.2%, 3.6% and 1.4% respectively. Provisioning expense increased for QNB and QIB QNB reported an increase in provisioning by 19% QoQ while QIB; which had a write-back of provisioning in the previous quarter; booked a QAR40mn charge during the quarter. However, provisioning expense for CBQ and Doha remained largely unchanged while in the case of MAR it came down to zero. Although, we do not know the reason for provisioning in the case of QIB, for QNB it was mainly to keep the coverage high. Provisioning against loan losses QAR mn 3Q10 2Q11 3Q11 QoQ YoY QNB % 113% CBQ (4) % -956% Doha % -6% QIB 26 (7) % 53% MAR % - Total % 96.8% Source : Company Financials & Global Research Asset quality improves for Doha and CBQ, coverage increases Both Doha and CBQ witnessed a drop in non-performing loans (NPLs) during the quarter. While the NPL ratio of Doha almost halved to 2.1%, with the bank recognizing QAR564mn in NPL write-offs, that of CBQ came down to 2.74% on account of a 4% decline in NPL during the quarter. Nonetheless, provisioning remained high and resulted in improved coverage for both the banks (98% in the case of Doha and 104% for CBQ from 93% and 94% respectively in 2Q11). However, QNB s witnessed a marginal jump (+3bps) in its NPL ratio. Coverage for QNB remains at a comfortable 124%. QIB and MAR did not report their NPLs. Strong macroeconomic backdrop will continue to benefit banks Despite the global concerns on European debt and US recovery, Qatari banks will continue to benefit from strong macroeconomic fundamentals of the economy and the high level of domestic spending. Strong Government support to the banking sector has ensured low risk for the banks. We recommend a BUY on CBQ and QNB and a HOLD on Doha, QIB and MAR. Valuation Summary Target CMP Mkt Cap Div. Yield P/E P/B ROAE Price Upside Rec Bank (QAR) (QAR mn) 2011e 2012e 2012e 2011e (QAR) QNB , % % % BUY CBQ , % % % BUY Doha , % % % HOLD QIB , % % % HOLD MAR , % % % HOLD Source: Global Research *Prices & derived ratios as of 6 December 2011 December

3 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Qatar National Bank (QNB) Market Data Bloomberg Code: QNBK QD Reuters Code: QNBK.QA CMP (6 December 2011): QAR150.6 O/S (mn) Market Cap (QAR mn): 95,799.3 Market Cap (USD mn): 26,318.5 P/E 2012e (x): 11.0 P/BV 2012e (x): 2.3 Price Performance 1-Yr High (QAR): Low (QAR): Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 1, Robust financial performance Surge in NII on account of higher loans and spreads Loan growth continued to outperform Valuation update Maintain BUY, increase fair value BUY Target Price QAR167.7 Robust financial performance QNB reported a net profit growth of QAR1,901mn (in line with our estimate of QAR1,889mn), an increase of 32% YoY and 5% QoQ. The results were driven by higher operating income and better cost control. Growth was strong in all revenue lines, and particularly in net interest income (+33% Y-o-Y) and forex income (+63% Y-o-Y), driven by strong growth in GRE and corporate lending. Cost efficiency continued to be among the best in our coverage universe with a cost to income ratio of 14.4% reported in 3Q11. Surge in NII on account of higher loans and spreads Net interest income (NII) remained the major growth driver growing by 33% YoY and 10.5% QoQ. The increase in NII was mainly on account of higher loans and widening of spreads. Cost of funds have come down significantly while yield on assets have expanded leading to higher spreads. As per our calculations, cost of funds for the quarter stood at 1.17% (8bps lower QoQ) which is the lowest in the last 4 years. With yield on assets standing at 4.70% (up 40bps QoQ), spreads for the quarter reached 353bps. However, we believe these levels are not sustainable and as the cost of funds (which we believe are an all time low) start to increase, spreads are likely to come down. The bank s management has indicated spreads of around 290bps in the next 2-3 quarters. Loan growth continued to outperform Loan growth for the quarter has been very strong at 11.7% (industry growth 7.6% QoQ) and follows already strong growth of 14.3% growth in 1H11. YTD loan growth stands at a healthy 27.7% and is best in the industry. With a capital adequacy ratio of 20.9%, there is still room for growth with the management indicating the possibility of equally strong growth in next quarter. While deposit base contracted negligibly The deposit base contracted 0.5% QoQ to QAR195.3bn. With lending growing strong, loan deposit ratio improved to 86% from 76.7% in the previous quarter leading to a healthier balance sheet mix. YTD deposit growth stands at a healthy 18.1%. Volume ('000) Source: Bloomberg Digvijay Tanwar, CFA Senior Financial Analyst dtanwar@global.com.kw Tel.: (965) QNB (QAR) Fee and commission likely to improve As a percentage of revenues, fee and commission income has been declining in recent years mainly due to a combination of increased loan growth and declining fee and commission income. For 3Q11, it stood at 13% compared to over 17% in 1Q10. Going forward, spending on government-related projects is likely to increase fee and commission income as contracts are placed and the effect of planned spending begins to feed through to the wider economy during the next 6-9 months. Asset quality remains supreme QNB reported NPLs worth QAR1.8bn amounting to a NPL ratio of 1.07% for 3Q11 as compared to 1.04% at the end of 2Q11. QNB s asset quality is one of the best in the industry and is expected to remain supreme. However, at 1.07% of gross loans, NPL ratio is a bit unrealistic and is expected to go up going forward. Provisioning charge has continued to remain high and has ensured coverage remains adequate. At 124%, coverage at the end of 3Q11 is more than comfortable. December

4 QNB - Result Summary QAR mn 3Q10 2Q11 3Q11 QoQ YoY 9M10 9M11 YoY Interest Income 2,456 2,423 2,594 7% 6% 7,063 7,548 7% Interest Expense % -34% 3,039 2,155-29% Net Interest Income 1,461 1,751 1,935 10% 32% 4,023 5,393 34% Net Fee & Commission Income % 17% % Gain on Foreign Exchange Activities % 63% % Investment income % 62% % Other Operating Income % 19% % Non-interest Income % 30% 1,427 1,746 22% Total Operating Income 1,923 2,346 2,538 8% 32% 5,451 7,140 31% Operating Expenses (326) (365) (366) 0% 12% (932) (1,095) 18% Provision (Loan Loss) (118) (210) (250) 19% 113% (307) (638) 108% Provision (Investments) (30) 39 (3) -109% -89% (52) % Others 1 0 (18) na na (6) (24) 282% Net Profit 1,451 1,809 1,901 5% 31% 4,154 5,417 30% Net loans 124, , ,121 12% 36% 124, ,121 36% Deposits 148, , ,343 0% 31% 148, ,343 31% Assets 171, , ,072 6% 63% 171, ,072 63% Source : Company Financials & Global Research Raising loan growth profitability figures remain more or less unchanged Given the strong surge in lending and impressive deposit growth witnessed in the first nine months, we have revised our 2011 loan growth upwards by 7.5% while deposits have increased by 2%. However, an expected tightening of spreads will translate into a lower NII growth. Operating income and profit figures remains largely the same. Estimates Revision 2011e QAR mn Earlier Estimates Revised Estimates % Change Loans 168, , % Deposits 205, , % Net Interest Income 7,190 7, % Operating Income 9,690 9, % Provisions (762) (860) 12.9% Net Profits 7,282 7, % Source: Global Research Valuation update Maintain BUY, increase fair value A change in forward estimates lead us to alter our fair value for QNB from QAR160.8/share to QAR167.5/share; an upward revision of 4.3%. We continue to believe that QNB s business model remains robust, and that the bank s asset quality is better than most of its GCC peers, with ample provisioning. Given its size (among the top three largest banks in GCC) and strong ties with the state, the bank will continue to capture Qatar s public sector credit growth which is expected to remain high due to the ongoing preparation to the World Cup. At the current price, the stock offers an upside potential of 11.3% and we therefore maintain a BUY on the stock. December

5 Ratio Analysis Financial Statements (QAR mn) e 2012e 2013e 2014e Interest/Financing Income 6,805 7,296 9,932 10,194 13,071 17,115 20,148 Interest Expense/Payment to Depositors (3,969) (3,569) (4,257) (2,820) (4,117) (6,806) (8,725) Net Interest/Financing Income 2,836 3,726 5,675 7,374 8,954 10,309 11,423 Fee & Commission Income ,121 1,274 1,723 2,114 2,548 Investment Income Other Income ,085 Total Non-Interest/Financing Income 2,255 1,931 1,934 2,372 2,873 3,449 4,104 Total Operating Income 5,091 5,657 7,609 9,746 11,827 13,758 15,528 Provisions expense (378) (359) (600) (860) (933) (1,065) (952) Operating Expenses (1,042) (1,107) (1,292) (1,491) (2,163) (2,575) (3,023) Profit Before Taxation 3,671 4,191 5,718 7,395 8,731 10,118 11,553 Taxation & Minority Interest (18) (3) (16) (36.97) (61) (71) (81) Net Profit Attributable to Parent 3,653 4,188 5,702 7,358 8,670 10,048 11,472 Cash Balances 6,270 9,880 33,912 12,315 11,619 12,911 13,684 Deposits with Banks & FIs 27,044 30,181 24,687 46,073 53,906 60,221 67,614 Investment Securities 11,815 23,333 24,048 43,287 39,463 36,371 38,778 Gross Loans & Financings 100, , , , , , ,823 Loan Loss Reserve (625) (924) (1,572) (2,476) (3,271) (4,172) (4,930) Net Loans & Financings 100, , , , , , ,892 Investment in Associates 4,597 4,444 4,648 5,559 5,837 6,491 6,894 Investments Properties Net Fixed Assets ,166 1,242 1,270 1,303 Other Assets 1,576 1,995 3,476 3,824 4,206 4,627 5,089 Total Assets 151, , , , , , ,255 Deposits from Banks & FIs 19,721 20,794 12,160 18,240 21,341 23,689 26,531 Deposits from Customers 104, , , , , , ,336 Other Borrowings 8,987 8,809 14,321 14,448 8,016 8,191 8,284 Other Liabilities 4,177 5,086 8,596 12,419 14,330 16,369 18,717 Paid-up Capital 2,409 3,011 3,915 6,361 6,361 6,361 6,361 Retained Earnings 1,249 2,439 3,530 3,483 5,089 7,452 10,725 Other Reserves 11,179 13,126 14,836 28,066 30,363 32,963 35,759 Shareholders' Equity 14,837 18,577 22,280 37,910 41,813 46,776 52,845 Minority Interest Total Equity & Liability 151, , , , , , ,255 Return on Average Assets 2.7% 2.5% 2.8% 2.8% 2.8% 2.9% 2.9% Return on Average Equity 26.3% 25.2% 27.9% 24.4% 21.8% 22.7% 23.0% Net Interest Income/Operating Income 55.7% 65.9% 74.6% 75.7% 75.7% 74.9% 73.6% Recurring Income/Operating Income 76.6% 73.7% 83.0% 89.3% 88.7% 90.3% 90.3% Interest Earning/Financing Assets Yield 6.0% 4.9% 5.8% 4.6% 4.6% 5.3% 5.5% Cost of Funds 3.4% 2.5% 2.5% 1.3% 1.6% 2.3% 2.7% Net Spread 2.6% 2.5% 3.4% 3.3% 3.0% 2.9% 2.9% Cost to Income Ratio 20.5% 19.6% 17.0% 15.3% 18.3% 18.7% 19.5% OPEX/Average Assets 0.9% 0.8% 0.7% 0.7% 0.8% 0.8% 0.9% Net Loans to Customer Deposits 96.0% 86.4% 79.6% 86.3% 87.7% 90.5% 91.4% Non Performing Loans , , , , ,287.3 Loan Loss Reserve , , , , ,930.4 NPLs to Gross Loans 0.7% 0.8% 1.0% 1.2% 1.3% 1.4% 1.5% NPL Coverage 85.4% 108.8% 117.7% 117.5% 120.0% 117.0% 115.0% Cost of Risk (bps) Equity to Gross Loans 14.7% 16.9% 16.7% 20.7% 19.2% 18.4% 18.5% Equity to Total Assets 9.8% 10.4% 10.0% 12.9% 12.6% 12.6% 12.8% Dividend Payout Ratio 49.5% 28.7% 34.3% 60.5% 55.0% 50.6% 47.1% Adjusted EPS (QAR)* Adjusted BVPS (QAR)* Market Price (QAR) * Dividend Yield 9.9% 4.9% 3.8% 4.6% 5.0% 5.3% 5.6% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2011 and subsequent years as per closing prices on DSM on 6 December 2011 December

6 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Commercial Bank of Qatar (CBQ) Market Data Bloomberg Code: CBQK QD Reuters Code: COMB.QA CMP (6 December 2011): QAR82.4 O/S (mn) Market Cap (QAR mn): 20,389.6 Market Cap (USD mn): 5,601.5 P/E 2012e (x): 8.1 P/BV 2012e (x): 1.5 Price Performance 1-Yr High (QAR): 95.0 Low (QAR): 62.4 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 2,500 2,000 1,500 1, Yet another strong quarterly performance Expansion in loans and steady spreads drives NII growth Robust credit growth better than anticipated Attractive valuations but off limits to foreign investors BUY Target Price QAR96.7 Yet another strong quarterly performance CBQ reported a net profit of QAR552mn, up 8.6% YoY and 8.4% QoQ and were marginally better than our expected profitability of QAR530mn. It was an all round performance with both net interest income (NII) including Islamic income and other income witnessing growth. Balance sheet growth for the second quarter running was quite strong with a QoQ loan book growth of 4.2%. Expansion in loans and steady spreads drives NII growth CBQ s NII was up 8.7% YoY and 6.2% QoQ to QAR507mn. The growth in NII was mainly on account of volume growth. Although, yield on assets witnessed a drop of 13bps QoQ, spreads were maintained as a result of similar drop in cost of funds. Spreads for the quarter stood at 322bps. Higher investment income (up 30% QoQ) and forex gains (up 14.2% QoQ) sustain non-interest income Non-interest income stood at QAR297mn and witnessed a drop of 0.2% QoQ. The decline was mainly on account of a 10% QoQ drop in fee and commission income. However, higher investment income (up 30% QoQ) and forex gains (up 14.2% QoQ) helped offset this drop. All in all, operating income posted a 3.7% QoQ growth to QAR804mn. Robust credit growth better than anticipated Following a 14.2% increase in total credit in 1H10 that was mainly driven by the public sector, net loans increased by 4.2% QoQ. YTD credit growth now stands at 23.6% which is marginally lower than the sector leader QNB s loan growth of 27.7% but ahead of the total Qatari Banking credit growth of 15.8%. The bank capitalized on the recovery taking place in the Qatari private sector lending (up 14% YTD). The growth during the quarter has mainly come from the real estate and contracting sector that has grown by 44% QoQ and 22% QoQ respectively. However, lending to consumer sector and government declined by 18% QoQ and 12% QoQ respectively. Volume ('000) Source: Bloomberg Digvijay Tanwar, CFA Senior Financial Analyst dtanwar@global.com.kw Tel.: (965) CBQ (QAR) Backed by stronger deposit mobilization CBQ s total deposits surged by 6.2% QoQ to reach QAR36.9bn led by a 7% QoQ growth in customer deposits that was partially offset by a 17% QoQ decline in unrestricted investment accounts. The bank continues to shed its Islamic deposits to meet the Central bank s regulation for closing conventional bank s Shariah-compliant operations by year-end. As a result, loans-to-deposits ratio dropped to 112% from 115% as of 2Q11. Asset quality improves; coverage increases Despite stronger lending volumes, NPLs witnessed a 4% QoQ drop to QAR 1.2bn leading to a drop in NPL ratio from 3.0% in 2Q11 to 2.74% at the end of 3Q11. With provisioning increasing against loan losses, the coverage ratio improved to 104% compared with 90% in FY10 and 94% in 2Q11. Adjusting forecast positively On the back of recent strong performance and better than expected credit growth, we are sharply revising our 2011 credit growth. However, due to some compression in spreads, the credit growth will translate only to an 11% growth in NII. Provisioning expense has been revised downwards. Given stronger operating income and lower provisioning, 2011 profits have been revised upwards by 23%. December

7 CBQ - Result Summary QAR mn 3Q10 2Q11 3Q11 QoQ YoY 9M10 9M11 YoY Interest Income % -4% 2,238 2,137-4% Interest Expense % -24% % Net Interest Income % 9% 1,308 1,429 9% Net Fee & Commission Income % 34% % Gain on Foreign Exchange Activities % 6% % Investment income % -48% % Other Operating Income % 27% % Non-interest Income % 12% % Total Operating Income % 10% 2,043 2,308 13% Operating Expenses (194) (217) (211) -3% 8% (578) (634) 10% Provision (Loan Loss) 4 (35) (35) 0% -956% (57) (123) 116% Provision (Investments) (33) (14) (7) -52% -80% (81) (43) -47% Net Profit % 9% 1,326 1,508 14% Net loans 34,678 39,788 41,472 4% 20% 34,678 41,472 20% Deposits 31,942 34,737 36,899 6% 16% 31,942 36,899 16% Assets 60,191 67,719 70,426 4% 17% 60,191 70,426 17% Source : Company Financials & Global Research Valuation update Maintain BUY, increase fair value We have increased our valuation for CBQ by 11.5% with the new fair value at QAR96.7/share, post incorporation of current results into our full year estimates and roll-over of multiples to The recent results re-affirm our positive outlook on CBQ s stock. Given its relatively strong balance sheet, solid long-term funding and high capitalization level, the bank is expected to do well in the near term. Dividend yield is expected to remain high and is forecasted to be 7.5% in 2011e, which is one of the highest in our coverage universe and next only to Doha Bank. The stock trades at a 2012e P/BV multiple of 1.5x, which is the lowest among our coverage universe and 27% discount to the Qatari banking industry multiple. At the current market price, the stock offers an upside potential of 17.4% over our fair value; thereby making it our top pick in the sector. We therefore recommend a BUY on the stock. However, given its attractiveness and positive outlook, CBQ is currently at its foreign-ownership limit (19.1% foreign ownership limit) and off to foreigner investors. Estimates Revision 2011e QAR mn Earlier Estimates Revised Estimates % Change Loans 36,129 43, % Deposits 35,522 38, % Net Interest Income 1,772 1, % Operating Income 2,803 3, % Provisions (335) (199) -40.6% Net Profits 1,672 2, % Source: Global Research December

8 Ratio Analysis Financial Statements (QAR mn) e 2012e 2013e 2014e Interest/Financing Income 2,873 3,117 2,989 2,888 3,482 3,973 4,560 Interest Expense/Payment to Depositors (1,581) (1,456) (1,211) (945) (1,281) (1,685) (2,211) Net Interest/Financing Income 1,292 1,661 1,778 1,943 2,202 2,287 2,348 Fee & Commission Income Investment Income Other Income Total Non-Interest/Financing Income 1,684 1, ,194 1,412 1,694 1,893 Total Operating Income 2,976 2,931 2,717 3,137 3,614 3,982 4,241 Provisions expense (524) (648) (295) (199) (322) (380) (407) Operating Expenses (750) (759) (787) (876) (997) (1,073) (1,158) Profit Before Taxation 1,702 1,524 1,635 2,062 2,295 2,528 2,676 Taxation & Minority Interest Net Profit Attributable to Parent 1,702 1,524 1,635 2,062 2,295 2,528 2,676 Cash Balances 3,015 4,374 8,703 3,437 5,192 6,915 7,887 Deposits with Banks & FIs 14,316 5,644 4,238 5,777 6,255 6,004 5,604 Investment Securities 4,775 9,747 10,024 13,409 14,158 14,830 16,616 Gross Loans & Financings 34,184 32,652 34,546 44,290 49,143 53,789 58,843 Loan Loss Reserve (287) (722) (980) (1,230) (1,415) (1,614) (1,824) Net Loans & Financings 33,898 31,929 33,567 43,060 47,729 52,176 57,019 Investment in Associates 3,641 3,760 3,840 4,231 4,654 4,934 5,230 Investments Properties Net Fixed Assets 1,136 1,030 1,069 1,130 1,214 1,326 1,473 Other Assets ,081 1,318 1,516 1,728 1,970 Total Assets 61,302 57,317 62,520 72,363 80,717 87,912 95,798 Deposits from Banks & FIs 10,923 7,391 3,553 4,619 5,312 6,109 7,026 Deposits from Customers 32,186 26,272 33,281 38,513 44,676 50,037 56,041 Other Borrowings 6,877 10,292 11,901 13,363 13,968 14,222 14,481 Other Liabilities 2,781 2,651 2,873 2,963 3,506 4,019 4,449 Paid-up Capital 2,062 2,165 2,268 2,474 2,474 2,474 2,474 Retained Earnings ,181 1,458 Other Reserves 6,472 8,411 8,533 9,870 9,870 9,870 9,870 Shareholders' Equity 8,535 10,711 10,912 12,904 13,256 13,525 13,802 Minority Interest Total Equity & Liability 61,302 57,317 62,520 72,363 80,717 87,912 95,798 Return on Average Assets 3.2% 2.6% 2.7% 3.1% 3.0% 3.0% 2.9% Return on Average Equity 24.0% 15.8% 15.1% 17.3% 17.5% 18.9% 19.6% Net Interest Income/Operating Income 46.7% 59.8% 69.4% 66.2% 64.7% 61.8% 59.5% Recurring Income/Operating Income 80.7% 84.2% 89.9% 88.7% 87.4% 86.0% 84.0% Interest Earning/Financing Assets Yield 6.5% 6.4% 6.4% 5.3% 5.4% 5.8% 6.2% Cost of Funds 3.6% 3.1% 2.6% 1.8% 2.1% 2.5% 3.0% Net Spread 2.9% 3.3% 3.7% 3.5% 3.3% 3.3% 3.2% Cost to Income Ratio 30.6% 33.3% 32.5% 29.8% 30.3% 29.8% 30.2% OPEX/Average Assets 1.4% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Net Loans to Customer Deposits 106.2% 124.3% 103.8% 115.0% 110.0% 107.5% 105.0% Non Performing Loans , , , , ,824.1 Loan Loss Reserve , , , ,824.1 NPLs to Gross Loans 0.8% 2.2% 3.2% 2.8% 2.9% 3.0% 3.1% NPL Coverage 98.9% 99.6% 89.7% 101.0% 101.0% 100.0% 100.0% Cost of Risk (bps) Equity to Gross Loans 25.0% 32.8% 31.6% 29.1% 27.0% 25.1% 23.5% Equity to Total Assets 13.9% 18.7% 17.5% 17.8% 16.4% 15.4% 14.4% Dividend Payout Ratio 84.8% 85.3% 97.1% 72.0% 75.5% 78.3% 78.6% Adjusted EPS (QAR)* Adjusted BVPS (QAR)* Market Price (QAR) * Dividend Yield 7.9% 9.7% 7.6% 7.3% 8.5% 9.7% 10.3% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2011 and subsequent years as per closing prices on DSM on 6 December 2011 December

9 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Doha Bank (Doha) Market Data Bloomberg Code: DHBK QD Reuters Code: DOBK.QA CMP (6 December 2011): QAR64.9 O/S (mn) Market Cap (QAR mn): 13,414.7 Market Cap (USD mn): 3,685.4 P/E 2012e (x): 8.2 P/BV 2012e (x): 2.1 Price Performance 1-Yr High (QAR): 70.0 Low (QAR): 45.0 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 3,000 2,500 2,000 1,500 1, Volume ('000) Source: Bloomberg Doha (QAR) Profitability hit by weak operating income and higher costs Capping of interest rates on Retail loans impacts margins Balance sheet growth disappoints Rich Valuations Dividend play rather than growth HOLD Target Price QAR66.2 Profitability hit by weak operating income and higher costs Doha Bank reported a net profit of QAR308.4mn in 3Q11, up by 9.9% YoY. However on a quarterly basis, the results were down by 6.7% and came 11% below our expectation of QAR346.7mn. The results were impacted by lower than anticipated operating income and higher operating costs. Capping of interest rates on Retail loans impacts margins Despite a 2.3% growth in lending, net interest income came down by 1.7% QoQ mainly on account of lower asset yield. Yield on assets came down to 4.92%, 30bps lower than the last quarter, impacted by the capping of interest rates on retail loans earlier this year while cost of funds came down by 6bps. Consequently spreads tightened by 24bps while NIMs came down to 388bps from 410bps in the previous quarter. Non-interest income declines on lower investment and forex income Non-interest income stood at QAR138mn and witnessed a drop of 4.1% QoQ. The decline was mainly on account of a 23% QoQ drop in investment income and 13% drop in forex income. However, fee and commission income remained resilient despite the regulatory changes and grew by 3.6% QoQ. Total operating income of the bank came down by 2.3% QoQ to QAR566mn. Cost efficiency deteriorates on higher SG&A expense Cost efficiency came down with a cost to income ratio of 36.2% reported in 3Q11. The bank s cost efficiency deteriorated during the quarter as SG&A expenses saw a 7% QoQ growth to QAR 205mn in 3Q11. It is worth noting that Doha Bank is among the least cost efficient bank among its peers. We believe the recent hike in basic salaries and social allowances of Qatari employees will further pressurize cost efficiency of the bank. Balance sheet growth disappoints Balance sheet growth, compared to the industry was low, with deposits increasing by a 3.6% QoQ while lending has increased by 2.3% QoQ. Although, the bank s customer deposits increased 5% QoQ, the bank s unrestricted investment accounts declined by 27% QoQ. The bank continues to shed its Islamic deposits to meet the Central bank s regulation for closing conventional bank s Shariah-compliant operations by year-end. YTD, the unrestricted investments are down almost 50% while customer deposits have remained almost stagnant, growing by a marginal 1%. Loan to deposit ratio at the end of 3Q10 stood at 94%. Asset quality metrics improved on write-off NPL ratio of the bank almost halved to 2.1%, as the bank recognized QAR564mn in NPL write-offs. NPLs stood at QAR598mn at the end of 3Q11, translating into an NPL ratio of 2.1%, down from 4.1% in 2Q11. The provision coverage of the bank improved from 93% at end 2Q11 to 98% at end 3Q11. Digvijay Tanwar, CFA Senior Financial Analyst dtanwar@global.com.kw Tel.: (965) Adjusting forecast upwards We have raised our credit growth projections for 2011 by 6.4% and inched up our net profit estimates by 11.1% on higher spreads and stronger top-line estimates. We had earlier anticipated that the closure of Islamic operations by year end will have a negative impact on loan growth. However, the bank has been able to hold on to its credit portfolio and also post better than anticipated profit growth. December

10 Doha Bank - Result Summary QAR mn 3Q10 2Q11 3Q11 QoQ YoY 9M10 9M11 YoY Interest Income % -13% 1,900 1,723-9% Interest Expense % -49% % Net Interest Income % 9% 1,081 1,304 21% Net Fee & Commission Income % 14% % Gain on Foreign Exchange Activities % -24% % Investment income % -40% % Other Operating Income % -17% % Non-interest Income % 2% % Total Operating Income % 7% 1,552 1,747 13% Operating Expenses (181) (192) (205) 7% 14% (497) (584) 17% Provision (Loan Loss) (49) (47) (46) -3% -6% (154) (138) -11% Provision (Investments) (12) (9) (6) -34% -51% (40) (21) -48% Others (0) (1) (1) 40% 160% 41 (3) -107% Net Profit % 10% 895 1,002 12% Net loans 26,632 27,714 28,361 2% 6% 26,632 28,361 6% Deposits 28,273 29,197 30,242 4% 7% 28,273 30,242 7% Assets 44,817 49,530 49,982 1% 12% 44,817 49,982 12% Source : Company Financials & Global Research Valuation update Downgraded to Hold on recent price hike despite an upward revision in Fair value A change in forward estimates lead us to alter our fair value for Doha from QAR59.8/share to QAR66.2/share; an upward revision of 10.8%. The stock has rallied 9.7% in the last 3 months and valuations now look fair. However, the bank continues to suffer from its exposure to the retail sector in Qatar which remains sluggish. Nonetheless, the recent salary hikes in Qatar and resultant uptick in retail activity is expected to bode well for the bank. Although growth, due to its low capitalization level and retail focus, will be limited for the bank in the near term, the stock will remain a dividend play. Dividend yield has historically been very high and is expected to continue this way going forward (projected 7.7% in 2011 the highest in our coverage universe). At the current price, the stock offers an upside potential of 2%. We therefore recommend a HOLD on the stock. Estimates Revision 2011e QAR mn Earlier Estimates Revised Estimates % Change Loans 27,648 29, % Deposits 31,262 31, % Net Interest Income 1,640 1, % Operating Income 2,206 2, % Provisions (225) (212) -5.9% Net Profits 1,186 1, % Source: Global Research December

11 Ratio Analysis Financial Statements (QAR mn) e 2012e 2013e 2014e Interest/Financing Income 2,239 2,474 2,549 2,284 2,630 2,901 3,505 Interest Expense/Payment to Depositors (1,132) (1,233) (1,017) (556) (861) (1,122) (1,664) Net Interest/Financing Income 1,107 1,241 1,532 1,728 1,769 1,779 1,841 Fee & Commission Income Investment Income Other Income Total Non-Interest/Financing Income Total Operating Income 1,675 2,044 2,139 2,346 2,512 2,665 2,767 Provisions expense (188) (411) (359) (212) (200) (208) (175) Operating Expenses (540) (659) (723) (813) (880) (889) (894) Profit Before Taxation ,056 1,321 1,431 1,568 1,698 Taxation & Minority Interest (0) (1) (2) (3) (3) (3) (3) Net Profit Attributable to Parent ,054 1,318 1,429 1,565 1,695 Cash Balances 2,552 10,754 10,379 6,543 7,785 10,271 10,622 Deposits with Banks & FIs 7,950 4,414 3,634 6,252 6,940 5,830 6,529 Investment Securities 3,380 3,825 5,217 6,878 7,634 6,996 7,400 Gross Loans & Financings 24,529 26,613 27,549 30,012 31,578 36,145 40,482 Loan Loss Reserve (564) (717) (1,002) (589) (690) (858) (1,000) Net Loans & Financings 23,966 25,896 26,547 29,423 30,888 35,286 39,482 Investment in Associates Investments Properties Net Fixed Assets ,174 1,416 1,707 Other Assets ,185 1,482 1,852 Total Assets 39,003 46,010 47,230 51,009 55,624 61,299 67,614 Deposits from Banks & FIs 8,161 10,489 8,683 10,854 11,614 12,659 13,799 Deposits from Customers 23,277 27,890 30,822 31,262 34,701 38,866 43,529 Other Borrowings 1, Other Liabilities 2,282 1,860 1,869 2,066 2,242 2,434 2,644 Paid-up Capital 1,722 1,809 1,895 2,067 2,067 2,067 2,067 Retained Earnings Other Reserves 2,277 3,031 3,044 3,648 3,673 3,743 3,810 Shareholders' Equity 4,052 4,946 5,087 6,058 6,299 6,573 6,874 Minority Interest Total Equity & Liability 39,003 46,010 47,230 51,009 55,624 61,299 67,614 Return on Average Assets 2.7% 2.3% 2.3% 2.7% 2.7% 2.7% 2.6% Return on Average Equity 26.4% 21.6% 21.0% 23.7% 23.1% 24.3% 25.2% Net Interest Income/Operating Income 66.1% 60.7% 71.6% 73.7% 70.4% 66.7% 66.5% Recurring Income/Operating Income 86.4% 80.9% 90.1% 89.6% 88.5% 87.4% 87.2% Interest Earning/Financing Assets Yield 7.4% 7.3% 7.5% 6.0% 6.1% 6.3% 7.1% Cost of Funds 3.9% 3.4% 2.6% 1.3% 1.9% 2.3% 3.0% Net Spread 3.5% 3.9% 4.9% 4.6% 4.2% 4.1% 4.0% Cost to Income Ratio 32.2% 32.2% 33.8% 34.7% 35.0% 33.4% 32.3% OPEX/Average Assets 1.6% 1.5% 1.6% 1.7% 1.7% 1.5% 1.4% Net Loans to Customer Deposits 103.0% 92.8% 86.1% 94.1% 89.0% 90.8% 90.7% Non Performing Loans , ,052.5 Loan Loss Reserve , NPLs to Gross Loans 3.0% 3.2% 3.9% 2.1% 2.3% 2.5% 2.6% NPL Coverage 77.9% 84.3% 92.2% 93.5% 95.0% 95.0% 95.0% Cost of Risk (bps) Equity to Gross Loans 16.5% 18.6% 18.5% 20.2% 19.9% 18.2% 17.0% Equity to Total Assets 10.4% 10.8% 10.8% 11.9% 11.3% 10.7% 10.2% Dividend Payout Ratio 91.0% 92.9% 89.9% 78.4% 79.6% 79.2% 79.3% Adjusted EPS (QAR)* Adjusted BVPS (QAR)* Market Price (QAR) * Dividend Yield 11.9% 10.6% 7.7% 7.7% 8.5% 9.2% 10.0% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2011 and subsequent years as per closing prices on DSM on 6 December 2011 December

12 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Qatar Islamic Bank (QIB) Market Data Bloomberg Code: QIBK QD Reuters Code: QISB.QA CMP (6 December 2011): QAR84.3 O/S (mn) Market Cap (QAR mn): 19,919.5 Market Cap (USD mn): 5,472.4 P/E 2012e (x): 12.0 P/BV 2012e (x): 1.9 Price Performance 1-Yr High (QAR): 92.0 Low (QAR): 71.3 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance HOLD Target Price QAR81.7 Strong quarterly revenues beat expectations Net Profit Sharing jumps on healthy volumes and strong spreads Financing portfolio growth rebounds sharply Target price reduced, downgraded to Hold Strong quarterly revenues beat expectations QIB s came up with a strong quarterly performance with a net profit of QAR407mn and beating our profitability expectations of QAR355mn. The 33.5% YoY jump was mainly due to a 20x jump in investment income and more than doubling of fee income partially offset by forex losses and a jump in provisioning. On a quarterly basis, net profit has gone up by 6.5% driven mainly by a 22.5% jump in net profit sharing and a 54.1% jump in fee income. Net Profit Sharing jumps on healthy volumes and strong spreads Net profit sharing (Income from Financing Activities - Depositors Profit Sharing) was up by 22.5% QoQ to QAR373mn (down 5.8% YoY). The growth in net profit sharing was on account of growth in financing as well as spreads expansion. While financing increased 8.6% QoQ, spreads expanded by 30bps during the quarter. Although, cost of funds increased by 20bps to 1.32%, yield on assets at 4.53%, witnessed a jump of 50bps QoQ. Spreads for the quarter stood at 321bps compared with 291bps in the previous quarter. The jump in yields was largely due to a better asset-liability mix and a higher yield on financing assets. 2,500 2,000 1,500 1, Volume ('000) Source: Bloomberg Digvijay Tanwar, CFA Senior Financial Analyst dtanwar@global.com.kw Tel.: (965) QIB (QAR) Financing portfolio growth rebounds sharply After witnessing a decline of 15.7% in 1Q11 and a stagnant 2Q11, QIB s financing portfolio rebounded sharply and was up 8.6% QoQ. Nonetheless, YTD the financing portfolio is down 8.5%. However, deposits continue to remain stagnant with Investment Accountholders increasing by 1.4% QoQ. YTD, investment accountholders are down by 12.7%. Loan to deposit ratio for the bank stood at 102% for the quarter. Despite QCB s regulation instructing local conventional commercial banks to discontinue their Islamic operations by the end of 2011, the bank has not been successful in growing its deposit base Surge in fee income offsets forex losses QIB s other income stood at QAR246mn, a marginal decline of 0.9% QoQ (up 351% YoY on account of investment income). The results were largely impacted by forex losses amounting to QAR28mn in 3Q11 against a profit of QAR6mn in the previous quarter. However, a surge in fee income by 54% QoQ and 119% YoY that stood at QAR86m helped limit the downfall. Investment income, like previous quarter remained strong at QAR188mn. Although cost efficiency was maintained, provisioning dilutes earnings partially Cost efficiency improved marginally with a cost to income ratio of 31.1% reported in 3Q11 against 32.6% in 2Q11. Although the bank s SG&A expenses increased by 6.7% QoQ, the ratio declined on even stronger growth (up 12%) in total operating income. However, the recent hike in basic salaries and social allowances of Qatari employees is likely to adversely impact SG&A expenses going forward. The bank does not disclose NPLs on a quarterly basis. However, provisioning for the quarter stood at QAR40mn following net recoveries in 2Q11. Had it not been for above, the profitability growth would have been much stronger. The increased provisioning for the quarter may indicate deteriorating asset quality. It is worth mentioning that QIB, like many other Islamic banks is highly exposed to the real estate sector which could be a cause of concern for the bank.. December

13 QIB - Result Summary QAR mn 3Q10 2Q11 3Q11 QoQ YoY 9M10 9M11 YoY Inc from Financing Activities % -7% 1,442 1,360-6% Depositors Profit Sharing % -12% % Net Profit Sharing % -6% 1, % Investment income % 2036% % Net Fee & Commission Income % 119% % Gain on Foreign Exchange Activities 7 6 (28) -598% -528% 20 (15) -174% Total Other Income % 351% % Total Operating Income % 37% 1,353 1,681 24% Operating Expenses (122) (180) (192) 7% 58% (333) (509) 53% Provision (Receivables) (26) 7 (40) -635% 53% (98) (61) -38% Provision (Investments) (1) - 9 na -854% (18) (12) -34% Others % 275% (14) (9) -36% Net Profit % 34% 907 1,110 22% Receivables from Financing 26,920 24,727 26,862 9% 0% 26,920 26,862 0% Investment Accountholders 27,244 26,031 26,404 1% -3% 27,244 26,404-3% Assets 44,841 50,144 52,759 5% 18% 44,841 52,759 18% Source : Company Financials & Global Research Valuation update Downgraded to HOLD, fair value decreased by 4.3% We have downgraded our fair value for QIB from QAR85.4/share to QAR81.7/share; a downward revision of 4.3% after taking into account the dull operating performance of the bank in recent quarters and negative YTD credit growth. Additionally, we have revised our growth forecasts for the bank in the medium-term, as we believe that a favorable impact of the QCB regulation on closure of Islamic operations of conventional banks by the year-end may come into effect only in Updates are pending further guidance from QCB regarding the regulation and are expected towards the end of the year. Estimates Revision 2011e QAR mn Earlier Estimates Revised Estimates % Change Loans 31,934 28, % Deposits 43,963 36, % Net Interest Income 1,261 1, % Operating Income 2,037 2, % Provisions (60) (72) 20.0% Net Profits 1,386 1, % Source: Global Research December

14 Ratio Analysis Financial Statements (QAR mn) e 2012e 2013e 2014e Income from Financing Activities 1,328 1,827 1,863 1,846 2,087 2,652 3,156 Depositors Profit Sharing (389) (510) (447) (496) (659) (974) (1,168) Net profit sharing 939 1,316 1,417 1,350 1,428 1,678 1,987 Fee & Commission Income Investment Income 1, Other Income (68) Total Non-Profit Sharing Income 1, ,112 1,234 1,196 Total Operating Income 2,166 1,902 1,906 2,334 2,540 2,912 3,184 Provisions Expense (17) (131) (40) (72) (50) (105) (115) Operating Expenses (444) (487) (479) (710) (781) (837) (884) Profit Before Taxation 1,705 1,284 1,387 1,552 1,710 1,970 2,185 Taxation & Minority Interest (62) 38 (52) (47) (51) (59) (66) Net Profit Attributable to Parent 1,643 1,322 1,335 1,505 1,658 1,911 2,119 Cash Balances 717 1,032 1, (1,488) 19 11,134 Deposits with Banks & FIs 6,368 8,903 12,431 5,249 8,517 8,401 8,335 Investment Securities 2,947 1,819 3,501 15,092 14,906 14,702 4,903 Receivables & Balances from Financing 21,235 25,734 33,746 32,663 39,748 47,046 54,911 Unearned profit (2,135) (2,807) (4,031) (3,920) (4,770) (5,646) (6,589) Provisions (234) (264) (363) (432) (477) (576) (686) Investment in Associates 1,650 1,617 1,563 1,641 1,724 1,810 1,900 Investment Properties 1,692 1,203 1,115 1,167 1,774 2,100 2,451 Net Fixed Assets Other Assets 737 1,430 1,558 1,667 1,784 1,909 2,042 Total Assets 33,237 38,966 51,765 54,448 62,146 70,211 78,868 Deposits from Banks & FIs 8,697 8,691 8,412 9,674 10,351 11,075 11,851 Equity of Investment Accountholders 11,495 20,361 30,258 29,163 35,490 42,006 49,028 Deposits from Customers 5,097 6,719 8,731 7,421 8,311 9,392 10,707 Other Liabilities 2,264 2,203 4,920 5,176 5,488 5,871 6,241 Paid-up Capital 1,969 2,068 2,166 2,363 2,363 2,363 2,363 Retained Earnings (223) (306) ,125 1,549 Other Reserves 3,712 5,756 5,692 7,408 7,408 7,408 7,408 Shareholders' Equity 5,458 7,517 7,969 10,182 10,513 10,896 11,320 Minority Interest Total Equity & Liability 33,237 45,685 60,496 61,869 70,457 79,603 89,575 Return on Average Assets 6.0% 3.7% 2.9% 2.8% 2.8% 2.9% 2.8% Return on Average Equity 33.4% 20.4% 17.2% 16.6% 16.0% 17.9% 19.1% Net Profit sharing Income/Operating Inc 36.7% 43.4% 69.2% 74.3% 57.8% 56.2% 57.6% Recurring Income/Operating Income 53.7% 82.8% 89.5% 69.8% 70.6% 73.7% 81.1% Financing Assets Yield 6.6% 6.4% 5.1% 4.9% 5.5% 5.8% 6.0% Cost of Funds 1.9% 1.9% 1.3% 1.2% 1.5% 1.9% 2.0% Net Spread 4.7% 4.6% 3.8% 3.7% 4.0% 3.9% 4.0% Cost to Income Ratio 20.5% 25.6% 25.1% 30.4% 30.7% 28.7% 27.8% OPEX/Average Assets 1.6% 1.4% 1.1% 1.3% 1.3% 1.3% 1.2% Net Loans to Customer Deposits 113.7% 111.3% 97.0% 97.1% 97.2% 97.2% 97.2% Non Performing Loans Loan Loss Reserve NPLs to Gross Loans 1.5% 1.3% 1.1% 1.2% 1.2% 1.2% 1.3% NPL Coverage 79.6% 89.6% 111.5% 110.3% 100.0% 100.0% 100.0% Cost of Risk (bps) (28) Equity to Gross Loans 25.7% 29.2% 23.6% 31.2% 26.4% 23.2% 20.6% Equity to Total Assets 16.4% 19.3% 15.4% 18.7% 16.9% 15.5% 14.4% Dividend Payout Ratio 83.9% 89.4% 81.2% 80.0% 80.0% 80.0% 80.0% Adjusted EPS (QAR)* Adjusted BVPS (QAR)* Market Price (QAR) * Dividend Yield 8.5% 7.3% 6.2% 6.0% 6.7% 7.7% 8.5% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2011 and subsequent years as per closing prices on DSM on 6 December 2011 December

15 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Masraf al Rayan (MAR) Market Data Bloomberg Code: MARK QD Reuters Code: MARK.QA CMP (6 December 2011): QAR26.75 O/S (mn) Market Cap (QAR mn): 20,062.5 Market Cap (USD mn): 5,511.7 P/E 2012e (x): 13.8 P/BV 2012e (x): 2.4 Price Performance 1-Yr High (QAR): Low (QAR): Average Volume: (000) 1, m 3m 12m Absolute (%) Relative (%) Price Volume Performance 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Volume ('000) Source: Bloomberg MAR (QAR) Profits decline QoQ on account of lower operating income High growth halts for the first time Net Profit Sharing jumps on stronger spreads Valuations rich - Growth factored in price HOLD Target Price QAR26.5 Profits decline QoQ on account of lower operating income Masraf al Rayan (MAR) reported a net profit of QAR321mn for 3Q11, 5% up YoY and down 12% QoQ. The profitability results were off our expectation of QAR376mn on account of zero balance sheet growth that resulted in lower than anticipated increase in net profit sharing income and at the same time a drop in investment income of the bank aggravated the difference further. High growth halts for the first time Balance sheet for the first time in the last eight quarters declined, albeit marginally (- 0.2% QoQ) while investment accountholders declined by 2.4% QoQ. Lending, nonetheless, grew by 1.4% QoQ. Despite a stagnant quarter, the bank enjoys one of the highest balance sheet growth (40.8% YTD) and even better deposits growth (48.5% YTD). The sheer size of deposit growth makes the decent 14.6% YTD growth in financing portfolio look small. We believe the stagnant balance sheet growth for the quarter was an aberration; with the bank poised to grow in the near term. State spending is expected to remain high and Masraf al Rayan due to its close ties with the state is likely to remain a key beneficiary. Net Profit Sharing jumps on stronger spreads While net profit sharing (income from financing activities - depositor s profit sharing) has come down by 24.5% YoY; on a quarterly basis, it has increased by 18.6%. Income from financing assets stood at QAR328mn, implying a yield of 4.13%, a drop of 34bps QoQ. However, the bank was successful in reducing its cost of funds further, from 1.62% in 2Q11 to 1.27% in 3Q11, outpacing the drop in interest yield, thereby leading to surge in spreads. This can be partially explained by 2.4%QoQ drop in investment accountholders. At the same time, we believe that replacement of high cost deposits with low cost ones has also played its part. Other income drops in the absence of one-off gains (subsidiary sale) MAR s other income dropped 46%QoQ (up 80%YoY on account of investment income) in the absence of the one-off gain that the bank had recorded in 2Q11. The bank had in the previous quarter sold 50% of its stake in a subsidiary, Lusail Waterfront Real Estate Company on which it had booked a profit of QAR172mn. Adjusting for that one- off gain, the bank s other income has increased by 2.8% QoQ. The income was also boosted by a 3.6x QoQ jump in forex income which increased to QAR19mn in 3Q11. However, investment income was down 8.8% QoQ and partially offset the gain from forex income. All in all, operating income declined by 25.5% QoQ to QAR396mn. Digvijay Tanwar, CFA Senior Financial Analyst dtanwar@global.com.kw Tel.: (965) Lower operating income impacts cost efficiency Although, SG&A expenses of the bank came down by 12% QoQ, operating efficiency deteriorated to 18.9% for 3Q11 from 15.9% in 2Q11. Despite the decline, MAR remains one of the most cost efficient banks in our coverage universe. Being a corporate franchise (almost 88% lending to the Government and GRE entities and the corporate sector at the end of 2010), the bank does not need to maintain a large number of branches and is therefore able to maintain low operating costs. However, the recent hike in basic salaries and social allowances of Qatari employees is likely to adversely impact SG&A expenses going forward and the resultant deterioration in cost efficiency. December