MENA financials. Looking beneath the surface. Investor pay-out what you see is not what you get

Transcription

1 MENA financials Looking beneath the surface Investor pay-out what you see is not what you get Sector Report May 23, 2012

2 S e c t o r C o v e r a g e M a y Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Loubna ElHassan Nisreen Assi Christine Kalindjian Arqaam Capital Research offshore s.a.l. Michael Malkoun Jonathan Milan Zeina Nasreddine MENA financials Looking beneath the surface Investor payout: what you see is not what you get Some banks are selling dividend yields to investors, rather than setting consistent pay-out levels. A number will have to raise capital or cut their loan growth, diluting their EPS growth or fundamental upside. Focus should shift towards tangible capital and away from capital adequacy ratios that include low quality capital such as subordinated debt. Some banks have also adopted some form of less conservative accounting relating to the valuation of real estate assets, associates or acquisition accounting (a few UAE banks), while others have substantial cushions (KSA, Egyptian & Qatari banks). 12 banks should be short in capital: ADCB, ADIB, ENBD, DIB, Bank Audi, Bank of Beirut and Ahli United are already below CET1 of 12% under Basel 3, while another 5 (CBQ, Doha, KFH, Sohar and CAE) may soon have to find fresh capital due to their high dividend pay-outs. The best capitalized banks are Qatari, Kuwaiti and Saudi banks, while the least are Omani, Lebanese and UAE banks. We initiate on 54 financial institutions and our TPs offer an average of 22% upside. We prefer to be highly selective. We play deep value. We see deep value in UNB, FGB, and CBD, while avoiding pitfalls like capital, under-provisioning, real estate losses and concentration risk. We also play growth with attractive valuations and strong RORWA. Loan growth in Qatar, KSA, Egypt & Oman should exceed 10%, while most banks in the UAE, Lebanon & Kuwait should grow loans by single digits only. We recommend Bank Muscat (well balanced growth and to be better positioned after 2 capital hikes in FY 12e), QNB (despite a slowdown vs. FY 11A), CIB (helped by loan demand as corporates rebuild their stocks and higher T-bill yields), Burgan (helped by the Turkish acquisition) and Al Rajhi (best KSA growth stock). We play Salama as our favorite insurance pick. We also play M&A: We see CAE and SHB as mispriced M&A candidates. We strongly avoid DIB (large hidden losses on associates, real estate investments), Khaliji (poor quality of earnings), BOB (lowest CET1), EGB and Boubyan (both very highly valued on take-over speculation), HSBC Oman (high valuation, despite merger synergies), Shuaa (a break-up not likely in the short-term), KFH (poor quality of earnings, weak capital base), Gulf bank (elevated valuation, below average fundamentals), DFM (valuation prices in a substantial improvement in volumes), Mashreq (premium valuation unwarranted) and Medgulf (higher claims in health care, very expensive). Core Buy Portfolio Company Ticker UNB UH Price Target AED 4.6 Upside (%) 57.1 Company Ticker FGB UH Price Target AED 13.4 Upside (%) 53.4 Company Ticker BKMB OM Price Target OMR 0.9 Upside (%) 51.2 Company Ticker SALAMA UH Price Target AED 0.93 Upside (%) 51.2 Company Ticker CBD UH Price Target AED 4.2 Upside (%) 49.1 Company Ticker BURG KK Price Target KWD 0.6 Upside (%) 45.3 Company Ticker AAAL AB Price Target SAR 38.3 Upside (%) 41.9 Company Ticker QNBK QD Price Target QAR Upside (%) 41.6 Company Ticker COMI EY Price Target EGP 35.6 Upside (%) 39.3 Company Ticker RJHI AB Price Target SAR Upside (%) 35.8 Company Ticker CIEB EY Price Target EGP 12.0 Upside (%) 32.2 Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See

3 Table of Contents Investment recommendation... 3 Core Portfolios We introduce our Core portfolio We introduce our Avoid portfolio Picks by country Valuation: P/tNAV12e of 1.5x and P/E13e of 9.8x % MENA banks undercapitalized Potential Disruptions in Strait of Hormuz - GCC is a sweet spot Hidden deficits and values in balance sheets Solid credit growth outlook Strongest project-related loan growth in Qatar Fees and commissions Investment income: We do not include bond gains Stress testing: MENA banks more resilient to any liquidity shortage scenarios M & A: Banks to become more confident: What to play? RORWA: The true strengths of a franchise Insurance Credit Quality Screen Arqaam Valuation Approach: Recent results & Previews Q Credit analysis Key upside and downside risks Appendices Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 2

4 ALINMA QNBK TAMWEEL BOUBYAN QIIK QIBK RAKBANK NBK ALBI SIBC KCBK CBD RJHI MARK EGBE SAMBA RIBL MASQ SABB GBK COMI ARNB NSGB FGB BJAZ UNB OIBB BURG BSFR DHBK AAAL NBAD BYB BLOM CBQK KFIN BKMB ADCB ENBD CIEB AUB DIB HDBK AUDI BKSB ADIB BOB May Investment recommendation What you seen is not what you get. Regional investors are too focused on reported capital adequacy ratios which include low quality capital such as subordinated debt, rather than tangible equity ratios. Furthermore, capital ratios are not reported in a consistent way among banks. We harmonize reported Tier-1 ratios and look at tangible equity under Basel 3 by stripping out preference shares and subordinated debt, fully deducting associate interests, and including retained earnings, while deducting cash dividends. We are setting a minimum of 12% CET1 under Basel 3. ADCB, ADIB, ENBD, DIB, Bank Audi, Bank of Beirut and Ahli United fail to meet this 12% minimum under Basel 3, and may have to reduce their pay-out, cut their growth or raise common equity to address this shortfall. Exhibit 1: Core Equity Tier 1 FY 12e 30% 25% 20% 15% 10% 5% 0% Capital conundrum: Beware the bank selling dividend yield A lot of banks are paying dividends that are too high when compared to their growth in capital requirements, with the purpose of appeasing retail investors. For most banks such as QIB, MARK, Khaliji, QIIB, HSBC Oman, Egyptian Gulf Bank, we welcome these high dividends to address their very high capital base. However, for 5 banks, i.e. CBQ, Doha, KFH, Sohar and Credit Agricole Egypt, this is eroding their already reasonably tight capital base. As a result of their high dividend pay-outs, these banks will soon need to find fresh capital, or alternatively cut back their loan growth substantially. As a consequence, a number of banks will have to come to the market with capital increases, or will have to cut back their loan growth, both of which could dilute their EPS growth or fundamental upside. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 3

5 ALINMA QNBK TAMWEEL RAKBANK QIBK BOUBYAN QIIK NBK RJHI ALBI CBD SIBC SAMBA MARK KCBK MASQ RIBL GBK EGBE COMI UNB SABB NSGB BURG ARNB FGB OIBB BSFR BJAZ AAAL NBAD BLOM BYB DHBK ADCB KFIN AUDI ENBD BKMB AUB CBQK CIEB DIB BKSB HDBK ADIB BOB May Exhibit 2: 30% FY 11-15e CAGR Capital vs. RWA Growth Capital Generation 25% OIB 20% 15% 10% 5% GULF BANK NBK CBD ENBD RJHI MUSCAT ALBI RAKBANK SABB QNB NSGB Audi BOB BLOM BJAZ NBAD SAMBA SHB SOHAR BSFR AUB ANB ADIB UNB FGBDOHA BYBLOS BOUBYAN CAE KFH Burgan RIYAD ADCB SIB MASQ QIB EGB DIB Khaliji CBQ QIIB TAMWEEL Capital Absorption 0% 0% 5% 10% 15% 20% 25% We have factored in a capital increase of 10% for Doha bank and for Al-Jazeera, which we view as a relative certainty, while Bank Muscat unveiled capital increase plans for FY 12e. An alternative for CAE could be a new strategic investor and we see the bank as an attractive M&A target, even though Gulf banks (i.e. QNB, Burgan) have turned to Turkey as a new growth market. The best capitalized banks are the Qatari, Kuwaiti and Saudi banks, the least, Omani, Lebanese and UAE banks. CIB HDB MARK Exhibit 3: Core Equity Tier 1 FY 15e 25% 20% 15% 10% 5% 0% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 4

6 EGBE QNBK AAAL ALBI BJAZ BOUBYAN DHBK SABB AUB BKMB KFIN HDBK MARK RIBL NBAD CEIB COMI ARNB KCBK QIIK BYB AUDI NSGB NBK BLOM CBD BKSB GBK SIBC BOB RJHI BURG ADCB CBQK OIBB UNB SAMBA ALINMA QIBK MASQ ADIB ENBD BSFR FGB TAMWEEL RAKBANK DIB May Checking what s behind the numbers Next to that, some banks have adopted some form of less conservative accounting relating to the valuation of real estate assets, associates or acquisition accounting, while others have substantial hidden reserves. We fully take those hidden losses into account. Most prominent are our negative adjustments for FGB (AED3.8bn on real estate, though the bank remains well capitalized even after taking those impairments), DIB (AED 1.3bn on associates, AED 1.2bn on real estate, AED 0.9bn negative FV adjustments) and ENBD (AED 1.3bn on real estate), UNB (AED 0.7bn on real estate), ADIB (AED 561mn on real estate investments, AED 151m on FV adjustments), ADCB (AED 198m, AED 432m FV adjustments), Tamweel (AED 194mn) and CBD (AED 87mn). On the other hand, we believe KSA banks, mainly Riyad, Bank Al-Jazira and SIB, are still sitting on substantial unrealized gains related to their real estate investments that could be unlocked if the properties are sold, as was illustrated by the capital gains reported by Albilad in Q1 12A. Qatari and Egyptian banks also have substantial risk reserves, which are being deducted from their capital ratios. Exhibit 4: Impact of Accounting Adjustments on CET1 8% 6% 4% 2% 0% -2% -4% -6% We also adjust for potential underprovisioning as some banks have not yet fully bitten the bullet, such as ENBD (AED 2.0bn) and again DIB, (AED 1.5bn) and Tamweel (AED 0.6bn) being the most affected. Conversely, we believe that KSA banks are significantly overprovisioned as illustrated below. All of these adjustments are reflected in our valuations. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 5

7 SIBC ALBI ARNB EGBE BJAZ BOUBYAN KFIN SABB BKMB SHB CIEB RJHI AUB SAMBA HDBK COMI NBK RIBL DHBK QNBK NBAD BSFR BURG BYB ALINMA CBQK NSGB KCBK MARK BLOM GBK BKSB AUDI QIIK BOB FGB QIBK ADIB ENBD ADCB OIBB CBD MASQ DIB UNB RAKBANK TAMWEEL May Exhibit 5: Over/Under provisioning as % RWA 6% 4% 2% 0% -2% -4% -6% % RWA (reported) % RWA (Basel 3) Questioning zero risk-weighted assets for sovereign bonds We also ran a stress test of a potential risk-weighting for risk weighting of Treasury bills. The debt crisis also is leading some regulators, particularly European, to question rules that allow lenders to apply zero risk-weightings to government bonds issued in a bank s home currency when calculating capital ratios. Under current guidelines, banks do not need to hold any capital against the securities, even after the cost of insuring government bonds against default are high and clearly the risk of holding the securities is no longer zero. Many corporate issuers can borrow at narrower spreads than governments. We therefore would not be surprised by further adjustments to the Basel III rules. In the calculations below we calculate the potential impact of applying 10% risk weighting Kuwait, UAE, KSA, Qatar and Abu Dhabi (rated AA to AAA), for 20% risk-weighting for Oman (rated AA), 50% for Bahrain (rated BBB) and 100% risk-weighting for Lebanese, Egypt (both not investment grade) and Dubai banks (not rated). This more or less is in line with S&P s capital model. The impact would be the largest for the ENBD (AED 2.33% negative effect on CET1), Egypt (NSGB 2.29%, CIB 2.04%, CAE 1.93%) and Lebanese banks (Byblos 2.35%, Blom 2.37%, Audi 1.85% and BOB 0.62% (partly offset by the fact that USD government bonds are already risk weighted at 100%). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 6

8 BOB AUDI BLOM BYB ENBD QNBK CIEB NSGB OIBB COMI KCBK DHBK ARNB AAAL SAMBA RJHI SABB HDBK CBQK GBK QIIK BURG NBK NBAD MASQ BSFR EGBE BJAZ ALINMA RIBL BKMB ADCB SIBC FGB BKSB QIBK MARK KFIN BOUBYAN ADIB UNB DIB CBD RAKBANK TAMWEEL ALBI AUB QIBK MARK KFIN BOUBYAN EGBE ADIB UNB DIB CBD RAKBANK TAMWEEL ALBI AUB FGB ADCB SIBC BKMB BJAZ NBAD BKSB BSFR RIBL CBQK BURG DHBK GBK AAAL SABB NBK ARNB RJHI SAMBA BOB OIBB KCBK QIIK ALINMA MASQ HDBK CIEB AUDI QNBK COMI NSGB ENBD BYB BLOM May Exhibit 6: Weighting Treasury Bills 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% We also run a stress test of a potential 35% haircut on the holdings of sovereign bonds and loans, in a theoretical default. This is particularly a huge impact on the Lebanese, Egyptian banks and ENBD. Exhibit 7: 250% Sovereign Haircut on CET1 200% 150% 100% 50% 0% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 7

9 RAKBANK COMI CBD NSGB UNB ALBI SAMBA QIIK RIBL ARNB QNBK SIBC FGB BLOM RJHI TAMWEEL MARK SABB NBK MASQ AAAL BYB QIBK KCBK CIEB DHBK EGBE BSFR BURG NBAD BKMB ADCB AUDI CBQK OIB ENBD GBK BJAZ ALINMA KFH DIB AUB HDBK BKSB BOUBYAN ADIB BOB May Exhibit 8: Cap on Dividend Distribution given 7% minimum CET1 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% New potential yield Current yield We see the GCC as a potential beneficiary if tensions in the Gulf resurface, with KSA and to a lesser extent, Oman, as the key beneficiaries. Kuwait and Qatar are more vulnerable, while the UAE is in a middle position. This may hamper the already sluggish global growth since we view the GCC as a sweet spot. Iran has threatened retaliation in the form of a blockade of the Strait of Hormuz, a channel for 20% of the global flow of oil and gas out of the Gulf, in response to tougher sanctions, including a boycott of Iranian oil exports by the EU from 1 July 2011 over Iran s nuclear program. This has been aggravated by a visit to one of the three UAE islands occupied by Iran since These threats have been verbal and are most likely to remain in check. The US has expressed it is hopeful that it could resolve the issues in a peaceful manner. However, we view that a plausible scenario would be the slowdown of shipping through the Strait of Hormuz, while we expect such tension to keep oil prices at their currently high level as markets would increasingly view the vision of military confrontation as a realistic possibility. Due to the very low price elasticity, the high oil prices are boosting the GDP and fiscal balances of the GCC, despite potential disruptions in exports. However, the weak growth prospects in the advanced economies and the ramification of the euro zone crisis could lead to a pronounced decline in oil prices if regional geopolitical risks subside, although we think OPEC is committed to an oil price of USD 100. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 8

10 OIBB ALINMA MARK BOUBYAN SABB ALBI KCBK BURG QIIK BJAZ RJHI AAAL BKMB BOB DHBK CBQK COMI BLOM BKSB SIBC QNBK BSFR NBAD SAMBA BYB ARNB EGBE HDBK NSGB FGB QIBK RIBL CIEB KFIN AUB UNB RAKBANK MASQ ADCB GBK CBD NBK AUDI TAMWEEL ADIB DIB ENBD May Exhibit 9: Loan growth by country for banks under our coverage 30% 25% 20% 15% 10% 5% 0% Qatar Oman KSA Egypt Lebanon UAE Kuwait Bahrain FY 11A FY 12e Source: Central Bank, Arqaam Capital Research Qatar, Egypt, Oman and KSA are best positioned for future loan growth, while we see the lowest growth in UAE, Lebanon and Kuwait. Growth is still mainly coming from the public sector: We play QNB, but we also like more balanced growth such as Bank Muscat, CIB & Al Rajhi. Exhibit 10: Loan growth by bank (incl. acquisitions) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% FY 12e FY 13e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 9

11 Slowdown in Qatar: We expect loan growth in Qatar to slowdown due to the 2 month delay in the budget which is now for 3 years and could involve a budget increase of 20-25% y/y, while loan margins could put pressure on the sector s profitability due to the banks willingness to lend (e.g. QIB wants to recapture its lost market share in FY 11A). Nevertheless, over the next few years, loan growth should remain in the mid double digits due to strong support from projects, while we expect public sector loan demand to continue to outpace corporate loan demand that mainly relates to real estate. In Qatar we prefer to play growth through QNB, even though loan growth should only be % after growing by 47% in FY 11A. Well balanced growth in Oman: We also view Oman very positively, with a strong support from the public sector projects (10% pa), where we calculate the second highest contribution after Qatar, while the overall loan demand is much more balanced than in Qatar due to a lower focus on real estate lending. We view Bank Muscat as the best positioned, while HSBC Oman should be more internally focused as opposed to focusing on external growth (illustrated by the closing of the India and Pakistan operations), though its capital position (the strongest among the Omani banks under our coverage) allows for strong medium term growth, particularly if the bank increases its product suite. We also view Sohar s capital base as very tight. Growth for niche banks in Egypt: While the duration of Egypt s transitional period continues to be uncertain, corporate loan demand is picking up, whereas higher average T-bill rates are a welcome boost for the banks net interest margins, while the cost of risk increased substantially last year, but remains in check for the private banks (except for NSGB where we anticipate higher loan loss charges). We expect 10-13% loan growth for most banks in FY 12e, with structural growth north of 15% if Egypt returns back to normalcy. We view CIB as the best positioned, as the French subsidiaries face caps on their growth of 10%, implemented by their parent companies, which both have tight capital positions due to Basel 3 and losses on Greek exposures. KSA banks growing loans by over 10%: We are enthused by Saudi s renewed double digit growth, fully driven by the trickle-down effect on the private sector, and we expect this to remain at these levels for the next few years. However, we expect continued pressure on net interest margins and the full extent of loan growth may not translate into revenue growth. We are not overly optimistic about the pending new mortgage laws in the short-term, though this could potentially create significant opportunities for the virtually non-existent mortgage loans, while solving the housing shortage in KSA. Al Rajhi should outperform its peers with respect to loan growth, as we expect retail growth, 60% of its loan book, to outpace corporate loan demand. Single digit growth in Lebanon, UAE and Kuwait For Lebanon, we expect high single digit growth, driven by continued deposit inflows from Lebanese expatriates and expansion abroad. Audi is the most aggressive, and plans to have USD 5bn in loans with branches in Turkey, while BLOM stands out because of its conservativeness. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 10

12 We are cautious on loan growth in the UAE, due to what can already be regarded as very high loan penetration, and the expected reduction in leverage of some GREs, while some projects in Abu Dhabi have also been halted. Furthermore, we are now cautious on the loan growth of NBAD and ENBD because of a new circular capping single party exposures including to local governments and GREs. Exhibit 11: UAE banks exposure to public sector as % of BIS 200% 180% 160% 140% 35% 120% 100% 128% 80% 60% 132% 41% 40% 20% 0% 49% 49% 31% 15% 24% 1% 16% 3% NBAD ENBD UNB FGB CBD ADIB Gov. As % of BIS PSE as % of BIS We are even more cautious on Kuwait, as only a few private public finance partnerships are coming to the market, while corporate leverage continues to be very high. The strong fiscal surpluses are not being translated into a wave of government projects as the opposition controls its parliament. We welcome Burgan s move to buy Tekfen, we forecasts that the acquisition could increase its loan growth by 3% pa, while we have a very negative view on NBK s plan to increase its stake in Boubyan due to its excessive valuation, making it hard to view that this deal would be in the best interests of NBK s shareholders. Deposit growth to exceed GDP due to high savings rates We forecast deposits based on national savings (33%-63% of GDP in GCC, 13-14% in Lebanon and Egypt) and conversation rates (c %). Based on this model we forecast deposit growth of high single digit to mid double digits. Bank deposits should to outpace GDP growth in the next few years. Net interest margin to fall in most markets We expect margins to fall in most markets, particularly in Qatar, KSA and the UAE as lowering deposit rates has come to an end, while rivalry for new loans remains intense, despite European banks withdrawing from the market. On top of that, we see caps by Central banks in Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 11

13 HDBK EGBE NSGB CIEB TAMWEEL COMI BYB BOB BLOM AUDI MASQ BKSB UNB RAKBANK ADCB KFIN CBQK DIB ENBD AUB BURG QIIK FGB GBK MARK BKMB CBD ADIB QNBK DHBK KCBK QIBK BOUBYAN NBAD NBK SIBC OIBB BJAZ AAAL RIBL ALINMA BSFR SABB SAMBA ARNB RJHI ALBI RAKBANK HDBK CIEB NSGB EGBE COMI TAMWEEL BLOM BYB ADIB KFIN FGB BOB DIB AUDI CBD UNB ADCB CBQK DHBK RJHI BKMB BKSB MASQ QIIK ENBD QNBK QIBK BURG ALINMA NBK AUB BOUBYAN GBK NBAD KCBK OIBB SIBC ALBI ARNB MARK AAAL BSFR RIBL BJAZ SABB SAMBA May the UAE and Oman. In Egypt, we expect strongly improved margins, helped by higher yields on treasury bills, a return to local currency lending, and a pick-up in SME lending. We also expect pressure on net interest margins as banks prepare for Basel 3 liquidity ratios, with pressure on asset yields due to higher required liquidity and higher cost of funding (longer maturity deposits, raising wholesale debt). This is particularly relevant for ENBD and NBAD, though both have increased their outstanding deposits in Q1 12A substantially. Exhibit 12: Asset Yields 12% 10% 8% 6% 4% 2% 0% FY 11A FY 14e Exhibit 13: Liabilities Costs 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY 11A FY 14e Funding markets in good shape despite global slowdown; almost all banks net cash positive Funding markets across the MENA region are in a much better shape, with interbank rates generally still not pointing upwards due to Islamic financing options, a better overall economic Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 12

14 BJAZ HDBK AUDI BLOM SAMBA AAAL SABB QIIK BOUBYAN SIBC BSFR ARNB CIEB ALBI RIBL RJHI DIB BURG MASQ NSGB COMI ALINMA OIBB MARK BYB BKSB ADIB CBD BKMB TAMWEEL NBK UNB RAKBANK EGBE ENBD KFIN ADCB DHBK GBK QNBK FGB NBAD QIBK CBQK AUB KCBK BOB May outlook and the cash injection provided by the ECB. Most banks are cash positive (cash and interbank), with the exception of NBK and Al Khaliji. Banks have been addressing their liquidity gap and redemptions by issuing new wholesale debt and even subordinated debt (SABB). Nevertheless we expect deposit rates to move up moderately or to stabilize. UAE banks have addressed some gaps in short-term liquidity, but more work needs to be done in light of the Basel Committee s stricter liquidity guidelines (we focus on its new liquidity coverage ratio and net stable funding ratio). Basel may further tweak the key variables of the so-called liquidity coverage ratio (LCR) that is due to take effect in FY 15e, meaning that the liquidity gap may therefore be smaller than what we calculate. A few banks are below an LCR of 100%, i.e. Tamweel (29%), NBAD (69%), NBK (79%), ENBD (81%), RAKBank (82%), SIB (90%). Addressing the liquidity gap could reduce net profits by up to 9% and net interest margins by up to 17bps. Medium-term liquidity (Basel III) very sound overall Most banks score well on medium-term liquidity, with Lebanese and Egyptian banks commanding the strongest liquidity positions. This is due to the high liquidity of T-bills and bonds, the banks higher share of short-term corporate loans, and the long-term nature of outstanding term deposits. The new rules will go into effect in FY 18e but are already being used by SAMA, the most rigorous regulator across MENA in our view, for monitoring purposes. Al Khaliji (67%), Ahli United (67%), CBQ (71%), QIB (74%), NBAD (81%), FGB (87%), QNB (89%), Gulf bank (90%) ADCB (92%) and ENBD (94%) are well below the 100% minimum requirement, on our calculations. Exhibit 14: Net stable funding ratio 250% 200% 150% 100% 50% 0% Maturities of deposits We expect banks to extend the maturities of deposits to at least 1 month (helping LCR) or 12 months (supporting NSFR) by incentivizing to switch to term deposits. Boubyan, NBK, Burgan, Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 13

15 OIBB BJAZ BOUBYAN ALINMA ARNB SAMBA SIBC BSFR QNBK QIBK RJHI ALBI RIBL QIIK TAMWEEL EGBE CIEB AAAL SABB KCBK COMI BKSB BKMB BOB HDBK NSGB NBAD CBQK NBK DHBK BLOM BYB BURG DIB AUB GBK KFIN CBD ADIB AUDI ENBD MASQ UNB RAKBANK FGB ADCB MARK May Albilad, Bank Muscat and KSA banks greatly rely on current accounts, while UNB, FGB & Al Khaliji have a very high share of time deposits and may be able to reduce the cost of funding. Fees & commissions: factoring in regulatory changes We expect growing fees and commissions for all our countries, but with the lowest growth in the UAE, due to strict regulation capping retail charges. We expect an accelerating growth in brokerage and asset management fees due to the improving markets, though we expect a significant slowdown vs. the buoyant Q1 12A, though markets have fallen due to the increased issues in the Euro zone. We also expect continued strong growth in fees related to new net lending. We expect acceleration in Saudi Arabia due to higher new loan growth (partly due to margin lending) and increased trade finance, brokerage, and asset management. The increase in fees in Lebanon is slightly subdued due to lower net new loan growth. In Qatar, the double digit increase in fees and commissions is driven by new lending and, to a much lesser extent, higher brokerage fees given the resumption of brokerage activities. But growth in brokerage (we expect 50% for FY 12e) and asset management (25%) should mainly help DFM and most Saudi banks (particularly Bank Aljazira), NBAD and Bank Audi, but not EFG-Hermes as the company is expected to fully exit its investment banking activities (brokerage, research, investment banking, asset management), while the brokerage activities of the Qatari banks are unlikely to be a significant generator of revenues yet. Exhibit 15: F&C Growth FY 12e, FY 13e, and FY 14e 50% 40% 30% 20% 10% 0% -10% -20% FY 12e FY 13e FY 14e Investment income structurally under pressure Banks that relied on capital gains should be impacted by a normalization of these gains. We anticipate a (significant) negative effect on the earnings of KFH, Al Khaliji, HDB, Bank of Beirut, CAE, Byblos and AUB. On the other hand, we would expect EGB, DIB, Boubyan, ENBD, OIB, BJAZ, SHB and QIIB to benefit from normalization in investment returns. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 14

16 KFIN CIEB MARK RAKBANK BURG QIBK QIIK AUDI ADIB BOB HDBK KCBK BYB AUB SABB DHBK COMI BLOM BKMB CBQK NSGB ADCB ARNB QNBK MASQ BSFR SAMBA RIBL ALBI AAAL NBK CBD NBAD FGB BKSB DIB SIBC ENBD BJAZ ALINMA TAMWEEL RJHI UNB OIBB GBK BOUBYAN EGBE EGBE DIB BOUBYAN ENBD OIBB BJAZ AAAL QIIK BURG QIBK UNB MARK BKMB ARNB GBK CBD RIBL SABB BLOM SIBC BSFR SAMBA FGB ALINMA ALBI QNBK TAMWEEL RJHI NBAD COMI BKSB NSGB NBK MASQ ADIB ADCB AUDI RAKBANK CBQK DHBK AUB CIEB BYB HDBK BOB KCBK KFIN May Capital gains on fixed income securities through realizing available for sale capital gains or fair value changes have been helpful in a falling interest rate environment, however, they are not a sustainable source of income, and instead reduce the average yield on assets as cash is reinvested at lower rates. We use only normalized investment returns in our forecasts, do not include bond gains, and use 5% gains on (private) equity investments and mutual funds. Furthermore, we expect the balance sheet de-risking trend to be reinforced due to Basel 2.5 and Basel III (tripling risk weighted assets), while expecting part of the gains on securities to move to other comprehensive income under IFRS 9. For most banks that have adopted IFRS 9, the picture has been mixed in terms of impact on their shareholder equity and net earnings. Exhibit 16: Change in Investment Income to Net Profit 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Exhibit 17: Investment Income/Total Investments 8% 6% 4% 2% 0% -2% -4% FY 11A FY 12e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 15

17 Loan losses to slowly come down, but underlying picture is improving We use a very detailed granular approach, and divide loan books into 7 loan categories: We estimate the probability of default (PD) and loss given default (LGD) for each category and forecast the expected losses (EL). We back test our non performing loans and losses given default with the EU stress test. We are becoming more optimistic on the underlying provisioning trend: Global corporate default rates have fallen substantially. Banks have substantially increased provisions to 3.57% in FY 11A of loans vs. 2.32% in FY 08A, with UAE banks at 4.61% vs. merely 1.65% FY 08A. Coverage remains high (77%) despite an increase in reported NPLs and a large number of restructurings Net NPL formation is slowing down. NPLs decreased 0.32% in FY 11A while it increased 0.91% in FY 10A and 1.90% in FY 09A. Stabilization of residential house prices in Dubai. However, we only expect loan loss charges to slowly taper off, putting us below consensus for most stocks under coverage, for the following reasons: Banks are required to build general reserves. UAE banks are required to build 1.5% of credit risk weighted assets as provisions, while SAMA implicitly demands coverage by FY 15e of 150% of NPLs, while other banks add 1% of new loans. Cut off rates have been reduced for NPLs to 90 days from 180 days past due in the UAE. Regulators and accounting boards are strongly in favor of using expected loss models rather than a fair value approach or the backward-looking incurred loss approach. Ongoing restructuring of loans. Some 25% of restructured loans ultimately return as non performing, while we cannot exclude a second round of restructuring on previously restructured loans. CBQ, Khaliji, CIB, RAK Bank, FGB and Mashreq have particularly high share of restructured loans Past due but not impaired loans are relatively elevated, particularly in UAE (UNB, ADCB, ENBD, CBD and RAKBank) & Kuwait (KFH, Khaliji and Gulf Bank). Potential new regulation forcing banks to be more lenient towards consumer credits, particularly towards nationals. High concentration risks (single party). High exposures to Commercial Real Estate, where we see continued price pressure, contrary to residential market, where we have witnessed stabilization. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 16

18 KFIN MASQ FGB DHBK ADIB CBQK RAKBANK QNBK ADCB BURG KCBK BYB QIIK SIBC AUDI DIB NBAD UNB CBD NBK MARK BKMB ARNB RIBL SAMBA SABB QIBK BSFR RJHI BLOM BKSB ENBD AAAL AUB ALBI GBK BOB OIBB TAMWEEL NSGB CIEB ALINMA COMI BOUBYAN BJAZ HDBK EGBE DIB RAKBANK ADCB CBD ENBD TAMWEEL KFIN MASQ GBK ADIB FGB UNB BURG BOUBYAN HDBK QIBK NBAD CIEB BLOM BYB AUDI NSGB RJHI NBK EGBE QIIK AUB BOB COMI CBQK MARK BKMB KCBK BKSB OIBB ALBI DHBK SIBC ARNB SABB RIBL SHB BSFR QNBK SAMBA BJAZ ALINMA May Exhibit 18: Total average LLP (bps) Cost/income convergence We expect cost/income ratios to improve dramatically over the next 4 years for a number of banks, mainly Aljazeera, Alinma, Egyptian Gulf Bank, and Al Khaliji due to increasing scale, while we see sharp cost reduction plans in place for ENBD, Shuaa and HSBC Oman. We anticipate a deterioration of efficiency ratios for FGB, CBD, NBAD, and QNB as we expect modest upward pressure on their cost/income ratios, despite their relatively low cost bases due to continued expansion of branch networks and systems (and a new headquarters for QNB) and continued business expansion to cope with increased activity levels and salary hikes in FY 11A. For KSA banks, we expect a positive base effect, since KSA banks paid a 2 month bonus to all employees in FY 11A, which may not be recurring. Exhibit 19: Cost/Income: FY 12e vs. FY 15e 80% 70% 60% 50% 40% 30% 20% 10% 0% 10% 5% 0% -5% -10% -15% -20% -25% FY 11A FY 15e Change Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 17

19 RAKBANK RJHI QNBK ALBI COMI QIIK NSGB AUDI DHBK SAMBA FGB MARK QIBK BLOM CBD NBK CIEB SABB BSFR NBAD AAAL ARNB OIBB RIBL BURG UNB BKMB CBQK SIBC GBK EGBE KCBK BOB BJAZ BYB AUB ALINMA BOUBYAN ADIB ADCB BKSB MASQ TAMWEEL DIB KFIN HDBK ENBD May Looking at underlying returns and what is driving them We strongly prefer to focus on RORWA (net profit/risk weighted assets) rather than on ROE as the latter could easily be distorted by the banks capital position. A strong capital position a source of value as this allows for dividend payments or loan growth - reduces ROE, while high leverage, which caps future growth and dividend payments, boosts ROE and gives an inflated view on the underlying performance. Our RORWA rankings reveal that RAKBank, Al Rajhi Bank and QNB should consistently be the most profitable franchises within our coverage. When 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 FY 12e. 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 under Basel 2). Exhibit 20: FY 12e: Adjusted RORWA 6% 5% 4% 3% 2% 1% 0% We also compare ROE on a reported basis with an adjusted ROE. We have adjusted the reported ROE to a theoretical situation where a given bank would be perfectly adequately capitalized, i.e. core equity would equal 12% of risk-weighted assets + 100% for its (financial and non-financial) stakes. The reported ROE particularly understates banks that have very solid capital positions coupled with already reasonably high ROE. In the UAE the largest upward corrections are for Rakbank, CBD and FGB, while we see a negative adjustment for ADIB, DIB, and ADCB. In Qatar all banks are understating their profitability (particularly QNB), with CBQ being the only exception. In Egypt, NSGB s ROE is understated, while EGB s underlying RoE is much weaker than reported due to its already low ROE. In Lebanon, only Bank of Beirut is heavily affected due to its very poor capital ratios and weak underlying profitability, which would be worse if it would address its undercapitalization. In Saudi the largest uplift is for Al Rajhi, while most banks would also Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 18

20 RJHI COMI ALBI AUDI RAKBANK NSGB CIEB QNBK BLOM BOB SABB NBAD DHBK MARK SAMBA FGB BKMB AAAL AUB QIIK BSFR ARNB NBK ADIB CBQK BURG CBD BKSB RIBL BYB UNB BJAZ QIBK OIBB KFIN SIBC GBK DIB EGBE ADCB KCBK MASQ BOUBYAN HDBK ENBD ALINMA TAMWEEL May enjoy a higher ROE if they would address their overcapitalization. Oman banks ROE would fall if they shore up capital ratios, while the same applies for Bahrain. Exhibit 21: FY 12e ROaE vs. Adjusted RoE 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% ROaE Adjusted ROE Exhibit 22: Takeover targets Source: Arqaam Capital Research SELLER Attractive sector valuation: even more so by being selective BUYER CAE CASA QNB, QIB, FGB, NBK NSGB SG QNB, QIB, FGB, NBK Egypt Gulf Bank MISR, Al Naeem Deniz Bank Dexia QNB Credit du Maroc Credit Agricole QNB 40% Saudi Hollandi stake RBS Barclays, STAN, FGB, QNB, NBK Beltone Shareholders Amlak Dubai gov ENBD, DIB Anything in Africa & GCC Boubyan Maltese bank The MENA banking sector offers attractive value at an average P/tNAV12e of 1.4x and P/E13e of 9.6x according to our estimates. Our estimates point to an average RORWA of 2.0%-2.1% and RoE of % (pre provision RoE of 19.3%-20.7%). We value leverage adjusted returns, growth and adjusted earnings, with amendments for social contribution levies, goodwill amortization, Zakat, coupons on Tier-1/Tier-2 debt. We value capital surpluses/deficits. Our core capital ratios deviate from those published by the banks as we include hidden reserves, such as general banking reserves, available-for-sale EFG NBK Burgan Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 19

21 reserves, and special reserves, and include the current year s earnings. We adjust for other hidden balance sheet strengths and weaknesses such as real estate assets and level 3 assets. Catalysts include MSCI inclusion for Qatar and the UAE, and elections for Egypt, but NBK faces regulatory risk The UAE and Qatar may be upgraded to emerging market status in June as both countries may lift the ban on short selling as well as certain other restrictions such as constraints on foreign ownership. Currently, MSCI still has both countries under review for classification. Another element that could increase liquidity is a merger of the UAE bourses. We think ADCB, FGB, and NBAD could be MSCI candidates in the UAE, while QNB, QIB, CBQ, and MARK could be candidates in Qatar. We expect Egyptian banks to recover, particularly if a new democratic government takes control after the parliamentary and presidential elections with a moderate program, at least initially, to secure aid packages. However, NBK may suffer from a new regulation that has been passed and which is going into effect by June 2012 that limits funds holdings of a particular stock to 10%, which may affect some local funds. Exhibit 23: MSCI candidates: Qatar and the UAE Bank MSCI candidate Country Average daily volume (USDmn) Free float market cap (USDbn) CBQK Yes QATAR MARK Yes QATAR QIBK Yes QATAR QNBK Yes QATAR DHBK No QATAR ADCB Yes UAE ADIB No UAE FGB Yes UAE NBAD Yes UAE UNB No UAE EMIRATES No UAE DIB No UAE CBD No UAE TAMWEEL No UAE Source: Bloomberg, Arqaam Capital Research We are below street on a small majority of our stocks, but we do not play earnings surprises We are below the street on the majority of stocks as we generally are more conservative and consistent with respect to loan loss charges and do not include bond gains in our forecasts. Nevertheless we see an average of 22% upside in the sector. Despite having above consensus forecasts for Albilad and Aljazira, we believe they are fully valued. With respect to ENBD and CBD we are more conservative than consensus relating to our conservativeness regarding loan loss charges. For OIB we are below, due to the EPS dilution from the merger with HSBC. With respect to bank Muscat, this reflects the anticipated capital increase. Despite expecting positive earnings surprises for Albilad, HDB, DFM and Aljazeera, we believe those share area already fully valued. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 20

22 HRHO ALBI AUDI CIEB COMI BLOM FGB ADCB NSGB AAAL BYB RIBL RJHI NBK MARK SIBC BJAZ NBAD KFIN ARNB BURG QNBK BSFR SAMBA UNB ALINMA BKMB DHBK CBQK ADIB TAMWEEL OIBB DIB BKSB SABB HDBK CBD QIBK ENBD DFM Exhibit 24: EPS: Arqaam Estimates vs. Bloomberg Consensus 150% May % 50% 0% -50% -100% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 21

23 Core Portfolios We introduce our Core portfolio Our TPs offer 22% upside on average, which is already very respectable, in our view; we see even more upside by being selective. Our Core Buy portfolio offers a 45% upside. The Core Buy portfolio comprises UNB, FGB, CBD, CIB, CAE, Bank Muscat, Salama, QNB, Al Rajhi, SHB and Burgan and offers an average of 45% upside. We prefer a 3 way strategy: We play deep value stocks. We see strong value in names such as UNB, CBD & FGB, which are trading at around or below book value and are offering very low P/E multiples. UNB has strongly improved its pre-provisioning earnings by reducing the cost of funding (while its share price has not adjusted to this very positive development, which should absorb a substantial expected increase in loan loss charges), while FGB and CBD are strongly overcapitalized and are generating very solid returns. FGB s share price has recently been weak due to impatience over a pending share buy-back and concerns over the regulatory impact (retail caps, credit card, concentration) which we believe to be very manageable. Next to that, we also see strong value in CIB (which is also a good growth story as CIB expands its domestic market share while other banks shy away from lending to the corporate sector given their tight capital positions or prefer to buy Treasury bills and bonds). We also view BLOM as a deep value play; however, FY 12e should be a transitional year and is therefore not included as a Core Buy. We do not recommend DIB or ENBD due to their capital deficits and continued high loan loss provisions, which should absorb a large share of pre-provisioning profits. Salama is our favorite insurance pick on its very low valuation (P/tNAV12e of 0.5x), while we expect Salama to be able to increase its RoE thanks to increase in underwriting profits (growth in family Takaful), increased investment yields, a fall in expense ratios and growing gross written premiums. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 22

24 Exhibit 25: P/E15e vs. P/TNAV12e TAMWEEL 15.0x Expensive 13.0x NBK 11.0x 9.0x EGBE KCBK QIBK MASQ ALINMA HRHO OIBB BJAZ BSFR QIIK QATI ALBI GBK DHBK MARK RJHI QNBK MEDGULF SIBC SABB KFIN RIBL BOB 7.0x CBQK 0.0x 0.5x 1.0x AAAL 1.5x SAMBA ARNB AUB TAWUNIYA 2.0x BURG 2.5x 3.0x 3.5x SALAMA CBD BKSB BKMB ADCB NSGB ADIB RAKBANK DIB 5.0x NBAD AUDI FGB BYB COMI HDBK CIEB UNB EMIRATES BLOM Cheap 3.0x Exhibit 26: P/tNAV12e vs. RoRWA12e 4.5x Expensive 4.0x BOUBYAN 3.5x 3.0x RJHI 2.5x 2.0x 1.5x 1.0x 0.5x GBK BOB KFIN BJAZ MASQALINMA KCBK AAAL ADIB BKSB ADCB DIB EMIRATES BYB UNB HDBK TAMWEEL MARK BURG NBK ALBI AUB SABB QIBK EGBE DHBK OIBB NSGB COMI QIIK ARNB SAMBA NBAD RIBL BSFR CIEB CBQK BKMB AUDI SIBC FGB CBD BLOM QNBK RAKBANK Cheap 0.0x 0% 1% 2% 3% 4% 5% 6% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 23

25 And we play value growth stocks with high RORWA May We see the best growth in Qatar, Oman, KSA and Egypt with loan growth in excess of 10%. We play strong growth if coupled with above average capital adjusted returns and attractive valuations. QNB and Al Rajhi are offering the best combination of the strongest RORWA and the highest growth. Furthermore, their growth is fully self-funded, as both banks should not need to bolster their capital base to finance their strong growth, while dividends are set in a consistent manner. We also highlight CIB as a solid growth stock as other banks are not lending to the corporate sector as they prefer buying treasury bills or are constrained by their parent companies that are tight in capital. We also recommend Bank Muscat, as the best bank to play growth in Oman, and it should be better positioned after two capital hikes and the conversion of the mandatory convertible where a successful completion should be a strong positive catalyst for the shares. Burgan Bank is our only Buy recommendation in Kuwait. Burgan Bank offers strong organic growth (7% sequential growth in Q1 and 12% y/y), while the acquisition of the Turkish bank Tekfen should boost outstanding loans by 15% and support the group s loan growth by 3% pa. Naturally, the sector offers other strong growth stocks, such as Alinma, Aljazeera, QIB, Masraf Al Rayan, and Boubyan, but we do not recommend them because of their (very) high valuations. We think the national banks are best positioned to capture public sector growth, which should continue to outpace private sector growth. We play QNB and Bank Muscat, but not NBK as growth momentum should remain lackluster in Kuwait and NBAD, as the new circular may impact its growth in the public sector. Exhibit 27: RoRWA12e vs. FY 12-15e Loan CAGR High returns, low growth RAKBANK 6% Sweet Spot 5% RJHI QNBK NBK 4% QIBK COMI MARK CBD 3% QIIK FGB NSGB SAMBA ALBI GBK BOUBYAN BURG NBAD CIEB CBQK BLOM ARNB DHBK SABB 2% SIBCRIBL AUDI UNB EGBE BKMB OIBB AUB EMIRATES AAAL BSFR ALINMA DIB ADIB MASQ ADCB KFIN BOB BJAZ HDBKBYB KCBK 0% 5% 10% 15% 20% 25% 30% 35% BKSB 1% TAMWEEL Low returns, low growth 0% Low returns, high growth Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 24

26 ALINMA OIBB MARK KCBK QIIK BJAZ QNBK SABB ALBI COMI CBQK BKMB CIEB RJHI DHBK NSGB BOUBYAN BOB EGBE BKSB AUDI AAAL BYB SAMBA ARNB QIBK KFIN NBAD BLOM HDBK BURG BSFR RIBL SIBC FGB TAMWEEL AUB ADCB NBK GBK UNB RAKBANK MASQ ADIB CBD DIB ENBD May Exhibit 28: RoRWA15e vs. EPS FY 12-15e CAGR RAKBANK 6% High growth & returns 5% QNBK RJHI NBK 4% QIBK 3% MARK COMI QIIK CBD FGB NSGB BOUBYAN NBAD ALBI SAMBA GBK CBQK BLOM BURG CIEB 2% ARNB DHBK AAAL RIBL SIBC UNB OIBB AUDI BKMB SABBEMIRATES BSFR AUB EGBE ALINMA ADCB ADIB MASQ BOB DIB KFIN -10% 0% KCBK 10% BYB BKSB 20% HDBK 30% BJAZ 40% 50% 60% 1% TAMWEEL 0% Exhibit 29: FY 11-15e Loan CAGR 35% 30% 25% 20% 15% 10% 5% 0% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 25

27 We see CAE and SHB as mispriced M&A candidates May We highlight Credit Agricole Egypt, Boubyan and Egyptian Gulf Bank as potential take-over targets. Boubyan s trading at over 4.1x P/tNAV12e is already extremely expensive, and we think that after NBK acquires the 12.7% it is allowed to buy, the shares should fall substantially, as the implicit valuation support from NBK buying up shares would fall away. Egyptian Gulf Bank is also too expensive for a take-over to succeed and, as a consequence, is unlikely to Outperform. A nil premium offer would result in an ROI of only 7% and would require substantial goodwill to be paid. On the other hand, we see Credit Agricole Egypt as an attractive take-over target given its valuation (we calculate an ROI 17% in year 1 and 20.8% in year 2) and the tight capital base of Credit Agricole SA. The potential sale by CASA is highly dependent on the lobbying efforts with the EU Committee to allow double counting of insurance capital. If double counting would not be allowed, we expect CASA to sell assets. EFG-Hermes should enjoy a capital gain with the tie up with Qinvest. We expect EFG-Hermes to exercise its put option after 12 months and divest its remaining stake of 40% in the investment banking platform for c. USD165m. Tangible NAV is only EGP 8.6 ps. However, valuing CL at P/E13e 7x, EGP 4.7 ps may be recoverable of the goodwill. On top of that, EFG has a Private Equity business that we could value at EGP1.4 ps (7x EGP 144m in fees in FY 11 minus 5% of assets under management as a capital requirement). Together with the capital gain of EGP 2.1, the potential Fair Value could be c.egp16.6, 42% above the current share price. But it highly depends on the potential exit price of CL and Private Equity. The sale of the remaining 40% in the investment bank and the distribution of a further cash dividend after the EGP 4 may take a while. We therefore think the stock could continue trading below its fair value. We also expect the French banks to be willing to sell other assets such as Credit du Maroc (77% owned by Credit Agricole SA, Not rated) or Union Internationale de Banq in Tunisia (57% owned by SocGen, Not Rated) and we also expect NBG to divest Finansbank, its Turkish subsidiary, with QNB being the most likely buyer of it fails to acquire Denizbank, or potentially NBK. We don t play cost cutting or improved efficiency We do not play the merger between HSBC Oman and OIBB, as cost savings are more than fully priced, and we do not play the potential merger between ADX and DFM, as 35% cost synergies would only increase DFM s market valuation by c. 5%. We also expect cost/income ratios to improve dramatically over the next 4 years for Aljazeera, Alinma, Egyptian Gulf Bank, Shuaa and Al Khaliji, but all these stocks are already fully valued or overvalued. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 26

28 We do not play the normalization in cost of risk yet: For us it is too early to play a full recovery in the cost of risk (ENBD, DIB) as we expect additions to loan loss reserves to remain high for the next two years. Nevertheless we are witnessing an underlying improvement as banks not only set aside provisions for specific risks, but also add to general reserves. Instead we expect consensus to continue to move downward for a majority of stocks, particularly in the UAE. Nevertheless we factor in a drop of 40% in FY 15e as compared to our asset quality screen outcome that calculates the average expected loan loss for FY 11-14e. We would see further upside in the UAE if loan loss charges would normalize beyond the 40% drop. Exhibit 30: P/PPP vs. LLP as % of Operating Profits 35x 30x 25x ALINMA 20x 15x 10x 5x NBK KCBK MARK BJAZ SABB EGBE RJHI QIBK ALBI QIIK QNBK BSFR CBQK SAMBA SIBC OIBBDHBK ARNB AUB AAAL TAMWEEL NBAD RAKBANK NSGB BKSB BURG HDBK CBD COMI BOB FGB BKMB CIEB AUDI UNB BLOM BYB KFIN ADIB RIBL MASQ ADCB DIB GBK EMIRATES 0x 0% 10% 20% 30% 40% 50% 60% 70% 80% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 27

29 Exhibit 31: Core Portfolio Bank Curr TP Upside FY 13e P/E FY 12e P/tNAV YTD Investment case CBD AED % 6.8x 0.8x (3.4%) Share buy-back of potentially 35% of market cap FGB AED % 5.9x 1.0x 14.1% Good entry point after pull back due to impatience on buy back UNB AED % 5.0x 0.6x 3.2% Offers deepest value, higher NIMs absorbing higher loan losses QNB QAR % 9.9x 2.0x (3.9%) Best LT growth, strong RORWA & capital, Denizbank acquisition unlocking value CAE EGP % 5.9x 1.3x 14.2% Take-over target, positive outlook FY12 after transitional FY11 CIB EGP % 6.0x 1.5x 34.4% Growing when others do not, helped by higher NIMs, and very low valuation Al Rajhi SAR % 15.4x 4.2x 6.9% Best geared to benefit from retail growth, strong RORWA to be maintained SHB SAR % 8.7x 1.7x 9.8% Very cheap, potential to cut C/I, new potential core shareholder a positive catalyst Muscat OMR % 7.4x 1.2x (12.0%) Two capital increases should bolster its growth outlook, cheap entry point Burgan KWD % 8.7x 1.9x (7.3%) Best Kuwait growth story. Tekfen could add 12% to EPS and 3% to loan growth CAGR Salama AED % 5.8x 0.5x 11.9% Deep value. RoE to improve due to growing GWP, improve underwriting margins & yields Average 45% % Source: Bloomberg, Arqaam Capital Research UNB: Very solid capital and liquidity positions UNB is trading at very compelling multiples of a P/E13e of 5.0x (despite taking into account conservative loan loss forecasts) and P/tNAV12e of 0.6x as asset quality concerns have been blown out of proportion (we use cumulative NPLs similar to the total of NPLs, all past due, but not impaired and restructured loans in our asset quality screen) and underlying improvements in profitability are being ignored. Given the bank s strongly improved PPP/RWAs, adequate liquidity position (NSFR of 100% and LCR of 144%) and robust net capital generation (CET1 of 13.3% in FY 11A), we believe the stock should offer a 57.1% upside potential. Its growth should be further facilitated by solid margins and cost efficiency as the bank currently enjoys the second lowest position in C/I ratio after FGB. Furthermore, UNB is expected to be a major contributor to the Abu Dhabi Economic Vision 2030, enabling it to benefit from secured low risk businesses. The bank may not offer the best loan growth as compared to NBAD, but we believe that UNB has room to further decrease its deposit rates (UNB could reduce the amount of time deposits towards current accounts and cheaper savings accounts) and enjoy high net profit growth of at least 7% after FY 12e. We also do not expect negative repercussions from the new circular capping single party exposures. FGB: Substantially low cost base driving bottom line profitability: buyback still possible We value FGB at AED 13.4 offering 53.4% upside, and put the name in our core Buy portfolio. FGB is offering high returns, but has been partially penalized by the new regulations capping both retail and credit card lending activity. FGB s returns remain very high thanks to its retail focus and strong cost efficiency, as the bank currently enjoys the lowest C/I ratio in the UAE of 19.4% in Q1 12A. FGB targets 6-8% net profit growth despite the regulatory headwinds and loan growth of 10-12%, but may revise the latter downward to 6-8% after Q2 12. Moreover, even after writing down its real estate investment portfolio by 50%, FGB would remain well capitalized. FGB has put the share buyback on hold until the bank gets clarity on the applicable caps, as a share buyback would effectively reduce the single borrower limit. The stock offers a very attractive entry point after the recent sharp fall, which is probably because of disappointments over the timing of a potential buyback, regulatory changes (retail charges, credit card interest rates, single party circular) and the purchase of a small real estate subsidiary (Emirates Green Properties) issues we believe should not be blown out of proportions. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 28

30 CBD: Best Dubai bank on strong returns and very strong capital base: Share buyback possible CBD is delivering very solid pre-provisioning income, allowing for the absorption of high loan loss charges. We anticipate RORWA to remain over 2%, but the ROAE has been diluted to 11.6% because of CBD s very solid capital base. However, we expect earnings to fall by 8% in FY12e on the back of pressured margins and continuing additions to loan reserves; followed by tempered growth in FY13. We however expect double digit bottom line growth to resume in FY 14e (16.7%). CBD s key attractiveness is a hidden jewel: We expect CBD s Basel III CET1 to be 16.9% in FY 12e and to increase further thanks to limited RWA growth and strong ROAE. We would welcome a share buyback or higher pay-out to address the overcapitalization. It could finance up to 35% buyback or bonus dividends in cash of AED 0.92 if it were to go back to 12% CET1, a key differentiator compared to the tight capital positions of DIB and ENBD. The bank has an adequate liquidity position as we calculated a NSFR of 102% and LCR of 100%. Moreover, the bank enjoys a solid net cash balance of 18% despite an LTD ratio of c. 100%. CBD is trading at attractive multiples of a P/E13e of 6.8x (on our conservative forecasts) and P/tNAV12e of 0.8x, with an expected RoE of 11.6% in FY 12e. The valuation ignores the bank s solid asset quality, robust capital position that allows for buybacks or bonus cash dividends and its solid liquidity position. However, CBD is not open to foreign investors. CIB: Growing when others do not & very cheap CIB s valuation indicates a 39% upside fuelled by the expected substantial hike in margins from already elevated levels, an upturn in corporate loan demand as public banks are focused on T- bills and French banks are tight in capital, coupled with an improvement in cost efficiency. We forecast a 24% FY 12-15e CAGR in net profits supported by the bank s comfortable capital buffer (CET1 forecasted at 14%), controlled provisioning with the highest forecasted coverage among peers at 117%) and a resilient structure. Even a 10-20% devaluation of EGP vs. the USD would not dent CIB s asset quality. The stock trades at attractive multiples with P/tNAV12e of 1.5x, P/E13e of only 6.0x with a ROAE of 22%. CAE: Take-over target & improving fundamentals We find CAE attractive on different levels; the stock currently trades at cheap multiples with a P/E13e of 5.9x, P/tNAV12e of 1.25x and RoE of 18.6% which gives it a 32% potential upside based on our valuation. We expect the bank to shift back from the contraction it witnessed in FY 11A and revert to bottom line growth in the near term with a forecasted 19.5% FY 11-15e net earnings CAGR and lower loan loss charges. In Q1 12A the bank reported a 10% YTD loan growth and a fall in NPLs from 1.9% to 1.6% with a reduction in the cost of risk to just 53bps of loans and a very strong cost containment. We also view the bank as a potential take-over target given parent Credit Agricole s restructuring plan in response to the financial crisis. France s 3 rd largest bank already started trimming its balance sheet by selling its stake in life insurance provider BES Vida SA and CAE could be next as Credit Agricole targets compliance with new capital rules by FY 13e. It also depends on proposals by the EU commission on whether double counting of insurance capital would be allowed and French banks are strongly lobbying the commission (double counting is not allowed under the new Basel III regulation). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 29

31 QNB: Best long-term story in MENA QNB is the most compelling long-term investment in the MENA region, generating exceptional returns and high lending growth. Having an entrenched exposure to the government of Qatar, whose economy is fast growing at an expected GDP growth of 13% for 2012, QNB is an outperformer with extremely robust fundamentals (exceptional capital base (CET1>20%), solid asset quality, and strong liquidity) which should all bode well for future profitability. We expect QNB s returns to remain high at an average 5% RORWA over our forecasted period, thanks to the high quality of assets and low cost base. Our TP of QAR 189 offers 42% upside with potential catalyst M&A deals (Denizbank most likely) and improved loan growth momentum in H2 12, though unlikely to match the growth of FY 11A of 47%. Bank Muscat: National Champion in the Sultanate: cheap because of upcoming share issue Bank Muscat is a high return bank with highest margins among the Omani banks under coverage. The bank has a solid asset quality, with an NPL ratio of only c. 3% in FY 11A, and a robust liquidity position. Bank Muscat s capital base is relatively weak, but it is working on addressing this problem by injecting capital in Q2 or Q3. We think the shares are offering a cheap entry point because of the share issue overhang. As such, the capital increase should be a positive catalyst for the stock. The stock is trading at a P/tNAV12e of 1.2x (with a RoTE of 15%) and a P/E13e of 7.4x, despite taking into account the dilutive effect of two capital increases. Our TP offers a very substantial upside. Burgan Bank: High growth story, attractive acquisition with 10% EPS contribution Burgan Bank should be one of the most profitable banks in Kuwait and offers also substantial growth, mostly driven by the acquisition of Tekfen. The bank s loan loss charges are expected to normalize, though the bank may need to further bolster its low coverage of NPLs, even though Burgan has strong collateral against the NPLs. Burgan bank s recent acquisition is expected to decrease CET1 slightly to 13.1%, which is still adequate. We expect an EPS contribution of 12% if it manages to achieve an ROI of 10% on the acquisition. Burgan Bank stands out among other Kuwaiti players as it offers an attractive valuation coupled with strongest loan growth momentum (in Q1 it delivered 7% YTD growth and 12% Y/Y growth) further enhanced by its Turkish acquisition, which should support its loan growth by 3% pa. The stock is trading at a sharp discount to its Kuwaiti peers (P/E13e of 8.7x & P/tNAV12e of 1.9x with a RoTE of 19.3%). Al Rajhi: High valuation fully warranted, best Saudi bank We expect Al Rajhi, the largest Islamic bank in the world, to continue generating stellar preprovisioning returns of c.5% of RWA; second only to RAKBank. We forecast an FY 11-15e earnings CAGR of 17% despite sector-wide pressure on margins. We expect Al Rajhi to outperform the loan growth of its peers driven by its retail tilt. We calculate a core equity tier 1 capital of 16.5% for FY 12e, higher than Al Rajhi s reported Tier-1, which does not include current years earnings. We expect the CET1 to improve by % pa, driven by the banks very high returns, partly offset by its high pay-out and RWA growth. The stock is trading at a P/E13e of 15.4x and an P/tNAV12e of 3.1x, both among the highest in the sector. However, we think Al Rajhi should deserve a higher premium, driven by its very high RORWA of 3.8%, very solid capital base and its expected growth. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 30

32 SHB: Potential new core shareholder catalyst We estimate pre-provisioning returns as 2.2% of RWA in FY 12e, potentially helped by a reduction in cost/income driven by revenue growth. We forecast an FY 11-15e CAGR of 12%, helped by a reduction in cost/income as SHB has one of the highest in KSA, though we expect SHB s earnings growth to slow down after a huge recovery in FY 10A and FY 11A. We estimate a CET1 of 12.4% in FY 12e, an improvement over the current 12.8%, primarily coming from retained earnings. SHB offers very attractive valuation multiples: SHB is currently trading at 8.7x P/E13e, and 1.2x P/tNAV12e, both the lowest among KSA banks. We also estimate an RoE12e of 14.3% and RORWA of 1.8%. We believe a potential catalyst should be a new strategic investor which should accelerate SHB s growth outlook given that RBS has earmarked its 40% stake in SHB as non-core. Salama: Extremely deep discount on P/tNAV Salama is our Core Buy in insurance. We forecast a 5 year FY11-16e CAGR of c. 21% in earnings fueled mostly by GWP growth, higher investment income and improving underwriting margins. Salama is very well capitalized with equity as much as c. 35% of assets. Market valuation reflects low earnings and RoE (which we expect to substantially improve), valuing Salama at only P/tNAV12e of 0.5x and P/E13e 5.8x. We expect combined ratio to improve as Salama is expanding in new business lines, while the low yield on its investment portfolio offers substantial scope for improvement. On our TP, Salama would still trade at a significant discount to NAV as RoE will remain below average in the short-medium term due to Salama s low leverage, conservative asset allocation and relatively high combined ratio. We introduce our Avoid portfolio A lot of stocks leave (substantial) downside on our TPs We strongly avoid DIB (large hidden losses on associates, real estate investments), Khaliji (poor quality of earnings), BOB (lowest CET1), EGB and Boubyan (both very highly valued on takeover speculation), HSBC Oman (mainly on high valuation, despite merger synergies), Shuaa (a break-up not likely in the short-term), KFH (poor quality of earnings, weak capital base), Gulf bank (elevated valuation, below average fundamentals), BJAZ (overvalued, and we expect the pull back to continue), Mashreq (unwarranted premium valuation), DFM (option value already fully reflected in its valuation) and Medgulf (very expensive, substantial capitalized intangibles and vulnerable for increased rivalry in health insurance in KSA). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 31

33 Exhibit 32: Avoid Portfolio Bank Curr TP Upside FY 13e P/E FY 12e P/tNAV YTD Investment case DIB AED 1.76 (7%) 7.6x 0.8x (1.6%) Substantial hidden losses on associates, real estate, provisions and fair value reserves MASQ AED (37%) 12.3x 0.9x (0.5%) Unjustified premium, below average fundamentals Khaliji QAR 14.1 (17%) 14.5x 1.2x (1.0%) Low quality of earnings EGB USD 1.09 (26%) 16.1x 1.6x (2.6%) Unjustified M&A premium BOB USD 10.5 (45%) 9.5x 1.8x (0.6%) Weakest capital base of sector due to high reliance on preference shares BJAZ SAR % 11.7x 1.2x (21.1%) Sector-worst returns and asset quality OIB OMR 0.22 (7%) 12.3x 1.4x (17.5%) Merger synergies fully factored in its valuation Boubyan KWD 0.28 (54%) 40.0x 4.1x 3.4% Valuation artificially high KFH KWD 0.60 (14%) 14.3x 1.6x (16.3%) Capital gains should come down Gulf Bank KWD 0.34 (18%) 21.4x 2.3x (10.9%) Valuation fully reflects earnings recovery MedGulf SAR 24.6 (16%) 11.4x 3.0x 7.7% Exposed to higher claims in medical, expensive and high capitalized goodwill Shuaa AED 0.63 (16%) -58.8x 0.7x 49.2% Break-up unlikely and upside too low to play this scenario. DFM AED 0.74 (23%) 45.0x 3.6x 15.1% Only option value Average (17%) % Source: Bloomberg, Arqaam Capital Research We are also introducing a list of banks that investors should avoid, as at best our estimates put their returns in line with the market. We play a few issues: 1) Weak capital base or inconsistent pay-out structure: DIB & BOB Many banks have capital ratios that are too low and/or pay-out ratios that are too high, which should result in future capital increases. We list CBQ, ADIB, DIB, ENBD, CBQ, Doha, CAE, HDBK, Audi, Bank of Beirut, Sohar, and Ahli United under this category. Though we are only positive on Bank Audi and CAE (as take-over target), we only have DIB and Bank of Beirut as core sells, as their valuations have not fully captured their weak capital base, whereas this has been more or less already been reflected for the other banks. 2) Asset quality concerns: We continue to apply large adjustments in our valuation, as some banks are pushing the bowl forward, rather than biting the bullet. We list DIB and ENBD amongst others, and have large adjustments factored into our forecasts and valuations. 3) Poor quality of earnings: A large number of banks have realized substantial capital gains that we believe are not recurring. We do not believe capital gains on bonds are recurring, while we use consistent total returns for equity portfolios. This makes us negative on Bank of Beirut, Al Khaliji, Mashreq and Kuwait Finance House. 3) Poor underlying returns vis a vis valuations We list most Kuwaiti banks (excluding Burgan), Alinma, Albilad and Aljazeera under this category. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 32

34 Core Sell Al Khaliji: Low quality of earnings: over 1/3 of net profit FY 11A because of capital gains Despite its decent loan growth, we expect relatively low returns for Al Khaliji (2% earnings CAGR) due to its low net interest margins, high cost structure and normalization of capital gains (which comprised 34% of net profits in FY 11A). Al Khaliji needs to address its liquidity, one of the weakest in the sector, and its negative cash position which could put further weight on its margins. We do not see upside for the bank whose P/E13e of 14.5x and low P/tNAV12e of 1.1x are fully justified by its low returns (RORWA is expected to come down to an average 1.29% for the next 5 years) and its very weak liquidity. Boubyan: Valuation artificially high Boubyan Bank has extremely low returns that are expected to improve significantly driven by growth in Islamic finance and improvement in C/I filters through. The bank has a robust asset quality with a below average cumulative loss. Boubyan has comparatively low NPLs, with NPL ratio coming in at 0.5% in FY 11A with a strong coverage ratio of 2286%. It has the strongest capital base (CET1 of 22.2%) and an adequate liquidity profile. However the main drawback is that the bank s valuation, which is extremely high fueled by NBK s potential takeover. Boubyan is trading at over 4x tnav which is extremely expensive, in our view. We think that after NBK acquires the additional 12.7% it is allowed to buy (which remains to be seen as NBK has previously shied away from doing this while being granted permission), the shares would fall substantially, as the implicit valuation support from NBK buying up shares would fall away. We do not expect the Kuwait Central bank to grant NBK the right to buy 100% of the shares. Gulf Bank: Expensive despite earnings recovery potential Gulf bank is a relatively low return bank in spite of our bullish earnings outlook. We forecast revenue growth of 7%, cost growth of c. 2%, and loan loss provisions remaining stable or declining. We expect margins to remain relatively stable or improve slightly going forward. The bank has a very weak asset quality, its NPL ratio stood at 14.4% in FY 11A, with a relatively low coverage ratio of 38%. Gulf bank has an acceptable capital base, with FY 11A CET1 of 13.6% that is expected to increase to 15% in FY 14e. We believe the bank is fully valued despite the fact that we have factored in double digit earnings growth in our valuation (P/E13e of 21.4 and P/tNAV12e of 2.3x vs. a RoE of 9.5%) Kuwait finance House: High reliance on capital gains We expect lower capital gains for Kuwait Finance House, and as a result we expect revenues to fall in FY 12e. The bank enjoyed substantial capital gains over the last few years, but we expect a structural level to be c. 50% lower than in FY 11A. It still has revaluation reserves on real estate, but its available for sale reserve is negative, making it difficult to realize capital gains. Nevertheless we expect a strong earnings recovery for the bank, but its returns remain low on our forecasts, despite penciling in very low cost growth and a pick-up in lending, The bank has a reasonable asset quality, with an NPL ratio of 10% in FY 11A and coverage of 77%. KIFN s capital base is the weakest among the Kuwaiti banks. Additionally it has a high reliance on Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 33

35 investment income, while its liquidity position that is close to the minimum threshold. The shares are overvalued in our view (P/E13e of 14.3x, P/tNAV12e of 1.6x vs. a RoE12e of 9.7%). HSBC Oman: Remains too expensive despite merger We expect decent profitability resulting from the merger of OIB and HSBC Oman, HSBC Oman s RORWA is expected to stand at 1.8%, helped by a 10-15% cost reduction, with cost/income improving from 58.5% in FY 11A to 42.6% in FY 15e. We expect OIB to be initially focused at the integration, but medium term we expect positive revenues emanating from a broadening product sweet and enhanced retail and corporate relationships though the HSBC network. The bank has the weakest asset quality among the Omani banks under coverage, OIB s NPL ratio stood at 10.9%, relatively high compared to its peers, with a coverage ratio of only 38.8% in FY 11A. The Bank s capital base (CET1>13%) is relatively strong; however it is relatively expensive on earnings despite the strong capital base and expertise of HSBC. We think the merger is initially EPS dilutive for shareholders of OIB, as HSBC s activities are smaller than OIB, while HSBC acquired a majority stake. DIB: Sizeable potential hidden losses Even though DIB may not look expensive with trading at multiples of P/E13e of 7.6x and P/tNAV12e of 0.8x, while offering an ROAE of 9.7%, we initiate with a Sell recommendation. DIB has substantial hidden losses because of the (i) Valuation of associates (ii) aggressive valuation of Tamweel and (iii) real estate investment portfolio that is not fully impaired (iv) too low balance sheet loan loss provisions (v) Fair value losses that are not subtracted from Tier-1. DIB is generating low pre-provisioning income relative to peers (2.8% of RWAs) due to relatively average margins and burdening efficiency levels with a C/I ratio of 41%. We are forecasting at least two transitional years due to continued high loan loss charges as DIB has not bitten the bullet so far due to its limited earnings capacity and tight capital base. The market value of DIB s associates is as much as AED 1.3bn below their BV exerting an unfolded drag on DIB s valuation. Moreover, DIB has valued Tamweel at above Tamweel s BV, which increased DIB s book value by AED 276mn. The situation is further magnified if we use Tamweel s market valuation which would bring the discrepancy to above AED 875mn. We are assuming 50% cumulative impairment (or AED 1.2bn) on real estate investment portfolio. We also take into account a substantial underprovisioning. DIB s Basel III CET1 is expected to stand at 10.2% in FY 12e. However, this does not include the above mentioned fair value losses. EGB: Unlikely M&A candidate given elevated valuation We forecast a RORWA of 1.8x vs. 1.2x in FY 11A, a level much lower than the 3.2% achieved in FY 10A due to lower capital gains and a structurally higher cost of risk. We also expect normalization of investment income to boost bottom line growth, as trading/investment losses were the main driver behind the c. 66% fall in FY 11A. Although EGB incurred a loan loss charge of only 51bps, well below CIB (81bps) and CAE (121bps), we expect the bank to take on further provisions in FY 12e (forecasted at 75bps). In Q1 12 EGB recorded net releases, but also a steep increase in NPLs. Our valuation shows a strong downside of 26%, largely driven by its very high valuation multiples. The stock currently trades at a P/E13e of 16.1x, highest among peers, P/tNAV12e of 1.6x and RoE of c. 9%, substantially lower than the cost of capital fueled by takeover speculation. We, however, view CAE as a much more likely M&A candidate than EGB, as a take-over of CAE would offer a far higher ROI than the purchase of EGB. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 34

36 Bank Al-Jazira: Sector-worst returns and asset quality May Bank Al-Jazira recently transitioned its focus into the Islamic banking sector, having previously been a conventional bank with a strong focus on retail brokerage services. The bank currently has the lowest returns among KSA banks as a result of having the lowest NIMs in the sector, coupled with the highest cost/income ratio. Moreover, the bank maintains the weakest asset quality in the Kingdom with an NPL ratio of 7.7%, and the lowest coverage at 64%. This implies that the bank will incur high provisioning charges in the upcoming periods as it attempts to reach the informal 150% coverage ratio required by SAMA, negatively impacting its earnings. Although we expect the bank to grow its loan book aggressively, we also expect it to raise capital given its very tight position. The bank currently trades at a P/E13e of 11.7x and a P/tNAV12e of 1.4x, which given its low returns and tight capital position, we feel fully reflects any future potential. Bank of Beirut: Tier-1 highly leveraged, masking weak underlying RoE We forecast a 1.3% RORWA, down from 1.7% in FY 11A, due to lower capital gains and a higher average cost of risk, with a more moderate, but still double digit, balance sheet expansion. We expect EPS to remain stagnant over the next two years. We forecast a Tier 1 ratio of 13.6% that could fall by half if preferred shares were to be excluded. We calculate a CET1 of 6.5% (the lowest among our coverage range). The bank will have to address its unusual capital structure with preference shares at a staggering 47% of total shareholder s equity, if it were to meet the 12% requirement by FY 16e. BOB currently trades at a P/E13e of 9.5x with P/tNAV12e of 1.82x and RoE of 16.4%. However the high RoE is inflated by the very low capital ratios of the bank, while also lower capital gains and higher cost of risk should be headwinds for earnings growth going forward, while international expansion (the bank recently acquired Laiki Bank in Australia) is a further drain on its capital ratios. Mashreq: Unjustified premium valuation compared to peers, subpar fundamentals Mashreq is trading at relatively high (in UAE context) multiples of 0.9x P/tNAV12e and 12.3x P/E 13e on the back of low earnings capacity due to poor efficiency and lower capital gains, slightly lower margins, pressured fees (due to retail cap) and relatively high C/I ratio (highest in the UAE) of 46.3% in FY 11e. The bank s RORWA look dismal at 1.1% (second lowest in the UAE). Furthermore, asset quality remains a concern for Mashreq as the bank s NPL and coverage ratio stand at levels of 12.6% and 52.1% in FY 11A, respectively. The bank has strong capital base of CET1 ratio of 15.5% helped by a substantial contraction in loans over the last 3 years; nevertheless we anticipate this level to fall once growth returns. The bank s liquidity position is strong with a LCR of 163% and NSFR of 113%. DFM: Only option value Despite a surge in volumes and prices during Q1 12A, assuming value traded increase by 75% y-o-y, we price DFM at AED 0.74 per share, at a 23% discount to market price. We believe DFM would be fairly valued if traded value reaches USD 140mn per day, close to FY 09A levels. Even with reasonable cost reductions arising from a merger with ADX, TP would only improve by 5%. The company currently trades at a FY 11A P/tNAV of 3.8x (its balance sheet contains a high Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 35

37 amount of capitalized intangibles) and FY 13e P/E of 45x and cash P/E13e of 31x (including amortization intangibles). Shuaa: Break-up, the only scenario with upside, too unlikely to play The stock trades at a P/tNAV12e of 0.8x and a negative P/E13e. We welcome the new strategic direction (growth in SME lending, building a private bank), but the bank is still a long way from covering its cost of capital. Following a transitional year of significant restructuring, we expect Shuaa to cut administrative costs by c. 20%, grow fee income by c. 24% and net interest income by c. 8% in FY 12e. However, despite the significant cost reductions and revenue growth, we do not see Shuaa breaking even in FY 12e or even FY 13e. A break-up could realize a capital distribution close to Shuaa s capital base, but we think the shares are too expensive (only 32% discount to tnav) to play this still unlikely scenario. Medgulf: Highly exposed to competitive health insurance market Medgulf is our least favorite insurance stock as we expect combined ratio to edge up by 3.5% by FY 16e due to increased claims and price pressure in health insurance, which accounts for c.72% of GWP. On the other hand, we expect the insurer to benefit from increasing investment returns, enabling the RoE to remain high. Medgulf is trading at high multiples (P/B12e of 1.8x, P/tNAV is even 3.0x, as 41% of Medgulf s equity relates to intangible assets and P/E13e of 11.4x) compared to its peers under coverage. It may not reach its growth targets (20-38%) and as a result we cannot rule out a potential impairment on the goodwill. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 36

38 Picks by country Positive stance on UAE in general with a few stocks offering >50% upside: We play UNB, FGB and CBD Exhibit 33: UAE valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE ADCB UH ADCB 3.0 (5.2) HOLD ADIB UH ADIB 2.7 (12.5) SELL CBD UH CBD BUY DIB UH DIB 1.8 (7.0) SELL EMIRATES UH ENBD HOLD FGB UH FGB BUY NBAD UH NBAD BUY UNB UH UNB BUY TAMWEEL UH Tamweel BUY MASQ UH Mashreq 57.0 (37.4) SELL RAKBANK UH Rakbank BUY UAE banks Source: Bloomberg, Arqaam Capital Research We are positive on the UAE in general, despite the 6.2% YTD rally, though we witnessed a strong pull back recently, as we still observe, on average, very compelling valuations (P/E13e of 7.5x, 0.9x tnav with RoE 11%, P/PPP13e of 4.0x and an average dividend yield of 6.1%) that are not aligned with the UAE s strengthened fundamentals. We see an average of 26.5% upside. Positive catalyst should be the potential inclusion in the MSCI Emerging market indices and the substantially increased liquidity of the UAE. We do not expect additions to loan loss reserves to come down by much in FY 12e or FY 13e, due to the buildup of general reserves, but we have moved another year past the crisis year of 2008 and balance sheet provisions have increased to 5.39% from 1.65% of loans in FY 08A to 4.61% in FY 11A. We expect this to further increase to 6.92% in FY 15e. It is also encouraging to see that residential property prices may have seen their trough or appear to be bottoming out. Capital positions have improved substantially thanks to retained earnings, limited risk-weighted assets growth and asset disposals to, in most cases, adequate levels (even under Basel III), while liquidity is progressively addressed by issuing wholesale debt, that are further aided by lower credit spreads. We see dome headwind stemming from potentially reduced credit card interest charges, spill-over effects of reduced retail charges that were implemented in Q2 11A and from a slowdown in public projects in Abu Dhabi. We see a 5.6% contribution from public sector projects to the annual loan growth in the UAE. The UAE's central bank has expanded its large exposure limit rules for commercial banks, introducing new caps for loans made to local governments and their entities. We expect this circular to impact the growth of ENBD and NBAD if the circular is not changed, but we do not expect the banks to have to sell high quality loans. We prefer a selective approach: UNB and FGB are our favorite picks in Abu Dhabi on their very low valuations (particularly their P/Es), more than adequate capital positions (even if we take a large impairment on FGB s real estate portfolio), attractive earnings outlook (CAGR FY 12-15e of 11% for FGB, 8% for UNB) and the three offer an upside of over 50% to our TPs. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 37

39 We acknowledge ADCB s progress in improving its operating profit, substantially improved balance sheet strength by selling its stake in RHB and by reducing its CDS exposures, which helps its Basel core equity Tier-1. However, we disagree with the 10% share buy back as it creates a new capital hole. We do not recommend ADIB despite its strong RORWA, due to its tight capital base which could cap future growth or dividend distributions or could lead to a capital increase. Within Dubai, we prefer CBD that is helped by its low valuation, decent profitability and the strongest capital position which allows for a buy back as large as 35% of its market capitalization. We cannot go further than a Hold for ENBD at the moment, as the company continues to be affected by high loan loss charges, which absorb a lot of its operating profits, while we also expect pressure on its margins as ENBD should rebuild its liquidity position. DIB is the least attractive stock in our view, due to its very high commercial real estate exposure, relatively low provisioning so far, and less conservative accounting especially with regards to its valuation of its associates. We also initiate on RAK Bank with a BUY recommendation. RAK Bank offers the highest profitability within the UAE thanks to its consumer lending footprint, but the high profitability should come under pressure due to new regulation capping credit card charges and retail charges and caps on retail leverage, and therefore we have not included the stock in our Core Buy portfolio. We see further upside in Tamweel, despite its staggering YTD performance, but we do not include the stock in our Core Portfolio, as its very large undervaluation has largely corrected. Salama is our preferred insurance stock on its extremely low valuation (P/tNAV12e of only 0.5x). We expect RoE to improve due to a fall in the very high combined ratio (as Salama grows into family business, causing reinsurance to become less prominent), increased yields on its investment portfolio and re-leverage helped by business growth. A potential catalyst could be further acquisitions in new markets. Its solid capital position certainly allows for acquisitions, which could enhance the re-leveraging process. We initiate on Mashreq with a Sell recommendation due to low pre-provisioning earnings, high costs, shrinking loan book and a premium valuation compared to UAE peers. We do not expect a break-up of Shuaa, and the potential upside to its tnav is not high enough to play this unlikely scenario. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 38

40 Delays in budget may dent loan momentum in Qatar: QNB best long-term play Exhibit 34: Qatar valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE CBQK QD CBQ HOLD DHBK QD Doha HOLD QIBK QD QIB HOLD QNBK QD QNB BUY MARK QD MARK HOLD KCBK QD Khaliji 14.1 (16.9) SELL QIIK QD QIIB BUY Qatar banks Source: Bloomberg, Arqaam Capital Research We forecast an average of 28% upside for Qatar, as part of the exceptionally strong fundamentals (double digit loan growth, high RORWA, the region s best Basel 3 capital position, solid liquidity) is already partly factored in the valuations (P/E13e of 10.3x, 1.7x tnav with ROE 14.8%, P/PPP13e of 8.9x and an average dividend yield of 5.3%). Positive catalyst should be the potential inclusion in MSCI Emerging market indices. The government of Qatar is in an exceptionally strong position, with the lowest break-even point in the GCC after Kuwait. Even though we do anticipate some trickle-down effect of public sector spending, we continue to expect that public sector loan growth will outpace the private sector s, at least in the next few years, making us positive on QNB, even though we expect a marked slowdown in QNB s loan growth as compared to the whopping 47% in FY 11A to only 11% for FY 12e. We pencil in a 10.1% contribution from public sector projects to the annual loan growth in the Gulf state. However, as banks are all chasing the same public loans, we expect margin pressure to continue unabated, while also banks are continuing to invest in their expansion, putting upward pressure on their very low cost/income ratios. We do not foresee any major asset quality issues, but we do expect some normalization in the cost of risk for Khaliji, Masraf Al Rayan and QIB, which could cap their earnings growth. Again we are highly selective and we only like to play QNB. We initiate QNB with a BUY with 42% upside. We continue to expect an FY 12-15e earnings CAGR of 13.0% and loan growth of 16.0%, on average, during this period, coupled with the highest RORWA of the sector of % and the sector s best capital position (Basel III Core Tier-1 of 23.6%), which allows for continued strong growth, ample dividends and no need for future capital increases. We expect QNB as one of the best positioned to grow, but due to its denominator effect and some delays in the government budgets, we do anticipate loan growth to slow down significantly in FY 12e. Doha is very tightly capitalized and should raise capital in FY 12e, which would dilute EPS in the short term. CBQ is paying out a very high share of its earnings, and as a result of its high RWA growth in FY 11A, we expect CBQ to raise capital in FY 13e, which will also dilute CBQ s upside and reduce its net distribution to shareholders. It is also showing a low underlying profitability. QIB is very well capitalized, and after changes in management, the bank should be able to recapture lost market share of FY 11A. However, we expect short-term profitability to be impacted by higher loan loss charges relating to its exposure to Arcapita (USD200m) which could impact Q2 12e earnings, though the net interest margin could improve. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 39

41 Al Khaliji offers strong growth, but enjoyed significant one off gains on its bond portfolio in FY 11A. Bottom line growth should be capped due to structurally higher loan loss charges as its loan book matures, while its efficiency should remain less favorable as compared to peers. It is our least preferred stock in Qatar. Masraf Al Rayan is well positioned due to its public sector and Islamic focus, but a recovery in its earnings capacity will depend ultimately on a normalization in its net interest margins, which is still uncertain to happen, while one off gains in FY 11A inflated its profitability. QIIB has a very strong capital base, ample cash and high pay-out ratio, which should bring down slowly the overcapitalization. We believe QIIB is well positioned to grow although we may see continued pressure on net interest margin. It is our second preferred bank in Qatar. Our TP offers 21% upside. Egypt: Pricing in more than another transitional year: Best play CIB Exhibit 35: Egypt valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE CIEB EY CAE BUY COMI EY CIB BUY HDBK EY HDB HOLD NSGB EY NSGB HOLD EGBE EY EGB 1.1 (26.2) SELL Egypt banks Source: Bloomberg, Arqaam Capital Research Egyptian banks offer a very strong value, with an average P/E13E of 6.7x (even cheaper than UAE), P/tNAV12e of 1.4x (with RoE of 17.8%), a yield of 4.8% and a P/PPP13e of 4.5x. Our TPs offer an average of 23% upside. Egyptian banks earnings have been affected by higher loan loss charges, but they are, by all means, well contained with loan loss charges only absorbing c. 20% of operating profit. Nevertheless FY 12e should be another transitional year, though the economic activity has improved. Crucial is the support from Arab states and the IMF to beef up the FX currency reserves that have been depleted to USD 15.1bn. It remains questionable whether the IMF will demand a devaluation of the EGP vs. the USD, which could result in shortterm disruptions for trading businesses and renewed social unrest due to imported price inflation. We argue that Egypt doesn t need a strong devaluation, merely a pick-up in tourism revenues and a return to the FDI and portfolio inflows that would be enough to balance the payments. However, this requires political stability and a return to a stable investment environment. Even with a 10-20% devaluation, we think asset quality would not be severely affected, and banks would realize modest currency gains on their FX positions. We perceive CIB as best positioned to grow its loans, as public sector banks shy away from lending and instead, allocate excess cash to treasury bills, while the French owned banks are in less of a growth mode as their Egyptian treasury bill positions are weighted more heavily due to the lowered credit rating of the Egyptian sovereign. We see less upside in NSGB, as we expect earnings to remain flat y/y as NSGB hasn t strengthened its provisions as much as its closest peers and is slightly more expensive on our forecasts. We see CAE as a very attractive take-over target, and Credit Agricole could be inclined to sell its operations to strengthen its own capital base which is heavily affected by Basel 3. Credit Agricole Egypt will soon be Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 40

42 severely hampered by its very high dividend distribution and is facing a choice between joining a better capitalized bank, raising capital from the parent company, increasing its free float or cutting its growth ambitions. Egyptian Gulf Bank is severely overvalued on its own metrics, and due to its high valuation, we see CAE as a much likelier take-over target. EFG to exit investment banking as Qatar builds financial power EFG-Hermes should enjoy a capital gain with the tie up with Qinvest. We expect EFG-Hermes to exercise its put option after 12 months and divest its remaining stake of 40% in the investment banking platform for c. USD 165m. Tangible NAV is only EGP 8.6 ps. However, valuing CL at P/E13e 7x, EGP 4.7 ps may be recoverable of the goodwill. In addition to that, EFG has a Private Equity business that we could value at EGP 1.4 ps (7x EGP 144m in fees in FY 11A minus 5% of assets under management as a capital requirement). Together with the capital gain of EGP 2.1, the potential Fair Value could be c. EGP 16.6, 42% above the share price. But it highly depends on the potential exit price of CL and Private Equity, and the distribution of further cash dividend after the EGP 4 may take a while, and hence the stock could continue trading below its fair value. Lebanon: Impact of Syria felt by Lebanese banks: Best value BLOM, Audi second best Exhibit 36: Lebanon valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE AUDI LB Audi BUY BLOM LB BLOM BUY BYB LB Byblos 1.5 (3.7) HOLD BOB LB BOB 10.5 (45.4) SELL Lebanon banks Source: Bloomberg, Arqaam Capital Research We estimate an average of 24% upside in Lebanon. Banks are very cheap in Lebanon, but this partly reflects the fragile nature of the banking business in Lebanon (i.e. recycling deposits from expatriates living abroad into government securities) while the fragile situation in Syria may also spill over to Lebanon. We expect continued elevated loan loss charges in general, particularly for the banks foreign market banking operations. BLOM: Best from every angle, but FY 12e should be a transitional year due to loan losses In Lebanon, we prefer BLOM on its best returns (RORWA of 2.1% and RoE of 18.1%), capital position (CET1 c. 12%) and lowest valuation (P/E13e 4.9x), which offers 41% upside, though we do not expect earnings growth for FY 12e as additions to loan loss reserves (mainly for Syria and Sudan) should absorb any improvement in operating profit, making it a somewhat an unexciting story for FY 12e. Bank Audi: Expansion in Turkey may hamper capital rebuilding plans We are positive on Audi, as earnings growth should be feasible since it has taken higher loan loss charges for Syria and Egypt in FY 11A, but Audi is also structurally less profitable than BLOM, with a lower RORWA, higher cost/income ratio and worse, a much poorer capital base. However we expect Bank Audi to fork away its capital deficit through contained risk-weighted Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 41

43 asset growth and retained earnings, though its expansion in Turkey could put upward pressure on the growth in risk-weighted assets and may be too ambitious without a capital increase. Byblos and Bank of Beirut fully valued, Bank of Beirut very tight in capital Byblos low valuation is fair given its subpar returns and small capital deficit. The excessively high valuation of Bank of Beirut (P/E 13e 9.5x and p/tnav12e of 1.8x) is not aligned whatsoever with its stand-alone fundamentals (a very low RORWA of 1.3% and an even poorer capital position with a Core Equity of 6.5% in FY 12e due to a high reliance on preference shares) and hence we initiate with a Sell recommendation. Saudi: Accelerating growth and better trading environment, but NIM under pressure: We like Al Rajhi, Samba, ANB, Riyad and SHB Exhibit 37: KSA valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE ARNB AB ANB BUY RJHI AB Al Rajhi BUY BSFR AB BSFR HOLD RIBL AB Riyad BUY SAMBA AB Samba BUY SABB AB SABB HOLD AAAL AB SHB BUY ALBI AB Albilad HOLD BJAZ AB Aljazeera 22.0 (13.7) SELL SIBC AB SIB HOLD ALINMA AB Alinma HOLD KSA banks Source: Bloomberg, Arqaam Capital Research We are positive on Saudi with an average upside of 27%. A positive catalyst should be the gradual opening up of the financial markets to foreign capital. We witness encouraging signs of an accelerating loan growth to double digits (4.7% YTD and 12.4% y/y in Q1 12A) while Saudi banks also enjoy a stronger trading environment, helping fees and commissions, particularly supporting Aljazira. Moreover, most Saudi banks should enjoy lower additions to loan loss reserves, except for Samba, Saudi Hollandi Bank, BSFR and Aljazeera. We also expect help from the cost comparison base, as the banks paid out special bonuses of two months basic pay last year. We expect moderate headwinds from lower net interest margin due to the persistently low interest rate environment, which could last until FY 14e, given that SAMA s interest rates should closely track the rates of the US. We are positive on Al Rajhi, SHB, ANB, Riyad and Samba We are most positive on Al Rajhi (best RORWA, highest sustainable growth rate thanks to its Islamic footprint, strong capital and liquidity) and SHB (cheap, mid double digit loan growth, new potential core shareholder could be a catalyst). We also recommend ANB, Riyad and Samba, which are all trading at attractive valuation multiples (P/E13e of x & P/tNAV12e of x). On the other hand, Alinma, Aljazira and Albilad are fully valued, despite their above average earnings growth potential. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 42

44 Kuwait: Burgan most appealing, Boubyan s overvaluation due to M&A speculation Exhibit 38: Kuwait valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE NBK KK NBK HOLD KFIN KK KFH 0.6 (13.6) SELL GBK KK Gulf Bank 0.3 (18.5) SELL BURG KK Burgan BUY BOUBYAN KK Boubyan 0.3 (54.0) SELL Kuwait banks (4.2) Source: Bloomberg, Arqaam Capital Research We initiate on Kuwait with the lowest upside among all our covered countries, despite support from high oil prices. The Kuwaiti banking sector is still grappling with the aftermath of the crisis. Debt restructurings (though less prominent than Dubai), excessive exposure to investment companies, high corporate leverage and a structural political gridlock with the opposition in control of the Parliament are stifling growth and continue to cause delays in the implementation of economic policy, causing Kuwait to lag the region. We expect loan growth increase to mid-single digits from virtually stagnation, as some private-public partnerships are being started. We also think that banks will enjoy lower additions to loan loss reserves, despite the buildup of general reserves. NBK: Fully valued, purchase of 12.7% of Boubyan value destructive, further acquisition risks We initiate NBK with a Hold recommendation with merely 8% upside (as its poor growth outlook and poor liquidity position is somewhat mitigated by its strong capital position). However, it could be affected by upcoming regulation limiting a funds holding of a particular stock to 10%, which may put pressure as some local funds may have 20-30% exposure to NBK. We also think that buying 12.7% of Boubyan would reduce the shareholder value of NBK. We initiate on 3 other Kuwaiti banks (KFH, Gulf Bank, Boubyan) with a Sell recommendation, mainly because their very high valuations (P/E13e x, P/tNAV 1.6x-4.1x with a low RoE of 6.2%-9.7%, dividend yield of 0.3%-1.3%) and an unappealing growth outlook for the next few years. Boubyan: Significantly overvalued due to take-over speculation Boubyan is significantly overvalued on its own fundamentals (trading at a P/tNAV12e of over 4x, the highest in the sector, and at about 170% premium to the sector average), but its valuation is held this high because of the anticipation that NBK will buy 12.7% of its shares at the current high market valuation. This is not certain, and even if NBK does purchase Boubyan at the current valuation as NBK is willing to deploy its excess capital since it has a strong capital positions, and its loan growth is very limited, we do not think NBK will get approval to buy the remaining 40%. After acquiring a 60% stake, we believe Boubyan could fall substantially. KFH: Impacted by lower capital gains We expect lower capital gains to normalize for Kuwait Finance House, and as a result, we expect revenues to fall in FY 12e. The bank enjoyed substantial capital gains over the last few years, but we expect the structural level to be c. 50% lower than in FY 11A, though it still has revaluation reserves on real estate, and its available for sale reserve is marginally negative, Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 43

45 making it difficult to realize capital gains. Nevertheless we expect a strong earnings recovery for the bank, but its returns remain low on our forecasts, despite penciling in very low cost growth and a pick-up in lending, The bank has a reasonable asset quality, with an NPL ratio of 10% in FY 11A and coverage of 77%. KFN s capital base is the weakest among the Kuwaiti banks coupled with a weak earnings structure, in addition to its high reliance on investment income and a liquidity position that is close to the minimum threshold. The shares are overvalued in our view (P/E13e of 14.3x, P/tNAV12e of 1.6x vs. a RoE12e of 9.7%). Gulf Bank: Expensive despite earnings recovery potential Gulf bank is a relatively low return bank in spite of our bullish earnings outlook. We forecast revenue growth of 7%, cost growth of c. 2%, and loan loss provisions remaining stable or declining. We expect margins to remain relatively stable or improve slightly going forward. The bank has a very weak asset quality, its NPL ratio stood at 14.4% in FY 11A, with a relatively low coverage ratio of 38%. Gulf bank has an acceptable capital base, with FY 11A CET1 of 13.6% that is expected to increase to 15% in FY 14e. We believe the bank is fully valued despite the fact that we have factored in double digit earnings growth in our valuation (P/E13e of 21x and P/tNAV12e of 2.3x vs. a RoE of 9.5%) Burgan Bank: High growth story, attractive acquisition with 12% EPS contribution Burgan Bank stands out among other Kuwaiti players as it offers an attractive valuation, coupled with the strongest loan growth momentum (in Q1 12A, it delivered 7% YTD growth and 12% y/y growth) further enhanced by its Turkish acquisition, which should support its loan growth by 3% pa. The stock is trading at a sharp discount to its Kuwaiti peers (P/E13e of 8.7x & P/tNAV12e of 1.9x with a ROTE of 19.3%). Burgan Bank should be one of the most profitable banks in Kuwait that also offers substantial growth, mostly driven by the acquisition of Tekfen. The bank s loan loss charges are expected to normalize, though it may need to further bolster its low coverage of NPLs. Burgan bank s recent acquisition is expected to decrease CET slightly to 13.1%, which is still adequate. We expect an EPS contribution of 12% if it manages to achieve an ROI of 10% on the acquisition. Attractive growth opportunities in Oman: We play bank Muscat Exhibit 39: Oman valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE BKMB OM Muscat BUY BKSB OM Sohar HOLD OIBB OM OIB 0.2 (6.7) SELL Oman banks Source: Bloomberg, Arqaam Capital Research We initiate coverage on Oman with a positive stance, with a broadly based loan and deposit growth. We expect 10% support from government project lending. Recent central bank regulation should allow for Islamic banking to be started, though it may also put some pressure on margins as banks are targeting the same market. Our TP for Bank Muscat offers >50% upside and the current valuation is very attractive (P/tNAV12e of 1.2x, P/E13e of 7.4x, P/PPP13e of 5.3x and a dividend yield of 4.3%). The bank is addressing its capital deficit under Basel 3, has a sound liquidity, low NPL levels and should enjoy wider deposit margins and is the best positioned of our coverage to grow in the public sector. We expect the capital increase to Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 44

46 be a positive catalyst for the shares as the share overhang has pushed down the shares YTD and we believe the current weakness offers a good entry point. We initiate Bank Sohar with a Hold recommendation due to its much lower RORWA and weak capital position (Core Equity Tier-1 of only 9.4% year end FY 12e despite a small planned capital increase) and the negative impact of a return to a more normalized structural cost of risk. We initiate OIB with a Sell recommendation. Based on its merger with HSBC Oman, we think the shares are overvalued (P/E13e 12.3x and P/tNAV 1.4x), even though we factor in 10% cost reduction from the merger with HSBC in Oman. The transaction is initially dilutive, in our view, as HSBC has been granted 51% despite having much smaller operations than OIB. The bank is well positioned for medium-term growth thanks to HSBC s network and broadening product offering, despite closing its offices in India and Pakistan. Bahrain: Below average fundamental strength already captured by its valuation of the leading bank Exhibit 40: Bahrain valuation summary move table up Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE AUB BI Ahli United HOLD Bahrain banks Source: Bloomberg, Arqaam Capital Research We initiate coverage on Bahrain with the country s biggest name- Ahli United Bank. We have a neutral view on the stock. The bank has a poor liquidity position, which needs being addressed by a substantial issuance of wholesale debt, while its capital position is also tight due to overreliance on preference shares. The bank is showing a slightly below average RORWA (1.6%, and adjusted for associate interests 1.1%) as well. However, this appears fully factored in its valuation (P/E 13e of 7.9x P/tNAV12e of 1.5x vs. a RoE of 13.0%, dividend yield of 5%). We initiate on the stock with a Hold with close to 11% upside. We have a positive view on the GCC insurance sector names. Exhibit 41: Insurance valuation summary Ticker Company TP Upside (%) Rating FY 13e P/E (x) Implied FY 13e P/E(x) FY 12e P/tNAV (x) FY 12e RoTE SHUAA UH Shuaa 0.63 (16.2) SELL (58.8) (49.2) 0.7 (2.8) HRHO EY EFG BUY DFM UH DFM 0.74 (23.3) SELL SALAMA UH Salama BUY QATI QD Qatar Insurance BUY TAWUNIYA AB Tawuniya BUY MEDGULF AB MedGulf 24.6 (15.6) SELL MENA financials' avg Source: Bloomberg, Arqaam Capital Research We see expect double digit premium growth driven by the very low base. The market could grow 5 fold to catch up to the global average, driven by higher awareness, compulsory insurance, new distribution channels and increasing acceptance of Takaful insurance. Insurance companies enjoy low combined ratios, although they should move up, particularly in health insurance due to increased claims and intense competition. Robust capital positions allow for more aggressive asset allocation and future growth. We expect consolidation to create economies of scale. Valuations are still very attractive, though we prefer a selective approach. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 45

47 We initiate on 4 insurance names: We strongly recommend Salama. Salama offers a strong growth in Takaful insurance and a very low valuation, despite a high reliance on reinsurance and high combined ratios. We expect RoE to move up due to a reduction in the combined ratio (better business mix) and higher investment yields, while the 25% price fall since its intra-year high by the end of February offers a very attractive entry point. We also see over 26% upside in QIC (Buy, TP QAR 94.9), which is a national champion in the fastest growing market, but does have a high equity exposure and we expect investment yields to fall moderately. We also initiate on Tawuniya (Buy, TP SAR 61.1). It has a high quality of earnings and under geared investment portfolio, though we are cautious regarding increased claims in health insurance. We believe the sharp fall post the disappointing Q1 12A results represents a good buying opportunity, as the bulk of the increase in claim ratio in Q1 12 related to strengthening of provisions and incurred but not reported losses. Our least preferred name in insurance is Medgulf (Sell, TP SAR 24.6). It has a high exposure to health insurance where we see the biggest margin contraction. Furthermore Medgulf has substantial capitalized goodwill at 41% of shareholders equity, which may be impaired if it fails to deliver very strong premium growth. Medgulf is also expensive, trading at a P/tNAV of 3.0x). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 46

48 Valuation: P/tNAV12e of 1.5x and P/E13e of 9.8x May We value banks based on a combination of 1) DCF (adjusted for excess returns on excess capital and non-cash amortizations, Zakat etc), 2) Its Basel 3 capital position vs. 12% minimum tangible equity 3) other balance sheet strengths and weaknesses such as unrealized gains and losses and 4) dividends. Our Core Buy Portfolio (CBD, FGB, UNB, QNB, CAE, CIB, Al Rajhi, SHB, Muscat, Burgan, Salama) offers 45% upside on our TPs, while our avoid portfolio (DIB, Khaliji, EGB, BOB, Alinma, OIB, Boubyan, KFH, Gulf Bank, Mashreq, DFM and Shuaa) leaves 22% downside We see the highest upside in the UAE (30% upside) and Oman (33% upside), followed by Egypt (28%), Qatar (18%), Lebanon (16%), KSA (13%) and the lowest upside in Kuwait (0%) The MENA banking sector offers attractive value at an average P/tNAV12e of 1.5x and P/E13e of 9.8x based on our estimates, which remain c2% below consensus. Our estimates, although generally below consensus (as we are more pessimistic about the cost of risk and do not pencil in capital gains on fixed income securities), point to an average RORWA of 2.0% 2.3% and RoE of 13.5%-14.7%. Our TPs, which capture underlying earnings, are adjusted for capital strengths, and take balance sheet weaknesses and strengths into account, offer 22% upside on average, which is already very respectable, in our view; We see even more upside by being selective: such as 45% by playing our preferred financials portfolio. Global funds avoided the region last year due to the recent political instability in 2011, and we believe this has given rise to continued opportunities, despite the strong YTD performance of KSA particularly, and to a much lesser extent the UAE. We expect the potential MSCI upgrade of the UAE and Qatar to be a positive step, and based on anecdotal evidence from speaking to investors, would definitely raise the interest in these two markets. On the other hand, NBK may suffer from a new investment regulation that has been implemented by the Capital Markets Authority limiting funds holdings of a particular stock to 10%. The GCC region offers much better prospects than developed markets given muted economic prospects, the urgent need for fiscal consolidation (we argue that the fiscal consolidation in Egypt will be a much smaller effort than in Europe or the US given Egypt s primary deficit of 5.1% for FY 12e (IMF forecast), even if the strait of Hormuz would be disrupted. We see the GCC as a key beneficiary of potentially renewed tensions in the Gulf, as the potential boost in oil prices should more than offset any production cuts (as illustrated by the hike in oil prices this year, though oil prices are now back to year end levels), as long as they remain in check. In the short-term, Brent could fall further as KSA targets to bring the Brent oil price down to USD 100. We see KSA and to a lesser extent Oman as the key beneficiary, while we also see a net positive effect for the UAE. Kuwait and Qatar may be more vulnerable as they solely trade through the Strait of Hormuz. Most banks are still trading below their average multiples (as illustrated in the charts on the next page) and well below peak levels despite a strong re-rating of KSA banks y-t-d. Although MENA financials do not offer a steep discount compared to their tnav (except for a few UAE banks), we argue that value is still extremely compelling considering the satisfactory profitability, growth outlook, strong capital position and opportunities in the wholesale markets opening up to address potential Basel 3 liquidity gaps. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 47

49 Exhibit 42: P/tNAV12e vs. FY 12e RoE 4.5x 4.0x BOUBYAN 3.5x DFM 3.0x MEDGULF RJHI 2.5x GBK 2.0x 1.5x 1.0x 0.5x SHUAA HRHO ALINMA MASQ KCBK EMIRATES HDBK TAMWEEL SALAMA QIBK EGBE KFIN OIBB BJAZ SIBC ADCB DIB MARK QNBK BURG NBK QATI BOB SABB TAWUNIYA AUB DHBK QIIK NSGB SAMBA ARNB BSFR NBAD RIBL CIEB CBQK BKMB AAAL CBD ADIB FGB BKSB BLOM BYB UNB RAKBANK ALBI COMI AUDI 0.0x 0% 5% 10% 15% 20% 25% Exhibit 43: P/tNAV12e vs. FY 15e RoE 4.5x 4.0x BOUBYAN 3.5x DFM 3.0x MEDGULF 2.5x GBK 2.0x 1.5x 1.0x 0.5x SHUAA TAMWEEL HRHO SALAMA KCBK ALINMA MASQ MARK QNBK NBK ALBI BURG BOB QATI QIBK SABB TAWUNIYA AUB EGBE KFIN DHBK QIIK NSGB BSFR OIBB BJAZ SAMBA ARNB NBAD RIBL CBQK BKMB RAKBANK AAAL CBD ADIB SIBC AUDI FGB BKSB ADCB DIB BLOM EMIRATES BYB UNB HDBK COMI CIEB 0.0x 0% 5% 10% 15% 20% 25% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 48

50 Exhibit 44: P/tNAV12e vs.fy 12e Pre-provisioning RoE 4.5x 4.0x BOUBYAN May x 3.0x RJHI 2.5x GBK 2.0x NBK MARK BURG BOB QNBK ALBI 1.5x 1.0x 0.5x ALINMA KCBK TAMWEEL HDBK QIBK EGBE QIIK BJAZ OIBB BSFR RIBL CBQK AAAL MASQ BKSB SIBC BYB SAMBA ARNB UNB AUB KFIN NBAD SABB DHBK NSGB BKMB FGB BLOM ADCB CBD EMIRATES DIB COMI CIEB ADIB AUDI RAKBANK 0.0x 5% 10% 15% 20% 25% 30% Exhibit 45: P/E12e vs. FY 11-15e EPS CAGR 70x BOUBYAN 60x 50x 40x 30x ALINMA GBK 20x TAMWEEL 10x MASQ KCBK QIBK SABB NBK OIBB MEDGULF MARK RJHI QATI QNBK DHBK CBD RIBL BSFR BOB QIIK SIBC BURG SALAMA ADCB DIB EMIRATES TAWUNIYA CBQK SAMBA ARNB HDBK NBAD ADIB AAAL NSGB BKMBKSB AUB RAKBANK BYB FGB CIEBCOMI UNB AUDI BLOM BJAZ ALBI EGBE KFIN HRHO 0x SHUAA -10% 0% 10% 20% 30% 40% 50% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 49

51 ENBD GBK DIB MASQ ADCB RIBL KFIN ADIB CBD BOUBYAN AAAL UNB TAMWEEL HDBK BURG FGB ALBI SIBC QIBK RAKBANK NBAD AUB ARNB RJHI CIEB BKSB BJAZ SAMBA BKMB EGBE MARK SABB CBQK AUDI KCBK DHBK BYB BOB NSGB QNBK BLOM BSFR OIBB NBK COMI QIIK ALINMA May Exhibit 46: FY 12e LLP as % of Operating Profit 80% 70% 60% 50% 40% 30% 20% 10% 0% Exhibit 47: P/tNAV12e vs. PPP/RWA12e 4.5x 4.0x BOUBYAN 3.5x 3.0x RJHI 2.5x GBK 2.0x BOB ALBI BURG MARK NBK QNBK 1.5x 1.0x 0.5x HDBK KFINAUB NBAD SABB DHBK EGBE SAMBA BJAZ OIBB AAAL BSFR ARNB ALINMA KCBK RIBL CBQK MASQ BKMB BKSB ADIB SIBC AUDI BLOM ADCB DIB EMIRATES BYB UNB TAMWEEL CIEB FGB CBD QIBK QIIK NSGB COMI RAKBANK 0.0x 1% 2% 3% 4% 5% 6% 7% 8% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 50

52 UNB FGB BKMB CBD NBAD RAKBANK TAMWEEL BURG AAAL QNBK BLOM COMI RIBL SAMBA RJHI ARNB CIEB AUDI QIIK ENBD CBQK DHBK ALINMA SIBC MARK ALBI BSFR HDBK NSGB NBK SABB AUB QIBK BKSB BYB ADCB OIBB DIB ADIB KFIN BJAZ KCBK GBK EGBE MASQ BOB BOUBYAN May Exhibit 48: P/tNAV12e vs. RORWA12e 4.5x 4.0x BOUBYAN 3.5x 3.0x RJHI 2.5x GBK 2.0x BOB ALBI BURG MARK NBK QNBK 1.5x 1.0x 0.5x HDBK KFINAUB NBAD SABB DHBK EGBE SAMBA BJAZ OIBB AAAL BSFR ARNB ALINMA KCBK RIBL CBQK MASQ BKMB BKSB ADIB SIBC AUDI BLOM ADCB DIB EMIRATES BYB UNB TAMWEEL CIEB FGB CBD QIBK QIIK NSGB COMI RAKBANK 0.0x 1% 2% 3% 4% 5% 6% 7% 8% Exhibit 49: Upside/downside potential 60% 40% 20% 0% -20% -40% -60% Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 51

53 CIEB BOUBYAN KFIN ALINMA GBK EGBE BJAZ HDBK RJHI ARNB ENBD ALBI COMI MASQ RIBL DIB BKSB SIBC NBAD BURG OIBB AAAL CBD CBQK AUB MARK FGB QIBK BKMB KCBK SAMBA QIIK NBK BYB ADIB BOB UNB BLOM TAMWEEL DHBK NSGB SABB AUDI BSFR QNBK ADCB RAKBANK GBK BOUBYAN ALINMA ALBI BURG ARNB RJHI COMI ENBD BJAZ EGBE KFIN MASQ CIEB NBAD SIBC CBD NBK QNBK AAAL RIBL AUB BKSB DIB UNB OIBB MARK BKMB FGB AUDI ADIB BLOM BYB SAMBA SABB BOB CBQK BSFR HDBK TAMWEEL QIBK DHBK NSGB ADCB QIIK KCBK RAKBANK May Exhibit 50: FY 11-15e Change in RORWA 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% Exhibit 51: FY 11-15e Change in ROE 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 52

54 RAKBANK COMI CBD NSGB UNB ALBI SAMBA QIIK RIBL ARNB QNBK SIBC FGB BLOM RJHI TAMWEEL MARK SABB NBK MASQ AAAL BYB QIBK KCBK CIEB DHBK EGBE BSFR BURG NBAD BKMB ADCB AUDI CBQK OIB ENBD GBK BJAZ ALINMA KFH DIB AUB HDBK BKSB BOUBYAN ADIB BOB May Exhibit 52: RORWA12e vs. RWA Growth 6% RAKBANK 5% QNBK 4% NBK RJHI ALBI QIIK 3% AUDI QIBK CBQK COMI NSGB MARK 2% 1% CBD UNB GBK ADIB ADCB MASQ DIB EMIRATES TAMWEEL FGB BLOM DHBK RIBL BSFR AAAL SIBC AUB BURG BOB BYB NBAD ARNB SAMBA BKSB KFIN CIEB SABB EGBE BOUBYAN BKMB BJAZ KCBK OIBB ALINMA 0% 0% 5% 10% 15% 20% 25% 30% 35% Exhibit 53: Dividend yield vs. potential yield 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% New potential yield Current yield Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 53

55 Albilad Alinma Aljazeera Tamweel MARK ADCB Doha QIC SHB QIIB NBAD SABB Rakbank Boubyan BOB QNB ADIB MedGulf BKSB Al Rajhi QIB CBQ Khaliji BSFR FGB NBK Riyad BKMB NSGB CBD ANB OIBB SIB BYB Samba BLOM CIB AUB DIB Audi Burgan UNB Salama Gulf Bank DFM CAE EGB Tawuniya EFG KFH ENBD Shuaa HDB Tamweel Aljazeera Shuaa NSGB Alinma Albilad CIB QIC EFG DFM CAE FGB SABB ADCB Salama BSFR SHB ANB NBAD MedGulf HDB Al Rajhi SIB BLOM Audi Samba NBK Boubyan Riyad UNB MASQ BOB Khaliji ADIB DIB BYB EGB CBD Tawuniya MARK QNB AUB BKSB ENBD Rakbank Burgan QIIB QIB Doha Gulf Bank BKMB KFH CBQ OIBB May Exhibit 54: YTD Price Performance 100% 80% 60% 40% 20% 0% -20% -40% Source: Bloomberg Exhibit 55: 1 year share performance 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Source: Bloomberg Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 54

56 ADCB ADIB CBD DIB ENBD FGB NBAD UNB TAMWEEL MASQ RAKBANK CBQK DHBK QIBK QNBK MARK KCBK QIIK CIEB COMI HDBK NSGB EGBE AUDI BLOM BYB BOB ARNB RJHI BSFR RIBL SAMBA SABB AAAL ALBI BJAZ SIBC ALINMA NBK KFIN GBK BURG BOUBYAN BKMB BKSB OIBB AUB SHUAA HRHO DFM SALAMA QATI TAWUNIYA MEDGULF ADCB ADIB CBD DIB ENBD FGB NBAD UNB TAMWEEL MASQ RAKBANK CBQK DHBK QIBK QNBK MARK KCBK QIIK CIEB COMI HDBK NSGB EGBE AUDI BLOM BYB BOB ARNB RJHI BSFR RIBL SAMBA SABB AAAL ALBI BJAZ SIBC ALINMA NBK KFIN GBK BURG BOUBYAN BKMB BKSB OIBB AUB SHUAA HRHO DFM SALAMA QATI TAWUNIYA MEDGULF May Exhibit 56: Historical P/B Max Current Min Source: Factset Exhibit 57: Historical Earnings/Price 25% 20% 15% 10% 5% 0% Min Current Max Source: Factset Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 55

57 Exhibit 58: MENA banks valuation screen Company Rating Mkt. Cap. Currency Mkt Cap. Share Target Upside P/E (x) Target P/E(x) CAGR PEG P/tNAV (x) ROTE(%) Dividend yield (%) P/PPP (x) USDm (m) Price* Price % FY 12e FY 13e FY 14e FY 13e FY 12-15E FY 12e FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e ADCB HOLD 4,799 AED 17, (5.2) ADIB SELL 1,996 AED 7, (12.5) CBD BUY 1,480 AED 5, DIB SELL 1,954 AED 7, (7.0) ENBD HOLD 4,116 AED 15, FGB BUY 7,155 AED 26, NBAD BUY 9,283 AED 34, UNB BUY 1,977 AED 7, Tamweel BUY 313 AED 1, (3.1) (3.6) Mashreq SELL 3,084 AED 11, (37.4) Rakbank BUY 1,726 AED 6, UAE banks 37, , CBQ HOLD 4,757 QAR 17, Doha HOLD 3,292 QAR 11, QIB HOLD 5,016 QAR 18, QNB BUY 25,674 QAR 93, MARK HOLD 5,500 QAR 20, Khaliji SELL 1,681 QAR 6, (16.9) QIIB BUY 2,076 QAR 7, Qatar banks 47, , CAE BUY 430 EGP 2, CIB BUY 2,521 EGP 15, HDB HOLD 225 EGP 1, NSGB HOLD 2,000 EGP 12, EGB SELL 296 USD 1, (26.2) Egypt banks 5,473 33, Audi BUY 2,091 USD 2, (2.1) (2.8) BLOM BUY 1,675 USD 1, Byblos HOLD 899 USD (3.7) BOB SELL 974 USD (45.4) Lebanon banks 5,638 5, ANB BUY 6,675 SAR 25, Al Rajhi BUY 29,598 SAR 111, BSFR HOLD 8,871 SAR 33, Riyad BUY 9,599 SAR 36, Samba BUY 11,567 SAR 43, SABB HOLD 9,199 SAR 34, SHB BUY 2,857 SAR 10, Albilad HOLD 2,160 SAR 8, Aljazeera SELL 2,040 SAR 7, (13.7) SIB HOLD 2,493 SAR 9, Alinma HOLD 5,300 SAR 19, KSA banks 90, , Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 56

58 Exhibit 59: MENA banks valuation screen (continued) Company Rating Mkt. Cap. Currency Mkt Cap. Share Target Upside P/E (x) Target P/E(x) CAGR PEG P/tNAV (x) ROTE(%) Dividend yield (%) P/PPP (x) USDm (m) Price* Price % FY 12e FY 13e FY 14e FY 13e FY 12-15E FY 12e FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e NBK HOLD 16,197 KWD 4, KFH SELL 7,169 KWD 2, (13.6) Gulf Bank SELL 3,956 KWD 1, (18.5) Burgan BUY 2,294 KWD Boubyan SELL 3,815 KWD 1, (54.0) Kuwait banks 33,431 9,345 (4.2) Muscat BUY 2,752 OMR 1, Sohar HOLD 390 OMR OIB SELL 589 OMR (6.7) Oman banks 3,730 1, Ahli United HOLD 3,556 BHD 3, Bahrain banks 3,556 3, MENA banks' avg. 228, Source: Bloomberg, Arqaam Capital Research Exhibit 60: MENA diversified financials valuation screen Company Rating Mkt. Cap. Currency Mkt Cap. Share Target Upside P/E (x) Target P/E(x) CAGR PEG P/tNAV (x) ROTE(%) Dividend yield (%) P/PPP (x) USDm (m) Price* Price % FY 12e FY 13e FY 14e FY 13e FY 12-15E FY 12e FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e Shuaa SELL 217 AED (16.2) (25.7) (58.8) (49.2) na na (22.2) (2.7) (1.2) (32.5) (72.3) 1,050 EFG BUY 927 EGP 5, DFM SELL 2,089 AED 7, (23.3) (0.1) Salama BUY 201 AED na na na Qatar Insurance BUY 1,835 QAR 6, na na na Tawuniya BUY 988 SAR 3, na na na MedGulf SELL 623 SAR 2, (15.6) NA NA na na na MENA financials' avg. 234, Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 57

59 Exhibit 61: MENA financials: Earnings estimates (LCY) Company Rating Currency EPS tnav DPS BBG EPS consensus Deviation vs consensus BBG consensus PE FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e ADCB HOLD AED % (19%) (13%) ADIB SELL AED % (25%) (25%) CBD BUY AED na (19%) (31%) na na DIB SELL AED (5%) (31%) (39%) ENBD HOLD AED % (49%) (60%) FGB BUY AED % (9%) (17%) NBAD BUY AED (8%) (12%) (10%) UNB BUY AED % (16%) (26%) Tamweel BUY AED % (47%) (47%) Mashreq SELL AED na na na na na na na na na Rakbank BUY AED na na na na na na na na na CBQ HOLD QAR (9%) (15%) (16%) Doha HOLD QAR (5%) (16%) (22%) QIB HOLD QAR (14%) (12%) (13%) QNB BUY QAR (15%) (5%) (6%) MARK HOLD QAR (2%) 10% 26% Khaliji SELL QAR na na na na na na na na na QIIB BUY QAR na na na na na na na na na CAE BUY EGP (4%) 13% 11% CIB BUY EGP (14%) 16% 16% HDB HOLD EGP (18%) (22%) (14%) NSGB HOLD EGP % 1% 4% EGB SELL EGP na na na na na na na na na Audi BUY USD na 2% (11%) na na BLOM BUY USD na 13% (0%) na na Byblos HOLD USD % 3% 15% BOB na na na na na na na na na ANB BUY SAR (10%) 1% (1%) Al Rajhi BUY SAR (11%) 2% 1% BSFR HOLD SAR (9%) (11%) (18%) Riyad BUY SAR (6%) (4%) (6%) Samba BUY SAR (9%) (8%) (10%) SABB HOLD SAR (13%) 7% 3% SHB BUY SAR (9%) (4%) (7%) Albilad HOLD SAR (37%) (12%) (14%) Aljazeera SELL SAR (36%) (10%) (13%) SIB HOLD SAR (15%) (0%) 2% Alinma HOLD SAR (37%) (3%) (19%) Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 58

60 Exhibit 62: MENA financials: Earnings estimates (LCY) (continued) Company Rating Currency EPS tnav DPS BBG EPS consensus Deviation vs consensus BBG consensus PE FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e NBK HOLD KWD (4%) (16%) (22%) KFH SELL KWD (33%) (23%) (2%) Gulf Bank SELL KWD na na na na na na na na na Burgan BUY KWD (16%) 4% 2% Boubyan SELL KWD na na na na na na na na na Muscat BUY OMR (11%) (6%) (4%) Sohar HOLD OMR na (19%) (6%) na na OIB SELL OMR (7%) (22%) (25%) AUB HOLD BHD na na na na na na na na na Source: Bloomberg, Arqaam Capital Research Exhibit 63: MENA diversified financials: Earnings estimates (LCY) Company Rating Currency EPS tnav DPS BBG EPS consensus Deviation vs consensus BBG consensus PE FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 11A FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e FY 12e FY 13e FY 14e Shuaa SELL AED (0.28) (0.03) (0.01) (0.17) (0.01) na 63% 16% na (4.4) (68.1) na EFG BUY EGP (28%) 36% 16% DFM SELL AED (0.00) (105%) (29%) (23%) Salama BUY AED na na na na na na na na na Qatar InsuraBUY QAR na na na na na na na na na Tawuniya BUY SAR na na na na na na na na na MedGulf SELL SAR na na na na na na na na na Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 59

61 Exhibit 64: MENA banks: Assets and returns Company Arqaam Currency RWA (bn) RWA Growth RORWA Tier I Ratio CET1 RotE Rating FY 11A FY 12e FY 13e FY 11A FY 12e FY 13e FY 11A FY 12e FY 13e FY 11A FY 12e FY 13e FY 11A FY 11A FY 12e FY 13e ADCB HOLD AED % 12.1% 6.3% 2.0% 1.1% 1.2% 15.9% 14.2% 14.2% 11.5% 16.7% 9.1% 10.7% ADIB SELL AED (2.0%) 15.0% 5.9% 1.7% 1.2% 1.3% 14.2% 12.6% 12.6% 8.0% 16.3% 13.0% 13.8% CBD BUY AED % 4.3% 4.8% 2.3% 2.1% 2.1% 16.6% 16.9% 17.1% 16.6% 18.8% 16.4% 16.6% DIB SELL AED (4.9%) 28.8% 2.3% 1.3% 0.9% 1.0% 13.6% 11.1% 10.3% 12.1% 11.0% 9.3% 9.7% ENBD HOLD AED % 2.5% 3.1% 1.0% 0.6% 0.7% 13.0% 12.8% 12.9% 10.5% 9.3% 5.3% 5.9% FGB BUY AED % 15.3% 8.9% 2.6% 2.3% 2.5% 18.5% 18.0% 17.7% 13.3% 16.6% 15.2% 15.8% NBAD BUY AED % 19.5% 11.8% 2.0% 1.8% 2.0% 15.6% 14.5% 14.4% 11.9% 16.3% 16.1% 17.7% UNB BUY AED % 8.0% 5.9% 1.8% 1.5% 1.5% 16.7% 17.9% 18.3% 13.3% 13.7% 11.2% 10.9% Tamweel BUY AED (7.5%) 1.5% 2.8% 1.0% 0.8% 1.0% 22.9% 23.0% 22.9% 22.4% 4.8% 3.8% 4.3% MASQ SELL AED % 8.4% 6.3% 1.1% 0.9% 1.0% 16.2% 15.9% 15.7% 15.5% 6.8% 6.2% 6.9% RAKBANK BUY AED % 20.1% 6.5% 7.6% 5.3% 5.2% 22.0% 21.3% 22.9% 19.1% 28.6% 20.4% 19.0% CBQ HOLD QAR % 16.3% 13.2% 3.0% 2.6% 2.4% 16.4% 14.4% 13.1% 12.5% 13.7% 12.7% 13.1% Doha HOLD QAR % 7.2% 12.8% 2.4% 2.4% 2.2% 10.7% 12.4% 11.3% 10.1% 18.5% 16.1% 15.0% QIB HOLD QAR (9.4%) 13.2% 9.4% 3.9% 2.8% 3.6% 23.0% 21.3% 20.4% 21.8% 13.3% 10.0% 13.5% QNB BUY QAR % 6.9% 14.2% 4.7% 5.0% 4.8% 22.0% 23.6% 23.7% 21.2% 22.3% 18.6% 18.2% MAR HOLD QAR % 33.6% 17.3% 3.9% 3.1% 3.2% 21.8% 17.4% 16.5% 20.1% 17.6% 15.9% 17.4% Khaliji SELL QAR % 37.2% 11.7% 2.3% 1.2% 1.3% 22.0% 17.0% 15.4% 16.3% 9.5% 6.9% 8.0% QIIB BUY QAR % 15.1% 14.1% 3.9% 3.7% 3.4% 24.3% 22.5% 20.1% 22.6% 14.6% 14.2% 14.4% CAE BUY EGP % 18.9% 14.3% 1.9% 2.0% 2.0% 11.6% 10.2% 9.5% 11.6% 13.6% 17.4% 18.6% CIB BUY EGP % 18.4% 15.0% 2.6% 3.1% 3.1% 12.5% 12.8% 12.9% 13.4% 19.8% 23.8% 22.8% HDB HOLD EGP % 157.2% 9.9% 1.9% 0.7% 0.9% 23.0% 9.2% 8.5% 20.8% 6.3% 6.0% 8.3% NSGB HOLD EGP % 19.3% 13.7% 3.2% 2.7% 2.7% 12.8% 12.6% 12.7% 13.5% 21.6% 19.4% 19.2% EGB SELL EGP (6.2%) 15.3% 11.7% 1.2% 1.8% 1.8% 21.4% 19.5% 18.5% 17.4% 5.0% 9.3% 9.5% Audi BUY USD trn % 5.7% 4.9% 1.9% 2.6% 1.7% 10.4% 11.3% 12.2% 8.5% 18.8% 24.8% 15.5% BLOM BUY USD trn % 17.6% 8.6% 2.4% 2.1% 2.0% 12.8% 12.8% 13.1% 11.2% 19.9% 18.6% 17.0% Byblos HOLD USD trn % 9.4% 10.6% 1.5% 1.2% 1.2% 14.4% 14.5% 13.9% 11.4% 13.1% 11.1% 11.3% BOB SELL USD trn % 15.2% 7.4% 1.7% 1.3% 1.3% 14.3% 13.6% 13.4% 5.9% 20.1% 18.4% 18.2% ANB BUY SAR % 15.1% 11.6% 1.7% 1.8% 2.0% 15.0% 14.2% 14.1% 14.0% 10.9% 12.8% 14.0% Al Rajhi BUY SAR % 16.3% 12.3% 3.8% 3.9% 4.0% 14.7% 14.4% 14.8% 14.6% 21.0% 23.0% 24.1% BSFR HOLD SAR % 14.2% 9.8% 2.1% 1.9% 1.8% 13.9% 13.6% 13.7% 12.9% 15.2% 13.7% 12.3% Riyad BUY SAR % 8.7% 9.0% 1.7% 1.7% 1.7% 14.8% 14.4% 14.0% 15.3% 10.1% 10.9% 11.3% Samba BUY SAR % 24.6% 10.2% 2.7% 2.3% 2.2% 18.1% 16.0% 16.1% 14.8% 15.5% 15.0% 14.7% SABB HOLD SAR % 15.4% 17.0% 2.2% 2.0% 2.0% 11.8% 13.5% 12.8% 13.4% 16.2% 14.5% 13.8% SHB BUY SAR % 18.1% 10.7% 1.6% 1.8% 1.7% 12.7% 12.4% 12.4% 12.9% 12.5% 13.9% 13.0% Albilad HOLD SAR % 24.0% 12.6% 1.6% 3.4% 2.2% 15.4% 14.0% 15.2% 15.6% 10.1% 22.1% 13.7% Aljazeera SELL SAR % 22.0% 15.7% 0.8% 1.2% 1.2% 13.6% 14.1% 13.0% 11.7% 6.3% 9.6% 9.8% SIB HOLD SAR (5.3%) 8.6% 9.9% 1.6% 1.8% 1.8% 17.2% 18.7% 18.0% 16.2% 8.2% 9.3% 9.7% Alinma HOLD SAR % 49.3% 30.1% 0.7% 1.1% 1.4% 43.8% 30.5% 24.8% 39.0% 1.6% 3.8% 5.6% Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 60

62 Exhibit 65: MENA banks: Assets and returns (continued) Company Arqaam Currency RWA (bn) RWA Growth RORWA Tier I Ratio CET1 RotE Rating FY 11A FY 12e FY 13e FY 11A FY 12e FY 13e FY 11A FY 12e FY 13e FY 11A FY 12e FY 13e FY 11A FY 11A FY 12e FY 13e NBK HOLD KWD % 6.8% 6.2% 3.5% 3.5% 3.6% 18.3% 19.0% 19.7% 15.9% 14.8% 14.7% 14.4% KFH SELL KWD % 19.2% 9.3% 0.8% 1.0% 1.0% 13.5% 12.0% 11.8% 11.0% 6.8% 10.0% 10.6% Gulf Bank SELL KWD % 5.0% 6.4% 1.0% 1.4% 1.5% 13.6% 14.4% 15.0% 13.6% 7.3% 9.5% 10.3% Burgan BUY KWD % 23.4% 0.7% 1.7% 1.6% 2.0% 14.7% 14.6% 15.6% 14.3% 19.7% 19.3% 20.8% Boubyan SELL KWD % 13.4% 24.4% 0.9% 1.5% 2.0% 25.5% 23.8% 21.1% 22.2% 3.3% 6.2% 9.7% Muscat BUY OMR % 20.5% 14.9% 1.8% 1.7% 1.8% 11.9% 11.4% 12.5% 9.1% 15.9% 15.0% 15.3% Sohar HOLD OMR % 16.2% 12.2% 1.1% 1.0% 1.1% 9.3% 9.4% 9.1% 9.3% 11.5% 11.3% 12.4% OIB SELL OMR % 101.4% 7.5% 1.9% 1.7% 1.8% 13.6% 13.4% 13.3% 12.1% 10.5% 9.8% 11.1% AUB HOLD BHD % 9.9% 7.8% 1.5% 1.6% 1.7% 11.5% 11.2% 11.3% 10.3% 18.2% 19.6% 19.4% Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 61

63 Exhibit 66: MENA banks: Key performance indicators Company Arqaam Currency Source: Bloomberg, Arqaam Capital Research Rev Growth Cost Growth Jaws Cost / Income Ratio LCR NSFR Rating FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 10A FY 11A ADCB HOLD AED 9.6% 21.4% 1.0% 6.6% 7.1% 25.1% 4.6% 6.0% 2.5% (3.7%) (3.5%) 0.6% 33.0% 34.0% 35.2% 35.0% 80.3% 150.9% 110.6% 92.0% ADIB SELL AED 21.2% 11.4% (0.0%) 6.6% 31.0% 11.4% 5.2% 6.1% (9.8%) 0.0% (5.2%) 0.5% 42.5% 42.5% 44.8% 44.6% 358.4% 216.7% 127.4% 102.3% CBD BUY AED 6.9% (1.7%) 2.7% 3.3% 1.4% 4.0% 2.8% 3.9% 5.5% (5.7%) (0.1%) (0.6%) 28.7% 30.4% 30.4% 30.6% 46.3% 100.0% 155.6% 101.7% DIB SELL AED (3.1%) 10.5% 9.0% 3.7% 2.0% 8.2% 3.3% 3.6% (5.0%) 2.4% 5.7% 0.1% 42.3% 41.4% 39.2% 39.2% 201.8% 269.8% 108.7% 116.5% ENBD HOLD AED (9.9%) 2.1% (3.6%) 1.2% (13.7%) 14.4% (5.6%) 1.0% 3.7% (12.3%) 2.0% 0.2% 32.4% 36.3% 35.5% 35.5% 100.3% 80.8% 91.6% 94.2% FGB BUY AED 3.4% 2.3% 5.7% 9.7% 3.8% 9.1% 12.2% 13.9% (0.4%) (6.8%) (6.5%) (4.2%) 17.7% 18.9% 20.0% 20.8% 144.2% 134.5% 83.7% 87.2% NBAD BUY AED 12.2% 9.8% 8.2% 18.0% 15.2% 17.3% 12.5% 13.3% (3.0%) (7.5%) (4.3%) 4.7% 30.5% 32.5% 33.8% 32.5% 76.8% 68.9% 74.5% 81.1% UNB BUY AED 20.6% 11.1% 6.7% 4.0% 10.2% 1.9% 2.8% 7.6% 10.4% 9.2% 3.9% (3.6%) 28.0% 25.7% 24.7% 25.6% 139.2% 143.9% 91.8% 100.4% Tamweel BUY AED (10.6%) (4.1%) 5.6% 5.3% (23.4%) 2.6% 2.5% 4.1% 12.8% (6.7%) 3.0% 1.1% 34.8% 37.3% 36.2% 35.8% na 29.4% 309.8% 100.5% Mashreq SELL AED (11.6%) (11.7%) (3.2%) 6.5% (0.4%) 1.7% 4.6% 6.4% (11.2%) (13.4%) (7.9%) 0.2% 40.2% 46.3% 50.1% 50.0% 218.1% 162.8% 127.4% 113.3% Rakbank BUY AED 28.4% 19.2% (4.2%) 4.4% 26.1% 20.4% 1.5% 4.7% 2.3% (1.2%) (5.8%) (0.3%) 42.5% 43.0% 45.5% 45.7% 79.9% 81.9% 210.8% 95.9% CBQ HOLD QAR (7.8%) 11.8% 4.4% 9.0% 3.7% 11.2% 15.7% 10.7% (11.4%) 0.6% (11.3%) (1.7%) 30.7% 30.6% 33.9% 34.4% 191.1% 167.2% 93.9% 71.2% Doha HOLD QAR 4.6% 9.1% 4.0% 8.6% 9.8% 10.0% 12.5% 11.8% (5.2%) (0.9%) (8.4%) (3.2%) 33.8% 34.1% 36.8% 37.9% 119.9% 123.2% 128.4% 91.6% QIB HOLD QAR (4.3%) 19.7% 15.4% 10.8% 0.5% 57.1% 12.5% 9.0% (4.9%) (37.4%) 2.9% 1.8% 26.5% 34.8% 33.9% 33.4% 157.5% 187.1% 111.0% 74.4% QNB BUY QAR 37.5% 35.5% 15.7% 11.0% 16.7% 24.1% 25.3% 17.7% 20.7% 11.4% (9.6%) (6.6%) 17.5% 16.0% 17.3% 18.4% 198.8% 162.5% 53.7% 88.7% MAR HOLD QAR 21.0% 31.2% 17.1% 20.5% 15.3% 33.0% 15.0% 17.8% 5.7% (1.7%) 2.1% 2.7% 17.3% 17.5% 17.2% 16.8% 129.7% 126.0% 131.2% 107.3% Khaliji SELL QAR 45.6% 23.7% (5.4%) 14.9% 290.5% (1.0%) 11.7% 8.2% (244.9%) 24.6% (17.0%) 6.7% 51.7% 41.4% 48.9% 46.0% 154.2% 159.1% 291.5% 66.7% QIIB BUY QAR 8.1% 18.8% 13.7% 9.7% (12.1%) 39.3% 7.7% 13.1% 20.2% (20.4%) 5.9% (3.4%) 19.1% 22.4% 21.3% 21.9% 460.9% 965.9% 340.6% 137.7% CAE BUY EGP 15.2% 8.8% 6.9% 9.9% 9.2% 17.6% 6.0% 8.0% 6.1% (8.8%) 0.9% 1.9% 47.9% 51.8% 51.3% 50.4% 72.1% 117.2% 201.8% 127.0% CIB BUY EGP 17.6% 1.1% 22.4% 14.0% 23.0% 3.5% 7.3% 12.5% (5.4%) (2.3%) 15.1% 1.5% 39.9% 40.9% 35.8% 35.3% 47.2% 249.9% 104.6% 110.2% HDB HOLD EGP 11.9% (4.4%) 2.6% 17.0% 18.7% 8.4% 5.8% 5.9% (6.8%) (12.7%) (3.2%) 11.1% 56.3% 63.8% 65.8% 59.6% 14.0% 84.1% 233.7% 126.7% NSGB HOLD EGP 18.4% 7.8% 13.2% 11.6% 13.4% (13.3%) 8.2% 9.1% 5.1% 21.1% 5.0% 2.5% 47.3% 38.0% 36.3% 35.5% 87.2% 135.4% 102.8% 113.3% EGB SELL EGP 21.2% (20.1%) 39.9% 9.3% (11.2%) 0.4% 7.5% 8.0% 32.4% (20.4%) 32.4% 1.3% 50.0% 62.8% 48.3% 47.7% 75.2% 97.2% 453.4% 94.4% Audi BUY USD 18.9% 14.0% 1.8% 3.4% 15.3% 9.7% 4.9% 7.2% 3.5% 4.3% (3.1%) (3.8%) 47.4% 45.6% 47.0% 48.7% 440.6% 854.5% 245.3% 199.4% BLOM BUY USD 19.6% 7.3% 4.5% 5.6% 12.8% 8.1% 7.1% 8.0% 6.8% (0.9%) (2.6%) (2.4%) 38.4% 38.7% 39.7% 40.6% 594.4% 426.0% 132.3% 168.6% Byblos HOLD USD 19.6% 4.0% (0.9%) 10.5% 20.4% (3.4%) 9.1% 8.6% (0.8%) 7.4% (10.1%) 1.9% 46.6% 43.3% 47.7% 46.9% 321.5% na 104.8% na BOB SELL USD 24.8% 11.5% 4.4% 11.7% 15.3% 21.0% 6.7% 8.4% 9.4% (9.5%) (2.3%) 3.3% 46.3% 50.3% 51.4% 49.9% 346.7% na 64.5% na ANB BUY SAR (0.4%) 0.8% 6.2% 12.5% 2.7% 7.9% 3.8% 7.3% (3.1%) (7.1%) 2.4% 5.3% 36.5% 39.1% 38.2% 36.4% 172.2% 169.2% 133.0% 130.1% Al Rajhi BUY SAR 0.2% 7.2% 7.9% 13.3% 0.1% 16.7% 1.5% 7.9% 0.1% (9.5%) 6.4% 5.3% 25.9% 28.2% 26.5% 25.3% 202.6% 200.0% 88.2% 118.0% BSFR HOLD SAR 2.3% 4.3% 11.0% 7.5% 8.7% 19.2% 5.7% 7.3% (6.3%) (14.8%) 5.3% 0.2% 28.6% 32.7% 31.1% 31.1% 177.2% 180.6% 100.3% 131.2% Riyad BUY SAR 0.3% 5.7% 6.4% 8.3% 5.1% 8.9% 3.7% 6.5% (4.8%) (3.2%) 2.6% 1.8% 38.6% 39.7% 38.7% 38.1% 160.6% 139.2% 69.4% 119.2% Samba BUY SAR (2.9%) (4.9%) 6.0% 8.8% (2.1%) 2.4% 1.7% 6.5% (0.8%) (7.3%) 4.3% 2.3% 27.7% 29.8% 28.6% 28.0% 242.2% 193.1% 142.6% 157.9% SABB HOLD SAR (6.2%) 1.2% 7.9% 12.1% 4.6% (8.5%) 3.7% 8.7% (10.8%) 9.7% 4.2% 3.3% 36.2% 32.8% 31.5% 30.6% 221.8% 194.8% 108.7% 137.9% SHB BUY SAR (9.0%) 2.6% 10.6% 9.0% (4.9%) 3.9% 5.3% 6.7% (4.0%) (1.2%) 5.3% 2.3% 39.5% 40.0% 38.1% 37.3% 224.9% 185.0% 157.1% 150.6% Albilad HOLD SAR 20.9% 25.0% 13.3% 10.2% (9.7%) 10.4% 6.9% 8.3% 30.6% 14.6% 6.4% 1.9% 65.3% 57.6% 54.4% 53.5% 280.8% 349.3% 253.8% 119.7% Aljazeera SELL SAR (1.4%) 4.6% 29.1% 14.4% 5.3% 9.2% 7.9% 10.6% (6.6%) (4.6%) 21.2% 3.8% 66.2% 69.1% 57.7% 55.8% 309.2% 242.8% 153.7% 238.5% SIB HOLD SAR 15.3% (7.6%) 4.5% 8.9% 3.7% 11.6% 6.9% 7.9% 11.6% (19.2%) (2.4%) 1.1% 32.0% 38.6% 39.5% 39.1% 164.7% 89.7% 127.2% 132.1% Alinma HOLD SAR (30.6%) 109.6% 26.1% 34.7% 0.9% 29.2% 12.2% 20.3% (31.5%) 80.4% 13.9% 14.4% 97.3% 59.9% 53.3% 47.6% 238.3% 136.1% 159.1% 109.7% Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 62

64 Exhibit 67: MENA banks: Key performance indicators (Continued) Company Arqaam Currency Net Interest Margin Loan Loss Charge / Avg Loans NPL Ratio Coverage Rating FY 10 FY 11 FY 12e FY 13e FY 10 FY 11 FY 12e FY 13e FY 10 FY 11 FY 12e FY 13e FY 10 FY 11 FY 12e FY 13e ADCB HOLD AED 2.47% 2.91% 2.78% 2.77% 2.3% 1.6% 1.6% 1.4% 11.1% 4.6% 5.8% 5.9% 44.1% 94.8% 89.2% 98.3% ADIB SELL AED 4.02% 4.08% 4.05% 4.08% 0.9% 1.1% 1.3% 1.3% 7.1% 8.7% 8.6% 8.6% 63.6% 66.8% 82.2% 94.1% CBD BUY AED 3.91% 3.75% 3.71% 3.60% 1.8% 1.6% 1.9% 1.8% 5.8% 13.1% 13.4% 13.3% 76.7% 47.4% 48.5% 50.5% DIB SELL AED 2.87% 3.33% 3.19% 3.02% 1.1% 1.6% 2.4% 2.4% 8.3% 14.5% 14.0% 13.8% 59.0% 48.8% 55.2% 72.7% ENBD HOLD AED 2.62% 2.79% 2.70% 2.71% 1.4% 2.2% 2.2% 2.1% 10.0% 13.8% 15.0% 16.0% 40.7% 43.4% 56.2% 64.5% FGB BUY AED 3.51% 3.71% 3.52% 3.51% 1.7% 1.5% 1.4% 1.2% 4.6% 4.0% 4.0% 3.9% 72.1% 84.2% 78.4% 70.7% NBAD BUY AED 2.69% 2.70% 2.44% 2.51% 0.8% 0.9% 0.8% 0.8% 2.6% 3.3% 3.5% 3.6% 101.6% 89.9% 85.2% 100.4% UNB BUY AED 2.60% 3.05% 3.10% 3.09% 0.8% 1.0% 1.4% 1.3% 4.3% 3.7% 4.0% 4.1% 47.5% 74.7% 71.6% 69.7% Tamweel BUY AED 1.86% 2.41% 2.49% 2.49% 1.1% 0.2% 0.6% 0.6% 6.7% 10.0% 12.5% 14.5% 51.7% 35.4% 31.2% 29.8% Mashreq SELL AED 2.81% 2.63% 2.40% 2.39% 3.2% 2.3% 2.4% 2.2% 11.9% 12.6% 12.4% 12.2% 61.0% 52.1% 62.0% 72.4% Rakbank BUY AED 8.75% 9.07% 7.94% 7.77% 1.8% 1.7% 1.8% 1.8% 2.5% 2.5% 2.6% 2.7% 74.8% 71.3% 70.8% 72.0% CBQ HOLD QAR 3.32% 3.22% 2.99% 2.89% 0.5% 0.6% 0.7% 0.7% 3.2% 1.2% 1.5% 2.2% 89.7% 107.8% 108.9% 90.4% Doha HOLD QAR 3.39% 3.63% 3.46% 3.37% 1.1% 0.9% 0.6% 0.6% 4.9% 3.4% 3.5% 3.6% 73.8% 73.1% 102.3% 100.1% QIB HOLD QAR 3.21% 2.88% 3.41% 3.37% 0.2% 0.0% 1.2% 0.6% 1.5% 1.2% 1.6% 1.9% 83.2% 97.7% 133.2% 128.4% QNB BUY QAR 2.95% 3.08% 2.95% 2.90% 0.4% 0.6% 0.6% 0.5% 1.0% 1.1% 1.2% 1.3% 117.7% 118.9% 120.3% 112.0% MAR HOLD QAR 3.73% 1.64% 1.86% 2.02% 0.0% 0.2% 0.7% 0.7% 0.0% 0.3% 0.5% 0.9% 100.5% 82.2% 317.1% 237.7% Khaliji SELL QAR 3.23% 2.70% 2.40% 2.44% (0.9%) 0.4% 0.5% 0.6% 1.4% 0.5% 0.9% 1.3% 161.1% 296.5% 202.1% 164.9% QIIB BUY QAR 3.63% 3.17% 2.94% 2.89% 0.1% 0.2% 0.4% 0.7% 3.9% 1.8% 2.0% 2.4% 30.6% 84.3% 81.4% 83.0% CAE BUY EGP 3.32% 3.54% 3.74% 3.62% 0.4% 1.2% 1.1% 1.0% 2.6% 1.9% 3.0% 2.9% 107.6% 163.9% 114.1% 119.4% CIB BUY EGP 3.38% 3.48% 3.93% 3.84% 0.0% 0.8% 0.7% 0.7% 2.8% 2.8% 3.1% 3.1% 153.8% 154.5% 146.8% 149.5% HDB HOLD EGP 3.41% 3.37% 3.48% 3.49% 0.9% 0.7% 1.0% 1.0% 5.6% 6.0% 6.0% 5.0% 97.2% 91.1% 103.0% 131.2% NSGB HOLD EGP 3.43% 3.56% 3.79% 3.74% (0.2%) 0.4% 0.7% 0.7% 3.4% 3.0% 3.5% 3.3% 93.8% 101.3% 86.1% 90.3% EGB SELL EGP 3.41% 3.40% 3.55% 3.46% (0.6%) 0.5% 0.8% 0.8% 12.4% 11.2% 14.1% 14.1% 122.6% 126.3% 70.3% 70.7% Audi BUY USD 1.72% 1.95% 1.99% 2.04% 0.4% 1.0% 0.9% 0.9% 3.3% 3.9% 3.8% 3.5% 55.0% 70.5% 73.8% 83.0% BLOM BUY USD 2.36% 2.33% 2.28% 2.29% 0.3% 0.7% 0.9% 0.9% 2.2% 2.2% 2.7% 3.2% 70.4% 73.5% 118.0% 135.6% Byblos HOLD USD 1.98% 1.82% 1.71% 1.73% 0.5% 0.7% 0.8% 0.9% 3.2% 3.3% 3.8% 4.0% 142.6% 140.5% 150.6% 162.2% BOB SELL USD 2.01% 1.47% 1.64% 1.63% (0.0%) 0.1% 0.5% 0.6% 0.6% 0.5% 0.8% 0.8% 160.8% 231.9% 189.8% 229.9% ANB BUY SAR 2.88% 2.81% 2.70% 2.73% 1.4% 0.9% 0.8% 0.8% 3.0% 2.4% 2.4% 2.4% 108.1% 146.0% 150.0% 154.0% Al Rajhi BUY SAR 5.30% 4.61% 4.17% 4.20% 1.5% 1.1% 0.8% 0.8% 2.2% 1.7% 1.8% 1.8% 135.8% 148.4% 150.3% 152.6% BSFR HOLD SAR 2.64% 2.50% 2.45% 2.41% 0.4% 0.2% 0.4% 0.5% 1.2% 1.2% 1.3% 1.4% 147.0% 136.4% 131.3% 134.3% Riyad BUY SAR 2.45% 2.46% 2.45% 2.44% 0.9% 0.6% 0.6% 0.6% 1.7% 1.6% 1.6% 1.5% 126.2% 106.3% 112.5% 123.9% Samba BUY SAR 2.53% 2.39% 2.33% 2.31% 0.7% 0.3% 0.4% 0.5% 3.7% 3.0% 3.0% 3.1% 118.1% 124.4% 130.0% 138.7% SABB HOLD SAR 2.66% 2.37% 2.27% 2.25% 1.6% 0.6% 0.6% 0.6% 3.4% 1.9% 2.1% 2.1% 100.0% 124.0% 122.0% 120.5% SHB BUY SAR 2.35% 2.39% 2.23% 2.18% 1.0% 0.4% 0.5% 0.6% 2.6% 1.9% 2.0% 2.0% 124.4% 145.4% 150.0% 155.0% Albilad HOLD SAR 3.37% 2.96% 2.84% 2.79% 2.0% 1.8% 1.3% 0.8% 5.5% 4.7% 4.6% 4.6% 89.4% 129.0% 132.6% 138.0% Aljazeera SELL SAR 2.40% 2.27% 2.16% 2.10% 2.0% 0.3% 0.5% 0.5% 9.1% 7.7% 7.5% 7.2% 62.0% 64.4% 96.0% 113.0% SIB HOLD SAR 2.74% 2.52% 2.40% 2.35% 2.3% 0.9% 0.8% 0.8% 5.4% 6.1% 5.8% 5.7% 110.4% 124.6% 132.8% 135.1% Alinma HOLD SAR 2.56% 3.78% 3.46% 3.43% 0.0% 0.6% 0.6% 0.6% --% 0.0% 0.0% 0.0% --% % % % Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 63

65 Exhibit 68: MENA banks: Key performance indicators (Continued) Company Arqaam Currency Rating FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 12e FY 13e FY 10A FY 11A FY 10A FY 11A NBK HOLD KWD (7.0%) 7.5% 3.6% 6.9% (11.6%) 1.8% 2.6% 5.6% 4.6% 5.6% 1.0% 1.3% 32.7% 31.0% 30.7% 30.3% 83.7% 78.5% 347.1% 100.5% KFH SELL KWD 6.9% 14.0% (11.2%) 6.7% 6.3% 20.4% 0.3% 4.0% 0.6% (6.5%) (11.5%) 2.6% 43.3% 45.7% 51.7% 50.4% 104.6% 103.2% 365.3% 93.4% Gulf Bank SELL KWD 38.3% (16.1%) 6.8% 7.0% (1.6%) 10.0% (4.7%) 4.8% 39.8% (26.1%) 11.6% 2.2% 25.9% 34.0% 30.3% 29.7% 141.0% 126.9% 946.9% 89.9% Burgan BUY KWD 7.1% (0.9%) 12.0% 13.0% 49.9% (5.9%) 16.9% 5.5% (42.8%) 5.0% (4.9%) 7.6% 39.6% 37.6% 39.2% 36.6% 131.7% 116.0% % 114.2% Boubyan SELL KWD 498.1% 7.1% 33.3% 27.4% 13.0% 14.4% 15.3% 12.0% 485.1% (7.3%) 18.0% 15.5% 56.2% 60.0% 51.9% 45.6% 223.5% 242.6% % 135.0% Muscat BUY OMR (8.8%) 10.8% 12.5% 14.2% 25.3% 17.5% 10.5% 11.5% (34.1%) (6.7%) 1.9% 2.7% 38.8% 41.1% 40.4% 39.4% 315.3% 220.8% 631.0% 101.4% Sohar HOLD OMR 20.9% 22.6% 13.2% 16.0% 13.8% 18.3% 9.4% 9.8% 7.2% 4.2% 3.8% 6.2% 55.6% 53.7% 51.9% 49.1% 145.5% 139.0% % 104.8% OIB SELL OMR (6.9%) 5.1% 62.9% 36.8% 7.3% 18.5% 50.9% 23.2% (14.2%) (13.4%) 12.0% 13.6% 51.9% 58.5% 54.2% 48.8% 533.1% 172.2% % 108.2% AUB HOLD BHD 7.2% 11.7% 5.0% 8.1% 7.6% 7.8% (1.7%) 6.3% (0.4%) 3.9% 6.8% 1.8% 36.0% 34.8% 32.5% 32.0% 76.1% 99.5% 66.9% 67.6% Source: Bloomberg, Arqaam Capital Research Rev Growth Cost Growth Jaws Cost / Income Ratio LCR NSFR Exhibit 69: MENA banks: Key performance indicators (Continued) Company Arqaam Currency Net Interest Margin Loan Loss Charge / Avg Loans NPL Ratio Coverage Rating FY 10 FY 11 FY 12e FY 13e FY 10 FY 11 FY 12e FY 13e FY 10 FY 11 FY 12e FY 13e FY 10 FY 11 FY 12e FY 13e NBK HOLD KWD 3.00% 3.11% 3.03% 3.00% 0.1% 0.6% 0.5% 0.5% 1.6% 1.5% 1.8% 1.5% 208.7% 243.0% 220.8% 290.5% KFH SELL KWD 3.41% 3.24% 3.12% 3.08% 2.0% 2.4% 1.6% 1.5% 13.3% 10.0% 12.0% 12.0% 59.4% 77.3% 126.6% 132.7% Gulf Bank SELL KWD 2.25% 2.30% 2.32% 2.32% 3.3% 1.9% 1.8% 1.7% 18.7% 14.4% 14.0% 14.0% 36.1% 38.1% 50.1% 59.4% Burgan BUY KWD 2.79% 2.59% 2.53% 2.52% 3.1% 1.3% 1.2% 1.1% 6.1% 11.5% 11.0% 11.0% 72.9% 35.3% 41.8% 48.7% Boubyan SELL KWD 2.81% 2.90% 2.92% 2.91% 1.4% 1.1% 0.9% 0.8% 0.7% 0.5% 2.9% 3.1% % % 320.0% 306.6% Muscat BUY OMR 3.36% 3.42% 3.23% 3.23% 0.8% 0.6% 0.7% 0.7% 4.2% 3.0% 4.0% 4.0% 105.9% 118.4% 75.6% 74.5% Sohar HOLD OMR 2.74% 2.64% 2.76% 2.93% 0.4% 0.3% 0.5% 0.5% 0.9% 1.5% 1.9% 2.3% 212.5% 133.6% 133.9% 132.5% OIB SELL OMR 3.02% 2.79% 2.78% 2.78% (0.1%) (0.4%) 0.3% 0.4% 10.8% 10.9% 10.7% 10.6% 42.7% 38.8% 48.1% 47.4% AUB HOLD BHD 2.24% 2.26% 2.31% 2.35% 1.1% 0.8% 0.8% 0.8% 2.4% 2.5% 3.0% 3.2% 119.5% 135.3% 130.7% 135.7% Source: Bloomberg, Arqaam Capital Research Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 64

66 Exhibit 70: MENA financials: Share price performance Company Arqaam CurrencShare Source: Bloomberg, Arqaam Capital Research 52 Week % to 52 week Absolute Performance % Relative Performance (vs. sector) % Relative Performance (vs. market) % Rating Price High Low High Low 5D 1M 3M 6M 12M y-t-d 5D 1M 3M 6M 12M y-t-d 5D 1M 3M 6M 12M y-t-d ADCB HOLD AED % 20% (0.6) (2.5) (1.1) (0.2) (0.7) ADIB SELL AED % 6% (1.6) (2.2) (8.8) (1.9) 0.6 (1.9) (0.8) (0.9) (11.1) (10.5) 0.2 (8.2) (1.2) (0.4) (8.6) (1.7) 7.9 (4.6) CBD BUY AED % 5% (5.1) (5.4) (8.2) (3.4) (2.4) (12.4) (1.0) (12.5) DIB SELL AED % 3% (3.6) (4.5) (12.1) (6.0) (12.9) (2.6) (1.4) 4.3 (1.3) (1.0) 5.6 (9.4) (13.0) (5.7) (11.6) ENBD HOLD AED % 3% (2.9) (5.2) (4.9) (16.3) (28.2) (7.5) (0.7) (9.5) (14.0) 1.2 (0.3) 4.9 (2.2) (23.3) (21.1) (16.5) FGB BUY AED % 26% (1.0) (4.8) (1.6) 16.8 (5.8) 13.4 (0.2) (3.4) (3.9) 8.2 (6.3) 7.1 (0.6) (3.0) (1.3) NBAD BUY AED % 19% (0.6) (0.1) UNB BUY AED % 4% (1.0) (1.7) (2.3) (0.3) (17.8) 0.7 (0.2) (0.3) (4.7) (8.9) (18.2) (5.6) (0.6) 0.1 (2.1) (0.1) (10.6) (2.0) Tamweel BUY AED % 119% 3.3 (4.5) (31.9) (3.1) 0.4 (8.1) (32.4) (2.7) (24.7) 33.5 Mashreq SELL AED % 41% (1.7) (7.3) (0.9) (5.9) (1.3) (5.5) Rakbank BUY AED % 29% (5.0) (15.9) 14.0 (1.2) (23.3) 14.2 (4.3) (14.5) 11.7 (9.8) (23.7) 7.8 (4.6) (14.1) 14.3 (1.0) (16.1) 11.4 UAE CBQ HOLD QAR % 4% (2.8) (6.8) (12.7) (14.7) (4.4) (16.7) (2.6) (5.5) (10.0) (9.6) (6.8) (10.2) (1.7) (3.8) (11.7) (11.4) (2.5) (13.0) Doha HOLD QAR % 16% 1.0 (3.2) (6.5) (7.9) 7.8 (9.5) 1.2 (1.9) (3.8) (2.8) 5.4 (3.1) 2.1 (0.2) (5.4) (4.6) 9.7 (5.8) QIB HOLD QAR % 8% (0.6) (0.3) (3.6) (6.0) (3.6) (8.3) (0.5) 1.1 (0.9) (0.9) (6.0) (1.9) (2.6) (2.7) (1.7) (4.6) QNB BUY QAR % 10% 0.4 (0.4) -- (3.3) 1.4 (3.3) (1.0) MAR HOLD QAR % 21% (0.7) (0.6) (4.1) (0.6) (0.4) Khaliji SELL QAR % 6% (2.0) (5.2) (1.0) (7.6) (3.3) 2.7 QIIB BUY QAR % 11% (1.5) (2.1) (7.3) (10.2) 6.3 (7.5) (1.3) (0.7) (4.6) (5.1) 3.9 (1.1) (0.4) 0.9 (6.3) (6.9) 8.1 (3.8) Qatar CAE BUY EGP % 18% (3.5) 7.8 (23.5) (0.8) 13.0 (25.8) (1.7) (2.0) (10.7) (17.7) (20.8) CIB BUY EGP % 38% (2.0) (12.8) 36.6 (1.8) (15.2) (11.0) (7.1) 1.6 HDB HOLD EGP % 13% (5.2) (8.6) (5.6) (8.2) (36.3) 7.7 (5.0) (7.2) (3.0) (3.1) (38.7) 14.1 (2.7) (13.2) (4.1) (26.8) (30.5) (27.3) NSGB HOLD EGP % 63% (6.9) (9.3) (1.2) 12.8 EGB SELL EGP % 15% (8.6) (8.6) (23.7) (2.6) (6.0) (3.5) (26.1) (7.1) (27.2) (18.0) (37.6) Egypt Audi BUY USD % 7% (0.8) -- (0.2) 0.3 (14.3) (2.4) 6.4 (0.5) BLOM BUY USD % 11% (0.1) (12.0) 5.0 (0.7) (16.7) Byblos HOLD USD % 2% (1.3) (1.3) (3.7) (1.3) (12.2) (3.1) (14.4) 11.4 (0.9) (0.3) (2.8) (1.2) 2.9 (2.9) BOB SELL USD % 2% -- (0.1) (0.1) (0.8) 1.5 (0.6) (1.1) 0.1 (1.0) 3.9 (14.6) (0.8) 16.7 (0.4) Lebanon ANB BUY SAR % 12% (1.7) (5.8) (9.8) (3.9) (5.7) (9.4) (3.6) 0.0 (0.3) (4.2) (8.8) (16.6) (3.7) Al Rajhi BUY SAR % 14% (2.0) (5.1) (1.7) (2.9) (3.5) (1.2) (4.0) (0.3) 0.4 (3.2) (6.5) (8.4) (4.2) BSFR HOLD SAR % 24% (0.5) (5.4) (5.7) (0.5) (5.3) (1.2) (3.6) (12.5) (1.4) Riyad BUY SAR % 8% (1.6) (4.4) (1.4) 1.9 (6.3) (5.3) (9.2) (5.8) (7.5) (5.7) (12.2) (13.0) (7.6) Samba BUY SAR % 14% (1.4) (10.3) (0.2) 1.7 (12.0) (2.7) (4.1) (9.4) (11.5) (7.0) 0.3 (4.8) (4.4) (12.5) (18.7) (7.2) SABB HOLD SAR % 24% (1.4) (6.0) (0.5) (4.3) 2.4 SHB BUY SAR % 29% (2.9) (6.9) (0.9) (1.7) (1.2) (1.4) (1.9) Albilad HOLD SAR % 64% (1.5) (14.6) (6.9) (9.1) Aljazeera SELL SAR % 69% (2.3) (13.6) (0.3) (5.9) (0.6) (8.1) SIB HOLD SAR % 10% (3.1) (10.5) (2.3) 4.9 (10.5) 5.3 (1.1) (2.9) (6.2) (6.2) (10.1) (5.2) (1.5) (5.0) (6.5) (9.2) (17.3) (5.4) Alinma HOLD SAR % 51% (5.4) (12.8) (3.4) (5.2) (3.7) (7.3) KSA Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 65

67 Exhibit 71: MENA financials: Share price performance (Continued) Company Arqaam CurrencShare Source: Bloomberg, Arqaam Capital Research 52 Week % to 52 week Absolute Performance % Relative Performance (vs. sector) % Relative Performance (vs. market) % Rating Price High Low High Low 5D 1M 3M 6M 12M y-t-d 5D 1M 3M 6M 12M y-t-d 5D 1M 3M 6M 12M y-t-d NBK HOLD KWD % 16% (3.7) (1.9) (1.4) (1.4) (6.2) 2.1 (3.7) (1.6) (2.9) (0.0) (1.4) (0.0) (2.2) (0.3) KFH SELL KWD % 1% (2.8) (9.2) (11.3) (17.2) (26.9) (17.2) (2.8) (8.9) (12.8) (15.9) (18.7) (18.0) (0.5) (7.4) (12.1) (16.1) (17.4) (18.1) Gulf Bank SELL KWD % 2% (1.2) (2.3) (9.1) (15.2) (22.6) (13.5) (1.2) (2.0) (10.6) (13.9) (14.4) (14.3) 1.2 (0.5) (9.9) (14.1) (13.1) (14.5) Burgan BUY KWD % 2% (3.5) (2.4) (5.3) (7.3) (17.8) (8.3) (3.5) (2.0) (6.8) (6.0) (9.6) (9.0) (1.2) (0.5) (6.1) (6.2) (8.2) (9.2) Boubyan SELL KWD % 15% Kuwait Muscat BUY OMR % 4% (1.2) (7.9) (5.8) (5.3) (6.2) (12.3) (1.2) (7.6) (7.4) (3.9) 2.0 (13.1) 0.4 (2.0) (5.9) (7.7) 0.0 (11.7) Sohar HOLD OMR % 13% (2.0) (6.2) (2.6) (3.2) (1.3) (5.1) (2.0) (5.9) (4.2) (1.9) 6.9 (5.8) (0.4) (0.4) (2.7) (5.7) 4.9 (4.4) OIB SELL OMR % 3% (0.4) (15.7) (15.3) (16.2) (10.0) (16.5) (150.4) 1.0 (115.3) (916.2) (910.0) (59.3) 1.1 (9.9) (15.3) (18.6) (3.8) (15.8) Oman Ahli UnitedHOLD BHD % 3% (4.4) (12.3) (12.9) (3.7) -- (0.3) 1.6 (1.3) (8.2) (0.1) Bahrain Exhibit 72: MENA diversified financials: Share price performance Company Arqaam CurrencShare Source: Bloomberg, Arqaam Capital Research 52 Week % to 52 week Absolute Performance % Relative Performance (vs. sector) % Relative Performance (vs. market) % Rating Price High Low High Low 5D 1M 3M 6M 12M y-t-d 5D 1M 3M 6M 12M y-t-d 5D 1M 3M 6M 12M y-t-d Shuaa SELL AED % 74% 3.3 (4.5) (31.9) (5.0) 0.2 (10.5) (6.5) (24.7) 27.2 EFG BUY EGP % 27% (12.0) 2.9 (5.6) (3.9) (24.6) 17.2 (4.8) (7.7) (3.5) (0.4) (9.5) (1.8) (4.0) (22.5) (18.8) (17.8) DFM SELL AED % 41% (5.0) (15.9) 14.0 (1.2) (23.3) 14.2 (2.8) (1.6) (1.9) 0.4 (2.4) (5.7) 16.7 (8.2) (16.1) 5.1 Salama BUY AED % 29% (8.5) (17.9) (5.3) 0.7 (18.1) 7.2 (6.0) (12.8) (5.8) (1.3) (13.4) 3.4 (5.9) (7.7) (2.6) (6.3) (10.9) (1.8) Qatar InsurBUY QAR % 18% 0.4 (2.1) (0.0) 0.0 (0.1) (0.1) (0.1) (0.1) Tawuniya BUY SAR % 6% 0.8 (9.4) (16.6) 1.2 (24.3) (4.5) na na na na na na 2.5 (3.9) (20.9) (12.9) (31.0) (15.2) MedGulf SELL SAR % 22% (3.6) (13.4) (13.4) 12.7 (0.7) 4.3 na na na na na na (1.9) (7.9) (17.6) (1.4) (7.4) (6.3) Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 66

68 20% MENA banks undercapitalized May We include potential hidden losses and gains on our Basel capital calculations for FY 12-13e. Other than 7 banks, most banks under our coverage remain very well capitalized, while another 5 are paying out very high dividends to please their investors to the extent that they should need new capital. We also run a stress test where we weigh investment grade sovereign exposure at 20% and non-investment grade at 100% of risk weighted assets, which would particularly leave the Lebanese banks, NSGB, CAE and ENBD undercapitalized, capping their ability to grow their balance sheets and increase their dividends. We continue to favorably view strong capital situations as there may be dividend restrictions for undercapitalized banks (with core equity below 7%); the best capitalized banks should have the best growth potential. We expect Tier-1 subordinated debt and preference shares to be converted into Basel III structures (conditional convertibles) or converted into common equity, particularly for ADIB and the Lebanese banks. We see 12% Core Equity Tier-1 under Basel III as a minimum for MENA banks We expect all MENA countries to adopt Basel III, the new set of solvency rules introduced by the Bank for International Settlements. Saudi Arabia is a member of Basel, and the UAE and Qatar have said they will adopt Basel III as well. Saudi banks have already started reporting their Basel III solvency ratios to their regulators. We expect Egypt to be the last to implement Basel III as implementation of Basel II is scheduled for NBAD was the first UAE bank to report Basel 3 capital ratios. Our Basel 3 calculation for NBAD slightly deviates as we deduct dividends from the capital ratios and include slightly higher risk-weighted assets. We strongly favor Basel III over II as banks will become stronger as they will have better (less hybrid debt) and more capital (higher minimum capital ratios, no longer double counting of capital), while making banks more liquid, thus making them less vulnerable to sudden funding shocks. Basel III capital ratios are lower than under Basel I or II as: Basel III should reduce banks available capital, mainly for the Qatari banks (due to investments in associates), the UAE banks (as they rely on subordinated debt), and the Lebanese banks (due to preferred shares), while Egyptian banks capital ratios may increase (as Egyptian banks do not include the current year s profits in their capital ratios). Capital ratios within countries are not always calculated in the same way. Basel II is likely to markedly increase the capital requirements of Egyptian banks as they include a more comprehensive coverage of risks, especially those related to capital market activities, while also credit quality, market risks and operational risks are captured as compared to Basel I. We expect a much smaller effect of Basel III on risk-weighted assets on the banks, given the small trading books of the MENA banks. We are setting a 12% core equity Tier-1 for our universe unilaterally: The Basel committee has increased the minimum core equity Tier 1 to 4.5%. Basel has also introduced a capital conservation buffer of 2.5%, making the new effective minimum 7%. Basel agreed to require an additional 2.5% for banks that are systemically important from a global perspective, making the effective minimum 9.5% for such banks. We believe the market will effectively force non-systemic banks to have a core equity Tier 1 of 9.5% as Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 67

69 well: Senior and junior debt holders are not likely to be keener to lend to non-systemic banks with weaker capital ratios than banks that would be bailed out by their governments in cases of acute stress. Most European banks are already targeting 9-10% core equity Tier-1. We apply another buffer of 2.5% for the MENA banks, given their higher risks (higher economic volatility, untested credit history, higher concentration risks, more vulnerable for foreign money flows, but also simply perceived riskiness by foreign investors). We do not take into account implicit support from the government, as we do not believe banks that are partly owned by national government should run on lower capital ratios than banks that are not partly owned by national governments. From a credit perspective, implicit support may enhance the bank s credit worthiness; shareholders on the other hand, would face a dilution risk if a government indeed were to step in to stabilize a bank. We are not rushing banks to improve their capital structure as some banks do generate enough retained earnings compared to their capital consumption emanating from their expected growth and we think banks should adjust their dividends to prepare for the new higher capital requirements. However, we see capital weakness or strength as a hidden value that is often neglected in stock analysis in this region. We believe common equity Tier 1 will be the most important capital ratio going forward (as it takes into account only capital of the highest quality) rather than the total capital adequacy ratio or BIS ratio (which includes debt instruments), which has typically been the focus point for MENA analysts. Exhibit 73: Basel III Implementation framework FY 13 FY 14 FY 15 FY 16 FY As of 1 Jan Minimum common equity capital ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% Capital conservation buffer 0.6% 1.3% 1.9% 2.5% Minimum CE capital ratio plus conservation buffer 3.5% 4.0% 4.5% 5.1% 5.8% 6.4% 7.0% Additional buffer for Global Systemic banks 2.5% New effective minimum 9.5% Arqaam Capital minimum 12.0% Minimum Tier-1 capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% Minimum Total capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Minimum Total capital plus conservation buffer 8.0% 8.0% 8.0% 8.6% 9.3% 9.9% 10.5% Minimum Total capital plus conservation buffer for systemic banks 13.0% Capital instruments that no longer qualify as non-core T1 or T2 Phased out over 10 years Source: Bank for International Settlements, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 68

70 Available capital under pressure due to Basel III (impact of up to 39%) Basel III should raise the quality of capital, with a much greater focus on common equity to absorb losses. Non-equity components (such as preferred shares, subordinated loans, etc) will no longer be included in core equity ratios, as they are not loss-absorbing. Intangibles and deferred assets (in excess of 10% of Tier 1) will have to be deducted from core capital ratios. Financial associates will need to be fully deducted from Tier 1. Currently only 50% is deducted from Tier 1 and 50% deducted from Tier 2 for bank holdings, while insurance capital is only deducted from the total BIS ratio. We also adjust for differences between banks: We include earnings, but subtract dividends payable. We include minority interests in core equity Tier-1, if not already included. We adjust for securitizations being directly deducted, as those positions should be grossed-up into risk-weighted assets. In the following table, we summarize the impact of the deductions and additions to current reported Tier 1 capital and common equity Tier 1. Common equity Tier 1 falls 11.9% on average for UAE banks, 21.9% for Lebanese banks, 3.1% for Kuwaiti banks, 3.5% for Omani banks and 3.2% for Qatari banks, but increases 2.6% for Saudi banks. Our estimated total impact is smaller than the average impact estimated in the most recent quantitative impact study performed by Basel (41.3% for a sample of large banks and 24.7% for small banks). We think this is because, for banks under our coverage, goodwill and intangibles have already been deducted from Tier 1 in most cases, deferred tax assets are very small, and the current year s earnings are not always included in reported Tier 1 ratios. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 69

71 Exhibit 74: Impact of Basel III on common equity Tier 1 (FY 13e) Source: Arqaam Capital Research May Preference Subordinated Associates Associates Current year Allowed Deferred tax Dividends Intangibles shares debt already earnings minorities assets beyond Securitization CET1 Audi (10.2%) -- (2.8%) 1.6% (11.3%) Blom (8.9%) (8.9%) Byblos (22.5%) % (3.4%) (17.1%) BOB (48.2%) -- (3.6%) 1.8% (50.0%) Lebanon (22.4%) -- (1.6%) 0.9% 2.2% (0.9%) (21.9%) QNB (10.6%) 8.1% (2.5%) Doha (0.2%) 0.1% (0.1%) QIB (12.7%) 12.7% CBQ (42.8%) 21.4% (21.4%) MARK (7.2%) 7.2% Khaliji QIIB (4.1%) 2.0% 18.1% (14.4%) % Qatar (11.1%) 7.4% 2.6% (2.1%) (3.2%) NBK (29.8%) 24.8% (5.0%) Burgan Gulf Bank KFH (9.5%) 4.7% (4.7%) Boubyan (11.6%) 5.8% -- (1.3%) (5.8%) Kuwait (10.2%) 7.1% -- (0.3%) (3.1%) Muscat -- (9.7%) (6.6%) 4.3% % (10.5%) Sohar OIB Oman -- (3.2%) (2.2%) 1.4% % (3.5%) CIB (1.5%) % (6.8%) (3.9%) 0.5% % CAE % (16.4%) % % NSGB (1.6%) % (8.1%) % HDB (26.4%) 26.4% 10.9% (4.4%) % EGB (16.5%) (3.1%) (19.6%) Egypt (7.7%) 4.4% 13.6% (6.5%) (0.6%) 0.1% % ADCB -- (17.2%) (0.4%) 0.2% -- (3.0%) (20.4%) ADIB -- (21.5%) (8.8%) (5.5%) (35.8%) NBAD -- (11.9%) (0.1%) (5.0%) (16.9%) FGB -- (13.2%) (1.9%) (8.3%) (23.4%) UNB -- (13.4%) (0.0%) 0.0% -- (1.8%) (15.2%) ENBD -- (13.3%) (2.5%) (15.8%) DIB (5.7%) (6.3%) (12.0%) CBD (0.2%) (0.2%) Mashreq (0.2%) (2.6%) (2.8%) Rakbank (10.3%) (10.3%) Tamweel (2.1%) (2.1%) UAE -- (7.0%) (1.3%) 0.0% -- (3.6%) (11.9%) SAMBA (1.1%) (1.1%) RIYAD (1.1%) 0.5% 12.0% (3.2%) % ALRAJHI % (11.2%) % BSFR (0.9%) 0.4% -- (3.8%) (4.2%) SABB (3.6%) 1.8% 15.4% (3.4%) % ANB (2.2%) 1.1% (1.1%) SHB (0.2%) 0.1% (0.1%) SIB (11.1%) 5.5% -- (3.6%) (9.1%) ALBILAD % (1.8%) % BJAZ (2.7%) (2.7%) ALINMA KSA (1.7%) 0.9% 6.3% (2.8%) % AUB (4.7%) -- (23.6%) 11.8% 14.9% (5.6%) (7.2%) Bahrain (4.7%) -- (23.6%) 11.8% 14.9% (5.6%) (7.2%) Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 70

72 Exhibit 75: Composition of Tier I (Basel III FY 13e) Tier-1 Preference Subordinated Associates Associates Current year Dividends Intangibles Allowed CET1 (Basel 3) shares debt already earnings minorities Audi 12.2% 1.2% 0.0% 0.3% 0.2% 0.0% 0.0% 0.0% 0.0% 10.9% Blom 13.0% 1.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 11.9% Byblos 13.9% 3.1% 0.0% 0.0% 0.0% 1.2% 0.5% 0.0% 0.0% 11.5% BOB 13.1% 6.3% 0.0% 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 6.6% Lebanon 13.1% 3.0% 0.0% 0.2% 0.1% 0.3% 0.1% 0.0% 0.0% 10.2% QNB 23.7% 0.0% 0.0% 2.5% 1.9% 0.0% 0.0% 0.0% 0.0% 23.2% Doha 11.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 11.3% QIB 19.6% 0.0% 0.0% 2.5% 2.5% 0.0% 0.0% 0.0% 0.0% 19.6% CBQ 13.1% 0.0% 0.0% 5.6% 2.8% 0.0% 0.0% 0.0% 0.0% 10.3% MARK 15.7% 0.0% 0.0% 1.1% 1.1% 0.0% 0.0% 0.0% 0.0% 15.7% Khaliji 15.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.4% QIIB 19.2% 0.0% 0.0% 0.8% 0.4% 3.5% 2.8% 0.0% 0.0% 19.5% Qatar 16.9% 0.0% 0.0% 1.8% 1.3% 0.5% 0.4% 0.0% 0.0% 16.4% NBK 19.7% 0.0% 0.0% 5.9% 4.9% 0.0% 0.0% 0.0% 0.0% 18.7% Burgan 13.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 13.9% GBK 15.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.0% KFH 11.8% 0.0% 0.0% 1.1% 0.6% 0.0% 0.0% 0.0% 0.0% 11.2% Boubyan 21.1% 0.0% 0.0% 2.5% 1.2% 0.0% 0.3% 0.0% 0.0% 19.9% Kuwait 16.3% 0.0% 0.0% 1.9% 1.3% 0.0% 0.1% 0.0% 0.0% 15.7% Muscat 12.0% 0.0% 1.2% 0.8% 0.5% 0.0% 0.0% 0.0% 0.0% 10.7% Sohar 9.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.1% OIB 13.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 13.3% Oman 11.5% 0.0% 0.4% 0.3% 0.2% 0.0% 0.0% 0.0% 0.0% 11.1% CIB 12.4% 0.0% 0.0% 0.2% 0.0% 3.3% 0.8% 0.5% 0.1% 14.3% CAE 9.5% 0.0% 0.0% 0.0% 0.0% 2.0% 1.6% 0.0% 0.0% 9.9% NSGB 12.7% 0.0% 0.0% 0.2% 0.0% 2.9% 1.0% 0.0% 0.0% 14.4% HDB 15.5% 0.0% 0.0% 4.1% 4.1% 1.7% 0.7% 0.0% 0.0% 16.6% EGB 18.5% 0.0% 0.0% 3.1% 0.0% 0.0% 0.6% 0.0% 0.0% 14.9% Egypt 13.7% 0.0% 0.0% 1.5% 0.8% 2.0% 0.9% 0.1% 0.0% 14.0% ADCB 14.1% 0.0% 2.4% 0.1% 0.0% 0.0% 0.4% 0.0% 0.0% 11.2% ADIB 12.6% 0.0% 2.7% 1.1% 0.0% 0.0% 0.7% 0.0% 0.0% 8.1% NBAD 14.4% 0.0% 1.7% 0.0% 0.0% 0.0% 0.7% 0.0% 0.0% 12.0% FGB 17.7% 0.0% 2.3% 0.3% 0.0% 0.0% 1.5% 0.0% 0.0% 13.5% UNB 16.3% 0.0% 2.2% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0% 13.8% ENBD 12.7% 0.0% 1.7% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0% 10.7% DIB 10.5% 0.0% 0.0% 0.6% 0.0% 0.0% 0.7% 0.0% 0.0% 9.2% CBD 17.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 17.1% Mashreq 15.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% 0.0% 0.0% 15.3% Rakbank 22.4% 0.0% 0.0% 0.0% 0.0% 0.0% 2.3% 0.0% 0.0% 20.1% Tamweel 22.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.5% 0.0% 0.0% 22.4% UAE 16.0% 0.0% 1.2% 0.2% 0.0% 0.0% 0.7% 0.0% 0.0% 13.9% SAMBA 16.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 15.9% RIYAD 13.9% 0.0% 0.0% 0.1% 0.1% 1.7% 0.5% 0.0% 0.0% 15.1% ALRAJHI 14.8% 0.0% 0.0% 0.0% 0.0% 4.0% 1.7% 0.0% 0.0% 17.2% BSFR 14.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.5% 0.0% 0.0% 13.4% SABB 12.4% 0.0% 0.0% 0.4% 0.2% 1.9% 0.4% 0.0% 0.0% 13.6% ANB 14.1% 0.0% 0.0% 0.3% 0.2% 0.0% 0.0% 0.0% 0.0% 13.9% SHB 12.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.4% SIB 18.0% 0.0% 0.0% 2.0% 1.0% 0.0% 0.7% 0.0% 0.0% 16.4% ALBILAD 15.2% 0.0% 0.0% 0.0% 0.0% 2.2% 0.3% 0.0% 0.0% 17.1% BJAZ 13.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% 0.0% 0.0% 12.7% ALINMA 24.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 24.8% KSA 15.3% 0.0% 0.0% 0.3% 0.1% 0.9% 0.4% 0.0% 0.0% 15.7% AUB 11.3% 0.5% 0.0% 2.7% 1.3% 1.7% 0.6% 0.0% 0.0% 10.5% Bahrain 11.3% 0.5% 0.0% 2.7% 1.3% 1.7% 0.6% 0.0% 0.0% 10.5% Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 71

73 Increased capital requirements under Basel II For Egypt (the only country under our coverage that has not applied Basel II yet), we estimate an increase of 5% 14% in risk weighted assets as a result of Basel II. This is driven by a number of factors: Increased risk weightings for sovereign bills in foreign currency (depending on the country rating), The introduction of market risk (based on the volatility of held securities), and The introduction of operational risk (the risk of loss due to inadequate or failed internal processes, people, and systems). (1) Increased weightings for sovereign debt in foreign currencies due to Basel II (increasing capital requirements 1% 2%) According to Basel II, the standardized approach of BIS, non-investment grade treasury bonds should attract a risk weight of 100%. Within our universe, Lebanon and Egypt (both B rating) are within this category. However, we expect only a small impact as we believe the Egyptian central bank, like Lebanon s, will assign a risk weight of 0% to sovereign exposures denominated in the local currency (EGP). Around 95% of the treasury bills and bonds held by the Egyptian banks are in local currency, while the Lebanese banks hold far more T-bills and bonds in foreign currency (mainly USD c. 40%-50% of total). Exhibit 76: Country rating under Basel II Credit Assessment AA- to AAA A- to A+ BBB- to BBB+ BB+ to B- Below B- Unrated Risk weights sovereign debt 0% 20% 50% 100% 150% 100% Countries Kuwait Oman Bahrain Egypt Dubai UAE Lebanon Qatar KSA Abu Dhabi Source: Bloomberg, The Standardized Approach to Credit Risk, January 2001 (2) Market risk (5% 6% increase) and (3) operational risk (5% increase) The potential increase in capital requirements as a result of market risk should be fairly limited, as the Egyptian banks mainly hold short-dated treasury bonds and do not have large securities positions. Operational risk could be a major factor, however. The latest quantitative impact study from BIS showed an increase of 5% 13% in capital requirements. Considering the investments banks have made in their operational risk management systems, we expect the operational risk charge to come in at the lower end of the range. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 72

74 (4) Credit risks weighted according to internal or external ratings (roughly no impact expected) The standardized approach sets out specific risk weights for certain types of credit risk. We do not expect any material effect as we expect most credits to attract a 100% weighting, though borrowers with a lower credit rating could attract a 150% weighting. Increased capital requirements under Basel III Basel III is likely to increase the capital requirements of banks as they include a more comprehensive coverage of risks, especially those related to capital market activities, but the impact on MENA banks is much smaller than their peers in the US and Europe, as banks have shied away from those activities. We take into account the following impacts: Significantly increased weightings for market risk. Banks will have to calculate a stressed value at risk and an incremental risk capital charge (IRC) for credit sensitive positions, which captures default and migration risk at a longer liquidity horizon. Securitization positions will be subject to charges: All remaining regulatory adjustments currently deducting 50% of an item from Tier 1 and 50% from Tier 2 and not addressed elsewhere should receive a risk weight of 1250%. ADCB managed this position down from AED 13bn year-end FY 10A to less than AED 1bn, which is a major achievement. Rating migration/benefit seen from advanced models: We may see some benefit when MENA banks adopt more sophisticated models, such as the internal ratings-based method (under which banks rank their loans according to expected probability of default) and the advanced internal ratings-based method (under which banks also estimate the loss in case of default). We do not expect a substantial benefit from the use of sophisticated risk models as most lending is to corporate borrowers (for which we do not expect much of a positive effect from advanced modeling), while historical data for retail lending are not always available as the retail lending market is still in its infancy, particularly in Egypt. NBAD has adopted the foundation-irb approach and has said it does not expect a significant benefit. As a result of these revisions, market risk capital requirements will increase an estimated average of 3 to 4 times for large, internationally active banks. The impact on MENA banks should be smaller as they are not holding large credit exposures in their trading books. Banks are preparing for Basel III and should proactively reduced their market-risk weighted assets or potential gross up for securitization positions, with ADCB being the most aggressive in this respect. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 73

75 ALINMA QNBK QIIK CBQK DHBK BKMB KCBK BJAZ BOB NBAD BKSB COMI BLOM FGB BURG BOUBYAN RJHI NSGB RIBL BSFR SABB ALBI CIEB RAKBANK SAMBA ARNB AUDI OIBB GBK NBK SHB MARK BYB KFIN MASQ AUB ADCB HDBK CBD ENBD UNB ADIB DIB SIBC EGBE TAMWEEL QIBK TAMWEEL KCBK SAMBA QIIK OIBB ALINMA KFIN BJAZ RJHI BLOM NBAD ALBI BKMB BOUBYAN NBK SIBC AUDI ADIB FGB MARK ARNB DHBK CBQK BOB DIB ADCB BKSB BSFR RIBL AUB SHB UNB QIBK BURG ENBD COMI SABB MASQ QNBK CIEB BYB EGBE CBD GBK RAKBANK NSGB HDBK Exhibit 77: Market Risk Weighted Assets as % RWAs 15% 13% 11% 9% 7% 5% 3% 1% -1% May % RWA (reported) % RWA (Basel 3) Exhibit 78: Market Risk Weighted Assets y/y Growth 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Some banks will have to raise more capital in the next few years: CBQ, CAE, Doha Evolution Core Equity Tier We analyze the evolution of estimated capital ratios between 2011 and 2013, breaking the ratios down into various components; the ratios are positively affected by: pre-impairment income, capital increases, and disposals but are adversely impacted by acquisitions, share buybacks, dividend payments, taxes, impairments, and growth in risk weighted assets. We also incorporate hidden balance sheet strengths (such as potential capital gains on real estate assets, but not over provisioning as banks are required to build excess provisions) and weaknesses (potential impairments on real estate) in the calculations. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 74

76 ALINMA QNBK TAMWEEL RAKBANK QIBK BOUBYAN QIIK NBK RJHI ALBI CBD SIBC SAMBA MARK KCBK MASQ RIBL GBK EGBE COMI UNB SABB NSGB BURG ARNB FGB OIBB BSFR BJAZ AAAL NBAD BLOM BYB DHBK ADCB KFIN AUDI ENBD BKMB CBQK CIEB DIB BKSB HDBK ADIB BOB Capacity to grow RWA FY 13e onward vs. 12% CE Tier-1 Exhibit 79: Capacity to Grow 110% May % 70% 50% 30% 10% -10% -30% -50% Dividend constraints and sustainability of dividend payments: Exhibit 80: Dividend Payout 80% 70% 60% 50% 40% 30% 20% UAE Qatar Egypt Lebanon KSA Kuwait Oman Bahrain Sector 10% FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e Some banks are paying very high dividends to mainly satisfy retail shareholders. However, due to the very high pay-outs, those banks do not generate enough capital for future growth. A consistent pay-out should allow the banks to have roughly stable capital ratios. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 75

77 If (1-earnings pay-out)* RoE = the growth in risk weighted assets, then capital ratios remain stable. If every 1% point of growth in risk-weighted assets > the (1-pay-out)* RoE then capital ratios should fall by 1% (not pp) of their respective capital ratio. We think that the following banks are having too high pay-outs and should increase capital, cut their pay-outs or slow-down their risk-weighted asset growth. The chart below shows the link between RoE and pay-out. Exhibit 81: FY 12e Payout vs. ROE 100% 90% 80% QIBK CBQK QIIK DHBK QATI CIEB 5% Equity Growth 70% 60% 50% 40% 30% 20% TAMWEEL EMIRATES HDBK MASQ DIB SIBC ADCB BJAZ EGBE KFIN UNB FGB ADIB CBD MARK NBK MEDGULF AUB BKSB BKMB BYB ARNB BOB QNBK NBAD AAAL TAWUNIYA NSGB RIBL BLOM BSFR BURG SABB SAMBA 10% Equity Growth RJHI RAKBANK AUDI 15 % Equity COMI Growth 10% BOUBYAN ALBI 0% SHUAA DFM SALAMA ALINMA GBK OIBB 0% 5% 10% 15% 20% 25% We expect capital ratios to come down for HDB (as we include 100% risk-weighting for property developments), Alinma (due to its sharp leveraging), QIIB, MARK, QIB and CAE (due to its high pay-out and double digit loan growth). We expect capital ratios to improve for NBK (due to its very low loan growth), Audi (due to contained RWA growth), Al Rajhi (due to its very high RoE), RAKBank (due to a slowdown in lending due to retail caps) and Muscat (thanks to 2 capital increases). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 76

78 NBK RJHI RAKBANK AUDI ALBI BKMB GBK COMI UNB QNBK SAMBA BOB OIBB BLOM CBD BSFR SABB ENBD NSGB AUB ADIB NBAD DHBK BJAZ KFIN FGB ADCB SIBC ARNB BYB BKSB RIBL MASQ AAAL BURG TAMWEEL CIEB KCBK DIB BOUBYAN QIBK CBQK EGBE MARK QIIK HDBK ALINMA May Exhibit 82: Change in CET1 FY 11-14e 5% 0% -5% -10% -15% -20% Potential dividend cuts under Basel III Banks may face restrictions on their dividend payouts if their common equity Tier 1 is not above 7%. Some banks continued to pay out dividends during the crisis even though their individual financial conditions and the outlook for the sector were deteriorating. Much of this activity was driven by a sense that discretionary reductions in distributions could be seen as a sign of weakness. To remove the temptation for banks to distribute more in an attempt to signal strength when their financial condition has actually weakened, the Basel Committee has developed a proposal for capital conservation standards. The table below shows the minimum capital conservation ratios a bank must meet at various levels of the Common Equity Tier 1 (CET1) capital ratios. In the table on the next page, we compare the potential new FY 12e core Tier 1 ratios (as calculated in the previous section) with the potential minimum capital requirement of 7.0% core equity (4.5% plus the 2.5% conservation buffer), to find the maximum potential payout of dividends from retained earnings. Bank Audi, Bank of Beirut, Doha Bank, CBQ, Sohar, CIB, ADIB, DIB and Ahli United could be at risk under such a framework. DIB reduced its DPS for FY 11A from AED 0.15 to AED under pressure from the UAE Central Bank. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 77

79 Exhibit 83: Potential dividend constraints under Basel III CET1 FY 12e Minimum Exceeds min by Maximum Pay-out range (min 7%) May Current payout Dividend cut or Current yield allowed increase AUDI 9.9% 7.0% 41.2% 20.0% 38.0% (47.4%) 9.0% 4.7% BLOM 11.6% 7.0% 65.1% 40.0% 30.0% 33.3% 6.0% 7.9% BYB 11.7% 7.0% 66.7% 40.0% 40.0% --% 6.2% 6.2% BOB 6.5% 7.0% (7.3%) --% 40.0% (100.0%) 3.8% --% QNBK 23.1% 7.0% 230.6% 100.0% 39.0% 156.4% 3.6% 9.1% DHBK 12.4% 7.0% 77.6% 60.0% 87.7% (31.6%) 8.6% 5.9% QIBK 20.4% 7.0% 191.7% 100.0% 83.9% 19.3% 5.2% 6.1% CBQK 11.4% 7.0% 63.3% 40.0% 79.5% (49.7%) 8.6% 4.3% MARK 16.5% 7.0% 135.2% 100.0% 50.8% 96.7% 3.7% 7.4% KCBK 17.0% 7.0% 142.5% 100.0% 98.9% 1.1% 5.9% 5.9% QIIK 21.4% 7.0% 206.0% 100.0% 78.0% 28.2% 7.5% 9.6% NBK 17.9% 7.0% 156.0% 100.0% 48.7% 105.5% 3.5% 7.2% BURG 13.1% 7.0% 86.8% 60.0% 25.0% 139.5% 2.3% 5.5% GBK 14.4% 7.0% 105.2% 100.0% --% N/A --% 3.9% KFH 11.4% 7.0% 62.9% 40.0% 23.7% 68.6% 1.4% 2.4% BOUBYAN 22.4% 7.0% 219.7% 100.0% --% N/A --% 1.5% BKMB 11.0% 7.0% 57.3% 40.0% 36.0% 11.2% 4.3% 4.8% BKSB 9.4% 7.0% 34.6% 20.0% 40.8% (51.0%) 4.0% 2.0% OIB 13.4% 7.0% 91.4% 60.0% 60.3% (0.5%) 4.3% 4.3% COMI 14.3% 7.0% 104.4% 100.0% 31.0% 222.6% 4.5% 14.6% CIEB 10.6% 7.0% 51.6% 40.0% 70.0% (42.9%) 10.3% 5.9% NSGB 14.1% 7.0% 100.7% 100.0% 35.0% 185.7% 4.4% 12.5% HDBK 9.9% 7.0% 41.6% 20.0% 40.0% (50.0%) 4.2% 2.1% EGBE 15.9% 7.0% 127.3% 100.0% 30.0% 233.3% 1.7% 5.7% ADCB 11.1% 7.0% 58.7% 40.0% 30.5% 31.0% 3.6% 4.7% ADIB 7.8% 7.0% 12.1% --% 50.1% (100.0%) 6.8% --% NBAD 11.9% 7.0% 70.1% 40.0% 32.9% 21.4% 3.9% 4.8% FGB 13.8% 7.0% 96.4% 60.0% 56.3% 6.5% 8.4% 8.9% UNB 13.9% 7.0% 99.2% 60.0% 18.2% 228.8% 3.4% 11.3% ENBD 10.8% 7.0% 54.1% 40.0% 41.9% (4.5%) 4.5% 4.3% DIB 10.2% 7.0% 45.8% 20.0% 60.0% (66.7%) 7.3% 2.4% CBD 16.9% 7.0% 141.3% 100.0% 55.0% 81.8% 7.6% 13.9% MASQ 15.5% 7.0% 121.8% 100.0% 40.0% 150.0% 2.8% 6.9% RAKBANK 18.9% 7.0% 170.6% 100.0% 45.0% 122.2% 7.2% 16.0% TAMWEEL 22.5% 7.0% 221.7% 100.0% 58.7% 70.4% 4.3% 7.4% SAMBA 15.7% 7.0% 123.6% 100.0% 32.4% 208.2% 3.4% 10.6% RIBL 15.6% 7.0% 122.4% 100.0% 56.6% 76.8% 5.4% 9.6% RJHI 16.5% 7.0% 135.7% 100.0% 57.5% 74.0% 4.4% 7.6% BSFR 13.0% 7.0% 85.2% 60.0% 29.1% 105.9% 2.7% 5.6% SABB 15.1% 7.0% 115.2% 100.0% 27.9% 258.7% 2.0% 7.3% ARNB 14.1% 7.0% 101.0% 100.0% 39.5% 153.2% 3.7% 9.5% AAAL 12.4% 7.0% 77.2% 60.0% 34.2% 75.6% 3.7% 6.5% SIBC 17.0% 7.0% 143.1% 100.0% 35.8% 179.4% 3.2% 9.0% ALBI 17.4% 7.0% 148.2% 100.0% --% N/A --% 10.8% BJAZ 13.6% 7.0% 94.9% 60.0% 33.1% 81.4% 2.1% 3.8% ALINMA 30.5% 7.0% 335.2% 100.0% --% N/A --% 2.8% AUB 10.2% 7.0% 46.0% 20.0% 43.9% (54.4%) 4.9% 2.2% New potential yield Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 78

80 Exhibit 84: FY 11-15e CAGR Capital vs. RWA growth May % Capital Generation 25% OIB CIB 20% RJHI MUSCAT ALBI RAKBANK SABB 15% QNB NSGB Audi BOB BLOM BJAZ NBAD SAMBA SHB SOHAR NBK BSFR AUB ANB MARK 10% GULF BANK UNB DOHA BYBLOS BOUBYAN ADIB FGB CAE KFH Burgan CBD RIYAD ADCB SIB ENBD MASQ 5% QIB EGB DIB Khaliji CBQ HDB QIIB TAMWEEL Capital Absorption 0% 0% 5% 10% 15% 20% 25% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 79

81 Exhibit 85: Evolution of core equity Tier 1: FY 11-12e Core Tier-1 FY 11A Pre pairment income Equity raisings Asset sales/acquisitions Impairments Taxes Dividends Increase in RWAs Residual Core Tier-1 FY 12e AUDI 8.5% 2.9% --% 0.5% (0.4%) (0.5%) (1.0%) (0.1%) 0.0% 9.9% BLOM 11.2% 3.3% --% --% (0.4%) (0.4%) (0.6%) (1.9%) 0.3% 11.6% BYB 11.4% 2.6% --% --% (0.3%) (0.4%) (0.5%) (1.1%) (0.0%) 11.7% BOB 5.9% 2.0% (0.2%) (0.3%) (0.5%) (0.7%) 0.4% 6.5% QNBK 21.2% 5.4% --% --% (0.7%) (0.0%) (2.0%) (1.3%) 0.6% 23.1% DHBK 10.1% 2.9% 2.2% --% (0.4%) (0.0%) (2.1%) (0.2%) (0.1%) 12.4% QIBK 21.8% 4.0% --% --% (1.3%) (0.0%) (2.4%) (2.0%) 0.3% 20.4% CBQK 12.5% 3.4% --% --% (0.4%) --% (2.1%) (1.2%) (0.7%) 11.4% MARK 20.1% 4.0% --% --% (0.7%) --% (1.6%) (4.5%) (0.9%) 16.5% KCBK 16.3% 2.0% (0.3%) (0.0%) (1.3%) (0.3%) 0.6% 17.0% QIIK 22.6% 3.9% (0.3%) --% (3.0%) (1.7%) 0.0% 21.4% NBK 15.9% 4.1% --% --% (0.5%) (0.2%) (1.7%) 0.2% 0.2% 17.9% BURG 14.3% 3.3% --% (0.9%) (0.3%) (0.4%) (2.6%) (0.2%) 13.1% GBK 13.6% 3.4% (2.2%) (0.1%) --% (0.7%) 0.3% 14.4% KFIN 11.0% 3.0% (1.1%) (0.0%) (0.2%) (0.2%) (0.9%) 11.4% BOUBYAN 22.2% 2.1% (1.1%) (0.1%) --% (1.0%) 0.3% 22.4% BKMB 9.1% 2.3% 1.5% --% (0.5%) (0.3%) (0.6%) (1.1%) 0.6% 11.0% BKSB 9.3% 1.5% (0.4%) (0.2%) (0.4%) (1.4%) 0.9% 9.4% OIBB 12.1% 1.6% 10.6% (0.2%) (0.2%) --% (10.6%) 0.0% 13.4% COMI 13.4% 4.3% --% --% (0.5%) (0.9%) (1.0%) (2.6%) 1.7% 14.3% CIEB 11.6% 4.1% --% --% (0.8%) (0.7%) (1.5%) (2.0%) (0.0%) 10.6% NSGB 13.5% 4.2% --% --% (0.5%) (0.9%) (1.0%) (1.6%) 0.3% 14.1% HDBK 20.8% 3.1% --% --% (0.7%) (0.3%) (0.5%) (6.1%) (6.3%) 9.9% EGBE 17.4% 1.8% (0.6%) (0.6%) (0.6%) (2.2%) 0.6% 15.9% ADCB 11.5% 3.8% (1.2%) (1.4%) (0.0%) (0.4%) (0.8%) (0.3%) 11.1% ADIB 8.0% 3.1% --% (1.3%) --% (0.7%) (0.7%) (0.5%) 7.8% NBAD 11.9% 2.8% --% (0.7%) (0.1%) (0.6%) (1.3%) (0.1%) 11.9% FGB 13.3% 3.6% --% (1.0%) --% (1.4%) (1.2%) 0.4% 13.8% UNB 13.3% 2.7% --% (1.0%) (0.0%) (0.3%) (1.1%) 0.3% 13.9% ENBD 10.5% 3.3% --% (2.0%) (0.0%) (0.3%) (0.1%) (0.6%) 10.8% DIB 12.1% 2.7% --% (1.6%) (0.0%) (0.5%) (2.4%) (0.1%) 10.2% CBD 16.6% 3.7% --% (1.6%) --% (1.1%) (0.7%) 0.1% 16.9% MASQ 15.5% 2.6% (1.2%) (0.0%) (0.4%) (1.1%) 0.0% 15.5% RAKBANK 19.1% 9.5% (1.9%) --% (2.4%) (4.1%) (1.3%) 18.9% TAMWEEL 22.4% 1.7% (1.0%) --% (0.5%) (0.3%) 0.2% 22.5% SAMBA 14.8% 2.5% --% --% (0.2%) --% (0.4%) (0.7%) (0.3%) 15.7% RIBL 15.3% 2.0% --% --% (0.3%) --% (0.5%) (0.9%) (0.1%) 15.6% RJHI 14.6% 4.8% --% --% (0.6%) (0.3%) (1.9%) (1.3%) 1.2% 16.5% BSFR 12.9% 2.1% --% --% (0.3%) --% (0.6%) (1.0%) (0.2%) 13.0% SABB 13.4% 2.8% --% --% (0.4%) --% (0.5%) (2.3%) 2.1% 15.1% ARNB 14.0% 2.5% --% --% (0.5%) --% (0.8%) (1.2%) 0.1% 14.1% AAAL 12.9% 2.2% (0.3%) --% (0.6%) (1.9%) 0.1% 12.4% SIBC 16.2% 2.4% (0.6%) --% (0.7%) (0.2%) (0.1%) 17.0% ALBI 15.6% 2.7% 1.9% (0.8%) --% --% (2.3%) 0.3% 17.4% BJAZ 11.7% 1.0% 2.5% (0.3%) --% (0.4%) (1.1%) 0.4% 13.6% ALINMA 39.0% 1.4% (0.3%) --% --% (8.8%) (0.8%) 30.5% AUB 10.3% 2.9% (1.0%) (0.1%) (0.7%) (1.0%) (0.1%) 10.2% Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 80

82 Exhibit 86: Evolution of core equity Tier 1: FY 12-13e Core Tier-1 FY 12e Pre pairment income Equity raisings Asset sales/acquisitions Impairments Taxes Dividends Increase in RWAs Residual Core Tier-1 FY 13e AUDI 9.9% 2.4% --% 0.5% (0.5%) (0.4%) (0.7%) (0.5%) 0.1% 10.9% BLOM 11.6% 3.3% --% --% (0.4%) (0.4%) (0.7%) (1.1%) (0.5%) 11.9% BYB 11.7% 2.6% --% --% (0.4%) (0.4%) (0.5%) (1.3%) (0.4%) 11.4% BOB 6.5% 2.0% (0.3%) (0.3%) (0.6%) (0.5%) (0.1%) 6.7% QNBK 23.1% 5.4% --% --% (0.7%) (0.0%) (1.9%) (3.2%) 0.4% 23.2% DHBK 12.4% 2.9% --% --% (0.5%) (0.0%) (1.9%) (1.5%) (0.2%) 11.3% QIBK 20.4% 4.0% --% --% (0.6%) (0.0%) (3.0%) (1.8%) 0.6% 19.6% CBQK 11.4% 3.4% --% --% (0.5%) --% (1.8%) (1.5%) (0.8%) 10.3% MARK 16.5% 4.0% --% --% (0.7%) --% (1.4%) (2.7%) (0.1%) 15.7% KCBK 17.0% 2.0% (0.4%) (0.0%) (1.1%) (1.8%) (0.2%) 15.4% QIIK 21.4% 3.9% (0.5%) --% (2.8%) (2.6%) (0.1%) 19.3% NBK 17.9% 4.1% --% --% (0.5%) (0.2%) (1.8%) (1.1%) 0.4% 18.7% BURG 13.1% 3.3% (0.9%) (0.4%) --% (0.1%) (1.0%) 13.9% GBK 14.4% 3.4% (2.0%) (0.1%) --% (0.9%) 0.4% 15.0% KFIN 11.4% 3.0% (1.1%) (0.1%) (0.2%) (1.1%) (0.7%) 11.2% BOUBYAN 22.4% 2.1% (0.9%) (0.1%) (0.3%) (4.5%) 1.0% 19.6% BKMB 11.0% 2.3% --% --% (0.5%) (0.3%) (0.6%) (1.6%) 0.3% 10.7% BKSB 9.4% 1.5% (0.4%) (0.2%) (0.4%) (1.1%) 0.2% 9.1% OIBB 13.4% 1.6% (0.3%) (0.2%) --% (1.0%) (0.2%) 13.3% COMI 14.3% 4.3% --% --% (0.5%) (0.9%) (0.8%) (2.3%) 0.6% 14.6% CIEB 10.6% 4.1% --% --% (0.7%) (0.7%) (1.6%) (1.5%) (0.3%) 9.9% NSGB 14.1% 4.2% --% --% (0.6%) (0.9%) (1.0%) (1.9%) 0.2% 14.1% HDBK 9.9% 3.1% --% --% (0.7%) (0.4%) (0.7%) (1.2%) (0.9%) 9.0% EGBE 15.9% 1.8% (0.6%) (0.5%) (0.6%) (1.7%) 0.5% 14.9% ADCB 11.1% 3.8% (1.3%) (0.0%) (0.4%) (0.8%) (1.2%) 11.2% ADIB 7.8% 3.1% --% (1.3%) --% (0.7%) (0.5%) (0.4%) 8.1% NBAD 11.9% 2.8% --% (0.7%) (0.1%) (0.7%) (1.4%) 0.1% 12.0% FGB 13.8% 3.6% --% (0.9%) --% (1.5%) (1.2%) (0.2%) 13.6% UNB 13.9% 2.7% --% (0.9%) (0.0%) (0.3%) (1.0%) 0.1% 14.4% ENBD 10.8% 3.3% --% (1.9%) (0.0%) (0.3%) (0.5%) (0.6%) 10.8% DIB 10.2% 2.7% --% (1.6%) (0.0%) (0.7%) (0.3%) (1.0%) 9.4% CBD 16.9% 3.7% --% (1.5%) --% (1.1%) (0.8%) (0.1%) 17.1% MASQ 15.5% 2.6% (1.1%) (0.0%) (0.4%) (1.0%) (0.4%) 15.3% RAKBANK 18.9% 9.5% (1.8%) --% (2.3%) (1.9%) (1.8%) 20.6% TAMWEEL 22.5% 1.7% (0.9%) --% (0.5%) (0.6%) 0.2% 22.4% SAMBA 15.7% 2.5% --% --% (0.2%) --% (0.3%) (1.6%) (0.2%) 15.8% RIBL 15.6% 2.0% --% --% (0.4%) --% (0.5%) (1.4%) (0.2%) 15.2% RJHI 16.5% 4.8% --% --% (0.7%) (0.3%) (1.7%) (2.0%) 0.6% 17.2% BSFR 13.0% 2.1% --% --% (0.3%) --% (0.5%) (1.3%) 0.2% 13.2% SABB 15.1% 2.8% --% --% (0.4%) --% (0.4%) (2.5%) (0.2%) 14.3% ARNB 14.1% 2.5% --% --% (0.5%) --% (0.8%) (1.6%) 0.2% 13.9% AAAL 12.4% 2.2% (0.4%) --% (0.6%) (1.3%) 0.1% 12.4% SIBC 17.0% 2.4% (0.5%) --% (0.7%) (1.6%) (0.2%) 16.4% ALBI 17.4% 2.7% (0.5%) --% (0.3%) (2.1%) 0.1% 17.1% BJAZ 13.6% 1.0% (0.3%) --% (0.4%) (1.9%) 0.7% 12.7% ALINMA 30.5% 1.4% (0.3%) --% --% (8.2%) 1.4% 24.8% AUB 10.2% 2.9% (0.9%) (0.1%) (0.7%) (0.8%) (0.1%) 10.4% Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 81

83 Portugal Egypt Ireland Spain Lebanon Italy Dubai Bahrain Holland Qatar AD KSA Germany UK US Questioning zero risk weighting for sovereign debt May The debt crisis also is leading some regulators, particularly European, to question rules that allow lenders to apply zero risk-weightings to government bonds issued in a bank s home currency when calculating capital ratios. Under current guidelines, banks do not need to hold any capital against the securities, even after the cost of insuring government bonds against default are high and clearly the risk of holding the securities is no longer zero. Many corporate issuers can borrow at narrower spreads than governments. We therefore would not be surprised by further adjustments to the Basel III rules. Exhibit 87: CDS vs. Probability of default (bps) Yr CDS PD Source: Bloomberg In the calculations below we calculate the potential impact of applying 10% risk weighting for Kuwait, UAE, KSA, Qatar and Abu Dhabi (rated AA to AAA), 20% risk-weighting for Oman (rated AA), 50% for Bahrain (rated BBB) and 100% risk-weighting for Lebanon, Egypt (both not investment grade) and Dubai banks (not rated). This is more or less in line with S&P s capital model. The impact would be the largest for ENBD (2.35% negative effect on CET1), Egypt (NSGB 2.34%, CIB 2.01%, CAE 1.84%) and Lebanese banks (Byblos 2.35%, Blom 2.37%, Audi 1.85% and BOB 0.60%, partly offset by the fact that USD government bonds are already risk weighted at 100%). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 82

84 BOUBYAN TAMWEEL QIBK EGBE RAKBANK ALBI CBD MARK UNB KFIN DIB AUB ADIB FGB ADCB SIBC BKMB BJAZ NBAD BKSB BSFR RIBL CBQK BURG DHBK GBK AAAL SABB NBK ARNB RJHI SAMBA BOB OIBB KCBK QIIK ALINMA MASQ HDBK CIEB AUDI QNBK COMI NSGB ENBD BYB BLOM BLOM BYB AUDI QNBK ALINMA BOB KCBK ENBD SAMBA ARNB QIIK AAAL OIBB RJHI NSGB DHBK CIEB SABB COMI CBQK MASQ HDBK NBK BSFR BURG GBK RIBL EGBE BJAZ NBAD BKSB SIBC BKMB ADCB FGB QIBK MARK KFIN BOUBYAN ADIB UNB DIB CBD RAKBANK TAMWEEL ALBI AUB May Exhibit 88: Claims on governments as % of Total Assets 40% 35% 30% 25% 20% 15% 10% 5% 0% Exhibit 89: Impact on CET1 vs. New CET1 35% 30% 25% 20% 15% 10% 5% 0% -5% Impact CET1 New CET1 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 83

85 BOB BURG AUB AUDI BYB CIEB BLOM NBAD ADIB KFIN ADCB ENBD GBK BKSB HDBK DIB COMI CBD NSGB BKMB BJAZ AAAL ALBI OIBB UNB ARNB BOUBYAN SABB RJHI QNBK MARK FGB DHBK SAMBA MASQ EGBE SIBC NBK BSFR RIBL KCBK QIBK CBQK QIIK RAKBANK TAMWEEL ALINMA ALINMA TAMWEEL BOUBYAN QNBK QIIK QIBK RAKBANK NBK ALBI CBD SIBC MARK KCBK RJHI EGBE RIBL SAMBA SABB MASQ GBK UNB FGB ARNB BJAZ BURG BSFR OIBB COMI DHBK AAAL NSGB NBAD KFIN CBQK ADCB BKMB AUB DIB BYB BKSB BLOM CIEB ENBD HDBK AUDI ADIB BOB Exhibit 90: Capacity to Grow after Weighting T-Bills 150% May % 90% 60% 30% 0% -30% -60% Exhibit 91: FY 12e Leverage Ratio (assets/tangible equity) % % % 500.0% 0.0% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 84

86 Potential Disruptions in Strait of Hormuz - GCC is a sweet spot Iran has threatened retaliation in the form of a blockade of the Strait of Hormuz, a channel for the 20% of the global flow of oil and gas out of the Gulf, in response to tougher sanctions, including a boycott of Iranian oil exports by the EU from 1 July 2011 over Iran s nuclear program. These threats have been verbal and most likely to remain in check. However, we view that a plausible scenario would be the slowdown of shipping through the Strait of Hormuz by the Iranian authorities through tanker inspections, boarding merchant ships, and obstructing shipping routes in its territorial waters. We rule out a scenario where Iran would place mines as Iran s exports would also come to a complete stand still. Additionally, the US has expressed it is hopeful that it could resolve the issues in a peaceful manner. Such tension could increase oil prices as markets would increasingly view the vision of military confrontation as a possibility. Based on the very low price inelasticity in the short term it is estimated that the price elasticity is as low as 6.1% - we calculate that if 5% of the trade volumes in the strait are affected, or 1% of worldwide oil production, there may be an increase in oil prices of up to 16.7%. Exhibit 92: Strait of Hormuz Source: Global Security, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 85

87 Below we share the outcome of such a plausible scenario with a 5% production cut for countries that rely on the Strait of Hormuz, Kuwait and Qatar, as both countries have limited options with regard to the transport of its hydrocarbon exports other than through the Strait, and a 3.3% cut for UAE as Abu Dhabi plans to build a crude oil pipeline in H1 12 that diverts half of its oil exports directly to the Gulf of Oman, bypassing the Strait of Hormuz. We would see no production impact on Oman, while KSA is ideally positioned as it could boost its oil production to offset lower Iranian production, though it will have to divert part of its oil exports through the East-West pipeline to the Red Sea, which could transport around 60% of Saudi Arabia's oil exports, according to S&P. Saudi Arabia's oil minister has said the country could even increase its oil production by about 2m barrels a day, however, the crude oil would not be considered of the same quality. Exhibit 93: GCC A SWEET SPOT Short-term (price elasticity 0.061) Impact 5% trade disruption KSA Oman Kuwait UAE Qatar Crude oil production (b/d million; average) (0.13) (0.08) (0.04) Impact (%) 5.6% -- (5.0%) (3.3%) (5.0%) Impact on GDP 12.9% 8.9% 5.5% 3.6% 1.7% Impact on fiscal balance 8.1% 2.7% 3.9% 2.3% 0.9% Long-term (price elasticity of 0.45) Impact 5% trade disruption KSA Oman Kuwait UAE Qatar Crude oil production (b/d million; average) (0.13) (0.08) (0.04) Impact (%) 5.6% -- (5.0%) (3.3%) (5.0%) Impact on GDP 4.4% 1.2% (1.5%) (0.3%) (2.3%) Impact on fiscal balance 3.4% 0.1% (1.1%) (0.7%) (0.2%) Source: Arqaam Capital Research The combined effect of production changes and oil price changes results in a net positive effect for the GCC countries ranging from 1.7% for Qatar to 12.9% for KSA. Qatar should benefit the least, as we do not expect any compensation from higher LNG prices (though admittedly there is a link between LNG and oil prices), as Qatar controls only 5% of worldwide gas production, while it depends highly on the Strait of Hormuz. It shares the giant North field gas reservoir with Iran and has the largest US military base outside the US. The Qatar Central Bank has already banned lenders from financing trade to Iran by US sanctions. However, the fiscal and external balances of oil importers in the Middle East - especially Jordan and Lebanon - would be even more stretched and they may be vulnerable to future oil price shocks. Egypt is currently a net exporter of oil, with a surplus of about USD 6bn or about 2.7% of GDP. In case of a severe disruption, this could affect the fragile global economic recovery and could lead to a new world wide recession. In such a world, GCC could prove to be a sweet spot. However, there are second order effects: Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 86

88 Dubai as the region's logistics hub is particularly exposed to trade downturns and tourism that could severely be impacted as well. Asset quality of the banks could be under pressure, while there also could be a renewed pressure on funding markets and increased risk aversion. The longer the disruption takes, the more likely that oil demand adjusts to the increased price levels. The long-term price elasticity is 45%, still low, but nevertheless a dramatic increase over the short-term price elasticity of 6.1%. This implies that a 5% disruption could initially lead to a 16.7% increase in oil prices, but medium term, this could fall back to a 2.2% price increase only. Hence a long-term disruption of trade flows is not in the GCC s best interest. Exhibit 94: Political landscape Country Affecting Impact Egypt Slowdown tourism SCAF governed since collapse of Mubarak regime CAPEX New Parliament dominated by Islamist parties (MB 47%, Salafi 25%) FDIs 10 Presidential candidates, 1stv round May, 30 June handover of power High Yields New presidential elections Higher taxes Lebanon Sanctions on Syria Audi, BLOM, Byblos Reduced loans & deposits by 40% Inharmonious political landscape Hardly any effect on T-bill yields & inflows UAE Extremely well governed and very stable ADIB, FGB Lower leverage Regulation capping retail loans Reduced fees Regulation capping retail charges ADIB, FGB Ahead of regulation FGB cut rates for national Potential regulation capping credit card charges to 18% New circular capping single party exposures ENBD, NBAD Negotiations with UAE CB New foreign ownership possibilities Large trading partner with Iran Noor Bank US Treasury disrupted the banks operations Kuwait Inharmony between Parliament and ruling family Slowing down spendingvery low corporate loan demand Disputes with Iraq over land Vulnerable for blockage Strait of Hormuz Oman Oman maintains its military ties with the West while keeping good relations with Iran Granting of legislative powers to the Majlis al-shura Strong diversification plan Qatar Together with UAE most stable creating a two-third elected Advisory Council play a leading role in the region KSA Mortgage law still not delivered Bahrain Domestic instability Financial centre hub slowly moving to Dubai Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 87

89 ALBI AAAL BJAZ ARNB EGBE SIBC QNBK DHBK BOUBYAN RIBL BKMB SABB RJHI AUB CIEB HDBK NSGB CBQK MARK OIBB SAMBA QIIK COMI NBAD BURG KFIN ALINMA GBK KCBK QIBK AUDI BYB BSFR BLOM NBK BKSB BOB ENBD ADCB CBD ADIB MASQ FGB UNB RAKBANK DIB TAMWEEL Hidden deficits and values in balance sheets May We scrutinize the quality of the banks balance sheets. Some banks have also adopted some form of less prudent accounting, which relates to the valuation of real estate assets, associates or acquisition accounting (a few UAE banks): We calculate the largest negative adjustment for DIB, driven by the valuation of associates (1.0% of RWAs), real estate valuation (1.4%), negative FV reserves (0.8%) and underprovisioning (1.5%). We also calculate negative adjustments for FGB (relating to real estate valuation), RAKbank and Tamweel (underprovisioning). Other banks, on the other hand, have substantial hidden reserves regarding some real estate investments or associates that are carried at well below market value (however the impact on CET1 is not significant in some circumstances as they are already deducted from CET1, DIB being the exception as the revaluation is on real estate associates), or substantial revaluation reserves that are included in shareholders equity and thus captured in our valuations, but not in the reported Tier 1. QNB has the largest unrealized gains. Qatari banks have set aside up to 1.5% of credit risk weighted assets as a special reserve that is part of equity, but is fully subtracted from Tier- 1 and Capital Adequacy ratios. The same applies to Egyptian banks with substantial general banking reserves and special reserves. Saudi banks are sitting on unrealized capital gains on real estate (Bank Aljazira (0.52%), Albilad (0.38%), and Riyad (0.22%)). Fair value gains or losses on associates are captured in our valuation of the banking operations, while the fair value reserves and risk reserves are included in our capital surplus in our valuation models as they are part of equity, while unrealized gains and losses on real estate and under/overprovisioning are reflected in the third section of our valuation. Exhibit 95: Impact of Accounting Adjustments on CET1 4% 2% 0% -2% -4% -6% -8% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 88

90 Exhibit 96: Accounting adjustments Impact on CET1 Associates Real estate Intangibles Level 3 FV reserves Risk reserves Provisions ADCB (1.40%) --% (0.13%) --% --% (0.28%) --% (0.99%) ADIB (1.68%) --% (0.80%) --% --% (0.22%) --% (0.66%) CBD (1.51%) --% (0.24%) --% --% 0.09% --% (1.36%) DIB (4.70%) (0.97%) (1.24%) --% --% (0.98%) --% (1.52%) ENBD (1.39%) --% (0.56%) --% (0.09%) 0.11% --% (0.84%) FGB (2.92%) --% (2.40%) --% --% 0.09% --% (0.61%) NBAD 0.26% --% --% --% --% --% --% 0.26% UNB (3.02%) --% (0.83%) --% --% (0.01%) --% (2.18%) TAMWEEL (3.05%) --% (1.90%) --% --% --% --% (1.15%) RAKBANK (3.36%) --% --% --% --% (0.05%) --% (3.31%) MASQ (1.95%) --% (0.19%) --% --% (0.45%) --% (1.31%) UAE CBQK 1.01% --% (0.06%) --% --% (0.10%) 1.13% 0.03% DHBK 1.54% --% --% --% --% (0.01%) 1.12% 0.43% QIBK (0.03%) --% (0.31%) --% --% (0.18%) 1.11% (0.65%) QNBK 1.58% --% --% --% --% 0.30% 0.96% 0.33% MARK 0.88% --% (0.02%) --% --% 0.02% 0.96% (0.08%) QIIK 0.50% --% (0.46%) --% --% 0.51% 0.89% (0.44%) KCBK --% Qatar CEIB 1.03% --% --% --% --% (0.76%) 0.60% 1.20% COMI 0.36% --% --% --% --% (1.08%) 0.70% 0.75% NSGB 1.01% --% --% --% --% (0.06%) 1.09% (0.02%) EGBE 1.85% --% --% --% --% (0.63%) 0.62% 1.86% HDBK 1.13% --% --% --% --% --% 0.36% 0.77% Egypt AUDI (0.07%) --% --% --% --% 0.30% --% (0.37%) BLOM (0.17%) --% --% --% --% --% --% (0.17%) BYB (0.05%) --% --% --% --% (0.13%) --% 0.07% BOB (0.39%) --% --% --% --% --% --% (0.39%) Lebanon ARNB 0.13% --% 0.04% --% (0.06%) --% --% 0.15% RJHI 0.23% --% --% --% (1.02%) --% --% 1.25% BSFR (2.24%) --% 0.00% --% (2.39%) --% --% 0.14% RIBL 0.73% --% 0.22% --% (0.88%) --% --% 1.39% SAMBA (1.11%) --% --% --% (1.96%) --% --% 0.85% SABB 1.33% --% --% --% (0.04%) --% --% 1.37% ALINMA 0.04% --% --% --% --% --% --% 0.04% AAAL 3.64% --% --% --% --% --% --% 3.64% BJAZ 2.08% --% 0.52% --% (0.01%) --% --% 1.57% SIBC (0.64%) --% 0.17% --% (2.57%) --% --% 1.75% ALBI 3.21% --% 0.38% --% (0.61%) --% --% 3.44% Saudi Arabia NBK (0.24%) --% --% (1.89%) --% (0.11%) --% 0.80% BURG 0.17% --% --% --% --% 0.11% --% 0.07% GBK 0.01% --% --% --% --% 0.23% --% (0.22%) KFIN 0.10% --% --% --% --% (0.71%) --% 1.48% BOUBYAN 1.54% --% --% --% --% (0.07%) --% 1.60% Kuwait BKMB 1.40% --% --% --% --% 0.06% --% 1.33% BKSB (0.34%) --% --% --% --% (0.14%) --% (0.21%) OIBB 0.76% --% --% --% --% 1.44% --% (0.68%) Oman AUB 1.11% --% --% --% --% --% --% 1.11% Bahrain Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 89

91 Solid credit growth outlook KSA, Oman, Qatar and Egypt should show loan growth in excess of 10%. In Qatar we expect a slowdown in H1 due to the 2 month delay in the national budget, we see Oman as having the best balanced loan growth (both public and private sector), while momentum has dramatically improved in KSA. We do not expect an overall 10% loan growth in Egypt, except for CIB and to a lesser extent NSGB and CAE as public banks give up loan market share. UAE, Kuwait and Lebanon should have loan growth below 10% due to high leverage in the UAE and Lebanon, in addition to the political gridlock in Kuwait. We think QNB, FGB, Bank Muscat, Al Rajhi, Alinma, Boubyan and CIB should outperform their peers and should record double digit loan growth in FY 12e. Some risks remaining in GCC We do see few risks for the GCC: The tensions in the Gulf could lead to an escalation of the conflict between Iran and the GCC. The weak growth prospects in the advanced economies could lead to a pronounced decline in oil prices if regional geopolitical risks subside, but KSA seems committed to a Brent oil price of USD 100. Particularly Europe could still remain in recession until Q3 12e. A renewed worsening of global financing conditions could make it more difficult to roll over some of the GREs maturing external debt and affect liquidity conditions in the banking system. GREs are still faced with high refinancing needs and continued reliance on foreign funding. The UAE central bank is not helping the situation in the short-term by capping the banks exposure to GREs and local governments. We do not expect large ramifications of the closure of Islamic windows of conventional banks in Qatar. We expect most Islamic corporate loans to be converted, though we anticipate Islamic banks to be able to snap up Islamic retail loans from conventional lenders, as illustrated below. Exhibit 97: Market share of Conventional and Islamic banks in Qatar Exhibit 98: Islamic share of total operations of the conventional banks in Qatar 10% 8% 6% 4% 2% 0% Doha CBQ ABQ KCB QNB % of loan % of deposit % of asset Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 90

92 We are very concerned about the unfolding of the euro zone sovereign crisis and its ramifications on the global outlook We are very concerned about the unfolding of the euro zone sovereign crisis and its ramifications on the global outlook despite the proactive approach of the ECB. Nevertheless, we believe the gulf is committed to keeping the Brent oil price at around USD 100, slightly lower than the current price, but high enough to pay for their government spending plans. The region s external balance is expected to remain high. Among oil exporters, high commodity prices will maintain strong external positions and enhance reserves. Moreover, the GCC strongly relies on domestic sources of growth, helped by investment sprees. Kuwait stands out with a strong fiscal surplus of 34.5%, but due to the grid lock in Kuwait these surpluses are not reinvested into the country. Nonetheless, all Gulf countries have very robust fiscal balances as illustrated below, except for Bahrain. We would not be surprised if Egypt underperforms IMF forecast with respect to its deficit, driven by salary hikes (up 15% for public servants), unemployment insurance to be introduced in 2012, lower tax revenue due to disruptions, rising bond yields, and increased spending on subsidies (up EGP 6bn). The deficit is highly sensitive on the interest charges Egypt is paying. Every 1% increase raises Egypt s deficit by 0.6% within one year due to the short-term nature of its outstanding debt. Exhibit 99: MENA governments' fiscal balances as a percentage of GDP FY 08A FY 09A FY 10A FY 11e FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e Bahrain 4.9% (6.6%) (6.7%) (2.3%) (1.0%) (1.7%) (3.2%) (4.8%) (6.3%) (8.0%) Egypt (7.8%) (6.8%) (7.8%) (9.9%) (10.0%) (7.8%) (6.6%) (5.3%) (3.8%) (2.7%) Kuwait 19.8% 27.2% 24.2% 31.0% 34.5% 31.8% 27.4% 25.8% 24.4% 24.0% Lebanon (9.5%) (8.3%) (7.7%) (5.6%) (8.1%) (8.0%) (7.8%) (8.0%) (8.3%) (8.2%) Oman 16.9% (0.3%) 5.6% 9.8% 12.9% 9.6% 4.5% 0.0% (2.4%) (5.1%) Qatar 10.4% 14.3% 2.7% 7.8% 8.9% 8.1% 5.3% 2.9% 2.1% 1.5% Saudi Arabia 34.4% (4.6%) 6.6% 15.2% 16.6% 10.1% 6.6% 3.2% (0.7%) (1.2%) UAE 21.5% (0.1%) 4.4% 11.0% 12.3% 11.5% 10.1% 9.7% 9.3% 9.4% Source: IMF Egypt s deficit is not as bad as it appears Even though we expect Egypt s deficit to be much worse than is budgeted by the government, we are not extremely worried about the size of the fiscal deficit. We think a structural deficit of 8.1%-10.8% is manageable considering the economy s high nominal growth rate of c. 11.8%- 15.9% (8%-10% inflation and 5%-6% structural real growth, of which 2.5% is population growth and 2.5%-3.5% is real GDP growth per capita). Exhibit 100: Egypt Macro FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 Primary deficit/gdp (3.8%) (4.7%) (5.3%) (4.5%) (4.3%) (5.8%) (5.1%) (2.3%) (1.0%) (0.2%) 0.3% Total deficit/gdp (9.2%) (7.5%) (7.8%) (6.8%) (7.8%) (9.9%) (10.0%) (7.8%) (6.6%) (5.3%) (3.8%) Deficit with stable net debt/gdp (10.5%) (13.3%) (11.2%) (9.6%) (9.5%) (8.8%) (8.1%) (10.8%) (10.4%) (10.0%) (9.1%) Above/below sustainable deficit 1.3% 5.7% 3.5% 2.8% 1.6% (1.1%) (1.9%) 3.0% 3.8% 4.7% 5.3% Nominal GDP growth (%) 14.7% 20.6% 20.2% 16.4% 15.8% 13.7% 11.8% 15.9% 15.7% 15.8% 15.2% Real GDP growth (%) 6.8% 7.1% 7.2% 4.7% 5.1% 1.8% 1.5% 3.3% 5.0% 6.2% 6.5% Net debt/gdp 71% 64% 56% 59% 60% 64% 68% 68% 67% 63% 60% Source: IMF, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 91

93 Exhibit 101: Egypt Balance of Payment Source: Egypt Central Bank, Arqaam Capital Research A large devaluation may not be necessary We argue that Egypt does not need a significant depreciation and that the IMF should not call for one (except for a managed fall of c. 10% pa), as imported inflation would create renewed unrest, while higher interest rate charges would increase Egypt s deficit almost instantly due to the short-term nature of its outstanding public debt. Furthermore, it could be hit by the J- curve effect as higher import prices would eat into the balance of payments. Below we analyze how Egypt could balance its balance of payments without depreciation: A normalization in tourism receipts supporting the current account by USD 700mn per quarter. A normalization in FDIs, though still below historical averages. A return of portfolio investments in Egypt after significant outflows since Q4 10A, driven by a more stable business environment and a more credible fiscal policy. Q1 08A Q2 08A Q3 08A Q4 08A Q1 09A Q2 09A Q3 09A Q4 09A Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Potential delta Potential Trade Balance (5,521) (6,626) (7,000) (7,628) (4,866) (5,680) (6,254) (5,675) (6,608) (6,583) (7,134) (6,692) (5,543) (5,369) (7,823) -- (7,823) Services (net) 4,049 4,170 4,060 3,406 2,158 2,878 3,302 2,983 2,478 1,577 2,623 2,961 1,265 1,030 1, ,322 o/w Suez 1,235 1,409 1,456 1, ,045 1,107 1,155 1,104 1,151 1,254 1,254 1,230 1,316 1, ,360 o/w Tourism (net) 1,981 1,868 2,490 1,732 1,525 2,002 2,516 2,175 2,254 2,319 3,021 2,694 1,400 1,361 2, ,775 Transfers 2,165 2,945 1,974 2,675 1,790 1,808 2,459 1,903 2,807 3,295 3,205 3,132 2,829 3,971 4, ,026 Balance of Current Account (966) (1,547) (918) (994) (493) (790) (1,323) (1,711) (1,306) (599) (999) (369) (2,175) 700 (1,475) Capital Account (0.2) (0.1) 0.7 (0.9) 0.1 (2.5) (14.0) (2.4) (0.4) (19.4) (7.9) (11.5) (4.8) (8.1) (20.5) -- (20.5) Financial Account 507 3,933 2,186 (159) (1,347) 704 2, ,877 3,182 1,040 1,797 (4,589) (3,039) 523 1,645 2,168 o/w FDIs 3,482 1,985 1,655 2,373 1,211 2,875 1, ,706 2,426 1, (164) ,300 1,740 o/w Portfolio investments in Egypt 383 (23) (3,485) (3,902) (1,503) (321) 1, , ,900 (1,329) (5,540) (1,582) (1,730) 2, o/w other investmensts (2,825) 2,702 4,847 1,818 (969) (1,463) 69 (590) (4,401) 145 (6,115) 2,615 1,469 (1,322) 1,955 (1,955) (0) Overall Balance 1, (1,006) (1,796) (1,035) 2, (6,071) (4,255) (2,356) 2,345 (11) Egypt could use strong fiscal aid from neighboring countries, the World Bank, and the IMF, but in the medium term the government deficit will need to be reduced by broadening the tax base or cutting back on low-priority expenditures. Egypt will increase its reliance on foreign borrowing to cover public spending needs and is considering the International Monetary Fund financing plan it previously turned down, but not until the new president takes over power. The government is still in talks with Gulf Arab states for funds of close to USD 7bn. Lebanon s deficit should be sustainable at a deficit of c. 8% (with debt/gdp stable at 130%) as long as its nominal GDP growth rate picks up to 6%-7.5% with real growth of 3%-4%, as we expect. Note that the UAE, Qatar and Bahrain have issued a travel warning for Lebanon and we anticipate a drop in tourist demand this summer as a consequence. Tourism contributes to c. 10% of GDP. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 92

94 Exhibit 102: Lebanon Macro Source: IMF, Arqaam Capital Research Primary deficit/gdp 6.5% 3.6% 2.0% 1.6% 1.9% 3.9% 1.3% 1.2% 1.5% 1.3% 1.1% Total deficit/gdp (10.4%) (10.8%) (9.5%) (8.3%) (7.7%) (5.6%) (8.1%) (8.0%) (7.8%) (8.0%) (8.3%) Deficit with stable net debt/gdp (4.6%) (18.9%) (29.0%) (20.4%) (9.4%) (6.8%) (9.2%) (9.8%) (7.9%) (8.0%) (8.0%) Above/below sustainable deficit (5.7%) 8.1% 19.5% 12.1% 1.7% 1.2% 1.1% 1.8% 0.2% (0.0%) (0.3%) Nominal GDP growth (%) 2.6% 11.7% 20.0% 15.2% 7.1% 5.2% 7.1% 7.6% 6.1% 6.1% 6.1% Real GDP growth (%) 0.6% 7.5% 9.3% 8.5% 7.0% 1.5% 3.0% 4.0% 4.0% 4.0% 4.0% Net debt/gdp 175% 162% 145% 134% 132% 131% 131% 129% 130% 130% 131% Double digit growth in KSA, Oman & Qatar, and selected banks in Egypt Qatar to witness the highest GDP growth in the region Exhibit 103: Real GDP growth in the MENA region FY 06A FY 07A FY 08A FY 09A FY 10A FY 11e FY 12e FY 13e FY 14e FY 15e Bahrain 6.3% 3.1% 4.5% 1.8% 2.0% 2.8% 2.6% 2.6% 2.9% 2.9% Egypt 7.2% 4.7% 5.1% 1.8% 1.5% 3.3% 5.0% 6.2% 6.5% 6.5% Kuwait 5.0% (5.2%) 3.4% 8.2% 6.6% 1.8% 3.3% 3.9% 3.9% 3.9% Lebanon 9.3% 8.5% 7.0% 1.5% 3.0% 4.0% 4.0% 4.0% 4.0% 4.0% Oman 12.9% 1.1% 4.0% 5.5% 5.0% 4.0% 3.2% 3.4% 3.5% 3.8% Qatar 17.7% 12.0% 16.6% 18.8% 6.0% 4.6% 4.6% 5.9% 5.9% 7.0% Saudi Arabia 4.2% 0.1% 4.6% 6.8% 6.0% 4.1% 4.4% 4.3% 4.3% 4.2% UAE 5.3% (3.3%) 0.9% 4.9% 2.3% 2.8% 3.3% 3.5% 3.6% 3.7% Source: IMF Exhibit 104: Nominal GDP growth in the MENA region Source: IMF FY 06A FY 07A FY 08A FY 09A FY 10A FY 11e FY 12e FY 13e FY 14e FY 15e Bahrain 17.8% 16.5% 19.9% (12.9%) 16.2% 16.5% 6.4% 3.4% 1.2% 1.8% Egypt 14.7% 20.6% 20.2% 16.4% 15.8% 13.7% 11.8% 15.9% 15.7% 15.8% Kuwait 24.9% 10.6% 21.6% (23.1%) 16.9% 36.8% 15.3% (1.4%) (0.1%) 2.0% Lebanon 2.6% 11.7% 20.0% 15.2% 7.1% 5.2% 7.1% 7.6% 6.1% 6.1% Oman 19.1% 13.9% 44.5% (22.6%) 23.4% 24.3% 9.7% 2.1% 0.1% 1.2% Qatar 36.6% 30.8% 44.6% (15.2%) 30.5% 36.5% 12.5% 1.4% 2.8% 5.4% Saudi Arabia 12.9% 8.0% 23.8% (20.9%) 19.7% 28.0% 12.8% 2.3% 2.4% 3.0% UAE 23.0% 16.2% 22.0% (14.1%) 10.1% 21.0% 7.3% 2.1% 2.1% 2.8% GCC is a sweet spot in a world that is slowing down, helped by high oil prices and very strong external surpluses. The economic environment remains favorable, with the IMF estimating growth of 2.6%-5% real GDP 2012 in the MENA region, with Egypt (though we cannot rule out Egypt underperforming IMF forecast for 2012), Qatar and Saudi Arabia taking the lead. The nominal growth should be even higher, boosted by increased oil prices, but the IMF takes into account a bearish view on future oil prices, hence its nominal growth forecasts for FY 13-14e appear low. We see loan growth picking up in KSA, while growth in Qatar, which was mainly driven by the public sector, should slow down in FY 12e vs. the rapid expansion in FY 11A due to budget delays. Oman, despite its small economy, should see better growth prospects as the economy expands and spending on infrastructure projects picks up, further driven by Islamic Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 93

95 financing (introduced in FY 12e), particularly helping credit penetration in retail. We expect loan growth to pick up in Egypt, with private sector lenders outpacing their public peers, who are more focused on investing in treasury bills rather than lending to the private sector (and as a consequence there is a crowding out effect, though also corporate loan demand is generally weak). CIB is best positioned to grow as corporations rebuild their working capital, while CAE and NSGB are, to some extent, constrained by the tight capital positions of their parent companies (though CAE had a stellar 10% YTD loan growth). At the same time, activity has of course been adversely affected by social unrest and the ongoing conflict, which is weighing heavily on tourism receipts, capital flows, and investment. Loan growth in KSA is driven by a pick-up in corporate loan demand and moreover, by an expanding retail sector (particularly helping Al Rajhi) and Islamic finance (Al Rajhi, Alinma, Albilad, Al Jazira). We do not expect much support from public sector lending. Single digit growth in Kuwait, UAE, Egypt and Lebanon Kuwait should remain stagnant due to the political grid lock and since the strong fiscal balances are not reinvested into the local economy in the medium term. Instead banks are seeking growth through acquisitions. The UAE should see mid single digit growth as some projects in Abu Dhabi are being delayed and due to new caps on personal lending, restricting personal loans to no more than 20 times the borrower s monthly income and capping the repayment period at a maximum of 48 months. This may slow consumer loan growth, but once initial adjustments are over, it should improve loan servicing, in our view. In Dubai, we have witnessed some crowding out as the leading bank had been lending to the Dubai government instead of to the private sector. We expect high single digit growth in Lebanon, though we remain cautious, due to the unrest in Syria, which could spill over to Lebanon. In Bahrain, we expect GDP growth to lag behind the historical growth due to the prevailing social unrest, which may have ramifications for private-sector confidence, investment appetite and foreign direct investments. Developments in GCC The chart on the following page shows the economic development plans being implemented by the countries under our coverage. The GCC has big budgets for economic spending, but we do not expect full implementation in Bahrain given its fiscal deficit and social unrest and Kuwait due to the political gridlock. In Qatar the investments in infrastructure stand out, presenting c. 50% of the budgeted spending thanks to the FIFA World Cup. However, we think the project plans are more balanced in other countries and believe that Qatar may have to invest into other segments like the petro-chemical sector, trade and tourism as there is still an oversupply of commercial office and residential real estate. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 94

96 FY 09A FY 10A FY 11A FY 12e FY 09A FY 10A FY 11A FY 12e FY 09A FY 10A FY 11A FY 12e FY 09A FY 10A FY 11A FY 12e FY 09A FY 10A FY 11A FY 12e FY 09A FY 10A FY 11A FY 12e May Exhibit 105: Economic plans being implemented by MENA governments versus GDP KSA UAE Qatar Kuwait Oman Bahrain Egypt 40% 35% 30% 25% 20% 15% 10% 5% 0% Amount budgeted for development plans over the next 5 years (LHS) Annualized spending as a % of GDP (RHS) Source: Central Bank, IMF, Arqaam Capital Research Exhibit 106: Government gross debt/gdp Exhibit 107: Economic diversification: GDP breakdown Oil vs. non-oil % % % 70% 60% % 40% 30% % Lebanon Egypt Bahrain Qatar UAE Saudi Arabia FY 11A FY 15e Kuwait Oman 10% 0% Kuwait Qatar KSA Oman UAE Bahrain Oil Non-oil Source: IMF, Arqaam Capital Research Source: Central Bank, Arqaam Capital Research, Corporate sector unleveraged in Egypt, most leveraged in the UAE and Kuwait Oman and Egypt are the least leveraged markets of the countries under our coverage, followed by Qatar and Saudi Arabia, leaving ample room for corporate credit growth, in our view. However, this is not the case for Kuwait and the UAE, as illustrated in the chart below. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 95

97 Saudi Arabia Qatar Oman UAE Kuwait Morocco Lebanon Egypt Bahrain Lebanon UK USA Morrocco UAE Kuwait Turkey Bahrain Qatar Saudi Arabia Brazil Oman Egypt May Exhibit 108: Corporate leverage in the region 60% 50% 40% 30% 20% 10% 0% UAE Bahrain Kuwait Qatar KSA Oman Egypt Net debt/mkt cap Net debt/assets Interest coverage (RHS) Source: Bloomberg, Arqaam Capital Research Liquidity very strong in Lebanon and Egypt On the liquidity front, Egypt and Lebanon stand out, enabling them to expand their loan portfolios without limitations. Qatar looks a bit stretched, with a loan/deposit ratio of more than 100%. Exhibit 109: Loan/Deposits Exhibit 110: Credit Penetration 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 270% 220% 170% 120% 70% 20% Source: Central Bank Source: IMF, Central Bank, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 96

98 Strongest project-related loan growth in Qatar We calculate that investment projects will have the highest impact in Qatar, with support of 10.1% from projects, followed by Oman (10.0%), KSA (6.7%), Egypt (5.7%), UAE (5.6%), Kuwait (4.9%), Bahrain (4.5%), and Egypt (2.5%). We expect banks in Qatar to be the most involved (35% funded by banks), whereas we expect most projects in KSA to be funded directly by the government (only 15% funded by banks). Long-term loan growth trends All in all, we expect structural loan growth of 15%-18% in Egypt, 6%-8% in Lebanon, 13%-14% in Qatar, 10%-13% in KSA, 5%-7% in UAE, 6%-8% in Kuwait and 9%-13% in Oman. On the next few pages we detail the breakdown in retail, corporate and public sector credit penetration. Exhibit 111: Credit penetration 270% 220% 170% 120% 70% 20% Lebanon Qatar Oman KSA UAE Kuwait Egypt FY 06A FY 11A FY 14e FY 20e FY 30e Source: Central Bank, IMF, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 97

99 Exhibit 112: Computation of lending growth stemming from project spending; Qatar gains the most LCU bn Qatar Development plan Annualized spending Project spending FY 12e-FY14e % funded by government 45% % funded by corporates 20% % funded by banks 35% Bank lending from project spending Loans as of FY 11A Project lending + FY 11A loans Project lending CAGR 10.1% Non-project related loan growth rate 6.5% Non-project related loan growth Projected loans FY 14e CAGR 15.1% Oman Development plan 43.5 Annualized spending 7.3 Project spending FY 12e-FY14e 29.0 % funded by government 60% % funded by corporates 20% % funded by banks 20% Bank lending from project spending 5.8 Loans as of FY 11A 12.5 Project lending + FY 11A loans 18.3 Project lending CAGR 10.0% Non-project related loan growth rate 5.5% Non-project related loan growth 3.0 Projected loans FY 14e 21.3 CAGR 14.2% Egypt Development plan Annualized spending 50.4 Project spending FY 12e-FY14e % funded by government 20% % funded by corporates 20% % funded by banks 60% Bank lending from project spending Loans as of FY 11A Project lending + FY 11A loans Project lending CAGR 5.7% Non-project related loan growth rate 7.8% Non-project related loan growth Projected loans FY 14e CAGR 12.4% Saudi Development plan 2,802.8 Annualized spending Project spending FY 12e-FY14e 1,868.5 % funded by government 70% % funded by corporates 15% % funded by banks 15% Bank lending from project spending Loans as of FY 11A 1,068.0 Project lending + FY 11A loans 1,348.3 Project lending CAGR 6.0% Non-project related loan growth rate 6.1% Non-project related loan growth Projected loans FY 14e 1,633.7 CAGR 11.2% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 98

100 UAE Development plan 2,061.8 Average execution 32% Annualized spending Project spending FY 12e-FY14e % funded by government 35% % funded by corporates 25% % funded by banks 40% Bank lending from project spending Loans as of FY 11A 1,074.1 Project lending + FY 11A loans 1,338.0 Project lending CAGR 5.6% Non-project related loan growth rate 3.0% Non-project related loan growth Projected loans FY 14e 1,472.9 CAGR 8.2% Bahrain Development plan 23.5 Average execution 35% Annualized spending 1.4 Project spending FY 12e-FY14e 5.5 % funded by government 60% % funded by corporates 20% % funded by banks 20% Bank lending from project spending 1.1 Loans as of FY 11A 5.7 Project lending + FY 11A loans 6.8 Project lending CAGR 4.5% Non-project related loan growth rate 3.0% Non-project related loan growth 0.7 Projected loans FY 14e 7.5 CAGR 7.1% Kuwait Development plan 56.1 Average execution % 40% Annualized spending 5.6 Project spending FY 12e-FY14e 22.5 % funded by government 70% % funded by corporates 5% % funded by banks 25% Bank lending from project spending 5.6 Loans as of FY 11A 26.4 Project lending + FY 11A loans 32.0 Project lending CAGR 4.9% Non-project related loan growth rate 2.5% Non-project related loan growth 2.7 Projected loans FY 14e 34.7 CAGR 7.1% Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 99

101 OIBB ALINMA MARK BOUBYAN ALBI KCBK BURG QIIK BJAZ RJHI SABB AAAL BKMB DHBK CBQK BSFR CIEB BKSB NBAD SIBC QNBK SAMBA ARNB BLOM BOB COMI NSGB BYB FGB QIBK KFIN RIBL AUB RAKBANK HDBK ADCB GBK AUDI EGBE CBD NBK MASQ UNB TAMWEEL DIB ADIB ENBD May Exhibit 113: Expected Net Loan Growth 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% FY 12e FY 13e Exhibit 114: Loan growth by country 35% 30% 25% 20% 15% 10% 5% 0% -5% Qatar Lebanon Oman KSA Egypt UAE Kuwait Bahrain FY 10A FY 11A Source: Central Bank, Arqaam Capital Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 100

102 Exhibit 115: Total Credit Penetration FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 20e FY 30e Egypt 59% 56% 51% 48% 42% 38% 36% 34% 33% 31% 40% 54% Lebanon 208% 234% 239% 218% 222% 230% 228% 230% 231% 235% 234% 239% Qatar 43% 46% 55% 58% 76% 68% 64% 64% 73% 86% 93% 105% KSA --% 47% 53% 55% 65% 59% 49% 49% 54% 59% 64% 82% UAE 47% 53% 74% 85% 103% 95% 81% 79% 83% 86% 80% 76% Kuwait 52% 53% 65% 62% 86% 73% 54% 49% 52% 55% 54% 57% Oman 33% 33% 40% 40% 55% 48% 45% 47% 52% 59% 63% 85% Bahrain --% 19% 23% 27% 31% 67% 58% 57% 59% 62% 92% 70% Source: Central Bank, IMF, Arqaam Capital Research Exhibit 116: Retail Credit Penetration FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 20e FY 30e Egypt 8% 9% 9% 10% 9% 8% 8% 8% 7% 7% 9% 12% Lebanon 83% 93% 96% 87% 89% 92% 91% 99% 97% 97% 99% 101% Qatar 15% 16% 16% 14% 15% 12% 11% 11% 11% 12% 14% 18% KSA --% 19% 21% 22% 26% 23% 20% 20% 23% 26% 26% 31% UAE 4% 4% 5% 6% 7% 6% 5% 5% 5% 5% 6% 7% Kuwait 22% 21% 22% 18% 26% 23% 18% 16% 17% 17% 17% 17% Oman 13% 13% 16% 16% 22% 19% 18% 17% 17% 17% 18% 20% Bahrain --% 8% 8% 17% 9% 21% 18% 18% --% 17% 18% 19% Source: Central Bank, IMF, Arqaam Capital Research Exhibit 117: Corporate Credit Penetration FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 20e FY 30e Egypt 46% 43% 38% 35% 30% 3% 3% 3% 3% 3% 4% 10% Lebanon 81% 92% 86% 84% 84% 59% 62% 58% 62% 67% 63% 65% Qatar 16% 21% 27% 30% 40% 33% 29% 32% 39% 46% 48% 54% KSA --% 17% 19% 19% 26% 22% 20% 20% 21% 23% 26% 36% UAE 37% 44% 63% 73% 87% 80% 68% 67% 69% 72% 65% 58% Kuwait 30% 32% 43% 44% 60% 50% 36% 33% 36% 38% 38% 40% Oman 19% 19% 24% 24% 32% 29% 27% 30% 34% 42% 45% 65% Bahrain --% 10% 13% 8% 20% 47% 40% 39% 59% 45% 74% 51% Source: Central Bank, IMF, Arqaam Capital Research Exhibit 118: Public Credit Penetration FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 20e FY 30e Egypt 4% 4% 4% 4% 3% 27% 25% 23% 22% 20% 27% 32% Lebanon 81% 92% 86% 84% 84% 79% 75% 73% 72% 71% 73% 74% Qatar 12% 10% 12% 14% 21% 22% 24% 21% 23% 29% 31% 33% KSA --% 12% 13% 14% 13% 13% 10% 9% 10% 11% 12% 15% UAE 6% 6% 6% 6% 9% 9% 8% 8% 8% 9% 9% 11% Kuwait 0% 0% 0% 0% 0% --% 0% 0% 0% 0% --% --% Oman 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Bahrain --% 1% 1% 1% 2% 0% 0% 0% 0% 0% 0% 0% Source: Central Bank, IMF, Arqaam Capital Research Highest loan Y/Y growth in Qatar, but momentum slowing, KSA momentum improving The Y/Y growth amounted to 35.3% in Qatar, 17.9% in Oman, 10.3% in KSA, 7.8% in Lebanon, 4.9% in Egypt, 2.5% in Kuwait and 2.2% in UAE. YTD loan growth shows a different picture, with Qatar slowing and KSA accelerating, though Qatar showed a strong pick-up in April: The YTD loan amounted to 6.4% in Qatar (Apr), 5.1% in KSA (Mar), 2.1% in Oman (Feb), 1.4% in Lebanon (Mar), 1.1% in Kuwait (Mar), 1.1% in Egypt (Feb) and 0.1% in UAE (Feb). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 101

103 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Exhibit 119: Gross loan growth by country (Y/Y) YTD Y/Y Latest UAE 0.1% 2.2% Feb-12 Qatar 6.4% 35.3% Apr-12 Egypt 1.1% 5.4% Feb-12 Lebanon 1.4% 4.2% Mar-12 Saudi 5.1% 10.3% Mar-12 Kuwait 1.1% 2.5% Mar-12 Oman 2.1% 17.9% Feb-12 Source: Central Bank, Arqaam Capital Research May Exhibit 120: M/M gross loan growth by country Exhibit 121: M/M gross deposits growth by country 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% UAE Qatar Egypt Lebanon Saudi Kuwait Oman Source: Central Bank, Arqaam Capital Research UAE Qatar Egypt Lebanon Saudi Kuwait Oman Source: Central Bank, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 102

104 QNBK CBQK MARK DHBK QIBK KCBK QIIK BKMB BKSB OIBB NBK KFIN GBK BURG BOUBYAN ENBD NBAD ADCB FGB UNB DIB ADIB MASQ CBD RAKBANK TAMWEEL AUDI BLOM BYB BOB RJHI RIBL BSFR SAMBA SABB ARNB AAAL SIBC ALINMA BJAZ ALBI COMI NSGB CIEB HDBK EGBE KCBK CBD RAKBANK BKSB KFIN DIB DHBK MASQ UNB CBQK NBAD TAMWEEL MARK QIBK QNBK BYB ENBD RIBL BURG BKMB ALINMA SAMBA BSFR ADCB ARNB FGB AUB RJHI CIEB BJAZ BLOM ADIB EGBE SABB NBK BOUBYAN AUDI COMI AAAL QIIK GBK NSGB SIBC BOB HDBK ALBI GBK Exhibit 122: Credit Commitments as % of total loans May % 50% 40% 30% 20% 10% 0% -10% -20% -30% 1000% 800% 600% 400% 200% 0% -200% FY 10A FY 11A y/y growth (RHS) Exhibit 123: Banks market shares by loans and deposits 60% 50% 40% 30% 20% 10% 0% QATAR OMAN KUWAIT UAE LEBANON KSA EGYPT Loans market share FY 11A Deposits market share FY 11A Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 103

105 QNBK MARK KCBK QIIK CBQK DHBK QIBK BKMB BKSB OIBB KFIN NBK BOUBYAN BURG GBK NBAD FGB ENBD RAKBANK ADIB UNB TAMWEEL CBD ADCB MASQ DIB BOB BLOM BYB AUDI RJHI ALINMA BSFR SABB BJAZ SAMBA ARNB ALBI AAAL RIBL SIBC COMI NSGB CIEB HDBK EGBE QNBK MARK KCBK QIIK CBQK DHBK QIBK BKMB BKSB OIBB KFIN NBK BOUBYAN BURG GBK NBAD FGB ENBD RAKBANK ADIB UNB TAMWEEL CBD ADCB MASQ DIB BOB BLOM BYB AUDI RJHI ALINMA BSFR SABB BJAZ SAMBA ARNB ALBI AAAL RIBL SIBC COMI NSGB CIEB HDBK EGBE May Exhibit 124: Change in lending market share FY10-11A 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% QATAR OMAN KUWAIT UAE LEBANON KSA EGYPT Exhibit 125: Change in deposits market share FY11A-FY10A 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% QATAR OMAN KUWAIT UAE LEBANON KSA EGYPT Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 104

106 ALINMA MARK BOUBYAN BOB QIBK CIEB BLOM COMI AUDI BJAZ QNBK RAKBANK ADIB BYB NSGB DIB EGBE BKSB ALBI HDBK UNB AUB KFIN ADCB FGB RJHI SIBC CBQK NBAD OIBB BSFR DHBK BKMB QIIK NBK ARNB RIBL SABB CBD SAMBA AAAL BURG ENBD GBK MASQ TAMWEEL KCBK Exhibit 126: Private and public growth by country in FY 12e 20% May % 10% 5% 0% -5% Qatar Egypt Oman KSA Lebanon Kuwait UAE Private Sector Public Sector Source: Central Bank, Arqaam Capital Research Exhibit 127: Gross loans growth 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% FY 10A FY 11A Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 105

107 ALINMA MARK QIBK BOUBYAN QNBK RAKBANK CBQK BJAZ ALBI ADCB BOB QIIK ADIB RJHI COMI BYB BKSB BKMB NSGB HDBK FGB UNB SABB AUB DHBK ENBD BLOM OIBB CIEB AUDI BURG KFIN CBD BSFR ARNB NBAD RIBL DIB EGBE GBK SIBC NBK MASQ AAAL KCBK SAMBA May Exhibit 128: Deposits growth 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% FY 10A FY 11A Deposit growth to outpace GDP growth We use an economic model to forecast deposit growth: We forecast deposit growth for the countries under our coverage based on: 1. domestic saving ratios and GDP (IMF forecasts) 2. conversion ratios (i.e. how much of domestic savings translate into net new deposits). IMF forecasts for the GCC some very high gross national savings: Kuwait shows the highest ratio (62.6%) as the government does not use its fiscal surpluses to stimulate the domestic economy, followed by Qatar (56.6%), KSA (47.9%), Oman (44%), UAE (34.9%) and Bahrain (33.0%). For Lebanon, IMF forecasts 13.3% and for Egypt 14.8%. IMF forecasts a reduction in gross savings reflecting a reduction in oil prices and a further increase in government spending (projects, social programs). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 106

108 Exhibit 129: National Savings ratios May FY 00A FY 01A FY 02A FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A United Arab Emirates 37.9% 30.6% 24.9% 27.0% 25.4% 31.6% 34.5% 30.6% 30.1% Qatar 43.4% 56.4% 54.6% 60.1% 55.8% 63.7% 59.3% 59.1% 58.1% Egypt 18.4% 18.2% 19.0% 19.4% 21.3% 21.2% 20.4% 22.6% 22.9% Lebanon 2.2% 3.2% 3.7% 6.7% 7.2% 8.0% 16.6% 20.8% 20.7% Saudi Arabia 26.3% 23.9% 25.9% 32.8% 39.8% 46.7% 46.4% 44.8% 50.5% Kuwait 49.6% 38.1% 28.3% 36.3% 47.3% 56.8% 64.7% 57.2% 58.5% Oman 31.5% 27.4% 25.6% 24.7% 29.1% 39.9% 39.6% 36.5% 37.8% Bahrain 20.1% 15.5% 19.6% 22.9% 29.1% 35.4% 38.2% 42.7% 44.1% FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e United Arab Emirates 27.1% 28.5% 31.7% 34.9% 33.8% 32.3% 32.0% 32.2% 32.6% Qatar 46.2% 56.7% 54.3% 56.6% 55.9% 50.8% 45.0% 39.9% 36.7% Egypt 16.8% 17.5% 15.1% 14.8% 15.8% 16.6% 17.9% 19.4% 21.7% Lebanon 24.4% 22.3% 16.3% 13.3% 14.6% 15.5% 15.9% 16.1% 16.9% Saudi Arabia 31.0% 37.6% 43.0% 47.9% 45.2% 43.2% 41.3% 40.4% 40.1% Kuwait 42.3% 48.7% 59.6% 62.6% 60.6% 58.8% 58.0% 57.8% 58.8% Oman 32.3% 35.7% 41.8% 44.0% 40.1% 34.9% 30.4% 27.0% 23.7% Bahrain 30.2% 33.1% 28.6% 33.0% 35.5% 35.0% 34.3% 33.6% 32.2% Source: IMF,, Arqaam Capital Research The next leg is the conversion ratio. We have analyzed the historical growth in outstanding deposits and compared them to the national savings ratios. The conversion ratios were the highest in Lebanon (as savings are not driven by national savings, but by inflows from expatriates), followed by Egypt (with over half of national savings being deployed in bank deposits). The conversion ratios are lower in the GCC (17-34%) as the strong savings are invested in the domestic economy through projects, or are invested abroad, as banks are unable to deploy the deposits into the domestic economy. Our forecasts are closely tied to the historical average, though generally below. Exhibit 130: Conversion ratios FY 01A FY 02A FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A UAE 11% 27% 19% 42% 57% 39% 68% 56% 26% Qatar 17% 8% 14% 12% 24% 27% 27% 19% 21% Egypt 47% 69% 118% 57% 40% 39% 70% 32% 47% Lebanon 423% 394% 466% 397% 131% 97% 121% 170% 215% Saudi Arabia 13% 28% 14% 18% 20% 20% 10% Kuwait 27% 14% 15% 28% 13% 20% 0% 27% 26% Oman 0% 0% 139% 8% 14% 17% 31% 24% 9% Bahrain 0% 0% 0% 0% 0% 214% 84% 58% 1% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e LT average UAE 22% 5% 23% 25% 25% 25% 28% 38% Qatar 23% 17% 12% 16% 18% 18% 18% 19% Egypt 44% 18% 40% 50% 50% 50% 50% 58% Lebanon 142% 143% 170% 170% 170% 170% 170% 268% Saudi Arabia 10% 19% 14% 17% 17% 17% 17% 18% Kuwait 6% 7% 8% 8% 9% 9% 11% 19% Oman 17% 18% 15% 20% 20% 20% 20% 27% Bahrain 44% 22% 22% 22% 22% 22% 22% 40% Source: Central Bank, IMF, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 107

109 FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e May This is driving the strong deposit growth in the countries under our coverage. We expect forecasts high single digit (Lebanon, Kuwait) to mid double digit growth (Oman, KSA). We expect deposit growth to outpace GDP growth as a result, which is consistent with the same trend for our countries under coverage over the last 10 years. Exhibit 131: Deposit growth FY 01-16e FY 01A FY 02A FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e UAE 8% 15% 11% 25% 41% 27% 38% 27% 8% 7% 2% 11% 10% 9% 9% 9% Qatar 17% 8% 16% 15% 40% 41% 39% 27% 16% 24% 19% 13% 16% 14% 12% 10% Egypt 12% 17% 28% 13% 9% 9% 20% 9% 11% 11% 4% 9% 13% 14% 15% 17% Lebanon 6% 7% 15% 13% 4% 6% 10% 16% 23% 12% 8% 8% 9% 9% 9% 9% Saudi Arabia n/a n/a 7% 20% 12% 21% 21% 18% 11% 5% 12% 15% 15% 13% 11% 10% Kuwait 13% 5% 7% 21% 13% 25% 0% 33% 14% 4% 7% 9% 8% 8% 7% 9% Oman n/a n/a n/a 8% 22% 26% 38% 32% 6% 15% 20% 16% 17% 13% 10% 8% Bahrain n/a n/a n/a n/a n/a n/a 51% 29% 0% 13% 6% 7% 7% 6% 6% 6% Source: Factset, Central Bank, Arqaam Capital Research Exhibit 132: Deposits/GDP FY 01-16e FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12e FY 13e FY 14e FY 15e FY 16e UAE 45% 48% 52% 51% 54% 62% 64% 76% 79% 99% 96% 81% 83% 90% 96% 102% 107% Qatar 56% 67% 65% 62% 53% 53% 54% 58% 51% 69% 66% 57% 58% 66% 73% 78% 81% Egypt 77% 82% 90% 105% 102% 101% 96% 95% 87% 82% 79% 72% 70% 69% 68% 67% 68% Lebanon 221% 229% 226% 247% 256% 266% 275% 272% 262% 279% 293% 302% 304% 308% 316% 325% 334% Saudi Arabia n/a n/a 48% 45% 46% 41% 44% 50% 47% 67% 58% 51% 52% 58% 64% 70% 74% Kuwait 75% 92% 89% 77% 76% 64% 64% 58% 63% 93% 83% 65% 61% 67% 72% 76% 80% Oman n/a n/a n/a 34% 32% 32% 33% 41% 37% 51% 47% 45% 48% 55% 62% 67% 71% Bahrain n/a n/a n/a n/a n/a n/a 82% 106% 114% 131% 128% 116% 116% 120% 126% 132% 136% Source: Central Bank, IMF, Arqaam Capital Research Exhibit 133: Deposits/GDP FY 01-16e 400% 350% 300% 250% 200% 150% 100% 50% 0% UAE Qatar Egypt Lebanon Saudi Arabia Kuwait Oman Bahrain Source: Central Bank, IMF, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 108

110 RAKBANK RJHI ADIB ALINMA CBD FGB DHBK NSGB CIEB COMI BKMB EGBE HDBK DIB KFIN CBQK QIIK NBK QNBK UNB ALBI ADCB BOUBYAN QIBK ARNB ENBD OIBB NBAD KCBK BKSB MASQ BURG SIBC BSFR RIBL TAMWEEL SAMBA AAAL SABB BLOM GBK BJAZ AUB AUDI BYB MARK BOB May Net interest margins We expect margins to fall in most markets, particularly in Qatar, KSA and the UAE as lowering deposit rates has come to an end, while rivalry for new loans remains intense, despite some European banks withdrawing from the market. In addition to that, we see caps by Central banks in the UAE and Oman on personal loans. In Egypt, we expect strongly improved margins, helped by higher yields on treasury bills, a return to local currency lending and a pick-up in SME lending. We also expect pressure on net interest margins as banks prepare for Basel 3 liquidity ratios, with pressure on asset yields due to higher required liquidity and higher cost of funding (longer maturity deposits, raising wholesale debt). This is particularly relevant for NBAD, ENBD, Tamweel, NBK, SIB and AUB. In the table on page 116 we analyze the evolution of net interest margins (FY 11A-14e) and detail the main contributors to changes in asset yields and funding costs. Exhibit 134: NIM FY11-14e 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY 11A FY 14e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 109

111 RAKBANK HDBK CIEB NSGB EGBE COMI TAMWEEL BLOM BYB ADIB KFIN FGB BOB DIB AUDI CBD UNB ADCB CBQK DHBK RJHI BKMB BKSB MASQ QIIK ENBD QNBK QIBK BURG ALINMA NBK AUB BOUBYAN GBK NBAD KCBK OIBB SIBC ALBI ARNB MARK AAAL BSFR RIBL BJAZ SABB SAMBA May Asset yields under pressure due to increased rivalry and increased liquidity requirements Exhibit 135: Asset Yields 12% 10% 8% 6% 4% 2% 0% FY 11A FY 14e We expect asset yields to fall, except in Egypt, due to lower lending margins, due to: Increasing rivalry as banks have increased appetite to lend driven by their bolstered capital positions and reduced credit spreads. Increased liquidity requirements driven by Basel 3, which reduces the average yield on assets, particularly affecting UAE banks. Regulatory changes retail caps in UAE and Oman. For Egypt, we expect higher asset yields, helped by higher average rates on treasury bills. For the Qatari banks, lower asset yields are driven by rate cuts of 100 bps that took place in April 2011, an increase in the share of public sector loans, and rate caps applied to retail lending. In 2011, Qatari banks were helped by investments in financial instruments issued by the central bank and increased treasury bills investments, but it is uncertain whether this will provide any help in the future on the margin. In UAE and Oman, we have included regulatory changes, which fit into the global trend of protecting the customers and regulating banks more strictly. We expect the UAE to go ahead and to cap interest charges on credit cards at 1.5% per month (vs. a 2.5%-3% being (over)charged by banks), while Oman central bank reduced personal loan rates from 8% to 7%. In KSA we also expect continued pressure on loan margins. For UAE banks particularly, we expect increased liquidity requirements under Basel 3 to be a headwind as well. For KSA banks we expect loan margins to be under pressure. Loan growth should not increase faster than deposit growth as such high cash balances continue to impact the asset yields for the foreseeable future. The same applies to the Kuwaiti banks. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 110

112 HDBK EGBE NSGB CIEB TAMWEEL COMI BYB BOB BLOM AUDI MASQ BKSB UNB RAKBANK ADCB KFIN CBQK DIB ENBD AUB BURG QIIK FGB GBK MARK BKMB CBD ADIB QNBK DHBK KCBK QIBK BOUBYAN NBAD NBK SIBC OIBB BJAZ AAAL RIBL ALINMA BSFR SABB SAMBA ARNB RJHI ALBI May And deposit rates unlikely to fall further Exhibit 136: Deposit Rates 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY 11A FY 14e We expect average cost of funding to stabilize or to move up: We expect banks, particularly in the UAE, to issue wholesale debt as they prepare for liquidity ratios under Basel 3 (LCR and NSFR), which may increase the average cost of funding. Banks have successfully used the window that was created after the ECB addressed the liquidity shortfall in the European banking system and this helped open up the funding markets. We do not expect significant effects from resets of subordinated debt. We do not expect deposit rates to come down any further across the board, particularly not in the UAE as the difference between AED denominated accounts and USD accounts has become too small, and UAE banks suffered significant deposit outflows since April 2011, though this has partly been reversed over the last few months. In KSA, we see no room whatsoever for cost of funding to fall as rates are already extremely low. Oman may be a positive exception and we see limited potential for a reduction in deposit rates. We expect banks to extend the maturities of their deposits to at least 1 month (helping their LCR) or 1 year (helping their NSFR) by incentivizing their clients to switch to time deposits. Boubyan, NBK, Burgan, Aliblad, Bank Muscat and KFN greatly rely on current accounts, whereas UNB, FGB, MARK and Al Khaliji have a very high share of time deposits and could potentially lower the cost of funding. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 111

113 BOUBYAN NBK BURG ALBI BKMB KFIN SAMBA AAAL ARNB ALINMA SABB BSFR RIBL RAKBANK CBD RJHI QNBK OIBB ENBD BJAZ MASQ DIB CBQK ADIB DHBK COMI ADCB QIIK NSGB GBK NBAD CIEB BKSB SIBC EGBE AUB BYB AUDI BLOM QIBK KCBK BOB HDBK UNB MARK FGB May Exhibit 137: Deposits breakdown in FY 11A 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Current Accounts Savings accounts Time deposits Others We think there are several ways to increase liquidity ratios: Extending the maturities of deposits to at least 1 month (helping LCR) or 1 year (NSFR). Raising wholesale debt Reducing lending and increasing marketable securities such as Treasury bills or corporate bonds Due to the technicalities and the stickiness of deposits, we think the trade-off between raising wholesale debt (which cost an average of bps) and extending maturities of deposits is bps, and we think raising wholesale debt will probably be more cost efficient. Unlikely increase in rates negative for Lebanese banks and positive for KSA banks The ECB has successfully addressed the liquidity shortfall in the European banking system which has helped open up the funding markets as well. Nevertheless, we run a separate scenario to analyze the impact of an abrupt 25bps increase in funding costs. We expect a negative impact of rate increases on all Lebanese banks, ENBD, ADCB, ADIB, Al Khaliji, Bank Sohar, and Ahli United. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 112

114 RAKBANK RJHI ADIB ALINMA CBD FGB DHBK NSGB CIEB COMI BKMB EGBE HDBK DIB KFIN CBQK QIIK NBK QNBK UNB ALBI ADCB BOUBYAN QIBK ARNB ENBD OIBB NBAD KCBK BKSB MASQ BURG SIBC BSFR RIBL TAMWEEL SAMBA AAAL SABB BLOM GBK BJAZ AUB AUDI BYB MARK BOB May Exhibit 138: NIM 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY 11A FY 14e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 113

115 Exhibit 139: Interest rates Source: Arqaam Capital NIM Asset yield Of Which Funding costs Of which Loan Impact CB T-bill rate T-bill Credit card Retail vs Public vs Local vs Deposit Net wholesale FY 11A FY 14e Change FY 11A FY 14e Change Retail caps Rate cuts FY 11A FY 14e Change Rate cuts Deposit mix margins increased investments impact investment caps Corporate Private USD margins debt issuance ADCB 2.91% 2.76% (0.16%) 4.79% 4.68% (0.11%) 0.01% (0.12%) (0.00%) 2.06% 2.10% 0.04% 0.08% 0.02% (0.06%) ADIB 4.08% 4.06% (0.03%) 5.36% 5.34% (0.02%) 0.12% (0.13%) (0.01%) 1.37% 1.37% (0.00%) (0.04%) 0.06% (0.03%) CBD 3.75% 3.54% (0.21%) 4.94% 4.73% (0.21%) (0.17%) (0.03%) (0.01%) 1.39% 1.37% (0.02%) (0.08%) 0.09% (0.03%) DIB 3.33% 3.04% (0.29%) 5.06% 4.68% (0.38%) (0.37%) (0.01%) (0.00%) 1.82% 1.70% (0.12%) (0.16%) 0.05% (0.00%) ENBD 2.79% 2.72% (0.08%) 4.45% 4.42% (0.03%) 0.19% (0.19%) (0.03%) 1.80% 1.86% 0.06% (0.17%) 0.02% 0.22% FGB 3.71% 3.49% (0.22%) 5.17% 4.91% (0.26%) 0.01% (0.19%) (0.07%) (0.01%) 1.62% 1.57% (0.05%) 0.20% (0.17%) (0.08%) NBAD 2.70% 2.50% (0.21%) 3.73% 3.49% (0.24%) 0.25% (0.46%) (0.04%) 1.11% 1.10% (0.01%) 0.06% (0.01%) (0.06%) UNB 3.05% 2.98% (0.07%) 4.91% 4.76% (0.15%) (0.21%) 0.08% (0.03%) 2.10% 2.00% (0.10%) 0.02% (0.09%) (0.02%) TAMWEEL 2.41% 2.42% 0.01% 5.82% 5.60% (0.22%) (0.21%) (0.00%) --% 4.35% 4.10% (0.25%) (0.63%) 0.09% 0.28% MASQ 2.63% 2.38% (0.25%) 4.58% 4.30% (0.28%) (0.17%) (0.09%) (0.02%) 2.40% 2.33% (0.07%) (0.07%) 0.00% RAKBANK 9.07% 7.72% (1.35%) 10.81% 9.51% (1.30%) (1.31%) 0.01% --% 2.09% 2.20% 0.11% 0.33% (0.20%) (0.02%) UAE banks CBQK 3.22% 2.86% (0.36%) 4.78% 4.25% (0.53%) (0.45%) 0.13% (0.02%) (0.13%) (0.03%) (0.05%) 1.83% 1.53% (0.30%) (0.28%) (0.05%) 0.03% DHBK 3.63% 3.35% (0.27%) 4.76% 4.47% (0.29%) 0.05% (0.12%) (0.03%) (0.13%) (0.01%) (0.05%) 1.29% 1.30% 0.01% 0.03% (0.00%) (0.01%) QIBK 2.88% 3.37% 0.49% 4.13% 4.80% 0.67% 0.88% 0.02% (0.04%) (0.13%) (0.01%) (0.05%) 1.21% 1.20% (0.01%) (0.16%) (0.10%) 0.26% QNBK 3.08% 2.83% (0.25%) 4.23% 3.98% (0.25%) 0.09% (0.06%) (0.02%) (0.13%) (0.09%) (0.05%) 1.31% 1.31% --% (0.05%) 0.04% 0.01% MARK 1.64% 2.11% 0.47% 2.98% 3.30% 0.32% 0.54% 0.02% --% (0.13%) (0.06%) (0.05%) 1.58% 1.30% (0.28%) (0.08%) (0.30%) 0.10% KCBK 2.70% 2.42% (0.28%) 3.70% 3.50% (0.20%) 0.07% 0.03% (0.11%) (0.13%) (0.02%) (0.05%) 1.28% 1.26% (0.02%) 0.13% (0.26%) 0.11% QIIK 3.17% 2.82% (0.36%) 4.56% 4.14% (0.42%) (0.45%) 0.24% (0.02%) (0.13%) (0.01%) (0.05%) 1.64% 1.50% (0.14%) (0.41%) 0.07% 0.19% Qatar banks CIEB 3.54% 3.54% (0.00%) 7.51% 7.55% 0.04% (0.17%) (0.13%) 0.24% 0.00% 0.06% --% 0.04% 4.36% 4.30% (0.06%) (0.25%) 0.19% (0.00%) COMI 3.48% 3.68% 0.20% 7.07% 7.26% 0.19% (0.10%) (0.20%) 0.42% (0.02%) 0.04% --% 0.04% 3.98% 4.00% 0.02% (0.24%) 0.26% 0.00% HDBK 3.37% 3.47% 0.10% 8.98% 8.66% (0.32%) (2.13%) (0.02%) 1.86% (0.07%) --% --% 0.04% 6.40% 7.81% 1.41% 1.23% 0.32% (0.15%) NSGB 3.56% 3.71% 0.15% 7.39% 7.52% 0.13% 0.00% (0.15%) 0.19% (0.00%) 0.06% --% 0.04% 4.38% 4.39% 0.01% (0.02%) 0.04% (0.01%) EGBE 3.40% 3.38% (0.01%) 7.39% 7.55% 0.16% (0.16%) (0.18%) 0.41% (0.01%) 0.06% --% 0.04% 4.70% 4.70% (0.00%) (0.10%) 0.10% (0.00%) Egypt banks AUDI 1.95% 2.04% 0.09% 4.99% 5.10% 0.11% 0.45% (0.39%) 0.06% (0.00%) 3.27% 3.22% (0.05%) 0.15% (0.19%) (0.01%) BLOM 2.33% 2.32% (0.00%) 5.53% 5.32% (0.21%) 0.02% (0.29%) 0.06% --% 3.50% 3.24% (0.26%) (0.38%) 0.13% (0.01%) BYB 1.82% 1.72% (0.10%) 5.42% 5.32% (0.10%) 0.04% (0.21%) 0.06% --% 3.96% 3.98% 0.02% 0.23% (0.17%) (0.04%) BOB 1.47% 1.61% 0.15% 5.06% 5.35% 0.29% 0.57% (0.34%) 0.06% --% 3.82% 3.85% 0.03% 0.29% (0.19%) (0.07%) Lebanon banks ARNB 2.81% 2.70% (0.11%) 3.06% 2.95% (0.11%) 0.06% (0.18%) 0.01% (0.00%) 0.29% 0.30% 0.01% (0.15%) 0.17% (0.01%) RJHI 4.61% 4.19% (0.43%) 4.74% 4.28% (0.46%) (0.51%) 0.01% 0.04% --% 0.15% 0.11% (0.04%) (0.21%) 0.17% --% BSFR 2.50% 2.37% (0.13%) 2.89% 2.76% (0.13%) (0.25%) 0.11% 0.01% (0.00%) 0.46% 0.43% (0.03%) 0.04% 0.11% (0.17%) RIBL 2.46% 2.44% (0.02%) 2.88% 2.78% (0.10%) 0.00% (0.11%) 0.01% (0.00%) 0.50% 0.40% (0.10%) (0.19%) 0.06% 0.02% SAMBA 2.39% 2.30% (0.10%) 2.65% 2.52% (0.13%) (0.10%) (0.03%) 0.01% (0.01%) 0.31% 0.27% (0.04%) (0.31%) 0.24% 0.03% SABB 2.37% 2.22% (0.15%) 2.76% 2.62% (0.14%) (0.32%) 0.18% 0.01% (0.00%) 0.45% 0.45% 0.00% (0.16%) 0.14% 0.02% AAAL 2.39% 2.16% (0.23%) 2.90% 2.70% (0.20%) (0.19%) (0.02%) 0.01% (0.00%) 0.59% 0.63% 0.04% (0.56%) 0.59% 0.01% ALBI 2.96% 2.75% (0.22%) 3.07% 2.86% (0.21%) (0.67%) 0.45% 0.01% --% 0.12% 0.12% --% (0.58%) 0.55% 0.04% BJAZ 2.27% 2.05% (0.22%) 2.81% 2.62% (0.19%) (0.28%) 0.08% 0.01% --% 0.61% 0.64% 0.03% 0.12% (0.06%) (0.03%) SIBC 2.52% 2.31% (0.20%) 3.18% 3.00% (0.18%) (0.12%) (0.07%) 0.01% (0.00%) 0.76% 0.87% 0.11% (0.45%) 0.57% (0.01%) ALINMA 3.78% 3.40% (0.38%) 4.03% 3.63% (0.40%) (0.57%) 0.17% 0.01% (0.01%) 0.47% 0.29% (0.18%) (0.36%) 0.18% --% KSA banks 0.43% 0.41% NBK 3.11% 2.96% (0.15%) 4.00% 4.00% 0.00% 0.11% (0.15%) 0.04% --% 1.01% 1.20% 0.19% (0.39%) 0.58% KFIN 3.24% 3.04% (0.20%) 5.34% 4.86% (0.48%) (0.24%) (0.29%) 0.04% --% 2.01% 1.76% (0.25%) (0.25%) --% GBK 2.30% 2.32% 0.02% 3.74% 3.61% (0.13%) (0.03%) (0.14%) 0.04% --% 1.59% 1.45% (0.14%) (0.02%) (0.11%) (0.01%) BURG 2.59% 2.52% (0.07%) 4.13% 4.00% (0.13%) (0.02%) (0.14%) 0.04% --% 1.69% 1.62% (0.07%) (0.05%) (0.02%) BOUBYAN 2.90% 2.89% (0.01%) 3.88% 3.92% 0.04% 0.26% (0.25%) 0.04% --% 1.14% 1.16% 0.02% 0.02% --% Kuwait banks BKMB 3.42% 3.22% (0.20%) 4.63% 4.46% (0.17%) (0.26%) 0.05% 0.04% (0.00%) 1.41% 1.43% 0.02% (0.49%) 0.60% (0.09%) BKSB 2.64% 3.02% 0.38% 4.62% 4.50% (0.12%) (0.26%) 0.10% 0.04% (0.00%) 2.20% 1.60% (0.60%) (0.54%) (0.06%) 0.01% OIBB 2.79% 2.78% (0.01%) 3.38% 3.35% (0.03%) (0.00%) (0.07%) 0.04% (0.00%) 0.68% 0.65% (0.03%) (0.39%) 0.36% --% Oman banks AUB 2.26% 2.38% 0.12% 3.89% 4.04% 0.15% 0.15% 0.08% (0.00%) 1.70% 1.76% 0.06% (0.01%) (0.09%) 0.16% Bahrain banks Financials (bank, insurance and diversified Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 114

116 ADCB ADIB CBD DIB ENBD FGB NBAD TAMWEEL RAKBANK MASQ CBQK DHBK QIBK QNBK MARK QIIK CEIB COMI HDB NSGB EGBE AUDI BLOM BYB BOB ARNB RJHI BSFR RIBL SAMBA SABB ALINMA AAAL BJAZ SIBC NBK BURG GBK KFIN BOUBYAN May Fees and commissions We expect pressure on fees and commissions in the UAE due to lower retail charges. We expect an accelerating growth in brokerage and asset management fees due to the buoyant markets, though we expect a slowdown vs. the strong Q1 12A. We expect continued strong growth in fees related to new net lending. We expect growing fees and commissions for all our countries, but with the lowest growth in the UAE, due to strict regulation capping retail charges. We expect acceleration in Saudi Arabia as a result of higher new loan growth (partly due to margin lending) and increased trade finance, brokerage, and asset management. The increase in fees in Lebanon is slightly subdued due to lower net new loan growth. In Qatar, the double digit increase in fees and commissions is driven by new lending and, to a much lesser extent, higher brokerage fees (resumption of brokerage activities). On average, fees and commissions comprise 20% of total revenue. They are driven mostly by outstanding loan amounts and new lending (over 74%), trade finance (12%), brokerage (11%) and asset management (6%). But growth in brokerage (we expect 50% for FY 12e) and asset management (25%) should mainly help, DFM and most Saudi banks (particularly Aljazira) and NBAD and Bank Audi, while the brokerage activities of the Qatari banks are unlikely to be a significant generator of revenues yet. Brokerage fees and asset management commissions comprise c. 16% of total fee and commission revenue for most banks and are particularly high for Saudi banks (20% on average) and the investment banks like Shuaa Capital. Exhibit 140: FY 11A Fee Breakdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Brokerage Asset Management Trade Finance Other Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 115

117 BJAZ OIBB ALINMA BOUBYAN CIEB ALBI BOB RIBL TAMWEEL EGBE SIBC AAAL ARNB BSFR SAMBA SABB HDBK BKMB BYB NSGB BKSB RJHI BURG DIB QIBK COMI KCBK GBK NBAD KFIN CBQK ENBD BLOM NBK QNBK DHBK CBD AUB ADIB AUDI QIIK MASQ UNB RAKBANK FGB ADCB MARK Exhibit 141: Change in Fees as % of FY 12e Net Profit 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% May Exhibit 142: During FY 11A traded value was at its lowest point in 8years FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A Daily Traded Value in USD mn Source: Bloomberg, Arqaam Capital Research Exhibit 143: DFM would be fairly priced only if daily traded value goes back to FY 09A levels I II III IV V Excess of 2011 traded value 0% 44% 75% 300% 401% Avergae dailt traded value for FY 11A 35 Average daily traded volume Projected commission income 76, , , , ,743 Other revenues 158, , , , ,242 Cash Expenses 79,117 79,117 79,117 79,117 79,117 Cash income 155, , , , ,868 Value 3,118,409 3,794,205 4,270,334 7,726,109 9,277,368 Per share Upside/Downside (59%) (51%) (44%) 1% 21% Source: Bloomberg, DFM, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 116

118 Investment income: We do not include bond gains We expect the balance sheet de-risking trend to be reinforced due to Basel 2.5 and Basel III (tripling risk weighted assets). We expect part of gains on securities to move to other comprehensive income under IFRS 9. We use normalized investment returns in our forecasts; we exclude bond gains as we believe they are not sustainable income, and use 5% gains on (private) equity investments. De-risking of balance sheets Banks have substantially reduced their investment portfolios, either in order to de-risk (Shuaa Capital being the most obvious example) and improve their capital ratios, or to comply with central bank requirements (such as in Qatar), or through reclassifying debt securities as heldto-maturity. We expect this to continue as Basel 2.5 and Basel III should increase the risk weighting of market weighted assets, though not to the same extent as for US and European banks. IFRS 9 could help Tier-1 ratios Banks are now allowed to use International Financial Reporting Standards (IFRS) 9, which covers the classification and measurement of financial assets, rather than International Accounting Standards (IAS) 39, required previously. Early adoption is permitted starting from 2009, but banks are allowed to postpone adoption until 1 January Under IFRS 9, financial assets may only be classified at fair value or at cost as the available-for-sale category no longer exists. Also, part of investment gains will be included in other comprehensive income rather than in the normal income statement. For the banks that have adopted IFRS 9, the picture is mixed as illustrated below. Exhibit 144: Effect of IFRS 9 adoption AED 000 Adopted Effect on Earnings Effect on Equity ADIB Yes 43,851 (4,132) DIB Yes 34,190 (36,070) MASQ Yes TAMWEEL Yes LBP million Adopted Effect on Earnings Effect on Equity AUDI Yes (101,875) (5,666) BLOM* Yes -- (169,573) BYBLOS* Yes na (67,642) BOB* Yes na 39,000 SAR 000 Adopted Effect on Earnings Effect on Equity Source: Company data UAE Lebanon Saudi Arabia BJAZ Yes 91, *Retrospective impact on earnings and equity in 2010 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 117

119 KFIN CIEB MARK RAKBANK BURG QIBK QIIK AUDI ADIB BOB HDBK KCBK BYB AUB SABB DHBK COMI BLOM BKMB CBQK NSGB ADCB ARNB QNBK MASQ BSFR SAMBA RIBL ALBI AAAL NBK CBD NBAD FGB BKSB DIB SIBC ENBD BJAZ ALINMA TAMWEEL RJHI UNB OIBB GBK BOUBYAN EGBE May In our forecasts, we continue to use 5% as a structural level for capital gains on equity and private equity investments, and we gradually increase the earnings stream from associates as returns start to normalize. We also include a normalized level of trading income from forex and arbitrage in our forecasts. However, we still do not include capital gains on bonds as we do not see them as a sustainable source of income. We anticipate a significant negative effect on the earnings of Bank of Beirut and Byblos (due to lower bond gains), CAE, Doha, Al Khaliji, QIIB, KFH and Ahli United. On the other hand, we would expect DIB, UNB, BSFR, EGB, Riyad, Bank Muscat, SHB, Aljazeera, and SIB to benefit from the normalization of investment returns. In the following chart we include the impact on revenue of the normalization that we pencil in for FY 12e. Exhibit 145: Investment income as % of total income 8% 6% 4% 2% 0% -2% -4% FY 11A FY 12e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 118

120 FGB DIB NBAD ADIB ADCB QNBK MASQ MARK QIBK UNB BURG AUB AUDI CBD SIBC BOB BSFR TAMWEEL DHBK ENBD NBK GBK QIIK BLOM SAMBA AAAL CBQK BKMB RIBL BKSB KCBK BYB SABB ARNB RAKBANK COMI RJHI BJAZ HDBK ALINMA BOUBYAN NSGB ALBI KFIN EGBE OIBB CIEB May Some cost/income convergence We expect the biggest improvements in efficiency for Shuaa, Aljazeera, Alinma, Egyptian Gulf Bank and Al Khaliji due to increasing scale. Cost/income ratios should move up moderately for CBD, Doha, EFG-Hermes, FGB, and QNB. FGB, QNB, MARK and UNB are the most efficient banks, while Mashreq, RAK, ADIB, EGB, Albilad, Aljazeera, Alinma are the least efficient banks. Sharp improvement in efficiency for some banks We expect cost/income ratios to improve dramatically over the next 4 years for a number of banks, mainly Aljazeera, Alinma, Egyptian Gulf Bank and Al Khaliji due to increasing scale. ENBD, Shuaa and HSBC Oman should benefit from 10-15% cost reductions. while others continue to invest We anticipate a deterioration of efficiency ratios for FGB, CBD, NBAD, and QNB as we expect modest upward pressure on their cost/income ratios, despite their relatively low cost bases, due to continued expansion of branch networks and systems (and a new headquarters for QNB) and continued business expansion to cope with increased activity levels and salary hikes. Exhibit 146: Costs/RWAs: FY 12e vs. FY 15e 7% 6% 5% 4% 3% 2% 1% 0% FY 12e FY15e Change (bps) Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 119

121 Asset Quality: loan loss charges unlikely to fall significantly We become more optimistic as banks have substantially increased provisions, coverage has increased and net NPL formation is slowing down. However, we continue to use cautious assumptions, especially for the real estate and construction sectors, as well as unsecured credit, and thus factor in continued restructurings and potential changes relating to UAE consumer loans. We verify our screen with the latest stress test performed by 90 EU institutions. Exhibit 147: Impact of restructured loans on DCF Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 DCF Standard loan Interest 5% 5% 5% Redemption 100% Discount factor DCF 4.8% 4.5% 90.7% 100.0% Renegotiated loan Interest 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Redemption 100% Discount factor DCF 2.4% 2.3% 2.2% 2.1% 2.0% 76.5% 87.3% Source: Arqaam Capital Research Exhibit 148: Impact of re-renegotiation on fair value and provisioning Standard Renegiotated Re-renegotiated Zombie Fair value 0.0% 87.3% 80.7% 50.0% Provisions 0.0% 12.7% 19.3% 50.0% Source: Arqaam Capital Research Cost of risk tapering off only slowly, but improving underlying trend We use a very detailed granular approach, and divide loan books into 7 loan categories: government loans, bank and financial institution loans, corporate property and construction loans, corporate non-property and construction loans, SME loans, mortgages, and other retail loans (unsecured credit, credit cards, car loans, etc). We categorize Dubai World and Dubai Holding as NPLs and lower the LGD for corporate loans (without any change in total expected loss). We estimate the probability of default (PD) and loss given default (LGD) for each category and forecast the expected losses (EL). We apply a high variance with respect to the probability of default and loss given default, depending on the underwriting standards of the bank. We back test our non performing loans and losses given default with the EU stress test. We also run a stress test for the MENA markets similar to the EU s. We expect loan loss charges to only slowly taper off for the following reasons: Banks are required to build general reserves. UAE banks are required to build 1.5% of credit risk weighted assets as provisions, while SAMA implicitly demands coverage by 2015 of 150% of NPLs, while other banks add 1% of new loans. Cut off rates have been reduced for NPLs to 90 days from 180 days past due in the UAE. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 120

122 Regulators and accounting boards are strongly in favor of using expected loss models rather than a fair value approach or the backward-looking incurred loss approach as defined under the current accounting standards in IAS 39. It is highly likely that the models will be based on expected losses estimated over the lifetime of a product. Loan loss charges should therefore tally with our asset quality screen, in which we estimate future expected losses. Ongoing restructuring of loans. Some 25% of restructured loans ultimately return as Non Performing, while we cannot exclude a second round of restructuring on previously restructured loans. CBQ, Khaliji, CIB, RAK Bank, FGB and Mashreq have a particularly high share of restructured loans. Past due but not impaired loans are relatively elevated, particularly in the UAE (UNB, ADCB, ENBD, CBD and RAKBank) & Kuwait (KFH, Khaliji and Gulf Bank). New regulation forcing banks to be more lenient towards consumer credits, particularly towards nationals. High concentration risks (single party). High exposures to Commercial Real Estate, where we see continued price pressure, contrary to the residential market, where we have witnessed stabilization. Having said that, we are becoming more optimistic on the underlying provisioning trend: Global corporate default rates have fallen substantially. Banks have significantly increased provisions to 3.57% in FY 11A of loans vs. 2.32% in FY 08A, with UAE banks at 4.61% vs. merely 1.65% FY 08A. Coverage remains high (77%) despite an increase in reported NPLs and a large number of restructurings Net NPL formation is slowing down. NPLs decreased by 0.32% in FY 11A while it increased by 0.91% in FY 10A and 1.90% in FY 09A. Bottoming out of Dubai residential prices Exhibit 149: Global Default Rates: Investment Grade vs. Speculative Grade 12% 10% 8% 6% 4% 2% 0% Default rate Investment-grade default rate Speculative-grade default rate Standard & Poors Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 121

123 GBK BURG DIB OIBB EGBE ENBD CBD MASQ TAMWEEL KFIN ADIB BJAZ SIBC HDBK ALBI ADCB BLOM AUDI FGB UNB DHBK BKMB NSGB SAMBA BYB NBAD COMI AUB RAKBANK ARNB CIEB SABB SHB QIIK RJHI RIBL BKSB NBK QIBK CBQK BSFR QNBK KCBK BOUBYAN BOB MARK ALINMA COMI ADCB FGB CBQK KCBK RAKBANK UNB MASQ BKMB EGBE NBAD ADIB BOB NSGB CBD QNBK AUDI HDBK DHBK BLOM CIEB BYB BKSB QIBK MARK QIIK AUB ENBD Khaliji ADCB QIB Rakbank KFH Gulf Bank CBD Muscat Tamweel UNB ADIB DIB CBQ Albilad Byblos Audi BLOM MASQ NBAD HDB Doha FGB AUB OIB Sohar BSFR SIB SHB EGB SABB MARK BOB CIB CAE Riyad Al Rajhi NBK QIIB BJAZ ANB QNB Samba NSGB Alinma May Exhibit 150: Past due but not impaired as % of total loans 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY 10A FY 11A Exhibit 151: Restructured loans as % of total loans 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY 10A FY 11A Exhibit 152: FY 11A Total NPLs 30% 25% 20% 15% 10% 5% 0% NPL Past Due Restructured Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 122

124 BOUBYAN BOB ARNB RJHI SAMBA ALBI SIBC NBK SHB SABB COMI HDBK EGBE QNBK NSGB BJAZ CIEB RIBL QIIK ALINMA BKMB AUB BSFR KFIN NBAD ADIB DHBK BYB BURG DIB BLOM QIBK FGB TAMWEEL OIBB GBK AUDI ENBD CBD ADCB UNB RAKBANK MASQ BKSB KCBK CBQK MARK May Underlying picture not as rosy for a few banks In the chart below we have compared all balance sheet loan loss provisions with NPLs in a broad sense, i.e. including past due but not impaired and restructured loans. On this metric, Masraf Al Rayan, CBQ, AL Khaliji, Bank Sohar, RAKBank, UNB and ENBD score the worst. Of this list, we only recommend UNB, but have already assumed a substantial increase in the cost of risk. Boubyan, Bank of Beirut, ANB, Al Rajhi and Samba are among the best covered banks. Exhibit 153: FY 11e Coverage of total NPLs 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Exhibit 154: MENA Asset quality Exhibit 155: NPL Ratio per market 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY % 100% 90% 80% 70% 60% 50% 40% 30% 20% 12% 10% 8% 6% 4% 2% 0% UAE Kuwait Oman Egypt Lebanon Bahrain Saudi Qatar Provisions / Avg Loans NPL ratio Provisions / NPL FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 123

125 Exhibit 156: Provision as % of loans Exhibit 157: Coverage ratio per country 8% 7% 6% 5% 4% 3% 2% 1% 0% Kuwait UAE Egypt Bahrain Oman Lebanon Saudi Qatar 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Bahrain Saudi Egypt Qatar Lebanon Oman Kuwait UAE FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e Our assumptions for PD and LGD Exhibit 158: Comparison of our asset quality screen with Basel QIS5 and EU stress test PD Government Banks & FI P&C Non-P&C SME Mortg. Non-mortg. Arqaam Capital 0.3%-5% 0.30% 9%-40% 6%-60% 7.5%-30% 5%-20% 7%-25% Basel II 0.12%-0.96% N/A 3.4%-5.9% 3.4%-5.9% 8.6%-17.2% 3.9%-6.1% 9.3%-45.4% EU test 0%-0.8% 0.1%-0.4% 5.6%-16.8% 4.4%-12.4% 8.6%-19.5% 3.7%-11.2% 6%-15.6% EU stress test 0%-1.6% 0.1%-1.2% 7%-16% 5.8%-12.5% 10%-20% 4%-12% 7%-15.6% Arqaam Capital 35% 35% 30%-50% 20%-47% 40%-50% 35%-45% 65% Basel II 27.7%-38.2% 39.4%-40.9% 35.2%-39.8% 35.2%-39.8% 31.1%-49.6% 11%-40.4% 42.2%-71.6% EU test 15%-45% 25%-43% 22%-34% 35%-43% 25%-43% 12%-18% 38%-67% EU stress test 17%-45% 25%-43% 23%-37% 36%-43% 25%-43% 12%-18% 38%-73% Source: Arqaam Capital Research Government loans We include government and public sector exposures, but not loans to government owned private sector companies. We use a very low probability of default (0.3%), except for Egypt and Lebanon, for which we assign a 5% probability of default. Our loss given default of 35% is in line with the range suggested by Basel and the EU stress test. Bank and financial institution loans We include bank and financial institution loans, but not interbank exposures. We again use a very low probability of default (0.3%). Our loss given default of 35% is in line with the range suggested by Basel and the EU stress test. Most cautious on corporate property and construction loans We see the biggest stress in the property markets. For real estate lending, which comprises construction and property finance, we prudently assume that 20% 40% of loans in the UAE will eventually go into default, as we expect clients to walk away from property developments and foresee significant pressure on rents for real estate finance companies. This may be significantly cushioned by reduced interest rates and maturity extensions. Nevertheless, we feel the possibility of a worst-case scenario should be taken into account as much as possible in our estimates and especially in our valuations. Our probability of default is well ahead of the historical level for real estate debt. We use a relatively high loss given default of 43% 50% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 124

126 DIB EMIRATES MASQ UNB CBD RAKBANK KFIN ADCB ADIB FGB TAMWEEL NBAD Shuaa Gulf Bank QIBK AUB Boubyan BURG AUDI BLOM BYB BOB MUSCAT SOHAR OIB QNBK DHBK CBQK MARK QIIK KCBK SHB SIB ALBILAD BJAZ Alinma NBK NSGB CIEB HDBK HRHO EGBE SAMBA BSFR COMI RIBL RJHI SABB ANB Q1 08A Q2 08A Q3 08A Q4 08A Q1 09A Q2 09A Q3 09A Q4 09A Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Q4 11A Q1 08A Q2 08A Q3 08A Q4 08A Q1 09A Q2 09A Q3 09A Q4 09A Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Q4 11A May (historical average 25% 43%). This takes the total loan loss to 10% for NBAD and up to 20% for ENBD. We see relatively low risk for Egypt as property prices have already soared over the last few years and banks have been lending very little to hotels and the tourism sector. In Qatar, we are relatively cautious due to a slump in real estate prices and aggressive investments in property-related projects. For the other markets, we use NPL ratios of 9% 12.5%, again conservative and ahead of historical averages, but a lower loss given default (30% 40%). We are also concerned for the Bahraini real estate sector. Exhibit 159: Dubai asking price index Exhibit 160: Abu Dhabi asking price index Apartment Villa All Apartment Villa All Source: Colliers Source: Reidin Exhibit 161: Real Estate probability of default 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Arqaam Capital Research Corporate non-property and construction loans include Dubai Holding and Dubai World We categorize Dubai World and Dubai Holding as NPLs and lower the LGD for corporate loans (without any change in expected loss). We used a 15% loss for those exposures. For the other markets, we use NPLs of 6% 17% and a loss given default of 43%. We also use a higher default rate for corporate loans as some real estate exposure is reported under corporate loans. We believe it is very positive that lenders have been able to restructure loans as a cost of a default would be much higher (40%-50% as compared to a haircut of 10%-20% with Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 125

127 restructuring). Provisioning should take into account the fair value loss that results from the extension of the maturity and the softened interest rate charges. We illustrate this with the following example. Consider a three year loan with a maturity of 3 years paying 5% per annum, which is being restructured into a loan with a 2.5% interest rate and a maturity of 6 years. On a DCF basis, the fair value of the new loan is 87.3% that of the original loan, so the shortfall should be covered by impairment charges of 12.7%. However, some banks, like HSBC, Standard Chartered, and UNB, have provisioned less. If the restructured loans would require further restructuring at the end of the maturity, this could prompt another 6.6% value loss, while extending the loans into perpetuity would cut the fair value by 50%, as bad as a straight default. Exhibit 162: Impact of restructured loans on DCF Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 DCF Standard loan Interest 5% 5% 5% Redemption 100% Discount factor DCF 4.8% 4.5% 90.7% 100.0% Renegotiated loan Interest 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Redemption 100% Discount factor DCF 2.4% 2.3% 2.2% 2.1% 2.0% 76.5% 87.3% Source: Arqaam Capital Research Exhibit 163: Impact of re-renegotiation on fair value and provisioning Standard Renegiotated Re-renegotiated Zombie Fair value 0.0% 87.3% 80.7% 50.0% Provisions 0.0% 12.7% 19.3% 50.0% Source: Arqaam Capital Research Average to conservative assumptions for SME loans We use a probability of default of 7.5% 30% for SME loans, which is in line with the range used in the latest quantitative impact study performed by Basel and also with the base scenario in the EU stress test. The loss given default we use is in line with Basel but is more conservative than that used in the EU stress test. Very conservative assumptions for mortgages We use a probability of default of 5% 20% for retail mortgages, which is much more conservative than the ranges used in the latest quantitative impact study performed by Basel Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 126

128 CBD DIB ADCB ENBD KFH Rakbank UNB Tamweel Gulf Bank ADCB FGB ADIB Burgan Boubyan HDB QIB BLOM NBAD Byblos Audi CAE BOB NSGB NBK EGB QIIB CIB MARK CBQ Khaliji SOHAR AUB ADCB DHBK MUSCAT Albilad OIB Aljazeera SIBC SABB AAAL BSFR ANB QNB Samba Riyad Alinma May and in the EU stress test. Our loss given default is also much more conservative, justified by the sharp drop in housing prices across the region. Increased PDs for other retail loans due to new regulation in the UAE We may see UAE banks being forced by the central bank to cancel interest on interest charges and may have to help out some of their indebted clients. On the other hand, retail caps for credit cards should reduce the probability of defaults, while the set up of a fund should also have a positive impact on the asset quality of banks. For revolving and other retail credit, we use a probability of default that is higher than those used in the Basel impact study and EU stress test, but our loss given default (65%) remains conservative. Our weighted cumulative probability of default is very conservative and is ahead or in line with NPLs (broad definition including restructured loans and not impaired and past due) as discussed on p Exhibit 164: Weighted probability of default 30% 25% 20% 15% 10% 5% 0% Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 127

129 Exhibit 165: Loan loss charges % loans FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e ADCB 0.81% 2.56% 2.29% 1.60% 1.55% 1.40% 1.30% 1.09% ADIB 0.24% 2.51% 0.94% 1.13% 1.29% 1.28% 1.20% 0.98% CBD 0.09% 1.33% 1.83% 1.65% 1.90% 1.80% 1.50% 1.08% DIB 0.43% 1.22% 1.07% 1.59% 2.40% 2.40% 2.10% 1.37% EMIRATES 0.76% 1.41% 1.37% 2.25% 2.20% 2.10% 2.00% 1.05% FGB 0.90% 1.94% 1.71% 1.50% 1.35% 1.20% 1.05% 0.93% NBAD 0.72% 1.07% 0.81% 0.88% 0.78% 0.78% 0.69% 0.55% UNB 0.32% 0.53% 0.84% 1.01% 1.40% 1.29% 1.17% 0.80% TAMWEEL 1.55% 1.32% 1.12% 0.18% 0.60% 0.60% 0.80% 1.03% MASQ 0.61% 2.82% 3.24% 2.30% 2.40% 2.20% 2.00% 1.01% RAKBANK --% 2.02% 1.77% 1.70% 1.80% 1.75% 1.70% 1.33% UAE 0.58% 1.65% 1.51% 1.56% 1.63% 1.52% 1.38% 0.95% CBQK 0.20% 1.38% 0.50% 0.62% 0.65% 0.66% 0.67% 0.68% DHBK 0.25% 0.49% 1.14% 0.86% 0.60% 0.60% 0.60% 0.66% QIBK (0.28%) 0.13% 0.17% 0.04% 1.16% 0.60% 0.60% 0.94% QNBK 0.29% 0.26% 0.42% 0.61% 0.55% 0.50% 0.50% 0.58% MARK --% 0.05% 0.01% 0.23% 0.70% 0.70% 0.68% 0.67% KCBK 0.05% 3.12% (0.86%) 0.40% 0.47% 0.57% 0.71% 0.67% QIIK --% 0.16% 0.15% 0.18% 0.40% 0.65% 0.70% 0.79% Qatar 0.15% 0.51% 0.38% 0.47% 0.64% 0.57% 0.58% 0.66% CIEB (0.29%) 0.30% 0.39% 1.21% 1.09% 0.95% 0.90% 0.91% COMI 1.65% 0.03% 0.02% 0.81% 0.70% 0.70% 0.70% 0.75% HDBK 0.09% 0.28% 0.92% 0.75% 1.00% 1.00% 1.09% 1.11% NSGB 0.87% (1.02%) (0.24%) 0.40% 0.70% 0.73% 0.73% 0.85% EGBE 0.61% 0.53% (0.65%) 0.51% 0.75% 0.75% 0.75% 0.79% Egypt 0.90% (0.29%) 0.01% 0.66% 0.77% 0.77% 0.77% 0.83% AUDI 0.09% 0.36% 0.40% 1.03% 0.89% 0.87% 0.87% 0.88% BLOM 0.26% (0.09%) 0.35% 0.70% 0.88% 0.88% 0.89% 0.89% BYB 0.14% 0.56% 0.54% 0.70% 0.75% 0.85% 0.87% 0.87% BOB 0.27% (0.01%) (0.02%) 0.06% 0.47% 0.60% 0.70% 0.75% Lebanon 0.15% 0.23% 0.33% 0.72% 0.80% 0.83% 0.85% 0.87% ARNB 0.09% 0.73% 1.41% 0.86% 0.80% 0.75% 0.70% 0.64% RJHI 1.11% 1.52% 1.46% 1.10% 0.83% 0.82% 0.82% 0.83% BSFR 0.13% 0.71% 0.42% 0.18% 0.41% 0.47% 0.53% 0.59% RIBL 0.42% 0.60% 0.86% 0.59% 0.56% 0.59% 0.59% 0.59% SAMBA 0.29% 0.64% 0.65% 0.34% 0.40% 0.45% 0.52% 0.57% SABB 0.52% 1.88% 1.60% 0.57% 0.61% 0.61% 0.61% 0.61% AAAL 0.08% 2.97% 1.04% 0.43% 0.50% 0.58% 0.58% 0.59% ALBI 0.27% 3.06% 1.99% 1.83% 1.30% 0.80% 0.70% 0.66% BJAZ 0.39% 2.59% 2.01% 0.32% 0.48% 0.51% 0.53% 0.54% SIBC 0.11% 1.68% 2.31% 0.92% 0.80% 0.75% 0.65% 0.65% ALINMA --% --% 0.04% 0.61% 0.55% 0.55% 0.55% 0.53% Saudi 0.39% 1.25% 1.14% 0.62% 0.58% 0.59% 0.60% 0.61% NBK 0.81% 0.46% 0.14% 0.62% 0.45% 0.50% 0.55% 0.48% KFH 2.73% 1.62% 1.96% 2.37% 1.60% 1.50% 1.00% 1.02% Gulf Bank 8.69% 2.93% 3.31% 1.91% 1.80% 1.70% 1.60% 0.98% Burgan 1.66% 3.48% 3.12% 1.27% 1.20% 1.10% 1.05% 0.85% Boubyan 4.14% 6.49% 1.43% 1.15% 0.90% 0.80% 0.70% 0.71% Kuwait 3.11% 1.75% 1.60% 1.47% 1.17% 1.13% 0.95% 0.82% Bank Muscat 0.31% 2.16% 0.79% 0.61% 0.65% 0.65% 0.65% 0.67% Bank Sohar 0.84% 0.34% 0.44% 0.34% 0.45% 0.50% 0.55% 0.67% Oman Intn'l (1.00%) (0.11%) (0.10%) (0.39%) 0.25% 0.35% 0.45% 0.67% Oman 0.20% 1.63% 0.63% 0.46% 0.56% 0.59% 0.61% 0.68% Ahli United 0.71% 1.65% 1.06% 0.84% 0.79% 0.75% 0.67% 0.63% Bahrain 0.71% 1.67% 1.02% 0.81% 0.79% 0.75% 0.67% 0.63% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 128

130 Limited refinance risks Dubai government and GREs May GREs in Dubai may have to repay c. USD 13bn of maturing loans this year and face a significant amount of debt falling due in 2014 and 2015, according to the IMF. The IMF reiterated that the UAE. should adopt further deleveraging and strengthening of impaired GRE balance sheets, increased transparency, and improvements in corporate governance of GREs. Exhibit 166: Dubai refinancing needs Publicly-Held Debt in the Form of Bonds and Syndicated Loans 1/ 2/ (in mn of U.S. Dollars) Debt Type Beyond Total Dubai World and subsidiaries Bonds 2, ,200 3,600 9,943 Loans 3, ,662 11,739 26,180 Total 5, ,862 15,339 36,123 Dubai Holding and subsidiaries Bonds ,806 Loans , ,220 11,577 Total , ,197 14,383 Investment Corporation of Dubai and subsidiaries Bonds 1, ,543 6,712 Loans 2,282 2, ,273 12,619 Total 3,960 2, ,816 19,331 Other Dubai Inc. 4/ Bonds 1, ,000 2,000 3/ 5,121 Loans 2,639 1,100 3, ,163 8,992 Total 3,889 1,971 3,090 1,000 4,163 14,113 Total Dubai Inc. 13,392 5,580 8,649 12,077 31,515 71,213 Other Dubai Inc. 5/ Bonds ,569 Loans 1, ,686 Total 1, ,255 Government of Dubai Bonds -- 1,770 20, / 22,249 Loans Total 68 1,838 20, ,487 Total Dubai Debt 15,210 8,017 29,196 12,111 32,421 96,955 % of Dubai 2010 GDP 13.8% 7.3% 26.5% 11.0% 29.4% 102.6% Memornadum items: Restructured Debt ,400 10,005 15,100 30,505 Dubai Inc. Banks 20,484 10,995 13,576 5,473 33,722 84,251 Government guatanteed 7/ 1,515 2, ,658 7,949 Total GD including Guarantees 1,583 4,574 20, ,658 30,435 1/ Excluding bilateral bank loans and accounts payable 2/ Regardless of residency of debt holders 3/ Assuming DEW A fully draws its receivables-securitization program under Thor Asset Purchase (Cayman) Ltd 4/ Includes DEW A, DIFC, DAE, Borse Dubai, and others 5/ Dubai GREs with government owership below 50% (Emaar, DIB, CBD) 6/ Assuming Abu Dhabi direct and indirect support is fully drawn 7/ Mainly ICD holding level and DEW A debt, in addition to the governments Source: IMF, Arqaam Capital Research Dubai government has relatively low refinance needs for FY 12e, and a very limited fiscal deficit, which are fully manageable and fully absorbable by the domestic banking system, Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 129

131 insurance of bonds or borrowing from foreign banks. However a new UAE circular may make refinancing more challenging. Exhibit 167: UAE banks exposure to troubled entities AED bn Dubai World Source Dubai Holding Source ADCB 6.7 Transferred to performing 0.0 Estimated ADIB 0.0 No exposure 0.0 No disclosure CBD 0.6 Estimated 0.7 Estimated DIB 0.0 No exposure 0.0 Estimated ENBD 7.1 Derived from disclosure 11.1 Derived from disclosure FGB 0.9 Disclosed 0.6 Disclosed MASQ 2.6 No disclosure 0.4 Estimated NBAD 0.6 Press release 0.1 Estimated Rakbank 0.0 No exposure 0.0 No exposure UNB 1.6 Derived from disclosure 1.3 Estimated at 10% of capital Exhibit 168: ENBD s government exposure 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY 08A FY 09A FY 10A FY 11A 25% 20% 15% 10% 5% 0% Government Exposure Governement Exposure/Total Assets Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 130

132 But UAE Central bank guidelines are not helping May The UAE's central bank has expanded its large exposure limit rules for commercial banks, introducing new caps for loans made to local governments and their entities in the first such change in nearly two decades. UAE has updated a circular that introduced new limits for loans: Exposures now include unfunded exposures. Exposures to local emirate governments are set at of 25% of capital base on an individual basis and 100% on a group basis. In addition to that, the circular lowers the following caps: The maximum exposure to GREs & single borrower is lowered to 25%. Shareholders who own 5% or more, a cap of 50% and 25% on a funded basis and 20% and 10% respectively on an individual basis is introduced. 25% maximum exposure to subsidiaries on a group basis & 10% on an individual basis 2% to bank employees or 20 month salary (excluding mortgages) The full circular can be accessed through the following link: pages_circular_no_16-93.pdf We welcome the move as concentration risk remains one of the biggest risks faced by UAE banks, especially in Dubai as GRE exposure was the main drag to asset quality in the system. The main motivation of the circular, in our view, is to disinter-mediate and drive borrowers into the capital markets; therefore despite anticipated short term disruptions, we believe the circular will have positive long term effects on the UAE banking system as a whole. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 131

133 Exhibit 169: Government and PSE exposure as % of BIS 200% 180% May % 140% 35% 120% 100% 128% 80% 60% 132% 41% 40% 20% 0% 49% 49% 31% 15% 24% 1% 16% 3% NBAD ENBD UNB FGB CBD ADIB Gov. As % of BIS PSE as % of BIS However, it may pose debt (re)financing issues for the government of Dubai as ENBD is its largest lender (c. 67%). ENBD has AED 60bn of loans to the Dubai government (which attract 0% RWAs), representing 132% of BIS, 207% of Tier-1, 28% of its loans and 21% of its assets. Cutting back by AED 14bn (USD 3.7bn) by September (i.e. 5% of assets and 7% of loans) may impact its income statement without helping its capital ratios. ENBD also has exposure to GREs of 14% of loans or 55% of its BIS capital, and it might have to also reduce this exposure. It may also reduce NBAD s growth opportunities as the exposure to public sector entities is as much as 178% of BIS capital. If NBAD were to be forced to reduce this to 100%, it may have to sell AED 26.5bn in loans (10% of assets, 16% of loans) though it is much more difficult to estimate the impact on NBAD. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 132

134 TAMWEEL MASQ NBK KFIN RIBL CBD GBK AAAL OIBB CBQK UNB SAMBA DIB ENBD RJHI EGBE QNBK MARK ALBI COMI BJAZ BURG SIBC NSGB BKMB SABB DHBK NBAD ARNB FGB ADCB BLOM BSFR AUB KCBK ALINMA QIIK QIBK RAKBANK BYB BOB BOUBYAN AUDI CIEB BKSB ADIB EGBE TAMWEEL KFIN DIB RAKBANK CBD HDBK BLOM UNB MASQ SIBC QIBK FGB NBK QNBK COMI SAMBA BJAZ DHBK RIBL AAAL ALBI MARK AUDI NBAD CIEB KCBK NSGB OIBB QIIK CBQK ADCB RJHI BKMB ALINMA ARNB BYB GBK BURG BOUBYAN ENBD SABB ADIB AUB BOB BSFR BKSB QNBK MARK NBAD ENBD UNB ALINMA CBQK SAMBA MASQ FGB KCBK DHBK CBD QIBK ADIB DIB QIIK BSFR AAAL AUB SABB ADCB AUDI BKMB OIBB SIBC BKSB ARNB RIBL TAMWEEL RAKBANK CIEB COMI HDBK NSGB EGBE BLOM BYB BOB RJHI ALBI BJAZ NBK KFIN GBK BURG BOUBYAN May Stress testing: In this section we have included a number of stress tests: A reduction in asset & loan growth. We see on average a negative effect of c. 3% on our TPs. An increase in the cost of equity of 25bps. Cost of funds by 25bps due to a sudden shock in the funding markets. An increase of 10bps of annual loan loss charges. This mainly affects banks with already low returns and low pre-provisioning income like ENBD, ADCB and Sohar. A 10% increase in loan loss provisions for Dubai Holding & Dubai World. Exhibit 170: Public sector exposure at FY 11A 40% 35% 30% 25% 20% 15% 10% 5% 0% 300% 250% 200% 150% 100% 50% 0% Public exposure as % of total assets Public exposure as % of total equity (RHS) Exhibit 171: 3% decrease in FY 12e assets and loan growth Exhibit 172: 25bps increase in CoE 0% -1% -2% -3% -4% -5% -6% -7% -8% -9% 0% -1% -2% -3% -4% -5% -6% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 133

135 ENBD ADCB MASQ UNB CBD FGB NBAD ADIB DIB Rakbank ENBD ADCB MASQ UNB FGB CBD NBAD ADIB DIB Rakbank NSGB EGBE GBK TAMWEEL BSFR RAKBANK RJHI KFIN DIB KCBK NBK QNBK CBD COMI SAMBA MARK ALBI ARNB RIBL DHBK QIBK SIBC ALINMA FGB QIIK BURG BKMB SABB OIBB AAAL CBQK UNB HDBK NBAD MASQ BOUBYAN BYB CIEB BLOM BJAZ AUB AUDI BKSB ADCB ADIB ENBD BOB TAMWEEL KFIN RJHI RAKBANK NBK BLOM COMI SAMBA DIB ALBI BURG QNBK RIBL CBD AUDI NSGB SIBC MARK ARNB DHBK QIIK QIBK CBQK AAAL FGB CIEB OIBB BKMB NBAD ALINMA SABB MASQ BYB KCBK EGBE GBK BOUBYAN HDBK BJAZ BSFR AUB BOB BKSB ADCB ENBD ADIB UNB May Exhibit 173: 25bps increase in cost of funding Exhibit 174: 10bps increase in LLP 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% -50% 0% -2% -4% -6% -8% -10% -12% -14% Exhibit 175: Impact of a further 10% provisioning on Dubai World and Dubai Holding on target price in UAE Exhibit 176: Impact of a further 10% provisioning on Dubai World and Dubai Holding on CET1 ratio in the UAE 0.0% -1.0% -0.5% -0.1% 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% 0.0% 0.0% 0.0% -2.0% -3.0% -4.0% -5.0% -6.0% -3.6% -2.4% -2.0% -1.4% -0.1% -0.2% -0.2% -0.3% -0.2% -0.2% -0.1% -7.0% -8.0% -7.2% -0.3% -0.4% -0.3% -0.3% -0.3% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 134

136 MENA banks more resilient to any liquidity shortage scenarios We believe the MENA region is much more resilient in terms of liquidity and certainly better positioned to face an unlikely freeze in funding. Egypt and Lebanon top the region with exceptionally strong medium-term liquidity (surpassing the 400% for Audi and BLOM), while NBAD, Boubyan, and Tamweel are the weakest on this metric. MENA banks are at generally comfortable loan/deposit ratios, but most UAE banks, in addition to NBK and CBQ, will likely need to raise cash balances and/or wholesale funding. We don t see the funding market in the region facing any major obstacle, but margins may come under pressure as banks target meeting the LCR standards by Funding in the Euro zone shows hints of moderation and seems to be better managed than last year; in two separate long-term refinancing operations in December and February, the ECB injected more than USD 1,300bn into European banks in an attempt to avert a looming credit crunch. In parallel, Euro zone banks are proactively raising wholesale debt as the region witnessed bond issuance in the first 3 months equal to the entire amount raised last year. However, the euro zone is posing serious threats for the global economic outlook. As illustrated below, interbank rates in the GCC are behaving well and have not increased substantially, while liquidity markets continues to function well. Exhibit 177: 1 Month Interbank Rates Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 EIBO1M Index QRIFR1M Index SAIB1M Index US0001M Index Source: Bloomberg Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 135

137 Exhibit 178: 3 Month Interbank Rates Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 EIBO3M Index QRIFR3M Index SAIB3M Index US0003M Index Source: Bloomberg MENA banks score higher liquidity ratios than European peers We run a liquidity screen for the banks under coverage, calculating the 2 ratios introduced by the Basel Committee at the end of 2009: (1) the 30-day liquidity coverage ratio (LCR) to improve the banks resilience towards potential short-term funding markets disruptions by maintaining a stock of high quality liquid assets and (2) the net stable funding ratio (NSFR) to address longer-term structural liquidity in banks balance sheets. The introduction of these measures came as a result of a lesson following the crisis resulting from the over reliance of commercial and investment banks on short-term funding to finance longer-term activities. Although banks have until 2015 to meet the LCR requirement and until 2018 to meet that of the NSFR, the central banks have planned to begin monitoring these ratios earlier. We study these ratios carefully as adequate liquidity positions would help avoid future funding crises, but could also impact the banks margins to some extent. Short-term liquidity coverage could be a problem to a minority that includes some UAE banks and Boubyan The purpose of the Liquidity Coverage Ratio is to establish a minimum level of high quality liquid assets to withstand an acute stress scenario lasting 30 days, and therefore provides the potential net cash drain. Given that the liquidity buffer solely consists of high quality liquid assets which provide relatively low yields, this measure can be costly and is expected to put pressure on margin growth as these banks target meeting the requirements by The LCR will help ensure that global banks have sufficient unencumbered, high quality liquid assets to offset the net cash outflows it could encounter under an acute short-term stress scenario. The specified scenario is built upon circumstances experienced in the global financial crisis that began in 2007 and entails both institution-specific and systemic shocks. The scenario entails a significant stress, albeit not a worst-case scenario, and assumes the following: a significant downgrade of the institution s public credit rating; Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 136

138 AUDI BLOM ALBI BOB BYB DIB COMI BJAZ BOUBYAN BKMB ADIB RJHI SABB SAMBA QIBK AAAL BSFR OIBB ARNB CBQK MASQ QNBK KCBK ADCB UNB RIBL BKSB ALINMA NSGB FGB GBK MARK DHBK CIEB BURG KFIN CBD AUB EGBE SIBC RAKBANK ENBD NBK NBAD TAMWEEL HDBK May a partial loss of deposits; a loss of unsecured wholesale funding; a significant increase in secured funding haircuts; and increases in derivative collateral calls and substantial calls on contractual and non contractual off-balance sheet exposures, including committed credit and liquidity facilities. We estimate the ratios for the banks under our coverage based on FY 11A results, but note that the calculations should be interpreted as rough guidance as some had to be estimated using the limited reporting in some countries under coverage. Exhibit 179: Short-term liquidity coverage ratio 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% Most MENA banks score better than their global peers with Lebanese and Egyptian banks outlying the rest of the region, with the most robust LCRs (surpassing 400% for Audi and BLOM), driven by their investments in treasury bonds, strong cash positions, and extremely low loan/deposit ratios. Saudi banks, except for Saudi Investment Bank, also mark impressive liquidity coverage ratios, exceeding 110%, supported by their investment portfolios, cash, and treasury holdings. The UAE banks remain at the bottom of our coverage universe due to their high undrawn loan commitments, negative interbank positions, and relatively small holdings of liquid investments. ENBD is already proactively addressing its liquidity shortage and has issued a 5-year USD 1bn bond and enjoyed a strong inflow of deposits in Q1 12A. The latter also applies to NBAD, helped by an influx from government deposits (33% YTD increase). Kuwaiti banks score relatively good, expect for NBK for which we calculate an LCR of 79%. Tamweel also addressed its poor liquidity position with the launch of a bond and increased its cash balances substantially. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 137

139 How costly will it be for MENA banks to address their short-term liquidity deficit? In order to address their short-term liquidity gap, MENA banks with low LCR ratios can issue medium-term debt and increase their cash positions. This carry trade, however, comes with a cost and expensing it could put pressure on margins. We illustrate in the chart below the cost that the MENA banks have to carry in order to close their short-term liquidity gap. Assuming a carrying cost of 150bps, the impact on net interest margins can be up to 17bps and up to 9% on pre-tax earnings. The highest impact is on NBAD (9.4% of earnings and 17bps on NIM) and NBK (4.9% of earnings and 0.13% impact on NIM). Most banks, especially UAE banks like NBAD and ENBD, have already addressed their shortterm liquidity gaps by aggressively issuing medium-term notes and significantly cutting their loan/deposit ratios. We thus expect the impact to be smaller going forward. Exhibit 180: Impact on NIM & net profit of closing liquidity gap 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% NBAD Tamweel ENBD NBK HDB SIB RAKBANK EGB AUB 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% -0.4% Impact on PBT Impact on NIM Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 138

140 Exhibit 181: Bond issuances in the region Ticker Coupon Currency Issue Amount (mn) Issue Date Maturity NBAD UH 4.60% HKD 100 Jan-2011 Jan-2021 FGB UH 3.00% CHF 200 Feb-2011 Feb-2016 ADCB UH 3.00% CHF 150 Mar-2011 Dec-2015 BJAZ AB 2.63% SAR 1,000 Mar-2011 Mar-2021 Emirates UH 1.99% USD 332 May-2011 May-2018 Emirates UH 1.67% USD 200 Jun-2011 Jun-2013 BYB LB 7.00% USD 300 Jun-2011 Jun-2021 NBAD UH 2.60% JPY 10,000 Jul-2011 Jul-2026 FGB UH 3.80% USD 650 Jul-2011 Jul-2016 NBAD UH 4.80% USD 20 Sep-2011 Sep-2036 Emirates UH 2.04% USD 193 Nov-2011 Nov-2013 ADCB UH 4.07% USD 500 Nov-2011 Nov-2016 Emirates UH 1.60% USD 5 Jan-2012 Jul-2012 Emirates UH 1.89% USD 25 Jan-2012 Jan-2014 Emirates UH 1.75% USD 6 Feb-2012 Aug-2012 Emirates UH 1.94% USD 100 Feb-2012 Feb-2014 Emirates UH 1.70% USD 4 Feb-2012 Aug-2012 Emirates UH 3.74% USD 20 Feb-2012 Feb-2017 QNB QD 3.38% USD 1,000 Feb-2012 Feb-2017 Emirates UH 1.52% USD 7 Mar-2012 Sep-2012 Emirates UH 4.88% CNY 1,000 Mar-2012 Mar-2015 MASQ UH 2.17% USD 50 Mar-2012 Mar-2014 Emirates UH 1.92% USD 15 Mar-2012 Mar-2014 Emirates UH 2.25% USD 4 Mar-2012 Mar-2013 Emirates UH 2.22% USD 15 Mar-2012 Mar-2013 Emirates UH 2.14% USD 8 Mar-2012 Mar-2013 NBAD UH 3.25% USD 750 Mar-2012 Mar-2017 Emirates UH 4.63% USD 1,000 Mar-2012 Mar-2017 SABB AB 2.09% SAR 1,500 Mar-2012 Mar-2017 Emirates UH 3.77% USD 5 Mar-2012 Mar-2017 Emirates UH 1.55% USD 20 Mar-2012 Sep-2012 Emirates UH 1.60% USD 36 Mar-2012 Sep-2012 Emirates UH 2.21% USD 32 Mar-2012 Apr-2013 CBQ QD 3.76% USD 500 Mar-2012 Mar-2017 ADCB UH 5.10% USD 50 Apr-2012 Apr-2027 NBAD UH 3.95% HKD 335 Apr-2012 Apr-2022 Emirates UH 2.10% USD 6 Apr-2012 Apr-2013 Emirates UH 1.32% USD 19 Apr-2012 Oct-2012 DIB UH 4.75% USD 500 May-2012 May-2017 Source: Bloomberg, Company Data, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 139

141 BJAZ HDBK AUDI BLOM SAMBA AAAL SABB QIIK BOUBYAN SIBC BSFR ARNB CIEB ALBI RIBL RJHI DIB BURG MASQ NSGB COMI ALINMA OIBB MARK BYB BKSB ADIB CBD BKMB TAMWEEL NBK UNB RAKBANK EGBE ENBD KFIN ADCB DHBK GBK QNBK FGB NBAD QIBK CBQK AUB KCBK BOB May Net stable funding ratio: MENA banks more liquid than most global banks on longer term structural ratio The second measure introduced by the Basel committee, the Net Stable Funding Ratio (NSFR) is a more structural measure with the purpose of addressing longer-term liquidity. It insures that longer-term assets are funded by more stable medium or longer-term liability and equity financing. The NSFR aims to limit over-reliance on short-term wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all on- and off-balance sheet items. The ratio 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. Exhibit 182: Net stable funding ratio 250% 200% 150% 100% 50% 0% We calculate net stable funding ratios as of end of FY 11A based on the banks asset and liability maturity profiles. Saudi banks top our NSFR calculations with an average of 140%, while Lebanese and Egyptian banks also remain very liquid given the long-term nature of term deposits, high liquidity of government securities and the high share of short-term corporate loans held by Egyptian banks. Worst off are Al Khaliji (67%), AUB (68%), QIB (74%), NBAD (81%), FGB (87%) and CBQ (71%). However, we expect GCC Central banks to apply a less punitive approach regarding government deposits and corporate deposits as only retail deposits are considered sticky by the Basel Committee, and therefore their NSFR could substantially end up higher. We calculate an average NSFR for Saudi banks in excess of 140% (Alinma the lowest but remains higher than 100% and Bank Al Jazira the best at 238%), 184% for Lebanese banks, 114% for Egyptian banks (EGB the worst at 94% and CAE the best with 127%), 105% for Omani banks, 91% for Qatari banks (Al Khaliji the worst at 67% and QIIB the best at 138%), 99% for UAE banks (with NBAD being the lowest but still not far from the 100% threshold and proactively working to improve its liquidity by issuing medium-term debt securities), 107% for Kuwaiti banks with Gulf Bank the worst at 90%. These calculations take into account a relatively harsh treatment of corporate and government deposits and we do not rule out local Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 140

142 BLOM BYB CIEB NSGB QIIK ALBI AUDI ADIB COMI ALINMA BJAZ OIBB MASQ EGBE QNBK BOB MARK BURG CBD UNB CBQK RAKBANK SABB BKSB RJHI HDBK BOUBYAN FGB QIBK DHBK BSFR ENBD ADCB DIB RIBL SIBC BKMB SAMBA GBK TAMWEEL AAAL ARNB NBAD KFIN KCBK AUB NBK May central banks taking a more lenient approach, considering the historically high stickiness of the deposits. Both of the LCR and NSFR measures address the fragilities identified by previous crises and attempt to increase the resilience of banks to liquidity shocks by establishing minimum levels of buffers and structurally matching the term structure of both sides of the balance sheet. Although these measures have been highlighted among the most challenging aspects of the new capital and liquidity framework, we don t see the region vulnerable to a liquidity crisis such as the one experienced in Ireland. Net interbank position: NBK, AUB, Gulf Bank, Al Khaliji weakest We also look at another liquidity measure, the net interbank position, which gives us further insight into banks' liquidity positions. We would be concerned if a bank has a high reliance on interbank funding, as it would be depending on short term money which can easily vanish, making it harder for the bank to withstand a distressed financial market. Kuwait and some of the Qatari banks had poor interbank positions with NBK, Ahli United and Al Khaliji being the weakest, although most banks had positive net interbank positions once their cash positions were included. Exhibit 183: Net interbank position as percentage of total assets 60% 50% 40% 30% 20% 10% 0% -10% -20% FY 10A FY 11A FY 12e Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 141

143 BYB BLOM CIEB BURG NSGB ALINMA QIIK MASQ ALBI AUDI OIBB DHBK COMI ADIB QIBK GBK BOB QNBK BJAZ BOUBYAN BKMB UNB EGBE CBQK AUB KCBK CBD SAMBA MARK SIBC KFIN ENBD NBK SABB BKSB RJHI RIBL NBAD DIB RAKBANK HDBK ADCB FGB BSFR ARNB AAAL TAMWEEL QIIK ADIB ALBI BLOM BJAZ MARK ALINMA BYB AUDI UNB EGBE CIEB QIBK ADCB COMI NSGB FGB SIBC RAKBANK BKSB CBD MASQ QNBK RJHI HDBK BOB BSFR BOUBYAN SABB CBQK TAMWEEL OIBB ENBD DIB RIBL BKMB AAAL KFIN BURG NBAD ARNB SAMBA DHBK KCBK AUB GBK NBK May Exhibit 184: Net interbank position as percentage of total assets excluding cash 30% 20% 10% 0% -10% -20% -30% FY 10A FY 11A FY 12e Exhibit 185: Net interbank position as percentage of total assets including investments 70% 60% 50% 40% 30% 20% 10% 0% FY 10A FY 11A FY 12e Exhibit 186: FY 12e Redemptions (LCUmn) UAE KSA Qatar Kuwait Egypt Oman Lebanon Bahrain ADCB 9,556 ARNB - CBQK 2,548 NBK - CIEB na BKMB 70 AUDI - AUB 2,151 ADIB - RJHI - DHBK - KFIN - COMI 83 BKSB - BLOM - CBD - BSFR - QIBK - GBK - HDBK 346 OIBB - BYB - DIB 2,357 RIBL - QNBK 6,732 BURG - NSGB na BOB - ENBD 8,465 SAMBA - MARK - BOUBYAN - EGBE na FGB 6,612 SABB - KCBK - NBAD 3,546 AAAL - QIIK - UNB - ALBI - TAMWEEL 350 BJAZ - MASQ - SIBC - RAKBANK - ALINMA - Source: Company Data Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 142

144 RJHI AUDI RAKBANK QNBK KCBK ADIB BLOM CBQK NBAD DHBK ALBI BOB BYB GBK ADCB QIBK RIBL NBK QIIK UNB SABB SAMBA ENBD FGB ALINMA AAAL MARK CBD BKSB MASQ DIB BSFR KFIN BURG AUB BOUBYAN BKMB SIBC ARNB BJAZ TAMWEEL May Exhibit 187: Maturity Gap as percentage of total assets 80% 60% 40% 20% 0% -20% -40% -60% -80% *LCU mn (except Lebanon in LCU bn) < 3 months 3 months - 1 year > 1 year AL Rajhi has the largest liquidity mismatch, followed by Bank Audi. However, most of the mismatch comes from sticky deposits and we are therefore not overly concerned with those positions. We expect banks to extend the maturities of their deposits to at least 1 month (helping their LCR) or 1 year (helping their NSFR) by incentivizing their clients to switch to time deposits. NBK, Burgan and Boubyan, Bank Muscat and the KSA banks greatly rely on current accounts whereas UNB, FGB, MARK and Al Khaliji have a very high share of time deposits and could potentially lower the cost of funding. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 143

145 BOUBYAN NBK BURG ALBI BKMB KFIN SAMBA AAAL ARNB ALINMA SABB BSFR RIBL RAKBANK CBD RJHI QNBK OIBB ENBD BJAZ MASQ DIB CBQK ADIB DHBK COMI ADCB QIIK NSGB GBK NBAD CIEB BKSB SIBC EGBE AUB BYB AUDI BLOM QIBK KCBK BOB HDBK UNB MARK FGB May Exhibit 188: Deposits breakdown in FY 11A 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Current Accounts Savings accounts Time deposits Others Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 144

146 M & A: Banks to become more confident: What to play? We see continued merger and acquisition activity in the MENA region. This is driven by: Sellers being short in capital, e.g. SG, CASA, Dexia, NBG and RBS, the parent companies of NSGB, Credit Agricole, DenizBank, Finansbank and core shareholder of SHB respectively. Strong need for weaker players to become part of better capitalized and better managed financial institutions (DIB purchased Tamweel, ENBD purchased Dubai Bank. We expect ENBD or DIB to purchase Amlak). Acquirers drive to expand geographically and into all business lines, i.e. NBK (given large surplus capital and limited growth in Kuwait), QNB (strong capital base, willing to become a regional leader), FGB (well capitalized, particularly eying Egypt), Qinvest buying the investment bank of EFG-Hermes. We also expect consolidation in a fragmented market in insurance, with too many very small players with low profitability. Saudi Hollandi bank: A new core shareholder could be appositive catalyst We believe a 40% stake in Saudi Hollandi Bank is up for sale by RBS, which it acquired in 2007 when it purchased ABN AMRO, who itself had been looking to sell its stake. We believe RBS s, willingness to sell should increase because of a more punitive capital deduction under Basel III, where 100% of its stake will need to be deducted from Tier-1 instead of only 50%, further reducing its already weak capital base. RBS has qualified its SHB s stake as non-core. We see the well capitalized NBK, Standard Chartered, QNB, FGB and Barclays as potential buyers, as the first two already expressed an interest in the stake back in FY 09A. With a new strategic investor, we believe SHB could again implement a growth strategy, which could make it a more compelling investment. An acquisition at the current market price would result in an ROI of 11.1% in year 1 and 12.3% in year 2, which we believe is attractive, despite the more punitive treatment of associates under Basel 3. Boubyan too expensive, may fall if NBK is not allowed to buy 100% of company Boubyan, at over 4x tnav12e and a P/E13e of 22.6x is already extremely expensive, and we think that after NBK acquires the 12.7% it is allowed to buy, the shares would fall substantially, as the implicit valuation support from NBK buying up shares would fall away. We do not expect the Kuwait Central Bank to allow NBK to buy 100% of the company, though the bank has expressed its willingness to buy 100% at some point. The acquisition would only yield an ROI of 4% for NBK, well below its cost of capital. It is hard to view this acquisition as being in the best interests of NBK s shareholders, even though organic growth opportunities are very limited in Kuwait and Boubyan offers an opportunity to accelerate NBK s growth outlook. Egyptian Gulf Bank: too expensive for any M&A deal to succeed, CAE way more attractive Egyptian Gulf Bank is also too expensive for a take-over to succeed and as a consequence is unlikely to Outperform. A nil premium offer would result in an ROI of only 7% and would require substantial paid goodwill. On the other hand, we see Credit Agricole Egypt as an attractive take-over target given its valuation (we calculate an ROI 17% in year 1 and 20.8% in year 2) and the tight capital base of Credit Agricole SA, its parent company. The potential sale Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 145

147 by CASA is highly dependent on lobbying efforts with the EU Committee to allow double counting of capital. We also expect the French banks to be willing to sell other assets such as Credit du Maroc (77% owned by Credit Agricole SA, Not rated) or Union Internationale de Banq in Tunisia (57% owned by SocGen, Not Rated). Additionally, we expect NBG to divest Finansbank, its Turkish subsidiary. Dexia is in the process of selling DenizBank. The acquisition of Denizbank at P/tNAV11 of c. 1.3x would add 9.7% to EPS and would reduce QNB s Tier-1 by 7.9% to 15.8%. EFG still below its Fair value, but unlikely to close gap in short-term EFG-Hermes should enjoy a capital gain with the tie up with Qinvest. We expect EFG-Hermes to exercise its put option after 12 months and divest its remaining stake of 40% in the investment banking platform for c. USD 165mn. Tangible NAV is only EGP 8.6 ps. However, valuing CL at P/E13e 7x, EGP4.7 ps may be recoverable of the goodwill. Moreover, EFG has a Private Equity business that we could value at EGP 1.4 ps (7x EGP 144mn in fees in FY 11A minus 5% of assets under management as a capital requirement). Together with the capital gain of EGP 2.1, the potential Fair Value could be c. EGP 16.6, 41% above the share price. But it highly depends on the potential exit price of CL and Private Equity, and the distribution of further cash dividend after the EGP 4 may take a while and the exit of the remaining take of 40% can only be done after months, and hence the stock could continue trading at below its fair value, as the surplus capital should be generating returns that are below the cost of equity. Large increase in intangibles for Dubai bank, but not subtracted from Tier-1 capital ENBD acquired Dubai bank for virtually nil. It created AED 2.7bn loan loss provisions which wiped out the Tier-1 of Dubai Bank, but on top of that created AED 1.2bn provision offset by AED 1.2bn of new intangibles reflecting the valuation of deposits & government guarantees, which are included in Tier-1. Usually intangibles are not included in Tier-1 capital. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 146

148 Exhibit 189: Potential takeover targets Source: Arqaam Capital Research SELLER BUYER CAE CASA QNB, QIB, FGB, NBK NSGB SG QNB, QIB, FGB, NBK Egypt Gulf Bank MISR, Al Naeem Deniz Bank Dexia QNB Credit du Maroc Credit Agricole QNB 40% Saudi Hollandi stake RBS Barclays, STAN, FGB, QNB, NBK Beltone Shareholders Amlak Dubai gov ENBD, DIB Anything in Africa & GCC Boubyan Maltese bank Societe Generale also owns a 57.2% stake in Union Internationale de Banq in Tunisia (with loans of EUR4,735mn and deposits of EUR6,638mn). EFG NBK Burgan Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 147

149 Exhibit 190: M&A Scenarios Source: Company data, Arqaam capital May Nil premium 25% premium FGB's Acquisition of NSGB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (AED) EPS: new (AED) Change 12.4% 14.1% 16.4% 10.1% 12.0% 14.6% Return on investment 11.5% 13.5% 16.2% 9.2% 10.8% 12.9% Tier-1 ratio: old 18.0% 17.7% 17.3% 18.0% 17.7% 17.3% Tier-1 ratio: new 13.2% 13.2% 13.0% 12.3% 12.4% 12.3% Net impact on T1 from the acquisition (4.8%) (4.5%) (4.3%) (5.7%) (5.3%) (5.1%) CET1 ratio: old 13.8% 13.6% 13.4% 13.8% 13.6% 13.4% CET1 ratio: new 9.9% 10.3% 10.5% 9.0% 9.5% 9.8% Net impact on CET1 from the acquisition (3.8%) (3.3%) (2.8%) (4.7%) (4.1%) (3.6%) tnav: old tnav: new Net impact on tnav (7.8%) (4.8%) (1.8%) (14.7%) (11.2%) (7.7%) Nil premium 25% premium FGB's Acquisition of CAE 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (AED) EPS: new (AED) Change 2.8% 3.4% 4.4% 2.3% 3.0% 4.0% Return on investment 11.5% 14.1% 18.0% 9.2% 11.2% 14.4% Tier-1 ratio: old 18.0% 17.7% 17.3% 18.0% 17.7% 17.3% Tier-1 ratio: new 16.3% 16.1% 15.8% 16.1% 15.9% 15.6% Net impact on T1 from the acquisition (1.7%) (1.6%) (1.5%) (1.9%) (1.8%) (1.7%) CET1 ratio: old 13.8% 13.6% 13.4% 13.8% 13.6% 13.4% CET1 ratio: new 12.4% 12.4% 12.2% 12.2% 12.1% 12.0% Net impact on CET1 from the acquisition (1.3%) (1.2%) (1.1%) (1.5%) (1.5%) (1.3%) tnav: old tnav: new Net impact on tnav (1.4%) (0.9%) (0.4%) (3.0%) (2.4%) (1.7%) Nil premium 25% premium FGB's Acquisition of EGB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (AED) EPS: new (AED) Change 0.2% 0.3% 0.5% (0.2%) (0.0%) 0.2% Return on investment (earnings/price paid) 5.6% 6.1% 7.2% 4.5% 4.9% 5.8% Tier-1 ratio: old 18.0% 17.7% 17.3% 18.0% 17.7% 17.3% Tier-1 ratio: new 17.3% 17.0% 16.7% 17.1% 16.9% 16.6% Net impact on T1 from the acquisition (0.7%) (0.7%) (0.6%) (0.9%) (0.8%) (0.8%) CET1 ratio: old 13.8% 13.6% 13.4% 13.8% 13.6% 13.4% CET1 ratio: new 13.1% 13.0% 12.8% 12.9% 12.8% 12.6% Net impact on CET1 from the acquisition (0.7%) (0.6%) (0.6%) (0.8%) (0.8%) (0.8%) tnav: old tnav: new Net impact on tnav (1.6%) (1.3%) (1.0%) (2.7%) (2.3%) (2.0%) Nil premium 25% premium FGB's Acquisition of 40% of SHB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (AED) EPS: new (AED) Change 6.0% 5.9% 6.3% 4.5% 4.6% 5.2% Return on investment 10.0% 10.6% 11.8% 8.0% 8.5% 9.4% Tier-1 ratio: old 18.0% 17.7% 17.3% 18.0% 17.7% 17.3% Tier-1 ratio: new 15.2% 15.1% 15.0% 14.5% 14.5% 14.4% Net impact on T1 from the acquisition (2.8%) (2.6%) (2.4%) (3.5%) (3.2%) (3.0%) CET1 ratio: old 13.8% 13.6% 13.4% 13.8% 13.6% 13.4% CET1 ratio: new 12.9% 13.0% 13.0% 12.2% 12.3% 12.4% Net impact on CET1 from the acquisition (0.9%) (0.6%) (0.4%) (1.6%) (1.3%) (1.0%) Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 148

150 Exhibit 191: M&A scenarios (continued) May Nil premium 25% premium QNB's Acquisition of NSGB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (QAR) EPS: new (QAR) Change 6.6% 7.2% 7.9% 5.5% 6.2% 7.0% Return on investment 12.5% 14.0% 16.2% 10.0% 11.2% 12.9% Tier-1 ratio: old 23.6% 23.7% 22.7% 23.6% 23.7% 22.7% Tier-1 ratio: new 17.7% 18.4% 18.0% 16.8% 17.6% 17.4% Net impact on T1 from the acquisition (5.9%) (5.4%) (4.7%) (6.8%) (6.2%) (5.4%) CET1 ratio: old 23.1% 23.2% 22.4% 23.1% 23.2% 22.4% CET1 ratio: new 17.6% 18.1% 18.0% 16.7% 17.3% 17.3% Net impact on CET1 from the acquisition (5.6%) (5.1%) (4.4%) (6.5%) (5.9%) (5.1%) tnav: old tnav: new Net impact on tnav (4.9%) (3.1%) (1.5%) (8.8%) (6.6%) (4.5%) Nil premium 25% premium QNB's Acquisition of CAE 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (QAR) EPS: new (QAR) Change 1.6% 1.8% 2.1% 1.4% 1.6% 1.9% Return on investment 13.4% 15.5% 18.9% 10.7% 12.4% 15.1% Tier-1 ratio: old 23.6% 23.7% 22.7% 23.6% 23.7% 22.7% Tier-1 ratio: new 21.4% 21.6% 20.8% 21.1% 21.4% 20.7% Net impact on T1 from the acquisition (2.3%) (2.2%) (1.9%) (2.5%) (2.3%) (2.1%) CET1 ratio: old 23.1% 23.2% 22.4% 23.1% 23.2% 22.4% CET1 ratio: new 20.9% 21.1% 20.6% 20.7% 20.9% 20.4% Net impact on CET1 from the acquisition (2.2%) (2.1%) (1.8%) (2.4%) (2.3%) (2.0%) tnav: old tnav: new Net impact on tnav (0.7%) (0.4%) (0.1%) (1.5%) (1.1%) (0.8%) Nil premium 25% premium QNB's Acquisition of EGB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (QAR) EPS: new (QAR) Change 0.1% 0.1% 0.2% -0.1% 0.0% 0.1% Return on investment 5.6% 6.1% 7.2% 4.5% 4.9% 5.8% Tier-1 ratio: old 23.6% 23.7% 22.7% 23.6% 23.7% 22.7% Tier-1 ratio: new 22.9% 23.0% 22.1% 22.7% 22.9% 22.0% Net impact on T1 from the acquisition (0.8%) (0.7%) (0.6%) (0.9%) (0.8%) (0.7%) CET1 ratio: old 23.1% 23.2% 22.4% 23.1% 23.2% 22.4% CET1 ratio: new 22.3% 22.4% 21.7% 22.2% 22.3% 21.6% Net impact on CET1 from the acquisition (0.8%) (0.8%) (0.7%) (1.0%) (0.9%) (0.8%) tnav: old tnav: new Net impact on tnav (0.8%) (0.7%) (0.5%) (1.4%) (1.2%) (1.0%) QNB's Acquisition of 40% of SHB 2012e 2013e 2014e EPS: old (QAR) EPS: new (QAR) Change 2.1% 2.0% 2.0% Tier-1 ratio: old 23.6% 23.7% 22.7% Tier-1 ratio: new 22.3% 22.6% 21.7% Net impact on T1 from the acquisition (1.3%) (1.2%) (1.0%) CET1 ratio: old 23.1% 23.2% 22.4% CET1 ratio: new 20.5% 20.8% 20.4% Net impact on CET1 from the acquisition (2.6%) (2.3%) (2.0%) Source: Company Data, Arqaam Capital Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 149

151 Exhibit 192: M&A Scenarios (continued) May % premium 30% premium QNB's Acquisition of Deniz Bank 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (QAR) EPS: new (QAR) Change 11.7% 12.1% 12.1% 9.1% 9.7% 10.0% Return on investment (earnings/price paid) 14.5% 16.0% 17.6% 11.2% 12.3% 13.5% Tier-1 ratio: old 23.6% 23.7% 22.7% 23.6% 23.7% 22.7% Tier-1 ratio: new 16.1% 16.8% 16.8% 15.0% 15.8% 16.0% Net impact on T1 from the acquisition (7.6%) (7.0%) (5.9%) (8.7%) (7.9%) (6.7%) CET1 ratio: old 23.1% 23.2% 22.4% 23.1% 23.2% 22.4% CET1 ratio: new 15.7% 16.4% 16.6% 14.6% 15.4% 15.7% Net impact on CET1 from the acquisition (7.4%) (6.8%) (5.8%) (8.5%) (7.7%) (6.6%) tnav: old tnav: new Net impact on tnav (0.4%) 2.4% 4.9% (6.4%) (2.8%) 0.2% Nil premium 25% premium QNB's Acquisition of 40% Finansbank 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (QAR) EPS: new (QAR) Change 3.6% 3.9% 4.0% 2.9% 3.2% 3.4% Return on investment (earnings/price paid) 11.0% 12.1% 13.3% 8.8% 9.7% 10.7% Tier-1 ratio: old 23.6% 23.7% 22.7% 23.6% 23.7% 22.7% Tier-1 ratio: new 19.7% 20.2% 19.8% 19.0% 19.6% 19.3% Net impact on T1 from the acquisition (4.0%) (3.5%) (2.9%) (4.6%) (4.1%) (3.4%) tnav: old tnav: new Net impact on tnav (2.6%) (1.5%) (0.5%) (5.3%) (3.8%) (2.6%) Nil premium 25% premium ENBD's Acquisition of Amlak Finance 2012e 2013e 2014e 2012e 2013e 2014e ENBD s capital base 45,592 28,905 23,794 47,304 31,436 26,669 Capital base after consolidation 47,097 30,410 25,298 49,185 33,316 28,549 Change 3.3% 5.2% 6.3% 4.0% 6.0% 7.1% ENBD s RWA 222, , , , , ,118 Combined RWA 233, , , , , ,705 Change 5.2% 5.2% 5.2% 4.7% 4.7% 4.7% Amlak s loan portfolio write-off: 10% Amlak s investment portfolio write-off: 50% 1,985 1,985 1,985 1,985 1,985 1,985 Adjusted capital 44,350 27,663 22,552 46,438 30,570 25,803 Adjusted capital adequacy ratio (new) 18.98% 11.84% 9.65% 18.16% 11.96% 10.09% ENBD s stand-alone capital adequacy ratio (old) 20.53% 13.02% 10.71% 19.38% 12.88% 10.92% Impact (1.5%) (1.2%) (1.1%) (1.2%) (0.9%) (0.8%) Nil premium 25% premium NBK's Acquisition of CAE 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (KWD) EPS: new (KWD) Change 3.1% 3.9% 4.7% 2.6% 3.5% 4.3% Return on investment (earnings/price paid) 13.4% 16.3% 20.1% 10.7% 13.1% 16.1% Tier-1 ratio: old 19.0% 19.7% 20.2% 19.0% 19.7% 20.2% Tier-1 ratio: new 11.4% 12.1% 12.7% 11.2% 11.9% 12.5% Net impact on T1 from the acquisition (7.5%) (7.6%) (7.5%) (7.7%) (7.8%) (7.7%) CET1 ratio: old CET1 ratio: new Net impact on CET1 from the acquisition (7.1%) (7.2%) (7.1%) (7.3%) (7.4%) (7.3%) tnav: old tnav: new Net impact on tnav (1.1%) (0.7%) (0.2%) (2.4%) (1.8%) (1.3%) Source: Company Data, Arqaam Capital Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 150

152 Exhibit 193: M&A Scenarios (continued) May Nil premium 25% premium NBK's Acquisition of NSGB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (KWD) EPS: new (KWD) Change 12.5% 13.9% 15.9% 10.3% 11.9% 14.1% Return on investment (earnings/price paid) 12.3% 13.6% 15.8% 9.8% 10.9% 12.7% Tier-1 ratio: old 19.0% 19.7% 20.2% 19.0% 19.7% 20.2% Tier-1 ratio: new 9.0% 9.8% 10.5% 8.1% 9.0% 9.7% Net impact on T1 from the acquisition (10.0%) (9.9%) (9.7%) (10.8%) (10.7%) (10.5%) CET1 ratio: old CET1 ratio: new Net impact on CET1 from the acquisition (9.3%) (9.2%) (9.1%) (10.2%) (10.0%) (9.8%) tnav: old tnav: new Net impact on tnav (7.7%) (5.1%) (2.5%) (13.7%) (10.6%) (7.6%) Nil premium 25% premium NBK's Acquisition of 40% of SHB 2012e 2013e 2014e 2012e 2013e 2014e EPS: old (KWD) EPS: new (KWD) Change 4.1% 4.1% 4.2% 4.1% 4.1% 4.2% Return on investment (earnings/price paid) 10.0% 10.6% 11.8% 8.0% 8.5% 9.4% Tier-1 ratio: old 19.0% 19.7% 20.2% 19.0% 19.7% 20.2% Tier-1 ratio: new 17.1% 17.9% 18.6% 17.1% 17.9% 18.6% Net impact on T1 from the acquisition (1.8%) (1.7%) (1.6%) (1.8%) (1.7%) (1.6%) CET1 ratio: old 17.9% 18.7% 19.3% 17.9% 18.7% 19.3% CET1 ratio: new Net impact on CET1 from the acquisition (3.7%) (3.5%) (3.2%) (4.6%) (4.3%) (4.0%) Nil premium NBK's Acquisition of 12.7% Boubyan 2012e 2013e 2014e EPS: old (KWD) EPS: new (KWD) Change (1.1%) (0.6%) (0.2%) Return on investment (earnings/price paid) 1.5% 2.5% 3.5% Tier-1 ratio: old 19.0% 19.7% 20.2% Tier-1 ratio: new 17.1% 17.6% 18.0% Net impact on T1 from the acquisition (1.9%) (2.1%) (2.2%) CET1 ratio: old 17.9% 18.7% 19.3% CET1 ratio: new Net impact on CET1 from the acquisition (0.9%) (1.1%) (1.1%) tnav: old tnav: new Net impact on tnav (15.1%) (13.2%) (11.3%) Source: Company Data, Arqaam Capital Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 151

153 RORWA: The true strengths of a franchise May We strongly prefer to focus on RORWA (net profit/risk weighted assets) rather than on RoE as the latter could easily be distorted by the banks capital position. A strong capital position a source of value as this allows for dividend payments or loan growth - reduces RoE, while a high leverage, which caps future growth and dividend payments, boosts RoE and gives an inflated view of the underlying performance. Having said that, RORWA is still distorted by contributions from associates that do not generate risk weighted assets, but that are deducted from capital ratios. We therefore adjust our RORWA analysis by grossing up all investments in associates, including all nonfinancial associates. Best in class: Rakbank, QNB, and Al Rajhi Bank When comparing countries, it is clear that the Qatari banks are doing the best, followed by the Egyptian banks. 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). Our RORWA rankings reveal that Rakbank, Al Rajhi Bank, QNB, QIIB and NBK should consistently be the most profitable franchises within our coverage. Al Rajhi Bank enjoys an extremely cheap deposit base and higher asset yields thanks to its retail and Islamic finance tilt. However, QNB looks less profitable now than it did under our previous RORWA calculation due to its high amount of associate interests. Nevertheless, QNB is helped by its very low cost base and government guaranteed lending (resulting in a low risk weighting of assets and a low structural cost of risk). Rakbank and FGB are the most profitable banks in the UAE (thanks to their retail tilt, though regulatory changes should have a negative effect), while NBAD is doing well too due to its solid asset quality and focus on public sector (same reasons as QNB), while BLOM is the most profitable bank in Lebanon, thanks to its low cost/income ratio and slightly higher asset quality. In Kuwait, NBK is doing best, followed by Burgan bank. Worst: Shuaa Capital and DIB At the bottom of the range are Shuaa Capital, DIB (because of low margins and the worst structural cost of risk due to its real estate exposure), ENBD (due to very high loan loss charges), Tamweel (due to its relatively high cost of funding and lack of noninterest revenue) and HDB (as we assign much higher RWAs to its property activities). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 152

154 FGB DIB NBAD ADIB ADCB QNBK MASQ MARK QIBK UNB BURG AUB AUDI CBD SIBC BOB BSFR TAMWEEL DHBK ENBD NBK GBK QIIK BLOM SAMBA AAAL CBQK BKMB RIBL BKSB KCBK BYB SABB ARNB RAKBANK COMI RJHI BJAZ HDBK ALINMA BOUBYAN NSGB ALBI KFIN EGBE OIBB CIEB RAKBANK CIEB COMI QNBK NSGB RJHI QIBK ALBI EGBE NBK BOUBYAN AUDI QIIK CBD GBK BURG ADIB BLOM KFIN OIBB DHBK MARK MASQ FGB ENBD CBQK BYB BKMB NBAD DIB ARNB ADCB SABB AUB BOB BJAZ SIBC UNB SAMBA AAAL RIBL HDBK BKSB ALINMA BSFR KCBK TAMWEEL ALINMA DIB BSFR RIBL MASQ TAMWEEL UNB BKMB BKSB SAMBA AAAL KCBK BJAZ DHBK ARNB CBD ADIB FGB KFIN CBQK SABB HDBK ENBD SIBC OIBB RJHI ALBI ADCB NSGB AUB RAKBANK NBAD QIIK EGBE MARK COMI BURG BOB NBK AUDI BYB GBK CIEB BLOM QIBK BOUBYAN QNBK May Exhibit 194: FY 12e RWA/Assets 120% 100% 80% 60% 40% 20% 0% Exhibit 195: FY 12e Revenues/RWA 14% 12% 10% 8% 6% 4% 2% 0% Exhibit 196: FY 12e Costs/RWA 7% 6% 5% 4% 3% 2% 1% 0% FY 12e FY15e Change (bps) Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 153

155 GBK ENBD RAKBANK DIB CBD ADCB QIBK ADIB MASQ KFIN BOUBYAN UNB FGB TAMWEEL AUB BURG ALBI CIEB QNBK NBAD MARK RJHI EGBE NSGB SIBC ARNB COMI NBK BKMB DHBK CBQK AUDI SABB HDBK BLOM BKSB RIBL AAAL ALINMA BYB BJAZ KCBK QIIK BSFR BOB OIBB SAMBA RAKBANK QNBK RJHI COMI NSGB QIBK NBK QIIK CIEB MARK CBD GBK FGB EGBE BURG BLOM ALBI DHBK AUDI CBQK UNB ENBD NBAD ADIB SABB BOUBYAN ADCB SAMBA AUB ARNB DIB BKMB KFIN MASQ BSFR SIBC AAAL BYB OIBB RIBL TAMWEEL BOB KCBK BKSB BJAZ ALINMA HDBK HDBK BJAZ ALBI OIBB ALINMA BKSB BOUBYAN KFIN BOB CIEB MASQ KCBK EGBE BYB AUDI RAKBANK ADIB BKMB BLOM SIBC BURG DIB RIBL ARNB AAAL DHBK NSGB TAMWEEL COMI ENBD ADCB QIBK CBQK NBAD AUB SABB BSFR NBK CBD GBK SAMBA RJHI UNB QIIK FGB QNBK MARK May Exhibit 197: FY 12e Cost/Income 70% 60% 50% 40% 30% 20% 10% 0% Exhibit 198: FY 12e PPP/RWA 8% 7% 6% 5% 4% 3% 2% 1% 0% Exhibit 199: FY 12e Cost of Risk/RWA 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 154

156 RAKBANK QNBK RJHI QIIK NBK *ALBI COMI MARK QIBK NSGB AUDI CBQK DHBK FGB SAMBA BLOM CBD SABB CIEB BSFR NBAD ARNB AAAL EGBE SIBC RIBL OIBB BKMB AUB BURG UNB BOUBYAN GBK BOB ADIB KCBK BJAZ BYB ALINMA ADCB BKSB KFIN MASQ DIB TAMWEEL HDBK ENBD NSGB CIEB COMI EGBE HDBK AUDI BYB BOB BURG BLOM BKSB RJHI BKMB OIBB SABB ARNB AUB BOUBYAN NBK ALBI GBK ALINMA KFIN SIBC SAMBA RIBL AAAL BJAZ NBAD KCBK BSFR MASQ ADCB UNB ENBD DIB QNBK QIBK DHBK RAKBANK CBD ADIB FGB TAMWEEL MARK CBQK QIIK GBK ENBD RAKBANK DIB CBD ADCB QIBK ADIB MASQ KFIN BOUBYAN UNB FGB TAMWEEL AUB BURG ALBI CIEB QNBK NBAD MARK RJHI EGBE NSGB SIBC ARNB COMI NBK BKMB DHBK CBQK AUDI SABB HDBK BLOM BKSB RIBL AAAL ALINMA BYB BJAZ KCBK QIIK BSFR BOB OIBB SAMBA Exhibit 200: FY 12e Cost of Risk/Operating Profit 2.5% May % 1.5% 1.0% 0.5% 0.0% Exhibit 201: FY 12e Zakat/Tax as % of Operating Profit 25% 20% 15% 10% 5% 0% Exhibit 202: FY 12e RoRWA* 6% 5% 4% 3% 2% 1% 0% * Albilad is 1.9% without special gains Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 155

157 RJHI COMI ALBI AUDI RAKBANK NSGB CIEB QNBK BLOM BOB SABB NBAD DHBK MARK SAMBA FGB BKMB AAAL AUB QIIK BSFR ARNB NBK ADIB CBQK BURG CBD BKSB RIBL BYB UNB BJAZ QIBK OIBB KFIN SIBC GBK DIB EGBE ADCB KCBK MASQ BOUBYAN HDBK ENBD ALINMA TAMWEEL RAKBANK RJHI QNBK ALBI COMI QIIK NSGB AUDI DHBK SAMBA FGB MARK QIBK BLOM CBD NBK CIEB SABB BSFR NBAD AAAL ARNB OIBB RIBL BURG UNB BKMB CBQK SIBC GBK EGBE KCBK BOB BJAZ BYB AUB ALINMA BOUBYAN ADIB ADCB BKSB MASQ TAMWEEL DIB KFIN HDBK ENBD May Exhibit 203: RoRWA adjusted (in time) 6% 5% 4% 3% 2% 1% 0% Exhibit 204: FY 12e: ROaE vs. Adjusted ROE 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% ROaE Adjusted ROE Source: Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 156

158 Insurance: Robust GWP growth in conjunction with sustainable profitability renders insurance sector very lucrative We have a positive view on the GCC insurance sector names: We expect double digit premium growth driven by the very low base. The market could increase 5 fold to catch up to the global average, driven by higher awareness, compulsory insurance, new distribution channels and increasing acceptance of Takaful insurance. Insurance companies enjoy low combined ratios, though should edge up due to increasing competition and increased claims. Robust capital positions allow for more aggressive asset allocation and future growth (increasing the leverage). We expect consolidation to create economies of scale. Valuations are still very attractive, though we prefer a selective approach. GCC offers tremendous long-term revenue growth for insurers The GCC insurance industry is relatively small with very low levels of insurance penetration and density, with the lowest penetration in Qatar, followed by KSA, while the UAE enjoys the highest penetration in the region. The penetration rate in the GCC averaged 1.3%, well below the global average of 6.9% according to Swiss Re. Particularly, the life insurance penetration is very low at 0.16% of GDP vs. the global average of 4.0%. Exhibit 205: We believe Qatar has the highest potential for growth for countries under our coverage, having the lowest premiums as % of GDP per capita 2.8% 2.4% Bahrain GDP per capita in USD on X axis Penetration rate on Y axis 2.0% 1.6% UAE 1.2% 0.8% 0.4% KSA Oman Kuwait Qatar 0.0% 10,000 30,000 50,000 70,000 90, ,000 Source: IMF, BMI, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 157

159 UAE expected to experience the slowest growth, while KSA expected to experience to toughest competition We expect double digit growth in GWP in KSA and Qatar amid GDP growth and rising demand for insurance services: In an effort to diversify away from hydrocarbons, as well as to improve the social and health infrastructure of the nation, governments have embarked on multiple projects funded by surging oil prices, spurring demand for several types of non-life insurance services. The economic environment remains favorable, with the IMF estimating growth of 2.6-5% real GDP growth for FY 12e in the GCC region, with Qatar (driven by expanding natural gas exports) and Saudi Arabia taking the lead. Furthermore, we expect positive contribution from a wider acceptance of Takaful and Islamic finance products, a wider distribution such as bancassurance (now mostly conducted through direct sales and brokers), improved awareness and increased mandatory coverage (motor liability is mandatory in all GCC, medical insurance only in UAE and KSA). Growth should continue to be dominated by motor, fire, property insurance and health insurance. KSA insurance sector still has a long way: Life insurance is widely expected to grow in KSA, with the introduction of family Takaful. Non-life insurance is also expected to grow as the underserved market with a 0.78% penetration rate grows at a 5 year FY 11-16e CAGR of 10.8%. We expect the Medical insurance segment to grow at a 5 year CAGR of c. 13%, as a result of an increased penetration rate of that segment. Exhibit 206: Rising penetration rates are expected to compound the growth driven by GDP Exhibit 207: Insurance premiums (SARmn) are expected to grow at a 5 year CAGR of 11.0% 3, % 35,000 36% 2, % 1.1% 1.0% 30,000 25,000 30% 24% 2, % 20,000 18% 1, % 0.7% 0.6% 15,000 10,000 12% 6% 1,000 FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 0.5% 5,000 FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 0% Nominal GDP (LHS) Penetration rate (RHS) Insurance Premiums (LHS) Growth (RHS) Source: BMI, IMF, Arqaam Capital Research Source: BMI, IMF, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 158

160 Qatar insurance sector expected to grow the most: Hikes in government expenditure and overall vibrant economic activity coalesce to grow insurance premiums at the highest rate in the region from a very low base. We expect non-life premiums to grow at a 5 year FY 11-16e CAGR of 11.7%. Exhibit 208: Rising penetration rates are expected to compound the growth driven by GDP Exhibit 209: Insurance premiums (QARmn) are expected to grow at a 5 year CAGR of 11.8% % 8,000 16% % 7,000 14% 12% % 0.8% 6,000 5,000 4,000 10% 8% 6% 4% % 3,000 2% 0% 300 FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 0.6% 2,000 FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e -2% Nominal GDP (LHS) Penetration rate (RHS) Insurance Premiums (LHS) Growth (RHS) Source: BMI,IMF, Arqaam Capital Research Source: BMI,IMF, Arqaam Capital Research A more mature UAE insurance sector to experience moderate growth: Insurance penetration rates stand at 1.86%, more than twice that of Qatar or KSA, though still well below the global average. However a reviving economy is expected to boost demand, with non-life premiums expected to grow at a 9.2% 5 year FY 11-16e CAGR. Exhibit 210: Rising penetration rates (RHS) are expected to compound the growth driven by GDP (LHS) Exhibit 211: Insurance premiums (AEDmn) are expected to grow at a 6 year CAGR of 9.4% 1, % 45,000 28% 1, % 40,000 35,000 24% 20% 1,300 1, % 30,000 25,000 16% 12% % 20,000 15,000 8% 4% 700 FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 1.0% 10,000 FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 0% Nominal GDP (LHS) Penetration rate (RHS) Insurance Premiums (LHS) Growth (RHS) Source: BMI,IMF, Arqaam Capital Research Source: BMI,IMF, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 159

161 Multitude of challenges (claims and price pressure), but RoE to remain high Exhibit 212: Combined ratios have stabilized at 94% leaving room for possible rising loss ratios Exhibit 213: Improving investment income should improve earnings margins going forward 100% 99% 91% 93% 94% 97% 96% 16% 15% 85% 70% 55% 64% 62% 60% 61% 64% 64% 14% 12% 10% 13% 12% 12% 12% 10% 9% 9% 11% 12% 40% 34% 30% 33% 33% 33% 32% 8% 7% 8% 25% FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e 6% FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e Net Loss Ratio Expense Ratio Combined Ratio Underwriting Profit Margin Earnings Margin Source: Company Data, Zawya, Arqaam Capital Research Source: Company Data, Zawya, Arqaam Capital Research Increased competition from local and foreign insurers may reduce margins: An increasing number of foreign insurers have entered local markets through JVs or representative offices or are serviced from foreign offices, and have been steadily growing market share. That, along with the existence of numerous local insurers, has resulted in intense rivalry despite the strong demand. There are currently 26 insurers in KSA and 57 in the UAE. Although the top 3 local insurers in Qatar have a joint 65% of total market share, with over 50% for QIC, we expect the entry and expansion of foreign insurers to exert pressure on locals, taking away their market share. Therefore, we expect local insurers including QIC to cede market share to foreign entrants. Particularly in health insurance, the fastest growing segment, we expect margin pressure and rising combined ratios driven by consumers who are price sensitive, in addition to increasing claims. We believe numerous insurance companies are currently enduring losses due to rising combined ratios, especially in KSA and the UAE. We expect these companies to exit the market within a few years, or to become more rational in their price setting and underwriting policies, leaving room for higher profitability for the leading insurance companies. The Kingdom s largest insurers incurred loss ratios of 72%-75% in FY 11A and we expect this figure to increase to 82%-87% in FY 12e and FY 13e. Exhibit 214: Increasing number of insurers Exhibit 215: Top 3 insurers dominate the Kuwait and Qatar 90% 80% 70% 60% 50% 40% 30% 20% 0 UAE Bahrain Kuwait KSA Oman Qatar 10% Kuwait Qatar KSA Bahrain Oman UAE Source: Company Data, Zawya, Arqaam Capital Research Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 160

162 We expect RoE to remain stable in the medium term as we expect: May Rising investments yields to compensate for declining underwriting profitability: Return on the investment portfolios for most companies under our coverage currently stands at very low levels, below 1.5%, and well below the sector average of 5-5.5%. The main reason behind this is the conservative investment strategy with a heavy reliance on money markets and low yield bonds, and the generally low yields on good quality assets. We expect the situation to improve as companies shift towards corporate bonds, mutual funds and more equities as they become more sophisticated, gain better insight in claim behavior and gear their investment portfolios. We expect the subsequent increase in investment yields to partly compensate for deteriorating underwriting profitability. Exhibit 216: Exposure to investment income remains a critical factor when examining RoE and overall profitability Exhibit 217: Insurance companies carry little debt while investment portfolios still small 65% 55% 45% 35% 25% 39% 28% 57% 23% 51% 55% 22% 21% 58% 59% 18% 19% 0.40x 0.35x 0.30x 0.25x 0.20x 0.15x 0.30x 0.27x 0.28x 0.27x 0.19x 0.21x 0.26x 0.27x 0.26x 0.27x 0.29x 0.27x 15% FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e 0.10x FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e Investment Income/Earnings ROE Investments/Assets Debt/Equity Source: Company Data, Zawya, Arqaam Capital Research Source: Company Data, Zawya, Arqaam Capital Research Exhibit 218: Considerable equity investments maintain sector yields at moderate rates 8.0% 7.5% 7.5% 7.0% 6.5% 6.0% 5.5% 5.9% 5.6% 5.7% 5.6% 5.5% 5.0% FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e Yields on Investment Source: Company Data, Zawya, Arqaam Capital Research Lower cessation rates: Currently cessation rates are c. 50% of gross premiums, significantly higher than European/U.S firms, as insurers do not have sufficient underwriting capabilities and avoid concentration risks. We expect cessation rates to come down as concentration risks Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 161

163 become smaller due to growing business volumes and as insurers improve their underwriting expertise. Reinsurance is still attractive in the GCC due to a lack of catastrophes. Exhibit 219: Lack of underwriting ability upholds cession ratios at high levels 65.0% 60.0% 55.0% 53.2% 56.2% 57.5% 55.0% 56.0% 56.5% 50.0% 51.8% 48.3% 49.9% 50.9% 50.4% 49.7% 45.0% 40.0% FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e Cession ratio NEP/GWP Source: Zawya, Arqaam Capital Research Re-leveraging of balance sheets: We expect the insurers companies to re-leverage their balance sheets by growing GWP faster than their capital base, thus supporting their returns. Insurance companies are maintaining very solid solvency ratios. Even when we apply a Solvency I ratios of 200% and applying 50% charge on equity investments (to simulate Solvency II), we arrive at strong capital positions for insurers under our coverage. Insurers in the region generally use very little outstanding debt and have strong balance sheets with shareholders equity accounting for over 40% of total assets. Companies have been building up their policy reserves over the past few years, with some insurance companies such as QIC reaching over 2.5x net premiums and 1.0x book value of equity. We expect younger insurers to continue building their policy reserves, such as MedGulf and Tawuniya, reaching 1.5x net earned premium within 5 years from current levels of 1.1x. Exhibit 220: There is an upward trend in building reserves Exhibit 221: Low gearing keeps equity levels high 2.00x 1.80x 1.60x 1.40x 1.20x 1.00x 0.80x 1.99x 1.90x 1.92x 1.94x 1.81x 1.33x 0.95x 1.02x 0.89x 0.83x 0.75x 0.81x 0.48x 0.44x 0.40x 0.36x 0.32x 0.28x 0.24x 0.20x 0.41x 0.27x 0.42x 0.19x 0.41x 0.41x 0.26x 0.21x 0.40x 0.39x 0.27x 0.27x 0.60x FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e 0.16x FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e Policy reserves/net premiums Policy reserves/equity Equity/Assets Debt/Equity Source: Company Data, Zawya, Arqaam Capital Research Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 162

164 Increasing cost efficiency: We expect operating costs to come down as a percentage of gross written premiums when business volumes increase. Expense ratios in the region hover around c. 33%, compared to c. 29% in mature markets. Fragmented market and further consolidation expected The market is highly fragmented. We expect some consolidation to create efficiency gains and economies of scale; however, the growth outlook strong enough that we do not expect a significant wave of M&A in the medium term. We also expect foreign entrants, as entry restrictions are being relaxed. We ultimately think this will reduce the demand for reinsurance, and cessation rates should fall, boosting net premiums. We believe consolidations in the sector would induce cost saving synergies, dropping expense ratios to as low as c. 26%. A small reduction in commission expense to brokers: Brokers continue to dominate distribution channels. However, as business volumes grow, we could see fees coming down. Other than in the US or Europe, insurers expense the commission costs and do not capitalize them. We also expect an increase in JVs with banks (bancassurance) and direct sales which may help reduce fees paid out to brokers. Analyzing key drivers of the 4 insurers under our coverage High profitability (RoE) to be driven by a combination of underwriting profitability and investment returns: Consistently low net loss ratios render underwriting profitable: Net loss ratios in the region have generally resided at around 60%-64%. Along with moderate c. 33% expense ratios, insurance companies in the region are able to achieve combined ratios of 93%-94%, well below European/U.S. peers of 98%-100%. In addition to commission revenue, underwriting margins have generally stood at c. 11.7%. However some companies such as Salama have combined ratios of c. 100% and underwriting margins of 1.5%, and hence have to rely heavily on low yield investment income to generate profits of c. 2.6%, similarly to European and U.S. insurers. Salama s high combined ratio is a reflection of its high expense ratio, mainly related to high commissions paid to the broker channel, while its claim ratio is the lowest amongst peers. Medgulf, on the other hand, has the lowest expense ratios (a sign of its operational efficiency), but the highest claim ratio, due to the competitive nature of health care insurance. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 163

165 Exhibit 222: QIC net loss ratios jumped 12% in FY 11A due to reinsurance claims from the Fukushima disaster 50% 45% 40% 35% 30% 25% 20% 15% 100% 90% 80% 70% 101% 94% 10% 50% 55% 60% 65% 70% 75% 80% QIC Salama Tawuniya MedGulf Sector Source: Company Data, Zawya, Arqaam Capital Research Exhibit 224: Catastrophes in the far east pumped QIC s net loss ratios in FY 11A and FY 12e 93% 91% FY 11A Net loss ratio on X axis Expense ratio on Y axis 94% Exhibit 223: Salama s combined ratios are the highest at 100%, leaving little room for underwriting profit 50% 45% 40% 35% 30% 25% 20% 15% 100% 90% 80% 70% 81% 100% 87% 93% 10% 50% 55% 60% 65% 70% 75% 80% QIC Salama Tawuniya MedGulf Sector Source: Company Data, Zawya, Arqaam Capital Research FY 10A Net loss ratio on X axis Expense ratio on Y axis Exhibit 225: Salama s combined ratio is expected to stabilize at 99%, diminishing underwriting profit 91% 100% 85% 81% 93% 93% 84% 85% 85% 84% 105% 90% 100% 101% 103% 99% 99% 99% 99% 70% 55% 52% 65% 66% 57% 58% 59% 59% 75% 60% 56% 59% 65% 60% 60% 60% 60% 40% 25% 29% 28% 27% 27% 26% 26% 26% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 45% 30% 45% 42% 38% 39% 39% 39% 39% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e Net loss ratio Expense ratio Combined ratio Net loss ratio Expense ratio Combined ratio Exhibit 226: Tawuniya s exposure to the medical segment will increase net loss ratios to 74% in the long run Exhibit 227: MedGulf s heavy reliance on the medical segment is pushing combined ratios up 105% 90% 75% 60% 87% 58% 91% 68% 101% 78% 97% 96% 96% 96% 75% 74% 74% 74% 105% 90% 75% 60% 94% 98% 98% 97% 97% 98% 91% 72% 73% 78% 79% 77% 77% 77% 45% 30% 28% 23% 23% 22% 22% 22% 22% 45% 30% 19% 21% 20% 20% 20% 20% 20% 15% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 15% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e Net loss ratio Expense ratio Combined ratio Net loss ratio Expense ratio Combined ratio Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 164

166 Exhibit 228: Tawuniya and QIC have low operating RoEs due to high net loss ratios for FY 12e which are not expected to persist Profit Margin NEP/Equity High net loss ratios distort QIC and Tawuniya s underwriting profitability: High net loss ratios due to competition in the Saudi medical segment, and reinsurance claims for catastrophes in the Far East have pushed Tawuniya and QIC s net loss ratios above the levels of the previous years. We do not expect these high net loss ratios to persist, however, we do expect lower underwriting profits as compared to FY 10A. We expect underwriting profitability to be capped by rising net loss ratios amid tightening competition. Similarly Medgulf s small investment portfolio has yet to contribute significantly to RoE. As the investment book grows, we expect larger contributions from their investment portfolio. Exhibit 229: We expect RoEs to stabilize starting FY 16e amid a more rational insurance sector Operating ROE Investment Yields Investments / Assets Leverage Investments ROE Investment properties Inv. Prop./Assets Leverage Inv. Properties ROE QIC 8.3% 40% 3.3% 9.5% 54% 232% 11.8% 10.0% 5.4% 232% 1.3% 16.3% Salama -0.8% 121% (1.0%) 4.5% 32% 320% 4.6% 3.6% 5.2% 320% 0.6% 4.3% Tawuniya 2.7% 156% 4.2% 7.0% 50% 346% 12.2% --% --% 346% --% 16.3% MedGulf 7.9% 162% 12.9% 3.0% 14% 344% 1.5% --% --% 344% --% 14.4% Profit Margin NEP/Equity Operating ROE Investment Yields Investments / Assets Leverage Investments ROE Investment properties Inv. Prop./Assets Leverage Inv. Properties ROE QIC 17.0% 50% 8.5% 6.4% 57% 264% 9.5% 10.0% 4.2% 264% 1.1% 19.1% Salama 3.6% 40% 1.4% 3.6% 39% 375% 5.3% 3.6% 3.6% 375% 0.5% 7.2% Tawuniya 6.6% 141% 9.3% 4.5% 54% 338% 8.3% --% --% 338% --% 17.6% MedGulf 7.6% 167% 12.6% 4.5% 29% 382% 4.9% --% --% 382% --% 17.5% Some companies high RoEs are more reliant on investment income: RoEs in the region stood at an impressive c. 22.6% over the last three years, with an earnings margin at c. 9.6%. Several insurers in the region such as QIC rely heavily on investment income, with large positions in equities, and to a lesser extent, properties, to achieve their high RoEs of c. 18%. A figure too high could indicate possible volatility in earnings; however a figure too low could mean the company is not properly benefiting from investments and is losing at a nonoperating level. Such RoEs are highly exposed to the volatility of the markets, and are generally less attractive than if driven by underwriting profits. However a large number of Islamic insurers such as Tawuniya an MedGulf have little exposure to equities, having the majority of their investments in sukuk and low yield money markets, and rely much less on investment income. Tawuniya and MedGulf s investment income accounted for 21.5% and 1.3% of total earnings respectively during FY 11A, with RoEs of 22.6% and 18.3% in FY 11A. The sector has been achieving net earnings margin of 2-3pp above underwriting profit margins; we expect this gap to widen to 3.5%-4.0% in the next few years. We believe Tawuniya and Medgulf s current gaps of c. 0.1% will improve as yields rise, reaching c. 3%-3.5% by FY 16e amid improving earnings margins reaching 10.4% for Tawuniya and 7.8% for Medgulf. QIC however, is clearly seen heavily relying on investment returns to boost earnings margin, and we expect that the current high yield may not be fully recurring. ROE ROE Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 165

167 Exhibit 230: Despite falling investment yields ROEs are expected to remain high for QIC Exhibit 231: Improving investment yields and a growing investment book will drive Salama s ROEs upwards 20% 18% 16% 14% 12% 10% 8% 18% 17% 8.2% 7.6% 16% 6.8% 20% 19% 18% 19% 8.0% 7.3% 7.1% 7.1% 9% 8% 7% 6% 5% 4% 3% 2% 4.2% 4.5% 3.7% 3.7% 4.0% 3.2% 1.4% 1.4% 1.3% 8.1% 7.7% 7.5% 7.7% 7.2% 7.0% 6.8% 7.1% 2.2% 2.0% 1.9% 1.9% 6% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 1% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e ROaE ROaA ROaE ROaE excl. Intangibles ROaA Exhibit 232: We expect Tawuniya s ROEs to recover back to 20% after a drop in FY 12e and FY 13e Exhibit 233: MedGulf s RoEs are expected to recover to 18% from a drop in FY 12e and FY 13e 45% 40% 35% 30% 25% 20% 15% 10% 5% 39% 35% 7.4% 25% 23% 5.8% 18% 18% 20% 20% 19% 17% 17% 18% 19% 18% 4.6% 4.7% 5.1% 5.2% 5.0% 45% 40% 35% 30% 25% 20% 15% 10% 5% 39% 32% 20% 18% 5.9% 5.2% 24% 24% 15% 15% 4.3% 4.4% 27% 26% 24% 18% 18% 18% 5.1% 5.0% 4.8% 0% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e 0% FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e ROaE ROaE excl. Intangibles ROaA ROaE ROaE excl. Intangibles ROaA Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 166

168 Exhibit 234: Investment income elevates QIC s earnings margins to 26%, despite underwriting margins of 4% Exhibit 235: Contrary to the sector, Medgulf s earnings margin are lower than underwriting margins 30% 30% QIC 25% QIC 25% 20% 20% 15% 10% Medgulf Sector Tawuniya 15% 10% Medgulf Sector Tawuniya 5% Salama 5% Salama 0% 0% 2% 4% 6% 8% 10% 12% FY 11A - Underwriting profit on X axis. Profit margins on Y axis Source: Company Data, Zawya, Arqaam Capital Research 0% 0% 2% 4% 6% 8% 10% 12% FY 10A - Underwriting profit on X axis. Profit margins on Y axis Source: Company Data, Zawya, Arqaam Capital Research Investment income accounts for 50% of total earnings on average: In QIC and Salama s case however, investment income accounted for c. 70% of total earnings. We expect yields to dramatically improve for Medgulf, Tawuniya and Salama: Build up of investment portfolio when premium income is being received, particularly given a time lag between premium income and actual claims being paid. A move away from very liquid assets towards higher yielding corporate bonds and equities This should help their net profit margin by 1.7%, 1.6% and 1.1% by FY 16e. We expect equities to yield 9%, money markets 2%, funds 7% and corporate fixed income to yield 5%. We anticipate a blended return of 4.5%. We expect QIC s blended return to be higher due to its very solid capital position, which allows for a higher share of equities. Exhibit 236: We expect QIC to maintain relatively higher investment returns by FY 16e due to substantial investments in equities & high yield bonds Equities Yield F.I + M.M Yield Funds Yield Total Yield QIC 43.0% 9.0% 54.2% 4.2% 2.9% 7.0% 6.3% Salama 1.0% 9.0% 69.0% 2.7% 30.0% 5.6% 3.6% Tawuniya 29.0% 9.0% 71.0% 2.7% 4.5% MedGulf 5.5% 9.0% 40.0% 2.5% 54.5% 5.6% 4.5% - *Includes returns on funds classified with F.I and M.M Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 167

169 Exhibit 237: Medgulf s substantially low yields disable investments from contributing to earnings Exhibit 238: Investment returns are a major component of Salama s income due to low underwriting margins 80% 70% 60% 50% 40% Salama Sector QIC 80% 70% 60% 50% 40% Salama Sector QIC 30% 30% 20% Tawuniya 20% Tawuniya 10% Medgulf 0% 0% 2% 4% 6% 8% 10% 12% FY 11A Investment yield on X axis. Investment Income/Earnings on Y axis Source: Company Data, Zawya, Arqaam Capital Research 10% Medgulf 0% 0% 2% 4% 6% 8% 10% FY 10A Investment yield on X axis. Investment Income/Earnings on Y axis Source: Company Data, Zawya, Arqaam Capital Research Exhibit 239: Combined ratios and RoEs generally move in parallel in the long run Exhibit 240: High combined ratios reduce Salama s RoEs far lower than industry levels 26% 22% 18% 14% Tawuniya Sector Medgulf QIC 34% 30% 26% 22% 18% QIC Tawuniya Medgulf Sector 10% 6% Salama 2% 84% 86% 88% 90% 92% 94% 96% 98% 100% 102% FY 11A Combined Ratio on X axis. ROE on Y axis Source: Company Data, Zawya, Arqaam Capital Research 14% 10% 6% Salama 2% 80% 82% 84% 86% 88% 90% 92% 94% 96% 98% 100% 102% FY 10A Combined Ratio on X axis. ROE on Y axis Source: Company Data, Zawya, Arqaam Capital Research Improvement in underwriting ability should push cession ratios down: High cession ratios in the sector have capped NEP/GWP, lowering profitability. Salama s NEP/GWP remains relatively low in contrast to its low cession ratios, due to large movements in unearned premiums of 6.3% in FY 11A and FY 10A compared to 3.1% and 3.9% in the sector. Tawuniya also experienced large movements in unearned premiums in FY 11A of 7.6%. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 168

170 Exhibit 241: Companies in KSA cede smaller portions of their GWP, pushing NEP/GWP upwards Exhibit 242: Cession ratios of c.45% push down QIC s NEP/GWP to near 55% levels 50% 45% QIC Sector 50% 45% QIC Sector 40% 40% 35% 30% Medgulf 35% 30% Tawuniya Medgulf 25% Tawuniya 25% 20% 15% Salama 20% 15% Salama 10% 52% 56% 60% 64% 68% 72% 76% 80% FY 11A NEP/GWP on X axis. Cession Ratio on Y axis Source: Company Data, Zawya, Arqaam Capital Research 10% 50% 54% 58% 62% 66% 70% 74% 78% FY 10A NEP/GWP on X axis. Cession Ratio on Y axis Source: Company Data, Zawya, Arqaam Capital Research Stock recommendations All in all, we believe the sector universe under our coverage is undervalued, and does not reflect the strong underwriting profitability (though likely to deteriorate), high RoEs, strong balance sheets and investment return potential. Salama: Low RoE to improve through new business line and higher yielding investment portfolio We strongly recommend Salama, on its very low valuation and improving returns. It offers a strong growth in Takaful insurance (while avoiding the competitive health insurance market). We expect combined ratios to fall from the current high levels as the company increases the share of family insurance and reduces the share of reinsurance. We also anticipate RoE to benefit from growing business volume and a pick-up in its investment yield. The stock is trading at P/E13e of 5.8x, P/BV12e of 0.4x and P/tNAV12e of 0.5x and our TP of AED 0.93 offers 52% upside, particularly after the 36% pull back after reaching a 16 month high by the end of February. QIC: Investment yields could fall We also initiate QIC with a Buy recommendation. It is the national champion in the fastest growing market, with one of the lowest penetration rates. Nevertheless we expect some headwinds from a potentially lower yield on its investment portfolio, which may cap its earnings growth. QIC is also impacted by global catastrophe related claims in the short-run. Its capital position is strong, but adjusted for its high equity exposure (we use a harsh 50% capital allocation for equity risk), we arrive at small capital deficit. The stock is trading at P/E13e of 9.3x, P/BV12e of 1.8x and P/tNAV12e of 1.8x and our TP of QAR 95 offers 26.8% upside, despite a strong re-rating of c. 17%. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 169

171 Tawuniya: Higher claims in health, but higher yields on investments expected We also recommend Tawuniya, though with less upside than Salama & QIC. It offers a high quality of earnings and under geared investment portfolio, and is the market leader in KSA. We have penciled in some headwinds in health insurance stemming from increased claims and cost of claims, while price increases are difficult to implement. After a transitional FY 12e, we expect earnings growth to pick up helped by higher investment yields and strong top-line growth. The shares offer a cheap entry point after the sharp fall after its Q1 12 results, which were impacted by a substantial increase in medical claims. The stock is trading at P/E13e of 11.1x, P/BV12e of 1.6x and P/tNAV12e of 1.8x and our TP of SAR 61 offers 23.8% upside Medgulf: Highly exposed to competitive health insurance market, potential goodwill impairments Our least preferred name in insurance is Medgulf. It has the highest exposure to health insurance with potentially lower margins, while it also has substantial capitalized intangibles, which it may need to impair if it fails to meet aggressive growth rates. The stock is also expensive (P/E13e of 11.4x, P/BV12e of 1.8x and P/tNAV12e of 3.0x) and our TP of SAR 24.6 leaves 15.6% downside, despite its recent pull back. Exhibit 243: QIC is the least volatile stock, contrary to Salama and MedGulf which are mostly volatile to hikes in net loss ratios 1% increase in cost of equity 1% increase in net loss ratio 50 bps increase in yields 2% increase in GWP growth 5% increase in FY12e GWP TP New TP % Change New TP % Change New TP % Change New TP % Change New TP % Change Salama (16.6%) 0.58 (37.5%) % % % QIC (9.6%) 92 (3.2%) % % % Tawuniya (13.7%) 54.7 (10.6%) % % % Medgulf (15.9%) 21.3 (13.7%) % % % Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 170

172 Credit Quality Screen Exhibit 244: Asset quality screen Bank Total loans Government loans Banks & other FI Total loans (excl. Public EL from govt lending and FI) EL from EL from corp. banks & FI P&C EL from corp. Non- P&C EL from SMEs EL from mortgages Total EL FY 11A- EL from nonmortgages FY 14e (in m) Total EL FY 10A-FY 14e (in bp) Avg EL FY 10A-FY 14e (in bp) Stock of provisions as of year-end FY 11A Remaining NPL provisions (after deducting EL for existing NPLs, adj for DH) EL to be Provisions covered during FY 10A FY 10A-FY 14e Provisions FY 11A Remaining provisions for FY 12e, FY13e, FY14e Forecast Addition/ provisions (deduction FY 12e, FY 13e, to valuation FY 14e UAE (AED'000) net_provisions ADCB 130,466,613 2,916,734 9,153, ,396,462 3,063 9,611 5,179,069 2,341,154 1,454, ,000 2,601,755 11,889, ,711,876 1,141,196 10,747,956 2,859,578 2,082,360 7,888,378 6,352,158 (1,536,220 ADIB 51,841,547 2,799,419 1,268,509 47,773,619 2,939 1, , ,629 60,118 53,088 2,645,984 4,213, ,010, ,844 3,707, , ,056 3,150,486 2,691,300 (459,187 CBD 28,596,159 1,291, ,605 26,984,721 1, ,215 1,251, ,872 76, ,687 2,585, ,781,072 (80,806) 2,665, , ,348 2,139,520 1,640,765 (498,755 DIB 55,517,325 2,563,280 3,293,881 49,660,164 2,691 3,459 3,431, , ,030,970 1,109,202 6,344,776 1, ,931,237 (25,089) 6,369, , ,300 5,716,429 4,241,008 (1,475,421 ENBD 216,037,331 59,958,816 31,422, ,656,393 62,957 32,993 8,207,070 3,537, , ,100 5,629,582 18,921, ,897, ,678 18,325,123 2,926,037 4,747,708 15,399,086 13,476,280 (1,922,807 FGB 108,341,454 9,545, ,795,723 10, ,093,427 1,795,330 92, ,150 3,165,628 8,428, ,621,655 1,210,701 7,217,383 1,639,087 1,553,091 5,578,296 4,625,612 (952,684 NBAD 164,322,884 62,639,633 23,390,878 78,292,373 65,772 24,560 3,766,020 1,025,467 88, ,000 2,422,297 7,496, ,800,706 2,333,930 5,162,186 1,113,517 1,339,182 4,048,669 4,594, ,097 UNB 59,213,827 15,062,881 4,630,841 39,520,105 15,816 4,862 2,064, , ,158 15,453 1,108,092 4,379, ,632,516 (515,877) 4,894, , ,336 4,428,269 2,568,109 (1,860,160 TAMWEEL 9,643, ,643, , , , ,154 (91,171) 917, ,240 17, , ,734 (584,184 RAKBANK 18,706, ,213 18,691, , , ,090 1,371,046 2,080,051 1, ,978 68,718 2,011, , ,018 1,741,559 1,110,438 (631,121 MASQ 40,354,206 6,594,878 3,081,299 30,678,029 6,925 3, ,037 1,546, , ,471 3,382, ,279,346 (2,243,048) 5,625,693 1,527, ,972 4,098,518 2,993,444 (1,105, ,041, ,373,205 76,575, ,092, ,542 80,405 27,991,748 14,168,772 3,514,396 3,803,863 20,815,744 70,546,468 9,427 1,885 39,347,764 2,901,076 67,645,392 12,652,263 13,808,401 54,993,129 44,513,614 (10,479,515 Qatar (QAR'000) QNBK 196,623,399 33,454, ,168,440 23, ,815,867 2,877,250 39,000 11, ,065 5,674, ,680,172 1,711,717 3,962, ,664 1,034,767 3,425,219 3,972, ,403 QIBK 29,958, , ,694, , ,532 17,829 75, ,311 1,414, , ,239 1,281,216 49,979 13,001 1,231, ,143 (251,094 DHBK 31,475,243 1,444, ,031,167 1, , , , ,052 1,037, , , , , , , , ,002 CBQK 42,161, , ,509, , ,799 10,400 88, ,629 1,426, , ,692 1,251, , ,403 1,084,742 1,106,803 22,061 MARK 34,853,053 3,332, ,521,000 2, , , ,236 21, ,176, ,832 36,031 1,140,146 1,477 70,866 1,138,669 1,101,597 (37,072 QIIK 10,747, , ,163, ,316 4, , , ,600 26, ,556 16,064 19, , ,735 (82,757 KCBK 11,498, ,498, , , , , , , ,155 (70,165) 38, , ,327 (8, ,318,043 39,731, ,587,001 27, ,532,561 4,581, , ,827 1,818,806 11,537, ,420,943 2,432,313 9,105,098 1,013,380 1,672,279 8,091,718 8,510, ,551 Egypt (EGP'000) COMI 42,522, ,433,545 41,089, ,505 29, , ,862 7, ,330 1,588, ,457, , ,197 6, , ,034 1,166, ,535 NSGB 36,216, ,216, , , ,326 2, ,489 1,540, ,117, , ,563 (71,306) 137,725 1,006, ,510 (9,359 CIEB 11,848, ,848, , ,181 82,940 5, , , , , ,695 38, , , , ,526 HDBK 6,855, ,855, ,390 15,882 95,978 4, , , , , ,766 59,452 51, , ,218 79,904 EGBE 3,569, ,569, ,517 97, ,093 40, , , ,228 (17,551) (24,337) 19,734 6, ,724 95, ,012, ,433,545 99,578, , ,235 2,253, ,106 21,449 1,173,572 4,191,246 2, ,643,531 2,090,575 2,100,670 8, ,151 2,092,271 2,978, ,545 Lebanon (LBPmn) AUDI 13,324, ,218 1,611,211 11,331,035 6,689 1, , , ,549 18, , , ,820 7, ,073 47, , , ,740 (98,830 BLOM 8,676, ,676, , ,646 64,135 24,650 98, , ,386 37, ,809 24,892 59, , ,706 (40,210 BYB 6,304, ,304, , ,695 16,517 13,381 70, , ,534 63, ,639 29,272 42, , ,361 11,994 BOB 5,104, ,576 4,897, , , , ,028 27, ,998 (862) 3, , ,113 (47,746 33,410, ,218 1,817,787 31,210,143 6,689 1, , , ,202 56, ,400 1,432, , ,487 1,295, , ,733 1,194,713 1,019,920 (174,793 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 171

173 Exhibit 245: Asset quality screen (continued) Bank Total loans Government loans Banks & other FI Total loans (excl. Public EL from govt lending and FI) EL from EL from corp. banks & FI P&C EL from corp. Non- P&C EL from SMEs EL from mortgages Total EL FY 11A- EL from nonmortgages FY 14e (in m) Total EL FY 10A-FY 14e (in bp) Avg EL FY 10A-FY 14e (in bp) Stock of provisions as of year-end FY 11A Remaining NPL provisions (after deducting EL for existing NPLs, adj for DH) EL to be Provisions covered during FY 10A FY 10A-FY 14e Provisions FY 11A Remaining provisions for FY 12e, FY13e, FY14e Forecast Addition/ provisions (deduction FY 12e, FY 13e, to valuation FY 14e KSA (SAR'000) SAMBA 92,550, ,519 6,474,705 85,509, , ,664 1,710, , ,288 2,651, ,438,761 2,234, , , ,412 (141,936) 1,508,482 1,650,418 RIBL 114,971,308 6,697 7,281, ,683, , ,073 1,810,889 6,303 66,002 1,235,730 3,406, ,998,544 1,152,435 2,254, , ,712 1,319,138 2,288, ,861 RJHI 143,951, ,951, ,219 1,097, ,286 4,368,922 5,993, ,555,632 2,281,212 3,712,753 1,753,587 1,475,680 1,959,166 4,480,406 2,521,240 BSFR 93,863,772 2,680,756 1,326,330 89,856,686 1,877 1, ,717 1,931, , ,067 2,750, ,538,730 1,051,395 1,699, , ,908 1,359,986 1,584, ,355 SABB 86,892,010 2,239, ,652,753 1, ,011 1,714, , ,883 2,646, ,080,723 1,336,591 1,310,256 1,243, ,788 67,177 2,026,191 1,959,014 ARNB 75,448,667 9,357 3,223,158 72,216, , ,877 1,191, ,428 1,083,849 2,428, ,604,897 1,764, , , ,897 (299,619) 1,982,619 2,282,238 SHB 38,814,947 1,067,209 1,593,928 36,153, , , ,353 6, ,355 1,140, ,069, , , , ,776 (18,122) 790, ,049 SIBC 29,359,693 86,922 1,361,174 27,911, ,429 51, , , , ,245,600 1,439,519 (491,911) 738, ,000 (1,229,911) 749,859 1,979,770 ALBI 14,663, ,663, , , , , , , ,965 (93,447) 242, ,242 (335,750) 515, ,078 BJAZ 24,517, ,692 23,806, , , , ,210, , , ,232 70,352 (168,393) 496, ,414 ALINMA 25,386,233 6,346, ,040,211 4, , , , , ,766 2, ,698 3, , , ,268 21, ,419,791 13,001,739 21,972, ,446,046 9,101 23,071 2,018,683 11,740,724 14, ,457 9,580,602 23,794, ,632,824 13,083,571 10,710,978 7,528,544 4,579,466 3,182,434 16,423,171 13,911,436 Oman (OMR'000) BKMB 4,995,926 26, ,539 4,753, ,748 75,925 2,250 20,522 54, , , ,069 56,168 32,941 30,601 23, , ,452 BKSB 1,033, , , ,179 13, ,863 10,763 34, ,559 6,758 27,610 3,984 3,467 23,626 20,021 (3,605 OIBB 720,723 3,100 39, , , ,058 8,518 23, ,539 (4,970) 28,942 (676) (2,888) 29,618 16,433 (13,186 6,749,762 29, ,456 6,409, , ,012 2,250 27,443 73, , , , ,721 36,249 31,180 76, ,132 89,661 Kuwait (KWD'000) NBK 8,502, ,103 8,076, , , , , , ,753 81,944 11,792 52,393 70, ,175 73,023 BURG 2,347, ,347, ,794 81, , , ,408 (26,338) 170,700 71,756 29,122 98, ,357 2,414 GBK 3,564, ,555 3,158, , , , , ,960 (32,118) 323, ,840 67, , ,043 (6,790 KFIN 7,236, ,987,245 5,249, , , , , , , , , , , , ,111 BOUBYAN 1,064, ,064, , ,314 62, ,803 32,196 30,574 12,173 12,226 18,401 35,190 16,788 22,715, ,817,903 19,897, , , , ,295 1,454, ,203, , , , , , , ,546 Bahrain (USD'000) AUB 16,046, ,101 1,167,184 14,403, , , , , , , , , , , , , , ,806 16,046, ,101 1,167,184 14,403, , , , , , , , , , , , , , ,806 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 172

174 Exhibit 246: Average PD and LGD % of loans % of loans % of loans % of loans % of loans % of loans % of loans PD PD PD PD PD PD PD Weighted LGD LGD LGD LGD LGD LGD LGD Weighted EL EL EL EL EL EL EL Total Total Govt Banks & FI P&C Non-P&C SMEs mortgageson morgtag Govt Banks & FI P&C Non-P&C SMEs mortgageson morgtag PD Govt Banks & FP&C Non-P&C SMEs mortgageson morgtage LGD GovtBanks & F P&C Non-P&C SMEs mortgageson morgtage EL LLR UAE (AED'000) ADCB 100% 2% 7% 29% 20% 17% 4% 20% 0.3% 0.3% 30.0% 37.0% 13.0% 15.0% 15.0% 22.1% 35% 35% 45% 24% 50% 40% 65% 45% , ADIB 100% 5% 2% 9% 23% 2% 2% 56% 0.3% 0.3% 30.0% 15.0% 12.5% 14.0% 14.0% 14.6% 35% 35% 43% 47% 50% 40% 65% 56% , CBD 100% 5% 1% 15% 51% 21% 3% 4% 0.3% 0.3% 35.0% 32.9% 15.0% 18.0% 16.0% 26.4% 35% 35% 45% 26% 50% 45% 65% 37% , , DIB 100% 5% 6% 31% 18% 0% 23% 18% 0.3% 0.3% 40.0% 17.5% 15.0% 18.0% 17.0% 22.7% 35% 35% 50% 45% 50% 45% 65% 49% , , ENBD 100% 28% 15% 19% 14% 5% 3% 16% 0.3% 0.3% 40.0% 60.3% 16.0% 19.0% 25.0% 21.9% 35% 35% 50% 19% 50% 45% 65% 41% ,000 1, , FGB 100% 9% 0% 22% 25% 1% 13% 30% 0.3% 0.3% 30.0% 18.9% 13.0% 5.0% 15.0% 16.8% 35% 35% 43% 35% 50% 40% 65% 47% , NBAD 100% 38% 14% 20% 11% 1% 1% 15% 0.3% 0.3% 29.0% 15.1% 11.0% 13.0% 15.0% 10.0% 35% 35% 40% 39% 50% 40% 65% 41% , UNB 100% 25% 8% 24% 11% 13% 0% 19% 0.3% 0.3% 37.0% 56.8% 12.0% 14.0% 15.0% 19.5% 35% 35% 40% 20% 50% 40% 65% 42% ,480 1, TAMWEEL 100% 0% 0% 10% 0% 0% 90% 0% 0.3% 0.3% 30.0% 20.0% 12.0% 18.0% 17.0% 19.2% 35% 35% 43% 45% 50% 45% 65% 45% , , RAKBANK 100% 0% 0% 3% 18% 0% 20% 59% 0.3% 0.3% 35.0% 23.0% 15.0% 17.0% 19.0% 19.8% 35% 35% 43% 45% 50% 45% 65% 57% ,488 1, , MASQ 100% 16% 8% 9% 43% 0% 12% 12% 0.3% 0.3% 40.0% 22.7% 12.0% 20.0% 20.0% 18.3% 35% 35% 50% 40% 50% 45% 65% 43% , , Qatar (QAR'000) QNBK 100% 17% 0% 23% 49% 0% 0% 10% 0.2% 0.3% 10.0% 7.0% 13.0% 5.5% 7.0% 6.6% 35% 35% 40% 43% 50% 40% 65% 43% QIBK 101% 1% 0% 31% 31% 1% 10% 27% 0.2% 0.3% 17.7% 7.5% 13.0% 6.0% 7.0% 10.5% 35% 35% 40% 43% 50% 40% 65% 48% DHBK 100% 5% 0% 37% 25% 0% 19% 14% 0.2% 0.3% 10.0% 7.0% 13.0% 5.5% 7.0% 7.5% 35% 35% 40% 43% 50% 40% 65% 44% CBQK 100% 2% 0% 38% 43% 0% 9% 8% 0.2% 0.3% 10.0% 7.0% 13.0% 5.5% 7.0% 7.9% 35% 35% 40% 43% 50% 40% 65% 43% MARK 100% 10% 0% 41% 39% 8% 3% 0% 0.2% 0.3% 10.0% 7.0% 13.0% 5.5% 7.0% 8.0% 35% 35% 40% 43% 50% 40% 65% 41% QIIK 100% 5% 0% 61% 1% 0% 0% 32% 0.2% 0.3% 10.0% 7.0% 13.0% 5.5% 7.0% 8.5% 35% 35% 40% 43% 50% 40% 65% 48% KCBK 100% 0% 0% 26% 68% 0% 0% 6% 0.2% 0.3% 10.0% 7.0% 13.0% 5.5% 7.0% 7.8% 35% 35% 40% 43% 50% 40% 65% 43% Egypt (EGP'000) 0 COMI 100% 0% 3% 3% 73% 10% 1% 10% 5.0% 0.3% 9.0% 7.5% 12.0% 6.0% 11.0% 8.1% 35% 35% 30% 43% 50% 30% 65% 45% NSGB 100% 0% 0% 2% 73% 8% 0% 17% 5.0% 0.3% 9.5% 8.0% 13.0% 7.0% 11.0% 8.9% 35% 35% 30% 43% 50% 30% 65% 46% CIEB 100% 0% 0% 2% 64% 10% 2% 22% 5.0% 0.3% 9.5% 8.0% 14.0% 7.0% 11.0% 9.3% 35% 35% 30% 43% 50% 30% 65% 48% HDBK 100% 0% 0% 27% 7% 20% 3% 43% 5.0% 0.3% 9.5% 8.0% 14.0% 7.0% 11.0% 10.9% 35% 35% 30% 43% 50% 30% 65% 50% EGBE 100% 0% 0% 2% 80% 0% 1% 16% 5.0% 0.3% 9.5% 8.0% 14.0% 7.0% 11.0% 8.5% 35% 35% 30% 43% 50% 30% 65% 46% Lebanon (LBPmn) AUDI 100% 3% 12% 21% 27% 16% 6% 15% 5.0% 0.3% 13.5% 9.0% 12.0% 7.0% 11.0% 9.4% 35% 35% 35% 43% 50% 35% 65% 44% BLOM 100% 0% 0% 13% 44% 15% 12% 16% 5.0% 0.3% 13.5% 9.0% 12.0% 7.0% 11.0% 10.1% 35% 35% 35% 43% 40% 35% 65% 44% BYB 100% 0% 0% 10% 60% 5% 9% 16% 5.0% 0.3% 13.5% 9.0% 12.0% 7.0% 11.0% 9.7% 35% 35% 35% 43% 40% 35% 65% 45% BOB 100% 0% 4% 8% 87% 0% 0% 0% 5.0% 0.3% 13.5% 9.0% 12.0% 7.0% 11.0% 9.0% 35% 35% 35% 43% 40% 35% 65% 42% KSA (SAR'000) SAMBA 100% 1% 7% 7% 67% 0% 6% 13% 0.2% 0.3% 9.5% 6.5% 10.0% 5.0% 8.5% 6.4% 35% 35% 30% 43% 40% 35% 65% 44% RIBL 100% 0% 6% 9% 62% 0% 3% 19% 0.2% 0.3% 9.0% 6.0% 10.0% 5.0% 8.5% 6.4% 35% 35% 30% 43% 40% 35% 65% 45% RJHI 100% 0% 0% 11% 30% 0% 5% 55% 0.2% 0.3% 9.0% 6.0% 10.0% 5.0% 8.5% 7.6% 35% 35% 30% 43% 40% 35% 65% 53% BSFR 100% 3% 1% 10% 75% 0% 1% 10% 0.2% 0.3% 9.5% 6.5% 10.0% 5.0% 8.5% 6.7% 35% 35% 30% 43% 40% 35% 65% 43% SABB 100% 3% 0% 7% 71% 0% 4% 14% 0.2% 0.3% 9.0% 6.5% 10.0% 5.0% 8.5% 6.7% 35% 35% 30% 43% 40% 35% 65% 44% ARNB 100% 0% 4% 7% 62% 0% 1% 26% 0.2% 0.3% 9.0% 6.0% 10.0% 5.0% 8.5% 6.6% 35% 35% 30% 43% 40% 35% 65% 47% SHB 93% 3% 4% 13% 69% 0% 0% 10% 0.2% 0.3% 10.0% 6.5% 10.0% 5.0% 8.5% 6.7% 35% 35% 30% 43% 40% 35% 70% 41% SIBC 95% 0% 5% 6% 71% 0% 0% 18% 0.2% 0.3% 10.0% 6.5% 10.0% 5.0% 8.5% 6.8% 35% 35% 30% 43% 40% 35% 70% 45% ALBI 100% 0% 0% 19% 43% 0% 17% 21% 0.2% 0.3% 10.0% 6.5% 10.0% 5.0% 8.5% 7.3% 35% 35% 30% 43% 40% 35% 70% 45% BJAZ 97% 0% 3% 16% 81% 0% 0% 0% 0.2% 0.3% 10.0% 6.5% 10.0% 5.0% 8.5% 6.9% 35% 35% 30% 43% 40% 35% 70% 39% ALINMA 75% 25% 0% 23% 35% 0% 0% 17% 0.2% 0.3% 10.0% 6.5% 10.0% 5.0% 8.5% 6.0% 35% 35% 30% 43% 40% 35% 70% 34% Oman (OMR'000) BKMB 100% 1% 4% 8% 48% 1% 20% 19% 0.3% 0.3% 11.0% 7.5% 10.0% 6.0% 9.0% 7.5% 35% 35% 30% 43% 50% 35% 65% 44% BKSB 100% 0% 5% 18% 41% 0% 18% 18% 0.3% 0.3% 11.0% 7.5% 10.0% 6.0% 9.0% 7.8% 35% 35% 30% 43% 50% 35% 65% 43% OIBB 100% 0% 6% 3% 50% 0% 20% 20% 0.3% 0.3% 11.0% 7.5% 10.0% 6.0% 9.0% 7.2% 35% 35% 30% 43% 50% 35% 65% 45% Kuwait (KWD'000) NBK 100% 0% 5% 21% 47% 0% 0% 27% 0.3% 0.3% 10.0% 9.0% 13.0% 8.0% 9.0% 8.8% 35% 35% 30% 43% 50% 35% 65% 46% BURG 100% 0% 0% 19% 63% 0% 0% 18% 0.3% 0.3% 14.0% 13.0% 13.0% 12.0% 15.0% 13.5% 35% 35% 35% 43% 50% 35% 65% 45% GBK 100% 0% 11% 36% 29% 0% 0% 24% 0.3% 0.3% 22.0% 25.0% 13.0% 13.0% 15.0% 18.7% 35% 35% 35% 43% 50% 35% 65% 44% , KFIN 100% 0% 27% 25% 48% 0% 0% 0% 0.3% 0.3% 32.0% 28.0% 13.0% 13.0% 15.0% 21.4% 35% 35% 35% 43% 50% 35% 65% 39% ,120 1, BOUBYAN 100% 0% 0% 0% 77% 0% 0% 23% 0.3% 0.3% 15.0% 13.0% 13.0% 8.0% 11.0% 12.5% 35% 35% 30% 43% 50% 35% 65% 48% Bahrain (USD'000) AUB 100% 3% 7% 20% 47% 0% 8% 14% 0.3% 0.3% 15.5% 6.0% 10.0% 6.0% 9.0% 7.8% 35% 35% 30% 43% 50% 35% 65% 42% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 173

175 Exhibit 247: Asset quality screen: Government loans Tangible equity Total loan book Of which: government loans Govt. Loans Probability of as % of total default (%) loans Loss given default (%) Estimated total expected loss (in bps) Expected Loss from government UAE (AED'000) Abu Dhabi Commercial Bank 17,907, ,466,613 2,916,734 2% 0.3% 35% 11 3,06 Abu Dhabi Islamic Bank 6,780,778 51,841,547 2,799,419 5% 0.3% 35% 11 2,93 Commerical Bank of Dubai 4,670,242 28,596,159 1,291,833 5% 0.3% 35% 11 1,35 Dubai Islamic Bank 9,532,023 55,517,325 2,563,280 5% 0.3% 35% 11 2,69 Emirates NBD 25,437, ,037,331 59,958,816 28% 0.3% 35% 11 62,95 First Gulf Bank 25,526, ,341,454 9,545,731 9% 0.3% 35% 11 10,02 National Bank of Abu Dhabi 25,335, ,322,884 62,639,633 38% 0.3% 35% 11 65,77 Union National Bank 11,708,695 59,213,827 15,062,881 25% 0.3% 35% 11 15,81 Tamweel 2,291,625 9,643, % 0.3% 35% 11 RAK Bank 5,265,668 18,706, % 0.3% 35% 11 Mashreq 13,041,929 40,354,206 6,594,878 16% 0.3% 35% 11 6,92 Qatar (QAR'000) Qatar National Bank 47,667, ,623,399 33,454,959 17% 0.2% 35% 7 23,41 Qatar Islamic Bank 11,017,834 29,958, ,471 1% 0.2% 35% 7 18 Doha Bank 8,611,267 31,475,243 1,444,076 5% 0.2% 35% 7 1,01 Commercial Bank of Qatar 14,567,254 42,161, ,353 2% 0.2% 35% 7 45 Masraf Al Rayan 9,567,526 34,853,053 3,332,053 10% 0.2% 35% 7 2,33 QIIB 4,957,312 10,747, ,130 5% 0.2% 35% 7 40 Al Khaliji 5,190,638 11,498, % 0.2% 35% 7 Egypt (EGP'000) Commerical International Bank 10,349,981 42,522, % 5.0% 35% 175 NSGB 8,265,057 36,216, % 5.0% 35% 175 Credit Agricole Egypt 2,079,915 11,848, % 5.0% 35% 175 Housing and Development Bank 2,460,987 6,855, % 5.0% 35% 175 Egypt Gulf Bank 1,135,362 3,569, % 5.0% 35% 175 Lebanon (LBPmn) 35% Bank Audi 3,069,841 13,324, ,218 3% 5.0% 35% 175 6,68 Blom Bank 2,825,492 8,676, % 5.0% 35% 175 Byblos Bank 2,008,686 6,304, % 5.0% 35% 175 Bank of Beirut 825,618 5,104, % 5.0% 35% 175 KSA (SAR'000) Samba 30,960,078 92,550, ,519 1% 0.2% 35% 7 39 Riyad Bank 31,252, ,971,308 6,697 0% 0.2% 35% 7 Al Rajhi 35,833, ,951, % 0.2% 35% 7 BSFR 24,565,383 93,863,772 2,680,756 3% 0.2% 35% 7 1,87 SABB 21,933,304 86,892,010 2,239,257 3% 0.2% 35% 7 1,56 ANB 17,979,407 75,448,667 9,357 0% 0.2% 35% 7 SHB 8,820,107 38,814,947 1,067,209 3% 0.2% 35% 7 74 SIB 9,066,468 29,359,693 86,922 0% 0.2% 35% 7 6 Bank Albilad 4,262,986 14,663, % 0.2% 35% 7 Bank Al-Jazira 5,954,295 24,517, % 0.2% 35% 7 Alinma 16,511,688 25,386,233 6,346,022 25% 0.2% 35% 7 4,44 Oman (OMR'000) Bank Muscat 1,017,639 4,995,926 26,319 1% 0.3% 35% 11 2 Sohar 148,404 1,033, % 0.3% 35% 11 Oman International 330, ,723 3,100 0% 0.3% 35% 11 Kuwait (KWD'000) National Bank of Kuwait 2,309,807 8,502, % 0.3% 35% 11 Nurgan 333,360 2,347, % 0.3% 35% 11 Gulf Bank 473,025 3,564, % 0.3% 35% 11 Kuwait Finance Hoouse 1,238,888 7,236, % 0.3% 35% 11 Boubyan 260,812 1,064, % 0.3% 35% 11 Bahrain Ahli United 1,929,221 16,046, ,101 3% 0.3% 35% Total 497,280,888 2,161,098, ,993,723 10% 0.3% 35.0% ,67 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 174

176 Exhibit 248: Asset quality: Banks & FI loans Tangible equity Total loan book Of which: Banks and other FI loans Banks & FI as % of total loans Probability of default (%) Loss given default (%) Estimated total expected loss (in bps) Expected Loss from banks & FI UAE (AED'000) Abu Dhabi Commercial Bank 17,907, ,466,613 9,153,417 7% 0.3% 35% 11 9,611 Abu Dhabi Islamic Bank 6,780,778 51,841,547 1,268,509 2% 0.3% 35% 11 1,332 Commerical Bank of Dubai 4,670,242 28,596, ,605 1% 0.3% 35% Dubai Islamic Bank 9,532,023 55,517,325 3,293,881 6% 0.3% 35% 11 3,459 Emirates NBD 25,437, ,037,331 31,422,122 15% 0.3% 35% 11 32,993 First Gulf Bank 25,526, ,341, % 0.3% 35% National Bank of Abu Dhabi 25,335, ,322,884 23,390,878 14% 0.3% 35% 11 24,560 Union National Bank 11,708,695 59,213,827 4,630,841 8% 0.3% 35% 11 4,862 Tamweel 2,291,625 9,643, % 0.3% 35% RAK Bank 5,265,668 18,706,448 15,213 0% 0.3% 35% Mashreq 13,041,929 40,354,206 3,081,299 8% 0.3% 35% 11 3,235 Qatar (QAR'000) Qatar National Bank 47,667, ,623, % 0.3% 35% Qatar Islamic Bank 11,017,834 29,958, % 0.3% 35% Doha Bank 8,611,267 31,475, % 0.3% 35% Commercial Bank of Qatar 14,567,254 42,161, % 0.3% 35% Masraf Al Rayan 9,567,526 34,853, % 0.3% 35% QIIB 4,957,312 10,747, % 0.3% 35% Al Khaliji 5,190,638 11,498, % 0.3% 35% Egypt (EGP'000) Commerical International Bank 10,349,981 42,522,740 1,433,545 3% 0.3% 35% 11 1,505 NSGB 8,265,057 36,216, % 0.3% 35% Credit Agricole Egypt 2,079,915 11,848, % 0.3% 35% Housing and Development Bank 2,460,987 6,855, % 0.3% 35% Egypt Gulf Bank 1,135,362 3,569, % 0.3% 35% Lebanon (LBPmn) Bank Audi 3,069,841 13,324,464 1,611,211 12% 0.3% 35% 11 1,692 Blom Bank 2,825,492 8,676, % 0.3% 35% Byblos Bank 2,008,686 6,304, % 0.3% 35% Bank of Beirut 825,618 5,104, ,576 4% 0.3% 35% KSA (SAR'000) Samba 30,960,078 92,550,190 6,474,705 7% 0.3% 35% 11 6,798 Riyad Bank 31,252, ,971,308 7,281,019 6% 0.3% 35% 11 7,645 Al Rajhi 35,833, ,951, % 0.3% 35% BSFR 24,565,383 93,863,772 1,326,330 1% 0.3% 35% 11 1,393 SABB 21,933,304 86,892, % 0.3% 35% ANB 17,979,407 75,448,667 3,223,158 4% 0.3% 35% 11 3,384 SHB 8,820,107 38,814,947 1,593,928 4% 0.3% 35% 11 1,674 SIB 9,066,468 29,359,693 1,361,174 5% 0.3% 35% 11 1,429 Bank Albilad 4,262,986 14,663, % 0.3% 35% Bank Al-Jazira 5,954,295 24,517, ,692 3% 0.3% 35% Alinma 16,511,688 25,386, % 0.3% 35% Oman (OMR'000) Bank Muscat 1,017,639 4,995, ,539 4% 0.3% 35% Sohar 148,404 1,033,113 54,201 5% 0.3% 35% Oman International 330, ,723 39,716 6% 0.3% 35% Kuwait (KWD'000) National Bank of Kuwait 2,309,807 8,502, ,103 5% 0.3% 35% Nurgan 333,360 2,347, % 0.3% 35% Gulf Bank 473,025 3,564, ,555 11% 0.3% 35% Kuwait Finance Hoouse 1,238,888 7,236,475 1,987,245 27% 0.3% 35% 11 2,087 Boubyan 260,812 1,064, % 0.3% 35% Bahrain Ahli United 1,929,221 16,046,376 1,167,184 7% 0.3% 35% 11 1,226 Total 497,280,888 2,161,098, ,094,646 5% 0.3% 35.0% ,399 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 175

177 Exhibit 249: Asset quality screen: Corporate property and construction loans Tangible equity Total loans Of which: Corporate loans Corp. Loans as % of total loans Real Estate & construction loans Real Estate & construction as % of corp. Loans Loss given Probability of default default (%) (%) Estimated total expected loss (in bps) Expected Loss UAE (AED'000) Abu Dhabi Commercial Bank 17,907, ,466,613 86,711,796 66% 38,363,476 44% 30.0% 45% 1,350 5,179,069 Abu Dhabi Islamic Bank 6,780,778 51,841,547 16,786,978 32% 4,835,306 29% 30.0% 43% 1, ,502 Commerical Bank of Dubai 4,670,242 28,596,159 24,774,039 87% 4,280,728 17% 35.0% 45% 1, ,215 Dubai Islamic Bank 9,532,023 55,517,325 26,894,114 48% 17,159,113 64% 40.0% 50% 2,000 3,431,823 Emirates NBD 25,437, ,037,331 83,812,812 39% 41,035,348 49% 40.0% 50% 2,000 8,207,070 First Gulf Bank 25,526, ,341,454 51,346,793 47% 24,262,176 47% 30.0% 43% 1,275 3,093,427 National Bank of Abu Dhabi 25,335, ,322,884 51,448,299 31% 32,465,691 63% 29.0% 40% 1,160 3,766,020 Union National Bank 11,708,695 59,213,827 27,879,115 47% 13,951,277 50% 37.0% 40% 1,480 2,064,789 Tamweel 2,291,625 9,643, ,376 10% 964, % 30.0% 43% 1, ,958 RAK Bank 5,265,668 18,706,448 3,889,121 21% 516,560 13% 35.0% 43% 1,488 76,838 Mashreq 13,041,929 40,354,206 20,978,471 52% 3,795,186 18% 40.0% 50% 2, ,037 Qatar (QAR'000) Qatar National Bank 47,667, ,623, ,710,967 73% 45,396,687 32% 10.0% 40% 400 1,815,867 Qatar Islamic Bank 11,017,834 29,958,495 18,818,851 63% 9,398,442 50% 17.7% 40% ,410 Doha Bank 8,611,267 31,475,243 19,590,464 62% 11,698,722 60% 10.0% 40% ,949 Commercial Bank of Qatar 14,567,254 42,161,206 34,045,481 81% 15,841,830 47% 10.0% 40% ,673 Masraf Al Rayan 9,567,526 34,853,053 30,537,376 88% 14,188,572 46% 10.0% 40% ,543 QIIB 4,957,312 10,747,688 6,744,290 63% 6,607,907 98% 10.0% 40% ,316 Al Khaliji 5,190,638 11,498,959 10,813,849 94% 2,945,055 27% 10.0% 40% ,802 Egypt (EGP'000) Commerical International Bank 10,349,981 42,522,740 36,440,815 86% 1,093,224 3% 9.0% 30% ,517 NSGB 8,265,057 36,216,476 30,065,170 83% 901,955 3% 9.5% 30% ,706 Credit Agricole Egypt 2,079,915 11,848,607 8,957,579 76% 179,152 2% 9.5% 30% 285 5,106 Housing and Development Bank 2,460,987 6,855,590 3,676,472 54% 1,838,236 50% 9.5% 30% ,390 Egypt Gulf Bank 1,135,362 3,569,039 2,943,905 82% 88,317 3% 9.5% 30% 285 2,517 Lebanon (LBPmn) Bank Audi 3,069,841 13,324,464 8,510,913 64% 2,748,662 32% 13.5% 35% ,874 Blom Bank 2,825,492 8,676,307 6,292,154 73% 1,095,970 17% 13.5% 35% ,785 Byblos Bank 2,008,686 6,304,894 4,771,333 76% 618,214 13% 13.5% 35% ,211 Bank of Beirut 825,618 5,104,483 4,897,907 96% 432,865 9% 13.5% 35% ,453 KSA (SAR'000) Samba 30,960,078 92,550,190 68,141,855 74% 6,233,817 9% 9.5% 30% ,664 Riyad Bank 31,252, ,971,308 81,388,333 71% 10,373,069 13% 9.0% 30% ,073 Al Rajhi 35,833, ,951,251 58,345,088 41% 15,304,413 26% 9.0% 30% ,219 BSFR 24,565,383 93,863,772 79,080,173 84% 9,147,957 12% 9.5% 30% ,717 SABB 21,933,304 86,892,010 68,377,688 79% 6,296,702 9% 9.0% 30% ,011 ANB 17,979,407 75,448,667 51,717,401 69% 4,995,450 10% 9.0% 30% ,877 SHB 8,820,107 38,814,947 31,997,824 82% 5,161,522 16% 10.0% 30% ,846 SIB 9,066,468 29,359,693 22,485,849 77% 1,722,083 8% 10.0% 30% ,662 Bank Albilad 4,262,986 14,663,825 9,021,913 62% 2,717,998 30% 10.0% 30% ,540 Bank Al-Jazira 5,954,295 24,517,895 23,806,203 97% 4,003,711 17% 10.0% 30% ,111 Alinma 16,511,688 25,386,233 14,764,273 58% 5,798,764 39% 10.0% 30% ,963 Oman (OMR'000) Bank Muscat 1,017,639 4,995,926 2,798,570 56% 416,612 15% 11.0% 30% ,748 Sohar 148,404 1,033, ,963 59% 187,244 31% 11.0% 30% 330 6,179 Oman International 330, , ,693 54% 23,367 6% 11.0% 30% Kuwait (KWD'000) National Bank of Kuwait 2,309,807 8,502,050 5,754,141 68% 1,785,431 31% 10.0% 30% ,563 Burgan 333,360 2,347,756 1,920,440 82% 444,785 23% 14.0% 35% ,794 Gulf Bank 473,025 3,564,187 2,312,139 65% 1,267,312 55% 22.0% 35% ,583 Kuwait Finance Hoouse 1,238,888 7,236,475 5,249,230 73% 1,789,029 34% 32.0% 35% 1, ,371 Boubyan 260,812 1,064, ,736 77% -- --% 15.0% 30% Bahrain Ahli United 1,929,221 16,046,376 10,793,825 67% 3,238,376 30% 15.5% 30% ,584 Total 497,280,888 2,161,098,140 1,301,545,007 60% 377,724,129 29% 21.8% 40.1% ,437,377 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 176

178 Exhibit 250: Asset quality screen: Corporate non-property and construction loans Tangible equity Total loans Of which: Corporate loans Corp. Loans as % of total loans Non- P&C corporate loans Non- P&C as % of corp. Loans Probability of default (%) Loss given default Estimated total expected loss (in bps) Expected Loss UAE (AED'000) Abu Dhabi Commercial Bank 17,907, ,466,613 86,711,796 66% 25,971,389 30% 37.0% 24% 901 2,341,154 Abu Dhabi Islamic Bank 6,780,778 51,841,547 16,786,978 32% 11,951,672 71% 15.0% 47% ,629 Commerical Bank of Dubai 4,670,242 28,596,159 24,774,039 87% 14,495,023 59% 32.9% 26% 863 1,251,198 Dubai Islamic Bank 9,532,023 55,517,325 26,894,114 48% 9,735,001 36% 17.5% 45% ,631 Emirates NBD 25,437, ,037,331 83,812,812 39% 31,262,182 37% 60.3% 19% 1,132 3,537,877 First Gulf Bank 25,526, ,341,454 51,346,793 47% 27,084,617 53% 18.9% 35% 663 1,795,330 National Bank of Abu Dhabi 25,335, ,322,884 51,448,299 31% 17,382,608 34% 15.1% 39% 590 1,025,467 Union National Bank 11,708,695 59,213,827 27,879,115 47% 6,458,538 23% 56.8% 20% 1, ,928 Tamweel 2,291,625 9,643, ,376 10% -- --% 20.0% 45% RAK Bank 5,265,668 18,706,448 3,889,121 21% 3,372,561 87% 23.0% 45% 1, ,060 Mashreq 13,041,929 40,354,206 20,978,471 52% 17,183,285 82% 22.7% 40% 900 1,546,496 Qatar (QAR'000) Qatar National Bank 47,667, ,623, ,710,967 73% 96,714,280 68% 7.0% 43% 298 2,877,250 Qatar Islamic Bank 11,017,834 29,958,495 18,818,851 63% 9,146,117 49% 7.5% 43% ,532 Doha Bank 8,611,267 31,475,243 19,590,464 62% 7,891,742 40% 7.0% 43% ,779 Commercial Bank of Qatar 14,567,254 42,161,206 34,045,481 81% 18,043,651 53% 7.0% 43% ,799 Masraf Al Rayan 9,567,526 34,853,053 30,537,376 88% 13,560,560 44% 7.0% 43% ,427 QIIB 4,957,312 10,747,688 6,744,290 63% 136,383 2% 7.0% 43% 298 4,057 Al Khaliji 5,190,638 11,498,959 10,813,849 94% 7,868,794 73% 7.0% 43% ,097 Egypt (EGP'000) Commerical International Bank 10,349,981 42,522,740 36,440,815 86% 31,033,225 85% 7.5% 43% ,184 NSGB 8,265,057 36,216,476 30,065,170 83% 26,265,897 87% 8.0% 43% ,041 Credit Agricole Egypt 2,079,915 11,848,607 8,957,579 76% 7,593,567 85% 8.0% 43% ,181 Housing and Development Ban 2,460,987 6,855,590 3,676,472 54% 467,118 13% 8.0% 43% ,882 Egypt Gulf Bank 1,135,362 3,569,039 2,943,905 82% 2,855,588 97% 8.0% 43% ,090 Lebanon (LBPmn) Bank Audi 3,069,841 13,324,464 8,510,913 64% 3,619,762 43% 9.0% 43% ,456 Blom Bank 2,825,492 8,676,307 6,292,154 73% 3,860,033 61% 9.0% 43% ,646 Byblos Bank 2,008,686 6,304,894 4,771,333 76% 3,809,010 80% 9.0% 43% ,695 Bank of Beirut 825,618 5,104,483 4,897,907 96% 4,465,042 91% 9.0% 43% ,788 KSA (SAR'000) Samba 30,960,078 92,550,190 68,141,855 74% 61,908,038 91% 6.5% 43% 276 1,710,210 Riyad Bank 31,252, ,971,308 81,388,333 71% 71,015,264 87% 6.0% 43% 255 1,810,889 Al Rajhi 35,833, ,951,251 58,345,088 41% 43,040,675 74% 6.0% 43% 255 1,097,537 BSFR 24,565,383 93,863,772 79,080,173 84% 69,932,216 88% 6.5% 43% 276 1,931,877 SABB 21,933,304 86,892,010 68,377,688 79% 62,080,986 91% 6.5% 43% 276 1,714,987 ANB 17,979,407 75,448,667 51,717,401 69% 46,721,951 90% 6.0% 43% 255 1,191,410 SHB 8,820,107 38,814,947 31,997,824 82% 26,836,302 84% 6.5% 43% ,353 SIB 9,066,468 29,359,693 22,485,849 77% 20,763,766 92% 6.5% 43% ,599 Bank Albilad 4,262,986 14,663,825 9,021,913 62% 6,303,915 70% 6.5% 43% ,146 Bank Al-Jazira 5,954,295 24,517,895 23,806,203 97% 19,802,492 83% 6.5% 43% ,044 Alinma 16,511,688 25,386,233 14,764,273 58% 8,965,509 61% 6.5% 43% ,672 Oman (OMR'000) Bank Muscat 1,017,639 4,995,926 2,798,570 56% 2,381,958 85% 7.5% 43% ,925 Sohar 148,404 1,033, ,963 59% 423,719 69% 7.5% 43% ,506 Oman International 330, , ,693 54% 363,326 94% 7.5% 43% ,581 Kuwait (KWD'000) National Bank of Kuwait 2,309,807 8,502,050 5,754,141 68% 3,968,710 69% 9.0% 43% ,803 Burgan 333,360 2,347,756 1,920,440 82% 1,475,655 77% 13.0% 43% ,530 Gulf Bank 473,025 3,564,187 2,312,139 65% 1,044,827 45% 25.0% 43% 1, ,013 Kuwait Finance House 1,238,888 7,236,475 5,249,230 73% 3,460,201 66% 28.0% 43% 1, ,764 Boubyan 260,812 1,064, ,736 77% 822, % 13.0% 43% ,456 Bahrain Ahli United 1,929,221 16,046,376 10,793,825 67% 7,555,449 70% 6.0% 43% ,664 Total 497,280,888 2,161,098,140 1,301,545,007 60% 857,063,468 66% 11.7% 40.4% ,305,557 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 177

179 Exhibit 251: Asset quality screen: SME loans Tangible equity Total loans Loans to SMEs SMEs as % of total loans Probability of default (%) Loss given default (%) Estimated total expected loss Expected Loss from SMEs UAE (AED'000) Abu Dhabi Commercial Bank 17,907, ,466,613 22,376,931 17% 13.0% 50% 650 1,454,501 Abu Dhabi Islamic Bank 6,780,778 51,841, ,892 2% 12.5% 50% ,118 Commerical Bank of Dubai 4,670,242 28,596,159 5,998,288 21% 15.0% 50% ,872 Dubai Islamic Bank 9,532,023 55,517, % 15.0% 50% Emirates NBD 25,437, ,037,331 11,515,282 5% 16.0% 50% ,223 First Gulf Bank 25,526, ,341,454 1,423,468 1% 13.0% 50% ,525 National Bank of Abu Dhabi 25,335, ,322,884 1,600,000 1% 11.0% 50% ,000 Union National Bank 11,708,695 59,213,827 7,469,300 13% 12.0% 50% ,158 Tamweel 2,291,625 9,643, % 12.0% 50% RAK Bank 5,265,668 18,706, % 15.0% 50% Mashreq 13,041,929 40,354, % 12.0% 50% Qatar (QAR'000) Qatar National Bank 47,667, ,623, ,000 0% 13.0% 50% ,000 Qatar Islamic Bank 11,017,834 29,958, ,292 1% 13.0% 50% ,829 Doha Bank 8,611,267 31,475, % 13.0% 50% Commercial Bank of Qatar 14,567,254 42,161, ,000 0% 13.0% 50% ,400 Masraf Al Rayan 9,567,526 34,853,053 2,788,244 8% 13.0% 50% ,236 QIIB 4,957,312 10,747, % 13.0% 50% Al Khaliji 5,190,638 11,498, % 13.0% 50% Egypt (EGP'000) Commerical International Bank 10,349,981 42,522,740 4,314,365 10% 12.0% 50% ,862 NSGB 8,265,057 36,216,476 2,897,318 8% 13.0% 50% ,326 Credit Agricole Egypt 2,079,915 11,848,607 1,184,861 10% 14.0% 50% ,940 Housing and Development Bank 2,460,987 6,855,590 1,371,118 20% 14.0% 50% ,978 Egypt Gulf Bank 1,135,362 3,569, % 14.0% 50% Lebanon (LBPmn) Bank Audi 3,069,841 13,324,464 2,142,489 16% 12.0% 50% ,549 Blom Bank 2,825,492 8,676,307 1,336,151 15% 12.0% 40% ,135 Byblos Bank 2,008,686 6,304, ,109 5% 12.0% 40% ,517 Bank of Beirut 825,618 5,104, % 12.0% 40% KSA (SAR'000) Samba 30,960,078 92,550, % 10.0% 40% Riyad Bank 31,252, ,971, ,577 0% 10.0% 40% 400 6,303 Al Rajhi 35,833, ,951, % 10.0% 40% BSFR 24,565,383 93,863, % 10.0% 40% SABB 21,933,304 86,892, % 10.0% 40% ANB 17,979,407 75,448, % 10.0% 40% SHB 8,820,107 38,814, ,025 0% 10.0% 40% 400 6,001 SIB 9,066,468 29,359,693 24,904 0% 10.0% 40% Bank Albilad 4,262,986 14,663,825 17,774 0% 10.0% 40% Bank Al-Jazira 5,954,295 24,517, % 10.0% 40% Alinma 16,511,688 25,386, % 10.0% 40% Oman (OMR'000) Bank Muscat 1,017,639 4,995,926 45,000 1% 10.0% 50% 500 2,250 Sohar 148,404 1,033, % 10.0% 50% Oman International 330, , % 10.0% 50% Kuwait (KWD'000) National Bank of Kuwait 2,309,807 8,502, % 13.0% 50% Burgan 333,360 2,347, % 13.0% 50% Gulf Bank 473,025 3,564, % 13.0% 50% Kuwait Finance Hoouse 1,238,888 7,236, % 13.0% 50% Boubyan 260,812 1,064, % 13.0% 50% Bahrain Ahli United 1,929,221 16,046, % 10.0% 50% Total 497,280,888 2,161,098,140 69,545,438 3% 13.5% 50% 671 4,672,647 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 178

180 Exhibit 252: Asset quality screen: Mortgages Tangible equity Total loans Of which: Retail loans Retail loans as % of total loans Nonmortgages Probability of default (%) Loss given default (%) Estimated total expected loss (in bps) Expected Loss from nonmortgages UAE (AED'000) Abu Dhabi Commercial Bank 17,907, ,466,613 31,684,666 24% 26,684, % 65% 975 2,601,755 Abu Dhabi Islamic Bank 6,780,778 51,841,547 30,986,641 60% 29,076, % 65% 910 2,645,984 Commerical Bank of Dubai 4,670,242 28,596,159 2,210,682 8% 1,266, % 65% 1, ,687 Dubai Islamic Bank 9,532,023 55,517,325 22,766,050 41% 10,038, % 65% 1,105 1,109,202 Emirates NBD 25,437, ,037,331 40,843,581 19% 34,643, % 65% 1,625 5,629,582 First Gulf Bank 25,526, ,341,454 47,448,930 44% 32,467, % 65% 975 3,165,628 National Bank of Abu Dhabi 25,335, ,322,884 26,844,074 16% 24,844, % 65% 975 2,422,297 Union National Bank 11,708,695 59,213,827 11,640,990 20% 11,365, % 65% 975 1,108,092 Tamweel 2,291,625 9,643,757 8,679,381 90% % 65% 1, RAK Bank 5,265,668 18,706,448 14,802,114 79% 11,101, % 65% 1,235 1,371,046 Mashreq 13,041,929 40,354,206 9,699,558 24% 4,849, % 65% 1, ,471 Qatar (QAR'000) Qatar National Bank 47,667, ,623,399 20,457,473 10% 19,957, % 65% ,065 Qatar Islamic Bank 11,017,834 29,958,495 11,139,644 37% 8,006, % 65% ,311 Doha Bank 8,611,267 31,475,243 10,440,703 33% 4,440, % 65% ,052 Commercial Bank of Qatar 14,567,254 42,161,206 7,464,372 18% 3,464, % 65% ,629 Masraf Al Rayan 9,567,526 34,853, ,624 3% % 65% QIIB 4,957,312 10,747,688 3,419,268 32% 3,419, % 65% ,577 Al Khaliji 5,190,638 11,498, ,110 6% 685, % 65% ,173 Egypt (EGP'000) Commerical International Bank 10,349,981 42,522,740 4,648,380 11% 4,228, % 65% ,330 NSGB 8,265,057 36,216,476 6,151,306 17% 6,020, % 65% ,489 Credit Agricole Egypt 2,079,915 11,848,607 2,891,028 24% 2,613, % 65% ,842 Housing and Development Ban 2,460,987 6,855,590 3,179,118 46% 2,978, % 65% ,935 Egypt Gulf Bank 1,135,362 3,569, ,134 18% 573, % 65% ,976 Lebanon (LBPmn) Bank Audi 3,069,841 13,324,464 2,820,122 21% 2,059, % 65% ,273 Blom Bank 2,825,492 8,676,307 2,384,153 27% 1,378, % 65% ,530 Byblos Bank 2,008,686 6,304,894 1,533,561 24% 987, % 65% ,598 Bank of Beirut 825,618 5,104, % % 65% KSA (SAR'000) Samba 30,960,078 92,550,190 17,368,111 19% 11,987, % 65% ,288 Riyad Bank 31,252, ,971,308 26,295,259 23% 22,366, % 65% 553 1,235,730 Al Rajhi 35,833, ,951,251 85,606,163 59% 79,075, % 65% 553 4,368,922 BSFR 24,565,383 93,863,772 10,776,513 11% 9,702, % 65% ,067 SABB 21,933,304 86,892,010 16,275,065 19% 12,595, % 65% ,883 ANB 17,979,407 75,448,667 20,498,751 27% 19,617, % 65% 553 1,083,849 SHB 8,820,107 38,814,947 4,155,986 11% 4,005, % 70% ,355 SIB 9,066,468 29,359,693 5,425,748 18% 5,400, % 70% ,350 Bank Albilad 4,262,986 14,663,825 5,641,912 38% 3,088, % 70% ,740 Bank Al-Jazira 5,954,295 24,517, % % 70% Alinma 16,511,688 25,386,233 4,275,938 17% 4,275, % 70% ,418 Oman (OMR'000) Bank Muscat 1,017,639 4,995,926 1,954,498 39% 932, % 65% ,537 Sohar 148,404 1,033, ,949 36% 183, % 65% ,763 Oman International 330, , ,214 40% 145, % 65% 585 8,518 Kuwait (KWD'000) National Bank of Kuwait 2,309,807 8,502,050 2,322,807 27% 2,322, % 65% ,884 Burgan 333,360 2,347, ,316 18% 416, % 65% ,564 Gulf Bank 473,025 3,564, ,493 24% 846, % 65% ,533 Kuwait Finance Hoouse 1,238,888 7,236, % % 65% Boubyan 260,812 1,064, ,151 23% 242, % 65% ,314 Bahrain Ahli United 1,929,221 16,046,376 3,609,266 22% 2,262, % 65% ,374 Total 497,280,888 2,161,098, ,729,234 25% 427,635, % 65.2% ,260,429 Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 179

181 Arqaam Valuation Approach: We value leverage adjusted returns, growth and adjusted earnings, with amendments for social contribution levies, goodwill amortization, Zakat, coupons on Tier-1/Tier-2 debt. We value capital surpluses/deficits. Our core capital ratios deviate from those published by the banks as we include hidden reserves, such as general banking reserves, available-for-sale reserves, and special reserves, and include the current year s earnings. We adjust for other hidden balance sheet strengths and weaknesses, such as real estate assets, level 3 assets; Our valuations are made up of 4 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, Tier-1/2 coupons), and then add noncash amortizations (such as goodwill amortization). We do not include realized bond gains in our forecasts. We calculate earnings based on a normalized capital structure (12% 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 of 12% of risk-weighted assets and investments in associates. (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 12%; and (3) we include all financial associates (we do not use the 10% threshold the Basel Committee has agreed upon). (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). (4) Adding dividends payable for All in all, our target prices provide a consistent view of the most important value drivers of a bank, such as its returns and capital strength and fully incorporate our asset quality screen. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 180

182 Associates Exhibit 253: UAE banks associates AED 000 Associate & JVs Country Stake Carried at Al Nokhitha Fund UAE 22% 56,298 ADCB MSCI U.A.E Index Fund UAE 28% 25,519 ADCB UH Total 81,817 National Bank for Development Egypt 49% Abu Dhabi National Takaful Company UAE 40% Bosnia Bank Leasing and Real Estate Company Bosnia 32% Bosnia Bank International Bosnia 27% ADIB UH Total 851,503 CBD UH None Deyaar Development UAE 43% MESC Investment Company Jordan 40% Bank of Khartoum Sudan 28% Liquidity management Center Bahrain 25% Jordan Dubai Islamic Bank Jordan 21% Ejar Crances & Equipment UAE 17% DIB UH Total 2,336,439 Network International UAE 51% Union Properties UAE 48% National General Insurance UAE 37% EMIRATES UH Total 2,041,459 First Gulf Financial services UAE 45% Green Emirates Properties UAE 40% Aseel Finance UAE 40% Midmak Properties UAE 16% FGB UH Total 443,810 NBAD UH None Arab Orient Takaful Insurance Company Egypt 20% UNB UH Total 6,091 TAMWEEL UH None MASQ UH None RAKBANK UH None GEPAR Tunisia 20% Saudi IAIC Cooperative Insurance Co KSA 30% Best Invest Tunisia 36% Islamic Insurance Jordan Jordan 20% Salama UH None 57,563 City Engineering UAE 40% Septech Holding UAE 49% Amwal Qatar 47% Shuaa UH None 135,526 Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 181

183 Exhibit 254: Qatar banks associates QAR 000 Associate & JVs Country Stake Carried at National bank of Oman Oman 35% 1,538,990 United Arab Bank UAE 40% 2,374,737 Asteco LLC Qatar 30% 2,256 Massoun Insurance Qatar 50% 10,497 CBQK QD Total 3,926,480 Doha Brokerage and Financial Services Limited India 44% 10,846 DHBK QD Total 10,846 Arab Finance House Lebanon 37% 60,882 Asian Finance Bank Malaysia 42% 223,578 Al Jazeera Islamic Co Qatar 30% 231,966 Durat Al Doha Cayman 40% 198,216 Al Daman Islamic Insurance Qatar 25% 51,334 Retaj Marketing and Project Management Qatar 10% 25,262 Panmure Gordon & Co. UK 21% 93,679 QIBK QD Total 884,917 Mansoor bank Iraq 51% Housing bank for Trade and Finance Jordan 35% Aljazeera Islamic company Qatar 20% Commercial Bank International UAE 24% Tunisian Qatari Bank Tunisia 50% Bank of Commerce and Development Libya 49% QNBK QD Total 4,703,260 National Mass Housing Oman 20% 30,220 CI San Trading Qatar 50% 5,000 Kirnaf Investment and Installment Company Saudi Arabia 48% 305,228 Daman Insurance Qatar 20% 40,400 Linc Facility Services Qatar 33% 2,000 Lusail Waterfront Real estate Company Qatar 50% 1,048,438 MARK QD Total 1,431,286 Syria International Islamic Bank Syria 20% 107,504 Al Tashelat Islamic Company W.L.L. Qatar 49% 46,584 Al Moqawil Company W.L.L. Qatar 49% 1,470 Syria Islamic Insurance Company Syria 20% 14,443 Mackeen Investment and Real Estate Developme Qatar 49% 195,230 QIIK QD Total 365,231 Al Adaman Islamic Insurance Company Qatar 13% Asteco Qatar Qatar 20% Massoun Insurance Services Qatar 50% QATI QD Total 63,797 Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 182

184 Exhibit 255: Egyptian banks associates EGP 000 Associate & JVs Country Stake Carried at CIEB EY None Commercial International Life Insurance Egypt 45% 28,273 Corplease Egypt 40% 64,951 Haykala for investment Egypt 40% 1,802 Egypt Factors Egypt 39% 5,753 International Co. for Security and Services (Falcon) Egypt 40% 5,898 COMI EY Total 106,676 Al Taameer Housing and Ports Company Egypt 35% 12,534 El Taameer for Real Estate Financing Egypt 25% 104,078 New East Cairo Company Egypt 48% 1,846 Finserv Group Egypt 18% 13,509 Alexandria Company for Investments and Urban Developme Egypt 20% 105,000 Guardian for Leasing Egypt 40% 256 HDBK EY Total 237,222 Sogelease Egypt Company Egypt 40% 75,928 NSGB Life Insurance Company Egypt 25% 28,336 ALD Automotive Egypt 13% 2,094 Senouhi Company for Construction Materials Egypt 23% 2,688 NSGB EY Total 109,046 Macrofish Company for Processing and packaging fish Egypt 20% Dwarf Company for the Manufacture of Agricultural Crops Egypt 20% Tanmeyah Micro Finance Company Egypt 25% Arabian Investment Company for Construction Egypt 26% Prime Holding Egypt 22% EGBE EY Total 142,240 Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 183

185 Exhibit 256: Saudi banks associates SAR 000 Associate & JVs Country Stake Carried at Saudi Home Loans Company KSA 40% 320,000 ARNB AB Total 349,417 RJHI AB None Suadi Insurance Company Bahrain 50% Sofinco Saudi Fransi KSA 50% Saudi Fransi Cooperative Insurance Company KSA 33% 51,470 Banque BEMO Saudi Fransi Syria 27% 107,989 BSFR AB Total 170,789 Ajil Finance Services KSA 35% Royal and Sun Alliance Insurance ME Bahrain 21% Al-Alamiya for Cooperative Insurance Company KSA 20% RIBL AB Total 339,954 SAMBA AB Total 209 HSBC Saudi Arabia Ltd KSA 51% 453,689 SABB Takaful KSA 33% 111,502 SABB AB Total 565,191 Wataniya Insurance Company KSA 20% 17,750 AAAL AB Total 17,750 ALBI AB None BJAZ AB None Amex Saudi Arabia Limited KSA 50% Saudi Orix Leasing Company KSA 38% Amlak International for Finance & RE Development KSA 29% Naeem Investment Company KSA 20% Med & Gulf Insurance & Reinsurance Co. KSA 19% SIBC AB Total 894,672 ALINMA AB None MedGulf None The Cooperative Real Estate & Investment Co. KSA 33% Najm Insurance KSA 8% United Insurance Company KSA 50% Waseel Application Services KSA 45% Tawuniya Total 103,317 Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 184

186 Recent results & Previews Q2 12 UAE: ADCB: Net profit increased 38% y/y on lower deposit rates: Net profit AED802mn, 38% y/y & 56% q/q; beating BB by 33.5%. Gross loans up 2.9% y/y & down 0.5% YTD surpassed by 4.9% y/y & 4.2 % YTD growth deposits; LTD 113%, vs. 119% in Q4 & 116% in Q1 11A. ADIB: Higher operating performance absorbed by higher impairments on investments: Net profit AED307mn 1% y/y & 31% vs. Q4 11A (in line with BB). Gross loans 3% y/y & - 1.4% YTD, deposits 10.9% y/y & 4.3% YTD. CBD: Impacted by an increase in loan loss provisions: Net Profit of AED242mn; -8% y/y, 4% below consensus, but up 441% q/q. Net loans increased 2.8%, while deposits dropped by 0.4% YTD. DIB: Net profit attributable to shareholders of AED245mn, 11% y/y & 54% q/q. Loan loss charges stood at AED299mn 19% y/y & -15% q/q. Deposits grew 5% YTD, but plunged 6.6% y/y. Loans increased 1.2% YTD, but decreased 5.6% y/y. For FY 11A, the central Bank curbed DIB s pay-out from AED 0.15 to ENBD: Strong improvement in liquidity, but low quality of net profit: Net profit reached AED641mn, 4% above BB, reflecting a 55% decrease y/y (but Q1 11A was inflated by capital gains on Network Int. partly of offset by LLPs). ENBD is addressing its weak liquidity and upped deposits by 7.9% YTD at the expense of NIM, which fell from 2.85% in Q4 to 2.63% in Q1, in line with expectations. Loans increased 5% y/y & 0.5% q/q. LTD stood at 98% (vs. 92% Q1 11A; 105% Q4 11A). FGB: Higher NII, but with drop in fees & commissions: Revenues increased by 4% y/y on the back of 13% increase in NII partially offset by a 22% drop in Fees & Commissions. Net profit reached AED935mn, reflecting a 7% y/y increase, but an 8% drop q/q. NPL dropped to 4.1% (including DH) vs. 4.5% (including DW & DH) in Q1 11A and 4% in Q4 11A (including DH). Loans went up 7.7% y/y but dropped 10bps YTD while deposits are rose 5.4% y/y and 30bps YTD. LTD arrived flat y/y at 101% (up from 98.6% in Q1 11A). Share buyback put on hold for 2-3 months. Loan growth of 10-12% could be revised after Q2 12e to 6-8%, after a stagnant loan growth in Q1 11A but for now is maintained. Circular on large exposures unlikely to have any effect, though depends on some technicalities regarding shareholders. It does not expect to pick up loans from NBAD or ENBD. MASQ: Lower loan loss provisions could not fully offset revenue pressure: Net profit amounted to AED300mn, down 1.6% y/y, but up 5x q/q. Loans dropped by 8.2% y/y & 1% q/q, surpassed by a drop in deposits of 11.5% y/y & 2.2% q/q. LTD stood at 90% (vs. 87% Q1 11A, 89% Q4 11A). NBAD: Sharp increase in government deposits. Net profit of AED 1,041mn, 12.2% y/y and 43.8% q/q, beating consensus by 4.9%: Revenues increased by 7.9% y/y on the back of 5.9% and 13.3% higher NII and non-interest income respectively. Net loans increased 14% y/y and 2.3% YTD surpassed by 33.1% y/y & 23.6% YTD growth in deposits, deployed in cash, though AED5-6bn may not be recurring of the deposit inflow. LTD down to 87% vs. 102% in Q4 11A, down from 105% in Q1 11A. NBAD still sticks to 10% loan growth for FY 12e despite the circular capping exposures. However, if UAE circular Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 185

187 is not changed, NBAD would need to sell high quality loans. NBAD expects loans to grow by c. 10%, and top line growth of 5-10% (NII & F&C) with cost growth of 10-15%. Loan loss provisioning seen at AED350mn per quarter, which would be 5% higher than FY 11A, but a tad lower as % of loans. This implies a broad net profit guidance of AED3,927mm- AED4,449mn, i.e. 6-20% net profit growth. RAKBANK: Fees & commissions were affected by CB caps, but offset by other revenues: Rakbank reported net profit of AED325.3mn, reflecting an 11% increase y/y & 9.5% q/q. NII rose by 21% y/y & 1.6% q/q, but non-nii fell by 28% y/y, due to new CB restrictions on fees & charges. Gross loans increased 2.7% YTD & 9.8% y/y. UNB: Higher loan loss charges, fully offset by higher net interest margins: Revenues increased by 11% y/y and 26% q/q. Net profit came in at AED 475mn, reflecting a 3% increase y/y & 2.8x q/q, beating consensus. Loans increased by 4% y/y & 1% YTD. Deposits rose by 6% y/y & 5% YTD. LTD stood at 94% down from 98% in Q4 11A & 97% in Q1 11A. TAMWEEL: Impacted by one off litigation provisions relating to the rent of its own office: Revenues rose by 11% y/y & 2% q/q. NII increased 3% y/y, but went down 6% q/q. Loans increased 2% y/y and were flat YTD, but outstanding debt increased 7% YTD and y/y, helped by recent bond issuance. DFM: DFM increased net profit by 14x, but profitability is still very low: Revenues +40% y/y, benefitting from improved trading volumes (88% y/y) & alternative income at 2.2% of total, despite a fall of 18% in investment income. Costs dropped 18% y/y. Shuaa: Still loss making: Shuaa's revenues increased 107% y/y, helped by corporate centre & lending, however, revenues in the divisions investment banking, asset management & brokerage were down. Costs dropped 7.4% y/y and net loss narrowed to AED8.5mn vs. AED26.3mn loss. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 186

188 Exhibit 257: UAE banks Q2 12e earnings preview ADCB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 1,207 1, % 1, % 16.5% 29.1% Non interest income (11.1%) (3.5%) (10.6%) (2.9%) Total income 1,552 1,584 (2.0%) 1,422 1, % 9.2% 19.4% Operating expenses % % (4.0%) 18.4% Operating profit 1,015 1,078 (5.9%) (4.1%) 17.7% 19.9% Provisions % % (44.1%) (28.2%) Net income (34.6%) 1, % (60.7%) 37.7% Cost/income 34.6% 31.9% 39.4% 32.2% Net loans to deposits 109.8% 108.2% 110.4% 110.9% Net loans 126, , % 117, ,073 (3.0%) 7.5% 2.3% Customer deposits 115, , % 106, ,132 (2.5%) 8.2% 4.9% ADIB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (1.5%) % (1.5%) 8.7% Non interest income (1.2%) % (19.8%) 3.3% Total income (1.4%) % (5.1%) 7.8% Operating expenses (3.0%) % 2.4% 9.5% Operating profit (0.2%) % (10.1%) 6.5% Provisions % % (9.3%) 16.6% Net income (13.6%) (2.3%) (10.8%) 0.9% Cost/income 42.7% 43.4% 39.5% 42.7% Net loans to deposits 84.4% 86.2% 90.5% 92.7% Net loans 49,542 49,615 (0.1%) 48,128 48,134 (0.0%) 2.9% 3.1% Customer deposits 58,701 57, % 53,192 51, % 10.4% 10.9% CBD Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (1.9%) % (4.4%) (0.9%) Non interest income % % 6.2% 5.7% Total income (0.5%) % (1.4%) 0.9% Operating expenses % % (2.4%) 0.1% Operating profit (2.0%) % (1.0%) 1.3% Provisions % % 51.4% 39.0% Net income (8.5%) (1.2%) (14.7%) (7.9%) Cost/income 30.0% 28.9% 30.3% 29.2% Net loans to deposits 95.3% 97.3% 92.8% 89.0% Net loans 27,831 27, % 26,128 27,405 (4.7%) 6.5% 0.6% Customer deposits 29,193 28, % 28,153 30,787 (8.6%) 3.7% (7.9%) DIB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (0.2%) (3.8%) 3.7% (0.1%) Non interest income % % 24.3% 2.5% Total income % % 10.0% 0.6% Operating expenses % % 5.0% 0.5% Operating profit % % 13.3% 0.7% Provisions % (27.3%) 74.6% 3.1% Net income % % (26.2%) 8.4% Cost/income 38.6% 40.3% 40.4% 40.4% Net loans to deposits 75.4% 77.1% 71.3% 76.2% Net loans 52,435 52,532 (0.2%) 55,359 55,571 (0.4%) (5.3%) (5.5%) Customer deposits 69,516 68, % 77,645 72, % (10.5%) (6.6%) Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 187

189 ENBD Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 1,752 1,777 (1.4%) 1,731 1, % 1.2% 7.8% Non interest income (36.9%) % (31.9%) 48.7% Total income 2,326 2,686 (13.4%) 2,574 2, % (9.6%) 18.9% Operating expenses (15.2%) % (3.9%) 15.8% Operating profit 1,510 1,723 (12.4%) 1,725 1, % (12.5%) 20.6% Provisions 1,108 1, % 981 1,369 (28.3%) 13.0% (19.6%) Net income (37.4%) 744 1,413 (47.3%) (46.1%) (54.6%) Cost/income 35.1% 35.8% 33.0% 36.8% Net loans to deposits 97.3% 97.9% 88.2% 83.4% Net loans 198, ,130 (2.6%) 176, , % 12.4% 15.4% Customer deposits 204, ,541 (2.0%) 200, ,020 (5.4%) 1.9% (1.6%) FGB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 1,325 1, % 1,220 1, % 8.6% 13.1% Non interest income % (18.3%) 2.5% (17.1%) Total income 1,702 1, % 1,588 1,596 (0.5%) 7.2% 4.6% Operating expenses % % 22.4% 22.3% Operating profit 1,345 1, % 1,296 1,330 (2.6%) 3.7% 1.1% Provisions (7.3%) (10.5%) (6.9%) (10.1%) Net income % % 8.7% 6.5% Cost/income 21.0% 19.5% 18.4% 16.7% Net loans to deposits 101.8% 100.8% 98.2% 98.6% Net loans 109, , % 98,598 97, % 11.5% 7.7% Customer deposits 107, , % 100,394 98, % 7.5% 5.4% MASHREQ Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (14.4%) (6.9%) (21.2%) Non interest income (5.0%) % (20.1%) (7.0%) Total income (2.2%) 1,069 1,093 (2.2%) (14.2%) (14.3%) Operating expenses (1.3%) % (1.7%) 0.1% Operating profit (3.0%) (4.2%) (23.6%) (24.5%) Provisions % (4.1%) (14.2%) (46.0%) Net income (35.4%) (3.4%) (34.2%) (1.6%) Cost/income 49.1% 48.7% 42.9% 41.7% Net loans to deposits 83.7% 83.7% 73.3% 79.7% Net loans 37,930 37, % 38,095 40,022 (4.8%) (0.4%) (7.2%) Customer deposits 45,309 44, % 51,942 50, % (12.8%) (11.5%) NBAD Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 1,529 1, % 1,475 1, % 3.6% 5.9% Non interest income % % 7.8% 13.3% Total income 2,102 2, % 2,007 1, % 4.7% 7.9% Operating expenses % % 11.4% 14.0% Operating profit 1,410 1, % 1,385 1, % 1.8% 5.2% Provisions % (9.3%) 9.2% (14.3%) Net income 1,017 1,041 (2.2%) 1, % (0.8%) 12.2% Cost/income 32.9% 31.8% 31.0% 30.1% Net loans to deposits 93.1% 87.0% 103.9% 101.5% Net loans 171, , % 152, , % 12.0% 14.0% Customer deposits 183, ,699 (2.0%) 147, , % 25.0% 33.1% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 188

190 RAKBANK Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (5.9%) % 3.8% 20.9% Non interest income (0.4%) (28.3%) 0.0% (28.0%) Total income (4.6%) (2.7%) 2.9% 5.0% Operating expenses (2.5%) (4.0%) 8.3% 6.6% Operating profit (6.3%) (1.6%) (1.2%) 3.8% Provisions % (11.4%) 33.8% (23.1%) Net income (17.6%) % (9.4%) 11.0% Cost/income 45.3% 44.3% 43.0% 43.6% Net loans to deposits 99.6% 101.5% 102.8% 98.8% Net loans 19,067 18, % 17,516 17, % 8.9% 9.9% Customer deposits 19,147 18, % 17,045 17,390 (2.0%) 12.3% 6.9% UNB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (0.4%) % 3.4% 16.2% Non interest income (16.3%) (8.5%) (13.3%) (5.2%) Total income (3.7%) % (0.1%) 10.9% Operating expenses % % 6.9% 7.1% Operating profit (6.1%) % (2.3%) 12.2% Provisions % % 39.6% 66.8% Net income (27.3%) (8.9%) (17.6%) 3.3% Cost/income 25.5% 23.6% 23.9% 24.5% Net loans to deposits 90.8% 91.6% 96.2% 94.5% Net loans 59,851 58, % 56,244 56,292 (0.1%) 6.4% 3.2% Customer deposits 65,929 63, % 58,463 59,587 (1.9%) 12.8% 6.4% TAMWEEL Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 4.7% 3.5% Non interest income (33.8%) 7 12 (40.0%) 60.5% 45.5% Total income (0.3%) % 10.7% 11.0% Operating expenses % % 1.5% 8.4% Operating profit (1.3%) (4.7%) 16.4% 12.4% Provisions (25.3%) (53.7%) 69.0% 4.7% Net income % % (9.2%) 28.5% Cost/income 35.3% 34.6% 38.5% 35.4% Net loans 9,488 9, % 9,169 9, % 3.5% 2.1% Qatar QNB: Net profit increased 21.6% y/y, with revenues 25% y/y, but fell 9% vs. Q4, due to lower NIMs, fees & commissions and capital gains. NIM dropped from 3.80% in Q4 11 to 3.27% in Q1 12 on lower loan margins, despite reduced deposit rates. Decent momentum continues with loan growth of 43% y/y and 3.7% vs. Q4 11A. Deposit growth stood at 9.1% vs. Q4 11A and 21.4% y/y, which reduces L/D to 92% from 97% in FY 11A, but still up vs. 78% in Q1 11A. Annualized charge of rate was at 53bps of loans vs. 50bps in Q1 11 and 61 bps in FY 11A, roughly through the cycle level, in our view. QNB expects % FY 12A net profit growth (below consensus of 16.2%). NIMs seen down c. 5bps for FY 12A, as it plans to reinvest in bonds and expects non-nii income to grow in Q2-Q4 vs. Q1 12A. NIM should continue its Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 189

191 downward trend. Foreign expansion is still focused on Turkey (outcome on Denizbank is still uncertain) and Egypt, with no interest in RBS's 40% stake in SHB. CBQ: Lower impairments and associates offset revenue pressure. CBQ reported net profit of QAR471mn, 6% y/y & 25% y/y, c. 22% FY consensus. Revenues fell 1.2% y/y & 3.4% q/q. NII were up 7% y/y, but down 6% q/q, while non-nii was down as much as 17.6% y/y, though up 3% q/q, mainly due to lower investment income and lower fees & commissions. Loans increased 21% y/y and 1% YTD (on low credit demand). Deposits were up 25% y/y and down only 0.3% vs. FY 10A. CBQ anticipates a fall in net interest margins for FY 12e. The sharp drop in NPLs is due to renegotiations. QIB: QIB expects loan growth to pick up driven by enhanced focus on business segments and public sector from merely 1% in FY11 to over 10%. NIM was stable and there were no flashing lights with respect to loan quality. The bank expects the FY 11A investment losses of QAR182mn to be non-recurring. Al Khaliji: reports continued low quality of earnings with net profit of QAR122mn, up 2% y/y, as a sharp drop in impairments and costs could more than offset a lower top line. Capital gains on AFS securities still comprised 33% of net profits vs. 41% in Q1 11. Quality of earnings remains low. Loan loss charge off was positive in Q1 12 vs. 40bps in Q1 11. Loans increased 2.1% YTD and 43.5% y/y and deposits grew 30% y/y but down 0.5% YTD. Net cash is very negative (- 20.9% of assets vs. 17.9% FY 11A). Doha Bank: Net profit increased 7.4% y/y and 69% q/q to QAR 390mn. The Y/Y increase was 44% driven by higher investment income, 50% due to lower impairments (of which 16% is due to lower impairments on investments) and to a marginal extent due to tight cost control. Annualized loan loss charge was 46bps of loans vs. 66bps in Q1 11 and 86bps for FY 11A. Loans were up 13.1% y/y but down 3.8% YTD and deposits increased 11.8% y/y and down 1.1% YTD. QIIB: Net profit increased 10% y/y on strong investment income. Revenues increased 23.7% y/y and 14.6% q/q, supported by strong investment income (88% y/y and 150% q/q). However, we do not think this high investment income is sustainable as the annualized yield on the financial assets equals to 10.2%. NII increased 2.8% y/y but fell by as much as 19.5% q/q on lower loan spreads. Fees & Commissions fell 15% y/y, but was 24% q/q. Loans down were up 4.7% y/y and 0.5% q/q. Deposits also increased 18.6% y/y and 1.1% q/q. LTD are now very low at 57.6% vs. 58.5% a year ago. QIIB is also very liquid with cash balances at 30% of assets. MARK: net profit was reported at QAR353mn (8% y/y and -11% q/q). NII increased by 113% y/y and 2% q/q due to improvement in both asset yields and funding costs while Non-NII fell 21% y/y and 8% q/q mainly due to a decline in F&C (-81% y/y and +7% q/q) which failed to be offset by investment income (20% y/y and 8% q/q). Loans increased by 36% y/y and 3% q/q (the second best after QNB of all Qatari banks), while deposits were up by 44% y/y and 5% q/q. C/I improved to 17.8% vs. 21.3% in Q1 11 and in line with previous quarter (17.5%). Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 190

192 Exhibit 258: Qatar banks Q2 12e earnings preview CBQ Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 2.4% 7.4% Non interest income % % (4.1%) (17.1%) Total income % % 0.2% (1.2%) Operating expenses % % 7.2% 2.8% Operating profit % % (2.8%) (3.0%) Provisions % (35.9%) 19.6% (33.4%) Net income % % (4.0%) 5.6% Cost/income 32.0% 31.1% 29.9% 29.9% Net loans to deposits 109.6% 111.0% 114.5% 114.9% Net loans 43,427 42, % 39,788 34, % 9.1% 20.7% Customer deposits 39,637 37, % 34,737 30, % 14.1% 25.0% QNB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 2,270 2, % 1,751 1, % 29.6% 31.6% Non interest income % % 16.2% 3.9% Total income 2,898 2, % 2,291 2, % 26.5% 25.3% Operating expenses % % 37.6% 23.6% Operating profit 2,396 2, % 1,926 1, % 24.4% 25.6% Provisions % (3.3%) 78.6% 49.5% Net income 2,137 2, % 1,807 1, % 18.3% 21.6% Cost/income 17.3% 16.3% 15.9% 16.5% Net loans to deposits 92.4% 92.1% 76.7% 78.2% Net loans 206, , % 150, , % 37.2% 43.0% Customer deposits 223, , % 196, , % 13.9% 21.4% Doha Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (1.2%) 3.1% (0.4%) Non interest income (17.3%) (9.8%) (0.2%) 8.8% Total income (3.2%) (3.5%) 2.3% 2.0% Operating expenses % % (1.9%) (1.2%) Operating profit (5.8%) (6.6%) 4.4% 3.5% Provisions % (7.2%) 16.7% (27.3%) Net income (10.5%) (6.5%) 2.9% 7.4% Cost/income 31.8% 30.0% 33.2% 31.0% Net loans to deposits 93.6% 94.2% 94.9% 93.1% Net loans 30,601 29, % 27,714 26, % 10.4% 13.1% Customer deposits 32,684 31, % 29,197 28, % 11.9% 11.8% Masraf Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 53.1% 112.8% Non interest income % % (31.0%) (21.4%) Total income % % (4.7%) 17.0% Operating expenses % % 7.3% (2.0%) Operating profit % % (6.9%) 22.2% Provisions % % (7.3%) % Net income (2.8%) % (5.5%) 7.8% Cost/income 17.7% 17.8% 15.8% 21.3% Net loans to deposits 73.4% 73.8% 69.7% 78.6% Net loans 37,763 35, % 28,331 26, % 33.3% 35.6% Customer deposits 51,466 48, % 40,626 33, % 26.7% 44.5% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 191

193 QIIB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 4.0% 2.8% Non interest income (33.8%) (5.8%) 11.4% 58.5% Total income (4.2%) % 6.3% 23.7% Operating expenses % % 25.6% 16.3% Operating profit (15.1%) % 0.7% 25.3% Provisions (55.5%) % 33.7% 501.0% Net income (8.1%) % (1.3%) 10.4% Cost/income 26.8% 17.4% 22.7% 18.5% Net loans to deposits 58.9% 57.6% 59.3% 71.7% Net loans 10,990 10, % 10,122 11,050 (8.4%) 8.6% (4.7%) Customer deposits 18,659 18, % 17,067 15, % 9.3% 18.6% QIB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (6.3%) (3.9%) 17.9% 20.8% Non interest income (7.6%) % 6.1% 51.1% Total income (6.8%) % 12.6% 32.2% Operating expenses % % 11.0% 42.5% Operating profit (10.7%) % 13.3% 28.4% Provisions % (115.3%) (4779.1%) 73.0% Net income (80.6%) % (79.9%) 21.7% Cost/income 32.0% 29.0% 32.4% 26.9% Net loans to deposits 103.5% 106.4% 95.0% 96.4% Net loans 32,574 31, % 24,727 24,744 (0.1%) 31.7% 28.9% Customer deposits 31,457 29, % 26,031 25, % 20.8% 16.8% Khaliji Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % (9.2%) (8.4%) Non interest income (23.1%) % (44.6%) (3.8%) Total income (6.1%) % (23.8%) (6.8%) Operating expenses % % (8.0%) (10.6%) Operating profit (27.3%) % (36.5%) (4.0%) Provisions % % 40.1% (67.4%) Net income (41.7%) % (45.3%) 1.5% Cost/income 53.7% 40.3% 44.5% 42.0% Net loans to deposits 95.6% 95.8% 84.8% 83.4% Net loans 12,112 11, % 8,456 8, % 43.2% 43.6% Customer deposits 12,673 12, % 9,969 9, % 27.1% 25.1% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 192

194 Egypt: CIB: A strong start to the year with 64% y/y hike in earnings beating consensus by 13%, on the back of higher margins, much lower loan loss charges and improved cost efficiency. Net profit EGP505mn, up 64% y/y but down -8% q/q, 13% ahead of consensus and 26.6% of FY consensus, supported by strong boost in net interest margins, up by 79bps and 55bps y/y and q/q respectively on the back of higher asset yields (T bills). Lower than expected loan loss provisioning of 16bps vs. 129bps a year ago and 8bps in Q4 11 (75bps for the full year). NPL slightly up to 2.9% but coverage comfortable at 155%. Investment income fell by almost 93% on lower trading income. C/I also improved, down to 36% from 46% a year ago, with costs coming down 1% y/y and 13% sequentially. A pickup in deposit growth at 14% y/y & 4% YTD outpaced lending at 10% & -2% YTD, bringing down LTD to 56.5%. CAE: Strong start to the year as well, with net profit of EGP127m, 116% y/y & 88% vs. Q4 11, 60% ahead of consensus.nii increased 18% y/y & + 3% q/q driven by loan growth & NIM (3.86% vs. 3.57% in Q1, though slightly lower than Q4 (3.91%)). Costs up by 6% y/y & down by 7% q/q. C/I 47.4% vs. 54.1% in Q1 & 53.7% in Q4. Loan loss charges -46% y/y to 53bps in Q1 12 vs. 109bps in Q1 11 & 117bps in Q4 11. Impaired loans dropped from 1.9% FY 11A to 1.6% with coverage at 198%. Loans 10% y/y & 10% YTD & Deposits - 2% y/y & 2% YTD. NSGB: Another transitional year due to higher loan loss provisions. Loan growth might be c 12% helped by retail. NIM could surpass FY 11A. NPLs probably edging up. The loan loss charge of just 40bps in FY 11A was well below CIB (75bps) and CAE (117bps), and should be at least a recurring level if not more. Net profit in Q1 12 fell 4% y/y as strong NIMs could not offset higher loan loss charges. Charge offs increased to 86bps vs. 19bps in Q1 and 38bps in Q4 (catching up with peers as NSGB's LLPs were very low in FY 11A). NPLs increased from 3.04% FY to 3.15%. Net profit before tax 5% y/y, but after -4% due to increased effective corporate tax rate in Egypt (up from 17.3% to 24.4%). Loans -1% YTD, with retail 5% YTD & corporate loans -2% YTD. Deposits +1% YTD o/w retail +7% YTD & corporate -2%. Egyptian Gulf Bank: Net profit in Q1 12 amounted to EGP33.4mn, up 57% y/y & 8x Q4 11. Earnings growth was helped by investment losses in Q1 11 & Q4 11. Loan loss charges were negative at -45bps of gross loans annualized vs. -197bps in Q1 11 & 122bps in Q4 11 and 52bps for FY 11A. But impaired loans increased from 10.7% FY 11A to 14.1% & coverage is down from 126% FY 11A to 97%. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 193

195 Exhibit 259: Egyptian banks Q2 12e earnings preview CIB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y EGP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 30.8% 37.4% Non interest income % (14.8%) 41.7% 7.6% Total income 1,259 1, % % 33.7% 27.9% Operating expenses % (14.4%) 20.5% (0.7%) Operating profit % % 42.2% 52.5% Provisions % (9.6%) (25.8%) (86.5%) Net income % % 84.6% 64.2% Cost/income 35.1% 35.9% 39.0% 46.2% Net loans to deposits 55.8% 54.0% 55.4% 55.8% Net loans 42,068 40, % 37,248 36, % 12.9% 10.1% Customer deposits 75,333 74, % 67,288 65, % 12.0% 13.7% CAE Arqaam Capital Reported q/q Reported Reported q/q y/y y/y EGP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (6.0%) 39.3% 17.7% Non interest income (26.6%) % (7.9%) 27.6% Total income (0.4%) (3.8%) 24.7% 20.6% Operating expenses % (7.7%) 19.2% 5.6% Operating profit (4.7%) % 30.7% 38.3% Provisions % (40.8%) 51.5% (46.0%) Net income (4.2%) % 48.3% 116.3% Cost/income 49.6% 47.4% 51.9% 54.1% Net loans to deposits 60.0% 61.0% 54.2% 54.5% Net loans 12,738 12, % 11,274 11,488 (1.9%) 13.0% 10.0% Customer deposits 21,216 20, % 20,812 21,082 (1.3%) 1.9% (1.8%) NSGB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y EGP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 24.0% 26.5% Non interest income % (9.3%) 20.4% (10.7%) Total income % % 22.9% 14.0% Operating expenses % (4.9%) 17.9% 9.9% Operating profit % % 25.9% 16.6% Provisions % % 313.4% 386.1% Net income % % (3.7%) (3.9%) Cost/income 35.8% 38.0% 37.3% 39.4% Net loans to deposits 66.7% 66.2% 66.8% 61.5% Net loans 36,006 34, % 33,752 32, % 6.7% 5.7% Customer deposits 53,955 52, % 50,516 53,330 (5.3%) 6.8% (1.8%) HDB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y EGP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 23.4% 27.0% Non interest income % (2.3%) 97.0% Total income % % 12.5% 46.4% Operating expenses % 7.7% 29.0% Operating profit % % 22.7% 97.9% Provisions % 4-4 (201.9%) 419.1% (617.7%) Net income % % 6.1% 20.2% Cost/income 65.0% 65.8% 67.9% 74.7% Net loans to deposits 85.5% 85.5% 83.6% 86.8% Net loans 6,708 6, % 6,307 6, % 6.4% 4.7% Customer deposits 7,844 7, % 7,545 7, % 4.0% 6.3% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 194

196 EGB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y EGP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (2.4%) 22.0% 16.8% Non interest income (3.6%) (190.1%) 81.9% (270.0%) Total income % % 32.1% 97.3% Operating expenses (8.6%) % 8.3% 30.1% Operating profit % % 71.8% 498.1% Provisions 13-4 (419.2%) (178.7%) (13.1%) (78.6%) Net income (48.9%) 4 21 (83.0%) 371.5% 57.3% Cost/income 51.3% 56.5% 62.6% 85.6% Net loans to deposits 57.5% 56.0% 71.4% 71.5% Net loans 3,208 3, % 3,289 3,299 (0.3%) (2.5%) (5.6%) Customer deposits 5,582 5, % 4,606 4,614 (0.2%) 21.2% 20.4% Source: Company Data, Zawya, Arqaam Capital Research Lebanon: BLOM: Net profit increased 5% y/y as capital gains were used for increased loan loss provisions. Net profit amounted to LBP125.3bn, 5% y/y and -12% q/q, slightly below consensus. Revenues 26% y/y supported capital gains, with NII +1% only. NIM contracted both y/y & Q/Q by 11bps and 24bps respectively. Additions to LLR significantly increase (as expected) at an annualized 2.94% vs. 0.67% in Q4 FY 11A and 0.27% in Q1 FY 11A. C/I fell 1.7pp to 33.3% (best in class). Loans up by 7% y/y and a modest 1% q/q with deposits up 4% y/y and 3% q/q. Audi: Bottom line fell short of consensus by c5%, with a growth of 6% y-o-y and a drop of 3% vs. Q4. Loans +3.4% y/y and 4.3% sequentially and a slight contraction in deposits (2% y/y and 1.7% q/q). Byblos recorded a very weak underlying performance in Q1 12A and capital gains contributed to 90% of net profit. Byblos reports 11% y/y growth in net earnings (but a 26% fall q/q) due to capital gains. We see very weak U/L results due to sharp NIM compression, a spike in costs and LLPs. NII -22% y/y & -12% vs. Q4, mainly due to lower asset yields. Revenues 8% y/y, but excluding capital gains. Bank of Beirut: Net profit of LBP33bn was down -19% q/q but +9% y/y on the back of higher NIM, despite lower capital gains. Margin improvement of 58bps y/y and 19bps q/q offset by -7% y/y and -26% q/q drop in investment gains. Modest 4% growth in loans y/y vs. -5% contraction q/q, with deposits recording 10% growth y/y but slightly edging down q/q. Additions to loan loss reserve remains much lower than peers at an annualized 3bps vs. 6bps in Q4 FY 11A. C/I increased substantially q/q to c58% from 50% FY 11A. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 195

197 Exhibit 260: Lebanese banks Q2 12e earnings preview Audi Arqaam Capital Reported q/q Reported Reported q/q y/y y/y LBP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 10.1% 10.9% Non interest income (9.6%) (3.6%) 8.7% 16.0% Total income (4.3%) (1.0%) 9.5% 13.2% Operating expenses % (2.2%) 10.3% 4.9% Operating profit (9.6%) (0.0%) 8.8% 20.4% Provisions (20.1%) % 16.3% 102.8% Net income (4.3%) (1.8%) 1.7% 4.3% Cost/income 46.2% 43.0% 45.9% 46.4% Net loans to deposits 36.3% 36.4% 33.9% 34.8% Net loans 13,465 13, % 12,914 13,058 (1.1%) 4.3% 2.4% Customer deposits 37,133 36, % 38,091 37, % (2.5%) (2.0%) Blom Arqaam Capital Reported q/q Reported Reported q/q y/y y/y LBP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (2.0%) 5.6% 1.4% Non interest income (42.3%) (8.4%) 20.0% 90.4% Total income (16.7%) (3.8%) 9.4% 26.4% Operating expenses % (1.2%) 6.9% 3.6% Operating profit (26.0%) (5.6%) 11.2% 42.0% Provisions (77.5%) 4 6 (35.9%) 302.7% % Net income % (2.0%) 4.7% 2.2% Cost/income 40.8% 33.3% 41.7% 40.6% Net loans to deposits 27.6% 27.5% 27.2% 27.1% Net loans 8,810 8, % 8,329 8, % 5.8% 5.4% Customer deposits 31,882 31, % 30,624 29, % 4.1% 3.9% Byblos Arqaam Capital Reported q/q Reported Reported q/q y/y y/y LBP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (8.3%) 3.9% (21.5%) Non interest income (24.5%) % (1.5%) 71.0% Total income (1.6%) % 1.7% 7.5% Operating expenses (2.9%) % 5.3% 12.4% Operating profit (0.1%) % (1.7%) 2.8% Provisions (28.1%) 2 16 (88.6%) 519.3% (2.2%) Net income % % (20.4%) 11.5% Cost/income 51.1% 51.8% 49.4% 49.6% Net loans to deposits 30.4% 30.8% 31.2% 30.8% Net loans 6,252 6, % 5,916 5, % 5.7% 6.9% Customer deposits 20,539 19, % 18,987 18, % 8.2% 7.2% Bank of Beirut Arqaam Capital Reported q/q Reported Reported q/q y/y y/y LBP mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % (7.4%) 67.4% Non interest income (7.7%) (42.6%) 49.4% (7.1%) Total income % % 7.6% 23.8% Operating expenses (6.5%) % 8.6% 26.8% Operating profit % % 6.6% 19.8% Provisions % 0-3 (99.9%) ( %) (112.8%) Net income % % (1.8%) 8.8% Cost/income 48.5% 57.7% 48.1% 56.3% Net loans to deposits 43.6% 42.8% 45.6% 45.1% Net loans 5,129 4, % 4,807 4, % 6.7% 4.4% Customer deposits 11,753 11, % 10,531 10, % 11.6% 9.9% Source: Company Data, Zawya, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 196

198 KSA ANB: Decent Q1 12, but with lower growth than its peers. Net profit of SAR 656mn, +12% y/y & 79% q/q (easy comparison base), helped by non-nii, a few pp above consensus. Revs +7% y/y & +7% q/q, while NII -3% y/y & -3% q/q. Assets increased +4% y/y & 7% q/q, loans +12% y/y & 4% q/q, while deposits up +2% y/y & 3% q/q. L/D at 83% vs. 76% Q1 11. Al Rajhi: Net profit of SAR 2bn, +18% y/y, 1% q/q, 9% ahead of BB, NII +4% y/y, revenues +17% y/y & 9% q/q. Assets 15% y/y, 6% q/q, loans 23% y/y, 8% q/q, deposits +16% y/y & 7% q/q. BSFR: Net profit SAR 789mn, +10% y/y & +19% q/q, 1% ahead of BB. Revenues +6 % y/y, NII +6%, assets +18%, loans +16% & deposits +18% y/y. Riyad: Net profit of SAR901m +22% Y/Y & 16% Q/Q, with NII +9% Y/Y, but -1% Q/Q. Assets +2% Y/Y & 1% Q/Q, Loans +4% Y/Y & 0.6% Q/Q, Deposits +5% Y/Y & -0.2% Q/Q, below the growth of its peer s, but NIMs are maintained. Samba: Net income of SAR 1,145mn, +2% y/y & +21% q/q, c. 5% below BB consensus & 24% of FY 12e consensus. NII fell 0.5% y/y & 5% q/q as net interest margin contracted. Loans moved up 15% y/y & 4% q/q, while deposits were 4% y/y & 2% q/q. Loan/deposit is now only 66% vs. 70% in Q1 11A. SABB: Net profit of SAR 854mn, + 14% y/y & 30% q/q and 13% ahead of BB. NII +7% y/y & 6% q/q, revenues 1% y/y & 1% q/q. Assets +14% y/y, +8% q/q, loans +20% y/y & 5% q/q; deposits +15% y/y & 2% q/q. SHB: Net profit SAR 290mn, +22% y/y & 25% q/q. Revenues +11%, NII +4%, assets +18%, loans +22%, deposits +22% y/y. Albilad: Net profit of SAR 511.5mn (+378% y/y & 822% q/q) on a sale of a property. NII +18% y/y & 6% q/q, assets +30% y/y & 3% q/q, loans +19% y/y & 9% q/q, Deposits + 31% y/y & -1% q/q. Aljazira : Net profit of SAR 143mn, up + 131% y/y & 31% vs. Q4 (12% ahead of BB), revenues + 55%, NII+20%, assets +20%, loans +26% & deposits 20% y/y. SIB: Net profit of SAR 212mn, +2% y/y & 44% q/q. NII bell by 8% y/y & 1% q/q, as loans fell 9% y/y (due to large redemptions in Q4) but moved up 3% q/q as SIB plans to replace the loans. Alinma: Net profit of SAR 150mn up 114% y/y & 10% q/q. Revenues advanced 50% to SAR 393mn, but were down (20%) vs. Q4. Net interest income increased 51% y/y and 18% q/q (NIM up). Total assets were up 35% y/y & 17% q/q, with loans +35% y/y & +14% q/q & deposits 89% higher y/y and 35% q/q. ROAE at a low 4%. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 197

199 Exhibit 261: Saudi Arabian banks Q2 12e earnings preview ARNB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % (3.6%) (2.7%) Non interest income (3.3%) % 15.9% 32.2% Total income 1,185 1,196 (0.9%) 1,158 1, % 2.3% 7.3% Operating expenses % (10.9%) 16.9% (1.6%) Operating profit (5.0%) % (5.7%) 13.6% Provisions (13.8%) (19.1%) 40.9% 32.2% Net income (3.3%) % (9.0%) 11.6% Cost/income 40.6% 38.0% 35.5% 41.4% Net loans to deposits 82.8% 83.3% 81.7% 81.7% Net loans 77,082 75, % 69,087 69, % 9.4% Customer deposits 93,051 90, % 84,520 84, % 7.3% RJHI Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 2,421 2, % 2,278 2, % 6.3% 4.2% Non interest income 1,042 1,100 (5.3%) % 34.9% 56.5% Total income 3,463 3, % 3,051 2, % 13.5% 16.7% Operating expenses % (3.0%) 14.7% 7.0% Operating profit 2,475 2,478 (0.1%) 2,190 2, % 13.0% 20.9% Provisions (34.9%) (0.7%) (12.4%) 33.6% Net income 2,172 2, % 1,843 1, % 17.8% 18.3% Cost/income 28.5% 27.7% 28.2% 30.2% Net loans to deposits 81.6% 81.6% 76.8% 76.8% Net loans 155, , % 127, , % 18.8% Customer deposits 190, , % 166, , % 11.8% BSFR Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 7.7% 5.9% Non interest income (1.8%) (4.8%) 9.9% 6.5% Total income 1,260 1, % 1,163 1, % 8.4% 6.1% Operating expenses % (10.3%) 5.3% (8.4%) Operating profit % % 9.8% 14.0% Provisions % % 249.4% 175.7% Net income % % 3.2% 10.1% Cost/income 30.3% 30.3% 31.2% 35.1% Net loans to deposits 87.4% 86.6% 85.5% 87.4% Net loans 99,719 97, % 85,200 83, % 17.0% 16.1% Customer deposits 114, , % 99,708 96, % 14.4% 17.3% RIBL Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 1,114 1, % 1, % 4.4% 8.6% Non interest income (3.3%) (7.3%) 15.8% 11.0% Total income 1,696 1, % 1,570 1, % 8.1% 9.4% Operating expenses % % 0.7% (1.4%) Operating profit 1,045 1,054 (0.9%) % 13.2% 16.9% Provisions (20.7%) (45.4%) 38.7% (4.6%) Net income % % 10.5% 21.6% Cost/income 38.4% 36.9% 41.2% 41.0% Net loans to deposits 81.2% 81.5% 84.7% 83.5% Net loans 116, , % 112, , % 3.7% 2.8% Customer deposits 143, , % 132, ,404 (0.1%) 8.2% 5.4% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 198

200 SAMBA Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income 1,095 1, % 1,133 1, % (3.4%) (0.5%) Non interest income (15.1%) (20.7%) 24.1% 15.9% Total income 1,717 1,796 (4.4%) 1,635 1,701 (3.9%) 5.0% 5.6% Operating expenses % % (0.8%) 6.0% Operating profit 1,200 1,282 (6.4%) 1,113 1,216 (8.5%) 7.8% 5.4% Provisions (29.0%) (88.1%) 784.2% 48.2% Net income 1,102 1,145 (3.7%) 1,102 1,123 (1.9%) (0.0%) 1.9% Cost/income 30.1% 28.6% 31.9% 28.5% Net loans to deposits 66.4% 66.3% 59.3% 60.5% Net loans 94,731 92, % 82,366 81, % 15.0% 14.1% Customer deposits 142, , % 138, , % 2.7% 4.1% SABB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 4.4% 6.8% Non interest income % % (8.9%) (6.8%) Total income 1,331 1, % 1,348 1, % (1.2%) 1.3% Operating expenses % (1.4%) 0.7% (6.4%) Operating profit % % (2.1%) 5.2% Provisions % % (40.2%) (45.8%) Net income % % 2.0% 13.7% Cost/income 30.7% 31.2% 30.1% 33.7% Net loans to deposits 80.5% 81.7% 81.7% 80.5% Net loans 94,656 91, % 82,354 79, % 14.9% 14.2% Customer deposits 117, , % 100,752 99, % 16.7% 12.6% AAAL Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (1.4%) 8.6% 3.6% Non interest income (4.3%) % 10.6% 25.1% Total income % % 9.3% 11.3% Operating expenses (5.8%) (8.0%) 5.4% 2.9% Operating profit % % 11.8% 17.6% Provisions % (29.0%) 16.3% (37.0%) Net income % % 11.1% 31.9% Cost/income 37.2% 39.6% 38.6% 42.8% Net loans to deposits 83.7% 84.1% 81.0% 85.7% Net loans 41,392 40, % 35,921 34, % 15.2% 15.1% Customer deposits 49,431 47, % 44,339 40, % 11.5% 17.2% ALBI Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 15.2% 17.6% Non interest income (17.0%) % 17.6% 57.4% Total income (6.4%) % 16.3% 36.1% Operating expenses (1.3%) % 3.4% 6.8% Operating profit (11.8%) % 36.5% 91.7% Provisions (36.2%) (1.5%) (16.6%) 28.9% Net income (0.2%) % 69.1% 149.5% Cost/income 54.2% 51.4% 61.0% 65.5% Net loans to deposits 68.4% 65.7% 72.5% 75.2% Net loans 16,508 15, % 13,017 13, % 26.8% 15.7% Customer deposits 24,146 22, % 17,959 17, % 34.5% 32.4% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 199

201 BJAZ Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 19.9% 19.3% Non interest income (17.7%) % 47.2% 124.1% Total income (6.0%) % 30.2% 54.6% Operating expenses (4.5%) (8.8%) 12.8% 7.8% Operating profit (7.8%) % 62.1% 231.9% Provisions (36.4%) 44-4 (1135.5%) (31.0%) (1223.5%) Net income % % 125.2% 132.1% Cost/income 56.0% 55.2% 64.7% 79.1% Net loans to deposits 73.2% 72.5% 71.2% 75.8% Net loans 25,822 25, % 21,783 22,034 (1.1%) 18.5% 13.8% Customer deposits 35,294 34, % 30,598 29, % 15.3% 19.0% SIBC Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (0.2%) % (10.0%) (8.1%) Non interest income (30.8%) % 13.5% 71.0% Total income (11.4%) % (4.3%) 10.7% Operating expenses % (2.4%) 0.5% (2.7%) Operating profit (17.2%) % (6.9%) 18.5% Provisions (47.1%) % (10.2%) 88.0% Net income (7.8%) % (6.8%) 1.3% Cost/income 37.0% 32.5% 35.2% 37.0% Net loans to deposits 75.4% 75.7% 83.1% 84.9% Net loans 28,666 27, % 30,468 30,634 (0.5%) (5.9%) (8.7%) Customer deposits 38,016 36, % 36,645 36, % 3.7% 2.4% ALINMA Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 20.3% 38.1% Non interest income % % 268.2% -- Total income % % 39.6% 34.8% Operating expenses % % 17.1% -- Operating profit % % 81.4% 126.2% Provisions % % 271.1% -- Net income % % 72.0% 129.8% Cost/income 54.5% 53.7% 65.0% 72.4% Net loans to deposits 128.0% 129.4% 151.8% 170.1% Net loans 30,023 27, % 24,064 22, % 24.8% 22.7% Customer deposits 23,462 21, % 15,851 13, % 48.0% 61.2% Source: Company Data, Zawya, Arqaam Capital Research Kuwait NBK: A stagnant Q1 12A with net profit of KWD 81mn, +0.3% y/y, as slightly higher loan loss charges could be offset by lower operating expenses. Annualized charge off rate stood at 39bps vs. 33bps, but this was helped by some releases from general reserves. Loans increased 4.5% y/y & 1.1% YTD, while deposits up 0.5% y/y & 5.8% YTD. Boubyan: Net profit increased 9.6% y/y, but ROE still only 4%. Revenues fell 3% y/y, but increased 10% q/q. NII increased 33% y/y & 14% q/q, but F&C & investment income fell sharply. Annualized additions to loan loss reserves were 186bps vs. 313bps. Loans increased 23% y/y & 6% YTD & deposits 21% y/y & + 4% YTD. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 200

202 Burgan Bank: Revenues reached KWD 42.6mn reflecting a growth of 10% y/y and 11% q/q, 5% ahead of consensus. Loans grew by 7% from year end 2011 with 12% growth y/y. Deposits grew by 9% vs. 12% increase y/y. Burgan expects 4-5% loan growth in Q2 11e after 7% in Q1 11A (mainly on construction & services) outperforming its peers, with stable NIMs. Bank sees ROI of 10% on Tekfen deal within 18 months. Tekfen could double or triple its business volumes with its existing branch network and the liquidity of the group. Expansion of network on hold until ROI hits 10%. Gulf Bank: Net profit fell 25% y/y due to provisions for loans and investments. Bank recorded a strong operating profit, with revenues + 18% y/y, helped by NII +18% (lower cost of funds & higher yields), F&C +4%, despite lower capital gains. Costs increased 22% y/y, pushing C/I up from 31.4% in Q1 11A to 32.7%. Loan loss charge offs stood at 221bps (o/w 54bps specific). Gulf bank also incurred investment losses of KWD 3.8mn (50% of profits). Loans +2.6% y/y & (0.1%) YTD & deposits +3.9% y/y & (1.5%) YTD. KFIN: Revenues -6% y/y & -46% q/q (due to decrease in noninterest income by 20% y/y and 62% q/q). LLC decreased by 26% y/y and 77% q/q, leaving net profit increase by 23% y/y. Slight increase in net loans of 1.3% and deposits by 3.4% from FY 11A. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 201

203 Exhibit 262: Kuwaiti banks Q2 12e earnings preview NBK Arqaam Capital Reported q/q Reported Reported q/q y/y y/y KWD mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (0.6%) 5.9% 1.8% Non interest income % % 1.6% (1.0%) Total income % % 4.7% 1.0% Operating expenses % (0.1%) 1.3% (5.2%) Operating profit % % 6.3% 3.9% Provisions % % (48.4%) 21.4% Net income % (18.3%) 23.3% 0.3% Cost/income 30.7% 30.0% 31.7% 32.0% Net loans to deposits 115.8% 114.9% 121.1% 110.5% Net loans 8,346 8, % 7,866 7,912 (0.6%) 6.1% 4.5% Customer deposits 7,207 7, % 6,495 7,161 (9.3%) 11.0% 0.5% KFH Arqaam Capital Reported q/q Reported Reported q/q y/y y/y KWD mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 12.7% 6.8% Non interest income % (8.6%) 3.1% (19.8%) Total income % (2.7%) 8.3% (6.0%) Operating expenses % (5.1%) 10.1% 1.7% Operating profit % % 6.5% (14.5%) Provisions (10.0%) % (37.8%) (26.0%) Net income % (25.8%) 213.9% 23.1% Cost/income 51.7% 56.4% 50.8% 52.2% Net loans to deposits 75.2% 73.7% 84.6% 78.7% Net loans 6,972 6, % 7,074 6, % (1.4%) 4.3% Customer deposits 9,274 9, % 8,360 8, % 10.9% 11.4% Gulf Bank Arqaam Capital Reported q/q Reported Reported q/q y/y y/y KWD mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income (1.9%) % 6.9% 17.7% Non interest income (21.2%) % (30.7%) 14.0% Total income (8.7%) % (8.2%) 16.3% Operating expenses (15.4%) (8.3%) 11.8% 21.2% Operating profit (5.4%) % (14.9%) 14.1% Provisions (7.6%) % (30.0%) 39.0% Net income (4.9%) 9 13 (31.6%) 24.0% (10.9%) Cost/income 30.3% 32.7% 24.9% 31.4% Net loans to deposits 102.5% 102.5% 102.0% 103.8% Net loans 3,429 3, % 3,288 3, % 4.3% 2.6% Customer deposits 3,347 3, % 3,223 3, % 3.8% 3.9% Burgan Bank Arqaam Capital Reported q/q Reported Reported q/q y/y y/y KWD mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 3.0% 9.6% Non interest income % % 16.0% 10.2% Total income % % 7.2% 9.8% Operating expenses % (1.4%) 15.3% 1.7% Operating profit % % 2.6% 15.4% Provisions % % 13.8% 13.3% Net income (13.0%) % (1.6%) 23.6% Cost/income 39.2% 37.7% 36.5% 40.7% Net loans to deposits 77.4% 79.1% 86.1% 83.9% Net loans 2,447 2, % 2,152 2, % 13.7% 12.1% Customer deposits 3,161 3, % 2,500 2,559 (2.3%) 26.5% 18.8% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 202

204 Boubyan Bank Arqaam Capital Reported q/q Reported Reported q/q y/y y/y KWD mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 22.3% 32.8% Non interest income % -3 5 (165.9%) (162.6%) (67.6%) Total income % 7 14 (52.4%) 114.1% (3.2%) Operating expenses % % 6.9% 8.3% Operating profit % 0 8 (103.3%) (2794.9%) (12.8%) Provisions 3 5 (43.5%) -2 7 (125.7%) (259.4%) (27.3%) Net income % % 75.2% 9.6% Cost/income 51.9% 50.8% 103.8% 45.3% Net loans to deposits 87.4% 87.4% 84.3% 85.8% Net loans 1,102 1, % % 19.8% 22.8% Customer deposits 1,261 1, % 1,091 1, % 15.6% 20.5% Source: Company Data, Zawya, Arqaam Capital Research Oman: Bank Muscat: Net profit grew 20% y/y & 10% q/q to OMR 33.4mn, 5% above consensus & matching 24.4% of the FY 12e consensus. Net interest income increased 1.2% y/y (13% excluding one offs that occurred in Q1 11A) & 2.9% sequentially, helped by strong loan growth, partly offset by pressure on NIMs. Loans increased 24.7% y/y & 3.7% YTD & deposits increased 33.5 % y/y & 6.4% YTD. Oman International Bank: Net earnings fall -45% y/y on loan loss provisions (+86% y/y on a single exposure) & lower dividend income. Revenues fell 4% y/y & 2% q/q with NII +3% y/y & 6% q/q & other income -18% y/y & -21% q/q due an 85% y/y fall in dividend income (in Q1 11A, it enjoyed strong dividends from a fund). Costs increased 10% y/y & C/I increased to 57.1% vs. 49.9%. Annualized charge off stood at 126bps vs. 76bps in Q1 11A. Loans +13% y/y & 3% YTD & deposits +21% y/y & 2% YTD. Sohar: Net profit increased 74% y/y & 49% q/q to OMR 5.3mn, equal to 30% of the BB FY 12e consensus. Cost/income reached 47.9% vs. 59.0% in Q1 11A and 47.8% in Q4 11A. Total assets increased 30.8% y/y & 8.6% q/q, while outstanding loans & advances grew by 13.2% y/y & 3.6% q/q. Deposits were up 26.7% y/y & 1.7% q/q with L/D at 91% vs. 99% in Q1 11A & 87% YE 11A. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 203

205 Exhibit 263: Omani banks Q2 12e earnings preview Bank Muscat Arqaam Capital Reported q/q Reported Reported q/q y/y y/y OMR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % (2.8%) 10.9% 1.2% Non interest income (5.9%) (18.9%) 26.3% 8.8% Total income % (7.6%) 14.9% 3.4% Operating expenses (0.3%) (5.6%) 12.5% 6.5% Operating profit % (9.0%) 16.7% 1.3% Provisions % 5 10 (54.7%) 104.0% (32.6%) Net income (4.9%) % 8.2% 20.1% Cost/income 41.2% 42.4% 42.1% 41.2% Net loans to deposits 101.6% 100.6% 101.6% 109.7% Net loans 5,138 4, % 4,267 3, % 20.4% 24.7% Customer deposits 5,058 4, % 4,200 3, % 20.4% 36.0% Bank Sohar Arqaam Capital Reported q/q Reported Reported q/q y/y y/y OMR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 14.3% 19.7% Non interest income 2 3 (26.2%) % 9.0% 53.9% Total income (2.7%) % 13.3% 26.4% Operating expenses % 6 6 (1.5%) 9.8% 2.6% Operating profit 6 7 (10.2%) % 17.3% 60.7% Provisions % 1 1 (10.8%) 113.4% (20.1%) Net income 4 5 (26.4%) % 1.3% 74.3% Cost/income 51.9% 47.9% 53.5% 59.0% Net loans to deposits 89.5% 88.7% 98.7% 98.2% Net loans 1,077 1, % % 9.6% 13.5% Customer deposits 1,203 1, % % 20.9% 25.7% OIB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y OMR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 16.3% 2.8% Non interest income % 3 3 (23.0%) 49.1% (17.7%) Total income % (6.5%) 24.7% (3.6%) Operating expenses % % 10.1% 10.5% Operating profit % 4 5 (28.1%) 48.0% (17.5%) Provisions 1 3 (75.4%) -1 1 (192.8%) (223.4%) 365.9% Net income % 4 4 (11.2%) 15.6% (60.9%) Cost/income 54.2% 57.1% 61.4% 49.9% Net loans to deposits 75.2% 69.4% 78.5% 74.4% Net loans % (0.5%) 47.7% 13.0% Customer deposits 1,223 1, % (5.7%) 54.1% 21.0% Source: Company Data, Zawya, Arqaam Capital Research Bahrain: Ahli United Bank: Net profit increased 7% y/y and 17% vs. Q4 on higher net interest income (+10.3% y/y vs. -0.3% q/q), an 8.8% increase in fee income and to a lesser extent lower provisioning charges (-5% y/y and -60% q/q). Annualized loan loss charge was 86bps of loans vs. 98bps in Q1 11A & 131bps for FY11A. Loans were up 8.6% y/y and 2.6% q/q while deposits were up 43.9% y/y and 4.4% q/q. C/I improved to 30.1% vs. 32.2% in Q1 11A. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 204

206 Exhibit 264: Bahrain bank: Q2 12e earnings preview May AUB Arqaam Capital Reported q/q Reported Reported q/q y/y y/y USD mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 Net interest income % % 8.6% 10.3% Non interest income % % (7.3%) 13.6% Total income % % 4.2% 11.0% Operating expenses % % 4.8% 3.0% Operating profit % % 3.9% 15.3% Provisions % % 18.4% 28.4% Net income % % 5.9% 6.6% Cost/income 32.5% 32.6% 32.4% 35.1% Net loans to deposits 88.1% 88.0% 85.5% 84.0% Net loans 16,233 15, % 14,877 14, % 9.1% 8.9% Customer deposits 18,424 18, % 17,405 17,424 (0.1%) 5.9% 4.0% Insurance: QIC: Net claims ratio rose significantly as a result of higher claims expense related to New Zeeland earthquakes, than originally forecasted. This is not expected to be the case for the other catastrophes in the Far East. However overall net claims are expected to rise year on year. We do not expect investment returns to remain as high as Q1 12A as the company ceases to realize capital gains on equity investments. Tawuniya: Tough competition is rendering the medical segment less profitable. Hence Tawuniya incurred one time net loss expenses during Q1 12A to account for possible rise in net loss ratios. However we believe that although a significant portion of the surge in net claims was a one off expense, the year on year increase is expected to remain significant. We expect a drop in q/q net claims, but an overall increase y/y. Salama: We expect Salama to continue improving investment income as seen in Q1 12A. We expect an improvement in expense management, however this will be overshadowed by high net claims during FY 12e related to reinsurance claims from the recent Thailand floods. Medgulf: Net claims have seen a moderate increase due to tightening competition in the medical segment. Claims have been increasing while insurers have been unable to raise premiums adequately. The rise in net claims is expected to persist, however its effect on the bottom line will be diminished by rising investment income. Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 205

207 Exhibit 265: Insurance companies: Q2 12e earnings preview QIC Arqaam Capital Reported q/q Reported Reported q/q y/y y/y QAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 GWP (6%) % (20%) 3% NEP (10%) (9%) 0% 1% Net Claims (23%) (20%) 8% 12% Investment Income (57%) (51%) 7% 20% Earnings (41%) (33%) (11%) 2% Tawuniya Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 GWP % % 2% 31% NEP (5%) % 19% 31% Net Claims (15%) % 20% 68% Investment Income (20%) (6%) 172% 219% Earnings % (48%) 71% (53% Salama Arqaam Capital Reported q/q Reported Reported q/q y/y y/y AED mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 GWP (11%) % (21%) 10% NEP (1%) % (19%) 8% Net Claims (1%) % (25%) 36% Investment Income % % 57% 367% Earnings % % (41%) (56% MedGulf Arqaam Capital Reported q/q Reported Reported q/q y/y y/y SAR mn Q2 12e Q1 12A Q2 11A Q1 11A Q2 Q1 GWP (13%) (32%) 26% (2%) NEP % % (3%) 35% Net Claims % % 2% 48% Investment Income % % 185% 87% Earnings (13%) % (22%) 576% Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 206

208 UNBUH 16 ADIBUH 16 BGBKKK 20 DHBKQD 17 FGBUH 16 ADIBUH 15 QIBC 15 ADCB 16 NBADUH 17 QNBK 15 COMQAT 19 QNBK 17 COMQAT 17 COMQAT 14 BSFR 15 SIB 16 SABBAB 15 FGBUH 17 NBADUH 15 NBADUH 14 FGBUH 12 ADCB 14 TAMWEE 17 BBK 15 TAMWEE 13 May Credit analysis We witness the strongest relationship between maturity, credit ratings and spreads, and very little correlation between the liquidity positions, capital ratios or RORWA. We rank bank bond spreads vs.: Liquidity ratios LCR and NSFR (no direct relationship) Capital ratios RORWA Their credit rating Maturity Exhibit 266: Yield spread narrowing YTD 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% Current Yield Yield at beginning of the year Change Source: Bloomberg, Arqaam Capital Research Exhibit 267: Bank bonds yield vs. FY 11A NSFR 7% 6% BURG 5% 4% 3% 2% CBQK CBQK QIBK CBQK NBAD NBAD DHBK FGB ADCB QNBK ADCB UNB TAMWEEL ADIB BSFR SIB SABB 1% FGB 0% 60% 70% 80% 90% 100% 110% 120% 130% 140% Source: Bloomberg Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 207

209 Exhibit 268: Bank bonds yield vs. FY 11A LCR 7% BURG 6% 5% 4% 3% TAMWEEL NBAD SIB UNB DHBK FGB ADCB CBQK CBQK QNBK QIBK ADIB 2% NBAD ADCB CBQK BSFR SABB 1% FGB 0% 0% 50% 100% 150% 200% 250% 300% Source: Bloomberg, Arqaam Capital Research Exhibit 269: Bank bonds yield vs. FY 12e CET1 7% BURG 6% 5% CBQK TAMWEEL 4% 3% 2% 1% ADIB ADCB CBQK ADCB CBQK NBAD NBAD DHBK BSFR SABB UNB FGB FGB SIB QIBK QNBK 0% 7% 9% 11% 13% 15% 17% 19% 21% 23% Source: Bloomberg, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 208

210 Exhibit 270: Bank bonds yield vs. FY 12e RORWA 7% 6% BURG 5% 4% 3% 2% TAMWEEL ADCB ADCB ADIB UNB SIB NBAD SABB BSFR NBAD CBQK DHBK FGB CBQK CBQK QIBK QNBK FGB 1% 0% 1% 2% 3% 4% 5% Source: Bloomberg, Arqaam Capital Research Exhibit 271: Bank bonds yield vs. Rating Scorecard 8% 7% 6% BURG 5% 4% 3% 2% 1% ADCB FGB FGB ADIB ADCB TAMWEEL UNB SIB NBAD QIBK CBQK NBAD CBQK CBQK DHBK QNBK BSFR SABB BBK 0% AA- A+ A A- BBB+ BBB BBB- Source: Bloomberg, Arqaam Capital Research We also rank government bond yields vs.: CDS spreads Their credit rating Maturity Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 209

211 Exhibit 272: Sovereign bonds yield vs. CDS (bps) 12% 10% DUBAIH 17 DUBAIH 14 8% EGYPT 40 6% 4% QATAR 40 QATAR 30 QATAR 22 ADGB 19 DUGB 20 BHRAIN 20 DUGB 15 DUGB 13 EGYPT 20 2% QATAR 17 QATAR 14 ADGB 12 BHRAIN 14 0% Source: Bloomberg, Arqaam Capital Research Exhibit 273: Sovereign bonds yield vs. Maturity 12% 10% DUBAIH 17 8% DUBAIH 14 EGYPT 40 EGYPT 20 DUGB 20 BHRAIN 18 BHRAIN 20 QATAR 42 DUGB 13 DUGB 21 DUGB 15 MUBAUH 19 QATAR 30 MUBAUH 21 QATAR 40 DUGB 14 RAKS 16 QATAR 22 BHRAIN 14 QATAR 20 QATAR 19 MUBAUH 16 ADGB 19 RAKS 14 QATAR 17 QATAR 15 MUBAUH 14 QATAR 14 ADGB 14 ADGB 12 6% 4% 2% 0% Source: Bloomberg, Arqaam Capital Research Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 210

212 Exhibit 274: Sovereign bonds yield vs. Rating Scorecard 12% 10% 8% DUBAIH 17 DUBAIH 14 EGYPT 40 6% 4% 2% DUGB 20 EGYPT 20 BHRAIN 20 QATAR 40 BHRAIN 18 MUBAUH 21 DUGB 15 QATAR 30 DUGB 14 QATAR 20 BHRAIN 14 ADGB 19 MUBAUH 16 RAKS 14 MUBAUH 14 QATAR 15 ADGB 12 ADGB 14 QATAR 19 0% AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- Source: Bloomberg, Arqaam Capital Research Exhibit 275: Credit spread Risk weighting CET1 Equity allocation Cost/Income Target RoE Target pre cost RoE Credit spread AA 20% 12% 2.4% 35% 14% 21.5% 0.52% A 50% 12% 6.0% 35% 14% 21.5% 1.29% BBB 100% 12% 12.0% 35% 14% 21.5% 2.58% BB 150% 12% 18.0% 35% 14% 21.5% 3.88% Source: Bank of International Settlements Financials (bank, insurance and diversified Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See 211

213 Currency exposures Exhibit 276: Net Currency Exposure as % of Shareholder's Equity USD INR GBP EUR BHD BHD SAR JPY AUD CHF MYR KWD LYD EGP PKR DKK NOK SEK CAD AED QAR UAE ADCB (12.8%) -- (0.0%) (0.7%) (3.2%) 0.1% ADIB (33.0%) % (0.4%) CBD (0.4%) % (0.0%) (0.0%) DIB (10.5%) -- (0.1%) (0.6%) ENBD 11.4% % 0.0% (5.8%) -- (22.1%) (0.0%) % % Mashreq 60.7% 0.7% 0.2% 0.1% 0.0% 2.2% 0.1% 0.0% 0.0% 0.0% -- (0.1%) % 0.1% % % NBAD 7.8% % (0.2%) (1.2%) -- (2.3%) 0.0% -- (0.3%) % Rakbank (1.0%) UNB 69.2% % 0.0% % 0.0% % % Tamweel Qatar QNB 62.6% -- (0.0%) (0.0%) QIB 13.3% % (3.1%) Doha (3.2%) -- (3.5%) (5.0%) CBQ (17.4%) -- (0.1%) (2.9%) MARK (0.0%) (0.4%) KCBK 21.3% (5.9%) % -- Egypt CIB 14.7% -- (0.1%) 1.5% NSGB 16.1% -- (0.1%) 1.5% CAE (103.3%) % 103.1% HDB 0.2% -- (0.0%) 0.0% EGB 10.8% % 1.0% Lebanon Audi (21.9%) -- (4.9%) 2.4% BLOM 4.9% (0.1%) BOB 103.7% % 0.2% Financials (bank, insurance and diversified Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 212

214 Exhibit 277: Net Currency Exposure as % of Shareholder's Equity (Continued) USD INR GBP EUR BHD BHD SAR JPY AUD CHF MYR KWD LYD EGP PKR DKK NOK SEK CAD AED QAR KSA ANB 40.0% Al Rajhi 19.1% % 0.0% % % % -- BSFR 10.3% Riyad 72.2% % 6.0% Samba 29.4% % SABB 54.1% % AAAL BJAZ 0.3% % 0.2% % SIBC 26.8% % ALINMA Oman BKMB 0.9% 0.2% % 5.0% % % % 0.2% BKSB (27.9%) 0.0% -- (0.0%) (0.0%) 0.0% % % 0.0% OIBB 23.9% 0.0% Kuwait NBK 0.7% % % KFIN 14.9% % 0.8% GBK 11.0% % BURG (2.5%) % % (0.0%) % -- Financials (bank, insurance and diversified Copyright 2011, Arqaam Capital Limited. All Rights Reserved. See 213