Banking. Global Research. Qatar. Qatar Banking Sector. Growth, Value, Quality!

Transcription

1 Global Research Banking Qatar Qatar Banking Sector Growth, Value, Quality! April 2008

2 KSCC Banking Research Souk Al-Safat Bldg., 2nd Floor P.O. Box Safat Kuwait Tel: (965) Fax: (965) stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M. El-Quqa, CFA Executive Vice President Phone No:(965) Ext.104 Faisal Hasan, CFA Head of Research Phone No:(965) Ext.304 Chandresh Bhatt Assistant Vice President Phone No:(965) Ext. 270 Bikash Rout Senior Financial Analyst Phone No:(965) Ext. 254

3 Table of Contents Investment Summary 1 Qatar Economy 4 Qatar Banking Sector 6 Peer Group Comparison 12 Qatar Banking Sector Outlook 18 Valuation and Recommendation 19 Players Profile 22 Qatar National Bank 22 Commercial Bank of Qatar 31 Doha Bank 40 Qatar Islamic Bank 50 Masraf Al-Rayan 59 Al Khalij Commercial Bank 67 Ahli Bank 74 Qatar International Islamic Bank 82

4 Investment Summary The economy of Qatar has maintained its upward momentum till 2006 as it registered a staggering growth of 33.7% and 33.8% in 2006 and 2005 respectively, however, in 2007 the GDP growth had been slowed down to 12.5% which was its slowest pace in last five years. As per the recently released preliminary estimates by the Statistics Department of the Planning Council, Qatar's gross domestic product (GDP) at current prices rose by 12.5% to QR232.5bn (US$63.8bn) in 2007 as against QR206.6bn (US$56.8bn) recorded in the previous year. The economic growth has been reinforced with proactive macroeconomic initiatives. With respect to the policy initiatives, Qatar continued to adopt new laws and regulations with a view to make its investment environment more investor friendly. Qatar has taken several steps to attract foreign investors. Towards this end it has set up an international financial center, Qatar Financial Center (QFC), which is aimed to attract international financial institutions and multi-national corporations to set up their offices and to forge closer partnerships with international business houses. To further boost the economic growth, the government is keenly focusing on developing other economic sectors, apart from the oil & gas sector, which will further bolster economic growth of the country. The banking penetration in the country has been increasing over the last few years. The ratio of credit deployment to GDP for Qatar has grown to 49.6% at the end of 2006 from 42.8% at end 2004 and in 2007 it is estimated to have reached to 69.1%, mainly because of slowdown in the growth rate of GDP. The penetration level in terms of deposit to GDP ratio has also been increasing which has grown to 58.3% in 2006 from 52.6% in 2004 and in 2007 it is estimated to have reached to 71.9%. The credit to the private sector grown to QR73.2bn in 2006 from QR29.8bn at the end of 2004 and it increased further to QR100.2bn at the end of Q The private sector credit as a percentage of total domestic credit increased to 77.3% in 2006 from 61.8% in 2004 and at the end of Q it was at 72.9%. Until now public sector was the largest borrower in the country which accounted for 46.7% of the total domestic credit of the banking sector in 2002 which reduced gradually to 22.7% in At the end of Q3-2007, public sector borrowing accounted for 27.1% of the total domestic credit. During the period , total credit facilities of the sector grew at a CAGR of 29.7% to reach QR102.5bn, while total domestic credit grew by 27.4% to QR94.8bn. Almost all the sectors have witnessed double digit CAGR in their credit off-take, during , except credit to public sector which witnessed a marginal growth of 6.4%. During first 9M of 2007, total credit facilities grew by 46.4% on y-t-d basis to reach at QR150.2bn. The growing importance of Islamic finance, especially in the GCC region, have encouraged many Qatari banks to venture into Islamic banking as a window within the conventional bank. In 2005, all the three major banks, namely Qatar National Bank, Doha Bank and Commercial Bank started Islamic banking. During 2006, Ahli Bank started its Islamic April 2008 Qatar Banking Sector 1

5 banking operations. So effectively, all the seven leading banks in Qatar are now providing Islamic banking products. All the leading Qatari banks have announced their plans to expand in GCC. In 2007, Qatar National Bank opened two new branches in the region, in Oman and Kuwait. Doha Bank is also planning to open a branch in Kuwait in 2008, it already got an approval in this regard from regulatory authorities. Commercial Bank of Qatar has 34.85% stake in National Bank of Oman. Recently, it also acquired 40% stake in United Arab Bank P.J.S.C., a bank based in United Arab Emirates. The newly entered, Al Khaliji Commercial Bank is also acquiring the BLC Bank s banking operations in the United Arab Emirates. In 2007, all the listed banks in Qatar had reported a significant growth in their balance sheet size. The aggregate balance sheet of all the listed banks grew by 61% in 2007 to QR252bn from QR157bn in The total deposits of the listed banks registered a growth of 45.8% to reach at QR161bn and gross loans & advances grew by 51.4% to reach at QR147.7bn. The combined net profit of the banks under review grew by 56% y-o-y in 2007, from QR5.2bn in 2006 to QR8.1bn in In Q1-2008, aggregate assets of all the listed banks witnessed a y-t-d growth of 15.1% to QR290.4bn from QR252.4bn at the end of The combined net profit of the banks under review grew by 54.2% y-o-y in Q1-2008, from QR1.6bn in Q to QR2.5bn in Q Over the last few years, banks in Qatar have extensively focused on improving their quality of assets which resulted into substantial improvement in the quality of their loan portfolio. In 2007, the total NPLs of the listed banks amounted to QR1.83bn which represented 1.2% of the banks aggregate loan portfolio at the end of We believe that going forward quality of the loan book are likely to remain sound, however, steep growth in loan book needs to be watched with caution. At the same time, the loan portfolio of some of the banks requires diversification as it is highly concentrated mainly to two sectors, Personal and Real Estate. In certain cases these two sectors account for more than 50% of total loan book. All the banks under our coverage are adequately capitalized with capital adequacy ratios that are well above the minimum 10% required by the Qatar Central Bank. Qatari banks are focusing on expanding their capital base as many banks have announced their plans to come out with rights issues in 2008 and This measure will help the banks to shoreup their capital adequacy ratio and to leverage their balance sheet and will help the banks to tap lending opportunities the country would offer in the coming years. The region as well as the country have huge investment potential. Multi-billion-dollar projects are in the pipeline or in drawing board at various stages from various sectors apart from the hydrocarbon sector. Qatar has launched an impressive domestic investment program aimed at diversifying its economic base from the hydrocarbon sector. It is likely to spend about US$140bn on different projects over the next five to six years to continue this diversification strategy. We believe that the banking sector would be one of the major beneficiaries of this scale of projects and regional diversification program. 2 Qatar Banking Sector April 2008

6 Table 01: Global Valuation Matrix Price (QR) Target (QR) Reco. Disc./ BVPS* Prem. (QR) EPS* (QR) P/BV Qatar National Bank Buy 16.1% Commercial Bank of Qatar Buy 14.7% Doha Bank Buy 13.3% Qatar Islamic Bank Buy 13.0% Masraf Al Rayan Bank Buy 12.2% Al Khaliji Commercial Bank Reduce -13.4% * Based on 2008E. Source: Global Research, Market prices as on April 27, (x) P/E (x) April 2008 Qatar Banking Sector 3

7 Qatar Economy The economy of Qatar has maintained its upward momentum till 2006 as it registered a staggering growth of 33.7% and 33.8% in 2006 and 2005 respectively, however, in 2007 the GDP growth had been slowed down to 12.5% which was its slowest pace in last five years. As per the recently released preliminary estimates by the Statistics Department of the Planning Council, Qatar s gross domestic product (GDP) at current prices rose by 12.5% to QR232.5bn (US$63.8bn) in 2007 as against QR206.6bn (US$56.8bn) recorded in the previous year. Its GDP per capita is estimated to have reached to a record level of $72,444 in 2007 from US$67,740 in The contribution of oil and gas sector to the GDP increased from QR118.4bn in 2006 to QR129.5bn in The sector accounted for 55.7% of the GDP in 2007 and it represented a 9.3% growth over the previous year. The non-oil sectors achieved a growth rate of 16.8% in The sector contributed a total of QR103bn or 44.3% to the GDP. In terms of its relative contribution to the GDP, it improved from 42.7% in 2006 to 44.3% in Table 02: Gross Domestic Product (in QR mn) Oil & Gas Sector 62,922 92, , ,452 as % of GDP 54.5% 59.6% 57.3% 55.7% Non-oil GDP 52,590 62,493 88, ,033 as % of GDP 45.5% 40.4% 42.7% 44.3% GDP 115, , , ,485 Growth Rate 34.8% 33.8% 33.7% 61.0% Source: Qatar Central Bank, Planning Council and Global Research Over the last few years, the economy of Qatar witnessing the effect of high economic growth and strong liquidity in terms of high inflationary pressures. The Consumer Price Index (CPI) has been witnessing double digit growth rate since last two years, 11.8% in 2006 and 19.6% in In 2007, the CPI reached to as compared to in The main contributor to this was the soaring property rents in the country, which is the major cause of concern. This has been further intensified by the weakness of the US dollar, putting upward pressure on prices of imported goods and commodities. Apart from that, it also seems that consumer spending has gone up in Qatar mainly due to the increased liquidity. The country has huge investment potential. Qatar has launched an impressive domestic investment program aimed at diversifying its economic base from the hydrocarbon sector. An estimated US$140bn worth of projects are planned over the next five to six years to continue this diversification strategy. If we talk of only construction sector, it has multi-billion-dollar development projects in the pipeline. Qatar s construction sector is expanding rapidly, driven by the country s strong economic base, a flourishing real estate sector and strong tourist inflow. Among the renowned projects are the US$5.5bn New Doha International Airport;: the US$5bn Lusail real estate project; a US$5bn tourist project in al-khor; the US$2.5bn Energy City; the US$2.5bn man-made Pearl Island; a US$2bn causeway linking Qatar and neighboring Bahrain and a US$1.2bn leisure city in the capital Doha. 4 Qatar Banking Sector April 2008

8 The economic growth has been reinforced with proactive macroeconomic initiatives. With respect to the policy initiatives, Qatar continued to adopt new laws and regulations with a view to make its investment environment more investor friendly. Qatar has taken several steps to attract foreign investors. Towards this end it has set up an international financial center, Qatar Financial Center (QFC), which is aimed to attract international financial institutions and multi-national corporations to set up their offices and to forge closer partnerships with international business houses. All companies setting up their offices at the centre are entitled to a three-year tax holiday, full repatriation of profits and 100% foreign ownership. On the back of Qatar s strong finances and ongoing reforms, international rating agency Standard and Poor s has upgraded Qatar s sovereign rating to AA- from A+. Among the other major developments for the capital market was implementation of buy-back rule effective from July 4, The companies listed on the Doha Securities Market can buy back their own listed shares subject to a cap of 10%. At the same time, Qatar Financial Markets Authority was established in 2006 to regulate the securities market. Now Qatar is planning to bring its financial system under single integrated financial regulatory body. With this initiative, Qatar follows an international trend towards an integrated approach to the regulation of different financial services products and activities. To further boost the economic growth, the government is keenly focusing on developing other economic sectors, apart from the oil & gas sector, which will further bolster economic growth of the country. April 2008 Qatar Banking Sector 5

9 Qatar Banking Sector Qatar has a developed banking sector consists of 17 banks, out of which nine are Qatari owned institutions comprised of six commercial banks and three Islamic banks. The six Qatari owned commercial banks are Qatar National Bank (QNB), Commercial Bank of Qatar, Doha Bank, Ahli Bank, Al Khalij Commercial Bank and International Bank of Qatar while three Islamic banks are Qatar Islamic Bank, Qatar International Islamic Bank and Masraf Al Rayan. The seven foreign banks operating in Qatar include the Arab Bank, Mashreq Bank, HSBC, BNP Paribas, Standard Chartered Bank, United Bank and Bank Saderat Iran. The specialized government owned institution is Qatar Industrial Development Bank, which provides financing to the small and medium scale industries. The financial sector including the banking sector is supervised by the Qatar Central Bank (QCB). The QCB has introduced several regulations which are in line with the international standards (based on the Basle Accord) for banking supervision and regulations. Qatar Financial Centre (QFC) Qatar s economy is expanding at an unprecedented rate and is set to continue on this trajectory in the years ahead. Economic growth has naturally brought increasing demand for financial products and services. Responding to this demand, and conscious of the role financial services can play in driving economic diversification, the Government of Qatar in 2005 created the Financial Centre (QFC). The QFC has attracted world-class financial institutions through a combination of modern laws and a highly regarded and expert judiciary, an internationally recognized regulator operating a best practices, principles based regime, and a strong and supportive business services environment. At the same time, Qatar Financial Markets Authority was established in 2006 to regulate the securities market. Building on these recent accomplishments, work is now underway to ensure all financial institutions active in Qatar can operate in a high-quality legal and financial services environment, benchmarked to international standards. To achieve this objective, Qatar is to establish a single integrated financial regulatory body that will oversee all banking, insurance, securities, asset management and other financial services. This new regulator will bring together the staff resources currently dispersed amongst the Qatar Central Bank Department of Banking Supervision and its Banking Consumer services Unit, the Qatar Financial Markets Authority and the QFC Regulatory Authority, thus, creating a single organization and, in due course, one set of high standard rules will be applicable to all financial institutions. With this initiative, Qatar follows an international trend towards an integrated approach to the regulation of different financial services products and activities. The Qatari government anticipates significantbenefitsfromthismove,includinggreatertransparencyandpredictability given a simplified institutional landscape, greater efficiency through the pooling of scarce regulatory staff, and the ability to take a comprehensive view of financial institutions that are active across different lines of financial activity (banking, insurance, securities trading etc.). The banking penetration in the country has been increasing over the last few years. The ratio of credit deployment to GDP for Qatar has grown to 49.6% at the end of 2006 from 42.8% at end 2004 and in 2007 it is estimated to have reached to 69.1%, mainly because of slowdown in the growth rate of GDP. The credit to the private sector has grown to QR73.2bn in 2006 from QR29.8bn at the end of 2004 and it increased further to QR100.2bn at the end of Q3-6 Qatar Banking Sector April 2008

10 2007. The private sector credit as a percentage of total domestic credit increased to 77.3% in 2006 from 61.8% in 2004 and at the end of Q it was at 72.9%. The penetration level in terms of deposit to GDP ratio has also been increasing which has grown to 58.3% in 2006 from 52.6% in 2004 and in 2007 it is estimated to have reached to 71.9%. Chart 1: Banking Penetration 165.0% 145.0% 71.9% 125.0% 105.0% 58.3% 52.6% 55.3% 85.0% 69.1% 65.0% 45.0% 42.8% 49.6% 45.1% 25.0% Loans to GDP Ratio Deposits to GDP Ratio Source: Qatar Central Bank and Global Research Until now public sector was the largest borrower in the country which accounted for 46.7% of the total domestic credit of the banking sector in 2002 which reduced gradually to 22.7% in At the end of Q3-2007, public sector borrowing accounted for 27.1% of the total domestic credit. Asset and Liability Composition During the period , total assets of the commercial banking sector grew at a CAGR of 43.5% to QR189.5bn in 2006 from QR92.0bn in 2004 and in 2006 the asset base witnessed a growth of 45.4%. A major portion of this growth in the asset base was funded through the inflow of funds from resident deposits as it accounted for more than 63.0% of the total liabilities at the end of Table 03: Consolidated Balance Sheet of Commercial Banks in Qatar (in QR mn) M Total Assets 76, , , , ,082.7 Cash in Q.R , ,075.9 Due from QCB , , , ,924.9 Foreign Assets , , , ,389.7 Domestic Assets , , , ,692.2 Total Liabilities 76, , , , ,082.7 Foreign Liabilities 4, , , , ,124.9 Domestic Liabilities 71, , , , ,957.8 Source: Qatar Central Bank During 2006, the foreign assets grew at a steep rate of 59.2% to QR66.3bn and increased its share to 35.0% of the total banking assets from 32.0% in The major constituent of the April 2008 Qatar Banking Sector 7

11 foreign assets are due from banks abroad, credit outside Qatar and investments abroad. The banking sectors domestic credit portfolio accounted for 50.0% of the total banking assets and it grew by 40.7% to QR94.8bn in Keeping in line with the lackluster trend prevailed in the local stock market the commercial banks domestic investments grew marginally by 5.7% in 2006 to QR11.4bn. On the liabilities side, the commercial banks dependence on domestic liabilities declined in 2006 as its share in the total liabilities declined to 86.9% from 92.0% in As a As a result, the share of foreign liabilities have increased to 13.1% in 2006 from 8.0% in Foreign banks dues from Qatari banks increased by a whopping 113% in 2006 to QR20.5bn from QR9.6bn in 2005, which shows the kind of interest the foreign banks have in Qatar s flourishing economy. Apart from this the commercial banks have also raised foreign debts of QR3.1bn in 2006 which was nil in The major constituents of the domestic liabilities are resident deposits and capital accounts. In 2006, the banks dependence on customer deposits have declined as its share of resident deposits in total liabilities was at 64.9% in 2005 which declined to 63.0% in The resident deposits of the commercial banking sector increased by 40.9% in 2006 to QR119.3bn. At the same time, the banks have shored up their capital accounts in 2006 as also in 2005 especially to increase their capital adequacy ratio and to increase their leverage. The share of capital accounts in total liabilities increased to 12.3% in 2006 which was at 11.2% in At the end of 2006, it was at QR23.3bn. Total provisions of the banking sector has been declining which is despite the growth in loan portfolio, which indicates that the banking sector has strong quality of assets. In 2006, provisions of the commercial banks declined by 6.3% to QR2.9bn. During first 9-months of 2007, total assets of the commercial banking sector grew to QR252.1bn registered a y-t-d growth of 33%. Among the major components, domestic credit witnessed a growth of 45% to QR137.4bn and total domestic assets grew by 42.4% to QR166.7bn. Foreign assets of the banks stood at QR78.4bn with a growth of 18.2%. Among the components of liabilities, resident deposits grew by 21.7% on y-t-d basis to QR145.1bn. The commercial bank s total domestic liabilities stood at QR204.9bn, registered a y-t-d growth of 24.4%. On the back of increased borrowings from banks in international as well as domestic markets, the Qatari banks funds due to foreign banks grew by 95.9% to QR40.2bn and funds due to domestic banks grew by 125% to QR11.2bn. Trend in Credit Facilities During the period , total credit facilities grew at a CAGR of 29.7% to reach QR102.5bn, while total domestic credit grew by 27.4% to QR94.8bn. Almost all the sectors have witnessed double digit CAGR in their credit off-take, during , except credit to public sector which witnessed a marginal growth of 6.4%. During first 9M of 2007, total credit facilities grew by 46.4% on y-t-d basis to reach at QR150.2bn. 8 Qatar Banking Sector April 2008

12 Table 04: Trends in Credit Facilities of the Banking Sector (in QR mn) M-2007 CAGR (%) ( ) Public Sector 16, , , , , , % General Trade 4, , , , , , % Industry , , , , % Contractors , , , , , % Land & Housing 1, , , , , , % Consumption 9, , , , , , % Services , , , , , % Others 1, , , % Total Domestic 35, , , , , , % Outside Qatar , , , , % Total 36, , , , , , % Source: Qatar Central Bank Sectors which saw their share increase as a percentage of the total credit off-take, during , were credit facilities granted to land & housing, personal and services. While credit granted to public sector, merchandise, industrial and others declined during this period. During 2006, total credit facilities of the banking sector grew by 47.1% to reach QR102.5bn from QR69.7bn at the year end During 2006, the share of the public sector in the total credit facilities declined to 21% from 26.7% in 2005, which shows the diversification of lending to other businesses/sectors. The public sector witnessed a growth of 15.5% in credit off-take in 2006 which is low as compared to growth registered by other economic sectors which further points towards diversification of lending to other sectors of the economy. The credit to the public sector was at QR21.5bn in As a percentage of total credit facilities, the share of public sector declined further to 24% in first 9M of The personal segment, which had the highest share in the total credit off-take, witnessed a growth of 42.2% in 2006 to QR35.2bn. During 9M of 2007, credit facilities to personal segment grew by 35.1% on y-t-d basis to reach at QR441bn. For the last few years banks have witnessed significant growth in credit off-take to personal segment due to the increased focus on consumer loans as part of their thrust on retail banking. This was a trend not only in Qatar but in the whole of the Gulf region. In June 2007, the Qatar Central Bank has issued a directive, to all banks operating in the country, on personal loans. The circular was issued on June 11 and is to come into effect 30 days from its issuance i.e. on July 11. As per the directives, the maximum amount to be given out as loans will be QR2.5mn and the repayment period not to be more than seven years. Repayments of loans will now be restricted to 70% of one s salary whereas earlier it used to be 75% and perhaps even more. The highest growth in credit facilities was witnessed by the service sector, credit facilities granted to the sector grew by 146.3% in 2006 to QR7.2bn. Among the other sectors real estate, merchandise and others have also witnessed a significant growth in their credit off-take at 71.8%, 41.2% and 59.7% respectively. As part of diversification of the lending portfolio, majority of the banks in Qatar have increased their focus on regional lending by participation in syndications. Therefore, in 2006, the external credit of the commercial banks grew by a robust 228.4% to QR7.8bn. This has increased significantly in 9M of 2007 by 64.1% to QR12.7bn. April 2008 Qatar Banking Sector 9

13 Interest Rate Trend QCB interest rate framework embraces three policy rates: QCB Deposit Rate (QCBDR), QCB Lending Rate (QCBLR), and QCB Repurchase Rate (QCB Repo or QCBRR). QCBDR and QCBLR are the interest rates announced by QCB on overnight deposit and loan transactions between QCB and local banks through the Qatar Money Market Rate Standing Facility (QMR), respectively. The interest rates in Qatar follow closely those prevailing in the United States. Therefore, in the last two years, interest rates in Qatar witnessed an upward trend, which can be gauged from the movements in Qatar Central Bank s Monetary Rates (QMR) on lending and borrowing, both of which have almost doubled over the last one year. The QCB lending rate is the key rate used by QCB to convey signals to the market revealing adjustments to its monetary policy stance. QMR on lending witnessed its last increase in July 2006 to 5.5% which was at 4.5% in the beginning of QMR s rate on deposit moved along the line of rates on lending, which moved up from 4.4% in Jan to 5.15% in Dec In 2007 till Sept. the QCB kept its QMR on lending unchanged at 5.5% and reduced the QMR on deposit in Sept by 65 basis points to 4.5%. In Jan. 2008, the QCB made two cuts on QMR on deposit rate of 50 basis points each and reduced it to 3% and kept its QMR on lending unchanged at 5.5%. In March 2008, it again cut the deposit rate by 75 basis points to 2.25% and kept its lending rate unchanged. Chart 2: Trend in Qatar Central Bank s Monetary Rates 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Jan 05 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 06 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 07 Feb Mar Apr May Jun Jul Aug Sep 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Repo Lending Deposit Source: Qatar Central Bank On the lending front, interest rate on bank overdraft moved up from 6.87% in Dec to 7.56% at the end of It started the year 2007 at 7.9% and touched to 7.96% in June and at the end of Sept. it softened to 7.37%. Interest on bills discounted declined from 7.77% in Dec to 7.46% in Dec It increased to 8.91% in June 2006 and at the end of the year 2007 it was at 7.51%. Interest rate on car loans increased to 8.61% in Dec from 7.44% in Dec However, in 2007 it moved up to 9.77% in June and declined to 8.23% at the end of Sept. Interest rate on credit cards moved up to 20% in Dec from 18.14% in Dec. 2005, and declined to 19.35% at the end of Sept Qatar Banking Sector April 2008

14 Interest on personal loans, due in less than one year increased from 6.35% in Dec to 7.33% in Dec and in 2007 at the end of Sept. it was at 7.3%. Interest on loans which are due in less than three years declined to 9.15% at the end of 2006 from 9.48% at the end of In 2007 it declined further and at the end of Sept it was 8.14%. In case of loans which are due for more than three years interest rate moved up to 8.52% in Dec from 8.32% in Dec and at the end of Sept.2007 it declined to 8.28%. On the deposit front, interest on demand deposits moved up from 1.88% in Dec to 2.67% in Dec At the end of Sept it was at 2.42%. In case of saving deposits, rates moved from 1.03% in Dec to 1.49% in Dec and it was at 1.40% in Sept In case of 1 year time deposits, rate moved up from 3.76% in Dec to 4.38% in Dec and in Sept it was at 4.41%. Conventional banks ventured in Islamic Banking The growing importance of Islamic finance, especially in the GCC region, have encouraged many Qatari banks to venture into Islamic banking as a window within the conventional bank. In 2005, all the three major banks, namely Qatar National Bank, Doha Bank and Commercial Bank started Islamic banking. During 2006, Ahli Bank started its Islamic banking operations. So effectively, all the seven leading banks in Qatar are now providing Islamic banking products. However, we believe that old Islamic banks will continue to dominate the Islamic banking segment and new conventional banks will face tough competition among themselves to have a pie of the Islamic banking sector. The new Islamic bank, Masraf Al Rayan is the largest Islamic bank with a capital of QR7.5bn (US$2.06bn). Qatari banks expanding in GCC All the leading Qatari banks have announced their plans to expand in GCC. In 2007, Qatar National Bank opened two new branches in the region, in Oman and Kuwait. Doha Bank is also planning to open a branch in Kuwait in 2008, it already got an approval in this regard from regulatory authorities. Commercial Bank of Qatar has 34.85% stake in National Bank of Oman (NBO). Commercial Bank has entered into a separate management agreement with NBO and is responsible for the day to day management of NBO affairs subject to the overall supervision of NBO Board. Recently, Qatar Central Bank and Central Bank of United Arab Emirates had given their approvals to the Commercial Bank of Qatar for the acquisition of up to 40% stake in United Arab Bank P.J.S.C. (UAB), a bank based in United Arab Emirates. On 24 December 2007, the Commercial Bank successfully acquired 4.692% stake in UAB. Subsequent to the financial year ended 31 December 2007, the bank increased its stake in UAB to 35% and in February 2007, it further raised its stake in UAB by 3.46% to 38.16%. Al Khaliji Commercial Bank is also acquiring the branches of a banking operations in the United Arab Emirates. In October 2007, Al Khaliji has signed the Sale and Purchase Agreement (SPA) with BLC Bank (France) SA to acquire the banking business conducted by BLC in UAE. BLC Bank has branch presence in four emirates Abu Dhabi, Dubai, Sharjah and Ras Al Khaimah. April 2008 Qatar Banking Sector 11

15 Peer Group Comparison The peer group comparison is done on all the eight listed banks, namely Qatar National Bank, Commercial Bank of Qatar, Doha Bank, Qatar Islamic Bank, Ahli Bank, Qatar International Islamic Bank, Masraf Al Rayan and Al Khalij Commercial Bank. These banks together accounted for about 85% of the total assets of commercial banks in 2007 and 92% of total credit disbursed. Table 05: Key Indicators of Listed Banks in QR Mn Qatar Commercial Doha Qatar Qatar Ahli Masraf Al Al Khalij National Bank of Bank Islamic International Bank Rayan Commercial Bank Qatar Bank Islamic Bank Bank Total Assets 114,361 45,397 30,088 21,336 9,951 15,576 10,191 5,151 Gross Loans & Advances 66,472 25,224 19,729 13,294 10,246 5,082 6, Total Deposits 79,364 25,796 20,033 12,201 7,218 11,494 4,943 - Paid-up Capital 1,825 1,402 1,248 1, ,750 3,600 Equity Capital 12,945 5,667 3,120 4,390 2,356 1,422 4,409 4,561 Net Profit 2,506 1, , , Source: Banks Annual Reports and Global Research Balance Sheet Size In 2007, all the listed banks in Qatar have reported a significant growth in their balance sheet size. The aggregate balance sheet of all the listed banks grew by 61% in 2007 to QR252bn from QR157bn in Ahli Bank recorded the highest growth in its balance sheet among its peers as it grew by 63% in The sector s largest bank, Qatar National Bank s assets grew by 59.6% in 2007, followed by Commercial Bank (49.5%), Qatar Islamic Bank (43.3%), Doha Bank (38.7%) and Qatar International Islamic Bank (18.5%). Chart 3: Market Share of Total Assets 2007 Chart 4: Growth in Balance Sheet Masraf Al-Ryan 4.2% Ahli Bank 6.2% Qatar International Islamic Bank 3.9% Qatar Islamic Bank 8.5% Doha Bank 11.9% Al-Khalij Commercial Bank 2.0% Qatar National Bank 45.3% Commercial Bank of Qatar 18.0% Source: Banks Annual Reports and Global Research (in QR bn) Qatar National Bank 59.6% Commercial Bank 49.5% Doha Bank 38.7% Qatar Islamic Bank 43.3% Qatar International Islamic Bank 18.5% Ahli Bank 63.0% Masraf Al-Ryan Growth Rate Al-Khalij Commercial Bank 75% 50% 25% 0% 12 Qatar Banking Sector April 2008

16 In terms of market share of loans & advances, Qatar National Bank has by far the highest market share of system loans and deposits. In 2007, it accounted for 45% share of loans & advances and 49.3% of deposits among listed banks. Commercial Bank of Qatar held second position with a market share of 17.1% of loans and 6% of deposits. Doha Bank s share was at 13.4% of loans and 12.4% of deposits. Three Islamic banks, namely Qatar Islamic Bank, Qatar International Islamic Bank and Masraf Al Rayan accounted for 9%, 3.4% and 4.7%, respectively, of the market share of loans & advances and in terms of deposits, their respective share was at 7.6%, 4.5% and 3.1% among listed banks. Ahli Bank s market share was at 6.9% of loans and 7.1% of deposits. The newly established Al Khaliji Commercial Bank s share was at 0.5% of loans and its deposit base was nil at the end of In terms of the growth in loans and advances in 2007, two banks namely, Ahli Bank and Qatar Islamic bank have performed exceptionally well by achieving a growth of 59.1% and 57.3%. The largest bank in terms of size, Qatar National Bank has achieved a growth of 42.3% in In case of Qatar International Islamic Bank the growth in loan book was lowest among its peers at 19.3% for the year. Chart 5: Market Share of Loans & Advances 2007 Chart 6: Growth in Loans & Advances Masraf Al-Ryan 4.7% Qatar International Islamic Bank 3.4% Ahli Bank 6.9% Qatar Islamic Bank 9.0% Doha Bank 13.4% Commercial Bank of Qatar 17.1% Al-Khalij Commercial Bank 0.5% Qatar National Bank 45.0% (in QR bn) Qatar National Bank 42.3% Commercial Bank 44.1% Doha Bank 38.8% Qatar Islamic Bank 57.3% Qatar International Islamic Bank 59.1% Ahli Bank 19.3% Masraf Al-Ryan Growth Rate Al-Khalij Commercial Bank 75% 60% 45% 30% 15% 0% Source: Banks Annual Reports and Global Research In terms of the growth in customer deposits in 2007, Ahli Bank has achieved significant growth of 68.4%. Commercial Bank of Qatar was at second position with a growth of 49.9% and the largest bank, Qatar National Bank has achieved a growth of 42.3%. In case of Qatar International Islamic Bank the growth in loan book was lowest among its peers at 7.8% for the year. Chart 7: Market Share of Deposits 2007 Chart 8: Growth in Deposits Ahli Bank of Qatar 7.2% Qatar International Islamic Bank 4.5% Qatar Islamic Bank 7.6% Masraf Al-Ryan 3.3% Qatar National Bank 49.5% (in QR bn) % 42.3% 32.0% 38.9% 68.4% 75% 60% 45% 30% 15% 0% Doha Bank 12.4% Commercial Bank of Qatar 15.4% Qatar National Bank Commercial Bank Doha Bank Qatar Islamic Bank Qatar International Islamic Bank Ahli Bank Masraf Al-Ryan Al-Khalij Commercial Bank Source: Banks Annual Reports and Global Research Growth Rate April 2008 Qatar Banking Sector 13

17 Asset Quality Over the last few years Qatari banks have extensively focused on improving their quality of assets which resulted in substantial improvement in the quality of their assets portfolio. Especially, Ahli Bank and Doha Bank have witnessed significant improvement in the quality of their loan portfolio since last few years. In the sector, Doha Bank had the highest NPLs to gross loans ratio at 3.2% at the end of 2007, which was followed by Qatar International Islamic Bank at 2.4%. Two banks, namely Qatar National Bank and Commercial Bank have less than 1% of NPL to gross loans, at 0.7% and 0.8% respectively. In case of Ahli Bank and Qatar Islamic Bank this ratio was at 1.5% and 2.1%, respectively. Most of the banks in Qatar have adequately provided for their NPLs in FY2007. Qatar Islamic Bank was at the forefront in providing for its NPLs as it provided 99.1%. It was followed by Commercial Bank with 96.8% coverage. Qatar International Islamic Bank had the lowest NPL coverage of 63.4%. Chart 9: Quality of Loan Portfolio (in QR Mn) % Qatar National Bank 0.8% 0.21 Commercial Bank Doha Bank 3.2% 0.63 NPLs Source: Banks Annual Reports and Global Research 2.1% 0.29 Qatar Islamic Bank Qatar International Islamic Bank NPLs to Gross Loans % 3.0% 2.3% 1.5% 1.2% 0.8% 0.0% Capital Adequacy Ratio (CAR) In Qatar, the minimum capital adequacy ratio is 10% as per the Qatar Central Bank requirements and as per the Basel Committee on banking supervision requirements it is 8%. Looking at this standards banks in Qatar are well capitalized. In terms of comparison, barring two new banks, Qatar International Islamic Bank had the highest CAR of 25.07% at the end of 2007, which was followed by Qatar Islamic Bank 19.78%, Qatar National Bank 16.3%, Doha Bank 15.54%, Ahli Bank 12.9% and Commercial Bank has 11.85% CAR. As the two new banks, Masraf Al Rayan and Al Khaliji, have just initiated their operations they have very high CAR of 46.7% and 119.8%, respectively. Qatari banks are focusing on expanding their capital base as many banks have announced their plans to come out with rights issues in 2008 and This measure will help the banks to shore-up their CAR and to leverage their balance sheet % 0.15 Ahli Bank 1.5% Sector 14 Qatar Banking Sector April 2008

18 Chart 10: Total Capital Adequacy Ratio Al-Khalij Commercial Bank Commercial Bank Ahli Bank Doha Bank Qatar National Bank Qatar Islamic Bank Qatar International Islamic Bank Masraf Al-Rayan 0% 20% 40% 60% 80% 100% 120% 140% Source: Banks Annual Reports In terms of revenue in the sector, other income or non-interest revenue are keeping pace with the core earnings for almost all the banks. In many banks such as Qatar National Bank, Commercial Bank, Qatar Islamic Bank and Masraf Al Rayan non-interest revenue accounted for significant portion of the total revenue of the bank for the year In case of Qatar International Islamic Bank, Ahli Bank and Doha Bank core earnings have driven the growth in total operating revenue of the bank. Contraction in Margin and Spreads In 2007, except Doha Bank, all the banks under review have witnessed contraction in their net interest margin (NIM) and net spread. Qatar Islamic Bank witnessed significant decline in its NIM and net spread which declined from 5.2% and 4.2% to 3.8% and 2.6%, respectively. The only exception was Doha Bank which witnessed expansion in its margin as well as spread which improved to 3.5% and 3.2% from 3.1% and 2.7% respectively. Table 06: Net Interest Margin and Net Spread Net Interest Margin Net Spread Qatar National Bank 3.1% 2.4% 2.9% 2.3% Commercial Bank 3.2% 2.9% 2.8% 2.7% Doha Bank 3.1% 3.5% 2.7% 3.2% Qatar Islamic Bank 5.2% 3.8% 4.2% 2.6% Qatar International Islamic Bank 5.4% 4.7% 5.0% 4.3% Ahli Bank 3.3% 2.6% 2.8% 2.1% Masraf Al Rayan - 3.7% - 2.6% Al Khalij Commercial Bank - 4.1% - 3.7% Source: Banks Annual Reports and Global Research The combined net profit of the banks under review grew by 56% y-o-y in 2007, from QR5.2bn in 2006 to QR8.1bn in Among the banks under review, Commercial Bank of Qatar reported 61.2% increase in net profit, the highest among the listed banks. Following Commercial Bank, Ahli Bank recorded the second highest increase in net profit, increasing by 49.6%, followed by Qatar National Bank with a 25.4% increase, Qatar Islamic Bank April 2008 Qatar Banking Sector 15

19 25.2%, Doha Bank 24.5% and Qatar International Islamic Bank recorded 20.3% growth in net profit in Chart 11: Net Profit 3000 (in QR mn) ,390.7 Commercial Bank of Qatar Ahli Bank 1, ,506.1 Qatar National Bank Source: Banks Annual Reports and Global Research 1, ,003.0 Qatar Islamic Bank Doha Bank Qatar Intl. Islamic Bank 1, Masraf Al-Khalij Al-Rayan Comm. Bank Return on Assets and Equity In terms of return on equity and return on average assets, the banks have shown mixed trend in Among the banks under review, barring Commercial Bank of Qatar, all the banks witnessed a decline in heir return on assets. In case of Commercial Bank of Qatar RoAA improved from 3.3% in 2006 to 3.7% in In terms of return on average equity, Commercial Bank, Doha Bank and Ahli Bank reported improved returns in 2007 while Qatar National Bank, Qatar Islamic Bank and Qatar International Islamic Bank reported decline in their returns. Table 07: Return Ratios RoAA RoAE Qatar National Bank 3.3% 2.7% 25.6% 24.3% Commercial Bank 3.3% 3.7% 17.3% 27.0% Doha Bank 4.0% 3.6% 29.1% 31.8% Qatar Islamic Bank 8.2% 6.9% 37.6% 32.2% Qatar International Islamic Bank 5.4% 5.2% 34.6% 25.4% Ahli Bank 2.6% 2.4% 18.4% 23.8% Masraf Al Rayan - 5.9% % Al Khalij Commercial Bank - 1.4% - 1.6% Source: Banks Annual Reports and Global Research Qatar Islamic Bank posted the highest returns on equity and also on assets as it reported RoAE of 32.2% and RoAA of 6.9%. Masraf Al Rayan was at second position for RoAA with a return of 5.9% and in terms of RoAE Doha Bank was at the second position with a return of 31.8%. Masraf Al Rayan reported the lowest RoAE of 13.6% while Ahli Bank reported the lowest return on assets of 2.4%. The return ratios of Al Khaliji are not comparable to other banks as the bank has just initiated its operations. 16 Qatar Banking Sector April 2008

20 Q Performance In Q1-2008, the aggregate assets of all the listed banks witnessed a y-t-d growth of 15.1% to QR290.4bn from QR252.4bn at the end of The combined net profit of the banks under review grew by 54.2% y-o-y in Q1-2008, from QR1.6bn in Q to QR2.5bn in Q Table 08: Performance of Listed Banks in Q Assets (in bn) Net Profit (in mn) 2007 Q Y-T-D Y-o-Y Q Q Change Change Qatar National Bank % % Commercial Bank % % Doha Bank % % Qatar Islamic Bank % % Qatar International Islamic Bank % % Ahli Bank % % Masraf Al Rayan % % Al Khalij Commercial Bank % % Total % 1, , % Source: Bank Results and Global Research April 2008 Qatar Banking Sector 17

21 Qatar Banking Sector Outlook The economy of Qatar is registering a strong growth over the last few years and on the back of this, activities are flourishing in almost every sector of the economy and banking sector would be one of the major beneficiaries of this economic boom. The region as well as the country have huge investment potential. Multi-billion-dollar projects are in the pipeline or in drawing board at various stages from various sectors apart from the hydrocarbon sector. As mentioned earlier, Qatar has launched an impressive domestic investment program aimed at diversifying its economic base from the hydrocarbon sector. It is likely to spend about US$140bn on different projects over the next five to six years to continue this diversification strategy. The banking sector would be one of the major beneficiaries of this scale of projects and regional diversification program. The structure of the banking sector in Qatar has changed further as earlier conventional banks ventured into Islamic banking and the sector has also witnessed entry of two new banks in the recent past. Now to face the changing industry dynamics in the domestic market many local banks are focusing on regional expansion through acquisitions and opening branches in the region. Qatar National Bank and Doha Bank are focusing on regional branch expansion whereas Commercial Bank of Qatar and the newly established, Al Khaliji Commercial Bank are focusing on acquisition strategy to increase their foothold in the region. We consider this strategy as in right direction as it will bring diversification in asset class of Qatari banks. Over the last few years, banks in Qatar have extensively focused on improving their quality of assets which resulted into substantial improvement in the quality of their loan portfolio. We believe that going forward quality of the loan book are likely to remain sound, however, steep growth in loan book needs to be watched with caution. At the same time, the loan portfolio of some of banks requires diversification as it is highly concentrated mainly to two sectors, Personal and Real Estate. In certain cases these two sectors account for more than 50% of total loan book. Qatari banks are focusing on expanding their capital base as many banks have announced their plans to come out with rights issues in 2008 and This measure will help the banks to shore-up their CAR and to leverage their balance sheet and will help the banks to tap profitable lending opportunities the country would offer in the coming years. 18 Qatar Banking Sector April 2008

22 Valuation & Recommendation For arriving at the fair value of the banks under review, we have used two valuation methods: 1. Cash flow approach represented by the Dividend Discount Model. 2. Market approach represented by the Peer Group valuation. Dividend Discounting Model - DDM The DDM model constructed is based on a 4-year forecast of dividends as cash flows ( E). The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total NPV of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks: 1. Risk free rate of 5.75%. 2. Equity risk premium of 5% 3. We have taken Beta of for Qatar Islamic Bank, and for Qatar National Bank, Commercial Bank and Doha Bank we have taken Beta of 1 since their calculated Beta value is less than 1. In case of Masraf Al Rayan and Al Khalij Commercial Bank we have taken Beta of 1 as these are newly listed stocks and therefore sufficient stock price history is not available to calculate their Beta. 4. Cost of equity for Qatar Islamic Bank woks out to 10.88% and in case of remaining five banks it stood at 10.75%. 5. Terminal growth rate of 4%. Table 09: Value as per DDM approach QR DDM Value Qatar National Bank Commercial Bank of Qatar Doha Bank 86.1 Qatar Islamic Bank Masraf Al Rayan Bank 25.9 Al Khaliji Commercial Bank 9.4 Source: Global Research. Peer Group Valuation The peer group valuation is done by comparing the price to book value (P/BV) multiples enjoyed by the banks under our coverage. April 2008 Qatar Banking Sector 19

23 Table 10: Companies average P/BV ratios for the banks under coverage Equity 2008 BV/Share Price P/BV (QR mn) (QR) (QR) (x) Qatar National Bank 17, Commercial Bank of Qatar 6, Doha Bank 4, Qatar Islamic Bank Masraf Al Rayan Bank 5, Al Khaliji Commercial Bank 8, Total / Average 48, Source: Global Research, Market prices as on April 27, 2008 As indicated in table 10, the expected average P/BV multiple for the banks under coverage is around 3.1x. Therefore, on the basis of this industry average of 3.1x, the value of the banks under review is given in the table below. Table 11: Value as per Market approach QR P/BV Value Qatar National Bank Commercial Bank of Qatar Doha Bank 84.4 Qatar Islamic Bank 97.8 Masraf Al Rayan Bank 21.4 Al Khaliji Commercial Bank 19.9 Source: Global Research. To arrive at fair value, we have provided 80% weightage to DDM valuation and 20% to the peer group valuation. Table 12: Valuation QR DDM Value P/BV Value Weighted Price Qatar National Bank Commercial Bank of Qatar Doha Bank Qatar Islamic Bank Masraf Al Rayan Bank Al Khaliji Commercial Bank Source: Global Research. 20 Qatar Banking Sector April 2008

24 Table 13: Global Valuation Matrix Price (QR) Target (QR) Reco. Disc./ Prem. BVPS* (QR) EPS* (QR) P/BV (x) P/E (x) Qatar National Bank Buy 16.1% Commercial Bank of Qatar Buy 14.7% Doha Bank Buy 13.3% Qatar Islamic Bank Buy 13.0% Masraf Al Rayan Bank Buy 12.2% Al Khaliji Commercial Bank Reduce -13.4% * Based on 2008E. Source: Global Research, Market prices as on April 27, April 2008 Qatar Banking Sector 21