Qatar National Bank (QNBK.DSM)

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1 Qatar National Bank (QNBK.DSM) Country: Qatar Exchange: Doha Securities Market Sector: Banking Local Ticker: QNBK Reuters Code: QNBK.DSM Investment Opinion: OVERWEIGHT Last traded Price: QAR (as on May 07, 2008) Fair Value: QAR Current Market Price (QAR) YTD Stock Performance % 39.2 Outstanding Shares (In million) Market Cap (QAR Million) 58, Adj. EPS (QAR) P/E Adj. BVPS (QAR) P/B 4.26 Adj. DPS (QAR) 3.79 Dividend Yield (%) week High (QAR) week Low (QAR) Source: Doha Securities Market, Zawya.com Products & Services: Retail, investment and wealth management, and Islamic banking services. Share Price Movement QNBK vs. DSM Index Qatar National Bank (QNBK) is the largest bank in Qatar, controlling nearly half of the country s total banking industry. The government s plan to spend USD 140 billion on projects provides abundant opportunities for banks to enhance their loan portfolio. QNBK has a strong capitalization level, with capital adequacy ratio well above the minimum regulatory requirement. For 2007, the bank distributed 50% cash and 20% stock dividend. It also increased its share capital though right issues in two phases - in October 2007 and in April Competition resulting from liberalization and the entry of new players is threatening QNBK s market position. Offsetting QNBK s growth drivers against risk factors, we raise our 12-month price target to QAR from QAR , while reiterating our OVERWEIGHT recommendation on the stock. Call us on or us at research@taib.com

2 Background QNBK the largest bank in Qatar. Established on June 06, 1964, Qatar National Bank (QNBK) is a giant in the Qatari banking industry. It is not only the largest bank in Qatar, but also controls nearly half of the country s total banking industry. It was the first conventional bank in Qatar to offer Islamic banking products and services through QNB Al Islami, and the first Qatari bank to launch equity funds for companies listed on the Doha Securities Market. In terms of total assets, QNBK s market share comprises 45.3%; deposits stand at 49.5%; and loans and advances constitute 45%. Harnessing 44 years of rich experience in banking, QNBK is principally engaged in providing retail, corporate, treasury, investment & wealth management, and Islamic banking services. The bank operates though an extensive network of 42 branches and offices (including 3 mobile branches), in addition to 11 Islamic branches and offices, and more than 130 Automated Teller Machines (ATMs). In order to stave off competition in the banking sector and to tap the vast potential available in the GCC region and overseas, the bank is striving to expand its business geographically. QNBK s international presence spans Oman, Kuwait and Yemen, in addition to its existing branches in London and Paris, and representative offices in Singapore, Libya and Iran. Recently, it obtained licenses to operate in Sudan and Mauritania. Further, the bank intends to have a presence in around 20 to 25 countries by the year Its large branch network and expansive geographical spread gives QNBK, a broad customer base and access to low-cost deposits. A slew of acquisitions. A bouquet of innovative products and services. High ratings and accloades. Robust performance in 1Q As part of its expansion plan, in March 2008, the bank secured a 50% stake in Tunisian Qatari Bank and in January it increased its stake in The Housing Bank for Trade and Finance (Jordan) from 20% to 31.5%. It also acquired a 30% stake in The Kuwaiti-Qatari Company for Ijara and Investment, which will offer Islamic financing services within the GCC. In January 2008, it purchased a 20% stake in the Doha-based Al Jazeera Islamic Company. QNBK recently received approval from the Qatar Financial Center to establish a new investment company QNB Capital which will provide investment banking services. It also signed an agreement with Syrian private and public sectors institutions to establish the Qatar National Bank-Syria, with a 49% control. In order to meet the unique need of individual customers, QNBK has launched several new innovative products and services. Some notable offerings include QNB Secure, QNB First and QNB Business Banking Services, which attend to customer needs on a daily bases. In June 2007, the bank introduced Buy-to-Let Mortgage for Qatari citizens who wish to invest in Qatar s booming real estate sector. In 2007, QNB became the first bank in Qatar to offer automated IPO subscriptions via e-ipo, enabling its customers to subscribe to initial public offerings through the internet and its ATMs. In the same year, the bank also launched a new service EAZYLife that includes a wide range of e-banking services such as internet banking, SMS Alerts, ATMs, estatements, Mobile Branches, and the 365- day-a-year Customer Care Center. In February 2008, the bank revamped its corporate website and also upgraded internet banking service EAZYinternet with additional and unique services. On November 22, 2007, QNBK won the 'JPMorgan Chase Elite Quality Recognition Award' in recognition of its outstanding and high quality operational performance in fund transfers for customers. In September 2007, it was named as the Best e-bank in Qatar by the Middle East Excellence Award institute, on the back of its ability to cater to the ever changing needs of multi cultural societies. The bank has also been the recipient of the Best Bank in Qatar Award from a number of leading international specialized financial publications including: The Banker, Euromoney, Global Finance and Project Finance. In 2007, Fitch Ratings (Fitch) assigned QNBK a long-term issuer default rating of 'A+' and a short-term rating of 'F1', with an individual rating of 'B/C' and a support rating of '1'. Similarly, Capital Intelligence (CI) assigned it a long-term foreign currency rating of 'A+', a short-term foreign currency rating of 'A1', a financial strength rating of 'A+', and a support rating of '1'. Further, Moody's Investors Service assigned QNBK a long-term bank deposits rating of 'Aa3', a short-term bank deposits rating of 'P-1', and a financial strength rating of 'C-, while Standard and Poor s affirmed the bank with a long-term bank credit deposits rating of A+, a short-term bank credit deposits rating of 'A- '. All the rating agencies maintained a Stable outlook. For the quarter ended March 2008, QNBK reported a 40.5% growth in net profits, which increased to QAR 0.92 billion from QAR 0.65 billion in 1Q Consequently, earnings per share (EPS) increased to QAR 4.2 from QAR 3.4.

3 Board of Directors Chaired by H.E. Yousef Hussain Kamal. QNBK s board of directors consists of ten members. H.E. Yousef Hussain Kamal is the Chairman and H.E. Sheikh Hamad Bin Faisal Al-Thani is the Vice Chairman of the bank. The rest of the board members are as follows: Name H.E. Sheikh Hamad Bin Jabor Bin Jassim Al-Thani H.E. Sheikh Jassem Bin Abdulaziz Bin Jassem Bin Hamad Al-Thani H.E. Sheikh Hamad Bin Abdullah Bin Khalifa Al-Thani Mr. Rashid Misfer Al-Hajri Mr. Ali Hussain Ali Al-Sada Mr. Bader Abdullah Darwish Fakhroo Mr. Fahad Mohammed Fahad Buzwair Mr. Mansoor Ebrahim Al-Mahmoud Designation Major Shareholders and Affiliates Ownership equally divided. The ownership structure of QNBK is split between the Qatar Investment Authority (50%) and the public (50%). The government has mandated that foreign investors cannot hold more than 25% of the company. Shareholding Pattern 50% 50% Qatar Investment Authority Public QNBK in turn, has several subsidiaries and affiliates, which are as follows: SUBSIDIARIES/AFFILIATES COUNTRY % SHARE Ansbacher Group United Kingdom % Tunisian Qatari Bank Tunisia 50.00% Qatar National Bank - Syria Syria 49.00% The Housing Bank for Trade and Finance Jordan 31.53% Kuwait - Qatari Company for Ijara and Investment Qatar 30.00% Mansour Bank Iraq 23.00% Al Jazeera Islamic Company Qatar 20.00% Qatar Capital Partners Qatar

4 The Industry Scenario A booming economy. With Gross Domestic Product (GDP) increasing threefold since 1995 and expected to hit between USD 100 and USD 120 billion by 2015, Qatar is now recognized as one of the largest and most lucrative markets not just in the Gulf, but globally. Fuelled by the buoyant regional economic environment and driven by historically high oil and gas prices, Qatari banks have been enjoying robust results. According to analysts, Qatar s real GDP is expected to grow 13.2% this year and total revenues are anticipated to hit USD 106 billion (22%) on the back of a surge in hydrocarbon revenues (28%). However, the government is making strenuous efforts to diversify the economy, with primary focus on sectors such as tourism and financial services. Currently, the total number of banks operating in Qatar stands at 42. Of this, 10 are local and seven are foreign banks; another 25 banks are registered with the Qatar Financial Centre (QFC). Qatar s commercial banking sector's results for 9M 2007 illustrate excellent growth rates, with total assets reaching QAR billion, up 49.1%. Deposits increased to QAR billion, while loans touched QAR billion. The principal loan exposures are to the public sector, consumption, and the services sector; the banking sector s domestic credit portfolio accounted for 50% of the total banking assets. During 2007, private sector credit accounted for 72.9% of the total domestic credit, while public sector credit accounted for 27.1%. Out of the total deposits, private sector deposits accounted for 64.2%, followed by public sector deposits (33.4%), and Non resident deposit (2.3%). For the year, foreign assets climbed 27.1% to QAR billion. However, on account of increased borrowing from both foreign and Qatari banks, funds due to foreign banks grew by 128.5% to QAR billion, while due to domestic banks registered an over three fold growth to QAR billion. Snapshot of the Qatari Banking Industry (QAR billions) 30 Sept Sept '06 % Chg Total Assets % Loans & Advances % Deposits % Foreign assets % Foreign Liabilities % A new regulatory authority. Massive investment in infrastructure projects. In order to attract international financial institutions and multi-national corporates to establish business operations in the country and to participate in a long-term and mutually beneficial partnership with Qatar, in March 2005, the Government of Qatar established the Qatar Financial Centre (QFC). In the following year, the Qatar Financial Markets Authority was established to regulate the securities market. Subsequently, combining the supervision and regulatory aspects of all the financial institutions under one regulatory body, the country announced its intention to establish a single integrated regulatory authority. Accordingly, on March 05, 2008, the Minister of Finance and Acting Minister of Economy and Commerce announced that the new Financial Regulatory Authority would be established in the first half of this year. However, a period of about two years is envisaged for a smooth transition into a single regulatory regime. The new financial regulator will bring together the resources currently dispersed amongst the Qatar Central Bank, the Qatar Financial Markets Authority and the QFC Regulatory Authority, thus creating a single organization that is expected to set high standard rules, applicable to all financial institutions. While on the one hand positive factors contribute to strong performances across the sector, on the other new entrants into the market are heating up the competitive atmosphere. This trend is set to continue as the Qatar Financial Centre (QFC) attracts more international financial institutions. In addition, the gaining popularity of Islamic finance, especially in the GCC region, has attracted many Qatari banks to venture into Islamic banking as a window within the conventional banking framework. This can be evidenced from the fact that all the seven leading banks in Qatar are now providing Islamic banking products. This in turn is fuelling fierce competition in both the conventional and Islamic banking sectors. In order to accommodate increased demand from foreign investors, a number of DSM-listed companies, including financial institutions, are in the process of obtaining regulatory approvals to increase the current foreign ownership limit from 25% to 49%.

5 Qatar s expenditure has increased by more than 30% per annum since Further expenditure is expected with the government s plans to spend USD 100 billion on investment and infrastructure projects by The country is poised to have 10,000 new hotel rooms and 3,600 tourist apartments by In addition, the government is likely to spend about USD 140 billion on different projects over the next five to six years, in line with its diversification strategy. This would provide abundant growth opportunities for banks to expand their loan and project financing portfolios. To moderate the exuberant environment, the Qatar Central Bank (QCB) has implemented Basel II - the second regulator in the region to do so. It has also taken several other steps for effective risk management. The Central Bank lowers interest rates. On the flip side, the current inflation rate in Qatar is at a much higher level than in the past few years. According to US investment bank Merrill Lynch, the inflation rate in the country is expected to reach 14.5% in 2008, up from 14% in To curb the inflation rate, on May 01, 2008, the QCB reduced its deposit facility rate by 25 bps to 2% from 2.25%, while keeping the benchmark lending facility rate unchanged at 5.5%. The repurchase rate also remained unchanged at 5.5% However, the central bank declared its intention to benchmark lending rate and repurchase rate in the future. It also announced the increase in home buyer's minimum mortgage down payment to 30% from 1%, and a cut in the maximum loan term to 20 years from 30 years. Peer Analysis (for 1Q 2008) In QAR millions Qatar National Bank Ahli Bank Al Khalij Commercial Bank Commercial Bank of Qatar Doha Bank Net Profit Loans & Advances 77, , , , Deposits 72, , , , Total assets 130, , , , , Total equity 13, , , , , ROA* 2.8% 2.2% 0.4% 3.6% 3.3% ROE* 26.6% 22.8% 0.6% 28.9% 33.4% EPS* *Annualized figures Asset Structure Total assets climbed 85.8%. For the first quarter ended March 31, 2008, QNBK s total assets grew a robust 85.8% to QAR billion from QAR billion in the corresponding year ago period. The growth in total assets was driven mainly by the bank s loans & advances, which dominated the asset structure. During the period, loans & advances and financing activities soared 64.1% to QAR billion from QAR billion in 1Q 2007, while its contribution to total assets declined to 59.5% from 67.4%. Out of the total loans & advances and financing activities, conventional banking loans & advances climbed 61.3% to QAR billion, while total Islamic financing activities surged 98% to QAR 6.25 billion. This indicates the bank s ability to attract more customers and to tap the gaining popularity of Islamic financing. Further, in 1Q 2008, QNBK s ratio of NPLs to gross loans declined to 0.5% from 1.1%, reflecting the bank s significantly improved asset quality. Asset Structure of QNBK 59.5% 10.5% 2.2% 2.7% 14.0% 11.1% Cash and Deposits with Central Banks Due from Banks and Other FIs Loans & advances and Financing activities Financial Investments Investment in Associates Other assets

6 QNBK s cash and deposits with the Central Bank registered an almost six-fold growth, reaching QAR billion as against QAR 2.41 billion. Its financial investments surged 51.7% to QAR billion from QAR 9.03 billion, of which investments available for sale accounted for the lion s share (66.3 %), while investments held to maturity comprised 33.7%. During the quarter, investment in associates increased to QAR 2.82 billion from QAR 0.32 billion in 1Q 2007, mainly on account of investments in Housing Bank for Trade and Finance, Al Jazeera Islamic Company, Kuwait - Qatari Company for Ijara and Investment, Tunisian Qatari Bank. Among the geographic segments, assets allocated to the domestic segment comprised 86% of total assets, while the overseas segment accounted for 14%. Over time, as the bank expands into other markets and upgrades its services in the domestic market, we expect total assets to rise significantly. Capital Structure Shareholders equity up 70%. For the first quarter ended March 31, 2008, QNBK s total shareholders equity climbed 70% to QAR billion from QAR 8.10 billion, fueled by a surge in share capital, statutory reserves, and fair value reserve. On October 29, 2007, the bank s EGM met and approved the increase in the bank's capital through two stages - a 12.5% rights issue in Q and a 10% rights issue in Q Consequently, in November 2007, the bank offered one share for every 8 shares held (12.5% of share capital) at QAR 120 per share, comprising nominal share price of QAR 10 and a premium of QAR 110 per share. In April 2008, it launched the second phase, thereby issuing one share for every 10 shares held (10% of capital), at a price of QAR 120 per share, which includes a nominal share price of QAR 10 and a premium of QAR 110 per share. Further, on February 11, 2008, the bank distributed bonus shares. Currently, QNBK s total number of outstanding shares stands at million. During 1Q 2008, both statutory reserves and fair value reserves registered an over two-fold growth each to reach QAR 4.42 billion and QAR 2.26 billion, respectively. However, during the period shareholders equity to total assets ratio declined slightly to 10.6% from 11.6%. Capital Structure of QNBK in QAR billions Issued Capital Reserves Retained Earnings During the period under review, QNBK s total liabilities and unrestricted investment accounts climbed 87.9% to QAR billion from billion in 1Q 2007, mainly on account of increases in customers deposits and due to banks & other financial institutions. Customer deposits climbed 57.7% to QAR billion from QAR billion. However, its contribution to total liabilities & shareholders equity declined to 56.0% from 65.9% in 1Q Due to banks and other financial institutions registered an over three-fold growth to reach QAR billion. In order to finance its growth and expansion strategies, QNBK signed a USD 1,850 million Syndicated Term Loan Facility in September 2007, arranged by a group of international banks and financial institutions. The loan facility, which has a five year maturity, was successfully closed as the largest and the most competitive transaction in the Middle East to date with an aggressive pricing of 19.5 bps over LIBOR. Consequently, the bank s total debt to equity ratio increased to 227.9% from 97.4% in 1Q Further, during the quarter, the bank s unrestricted investment accounts grew 3.1% to QAR 6.76 billion. Healthy CAR. For 2007, the bank s capital adequacy ratio (CAR) decreased slightly to 16.2% from 16.8% in However, the bank maintains a satisfactory CAR, which is well above the minimum requirement of 10% mandated by the QCB and 8% by the Basel II norms. Therefore, it is in a comfortable position to withstand with any impairment to loans and investments, while meeting Basel II challenges.

7 Recent Performance Net profit surged 40.5% In the first quarter of 2008, QNBK s net profit surged 40.5% to QAR 0.92 billion from QAR 0.65 billion posted in 1Q 2007, thanks to a substantial growth in interest income. This resulted in annualized earnings per share of QAR 16.8 as against QAR 16.1 in the year-ago period. However, both annualized return on equity (ROE) and return on assets (ROA) declined to 26.6% and 2.8% as against 32.2% and 3.7%, respectively, in 1Q Recent Performance in QAR billions Q Q % 30.0% 20.0% 10.0% 0.0% Net Interest Income Net Profit ROE ROA Total operating income climbed 34.8%. QNBK s total operating income climbed 34.8% to QAR 1.27 billion from QAR 0.94 billion, as interest income surged. The continued expansion in the bank s loans and deposits book resulted in a 42.1% increase in interest income to QAR 1.42 billion from QAR million in 1Q However, due to a 65.9% spurt in interest expenses, net interest income rose by only 13.4% to QAR 0.51 billion. Concurrently, QNBK s income from Islamic financing and investing activities climbed 14.6% to QAR 0.12 billion from QAR 0.10 billion in 1Q For the period, net fees and commission income rose 31.2% to QAR 0.25 billion from QAR 0.19 billion, while net gains from financial investments registered an over five-fold growth to QAR 0.13 billion from QAR 0.02 billion in 1Q Meanwhile, QNBK s operating cost to operating income ratio slightly increased to 21.9% from 20.2% in 1Q The rise in cost can be attributed to an increase in general and administrative expenses to QAR 0.26 billion (up 46%) and depreciation to QAR million (54.2%) in 1Q Nevertheless, we expect operating expenses to increase in the near future on increasing competition and the bank s aggressive expansion strategies. Among the three main business segments operating income from conventional banking climbed 37.6%, and from Islamic banking by 34.8%, while operating income from wealth management declined slightly by 3.9%. Net profit from conventional banking surged 35.4% to QAR 0.85 billion, while Islamic banking registered an over two-fold growth to QAR million. However, wealth management segment registered a net loss of QAR 8.02 million in 1Q For the financial year ended December 31, 2007, QNBK recorded a 25.5% growth in net profits to QAR 2.51 billion compared to QAR 2.00 billion in The growth was mainly driven by a handsome rise in interest income and net fees & commission income. For the year, interest income surged 36.1% to QAR 4.62 billion from QAR 3.40 billion in However, interest expenses rose significantly by 59.1% to QAR 2.86 billion, restricting net interest income growth to 10.3%. Further, fees & commission income climbed 50.3% to QAR 0.78 billion, while income from Islamic financing increased to 0.42 billion. For the year, the bank s general and administrative expenses grew 15.6% to 0.84 billion, on rising staff costs, marketing expenses and the cost of enhancing IT systems. However, operating cost to income ratio declined to 24.2% from 27.0% in 2006, reflecting its efficient cost control measures. Excellent contribution from QNB Al Islami. At the end of 2007, QNBK s total assets-base grew a handsome 59.6% year-on-year to QAR billion, from QAR billion, mainly on account of a 42.9% surge in net loans & advances and financing to customers. Within the loan portfolio, the bank s principal loan exposures were to the government agencies, personal, industrial and commercial sectors. During the period, the bank s customer deposits and unrestricted investment accounts surged 42.3% to QAR billion mainly on account of an increase in retail and corporate banking business. Further, QNB Al Islami, the bank s affiliate, registered an exciting 125% increase in financing operations to QAR 4.50 billion, while net profits grew by 97.5% to QAR million.

8 New Projects and Strategy Expanding organically and inorganically. One of QNBK s major strategic initiatives is to expand its business organically and inorganically, so that it serves the dual purpose of overcoming domestic competitive pressures as well as seizing the vast opportunities in the GCC region and beyond. In line with this strategy, in March 2008, QNBK acquired a 50% stake in Tunisia-based Tunisian-Qatari Bank after obtaining regulatory approval. In the same month, the bank announced that it had reached an advanced stage in obtaining the necessary approval from regulatory and concerned authorities to establish a company - QNB Capital - in the Qatar Financial Center with a capital of USD 150 million. QNB Capital will provide investment banking services (advisory, structured finance) and direct investments, which will be independent from the regular commercial activities. In addition, QNBK is planning to have a presence in around 20 to 25 countries by the year To tap the increasing demand for Islamic financing, on March 09, 2008, the bank agreed to set up an Islamic financial services firm named Kuwaiti-Qatari Co. for Leasing & Investment with unnamed Kuwaiti partners. The new firm will cost KWD 24 million and QNBK will own 30% of it. This in turn would enable QNBK to expand its asset base rapidly, and generate revenues from new sources and markets. On April 30, 2008, QNBK signed an agreement with Bank Sohar to provide a syndicated credit facility of OMR 22.4 million to Oman Investment & Finance Co. (OIFC). The facility will be used by the OIFC to meet its contract financing requirement. Further, on April 24, 2008, Vodafone-Qatar, the second mobile license issued in the country, appointed HSBC Middle East and Qatar National Bank as joint lead advisers on its initial public offering. On April 09, 2008, the bank s Omani branch entered into a term agreement with Oman-based Desertline Group of Companies to provide a term loan facility worth USD 39 million. In the same month, QNBK signed an MoU with First Qatar Real Estate Development Co. to offer mortgage loan facilities to prospective buyers of First Qatar s luxurious homes in the Pearl- Qatar. Under the terms of the MoU, QNBK will finance up to 90% of the property value for both Qatari and resident expatriates, with loan tenors up to 30 years for Qatari nationals and up to 25 years for resident expatriates. On February 3, QNBK inked a deal to partner with Oxford Business Group (OBG), for the fifth consecutive year. According to the deal, QNBK will provide a refined assessment of Qatar's capital markets, which will be used for further research by OBG's team of international analysts. Wooing customers. In an effort to provide premium and convenient self-service channels to customers, in February 2008, QNBK revamped its corporate website and upgraded its internet banking services EAZYinternet, with additional and unique services. EAZYinternet is part of the EAZYLife service that includes in addition to EAZYinternet; EAZYSMS, EAZYATM, EAZYStatement, mobile branches and EAZYphone (the 24x7x365 Customer Care Center). Finally, the bank s affiliate QNB Al Islami, launched a new product called Vehicle Lease, that provides vehicle financing at very competitive profit rates - believed to be the lowest in the banking sector in Qatar.Al Islami is the first Islamic bank in Qatar to make such an offer. Positives With a 44-year history as Qatar s leading commercial bank, QNBK carries tremendous brand value. The bank s capitalization is strong with a CAR above the minimum requirement of 10% mandated by the QCB and 8% by the Basel II norms. The county s massive investment in the non-oil sector is providing abundant growth opportunities for the banking sector. Negatives Intensifying competition from domestic as well as foreign banks is likely to pressurize QNBK s profitability. The bank s cost ratios are likely to remain high on the back of its aggressive expansion strategy.

9 Valuation: Discounted Cash Flows Cost of Equity: 9.36% WACC: 9.36% We have used the Discounted Cash Flow (DCF) method to determine our fair value estimate. As inputs for our valuation, we have used the unlevered industry Beta for emerging markets Non-US Commercial Banks of We have derived the equity premium by adding the historical premium of US equities over the risk-free rate and the country premium. We estimate a country premium of 0.75% using Moody s long-term country rating (Aa2 for Qatar) and estimating a default spread for that rating, based upon the difference in yields for traded country bonds. As a proxy for the risk-free rate of interest, we have taken the yield on 10-year US treasury notes as the proxy for the risk-free rate of interest. At the time of this report, the 10-year US Treasury bond had a yield of 3.812%. Based on the inputs and the Capital Asset Pricing Model, we arrive at a Cost of Equity of 9.36%. The bank has no long term debt on its balance sheet (as of March 31, 2008). Consequently, we arrive at the Weighted Average Cost of Capital (WACC) of 9.36%. Investment Opinion Fair Value: QAR Investment Opinion: OVERWEIGHT Qatar s economic outlook continues to be favorable with an increasingly diversifying economy. We expect QNBK to have abundant growth opportunities, thanks to immense project finance requirements relating to infrastructure projects worth USD140 billion over the next five to six years. In addition, the rising demand for Shariah-compliant banking products from Muslims as well as non- Muslims is providing a great impetus to Islamic banking. QNBK is well positioned to exploit these conditions due to its current position, brand value, strategies to attract customers, and strong deposit franchise. In addition, the bank s aggressive expansion strategies coupled with strong fundamentals are likely to facilitate the mobilization of deposits at a low cost. QNBK is the first bank in Qatar to launch Portfolio Management Services covering markets in the GCC. Its plan to establish a USD 150 million new company - QNB Capital to provide investment banking services is a step in right direction which will enhance its fees and commission income. On the other hand, the robust growth in the country s financial sector has inspired many foreign banks to enter the market, raising the competitive temperatures. Further, on account of its aggressive expansion plans, cost ratios are likely to remain high. However, we believe that QNBK can meet these challenges through the recent rights issues which will allow it to leverage its balance sheet and innovative financial product. Considering the above factors, we revise our Fair Value per share for QNBK upwards by 5.8% to QAR from QAR (May 17, 2007). The stock exhibits a 15.6% potential upside from its closing price of QAR (as on May 07, 2008). Therefore, we reiterate our earlier OVERWEIGHT investment opinion on QNBK s stock. Condensed Projections (in QAR 000) 2008E 2009E 2010E Total operating income 4,629,427 5,818,632 6,985,260 Net income 3,166,467 4,172,274 5,192,644 Total assets 158,052, ,694, ,514,212 EPS (QAR) BVPS (QAR)

10 FINANCIAL STATEMENTS BALANCE SHEET As on In QAR Dec Dec 06 % Chg 31 March March 07 % Chg Cash and Deposits with Central Banks 10,948,569 2,481, % 14,371,919 2,411, % Due from Banks and Other Financial Institutions 21,302,608 12,780, % 18,155,363 9,859, % Loans and Advances and Financing Activities to Customers 66,064,137 46,226, % 77,390,974 47,152, % Financial Investments 11,308,925 8,877, % 13,696,578 9,028, % Investment in Associates 2,703,546 32, % 2,818,131 32, % Property and Equipment 651, , % 750, , % Other Assets 1,381, , % 2,822, , % Total Assets 114,360,668 71,663, % 130,005,353 69,959, % LIABILITIES and EQUITY LIABILITIES Due to Banks and Other Financial Institutions 9,928,352 6,254, % 24,682,580 7,888, % Repurchase agreement 2,495, ,438,442 0 Customer Deposits 74,180,689 51,930, % 72,743,375 46,135, % Other Borrowings 6,714, ,715,931 0 Other Liabilities 2,000,110 1,183, % 2,887,941 1,276, % 95,319,112 59,369, % 109,468,269 55,299, % Unrestricted Investment Accounts 5,183,192 3,836, % 6,760,494 6,557, % Total Liabilities and Unrestricted Investment Accounts 100,502,304 63,205, % 116,228,763 61,857, % EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF PARENT Issued Capital 1,824,975 1,297, % 2,189,970 1,622, % Statutory Reserve 3,852,723 1,297, % 4,420,493 1,622, % Other Reserves 1,751,616 1,760, % 1,755,702 1,758, % Risk Reserve 783, , % 783, , % Fair Value Reserve 2,346,658 1,099, % 2,256, , % Proposed Dividend 912, , % 0 0 Proposed Bonus Shares 364, , % 0 0 Proposed Transfer to Statutory Reserve 567, , % 0 0 Retained Earnings 1,453,563 1,130, % 2,370,841 1,783, % Total Equity Attributable to Equity Holders of Parent 13,857,859 8,457, % 13,776,590 8,102, % Minority Interest Total Equity 13,858,364 8,457, % 13,776,590 8,102, % Total Liabilities and Equity 114,360,668 71,663, % 130,005,353 69,959, %

11 INCOME STATEMENT For the period ended In QAR Dec Dec 06 % Chg 31 March March 07 % Chg Interest Income 4,622,719 3,397, % 1,416, , % Interest Expense -2,855,168-1,794, % -903, , % Net Interest Income 1,767,551 1,602, % 512, , % Fees and Commission Income 778, , % 266, , % Fees and Commission Expense -51,941-64, % -11,565-9, % Net Fees and Commission Income 726, , % 254, , % Dividend Income 122,048 86, % 103, , % Net Gains from Dealing in Foreign Currencies 175, , % 80,398 63, % Net Gains from Financial Investments 374, , % 132,772 23, % Share in Profit of Associates 122, ,072 0 Income from Islamic Financing and Investing Activities 417, , % 119, , % Other Operating Income 16,233 22, % 18,530 2, % Net Operating Income 3,722,256 2,894, % 1,268, , % General and Administrative Expenses -842, , % -260, , % Depreciation -57,293-53, % -17,414-11, % Recoveries of Provision for Impairment of Loans and Advances 19, , % -29,073 43, % Net Investment Revaluation (losses) / Gains -61,957-66, % 17,641-69, % Other (Provisions) / Recoveries -93 8, % % Recovery of Provision for Properties Acquired against settlement of Debt 0 5, % 0 0 Goodwill impairment -1, Unrestricted Investment Account Holders' Share of Profit -253, , % -55,517-65, % Net Profit before Taxes 2,525,458 2,006, % 923, , % Taxes -19,339-8, % -6,193-6, % Net Profit for the Period 2,506,119 1,997, % 917, , % Attributable to: The Bank's Shareholders 2,507,508 1,997, % 917, , % Minority Interest -1, ,506,119 1,997, % 917, , % No. of Outstanding Shares ( 000) 182, , , ,220 EPS (QAR) % 16.75* 16.10* 4.0% *Annualized figures KEY RATIOS 31 March Dec 07 Operating Cost/Operating Income 21.9% 24.2% Total debt/equity ratio 227.9% 120.1% Shareholders equity/asset ratio 10.6% 12.1% Equity/Gross loans ratio 17.6% 20.6% EPS (QAR) 16.75* ROE 26.6%* 18.1% ROA 2.8%* 2.2% * Annualized figures

12 OPINION RATINGS: OVERWEIGHT NEUTRAL UNDERWEIGHT The stock is expected to perform better than the market index; investors may give the stock more weight in their portfolio, than its weight in the overall market The stock is expected to perform in tandem with the market index; investors may give the stock the same weight in their portfolio as in the overall market. The Stock is not expected to perform in line with the market index; investors may give the stock less weight in their portfolio than its weight in the overall market. Call us on or us at DISCLAIMER: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication, but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing contained herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the investment to increase or diminish. Consequently, investors may not get back the full value of their original investment

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