BBK (BBK.BSE) Country: Bahrain. Exchange: Bahrain Stock Exchange. Sector: Financial services/commercial Banking

Transcription

1 BBK (BBK.BSE) Country: Bahrain Exchange: Bahrain Stock Exchange Sector: Financial services/commercial Banking Local Ticker: BBK Reuters Code: BBK.BSE Investment Opinion: OVERWEIGHT Last traded Price: BHD (as on April 16, 2008) Fair Value: BHD Current Market Price (BHD) YTD Stock Performance % 6.2 Outstanding Shares (In million) Market Cap (BHD Million) Adj. EPS (BHD) 0.04 P/E Adj. BVPS (BHD) 0.29 P/B 2.35 Adj. DPS (BHD) 0.03 Dividend Yield (%) week High (BHD) week Low (BHD) 0.51 Source: Bahrain Stock Exchange, Zawya.com Products & Services: Retail and corporate commercial banking services; treasury services; management of mutual funds. Share Price Movement BBK vs. BASI BBK is one of the leading conventional banks in Bahrain with a well established reputation. It was earlier known as Bank of Bahrain and Kuwait The country s huge investments in the nonoil sector, especially infrastructure, aluminum and metal projects is providing abundant growth opportunities for banks. BBK has a strong capitalization level, with capital adequacy ratio well above the minimum regulatory requirement. On March 03, 2008, its shareholders approved the distribution of 27% cash and 5% stock dividend for the year The entry of several conventional and Islamic banks into the country is heating up competitive temperatures and threatening BBK s position. Offsetting BBK s growth drivers against risk factors, we slightly downgrade our 12-month price target to BHD from BHD 0.856, while reiterating our OVERWEIGHT recommendation on the stock. Call us on or us at research@taib.com

2 Background BBK a 37 year old bank. A financial services power house. BBK, formerly known as the Bank of Bahrain and Kuwait, was established as a Public Shareholding Company in Bahrain on March 16, 1971, to operate under a commercial banking license issued by the banking regulator. In 2005, it completed a major re-branding exercise, changing its name to BBK from Bank of Bahrain and Kuwait and adopting a new logo to reflect a shift in culture towards a brighter, more friendly and dynamic institution. Listed on the Bahrain Stock Exchange (BSE), BBK is the 10 th largest company in terms of market capitalization. To enhance its liquidity, in September 2006, the bank listed its shares on the Kuwait Stock Exchange (KSE). In terms of total assets, BBK s market share comprises 11.2%; deposits stand at 15.2%; and net loans and advances constitutes 26.9%. The bank operates through four divisions Retail; Corporate; International; and Investment, treasury and other activities. The Retail banking division handles individual customers deposits and provides consumer finance loans, overdrafts, credit facilities and funds transfer facilities, card businesses and foreign exchange. The Corporate banking division focuses on providing loans and other credit facilities, deposit and current accounts to corporate and institutional customers in Bahrain, while the International banking division deals with loans and other credit facilities, deposit and current accounts to overseas units. The Investment, treasury and other activities division provides money market, trading and treasury services as well as management of the group s funding operations. BBK s other activities include business process outsourcing services, which it bank provides through a network of 18 branches in Bahrain and one branch in Kuwait. It also has two branches in India and a representative office in the UAE. In addition, BBK has 14 off-site ATMs, 26 ATMs at branches, and 3 specialized cheque and cash deposit machines and a number of point of sale (POS) terminals operated through CrediMax, BBK s wholly owned credit card subsidiary. BBK has been actively involved in supporting and sponsoring a wide range of humanitarian, medical, social and educational initiatives. During the year, the board approved the donation of a health centre to the Ministry of Health, which is expected to cost over BHD 3 million. In May 2007, BBK s landmark transaction - Euro Medium Term Deposit Notes (EMTDN) program that raised USD 500 million in March 2006, was awarded the Best Deal of the Year in the country by the Financial Times media group. In December, 2006, the bank was also awarded the Country Award at the 3rd Annual e- Banking Middle Eastern Awards 2006, held by the Middle East Excellence Awards Institute in Dubai. Creditable ratings. In recognition of BBK s good domestic franchise, satisfactory profitability, improving asset quality and adequate liquidity and capitalization, as well as extremely high probability of financial support, two top international rating agencies recently upgraded it. On January 28, 2008, Fitch Ratings affirmed BBK s long-term Issuer Default rating (IDR) 'A-', short-term IDR rating of 'F2', Individual rating of 'C', Support rating of '1' and Support Rating Floor at 'A-'. On December 24, 2007, Moody s Investor Service assigned the bank s local currency deposits ratings at A2, long-term foreign currency deposits at A2/P-1 and Financial Strength Rating (BFSR) at C-. Both the agencies maintained a Stable outlook. For the year 2007, BBK posted a net profit of BHD million compared to BHD million registered in the prior year period, a decrease of 8.5%. Consequently, earnings per share (EPS) decreased to BHD as against BHD in Board of Directors Chaired by Mr. Murad Ali Murad. BBK s board of directors consists of twelve members. Mr. Murad Ali Murad is the Chairman and Mr. Jassem Hasan Ali Zainal is the Deputy Chairman of the bank. The rest of the board members are as follows: Name Designation Yacoub Yousef Al Fulaij Mohammed Salahuddin Ahmed Hamad Ahmed Al Busairi

3 Abdulla Mohammed Al Sumait Sh. Mohammed bin Isa Al Khalifa Aref Saleh Khamis Jamal Ali Al Hazeem Abdul Majeed Haji Al Shatti Ali Hassan Meshari Al Bader Sh. Khalifa bin Daij Al Khalifa Major Shareholders and Affiliates Shareholding dominated by institutional investors. BBK s shareholding pattern is dominated by institutional investors. Eight institutions hold the lion s share (84.94%), with only 15.06% in public hands. On March 17, 2008, Global Investment House (GIH) increased its stake in the bank by 0.86% from 15%. Further, on February 20, 2008, Commercial Bank of Kuwait (CBK) sold its 19.18% stake to Bahrain's Ithmaar Bank for BHD million. The Bahraini Pension Fund Commission holds 18.83% stake, while the General Organization for Social Insurance Bahrain owns 13.35%. The remaining stakes are with the Bank of Kuwait and the Middle East, Securities Group, Kuwait Investment Authority, and Zumorroda Investment Company that own 6.75%, 4.15%, 3.75% and 3.07%, in that order. Shareholding Pattern 15.06% 84.94% Institutional Investors Public BBK in turn has several subsidiaries and affiliates, which are as follows: SUBSIDIARIES/AFFILIATES COUNTRY % SHARE CrediMax Bahrain % Invita Bahrain % Al Khaleej Islamic Investment Bank Bahrain % Sakana Holistic Housing Solutions Bahamas 50.00% The Benefit Company Bahrain 22.00% Bahrain Commercial Facilities Company Bahrain 20.25% INVESTMENTS COUNTRY % SHARE Securities and Investment Company Bahrain 9.90% Bahrain Kuwait Insurance Company Bahrain 6.78% Bahrain Telecommunications Company Bahrain 2.40% Credit Information Network Company Kuwait -

4 The Industry Scenario A strengthening economy. Bahrain a financial hub. On the back of robust oil revenues, low inflation, sound economic reforms, higher government and public spending, the Bahraini economy experienced yet another profitable year in It is expected to expand further at a growth rate of 6.5% in 2008, rising from 6.2% in After oil & gas, the financial services sector remains the highest contributor to the country s GDP and stands to benefit from the current investments in the non-oil sector. Largely on account of the country s astute regulatory policies, the Bahraini financial services sector is experiencing brisk growth. Consequently, several financial firms from the Gulf region as well as other parts of the world are swarming to set up business in this exciting environment. Bahrain has positioned itself as the financial hub of the Gulf region given its well-developed financial services industry, excellent regulatory supervision, and the presence of a large number of financial institutions. According to a study conducted by the Global Financial Centers Index (GFCI), it is considered to be the biggest mover, not only in the Gulf but globally. The study assessed the top 50 financial centers world-wide using people, business environment, market access, infrastructure and general competitiveness as the criteria. Bahrain was ranked at 39th place for 2007, a jump of three places from the previous year. On April 2, 2008, the CBB granted a license to leading French banking group, Credit Agricole (Euronext: ACA) to carry out private banking business in the country, thereby taking the total number of banking and financial institutions to 402. The sector now comprises 150 banks, 166 insurance companies, 34 investment firms, 13 capital market brokerage firms, and 39 specialized licensee firms. In 2007, Bahrain s retail banks registered total assets of BHD billion - an over two-fold growth from BHD 8.68 billion. Total loans and advances surged 38.0% to BHD 4.19 billion from BHD 3.03 billion. Of the total loan portfolio, business lending accounted for 58.4%, while personal lending comprised 35.7%. In the total business lending portfolio, the construction and real estate sector lead with a share of 32.2%, followed by trade at 30.2%. In the realm of personal lending, the average interest rate on personal loans increased to 9.3% as compared 8.9% in However, the average interest rate on business loans declined to 6.9% as compared 8.0%. In February 2008, money-supply growth in Bahrain, an indicator of future inflation, accelerated to 37.6% from 36.3% in January on the back of high oil prices, increase in private sector time and savings deposits (quasi money), and demand deposits. According to the CBB, time and savings deposits climbed 44.5% to BHD 4.1 billion and demand deposits grew 27.4% to BHD 1.59 billion. Snapshot of the Bahraini Banking Industry (BHD millions) 31 Dec Dec '06 % Chg Total Assets 18, , % Foreign assets 10, , % Foreign Liabilities 8, , % Loans & Advances 4, , % Deposits 7, , % Banks to ride on infrastructure investments. In order to rescue the country from an oil dependant economy, the Bahraini government is diversifying into the non-oil sector. It has already pumped in USD 5 billion in the metals sector with special industrial initiatives in the aluminum sector - 15 projects worth USD 142 million. As far as banks are concerned, according to Gulf Investment House, on completion of the Bahrain Financial Harbour (BFH) the contribution of the financial sector to GDP would increase further. BFH is a USD 1.5 billion integrated master-planned community, with a unique waterfront development designed for commercial, residential, and leisure purposes. BFH includes the Dual Towers, the Financial Mall, and the Harbour House. Other significant projects currently under way in the country include: the Bahrain- Qatar Causeway (USD 2 billion), Science and Technology Park (USD 1 billion), Seef District Development (USD 450 million), Sheikh Khalifa bin Salman Port (BHD 52 million) and the World Trade Centre. These huge infrastructure projects would in turn increase the country s diversification plans by attracting more Foreign Direct Investment (FDI). In order to promote the country as a choice destination for foreign investors, on April 3, 2008, the government announced its intention to spend USD 5 billion on a business park. Finally, Bahrain has outlaid BHD 184 million on road expansion projects and USD 1 billion on the development of a 1,200 MW power station.

5 CBB to assign banks individual ratios. On March 19, 2008, the CBB decided to cut its key policy interest rate by 75 basis points (bps). Consequently, the rate on the one-week deposit facility came down to 2.25% from 3%. The CBB has also cut the rate on overnight deposit facility to 1.75% from 2.50%, while the repo and lending rates remain unchanged. Further, the regulator has set a minimum capital adequacy ratio of 12%. However, it plans to reduce this blanket by assigning individual ratios to banks, based on their business model, strength of risk management procedures, and investment strategies. After facing the brunt of the subprime crisis in March 2008, the CBB announced that banks need to fully disclose their risk management procedures. In addition, as part of the Basel II implementation, the CBB is also working to ensure that banks are protected from a regional real estate collapse. By the end of 2008, Bahrain plans to have set capital ratios for every bank in the country. However, it is yet to finalize the exact metrics that will be used to establish these ratios. Peer Analysis (for 2007) In BHD millions Bank of Bahrain and Kuwait National Bank of Bahrain Ahli United Bank Arab Banking Corporation Bahraini Saudi Bank Net Profit Loans & Advances 1, , , Deposits 1, , , , Total assets 2, , , , Total equity ROA 1.4% 2.2% 1.3% 0.4% 1.8% ROE 12.7% 17.1% 12.8% 6.7% 7.1% EPS Asset Structure Total assets surged 23.5%. For the year 2007, BBK registered a robust 23.5% growth in total assets to BHD 2.09 billion as against BHD 1.69 billion in the earlier year. The improvement in total assets was driven mainly by the bank s loans & advances and cash & balances with central bank. BBK s loans & advances surged 20.2% to BHD 1.13 million from BHD 0.94 billion in 2006, while its contribution to total assets slightly declined to 53.9% from 55.4%. Out of the total loans & advances, commercial loans & advances climbed 22.9% to BHD 1.04 billion, while consumer loans declined 0.9% to BHD 0.14 billion. Consequently, commercial loans & advances accounted for the lion s share (88.2%), while consumer loans constituted only 11.8%. Following the CBB s 50 bps cut on the key policy interest rate, on February 3, 2008, the bank cut its base lending rate to 8.75% from 9.25%, one-week deposit facility to 3.5%, and overnight deposit facility to 3.0%. This move was directed at sharing the gain the bank earned from a decrease in the cost of deposits to customers. Concurrently, with effect from January 24, 2008, BBK decreased its consumer and mortgage loan interest rates by 0.25%. During the year, cash & balances with the CBB registered an over two-fold growth to BHD million as against BHD million. Of the total cash & balances with central banks, current account and placements increased to BHD million from BHD million, thereby accounting for the largest portion at 82.7%. Asset Structure of BBK 1% 10% 12% 22% 1% 54% Cash & balances with CBK Premises & equipment Investment inassociates and JV Loans and advances Non-trading investment securities Other assets

6 During the year, investment in associate companies and joint ventures soared 43.2% to BHD million. This is represented by BBK s 20.25% interest in Bahrain Commercial and Facilities Company and 50:50 JV with Sakana Holistic Housing Solutions, which is engaged in Islamic real estate financing. The bank s investments portfolio is classified into three categories - Financial assets at fair value through profit or loss (FVPTL), Investments available for sale, and Investments stated at amortized costs. The FVPTL category, which consists of government debt securities and structured notes, stood at BHD 4.50 million. The other two categories consist of quoted bonds and equities and unquoted securities that are mainly acquired for long term retention. At the end of 2007, 41.6% of these investments were in the form of quoted bonds, equities and managed funds, while the balances were in the form of unquoted investments. The bank classifies its geographic segments into two categories - Middle East, which is classified as Regional, and North America, European Union countries, Asia and others, which are classified as International. Between the two, 86.3% of total assets was allocated to the Regional segment and 13.7% was apportioned to Overseas. Capital Structure Shareholders equity up 26.3%. For 2007, BBK s issued and paid up share capital stood at BHD million comprising million shares of BHD each. On February 25, 2007, the bank approved the distribution of 5% bonus share worth BHD 3.20 million. Earlier, on November 12, 2007, the bank issued 100 million rights shares of BHD each at a premium of BHD per share, in order to finance its growth strategy. Consequently, the total number of outstanding shares increased to million from million. At the end of 2007, the bank had treasury shares worth BHD 1.36 million. However, this treasury stock does not carry any voting rights or cash dividends. BBK s shareholders equity attributable to the parent steadily increased to BHD million as against BHD million in Consequently, shareholders equity to asset ratio increased to 11.3% from 11.1% in the previous year. Further, sharing the rewards of its performance with its shareholders, on February 24, 2008, BBK approved 27% cash dividends and 5% bonus issue for the year On June 10, 2007, the bank issued USD 275million Lower Tier II Debt Issue under its USD 1 billion Euro Medium Term Note (EMTN) programmed with a maturity of 10 years, callable after 5 years. This was successfully closed on July 8, Moody's Investor Service has awarded the 10-year EMTN program A2 and currency debt ratings A3 foreign, while Fitch has given a long-term rating of BBB+ for the subordinated notes. The note carries a coupon rate of 75 bps over 3-month US LIBOR. Consequently, BBK s debt to equity ratio increased to 143.1% from 125.5%, and customers current, savings and other deposits increased 15.9% to BHD 1.12 billion from BHD 0.96 billion in However, its contribution to total liabilities & shareholders equity declined to 53.4% from 56.9%. Capital Structure of BBK 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Shareholders equity to asset ratio D/E ratio Meeting Basel II with sound CAR. For the year 2007, the bank s capital adequacy ratio (CAR) increased to 23.3% from 16.2% in This indicates that the bank maintains a satisfactory CAR, which is well above the minimum requirement of 12% mandated by the CBB and 8% by the Basel II norms. Therefore, it is in a comfortable position and can withstand with any impairment to loans and investments, while meeting Basel II challenges.

7 Recent Performance Net profit dipped 8.5% For the year 2007, BBK s net profit attributable to shareholders of the parent declined 8.5% to BHD million from BHD million in 2006, on account of exceptional provisions made by the bank against non-trading investment securities. This resulted in earnings per share of BHD as against BHD in the earlier year. Consequently, net profit margin decreased to 34.3% from 50.9% in In addition, both return on average assets (ROAA) and return on average equity (ROAE) dropped to 1.6% and 14.1% as against 2.1% and 18.2%, respectively, in the previous year. Recent Performance of BBK in BHD millions % 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Total income Net profit ROAA ROAE Total operating income climbed 35.9%. Exceptional provision made for US sub prime crisis. During the year, BBK s total income soared 35.9% to BHD million from BHD million in The increase in total income can be mainly attributed to an improvement in the bank s core business activities such as interest income, investment income, fees & commission, and foreign exchange income. Driven by a healthy growth in customer loans & advances, BBK s interest income grew 19.9% to BHD million from BHD million, as a result of which net interest income rose 19.8% reaching BHD million from the earlier year. The share of profit in associated companies and joint ventures surged 29.8% to BHD 1.35 million. Further, other income, which includes fees & commission income, dividend income, profit on sale of land, gain on foreign exchange income among others, climbed 63.8% to BHD million as profit realized from sale of land stood at BHD 6.16 million. In addition, income from foreign exchange dealings surged 56.9% to BHD 2.82 million, while fees & commission income grew 18.6% to BHD million on the back of higher income from its credit card business, commercial services fees, and corporate and retail banking fees. In 2007, BBK s total operating expenses grew 14.8% to BHD million from BHD million, mainly on account of investments made under the strategic plan of building capabilities, developing new businesses and development of human resources. Despite a surge in operating expenses, the bank s cost to income declined to 35% from 41.4% in 2006, indicating its operating cost efficiency. During the year, net provision for impairment on loans and advances to customers also dropped 35.1% to BHD 3.43 million. However, net provision for impairment of non-trading investment securities increased to BHD million as against a recovery of BHD 0.32 million, due to exceptional provisions made against securities impacted by the US sub-prime mortgage crisis. However, this exceptional provision was offset to a certain extent by extraordinary income of BHD 6.16 million on sale of acquired property, as approved by the Board in its earlier meeting in October Of the four business segments - operating income from investment, treasury and other activities registered an over two-fold growth to BHD million followed by the International segment (41.2%), Corporate segment (19.4%) and Retail segment (7.8%). New Projects and Strategy To maintain its leading position, diversification and innovation has become imperative for BBK as competition spirals on the back of the growth in Islamic banking services. On March 4, BBK announced its intention to raise the capital of its fully-owned subsidiary Al Khaleej Islamic Investment Bank to USD 100 million, which is expected to start operations in June. In addition, it plans to expand overseas through strategic mergers and acquisitions. This in turn would enable BBK to expand its asset base rapidly, and generate revenues from new sources and markets.

8 BBK strategy = Diversification + Innovation Customer centric initiatives. Reflecting its one-stop-shop philosophy, in December 2007, BBK launched the fourth financial mall in Muharraq - a milestone event in its strategic banking development. The mall features both face-to-face and electronic services, an automated queuing system (replacing conventional queues and improving time efficiency), as well as financial advisory services. It also offers dedicated parking, longer operating hours as well as telecommunications and insurance services. Muharraq also houses strategic third party partners whose personnel are available to provide their products and services to clients. In July 2007, BBK launched a new financial department, the Transactional Banking Division (TBD) to offer its corporate clients increased efficiencies coupled with outsourcing financial activities related to trade and cash management. TBD services, which will serve large conglomerates as well as small enterprises, will facilitate all core business transactions related to supply chain and cash-flow management, in addition to providing financial solutions. In order to tackle unexpected breakdown, on January 24, 2008, BBK established a disaster recovery centre as its back-up nerve centre to cope with any untoward situation. To tap the increasing demand for vehicle loans, on October 29, 2007, the bank launched a new car loan package with attractive features such as competitive interest rates, repayment periods of up to 84 months, comprehensive insurance with MotorSecure from Secura, coupled with fewer formalities. In a bid to leverage the large numbers of Non-resident Indians (NRIs) who need expert service in the Indian stock markets, on September 20, 2007, BBK tied up with Geojit Financial Services Limited, one of India s largest stock brokers. Under this agreement, Geojit will provide trained manpower and investment assistance to persons deputed by BBK. As of now, the bank s customers are offered services related to investments in the Indian stock market by NRI Marketing Teams in Bahrain and Kuwait with the support of NRI desks at BBK. With the new agreement, the NRI Banking Desk at Bahrain will be strengthened with additional staff trained by Geojit Financial Services, which in turn would add value to the bank s customer service and improve its customer reach. Continuing its strategy to attract more and more depositors through new offerings, on February 24, 2008, BBK launched the Al Mustaqbal savings account, under which customers are allowed to save a certain amount every month (Minimum BHD 50) for a specific time period (Minimum - 1 year, maximum - 15 years), for which interest is paid monthly. Further, in September 2007, BBK joined hands with UTI Asset Management Company and launched a five-year open-ended multiple class structured USD denominated fund, targeting both NRIs and Arab investors. The new fund will invest in UTI - Rainbow Fund - Class A, which is an open ended Multiple Class structure fund. The UTI- Rainbow Fund will create a well diversified portfolio of 30 to 40 stocks and will have an even mix of large-caps and mid-caps with a dynamic allocation depending on market conditions. It targets an average return on investment of 15% to 20% per annum. Positives BBK s 37-year history carries tremendous brand value as the Bahrain s leading conventional bank. The bank s capitalization is strong with a CAR above the minimum CBB requirement of 12% and Basel II dictum of 8%. The county s massive investment in the non-oil sector is providing abundant growth opportunities for the banking sector. Negatives Intensifying competition from conventional as well as Islamic banks is likely to pressurize BBK s profitability. The bank s its entry into varied geographical regions is risky; net profit dipped in 2007 as a result of exceptional provision for financial assets impacted by US sub-prime crisis.

9 Valuation: Discounted Cash Flows Cost of Equity: 13.19% WACC: 9.42% 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 1.20% using Moody s long-term country rating (A2 for Bahrain) 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 3.570%. Based on the inputs and the Capital Asset Pricing Model, we arrive at a Cost of Equity of 13.19%. Considering the long-term debts of BBK, we arrive at the Weighted Average Cost of Capital (WACC) of 9.42%. Investment Opinion Fair Value: BHD Investment Opinion: OVERWEIGHT Over the past few years, the Bahraini economy has been demonstrating substantial vigor. We expect BBK to have abundant growth opportunities, thanks to the immense project finance opportunities thrown up by infrastructure, aluminum and metal projects. With swelling demand for loans for the non-oil sector, the bank is poised to widen its asset size substantially over the next two to three years. BBK is well positioned to exploit these openings due to its current position, brand value, strategies to attract customers, and strong deposit franchise. The bank s plans to further expand its presence by means of strategic mergers and acquisitions are likely to facilitate the mobilization of deposits at a low cost. However, BBK also operates in key US markets, which negatively impacted its financials in Further, the robust growth in the country s financial sector has inspired many foreign banks to enter the market, turning up competitive temperatures. Finally, BBK faces competition from conventional banks as well as Islamic banks; the latter in particular, are gaining ground. Nevertheless, we believe that BBK can meet these challenges thanks to its dynamic diversification policy and innovative financial products. Considering the above factors, we revise our Fair Value per share for BBK downwards by 6.5% to BHD from BHD (June 13, 2007). The stock exhibits a 16.7% potential upside from its closing price of BHD (as on April 16, 2008). Therefore, we reiterate our earlier OVERWEIGHT investment opinion on BBK s stock. Condensed Projections (in BHD 000) 2008E 2009E 2010E Total operating income 85,774 95, ,426 Net income 35,647 40,541 45,582 Total assets 2,405,534 2,739,862 3,135,264 EPS (BHD) BVPS (BHD)

10 FINANCIAL STATEMENTS BALANCE SHEET As on In BHD Dec Dec 06 %Chg Assets Cash and balances with central banks 256,922 55, % Treasury bills 25,248 39, % Financial assets at fair value through profit or loss 4,497 0 Deposits and due from banks and other financial institutions 169, , % Loans and advances to customers 1,127, , % Non-trading investment securities 455, , % Investment in associated company and joint venture 13,633 9, % Interest receivable and other assets 20,262 22, % Premises and equipment 19,855 18, % TOTAL ASSETS 2,092,510 1,693, % LIABILITIES AND EQUITY LIABILITIES Deposits and due to banks and other financial institutions 354, , % Borrowings under repurchase agreements 12,567 16, % Term borrowings 339, , % Customers current, savings and other deposits 1,117, , % Interest payable and other liabilities 31,493 26, % 1,855,201 1,505, % TOTAL LIABILITIES EQUITY Share capital 77,220 64, % Treasury stock -1,357-1, % Share premium 39,919 0 Statutory reserve 32,792 29, % General reserve 20,000 20, % Cumulative changes in fair values 24,235 31, % Foreign currency translation adjustments 3, % Retained earnings 14,822 13, % Proposed appropriations 26,010 29, % EQUITY ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT 237, , % Minority interests % TOTAL EQUITY 237, , % TOTAL LIABILITIES AND EQUITY 2,092,510 1,693, %

11 INCOME STATEMENT For the period ended In BHD Dec Dec 06 %Chg Interest income 126, , % Interest expense 75,798 63, % Net interest income 50,571 42, % Share of profit in associated company and joint venture 1,346 1, % Other income 35,640 21, % Total Income 87,557 64, % Staff costs 17,740 15, % Other expenses 10,854 9, % Depreciation 2,026 1, % Net provision for impairment on loans and advances to customers 3,429 5, % Net (write back) for impairment of non-trading investment securities 23, % Total operating expenses 57,992 31, % PROFIT BEFORE TAXATION 29,565 32, % Taxation (write back)/ provision - Indian Branches % Kuwait National Labor support tax % NET PROFIT FOR THE YEAR 29,938 32, % Attributable to: SHAREHOLDERS OF THE PARENT 30,036 32, % Loss attributable to minority interests % 29,938 32, % No. of Outstanding Shares ( 000) 766, ,717 EPS (BHD) % KEY RATIOS 31 Dec Dec 06 Cost to income ratio 35.0% 41.4% Credit to Deposit Ratio 105.4% 102.2% Shareholders equity/asset ratio 11.3% 11.1% Capital Adequacy Ratio (CAR) 23.3% 16.2% Debt-Equity (D/E) Ratio 143.1% 125.5% EPS (BHD) ROAE 14.1% 18.2% ROAA 1.6% 2.1%

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