qatari banking sector

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1 qatari banking sector Enjoying the Ride May 19, 2011 Valuation Price * Fair Value Upside / Market Cap. Recommendation (QR) (QR) Downside QR Millions QNB % Accumulate 92,364 CBQ % Buy 18,113 Doha % Buy 11,079 *As of May 17, 2011 Sources: Reuters, Qatar Exchange, and NBK Capital Rebased Performance 15,500 14,500 13,500 12,500 11,500 10,500 9,500 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Qatar Banking and Financial Index Sources: Reuters and NBK Capital Forecasts P/E P/B 2011 F Net Profit Growth MSCI Qatar Operating Income Growth RoAE Dividend Yield QNB % 26% 21% 2.8% CBQ % 4% 13% 8.9% Doha % 11% 19% 9.3% Sources: Banks financial statements, Reuters, and NBK Capital Key Ratios NPLs-to- Gross Loans NPL Coverage Mar-2011 LDR Risk Cost Cost-to-Income QNB 1.0% 121% 78% 13.3% 0.5% 16.2% CBQ 3.2% 92% 115% 20.9% 0.6% 28.2% Doha 4.4% 89% 93% 14.2% 0.7% 31.0% CAR Sources: Banks financial statements and NBK Capital Analysts Raja Ghoussoub, CFA T E. raja.ghoussoub@nbkcapital.com Munira Mukadam 1Q2011 T E. munira.mukadam@nbkcapital.com Highlights Qatari banks continue to operate in a better operating environment than their GCC peers, driven by higher economic growth, sky-high public sector spending, and lower systemic risks. We maintain our favorable view of the Qatari banking sector with Buy recommendations on CBQ and Doha Bank and an Accumulate recommendation on QNB. The banks increased their operating income by double-digit growth rates in 1Q2011 on the back of higher net interest income as the cost of funds continued to decrease. Net profit growth was slightly lower than operating income growth due to a higher increase in provisioning. Following a 16% increase in total credit in, we forecast a similar growth rate in 2011 and 2012 despite the weak growth seen in 1Q2011. We believe the public sector will continue to drive growth although there are initial signs that private sector credit demand is picking up. We expect that Qatar Central Bank s new regulations on consumer loans will limit, but not entirely stop, the growth of consumer loans, and will be favorable for asset quality. Anticipating ongoing high growth going forward, the three banks undertook capital injections in 1H2011, which further cemented their decent capital adequacy ratios. We believe higher net interest income will result in increasing top lines for the banks in 2011, despite the pressure on the NIMs that has started to kick in due to decreasing loan yields. We expect provisioning to remain relatively high in the remainder of 2011, safeguarding NPL coverage ratios at decent levels, and we do not expect major changes in the banks cost-to-income ratios in We think that NPL ratios will trend upwards, albeit slightly, without reaching levels that might threaten the solvency or profitability of the banks under coverage. We have increased our fair value for Doha Bank by 9.7% on higher forecasted earnings, and maintain our Buy recommendation on the stock, which we believe offers an upside potential of 27% in addition to the highest dividend yield in our coverage universe at 9.3%. We decreased our fair value for CBQ by 5% on lower forecasted earnings but maintain our Buy recommendation on the stock, which we believe offers an upside potential of 26% in addition to a generous dividend yield of 8.9%. Finally, we have increased our fair value for QNB by 17% on higher forecasted earnings and to reflect the returns on the new capital (QR 12.7 billion) from the bank s recent rights issue, and upgraded our recommendation on QNB from Hold to Accumulate. We believe the three banks will increase their net profit in FY2011 (QNB +24%, Doha Bank +16%, and CBQ +3%) on the back of higher top lines with QNB being the outperformer in terms of balance sheet growth as well as earnings growth in the next two years. nbkcapital. com

2 contents Sector Highlights... 3 Loan Growth... 3 Capitalization... 4 Earnings... 4 Asset Quality... 7 Qatar national bank (Qnb) The commercial bank of qatar (cbq) doha bank (doha) nbkcapital. com 2

3 SECTOR HIGHLIGHTS Loan Growth We forecast sector loans will grow by around 16% in FY2011 and FY2012 Qatari banks continue to operate in a better operating environment than their GCC peers, driven by higher economic growth, sky-high public sector spending, and lower systemic risks. Following a 16% increase in total credit in FY that was mainly driven by the public sector, we forecast a similar growth rate in FY2011 and FY2012 despite the weak growth seen in 1Q2011. We still believe that the public sector will continue to drive growth although there are initial signs that private sector credit demand is picking up. On the other hand, we believe that the Qatar Central Bank s (QCB) new regulations on consumer loans will limit, but not entirely stop, the growth of consumer loans in Qatar, which, in any case grew only modestly (+7%) in FY. Among the banks under coverage, we expect Qatar National Bank (QNB) to continue to outperform, registering the highest loan growth of and 18% in FY2011 and FY2012, respectively (Figure 1). Figure 1 Loan Growth and Market Share Forecasts 25% 45% 50% Loan Growth 15% 10% 30% 5% 10% 8% 10% 0% Source: NBK Capital QNB CBQ Doha 2011F 2012F 2013F 2013F Market Share (RHS) 0% We expect the Commercial Bank of Qatar (CBQ) to achieve higher loan growth than Doha Bank (Doha), driven by CBQ s better private sector corporate banking franchise, a stronger interest in gaining market share in public sector credit, and higher capitalization. Doha, on the other hand, will have an easier job in defending the bank s retail market share as the QCB circular prohibited inter-bank refinancing of consumer loans. In addition, Doha will benefit from the re-invigorated private sector demand as the bank s private sector loans grew decently in FY. Regarding the closure of the Islamic banking business of conventional Qatari banks, CBQ and Doha are considering various options with no decision taken so far. On the other hand, QNB s large Islamic financing book (QR 27 billion, of December loans) means that selling that book is not an option for the bank. nbkcapital. com 3

4 Capitalization Capital injections were undertaken in 1H2011 in anticipation of high growth going forward Demonstrating further support for the banks especially in the current high growth environment, the Qatar Investment Authority (QIA) implemented the final capital injection in the local Qatari banks, and hence, injected QR 1.6 billion in CBQ, which increased the QIA s ownership to 16.7% in the bank, and injected QR 737 million in Doha, which also increased the QIA s ownership to 16.7% in that bank. In addition, QNB conducted a 25% rights issue (QR 12.7 billion) in 2Q2011 that we estimate will boost the bank s capital adequacy ratio (CAR) from 13.3% in March 2011 to around 23% by the end of 2011 (Figure 2). The rights issue is in preparation for high growth going forward. Moreover, the rights issue is in line with the bank s strategy of becoming the premier financial institution in the region as QNB currently is one of the largest banks in the region in terms of balance sheet size and earnings; however, QNB s capital base was far from being one of the highest in the region pre-rights issue. Figure 2 Capital Adequacy Ratios 25% 22.9% 20.9% 18.5% 19.0% 15% 15.3% 13.3% 14.2% 13.6% 13.7% 10% 5% 0% QNB CBQ Doha Dec-10 Mar F Sources: Banks financial statements and NBK Capital Earnings Qatari banks increased their operating income by double-digit growth rates in 1Q2011 mainly on the back of higher net interest income as the cost of funds continued to decrease in Qatar (Figure 3). Income from fees and commissions, however, remains under pressure driven by the constraints put on fees and commissions in and the still-weak private sector activity. One thing that characterized 1Q2011 earnings for the three banks under coverage was high investment earnings that supported operating income growth in that quarter. QNB was the outperformer, achieving a 36% increase in operating income in 1Q2011 driven by 44% growth in net interest income. On the other hand, in our opinion, CBQ exhibited the least impressive results with 14% growth in operating income, a growth that decreases to only 5% if investment earnings were excluded. Going forward, we believe higher net interest income will result in increasing top lines for the banks in FY2011 despite the pressure on the net interest margins (NIMs) that has started to kick in. Qatari banks have benefited immensely from the drop in the cost of funds on the back of high liquidity in Qatar. However, loan yields (corporate as well as consumer) are already dropping, which is driving NIMs downward. Moreover, we think that the cost of funds will bottom out during FY2011, which will exert further pressure on the NIMs. nbkcapital. com 4

5 Figure 3 Operating Income Growth 35% 35% 36% 30% We believe higher net interest income will result in increasing top lines for the banks in FY2011 despite the pressure on the NIMs that has started to kick in 25% 15% 10% 5% 26% 19% 14% 4% 11% 3% 21% 11% 9% 0% -5% -10% -7% QNB CBQ Doha 1Q F 2012F Sources: Banks financial statements and NBK Capital As for income from fees and commissions, we believe the banks will struggle to achieve the levels witnessed in FY (for the reasons mentioned above in addition to the recent QCB regulations that will put additional pressure on fee income), with only QNB managing to slightly increase fee income in FY2011. Regarding brokerage operations on the Qatar Exchange (QE), we expect brokerage commissions to start feeding through the top line in FY2012 but without materially affecting the banks results in the short term. All in all, we expect QNB to continue outperforming, finishing FY2011 with a 26% increase in operating income driven by a 30% increase in net interest income. We believe CBQ s increasing market share of the low-yielding public sector business will negatively affect the bank s NIM, net interest income, and, hence, operating income growth in FY2011. As previously mentioned, pressure on the NIM has already kicked in as seen in Figure 4. Although NIMs are dropping quarter-on-quarter (QoQ), we do not believe that the banks FY2011 NIMs should necessarily be lower than their FY ones because the peaks were reached toward the end of FY. Doha enjoyed the highest NIM in the previous two quarters as the bank did not sacrifice NIMs for volumes and because Doha still enjoys the highest share of consumer loans in the total loan book. nbkcapital. com 5

6 Figure 4 Net Interest Margins 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1Q 2Q 3Q 4Q 1Q2011 Sources: Banks financial statements and NBK Capital QNB CBQ Doha We expect provisioning to remain relatively high in the remainder of FY2011 for the three banks We do not expect major changes in the banks cost-toincome ratios in FY2011 Net profit growth was robust in 1Q2011, but was lower than operating income growth for each of the three banks due to a higher increase in provisioning (Figure 5). The relatively high provisioning charges came as no surprise, and we had already expected provisioning to remain high in Qatar as provisioning increased less in Qatar than elsewhere in the GCC in 2009 and. We expect provisioning to remain relatively high in the remainder of FY2011 for the three banks. For FY2011 as a whole, we expect only Doha to witness a drop in provisioning charges compared with FY when the bank s risk cost peaked, we believe, at 1.15%. Higher expected loan growth for QNB and CBQ compared with Doha, combined with lower provisioning in FY, will result in QNB and CBQ increasing their provisioning charges in FY2011, unlike Doha. We do not expect major changes in the banks cost-to-income ratios (CIRs) in FY2011, although we do expect QNB s ratio to trend upwards in our forecast horizon from the current low levels (17% in FY) while we expect CBQ s and Doha s to slightly decrease in our forecast horizon, owing to cost-saving initiatives and a lower contribution from the retail sector, respectively. nbkcapital. com 6

7 Figure 5 Net Profit Growth 35% 36% 35% 30% We forecast a 24% increase 25% 24% in QNB s net profit in FY2011 followed by a 16% increase for Doha and 3% for CBQ 15% 14% 15% 16% 14% 10% 7% 9% 8% 5% 3% 0% QNB CBQ Doha 1Q F 2012F Sources: Banks financial statements and NBK Capital All in all, we forecast a 24% increase in QNB s net profit in FY2011 driven by surging operating income, as mentioned previously. We expect Doha to deliver a 16% increase in net profit as the higher top line will be aided by lower provisioning charges. On the other hand, we forecast CBQ will achieve low single-digit growth in net profit on the back of similar top-line growth and increasing provisioning charges. Asset Quality Non-performing loans (NPLs) are still on the rise in Qatar with all covered banks witnessing an increase in the absolute level of NPLs as well as in NPL ratios in 1Q2011 (Figure 6). The QCB regulation on consumer loans will result in a better-quality consumer loan book, even overall loan book, as the majority of the weakness in asset quality was derived from the consumer book itself. We continue to believe that NPL ratios will trend upwards, albeit slightly, for the three banks under coverage without reaching levels that will cause a threat to the solvency or profitability of any of the banks. nbkcapital. com 7

8 Figure 6 NPLs-to-Gross Loans Ratios 6.0% 5.0% 4.4% 4.7% 4.9% We believe that NPL ratios will trend upwards, albeit slightly, without reaching alarming levels 4.0% 3.0% 3.6% 3.5% 3.2% 3.2% 3.9% 2.0% 1.0% 1.0% 1.5% 1.3% 1.0% 0.0% QNB CBQ Doha Mar F 2012F Sources: Banks financial statements and NBK Capital Despite rapid NPL formation in the past few quarters, QNB s NPL ratio is still unsustainably low at 1%, and we believe the only direction for that ratio is upwards. Doha s high share of consumer loans is the main reason for the bank s relatively high NPL ratio with consumer NPLs representing close to 60% of total NPLs at the end of. On the other hand, CBQ s increasing share of public sector loans will be favorable for asset quality, in effect, decreasing new NPL formation, in our view. We believe relatively high provisioning as previously mentioned will safeguard NPL coverage ratios, which are already at decent levels as can be seen in Figure 7. We believe QNB has a stronger incentive to keep a higher coverage ratio than CBQ and Doha due to the smaller base of NPLs that the bank enjoys. In all cases, QNB s higher operating income growth than CBQ and Doha makes it easier for QNB to increase further NPL coverage without significantly compromising the bottom line. nbkcapital. com 8

9 Figure 7 NPL Coverage Ratios % 125% 121% 118% 100% 90% 92% 92% 90% 90% 89% 91% 93% We believe relatively high provisioning will safeguard NPL coverage ratios at decent levels 80% 60% 0% QNB CBQ Doha Mar F 2012F Sources: Banks financial statements and NBK Capital We forecast Doha and CBQ will deliver dividend yields of 9.3% and 8.9%, respectively, in FY2011, the highest in our coverage universe Finally, despite the recent QR 12.7 billion rights issue, we believe QNB will be able to deliver a 21% Return on Average Equity (RoAE) in FY2011 before dropping to 19% in FY2012. QNB s higher expected growth and profitability come with higher valuations with the bank s 2011 price-to-book (P/B) ratio forecasted at 2.2x compared with 1.6x and 1.3x for Doha and CBQ, respectively. CBQ s relatively low P/B multiple is primarily due to the bank s low leverage, which we expect to increase going forward, but not drastically. We forecast an increase in CBQ s RoAE from 13% in FY to 16% by the end of the forecast horizon. Similarly, we forecast an increase in Doha s RoAE from 18% to 22% in the same period. We expect Doha and CBQ to carry on with their generous dividend payments, delivering dividend yields of 9.3% and 8.9%, respectively, in FY2011, the highest in our coverage universe. nbkcapital. com 9

10 Qatar National Bank (QNB) Valuation Valuation Method Value (QR) Weight (%) Discounted Equity Cash Flow (DECF) Dividend Discount Model (DDM) Peer-Based Valuation Weighted Average Fair Value Source: NBK Capital Rebased Performance % May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 QNB MSCI Qatar Banking and Financial Index Sources: Reuters and NBK Capital Historical Performance QR Thousands % Change in Net Loans and Advances 131,696, % 140,701, % Customer Deposits 165,470, % 179,872, % Shareholders' Equity 24,237, % 23,868, % Total Assets 223,382, % 242,658, % QR Thousands % Change in 1Q Mar Q2011 YTD Change % YoY Change % Net Interest Income 5,675, % 1,189,338 1,707, % Net Fees and Commissions 1,120, % 281, , % Share of Profit of Assoc. 216, % 58,529 45, % Investment Earnings 216, % 37, , % Operating Income 7,609, % 1,658,543 2,255, % Total Costs (1,292,057) 16.7% (299,279) (364,251) 21.7% Prov. for Credit Losses (537,664) 91.3% (92,292) (177,259) 92.1% Prov. for Investments (62,706) -15.1% (506) (531) 4.9% Net Profit 5,704, % 1,265,790 1,706, % Sources: Bank s financial statements and NBK Capital Forecasts QR Thousands 2011 Forecasts 2011f 5-year Old New Diff % versus a CAGR * Net Loans and Advances 154,801, ,399, % 19.5% 12.3% Customer Deposits 194,672, ,978, % 20.3% 10.4% Net Interest Income 6,941,372 7,411, % 30.6% 11.9% Net Fees and Commissions 1,282,964 1,205, % 7.5% 11.0% Operating Income 9,149,066 9,561, % 25.6% 11.6% Total Costs (1,571,545) (1,566,041) -0.4% 21.2% 14.2% Provisions for Credit Losses (652,246) (860,197) 31.9% 60.0% 1.2% Net Profit 6,918,714 7,087, % 24.2% 11.9% QR Millions 2QA 1Q2011A 2Q2011F 3Q2011F Operating Income 1,869 2,255 2,302 2,413 Income before Provisions 1,556 1,884 1,914 2,012 *CAGR: Sources: Bank s financial statements and NBK Capital 12-Month Fair Value: QR Recommendation: Accumulate Risk Level**: 2 Our fair value for QNB stands at QR per share, 8% above the last closing price; hence, our recommendation on QNB is Accumulate. This recommendation is in line with our view that QNB will continue to post good results going forward. Following superior results, QNB s share price has increased by 51% in the past 12 months, resulting in the bank trading at a premium to its peers. Nevertheless, QNB s recent rights issue (QR 12.7 billion) conducted in 2Q2011 dropped the bank s 2011 P/B to 2.2x, still a premium to the bank s peers, but justified we believe by QNB s higher expected growth. QNB continued to record double-digit growth in net profit, which reached QR 1.7 billion in 1Q2011, 35% above 1Q, driven by higher operating income, which reached a record QR 2.3 billion (+36% year-over-year [YoY]). Net interest income remained the major growth driver, soaring by 44% YoY on higher loans and steady NIM. QNB s loan growth in 1Q2011 was higher than expected, standing at an impressive 7% at a time when loan growth in the overall sector was nil. Fee income and gains from foreign exchange remained robust with minor volatility, reflecting the sustainability of these earning streams going forward. Investments soared in 1Q2011 (+83% QoQ), driven by the subscription in the QR 50 billion issuance undertaken by the QCB. QNB s deposit growth (+9% QoQ) remained skyhigh, driven by strong liquidity in Qatar and high deposit accumulation from QNB s international operations. Deposit accumulation continued to surpass loan growth, decreasing the bank s loans-to-deposits ratio (LDR) to 78% as of March NPLs, as expected, were still on the rise, increasing by 11% in 1Q2011, but still represented 1% of gross loans. However, ongoing high provisioning safeguarded the NPL coverage ratio at 121%. Cost efficiency continued to be among the best in our coverage universe with a CIR of 16% in 1Q2011. We expect QCB s new regulations regarding consumer loans to have a limited impact on QNB as, according to the bank s management, the loans that are salary-assigned represent only around 3.6% of total loans. As for the closure of the Islamic business, we believe that QNB will be able to transfer a decent portion of its Islamic corporate financing book to the bank s conventional business. We forecast QNB s operating income and net profit will increase by 26% and 24%, respectively, in FY2011, driven by soaring net interest income. We expect loan growth to remain much higher than that of the bank s peers, registering and 18% in FY2011 and FY2012, respectively, driven by the public sector. We expect an increase in the NPL ratio to around 1.3% by the end of 2011 and provisioning to remain high. We see the RoAE dropping to around 21% in FY2011 due to the QR 12.7 billion rights issue, which will increase the CAR to around 23%. **Please refer to page 16 for recommendations and risk ratings. nbkcapital. com 10

11 FINANCIAL STATEMENTS Balance Sheet (QR Thousands) Fiscal Year Ends December ASSETS Cash and Balances with Central Banks 9,880,170 33,912,459 18,568,411 21,081,595 22,295,577 22,637,502 23,552,551 Due from Banks 30,181,027 24,686,826 40,458,491 45,817,283 50,181,526 53,741,432 56,895,158 Net Investments 27,776,425 28,696,054 56,054,945 63,762,092 71,476,606 77,606,785 83,595,735 Net Loans and Advances 108,783, ,696, ,399, ,051, ,828, ,239, ,342,582 Net Fixed Assets 713, ,931 1,161,854 1,318,191 1,412,549 1,461,825 1,524,593 Other Assets 1,994,995 3,476,177 3,625,604 4,220,465 4,892,960 5,335,754 5,763,954 Total Assets 179,328, ,382, ,268, ,251, ,088, ,022, ,674,572 LIABILITIES & EQUITY Historical Due to Banks 20,794,043 12,160,273 16,183,396 18,326,913 20,574,426 24,721,059 30,154,434 Customer Deposits 125,872, ,470, ,978, ,575, ,537, ,134, ,018,406 Other Purchased Funds 6,723,541 12,136,410 12,140,135 12,140,135 12,140,135 12,140,135 12,140,135 Other Liabilities 6,063,106 8,822,643 7,331,212 8,638,572 10,372,044 11,234,556 12,046,737 Total Liabilities 159,452, ,589, ,633, ,680, ,624, ,229, ,359,712 Minority Interest 190, , , , , , ,121 Total Shareholders' Equity 19,685,317 24,237,464 41,971,254 47,898,429 54,777,677 62,086,294 69,581,739 TOTAL LIABILITIES & EQUITY 179,328, ,382, ,268, ,251, ,088, ,022, ,674,572 Forecast Income Statement (QR Thousands) Historical Fiscal Year Ends December Net Interest Income 3,726,262 5,675,006 7,411,187 8,949,132 10,275,164 11,276,301 12,173,576 Income from Fees and Commissions 967,746 1,120,947 1,205,293 1,388,465 1,521,444 1,695,352 1,873,487 Other Operating Income 963, , ,704 1,071,014 1,192,883 1,300,850 1,399,953 Total Operating Income 5,657,177 7,609,388 9,561,184 11,408,611 12,989,491 14,272,503 15,447,017 Provisions for Credit Losses (281,106) (537,664) (860,197) (1,003,172) (976,733) (953,404) (944,083) Salaries and Employee-Related Expenses (600,432) (648,580) (784,782) (944,266) (1,108,162) (1,256,404) (1,403,770) General and Administrative Expenses (395,428) (496,881) (601,226) (723,408) (848,969) (962,539) (1,075,437) Depreciation (110,998) (146,596) (180,033) (213,692) (238,669) (257,107) (280,382) Other Provisions and Operating Expenses (63,606) (61,979) (14,883) Total Operating Expenses (1,451,570) (1,891,700) (2,441,121) (2,884,538) (3,172,533) (3,429,454) (3,703,672) Net Operating Profit 4,205,607 5,717,688 7,120,063 8,524,073 9,816,958 10,843,049 11,743,344 Other Income / (Expenses) Income Taxes (17,140) (15,520) (30,238) (44,253) (61,225) (79,299) (99,062) Minority Interest 13,256 2,131 (2,585) (8,175) (13,955) (20,098) (26,795) Net Profit 4,201,723 5,704,299 7,087,240 8,471,645 9,741,778 10,743,652 11,617,488 Forecast EPS (QR) Key Ratios Fiscal Year Ends December Growth in Loans 8.7% 21.1% 19.5% 18.2% 13.9% 12.0% 10.2% Growth in Deposits 20.7% 31.5% 20.3% 17.9% 12.3% 9.0% 7.3% Growth in Net Profit 15.0% 35.8% 24.2% 19.5% 15.0% 10.3% 8.1% Growth in Operating Income 11.1% 34.5% 25.6% 19.3% 13.9% 9.9% 8.2% Loans-to-Assets 60.7% 59.0% 56.8% 57.7% 58.5% 59.6% 60.4% Loans-to-Deposits 86.4% 79.6% 79.1% 79.3% 80.4% 82.6% 84.8% NPLs-to-Gross Loans 0.8% 1.0% 1.3% 1.5% 1.7% 1.8% 1.9% NPL Coverage 108.8% 117.7% 123.7% 124.7% 124.7% 123.7% 122.2% Capital Adequacy 13.2% 15.3% 22.9% 21.8% 21.4% 21.3% 21.4% Growth in Costs 6.2% 16.7% 21.2% 20.1% 16.7% 12.8% 11.5% Non-Interest Expense-to-Average Assets 0.9% 0.9% 1.0% 1.0% 0.9% 0.9% 0.9% Cost-to-Income 19.6% 17.0% 16.4% 16.5% 16.9% 17.3% 17.9% Non-Interest Income-to-Operating Income 34.1% 25.4% 22.5% 21.6% 20.9% 21.0% 21.2% Dividend Payout 28.7% 34.3% 35.9% 33.8% 35.3% 38.4% 40.1% Net Interest Margin 2.3% 2.9% 3.1% 3.1% 3.1% 3.1% 3.0% RoAE 23.1% 26.0% 21.4% 18.9% 19.0% 18.4% 17.6% RoAA 2.5% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% Sources: Bank s financial statements and NBK Capital Historical Forecast nbkcapital. com 11

12 The Commercial Bank of Qatar (CBQ) Valuation Valuation Method Value (QR) Weight (%) Discounted Equity Cash Flow (DECF) Dividend Discount Model (DDM) Peer-Based Valuation Weighted Average Fair Value Source: NBK Capital Rebased Performance % May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 CBQ MSCI Qatar Banking and Financial Index Sources: Reuters and NBK Capital Historical Performance QR Thousands Net Loans and Advances 33,566, % 34,807, % Customer Deposits 33,280, % 30,288, % Shareholders' Equity 12,499, % 12,943, % Total Assets 62,520, % 60,780, % QR Thousands % Change in % Change in 1Q Mar Q2011 YTD Change % YoY Change % Net Interest Income 1,777, % 408, , % Net Fees and Commissions 526, % 163, , % Share of Profit of Assoc. 155, % 21,145 39, % Foreign Exchange Income 122, % 28,006 29, % Investment Earnings 75, % 4,235 58, % Other Operating Income 59, % 13,675 10, % Operating Income 2,717, % 639, , % Total Costs (787,262) 3.7% (195,655) (205,586) 5.1% Prov. for Credit Losses (166,523) -63.9% (11,987) (52,917) 341.5% Prov. for Investments (127,995) -29.7% (21,612) (23,084) 6.8% Net Profit 1,635, % 410, , % Sources: Bank s financial statements and NBK Capital Forecasts QR Thousands 2011 Forecasts 2011f Old New Diff % versus a 5-year CAGR * Net Loans and Advances 35,447,717 37,855, % 12.8% 10.7% Customer Deposits 36,308,282 36,858, % 10.8% 10.5% Net Interest Income 1,900,364 1,825, % 2.7% 7.8% Net Fees and Commissions 450, , % -0.4% 9.8% Operating Income 2,819,679 2,812, % 3.5% 8.6% Total Costs (820,992) (822,428) 0.2% 4.5% 8.2% Prov. for Credit Losses (191,739) (220,407) 15.0% 32.4% 1.7% Prov. for Investments (98,166) (91,466) -6.8% -28.5% n/m Net Profit 1,708,782 1,678, % 2.6% 10.7% QR Millions 2QA 1Q2011A 2Q2011F 3Q2011F Operating Income Income before Provisions *CAGR: Sources: Bank s financial statements and NBK Capital 12-Month Fair Value: QR Recommendation: Buy Risk Level**: 3 Our fair value for CBQ stands at QR per share, 26% above the last closing price; hence, our recommendation on CBQ is Buy. This new fair value is 5% lower than our prior fair value (QR 97) on lower forecasted net profit over our forecasted horizon. CBQ s share price has dropped by year to date (YTD), resulting in the stock trading at a cheap P/B multiple of 1.4x. Following three capital injections, the QIA currently owns 16.7% of CBQ, which we believe is positive for the bank. We forecast an increase in CBQ s RoAE from 13% in FY to 16% by the end of the forecast horizon. As CBQ is the least leveraged bank in our coverage universe, we expect an increase in leverage, but not a drastic one, going forward. We believe CBQ will remain a dividend play with the 2011 dividend yield forecasted to be 8.9%, one of the highest in our coverage universe. CBQ achieved strong results in 1Q2011 with operating income and net profit growing by 14% and 9%, respectively. This was driven by growth in net interest income (+9% YoY) as the cost of funds continues to drop and by higher investment earnings. Fee income was the highest in the past four quarters, rebounding by 48% QoQ but was still down 11% YoY. Loans expanded by 4% in 1Q2011, outperforming growth in the overall sector, primarily driven by the public sector and the retail sector. However, CBQ s deposits decreased by 9% in 1Q2011. CBQ shed time deposits (-31% QoQ) while witnessing high growth in the cheaper demand and savings deposits. The shedding of deposits supported the NIM but increased the bank s LDR to 115%. NPLs climbed by 6% in 1Q2011 to represent 3.2% of loans while high provisioning improved NPL coverage slightly to 92%. We expect CBQ to record a 13% increase in loans in FY2011. This assumes no sale of CBQ s Islamic financing book during FY2011. CBQ s management did not give any guidance on the extent of the impact of the QCB s regulations regarding consumer loans. Undoubtedly, there will be pressure on consumer fees and personal loan yields going forward. We believe CBQ s NIM will be under pressure in FY2011 as corporate loan yields are already being re-priced downwards and CBQ s growing public sector business carries relatively low yields. We expect a drop in fee income as well as in investment earnings from the unsustainable levels recorded in 1Q2011, hence resulting in a QoQ drop in operating income. We see a resumption of deposit growth, decreasing CBQ s LDR from the high witnessed in March We expect a further increase in CBQ s NPL ratio to 3.5% by the end of FY2011. We expect provisioning charges to remain high in the remainder of FY2011 safeguarding NPL coverage at around 90% by the end of the year. All in all, we expect CBQ to deliver low single-digit growth in operating income and net profit in FY2011 before achieving higher growth in FY2012 **Please refer to page 16 for recommendations and risk ratings. nbkcapital. com 12

13 FINANCIAL STATEMENTS Balance Sheet (QR Thousands ) Fiscal Year Ends December ASSETS Cash and Balances with Central Banks 4,374,423 8,702,824 3,323,007 4,273,237 4,638,059 4,763,760 4,317,121 Due from Banks 5,643,561 4,237,843 5,696,199 6,277,839 6,715,593 7,084,761 7,388,450 Net Investments 13,507,233 13,863,192 17,462,240 19,147,750 20,527,449 21,577,499 22,383,595 Net Loans and Advances 31,929,268 33,566,666 37,855,546 43,359,048 48,552,439 53,664,026 58,609,360 Net Fixed Assets 1,029,632 1,069,022 1,128,980 1,166,760 1,207,529 1,251,410 1,299,679 Other Assets 833,242 1,080,527 1,262,897 1,382,302 1,526,677 1,649,949 1,776,909 Total Assets 57,317,359 62,520,074 66,728,869 75,606,935 83,167,745 89,991,405 95,775,115 LIABILITIES & EQUITY Historical Due to Banks 7,391,335 3,553,398 3,873,415 5,022,271 6,379,813 7,793,238 8,866,141 Customer Deposits 26,271,548 33,280,662 36,858,689 44,105,430 49,552,882 54,142,281 57,912,430 Other Purchased Funds 9,924,358 10,993,562 9,196,253 9,196,253 9,196,253 9,196,253 9,196,253 Other Liabilities 1,719,935 2,192,595 2,625,053 2,806,848 2,985,934 3,116,130 3,230,655 Total Liabilities 45,307,176 50,020,217 52,553,411 61,130,803 68,114,882 74,247,901 79,205,478 Total Shareholders' Equity 12,010,183 12,499,857 14,175,458 14,476,133 15,052,863 15,743,503 16,569,637 TOTAL LIABILITIES & EQUITY 57,317,359 62,520,074 66,728,869 75,606,935 83,167,745 89,991,405 95,775,115 Forecast Income Statement (QR Thousands ) Historical Fiscal Year Ends December Net Interest Income 1,660,791 1,777,648 1,825,622 2,018,799 2,220,308 2,329,642 2,542,468 Income from Fees and Commissions 678, , , , , , ,157 Other Operating Income 590, , , , , , ,515 Total Operating Income 2,930,561 2,717,061 2,812,508 3,111,439 3,452,867 3,695,132 4,035,139 Provisions for Credit Losses (461,050) (166,523) (220,407) (230,103) (232,008) (237,496) (236,855) Salaries and Employee Related Expenses (465,886) (461,161) (479,607) (516,195) (562,515) (590,732) (648,042) General and Administrative Expenses (200,825) (222,253) (240,033) (265,546) (294,685) (315,361) (345,955) Depreciation (92,742) (103,848) (102,787) (114,115) (126,316) (139,913) (153,904) Other Provisions and Operating Expenses (186,464) (127,995) (91,466) (76,404) (52,212) - - Total Operating Expenses (1,406,967) (1,081,780) (1,134,301) (1,202,362) (1,267,735) (1,283,502) (1,384,757) Net Operating Profit 1,523,594 1,635,281 1,678,207 1,909,077 2,185,132 2,411,630 2,650,383 Other Income / (Expenses) Income Taxes Minority Interest Net Profit 1,523,594 1,635,281 1,678,207 1,909,077 2,185,132 2,411,630 2,650,383 Forecast EPS (QR) Key Ratios Fiscal Year Ends December Growth in Loans -5.8% 5.1% 12.8% 14.5% 12.0% 10.5% 9.2% Growth in Deposits -18.4% 26.7% 10.8% 19.7% 12.4% 9.3% 7.0% Growth in Net Profit -10.5% 7.3% 2.6% 13.8% 14.5% 10.4% 9.9% Growth in Operating Income -1.5% -7.3% 3.5% 10.6% 11.0% 7.0% 9.2% Loans-to-Assets 55.7% 53.7% 56.7% 57.3% 58.4% 59.6% 61.2% Loans-to-Deposits 121.5% 100.9% 102.7% 98.3% 98.0% 99.1% 101.2% NPLs-to-Gross Loans 3.6% 3.2% 3.5% 3.6% 3.7% 3.8% 3.8% NPL Coverage 62.1% 89.7% 89.8% 89.9% 90.4% 91.9% 94.3% Capital Adequacy 18.9% 18.5% 19.0% 17.0% 15.7% 14.9% 14.4% Growth in Costs 1.2% 3.7% 4.5% 8.9% 9.8% 6.4% 9.7% Non-Interest Expense-to-Average Assets 2.4% 1.8% 1.8% 1.7% 1.6% 1.5% 1.5% Cost-to-Income 25.9% 29.0% 29.2% 28.8% 28.5% 28.3% 28.4% Non-Interest Income-to-Operating Income 43.3% 34.6% 35.1% 35.1% 35.7% 37.0% 37.0% Dividend Payout 85.3% 97.1% 95.8% 84.3% 78.8% 75.6% 73.0% Net Interest Margin 3.1% 3.3% 3.1% 3.1% 3.1% 2.9% 3.0% RoAE 13.9% 13.3% 12.6% 13.3% 14.8% 15.7% 16.4% RoAA 2.6% 2.7% 2.6% 2.7% 2.8% 2.8% 2.9% Sources: Bank s financial statements and NBK Capital Historical Forecast nbkcapital. com 13

14 Doha Bank (Doha) Valuation Valuation Method Value (QR) Weight (%) Discounted Equity Cash Flow (DECF) Dividend Discount Model (DDM) Peer-based Valuation Weighted Average Fair Value Source: NBK Capital Rebased Performance % May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Doha MSCI Qatar Banking and Financial Index Sources: Reuters and NBK Capital Historical Performance QR Thousands Net Loans and Advances 26,546, % 26,114, % Customer Deposits 30,821, % 28,054, % Shareholders' Equity 6,034, % 6,162, % Total Assets 47,229, % 46,423, % QR Thousands % Change in % Change in 1Q Mar Q2011 YTD Change % YoY Change % Net Interest Income 1,531, % 327, , % Net Fees and Commissions 394, % 121,263 86, % Foreign Exchange Income 81, % 17,057 15, % Investment Earnings 25, % 20,057 39, % Other Operating Income 61, % 8,435 18, % Operating Income 2,095, % 494, , % Total Costs (723,191) 9.8% (161,862) (185,973) 14.9% Prov. for Credit Losses (311,838) 146.9% (14,761) (44,663) 202.6% Prov. for Investments (47,387) -83.4% (2,781) (6,233) 124.1% Net Profit 1,054, % 315, , % Sources: Bank s financial statements and NBK Capital Forecasts QR Thousands 2011 Forecasts 2011f Old New Diff % versus a 5-year CAGR * Net Loans and Advances 26,867,028 28,401, % 7.0% 9.2% Customer Deposits 31,449,763 31,240, % 1.4% 9.0% Net Interest Income 1,563,978 1,754, % 14.5% 6.8% Net Fees and Commissions 401, , % -18.4% 12.8% Operating Income 2,153,211 2,326, % 11.0% 8.2% Total Costs (756,908) (800,396) 5.7% 10.7% 7.6% Prov. for Credit Losses (204,205) (256,275) 25.5% -17.8% -7.0% Prov. for Investments (30,000) (39,500) 31.7% -16.6% n/m Net Profit 1,160,223 1,228, % 16.5% 11.5% 12-Month Fair Value: QR 68.0 Recommendation: Buy Risk Level**: 4 Our fair value for Doha stands at QR 68.0 per share, 27% above the last closing price; hence, our recommendation on Doha is Buy. This new fair value is 9.7% higher than our prior fair value (QR 62) on higher forecasted net profit during our forecast horizon. Doha s share price has dropped by 18% YTD, resulting in the stock trading at a relatively low, in our view, P/B and P/E of 1.8x and 10.1x, respectively. Following three capital injections, the QIA currently owns 16.7% of Doha, which we believe is a positive for the bank. We forecast an increase in Doha s RoAE from 18% in FY to 22% by the end of the forecast horizon. We expect Doha to remain a dividend play with the 2011 dividend yield forecasted to be a generous 9.3%, the highest in our coverage universe. Doha exhibited strong results in 1Q2011 with operating income and net profit growing by 21% and 15%, respectively, to reach record highs. This was driven by high growth in net interest income (+34% YoY) as the cost of funds continues to drop. However, fee income continued to decrease YoY, and foreign exchange gains were weak in 1Q2011. A surge in investment earnings (which we believe included oneoffs and, hence, unlikely to be repeated in the remainder of 2011) lessened the decrease in non-interest income in 1Q2011. Balance sheet growth was weak with loans decreasing by 1.6% in 1Q2011 while deposits plummeted by 9% as the bank released relatively high cost deposits. NPLs climbed by 9% in 1Q2011 to represent 4.35% of gross loans while NPL coverage was maintained at 89%. We expect loan growth to pick up, registering +7% in FY2011. Regarding the closure of the Islamic business, Doha is considering various options with no decision taken so far. We expect QCB s new regulations regarding consumer loans to have some impact on Doha as the bank s personal loans represented around 32% of the total loan book at the end of although salary-assigned loans are only a portion of total personal loans. The major impact will be through interest income, which, Doha, we believe, will be able to compensate through the ongoing decrease in the cost of funds, resulting, overall, in 15% growth in net interest income in FY2011. We believe fees and commissions, which have been under pressure since 2H, will also be affected by the new regulations and witness an 18% drop in FY2011. We expect a further increase in the NPL ratio to 4.7% by the end of FY2011. We expect provisioning charges to drop in FY2011 but to remain relatively high, reflecting a risk cost of 0.9% compared with 1.15% in FY. We believe this will safeguard NPL coverage at 91% by the end of All in all, we expect Doha to deliver decent growth in operating income and net profit in FY2011, standing at 11% and 16%, respectively. QR Millions 2QA 1Q2011A 2Q2011F 3Q2011F Operating Income Income before Provisions *CAGR: Sources: Bank s financial statements and NBK Capital **Please refer to page 16 for recommendations and risk ratings. nbkcapital. com 14

15 FINANCIAL STATEMENTS Balance Sheet (QR Tho usands ) Historical Forecast Fiscal Year Ends December ASSETS Cash and Balances with Central Banks 10,753,828 10,378,704 4,819,160 4,657,365 4,781,206 4,853,216 4,851,019 Due from Banks 4,399,729 3,634,244 9,609,947 10,064,834 10,592,573 11,142,205 11,682,875 Net Investments 3,837,607 5,230,662 7,227,528 8,042,849 8,868,481 9,781,950 10,755,680 Net Loans and Advances 25,895,855 26,546,918 28,401,896 31,323,211 34,628,811 37,919,072 41,251,888 Net Fixed Assets 570, , , , , , ,112 Other Assets 538, , , , , , ,615 Total Assets 45,996,182 47,229,611 51,646,770 55,793,998 60,611,789 65,467,289 70,363,190 LIABILITIES & EQUITY Due to Banks 10,488,856 8,683,403 11,531,936 12,279,098 13,028,865 13,593,490 14,136,279 Customer Deposits 27,890,357 30,821,976 31,240,176 34,216,585 37,676,425 41,279,883 44,821,164 Other Purchased Funds 824, , , , , , ,048 Other Liabilities 941, ,133 1,078,896 1,132,840 1,189,482 1,248,957 1,311,404 Total Liabilities 40,145,399 41,195,118 44,619,056 48,396,571 52,662,820 56,890,378 61,036,896 Total Shareholders' Equity 5,850,783 6,034,493 7,027,714 7,397,426 7,948,969 8,576,911 9,326,295 TOTAL LIABILITIES & EQUITY 45,996,182 47,229,611 51,646,770 55,793,998 60,611,789 65,467,289 70,363,190 Income Statement (QR Tho usands ) Historical Fiscal Year Ends December Net Interest Income 1,240,748 1,531,967 1,754,597 1,877,679 2,002,567 2,151,141 2,301,999 Income from Fees and Commissions 412, , , , , , ,998 Other Operating Income 391, , , , , , ,194 Total Operating Income 2,044,329 2,095,773 2,326,772 2,541,781 2,749,691 2,984,693 3,225,190 Provisions for Credit Losses (126,314) (311,838) (256,275) (241,626) (227,663) (209,666) (198,042) Salaries and Employee Related Expenses (309,738) (350,638) (389,208) (421,281) (451,528) (485,603) (519,875) General and Administrative Expenses (308,150) (331,762) (368,256) (398,603) (427,221) (459,461) (491,888) Depreciation (40,629) (40,791) (42,932) (48,758) (55,071) (61,646) (68,427) Other Provisions and Operating Expenses (284,950) (47,387) (39,500) (25,500) Total Operating Expenses (1,069,781) (1,082,416) (1,096,171) (1,135,768) (1,161,484) (1,216,376) (1,278,233) Net Operating Profit 974,548 1,013,357 1,230,602 1,406,013 1,588,208 1,768,317 1,946,957 Other Income / (Expenses) - 43, Income Taxes (929) (2,174) (2,461) (2,812) (3,176) (3,537) (3,894) Net Profit 973,619 1,054,245 1,228,140 1,403,201 1,585,031 1,764,781 1,943,063 EPS (QR) Forecast Key Ratios Fiscal Year Ends December Growth in Loans 8.2% 2.5% 7.0% 10.3% 10.6% 9.5% 8.8% Growth in Deposits 20.0% 10.5% 1.4% 9.5% 10.1% 9.6% 8.6% Growth in Net Profit 2.9% 8.3% 16.5% 14.3% 13.0% 11.3% 10.1% Growth in Operating Income 22.0% 2.5% 11.0% 9.2% 8.2% 8.5% 8.1% Loans-to-Assets 56.3% 56.2% 55.0% 56.1% 57.1% 57.9% 58.6% Loans-to-Deposits 92.8% 86.1% 90.9% 91.5% 91.9% 91.9% 92.0% NPLs-to-Gross Loans 3.2% 3.9% 4.7% 4.9% 5.0% 5.0% 4.9% NPL Coverage 84.3% 92.3% 90.8% 92.8% 95.3% 97.5% 99.9% Capital Adequacy 14.4% 13.6% 13.7% 13.1% 12.6% 12.4% 12.2% Growth in Costs 22.0% 9.8% 10.7% 8.5% 7.5% 7.8% 7.3% Non-Interest Expense-to-Average Assets 2.5% 2.3% 2.2% 2.1% 2.0% 1.9% 1.9% Cost-to-Income 32.2% 34.51% 34.4% 34.2% 34.0% 33.7% 33.5% Non-Interest Income-to-Operating Income 39.3% 26.9% 24.6% 26.1% 27.2% 27.9% 28.6% Dividend Payout 92.9% 89.9% 84.2% 73.7% 71.7% 67.6% 67.6% Net Interest Margin 3.0% 3.4% 3.7% 3.6% 3.6% 3.5% 3.5% RoAE 18.1% 17.7% 18.8% 19.5% 20.7% 21.4% 21.7% RoAA 2.3% 2.3% 2.5% 2.6% 2.7% 2.8% 2.9% Sources: Bank s financial statements and NBK Capital Historical Forecast nbkcapital. com 15

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