Qatar Banks Challenging times ahead

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1 SICO Research Sector Report ovember 23, 2016 Chiradeep Ghosh, CFA ext Qatar Challenging times ahead Headwinds from weak liquidity condition and pick-up in construction sector delinquencies Tight capital position for Qatari banks to cap balance sheet growth and rationalise dividend distribution We maintain Buy rating on QIB (TP: QAR 120), maintain eutral rating on QB (TP: QAR 165), Sell on CBQ (TP: QAR 30) and cut Doha Bank to eutral (TP: QAR 36) Expect higher delinquencies related to construction sector Despite an estimated USD 125bn of projects expected to be completed within the next 4 years, banks exposure to the construction sector has grown at just 2% YoY. We expect to see a pick-up in delinquencies of the contractors in an environment of tight liquidity. Doha Bank and CBQ with 17% and 10% respectively of its lending book to construction sector are relatively more exposed. In addition, most banks have a quarter of their lending book exposed to the real estate sector, which may also see rise in non-performance driven by price corrections YTD, as per QCB publications. Tight capital position to lead to balance sheet growth and dividends rationalisation All Qatari banks, save for QIB, have limited buffer above the Qatar Central Bank (QCB) regulated core tier 1 ratio CET1 (equity) requirement. CBQ aims to raise 17% and Doha Bank 20% of equity by 1H17. We estimate that despite the equity issuance, CBQ s CET1 will rise by only 40bps in 2017 and it will likely lower its dividends to QAR 1/share in 2016 and 2017 from QAR 3/share in Doha Bank can maintain its DPS of 3/share in 2016 in line with 2015, at a payout ratio of 63. QB s management has guided at maintaining a sustainable dividend payout ratio of 30-35% going forward, down from c.50% in Weak liquidity condition to put pressure on the banks funding cost Qatar Central Bank has regulated Qatari banks to deleverage their balance sheets and lower their loan-to-deposit ratio to 100% by the beginning of All Qatari banks, as at 3Q16, have their LDR in excess of 100% currently and accordingly we expect their funding costs to rise as they look to boost their deposit books in an environment of declining money supply (-6% YoY). They are also looking at international sources to manage their funding bases; however are lending domestically. Although QAR is pegged to USD, it does increase currency risk for the banks, and Qatar Central Bank has instructed banks to cap their exposure at 25% of equity by April Change in recommendation and target price We expect banks to witness deterioration in asset quality and higher funding cost. We have adjusted our target price of CBQ and Doha Bank for the potential equity issuance. Exhibit 1: Summary of our recommendation and target price Recommendation Target Price ew Old ew Old CBQ Sell Sell Doha eutral Buy QIB Buy Buy QB eutral eutral SICO 2016 All Rights Reserved Attention is drawn to the disclaimer and other information in the end

2 Valuation Matrix Exhibit 2: Valuation Matrix- Qatar banks appear expensive relative to its peers; QIB can justify its valuation on higher balance sheet growth Trendline Saudi UAE Bahrain Qatar. 2.1x 1.9x 1.7x CBQ Expensive Doha Bank QIB QB P-BVPS x 1.3x 1.1x 0.9x 0.7x Attractive 0.5x 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% ROE

3 Exposure to the construction & real estate sector egative on the banks construction sector exposure Despite the Qatar government s significant construction sector spending plan, we remain cautious about Qatari banks exposure to the sector. Our rational is based on: 1. Feedback from our recent visit to Qatar, following media articles and meeting with management, which indicates a slow payment release. However, bank management emphasised that many of the payment delays are related to dissatisfactory execution of work. 2. Construction sector-related corporations will likely be struggling for liquidity, considering a modest 2% lending growth, despite an estimated USD 125bn of major projects lined up with a deadline of 4 years or less. 3. Most of the construction sector loans are floating-rated and in an environment of rising interest rate, their debt servicing cost has gone up. We understand that many of the contracts were awarded more than 2 years ago, when crude prices were still above USD 80/barrel 4. The Qatar government has introduced a wage protection scheme to make direct payment to an employee s bank account. This is a social scheme, to ensure timely payment of employee wages; however, contractors are struggling to meet their obligations. We believe banks with greater exposure to the construction sector are more likely to witness a pick-up in delinquencies. Exhibit 3: Qatar banks' exposure to the construction & RE sector Past concerns have primarily been from the real estate sector Have a solid realestate portfolio, risk is in the contracting sector Contracting RE GRE Large public sector exposure, part of it may have exposure to const. & RE 37% 37% 20% Always a modest contracting sector exposure, but RE spiked in % 27% 26% 23% 13% 17% 11% 10% 3% 2% CBQ Doha QIB QB 3

4 Declining real estate index The steady upward trend of the Qatar real estate index peaked in 1Q16 and has been declining since then, according to the QCB publication. We expect to see earnings pressure for real estate companies and a pick-up in delinquencies for banks. Our industry sources have also informed us of rental corrections in both residential and commercial real estate. Exhibit 4: Real Estate Index on a downward trend since Mar RE Index peaked in Mar Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 ov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Source: SICO Research, Qatar Central Bank In the recent past (Exhibit 5), CBQ s asset quality has been impacted by real estate defaults, and with a quarter of its loan book still exposed to the sector, we would not be surprised to see more defaults. Although the bank is reducing its real estate exposure, the risk of default of its legacy exposure still persists in an environment of declining real estate prices. Despite a steady decline in its real estate lending to total lending ratio, QIB s net exposure to the sector has increased. Being a Sharia-compliant bank, the sector would continue to hold a healthy share of its lending book. Exhibit 5: CBQ s PL spikes related to real estate deterioration Exhibit 6: QIB exposure to the RE loans decline as a % of total loans 5,000 4,000 3,000 2,000 1,000 - PL Spike related to the real-estate 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 25,000 20,000 15,000 10,000 5,000 - RE loans RE loans-total assets % 30% 28% 26% 24% 22% 20% ote: in QARmn ote: in QARmn 4

5 Tight Capital Position Qatar capital requirement With the implementation of Basel III, the capital requirement of all Qatari banks has increased significantly. The banks are expected to maintain core tier 1 capital (8.5%), total tier 1 (10.5%) and capital adequacy ratio (12.5%); and an additional domestic systemically important bank requirement, which varies from bank to bank. We estimate that most Qatari banks, save for QIB, have a modest core tier 1 buffer. We believe CBQ and Doha Bank would have to raise equity and/or cut dividends, while QB is more likely to raise low-cost senior debt. (ote: CBQ and Doha have already announced their capital raising plan). Core Tier 1 Capital (CET 1): This primarily constitutes a bank s equity capital and is the most difficult ratio to maintain, considering it can only be replenished through equity issuances and may lead to dividends rationalisation. Exhibit 7: Core Tier 1 ratio- both CBQ and Doha Bank would need to raise capital. For further acquisition QB would have raise capital CET ex DSIB DSIB Basel III Basel III requirement is 8.5% 0.2% 0.0% 0.2% 1.0% 10.0% 9.2% Buffer of 1.5% 11.3% 9.9% CBQ Doha QIB QB ote: DSIB stands for Domestic Systemic Important Bank. This is the extra CET1 ratio which big banks are expected to maintain and are determined by the Central Bank Expect dividends rationalisation for CBQ and Doha Bank, while QB to increase dividends CBQ: We estimate that the bank would be reporting an EPS of 1.01/share adjusted for interest expenses related to its perpetual. The bank is likely to cut its dividends to 0.75/share from 3/share in 2015, with a payout ratio of ~74%. Doha Bank: The bank paid a dividend of QAR 3/share in 2015, and if it maintains its DPS at the level then the payout would increase to 63% in 2016 from 56% in However note that Doha Bank has an aggressive payout history of 79% over the past 7 years, and with the fresh capital issuance, it is possible for the bank s management to maintain its dividends. We estimate that every incremental DPS of QAR 0.5/share lowers the bank s CET by 0.16%. QIB: We expect QIB to report an earnings growth of 9% YoY, and expect the bank to marginally increase its DPS from 4.25/share in 2015 to 4.5/share in 2016, while maintaining its payout ratio of ~50%. The bank has strongest core tier 1 ratio among its peers. QB: The bank took a sharp cut in its dividends in 2015, lowering its DPS to 3.5/share in 2015 from QAR 7.5/share, with a 22% dividend payout ratio. Management gave guidance of a 30-35% payout ratio, and even at the lower end the bank should be able to disburse a DPS of QAR 4.5/share. 5

6 Additional Tier 1 and Tier 2 capital: Qatari are expected to maintain a Tier 1 ratio of 10.5% and a total capital adequacy ratio (CAR) of 12.5%. We estimate that most banks are well capitalised from a Tier 1 and CAR perspective. Exhibit 8: Buffer of Tier 1 and CAR above the QCB regulated level. Qatari banks are well capitalised in the Tier 1 and CAR parameter, but struggle with their core tier 1/equity target Tier 1 CAR 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% CBQ Doha QIB QB could comfortably place perpetual issuances All major Qatari banks raised perpetual bonds over the past 2 years at a comfortable pricing of 4-6%, depending on their credit rating. CBQ raised QAR 2bn of additional tier 1 capital in Feb 2016 at 6%. After raising QAR 2bn in 2015 at 5%, QIB raised another QAR 2bn in 3Q16 at 5.25%. Doha Bank raised another QAR 2bn in 2Q15 after raising QAR 2bn in 4Q13, for an estimated 6%. QB raised QAR 10bn in 2Q16. They have not disclosed the funding cost, but we understand it to be in the 4% range. 6

7 Weak liquidity condition to push up funding cost The Qatari banking system continues to see a liquidity crunch with waning money supply in the system. This is likely to push up the funding cost of the banks as they struggle to manage their loans-to-deposits. Bank management informed us that they can gather deposits if they are willing to pay a higher deposits rate. Exhibit 9: Money supply continues to decline in the State. Likely to put pressure on banks' funding cost 8% 6% 4% 2% 0% -2% -4% Aug-15 Sep-15 Oct-15 ov-15 Dec-15 Jan-16 Feb-16 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 M2 Supply YoY growth sustained decline in money supply Mar-16 Dec-15 Apr-16 Feb-16 May-16 Apr-16 Jun-16 Jun-16 Jul-16 Aug-16 Aug-16-6% -8% are looking at international sources to manage their funding base, despite primarily lending domestically. Although QAR is pegged to USD, it does increase currency risk for the banks, and Qatar Central Bank has instructed banks to cap their exposure at 25% of equity. Qatari banks benefitted from negative interest rates in many developed countries; however, there is always a deposits outflux risk, if investors find better investment opportunities. We understand from QB management that the average deposit tenure is 6-12 months. Exhibit 10: Surge in foreign liabilities which is funding domestic investments. Risk if there is outflux of deposits 70% 60% Foreign Liabilites to Domestic liabilites Foreign Asset-to Domestic Assets 50% 40% Spike in foreign liabilites 30% 20% Source: SICO Research, Qatar Central Bank 7

8 The Qatar Central Bank (QCB) has regulated Qatari banks to deleverage their balance sheet and lower their loan-to-deposit ratio to 100% by the beginning of All Qatar banks are above the regulated level, with Masraf Al Rayan (not covered), Doha Bank and CBQ having a considerable gap to bridge. Exhibit 11: Qatari banks are above the regulated level of loan-to-deposit ratio Loan-to-deposit ratio 3Q16 Regulated level 120% 115% 110% 105% 100% 95% 90% MAR Doha CBQ QB QIB We believe there is a reasonable probability of QCB giving extension to Qatari banks to comply with the regulated level in an environment of low liquidity, or allow them to include long-term debt as part of stable deposits. However, at this stage we are not factoring any extension in our model. Exhibit 12: Qatar bank IMs are already on a downward trend and we expect it to decline even further, led by rise in funding cost E Boosted by acquistion of Finbank Turkey, with IM of 5.35% 3.0% 2.3% 2.6% 2.5% 2.4% 2.6% 2.2% 2.0% CBQ Doha QIB QB 8

9 with diversified fee income better placed As noted earlier, we expect banks to prudently grow their lending books, especially to the construction and real estate sectors. This would also impact fee income related to their banking activities. We expect banks with a greater share of banking activities-related fees-tototal fees to face headwinds in maintaining their earnings. Exhibit 13: CBQ and Doha bank are likely to witness greater pressure to support their earnings 90% Banking activities related fees/ total fees 80% 70% 60% 50% 40% 30% CBQ Doha MAR QB QIB ote: As on FY 2015 To counter waning fee income, we believe there are the two possible options for the banks 1. Increase their focus on non-funded business. This we understand is competitive, and off-balance sheet transactions also come with default risk and will impact s bank s CAR. Qatari banks are looking to target HI clients to tap into wealth management business. 2. Increase fees from their existing businesses, which we believe would be difficult for CBQ and Doha Bank as they already have relatively higher fee-to-loan ratio. Exhibit 14: with higher share of banking related fees to total loans would struggle to maintain their fee level. We believe CBQ and Doha Bank have limited head room to increase their fees further 1.2% 1.0% 0.8% Banking fees/ total loans-2015 CBQ and Doha bank will struggle to maintain its fees 0.6% 0.4% 0.2% 0.0% CBQ Doha QB MAR QIB 9

10 Company Section 10

11 GCC Equities SICO RESEARCH Price Data (QAR) Current Price Target Price wk High/Low 50.10/31.50 Ratings Short-term eutral Long-term Sell Risk Profile ormal Market Data Sector Market Cap USD 3.0bn Primary Market Qatar Other Exchg Reuters COMB.QA Bloomberg CBQKQD Free Float 100% Valuation Ratio 2016E 2017E P/E x P/BV x ROE Div Yld % Trading Data Daily Vol (6M Avg) 0.2 Daily T/o (6M Avg USD) 1.9 Issued Shares All in millions Performance (%) 1m 3m 12m Absolute Relative Source: SICO Research, Bloomberg Commercial Bank of Qatar Still not out of the woods Capital issuances to provide temporary relief to the bank s capital requirement Asset quality concerns and likely pick-up in funding cost to remain as medium- term headwinds We maintain Sell rating on the stock, with a TP of QAR 30/share Investment Case The investment case for CBQ revolves on its asset quality concerns from its legacy real estate exposure. The bank in 3Q16 reported a 54% YoY pick-up in its non-performing loans. With the real estate and construction sectors comprising a third of the bank s lending book, we do not expect asset quality concerns to normalise in the near-term. The bank has a modest PL coverage of 79% and we expect provisioning to remain higher than its peers in However, we expect cost of risk to taper down to 130bps in 2017E from 190bps in 2016E, as we believe the bank booked high provisioning during the year, led by the new CEO s drive to clean up the bank s book. CBQ s loan-to-deposit at 114% is well above the QCB s regulated level of 100%, and we expect its funding cost to rise from 1.75% in 2015 to 2.16% by 2018e. Fresh capital issuance of 18% to provide only temporary relief CBQ plans to issue fresh capital of QAR 588mn (18% of capital) at QAR 25.5/share, which should conclude in 1Q17. The bank is likely to cut its dividends to QAR 1/share in 2017 from QAR 3/share disbursed in We expect the bank to report earnings of QAR 996mn in 2017, while it would be disbursing QAR 240mn as interest related to its perpetual debt, and QAR 385mn of dividends to its common shareholders (QAR 1/share). Hence we estimate that the bank s core tier 1 ratio would increase only marginally by 40bps in 2017e from 9.8% in 2016e, despite the capital issuance. Valuations CBQ is trading at 0.8x-BVPS 2017e for an ROE expectation of 6.5% and dividend yield of 3.2%. We have lowered out target price to QAR 30/share from QAR 36/share, after adjusting the bank s earnings expectation for asset quality concerns, capital issuances and dividends cut. We have a Sell recommendation on the stock. Risks to our recommendation Higher-than-expected government spending and liquidity easing would lower the bank s funding cost and improve its asset quality. Pick-up in real estate rentals would also be positive for the bank. CBQ s subsidiaries and associates are in Turkey, Oman and the UAE. Stronger performances in these economies would also be positive for the bank s earnings. Chiradeep.Ghosh@sicobahrain.com 11

12 GCC Equities SICO RESEARCH Price Data (QAR) Current Price Target Price wk High/Low 49.00/32.90 Ratings Short-term eutral Long-term eutral Risk Profile ormal Market Data Sector Market Cap USD 2.4bn Primary Market Qatar Other Exchg Reuters DOBK.QA Bloomberg DHBKQD Free Float 100% Valuation Ratio 2016E 2017E P/E x P/BV x ROE Div Yld % Trading Data Daily Vol (6M Avg) 0.1 Daily T/o (6M Avg USD) 1.3 Issued Shares All in millions Performance (%) 1m 3m 12m Absolute Relative Source: SICO Research, Bloomberg Doha Bank Asset quality concerns to persist Doha Bank to witness asset quality concerns arising from its construction sector exposure The high dividend payout ratio would continue to pressure the bank s capital position We lower our rating to eutral, while cut our TP to QAR 36/share Investment Case We have concerns on the potential asset quality deterioration for Doha Bank related to its construction sector exposure. The bank s impaired loans have doubled over the past 3 years and gone up by 32% in the past 2 years. We estimate the bank s cost of risk to increase to 90bps in 2017e from 60bps in Doha Bank s loan-to-deposit ratio is high at 114% and we believe the funding cost to rise in 2017 as the bank attempts to boost its deposits to meet the regulated level of 100%. Our model assumes Doha s funding cost will rise to 1.55% in 2017E from 1.17% in eed to opt for equity capital issuances We estimate Doha Bank s core tier 1 ratio to decline to 9.2% in 2016 post the dividend disbursement from 10.5% in 2015, marginally above the regulated level of 8.5%. However, after the 20% capital issuance, assumed at QAR 25.5/share (25% discount to current price), we expect the core tier 1 ratio to increase to 10.4% in We were initially factoring the bank to cut its dividends per share to QAR 2.5/share in 2016 from QAR 3/share in However, after the decision to raise capital we believe the bank may maintain their DPS at 3/share in 2016, while declining to QAR 2.5/share in 2017 postcapital issuance. We estimate the bank to report a net profit of QAR 1,102mn in 2017e and distribute a dividend of QAR 794mn (QAR 2.5mn/share) in 2017e, while pay an interest of QAR 240mn related to its perpetual issuances. Valuations We have lowered our target price on the stock from QAR 42/share to QAR 36/share, as we factor in higher provisioning, modest balance sheet growth and higher funding cost. We have also lowered our recommendation to eutral from Buy. Risks to our recommendation Positive risks: Higher government spending in the infrastructure space and release of payments for contractors would lower support for the bank s asset quality related to the construction sector. Elevated crude prices and liquidity easing would help the bank gather deposits at funding cost lower than our expectation. Doha Bank can be a potential target, if we see bank mergers in Qatar. egative risks: Higher-than-expected asset quality deterioration would be negative for the bank s earnings. Chiradeep.Ghosh@sicobahrain.com 12

13 GCC Equities SICO RESEARCH Price Data (QAR) Current Price Target Price wk High/Low /75.10 Ratings Short-term eutral Long-term Buy Risk Profile ormal Market Data Sector Market Cap USD 6.5bn Primary Market Qatar Other Exchg Reuters QISB.QA Bloomberg QIBKQD Free Float 91% Valuation Ratio 2016E 2017E P/E x P/BV x ROE Div Yld % Trading Data Daily Vol (6M Avg) 0.2 Daily T/o (6M Avg USD) 4.4 Issued Shares All in millions Performance (%) 1m 3m 12m Absolute Relative Source: SICO Research, Bloomberg Qatar Islamic Bank Slow down and cruise QIB to continue to grow its balance sheet, albeit at a more sustainable pace Cost of risk to rise after 3 years of modest provisioning We maintain our Buy rating, and our TP to QAR 120/share Investment Case QIB remains a market leader in Qatar s Sharia-compliant private sector. We expect the bank to report 13% lending growth in 2016e, while tapering down to 11% in 2017 after growing at 27% CAGR e. The bank continues to capture Sharia-compliant market share, especially in the private sector with limited competition from Masraf Al Rayan and QIIB. QIB had been able to grow its deposit book at an equally impressive pace of 29% CAGR e. The bank s LDR ratio is marginally above the regulated level of 100%, and we believe its Sharia-compliant licence would help it gather deposits more easily than its conventional bank peers. Healthy capital position QIB has a relatively strong capital position with core tier 1 ratio at 11.5% in 2016E, well above the regulated level of 8.7%. Unlike its peers, we do not expect the bank to raise any capital and we believe it is equally comfortable with its tier 1 and CAR targets. We expect the bank to marginally increase its DPS to QAR 4.5/share from QAR 4.25/share in 2015, translating into a 4.5% dividend yield. Valuations We have maintained our target price on the stock at QAR 120/share and our Buy recommendation. The stock is trading at 1.5x-BVPS 2017 for a ROE expectation of 15%. We expect the stock to offer a dividend yield of 4.5%. Risk to our recommendation We have factored in a lending book growth of 11% YoY in 2017e, and deposits growth of 10% YoY. Lower-than-expected balance sheet performance or higher competition from peers could be negative for the bank. One of QIB s subsidiaries reported earnings losses in If repeated in 2017, it would negatively impact our earnings expectation. Chiradeep.Ghosh@sicobahrain.com 13

14 GCC Equities SICO RESEARCH Price Data (QAR) Current Price Target Price wk High/Low / Ratings Short-term eutral Long-term eutral Risk Profile ormal Market Data Sector Market Cap USD 35.0bn Primary Market Qatar Other Exchg Reuters QBK.QA Bloomberg QBKQD Free Float 48% Valuation Ratio 2016E 2017E P/E x P/BV x ROE Div Yld % Trading Data Daily Vol (6M Avg) 0.2 Daily T/o (6M Avg USD) 7.8 Issued Shares All in millions Performance (%) 1m 3m 12m Absolute Relative Source: SICO Research, Bloomberg Chiradeep.Ghosh@sicobahrain.com Qatar ational Bank To witness pressure from subsidiaries QB investment to get impacted from currency devaluation of its subsidiaries in Egypt and Turkey Bank to witness provisioning pressure in its subsidiaries We raise our TP at QAR 165/share, while we maintain our recommendation at eutral Investment Case The investment case for Qatar ational Bank revolves around its exposure to its Egypt and Turkish subsidiaries. The Egyptian currency has depreciated vs USD from 8.8 to 17.5 (22 ov), which we estimate would impact both the bank s earnings and equity book. Egypt s inflation rose to 15.5% in August and is expected to rise to 20% by the year-end. This is bound to deteriorate asset quality in the near-term, while a moderate slowdown in economic activities would also impact lending opportunities. We estimate the bank s earnings would get impacted by 5-6% in 4Q16 and FY2017. QB Al Ahli (Egypt) contributes 11% of the consolidated earnings. Moody s in 3Q16 downgraded Turkey to Junk status, driven by the failed coup in July. We expect to see asset quality deteriorating for the entity, considering a third of its lending book is to the SME sector, as investments may slow down into the country. The bank is highly leveraged, with its loan-todeposits & TRY bonds at 122% indicating a potential rise in funding cost. However, with QB as the parent shareholder, the bank should be able to raise wholesale funds at a more attractive rate. The Turkish economy is still fairly underleveraged with household debt to GDP at only 19.3%. QB Finansbank contributes 9.5% of the group s consolidated earnings. In our model, we have factored an average 5% currency depreciation (For EGP and TRY) every year for the next 3 years ( E). Half of QB s deposits are international, while only 37% of its loan book is overseas, suggesting that the bank is borrowing foreign money to fund local lending. We believe such deposits are vulnerable and can lead to a pick-up in funding cost, if these investors find better investment opportunities. Despite the pick-up in PL ratio due to the consolidation of Finansbank, the bank s PL coverage is strong at 130%. As discussed above, we expect to see asset quality deterioration from its subsidiaries and PL ratio to rise to 1.9% in 2017 from 1.4% in Valuations Post the consolidation of Finansbank, we have increased QB s target price to QAR 165/share (previously TP QAR 150/sh), while maintaining our eutral recommendation. The stock is trading at 1.7x-BVPS 2017, for a ROE expectation of 20%. We expect the stock to offer a modest dividend yield of 4.5%. Risk to our valuations egative: Further negative news related to the economies of Egypt and Turkey would impact the stock. Positive: More project roll outs in Qatar, and QAR/USD strengthening against the basket of currency, would be positive for QB. 14

15 Commercial Bank of Qatar Financials Income Statement (QAR mn) 2015A 2016E 2017E Interest Income 4,291 4,551 4,821 Interest Expense (1,757) (2,175) (2,358) et Interest Income 2,534 2,376 2,464 Fees Income on-interest Income 1,415 1,237 1,246 Total Revenue 3,949 3,613 3,710 Operating_expenses (1,638) (1,589) (1,700) Pre-Provision Profit 2,311 2,024 2,010 Loan loss charges (842) (1,530) (1,100) Profit Before Tax 1, ,003 Zakat (36) (4) (7) Profit After Tax 1, Minority Interest (32) 6 0 et Income 1, Core Income 1, Balance Sheet (QAR mn) 2015A 2016E 2017E Cash & cash equivalent 5,424 10,180 9,397 Interbank 15,831 16,464 17,123 Investments 15,854 16,488 17,148 et Loans 76,602 78,705 83,163 Investment in associates 4,423 4,630 4,858 Intangible assets Fixed Assets 1,345 1,399 1,455 Other Assets 3,304 3,469 3,642 Total Assets 123, , ,425 Total deposits 69,788 69,439 74,299 Due to Interbank 12,456 19,146 18,637 Debt Securities 22,524 24,524 24,524 Other liabilities 3,355 3,489 3,629 Total liabilities 108, , ,088 Minority Interest Total Equity 14,753 14,837 15,797 Total Equity & Liabilities 123, , ,425 Valuation (Per Share) EPS DPS BPS Key Ratios (%) 2015A 2016E 2017E Asset Quality PL Ratio PL Coverage Provisions/ Avg. Loans (1.10) (1.90) (1.30) Margins Asset Yields Funding Cost IM Capital Adequacy (%) Core Tier 1 Ratio Tier 1 Ratio CAR Total RWA (LCY mn) (QAR mn) 105, , ,054 Liquidity Ratios (%) Liquid Assets/ Total Assets Wholesale funding/ Total Assets Loans and Advances to Deposit Loans/Assets Income statement ratio % Fees Income/ Total Revenue Cost to Income Ratio Du Pont Analysis (%) - avg. assets 2015A 2016E 2017E et Interest Income Fee Income Other non-int Income Total Revenue Staff Expense (0.7) (0.6) (0.7) Other Overhead Expenses (0.7) (0.6) (0.6) Operating Expense (1.4) (1.2) (1.3) Pre-provisioning Profit Loan loss provisioning (0.7) (1.2) (0.8) Others Zakat & Minority Interest (0.1) ROA Equity/Assets ROE Source: Company, SICO Research, Bloomberg 15

16 Doha Bank Financials Income Statement (QAR mn) 2015A 2016E 2017E Interest Income 2,842 3,138 3,269 Interest Expense (795) (1,075) (1,180) et Interest Income 2,048 2,063 2,089 Fees Income on-interest Income Total Revenue 8,296 8,623 9,419 Operating_expenses (1,031) (1,077) (1,142) Pre-Provision Profit 7,266 7,546 8,277 Loan loss charges (293) (350) (544) Profit Before Tax 1,378 1,234 1,106 Zakat (5) (4) (4) Profit After Tax 1,374 1,230 1,102 Minority Interest et Income 1,374 1,230 1,102 Core Income 1, Balance Sheet (QAR mn) 2015A 2016E 2017E Cash & cash equivalent 3,563 4,115 5,041 Interbank 10,385 10,801 11,017 Investments 12,198 12,930 13,447 et Loans 55,615 56,654 59,177 Investment in associates Intangible assets Fixed Assets Other Assets Total Assets 83,304 86,120 90,382 Total deposits 52,767 51,711 55,848 Due to Interbank 8,776 13,076 11,667 Debt Securities 10,040 10,040 10,040 Other liabilities 2,464 2,587 2,717 Total liabilities 74,047 77,414 80,272 Minority Interest Total Equity 9,257 8,705 10,110 Total Equity & Liabilities 228, , ,120 Valuation (Per Share) EPS DPS BPS Key Ratios (%) 2015A 2016E 2017E Asset Quality PL Ratio PL Coverage Provisions/ Avg. Loans (0.54) (0.60) (0.90) Margins Asset Yields Funding Cost IM Capital Adequacy (%) Core Tier 1 Ratio Tier 1 Ratio CAR Total RWA (LCY mn) (QAR mn) 80,152 82,431 86,265 Liquidity Ratios (%) Liquid Assets/ Total Assets Wholesale funding/ Total Assets Loans and Advances to Deposit Loans/Assets Income statement ratio % Fees Income/ Total Revenue Cost to Income Ratio Du Pont Analysis (%) - avg. assets 2015A 2016E 2017E et Interest Income Fee Income Other non-int Income Total Revenue Staff Expense (0.6) (0.6) (0.6) Other Overhead Expenses (0.7) (0.6) (0.7) Operating Expense (1.3) (1.3) (1.3) Pre-provisioning Profit Loan loss provisioning (0.4) (0.4) (0.6) Others (0.1) (0.2) (0.1) Zakat & Minority Interest ROA Equity/Assets ROE Source: Company, SICO Research, Bloomberg 16

17 Qatar Islamic Bank Financials Income Statement (QAR mn) 2015A 2016E 2017E Interest Income 3,678 4,542 5,143 Interest Expense (1,114) (1,777) (1,937) et Interest Income 2,564 2,765 3,207 Fees Income on-interest Income Total Revenue 3,361 3,690 4,159 Operating_expenses (1,044) (1,115) (1,193) Pre-Provision Profit 2,317 2,575 2,966 Loan loss charges (105) (364) (523) Profit Before Tax 2,041 2,070 2,284 Zakat (10) (10) (12) Profit After Tax 2,030 2,060 2,273 Minority Interest (76) 80 (23) et Income 1,954 2,140 2,250 Core Income 1,688 1,644 1,870 Balance Sheet (QAR mn) 2015A 2016E 2017E Cash & cash equivalent 5,086 5,476 5,992 Interbank 9,494 9,589 9,973 Investments 18,840 19,594 20,377 et Loans 87,222 98, ,763 Investment in associates 1,048 1,066 1,096 Intangible assets Fixed Assets Other Assets 4,355 4,572 4,801 Total Assets 127, , ,047 Total deposits 91,521 99, ,230 Due to Interbank 11,199 14,941 16,464 Debt Securities 7,451 7,451 7,451 Other liabilities 1,636 1,717 1,803 Total liabilities 111, , ,948 Minority Interest 1,798 1,718 1,741 Total Equity 13,426 14,376 15,358 Total Equity & Liabilities 127, , ,047 Valuation (Per Share) EPS DPS BPS Key Ratios (%) 2015A 2016E 2017E Asset Quality PL Ratio PL Coverage Provisions/ Avg. Loans (0.14) (0.39) (0.50) Margins Asset Yields Funding Cost IM Capital Adequacy (%) Core Tier 1 Ratio Tier 1 Ratio CAR Total RWA (LCY mn) (QAR mn) 104, , ,809 Liquidity Ratios (%) Liquid Assets/ Total Assets Wholesale funding/ Total Assets Loans and Advances to Deposit Loans/Assets Income statement ratio % Fees Income/ Total Revenue Cost to Income Ratio Du Pont Analysis (%) - avg. assets 2015A 2016E 2017E et Interest Income Fee Income Other non-int Income Total Revenue Staff Expense (0.6) (0.5) (0.5) Other Overhead Expenses (0.4) (0.3) (0.3) Operating Expense (0.9) (0.8) (0.8) Pre-provisioning Profit Loan loss provisioning (0.1) (0.3) (0.4) Others (0.2) (0.1) (0.1) Zakat & Minority Interest (0.1) ROA Equity/Assets ROE Source: Company, SICO Research, Bloomberg 17

18 Qatar ational Bank Financials Income Statement (QAR mn) 2015A 2016E 2017E Interest Income 20,019 38,455 43,632 Interest Expense (7,274) (20,077) (22,501) et Interest Income 12,746 18,378 21,130 Fees Income 2,243 3,616 3,861 on-interest Income 3,157 5,050 5,043 Total Revenue 15,902 23,428 26,174 Operating_expenses (3,505) (7,078) (7,503) Pre-Provision Profit 12,397 16,350 18,671 Loan loss charges (433) (2,057) (2,697) Profit Before Tax 12,002 14,003 15,740 Zakat (673) (1,000) (1,124) Profit After Tax 11,329 13,003 14,616 Minority Interest (65) (78) (88) et Income 11,264 12,925 14,529 Core Income 10,722 12,450 14,433 Balance Sheet (QAR mn) 2015A 2016E 2017E Cash & cash equivalent 31,566 47,902 50,960 Interbank 17,101 34,202 36,254 Investments 81,157 93,331 97,997 et Loans 388, , ,168 Investment in associates 7,951 8,071 8,197 Intangible assets 5,378 5,378 5,378 Fixed Assets 1,754 4,091 4,336 Other Assets 5,409 14,605 15,335 Total Assets 538, , ,624 Total deposits 395, , ,043 Due to Interbank 52,624 47,129 46,186 Debt Securities 13,617 65,106 65,106 Other liabilities 15,120 34,411 36,131 Total liabilities 476, , ,467 Minority Interest 952 1,030 1,118 Total Equity 61,103 64,110 74,040 Total Equity & Liabilities 538, , ,624 Valuation (Per Share) EPS DPS BPS Key Ratios (%) 2015A 2016E 2017E Asset Quality PL Ratio PL Coverage Provisions/ Avg. Loans (0.12) (0.45) (0.50) Margins Asset Yields Funding Cost IM Capital Adequacy (%) Core Tier 1 Ratio Tier 1 Ratio CAR Total RWA (LCY mn) (QAR mn) 318, , ,022 Liquidity Ratios (%) Liquid Assets/ Total Assets Wholesale funding/ Total Assets Loans and Advances to Deposit Loans/Assets Income statement ratio % Fees Income/ Total Revenue Cost to Income Ratio Du Pont Analysis (%) - avg. assets 2015A 2016E 2017E et Interest Income Fee Income Other non-int Income Total Revenue Staff Expense (0.4) (0.6) (0.5) Other Overhead Expenses (0.3) (0.5) (0.5) Operating Expense (0.7) (1.1) (1.0) Pre-provisioning Profit Loan loss provisioning (0.1) (0.3) (0.4) Others 0.0 (0.1) 0.0 Zakat & Minority Interest (0.1) (0.2) (0.2) ROA Equity/Assets ROE Source: Company, SICO Research, Bloomberg 18

19 Aug-12 ov-12 Feb-13 May-13 Aug-13 ov-13 Feb-14 May-14 Aug-14 ov-14 Feb-15 May-15 Aug-15 ov-15 Feb-16 May-16 Aug-16 ov-16 Aug-12 ov-12 Feb-13 May-13 Aug-13 ov-13 Feb-14 May-14 Aug-14 ov-14 Feb-15 May-15 Aug-15 ov-15 Feb-16 May-16 Aug-16 ov-16 SICO Price, RESEARCH Target Price and Rating Change History Chart of (CBQK QD) Date Closing Target Rating Initiation Price Price Oct A X Jan A Mar A May A 60.0 A 18-Jun A A Aug A A A Jan A Apr Sep A Apr B 2-Dec A 21-Feb Mar Jul S 23-ov S A Closing Price Rating A B Target Price Initiation A B=Buy, A=Add, =eutral, R=Reduce, S=Sell, U/R = Under Review S S Price, Target Price and Rating Change History Chart of (DHBK QD) Date Closing Target Price Price Rating Initiation 8-Oct Feb Apr A 12-May B 19-Jun B 1-Jul B 29-Aug B 29-Jan A 3-Apr A 23-Sep B 31-May B 25-Aug B 2-Dec B 21-Feb Apr B 23-ov B AB BB A A Closing Price Rating B B B B Target Price Initiation B B=Buy, A=Add, =eutral, R=Reduce, S=Sell, U/R = Under Review 19

20 Aug-12 ov-12 Feb-13 May-13 Aug-13 ov-13 Feb-14 May-14 Aug-14 ov-14 Feb-15 May-15 Aug-15 ov-15 Feb-16 May-16 Aug-16 ov-16 Aug-12 ov-12 Feb-13 May-13 Aug-13 ov-13 Feb-14 May-14 Aug-14 ov-14 Feb-15 May-15 Aug-15 ov-15 Feb-16 May-16 Aug-16 ov-16 SICO Price, RESEARCH Target Price and Rating Change History Chart of (QIBK QD) Date Closing Target Rating Initiation Price Price Oct Jan Apr May A 18-Jun Aug A 29-Jan Mar A /3/ A 9/23/ /2/ ov B Closing Price Rating Target Price Initiation B=Buy, A=Add, =eutral, R=Reduce, S=Sell, U/R = Under Review B Price, Target Price and Rating Change History Chart of (QBK QD) Date Closing Target Price Price Rating Initiation 8-Oct A 15-Jan A 19-Feb A 1-Apr A 12-May A 18-Jun A 29-Aug A 29-Jan A 3-Apr A 23-Sep Feb Dec ov A AAA AA A A A Closing Price Rating B=Buy, A=Add, =eutral, R=Reduce, S=Sell, U/R = Under Review Target Price Initiation 20

21 Securities & Investment Company BSC * ote:- Under old methodology, up until 20 th Feb 2016, we had 5 categories of LT rating. Sell (<-25%), Reduce (-10 to -25%), eutral (-10% to +10%), Add (+10% to +25%), Buy (>+25%). The LT rating was independent of Risk Profile. Analyst Stock Rating Definitions Time horizon Short term Long term SICO Research issues a Short term outlook if the analyst feels that there are factors which might affect the short-term performance of the stock during the immediate six months after issuing a rating. This might be due to both quantitative and qualitative factors which the analyst think can affect the stock price. SICO Research s Long-term rating is based on the Target Price calculated by the analyst. The Target Price is arrived at using both fundamental and/or comparative valuation methods based on the Financial models developed by analysts incorporating current expectations and analyst's assumptions. Target price for a stock is calculated one year forward from the valuation date Recommendation (Short term) Positive Analyst expect positive triggers in the short term which might affect current price positively (> 10%) eutral Analyst does not expect any short term triggers/events (+/- 10%) egative Analyst expect negative triggers in the short term which might affect current price adversely (< 10%) Recommendation (Long term)* Buy If Risk profile is High Target price estimate offers 20%+ return from the current share price. If Risk profile is ormal Target price estimate offers 15%+ return from the current share price. eutral If Risk profile is High Target Price estimate offers 0% to 20% return from the current share price. If Risk profile is ormal Target Price estimate offers 5% to 15% return from the current share price Sell If Risk profile is High Target price estimate offers less than 0% return from the current share price. If Risk profile is ormal Target price estimate offers less than 5% return from the current share price. Risk High Stock volatility (360 days standard deviation) exceeds 2x of S&P GCC market volatility ormal Stock volatility (360 days standard deviation) lower than 2x of S&P GCC market volatility 21

22 Contact Details OTES BMB Centre, 1st Floor P.O Box 1331, Diplomatic Area Manama Kingdom of Bahrain Investment Research Head of Research ishit Lakhotia, CFA, CAIA Tel: (Direct) Brokerage Fadhel Makhlooq Tel: (Direct): Visit us at Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. othing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. The analyst(s) who is (are) responsible for producing the report certifies(y) that he (she) or any of their close relative have no beneficial ownership in the company s stock at the time of publishing the report. Any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and ational Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA) and Zain Bahrain s shares. Copyright otice Securities and Investment Company This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part. 22