The commercial bank of qatar Rallied, Still Worth More November 30, 2010 key data Fair Value per Share (QR) 99.00 Closing Price (QR) * 86.10 52-week High / Low (QR) 89.50 / 57.10 YTD / 12-month Return 39% / 28% Trailing P/B 1.6 Market Cap (QR Millions) 19,530 Shares Outstanding (Thousands) 226,826 Free Float 80% Reuters / Bloomberg COMB.QA / CBQK QD *Price as of close on November 29, 2010. Sources: Reuters, Qatar Exchange, and NBK Capital key metrics 2009A 2010F 2011F 2012F EPS (QR) 7.1 7.3 8.0 9.1 EPS Growth -19% 3% 10% 13% P/B 1.6 1.6 1.5 1.4 Dividend Yield 7.0% 6.4% 6.4% 6.8% RoAA 2.6% 2.7% 2.7% 2.8% RoAE 13.9% 13.4% 14.2% 15.3% Op. Income (QR millions) 2,931 2,736 2,956 3,238 Op. Income Growth -1.5% -6.6% 8.0% 9.6% Net Profit (QR millions) 1,524 1,641 1,810 2,053 Net Profit Growth -11% 8% 10% 13% Net Interest Margin 3.1% 3.3% 3.3% 3.2% Sources: Bank s financial statements, Reuters, and NBK Capital forecasts QR Millions 4Q2009A 3Q2010A 4Q2010F 1Q2011F Operating Income 636 732 693 722 Income before Provisions 436 538 481 515 Source: NBK Capital Rebased Performance 90 85 80 75 70 65 60 55 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 CBQ MSCI Qatar Banking and Financial Index Sources: Reuters and NBK Capital Analysts Raja Ghoussoub, CFA T. +971 4365 2857 E. raja.ghoussoub@nbkcapital.com Munira Mukadam T. +971 4365 2858 E. munira.mukadam@nbkcapital.com Highlights 12-Month Fair Value: QR 99 Recommendation: Accumulate Risk Level**: 3 Reason for Report: 3Q2010 Update Our new estimate of the Commercial Bank of Qatar s (CBQ s) fair value per share stands at QR 99, 15% above the share s closing price as of November 29, 2010; hence, our recommendation on the stock is Accumulate. This value is 7% above our previous fair value of QR 92.80. Since our initiation of coverage of CBQ dated June 23, 2010, with a Buy recommendation, the share price has increased by 28% to close at QR 86.10. Year-to-date (YTD), CBQ s share price has surged by 39%, outperforming the 28% increase in the Qatari banking index. CBQ is currently trading at a P/B of 1.6x, lower than the 2.3x for its Qatari peers. We expect CBQ to continue paying rich dividends with an expected dividend payout of 76% for 2010, reflecting a generous 6.4% dividend yield. We now forecast CBQ s loans to grow by 3% in 4Q2010, followed by 11% in 2011. We expect net interest income to drive earnings going forward, increasing by 10% in 2011 despite a slight expected drop in CBQ s net interest margin (NIM) in that year. We believe income from fees and commissions will continue to be under pressure, dropping by 5% in 2011. Overall, we see CBQ ending 2010 with a 7% decrease in operating income, followed by 8% and 10% growth in 2011 and 2012, respectively. All in all, we expect a rebound in net profit in 4Q2010 from the low level achieved in 4Q2009 and forecast CBQ to end 2010 with an 8% increase in the bottom line followed by 10% and 13% in 2011 and 2012, respectively. CBQ has a high capital adequacy ratio (CAR) of 18.7%, providing the bank with ample space to grow without being constrained by capitalization issues. CBQ reported relatively good results in 9M2010 with net profit standing at QR 1.33 billion, 1% below 9M2009. Excluding one-offs recorded in 9M2009, net profit would have increased by 13% in 9M2010. Net interest income increased by 5% in 9M2010, driven by 9% loan growth and an improvement in the NIM on the back of a drop in the cost of funds. Net provisioning charges dropped sharply in 9M2010, compensating for the 11% decrease in operating income and resulting in nearly flat net profit growth in 9M2010. Tariq van der Loo T. +971 4365 2812 E. tariq.vanderloo@nbkcapital.com ** Please refer to page 6 for recommendations and risk ratings. nbkcapital. com
Valuation Our new estimate of CBQ s fair value per share stands at QR 99, 15% above the share s closing price as of November 29, 2010; hence, our recommendation on the stock is Accumulate. This value is 7% above our previous fair value of QR 92.80. Since our initiation of coverage of CBQ dated June 23, 2010, with a Buy recommendation, the share price has increased by 28% to close at QR 86.10. Year-to-date (YTD), CBQ s share price has surged by 39%, outperforming the 28% increase in the Qatari banking index and the 17% increase in the overall market index. However, this rally underperformed Qatar National Bank s 52% surge during the same period. CBQ is currently trading at a P/B of 1.6x compared with 2.3x for its Qatari peers. In terms of P/E, CBQ is trading in line with its peers at around 13x. We expect CBQ to continue paying rich dividends with an expected dividend payout of 76% for 2010, reflecting a generous 6.4% dividend yield. Figure 1 Weighted Average Fair Value per Share Valuation Method Value (QR) Weight (%) Our estimate of CBQ s fair value per share stands at QR 99 Discounted Equity Cash Flow (DECF) Dividend Discount Model (DDM) Peer-based Valuation 111.10 97.20 78.30 40% 40% 20% Weighted Average Fair Value 99.00 100% Source: NBK Capital Performance in 9M2010 CBQ reported relatively good results in 9M2010 with net profit standing at QR 1.33 billion, 1% below 9M2009. However, the 9M2009 results included a one-off gain of QR 165 million from the sale of real estate. Excluding that, net profit in 9M2010 would have increased by 13%. Operating income stood at QR 2.04 billion in 9M2010, 11% below 9M2009 but 2.7% above our forecast. Excluding the one-off, operating income would have still dropped by 4% in 9M2010. The decrease in operating income was driven by a 22% drop in fees and commissions in 9M2010. Quarterly trends reflect the weakness in fee generation ability with fees dropping by 13% and 14% quarter-on-quarter (QoQ) in 2Q2010 and 3Q2010, respectively. One reason for that decrease was the imposition of caps on certain fees by the Qatar Central Bank (QCB) in 1Q2010. Another reason for the decrease in operating income in 9M2010 was the large drop in dividend income from QR 62 million in 9M2009 to QR 10 million in 9M2010 as the equity securities listed on the Qatar Exchange were sold to the government in 2009. Net interest income increased by 5% in 9M2010, driven by loan growth and an improvement in the NIM on the back of a drop in the cost of funds. Performance of net interest income is more favorable when looking at quarterly trends whereby net interest income increased by 6% and 8% QoQ in 2Q2010 and 3Q2010, respectively. Foreign exchange income increased by a moderate 4% in 9M2010 while income from associates declined by a slight 2%. The drop in net provisioning charges from QR 289 million in 9M2009 to QR 57 million in 9M2010 compensated for the decrease in operating income, resulting in nearly flat net profit growth in 9M2010. A major reason for the drop in net provisioning charges was the recovery of around 70% (QR 119 million in 3Q2010) of a corporate default that CBQ completely provisioned for during 2009. Investment provisions continued to affect CBQ s bottom line albeit lower than before, standing at QR 81 million in 9M2010 compared with QR 108 million in 9M2009. Cost control was moderate at 3% in 9M2010, but still resulted in an increase in CBQ s cost-to-income ratio (CIR) to 28% in 9M2010 from 24% in 9M2009. nbkcapital. com 2
Net loan growth picked up, registering 5% in 2Q2010 and 4% in 3Q2010 after a 1% decrease in 1Q2010 and a 6% decline in FY2009. In line with the bank s strategy, CBQ succeeded in increasing public sector lending, which surged by around 49% in 9M2010, but still represented a small 12% of CBQ s total loans at the end of September 2010. Deposit accumulation significantly surpassed loan growth in 9M2010 with total deposits growing by 22%, bringing down the loansto-deposits ratio (LDR) from 122% in December 2009 to 109% in September 2010. After asset quality indicators improved in 2Q2010 with the non-performing loans (NPL) ratio decreasing from 3% in March 2010 to 2.7% in June 2010 and the NPL coverage ratio increasing from 77% to 91% during the same period, asset quality indicators weakened in 3Q2010. The NPL ratio increased again to 3% by September 2010 while the NPL coverage ratio decreased to 80%. However, as of the end of September 2010, CBQ was still reporting the full amount of the 70% recovered corporate default in NPLs. Excluding that from NPLs, asset quality indicators would have showed further improvement in 3Q2010. CBQ is one of the best capitalized banks in our coverage universe with a capital adequacy ratio of 18.7% by the end of September 2010, slightly lower than the 18.9% as of December 2009, but significantly above the 10% required by the QCB. CBQ s equity-to-assets ratio stood at a high 20% at the end of September 2010. Figure 2 Performance in 2009 and 9M2010 QR Thousands 2009 % Change in 2009 Sep-2010 YTD Change % Net Loans and Advances 31,929,268-5.8% 34,677,957 8.6% Customer Deposits 26,271,548-18.4% 31,942,206 21.6% Shareholders' Equity 12,010,183 20.4% 12,141,580 1.1% Total Assets 57,317,359-6.8% 60,191,192 5.0% The sharp drop in provisioning resulted in flat net profit growth in 9M2010 despite the decrease in operating income QR Thousands 2009 % Change in 2009 9M2009 9M2010 YoY Change % Net Interest Income 1,660,791 7.6% 1,247,795 1,307,722 4.8% Net Fees and Commissions 678,802-18.7% 549,355 428,128-22.1% Share of Profit of Assoc. 152,939-4.6% 113,186 110,870-2.0% Foreign Exchange Income 119,620-8.6% 90,710 94,084 3.7% Investment Earnings 99,354-29.0% 97,236 63,168-35.0% Other Operating Income 219,055 151.7% 196,054 38,533-80.3% Operating Income 2,930,561-6.6% 2,294,336 2,042,505-11.0% Total Costs (759,453) 4.1% (559,506) (578,108) 3.3% Prov. for Credit Losses (461,050) -61.2% (288,945) (56,944) -80.3% Prov. for Investments (181,943) -31.2% (108,120) (80,962) -25.1% Net Profit 1,523,594 7.7% 1,337,765 1,326,491-0.8% Sources: CBQ s financial statements and NBK Capital Outlook and Forecasts We believe CBQ will post relatively good results in 4Q2010 and beyond, benefiting from the strong economic growth in Qatar and despite the ongoing muted growth in private sector activity. According to the International Monetary Fund s (IMF s) recent forecasts for Qatar, real gross domestic product (GDP) is expected to expand by 19% and 9% in 2011 and 2012, respectively, following an estimated 16% increase in 2010. CBQ, historically strong in corporate banking, will be a primary beneficiary when private sector corporate lending activity picks up again. Meanwhile, CBQ is increasing its share in the rapidly growing public sector lending, which already increased, in the overall sector, by 37% in 9M2010. nbkcapital. com 3
Net profit in 4Q2009 was a low QR 186 million, giving an opportunity for a net profit rebound in 4Q2010, which we believe will result in an increasing bottom line in FY2010 compared with FY2009. We view favorably the increase in the public sector business for CBQ with the bank s public sector loans increasing by around 49% in 9M2010. We now forecast CBQ s loans to grow by 3% in 4Q2010, followed by 11% in 2011 as well as in 2012. CBQ s Islamic banking assets represented around 7.5% of the bank s total assets at the end of September 2010, giving CBQ additional space to grow its Islamic banking assets before hitting the 15% cap imposed by the QCB. We expect deposit growth to be quicker than loan growth, resulting in a drop in the bank s LDR to 102% by the end of 2011 compared with 109% as of September 2010. We expect net interest income will drive earnings going forward, increasing by 10% in 2011 despite a slight expected drop in CBQ s NIM in that year. We believe income from fees and commissions will continue to be under pressure, dropping by 5% in 2011, driven by the caps imposed by the QCB and the fact that the growing public sector lending generates lower fees than the muted corporate sector lending. We do not expect brokerage to have a large impact on earnings as trading on the Qatar Exchange has been weak so far in 2010 (although there has been some noticeable improvement recently), and we believe a large pickup in trading activity is required before brokerage can have a meaningful impact on earnings. Overall, we see CBQ ending 2010 with a 7% drop in operating income, albeit better than the 11% drop witnessed in 9M2010, followed by 8% and 10% growth in 2011 and 2012, respectively. We do not see a major change in the bank s CIR, which we expect will remain at around the 29% to 30% level in our forecast horizon compared with 28% in 9M2010. Figure 3 Forecasts 2010 Forecasts (QR Thousands) 2010f versus Old New Diff % 2009a 5-year CAGR * We expect CBQ to end 2010 with an 8% increase in the bottom line followed by a CAGR of 12% in the following five years Net Loans and Advances 33,935,612 35,881,554 5.7% 12.4% 10.4% Customer Deposits 31,806,140 33,788,265 6.2% 28.6% 12.2% Net Interest Income 1,668,051 1,787,572 7.2% 7.6% 10.1% Net Fees and Commissions 677,807 552,034-18.6% -18.7% 6.4% Operating Income 2,670,560 2,735,932 2.4% -6.6% 9.8% Total Costs (794,076) (790,540) -0.4% 4.1% 10.4% Prov. for Credit Losses (302,257) (178,857) -40.8% -61.2% -0.6% Prov. for Investments (111,331) (125,167) 12.4% -31.2% n/m Net Profit 1,462,896 1,641,369 12.2% 7.7% 12.0% *CAGR: 2010 2015 Source: NBK Capital We forecast only a moderate increase in the NPL ratio, which we see reaching 3.3% by the end of 2011 compared with 3% at the end of September 2010. However, we expect NPL coverage to be maintained between 85% and 90% in our forecast horizon. We forecast a risk cost of 0.49% in 2011, which is in line with the 0.51% expected for 2010, before the risk cost drops in 2012 and beyond. We expect investment provisions to continue to affect CBQ s bottom line but to a lower extent than previously. Overall, we forecast a rebound in net profit in 4Q2010 (compared with the low level of 4Q2009) resulting in an 8% increase in the bottom line in 2010 followed by 10% and 13% in 2011 and 2012, respectively. We forecast the return on average equity (RoAE) to bottom out at around 13% in FY2010 before increasing to 17% by the end of our forecast horizon. We expect CBQ to continue paying rich dividends with an expected dividend payout of 76% for 2010, reflecting a generous 6.4% dividend yield. nbkcapital. com 4
Financial Statements Balance Sheet (QR Thousands) Fiscal Year Ends December 2008 2009 2010 2011 2012 2013 2014 ASSETS Cash and Balances with Central Banks 3,015,283 4,374,423 7,219,030 7,886,866 8,350,054 8,483,012 8,486,824 Due from Banks 14,315,648 5,643,561 4,492,229 4,816,178 5,151,627 5,450,132 5,762,205 Net Investments 8,416,449 13,507,233 13,298,358 14,508,778 15,883,718 16,936,423 18,083,528 Net Loans and Advances 33,897,513 31,929,268 35,881,554 39,855,226 44,284,503 48,945,410 53,998,164 Net Fixed Assets 1,136,073 1,029,632 1,009,010 1,042,241 1,078,796 1,119,006 1,163,237 Other Assets 703,705 833,242 1,386,663 1,482,075 1,585,794 1,690,208 1,794,169 Total Assets 61,484,671 57,317,359 63,286,845 69,591,364 76,334,493 82,624,192 89,288,127 LIABILITIES & EQUITY Historical Due to Banks 10,922,869 7,391,335 3,863,317 4,093,752 4,327,367 4,523,610 4,725,008 Customer Deposits 32,185,874 26,271,548 33,788,265 39,154,526 44,711,469 49,651,660 54,816,932 Other Purchased Funds 6,096,091 9,924,358 10,944,475 10,944,475 10,944,475 10,944,475 10,944,475 Other Liabilities 2,301,392 1,719,935 2,234,331 2,380,048 2,526,738 2,649,922 2,786,790 Total Liabilities 51,506,226 45,307,176 50,830,387 56,572,801 62,510,050 67,769,668 73,273,205 Total Shareholders' Equity 9,978,445 12,010,183 12,456,458 13,018,564 13,824,444 14,854,524 16,014,922 TOTAL LIABILITIES & EQUITY 61,484,671 57,317,359 63,286,845 69,591,364 76,334,493 82,624,192 89,288,127 Forecast Income Statement (QR Thousands) Historical Fiscal Year Ends December 2008 2009 2010 2011 2012 2013 2014 Net Interest Income 1,292,091 1,660,791 1,787,572 1,964,601 2,137,079 2,337,459 2,543,625 Income from Fees and Commissions 943,451 678,802 552,034 522,368 575,354 630,744 693,014 Other Operating Income 740,672 590,968 396,326 468,617 525,475 599,158 654,678 Total Operating Income 2,976,214 2,930,561 2,735,932 2,955,585 3,237,908 3,567,362 3,891,317 Provisions for Credit Losses (58,812) (461,050) (178,857) (191,739) (163,734) (164,790) (177,014) Salaries and Employee Related Expenses (468,591) (465,886) (468,215) (508,147) (561,768) (624,545) (685,007) General and Administrative Expenses (213,546) (200,825) (222,916) (241,927) (267,456) (297,344) (326,130) Depreciation (67,973) (92,742) (99,409) (105,958) (116,554) (128,209) (141,030) Other Provisions and Operating Expenses (464,850) (186,464) (125,167) (98,166) (74,975) - - Total Operating Expenses (1,273,772) (1,406,967) (1,094,564) (1,145,937) (1,184,486) (1,214,888) (1,329,181) Net Operating Profit 1,702,442 1,523,594 1,641,369 1,809,648 2,053,422 2,352,475 2,562,136 Other Income / (Expenses) - - - - - - - Income Taxes - - - - - - - Minority Interest - - - - - - - Net Profit 1,702,442 1,523,594 1,641,369 1,809,648 2,053,422 2,352,475 2,562,136 Forecast EPS (QR) 8.78 7.08 7.27 7.98 9.05 10.37 11.30 Key Ratios Historical Fiscal Year Ends December 2008 2009 2010 2011 2012 2013 2014 Growth in Loans 35.5% -5.8% 12.4% 11.1% 11.1% 10.5% 10.3% Growth in Deposits 24.9% -18.4% 28.6% 15.9% 14.2% 11.0% 10.4% Growth in Net Profit 22.4% -10.5% 7.7% 10.3% 13.5% 14.6% 8.9% Growth in Operating Income 43.4% -1.5% -6.6% 8.0% 9.6% 10.2% 9.1% Loans-to-Assets 55.1% 55.7% 56.7% 57.3% 58.0% 59.2% 60.5% Loans-to-Deposits 105.3% 121.5% 106.2% 101.8% 99.0% 98.6% 98.5% NPLs-to-Gross Loans 0.8% 3.6% 3.1% 3.3% 3.3% 3.3% 3.3% NPL Coverage 98.9% 62.1% 85.1% 86.1% 87.1% 88.1% 89.1% Capital Adequacy 15.7% 18.9% 18.2% 17.3% 16.6% 16.2% 15.9% Growth in Costs 38.8% 1.2% 4.1% 8.3% 10.5% 11.0% 9.7% Non-Interest Expense-to-Average Assets 2.4% 2.4% 1.8% 1.7% 1.6% 1.5% 1.5% Cost-to-Income 25.2% 25.9% 28.9% 29.0% 29.2% 29.4% 29.6% Non-Interest Income-to-Operating Income 56.6% 43.3% 34.7% 33.5% 34.0% 34.5% 34.6% Dividend Payout 84.8% 85.3% 76.0% 68.9% 64.4% 59.6% 58.5% Net Interest Margin 2.7% 3.1% 3.3% 3.3% 3.2% 3.2% 3.2% RoAE 21.0% 13.9% 13.4% 14.2% 15.3% 16.4% 16.6% RoAA 3.2% 2.6% 2.7% 2.7% 2.8% 3.0% 3.0% Forecast Sources: Bank s financial statements and NBK Capital nbkcapital. com 5
RISK AND RECOMMENDATION GUIDE RECOMMENDATION UPSIDE (DOWNSIDE) POTENTIAL BUY MORE THAN 20% ACCUMULATE BETWEEN 5% AND 20% HOLD BETWEEN -10% AND 5% REDUCE BETWEEN -25% AND -10% SELL LESS THAN -25% RISK LEVEL LOW RISK HIGH RISK 1 2 3 4 5 Disclaimer The information, opinions, tools, and materials contained in this report (the Content ) are not addressed to, or intended for publication, distribution to, or use by, any individual or legal entity who is a citizen or resident of or domiciled in any jurisdiction where such distribution, publication, availability, or use would constitute a breach of the laws or regulations of such jurisdiction or that would require Watani Investment Company KSCC ( NBK Capital ) or its subsidiaries or its affiliates to obtain licenses, approvals, or permissions from the regulatory bodies or authorities of such jurisdiction. The Content, unless expressly mentioned otherwise, is under copyright to NBK Capital. 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