Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Global Research Investment Update Equity Qatar Banking Sector 15 February, 2016 (QNB) Market Data Bloomberg Code: QNBK QD Reuters Code: QNBK.QA CMP (15 Feb 2016): 138.5 O/S (mn) 839.7 Market Cap (QAR bn): 116.3 Market Cap (USD bn): 31.9 P/E 2016e (x): 8.1 P/BV 2016e (x): 1.6 Price Performance 1-Yr High (QAR): 173.8 Low (QAR): 122.5 Average Volume ( 000): 189.4 1m 3m 12m Absolute (%) 6.8-5.8-19.7 Relative (%) 0.5 5.8 4.7 Price Volume Performance 900 800 700 600 500 400 300 200 100 0 180.0 160.0 140.0 120.0 100.0 80.0 BUY Target Price QAR164.7 A visible jump in revenues and assets in 2016 upon acquisition Decent dividend payout (~30%) expected to continue ROAE to remain over 18%; one of the strongest in our universe Maintain BUY despite cut in FV, on price drop Growth in 4Q15 resulted from fall in provisions In 4Q15, QNB reported 5.3%YoY growth in its bottom-line primarily due to a huge decline in the bank s provision expenses. The bank s net interest income remained flat during the quarter, rising marginally by 0.7%YoY in 4Q15, mainly due to higher loan book. Notably, the bank s NIM declined 24bpsYoY during the quarter, on lower asset yields which resulted in a poor growth in the bank s top-line. Non-interest income declined by 64.8%YoY in 4Q15 on lower investment and other income while fees and commission income was flat during the quarter. The bank s provisions decreased 56.3%YoY during the period under review, which supported bottom-line growth. In 2015, net interest income of the bank grew 3.9%YoY and net profit of the bank rose 7.7%YoY. Non-interest income was unchanged with fee income and capital gains compensating for the drop in other non-interest income heads; operating profit rose 3.2%YoY. Net profit growth on YoY basis is mainly attributed to a huge 45.4%YoY drop in provision expenses. QNB's board proposed a cash dividend of QAR3.5 per share and a bonus of 20%. Asset quality remains solid and capital adequacy comfortable Balance sheet growth was satisfactory during 2015. Net loans and advances climbed 14.8%YoY, customer deposits increased 7.9%YoY. Net loan to deposit ratio stood at 98.3% in 2015. The bank s largest loan exposure is to the government & GREs (45.3%), followed by the services sector (24.9%). Non-government loans rose 19%YoY in 2015, and the bank is eyeing the service sector more to diversify its loan base. International loans accounted for 24% of the total loan book. Contributions from international deposits grew from 36% from a year ago to 38.5%, most of which comes from Egypt. Furthermore, non-government deposits in 2015 rose 17%YoY to QAR36bn, which reduced the bank s dependency on the government. Volume ('000) Source: Bloomberg Naveed Ahmed, CFA Senior Manager nahmed@global.com.kw Tel.: (965) 22951280 Global Investment House www.globalinv.net QNBK (QAR) NPL ratio of the bank improved to 1.4% from 1.6% in 2014, while coverage ratio rose by 300bps to at 127%. Cost of risk was 11 basis points in 2015. Capital adequacy ratio stood at 16.3% in 2015, much higher than the BASEL III requirement of 12.5% with capital conversation buffer. Acquisition of Finansbank would be bottom-line accretive In December 2015, QNB entered into an agreement with the National Bank of Greece for the acquisition of 99.81% stake of Finansbank in Turkey for a sum of USD3.0bn (EUR2.75bn). QNB expects to finalize the transaction during 1H16. Finansbank is the 5 th largest privately owned universal bank by total assets, customer deposits and loans in the Turkish market. Finansbank has a wide distribution network of 647 branches & 3,043 ATMs and has over 5.3mn active customers. As of 3Q15, Finansbank had USD30.6bn of assets, USD19.7bn in loans and USD16.0bn in deposits; with total equity amounting to USD3.0bn, on the face of it, it seems the deal was struck at a very low P/BV of 1.0x. Noteworthy, our Bloomberg sample of 8 listed banks on the Turkish exchange revealed that Turkish banks were trading at a 9M15 P/BV of 0.81x as of December 22, 2015 (date when the acquisition was announced) and had a median ROE of 12.3% (Finansbank: 9 11%) for 2015e.
Addition to QNB by Finansbank QARmn Finansbank (3Q15) QNB (2016e) % of QNB Deposits 58,258 430,757 14% Loans 71,850 430,757 17% Assets 111,297 588,055 19% Net income 1,128 11,944 9% Net interest income - LTM 5,522 13,745 40% Provisions - LTM 1,540 957 161% NPLs 4,281 6,246 69% ROE 9 11% NPL ratio 6.0% NPL coverage 80% Tier I 11.6% CAR 15.2% Source: Bloomberg, Global Research Albeit, the acquisition is expected in the 1H16, but for the sakes of comparison, if the acquisition were to take place on the first day of the year, it would add around 40% to QNB s net interest income and 9 10 % to the bottom-line. The acquisition will help grow QNB s loans, deposits and assets by 15 20%. It is however, disconcerting that Finansbank s NPL ratio is on the higher side; with an NPL ratio of 6.0% as of 3Q15, the bank is likely to add 60 70bps to QNB s NPL ratio. Moreover, Finansbank has a cost of risk of around 200bps much higher than the 15 20bps expected for QNB. The acquisition is also likely to lower QNB s NPL coverage given that FinansBank covers only 80% of their NPLs currently. Dividend payout ratio to remain around 28 32% In its analyst call QNB made it very clear that the era of dividend payouts ranging around 50% was over and it was likely to sustain around 30 35%. QNB cut down on its payout ratio from 50% in 2014 to 22% in 2015, with the DPS dropping from QAR7.5 to QAR3.5, in what seems to be in lieu of their latest acquisition. We expect the payout ratio to remain between 28 32% over our forecast period while management guidance ranged from 30 35% going forward. The bank s dividend yield for 2016e is expected to be around 3.3% despite the incorporation of lower dividends. The management has also stated that in order to maintain a CAR of around 14%, the bank needs to go for either issuance of perpetual notes or rights issue. As of now, the bank has decided to go for issuance of perpetual notes to maintain its CAR at a stronger level, though the details of the issue have not been revealed. Management expects the bottom-line to grow by 7 8%YoY In its analyst call, the management s guidance for 2016 was as follows: - QNB s total assets, loans and deposits to grow by 8-10%YoY - Non-interest income is expected to grow by 6-8%, backed by strong fee income - Net profit growth was estimated at 7-8%YoY - Cost to income ratio was expected to be between 21.5% and 22% - Net interest margin was projected at 275bps - NPL ratio was forecasted at 1.4% and coverage ratio world continue to be more than 120% - Cost of risk is believed to remain between 15-18bps Income Statement QAR mn 4Q15 4Q14 YoY% 3Q15 QoQ% 2015 2014 YoY% Interest Income 5,150 4,847 6.3% 5,007 2.9% 20,019 18,666 7.2% Interest Expense (1,951) (1,670) 16.8% (1,829) 6.7% (7,274) (6,404) 13.6% Net Interest Income 3,200 3,177 0.7% 3,177 0.7% 12,746 12,262 3.9% Fee & Commission Income 561 561 0.0% 548 2.4% 2,243 2,115 6.1% Investment Income 2 (28) -108.5% 112-97.8% 162 97 68.3% Foreign Exchange Gain 151 199-24.0% 188-19.5% 746 815-8.4% Other Income (22) 198-111.1% 131-116.8% 371 500-25.7% Total Non-Interest Income 693 929-25.4% 979-29.3% 3,523 3,526-0.1% Total Operating Income 3,892 4,106-5.2% 4,156-6.3% 16,268 15,788 3.0% Provisions Expense (228) (572) -60.1% 0 NA (682) (1,250) -45.4% Operating Expenses (914) (858) 6.6% (903) 1.2% (3,585) (3,356) 6.8% Profit Before Taxation 2,751 2,677 2.8% 3,254-15.5% 12,002 11,183 7.3% Taxation & Minority Interest (207) (224) -7.5% (120) 72.8% (737) (728) 1.3% Net Profit Attributable to Parent 2,543 2,453 3.7% 3,134-18.8% 11,264 10,455 7.7% Source: Company Accounts February - 2016 2
2016e bottom-line estimate revised down We have revised down our 2016e net profit estimate marginally on the back of greater pressure on NIMs and lower expectations from non-interest income. We have raised our loan book estimate by 4.6%, considering stable growth in the bank s lending portfolio backed by growth in international lending operations. Deposit estimate was revised upward by 2.5%. We have marginally reduced our net interest income projection by 0.7%. Operating income expectation reduced by 2.7%. Provision is expected to remain on the lower side due to improvement in asset quality; hence, we have cut our provision estimate by 8.2%. Estimates Revision - 2016e QAR mn Earlier Estimates Revised Estimates % Change Loans 411,892 430,757 4.6% Deposits 420,298 430,757 2.5% Net Interest Income 13,848 13,745-0.7% Operating Income 17,914 17,427-2.7% Provisions 1,043 957-8.2% Net Profit 12,194 11,944-2.0% Source: Global Research Valuation update maintain BUY despite cut in FV Considering decent financial performance over the past year and weakness in the stock price on account of steep fall in the Qatari market, we believe that the stock price offers decent headroom for growth at current levels. The acquisition of Finansbank will be bottom-line accretive to the tune of 10 12%, albeit our model does not incorporate the effects of the addition of the planned acquisition. Our fair value for QNB stands at QAR164.7/share as compared to our previous target price of QAR215.9/share (QAR179.9/share post bonus adjustment); the drop in valuation ensues from lowered expectations for profit and dividend payouts and higher COE. Our fair value estimate is 19.0% above its current market price of QAR138.5/share as of 15 February, 2016. We assumed the risk-free rate (US 10- year Treasury yield) at 2.0% and risk premium at 9.1% including country- and stock-specific risk. Albeit, the bank is trading at a 2016e P/BV of 1.6x which is higher than the Qatari banking sector average of 1.5x, we believe it is justified given its robust ROE (18.1% vs 16.1% for the sector). We maintain our BUY rating with an optimistic outlook. February - 2016 3
Ratio Analysis Balance Sheet Income Statement Global Research Qatar Financial Statements (QAR mn) 2013 2014 2015 2016e 2017e 2018e 2019e Interest/Financing Income 16,771 18,666 20,019 21,609 24,833 28,492 32,636 Interest Expense/Payment to Depositors (5,211) (6,404) (7,274) (7,864) (9,365) (10,807) (12,683) Net Interest/Financing Income 11,560 12,262 12,746 13,745 15,469 17,685 19,953 Fee & Commission Income 1,928 2,115 2,243 2,418 2,645 2,900 3,171 Investment Income 184 97 162 172 189 208 228 Other Income 1,045 1,315 1,117 1,093 1,231 1,341 1,486 Total Non-Interest/Financing Income 3,157 3,526 3,523 3,682 4,065 4,449 4,885 Total Operating Income 14,717 15,788 16,268 17,427 19,533 22,134 24,838 Provisions expense (1,643) (1,250) (682) (957) (944) (851) (933) Operating Expenses (3,075) (3,356) (3,585) (3,750) (4,046) (4,485) (4,861) Profit Before Taxation 9,999 11,183 12,002 12,720 14,543 16,798 19,045 Sale of associate (net) - - - - - - - Taxation & Minority Interest (521) (728) (737) (775) (887) (1,024) (1,161) Net Profit Attributable to Parent 9,479 10,455 11,264 11,944 13,657 15,774 17,884 Cash Balances 22,909 30,754 31,566 37,726 40,300 45,974 50,853 Deposits with Banks & FIs 13,602 29,955 17,101 19,153 22,409 22,857 23,314 Investment Securities 78,303 67,696 81,157 87,302 95,717 102,164 113,064 Gross Loans & Financings 317,350 345,194 395,506 430,757 473,833 521,216 573,338 Loan Loss Reserve (6,638) (7,064) (7,214) (7,946) (8,705) (9,434) (10,237) Net Loans & Financings 310,712 338,130 388,292 422,811 465,129 511,782 563,101 Investment in Associates 5,840 7,963 7,951 8,428 9,018 9,649 10,324 Net Fixed Assets 1,391 1,779 1,754 1,707 1,667 1,624 1,579 Other Assets 10,729 10,079 10,787 10,928 11,087 11,262 11,449 Total Assets 443,486 486,357 538,607 588,055 645,326 705,312 773,685 Deposits from Banks & FIs 11,568 22,114 36,282 38,096 40,000 42,000 44,101 Deposits from Customers 335,539 360,338 395,190 430,757 473,833 521,216 573,338 Other Borrowings 34,162 34,304 31,463 33,290 34,921 33,117 33,117 Other Liabilities 8,489 11,639 13,617 14,298 15,013 15,763 16,551 Paid-up Capital 6,997 6,997 6,997 8,397 8,397 8,397 8,397 Retained Earnings 17,830 22,448 25,157 33,153 42,527 53,601 66,370 Other Reserves 28,001 27,537 28,949 29,049 29,549 30,049 30,549 Shareholders' Equity 52,828 56,983 61,103 70,599 80,473 92,047 105,316 Minority Interest 899 979 952 1,015 1,086 1,168 1,262 Total Equity & Liability 443,486 486,357 538,607 588,055 645,326 705,312 773,685 Return on Average Assets 2.3% 2.2% 2.2% 2.1% 2.2% 2.3% 2.4% Return on Average Equity 19.0% 19.0% 19.1% 18.1% 18.1% 18.3% 18.1% Recurring Income/Operating Income 91.0% 91.6% 91.1% 92.1% 92.7% 92.7% 93.0% Interest Earning/Financing Assets Yield 4.6% 4.5% 4.4% 4.3% 4.5% 4.7% 4.9% Cost of Funds 1.5% 1.6% 1.7% 1.6% 1.8% 1.9% 2.0% Net Spread 3.0% 2.9% 2.7% 2.6% 2.7% 2.8% 2.9% Cost to Income Ratio 20.9% 21.3% 22.0% 21.5% 20.7% 20.3% 19.6% Net Loans to Customer Deposits 92.6% 93.8% 98.3% 98.2% 98.2% 98.2% 98.2% Non Performing Loans 5,206.0 5,579.0 5,570.0 6,246.0 7,107.5 7,297.0 7,453.4 Loan Loss Reserve 6,411.6 6,926.4 7,093.3 7,825.6 8,583.8 9,313.5 10,116.1 NPLs to Gross Loans 1.6% 1.6% 1.4% 1.5% 1.5% 1.4% 1.3% NPL Coverage 123.2% 124.2% 127.3% 125.3% 120.8% 127.6% 135.7% Provisions/Total Income 11.2% 7.9% 4.2% 5.5% 4.8% 3.8% 3.8% Cost of Risk (bps) 53.0 33.5 11.7 17.7 16.8 14.7 14.7 Equity to Gross Loans 16.6% 16.5% 15.4% 16.4% 17.0% 17.7% 18.4% Equity to Total Assets 11.9% 11.7% 11.3% 12.0% 12.5% 13.1% 13.6% DPS 7.0 7.5 3.5 4.5 5.0 5.5 6.0 Dividend Yield 5.3% 3.5% 2.0% 3.3% 3.6% 4.0% 4.3% Dividend Payout Ratio 51.4% 49.9% 21.6% 31.5% 30.6% 29.1% 28.0% Adjusted EPS (QAR)* 13.5 14.9 16.1 17.1 19.5 22.5 25.6 Adjusted BVPS (QAR)* 62.9 67.9 72.8 84.1 95.8 109.6 125.4 Market Price (QAR) * 130.9 212.9 175.0 138.5 138.5 138.5 138.5 P/E Ratio (x) 9.7 14.2 10.9 8.1 7.1 6.1 5.4 P/BV Ratio (x) 2.1 3.1 2.4 1.6 1.4 1.3 1.1 Source: Company Reports & Global Research * Market price for 2016 and subsequent years as per closing prices on QE on 15 February, 2016 February - 2016 3
Disclosure The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Bloomberg Ticker Reuters Ticker Price Disclosure (QNB) BUY QNBK QD QNBK.QA QAR138.5 1,10 1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY BUY HOLD SELL Fair value of the stock is >20% from the current market price Fair value of the stock is between +10% and +20% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is < -10% from the current market price Disclaimer This material was produced by Global Investment House KSCC ( Global ), a firm regulated by the Central Bank of Kuwait and the Capital Markets Authority (Kuwait). This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. February - 2016 4
Global Investment House Website: www.globalinv.net Global Tower Sharq, Al-Shuhada Str. Tel. + (965) 2 295 1000 Fax. + (965) 2 295 1005 P.O. Box: 28807 Safat, 13149 Kuwait Research Naveed Ahmed, CFA (965) 2295-1280 nahmed@global.com.kw Wealth Management Rasha Al-Qenaei (965) 2295-1380 alqenaei@global.com.kw Global Kuwait Tel: (965) 2 295 1000 Fax: (965) 2 295 1005 P.O.Box 28807 Safat, 13149 Kuwait Global Egypt Tel: (202) 24189705/06 Fax: (202) 22905972 24 Cleopatra St., Heliopolis, Cairo Global Bahrain Tel: (973) 17 210011 Fax: (973) 17 210222 P.O.Box 855 Manama, Bahrain Global Saudi Arabia Tel: (966) 1 2994100 Fax: (966) 1 2994199 P.O. Box 66930 Riyadh 11586, Kingdom of Saudi Arabia Global UAE Tel: (971) 4 4477066 Fax: (971) 4 4477067 P.O.Box 121227 Dubai, UAE Global Jordan Tel: (962) 6 5005060 Fax: (962) 6 5005066 P.O.Box 3268 Amman 11180, Jordan Global Wealth Manager E-mail: contactus@global.com.kw Tel: (965) 1-804-242 February - 2016 5