MENA financials - Arqaam Capital

Transcription

MENA financials
Looking beneath the surface
Investor pay-out what you see is not what you get
Company Section | May 23, 2012
Company Reports
May 23
2012
Jaap Meijer, MBA, CFA
jaap.meijer@arqaamcapital.com
+971 4 507 1744
Loubna Elhassan
Nisreen Assi
Christine Kalindjian
Michael Malkoun
Jonathan Milan
Zeina Nasreddine
Arqaam Arcapital Research offshore s.a.l.
MENA Financials –Banks, Insurance
and Diversified Financials
Table of Contents
Abu Dhabi Commercial Bank .......................................................................................... 2
Abu Dhabi Islamic Bank................................................................................................... 6
Commercial Bank of Dubai............................................................................................ 10
Dubai Islamic Bank ........................................................................................................ 14
Emirates NBD ................................................................................................................ 18
First Gulf Bank............................................................................................................... 22
National Bank of Abu Dhabi .......................................................................................... 26
Union National Bank ..................................................................................................... 30
Tamweel ....................................................................................................................... 34
Mashreq Bank ............................................................................................................... 38
National Bank of Ras Al-Khaimah.................................................................................. 42
Commercial Bank of Qatar ............................................................................................ 46
Doha Bank..................................................................................................................... 50
Qatar Islamic Bank ........................................................................................................ 54
Qatar National Bank...................................................................................................... 58
Masraf Al Rayan ............................................................................................................ 62
Al Khaliji Bank ............................................................................................................... 66
Qatar International Islamic Bank .................................................................................. 70
Credit Agricole Egypt .................................................................................................... 74
Commercial International Bank .................................................................................... 78
Housing Development Bank .......................................................................................... 82
National Societe Generale Bank.................................................................................... 86
Egyptian Gulf Bank ........................................................................................................ 90
Bank Audi ...................................................................................................................... 94
Blom Bank ..................................................................................................................... 98
Bank Byblos................................................................................................................. 102
Bank of Beirut ............................................................................................................. 106
Arab National Bank ..................................................................................................... 110
Al Rajhi Bank ............................................................................................................... 114
Banque Saudi Fransi.................................................................................................... 118
Riyad Bank .................................................................................................................. 122
SAMBA Financial Group .............................................................................................. 126
The Saudi British Bank ................................................................................................ 130
Saudi Hollandi Bank .................................................................................................... 134
Albilad Bank ................................................................................................................ 138
Bank Al-Jazira .............................................................................................................. 142
Saudi Investment Bank ............................................................................................... 146
Alinma Bank ................................................................................................................ 150
National Bank of Kuwait ............................................................................................. 154
Kuwait Finance House................................................................................................. 158
Gulf Bank .................................................................................................................... 162
Burgan Bank ................................................................................................................ 166
Boubyan Bank ............................................................................................................ 170
Bank Muscat ............................................................................................................... 174
Sohar Bank ................................................................................................................. 178
HSBC Oman Bank ....................................................................................................... 182
Ahli United Bank ......................................................................................................... 186
Shuaa Capital .............................................................................................................. 190
Dubai Financial Market ............................................................................................... 194
EFG Hermes ................................................................................................................ 198
Salama Insurance ........................................................................................................ 202
Qatar Insurance Company .......................................................................................... 206
Tawuniya Insurance .................................................................................................... 210
MedGulf Insurance ..................................................................................................... 214
Core Buy Portfolio
Company Ticker
Price Target
Upside (%)
UNB UH
AED 4.6
57.1
Company Ticker
Price Target
Upside (%)
FGB UH
AED 13.4
53.4
Company Ticker
Price Target
Upside (%)
BKMB OM
OMR 0.9
51.2
Company Ticker
Price Target
Upside (%)
SALAMA UH
AED 0.93
51.2
Company Ticker
Price Target
Upside (%)
CBD UH
AED 4.2
49.1
Company Ticker
Price Target
Upside (%)
BURG KK
KWD 0.6
45.3
Company Ticker
Price Target
Upside (%)
AAAL AB
SAR 38.3
41.9
Company Ticker
Price Target
Upside (%)
QNBK QD
QAR 189.2
41.6
Company Ticker
Price Target
Upside (%)
COMI EY
EGP 35.6
39.3
Company Ticker
Price Target
Upside (%)
RJHI AB
SAR 100.5
35.8
Company Ticker
Price Target
Upside (%)
CIEB EY
EGP 12.0
32.2
© Copyright 2012, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Arqaam Capital Research Offshore s.a.l
Abu Dhabi Commercial Bank
Capital deficit due to 10% buyback
 Earnings dilution on the back of sale of RHB Capital
 Capital adequacy remains a concern despite the sale of 25%
stake in RHB Capital due to a 10% share buyback
Low return bank: ADCB is generating slightly below average preprovision income relative to peers in UAE (2.9% of RWA) due to average
net interest margins, high C/I of 34% (vs. 33% in FY 10A) and a decline
of 6% in fees and commissions income in FY 11A. The bank sold its 25%
stake in RHB Capital for a gain of AED 1.31bn forcing it to shift its focus
to domestic core activity. We are forecasting a decline in net earnings of
41.3% (a 11.1% increase if we exclude the nonrecurring gain in FY 11A)
in FY 12e to AED 1.64bn mainly driven by a 5% drop in fees and
commissions to AED 853mn as it waives retail charges while NIMs are
expected to stand at 2.78% in FY 12e.
Earnings recovery thereafter: We expect earnings to recover at a 4 year
CAGR of 16.9% (excluding nonrecurring gain of FY 11A) helped by a
softening in loan loss charges, a small reduction in net interest margins,
accompanied by an elevation in fees and commissions.
Flight from retail and CC lending: We forecast loan book to increase at
a 4 year CAGR of 6.9% after a muted 1.6% growth in FY 11A. The growth
to be characterized by a flight away from retail and credit cards lending
activity after the new regulation, which is currently evident on fees and
commissions income and yet to reach margins.
Asset quality improvement: Our asset quality screen suggests a
cumulative loss of 911bps over the next 5 years, or 182bps pa. NPL
stood at 4.6% in FY 11A, down from 11.1% in FY 10A as restructured
loans of AED 6.7bn were reclassified (exposure to DW) and loan losses
absorb 52% of operating profits. The bank is currently at a general
provisions level of 1.6% of CRWAs surpassing the minimum requirement
of 1.5% by FY 14e.
Capital adequacy remains a concern, but liquidity is in comfort zone:
The capital gain on the sale of RHB Capital and the release of AED 5.3bn
in associates helped the estimated CET1 to reach 11.5% in FY 12e.
However, capital adequacy is cut back to 11.1% by a drag on the back of
a 10% share buyback; substantially below its Tier 1 of 14.2% under Basel
II in FY 12e. ADCB enjoys an adequate liquidity as we calculate an NSFR
of 92%, LCR of 151% and net cash balances of 13.2% in FY 11A.
HOLD
AED 3.0
Banks / UAE
Bloomberg code
Market index
Price target (local)
ADCB UH
Abu Dhabi
3.0
Upside (%)
Market data
-5.2
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Average daily value (AEDmn)
Average daily value (USDmn)
Year-end (local mn)
Revenues
Pre-provision Operating
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
P/TBVPS (x) ((mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
Loan/ Deposit ratio (%)
Risk weighted assets (bn)
Core Equity Tier 1 ratio
(%)
Tier 1 capital ratio (%)
Total capital ratio (%)
NPL ratio (%)
Coverage ratio (%)
3.2
2.6-3.4
17,626
4,799
2.9
0.8
2011
6,069
2012e
6,131
2013e
6,532
2014e
6,990
4,006
3,973
4,246
4,516
0.54
5.8
3.23
3.21
1.0
1.0
0.20
6.4
1.5
2.0
16.6
113.5
138
0.37
8.4
3.58
3.56
0.9
0.9
0.11
3.6
0.9
1.1
9.1
111.9
154
0.44
7.1
3.86
3.84
0.8
0.8
0.14
4.4
1.0
1.2
10.6
108.3
164
0.50
6.4
4.17
4.15
0.8
0.8
0.16
5.0
1.0
1.3
11.1
105.9
176
11.5
11.1
11.2
11.3
15.9
23
4.6
94.8
14.2
20
5.8
89.2
14.2
20
5.9
98.3
14.1
20
6.0
104.5
Price Performance
ADCB UH
122
Abu Dhabi
113
104
95
86
77
Fully priced in valuation: Our price target of AED 3 includes (i) a
valuation of the bank’s core operations which is roughly close to BV, (ii)
a large deduction for capital deficit, and (iii) a small adjustment for real
estate exposure and under-provisioning not accounted for in forecast
period. The stock is expected to trade at a P/E13e of 7.1x and
P/tNAV12e of 0.9x and to achieve an ROAE of 10.6% in FY 13e.
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Arqaam Capital Fundamental Data
Year-end
Profitability
4%
3%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
Net Interest Margin (%)
2.47
2.91
2.78
2.77
2.76
2.75
Cost/Income (%)
33.0
34.0
35.2
35.0
35.4
35.7
Net Interest Income/ total income (%)
73.6
77.2
78.7
79.4
79.8
80.0
Fees and commissions / Operating income (%)
19.1
14.8
13.9
13.6
13.3
13.2
Trading gains / Operating income (%)
1.2
2.7
2.0
1.7
1.6
1.5
RoAE (%)
0.9
16.6
9.1
10.6
11.1
12.5
19.6
29.0
21.1
21.8
21.5
21.2
0.1
1.5
0.9
1.0
1.0
1.1
Revenue / RWA (%)
3.69
4.41
3.97
3.98
3.98
3.97
Costs / RWA (%)
1.22
1.50
1.40
1.39
1.41
1.41
PPP / RWA (%)
2.47
2.91
2.58
2.59
2.57
2.55
Cost of risk / RWA (%)
2.43
1.74
1.41
1.28
1.20
1.01
RoRWA (%)
0.10
2.03
1.06
1.21
1.28
1.46
RoRWA (%) (adjusted for gross-up of associate)
0.07
2.01
1.05
1.20
1.27
1.45
Performance analysis
2.47%
2.91%
1.74%
2.43%
2.58%
2.59%
2.57%
1.41%
1.28%
1.20%
2.55%
1.01%
2.03%
0.10%
1.06%
0%
FY10
FY11
PPP/RWA
1.28%
1.21%
FY12e
FY13e
FY14e
Cost of risk/RWA
1.46%
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.91%
2.78%
2.77%
2.76%
2.75%
2.47%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.1
Asset Quality
Credit Quality
Charge offs / Avg gross loans (%)
110%
6.2%
6.1%
6.0%
5.9%
5.8%
5.7%
5.6%
100%
90%
80%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
NPL as % of tot loans
2.3
1.6
1.6
1.4
1.3
NPL/Gross Loans (%)
11.1
4.6
5.8
5.9
6.0
6.1
Provision coverage (%)
44.1
94.8
89.2
98.3
104.5
107.0
Provision/Avg gross loans (%)
Loan Loss Charge/Operating Income (%)
Year-end
3.3
4.8
4.1
4.8
5.4
5.8
85.3
52.0
54.5
49.2
46.4
39.5
2010
2011
2012e
2013e
2014e
2015e
Funding and Liquidity
Net loans/Deposits (%)
Capital Ratios
26%
22.5%
22%
18%
20.1%
14.2%
14.2%
FY12e
FY13e
19.9%
113.5
111.9
108.3
105.9
102.8
10.9
13.2
9.8
12.0
13.4
14.7
Deposits/Liabilities (%)
65.2
66.3
64.9
66.3
67.5
69.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
19.7%
16.7%
14%
10%
20.3%
115.7
Cash and Interbank / assets (%)
15.9%
12.0%
FY10
14.1%
14.2%
Capital and leverage ratios
Core Tier 1 ratio (Basel III) (%)
FY11
Tier 1
FY14e
CAR
FY15e
5.7
11.5
11.1
11.2
11.3
11.4
Tier 1 ratio (%)
12.0
15.9
14.2
14.2
14.1
14.2
16.7
22.5
20.3
20.1
19.9
19.7
Tangible equity / assets (%)
Growth
40%
8.7
9.8
9.0
9.0
9.0
9.2
RWA / assets (%)
76.0
74.9
77.1
76.2
75.5
75.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
8.0
23%
20%
5%
0%
FY10
4%
8%
6%
2%
FY11
FY12e
Loan growth
10%
10%
11%
Growth
7%
6%
FY13e
8%
FY14e
FY15e
Deposit growth
Asset growth (%)
11.3
3.1
9.0
7.5
8.0
Net loan growth (%)
5.3
1.6
6.1
6.3
7.5
7.7
Deposit growth (%)
23.0
3.5
7.7
9.8
9.9
10.9
(120.3)
1,926.0
(41.3)
21.3
13.5
22.3
Net income growth (%)
© Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice.
3
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (AEDmn)
Company Profile
Interest income
7,376
7,716
8,082
8,776
9,470
10,236
Interest expense
3,694
3,028
3,255
3,586
3,893
4,232
Abu Dhabi Commercial Bank is the third largest
bank in the UAE in total assets of AED 182.9bn as
of Q1 12 and in market capitalization of AED
17.6bn with a 12.1% market share in gross loans
and 10.3% in deposits in FY 11A. The bank was
established in 1985 on the back of a merger
between Emirate Commercial bank, Federal
Commercial and Khalij Commercial Bank. ADCB is a
full service bank providing retail banking, asset
management, private equity, brokerage and
investment banking services. The bank currently
operates 48 branches in the UAE, 2 branches in
India and 1 offshore branch in Jersey and
employees more than 4000 employees. ADCB is
58% owned by the government of Abu Dhabi
through the Abu Dhabi Investment Council, 6% by
Tasameem Real Estate Company and has a free
float of 36%.
Net interest income
3,682
4,688
4,827
5,190
5,577
6,005
956
898
853
887
932
988
49
157
110
97
99
104
Other operating income
312
326
341
358
381
407
Total Operating Income
5,000
6,069
6,131
6,532
6,990
7,503
Total Operating expenses
1,649
2,063
2,157
2,286
2,473
2,676
Pre-provision operating profit
3,351
4,006
3,973
4,246
4,516
4,827
Net provisions
2,860
2,082
2,164
2,091
2,097
1,905
427
315
11
11
12
13
64
1,608
1,799
2,144
2,407
2,909
Associates
336
1,473
135
145
157
169
Pre-tax profit
400
3,081
1,934
2,289
2,564
3,079
Fee income
Net trading income
Other provisions/Impairment
Operating profit
Taxation
Group Net profit
Minorities
31
39
46
55
1,903
2,250
2,518
3,023
10
19
25
23
23
24
237
240
240
240
240
Attributable net profit
138
2,789
1,639
1,988
2,255
2,759
Diluted EPS
0.03
0.50
0.33
0.39
0.45
0.55
—
0.20
0.11
0.14
0.16
0.19
BVPS
3.24
3.23
3.58
3.86
4.17
4.56
Tangible BVPS
3.20
3.21
3.56
3.84
4.15
4.54
2010
2011
2012e
2013e
2014e
2015e
129,068
130,467
139,599
149,371
161,321
174,227
6,296
5,712
7,226
8,667
10,114
11,369
122,772
124,755
132,374
140,704
151,207
162,857
Year-end
1.9%
36
3,045
243
Tier 1 Coupon
DPS
Loan Breakdown by Sector
9
391
Balance sheet (AEDmn)
24.8%
Gross loans and advances
Retail
Corporate
Government
73.3%
Less: Loan loss provisions
Net loans and advances
Cash and central bank
5,888
6,630
8,178
12,817
17,224
20,375
Due from banks
18,398
20,840
22,029
22,604
23,250
23,855
Investment, net
17,887
20,391
24,556
25,087
25,672
27,696
Fixed assets
1,070
965
985
1,028
1,076
1,130
Other assets
12,256
10,145
12,139
13,040
14,074
15,190
Total assets
178,271
183,726
200,261
215,281
232,503
251,103
Customer deposits
106,134
109,887
118,304
129,888
142,762
158,388
4,842
3,138
10,638
9,648
9,425
7,416
33,926
35,897
35,016
38,016
41,016
44,016
Due to banks
Loan Breakdown by Country
Debt
4.0%
Other liabilities
17,796
16,725
18,263
18,275
18,287
18,299
Total liabilities
162,698
165,648
182,222
195,826
211,489
228,119
15,573
18,078
18,039
19,454
21,014
22,985
135
138
154
164
176
189
Average interest-earning assets
149,097
160,997
173,796
187,514
202,353
218,728
Average interest-paying liabilities
138,741
146,912
158,760
170,755
185,377
201,511
15,410
17,948
17,908
19,322
20,881
22,851
9,005
16,676
17,244
18,529
19,987
21,772
16,216
21,875
21,863
23,273
24,829
26,794
Total Equity
UAE
International
Common shareholder’s equity
Core Equity Tier 1 (Basel III)
96.0%
Tier 1 capital
Nisreen Assi
+97145071744
4
May 23 2012
Abu Dhabi Commercial Bank valuation (AEDmn)
Year-end
2010
2011
1. DCF
Net profit
381
3,026
Other adjustments (comprehensive income)
243
237
Minus: excess return excess capital
(452)
(32)
Risk free rate
5.0%
5.0%
Tax shelter
--Adjusted net profit
589
2,821
Capital requirements
24,454 17,468
RoEcC
2.4%
16.1%
Cost of capital
12.5%
12.5%
Capital charge
3,057
2,184
Economic profit
(2,467)
637
Discount factor
--NPV of Economic Profit
--DCF EVA Forecast period
Perpetual growth rate (GDP)
Terminal Value
Terminal value discounted
Required Capital (adjusted for release associates)
Value of the bank operations
2. Capital surplus/deficit
Available capital:
Shareholders’ equity
15,573 18,078
Less Goodwill & intangibles
(155)
(124)
Less non equity elements reported shareholders’ equity
Less Dividends (if included in reported equity)
-- (1,120)
Tangible equity
15,418 16,834
Capital needs
RWAs (Basel I in FY 11A, Basel II/III starting FY 12e)
135,428 137,615
RWAs (Basel III)
159,133 144,885
Equity as % RWA
12.0%
12.0%
Financial stakes
5,358
82
Capital Requirements
24,454 17,468
Surplus capital
(9,036)
(634)
3. Other adjustments
Real estate losses
Corporate bond fair value losses
Equity investment losses
Under/overprovisioning not covered in forecast period
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Fully diluted number of shares
Fair value per share
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2012
2013
2014
2015
1,879
240
(69)
5.0%
-1,708
18,722
9.1%
12.5%
2,340
(633)
---
2,228
240
(63)
5.0%
-2,051
19,898
10.3%
12.5%
2,487
(436)
0.94
(411)
2,495
240
(60)
5.0%
-2,315
21,298
10.9%
12.5%
2,662
(347)
0.84
(291)
2,999
240
(52)
5.0%
-2,811
22,934
12.3%
12.5%
2,867
(56)
0.74
(42)
perp subtotal % of total
2,999
240
(52)
5.0%
-2,811
22,934
12.3%
12.5%
2,867
(56)
0.74
(42)
(744)
(5.0%)
(378)
18,722
17,599
(2.5%)
124.5%
117.1%
(1,379)
(9.2%)
1.5%
(508)
18,039
(124)
19,454
(124)
21,014
(124)
22,985
(124)
(574)
17,342
(696)
18,635
(789)
20,101
(966)
21,895
154,303
155,262
12.0%
90
18,722
(1,379)
164,053 175,656 189,212
165,012 176,614 190,171
12.0%
12.0%
12.0%
97
105
113
19,898 21,298 22,934
(1,264) (1,197) (1,038)
(198)
(1,536)
(26)
(1,761)
574
15,032
5,036
3.0
3.2
(5.2%)
9.2
0.84
(11.7%)
3.8%
100.0%
7.6
0.78
5
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Abu Dhabi Islamic Bank
Weakest capital base in the UAE
 Tight capital base under Basel III, due to (i) low capital
base, (ii) reliance on tier 1 capital notes, and (iii) dividends
 The retail focused bank is to be affected by CB’s
regulations capping fees, but CC ruling has a minimal
effect (credit cards book < AED 1bn)
 Average returns helped by impressive margins in Islamic
finance, offset by high C/I
Decent returns: The bank is generating reasonable pre-provisioning
income (3.2% of RWAs) on the back of relatively high margins of 4.1%,
partly offset by a high C/I ratio of 43%. We expect RORWA to increase
gradually to 1.4% in FY 15e despite continuing high additions to its
loan loss reserves.
Relatively poor earnings prospects: We are forecasting a drop in
earnings of 15.8% for FY 12e due to slightly higher loan loss charges
and lower net interest margins followed by a double digit recovery in
FY 13e and FY 14e driven by normalization in loan loss charges.
Limited asset quality concerns- no exposure to Dubai World and
Dubai Holding: Our asset quality screen suggests a cumulative loss of
813bps over the next 5 years, or 163bps pa. The bank has a large
unsecured consumer credit portfolio of 58.7% of gross loans in Q1
12A, and it may be affected by the UAE central bank forcing banks to
be more lenient. We expect loan loss charges to move up 18% vs. FY
11A.
Capital adequacy remains a drag on ADIB’s valuation: We calculate a
CET1 ratio of just 7.8%, the lowest within the UAE, which is no concern
for debt repayment capacity, as it is controlled by Abu Dhabi, but we
would not be surprised if ADIB addresses this weak capital base by an
EPS dilutive capital hike in the next few years.
Adequate Liquidity: We calculate an NSFR of 102% and an LCR of
217% which puts the bank at a conformable liquidity position.
SELL
AED 2.7
Banks / UAE
Bloomberg code
Market index
ADIB UH
Abu Dhabi
2.7
Upside (%)
Market data
-12.5
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
3.1
2.9-3.7
7,331
1,996
1.1
0.3
2011
3,408
2012e
3,407
2013e
3,633
2014e
3,860
1,959
1,882
2,014
2,131
0.49
6.3
2.78
2.78
1.1
1.1
0.24
7.9
1.4
1.7
16.3
88.5
61
0.42
7.4
2.87
2.87
1.1
1.1
0.21
6.8
1.2
1.2
13.0
83.1
70
0.46
6.7
3.07
3.07
1.0
1.0
0.22
7.0
1.2
1.3
13.8
81.4
74
0.52
5.9
3.35
3.35
0.9
0.9
0.24
7.8
1.3
1.4
14.7
77.0
78
8.0
7.8
8.1
8.4
14.2
17
8.7
66.8
12.6
15
8.6
82.2
12.6
15
8.6
94.1
12.8
15
8.5
104.3
Price Performance
ADIB UH
122
Abu Dhabi
113
104
High valuation: ADIB is trading at reasonable multiples of P/E13e of
6.7x and 1.1x P/tNAV12e (ROAE of 13.8% in FY 13e). However, our
price target of AED 2.7 includes: (i) a deduction for capital deficit, (ii)
an impairment on its to investment properties and (iii) a deduction for
underprovisioning.
95
86
77
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
4%
2.84%
3.23%
2.70%
2.73%
2.73%
2.64%
1.25%
1.31%
1.43%
1.57%
3%
2%
1.46%
1.71%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
4.02
4.08
4.05
4.08
4.06
3.91
Cost/Income (%)
42.5
42.5
44.8
44.6
44.8
45.7
84.8
83.4
83.5
82.9
82.9
82.1
11.2
12.6
13.1
12.9
13.0
13.4
2.5
2.5
1.8
2.6
2.6
3.0
RoAE (%)
16.1
16.3
13.0
13.8
14.7
15.7
Pre Prov.ROE (%)
26.0
28.1
26.2
26.8
26.5
25.0
1.3
1.4
1.2
1.2
1.3
1.4
Revenue / RWA (%)
4.94
5.62
4.89
4.92
4.95
4.87
Costs / RWA (%)
2.10
2.39
2.19
2.19
2.22
2.23
PPP / RWA (%)
2.84
3.23
2.70
2.73
2.73
2.64
1.21
1.35
1.31
1.29
1.20
0.99
RoRWA (%)
1.46
1.71
1.25
1.31
1.43
1.57
1.25
1.45
1.08
1.15
1.26
1.38
1.21%
1.35%
1.31%
FY10
FY11
PPP/RWA
1.29%
1.20%
0.99%
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
4.1%
3.9%
4.02%
4.08%
4.05%
4.08%
4.06%
3.91%
3.7%
3.5%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.9
1.1
1.3
1.3
1.2
1.0
NPL/Gross Loans (%)
7.1
8.7
8.6
8.6
8.5
8.5
63.6
66.8
82.2
94.1
104.3
109.7
Asset Quality
Credit Quality
150%
8.7%
8.6%
8.6%
8.5%
8.5%
8.4%
8.4%
100%
50%
0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
3.5
4.4
5.7
6.7
7.6
8.3
31.7
38.0
46.6
45.4
42.2
35.5
2010
2011
2012e
2013e
2014e
2015e
84.8
88.5
83.1
81.4
77.0
76.0
26.9
22.9
26.1
26.4
28.5
28.9
81.7
81.4
84.3
85.1
88.3
89.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18%
16.0%
17.4%
15.4%
15.3%
15.2%
15.2%
14%
10%
13.0%
14.2%
12.6%
12.6%
12.8%
13.0%
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
FY10
7.3
8.0
7.8
8.1
8.4
8.7
Tier 1 ratio (%)
13.0
14.2
12.6
12.6
12.8
13.0
16.0
17.4
15.4
15.3
15.2
15.2
Growth
20%
18%
17%
2%
7%
11%
7%
5%
0%
FY10
FY11
-2%
1%
FY12e
FY13e
7%
FY15e
-20%
Loan growth
8.8
8.8
8.9
9.1
9.3
82.2
81.6
90.6
90.5
89.4
88.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
17.4
(1.2)
3.5
6.0
7.0
7.0
Net loan growth (%)
18.5
1.8
0.6
4.7
4.9
6.6
Deposit growth (%)
17.2
(2.4)
7.2
6.9
10.9
8.0
4,981.3
14.6
(15.8)
11.1
15.4
16.5
8%
5%
FY14e
8.1
RWA / assets (%)
Deposit growth
Growth
7
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
3,641
3,728
3,767
3,966
4,212
4,386
Interest expense
1,045
886
922
954
1,012
1,085
Abu Dhabi Islamic Bank has a 4.8% market share in
gross loans and 5.2% in deposits as of FY 11A. The
bank was established in 1997 and commenced
commercial operations in 1998 with its activities
conducted in accordance with the Islamic Shari’a.
ADIB and its subsidiaries carry out full banking
services, financing and investing activities through
various Islamic instruments such as Murabaha,
Istisna’a, Mudaraba, Musharaka, Ijara, Wakalah,
Sukuk etc. The bank operates 70 branches in the
UAE and 1 branch in Iraq; employing more than
1,701 employees. ADIB is 38.6% owned by the
Emirates International Investment Company, 7.6%
by Abu Dhabi Investment Council and has a free
float of 53.8%.
Net interest income
2,596
2,841
2,845
3,013
3,199
3,301
343
429
447
469
502
537
Net trading income
76
86
63
96
102
122
44
52
54
55
58
60
3,059
3,408
3,407
3,633
3,860
4,020
1,301
1,450
1,525
1,619
1,729
1,838
Fee income
1,758
1,959
1,882
2,014
2,131
2,181
Net provisions
557
745
877
914
900
775
192
76
35
37
39
41
1,009
1,138
970
1,063
1,193
1,365
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
5.3%
36.0%
58.7%
Retail
Corporate
Government
UAE
Middle East
Europe
Others
95.8%
44
56
1,237
1,421
—
—
—
—
—
—
1,024
1,155
991
1,088
1,237
1,421
—
—
—
—
—
120
120
120
120
903
1,035
871
967
1,116
1,301
Diluted EPS
0.38
0.44
0.37
0.41
0.47
0.55
DPS
0.22
0.24
0.21
0.22
0.24
0.25
BVPS
2.58
2.78
2.87
3.07
3.35
3.67
Tangible BVPS
2.58
2.78
2.87
3.07
3.35
3.67
2010
2011
2012e
2013e
2014e
2015e
50,229
51,842
52,878
55,976
59,238
63,422
2,277
3,010
3,738
4,502
5,252
5,877
47,953
48,831
49,141
51,475
53,987
57,546
Year-end
5,400
11,207
13,131
14,143
15,316
16,552
Due from banks
15,730
7,732
7,694
8,155
8,726
9,337
Investment, net
3,719
3,626
3,903
4,815
5,957
6,306
Fixed assets
586
974
1,145
1,334
1,530
1,762
Other assets
1,870
1,965
1,923
1,631
1,745
1,867
Total assets
75,258
74,335
76,937
81,553
87,262
93,370
Customer deposits
56,517
55,172
59,142
63,199
70,079
75,699
891
1,931
773
800
(820)
(1,111)
Debt
9,647
8,798
9,028
9,269
9,269
9,269
Other liabilities
2,092
1,863
1,210
1,014
800
820
Total liabilities
69,147
67,764
70,153
74,280
79,329
84,676
6,111
6,571
6,784
7,273
7,933
8,694
62
61
70
74
78
83
64,551
69,605
70,281
73,862
78,870
84,345
Due to banks
0.7% 1.7%
24
1,088
120
1.8%
21
991
—
17
1,155
120
Tier 1 Coupon
15
1,024
Total Equity
60,849
64,478
65,422
69,105
73,898
79,193
6,108
6,568
6,781
7,268
7,928
8,688
4,720
5,170
5,473
5,975
6,521
7,191
Tier 1 capital
8,069
8,599
8,816
9,303
9,963
10,723
Nisreen Assi
+97145071744
8
May 23 2012
Abu Dhabi Islamic Bank valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
NPV of Economic Profit
DCF EVA Forecast period
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate investment properties (50%)
Level 3 assets (15%)
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012
2013
2014
2015
1,023
120
(151)
5.0%
-1,055
8,627
12.2%
12.6%
1,087
(32)
---
1,155
120
(99)
5.0%
-1,134
8,559
13.3%
12.6%
1,078
56
---
991
120
(121)
5.0%
-992
9,204
10.8%
12.6%
1,160
(168)
---
1,087
120
(121)
5.0%
-1,089
9,696
11.2%
12.6%
1,222
(133)
0.94
(125)
1,236
120
(113)
5.0%
-1,229
10,197
12.1%
12.6%
1,285
(56)
0.84
(46)
1,421
120
(103)
5.0%
-1,403
10,748
13.1%
12.6%
1,354
49
0.74
36
1,421
120
(103)
5.0%
-1,403
10,748
13.1%
12.6%
1,354
49
0.74
36
(135)
(2.1%)
344
9,204
9,413
5.4%
143.4%
146.7%
2.0%
463
6,111
--
6,571
--
6,784
--
7,273
--
7,933
--
8,694
--
(512)
5,599
(578)
6,571
(496)
6,784
(513)
7,273
(569)
7,933
(598)
8,694
61,894
64,919
12.0%
837
8,627
(3,029)
60,626
64,348
12.0%
837
8,559
(1,988)
69,720
69,720
12.0%
837
9,204
(2,419)
73,826
73,826
12.0%
837
9,696
(2,424)
78,002
78,002
12.0%
837
10,197
(2,265)
82,593
82,593
12.0%
837
10,748
(2,055)
(2,419) (37.7%)
(561)
(8.7%)
(459) (7.2%)
(52)
(1,072) (16.7%)
496
7.7%
6,417 100.0%
2,365
2.7
3.1
(12.5%)
7.4
0.95
6.6
0.88
9
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Commercial Bank of Dubai
Most attractive Dubai based bank
 Attractive upside potential of 49.1%
 Profitability is expected to remain decent, but two
transitional years ahead
 Robust capital position that allows for 35% buyback or
bonus dividends of AED 0.92 a share
BUY
Banks / UAE
Bloomberg code
Market index
Two transitional years ahead: We expect earnings to fall by 8.3% in FY
12e on the back of pressured margins and continuing additions to loan
reserves, followed by tempered growth in FY 13e. However, we expect
double digit bottom line growth to resume in FY 14e.
Decent asset quality: Our asset quality screen suggests a cumulative
loss of 904bps over the next 5 years, or 181bps pa, higher than the
1.6% it took in FY 11A. CBD is compelled to add to its collective
provisioning in order to adhere to the CB’s requirement of a 1.5% of
CRWAs; as the bank is currently at 1.3% as of FY 11A.
Significant surplus capital: We expect CBD’s Basel III CET1 to be at
16.9% in FY 12e and to increase further on the back of limited RWA
growth and strong ROAE. We would welcome a share buyback or
higher pay-out to address its overcapitalization. The bank could
finance up to 35% buyback or bonus dividends of AED 0.92 if it were to
go back to 12% CET1, a key differentiator compared to the tight capital
positions of other banks such as DIB and ENBD.
Sufficient liquidity: The bank has an adequate liquidity position as we
calculated an NSFR of 102% and LCR of 100% just at the threshold of
requirements. Moreover, the bank enjoys a solid net cash balance of
18% despite an LTD ratio of c. 100%.
Attractive upside potential: CBD is trading at attractive multiples with
a P/E13e of 6.8x (on our conservative forecasts) and P/tNAV12e of
0.8x, with an expected a ROAE of 11.6% in FY 13e. We believe the
market does not acknowledge the bank’s solid asset quality, robust
capital position that allows for buybacks or bonus cash dividends and
solid liquidity position.
CBD UH
DFM
4.2
Upside (%)
Market data
Strong returns: CBD should continue to deliver very solid preprovisioning income relative to others in UAE (currently at 3.7% of
RWA) on the back of decent NIMs and efficiency manifested in a C/I
ratio of 30.4%. We anticipate RORWA to remain over 2%, but the
ROAE is diluted to 11.6% because of CBD’s very solid capital base.
AED 4.2
49.1
10/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2.8
2.7-3.4
5,436
1,480
0.3
0.1
2011
1,857
2012e
1,908
2013e
1,970
2014e
2,058
1,292
1,327
1,366
1,428
0.42
6.6
3.26
3.26
0.9
0.9
0.20
7.1
2.1
2.3
13.5
94.3
35
0.39
7.2
3.44
3.44
0.8
0.8
0.21
7.6
1.9
2.1
11.6
93.5
37
0.41
6.8
3.64
3.64
0.8
0.8
0.23
8.1
1.9
2.1
11.6
93.3
38
0.48
5.8
3.89
3.89
0.7
0.7
0.24
8.6
2.1
2.3
12.7
93.3
40
16.6
16.9
17.1
17.4
16.6
23
13.1
47.4
16.9
23
13.4
48.5
17.1
23
13.3
50.5
17.4
23
13.2
50.7
CBD UH
DFM
Price Performance
119
110
101
92
83
74
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
5%
3.87%
3.67%
3.61%
2.36%
2.33%
2.05%
4%
3%
3.55%
3.53%
2.07%
3.52%
2.63%
2.30%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
3.91
3.75
3.71
3.60
3.54
3.49
Cost/Income (%)
28.7
30.4
30.4
30.6
30.6
30.5
73.3
72.2
70.8
70.0
69.6
69.3
18.2
19.2
19.6
20.1
20.4
20.6
2.5
1.1
1.9
2.2
2.2
2.2
1.51%
1.34%
1.56%
1.48%
1.23%
0.89%
FY15e
RORWA
RoAE (%)
14.6
13.5
11.6
11.6
12.7
14.2
Pre Prov.ROE (%)
24.0
21.2
20.4
19.9
19.5
19.0
2.2
2.1
1.9
1.9
2.1
2.4
Revenue / RWA (%)
5.42
5.27
5.19
5.12
5.09
5.06
4.0%
Costs / RWA (%)
1.56
1.60
1.58
1.57
1.56
1.54
3.8%
PPP / RWA (%)
3.87
3.67
3.61
3.55
3.53
3.52
1.51
1.34
1.56
1.48
1.23
0.89
RoRWA (%)
2.36
2.33
2.05
2.07
2.30
2.63
2.36
2.33
2.05
2.07
2.30
2.63
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
RoAA (%)
NIM
3.91%
3.6%
3.75%
3.71%
3.60%
3.4%
3.54%
3.49%
3.2%
3.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
1.8
1.6
1.9
1.8
1.5
1.1
5.8
13.1
13.4
13.3
13.2
13.1
76.7
47.4
48.5
50.5
50.7
48.2
51%
13.4%
NPL/Gross Loans (%)
50%
13.3%
49%
13.2%
48%
13.1%
47%
13.0%
46%
2.6
4.4
5.9
6.2
6.4
6.4
39.1
36.4
43.2
41.7
34.9
25.3
12.9%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
93.0
94.3
93.5
93.3
93.3
93.7
18.3
17.7
16.0
15.5
15.1
14.8
89.5
89.0
89.6
88.7
88.0
87.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
15.5
16.6
16.9
17.1
17.4
17.8
Tier 1 ratio (%)
15.6
16.6
16.9
17.1
17.4
17.8
22.1
23.1
23.2
23.1
23.2
23.4
15.3
16.5
16.6
16.5
16.7
17.1
RWA / assets (%)
90.5
92.1
91.1
90.0
89.2
88.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22.1%
23.1%
23.2%
23.1%
16.6%
16.9%
17.1%
FY11
Tier 1
FY12e
FY13e
23.2%
23.4%
22%
18%
14%
15.6%
17.4%
17.8%
10%
FY10
FY14e
CAR
FY15e
Growth
20%
5%
6%
5%
5%
5%
0%
FY10
-4%
FY11
-1%
-3%
FY12e
FY13e
5%
5%
FY14e
5%
5%
FY15e
Growth
Asset growth (%)
-20%
4.7
(0.7)
5.5
6.0
6.0
6.0
(4.3)
(1.3)
5.1
4.7
5.0
5.4
Deposit growth (%)
4.6
(2.7)
6.0
5.0
5.0
5.0
2.1
0.2
(8.3)
5.6
16.7
20.5
Net loan growth (%)
Loan growth
Deposit growth
11
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,968
1,769
1,759
1,831
1,915
2,004
583
427
407
452
483
509
1,385
1,341
1,351
1,378
1,433
1,495
345
357
375
395
419
444
38
10
21
24
26
27
122
149
160
172
181
190
1,890
1,857
1,908
1,970
2,058
2,156
543
565
581
603
630
657
1,347
1,292
1,327
1,366
1,428
1,499
526
470
573
570
498
379
—
—
—
—
—
—
821
822
754
797
930
1,120
Company Profile
Interest income
Commercial Bank of Dubai has a market share of
2.7% in both gross loans and deposits as of FY 11A.
The bank was established in 1969 carrying out full
banking services, operating 31 branches in the UAE
and employing more than 1200 employees. The
bank is 20% owned by the Investment Corporation
of Dubai, 10.5% by Al Futtaim Private Company,
8.8% by Arab Orient Insurance Company, 6.9% by
Abdullah Hamad Al Futtaim, 6.4% by Ghobash
Trading and Investment Company, 5.8% by
Abdulwahid Hassan Mohammed Al Rostamani, and
has a free float of 41.6%.
Net interest income
Interest expense
Fee income
Net trading income
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
7.7%
27.8%
Retail
Corporate
Government
64.6%
0.7%
—
—
930
1,120
—
—
—
—
—
754
797
930
1,120
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
821
822
754
797
930
1,120
Diluted EPS
0.42
0.42
0.39
0.41
0.48
0.58
DPS
0.20
0.20
0.21
0.23
0.24
0.29
BVPS
3.03
3.26
3.44
3.64
3.89
4.23
Tangible BVPS
3.03
3.26
3.44
3.64
3.89
4.23
2010
2011
2012e
2013e
2014e
2015e
28,420
28,596
30,140
31,647
33,230
34,891
1,256
1,781
1,954
2,123
2,222
2,200
27,165
26,815
28,187
29,524
31,008
32,691
5,076
5,376
5,818
6,417
6,990
7,492
Due from banks
2,298
1,701
1,210
1,283
1,360
1,442
Investment, net
1,890
2,086
2,691
3,014
3,351
3,703
Fixed assets
435
452
421
389
356
322
Other assets
1,644
1,811
2,017
2,138
2,267
2,403
Total assets
38,509
38,241
40,345
42,765
45,331
48,051
Customer deposits
29,210
28,423
30,140
31,647
33,230
34,891
309
326
561
1,062
1,514
1,810
Debt
1,467
1,632
1,583
1,535
1,489
1,444
Other liabilities
1,644
1,539
1,373
1,451
1,538
1,689
Total liabilities
32,630
31,920
33,657
35,696
37,770
39,834
5,879
6,322
6,687
7,069
7,561
8,217
35
35
37
38
40
43
35,399
35,806
36,410
38,297
40,493
42,826
Year-end
Total Equity
99.3%
—
797
822
Due to banks
UAE
GCC
—
754
—
—
822
821
Group Net profit
—
821
30,575
30,683
31,333
33,264
35,239
37,189
4,235
4,510
4,670
4,931
5,295
5,814
5,419
5,842
6,206
6,564
7,029
7,590
Tier 1 capital
5,429
5,852
6,216
6,574
7,039
7,600
Nisreen Assi
+97145071744
12
May 23 2012
Commercial Bank of Dubai valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Fair value per share (AED)
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012
2013
2014
2015
821
-65
5.0%
-756
4,198
18.0%
13.8%
579
177
---
822
-85
5.0%
-737
4,241
17.4%
13.8%
585
152
---
754
-93
5.0%
-661
4,418
15.0%
13.8%
610
52
---
797
-100
5.0%
-697
4,630
15.0%
13.8%
639
58
0.94
54
930
-112
5.0%
-818
4,863
16.8%
13.8%
671
147
0.82
121
1,120
-127
5.0%
-994
5,125
19.4%
13.8%
707
287
0.72
207
1,120
-127
5.0%
-994
5,125
19.4%
13.8%
707
287
0.72
207
383
4.7%
1,621
4,418
6,422
20.0%
54.5%
79.2%
1,855
22.9%
(87)
(1.1%)
(499)
(6.2%)
(586)
415
8,106
1,941
4.2
2.8
49.1%
(7.2%)
5.1%
100.0%
1.0%
2,240
5,879
--
6,322
--
6,687
--
7,069
--
7,561
--
8,217
--
(388)
5,491
(388)
5,933
(415)
6,273
(438)
6,631
(465)
7,096
(560)
7,656
34,840
34,897
12.0%
10
4,198
1,293
35,210
35,261
12.0%
10
4,241
1,692
36,734
36,734
12.0%
10
4,418
1,855
38,498
38,498
12.0%
10
4,630
2,002
40,441
40,441
12.0%
10
4,863
2,233
42,623
42,623
12.0%
10
5,125
2,532
10.2
1.15
8.7
1.07
13
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Dubai Islamic Bank
Substantial potential hidden losses
 Large hidden losses from (i) valuation of associates (ii)
aggressive valuation of Tamweel (iii) real estate investment
portfolio not fully impaired (iv) fair value losses
 Severe asset quality concerns, due to exposure to
commercial real estate
 Tight pre-provisioning earnings capacity
Muted returns bank and more transitional years ahead: DIB is
generating low pre-provisioning income relative to peers (2.8% of RWAs)
due to relatively average margins and burdening efficiency levels with a
C/I ratio of 41%. DIB has also substantial unrealized losses of AED 0.9bn
in FY 11A. We are forecasting at least two transitional years due to
continued high loan loss charges as DIB has not bitten the bullet so far
due to its limited earnings capacity and tight capital base.
Substantial hidden losses: The market value of DIB’s associates is as
much as AED 1.3bn below their BV exerting unfolded drag on DIB’s
valuation. Moreover, DIB has assigned a premium to Tamweel’s BV,
which increased DIB’s book value by AED 276mn. The situation is even
magnified if we use Tamweel’s market valuation which would bring the
discrepancy to above AED 875mn. We are assuming 50% cumulative
impairment (or AED 1.2bn) on real estate investment portfolio. We also
take into account a substantial underprovisioning and fair value losses
(AED0.9bn not being deducted from Tier-1).
Worst asset quality: Our asset quality screen suggests a cumulative loss
of 1,143bps, or 229bps pa, the highest relative to peers in the UAE due
to the bank’s high commercial real estate loans exposure (32% of total
loans), well above the loan loss charges DIB has been taking (1.7% in FY
11A). We therefore cannot rule out further disappointments with
respect to the cost of risk.
Underlying capital base is very weak: DIB’s Basel III CET1 is expected to
stand at 10.2% in FY 12e. However, this does not include the above
mentioned fair value losses; if included, the underlying CET1 would be
much lower (merely 5.5%).
SELL
AED 1.8
Banks / UAE
Bloomberg code
Market index
DIB UH
DFM
1.8
Upside (%)
Market data
-7.0
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
1.9
1.8-2.3
7,176
1,954
5.8
1.6
2011
3,618
2012e
3,945
2013e
4,092
2014e
4,258
2,122
2,398
2,489
2,563
0.27
7.1
2.41
2.41
0.8
0.8
0.13
6.6
1.1
1.3
10.9
79.6
75
0.23
8.2
2.51
2.51
0.8
0.8
0.14
7.3
0.9
0.9
9.3
74.4
97
0.25
7.6
2.62
2.62
0.7
0.7
0.17
9.2
1.0
1.0
9.7
74.6
99
0.30
6.2
2.75
2.75
0.7
0.7
0.18
9.6
1.2
1.1
11.3
75.0
103
12.1
10.2
9.4
9.5
13.6
18
14.5
48.8
11.1
15
14.0
55.2
10.3
14
13.8
72.7
10.5
14
13.5
88.1
Price Performance
DIB UH
119
DFM
110
101
92
83
Liquidity is of concern: We calculate an NSFR of 116% and LCR of 270%,
putting DIB in the highest liquidity position in the UAE, highly surpassing
the short-term requirements, and helped by a high cash balances 17.7%
(DIB could easily absorb Tamweel’s liquidity needs) and LTD of 91%.
Full valuation: DIB is trading at multiples of P/E13e of 7.7x and
P/tNAV12e of 0.8x, while offering an ROAE of 9.7% in FY 13e. We
however initiate with a Sell recommendation as the current share price
does not fully captures the hidden losses and the underlying weak
74
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Dubai Islamic Bank
Year-end
Profitability
3%
2.82%
2.39%
2%
1.44%
1.09%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.87
3.33
3.19
3.02
3.04
2.90
Cost/Income (%)
42.3
41.4
39.2
39.2
39.8
41.5
67.2
73.6
65.7
60.7
60.0
58.4
17.8
16.9
16.5
16.9
17.2
18.0
4.2
1.1
9.6
14.1
14.4
14.9
RoAE (%)
6.0
10.9
9.3
9.7
11.3
14.0
13.2
21.5
24.7
24.8
24.3
22.3
0.6
1.1
0.9
1.0
1.2
1.5
Revenue / RWA (%)
4.13
4.81
4.07
4.13
4.13
4.02
Costs / RWA (%)
1.75
1.99
1.59
1.62
1.65
1.67
PPP / RWA (%)
2.39
2.82
2.47
2.51
2.49
2.35
1.09
1.44
1.57
1.58
1.38
0.93
RoRWA (%)
0.70
1.34
0.90
0.95
1.12
1.41
0.47
0.97
0.69
0.73
0.86
1.09
2.47%
1.57%
2.51%
2.49%
1.58%
1.34%
2.35%
1.38%
1.41%
0.93%
1.12%
0.95%
0.70%
0.90%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
3.33%
3.19%
3.02%
3.04%
2.90%
2.87%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
1.1
1.6
2.4
2.4
2.1
1.4
8.3
14.5
14.0
13.8
13.5
13.5
59.0
48.8
55.2
72.7
88.1
94.9
100%
14.2%
NPL/Gross Loans (%)
80%
14.0%
60%
13.8%
40%
13.6%
20%
13.4%
0%
13.2%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
5.3
7.7
10.0
11.9
12.8
46.1
60.0
59.2
51.8
35.8
2010
2011
2012e
2013e
2014e
2015e
90.1
79.6
74.4
74.6
75.0
75.3
10.2
13.2
18.3
15.8
14.0
12.6
79.7
80.5
85.7
83.4
80.8
79.5
14.1%
Year-end
2010
2011
2012e
2013e
2014e
2015e
10.8%
11.0
12.1
10.2
9.4
9.5
10.1
Tier 1 ratio (%)
12.7
13.6
11.1
10.3
10.5
10.8
17.8
18.2
14.8
14.3
13.9
14.1
11.4
11.2
11.4
11.5
11.6
11.9
RWA / assets (%)
88.1
83.1
104.4
103.7
103.6
102.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Year-end
3.2
34.6
Capital Ratios
26%
22%
17.8%
18.2%
18%
14%
12.7%
14.8%
14.3%
11.1%
10.3%
FY12e
FY13e
13.6%
13.9%
10.5%
10%
FY10
FY11
Tier 1
FY14e
CAR
FY15e
Growth
20%
9%
15%
2%
2%
0%
FY10
-1%
FY11
-10%
FY12e
0%
0%
FY13e
1%
1%
FY14e
3%
FY15e
Growth
Asset growth (%)
-20%
Loan growth
3%
Deposit growth
6.6
0.8
2.5
3.0
4.0
5.0
Net loan growth (%)
14.5
(9.8)
1.7
0.3
1.3
3.3
Deposit growth (%)
(1.2)
2.1
8.8
0.1
0.7
2.8
(52.4)
82.6
(13.8)
8.5
22.0
31.8
Dubai Islamic Bank
15
May 23 2012
Abacus
Dubai Islamic Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
3,634
4,049
3,942
3,872
3,929
3,911
Interest expense
1,436
1,387
1,348
1,387
1,376
1,392
Dubai Islamic Bank has a market share of 5.2% in
gross loans and 6.1% in deposits as of FY 11A. The
bank was established in 1975 and commenced
commercial operations in 1984 with its activities
conducted in accordance with the Islamic Shari’a.
DIB carries out full banking services, financing and
investing activities and operates in 71 branches in
the UAE. The bank is 29.8% owned by the
Investment Corporation of Dubai, 7.2% by Saeed
Ahmad Lootah and has a free float of 63.0%.
Net interest income
2,199
2,662
2,593
2,484
2,553
2,519
Fee income
584
610
650
691
732
776
Net trading income
136
39
380
578
615
642
354
307
322
339
358
378
3,273
3,618
3,945
4,092
4,258
4,315
1,383
1,496
1,547
1,602
1,695
1,792
1,889
2,122
2,398
2,489
2,563
2,523
Net provisions
653
977
1,438
1,474
1,329
902
210
110
89
91
94
98
Operating profit
1,026
1,035
871
924
1,140
1,523
Associates
(463)
29
46
72
75
78
563
1,063
918
996
1,215
1,601
Pre-tax profit
Taxation
Group Net profit
Minorities
41.0%
54.4%
Retail
Corporate
Government
7
6
6
7
10
1,056
912
990
1,207
1,592
72
6
46
41
45
54
—
—
—
—
—
—
553
1,010
871
945
1,153
1,520
Diluted EPS
0.15
0.27
0.23
0.25
0.30
0.40
DPS
0.10
0.13
0.14
0.17
0.18
0.14
BVPS
2.46
2.41
2.51
2.62
2.75
2.97
Tangible BVPS
2.45
2.41
2.51
2.62
2.75
2.97
2010
2011
2012e
2013e
2014e
2015e
60,128
55,517
56,854
58,506
60,494
63,164
2,957
3,931
4,394
5,867
7,195
8,096
57,171
51,586
52,460
52,639
53,300
55,068
14,756
Tier 1 Coupon
4.6%
3
559
Year-end
11,247
12,952
12,867
12,863
13,992
Due from banks
2,357
3,043
2,786
2,869
2,984
3,133
Investment, net
16,142
19,326
21,332
23,745
25,534
27,659
Fixed assets
653
581
623
654
671
688
Other assets
2,314
3,099
2,786
2,869
2,984
3,133
Total assets
89,884
90,588
92,853
95,639
99,464
104,438
Customer deposits
63,447
64,771
70,501
70,602
71,086
73,108
Due to banks
4,409
4,052
(1,311)
625
3,085
4,760
Debt
7,929
7,927
8,135
8,223
8,312
8,403
Other liabilities
3,826
3,664
4,974
5,182
5,440
5,743
UAE
Total liabilities
79,611
80,415
82,300
84,632
87,924
92,015
International
Total Equity
10,273
10,174
10,553
11,006
11,540
12,423
79
75
97
99
103
107
76,708
79,998
81,268
82,378
83,956
86,909
3.7%
96.3%
73,799
76,268
77,038
78,388
80,967
84,378
9,309
9,135
9,532
9,954
10,446
11,274
9,393
9,499
9,897
9,274
9,777
10,820
10,370
10,576
11,022
10,538
11,071
11,954
Tier 1 capital
Dubai Islamic Bank
Nisreen Assi
+97145071744
16
May 23 2012
Dubai Islamic Bank valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel I in FY 11A, Basel II/III starting FY 12e))
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses (50% of investment portfolio in UAE)
Mark-to-market loss associates
minus what is already reflected on DCF
Tamweel revaluation
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Dubai Islamic Bank
2010
2011
2012
2013
2014
2015
553
-(44)
5.0%
-598
10,765
5.6%
13.5%
1,453
(856)
---
1,010
-(18)
5.0%
-1,028
10,053
10.2%
13.5%
1,357
(329)
---
871
(0)
(110)
5.0%
-982
12,238
8.0%
13.5%
1,652
(671)
---
945
0
(108)
5.0%
-1,053
12,501
8.4%
13.5%
1,688
(635)
0.94
(596)
1,153
0
(106)
5.0%
-1,259
12,965
9.7%
13.5%
1,750
(491)
0.83
(406)
1,520
0
(80)
5.0%
-1,600
13,494
11.9%
13.5%
1,822
(221)
0.73
(161)
10,273
(17)
10,174
--
10,553
--
11,006
--
11,540
--
12,423
--
(380)
9,876
(475)
9,699
(523)
10,031
(662)
10,345
(692)
10,848
(532)
11,891
79,154
85,113
12.0%
551
10,765
(888)
75,273
78,797
12.0%
597
10,053
(353)
96,963
96,963
12.0%
602
12,238
(2,207)
99,155 103,022 107,429
99,155 103,022 107,429
12.0%
12.0%
12.0%
602
602
602
12,501 12,965 13,494
(2,156) (2,117) (1,603)
perp subtotal% of total
1,759
0
(80)
5.0%
-1,839
13,494
13.6%
13.5%
1,822
18
0.73
13
(1,163) (17.4%)
2.0%
154
112
12,238
11,187
1.7%
183.3%
167.6%
(2,207) (33.1%)
(1,205) (18.1%)
(1,269) (19.0%)
1,398
20.9%
(276) (4.1%)
(1,475) (22.1%)
(2,827) (42.4%)
523
7.8%
6,675
100%
3,797
1.8
1.9
(7.0%)
7.7
0.70
7.1
0.67
17
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Emirates NBD
Affected by caps on public exposure
 A transitional year ahead, due to one offs in FY 11A, caps on
government exposures & lower NIM
 Loan loss charges to absorb >70% of operating profits
 Capital base only slowly addressed
Very low returns for FY 12e & FY 13e: We expect to see pressure on
ENBD’s pre-provision returns in FY 12e, which should stand at 2.7% of
RWAs, driven by a compression in its net interest margins (higher
deposit rates and new bond issuance), and partially offset by 10-15%
reductions in staff levels. The net RORWA should remain low (0.6% -0.7%
in FY 12e and FY 13e), due to high loan loss charges, which absorbs over
70% of operating profits, but we forecast RORWA 0.8% by FY 14e.
Earnings to fall in FY 12e: We expect net profit to fall substantially in FY
12e by 40.5% relative to FY 11A as the latter was inflated by one off
divestiture gains. From the low base of FY 12e we expect a strong
acceleration thereafter on the back of lower additions to loan loss
reserves.
Loan losses to absorb 70% of operating profits: Our asset quality screen
suggests a cumulative loss of 876bps over the next 5 years (175bps pa).
NPLs are still expected to rise to 15%-16% and a further bolstering of low
coverage to 55-60% is targeted, vs. 43% currently. Part of this high
coverage reflects ENBD’s conservativeness.
Growth to be impacted by new UAE caps. ENBD may have to reduce its
exposure to the local government by at least AED 14bn or 7% of total
loans by the end of Q3 12e due to a new UAE central bank guidelines
limiting government exposures to 100% of BIS capital (vs. 130%
currently).
ENBD needs to further bolster its capital base: ENBD’s Tier-1 stands at
13% and CAR at 20.5%. However, Tier-1 includes AED 4bn in
subordinated loans and does not subtract dividends. We calculate a
common equity CET1 under Basel III of only 10.8%, which is expected to
stabilize at this level due to the low earnings capacity. Moreover, ENBD
has substantial associate interests (such as real estate or network
International JV) that are not deducted from capital, while its exposure
to the non rated Dubai government also attracts zero risk weighting. The
reduction in loans to Dubai should not support capital ratios as a result.
HOLD
AED 3.2
Banks / UAE
Bloomberg code
Market index
EMIRATES UH
DFM
3.2
Upside (%)
Market data
18.0
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2.7
2.7-4.6
15,117
4,116
1.7
0.5
2011
9,930
2012e
9,574
2013e
9,687
2014e
10,083
6,329
6,174
6,252
6,577
0.46
6.0
5.57
4.52
0.5
0.6
0.20
7.4
0.8
1.0
7.5
105.1
222
0.29
9.4
5.61
4.58
0.5
0.6
0.12
4.5
0.5
0.6
4.4
97.6
228
0.32
8.4
5.76
4.75
0.5
0.6
0.14
5.1
0.6
0.7
4.8
92.9
235
0.39
6.9
5.97
4.97
0.5
0.5
0.14
5.1
0.7
0.8
5.9
87.7
244
10.5
10.8
10.8
10.9
13.0
21
13.8
43.4
12.8
20
15.0
56.2
12.9
20
16.0
64.5
12.9
19
16.0
74.9
Price Performance
135
EMIRATES UH
123
DFM
111
99
87
75
ENBD is to address its liquidity position too: The bank is in a work-inprogress mode to addressing liquidity as it has already raised a 5-yr USD
1bn bond; we anticipate further issuing of wholesale medium term debt
as its net cash is dwindled at 4.5% of total assets in FY 11A vs. 11% in FY
10A. We calculate an NSFR 94% and LCR of 81%.
Fully valued at current levels: Our TP of AED 3.2 offers 18% upside and
values it at a P/E13e of 8.4x and P/tNAV12e of 0.6x.
63
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Emirates NBD
Year-end
Profitability
4%
2.98%
2.85%
2.71%
3%
2%
2.69%
2.66%
2.71%
1.45%
2.24%
1.67%
2.01%
1.91%
1.81%
0.59%
0.65%
0.79%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.62
2.79
2.70
2.71
2.72
2.71
Cost/Income (%)
32.4
36.3
35.5
35.5
34.8
34.5
69.9
73.1
71.3
70.1
70.0
69.8
18.9
18.5
19.6
20.5
20.7
20.8
4.2
1.1
2.5
2.5
2.4
2.4
RoAE (%)
7.2
7.5
4.4
4.8
5.9
12.2
17.4
23.2
19.1
19.0
19.4
19.1
0.7
0.8
0.5
0.6
0.7
1.4
Revenue / RWA (%)
4.41
4.47
4.20
4.13
4.13
4.14
Costs / RWA (%)
1.43
1.62
1.49
1.46
1.44
1.43
PPP / RWA (%)
2.98
2.85
2.71
2.66
2.69
2.71
1.45
2.24
2.01
1.91
1.81
0.95
RoRWA (%)
0.94
1.02
0.59
0.65
0.79
1.67
0.87
0.92
0.54
0.59
0.71
1.51
0.94%
1.02%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
0.95%
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.79%
2.62%
FY10
FY11
2.70%
2.71%
2.72%
FY12e
FY13e
FY14e
Net interest margin
2.71%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
100%
16.5%
NPL/Gross Loans (%)
80%
16.0%
15.5%
20%
15.0%
0%
14.5%
60%
40%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
1.4
2.2
2.2
2.1
2.0
1.1
10.0
13.8
15.0
16.0
16.0
16.0
40.7
43.4
56.2
64.5
74.9
78.6
2.9
3.8
6.2
8.2
9.9
11.5
44.5
75.0
74.2
71.7
67.1
34.9
2010
2011
2012e
2013e
2014e
2015e
98.1
105.1
97.6
92.9
87.7
87.1
11.4
5.4
18.8
21.3
24.9
25.0
78.0
76.2
80.4
82.3
85.1
84.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
19.8%
20.5%
19.8%
19.6%
19.4%
20.0%
12.6%
13.0%
12.8%
12.9%
12.9%
13.7%
18%
14%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
10%
4%
1%
0%
FY10
-9%
FY11
-3%
8%
5%
FY12e
-7%
0%
FY13e
2%
FY14e
4%
3%
FY15e
10.5
10.8
10.8
10.9
11.6
12.6
13.0
12.8
12.9
12.9
13.7
19.8
20.5
19.8
19.6
19.4
20.0
10.4
10.9
11.4
11.4
11.4
11.9
RWA / assets (%)
77.1
78.0
83.3
83.4
83.4
82.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Growth
Asset growth (%)
-20%
Loan growth
9.9
Tier 1 ratio (%)
Deposit growth
1.6
(0.5)
(4.0)
3.0
4.0
5.0
Net loan growth (%)
(8.6)
3.5
(6.5)
0.4
1.6
3.3
Deposit growth (%)
10.4
(3.3)
0.6
5.5
7.6
4.0
(35.3)
9.2
(40.5)
13.1
25.5
121.6
Emirates NBD
19
May 23 2012
Abacus
Emirates NBD
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
12,667
11,565
11,246
11,123
11,474
11,817
Interest expense
5,872
4,307
4,415
4,336
4,421
4,460
Emirates NBD is the largest bank in the UAE in total
th
assets (AED 296.7bn as of Q1 12) and 4 by market
capitalization (AED 15.1bn) with a 20.1% market
share in gross loans and 18.1% in deposits as of FY
11A. The bank was incorporated in 2007 on the
back of a merger between Emirates Bank
International and National Bank of Dubai. ENBD is a
full service bank with principal business activities in
corporate, consumer, treasury, investment
banking, Islamic financing and asset management
services. The bank currently operates in the UAE
with 112 conventional and 54 Islamic and has an
international presence in UK, Jersey, Egypt, Iran
Qatar, KSA, India and Singapore. The bank is 55.6%
owned by the Investment Corporation of Dubai,
5.3% by Jumaa Al Majed Abdullah and has a free
float of 39.1%.
Net interest income
6,795
7,258
6,831
6,788
7,053
7,357
Fee income
1,839
1,837
1,874
1,986
2,086
2,190
Net trading income
319
24
160
175
181
189
769
811
710
738
763
801
9,721
9,930
9,574
9,687
10,083
10,537
3,147
3,602
3,401
3,435
3,506
3,631
6,574
6,329
6,174
6,252
6,577
6,907
Net provisions
2,926
4,748
4,579
4,480
4,416
2,414
264
230
2
2
2
2
3,384
1,351
1,593
1,770
2,159
4,491
(1,024)
1,159
20
20
20
20
2,360
2,509
1,613
1,790
2,179
4,511
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
22
45
2,158
4,466
(45)
(16)
(18)
(22)
262
262
262
262
262
2,078
2,269
1,351
1,528
1,918
4,249
Diluted EPS
0.37
0.41
0.24
0.27
0.35
0.76
DPS
0.20
0.20
0.12
0.14
0.14
0.27
BVPS
5.34
5.57
5.61
5.76
5.97
6.60
Tangible BVPS
4.27
4.52
4.58
4.75
4.97
5.62
2010
2011
2012e
2013e
2014e
2015e
204,546
216,037
207,396
212,581
220,021
228,822
8,322
12,897
17,476
21,957
26,373
28,787
196,224
203,140
189,919
190,624
193,648
200,035
37,683
21,526
24,000
29,951
36,067
41,563
Due from banks
13,850
19,852
16,394
16,886
17,561
18,439
Investment, net
19,015
19,645
22,178
22,809
23,677
24,807
Fixed assets
2,337
2,577
2,706
2,850
3,012
3,193
Other assets
16,970
17,874
18,032
18,306
18,717
19,280
Total assets
286,078
284,613
273,229
281,426
292,683
307,317
Customer deposits
199,972
193,314
194,535
205,150
220,823
229,656
Due to banks
19,749
28,625
(8,299)
(9,967)
(15,813)
(13,174)
Debt
24,683
20,876
43,674
41,702
41,471
40,591
Other liabilities
11,925
10,817
12,100
12,468
12,973
13,530
Total liabilities
256,329
253,632
242,010
249,353
259,454
270,604
29,750
30,981
31,219
32,073
33,228
36,713
221
222
228
235
244
255
259,626
259,906
252,710
250,527
259,592
271,657
18.6%
Retail
Corporate
Government
Total Equity
Emirates NBD
18
1,772
(48)
52.8%
16
1,597
—
28.5%
26
2,483
262
Tier 1 Coupon
Year-end
21
2,339
240,258
239,610
232,362
229,397
237,683
247,778
23,731
25,104
25,438
26,385
27,634
31,212
22,581
23,794
24,564
25,423
26,669
29,527
Tier 1 capital
27,692
28,905
29,240
30,187
31,436
35,014
Nisreen Assi
+97145071744
20
May 23 2012
Emirates NBD valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes (all minus impairment UPP)
Surplus capital
Real estate losses (UPP fair value loss)
Real estate investment fair value losss (50%)
Level 3 assets
Acquisition risk (amlak)
Total adjustments
4. Dividends
Total Fair Value YE
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Emirates NBD
2010
2011
2012
2013
2014
2015
perp
2,340 2,531
262
262
(216) (195)
4.0% 4.0%
--2,294 2,464
28,116 28,913
8.2% 8.5%
13.5% 13.5%
3,796 3,903
(1,502) (1,439)
-----
1,613
262
(166)
4.0%
-1,517
28,953
5.2%
13.5%
3,909
(2,391)
---
1,790
262
(168)
4.0%
-1,696
29,858
5.7%
13.5%
4,031
(2,335)
0.94
(2,192)
2,179
262
(166)
4.0%
-2,083
31,059
6.7%
13.5%
4,193
(2,109)
0.83
(1,745)
4,511
262
(107)
4.0%
-4,356
32,439
13.4%
13.5%
4,379
(23)
0.73
(17)
4,511
262
(107)
4.0%
-4,356
32,439
13.4%
13.5%
4,379
(23)
0.73
(17)
subtotal % of total
(3,953) (22.2%)
2.0%
(204)
(148)
28,953
24,851
29,750 30,981
(5,925) (5,831)
31,219
(5,737)
32,073
(5,642)
33,228
(5,547)
36,713
(5,451)
(1,112) (1,112)
22,713 24,038
(676)
24,807
(764)
25,667
(767)
26,915
(1,487)
29,775
220,528 222,075 227,732 234,788 244,118 254,749
227,577 226,721 227,732 234,788 244,118 254,749
12.0% 12.0%
12.0%
12.0%
12.0%
12.0%
807 1,706
1,625
1,684
1,764
1,869
28,116 28,913 28,953 29,858 31,059 32,439
(5,403) (4,875) (4,146) (4,191) (4,144) (2,664)
(0.8%)
162.3%
139.3%
(4,146) (23.2%)
(335) (1.9%)
(1,282) (7.2%)
(1,923) (10.8%)
-0.0%
(3,540) (19.8%)
676
3.8%
17,841 100.0%
5,558
3.2
2.7
18.0%
13.2
0.70
11.7
0.68
21
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
First Gulf Bank
Best cost efficiency in the UAE
 Attractive returns (strong margins, strong efficiency) only
partially dented by new regulation
 Robust capitalization even if we take haircuts on real estate,
but liquidity needs to be further bolstered
Recovery potential with double-digit earnings growth: We expect EPS
to grow at a 4 year CAGR of 11%, but expect a lower growth in FY 12e
due to reduced credit card charges and spill-over effects from FY 11e
resulting from lower retail charges. We conservatively penciled in 20bps
lower asset yields. This is supported by top line growth of almost 6% and
moderately falling provisions as % of loans. RORWA should remain high
at 2.3%-2.5%, helped by high NIMs due to its retail tilt and low
cost/income ratio.
Sustainable asset quality position: FGB’s NPLs could fall in FY 12A as
restructured loans move to performing loans (Dubai Holding of AED
621mn or 0.53% of loans). Our asset quality screen suggests a
cumulative loss of 778bps in the coming 5 years, or 156bps pa, which is
more or less in line with the level of FY 11A, partially due to build-up of
general provisions and potentially higher loan losses in consumer credit
due to new UAE policies forcing banks to be more lenient. The faster FGB
grows its loan book, the more it will have to add to its general reserves in
order to reach the 1.5% of CRWAs requirement.
Capital adequacy remains the bank’s strong point; attempts should be
exerted to combat a weak liquidity: FGB is reporting a robust net capital
generation, which increases CET1 by 50bps in FY 12e, despite an
increased pay-out to 40%. To address its overcapitalization, the bank
might apply one of the three potential options, in our view, of either (i) a
share buyback, (ii) increased dividend payments, or (iii) buyback of Tier1 debt, although we do not see the latter as a realistic option as the
coupon is low. We might witness impairments in the medium term on
the back of a huge real estate book, which could slightly offset the
surplus capital position.
Liquidity needs some improvements: FGB has to begin addressing its
weak liquidity of an NSFR of 87% and LCR of 135% which is in our view
insufficient and we expect to see the bank raising medium term debt in
the tune of AED 12-15bn gross of redemptions.
BUY
AED 13.4
Banks / UAE
Bloomberg code
Market index
FGB UH
Abu Dhabi
13.4
Upside (%)
Market data
53.4
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
8.8
6.9-11.0
26,280
7,155
7.9
2.2
2011
6,490
2012e
6,861
2013e
7,527
2014e
8,264
5,266
5,487
5,962
6,456
1.24
7.1
7.55
7.55
1.2
1.2
0.50
5.7
2.4
2.6
16.6
101.2
136
1.30
6.7
8.51
8.51
1.0
1.0
0.73
8.4
2.2
2.3
15.2
101.7
157
1.48
5.9
9.18
9.18
1.0
1.0
0.84
9.6
2.3
2.5
15.8
100.2
171
1.67
5.3
9.92
9.92
0.9
0.9
0.95
10.9
2.3
2.5
16.6
99.6
187
13.3
13.8
13.6
13.4
18.5
22
4.0
84.2
18.0
21
4.0
78.4
17.7
20
3.9
70.7
17.3
20
3.9
60.0
Price Performance
FGB UH
122
Abu Dhabi
111
100
89
78
Attractive upside from current levels: Our price target of AED 13.4
includes (i) a valuation for FGB’s banking operations at 2.0x of BV, (ii) an
increment for a large capital surplus, and (iii) a large deduction on the
back of real estate exposure. The bank offers substantial upside which
remains unacknowledged by market participants, in our view. FGB is
priced at a P/E13e of 5.9x and P/tNAV12e of 1.0x with a ROAE of 15.8%
in FY 13e. It offers a very compelling valuation, despite relatively low EPS
growth in FY 12e.
67
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
First Gulf Bank
Year-end
Profitability
5%
4.33%
3.87%
3.50%
4%
3.49%
3.44%
3.38%
3%
2%
2010
2011
2012e
2013e
2014e
2015e
3.51
3.71
3.52
3.51
3.49
3.48
Cost/Income (%)
17.7
18.9
20.0
20.8
21.9
23.2
67.1
78.3
78.1
78.5
79.4
80.4
23.4
18.7
17.3
16.6
15.8
15.1
2.7
0.1
1.8
2.2
2.2
2.1
2.46%
2.54%
2.57%
0.90%
0.79%
0.71%
FY15e
RORWA
RoAE (%)
16.5
16.6
15.2
15.8
16.6
17.2
Pre Prov.ROE (%)
24.9
23.9
21.9
21.7
21.8
21.9
2.4
2.4
2.2
2.3
2.3
2.3
Revenue / RWA (%)
5.26
4.77
4.38
4.41
4.41
4.39
4.0%
Costs / RWA (%)
0.93
0.90
0.88
0.92
0.96
1.02
3.8%
PPP / RWA (%)
4.33
3.87
3.50
3.49
3.44
3.38
1.36
1.14
1.02
0.90
0.79
0.71
RoRWA (%)
2.64
2.61
2.34
2.46
2.54
2.57
2.50
2.51
2.26
2.38
2.45
2.48
1%
2.64%
2.61%
2.34%
1.36%
1.14%
1.02%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
RoAA (%)
NIM
3.6%
3.4%
3.71%
3.52%
3.51%
3.51%
3.49%
3.2%
3.48%
3.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.7
1.5
1.4
1.2
1.1
0.9
NPL/Gross Loans (%)
4.6
4.0
4.0
3.9
3.9
3.8
72.1
84.2
78.4
70.7
60.0
47.6
Asset Quality
Credit Quality
100%
4.0%
4.0%
3.9%
3.9%
3.8%
3.8%
3.7%
80%
60%
40%
20%
0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
3.3
3.3
3.1
2.8
2.3
1.8
31.4
29.5
29.1
25.9
23.0
20.9
2010
2011
2012e
2013e
2014e
2015e
96.8
101.2
101.7
100.2
99.6
98.2
12.3
8.6
8.9
9.1
8.9
9.9
82.2
76.8
76.2
75.9
74.9
75.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
15.0
13.3
13.8
13.6
13.4
13.1
Tier 1 ratio (%)
20.3
18.5
18.0
17.7
17.3
16.9
22.9
21.5
21.0
20.5
20.5
19.8
14.7
14.5
14.8
14.4
13.9
13.5
RWA / assets (%)
85.7
86.3
90.5
88.8
87.1
86.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22.9%
21.5%
21.0%
20.5%
18.5%
18.0%
17.7%
22%
18%
20.5%
19.8%
20.3%
14%
17.3%
16.9%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
14%
10%
11%
9%
9%
FY11
FY12e
Loan growth
FY13e
5%
11%
13%
9%
11%
12%
6%
Growth
Asset growth (%)
0%
FY10
First Gulf Bank
FY14e
FY15e
Deposit growth
12.2
11.9
10.0
11.0
12.0
12.0
Net loan growth (%)
5.8
9.5
9.3
9.4
10.5
11.6
Deposit growth (%)
14.3
4.8
8.7
11.1
11.1
13.2
(0.3)
11.6
3.4
14.5
13.2
12.0
23
May 23 2012
Abacus
First Gulf Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Interest income
6,579
7,073
7,569
8,317
9,222
10,274
Interest expense
2,322
1,994
2,213
2,406
2,660
2,948
Net interest income
4,257
5,079
5,356
5,911
6,563
7,326
Fee income
1,487
1,212
1,188
1,247
1,310
1,375
45
63
67
81
87
90
554
136
249
287
305
324
6,343
6,490
6,861
7,527
8,264
9,115
1,122
1,224
1,374
1,565
1,809
2,111
5,221
5,266
5,487
5,962
6,456
7,004
Net provisions
1,639
1,553
1,594
1,545
1,487
1,467
—
—
—
—
—
—
3,582
3,713
3,893
4,417
4,969
5,537
Company Profile
th
First Gulf Bank is the 4 largest bank in the UAE in
nd
total assets (AED 159.7bn as of Q1 12A) and the 2
by market capitalization (AED 26.3bn as of Q1 12A)
with a 10.1% market share in gross loans and 9.7%
in deposits as of Q1 12A. The bank was
incorporated in 1979 and operates as a full service
bank providing conventional and Islamic
investment banking services including corporate
finance and investment advisory on mergers and
acquisitions,
initial
public
offering
and
underwriting; asset management services and
private equity investments. The bank currently
operates in 19 branches in the UAE and has an
international presence in Singapore, India and
Qatar employing more than 930 employees. FGB is
49.7% owned by the Abu Dhabi ruling family
members, 6.5% by Direct Access Investments, 5.4%
by Sheikh Tahnoun Bin Zayed Al Nahyan, 5.3% by
Mubadala Development Company, 5.3% by Nahda
Investment Company and has a free float of 27.8%.
8.0%
Net trading income
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
(38)
(8)
22
29
32
36
3,544
3,706
3,915
4,446
5,001
5,573
—
—
—
—
—
—
3,544
3,706
3,915
4,446
5,001
5,573
Minorities
124
(2)
3
4
4
4
Tier 1 Coupon
240
157
240
240
240
240
3,180
3,550
3,672
4,203
4,757
5,329
Diluted EPS
1.16
1.18
1.22
1.40
1.59
1.78
DPS
0.32
0.50
0.73
0.84
0.95
1.07
BVPS
6.04
7.55
8.51
9.18
9.92
10.75
Tangible BVPS
6.04
7.55
8.51
9.18
9.92
10.75
2010
2011
2012e
2013e
2014e
2015e
98,923
108,341
118,092
128,720
141,593
157,168
3,295
3,622
3,657
3,550
3,273
2,842
95,628
104,720
114,436
125,171
138,319
154,326
Year-end
41.0%
Retail
Corporate
Government
51.0%
8,526
9,587
12,862
18,222
24,766
32,353
Due from banks
10,268
12,225
12,992
13,460
13,998
14,472
Investment, net
22,554
26,771
28,507
30,578
32,913
34,118
Fixed assets
626
620
621
622
624
625
Other assets
3,156
3,557
3,811
4,230
4,738
5,306
Total assets
140,758
157,480
173,228
192,283
215,358
241,200
98,742
103,474
112,469
124,971
138,816
157,168
1,527
8,247
10,461
14,095
19,614
23,042
15,724
19,082
19,470
20,244
21,056
21,909
Other liabilities
4,134
3,910
5,129
5,256
5,894
6,605
Total liabilities
120,127
134,713
147,529
164,565
185,381
208,723
20,631
22,767
25,699
27,718
29,977
32,477
121
136
157
171
187
207
121,392
136,862
151,992
168,194
187,831
210,739
Customer deposits
Due to banks
Total Assets Breakdown by Country
Debt
11.3%
4.4%
Total Equity
4.5%
1.9%
UAE
Other Arab
Europe
USA
77.8%
First Gulf Bank
109,088
123,398
136,602
150,855
169,398
190,802
20,126
22,651
25,526
27,526
29,762
32,236
19,150
19,175
21,563
23,216
25,084
27,177
Tier 1 capital
24,532
25,119
28,199
30,218
32,477
34,977
Nisreen Assi
+97145071744
24
May 23 2012
First Gulf Bank valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses (50% on investment portfolio of AED7bn)
Losses on associates (Green Emirates Properties)
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
First Gulf Bank
2010
2011
2012
2013
2014
2015
3,420
240
195
5.0%
-2,985
15,865
18.8%
12.0%
1,904
1,082
---
3,707
157
176
5.0%
-3,374
17,740
19.0%
12.0%
2,129
1,245
---
3,912
240
212
5.0%
-3,459
19,250
18.0%
12.0%
2,310
1,149
---
4,443
240
211
5.0%
-3,991
20,970
19.0%
12.0%
2,516
1,475
0.94
1,394
4,997
240
204
5.0%
-4,553
23,037
19.8%
12.0%
2,764
1,789
0.84
1,509
5,569
240
189
5.0%
-5,140
25,497
20.2%
12.0%
3,060
2,080
0.75
1,567
20,631
--
22,767
--
25,699
--
27,718
--
29,977
--
32,477
--
(865)
19,766
(1,500)
21,267
(2,203)
23,496
(2,522)
25,196
(2,854)
27,122
(3,197)
29,280
120,659 135,980 156,808 170,745 187,485 207,446
127,899 144,139 156,808 170,745 187,485 207,446
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
517
444
433
481
538
603
15,865 17,740 19,250 20,970 23,037 25,497
3,902
3,527
4,246
4,226
4,086
3,783
5,569
240
189
5.0%
-5,140
25,497
20.2%
12.0%
3,060
2,080
0.75
1,567
4,470
1.5%
19,812
11.1%
14,924
19,250
38,644
37.0%
47.8%
95.9%
4,246
10.5%
(3,769)
(55)
(9.4%)
(0.1%)
(953) (2.4%)
(9)
0.0%
(4,787) (11.9%)
2,203
5.5%
40,307 100.0%
3,000
13.4
8.8
53.4%
11.0
1.58
9.6
1.46
25
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
National Bank of Abu Dhabi
Circular’s impact on growth still unknown
 NBAD offers the highest growth prospects in the UAE and
is best positioned to grow in the public sector after a
transitional FY 11A, but circular is a risk
 Asset quality remains NBAD’s strong point, decent capital
base, but liquidity needs to be addressed
BUY
Banks / UAE
Bloomberg code
Market index
Among the cleanest books in the UAE: Asset quality remains NBAD’s
strong point, despite some pick up in FY 11A. Our asset quality screen
suggests a cumulative loss of 456bps over the course of 5 years, or
91bps pa, which is benign in UAE context, vs. 88bps in FY11.
Adequate capital base: We expect NBAD’s Basel III CET1 to stabilize at
11.9% in FY 12e (adjusted for Tier1 capital notes which account for
14.7% of reported Tier 1 capital and proposed dividends). RWAs are
to slightly increase on the back of elevation of market risk weighted
assets from a low base.
Work in progress in addressing NBAD’s liquidity: Management is
aware of the bank’s weak liquidity and has already issued a USD
750mn 5yr bond in Q1 12A which improved NSFR by 1.7% (81%) and
LCR by 3.9% (69%), and it enjoyed a 33% y-t-d hike in deposits mainly
coming from the Abu Dhabi government, most of which should not
leave the bank. We anticipate NBAD to continue issuing new
wholesale medium term debt in the tune of AED 10-15bn, which
could be a drag on NBAD’s margins.
Attractive upside potential in the medium term: Our target price of
AED 13.0 is expected to trade at a P/E13e of 6.8x and P/tNAV12e of
1.3x leaving room for a substantial upside potential yet to be priced
in, in our view. We recommend the shares, though the UAE circular
capping single exposures could pose a serious threat to its growth
outlook.
NBAD UH
Abu Dhabi
13.0
Upside (%)
Market data
Strong earnings recovery after transitional year FY 11A: We are
forecasting net earnings to grow at a 4 year CAGR of 18%
characterized by improving operational performance accompanied by
normalized loan loss provisioning, after a transitional year FY 11A that
was affected by lower margins and increased additions to loan loss
reserves. NBAD’s position as a key contributor to Abu Dhabi’s 2030
development plan and a main beneficiary of the Abu Dhabi’s
government spending enables the bank to benefit from massive
secured businesses with a low risk profile. Loan book is expected to
grow at a 4 year CAGR of 11%. Thanks to a low capital intensity of its
assets (RWA/assets of 68%in FY 11A) and relatively low structural cost
of risk, RORWA should be in the range of 2% going forward.
AED 13.0
48.1
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
8.8
7.4-9.2
34,096
9,283
3.8
1.1
2011
7,881
2012e
8,526
2013e
10,057
2014e
11,297
5,317
5,641
6,789
7,631
0.96
9.2
5.77
5.77
1.5
1.5
0.22
2.5
1.5
2.0
16.3
105.1
175
1.05
8.4
6.54
6.54
1.3
1.3
0.35
3.9
1.4
1.8
16.1
96.7
209
1.30
6.8
7.43
7.43
1.2
1.2
0.43
4.9
1.5
2.0
17.7
96.1
233
1.51
5.8
8.45
8.45
1.0
1.0
0.51
5.8
1.6
2.2
18.3
95.7
260
11.9
11.9
12.0
12.2
15.6
21
3.3
89.9
14.5
19
3.5
85.2
14.4
18
3.6
100.4
14.5
18
3.7
110.9
Price Performance
119
NBAD UH
112
Abu Dhabi
105
98
91
84
77
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
4%
3%
3.29%
2.27%
3.04%
2.70%
1.98%
1.84%
0.86%
0.69%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
2.69
2.70
2.44
2.51
2.50
2.49
Cost/Income (%)
30.5
32.5
33.8
32.5
32.5
32.7
73.1
73.6
73.8
75.9
76.6
77.2
17.9
17.6
17.8
16.4
15.9
15.6
4.2
1.2
0.9
0.8
0.8
0.8
RoAE (%)
18.8
16.3
16.1
17.7
18.3
18.9
Pre Prov.ROE (%)
24.9
22.6
22.1
23.6
23.4
22.8
1.7
1.5
1.4
1.5
1.6
1.7
Revenue / RWA (%)
4.74
4.51
4.08
4.31
4.35
4.41
Costs / RWA (%)
1.44
1.47
1.38
1.40
1.41
1.44
PPP / RWA (%)
3.29
3.04
2.70
2.91
2.94
2.97
0.80
0.86
0.69
0.69
0.61
0.49
RoRWA (%)
2.27
1.98
1.84
2.05
2.17
2.33
2.27
1.98
1.84
2.05
2.17
2.33
0.80%
2.94%
2.91%
2.05%
0.69%
2.17%
0.61%
2.97%
2.33%
0.49%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.69%
2.70%
FY10
FY11
2.51%
2.50%
2.49%
FY12e
FY13e
FY14e
Net interest margin
FY15e
2.44%
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.8
0.9
0.8
0.8
0.7
0.5
3.8%
NPL/Gross Loans (%)
2.6
3.3
3.5
3.6
3.7
3.7
3.7%
101.6
89.9
85.2
100.4
110.9
119.4
3.6%
3.5%
Asset Quality
Credit Quality
150%
100%
50%
0%
2.6
2.9
3.0
3.6
4.1
4.4
22.3
25.2
25.3
23.5
20.6
16.1
3.4%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
111.1
105.1
96.7
96.1
95.7
95.4
0.8
(0.1)
10.4
9.3
8.7
7.5
64.4
65.1
68.5
67.4
66.3
65.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.3
11.9
11.9
12.0
12.2
12.6
Tier 1 ratio (%)
16.2
15.6
14.5
14.4
14.5
14.8
22.6
20.6
18.8
18.3
18.1
18.1
Capital Ratios
26%
22.6%
20.6%
22%
18.8%
18.3%
18.1%
18.1%
18%
14%
16.2%
15.6%
FY10
FY11
Tier 1
10%
14.5%
14.4%
FY12e
FY13e
14.5%
FY14e
CAR
14.8%
FY15e
Growth
40%
9.5
8.8
8.8
8.7
8.8
9.0
RWA / assets (%)
71.7
68.4
72.3
70.9
69.7
68.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
7.4
20.9
13.0
14.0
13.0
12.0
Net loan growth (%)
3.5
16.6
11.0
11.3
10.5
9.7
Deposit growth (%)
1.6
23.3
20.5
12.0
11.0
10.0
18.7
0.7
10.6
24.7
17.6
18.1
23%
21%
20%
17%
3%
0%
11%
12%
11%
11%
10%
2%
FY10
FY11
FY12e
Loan growth
FY13e
10%
10%
FY14e
FY15e
Deposit growth
Growth
27
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
7,430
8,015
8,909
10,655
12,101
13,607
Interest expense
2,181
2,212
2,614
3,025
3,443
3,876
National Bank of Abu Dhabi is the largest bank in
the UAE by market capitalization of AED 34.1bn
and the second largest by total assets of 289.3bn
as of Q1 12A. The bank has a 15.3% market share
in gross loans and 14.2% in deposits as of FY 11A.
The bank was established in 1968 carrying out full
banking services and operating in 116 branches in
the UAE with a broad international presence in
Egypt (29 branches), Oman (9 branches), Sudan (3)
branches, Jordan (2 branches), Kuwait, Bahrain,
France, UK, Hong Kong, and US with a
representative office in Libya. The bank is 70.5%
owned by the Abu Dhabi Investment Council and
Net interest income
5,249
5,803
6,295
7,629
8,659
9,731
Fee income
1,284
1,391
1,516
1,652
1,801
1,963
Net trading income
301
94
75
85
92
99
344
594
640
691
745
804
7,179
7,881
8,526
10,057
11,297
12,597
2,186
2,564
2,885
3,268
3,666
4,116
4,993
5,317
5,641
6,789
7,631
8,481
Net provisions
1,114
1,339
1,427
1,598
1,569
1,370
93
159
17
19
22
24
3,786
3,819
4,197
5,171
6,040
7,087
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
Tier 1 Coupon
16.3%
Retail
Corporate
Government
38.0%
8.1%
8.3%
5.0%
73.0%
UAE
Europe
Other Arab
America
Asia
Others
—
—
—
5,171
6,040
7,087
103
111
122
150
175
206
3,683
3,708
4,075
5,021
5,865
6,882
—
—
—
—
—
—
240
240
240
240
240
240
3,468
3,835
4,781
5,625
6,642
0.89
0.89
0.99
1.23
1.45
1.71
DPS
0.19
0.22
0.35
0.43
0.51
0.60
BVPS
5.17
5.77
6.54
7.43
8.45
9.65
Tangible BVPS
5.17
5.77
6.54
7.43
8.45
9.65
2010
2011
2012e
2013e
2014e
2015e
140,498
164,323
182,444
204,388
226,918
249,652
3,664
4,801
5,441
7,389
9,309
11,028
136,833
159,522
177,002
196,999
217,609
238,624
18,430
24,469
51,748
64,113
81,482
96,647
Due from banks
14,765
15,167
17,334
19,761
22,330
25,010
Investment, net
22,689
28,180
31,779
36,229
37,217
41,683
Fixed assets
2,211
2,216
2,373
2,369
2,364
2,359
Other assets
16,500
26,114
8,667
9,881
11,165
12,505
Total assets
211,427
255,668
288,904
329,351
372,166
416,826
Customer deposits
123,131
151,817
182,956
204,910
227,451
250,196
Due to banks
34,094
43,309
42,570
56,916
75,080
94,066
Debt
26,771
27,139
36,539
37,227
35,366
33,597
Other liabilities
7,318
11,013
5,017
5,037
5,058
5,082
Total liabilities
191,314
233,278
267,082
304,090
342,954
382,941
20,113
22,389
25,336
28,775
32,726
37,399
152
175
209
233
260
285
194,970
214,690
258,229
304,415
346,746
391,007
Year-end
4.5%
1.1%
—
4,197
3,443
Net Loan Breakdown by Country
—
3,819
Diluted EPS
45.7%
—
3,786
Total Equity
176,849
200,102
237,651
275,045
312,961
352,364
20,113
22,389
25,336
28,775
32,726
37,399
19,734
22,397
24,862
27,969
31,625
35,943
Tier 1 capital
24,528
27,288
30,235
33,674
37,625
42,298
Nisreen Assi
+97145071744
28
May 23 2012
National Bank of Abu Dhabi (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012
2013
2014
2015
3,683
240
3
5.0%
-3,440
19,331
17.8%
12.0%
2,320
1,120
---
3,708
240
(56)
5.0%
-3,524
22,652
15.6%
12.0%
2,718
805
---
4,075
240
(53)
5.0%
-3,888
25,060
15.5%
12.0%
3,007
881
---
5,021
240
(45)
5.0%
-4,827
28,008
17.2%
12.0%
3,361
1,466
0.94
1,385
5,865
240
(20)
5.0%
-5,644
31,153
18.1%
12.0%
3,738
1,906
0.84
1,608
6,882
240
41
5.0%
-6,601
34,258
19.3%
12.0%
4,111
2,490
0.75
1,876
20,113
--
22,389
--
25,336
--
28,775
--
32,726
--
37,399
--
(718)
19,396
(861)
21,528
(1,342)
23,994
(1,673)
27,101
(1,969)
30,757
(2,325)
35,075
151,562 174,781 208,803 233,374 259,577 285,456
161,066 188,737 208,803 233,374 259,577 285,456
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
3
3
3
3
3
3
19,331 22,652 25,060 28,008 31,153 34,258
64 (1,123) (1,066)
(907)
(395)
816
6,882
240
41
5.0%
-6,601
34,258
19.3%
12.0%
4,111
2,490
0.75
1,876
4,868
2.5%
26,212
9.6%
19,745
25,060
49,673
39.1%
49.6%
98.4%
(1,066)
(2.1%)
--
546
546
1,342
50,495
3,875
13.0
8.8
48.1%
13.2
1.99
1.1%
2.7%
100.0%
10.6
1.75
29
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Union National Bank
Deep value
 Strong improvement in operating performance in FY 11A
ignored, further help from lower deposit rates
 Very solid capital and liquidity positions, while asset quality
concerns exaggerated
 Cheap valuation (P/tNAV12e 0.6x & P/E13e of 5.0x)
BUY
Banks / UAE
Bloomberg code
Market index
Loan loss charges to go up, but remain in check: Our asset quality screen
suggests a cumulative loss of only 740bps over the next 5 years, or
148bps pa which is reasonable within the UAE. Nevertheless we expect
additions to loan loss reserves to increase by 46% vs. FY 11A. NPL has
witnessed an improvement to 3.7% in FY 11A from 4.3% in FY 10A. We
expect a slight increase to 4.2% in FY 14e on the back the high share of
past due but not impaired and restructured loans. UNB will add to its
collective provisions which amount to just 1.1% of CRWA relative a
minimum requirement of 1.5% by FY 14e.
Robust capital and liquidity positions: UNB is reporting impressive net
capital generations which increases Basel III CET1 to 13.9% in FY 12e
from 13.3% in FY 11A (adjusted for Tier 1 capital and proposed
dividends), which enables UNB to increase DPS or to do buybacks. We
calculate an NSFR of 100%, but a strong LCR of 144% helped by the
bank’s strong net cash balance of 17% of total assets and an LTD ratio of
96%.
UNB UH
Abu Dhabi
4.6
Upside (%)
Market data
Earnings growth > 7% after FY 12e: UNB is generating pre-provisions
income (2.8% of RWAs) on the back of improving margins and a high
efficiency manifested in a C/I ratio of 25.7%, the second lowest in the
sector after FGB. We expect FY 12A to be a transitional year due to
higher loan loss charges and forecast profitability to grow at a 4 year
CAGR of 7.8% with top line expanding at a CAGR of c. 6%. Furthermore,
we expect stabilization in fees and commissions income, after a fall of
16.6% in FY 11A due to retail caps. Loan book is expected to grow at a
CAGR of 6% after just 1.8% growth in FY 11A. UNB should be a major
contributor to the Abu Dhabi’s Economic Vision 2030 enabling it to
benefit from secured low risk businesses, particularly as NBAD may be
impacted by new caps on loans to public sector. We expect RORWA of c.
1.5% and ROAE to be c. 10.7% going forward.
AED 4.6
57.1
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2.9
2.8-4.0
7,262
1,977
1.8
0.5
2011
2,838
2012e
3,028
2013e
3,150
2014e
3,306
2,109
2,279
2,344
2,446
0.60
4.8
4.38
4.28
0.7
0.7
0.09
3.1
1.7
1.8
13.4
95.5
77
0.55
5.3
4.79
4.69
0.6
0.6
0.10
3.4
1.5
1.5
10.9
92.6
83
0.58
5.0
5.22
5.12
0.6
0.6
0.11
3.7
1.5
1.5
10.7
92.6
88
0.63
4.6
5.70
5.60
0.5
0.5
0.12
4.0
1.5
1.6
10.7
92.8
94
13.3
13.9
14.4
14.7
16.7
22
3.7
74.7
17.9
23
4.0
71.6
18.3
23
4.1
69.7
18.4
23
4.2
66.4
Price Performance
UNB UH
116
Abu Dhabi
107
98
89
80
Exceptional value: UNB is trading at very compelling multiples with a
P/E13e of 5.0x and P/tNAV12e of 0.6x (with a ROAE of 10.7% in FY 13e)
as asset quality concerns are blown out of proportion and the underlying
improvement in operating profits is being ignored. It may not offer the
best loan growth (that would be NBAD), but UNB has room to further
reduce deposit rates and after FY 12e we expect net profits to grow by at
least 7% and we strongly recommend the shares.
71
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Union National Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.60
3.05
3.10
3.09
2.98
2.96
Cost/Income (%)
28.0
25.7
24.7
25.6
26.0
25.8
76.4
84.2
81.3
80.7
79.4
79.0
21.9
16.4
15.3
15.3
15.3
14.9
0.60%
(2.8)
(3.7)
0.3
0.9
2.1
2.8
FY15e
RORWA
RoAE (%)
13.6
13.4
10.9
10.7
10.7
12.5
Pre Prov.ROE (%)
18.7
19.2
18.6
17.6
16.8
16.5
1.6
1.7
1.5
1.5
1.5
1.8
Revenue / RWA (%)
3.35
3.70
3.66
3.59
3.51
3.53
Costs / RWA (%)
0.94
0.95
0.90
0.92
0.91
0.91
PPP / RWA (%)
2.41
2.75
2.75
2.67
2.60
2.62
0.63
0.77
1.06
0.98
0.88
0.60
RoRWA (%)
1.62
1.81
1.51
1.52
1.55
1.86
1.62
1.81
1.51
1.52
1.55
1.86
Profitability
3%
2.41%
2%
1.62%
2.75%
2.75%
1.81%
1.51%
2.67%
2.60%
1.52%
1.55%
2.62%
1.86%
1%
0%
0.77%
0.63%
FY10
FY11
PPP/RWA
1.06%
0.98%
0.88%
FY12e
FY13e
FY14e
Cost of risk/RWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
3.05%
3.10%
3.09%
2.98%
2.96%
2.60%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.8
1.0
1.4
1.3
1.2
0.8
4.3%
NPL/Gross Loans (%)
4.3
3.7
4.0
4.1
4.2
4.2
4.2%
47.5
74.7
71.6
69.7
66.4
57.4
4.1%
Asset Quality
Credit Quality
80%
60%
40%
4.0%
20%
3.9%
0%
2.0
2.8
2.9
2.9
2.8
2.4
25.4
28.5
38.5
36.6
34.0
23.0
3.8%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
97.6
95.5
92.6
92.6
92.8
93.2
17.3
16.6
16.9
16.6
15.7
15.5
80.6
84.5
87.8
88.0
87.6
87.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.2
13.3
13.9
14.4
14.7
15.2
Tier 1 ratio (%)
15.2
16.7
17.9
18.3
18.4
18.9
20.1
21.9
23.4
23.5
23.3
23.6
12.1
13.4
14.1
14.5
14.7
15.2
RWA / assets (%)
93.3
93.0
96.6
96.3
95.8
95.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
21.9%
23.4%
23.5%
17.9%
18.3%
23.3%
23.6%
20.1%
18%
14%
15.2%
16.7%
18.4%
18.9%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
13%
11%
4%
2%
6%
4%
7%
6%
7%
7%
7%
7%
Growth
Asset growth (%)
0%
FY10
FY11
FY12e
Loan growth
Union National Bank
FY13e
FY14e
FY15e
Deposit growth
8.0
0.8
4.0
6.2
7.7
7.5
Net loan growth (%)
11.4
1.8
3.9
6.1
7.2
7.5
Deposit growth (%)
13.0
4.1
7.2
6.0
7.0
7.0
12.6
12.0
(9.9)
6.9
9.4
27.9
31
May 23 2012
Abacus
Union National Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
3,786
3,856
3,874
4,011
4,193
4,488
Interest expense
1,835
1,466
1,411
1,470
1,568
1,681
Union National Bank has a market share of 5.5% in
gross loans and 5.6% in deposits as of FY 11A. UNB
was established in 1982 carrying out full banking
services and operating in 55 branches in the UAE
and has an international presence in Qatar;
employing more than 1450 employees. The bank is
50% owned by the Abu Dhabi Investment Council,
10% by the Investment Corporation of Dubai and
has a free float of 40%.
Net interest income
1,951
2,389
2,463
2,541
2,625
2,807
560
467
462
481
505
530
Net trading income
16
(8)
27
30
33
37
28
(10)
76
98
143
178
2,555
2,838
3,028
3,150
3,306
3,552
715
729
749
806
859
916
1,840
2,109
2,279
2,344
2,446
2,636
467
600
878
858
832
607
16
(7)
—
—
—
—
1,357
1,515
1,401
1,486
1,614
2,030
Fee income
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
—
2,030
7
15
17
18
19
24
1,350
1,500
1,384
1,468
1,595
2,005
14
12
12
15
120
120
120
120
1,239
1,387
1,250
1,336
1,463
1,870
0.50
0.56
0.50
0.54
0.59
0.75
—
0.09
0.10
0.11
0.12
0.15
BVPS
3.92
4.38
4.79
5.22
5.70
6.33
Tangible BVPS
3.82
4.28
4.69
5.12
5.60
6.24
2010
2011
2012e
2013e
2014e
2015e
57,756
59,214
61,615
65,356
69,988
74,945
1,183
1,633
1,761
1,868
1,951
1,807
56,573
57,581
59,855
63,488
68,037
73,137
DPS
5,973
1,823
1,668
1,703
1,759
2,020
Due from banks
11,364
14,465
12,865
13,663
14,722
15,826
Investment, net
10,270
5,796
6,461
7,781
8,459
9,619
Fixed assets
366
358
356
345
332
319
Other assets
1,708
1,781
3,242
3,428
3,675
3,933
Total assets
81,780
82,469
85,768
91,085
98,144
105,505
Customer deposits
57,941
60,315
64,662
68,542
73,340
78,474
Due to banks
3,229
2,599
51
217
1,045
1,509
Debt
8,909
6,705
6,750
6,800
6,850
6,850
Other liabilities
1,770
1,782
2,210
2,337
2,512
2,686
Total liabilities
71,849
71,401
73,673
77,895
83,747
89,518
9,931
11,068
12,094
13,190
14,397
15,987
76
77
83
88
94
101
75,090
78,466
79,378
82,369
88,081
94,878
Total Equity
67,533
69,849
70,541
73,511
78,397
84,033
9,532
10,685
11,709
12,795
13,990
15,568
9,639
10,544
11,547
12,626
13,808
15,316
11,639
12,771
13,797
14,893
16,100
17,690
Tier 1 capital
Union National Bank
—
1,614
(7)
Year-end
54.9%
—
1,486
120
Diluted EPS
Retail
Corporate
Government
—
1,401
(9)
19.7%
—
1,515
120
Tier 1 Coupon
25.4%
—
1,357
Nisreen Assi
+97145071744
32
May 23 2012
Union National Bank valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Shareholders equity
Less non equity elements reported shareholders equity
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses (50% on real estate investments and advances)
Level 3 assets (25%)
Total adjustments
4. Dividends
Total Fair Value
Number of shares
Conversion mandatory convertibles
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Union National Bank
2010
2011
2012
2013
2014
2015
1,359
120
11
5.0%
-1,228
9,463
13.0%
12.4%
1,171
57
---
1,507
120
56
5.0%
-1,332
9,489
14.0%
12.4%
1,174
157
---
1,370
120
83
5.0%
-1,167
9,939
11.7%
12.4%
1,230
(63)
---
1,456
120
108
5.0%
-1,229
10,528
11.7%
12.4%
1,303
(74)
0.94
(70)
1,583
120
129
5.0%
-1,334
11,288
11.8%
12.4%
1,397
(63)
0.84
(53)
1,990
120
165
5.0%
-1,705
12,071
14.1%
12.4%
1,494
211
0.75
158
1,990
120
165
5.0%
-1,705
12,071
14.1%
12.4%
1,494
211
0.75
158
35
0.3%
1,389
9,939
11,363
12.2%
87.1%
99.5%
1,666
14.6%
1.0%
1,859
9,931
(249)
11,068
(240)
12,094
(240)
13,190
(240)
14,397
(240)
15,987
(240)
-9,682
(227)
10,601
(250)
11,604
(267)
12,683
(293)
13,865
(374)
15,373
76,338
78,859
12.0%
-9,463
219
76,668
79,078
12.0%
-9,489
1,112
82,823
82,823
12.0%
-9,939
1,666
87,735
87,735
12.0%
-10,528
2,154
94,069 100,596
94,069 100,596
12.0% 12.0%
--11,288 12,071
2,576
3,302
--
(1,860)
(2)
(1,863) (16.3%)
250
2.2%
11,416 100.0%
2,497
-2,497
4.6
2.9
57.1%
9.1
0.97
8.5
0.89
33
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Tamweel
Solid capital base
 Solid capital base, strongest in the UAE’s covered universe,
with sound liquidity
 Tamweel’s structural returns are low due to high cost of
funding (wholesale), pressure on mortgage rates, but also
an unleveraged balance sheet
 Tamweel still provides attractive upside potential despite
more than doubling YTD
Low operating profitability: Tamweel’s profitability (ROAE of c. 4.5%,
RORWA c. 1%) should remain low in the near term, due to pressure on
mortgages rates, loan loss impairments, lack of a cheap deposit base
and a low contribution of property development. Tamweel’s margins
could improve substantially if it could access the strong cash position
of DIB at lower rates, such as interbank rates. Nevertheless, we
expect Tamweel to grow pre-provisioning income to AED 184mn in FY
12e as compared to AED 172mn in FY 11A.
Concerns over loan quality blown out of proportion: We prudently
take cumulative losses of 8.6% of loans into account, assuming NPLs of
19.5% (as compared to 10% in FY 11A) and a loss given default of 45%
on average. We take this fully into account in our valuation.
Very robust balance sheet: Tamweel is enjoying a healthy
underleveraged balance sheet. We estimate Basel CET1 ratio to be at
22.5% in FY 12e, even when multiplying its small property
development book by 12.5x and applying 50% weight for its mortgage
book.
Liquidity position fixed: Tamweel has rolled over its wholesale funding
in an attempt to fix its liquidity position and has secured in a profit
rate of c. 4% in all funding instruments. Tamweel has placed new
bonds in Q1 12A and we do not expect it to issue new debt in FY 12e.
Net cash now stands at 7% in Q1 12A vs. 2% FY 11A. We calculate a
NSFR of 100%. We think DIB can provide it with ample liquidity when
needed, but we do not agree with the high rates DIB is charging
Tamweel.
We initiate on Tamweel with a buy recommendation: Our price
target of AED 1.7x is still offering a significant upside potential, even
though the stock almost doubled y-t-d, and the market still ignores
Tamweel’s solid balance sheet (capital surplus is explaining 64.7% of
the valuation) and liquidity position.
BUY
AED 1.7
Banks / UAE
Bloomberg code
Market index
TAMWEEL UH
DFM
1.7
Upside (%)
Market data
45.3
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
1.2
0.5-1.6
1,150
313
16.7
4.6
2011
274
2012e
289
2013e
304
2014e
327
172
184
195
214
0.10
11.2
2.32
2.32
0.5
0.5
0.05
4.4
1.0
1.0
4.5
—
10
0.09
13.5
2.34
2.34
0.5
0.5
0.05
4.3
0.8
0.8
3.7
—
10
0.10
11.4
2.39
2.39
0.5
0.5
0.05
4.3
0.9
1.0
4.2
—
10
0.09
13.1
2.42
2.42
0.5
0.5
0.06
5.2
0.8
0.8
3.7
—
11
22.4
22.5
22.4
20.9
22.9
29
10.0
35.4
23.0
29
12.5
31.2
22.9
29
14.5
29.8
21.4
27
13.4
34.0
Price Performance
TAMWEEL UH
169
DFM
146
123
100
77
54
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Tamweel
Year-end
Profitability
3%
2%
1.72%
1.71%
1.02%
1%
1.48%
0.24%
0.70%
0%
FY10
FY11
PPP/RWA
1.81%
1.87%
1.89%
0.97%
0.96%
1.11%
0.84%
2.00%
2011
2012e
2013e
2014e
2015e
1.86
2.41
2.49
2.49
2.42
2.35
Cost/Income (%)
34.8
37.3
36.2
35.8
34.7
32.6
0.63%
67.4
84.6
83.3
82.4
81.9
81.9
1.37%
32.0
15.4
16.7
17.6
18.1
18.1
0.5
—
—
—
—
—
RoAE (%)
1.2
4.5
3.7
4.2
3.7
3.2
Pre Prov.ROE (%)
8.3
7.6
8.0
8.2
8.9
10.1
RoAA (%)
0.2
1.0
0.8
0.9
0.8
0.6
Revenue / RWA (%)
2.63
2.73
2.84
2.91
2.90
2.97
Costs / RWA (%)
0.92
1.02
1.03
1.04
1.01
0.97
PPP / RWA (%)
1.72
1.71
1.81
1.87
1.89
2.00
1.48
0.70
0.97
0.90
1.11
1.37
RoRWA (%)
0.24
1.02
0.84
0.96
0.78
0.63
0.24
1.02
0.84
0.96
0.78
0.63
0.78%
0.90%
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
NIM
2.9%
2.7%
2.5%
2.3%
2.1%
1.9%
1.7%
1.5%
2010
2.49%
2.41%
2.49%
2.42%
2.35%
1.86%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
1.1
0.2
0.6
0.6
0.8
1.0
6.7
10.0
12.5
14.5
13.4
13.4
51.7
35.4
31.2
29.8
34.0
37.2
2.3
3.4
3.9
4.3
4.6
5.0
60.9
9.9
32.6
32.3
45.3
58.2
40%
15.0%
NPL/Gross Loans (%)
30%
14.0%
20%
13.0%
10%
12.0%
0%
11.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2010
2011
2012e
2013e
2014e
2015e
18.5
22.4
22.5
22.4
20.9
19.2
Tier 1 ratio (%)
18.5
22.9
23.0
22.9
21.4
19.8
28.5
29.4
29.4
29.1
27.2
25.1
Capital Ratios
34%
30%
26%
22%
18%
14%
10%
28.5%
29.4%
22.9%
29.4%
23.0%
29.1%
27.2%
21.4%
22.9%
25.1%
19.8%
18.5%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
15%
20%
0%
FY10
-20%
Growth
0%
Year-end
2%
0%
FY11
5%
3%
0%
0%
FY12e
FY13e
0%
FY14e
14%
0%
FY15e
-12%
Loan growth
Deposit growth
21.8
22.9
22.7
22.1
19.6
17.2
RWA / assets (%)
106.3
100.0
98.5
96.4
91.4
87.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
(12.7)
(1.6)
3.0
5.0
14.0
14.0
Net loan growth (%)
(12.2)
1.5
3.4
4.5
14.7
14.5
—
—
—
—
—
—
(147.8)
291.4
(16.4)
18.0
(12.5)
(12.0)
Growth
Deposit growth (%)
Tamweel
35
May 23 2012
Abacus
Tamweel
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
553
559
552
568
620
710
Interest expense
361
327
312
317
352
412
Tamweel has a 0.9% market share in gross loans as
of FY 11A. The company does not have deposits
and is fully wholesale funded. The company was
registered in 2006 engaging in Islamic Sharia’a
complaint financing and investment activities such
as Ijara, Murabaha, Istisna’a etc. The bank is 57%
owned by DIB. Its free float amounts to 43%.
Net interest income
192
232
241
251
268
298
91
42
48
53
59
66
1
—
—
—
—
—
—
—
—
—
—
—
285
274
289
304
327
364
99
102
105
109
114
119
186
172
184
195
214
245
Net provisions
113
17
60
63
97
143
47
53
39
32
29
25
Operating profit
26
102
85
101
88
77
Associates
—
—
—
—
—
—
Pre-tax profit
26
102
85
101
88
77
Fee income
Net trading income
Taxation
—
—
—
—
—
—
Group Net profit
26
102
85
101
88
77
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
26
102
85
101
88
77
0.03
0.10
0.09
0.10
0.09
0.08
—
0.05
0.05
0.05
0.06
0.07
BVPS
2.25
2.32
2.34
2.39
2.42
2.43
Tangible BVPS
2.25
2.32
2.34
2.39
2.42
2.43
2010
2011
2012e
2013e
2014e
2015e
9,488
9,644
10,006
10,506
12,082
13,895
331
344
391
454
550
693
9,158
9,300
9,615
10,053
11,532
13,202
261
Diluted EPS
DPS
Year-end
482
188
143
213
227
Due from banks
—
—
—
—
—
—
Investment, net
457
434
439
441
449
458
Fixed assets
32
27
29
30
32
33
Other assets
64
80
103
108
124
141
Total assets
14,095
10,193
10,028
10,329
10,845
12,364
Customer deposits
—
—
—
—
—
—
Due to banks
—
—
(13)
(78)
(117)
(68)
11,085
Debt
7,619
7,413
7,435
7,935
9,435
Other liabilities
349
323
564
596
625
650
Total liabilities
7,968
7,735
7,987
8,453
9,944
11,667
Total Equity
2,225
2,293
2,342
2,392
2,420
2,427
11
10
10
10
11
12
10,337
9,610
9,672
10,065
11,070
12,677
8,049
7,516
7,418
7,640
8,588
10,168
2,008
2,243
2,292
2,342
2,360
2,357
2,008
2,243
2,292
2,342
2,360
2,357
Tier 1 capital
2,008
2,293
2,342
2,392
2,420
2,427
Tamweel
Nisreen Assi
+97145071744
36
May 23 2012
Tamweel valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses (50% of investment portfolio in UAE)
Real estate losses (HTM ABS)
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Tamweel
2010
2011
2012
2013
2014
2015
26
3
37
4.0%
-(14)
1,300
(1.1%)
9.0%
117
(131)
---
102
3
42
4.0%
-57
1,203
4.8%
9.0%
108
(51)
---
85
3
43
4.0%
-39
1,221
3.2%
9.0%
110
(71)
---
101
3
43
4.0%
-54
1,255
4.3%
9.0%
113
(59)
0.96
(56)
88
3
40
4.0%
-45
1,356
3.3%
9.0%
122
(77)
0.88
(68)
77
3
35
4.0%
-39
1,472
2.6%
9.0%
132
(93)
0.81
(75)
185
3
35
4.0%
-146
1,472
9.9%
9.0%
132
14
0.81
11
(200) (12.1%)
2.0%
200
2,225
--
2,293
--
2,342
--
2,392
--
2,420
--
2,427
--
-2,225
(50)
2,243
(50)
2,292
(50)
2,342
(60)
2,360
(70)
2,357
10,836
10,836
12.0%
-1,300
925
10,029
10,029
12.0%
-1,203
1,039
10,177
10,177
12.0%
-1,221
1,070
10,457
10,457
12.0%
-1,255
1,087
11,296
11,296
12.0%
-1,356
1,005
12,264
12,264
12.0%
-1,472
886
161
1,221
1,183
9.7%
73.9%
71.5%
1,070
64.7%
--(16) (0.9%)
(584) (35.3%)
(600) (36.3%)
0
0.0%
1,653 100.0%
989
1.7
1.2
45.3%
19.6
0.71
16.6
0.70
37
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
Mashreq Bank
Unwarranted premium valuation
 Low earnings capacity due to poor cost efficiency and
lower capital gains
 Earnings could recover on lower LLP, but fully valued
 Adequate capital position, but low capital generation
Low pre-provisioning and bottom line returns: We expect preprovisioning earnings as a percentage of RWA to fall to 2.2% in FY 12e
due to structurally lower capital gains and slightly lower loan margins,
pressure on fees (due to retail caps) and a relatively high C/I ratio
(highest in the UAE) of 46.3% in FY 11A. The bank’s RORWA looks
dismal at 1.1% (second lowest in the UAE).
Earnings growth due to lower loan loss charges: We forecast earnings
to grow at a 4 year CAGR of 17% helped by lower additions to loan loss
reserves and enhanced efficiency when the bank starts growing again.
We estimate the bank’s loan book to grow at a 4 year CAGR of 6%
after the drop of 8.5% in FY 11A on the back of a significant decline in
public lending activity of 34%.
Loan loss charges could fall: We forecast cumulative loan loss of
838bps over the next 5 years, or 168bps pa suggesting reined in loan
loss charges well below FY 11A. Mashreq’s gross NPL and coverage
ratio stand at 12.6% and 52% respectively. The bank should add to its
general provisioning to reach the minimum requirement of 1.5% of
CRWAs in FY14e; it is currently at 1.1%.
Strong capital base, but expected to fall when growth returns: We
expect Mashreq’s CET1 ratio to stand at a sufficient level of 15.5% in
FY 12e (we deduct dividends and 100% of associates), helped by a
substantial contraction in loans over the last 3 years (-11% in FY 09A, 11% in FY 10A and -9% in FY 12e). However, due to Mashreq’s low
ROAE and pay-out of 40%, the bank does not generate sufficient
capital and we expect RWAs growth to offset the internal capital
generation.
SELL
AED 57.0
Banks / UAE
Bloomberg code
Market index
MASQ UH
DFM
57.0
Upside (%)
Market data
-15.0
03/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2011
3,872
2012e
3,747
2013e
3,993
2014e
4,222
2,079
1,871
1,997
2,098
4.85
13.8
72.53
72.53
0.9
0.9
2.00
3.0
1.0
1.1
6.8
83.0
78
4.61
14.5
77.14
77.14
0.9
0.9
1.84
2.8
0.9
0.9
6.2
84.6
84
5.46
12.3
80.75
80.75
0.8
0.8
2.18
3.3
1.1
1.0
6.9
86.3
90
6.21
10.8
84.78
84.78
0.8
0.8
2.49
3.7
1.1
1.1
7.5
86.7
95
15.5
15.5
15.3
15.1
16.2
17
12.6
52.1
15.9
17
12.4
62.0
15.7
17
12.2
72.4
15.6
17
11.2
91.5
Price Performance
MASQ UH
139
Liquidity position needs to be improved: The bank enjoys a cash
balance of 31.4% and a relatively acceptable LTD of 83%. We calculate
an NSFR and LCR of 113% and 163% respectively.
67.0
67.0-102.0
11,328
3,084
0.1
0.0
DFM
126
113
100
87
74
Fully valued: We believe Mashreq is fully valued at 0.9x tNAV12e
(ROAE and RORWA are expected to stand at 6.9% and 1.0% in FY 13e)
and P/E13e of 12.5x. Our TP of AED 57 leaves 15% downside.
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Mashreq Bank
Year-end
Profitability
4%
3%
3.44%
2.67%
2.22%
2.32%
2%
1.54%
1.22%
2.23%
2.21%
1.12%
2.13%
1.50%
1.01%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.81
2.63
2.40
2.39
2.38
2.33
Cost/Income (%)
40.2
46.3
50.1
50.0
50.3
51.3
52.2
50.2
47.4
47.9
48.3
47.9
25.4
25.4
26.5
25.9
25.7
25.8
1.1
3.2
3.0
3.5
3.5
3.6
RoAE (%)
7.0
6.8
6.2
6.9
7.5
10.2
20.2
14.9
14.3
14.4
14.4
13.6
0.9
1.0
0.9
1.1
1.1
1.5
Revenue / RWA (%)
5.75
4.97
4.44
4.45
4.44
4.38
Costs / RWA (%)
2.31
2.30
2.22
2.23
2.24
2.25
PPP / RWA (%)
3.44
2.67
2.22
2.23
2.21
2.13
2.32
1.54
1.22
1.12
1.01
0.51
RoRWA (%)
1.05
1.05
0.92
1.03
1.11
1.50
1.05
1.05
0.92
1.03
1.11
1.50
1.05%
1.05%
FY10
FY11
PPP/RWA
0.92%
1.11%
1.03%
FY12e
FY13e
FY14e
Cost of risk/RWA
0.51%
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.81%
2.63%
2.40%
FY10
FY11
2.39%
2.38%
2.33%
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
150%
15.0%
100%
10.0%
50%
5.0%
0%
3.2
2.3
2.4
2.2
2.0
1.0
NPL/Gross Loans (%)
11.9
12.6
12.4
12.2
11.2
10.2
61.0
52.1
62.0
72.4
91.5
103.7
4.5
8.0
6.2
7.3
8.4
9.7
58.2
46.9
55.0
50.1
45.9
23.9
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
80.4
83.0
84.6
86.3
86.7
86.4
24.7
22.3
13.1
14.4
13.7
13.3
70.7
68.4
62.5
61.1
59.8
60.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
15.2
15.5
15.5
15.3
15.1
15.2
Tier 1 ratio (%)
15.9
16.2
15.9
15.7
15.6
15.9
22.7
16.8
17.1
16.8
16.6
16.9
14.6
16.2
15.9
15.9
15.7
16.0
RWA / assets (%)
89.9
98.3
98.7
99.8
99.7
99.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
(10.3)
(6.6)
8.0
5.0
6.0
6.0
Net loan growth (%)
(13.7)
(8.5)
4.6
4.7
4.4
5.6
Deposit growth (%)
(4.5)
(11.4)
2.7
2.7
3.8
6.0
(19.7)
2.1
(5.0)
18.4
13.8
43.9
Capital Ratios
26%
22.7%
22%
16.8%
17.1%
16.8%
15.9%
16.2%
15.9%
15.7%
FY10
FY11
Tier 1
FY12e
FY13e
16.6%
18%
14%
15.6%
16.9%
15.9%
10%
FY14e
CAR
FY15e
Growth
20%
5%
0%
-20%
3%
FY10
-4%
FY11
-14%
-9%
-11%
FY12e
Loan growth
5%
6%
4%
3%
FY13e
6%
4%
FY14e
FY15e
Deposit growth
Growth
Mashreq Bank
39
May 23 2012
Abacus
Mashreq Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
4,318
3,388
3,270
3,470
3,686
3,863
Interest expense
2,027
1,444
1,492
1,556
1,648
1,750
Mashreq Bank has a 3.8% market share in gross
loans and 4.2% in deposits as of FY 11A. The bank
was incorporated in 1967 and carries out retail,
commercial, investment and Islamic banking in
addition to asset management activities. Mashreq
has 54 branches in the UAE, 11 branches in Egypt,
and 4 branches in Qatar in addition to a presence
in Bahrain, Kuwait, Hong Kong, India, UK and US.
Mashreq is 39.5% owned by Saif Ahmad Al Ghurair,
31% by Abdullah Ahmad Al Ghurair Investment
Company, 11.8% by Abdulaziz Abdulaziz Abdullah
Ahmad Al Ghurair and has a free float of 17.7%.
Net interest income
2,291
1,944
1,778
1,914
2,038
2,113
Fee income
1,112
983
993
1,033
1,084
1,138
9
79
61
75
79
83
974
866
916
972
1,021
1,073
4,387
3,872
3,747
3,993
4,222
4,408
1,764
1,794
1,877
1,996
2,124
2,262
2,623
2,079
1,871
1,997
2,098
2,146
Net provisions
1,527
975
1,029
1,000
964
514
240
221
—
—
—
—
Operating profit
856
883
841
996
1,134
1,632
Net trading income
Associates
Pre-tax profit
Taxation
16.3%
25.6%
Retail
Corporate
Government
58.1%
3.8%
8.7%
UAE
Middle East
O.E.C.D
Others
17.2%
70.2%
Mashreq Bank
—
—
—
—
—
883
841
996
1,134
1,632
19
22
21
25
28
41
837
861
820
971
1,106
1,591
Minorities
33
41
41
49
55
80
Tier 1 Coupon
—
—
—
—
—
—
803
820
779
923
1,050
1,512
Diluted EPS
4.75
4.85
4.61
5.46
6.21
8.94
DPS
2.00
2.00
1.84
2.18
2.49
3.58
BVPS
70.06
72.53
77.14
80.75
84.78
91.24
Tangible BVPS
70.06
72.53
77.14
80.75
84.78
91.24
Year-end
2010
2011
2012e
2013e
2014e
2015e
44,447
40,354
42,731
45,298
48,030
50,927
3,236
2,660
3,299
4,015
4,941
5,411
41,211
37,695
39,433
41,283
43,089
45,516
13,374
14,732
13,562
15,968
17,419
18,439
Due from banks
13,652
10,148
11,125
12,580
13,335
14,135
Investment, net
10,479
10,052
15,014
15,890
16,957
18,080
Fixed assets
1,144
1,198
1,312
1,443
1,594
1,767
Other assets
4,986
5,417
5,135
2,696
2,858
3,029
Total assets
84,846
79,241
85,581
89,860
95,251
100,966
Customer deposits
Group Net profit
—
856
51,254
45,417
46,621
47,857
49,683
52,664
Due to banks
9,408
9,729
16,114
18,342
20,567
22,044
Debt
5,912
4,643
4,945
5,000
5,500
5,500
Other liabilities
5,887
6,649
6,865
7,088
7,319
7,556
Total liabilities
72,461
66,437
74,545
78,287
83,068
87,764
Total Equity
12,385
12,804
13,641
14,282
15,001
16,133
76
78
84
90
95
101
81,619
74,034
73,981
80,134
85,721
90,683
66,434
60,244
63,499
66,782
70,710
75,104
11,845
12,263
13,042
13,653
14,334
15,426
11,773
12,244
13,108
13,692
14,360
15,307
Tier 1 capital
12,143
12,614
13,451
14,093
14,812
15,943
Nisreen Assi
+97145071744
40
May 23 2012
Mashreq Bank valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Mashreq Bank
2010
2011
2012
2013
2014
2015
803
-138
5.0%
-665
9,280
7.2%
12.9%
1,197
(532)
---
820
-150
5.0%
-670
9,458
7.1%
12.9%
1,220
(550)
---
779
-160
5.0%
-619
10,131
6.1%
12.9%
1,307
(688)
---
923
-157
5.0%
-765
10,764
7.1%
12.9%
1,389
(623)
0.94
(587)
1,050
-159
5.0%
-891
11,400
7.8%
12.9%
1,471
(579)
0.83
(483)
1,512
-173
5.0%
-1,339
12,067
11.1%
12.9%
1,557
(218)
0.74
(161)
1,512
-173
5.0%
-1,339
12,067
11.1%
12.9%
1,557
(218)
0.74
(161)
(1,230) (12.8%)
2.0%
(1,999)
(1,476) (15.3%)
10,131 105.2%
7,425 77.1%
12,385
--
12,804
--
13,641
--
14,282
--
15,001
--
16,133
--
(338)
12,047
(338)
12,466
(312)
13,329
(369)
13,913
(420)
14,581
(605)
15,528
76,289
77,334
12.0%
-9,280
2,767
77,890
78,819
12.0%
-9,458
3,007
84,425
84,425
12.0%
-10,131
3,198
89,704
89,704
12.0%
-10,764
3,149
94,999
94,999
12.0%
-11,400
3,181
100,557
100,557
12.0%
-12,067
3,461
3,198
33.2%
(159)
--(1,105)
(39)
(1,303) (13.5%)
312
3.2%
9,632 100.0%
169
57.0
67.0
(15.0%)
12.4
0.74
10.4
0.71
41
Initiation Report
May 23
2012
+97145071744
Nisreen Assi
National Bank of Ras Al-Khaimah
Regulatory headwinds, highest RORWA
 Over 40% upside on strong net margins, returns, growth
and balance sheet (CET1≈ 20%), but….
 Rakbank should be affected by credit card and retail
charges, caps and more lenience towards consumer loans,
putting pressure on EPS.
BUY
Banks / UAE
Bloomberg code
Market index
But earnings to fall in FY 12e, and remain stagnant in FY 13A: We
expect Rakbank to be among the most affected by the CB’s regulations
to curb down retail charges and capping credit card margins and to be
more lenient towards personal loans. We forecast loan book to grow
at a 4 year CAGR of 6.0%, which is a marked slowdown from the
growth achieved over the last few years.
The lowest NPL ratio in the UAE: Despite its retail tilt, the bank has
managed to sustain the cleanest loan book in the UAE with a steady
NPL ratio of 2.5%. Our asset quality suggests a cumulative loss of 1,112
bps over the next 5 years, or 222bps pa. The bank should build up its
collective provisioning as the bank is currently at 0.5% of CRWA
relative to a minimum of 1.5% by FY 14e, but it can easily take these
provisions (23%-24% of operating profits).
Solid capital base, but liquidity needs addressing: Rakbank reported a
robust capital position of Basel III CET 1 of 19.1% (second highest in
the UAE); we anticipate a steady level of 18.9% in FY 12e on the back
of modest dividend payout and strong returns. The bank needs to
address its relatively weak liquidity positions as we calculate an NSFR
of 96% and LCR of just 82%. Nevertheless, the bank enjoys an
adequate net cash balance of 14.2% while its LTD ratio stands at c.
100%. We would welcome a further diversification of its funding
through the wholesale markets.
46.3
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
4.2
4.1-4.7
6,339
1,726
0.5
0.1
2011
2,637
2012e
2,526
2013e
2,636
2014e
2,782
1,505
1,375
1,432
1,520
0.79
5.3
3.08
3.08
1.3
1.3
0.30
7.2
5.2
7.6
28.6
100.4
16
0.67
6.2
3.46
3.46
1.2
1.2
0.30
7.2
4.0
5.3
20.4
100.1
19
0.70
6.0
3.85
3.85
1.1
1.1
0.31
7.5
3.9
5.2
19.0
99.0
20
0.75
5.6
4.29
4.29
1.0
1.0
0.34
8.1
3.9
5.3
18.4
98.9
21
19.1
18.9
20.6
22.2
22.0
26
2.5
71.3
21.3
25
2.6
70.8
22.9
26
2.7
72.0
24.6
28
2.8
74.6
Price Performance
RAKBANK UH
122
Abu Dhabi
113
104
95
86
77
May/11
Upside potential from current price levels: Rakbank is trading at very
attractive multiples of 6.0x P/E13e and 1.2x P/tNAV12e (ROAE in FY
13e of 19%). However, we do not highly recommend the stock, due to
the impact of new regulations.
RAKBANK UH
Abu Dhabi
6.1
Upside (%)
Market data
High-return bank with solid margins: Rakbank is generating by far the
highest pre-provisioning income (9.5% of RWAs) in the UAE driven by
the strongest NIMs of 9.1% on the back of the bank’s focus on retail
lending (78.8% of gross loan book), making it unchallenging for the
bank to absorb through the elevated loan loss charges, in our view.
We forecast RORWA to hover around an average 5.2% maintaining the
highest position in the UAE but compressed from the impressive 7.6%
levels in FY 11A.
AED 6.1
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
8.75
9.07
7.94
7.77
7.72
7.53
Cost/Income (%)
42.5
43.0
45.5
45.7
45.4
45.9
72.7
75.2
75.8
75.8
76.0
75.6
23.9
19.8
20.5
20.4
20.3
20.6
0.6
1.9
0.3
0.4
0.4
0.4
8.76%
9.49%
7.23%
6.90%
1.86%
7.10%
7.06%
6.90%
7.59%
1.90%
FY10
FY11
PPP/RWA
5.34%
5.23%
5.32%
5.50%
1.88%
1.83%
1.78%
1.40%
FY15e
RORWA
RoAE (%)
30.8
28.6
20.4
19.0
18.4
18.0
Pre Prov.ROE (%)
39.1
35.8
27.6
25.7
24.5
22.6
5.2
5.2
4.0
3.9
3.9
4.1
15.24
16.64
13.28
13.00
13.00
12.75
Costs / RWA (%)
6.48
7.15
6.05
5.94
5.90
5.86
PPP / RWA (%)
8.76
9.49
7.23
7.06
7.10
6.90
1.86
1.90
1.88
1.83
1.78
1.40
RoRWA (%)
6.90
7.59
5.34
5.23
5.32
5.50
6.90
7.59
5.34
5.23
5.32
5.50
FY12e
FY13e
FY14e
Cost of risk/RWA
RoAA (%)
NIM
Revenue / RWA (%)
9.3%
8.8%
8.3%
9.07%
8.75%
7.8%
7.94%
7.3%
7.77%
7.72%
6.8%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
7.53%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.8
1.7
1.8
1.8
1.7
1.3
NPL/Gross Loans (%)
2.5
2.5
2.6
2.7
2.8
2.9
74.8
71.3
70.8
72.0
74.6
66.9
Asset Quality
Credit Quality
80%
3.0%
2.9%
2.8%
2.7%
2.6%
2.5%
2.4%
75%
70%
65%
60%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2.1
1.6
1.7
1.8
1.9
2.0
21.2
20.0
26.1
25.9
25.0
20.2
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
34%
30%
26%
22%
18%
14%
10%
26.4%
23.4%
24.9%
27.8%
26.3%
24.6%
22.0%
21.3%
FY11
Tier 1
FY12e
18.7%
FY10
29.4%
100.2
100.4
100.1
99.0
98.9
99.0
14.7
14.2
14.3
15.6
16.3
15.9
92.7
92.3
93.2
94.7
95.5
56.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
17.1
19.1
18.9
20.6
22.2
23.9
Tier 1 ratio (%)
18.7
22.0
21.3
22.9
24.6
26.4
23.4
26.4
24.9
26.3
27.8
29.4
17.4
19.2
20.1
20.9
22.0
23.0
RWA / assets (%)
67.9
64.7
72.6
72.3
72.0
71.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
24.9
14.6
7.0
7.0
6.0
6.0
Net loan growth (%)
22.1
12.0
6.4
6.4
5.3
5.7
Deposit growth (%)
27.4
11.7
6.8
7.6
5.5
5.5
38.1
20.0
(15.5)
4.3
7.5
9.1
26.4%
22.9%
FY13e
FY14e
CAR
FY15e
Growth
40%
27%
20%
22%
12%
12%
7%
6%
6%
8%
6%
5%
6%
6%
0%
FY10
FY11
FY12e
Loan growth
FY13e
FY14e
FY15e
Deposit growth
Growth
43
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
2,047
2,366
2,359
2,474
2,602
2,693
438
381
445
475
489
515
1,609
1,985
1,915
1,999
2,113
2,178
Company Profile
Interest income
National bank of Ras Al Khaimah has 1.7% market
share in both gross loans and deposits as of FY 11.
Rakbank was established in 1976 carrying out full
banking services and operating in 31 branches in
the UAE with no international presence; employing
more than 2700 employees. The bank is 52.8%
owned by the Government of Ras Al Khaimah, 6.1%
by Ahmad Issa Al Naeem and has a free float of
41.1%.
Net interest income
Interest expense
Fee income
530
523
518
538
565
593
Net trading income
13
49
9
9
10
11
62
81
85
89
94
98
2,214
2,637
2,526
2,636
2,782
2,880
941
1,133
1,150
1,204
1,262
1,323
1,273
1,505
1,375
1,432
1,520
1,558
270
301
359
371
381
315
—
—
—
—
—
—
1,003
1,204
1,017
1,060
1,139
1,243
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Retail
Corporate
78.8%
—
—
—
—
1,017
1,060
1,139
1,243
—
—
—
—
—
—
1,204
1,017
1,060
1,139
1,243
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
1,003
1,204
1,017
1,060
1,139
1,243
Diluted EPS
0.66
0.79
0.67
0.70
0.75
0.82
DPS
0.15
0.30
0.30
0.31
0.34
0.37
BVPS
2.44
3.08
3.46
3.85
4.29
4.76
Tangible BVPS
2.44
3.08
3.46
3.85
4.29
4.76
2010
2011
2012e
2013e
2014e
2015e
16,710
18,706
19,922
21,217
22,384
23,615
308
338
372
418
473
464
16,402
18,368
19,551
20,799
21,911
23,152
1,935
1,844
1,676
1,866
2,045
2,160
Due from banks
1,303
1,972
2,360
2,525
2,676
2,837
Investment, net
768
1,164
1,311
1,403
1,487
1,576
Fixed assets
772
952
1,058
1,180
1,320
1,481
Other assets
200
202
262
281
297
315
Total assets
21,380
24,503
26,218
28,053
29,736
31,520
Customer deposits
23,382
21.2%
—
1,204
1,003
Group Net profit
—
1,003
Year-end
0.1% 0.4%
UAE
O.E.C.D
Others
16,370
18,290
19,532
21,007
22,163
Due to banks
100
334
287
20
(135)
—
Debt
684
684
684
684
684
684
Other liabilities
509
497
448
473
493
17,521
Total liabilities
17,664
19,806
20,952
22,185
23,205
41,587
3,716
4,697
5,266
5,868
6,531
7,261
15
16
19
20
21
23
18,377
21,878
24,123
25,745
27,356
28,922
Total Equity
99.5%
15,554
18,232
22,226
21,108
22,212
23,389
3,716
4,697
5,266
5,868
6,531
7,261
2,483
3,036
3,604
4,168
4,759
5,396
Tier 1 capital
2,714
3,493
4,062
4,645
5,272
5,955
Nisreen Assi
+97145071744
44
May 23 2012
National Bank of Ras Al-Khaimah valuation (AEDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate impairment
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012
2013
2014
2015
1,003
-87
5.0%
-916
1,745
52.5%
15.0%
262
654
---
1,204
-117
5.0%
-1,087
1,904
57.1%
15.0%
286
801
---
1,017
-126
5.0%
-891
2,283
39.0%
15.0%
342
548
---
1,060
-148
5.0%
-912
2,432
37.5%
15.0%
365
547
0.93
511
1,139
-172
5.0%
-967
2,568
37.7%
15.0%
385
582
0.81
472
1,243
-200
5.0%
-1,043
2,710
38.5%
15.0%
407
637
0.71
449
1,243
-200
5.0%
-1,043
2,710
38.5%
15.0%
407
637
0.71
449
1,431
15.4%
3,206
2,283
6,921
34.6%
24.6%
74.6%
2,525
27.2%
1.0%
4,547
3,716
--
4,697
--
5,266
--
5,868
--
6,531
--
7,261
--
(231)
3,485
(457)
4,240
(458)
4,808
(477)
5,391
(513)
6,018
(559)
6,701
14,522
14,538
12.0%
-1,745
1,741
15,847
15,870
12.0%
-1,904
2,335
19,026
19,026
12.0%
-2,283
2,525
20,271
20,271
12.0%
-2,432
2,959
21,400
21,400
12.0%
-2,568
3,450
22,585
22,585
12.0%
-2,710
3,991
--
(631)
-(631) (6.8%)
458
4.9%
9,272 100.0%
1,524
6.1
4.2
46.3%
9.1
1.76
8.7
1.58
45
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Arqaam Capital Research Offshore s.a.l.
Commercial Bank of Qatar
Tight Capital base despite capital hike
in FY 11A
 Low structural returns due to focus on corporate sector
 Capital hike fully absorbed by FY11 loan growth.
 Upside diluted as CBQ should raise capital or reduce loan growth
Medium return bank: We expect RORWA to be 2.6%, but this is highly
distorted by its associates, as adjusted for those, RORWA should
remain only 1.5%, one of the lowest within Qatar. NIMs are relatively
tight due to focus on corporate sector lending, while its C/I is middle
ground (30.6% in FY 11A), and capital intensity of assets stands at 86%.
7% earnings CAGR: We project earnings growth of c. 7% in the next
few years from 17% in FY 11A. We expect continued loan growth due
to its increased willingness to lend to the public sector; however, we
would not be surprised to see a slowdown vs. FY 11A when it recorded
22% growth. We project an FY12-15e CAGR of 15% for loans and 22%
for deposits.
Improved asset quality: CBQ asset quality has improved in FY 11A
with NPL dropping down to 1.2% from 3.2% in FY 10A (QAR 825mn
were written off during the year). Our asset quality screen suggests
cumulative losses of just 338bps over the next 5 years, or 68bps per
year. We expect NPL to be move up to 1.5%-2.2% in FY 12e and FY 13e
due to sharp increase in renegotiated loans.
Increase capital or face cap on growth: We expect CET1 to fall to
11.4% in FY12e from 12.5% due to its high pay-out and high growth.
We think CBQ is again close to making a decision whether to increase
capital or alternatively it should back track on its recently embarked
growth strategy.
Decent liquidity despite high L/D ratio We compute Basel III NSFR of
71.2% in FY 11A (the lowest after Al Khaliji) and a robust LCR of 167%
while L/D ratio climbed to 110% in FY 11A from 101% in FY 10A.
HOLD
QAR 82.1
Banks / QATAR
Bloomberg code
Market index
CBQK QD
Qatar
82.1
Upside (%)
Market data
17.2
17/05/2012
Last closing price
52 Week range
Market cap (QAR mn)
Market cap (USD mn)
Average daily value (QAR mn)
Average daily value (USD mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2011
2,864
2012e
2,990
2013e
3,258
2014e
3,644
1,988
1,977
2,137
2,402
7.61
9.2
57.51
57.51
1.2
1.2
6.00
8.6
2.7
3.0
13.7
109.5
61
7.55
9.3
58.87
58.87
1.2
1.2
6.00
8.6
2.4
2.6
12.7
104.8
71
8.05
8.7
60.72
60.72
1.2
1.2
6.00
8.6
2.3
2.4
13.1
100.2
81
8.94
7.8
63.43
63.43
1.1
1.1
6.00
8.6
2.2
2.3
14.0
95.6
92
12.5
11.4
10.3
9.3
16.4
18
1.2
107.8
14.4
15
1.5
108.9
13.1
14
2.2
90.4
11.9
12
2.5
92.3
Price Performance
CBQK QD
123
Fair valuation: CBQ is trading at P/E13e of 8.7x and P/tNAV12e of 1.2x
which is fair in our view considering the tight capital base and dilution
risk from a potential capital increase and its low structural returns (FY
12e RORWA of 1.5% and RoE of 12.7%). We initiate on CBQ with a
Hold recommendation and TP of QAR 82, offering a 17% upside.
70.0
67.6-87.2
17,321
4,757
14.9
4.1
Qatar
115
107
99
91
83
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
4%
3%
3.14%
2.98%
2.56%
3.56%
3.24%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
3.32
3.22
2.99
2.89
2.86
2.84
0.59%
2.77%
0.45%
0.50%
2.41%
2.34%
2.61%
2.65%
0.46%
0.48%
2.30%
Cost/Income (%)
30.7
30.6
33.9
34.4
34.1
33.5
2.59%
69.4
67.7
68.1
67.8
68.4
68.9
0.49%
20.5
20.5
21.3
21.4
21.0
20.7
2.9
5.6
4.1
4.3
4.3
4.3
RoAE (%)
12.8
13.7
12.7
13.1
14.0
15.0
Pre Prov.ROE (%)
14.1
15.5
14.8
15.6
16.8
18.1
2.6
2.7
2.4
2.3
2.2
2.2
Revenue / RWA (%)
5.14
4.67
4.20
4.04
3.96
3.89
Costs / RWA (%)
1.58
1.43
1.42
1.39
1.35
1.31
PPP / RWA (%)
3.56
3.24
2.77
2.65
2.61
2.59
0.59
0.50
0.45
0.46
0.48
0.49
RoRWA (%)
3.14
2.98
2.56
2.41
2.34
2.30
1.60
1.66
1.47
1.42
1.40
1.40
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
3.32%
3.22%
2.99%
FY10
FY11
2.89%
2.86%
FY12e
FY13e
FY14e
Net interest margin
2.84%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.5
0.6
0.7
0.7
0.7
0.7
NPL/Gross Loans (%)
3.2
1.2
1.5
2.2
2.5
2.7
89.7
107.8
108.9
90.4
92.3
96.2
Asset Quality
Credit Quality
150%
3.0%
100%
2.0%
50%
1.0%
0%
2.8
1.3
1.6
2.0
2.3
2.6
9.4
12.0
15.8
17.1
17.9
18.5
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18.5%
15.5%
16.6%
16.4%
10%
FY10
FY11
Tier 1
13.9%
14.4%
13.1%
FY12e
FY13e
12.4%
FY14e
CAR
11.3%
FY15e
Growth
40%
27%
24%
20%
5%
14%
19%
20%
14%
15%
FY11
FY12e
Loan growth
FY13e
21%
104.8
100.2
95.6
91.0
8.4
10.0
11.1
12.5
14.4
66.5
66.3
68.8
71.6
74.9
78.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.5
12.5
11.4
10.3
9.3
8.6
Tier 1 ratio (%)
16.6
16.4
14.4
13.1
11.9
11.1
18.5
17.9
15.5
13.9
12.4
11.3
20.0
19.9
18.2
16.6
15.2
14.1
RWA / assets (%)
79.7
85.7
88.9
89.1
89.3
89.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
16%
Asset growth (%)
9.1
14.4
12.0
13.0
14.0
14.0
Net loan growth (%)
5.1
24.0
13.6
14.6
15.6
15.7
Deposit growth (%)
26.7
14.1
18.8
19.8
21.2
21.5
2.7
16.9
(0.4)
6.6
11.1
12.3
22%
16%
0%
FY10
109.5
15.0
17.9%
18%
14%
100.9
FY14e
FY15e
Deposit growth
Growth
47
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (QARmn)
Company Profile
Interest income
2,989
2,876
3,060
3,324
3,699
4,131
Interest expense
1,211
939
1,023
1,114
1,208
1,306
Qatar by total assets and shareholder's equity and
maintains 10% market share within the Qatari banking
sector in both loans and deposits. The bank offers a
full range of services mainly on the private sector and
is expanding its focus on the public sector. The bank
has 34 full service branches and 148 ATMs throughout
Qatar. It also has 35% stake in National Bank of Oman
and 40% in United Arab Bank. The Qatar Investment
Authority is today CBQ's largest shareholder with a
20% stake.
Net interest income
1,778
1,938
2,037
2,211
2,491
2,825
526
586
635
696
765
850
64
136
63
72
80
90
194
204
255
280
306
336
2,562
2,864
2,990
3,258
3,644
4,101
787
875
1,013
1,121
1,241
1,375
Fee income
Net trading income
1,775
1,988
1,977
2,137
2,402
2,725
Net provisions
167
239
312
365
430
503
128
68
6
7
8
9
1,480
1,681
1,658
1,765
1,965
2,213
Operating profit
Associates
Pre-tax profit
Taxation
18%
17%
Corporate
65%
270
2,483
—
—
—
—
—
1,868
1,991
2,212
2,483
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
1,564
1,829
1,822
1,941
2,156
2,421
Diluted EPS
6.90
7.39
7.36
7.85
8.71
9.78
DPS
7.00
6.00
6.00
6.00
6.00
6.00
BVPS
55.11
57.51
58.87
60.72
63.43
67.21
Tangible BVPS
55.11
57.51
58.87
60.72
63.43
67.21
Year-end
2010
2011
2012e
2013e
2014e
2015e
34,546
42,161
48,064
55,273
64,117
74,376
980
547
785
1,100
1,479
1,933
33,567
41,614
47,279
54,174
62,638
72,443
Qatar
8,703
2,576
2,708
2,821
2,885
2,874
Other GCC
Due from banks
4,238
9,272
8,814
9,960
11,354
12,943
Investment, net
Europe
North America
Others
13,863
15,659
17,819
19,682
21,973
24,520
Fixed assets
1,069
1,070
1,903
2,093
2,303
2,533
Other assets
1,081
1,348
1,602
1,811
2,064
2,353
Total assets
62,520
71,540
80,125
90,541
103,217
117,667
Customer deposits
33,281
37,989
45,115
54,063
65,514
79,631
3,553
5,838
3,476
2,689
1,382
(1,127)
19,500
Due to banks
Debt
10,994
11,054
15,000
16,500
18,000
Other liabilities
2,193
2,429
1,967
2,266
2,626
3,031
Total liabilities
50,020
57,310
65,558
75,517
87,521
101,035
Total Equity
12,500
14,230
14,567
15,024
15,696
16,632
50
61
71
81
92
105
53,573
60,158
67,997
76,418
87,045
99,540
45,707
51,354
59,236
68,421
79,074
91,450
12,500
14,230
14,567
15,024
15,696
16,632
6,374
8,088
8,148
8,285
8,531
9,011
Tier 1 capital
8,294
10,052
10,247
10,544
11,003
11,710
247
2,212
1,884
0% 0%
1%
94%
226
1,991
Balance sheet (QARmn)
5%
210
1,868
—
Retail
203
1,884
1,635
Group Net profit
Public
155
1,635
Loubna El Hassan
+97145071744
48
May 23 2012
Commercial Bank of Qatar Valuation (QAR mn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Shareholder's equity
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
1,635
71
45
5.0%
2.5%
1,519
9,981
15.2%
11.3%
1,123
396
---
1,884
55
52
5.0%
2.5%
1,777
11,682
15.2%
11.3%
1,314
463
---
1,868
47
16
5.0%
2.5%
1,805
12,749
14.2%
11.3%
1,434
371
---
1,991
50
(32)
5.0%
2.5%
1,973
14,196
13.9%
11.3%
1,597
376
0.95
357
2,212
55
(87)
5.0%
2.5%
2,243
15,997
14.0%
11.3%
1,800
444
0.85
378
2,483
62
(141)
5.0%
2.5%
2,562
18,036
14.2%
11.3%
2,029
533
0.77
408
Perp. Subtotal % of total
2,483
62
(141)
5.0%
2.5%
2,562
18,036
14.2%
11.3%
2,029
533
0.77
408
1,143
5.6%
4,946
12,749
18,837
24.4%
62.8%
92.8%
334
1.6%
3.0%
6,456
12,500
--
14,230
--
14,567
--
15,024
--
15,696
--
16,632
--
(1,588)
10,912
(1,485)
12,746
(1,485)
13,083
(1,485)
13,539
(1,485)
14,211
(1,485)
15,147
49,821
51,178
12.0%
3,840
9,981
931
61,288
64,631
12.0%
3,926
11,682
1,063
71,260
71,260
12.0%
4,197
12,749
334
80,658
80,658
12.0%
4,517
14,196
(656)
92,122 105,310
92,122 105,310
12.0%
12.0%
4,943
5,399
15,997 18,036
(1,786) (2,889)
(371)
22
(349)
1,485
20,307
247
82.1
70.0
17.2%
11.1
1.4
(1.7%)
7.3%
100.0%
10.5
1.4
49
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Doha Bank
Most affected by its retail tilt
 The least cost efficient bank due to impact of retail cap and
public wage rise
 Lowest capital base and a potential capital hike is anticipated
 Improved asset quality and relief on retail NPL
Medium term return bank: RORWA is average at 2.4%, as Doha is
generating strong NIMs of 3.63% due to its focus on retail, but also
retail banking corresponds to a higher C/I of 34% due to the branch
network. We expect continued pressure on NIMs due to retail caps,
though Doha has protected margins at the expense of growth.
Earnings CAGR of 7%: We expect net income to grow at a slower pace
than peers with a 7% CAGR, due to reduced retail charges and
normalization of investment income. We expect structurally lower
capital gains for Doha, and the impact on net profit is c. 5%. We
project that Doha will witness 14% CAGR in loans and 15% CAGR in
deposits. Loan growth will be helped by the infrastructure projects
(contracting and real estate represent 37% of loan book) and salary
hikes in the public sector which should compensate for the lower caps
on individual leverage.
Improved credit quality: Our asset quality screen suggests cumulative
losses of just 330bps over the next 5 years, or 66bps per year. NPL
ratio came down to a record low of 3.4% in FY 11A due to write off in
Q3 11A, while coverage remained stable at 73%. Given the public
wage rise we expect less pressure on retail NPL, and forecast NPL to
gradually increase to 3.5%-3.8% over our forecasted period driven by
Doha's real estate and construction exposure.
Lowest capital base: Doha bank has the lowest capital base compared
to its Qatari peers with CET1 coming in at 10.1% in FY 11A. Note that
Doha did not pay any dividends in FY 11A for the first time in 5 years.
We expect that the planned 15% capital increase will hit FY 12e and
thus expect common equity Tier 1 to come in at 12.4%.
Weak liquidity: We compute Basel III NSFR of 91.6% in FY 11A and a
strong LCR of 132%, and a net cash position at only 2% of assets and a
relatively high L/D ratio, which increased to 97% in FY 11A from 86%.
Valuation not appealing: Doha is currently trading at a P/E13e of 9.8x
and P/tNAV12e of 1.5x (with ROE of 16.1% and RORWA of 2.4%),
cheaper than its Qatari peers justified by its lower growth, low returns
and its tight capital base. We expect the upside to be diluted by an
upcoming 10-15% capital hike, which is factored into our valuation
and forecasts. We initiate on Doha with a Hold recommendation and a
TP of QAR 68 offering a 17% upside.
HOLD
QAR 68.0
Banks / QATAR
Bloomberg code
Market index
DHBK QD
68.0
Upside (%)
Market data
17.2
17/05/2012
Last closing price
52 Week range
Market cap (QAR mn)
Market cap (USD mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
58.0
49.9-67.2
11,988
3,292
8.1
2.2
2011
2,334
2012e
2,428
2013e
2,638
2014e
2,938
1,539
1,533
1,637
1,819
6.00
9.7
34.26
34.26
1.7
1.7
5.00
8.6
2.4
2.4
18.5
96.9
50
5.70
10.2
37.99
37.99
1.5
1.5
5.00
8.6
2.3
2.4
16.1
94.5
54
5.89
9.8
38.73
38.73
1.5
1.5
5.00
8.6
2.1
2.2
15.0
94.3
60
6.51
8.9
40.08
40.08
1.4
1.4
5.00
8.6
2.1
2.1
16.1
94.1
68
10.1
12.4
11.3
10.4
10.7
13
3.4
73.1
12.4
15
3.5
102.3
11.3
13
3.6
100.1
10.4
12
3.7
97.7
Price Performance
DHBK QD
133
123
113
103
93
83
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Doha Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.39
3.63
3.46
3.37
3.35
3.34
Cost/Income (%)
33.8
34.1
36.8
37.9
38.1
38.1
71.6
74.6
76.3
76.5
77.0
77.5
18.4
16.4
17.0
17.0
16.6
16.2
2.6
3.2
0.8
0.6
0.6
0.6
RoAE (%)
17.3
18.5
16.1
15.0
16.1
16.9
Pre Prov.ROE (%)
22.5
22.4
18.8
17.8
19.3
20.7
2.2
2.4
2.3
2.1
2.1
2.0
Revenue / RWA (%)
5.08
4.67
4.53
4.37
4.29
4.22
3.8%
Costs / RWA (%)
1.72
1.59
1.67
1.66
1.63
1.61
3.6%
PPP / RWA (%)
3.36
3.08
2.86
2.71
2.66
2.62
0.85
0.59
0.45
0.50
0.50
0.55
RoRWA (%)
2.44
2.42
2.35
2.16
2.10
2.02
2.43
2.42
2.34
2.15
2.09
2.01
Profitability
4%
3%
2.44%
2.35%
3.36%
2%
1%
2.42%
2.86%
3.08%
0.85%
0.59%
0.45%
2.16%
2.71%
0.50%
2.10%
2.66%
0.50%
2.02%
2.62%
0.55%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.63%
3.4%
3.2%
3.46%
3.39%
3.37%
3.35%
3.34%
3.0%
2.8%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.1
0.9
0.6
0.6
0.6
0.7
3.8%
NPL/Gross Loans (%)
4.9
3.4
3.5
3.6
3.7
3.8
3.7%
73.8
73.1
102.3
100.1
97.7
96.5
3.6%
Asset Quality
Credit Quality
104%
102%
100%
98%
96%
94%
92%
3.5%
3.4%
2.6
3.2
3.2
3.2
3.2
3.3
22.0
16.7
14.2
15.2
15.6
17.6
3.3%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
86.1
96.9
94.5
94.3
94.1
93.8
11.3
2.1
12.3
11.0
10.0
9.4
74.8
69.9
74.6
75.1
75.3
76.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
10.2
10.1
12.4
11.3
10.4
9.7
Tier 1 ratio (%)
11.0
10.7
12.4
11.3
10.4
9.7
13.6
13.2
14.8
13.4
12.3
11.3
12.8
13.5
14.8
13.5
12.3
11.4
RWA / assets (%)
89.1
95.3
92.0
92.7
93.0
93.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
2.7
11.0
11.0
12.0
13.0
13.0
Net loan growth (%)
2.5
15.7
13.8
14.3
14.5
14.9
Deposit growth (%)
10.5
2.8
16.6
14.5
14.7
15.2
5.6
17.7
4.1
3.4
10.4
9.2
Capital Ratios
17%
14.8%
13.6%
13.4%
13.2%
12.3%
13%
9%
12.4%
11.0%
10.7%
11.3%
10.4%
11.3%
9.7%
5%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
15%
16%
11%
3%
14%
14%
14%
10%
5%
17%
15%
15%
15%
15%
Growth
3%
0%
FY10
FY11
FY12e
Loan growth
FY13e
FY14e
FY15e
Deposit growth
Doha Bank
51
May 23 2012
Abacus
Doha Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
3,412
Company Profile
Interest income
2,549
2,287
2,447
2,678
3,017
Interest expense
1,017
545
595
660
755
863
Doha Bank is the third largest commercial bank in
Qatar by total assets and maintains an 8% lending
market share and 9% deposit market share. The bank
operates 37 branches and 116 ATMs in Qatar and has
1,414 employees. It provides a full range of services
focused mainly on retail, corporate, treasury and
private banking products. It also has 49% stake in
Doha Brokerage and Financial Services (DBFS) in India
and owns 100% of Dbank tech in the UAE. The QIA is
the largest shareholder with a 16.7% stake.
Net interest income
1,532
1,742
1,852
2,018
2,262
2,550
395
382
412
448
488
534
38
57
4
3
4
5
174
153
160
169
184
201
2,139
2,334
2,428
2,638
2,938
3,289
723
796
895
1,001
1,119
1,252
1,415
1,539
1,533
1,637
1,819
2,037
312
257
217
248
284
359
47
35
23
52
59
67
1,056
1,246
1,293
1,337
1,475
1,611
Fee income
Net trading income
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
9%
Group Net profit
33%
Minorities
Public
Tier 1 Coupon
Corporate
Retail
58%
—
—
—
—
—
—
1,056
1,246
1,293
1,337
1,476
1,611
2
5
1
1
1
1
1,054
1,241
1,293
1,336
1,475
1,611
—
—
—
—
—
—
26,356
31,029
32,313
33,406
36,873
40,269
1,028
1,210
1,260
1,303
1,438
1,570
Diluted EPS
5.42
5.64
5.82
5.75
6.34
6.93
DPS
5.00
5.00
5.00
5.00
5.00
5.00
BVPS
31.85
34.26
37.99
38.73
40.08
42.00
Tangible BVPS
31.85
34.26
37.99
38.73
40.08
42.00
Year-end
2010
2011
2012e
2013e
2014e
2015e
27,549
31,475
36,091
41,247
47,224
54,302
1,002
771
1,153
1,324
1,518
1,769
30,704
34,937
39,923
45,706
52,532
7%
0% 1%
1%
Qatar
26,547
Other GCC
10,379
2,605
11,005
11,650
12,633
13,455
Due from banks
3,634
10,147
5,819
6,517
7,364
8,321
Europe
Investment, net
5,231
7,587
4,669
5,230
5,910
6,678
North America
Fixed assets
737
821
825
872
923
979
Other assets
702
555
931
978
1,105
1,248
Total assets
47,230
52,420
58,187
65,169
73,641
83,214
Customer deposits
30,822
31,699
36,974
42,343
48,582
55,988
8,683
11,636
9,645
11,020
12,622
13,987
Debt
768
769
769
769
769
769
Other liabilities
922
1,235
2,186
2,256
2,582
2,948
Total liabilities
41,195
45,339
49,575
56,388
64,556
73,692
6,034
7,081
8,611
8,781
9,085
9,522
42
50
54
60
68
78
45,152
48,005
53,498
59,859
67,449
76,280
Others
91%
Due to banks
Total Equity
Doha Bank
39,739
42,188
45,746
50,761
58,053
66,359
6,034
7,081
8,611
8,781
9,085
9,522
4,611
5,336
6,659
6,826
7,129
7,563
Tier 1 capital
4,618
5,341
6,666
6,835
7,138
7,574
Loubna El Hassan
+97145071744
52
May 23 2012
Doha Bank Valuation (QARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Number of shares (after 10% capital hike)
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Doha Bank
2010
2011
2012e
2013e
2014e
2015e
Perp. Subtotal% of total
1,054
26
(18)
5.0%
2.5%
1,046
5,460
19.2%
11.3%
614
432
---
1,241
31
(15)
5.0%
2.5%
1,225
6,354
19.3%
11.3%
715
510
---
1,293
32
51
5.0%
2.5%
1,210
6,442
18.8%
11.3%
725
485
---
1,336
33
19
5.0%
2.5%
1,284
7,266
17.7%
11.3%
817
467
0.95
443
1,475
37
(14)
5.0%
2.5%
1,452
8,233
17.6%
11.3%
926
526
0.85
448
1,611
40
(47)
5.0%
2.5%
1,618
9,363
17.3%
11.3%
1,053
565
0.77
433
1,611
40
(47)
5.0%
2.5%
1,618
9,363
17.3%
11.3%
1,053
565
0.77
433
1,323
8.6%
5,243
6,442
13,008
34.0%
41.8%
84.4%
1,036
6.7%
3.0%
6,844
6,034
--
7,081
--
8,611
0
8,781
0
9,085
0
9,522
0
(947)
5,087
(1,033)
6,048
(1,133)
7,478
(1,133)
7,647
(1,133)
7,952
(1,133)
8,389
42,074
45,381
12.0%
14
5,460
(373)
49,940
52,831
12.0%
14
6,354
(306)
53,559
53,559
12.0%
14
6,442
1,036
60,428
60,428
12.0%
14
7,266
381
68,489
68,489
12.0%
14
8,233
(281)
77,902
77,902
12.0%
14
9,363
(974)
229
229
1,133
15,406
227
227
68.0
58.0
17.2%
11.7
1.8
1.5%
7.4%
100.0%
11.8
1.8
53
Report Type
May 23
2012
+97145071744
Loubna El Hassan
Qatar Islamic Bank
Renewed focus on growth
 Renewed focus on growth after a lost FY11
 Continued weak liquidity and negative cash which might impact
net interest income
 Arcapita exposure might be a threat on asset quality in FY12
Medium return bank: QIB is generating a decent return with a high
RORWA of 3% in FY 11A. Although C/I has improved in Q1 12A (29%
vs. 35% in FY 11A), QIB is still the second least cost efficient amongst
Qatari peers (after Al Khaliji). NIM sharply improved in Q1 12A to
4.31% from 1.85% in Q4 11A, but it might not be sustainable going
forward as NIM tend to be lumpy for QIB.
QIB has refocused recently on growth: We forecast that earnings will
grow at a 6% CAGR over our forecasted period. Loan growth is also
expected to pick up driven by enhanced focus on business segments
and public sector to 10% in Q1 12A from merely 1% in FY 11A, with an
encouraging start to the year. QIB has been under critical challenge to
leverage the QCB Islamic ruling as MARK was picking up most of the
share flowing in from conventional banks. We project that QIB will
witness a CAGR of 12% for loans and 15% for deposits.
Solid asset quality threatened by Arcapita exposure: Our asset quality
screen suggests cumulative losses of 472bps over the next 5 years, or
94bps per year. QIB should be taking more provisioning in FY 12e on
the USD 200m exposure of its bankrupted Bahraini entity 'Arcapita',
otherwise it could substantially hurt its NPL and coverage ratio (NPL
could move up from 1.1% to 3.3% and coverage could go down from
98% to 32%).
Strong capital base: QIB has the highest capital base amongst its peers
with CET1 of 21.8% in FY 11A as it already deducts 100% of associates
and has recently had a capital hike. On top of that it did not grow
loans by much in FY 11A. We expect Tier 1 to come in at 20.4% in FY
12e. It also has a high payout ratio of 80% compared to peers which
should be maintained for the next 3 years. We expect QIB to releverage due its renewed focus on growth and high dividend pay-out,
which will help its RoE.
Weak liquidity with negative cash We compute Basel III NSFR of
74.4% in FY 11A and a decent LCR of 187%. QIB has a weak liquidity
translated into its high L/D ratio of 107 in Q4 11A and its negative cash
position of -4%. We thus do not see room for it to invest in high yield
T-bills. QIB may have to raise more deposits.
Average valuation: QIB is trading at average multiples (P/E13e of
11.7x and P/tNAV12e of 1.6x) which do not entirely reflect the bank
renewed focus on growth, however we expect a particularly poor
Q2 12 as the bank starts taking provisioning for its exposure to
Arcapita leading to the low FY 12e ROE of 10% and RORWA of 3%. Our
TP of QAR 79.8 offers 3% upside.
HOLD
QAR 79.8
Banks / QATAR
Bloomberg code
Market index
QIBK QD
79.8
Upside (%)
Market data
3.3
17/05/2012
Last closing price
52 Week range
Market cap (QAR mn)
Market cap (USD mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
77.3
71.3-86.1
18,265
5,016
7.9
2.2
2011
2,166
2012e
2,500
2013e
2,771
2014e
3,068
1,413
1,653
1,847
2,044
5.78
13.4
47.41
46.49
1.6
1.7
4.50
5.8
2.4
3.9
13.1
107.0
34
4.75
16.3
47.54
46.63
1.6
1.7
3.98
5.2
1.8
2.8
9.8
96.2
38
6.62
11.7
50.01
49.10
1.5
1.6
5.36
6.9
2.3
3.6
13.2
98.4
42
7.31
10.6
51.79
50.87
1.5
1.5
5.71
7.4
2.3
3.6
14.0
94.3
46
21.8
20.4
19.6
18.7
23.0
23
1.2
97.7
21.3
23
1.6
133.2
20.4
22
1.9
128.4
19.4
21
2.3
123.3
Price Performance
QIBK QD
114
108
102
96
90
84
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Qatar Islamic Bank
Year-end
Profitability
5%
3.91%
3.19%
2.84%
3.62%
3.63%
4.39%
4.40%
3.30%
4%
3%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
3.21
2.88
3.41
3.37
3.37
3.37
4.29%
4.16%
3.54%
1.33%
0.61%
0.57%
0.11%
0.61%
Cost/Income (%)
26.5
34.8
33.9
33.4
33.4
33.4
4.42%
67.8
54.8
55.2
53.9
53.7
54.2
0.98%
16.0
13.9
13.9
14.3
14.6
15.0
14.7
32.5
29.8
30.4
30.4
29.5
RoAE (%)
13.2
13.1
9.8
13.2
14.0
13.6
Pre Prov.ROE (%)
13.8
13.3
13.7
15.4
16.4
17.6
2.6
2.4
1.8
2.3
2.3
2.1
Revenue / RWA (%)
4.82
6.37
6.50
6.58
6.60
6.64
Costs / RWA (%)
1.28
2.21
2.20
2.19
2.20
2.22
PPP / RWA (%)
3.54
4.16
4.29
4.39
4.40
4.42
0.11
0.57
1.33
0.61
0.61
0.98
RoRWA (%)
3.19
3.91
2.84
3.62
3.63
3.30
2.06
2.95
2.17
2.80
2.81
2.55
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.5%
3.3%
3.1%
2.9%
3.41%
3.37%
3.37%
3.37%
3.21%
2.7%
2.88%
2.5%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.9
Asset Quality
Credit Quality
135%
3.0%
0.2
—
1.2
0.6
0.6
NPL/Gross Loans (%)
1.5
1.2
1.6
1.9
2.3
2.6
83.2
97.7
133.2
128.4
123.3
131.3
1.2
1.2
2.4
2.8
3.2
4.0
3.8
0.9
26.6
13.8
14.0
22.2
130%
2.0%
125%
1.0%
120%
115%
0.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
96.6
107.0
11.4
(7.1)
71.3
60.9
Year-end
2010
Tier 1 ratio (%)
2012e
2013e
2014e
2015e
96.2
98.4
94.3
91.7
(0.1)
(2.1)
2.4
6.7
65.7
66.8
68.5
68.8
2011
2012e
2013e
2014e
2015e
13.2
21.8
20.4
19.6
18.7
17.9
17.4
23.0
21.3
20.4
19.4
18.5
17.4
23.0
22.6
21.7
20.7
19.8
17.8
22.0
20.3
19.6
18.6
17.5
RWA / assets (%)
72.3
58.3
60.0
59.7
59.9
59.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
32.1
12.4
10.0
10.0
10.0
10.0
Net loan growth (%)
29.5
0.8
9.1
15.5
9.3
8.9
Deposit growth (%)
49.2
(8.9)
21.3
13.0
14.0
12.0
(9.6)
11.3
(17.7)
39.4
10.5
—
Capital Ratios
23.0%
26%
22%
17.4%
18%
14%
23.0%
22.6%
21.3%
21.7%
20.7%
20.4%
19.4%
19.8%
18.5%
17.4%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
60%
49%
40%
30%
20%
1%
21%
9%
0%
15%
9%
13%
14%
12%
9%
-20%
FY10
FY11
FY12e
Loan growth
Qatar Islamic Bank
FY13e
FY14e
FY15e
Deposit growth
Growth
55
May 23 2012
Abacus
Qatar Islamic Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,698
1,702
1,942
2,126
2,351
2,627
471
515
563
633
703
785
1,227
1,187
1,379
1,493
1,648
1,842
Fee income
289
300
348
397
448
511
Net trading income
183
654
687
778
859
912
110
26
86
103
112
132
1,809
2,166
2,500
2,771
3,068
3,398
479
753
847
924
1,024
1,136
1,330
1,413
1,653
1,847
2,044
2,262
50
13
440
255
285
503
(10)
182
71
—
—
—
1,290
1,218
1,142
1,592
1,758
1,759
Company Profile
Interest income
Qatar Islamic Bank is the second largest Islamic bank
by assets and shareholders’' equity in Qatar
maintaining 7% and 5% respectively in loan and
deposits market share within the Qatari banking
sector. The bank provides commercial banking
services across both the corporate and retail segment
and offers a wide range of Islamic products including
Murabaha, Musharaka, Musawama and Istisnaa. It
operates in a network of 30 branches and more than
100 ATMs and employs 988 staff as a group. It owns
46.7% stake in QInvest and 30% in Al Jazeera Finance
Company among other associates in Qatar, UK,
Lebanon and Malaysia. The Qatar Investment
Authority is the largest shareholder with a 20% stake.
Net interest income
Interest expense
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Loans Breakdown by Sector
Minorities
Tier 1 Coupon
7%
13%
—
—
—
—
1,142
1,592
1,758
1,759
—
2
2
3
4
4
1,290
1,216
1,140
1,589
1,755
1,755
27
(149)
17
24
26
26
66,416
34,131
28,072
39,122
43,211
43,222
1,196
1,331
1,095
1,526
1,685
1,686
5.52
5.63
4.63
6.46
7.13
7.13
Public
DPS
5.00
4.50
3.98
5.36
5.71
5.71
Corporate
BVPS
41.79
47.41
47.54
50.01
51.79
53.22
Tangible BVPS
41.79
46.49
46.63
49.10
50.87
52.30
Year-end
2010
2011
2012e
2013e
2014e
2015e
29,715
29,958
33,104
38,357
42,127
46,250
363
363
803
1,057
1,343
1,846
29,352
29,596
32,301
37,300
40,785
44,404
5,018
80%
0%
4%
1%
Qatar
Other GCC
Europe
Others
1,875
1,833
2,140
1,037
2,186
Due from banks
12,431
7,369
7,694
8,111
8,534
8,534
Investment, net
6,179
16,901
19,431
21,330
23,106
24,170
Fixed assets
371
402
409
417
425
434
Other assets
1,670
1,970
1,923
2,116
2,327
2,560
Total assets
51,877
58,286
64,115
70,526
77,579
85,337
Customer deposits
30,370
27,657
33,560
37,923
43,246
48,435
Due to banks
8,412
13,342
9,909
10,634
8,862
7,813
Debt
2,713
2,717
6,717
6,717
9,717
12,717
Other liabilities
1,124
1,719
900
1,460
1,345
1,408
Total liabilities
42,619
45,436
51,086
56,733
63,170
70,373
9,258
12,850
13,029
13,793
14,409
14,964
38
34
38
42
46
51
38,281
41,227
40,466
44,291
48,976
54,730
Total Equity
Qatar Islamic Bank
—
1,218
Diluted EPS
Retail
95%
—
1,290
35,273
42,606
46,951
52,730
58,549
65,395
9,052
10,986
11,018
11,602
12,021
12,358
6,518
7,636
7,860
8,273
8,709
9,155
Tier 1 capital
6,518
7,636
7,860
8,273
8,709
9,155
Loubna El Hassan
+97145071744
56
May 23 2012
Qatar Islamic Bank Valuation (QARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Qatar Islamic Bank
2010
2011
2012
2013
2014
2015
1,262
66
30
5.0%
2.5%
1,165
7,554
15.4%
11.0%
831
335
---
1,365
34
252
5.0%
-1,079
5,092
21.2%
11.0%
560
519
---
1,123
28
242
5.0%
-852
5,580
15.3%
11.0%
614
238
---
1,565
39
241
5.0%
-1,284
6,041
21.3%
11.0%
664
620
0.95
588
1,728
43
237
5.0%
-1,448
6,663
21.7%
11.0%
733
715
0.86
612
1,729
43
231
5.0%
-1,454
7,332
19.8%
11.0%
806
648
0.77
499
1,729
43
231
5.0%
-1,454
7,332
19.8%
11.0%
806
648
0.77
499
1,699
9.0%
7,130
5,580
14,409
37.8%
29.6%
76.4%
4,850
25.7%
4.0%
9,255
9,258
-(1,083)
8,175
12,850
(216)
(1,441)
(1,063)
10,130
13,029
(216)
(1,441)
(942)
10,430
13,793
(216)
(1,441)
(1,266)
10,869
14,409
(216)
(1,441)
(1,348)
11,404
14,964
(216)
(1,441)
(1,349)
11,958
37,523
49,360
12.0%
1,631
7,554
621
34,004
35,056
12.0%
885
5,092
5,038
38,488
38,488
12.0%
962
5,580
4,850
42,110
42,110
12.0%
987
6,041
4,829
46,473
46,473
12.0%
1,086
6,663
4,741
51,142
51,142
12.0%
1,195
7,332
4,626
(1,086)
(251)
(1,337)
942
18,864
236
236
79.8
77.3
3.3%
17.2
1.7
(7.1%)
5.0%
100.0%
12.4
1.6
57
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Qatar National Bank
Attractive from many angles
 Extremely well capitalized enabling it to become regional leader
 Very high RORWA due to low capital intensity of assets, low C/I,
low structural cost of risk, despite low NIM
 Valuation ignores all of the above
We believe QNB is an outperformer capitalizing on its ability to
access the public sector: It is the most profitable banks in Qatar with
the highest RORWA of 5%, due to its entrenched exposure to
government lending (RWA are only 52% of total assets) and its low
cost base structure (most cost efficient bank with C/I of 16%). It
generates an attractive NIM of 3.1% although we expect a gradual
contraction in the net interest margin going forward due to upward
pressure on funding costs, and moderate pressure on asset yields.
High earnings CAGR at 13%: We expect earnings to grow at 13% CAGR
with cost growth slightly outpacing strong revenue growth. We
project an FY12-15 CAGR of 16% for loans (FY 12e might be lower at
11% due to budget delays). Deposits should also accelerate at a CAGR
of 16%. The bank will continue to see highest growth in Government
agencies and Real estate (41% and 13% of total loans respectively);
the corporate sector growth should be limited in FY 12e, although
demand should pick in FY 13-15e.
Solid asset quality: Our asset quality screen suggests a cumulative
loss of 289bps over the next 5 years (58bps pa). QNB has very strong
asset quality with NPL ratio of 1.1% and coverage ratio of 119% in FY
11A, due to its public sector tilt and low exposure to the retail sector.
Extremely well capitalized: Despite a loan growth of 47% in FY 11A,
QNB remains one of the best capitalized banks with CET1 of 21.2%.
We expect CET1 to improve in FY12 to 23.1% due to a slowdown in
loan growth, relatively low pay-out and very high returns. Even if QNB
buys Denizbank at 1.3x P/tNAV, CET1 would remain at 16%.
Strong liquidity QNB has Basel III NSFR of 89% and robust LCR of 162%
although L/D has weakened in FY 11A to 97% from 80% in FY 10A.
BUY
QAR 189.2
Banks / Qatar
Bloomberg code
Market index
QNBK QD
189.2
Upside (%)
Market data
41.6
17/05/2012
Last closing price
52 Week range
Market cap (QAR mn)
Market cap (USD mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
133.6
121.8-142.7
93,484
25,674
20.3
5.6
2011
10,018
2012e
11,591
2013e
12,872
2014e
14,721
8,415
9,583
10,509
11,941
10.73
12.4
60.05
59.85
2.2
2.2
3.64
2.7
2.8
4.7
22.2
96.9
156
12.21
10.9
68.33
68.12
2.0
2.0
4.76
3.6
2.6
5.0
18.6
97.6
167
13.51
9.9
76.74
76.53
1.7
1.7
5.27
3.9
2.6
4.8
18.2
97.6
191
15.32
8.7
86.40
86.20
1.5
1.5
5.97
4.5
2.5
4.6
18.3
97.5
226
21.2
23.1
23.2
22.4
22.0
22
1.1
118.9
23.6
24
1.2
120.3
23.7
24
1.3
112.0
22.7
23
1.5
98.7
Price Performance
119
QNBK QD
113
107
101
95
High premium justified: QNB is trading at a P/E13e of 9.9x, and
P/tNAV12e of 2.0x (vs. ROE of 19%), which does not reflect
whatsoever the high sustainable RORWA, its solid asset quality, the
very solid capital base offering room for long-term organic growth and
EPS enhancing deals that should make QNB the regional leader,
despite a slowdown in organic growth in FY 12e after a very
spectacular FY 11A. We see an upside of 42%, with potential catalyst
M&A deals and improved loan growth as of Q4 12 only.
89
83
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Qatar National Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.95
3.08
2.95
2.90
2.83
2.83
Cost/Income (%)
17.5
16.0
17.3
18.4
18.9
18.9
76.8
77.8
78.3
77.6
77.2
77.5
15.2
12.9
13.0
13.7
14.1
14.1
2.9
3.7
3.1
2.6
2.3
1.9
RoAE (%)
25.4
22.2
18.6
18.2
18.3
18.6
Pre Prov.ROE (%)
27.9
25.3
21.2
20.6
20.9
21.8
2.8
2.8
2.6
2.6
2.5
2.4
Revenue / RWA (%)
6.60
6.41
6.93
6.74
6.53
6.55
3.3%
Costs / RWA (%)
1.15
1.02
1.20
1.24
1.23
1.24
3.1%
PPP / RWA (%)
5.45
5.38
5.73
5.50
5.29
5.31
0.54
0.64
0.73
0.68
0.67
0.79
RoRWA (%)
4.99
4.70
4.98
4.82
4.63
4.52
3.28
3.42
3.69
3.67
3.63
3.64
Profitability
7%
6%
5%
4%
3%
2%
1%
0%
4.99%
4.70%
4.98%
5.73%
5.45%
5.38%
0.54%
0.73%
0.64%
4.82%
5.50%
4.63%
5.29%
0.68%
0.67%
4.52%
5.31%
0.79%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.08%
2.9%
2.95%
2.95%
2.7%
2.90%
2.83%
2.83%
FY12e
FY13e
FY14e
Net interest margin
FY15e
2.5%
FY10
FY11
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.4
0.6
0.6
0.5
0.5
0.6
2.0%
NPL/Gross Loans (%)
1.0
1.1
1.2
1.3
1.5
1.7
1.5%
117.7
118.9
120.3
112.0
98.7
94.6
1.0%
1.2
1.4
1.4
1.5
1.5
1.6
0.5%
8.8
12.3
12.5
12.0
12.6
14.9
Asset Quality
Credit Quality
150%
100%
50%
0%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
79.6
96.9
97.6
97.6
97.5
97.4
19.8
3.1
0.9
1.9
6.0
7.0
83.3
77.2
77.8
78.1
78.2
79.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
14.6
21.2
23.1
23.2
22.4
21.8
Tier 1 ratio (%)
15.3
22.0
23.6
23.7
22.7
22.1
15.3
22.0
23.6
23.7
22.7
22.1
11.1
14.1
14.6
14.3
13.7
13.1
RWA / assets (%)
50.1
51.8
50.4
50.0
50.0
49.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
24.6
35.2
10.0
15.0
18.0
18.0
Net loan growth (%)
21.1
47.3
10.9
16.0
19.0
19.8
Deposit growth (%)
31.5
20.9
10.2
16.0
19.0
20.0
36.1
31.7
13.3
10.6
13.4
14.4
Capital Ratios
26%
22.0%
22%
18%
15.3%
22.0%
23.6%
23.7%
23.6%
23.7%
22.7%
22.7%
22.1%
22.1%
14%
15.3%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
60%
47%
40%
31%
21%
21%
20%
11%
10%
0%
FY10
19%
16%
FY11
FY12e
Loan growth
Qatar National Bank
16%
FY13e
19%
20%
20%
FY14e
FY15e
Deposit growth
Growth
59
May 23 2012
Abacus
Qatar National Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
18,850
Company Profile
Interest income
9,932
10,695
12,532
13,887
15,945
Interest expense
4,257
2,896
3,451
3,899
4,577
5,438
Qatar National Bank is the largest bank in Qatar by
both assets and market capitalization and maintains
respectively, 49% and 55% of loans and deposit
market share within the Qatari banking sector. QNB
provides a full range of banking services including
retail, corporate, treasury, investment and wealth
management services but is mainly focused on the
public sector. The bank has presence in 24 countries
supported by more than 600 ATMS and employing
around 7,000 staff. It recently acquired 49% of Bank of
Commerce and Development in Libya and increased
its stake in Mansour Investment Bank in Iraq to 51%.
The Qatar Investment Authority is the largest
shareholder with a 50% stake.
Net interest income
5,675
7,799
9,080
9,988
11,368
13,412
Fee income
2,441
1,121
1,297
1,505
1,760
2,068
Net trading income
175
312
313
285
287
273
422
610
694
839
997
1,184
7,393
10,018
11,591
12,872
14,721
17,310
1,292
1,603
2,008
2,363
2,780
3,273
6,101
8,415
9,583
10,509
11,941
14,037
538
1,035
1,200
1,266
1,506
2,087
62
(31)
27
30
14
13
5,501
7,411
8,356
9,214
10,421
11,936
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Loan Breakdown by Segment
Minorities
Tier 1 Coupon
166
234
288
349
382
7,578
8,590
9,502
10,770
12,318
16
24
43
48
54
62
5,702
7,554
8,547
9,454
10,717
12,257
(2)
45
—
—
—
—
118
152
214
236
268
306
5,586
7,357
8,333
9,218
10,449
11,950
Diluted EPS
9.32
10.51
11.91
13.17
14.93
17.08
DPS
3.26
3.64
4.76
5.27
5.97
6.83
Public
BVPS
40.43
60.05
68.33
76.74
86.40
97.50
Corporate
Tangible BVPS
40.43
59.85
68.12
76.53
86.20
97.30
Year-end
2010
2011
2012e
2013e
2014e
2015e
133,268
196,623
218,252
253,172
301,275
361,530
1,572
2,680
3,150
3,685
4,461
5,817
131,696
193,943
215,102
249,487
296,814
355,713
33,912
10,279
20,835
20,616
38,511
51,561
Due from banks
24,687
38,566
33,215
38,197
45,073
53,186
Investment, net
28,696
55,086
58,500
64,792
60,003
59,368
Fixed assets
915
979
1,036
1,099
1,171
1,253
Other assets
3,476
2,961
3,322
7,639
9,015
10,637
10%
32%
216
5,718
Retail
58%
0% 2%
9%
Qatar
3%
Total assets
223,382
301,955
332,151
381,973
450,729
531,860
Other GCC
Customer deposits
165,470
200,123
220,457
255,730
304,318
365,182
Europe
Due to banks
14,345
39,482
51,159
51,695
56,553
67,275
Debt
12,136
12,152
5,437
13,000
20,000
20,000
Other liabilities
6,638
7,563
6,459
6,900
8,275
9,847
Total liabilities
198,590
259,320
283,511
327,324
389,146
462,304
24,793
42,635
48,640
54,649
61,582
69,556
112
156
167
191
226
264
192,470
253,048
307,424
344,902
400,996
474,066
North America
Others
86%
Qatar National Bank
Total Equity
173,714
221,854
264,404
298,738
350,648
416,664
24,237
41,879
47,668
53,552
60,314
68,085
16,422
33,463
38,707
44,234
50,486
57,759
Tier 1 capital
17,119
34,358
39,544
45,369
51,235
58,523
Loubna El Hassan
+97145071744
60
May 23 2012
Qatar National Bank Valuation (QARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Qatar National Bank
2010
2011
2012e
2013e
2014e
2015e
5,704
118
232
5.0%
0.5%
5,355
18,177
29.5%
11.0%
1,999
3,355
---
7,509
152
809
5.0%
0.5%
6,547
23,678
27.7%
11.0%
2,605
3,943
---
8,547
214
1,016
5.0%
0.5%
7,317
24,745
29.6%
11.0%
2,722
4,595
---
9,454
236
1,149
5.0%
0.5%
8,069
27,731
29.1%
11.0%
3,050
5,019
0.95
4,764
10,717
268
1,254
5.0%
0.5%
9,195
32,058
28.7%
11.0%
3,526
5,668
0.86
4,847
12,257
306
1,384
5.0%
0.5%
10,567
36,819
28.7%
11.0%
4,050
6,517
0.77
5,020
12,257
306
1,384
5.0%
0.5%
10,567
36,819
28.7%
11.0%
4,050
6,517
0.77
5,020
14,631
11.1%
68,768
24,745
108,144
52.0%
18.7%
81.7%
20,420
15.4%
3.7%
89,268
24,793
--
42,635
(142)
48,640
(142)
54,649
(142)
61,582
(142)
69,556
(142)
(1,957)
22,835
(2,544)
39,949
(3,333)
45,165
(3,687)
50,820
(4,179)
57,261
(4,780)
64,634
112,003
112,738
12.0%
4,648
18,177
4,659
156,382
158,124
12.0%
4,703
23,678
16,271
167,246
167,246
12.0%
4,675
24,745
20,420
191,058
191,058
12.0%
4,804
27,731
23,089
225,551
225,551
12.0%
4,992
32,058
25,203
264,386
264,386
12.0%
5,093
36,819
27,815
547
(83)
464
3,333
132,361
700
700
189.2
133.6
41.6%
15.9
2.8
0.4%
2.5%
100.0%
14.4
2.5
61
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Masraf Al Rayan
Aggressive growth already priced in
 Best positioned for growth in public sector and Islamic finance
 Well capitalized due to lack of cash dividends so far
 Growth should slow down as MARK will need to rebuild its NIMs
and QIB refocuses on growth
Medium return bank: MARK is generating a sector average adjusted
RORWA of 2.6%. NIMs have been hammered (1.6% in FY 11A down
from 3.7% in FY 10A) due to lower margins in the public sector, driven
by a swap from LC into FC (USD). We expect the bank to try to rebuild
its NIM going forward.
Earnings CAGR of 14%: We expect net income growth to remain high
at a 14% CAGR. MARK, the obvious primary beneficiary of the CB
Islamic ruling, witnessed aggressive growth in FY 11A (financings
soared by 37% and deposits almost tripled). The bank is gaining
footprints in the public sector, which we believe will be the main
driver of lending growth due to increased government spending fueled
by income from oil and natural gas. We do not expect explosive
growth to continue and project loan CAGR to slow down to 20%, as
MARK will need to focus on rebuilding its very low NIM, and QIB
refocuses on growth.
Excellent credit quality: Our asset quality screen suggests cumulative
losses of just 337bps over the next 5 years, or 67bps per year. The cost
of risk has remained virtually nil in the past due to the absence of
corporate default. LLR charges increased in FY 11A due to a provision
expense of QAR 75mn that was taken in Q2 11A as a collective
provision to boost risk reserve and was not related to a specific
exposure. We expect provisioning to return to normal level and NPL
ratio to stand within the range of 0.5%-0.9% for the next two years.
Adequate capital: MARK has a solid capital base with CET1 of 20.1% in
FY 11A. Note that MARK is now more likely to pay regular cash
dividends to common shareholders’ as the dividend addition to paidup capital is nearing the QAR 10 per share signaling the end of
dividends paid in to uncalled share capital. We expect Tier 1 to come
in at 16.5% due to loan growth and higher dividends.
HOLD
QAR 30.9
Banks / QATAR
Bloomberg code
Market index
MARK QD
30.9
Upside (%)
Market data
15.8
17/05/2012
Last closing price
52 Week range
Market cap (QAR mn)
Market cap (USD mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
26.7
22.1-28.6
20,025
5,500
31.1
8.5
2011
1,797
2012e
2,105
2013e
2,536
2014e
2,947
1,482
1,742
2,109
2,444
1.88
14.2
11.34
11.34
2.4
2.4
—
—
3.1
3.9
17.6
75.1
35
1.97
13.6
12.76
12.76
2.1
2.1
1.00
3.7
2.4
3.1
15.9
75.9
47
2.39
11.2
14.09
14.09
1.9
1.9
1.00
3.7
2.4
3.2
17.4
77.1
55
2.78
9.6
15.80
15.80
1.7
1.7
1.00
3.7
2.4
3.2
18.1
78.3
64
20.1
16.5
15.7
15.3
21.8
23
0.3
82.2
17.4
18
0.5
317.1
16.5
17
0.9
237.7
16.0
17
1.4
183.2
Price Performance
MARK QD
129
120
Strong liquidity We compute Basel III NSFR of 107% in FY 11A (the
highest after QIIB) and a decent LCR of 126%. L/D ratio stood at 75% in
FY 11A from 93% in FY 10A. With net cash position of 15%, MARK has
enough room to invest in higher yielding T-bills.
Rich valuation: MARK is trading at a rich P/E13e of 11.2x and
P/tNAV12e of 2.1x (vs. RoE of 16% and RoRWA of 3.1%) which already
fully factors in its aggressive growth, strong capital base and potential
margin expansion. We initiate on MARK with a Hold recommendation
and TP of QAR 31 providing 16% upside.
111
102
93
84
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Masraf Al Rayan
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.73
1.64
1.86
2.02
2.11
2.21
Cost/Income (%)
17.3
17.5
17.2
16.8
17.1
17.2
77.7
39.7
51.7
55.8
59.1
62.1
7.0
13.7
6.4
6.3
6.4
6.5
5.1
33.3
30.1
27.8
25.5
23.4
RoAE (%)
17.7
17.6
15.9
17.4
18.1
18.5
Pre Prov.ROE (%)
17.7
18.5
19.3
21.0
22.0
22.5
3.9
3.1
2.4
2.4
2.4
2.4
Revenue / RWA (%)
4.09
5.11
4.48
4.60
4.60
4.61
3.9%
Costs / RWA (%)
0.71
0.90
0.77
0.77
0.79
0.79
3.4%
PPP / RWA (%)
3.38
4.21
3.71
3.82
3.81
3.81
Profitability
5%
4%
3%
2%
1%
0%
-1%
3.46%
3.38%
3.90%
4.21%
3.71%
0.65%
-0.24% 0.25%
FY10
3.06%
FY11
FY12e
PPP/RWA
3.17%
3.17%
3.81%
3.82%
0.67%
0.67%
FY13e
FY14e
Cost of risk/RWA
3.14%
3.81%
0.67%
FY15e
RORWA
RoAA (%)
NIM
2.9%
3.73%
2.4%
1.9%
1.4%
1.64%
0.9%
FY10
FY11
2.11%
2.21%
FY12e
FY13e
FY14e
Net interest margin
FY15e
1.86%
2.02%
(0.24)
0.25
0.65
0.67
0.67
0.67
RoRWA (%)
3.46
3.90
3.06
3.17
3.17
3.14
3.03
2.59
2.26
2.44
2.50
2.62
Year-end
2010
2011
2012e
2013e
2014e
2015e
—
0.2
0.7
0.7
0.7
0.7
2.0%
NPL/Gross Loans (%)
—
0.3
0.5
0.9
1.4
1.9
300%
1.5%
100.5
82.2
317.1
237.7
183.2
154.4
200%
1.0%
—
0.3
0.9
1.4
1.9
2.3
100%
0.5%
0.1
4.8
17.6
17.4
17.5
17.7
Asset Quality
Credit Quality
400%
0%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
92.8
75.1
75.9
77.1
78.3
79.4
18.7
11.8
11.3
11.9
13.0
13.5
98.0
98.9
100.7
99.2
98.7
98.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
18.1
20.1
16.5
15.7
15.3
15.1
Tier 1 ratio (%)
19.1
21.8
17.4
16.5
16.0
15.6
19.2
22.6
18.1
17.1
16.6
16.3
20.5
15.4
14.4
13.5
12.9
12.5
RWA / assets (%)
96.5
63.7
70.9
70.5
70.0
69.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
43.8
59.4
20.0
18.0
17.0
17.0
Net loan growth (%)
41.2
38.7
24.9
19.3
19.0
18.5
Deposit growth (%)
51.5
71.2
23.5
17.5
17.2
16.8
31.6
18.5
4.8
21.6
16.2
15.3
Capital Ratios
26%
22%
22.6%
19.2%
18.1%
21.8%
18%
19.1%
17.4%
14%
17.1%
16.6%
16.0%
16.5%
16.3%
15.6%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
80%
71%
60%
52% 39%
41%
40%
20%
25%
24%
18%
0%
FY10
FY11
FY12e
Loan growth
Masraf Al Rayan
19%
19%
FY13e
17%
17%
19%
FY14e
FY15e
Deposit growth
Growth
63
May 23 2012
Abacus
Masraf Al Rayan
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,636
1,292
1,820
2,242
2,724
3,294
571
578
731
828
981
1,155
1,064
713
1,089
1,415
1,743
2,139
Fee income
95
246
135
160
188
222
Net trading income
69
598
633
703
746
801
141
240
248
258
270
281
1,369
1,797
2,105
2,536
2,947
3,444
237
315
363
427
503
593
1,132
1,482
1,742
2,109
2,444
2,851
1
71
307
368
427
504
(82)
16
—
—
—
—
1,213
1,395
1,436
1,741
2,017
2,346
Company Profile
Interest income
Masraf Al Rayan is the largest Islamic bank in Qatar by
market cap. It maintains a 9% market share in loans
and 12% market share in deposits. The bank is the
newest Islamic bank in Qatar, founded in January
2006. It provides a full range of services all in
accordance with Islamic principles, and is mainly
focused on corporate and public sectors. The bank
currently operates through 9 branches supported by
27 ATMs and employs 366 staff in Qatar. The Qatar
Investment Authority is the largest shareholder with a
10% stake.
Net interest income
Interest expense
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
3%
Minorities
Corporate
Retail
55%
40
53
69
59
1,475
1,794
2,085
2,405
—
1
—
—
—
—
1,211
1,408
1,475
1,794
2,085
2,405
—
—
—
—
—
—
35,209
36,887
44,861
52,136
60,130
1,159
1,373
1,439
1,750
2,033
2,345
1.55
1.83
1.92
2.33
2.71
3.13
—
—
1.00
1.00
1.00
1.00
BVPS
9.50
11.34
12.76
14.09
15.80
17.93
Tangible BVPS
9.50
11.34
12.76
14.09
15.80
17.93
2010
2011
2012e
2013e
2014e
2015e
25,076
34,853
43,799
52,559
62,808
74,741
12
87
394
762
1,189
1,693
25,064
34,766
43,405
51,797
61,619
73,048
1,482
2,253
2,390
3,281
4,858
6,252
Due from banks
4,989
4,274
5,107
6,026
7,051
8,249
Investment, net
2,684
13,569
14,683
16,292
17,032
18,411
Public
15
1,410
52,301
Tier 1 Coupon
42%
(2)
1,211
Diluted EPS
DPS
Year-end
0%
Qatar
Other GCC
100%
Fixed assets
87
71
78
85
94
103
Other assets
378
339
663
783
916
1,071
Total assets
34,683
55,271
66,326
78,264
91,569
107,136
Customer deposits
27,017
46,264
57,150
67,169
78,720
91,979
Due to banks
—
—
—
—
—
—
Debt
—
—
1,000
2,000
3,000
4,000
Other liabilities
540
503
(1,392)
(1,473)
(2,003)
(2,289)
Total liabilities
27,557
46,767
56,757
67,696
79,718
93,689
7,126
8,504
9,568
10,567
11,850
13,445
33
35
47
55
64
75
28,546
43,376
58,708
70,071
82,535
96,893
Total Equity
Masraf Al Rayan
22,424
36,640
52,207
63,659
75,445
88,850
7,126
8,504
9,568
10,567
11,850
13,445
6,401
7,497
7,740
8,639
9,805
11,263
Tier 1 capital
6,401
7,497
7,740
8,639
9,805
11,263
Loubna El Hassan
+97145071744
64
May 23 2012
Masraf Al Rayan Valuation (QARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Masraf Al Rayan
2010
2011
2012e
2013e
2014e
2015e
1,211
52
121
5.0%
2.5%
1,038
4,642
22.4%
11.0%
511
527
---
1,408
35
127
5.0%
2.5%
1,247
5,907
21.1%
11.0%
650
597
---
1,475
37
90
5.0%
2.5%
1,348
6,967
19.4%
11.0%
766
582
---
1,794
45
91
5.0%
2.5%
1,658
7,949
20.9%
11.0%
874
784
0.95
744
2,085
52
99
5.0%
2.5%
1,934
9,066
21.3%
11.0%
997
937
0.86
801
2,405
60
124
5.0%
2.5%
2,221
10,151
21.9%
11.0%
1,117
1,104
0.77
851
2,405
60
124
5.0%
2.5%
2,221
10,151
21.9%
11.0%
1,117
1,104
0.77
851
2,396
10.3%
11,343
6,967
20,707
48.9%
30.0%
89.3%
1,851
8.0%
3.5%
14,725
7,127
--
8,504
--
9,568
--
10,568
--
11,851
--
13,447
--
-7,127
-8,504
(750)
8,818
(750)
9,818
(750)
11,101
(750)
12,697
33,453
35,460
12.0%
386
4,642
2,485
35,183
37,294
12.0%
1,431
5,907
2,598
47,005
47,005
12.0%
1,327
6,967
1,851
55,151
55,151
12.0%
1,330
7,949
1,869
64,101
64,101
12.0%
1,374
9,066
2,036
74,771
74,771
12.0%
1,178
10,151
2,546
(82)
(37)
(119)
750
23,188
750
750
30.9
26.7
15.8%
16.1
2.4
(0.5%)
3.2%
100.0%
13.3
2.2
65
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Al Khaliji Bank
Low quality of earnings
 Impacted by normalization of capital gains
 NIM under sharp pressure leading to slower growth in earnings
 Weakest liquidity in the sector, with negative cash position which
could further hurt NIM
Medium to low return bank: Al Khaliji has been generating a slightly
below sector average return with an adjusted RORWA of 2.3% as of FY
11A. It is the least cost efficient bank amongst it Qatari peers with C/I
ratio of 41.4% in FY 11A. We saw compression in NIM by 53bps in FY
11A to 2.70% due to a decline in asset yield offsetting the
improvement in funding costs. We expect RORWA to come down, as
the sharp NIM pressure in FY11 is unlikely to be reversed, while capital
gains should sharply fall vs. FY11, while C/I should remain higher than
peers for the foreseeable future.
Earnings growing at slower pace than peers: the main headwind is
lower capital gains. Capital gains comprised 35% of earnings in FY11,
and we expect this to come down by 93%. Despite strong loan and
deposit growth (both expected to grow at 20% CAGR), net income
growth should remain only 3% over our forecasted period.
Solid credit quality: Our asset quality screen suggests cumulative
losses of just 333bps over the next 5 years, or 67bps per year. Al Khaliji
asset quality has significantly improved in FY 11A after its NPL ratio
tightened to 0.5% (against 1.4% in FY 10A) and provision coverage
improved from 161% to a staggering 297%.
Strong capital base: Al Khaliji has one of the highest capital base
amongst Qatari banks with CET1 of 21.8% in FY 11A. We expect Tier 1
to come down to 17.1% in FY 12e due to high dividend payout (76% in
FY 11A) and strong loan growth. We expect provisioning to remain
adequate over our forecasted period and NPL to stand within a range
of 1.8%-2.7%.
SELL
QAR 14.1
Banks / QATAR
Bloomberg code
Market index
KCBK QD
14.1
Upside (%)
Market data
-16.9
17/05/2012
Last closing price
52 Week range
Market cap (QAR mn)
Market cap (USD mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
17.0
16.0-18.3
6,120
1,681
2.2
0.6
2011
940
2012e
890
2013e
1,023
2014e
1,170
551
455
552
651
1.35
12.6
15.01
14.22
1.1
1.2
1.00
5.9
2.1
2.3
8.9
93.3
21
1.01
16.8
14.99
14.21
1.1
1.2
1.00
5.9
1.2
1.2
6.6
93.0
29
1.17
14.5
15.14
14.35
1.1
1.2
1.00
5.9
1.2
1.3
7.6
92.8
32
1.29
13.2
15.39
14.60
1.1
1.2
1.00
5.9
1.2
1.2
8.2
92.5
36
16.3
17.0
15.4
13.8
22.0
23
0.5
296.5
17.0
18
0.9
202.1
15.4
16
1.3
164.9
13.8
15
1.7
150.2
Tight liquidity with negative cash position We compute Basel III NSFR
of 67% in FY 11A (the lowest amongst Qatari banks) and a decent LCR
of 159%. Like QIB, Al Khaliji has a negative cash position and we thus
do not see much room for it to buy T-bills which could further hurt its
NIM. We see continued pressure on liquidity after the yearly increase
in L/D from 85% to 93% in FY 11D. Al Khaliji may have to reduce its
investments or raise deposits or wholesale debt to address its weak
liquidity.
Price Performance
Full valuation: Al Khaliji is currently trading at P/E13e of 14.5x and a
low P/tNAV12e of 1.2x fully warranted by its low RORWA of 1.2% and
very weak liquidity. Our TP of QAR 14 provides a 17% downside and
we initiate on Al Khaliji with a Sell recommendation.
KCBK QD
110
104
98
92
86
80
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Al Khaliji Bank
Year-end
Profitability
3%
2.32%
2.28%
2%
2.05%
1.24%
1.29%
0.28%
1.59%
1.73%
0.37%
1.25%
2.65%
1%
0.24%
0%
-0.39%
-1%
FY10
FY11
FY12e
PPP/RWA
1.80%
0.49%
FY13e
FY14e
Cost of risk/RWA
1.28%
1.85%
0.50%
FY15e
RORWA
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2010
2011
2012e
2013e
2014e
2015e
3.23
2.70
2.40
2.44
2.42
2.40
Cost/Income (%)
51.7
41.4
48.9
46.0
44.4
42.8
72.6
62.5
75.1
75.9
76.5
77.1
13.3
12.8
15.2
14.8
14.5
14.2
12.5
18.1
2.1
1.9
1.9
1.9
RoAE (%)
8.2
8.9
6.6
7.6
8.2
9.4
Pre Prov.ROE (%)
6.9
9.6
7.7
9.3
10.7
12.2
RoAA (%)
2.3
2.1
1.2
1.2
1.2
1.2
Revenue / RWA (%)
4.26
4.52
3.12
3.21
3.23
3.24
Costs / RWA (%)
2.20
1.87
1.52
1.48
1.43
1.38
PPP / RWA (%)
2.05
2.65
1.59
1.73
1.80
1.85
3.23%
2.70%
FY10
FY11
2.44%
2.42%
2.40%
FY12e
FY13e
FY14e
Net interest margin
FY15e
2.40%
(0.39)
0.24
0.28
0.37
0.49
0.50
RoRWA (%)
2.32
2.28
1.24
1.29
1.25
1.28
2.32
2.28
1.24
1.29
1.25
1.28
Year-end
2010
2011
2012e
2013e
2014e
2015e
(0.9)
0.4
0.5
0.6
0.7
0.7
1.4
0.5
0.9
1.3
1.7
2.1
161.1
296.5
202.1
164.9
150.2
136.1
2.2
1.6
1.8
2.1
2.4
2.7
(19.1)
6.9
14.3
17.1
21.7
20.7
Asset Quality
Credit Quality
2.5%
NPL/Gross Loans (%)
200%
2.0%
150%
1.5%
100%
1.0%
50%
0.5%
250%
0%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
23.3%
26%
22%
25.5%
18.0%
22.0%
18%
14%
17.0%
16.4%
14.8%
15.4%
13.8%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
13.4%
12.5%
FY15e
Growth
56%
43%
60%
40%
20%
20%
20%
0%
20%
20%
20%
20%
20%
20%
-8%
-15%
-20%
FY10
FY11
FY12e
Loan growth
85.3
93.3
93.0
92.8
92.5
92.2
(4.2)
(17.9)
(13.8)
(12.6)
(13.3)
(13.8)
63.1
56.2
58.0
58.3
58.9
59.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
17.3
16.3
17.0
15.4
13.8
12.5
Tier 1 ratio (%)
25.5
22.0
17.0
15.4
13.8
12.5
27.0
23.3
18.0
16.4
14.8
13.4
28.0
20.0
17.7
15.4
13.5
12.0
RWA / assets (%)
95.4
77.0
93.6
90.1
88.2
86.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
Growth
Asset growth (%)
FY13e
FY14e
FY15e
Deposit growth
6.9
44.1
13.0
16.0
16.0
16.0
Net loan growth (%)
(15.5)
55.9
19.6
19.6
19.5
19.6
Deposit growth (%)
(8.0)
42.6
20.0
19.9
19.9
20.0
153.4
14.3
(25.3)
16.0
9.6
17.5
Al Khaliji Bank
67
May 23 2012
Abacus
Al Khaliji Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,504
Company Profile
Interest income
873
806
974
1,116
1,296
Interest expense
321
219
307
339
400
473
Founded in 2007, Al Khaliji Commercial Bank
is one of the smaller commercial banks in
Qatar currently maintaining only 3% in loans
and deposits market share within the Qatari
banking sector. The bank offers full range of
services mainly focused on the corporate
sector. It operates in 7 branches across Qatar,
France and the UAE supported by 22 ATMs
throughout Qatar and employs 374 staff as a
group. Qatar Diar Real Estate Company is the
largest shareholder with 17% stake followed
by Qatar Investment Authority who owns a
10% stake.
Net interest income
552
587
668
777
896
1,031
Fee income
189
101
120
135
151
169
Net trading income
93
164
11
12
13
15
14
68
76
84
92
102
760
940
890
1,023
1,170
1,338
393
389
435
471
519
572
367
551
455
552
651
766
Net provisions
(70)
38
65
94
141
159
—
13
16
24
35
49
437
500
374
434
475
558
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
Tier 1 Coupon
6%
13%
—
—
—
—
—
—
437
500
374
434
475
558
11
13
10
11
12
15
427
487
364
422
463
544
—
—
—
—
—
—
11,413
12,175
9,098
10,556
11,567
13,593
415
475
355
412
451
530
Diluted EPS
1.15
1.32
0.99
1.14
1.25
1.47
DPS
1.00
1.00
1.00
1.00
1.00
1.00
BVPS
14.60
15.01
14.99
15.14
15.39
15.86
Tangible BVPS
13.66
14.22
14.21
14.35
14.60
15.07
Year-end
2010
2011
2012e
2013e
2014e
2015e
7,418
11,499
13,786
16,537
19,836
23,794
162
185
250
344
485
644
7,257
11,314
13,536
16,193
19,351
23,150
1,387
860
1,620
2,137
1,953
1,606
Due from banks
2,322
3,118
3,356
3,893
4,516
5,239
Investment, net
7,083
11,029
11,141
12,215
14,170
16,437
199
Public
Corporate
Retail
81%
1% 2%
Qatar
Other GCC
33%
Europe
64%
116
96
118
143
170
Other assets
572
587
741
814
899
998
Total assets
18,737
27,003
30,513
35,395
41,059
47,628
Customer deposits
8,505
12,130
14,556
17,451
20,919
25,103
Due to banks
4,492
8,799
9,189
10,480
11,917
13,440
Debt
121
117
617
1,117
1,617
2,117
Other liabilities
364
554
753
898
1,066
1,258
Total liabilities
13,482
21,600
25,116
29,946
35,519
41,918
5,255
5,402
5,397
5,449
5,540
5,710
18
21
29
32
36
41
17,095
21,798
27,840
31,878
37,019
42,984
Total Equity
Others
Al Khaliji Bank
Fixed assets
12,813
17,082
22,705
26,705
31,751
37,557
4,919
5,119
5,114
5,166
5,257
5,427
4,564
4,568
4,846
4,897
4,989
5,159
Tier 1 capital
4,564
4,568
4,846
4,897
4,989
5,159
Loubna El Hassan
+97145071744
68
May 23 2012
Al Khaliji Bank Valuation (QARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Al Khaliji Bank
2010
2011
2012e
2013e
2014e
2015e
427
11
68
5.0%
2.5%
347
3,157
11.0%
10.5%
331
15
---
487
12
68
5.0%
2.5%
407
3,371
12.1%
10.5%
354
53
---
364
9
65
5.0%
2.5%
290
3,426
8.5%
10.5%
360
(70)
---
422
11
48
5.0%
2.5%
364
3,827
9.5%
10.5%
402
(38)
0.95
(36)
463
12
27
5.0%
2.5%
424
4,348
9.8%
10.5%
457
(32)
0.86
(28)
544
14
5
5.0%
2.5%
525
4,961
10.6%
10.5%
521
4
0.78
3
544
14
5
5.0%
2.5%
525
4,961
10.6%
10.5%
521
4
0.78
3
(60)
(1.2%)
42
3,426
3,408
0.8%
67.4%
67.0%
1,328
26.1%
3.0%
54
5,255
(336)
5,402
(283)
5,397
(283)
5,449
(283)
5,540
(283)
5,710
(283)
(360)
4,559
(360)
4,759
(360)
4,754
(360)
4,806
(360)
4,897
(360)
5,067
17,868
26,308
12.0%
-3,157
1,402
20,805
28,090
12.0%
-3,371
1,388
28,552
28,552
12.0%
-3,426
1,328
31,889
31,889
12.0%
-3,827
979
36,230
36,230
12.0%
-4,348
549
41,342
41,342
12.0%
-4,961
106
(9)
(9)
360
5,087
360
360
14.1
17.0
(16.9%)
(0.2%)
7.1%
100.0%
69
14.3
1.0
12.4
1.0
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Qatar International Islamic Bank
Strongest capital base; ample cash
 Strongest liquidity with ample cash to invest in higher CB yielding
T-Bills and CB paper
 Strongest capital base and highest payout amongst Qatari peers
 Continued pressure on NIM due to higher funding costs
BUY
QAR 60.5
Banks / QATAR
Bloomberg code
Market index
QIIK QD
60.5
Medium to high return bank: QIIB has been generating a decent and
sustainable return with an RORWA of 3.9% as of FY 11A due to its
relatively low associated risk weighted assets (RWAs are 71% of total
assets) and its low cost structure (most cost efficient after QNB and
MARK with C/I of 22.4%). QIIB has an attractive NIM of 3.17% relative
to peers although continued pressure was exerted on NIM over the
past 3 years due to higher pressure on funding costs and drop in asset
yields. We expect this trend to continue.
Upside (%)
Earnings CAGR of 7%: We forecast net income to grow at an 7% CAGR
over our forecasted period. We expect our FY 11A-15e CAGR to stand
at 20% for loans and 11% for deposits, as it should still benefit from
QCB Islamic ruling – although MARK is pretty much taking the lion's
share of the financing flowing in from conventional banks.
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
losses of just 395bps over the next 5 years, or 79bps per year, slightly
ahead of peers due to high real estate exposure. The improvement in
asset quality was remarkable in FY 11 with NPL declining to 1.8% from
3.9% in FY 10A and provision coverage improving to 84% from 31%.
We expect provisioning to remain adequate over our forecasted
period and NPL to gradually increase with lending growth within the
range of 2%-3%.
Strongest capital base: QIIB has the strongest capital base in Qatar
with CET1 of 22.6% in FY 11A. We expect Tier 1 to come down to
21.4% in FY 12e due to high pay-out and loan growth. Note that
although QIIB dividend payout went down to 83% in FY 11A (from 95%
in FY 10A), it is still the most generous amongst peers. We expect the
payout ratio to remain at around 80% going forward.
Strongest liquidity We compute Basel III NSFR of 138% in FY 11A (the
highest after QIIB) and a very strong LCR of 966%. QIIB is extremely
liquid with L/D ratio improving to 59% in FY 11A from 65% in FY 10A.
Given its highest net cash position of 35%, the highest amongst Qatari
banks, the bank has a lot of free cash to invest in higher yielding Tbills.
Market data
17/05/2012
Last closing price
52 Week range
Market cap (QARmn)
Market cap (USDmn)
Average daily value (QARmn)
50.0
45.0-56.5
7,561
2,076
5.0
1.4
2011
869
2012e
988
2013e
1,083
2014e
1,167
674
778
846
898
4.31
11.6
32.32
32.32
1.5
1.5
3.50
7.0
3.1
3.9
14.6
58.5
17
4.79
10.4
33.49
33.49
1.5
1.5
3.74
7.5
2.8
3.7
14.2
63.4
19
5.04
9.9
34.66
34.66
1.4
1.4
3.93
7.9
2.6
3.4
14.4
64.2
22
5.22
9.6
35.83
35.83
1.4
1.4
4.07
8.2
2.4
3.0
14.4
64.7
25
22.6
21.4
19.3
17.0
24.3
25
1.8
84.3
22.5
24
2.0
81.4
20.1
21
2.4
83.0
17.5
19
2.9
80.6
Price Performance
132
QIIK QD
124
116
108
100
92
84
May/11
Average valuation: QIIB is trading at P/E13e of 9.9x and P/tNAV12e of
1.5x which does not at all reflect QIIB's strong capital base (allowing
for high payout without financing via capital hike like Doha and CBQ),
its strong liquidity position and high return (RORWA of 4.0% and ROE
of 14% for FY 12e). Our TP of QAR 60.5 offers a 21% upside thus we
initiate with a 'Buy' recommendation.
21.2
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
5%
4%
2010
2011
2012e
2013e
2014e
2015e
3.63
3.17
2.94
2.89
2.82
2.76
4.20%
3.86%
3.72%
3.43%
3.05%
Cost/Income (%)
19.1
22.4
21.3
21.9
23.0
23.3
3.37%
76.3
69.6
68.0
68.8
71.1
72.5
0.65%
12.8
8.1
8.2
8.6
9.4
9.9
9.6
21.5
23.0
21.7
18.6
16.7
RoAE (%)
14.3
14.6
14.2
14.4
14.4
15.0
Pre Prov.ROE (%)
14.7
15.1
15.3
16.5
17.0
18.4
3.2
3.1
2.8
2.6
2.4
2.2
Revenue / RWA (%)
5.64
5.27
5.20
5.00
4.62
4.39
4.0%
Costs / RWA (%)
1.08
1.18
1.11
1.10
1.06
1.02
3.5%
PPP / RWA (%)
4.56
4.09
4.10
3.90
3.55
3.37
0.44
0.13
0.28
0.49
0.55
0.65
RoRWA (%)
4.20
3.86
3.72
3.43
3.05
2.79
3.45
3.02
2.95
2.72
2.42
2.22
4.56%
3%
4.10%
4.09%
3.90%
3.55%
2%
1%
0.44%
0.13%
0.28%
0.49%
0.55%
2.79%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.63%
3.0%
3.17%
2.94%
2.5%
2.89%
2.82%
2.76%
FY12e
FY13e
FY14e
Net interest margin
FY15e
2.0%
FY10
FY11
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.1
0.2
0.4
0.7
0.7
0.8
4.0%
NPL/Gross Loans (%)
3.9
1.8
2.0
2.4
2.9
3.4
3.0%
30.6
84.3
81.4
83.0
80.6
79.8
2.0%
1.2
1.5
1.7
2.1
2.5
3.0
1.0%
2.7
2.9
6.9
12.5
15.5
19.2
Asset Quality
Credit Quality
84%
82%
80%
78%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
65.4
58.5
63.4
64.2
64.7
65.1
33.0
28.5
27.2
27.4
28.2
28.5
97.7
98.0
91.8
93.9
93.9
93.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
21.4
22.6
21.4
19.3
17.0
14.8
Tier 1 ratio (%)
23.2
24.3
22.5
20.1
17.5
15.2
24.0
25.3
23.6
21.3
18.8
16.5
21.0
20.9
19.2
17.5
15.6
13.9
RWA / assets (%)
71.3
70.7
72.0
72.3
72.7
73.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
24.0%
25.3%
23.6%
21.3%
22%
23.2%
24.3%
18%
18.8%
16.5%
22.5%
20.1%
17.5%
14%
15.2%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
40%
29%
21%
20%
15%
20%
20%
17%
19%
1%
0%
FY10
19%
19%
19%
8%
FY11
FY12e
Loan growth
Growth
Asset growth (%)
FY13e
FY14e
FY15e
Deposit growth
17.1
28.5
13.0
13.5
16.0
17.0
Net loan growth (%)
1.2
15.4
17.3
19.9
19.5
19.4
Deposit growth (%)
21.5
28.9
8.3
18.5
18.6
18.7
6.6
16.9
11.0
5.2
3.7
7.5
71
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company profile
Interest income
888
870
961
1,078
1,221
1,410
Interest expense
329
265
290
333
391
466
Qatar International Islamic Bank, founded in 1990, has
a 3% market share in Loans and 4% market share in
deposits within the Qatari Banking sector. The bank
provides a full range of banking services including
commercial banking, investment banking and private
equity, all in accordance with Islamic Shari'a. It has 15
local branches and 61 ATMs and employs 61 staff in
Qatar. It owns stakes in several associates across
Qatar, Syria and the UK. The Qatar Investment
Authority is the largest shareholder with a 20% stake.
Net interest income
558
605
672
746
830
944
Fee income
94
70
81
94
109
129
Net trading income
61
173
212
217
197
194
18
21
24
27
30
35
731
869
988
1,083
1,167
1,303
140
195
210
238
269
304
591
674
778
846
898
999
Net provisions
16
19
53
106
139
192
41
2
—
—
—
—
534
653
724
740
759
807
Operating profit
Associates
Pre-tax profit
Taxation
5%
Group Net profit
32%
25
—
—
22
31
43
559
653
725
762
790
850
—
—
—
—
—
—
559
653
725
762
790
850
Minorities
—
—
—
—
—
—
Public
Tier 1 Coupon
14
16
18
19
20
21
Corporate
545
637
707
743
770
829
Diluted EPS
3.93
4.21
4.67
4.91
5.09
5.47
Retail
63%
DPS
3.75
3.50
3.74
3.93
4.07
4.38
BVPS
27.51
32.32
33.49
34.66
35.83
37.23
Tangible BVPS
27.51
32.32
33.49
34.66
35.83
37.23
Year-end
2010
2011
2012e
2013e
2014e
2015e
9,288
10,748
12,637
15,222
18,272
21,928
110
159
212
318
457
649
9,178
10,589
12,425
14,904
17,815
21,279
0%
Qatar
Other GCC
955
935
2,088
2,100
1,947
1,979
Due from banks
5,148
5,734
5,543
5,692
6,603
7,725
Investment, net
2,441
5,500
5,870
6,737
7,792
8,997
Fixed assets
216
186
204
224
247
272
Other assets
241
414
264
300
348
407
Total assets
18,179
23,358
26,394
29,957
34,750
40,658
Customer deposits
14,034
18,091
19,585
23,214
27,537
32,690
100
16
447
(403)
(1,253)
(1,888)
3,000
Due to banks
100%
Debt
—
—
500
1,000
2,000
Other liabilities
228
358
792
899
1,043
1,220
Total liabilities
14,362
18,464
21,324
24,709
29,327
35,022
3,817
4,893
5,070
5,248
5,424
5,636
13
17
19
22
25
30
15,399
19,062
22,816
25,809
29,458
34,228
Total Equity
12,855
16,120
19,319
22,171
26,047
31,043
3,817
4,893
5,070
5,248
5,424
5,636
2,943
3,945
4,068
4,180
4,290
4,404
Tier 1 capital
3,002
3,923
4,011
4,115
4,220
4,323
Loubna El Hassan
+97145071744
72
May 23 2012
Qatar International Islamic Bank Valuation (QARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
Perp.
559
14
69
5.0%
2.5%
476
1,877
25.3%
10.7%
201
275
---
653
16
93
5.0%
2.5%
544
2,464
22.1%
10.7%
264
280
---
725
18
89
5.0%
2.5%
618
2,675
23.1%
10.7%
286
331
---
762
19
78
5.0%
2.5%
665
3,050
21.8%
10.7%
326
339
0.95
322
790
20
61
5.0%
2.5%
709
3,555
20.0%
10.7%
380
329
0.86
283
850
21
39
5.0%
2.5%
790
4,171
18.9%
10.7%
446
343
0.78
266
850
21
39
5.0%
2.5%
790
4,171
18.9%
10.7%
446
343
0.78
266
Subtotal
% of total
871
9.5%
4,095
2,675
7,641
44.7%
29.2%
83.4%
1,830
20.0%
4%
5,280
3,817
--
4,893
--
5,070
--
5,248
--
5,424
--
5,636
--
(520)
3,297
(530)
4,363
(565)
4,505
(595)
4,653
(616)
4,808
(663)
4,973
12,962 16,502 18,992 21,668 25,278 29,678
13,740 17,492 18,992 21,668 25,278 29,678
12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
228
365
396
449
521
610
1,877 2,464 2,675 3,050 3,555 4,171
1,420 1,899 1,830 1,604 1,253
802
(788)
(83)
(871)
565
9,165
151
151
60.5
50.0
21.2%
13.0
1.8
(9.5%)
6.2%
100.0%
12.3
1.7
73
Initiation Report
May 23
2012
+97145071744
Credit Agricole Egypt
Take-over target



High dividends are depleting CAE’s capital base.
CAE is facing a choice: cut DPS, cut growth, raise capital
or seek a new strategic owner.
CASA may be willing to sell considering its own tight
capital base.
Contraction in earnings expected to shift back: We believe CAE will be
able to overcome the 31% decrease in net earnings and increase EPS
vs. FY 11A. The bank’s profits were hit by the 117bps (vs. 75bps for
CIB) loan loss charge offs along with an increase in cost/income ratio,
but partially offset by increasing margins lifted by higher yields on Tbills. We forecast a 21% FY11-15 CAGR in net profits, helped by double
digit loan growth, wider margins, an improving efficiency and a small
reduction in the cost of risk.
We expect loan loss provisions to come down vs. FY 11A: We forecast
additions to loan loss reserves to be 109bps vs. 121bps in FY 11A. NPLs
are very well covered at 164%, which supports our view of a further
normalization.
Already strong liquidity to further improve: With NSFR at 127%, LCR
at 250% and L/D forecasted at 57%, we see the bank has significant
capacity to take on more leverage (T bills), especially that it is
positioned to benefit the most from the recent CBE reduction on the
required reserve ratio on LCY deposits (59% of total for CAE) to 12%
from 14%. The bank substantially decreased its investments in T-bills
(by 43% y-o-y) in an attempt to manage interest rate gap positions but
at the expense of higher margins. Cash balances are 18% of assets.
Significant drop in capital: We expect CET1 to further decrease to c.
10.6% from current 11.6% level, due to the banks’ very high cash payout. We think the bank faces a dilemma; cut DPS, raise capital, curtail
growth or find a new strategic partner. We think a lot of regional
banks would be extremely interested in buying CAE (e.g. QNB, NBK,
FGB) from CASA, which is tightly capitalized due to Greek losses and
Basel 3 impact given its double counting of capital and circular capital
structure.
BUY
EGP 12.0
Banks / EGYPT
Bloomberg code
Market index
CIEB EY
EGX
12.0
Upside (%)
Market data
32.2
17/05/2012
Last closing price
52 Week range
Market cap (EGPmn)
Market cap (USDmn)
Average daily value (EGPmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
9.1
7.7-12.0
2,603
430
0.2
0.0
2011
1,239
2012e
1,325
2013e
1,455
2014e
1,660
597
645
721
856
1.07
8.5
6.98
6.76
1.3
1.3
0.85
9.4
1.2
1.9
14.5
56.5
15
1.34
6.8
7.46
7.25
1.2
1.3
0.94
10.3
1.4
2.0
18.6
56.7
17
1.54
5.9
8.07
7.85
1.1
1.2
1.08
11.9
1.5
2.0
19.8
59.6
20
1.86
4.9
8.85
8.64
1.0
1.1
1.16
12.7
1.5
2.2
22.0
60.5
23
11.6
10.6
9.9
9.6
11.6
13
1.9
163.9
10.2
11
3.0
114.1
9.5
11
2.9
119.4
8.9
10
2.8
125.3
CIEB EY
EGX
Price Performance
113
102
91
80
69
58
Potential recovery priced in: Our valuation shows over 30% upside
and we see even further upside in a take-over scenario. The stock
currently trades at a P/tNAV12e of 1.25x and a P/E13e of 5.9x with an
FY 13e ROE of 19.8%.
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.32
3.54
3.74
3.62
3.54
3.52
Cost/Income (%)
47.9
51.8
51.3
50.4
48.4
45.8
67.6
70.2
73.4
73.4
73.1
73.0
18.3
18.1
19.2
19.7
19.6
19.5
5.6
10.9
6.5
6.0
6.4
6.6
RoAE (%)
20.6
14.5
18.6
19.8
22.0
24.2
Pre Prov.ROE (%)
22.3
21.1
25.6
26.4
28.7
31.2
1.9
1.2
1.4
1.5
1.5
1.6
Revenue / RWA (%)
8.55
8.47
7.61
7.32
7.30
7.26
3.8%
Costs / RWA (%)
4.10
4.38
3.91
3.69
3.53
3.33
3.6%
PPP / RWA (%)
4.46
4.08
3.71
3.63
3.76
3.93
0.29
0.95
0.84
0.74
0.71
0.72
RoRWA (%)
3.04
1.90
2.01
2.02
2.16
2.28
3.04
1.90
2.01
2.02
2.16
2.28
Profitability
5%
4%
3.04%
1.90%
2.01%
4.46%
3%
4.08%
3.71%
2.02%
2.16%
2.28%
3.76%
3.63%
3.93%
2%
1%
0.84%
0.95%
0.29%
0.74%
0.71%
0.72%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.74%
3.4%
3.2%
3.62%
3.54%
3.54%
3.52%
3.32%
3.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.4
1.2
1.1
1.0
0.9
0.9
3.1%
NPL/Gross Loans (%)
2.6
1.9
3.0
2.9
2.8
2.8
3.0%
107.6
163.9
114.1
119.4
125.3
131.2
2.9%
2.5
2.6
2.8
3.0
3.0
3.0
6.5
23.4
22.5
20.4
18.9
18.2
Asset Quality
Credit Quality
140%
130%
120%
2.8%
110%
2.7%
100%
2.6%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
51.2
56.5
56.7
59.6
60.5
60.4
14.9
17.7
17.1
12.4
9.8
9.3
91.2
85.8
86.6
82.0
80.4
80.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
13.5
11.6
10.6
9.9
9.6
9.2
Tier 1 ratio (%)
13.3
11.6
10.2
9.5
8.9
8.4
14.6
12.8
11.4
10.7
10.1
9.7
Capital Ratios
15%
14.6%
12.8%
11.4%
10.7%
10.1%
13.3%
10%
9.7%
11.6%
10.2%
8.9%
9.5%
8.4%
5%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
40%
30%
30%
8%
6%
-4%
0%
-10%
FY10
16%
16%
20%
10%
FY11
16%
12%
11%
FY12e
Loan growth
10%
FY13e
14%
FY14e
16%
FY15e
Deposit growth
8.8
7.8
7.6
7.1
6.7
6.5
RWA / assets (%)
52.5
57.0
61.6
60.8
59.9
60.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
11.0
1.2
10.0
16.0
16.0
16.0
Net loan growth (%)
30.1
6.3
11.7
16.0
16.0
15.9
Deposit growth (%)
8.4
(3.7)
11.3
10.4
14.2
16.0
12.8
(31.1)
25.5
15.3
22.3
22.4
Growth
75
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (EGPmn)
Interest income
Company Profile
th
Established in 2006, Credit Agricole Egypt is the 4
largest bank in Egypt with EGP 27.4bn in total
assets with 2% market share in loans and deposits.
The bank operates a network of 72 branches
employing over 1,997 employees. The bank
provides retail, private and corporate banking
services with a focus on corporate lending that
comprises 76% of total loan book. CAE is majorly
held by parents company Groupe Credit Agricole
who owns 47% of the bank with El Mansour and El
Maghraby Investment and Development Company
owning a 17.5% stake.
24%
Retail
Corporate
1,630
1,842
2,000
2,241
2,587
3,005
Interest expense
860
973
1,028
1,173
1,373
1,604
Net interest income
770
869
972
1,068
1,214
1,402
Fee income
208
225
254
287
326
375
55
126
79
78
95
116
106
19
20
22
25
28
1,138
1,239
1,325
1,455
1,660
1,920
545
641
680
734
804
880
Net trading income
593
597
645
721
856
1,040
Net provisions
38
140
145
147
161
189
—
—
—
—
—
—
555
458
500
574
695
850
Operating profit
Associates
—
—
—
—
—
—
Pre-tax profit
555
458
500
574
695
850
Taxation
108
151
115
132
160
196
Group Net profit
447
307
385
442
535
655
Minorities
—
—
—
—
—
—
Tier 1 Coupon
42
28
36
40
43
52
404
278
349
402
492
602
Diluted EPS
1.41
0.97
1.22
1.40
1.71
2.10
DPS
1.20
0.85
0.94
1.08
1.16
1.37
BVPS
7.75
6.98
7.46
8.07
8.85
9.98
Tangible BVPS
7.54
6.76
7.25
7.85
8.64
9.76
2010
2011
2012e
2013e
2014e
2015e
11,097
11,849
13,267
15,392
17,858
20,717
310
377
454
533
626
748
10,788
11,472
12,812
14,859
17,231
19,969
7,597
5,254
6,001
6,856
7,823
8,930
Due from banks
3,077
5,003
5,645
6,548
7,596
8,812
Investment, net
2,949
2,940
2,823
3,438
4,178
5,067
Fixed assets
283
268
318
324
330
337
Other assets
596
661
565
655
760
881
Total assets
25,352
25,660
28,226
32,742
37,981
44,058
Customer deposits
21,081
20,304
22,602
24,949
28,482
33,039
851
2,297
2,589
4,430
6,015
7,050
41
33
—
—
—
—
Other liabilities
1,018
888
730
852
709
824
Total liabilities
23,127
23,657
26,084
30,427
35,440
41,194
2,225
2,003
2,142
2,315
2,540
2,864
13
15
17
20
23
26
23,212
24,540
25,975
29,491
34,265
39,803
76%
Year-end
Balance sheet (EGPmn)
Egypt
100%
Due to banks
Debt
Total Equity
20,806
22,303
23,912
27,285
31,938
37,293
2,163
1,941
2,080
2,253
2,478
2,801
1,828
1,729
1,846
1,979
2,182
2,444
Tier 1 capital
1,768
1,696
1,766
1,886
2,021
2,234
+97145071744
76
May 23 2012
Credit Agricole Egypt valuation (EGPmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
447
42
17
10.4%
20.0%
387
1,628
23.8%
16.8%
273
114
---
307
28
(6)
10.4%
22.0%
285
1,786
15.9%
16.8%
300
(15)
---
385
36
(21)
10.4%
22.0%
370
2,088
17.7%
16.8%
351
20
---
442
40
(35)
10.4%
22.0%
437
2,387
18.3%
16.8%
401
36
0.93
33
535
43
(46)
10.4%
22.0%
538
2,729
19.7%
16.8%
459
79
0.79
63
655
52
(60)
10.4%
22.0%
663
3,173
20.9%
16.8%
533
129
0.68
88
655
52
(60)
10.4%
22.0%
663
3,173
20.9%
16.8%
533
129
0.68
88
184
5.3%
944
2,088
3,215
27.4%
60.7%
93.4%
(263)
(7.6%)
7.5%
1,391
2,225
12
(62)
2,003
12
(62)
2,142
14
(62)
2,315
16
(62)
2,540
19
(62)
2,864
22
(62)
(344)
1,831
(245)
1,707
(269)
1,825
(310)
1,960
(332)
2,166
(393)
2,431
13,309
13,563
12%
-1,628
204
14,632
14,886
12%
-1,786
(79)
17,399
17,399
12%
-2,088
(263)
19,893
19,893
12%
-2,387
(427)
22,745
22,745
12%
-2,729
(564)
26,446
26,446
12%
-3,173
(743)
221
221
269
3,442
287
12.0
9.1
32.2%
9.9
1.65
6.4%
7.8%
100.0%
8.6
1.53
77
Initiation Report
May 23
2012
+97145071744
Commercial International Bank
Strong FY12e ahead
BUY
EGP 35.6
Banks / EGYPT



Solid capital & liquidity position, with high RORWA.
We forecast a 24% FY11-15 net profit CAGR, on a pickup in loan growth, wider NIM & lower LLP.
Very attractive valuation.
Earnings prove decent resilience: We expect CIB to achieve a 24%
FY11-15 CAGR in net profits mainly due the expected substantial hike
in margins from already elevated levels with T-bills forecasted at c.
80% of shareholder’s equity, an upturn in loan demand (in FY 12e
mainly stemming from corporates rebuilding working capital as public
banks focus on T bills and French banks face capital constraints) and
an improvement in cost efficiency.
Strong commercial momentum: We see continued growth prospects
for CIB and expect the remarkable expansion in balance sheet (13% in
FY 11A) to continue in FY 12e boosted by the 10% growth in lending as
the bank benefits from higher corporate demand for financing working
capital while other banks prefer to invest in government bonds.
Prudent risk management protects asset quality: We expect additions
to loan loss reserves to fall slightly vs. FY 11A. We expect NPL to
remain in check at 3.1% and coverage should remain at 117%, one of
the highest among local peers. We are confident in the bank’s
portfolio quality, as little risk is seen in SME, given that all are
supplying to large corporate and in retail books (given that payments
are made through payrolls). Even a devaluation of 10-20% would not
increase NPLs, according to CIB.
A liquid Egyptian bank: We calculate an LCR of 117% and an NSFR of
110%, the bank is very liquid due to its large T-bill investments and
bonds, along with the long-term nature of outstanding term deposits.
Cash balances are 16% of assets.
Again capital amongst the best: Although substantially down from FY
09A levels, the bank’s CET1 buffer remains better than peers
forecasted at 14.2% in FY 12e.
Bloomberg code
Market index
COMI EY
EGX
35.6
Upside (%)
Market data
39.3
17/05/2012
Last closing price
52 Week range
Market cap (EGPmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
25.5
18.5-32.3
15,253
2,521
28.9
4.8
2011
4,032
2012e
4,936
2013e
5,626
2014e
6,541
2,385
3,169
3,638
4,264
2.72
9.4
14.73
14.00
1.7
1.8
1.00
3.9
2.0
2.6
18.7
57.5
55
3.74
6.8
18.13
17.44
1.4
1.5
1.16
4.5
2.4
3.1
22.8
59.7
66
4.29
6.0
20.87
20.22
1.2
1.3
1.12
4.4
2.4
3.1
22.0
62.0
75
5.03
5.1
24.43
23.81
1.0
1.1
1.26
4.9
2.4
3.1
22.2
66.8
89
13.4
14.3
14.6
14.7
12.5
14
2.8
120.6
12.8
14
3.1
116.8
12.9
14
3.1
119.5
12.8
14
3.0
123.0
COMI EY
EGX
Price Performance
111
100
89
78
67
Safe & cheap: Our valuation shows a strong upside of 39%, largely
driven by the bank’s comfortable capital buffer, controlled
provisioning and resilient structure generating decent returns. The
stock trades at attractive multiples with P/tNAV12e of 1.46x, P/E13e
of only 6.0x, which does not reflect whatsoever the bank’s good
growth (as public banks are focused on T bills, French banks are tight
in capital), strong capital and returns.
56
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.38
3.48
3.93
3.84
3.68
3.66
Cost/Income (%)
39.9
40.9
35.8
35.3
34.8
33.7
56.6
66.7
69.6
68.5
66.7
66.8
21.4
20.9
19.0
19.3
19.7
19.8
13.6
5.7
5.2
5.8
6.9
6.7
RoAE (%)
25.9
18.7
22.8
22.0
22.2
22.7
Pre Prov.ROE (%)
26.0
22.4
26.2
25.3
25.5
26.3
2.9
2.0
2.4
2.4
2.4
2.4
Revenue / RWA (%)
8.20
7.28
7.53
7.46
7.35
7.42
4.0%
Costs / RWA (%)
3.28
2.97
2.69
2.63
2.56
2.50
3.8%
PPP / RWA (%)
4.93
4.31
4.83
4.82
4.79
4.92
0.01
0.58
0.50
0.51
0.51
0.55
RoRWA (%)
3.68
2.57
3.08
3.07
3.12
3.18
3.59
2.51
3.01
3.00
3.04
3.11
Profitability
6%
4%
3.68%
2.57%
4.93%
4.31%
3.08%
3.07%
3.12%
4.83%
4.82%
4.79%
2%
0.50%
0.58%
0.01%
0.51%
0.51%
3.18%
4.92%
0.55%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.93%
3.6%
3.84%
3.68%
3.4%
3.2%
3.66%
3.48%
3.38%
3.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.7
Asset Quality
Credit Quality
165%
160%
155%
150%
145%
140%
135%
—
0.8
0.7
0.7
0.7
2.8
2.8
3.1
3.1
3.0
2.9
125.4
120.6
116.8
119.5
123.0
130.6
3.2%
NPL/Gross Loans (%)
3.1%
3.0%
3.6
3.0
3.1
3.1
3.1
3.1
2.9%
0.3
13.4
10.4
10.5
10.6
11.1
2.8%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
55.5
57.5
59.7
62.0
66.8
66.8
15.1
14.8
15.8
12.5
6.0
6.5
94.8
93.1
88.9
84.6
77.7
77.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
17.3
13.4
14.3
14.6
14.7
15.0
Tier 1 ratio (%)
15.7
12.5
12.8
12.9
12.8
12.8
16.9
13.8
14.0
14.1
14.1
14.1
11.4
10.3
11.3
11.1
10.9
10.8
RWA / assets (%)
64.4
64.7
68.5
67.3
66.7
65.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
17.4
13.4
12.0
17.0
19.0
19.0
Net loan growth (%)
28.2
16.7
9.8
16.0
18.0
17.9
Deposit growth (%)
15.9
12.8
5.7
11.5
9.6
18.0
15.9
(20.1)
37.4
14.7
17.2
19.9
Capital Ratios
18%
16.9%
16%
14%
13.8%
14.0%
14.1%
12.5%
12.8%
12.9%
FY11
Tier 1
FY12e
FY13e
14.1%
14.1%
15.7%
12%
12.8%
12.8%
10%
FY10
FY14e
CAR
FY15e
Growth
30%
28%
16%
18%
16%
17%
20%
10%
18%
10%
13%
FY10
Growth
12%
10%
6%
0%
18%
FY11
FY12e
Loan growth
FY13e
FY14e
FY15e
Deposit growth
79
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
4,525
5,471
6,560
7,428
8,618
10,270
Interest expense
2,268
2,781
3,124
3,577
4,253
5,092
Established in 1975, Commercial International Bank
is the largest privately owned bank in Egypt with
EGP 86.5bn in total assets, 9% lending market
share and 7% deposit market share. The bank
operates a network of 110 branches employing
over 4,495 employees and provides commercial
and investment banking services with c90% in
corporate lending. CIB is 62% held by the public
with the bank of New York Mellon and Actis CIB
Mauritius Limited owning 9.5% and 9.2% stakes
respectively.
Net interest income
2,258
2,690
3,435
3,851
4,364
5,178
Fee income
854
843
936
1,085
1,292
1,537
Net trading income
375
167
155
167
198
228
500
332
410
522
687
812
3,987
4,032
4,936
5,626
6,541
7,755
1,592
1,647
1,767
1,987
2,277
2,613
2,395
2,385
3,169
3,638
4,264
5,142
6
321
331
383
453
570
—
—
—
—
—
—
2,388
2,064
2,839
3,255
3,812
4,572
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
11%
Tier 1 Coupon
Retail
Corporate
(4)
(8)
9
11
15
18
2,384
2,056
2,848
3,266
3,827
4,590
362
442
627
719
842
1,010
2,022
1,614
2,221
2,547
2,985
3,580
1
(1)
2
2
3
3
—
—
—
—
—
—
2,021
1,615
2,219
2,545
2,982
3,577
Diluted EPS
3.03
2.40
3.40
3.90
4.67
5.61
DPS
1.00
1.00
1.16
1.12
1.26
1.33
BVPS
14.52
14.73
18.13
20.87
24.43
28.78
Tangible BVPS
13.61
14.00
17.44
20.22
23.81
28.19
Year-end
2010
2011
2012e
2013e
2014e
2015e
36,432
42,523
46,791
54,283
64,067
75,621
1,258
1,457
1,694
1,991
2,364
2,864
35,175
41,065
45,097
52,292
61,703
72,758
89%
Egypt
100%
14,496
16,753
21,479
28,003
35,376
44,554
Due from banks
7,055
8,528
8,622
8,967
9,337
11,111
Investment, net
15,624
16,255
17,360
19,175
22,806
25,543
Fixed assets
708
631
915
1,016
1,121
1,233
Other assets
1,830
1,872
1,916
2,242
2,668
3,174
Total assets
75,425
85,534
95,798
112,084
133,380
158,722
Customer deposits
63,364
71,468
75,562
84,281
92,348
108,971
1,322
3,341
6,388
12,293
23,368
29,463
129
99
142
174
206
238
Other liabilities
1,677
1,569
2,500
2,500
2,500
2,500
Total liabilities
66,812
76,748
84,990
99,646
118,820
141,570
8,614
8,786
10,808
12,438
14,560
17,152
49
55
66
75
89
104
66,751
77,353
87,462
100,379
118,703
141,454
Due to banks
Debt
Total Equity
60,008
69,862
78,500
89,420
106,335
127,297
8,030
8,310
10,350
11,998
14,130
16,731
8,486
7,442
9,381
11,028
13,106
15,635
Tier 1 capital
7,613
6,938
8,376
9,699
11,404
13,421
+97145071744
80
May 23 2012
Commercial International Bank valuation (EGPmn)
Year-end
1. DCF
Net profit
Other adjustments (comprehensive income and GW amortization)
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Perpetual growth rate (nominal GDP)
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
2,021
(36)
133
10.4%
16.0%
1,924
5,969
32.2%
16.6%
988
936
---
1,615
(6)
80
10.4%
21.0%
1,541
6,791
22.7%
16.6%
1,124
417
---
2,219
56
141
10.4%
21.0%
2,021
7,989
25.3%
16.6%
1,322
699
---
2,545
93
180
10.4%
21.0%
2,272
9,192
24.7%
16.6%
1,521
751
0.93
696
2,982
79
213
10.4%
21.0%
2,690
10,850
24.8%
16.6%
1,796
894
0.79
711
3,577
128
270
10.4%
21.0%
3,179
12,732
25.0%
16.6%
2,107
1,072
0.68
731
3,577
128
270
10.4%
21.0%
3,179
12,732
25.0%
16.6%
2,107
1,072
0.68
731
2,137
10.1%
8,076
7,989
18,202
38.3%
37.8%
86.2%
1,722
8.2%
7.5%
11,843
8,614
(537)
8,786
(430)
10,808
(410)
12,438
(390)
14,560
(370)
17,152
(350)
(590)
7,487
(593)
7,763
(688)
9,711
(662)
11,387
(746)
13,444
(787)
16,015
48,599
48,935
0
97
5,969
1,518
55,367
55,703
0
107
6,791
972
65,577
65,577
0
119
7,989
1,722
75,436
75,436
0
140
9,192
2,195
89,027 104,451
89,027 104,451
0
0
166
198
10,850 12,732
2,595
3,283
500
500
2.4%
688
3.3%
21,111 100.0%
593
35.6
25.5
39.3%
10.5
2.04
9.1
1.76
81
Initiation Report
May 23
2012
+97145071744
Housing Development Bank
Risk jeopardizes further expansion



Weak loan & deposit growth not to reverse before FY
13e.
Asset quality the most vulnerable due to its real estate
and retail exposure.
Real estate activities should absorb a large share of
capital going forward.
HDBK to underperform its long-term plans due to weak economic
environment: We expect HDBK to continue to show low loan growth,
well below its initial target of 20% expansion, as it continues to
monitor its asset quality. As a consequence, we don’t expect its
cost/income ratio to improve as quickly as budgeted. Project deliveries
on the other hand should continue to be lumpy activity.
Asset quality should be concerning: We expect provisioning to remain
flat but high in FY 12e at 100bps of total loans due to its reliance on
risky project finance and SME lending. But we believe the bank will
shift its revenue reliance more on retail as it grows.
Meeting liquidity requirements: HDBK has the highest loan/deposit
ratio at 86%. We calculate NSFR at 127% well above the 100%
threshold, and its short-term coverage ratio is very solid due to its high
cash reserves and limited reliance on short-term deposits as the
maturity of most of its funding exceeds 1 year. The bank is also
positioned to benefit from the CBE’s recent cut on RRR given that 98%
of its deposits are in LCY.
Among the least capitalized in Egypt: We estimate CET1 at c10%, the
lowest among peers making it more challenging for the bank to meet
capital requirement. This includes a 100% risk-weighting for the real
estate activities. These activities have not been attracting riskweighted assets, which has resulted in inflated reported capital ratios.
Low valuation but with high risk: We see a slight upside in HDB’s
valuation. The stock currently trades at a P/E13e of 9.4x, a P/TNAV12e
of 0.55x, with RORWA forecasted at 0.7% (lowest among coverage)
and RoE at 6%, which already reflects HDB’s high risk profile (high
execution risk in project deliveries), weak asset quality, poor
disclosure, and a significant slowdown of its aggressive retail strategy.
HOLD
EGP 13.0
Banks / EGYPT
Bloomberg code
Market index
HDBK EY
EGX
13.0
Upside (%)
Market data
9.6
17/05/2012
Last closing price
52 Week range
Market cap (EGPmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
11.9
10.5-20.0
1,364
225
0.7
0.1
2011
681
2012e
698
2013e
817
2014e
929
246
239
330
413
1.30
6.7
20.65
20.65
0.6
0.6
0.52
4.4
0.7
1.9
6.3
85.9
8
1.26
9.1
21.40
21.40
0.6
0.6
0.50
4.2
0.6
0.7
6.0
85.5
21
1.83
9.4
22.49
22.49
0.5
0.5
0.73
6.2
0.8
0.9
8.3
85.3
23
2.28
6.5
23.86
23.86
0.5
0.5
0.91
7.7
0.9
1.1
9.8
89.5
25
20.8
9.9
9.0
8.7
23.0
24
6.0
91.1
9.2
10
6.0
103.0
8.5
8
5.0
131.2
8.0
8
5.0
139.9
HDBK EY
EGX
Price Performance
110
98
86
74
62
50
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.41
3.37
3.48
3.49
3.47
3.47
Cost/Income (%)
56.3
63.8
65.8
59.6
55.5
50.6
47.3
55.5
62.7
62.2
63.6
63.5
11.2
10.7
11.5
10.9
10.8
10.6
34.1
27.7
19.4
21.2
20.4
21.3
RoAE (%)
10.2
6.3
6.0
8.3
9.8
12.1
Pre Prov.ROE (%)
13.2
8.5
9.0
11.6
13.6
16.1
1.1
0.7
0.6
0.8
0.9
1.0
Revenue / RWA (%)
8.97
8.46
3.38
3.60
3.73
3.91
3.5%
Costs / RWA (%)
5.05
5.40
2.22
2.14
2.07
1.98
3.5%
PPP / RWA (%)
3.92
3.06
1.15
1.45
1.66
1.93
0.75
0.64
0.36
0.37
0.41
0.42
RoRWA (%)
2.56
1.86
0.70
0.92
1.05
1.26
1.62
1.36
0.60
0.79
0.90
1.07
Profitability
5%
4%
3%
2.56%
1.86%
3.92%
3.06%
2%
1%
0.75%
0.70%
0.64%
0.36%
1.15%
0%
FY10
FY11
PPP/RWA
0.92%
0.37%
1.45%
1.05%
0.41%
1.66%
FY12e
FY13e
FY14e
Cost of risk/RWA
1.26%
1.93%
0.42%
FY15e
RORWA
RoAA (%)
NIM
3.48%
3.49%
3.47%
3.47%
3.4%
3.41%
3.4%
3.37%
3.3%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.9
0.7
1.0
1.0
1.1
1.1
8.0%
NPL/Gross Loans (%)
5.6
6.0
6.0
5.0
5.0
5.0
150%
6.0%
97.2
91.1
103.0
131.2
139.9
148.0
100%
4.0%
50%
2.0%
Asset Quality
Credit Quality
200%
0%
4.9
5.4
5.1
5.5
5.9
6.2
19.1
20.9
31.0
25.1
24.5
21.9
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
85.8
85.9
85.5
85.3
89.5
89.2
7.2
8.7
8.8
12.8
14.7
14.3
43.1
39.4
37.7
36.7
34.6
34.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
21.9
20.8
9.9
9.0
8.7
8.4
Tier 1 ratio (%)
22.9
23.0
9.2
8.5
8.0
7.6
24.2
24.2
9.7
8.2
7.7
7.3
15.2
14.1
13.8
13.1
12.6
12.2
RWA / assets (%)
38.9
36.0
83.5
80.5
78.7
77.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
14.1
9.5
11.0
14.0
12.0
12.0
Net loan growth (%)
12.8
1.5
6.3
11.7
11.5
11.5
Deposit growth (%)
14.5
1.3
6.7
12.0
6.2
12.0
(64.9)
(26.1)
(3.5)
45.2
24.7
31.4
Capital Ratios
30%
20%
24.2%
24.2%
22.9%
23.0%
9.7%
8.2%
7.7%
10%
0%
FY10
FY11
Tier 1
9.2%
8.5%
FY12e
FY13e
8.0%
FY14e
CAR
7.3%
7.6%
FY15e
Growth
20%
15%
14%
12%
11%
13%
10%
6%
5%
1%
1%
0%
FY10
12%
12%
12%
Growth
7%
FY11
FY12e
Loan growth
6%
FY13e
FY14e
FY15e
Deposit growth
83
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
934
1,004
1,125
1,285
1,473
1,650
Interest expense
597
627
687
777
883
971
Established in 1979, Housing & Development Bank
operates a network of 59 branches employing over
2,627 employees with EGP 22.3bn in total assets as
of FY 11A, with 1.4% in lending market share and c.
1% in deposit market share. The bank specializes in
local housing projects and provides retail and
corporate banking services with 57% of its loan
book in retail. Major shareholders include New
Urban Communities Authority and Egyptian Awkaf
Organization with 29.8% and 11.4% stakes
respectively.
Net interest income
337
377
438
508
591
679
79
73
80
89
100
113
238
178
126
158
171
204
58
53
54
61
67
74
712
681
698
817
929
1,070
401
434
460
487
516
541
Fee income
Net trading income
311
246
239
330
413
529
Net provisions
59
51
74
83
101
116
—
—
—
—
—
—
Operating profit
251
195
165
247
312
413
Associates
(12)
—
16
16
16
18
Pre-tax profit
239
195
181
263
327
430
Taxation
Group Net profit
53
65
86
210
262
344
—
—
6
—
—
—
—
—
—
—
—
—
203
150
145
210
262
344
Retail
Diluted EPS
1.76
1.30
1.26
1.83
2.28
2.99
Corporate
DPS
1.00
0.52
0.50
0.73
0.91
1.20
BVPS
20.60
20.65
21.40
22.49
23.86
25.65
Tangible BVPS
20.60
20.65
21.40
22.49
23.86
25.65
Year-end
2010
2011
2012e
2013e
2014e
2015e
6,757
6,856
7,339
8,231
9,219
10,325
370
376
454
540
645
764
6,387
6,479
6,885
7,691
8,574
9,562
5,890
Egypt
2,139
3,089
3,705
4,596
5,365
Due from banks
551
1,121
743
988
1,107
1,240
Investment, net
10,135
10,403
11,946
13,278
14,707
16,646
Fixed assets
125
142
130
133
136
138
Other assets
1,042
1,083
1,362
1,553
1,740
1,948
Total assets
20,378
22,317
24,772
28,240
31,629
35,424
7,443
7,540
8,048
9,014
9,576
10,725
1
1
1
1
1
2
2,352
2,262
2,159
2,056
1,953
1,850
Customer deposits
Due to banks
Debt
Other liabilities
7,381
9,284
11,032
13,377
16,018
18,413
Total liabilities
17,281
19,159
21,345
24,552
27,652
31,093
3,097
3,158
3,427
3,688
3,977
4,332
8
8
21
23
25
27
9,863
11,190
12,588
14,566
17,013
19,576
9,175
9,800
10,006
10,640
11,301
12,053
2,369
2,374
2,461
2,587
2,744
2,950
2,020
1,998
2,050
2,054
2,153
2,285
Tier 1 capital
1,817
1,848
1,906
1,928
1,996
2,078
Total Equity
36
145
Tier 1 Coupon
100%
40
156
Minorities
45%
55%
36
203
+97145071744
84
May 23 2012
Housing Development Bank valuation (EGPmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC (after minorities)
Cost of capital
Capital charge (adjusted for 20 pct share minorities)
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
203
-133
10.4%
15.0%
69
1,473
4.7%
16.6%
195
(126)
---
150
-141
10.4%
20.3%
8
1,393
0.6%
16.6%
185
(177)
---
145
-51
10.4%
20.0%
93
2,754
3.4%
16.6%
366
(272)
---
210
-47
10.4%
20.0%
163
3,037
5.4%
16.6%
403
(240)
0.93
(223)
262
-45
10.4%
20.0%
217
3,333
6.5%
16.6%
442
(226)
0.79
(179)
344
-43
10.4%
20.0%
300
3,672
8.2%
16.6%
487
(187)
0.68
(127)
361
-43
10.4%
20.0%
318
3,672
8.7%
16.6%
487
(170)
0.79
(135)
(529)
(35.4%)
(1,483)
2,754
742
(99.3%)
184.3%
49.6%
615
41.1%
7.5%
(1,867)
2,369
728
--
2,374
784
--
2,461
966
--
2,587
1,101
--
2,744
1,234
--
2,950
1,382
--
(115)
2,982
(60)
3,098
(58)
3,369
(84)
3,604
(105)
3,873
(138)
4,194
7,933
9,218
12%
366
1,473
1,510
8,041
9,624
12%
238
1,393
1,705
20,682
20,682
12%
272
2,754
615
22,720
22,720
12%
311
3,037
567
24,878
24,878
12%
348
3,333
540
27,355
27,355
12%
390
3,672
522
80
80
58
1,494
115
13.0
11.9
9.6%
10.3
0.61
5.3%
3.9%
100.0%
7.1
0.58
85
Initiation Report
May 23
2012
+97145071744
National Societe Generale Bank
Another transitional year



We expect virtually flat earnings for FY 12e due to
higher provisions, as NSGB has not bitten the bullet like
its peers.
RORWA second best after CIB.
SocGen may want to cap NSGB’s growth given SG’s tight
capital position and higher risk weighting of T-bills.
Returns to be hit by higher provisioning: NSGB’s FY 11A net profit
growth of 11% was helped by the end of the amortization and
relatively light loan loss charges. While SocGen took EUR 50m for its
MENA country exposures, NSGB only took 40bps for loans. We expect
NSGB to use the full increase in operating profit as additional cushion
to its loan loss reserves. We forecast 10% growth in loans coming
mostly from retail. We also include a 5% hike in the corporate tax rate.
The bank has reduced its sovereign exposure (c. 20%). Despite this
decrease, we expect margins to go up by c. 20bps due to higher yields
on these securities and repricing of loans. Its RORWA remains the
highest among the Egyptian banks under our coverage (after CIB at
3%), helped by its low costs.
Provisioning costs to go up as NSGB did not provide enough in FY
11A: NSGB incurred a loan loss charge of only 40bps, well below CIB
(81bps) and CAE (121bps) and we expect this to go up to at least c.
70bps. NPL is also expected to edge up at 3.5% vs. 3% in FY 11A,
bringing down coverage below 90% from 101% level in FY 11A.
Comfortable on liquidity: With NSFR at 84%, LCR at 135% and L/D
forecasted at 67%, NSGB looks fairly liquid in our view taking into
consideration that it has the largest eligible deposits percentage (c.
68% in LCY) to benefit from the CBE’s latest cut on RRR. Cash balances
stand at 18%.
Capital position reasonable: We forecast a 19% surge in RWA with
CET1 at 14%, the negative impact of Basel II due to operational risk
and loan growth. The underlying Tier-1 is better than reported as the
latter does not include current year’s earnings.
HOLD
EGP 32.8
Banks / EGYPT
Bloomberg code
Market index
NSGB EY
EGX
32.8
Upside (%)
Market data
9.4
17/05/2012
Last closing price
52 Week range
Market cap (EGPmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
30.0
18.4-35.2
12,100
2,000
3.1
0.5
2011
3,096
2012e
3,505
2013e
3,911
2014e
4,443
1,918
2,231
2,521
2,913
3.69
8.1
18.30
18.06
1.6
1.7
1.25
4.2
2.4
3.2
21.3
67.9
43
3.75
8.0
20.73
20.50
1.4
1.5
1.31
4.4
2.3
2.7
19.2
67.5
51
4.20
7.1
23.46
23.23
1.3
1.3
1.47
4.9
2.3
2.7
19.0
70.5
58
4.85
6.2
26.62
26.38
1.1
1.1
1.70
5.7
2.3
2.7
19.4
67.7
67
13.5
14.1
14.1
13.9
12.8
15
3.0
101.3
12.6
13
3.5
86.1
12.7
13
3.3
90.3
12.4
13
3.1
88.4
NSGB EY
EGX
Price Performance
114
102
90
Fairly valued: We see very modest upside potential as we do not
expect the bank’s earnings to recover before FY 13e and resume
posting bottom line growth. The stock currently trades at a P/E13e of
7.1x with a P/tNAV12e of 1.46x versus an RoE of 19.2%.
78
66
54
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.43
3.56
3.79
3.74
3.71
3.69
4.35%
Cost/Income (%)
34.7
38.0
36.3
35.5
34.4
32.9
0.67%
66.0
68.8
69.1
69.0
69.3
69.9
23.9
23.2
22.5
22.8
22.8
22.5
4.0
2.0
1.3
1.2
1.2
1.2
RoAE (%)
21.6
21.3
19.2
19.0
19.4
19.7
Pre Prov.ROE (%)
20.5
23.3
22.8
22.7
23.2
24.3
2.3
2.4
2.3
2.3
2.3
2.3
Revenue / RWA (%)
7.50
7.25
6.88
6.75
6.61
6.48
Costs / RWA (%)
3.55
2.76
2.50
2.40
2.28
2.13
PPP / RWA (%)
3.95
4.49
4.38
4.35
4.33
4.35
Profitability
6%
3.26%
3.17%
4%
2%
0%
-2%
3.95%
2.73%
2.69%
2.68%
4.38%
4.35%
4.33%
4.49%
-0.19% 0.32%
0.55%
FY10
FY12e
FY11
PPP/RWA
0.57%
0.57%
FY13e
FY14e
Cost of risk/RWA
2.62%
FY15e
RORWA
RoAA (%)
NIM
3.8%
3.79%
3.6%
3.74%
3.71%
3.69%
3.56%
3.4%
3.43%
(0.19)
0.32
0.55
0.57
0.57
0.67
RoRWA (%)
3.26
3.17
2.73
2.69
2.68
2.62
3.17
3.07
2.66
2.62
2.61
2.56
3.2%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
(0.2)
0.4
0.7
0.7
0.7
0.9
3.4
3.0
3.5
3.3
3.1
3.0
93.8
101.3
86.1
90.3
88.4
91.1
3.8
2.9
2.8
2.6
2.5
2.3
(4.7)
7.2
12.5
13.2
13.2
15.4
Asset Quality
Credit Quality
3.6%
NPL/Gross Loans (%)
90%
3.4%
88%
3.2%
86%
3.0%
84%
2.8%
92%
82%
2.6%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
62.6
67.9
67.5
70.5
67.7
67.7
14.7
15.8
19.5
17.3
20.2
19.8
92.3
93.7
93.4
89.5
93.1
92.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
13.5
13.5
14.1
14.1
13.9
13.5
Tier 1 ratio (%)
12.7
12.8
12.6
12.7
12.4
12.1
15.4
14.8
13.0
13.0
12.7
12.3
10.9
11.8
12.0
12.0
11.7
11.3
RWA / assets (%)
62.8
68.2
73.4
73.2
73.2
73.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
16%
15.4%
14.8%
13.0%
14%
12%
13.0%
12.7%
12.8%
12.6%
12.7%
FY10
FY11
Tier 1
FY12e
FY13e
12.7%
12.4%
12.3%
12.1%
10%
FY14e
CAR
FY15e
Growth
30%
21%
20%
18%
18%
14%
12%
10%
15%
10%
3%
16%
10%
9%
FY11
FY12e
Loan growth
FY13e
18%
0%
FY10
FY14e
FY15e
Deposit growth
Growth
Asset growth (%)
14.4
2.7
11.0
14.0
16.0
18.0
Net loan growth (%)
18.0
12.0
9.7
14.1
16.3
18.0
Deposit growth (%)
14.6
3.2
10.4
9.3
21.0
18.0
3.5
11.3
1.4
12.2
15.5
15.5
87
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
3,866
4,420
4,861
5,443
6,244
7,319
Interest expense
1,970
2,291
2,439
2,745
3,167
3,726
Incorporated in 1978, National Societe Generale
nd
Bank is the 2 largest listed bank in Egypt with EGP
63.6bn in total assets with 83% of loan book in
corporate lending. NSGB has a lending market
share of 7.4% and a deposit market share of 5%.
Headquartered in Cairo, the bank operates 161
branches employing 4,200 employees and provides
retail and corporate banking services. Parent
company Groupe Societe Generale owns a majority
stake in the bank with a 77% holding.
Net interest income
1,896
2,129
2,421
2,698
3,077
3,593
685
718
789
892
1,013
1,154
95
43
22
24
27
32
195
207
272
297
326
359
2,871
3,096
3,505
3,911
4,443
5,139
1,358
1,178
1,274
1,390
1,530
1,691
1,513
1,918
2,231
2,521
2,913
3,448
(71)
138
280
332
386
530
—
—
—
—
—
—
1,584
1,781
1,951
2,188
2,527
2,918
Fee income
Net trading income
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Corporate
83%
Egypt
14
16
2,541
2,934
312
451
506
584
675
1,490
1,510
1,694
1,957
2,259
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
1,338
1,490
1,510
1,694
1,957
2,259
Diluted EPS
3.10
3.35
3.75
4.20
4.85
5.60
DPS
1.14
1.25
1.31
1.47
1.70
1.96
BVPS
16.42
18.30
20.73
23.46
26.62
30.26
Tangible BVPS
16.16
18.06
20.50
23.23
26.38
30.03
Year-end
2010
2011
2012e
2013e
2014e
2015e
32,387
36,216
39,703
45,281
52,539
62,007
1,042
1,117
1,197
1,329
1,440
1,695
31,345
35,099
38,506
43,951
51,099
60,312
17,503
14,923
16,337
18,641
21,605
25,604
Due from banks
4,724
4,977
6,943
7,915
9,182
10,835
Investment, net
5,612
5,676
5,659
6,451
7,483
8,830
Fixed assets
700
793
852
914
978
1,046
Other assets
895
989
1,041
1,187
1,377
1,625
Total assets
60,885
62,552
69,433
79,154
91,818
108,345
Customer deposits
50,084
51,710
57,065
62,371
75,451
89,033
Due to banks
942
110
400
3,384
1,186
2,015
Debt
892
961
947
947
1,032
1,125
Other liabilities
1,958
1,894
2,138
2,439
2,838
3,365
Total liabilities
54,263
55,175
61,074
69,694
81,086
96,145
6,621
7,377
8,359
9,460
10,732
12,200
38
43
51
58
67
79
55,202
59,831
63,954
72,091
83,036
97,324
Total Equity
12
2,200
100%
10
1,962
253
Retail
21
1,802
1,338
Group Net profit
17%
7
1,591
48,594
52,350
55,596
62,557
72,186
84,921
6,516
7,283
8,265
9,366
10,638
12,107
5,568
6,188
7,157
8,180
9,341
10,678
Tier 1 capital
4,868
5,449
6,401
7,333
8,363
9,553
+97145071744
88
May 23 2012
National Societe Generale Bank valuation (EGPmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
2010
2011
2012e
2013e
2014e
2015e
perp
1,338
89
88
10.4%
16.0%
1,161
5,047
23.0%
15.6%
785
376
---
1,490
138
96
10.4%
22.0%
1,256
5,596
22.4%
15.6%
870
386
---
1,510
121
123
10.4%
22.0%
1,266
6,216
20.4%
15.6%
967
300
---
1,694
136
138
10.4%
22.0%
1,421
7,071
20.1%
15.6%
1,099
321
0.93
299
1,957
157
142
10.4%
22.0%
1,658
8,203
20.2%
15.6%
1,276
383
0.81
308
2,259
181
133
10.4%
22.0%
1,945
9,674
20.1%
15.6%
1,504
441
0.70
307
2,259
181
133
10.4%
22.0%
1,945
9,674
20.1%
15.6%
1,504
441
0.70
307
subtotal % of total
914
6.9%
4,069
6,216
11,199
30.7%
47.0%
84.6%
1,520
11.5%
8.0%
5,839
6,621
(105)
7,377
(94)
8,359
(94)
9,460
(94)
10,732
(94)
12,200
(94)
(458)
6,058
(504)
6,779
(529)
7,736
(593)
8,773
(685)
9,953
(791)
11,316
38,264
41,304
12%
90
5,047
1,011
42,687
45,727
12%
109
5,596
1,183
50,933
50,933
12%
104
6,216
1,520
57,932
57,932
12%
119
7,071
1,703
67,208
67,208
12%
138
8,203
1,751
79,265
79,265
12%
163
9,674
1,642
(9)
(9)
529
13,238
403
32.8
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
30.0
9.4%
8.8
1.6
(0.1%)
4.0%
100.0%
7.8
1.4
89
Initiation Report
May 23
2012
+97145071744
Egyptian Gulf Bank
Unjustified take-over premium



Strong earnings recovery in FY 12e, but RORWA to
remain low, due to high cost/income.
Excellent capital buffer with CET1 among highest in
Egypt forecasted at c. 16%.
Premium valuation not justified.
SELL
Banks / EGYPT
Bloomberg code
Market index
Provisioning yet to increase: Although EGB incurred a loan loss charge
of only 51bps, well below CIB (81bps) and CAE (121bps), we expect the
bank to take on further provisions in FY 12e (forecasted at 75bps).
Coverage remains low (c. 70%), due to the bank’s exceptionally high
and increasing NPL ratio (c. 14% in FY 12e).
Liquidity is almost adequate: We calculate LCR at 97% and NSFR at
94% and liquid assets are standing at 21%. But EGB remains fairly
liquid and is expected to benefit from the recent CBE cut to RRR (c.
84% in LCY deposits) and the high liquidity of T-bills and bonds.
Outstanding capital: Despite its deteriorated asset quality, EGB has
sustained a surprisingly high CET1 ratio, forecasted at 16%, the highest
of the listed Egyptian banks, though this should fall due to high cash
dividends and growth in its loan book.
EGBE EY
EGX
1.1
Upside (%)
Market data
Earnings massively contracted: Following the 7% reduction in lending,
we expect EGB to revert back to growing its balance sheet and loan
book, though we do not expect double digits before FY 13e. We
forecast a RORWA of 1.8x vs. 1.2x in FY 11A, a level much lower than
the one off 3.2% achieved in FY 10A, due to lower capital gains and
structurally higher cost of risk. We also expect normalization of
investment income to support bottom line growth, as
trading/investment losses were the main driver behind the c. 66% fall
in FY 11A. Increase in T-bill yields, forecasted at c. 57% of
shareholder’s equity, is expected to lift margins by 15bps, though we
pencil in marginal headwind in the tax rate forecasted to increase by c.
4pp.
USD 1.1
-26.2
17/05/2012
Last closing price
52 Week range
Market cap (USDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2011
220
2012e
308
2013e
337
2014e
380
82
159
176
207
0.04
34.4
0.86
0.86
1.7
1.7
0.03
1.9
0.8
1.2
5.0
59.0
4
0.08
17.7
0.94
0.94
1.6
1.6
0.03
1.7
1.5
1.8
9.3
60.1
5
0.09
16.1
1.00
1.00
1.5
1.5
0.03
1.9
1.4
1.8
9.5
61.8
6
0.11
13.7
1.07
1.07
1.4
1.4
0.03
2.2
1.5
1.8
10.4
63.6
7
17.4
15.9
14.9
13.5
21.4
23
11.2
126.3
19.5
21
14.1
70.3
18.5
20
14.1
70.7
17.1
18
14.1
69.9
EGBE EY
EGX
Price Performance
110
Sharply overvalued: Our valuation shows a strong downside of 26%,
largely driven by its very high valuation multiples. The stock currently
trades at a P/E13e of 16.1x, highest among peers, P/tNAV12e of 1.58x
and RoE of 9.3% (substantially lower than the cost of capital), fueled
by take-over speculation. We, however, view CAE as a much more
likely candidate for M&A than EGB, as a take-over of CAE would offer a
far higher ROI than a purchase of EGB.
1.5
1.3-2.0
296
296
0.1
0.0
100
90
80
70
60
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Egypt Gulf Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.41
3.40
3.55
3.46
3.38
3.32
Cost/Income (%)
50.0
62.8
48.3
47.7
45.6
43.2
72.4
94.4
76.2
75.5
75.2
75.1
19.5
21.5
17.5
18.4
18.8
18.7
8.1
(17.0)
5.4
5.2
5.1
5.2
RoAE (%)
14.8
5.0
9.3
9.5
10.4
11.6
Pre Prov.ROE (%)
12.5
6.9
12.0
12.4
13.6
15.2
2.5
0.8
1.5
1.4
1.5
1.5
Revenue / RWA (%)
5.78
4.93
5.98
5.85
5.74
5.60
3.6%
Costs / RWA (%)
2.89
3.10
2.89
2.79
2.62
2.42
3.5%
PPP / RWA (%)
2.89
1.83
3.09
3.06
3.12
3.18
Profitability
4%
3.18%
1.79%
3%
2%
1%
0%
-1%
1.16%
3.09%
2.89%
-0.51%
FY10
0.44%
1.83%
FY11
0.58%
FY12e
PPP/RWA
1.75%
1.83%
3.06%
3.12%
1.85%
3.18%
0.59%
0.59%
FY13e
FY14e
Cost of risk/RWA
0.63%
FY15e
RORWA
RoAA (%)
NIM
3.55%
3.4%
3.3%
3.46%
3.41%
3.40%
3.38%
3.32%
(0.51)
0.44
0.58
0.59
0.59
0.63
RoRWA (%)
3.18
1.16
1.79
1.75
1.83
1.85
2.26
0.83
1.30
1.27
1.32
1.34
3.2%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
71%
15.0%
(0.6)
0.5
0.8
0.8
0.8
0.8
NPL/Gross Loans (%)
12.4
11.2
14.1
14.1
14.1
14.1
122.6
126.3
70.3
70.7
69.9
68.4
12.4
10.8
9.0
9.1
9.0
8.7
(17.7)
24.1
18.6
19.2
19.0
19.7
70%
10.0%
69%
5.0%
68%
67%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
70.2
59.0
60.1
61.8
63.6
65.5
18.9
23.2
17.0
15.1
12.2
8.9
94.5
97.6
93.0
89.3
85.8
82.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
15.2
17.4
15.9
14.9
13.5
11.9
Tier 1 ratio (%)
21.4
21.4
19.5
18.5
17.1
15.5
22.8
22.7
20.7
19.8
18.4
16.8
16.7
15.7
15.8
14.7
13.6
12.5
RWA / assets (%)
76.6
67.2
71.4
70.0
69.4
69.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
22.8%
22.7%
20.7%
22%
21.4%
19.8%
18.4%
21.4%
18%
16.8%
19.5%
18.5%
17.1%
15.5%
14%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
30%
22%
20%
14%
12%
10%
5%
-1%
0%
-10%
FY10
16%
-6%
3%
FY11
FY12e
Loan growth
11%
FY13e
18%
13%
15%
FY14e
FY15e
Deposit growth
Growth
Asset growth (%)
1.8
6.9
8.5
14.0
16.0
18.0
Net loan growth (%)
21.6
(6.2)
5.2
13.9
16.2
18.3
Deposit growth (%)
(1.2)
11.7
3.3
10.8
12.9
14.9
214.0
(65.7)
94.5
9.7
17.6
19.4
Egypt Gulf Bank
91
May 23 2012
Abacus
Egypt Gulf Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
432
452
502
554
639
748
Interest expense
232
244
267
300
353
419
Egyptian Gulf Bank was established in 1981 and
currently operates 16 branches, employing 679
employees with an asset base of EGP 6.8bn and c.
1% market share in loans and deposits. The bank
provides retail, corporate and Islamic banking
services with 83% of loan book in corporate
lending. Sons of Mohamed Mahmoud (private) and
Misr Insurance Company (government) are the
major shareholders with 19.5% and 19.4% stakes
respectively.
Net interest income
200
208
235
254
286
329
Fee income
54
47
54
62
71
82
Net trading income
13
(44)
9
8
9
11
10
9
10
13
14
16
276
220
308
337
380
438
138
138
149
161
173
189
138
82
159
176
207
249
Net provisions
(24)
20
30
34
39
49
—
—
—
—
—
—
162
62
130
142
167
200
Operating profit
Associates
Pre-tax profit
Taxation
Retail
Corporate
—
—
—
—
—
62
130
142
167
200
11
10
29
31
37
44
151
52
101
111
131
156
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
151
52
101
111
130
156
Diluted EPS
0.13
0.04
0.08
0.08
0.10
0.12
DPS
0.11
0.03
0.03
0.03
0.03
0.04
BVPS
0.86
0.86
0.94
1.00
1.07
1.16
Tangible BVPS
0.86
0.86
0.94
1.00
1.07
1.16
2010
2011
2012e
2013e
2014e
2015e
3,826
3,569
3,788
4,319
5,010
5,912
387
341
392
449
515
595
3,439
3,228
3,396
3,869
4,494
5,317
676
1,107
1,516
1,984
2,494
2,939
Due from banks
612
909
649
658
668
788
Investment, net
1,318
1,250
1,453
1,492
1,636
1,930
Group Net profit
17%
—
162
83%
Year-end
Egypt
100%
Fixed assets
66
55
56
58
59
60
Other assets
109
101
144
165
191
225
Total assets
6,222
6,651
7,216
8,227
9,543
11,261
Customer deposits
4,897
5,472
5,651
6,263
7,069
8,122
Due to banks
—
1
292
619
1,041
1,600
Debt
12
5
5
5
5
5
Other liabilities
272
128
128
128
128
128
Total liabilities
5,181
5,606
6,076
7,016
8,243
9,855
Total Equity
1,041
1,045
1,140
1,211
1,300
1,406
5
4
5
6
7
8
5,854
6,121
6,606
7,344
8,458
9,910
4,957
5,194
5,714
6,418
7,502
8,921
1,039
1,043
1,135
1,206
1,294
1,400
728
782
820
856
891
928
1,019
958
1,004
1,065
1,134
1,215
Tier 1 capital
Egypt Gulf Bank
+97145071744
92
May 23 2012
Egyptian Gulf Bank valuation (EGPmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Fair value per share (EGP)
Fair value per share (USD)
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Egypt Gulf Bank
2010
2011
2012e
2013e
2014e
2015e
151
(8)
15
10.4%
16.0%
144
730
19.8%
14.9%
109
36
---
52
-27
10.4%
21.0%
25
682
3.7%
14.9%
102
(77)
---
101
9
28
10.4%
21.0%
64
773
8.3%
14.9%
115
(51)
---
111
10
25
10.4%
21.0%
75
867
8.7%
14.9%
129
(54)
0.93
(50)
130
9
21
10.4%
21.0%
100
999
10.0%
14.9%
149
(49)
0.81
(40)
156
11
15
10.4%
21.0%
130
1,179
11.0%
14.9%
176
(46)
0.71
(32)
226
11
15
10.4%
21.0%
201
1,179
17.0%
14.9%
176
25
0.71
18
(122)
(9.2%)
239
773
890
18.1%
58.5%
67.4%
336
25.4%
7.5%
338.39
1,041
(2)
1,045
(1)
1,140
(1)
1,211
(1)
1,300
(1)
1,406
(1)
(136)
903
(34)
1,010
(30)
1,109
(33)
1,176
(39)
1,259
(47)
1,358
4,764
4,797
12%
155
730
173
4,467
4,500
12%
142
682
327
5,152
5,152
12%
154
773
336
5,755
5,755
12%
176
867
310
6,623
6,623
12%
204
999
260
7,817
7,817
12%
241
1,179
179
(31)
96
64
30.33
1,321
200
6.6
1.1
1.5
(26.2%)
4.9%
2.3%
100.0%
93
14.4
1.16
13.1
1.10
Initiation Report
May 23
2012
+97145071744
Bank Audi
Is Turkey the new haven?


We see substantial upside potential coming from
Turkey, as the bank targets USD 5bn in assets by FY 16e
with 50-60 branches.
The largest bank in Lebanon will have to address its
capital deficit under Basel III, with CET1 forecasted at c.
10%.
Booming balance sheet to generate income growth: We forecast FY
12-15e total assets CAGR of 13%, driven by a surge in net lending
expected to approximately double by FY 15e. ROE and RORWA should
increase in FY 12e due to the capital gains on selling insurance. The
bank plans to aggressively expand in Turkey, a potential number 2
ranking market for the group where it plans to establish 50-60
branches by FY 16e, however we also see execution risks involved.
Investment income moves against the flow: Income from investment
securities touched record highs in FY 11A reflecting threefold gains
from the sale of CB certificates and Eurobonds and constituting 25% of
total income. This normalization will de-amplify growth, and therefore
we do not expect strong EPS momentum in FY12e or FY13e.
A victim of regional turmoil: Contraction in Syria will continue in FY
12e after the bank already saw assets shrinking by more than 40% in
FY 11A. Provisions in Syria and Egypt contributed to 2/3 of total
provisions taken during FY 11A and were the main drivers of the
increase in NPLs. Syria and Egypt constitute 6% and 15% of the loan
book.
Capital base must adjust to meet new requirements: Audi targets a
core equity Tier 1 of 12% in FY 16e, assuming a 7% and 6% growth in
RWA and net profit respectively, with a 40% payout. The bank already
adopted new technical solutions in FY 11A, by contractually ceding the
risk of USD Eurobonds to customers and also expects lower risk
weightings of FCY reserves at the Central Bank to help lift the ratio.
The bank recently sold 81% of its insurance subsidiary with an
expected uplift of 0.5% on CET1.
Another liquid Lebanese bank: With LCR off the roof above 800%,
NSFR at 200% and a forecasted L/D at 36%, the bank is very liquid.
Buy: We see a 21% upside reflecting the bank’s bullish expansion
strategy in Turkey which we expect will drive double digit growth in
net earnings after FY 14e, its very strong liquid base, improvement in
margins and attractive multiples; P/E13e of 6.0x and P/tNAV12e of
0.97x with an ROE13e of 14%. However, its capital position may cap
potential expansion in Turkey.
BUY
USD 7.3
Banks / LEBANON
Bloomberg code
Market index
AUDI LB
Beirut
7.3
Upside (%)
Market data
21.3
17/05/2012
Last closing price
52 Week range
Market cap (USDmn)
Market cap (USDmn)
Year-end (USD)
Revenues (LCmn)
Profit (LCmn)
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
6.0
5.6-7.1
2,091
2,091
0.2
0.0
2011
1,515
2012e
1,543
2013e
1,594
2014e
1,768
824
817
817
921
1.00
6.0
5.80
5.28
1.0
1.1
0.38
6.4
1.2
1.9
17.0
34.7
27
1.42
4.2
6.68
6.16
0.9
1.0
0.54
9.0
1.7
2.6
17.4
36.1
29
1.00
6.0
7.30
6.78
0.8
0.9
0.38
6.4
1.1
1.7
14.3
37.1
30
1.13
5.3
8.01
7.48
0.7
0.8
0.43
7.2
1.1
1.8
14.8
37.9
33
8.5
9.9
10.9
11.2
10.4
11
3.9
70.5
11.3
12
3.8
73.8
12.2
13
3.5
83.0
12.5
13
3.4
92.0
Price Performance
108
AUDI LB
Beirut
101
94
87
80
73
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Bank Audi
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.72
1.95
1.99
2.04
2.04
2.06
Cost/Income (%)
47.4
45.6
47.0
48.7
47.9
46.4
52.2
53.8
55.8
60.8
62.8
64.5
19.8
18.3
18.7
20.1
20.7
20.7
24.4
24.6
22.4
15.9
13.6
12.0
RoAE (%)
16.4
17.0
17.4
14.3
14.8
15.8
Pre Prov.ROE (%)
18.0
21.5
26.6
18.1
18.8
20.1
1.2
1.2
1.7
1.1
1.1
1.1
Revenue / RWA (%)
5.23
5.54
5.34
5.26
5.42
5.33
2.1%
Costs / RWA (%)
2.48
2.53
2.51
2.56
2.60
2.48
2.0%
PPP / RWA (%)
2.75
3.01
2.83
2.70
2.82
2.86
0.19
0.50
0.44
0.46
0.49
0.50
RoRWA (%)
1.95
1.91
2.56
1.73
1.81
1.84
1.92
1.87
2.53
1.70
1.78
1.81
Profitability
4%
3%
3.01%
2%
1%
1.91%
1.95%
2.83%
2.75%
0.44%
0.50%
0.19%
2.56%
1.73%
1.81%
2.70%
2.82%
0.46%
1.84%
2.86%
0.49%
0.50%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
1.9%
1.95%
1.99%
2.04%
2.04%
2.06%
1.8%
1.7%
1.6%
1.72%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.4
1.0
0.9
0.9
0.9
0.9
4.0%
NPL/Gross Loans (%)
3.3
3.9
3.8
3.5
3.4
3.3
3.8%
55.0
70.5
73.8
83.0
92.0
100.8
3.6%
1.8
1.8
2.6
2.5
2.5
2.7
6.8
15.9
15.5
17.0
17.3
17.6
Asset Quality
Credit Quality
150%
100%
3.4%
50%
3.2%
0%
3.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
34.4
34.7
36.1
37.1
37.9
38.8
27.3
28.0
9.2
8.3
10.0
9.8
93.7
93.1
89.8
85.7
83.2
80.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
12.5%
13%
12%
11.6%
11.4%
12.8%
12.3%
12.5%
12.2%
12.0%
10.7%
11%
11.3%
11.1%
10%
FY10
10.4%
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
30%
27%
20%
12%
8%
0% 1%
0%
-10%
8.5
9.9
10.9
11.2
10.8
11.1
10.4
11.3
12.2
12.5
12.0
11.4
10.7
11.6
12.5
12.8
12.3
Growth
10%
8.8
Tier 1 ratio (%)
FY10
FY11
6%
2%
FY12e
Loan growth
15%
9%
12%
FY13e
FY14e
7.6
7.3
8.0
7.7
7.4
7.0
RWA / assets (%)
58.7
63.1
62.9
57.9
54.2
53.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
17%
14%
Growth
FY15e
Deposit growth
Asset growth (%)
8.3
0.2
6.0
14.0
15.0
17.0
Net loan growth (%)
26.7
0.5
5.7
12.0
14.8
16.8
Deposit growth (%)
8.1
(0.2)
1.5
9.1
12.1
14.1
26.1
5.7
41.9
(29.2)
12.8
17.4
Bank Audi
95
May 23 2012
Abacus
Bank Audi
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (local bn)
Company Profile
Interest income
1,987
2,085
2,175
2,419
2,773
3,229
Interest expense
1,294
1,270
1,314
1,449
1,663
1,930
Founded in 1962, Bank Audi is the largest bank in
Lebanon with 153 branches and USD c. 29bn in
total assets, with 10% market share in loans and
21% market share in deposits. The bank’s principal
activities include commercial & corporate banking,
retail, private and investment banking services.
Bank Audi’s geographic coverage spans 13
countries including Syria, Egypt, France,
Switzerland, Jordan, Sudan, KSA, Qatar and a
recently acquired license in Turkey. Deutsche Bank
Trust Company Americas is the major shareholder
with a 28.3% stake.
Net interest income
693
815
861
970
1,110
1,299
Fee income
263
278
289
321
365
417
Net trading income
325
373
346
254
241
242
48
50
47
50
52
55
1,329
1,515
1,543
1,594
1,768
2,013
630
692
725
777
847
935
699
824
817
817
921
1,078
48
137
127
139
159
189
1
—
—
—
—
—
651
687
691
679
762
889
1%
22%
Government
Retail
Corporate
76%
Net provisions
Operating profit
Associates
4
5
2
2
2
3
Pre-tax profit
655
691
692
681
764
891
Taxation
124
141
152
109
122
143
Group Net profit
531
551
797
572
642
749
Minorities
22
6
30
21
24
28
Tier 1 Coupon
—
—
—
—
—
—
494
522
741
525
592
695
Diluted EPS (USD)
0.94
1.00
1.42
1.00
1.13
1.33
DPS (USD)
0.38
0.38
0.54
0.38
0.43
0.51
BVPS (USD)
5.92
5.80
6.68
7.30
8.01
8.83
Tangible BVPS (USD)
5.34
5.28
6.16
6.78
7.48
8.30
2010
2011
2012e
2013e
2014e
2015e
13,123
13,324
14,095
15,799
18,173
21,268
238
369
395
459
568
708
12,885
12,956
13,700
15,340
17,605
20,560
6,875
8,922
9,218
11,119
14,106
18,045
Due from banks
6,147
4,562
5,511
6,282
7,224
8,453
Investment, net
15,944
15,398
16,107
17,839
19,310
21,184
Fixed assets
510
512
422
449
480
513
Other assets
583
698
689
1,047
1,204
1,409
Total assets
43,247
43,323
45,922
52,351
60,204
70,438
Customer deposits
37,458
37,382
37,945
41,394
46,398
52,946
1,043
1,141
3,636
6,249
8,675
11,851
377
377
377
377
377
377
Other liabilities
1,069
1,152
211
242
279
328
Total liabilities
39,975
40,148
42,245
48,323
55,778
65,541
3,272
3,175
3,677
4,028
4,426
4,898
25
27
29
30
33
38
40,220
41,808
43,149
47,521
54,370
63,194
Year-end
Balance sheet (local bn)
6%
15%
6%
10%
63%
Lebanon
Europe
Syria
Egypt
Other
Due to banks
Debt
Total Equity
Bank Audi
37,389
38,889
40,429
44,989
51,735
60,312
2,792
2,759
3,218
3,543
3,910
4,341
2,393
2,435
2,855
3,288
3,661
4,093
Tier 1 capital
2,813
2,855
3,275
3,708
4,081
4,514
+97145071744
96
May 23 2012
Bank Audi valuation (LBPbn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Fair value per share (LBP)
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Bank Audi
2010
2011
2012e
2013e
2014e
2015e
494
-(35)
7.0%
16.0%
529
3,359
15.7%
14.0%
471
58
---
522
-(49)
7.0%
16.0%
571
3,533
16.2%
14.0%
495
76
---
741
-(26)
7.0%
16.0%
767
3,570
21.5%
14.0%
501
267
---
525
-(11)
7.0%
16.0%
536
3,740
14.3%
14.0%
524
11
0.94
10
592
-(5)
7.0%
16.0%
597
4,017
14.9%
14.0%
563
34
0.82
28
697
-(16)
7.0%
16.0%
713
4,634
15.4%
14.0%
650
64
0.72
46
697
-(16)
7.0%
16.0%
713
4,634
15.4%
14.0%
650
64
0.72
46
84
2.2%
416
3,570
4,071
10.9%
93.9%
107.0%
(450)
(11.8%)
3.0%
578
3,272
(303)
3,175
(275)
3,677
(275)
4,028
(275)
4,426
(275)
4,899
(275)
(200)
2,770
(200)
2,700
(282)
3,120
(199)
3,553
(225)
3,926
(265)
4,359
25,395
27,127
12%
104
3,359
(589)
27,332
28,578
12%
104
3,533
(833)
28,891
28,891
12%
104
3,570
(450)
30,301
30,301
12%
104
3,740
(186)
32,612
32,612
12%
104
4,017
(91)
37,753
37,753
12%
104
4,634
(275)
(99)
(99)
282
3,803
348
10.9
7.3
6.0
21.3%
5.1
1.18
(2.6%)
7.4%
100.0%
7.3
1.07
97
Initiation Report
May 23
2012
+97145071744
Blom Bank
The best in Lebanon from every angle



BLOM generates best in class returns in Lebanon backed
by a tight cost-control policy, sound risk management
and efficient asset allocation.
No capital deficit with CET1 at 11.9% in FY13e.
FY12e to be a transitional year, but stock is very cheap.
Robust structure generating decent returns: Although we forecast
RORWA to decrease to the range of 2.1% due to slow loan growth
coupled with an increase in RWA, we expect BLOM to remain the most
profitable and cost efficient Lebanese bank with an 18% RoE and 40%
cost-to-income ratio (the lowest among peers). We also forecast a 4year EPS CAGR of 10%, though less than that in FY 12e & FY 13e due to
the cost of risk.
Loan loss charges to remain high in FY 12e but credit quality stands
higher than peers: The bank will continue using capital gains and
operating profit to add to provisions. We expect additions to loan loss
reserves to be c. 90 bps vs. 70 bps in FY 11A.
A resilient capital base: BLOM is better placed than its rivals to
implement Basel III requirements, being the least reliant on preferred
shares. The bank is unlikely to face any capital deficiency even with
the new required minimum of 12% CAR as CET1 stands almost
sufficient at 11.2%.
Over the top liquidity coverage ratio, no different than all Lebanese
banks: Both NSFR and LCR stand much higher than the required
minimum at 169% and 426% respectively. The bank remains the least
leveraged among peers with loan-to-deposit ratio at 28% leaving room
for growth, although it is experiencing contraction in Syria and has
stopped expansion plans in Egypt.
Massively underpriced: The company shares, similar to most financial
institutions with regional operations, are currently subject to a steep
discount due to the upheavals in Syria (6.8% of loans) and Egypt (7.6%
of loans) where the bank has significant operations. Our valuation
indicates a strong upside of 41% driven by BLOM’s conservative
balance sheet, more prudent credit risk management than its peers,
cost efficiency with cost-to-income at 39% and attractive price
multiples (P/E13e of 4.9x, P/tNAV12e of 0.88x, ROE12e of 18.2%, and
RoRWA of 2.1%). However, we do not expect earnings growth for FY
12e due to increased loan loss charges.
BUY
USD 11.0
Banks / LEBANON
Bloomberg code
Market index
BLOM LB
Beirut
11.0
Upside (%)
Market data
41.1
17/05/2012
Last closing price
52 Week range
Market cap (USDmn)
Market cap (USDmn)
Year-end (USD)
Revenues (LCmn)
Profit (LCmn)
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
7.8
7.0-8.9
1,675
1,675
0.2
0.0
2011
1,096
2012e
1,146
2013e
1,210
2014e
1,344
672
691
719
815
1.51
5.2
7.97
7.77
1.0
1.0
0.45
5.8
1.4
2.4
19.4
27.8
20
1.55
5.0
9.05
8.85
0.9
0.9
0.46
6.0
1.4
2.1
18.2
28.4
24
1.59
4.9
10.12
9.92
0.8
0.8
0.53
6.8
1.3
2.0
16.6
28.7
26
1.81
4.3
11.30
11.10
0.7
0.7
0.63
8.1
1.3
2.1
16.9
29.0
28
11.2
11.6
11.9
12.1
12.8
13
2.2
73.5
12.8
13
2.7
118.0
13.1
13
3.2
135.6
13.1
13
3.7
151.8
Price Performance
110
BLOM LB
104
Beirut
98
92
86
80
74
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Blom Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.36
2.33
2.28
2.29
2.32
2.45
Cost/Income (%)
38.4
38.7
39.7
40.6
39.3
36.9
73.0
70.8
71.0
74.3
74.6
75.4
14.2
16.3
16.8
17.3
17.0
16.3
11.3
11.6
11.3
7.4
7.5
7.4
RoAE (%)
20.8
19.4
18.2
16.6
16.9
18.1
Pre Prov.ROE (%)
21.9
21.7
21.3
19.7
20.0
21.2
1.5
1.4
1.4
1.3
1.3
1.4
Revenue / RWA (%)
5.74
5.45
4.85
4.71
4.74
4.96
2.5%
Costs / RWA (%)
2.20
2.11
1.92
1.91
1.86
1.83
2.5%
PPP / RWA (%)
3.54
3.34
2.92
2.80
2.87
3.13
0.14
0.30
0.36
0.37
0.37
0.38
RoRWA (%)
2.71
2.42
2.11
2.00
2.06
2.27
2.71
2.42
2.11
2.00
2.06
2.27
Profitability
4%
3%
2.71%
2.11%
2.00%
2.06%
2.27%
3.13%
2%
1%
2.42%
3.54%
3.34%
2.92%
0.36%
0.30%
0.14%
2.80%
0.37%
2.87%
0.37%
0.38%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
2.4%
2.45%
2.4%
2.3%
2.36%
2.33%
2.3%
2.28%
2.2%
FY10
FY11
2.29%
2.32%
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.3
0.7
0.9
0.9
0.9
0.9
5.0%
NPL/Gross Loans (%)
2.2
2.2
2.7
3.2
3.7
4.1
4.0%
70.4
73.5
118.0
135.6
151.8
166.5
3.0%
0.3
0.7
0.9
0.9
0.9
0.9
4.0
8.8
12.2
13.1
12.9
12.1
Asset Quality
Credit Quality
200%
150%
100%
2.0%
50%
1.0%
0%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
26.5
27.8
28.4
28.7
29.0
29.4
94.9
94.2
92.5
91.8
91.3
90.8
94.9
94.2
92.5
91.8
91.3
90.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.0
11.2
11.6
11.9
12.1
12.4
Tier 1 ratio (%)
13.6
12.8
12.8
13.1
13.1
13.4
13.8
12.9
12.9
13.1
13.2
13.4
Capital Ratios
14%
13.8%
13.4%
13.1%
14%
13%
12.9%
13.6%
12.9%
13.4%
13.1%
13%
13.2%
12.8%
12.8%
FY11
Tier 1
FY12e
13.1%
12%
FY10
FY13e
FY14e
CAR
FY15e
Growth
40%
30%
7.7
7.7
8.0
8.1
8.2
8.3
RWA / assets (%)
52.9
57.6
61.6
60.8
61.1
60.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
29%
20%
8%
10%
10%
3%
0%
FY10
10%
10%
8%
9%
FY11
FY12e
Loan growth
FY13e
10%
9%
9%
10%
FY14e
FY15e
Deposit growth
Growth
Asset growth (%)
7.8
3.7
10.0
10.0
10.0
10.0
Net loan growth (%)
28.7
8.0
10.0
10.4
10.4
10.5
Deposit growth (%)
9.7
2.9
7.6
9.1
9.2
9.2
19.2
0.8
2.4
3.0
13.5
20.4
Blom Bank
99
May 23 2012
Abacus
Blom Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
1,814
1,845
1,959
2,115
2,293
2,467
Interest expense
1,067
1,069
1,145
1,216
1,291
1,306
Founded in 1951, Blom Bank is the second largest
bank in Lebanon today with over USD 23.8bn in
assets, 6% in lending market share and 17% in
deposit market share. The bank provides retail,
commercial, corporate, private, investment
banking, insurance and Islamic banking services
with the corporate sector comprising of 67% of its
loan book. Blom is internationally present in Egypt
(6% of total assets), Syria (5.3%), Jordan, UAE,
Europe, KSA and Qatar with c. 76% in domestic
assets and over 4,000 employees. Major
shareholders include The Bank of New York Mellon
and Banorable Holdings (Luxembourg) with 34.4%
and 13.5% stakes respectively.
Net interest income
747
776
813
899
1,002
1,160
Fee income
145
179
192
210
229
251
Net trading income
116
127
129
89
100
113
14
14
11
12
13
14
1,022
1,096
1,146
1,210
1,344
1,539
392
424
454
491
529
568
33%
Retail
630
672
691
719
815
971
Net provisions
25
59
85
94
105
117
—
1
—
—
—
—
605
612
607
625
710
854
Operating profit
Associates
—
—
—
—
—
—
Pre-tax profit
605
612
607
625
710
854
Taxation
107
113
91
94
106
128
Group Net profit
498
500
516
531
603
726
Minorities
15
12
17
17
19
23
Tier 1 Coupon
—
—
—
—
—
—
483
487
499
514
584
703
Diluted EPS (USD)
1.50
1.51
1.55
1.59
1.81
2.18
DPS (USD)
0.45
0.45
0.46
0.53
0.63
0.76
BVPS (USD)
7.62
7.97
9.05
10.12
11.30
12.72
Tangible BVPS (USD)
7.40
7.77
8.85
9.92
11.10
12.51
2010
2011
2012e
2013e
2014e
2015e
7,989
8,676
9,606
10,663
11,836
13,138
190
255
340
434
539
656
7,799
8,421
9,266
10,229
11,297
12,481
Corporate
67%
Year-end
Breakdown by Country
4%
8%
7%
1%
7%
8%
67%
Lebanon
Egypt
Syria
Qatar
Jordan
UAE
Europe
13,793
6,173
6,149
6,751
6,708
7,091
Due from banks
5,925
4,837
7,675
8,443
9,287
10,216
Investment, net
5,243
14,498
14,200
15,620
17,880
19,924
Fixed assets
413
444
445
472
501
534
Other assets
408
448
576
633
697
766
Total assets
33,650
34,887
38,376
42,213
46,435
51,078
Customer deposits
29,478
30,342
32,659
35,646
38,917
42,499
Due to banks
378
337
1,489
1,994
2,552
3,142
Debt
264
301
301
301
301
301
Other liabilities
823
1,098
750
750
750
750
Total liabilities
31,067
32,200
35,321
38,814
42,642
46,814
2,583
2,687
3,054
3,400
3,793
4,264
18
20
24
26
28
31
31,567
33,345
35,609
39,165
43,105
47,439
Total Equity
Blom Bank
28,974
30,550
32,715
36,195
39,856
43,856
2,388
2,505
2,854
3,199
3,578
4,035
2,157
2,280
2,733
3,059
3,417
3,847
Tier 1 capital
2,422
2,581
3,035
3,360
3,718
4,148
+97145071744
100
May 23 2012
BLOM Bank valuation (LBPbn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Fair value per share (LPB)
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Blom Bank
2010
2011
2012e
2013e
2014e
2015e
483
-13
7.0%
15.0%
471
2,154
21.8%
15.9%
342
128
---
487
-2
7.0%
15.0%
485
2,437
19.9%
15.9%
388
98
---
499
0
0
7.0%
15.0%
499
2,838
17.6%
15.9%
451
48
---
514
0
5
7.0%
15.0%
509
3,082
16.5%
15.9%
490
19
0.93
18
584
0
7
7.0%
15.0%
577
3,402
17.0%
15.9%
541
36
0.80
29
703
0
14
7.0%
15.0%
689
3,722
18.5%
15.9%
592
97
0.69
67
703
0
14
7.0%
15.0%
689
3,722
18.5%
15.9%
592
97
0.69
67
114
3.2%
483
2,838
3,435
13.6%
80.0%
96.9%
1
0.0%
2.0%
699
2,583
(69)
2,687
(66)
3,054
(66)
3,400
(66)
3,793
(66)
4,264
(66)
(145)
2,369
(146)
2,475
(150)
2,839
(170)
3,164
(204)
3,523
(246)
3,953
17,814
17,948
12%
-2,154
215
20,109
20,311
12%
-2,437
38
23,648
23,648
12%
-2,838
1
25,683
25,683
12%
-3,082
82
28,349
28,349
12%
-3,402
121
31,017
31,017
12%
-3,722
231
(40)
(40)
150
3,546
215
16.5
11.0
7.8
41.1%
7.1
1.2
(1.1%)
4.2%
100.0%
6.9
1.1
101
Initiation Report
May 23
2012
+97145071744
Bank Byblos
Lagging profitability


Byblos growth and profitability shrink as the bank
weathers exposure to troubled Syria and Sudan, with a
forecasted 11% ROE and 1.2% RORWA.
Drop in CET1 in FY 11A due to surge in RWA, but the
ratio could hit back the 13% level benefitting from lower
risk weightings of CB cash.
Lackluster earnings due to lower contribution from capital gains and
rd
higher provisions: We forecast the 3 largest bank in Lebanon to
generate an FY 12e 11% RoE and a 1.2% RORWA, brought down by
anemic margins (due to excess liquidity), a lower contribution from
capital gains on bonds and higher provisions for high risk countries. In
contrast, F&C income is expected to remain high and contribute to
22% of total income boosted by increased retail charges. We expect
EPS to slightly decrease in FY 12e, but after this transitional year the
bank is expected to show double digit EPS growth.
Loan loss charges still at record levels: We expect the bank to take on
further provisions in FY 12e and to be in the range of 75-85 bps mainly
due to a drag in Syria and Sudan where it is facing trade and
economical issues in the latter. Syria and Sudan currently constitute
8% and 2% of total loan book. We calculate a structural cost of risk of
88bps.
Capital base insufficient under Basel III: Byblos might face some
minor issues under Basel III due to its high reliance on preferred
shares. We forecast 11.7% CET1 vs. T1 of 14.5% with preferred shares
constituting 24% T1 capital.
Strong liquidity at the expense of profits: With NSFR at 105%, LCR at
322% and L/D forecasted at 30%, the high liquidity position of the
bank is a drag on average NIM, standing lower than peers.
Fairly priced: Our valuation shows a slight downside due to flat
earnings and lower profitability with growth mostly coming in the
second half of the year, but we expect double digit net income growth
to resume after FY 12e. The stock trades at a P/E13e of 5.8x with
P/tNAV12e at 0.68x, which is justified given the low RoE and renewed
political unrest in Lebanon.
HOLD
USD 1.5
Banks / LEBANON
Bloomberg code
Market index
BYB LB
Beirut
1.5
Upside (%)
Market data
-3.7
17/05/2012
Last closing price
52 Week range
Market cap (USDmn)
Market cap (USDmn)
Year-end (USD)
Revenues (LCmn)
Profit (LCmn)
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
1.6
1.6-1.8
899
899
0.2
0.0
2011
711
2012e
705
2013e
779
2014e
858
403
369
414
465
0.27
5.8
2.09
2.09
0.8
0.8
0.11
6.9
0.9
1.5
13.1
31.2
15
0.25
6.5
2.33
2.33
0.7
0.7
0.10
6.2
0.8
1.2
11.1
29.6
17
0.27
5.8
2.51
2.51
0.6
0.6
0.11
6.7
0.8
1.2
11.3
29.5
19
0.31
5.1
2.71
2.71
0.6
0.6
0.12
7.7
0.8
1.2
11.9
29.4
21
11.4
11.7
11.4
11.1
14.4
17
3.3
140.5
14.5
17
3.8
150.6
13.9
16
4.0
162.2
13.3
15
4.3
173.8
Price Performance
108
BYB LB
Beirut
102
96
90
84
78
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Bank Byblos
Year-end
Profitability
3%
2%
2010
2011
2012e
2013e
2014e
2015e
1.98
1.82
1.71
1.73
1.72
1.72
Cost/Income (%)
46.6
43.3
47.7
46.9
45.8
44.4
60.9
59.6
61.7
62.1
62.1
62.1
18.4
20.4
22.0
21.9
22.0
22.0
19.6
18.3
14.5
14.2
14.3
14.3
RoAE (%)
15.0
13.1
11.1
11.3
11.9
12.8
Pre Prov.ROE (%)
17.0
15.6
14.0
14.6
15.5
16.4
1.0
0.9
0.8
0.8
0.8
0.8
Revenue / RWA (%)
4.64
4.60
4.16
4.16
4.12
4.10
Costs / RWA (%)
2.16
1.99
1.99
1.95
1.89
1.82
PPP / RWA (%)
2.48
2.61
2.18
2.21
2.23
2.28
0.26
0.43
0.31
0.35
0.37
0.37
RoRWA (%)
1.50
1.46
1.21
1.21
1.24
1.29
1.50
1.46
1.21
1.21
1.24
1.29
1.46%
1.50%
1.21%
2.48%
2.61%
1%
2.18%
0.43%
0.26%
0.31%
1.21%
2.21%
0.35%
1.24%
1.29%
2.23%
2.28%
0.37%
0.37%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
2.0%
1.9%
1.98%
1.8%
1.82%
1.7%
1.72%
1.72%
FY12e
FY13e
FY14e
Net interest margin
FY15e
1.71%
1.6%
FY10
FY11
1.73%
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.5
0.7
0.8
0.9
0.9
0.9
5.0%
NPL/Gross Loans (%)
3.2
3.3
3.8
4.0
4.3
4.7
4.0%
142.6
140.5
150.6
162.2
173.8
184.3
3.0%
0.5
0.7
0.8
0.9
0.9
0.9
8.0
10.6
14.1
16.0
16.3
16.1
Asset Quality
Credit Quality
200%
150%
100%
2.0%
50%
1.0%
0%
0.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
31.7
31.2
29.6
29.5
29.4
29.3
84.7
83.6
88.5
90.3
91.0
91.2
84.7
83.6
88.5
90.3
91.0
91.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
11.6
11.4
11.7
11.4
11.1
10.8
Tier 1 ratio (%)
14.9
14.4
14.5
13.9
13.3
12.6
17.4
16.7
16.5
15.8
15.1
14.5
Capital Ratios
20%
17.4%
16%
14.9%
16.7%
16.5%
14.4%
14.5%
15.8%
13.9%
15.1%
13.3%
14.5%
12.6%
12%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
18%
16%
15%
10%
8%
10%
12%
12%
12%
12%
12%
12%
6%
Bank Byblos
7.6
7.7
7.5
7.3
7.2
64.0
61.8
61.8
62.1
62.2
62.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
12.6
8.6
9.5
10.0
11.0
11.5
Net loan growth (%)
18.0
6.3
9.6
12.1
11.6
11.6
Deposit growth (%)
15.6
7.8
15.8
12.5
12.0
12.0
24.3
1.9
(9.7)
11.4
13.8
16.2
16%
5%
FY10
8.1
RWA / assets (%)
FY11
FY12e
Loan growth
FY13e
FY14e
FY15e
Deposit growth
Growth
103
May 23 2012
Abacus
Bank Byblos
Year-end
2010
2011
2012e
2013e
2014e
2015e
Interest income
Company Profile
rd
Bank Byblos was established in 1950 and is the 3
largest bank in Lebanon with USD 16.6bn in total
assets, operating a network of 100 branches with
over 2,700 employees. The bank has a 5% market
share in loans and 11% in deposits. Byblos provides
commercial banking services and is internationally
present in 11 countries including Syria, Sudan, UAE,
Armenia, Iraq, Nigeria, Cyprus, UK, France and
Belgium. Byblos Invest Holding and The Bank of
New York are the 2 main shareholders with 28.8%
and 11.4% holdings respectively.
1,213
1,264
1,354
1,488
1,646
1,833
Interest expense
797
840
919
1,004
1,113
1,240
Net interest income
416
424
435
484
533
592
Fee income
126
145
155
171
189
209
Net trading income
134
130
102
111
122
136
8
12
13
13
14
15
684
711
705
779
858
953
319
308
336
365
393
423
365
403
369
414
465
530
29
43
52
66
76
86
9
24
—
—
—
—
327
337
317
347
389
444
Net provisions
Operating profit
Associates
Pre-tax profit
Loan Breakdown by Sector*
Taxation
—
—
—
—
—
—
327
337
317
347
389
444
59
66
63
69
78
89
268
271
253
278
311
356
Minorities
12
11
15
17
19
21
Tier 1 Coupon
—
—
—
—
—
—
222
226
204
227
258
300
Retail
Diluted EPS (USD)
0.27
0.27
0.25
0.27
0.31
0.36
Corporate
DPS (USD)
0.13
0.11
0.10
0.11
0.12
0.14
BVPS (USD)
2.06
2.09
2.33
2.51
2.71
2.96
Tangible BVPS (USD)
2.06
2.09
2.33
2.51
2.71
2.95
2010
2011
2012e
2013e
2014e
2015e
5,891
6,305
6,935
7,802
8,739
9,787
206
261
313
380
456
541
5,685
6,044
6,622
7,423
8,283
9,246
Lebanon
9,622
4,932
6,020
6,509
7,213
8,069
Europe
Due from banks
4,529
4,367
4,385
4,823
5,354
5,969
Investment, net
2,510
8,938
9,591
10,550
11,711
13,058
Fixed assets
281
301
511
536
563
591
Other assets
418
443
274
301
335
373
Total assets
23,047
25,026
27,404
30,144
33,460
37,308
Customer deposits
17,944
19,342
22,392
25,190
28,213
31,598
1,516
1,636
316
42
(16)
39
800
1,251
1,251
1,251
1,251
1,251
Group Net profit
26%
74%
Year-end
Loan Breakdown by Country**
1%
1%
4%
11%
5%
Africa
Armenia
77%
Syria
Other
Due to banks
*As of 2010
**As of Q3 2010
Debt
Other liabilities
918
1,055
1,347
1,401
1,563
1,748
Total liabilities
21,177
23,131
25,306
27,884
31,011
34,636
1,870
1,895
2,097
2,259
2,449
2,672
15
15
17
19
21
23
21,041
23,314
25,449
27,961
30,933
34,451
Total Equity
Bank Byblos
19,310
21,244
23,094
25,221
27,966
31,168
1,709
1,728
1,932
2,077
2,247
2,447
1,714
1,758
1,975
2,135
2,312
2,518
Tier 1 capital
2,204
2,227
2,456
2,600
2,758
2,939
+97145071744
104
May 23 2012
Bank Byblos valuation (LBPbn)
Year-end
2010
1. DCF
Net profit
222
-Minus: excess return excess capital
(2)
Risk free rate
7.0%
Tax shelter
16.0%
Adjusted net profit
224
1,800
RoEcC
12.5%
Cost of capital
14.2%
Capital charge
256
Economic profit
(31)
Discount factor
-NPV of Economic Profit
-DCF EVA Forecast period
Terminal Value
Required Capital
Available capital:
1,870
(1)
(110)
Tangible equity
1,759
Capital needs
14,743
RWAs (Basel III)
14,752
Equity as % RWA
12%
Financial stakes
29
1,800
Surplus capital
(41)
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Number of shares
Conversion mandatory convertibles
Fair value per share (LPB)
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Bank Byblos
2011
2012e
2013e
2014e
2015e
perp
226
-(5)
7.0%
16.0%
231
1,887
12.2%
14.2%
268
(37)
---
204
-(3)
7.0%
16.0%
207
2,061
10.0%
14.2%
293
(86)
---
227
-(6)
7.0%
16.0%
233
2,275
10.3%
14.2%
323
(90)
0.94
(84)
258
-(11)
7.0%
16.0%
269
2,528
10.6%
14.2%
359
(90)
0.82
(74)
300
-(16)
7.0%
16.0%
316
2,818
11.2%
14.2%
400
(84)
0.72
(61)
300
-(16)
7.0%
16.0%
316
2,818
11.2%
14.2%
400
(84)
0.72
(61)
subtotal % of total
(218)
(17.2%)
(541)
2,061
1,302
(42.7%)
162.5%
102.7%
(46)
(3.6%)
3.0%
(754)
1,895
(1)
2,097
(1)
2,259
(1)
2,449
(1)
2,672
(1)
(90)
1,804
(82)
2,015
(89)
2,170
(101)
2,347
(117)
2,553
15,470
15,479
12%
29
1,887
(83)
16,926
16,926
12%
29
2,061
(46)
18,716
18,716
12%
29
2,275
(106)
20,818
20,818
12%
29
2,528
(180)
23,235
23,235
12%
29
2,818
(264)
12
12
82
1,268
0.9%
6.4%
100.0%
552
0
552
2.3
1.5
1.6
(3.7%)
6.2
0.66
5.6
0.61
105
Initiation Report
May 23
2012
+97145071744
Bank of Beirut
Large capital deficit



Could fall severely short on capital under Basel III as
preferred shares constitute 56% of T1.
ROE boosted by aggressive leverage, masking low
underlying RORWA.
Very expensive compared to peers.
SELL
Banks / LEBANON
Bloomberg code
Market index
Solid asset quality, but cost of risk should move up structurally: We
expect the cost of risk to increase vs. the very low level of FY11A.
BOB’s credit quality is solid due to its relatively low exposure to
currently troubled Syria and Egypt. Although we expect the bank to
take on further provisions in FY 12e and to be in the range of 4550bps, BOB still stands far below industry peers (with Audi at 89bps,
Blom at 88bps and Byblos at 75bps). The bank also exceeds in quality
on both coverage and NPL levels, forecasted at 190% and 1%
respectively.
Alarming deficiency under Basel III: We forecast a Tier 1 ratio of
13.6% that could fall by half if preferred shares were to be excluded.
We calculate a CET1 of 6.5% (the lowest among our coverage range).
The bank will have to address its unusual capital structure with
preference shares at a staggering 48% of total shareholder’s equity, if
it were to meet the 12% requirement by FY 16e.
Sufficient liquidity: With NSFR at 65% and LCR at 347%, BOB is liquid,
though less than its peers. We forecast L/D to be in the range of 44%.
Cash balances are at 20% of total assets.
Current valuation is more than full: BOB currently trades at a P/E13e
of 9.5x with P/tNAV12e at 1.82x and ROE at 16.4%. However the high
ROE is inflated by the very low capital ratios of the bank, while also
lower capital gains and higher cost of risk should be headwinds for
earnings growth going forward, and international expansion (the bank
recently acquired Laiki Bank in Australia) is a further drain on its
capital ratios.
BOB LB
Beirut
10.5
Upside (%)
Market data
Bottom-line earnings under pressure: We forecast a 1.3% RORWA
down from 1.7% in FY 11A, due to lower capital gains and a higher
average cost of risk, with a more moderate, but still double digit,
balance sheet expansion (loan book c. 10%). We expect EPS to remain
stagnant over the next two years.
USD 10.5
-45.4
17/05/2012
Last closing price
52 Week range
Market cap (USDmn)
Market cap (USDmn)
Year-end (USD)
Revenues (LCmn)
Profit (LCmn)
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
19.3
18.9-20.0
974
974
0.0
0.0
2011
380
2012e
397
2013e
443
2014e
496
189
193
222
257
2.05
9.4
10.73
9.51
1.8
2.0
0.82
4.3
1.2
1.7
18.9
44.5
9
1.85
10.4
11.84
10.62
1.6
1.8
0.74
3.8
0.9
1.3
16.4
43.5
11
2.04
9.5
12.97
11.74
1.5
1.6
0.92
4.8
0.9
1.3
16.4
43.4
12
2.28
8.4
14.22
13.00
1.4
1.5
1.03
5.3
0.9
1.4
16.8
43.2
13
5.9
6.5
6.7
6.9
14.3
14
0.5
231.9
13.6
14
0.8
189.8
13.4
13
0.8
229.9
13.1
13
0.9
270.7
Price Performance
113
BOB LB
Beirut
106
99
92
85
78
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Bank of Beirut
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.01
1.47
1.64
1.63
1.61
1.61
Cost/Income (%)
46.3
50.3
51.4
49.9
48.1
46.1
64.1
49.0
61.3
61.5
61.5
61.8
22.8
25.5
27.1
27.1
27.1
27.0
2.0
25.5
11.5
11.5
11.4
11.3
RoAE (%)
19.6
18.9
16.4
16.4
16.8
17.6
Pre Prov.ROE (%)
19.5
19.3
19.5
20.6
21.8
23.3
1.3
1.2
0.9
0.9
0.9
0.9
Revenue / RWA (%)
4.22
4.07
3.69
3.83
3.97
4.01
2.2%
Costs / RWA (%)
1.96
2.04
1.89
1.91
1.91
1.85
2.0%
PPP / RWA (%)
2.27
2.02
1.79
1.92
2.06
2.16
Profitability
3%
1.88%
1.66%
1.30%
2%
1%
0%
-1%
1.38%
1.33%
2.06%
2.27%
2.02%
-0.01% 0.03%
1.79%
0.25%
FY10
FY12e
FY11
PPP/RWA
1.92% 0.42%
0.33%
FY13e
FY14e
Cost of risk/RWA
1.43%
2.16%
0.46%
FY15e
RORWA
RoAA (%)
NIM
1.8%
2.01%
1.6%
1.47%
1.64%
1.61%
1.61%
FY12e
FY13e
FY14e
Net interest margin
FY15e
1.4%
FY10
FY11
1.63%
(0.01)
0.03
0.25
0.33
0.42
0.46
RoRWA (%)
1.88
1.66
1.30
1.33
1.38
1.43
1.79
1.59
1.23
1.26
1.30
1.35
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.8
Asset Quality
Credit Quality
400%
300%
200%
1.0%
NPL/Gross Loans (%)
0.8%
0.6%
0.4%
100%
0.2%
0%
—
0.1
0.5
0.6
0.7
0.6
0.5
0.8
0.8
0.9
1.0
160.8
231.9
189.8
229.9
270.7
289.8
1.2
0.7
1.0
1.2
1.6
2.0
(0.5)
1.7
13.7
17.4
20.2
21.3
0.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
40.4
44.5
43.5
43.4
43.2
43.0
—
—
—
—
—
—
80.4
82.0
83.3
84.6
86.0
87.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
15%
14.4%
14.3%
13.6%
14%
13%
14.3%
13.8%
13.6%
13.4%
13.1%
12.5%
13.4%
13.1%
12.5%
12%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
6.5
5.9
6.5
6.7
6.9
6.9
Tier 1 ratio (%)
13.8
14.3
13.6
13.4
13.1
12.5
14.4
14.3
13.6
13.4
13.1
12.5
Growth
60%
6.9
5.7
5.9
5.7
5.6
5.4
RWA / assets (%)
67.0
63.8
66.2
62.9
60.2
59.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
14.8
21.7
11.0
13.0
13.0
13.0
Net loan growth (%)
30.5
38.6
9.9
14.7
14.6
14.5
Deposit growth (%)
21.5
25.7
12.5
15.0
15.0
15.0
92.8
2.4
(9.9)
10.2
12.0
15.3
39%
40%
30%
20%
22%
26%
10%
13%
0%
FY10
FY11
FY12e
Loan growth
Bank of Beirut
15%
15%
15%
FY13e
15%
15%
15%
FY14e
FY15e
Deposit growth
Growth
107
May 23 2012
Abacus
Bank of Beirut
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
586
642
777
889
1,013
1,156
Interest expense
368
456
534
617
707
811
Bank of Beirut was incorporated in 1963 but did
not significantly expand its operations until late
1992 when it was acquired by the existing
controlling group headed by the current Chairman.
The bank currently has a 4% market share in loans
and 6% in deposits. With approximately USD 8.8bn
in total assets, the bank provides retail banking,
corporate banking, trade finance and asset
management services and has operations in the
UK, Germany, Cyprus, and Oman with
representative offices in the UAE, Nigeria, Iraq and
a subsidiary in Australia. International Century
Corporation Luxembourg is the major shareholder
with a 28% stake.
Net interest income
218
186
244
273
305
345
78
97
108
120
134
151
7
97
46
51
57
63
38
—
—
—
—
—
341
380
397
443
496
559
158
191
204
221
239
257
Fee income
Net trading income
183
189
193
222
257
301
Net provisions
(1)
3
26
39
52
64
—
—
—
—
—
—
184
186
167
184
206
237
Operating profit
Associates
Pre-tax profit
Taxation
2
3
3
4
169
186
209
241
32
33
29
32
35
41
156
140
155
173
200
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
152
156
140
154
173
199
Diluted EPS (USD)
2.01
2.05
1.85
2.04
2.28
2.63
DPS (USD)
0.86
0.82
0.74
0.92
1.03
1.18
BVPS (USD)
10.96
10.73
11.84
12.97
14.22
15.67
Tangible BVPS (USD)
10.93
9.51
10.62
11.74
13.00
14.45
Year-end
2010
2011
2012e
2013e
2014e
2015e
3,681
5,104
5,604
6,444
7,410
8,519
37
53
53
80
119
171
3,644
5,051
5,551
6,364
7,291
8,349
2,066
2,352
2,908
3,123
3,241
3,806
Due from banks
1,109
1,336
1,628
2,024
2,495
2,819
Middle East &
Africa
Europe
Investment, net
4,762
5,124
5,747
6,310
7,130
7,822
Fixed assets
99
116
109
115
123
132
Other assets
366
595
244
368
416
470
Other
Total assets
12,048
14,667
16,280
18,396
20,788
23,490
Loan Breakdown by Sector*
Retail
Corporate
60%
3
189
152
Group Net profit
40%
—
184
Loan Breakdown by Country*
Lebanon
9% 1%
12%
78%
*As of 2010
Customer deposits
9,023
11,343
12,761
14,675
16,877
19,408
Due to banks
805
770
1,463
1,568
1,646
1,687
Debt
926
990
990
990
990
990
Other liabilities
431
696
77
87
98
111
Total liabilities
11,218
13,833
15,318
17,341
19,628
22,210
830
834
962
1,055
1,160
1,280
8
9
11
12
13
14
10,843
12,687
14,806
16,776
18,930
21,410
Total Equity
10,102
11,928
14,159
16,224
18,373
20,799
828
720
804
889
984
1,094
554
577
699
772
861
962
1,111
1,340
1,468
1,545
1,638
1,742
Tier 1 capital
Bank of Beirut
+97145071744
108
May 23 2012
Bank of Beirut valuation (LBPbn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Fair value per share (LBP)
Current share price
Upside/Downside
Implied P/E (x)
Implied P/tNAV (x)
Bank of Beirut
2010
2011
2012e
2013e
2014e
2015e
perp
152
-(17)
7.0%
16.0%
169
1,057
16.0%
13.7%
145
25
---
156
-(31)
7.0%
16.0%
187
1,213
15.4%
13.7%
166
21
---
140
-(31)
7.0%
16.0%
171
1,341
12.8%
13.7%
183
(12)
---
154
-(32)
7.0%
16.0%
187
1,443
12.9%
13.7%
197
(11)
0.94
(10)
173
-(34)
7.0%
16.0%
207
1,563
13.2%
13.7%
214
(7)
0.83
(6)
199
-(38)
7.0%
16.0%
237
1,741
13.6%
13.7%
238
(1)
0.73
(1)
199
-(38)
7.0%
16.0%
237
1,741
13.6%
13.7%
238
(1)
0.73
(1)
subtotal % of total
-17
-2.1%
-7
1,341
1,317
-0.9%
168.2%
165.2%
(528)
(66.2%)
3.0%
-10
830
(2)
834
(92)
962
(92)
1,055
(92)
1,160
(92)
1,280
(92)
(65)
763
(62)
679
(56)
813
(69)
893
(78)
990
(90)
1,098
8,073
8,525
12%
34
1,057
(294)
9,351
9,804
12%
37
1,213
(534)
10,770
10,770
12%
49
1,341
(528)
11,569
11,569
12%
55
1,443
(550)
12,505
12,505
12%
62
1,563
(573)
13,919
13,919
12%
70
1,741
(643)
(48)
(48)
56
797
50
15.8
10.5
19.3
(45.4%)
5.7
0.99
(6.0%)
7.0%
100.0%
5.2
0.90
109
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Arab National Bank
Well placed for an increase in returns
 Robust returns due to a strong revenue stream and
normalizing provisioning charges
 Sufficient capital, liquidity, and asset quality
 Our TP of SAR 37 offers 34% upside
Strong returns: We estimate pre-provisioning returns to be 2.5% of
RWA in FY 12e due to a strong revenue stream coming from high fee
intensity, as well as a solid yield on a growing loan book. RORWA, on
the other hand, is not as high when compared to the sector at 1.9% in
FY 12e due to the relatively high provisioning costs the bank is
expected to incur. Net interest margin is roughly in line with the KSA
average. We expect loans to increase by 10% in FY 12e, and deposits
to grow by 12% as the bank attempts to manage its LTD ratio.
FY 11-15e earnings CAGR is 16.6%: In addition to the aforementioned
income growth, we expect provisioning charges to fall slightly
following a sharp fall in FY 11A, and cost/income to improve
moderately, especially since the bank will not have to pay a 2 month
extraordinary salary bonus to its employees as all KSA banks were
required to in March 2011.
Satisfactory asset quality: Our asset quality screen suggests a
cumulative loss of 322 bps over the next 5 years (64bps pa), driven by
the bank’s exposure to retail and corporate lending, below the FY 11A
level of 86bps. ANB’s NPL ratio stood at 2.4%, around the median of
KSA banks, but has been able to maintain an impressive 146%
coverage ratio.
Adequate capital base: We calculate CET1 of 14% for ANB under Basel
III, a level which we expect the bank to be able to maintain. We do not
foresee a large impact of Basel III other than a higher deduction for
associates that should only have a marginal negative effect. We expect
ANB to be able to grow its DPS.
Sound liquidity: As most of its KSA peers, ANB has ample liquidity. We
estimate an NSFR of 130% and an LCR of 169% for ANB, both well
above the threshold. However, ANB has a relatively low net cash
position of 13% of total assets.
BUY
SAR 39.1
Banks / SAUDI ARABIA
Bloomberg code
Market index
ARNB AB
Saudi Arabia
39.1
Upside (%)
Market data
32.8
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Average daily value (SARmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
29.4
26.2-34.1
25,034
6,675
4.6
1.2
2011
4,541
2012e
4,824
2013e
5,429
2014e
6,051
2,766
2,982
3,453
3,924
2.55
15.3
19.52
19.52
1.5
2.0
1.00
3.4
1.9
1.7
13.6
82.9
104
2.78
14.0
21.11
21.11
1.4
1.8
1.10
3.7
1.9
1.8
13.7
81.9
120
3.31
11.8
23.10
23.10
1.3
1.7
1.25
4.3
2.0
2.0
15.0
82.4
134
3.84
10.2
25.42
25.42
1.2
1.5
1.40
4.8
2.1
2.0
15.8
82.9
150
14.0
14.1
13.9
13.8
15.0
17
2.4
146.0
14.2
16
2.4
150.0
14.1
16
2.4
154.0
13.9
16
2.3
158.3
Price Performance
ARNB AB
123
Saudi Arabia
113
103
93
83
73
We initiate with a Hold: ANB is currently trading at a P/E13e of 11.8x
and a P/tNAV12e of 1.4x which we feel do not fairly reflect our
estimated ROE12e of 14.1% and RORWA12e of 1.9%.
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Arab National Bank
Year-end
Profitability
4%
2.97%
2.65%
3%
2%
2.48%
2.61%
2.58%
2.75%
1.61%
1.84%
0.53%
1.67%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.88
2.81
2.70
2.73
2.70
2.81
Cost/Income (%)
36.5
39.1
38.2
36.4
35.2
33.2
70.1
70.0
67.4
67.8
68.1
69.5
12.1
16.0
17.8
17.8
17.9
17.3
8.1
4.1
4.8
4.7
4.6
4.4
RoAE (%)
12.9
13.6
13.7
15.0
15.8
17.4
Pre Prov.ROE (%)
19.4
17.5
17.4
18.5
19.2
20.5
1.7
1.9
1.9
2.0
2.1
2.2
Revenue / RWA (%)
4.67
4.35
4.02
4.05
4.03
4.11
Costs / RWA (%)
1.71
1.70
1.53
1.47
1.42
1.36
PPP / RWA (%)
2.97
2.65
2.48
2.58
2.61
2.75
1.00
0.59
0.53
0.49
0.46
0.42
RoRWA (%)
1.61
1.67
1.84
1.96
2.02
2.18
1.51
1.56
1.72
1.96
2.02
2.18
1.00%
1.96%
2.02%
0.46%
0.49%
2.18%
0.42%
0.59%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.88%
2.81%
FY10
FY11
2.70%
2.73%
2.70%
FY12e
FY13e
FY14e
Net interest margin
2.81%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.4
0.9
0.8
0.8
0.7
0.6
NPL/Gross Loans (%)
3.0
2.4
2.4
2.4
2.3
2.3
108.1
146.0
150.0
154.0
158.3
161.9
Asset Quality
Credit Quality
165%
2.5%
2.4%
2.4%
2.3%
2.3%
2.2%
2.2%
160%
155%
150%
145%
140%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2.1
2.9
3.1
3.2
3.2
3.2
33.7
22.3
23.7
20.0
20.0
19.4
2010
2011
2012e
2013e
2014e
2015e
78.6
82.9
81.9
82.4
82.9
83.3
1.1
5.2
6.6
8.5
10.0
11.1
83.7
87.1
86.4
84.0
82.3
81.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
14.4
14.0
14.1
13.9
13.8
13.8
Tier 1 ratio (%)
15.1
15.0
14.2
14.1
13.9
14.0
17.0
16.5
15.9
15.7
15.6
15.6
13.3
14.2
13.7
13.3
13.0
12.8
RWA / assets (%)
83.1
88.8
91.2
90.1
89.4
89.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
17.0%
16.5%
15.1%
15.0%
14.2%
14.1%
FY10
FY11
Tier 1
FY12e
FY13e
18%
15.9%
15.7%
15.6%
15.6%
14%
10%
13.9%
FY14e
CAR
14.0%
FY15e
Growth
20%
10%
4%
10%
12%
11%
2%
-1%
0%
FY10
FY11
FY12e
12%
11%
FY13e
11%
FY14e
12%
12%
FY15e
Growth
Asset growth (%)
-20%
Net loan growth (%)
Loan growth
Deposit growth
Deposit growth (%)
Arab National Bank
5.2
1.3
12.0
13.0
13.0
13.0
(0.9)
10.0
10.3
11.1
11.8
12.5
1.8
4.3
11.6
10.5
11.2
11.8
(28.3)
12.5
27.0
19.0
15.9
21.5
111
May 23 2012
Abacus
Arab National Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
3,454
3,463
3,625
4,027
4,500
5,251
297
283
373
343
379
420
3,158
3,181
3,251
3,684
4,121
4,831
Fee income
545
727
856
968
1,084
1,203
Net trading income
329
155
192
211
233
257
472
478
525
567
613
663
4,504
4,541
4,824
5,429
6,051
6,954
1,644
1,775
1,843
1,976
2,127
2,308
2,859
2,766
2,982
3,453
3,924
4,647
964
618
635
660
687
709
—
—
—
—
—
—
1,895
2,149
2,347
2,793
3,237
3,938
Income statement (SARmn)
Company Profile
Interest income
Established in 1979, Arab National Bank provides
conventional and Islamic commercial banking services
to both retail and corporate clients. The bank has a c.
7.1% market share in lending and an 8.0% market
share in deposits with a branch network of c. 140 and
c. 935 ATMs, while employing c. 3,700 employees.
ANB is headquartered out of Riyadh, but maintains a
representative office in London. Major Shareholders
include the Arab Bank of Jordan at 40%, General
Organization for Social Insurance – KSA with 10.8%,
Rashed Abdul Rahman Al Rashed and Sons Company
with 9.9%, Al Jabr Trading Company at 5.6%, with the
remaining 33.7% as free float.
Net interest income
Interest expense
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
35
40
3,272
3,977
—
—
—
—
—
2,374
2,824
3,272
3,977
(3,587)
(448)
2,849
3,389
3,927
4,773
361
432
166
197
229
278
1,546
1,739
2,208
2,627
3,044
3,699
Diluted EPS
1.82
2.04
2.59
3.08
3.57
4.34
DPS
0.76
1.00
1.10
1.25
1.40
1.55
BVPS
17.96
19.52
21.11
23.10
25.42
28.35
Tangible BVPS
17.96
19.52
21.11
23.10
25.42
28.35
Year-end
2010
2011
2012e
2013e
2014e
2015e
68,397
75,449
83,371
92,681
103,648
116,604
2,194
2,605
3,001
3,355
3,773
4,268
66,203
72,844
80,369
89,325
99,875
112,336
27,995
Corporate
31
2,824
2,171
Tier 1 Coupon
Retail
28
2,374
—
Minorities
18.5%
22
2,171
1,908
Group Net profit
0.3%
13
1,908
Government
81.2%
Balance sheet (SARmn)
0.1%
0.1%
0.5%
KSA
99.3%
11,997
13,353
15,328
19,440
23,663
Due from banks
1,381
1,572
2,634
2,976
3,363
3,800
Investment, net
34,228
26,335
28,834
31,836
35,131
38,745
2,788
Fixed assets
1,261
1,284
1,516
1,829
2,275
Other Middle
East
Other assets
1,924
1,922
2,634
2,976
3,363
3,800
Total assets
116,035
117,574
131,683
148,802
168,146
190,005
Europe
Customer deposits
84,199
87,859
98,083
108,398
120,521
134,802
Due to banks
12,097
8,824
9,266
9,729
10,215
10,726
Debt
1,688
1,688
1,750
1,750
1,750
1,750
Other liabilities
2,655
2,474
4,486
9,125
13,868
18,412
Total liabilities
100,638
100,845
113,585
129,002
146,354
165,691
15,397
16,730
18,098
19,800
21,793
24,315
96
104
120
134
150
169
109,517
113,137
120,368
135,074
152,471
172,080
95,532
98,177
103,735
114,488
126,182
139,882
15,291
16,624
17,979
19,666
21,641
24,144
14,353
15,468
16,902
18,659
20,735
23,388
Tier 1 capital
14,551
15,673
17,108
18,864
20,940
23,593
North America
Total Equity
Arab National Bank
Michael Malkoun
+97145071744
112
May 23 2012
Arab National Bank valuation (SARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel I in FY 11A, Basel II/III after FY 12e)
RWAs (Basel 3)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Arab National Bank
2010
2011
2012e
2013e
2014e
2015e
1,911
361
110
4.5%
-1,440
12,312
11.7%
11.5%
1,418
22
---
2,171
432
102
4.5%
-1,637
13,603
12.0%
11.5%
1,567
70
---
2,371
166
103
4.5%
-2,102
14,874
14.1%
11.5%
1,713
389
---
2,821
197
96
4.5%
-2,528
16,609
15.2%
11.5%
1,913
614
0.95
582
3,268
229
89
4.5%
-2,951
18,622
15.8%
11.5%
2,145
805
0.85
684
3,973
278
92
4.5%
-3,603
20,959
17.2%
11.5%
2,415
1,188
0.76
905
3,973
278
92
4.5%
-3,603
20,959
17.2%
11.0%
2,415
1,188
0.76
905
2,170
6.5%
10,646
14,874
27,690
32.0%
44.7%
83.3%
2,287
6.9%
2.5%
13,982
15,291
106
--
16,624
105
--
17,979
119
--
19,666
134
--
21,641
151
--
24,144
171
--
(647)
14,750
(852)
15,878
(937)
17,161
(1,064)
18,736
(1,192)
20,600
(1,320)
22,995
96,391 104,357 120,108 134,071 150,281 169,119
99,872 110,445 120,108 134,071 150,281 169,119
12.0%
12.0%
12.0%
12.0%
12.0%
12.0%
327
349
461
521
589
665
12,312 13,603 14,874 16,609 18,622 20,959
2,438
2,275
2,287
2,126
1,978
2,036
46.548
2,282
-2,329
7.0%
937
2.8%
33,243 100.0%
852
39.0
29.4
32.8%
15.1
1.85
12.7
1.69
113
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Al Rajhi Bank
Highest returns resulting from retail tilt
 Top of class returns, asset quality, sufficient capital
 Best positioned for retail sector growth
 Our TP of SAR 101 offers a 36% upside
Industry leading returns across all metrics: Al Rajhi, the largest Islamic
bank in the world, is expected to continue generating stellar preprovisioning returns of c. 5% of RWA; second only to RAKBank. The
bank’s NIM has consistently been leading KSA banks, resulting from an
extremely low cost of funding and high share of retail loans that
amount to 60% of total loans. The net RORWA should be c. 4% despite
above average loan loss charges emanating from its retail tilt.
Double digit EPS growth: We forecast an FY 11-15e earnings CAGR of
17%, despite sector-wide pressure on margins. We expect Al Rajhi to
outperform the loan growth of its peers, driven by its retail tilt and
public sector exposure. Al Rajhi has the largest market share in KSA
that is expected to be c. 20% of loans and c. 20% of deposits in FY 12e.
However, it could lose its unique position with respect to government
deposits as other Islamic banks should begin targeting those too.
High capital generation: We calculate a core equity tier 1 capital of
16.5% for FY 12e, higher than Al Rajhi’s reported Tier-1, which does
not include current year’s earnings. We expect the CET1 to improve
by 0.5-0.6% pa, driven by the banks’ very high returns, partly offset by
its high pay-out and RWA growth.
Sufficient liquidity: With an NSFR of 118% and an LCR of 200%, Al
Rajhi appears to be sufficiently liquid despite significant maturity
mismatches between assets and liabilities. The bank has a net cash
balance of 18%.
Strong asset quality: Our asset quality screen suggests a cumulative
loss of 416 bps over the next 5 years (83bps pa), particularly due to its
increasing retail exposure, although Al Rajhi should be able to easily
absorb those charges. The bank’s NPL ratio of 1.7% and coverage ratio
of 148% are both in the top end of the industry spectrum.
BUY
SAR 100.5
Bloomberg code
Market index
RJHI AB
Saudi Arabia
100.5
Upside (%)
Market data
35.8
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
74.0
65.0-83.3
111,000
29,598
89.1
334.1
2011
12,333
2012e
13,310
2013e
15,074
2014e
16,868
8,854
9,778
11,262
12,787
4.92
20.4
21.88
21.88
3.4
4.6
3.25
4.4
3.3
3.8
21.0
81.0
173
5.65
17.8
23.89
23.89
3.1
4.2
3.25
4.4
3.6
3.9
24.7
81.8
201
6.52
15.4
26.40
26.40
2.8
3.8
3.55
4.8
3.6
4.0
25.9
82.7
226
7.39
13.6
29.43
29.43
2.5
3.4
3.85
5.2
3.7
4.1
26.5
83.7
254
14.6
16.5
17.2
17.8
14.7
20
1.7
148.4
14.4
21
1.8
150.3
14.8
21
1.8
152.6
15.3
21
1.8
154.3
Price Performance
RJHI AB
125
Saudi Arabia
116
107
Al Rajhi offers attractive returns and a 36% potential upside. The
stock is trading at a P/E13e of 15.4x and a P/tNAV12e of 3.1x, both
among the highest in the sector. We think Al Rajhi should deserve a
higher premium, driven by its very high RORWA of 3.8%, very solid
capital base and its expected growth.
98
89
80
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Al Rajhi Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
5.30
4.61
4.17
4.20
4.19
4.53
Cost/Income (%)
25.9
28.2
26.5
25.3
24.2
21.9
79.3
73.5
71.9
72.6
73.1
75.2
14.2
18.6
20.0
19.4
19.0
17.5
0.2
0.3
0.3
0.4
0.4
0.4
RoAE (%)
20.4
21.0
24.7
25.9
26.5
28.8
Pre Prov.ROE (%)
28.9
28.0
28.5
29.9
30.5
32.9
3.4
3.3
3.6
3.6
3.7
4.0
Revenue / RWA (%)
7.44
7.13
6.62
6.67
6.64
7.01
6.0%
Costs / RWA (%)
1.93
2.01
1.76
1.69
1.61
1.53
5.0%
PPP / RWA (%)
5.51
5.12
4.86
4.98
5.03
5.48
1.13
0.85
0.64
0.66
0.67
0.69
RoRWA (%)
3.89
3.83
3.92
4.02
4.06
4.45
3.89
3.83
3.92
4.02
4.06
4.45
Profitability
6%
5%
4%
3%
2%
1%
0%
5.51%
3.89%
1.13%
5.12%
4.86%
4.98%
5.03%
3.83%
3.92%
4.02%
4.06%
0.85%
0.64%
0.66%
0.67%
5.48%
4.45%
0.69%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
5.30%
4.0%
4.61%
4.17%
4.20%
4.19%
4.53%
3.0%
2.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.5
1.1
0.8
0.8
0.8
0.8
2.0%
NPL/Gross Loans (%)
2.2
1.7
1.8
1.8
1.8
1.8
160%
1.5%
135.8
148.4
150.3
152.6
154.3
160.0
155%
1.0%
150%
0.5%
Asset Quality
Credit Quality
165%
145%
3.4
2.5
2.1
2.3
2.3
2.4
20.6
16.7
23.1
20.8
20.4
19.8
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
83.9
81.0
81.8
82.7
83.7
84.6
6.0
6.2
8.5
9.0
9.2
9.6
92.6
92.3
92.9
92.6
92.6
92.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
14.6
14.6
16.5
17.2
17.8
19.4
Tier 1 ratio (%)
15.2
14.7
14.4
14.8
15.3
16.2
20.6
20.0
20.5
20.9
21.3
22.6
16.4
14.9
14.2
13.9
13.7
14.0
RWA / assets (%)
83.7
78.4
79.9
79.1
79.1
78.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
8.3
19.5
14.0
13.5
12.5
12.5
Net loan growth (%)
7.1
16.9
16.8
15.0
14.0
12.9
Deposit growth (%)
16.4
21.2
15.6
13.6
12.7
11.7
(6.5)
10.1
19.0
15.3
13.4
22.9
Capital Ratios
26%
22%
20.6%
20.0%
20.5%
21.3%
20.9%
22.6%
18%
14%
15.2%
14.7%
14.4%
14.8%
FY10
FY11
Tier 1
FY12e
FY13e
10%
15.3%
FY14e
CAR
16.2%
FY15e
Growth
40%
21%
17%
20%
16%
17%
16%
7%
15%
14%
12%
14%
13%
13%
0%
FY10
FY11
FY12e
Loan growth
Al Rajhi Bank
FY13e
FY14e
FY15e
Deposit growth
Growth
115
May 23 2012
Abacus
Al Rajhi Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
9,353
9,324
9,854
11,180
12,602
15,239
230
254
287
237
267
245
Company Profile
Interest income
Al Rajhi was established in 1976 and has gone on
to become the largest Islamic bank in the world
and the largest publicly traded bank in KSA. Al Rajhi
has a 13.5% lending market share and a 15.7%
deposit market share. The bank operates c. 500
branches and c. 3000 ATMs in KSA, with over 3,000
employees, and has been expanding its operations
internationally, primarily to Malaysia with c. 23
branches while establishing a presence in Kuwait
and Jordan. Al Rajhi provides both commercial and
investment banking services, all according to the
principles of Islam. Major shareholders include
Suleiman Bin Abdulaziz Saleh Al Rajhi at 19.9%,
Saleh Bin Abdulaziz Saleh Al Rajhi at 15.1%, the
General Organization for Social Insurance – KSA at
9.9%, Abdullah Bin Abdulaziz Saleh Al Rajhi with
5.9%, with the remaining 49.2% as free float.
Net interest income
9,122
9,070
9,567
10,943
12,335
14,994
Fee income
1,634
2,298
2,664
2,930
3,209
3,497
—
—
—
—
—
—
749
964
1,079
1,201
1,324
1,458
11,506
12,333
13,310
15,074
16,868
19,949
2,981
3,479
3,533
3,813
4,080
4,367
8,524
8,854
9,778
11,262
12,787
15,582
Net provisions
1,754
1,476
1,296
1,485
1,699
1,958
—
—
—
—
—
—
6,771
7,378
8,481
9,777
11,088
13,624
Interest expense
Net trading income
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
Tier 1 Coupon
19%
—
—
—
—
—
—
6,771
7,378
8,481
9,777
11,088
13,624
750
750
594
684
776
954
6,771
7,378
8,481
9,777
11,088
13,624
—
—
—
—
—
—
750
750
594
684
776
954
6,021
6,628
7,888
9,093
10,312
12,670
Diluted EPS
4.01
4.42
5.26
6.06
6.87
8.45
DPS
3.00
3.25
3.25
3.55
3.85
4.15
BVPS
20.21
21.88
23.89
26.40
29.43
33.72
Tangible BVPS
20.21
21.88
23.89
26.40
29.43
33.72
Year-end
2010
2011
2012e
2013e
2014e
2015e
123,681
143,951
168,423
193,686
220,803
249,507
3,616
3,556
4,430
5,171
5,962
6,986
120,065
140,396
163,993
188,515
214,841
242,521
19,475
20,419
23,482
27,171
31,042
35,946
Due from banks
11,118
14,600
16,362
18,571
20,893
23,504
Investment, net
29,270
39,968
41,661
44,428
46,767
50,805
Fixed assets
3,395
3,624
4,089
4,597
5,150
5,753
Other assets
2,230
2,597
3,021
3,429
3,857
4,339
Total assets
184,841
220,813
251,727
285,710
321,424
361,602
Customer deposits
143,064
173,429
200,497
227,859
256,739
286,780
5,414
7,021
1,755
878
702
562
—
—
—
—
—
—
Retail
Corporate
81%
0.1% 3.2%
KSA
96.7%
Other Middle
East
Due to banks
South East Asia
Other liabilities
6,045
7,542
13,642
17,373
19,845
23,677
Total liabilities
154,523
187,992
215,894
246,109
277,286
311,019
30,318
32,821
35,834
39,601
44,138
50,583
155
173
201
226
254
285
171,969
196,561
229,166
260,614
294,444
331,281
Debt
Total Equity
Al Rajhi Bank
138,721
164,464
191,351
215,494
243,089
272,391
30,318
32,821
35,834
39,601
44,138
50,583
25,068
27,197
33,187
38,844
45,376
55,134
Tier 1 capital
23,547
25,443
29,050
33,502
38,814
46,213
Michael Malkoun
+97145071744
116
May 23 2012
Al Rajhi Bank valuation (SARmn)
Year-end
1. DCF
Net profit
Other adjustments (Zakat)
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Al Rajhi Bank
2010
2011
2012e
2013e
2014e
2015e
perp
6,771
750
238
4.5%
-5,783
20,539
28.2%
10.8%
2,213
3,570
---
7,378
750
254
4.5%
-6,374
22,306
28.6%
10.8%
2,404
3,971
---
8,481
594
307
4.5%
-7,581
24,141
31.4%
10.8%
2,601
4,980
---
9,777
684
322
4.5%
-8,770
27,120
32.3%
10.8%
2,922
5,848
0.95
5,557
11,088
776
354
4.5%
-9,958
30,507
32.6%
10.8%
3,287
6,671
0.86
5,722
13,624
954
459
4.5%
-12,211
34,150
35.8%
10.8%
3,680
8,531
0.77
6,605
13,624
954
459
4.5%
-12,211
34,150
35.8%
10.8%
3,680
8,531
0.77
6,605
subtotal % of total
17,884
11.9%
94,697
24,141
136,722
62.8%
16.0%
90.7%
6,818
4.5%
3.8%
122,305
30,318
---(4,500)
25,818
32,821
---(4,875)
27,946
35,834
---(4,875)
30,959
39,601
---(5,325)
34,276
44,138
---(5,775)
38,363
50,583
---(6,225)
44,358
154,636
171,161
12.0%
-20,539
5,278
173,017
185,887
12.0%
-22,306
5,640
201,172
201,172
12.0%
-24,141
6,818
225,998
225,998
12.0%
-27,120
7,156
254,221
254,221
12.0%
-30,507
7,856
284,585
284,585
12.0%
-34,150
10,208
2,521
(205)
2,316
4,875
150,731
1,500
100.5
74.0
35.8%
19.1
4.21
1.5%
3.2%
100.0%
16.6
3.81
117
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Banque Saudi Fransi
Fairly valued
 Normalization in cost of risk could affect EPS growth
 Adequate capital base & liquidity
 Our TP of SAR 41 offers 11% potential upside
Medium returns: We estimate pre-provisioning income to be 2.2% of
RWA due to improving NIMs as the bank increases its retail lending,
especially into the high yielding credit card segment that is very
underdeveloped in KSA. This segment is also expected to increase fee
intensity going forward.
FY 11-15e net earnings CAGR is 6%: We forecast relatively low, albeit
improving, earnings growth driven by an increase in revenues, as well
as a small improvement in cost/income, however, growth is impacted
by a normalization in the cost of risk. We expect BSFR’s lending to
increase by 13% in FY 12e, and deposits to also increase by 13% as the
bank attempts to remain at around its current LTD which is already
very near the informal 85% LTD limit imposed by SAMA.
Premium asset quality: Our asset quality screen suggests a cumulative
loss of 293 bps over the next 5 years (59bps pa), driven by the bank’s
lending to corporations, vs. only 18bps in FY 11A. BSFR has the lowest
NPL ratio, aside from Alinma, at 1.2% while having a coverage ratio of
136%. However, we expect the bank’s increase in retail lending,
especially its added credit card exposure, to cause a slight
deterioration in asset quality in the future.
Sufficient capital base: We calculate BSFR’s FY 11A CET1 at 13%, and
expect it to improve to 13.2% in FY 12e, remaining towards the lower
end of KSA banks. We expect Basel 3 to hardly affect its capital ratios,
except for deductions for dividends.
Strong liquidity: The banks’ Basel liquidity remains strong; we
estimate an NSFR c. 130% and an LCR of c. 181%, both comfortably
above the minimum requirements. Its net cash position of 18% is
adequate.
HOLD
SAR 40.9
Bloomberg code
Market index
BSFR AB
Saudi Arabia
40.9
Upside (%)
Market data
11.1
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
36.8
29.7-40.6
33,268
8,871
5.8
1.5
2011
4,585
2012e
5,088
2013e
5,469
2014e
5,894
3,085
3,504
3,770
4,070
3.22
11.4
21.74
21.74
1.7
1.9
0.70
1.9
2.2
2.1
15.2
84.0
139
3.43
10.7
27.17
27.17
1.4
1.5
1.00
2.7
2.1
1.9
14.0
83.5
158
3.60
10.2
29.77
29.77
1.2
1.4
1.00
2.7
2.0
1.8
12.6
82.4
174
3.79
9.7
32.57
32.57
1.1
1.3
1.00
2.7
1.9
1.8
12.2
82.2
190
12.9
13.0
13.2
13.4
13.9
15
1.2
136.4
13.6
14
1.3
131.3
13.7
14
1.4
134.3
13.9
15
1.5
141.0
Price Performance
BSFR AB
124
Saudi Arabia
113
Fairly valued: BSFR currently trades at a P/E13e of 10.2x and a
P/tNAV12e of 1.4x, both at the sector median. We believe that its
current multiples fairly reflect our estimated futures earnings of RoE
of 14.0% and RORWA of 1.9% in FY 12e and the bank’s slightly below
average capital base.
102
91
80
69
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Banque Saudi Fransi
Year-end
Profitability
3%
2010
2011
2012e
2013e
2014e
2015e
2.64
2.50
2.45
2.41
2.37
2.43
Cost/Income (%)
28.6
32.7
31.1
31.1
30.9
30.2
69.8
68.4
67.7
67.8
68.2
69.4
20.2
22.9
23.9
23.8
23.4
22.4
5.0
3.2
3.1
3.2
3.3
3.3
RoAE (%)
16.3
15.2
14.0
12.6
12.2
12.1
Pre Prov.ROE (%)
18.6
16.3
15.9
14.7
14.5
14.7
2.3
2.2
2.1
2.0
1.9
1.9
Revenue / RWA (%)
3.50
3.31
3.22
3.15
3.11
3.15
Costs / RWA (%)
1.00
1.08
1.00
0.98
0.96
0.95
PPP / RWA (%)
2.50
2.23
2.21
2.17
2.15
2.20
0.27
0.11
0.26
0.30
0.34
0.38
RoRWA (%)
2.19
2.06
1.91
1.83
1.76
1.77
2.15
2.03
1.88
1.80
1.74
1.75
2.50%
2.23%
2.21%
2.17%
2.15%
2.20%
2%
2.19%
2.06%
1.91%
1%
0.27%
0.26%
0.11%
1.83%
0.30%
1.77%
1.76%
0.34% 0.38%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.0%
2.8%
2.64%
2.50%
2.6%
2.45%
2.41%
2.37%
2.43%
2.4%
2.2%
2.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.4
0.2
0.4
0.5
0.5
0.6
2.0%
NPL/Gross Loans (%)
1.2
1.2
1.3
1.4
1.5
1.6
150%
1.5%
147.0
136.4
131.3
134.3
141.0
149.9
140%
1.0%
1.5
1.6
1.5
1.5
1.7
1.9
130%
0.5%
10.8
5.1
11.7
13.9
16.0
17.4
Asset Quality
Credit Quality
160%
120%
0.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
86.6
84.0
83.5
82.4
82.2
82.0
0.8
3.9
4.2
4.3
4.4
4.5
88.9
91.0
96.8
97.9
97.9
98.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.3
12.9
13.0
13.2
13.4
13.7
Tier 1 ratio (%)
14.2
13.9
13.6
13.7
13.9
14.2
14.7
14.5
14.2
14.4
14.6
14.9
Capital Ratios
26%
22%
18%
14.7%
14.5%
14.2%
14.4%
14.6%
14%
14.2%
13.9%
13.6%
13.7%
FY10
FY11
Tier 1
FY12e
FY13e
10%
13.9%
FY14e
CAR
14.9%
14.2%
FY15e
Growth
20%
14%
3%
3%
FY10
14.6
14.0
16.0
15.9
15.9
16.0
RWA / assets (%)
102.0
98.6
103.1
102.6
102.2
101.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
2.2
14.0
9.3
10.3
9.6
8.9
Net loan growth (%)
3.4
14.0
12.9
10.1
9.4
8.7
Deposit growth (%)
2.5
17.6
13.5
11.6
9.7
9.0
20.0
3.9
5.9
4.9
5.4
9.1
13%
10%
18%
0%
13%
FY11
FY12e
Loan growth
12%
FY13e
9%
10%
9%
9%
FY14e
FY15e
Deposit growth
Growth
Banque Saudi Fransi
119
May 23 2012
Abacus
Banque Saudi Fransi
Year-end
2010
2011
2012e
2013e
2014e
2015e
3,537
3,631
3,985
4,298
4,675
5,162
471
494
541
591
655
666
3,066
3,137
3,444
3,707
4,020
4,496
Fee income
887
1,050
1,218
1,304
1,382
1,451
Net trading income
204
133
145
161
177
193
238
265
280
298
315
335
4,395
4,585
5,088
5,469
5,894
6,475
1,259
1,500
1,584
1,700
1,823
1,956
3,137
3,085
3,504
3,770
4,070
4,519
339
158
410
524
650
786
—
—
—
—
—
—
2,797
2,927
3,094
3,245
3,420
3,733
Company Profile
Interest income
BSFR was established in 1977 to provide conventional
and Islamic commercial banking services. The bank
has 114 branches and 424 ATMs, while having a
workforce of c. 2,780 people. BSFR has 8.8% of the
lending market share, and 10.0% of the deposit
market share. BSFR’s direct investments include a 27%
stake in Banque Bemo Saudi Fransi in Syria and 32.5%
of Allianz Saudi Fransi Cooperative Insurance
Company in KSA. Credit Agricole, the second largest
bank in France, owns 31% of BSFR’s shares, while the
General Organization for Social Insurance-KSA with
12.8%, Rashed Abdul Rahman Al Rashed and Sons
Company with 9.8%, while the bank’s free float stands
at 30.45%.
Net interest income
Interest expense
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
3% 12%
(16)
8
9
10
11
2,911
3,102
3,254
3,430
3,743
—
—
—
—
—
—
2,801
2,911
3,102
3,254
3,430
3,743
Minorities
—
—
—
—
—
—
Tier 1 Coupon
53
56
78
81
86
94
Retail
4
2,801
2,748
2,855
3,025
3,173
3,344
3,649
Diluted EPS
3.04
3.16
3.35
3.51
3.70
4.04
DPS
1.00
0.70
1.00
1.00
1.00
1.00
BVPS
19.92
21.74
27.17
29.77
32.57
35.71
Tangible BVPS
19.92
21.74
27.17
29.77
32.57
35.71
Year-end
2010
2011
2012e
2013e
2014e
2015e
82,470
93,864
106,066
117,026
128,339
139,889
1,493
1,539
1,814
2,203
2,718
3,359
80,977
92,325
104,252
114,823
125,621
136,530
Corporate
Government
85%
0.2% 0.0%
1.6%
0.8%
97.4%
KSA
18,116
16,161
18,004
19,968
22,023
5,192
7,009
7,674
8,464
9,277
10,102
Investment, net
30,266
25,131
27,766
30,626
33,566
36,554
Fixed assets
586
581
632
685
741
800
Other assets
5,573
5,609
6,139
6,771
7,421
8,082
Total assets
123,218
140,480
153,474
169,282
185,533
202,046
93,529
109,963
124,784
139,317
152,784
166,535
Other Middle
East
Customer deposits
Due to banks
2,313
2,064
2,291
2,543
2,822
3,133
Europe
Debt
4,894
4,230
(2,870)
(4,433)
(4,702)
(5,349)
North
America
Other
Countries
Banque Saudi Fransi
10,864
Due from banks
Other liabilities
4,459
4,568
4,705
4,940
5,187
5,447
Total liabilities
105,195
120,825
128,909
142,367
156,092
169,766
18,023
19,655
24,565
26,915
29,441
32,280
126
139
158
174
190
206
116,206
125,496
140,312
154,055
169,367
185,015
Total Equity
100,876
108,496
122,866
137,417
152,233
166,387
18,004
19,655
24,565
26,915
29,441
32,280
16,817
18,584
20,510
22,861
25,386
28,225
Tier 1 capital
17,825
19,321
21,519
23,869
26,394
29,234
Michael Malkoun
+97145071744
120
May 23 2012
Banque Saudi Fransi valuation (SARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Banque Saudi Fransi
2010
2011
2,801
53
22
4.5%
1.9%
2,726
16,624
16.4%
10.3%
1,706
1,021
---
2,911
56
68
4.5%
1.9%
2,787
17,482
15.9%
10.3%
1,794
993
---
2012e
2013e
2014e
2015e
3,102 3,254 3,430 3,743
78
81
86
94
196
217
243
282
4.5%
4.5%
4.5%
4.5%
2.5%
2.5%
2.5%
2.5%
2,828 2,956 3,101 3,367
19,187 21,070 22,997 24,947
14.7% 14.0% 13.5% 13.5%
10.3% 10.3% 10.3% 10.3%
1,969 2,162 2,359 2,560
860
794
741
808
-0.95
0.86
0.78
-756
640
633
3,743
94
282
4.5%
2.5%
3,367
24,947
13.5%
10.3%
2,560
808
0.78
633
2,030
5.5%
10,511
19,187
31,727
28.4%
51.9%
85.8%
4,475
12.1%
4.2%
13,419
18,004
19
--
19,655
---
24,565 26,915 29,441 32,280
---------
(904)
17,119
(633)
19,023
(904)
(904)
(904)
(904)
23,661 26,011 28,537 31,376
125,703
136,987
12.0%
186
16,624
495
138,516 158,225 173,747 189,630 205,706
144,258 158,225 173,747 189,630 205,706
12.0%
12.0% 12.0% 12.0% 12.0%
171
200
220
241
263
17,482 19,187 21,070 22,997 24,947
1,541
4,475 4,942 5,540 6,429
2.4
224
(371)
(145) (0.4%)
904
2.4%
36,962 100.0%
904
40.9
36.8
11.1%
12.2
1.50
11.6
1.37
121
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Riyad Bank
Attractive price for conservativeness
 Among highest core Tier 1 ratio in KSA at 15.3%, although
returns offer scope for improvement.
 Impressive asset quality thanks to write-off policy
 Our target price of SAR 33.0 offers 38% upside
Disappointing pre-provisioning returns: We expect low preprovisioning returns as a percentage of RWA to persist in FY 12e at
2.1%, and to continue to be a flaw for Riyad Bank. This low return is
primarily due to relatively low fee intensity, coupled with a high
cost/income ratio. We believe that the bank’s RORWA will continue to
stand at around the median of Saudi banks at 1.7%. We forecast FY 1115e earnings CAGR at 13% for Riyad, particularly fueled by strong net
interest income growth, though loan growth should be below peers
for FY12e.
Prime asset quality: Riyad Bank prides itself on its conservatism in
both its provisioning and credit risk, writing off all past due loans older
than 180 days, thus resulting in an impressive 1.6% NPL ratio and
credit costs of 59bps. Moreover, the aggressive write-offs allow the
bank to maintain a coverage ratio significantly below the average of
KSA banks, but just over 100%. We forecast cumulative loan losses of
296bps over the next 5 years, or 59bps pa, suggesting stable loan loss
provisioning.
Above average core Tier 1: We calculate CET1 under Basel III of 15.3%,
well above industry peers, and with SAR 4.4bn worth of surplus
capital, equivalent to 9% of its fair value. However, Riyad has
sustained a high dividend payout ratio of c. 43% (compared to its
country peers of c. 35%), which may affect its surplus capital.
Liquidity adequate: Riyad has a net stable funding ratio of 119% and a
liquidity coverage ratio of 139%, both higher than the 100% threshold,
making the bank relatively liquid. However, its net cash and interbank
position amounts to c. 14% of net assets, which is acceptable.
BUY
SAR 33.1
Bloomberg code
Market index
RIBL AB
Saudi Arabia
33.1
Upside (%)
Market data
37.9
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2011
6,321
2012e
6,724
2013e
7,280
2014e
8,033
3,811
4,120
4,507
5,080
2.10
15.8
20.11
20.11
1.2
1.6
1.30
5.4
1.7
1.7
10.1
80.8
181
2.30
14.4
20.84
20.84
1.2
1.6
1.30
5.4
1.8
1.7
11.2
81.5
197
2.49
13.3
21.95
21.95
1.1
1.5
1.30
5.4
1.9
1.7
11.6
82.1
215
2.82
11.7
23.38
23.38
1.0
1.4
1.30
5.4
1.9
1.7
12.4
82.7
236
15.3
15.6
15.2
15.0
14.8
17
1.6
106.3
14.4
17
1.6
112.5
14.0
16
1.5
123.9
13.7
16
1.5
129.5
Price Performance
RIBL AB
125
Riyad is trading at cheap valuation multiples: Bank currently trades at
13.3x P/E13e, and one of the lowest P/tNAV12e amongst peers at 1.2x
with an ROE12e of c. 11% and RORWA of c. 1.7%, which doesn’t factor
whatsoever in improving returns and a strong capital base. We believe
that Riyad Bank offers a conservative and stable growth model, aided
by a strong balance sheet and high potential for further growth. The
bank’s consistent dividend yields offer a further attractive proposition.
24.0
22.2-27.2
36,000
9,599
29.5
7.9
Saudi Arabia
116
107
98
89
80
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Riyad Bank
Year-end
Profitability
3%
2.24%
2.10%
2.09%
2.15%
2.10%
2.29%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
2.45
2.46
2.45
2.44
2.44
2.54
Cost/Income (%)
38.6
39.7
38.7
38.1
36.8
34.4
69.3
66.4
65.4
64.9
64.4
64.9
23.7
25.1
27.2
27.9
28.6
28.3
2.1
2.3
2.6
2.3
2.3
2.2
RoAE (%)
9.6
10.1
11.2
11.6
12.4
13.8
13.1
12.8
13.4
14.0
14.9
16.4
1.6
1.7
1.8
1.9
1.9
2.1
Revenue / RWA (%)
3.65
3.49
3.42
3.39
3.40
3.49
Costs / RWA (%)
1.41
1.39
1.32
1.29
1.25
1.20
PPP / RWA (%)
2.24
2.10
2.09
2.10
2.15
2.29
0.57
0.37
0.34
0.36
0.36
0.36
RoRWA (%)
1.68
1.66
1.70
1.69
1.74
1.87
1.68
1.62
1.66
1.65
1.70
1.83
1.68%
0.57%
1.70%
0.34%
1.66%
0.37%
1.87%
1.74%
0.36% 0.36%
1.69%
0.36%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.45%
2.46%
2.45%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
2.44%
2.44%
2.54%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.9
0.6
0.6
0.6
0.6
0.6
1.7%
NPL/Gross Loans (%)
1.7
1.6
1.6
1.5
1.5
1.4
1.6%
126.2
106.3
112.5
123.9
129.5
135.7
1.5%
1.4%
Asset Quality
Credit Quality
150%
100%
50%
0%
1.6
2.0
1.6
1.6
1.7
1.7
25.4
17.4
53.2
52.8
47.2
42.9
1.3%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
83.5
80.8
81.5
82.1
82.7
83.4
(2.0)
2.0
4.9
5.1
5.2
5.3
88.0
92.8
92.4
91.9
91.5
91.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
16.6
15.3
15.6
15.2
15.0
14.9
Tier 1 ratio (%)
16.0
14.8
14.4
14.0
13.7
13.4
18.3
17.1
16.7
16.4
16.1
16.0
16.8
16.7
16.2
15.6
15.1
14.8
RWA / assets (%)
94.4
100.1
102.0
101.9
102.0
102.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
(1.6)
4.2
6.7
9.0
10.0
11.0
Net loan growth (%)
(0.5)
6.5
7.9
9.9
11.0
12.0
1.3
10.1
7.0
9.1
10.1
11.1
(6.5)
8.9
11.5
8.3
13.2
19.6
Capital Ratios
26%
22%
18.3%
17.1%
16.7%
18%
14%
16.0%
10%
16.4%
14.8%
14.4%
14.0%
FY11
Tier 1
FY12e
FY13e
FY10
16.1%
13.7%
FY14e
CAR
16.0%
13.4%
FY15e
Growth
20%
10%
7%
FY10
FY11
11%
11%
8%
7%
1%
0%
0%
10%
FY12e
9%
FY13e
10%
FY14e
12%
FY15e
-20%
Loan growth
Deposit growth
Growth
Deposit growth (%)
Riyad Bank
123
May 23 2012
Abacus
Riyad Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
4,873
4,915
5,079
5,385
5,893
6,643
731
718
684
661
722
696
Company Profile
Interest income
Riyad Bank was established in 1957, making it one of
the oldest banks in the Kingdom. The bank provides
conventional and Islamic commercial banking. RIBL
maintains c. 250 branches and c. 3,170 ATMs,
employing c. 5,000 people. In addition to its presence
in KSA, RIBL has branches in the UK and the US. The
bank has 10.7% of the lending market share, and
12.7% of the deposit market share. Major
shareholders include the Public Investment Fund with
21.7%, the General Organization for Social InsuranceKSA with 21.6%, and the Saudi Arabian Monetary
Agency (SAMA) with 6.5%. Riyad has a 32.3% free
float.
Net interest income
4,142
4,197
4,395
4,724
5,170
5,947
Fee income
Interest expense
1,418
1,589
1,830
2,031
2,295
2,594
Net trading income
124
145
174
169
182
198
297
390
326
355
386
419
5,980
6,321
6,724
7,280
8,033
9,158
2,306
2,510
2,604
2,773
2,953
3,146
3,675
3,811
4,120
4,507
5,080
6,012
Net provisions
935
662
670
769
850
952
(85)
—
3
3
4
4
2,825
3,149
3,448
3,734
4,226
5,055
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
0.0%
Retail
Corporate
77.1%
—
—
—
—
—
3,149
3,448
3,734
4,226
5,055
—
—
—
—
—
—
2,825
3,149
3,448
3,734
4,226
5,055
Minorities
—
—
—
—
—
—
Tier 1 Coupon
71
150
103
112
127
152
22.9%
—
2,825
2,754
2,999
3,344
3,622
4,099
4,903
Diluted EPS
1.84
2.00
2.23
2.41
2.73
3.27
DPS
1.30
1.30
1.30
1.30
1.30
1.45
BVPS
19.49
20.11
20.84
21.95
23.38
25.43
Tangible BVPS
19.49
20.11
20.84
21.95
23.38
25.43
Year-end
2010
2011
2012e
2013e
2014e
2015e
108,323
114,971
124,169
136,586
151,610
169,804
2,288
1,999
2,235
2,595
2,881
3,226
106,035
112,973
121,934
133,991
148,730
166,577
Government
0.0% 0.2%
4.6%
0.8%
KSA
Other Middle
East
94.4%
Europe
Riyad Bank
17,623
18,922
20,195
21,408
22,664
4,689
6,085
11,586
12,629
13,891
15,419
Investment, net
34,254
37,057
33,277
35,400
38,210
41,859
Fixed assets
1,863
1,807
2,184
2,599
3,056
3,559
Other assets
3,538
5,002
4,827
5,262
5,788
6,425
Total assets
173,556
180,887
193,097
210,476
231,524
256,991
Customer deposits
126,945
139,823
149,601
163,250
179,775
199,769
10,637
6,242
6,554
6,882
7,226
7,587
Debt
1,874
—
1,750
2,250
1,750
1,750
Other liabilities
4,867
4,665
3,939
5,169
7,699
9,745
Total liabilities
144,323
150,729
161,845
177,551
196,450
218,851
29,233
30,158
31,253
32,925
35,074
38,140
164
181
197
215
236
263
169,335
170,511
179,283
193,511
211,761
233,902
Due to banks
North America
Other
Countries
23,179
Due from banks
Total Equity
141,385
142,760
151,985
165,144
180,566
198,929
29,233
30,158
31,253
32,925
35,074
38,140
27,939
28,850
30,646
32,717
35,485
39,081
Tier 1 capital
26,249
26,836
28,333
30,118
32,393
35,274
Michael Malkoun
+97145071744
124
May 23 2012
Riyad Bank valuation (SARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Riyad Bank
2010
2011
2,825
71
321
4.5%
-2,432
20,144
12.1%
10.7%
2,161
271
---
3,149
150
238
4.5%
-2,761
22,921
12.0%
10.7%
2,459
302
---
2012e
2013e
2014e
2015e
3,448 3,734 4,226 5,055
103
112
127
152
239
217
195
179
4.5%
4.5%
4.5%
4.5%
----3,105 3,405 3,904 4,724
23,994 26,147 28,782 31,988
12.9% 13.0% 13.6% 14.8%
10.7% 10.7% 10.7% 10.7%
2,575 2,806 3,088 3,432
531
599
815 1,292
-0.95
0.86
0.78
-569
700 1,001
5,055
152
179
4.5%
-4,724
31,988
14.8%
10.7%
3,432
1,292
0.78
1,001
2,271
4.6%
14,879
23,994
41,144
30.0%
48.3%
82.9%
5,309
10.7%
4.0%
19,198
29,233
---
30,158
---
31,253 32,925 35,074 38,140
---------
(1,950)
27,283
(1,950)
28,208
(1,950) (1,950) (1,950) (2,175)
29,303 30,975 33,124 35,965
163,785
167,866
12.0%
-20,144
7,139
181,052 196,890 214,560 236,183 262,500
188,175 196,890 214,560 236,183 262,500
12.0%
12.0% 12.0% 12.0% 12.0%
340
367
400
440
488
22,921 23,994 26,147 28,782 31,988
5,287
5,309 4,828 4,342 3,977
440.896
970
(175)
1,236
2.5%
1,950
3.9%
49,639 100.0%
1,500
33.1
24.0
37.9%
14.8
1.59
13.7
1.51
125
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
SAMBA Financial Group
Attractive valuation for an established
franchise
 Returns helped by high efficiency
 Very strong capital base and liquidity leaving plenty of
room for growth
 Our TP of SAR 69 offers 43% upside
Attractive returns: We estimate pre-provisioning returns in FY 12e to
be 2.6% of RWA despite slightly deteriorating net interest margins
(which has been the biggest headwind for Samba so far), while
expecting to RORWA to remain at c. 2.3%. However, the bank has
been able to make up for lower revenues through a low cost/income
ratio of below 30%; second only to Al Rajhi. Moreover, Samba has
strong brokerage operations which place it in a good position to
benefit from increased trading volumes.
FY 11-15e net earnings CAGR is 11%: We expect the cost of risk to be
a moderate headwind for the bank after a sharp fall in FY 11A. We
expect lending to increase by 11% in FY 12e, and deposits to grow by
8%, relatively slower than loans as the bank attempts to shore up its
LTD from its current low level of 65%. Samba is also among the best
positioned to benefit from a pickup in corporate lending.
Average, but improving, asset quality: Our asset quality screen
suggests a cumulative loss of 286bps over the next 5 years (57bps pa),
up vs. the 34bps of FY 11A. In FY 11A, Samba recorded a 3.0% NPL
ratio, down significantly from 3.7% in FY 10A, while maintaining a
coverage of 124%.
Capital ratios very robust: We calculate a CET1 of 15.7% for FY 12e
under Basel III, above the average of KSA banks, despite a potential
increase in RWAs under Basel 3.
Strong liquidity: We estimate high Basel liquidity ratios with an NSFR
of c. 158% and an LCR c. 193%, both well above the minimum
requirements. Samba’s net cash position is adequate at 20% of total
loans.
Samba offers an attractive valuation and 43% potential return: The
bank currently trades at a P/E13e of 8.75x and a P/tNAV12e of 1.4x,
which do not fully factor in Samba’s high returns (RoE of 15.5% and a
RORWA of 2.3%) and strong capital and liquidity ratios. Samba is well
positioned for future corporate loan demand.
BUY
SAR 65.6
Bloomberg code
Market index
SAMBA AB
Saudi Arabia
65.6
Upside (%)
Market data
36.2
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
48.2
42.1-57.0
43,380
11,567
13.9
3.7
2011
6,562
2012e
6,958
2013e
7,570
2014e
8,447
4,606
4,968
5,450
6,180
4.78
10.1
31.26
31.23
1.5
2.1
1.65
3.4
2.2
2.7
15.5
64.9
156
5.09
9.5
34.43
34.40
1.4
1.9
1.65
3.4
2.3
2.3
15.5
66.7
195
5.51
8.8
38.12
38.09
1.3
1.7
1.65
3.4
2.3
2.2
15.2
68.4
214
6.16
7.8
42.46
42.44
1.1
1.5
1.65
3.4
2.3
2.3
15.3
70.0
237
14.8
15.7
15.8
15.9
18.1
19
3.0
124.4
16.0
17
3.0
130.0
16.1
17
3.1
138.7
16.2
17
3.2
146.9
Price Performance
SAMBA AB
125
Saudi Arabia
114
103
92
81
70
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
4%
2.99%
3%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
2.53
2.39
2.33
2.31
2.30
2.40
Cost/Income (%)
27.7
29.8
28.6
28.0
26.8
24.7
65.7
66.7
64.3
63.6
63.2
64.2
18.2
21.3
23.6
24.3
24.9
24.4
10.6
7.2
7.2
7.1
7.1
6.9
RoAE (%)
18.0
15.5
15.5
15.2
15.3
16.3
Pre Prov.ROE (%)
20.9
17.2
16.8
16.7
17.0
18.2
2.3
2.2
2.3
2.3
2.3
2.4
Revenue / RWA (%)
4.81
4.21
3.58
3.53
3.57
3.74
Costs / RWA (%)
1.33
1.25
1.02
0.99
0.96
0.92
PPP / RWA (%)
3.48
2.95
2.55
2.54
2.61
2.81
0.39
0.19
0.20
0.23
0.27
0.30
RoRWA (%)
2.99
2.66
2.28
2.24
2.28
2.46
2.99
2.66
2.27
2.24
2.27
2.46
2.66%
2.28%
2.28%
2.24%
3.48%
2.95%
0.39%
2.55%
0.20%
0.19%
2.46%
2.81%
2.61%
2.54%
0.23%
0.27%
0.30%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.53%
FY10
2.39%
2.33%
FY11
FY12e
FY13e
FY14e
Net interest margin
2.31%
2.30%
2.40%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.7
0.3
0.4
0.5
0.5
0.6
NPL/Gross Loans (%)
3.7
3.0
3.0
3.1
3.2
3.3
118.1
124.4
130.0
138.7
146.9
151.5
4.0
4.0
3.3
3.5
3.9
4.2
11.2
6.5
19.0
24.4
25.2
22.8
Asset Quality
Credit Quality
160%
3.4%
3.3%
3.2%
3.1%
3.0%
2.9%
2.8%
150%
140%
130%
120%
110%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18.9%
19.2%
17.8%
18.1%
17.3%
17.3%
16.0%
16.1%
FY12e
FY13e
17.5%
16.2%
16.5%
FY11
Tier 1
FY14e
CAR
FY15e
Growth
20%
11%
3%
0%
-5%
FY10 -9% FY11
11%
8%
FY12e
11%
8%
FY13e
64.9
66.7
68.4
70.0
71.7
(8.8)
(8.6)
(9.0)
(8.5)
(7.6)
(6.5)
82.5
83.4
84.3
83.0
79.6
76.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
14.6
14.8
15.7
15.8
15.9
16.3
Tier 1 ratio (%)
17.8
18.1
16.0
16.1
16.2
16.5
18.9
19.2
17.3
17.3
17.5
17.8
13.7
14.7
15.1
15.2
15.0
14.9
RWA / assets (%)
76.6
80.9
94.1
94.2
92.2
90.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
10%
FY10
60.1
17.8%
18%
14%
11%
9%
9%
FY14e
12%
FY15e
Growth
Asset growth (%)
-20%
Loan growth
Deposit growth
1.0
2.9
7.2
10.1
12.9
13.5
Net loan growth (%)
(4.6)
11.0
10.8
10.9
11.2
11.6
Deposit growth (%)
(9.3)
2.8
7.8
8.2
8.6
9.0
(2.8)
(3.1)
6.6
8.6
12.2
19.8
127
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
5,195
4,855
5,016
5,358
5,871
6,712
658
479
546
540
528
405
Company Profile
Interest income
SAMBA Financial Group was established in 1980 and
provides conventional and Islamic commercial
banking services. The bank has an 8.7% lending
market share, and a 12.4% deposit market share.
SAMBA operates c. 70 branches and c. 520 ATMs,
while employing c. 3,000 people. The bank also
maintains a presence in the UAE and the UK. Major
shareholders include the Public Investment Fund with
22.9%, Public Pension Agency with 15%, and the
General Organization for Social Insurance-KSA with
11.4%. SAMBA has a 50.7% free float.
Net interest income
4,536
4,376
4,471
4,818
5,343
6,306
Fee income
Interest expense
1,258
1,399
1,645
1,842
2,100
2,394
Net trading income
690
355
367
396
442
500
416
433
475
514
563
623
6,901
6,562
6,958
7,570
8,447
9,824
1,910
1,956
1,990
2,120
2,268
2,427
4,991
4,606
4,968
5,450
6,180
7,397
559
301
391
488
629
776
—
—
—
—
—
—
4,432
4,305
4,577
4,962
5,550
6,622
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
23.1%
23.1%
Tier 1 Coupon
—
—
—
—
—
—
4,432
4,305
4,577
4,962
5,550
6,622
—
—
—
—
—
—
4,432
4,305
4,577
4,962
5,550
6,622
(3)
2
—
5
6
7
149
150
150
150
150
150
4,286
4,153
4,427
4,807
5,395
6,465
Retail
Diluted EPS
4.93
4.78
5.09
5.51
6.16
7.35
Corporate
DPS
1.65
1.65
1.65
1.65
1.65
1.65
BVPS
28.26
31.26
34.43
38.12
42.46
48.00
Tangible BVPS
28.22
31.23
34.40
38.09
42.44
47.98
Year-end
2010
2011
2012e
2013e
2014e
2015e
83,958
92,550
102,731
114,374
127,717
143,043
3,707
3,439
4,006
4,918
6,003
7,152
80,251
89,111
98,724
109,455
121,714
135,891
52,008
Government
53.8%
32,581
33,509
35,026
37,542
44,023
Due from banks
2,491
2,732
3,100
3,413
3,853
4,373
Investment, net
83,062
74,580
78,528
86,460
97,613
110,791
Fixed assets
970
1,169
1,567
1,992
2,477
3,029
Other Middle
East
Other assets
6,213
6,051
6,200
6,826
7,706
8,747
Total assets
187,416
192,774
206,654
227,526
256,876
291,555
Europe
Customer deposits
133,463
137,257
147,966
160,123
173,934
189,641
19,801
20,628
22,691
24,960
27,456
30,202
Debt
1,875
—
2,072
2,242
2,435
2,655
Other liabilities
6,675
6,631
2,734
5,667
14,579
25,570
Total liabilities
161,813
164,517
175,463
192,992
218,404
248,068
25,603
28,257
31,190
34,533
38,472
43,487
143
156
195
214
237
263
179,332
182,866
192,186
208,757
232,661
263,196
1.0%
8.5%
1.1%
KSA
89.4%
Due to banks
Other
Countries
Total Equity
155,730
156,512
165,307
180,027
195,575
213,162
25,402
28,104
30,960
34,284
38,196
43,178
24,860
27,515
30,448
33,791
37,730
42,745
Tier 1 capital
25,575
28,231
31,167
34,512
38,453
43,470
Michael Malkoun
+97145071744
128
May 23 2012
SAMBA Financial Group valuation (SARmn)
Year-end
2010
1. DCF
Net profit
4,435
149
161
Risk free rate
4.5%
Tax shelter
3.4%
Adjusted net profit
4,125
20,379
RoEcC
20.2%
Cost of capital
11.2%
Capital charge
2,242
Economic profit
1,883
Discount factor
Terminal Value
Required Capital
Available capital:
25,430
Minorities
173
(28)
(1,485)
Tangible equity
24,090
Capital needs
143,487
RWAs (Basel III)
169,821
Equity as % RWA
12.0%
Financial stakes
0
20,379
Surplus capital
3,712
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2011
2012e
2013e
2014e
2015e
perp
4,303
150
193
4.5%
3.5%
3,960
22,304
17.8%
11.2%
2,453
1,507
---
4,577
150
275
4.5%
3.3%
4,152
23,357
17.8%
11.2%
2,569
1,583
---
4,957
150
318
4.5%
3.0%
4,489
25,746
17.4%
11.2%
2,832
1,657
0.95
1,573
5,545
150
373
4.5%
2.7%
5,022
28,448
17.7%
11.2%
3,129
1,892
0.86
1,618
6,615
150
458
4.5%
2.3%
6,007
31,568
19.0%
11.2%
3,473
2,535
0.77
1,952
6,615
150
458
4.5%
2.3%
6,007
31,568
19.0%
11.2%
3,473
2,535
0.77
1,952
subtotal% of total
5,144
8.3%
24,406
23,357
52,906
39.4%
37.7%
85.4%
6,325
10.2%
2.5%
31,681
28,130
127
(26)
30,984
207
(24)
34,306
228
(21)
38,215
257
(19)
43,196
292
(17)
(1,485)
26,746
(1,485)
29,682
(1,485)
33,027
(1,485)
36,968
(1,485)
41,985
156,050
185,865
12.0%
0
22,304
4,442
194,503
194,503
12.0%
17
23,357
6,325
214,399
214,399
12.0%
18
25,746
7,281
236,891
236,891
12.0%
21
28,448
8,521
262,876
262,876
12.0%
23
31,568
10,416
(5)
1,650
(381)
1,265
2.0%
1,485
2.4%
61,981 100.0%
900
68.9
48.2
42.9%
13.5
2.00
12.5
1.81
129
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
The Saudi British Bank
Growth potential fully priced in
 Double digit earnings growth, potential headwind from
structurally higher cost of risk, after huge jump in FY 11A
 Improved asset quality, adequate capital and liquidity
positions.
 Stock is fairly valued after strong performance
HOLD
Bloomberg code
Market index
FY 11-15e net earnings CAGR is 15%: SABB witnessed significant
bottom line net earnings growth in FY 11A of 55% y/y due to a sizeable
decrease in provisioning charges, but we expect loan loss charges to
be a moderate headwind going forward.
Improved asset quality: Our asset quality screen suggests a
cumulative loss of 305bps over the next 5 years (61bps pa), slightly
higher than the charge of 57bps in FY 11A. SABB’s asset quality has
also improved noticeably, with the bank reporting an NPL ratio of
1.9%, and a coverage ratio of 124%.
Solid capital base: We calculate common equity Tier 1 of 13.4% under
Basel III, which is stronger than SABB’s reported Tier 1 as it does not
include the current year’s earnings. We expect this ratio to increase to
15.1% in FY 12e.
Well above liquidity requirements: We estimate an NSFR of 138%
and an LCR of 195% for SABB, significantly higher than the 100%
minimum, making SABB relatively liquid. Its net cash and interbank
position stood at a high 21% of total assets.
Currently trading at fairly priced valuation multiples: SABB is
currently trading at a P/E13e of 10.8x and a P/B12e of 1.6x, which fully
captures SABB’s improved fundamentals (RORWA of 2.0% and RoE of
16.1%) after a robust stock price performance.
SABB AB
Saudi Arabia
37.1
Upside (%)
Market data
Medium returns: We expect SABB to maintain pre-provisioning profits
as a percentage of RWA in the range of 2.5-2.7%. We expect RORWA
to fall vs. FY 11A due to a return to higher additions to loan loss
reserves.
SAR 37.1
7.5
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
34.5
27.8-37.2
34,499
9,199
6.6
1.7
2011
4,899
2012e
5,287
2013e
5,925
2014e
6,601
3,293
3,622
4,115
4,608
2.71
13.2
17.17
17.17
2.0
2.0
0.56
1.6
2.0
2.2
16.2
77.4
120
2.51
12.2
21.93
21.93
1.6
1.6
0.70
2.0
2.1
2.0
16.1
78.0
138
3.85
10.8
24.43
24.43
1.4
1.4
0.70
2.0
2.1
2.0
15.3
78.9
162
4.19
9.7
27.27
27.27
1.3
1.3
0.70
2.0
2.0
1.9
15.2
79.8
187
13.4
15.1
14.3
13.9
11.8
15
1.9
124.0
13.5
17
2.1
122.0
12.8
16
2.1
120.5
12.4
16
2.2
120.3
Price Performance
SABB AB
125
Saudi Arabia
115
105
95
85
75
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
4%
2.83%
2.74%
2.62%
2.54%
2.47%
2.51%
3%
2%
0%
-1%
2010
2011
2012e
2013e
2014e
2015e
2.66
2.37
2.27
2.25
2.22
2.32
Cost/Income (%)
36.2
32.8
31.5
30.6
30.2
29.2
67.0
61.7
61.1
61.8
62.5
64.5
24.4
24.8
25.9
25.4
24.9
23.4
5.4
7.4
7.2
7.5
7.7
7.6
RoAE (%)
12.0
16.2
16.1
15.3
15.2
15.8
Pre Prov.ROE (%)
22.2
20.8
19.0
18.2
18.3
18.9
1.3
2.0
2.1
2.1
2.0
2.1
Revenue / RWA (%)
4.44
4.08
3.82
3.66
3.54
3.55
Costs / RWA (%)
1.61
1.34
1.20
1.12
1.07
1.04
PPP / RWA (%)
2.83
2.74
2.62
2.54
2.47
2.51
1.14
0.39
0.41
0.41
0.42
0.42
RoRWA (%)
1.55
2.18
2.04
1.97
1.90
1.94
1.51
2.06
1.93
1.87
1.80
1.84
1.14%
2.18%
2.04%
1.55%
0.41%
0.39%
FY10
FY11
FY12e
PPP/RWA
1.97%
1.90%
0.41%
0.42%
FY13e
FY14e
Cost of risk/RWA
1.94%
0.42%
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.66%
2.37%
FY10
FY11
2.27%
2.25%
2.22%
FY12e
FY13e
FY14e
Net interest margin
2.32%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.6
0.6
0.6
0.6
0.6
0.6
2.4%
NPL/Gross Loans (%)
3.4
1.9
2.1
2.1
2.2
2.3
2.3%
100.0
124.0
122.0
120.5
120.3
120.4
2.2%
Asset Quality
Credit Quality
123%
122%
121%
2.1%
120%
2.0%
119%
2.3
3.0
2.1
2.1
2.2
2.3
40.3
14.2
15.8
16.3
17.0
16.9
1.9%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
80.7
Capital Ratios
26%
22%
18%
17.3%
14.2%
14%
10%
11.9%
FY10
14.7%
11.8%
FY11
Tier 1
13.5%
FY12e
16.3%
15.7%
20%
14%
12%9%
12.8%
12.4% 12.1%
FY13e
FY14e
CAR
FY15e
16%
15%
18%
16%
17%
15%
14%
78.0
78.9
79.8
(0.6)
(0.4)
—
0.2
0.5
90.9
90.2
93.2
93.9
94.4
94.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.6
13.4
15.1
14.3
13.9
13.7
Tier 1 ratio (%)
11.9
11.8
13.5
12.8
12.4
12.1
14.2
14.7
17.3
16.3
15.7
15.4
12.1
12.4
14.0
13.5
13.3
13.2
RWA / assets (%)
87.0
86.6
88.1
89.6
90.8
91.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
FY11
FY12e
FY13e
FY14e
Asset growth (%)
10.6
13.3
15.1
13.7
13.1
(100.0)
Net loan growth (%)
(2.8)
14.2
15.9
17.9
15.9
FY15e
-20%
Loan growth
14.9
Deposit growth (%)
12.3
9.4
15.0
16.5
14.6
13.6
(6.9)
54.5
8.2
12.8
11.1
16.5
15%
-3%
FY10
77.4
2.4
15.4%
Growth
0%
74.1
Deposit growth
Growth
131
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
3,725
3,516
3,818
4,308
4,870
5,730
482
494
585
648
744
846
Company Profile
Interest income
SABB was founded in 1978 to provide conventional
and Islamic commercial banking and wealth
management services. The bank has an 8.1% lending
market share and a 9.9% deposit market share. SABB
operates c. 80 branches and c. 524 ATMs, employing
c. 3,100 people. SABB is an associate of HSBC Holdings
that owns 40% of the bank, the Olayan Saudi
Investment Company owns 16.9%, the General
Organization for Social Insurance-KSA with 9.5%, and
A.K. Al Muhaidib and Sons Group with 4.5%. The bank
Net interest income
3,243
3,022
3,232
3,660
4,126
4,885
Fee income
Interest expense
1,181
1,215
1,368
1,505
1,641
1,772
Net trading income
258
312
328
380
435
493
157
350
358
379
400
421
4,839
4,899
5,287
5,925
6,601
7,570
1,754
1,606
1,665
1,810
1,993
2,209
3,085
3,293
3,622
4,115
4,608
5,361
Net provisions
1,243
469
572
670
784
904
—
—
—
—
—
—
1,842
2,824
3,050
3,445
3,824
4,457
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
2.6%
Minorities
19.2%
Tier 1 Coupon
64
94
101
115
130
2,888
3,144
3,546
3,939
4,588
—
—
—
—
—
—
1,883
2,888
3,144
3,546
3,939
4,588
—
—
—
—
—
—
190
272
314
355
394
459
1,693
2,616
2,830
3,191
3,545
4,129
Retail
Diluted EPS
1.69
2.62
2.83
3.19
3.55
4.13
Corporate
DPS
0.56
0.56
0.70
0.70
0.70
0.70
BVPS
15.17
17.17
21.93
24.43
27.27
30.70
Tangible BVPS
15.17
17.17
21.93
24.43
27.27
30.70
Year-end
2010
2011
2012e
2013e
2014e
2015e
76,863
86,892
100,795
118,938
137,968
158,663
2,614
2,081
2,521
3,058
3,681
4,392
74,248
84,811
98,273
115,880
134,287
154,271
25,172
Government
78.1%
41
1,883
1.2%
0.0%
0.7% 0.0%
KSA
Other Middle
East
98.0%
Europe
North America
15,144
22,381
23,029
23,757
24,426
Due from banks
7,042
4,347
4,713
5,425
6,165
6,970
Investment, net
25,073
22,300
25,249
29,062
33,029
37,339
Fixed assets
559
537
607
680
757
838
Other assets
3,185
3,816
4,713
5,425
6,165
6,970
Total assets
125,373
138,658
157,099
180,821
205,503
232,321
Customer deposits
100,149
109,555
125,993
146,837
168,253
191,160
4,849
6,066
6,369
6,688
7,022
7,373
—
—
1,000
1,000
1,000
1,000
Other liabilities
5,204
5,870
1,803
1,872
1,957
2,089
Total liabilities
110,201
121,491
135,166
156,396
178,233
201,622
15,172
17,166
21,933
24,425
27,270
30,699
109
120
138
162
187
213
122,113
127,573
142,445
162,572
185,876
210,672
Due to banks
Debt
Other Countries
Total Equity
106,843
110,309
124,492
143,944
165,400
187,904
15,172
17,166
21,933
24,425
27,270
30,699
14,145
16,284
20,855
23,201
25,898
29,170
Tier 1 capital
12,938
14,185
18,725
20,717
23,070
25,747
Michael Malkoun
+97145071744
132
May 23 2012
The Saudi British Bank valuation (SARmn)
Year-end
2010
1. DCF
Net profit
1,883
190
42
Risk free rate
4.5%
Tax shelter
-Adjusted net profit
1,651
13,675
RoEcC
12.1%
Cost of capital
11.0%
Capital charge
1,504
Economic profit
147
Discount factor
Terminal Value
Required Capital
Available capital:
15,172
Minorities
-Less Goodwill & intangibles
-Less non equity elements reported shareholders equity
(563)
Tangible equity
14,609
Capital needs
109,072
RWAs (Basel III)
112,111
Equity as % RWA
12.0%
Financial stakes
222
13,675
Surplus capital
935
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2011
2012e
2013e
2014e
2015e
perp
2,888
272
65
4.5%
-2,551
15,162
16.8%
11.0%
1,668
883
---
3,144
314
180
4.5%
-2,650
17,244
15.4%
11.0%
1,897
753
---
3,546
355
160
4.5%
-3,031
20,167
15.0%
11.0%
2,218
813
0.95
772
3,939
394
151
4.5%
-3,395
23,219
14.6%
11.0%
2,554
841
0.86
719
4,588
459
156
4.5%
-3,973
26,533
15.0%
11.0%
2,919
1,054
0.77
812
4,588
459
156
4.5%
-3,973
26,533
15.0%
11.0%
2,919
1,054
0.77
812
subtotal % of total
2,302
6.2%
10,889
17,244
30,435
29.4%
46.5%
82.1%
3,989
10.8%
3.5%
14,135
17,166
---
21,933
---
24,425
---
27,270
---
30,699
---
(563)
16,604
(700)
21,233
(700)
23,725
(700)
26,570
(700)
29,999
120,019
121,640
12.0%
565
15,162
1,442
138,463
138,463
12.0%
628
17,244
3,989
162,028
162,028
12.0%
723
20,167
3,558
186,639
186,639
12.0%
822
23,219
3,351
213,361
213,361
12.0%
929
26,533
3,466
0
1,959
(6)
1,954
700
37,078
1,000
37.1
34.5
7.5%
13.1
1.69
5.3%
1.9%
100.0%
11.6
1.52
133
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Saudi Hollandi Bank
Cheap multiples for potential takeover
target
 Cost efficiency offers room for improvement
 Clean asset quality, average fundamental strength
 Our TP of SAR 38 offers 41% upside, among highest for
KSA banks, catalyst would be a new strategic partner
Medium returns: We estimate pre-provisioning returns as 2.2% of
RWA in FY 12e, potentially helped by a reduction in cost/income
driven by revenue growth.
FY 11-15e net earnings CAGR of 12%: We expect SHB’s earnings
growth to slow down after a huge recovery in FY 10A and FY 11A. We
also estimate loan growth of 16%, following strong Q1 results, but
believe that deposit growth will outpace lending growth as the bank
attempts to keep its LTD below the informal 85% cap imposed by
SAMA.
Superior asset quality: Our asset quality screen suggests a cumulative
loss of 294bps over the next 5 years (59bps pa), coming from lending
to both the corporate and retail sectors, however the bank should be
able to comfortably absorb these charges. Its NPL ratio of 1.9% is
towards the lower end of the KSA bank spectrum, while its 145%
coverage ratio is better than peers.
Low capital reserves: We estimate a CET1 of 12.4% in FY 12e, virtually
in line with Tier 1. We do not expect a significant effect from Basel 3
for SHB.
Medium liquidity: We calculate an NSFR of 151% and an LCR of 185%,
implying that SHB is highly liquid. However, the bank has a 12% net
cash position as a percentage of total assets, the lowest among KSA
banks.
Very attractive valuation multiples offering 35% upside: SHB is
currently trading at a P/E13e of 8.7x, and a P/tNAV12e of 1.2x, both
the lowest among KSA banks. We also estimate a RoE12e of 14.3% and
RORWA of 1.8%, implying that the market is significantly undervaluing
this bank. We believe a potential catalyst should be a new strategic
investor, which should accelerate SHB’s growth outlook RBS has
earmarked its 40% stake in SHB as non-core and has put it up for sale.
BUY
SAR 38.3
Bloomberg code
Market index
AAAL AB
Saudi Arabia
38.3
Upside (%)
Market data
41.9
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
27.0
21.0-29.7
10,716
2,857
3.9
1.0
2011
2,005
2012e
2,217
2013e
2,417
2014e
2,651
1,203
1,373
1,516
1,681
2.60
10.4
18.67
18.67
1.4
2.1
0.95
3.5
1.5
1.6
12.5
83.8
53
2.93
9.2
22.22
22.22
1.2
1.7
1.00
3.7
1.9
1.8
14.3
82.5
63
3.12
8.7
24.25
24.25
1.1
1.6
1.10
4.1
1.8
1.7
13.4
82.4
69
3.46
7.8
26.51
26.51
1.0
1.4
1.20
4.4
1.7
1.7
13.6
82.3
77
12.9
12.4
12.4
12.3
12.7
16
1.9
145.4
12.4
15
2.0
150.0
12.4
15
2.0
155.0
12.3
15
2.0
157.5
Price Performance
AAAL AB
126
Saudi Arabia
116
106
96
86
76
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Saudi Hollandi Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.35
2.39
2.23
2.18
2.16
2.24
Cost/Income (%)
39.5
40.0
38.1
37.3
36.6
34.9
65.9
64.3
60.4
61.1
61.7
62.9
23.3
25.9
26.4
26.2
26.0
25.1
6.3
4.3
7.2
6.6
6.3
6.1
RoAE (%)
11.9
12.5
14.3
13.4
13.6
14.5
Pre Prov.ROE (%)
19.6
17.3
16.9
16.4
16.7
17.6
1.3
1.5
1.9
1.8
1.7
1.8
Revenue / RWA (%)
3.89
3.78
3.54
3.48
3.45
3.55
2.8%
Costs / RWA (%)
1.54
1.51
1.35
1.30
1.26
1.24
2.6%
PPP / RWA (%)
2.36
2.27
2.19
2.19
2.19
2.31
0.77
0.30
0.33
0.40
0.40
0.41
RoRWA (%)
1.42
1.63
1.80
1.73
1.73
1.85
1.41
1.62
1.78
1.72
1.72
1.83
Profitability
3%
2.36%
2.27%
2.19%
2.19%
2.19%
2.31%
2%
1%
0%
1.42%
0.77%
1.80%
1.63%
0.30%
0.33%
1.73%
0.40%
1.85%
1.73%
0.40% 0.41%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
2.35%
2.39%
2.4%
2.23%
2.18%
2.24%
2.16%
2.2%
2.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.0
0.4
0.5
0.6
0.6
0.6
2.5%
NPL/Gross Loans (%)
2.6
1.9
2.0
2.0
2.0
2.0
2.0%
124.4
145.4
150.0
155.0
157.5
160.0
1.5%
Asset Quality
Credit Quality
165%
160%
155%
1.0%
150%
0.5%
145%
6.2
3.0
2.4
2.7
2.8
2.9
32.9
13.4
38.8
27.5
23.5
20.2
0.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
82.3
Capital Ratios
26%
84.2
83.8
82.5
82.4
82.3
(4.2)
(1.0)
0.2
1.1
2.0
2.3
87.6
89.8
91.4
90.7
89.6
89.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.1
12.9
12.4
12.4
12.3
12.5
Tier 1 ratio (%)
12.7
12.7
12.4
12.4
12.3
12.5
16.4
16.4
15.5
15.2
14.9
15.0
11.9
12.9
13.2
12.9
12.6
12.7
RWA / assets (%)
93.1
92.2
93.9
93.2
92.2
92.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
(8.8)
6.8
16.0
11.5
12.0
10.0
Net loan growth (%)
(2.7)
7.7
15.7
10.9
10.9
9.9
Deposit growth (%)
(7.2)
8.2
17.6
11.0
11.0
10.0
935.0
21.0
30.6
6.6
10.9
16.8
22%
18%
16.4%
16.4%
15.5%
15.2%
14.9%
15.0%
14%
10%
12.7%
12.7%
12.4%
12.4%
FY10
FY11
Tier 1
FY12e
FY13e
12.3%
FY14e
CAR
12.5%
FY15e
Growth
16%
20%
8%
11%
11%
10%
11%
11%
10%
18%
-3%
8%
0%
FY10
-7%
FY11
FY12e
FY13e
FY14e
FY15e
-20%
Loan growth
Deposit growth
Growth
Saudi Hollandi Bank
135
May 23 2012
Abacus
Saudi Hollandi Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,625
1,567
1,662
1,838
2,047
2,330
338
277
323
361
412
446
1,287
1,290
1,338
1,478
1,635
1,883
Fee income
455
519
585
632
689
751
Net trading income
123
87
159
161
166
184
89
110
134
146
161
177
1,954
2,005
2,217
2,417
2,651
2,995
772
802
845
901
969
1,047
1,182
1,203
1,373
1,516
1,681
1,949
389
161
210
276
306
342
9
26
1
2
2
2
784
1,016
1,162
1,239
1,374
1,604
Company Profile
Interest income
SHB was among the first banks established in KSA in
1926 and provides conventional and Islamic
commercial banking services. The bank maintains a
3.6% lending market share, and a 4.1% deposit market
share. SHB operates c. 44 branches and c. 255 ATMs,
while employing c. 1,600 people. The Royal Bank of
Scotland owns 39.9% of the bank, the Olayan Saudi
Investment Company owns 20.8%, and the General
Organization for Social Insurance-KSA owns 9.6%. SHB
Net interest income
Interest expense
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
2.8%
11.0%
Group Net profit
(2)
—
—
—
—
1,014
1,162
1,239
1,374
1,604
—
—
—
—
—
—
790
1,032
1,162
1,239
1,374
1,604
Minorities
—
—
—
—
—
—
Tier 1 Coupon
77
169
35
37
41
48
Retail
713
863
1,127
1,201
1,333
1,556
Corporate
Diluted EPS
1.99
2.60
2.93
3.12
3.46
4.04
—
0.95
1.00
1.10
1.20
1.30
BVPS
16.09
18.67
22.22
24.25
26.51
29.23
Tangible BVPS
16.09
18.67
22.22
24.25
26.51
29.23
Year-end
2010
2011
2012e
2013e
2014e
2015e
36,197
38,815
45,025
49,978
55,476
61,023
1,158
1,070
1,351
1,549
1,747
1,953
35,039
37,745
43,675
48,429
53,728
59,071
9,774
Government
86.2%
—
784
DPS
1.2%
KSA
98.8%
Other Middle
East
5,000
5,969
6,457
7,460
8,867
Due from banks
309
613
668
744
834
917
Investment, net
22,142
22,160
23,365
26,052
29,178
32,096
Fixed assets
495
489
557
628
704
785
Other assets
1,268
1,212
2,003
2,233
2,501
2,751
Total assets
53,882
57,549
66,757
74,434
83,366
91,702
Customer deposits
41,604
45,024
52,971
58,798
65,266
71,792
Due to banks
2,857
1,611
1,369
1,232
1,109
998
Debt
1,500
1,500
1,854
2,058
2,284
2,513
Other liabilities
1,535
2,005
1,742
2,720
4,185
4,797
Total liabilities
47,495
50,140
57,936
64,809
72,844
80,100
6,387
7,408
8,820
9,625
10,522
11,602
50
53
63
69
77
84
54,831
53,964
59,990
67,835
75,811
84,102
Total Equity
Saudi Hollandi Bank
49,022
47,048
52,165
59,141
65,374
71,981
6,387
7,408
8,820
9,625
10,522
11,602
6,353
7,010
7,774
8,576
9,474
10,563
Tier 1 capital
6,353
7,018
7,783
8,585
9,483
10,571
Michael Malkoun
+97145071744
136
May 23 2012
Saudi Hollandi Bank valuation (SARmn)
Year-end
2010
1. DCF
Net profit
790
77
5
Risk free rate
5.5%
Tax shelter
709
6,301
RoEcC
11.2%
Cost of capital
10.8%
Capital charge
678
Economic profit
31
Discount factor
Terminal Value
Required Capital
Available capital:
6,387
Minorities
-Tangible equity
6,387
Capital needs
50,176
RWAs (Basel III)
52,503
Equity as % RWA
12.0%
Financial stakes
0
6,301
Surplus capital
86
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Number of shares
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Saudi Hollandi Bank
2011
2012e
2013e
2014e
2015e
perp
1,032
169
28
5.5%
-835
6,529
12.8%
10.8%
702
133
---
1,162
35
49
5.5%
-1,078
7,538
14.3%
10.8%
811
267
---
1,239
37
47
5.5%
-1,155
8,342
13.8%
10.8%
897
257
0.95
245
1,374
41
44
5.5%
-1,289
9,247
13.9%
10.8%
995
294
0.86
252
1,604
48
52
5.5%
-1,504
10,143
14.8%
10.8%
1,091
413
0.77
320
1,604
48
52
5.5%
-1,504
10,143
14.8%
10.8%
1,091
413
0.77
320
subtotal % of total
817
5.4%
5,156
7,538
13,511
33.9%
49.6%
88.9%
885
5.8%
4.5%
6,657
7,408
---
8,820
---
9,625
---
10,522
---
11,602
---
(377)
7,031
(397)
8,423
(437)
9,188
(476)
10,045
(516)
11,086
53,073
54,277
12.0%
16
6,529
502
62,672
62,672
12.0%
17
7,538
885
69,362
69,362
12.0%
19
8,342
846
76,887
76,887
12.0%
21
9,247
798
84,351
84,351
12.0%
21
10,143
943
809
13.1
1.72
809
5.3%
15,206
397
38.3
27.0
41.9%
100.0%
12.3
1.58
137
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Albilad Bank
Expensive strong returns
 Strong growth from low base, returns set to improve
 Asset quality tainted, capital position comfortable
 High valuation already reflects strong growth
HOLD
SAR 30.9
Bloomberg code
Market index
ALBI AB
Saudi Arabia
30.9
Upside (%)
Returns should improve: Albilad Bank is expected to continue
generating a high pre-provision return on RWA of 2.9% in FY 12e,
increasing to 3.1% by FY 15e, largely due to the bank’s prominent fee
income which makes up a sector high 33% of operating income (with
remittances accounting for 57% of total fees).
FY 11-15e net earnings CAGR is 29%: We forecast relatively high
earnings growth due to double digit revenue growth, a reduction in
the cost/income ratio and a small decrease in the average cost of risk.
Additionally, we expect high fee intensity, especially on the back of
strong lending growth of 20% in FY 12e and deposit growth of 16%,
albeit still with the smallest market share in the sector.
Tainted asset quality: Our asset quality screen suggests a cumulative
loss of 330 bps over the next 5 years (66bps pa), coming from both the
corporate and retail sectors, well below the loan loss charge of 1.8% in
FY 11A. The bank’s NPL ratio is relatively high compared to peers,
standing at 4.7%, while maintaining a coverage ratio of 129%. Asset
quality remains a risk for Albilad given that retail lending makes up
c.40% of the loan book, and has not yet fully matured.
Ample capital reserves: We expect Albilad’s CET1 ratio to come in at
17.4% in FY 12e providing the bank with enough room to maneuver
and to grow its books.
Very strong liquidity: The bank has sufficient liquidity to do so, and we
calculate an NSFR of c. 119% and an LCR of c. 349%. This is further
corroborated by the fact that the bank has an industry-low LTD of 60%
and a net cash position of c52%.
Market data
14.6
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2011
1,374
2012e
1,556
2013e
1,715
2014e
1,901
582
709
798
909
1.10
24.6
11.39
11.39
2.4
2.7
—
—
1.3
1.6
10.1
59.8
20
2.91
9.3
14.21
14.21
1.9
2.2
—
—
2.9
3.4
22.7
61.6
25
2.15
12.6
16.30
16.30
1.7
1.9
0.25
0.9
1.9
2.2
14.1
63.4
28
2.52
10.7
18.49
18.49
1.5
1.7
0.25
0.9
2.0
2.3
14.5
65.2
31
15.6
17.4
17.1
17.4
15.4
18
4.7
129.0
14.0
19
4.6
132.6
15.2
19
4.6
138.0
15.3
19
4.5
143.3
Price Performance
ALBI AB
175
We initiate with a hold: Albilad is currently trading at relatively
expensive multiples, with a P/E13e of 12.6x and a P/tNAV12e of 1.9x,
both at the higher end among KSA banks. We estimate a ROE12e of
22.7% and RORWA of 3.4% (excluding one offs only 1.9%) that partially
justify the relatively expensive multiples.
27.0
16.5-35.4
8,100
2,160
34.3
9.1
Saudi Arabia
156
137
118
99
80
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Albilad Bank
Year-end
Profitability
4%
3%
2%
2.86%
2.91%
2.91%
2.86%
3.06%
2.10%
3.42%
1.33% 1.65%
0.85%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
3.37
2.96
2.84
2.79
2.75
2.82
Cost/Income (%)
65.3
57.6
54.4
53.5
52.2
49.9
56.8
51.2
51.8
51.4
51.4
52.3
31.1
33.4
33.9
34.3
34.5
34.1
1.0
1.3
0.6
0.6
0.6
0.4
RoAE (%)
3.0
10.1
22.7
14.1
14.5
15.3
11.0
17.9
28.2
17.4
17.4
18.1
0.5
1.3
2.9
1.9
2.0
2.1
Revenue / RWA (%)
6.05
6.87
6.28
6.15
6.08
6.11
Costs / RWA (%)
3.95
3.96
3.42
3.29
3.17
3.05
PPP / RWA (%)
2.10
2.91
2.86
2.86
2.91
3.06
1.33
1.26
0.85
0.55
0.49
0.47
RoRWA (%)
0.51
1.65
3.42
2.25
2.34
2.51
0.51
1.65
3.42
2.25
2.34
2.51
2.25%
0.55%
2.34%
0.49%
1.26%
0.51%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
2.51%
0.47%
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
3.37%
2.96%
FY10
FY11
2.84%
2.79%
2.75%
FY12e
FY13e
FY14e
Net interest margin
2.82%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.0
1.8
1.3
0.8
0.7
0.7
NPL/Gross Loans (%)
5.5
4.7
4.6
4.6
4.5
4.0
89.4
129.0
132.6
138.0
143.3
150.0
Asset Quality
Credit Quality
160%
4.8%
4.6%
4.4%
4.2%
4.0%
3.8%
3.6%
150%
140%
130%
120%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
3.0
4.3
5.0
5.3
5.5
5.7
63.5
43.4
26.9
28.1
24.2
8.7
2010
2011
2012e
2013e
2014e
2015e
72.6
59.8
61.6
63.4
65.2
67.4
20.9
25.8
31.2
29.9
30.4
30.9
94.0
94.8
97.0
97.9
97.8
97.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
14.4
15.6
17.4
17.1
17.4
17.8
Tier 1 ratio (%)
16.6
15.4
14.0
15.2
15.3
15.5
17.4
18.3
18.6
18.7
18.9
19.2
14.7
12.3
13.4
13.7
13.9
14.2
RWA / assets (%)
86.0
72.1
77.7
78.1
78.1
78.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
21.3
31.3
15.0
12.0
12.0
12.0
Net loan growth (%)
11.6
12.1
19.9
15.7
14.9
14.5
Deposit growth (%)
23.4
36.1
16.3
12.6
11.7
10.8
(137.2)
257.0
156.9
(26.0)
17.0
20.5
Capital Ratios
26%
22%
17.4%
18.3%
18.6%
18.9%
18.7%
19.2%
18%
14%
16.6%
15.4%
10%
FY10
FY11
Tier 1
14.0%
FY12e
15.3%
15.2%
FY13e
FY14e
CAR
15.5%
FY15e
Growth
40%
36%
20%
23%
20%
16%
15%
12%
12%
16%
11%
13%
12%
15%
0%
FY10
FY11
FY12e
Loan growth
FY13e
FY14e
FY15e
Deposit growth
Growth
Albilad Bank
139
May 23 2012
Abacus
Albilad Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,168
Company Profile
Interest income
646
728
837
916
1,016
Interest expense
21
25
31
36
40
44
One of the most recently established banks under
coverage, Albilad began its operations 2004 providing
Islamic commercial banking services through its c. 82
branches and c. 600 ATMs, all in KSA and in which it
employees over 2,100 employees. Albilad also
generates significant revenue from its remittance
service. The bank currently has a c. 1.4% lending
market share and a 2.1% deposit market share. Major
shareholders
include
Mohammed
Ibrahim
Mohammed Al Subeaei with 11.67%, Abdullah
Ibrahim Mohammed Al Subeaei with 11.14%, First
Investment Company with 7.43%, Abulrahman Saleh
Abdulaziz Al Rajhi with 6.97%, Abdulrahman Abdulaziz
Saleh Al Rajhi with 6.57%, and a public free float of
50%
Net interest income
625
703
805
881
976
1,124
Fee income
342
458
528
589
657
732
8
7
8
9
9
7
125
205
214
236
259
284
Loan breakdown by Sector
Net trading income
1,099
1,374
1,556
1,715
1,901
2,147
717
792
846
916
992
1,071
382
582
709
798
909
1,076
Net provisions
242
252
210
152
154
166
47
—
—
—
—
—
Operating profit
92
330
500
646
756
910
Associates
—
—
—
—
—
—
Pre-tax profit
92
330
500
646
756
910
Taxation
—
—
—
—
—
—
Group Net profit
92
330
873
646
756
910
Minorities
—
—
—
646
756
910
Tier 1 Coupon
—
—
26
19
23
27
92
330
847
627
733
883
0.31
1.10
2.91
2.15
2.52
3.03
—
—
—
0.25
0.25
0.25
BVPS
10.34
11.39
14.21
16.30
18.49
21.18
Tangible BVPS
10.34
11.39
14.21
16.30
18.49
21.18
Year-end
2010
2011
2012e
2013e
2014e
2015e
12,923
14,664
17,597
20,412
23,474
26,760
633
884
1,073
1,296
1,514
1,606
12,290
13,780
16,523
19,116
21,960
25,155
2,497
5,835
3,918
4,488
5,417
6,016
Due from banks
4,032
6,454
7,978
8,285
9,000
10,304
Investment, net
1,272
Diluted EPS
19%
DPS
Retail
Corporate
81%
Loan breakdown by Country
100%
KSA
2,912
1,552
1,876
2,207
1,800
Fixed assets
342
328
598
609
622
636
Other assets
344
378
1,594
1,607
1,800
2,016
Total assets
21,117
27,727
31,886
35,713
39,998
44,798
Customer deposits
16,932
23,038
26,803
30,173
33,702
37,348
382
422
359
305
259
220
—
—
375
422
472
523
Other liabilities
699
851
86
(76)
19
353
Total liabilities
18,014
24,311
27,623
30,824
34,452
38,444
3,103
3,416
4,263
4,889
5,546
6,353
18
20
25
28
31
35
18,551
23,725
28,357
31,596
35,537
39,861
Due to banks
Debt
Total Equity
Albilad Bank
15,617
20,387
25,498
29,218
32,666
36,262
3,103
3,416
4,263
4,889
5,546
6,353
3,103
3,416
4,304
4,780
5,437
6,245
Tier 1 capital
3,011
3,087
3,457
4,229
4,780
5,437
Michael Malkoun
+97145071744
140
May 23 2012
Albilad Bank valuation (SARmn)
Year-end
2010
1. DCF
Net profit
92
0
29
Risk free rate
5.5%
Tax shelter
64
2,585
RoEcC
2.5%
Cost of capital
10.5%
Capital charge
270
Economic profit
(206)
Discount factor
Terminal Value
Required Capital
Available capital:
3,103
Minorities
-Less non equity elements reported shareholders’ equity
-Tangible equity
3,103
Capital needs
18,160
RWAs (Basel III)
21,539
Equity as % RWA
12.0%
Financial stakes
-Capital Requirements
2,585
Surplus capital
518
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Albilad Bank
2011
2012e
2013e
2014e
2015e
perp
330
0
44
5.5%
-286
2,625
10.9%
10.5%
274
12
---
873
26
71
5.5%
-776
2,973
26.1%
10.5%
311
465
---
645
19
81
5.5%
-545
3,346
16.3%
10.5%
350
196
0.95
186
755
23
95
5.5%
-638
3,750
17.0%
10.5%
392
246
0.86
212
909
27
113
5.5%
-769
4,217
18.2%
10.5%
441
328
0.78
256
909
27
113
5.5%
-769
4,217
18.2%
10.5%
441
328
0.78
256
subtotal % of total
654
7.0%
3,435
2,973
7,062
37.0%
32.0%
76.1%
1,290
13.9%
3.0%
4,405
3,416
---
4,263
---
4,889
---
5,546
---
6,353
---
-3,416
-4,263
(75)
4,814
(75)
5,471
(75)
6,278
19,982
21,877
12.0%
-2,625
791
24,772
24,772
12.0%
-2,973
1,290
27,884
27,884
12.0%
-3,346
1,468
31,247
31,247
12.0%
-3,750
1,722
35,144
35,144
12.0%
-4,217
2,061
93
851
(15)
929
-9,281
300
30.9
27.0
14.6%
10.6
2.18
10.0%
-100.0%
14.4
1.90
141
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Bank Al-Jazira
Sector-worst returns and asset quality
 Low returns and weak asset quality
 We expect a capital increase of 10%
 High growth captured in its valuation
Lowest returns amongst KSA banks: We expect Bank Al-Jazira to
continue to generate below sector average returns, and estimate a
pre-provision return on RWA of 1.6% in FY 12e, mainly due to the
lowest NIMs in the sector (due to low loan margins and high funding
costs, though we expect NIMs to improve), coupled with the highest
cost/income ratio and a normalization in the cost of risk. However,
fees generated remain above peers due to the bank’s original
concentration on brokerage and its recent transition into Islamic
banking. We expect pre-provision RORWA to improve to 1.8% by FY
15e.
FY 11-15e net earnings CAGR is 29%: We see a large potential for
bottom line earnings growth for Al-Jazira, primarily driven by
improving NII and efficiency. We anticipate the bank to continue
growing its loan book aggressively by 17% in FY 12e on the back of an
increase in mortgage lending, in addition to an aggressive push by the
bank’s management to increase its lending to SMEs and to establish a
credit card product.
Weakest asset quality: Our asset quality screen suggests a cumulative
loss of 272 bps over the next 5 years (54bps pa), primarily coming
from the bank’s exposure to corporations. Al-Jazira maintains the
highest NPL ratio among KSA banks at 7.7%, in addition to a low
coverage ratio of 64% which should be improved significantly over the
next four years. We expect the cost of risk to increase vs. FY 11A
when the bank allocated only 32bps of gross loans to its provisions.
We expect a 10% capital increase: The bank has a very tight capital
position with a CET1 of 11.7% in FY 11A, and we believe that the bank
will raise 10% new common equity. Its Basel liquidity, on the other
hand, is particularly strong, with an NSFR of c. 239% and an LCR of
243%, while its net cash position is high at 25.3%.
SELL
SAR 22.0
Bloomberg code
Market index
BJAZ AB
Saudi Arabia
22.0
Upside (%)
Market data
-13.7
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
25.5
15.1-33.9
7,650
2,040
14.8
55.4
2011
1,208
2012e
1,559
2013e
1,783
2014e
2,038
373
659
788
935
1.01
21.8
15.78
15.78
1.6
1.4
0.53
2.1
0.8
0.8
6.3
74.8
35
1.60
13.7
18.04
18.04
1.4
1.2
0.53
2.1
1.2
1.2
9.9
74.2
42
1.89
11.7
19.34
19.34
1.3
1.1
0.53
2.1
1.3
1.2
10.1
74.7
49
2.22
9.9
20.96
20.96
1.2
1.0
0.53
2.1
1.3
1.3
11.0
75.6
57
11.7
13.6
12.7
11.9
13.6
17
7.7
64.4
14.1
17
7.5
96.0
13.0
16
7.2
113.0
12.2
15
6.8
124.4
Price Performance
BJAZ AB
161
Saudi Arabia
143
125
We initiate with a Sell with 14% downside: The stock is trading at a
P/E13e of 11.7x and a P/tNAV12e of 1.4x, with an RoE12 of 9.9% and
RORWA of 1.2%. The banks strong earnings growth is fully reflected by
its high valuation.
107
89
71
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Bank Al-Jazira
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.40
2.27
2.16
2.10
2.05
2.13
Cost/Income (%)
66.2
69.1
57.7
55.8
54.1
51.3
62.1
64.7
56.0
55.7
55.6
56.9
23.0
29.5
34.5
35.0
35.2
34.3
9.2
1.2
5.7
5.8
5.9
5.8
RoAE (%)
0.6
6.3
9.9
10.1
11.0
12.6
Pre Prov.ROE (%)
8.7
8.1
12.3
12.8
14.0
15.9
RoAA (%)
0.1
0.8
1.2
1.3
1.3
1.4
Revenue / RWA (%)
3.86
3.48
3.68
3.64
3.60
3.69
2.8%
Costs / RWA (%)
2.56
2.41
2.13
2.03
1.95
1.89
2.6%
PPP / RWA (%)
1.31
1.08
1.56
1.61
1.65
1.80
1.21
0.20
0.31
0.34
0.36
0.38
RoRWA (%)
0.08
0.84
1.21
1.23
1.25
1.37
0.08
0.84
1.21
1.23
1.25
1.37
Profitability
2%
1.31%
1%
1.56%
1.61%
1.65%
1.21%
1.23%
1.25%
1.80%
1.08%
1.21%
1.37%
0.84%
0.20%
0%
0.31%
0.08%
FY10
FY11
PPP/RWA
0.34%
0.36%
FY12e
FY13e
FY14e
Cost of risk/RWA
0.38%
FY15e
RORWA
NIM
2.40%
2.27%
2.4%
2.16%
2.2%
2.10%
2.05%
2.13%
2.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.0
0.3
0.5
0.5
0.5
0.5
8.0%
NPL/Gross Loans (%)
9.1
7.7
7.5
7.2
6.8
6.5
150%
7.5%
62.0
64.4
96.0
113.0
124.4
150.0
100%
7.0%
50%
6.5%
Asset Quality
Credit Quality
200%
0%
4.0
4.6
4.1
6.1
6.9
7.3
92.7
18.8
19.6
20.9
21.6
21.0
6.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
68.4
74.8
74.2
74.7
75.6
75.8
17.1
9.7
8.8
8.9
8.7
9.0
96.9
91.7
92.6
91.5
90.8
90.4
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.0
11.7
13.6
12.7
11.9
11.5
Tier 1 ratio (%)
15.1
13.6
14.1
13.0
12.2
11.8
15.7
17.4
17.1
15.7
14.7
14.0
14.6
12.7
13.5
12.4
11.6
11.2
RWA / assets (%)
90.5
89.2
92.3
91.3
90.8
90.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18%
15.7%
17.4%
17.1%
15.7%
14.7%
14.0%
14%
15.1%
FY10
10%
13.6%
14.1%
13.0%
FY11
Tier 1
FY12e
FY13e
12.2%
FY14e
CAR
11.8%
FY15e
Growth
40%
25%
23%
21%
14%
20%
17%
18%
17%
18%
15%
17%
16%
15%
Growth
Asset growth (%)
0%
FY10
FY11
FY12e
Loan growth
Bank Al-Jazira
FY13e
FY14e
FY15e
Deposit growth
Net loan growth (%)
8.9
8.9
8.9
8.9
8.9
8.9
20.6
24.6
17.1
17.8
17.5
15.4
Deposit growth (%)
23.5
13.9
18.0
17.0
16.1
15.1
(8.4)
1,059.6
75.4
17.8
17.5
25.2
143
May 23 2012
Abacus
Bank Al-Jazira
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,717
Company Profile
Interest income
868
968
1,109
1,268
1,446
Interest expense
151
187
236
275
314
360
Bank Al-Jazira was established in 1975 with a focus on
financial services that resulted in a very strong retail
brokerage arm, in addition to conventional banking
operations. However, in 1998, the bank decided to
change its focus towards Islamic commercial banking,
while maintaining its financial services operations, the
full conversion being completed in 2007. The bank
currently operates over 50 branches and c. 320 ATMs,
employing c. 2,600 people. BJAZ has a lending market
share of c. 2.3% and a deposit market share of 2.8%.
Major shareholders include Rashed Abdul Rahman Al
Rashed and Sons Company with 22.2%, Union
Brothers for Development Company with 6.5%, the
National Bank of Pakistan at 5.8%, Saleh Abdullah
Mohammed Kamel with 5%, while the remaining
60.5% is in free float.
Net interest income
717
781
873
993
1,133
1,357
Fee income
818
265
356
538
624
717
Net trading income
95
5
42
49
57
66
77
65
106
118
131
145
1,155
1,208
1,559
1,783
2,038
2,385
764
835
900
996
1,103
1,224
391
373
659
788
935
1,161
Net provisions
362
70
129
164
202
244
—
—
1
1
1
1
Operating profit
29
303
529
623
732
916
Associates
—
—
—
—
—
—
Pre-tax profit
29
303
529
623
732
916
Taxation
—
—
—
—
—
—
Group Net profit
29
303
529
623
732
916
Minorities
—
—
—
—
—
—
4
11
16
19
22
27
Tier 1 Coupon
Diluted EPS
DPS
19%
25
292
513
604
710
888
0.08
0.97
1.55
1.83
2.15
2.69
—
0.53
0.53
0.53
0.53
0.53
BVPS
15.05
15.78
18.04
19.34
20.96
23.13
Tangible BVPS
15.05
15.78
18.04
19.34
20.96
23.13
Year-end
2010
2011
2012e
2013e
2014e
2015e
19,829
24,518
29,421
35,012
41,314
48,337
1,124
1,210
2,118
2,836
3,512
4,713
18,704
23,307
27,303
32,176
37,802
43,624
2,608
4,379
7,057
8,140
9,071
10,378
Due from banks
5,580
4,331
2,754
3,222
3,738
4,298
Investment, net
7,136
6,372
7,108
8,201
9,405
10,715
Fixed assets
462
447
530
622
722
833
Other assets
438
356
1,147
1,343
1,557
1,791
Total assets
33,018
38,898
45,900
53,703
62,295
71,640
Customer deposits
27,345
31,159
36,777
43,047
49,976
57,544
389
1,306
1,371
1,440
1,512
1,587
—
1,000
1,000
1,000
1,000
1,000
Other liabilities
479
497
568
1,564
2,578
3,518
Total liabilities
28,213
33,961
39,716
47,051
55,066
63,650
4,806
4,937
6,184
6,652
7,230
7,990
30
35
42
49
57
65
29,934
34,426
40,478
47,298
55,194
63,831
Retail
Corporate
81%
0.3%
KSA
Due to banks
99.7%
Other Middle
East
Debt
Total Equity
Bank Al-Jazira
26,283
30,599
36,306
42,317
48,987
56,309
4,516
4,733
5,954
6,383
6,918
7,632
4,516
4,573
5,779
6,208
6,743
7,457
Tier 1 capital
4,516
4,733
5,954
6,383
6,918
7,632
Michael Malkoun
+97145071744
144
May 23 2012
Bank Al-Jazira valuation (SARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Bank Al-Jazira
2010
2011
2012e
2013e
2014e
2015e
perp
29
4
14
4.5%
-12
4,501
0.3%
11.0%
495
(484)
---
303
11
3
4.5%
-289
4,701
6.1%
11.0%
517
(228)
---
529
16
42
4.5%
-471
5,083
9.3%
11.0%
559
(88)
---
623
19
27
4.5%
-577
5,883
9.8%
11.0%
647
(70)
0.95
(66)
732
22
12
4.5%
-698
6,790
10.3%
11.0%
747
(49)
0.86
(42)
916
27
3
4.5%
-886
7,757
11.4%
11.0%
853
33
0.77
25
916
27
3
4.5%
-886
7,757
11.4%
11.0%
853
33
0.77
25
subtotal% of total
(83)
(1.1%)
314
5,083
5,314
4.3%
69.6%
72.8%
926
12.7%
3.0%
408
4,516
290
--
4,733
204
--
5,954
229
--
6,383
269
--
6,918
311
--
7,632
358
--
-4,806
(160)
4,777
(175)
6,009
(175)
6,477
(175)
7,055
(175)
7,815
29,894
37,510
12.0%
-4,501
304
34,708
39,172
12.0%
-4,701
76
42,358 49,024 56,582 64,638
42,358 49,024 56,582 64,638
12.0% 12.0% 12.0% 12.0%
----5,083 5,883 6,790 7,757
926
594
265
59
219
664
(0)
884 12.1%
175
2.4%
7,298 100.0%
330
22.1
25.5
(13.3%)
14.2
1.23
12.1
1.14
145
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Saudi Investment Bank
Recuperating FY11 loan redemptions
 Play on normalization in cost of risk.
 Abundant capital base and cash position.
 Our TP of SAR 20 offers 16% potential upside.
Below average returns: We estimate pre-provision income to be 2.2%
of RWA in FY 12e due to low NIMs and a high cost/income ratio. This
can be explained by the bank’s large corporate client base that yields
relatively low margins, coupled with the bank’s aggressive branch and
operational expansion to reach out to more retail clients.
FY 11-15e net earnings CAGR is 15%: We forecast high net earnings
growth due to normalization of cost of risk and increased fees &
commissions. We expect loan growth in FY 12e to fully offset the
decline of FY 11A, which was impacted by redemptions. On the other
hand, we expect deposits to grow by 9% over the year, bringing the
LTD up to 75%.
Our play on normalization of cost of risk: Our asset quality screen
suggests a cumulative loss of 323bps over the next 5 years (65bps pa),
driven primarily by expected losses from corporations, well below the
level of FY 11A (92bps). SIB’s NPL ratio is the second highest among
KSA banks at 6.1%, though it remains adequately covered at 125%.
Very strong capital reserves: We calculate core equity Tier 1 of 16%,
despite a small negative effect under Basel 3 because of associate
deductions, among the highest in the sector, and only coming second
to Alinma. This increase was driven by the fall in loans in FY 11A, which
allows for renewed growth or dividends to shareholders.
Strong liquidity position: Although we estimate an NSFR ratio of
132%, which easily meets the minimum 100% requirement, the bank’s
LCR is the lowest among KSA banks at 90%. Its net cash position,
however, is comfortable at 27% of total assets.
We initiate with a Hold due to lackluster growth, despite a
normalization in cost of risk: SIB is currently trading at a P/E13e of
9.9x and a P/tNAV12e of 1.0x. This does not fully capture SIB’s RoE of
9.6% and RORWA of 1.8%, as well as its very solid capital base and the
potential retail loan growth.
HOLD
SAR 19.8
Bloomberg code
Market index
SIBC AB
Saudi Arabia
19.8
Upside (%)
Market data
16.3
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
17.0
15.5-21.4
9,350
2,493
6.6
1.8
2011
1,616
2012e
1,688
2013e
1,839
2014e
2,010
992
1,021
1,120
1,230
1.29
13.2
15.47
15.47
1.1
1.3
0.50
2.9
1.3
1.6
8.2
73.7
43
1.54
11.1
16.48
16.48
1.0
1.2
0.55
3.2
1.6
1.8
9.6
74.8
46
1.71
9.9
17.61
17.61
1.0
1.1
0.60
3.5
1.6
1.8
10.0
76.3
51
1.95
8.7
18.90
18.90
0.9
1.0
0.65
3.8
1.6
1.9
10.7
77.6
56
16.2
17.0
16.4
16.0
17.2
17
6.1
124.6
18.7
19
5.8
132.8
18.0
18
5.7
135.1
17.6
18
5.6
142.9
Price Performance
SIBC AB
123
Saudi Arabia
113
103
93
83
73
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
3%
2.65%
2.33%
2.21%
2.21%
2.21%
2.32%
1.87%
1.98%
2%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.74
2.52
2.40
2.35
2.31
2.37
Cost/Income (%)
32.0
38.6
39.5
39.1
38.8
37.7
75.2
75.9
72.9
72.5
72.2
72.6
13.8
19.2
21.5
21.9
22.3
22.1
1.64%
1.60%
0.94%
0.68%
FY10
FY11
PPP/RWA
1.78%
1.80%
0.54%
0.51%
0.44%
FY12e
FY13e
FY14e
Cost of risk/RWA
0.44%
9.4
1.7
2.4
2.5
2.6
2.6
FY15e
RORWA
RoAE (%)
5.5
8.2
9.6
10.0
10.7
11.4
15.1
12.0
12.4
12.8
13.1
13.8
0.8
1.3
1.6
1.6
1.6
1.7
Revenue / RWA (%)
3.90
3.80
3.66
3.62
3.62
3.73
Costs / RWA (%)
1.25
1.47
1.45
1.42
1.41
1.40
PPP / RWA (%)
2.65
2.33
2.21
2.21
2.21
2.32
1.64
0.68
0.54
0.51
0.44
0.44
RoRWA (%)
0.94
1.60
1.78
1.80
1.87
1.98
0.76
1.27
1.42
1.44
1.49
1.58
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.74%
2.52%
FY10
FY11
2.40%
2.35%
2.31%
FY12e
FY13e
FY14e
Net interest margin
2.37%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.3
0.9
0.8
0.8
0.7
0.6
NPL/Gross Loans (%)
5.4
6.1
5.8
5.7
5.6
5.5
110.4
124.6
132.8
135.1
142.9
147.3
Asset Quality
Credit Quality
150%
5.9%
5.8%
5.7%
5.6%
5.5%
5.4%
5.3%
145%
140%
135%
130%
125%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
3.8
6.7
6.9
7.0
7.0
7.3
62.0
29.0
26.7
24.2
32.5
24.4
2010
2011
2012e
2013e
2014e
2015e
83.3
73.7
74.8
76.3
77.6
79.0
6.9
13.9
14.9
15.6
16.1
16.6
85.8
84.7
83.8
81.2
78.5
76.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
16.1
16.2
17.0
16.4
16.0
15.8
Tier 1 ratio (%)
17.2
17.2
18.7
18.0
17.6
17.5
17.3
17.3
18.8
18.2
17.8
17.6
15.8
16.4
15.9
15.3
14.9
14.7
RWA / assets (%)
87.2
81.8
80.9
80.3
79.4
78.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
17.3%
17.3%
17.2%
17.2%
FY10
FY11
Tier 1
18.8%
18.2%
18.7%
18.0%
17.8%
17.6%
18%
14%
17.6%
17.5%
10%
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
11%
10%
9%
9%
9%
8%
7%
7%
4%
-13%
0%
FY10
-3%
-20%
FY11
FY12e
FY13e
FY14e
FY15e
-1%
Loan growth
Deposit growth
Growth
Asset growth (%)
2.7
0.9
9.9
10.8
10.6
9.3
Net loan growth (%)
4.1
(12.5)
10.9
10.3
9.3
8.9
(2.7)
(1.2)
9.4
8.1
7.5
6.9
(13.8)
61.0
20.2
11.3
13.9
14.8
Deposit growth (%)
147
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,674
1,549
1,579
1,722
1,883
2,109
359
323
348
389
432
476
1,315
1,226
1,231
1,334
1,452
1,632
Fee income
242
311
363
403
448
497
Net trading income
123
12
16
20
22
25
69
66
78
82
88
94
1,749
1,616
1,688
1,839
2,010
2,248
559
624
667
720
780
847
Company Profile
Interest income
SIB was established in 1976 to provide conventional
and Islamic commercial banking services. The bank
maintains a 2.7% lending market share and a deposit
market share of 3.3%. SIB operates c. 48 branches and
c. 335 ATMs, while employing c. 900 people. Its
shareholders include Saudi Oger with 8.5% stake, J.P
Morgan Chase at 7.4%, the General Organization for
Social Insurance-KSA with 21.5%, the Public Pension
Agency with 17.3%, and the National Commercial
Bank with 7.3%. SIB has a free float of 38%.
Net interest income
Interest expense
1,190
992
1,021
1,120
1,230
1,401
Net provisions
738
288
248
257
245
266
107
85
11
12
13
14
Operating profit
345
619
763
851
972
1,121
Associates
Pre-tax profit
0.3%
Taxation
18.5%
Group Net profit
Minorities
Tier 1 Coupon
Retail
Corporate
Government
81.2%
95
93
82
91
101
110
440
712
845
942
1,072
1,231
—
—
—
—
—
—
440
712
845
942
1,072
1,231
11
4
—
1
1
1
6
26
25
28
32
37
424
682
820
913
1,039
1,193
Diluted EPS
0.78
1.29
1.54
1.71
1.95
2.24
—
0.50
0.55
0.60
0.65
0.70
BVPS
14.73
15.47
16.48
17.61
18.90
20.42
Tangible BVPS
14.73
15.47
16.48
17.61
18.90
20.42
Year-end
2010
2011
2012e
2013e
2014e
2015e
32,979
29,360
32,589
35,957
39,433
42,982
1,977
2,246
2,509
2,769
3,155
3,482
31,002
27,114
30,080
33,188
36,278
39,500
DPS
100.0%
KSA
1,442
1,934
2,454
2,764
3,049
3,370
Due from banks
8,043
10,956
11,989
13,277
14,685
16,050
Investment, net
8,060
8,893
9,134
10,432
11,888
12,993
Fixed assets
748
907
1,091
1,287
1,511
1,765
Other assets
1,332
1,246
1,427
1,265
1,399
1,529
Total assets
51,491
51,946
57,088
63,225
69,927
76,430
Customer deposits
37,215
36,770
40,234
43,496
46,758
49,979
4,896
4,224
4,351
4,438
4,527
4,617
Debt
500
1,500
1,500
1,500
1,500
1,500
Other liabilities
739
894
1,937
4,108
6,746
9,101
Total liabilities
43,350
43,388
48,022
53,542
59,531
65,197
8,141
8,508
9,066
9,683
10,396
11,233
45
43
46
51
56
60
47,931
48,722
51,277
56,659
62,781
68,906
Due to banks
Total Equity
42,285
42,553
43,540
46,259
49,609
52,940
8,103
8,508
9,066
9,683
10,396
11,233
7,274
7,369
7,854
8,318
8,868
9,546
Tier 1 capital
7,707
8,091
8,613
9,153
9,785
10,542
Michael Malkoun
+97145071744
148
May 23 2012
Saudi Investment Bank valuation (SARmn)
Year-end
2010
1. DCF
Net profit
429
6
104
Risk free rate
5.5%
Tax shelter
320
6,296
RoEcC
5.1%
Cost of capital
12.2%
Capital charge
766
Economic profit
(446)
Discount factor
Terminal Value
Required Capital
Available capital:
8,141
Minorities
38
-Tangible equity
8,179
Capital needs
44,888
RWAs (Basel III)
45,257
Equity as % RWA
12.0%
Financial stakes
865
6,296
Surplus capital
1,884
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2011
2012e
2013e
2014e
2015e
perp
708
26
103
5.5%
-579
6,363
9.1%
12.2%
774
(195)
---
845
25
127
5.5%
-693
6,453
10.7%
12.2%
785
(93)
---
941
28
124
5.5%
-789
7,100
11.1%
12.2%
864
(75)
0.94
(71)
1,071
32
124
5.5%
-915
7,782
11.8%
12.2%
947
(32)
0.84
(27)
1,230
37
131
5.5%
-1,061
8,462
12.5%
12.2%
1,030
32
0.75
24
1,230
37
131
5.5%
-1,061
8,462
12.5%
12.2%
1,030
32
0.75
24
subtotal % of total
(74)
(0.7%)
245
6,453
6,624
2.3%
59.3%
60.9%
2,311
21.3%
2.5%
327
8,508
---
9,066
---
9,683
---
10,396
---
11,233
---
(275)
8,233
(303)
8,764
(330)
9,353
(358)
10,039
(385)
10,848
42,506
45,571
12.0%
895
6,363
1,870
46,160
46,160
12.0%
913
6,453
2,311
50,740
50,740
12.0%
1,012
7,100
2,253
55,525
55,525
12.0%
1,119
7,782
2,257
60,326
60,326
12.0%
1,223
8,462
2,386
80
1,980
(119)
1,941
303
10,876
550
19.8
17.0
16.3%
12.9
1.20
17.8%
100.0%
11.6
1.12
149
Initiation Report
May 23
2012
+97145071744
Michael Malkoun
Alinma Bank
Low returns with high growth potential
 Newest and fastest growing bank in KSA with pristine
asset quality, ample capital, and reasonable liquidity.
 Returns improving, but still muted due to high
expansionary costs, increasing cost of risk & NIM pressure.
 Low underlying RORWA, but with high potential
HOLD
Bloomberg code
Market index
FY 11-15e net earnings CAGR is 46%: We forecast high net income
growth as the bank’s cost/income ratio is expected to improve
following its initial expansion. Moreover, Alinma currently maintains a
high NIM of 3.78% that can partly be explained by the fact that its LTD
is 142%, meaning that it has significantly more interest earning assets
than bearing liabilities. However, we expect the LTD to improve going
forward, and forecast a deposit growth of 59% in FY 12e compared to
a 39% lending growth rate, both of which have repercussions on net
interest margins. Furthermore a higher cost of risks should be a drag.
Faultless asset quality: Our asset quality screen suggests a cumulative
loss of 266bps over the next 5 years (53bps pa). Alinma’s NPL ratio
currently stands at a negligible 0.04%, and its coverage ratio at 1260%
with FY 11A being the first year the bank took any provisions.
Capital galore: We calculate an FY 11A CET1 of 39% in FY 11A, but
expect this position to deteriorate slightly to 31% in FY 12e as the bank
continues its aggressive expansion, though it has yet to pay dividends.
Reasonable liquidity: We estimate an NSFR of 110% for Alinma, and
an LCR of 136%, near the bottom end of KSA banks. Cash balances are
only 27% of assets. However, liquidity is expected to improve.
ALINMA AB
Saudi Arabia
15.4
Upside (%)
Market data
Low returns: Alinma was only established in 2008 as an Islamic bank
and has yet to reach its cost of capital, although it is growing at a
remarkable rate. However, its returns are expected to be lower than
peers due to its current development phase. Nevertheless, we
estimate pre-provisioning returns to be 1.5% of RWA in FY 12e as the
bank starts to become more profitable.
SAR 15.4
16.5
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
13.3
8.8-16.9
19,875
5,300
578.6
154.3
2011
1,388
2012e
1,751
2013e
2,359
2014e
3,052
556
817
1,235
1,706
0.29
53.7
10.60
10.60
1.3
1.5
—
—
0.8
0.7
1.6
142.1
36
0.43
35.6
11.01
11.01
1.2
1.4
—
—
1.5
1.1
4.0
124.4
54
0.67
23.0
11.65
11.65
1.1
1.3
—
—
1.7
1.4
5.9
109.5
71
0.94
16.4
12.74
12.74
1.0
1.2
0.40
3.0
1.9
1.5
7.7
99.5
88
39.0
30.5
24.8
21.5
43.8
44
—
1260.1
30.5
31
—
1250.0
24.8
25
—
1250.0
21.8
22
—
1250.0
Price Performance
ALINMA AB
165
Saudi Arabia
148
131
Growth potential fully priced in: Alinma is currently trading at a
P/E13e of 23.0x and P/tNAV of 1.2x, which are justified by the low
RORWA of 1.10%, despite its strong capital base that allows for a
strong expansion. Our TP leaves 17% upside.
114
97
80
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Alinma Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.56
3.78
3.46
3.43
3.40
3.44
Cost/Income (%)
97.3
59.9
53.3
47.6
44.1
40.6
79.3
80.1
79.8
79.1
78.4
78.1
19.4
18.5
18.9
19.6
20.5
20.9
—
0.4
0.5
0.6
0.6
0.6
RoAE (%)
0.1
1.6
4.0
5.9
7.7
9.8
Pre Prov.ROE (%)
0.1
3.5
5.0
7.3
9.3
11.7
RoAA (%)
0.1
0.8
1.5
1.7
1.9
2.1
Revenue / RWA (%)
3.18
3.82
3.23
3.34
3.48
3.57
4.0%
Costs / RWA (%)
3.10
2.29
1.72
1.59
1.54
1.45
3.5%
PPP / RWA (%)
0.09
1.53
1.51
1.75
1.95
2.12
0.01
0.34
0.31
0.32
0.34
0.34
RoRWA (%)
0.07
0.68
1.14
1.36
1.53
1.70
0.07
0.68
1.14
1.36
1.53
1.70
Profitability
3%
1.53%
2%
1%
0%
1.51%
0.09%
1.14%
0.31%
0.68%
0.01%
0.34%
0.07%
FY10
FY11
PPP/RWA
1.95%
1.75%
1.53%
1.36%
2.12%
1.70%
0.34%
0.34%
0.32%
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
NIM
3.78%
3.46%
3.0%
3.43%
3.40%
3.44%
2.5%
2.0%
2.56%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
—
0.6
0.6
0.6
0.6
0.5
0.1%
NPL/Gross Loans (%)
—
—
—
—
—
—
0.0%
—
1,260.1
1,250.0
1,250.0
1,250.0
1,250.0
0.0%
Asset Quality
Credit Quality
1252%
0.0%
0.0%
1249%
—
—
—
—
—
—
16.5
22.4
6.0
5.0
3.8
3.5
0.0%
FY12e
FY13e
NPL Cov ratio (%)
FY14e
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
80%
70%
60%
50%
40%
30%
20%
10%
75.1%
75.1%
142.1
124.4
109.5
99.5
99.5
14.0
5.2
7.2
8.8
9.9
10.1
75.3
85.1
84.2
88.3
93.5
91.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
62.8
39.0
30.5
24.8
21.5
18.4
Tier 1 ratio (%)
75.1
43.8
30.5
24.8
21.8
18.8
75.1
44.1
31.1
25.4
22.5
19.5
58.4
43.2
33.0
26.3
22.8
19.6
RWA / assets (%)
78.3
98.7
108.4
106.0
104.5
104.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
44.1%
31.1%
25.4%
22.5%
43.8%
30.5%
FY10
FY11
Tier 1
FY12e
19.5%
24.8%
21.8%
18.8%
FY13e
FY14e
CAR
FY15e
Growth
1500%
1302%
1200%
900%
600%
300%
62%
39%
35%
27%
27%
FY13e
FY14e
FY15e
0%
-300%
187.5
Growth
Asset growth (%)
FY10
FY11
FY12e
Loan growth
Alinma Bank
Deposit growth
53.4
38.6
36.0
33.0
26.0
25.0
1,302.5
62.0
39.0
35.0
27.0
27.0
Deposit growth (%)
455.3
113.8
58.8
53.4
39.7
27.0
(95.3)
1,550.0
150.7
54.9
39.9
38.3
Net loan growth (%)
151
May 23 2012
Abacus
Alinma Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
3,246
Company Profile
Interest income
556
1,184
1,525
2,000
2,550
Interest expense
30
73
128
134
159
208
Founded in 2008, the burgeoning Alinma aims to
provide Shariah compliant commercial banking
services. The bank currently has c. 37 branches, and
over 400 ATMs in which employees c. 1,400
employees. The bank’s presence is limited to Saudi
Arabia where it maintains a c. 2.4% lending market
share and a c. 1.6% deposit market share. Alinma’s
major shareholders include the Public Pension Agency
with 10.71%, the General Organization for Social
Insurance-KSA with 10%, the Public Investment Fund
with 10%, and the remaining 69.29% is in free float.
Net interest income
525
1,112
1,397
1,866
2,392
3,039
Fee income
129
257
330
463
624
812
—
—
1
4
5
7
9
20
22
26
31
35
662
1,388
1,751
2,359
3,052
3,893
644
832
934
1,124
1,346
1,579
18
556
817
1,235
1,706
2,314
3
125
167
228
297
366
—
—
—
—
—
—
Operating profit
15
431
650
1,007
1,409
1,948
0%
30%
Retail
Net trading income
Net provisions
Associates
—
—
—
—
—
—
Pre-tax profit
15
431
650
1,007
1,409
1,948
Taxation
—
—
—
—
—
—
Group Net profit
15
431
650
1,007
1,409
1,948
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
185
33
50
70
97
15
246
618
957
1,339
1,851
0.01
0.16
0.41
0.64
0.89
1.23
—
—
—
—
0.40
0.60
BVPS
10.33
10.60
11.01
11.65
12.74
13.67
Tangible BVPS
10.33
10.60
11.01
11.65
12.74
13.67
Year-end
2010
2011
2012e
2013e
2014e
2015e
15,596
25,386
35,287
47,637
60,499
76,834
3
128
176
238
302
384
15,593
25,259
35,110
47,399
60,197
76,450
3,207
4,063
4,868
5,954
7,115
7,778
Due from banks
5,803
4,003
5,503
7,319
9,222
11,527
Corporate
Diluted EPS
Government
DPS
70%
Investment, net
100%
KSA
74
836
1,182
1,572
1,981
2,476
Fixed assets
1,193
1,379
1,693
2,069
2,521
3,063
Other assets
678
1,301
1,751
2,329
2,934
3,668
Total assets
26,549
36,783
50,025
66,534
83,833
104,791
Customer deposits
8,316
17,776
28,229
43,307
60,499
76,834
Due to banks
2,254
2,443
2,565
2,693
2,828
2,969
—
—
—
—
—
—
Other liabilities
478
670
2,719
3,066
1,398
4,480
Total liabilities
11,048
20,889
33,514
49,065
64,726
84,283
Total Equity
15,501
15,894
16,512
17,468
19,107
20,508
21
36
54
71
88
109
20,498
29,390
40,342
54,359
70,257
88,219
Debt
Alinma Bank
6,034
15,395
25,507
38,397
54,664
71,565
15,501
15,894
16,512
17,468
19,107
20,508
15,636
15,897
16,512
17,468
18,807
20,058
Tier 1 capital
15,621
15,897
16,512
17,468
19,107
20,508
Michael Malkoun
+97145071744
152
May 23 2012
Alinma Bank valuation (SARmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel 3)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Alinma Bank
2010
2011
2012e
2013e
2014e
2015e
15
0
626
5.0%
-(611)
2,990
(20.4%)
10.5%
314
(925)
---
431
185
550
5.0%
-(304)
4,887
(6.2%)
10.5%
513
(817)
---
650
33
500
5.0%
-117
6,505
1.8%
10.5%
683
(566)
---
1,007 1,409 1,948
50
70
97
450
400
326
5.0%
5.0%
5.0%
---506
939 1,525
8,465 10,513 13,090
6.0%
8.9% 11.6%
10.5% 10.5% 10.5%
889 1,104 1,374
(382)
(165)
150
0.95
0.86
0.78
(364)
(142)
117
2,338
97
326
5.0%
-1,914
13,090
14.6%
10.5%
1,374
540
0.78
421
(389)
(1.7%)
7,011
6,505
13,127
30.3%
28.1%
56.7%
10,007
43.2%
4.5%
8,999
15,501
---
15,894
---
16,512 17,468 19,107 20,508
---------
-15,501
-15,894
--(600)
(900)
16,512 17,468 18,507 19,608
20,793
24,913
12.0%
-2,990
12,511
36,295
40,728
12.0%
-4,887
11,007
54,206 70,538 87,605 109,083
54,206 70,538 87,605 109,083
12.0% 12.0% 12.0% 12.0%
----6,505 8,465 10,513 13,090
10,007 9,004 7,994 6,518
22
22
0.1%
--23,156 100.0%
1,500
15.4
13.3
16.5%
37.5
1.40
24.2
1.33
153
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
National Bank of Kuwait
Following the footsteps of its economy
 Strong capital but poor liquidity
 Very robust asset quality
 Fully valued, Boubyan acquisition to reduce FV
NBK should remain medium‐ to high‐return bank: NBK is generating
very strong pre‐provisioning profits (c. 4% of RWA), thanks to the
relatively low risk weighted assets (63% of total assets), its low cost of
risk, and its low cost structure. NBK’s RORWA should amount to 3.53.8% going forward, but its RoE may be relatively low at 13% due to its
very solid capital base.
4 year CAGR earnings of 9% due to normalization of investment
income: We expect income to grow by 4% in FY 12e, 7% in FY 13e, and
8% in FY 14e from 7% in FY 11A. We expect a small improvement in
efficiency ratios. However, we expect net earnings growth to be held
back by normalization of investment income (we forecast a structural
fall of c. 50%). After an earnings growth of 0.2% in FY 11A, we expect
the growth to remain at c. 9%.
Very robust asset quality: Our asset quality screen suggests a
cumulative loss of just 402 bps over the next 5 years (80 bps pa),
which is the lowest among the banks under coverage. However, it is
relatively close with the provisions NBK took in FY 11A (62bps). The
bank’s NPL ratio is benign at 1.5%, with a coverage ratio of 243%, as
the exposure to investment companies is limited.
Very strong capital base, with FY 11A CET1 of 15.9%, which allows for
strong growth in risk weighted assets and a sharp increase in dividend
payouts. We expect CET1 to further increase due to the low growth in
risk weighted assets, and we expect NBK to deploy the surplus capital
for future M&A deals, such as 12.7% in Boubyan (P/BV 4x).
Very weak liquidity profile: We compute a NSFR of c. 101% as of FY
11A and a very low LCR of 79%. Closing Cash and interbank stand at
the extremely low level of -17% of total assets, although part of this
comes from government institutions, and we recommend that NBK
lengthen its wholesale debt obligations.
Fully valued: NBK is fully valued, helped by its high weight in MENA
benchmarks, but regional investors may have to cut down their
exposures due to new regulation, while M&A deals could reduce its
FV.
HOLD
KWD 1.12
Banks / KUWAIT
Bloomberg code
Market index
NBK KK
Kuwait
1.12
Upside (%)
Market data
8
17/05/2012
Last closing price
52 Week range
Market cap (KWDmn)
Market cap (USDmn)
Average daily value (KWDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
1.04
0.90-1.13
4,528
16,190
1,378.9
4,932.0
2011
523
2012e
542
2013e
579
2014e
625
361
376
404
440
0.07
14.9
0.54
0.49
1.9
2.1
0.04
3.5
2.3
3.5
13.3
120.3
9
0.07
13.9
0.58
0.53
1.8
2.0
0.04
3.5
2.3
3.5
13.4
120.2
9
0.07
14.0
0.59
0.54
1.8
1.9
0.04
3.6
2.3
3.6
13.2
114.8
10
0.08
13.7
0.60
0.55
1.7
1.9
0.04
3.6
2.4
3.6
13.2
114.5
10
15.9
17.9
18.7
19.3
18.3
18
1.5
243.0
19.0
19
1.8
220.8
19.7
20
1.5
290.5
20.2
20
1.0
462.2
Price Performance
107
NBK KK
Kuwait
100
93
86
79
72
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
5%
4.21%
4.10%
4.15%
3.52%
3.55%
3.57%
4.05%
4%
3%
3.73%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
3.00
3.11
3.03
3.00
2.96
2.95
Cost/Income (%)
32.7
31.0
30.7
30.3
29.6
28.7
73.7
72.8
72.8
71.9
70.9
70.1
20.2
19.9
20.7
21.5
22.5
23.3
1.3
2.7
1.7
1.6
1.6
1.6
RoAE (%)
14.9
13.3
13.4
13.2
13.2
13.7
Pre Prov.ROE (%)
15.5
15.6
15.1
15.0
15.2
15.4
2.3
2.3
2.3
2.3
2.4
2.5
Revenue / RWA (%)
6.02
6.09
5.91
5.95
5.99
6.06
Costs / RWA (%)
1.97
1.89
1.81
1.80
1.78
1.74
PPP / RWA (%)
4.05
4.21
4.10
4.15
4.21
4.32
0.25
0.67
0.49
0.54
0.59
0.52
RoRWA (%)
3.73
3.52
3.55
3.57
3.64
3.80
2.10
1.99
2.03
2.06
2.12
2.23
0.25%
0.67%
0.49%
4.21%
3.64%
0.54%
4.32%
3.80%
0.59%
0.52%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
3.11%
3.00%
FY10
3.03%
FY11
3.00%
2.96%
FY12e
FY13e
FY14e
Net interest margin
2.95%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.1
0.6
0.5
0.5
0.6
0.5
2.0%
NPL/Gross Loans (%)
1.6
1.5
1.8
1.5
1.0
0.5
1.5%
208.7
243.0
220.8
290.5
462.2
987.4
1.0%
3.4
3.8
3.9
4.4
4.6
4.8
0.5%
3.6
14.5
10.7
11.7
12.7
10.8
Asset Quality
Credit Quality
1500%
1000%
500%
0%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
114.3
Capital Ratios
26%
22%
18.3%
18.3%
19.1%
19.8%
18.3%
19.0%
19.7%
18%
14%
18.2%
20.4%
20.2%
21.0%
123.0
120.3
120.2
114.8
114.5
(16.9)
(16.5)
(1.4)
3.9
6.2
5.2
59.9
60.2
60.0
62.1
61.7
61.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
15.7
15.9
17.9
18.7
19.3
19.8
Tier 1 ratio (%)
18.2
18.3
19.0
19.7
20.2
20.7
18.3
18.3
19.1
19.8
20.4
21.0
17.3
17.1
17.6
17.9
18.0
18.1
RWA / assets (%)
62.7
63.0
63.5
63.0
62.6
62.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
(0.1)
5.6
6.0
7.0
8.0
9.0
0.5
4.2
4.9
5.5
6.7
7.8
Deposit growth (%)
(3.3)
6.5
5.0
10.4
7.0
8.0
13.7
0.2
7.6
7.0
9.3
12.9
20.7%
10%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
6%
0%
0%
FY10
-3%
4%
FY11
10%
7%
8%
5%
5%
FY12e
5%
FY13e
7%
FY14e
8%
FY15e
Growth
Asset growth (%)
-20%
Net loan growth (%)
Loan growth
Deposit growth
155
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (KWDmn)
Company Profile
Interest income
482
490
520
556
599
651
Interest expense
123
109
126
139
156
172
National Bank of Kuwait (NBK) provides commercial
banking services directly and through subsidiaries
across the MENA region, Turkey, China, Singapore,
Vietnam, Switzerland, US and UK. It was established
in 1952, it has 5,000 employees, and a network of 70
branches located in Kuwait. The bank holds a market
share of 32%, the largest market share in terms of
loans, and 21% of market share in terms of deposits.
NBK is corporate focused bank, with 73% of its loan
book consisting of corporate loans. The bank’s main
operations are in the Middle East and North Africa
region with 94% of NBK’s loan book in FY 11A coming
from that region. The bank’s free float is 49%.
Net interest income
359
381
395
417
443
480
98
104
112
125
141
159
3
9
5
5
6
6
27
29
30
33
36
39
487
523
542
579
625
684
159
162
166
175
185
196
328
361
376
404
440
488
12
52
40
47
56
53
8
5
5
5
6
6
308
304
331
351
379
429
Fee income
Net trading income
Net provisions
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
Minorities
Tier 1 Coupon
Corporate
27%
Retail
17
14
17
24
25
321
344
368
403
455
17
17
18
19
21
24
303
304
327
349
382
431
1
1
1
1
2
2
—
—
—
—
—
—
302
302
325
348
380
429
Diluted EPS
0.07
0.07
0.07
0.07
0.08
0.08
DPS
0.03
0.04
0.04
0.04
0.04
0.04
BVPS
0.51
0.54
0.58
0.59
0.60
0.61
Tangible BVPS
0.46
0.49
0.53
0.54
0.55
0.57
2010
2011
2012e
2013e
2014e
2015e
8,133
8,502
8,927
9,463
10,125
10,935
279
320
345
412
468
521
7,853
8,182
8,582
9,050
9,657
10,414
Year-end
73%
12
320
Balance sheet (KWDmn)
1%
1%
3% 1%
MENA
1,668
1,945
2,239
2,565
2,943
716
788
867
927
1,002
1,092
Investment, net
2,260
2,485
2,571
2,736
2,938
3,184
Fixed assets
174
174
192
211
232
255
Other assets
301
330
288
293
299
306
Total assets
12,899
13,627
14,444
15,456
16,692
18,194
North America
Customer deposits
6,385
6,799
7,142
7,886
8,438
9,113
Europe
Due to banks
4,074
4,310
2,583
2,099
2,026
2,547
Asia
Debt
—
—
2,000
2,500
3,000
3,000
Other liabilities
209
181
180
206
218
237
Total liabilities
10,668
11,290
11,905
12,690
13,681
14,897
2,231
2,337
2,540
2,765
3,011
3,297
8
9
9
10
10
11
11,970
12,257
13,005
13,898
14,970
16,278
Other
94%
1,594
Due from banks
Total Equity
10,664
10,784
11,417
12,105
12,974
14,061
Common shareholders’ equity
1,989
2,109
2,310
2,534
2,778
3,064
1,378
1,475
1,644
1,820
2,014
2,241
Tier 1 capital
1,474
1,570
1,739
1,916
2,109
2,336
Zeina Nasreddine
+97145071744
156
May 23 2012
National Bank of Kuwait valuation (KWDmn)
2010
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
50% potential loss in value from buying the remaining stake in Boubyan
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2011
2012e
2013e 2014e 2015e
302
302
--15
16
5.0%
5.0%
2.5%
2.5%
287
287
1,561 1,644
18.4% 17.4%
10.0% 10.0%
156
164
131
122
-----
325
-25
5.0%
2.5%
300
1,649
18.2%
10.0%
165
135
---
348
380
429
429
----31
37
43
43
5.0% 5.0%
5.0% 5.0%
2.5% 2.5%
2.5% 2.5%
317
344
386
386
1,741 1,854 1,992 1,992
18.2% 18.5% 19.4% 19.4%
10.0% 10.0% 10.0% 10.0%
174
185
199
199
143
158
187
187
0.95
0.87
0.79
0.79
136
137
147
147
421
8.6%
2,266
1,649
4,336
46.3%
33.7%
88.6%
516
10.6%
3.5%
2,875
2,231
(229)
2,337
(216)
2,540
(216)
2,765
(216)
3,011
(216)
3,297
(216)
(144)
1,858
(157)
1,964
(158)
2,166
(174)
2,376
(187)
2,608
(201)
2,881
8,088 8,586
8,805 9,302
12.0% 12.0%
504
528
1,561 1,644
298
320
9,172
9,172
12.0%
549
1,649
516
9,742 10,443 11,296
9,742 10,443 11,296
12.0% 12.0% 12.0%
572
601
637
1,741 1,854 1,992
635
754
888
(190)
73
(117)
158
4,894
4,353
1.1
1.0
8.1%
15.0
2.12
(2.4%)
3.2%
100%
15.1
2.08
157
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
Kuwait Finance House
Headwind from lower capital returns
 Weak capital base & liquidity position
 Low quality of earnings
 Low fundamental returns
KFIN should be a structurally low‐return bank: KFIN is generating
fairly weak RORWA of less than 1%. Income is expected to decrease by
11% in FY 12e due to structurally lower capital gains. Following the
decline in FY 12e, we expect income to pickup by 10% in FY 14e and FY
15e. The Bank’s core income is relatively weak, investment income
constituted 28% of its total income, of which c.68% are from non
operating activities as of FY 11A. KFIN has relatively strong net interest
margins of 3.2% in FY 11A but fairly weak returns. RoE stood at 6.5% in
FY 11A; however, we forecast an increase to 9.7% in FY 12e, to reach
14.4% in FY 15e. We expect very high EPS growth from a very low FY
11A base.
Reasonable asset quality: Our asset quality screen suggests an above
average cumulative loss of 849 bps over the next 5 years (170 bps pa),
well below the level of 237bps in FY 11A. The bank’s NPL ratio stood at
10% in FY 11A, and is expected to remain at a stable at 12% for the
next 4 years, with coverage of 77% of FY 11A, that is expected to
increase to c.130%, going forward.
KFIN’s capital base is the weakest among the Kuwaiti banks under
coverage, with FY 11A CET1 of 11%. This is due to a deduction of the
associate investments. We expect KFIN to improve its capital base by
selling some operations or associates that could unlock limited value.
Weak liquidity: We compute a NSFR of 93.4% as of FY 11A and a LCR
of 103%. Closing Cash and interbank stand at extremely low level of
2% of total asset in FY 11A.
Fully valued: KIFN is lying on a thin thread, it has weak earnings’
structure coupled with a weak capital base, a high reliance on
investment income and a liquidity position that is close to minimum
threshold. The only positive aspect is that the bank has a fairly decent
asset quality and relatively high margins, though the latter could
normalize if the bank addresses its weak liquidity position. We value
KIFN at a TP of KD 0.60, c.14% below the current market price. We
initiate with a Sell recommendation.
SELL
KWD 0.60
Banks / KUWAIT
Bloomberg code
Market index
KFIN KK
Kuwait
0.6
Upside (%)
Market data
-14
17/05/2012
Last closing price
52 Week range
Market cap (KWDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.69
0.68-0.96
2,004
7,169
1,138.0
4,070.4
2011
668
2012e
593
2013e
633
2014e
694
362
287
314
362
0.03
24.4
0.42
0.41
1.6
1.7
0.01
2.0
0.6
0.8
6.5
75.2
10
0.04
16.4
0.45
0.43
1.5
1.6
0.01
1.4
0.9
1.0
9.7
76.3
12
0.05
14.3
0.49
0.47
1.4
1.5
0.01
1.3
0.9
1.0
10.3
75.7
14
0.08
8.9
0.60
0.58
1.2
1.2
0.02
2.9
1.3
1.4
13.8
75.7
15
11.0
11.4
11.2
11.2
13.5
14
10.0
77.3
12.0
12
12.0
126.6
11.8
12
12.0
132.7
11.7
12
12.0
132.8
Price Performance
KFIN KK
107
Kuwait
99
91
83
75
67
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.41
3.24
3.12
3.08
3.04
3.01
Cost/Income (%)
43.3
45.7
51.7
50.4
47.8
45.1
52.9
47.5
56.9
59.1
59.2
59.4
11.1
8.4
10.0
9.9
9.6
9.2
25.6
28.5
14.7
12.1
12.2
12.3
8.6
6.5
9.7
10.3
13.8
14.4
19.4
20.5
20.6
20.9
21.0
21.7
0.9
0.6
0.9
0.9
1.3
1.3
Revenue / RWA (%)
5.86
6.42
4.78
4.67
4.65
4.65
3.4%
Costs / RWA (%)
2.54
2.94
2.47
2.35
2.22
2.10
3.2%
PPP / RWA (%)
3.32
3.48
2.31
2.32
2.42
2.55
1.99
3.09
1.11
1.06
0.72
0.74
RoRWA (%)
1.06
0.77
0.97
1.02
1.38
1.46
0.74
0.49
0.64
0.67
0.92
0.98
Profitability
4%
3.48%
3.32%
2.31%
3%
1.99%
2%
2.32%
2.42%
3.09%
1.06%
0.77%
1.11%
1%
0.97%
0%
FY10
FY11
PPP/RWA
1.38%
1.06%
2.55%
1.46%
1.02%
0.72%
0.74%
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAE (%)
Pre Prov.ROE (%)
RoAA (%)
NIM
3.24%
3.0%
3.12%
2.8%
3.08%
3.04%
3.01%
2.6%
2.4%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
135%
15.0%
130%
10.0%
125%
5.0%
120%
2.0
2.4
1.6
1.5
1.0
1.0
NPL/Gross Loans (%)
13.3
10.0
12.0
12.0
12.0
12.0
59.4
77.3
126.6
132.7
132.8
133.4
5.9
7.5
8.4
9.4
9.5
9.5
40.3
47.3
47.5
45.2
29.2
28.7
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
82.4
75.2
76.3
75.7
75.7
75.6
(1.4)
2.2
3.1
4.2
5.3
6.0
73.1
78.0
76.8
77.3
78.1
78.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
11.2
11.0
11.4
11.2
11.2
11.2
Tier 1 ratio (%)
14.2
13.5
12.0
11.8
11.7
11.8
14.2
13.7
12.4
12.2
12.2
12.3
13.0
11.4
11.2
11.0
11.1
11.2
RWA / assets (%)
83.1
80.9
89.3
88.7
88.1
87.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18%
14.2%
13.7%
14%
10%
12.4%
12.2%
12.2%
12.3%
14.2%
13.5%
FY10
FY11
Tier 1
12.0%
FY12e
11.7%
11.8%
FY13e
FY14e
CAR
11.8%
FY15e
Growth
20%
16%
12%
10%
6%
7%
5%
8%
11%
12%
12%
12%
Growth
7%
Asset growth (%)
0%
FY10
FY11
FY12e
Loan growth
FY13e
FY14e
FY15e
Deposit growth
11.1
6.8
8.0
10.0
11.0
11.0
Net loan growth (%)
6.6
6.0
8.1
10.0
12.0
11.9
Deposit growth (%)
5.3
16.1
6.5
11.0
12.0
12.0
(10.7)
(24.2)
49.7
14.5
49.2
17.1
159
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Interest income
518
524
542
598
658
728
Interest expense
208
207
205
224
247
272
Net interest income
310
317
337
374
411
456
65
56
59
63
67
71
140
180
77
66
72
80
71
114
120
130
144
160
586
668
593
633
694
767
254
305
306
319
332
346
332
362
287
314
362
421
Net provisions
134
171
136
142
106
121
65
150
1
1
2
2
Operating profit
134
41
149
171
255
298
Associates
(57)
(2)
—
—
—
—
76
39
149
171
255
298
Company Profile
Kuwait Finance House (KFH) provides commercial
banking services, all in accordance with Islamic
principles or Shari’a compliant banking. It was
established in 1977, the first Islamic bank in the State
of Kuwait. The Bank has the second largest market
share, with 27% and 28% of loan and deposit market
share respectively. The bank’s main operations are in
the Middle East, with 64% of the bank’s loan book
coming from that region. The bank’s major
shareholders are Kuwait Investment Authority,
holding 24.1% and Public Authority for Minor Affairs,
holding 10.5%. The bank has a free float of 49%.
Fee income
Net trading income
Pre-tax profit
Taxation
Group Net profit
Minorities
Tier 1 Coupon
20%
28%
21%
31%
4
1
6
7
10
12
73
37
143
164
245
286
(34)
(43)
23
26
39
46
1
—
—
—
—
—
Trading &
manufacturing
106
80
120
138
205
241
Diluted EPS
0.04
0.03
0.04
0.05
0.08
0.09
Banks & financial
institutions
DPS
0.02
0.01
0.01
0.01
0.02
0.02
BVPS
0.44
0.42
0.45
0.49
0.60
0.67
Construction &
real estate
Tangible BVPS
0.43
0.41
0.43
0.47
0.58
0.65
Other
Year-end
2010
2011
2012e
2013e
2014e
2015e
6,844
7,236
7,885
8,772
9,831
11,011
541
558
663
824
930
1,051
6,303
6,679
7,223
7,947
8,901
9,960
448
620
1,384
1,614
1,826
2,064
Due from banks
1,597
1,478
1,666
1,832
2,034
2,257
Investment, net
2,305
2,602
2,583
2,753
2,957
3,181
Fixed assets
751
767
908
999
1,099
1,209
Other assets
629
706
116
123
131
140
Total assets
12,033
12,851
13,879
15,267
16,947
18,811
Customer deposits
7,649
8,882
9,463
10,503
11,764
13,176
Due to banks
2,212
1,819
2,626
2,810
2,968
3,202
—
—
—
—
—
—
Other liabilities
602
682
235
270
328
334
Total liabilities
10,463
11,382
12,324
13,583
15,060
16,711
1,570
1,469
1,556
1,684
1,887
2,100
10
10
12
14
15
16
9,095
9,805
10,800
12,144
13,526
15,130
9,292
10,281
11,394
12,701
14,023
15,555
1,214
1,158
1,239
1,348
1,527
1,715
1,323
1,338
1,414
1,519
1,669
1,854
Tier 1 capital
1,416
1,404
1,484
1,594
1,750
1,941
Middle East
35%
Western Europe
64%
1%
Other
Debt
Total Equity
Zeina Nasreddine
+97145071744
160
May 23 2012
Kuwait Finance House valuation (KWDmn)
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
107
1
(6)
5.0%
2.5%
112
1,603
7.0%
10.0%
160
(48)
---
81
0
(10)
5.0%
2.5%
91
1,597
5.7%
10.0%
160
(69)
---
120
-(7)
5.0%
2.5%
127
1,628
7.8%
10.0%
163
(35)
---
138
-(8)
5.0%
2.5%
146
1,776
8.2%
10.0%
178
(32)
0.95
(30)
205
-(8)
5.0%
2.5%
214
1,954
10.9%
10.0%
195
18
0.87
16
241
-(7)
5.0%
2.5%
248
2,153
11.5%
10.0%
215
33
0.79
26
208
-(7)
5.0%
2.5%
215
2,153
10.0%
10.0%
215
(0)
0.79
(0)
11
0.7%
(2)
1,628
1,637
(0.1%)
95.7%
96.2%
(147)
(8.6%)
3.5%
(3)
1,570
(44)
1,469
(46)
1,556
(46)
1,684
(46)
1,887
(46)
2,100
(46)
(49)
1,476
(40)
1,383
(29)
1,481
(26)
1,612
(53)
1,788
(53)
2,001
10,003 10,400
11,805 12,202
12.0% 12.0%
186
133
1,603 1,597
(127)
(214)
12,397
12,397
12.0%
140
1,628
(147)
13,549 14,936
13,549 14,936
12.0% 12.0%
150
162
1,776 1,954
(164)
(166)
16,486
16,486
12.0%
175
2,153
(152)
183
183
29
1,701
2,854
10.8%
1.7%
100%
0.6
0.7
(13.6%)
14.1
1.37
12.4
1.26
161
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
Gulf Bank
Expensive despite positive outlook
 Very expensive with below average fundamentals
 Capital & liquidity is adequate
 Returns are low, but expected to improve
Despite bullish earnings outlook, return on the bank is relatively low:
Gulf Bank is generating pre‐provisioning profits of c. 3.4% of RWA, due
to the relatively low risk cost/income of 34%. We do not expect the
pre-provisioning RORWA to reach FY 10A level of 4.8%, as this was
boosted by capital gains (87% of FY 10A net profit). Nevertheless, we
expect RORWA to increase from 1% in FY 11A to 2.4% in FY 15e,
mainly due to a lower cost of risk. RoE should improve from 7.3% in FY
11A to 10.8% in FY 14e on our forecasts. The bank targets to grow at
2-3% faster than the market.
High double digit earnings growth: We forecast a double digit growth
in earnings, thanks to the expected c. 7% top line growth coupled with
a small improvement in cost/income ratio and lower loan loss
additions. We expect net earnings to really pick up and grow at 40% in
FY 12e, 20% in FY 13e and 17% in FY 14e. We expect margins to
remain relatively stable or improve slightly.
Very weak asset quality: Our asset quality screen suggests a
cumulative loss of just 818 bps over the next 5 years (164 bps pa),
which is amongst the highest for covered Kuwaiti banks. The bank’s
NPL ratio is at 14.4%, with a coverage ratio of 38%. Loan loss charges
are expected to decrease going forward, provisions will mostly consist
of general provisions as the large write- downs have been completed.
Capital is low in Kuwait context: Gulf bank has an acceptable capital
base, with FY 11A CET1 of 13.6%, and we expect it to increase to 15%
in FY14e, as the bank does not pay dividends. The bank is not looking
for acquisitions, as it plans to focus on the domestic market.
Strong liquidity profile: We compute a NSFR of 90% as of FY 11A and a
LCR of 127% with closing cash and interbank standing at -10% of total
assets.
We believe we have captured high growth with our PE ratio: Gulf
bank is trading at a rich a P/E 13e of 21.4x and P/tNAV 12e 2.3x vs. a
relatively low RoE 12e of 9.5%. We initiate with a Sell
recommendation and our TP leaves 19% downside.
This is text style...
SELL
KWD 0.34
Banks / KUWAIT
Bloomberg code
Market index
GBK KK
Kuwait
0.34
Upside (%)
Market data
-19
17/05/2012
Last closing price
52 Week range
Market cap (KWDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.42
0.41-0.54
1,106
3,956
773.8
2,767.7
2011
152
2012e
162
2013e
173
2014e
185
100
113
122
131
0.01
35.4
0.17
0.17
2.5
2.5
—
—
0.7
1.0
7.3
101.1
3
0.02
25.6
0.18
0.18
2.3
2.3
—
—
0.9
1.4
9.5
101.4
3
0.02
21.4
0.20
0.20
2.1
2.1
—
—
1.0
1.5
10.3
99.9
3
0.02
18.3
0.23
0.23
1.9
1.9
0.01
1.2
1.1
1.7
10.8
98.6
4
13.6
14.4
15.0
15.1
13.6
17
14.4
38.1
14.4
17
14.0
50.1
15.0
17
14.0
59.4
15.5
17
14.0
67.5
Price Performance
GBK KK
106
Kuwait
99
92
85
78
71
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Gulf Bank
Year-end
Profitability
6%
5%
4%
3%
2%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.25
2.30
2.32
2.32
2.32
2.33
Cost/Income (%)
25.9
34.0
30.3
29.7
29.2
28.6
57.2
69.9
69.6
69.6
69.3
69.3
15.2
18.9
18.8
18.6
18.5
18.3
9.5
(0.1)
0.3
0.3
0.3
0.3
RoAE (%)
4.7
7.3
9.5
10.3
10.8
14.8
32.5
23.4
24.5
23.9
23.0
21.9
0.4
0.7
0.9
1.0
1.1
1.5
Revenue / RWA (%)
6.44
5.09
5.18
5.21
5.22
5.23
Costs / RWA (%)
1.67
1.73
1.57
1.55
1.53
1.49
PPP / RWA (%)
4.77
3.36
3.61
3.66
3.70
3.74
4.06
2.28
2.16
2.04
1.91
1.17
RoRWA (%)
0.68
1.03
1.37
1.54
1.69
2.43
0.68
1.03
1.37
1.54
1.69
2.43
4.77%
3.36%
4.06%
2.28%
3.61%
2.16%
3.66%
2.04%
0.68%
1.03%
FY10
FY11
PPP/RWA
1.37%
3.70%
2.43%
1.91%
1.69%
1.54%
3.74%
FY12e
FY13e
FY14e
Cost of risk/RWA
1.17%
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
2.4%
2.3%
2.32%
2.32%
2.32%
2.33%
2.30%
2.3%
2.25%
2.2%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
80%
15.0%
60%
10.0%
40%
5.0%
20%
0%
3.3
1.9
1.8
1.7
1.6
1.0
NPL/Gross Loans (%)
18.7
14.4
14.0
14.0
14.0
14.0
36.1
38.1
50.1
59.4
67.5
70.1
15.2
6.5
5.2
6.6
7.8
8.8
85.1
67.9
60.0
55.6
51.7
31.3
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
104.3
101.1
101.4
99.9
98.6
97.6
(12.2)
(9.7)
(9.1)
(7.8)
(6.3)
(5.1)
73.3
76.5
76.4
76.4
76.4
76.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.3
13.6
14.4
15.0
15.1
15.5
Tier 1 ratio (%)
13.5
13.6
14.4
15.0
15.5
16.2
17.5
16.9
16.6
17.1
17.4
16.6
Capital Ratios
20%
17.5%
16.9%
16.6%
17.1%
13.5%
13.6%
14.4%
15.0%
17.4%
15%
10%
15.5%
16.6%
16.2%
5%
0%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
8%
5%
0%
6%
-2%
FY10
6%
FY11
FY12e
6%
4%
FY13e
6%
5%
FY14e
9.0
9.3
9.7
10.2
10.8
60.9
62.2
61.7
61.6
61.5
61.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
(3.0)
4.0
6.0
6.5
6.5
7.0
Net loan growth (%)
(2.2)
5.2
5.8
4.4
4.6
5.9
Deposit growth (%)
(2.5)
8.5
5.5
6.0
6.0
7.0
(167.9)
60.7
39.7
19.7
17.0
54.0
7%
6%
FY15e
-20%
Loan growth
8.9
RWA / assets (%)
Deposit growth
Growth
Gulf Bank
163
May 23 2012
Abacus
Gulf Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
213
Company Profile
Interest income
181
172
182
194
199
Interest expense
77
66
69
73
71
76
Gulf Bank was established in 1960, it has a network of
56 branches strategically positioned in key locations
throughout Kuwait. Gulf Bank has a market share of
14% in terms of loans and 11% in terms of deposits, its
corporate loan book stood at 76% in FY 11A, with real
estate being the largest contributor arriving at 28% of
total loans in FY 11A. The bank generally operates in
Kuwait with domestic loans standing at 98% in FY 11A.
The bank’s Major shareholders are Kuwait investment
authority, holding 16.1%, and Morad Yousuf
Behbehani Group holding 5.8%. The bank has a free
float of 49%.
Net interest income
103
106
113
121
128
137
Fee income
27
29
30
32
34
36
Net trading income
17
—
—
—
—
—
33
17
19
20
22
24
181
152
162
173
185
198
47
52
49
51
54
57
134
100
113
122
131
142
Net provisions
114
68
68
68
68
44
—
—
—
—
—
—
Operating profit
20
32
45
54
63
97
Personal
Financial
24%
11%
9%
10%
8% 1%
—
—
—
—
32
45
54
63
97
1
1
2
3
3
5
Group Net profit
19
31
43
51
60
92
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
19
31
43
51
60
92
0.01
0.01
0.02
0.02
0.02
0.04
—
—
—
—
0.01
0.01
BVPS
0.16
0.17
0.18
0.20
0.23
0.26
Tangible BVPS
0.16
0.17
0.18
0.20
0.23
0.26
2010
2011
2012e
2013e
2014e
2015e
3,435
3,564
3,760
3,986
4,225
4,521
232
196
196
264
331
399
3,203
3,368
3,564
3,722
3,894
4,122
1,772
DPS
Construction
Manufacturing
Real estate
Year-end
Others
2% 0%
—
20
Diluted EPS
Trade and
commerce
Crude oil and gas
28%
—
Pre-tax profit
Taxation
9%
Associates
Kuwait
Other Middle
East
Western Europe
1,112
1,218
1,289
1,448
1,613
Due from banks
111
20
56
59
63
68
Investment, net
92
106
112
119
127
135
Fixed assets
26
26
27
28
28
29
Other assets
56
48
25
27
29
31
Total assets
4,600
4,786
5,073
5,403
5,754
6,157
Customer deposits
3,071
3,330
3,514
3,725
3,949
4,225
954
853
910
972
1,021
1,062
Debt
84
84
84
84
84
84
Other liabilities
80
89
92
98
116
123
Total liabilities
4,189
4,356
4,600
4,879
5,170
5,493
411
430
473
524
584
663
3
3
3
3
4
4
4,593
4,615
4,867
5,185
5,523
5,897
Due to banks
Total Equity
Asia Pacific
98%
Gulf Bank
Rest of World
4,177
4,188
4,388
4,645
4,917
5,212
411
430
473
524
584
663
377
406
449
500
535
588
Tier 1 capital
377
406
449
500
547
614
Zeina Nasreddine
+97145071744
164
May 23 2012
Gulf Bank valuation (KWDmn)
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Gulf Bank
2010
2011
2012e
2013e
2014e
2015e
19
0
2
5.0%
2.5%
17
367
4.6%
10.0%
37
(20)
---
31
0
4
5.0%
2.5%
27
358
7.6%
10.0%
36
(9)
---
43
-5
5.0%
2.5%
38
375
10.1%
10.0%
38
0
---
51
-6
5.0%
2.5%
45
399
11.3%
10.0%
40
5
0.95
5
60
-7
5.0%
2.5%
53
424
12.4%
10.0%
42
10
0.83
9
92
-9
5.0%
2.5%
83
455
18.3%
10.0%
45
38
0.65
25
92
-9
5.0%
2.5%
83
455
18.3%
10.0%
45
38
0.65
25
38
4.3%
379
375
792
42.9%
42.5%
89.7%
98
11.1%
3.5%
582
411
--
430
--
473
--
524
--
584
--
663
--
-411
-430
-473
-524
(13)
571
(26)
638
2,803
3,060
12.0%
-367
44
2,978
2,983
12.0%
-358
72
3,128
3,128
12.0%
-375
98
3,327
3,327
12.0%
-399
125
3,537
3,537
12.0%
-424
147
3,789
3,789
12.0%
-455
183
(7)
(7)
0
883
2,581
0.3
0.4
(19.5%)
20.7
1.87
(0.8%)
0.0%
100%
17.3
1.69
165
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
Burgan Bank
Kuwait’s best growth story
 Capital ratios under pressure due to acquisition, though still
adequate
 Tekfen acquisition lifts loan growth by 3 % pa
 Very attractive valuation coupled with high RORWA
Burgan should be one of the best players with high‐growth story: We
expect Burgan Bank RORWA to remain at 1.7%–2.4%, with an RoE of
12.3% in FY 12e, reaching c. 15% in FY 13-15e, driven by strong top
line growth, improving efficiency and lower loan loss charges.
Strong earnings growth of 19%: We expect the bank’s Loan book to
increase by 20% in FY 12e (of which 15% stemming from Tekfen); we
expect income to grow by 12% in FY 12e recovering from a drop of 1%
in FY 11A (on low investment income). We expect income to grow
further by 13% and 10% in FY 13e and FY 14e respectively. We expect
double digit net earnings growth as a result of low double digit
revenue growth coupled with a small improvement in cost/income
and lower structural cost of risk.
Loan loss charges to normalize: Our asset quality screen suggests an
above average cumulative loss of 615 bps over the next 5 years
(123bps pa), below FY 11A charge of 127bps. The bank’s NPL ratio is
11.5%, mainly resulting from the Jordanian subsidiary that was
affected by the Arab spring, with a coverage ratio of 35% in FY 11A.
The bank however is comfortable with its low coverage given its
strong collateral base and restrictive requirements that overstates
NPLs.
Burgan Bank expected capital for FY 12e to decrease but recover
thereafter: With its recent acquisition of Tekfen, its CET1 is expected
to decrease from 14.3% in FY 11A to a very acceptable 13.1% in FY 12e
(despite 2.5% negative effect from the acquisition), given the bank’s
strong capital generation. We expect CET1 to reach 13.8% in FY 15e.
BUY
KWD 0.60
Banks / KUWAIT
Bloomberg code
Market index
BURG KK
Kuwait
0.60
Upside (%)
Market data
45
17/05/2012
Last closing price
52 Week range
Market cap (KWDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.42
0.41-0.51
641
2,294
409.4
1,464.3
2011
163
2012e
183
2013e
207
2014e
227
102
111
131
147
0.03
12.7
0.29
0.18
1.4
2.3
0.01
2.3
1.2
1.7
11.7
80.6
3
0.04
10.9
0.33
0.22
1.3
1.9
0.01
2.3
1.2
1.6
12.3
82.0
4
0.05
8.7
0.36
0.24
1.2
1.7
0.01
2.3
1.3
2.0
14.0
81.4
4
0.06
7.5
0.39
0.28
1.1
1.5
0.02
4.8
1.3
2.1
14.7
80.8
4
14.3
13.1
13.9
13.5
14.7
20
11.5
35.3
14.6
19
11.0
41.8
15.6
20
11.0
48.7
15.1
19
11.0
54.7
Price Performance
BURG KK
108
Kuwait
101
Strong liquidity profile: We compute a NSFR of 114% as of FY 11A and
a high LCR of 116%. Closing cash and interbank is at a well positioned
level of 10% of total assets. L/D ratio is only 81%, the lowest among its
peers.
Attractive valuation with c. 45% upside: Burgan offers an attractive
valuation (P/E 13e of 8.7x P/NAV12e of 1.9x vs. RoE of c.12-15%),
while offering also the strongest loan growth momentum (thanks to
the Turkish acquisition) and structurally high returns.
94
87
80
73
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Burgan Bank
Year-end
Profitability
5%
3.75%
4%
3.42%
3%
2.70%
2%
1%
2010
2011
2012e
2013e
2014e
2015e
2.79
2.59
2.53
2.52
2.52
2.54
Cost/Income (%)
39.6
37.6
39.2
36.6
35.2
33.7
64.8
64.0
64.7
65.9
65.9
65.8
19.8
23.3
22.3
21.3
21.2
21.3
8.4
4.8
5.6
5.6
5.6
5.5
RoAE (%)
1.2
11.7
12.3
14.0
14.7
16.0
20.4
18.5
18.5
19.9
20.7
21.5
0.1
1.2
1.2
1.3
1.3
1.5
Revenue / RWA (%)
6.20
5.47
4.97
5.58
5.65
5.76
Costs / RWA (%)
2.45
2.06
1.95
2.04
1.99
1.94
PPP / RWA (%)
3.75
3.42
3.02
3.54
3.66
3.82
2.70
1.13
0.91
0.90
0.86
0.69
RoRWA (%)
0.18
1.69
1.59
1.99
2.12
2.36
0.18
1.69
1.59
1.99
2.12
2.36
3.54%
1.59%
1.99%
1.69%
0.18%
0.91%
1.13%
0%
FY10
FY11
PPP/RWA
3.82%
3.66%
3.02%
0.90%
2.12%
2.36%
0.86%
FY12e
FY13e
FY14e
Cost of risk/RWA
0.69%
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.79%
2.59%
2.53%
2.52%
2.54%
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
FY10
2.52%
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
80%
15.0%
3.1
1.3
1.2
1.1
1.1
0.9
NPL/Gross Loans (%)
6.1
11.5
11.0
11.0
11.0
11.0
72.9
35.3
41.8
48.7
54.7
58.3
60%
10.0%
40%
5.0%
20%
0%
4.5
4.1
4.6
5.4
6.0
6.4
72.0
28.6
30.3
25.4
23.4
18.2
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
83.3
80.6
82.0
81.4
80.8
80.5
7.2
10.3
8.8
9.5
9.9
11.4
71.1
70.1
67.3
65.9
65.2
65.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
14.7
14.3
13.1
13.9
13.5
13.8
Tier 1 ratio (%)
15.2
14.7
14.6
15.6
15.1
15.4
20.6
19.6
19.0
19.9
19.1
19.1
13.0
12.4
11.6
11.3
11.2
11.3
RWA / assets (%)
64.1
65.6
67.1
61.5
61.0
61.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
20.6%
19.6%
19.0%
19.9%
19.1%
19.1%
18%
14%
15.2%
14.7%
14.6%
FY10
FY11
Tier 1
FY12e
10%
15.6%
FY13e
15.1%
FY14e
CAR
15.4%
FY15e
Growth
40%
20%
6%
0%
-5%
FY10
9%
19%
7%
7%
8%
17%
8%
5%
FY11
FY12e
FY13e
8%
8%
FY14e
FY15e
-20%
Growth
Asset growth (%)
Net loan growth (%)
Loan growth
Deposit growth
Deposit growth (%)
Burgan Bank
1.1
9.7
20.5
10.0
9.0
8.0
(4.9)
5.5
18.8
7.1
7.3
7.5
5.8
9.0
16.7
8.0
8.0
8.0
(25.1)
986.2
15.9
26.2
15.0
20.4
167
May 23 2012
Abacus
Burgan Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
259
Company Profile
Interest income
174
167
187
216
237
Interest expense
67
62
69
80
88
95
Burgan Bank is a regional bank with majority of its
owned subsidiaries located in the MENA region. The
bank was established in 1977, it holds a market share
of 9% in terms of loans and deposits. It provides retail,
corporate and investment banking services, with
subsidiaries in Algeria (Gulf Bank Algeria), Iraq (Bank
of Baghdad), Jordan (Jordan Kuwait Bank) and Tunis
(Tunis International). Burgan Bank’s loan book
consists mainly of corporate loans, 82% in FY 11A. The
bank’s major shareholders are Kuwait Projects
Company holding 41% and United Gulf bank holding
17%, with a free float of 49%.
Net interest income
107
105
118
136
149
164
Fee income
33
38
41
44
48
53
Net trading income
11
6
8
9
10
11
14
14
16
17
19
21
165
163
183
207
227
250
65
61
72
76
80
84
Corporate
18%
Retail
100
102
111
131
147
165
Net provisions
72
29
34
33
34
30
—
5
—
—
—
—
Operating profit
28
68
78
98
112
135
Associates
—
—
—
—
—
—
Pre-tax profit
28
68
78
98
112
135
Taxation
12
11
12
16
18
22
Group Net profit
16
58
65
82
94
114
Minorities
11
7
7
8
9
11
Tier 1 Coupon
—
—
—
—
—
—
5
51
59
74
85
102
Diluted EPS
—
0.03
0.04
0.05
0.06
0.07
DPS
—
0.01
0.01
0.01
0.02
0.02
BVPS
0.27
0.29
0.33
0.36
0.39
0.44
Tangible BVPS
0.16
0.18
0.22
0.24
0.28
0.33
2010
2011
2012e
2013e
2014e
2015e
2,236
2,348
2,806
3,030
3,272
3,534
100
95
129
162
197
227
2,136
2,252
2,676
2,868
3,076
3,307
Year-end
82%
1,092
986
1,261
2,237
2,503
2,809
Due from banks
486
843
1,016
362
395
426
Investment, net
133
149
179
197
215
232
Fixed assets
49
49
60
66
72
—
Other assets
252
272
292
304
316
328
Total assets
4,147
4,552
5,485
6,033
6,576
7,102
Customer deposits
2,565
2,796
3,262
3,523
3,805
4,110
Due to banks
811
942
1,290
1,543
1,720
1,857
Debt
109
108
110
110
110
110
Other liabilities
123
140
185
174
206
222
Total liabilities
3,609
3,986
4,847
5,350
5,840
6,299
539
566
638
683
736
804
3
3
4
4
4
4
3,830
4,038
4,682
5,398
5,925
6,481
Total Equity
Burgan Bank
3,506
3,666
4,254
4,919
5,406
5,856
240
275
333
378
432
504
404
439
482
517
543
600
Tier 1 capital
404
439
482
517
543
600
Zeina Nasreddine
+97145071744
168
May 23 2012
Exhibit 1:
Burgan Bank valuation (KWD mn)
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Burgan Bank
2010
2011
2012e
2013e
2014e
2015e
5
0
1
5.0%
2.5%
3
329
1.0%
11.1%
36
(33)
---
51
0
0
5.0%
2.5%
50
369
13.6%
11.1%
41
9
---
59
-0
5.0%
2.5%
58
442
13.2%
11.1%
49
9
---
74
-2
5.0%
2.5%
71
445
16.1%
11.1%
49
22
0.95
21
85
-2
5.0%
2.5%
83
482
17.1%
11.1%
53
29
0.85
25
105
-4
5.0%
2.5%
101
520
19.5%
11.1%
58
44
0.77
34
105
-4
5.0%
2.5%
101
482
21.0%
11.1%
53
48
0.77
37
80
8.5%
385
442
906
41.3%
47.4%
97.3%
8
0.9%
3.7%
500
539
(181)
566
(173)
638
(173)
683
(173)
736
(173)
807
(173)
-358
(15)
379
(15)
450
(15)
496
(31)
533
(31)
603
2,659
2,739
12.0%
-329
29
2,985
3,075
12.0%
-369
10
3,683
3,683
12.0%
-442
8
3,709
3,709
12.0%
-445
51
4,013
4,013
12.0%
-482
51
4,335
4,335
12.0%
-520
83
2
2
15
932
1,545
0.60
0.42
45.3%
15.9
2.80
0.3%
1.6%
100.0%
12.6
2.47
169
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
Boubyan Bank
Expensive on take-over speculation
 Well positioned for growth in Islamic finance
 RORWA to improve, strong EPS growth ahead
 Very steep take-over premium not justified
Poor return for Boubyan Bank to be lifted: We expect Boubyan’s low
pre‐provisioning profits (1.8% of RWA) to increase substantially to 3.4%
by FY 14e, as top line growth filters through and efficiency improves
(C/I to drop from 60% to 43% over this period) as the bank increases its
economies of scale. We expect income to grow by 33% in FY 12e, 27%
in FY13e and 20% in FY 14e from just 7% in FY 11A. We expect the RoE
to improve from 3.3% to c. 12% in FY 15e coupled with a very high
double digit EPS growth.
Very robust asset quality: Boubyan has been working on cleansing its
loan book and has succeeded in doing so. Looking at our asset quality
screen, Boubyan should have an average cumulative loss of just 589bps
over the next 5 years (118bps pa), compared with 115bps in FY 11A.
The bank’s NPL ratio is benign at 0.5%, with a coverage ratio of 2287%.
We expect its NPL ratio to increase in the next few years and the
coverage ratio to tapper of at c. 300%, as we also expect loan loss
charges to remain relatively stable.
Strongest capital base: We calculate a CET1 of 22.2%, despite a small
negative effect from higher deductions from associates; however we
expect the ratio to come down slowly due to the sharp growth in loans,
despite zero cash pay-out to shareholders.
Robust liquidity profile: We compute a NSFR of 135% as of FY 11A and
a high LCR of 243%. Closing cash and interbank stand at an adequate
level of 16% of total assets.
Fully valued: Boubyan’s valuation is artificially high due to take-over
speculation. NBK has been granted permission to increase its stake
from 47.3% to 60.0%. CBK currently holds 19.2% stake in Boubyan,
though it cannot sell its stake until it resolves its dispute with
Investment Dar, however NBK could buy on the market. We do not
believe that the Central Bank will grant NBK permission to buy the
remaining 40%. Consequently, if NBK were to reach the 60%, the
implicit valuation support would fall away and the shares could fall
substantially. We think a potential purchase of Boubyan at the current
valuation would reduce the fair value of NBK itself, but NBK’s
willingness to buy is understandable given its low growth and strong
capital base. Despite the aggressive estimated growth, we see 54%
downside on its stand-alone fundamentals.
SELL
KWD 0.28
Banks / KUWAIT
Bloomberg code
Market index
BOUBYAN KK
Kuwait
0.28
Upside (%)
Market data
-54
17/05/2012
Last closing price
52 Week range
Market cap (KWDmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.61
0.53-0.61
1,066
3,815
380.9
1,362.3
2011
42
2012e
56
2013e
72
2014e
86
17
27
39
50
—
131.3
0.14
0.14
4.4
4.4
—
—
0.6
0.9
3.3
85.7
1
0.01
68.5
0.15
0.15
4.1
4.1
—
—
0.9
1.5
6.2
88.2
1
0.02
40.0
0.16
0.16
3.7
3.7
—
0.3
1.3
2.0
9.7
87.6
1
0.02
28.8
0.18
0.18
3.3
3.3
—
0.3
1.5
2.5
12.2
87.2
1
22.2
22.4
19.6
19.6
25.5
25
0.5
2286.6
23.8
23
2.9
320.0
21.1
21
3.1
306.6
21.0
21
3.2
293.2
Price Performance
BURG KK
108
Kuwait
101
94
87
80
73
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Boubyan Bank
Year-end
Profitability
5%
4%
3.42%
3.75%
3.54%
1.59%
1.69%
2%
0%
3.66%
3.02%
3%
1%
2010
2011
2012e
2013e
2014e
2015e
2.81
2.90
2.92
2.91
2.89
2.72
Cost/Income (%)
56.2
60.0
51.9
45.6
42.6
42.9
76.6
93.6
85.5
80.2
77.6
75.8
19.1
9.4
9.6
8.5
8.2
9.5
2.1
(5.4)
3.0
9.6
12.7
13.1
RoAE (%)
3.8
3.3
6.2
9.7
12.2
11.6
11.2
8.4
10.7
14.1
16.1
15.5
0.5
0.6
0.9
1.3
1.5
1.5
Revenue / RWA (%)
4.81
4.59
5.39
5.53
5.91
5.82
Costs / RWA (%)
2.70
2.75
2.80
2.52
2.51
2.50
PPP / RWA (%)
2.11
1.84
2.60
3.01
3.39
3.32
1.48
1.33
1.09
0.92
0.81
0.82
RoRWA (%)
0.74
0.87
1.49
2.04
2.53
2.44
0.56
0.64
1.10
1.56
1.96
1.93
1.99%
2.12%
3.82%
2.36%
2.70%
0.69%
0.18%
1.13%
FY10
FY11
PPP/RWA
0.91%
0.86%
0.90%
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.79%
2.59%
2.53%
2.52%
2.54%
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
FY10
2.52%
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.4
1.1
0.9
0.8
0.7
0.7
NPL/Gross Loans (%)
0.7
0.5
2.9
3.1
3.2
3.3
1,257.4
2,286.6
320.0
306.6
293.2
287.1
Asset Quality
Credit Quality
80%
15.0%
60%
10.0%
40%
5.0%
20%
0%
7.1
6.8
9.7
8.7
9.0
9.2
70.3
72.1
42.1
30.5
23.8
24.8
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
87.6
85.7
88.2
87.6
87.2
86.7
12.7
15.5
12.4
12.2
12.1
12.9
87.4
92.2
86.8
83.7
81.1
81.3
Year-end
2010
2011
2012e
2013e
2014e
2015e
25.0
22.2
22.4
19.6
19.6
20.0
Tier 1 ratio (%)
27.8
25.5
23.8
21.1
21.0
21.3
27.6
25.1
23.4
21.0
21.0
21.5
18.2
15.9
13.9
13.0
12.6
12.7
RWA / assets (%)
62.4
59.4
55.3
58.2
57.0
56.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
36.4
17.9
22.0
18.0
15.0
10.0
Net loan growth (%)
43.0
24.9
21.1
14.2
11.4
9.4
Deposit growth (%)
32.7
27.8
17.6
15.0
12.0
10.0
(111.8)
31.4
93.7
71.2
39.1
6.0
Capital Ratios
26%
22%
20.6%
19.6%
19.0%
19.9%
19.1%
19.1%
18%
14%
15.2%
14.7%
14.6%
FY10
FY11
Tier 1
FY12e
10%
15.1%
15.6%
FY13e
FY14e
CAR
15.4%
FY15e
Growth
40%
19%
20%
8%
8%
9%
17%
6%
0%
-5%
FY10
5%
FY11
FY12e
7%
FY13e
7%
FY14e
8%
8%
FY15e
-20%
Loan growth
Deposit growth
Growth
Boubyan Bank
171
May 23 2012
Abacus
Boubyan Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
41
53
65
78
91
98
Interest expense
11
13
16
20
24
27
Boubyan Bank (BB) is a Kuwaiti Islamic commercial
bank established in 2004, with 700 employees. The
bank is one of the only four Islamic commercial banks
operating in Kuwait; its largest shareholder is National
Bank of Kuwait holding 47.3% and Commercial Bank
of Kuwait holding 19.2%. The Bank has a relatively low
market share of 4% in terms of loans and deposits,
lowest among the other Kuwaiti banks under
coverage. The bank’s loan book mainly consists of
corporate loans, standing at 77% in FY11A, with
operations concentrated in Kuwait and Middle East.
The bank has a free float of 49%.
Net interest income
30
40
48
58
67
71
8
4
5
6
7
9
—
(3)
1
7
11
12
Fee income
Net trading income
1
2
1
2
2
2
40
42
56
72
86
94
22
25
29
33
37
40
17
17
27
39
50
53
Net provisions
12
12
11
12
12
13
—
—
—
—
—
—
Operating profit
5
5
16
27
38
40
Associates
1
4
1
1
1
1
Pre-tax profit
6
8
16
28
39
42
—
—
1
1
2
2
6
8
16
27
37
39
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
6
8
16
27
37
39
Diluted EPS
—
—
0.01
0.02
0.02
0.02
DPS
—
—
—
—
—
—
BVPS
0.14
0.14
0.15
0.16
0.18
0.20
Tangible BVPS
0.14
0.14
0.15
0.16
0.18
0.20
2010
2011
2012e
2013e
2014e
2015e
849
1,065
1,294
1,483
1,658
1,821
24
35
46
58
70
83
825
1,030
1,248
1,425
1,588
1,738
141
192
266
370
485
549
Due from banks
148
128
151
179
206
226
Investment, net
187
183
212
242
271
292
Fixed assets
5
6
6
7
7
7
Other assets
11
12
9
11
13
14
Total assets
Taxation
Group Net profit
23%
Retail
Corporate
77%
Year-end
0.03% 0.32%
Kuwait and
Middle East
Western
Europe
Other
99.65%
Boubyan Bank
1,316
1,552
1,893
2,234
2,569
2,826
Customer deposits
941
1,202
1,415
1,627
1,822
2,004
Due to banks
121
79
183
275
379
411
Debt
—
—
—
—
—
—
Other liabilities
14
23
33
42
45
51
Total liabilities
1,076
1,305
1,630
1,944
2,246
2,467
240
247
263
290
323
359
1
1
1
1
1
2
1,078
1,365
1,649
1,985
2,318
2,611
964
1,172
1,440
1,750
2,051
2,308
238
244
261
287
321
357
218
222
234
255
287
321
Tier 1 capital
229
235
249
274
307
343
Total Equity
Zeina Nasreddine
+97145071744
172
May 23 2012
Boubyan Bank valuation (KWDmn)
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Boubyan Bank
2010
2011
2012e
2013e
2014e
2015e
6
0
6
5.0%
2.5%
1
126
0.4%
9.0%
11
(11)
---
8
0
5
5.0%
2.5%
3
146
2.1%
9.0%
13
(10)
---
16
-5
5.0%
2.5%
10
155
6.6%
9.0%
14
(4)
---
27
-5
5.0%
2.5%
22
188
11.6%
9.0%
17
5
0.96
5
37
-5
5.0%
2.5%
32
209
15.1%
9.0%
19
13
0.88
11
39
-6
5.0%
2.5%
33
227
14.6%
9.0%
20
13
0.81
10
39
-6
5.0%
2.5%
33
227
14.6%
9.0%
20
13
0.81
10
26
5.3%
185
155
366
37.7%
31.6%
74.6%
108
22.0%
3.5%
229
240
--
247
--
263
--
290
--
323
--
359
--
-240
-247
-263
(3)
286
(3)
320
(5)
354
822
870
12.0%
21
126
115
922
1,000
12.0%
26
146
101
1,046
1,046
12.0%
29
155
108
1,301
1,301
12.0%
32
188
98
1,464
1,464
12.0%
34
209
111
1,608
1,608
12.0%
34
227
128
17
31.5
1.88
17
3.4%
490
1,747
0.3
0.6
(54.0%)
100.0%
18.4
1.71
173
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
Bank Muscat
Better positioned after capital hikes
 We expect Bank Muscat’s capital ratios to improve from
their relatively low levels, helped by retained earnings &
capital hikes
 Liquidity is very robust
 Best growth in Oman with decent RORWA & RoE
High return bank with solid margins: We expect Bank Muscat’s
RORWA to remain at c. 1.8%– 1.9%, with ROE clocking in at c.16%,
more or less in line with its historical average. Earnings are expected
to grow at c. 17%, with an income growth of 14% (with revenue
growth of 15% on average). We expect NIM to decrease slightly to
reach 3.4% in FY 11A and 3.2% in FY 14-15e, as central bank imposes
lower caps on interest rates on new personal loans. We expect loan
growth of c.15% CAGR.
Cost of risk to remain unchanged: Our asset quality screen suggests a
through the cycle cost of risk of 67bps, more or less unchanged from
previous years. Bank Muscat’s NPL ratio stood at c. 3% in FY 11A, and
we expect it to remain relatively stable at 4% despite the expected
double‐digit loan growth starting FY 12e. We also expect coverage to
level at 74% by FY 14e from 118% in FY 11A.
Capital base relatively weak: CET1 stood at 9% in FY 11A, however it is
expected to improve due to expected capital injection to reach 11% in
FY 12e. We expect a rights issue of USD 150mn (adding 6% new
shares), a 50% conversion of the mandatory convertible note and a
private placement of OMR 50-100mn. Ideally, we would like to see a
higher CET1, but in Oman context, Bank Muscat is well capitalized.
Robust liquidity supporting margin: We compute a net stable funding
ratio of 101% as of FY 11A, along with a robust liquidity coverage ratio
of 221%. Net cash and interbank are also solid at 13% of assets, as of
FY 11A.
BUY
OMR 0.9
Banks / OMAN
Bloomberg code
Market index
BKMB OM
Muscat
0.9
Upside (%)
Market data
51
17/05/2012
Last closing price
52 Week range
Market cap (OMRmn)
Market cap (USDmn)
Average daily value (OMRmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.6
0.6-0.7
1,058
2,752
0.6
1.6
2011
294
2012e
331
2013e
378
2014e
432
173
197
229
266
0.07
8.8
0.43
0.43
1.4
1.4
0.02
3.7
1.8
1.8
15.9
101.5
7
0.07
8.4
0.49
0.49
1.2
1.2
0.03
4.3
1.7
1.7
15.0
103.8
8
0.08
7.4
0.54
0.54
1.1
1.1
0.03
4.3
1.8
1.8
15.3
103.8
9
0.09
6.4
0.60
0.60
1.0
1.0
0.03
4.3
1.9
1.8
16.0
103.8
10
9.1
11.0
10.7
10.7
11.9
15
3.0
118.4
11.4
16
4.0
75.6
12.5
17
4.0
74.5
12.0
16
4.0
74.4
Price Performance
114
BKMB OM
Muscat
107
100
We initiate with a Buy recommendation: The current share price
offers a cheap entry point into the leading Omani based bank, which
has a fairly adequate liquidity and profitability profile. The bank is
progressively addressing its tight capital base that we believe will be a
strong catalyst for the shares. The key reason for the weak YTD
performance has been the share overhang, and with this out of the
way soon, we think the shares are due for a rebound.
93
86
79
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Bank Muscat
Year-end
Profitability
2010
2011
2012e
2013e
2014e
2015e
2.49%
2.53%
2.58%
3.36
3.42
3.23
3.23
3.22
3.22
1.78%
1.83%
1.86%
Cost/Income (%)
38.8
41.1
40.4
39.4
38.5
37.5
70.5
72.1
72.0
72.6
73.0
73.2
19.6
20.8
20.5
20.1
19.9
19.8
0.9
2.4
3.0
3.1
3.1
3.1
RoAE (%)
14.7
15.9
15.0
15.3
16.0
16.4
Pre Prov.ROE (%)
19.0
19.5
18.7
18.8
19.6
20.2
1.7
1.8
1.7
1.8
1.9
1.9
Revenue / RWA (%)
4.66
4.43
4.14
4.11
4.12
4.13
3.5%
Costs / RWA (%)
1.81
1.82
1.67
1.62
1.59
1.55
3.4%
PPP / RWA (%)
2.85
2.61
2.47
2.49
2.53
2.58
0.56
0.51
0.47
0.47
0.47
0.49
RoRWA (%)
1.78
1.77
1.67
1.78
1.83
1.86
1.59
1.62
1.48
1.58
1.62
1.64
3%
2%
1%
2.85%
2.61%
1.77%
1.78%
0.56%
0.51%
2.47%
1.67%
0.47%
0.47%
0.47%
0.49%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.42%
3.3%
3.36%
3.2%
3.23%
3.23%
3.22%
3.22%
FY12e
FY13e
FY14e
Net interest margin
FY15e
3.1%
FY10
FY11
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.8
0.6
0.7
0.7
0.7
0.7
5.0%
NPL/Gross Loans (%)
4.2
3.0
4.0
4.0
4.0
4.0
76%
4.0%
105.9
118.4
75.6
74.5
74.4
75.8
75%
3.0%
75%
2.0%
74%
1.0%
Asset Quality
Credit Quality
76%
74%
4.4
3.5
3.0
3.0
3.0
3.0
20.3
17.7
18.9
18.8
18.6
19.0
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
113.6
101.5
103.8
103.8
103.8
103.8
8.8
13.3
12.1
11.0
10.1
9.4
68.7
73.5
73.6
73.3
73.0
72.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18%
14%
15.2%
14.8%
11.6%
15.9%
16.5%
11.4%
12.5% 12.0%
11.9%
FY12e
FY13e
FY15e
16.2%
15.6%
11.9%
10%
FY10
FY11
Tier 1
FY14e
CAR
Growth
40%
9.3
9.1
11.0
10.7
10.7
10.7
Tier 1 ratio (%)
11.6
11.9
11.4
12.5
12.0
11.9
15.2
14.8
15.9
16.5
16.2
15.6
12.2
10.6
12.2
11.8
11.6
11.4
RWA / assets (%)
97.4
91.9
96.3
96.1
95.3
94.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
35%
20%
20%
15%
16%
13%
15%
15%
15%
15%
15%
15%
4%
0%
FY10
Growth
Asset growth (%)
FY11
FY12e
Loan growth
Bank Muscat
FY13e
FY14e
FY15e
Deposit growth
—
23.5
15.0
15.0
15.0
15.0
Net loan growth (%)
4.4
20.2
15.6
15.1
15.0
14.9
Deposit growth (%)
14.9
34.7
13.1
15.0
15.0
15.0
37.8
15.7
13.9
22.4
17.1
15.8
175
May 23 2012
Abacus
Bank Muscat
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (OMRmn)
Company Profile
Interest income
275
287
329
379
436
502
Interest expense
88
75
91
105
121
139
Bank Muscat, the best player in Oman, holding 40%
and 38% in terms of loans and deposits market share
respectively, it was established in 1982, with 2,904
employees and a network of 130 branches. Bank
Muscat launched its Islamic banking operations, in
December 2011, Meethaq. The bank’s loan book
consists mainly of corporate and retail loans with 56%
and 39% respectively in FY 11A. The bank’s main
operations are in Oman, with 94% in FY 11A coming
from Sultanate of Oman and 4% from other GCC
countries. Major shareholders include Royal Court
Affairs with 24.8% stake, Dubai Financial Group
holding 15% and HSBC A/C The Bank of New York
International with 13% stake. It has a free float of
49%.
Net interest income
187
212
238
274
315
362
52
61
68
76
86
98
1
4
7
8
9
11
25
17
18
19
21
24
265
294
331
378
432
495
103
121
134
149
166
186
Fee income
Net trading income
163
173
197
229
266
309
Net provisions
33
31
37
43
49
59
(1)
3
—
—
—
—
Operating profit
130
140
160
186
216
250
Associates
(13)
(4)
(4)
5
7
8
Pre-tax profit
118
136
156
190
223
258
Taxation
16
19
22
27
31
36
102
118
134
164
192
222
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
102
118
134
164
192
222
Diluted EPS
0.06
0.07
0.06
0.08
0.09
0.11
DPS
0.02
0.02
0.03
0.03
0.03
0.03
BVPS
0.40
0.43
0.49
0.54
0.60
0.68
Tangible BVPS
0.40
0.43
0.49
0.54
0.60
0.68
2010
2011
2012e
2013e
2014e
2015e
4,194
4,996
5,745
6,607
7,598
8,738
186
176
174
197
226
265
4,008
4,819
5,571
6,410
7,372
8,473
726
826
1,083
1,247
1,438
1,662
Due from banks
550
869
831
956
1,099
1,264
Investment, net
322
392
499
574
660
759
Fixed assets
75
72
78
86
95
105
Other assets
170
249
249
287
330
379
Total assets
5,851
7,228
8,312
9,559
10,993
12,642
Customer deposits
Group Net profit
Corporate
Sovereign
39%
Year-end
56%
Financial
institution
Balance sheet (OMRmn)
Retail
4%
1%
4% 2%
Sultanate of
Oman
Other GCC
countries
3,527
4,749
5,369
6,175
7,101
8,166
Due to banks
760
731
912
1,153
1,430
1,741
Debt
334
502
502
511
511
511
Other liabilities
514
482
511
590
681
784
Total liabilities
5,135
6,464
7,294
8,429
9,722
11,202
716
764
1,018
1,130
1,270
1,440
6
7
8
9
10
12
5,579
6,204
7,379
8,496
9,775
11,245
Total Equity
Others
94%
Bank Muscat
4,696
5,301
6,383
7,311
8,440
9,730
Common shareholders' equity
716
764
1,018
1,130
1,270
1,440
599
656
881
987
1,120
1,281
Tier 1 capital
675
755
996
1,103
1,251
1,413
Zeina Nasreddine
+97145071744
176
May 23 2012
Bank Muscat valuation (OMRmn)
1. DCF
Net profit
Minus: excess return excess capital (line 6 x line 29 x tax shelter)
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Bank Muscat
2010
2011
2012e
2013e
2014e
2015e
102
-(7)
5.0%
2.5%
109
825
13.2%
11.2%
92
17
---
118
-(10)
5.0%
2.5%
127
924
13.8%
11.2%
103
24
---
134
-(2)
5.0%
2.5%
136
1,015
13.4%
11.2%
113
23
---
164
-(4)
5.0%
2.5%
168
1,158
14.5%
11.2%
129
39
0.95
37
192
-(5)
5.0%
2.5%
197
1,312
15.0%
11.2%
146
50
0.85
43
222
-(5)
5.0%
2.5%
227
1,490
15.3%
11.2%
166
61
0.77
47
222
-(5)
5.0%
2.5%
227
1,490
15.3%
11.2%
166
61
0.77
47
127
6.8%
614
1,015
1,756
33.0%
54.6%
94.4%
(49)
(2.6%)
3.5%
800
716
--
764
--
1,018
--
1,130
--
1,270
--
1,440
--
(34)
683
(39)
725
(52)
966
(52)
1,078
(53)
1,218
(53)
1,388
5,696
6,416
12.0%
55
825
(142)
6,640
7,242
12.0%
55
924
(199)
8,001
8,001
12.0%
55
1,015
(49)
9,189 10,478 11,962
9,189 10,478 11,962
12.0% 12.0% 12.0%
55
55
55
1,158 1,312 1,490
(79)
(95)
(103)
106
(6)
100
52
1,859
2,105
0.9
0.6
51.2%
13.7
1.80
5.4%
2.8%
100%
11.2
1.62
177
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
Sohar Bank
Weak capital base
 Weak capital base not adequately addressed
 Cost of funding expected to come down
 Valuation should capture low structural RORWA
HOLD
OMR 0.2
Banks / OMAN
Bloomberg code
Market index
BKSB OM
Muscat
0.2
Upside (%)
Decent profitability, NIMs to go up: We expect Bank Sohar’s RORWA
to remain at c. 1.1%– 1.2%, with RoE at 11.5% in FY 11A to decrease to
11.3% in FY 12e, as capital is injected into its Islamic financing unit.
Despite capital injection, RoE is expected to improve to reach 14.4%
by FY 15e. We expect a double digit income growth of 13% in FY 12e,
increasing to 16% in FY 15e, driven by loan demand in Oman. Margins
are expected to improve, with 2.8% in FY 12e to reach 3.1% in FY 15e,
thanks to a lower cost of funding by reducing its book of term
deposits. The Bank’s loan book growth is expected to increase by 11%
in FY 12e and to remain at 13% for the next 4 years.
Solid asset quality: Our asset quality screen suggests a cumulative loss
of 333bps over next 5 years (67bps pa). NPL ratio stood at c. 1.5% in FY
11A, relatively lower than its peers, it is expected to increase to 2.7%
in FY 14e. The Bank has an extremely high coverage ratio of 133.6%,
which is expected to remain at an average of 133%.
Capital base very weak: CET1 stood at 9.3% in FY 11A, but is expected
to improve to 9.4% in FY 12e due to expected capital injection of OMR
10mn. However, Bank Muscat is addressing its capital position in a
much more rigorous way. We do not expect the bank to be able to
improve its capital ratios from retained earnings.
Relatively strong liquidity supporting margin: We compute a net
stable funding ratio of 105% as of FY 11A and a liquidity coverage ratio
of 221%. Net cash and interbank are also solid at 18% of assets.
We initiate with a Hold recommendation: We think Bank Sohar is fully
valued, despite trading at a P/E 13e of 8.4x and P/tNAV 12e of 1.1x.
We think the low multiples are warranted by the low underlying
RORWA 1.0%-1.2% and RoE in the range of 11.3%-13.6% with a tight
capital base, though it has a clean asset book and good liquidity
position.
Market data
1
17/05/2012
Last closing price
52 Week range
Market cap (OMRmn)
Market cap (USDmn)
Average daily value (OMRmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.15
0.1-0.2
150
390
0.2
0.5
2011
43
2012e
49
2013e
57
2014e
66
20
24
29
35
0.01
10.4
0.13
0.13
1.2
1.2
0.01
5.3
1.1
1.1
11.5
87.0
1
0.01
10.2
0.14
0.14
1.1
1.1
0.01
4.0
1.0
1.0
11.3
88.3
2
0.02
8.4
0.15
0.15
1.0
1.0
0.01
4.0
1.1
1.1
12.4
87.9
2
0.02
7.0
0.17
0.17
0.9
0.9
0.01
4.0
1.2
1.2
13.6
87.4
2
9.3
9.4
9.1
9.0
9.3
14
1.5
133.6
9.4
14
1.9
133.9
9.1
13
2.3
132.5
9.0
13
2.7
131.4
Price Performance
BKSB OM
114
Muscat
107
100
93
86
79
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Bank Sohar
Year-end
Profitability
3%
2%
1%
0%
2010
2011
2012e
2013e
2014e
2015e
2.74
2.64
2.76
2.93
3.02
3.11
Cost/Income (%)
55.6
53.7
51.9
49.1
46.6
43.7
86.8
80.5
81.9
82.5
82.9
83.2
10.9
15.4
15.1
14.6
14.3
14.0
0.3
2.1
1.0
1.0
0.9
0.9
RoAE (%)
8.7
11.5
11.3
12.4
13.6
14.4
11.6
13.9
14.7
16.1
17.8
19.6
0.9
1.1
1.0
1.1
1.2
1.3
Revenue / RWA (%)
3.13
3.34
3.25
3.36
3.45
3.55
Costs / RWA (%)
1.74
1.79
1.69
1.65
1.60
1.55
PPP / RWA (%)
1.39
1.55
1.56
1.71
1.84
2.00
0.36
0.27
0.35
0.39
0.43
0.53
RoRWA (%)
0.91
1.12
1.04
1.13
1.21
1.26
0.91
1.12
1.04
1.13
1.21
1.26
1.39%
0.91%
1.55%
1.12%
0.36%
0.27%
FY10
FY11
PPP/RWA
1.56%
1.84%
1.71%
1.04%
1.13%
0.35%
0.39%
1.21%
2.00%
1.26%
0.43%
0.53%
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.93%
2.74%
FY10
2.64%
FY11
3.02%
3.11%
2.76%
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.4
0.3
0.5
0.5
0.6
0.7
4.0%
NPL/Gross Loans (%)
0.9
1.5
1.9
2.3
2.7
3.0
3.0%
212.5
133.6
133.9
132.5
131.4
136.7
2.0%
1.0%
Asset Quality
Credit Quality
138%
136%
134%
132%
130%
128%
1.4
1.7
2.1
2.6
3.1
3.7
25.5
17.3
22.3
22.8
23.4
26.2
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
89.7
87.0
88.3
87.9
87.4
86.9
13.8
17.5
14.4
14.2
15.4
15.3
88.6
89.9
89.8
90.3
90.1
90.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
10.3
9.3
9.4
9.1
9.0
8.9
Tier 1 ratio (%)
10.3
9.3
9.4
9.1
9.0
8.9
15.9
14.2
13.8
13.2
12.7
12.3
Capital Ratios
20%
15.9%
14.2%
13.8%
13.2%
10.3%
9.3%
9.4%
9.1%
FY10
FY11
FY12e
FY13e
15%
12.7%
12.3%
10%
5%
9.0%
8.9%
0%
Tier 1
FY14e
FY15e
CAR
Growth
20%
15%
15%
16%
12%
12%
11%
13%
13%
13%
12%
0%
Bank Sohar
FY11
FY12e
Loan growth
FY13e
9.0
9.4
9.1
8.9
8.8
89.4
90.4
95.5
95.7
95.4
95.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset growth (%)
22.8
13.8
10.0
12.0
13.0
13.0
Net loan growth (%)
14.8
12.9
11.0
12.4
12.4
12.3
Deposit growth (%)
15.5
16.4
9.4
13.0
13.0
13.0
27.4
41.8
8.2
21.9
20.3
17.8
13%
9%
FY10
9.8
RWA / assets (%)
FY14e
FY15e
Deposit growth
Growth
179
May 23 2012
Abacus
Bank Sohar
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
58
61
65
72
81
91
Interest expense
28
26
25
25
27
28
Bank Sohar is a conventional and soon to have Islamic
banking operations in Oman; it holds a market share
of 8% and 9% in terms of loans and deposits
respectively. It was established in 2007, currently has
552 employees and a network of 24 branches. The
Bank’s loan book consists mainly of corporate loans
standing at 62% in FY 11A and retail loans at 35%.
Bank Sohar’s main operation is in the Middle East,
with 97% of its loan book in FY 11A coming from the
Middle East and the rest from Asia. The Bank’s major
shareholders are Omani Government Owned Funds
holding 15.3%, Oman Investment and Finance
Company holding 15% and Royal Court Affairs with
14.6%. It has a free float of 70%.
Net interest income
31
35
40
47
54
63
4
7
7
8
9
11
—
—
—
—
—
—
1
2
1
2
2
2
35
43
49
57
66
76
20
23
25
28
31
33
16
20
24
29
35
43
4
3
5
7
8
11
—
—
—
—
—
—
Operating profit
12
17
18
22
27
32
Fee income
Net trading income
Net provisions
Associates
—
—
—
—
—
—
Pre-tax profit
12
17
18
22
27
32
Taxation
2.9%
Loans to
banks
35.3%
Corporate
61.8%
2
3
3
4
4
10
14
16
19
23
27
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
10
14
16
19
23
27
Diluted EPS
0.01
0.01
0.01
0.02
0.02
0.03
DPS
0.01
0.01
0.01
0.01
0.01
0.01
BVPS
0.12
0.13
0.14
0.15
0.17
0.19
Tangible BVPS
0.12
0.13
0.14
0.15
0.17
0.19
2010
2011
2012e
2013e
2014e
2015e
916
1,033
1,156
1,305
1,475
1,667
13
14
24
34
45
61
903
1,020
1,131
1,272
1,429
1,606
105
62
122
132
158
189
Due from banks
119
232
158
176
199
225
Investment, net
107
86
95
106
120
135
Fixed assets
14
14
23
25
28
30
Other assets
10
20
47
53
60
68
Total assets
1,259
1,432
1,575
1,764
1,994
2,253
Customer deposits
Year-end
Retail
2.6%
Middle East
Asia
1
Group Net profit
1,006
1,171
1,281
1,448
1,636
1,849
Due to banks
51
43
53
57
50
69
Debt
50
50
50
50
75
75
Other liabilities
28
39
43
48
54
62
Total liabilities
1,135
1,303
1,427
1,603
1,816
2,054
124
129
148
161
178
198
1
1
2
2
2
2
1,118
1,316
1,452
1,596
1,796
2,030
1,000
1,186
1,324
1,469
1,658
1,877
124
129
148
161
178
198
115,800
120,331
141,649
154,373
170,978
190,605
116
120
142
154
171
191
Total Equity
97.4%
Tier 1 capital
Bank Sohar
Zeina Nasreddine
+97145071744
180
May 23 2012
Bank Sohar valuation (OMR mn)
1. DCF
Net profit
Minus: excess return excess capital (line 6 x line 29 x tax shelter)
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Bank Sohar
2010
2011
2012e
2013e
2014e
2015e
perp
10
-(1)
5.0%
2.5%
11
135
8.2%
11.0%
15
(4)
---
14
-(2)
5.0%
2.5%
16
155
10.4%
11.0%
17
(1)
---
16
-(2)
5.0%
2.5%
18
180
9.7%
11.0%
20
(2)
---
19
-(2)
5.0%
2.5%
21
203
10.6%
11.0%
22
(1)
0.95
(1)
23
-(3)
5.0%
2.5%
26
228
11.3%
11.0%
25
1
0.86
1
27
-(3)
5.0%
2.5%
30
257
11.8%
11.0%
28
2
0.77
2
27
-(3)
5.0%
2.5%
30
257
11.8%
11.0%
28
2
0.77
2
subtotal % of total
1
0.8%
21
180
203
13.0%
111.7%
125.5%
(38)
(23.8%)
3.5%
27
124
--
129
--
148
--
161
--
178
--
198
--
(6)
118
(8)
121
(6)
142
(6)
155
(6)
171
(7)
191
1,125
1,125
12.0%
-135
(18)
1,294
1,294
12.0%
-155
(35)
1,504
1,504
12.0%
-180
(38)
1,688
1,688
12.0%
-203
(48)
1,901
1,901
12.0%
-228
(57)
2,142
2,142
12.0%
-257
(66)
(4)
(6)
(10)
6
161
1,067
0.2
0.2
1%
10.3
1.09
(6.0%)
4.0%
100%
8.4
1.00
181
Initiation Report
May 23
2012
+97145071744
Zeina Nasreddine
HSBC Oman Bank
Merger synergies fully discounted



Opportunities for cost reductions due to merger
Capital base solid after HSBC capital injection
Valuation already very high
Decent profitability: We expect HSBC Oman’s RORWA to stand at c.
1.8%, helped by a 10-15% cost reduction, with cost/income improving
from 58.5% in FY 11A to 42.6% in FY 15e. Our forecasts for FY 12e
incorporate a merger by June 30th. We expect RoE to improve to
12.5% in FY 15e. The merger between HSBC and OIB increases OIB’s
loan book from USD 1,787mn to USD 2,995mn (+68%) and its assets
from USD 3,251mn to USD 5,770mn (+77%). The EPS may be slightly
diluted, (by c. 10%) as OIB issues 51% of new shares to HSBC, even
though HSBC’s operations are much smaller than OIB’s (43.7% of total
assets of the new group, 40.3% of loans 42.8% of deposits, 45.5% of
profits before tax, 8.6% of branches, 22% of staff and 42% of
estimated risk weighted assets), however the effect is partly offset by
a capital injection by HSBC.
Weakest Asset quality and lowest coverage: Our asset quality screen
suggests a through the cycle cost of risk of 66 bps, with a cumulative
risk of 336bps over the next 5 years vs. net write-backs in FY 11A. We
expect CET1 to reach 13%, highest amongst the Omani banks under
coverage. Thus we think loan loss charges will be a headwind. OIB’s
NPL ratio stood at 10.9%, relatively high compared to its peers, with a
coverage ratio of only 38.8% in FY 11A. We do not know HSBC’s NPL or
coverage ratio.
Capital base is relatively strong: CET1 stood at 12.1% in FY 11A.
HSBC’s Oman capital adequacy stood at 16.4%, and it will inject up to
USD 97.4mn into the company. Moreover OIB had about OMR 25.3mn
of property revaluation reserves, equal to 1.3% of RWAs, and the bank
could unlock this by selling land.
SELL
OMR 0.2
Banks / OMAN
Bloomberg code
Market index
OIBB OM
Muscat
0.2
Upside (%)
Market data
-7
17/05/2012
Last closing price
52 Week range
Market cap (OMR mn)
Market cap (USD mn)
Average daily value (OMR mn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.2
0.2-0.3
226
588
0.1
0.3
2011
42
2012e
69
2013e
94
2014e
105
17
31
48
57
0.02
12.4
0.18
0.18
1.3
1.3
0.01
5.5
1.5
1.9
10.5
69.0
1
0.02
13.9
0.17
0.17
1.4
1.4
0.01
4.3
1.3
1.7
9.8
65.6
2
0.02
12.3
0.17
0.17
1.3
1.3
0.01
4.3
1.5
1.8
11.1
66.3
2
0.02
10.6
0.19
0.19
1.2
1.2
0.01
4.3
1.5
1.9
12.1
66.7
2
12.1
13.4
13.3
13.1
13.6
14
10.9
38.8
13.4
15
10.7
48.1
13.3
15
10.6
47.4
13.1
14
10.4
47.1
Price Performance
OIBB OM
118
Muscat
110
Strong liquidity profile: We compute a net stable funding ratio of
108% and a very robust liquidity coverage ratio 172% with closing cash
and interbank standing at 18% of total assets (we expect that HSBC is
more liquid than OIB stand-alone given its slightly lower LTD ratio).
Expensive on earnings: The stock is expensive on earnings, with P/E
13e at 12.3x and P/tNAV of 1.3x vs. a RoE of 11.1%. We see a strong
downside in the stock, despite the strong capital base and the
expertise of HSBC.
102
94
86
78
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Oman International Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
3.02
2.79
2.78
2.78
2.78
2.77
Cost/Income (%)
51.9
58.5
54.2
48.8
45.5
42.6
74.4
72.1
69.4
70.5
69.6
68.8
14.8
17.0
16.1
14.9
15.7
16.5
0.5
2.4
6.3
7.2
7.2
7.3
RoAE (%)
10.3
10.5
9.8
11.1
12.1
12.5
Pre Prov.ROE (%)
11.3
10.2
12.5
14.1
15.9
17.5
1.6
1.5
1.3
1.5
1.5
1.5
Revenue / RWA (%)
4.45
4.36
4.72
4.49
4.55
4.66
3.1%
Costs / RWA (%)
2.31
2.55
2.56
2.19
2.07
1.99
3.0%
PPP / RWA (%)
2.14
1.81
2.16
2.30
2.48
2.68
Profitability
3%
2.14%
2.16%
1.86%
2.30%
2.48%
2.68%
1.91%
2%
1%
0%
-1%
1.81%
1.95%
-0.07%
1.69%
0.24%
1.89%
1.80%
0.33%
0.25%
0.51%
-0.30%
FY10
FY11
FY12e
PPP/RWA
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
2.9%
3.02%
2.8%
2.7%
2.79%
2.78%
2.78%
2.77%
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
2.78%
(0.07)
(0.30)
0.24
0.25
0.33
0.51
RoRWA (%)
1.95
1.86
1.69
1.80
1.89
1.91
1.95
1.86
1.69
1.80
1.89
1.91
2.6%
FY10
Year-end
2010
2011
2012e
2013e
2014e
2015e
(0.1)
(0.4)
0.3
0.4
0.5
0.7
10.8%
NPL/Gross Loans (%)
10.8
10.9
10.7
10.6
10.4
10.3
10.6%
42.7
38.8
48.1
47.4
47.1
48.6
10.4%
10.2%
Asset Quality
Credit Quality
49%
49%
48%
48%
47%
47%
46%
4.4
4.3
2.4
4.7
4.5
4.4
(3.5)
(16.5)
11.0
11.1
13.4
18.9
10.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
80.2
69.0
65.6
66.3
66.7
67.1
10.9
18.4
17.7
17.9
17.0
18.2
80.8
92.6
88.6
87.8
87.8
88.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
12.5
12.1
13.4
13.3
13.1
13.1
Tier 1 ratio (%)
14.2
13.6
13.4
13.3
13.1
13.1
15.1
14.4
14.7
14.6
14.4
14.4
14.6
13.9
13.6
13.1
12.6
12.2
RWA / assets (%)
78.0
77.2
80.1
78.3
77.8
76.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
26%
22%
18%
15.1%
14.4%
14.7%
14.6%
14.4%
14.4%
14%
10%
14.2%
13.6%
13.4%
13.3%
FY10
FY11
Tier 1
FY12e
FY13e
13.1%
FY14e
CAR
13.1%
FY15e
Growth
100%
86%
80%
60%
77%
40%
25%
8%
20%
9%
4%
0%
FY10
12%
11%
10%
FY11
FY12e
Loan growth
FY13e
12%
13%
13%
FY14e
FY15e
Deposit growth
Growth
Asset growth (%)
11.2
8.3
94.0
10.0
11.0
11.0
Net loan growth (%)
4.0
7.7
77.2
10.9
12.4
13.3
Deposit growth (%)
9.2
25.2
86.2
9.7
11.7
12.7
(18.3)
2.4
36.8
52.7
15.9
10.6
183
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
37
37
57
80
88
98
Interest expense
7
6
10
14
15
17
Oman International Bank SAOG (OIB) was established
in 1979, it holds a market share of 6% in terms of
loans, and 8% in terms of deposits, lowest among the
Omani banks under coverage. It has a network of 84
branches with 1,012 numbers of employees. The
bank’s loan book consists mainly of corporate loans,
60% in FY 11A and c. 40% of retail loans. OIB’s main
operations are in Sultanate Oman with domestic loans
standing at 99%. HSBC owns 51% of the outstanding
shares after the merger.
Net interest income
30
30
48
66
73
81
6
7
11
14
16
19
—
—
2
3
3
4
4
5
8
11
12
13
40
42
69
94
105
118
21
25
37
46
48
50
Fee income
Net trading income
19
17
31
48
57
68
Net provisions
(1)
(3)
3
5
8
13
—
—
—
—
—
—
Operating profit
20
20
28
43
50
55
Associates
—
—
—
—
—
—
Pre-tax profit
20
20
28
43
50
55
Taxation
0.4%
Retail
39.6%
Corporate
Government
60.0%
2
2
3
5
6
7
Group Net profit
18
18
25
38
44
48
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
18
18
25
38
44
48
Diluted EPS
0.02
0.02
0.02
0.02
0.02
0.02
DPS
0.01
0.01
0.01
0.01
0.01
0.01
BVPS
0.17
0.18
0.17
0.17
0.19
0.20
Tangible BVPS
0.17
0.18
0.17
0.17
0.19
0.20
2010
2011
2012e
2013e
2014e
2015e
672
721
1,290
1,429
1,603
1,818
33
33
71
76
84
96
639
688
1,220
1,352
1,520
1,721
Year-end
0.67%0.05%
0.36%
Oman
267
310
684
741
805
861
Due from banks
82
128
243
267
296
329
Investment, net
32
35
121
134
148
165
Fixed assets
31
37
87
96
106
116
Other assets
105
53
73
80
89
99
Total assets
1,156
1,251
2,428
2,671
2,964
3,290
Customer deposits
other GCC
countries
India
Pakistan
797
998
1,858
2,039
2,277
2,567
Due to banks
84
23
123
156
172
165
Debt
—
—
—
—
—
—
Other liabilities
106
57
115
128
143
159
Total liabilities
987
1,078
2,097
2,322
2,592
2,890
Total Equity
169
174
331
349
372
400
1
1
2
2
2
3
988
1,090
1,715
2,381
2,632
2,922
847
951
1,501
2,088
2,322
2,590
169
174
331
349
372
400
128
132
261
278
302
330
Tier 1 capital
128
132
261
278
302
330
98.92%
Zeina Nasreddine
+97145071744
184
May 23 2012
Oman International Bank valuation (OMRmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
2010
2011
2012e
2013e
2014e
2015e
18
-2
5.0%
2.5%
16
123
13.0%
11.1%
14
2
---
18
-2
5.0%
2.5%
16
130
12.6%
11.1%
14
2
---
25
-4
5.0%
2.5%
21
233
8.9%
11.1%
26
(5)
---
38
-4
5.0%
2.5%
34
251
13.5%
11.1%
28
6
0.95
6
44
-4
5.0%
2.5%
40
277
14.4%
11.1%
31
9
0.85
8
48
-4
5.0%
2.5%
44
303
14.7%
11.1%
34
11
0.77
8
48
-4
5.0%
2.5%
44
303
14.7%
11.1%
34
11
0.77
8
22
5.0%
105
233
360
23.9%
53.3%
82.1%
78
17.7%
5.0%
136
169
--
174
--
331
--
349
--
372
--
400
--
(14)
155
(12)
162
(20)
311
(20)
329
(20)
352
(20)
380
901
1,023
12.0%
-123
33
966
1,087
12.0%
-130
31
1,945
1,945
12.0%
-233
78
2,090
2,090
12.0%
-251
78
2,307
2,307
12.0%
-277
75
2,527
2,527
12.0%
-303
77
(13)
(6)
(19)
20
438
2,033
0.2
0.2
(6.7%)
13.0
1.30
(4.4%)
4.6%
100%
11.5
1.24
185
Initiation Report
May 23
2012
+97145071744
Loubna El Hassan
Ahli United Bank
Weak capital base, poor liquidity
 We expect decent profitability and double digit EPS growth
helped by lower C/I and lower provisioning
 AUB should address its capital and liquidity position
 AUB offers a reasonable valuation
Reasonable return bank: AUB should be able to maintain its preprovisioning profits at 2.5% of RWAs and RORWA to remain at 1.6%.
However, the RORWA is somewhat inflated by a high contribution
from associate interests. We expect the bank to be able to reduce the
cost/income ratio slightly from 34.8% to 32.5% by FY 12e, while net
interest margins to remain at around 2.31%.
Earnings CAGR of 13%: We forecast net income to grow at 13% CAGR
over our forecasted period, helped by 9% top line growth, a small
improvement in cost/income and lower cost of risk. We expect loan
growth to stand within the range of 8%-10% over our forecasted
period. AUB loan book is well diversified with growth mainly driven by
retail lending (22% of total loans) and real estate (20% of total loans).
losses of just 315bps over the next 5 years, or 63bps per year, well
below the level AUB has taken for FY 11 (84bps). AUB has a solid asset
quality relative to its MENA peers with a stable NPL ratio of 2.5% in FY
11A (2.4% in FY 10A) and a coverage ratio of 135% (vs. 119% in FY
10A).
Tight capital base: AUB has a low capital base relative to its MENA
peers with a CET1 of 10.3% in FY 11A. We expect Tier 1 to come in at
10.2% in FY 12e due its single digit loan growth and relatively low
return and a high dividend pay-out.
Low liquidity We compute Basel III NSFR of 68% in FY 11A and a LCR of
100%, which are both below the minimum requirement. AUB net cash
position is also limited at -7%.
Fair valuation: AUB is almost fairly valued at P/E13e of 8.0x and
P/tNAV12e of 1.2x, which already reflects its double digit earnings
potential growth, its average return profile (ROAE of 14.2% and
adjusted RORWA of 1.2% for FY 12e), tight capital and poor liquidity
position. We thus initiate on AUB with a Hold recommendation and a
TP of QAR 0.6, which provides 4% upside.
HOLD
BHD 0.6
Banks / Bahrain
Bloomberg code
Market index
AUB BI
Bahrain
0.6
Upside (%)
Market data
3.9
17/05/2012
Last closing price
52 Week range
Market cap (BHDmn)
Market cap (USDmn)
Average daily value (BHDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.6
0.6-0.7
3,556
3,556
0.2
0.5
2011
785
2012e
825
2013e
892
2014e
975
512
557
607
663
0.06
10.3
0.46
0.33
1.3
1.9
0.03
4.7
1.1
1.5
12.8
89.3
20
0.07
8.9
0.50
0.37
1.2
1.7
0.03
4.9
1.2
1.6
14.2
89.8
22
0.08
8.0
0.55
0.41
1.1
1.5
0.03
4.9
1.3
1.7
14.5
89.4
24
0.09
7.1
0.60
0.47
1.0
1.3
0.03
4.9
1.3
1.7
14.9
89.2
26
10.3
10.2
10.4
10.6
11.5
16
2.5
135.3
11.2
15
3.0
130.7
11.3
15
3.2
135.7
11.3
15
3.4
135.7
Price Performance
108
AUB BI
Bahrain
101
94
87
80
73
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Ahli United Bank
Year-end
Profitability
3%
2%
2010
2011
2012e
2013e
2014e
2015e
2.24
2.26
2.31
2.35
2.38
2.41
Cost/Income (%)
36.0
34.8
32.5
32.0
32.0
31.6
72.4
72.2
75.2
75.4
75.7
75.8
17.5
15.6
15.7
15.6
15.4
15.5
6.6
9.1
6.0
5.9
5.9
5.8
RoAE (%)
11.6
12.8
14.2
14.5
14.9
15.2
Pre Prov.ROE (%)
17.8
17.8
19.4
19.4
19.3
19.3
1.1
1.1
1.2
1.3
1.3
1.4
Revenue / RWA (%)
3.59
3.94
3.77
3.78
3.78
3.82
Costs / RWA (%)
1.29
1.37
1.23
1.21
1.21
1.21
PPP / RWA (%)
2.30
2.57
2.54
2.57
2.57
2.61
0.98
1.02
0.96
0.93
0.87
0.84
RoRWA (%)
1.36
1.55
1.63
1.68
1.73
1.80
0.98
1.11
1.18
1.22
1.26
1.30
1.36%
2.30%
1.55%
2.54%
2.57%
1.02%
0.98%
1%
1.63%
0.96%
1.68%
1.73%
2.57%
2.57%
0.93%
0.87%
1.80%
2.61%
0.84%
0%
FY10
FY11
PPP/RWA
FY12e
FY13e
FY14e
Cost of risk/RWA
FY15e
RORWA
RoAA (%)
NIM
3.4%
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2.26%
2.38%
2.24%
2.31%
2.41%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
2.35%
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.1
0.8
0.8
0.8
0.7
0.6
NPL/Gross Loans (%)
2.4
2.5
3.0
3.2
3.4
3.6
119.5
135.3
130.7
135.7
135.7
133.9
Asset Quality
Credit Quality
138%
3.8%
3.6%
3.4%
3.2%
3.0%
2.8%
2.6%
136%
134%
132%
130%
128%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2.9
3.4
4.0
4.4
4.7
4.9
33.7
25.4
24.6
23.4
21.0
19.6
2010
2011
2012e
2013e
2014e
2015e
89.0
Capital Ratios
97.6
89.3
89.8
89.4
89.2
(12.6)
(7.2)
(6.9)
(1.3)
(0.6)
0.1
62.5
67.9
68.6
70.0
70.7
71.5
Year-end
2010
2011
2012e
2013e
2014e
2015e
26%
22%
18%
14.1%
14%
10.1%
15.8%
15.3%
15.3%
15.1%
15.0%
11.5%
11.2%
11.3%
11.3%
11.4%
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
10%
FY10
Growth
20%
9.4
10.3
10.2
10.4
10.6
10.9
Tier 1 ratio (%)
10.1
11.5
11.2
11.3
11.3
11.4
14.1
15.8
15.3
15.3
15.1
15.0
10.3
9.8
10.0
10.2
10.3
10.5
RWA / assets (%)
74.0
70.3
72.9
73.5
73.6
73.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
9.0
17%
12%
9% 7%
9%
10%
7%
7%
9%
10%
10%
10%
Growth
Asset growth (%)
0%
FY10
FY11
FY12e
Loan growth
Ahli United Bank
FY13e
FY14e
FY15e
Deposit growth
12.2
7.1
6.0
7.0
9.0
Net loan growth (%)
8.9
7.0
7.4
8.5
9.7
9.8
Deposit growth (%)
12.0
16.9
6.8
9.0
10.0
10.0
32.3
16.0
16.2
10.9
12.7
13.2
187
May 23 2012
Abacus
Ahli United Bank
Year-end
2010
2011
2012e
2013e
2014e
2015e
Income statement (BHDmn)
Company Profile
Interest income
893
974
1,058
1,142
1,251
1,383
Interest expense
385
407
438
469
513
567
Established in May 2000, Ahli United Bank provides a
full range of conventional and Islamic banking services
including investment banking, asset management and
private equity. The bank operates through a network
of 130 branches and employs 3,317 staff within the
group. It owns several associates across different
countries including the UK, Egypt, Iraq, Libya, Oman
and Qatar. The Public Institution for Social Security
and the Pension Fund Commission are the largest
shareholders, respectively owning 19% and 10% stake
of the bank.
Net interest income
509
567
620
673
738
817
Fee income
123
122
130
139
150
166
Net trading income
47
72
50
53
57
62
24
24
26
27
29
31
703
785
825
892
975
1,077
253
273
268
285
312
341
450
512
557
607
663
736
Net provisions
152
130
137
142
139
144
41
73
73
78
85
92
257
309
347
387
439
500
Operating profit
Associates
Loan breakdown by Sector
Pre-tax profit
Taxation
3%
57
60
64
70
76
366
407
451
509
576
17
30
20
23
25
29
292
336
387
429
483
547
Minorities
27
25
29
32
36
41
Tier 1 Coupon
—
—
—
—
—
—
Group Net profit
22%
52
309
Public
265
308
358
397
447
506
Corporate
Diluted EPS
0.05
1.43
0.07
0.08
0.09
0.10
Retail
DPS
0.02
0.03
0.03
0.03
0.03
0.03
BVPS
0.46
0.46
0.50
0.55
0.60
0.67
Tangible BVPS
0.32
0.33
0.37
0.41
0.47
0.54
2010
2011
2012e
2013e
2014e
2015e
14,910
16,046
17,330
18,890
20,779
22,857
433
550
687
829
968
1,112
14,478
15,496
16,643
18,061
19,811
21,744
2,515
3,286
3,493
3,546
3,792
4,036
Due from banks
2,915
3,069
3,003
3,213
3,502
3,818
Investment, net
5,019
5,000
5,322
5,695
6,207
6,766
Fixed assets
373
352
396
444
494
548
Europe & UK
Other assets
441
435
480
482
525
573
Kuwait
Total assets
26,457
28,330
30,030
32,132
35,023
38,176
Customer deposits
75%
Year-end
Balance sheet (BHDmn)
2%
19%
Bahrain
Other GCC (incl.
Egypt)
43%
23%
Others
13%
14,836
17,345
18,532
20,200
22,220
24,442
Due to banks
6,610
5,787
5,814
4,222
4,266
4,305
Debt
1,579
1,666
1,666
3,425
3,925
4,425
Other liabilities
694
745
1,000
1,000
1,000
1,000
Total liabilities
23,719
25,544
27,013
28,848
31,411
34,173
2,738
2,786
3,017
3,284
3,612
4,003
20
20
22
24
26
28
22,732
25,055
26,861
28,642
30,999
33,841
Total Equity
Ahli United Bank
21,687
23,912
25,406
26,930
29,129
31,792
1,662
1,721
1,929
2,169
2,459
2,808
1,832
2,047
2,237
2,463
2,735
3,064
Tier 1 capital
1,977
2,291
2,455
2,663
2,912
3,213
Loubna El Hassan
+97145071744
188
May 23 2012
Ahli United Bank Valuation (USDmn)
Year-end
1. DCF
Net profit
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Tangible equity
Capital needs
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E (x)
Implied P/tNAV (x)
Ahli United Bank
2010
2011
2012e
2013e
2014e
2015e
265
0
(36)
5.0%
2.5%
301
2,904
10.4%
11.5%
334
(32)
---
311
3
(33)
5.0%
2.5%
341
2,917
11.7%
11.5%
335
5
---
358
-(34)
5.0%
2.5%
392
3,184
12.3%
11.5%
366
26
---
397
-(32)
5.0%
2.5%
429
3,429
12.5%
11.5%
394
34
0.95
33
447
-(30)
5.0%
2.5%
477
3,745
12.7%
11.5%
431
46
0.85
39
506
-(26)
5.0%
2.5%
532
4,091
13.0%
11.5%
470
62
0.76
47
506
-(26)
5.0%
2.5%
532
4,091
13.0%
11.5%
470
62
0.76
47
119
3.6%
590
3,184
3,893
17.8%
96.0%
117.4%
3.5%
774
2,738
(716)
264
(123)
2,163
2,786
(691)
296
(150)
2,241
3,017
(691)
314
(157)
2,482
3,284
(691)
336
(157)
2,771
3,612
(691)
366
(157)
3,130
4,003
(691)
399
(157)
3,554
19,577
19,580
12.0%
554
2,904
(741)
19,915
19,922
12.0%
526
2,917
(675)
21,891
21,891
12.0%
557
3,184
(702)
23,604
23,604
12.0%
596
3,429
(658)
25,791
25,791
12.0%
650
3,745
(615)
28,184
28,184
12.0%
709
4,091
(537)
(702) (21.2%)
244
(275)
(31)
157
3,317
5,234
5,234
0.6
0.6
3.9%
9.3
1.7
(0.9%)
4.7%
100.0%
8.4
1.5
189
Initiation Report
May 23
2012
+97145071744
Jonathan Milan
Shuaa Capital
Still lacking in revenue generation

Despite cost reductions, a new strategy and CEO, we
expect returns to remain very low.

Payment of surplus capital unlikely unless returns
substantially improve

Break-up scenario would not give much upside either
Revenue growth and cost reductions not enough to break-even:
Following a transitional year of significant restructuring, we expect
Shuaa to cut administrative costs by c. 21% and grow fee income by c.
24% and net interest income by c. 8% in FY 12e. However, despite the
significant cost reductions and revenue growth. We do not see Shuaa
breaking even in FY 12e or even FY 13e.
Recovery possibly in sight driven by investment income,
commissions and interest income: The biggest swing factor for FY 12e
is a recovery in investment income on our forecasts. We forecast a
7.1% 4 year FY 11e-15e CAGR in interest income, driven mainly by GFC
loans which account for c. 70% of current interest income. We
forecast an 18% 4 year FY 11e-15e CAGR in commission income, driven
partially by the significant increase in trading volume on the DFM,
however, stopping research should reduce Shuaa’s market share and
average commission rates, while performance fees and growing AuM
should support fee income growth of the asset management division
(accounting for c. 48% of total commission income). Shuaa also targets
private banking services, by leveraging on its SME and HNWI
relationships.
Significant cost reductions in 2012 amid closure of retail brokerage
and research: We expect the largest cost reduction to arise from
brokerage and corporate mostly resulting from the closure of retail
brokerage and research and expect a 21% drop in costs. Going forward
we expect costs growing at a minimal average rate of c. 3%, at least
until break-even, though Shuaa’s push into private banking may
increase headcount and expenses ultimately.
Solid capital base: Shuaa has significantly improved its leverage
position by converting AED 1.7bn debt into equity in FY 10A. We
estimate the surplus capital to be AED421m or AED 0.40 a share.
SELL
AED 0.6
Banks / UAE
Bloomberg code
Market index
SHUAA UH
UAE
0.6
Upside (%)
Market data
-16.2
17/05/2012
Last closing price
52 Week range
Market cap ( AEDmn)
Market cap ( USDmn)
Average daily value AEDmn
Average daily value USDmn
Year-end (local)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
0.7
0.4-1.1
798
217
0.0
0.0
2012e
154
2013e
170
(24)
(11)
(0.03)
(24.1)
1.07
1.04
0.8
0.7
—
—
(1.9)
(0.7)
(2.7)
—
4
(0.01)
(55.1)
1.06
1.03
0.8
0.7
—
—
(0.8)
(0.3)
(1.2)
—
4
26.7
25.4
26.7
23
—
—
25.4
22
—
—
2014e
187
1
2015e
201
8
—
252.7
1.06
1.03
0.8
0.7
—
—
0.2
0.1
0.3
—
5
24.4
0.01
71.3
1.07
1.04
0.8
0.7
—
—
0.6
0.2
0.9
—
5
23.8
24.4
21
—
—
23.8
20
—
—
Price Performance
SHUAA UH
110
UAE
95
80
65
We initiate with a Sell: We stock trades at a P/tNAV12e of 0.8x and a
negative P/E13e. We welcome the new strategic direction, but the
bank is still a long way from covering its cost of capital. A break-up
could realize a capital distribution close to Shuaa’s capital base, but we
think the shares are too expensive (only 32% discount to tNAV) to play
this still unlikely scenario.
50
35
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Shuaa
Year-end (AEDmn )
Profitability
1.29%
0.84%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
2010
2011
2012e
2013e
2014e
2015e
3.00
4.71
5.49
5.81
5.92
5.94
-0.71%
0.30%
-0.30% 0.06%
0.16% 0.22%
0.24%
0.17%
-4.46%
FY10
FY11
FY12e
FY13e
-0.56% -0.25%
-1.65%
-7.24%
0.02%
FY14e
Cost/Income (%)
0.18%
FY15e
-3.47%
153.2
269.5
115.9
106.5
99.6
95.8
34.4
78.8
45.9
44.0
42.0
40.3
56.1
59.1
39.5
42.4
45.2
47.5
9.5
(37.9)
14.7
13.6
12.8
12.2
(14.1)
(22.2)
(2.7)
(1.2)
0.3
0.9
RoAE (%)
PPP/RWA
Cost of risk/RWA
RORWA
Pre Prov.ROE (%)
NIM
—
—
—
—
—
—
RoAA (%)
(9.4)
(16.7)
(1.9)
(0.8)
0.2
0.6
Revenue / RWA (%)
3.10
2.05
3.52
3.80
4.04
4.24
8.0%
Costs / RWA (%)
4.74
5.52
4.08
4.05
4.03
4.06
6.0%
PPP / RWA (%)
(1.65)
(3.47)
(0.56)
(0.25)
0.02
0.18
4.0%
4.71%
2.0%
5.49%
5.81%
5.92%
5.94%
3.00%
0.84
1.29
0.30
0.24
0.16
0.17
RoRWA (%)
(4.46)
(7.24)
(0.71)
(0.30)
0.06
0.22
(3.04)
(5.11)
(0.49)
(0.21)
0.04
0.15
0.0%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
Credit Quality
6.0
8.9
2.0
1.5
1.0
1.0
100.0%
NPL/Gross Loans (%)
—
—
—
—
—
—
80%
80.0%
—
—
—
—
—
—
60%
60.0%
40%
40.0%
100%
20%
20.0%
0%
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
—
6.2
13.5
14.2
14.7
15.0
(51.0)
(37.3)
(52.7)
(96.0)
994.8
93.3
2010
2011
2012e
2013e
2014e
2015e
Capital Ratios
40%
30%
33.9%
32.7%
33.9%
36.0%
20%
—
—
—
—
—
23.7
24.1
24.6
24.8
25.1
—
—
—
—
—
—
2010
2011
2012e
2013e
2014e
2015e
33.9
36.0
26.7
25.4
24.4
23.8
Tier 1 ratio (%)
33.9
36.0
26.7
25.4
24.4
23.8
33.9
32.7
23.1
21.8
20.8
20.3
23.1%
21.8%
26.7%
25.4%
20.8%
24.4%
20.3%
23.8%
10%
Year-end
0%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
20%
0%
0%
FY10
-20%
—
25.1
12%
9%
7%
0%
FY12e
0%
FY13e
0%
FY14e
72.8
70.1
68.6
67.5
66.7
260.8
252.6
269.4
273.6
276.1
277.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
0%
0%
-5%
FY11
76.7
RWA / assets (%)
5%
FY15e
Growth
-25%
-40%
Loan growth
Deposit growth
Asset growth (%)
(16.5)
1.0
1.0
2.0
2.0
(100.0)
Net loan growth (%)
(25.3)
(4.8)
12.0
9.0
7.0
5.0
—
—
—
—
—
—
(65.2)
21.6
(86.2)
(56.3)
(121.8)
254.1
Deposit growth (%)
Shuaa
191
May 23 2012
Abacus
Shuaa
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
87
82
90
97
103
107
Interest expense
33
16
19
22
24
26
Shuaa Capital is an investment bank founded in 1979.
The company provides investment banking services
including corporate finance and advisory on mergers
and acquisitions and IPOs, asset management
services, private equity investments, brokerage
services and commercial lending and financial
services. After a recent debt restructure, the company
began, incurring heavy losses, began a restructuring
process which entailed the closure of the retail
brokerage and research departments. The largest
shareholder is Dubai banking Group with 48%
ownership.
Net interest income
53
66
71
75
78
81
Fee income
87
49
61
72
84
95
Net trading income
10
(32)
23
23
24
25
4
—
—
—
—
—
155
83
154
170
187
201
238
224
179
181
186
192
8
(83)
(141)
(24)
(11)
1
Net provisions
42
53
13
11
8
8
—
—
—
—
—
—
(125)
(193)
(37)
(22)
(7)
1
(60)
(31)
6
8
10
10
(184)
(224)
(31)
(14)
3
10
—
—
—
—
—
—
(184)
(224)
(31)
(14)
3
10
Minorities
—
—
—
—
—
—
Tier 1 Coupon
—
—
—
—
—
—
(184)
(224)
(31)
(14)
3
10
Diluted EPS
(0.21)
(0.28)
(0.03)
(0.01)
—
0.01
—
—
—
—
—
—
BVPS
1.39
1.10
1.07
1.06
1.06
1.07
Tangible BVPS
1.29
1.07
1.04
1.03
1.03
1.04
2010
2011
2012e
2013e
2014e
2015e
605
576
646
704
753
791
—
—
—
—
—
—
605
576
646
704
753
791
167
Operating profit
Associates
Pre-tax profit
Taxation
Group Net profit
DPS
Year-end
397
340
241
197
176
Due from banks
—
—
—
—
—
—
Investment, net
735
582
615
629
646
663
Fixed assets
42
30
46
33
20
7
Other assets
143
78
75
75
76
77
Total assets
1,922
1,606
1,622
1,638
1,671
1,705
—
—
—
—
—
—
Due to banks
134
222
277
315
352
382
Debt
144
54
54
54
54
54
Other liabilities
170
161
153
146
138
131
Customer deposits
Total liabilities
Total Equity
Shuaa
448
437
484
514
544
567
1,475
1,169
1,138
1,124
1,127
1,138
5
4
4
4
5
5
1,779
1,391
1,287
1,291
1,324
1,365
381
277
304
350
387
421
1,371
1,135
1,104
1,090
1,093
1,104
1,698
1,462
1,169
1,138
1,124
1,127
Tier 1 capital
1,698
1,462
1,169
1,138
1,124
1,127
Jonathan Milan
+97145071744
192
May 23 2012
Shuaa Capital valuation (AED mn)
Year-end
1. DCF
Net profit
Other adjustments
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Value of the investment banking operations
Available capital:
Minorities
Tangible equity
Capital needs
RWAs (Basel I until 2011, Basel II/III after 2012)
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E
Implied P/B
Shuaa
2010
2011
2012e
2013e
2014e
2015e
(224)
0
26
4.5%
0.0%
(249)
838
(29.8%)
12.5%
105
(354)
0.000
0
(294)
0
23
4.5%
0.0%
(317)
663
(47.8%)
13.0%
86
(403)
0.000
0
(31)
0
19
4.5%
0.0%
(50)
726
(6.9%)
13.0%
94
(144)
0.000
0
(14)
0
18
4.5%
0.0%
(31)
742
(4.2%)
13.0%
96
(128)
0.943
(120)
3
0
17
4.5%
0.0%
(14)
762
(1.8%)
13.0%
99
(113)
0.838
(95)
10
0
16
4.5%
0.0%
(6)
781
(0.8%)
13.0%
102
(108)
0.745
(80)
119
0
16
4.5%
0.0%
103
781
13.1%
13.0%
102
1
0.745
1
(295)
2.0%
9
1,474
43
-104
1,169
43
-34
1,138
43
-34
1,124
43
-34
1,127
43
-34
1,137
44
-34
0
1,414
0
1,177
0
1,146
0
1,133
0
1,136
0
1,147
5,013
5,013
13%
187
838
575
4,057
4,057
13%
136
663
515
4,370
4,370
13%
158
726
421
4,483
4,483
13%
159
742
391
4,614
4,614
13%
162
762
374
4,736
4,736
13%
166
781
366
9
663
377
56.5%
421
63.1%
-103
-28
-131 (19.7%)
0
0.0%
666
100%
0.63
0.70
(10.6%)
neg
0.60
neg
0.61
193
Initiation Report
May 23 2012
+97145071744
Jonathan Milan
Dubai Financial Market
SELL
Only option value
 Valuation assumes an improvement in traded value to USD
140m a day, 300% increase vs. FY 11e and 9% vs. annualized
Q1 12A;
 Merger with ADX could reduce costs, but impact on FV only
5%
Banks / UAE
Bloomberg code
Market index
Return to profitability supported by significant increase in traded
volume: DFM’s reported a loss in FY 11A as a result of a large drop in
traded volumes. We forecast an increase of 75% year on year in
commission income for FY 12e, assuming the surge in volumes in the
first 4 months (81% y-o-y) persists at a lower rate throughout the year.
We forecast an increase in commission income of 50% in FY13-15e.
We expect a growing contribution from alternative sources of income
(including market data charging, charges for third party usage,
increased custody services and possibly IVESTOR cards), but we do not
expect a contribution higher than 18% by FY 15e. On top of that, we
cannot rule out a potential cut in rates when volumes fully recover,
considering the high charge of 12.5bps.
Synergies of merger with ADX arise mostly from cost reductions: The
anticipated merger with ADX should substantially increase commission
fees from traded volume (ADX volumes amount to 80% of DFM
volumes in FY 11A and 40% in Q1 12A); however of course an increase
in the number of shares will accompany the merger. However we
expect a cost reduction in administrative expenses of c. 35%,
accounting for the bulk of the synergies of the merger, but this would
represent only 5% of DFM’s fair value. The biggest lever is the traded
volumes.
Only option value: Only in case trading volumes go back to USD140m
per day (implying a churn ratio of 120%), we would not see downside
in the shares. On our forecasts, DFM is trading at a P/E13e of 45x and
P/tNAV12e of 3.6x vs. a RoTE of 6.9% by FY 14e. However, if we add
the non-cash amortization of intangibles, DFM is trading at a P/E13e of
31x and the RoTE would be 10% in FY14e.
DFM UH
UAE
0.7
Upside (%)
Market data
 Very little support from tangible equity
AED 0.7
-23.3
17/05/2012
Last closing price
52 Week range
Market cap ( AEDmn)
Market cap ( USDmn)
Average daily value AEDmn
Average daily value USDmn
Year-end (local)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
1.0
0.7-1.3
7,672
2,089
20.2
5.6
2012e
245
2013e
326
48
171
0.01
162.1
0.94
0.27
1.3
3.6
—
—
0.6
1.2
0.6
—
4
0.02
45.0
0.96
0.28
1.2
3.4
—
—
2.1
4.2
2.2
—
4
187.4
187.2
187.4
188
—
—
187.2
188
—
—
DFM UH
UAE
2014e
386
229
2015e
452
292
0.03
33.7
0.99
0.31
1.2
3.1
—
—
2.8
5.5
2.9
—
4
187.5
0.04
26.4
1.03
0.34
1.2
2.9
—
—
3.5
6.9
3.6
—
4
189.2
187.5
188
—
—
189.2
190
—
—
Price Performance
113
100
87
Exhibit 1:
DFM would be fairly valued if traded value increases
by 300% over FY 11A
1
Excess of 2011 traded value
Average daily traded value
Value per share
Upside/Downside
Source: Arqaam Capital Research
0%
35
0.39
(59.3%)
2
44%
50
0.47
(50.5%)
3
75%
61
0.53
(44.3%)
4
300%
140
0.97
0.8%
5
401%
175
1.16
21.0%
74
61
48
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
DFM
Year-end (AEDmn )
Profitability
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
2010
2011
2012e
2013e
2014e
2015e
(0.06)
(0.08)
—
—
—
—
Cost/Income (%)
72.1
104.7
80.6
47.5
40.8
35.4
(0.6)
(0.9)
—
—
—
—
60.3
42.4
54.8
51.5
54.4
58.1
28.2
30.1
23.1
28.6
26.3
23.7
1.0
(0.1)
0.6
2.2
2.9
3.6
6.93%
4.24%
6.97%
2.10%
5.57%
1.19%
-0.20%
0.00%
1.96%
FY10
5.54%
0.00%
FY11
-0.25%
PPP/RWA
0.00%
4.26%
0.00%
1.19%
FY12e
FY13e
Cost of risk/RWA
0.00%
FY14e
0.00%
FY15e
RORWA
RoAE (%)
Pre Prov.ROE (%)
—
—
—
—
—
—
1.0
(0.1)
0.6
2.1
2.8
3.5
Revenue / RWA (%)
7.01
5.37
6.14
8.11
9.40
10.78
Costs / RWA (%)
5.05
5.62
4.95
3.85
3.83
3.81
PPP / RWA (%)
1.96
(0.25)
1.19
4.26
5.57
6.97
RoAA (%)
—
—
—
—
—
—
RoRWA (%)
2.10
(0.20)
1.19
4.24
5.54
6.93
2.10
(0.20)
1.19
4.24
5.54
6.93
Year-end
2010
2011
2012e
2013e
2014e
2015e
Asset Quality
0.1
—
—
—
—
—
NPL/Gross Loans (%)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Year-end
2010
2011
2012e
2013e
2014e
2015e
—
—
—
—
—
—
6.5
5.9
7.0
7.0
7.0
7.0
—
—
—
—
—
—
2010
2011
2012e
2013e
2014e
2015e
50.1
60.3
52.0
52.2
54.0
57.1
Tier 1 ratio (%)
50.1
60.3
52.0
52.2
54.0
57.1
51.7
60.9
52.5
52.7
54.5
57.6
Year-end
23.8
26.4
26.3
26.3
27.3
28.8
RWA / assets (%)
210.8
228.2
197.7
198.2
198.1
197.9
Year-end
2010
2011
2012e
2013e
2014e
2015e
Growth
Asset growth (%)
(2.7)
2.5
1.0
2.0
2.0
2.0
Net loan growth (%)
—
—
—
—
—
—
Deposit growth (%)
—
—
—
—
—
—
(77.2)
(108.7)
(789.8)
260.1
33.4
27.7
DFM
195
May 23 2012
Abacus
DFM
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
—
—
—
—
—
—
Interest expense
2
2
—
—
—
—
Dubai Financial Market was established in 2000,
operating as a secondary market for trading of
securities in the country. In 2010 DFM merged with
NASDAQ Dubai. In 2011 DFM announced plans for a
possible merger with ADX, a move that would greatly
increase traded volumes in the exchange. The
company’s major shareholder is Borse Dubai Limited
with a majority 79.6% ownership level.
Net interest income
(2)
(2)
—
—
—
—
159
77
134
168
210
262
Net trading income
74
55
57
93
101
107
32
51
54
65
75
82
263
181
245
326
386
452
190
190
198
155
157
160
73
(9)
48
171
229
292
Net provisions
—
—
—
—
—
—
—
6
—
—
—
—
Operating profit
73
(15)
48
171
229
292
Fee income
Associates
—
—
—
—
—
—
Pre-tax profit
73
(15)
48
171
229
292
Taxation
—
—
—
—
—
—
Group Net profit
73
(15)
48
171
229
292
Minorities
(5)
(8)
—
1
1
1
Tier 1 Coupon
—
—
—
—
—
—
79
(7)
47
170
227
290
Diluted EPS
—
—
—
—
—
—
DPS
—
—
—
—
—
—
BVPS
0.94
0.94
0.94
0.96
0.99
1.03
Tangible BVPS
0.25
0.25
0.27
0.28
0.31
0.34
2010
2011
2012e
2013e
2014e
2015e
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,797
1,770
1,894
1,942
2,040
2,140
Year-end
Due from banks
—
—
—
—
—
—
Investment, net
515
456
552
558
569
580
Fixed assets
40
22
41
41
40
39
Other assets
5,562
5,450
5,404
5,429
5,480
5,532
Total assets
7,915
7,698
7,891
7,970
8,129
8,292
Customer deposits
—
—
—
—
—
—
Due to banks
—
—
—
—
—
—
Debt
58
20
20
20
20
20
Other liabilities
302
175
336
245
176
48
Total liabilities
360
196
357
265
197
69
7,555
7,503
7,534
7,705
7,932
8,223
Total Equity
DFM
4
3
4
4
4
4
2,435
2,269
2,336
2,473
2,554
2,665
29
39
20
20
20
20
4,676
4,624
4,655
4,826
5,053
5,344
7,444
7,486
7,479
7,526
7,697
7,924
Tier 1 capital
7,444
7,486
7,479
7,526
7,697
7,924
Jonathan Milan
+97145071744
196
May 23 2012
Dubai Financial Market valuation (AED mn)
Year-end
1. DCF
Net profit
Other adjustments
Risk free rate
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Value of the investment banking operations
Available capital:
Minorities
Less dividends
Tangible equity
Capital needs
RWAs (Basel I until 2011, Basel II/III after 2012)
RWAs (Basel III)
Equity as % RWA
Financial stakes
Surplus capital
Real estate losses
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E
Implied P/B
DFM
2010
2011
2012e
2013e
2014e
2015e
79
76
56
3.5%
0.0%
99
451
22.0%
11.0%
50
50
0.000
0
-7
76
58
3.5%
0.0%
11
405
2.6%
11.0%
45
-34
0.000
0
47
76
62
3.6%
0.0%
61
479
12.8%
11.0%
53
9
0.000
170
76
72
3.7%
0.0%
174
483
36.0%
11.0%
53
121
0.949
115
227
76
86
3.8%
0.0%
218
493
44.2%
11.0%
54
164
0.855
140
290
77
99
3.8%
0.0%
268
504
53.2%
11.0%
55
213
0.770
164
290
77
99
3.8%
0.0%
268
493
54.5%
11.0%
54
214
0.770
214
418
7.1%
3,297
479
4,195
56.1%
8.1%
71.3%
1,716
29.2%
6.0%
4,280
7,523
43
-5,526
7,479
43
-5,450
7,526
43
-5,374
7,697
43
-5,299
7,924
43
-5,223
8,215
44
-5,146
0
2,040
0
2,072
0
2,195
0
2,441
0
2,744
0
3,113
3,754
3,754
12%
0
451
1,590
3,373
3,373
12%
0
405
1,667
3,991
3,991
12%
0
479
1,716
4,021
4,021
12%
0
483
1,959
4,104
4,104
12%
0
493
2,252
4,189
4,189
12%
1
504
2,609
0
-28
-28
0
5,882
0.74
0.96
(23.3%)
124.3
2.8
(0.5%)
0.0%
100%
34.5
2.6
197
Initiation Report
May 23
2012
+97145071744
EFG Hermes
Unlocking part of its option value
 EFG will become an investment company with a 65%
stake in CL, a PE arm and a 40% stake in an IB to be sold
for c. EGP1bn after 1 year.
 We calculate an appraisal value of EGP 16.6 including
EGP4 cash dividends.
 We expect EFG to exit CL and PE too.
Exciting investment banking for small premium: Qinvest acquired
60% of EFG-Hermes’ investment bank, which comprises brokerage,
research, investment banking and asset management, excluding
private equity. Qinvest contributed USD 250m to the new JV while
EFG-Hermes only brought in its activities which released substantial
capital for the company. On top of that, EFG-Hermes has the put
option to sell the 40% stake for EGP1bn or c. USD165m to Qinvest in
the period of 12-36 months post the signing, while Qinvest has the call
option to buy the stake at c. USD165m or at fair value if higher during
the same period. Qatar buys a leading investment bank, while EFG is
exiting a volatile business for a goodwill amount of 1.7x peak earnings
or a total of only 4.1x total peak earnings. The transaction unlocks
limited fair value, but at the same time a large part of the option value
of EFG-Hermes disappears.
EFG is a holding company: We believe EFG-Hermes will sell its
remaining 40% stake next year, becoming effectively a holding
company with 3 assets: 1) 65% stake in a Lebanese bank (Credit
Libanais), purchased at USD542m. 2) a Private Equity unit with USD
980m in assets under management and EGP 144m in fees and
commissions in FY 11A (2.4% of AuM) and 3) a large surplus capital
position, part of which will be distributed to shareholders. After paying
EGP4 bonus dividends, there is still surplus capital left for EFG-Hermes.
BUY
EGP 16.6
Banks / EGYPT
Bloomberg code
Market index
HRHO EY
EGX
16.6
Upside (%)
Market data
41.9
17/05/2012
Last closing price
52 Week range
Market cap (EGPmn)
Market cap (USDmn)
Year-end (local mn)
Revenues
Profit
EPS
P/E (x) (mkt price)
BVPS
Tangible BVPS
P/B (x) (mkt price)
DPS
Div. yield (%)
RoAA (%)
RoRWA (%)
RoAE (%)
(%)
NPL ratio (%)
Coverage ratio (%)
2011
1,806
2012e
1,411
2013e
1,599
2014e
1,776
480
778
926
1,060
0.28
42.3
17.16
8.60
0.7
1.4
1.00
8.5
0.3
0.6
1.6
31.5
21
0.87
13.5
14.66
7.57
0.8
1.5
4.00
34.1
0.8
1.8
5.5
35.5
23
1.00
11.7
15.37
8.29
0.8
1.4
0.29
2.4
0.8
1.8
6.7
36.4
27
1.11
10.6
16.01
8.93
0.7
1.3
0.48
4.1
0.8
1.8
7.1
37.3
30
10.0
2.9
13.4
11.7
11.6
13
5.5
41.2
9.4
10
5.5
28.2
12.1
13
5.5
29.5
10.7
11
5.5
33.3
HRHO EY
EGX
Price Performance
121
42% upside to our SotP: Based on our SotP valuation, we value EFGHermes at EGP16.6, of which EGP 4.7 for Credit Libanais (P/E13e of
7.2x), EGP 1.4 for the private equity business (P/E11 7x minus 5% of
assets under management), EPG4 for special dividends and EGP6.5 for
its surplus capital. This offers 42% upside to our TP. We expect EFG to
continue to trade at a discount to tNAV, until it sells CL or exits PE and
is able to distribute additional dividends, while there is a small risk it
will engage in acquiring other retail banks.
11.7
9.3-18.6
5,610
927
17.8
2.9
108
95
82
69
56
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
EFG Hermes
Year-end
Profitability
8%
6%
3.76%
6.97%
0.62%
0.86%
0%
3.34%
0.52%
2.26%
FY10
FY11
PPP/RWA
1.76%
1.80%
1.79%
4%
2%
2010
2011
2012e
2013e
2014e
2015e
2.39
2.04
1.93
2.12
2.10
2.07
Cost/Income (%)
48.5
73.4
44.9
42.1
40.3
39.4
21.0
48.9
61.2
64.1
65.2
66.9
77.3
199.3
50.5
46.6
45.4
43.5
—
—
—
—
—
—
8.1
1.6
5.5
6.7
7.1
7.5
0.32%
1.73%
3.48%
3.52%
0.49%
0.39%
FY12e
FY13e
FY14e
Cost of risk/RWA
3.46%
0.48%
RoAE (%)
FY15e
RORWA
Pre Prov.ROE (%)
RoAA (%)
NIM
Revenue / RWA (%)
—
—
—
—
—
—
2.4
0.3
0.8
0.8
0.8
0.8
13.52
8.49
6.06
6.01
5.89
5.70
2.5%
Costs / RWA (%)
6.56
6.24
2.72
2.53
2.38
2.24
2.3%
PPP / RWA (%)
6.97
2.26
3.34
3.48
3.52
3.46
0.86
0.52
0.32
0.39
0.49
0.48
RoRWA (%)
3.76
0.62
1.79
1.80
1.76
1.73
—
—
—
—
—
—
2.39%
2.1%
1.9%
2.12%
2.04%
2.10%
2.07%
1.93%
1.7%
1.5%
FY10
FY11
FY12e
FY13e
FY14e
Net interest margin
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.6
0.5
0.5
0.6
0.8
0.8
NPL/Gross Loans (%)
4.7
5.5
5.5
5.5
5.5
5.5
52.5
41.2
28.2
29.5
33.3
39.9
Asset Quality
Credit Quality
50%
6.0%
40%
4.0%
30%
20%
2.0%
10%
0%
2.5
1.8
1.9
2.1
2.5
2.8
8.7
(7.0)
13.1
14.8
17.9
17.8
0.0%
FY12e
FY13e
FY14e
NPL Cov ratio (%)
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
29.4
31.5
35.5
36.4
37.3
35.0
20.7
23.4
14.0
15.4
15.3
16.7
88.3
91.2
84.4
82.3
80.2
80.2
Year-end
2010
2011
2012e
2013e
2014e
2015e
17.8
10.0
2.9
13.4
11.7
10.3
Tier 1 ratio (%)
14.0
11.6
9.4
12.1
10.7
9.5
14.0
12.7
10.3
13.0
11.5
10.2
22.4
20.3
18.6
17.7
16.8
16.0
RWA / assets (%)
38.6
40.5
42.0
42.7
43.1
43.7
Year-end
2010
2011
2012e
2013e
2014e
2015e
11.0
Capital Ratios
15%
14.0%
13.0%
12.7%
11.5%
10.3%
14.0%
10%
10.2%
12.1%
11.6%
10.7%
9.5%
9.4%
5%
FY10
FY11
Tier 1
FY12e
FY13e
FY14e
CAR
FY15e
Growth
22%
14%
15%
15%
14%
13%
11%
0%
-5%
FY10
10%
5%
2%
FY11
FY12e
Loan growth
12%
FY13e
FY14e
FY15e
Deposit growth
Growth
Asset growth (%)
Net loan growth (%)
Deposit growth (%)
EFG Hermes
343.0
7.5
(4.0)
12.6
12.4
25,143.4
22.4
14.6
13.9
12.8
5.1
—
14.1
1.7
11.0
10.1
12.0
(27,307.3)
(81.3)
213.6
15.3
10.9
10.4
199
May 23 2012
Abacus
EFG Hermes
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
Interest income
1,324
2,518
2,741
3,160
3,582
4,018
Interest expense
789
1,636
1,877
2,135
2,424
2,725
Originally established as an investment bank in 1984
offering brokerage, asset management, investment
banking, private equity and research services, EFG
recently sold 60% of its investment banking unit
leaving the bank with a 65% stake in the Lebanese
bank Credit Libanais and a private equity unit with
USD 980m in assets under management. Major
shareholders include Dubai Financial Group with 18%
stake and Gazelle Incorporation (Egypt) with 7% stake.
Net interest income
534
882
864
1,025
1,158
1,293
Fee income
890
748
358
383
414
439
Net trading income
889
68
83
85
96
93
234
108
106
107
108
108
2,547
1,806
1,411
1,599
1,776
1,933
1,234
1,326
633
674
716
761
1,312
480
778
926
1,060
1,172
162
110
74
104
147
162
—
—
—
—
—
—
1,150
370
704
822
913
1,011
Net provisions
Operating profit
Associates
Pre-tax profit
1
5
5
—
—
—
1,151
375
709
822
913
1,011
Taxation
325
67
69
84
95
108
Group Net profit
826
308
640
737
817
903
Minorities
118
175
224
258
286
316
—
—
—
—
—
—
708
133
416
479
531
587
Diluted EPS
1.48
0.28
0.87
1.00
1.11
1.23
—
1.00
4.00
0.29
0.48
0.65
18.20
17.16
14.66
15.37
16.01
16.58
9.91
8.60
7.57
8.29
8.93
9.50
2010
2011
2012e
2013e
2014e
2015e
9,835
12,037
14,012
15,973
18,050
19,076
—
—
223
266
339
455
9,835
12,037
13,789
15,707
17,711
18,621
5,734
Tier 1 Coupon
DPS
BVPS
Tangible BVPS
Year-end
169
188
2,751
3,899
4,192
Due from banks
9,950
12,100
5,028
5,732
6,477
7,254
Investment, net
21,351
20,735
23,675
25,792
29,145
32,643
Fixed assets
1,273
1,106
554
842
1,321
1,453
Other assets
6,246
6,326
4,611
4,780
4,959
5,145
Total assets
48,824
52,491
50,407
56,752
63,804
70,850
Customer deposits
33,461
38,163
38,830
43,101
47,456
53,151
Due to banks
591
614
5,454
7,585
10,044
11,464
Debt
445
487
487
487
487
487
Other liabilities
3,389
2,587
1,219
1,200
1,183
1,166
Total liabilities
37,885
41,851
45,990
52,374
59,169
66,267
Total Equity
10,939
10,640
9,377
10,033
10,688
11,362
19
21
23
27
30
34
22,336
43,140
44,893
48,286
55,061
62,341
EFG Hermes
17,387
36,971
41,772
47,485
54,093
61,057
4,741
4,109
3,620
3,963
4,265
4,539
3,345
2,129
680
3,569
3,529
3,500
Tier 1 capital
2,637
2,475
2,176
3,226
3,226
3,226
+97145071744
200
May 23 2012
EFG Hermes valuation (EGPmn)
Year-end
2010
1. DCF
Net profit
708
Other adjustments (goodwill amortization)
-Other adjustments (comprehensive income)
38
149
Risk free rate
4.5%
Tax shelter
28.2%
Adjusted net profit
521
2,388
RoEcC
21.8%
Cost of capital (after minorities 35%)
13.0%
Capital charge
310
Economic profit
210
Discount factor
Terminal Value
Required Capital
Available capital:
8,736
(3,966)
Minorities
2,232
Tangible equity
7,003
Capital needs
RWAs (Basel I in FY 11A, Basel II/III starting FY 12e) 18,829
RWAs (Basel III)
19,570
Equity as % RWA
12%
Financial stakes
39
2,388
Surplus capital
4,615
Real estate losses
Financial stakes available for sale
Level 3 assets
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
SotP per share
CL
PE
Surplus capital
Dividends
Implied P/E (x)
Implied P/tNAV (x)
EFG Hermes
2011
2012e
2013e 2014e
2015e
133
-38
142
4.5%
18.0%
(48)
2,696
(1.8%)
13.0%
350
(398)
---
416
-9
87
4.5%
9.8%
320
3,843
8.3%
13.0%
500
(180)
---
479
531
--14
23
139
149
4.5% 4.5%
10.3% 10.4%
326
360
3,195 3,616
10.2% 10.0%
13.0% 13.0%
415
470
(89) (110)
1
1
(84)
(92)
587
0
31
157
4.5%
10.7%
398
4,069
9.8%
13.0%
529
(131)
1
(96)
perp subtotal
% of total
587
-31
157
4.5%
10.7%
398
4,069
9.8%
13.0%
529
(131)
1
(96)
(272)
(3.4%)
(645)
3,843
2,926
(8.1%)
48.3%
36.8%
2,150
27.0%
2.0%
(875)
8,200 7,004
7,347 7,649 7,923
(4,091) (3,384) (3,384) (3,384) (3,384)
2,440 2,373
2,686 3,039 3,439
6,549 5,993
6,649 7,304 7,978
21,256 23,273
22,092 23,273
12%
12%
45 1,050
2,696 3,843
3,853 2,150
26,625 30,134 33,906
26,625 30,134 33,906
12%
12%
12%
---3,195 3,616 4,069
3,453 3,688 3,909
1,000
(35)
965
1,912
7,954
478
16.6
11.7
41.9%
12.1%
24.0%
100%
4.7
P/E
1.47x FY11 revenues minus 5% AuM
6.5
4.0
16.6
19.1
2.20
16.6
2.01
201
Initiation Report
May 23
2012
+97145071744
Jonathan Milan
Salama Insurance
RoE to increase from low levels
 Further growth in profitable Takaful, reducing contribution
reinsurance
 RoE to improve on investments and leverage
 Salama cheapest insurance stock under coverage
Strong opportunities in Takaful insurance, with reinsurance
becoming less prominent: The Far East (Malaysia, mainly reinsurance)
accounts for c. 62% of GWP, Middle East (mostly UAE) for 19%, Africa
for 15% (Senegal, Algeria and Egypt) and other markets for 4%. We
expect a GWP 5 year FY 11A-16e CAGR of 10.5%. Recently launched
family Takaful should experience the strongest 5 year CAGR of 14.8%,
raising its contribution of 9.4% of GWP in FY 11A to 11.3% by FY 16e,
while we expect the share of reinsurance to fall substantially to 56%.
We believe Salama’s geographical diversification shields the company
from country specific risks, despite the surge in claims in Q1 12A
caused by the Thailand floods and escalating claims in non-motor
reinsurance. We forecast a combined ratio of 99% as of FY 13e.
GWP growth and high profitability contribute to strong earnings
growth: We forecast a 5 year FY 11A-16e CAGR of 20.9% in earnings
fueled mostly by GWP growth, diminishing expense ratio and higher
investment income. We forecast a c. 25% 5 year CAGR in investment
income caused by an increase in return on investments from 2.5% in
FY 11A to 3.6% in FY16e as Salama may shift away from highly liquid
low yield assets, and investments to grow at a 5 year CAGR of 17%.
Strong balance sheet provides high solvency but low returns: Salama
is very well capitalized with equity as much as c. 35% of assets. The
company has been increasing its policy reserves and has substantial
surplus capital over the regulatory minimum. Investments account for
c. 31% of total assets, out of which c. 69% are invested in low yield
highly liquid Islamic placements, sukuk and government bonds
whereas equities account for less than 1%.
Strong diversified growth and robust balance sheet not reflected in
valuation: Market valuation reflects low earnings and RoEs, valuing
Salama at P/B12e of 0.4x, P/tNAV12e of 0.5x and P/E13e 5.8x. Taking
into consideration double digit earnings growth and improving RoE we
initiate with a BUY valuing Salama at a P/E13e of 8.8x and P/B12e of
0.7x. Salama would still trade at a significant discount to NAV as RoE
remains below average. We believe shares offer a very attractive entry
point, due to the 36% drop in share price from AED 0.97 in February.
BUY
AED 0.93
Insurance / UAE
Bloomberg code
Market index
SALAMA UH
UAE
0.93
Upside (%)
Market data
51.2
17/05/2012
Last closing price
52 Week range
Market cap (AEDmn)
Market cap (USDmn)
Year-end (AED mn)
Gross Written Premiums
Underwriting Profit
EPS
P/E (x) (market price)
BVPS
Tangible BVPS
P/B (x) (market price)
P/TBVPS (x) (market
price)
DPS
Div. yield (%)
RoAA (%)
RoAE (%)
Investments/Assets (%)
Investment Yield (%)
Net Loss Ratio
Combined Ratio
Underwriting Profit
Margin
Net Profit Margin
Policy Reserves/Equity
0.61
0.5-1.0
738
201
3.9
1.1
2012e
2,589
198
0.05
11.2
1.40
1.25
0.4
2013e
2,866
312
0.10
5.8
1.51
1.36
0.4
0.5
0.7
—
—
1.3
4.0
32.3
4.4
64.7
103.2
—
—
2.2
7.2
33.8
3.6
59.8
98.6
0.5
3.7
2.6
144.6
4.4
156.4
2014e
3,145
342
0.11
5.6
1.62
1.47
0.4
0.6
2015e
3,445
366
0.11
5.4
1.74
1.59
0.4
0.6
—
—
2.0
7.0
35.5
3.6
59.8
98.7
3.6
—
—
1.9
6.8
37.3
3.6
60.2
99.0
3.4
4.2
168.2
4.0
179.2
Price Performance
150
SALAMA UH
UAE
100
50
0
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Salama Insurance
Year-end
2010
2011
2012e
2013e
2014e
2015e
Cession Ratio
15.9
15.1
14.8
14.8
14.8
14.8
Net Loss Ratio
55.8
59.3
64.7
59.8
59.8
60.2
Expense Ratio
44.6
41.8
38.4
38.8
38.9
38.8
100.3
101.0
103.2
98.6
98.7
99.0
Underwriting Profit Margin
2.7
1.5
0.5
3.7
3.6
3.4
Investment Yield
2.8
2.9
4.4
3.6
3.6
3.6
Net Margin
2.7
2.6
2.6
4.4
4.2
4.0
RoAE
3.2
3.7
4.0
7.2
7.0
6.8
RoAA
1.4
1.4
1.3
2.2
2.0
1.9
Net Premiums/Equity
0.9
1.1
1.2
1.2
1.3
1.3
Gross Premiums/Equity
1.2
1.4
1.5
1.6
1.6
1.6
2%
Claims Reserve/NPE
0.7
0.8
0.8
0.8
0.8
0.8
0%
Investment Income/Total Income
2.3
2.1
3.7
3.2
3.4
3.6
Profitability
4%
5%
3%
3%
3%
4%
4%
4%
4%
3%
1%
3%
Combined Ratio
0%
0%
FY10
FY11
FY12e
Net Underwriting Margin
FY13e
FY14e
FY15e
Net Earnings Margin
Investment Yield
8%
4.4%
6%
2.8%
4%
FY10
3.6%
2.9%
FY11
3.6%
FY12e
FY13e
InvestmentYield
FY14e
3.6%
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
37.8
31.4
32.3
33.8
35.5
37.3
2.4
0.6
0.7
0.8
0.9
1.0
42.7
34.7
31.2
29.4
28.2
27.4
Investment Exposure
Investments/Assets
Investment Exposure
Equities/Investments
40%
2.5%
Equity/Assets (%)
2.0%
35%
1.5%
1.0%
30%
0.5%
25%
0.0%
FY10
FY11
FY12e
Investments/Assets
FY13e
FY14e FY15e
Solvency ratios & reserve adequacy
2.0x
1.8x
1.6x
1.4x
1.2x
1.0x
0.8x
0.6x
1.45x
1.68x
1.56x
0.90x
0.95x
1.05x
1.00x
17%
9%
23%
19%
20%
18%
11%
6%
FY11
FY12e
Growth in GrossPremiums
Salama Insurance
16%
10%
FY13e
2013e
2014e
2015e
Policy Reserves/Gross Premiums
0.8
0.9
0.9
1.0
1.1
1.1
Policy Reserves/Net Earned Premiums
1.0
1.2
1.2
1.3
1.3
1.4
0.9
1.3
1.4
1.6
1.7
1.8
Debt/Capital
0.1
0.1
0.2
0.3
0.3
0.3
Debt/Equity (x)
0.1
0.1
0.2
0.3
0.4
0.4
2010
2011
2012e
2013e
2014e
2015e
Gross Premiums
17.1
23.1
14.1
10.7
9.7
9.6
Net Earned Premiums
24.7
25.3
14.6
11.3
9.2
9.5
9.1
5.7
19.3
19.8
17.8
16.0
Assets
11.9
27.1
16.0
14.5
12.0
10.5
Total Reserves
38.3
67.8
11.9
10.6
10.0
9.4
4.2
3.3
4.4
7.8
7.5
7.4
2010
2011
2012e
2013e
2014e
2015e
P/B(x) (current price)
0.5
0.5
0.4
0.4
0.4
0.4
P/B(x) (target price)
0.7
0.7
0.7
0.6
0.6
0.5
P/E(x) (current price)
14.9
12.5
11.2
5.8
5.6
5.4
P/E(x) (target price)
22.5
18.8
17.0
8.8
8.5
8.1
Investments
Equity
10%
14%
FY10
2012e
Growth
FY14e
FY15e
Growth
30.00%
20.00%
10.00%
0.00%
2011
Year-end
1.10x
0.79x
FY10
FY11
FY12e
FY13e
2010
Liquidity/Leverage
1.79x
1.26x
0.92x
Year-end
FY14e
FY15e
Gross in Investments
Year-end
Valuation
203
May 23 2012
Abacus
Salama Insurance
Year-end
2010
2011
2012e
2013e
2014e
2015e
1,842
2,268
2,589
2,866
3,145
3,445
292
342
382
423
465
509
1,550
1,926
2,207
2,443
2,681
2,937
Income statement (mn)
Company Profile
Salama was established in 1979, operates 6 branches
in the UAE with 150 employees. The company
provides Islamic non-life insurance, life insurance and
Islamic reinsurance services. The majority of the
company’s GWP arise from the Far East (Malaysia,
mainly reinsurance) accounting for 62%, and 19%
from the Middle East (mostly UAE). The company
recently launched a Sharia compliant life insurance
segment that has been experiencing strong double
digit growth. Noor al Ain Management Services is the
largest shareholder with 13.7% ownership, Ajyad
Management services with 10% ownership and 56%
owned by several investors, with a remaining 20%
free float.
Retained Premiums
Ceded Premiums
Movement in Unearned Premiums
127
144
163
167
195
215
1,423
1,783
2,044
2,275
2,485
2,722
Commissions Received on Ceded Reinsurance
54
52
77
75
82
89
Gross Claims Paid
—
—
—
—
—
—
Claims recovered
—
—
—
—
—
—
Net Premiums Earned
Movement in Outstanding Claims
76
180
198
197
208
213
Net Claims
793
1,057
1,323
1,361
1,486
1,637
commissions paid
461
556
600
676
739
808
Underwriting Profit
222
222
198
312
342
366
Investment Income
35
40
82
79
93
107
23
28
31
34
36
38
280
289
311
425
471
511
Total Income
Interest Expense
GWP Breakdown by Segment
General & Administrative
Operating Profit
9.4%
59.7%
Other income/(loss)
2.1%
28.8%
Takaful
Medical
Motor
Non-motor
22
17
24
44
60
68
173
189
186
206
228
249
86
84
102
175
183
194
(22)
(17)
(18)
(23)
(25)
(27)
22
Tax
9
7
12
20
21
Minority Interest
5
—
6
5
6
6
Net Income
50
60
66
127
132
138
Reported EPS
—
—
0.1
0.1
0.1
0.1
Year-end
2010
2011
2012e
2013e
2014e
2015e
Cash
209
435
717
973
1,156
1,288
Reinsurers Share of Outstanding Claims
218
478
501
524
547
571
Reinsurers Share of Unearned Premiums
52
69
83
101
123
146
Investment Properties
83
275
280
286
292
297
1,389
1,468
1,751
2,097
2,470
2,865
Balance sheet (mn)
Investments
Associates
57
58
59
61
63
65
826
1,103
1,241
1,374
1,508
1,652
Fixed Assets
72
107
107
107
107
107
Other Assets
773
685
685
688
691
693
Total Assets
3,679
4,676
5,424
6,211
6,956
7,686
Outstanding Claims
953
1,393
1,614
1,835
2,066
2,303
Unearned Contribution Reserves
500
659
836
1,021
1,238
1,476
Debt
214
160
390
627
757
832
Insurance Payables
282
715
761
769
796
829
Other Liabilities
158
126
129
132
134
137
Total Liabilities
2,107
3,053
3,730
4,384
4,992
5,577
Shareholders’ Equity
1,525
1,579
1,645
1,772
1,904
2,042
46
44
49
55
60
67
1,572
1,623
1,695
1,827
1,964
2,109
1.3
1.3
1.4
1.5
1.6
1.7
Insurance Receivables
Minority Interest
Total Equity
BVPS
Salama Insurance
Jonathan Milan
+97145071744
204
May 23 2012
Salama valuation (AEDmn)
Year-end
1. DCF
Net profit
Return on excess capital
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Value of the insurance operations
Available capital:
Shareholders' equity
Less dividends
Tangible equity
Capital needs
Gross written premium (GWP)
Technical reserve
Equity investments
Investment properties
Associates
Equity as % GWP
Equity as % Technical reserves
Equity as % of investments
Equity as % of investment properties
Equity as % of associates
Surplus capital
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E
Implied P/BV
Salama Insurance
2012e
2013e
2014e
2015e
2020e
Perp.
66,087
-8,122
4.0%
12.0%
57,965
1,273,509
4.6%
11.5%
146,454
(88,488)
0.00
--
127,003
-7,709
4.0%
12.0%
119,294
1,417,708
8.4%
11.5%
163,036
(43,742)
0.95
(41,425)
131,780
-7,279
4.0%
12.0%
124,501
1,567,655
7.9%
11.5%
180,280
(55,779)
0.85
(47,376)
138,306
-6,729
4.0%
12.0%
131,577
1,728,059
7.6%
11.5%
198,727
(67,150)
0.76
(51,151)
289,352
-11,267
4.0%
12.0%
278,085
2,574,721
10.8%
11.5%
296,093
(18,008)
0.44
(7,960)
289,352
Subtotal
% of total
11,267
4.0%
12.0%
278,085
2,574,721
10.8%
11.5%
296,093
(18,008)
0.44
(18,008)
(287,035)
3.0%
(211,864)
1,694,664
190,425
-1,504,239
1,826,869
190,144
-1,636,725
1,964,399
189,962
-1,774,437
2,109,060
189,843
-1,919,217
3,113,400
189,648
28,935
2,894,816
2,588,699
2,449,996
136,586
280,228
59,002
34%
8%
50%
25%
100%
1,273,509
230,730
2,865,804
2,856,456
165,176
285,832
60,772
34%
8%
50%
25%
100%
1,417,708
219,017
3,145,007
3,303,825
196,521
291,549
62,899
34%
8%
50%
25%
100%
1,567,655
206,782
3,445,355
3,779,575
229,025
297,380
65,415
34%
8%
50%
25%
100%
1,728,059
191,158
4,844,864
6,780,566
439,698
328,331
83,091
34%
8%
50%
25%
100%
2,574,721
320,095
(93,647)
1,273,509
892,826
79.5%
230,730
20.5%
1,123,556
0.93
0.61
51.2%
17.0x
0.7x
8.8x
0.6x
205
Initiation Report
May 23
2012
+97145071744
Jonathan Milan
Qatar Insurance Company
Ample surplus capital and dividends
 Leading insurer in underpenetrated market
 Investment yields could fall if QIC trims its Investments in
equities
 Strong capital base shields equity from investment return
volatility
Low penetration rate and a growing economy collude towards high
gross written premium growth: QIC, the largest insurance company in
Qatar, dominates more than 50% of total market share. We expect
GWP to grow at a slightly lower rate than the industry at a 5 year
CAGR of FY 11A-16e of 9.0%. EPS however, will grow at a 5 year CAGR
of 5.5% during FY 11A-16e, as a result of falling investment yields. We
expect DPS to grow in line with EPS with a payout ratio of 85%.
Investment yields should come down if QIC trims equity exposures:
The surge in claims in FY 11A and Q1 12A mostly relate to reinsurance
claims related to the recent catastrophes in the Far East. We expect
QIC to settle all claims related to the catastrophes in the Far East in FY
12e. Hence we forecast underwriting profit margins to rebound and
stabilize at c. 8.8% with combined ratios of c. 84.5% starting FY 13e. As
equities account for 50% of total investments and time deposits,
investment yield of its portfolio stood at an impressive 10.2% in FY
11A. QCB recently announced plans to impose stricter regulations on
insurance companies including investment strategies. We hence
expect QIC to reduce its exposure to equities and expect a reduction in
capital gains on equity investments thereby we forecast yields on
investment down to go down to 6.4% by FY 16e.
Very strong balance sheet backed by conservative reserves and
ample cash: QIC adequately accounts for policy reserves which stood
at an impressive 2.5x net earned premiums and 1.0x equity in FY 11A.
Equity investments account for 50% of investments and 27% of assets.
A 1% drop in returns on equity investments results in a 7% drop in EPS
for FY 12e. Although QIC is highly exposed to equities, we believe the
company is well capitalized against any surge in claims or volatility in
the stock market. In our capital model we assign 50% surcharge based
on a 99.5% certainty and an average volatility of 17%, as per Solvency
II. We also assign 34% of GWP in non-life insurance.
We initiate with a Buy recommendation helped by strong
fundamentals, very solid market share and strong growth outlook,
but held back by a potential normalization of its high investment
yield. The stock is trading at a P/BV12e of 1.8x and P/E13e of 9.3x. We
value QIC at QAR 94 per share with a 27% upside. Our valuation places
QIC at a P/B12e of 2.3x and P/E12e of 14.7x and P/E13e of 11.8x.
BUY
QAR 94.9
Insurance / Qatar
Bloomberg code
Market index
QATI QD
Qatar
94.9
Upside (%)
Market data
26.8
17/05/2012
Last closing price
52 Week range
Market cap (QARmn)
Market cap (USDmn)
Average daily value (QARmn)
Year-end (QAR mn)
Underwriting Profit
EPS
BVPS
Tangible BVPS
P/TBVPS (x) (market
price)
DPS
Div. yield (%)
RoAA (%)
RoAE (%)
Net Loss Ratio
Combined Ratio
Underwriting Profit
Margin
Net Profit Margin
74.9
63.3-78.3
6,680
1,835
2.1
0.6
2012e
2,584
358
6.44
11.6
40.66
40.66
1.8
2013e
2,828
536
8.07
9.3
42.01
42.01
1.8
1.8
2.2
5.5
7.3
6.8
16.1
53.7
9.5
65.8
93.0
6.9
9.2
8.0
19.5
54.6
8.4
57.1
83.8
3.9
9.2
22.2
106.4
25.5
112.9
2014e
3,087
566
7.91
9.5
43.34
43.34
1.7
2.2
2015e
3,365
610
8.13
9.2
44.71
44.71
1.7
2.1
6.7
9.0
7.3
18.5
55.4
7.2
58.1
84.5
8.7
6.9
9.2
7.1
18.5
56.0
6.6
58.5
84.6
8.7
22.9
119.7
21.6
126.4
Price Performance
120
QATI QD
Qatar
110
100
90
80
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Year-end
Profitability
30%
27%
25%
25%
25%
22%
23%
22%
20%
15%
10%
10%
9%
4%
9%
9%
4%
5%
0%
FY10
FY11
FY12e
FY13e
FY14e
FY15e
Net Earnings Margin
Investment Yield
16%
12%
2010
2011
2012e
2013e
2014e
2015e
Cession Ratio
45.8
41.9
41.3
40.4
40.4
40.4
Net Loss Ratio
52.3
65.1
65.8
57.1
58.1
58.5
Expense Ratio
28.7
27.8
27.2
26.7
26.4
26.1
Combined Ratio
81.0
92.8
93.0
83.8
84.5
84.6
9.8
4.0
3.9
9.2
8.7
8.7
Investment Yield
8.0
10.2
9.5
8.4
7.2
6.6
Net Margin
27.4
24.8
22.2
25.5
22.9
21.6
RoAE
18.1
16.8
16.1
19.5
18.5
18.5
RoAA
8.2
7.6
6.8
8.0
7.3
7.1
Net Premiums/Equity
0.3
0.4
0.4
0.5
0.5
0.5
0.6
0.7
0.8
0.8
0.8
0.9
8.0%
10.2%
9.5%
8.4%
7.2%
8%
6.6%
4%
Claims Reserve/NPE
0%
FY10
FY11
FY12e
FY13e
InvestmentYield
FY14e
1.6
1.7
1.7
1.6
1.6
1.6
23.7
21.2
21.2
19.0
16.8
15.4
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Investments/Assets
60.2
53.5
53.7
54.6
55.4
56.0
52.8
50.7
50.6
48.4
46.6
44.8
Equity/Assets (%)
46.1
42.9
40.8
39.1
37.8
36.6
Investment Exposure
Investment Exposure
70%
55%
60%
50%
50%
45%
40%
40%
30%
35%
FY10
FY11
FY12e
Investments/Assets
FY13e
FY14e FY15e
1.6x
1.4x
1.27x
1.2x
1.0x
1.37x
0.98x
1.41x
1.06x
1.41x
1.41x
2011
2012e
2013e
2014e
2015e
1.3
1.4
1.4
1.4
1.4
1.4
2.5
2.5
2.5
2.5
2.5
2.5
0.8
1.0
1.1
1.1
1.2
1.3
Debt/Capital
0.1
0.1
0.1
0.1
0.1
0.1
Debt/Equity (x)
0.1
0.1
0.1
0.1
0.1
0.1
2013e
2014e
2015e
Year-end
1.20x
1.26x
2010
2011
2012e
Gross Premiums
0.2
10.7
8.4
9.4
9.2
9.0
Net Earned Premiums
5.9
18.2
9.5
10.9
8.9
9.0
11.3
(5.0)
10.4
10.5
10.2
9.9
6.5
7.5
8.0
7.5
6.5
6.5
Total Reserves
30.6
19.0
11.9
9.4
9.2
8.7
Equity
17.0
—
2.6
3.2
3.0
3.0
Year-end
2010
2011
2012e
2013e
2014e
2015e
1.9
1.9
1.8
1.8
1.7
1.7
2.4
2.4
2.3
2.3
2.2
2.1
11.3
11.3
11.6
9.3
9.5
9.2
14.4
14.3
14.7
11.8
12.0
11.7
Growth
0.8x
0.6x
FY10
FY11
FY12e
FY13e
2010
Liquidity/Leverage
1.41x
1.13x
0.82x
Year-end
FY14e
FY15e
Investments
Assets
Growth
13%
7%
11%
11%
0%
11%
10%
10%
8%
9%
9%
9%
FY12e
FY13e
FY14e
FY15e
10%
1%
-5%
FY10
FY11
-5%
Valuation
207
May 23 2012
Abacus
Year-end
2010
2011
2012e
2013e
2014e
2015e
2,153
2,383
2,584
2,828
3,087
3,365
987
1,000
1,067
1,143
1,247
1,360
1,166
1,383
1,517
1,685
1,840
2,005
48
62
70
81
93
101
1,118
1,321
1,446
1,604
1,747
1,904
Company Profile
Qatar Insurance Company is the largest insurer in
Qatar by GWP, having over 50% market share.
Founded in 1964, the company operates outside
Qatar as well, with 54% of GWP received from outside
the state. The company engages in reinsurance,
accounting for c.20% of total GWP. Along with the 2nd
and 3rd largest insurers in Qatar, QIC accounts for
c.68% of total GWP. The Qatari government is the
largest shareholder with 12% ownership, followed by
QNB and Burooq Trading Co. each with 5% ownership.
Free float is estimated to be 72%.
Retained Premiums
Ceded Premiums
Net Premiums Earned
—
—
—
—
—
—
Gross Claims Paid
976
1,123
1,493
1,365
1,491
1,625
Claims recovered
447
532
667
576
614
662
56
268
125
127
139
151
Net Claims
585
859
952
917
1,016
1,114
commissions paid
107
123
136
151
165
180
Underwriting Profit
426
338
358
536
566
610
Investment Income
362
435
410
395
369
363
48
71
78
82
86
90
836
845
846
1,013
1,022
1,063
Total Income
Interest Expense
14%
Fire &
General
Marine &
Aviation
—
—
5
8
11
12
214
244
257
276
296
318
Operating Profit
734
622
601
583
729
714
Other income/(loss)
—
2
3
3
4
5
Tax
—
—
—
—
—
—
Minority Interest
33
11
11
12
13
14
Net Income
590
592
575
720
706
725
Reported EPS
6.6
6.6
6.4
8.1
7.9
8.1
86%
Year-end
2010
2011
2012e
2013e
2014e
2015e
Cash
1,736
2,081
2,185
2,304
2,356
2,425
1,160
1,282
1,433
1,496
1,548
1,585
457
523
564
636
720
811
385
453
453
454
454
454
2,860
2,718
3,000
3,316
3,653
4,015
Balance sheet (mn)
Investments
Associates
62
64
66
70
74
79
549
630
673
728
787
848
Fixed Assets
29
26
26
25
25
25
Other Assets
—
—
—
—
—
—
Total Assets
7,237
7,777
8,399
9,029
9,616
10,241
Outstanding Claims
1,789
2,180
2,456
2,647
2,837
3,027
950
1,080
1,190
1,344
1,520
1,711
Debt
229
182
232
434
445
478
Insurance Payables
746
807
895
859
949
1,038
Other Liabilities
—
—
—
—
—
—
Total Liabilities
3,715
4,248
4,773
5,283
5,751
6,254
3,339
3,339
3,426
3,534
3,639
3,748
184
190
201
213
226
239
3,522
3,529
3,626
3,746
3,865
3,987
39.5
39.6
40.7
42.0
43.3
44.7
Minority Interest
Total Equity
BVPS
Jonathan Milan
+97145071744
208
May 23 2012
Qatar Insurance Company valuation (QARmn)
Year-end
1 DCF
Net profit
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
2 Capital surplus/deficit
Available capital:
Less dividends
Tangible equity
Capital needs
Technical reserves
Equity investments
Associates
Equity as % GWP
Surplus capital
3 Other adjustments
Total adjustments
4. Dividends
Total Fair Value YE 2011
Current share price
Upside
Implied P/E
Implied P/B
2012e
2013e
2014e
2015e
2020e
Perp.
574,618
-36,752
4.0%
0.0%
537,867
2,219,208
24.2%
12.0%
266,305
271,562
0.00
--
719,969
-30,922
4.0%
0.0%
689,047
2,361,445
29.2%
12.0%
283,373
405,674
0.94
383,326
705,593
-30,428
4.0%
0.0%
675,165
2,504,629
27.0%
12.0%
300,555
374,610
0.84
316,047
725,403
-28,859
4.0%
0.0%
696,545
2,649,378
26.3%
12.0%
317,925
378,619
0.75
285,205
973,748
-2,362
4.0%
0.0%
971,386
3,822,516
25.4%
12.0%
458,702
512,684
0.43
219,136
1,007,829
Subtotal
% of total
2,445
4.0%
0.0%
1,005,384
3,956,305
25.4%
12.0%
474,757
530,628
0.43
530,628
2,173,017
3.5%
6,242,681
3,626,424
-488,425
3,137,998
3,746,471
-611,974
3,134,498
3,865,086
-599,754
3,265,331
3,987,438
-616,593
3,370,845
4,709,256
-827,686
3,881,570
2,583,908
2,456,300
2,321,913
453,495
66,349
34.0%
2,827,542
2,646,742
2,433,945
453,767
69,666
34.0%
3,086,874
2,837,401
2,535,471
454,039
73,846
34.0%
3,364,693
3,026,531
2,625,578
454,312
79,016
34.0%
4,925,896
4,090,588
3,845,939
455,676
110,823
34.0%
50.0%
25.0%
100.0%
2,219,208
918,790
50.0%
25.0%
100.0%
2,361,445
773,053
50.0%
25.0%
100.0%
2,504,629
760,702
50.0%
25.0%
100.0%
2,649,378
721,467
50.0%
25.0%
100.0%
3,822,516
59,053
14.7x
2.3x
2,668,308
2,219,208
7,060,534
83.4%
918,790
10.9%
488,425
8,467,749
94.9
74.9
26.8%
5.8%
11.8x
2.3x
209
Initiation Report
May 23
2012
+97145071744
Jonathan Milan
Tawuniya Insurance
High ROEs and strong asset base
 Combined ratios to increase significantly due to rivalry in
medical segment, but should fall vs. a disappointing Q1 12A
BUY
Insurance / KSA
 Strong RoEs amid improving investment income
Bloomberg code
Market index
 Poor performance in Q1 12A due to one-off items
Upside (%)
High single digit growth in GWP: Tawuniya, the region’s largest
insurer by GWP, has been letting go market share, dropping to 26.4%
in FY 11A from 29.7% in FY09A. We expect a 5 year FY 11A-16e CAGR
of 9.6% in GWP. The medical segment will contribute the most to the
growth with a 5 year CAGR of 10.5% vs. 8.5% in motor and P&C.
Growing dependence on a less profitable medical segment: The
medical segment is the largest contributor to GWP at c. 57%. Due to
one off increased claim reserves and IBNR, we expect net loss ratios to
increase to 87% in FY 12e. However, as a result of structurally
increased competition in the medical segment, and price competition,
we expect it to come down only to 82% in FY 12e and FY 13e, still up
from just 72% in FY 10A. Thereafter we expect potential further price
increase and better claim management to reign down net loss ratios
to 79%. The surge will push combined ratios to 101% in FY12e, up
from 91% in FY 11A, and stabilize by FY 15e at 95.7%. As a result
underwriting margins will drop from 9.6% in FY 11A to 6.0% by FY 15e.
Rising yields on investment to partially offset effect of rising loss
ratios: We forecast Tawuniya’s investment yield to increase to 4.5% by
FY 13e from 1.7% in FY 11A, as it could increase its exposure to
equities (helped by buoyant markets) and longer dated bonds. We
expect an 8.0% 5 year CAGR in earnings. We expect RoE to fall
moderately from 22.6% in FY11 to c. 18% by FY 16e.
Strong balance sheet backed by large investments in money markets:
Tawuniya has a strong asset base of SAR 7.4bn unhampered by debt.
Total investments constitute an impressive 53% of total assets totaling
SAR 3.7bn. Equity investments comprise only 29% of total investments
with the remaining 71% invested in money markets and sukuk.
ROEs and asset base not embedded in market value: Current market
valuation prices Tawuniya at a P/B12e of 1.6x P/tNAV12e of 1.8x and
P/E13e of 9.0x respectively. Given very high RoEs, robust capital
position and high single digit EPS growth, we initiate with a BUY. The
pullback after the very poor Q1 12 offers a good entry point as we
believe a large part of the disappointing net claims in Q1 12 were due
to one off factors, though we factor in structurally increased net
claims. Our TP provides 26% upside and values the company at a
P/B13e of 1.8x and P/E13e of 11.1x.
SAR 61.1
Market data
TAWUNIYA AB
KSA
61.1
23.7
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (SAR mn)
Underwriting Profit
EPS
BVPS
Tangible BVPS
P/TBVPS (x) (market
price)
DPS
Div. yield (%)
RoAA (%)
RoAE (%)
Net Loss Ratio
Combined Ratio
Underwriting Profit
Margin
Net Profit Margin
49.4
46.4-66.8
3,705
988
17.7
4.7
2012e
4,901
574
4.86
10.0
30.48
28.08
1.6
2013e
5,398
748
5.49
8.8
34.05
31.41
1.4
1.7
1.9
1.7
3.5
4.6
16.8
50.2
7.0
78.1
100.7
1.9
4.0
4.7
17.0
51.1
4.5
75.1
97.4
2.4
4.8
7.4
182.2
7.6
186.3
2014e
5,919
863
6.66
7.3
38.37
35.50
1.3
1.7
2015e
6,467
961
7.57
6.4
43.30
40.15
1.1
1.5
2.3
4.8
5.1
18.4
51.2
4.5
74.1
96.1
5.7
2.7
5.5
5.2
18.5
52.8
4.5
73.7
95.6
6.0
8.4
192.2
8.8
193.4
Price Performance
150
TAWUNIYA AB
KSA
100
50
0
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
Tawuniya Insurance
Year-end
Profitability
15%
13%
11%
10%
10%
5%
8%
8%
7%
10%
2011
2012e
2013e
2014e
2015e
6%
5%
2%
Cession Ratio
30.8
22.5
21.4
21.2
21.1
21.0
9%
Net Loss Ratio
58.2
67.6
78.1
75.1
74.1
73.7
6%
Expense Ratio
28.4
23.3
22.7
22.3
22.0
22.0
Combined Ratio
86.6
91.0
100.7
97.4
96.1
95.6
10.9
9.6
2.4
4.8
5.7
6.0
2.2
1.7
7.0
4.5
4.5
4.5
0%
FY10
FY11
FY12e
FY13e
Investment Yield
FY14e
FY15e
Net Earnings Margin
Investment Yield
10%
8%
6%
4%
2%
0%
2010
7.0%
4.5%
2.2%
FY10
4.5%
4.5%
1.7%
FY11
FY12e
FY13e
InvestmentYield
FY14e
Net Margin
13.3
9.7
7.4
7.6
8.4
8.8
RoAE
34.9
22.6
16.8
17.0
18.4
18.5
RoAA
7.4
5.8
4.6
4.7
5.1
5.2
Net Premiums/Equity
1.5
1.5
1.6
1.5
1.5
1.5
2.4
2.2
2.1
2.1
2.1
2.0
Claims Reserve/NPE
0.6
0.4
0.4
0.4
0.5
0.5
3.1
2.0
6.9
4.5
4.6
4.8
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
Investments/Assets
49.3
50.3
50.2
51.1
51.2
52.8
26.5
29.4
29.0
29.0
29.0
29.0
Equity/Assets (%)
23.5
27.7
28.9
29.3
29.3
29.5
Investment Exposure
Investment Exposure
60%
33%
50%
30%
40%
27%
30%
24%
FY10
FY11
FY12e
Investments/Assets
FY13e
FY14e FY15e
2.6x
2010
2011
2012e
2013e
2014e
2015e
0.9
0.8
0.8
0.9
0.9
1.0
1.5
1.2
1.2
1.2
1.3
1.3
2.2
1.8
1.8
1.9
1.9
1.9
Debt/Capital
—
—
—
—
—
—
Debt/Equity (x)
—
—
—
—
—
—
Liquidity/Leverage
2.20x
2.2x
1.77x
1.82x
1.86x
1.92x
1.93x
0.88x
0.93x
0.97x
Year-end
1.8x
1.4x
Year-end
0.93x
1.0x
0.82x
0.85x
Gross Premiums
0.6x
FY10
FY11
FY12e
FY13e
FY14e
FY15e
30%
20%
10%
0%
24%
4%
6%
0%
FY10
FY11
12%
11%
16%
7% 10%
10%
9%
FY13e
FY14e
FY15e
FY12e
Tawuniya Insurance
13%
2011
2012e
2013e
2014e
2015e
9.3
3.5
6.0
10.6
10.1
9.7
Net Earned Premiums
28.7
16.5
15.4
10.2
9.7
9.3
Investments
24.2
—
6.9
12.2
13.0
15.6
7.4
(2.0)
7.1
10.1
12.8
12.2
Total Reserves
13.4
(6.6)
14.6
14.2
16.3
13.5
Equity
25.4
15.8
11.6
11.7
12.7
12.8
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.1
1.8
1.6
1.4
1.3
1.1
2.6
2.2
2.0
1.8
1.6
1.4
6.7
8.6
10.2
9.0
7.4
6.5
8.3
10.6
12.6
11.1
9.2
8.1
Assets
Growth
2010
Growth
Valuation
211
May 23 2012
Abacus
Tawuniya Insurance
Year-end
2010
2011
2012e
2013e
2014e
2015e
Company Profile
4,181
4,431
4,901
5,398
5,919
6,467
Ceded Premiums
1,288
995
1,046
1,146
1,249
1,359
Established in 1986, Tawuniya is the largest insurer in
the Kingdom and the region by GWP. The company
operates 10 branches with 1,500 employees.
Tawuniya provides Shariah compliant non-life
insurance including medical, motor, fire and property,
marine and aviation, and energy insurance. The
company also provides reinsurance. The company
operates a non-life insurance provider in Bahrain, the
United Insurance Company, which provides car
insurance. The two largest shareholders are the
government owned Public Pension Agency and
General Organization for Social Insurance with 23.7%
and 22.8% ownership respectively.
Retained Premiums
2,893
3,436
3,855
4,253
4,671
5,108
234
338
278
313
350
383
2,659
3,098
3,576
3,940
4,321
4,725
Net Premiums Earned
100
144
144
157
170
182
Gross Claims Paid
—
—
—
—
—
—
Claims recovered
—
—
—
—
—
—
131
(221)
84
118
160
174
1,548
2,095
2,792
2,959
3,202
3,481
commissions paid
331
322
355
390
426
465
Underwriting Profit
880
824
574
748
863
961
Investment Income
74
65
269
189
213
244
30
19
18
19
18
18
984
908
861
956
1,095
1,223
Net Claims
Total Income
Interest Expense
Operating Profit
18%
Medical
Motor
25%
57%
P&C
—
—
—
—
—
—
321
233
235
248
259
281
663
676
626
708
836
941
(100)
(223)
(248)
(280)
(313)
(344)
Tax
27
35
25
29
35
39
Minority Interest
—
—
—
—
—
—
Net Income
535
418
353
400
488
558
Reported EPS
7.4
5.8
4.9
5.5
6.7
7.6
Other income/(loss)
Year-end
2010
2011
2012e
2013e
2014e
2015e
Cash
165
254
474
183
309
340
977
739
831
933
1,107
1,230
647
511
587
646
737
805
—
—
—
—
—
—
3,714
3,714
3,969
4,452
5,031
5,819
Balance sheet (mn)
Investments
Associates
153
156
156
156
156
156
1,297
1,392
1,289
1,716
1,849
2,020
Fixed Assets
147
177
192
200
201
202
Other Assets
431
442
410
422
431
447
Total Assets
7,532
7,384
7,907
8,708
9,822
11,019
Outstanding Claims
1,688
1,229
1,404
1,624
1,958
2,256
2,204
2,406
2,760
3,133
3,573
4,024
—
—
—
—
—
—
826
564
424
429
417
413
Debt
Insurance Payables
Other Liabilities
1,044
1,136
1,033
968
995
1,079
Total Liabilities
5,763
5,335
5,621
6,154
6,944
7,772
Shareholders' Equity
1,769
2,049
2,286
2,553
2,878
3,247
—
—
—
—
—
—
1,769
2,049
2,286
2,553
2,878
3,247
23.6
27.3
30.5
34.0
38.4
43.3
Minority Interest
Total Equity
BVPS
Tawuniya Insurance
Jonathan Milan
+97145071744
212
May 23 2012
Tawuniya valuation (SARmn)
Year-end
1. DCF
Net profit
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Value of the insurance operations
Available capital:
Less dividends
Tangible equity
Capital needs
Technical reserves
Equity investments
Associates
Equity as % GWP
Surplus capital
Total adjustments
4. Dividends
Total Fair Value
Current share price
Upside
Implied P/E
Implied P/B
Tawuniya Insurance
2012e
2013e
2014e
2015e
2020e
Perp.
364,684
-(14,661)
4.0%
6.5%
379,345
2,400,245
15.8%
12.2%
292,830
86,516
0.00
--
411,513
-(15,991)
4.0%
6.5%
427,504
2,639,330
16.2%
12.2%
321,998
105,505
0.94
99,604
499,410
-(15,453)
4.0%
6.5%
514,862
2,900,528
17.8%
12.2%
353,864
160,998
0.84
135,466
568,045
-(14,518)
4.0%
6.5%
582,563
3,200,839
18.2%
12.2%
390,502
192,061
0.75
144,031
916,860
-3,411
4.0%
6.5%
913,449
4,980,924
18.3%
12.2%
607,673
305,776
0.42
128,960
916,860
2,315,903
180,024
127,640
2,008,239
2,553,386
197,596
144,029
2,211,761
2,878,002
215,858
174,793
2,487,351
3,247,231
235,761
198,816
2,812,655
5,732,359
339,327
320,901
5,072,131
4,901,019
5,398,204
5,919,314
6,466,872
9,383,151
1,150,993
9,861
155,936
34.0%
1,291,080
9,861
155,936
34.0%
1,459,121
9,861
155,936
34.0%
1,687,403
9,861
155,936
34.0%
3,264,503
9,861
155,936
34.0%
50.0%
25.0%
100.0%
2,400,245
(392,005)
50.0%
25.0%
100.0%
2,639,330
(427,569)
50.0%
25.0%
100.0%
2,900,528
(413,178)
50.0%
25.0%
100.0%
3,200,839
(388,184)
50.0%
25.0%
100.0%
4,980,924
91,207
12.6x
2.0x
Subtotal
% of total
1,401,744
2,400,245
4,849,775
105.8%
(392,005)
(8.5%)
127,640
4,585,409
61.1
49.4
23.7%
2.8%
3,411
4.0%
6.5%
913,449
4,980,924
18.3%
12.2%
607,673
305,776
0.42
305,776
1,047,786
3.0%
3,323,650
11.1x
1.8x
213
Initiation Report
May 23
2012
+97145071744
Jonathan Milan
MedGulf Insurance
High reliance on medical segment
 RoEs to remain high as investment returns grow
 Investments to grow significantly
 Heavy reliance on Medical insurance could reduce margins
Moderate growth in GWP with falling underwriting margins: We
expect MedGulf to maintain its current market share of c. 15.7% in
KSA. We forecast a 5 year FY 11A-16e CAGR of 11.1% in GWP. Medical
insurance will remain the largest source of GWP at c.72% of total and
c. 6% from motor. We expect a compression in underwriting profit
margins due to rising loss ratios in the medical insurance segment,
pushing combined ratios to 98% by FY16e, up 5.5% from FY 11A. We
forecast a 5 year FY 11A-16e CAGR of 9.2% in net profit.
RoE to remain high as rising investment income outweighs falling
underwriting margins: Despite falling underwriting margins from 7.3%
in FY 11A to 4.3% in FY 16e, we expect a small drop in RoEs from
18.3% in FY 11A to 17.9% by FY 16e, due to rising investment income
and growth in business volume. Return on investments stood only at
0.8% in FY 11A and 2.1% in FY 10A; we expect a broad recovery in
investment yields, with returns on investments reaching 4.5% by FY
16e if Medgulf increases the risk profile of its portfolio. We forecast a
5 year FY 11A-16e investment income CAGR of 100%, reaching SAR
83mn by FY 16e.
Investments, still a small part of the balance sheet, are expected to
grow radically: Investments totaled SAR 338mn by FY 11A comprising
8.6% of total assets, with equities accounting for 5.5% of investments.
We expect investments to grow significantly as MedGulf’s asset base
grows, reaching SAR 2.0bn by FY 16e. The company has SAR 480mn of
goodwill, accounting for c. 41% of total equity, making tangible book
value much lower than current book value.
High ROEs and impressive performance already priced in expensive
price to book valuation: Very high RoEs and potentially improved
investment yields are already reflected in Medgulf’s valuation. We
initiate with a Sell recommendation due to high dependence on highly
competitive medical insurance and substantial intangibles. We value
MedGulf at a P/B12e of 1.6x and P/E13e of 9.6x. The P/tNAV is even
3.3x, as 41% of Medgulf relates to intangible assets. The valuation of
the goodwill amount is based on a yearly growth of 20%-38% in GWP.
Since this growth target was not achieved in FY 11A and is not
expected to be achieved in FY 12e, we believe a goodwill impairment
is possible.
SELL
SAR 24.6
Insurance / KSA
Bloomberg code
Market index
MEDGULF AB
TASI
24.6
Upside (%)
Market data
-15.6
16/05/2012
Last closing price
52 Week range
Market cap (SARmn)
Market cap (USDmn)
Year-end (SAR mn)
Underwriting Profit
EPS
BVPS
Tangible BVPS
P/TBVPS (x) (market
price)
DPS
Div. yield (%)
RoAA (%)
RoAE (%)
Net Loss Ratio
Combined Ratio
Underwriting Profit
Margin
Net Profit Margin
29.2
23.9-37.5
2,336
623
14.5
3.9
2012e
3,153
432
2.23
13.1
15.89
9.89
1.8
2013e
3,515
473
2.56
11.4
17.30
11.30
1.7
3.0
2.2
1.0
3.4
4.3
14.6
14.1
3.0
78.4
98.2
1.2
3.9
4.4
15.4
19.6
3.5
78.7
98.5
4.3
4.0
5.7
186.3
5.8
202.1
2014e
3,902
563
3.34
8.7
19.14
13.14
1.5
1.9
2015e
4,317
606
3.68
7.9
21.17
15.17
1.4
1.6
1.5
5.2
5.1
18.4
22.7
4.0
77.1
96.9
5.0
1.7
5.7
5.0
18.3
25.9
4.5
77.3
97.4
4.7
6.9
216.1
6.8
230.2
Price Performance
150
MEDGULF AB
TASI
100
50
0
May/11
Aug/11
Nov/11
Feb/12
May 23 2012
Abacus
MedGulf Insurance
Year-end
Profitability
10%
2010
2011
2012e
2013e
2014e
2015e
Cession Ratio
26.2
31.8
30.8
30.5
30.2
30.0
Net Loss Ratio
71.9
73.4
78.4
78.7
77.1
77.3
Expense Ratio
19.2
21.0
19.8
19.8
19.8
20.1
Combined Ratio
91.1
94.4
98.2
98.5
96.9
97.4
8.2
7.3
4.3
4.0
5.0
4.7
Investment Yield
2.1
0.8
3.0
3.5
4.0
4.5
8%
7%
8%
6%
7%
5%
7%
6%
5%
4%
4%
7%
5%
0%
FY10
FY11
FY12e
FY13e
FY14e
FY15e
Net Earnings Margin
Net Margin
Investment Yield
8%
6%
4%
3.0%
2.1%
4.0%
3.5%
4.5%
0.8%
2%
0%
FY10
FY11
FY12e
FY13e
InvestmentYield
FY14e
7.7
7.3
5.7
5.8
6.9
6.8
RoAE
20.4
18.3
14.6
15.4
18.4
18.3
RoAA
5.9
5.2
4.3
4.4
5.1
5.0
Net Premiums/Equity
1.7
1.6
1.6
1.7
1.7
1.7
2.5
2.4
2.5
2.5
2.5
2.5
Claims Reserve/NPE
0.3
0.4
0.4
0.5
0.5
0.6
0.3
0.1
0.7
1.2
1.7
2.3
FY15e
Year-end
2010
2011
2012e
2013e
2014e
2015e
25.9
Investment Exposure
Investments/Assets
Investment Exposure
40%
15%
30%
4.7
8.6
14.1
19.6
22.7
10.1
5.5
5.5
5.5
5.5
5.5
Equity/Assets (%)
27.3
29.9
29.1
28.2
27.5
26.9
10%
20%
5%
10%
0%
0%
FY10
FY11
FY12e
Investments/Assets
FY13e
FY14e FY15e
2.6x
2.2x
1.75x
1.77x
1.86x
2.16x
2.02x
Year-end
2010
2011
2012e
2013e
2014e
2015e
0.7
0.7
0.8
0.8
0.8
0.9
1.0
1.1
1.1
1.2
1.3
1.4
1.8
1.8
1.9
2.0
2.2
2.3
Debt/Capital
—
—
—
—
—
—
Debt/Equity (x)
—
—
—
—
—
—
Liquidity/Leverage
2.30x
1.8x
Year-end
1.4x
Growth
0.72x
1.0x
0.74x
0.75x
0.85x
0.80x
0.90x
0.6x
FY10
FY11
FY12e
FY13e
FY14e
FY15e
Growth
82%
100.00%
83%
56%
42%
50.00%
7%
0.00%
-29%
-50.00%
FY10
12%
11%
11%
31%
FY11
FY12e
MedGulf Insurance
FY13e
FY14e
2010
2011
2012e
2013e
2014e
2015e
Gross Premiums
41.8
7.2
12.2
11.5
11.0
10.7
Net Earned Premiums
37.8
4.4
10.4
11.3
11.1
10.7
(29.0)
82.5
82.5
56.0
31.1
29.2
Assets
32.2
0.2
11.4
12.4
13.2
13.2
Total Reserves
37.1
10.5
14.3
18.1
18.3
17.8
Equity
15.5
9.8
8.4
8.8
10.6
10.6
Year-end
2010
2011
2012e
2013e
2014e
2015e
2.2
2.0
1.8
1.7
1.5
1.4
1.8
1.7
1.6
1.4
1.3
1.2
11.5
11.4
13.1
11.4
8.7
7.9
9.7
9.6
11.1
9.6
7.4
6.7
Investments
11%
29%
FY15e
Valuation
215
May 23 2012
Abacus
MedGulf Insurance
Year-end
2010
2011
2012e
2013e
2014e
2015e
2,623
2,811
3,153
3,515
3,902
4,317
688
895
971
1,073
1,179
1,295
1,935
1,916
2,182
2,442
2,722
3,023
143
45
116
142
167
194
1,792
1,871
2,066
2,300
2,555
2,829
54
98
95
105
114
125
Gross Claims Paid
—
—
—
—
—
—
Claims recovered
—
—
—
—
—
—
Company Profile
Ceded Premiums
MedGulf is the 2ndlargest insurer in Saudi Arabia by
GWP. The company maintained a c. 15.7% market
share of total premiums in FY 11A. The company
operates solely in Saudi Arabia with c. 700 employees
and 56 representative offices. The company’s main
shareholders are MedGulf Bahrain with 40% and
Saudi Investment Bank with 19%. The majority of
GWP arise from the medical segment, accounting for
72% of total GWP, motor for 6.6% and other segments
(including life) combine to form 21.6% of total GWP.
Retained Premiums
Net Premiums Earned
216
280
371
509
727
969
1,288
1,373
1,619
1,810
1,971
2,186
commissions paid
116
104
110
122
136
161
Underwriting Profit
442
492
432
473
563
606
Investment Income
5
3
14
28
44
65
24
43
60
71
79
84
471
537
505
572
686
756
Net Claims
Total Income
Interest Expense
22%
7%
72%
—
—
—
—
—
—
226
286
295
330
367
405
Operating Profit
245
251
210
241
319
351
Other income/(loss)
(13)
(13)
(5)
(6)
(12)
(12)
44
Medical
Tax
29
33
27
31
40
Motor
Minority Interest
—
—
—
—
—
—
Net Income
203
205
178
205
268
295
Reported EPS
2.5
2.6
2.2
2.6
3.3
3.7
Others
Year-end
2010
2011
2012e
2013e
2014e
2015e
Cash
734
680
545
333
250
214
317
538
617
742
865
1,018
438
453
490
562
645
668
—
—
—
—
—
—
185
338
617
963
1,262
1,631
Balance sheet (mn)
Investments
Associates
14
14
14
14
14
979
1,149
1,348
1,561
1,774
Fixed Assets
57
67
80
89
95
96
Other Assets
957
853
856
862
868
878
Total Assets
3,914
3,922
4,368
4,912
5,560
6,293
616
754
897
1,113
1,374
1,746
1,259
1,318
1,471
1,685
1,935
2,152
—
—
—
—
—
—
294
371
428
429
412
390
Outstanding Claims
Debt
Insurance Payables
Other Liabilities
677
306
300
301
308
312
Total Liabilities
2,845
2,749
3,097
3,528
4,029
4,600
1,069
1,174
1,272
1,384
1,531
1,693
—
—
—
—
—
—
1,069
1,174
1,272
1,384
1,531
1,693
13.4
14.7
15.9
17.3
19.1
21.2
Minority Interest
Total Equity
BVPS
MedGulf Insurance
—
1,224
Jonathan Milan
+97145071744
216
May 23 2012
MedGulf valuation (SARmn)
Year-end
1. DCF
Net profit
Tax shelter
Adjusted net profit
RoEcC
Cost of capital
Capital charge
Economic profit
Discount factor
Terminal Value
Required Capital
Available capital:
Less dividends
Tangible equity
Capital needs
Technical reserves
Equity investments
Associates
Equity as % GWP
Surplus capital
Total adjustments
4. Dividends
Total Fair Value YE 2011
Current share price
Upside
Implied P/E
Implied P/B
MedGulf Insurance
2012e
2013e
2014e
2015e
2020e
Perp.
178,348
-(16,791)
4.0%
13.0%
195,139
1,161,857
16.8%
12.6%
146,394
48,745
0.00
--
204,526
-(19,167)
4.0%
13.0%
223,693
1,327,341
16.9%
12.6%
167,245
56,448
0.94
53,196
267,591
-(21,031)
4.0%
13.0%
288,621
1,495,640
19.3%
12.6%
188,451
100,171
0.84
83,836
294,778
-(22,564)
4.0%
13.0%
317,343
1,682,291
18.9%
12.6%
211,969
105,374
0.74
78,323
474,955
-(25,401)
4.0%
13.0%
500,356
2,738,304
18.3%
12.6%
345,026
155,330
0.41
63,785
474,955
1,271,597
511,987
80,257
679,353
1,384,086
515,478
92,037
776,571
1,531,261
519,532
120,416
891,313
1,693,389
526,850
132,650
1,033,888
2,776,675
554,558
213,730
2,008,387
3,152,966
3,514,857
3,901,600
4,317,446
6,484,389
151,698
236,579
310,192
400,718
1,039,224
14,000
34.0%
14,000
34.0%
14,000
34.0%
14,000
34.0%
14,000
34.0%
50%
50%
50%
50%
50%
100%
1,161,857
(482,505)
100%
1,327,341
(550,769)
100%
1,495,640
(604,327)
100%
1,682,291
(648,402)
100%
2,738,304
(729,917)
11.1x
1.6x
Subtotal
% of total
664,424
1,161,857
2,374,169
120.4%
(482,505)
(24.5%)
80,257
1,971,922
24.6
29.2
(15.6%)
4.1%
(25,401)
4.0%
13.0%
500,356
2,738,304
18.3%
12.6%
345,026
155,330
0.41
155,330
547,889
3.0%
1,618,017
9.6x
1.4x
217
May 23 2012
Important Notice
1. Author, regulator and responsibility
Arqaam Capital Limited (“Arqaam”) is incorporated in the Dubai International Financial Centre (“DIFC”) and is authorised and regulated by the Dubai Financial Services Authority ("DFSA") to carry on financial services in
and from the DIFC. Arqaam publishes and distributes (i.e. issues) all research.
Arqaam Capital Research Offshore s.a.l. is a specialist research centre in Beirut, Lebanon, which assists in the production of research issued by Arqaam.
2. Purpose
This document is provided for informational purposes only. Nothing contained in this document constitutes investment, legal, tax or other advice or guidance and should be disregarded when considering or making
investment decisions. In preparing this document, Arqaam did not take into account the investment objectives, financial situation and particular needs of any particular person. Accordingly, before acting on this
document, investors should independently evaluate the investments and strategies referred to herein and make their own determination of whether it is appropriate in light of their own financial circumstances and
objectives.
3. Rating system
Arqaam investment research is based on the analysis of regional and country economics, industries and company fundamentals. Arqaam company research reflects a long-term (12-month) fair value target for a
company or stock. The ratings bands are:
Ratings
Buy
Total return > 20%
Hold
-10% < Total return < 20%
Sell
Total return < -10%
In certain circumstances, ratings may differ from those implied by a fair value target using the criteria above. Arqaam policy is to maintain up-to-date fair value targets on the companies under its coverage, reflecting
any material changes to the analyst’s outlook on a company. Share price volatility may cause a stock to move outside the rating range implied by Arqaam’s fair value target. Analysts may not necessarily change their
ratings if this happens, but are expected to disclose the rationale behind their view to Arqaam clients.
4. Accuracy of information
The information contained in this document is based on current trade, statistical and other public information we consider reliable. We do not represent or warrant that such information is accurate or complete and it
should not be relied upon as such. Any mention of market rumours has been derived from the markets and is not purported to be fact or reflect our opinions. Arqaam has no obligation to update, modify or amend this
document or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. In accordance with Regulation AC of the 1934
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analysts’ compensation is related to the specific recommendations or views in the research report.
5. Recipients and sales and marketing restrictions
5.1 Nothing in this document should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction, or to provide any investment advice or
service.
5.2 This document is directed at Professional Clients and not Retail Clients within the meaning of DFSA rules. Any investments or financial products referred to herein will only be made available to clients who Arqaam is
satisfied qualifies as Professional Clients. Any other persons in receipt of this document must not rely upon or otherwise act upon it.
5.3 This document is only being distributed to investors who meet certain qualifications and to whom an investment or service may be offered or promoted in accordance with relevant country restrictions. This
excludes the US except for SEC registered broker-dealers (or banks in permissable ”broker” or “dealer” capacity) acting on a principal or agency capacity, and major US institutional investors in accordance with SEC Rules
15a-6(a)(2). Details of other relevant country restrictions are set out on our website at http://www.arqaamcapital.com/english/system/footer/terms-of-use.aspx. Persons into whose possession this document comes
are required to inform themselves about, and observe, such restrictions and should not rely upon or otherwise act upon this document where it is unlawful to make to such person such an offer or invitation or
recommendation without compliance with any authorisation, registration or other legal requirements.
6. Risk warnings
6.1 Any prices, valuations or forecasts are indicative and are not intended to predict actual results, which may differ substantially from those reflected.
6.2 The value of an investment may go up as well as down. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including, without
limitation, foreseeable or unforeseeable changes in interest rates, foreign exchange rates, default rates, prepayment rates, political or financial conditions, etc.).
6.3 Past performance is not indicative of future results. Any opinions, estimates, valuations or projections (target prices and ratings in particular) are inherently imprecise and a matter of judgment. They are statements
of opinion and not of fact, based on current expectations, estimates and projections, and rely on beliefs and assumptions. Actual outcomes and returns may differ materially from what is expressed or forecasted. There
are no guarantees of future performance.
6.4 Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
6.5 This document does not propose to identify or to suggest all of the risks (direct or indirect) which may be associated with the investments and strategies referred to herein.
7. Conflict
7.1 Arqaam and its affiliates provide full investment banking services, and they and their directors, officers and employees, may take positions which conflict with the views expressed in this document. Our salespeople,
traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in
this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this
document.
7.2 Arqaam may have or seek investment banking or other business relationships for which it will receive compensation from the companies that are the subject of this document.
7.3 Facts and views presented in this document have not been reviewed by, and may not reflect information known to, professionals in other Arqaam business areas, including investment banking personnel.
7.4 Emirates NBD PJSC owns 8.32% of Arqaam..
8. No warranty
Arqaam makes no representations or warranties and, to the fullest extent permitted by applicable law, we hereby expressly disclaim any and all express, implied and statutory representations and warranties of any kind,
including, without limitation, any warranty as to accuracy, timeliness, completeness, merchantability, fitness for a particular purpose and/or non-infringement.
9. No liability
Arqaam will accept no liability in any event including (without limitation) negligence for any damages or loss of any kind, including (without limitation) direct, indirect, incidental, special or consequential damages,
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10. Governing law
English law governs this document and these disclaimers and any dispute in relation thereto shall be exclusively referred to the English Courts.
MedGulf Insurance
218

MENA financials - Arqaam Capital

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