Global Research

Sector

GCC
GCC Banking Sector
May 2005

Global Investment House KSCC
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Omar M. El-Quqa, CFA
Executive Vice President
omar@global.com.kw Phone No:(965) 2400551 Ext.104

Shailesh Dash, CFA
Head of Research
shaileshdash@global.com.kw Phone No:(965) 2400551 Ext.196

Pravin Bokade
Senior Financial Analyst
pravin@global.com.kw Phone No:(965) 2400551 Ext 229

Raghu Sarma
Financial Analyst
rsarma@global.com.kw Phone No:(965) 2400551 Ext 273

Faisal Hasan, CFA
Financial Analyst
fhasan@global.com.kw Phone No:(965) 2400551 Ext.304

Table of Contents

Major Highlights .............................................................................................................................................................. 1

Islamic Banks in GCC .................................................................................................................................................. 10

Role of Foreign Banks .................................................................................................................................................. 13

Competitive Strategies & Other Developments ....................................................................................... 15

Financial Performance ................................................................................................................................................ 19

Outlook .................................................................................................................................................................................... 23

Valuation & Recommendation Summary .................................................................................................... 28

Global Research - GCC

Global Investment House

1. Major Highlights
The GCC region has been an important financial center for decades, with the oil and gas industry playing a critical role. The region has a longstanding active tradition in commerce and finance. Banking has played an important part in the growth of the region for a long time. Recent years have witnessed a growth in both the size and sophistication of the region’s banking industry. The 45 listed banks across the six GCC countries, which we are covering in this Report, had an aggregate asset size of US$354.3bn at the end of 2004, having grown by 14.8% over 2003. These banks had aggregate net profit of US$8.9bn in 2004, having grown by a healthy 38.6% over 2003. The major highlights of the region’s banking industry are as follows: i. Controlling ownership by government and influential families The shareholding structures of the GCC banks are often dominated by two groups of owners – governments or government agencies, and influential ruling or merchant families. Kuwaiti families own the major Kuwaiti banks – National Bank of Kuwait (NBK), Commercial Bank of Kuwait (CBK), and Gulf Bank (GB); while the large Saudi bank – National Commercial Bank (NCB); and banks in UAE – Emirates Bank International (EBI), National Bank of Abu Dhabi (NBAD) and Abu Dhabi Commercial Bank (ADCB) are majority-state-owned. In Oman and Qatar, the governments own major stakes in the local banks. Government ownership enables them to intervene and support their banks during a crisis. On the other hand, shareholdings of leading business families leave banks vulnerable to potential relatedparty lending and shareholder meddling in credit policies. Foreign ownership is more limited in the banking sectors of the GCC, compared to other emerging market regions. ii. Low business diversification The business diversification of the GCC banks remains relatively poor. ‘Plain vanilla’ credit products and services constitute the bulk of the region’s banking activities, with particular focus on short-term loans. Investment activities are almost restricted to government bills and bonds, along with investment-grade securities in mostly international markets. Trading positions are generally limited. Stock markets in the GCC remain relatively small and underdeveloped, though there seems to be an increasing tendency towards investing in GCC stock markets as well; while the bond markets consist almost exclusively of government paper. Activities such as sophisticated structured financing, advisory, asset and fund management, fiduciary and custody services are at a nascent stage, and do not contribute significantly to profits, which remain highly reliant on interest margins. Top-tier banks are now placing particular emphasis on the development of domestic asset management competencies. With economic diversification, modernization and liberalization, banks are under pressure to respond to more sophisticated client needs. As a result, some banks are developing aggressive programs to widen their product range. This is reflected in an increasing tendency for the banks to offer more fee-rich products, to reduce their reliance on interest margins. Such initiatives are made easier by new communications and upgraded IT networks. Internet

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banking has reached a high level of use in the GCC, compared with other emerging markets. Great strides have been made in recent times in the breadth and sophistication of the GCC banks’ services, including diversification in products aimed at addressing different customer segments – corporate lending, project financing, and the relatively new retail banking segment. iii. Constrained by relatively small size The GCC banks are characterized by their relatively small size by international standards. While the balance sheet sizes of most banks in the region have grown in recent years, reflecting their business growth, they are still small compared to their Western counterparts. As a result, banking systems in the GCC remain fragmented. GCC banks are, therefore, primarily domestic players. Their international business is concentrated in trade finance, intra-regional money market placements, and government and investment-grade corporate bonds in the US and Europe. The lower exposures abroad have also been exacerbated in recent years by the growing business at home. The foreign assets as a proportion of total assets have generally trended down for the GCC as a whole (see Chart later in this section), though Kuwait, Oman and Qatar are exceptions to this general trend. Efforts in the GCC to create a fully integrated regional banking market have not been successful so far, particularly for retail credit and funding. Legal barriers to entry and family ownership are certainly the main causes of the very slow emergence of a regional playing field. Most banking activities remain domestic in nature, except for large government-related infrastructure, power and water projects. But most of the GCC banks are excluded from the financing of such big-ticket deals, either because they are too small, or because of their limited international franchise and narrow commercial networks. As a result, major international banks dominate project finance and syndication business, with only Arab Banking Corporation (ABC) and Gulf International Bank (GIB), the two off-shore banking units in Bahrain, reportedly having a significant presence in this segment. Also, the banks in Saudi Arabia benefit from their larger and more diversified domestic market and, as such, face less business concentration risks than do their neighboring peers. iv. High concentration Banking businesses in the six GCC countries are concentrated locally. The single notable exception to this trend has been the asset concentration profile of banks in Bahrain, thanks to the many Offshore Banking Units (OBUs) operating from that country. These OBUs carry on all banking activities with non-residents, mostly in foreign currency. They do not deal in any way with residents of Bahrain, other than the Government of Bahrain and its agencies, and with licensed banks. The aggregate foreign assets of banks in the six GCC countries, while growing at a CAGR of 4.9% during 2001-’04, have generally trended down as a proportion of the total assets of the banks during the period, indicating a larger concentration of their business in their respective geographies. This could also have been a result of the resurgence in all the GCC economies during the said period.

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Chart 1-1: GCC Banks - Concentration of Assets

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Foreign Assests/Total Assets (%)

2001

2002
Bahrain Qatar GCC Average

Year
Kuwait Saudi Arabia

2003 Oman UAE

2004

Source: Global Research

Besides, a limited number of players dominate each banking system, particularly in the retail field, where market shares remain stable. Consequently, oligopolistic behavior tends to appear, with non-price competition prevailing over price competition. In Oman, for example, the interest rates charged to retail customers are close to the maximum authorized by the Central Bank of Oman, showing that competition mainly centers on the quality of supply, collateral requirements, and general marketing and commercial strengths. In the other five GCC banking systems, yields on retail lending are within the 6-8% range on average, and are slowly trending downward, showing more the effect of a low interest rate environment, than more intense price competition. The most price-competitive market is undoubtedly that of the UAE, which is overbanked, with 47 financial institutions serving a population of about 4.3 million inhabitants. v. High capitalization As far as capitalization is concerned, the GCC banks usually keep high capital bases as a cushion to absorb unexpected losses. The median capital adequacy ratio (CAR) for the GCC banks was estimated to be 16.5% in 2004. Banks in Oman and Qatar had a higher CAR. It could indeed be necessary for the GCC banks to maintain such high levels of capital, given the uncertain economic and geopolitical environment. Over the years, the GCC banks have distributed a large share of their profits to shareholders. This has not been detrimental to the banks so far, as their financial performance has been satisfactory. In the medium-term too, this may not pose much of a problem, with the banking sector expected to turn in consistently robust financial performance on the back of improving spreads and profitability. vi. High profitability The GCC banks have shown consistently high financial performance in the past decade. They achieved an average return on assets of about 1.5%-2% during this period, which compares favorably with international standards. This provides the banks the cushion to ward off financial crises.

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Global Research - GCC

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The most profitable banks are those in Saudi Arabia, Kuwait, and UAE. The Return on Average Assets (RoAA) of Saudi banks in 2004 ranged between 1.9% and 4.1%, while that of Kuwaiti banks ranged between 1.4% and 3.3%, while for the UAE banks, it ranged between 1.1% and 4.2%. The GCC average RoAA in 2004 was 2.6%. Strong profit generation has resulted from high margins, low cost of funds and labor, and the absence of income tax. Besides, pricing on deposits is often fixed or adjusted less rapidly than on the asset side, so interest margins are closely correlated to trends in interest rates. While GCC countries remain small, outward-oriented economies still heavily reliant on oil and gas, contagion effects in the aftermath of a global or regional recession have not shaken banks to pose a threat to their respective economies. The notable exception to this stability in performance is Kuwait, which was hard hit by the Gulf War in 1990-1991.
Chart 1-2: GCC Banks - Profitability

3.5% 3.0% 2.5%
ROAA (%)

2.0% 1.5% 1.0% 0.5% 0.0% 2001
Bahrain Qatar Gcc Average

2002

Year
Kuwait Saudi Arabia

2003
Oman UAE

2004

Source: Global Research

vii. Improving asset quality Asset quality has improved in the recent years. Non-performing loans for banks across GCC have trended down in the last three years – more than halving from 7.9% of gross loans in 2001 to 3.5% of gross loans in 2004. While the NPLs as a proportion of gross loans remain the highest for Oman, the ratio has been the lowest for Saudi Arabian banks. However, the NPLs/gross loans ratio saw the steepest fall in the case of banks in UAE during 2004 – from 9.4% in 2003 to 3.5% in 2004 (based on the figures available for seven of the 12 UAE banks covered in this Report). Improving management of credit risk, limited appetite for the most risky sectors and products, satisfactory economic environment, and high liquidity of recent months have been at the root of this positive trend. Improving diversification of banking business has also contributed to the decline in non-performing loans.

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Chart 1-3: GCC Banks - Asset Quality
18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2001 Bahrain Qatar GCC Average
Source: Global Research

NPLs/Gross Loans (%)

2002

Year Kuwait Saudi Arabi

2003 Oman UAE

2004

viii. Strong funding profile The GCC banks have traditionally been characterized by strong funding profiles. The largest banks are net placers of funds in the international markets. Significant differences exist among the six countries, however. The main source of funding so far has been customers’ deposits. Customers’ deposits have traditionally constituted a high proportion of the total liabilities of banks. Customers’ deposits constituted about 80% of the total deposits and 60% of the total liabilities in Kuwait in 2004, while these figures were 87% and 75% respectively for Saudi Arabia, and 88% and 71% respectively for UAE. The highly stable customer deposits have meant steady deposit-base and low cost of funds for the banks. But this is set to change. The banks’ lending portfolios are experiencing a gradual increase in maturity following the rapid expansion of consumer loans accelerating the need for longer-term funds. In addition, large infrastructure projects pertaining to utilities development, triggered by demographic trends, and enhanced economic reforms toward more liberalization have fueled demand for longterm project finance. As a result of high credit growth, GCC banks’ funding is gradually shifting away from a focus on customers’ deposits. Alternative funding is developing through certificates of deposits, syndication, and even international bond issues. It is worth noting that the $450 million three-year Eurobond issue of National Bank of Kuwait in early 2002 was the first bond issue for a GCC onshore bank. The NBK bond issue has set an important benchmark, which other banks in the region could be following. Recent years have seen more such issues. Some of the long-term bond offerings, completed in the recent past as well as those proposed in 2005, are as under: Table 1-1 : Long-Term Bond Offerings by GCC Banks
Gulf Bank Mashreqbank Bank Muscat Emirates Bank Mashreqbank Saudi British Bank Saudi Hollandi Bank Source: Global Research.

Bank

Country

Kuwait UAE Oman UAE UAE Saudi Arabia Saudi Arabia

Type of Offering
Subordinated Loan EMTNs EMTNs FRNs EMTNs FRBs FRNs

Year
2004 2004 2004 2005 2005 2005 2005

Amount in $mn
150 300 250 750 325 650 187

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ix. High proportion of non-interest bearing deposits The GCC banks have a key advantage in funding, that is, access to a large amount of noninterest-bearing deposits (NIBs). The main driving force behind the large amounts of NIBs, seems to be the religious tenets in Islam. In Islam, receiving interest on a deposit is considered unlawful and many customers do not accept any remuneration on their current accounts. Consequently, the proportion of NIBs in total deposits has been substantial. For example, at the end of 2004, NIBs have been estimated to represent about 35% of total customer deposits in Oman, and about 50% in Saudi Arabia. For all six GCC countries, the proportion of NIBs in customer deposits has been estimated at 35-40% at the end of 2004. x. Healthy liquidity profile The GCC banks have traditionally seen a healthy level of liquidity, partially as a result of the boom in oil prices in the 1970s, as well as a low level of leverage. Thus, the region’s banks never had to compete fiercely to attract customer deposits. Another characteristic is the high stability of these deposits, despite periodic geopolitical pressures and recurrent episodes of strife in the region. xi. Unrealized potential of corporate banking Competition in corporate banking in GCC has been fierce for decades. But it has been a competitive, cyclical and narrow business line in the region. The GCC banks have been involved in corporate banking far longer than in retail banking, the latter being only about a decade old. Consequently, the GCC banks’ loan portfolios are still dominated by corporate and public sector loans. While large international players have always been active in the region for financing large corporations and projects, they have been far less involved in the mass retail market, because of the costs, risks, and limitations of building up a large physical presence. With the noticeable exception of Saudi Arabia, GCC corporate banking markets remain narrow, and attractive new deals are scarce. In Kuwait, for example, new good-quality corporate loans have been limited in the recent past, at least up to the end of the war in Iraq. Since then, improved business environment has benefited Kuwaiti banks, with the bulk of supply to the Iraqi market transiting through Kuwait and increasing momentum in Kuwaiti project financing. More systematic use of market segmentation is another major feature of corporate banking in the GCC countries. The GCC banks have tended to specialize in specific market segments. Since the mid-1990s, traditional segmentation has tended to distinguish between SMEs, midmarket firms, and large corporations. The latter segment comprises multinational companies, government-related or family conglomerates, and public sector enterprises in strategic sectors such as hydrocarbons, petrochemicals, and power and water. Despite several deterrents, there are good opportunities to provide far wider range of corporate banking products and to develop the small and midsize enterprise (SME) segment business. Major GCC banks are indeed moving towards a comprehensive corporate relationship management business model from the credit-focused approach followed so far.

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Regulatory limits and size drastically restrict the ability of the region’s banks to take large exposures. The GCC banks also face concentration risks in a limited number of sectors. With hydrocarbon sectors flush with liquidity, lending is mostly concentrated on private sector corporate clients – in the real estate and construction sectors, in particular. As a result, any signal of fragility in one key industrial sector has tended to have a severe impact on banks’ asset quality and ultimately on their creditworthiness. Data are hard to come by on the respective levels of corporate and retail NPLs. But as retail sticky loans are low (estimated at not more than 2-4% in all six GCC countries), it would seem that, given the estimated average NPL ratio of 3.5% for GCC in 2004, the corporate loan portfolio is significantly riskier, with the consolidated corporate NPL ratio estimated to be close to 10%, pushed up by the high level of delinquencies in the SME loan book. In their corporate banking business, most GCC banks suffer from a widening of maturity mismatches between funding and lending. One key trend in the corporate loan portfolios is the lengthening of their maturity profiles. The changing structure of the GCC economies toward larger, more complex, and more integrated projects (for example, independent water and power projects, or gas exploration, exploitation, and transportation projects) provides incentives to accept longer tenors. But, access to long-tenor funding sources has been limited. Over-reliance on retail, corporate, and government deposits, which are short-term by nature, has led to widening gap between the average duration of assets and deposit-dominated funding structures. This has led to awareness on the banks’ part of the necessity to raise longer-term funds to be able to meet the longer-maturity profiles of the loan book. xii. Retail banking coming into its own The GCC commercial banks have been witnessing a major evolution of their business models. While 20 years ago they were mainly serving large corporates related to the oil sector, as well as a limited number of high-net-worth individuals, they now show a much wider scope of banking activities. The wider access of banks to the retail-banking segment over the last 10 years has largely contributed to this evolution toward universal banking in the GCC. Banks in the GCC have benefited from the shift to retail banking on many fronts. Retail banking has been a profitable means of revenue diversification out of the more risky commercial banking, given the limited amount of risks it carries. It has also been a major stabilizer for banks’ bottom lines through the business cycles, thus placing the GCC banks in a position to become more resilient to internal and external shocks. Simultaneously, the development of the retail franchise turned out to be a strong lever for capturing cheap deposits with limited efforts. To cope with this, banks in the region have made heavy investments in conventional and electronic delivery channels, as well as in risk management systems and marketing know-how. The main reasons for the booming retail banking are the demographic characteristics of the region and the population’s social habits. A young and fast-increasing population at an early stage of its life cycle naturally fuels demand for credits, all the more so as a very high proportion of young nationals are encouraged to find jobs in the public sector, as protected civil servants, with relatively high wages. Early marriage leads to a strong demand for homes, and, consequently, for consumer and housing loans. The GCC banks, however, mainly deal with employed nationals and white-collar expatriates currently. Banks, especially in smaller

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Nascent stage of capital markets A limited role played by the capital markets. The situation is almost similar in the rest of the GCC countries as well.000 still contribute more than two-thirds of the GCC banks’ profits in the retail segment. In addition. however. These products are expected to compete with those offered by the three existing listed Islamic banks in UAE – Abu Dhabi Islamic Bank. Similarly. This is particularly true in Saudi Arabia. As a result.and equity-like features in the same instrument. whereas the Savings & Credit Bank and Kuwait Real Estate Bank hold a quasi monopoly on housing loans. new capital market laws are 8 GCC Banking Sector May 2005 .Global Research . Dubai Islamic Bank and Sharjah Islamic Bank. as a public service. the retail-banking business in GCC is slowly coming into its own. constrains the banks’ ability to expand at a time when they must raise additional funds to meet their growing financing needs and increasing competition. More government companies are either being sold to the public or listed as possible candidates for privatization. Islamic banks have access to larger volumes of NIBs relative to their asset size. where conventional banks target aggressively Sharia-compliant deposits through Islamic windows that compete with the only Islamic bank in the kingdom – Al Rajhi Bank. The coming days could. These banks have a clear competitive advantage over their conventional competitors. because of the difficulties that banks have in initiating court proceedings and in foreclosing on residential real estate collateral. While conventional banks attract all kinds of depositors. very few companies have resorted to bond issues. There is a clear preference by companies for bank bilateral or syndicated borrowing. many conventional banks have developed Sharia-compliant un-remunerated deposits in recent years. mortgage loans supplied by private-sector banks are crowded out by state-owned specialized credit institutions. which are still at early stages of development. It is estimated that customers with financial assets of more than $25. This is a result of the lack of disintermediation in the region. In addition. and the narrowness of regional capital markets. xiii. xiv. xv. This leads to very high spreads for the Islamic banks. Many family businesses are seeking listings on region’s stock exchanges. Mortgage lending in early stages Mortgage credit is far less developed than other types of retail loans in GCC banks. which exhibits a combination of debt. see changes in the scenario. Banks have so far met the bulk of the financing needs of companies active in the GCC region. private-sector commercial banks grant only supplemental lending for housing. with capital markets in the region becoming deeper and more efficient. than do the conventional banks. In Kuwait for example. either through a separate Islamic window or a subsidiary. highly-profitable banking product. One such instrument is the ‘profit-sharing investment account’ (PSIA). The Islamic banks have also given rise to hybrid funding instruments. tend to direct their lending toward the profitable upper-tier category. either on the domestic or international debt markets. Even though it is yet to become mass-based. Islamic banks’ customers are more sensitive to the Islamic Sharia principles. Islamic banking is turning into a fast-developing. which provide nationals with interest-free financing for housing purposes.GCC Global Investment House GCC countries. in UAE too most banks have either already launched or have plans in the near-term to launch Islamic banking products. Indeed. Islamic banking Islamic banks follow the Sharia principles. As a consequence.

which forced 18 regional banks to restructure its $300mn of debt. Poor disclosure levels The GCC banking sector suffers from low levels of disclosures. there was the case of Solo Industries. This has predominantly been on the back of high oil prices. The banking regulators are only too aware of these systemic flaws and their repercussions on the banking sector as a whole. Qatar and UAE. But the banking systems have lacked swift and timely measures to avoid solvency problems.and disclosure-related issues. Banks are not used to sharing information on their largest debtors. the GCC governments have both injected capital and replaced doubtful loans with government bonds. Then there was the case of the default of Ahmed Mannai Corporation in Qatar. Big-ticket projects that have either been announced or are being executed benefit the banks in the region tremendously. Supervisors have been often aware of large credit concentrations. Benefit of high growth trajectory of GCC countries All the six GCC countries have seen a high trajectory growth over the last two years. either in each domestic market. including Bahrain. and Islamic banking accounting principles and practices lack regional standardization. or on a regional basis. The GCC banks need to address some accounting. In 2002. xvii. as these offer the banks sizeable and profitable project financing avenues. which makes comparability with traditional banks difficult. The collapse of the ARTG group caused significant losses in Oman. There have been examples of such support being extended in most of the GCC countries. Budget surpluses and growing populations have made the respective governments go for higher spending on infrastructure and utility projects. Besides the central banks offering liquidity support in times of need.GCC Global Investment House being implemented and existing laws strengthened to allow domestic companies of large and medium size to raise additional funds through tradable debt. The banking secrecy has been a potential breeding ground for frauds or large defaults. reflecting the dominant role of the governments in the GCC economies. shareholding structures are often undisclosed. May 2005 GCC Banking Sector 9 . which allegedly raised $350mn by fraudulent means from banks operating in the UAE. xvi. This has been more so where the governments hold a major shareholding in the bank. Strong systemic support by governments Government support for banks is strong. xviii. Kuwait.Global Research . Similarly. details on impaired assets and provisioning policies remain limited.

liquidity and capital adequacy measure. The case in point is that of Al Rajhi Banking & Investment Corp which has successfully leveraged retail 10 GCC Banking Sector May 2005 . level of competition and labour costs have a significant effect on the overall level of profits enjoyed by the banking sector. Though the Islamic financial institutions are spread across the world. Country UAE UAE Kuwait Bahrain Bahrain Qatar Saudi Arabia Qatar UAE Year of Incorporation 1975 1975 1977 1979 1983 1983 1985 1990 1997 Performance of listed Islamic banks Islamic financial institutions (IFIs) in the Gulf Cooperation Council (GCC) countries are posting spectacular growth. This can be illustrated from the fact that as with the conventional banks. including the Islamic banks. The table below shows some of the major listed commercial Islamic banks in the GCC region.Global Research . The emergence of Islamic banking was a result of a revival of interest to develop an Islamic economic system as well as the increasing demand from Muslims worldwide for products and modes of investment that are in compliance with Shariah principles. Table 2-1: Listed Islamic Banks in the GCC region Name of the Institution Dubai Islamic Bank Sharjah Islamic Bank Kuwait Finance House Bahrain Islamic Bank Bahraini Saudi Bank Qatar Islamic Bank Al Rajhi Banking & Investment Corp Qatar International Islamic Bank Abu Dhabi Islamic Bank Source: Zawya. they are primarily concentrated in the Middle East region.8bn. Islamic banks that focus on retail customers perform better than those focusing on corporate banking. Deposits with IFIs have more than doubled in the five-year period from 1998 to 2003 while the net profit also more than doubled during the same period.GCC Global Investment House 2. According to the World Islamic Banking Competitiveness Report (WIBC) most of the Islamic banks are growing faster than their respective conventional banking peers. In addition. In our report. There are several factors that have a significant impact on the bank’s financial performance. Average wealth levels. The pioneering establishment of Islamic banks had been the catalyst for growth and provided the foundation for the development of the Islamic financial services industry as a whole. the total asset size of these banks was estimated at US$48. we are primarily covering listed commercial Islamic banks in the GCC region. Islamic banking is often subject to variety of questions and perceptions on profitability. In 2004.3bn. the business model of the banks also made huge differences to their revenues. Islamic Banks in GCC Islamic banks today represent the majority of Islamic financial institutions. it would be interesting to compare the performance of the listed Islamic banks in the GCC region. As of December 2004. others have under-performed as compared to their conventional peers. Company Websites. which represented a growth of about 45% over the previous year. which are spread worldwide.com. the aggregate net profit of these listed banks was at US$1. Comparing the returns on assets of Islamic retail banks to leading conventional banks in their markets show that while some have strong profitability. As Islamic banks are different from conventional banks.

Qatar Islamic Bank (QIB) and Kuwait Finance House (KFH) enjoy superior returns on their equity.71% QIB 28. the higher total operating expense to operating revenue ratio implies that the Islamic banks still have a lot to achieve in terms of operating efficiencies.40% 2.30% 3.9%.10% 32. At the same time.94% 2. QIB has the lowest operating expenses as a percentage of total operating income at 27.90% 45.1% followed by Qatar Islamic Bank with 4.80% 56. Asset quality in the recent past has been a cause of concern for some of the Islamic banks in the region.13% 43. One of the problems that is faced is that most of the banks are wary of giving information about the asset quality which makes it difficult to analyze bank’s assets and NonPerforming Loans (NPL) structure. Qatar Islamic Bank and Al Rajhi Bank can be seen in their cost structure as they have a lower operating cost to operating revenue ratios.9% - DIB 21.34% 4.40% 1.GCC Global Investment House banking potential as it has one of the largest branch and ATM networks in Saudi Arabia.20% 18. most of the countries have brought out amendments in their Islamic banking regulations so that the Islamic banking industry is better supervised and regulated. Most of the Islamic banks are trying to contain this ratio by generating incremental revenues through e-initiatives such as Internet Banking. It has been observed that. Al-Rajhi is at the forefront in this regard as it has net spread of 6.80% AlRajhi 37.2% 1. The silver lining is that it directly shows which area to improve in order to improve their profitability.3% - BSB 16.10% 14.20% 4.4%). Table 2-2: Comparative Ratios of Islamic Banks in GCC (as of FY2004) BIsB ROAE ROAA Net Spread Net Interest Margin Cost to Operating Income Capital Adequacy Ratio Source: Global Research 8.11% 55.2% followed by KFH with 27.3% - KFH 24.Global Research .2% followed by Qatar Islamic Bank (28.60% 27.68% 27.4% 2.60% 2. This makes it easier for banks to shift the customers from branch banking to ATM-banking or e-banking. the number indicates that some of the banks May 2005 GCC Banking Sector 11 . most of the Islamic banks have higher spread and net interest margin as compared to their Islamic banking counterparts in the region.10% 2.48% and 4.10% 3. The profitability of Islamic banks depends significantly on how efficiently they manage their resources. The other factor which bodes well for the Islamic banks was that Islamic banks have often enjoyed protection from competition and have traditionally enjoyed monopoly in their respective regions.8%) and Qatar International Islamic Bank (22.70% 2.80% 1.20% 29.5% and net interest margin of 5.50% 44. In some countries. However. Mobile Banking etc.10% 6. Qatar Islamic Bank was highly efficient in utilizing its assets as it had the Return on Average Assets of 4.80% 4. But now.01% 2.00% - QIIB 22.89% 3. Al-Rajhi Bank had the highest Return on Average Equity of 37.80% Here it should be noted that banks which have a significant retail customer base such as Al Rajhi Banking Corporation.00% 2.34% followed by Al-Rajhi with 4. Many Islamic banks are now resorting to implement cost-saving measures and are reeling out new cost-cutting initiatives to improve their bottom-lines. For most of the banks.20% - SIB 11.70% 2.48% 4.0% 1. The customers perception about the Islamic banking products and their appetite for returns on Islamic banking products also makes serious difference to the Islamic banks. One of the major reasons of the high profitability of some of the banks such as Kuwait Finance House.68% respectively. Both the banks in Bahrain have much higher cost to operating income in FY2004.30% 2.10%.00% 2.50% 5.90% 1.71% 60.52% 1.10% - ADIB 8. they enjoy regulatory advantages such as higher lending limits.48% 2.

834 6.002) 5.319 81.203.895.154 68.2% Al-Rajhi 20.337 (491. will survive the onslaught of competition.A.008 167. This is likely to call for increased cushion of safety by the Islamic banks.8% on account of its low level of NPLs coupled with high provisioning.Global Research .GCC Global Investment House have very high NPLs such as Bahraini Saudi Bank and Qatar Islamic Bank.5% BSB 340.039.761. which have enjoyed monopoly or duopoly positions in their markets.A.292) 17.185) 6.994. The older and established players such as Al Rajhi Banking & Investment Corp and Kuwait Finance House have lower equity to total assets ratios although they are still in the comfort zone. It should be noted that Islamic banks have very high capital adequacy ratios which are being improved further by way of increase in their capital.7% 76.145) 3.109 253. However.165 22. Though some of the banks have remained laggards in this respect.245 10.363) 1. - DIB 8. Islamic banks.326.335 N. the good point is that banks have been maintaining adequate provisions in order to counter the problem of high NPLs.262 (20.4% 333.8% Source: Global Research Islamic banks have traditionally maintained adequate coverage ratios. Islamic banks need to significantly change their strategies to make it more competitive.117 N.648 847.1% 91.425 (108.879) 710. 12 GCC Banking Sector May 2005 . - ADIB 3.681 (62. as banks increase their operations and increase in size their equity to total asset gradually declines as the growth in equity is not able to match the pace of growth in assets. The capital adequacy of the banks have gained increased attention through the initiatives taken by Central banks and the Basel Committee in standardizing the norms.841 N.547.401 (846. branding and treasury operations. chiefly corporate governance.044 (20.530.868 6. However. Non-performing loans of the Al-Rajhi Bank was just 1. Islamic banks need to improve their capabilities across multiple dimensions. the banks which will use its capital efficiently.802 3. The BIS capital adequacy ratio proposed by the Basle Committee is 8% although some of the regulatory authorities have kept this ratio more stringent at 12%. The corporate sector in the region is also going in for major capacity expansions to take advantage of the tremendous opportunities available in the region. higher than those of their conventional peers. this has been partly due to favourable market factors and regulatory advantages.416) 136.719 244.4% of the gross loans in 2004.450.747 5. Al Rajhi Bank has the highest coverage ratio of 333.194 N. - QIIB 264. going forward. Table 2-3: Asset Quality of Islamic Banks in GCC (FY 2004) (Amt in US$ 000) Total Assets Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL BIsB 677. As it increases its lending.040.034 2. However. Abu Dhabi Islamic bank has a very low provisioning level as it is a new entrant in the market.099 (49. it will have to increase its provisioning.4% 64.379 (197.2% 53. correspondent banks and regulatory authorities. Islamic banks have kept a high equity to total assets ratio in order to provide comfort to their customers.365) 452.A. We expect the NPL levels to go down in future as the Islamic banks are concentrating their efforts towards retail banking especially consumer loans and credit cards which have relatively lower level of delinquencies. - SIB 939.286 731. may not find the going easy as the competitive landscape is becoming more intense in all countries in the GCC region. etc.258) 797.156.797.610 (5.273 18. While Islamic Financial Institutions (IFIs) have enjoyed above-average growth rates in the recent past. product innovation.218.813 1.701 457.6% QIB 2.060. We expect the provisions to increase as the banks increase their lending activity to take advantage of the increased demand for consumer finance.A.5 1.111. Going forward.357.910 3.9% KFH 11.

Saudi Arabia Arab Bank . Central Bank of UAE had declared in 2003 that it was ready to allow the operations of more foreign banks on a reciprocal basis. Role of Foreign Banks Foreign ownership is more limited in the GCC banking sector. Saudi Arabia ABN Amro Bank Source: Banks’ Annual Reports. compared to that in other emerging markets. which also benefits from managers seconded by the international partner. Dominant government and family ownership constitute a degree of protection against the increasing competition from foreign banks seeking to enter these markets. particularly to foreign banks. Saudi Arabia HSBC Holding BV Bank Al Jazira.Egypt Bank Melli . Saudi Arabia Banque du Caire . HSBC and National Bank of Abu Dhabi. For instance.Iran Saudi Investment Bank. The legal framework brings additional protection to these banking systems. international banks have been operating freely but Saudi Arabia and Kuwait have recently started receiving international banks with open arms. Foreign banks have been operating in the GCC region with their regional counterparts for a number of years. products and information systems of the partner institution are installed in the Saudi bank. Saudi Arabia JP Morgan Chase Mizuho Corporate Bank Saudi Hollandi Bank. Saudi Arabia Bank Saudi British Bank.. no foreign bank has a majority ownership but several major domestic players.GCC Global Investment House 3. as a general trend toward globalization. they do not represent a material share of the domestic markets. till recently foreign banks were not allowed in Kuwait.Jordan SAMBA Financial Group.g. etc. the Saudi Arabian Monetary Agency (SAMA) has issued operating licenses to the Emirates Bank Group and National Bank of Kuwait. Saudi Arabia National Bank of Pakistan Arab National Bank. thereby limiting competition. We believe that Saudi Arabia’s membership of the WTO in the future might persuade it to bring down the barriers to foreign competition. In the recent past Saudi Arabia has also liberalized the banking sector and issued licenses to a number of international banks such as HSBC. % Equity Stake 20% 40% 31% 40% 6% 40% 2% 1% 8% 3% 40% May 2005 GCC Banking Sector 13 . UAE and Qatar. Qatar Foreign Bank National Bank of Kuwait . Deutsche Bank. These domestic banks often enter into management agreements whereby the banking policies. While several international banks are active in this region.Global Research . The limited competition and presence of foreign banks is likely to change gradually. such as Saudi Hollandi Bank (SHB). Similarly. In Bahrain. It also is considering allowing more branches to foreign banks operating currently in the UAE.Kuwait Ahli United Bank .Bahrain CALYON Corporate & Investment Banque Saudi Fransi. Saudi British Bank (SBB). and Al Bank Al Saudi Al Fransi (BSF) have active minority foreign shareholders. with the notable exception of Saudi Arabia. especially in compliance of World Trade Organization (WTO) agreements entered into by the GCC countries (except Saudi Arabia). The UAE has 28 foreign banks but no new licenses have been issued to a foreign bank for 20 years now. GCC central banks have been slow in issuing new banking licenses. Kuwait has also liberalized its banking system and issued license to three foreign banks. Table 3-1 : Foreign Banks’ Shareholding in GCC Banks Name of the Bank International Bank of Qatar. Qatar Ahli Bank. Oman. while in Saudi Arabia. In addition. BNP Paribas. though. e.

insurance and re-insurance and back-office operations. opened its representative office in Bahrain in 2004 to cater to the regional markets. we believe that banking sector in the region is on the threshold of a new era. The growth opportunities are abound in the region for players who are willing and ready to meet the challenges. mortgages. investors. The Bank of China. Thus. and Qatar are developing dedicated financial districts and environments to foster banking and finance. Bahrain. BNP Paribas.GCC Global Investment House Banking sector in the region has witnessed tremendous developments in recent past. bancassurance. transparent and better governed and regulated. Dubai. and banking and finance professionals from all over the world with a stake in the GCC market. upper-mass banking for the growing middle class. which was named as the largest emerging market bank by Euromoney. Broadly speaking. Bahrain Financial Harbour’s first phase is moving at full speed.Global Research . Some of the international banks which are active in GCC project related and asset-backed finance market are HSBC. Islamic finance. In addition to this. Royal Bank of Scotland is focusing on lucrative projects in Qatar. Standard Chartered Bank and Calyon. At the same time. banks such as HSBC and Deutsche Bank are in the process of setting up their presence in Saudi Arabia. That’s good news for banking customers. where foreign banks are likely to give tough time to local banks. this is good news for the GCC economic growth too. the number of international investment banks interested in securing GCC mandates is growing. and Islamic banking. Its scope of operations would include asset management. etc. The potential business segments lure many foreign banks to enter the banking industry in the region. Some of the areas ready to be tapped are private banking. 14 GCC Banking Sector May 2005 . Dubai International Finance Centre has been established to be the regional financial hub. Societe Generale. regional financial exchange services. the GCC banking sector is expected to become more liberalised. small to medium enterprise (SME) banking. Seeing how closely the region’s banks are connected to the economies of the GCC countries. to be completed by October 2005.

AUB was also instrumental in taking equal stake in Future Bank along with two top Iranian banks namely Bank Melli Iran and Bank Saderat Iran. The competition in the banking industry remains extremely intense and thus introduction of value added products become necessary. Similarly. most of the banks in the region are looking forward to increase their non-interest income as this May 2005 GCC Banking Sector 15 . Thrust on retail banking Retail banking has become the buzzword in the Middle East banking sphere. Qatar National Bank (QNB) acquired London based wealth management firm Ansbacher Holdings Limited. Some are looking at organic growth while others believe in inorganic growth. With the booming economy and entry of foreign banks. This thrust on retail banking is justifiable considering the fact that margins for commercial and corporate banking have been compressed in recent years due to severe competition in the banking sector from both domestic as well as international banks. banks such as National Bank of Kuwait and National Bank of Bahrain are looking to expand their operations in Saudi markets while National Bank of Abu Dhabi has got license to operate in Kuwait. Rising oil prices.GCC Global Investment House 4. After acquiring 48% in Kuwait based Bank of Kuwait and Middle East. we are going to witness lot more activities in the banking sector in the region in future. and growing business confidence in the region kept the region’s banking industry on a strong growth trajectory. Kuwait Finance House has expanded its full-fledged banking operations in Bahrain under KFH (Bahrain) and it also owns 62% in Bahrain-based Kuwait Turkish Evkaf Finance House. which in December 2004 opened its first Mideast office at the Dubai International Finance Centre (DIFC). The booming economy has aroused unprecedented interest from across the world in recent years and encouraged banks to expand their products and service offerings. Bank Muscat stared its operation in Bahrain by establishing Bank Muscat International. Emirates Bank opened its first branch in Saudi Arabia and will explore the possibility of expanding its operations in other GCC countries in the near future. As mentioned earlier. banks in region are trying to become more competitive. acquired 40% stake in Qatar based Ahli Bank of Qatar. Bahrain based Ahli United Bank.Global Research . the markets of these countries still have tremendous potential in terms of services offered. This will also help the bank to derisk their business model by diversifying the sources of revenue. The thrust on retail segment is also necessary to increase their interest income as well as to increase their fee based income. Apart from this. Competitive Strategies & Other Developments Expansionary moves gaining ground The banking sector is one of the most happening sector in the GCC region. KFH has also got a license to start Islamic banking operations in Malaysia. Most banks in the GCC region have identified the retail banking segment as a key to improve margins and enhance fees and commissions income. We believe that. strong economic fundamentals. The new bank is established to enable Bank Muscat to undertake expansion in the Middle East and North Africa (MENA) region through a base in Bahrain. The examples are abound in this respect. Despite the diversity of the banking units in the GCC countries. In 2004. Kuwait has opened its banking sector to foreign banks while UAE has also announced its intention to issue licenses to international banks.

there were just under three million regular online banking users in the Middle East. SMS services made banking more convenient for the banking customers in the region. In another development. are more active in this segment. the Middle East is predicted to account for US$1. 16 GCC Banking Sector May 2005 . Ahli United Bank (AUB) is one that has taken the partnership route for its asset management business. For Kuwaiti banks. However. Private Banking not too behind as well The entire GCC region has a large number of High Networth Individuals (HNIs). This number has grown rapidly and online banking transactions have grown to represent around 19% of all banking transactions in the region. As per one estimate. Private banking has always been a lucrative business for the region’s banks and financial institutions as it has the potential to enhance banks bottomline tremendously. Thus there is intense competition from both regional as well as foreign banks to manage private wealth. In addition. regional banks have also become more active in the private banking. The past two years has seen a number of new players in the private banking sector.GCC Global Investment House source of income has generally been low as compared to the global standards. there are around 200. This should result in the banks efficiently and cost effectively handling the customers needs. UBS. foreign banks such as BNP Paribas. Technology Initiatives To strengthen and streamline their operations most of the banks in the region are in the process of implementing core banking solutions. At the same time foreign banks though they are able to provide most advanced may not be able to tap the market fully because of their lack of knowledge about the regional market. The vast market potential was behind Bahrain-based TAIB Bank’s decision to reposition itself from an investment bank to a fully-fledged private bank. The number of regional banks providing online services has increased rapidly since the past few years. Some banks are striving for middle path and have tried partnership route with international wealth management experts. going forward. targeting clients between US$3-US$15mn to invest.5trillion of the world’s private wealth. Citibank. To acquire more number of customers. Generally. some of the local banks that offer private banking may be too small to provide the complete range of products of private banking service. there is a large demand for these services. internet banking. from various investment products to brokerage and trust services. This offers excellent ground for banks to tap the market for private banking. banks are offering a number of innovative products and services.000 multi-millionaires in the GCC region. Since GCC has more affluent people.Global Research . Regional banks have a great opportunity to target the customers as they know the customers well and they also have good understanding of the local market dynamics. as well as more established players moving into wealth management business. E-statements. most of the banks in the region are expected to boost their non-interest income from retail side. TAIB aims to provide the complete range of wealth-management services. this ratio was around 37. HSBC etc.000 to 225. In the beginning of 2003. The bank has allied with Mellon Global Investments to offer private banking services to its clients. Qatar National Bank has acquired London based wealth management company called Ansbacher Holding. We believe that. Private banking is generally considered to be a low risk and high return business.5% of the total operating income while for banks in Bahrain it was around 41% in FY2004. By 2008. Foreign banks are more active in private banking because of their expertise in this segment.

Overall. other promising May 2005 GCC Banking Sector 17 .GCC Global Investment House Burgan Bank in Kuwait is at the forefront of providing these services with its Bee Bank brand. which was close to double the roughly US$8bn worth concluded in 2003. The UAE has its very own internet bank . In Kuwait. Bahrain Monetary Agency has issued anti-money laundering rules for capital markets. the first online internet banking service . Doha Bank launched a short message service (SMS) facility incorporating around 15 banking services including alerts in Arabic and English. Apart from petrochemical.meBANK . Most of the Governments in the GCC region took serious steps to curb these practices. This forces the banks to implement IT security systems in their operations. Dubai Islamic Bank launched the region’s first mobile banking service in Arabic with 36 features like account debit alert. As per one estimate.which has evolved into a fullservice convenience bank giving its bricks-and-mortar counterparts a run for their money with its unique strengths and aggressive marketing strategies. The petrochemical is the most promising sector in the coming years for deal flow. Regulating money laundering One of the major issues that affected the banking industry in the Gulf in recent years was that of money laundering. Saudi Arabia banned 24 investment firms operating in the kingdom without a license and offering very high interest rates. Most of the banks have upgraded their IT systems and implemented new core banking solution. Some of the banks have followed innovative approach in IT Security Systems. account balance and previous transaction information to allow users to manage their accounts via their mobile phones.Global Research . Saudi Arabian Monetary Agency. Going forward. As the technology is making matters easy for banks it exposes banks with certain risk also. It is widely believe that the region’s IT security market could be worth around US$500mn in the next three years. For example. Similarly. with a host of projects across the region looking for finance. UAE was hit by ATM fraud in 2003. There is a tremendous infrastructure boom in the region and the large banks are rightly placed to benefit from these opportunities. the tremendous volume creates enormous opportunities for lenders to the region. risk management has assumed critical importance and the market is currently seeing an influx of specialised services to cater to the security needs of the banking industry. Saudi Arabia is the biggest market followed by the UAE. adopted stringent rules to prevent money laundering. Citibank UAE launched internet kiosks at several branches in association with Emirates Internet & Multimedia to make its online services more easily accessible to its customers where they are. NBK has established a state-of-the-art call centre to serve its customers while Burgan Bank continued to offer other e-banking services to its clients. deals with a total value in excess of US$14bn were closed in 2004.was successfully implemented by National Bank of Oman. for example.NetB@nk . the Central Bank of UAE has also instituted a new supervisory policy to improve bank risk profile and fight money laundering. In Oman. Project financing opportunities – the boom area Banks in the GCC region have lot of opportunities by way of project financing deals. Habib Bank Zurich launched its highly secure web and WAP-based e-banking services. Dubai Bank installed biometric technology at its Tijori safety deposit vaults. For example.

Since the last few years many of the banks based in GCC region have become aggressive in increasing their revenue stream. 18 GCC Banking Sector May 2005 . Qatar National Bank and Ahli United bank were the most active cross border project lenders in recent times. Various local institutions have been working hard to build structural capabilities and are also entering into number of transactions. They are being lured by the opportunities in the region. have been joining mandated arranger groups on the GCC deals. International banks that had scaled down their presence in the region are returning vigorously. Government diversification plans and benign economic conditions are also accelerating downstream industrial projects. healthy economies and the track record of existing projects. Thus the volume of project finance required over the next year or two will be unprecedented. which indicates that the market is developing in such a way as to be able to fulfill the huge requirements of clients. water. Several positive trends have emerged during the past few years. At the same time. and port projects across the region. Important trend is that most of the banks. both regional and international. At the same time Kuwait based Kuwait Finance House and National Bank of Kuwait also ventured overseas. we have been witnessing that regional banks capacities and their appetite for cross border lending are growing rapidly. Banks in the GCC region have started deploying their balance sheets towards structured finance while banks such as National Bank of Abu Dhabi are stepping up such activities after a brief period of lull. Some of the other active banks in cross border project financing included Dubai Islamic Bank. Commercial Bank of Qatar and Mashreq Bank among others. many of which have been on the table for a considerable period.Global Research . power.GCC Global Investment House sector for banks are electricity.

The operating expenses per employee in the GCC averaged at around US$0. The operating income per employee of the banking sector in GCC in 2004 ranged from US$0.10) 0. number of employees in the wake of upcoming competition from foreign banks and also to utilize economies of scale.850 800 (256) 544 0.GCC Global Investment House 5. of Branches No. we expect the staff expenses to increase as the banks try to retain the staff from poaching by the competitors and also expand their staff strength in wake of expanding operations.23mn per employee as the Kuwaiti banks improved their efficiency through costcutting initiatives coupled with the marked improvement in their operating income.373 2. This is attributed to the increase in the staff costs as well as general and administration expenses as the banks increased their marketing efforts.09) 0.22 (0.841 2. of Employees Operating Income (Net of Provisions) Operating Expenses Operating Profit Operating Income Per Employee Operating Expense Per Employee Operating Profit Per Employee Kuwait # 203 6.416 539 (320) 210 0.23 Saudi Arabia 954 20.19 Oman 277 4. However.796 0.857 (2.221 (610) 1.14 78 2. especially to cater to the lucrative retail segment of the industry. They would also try to improve their operating expenses per employee so that they are on a better footing once the competition hots up further in the region. Kuwaiti banking sector reported the highest operating profit per employee of US$0.11) 0.12 (0.09) 0. banks in respective economies increased their branch network. added new branches and expanded their employee base.550 0.19 UAE Bahrain 330 12.783 0.29 (0. it is to be noted that one of the bank in Oman (NBO) had a very small operating profit which depressed the overall Omani sector’s operating profit per employee. interest and non-interest based income of respective banks in the banking sector.12 Source : Banks’ financial statements & Global Research * Only listed banks covered in this Report have been considered. increased liquidity in the banking system and improvement in both.060) 3. Financial Performance GCC banking sector showed improved performance on the back of strong macro-economic performance (thanks to high oil prices). Table 5-1:Comparison of Operating Performance of the GCC Banking Sector* (FY 2004) US$ mn No.121 482 (225) 256 0. and be more competitive regionally.28 (0. # For sector’s aggregate branch network we have excluded KREB as data for the bank are not available. However. May 2005 GCC Banking Sector 19 .08) 0.05 Qatar 101 2.32mn in Kuwait with the average being US$0.23 (0. Saudi Arabia stands out with the number of branches close to 1000 (for listed banks) which is understandable keeping in mind the sheer size of the economy and the geographic area the banking sector needs to cater to.09mn for the combined GCC banking sector which increased as compared to the previous years.07) 0.26mn for the entire banking sector in the GCC.32 (0. The banking sector penetration in the GCC increased as.Global Research .397 5.766 (984) 1.12mn in Oman to US$0. We expect the GCC banks to increase their branch network.

Saudi Arabia and UAE had the lowest NPLs to Gross Loan ratio in 2004 at 2.GCC Global Investment House GCC Banking Sector Credit Portfolio In 2004.975. again Saudi Arabian banking sector eclipsed the other with the net loans of US$75. The asset quality of banks in the region has improved considerably in the last 2 years.5% 121% Saudi Arabia 75.128 (1. However.296 539 7.9bn in 2004.2% and 2.9 14. Oman had a very high NPLs to Gross Loan ratio of 14. still much needs to be done if the banking sector in Oman has to bring its NPLs to Gross Loans ratio in line with its peers in the GCC region.7% 89.9bn.001 1. Asset quality of Omani banks has been a cause of concern which led to the restructuring of the balance sheets over the past few years.7% Bahrain 7. the average coverage ratio (PLLs-to-NPLs) was 126% with Saudi Arabia leading the pack with the average coverage ratio of 177% in 2004.028.574 1.038 (2.553) 52.9bn while the provision for loans losses amounted to US$8.443 2. A favorable economic environment have kept loan losses at low levels. In 2004.2 1.834 675 5.2% 177% Oman 8.9% Qatar 13. However.299. Rise in real estate values and better cash flow conditions for borrowers boosted prices of collateral that banks hold and reduced the percentage of non-performing loans to total loans in 2004. Non-Performing Loans (NPLs) to Gross Loans ratio for the combined GCC banking sector stood at 3.342 4. The total non-performing loans (NPLs) of the GCC sector combined amounted to US$6.1 1. NPLs and related ratios for UAE only for 8 banks for which data are available.8 2. this has definitely helped in reducing the systemic risk in the banking sector.7bn in 2004.5) 72.Global Research .2% in 2004.7% respectively. Table 5-2: Asset Quality of GCC Banking Sector* (FY 2004) (Amt in US$ mn) Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL Kuwait 35. increasing provisions have also kept pace with the increase in NPLs.399 (565) 12. thus bringing down the NPLs. 20 GCC Banking Sector May 2005 .7% 107.6% in 2004. Saudi Arabian banking industry had the lowest NPLs to Gross Loans ratio of 2. # NPLs of KFH is not available therefore we have excluded KFH while calculating these ratios.708.947. However. Bahrain and Qatar had an average coverage ratio in the comfortable range of 80%-90%.233. GCC listed banks had a net aggregate credit portfolio of US$185.7% in 2004. Despite the sheer size of the loan book.740 (444) 7.0% 82. GCC banks have been following a conservative policy regarding provisioning for loan losses.7% UAE 54. Banks in the GCC region have become increasingly prudent at improving the quality of their earnings and have raised provisions.408.0% 83.109.4% Source : Banks’ financial statements & Global Research * Only listed banks covered in this Report have been considered.037) 33.8) 7. A substantial effort on the part of banks and regulatory authorities has brought about a marked improvement for the sector in this respect. It is impressive to note that the top-2 countries in terms of the gross loan portfolio.7 (3.9 (1. Kuwait banking sector and UAE banking sector too had the coverage ratio of more than 100% in 2004 while Oman.

5% 31.8% Bahrain 13.GCC Global Investment House Comparative Indicators Loans to Deposits Ratio.0% 18.0% 2. However.4% 37.6% 1.2% 16.7% 57. May 2005 GCC Banking Sector 21 .. Customers’ deposits remained the main source of funding for the GCC banks.2% Qatar 20.2% UAE 17. Table 5-3: Comparative Financial Indicators of GCC Banking Sector* (FY2004) Kuwait Profitability Indicators Return on Average Equity Return on Average Assets Interest Exp / Interest Income Interest Income / Avg Int earning assets Interest Exp / Avg Int bearing liabilities Net Spread Net Interest Margin Non Interest Income / Operating Income Dividend Payout Ratio Efficiency Indicators Cost to Operating Income Staff Expenses / Operating Income Liquidity Indicators Net Loans / Customer Deposits & Deposits from FIs Customer Deposits / Total Deposits Capitalization Indicators Capital Adequacy Ratio Equity to Total Assets Equity to Gross Loans 20.9% 4.2% Saudi Arabia 26.3% 41. # For sector’s average CAR we have excluded ABK. Saudi Arabia and Qatar had the lowest loans to deposit ratio at 63% and 65% respectively which provide the banking sector in these countries with a very good opportunity to expand their lending operation and take advantage of the booming economy especially in the areas of high-margin retail lending.5% 90.7% 4.1% 34.0% 74.7% 25.5% 62.0% 18.6% 20.4% 45..0% 89. this ratio in some countries is also significantly affected by the regulatory statutes wherein the banks are dictated to maintain a cut-off rate for the loans to deposits ratio. Kuwait had the highest customer deposits to total deposits ratio of 95.3% 52.4% 24.5% 3.1% 6.7% 24.4% 16.9% 32.7% 35.2% 10.1% 92.0% 4. KFH and KREB as data for these banks are not available.2% 3.6% 25.7% 42.0% 43.7% 3.9% 63.1% 35.3% 4.6% 21.0% 59.6% 1.5% 105.3% 1.5% (#) 13.Global Research . The GCC banking sector had a comfortable loans to deposits ratio with only one sectorOman reporting the loans to deposit ratio of more than 100% in 2004.4% 2.3% 50.0% 87.8% 13.4% 2.3% 17.2% 23.4% 16.8% 24.2% 15.3% 2.6% 4.4% 2.2% 27.1% 3. it should be noted that there was a growth rate in customers’ deposits in the GCC banking sector could have been much higher but for the low interest rate scenario (although increasing) and the increasing preference of the GCC investors to invest their money in the high-yielding mutual funds and rapidly growing stock markets.1% 55.6%.0% 2.7% 79.0% 70. However.2% 35.2% 25.4% 12.5% 1. providing an average of more than 85% of their total deposits.9% Source: Annual Reports & Global Research * Only listed banks covered in this Report have been considered.2% 65.9% 3.8% 41.5% 2.7% 5.2% 29.5% 19.6% 2.7% Oman 9.8% 38.7% 16.9% 2.9% 83.6% 2.9% 16.8% 2.8% 1.4% 95.1% 3.3% 29.0% 39.6% 1.1% 88.0% 22.4% in 2004 while Qatar had the lowest ratio at 74. CAR in respect of UAE banks is the median value for 5 banks for which data are available.

Bahraini banks led the GCC region with the average payout of 70.5%. GCC banks are also looking at cost-cutting as means of boosting profitability. we feel that the impending implementation of Basel-II norms will put pressure on GCC banks to improve their risk management practices and measurement. Spreads in the GCC banking industry has ranged from 3.5% compared to Saudi banking sector which reported the smallest ratio of 10.Global Research .7% in 2004. Saudi banks had the highest ROAE amongst the GCC banks at 26.2% and 18% in 2004 respectively.0% in Bahrain. The GCC banking sector’s average ROAA and ROAE stood at 2. higher government expenditure and subsequently greater private sector activity. The dividend payout in the GCC banks was above 50% with the exception of UAE which stood at 41. Profitability The peer group’s profitability measures improved in 2004 as a result of flourishing economic conditions created by high oil revenue. 22 GCC Banking Sector May 2005 . The GCC banks have been able to widen their spreads in 2004 on the back of rising interest rates coupled with the increase in the non-interest bearing deposits in the GCC banking sector.1% in 2004. Most of the Saudi banks have also distributed liberal stock and cash dividends in 2004. The GCC banking sector combined have the cost to total operating income above 30% levels which gives them the opportunity to improve profitability by containing their costs. However. The bank have also used the growth in their profitability and improved margins to reward their shareholders. followed by Saudi Arabia at 2.3% followed by Kuwaiti banks at 62.9%. The peer group’s average equity-to-total assets for the combined GCC banking sector was more than 10% in 2004. This also calls upon the central banks and banking regulators to proactively assist the banks in their respective countries.3%. We expect the capitalization ratio of the GCC bank to remain at the comfortable levels even though they increase their lending activities.2%.GCC Global Investment House Capitalization GCC banks are adequately capitalized by international standards.9% in 2004 followed by Oman’s banking sector with the CAR of 25. GCC banks have managed the low interest rate environment of the past few years quite effectively and any pressure on margins now is likely to be offset by growing loan demand.4% while the Qatar banking sector led in terms of the ROAA which stood at 2. The presence of the huge chunk of Islamic deposits in Saudi Arabia is evident from the fact that it has the lowest Interest Expense to Interest Income ratio (Commission Expense to Commission Income as called in Saudi Arabia) of 25% in 2004. to adopt the reviewing of bank’s internal capital adequacy assessments and to review and act if the bank’s capital fall below the level appropriate to its risk characteristics. hence increasing the domestic liquidity. All the banking sectors in the GCC region had the Capital Adequacy Ratio (CAR) much above the BASEL norm of 8%. Qatar banking sector led the region with the capital adequacy ratio of 25. with the Qatari banking sector reporting the highest ratio amongst the peer group of 16.9% in Oman to 2.

iii. the Saudi authorities recently granted banking licenses to Bahrain based GIB and Dubai-based EBI. They must be majority owned by GCC nationals. but the authorities in the GCC countries have also agreed to open their doors to regional banking players. for example. HSBC and NBAD to open branches in the country. Regulatory reforms to pick up pace It is likely that GCC regulators will make the legal framework of banking more attractive. Outlook Over the medium-term. Under the treaty. Deutsche Bank and J P Morgan Chase for commercial banking. Banks are known to favor a more transparent and practicable system of foreclosure of collateral. NBK and NBB have also recently received licenses to open branches in Saudi Arabia. the growing populations could also favorably impact the retail end of the market. One of the regulations being discussed in several GCC countries currently. we maintain a positive outlook on the GCC banking sector. except Saudi Arabia. Saudi Arabia has issued licenses to BNP Paribas. financial services will remain protected at least until 2005. if not at the currently ruling record-high levels. ii. with increased retail accounts for consumer loans. Oil prices expected to rule at high levels Oil prices are expected to remain at high levels. Foreign banks are already operating in the other GCC countries. Speedier reforms in such areas could go a long way in making the banking system more fleet-footed and enable it to take part in emerging opportunities. May 2005 GCC Banking Sector 23 . Similarly. However. Not only are banks in the GCC preparing to face the potential impact on competition of their countries’ full accession to the WTO. While this would provide opportunities to the banks by way of taking part in loan syndications and increasing fee-based incomes. Some of the major trends going forward are as follows: i. particularly where residential real estate is involved. Increasing competition All GCC countries. and should have been established for a minimum of 10 years in their country of origin. Kuwait. etc. would necessitate increasing infrastructure spending from the governments. Central Banks have agreed to allow the regional banks to operate in their respective countries provided they comply with specific requirements.GCC Global Investment House 6. limiting foreign competition in the shortterm. for example. have a sufficient capital base (minimum of $100mn). and efficient framework for mortgage lending. besides allowing HSBC for investment banking. entry barriers are bound to be lifted in the longer term. as such operations have proved to be very difficult to execute.Global Research . and many institutions are preparing to face increasing foreign presence. Budget surpluses and domestic compulsions of growing populations. is believed to have already issued licenses to BNP Paribas. which would continue to put pressure on the available infrastructure. are members of the WTO. is the setting up of a clear. For example. appropriate.

turn themselves into 24 GCC Banking Sector May 2005 . forays into Islamic banking by almost all the banks. As for customers involved in margin borrowing. This could also correct the asset-liability mismatches and skew the loan book towards the longer-end. thus giving banks two alternatives. Capital market and real estate exposures could pose risk Name lending and margin lending are reportedly common practices in the GCC banking systems. be ruled out.and third-rung customers. The sophistication of products on offer too is expected to go a few notches higher. If the private sector is able to throw up more jobs going forward. The banks have already invested heavily in putting the necessary infrastructure in place. uncertainties regarding the ability of GCC governments to provide stable. Capitalization levels to remain high The capitalization levels are expected to remain high in the medium-term. at the risk of ignoring the consumption needs of a large chunk of the population. well-paid jobs for all young citizens entering the labor market are severe constraints to their tenability to continue as safe accounts. long-term project financing. the overall profile of the average bank customer will undoubtedly become riskier.Global Research . therefore. A possibility of these portfolios turning riskier going forward cannot. Retail loan accounts could turn riskier too It is possible that asset-quality problems could arise with the existing retail loan portfolios of the GCC banks slowly maturing in the coming years. The numbers are expected to be driven by increasing spreads. Solid financial performance to continue All the banks are expected to continue with their robust financial performance in the mediumterm. Most banks in the GCC seem to be aware of this issue. who might not have the same credit profile as the top-rung ones of the existing portfolios. thereby. and thrust on fee-based activities. and have so far chosen to react to it by increasing collateral. Banks could either continue to offer retail credit to only the top-quality customers. Many banks across the six GCC countries are believed to be mulling over raising long-term financing through debt. The alternative to this could be to extend credit beyond the safe. these factors could impact negatively on the asset quality of the banks should an economic downturn occur.GCC Global Investment House iv. Growing populations in all the six GCC countries would only make it imperative. as well as that of booming real estate prices. Indeed. enabling participation by the banks in long-term project financing deals. viii. However. growing participation by almost all the banks in big-ticket. and. improved delivery channels. with increasingly demanding customers. Rapid expansion of retail banking Enhanced physical expansion and improved electronic delivery channels are expected to enable banks to have an increased focus on retail banking in the coming years. thus weakening the current soundness of banks’ retail portfolios. In such a situation. under the close supervision of the central banks. vi. any downturn in the stock markets could hit them hard. vii. v. banks would have to grant credit to second. upper-class segments. product diversification.

similarly. soon. however. expected to hit the region in the medium-term. NBK. NBK. formerly Grindlays Qatar Bank. domestic mergers are expected to be a first step. often beyond. and enhance regional presence. are also believed to be close to finalizing their purchase of a stake in the Credit Bank of Iraq. In the UAE and Bahrain. Kuwait and Al Ahli Bank of Qatar. Banks in Kuwait and Oman. in addition to a representative office in China. In Oman. the central bank has been actively promoting mergers among banks. is known to be interested in acquiring banks in India and Turkey. NBK also has plans to establish a new branch in Jeddah in Saudi Arabia. Ahli United Bank (AUB). could see relatively lower future domestic organic growth. May 2005 GCC Banking Sector 25 . NBK and the International Finance Corporation. ix. however. for example. the strategy to look outwards also involves opening of branches in the rest of the GCC/MENA countries. Mashreqbank. National Bank of Bahrain is reportedly planning to enter Saudi Arabia. for example. a popular Kuwaiti holiday destination. family. for example. For example. is the result of several mergers and acquisitions. Higher M&A and cooperation among GCC banks There are moves towards national and regional consolidation in the GCC banking industry. This. in addition to the significant potential to expand retail and private banking operations. the largest onshore bank in Bahrain. The deal. Jordan in 2004. given the country’s huge project finance needs in energy and infrastructure projects. but it would be a valuable opportunity to overcome the constraints of size for the smaller competitor.Global Research . and pursuing more aggressive recovery efforts. National Bank of Kuwait (NBK) has acquired 20% in International Bank of Qatar (IBQ). In a few of these countries. inaugurated a new branch in Amman. enabling local banks to reach the critical mass needed to handle big syndicated and project finance transactions. Among bank acquisitions in the recent past. Similarly. warranting more focused efforts in credit-risk management. which has been approved by the Central Bank of Iraq. The move toward regional players would eliminate the less efficient banks.GCC Global Investment House mass-market financial institutions. has plans to expand its presence in Qatar. the largest banks have reached a stage where their future domestic organic growth is expected to slow down. Besides M&A. while IFC will hold a 10% stake and Credit Bank of Iraq will hold the remaining 15%. A domestic takeover of one of the smaller banks by the major players would deliver only marginal economic benefit for the large bank. is known to give NBK a 75% stake in the bank. as these markets are over-banked and offer potential take-over targets. the private lending arm of the World Bank. Bahrain has acquired 40% stakes each in BKME. The latter. This would also give the regional banks the ability to resist foreign competition. which are among the smallest in the region. comes with the risk of triggering asset-quality deterioration. for example. calls for the consolidation decisions to be taken on broader financial rationale. and nationalistic grounds. The IBQ stake is considered strategically important for NBK. Ahli United Bank (AUB). but not yet publicly announced. It also opened its 9th branch in the mountain resort of Aley in Lebanon. rather than on narrow political.

namely retail and Islamic banking activities. Increasing product diversification Diversification is a key challenge for almost all the GCC banks.GCC Global Investment House x. funds management. High liquidity has led to better wages. Private banking. were strong incentives for the GCC investors to repatriate overseas funds. Finally. The historically low interest rate environment is also supportive. as the GCC currencies are pegged to the US dollar. to having a separate division offering these specialized products. Banks have begun expansion in their offerings of retail products and services. etc. The GCC economies are enjoying a period of high oil prices. Funding structure of banks to diversify The funding structure of Gulf banks is undergoing significant changes with the evolution of the banks’ asset structure and the introduction of more sophisticated refinancing techniques. including bancassurance products. Furthermore. which could lead to the banks increasingly resorting to long-term funding. etc. provided that economic reforms are effectively implemented. it is likely that diversification will be directed toward the comparative advantages held by the GCC banks. The model followed for the Islamic banking foray could be different. Raising cheap long-term funds could also give a competitive advantage in the medium-term. This is expected to help the banks address one of their main weaknesses – that of maturity mismatches. geographic diversification out of the region would improve banks’ risk profile in the mediumterm. managing IPOs. Interest rates in the GCC very closely track those in the US. Private banking too could turn out to be a profitable revenue stream going forward. insurance and corporate finance to head revenue growth Banks are expected to increasingly focus on fee-based activities. local bonds. xiii. bear-market conditions in the international capital markets during 2000-’03. lucrative investments. as interest rates have begun to now increase. The trend is largely being driven by the boom in retail banking and project finance. syndications. which in turn have driven a significant and sustained demand for alternative investments from the region’s institutional and individual investors. though – ranging from offering these services as a part of their existing operations. In this context. 26 GCC Banking Sector May 2005 . or at least limit the outward remittances. The GCC banks could rely more and more on bank loans. in preparation for the proposed 2010 GCC monetary union. incentives have been high for banks to tap local and international debt markets. for their funding. Islamic ‘sukuks’.Global Research . The local equity and bonds/sukuks/Eurobonds issued by the GCC banks provide one such lucrative investment avenue for the region’s liquidity. to floating a separate Islamic banking subsidiary. xii. which are fueling government surpluses and boosting liquidity. like loan syndications. all the GCC banks have either entered the Islamic banking or are about to do so. Eurobonds. But. offering insurance products. Islamic banking to grow rapidly With the exception of a few banks. The available funds need to be invested in new. xi. Extending their operations into a variety of sectors will lead to a lower dependence on government spending and more involvement in the private sector. and the effects of 9/11. The increased diversification in funding is a positive development.

Increasing competition will mean new sources of risk for the banks. Techniques such as data mining and warehousing. Over the long-term. xv. Leading banks of the GCC countries are investing heavily in IT to upgrade distribution channels.GCC Global Investment House xiv. This is set to change the face of corporate banking in the region. dependence on government for capital and deposits could be reduced. Not only have volumes of bank financing been rising. From simple lending to large and relatively strong counterparts. and a widened product range. and the banks’ adaptation to the changing business scenario. the presence of the government is expected to continue in the field of regulation. The net effect of all these factors could be accelerated modernization and sophistication of the banking sector in GCC. the related regulations. cash management. this could only improve the overall business and risk profiles of the GCC banks. and Value-at-Risk measurement are expected to become increasingly common. corporate treasury. credit scoring. trade finance. and structured finance. Changing risk profile of the banks The public sector in the GCC has been the regional banks’ main client and. supervision. With further economic diversification. xvi.Global Research . under this agreement will remain protected at least until 2005. All GCC countries. at least among the top-rung players. in many cases. limiting foreign competition in the short-term. but also the complexity of corporate lending has increased. Nevertheless. except Saudi Arabia. current efforts in this direction should make this process easier. as credit itself has become secondary to fee-based businesses. electronic record of defaults and recoveries for statistical purposes. and intervention to prevent or correct bank crises and systemic risks. entry barriers are bound to be lifted in the longer term. However. Increasing moves towards comprehensive corporate relationships The coming years could see major GCC banks increasingly moving toward a comprehensive corporate relationship management model from a credit-centric approach followed so far. its main shareholder too. could be more than made up in terms of credit diversification. enhanced business opportunities. Financial services. merchant banking. corporate banking has moved towards greater sophistication and has now stretched beyond straight forward bilateral credit and syndication to corporate finance – namely. New risk management techniques to come to fore The changing risk profile of the banking system calls for a change in the risk management tools and techniques used. and to streamline tools and procedures for risk monitoring. there is a strong inflow of new projects across the region. are members of the WTO. The extent to which banks’ risk profiles will be affected will depend on the soundness of the private sector that will emerge. financial advisory. The sophistication in risk management tools and techniques is expected to be in step with the increasing complexity of financial transactions in the region. its diversity. May 2005 GCC Banking Sector 27 . As banks in the region move to adopt the Basel II Capital Accord. institutional investment on behalf of corporate clients. With high oil prices and budget surpluses reaching record levels. Kuwait and Saudi Arabia have already taken the first steps in granting licenses to foreign banks. What could be lost in terms of safety with respect to government exposures.

As a part of its rebranding exercise. We had recommended a price target of 68 cents for the bank in Dec 2003 when the stock was quoting at 57 cents. 28 GCC Banking Sector May 2005 . Bahrain Ahli United Bank We believe that AUB’s net interest income is expected to improve strongly due to the further hardening of the interest rates.1x of its estimated earnings of 2005. Currently. equity valuations of 28 banks have been done.00 based on DDM and peer group valuation method. in order to establish cost efficiencies and diversify asset base. Valuation & Recommendation Summary Out of a total of 45 banks covered in this Report. when the stock was trading at 695 fils. which is higher by around 12. The estimated fair value of AUB’s stock works out to US$1. which will focus primarily on customer service. A summary of the values arrived at for each of the banks. Hence. which is higher by around 12. Focus on alternative delivery channels is expected to further boost its efficiency. Bank of Bahrain & Kuwait The bank is expected to look forward for strategic alliances as well as the opportunity for mergers and acquisitions. the bank is expected to launch new and innovative retail banking concept. along with the recommendation rationale for each of them.3% vis-à-vis the current market price of the stock. AUB is expected to post stellar performance buoyed by the improvement in its core and non-core businesses.2x of its estimated earnings of 2005. We had recommended a Buy on the stock in September 2004 with a target price of 788 fils. The fundamentals of the bank remained robust and has strong income visibility. follows. BBK is trading at 2. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions. going forward. A combination of Dividend Discount and Peer Comparison Methods has been employed for the valuation – the former with an 80% weightage and the latter with a 20% weightage – to arrive at a Composite Value for each of the banks.6x of its estimated book value and 17. The estimated fair value of BBK’s stock works out to 794 fils based on DDM and peer group valuation method. Since then the stock has moved up as per our expectations and reached its peak of 762 fils.8% vis-à-vis the current market price of the stock. AUB is trading at 1. The bank is all set to take the advantage of the booming regional markets by becoming a pan-GCC bank. though it has yet to reach our targeted price. Hence. we maintain our earlier rating and recommend a ‘Buy’ on the stock with a medium term perspective. The bank is expected to grow in an inorganic way and is expected to become a pan-GCC bank in near future. we maintain our earlier rating and recommend a ‘Buy’ on the stock. Since then the stock moved up as per expectations and reached our target price in August 2004.79x of its estimated book value and 13. justifying our earlier buy recommendation.Global Research . Over the medium term. Currently.GCC Global Investment House 7.

61 1.BH BSBB.23 2. the further hardening of interest rates is likely to result in the bank improving its profitability significantly.2x and P/BV of 1. We have revised upwards our earlier projections due to strong outlook of the bank and improved market conditions.81x of its actual 2004 earnings. Over the medium term. May 2005 GCC Banking Sector 29 .3% Buy NATB.89 870.2% Not Rated Buy Hold Not Rated * As on April 24. other external factors weighed negatively on the stock. Therefore.5% vis-à-vis the current market price of the stock.14 1. BB is expected to continue its focus on improving operating efficiency and asset quality.8% 3.0 2. Apart from the fundamentals. In October 2004.12% 15. when the stock was trading at 336fils.GCC Global Investment House Bahrain Islamic Bank We believe that fees and commission income of the bank is expected to be buoyant due to the bank’s efforts to launch various new products and services. Currently.72% 17. The withdrawal of rating by Fitch was also not perceived well by the market.5 67.BH 704 405 134 607.52% 7. We had recommended a Buy on the stock with a price target of 487 fils in Oct 2004 when the stock was quoting at 375 fils.1 1. which is higher by around 18.5 400. Some of the positive events which could provide upward momentum to the stock is sustain positive performance.BH 1. Since then the stock has been quoting in the range of 340 fils to 380 fils.86 2.125 BBKB. which leaves marginal upside potential of about 3.99% 25. The estimated fair value of BB’s stock works out to 503.Global Research . BIsB is trading at 1.3x of its estimated earnings of 2005. Table 7-1: Recommendation Summary . we had recommended a Hold on the stock. Since then the stock moved up smartly to reach its all time high of 480 fils in March 2005.22% 14.8 fils based on DDM and peer group valuation method.18% 15. the stock is quoting at a PE of 12.91 1.92 1. The estimated fair value of BIsB’s stock works out to 418 fils based on DDM and peer group valuation method.48% 16.61 2. 2005. # The stock price of AUB is in US$ Kuwait Burgan Bank (BB) We believe that the current restructuring exercise is expected to positively benefit the bank in the longer term.BH BISB. The bank’s management has been perceived to be very unstable as seen from frequent changes in the top management of the bank in the past. we reiterate our ‘Buy’ recommendation on the stock.49 1. rating upgrade by an international rating agency and consistency of policies and strategies. Therefore.00 12.Bahrain Name of Bank Ahli United Bank # National Bank of Bahrain Bank of Bahrain & Kuwait Bahrain Islamic Bank Bahraini Saudi Bank Composite Potential P/E * P/BV * Reuters CMP * M-Cap * Share Value Upside/ Recommendation RoAA RoAE (X) (X) Code (fils) (BD Mn) (fils) Downside AUBB. This creates a lot of doubts over the continuity of the policies and strategies of the bank.71 2.48% 11. The bank is also expected to report strong gains from its investment income.2% over the current market price. We believe that the bank’s management has the potential to create strong value out of its franchise and hence the current discount to the stock is unwarranted.BH 0. we continue to maintain ‘Hold’ on the stock. Currently.12 794 418 12.00% 21.88x of its estimated book value and 22.88% 17.6 102.

The gamut of products and continuous expansion complements well with the rising domestic liquidity 30 GCC Banking Sector May 2005 . our valuation lags behind the current market price of the stock. The bank is likely to rely on organic growth by introducing innovative product range and delivery mechanism to capture more customers. we re-rate the stock with a ‘Hold’ recommendation.240 fils.5% vis-à-vis current market price of the stock. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions.6x of its estimated earnings of 2005. representing a decline of 17% over Dec end 2003. CBoK reported an EPS of 59 fils per share during FY2004. The bank reported a marginal decrease of 0. CBoK has the second largest branch network in Kuwait with 39 branches. CBoK’s total assets decreased significantly to KD1. the bank is weighing the options of moving to new markets such as Iraq and Turkey in the next couple of years. which is higher by just about 7. which is lower by around 0. However.9mn in FY2004.3% during the same period. the stock has moved up sharply by 47.230 fils based on DDM and peer group valuation method.6% to the current 1.8% vis-à-vis the current market price of the stock.4% in FY2004. retail & corporate lending will continue to provide the lucrative growth opportunity for the bank. The estimated fair value of GB’s stock works out to 1. CBoK is also planning to increase its branch network in Kuwait by adding 10 new branches in strategic locations during FY2005. Though the fundamentals of the bank remained strong. Currently.135. Currently. Hence.2mn at the end of Dec2004. Deposits from customers increased by 31. NPLs as a percentage of gross loans & advances have increased marginally from 11.Global Research .8x of its estimated book value and 12.825.0% in FY2003 to 11. Since our last investment update in Oct 2004.4mn by the end of FY2004. As per the bank’s management. we revise our earlier rating and recommend a ‘Hold’ on the stock. Therefore. GB is expected to post stellar performance buoyed by the improvement in its core and non-core businesses.GCC Global Investment House Gulf Bank (GB) GB is expected to continue its focus on improving operating efficiency and asset quality. giving it a strong position in the domestic retail banking. The bank reported a 10% growth in its net profits in the FY2004 owing to a substantial reduction in depreciation (-76% yoy) and also lower provisioning for impairment (-19% yoy) as compared to the corresponding period in the previous fiscal. GB is trading at 3. National Bank of Kuwait National Bank of Kuwait (NBK) commenced operations in 1952 and is the largest financial institution in Kuwait and the fourth largest Arab bank. The estimated fair value of CBoK’s stock works out to 817 fils based on DDM and relative valuation method. The net interest income of the bank is expected to improve by around 19. which have relatively higher cost of servicing declined by 31. Commercial Bank of Kuwait Commercial Bank of Kuwait SAK (CBoK) commenced operations in 1961 and is the third largest conventional bank in Kuwait in terms of total assets. Over the medium term. justifying our earlier buy recommendation. NBK’s strong position in domestic retail banking is likely to remain the bank’s primary catalyst for profitability and growth. NBK has the highest credit rating awarded to banks in the Middle East by rating agencies.5% in 2005 due to the further hardening of the interest rates.3% in total loans and advances (gross) to reach KD1. while the deposits from banks & financial institutions.8% to KD963.

To expand its marketing reach and take the competition head-on. The stock currently trades at around 420fils (24th April 2005). since it does not have large capex plans in the near future. we value the stock of BKME at 539. Therefore. It is worthwhile to note that since our last report of KFH. The bank reported a growth of 10% in total loans and advances (gross) to reach KD2. Deposits from customers increased by 8% to KD3. NPLs as a percentage of gross loans & advances have decreased significantly to 1. as its interest income increased by 21.1fils.7% to KD58. loan loss reserves as a percentage of gross loans & advances have increased to 3. which is up by 5. The bank reported a 23.7mn in FY2003. taking the total to 22 branches by the end of 2005. It is also expanding its presence internationally especially in the Middle East and Southeast Asia.626fils based on DDM method. We expect strong growth to continue throughout 2005. Bank of Kuwait & Middle East (BKME) Continuing from its improved performance in FY2003.4% higher than the current market price.5% in interest income during FY2003.24bn in FY2004.customer deposit taker among Kuwaiti commercial banks.1% in FY2004 thus leading to a NPL coverage ratio of over 200%. Based on the dividend discount method (DDM) and peer group valuation methodology using the Price to Book value (P/BV) multiple.Global Research .1mn during the year from KD47. which is higher by 13. is around 28. However. BKME has further improved performance in FY2004. The estimated fair value of NBK’s stock works out to 1. It has been awarded a license to operate in Malaysia. the discount rates have increased twice to reach 5. However.6% vis-à-vis current market price of the stock.5% in FY2004.9% growth in its net profits in the FY2004 owing to a substantial increase in net interest income (24% y-o-y) as compared to the corresponding period in the previous fiscal. The bank is likely to focus on organic growth by introducing innovative product range and delivery mechanism to capture more customers leading to accelerating income growth and margin expansion.83bn at the end of FY2004. It also has the distinction of being the lowest cost. an achievement that has provided the bank with a solid platform for profitability in the current rising interest rate environment. The bank has been exploring the possibility of expanding its regional coverage in order to get the maximum share in the increasing Islamic banking activities. Therefore we maintain our earlier recommendation and reiterate a Buy on the stock with a medium term outlook. BKME plans to add 4 new branches in Kuwait during 2005. The estimated fair value arrived at is based on the improved performance of BKME and our expectations about its future potential. We expect BKME to distribute higher dividends going forward. Kuwait Finance House (KFH) We believe that KFH is well placed to exploit the increase in the Islamic banking activity in Kuwait and the other GCC markets. Regional expansion is at the forefront of NBK’s diversification strategy and may provide the bank with the growth opportunities lacking in its domestic environment. we revise our earlier rating and recommend a ‘Hold’ on the stock.GCC Global Investment House levels which will help to drive the loan book expansion for the bank in the medium term. This is quite impressive as compared to a decline of 1.3% vis-à-vis current market price of the stock. May 2005 GCC Banking Sector 31 .25% which has considerably affected the valuations. The net commission of the bank is expected to improve as we expect the interest rates to continue moving upwards.496fils based on DDM and relative valuation method. we upgrade our earlier recommendation on NBK to Buy. which implies that the value arrived at. Based on the current growth potential of the bank. the estimated fair value of KFH’s stock works out to 1.

KW ABKK.6 3.5% 13.2% 28.0 295.3x our projected 2005 and 2006 book values per share.4% 21.0 16.4% 16. The ABK stock simultaneously gained by 13.5 3.2 2. The overall changes lead to a higher projected profitability and net spreads for the bank in the period 2005-’08.KW CBKK.5 4. Based on the results for full year 2004 and first quarter of 2005.6% since our above-mentioned report. with a medium-term perspective. The composite share valuation translates to forward P/BV multiples of 2.4% 12.7% 3. while simultaneously bringing in cost efficiencies to improve its margins.2 1.1% 3.320 1.KW KREB. therefore.4 1. Table 7-2: Recommendation Summary .7 357.568 per share. The book value per share (BVPS) of ABK was KD0. issued in our Results Update on the bank at the end of the third Quarter of 2004.8 13.230 817 504 568 539 1. arrived at by using the Dividend Discounting Method (DDM) and peer valuation method.KW CMP * M-Cap * 1.7% 1.232 at the end of 2004.8% 7.240 760 425 500 420 1.0 365.2 15.0 1. such as National Bank of Kuwait and Gulf Bank. 2005 32 GCC Banking Sector May 2005 .1% 1.3% -0.GCC Global Investment House Al Ahli Bank of Kuwait (ABK) Global currently has a “HOLD” recommendation on the ABK stock.6 12. justifying our “HOLD” recommendation.0 1068.9 12. than in our late-2004 Update.8% 14.3 13. as well as improving its asset quality in the near-term.2 12. from our earlier recommendation of “HOLD”. The intrinsic value of ABK of KD0.540 475 RoAA 2.5% 18.145. upgrade ABK to a “BUY”. Though smaller than the other Kuwaiti banks.3% 3.3% Composite RoAE P/E * P/BV * Share Value Potential Upside/ Recommendation Downside 13.8 2.8 3.8 457.5% 14.Global Research . as against the average P/BV for the Kuwaiti banking industry of 3.6 1684.7%.4% 24.2x. We.4% 5.KW BURG.KW BKME. At the current stock price of KD0. we have now revised our earlier projections.626 - * As on April 24.6% Buy Hold Hold Buy Buy Buy Hold Not rated (fils) (KDmn) 2.KW GBKK.4% 2.6% 14. is higher than the current stock price of KD0.7% 28. ABK seems poised to improve its performance further in the coming years and take better advantage of the emerging opportunities in the market. it is quoting at a P/BV of 2.Kuwait Name of Bank National Bank of Kuwait Gulf Bank Commercial Bank of Kuwait Burgan Bank Al-Ahli Bank of Kuwait BKME Kuwait Finance House KREB Reuters Code NBKK.6% 1.500 by 13.8 808.500. The bank has had a healthy performance in the year 2004 as well as in the first quarter of 2005.KW KFIN.4x and 2.496 1.42x.2 (X) (X) (fils) 28.

218 3. The estimated fair value of OIB’s stock works out to RO4.3% over the EPS recorded for the corresponding period last year.5x and at 2.4x. which represents a discount of -8. an increase of 38% over the basic and diluted EPS of 2003.850 NBO. We recommend a Hold on the stock.6% 19. which is higher by 9.3% 12.267 during FY04.Global Research .689 4. an increase of 6. an increase of 10. We have revised our fair value of AHB’s stock at RO3. Currently the stock is trading at 2005 earnings multiple of 15.OM 8.76 2.OM 3.700 BDOF.650 *As on April 24.1x its book value (forecast).830 Hold Reuters Code OIB. We revise our earlier recommendation to ‘Hold’.6% Hold Hold Hold Not Rated AHBK. Our price target represents an implied 2005 P/E multiple of 12.7 161.3% BMAO.689 based on DDM and relative valuation method.OM 3.527 3.527 based on DDM and relative valuation method.2005 Bank Muscat BankMuscat reported an annualized basic and diluted EPS of RO0. which is higher by 3.6% 15. May 2005 GCC Banking Sector 33 .101 -8.3% from the current market price of RO3.5 255.37 2. Oman International Bank OIB reported basic EPS of RO0.2% 48. an increase of 17% over the diluted EPS recorded for the corresponding period last year.OM 4.5x and at 2. We have increased our valuation from our earlier projection of RO7.101 based on DDM and relative valuation method. Alliance Housing Bank AHB reported basic and diluted EPS of RO0.570 during FY04. The estimated fair value of Bank Dhofar’s stock works out to RO4.8% vis-à-vis current market price of the stock.2 77.6 2.1% 14.046 to the current RO8.82 2. We maintain ‘Hold’ on the stock. We revise our earlier recommendation to ‘Hold’.2 2.6x.5 2.7% 5.101 mainly to indicate the fact that BankMuscat will be benefited from the rising interest rates thus positively impacting its bottom-line and improving its lending spreads.830.0% 18.170 during FY04.5 4.6x its 2005 book value.46 3.62 2.700.Oman Name of Bank Bank Muscat Oman International Bank Alliance Housing Bank Bank Dhofar National Bank of Oman Composite Potential CMP Share M-Cap in Upside/ Recommendation in RO RoAA RoAE P/E * P/BV * Value in ROmn * Downside (X) (X) * RO 528.2% 17.224 during FY04.6% vis-à-vis current market price of the stock.13 8. Our price target represents an implied 2005 P/E multiple of 16.8% -0.218 based on DDM and relative valuation method.41 0.1% 13. Currently the stock is trading at 2005 earnings (forecast) multiple of 11.7% 21. Bank Dhofar Bank Dhofar reported an annualized basic EPS of RO0.3% from the current market price of RO8.3% 9.GCC Global Investment House Oman Table 7-3: Recommendation Summary .7% over the previous year. The estimated fair value of BankMuscat’s stock works out to RO8.360 274.OM 3.49 3. which represents a discount of 0.

we initiated coverage on QNB and recommended a Buy on the stock with a price target of QR140.4% than the intrinsic value of the stock. QNB registered an impressive y-o-y jump of 27% in its bottomline to QR814. Commercial Bank of Qatar Over the last five years.60 per share at the then market price of QR120 per share.7% premium to the current market price. Since then the stock meet our expectations and witnessed significant run-up in its price.4 (as of April 14th. which was backed by both growing net interest income and also non-interest revenues. the bank’s recent entry into Islamic banking will further widen the product basket of the bank as there is increasing importance of Islamic finance in the region. The intrinsic value arrived by us is at 18.8% in its net profit to QR391. CB has witnessed significant growth in its profitability.7mn. In January 2004. which will also diversify its revenue streams. The bank’s net profit was at QR365. During Q1FY2005. apart from the conventional banking it has also started providing Islamic banking products.GCC Global Investment House Qatar Qatar National Bank In FY2004. The economy is growing at a very healthy rate which will further expand business opportunities for the bank and QNB being the leading bank will have an advantage as compared to the peer in the sector. the bank registered a robust growth of 105. We maintain our earlier rating and recommend a Buy and value the bank’s stock at an intrinsic value of QR363 based on the Discounted Dividend Model (DDM) and peer group valuation method.8. the bank also plans to expand its branch network with five to six additional branches in Qatar. In 2004. on the back of substantial boost in non-interest revenues and also a marginal increase in net interest income. During 2005.2 achieved in FY2003.9 for the FY2004 from QR6.9mn. Since then the stock price run-up significantly. we re-rate the stock with a HOLD recommendation. We initiated coverage of Commercial Bank with a buy recommendation at the market price of QR192.6mn for FY2004 as compared 34 GCC Banking Sector May 2005 . which will further strengthen its business operations in the Qatari as well as in the regional markets.1 is marginally higher by about 1. CB registered an impressive y-o-y jump of 32% in its bottomline to QR326. therefore. we value the bank’s share at an intrinsic value of QR224. which was backed by all round growth in net interest income. Doha Bank Since the last the three consecutive years Doha Bank has been reporting over 70% y-o-y growth in its net profit.Global Research . We believe that the bank will see successful expansions into wealth management business following the acquisition of Ansbacher. Now. It has led to the increase in the earnings per share to QR7.7mn. fees & commission income and also a significant jump in income from investments. The current market price of QR227. As part of its future strategies. 2005) with a price target of QR214. Based on the combination of Discounted Dividend Method and Peer Group Valuation Method. Expansion and enhancement of branch network through investment in alternative delivery channels are the focus area to capture retail market and will further help the bank to increase its non-interest revenues. The bank’s expanded capital base will allow the bank to leverage its balance sheet and increase profitable lending opportunities which Qatar would offer in the coming years.

7 227.4 37.4% 4.4% 3. QA DOBK.7% 27. India and Central European countries.802 6.9 46.096 3.QA QIIB.QA AABQ. QA QISB.9 24.738 15.1 based on DDM and peer group valuation method.9% -1.1 4.1 125. Since then the stock meet our expectations and witnessed significant run-up in its price.5% vis-à-vis the current market price of the stock. As part of its expansion plans.815 2.Qatar Name of Bank Qatar National Bank Doha Bank Commercial Bank of Qatar Qatar Islamic Bank Qatar International Islamic Bank Ahli Bank Reuters CMP * M-Cap * RoAA RoAE Code (QR) (QR mn) QNBK. Now. based on the Discounted Dividend Model (DDM) and Peer Group Valuation Method. It will soon set up a dedicated division to offer Islamic banking products which will further strengthen its business operations in the Qatari as well as in the regional markets.4% 2.9% in FY2004 to QR538.2 31.9% higher than the intrinsic value of the stock. Table 7-4: Recommendation Summary .4% 13. The bank is planning to open eight more branches in Qatar and it also plans to open branches in overseas markets.3% 28. we initiated coverage on DB and recommended a Buy on the stock with a price target of QR194.3 per share at the then market price of QR159 per share.6 11. we recommend a ‘Buy’ on the stock.4% Buy Hold Hold Not Rated Not Rated Not Rated * As on April 24.2% 13. SAMBA has one of the lowest commission expense/commission income ratio which will continue to provide it with one of the highest spreads among the conventional banks in Saudi Arabia.9% 22.4% 3.0% 16.8% 1.5 300.7 363 208 224 18. The increased investment banking activity and project financing (especially in the infrastructure sector) is likely to increase its fee income.4mn reported during the previous year. The bank has been making a conscious effort to increase its market in the retail banking business especially in the high-margin consumer financing business.8 5. we value the bank’s stock at an intrinsic value of QR208.8% P/E * (X) 38. and recommend HOLD for the stock as the current market price is about 4. which is up by around 10.2 Composite Potential P/BV * Share Value Upside/ Recommendation Downside (QR) (X) 5.165 16.2mn as compared to QR324. The estimated fair value of SAMBA’s stock works out to SR812.2 7.7% -4. All these will see it increases its branch network to 34 across nine countries as part of a global expansion drive. Japan. QA COMB.Global Research . May 2005 GCC Banking Sector 35 .6mn for FY2003.GCC Global Investment House to QR214. QA 305. In March 2004.1 268. We expect SAMBA to post healthy growth in its net profits in 2005 and 2006 as the growth outlook for Saudi economy and banking industry remains positive.3 55.4 5. Total operating income (net of provisions) of the bank grew by 65. 2005 Saudi Arabia SAMBA Financial Group We project the net commission income of the bank to show strong growth in 2005 as we expect the interest rates to move up in the short to medium term.7 218. Hence. including Korea.976 17.1 36. the bank is planning to venture into Islamic banking.

5% 3.Global Research .2% 22.0 786.083.SE 1050.9 659.0 1.3% vis-à-vis the current market price of the stock.8% 26.3% 19.8% yearly growth in 2004 (lower than our expected growth).492.0 1.3 6.6% 32. Al Rajhi Banking & Investment Corp is planning to expand overseas and has got Islamic banking license to operate in Malaysia. However. High growth in the Saudi economy and the government’s intention to increase infrastructure spending will kick-off medium to big-ticket projects which will provide ALRAJHI with growth opportunities in project financing.1 26.6 10. Though the fundamentals of the bank remain strong. We expect the bank to increase its market share in term of assets as it introduces new deposits as well as loan products.0 630. 2005.8bn at the end of 2004.5 22.SE * As on April 24.8% 2.SE 1030.1% 15. Hence.GCC Global Investment House Table 7-5: Recommendation Summary .484 based on DDM valuation. which is up by around 3.1 885. Riyad Bank Arab National Bank The Saudi British Bank Saudi Hollandi Bank The Saudi Investment Bank Banque Saudi Fransi Bank Al Jazira 1120.3% 2.5 7.1% 2. The NPLs to Gross Loans ratio has declined from 2.6 28.8% P/E * P/BV * (X) (X) 23.3% 27.4% during the same period and amounted to SR34.3% 12.6 10.1% 3.Saudi Arabia Name of Bank Reuters Code CMP * (SR) 734.6 NOT RATED NOT RATED 10.0 39.0 845.2 2.5 M-Cap * RoAA RoAE (SR bn) 88.484.2% in 2004 which is one of the lowest in Saudi banking sector. we revise our earlier rating and recommend a ‘Hold’ on the stock. Non-performing loans (NPLs) in 2004 amounted to SR432.2 33.1 based on DDM and peer group valuation method.SE 1010. Source: Banks’ financial statements. our valuation lags behind the current market price of the stock.0 643.130.4% 2.2 134.2 7.4 944.9 25. entry of new players in Saudi banking sector and conversion of NCB will increase competition in the Islamic banking sector.6% -4.3 63.1% 11. Riyad Bank Riyad Bank’s assets reported a modest 3.SE 1080.129.9% 4.9 5.3% 37. The estimated fair value of ALRAJHI’s stock works out to SR1.1% 2.5% -0.4 5. 36 GCC Banking Sector May 2005 . The estimated fair value of Riyad Bank’s stock works out to SR651.1 1.6mn compared to SR651mn in 2003.0 651.3 56. Corp. aggregating to SR74.SE 1040.6 6.6 30.8 Composite Potential Share Upside/ Recommendation Value (SR) Downside 812. Riyad Bank has a comfortable loans-to-deposits ratios which would allow it to further expand its loan portfolio especially in the consumer and personal lending. we revise our earlier rating and recommend a ‘Hold’ on the stock.5% vis-à-vis the current market price of the stock.SE Al Rajhi Banking & Inv. Tadawul and Global Research Al Rajhi Banking & Investment Corp. which is lower by around 0.5 677.3 22.6% NOT RATED NOT RATED BUY HOLD HOLD BUY HOLD BUY HOLD NOT RATED NOT RATED SAMBA Financial Group 1090.1% 29. However.9 34.SE 1060.2% in 2003 to 1.2 1.9% 27.1 50.0 9.SE 1020.1 6.7% 1.1 54.8 1. The gross loans and advances increased by 21.25bn.5 21. Hence.8% 2.

8% vis-à-vis the current market price of the stock. The bank is likely to post strong growth in its non-commission income and take advantage of the booming economy to increase its investments and trading income. the bank’s net profit did not meet our expectations. we reiterate our earlier rating and recommend a ‘Buy’ on the stock. up 30% from the previous year’s profit of SR1. SABB reported a net profit of SR1.16bn for the year 2004.25bn. a strong growth of 52. The estimated fair value of ANB’s stock works out to SR885. Although the bank has done a good job in reducing its NPL ratio. ANB reported a net profit of SR1.2 based on DDM and peer group valuation method. Saudi Hollandi Bank The net commission income did not exhibit a strong growth as other Saudi banks as it increased by only 7. However. The net commission income of the bank is expected to show strong growth as it increases lending to the high-margin retail lending segment.0% in 2004. The bank also witnessed declining interest spreads from 3. Hence. we expect it to further go down. while maintaining the bank’s current ratings. Hence. Hence. However. we believe that the bank’s loan to deposits ratio is likely to increase to more than 75% in medium term as it expands its lending activities.2% in 2003 to 3.Global Research .4 based on DDM and peer group valuation method. in its latest review.7% in 2004. However. The Saudi Investment Bank The bank has traditionally focused on corporate banking activities but has changed its strategy in the last couple of years to concentrate more on retail banking and has therefore entered the retail banking business of credit cards. We have revised upwards our earlier projections and now the estimated fair value of SHB’s stock works out to SR944. the bank is likely to remain one of the most profitable banks in the Kingdom.8% in 2004 helped by the upward movement in the interest rates. which exceeded our expectations. which is likely to be instrumental in strengthening the bank’s customer base. Capital Intelligence.2% as compared to the previous year. The net commission income saw a growth of 15. placed SAIB on a Positive Outlook.6% vis-à-vis the current market price of the stock. The bank is likely to be among the leaders in the corporate banking business in Saudi Arabia as it has a large base of blue-chip corporate clientele. which is down by around 4. we reiterate our earlier rating and recommend a ‘Hold’ on the stock. On the back of strong growth in the noninterest income as well as increase in its spreads.9 based on DDM and peer group valuation method.GCC Global Investment House Arab National Bank ANB has been a front-runner in adopting newer technologies and has made substantial investments in upgrading its IT infrastructure. it has the limitation of a small branch network May 2005 GCC Banking Sector 37 .1% vis-à-vis the current market price of the stock. The estimated fair value of SABB’s stock now works out to SR1083. ANB secured a three-year syndicated loan worth US$350mn. The Saudi British Bank The bank started the implementation of its strategic plan for 2005-2007 which includes the development of Amanah Islamic banking services and launching new Amanah products in light of the growing demand for this kind of services. The bank has been aggressively marketing its “Fourijat” and “Al Tawarruq” consumer loans. which is up by around 11. which is up by around 12.63bn for the year 2004. strengthening its balance sheet for possible opportunities in long-term project financing. we revise of our earlier rating of ‘Hold” and recommend a ‘Buy’ on the stock with medium term perspective. leasing and consumer lending.

First Gulf Bank The intrinsic value of FGB of AED42.8%. with a medium-term perspective.AD NBAD. The bank.0 41. with a medium-term perspective.6x and 9. initiate our coverage of FGB with a “HOLD” recommendation.0 by 5. We. the stock would seem to have a marginal upside at its current price levels. with considerable experience in the GCC banking industry.7 17.AD MASB. We. private banking.3 HOLD HOLD BUY HOLD Source: Global Research. therefore.267 19.6 18. since it has had a good run on the stock market in recent months.0 6.9 3.0 per share.3 2. Hence.2 38. UAE Abu Dhabi Commercial Bank The intrinsic value of ADCB of AED253. therefore. arrived at by using the Dividend Discounting Method (DDM) and peer set valuation method. Reuters.0 Composite Potential Upside / Share Recommendation (Downside) Value (%) (AED) 253. however. Table 7-6 : Recommendation Summary .0 by 3. is higher than the current stock price of AED41.4 2.AD FGB.0 230. believe that ADCB presents an attractive investment opportunity at lower price levels. gaining 75.4x our projected 2005 and 2006 book value per share. managing IPOs. facilities arrangement and loan syndication activities going forward.4 2.UAE Name of Bank Abu Dhabi Commercial Bank First Gulf Bank National Bank of Abu Dhabi Mashreqbank Reuters Code ADCB.0 42. Though the composite share valuation translates to forward P/BV multiples of 7.7% since the beginning of 2005.0x our projected 2005 and 2006 book value per share. is expected to steer the bank on a high growth curve in the years to come. would appear constrained by its relatively smaller size vis-à-vis the other players in the highly competitive banking industry in UAE.2 20.GCC Global Investment House which hinders its deposit taking capabilities.0 35.6 51.DU CMP M-Cap RoAA RoAE (AED)* (AEDmn)* (%) (%) 239.0 46.922 2.0% since the beginning of 2005.4 5. The net fees and commissions income of the bank is also expected to show a high growth in the medium-term from its funds management. gaining 137. arrived at by using the Dividend Discounting Method (DDM) and peer set valuation method.0 24.Global Research . 38 GCC Banking Sector May 2005 . which is up by around 2. The bank is likely to benefit from aggressively promoting its consumer loan products going forward.6% vis-à-vis the current market price of the stock.0 4.6 per share. Though the composite share valuation translates to forward P/BV multiples of 9. the stock would seem to have a limited upside from its current price levels. since it has had a good run on the stock market in recent months.850 16. though growing at a high rate of late. The estimated fair value of SAIB’s stock works out to SR659.763 43.1 25.7x and 7. we revise our earlier rating and recommend a ‘Hold” on the stock.3 65.8 11.6 based on DDM and peer group valuation method.9%. is higher than the current stock price of AED239. The new management of the bank. initiate our coverage of ADCB with a “HOLD” recommendation. We.4 9.1 P/BV (x)* 6. * As on April 24.0 244.4 9. 2005.9 P/E (x)* 37.

Subsequent to that report.4 per share.9% since the beginning of 2005. however. the stock has had a good run on the stock market. net commission income. gaining by 21.0 by 6.3x and 6. We have modified a few of our projections in the wake of the announcement of the first quarter 2005 results by the bank. reiterate our “HOLD” recommendation on Mashreqbank. diversified and growing earnings story. The bank has substantial treasury and investment banking operations. and presents an attractive investment opportunity at lower price levels. The composite share valuation also translates to forward P/BV multiples of 8. is higher than the current stock price of AED46. arrived at by using the Dividend Discounting Method (DDM) and peer set valuation method (with a revised P/BV multiple. particularly in the emirate of Abu Dhabi. with a medium-term perspective. Some of these changes include the projected growth rates in loans and advances. May 2005 GCC Banking Sector 39 . interest income and expense. We have. based on the weighted average P/BV of 12 UAE banks covered in this report).0 per share. besides sizeable international presence. We had valued the bank at AED207.3%.0 by 11. where it is a prominent provider of retail banking services. is higher than the current stock price of AED230. Mashreqbank Global had initiated its coverage of Mashreqbank with an equity valuation report in March 2005. We. arrived at by using the Dividend Discounting Method (DDM) and peer set valuation method. with a mediumterm perspective. We. and net profit. initiate our coverage of NBAD with a “BUY” recommendation.9 per share in that report and had recommended a “HOLD” on its shares. The intrinsic value of Mashreqbank of AED244. customer deposits. We are of the opinion that the modified numbers reflect the future earnings potential of the bank in a more appropriate manner. retained our projections of the net spreads of the bank more or less along the same lines as in our March 2005 report.8x our projected 2005 and 2006 book value per share. We still believe that Mashreqbank is a strong brand-based. The dividend payout ratios too have not been changed from the projections in that report.1%. This is despite the stock running up considerably in recent months – gaining about 120. NBAD has a strong customer franchise. therefore.Global Research .GCC Global Investment House National Bank of Abu Dhabi The intrinsic value of NBAD of AED51. The booming project finance and IPO markets in UAE and its foray soon into the Kuwaiti banking market are expected to keep it on a high growth trajectory in the years to come. therefore.0%.

Global Research .GCC Global Investment House This Page Intentionally Left Blank 40 GCC Banking Sector May 2005 .

Global Research Sector Bahrain Bahrain Banking Sector May 2005 .

CFA Head of Research shaileshdash@global.O.com.kw Phone No:(965) 2400551 Ext.com.net Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M. 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: research@global.. CFA Executive Vice President omar@global.104 Shailesh Dash.com. El-Quqa.196 Pravin Bokade Senior Financial Analyst pravin@global.kw Phone No:(965) 2400551 Ext 229 Chandresh Bhatt Senior Financial Analyst cbhatt@global.kw Phone No:(965) 2400551 Ext.270 .Global Investment House KSCC Equities Research Souk Al-Safat Bldg. 2nd Floor P Box 28807 Safat .com.com.kw Phone No:(965) 2400551 Ext.globalinv.kw http://www.

........................................Table of Contents The Bahraini Banking Sector ............................................................ 34 Bahrain Islamic Bank ........................................................................... 16 Banking Sector Outlook .................................................................................................... 6 Islamic Banks in Bahrain ......................................................................................................................................... 22 Players Profiles Ahli United Bank ......................................................................................................................................................................................................................................... 5 Interest Rates ................................................................................................................................................................................................................................................................................................................ 26 Bank of Bahrain and Kuwait .................................................................................................................................................................................................................................................. 21 Valuation Matrix . 2 Credit Portfolio ........................................................................................................................................... 49 Bahraini Saudi Bank ............... 56 ........................................ 42 National Bank of Bahrain ...... 1 Growth in Assets ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 9 Peer Group Comparison ...........................................

While in another development. also adds value to Bahrain’s financial center. In 2004. This comprises 189 banking institutions. which is being created by these two Iranian banks. the Bank of China. 165 insurance firms and 13 capital market brokers. along with Bahrain based Ahli United Bank. Recently. Table 1: Total number of Banks and financial institutions in Bahrain Banking Institutions Insurance Firms Capital Market Brokers Total Source: Bahrain Monetary Agency 2004 189 165 13 367 The banking system in the region and in Bahrain is witnessing the entry of new players and some consolidation among the existing players. The BMA is responsible for the licensing. The business activities of the new institutions. 17 were for banks and banking-related institutions and 6 for insurance and insurance-related operations. Bahrain’s financial sector is growing rapidly and continues to attract banks and financial institutions from all over the world.Global Research Bahrain Global Investment House Overview of Banking Sector in Bahrain Bahrain hosts the largest concentration of banks and other financial institutions in the Middle East region. investment advice and insurance products involving risk transfer and capital accumulation. BMA approved the merger of the Bahrain operations of two top Iranian banks namely Bank Melli Iran and Bank Saderat Iran. Future Bank will have an authorized capital of US$200mn and an initial paid up capital of US$99mn. The new venture will be equally owned and controlled by the three institutions and will provide all commercial and investment banking activities. Bahrain was one of the first countries outside the G10 to apply the BIS’s 8 percent capital adequacy ratio. BMA also issued a license for a new bank called Future Bank. This brought to 367 the total number of financial institutions licensed by the BMA by 2004-end. which is named as the largest emerging market bank by Euromoney. regional and international names. The pre-eminence of Bahrain’s financial sector rests upon the regulatory regime imposed by the Bahrain Monetary Agency. Banking sector further expanding… Bahrain’s financial services industry continued to develop and expand during 2004. supervision and regulation of the financial sector and its supervisory and regulatory framework is fully consistent with international standards. Of the new licenses issued during 2004. The country attracted a good mix of locallyincorporated. Bahrain granted a number of licenses to various international banks to operate in the country. many of which will serve the Middle East market. opened its representative May 2005 Bahrain Banking Sector 1 . regional and international institutions during 2004. representing a blend of local. with nearly 367 financial institutions offering diverse range of services. the financial strength of the individual institutions and the professional and technical competence of individuals employed in the industry. with 23 new licenses issued by the Bahrain Monetary Agency (BMA). including money market and portfolio management.

The new bank. Housing Bank and the BDB. offshore banking units (OBUs). investment banks (IBs). Bank Muscat was granted license to establish a locally incorporated full commercial bank (FCB) in Bahrain.3% during 2004. representing a jump of 17. compared with 5. which represented 78. the bank’s first branch outside Turkey. ICICI Bank. of whom 68. grew by 5.301.4% to 4.1% were Bahrainis.8%. to offer investment services to high net worth individuals and institutional investors in the Gulf region. The employment in the banking industry. UTI International. Employment in the banking sector… According to an annual survey conducted by the Bahrain Monetary Agency (BMA) employment in Bahrain’s financial services industry grew by 6.Global Research Bahrain Global Investment House office in Bahrain in July 2004. nearly one-third (or 1. of whom 88.5% of total employment in the financial services industry in 2004.498 in 2004.2bn at the end of Dec 2004. The local Bahrainis represented around 74. with 2. which will be called Bank Muscat International. which comprises full commercial banks (FCBs).905 were males.1% were Bahrainis. A total 7.2% of the total workforce in this sector. of whom 70. BMA granted licenses to the Industrial Development Bank of Turkey (TSKB).520 personnel.9bn at the end of 2003. The new found interest in the regional markets are expected to give a further fillip to the banking industry in the region and particularly in Bahrain. 2 Bahrain Banking Sector May 2005 .968 at 2003-end. which will be raised to BD50mn in 2007 through a public offering. The new bank is being established to enable Bank Muscat to undertake expansion in the Middle East and North Africa (MENA) region through a base in Bahrain. Strong growth in assets… With the increase in banking activities. HC Securities & Investment (HCSI) and The Family Office (FO).9bn at the end of Dec 2004 compared with US$100.185 people. Of the Bahraini personnel. Bank Muscat’s FCB branch in Bahrain will cease operations. During December 2004. will have an initial paid up capital of BD20mn. At end-Dec 2004. which is the second largest commercial banking institution in India. FCBs remained the largest employer in the banking sector in 2004. an increase of 25. The TSKB will establish an offshore banking unit (OBU) in Bahrain.3% were Bahrainis.406 people were employed by the country’s financial services institutions at 2004-end. has opened its Offshore Banking Unit in Bahrain in Oct 04. compared with 6. Once BMI becomes operational. UTI International Limited (UTIIL) has been granted a license to establish a Representative Office in Bahrain.4% to 5.3% over Dec 2003 level. In Oct 04.396) were females. net foreign assets of the banking system were US$4bn. assets of the banks showed robust growth. while IBs employed 1. HC Securities & Investment (HCSI) will establish a Representative Office in Bahrain.217 in 2003. Representative Offices. OBUs employed a total of 1. while 2. The asset size of the consolidated balance sheet of the banking system in Bahrain stood at US$118.563 people. The entry of such diverse financial institutions from across the world demonstrates the excellent reputation the Kingdom enjoys as an international financial center. The Family Office is the first investment company in the Gulf region that specializes in multi-family wealth services with offices in Geneva and London. The total domestic assets amounted to US$18. The Bahraini workforce in the banking sector grew by 5.

40 73.6bn at the end of Dec 2004 while the domestic liabilities amounted to US$8.815.1 352.370.996.4 473.9 632.5 1.2 668.20 2004 5.5 78. The system remains a net external creditor.20 118.10 Offshore Banking Units substantial rise in assets… The total assets of the OBUs stood at US$98bn at the end of Dec 2004.874.80 2003 3.917.4 86.6% jump from 2003-end level.382.60 2002 5.622.181.643.797.30 937.028.4 263.9 82.30 960 617.682.10 89.30 82.8% to US$83.4bn at the end of 2003.4 260.743.021.107.50 96.30 2.50 457.813.40 May 2005 Bahrain Banking Sector 3 .3 998 53.50 98.90 4.00 6.888.40 102.00 2003 6.20 102.149.479.097.025.70 2.707.089.90 1.382. the total assets of the OBUs were more than 9 times the country’s GDP.30 1.50 98. Overseas Banking Units and Investment Banks In US$ mn Assets Banks Private Non-Banks General Government Other Assets Foreign Assets Total Assets Liabilities Banks Private Non-Banks General Government Other Liabilities Foreign Liabilities Total Liabilities Source: Bahrain Monetary Agency 2001 5.70 5339 119.729.519.713.40 7.80 7.70 4.70 2002 3.30 425.10 5.00 87.5 100.60 529.10 83.2 100.60 2.00 693.7 91.423.743.80 88.815.7 62.40 1.00 7.298.70 447.3 90.694.80 2004 8.30 6.934.80 5. The total assets of the OBUs witnessed substantial rise after the end of Iraq war.4 376.602.934.30 58.792.8 54.488.5 223.50 1.697.965.00 4. Table 3: Consolidated Balance Sheet of Offshore Banking Units In US$ mn Assets Banks Private Non-Banks General Government Other Assets Foreign Assets Total Assets Liabilities Banks Private Non-Banks General Government Other Liabilities Foreign Liabilities Total Liabilities Source: Bahrain Monetary Agency 2001 3. with net foreign assets amounting to US$1.370.913.097.40 5.505.9bn as of Dec 2004. as it increased by 41.519.50 991.40 411.80 3.457.7 569.0 1.70 730.007.70 88.136.6 437.20 4.906.055.90 2. This indicates the importance of OBUs in the overall economy of Bahrain. In Dec 2004.771.266.388.692.10 7.00 76.20 58.786.136.447.084.382. which represents 17.387.10 100.5bn during the same period.20 6.20 100. Domestic assets of the OBUs amounted to US$6.10 554.2 293.00 118.60 4.847.30 83.913.040.00 2.Global Research Bahrain Global Investment House Table 2: Consolidated Balance Sheet of the Banking System: Full Commercial Banks.1 235.996.90 5.70 58.032.560.681.729.10 73.382.7 84.

7 54.3 440.90 4.8 116.021.30 463.6 73.9% rise in private non-bank assets which stood at BD2.00 31.90 150.4 31.50 2003 40.5 57. Table 5: Consolidated Balance Sheet of the Commercial Banks – Selected Banking Indicators Loans to Non-Banks / Total Assets Loans to Non-Banks / Total Deposits Foreign Assets / Total Assets Total Deposits / Total Liabilities Private Sector Deposits / Total Deposits Source: Bahrain Monetary Agency 2001 37.30 The consolidated balance sheet of full commercial banks (FCBs) in Bahrain rose to a 10-year high to stand at BD5.10 44.5 154.4 70.1 2.7 1074.498.498.0 65.7 2002 40.40 4.5 3.3 107.7 30. The strong performance by FCBs was a reflection of the positive business and economic conditions prevalent in Bahrain and the quality of assets held by those banks.172.60 172 108.565.9 1.2 542.0 680.4 77.8 1.4 2004 40.314.3 603.5 44.3 1.4 203.410. Most of the local listed commercial banks showed higher earnings for the period compared to 2003.251.80 62.7 1.602.1 55.4 1.Global Research Bahrain Global Investment House Commercial Banks are not far behind too… Commercial banks in Bahrain recorded outstanding performance in 2004.20 2002 32.1 556.80 256. The consolidated balance sheets of FCBs rose mainly on account of 23. This coupled with an upbeat lending market further supported the banks earnings for the first nine months of 2004.7 70.3 53.1 5.1 79.6 2.021.30 3.00 387.5% over that of 2003.273.4 2003 39.9 4.1 2.882.9 427.5 1.9 257.9 2.4 514.2 577.00 2004 39.593.2 70.4 207.5 135.60 66.6 81.50 357. an increase of 19.9 29.3 2.602.5bn at the end of Dec 2004.17bn at the end of Dec 2004.754.2 732.1 217.6 4.882.8 1.20 263.4 310.8 4 Bahrain Banking Sector May 2005 .4 129.5 445.4 79.195.398.664. The trend that underpinned earnings in 2003 continued into the year 2004 and margins expanded further as the banks enjoyed record low levels of cost of funds at least in the first half of 2004.6 61.9 315.5 233.3 82.0 80.606.20 311.80 5.6 782.3 258.3 32. Table 4: Consolidated Balance Sheet of the Commercial Banks In BD mn Assets Cash Due to Banks Loans to Private Non-Banks Bahrain Monetary Agency General Government Loans Securities Other Assets Foreign Assets Total Assets Liabilities Capital & Reserves Due from Banks Private Non-Banks Deposits Bahrain Monetary Agency General Government Other Liabilities Foreign Liabilities Total Liabilities Source: Bahrain Monetary Agency 2001 27 628.

8% and 0.6%.70 5.5% and 9.192. representing an increase of 16.2 550. Western Europe 25.80 6.155. Domestic assets increased by 18.00 6.23bn.7 General Government 169.1%.233.9 Private Non-Banks 197.3 881. and Asia 1.70 Expanding credit portfolio… In line with the increase in economic activity. while personal and government sector accounted for 45.2 252.842. The low interest rate regime prevalent during the first six months of 2004 induced many retail customers to borrow at lower interest rate.7 21.Global Research Bahrain Global Investment House Investment Banks also posted impressive performance… The consolidated balance sheet of investment banks rose to its 10-year high to US$6.8 Private Non-Banks 183.5 146.9 190. total loans and advances extended to residents by commercial banks increased by 24% during FY2004 and stood at BD2.00 Total Assets 4.2 3.70 528.484.2 Other Liabilities 520.70 3.70 Total Liabilities 4.6%.9 32.6 4.8 Other Assets 96.5 414. 5. while their shares in liabilities were 31%.2bn at the end of Dec 2004.20 319. Share of GCC countries in investment banking assets (excluding Bahrain) was 18%.80 Liabilities Banks 317.4 Foreign Liabilities 2. 24.192.313. USA 29.20 2004 773. Chart 1: Credit to various sectors in percentage as of Dec 2004 13% 8% 46% 16% 3% 9% Manufacturing Trade 3% 2% Construction & Real Estate Non-Banking Financial Institutions Other Sectors Personal Transportation & Communication Source: Global Research General Government May 2005 Bahrain Banking Sector 5 .033.2 239.772. Table 6: Consolidated Balance Sheet of Investment Banks 2001 2002 In US$ mn Assets Banks 328.0 4.90 4.1 243.8 285.0 298.949.245.5 Foreign Assets 3.26bn as of Dec 2004.2 4.1 375.2 113.2% respectively as of Dec 2004.80 Source: Bahrain Monetary Agency 2003 646.923.3 11.9 221.8%.2% of the loans were in the form of business lending.033.313.50 3.5 316.1 103.0 562.484. compared with BD1.9% to US$1.90 5.8bn at the end of December 2003.6 173.90 4.6 General Government 4.407.6% over 2003. The sectoral distribution of total outstanding loans indicates that 45.3% respectively.

Global Research Bahrain Global Investment House On the heels of improved demand.9 299. Under the business loan category. investment in and construction of several large-scale projects is expected to help bolster growth.0 41.3 165.7% in FY2004 while at the same time business segment also registered an increase of 20.629.5 187.8% jump in lending from BD165. Most of the other sectors barring agriculture & fishing recorded modest credit offtake from the banking sector.6 298. Similar is the trend for business loans as they kept on sliding till 2003 only to increase in 2004.5 1.27% during the same period. interest rates started moving northwards especially in the second half of 2004.5% during the same period.8% of the total credit to the business segment and was followed by the manufacturing sector.7 0.5mn at the end of FY2004. Trade sector accounted for the largest pie of the commercial banks credit to the private sector. The lending market is expected to remain buoyant in near term due to increased government spending in various sectors.9 13.5 31.2mn during the period.5 108. The increase was sharp for less than three months deposits and 3-12 months category. construction and real estate sector didn’t witnessed any sharp reduction in interest rates and in 2004 as well rates were highest among its peers in business loan category.3 807.1 1 6. Strangely enough. Table 7: Commercial Banks Credit to Various Sectors In BD mn Business Manufacturing Mining & Quarrying Agriculture. It accounted for almost 33.80 2003 837. which accounted for another 29.008. The booming real estate and construction sector witnessed 12.3 8.2 2.1 251. Transportation & communication sector witnessed a sharp increase in credit offtake as it increased from BD15. Going forward. the personal segment witnessed sharp increase in lending as it grew by 25. personal lending rates continued to slide in 2004 despite the increase in overall interest rates. Mortgage rates fall from 7. we have witnessed consistent decline in interest rates in Bahrain since the past few years. However.90 2004 1.8mn at the 2003-end to BD187.6% share during the period.8 154. Fishing & Dairy Construction & Real Estate Trade Non-Banking Financial Institutions Transportation & Communication Hotels & Restaurants Other Sectors General Government Personal Total Source: Bahrain Monetary Agency 2002 842.3 71.47% to 9.8 286.4 1014.7 1. 6 Bahrain Banking Sector May 2005 .2 207.64% as compared to 17.1 341.798.7 255.44% in 2003.7 43.1mn in 2003 to BD41.7 2.5 27.82% in 2004 while vehicle loans dropped from 9.4 678.1 26.6 5. The credit offtake by the manufacturing sector also witnessed good growth in FY2004 and it stood at BD298.2 24.4 38.9 176. Average credit card rates in 2004 stood at 18.6 27.1 15.230.1mn at the end of Dec 2004. This may be due to the more demand from the sector.57% in 2003 to 6.70 Interest rate scenario… Taking cue from the global trend.2 41.

82 9.11 18. besides the interest rate applied.15 5.58 8. to support the continued growth and advancement of the financial services industry.90 5.75 8.By mortgages .33 0.27 6.94 17. The regulations define consumer finance as any form of credit facility.18 5.60 Less than 3 months 1.By deposits Unsecured .47 5. procedures on early settlement.16 0. taking into consideration all additional charges.68 2004 0.43 17. May 2005 Bahrain Banking Sector 7 .52 0. The Annual Percentage Rate (APR) is commonly used to calculate the annual cost of loans. Loans secured against residential property or loans for business activities are not included.47 5. personal loan or lease. such as insurance and documentation /processing fees. The regulations are aimed at bringing in more uniformity and transparency into this line of business by laying down rules on calculation of interest rates by banks.77 7.40 7.94 5.96 4. Recently.48 5.64 9.Global Research Bahrain Global Investment House Table 8: Commercial banks – interest rates on BD deposit rates 2001 2002 % Deposits Savings 1. to an individual or a family.26 10. BMA issued new guidelines to govern the Bahraini banks consumer credit business. The new regulations limit an individual’s total consumer finance repayments to a maximum of 50% of a person’s monthly income. credit card.38 4.57 9.59 7.44 6.Other Credit Cards Source: Bahrain Monetary Agency 2003 0.17 17.21 6.82 6. while the tenor of a loan may not extend beyond 7 years.91 Business Loans Construction & Real Estate Manufacturing Trade Other Personal Loans Secured . The new regulations create new protections and strengthen existing protections for Bahrain’s borrowers and ensure that banks compete and operate fairly in the area of consumer finance.93 4.26 0.42 6. credit advertising.60 4.86 3-12 months 1.35 1.95 10.99 5. such as an overdraft.47 4.26 9.99 4.93 6.96 6. A highlight of the regulations is the introduction of a uniform methodology for calculating the total cost of credit to the borrower.64 Changing regulatory environment… BMA continues to undertake a number of regulatory and market development initiatives.63 1.54 0.34 8. The new regulations come into effect from 1st January 2005.21 4.20 4.70 7.By vehicle title . as well as limits on an individual’s total borrowing.Salary Assignments .

The first phase of the CRB is scheduled to start during the first quarter of 2005. which will serve as a database of information related to loans to individuals and corporates in Bahrain. It would also provide lending institutions the information they need to ascertain the credit and payment history of a loan applicant. The central database on consumer and corporate debtors will be an important tool in assessing individual indebtedness. which operates the national automated teller machine (ATM) system. BMA granted permission for the establishment of a credit reference bureau (CRB). 8 Bahrain Banking Sector May 2005 .Global Research Bahrain Global Investment House Launching of CRB… In April 2004. The CRB will be operated by The Benefit Company.

The bank’s newly established unit in Bahrain is in the process of finalising a Murabaha transaction with an Islamic financial institution in the GCC region. A final category of Islamic banks operating in Bahrain is represented by multinational banks like Citi Islamic Bank. Shamil Bank of Bahrain and Al Baraka Islamic Bank are dedicated fully to Islamic banking services.Global Research Bahrain Global Investment House Islamic Banks in Bahrain Bahrain pursues a dual banking system. Geneva based UBS launched its Islamic private banking subsidiary. Noriba. BNP Paribas is setting up a dedicated Islamic banking team in Bahrain. which has spearheaded the Islamic banking activities in the region has become the natural and convenient location for Islamic finance in the Middle East region with 29 Islamic financial institutions. Other Islamic banks are resident banks with originally conventional banking activities like Arab Banking Corporation. which is also based in Bahrain and is focusing on high net-worth individuals. Banks have also been attracted by the specifically structured regulatory systems and the presence of a number of organisations. the emergence of Islamic banks in Bahrain drew on the same environment that led to the development of Bahrain as an international financial centre. The Islamic banking industry in Bahrain has grown considerably over the years. Other major global players includes Citigroup and First Islamic Investment Bank. The birth of Islamic banking industry in Bahrain dates back to 1978 when Bahrain Islamic Bank was established to provide commercial banking services. which saw potentially profitable opportunities in diversifying their activities to Islamic banking. BNP Paribas is the latest addition to a growing list of financial powerhouses joining the Islamic banking ranks from Bahrain. Bahrain. The BMA provides equal opportunities and treatment for conventional as well as Islamic banks. The multinational banks involvement has grown with the better regulations and the introduction of internationally accepted accounting standards. Islamic banking in Bahrain gained momentum in the early 1980s when four licenses were issued for Islamic institutions. India’s second largest bank. including AAOIFI (Accounting and Auditing Organisation May 2005 Bahrain Banking Sector 9 . ICICI Bank is also set to make its debut in Islamic financing. The 1990s marked a turning point in the development of Islamic banks in Bahrain as more licenses were issued by BMA and it gained further momentum in 2000. The strong growth of Islamic banking and its impact on financial markets has prompted a number of traditional local and international banks to seek stronger relationships and joint project financing arrangements with their Islamic counterparts. Bahrain is the only country to have created a legal framework for Islamic banks and is one of the few markets that allows dual banking system. In fact. satisfying a growing desire of customers to transact their financial activities in accordance with the Islamic Sharia principles. where Islamic banks operate side by side with their conventional counterparts. thus changing the competitive setting of the commercial banking sector in Bahrain. a subsidiary of Citicorp. In 2003. The Islamic banking industry in Bahrain is becoming highly competitive and more multinational banks are entering in the Islamic banking arena. No other country in the region has created an environment or the legal framework for the operations of Islamic banks. Some banks such as Bahrain Islamic Bank. French major BNP Paribas announced its intention to exploit business opportunities created by the growing Islamic banking market in Bahrain. The Islamic banking and finance industry in Bahrain encompasses a unique blend of institutions of different categories.

With this in mind. International acceptability is further enhanced by the consistent positive assessment of the financial sector by the major international rating agencies. Singapore and Hong Kong in the East and London and New York in the west.g. Accounting Standards: Internationally accepted and customized accounting framework is one of the main business enablers for Islamic banks in Bahrain. corporate governance and liquidity management. an important aspect in the government’s policy in maintaining and enhancing Bahrain’s status as the region’s pre-eminent international centre. Free Capital flow: There are no exchange controls and movement of capital is unrestricted. BMA acknowledges it responsibility to regulate and supervise Islamic banking standards. asset quality. The strengthening and development of Islamic banking has been. market driven non-interventionist approach adopted by the Bahrain Government. The management of investment is entirely a matter of the commercial judgment of the individual investor. Tax-Free Environment: There are no corporate or individual income taxes. 5% import duty on selected goods). There are minimal business regulations and a low tariff structure (e. Bahrain offers global banks the right mix of regulatory support and a safe jurisdiction for accessing the regional markets. the management of investment accounts. and remains. Bahrain based institutions enjoys global access. The framework covers areas such as capital adequacy. the International Islamic Financial Market. in line with IAS and FAS to address the requirements of the diverse stakeholders. the Liquidity Management Centre and the First Islamic Rating Agency. the BMA in consultation with IMF and the Basle guidelines. Key Factors for Global Banks to operate in Bahrain: • Financial Hub: As a financial capital of the Middle East. The diversified and market-oriented economy makes Bahrain an attractive location for private banks. Many banks report on a dual basis. • • • • Regulatory Environment & Enabling Institutions: With Bahrain at the heart of the growing Islamic banking industry. Positioned in the convenient time zone between Tokyo. International Best Practice: International financial institutions find solace in the truly international. 10 Bahrain Banking Sector May 2005 . has developed the first Prudential Information and Regulatory framework for Islamic banks (PIRI) in 2000.Global Research Bahrain Global Investment House For Islamic Financial Institutions). All Islamic banks are required to comply with Financial Accounting Standards (FAS) developed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The financial sector operates within a transparent legal structure and Bahrain’s anti-money laundering laws are on par with international standards set by the Financial Action Task Force (FATF). BMA is trying to provide a level playing field for both Islamic and conventional banks.

as a viable alternative to the conventional banking system. • Endeavour to create secondary market activity with designated market makers where such instruments can be actively traded. the Central Bank of Sudan and the Ministry of Finance of Brunei Darussalam. The international relevance has created a strong sense of security and confidence in the Islamic banking system for the major financial markets. The primary purpose of the IIFM is to provide a cooperative framework to ensure the continued growth of an Islamic financial market. non-profit-making body. It was formed with the agreement between the Islamic Development Bank.Global Research Bahrain Global Investment House The initiative creates uniformity within the Islamic banking industry. The IIFM began operations in April 2002. auditing. c) International Islamic Financial Markets: International Islamic Financial Markets (IIFM) was established to create and develop an international market for Islamic financial instruments by facilitating cross-border investment activity. standardizes interpretation of risks inherent to unique Islamic contracts. • Enable IFSIs to assume term risk. a) Accounting and Auditing Organization for Islamic Financial Institutions: The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established as an international. The following institutions are the backbone of the Islamic banking regulatory environment in Bahrain. all Islamic financial institutions in Bahrain comply with PIRI guidelines. Islamic banks and corporates with surplus liquidity will form the primary investor base for the sukuks. asset-backed treasury instruments (sukuks) where IFSIs can invest their surplus liquidity. the Labuan Offshore Financial Services Authority (representing Malaysia). • Provide short-term investment opportunities that have greater Sharia credibility and are more competitively priced than commodity Murabaha transactions currently undertaken in the market. Key objectives of the LMC are to: • Facilitate the creation of an interbank money market that will allow Islamic Financial Services Institutions (IFSIs) to effectively manage their asset liability mismatch. governance and transparency. It is the leading international standard setter for Islamic financial institutions. Bahrain Monetary Agency. All Islamic financial institutions licensed in Bahrain have to comply with AAOIFI standards. b) Liquidity Management Centre: The Liquidity Management Centre (LMC) was established in Bahrain in 2002 to develop an active secondary market for short-term Sharia compliant treasury products. in the field of accounting. These comprise different asset pools with varying risk and return profiles and different tenors. the Central Bank of Indonesia. based on Sharia rules and principles. and its standards are based on international accounting standards. • Provide short-term liquid. • Enable IFSIs to participate as both investors (providers of funds) and borrowers (providers of assets). Now. May 2005 Bahrain Banking Sector 11 . autonomous. securities and liquidate such assets to improve the quality of their portfolios. and offers a mechanism for measuring bank’s performance and enhances corporate governance. tradable. It works closely with bodies such as the International Accounting Standards Board.

but smaller players have also plans to participate. number of other nations have also issued Sukuks and some are in the process of issuing it further.Global Research Bahrain Global Investment House The roles of the IIFM are as follows . a team led by the private sector is in the process of setting up a world class Islamic finance R&D institute in Bahrain. One of these innovations has been in the area of 12 Bahrain Banking Sector May 2005 . There is an impressive local talent. US$400mn sukuk from the Islamic Development Bank issued in July 2003 and US$700mn issue from Qatar in September 2003. Talent Pool: The presence of support institutions in Bahrain has been the main driving force behind the thriving financial industry. . out of which around 92% were Bahrainis. prudential regulations and product development. More large scale sukuks of this kind are expected to come in the coming year. These include organising seminars and conferences in key financial centres and providing technical assistance and employee training programmes to its members. e) International Islamic Rating Agency: International Islamic Rating Agency (IIRA) was established to evaluate and rate Islamic banks and instruments and provide an independent assessment of their compliance with Sharia tenets. f) Bahrain Institute of Banking & Finance: Bahrain Institute of Banking & Finance (BIBF) provides training courses for Bahrain’s financial sector. Currently.To promote the harmonisation and convergence of Sharia interpretations in developing Islamic banking products and practices which are universally acceptable. Other notable sukuks were the US$600mn sovereign issue from Malaysia that came to the market in June 2002. The institute would provide and institutional platform for research on Sharia compliant products. with a number of academics and analysts working in the financial sector. BMA introduced the first tradable sukuk market in 2001 and since then the pace of issuance has quickened with the BMA tapping this market seven more times. and aims to create a new generation of highly professional Islamic bankers. growth in Islamic finance has largely come from the ability of private sector Islamic bankers to devise innovative products that meet their customers’ needs while complying with Islamic law. The total employment in the Bahrain’s Islamic banking industry is estimated to be around 850 at the end of 2003. It develops and facilitates specialist courses on Islamic finance focusing on risk management. Apart from the BMA’s efforts. Innovations in Islamic Finance: BMA has pioneered a series of new Islamic financial instruments designed to broaden the depth and liquidity of Islamic financial markets. The total value of sukuks issued by Bahrain has reached close to US$1bn. d) General Council for Islamic Banks and Financial Institutions: General Council for Islamic Banks and Financial Institutions (GCIBFI) aims to enhance market understanding of Islamic banking and finance on an international scale.To encourage a large number of Islamic financial institutions to participate in the market by introducing a wide range of Sharia compliant products and the creation of an active secondary market thus providing liquidity to the instruments traded in the market. Following the footsteps of Bahrain.

however. thereby providing clients with access to an alternative asset class offering absolute returns. a number of financial institutions have been researching viable shariah compliant alternatives to these conventional trading strategies. Another area of particular interest is alternative investments. RaMI offers investors a number of important benefits. Islamic commercial banks have been able to leverage the structure to offer indirect working capital financing as well as for short-term liquidity management. This breakthrough means that for the first time. The original amount is reinvested in another Murabaha transaction and so on. the possibility of higher rates of return and a flexible investment period. which involved financing for the expansion of Alba and Al-Hidd Water plant provide examples of the increased use of Islamic funds.Global Research Bahrain Global Investment House Islamic collective investments schemes. RaMI is a shortterm. Shariah compliant structured yield alternative that offers capital preservation while providing investors with the potential to earn up to 10% per annum. Islamic banks in the Middle East boast US$30bn in excess liquidity looking to be deployed. including capital preservation. Examples of such institutions which manage a number of collective investment schemes are Al Amin Bank and ABC Islamic Bank. private banking. Islamic project finance is one area that has caught the attention of Islamic banks in recent years. while for quite a number of years there has been a considerable talk of the potential Islamic finance. In another development. facilitating ready access to regional opportunities. Two recent transactions in Bahrain. RaMI investors select their benchmark commodity or currency and its performance within a selected price range. Over the years. Once the individual Murabaha deferred sales proceeds are due. any profit arising from the investment is paid to the investor. At the core of this Islamic banking offering is enhancement of institutional financial services. More and more project finance deals are having Islamic tranches alongside conventional financing and Islamic debt capital market is emerging as a fast growing alternative funding source. it now appears that the door to such potential has finally been unlocked. The result of these research efforts is the recent development of an innovative short sale structure that is in accordance with shariah finance principles. May 2005 Bahrain Banking Sector 13 . Building on the Murabaha principle. shariah compliant financial institutions can introduce hedge funds into their product offerings. particularly shariah compliant hedge funds. Several pioneering initiatives being promoted in Bahrain will ensure continued integration of the industry in global markets over the next decade. thereby planning for a higher return within a given time period. More recently. Periodic Murabaha trades are carried out over the life of the investments. Until recently. All the above indicators point to the fact that. which is significantly higher than normal Murabaha investments. Noriba Bank recently announced the launch of a new product called Range Murabaha Investments (RaMI). Islamic investors have been unable to invest in hedge funds because of the lack of shariah compliant equivalents to such strategies as equities shorting and options. There is a surge in Tawaruq based contracts within the Islamic banking industry in the GCC region. Bahrain is actively implementing a framework of strategies to facilitate asset management investment advisory. project finance and takaful activities for the Islamic financial industry. There are a number of Islamic financial institutions in Bahrain which have specialised in Islamic collective investment schemes. Currently.

Globally. As per the Chairman of the General Council for Islamic Banks and Financial Institutions (GCIBFI). The growth in assets was mainly fuelled by 39. the assets of the global Islamic finance companies stood at over US$260bn with an annual growth rate of 23. Market Size There are currently 29 Islamic financial institutions licensed in Bahrain. restricted and unrestricted investment accounts. the industry witnessed scorching pace of growth. A case in point is the proposed world-class Islamic Finance Training Institute. Islamic Banks continue to grow… As a result of the various initiatives undertaken by the Bahraini government to develop the country as an Islamic banking hub. Islamic banks provide a variety of products. In addition. which was an increase of 30. Islamic credit cards have been introduced. these challenges need to be overcome if Islamic banking is to fulfill its true potential. although growing.3%. do not yet offer all the conveniences and choices available from conventional banks.7% over its 2003-year end level. Since the past four years. Musharaka.43bn at the end of Dec 2004. which have been accordingly modified to comply with Sharia principles. Thus. In recent years. Islamic banks. thus ensuring their international application. The Islamic banking industry in the region has gained momentum in recent years and as per one estimate it is growing at the rate of 15% per annum. including 5 full commercial banks. more Islamic instruments are needed to aid risk management. aimed at refining new talents to international standards. The total assets of Islamic banks and financial institutions operating in Bahrain stood at US$5. Mudaraba. Al Salam and Istisna. More and more countries need to adopt common standards for auditing and reporting systems to ensure the transparency demanded by global regulators and to make comparisons easier. ranging from traditional Islamic structures such as Murabaha. The taskforce ensures that all initiatives are developed in consultation with relevant stakeholders. including Islamic alternatives to derivatives and insurance. All these new initiatives are expected to bring new dynamism to the Islamic banking industry in the region and especially in Bahrain. The foreign assets of the banks jumped primarily in the third and the fourth quarter of 2004. the size of Bahrain’s Islamic banking and finance industry rose sharply in recent years and has continued to grow in 2004 as well. Ijara. There is even a talk of creating Islamically compatible hedge funds. The number of Islamic banks in the world increased from 176 in 1997 to 267 in the first quarter of 2004.Global Research Bahrain Global Investment House The initiative is driven by a public and private sector working partnership. the total assets of the Islamic banking industry grew at a CAGR of impressive 30. 16 investment banks and 3 offshore banking units. syndications and other structures used in conventional finance. The Islamic banking industry needs to develop more innovative new products to meet the customers varied demands. and the insurance business is starting to grow. Islamic banking and finance is now an established industry in Bahrain and the government considers it as a growth industry of the future. it has become acceptable to invest in shares.4% rise in foreign assets of the banks. 14 Bahrain Banking Sector May 2005 .5%. under the banner of Islamic Banking & Takaful Taskforce (IB&T).

00% 2.241.90 2004 12.1 654.80 2.30 678.4% of the total banking assets in 2001 to 4.1 1.5 1.50 4.7 67.458.4 48.899.4 429.60 2.2 774.8 2.20 The total assets of the Islamic banking has been increasing continuously since the past few years.9 1. Overseas Banking Units and Investment Banks In US$ mn Assets Cash Banks Private Non-Banks General Government Other Assets Foreign Assets Total Assets Liabilities Capital & Reserves Banks Private Non-Banks General Government Other Liabilities Foreign Liabilities Total Liabilities Source: Bahrain Monetary Agency 2001 4.4 22.458.6 1.2 258.1 28.3 733.7 61.8 1.00 5.4 18.1 438.1 1.50 2.80 536.434.00% 1.10 403.8 105.5 67.096.552.10 2002 7.156.147.2 793.911.277.50 2.092.00% 2001 2002 2003 2004 Assets of Islamic banks as a % of total banking assets Source: Global Research May 2005 Bahrain Banking Sector 15 .008.00% 3. we believe that the assets of Islamic banks are set to increase exponentially in view of the strong demand for Islamic products and services.3 18.056.9 333.80 2003 10.9 51.6 817.296.156.00% 0.5 120.924. Going forward.434.247.Global Research Bahrain Global Investment House Table 9: Consolidated Balance Sheet of Islamic Banks: Full Commercial Banks.9 21.8 5.080.8 2. Chart 2: Historical trend of assets of Islamic banks as a percentage of total banking assets 5.1 1.7 87.00% 4.20 1.8 2.8 1.9 117.90 678.8 231.80 153.5 1.6 189.30 4.50 1022.911.6% as of Dec 2004. It increased from 2.

Because of the shoring up of their share capital. AUB had 39.3% 2.8% 2004 42. AUB continued to have a larger chunk of the total loans and advances portfolio of the listed banks in FY2004.1% 21. remained a marginal player in the banking industry in Bahrain in FY2004. Bahrain Islamic Bank (BIsB) and Bahraini Saudi Bank (BSB).3% 3. both operate in compliance with the Islamic Sharia principles.7% Loans 2004 39.1% Source: Bank Reports.8% 4.8% 23.3% 2003 38.8% 6.5% 2.2bn. most of the banks have also increased their investment portfolio.6%).4% share which was followed by NBB with 26. The opportunities are there. In addition. AUB was highly successful in increasing its customer deposits in FY2004. Banks such as BIsB have issued bonus shares in FY2004 while AUB have raised equity by way of partly convertible non-cumulative preference shares. 16 Bahrain Banking Sector May 2005 .Global Research Bahrain Global Investment House Performance of listed banks Bahrain has total five banks listed in the commercial banking category. Ahli United Bank (AUB) is the largest bank in terms of asset in Bahrain and virtually dominate the banking industry in Bahrain.8% in FY2003.4% 2. Most banks in Bahrain have reported healthy growth in assets and earnings during the year ended 2004. The winner will be those who are effective in utilizing their capital by providing higher return on equity.9%. Some of the banks in Bahrain followed their counterparts in the GCC region to shore up their share capital by way of bonus issue or rights issue to comply with the Basel II requirements.9% 23. AUB has around 49.4% 26. as a result its market share went up from 35. The total assets of the listed Bahraini banks at the end of 2004 stood at BD6. the focus now should shift from capital adequacy to capital efficiency.7% 22.2%) and NBB (23. representing a growth of 17.7% 6.2% in FY2003 to 42. banks in Bahrain are adequately capitalised to take the advantage of emerging opportunities not only in Bahrain but in the entire GCC region.9% 4.9% 3. In recent years all the banks have taken initiatives to restructure their assets as well as liabilities.9% and BBK with 23. Bank of Bahrain & Kuwait (BBK).1% 23.9% closely followed by NBB with 21. However.9% 4.6% 28.1% 2.6% 28.1% Deposits 2003 35.1% share in loans which was followed by BBK (28. in order to take the advantage of the booming market.2% 5.8%.1% of the total assets of the listed banks in Bahrain in FY2004 as compared to 44. Global Research In terms of customer deposits also. which overtook National Bank of Bahrain (NBB) in terms of assets in 1998.4% in FY2004.9% 25. the challenge lies in how the banks convert this into a higher topline as well as bottomline.5% 24.2% 29. was at the second spot with 22. A phenomenon which has been prevalent all across the GCC region is the increase in the share capital of the banks.9% 22. The following table gives the broad overview of the total balance sheet of all the listed banks in Bahrain. AUB dominated the banking industry in Bahrain with 42.4% 2004 49.9% over 2003. Table 10: Market Share of Listed Bahraini Banks (FY 2004) Assets 2003 AUB NBB BBK BIsB BSB 44.

NBB’s non-performing loans to gross loans stood at 1.864 18.131 10.670 1.409) 673.Global Research Bahrain Global Investment House Table 11: Comparative Balance sheet of Bahraini Banks (as of FY2004) BD' 000 AUB NBB BBK BIsB 9.936 BSB 10.775 688.400 45.111 (15.625) 1.689 722.206 244.906 131.501) (15.702 764.772 2.166 14.040 844.594 (50.883.636 148.595.778 2.153 1.830 94.262 158. NBB continued to have the best asset quality among its peers despite its huge size and outstanding growth.034 (2.770 1.017 3.470 1. Despite that there are some banks whose delinquency ratios are much higher as compared to the international standards.595 40.682 59.973 83.314 (58.017 55.1% 196.830 187.780 Asset Size and Asset Quality As mentioned earlier.163 1.002 185.840 68.359.250 305.292 9.093 673.2% and AUB with 4.017) 170.302 Assets Cash & cash equivalents Treasury Bills Due from banks and other FIs Gross Loans & Advances Less: Provisions Net Loans & Advances Investments Securities Net Fixed Assets Interest Earning Assets Total Assets Liabilities Due to banks & FIs Customer Deposits Medium term loans / Other borrowings Term loans Paid-Up Capital Reserves Shareholders Equity Interest Bearing Liabilities Source: Bank Reports. Around 47% or BD2.402 4.850 1.279 306.185 128.930 157.111 823. As a result we have witnessed substantial improvement in the asset quality of the banks.91bn of the total assets were deployed in lending operations.370) 12.936 23.501) 1.091.653 91.5% BSB 91. the total assets of the banking sector stood at BD6. Global Research 820.3% 102.580 1.036 193.420.750 158.758) 51.000 (7. Bahraini Saudi Bank has the highest non-performing loans as a percentage of gross loans which was followed by BBK.1% followed by BIsB at 2.364 3.2% 53.090 9.852 1.316.034 (2.758) 51.400 25.093 49. Global Research May 2005 Bahrain Banking Sector 17 .630 93.165 208.9% Source: Company Reports.240 35.416 957.502 6.248.435 19. In the Bahraini banking sector.9% BIsB 172.3% BBK 823.750 52.643 486 157.2bn as of Dec 2004 end.889 (40.775 40.802 54.889 (40.423 1.407 172.520 376.594 689.507.409) (58.000 29.600 1.149.872 376.462 1.314 (50.930 100. Since the past few years banks in Bahrain have focused extensively on improving their asset quality.141.689 79. Table 12: Asset Quality of Bahraini Banks (FY 2004) (Amt in BD 000) Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL AUB 1.589 229.131 21.349 254.239.000 56.329 20.2% NBB 689.045.141.6% 73.625) 764.3% in FY2004.017) 170.091.800 228.131 62.702 7.4% 64.

074) 4. most of the Bahraini banks have been improving their operating performance over the years owing to infusion of IT.564 (4.910 17. resulting in surplus liquidity being kept within the region. Table 13: Comparative Income Statement of Bahraini Banks (as of FY2004) BD’ 000 Interest Income Interest Expense Net Interest Income Non-Interest Income Provisions for loans Impairment of inv.3%.88mn. which faced credit irregularities in 2002 and has got a strong backing from the regulator BMA.3% to BD3. thereby achieving higher net interest income.880) 27.379) 75.4% to US$106.427 25. Overall. the booming markets also helped the banks in Bahrain to substantially increased their investment income. a new and very promising market. The bank has worked out a three-year business plan with the assistance of an external consulting firm to create niche for itself.265 655 (174) 4. while that of Ahli United Bank rose by 22.411 (2.435 (14.790 (10. FY2004 net profit of National Bank of Bahrain surged by 26.244) 24.061 NBB 38. the bank reported an impressive performance as its net profit jumped by 25.920 (37. Overall.944 44.737) 3.821) 47.1% to BD28. Operating Performance Most banks in Bahrain have reported healthy growth in interest income and earnings during the year ended 2004. BBK is also planning expansion in the region as the domestic market is highly competitive. AUB acquired 40 per cent stake in Al-Ahli Bank of Qatar.784 (21. For example.485 (184) 8.698 (16.746 (2.080) (1. Recent growth in deposits in the banking sector indicates that investors are still less inclined at taking on overseas equity-risks. Global Research AUB 95.258 BBK 50.7mn during the same period.258 28.511 (48.884 1. NBB was followed by AUB with 102.264 4. In addition to this.675) 38. to its existing large operations in Bahrain and Kuwait.444) (1.259) 29.705 BSB 5. the banks in Bahrain have prudently managed their interest rate spreads between assets and liabilities. NBB is as usual were at the forefront of providing more for its NPLs as it provided 196. process re-engineering with emphasis on automation and cost initiatives in the banking business.4% to BD1.566) 46.884 The listed banking segment in Bahrain showed lots of activities during the year ended 2004. Securities Operating Income Operating Expense Operating Profit Net Profit Source: Bank Reports. In FY2004.775 (1.440) 28. others have not provided adequately for their NPLs in FY2004.2% and BBK with 73.510) 4. Bahraini banks have benefited from the buoyant activities in the domestic and regional markets.338 (550) 44. The banks such as BIsB have chalked out long-term strategy to make serious dent in the Islamic banking in 18 Bahrain Banking Sector May 2005 . Bahraini Saudi Bank.525 22. AUB was also active in forming a new bank in Bahrain called Future Bank.26mn over the corresponding period in 2003.827 3.245 40.338 (2.Global Research Bahrain Global Investment House Except two banks namely NBB and AUB. In addition to this. The acquisition represents an important milestone in AUB’s strategy to become a major regional bank in the Gulf by adding a significant presence in Qatar.862) 1.678 BIsB 6. to improve service levels.671 (23.5mn and BIsB’s profit improved by 50.9%.

27% 28.70% 30. aggregately up by around 21% over 2003.14% BBK 17.4% 108.6% 75. NBB reported a net spread of 2.94% 56.71% 13.8% 24. banking sector in Bahrain has been witnessing cost rationalization since the past few years.5% 55.10% 1.2% 1. As a result. AUB and BSB were at the bottom in efficiently utilizing their asset base. It has been observed that recent thrust on implementing core banking solution and automation of branches have helped the bank to efficiently serve the customers.7% 67.0% 97.74% The strong profitability of the banks have also boosted their Return on Average Equity (RoAE) and Return on Average Assets (RoAA). which was followed by BBK at 1. which was followed by BBK (2.0% 83.9% 49.48% 26. We believe that.94% NBB 15.0% 1.88% 41.6% 23.11% 19.52% 32.97% 1.8% 11.1% 1.31% 43.4% 74.19% 1.8% 60.01% 2.90% 2. which was closely followed by BSB with 16. AUB and BIsB were the laggards in this respect as they reported very low RoAE of 11% and 8% respectively in FY2004.1% in FY2004.2% 86. a move that is currently helping bolster expectations in the sector.Global Research Bahrain Global Investment House Bahrain.80% 1.0% 1. banks were forced to restructure their balance sheets. AUB and BIsB reported the lowest spread in the banking sector in Bahrain. all 5 banks saw improved profitability during FY2004.19% 2. though they were late starters in this respect.18% 28.98% 2. BBK has the highest return on equity in the banking sector in Bahrain as it reported RoAE of 17. Table 14: Comparative Ratios of Bahraini Banks (as of FY2004) BD' 000 Profitability Indicators ROAE ROAA Interest Exp / Interest Income Interest Income / Avg Int earning assets Interest Exp / Avg Int bearing liabilities Net Spread Net Interest Margin Non Interest Income / Operating Income Dividend Payout Ratio Efficiency Indicators Cost to Operating Income Staff Expenses / Operating Income Liquidity Indicators Gross Loans to Customer Deposits Customer Deposits / Total Deposits Capitalisation Indicators Capital Adequacy Ratio Equity to Total Assets Equity to Gross Loans Source: Global Research AUB 11. Similarly. On account of falling interest rates till mid-2004. NBB leads the pack in efficiently utilizing its assets as it reported the highest Return on Average Assets at 2.7% 72.01%).16% BIsB 8.13% 1.5% 72.4% BSB 16.3% 20.88%.7% 12.94% 2.18%. NBB has the highest net interest margin in Bahrain while BBK is at the second spot.28% in FY2004.33% 38.35% 32.7% 2.48% 50.66% 9.66% 1.7% 65.11% 52. banks focused heavily on improving operating efficiency and asset quality during the past period.1% 3.3% 89.7% 3. As mentioned earlier.8% 28. banks will continue to benefit from the further hardening of interest rates.26% 0.7% 36.7% 31.2%) and BSB (2.65% 2.9% 3.28% 2.3% 30.2% 77.3% 18. As a result. NBB has the highest net spread among its banking peers in the country.78% 2.7% 110. which increased rapidly.0% 48. Also.8% 3.8% 63. growing the size of the loans and advances segments.2% and NBB with 15. their cost May 2005 Bahrain Banking Sector 19 .7%.0% 3.3% 32.8% 14.86% 13.3% 23.

Going forward. followed by BBK.Global Research Bahrain Global Investment House to operating income after provision seems to be on a higher side. AUB and BIsB. AUB continued to have higher employee productivity as it reported a net profit per employee of BD71. NBB was followed by BBK with cost to income ratio of 48. Efficiency Parameters Bahraini banks have made significant investments in Information Technology infrastructure in order to improve their operating efficiency and enhance customer satisfaction.564 (4.11 36. and more importantly.41 NBB 25 571 44.675) 135.862) 46. Though NBB has higher operating income per employee as compared to BBK.65 20 Bahrain Banking Sector May 2005 .33 67.8%. In terms of employee productivity AUB is ahead of its peers with the highest operating income per employee.440) 78.410.737) 46. This has resulted in banks being able to improve employee productivity and launch new products and services faster.58 BIsB 12 186 8.49 BBK 18 702 47.92 BSB 6 101 4.698 (16. banks’ operating costs have been decreasing. In terms of operating income AUB and BBK are way ahead of their rivals.16 71. going forward. of Employees Operating Income (Net of Provisions) Operating Expenses Operating Income Per Employee Operating Expense Per Employee Net Profit Per Employee Source: Bank Reports. Consequently. As can be seen from the table below.47 19. which is much lower as compared to its peers in Bahrain. Since most of the banks seem to have completed their technology upgradation projects.99 28. profits. Most banks are now able to monitor sources of costs.79 49. NBB was at the forefront in this regard as it reported the lowest cost to income of 36. it would mean large investment outlays needed for these projects are over. risks. of Branches No.746 (2. these systems make the creation of new products easier and faster. Table 15: Comparison of Operating Performance of the Banks (FY 2004) (Amt in BD 000) No. New and sophisticated systems have been introduced which should allow banks to reap efficiency gains. During the past two to three years most of the banks in Bahrain have been busy upgrading their technological capabilities. They also allow bank employees to focus on customer services. NBB has the largest banking network in Bahrain.3% and 55.91 33.3% respectively. the latter has higher operating expenses per employee than NBB. BSB and BIsB has the highest cost to income ratio of 60. the banks in Bahrain still have wide scope to improve their cost to income ratio and thus perk up their profitability as well.920 (37.244) 67. In addition. Global Research AUB 17 561 75.8%.34 18.04 25.28 28.671 (23.

As banks in Bahrain has shown their intentions to grow. The outlook for 2005 is quite positive for the banks in Bahrain and in the GCC region. The capital raising in recent years by way of bonus/rights has almost been over and now the focus should shift to efficient use of capital rather than on capital itself. it is high time for the bank to move out of its domestic focus and look aggressively for opportunities elsewhere in the region. Last two years have witnessed a number of new entrants into the retail banking field in Bahrain. May 2005 Bahrain Banking Sector 21 . However. overall environment remains highly competitive. there are strong indications of an overall increase in competition from other banks. Banks are also expected to refocus on their target market through a process of re-engineering its retail capabilities. Bahraini banks are not expected to be tied down to a very smaller and possibly saturated Bahraini market. Since the banking sector in the region is still in a consolidating phase Bahraini banks would have an early mover advantage and can grab substantial market share before others move in. demand for credit from corporates is expected to remain buoyant as well though margins will be lower as compared to retail side. prospects for Bahrain’s commercial banks are challenging given their relative size and lending opportunities. The major push for banks in Bahrain is likely to come from the retail side of their business as this segment is higher margin business. improve product range delivery and enhanced client segmentation. upgrading human resources. Further. We believe that banks like AUB. Although all those initiatives have not yet made any significant impact on the competitive environment. banks in Bahrain are expected to shore up their retail businesses by expanding their operations in other parts of the region.Global Research Bahrain Global Investment House Banking Sector Outlook Banking sector in Bahrain has become more competitive in recent years. In order to become more efficient banks undertook restructuring exercise in recent years and this is expected to continue going forward. In addition to these. Many corporates have already announced their capital expenditure plans. Consequently. growth will also be driven from number of infrastructural projects which are coming up in the region. BBK and NBB are likely to expand their presence in the other GCC market for growth. the fee based income is also expected to be robust for most of the banks. Those banks will be winners. Oil revenues will be much better than originally forecasted and with this huge inflow of liquidity most of the banks are looking forward at further restructuring and modernizing their structures and also spending heavily on IT development. Nevertheless. To maintain its growth rate and to face the increasing competition in the small Bahraini market. who can control their operating expenses at the sane time providing efficient services to customers.

Since then the stock moved up as per expectations and reached our target price in August 2004. Our valuation matrix includes only commercial banks.6 1.48% 16.22% 14.23 # The stock price of AUB is in US$ * As on April 24. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions. 2004 (excluding proposed dividends). with some exceptions. BIsB.2x of its estimated earnings of 2005. BBK enjoys the highest price to book value multiple of 2.71 2. Increase in interest rates would lead to substantial improvement in the incomes of large banks such as AUB. which has the highest price to earnings ratio in the sector has the lowest price to book value of just 1.00% 21.86 times.125 704 405 134 RoAE P/E * P/BV* Composite Potential (x) (x) Share Value Upside/ (fils) Downside 870.5 1.12% 15.1 1.89 1.00 based on DDM and peer group valuation method. Over the medium term. Currently. BIsB enjoys the highest P/E multiple with 25.61 times. NBB & BBK. 2005.52% 7. AUB is also trading at P/BV of 2.86 2.7x.88% 17.2% Recommendation Buy Not Rated Buy Hold Not Rated Bahrain AUBB.3% vis-à-vis the current market price of the stock. Similarly.92 1.49 1.99% 25.BH Bahrain NATB. We had recommended a price target of 68 cents for the bank in Dec 2003 when the stock was quoting at 57 cents.1x followed by AUB with 21.12 794 418 12. which is higher by around 12. Source: Global Research The average price to book value of the sector was at 2.92 times followed by NBB with 2. As of April 24.14 2. AUB is expected to post stellar performance buoyed by the improvement in its core and non-core businesses.5 2.48% 11. the average price earnings ratio for the banking sector stood at 18.8% 3.18% 15.BH Bahrain BBKB. 2005.6x in the banking sector in Bahrain.49x. Ahli United Bank We believe that AUB’s net interest income is expected to improve strongly due to the further hardening of the interest rates.91 400.BH Bahrain BISB.BH 67.61 102.61 2.00 12.6x of its estimated book value and 17.40 times the book value as of December. both conventional and Islamic. The estimated fair value of AUB’s stock works out to US$1. The bank is all set to take the advantage of the booming regional markets by becoming a pan-GCC 22 Bahrain Banking Sector May 2005 . The bank is expected to grow in an inorganic way and is expected to become a pan-GCC bank in near future.9x based on their 2004 earnings. BBK enjoys much lower P/E of 15. Table 16: Comparative Valuation of Bahraini Banks (FY 2004) Name of Bank Ahli United Bank # National Bank of Bahrain Bank of Bahrain & Kuwait Bahrain Islamic Bank Bahraini Saudi Bank Country Reuters Code CMP* M-Cap* RoAA (fils) BD Mn 0.BH Bahrain BSBB.0 1.72% 17.3% 607. The discounting enjoyed by some of the banks is likely to improve from the current levels owing to the further increase in interest rates over the medium term which would result in higher margins and profits and attractive yields.Global Research Bahrain Global Investment House Valuation Matrix The valuation of the banking sector in Bahrain appears to be rather realistic. GB is trading at 1.

Since then the stock has moved up as per our expectations and reached its peak of 762 fils. Focus on alternative delivery channels is expected to further boost its efficiency. BIsB is trading at 1. Hence. May 2005 Bahrain Banking Sector 23 .1x of its estimated earnings of 2005. The estimated fair value of BBK’s stock works out to 794 fils based on DDM and peer group valuation method. going forward. Bank of Bahrain & Kuwait The bank is expected to look forward for strategic alliances as well as the opportunity for mergers and acquisitions. Currently. Bahrain Islamic Bank We believe that fees and commission income of the bank is expected to be buoyant due to the bank’s efforts to launch various new products and services.Global Research Bahrain Global Investment House bank. which is higher by around 12. The fundamentals of the bank remained robust and has strong income visibility. though it has yet to reach our targeted price.88x of its estimated book value and 22. which leaves marginal upside potential of about 3. Therefore. As a part of its rebranding exercise.2% over the current market price. BBK is trading at 2. Hence. In October 2004. we continue to maintain ‘Hold’ on the stock. The bank is also expected to report strong gains from its investment income.3x of its estimated earnings of 2005. Currently. we had recommended a Hold on the stock. which will focus primarily on customer service. the bank is expected to launch new and innovative retail banking concept. when the stock was trading at 695 fils. justifying our earlier buy recommendation. Since then the stock moved up smartly to reach its all time high of 480 fils in March 2005.8% vis-à-vis the current market price of the stock.79x of its estimated book value and 13. in order to establish cost efficiencies and diversify asset base. we maintain our earlier rating and recommend a ‘Buy’ on the stock. we maintain our earlier rating and recommend a ‘Buy’ on the stock with a medium term perspective. when the stock was trading at 336fils. We have revised upwards our earlier projections due to strong outlook of the bank and improved market conditions. We had recommended a Buy on the stock in September 2004 with a target price of 788 fils. The estimated fair value of BIsB’s stock works out to 418 fils based on DDM and peer group valuation method.

Global Research Bahrain Global Investment House This Page Intentionally Left Blank 24 Bahrain Banking Sector May 2005 .

Global Research Bahrain Global Investment House PLAYERS PROFILES May 2005 Bahrain Banking Sector 25 .

AUB has established strategic alliance with Mellon Global Investments.Global Research Bahrain Global Investment House Ahli United Bank Reuters Code: AUBB. AUB has signed a ten-year management agreement which will see the bank oversee the management and provide technical and marketing services to the bank. and Henderson Global Investors.49 12M Avg. the bank acquired 40% stake in Qatar based Al Ahli Bank of Qatar.57 / 1.1 US$2. Public Institute for Social Security and Pension Fund Commission of Bahrain. global fund management and private banking services directly and through its subsidiaries. It represents a merger between London-based United Bank of Kuwait and Bahrain based Ahli Commercial Bank.1 35.314mn US$1. The bank had 561 employees as of end-Dec 2004 servicing customers from 17 branches spread across strategic locations in Bahrain. Future Bank have an authorized capital of US$200mn and an initial paid up capital of US$99mn.00 Key Data EPS (Cents) BV (Cents) P/E P / BV Source: Global Research Background • Ahli United Bank (AUB) was incorporated in Kuwait in 2000 as a closed company and changed to a public shareholding company in the same year. AUB formed Future Bank in Bahrain based by merging the Bahrain operations of Bank Melli Iran (BMI) and Bank Saderat Iran (BSI). where BMI and BSI has operations. The obvious reason being that this will give AUB entry point in Iran and Oman. As part of the agreement Al Ahli Bank of Qatar has been renamed as Ahli Bank QSC. a specialist in international real estate fund management. Recent Developments • AUB is rapidly trying to become a pan-GCC bank with a strong regional focus. a major mutual fund provider. 52 week Lo / Hi Market Cap Target Price 0. commercial and investment banking business. vol. In 2004.7 21.424mn US$ 0.89 24th April 2005 BUY 4.BH Listing: Bahrain Stock Exchange Current Price US$0. The bank offers a full range of banking services focused on retail. • 26 Bahrain Banking Sector May 2005 . with each bank having equal stake. Shareholding Pattern • The major shareholders of the bank include Gulf Projects Investment Company.7 2.

5% during the same period.6mn while other operating expenses jumped by 70% to US$45.2% in our projected net profit figures for FY2004.Global Research Bahrain Global Investment House • The end of Dec 2004 mark the bank issuing partly convertible preference shares. The net interest income during the period increased by a 11.7% to US$47.000mn shares and thus raised US$450mn. Trading income of the bank recorded strong growth as it grew by 196.031mn shares with total proceeds of US$464mn. Despite the huge jump in provision. Income from associates. Similarly.3% to US$3. The bank falls short by just 2. AUB increased the final issue size to 1.3% to US$12.6mn gains on sale of investments. The issue is expected to shore up the bank’s CAR tremendously. as a result the bank can leverage its capital base to take aggressive exposure in the booming GCC economy. the total operating income after provision of the bank increased by 17. The total subscriptions exceeded 1.85mn as a result of strong retail and corporate loan growth.16mn. fees and commissions income grew higher by 20% to US$40. However. superior corporate loan spreads and improved balance sheet mix. This injects the required capital for growth without diluting its earnings per share. Helped by business volume growth in corporate and retail banking space.5% to US$254mn during FY2004 as compared to the same period last year due to the restructuring of its interest earning assets as well as hardening of the interest rates in the later half of the year. The provision for loan losses were up sharply by 131.1% in our projected net interest income and 6.5% to US$124. to accommodate the massive investor demand and its future growth objectives.6% in FY2004 as compared to 44. which formed the highest chunk of noninterest income. The interest income of the bank surged by 15. the booming regional markets helped the bank to record US$16.9% in FY2003. Analysis of Financial Performance – 2004 • We had recommended a Buy on the stock in our investment update in December 2003.7mn. The cost to total operating income after provision increased sharply to 49. The northward movement of the interest rates also raised interest expenses of the bank by 19.9mn. • • • • • • May 2005 Bahrain Banking Sector 27 . grew by 82. thus representing an oversubscription of approximately 172% of the initial issue size of 600mn shares.35mn.44mn while provision for impairment of investment losses were down by 54. This was due to strong growth in foreign exchange gains in FY2004. Operating expenses of the bank increased in line with the business volume growth. Staff expenses grew marginally by 7. We believe that this ratio is on a much higher side and the bank need to reduce this ratio further in order to remain competitive. In addition to its significant quantum.2mn as compared to the same period last year.9% to US$201.3% to US$41.4% to US$37. the issue is equally divided between Tier 1 and Tier 2 capital.7mn.

the bank remained strongly capitalised to exploit the emerging opportunities in the region. Thus.3% to US$1.6% of the loans portfolio were deployed in consumer finance while 22. Despite the stiff competition.Global Research Bahrain Global Investment House • The bank reported 22. representing an increase of 29.83bn. the bank allotted 1.12bn at the end of FY2004.7% were in non-trading investments.8% to US$4bn during the same period.04bn. which have relatively higher cost of servicing increased by around 9. CAR is expected to boost further in FY2005 due to the issue of hybrid preference shares.29bn. Non-trading investments grew by 11. while the deposits from banks and financial institutions. The bank raised additional term debt in FY2004. AUB is expected to post stellar performance buoyed by the improvement in its core and non-core businesses. The bank is expected to grow in an inorganic way and is expected to become a pan-GCC bank in near future.7mn while the subordinated liabilities increased by 4% to US$134.4mn in FY2004 as compared to US$161.7% as of FY2004. • • • • • • • Outlook • • • The net interest income of the bank is expected to improve strongly due to the further hardening of the interest rates. deposits from customers increased by a whopping 42.35 cents in 2003.5% to US$3. Over the medium term.6% over its Dec 2003 level. This resulted in its EPS moving up to 4.54mn.4% to US$1. 2005. Non-performing loans decreased to US$131.000mn non-cumulative partly convertible preference shares and thus raised US$450mn. AUB’s total assets stood at US$8. 28 Bahrain Banking Sector May 2005 . The bank remained strongly capitalised with a Capital Adequacy Ratio of 23.92bn. The proportion of NPLs to total loans stood at 4. thus it increased by 96% to US$811. This was due to the fact that AUB acquired 40% stake in Al-Ahli Bank of Qatar. Total loans and advances increased by an impressive 14.8% were in trading and manufacturing and 14. reflecting strong growth in all its business segments.8% were in real estate sector. Effective January 1. The strong growth in customer deposits is expected to help the bank to improve its margin going forward.3% in FY2004 while the bank has provided for 102% of its NPLs at the end of FY2004.2mn in FY2003.1 cents from 3. AUB also.4% growth in its net profit to US$106. The thrust on retail lending is expected to be a future growth driver for the bank. together with Bank Melli Iran and Bank Saderat Iran. formed Future Bank in 2004.7mn.6% to US$1.2mn.5% to US$820. Lending to the consumer finance recorded strong growth of 21. Investments in associates of the bank increased by 63. Around 42. Around 35.7% of the assets were deployed in loans and advances portfolio while 23.

00 based on DDM and peer group valuation method.2x of its estimated earnings of 2005.Global Research Bahrain Global Investment House Valuation • We had recommended a price target of 68 cents for the bank in Dec 2003 when the stock was quoting at 57 cents.3% vis-à-vis the current market price of the stock. Since then the stock moved up as per expectations and reached our target price in August 2004. • • • May 2005 Bahrain Banking Sector 29 . The estimated fair value of AUB’s stock works out to US$1. we maintain our earlier rating and recommend a ‘Buy’ on the stock. going forward. which is higher by around 12.6x of its estimated book value and 17. Currently. The fundamentals of the bank remained robust and has strong income visibility. The bank is all set to take the advantage of the booming regional markets by becoming a pan-GCC bank. Hence. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions. AUB is trading at 1.

831 80.198 249.066 51.530 (7.398.752 250.530 3.272 1.896 307 23.123 1.213 62.722 (144.397 242.205 47.513.258) 85.603 4.Less Provisions Total Assets Bahrain Banking Sector Liabilities: .419.290 650.845.945.957 1.972 147.724 811.427 1.064 650.666 74.072) 10.400 174.829.258) 91.Gross .752 250.779 820.546 74.430 143.Customer deposits .592 3.346.897 0 73.410.Investment in associates .281.750 1.036.746 54.680 1.424.989.258) 80.084 116.797 10.181.483.226) 28.579.709.066 307 34.258) 54.013 5.709 650.560 892.188.135.772.000 307 47.105 12.236 (7.760) 6.185 (7.892 (133.Other liabilities Total liabilities 2.485.000 123.616 Subordinated Liabilities Global Investment House May 2005 Share Capital Share Premium Preference Share Capital Reserve Statutory Reserve Foreign Currency Translation Adjst.582.356 122.000 323.323 650.357 135.284 2.266 2.023.418 2.000 307 64.481) 830.152.935 329.688 982.Cash & balances with central banks & Mandatory Reserves .124.599 7.Premises and equipment .383 76.958 145.628 (7.752 138.904 142.897 650.930 5.890 228.Loans & advances .145 6.863 9.570.172 70.025.650 128.110 223.651.455 1.722 2.323 104.124.784 2.858 41.182.260 1.346.200 307 14.150 188.537 (296.896 19.436 249.921.000 123.401 141.752 125.272 1.949 414.719 2003 2004 AUB 2005F 2006F 2007F 2008F Global Research Bahrain 30 1.000 307 109.615 5.183 111.395.179 235.009.373 501.718 221.618.614 2.272 1.393 1.676 (173.241.949.305.290 0 88.094.068 2.273.802 216.141.170 58.985 4.752 650.272 1.521 9.Term Debt .527 54.514) 13.348.242 197.674.507.Certificate of deposits .305.879 1.000.153 1.967 0 106.324 4.270.000 123.546 74.822 (11.270.427 Amount in US$ 000 Assets: .879 4.472 10.204.752 250.064 0 61.258) 70.424.255 11.623 (7.Non-trading Investments .178 (213.Trading securities .516 67. Retained Earnings Proposed Appropriations Cumulative changes in fair value Total Shareholders equity Total Liabilities 775.490.553 60.537.983 75.457 8.311.961 1.752 129.171 2.000 323.423.438 10.721.483) 5.259.642.430.485 6.293 233.275 3.BALANCE SHEET 2002 855.705 1.836 3.095 8.902 286.Deposits with banks & FIs more than 3 months .512 62.449 2.719 .913 2.976) 12.214 2.376 (7.135.871 (2.793 4.483 438.061) 9.807.699.784.346 74.109) 11.554 (254.466 134.461.279 2.301.346 74.414 (134.957.758 1.083 128.272 1.Due to banks .941 6.Other Assets .000 307 85.000 323.130 2.080.958 123.817 104.434 2.524 936.998 151.000 323.273.819 71.311) 8.575 5.

924 21.434 178.076 (968) (8.672 220.300 76.381) 235.352 417.097) (68.INCOME STATEMENT 2002 211.849) 206.354) (76.392) (7.978 (10.027) 282.200) (223.260 55.463) (32.899 13.476 (16.018 300.933 (7.668) 201.943 124.592) (37.510 (7.448 118.269 8.076 7.012) (6.207) 59.Tax Global Investment House Net profit 31 P&L Appropriation Account: Op Balance of Retained Earnings .389 9.909) (8.231) 87.786 59.512 28.430 91.671 133.899 24.434 169.716 4.477 14.908) (7.145) (72.131 (40.798 15.779 10.446) (3.001) 66.726 94.726 (810) (5.433) (6.Provisions for loan losses .842 22.140) (70.Net Profit for the year .748 7..624 13.867) (7.036) (6.509) (94.533 13.018) (6.982) (33.Adjst for net gain on sale of available for sale investments .705) 241.878 360.750) (5.423) (26.871) (32.006 254.789 (38.396 2003 2004 AUB 2005F 2006F 2007F 2008F Amount inUS$ 00 Global Research Bahrain May 2005 2.162 16.443) (16.408) (108.Depreciation .419) (4.216 92.000) (143.076) 134.400 85.786 8.840) 96.013 17.172 70.613) (24.123 83.202 12.400) (346) 28.952) (189.608 (42.926 171.904) (100.681) (45.655) (13.396 435 (10.817 80.955 216.Trfr to Statutory reserves .307 (7.900 (8.945) 169.200) (104.708) (62.Gain on sale of investments .030) (7.004 217.000) (174.023) 171.915 44.545 134.945) (120.129 241.817 80.200) (466) (346) (346) (346) (346) 54.430 91.139 179.Proposed Director's Remuneration Cl Balance of Retained Earnings .965 66.110 Interest Income Interest Expense Net Interest income Bahrain Banking Sector .545 33.091 (54.858 87.858 13.172 70.852 145.177 (37.184) (62.Income from associates .768 (19.910 33.696 64.584 49.076 (44.199) 101.934 (39.167 194.750) 325.185) (223.074) (103.209) (256.560) 375. other assets and contingencies Total operating income Operating expenses: .Trading Income .829 106.Other operating income Total non interest income .Provisions for impairment of non-trading invest.185) (8.Proposed Dividends .213 474.261 7.891 8.063) (129.996) (20.101 (12.617 41.849 3.955 206.Other Operating Expenses Total operating expenses Profit Before Taxation .104 9.942 27.923 63.383 207.Fees & Commission (net) .net .400 106.240) (26.360) (108.193) (47.990) 141.211 40.512 54.508 4.973) (41.Staff costs .219 51.166) (154.553) (318) 13.705 (41.750 (115.129 254.264 111.444) (75.605) (6.679) 138.902 157.

418 6.027 (64.454 458.013 436.FX translation adjustments Increase/Decrease in cash & cash equivalents Opening Cash Balance Closing balance .149 450.114) (453.381 (51.404 (9.306 (15.318 (7.Certificate of Deposits .891 (12.Changes in fair value Cash from financing activities Global Investment House May 2005 .815 (8.971 35.496) (525.427 (173.146.216 (307.287) 21.030 (9.259) 35.283) (473.Proceeds from Issue of Rights share .185 8.012 6.200) 465.613) (457.613) (431.446) (484.618.888 5.Deposits with banks.043) 51.490.842) 16.870 (98.995) (33.Trading securities .172) 2.656 278.502 340.877 (323.088 656.617) 37.614) 17.Increase in Subordinated liabilities .748) 91.668 (41.203 7.945) 324.490.288 400.423.658 233.Due to banks & FIs .400) 250.365 (41.307 101.389) 19.008 19.508 (66.243 397.000) (40.696) 40.434 146.301) 569.303) 76.882 824.207 (32) 920.343) (43.216) 42.762) (9.261) 124.420 (13.446 3.549) (126.437) 2.013 39.200) (61.134) (230.240 (16.200 69.577) 676 (286.439) 208.218 (143.269) 193.007) 4.510 178.714 (17.418 2.130 2.558 7.788) (440.560 (92.045 7.910 723.Proceeds from Issue of Share Capital .849) 279.358) (742.300) 41.571 (260.Proceeds from sale of associates .269 (13.570) 4.967 Changes in: .978 254.Taxes paid Cash from operating activities Bahrain Banking Sector Investing activities: .076) 350.219) 38.303) 64.775 155.Investment in Associates .024 13.120 824.476) (304.606) 4.074 (12.440 (9.423.289 (104.286 (29.744) (152.272 6.804 7.705) 434.679 (9.538 1.995) 27.483 94.052 571.891) 171.000) (10.Proceeds from sale of non-trading investments .715) 228.061) (28.463 (27.867 7.779) 79.705 6.128 137.736) 464.069 7.377) 6.729 1.495) (218.143 181.781 (8.756 156.Depreciation .159 (41.836 128.010) 4.588 2.618. for impairment of non-trading investments .Other liabilities Total WC changes .005) 537.392 (21.171 16.645 642.420 2.219 (205.725 737.Cash Flow Statement 2002 66.696 (10.423 (8.276 254.Loans and advances .023 (22.149 2.858 186.Sale of premises and equipment Cash from investing activities Financing activities: .311 (17.553 (432.Purchase of premises and equipment .899) 91.Other assets .564) 92.501) 6.594) 36.909 (24.Prov.378 (711.(Gain) on sale of investments .211 (240.933 6.295 6.400) 805.750 (76.983) 6.Operating profit before WC changes 8.086 561.101 2003 2004 AUB 2005F 2006F 2007F 2008F Amount inUS$ 000 Global Research Bahrain 32 Operating Activities: Profit before taxation Adjustments for: .261 (11.172 (70.181 487.900 216.146.040 (174.570) (32.282) 24.287 98.311.163 89.706 7.416 108.Dividends paid .419 4.854) 242.908 (17.130 (258.752) (772.494) (37.Provisions .041 81.560) (378.224) (10.064 118.716 141.722) (354.728) 2.103) 43.476 (62.036 6.484 454.076) 146.000 4.696 (256.750 5.553) 145.119) 493.Customer deposits .582) 923. FIs & Mandatory Reserves .Purchase of non-trading investments .313) (42.076 (11.538 6.300 (256.902 (10.210) (425.262) 5.225.275 (24.Share of profits in associates .348) 410.749 4.088 13.171 2.031) (10.225.Proceeds from FRNs .330 (289.616) (530.855) (41.

5% 18.1% 13.0% 16.6% 22.0% 49.Weighted Average Number of Shares (mn) .2% 32.Change in other income Shareholders' Data .8 2003 1.Interest income / Avg interest earning assets .7 3.0 14.Par Value of Share (Cents) .0% 5.23% 76.Net spread .5% 53.5% 4.4% 25.7% 2.Interest income .0% 46.Provision/Interest income .4 1.9% 6.100 3.6 2007F 1.1% 4.Change in investment income .Cost to average total assets Liquidity: .0 2.6% 17.Loans to interest earning assets .0% 36.7% 2.Provision to Gross Loans Constitution of Total income: .9% 5.0 3.88% 76.2% 54.8% 46.Global Research Bahrain Global Investment House RATIO ANALYSIS Amount inUS$ 000 Profitability ratios: .1% 44.0 2.9% 2.4% 0.4% 10.P/E .5% 5.311 4.22% 75.Equity to loans & advances Asset Quality Ratios: .8% 2.2 1.7% 3.3% 6.600 2.31% 98.483 7.EPS (cents) .9% 44.0 0.8% 28.600 2.8% 12.0% 1.0% 2.4% 20.0% 21.Net interest margin Efficiency: .Provision to NPLs .Non-interest income/total operating income .0 1.6% 6.600 69.1 6.4% 3.2% 4.Book Value (Cents) .3% 1.0% 3.0% 11.4% 0.3% 40.4% 2.1% 43.2% 2.Fees and commission .9% 3.Income from associates .600 84.9 May 2005 Bahrain Banking Sector 33 .0% 12.9% 53.7 2004 1.77% 89.4% 14.9% 55.0 2.0% 45.0% 68.9 4.0 2.Provisions to total operating income .2% 36.6% 1.2 89 13.3% 24.4% 1.0% 5.04% 14.3% 25.53% 10.1% 13.0% 177.4% 15.29% 8.1% 16.NPL to Gross Loans .1% 1.80% 55.8% 50.9% 2.75% 46.Cost to income ratio .7 82 20.072 4.8% 1.7% 7.0% 16.6% 0.600 2.2 1.7% 155.48% 11.2% 198.Investment income .7% 45.1% 14.7% 9.NPL to Net Loans .3% 63.93 56.4 5.807 2.8% 1.5% 4.5% 12.560 213.464 133.5% 2.9% 2.8% 16.9% 131.Total income to average assets Margins: .6% 55.7% 3.6 1.Provisions .5 89 11.5% 25.0% 47.9% 11.6% 49.9% 17.5% 4.74% 75.6 58 17.4% 16.0% 1.4% 13.2 89 17.5 7.Dividend Payout (%) .0% 3.7% 51.0% 2.Return on Average Assets .0% 1.9% 49.6 2008F 2.3% 14.100 92.7% 17.3% 32.Shares in issue (mn) .72% 11.0% 54.6 3.0% 1.6% 2.79 47.755 173.5 7.3% 3.0% 53.5% 17.Staff expense to total operating income .Equity to total assets .Change in fees and commission .25% 133.8% 34.6% 25.1% 5.4% 5.9% 35.5% 4.9% 19.7% 4.600 71.0 12.Interest expense / Interest income .53% 9.7% 17.7% 18.6% 7.14% 102.600 84.5% 2.01 35.8 9.0% 5.4% 42.5 9.1% 33.00% 45.6% 37.4% 21.8% 52.54 55.9% 2.3% 19.1% 172.5% 12.26% 127.2% 0.3 AUB 2005F 1.63% 76.5% 0.0 7.5% 4.7% 3.0% 10.5% 2.9% 52.6% 22.8% 1.4% 46.29% 111.Return on Average Equity .6% 23.5% 3.732 296.0% 19.3% 46.6 2006F 1.0% 12.7 33 10.2% 2.9% 3.Other income Operating Performance: .00% 46.600 2.1% 3.58% 94.061 4.1% 3.5% 4.17 54.3% 12.5% 20.35 33.2% 51.7% 25.868 254.760 7.232 144.3% 44.8% 5.P/BV 2002 1.4% 9.Net interest income/total operating income .1% 1.91% 12.3% 161.976 4.9% 25.3% 56.3% 20.9 89 11.29% 55.9% 25.8% 8.3% 1.1% 3.40% 46.0% 26.0% 1.08% 77.2% 24.7% 9.31 43.3% 15.8% 6.0% 5.5% 0.4% 16.9% 23.Gross Loans to customer deposits .0% 0.Customer deposits to equity Provisions: .42% 43.0 2.2% 14.Market Price (Cents) .Interest expense / Avg interest bearing liabilities .5% 7.1% 41.3% -1.387 134.3% 11.7% 11.1% 4.Change in interest income .9% 16.Provisions to average assets Capital Adequacy: .600 65.0 2.NPL .600 77.3 1.5% 54.4% 23.9% -41.6% 1.600 2.9% 39.5% 2.8 9.3% 4.0% 43.3% 25.109 4.6% 11.5% 4.7% 53.0% 17.27% 120.7% 7.5% 222.5% 3.2% 44.1% 2.3 11.

34 Bahrain Banking Sector May 2005 .1 241. the bank has 18 domestic branches in Bahrain. BBK overtook the leading position of National Bank of Bahrain.2mn 794 fils Key Data EPS (fils) BV (fils) P/E P / BV Source: Global Research Background • Bank of Bahrain & Kuwait (BBK) is a public shareholding company incorporated in Bahrain in 1971 and listed on the Bahrain Stock Exchange. vol. 52 week Lo / Hi Market Cap Target Price 0.S.141mn 537 / 762 BD401.89% stake while General Organisation for Social Insurance held 13. each held 6. In addition to this.Global Research Bahrain Global Investment House Bank of Bahrain & Kuwait B. In addition to this. and Bank of Kuwait and the Middle East. Al-Ahli Bank of Kuwait.66% stake in the bank as of Dec 2004. The Bank has launched new Al Hayrat savings certificates to attract customers. In addition to these.BH Listing: Bahrain Stock Exchange Current Price 704 fils 24th April 2005 BUY 45. BBK is the largest onshore commercial bank in Bahrain in asset terms. The bank offers a full range of banking services focused on both retail and corporate clients. The Bank is currently looking at establishing additional branches in the region. Gulf Bank. after years of steady growth in its balance sheet.92 12M Avg. In 1978 the first branch outside Bahrain was opened in Kuwait as part of the Bank's regional policy. the Bank has established a number of subsidiaries in the areas of brokerage.42%.C Reuters Code: BBKB. Bahraini citizens held around 19. In the last few years. Commercial Bank of Kuwait.0 15.61 2. The bank also launched its money transfer services through post offices in alliance with Western Union Financial. financial services and credit cards. Recent Developments • • During 2004 the bank continued to implement its three year (2003-2005) Strategic Plan. followed by the establishment of two branches in India and a representative office in Dubai. Shareholding Pattern • The principal shareholders of the bank are Pension Fund Commission. The bank had 702 employees as of end-Dec 2004 servicing customers from 18 branches and 26 ATMs spread across strategic locations in Bahrain. Bahrain with 18.75% stake in the bank. In 1998.

interest expenses increased by just 4.4% to BD6mn.5% to BD23. The bank continued its I.4% while provision for investment losses increased by 56.44mn representing an increase of 121.24mn. the cost to operating income after provision of the bank declined to 48. The bank was able to control its expenses as it increased by 5.8% in FY2004 as compared to 49.2% at BD25.4% to BD50. The bank continued to provide financing for a range of industrial. Fees and commissions income decreased by 12. recognizing and rewarding individual achievement and strengthening the bank’s succession planning process.87% of our net earnings estimate for FY2004.5mn.T.8mn during FY2004 as compared to the same period last year. • • • • Analysis of Financial Performance – 2004 • The bank falls short by just 2. On the back of improved net interest income and modest gain from non-interest income the total operating income after provision increased by 8% to BD47. Dividend income also increased by 15.68mn over the corresponding period of the last fiscal. The net profit attributable to shareholders was higher by 10.9% in FY2003. initiatives in 2004 and offered more products and services online. The improved net income resulted in EPS moving • • • • • May 2005 Bahrain Banking Sector 35 . The bank initiated the implementation of new core banking and branch automation systems during 2004.Global Research Bahrain Global Investment House • The bank has arranged US$125mn medium term credit facility through 14 regional and international banks.4% to BD1. the net interest income during the period surged by 13.26mn during the same period. and the purchase of secura insurance products and Al-Hayrat savings certificate.7% of our projected net interest income and 1.2% to BD29. As a result. The bank has launched a new smart credit card and also launched its another exclusive real estate investment fund. As a result.82mn.4% to BD10.4% to BD21. The major jump was witnessed by realized gain on investments as it increased by 128.7mn as compared to the same period last year.54mn during the same period.6% to BD2. The interest income of the bank increased by 9. The bank is expected to implement its corporate rebranding exercise in 2005. BBK introduced a new employees performance management system.7mn. However. such as real time payment of telephone bills.4mn. Provision for loan losses were at BD2. including the Alba potline expansion and refinery modernisation of Bapco. commercial and infrastructural projects. The term loan facility has a tenor of five years. the total non-interest income of the bank increased by 10% to BD22. As a result. The increase in net interest income is mainly attributable to good growth in core commercial banking businesses and increased interest rate spreads in the present interest rate environment.

In order to take the advantage of the booming market. • • • • Outlook • The bank is expected to look forward for strategic alliances as well as the opportunity for mergers and acquisitions.1x of its estimated earnings of 2005. the bank remain well positioned to participate in the business opportunities stemming from regional growth.3mn over December 2003.4% to BD844.7mn in FY2004.79x of its estimated book value and 13. The proportion of NPL to gross loans declined substantially from 13. in order to establish cost efficiencies and diversify asset base. justifying our earlier buy recommendation. though it has yet to reach our targeted price. while the deposits from banks and other financial institutions. Around 34% of the loan portfolio were deployed in trade and manufacturing sector while 24. The bank has provided for 73.2% over Dec 2003. Lending to the real estate and construction sector were actually declined by 13.5% to BD323. Focus on alternative delivery channels is expected to further boost its efficiency.4% were loans to retail consumers. The estimated fair value of BBK’s stock works out to 794 fils based on DDM and peer • • 36 Bahrain Banking Sector May 2005 . non-trading investment portfolio increased by 16% to BD376. Gross loans and advances increased by 11.73% in FY2003. which have relatively higher cost of servicing declined by around 3. The bank’s investments in government debt bond was particularly responsible for the increase in non-trading investment portfolio. Deposits from customers increased by 9. As a result.5mn over Dec 2003. Around 53.94% of its NPL at the end of Dec 2004. Currently. the bank is expected to launch new and innovative retail banking concept.63% in FY2004.6% to BD823. • • Valuation • We had recommended a Buy on the stock in September 2004 with a target price of 788 fils.1 fils in FY2004.63% in FY2003 to 9.1mn. The bank repaid its entire term loan facility of BD37. when the stock was trading at 695 fils.Global Research Bahrain Global Investment House up from 41 fils in FY2003 to 45. • BBK’s total assets stood at BD1. which will focus primarily on customer service.5% in FY2004. The bank is strongly capitalised with a CAR of 18.42bn at the end of Dec 2004.8% of the assets were deployed in loans and advances portfolio while 26. As a part of its rebranding exercise. Since then the stock has moved up as per our expectations and reached its peak of 762 fils.82% as of FY2004 as compared to 16.1mn during the same period.5% were deployed in non-trading investment securities. BBK is trading at 2. representing an increase of 8. The bank has declared a cash dividend of 35% for FY2004.

May 2005 Bahrain Banking Sector 37 .8% vis-à-vis the current market price of the stock.Global Research Bahrain Global Investment House group valuation method. Hence. which is higher by around 12. we maintain our earlier rating and recommend a ‘Buy’ on the stock with a medium term perspective.

45 (0.51) 28.313.65 406.45 (0.89 72.44 0.44 195.91 (1.09 1.85 24.14 84.25 1.85 15.70) 22.58 1.82 0.05) 31.BALANCE SHEET 2002 64.313.08 1.44 17.83 15.19 30.002 202.05) 21.65 42.05) 31.05) 23.13 1.63) 764.18 928.03 27.89 456.91 (1.537.88 69.91) 950.18) 1.57 170.49 72.15 1.08 13.94 14.44 72.263.37 323.30 369.00 13.94 1.50 23.80 29.05) 26.05) 30.15 823.92 0.32 56.42 1.18 23.214.97 4.65 56.115.62 157.367.95 23.99 7.15 72.621.83 658.52 15.98 131.93 1.34 31.16 20.13 Global Research Bahrain 38 326.59 6.91 (1.64 1.68 20.29 14.82 6.85 15.88 295.59) (1.03 24.00 13.51) 24.05 738.16 20.44 0.06 1.002 187.41 (86.51) 27.21 191.48 37.89) 659.64 913.51) 28.46 623.048.18 Global Investment House May 2005 Owner's Equity Share capital Treasury stock Statutory Reserves General Reserves Cumulative changes in fair value Foreign currency translation adjustments Retained earnings Proposed Appropriations Total Shareholder's Equity 56.50 430.99 3.92 1.78 56.18 1.488.45 (0.014.69 376.959.667.31 (58.71 0.05) 18.00 13.00 (0.35 11.48 72.021.62 56.52 1.58 22.37 1.63 20.16 37.45 168.18 1.27 (70.83) 24.21 1.18 844.807.36 2003 2004 BBK 2005 (F) 2006 (F) 2007 (F) 2008 (F) 44.17 324.98 15.85 (66.002 218.68 25.45 (0.27 26.79 20.62 35.07 399.54 12.537.17 11.22 1.807.959.33 16.40 14.53) 536.80 142.06 (78.81 11.04 0.02 1.13 Total Liabilities .44 25.95) 1.09 483.00 13.03 1.45 (0.91 (1.002 194.13 5.97 1.667.69 178.16 20.78 24.43 6.51) 28.03 56.70 772.56 5.083.36 Amount in BD mn Assets Cash & balances with banks Treasury bills Trading Investments Deposits and due from banks & other FIs Loans and Advances (Gross) Less: provisions Loans and Advances (Net) Non trading investment securities Investment in associated company Interest receivable & other assets Kuwait Government bonds Fixed Assets Total Assets Bahrain Banking Sector Liabilities Deposits and due to banks and other FIs Borrowings under repurchase agreements Medium term loans Customers' Deposits Interest payable & Other liabilities Total Liabilities 431.57 334.68 1.01 20.88 (61.00 3.216.22 16.22 5.420.18 1.84 26.75 15.41 1.171.767.95 186.10 72.214.78 1.00 342.236.146.002 210.00 13.57 20.09 28.420.91 (1.124.97 4.99 11.47 1.91 (1.58 56.99 (0.41 (63.23) 852.25 1.76 44.91 (1.

62 (0.09 29.73) (0.12 0.44 (20.10) 1.00 1.65 (27.97) 83.53) (9.20) 48.57) (8.68 20.16 (1.44 48.70) 28.25) (0.Fees and commission income .10 1.16) 44.51 72.23) (0.01 (2.Income from managed funds .17 1.25 2.60 0.00 1.83 (35.41 1.20) (36.Dividend income .26) (0.14) 32.Tax .96 8.78 (44.32) (29.73 2.00 1.16 2003 2004 BBK 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in BD' mn Global Research Bahrain May 2005 (11.60) 24.Trading income .36 30.50) 22.76) (0.54 6.94 0.61 46.16 28.69 1.80 2.12 0.68 (2.05 23.60) (2.99 0.Other income Total non-interest income .20 (0.84) 25.86 (0.60 3.59) (2.58 87.12 1.61 1.62) (11.OPERATING STATEMENT 2002 51.25) (26.24 0.19) 20.34 28.43 1.09) (19.04 26.Provisions for losses on loans & adv.14) 35.44 24.19 2.53 (17.Write backs of provisions for impairment in other assets & contingencies .81) 55.10) 10.33) (7.43 (0.04) 22.53) (30.46) (35.70) 28.26) 29.34 1.01 (12.22) 34.63 (0.85 22.14) 0.44 25.67 (0.26 0.32 30.37) (2.27) 1.25 11.Depreciation Total Operating Expenses Operating Profit .61 0.94) (0.43 1.29 (25.86) 40.70) 28.26) (0.26 (3.91) 73.83 20.Other operating expenses .45 9.52 (2.16 48.13 23.76 Interest Income Interest Expense Net interest income .00) (15.65 (0.25 (2.23 2.20 38.46 0.68) 16.36 35.31 (13.23) (0.12 0.53 1.24) 24.39 0.25 25.13) 15.60) 27.00 1.70 1.97 (4.12) 30.99) (0.99 22.20 1.53 (3.Share of profit in associated company Profit before tax & minority interest .86) 42.97) (2.14 (0.70 39.27 28.41 (2.25) (0.96 20.14 (1.Staff costs .00 (19.70) 27.05) (25.35 (1.26) (0.34 41.26) (0.01 0.16) (23.34) 49.97 (21.08 18.82) 47.87) (43.75) (2.17) 41.32) (6.64) (2.29 (19.90) 19.46 1.Realised gain on investments .28) 29.42 (55.29 (3.72) 47.25) 37.33) (16.71 20.47) (22.14 34.87 (0.05 0.foreign units Net Income Global Investment House 39 P&L Appropriation Account: Op Balance of Retained Earnings Net Profit Portion of realised gain on sale of investments Transfer to statutory reserve Proposed Dividend Proposed Directors Remuneration Proposed Donations Cl Balance of Retained Earnings .07 1.74 8.27 35.74 1.63 0.68 25.39) (32.68 (15.04) (0.40 42.36) 26.44) 12.26 0.29 12.87) (10.Gain on foreign exchange .58 12.Provision for impairment in the value of non-trading investment securities Total Operating income Bahrain Banking Sector Operating Expenses . to customers .45) (2.86) 63.26) (0.92 104.59) (6.60) 14.36 27.64 (3.61) (0.06 2.17 3.31 (1.48) (2.68 (4.78 (21.53 59.08 50.28 (3.85 23.26) (0.

43 42.18) (28.00 (2.49 97.01) 68.00 (37.69 (231.95) (100. directors remuneration & donations Term Loans repaid Total Financing Foreign exchange translation adjustment Net Change in Cash Net Cash at beginning Net Cash at end .40 0.17) (32.91 (1.97) 2.51) (45.00 (2.01) (0.92) (4.04) (0.80) 0.46 (0.88) 0.70 72.40) 2.20 3.24 80.25) 2.69) (0.Other assets and contingencies Share of profit in associated company Depreciation Negative goodwill amortised Realised (gains) losses on redemption of non-trading investments Taxation of foreign units Increase / Operating Activities Mandatory reserve deposits with central banks Treasury bills maturing after 91 days Trading investments Deposits and due from banks & other FIs Loans and advances to customers Interest receivable and other assets Kuwait Government bond Increase in operating liabilities Deposits and due to banks & other FIs Borrowings under repurchase agreements Customer Deposits Interest payable and other liabilities Net Cash from operating activities Investing activities Purchase of non-trading investment securities Maturities and redemptions of non-trading investment securities Dividends received from associated company Purchase of fixed assets Investment in subsidiary Net Cash from investing activities Global Investment House (2.95) 27.32) 2.45 0.00 (31.40 0.00 (2.12) (0.66) (17.48 75.71 0.80) (37.56) (327.32 (1.82 2.26) 34.00 92.64 (6.20 47.86 3.36) 3.81) 0.25 156.89 0.39) 1.00 31.97 (1.00 84.27 (24.17 (107.01) (48.14 48.25) 460.01) 1.00 (20.18 0.94) (0.04 0.25 0.25 (1.46) 310.23) 0.01 (30.46 45.13 (17.47 57.75 21.68 0.CASH FLOW STATEMENT 2002 20.90 0.57 (2.20 175.09 (0.68 30.50 6.60 0.00 (26.52) 189.45 10.62) (20.27 144.01 166.47 (2.84) (2.95) (37.Loans and advances to customers .52) 0.86 (119.58 (0.96 0.43) (0.56) (0.65 35.24) 0.77) (0.98) 0.39) 2003 2004 BBK 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Bahrain 40 (14.84) 0.19 50.37) (2.62) (8.81) 286.85) (0.76) (18.82 (86.33 0.96 0.21 0.48 113.70) (0.08 (493.01 47.70) (8.63) 0.79 156.40 17.00 (2.16 2.13) (15.83 (25.23 0.44) (0.33 Bahrain Banking Sector Amount in BD' mn Cash Flows from Operating Activities Profit before taxation and minority interest Adjustments for Net provisions (write backs) relating to: .96 144.Non-trading investment securities .81 2.23) 0.98) (47.76) (1.26 25.76) 0.80) (123.69) (31.13 (15.32 9.39 0.72) (100.10) (21.00 (2.57) 3.59 0.00 102.01 166.21 141.20) (0.83) (101.17) (0.10 1.39 (0.57) (26.53) (0.00 112.62) (90.87) 23.55) (38.87 3.46) (0.32) 29.16 (1.96) 2.23) 0.67 0.95) 28.27 (1.33 178.44) 2.71 (1.09) (2.38 141.13) 2.38) 0.44) 5.37) (33.00 19.93 286.07 (59.19) (1.00 (1.61 (1.48 0.28) 3.18) (27.78 8.69) 15.25 (27.14) (0.05 (0.07 264.58) (0.13) (59.24 May 2005 Financing activities Medium term deposits form banks Payment of dividend.00 4.57) 175.81) (14.44 1.60 104.36) 2.19) (30.

7% 56.0% 15.95 8.19% 2. Income .34% 2.3% 51.09% 2.57% 62.5% 2.69% 78.Non-interest expense/ total Op.07% 18.7 545 13.70% 74.0% 569 62.Fees & Comm.7% 0.8 704 11.0% 13.06% 56.96% 604.2% 100.4% 10.27% 98.Market Price Year End (fils) * .5 704 13.51% 71.00% 54.91 8.00% 75.Change in Fx Income RATIO'S USED FOR VALUATION .41% 50.63% 44.7% 0.12% 73.1% 18.78% 9.74% 62.63 9.49% 5.8% 2.61% 2.24% 72.8% 46.9% -22.5 2.7 252.Shares in Issue (mn) .88% 17.9% 50.7% 79.Interest Income to total Op Income .Cost to Total Op Income .7% 1.14% 2.2% -4.00% 8.00% BBK 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 1.9% 86.18 8.0% 1.2% 22.77% 72.0% 2.95% 56.06% 18.9% 3.89 27% 76.30% 2.9% 1.8% 1.P/BV .20% 49.37% 7.5% 1.6 704 8.5% 2.Non Performing Loans (BD mn) .65% 6.29% 542.Loan Loss Reserves (BD mn) .9% 2.4% 49.31% 59.Capital Adequacy Constitution of Total Income .4% 19.79% 21.8% 50.2% 47.FX Income to Total Op.4% 2.Net income / Interest Income .42% 10.Loan Loss Reserve to Gross Loans .31% 48.3% 20.7% 2.2% -22.6% 569 41.32% 66.6% 47.2 55.9 1.3% 2.2% 45.87 86.Change in Interest Income .70% 18.8% 22.2% 569 45.8 260.8% 3.Loans to total Deposits .0 53.13% 9.2% 44.11% 19. Income Operating Performance .76% 55.Cost to Average Total Assets .Return on Average Equity .9% 1.2% 22.8% 9.27% 99.2% 48.8% May 2005 Bahrain Banking Sector 41 . to Total Op.9% 43.4% 48.Dividend .09% 2.26% 10.4% 4.3% -9.1% 15.49% 98.2% 1.9% 1.37% 94.0% 2.8% 46.44% 11.Global Research Bahrain Global Investment House Ratio Analysis Amount in BD mn Profitability .64% 8.1% 97.45% 2.38% 99.23 9.89% 73.16% 8.1% 44.8% 44.Gain on Invetsment Income to Total Op.Total Provisions to NPL Capital Adequacy .1% 22.2% 22. Income .0% 1.6% 13.00% 8.62% 53.61 78.70 65% 88.8% 2.88% 72.Non-interest income/ total Op.54% 61.82% 535.66% 70.01 35% 77.7 54.1% 5.94% 11.Book Value Per Share (fils) .79% 43.00% 9.3 55.58% 56.Total liabilities to shareholders equity (times) .7% 25.23% 13.83% 19.21% 55.3 2.Loans to Interest Earning Assets .72 54% 87.6% 27.6% 41.9% 3.28% 58.NPL's to Gross Loans .2 16.00% 10.12% 10.50% 9.5% 15.07% 6.30% 74. Income .0% 46.42% 23.2% 43.36% 47.1% 89.4% -12.95% 59.6% 43.79 45% 83.88% 88.50% 46.0% 82.7% 1.13% 644.25% 51.9% 8.53 15.Gross Loans to Total Assets Credit Quality .3% 50.5% 24.7% 43.8% 51.3% 2.2 2.Dividend Payout 2002 1.1% 2.3 382 10.6% 53.Return on Average Assets .EPS (fils) .25 61.51% 6.Net interest income/ total Op.4 2.22 63.Change in Fees and Commission .0% 569 73.0 18.3 704 9.5 259.8% 56.Equity to Gross Loans .0% 26.5% 4.23% 2.8% 1.0% 5.3% 28.8% 2.97% 2.69% 95.12% 56.4% 12.78% 2.97% 1.2% 14.0 725 16.73% 15.63% 15.58% 97.27% 8.6% 27.74% 17.Interest Income / Avg Interest Earning Assets .3% 569 35.15% 51.0% 5.0% 5.Staff Expense to Total Op Income .8% 56.49 30% 72.5% 2.0% 1.27 66.Net Spread .Equity to Total Assets .0% 4.32% 56. Income Margins .2% 45.0% 50.30 70.Interest Expense / Avg Interest Bearing Liabilities .8% 22.19% 57.2% 2.4% 4.0% 569 85.63% 570.25% 545.92% 502.1 2.NPL's to Net Loans .29 58.1 3.9% 28.08% 97.Customer Deposits to Equity .1% 17.5% 14.29% 16.63% 10.71 76% 88.20% 20.P/E .0% 5.03% 8.8% 28.63% 8.2% 48.8% 28.37% 63.9% 1.2 202.80% 15.05% 2.0 258.2% 27.Loans to Customer Deposits .3 16.58% 25.89 13.85% 61.0% 5.8% 43.Staff Expense to Average assets Liquidity .1 241.0% 1. Income .84% 17.0 218.Net Interest Margin Efficiency .42% 10.98% 2003 1.8% 39.67% 8.4% 2.Interest Expense to Interest Income .29% 60.9% 3.44% 60.0% 569 53.

The bank is considered to be the first Islamic institution established in Bahrain and the third bank to carry out such kind of business in the Gulf region.2%) and the Gulf Finance Group (9.S.C Reuters Code: BISH. vol. However. The bank had 186 employees as of end-Dec 2004 servicing customers from 12 branches in Bahrain.1 1.BH Listing: Bahrain Stock Exchange Current Price 405 fils 24th April 2005 HOLD 16. • Shareholding Pattern • BIsB’s shareholding is widely spread with Investors Bank holding nearly 15. The directors of the bank held a 0. The profit sharing income of the bank increased by 12.625 246 / 480 fils BD102.3 25.5mn 418 fils Key Data EPS (Fils) BV (Fils) P/E P / BV Source: Global Research Background • Bahrain Islamic Bank (BIsB) was incorporated in 1979 in Bahrain to carry out banking and other financial trading activities in accordance with the Islamic Shari’a principles. followed by Islamic Development Bank and Kuwait Finance House with 13% each.86 12M Avg. the bank opened its first dedicated women branch in Bahrain.11 217. through direct and indirect investments. Other major shareholders of the bank include Kuwait based International Investment Group (10.33mn during FY2004 as compared to the same period last year.7% to BD6. The bank operates under an onshore domestic commercial banking license granted by the Bahrain Monetary Agency (BMA).8% stake. Recent Developments • As a part of its initiative to enhance its services. 52 week Lo / Hi Market Cap Target Price 79.5% stake. Analysis of Financial Performance – 2004 • • The bank falls short by 6. depositors profit sharing expenses 42 Bahrain Banking Sector May 2005 .2%).Global Research Bahrain Global Investment House Bahrain Islamic Bank B.3% of our projected net earnings for FY2004.

9% in FY2003. Banks Mudaraba investments. As a result.7% to BD12mn.2mn over Dec 2003. Murabaha receivables portfolio increased by 10.26mn.8% to BD0. The bank has provided for just 53. non-trading investment portfolio surged by 35% to BD55. As a result. Out of this.07mn during the same period.7mn over the corresponding period of the last fiscal.54mn as compared to the same period last year. Provision for loan losses were declined substantially by 48. commissions and other income declined substantially by 40. the total noninterest income of the bank increased by 37.7% to BD2.7mn at the end of Dec 2004. which consists of investment in funds operated by other banks and financial institutions and participation in financial transactions. May 2005 Bahrain Banking Sector 43 .18mn. • • • • • • • Outlook • • The bank is expected to report strong gains from its investment income.8% to BD8.3% in FY2004 as compared to 62. On the back of improved investment income and substantial decline in provision for loan losses the total operating income after provision increased by 22. representing an increase of 10. • Fees. the cost to operating income after provision of the bank declined to 55. This increase was due to the substantial increase in non-trading investments portfolio and Murabaha receivables.3% to BD4. declined by 30.9% to BD4.3% at BD3.73mn. investments in debt was 64.3mn over December 2003. The proportion of NPL to gross loans remained at 2. In order to take the advantage of the booming market. Around 60% of the assets were deployed in Murabaha receivables while 22% were in non-trading investments. The biggest gain was recorded by income from investments in securities as it increased by 92.2% to BD157. The majority of the Murabaha receivables were deployed in international commodity Murabaha. Deposits from customers increased by 5. The latest bonus issue is expected to boost the bank’s CAR further.2% to BD0. the net profit sharing income during the period increased by just 4.Global Research Bahrain Global Investment House increased by a whopping 33% to BD2. As a result. The net profit attributable to shareholders was higher by 50.7% while rest of the portfolio was in equities.78mn. BIsB’s total assets stood at BD254. We believe that the bank needs to provide more in view of the rising interest rate scenario.56mn. The total operating expenses of the bank increased by 8% to BD4. The bank has declared a cash dividend of 12% and a stock dividend of 10% for FY2004.77mn.2% in FY2004.1% over Dec 2003.7% to BD199.48mn. it remained very high as compared to its conventional banking peers in Bahrain.5% of its NPL at the end of Dec 2004. Fees and commission of the bank is expected to be buoyant due to the bank’s efforts to launch various new products and services. Though the cost to income ratio has declined in FY2004.

88x of its estimated book value and 22. when the stock was trading at 336fils. which leaves marginal upside potential of about 3. We have revised upwards our earlier projections due to strong outlook of the bank and improved market conditions. Therefore.2% over the current market price. • • 44 Bahrain Banking Sector May 2005 . The estimated fair value of BIsB’s stock works out to 418 fils based on DDM and peer group valuation method.3x of its estimated earnings of 2005. Since then the stock moved up smartly to reach its all time high of 480 fils in March 2005.Global Research Bahrain Global Investment House Valuation • We had recommended a Hold on the stock in October 2004. BIsB is trading at 1. we continue to maintain ‘Hold’ on the stock. Currently.

274.558 231.033.659.013.300.018 1.051 303.817 25.378 92.734.165.061.877.605.979.241.206.116 2.207 13.875.860.506.646 1.418 767.153 336.082 4.797.442 1.018.661.325.498 34.855 1.451.760.C 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Bahrain May 2005 21.761.929 2.000.157 254.308 140.376.761.962.956.431 4.761.489.530.612 157.406.178 4.448.961.287 336.607.300.688.607 76.954 3.182 3.885.052 13.381 1.273.917 4.788 975.441 905.280 (2.105 4.624 3.556 3.938 (2.888 5.317 12.836 828.255.909.420.132.871 2.000.000 80.010.367 254.687.000.281 2.341 1.241.712.179.000.302.140.579.050 4.189.300.000 8.083.000 369.474.783 8.601 6.000 4.200.977 4.300.049 2.219 171.195 5.507 6.480.870.189 17.377.530.426.602.774.135.021 2.658.208.327 3.715 25.290.019.241 3.669 4.271 1.367.777 37.228 4.440) 3.048.992 1.854.000 2.396 55.515 1.093.595 25.000.139.070 33.448 25.000 136.754 (1.359 1.830 47.514.070.410 8.923.000.770.827.254 64.857 142.374 (1.504.123 303.431.109.529.302.868.157 23.813 2.013 203.932 1.739.480.771.352 4.947.951.382 (2.000 5.931.858 185.416 26.988.194.136 23.118.604 4.000.530 3.455 230.000 39.000.473 2.067.194.030) 4.439.000 8.300.690 2.836 637.000 5.121.S.241.902 7.529.366.215.777 11.341.476 1.878 30.000.355.641.817 277.578.458.000 52.010.763.453.057 5.721 159.838.449.136 2003 Bahrain Islamic Bank B.000 61.878.032.750.604 5.247 1.999 41.190) 8.000.075 377.000 55.653 23.285 206.311.876 2.207 13.603 5.923.060.829.012.300.836 551.283.067.645.000 369.BALANCE SHEET 2002 9.460 4.604 3.000 369.806.914 24.340.878.539 31.500.612 2.604 6.500 4.000.604 2.917 222.201 3.836 515.903.207 13.000 5.724 4.234.629 231.000) 9.604 3.836 799.457 10.000.457 49.642 646.762.000 5.333 (2.000 58.878.289 1.535 147.604 3.009 1.684) 377.278.352 1.761.153 43.668 3. Unrestricted Investment Accounts and Equity Liabilities: Customers' current accounts Other liabilities Total Liabilities Unrestricted Investment Accounts Equity: Share Capital Share Premium Statutory Reserve General Reserve Investments fair value reserve Cumulative changes in fair values Retained earnings Proposed Bonus Proposed Dividends Total Equity Total Liabilities.465 263.200.000 369.380 1.486.864 Amount in BD Assets: Cash and Balances with the BMA and other Banks Murabaha Receivables Mudaraba Investments Musharaka Investments Non-trading investments Investments in associates Investments in Ijarah Assets Ijarah Muntahia Bittamleek Investments in Properties Equipment Other assets Less: Provision Bahrain Banking Sector Total Assets Global Investment House 45 Liabilities.832.856 12.785 1.491 861.536.999 168.236.000 369.552.997 5.241. Unrestricted investment accounts and Equity .300.265) 7.864 277.293 (2.000 5.614 186.762.956) 209.039 1.811.207 13.239.000 54.629 2.000 38.531 28.959.281 2.629.996 1.017.761.774.755 41.652 15.649.739.157 3.123 38.376.061.441 209.116.724.081 3.826.207 13.872.241.467.887 14.113 53.497 110.

OPERATING STATEMENT 2002 4.493 80.440 2.375 215.152 2.687.770.294 4.133) 5.687 (464.000) (2.611 719.194) 4.440 174.000) (40.102 5.745) (70.034 114.187.464.825 7.412 10.772 1.000) (6.826) 3.044 243.000) 3.506 2.719.621 643.230.056 291.233 799.441 205.048.066 234.884.155) 2.858 449.000) 515.307 589.864 541.994 698.948 (348.277 1.055 246.565.352) 3.988 12.848.683.587.888 4.554 (577.694.724.940 6.411 817.786.589.615 (370.859 4.060 8.748.854 208.234 1.035.415 201.678 402.335.451 828.353.727.473 Income from Murabaha Receivables Income from Mudaraba Investing Income from Musharaka Investing Income from investments in securities Ijarah income Ijarah Muntahia Bittamleek Income Gain on fair value adjustment for investments in properties Gain on sale of investments in properties Net fee.800 1.763 544.000) 646.119.746 195.996 189.788 515.000) (2.195 571.760 (173.602.094.000) 551.351 80.065 3.779 562.779 15.000) (40.827.068 (397.483 78. commission income & other income Bank's share in the associates Net gains from foreign currency transactions Operating Income Bahrain Banking Sector 5.344.381 2.384 227.426) (136.119.000) 637.074.410 6.060.339 378.211 6.996) (70.958 7.379 794.840 5.300.515 (137.991 173.324) 975.000) (40.000) 975.178 5.560 180.095 690.544.796 7.343.237 637.451 (458.617.025.790.389 (134.855 202.602 2.926.482 8.131 15.092.127 184.148 359.353 4.760.947 673.786.410 Return on unrestricted investment accounts before Bank's share as a Mudarib Bank's share as a Mudarib Return on unrestricted investment accounts Bank's share in operating income (as a Mudarib and Rabalmal) Staff costs Depreciation Expenses on Ijarah assets Expenses on premises and equipment Other operating expenses Provisions Write back of provisions against investments in properties OPERATING EXPENSES OPERATING PROFIT BEFORE OTHER INCOME AND ZAKAH Other income Zakah NET PROFIT FOR THE YEAR Global Investment House May 2005 P&L Appropriation Account: Op Balance of Retained Earnings Net Profit for the year Trfr to Statutory reserves Unrealised gain on investments in property Director's Remuneration Charitable Contributions Proposed Dividends Cl Balance of Retained Earnings .744.320) 7.333.000) (5.719.373 3.000) (40.601 2.406.445.012 (658.010 17.957.847 3.791.237 (729.744 232.578.810 7.053.643 18.000) (60.535 9.959 541.979) (70.867 85.228 210.815 7.670 221.531 646.573 22.870 136.000) (8.000) 799.442.464.001) 4.893.606.713 4.872 7.978 202.753) 905.648 3.236 210.958) 2.559.972) 9.193 913.592.040.367 (148.310 470.281) 2.295.360 14.943.440.905 4.223 2.791.462) (232.846) 2.794 540.000) 828.337.541 2.417.587.464 (515.441 (122.480 5.586.263 4.607.053.092 605.000) (40.617.780 2.603.882 74.934 10.191 176.309 (164.565.523) (70.452 182.792 9.760 534.713.926 432.264.088 567.606 1.589.258) 1.228 4.035 634.893.464.537.473 4.000) (40.064) 4.000) (2.892.704.831.785.382 1.347 900.492 751.704.601 9.411 2003 Bahrain Islamic Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 11.221 (124.233 (556.168 179.027 144.690 (70.286 94.110.429 123.300.656 332.757.692 (412.453.524) (70.112 11.615 2.305 Amount in BD Global Research Bahrain 46 1.263 (246.835 230.690 2.436 1.217 1.374 176.406 10.392.996 5.625 175.212 152.321.531 3.822.000) (4.255 716.234 (205.888 7.982 875.400 (342.810 605.788 (971.291 808.211) (100.918) 2.921.394.295.837 535.573.419 7.178 3.557 (158.

410 643.629.000) (110.406.270 (3.379) (8.111) (15.165) (498.578.268.947) (110.873) (11.744.541) 1.612 9.747 3.000) 10.000) 13.727 (110.169.963.684 7.(1.302.560 571.101 563.440 210.357) 16.122.374 (412.299.233 7.911) 424.880 3.272.310.614 3.620 (866.053.760.091) (181.589 184.642) (606.565.731) (19.826) (6.539) (16.825 2.419 10.155.314.013 32.549 9.164.300.025 (306.052 3.245 (2.265) (538.746 (2.612 8.086.890) (6.585.076 376.450 5.620 (2.587.905 3.418 2003 Bahrain Islamic Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Bahrain May 2005 470.605) 8.345.010.831) 9.753 (94.000.234 634.550) (930.315.102) (118.838.048.450) (681.201.544.212 227.208) (4.092) (182.215.061.661.081) (627.211) 544.719.161 1.867) (1.469) 282.191.399) 332.482 6.978 342.453) (13.320.455 (379.707 310.184) (94.363 5.991 208.369 (4.066) (234.152 4.000) 16.283 7.827.000) 6.000) 164.096 48.380) 3. assets and liabilities Changes in: Mandatory reserve with BMA Murabaha receivables Mudaraba Financing Musharaka financing Ijarah Muntahia Bittamleek Other assets Other liabilities Customer' current accounts Directors' renumeration and charitable contribution Net Cash From Operating Activities Bahrain Banking Sector Investing Activities Purchase of Ijara Muntahia Bittamleek Investment in properties and Ijarah assets Disposal of investment in properties Purchase of investment properties Purchase of non-trading investments Investment in Associates Purchase of equipment Net Cash (used in) Investing activities Global Investment House 47 Financing Activities Increase (decrease) in unrestricted investment accounts Dividends paid Sale of treasury stock Net Cash (used in) Financing activities NET INCREASE (DECREASE) IN CASH Cash and cash equivalents & mandatory reserve at 1 January CASH AND CASH EQUIVALENTS at 1 January .644.881 (716.000) (1.263 3.855 359.947.654.676.195.624 9.661.882.766) (16.000) 19.398) (14.CASH FLOW STATEMENT 2002 2.380) (318.958) (21.219 4.858) 1.898 (5.536.851) (4.380.012.489.128) 56.040) (59.149.376.000) 357.322.142 80.710.840 605.619) (1.122 .331) (518.415) (9.314.977) 1.394 1.192.084 8.995) 541.735 (2.209) (61.092.060.272) (816.081.464.365.315.225 (2.013 7.615 4.417.380.283) (14.603 83.440 (114.095) (189.788 589.838.029) (60.880 (6.289 9.544 (158.000) 14.905 (15.612 49.534) (18.152) (641.102.601) 4.441 (405.393) 9.648 78.392.119 (168.704.295.148.177.349.237 9.395) (101.357) (175.967 4.369 (3.614 24.349) (214.894) 2.381.319.000) (110.981) (3.736.605 48.540) (15.527.518) (19.950 (2.471.308 12.322.215.950 (1.064.228 75.094 6.000) 25.537.413) (62.306.507) (12.437 3.406.060) (136.460 6.081.641.566.681.813.815) (232.917 11.417 484.308 10.500.996) 5.170 (8.630.333.428.219 20.704.592 (846.000) (110.896 1.761.014) 33.210 (295.000) (110.275) (10.835) 4.079.041 (479.000) (110.999.686) (3.188) (94.299.197) (18.115) 49.794) 9.818.331.857 Amount in BD Operating Activities Net profit Adjustments for non-cash items: Depreciation Provisions for Islamic Financing activities Write back of provisions-net Bank's share in the loss of an associate Gain on fair value adjustment for investments in properties Gain on sale of investments in properties and Ijarah assets Operating profit before changes in op.898 (1.541.191 221.490.429.451 5.019.

0% 0.4% 1.3 405 22.6% 8.7% 3.23% 61.2% 48.99% 47.6% 45.3% 17.61% 57.3% 30.Equity to Gross Loans Constitution of Total Income .0 20% 220.2% 52.2 1.55 20.Return on Average Assets .265 2.931.4% 108% 301% 80% 84.4% 74.07% 5.4% 17.9% 38.Shares in Issue (mn) .Non Performing Loans BD .06% 2.45% 53.3% 16.1% 82.P/E .4% 13% 12% 19.9% 230 10.Equity to (Total Assets + Cont.528 5.7% 40.95% 67.6% 6.6% 6.9% 30% 101% 6.P/BV 2002 1.7% 109% 376% 80% 86.0% Bahrain Islamic Bank 2004 F 2005 F 2006 F 1.889 4.20% 2.20% 2.8% 24.3% 69.6% 52.94% 67.3% 31.052.6% 32.771.4% 2.1% 2007 F 2.5% 55.0% 52.960 4.92% 10.1% 2.88 18.2% 1.Customer Deposits to Total Deposits Credit Quality .Dividend payout ratio .88% 2.7% 61.9% 15% 15% 33.001.9% 1.3% 99.3% 62.7% 43.7% 20.9 1.4% 139.3% 51.Loan Loss Reserve BD .6% 19.Change in Net Profit Sharing Income .Return on Average Equity .440 2.5% 8.4% 2.956 1.3% 135.1% 5% -40% 67.3% 51.Depositors Profit Sharing to Depositors Profit Sharing Liabilities .1% 32% 1201% 254% 76.6% 6.1 16% 215.7 10% 173.Net profit sharing income/ Gross Income .7% 5.8% 5.8% 35.8% 27.Non-profit sharing income/ Gross Income .1% 3.30% 7.9% 48.Gross Income Per Staff (BD) .5% 54.Operating Expenses / Profit Sharing .5% 55.658.28% 12.1% 46.3% 1.291 2.Loans to Customer Deposits .918 1.Book Value Per Share (fils) .Global Research Bahrain Global Investment House Ratios Profitability .9% 49% 743% 170% 80.6 1.3% 16% 14% 20.885.6% 7.12% 6.0% 253 18.7% 37.13% 1.2% 2.0% 27.2% 2008 F 2.2% 1.81% 42.1% 5.1% 13.2% 64.8% 2.9% 7.239.000 2.2% 35.9% 3.0% 43.Change in Investment Income RATIOS USED FOR VALUATION .Net Profit Sharing Margin Efficiency .70% 56.3% 124.3% 8.923.5% 43.9% 1.9% 37.8% 1.Market Price Year End (fils) .Net Spread .900 5.3% 52.30% 53.2% 1.4% 51.7% 64.2% 62.6% 43.2% 1.3% 72.Investment Income to Gross Income Operating Performance .2% 52.5 1.453.52% 7.47 19.3 405 14.Loan Loss Reserve to Gross Loans .Operating Expenses / Gross Income .753 3.4 320 19.4% 48.Gross Income / Revenues .3 1.07% 64.2% 140.0% 29.9% 112.9% 64.315 1.1% 2.05 17.56% 46.Operating Expenses to Gross Income .02% 5.7% 47.Staff Expense to Gross Income .4% 135.1% 55.1 1.4% 1.9% 42.493 3.4% 53.3% 4.9% 93.8% 2.203 2.34% 43.017.9% 48.3% 31.23% 2.485.Profit Sharing to Profit Sharing Income Earning Assets .4% 66.2% 7.4% 253 38.449.77 16.4% 38.4% 2.6% 3.6% 3.Equity to Total Assets .Change in Fees and Commission .1% 1.387 2.6% 1.529 1.2 405 10.2% 15.8% 2.7% 253 28.2% 46.15% 63.Provisions to NPL Capital Adequacy .0% 33.Gross Loans to Total Deposits .9% 68.0% 3.Operating Expenses to Average Total Assets Liquidity .31% 2. to Gross Income .7% 253 22.0% 230 16.5% 3.9 270 25.Investment Income to Investment Assets .7% 76.5% 138.1% 94.30% 2.4% 42.4 34% 241.Depositors Profit Sharing to Profit Sharing Income .1% 47.09% 45.3% 16.8% 24.3% 32.6% 52.15% 2.Net Profit Sharing Income to Gross Income .2% 1.2% 1.NPL's to (Equity+Loan loss reserve) .190 2.9% 1.9% 118.7% 47.184 1.1% 2.9 405 18.684 1.1% 32.00% 59.4 1.Customer Deposits to Equity .7% 26.6% 5.0% 43.Fees & Comm.14% 2.NPL's to Gross Loans .78% 1.72% 16.6% 18.4% 36.9% 77.585.9% 99% 345% 86% 82.83 17.4% 90.3% 74.030 2.Dividend .9% 7.82% 54.3% 88. Liabilities) .3% 23% 1733% 338% 3.7% 230 8.20% 2.Cost to total operating income .4% 55.72% 8.3% 55.9 10% 166.11 12% 217.6% -31% 78% 58.3% 5.Net Profit Sharing / Revenues .6% 111% 376% 85% 86.2% 35.8% 4.7% 3.104.9% 51.6% 53.2% 90.8 26% 229.1% 23% 15% 18.5 175 19.0% 64.5% 53.443 2.2% 1.7% 25.22% 3.99% 72.7% 28.0% 2003 1.3% 46.9% 62.19% 2.33% 43.EPS (fils) .6% 88.4% 6.Operating Expenses / Assets Margins .2% 51.9% 30.68 48 Bahrain Banking Sector May 2005 .6% 1.

vol. NBB operates one branch in Abu Dhabi that focuses on corporate customers and middle-income retail customers. NBB has grown steadily to become the country's leading provider of retail and commercial banking services. The bank introduced a new product called Al Baseet loan to target customers who are fiscally prudent and disciplined borrowers. The bank offers a full range of banking services focused on both retail and corporate clients. Shareholding Pattern • The principal shareholders of the bank as of Dec 31.125 fils 24th April 2005 Not Rated 62.Global Research Bahrain Global Investment House National Bank of Bahrain B. particularly in sales.BH Listing: Bahrain Stock Exchange Current Price 1.741 828 / 1. In addition. The bank signed an agreement with Bahrain National Insurance Company to provide insurance products through banking channels.5mn Not Rated Key Data EPS (Fils) BV (Fils) P/E P / BV Source: Global Research Background • National Bank of Bahrain (NBB) is a public shareholding company incorporated in Bahrain in 1957 and listed on the Bahrain Stock Exchange. 2004 was the government of Bahrain with 49% stake while the remaining stake was being held by other shareholders.0 17. The bank had 571 employees as of end-Dec 2004 servicing customers from 25 branches and 43 ATMs spread across strategic locations in Bahrain. the bank implemented the project to replace its core banking computer system.9 2.C Reuters Code: BISH. • • • May 2005 Bahrain Banking Sector 49 . Recent Developments • During 2004.400 fils BD607. The bank initiated the process by offering motor insurance with plans to expand the scope of products in the future.S. 52 week Lo / Hi Market Cap Target Price 41. During 2004 the bank commenced the implementation of the Strategic Plan for 20042006. Outside Bahrain.8 431. The core theme of this plan is to target known markets and areas more aggressively and effectively by further strengthening the core capabilities. the bank had around 2300 Point of Sales at different locations in the country.61 12M Avg.

Fees and commissions income increased by an impressive 31. The agency reaffirmed the bank’s short-term foreign currency rating of A2 with the financial strength rating remaining at A.8% in FY2004 as compared to 40. However.9mn during the same period.2% to BD9.1% to BD10.36bn at the end of Dec 2004.5mn as compared to the same period last year. the total non-interest income of the bank increased by 7. Dividend income also increased sharply by 33. Fitch rating also upgraded the long and short-term ratings to A. NBB’s total assets stood at BD1. Tremendous opportunities that are available in the region are expected to benefit NBB. the cost to operating income after provision of the bank declined to 36.9% over Dec 2003.92% in FY2003 to 1. The proportion of NPL to gross loans declined substantially from 1.9mn.27mn during the same period.55mn.7mn.Global Research Bahrain Global Investment House • The bank was mandated to lead arrange in the financing of the Bahrain Petroleum Company’s modernisation programme with substantial underwriting commitments. The bank was able to control its expenses as it increased by 7.5% to BD17. As a result. This increase was due to the substantial increase in loans and advances portfolio and available for sale investments. going forward. The bank has declared a cash dividend of 40% and a stock dividend of 20% for FY2004. On the back of improved net interest income and substantial decline in provision for loan losses the total operating income after provision increased by 18. The bank has provided for 196. interest expenses increased by just 6. As a result.8mn during FY2004 as compared to the same period last year. The bank is expected to launch its first branch in Saudi Arabia in FY2005. Provision for loan losses were declined substantially by 67. Gross loans and advances increased by 18.25mn over the corresponding period of the last fiscal.from BBB and F2 from F3 respectively.1mn over December 2003.4% to BD3.3% of its NPL at the end of Dec 2004.6% in FY2003.7% to BD38. • • Analysis of Financial Performance – 2004 • The interest income of the bank increased by 15.4% to BD16.1% at BD28. The increase in net interest income is mainly attributable to good growth in core commercial banking businesses and increased interest rate spreads in the present interest rate environment.3mn. representing an increase of 9. • • • • • • 50 Bahrain Banking Sector May 2005 . In 2004 Capital Intelligence.5% to BD689.44mn. As a result. The net profit attributable to shareholders was higher by 26.14% in FY2004.5% to BD44. upgraded the bank’s long-term foreign currency rating to BBB+ from BBB.6% to BD0. the net interest income during the period surged by 20% to BD27.

available for sale investment portfolio surged by 51.7% to BD6.4% while rest of the portfolio was in equities.52mn. investment in debt was 74.Global Research Bahrain Global Investment House • In order to take the advantage of the booming market. which have relatively higher cost of servicing increased by around 15. NBB is expected to continue its focus on improving operating efficiency and asset quality.9% to BD957mn over Dec 2003. the bank remain well positioned to participate in the business opportunities stemming from regional growth. which is currently focuses on domestic market. Deposits from customers increased by 6.8mn during the same period. • May 2005 Bahrain Banking Sector 51 . This should also derisk the bank’s business model. Out of this.8% as of FY2004.2% to BD229. which grew by 80. • • Outlook • The entry of the bank in Saudi market is expected to add further visibility to the banks earnings. The bank is strongly capitalised with a CAR of 31. while the deposits from banks and other financial institutions.83mn. The highest growth was recorded by borrowings under repurchase agreements.8% to BD185. As a result.

214.490.0 22.104.679.390.0 13.000.470.0 18.0 15.0 160.990.0 957.540.0 12.0 895.719.000.165.420.0 1.440.0 1.830.373.0 1.263.0) 18.860.0 15.220.0) 461.0 9.832.0 151.0 165.0 32.845.0 18.0 45.0 93.0 1.380.111.688.0 10.400.904.0 3.166.0 40.0 40.Debt .0) 14.000.0 43.0 689.0 19.720.471.359.470.137.794.0 10.350.237.0 229.0 12.136.0) 673.Global Research Bahrain Global Investment House Balance Sheet NBB Amount in BD 000 Assets Cash & balances with banks Treasury bills & bonds Placements with banks & other FIs Trading Securities Loans and Advances (Gross) Less: provisions Loans and Advances (Net) Available for sale investment securities .820.027.0 41.0 41.0 1.167.250.000.0 44.0 45.0 (14.500.140.0 19.780.430.409.817.740.0 22.0 8.000.0 110.0 27.500.0 (13.470.0 1.800.490.0 45.0 478.650.000.0 371.180.0 2002 2003 2004 52 Bahrain Banking Sector May 2005 .0 27.152.0 6.050.260.0) 16.056.0 22.0 (17.240.Equity Held to maturity investment securities Accrued interest receivable & other assets Fixed Assets (Gross) Less: Depreciation Fixed Assets (Net) Total Assets Liabilities Due to Banks and other FIs Borrowings under repurchase agreements Customer Deposits Accrued Interest payable & Other liabilities Total Current Liabilities Owner's Equity Share capital Statutory Reserves General Reserves Retained earnings Revaluation reserve Proposed Appropriations Total Shareholder's Equity Total Liabilities 40.0 31.104.0 185.880.0 3.359.570.501.0 129.0 193.237.702.0 581.360.0 (18.950.670.690.0 53.0 366.0 9.0 71.071.0 10.0 151.0 952.0 (14.830.0 11.090.0 28.0 1.520.243.0 31.0 1.0) 563.0 162.0 306.240.0 59.0 58.470.400.0 (15.380.870.930.270.0 760.0 35.471.400.0 17.521.500.170.554.746.530.0 8.520.0 170.040.

258.0 23.0) (15.0) (16.0) (10.131.0) 2002 37.274.0 (1.249.0 83.698.0 1.0 439.0 10.0) (180.800.108.310.0) 10.440.038.000.0 801.0) (280.0 9.0) 19.0) May 2005 Bahrain Banking Sector 53 .Staff costs .Provisions Total Operating income Operating Expenses .0) (7.0 (14.250.232.401.880.0 1.0 2.910.501.790.000.530.120.130.0 12.0 (14.0 1.0 2003 33.711.0 129.0) 10.0) 33.0 (9.0 (1.338.0 28.670.0) (10.500.0 2.0 2.0) (10.0) (4.692.0 1.010.0) 37.0 23.500.650.0) (11.Other operating expenses Total Operating Expenses Net Income P&L Appropriation Account: Op Balance of Retained Earnings Effect of adopting IAS 39 Prior period adjustments Net Income Dividend Proposed Donations and Contributions Directors Remuneration Transfer to general reserve Cl Balance of Retained Earnings 11.990.0 22.250.Dividend income .0 2.198.0 (960.400.740.0 16.Profit on sale of available for sale investments .0) (15.0 17.040.057.0) (4.Income from derivatives .650.770.410.0) 28.0) (3.0) 13.870.750.000.0 (5.170.0 (5.0 3.Profit on exchange dealing and transactions .501.220.550.0 91.Other income Total non-interest income .258.0 2004 38.0 50.0) (180.Fees and Commission income .0 7.0) 44.250.0 2.Profit on trading in securities & returns & commission from managed funds .0) 22.140.489.401.Global Research Bahrain Global Investment House OPERATING STATEMENT NBB Amount in BD' 000 Interest Income Interest Expense Net interest income .940.0 (550.0 5.0) (18.130.0 (14.569.455.0 (430.700.0 (1.270.0) 19.0) 12.0 27.280.0 601.0 (1.0 943.

170.730 (2.140.0 19.300) (11.0) 3.430.110) (60.0) (6.250 1.0) (1.0) (3.0 (14.290) 4.060.000.750.890.0) 7.0) 2.380.630.730.0 (2.0) (8.0) 6.070 430 20.280.500 54 Bahrain Banking Sector May 2005 .110.060 67.010.0 286.250.680.130.0 2002 2003 2004 (14.720.0 (4.060.400 1.550.0 (14.0 286.0 (8.750) (1.250 (7.0) 223.0 (46.900) (550) 57.0) 38.700 25.0) 6.140.060) (6.150) 3.040 84.0 690.0 271.0) (15.0) (17.480.020.200) 25.0 (1.0) (32.110.350.360.0 28.050.980.340.500) (1.0) 62.250 1.610 (480) (111.0) (15.190.370 3.0 282.930.0) (10.0 29.0 11.000.610) 135.0 22.420.0) 18.630.340.720.0 (16.450.430.560 3.600 23.0 (260.Global Research Bahrain Global Investment House CASH FLOW STATEMENT NBB Amount in BD' 000 Cash Flows from Operating Activities Net Income Depreciation Provisions for loans and advances impairment Net Income after adjustments Changes in operating assets and liabilities Treasury bills Placements with banks and FIs Trading Securities Loans and advances Available for investment securities Accrued interest receivable & other assets Due to banks and other FIs Borrowings under repurchase agreements Customer Deposits Accrued interest payable & other liabilities Net Cash from operating activities Cash flows from Investing activities Purchase of held to maturity investment securities Proceeds from redemption of held to maturity investment securities Purchase of fixed assets Total Investing Cash flows from financing activities Dividend paid to shareholders Directors remuneration & donations & contributions Total Financing Net Change in Cash Net Cash at beginning Net Cash at end (13.260 9.0) (1.0) (103.070.440.0) (14.050 61.260 910 550 29.0 271.680.

Loan Loss Reserve to Gross Loans .3% 43.P/BV .20% 3.3% 2004 2.4% 29.2% 38.92% 3.000 15.7% 1.6 72.6% 27.3% 56.7% 31.14% 163.NPL's to Gross Loans .Market Price Year End (fils) .Cost to Total Op Income .Loans to total Deposits .0 18.Interest Expense / Avg Interest Bearing Liabilities .91% 14.P/E .75% 6.19% 64.0% 37.Interest Income / Avg Interest Earning Assets .243.00% 46. Income .Cost to Average Total Assets Liquidity .18% 15.Loans to Customer Deposits .Dividend Payout 2002 1.95% 72.7% 6.69% 7.Change in Fx Income RATIO'S USED FOR VALUATION .72% 61.8% 66.0 1.0 1.76% 13.2% 2. Income Margins .0% 1.5% 2.8% 28.Net Interest Margin Efficiency .4% 6.33% 36.12% 57. to Total Op.1% 450 49.Fees & Comm.Customer Deposits to Equity .99% 2.Staff Expense to Total Op Income .00% 62.2% 19.6% 3.Book Value Per Share (fils) .8 802 16.Equity to Gross Loans .7% 450 62.1% 1.Total liabilities to shareholders equity (times) Constitution of Total Income .2% 2.3% 63.3 63.50% 50.Total Provisions to NPL Capital Adequacy .1% 3.1% 2.0% 16.0 2.2 70.Equity to Total Assets .3 68.0 15.500.7% 1.94% 493.47% 6.8 431.6% -30.Interest Income to Total Op Income .Net income / Interest Income .24% 196.Change in Fees and Commission . Income .409.2% 4.Return on Average Assets .0% 32.136.0 1.27% 28.8 367.4% 51.2% 42.0% 51.7 604 12.5% -11.28% 2.8% 72.26% 0.2% 21.92% 54.8% 57.Loan Loss Reserves .Gross Loans to Total Assets Credit Quality .6% 3.14% 2.2% 27.20% 13.2% 400 48.7% NBB 2003 1.29% 14.7% 2.1% 40.Global Research Bahrain Global Investment House Ratio Analysis .54% 43.FX Income to Total Op.93% 68. Income Operating Performance .14% 6.75% 31.Dividend Income to Total Op.0 17.NBB Amount in BD 000 Profitability .8% -5.8% 24.76% 12.9 2.31% 10.Loans to Interest Earning Assets . Income .7% May 2005 Bahrain Banking Sector 55 .98% 11.Return on Average Equity .140.Net interest income/ total Op.6 1.Non-interest income/ total Op.3% 15.Shares in Issue (mn) .26% 500.4% 7.2% 1.Net Spread .EPS (fils) .8% 30.Interest Expense to Interest Income .38% 28.1 2.58% 163.92% 51.1 379.850.1% 26.0% 2.0 61.2% 2.86% 541.Non Performing Loans .Change in Interest Income .5 57.01% 59.

7% of shares are held by more than 1. Recent Developments • • The bank has open its new branch in Arad area of Bahrain.C. The remaining 54. BSB was the focus of an official investigation into alleged irregularities involving BD17mn.Global Research Bahrain Global Investment House Bahraini Saudi Bank B. This represents a new banking service from BSB following its recent acquisition of Arab Financial Services’ (AFS) card • 56 Bahrain Banking Sector May 2005 . BSB has introduced for the first time in Bahrain a unique Corporate Card. vol. 52 week Lo / Hi Market Cap Target Price 0.16mn 125 / 166 fils BD67mn Not Rated Key Data EPS (Fils) BV (Fils) P/E P / BV Source: Global Research Background • Bahraini Saudi Bank (BSB) is a public shareholding company incorporated in Bahrain in 1983 and listed on the Bahrain Stock Exchange. The rights issue resulted in an increase in BSB’s issued capital from BD20mn to BD50mn. Similarly. who own approximately 45. The bank had 101 employees as of Dec 31. which was around 85% of its paid-up capital.12 12M Avg.3% of BSB’s issued and outstanding shares. Bank of Bahrain & Kuwait and National Bank of Bahrain supported BSB in time of crisis. Shareholding Pattern • The bank is owned 50:50 by Bahraini and Saudi Investors. with a stake of about 10. The bank offers a full range of banking services focused on both retail and corporate clients with Islamic Sharia principles. which provides enhanced features from MasterCard International. Reuters Code: BSBB. The bank’s principal shareholder is the Pension Fund Commission of Bahrain.BH Listing: Bahrain Stock Exchange Current Price 134 fils 24th April 2005 Not Rated 9. During 2002.000 shareholders in both Bahrain and Saudi Arabia.1%. In view of the growth over the past few years the bank extended its branch network in the country to the current six branches in addition to 10 ATMs.4 63. 2004.2 2. The bank came out with rights issue in March 2005 to shore up its share capital.2 14. Ahli United Bank.S. Other major stakeholders in BSB include the various shareholders from both Bahrain and Saudi Arabia. BMA also supported the management of the bank.

9% of the assets were deployed in loans and advances portfolio while 42.5mn during the same period. increased by 109. which is in line with BSB’s strategy.4% in FY2004. earnings per share of the bank improved from 7. Cash and balances with central banks.8% to BD1.4 fils in FY2004. As of Dec 2004.65mn.5 fils in FY2003 to 9. Around 39. The proportion of NPLs to gross loans were at 68.86mn. Analysis of Financial Performance – 2004 • The interest income of the bank decreased by 2% to BD5.3% in FY2004 as compared to 67. Deposits from customers decreased by 2% to BD83.4% at BD1. As a result. interest expenses decreased by just 11. the net interest income during the period almost remained flat at BD4.2% to BD0.8% over Dec 2003.6% to BD10. The deposits from banks and financial institution increased by 117% to BD9. The net profit was higher by 25.4% to BD4.Global Research Bahrain Global Investment House portfolio.9mn over December 2003. • • • • • • • Outlook & Valuation • The bank is expected to focus more on improving its operating efficiency and asset quality. Provision for loan losses were BD0. BSB’s total assets stood at BD128mn at the end of Dec 2004. Despite the decline in total expenses.86% of its NPLs at the end of Dec 2004.4% of total assets in FY2004.4% to BD0.88mn over the corresponding period of the last fiscal.77mn during FY2004 as compared to the same period last year. The bank was able to control its expenses as it was down by 8. Gross loans and advances declined by 3. The decline in loan portfolio was despite the tremendous lending opportunities available in the region. which constitute around 8.26mn.74mn.84mn. However. representing an increase of just 1. the cost to operating income after provision of the bank stood at 60. The total operating income after provision increased by 2.8mn.7% were in due to banks and other financial institutions.17mn. the gross NPLs in the bank’s books were BD62. • May 2005 Bahrain Banking Sector 57 . The bank is trading at a P/BV of 2.12x and earnings multiple of 14.5% to BD91. Fees and commissions income increased by an impressive 39.2x of its 2004 earnings. The bank has funded most of its assets by higher cost deposits from banks and other financial institutions.3mn as compared to the same period last year. The bank is saddled with a heavy non-performing loans in its books.97mn. The bank has provided for 64.33mn over Dec 2003. As a result.6% in FY2003.6% to BD2. The total non-interest income of the bank increased by 29.

0) 56.0 20.0 9.0 486.997.0 6.154.0 125.0 427.020.596.630.090.973.0 54.0 (38.0 6.0 95.0 364.0 (40.881.0 128.0 52.050.116.0 5.074.598.0 498.0 4.050.0 85.881.0 4.0 2003 2004 58 Bahrain Banking Sector May 2005 .460.0 (18.220.0 20.116.0 10.0 10.0 95.0 668.778.653.643.0 10.0 375.000.0 128.0) 12.285.0 (19.Global Research Bahrain Global Investment House BALANCE SHEET BSB Amount in BD 000 Assets Cash & balances with central bank Non-trading investments Loans and Advances (Gross) Less: provisions Loans and Advances (Net) Due from banks & other FIs Investment Property Premises & Equipment Other Assets Total Assets Liabilities Due to Banks and other FIs Customer Deposits Other liabilities Total Liabilities Owner's Equity Share capital Statutory Reserves General Reserves Cumulative changes in fair values Accumulated Losses Total Shareholder's Equity Support from BMA Total Liabilities 20.0 125.442.0 95.0 83.758.000.0 619.0 4.329.0 91.0 5.889.000.158.0) 10.0 20.681.000.131.802.0) 51.667.090.155.0 2.

0) (229.456.0 2004 5.0 (174.712.179.0 191.0) May 2005 Bahrain Banking Sector 59 .0 (114.884.Loss from fair value adjustment of investment property Total Operating income Operating Expenses .0 (1.0 237.265.0 128.Staff costs .Realised gain on sale of non-trading investment .002.775.0) 1.0 655.0 78.0 2003 5.997.0) 1.0) (1.633.0 (1.499.746.0) 1.Premises & Equipment .891.0) 4.Global Research Bahrain Global Investment House OPERATING STATEMENT BSB Amount in BD' 000 Interest Income Interest Expense Net interest income .0) (604.155.0 (19.Depreciation .0) (1.510.502.0 506.Other operating expenses Total Operating Expenses Net Income P&L Appropriation Account: Op Balance of accumulated losses Net Income Part of realised profit non-trading investments Cl Balance of Retained Earnings (19.0) (580.0 4.357.0) (597.Other income Total non-interest income .Fees and Commission income .0 177.131.0) (3.997.0 (42.0) 4.0) (21.0) 4.0) 1.Provisions/ write backs .0 330.0 62.Profit on exchange dealing and transactions .884.502.0 (1.0) (168.0) (18.0) (2.0 20.862.

0 (19.633.0) (110) 5.0) 4.785.691) (3.982.0) 69.469) 1.0 2004 1.648.0 (40) (40.0 52.909.518.0 1.666.166.0 49.0 316 650 (217) 749. Due to banks and othet FIs Clients Deposits Other liabilities Net Cash from operating activities Cash flows from Investing activities Proceeds from inveting activity Proceeds from selling real estate Purchase of fixed assets Total Investing Cash flows from financing activities Support from BMA Paid shares profit Total Financing Net Change in Cash & others Net Cash at beginning Net Cash at end 20.0 37.502 168 (915) (62) 114 807.0 (18.0 BSB 2003 1.0 60 Bahrain Banking Sector May 2005 .939.0) 2.270.0 94.0) (262.0 (228.609.884 229 (511) (128) 174 18 1.557 4.0 228. Net Income after adjustments Changes in operating assets and liabilities Legal Reserve with BMA Changes in loans Other Assets Amt.0) (43.000.042.648 (11) (94) (1.0 (83.Global Research Bahrain Global Investment House CASH FLOW STATEMENT Amount in BD' 000 Cash Flows from Operating Activities Net Income Adjustments Cancelling Juridical Interest on Loans Realised Profit Provisions Loss from selling real estate investments Loss from updating the fair value of real estate inv.0) 19.909.0 49.451.

86% 13.22% 86.01% 2.71% 1.8% 71.48% 16.840.Net Spread .36% 64.Interest Income / Avg Interest Earning Assets .Loans to Interest Earning Assets .36 -2.65% 2.Return on Average Equity .Loan Loss Reserve to Gross Loans .39% 44. Income Margins .Staff Expense to Total Op Income .4 63.6 62.7% 2.6% 26.Global Research Bahrain Global Investment House Ratio Analysis BSB 2004 Profitability .P/E .8 2.Market Price Year End (fils) .Non-interest income/ total Op.Net interest income/ total Op.46% 110.74% 7.P/BV 200 9.66% 1.Equity to Gross Loans . Income .Cost to Total Op Income .74% 60.3% 9.Interest Expense to Interest Income .Total Provisions to NPL Capital Adequacy .0 40.Loans to Customer Deposits .Change in Fees and Commission .Gross Loans to Total Assets Credit Quality .NPL's to Gross Loans .Non Performing Loans (BD 000) .Change in Interest Income .86% 58.Interest Expense / Avg Interest Bearing Liabilities .Loans to total Deposits .2% -7.Net Interest Margin Efficiency .Shares in Issue (mn) .Net income / Interest Income .Book Value Per Share (fils) .3% 98.2 149 15.3% 32.49% 659.Total liabilities to shareholders equity (times) Operating Performance .Loan Loss Reserves (BD 000) .2% 13.0 68.1% 3.3% 30.Cost to Average Total Assets Liquidity .Customer Deposits to Equity .758.Equity to Total Assets .8% May 2005 Bahrain Banking Sector 61 .Return on Average Assets .0% 39.EPS (fils) .Change in Fx Income RATIO'S USED FOR VALUATION .

Global Research Bahrain Global Investment House This Page Intentionally Left Blank 62 Bahrain Banking Sector May 2005 .

Global Research Bahrain Global Investment House This Page Intentionally Left Blank May 2005 Bahrain Banking Sector 63 .

Global Research Bahrain Global Investment House This Page Intentionally Left Blank 64 Bahrain Banking Sector May 2005 .

10 1. 9.BH BISB. for which it received fees.BH BSBB.125 fils 134 fils Disclosure 1. 6. 7.10 1.BH NATB. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 3. An employee of Global Investment House serves on the board of directors of this company.10 1. 2. 4.The following is a comprehensive list of disclosures which may or may not apply to all our researches. Global Investment House makes a market in securities issued by this company. Global Investment House has managed or co-managed a public offering for this company. The company being researched holds more than 5% stake in Global Investment House. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 5. Global Research: Equity Ratings Definitions Global Rating Buy Hold Reduce Sell Definition Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price .BH BBKB. Within the past year . Global Investment House acts as a corporate broker or sponsor to this company.10 1. 8. Please see special footnote below for other relevant disclosures.BH Price 89 Cent 704 fils 405 fils 1. Disclosure Checklist Company Ahli United Bank Bank of Bahrain & Kuwait Bahrain Islamic Bank National Bank of Bahrain Bahraini Saudi Bank Recommendation Buy Buy Hold Not Rated Not Rated Ticker AUBB. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report.10 1. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. 10.

Global Research Sector Kuwait Kuwait Banking Sector May 2005 .

2nd Floor P Box 28807 Safat .kw http://www.com.kw Phone No:(965) 2400551 Ext.kw Phone No:(965) 2400551 Ext 269 Raghu Sarma Financial Analyst rsarma@global.kw Phone No:(965) 2400551 Ext.Global Investment House KSCC Equities Research Souk Al-Safat Bldg.304 Adham Fayoumi Financial Analyst afayoumi@global.com. CFA Head of Research shaileshdash@global.196 Pravin Bokade Senior Financial Analyst pravin@global.104 Shailesh Dash.com. El-Quqa. CFA Financial Analyst fhasan@global.globalinv.com.net Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M.kw Phone No:(965) 2400551 Ext 229 Amit Tripathy Senior Financial Analyst amitt@global.317 . 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: research@global.com..kw Phone No:(965) 2400551 Ext.kw Phone No:(965) 2400551 Ext.O.com.com.kw Phone No:(965) 2400551 Ext. CFA Executive Vice President omar@global.273 Faisal Hasan.com.

...................... 28 Commercial Bank of Kuwait ................ 7 Peer Group Comparison .................................................... 75 ..................................................................................................................................................... ................................................................................................................. 1 Islamic Banking ........................................ 14 Valuation Matrix ................. 20 Gulf Bank..... 3 Credit Portfolio ....................................................................................................................................................................................... 4 Interest Rates ........................................................... 36 Burgan Bank ............................................................................................................................................................................................................................................... 6 Asset Size ................................................................................................................................................. 9 Banking Sector Outlook ......................................................................................................................................................................................................................................................................................................................................................................................... 68 Kuwait Real Estate Bank ..............Table of Contents Kuwaiti Banking Sector ............................................................................................................................................................................................................................................... 15 Players Profiles National Bank of Kuwait ........................................ 50 Al Ahli Bank of Kuwait ...................................................................................................................................................................................................................................................................... 43 Bank of Kuwait and Middle East ...................... 59 Kuwait Finance House .................................................................................................................................................................................................................................................................................................................................................................................................

restrictions on retail fees and commissions that can be charged. Kuwait Finance House (KFH) and Kuwait Real Estate Bank (KREB) are also listed on the stock market. helping reinforce economic growth. Bank of Kuwait & Middle East (BKME) and Al Ahli Bank of Kuwait (ABK). The growth of the Kuwaiti banking sector has also been driven by the growth of the national economy. and securities underwriting). the CBK has moved to liberalize the financial services industry. The beneficiary. the overhauling of Islamic banking laws have been emphasized by industry experts by opening new doors for additional Islamic banks. with total banking assets amounting to around KD19bn as of end 2004. Kuwait Finance House and Boubyan Bank which operates according to Islamic principles. KFH is an Islamic bank while KREB specializes in lending to the real estate sector and giving housing loans. The Central Bank of Kuwait has also played a finely balanced role in supporting and liberalizing the sector at the same time. Highly Regulated Industry Kuwaiti banks operate in a highly regulated and protected environment under the supervision of the CBK. The CBK issued its first license for a foreign bank to operate in Kuwait. the CBK ended the Islamic banking monopoly of KFH by licensing the country’s second Islamic bank. one specialized bank. Subsequently. six commercial banks. two more licenses were issued. private placements. 37 investment funds and around 25 insurance and reinsurance companies. we have seen the CBK open the sector wide open to competition by allowing foreign banks to operate alongside its six conventional commercial banks and two Islamic banks. The Kuwaiti banking sector remains a cornerstone of growth in the local economy. Boubyan Islamic Bank. is allowed to open a branch. 31 exchange companies (mostly into foreign exchange related activities). limit on level of consumer loans and restraints on increasing loan portfolios and exposure to a single borrower. All three foreign banks are expected to be operational by the end of FY2005. The six listed commercial banks are: National Bank of Kuwait (NBK). The solid financial profile of local banks as well as balance sheet restructuring has allowed Kuwaiti banks to feed the growing need for credit. Commercial Bank of Kuwait (CoBK). Consequently. In addition. etc. one to National Bank of Abu Dhabi and the other to HSBC. close regulatory supervision and liberal policy measures catapulted it to one of the strongest in the region. By removing the government guarantees on private sector May 2005 Kuwait Banking Sector 1 . In terms of supervisory regulations. The banking sector in Kuwait is one of the largest in the Gulf region. Recently.Global Research Kuwait Global Investment House Kuwait Banking Sector Industry Structure Kuwait’s financial system consists of the Central Bank of Kuwait (CBK). Gulf Bank (GB). 38 investment companies (engaged in portfolio management. Its strength. There are several CBK regulations which banks are subject to such as: cap on lending rates. a branch of a foreign bank. BNP Paribas. Industrial Bank of Kuwait (IBK) is an unlisted government funded bank that focuses on industrial lending. Burgan Bank (BB). In the past few months.

Recent Regulatory Initiatives In the past two years or so. They are BNP Paribas. which were previously enacted following a 1982 stock market crash.000. In Feb 2004. CBK imposed limits on the ownership structure of Kuwaiti banks by setting the maximum limit of any individual in a bank at 5% of the bank’s capital. With foreign banks now permitted to operate in Kuwait. The removal was done in view of the local banks having considerably improved their financial positions with above par financial ratios of solvency. unless prior consent is obtained from CBK and excluding government entities and positions existing prior to this law. specialist Kuwait Real Estate Bank into an Islamic bank. Some of the major regulatory changes are enumerated below: • The Central Bank of Kuwait (CBK) liberalizes the banking sector in Kuwait allowing foreign banks to operate in Kuwait. which most of the bank in Kuwait hate to comply with. The loan term. HSBC & National Bank of Abu Dhabi. The banks will have to comply by July 2005. In June 2004. the government realized that the time has come to encourage free competition in the sector. should not be more than one year excluding the original term of five years. the country witnessed tremendous regulatory changes which will have far reaching implications for banking industry in Kuwait. The most notable of all regulation. CBK stressed that it would license two new Islamic banks in Kuwait. As a result. which was launched through an IPO in April. CBK allowed commercial banks to set up Islamic subsidiaries. This liberalisation is combined with good governance. These include the newly formed Boubyan Bank.Global Research Kuwait Global Investment House bank deposits. and will undoubtedly motivate managements to improve performance and standard of services to cope with the new conditions. and the transformation of the small. The removal of guarantees is expected to result in healthier competition between the local banks and expected new foreign banks. under a scheduling arrangement. liquidity and profitability and are now considered better equipped to safeguard their customer deposits. The maximum term of a consumer loan should not exceed five years. The new banks should have minimum capital of KD15mn and will have achieve 50% Kuwaitization within a period of three years of their operation. CBK came out with the guidelines that CDs/Medium Term Loans to be netted off for 88:12 ratio purposes thus closing the loophole whereby banks were using back-to-back interbank funding to expand retail loan capacity at nil net of cost. In July 2004. three foreign banks have been given license to operate in Kuwait. is 80:20 customer loan / customer deposit ratio. CBK restrictions on loan growth significantly tightened. • • • • • 2 Kuwait Banking Sector May 2005 . efficient internal control and risk management systems which constitute the real guarantee for depositors. CBK stressed that the consumer loan amount should not exceed fifteen times the customers monthly salary or his monthly stable income with the maximum limit of KD15. In another development. Other Kuwaiti banks will have to endure a grace period which could last anything from 1-3 years before they are permitted to form Islamic subsidiaries.

and allow CBK to test. bonds. while article 85 allows the CBK to take corrective action if a bank violates the law through the imposition of financial penalties. enjoyed a monopoly since its inception in the area of Islamic Banking in Kuwait. foreign assets and foreign interbank and cash holdings are divided by private deposits. Other changes by the CBK included an amendment to law 32 that permits CBK to share information with other central banks and supervisory authorities. The law also allows CBK to introduce Islamic instruments to deal with Islamic banks in order to regulate banking liquidity. Until recently. CBK introduced a net liquid assets ratio where the assets such as T-bills. The law allows traditional Kuwaiti banks to practice Islamic banking activities through affiliates in which the principal bank owns at least 51% of the capital. Salaries of immediate family members should not be combined and spouses should not guarantee each other. However. cash. • • • • Islamic Banking KFH. The law also allows existing local banks to convert into Islamic banks in accordance with terms and conditions set forth by CBK Board of Directors. Each bank has to comply with a specific ratio (which the CBK will not disclose) based on its financial position. Each bank can establish only one affiliate whose paid up capital should be a minimum of KD15mn. However. which is a major Islamic banks in Kuwait. around two years back the National Assembly passed a law that ensures regulation of Islamic banking by the Central Bank of Kuwait. In January 2005. banks are now permitted to count their balances with the CBK as part of their liquidity position. CBK has removed deposit guarantee to create a level playing field for the new entrants. The Board of Directors of CBK has decided to adopt a gradual approach in licensing new Islamic banks whereby two new banks besides the KFH is to be licensed in the first stage. The licensing policy aims at allowing three Islamic banks including KFH to operate in the first stage. The law also outlines the conditions to establish new Islamic banks and Islamic banking units of existing traditional local and branches of foreign banks. in order to promote a competitive environment for Islamic banking in the local market and to avoid any negative repercussions of having too many Islamic banks operating at this early stage. 88:12 consumer loan ratio was lifted. evaluate and adjust if necessary its supervisory policies and instructions regarding Islamic banking. It would also allow time for developing indigenous expertise in Islamic banking that would satisfy the demand on skilled workforce in the next stage.Global Research Kuwait Global Investment House • CBK has also issued special regulations pertaining to installment loans which states that maximum repayment period of installment loans shall be fifteen years. In 2004. KFH did not come under the supervision of the Central Bank of Kuwait (CBK). The CBK now regulates both the existing and future Islamic banking business taking into account the special characteristics of Islamic banking using appropriate supervisory principles and standards. Boubyan Bank was offered a new license. This development ends the monopoly situation that KFH was enjoying and increase competition in the local banking industry. In Oct 2003. May 2005 Kuwait Banking Sector 3 . while the Kuwait Real Estate Bank (KREB) was allowed to become an Islamic bank.

0% 7.1% 9.9% growth in 2004.9% 16.0% 8.2% 8.2% 8.2% 15.9% 18. NBK and KFH together account for over half of total bank deposits in the country.6% 16.6% 4. both in terms of short-term and medium-term financing has been readily available.0% 9. Gulf Bank.3% 10.2% 11. Table 1: Kuwaiti Banks Market Share Assets NBK GB COBK BB BKME ABK KFH KREB Source: Global Research 2003 29.4% 22.8% 3. reach and coverage. The large banks also have competitive advantage over the smaller banks on account of their strong brand equity and distribution coverage.3% 8. Credit to the private sector grew by 37.7% It is quite difficult for any bank in Kuwait to build a distinctive franchise. activating the economy into an estimated 14. the smaller banks that have been in the lower tier have become much stronger and profitable and are now challenging the top banks for business. as clients become more sophisticated.0% 12. This means that all Kuwaiti banks follow similar strategies and essentially compete for the same business. This is gradually changing.1% 8.Global Research Kuwait Global Investment House Large banks have a dominant presence Large banks such as NBK and KFH dominate the banking industry by virtue of their size.0% 7.4% 14.1% 13.2% 11. However. usually comprising closely related family groups.6% 2004 29.8% 9. Despite that NBK and KFH continue to grow in strength as they have expanded their operations to Saudi Arabia.2% 4.2% 22. It also has the most extensive international presence by any Kuwaiti bank.8% 15.2% 12.6% 11.1% 3. Both have matched up to incite growth of credit facilities to the private sector to a brisk pace of 37.1% 9.0% 3.5% Loans 2003 26. Simultaneously. and Commercial Bank of Kuwait – together with the Islamic financial institution Kuwait Finance House control nearly 70% of the total bank assets and customer deposits. each bank has its “own”.6% 9.1% 8. NBK has a dominant presence in the domestic banking industry accounting for over 29% of the total banking assets and 28% of deposits.6% in 2004 over the previous year level. extremely lax monetary policy has spurred corporate demand for cheap loans. The National Bank of Kuwait (NBK).6%. a potential for rationalisation exists.4% 7. 4 Kuwait Banking Sector May 2005 .6% 8. but allows less competitive banks to remain in business. Also.8% 12. In addition.7% 10.9% Deposits 2003 2004 29. there are a large number of banks for a country of Kuwait’s size. Bahrain and Turkey respectively.3% 9.0% 7.2% 8. Enter Feb 2005.2% 27.8% 9.9% 2004 27. record high oil prices flooded the banking system with excess liquidity. over the last two to three years. The small size of the Kuwaiti market and lack of a real “non-oil” economy are limiting factors when it comes to building a banking franchise. the situation remained in its status quo and credit during the first two month of the current year. which is more than twice as much as its nearest conventional banking competitor.2% 3. Credit to the private sector During the last few years. Following the proposed entry of new foreign and Islamic banks. the intensity of competition is likely to increase further. loyal core clientele. Thus.

1% 14.3% 6. the increase in credit extended in 2004 saw a growth of nearly 37.8% in the FY 2004 period. Already. Chart 1: Credit to various sectors as of Feb 2005 0. Leading the growth was additional facilities provided for trade sector.6%. the CBK stepped in and issued a number of edicts to rein in bank lending.8% additional credit facilities. As a result. and orders picking up. taking a larger exposure to trade. real estate and construction sectors. the sanguine state of the property market also expanded demand for real estate and construction loans. However. After evidence mounted that bank credit growth was feeding growth in the capital and real estate markets out of control. May 2005 Kuwait Banking Sector 5 . Aside from personal facilities. the banks were given a later deadline of July 2005 to comply. businesses often need to borrow to build inventory. Banks have complied.5% 9.1% 0. this instruction from CBK will have major effect on credit offtake from banks in 2005. crude oil and gas. The CBK mandated commercial banks to limit net loans to 80% of the total customer deposits and deposits from financial institutions. also seen double-digit credit expansion. The robust state of the economy had resulted in an increased appetite for credit by major productive sectors of the economy in 2004.8% Trade Construction Non-bank financial Institutions Real Estate Public Services Industry A griculture and Fishing Personal Facilities Crude Oil and Gas Source: Global Research Despite this instruction the rate of credit growth could not be curtailed compared with 2003.3% and 58%.6% 16.4% 4. credit growth was only 0. Most of the other sectors barring public services.Global Research Kuwait Global Investment House as oil prices continued to trek higher. as purchase of securities and installment loans surged ahead by 98. till Feb of this year.4% and 41. industry and other loans. other main beneficiaries of increased bank lending are the trade. Personal facilities have surged ahead by 41. With domestic demand strong and trade with Iraq mounting. both have seen 25. which still has the lions share of the total claims extended to the private sector. Due to the fact that the some of banks were already in excess of 80%. financing the increasing purchase of goods for traders. construction sector as well as additional personal facilities.7% 7. Also. industry.4%.6% 40.

it will also depend on the interest rate scenario in US. average interest rates on public debt instruments such as Treasury Bills and Treasury Bonds and the average interest rates in Time Deposits increased during the past nine months in line with the increase in CBK’s discount rate.7 553. rates in Kuwait kept on imitating US rates as they continued their northward journey.50 852.2 648.6 1. This parity rate would help absorb fluctuations in exchange rates of major currencies in world markets.6 9. it is possible that the CBK will also increase interest rates. Local rates have been following US rates and the average rate is expected to rise further in 2005.5 1.20 736.60 889.883 1.5 2. In the first two months of 2005 as well.074.868 1. We believe that the central bank will keep on tightly controlling money supply in the economy by increasing interest rates.00 692.1 899. The average inter-bank interest rates on KD deposits.808.30 58.040 1.63 fils per dollar with a margin of ± 3.3 4.609 1.313.888 1.625.8 1.7 641. the discount rate has been raised by seven times to the current rate of 5.30 Feb-05 1.380 USD 1.008 2.20 460.00 Interest Rate Environment The Kuwaiti Dinar (KD) has been officially pegged to the US dollar as part of the creation of a single GCC currency.551 2. Following the recent hike in interest rates by the US Federal Reserve.Global Research Kuwait Global Investment House Table 2 : Credit to Private Sector End of Period .3 0.130 2.6 0.2 7.015.296.1 394. The parity rate of the KD exchange rate as against the US Dollar was set at 299.9 16. 6 Kuwait Banking Sector May 2005 .766 1.40 55. which in turn will benefit the interest incomes of banks.8 351.2 698.415. Though the future increase in interest rates will be a measured one rather than any abrupt hike.10 504.KDmn Trade Industry Construction Agriculture and Fishing Non-bank Financial Institutions Personal Facilities Consumer loans Installment Loans Purchase of Securities Other Loans Real Estate Crude Oil and Gas Public Services Other Total Source: Central Bank of Kuwait 2003 905.2 494.200 2.50 73.907 1.7 4.5%.1 873.831.506 2.9 9. average interest rates on all maturity brackets declined in 2003. after that interest rates started to move up and increased gradually in 2003 and 2004 on all maturity brackets.5 29.1 0.4 453.942 2.129.286 2.4 2.458 1.476 0.846. However.411.9 701.620. Table 3:Average Interest Rates on Customer Time Deposits with Local Banks Maturity 3 months 6 months 12 months (%) 2002 2003 2004 Feb-05 2002 2003 2004 Feb-05 2002 2003 2004 Feb-05 KD 2.8 1.014.232 1.773 2.25%. Nonetheless.251 2.906 1.8 30.20 454.514 Source: Central Bank of Kuwait As seen from the table above. since July 2004.390 0.10 2004 1.967 2.50 430.

therefore.0 Claims on Government 3.067.80 11.60 2.453. Although a growth in all of the above is favorable for the economy.058. new regulatory changes by the Central Bank of Kuwait (CBK) not to include the entire Inter-bank liability but rather the net Inter-bank position of the banks while calculating the lending ceilings prompted the local banks to decrease their Inter-bank deposits.330.811.80 9.80 Other Assets 431.00 Government Deposits 224.5 2.792.4 10.7% in 2004.47bn in February 2005. however.097.192. However.00 575.0 2.50 1.051.8% of total assets as of Feb 2005.50 7.7 2. rising rates should in theory check further price increases.2 Public Debt Instruments 2.80 1.20 757.846.00 Inter-bank Deposits 1. a decrease of KD683mn or 3.872.80 211.3 985.8 135.20 9. the Inter-bank May 2005 Kuwait Banking Sector 7 .5 416.994.10 Private Sector Deposits 9.40 Own Funds 1.20 Debt Purchase Bonds 1204. amounting to 58.30 1.818.00 2. Inter-bank placements of the banks in Kuwait had previously increased substantially from KD1bn in 2002 to KD2bn in Dec 2003.80 Inter-bank Deposits 1. Private sector lending has expanded by 35.80 2.00 Source: Central Bank of Kuwait 2004 19.337.750.9 844.5 18.20 2.90 534.1 316.964.228.50 2.1 2.209.828.0 3.10 1.353.5 Foreign Assets 1.90 1. as the CBK continues to maneuver bank lending lower.4 1.90 Other Local Investments 753.50 Also. We believe a discount rate of around 5.146.10 Cash & Short-term deposits 121.704.1 Foreign Liabilities 1. Low interest rates in recent times have resulted in remarkable gains at the Kuwait Stock Exchange as well as astronomical increases in the value of real estate in the country and a general increase in business investment.2 Time Deposits with CBK 1626 920. At the end of December 2004.972. Private sector lending continued to form the bulk of local bank assets.701.0 10.30 1.231.0 3.3 19.022.468.6 125.010.3% in two months.Global Research Kuwait Global Investment House The rate increases are part of a gradual process to wean the economy from what was an extraordinarily low discount rate. the total assets of the banking sector decreased from a high of KD19bn in December 2004 to KD18.60 7. meaning it would neither slow nor stimulate economic activity.808.136.50 3.5% to 6% would be relatively neutral.20 763.057.015.3 125.301.7 Total Liabilities 15.109.058.00 603.778.40 587.10 9.474. which is the CBK’s main tool in influencing the economy.7 2.353.50 2.7 Claims on the Private Sector 6.128.026.90 Credit Facilities 6.188. private sector lending is expected to slow.139.80 10.771.50 Feb-05 18.30 587.231.213.073. This is mainly on account of a quicker pace of loans for the purchase of securities.30 1.4 2. Asset Size of Banks Prompted mainly by regulatory instructions.376.474.244.30 17.30 17.70 509.80 254.097.80 Other liabilities 1.369. Table 4: Consolidated Balance Sheet of Local Banks 2002 2003 In KD mn Total Assets 15.10 2. the central bank felt that the abundant liquidity in the system would adversely affect both the equity market as well as the property market if prices continued to balloon.097.

2% 1.1% 9.2% Private Sector Deposits Inter-bank Deposits Government Deposits Other liabilities Foreign Liabilities Own Funds 4. mainly from the growth in private sector and government deposits. The high Inter-bank deposits were being used by the local banks to increase their highly profitable consumer loan book size. Chart 2: Composition of assets of the banking system as of Feb 2005 4. Global Research We are also beginning to see a relatively new phenomenon of tapping into international markets for financing needs.2% to KD763mn. banks are expecting considerable deposits in the coming months.1% 3.8% of the total banking sector assets but having fallen by 45.0% Cash & Short-term Deposits Time Deposits with CBK Foreign Assets Claims on the Private Sector Claims on Government Inter Bank Deposits Other Assets 58. both private sector and government sector. as the US$ continues tumbling lower to international currencies. Global Research The marginal asset growth is being funded from the liability side. This 8 Kuwait Banking Sector May 2005 .2% over 2003.9% 62. and the interest rate continues to trek higher.1% 15. A number of local banks have already mandated international banks to syndicate sizeable facilities to keep liquidity and additional lending an option.9% Source: Central Bank of Kuwait.0% 2.0% 0. In the first two months of 2005. The two have grown by quick ticks of 19.0% 9.8% Source: Central Bank of Kuwait.Global Research Kuwait Global Investment House placements were at KD1.1bn representing 5. A rising interest rate environment has prompted a portion of investors to re-channel funds back into the banking system.3% and 82% respectively. Chart 3: Composition of liabilities of the banking system as of Feb 2005 12. Also. interbank deposits fallen further by 31.7% 17.

Asset Size and Asset Quality As mentioned earlier.758) 2.722 1.508 1.5% followed by Gulf Bank at 3% and BKME with 3.286. Those banks. banks in Kuwait have reduce their interbank assets and liabilities.3% 74.825.065 1.971 26.754. Other banks have also been reducing Government Debt Bonds from their balance sheets. non-performing loans of the banking system may rise gradually.5% 84.7% and Gulf Bank with 122. As a result we have witnessed substantial improvement in the asset quality of the banks. NBK continues to have the best asset quality among its peers despite its huge size and outstanding growth.804 1.6% 5.607.537) (122.521) 449.743 1. Global Research.043 (33.454. In the Kuwaiti banking sector.5% 116.418) (55.348 1. Table 5: Non-Performing Loans of Kuwaiti Banks (FY 2004) (Amt in KD 000) Total Assets Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL NBK GB COBK BB ABK BKME KFH 5.33mn of the total assets were deployed in lending operation.656 (32.685 N/A 3.484.000 45.201 129. the total assets of the banking sector stood at KD19bn as of Dec 2004 end.221 1. As a result of this ratio. construction and stock market are expected to suffer the most.685) 822.744.164 1.462 980.058.9% 855.705. Around 54. Since the past few years banks in Kuwait have focused extensively on improving their asset quality. Commercial Bank of Kuwait has the highest non-performing loans which was followed by Kuwait Real Estate Bank.5% 3.0% 122. Gulf Bank became the first bank in Kuwait to completely eliminate its entire portfolio of low yielding Government Debt Bonds. most of the banks have witnessed a marginal increase or in some cases decline in their lending portfolio.092) 814.572.522 44. In response to the changing regulatory environment. N/A – Not Available We believe that once the market starts its downward trends.Global Research Kuwait Global Investment House would also help banks to exploit the difference between lower US$ dollar borrowing rates and higher Kuwaiti lending rates. Most of the banks in Kuwait have provided adequately for their NPLs in FY2004.0 9. NBK was followed by Ahli Bank of Kuwait with 133.831. To comply with this ratio.0% 11.331 3.5% 133.983 2. though pace at which they are declining is a gradual one.591 983. which have exposure in real estate.9% -KREB 736.669 483. the banks did try vigorously to increase their customer May 2005 Kuwait Banking Sector 9 .837 (40.745 48.509.389 5.7% 854. Another interesting phenomenon which has become a sort of short term burden for banks is the 80:20 deposit ratio.458. Comparative Snapshot of Kuwaiti Banks The following table gives the broad overview of the total balance sheet of all the banks in Kuwait.5%.4% 201.366) (151. NBK as usual was at the forefront when it comes to providing more for its NPLs as it provided 201%.548 (86.034 58. NBK’s non-performing loans to gross loans stood at 1.4% or KD10.818.1% -121.957 1.790 43.1% in FY2004.8% Source: Company Reports.066 2.135.885 1. In recent years all the banks have been taking initiatives to restructure their assets as well as liabilities.603) (78. Despite that there are some banks whose delinquency ratios are much higher as compared to the international standards.738.140 1. which has been introduced in FY2004.

607. encompass efficient balance sheet management in which capital flows quickly to its most efficient use. insurance and other products.387 6.790 82. therefore.293 559. Gulf Bank.164 1.006 Source: Banks Annual Report.205 133. These changes will imply a new found emphasis on marketing of products. Table 6: Comparative snapshot of Kuwaiti Banks (as of FY2004) KD' 000 Assets Cash & Bank Balances GDBs Gross Loans & Advances Less: Provisions Net Loans & Advances Investments Net Fixed Assets Interest Earning Assets Total Assets Liabilities Due to banks Due to FIs Customer Deposits Medium Term Loans Floating Rate Notes / Other borrowed funds Subordinated Loans Paid-Up Capital Proposed Bonus Shares Reserves Shareholders Equity Interest Bearing Liabilities NBK 391.164 CoBK BB BKME AABK KFH KREB 238.959 1.418) 2.257 127. Global Research 10 Kuwait Banking Sector May 2005 .141 67.000 167.971 449.066 736.043 135.436 233.509.454.825.615 105.669 20.528 46.299 1. banks in Kuwait are adequately capitalised to take the advantage of emerging opportunities not only in Kuwait but in the entire GCC region.205 154.073.315 142.983 GB 234.940 114. Most of the banks in Kuwait followed their counterparts in the GCC region to shore up their share capital by way of bonus issue or rights issue to comply with the Basel II requirements.738 .246 173.124 206.521) 1.354 17.345 16.458 89.561 207.244.017 1.520.259 234.048.010 2. the challenge lies in how they can convert this into a marketing advantage.929 121.885 113.240 3.913 561. and Al Ahli Bank of Kuwait have issued bonus shares in FY2004 while some others like KFH have raised capital by way of rights issue.072 22. Because of the shoring up of their share capital.221 1. banks may have to firm up new strategies. whether it will be investment. In order to take the advantage of the booming market.858 78.371.754.208 12.837 (151. most of the banks have also increased their investment portfolio.883.584 325.088 58.475.010.444 101.522 565. Future plans of banks could.057 88.656 483.572.412 963.508 231.462 822.967 3.382 91.104 3.942 5.174 221.027.106 1.026 40.957 (55.477 84.043 (122.938 4.288 112.144 8.065 854.944 1.295.537) (78.641.767 60.765 94.795.814 361.758) (40.615 200.031 20.179 2.000 - 44.058.660 97.787 37.041 2.640 1.811 2.484.020 112.542 94.042 203.303 192.086 106.514 7.831.295 163.080 196.587 170.739 4.738.685) (33.208 102.140 (86.038 39.603) (32.722 861.705.743 1.904 1. A phenomenon which has been prevalent all across the GCC region is the increase in the share capital of the banks. thanks to their image of trustworthiness and their extensive distribution systems.744.393.141 7.331 1.135.472.092) 983.587 12.552 5.366) 1.650 320.286.612 1. With the Basel II norms placing banks on track for transition from the traditional regulatory and market led capital adequacy to one based on the most efficient use of capital.185 58.306 1.444. Considering that banks have advantages.596 1. and from physical distribution to virtual distribution.528 265. Besides the shift in trend from the capital adequacy to capital efficiency.167 684.821 75.395.591 87. banks are also now witnessing transition from deposit banking to financial services.773 2.940 371.858 411.394 87.406 72.987 229.Global Research Kuwait Global Investment House base as well as increase the deposits from financial institutions. Banks such as NBK.044 1.127 1.745 112.559.000 108.522 1.058 1.362 86.790 814.888 1.154.033 955.060 70.563. We believe that the fluid use of capital will be a key factor in the return on equity strategy for banks in the years ahead.458.685.058 1.548 855.348 980.933 39.936 2.477.885 1.

664) 95. growing the size of the loans and advances segments.532) 29. though the banks like Commercial Bank of Kuwait.221) 29.297 BB 74.022) (3.607) 19.441 (18.365 (57.670) 42.491) 83. There are number of projects in the pipeline and the booming economy offers diverse opportunities for the banks which have developed their investment banking divisions. Thus. all 8 banks saw improved profitability during the FY2004.802) 157.338 18.588 24. a move that is currently helping bolster expectations in the sector.563 150.206 27.982) 20.600 62. profits of the banking sector. Banks will continue to benefit from the further hardening of interest rates.281 (15. However. which trailed all other sectors in 2003 picked up in 2004.25%.Global Research Kuwait Global Investment House In terms of interest income. This is the reason why operating income after provision of some of the banks was inflated in FY2004.622 29.596 BKME 58. have reduced their provision for loan losses dramatically. May 2005 Kuwait Banking Sector 11 .3%).603) 61.110) 215.394 (12.279 (2. Burgan Bank (+45.519 Source: Bank Reports.521) 30.714) 28.506 (5. NBK continued to lead its peer by a wide margin. Gulf Bank. Also. Table 7: Comparative snapshot of Kuwaiti Banks (as of FY2004) KD’ 000 Operating Statement Interest Income Interest Expense Net Interest Income Non-Interest Income Provisions for loans Impairment of inv.492 (16.315) 95.143 (17.987 47.412 KREB 35.141 (27. Kuwaiti banks have been improving their operating performance over the years owing to infusion of IT. led by Gulf Bank (+54%).650 35.285) 67.476) 61.174 (13. etc.7%.289 GB 106.349) 50.320 (2.575 (7. On account of falling interest rates till mid2004.329 12.559 (33.778 22.620 (6.117 (8.445 (76. Burgan Bank. with the latest rate hike occurring in March 2005 bringing the discount rate to 5.668) 77. banks were forced to restructure their balance sheets.194 78.910 (18. Securities Operating Income Operating Expense Operating Profit Net Profit NBK 228.841) 64.242 74. We believe that the banks in Kuwait have greater opportunity to increase their fee based income.968) 28. process re-engineering with emphasis on automation and cost initiatives in the banking business.403) (313) 45.883) 48. As a result. which increased rapidly.725 (41. aggregately up 27. and Kuwait Real Estate Bank (+32.157 KFH 133.251) 152. The hike in interest rates since mid-2004 have helped the bank to increase their interest income.769 21.501 (27. The total operating income after provisions of the banks witnessed excellent growth in FY2004.646 CoBK 89.178 (13.538 34.135 23. NBK’s interest income is more than twice that of its nearest conventional banking competitor i.776 AABK 62.936 (16.476) 27. banks focused heavily on improving operating efficiency and asset quality during the past period. Global Research Overall.064 (30.2%). other smaller banks have also been trying to increase their interest income.956) 32.e.038 74.463 (71. to improve service levels.935 (39.

8% 62.08% 2.2% 33.13% 36.93% 3.70% 52.1% 4.21% 2.70% 43. 9.3% 117. Burgan Bank and AABK continued to be at the bottom three in efficiently utilizing their asset base.07% 3.60% 1.1% 19.91% 58. Gulf Bank was followed by CoBK with cost to income ratio of 22.6% 5.40% 52.8% 12.09% 41. BKME.8% 16.98% 63. cost to operating income after provision for Kuwaiti banks is on a lower side as compared to their regional counterparts.0% 19.00% 1.2% N.4% 4.70% 53.14% 12.6% 3.Global Research Kuwait Global Investment House Table 8: Comparative snapshot of Kuwaiti Banks (as of FY2004) NBK Profitability Indicators ROAE ROAA Interest Exp / Interest Income Interest Income / Avg Int earning assets Interest Exp / Avg Int bearing liabilities Net Spread Net Interest Margin Net Interest Income / Total Operating Income Non Interest Income / Total Operating Income Cash Dividend Payout Ratio Efficiency Indicators Cost to Operating Income Staff Expenses / Operating Income Liquidity Indicators Net Loans / Customer Deposits & Deposits from FIs Gross Loans / Customer Deposits Capitalisation Indicators Capital Adequacy Ratio Equity to Total Assets Equity to Gross Loans Source: Global Research GB 28.78% 63.4% in FY2004.16% 1. which was closely followed by NBK with 28.50% 49.00% 2.5% 81.5%.5% 16.33%.87% 2. KFH leads the pack in efficiently utilizing its assets as it reported the highest Return on Average Assets at 3.A.60% 2.90% KFH KREB 24.9% 19. banking sector in Kuwait has been witnessing cost rationalization since the past few years.00% 15.13%.8% The strong profitability of banks have also boosted their Return on Average Equity (RoAE) and Return on Average Assets (RoAA).2% 5.9% 98.4% 71. Similarly.94% 14.7% 36.0% 5.5% 82.0% 87.0% 17.13% 53.02% 2.0% 28.7% 117.43% 43.6% 27.60% 3. BKME.60% 2.47% 1.62% 56.4% 17.6% 3.4% respectively. BKME and AABK reported the lowest spread in the banking industry in Kuwait.29% 53.92% 28.16% CoBK 25.42% in FY2004. As a result.4% 2.2%.51% BB BKME AABK 14.7% 22.87% 2.60% 57.4% 3. Gulf Bank reported the lowest cost to income of 19.10% 31.66% 2.1% 4.4% 98.00% 2.00% 17.80% 16.0% 12.5% 85.00% 72. Gulf Bank has the highest return on equity in the banking sector in Kuwait as it reported RoAE of 28.3% N.00% 10.4% 1.57% 69.2% 20.3% 108.42% 3.69% 36.5% 25.6% 12.45% 1. which is much lower as compared to its peers in Kuwait.8% 17.3% 36.6%. CoBK reported a net spread of 3.2% 2.7% 57.7% 11.2% 11. we believe that it will be difficult for banks in Kuwait to lower their costs as they will have to make more 12 Kuwait Banking Sector May 2005 . As mentioned earlier.33% 46. Going forward. 22.9% 30.A. CoBK has the highest net interest margin in Kuwait while Gulf Bank is at the second spot. which was followed by Gulf Bank (3.08% 1.9% 21.30% 64.60% 16.86% 14.00% 75.9% 22.88% 49.42% 3. CoBK has the highest net spread among its banking peers in the country.92% 1.4% 1. AABK and Burgan Bank were the laggards in this respect as they reported RoAE of less than 15% in FY2004.3% 15.8% 19.24% 26.40% 42.31% 61.5% 4.4% 20.66% 3.8% 1. which was followed by Gulf Bank at 3.0% 28.41% 2.5% 12.73% 33.65% 62.20% 80.07%) and KFH (3%).0% 93.35% 37.7% 5.1% 93.22% 36.2% 22.6% 86. BKME and Burgan Bank has the highest cost to income ration of 36.1% 89.6% 50.7% and 36.87% 46.

365 GB 33 809 95.600 30.5 43. Global Research NBK 47 1.206 50.910 CoBK 39 765 83. with all probability. Since most of the banks seem to have completed their technology upgradation projects. it would mean large investment outlays needed for these projects are over.349) 157. profits.501 KREB 6 340 29. The large number of foreign workers means that banks’ personnel costs are.714) (13.9 32. During the past two to three years most banks in Kuwait have been busy upgrading their technological capabilities. followed by CoBK. relatively low and that they have more flexibility in reducing staff to maximize efficiency.1 23. although they make up a much higher percentage of the managerial staff.6 35.6 109.5 118.7 Kuwaiti nationals make up only a small proportion of the financial-sector work force. This has resulted in banks being able to control their costs.1 96.289 74.143 BKME 18 525 45.778 28.9 86.117 (8.135 23. In addition.622 28.4 59.157 74.563 77.982) 20.174 KFH 33 1. Consequently. New and sophisticated systems have been introduced allowing banks to reap efficiency gains. Gulf Bank reported the lowest expenses per employee while it has the highest net profit per employee.1 24.968) (27. the banks in Kuwait are making vigorous efforts to increase Kuwaiti staff due to government’s Kuwaitization May 2005 Kuwait Banking Sector 13 . NBK is way ahead of its rivals. on the whole.4 46. NBK is ahead of its peers with the highest operating income.646 62.521) (16. and more importantly. the Islamic banking institution.4 69. NBK is Kuwait’s largest commercial bank and has the largest banking network in Kuwait. of Employees Total Operating Income (Net of Provisions) Operating Expenses Operating Profit Net Profit Operating Income Per Employee Operating Expense Per Employee Profitability Per Employee Source: Bank Reports. In terms of operating income and operating profit.776 27. Though in future.492 ABK 15 509 42. Gulf Bank and KFH. banks’ operating costs have been decreasing.8 27. improve employee productivity and launch new products and services faster. Most banks are now able to monitor sources of costs.6 26. though it would be interesting to see the sustainability of these indicators.2 83. However.3 81.596 22. Though NBK is ahead in terms of operating income per employee.038 150. Table 9: Comparison of Operating Performance of the Banks (FY 2004) (Amt in KD 000) No.594 95. This has enabled banks to compete in the highly competitive banking environment in Kuwait.412 119.4 17. risks.2 (57.519 85. As can be seen from the table below.7 82.802 215.4 53.841) (17. Operational Performance Kuwaiti banks have made significant investments in Information Technology infrastructure in order to improve their operating efficiency and enhance customer satisfaction.242 64. this will not be the case and we may witness some increase in cost for some of the banks as they have to incur heavy marketing costs due to impeding competition from foreign banks. They also allow bank employees to focus on customer service.4 92. The recent right-sizing of the people by Gulf Bank has really helped the bank. In terms of employee productivity too.9 59.802) (18.441 BB 18 497 48.Global Research Kuwait Global Investment House efforts to increase their customer base in view of the impending competition and possible poaching of staff by foreign banks. of Branches No. Gulf Bank is fast catching up NBK in terms of employee efficiency.297 29. these systems make the creation of new products easier and faster.668) (18.3 31.

banks in Kuwait have realized the negative implications of this and we opined that banks need to have continuity and consistency in their management and policies. banks may have to firm up new strategies. banks are likely to see more growth from their fee based income. some of the banks like NBK are looking for widening their footholds in other regional markets. whether it will be investment. The current liquidity in the market will further drive the volume growth of banks. Oil revenues will be much better than originally forecasted and with this huge inflow of liquidity most of the banks are looking forward at further restructuring and modernizing their structures and also spending heavily on IT development. This is especially true for large banks. In addition. there are always concerns about the “institutionalization” of new management. With the Basel II norms placing banks on track for transition from the traditional regulatory and market led capital adequacy to one based on the most efficient use of capital. Apart from their core businesses. banks are also now witnessing transition from deposit banking to financial services. One issue that negatively impacts the banks is their senior management turnover. Future plans of banks could. the challenge lies in how they can convert this into a marketing advantage. These changes will imply a new found emphasis on marketing of products. demand from corporate is also expected to be robust since most of them have announced their plans for capital expenditure. thanks to their image of trustworthiness and their extensive distribution systems. With the buoyant real estate and booming stock markets we expect the demand from retail customers to remain strong going forward. While new management can be experienced and capable of running a bank. overall environment remains highly competitive. Islamic banks are also expected to show progression in their income as demand for Islamic products remain strong. going forward. Retail customers are the main target of banks as it helps the banks to improve their margins. Nevertheless. Moreover. The liberalisation of the banking sector in Kuwait will also help to attract foreign capital. domestic banks will have to face stiff competition from foreign banks especially in the private banking domain.Global Research Kuwait Global Investment House initiative. Kuwaiti Banking Sector Outlook The outlook for the banking sector in Kuwait is positive with the upbeat macroeconomic environment and strong oil prices will help the country to report record surplus. we may witness an increase in the Kuwaiti nationals ratio to the total banking sector employment. insurance and other products. and from physical distribution to virtual distribution. As the Kuwaiti market is small. Besides the shift in trend from the capital adequacy to capital efficiency. The outlook for 2005 is quite positive for the banks in Kuwait and in the GCC region. 14 Kuwait Banking Sector May 2005 . With the opening up of the banking sector. encompass efficient balance sheet management in which capital flows quickly to its most efficient use. therefore. Though in recent past. As a result. Considering that banks have advantages. turnover delays the implementation of much-needed projects.

KW BKME.2x in the banking industry in Kuwait.4% 13.6% 14.8 808.3% 24. The entry into this segment could help conventional banks improve their business levels and enhance profits over the medium term.2 2. 2004 (excluding proposed dividends).8% 12. Burgan Bank enjoys much lower P/E of 12.5 4. Hence.8 times the book value as of December.240 760 425 500 420 1.4% 16. BKME has the lowest price to book value of just 1.2% 14.8% 4.5 times.3 3. We expect the sector to witness consolidation over the medium term with large regional banks and foreign banks acquiring controlling stakes in local banks.KW BURG. The commercial banking sector in Kuwait is saturated and highly competitive.8x based on their 2004 earnings.KW Composite Potential CMP* M-Cap* P/E * P/BV* RoAA RoAE Share Value Upside/ Recommendation (fils) (KDmn) (x) (x) (fils) Downside 1. the Bahrain based Ahli United Bank (AUB) acquired a substantial stake in Bank of Kuwait and the Middle East (BKME).6 3. it should be noted that consolidation in the sector will not be an easy one.0 1.0 1. May 2005 Kuwait Banking Sector 15 .1% 21.2 1. Another factor which could improve the valuation of banks is the proposed entry of several of these banks into the fast growing Islamic banking segment.0 295. One example in this respect should be interesting.7 357.7% 14.8% 18. AUB having taken 48% stake in BKME is not able to take additional 3% stake to become a controlling entity in the bank.3% 16.7% 28.8 3.0 2.497 1. Having said that.KW CBKK. Recently.6% Buy Hold Hold Buy Buy Buy Hold Not rated The price to book value of the sector was at 2.230 797 504 568 539 1.KW KREB.0 365.4% 12.6 3.Global Research Kuwait Global Investment House Valuation Matrix The valuation of the banking sector in Kuwait appears to be rather realistic compared to other related sectors such as Investment companies.145.2 3. KFH enjoys the highest P/E multiple of 16. We are going to see a lot more resistance from the existing management of the banks before they succumb to the competitive pressure of the market.4% -0. 2005 Source: Global Research Country Reuters Code Kuwait Kuwait Kuwait Kuwait Kuwait Kuwait Kuwait Kuwait NBKK.2 times followed by Gulf Bank with 3. Increase in interest rates would lead to substantial improvement in the incomes of large banks such as NBK. Our valuation matrix includes only commercial banks. KFH enjoys the highest price to book value multiple of 4.8 2.8 times.8 457. The likely consolidation in the industry could help improve valuations especially of small banks which are potential targets for mergers / acquisitions.2 1.8x.4% 15. KFH and Gulf Bank as compared to the smaller banks.KW ABKK.5% 12. As of April 24h.9 1.5% 13.4% 13.5 3.540 475 1068.4% 5.2 2.7% 28. The discounting enjoyed by some of the banks is likely to improve from current levels owing to the further increase in interest rates over the medium term which would result in higher margins and profits and attractive yields.2x followed by AABK with 15.KW GBKK. both conventional and Islamic. Table 10: Comparative Valuation of Kuwaiti Banks (FY 2004) Name of Bank National Bank of Kuwait Gulf Bank Commercial Bank of Kuwait Burgan Bank Al-Ahli Bank of Kuwait BKME Kuwait Finance House KREB * As on April 24.1% 28.4 1.6 1684.320 2.8 1. 2005 the average price earnings ratio for the banking sector stood at 13.626 13.KW KFIN. it is likely that foreign banks would prefer to buy out the promoters of existing banks than set up new operations.6% 12.

We had recommended a Buy on the stock with a price target of 487 fils in Oct 2004 when the stock was quoting at 375 fils. As per the bank’s management. Currently. we revise our earlier rating and recommend a ‘Hold’ on the stock. The net interest income of the bank is expected to improve by around 19. Over the medium term. The bank is likely to rely on organic growth by introducing innovative product range and delivery mechanism to capture more customers.8x of its estimated book value and 12. the stock is quoting at a PE of 12. The estimated fair value of GB’s stock works out to 1. the bank is weighing the options of moving to new markets such as Iraq and Turkey in the next couple of years. Currently. GB is trading at 3. However. CBoK has the second largest branch network in Kuwait with 39 branches. The estimated fair value of BB’s stock works out to 503. other external factors weighed negatively on the stock.6x of its estimated earnings of 2005. Though the fundamentals of the bank remained strong. which is lower by around 0. We believe that the bank’s management has the potential to create strong value out of its franchise and hence the current discount to the stock is unwarranted. Therefore. The bank 16 Kuwait Banking Sector May 2005 . justifying our earlier buy recommendation. Gulf Bank Gulf Bank (GB) is expected to continue its focus on improving operating efficiency and asset quality.6% to the current 1.8% vis-à-vis the current market price of the stock. the stock has moved up sharply by 47.Global Research Kuwait Global Investment House Burgan Bank We believe that the current restructuring exercise is expected to positively benefit the bank in the longer term. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions. Commercial Bank of Kuwait Commercial Bank of Kuwait (CBoK) commenced operations in 1961 and is the third largest conventional bank in Kuwait in terms of total assets. Currently. This creates a lot of doubts over the continuity of the policies and strategies of the bank. retail & corporate lending will continue to provide the lucrative growth opportunity for the bank.230 fils based on DDM and peer group valuation method. the further hardening of interest rates is likely to result in the bank improving its profitability significantly. Burgan Bank (BB) is expected to continue its focus on improving operating efficiency and asset quality.240 fils. The bank’s management has been perceived to be very unstable as seen from frequent changes in the top management of the bank in the past. rating upgrade by an international rating agency and consistency of policies and strategies. Apart from the fundamentals. CBoK is also planning to increase its branch network in Kuwait by adding 10 new branches in strategic locations during FY2005. Some of the positive events which could provide upward momentum to the stock is sustain positive performance.5% in 2005 due to the further hardening of the interest rates. Since then the stock has been quoting in the range of 340 fils to 380 fils. Over the medium term. Hence. which is higher by around 18. we reiterate our ‘Buy’ recommendation on the stock.81x of its actual 2004 earnings.5% vis-à-vis the current market price of the stock.2x and P/BV of 1. giving it a strong position in the domestic retail banking. GB is expected to post stellar performance buoyed by the improvement in its core and non-core businesses.8 fils based on DDM and peer group valuation method. our valuation lags behind the current market price of the stock. The withdrawal of rating by Fitch was also not perceived well by the market. Since our last investment update in Oct 2004.

3% in total loans and advances (gross) to reach KD1.83bn at the end of FY2004. Deposits from customers increased by 8% to KD3. Therefore.9mn in FY2004.customer deposit taker among Kuwaiti commercial banks.3% during the same period. representing a decline of 17% over Dec end 2003. loan loss reserves as a percentage of gross loans & advances have increased to 3.825. CBoK reported an EPS of 59 fils per share during FY2004. The bank reported a 23. NPLs as a percentage of gross loans & advances have increased marginally from 11. Bank of Kuwait & Middle East (BKME) has further improved performance in FY2004. The bank reported a growth of 10% in total loans and advances (gross) to reach KD2.496fils based on DDM and relative valuation method. which is higher by 13.1% in FY2004 thus leading to a NPL coverage ratio of over 200%.8% to KD963.9% growth in its net profits in the FY2004 owing to a substantial increase in net interest income (24% y-o-y) as compared to the corresponding period in the previous fiscal. which is higher by just about 7. It also has the distinction of being the lowest cost.7mn in FY2003. National Bank of Kuwait National Bank of Kuwait (NBK) commenced operations in 1952 and is the largest financial institution in Kuwait and the fourth largest Arab bank. BKME plans to add 4 new branches in Kuwait during 2005. NBK’s strong position in domestic retail banking is likely to remain the bank’s primary catalyst for profitability and growth. The estimated fair value of NBK’s stock works out to 1. To expand its marketing reach and take the competition head-on. we re-rate the stock with a ‘Hold’ recommendation. as its interest income increased by 21. NBK has the highest credit rating awarded to banks in the Middle East by rating agencies. an achievement that has provided the bank with a solid platform for profitability in the current rising interest rate environment. while the deposits from banks & financial institutions. Bank of Kuwait & Middle East Continuing from its improved performance in FY2003. NPLs as a percentage of gross loans & advances have decreased significantly to 1.0% in FY2003 to 11. The gamut of products and continuous expansion complements well with the rising domestic liquidity levels which will help to drive the loan book expansion for the bank in the medium term. The bank reported a marginal decrease of 0.4% in FY2004. The bank is likely to focus on organic growth by introducing innovative product range and delivery mechanism to capture more customers leading to accelerating income growth and margin expansion. However.2mn at the end of Dec2004.4mn by the end of FY2004.5% in interest income during FY2003. we upgrade our earlier recommendation on NBK to Buy. Therefore. We expect BKME to distribute higher dividends going May 2005 Kuwait Banking Sector 17 .135. This is quite impressive as compared to a decline of 1. Regional expansion is at the forefront of NBK’s diversification strategy and may provide the bank with the growth opportunities lacking in its domestic environment.7% to KD58.5% in FY2004. We expect strong growth to continue throughout 2005. The estimated fair value of CBoK’s stock works out to 817 fils based on DDM and relative valuation method. Deposits from customers increased by 31. which have relatively higher cost of servicing declined by 31.3% vis-à-vis current market price of the stock.24bn in FY2004.Global Research Kuwait Global Investment House reported a 10% growth in its net profits in the FY2004 owing to a substantial reduction in depreciation (-76% yoy) and also lower provisioning for impairment (-19% yoy) as compared to the corresponding period in the previous fiscal. taking the total to 22 branches by the end of 2005. CBoK’s total assets decreased significantly to KD1.1mn during the year from KD47.5% vis-à-vis current market price of the stock.

The net commission of the bank is expected to improve as we expect the interest rates to continue moving upwards. Al Ahli Bank of Kuwait Global currently has a “HOLD” recommendation on the ABK stock. However. We.6% vis-à-vis current market price of the stock. Though smaller than the other Kuwaiti banks. 18 Kuwait Banking Sector May 2005 . such as National Bank of Kuwait and Gulf Bank. it is quoting at a P/BV of 2. The ABK stock simultaneously gained by 13. we value the stock of BKME at 539. as well as improving its asset quality in the near-term. The estimated fair value arrived at is based on the improved performance of BKME and our expectations about its future potential.42x.500 by 13. since it does not have large capex plans in the near future. Kuwait Finance House We believe that Kuwait Finance House (KFH) is well placed to exploit the increase in the Islamic banking activity in Kuwait and the other GCC markets. It is also expanding its presence internationally especially in the Middle East and Southeast Asia. is around 28.500. which implies that the value arrived at. we revise our earlier rating and recommend a ‘Hold’ on the stock. Based on the results for full year 2004 and first quarter of 2005. we have now revised our earlier projections. is higher than the current stock price of KD0. arrived at by using the Dividend Discounting Method (DDM) and peer valuation method. It is worthwhile to note that since our last report of KFH. The book value per share (BVPS) of ABK was KD0. from our earlier recommendation of “HOLD”. The bank has had a healthy performance in the year 2004 as well as in the first quarter of 2005.4x and 2. justifying our “HOLD” recommendation. the estimated fair value of KFH’s stock works out to 1. The bank has been exploring the possibility of expanding its regional coverage in order to get the maximum share in the increasing Islamic banking activities.6% since our above-mentioned report. the discount rates have increased twice to reach 5. as against the average P/BV for the Kuwaiti banking industry of 3. The composite share valuation translates to forward P/BV multiples of 2. The overall changes lead to a higher projected profitability and net spreads for the bank in the period 2005-’08. It has been awarded a license to operate in Malaysia. which is up by 5.1fils. The stock currently trades at around 420fils (24th April 2005). with a medium-term perspective.626fils based on DDM method.25% which has considerably affected the valuations. issued in our Results Update on the bank at the end of the third Quarter of 2004. than in our late-2004 Update. Based on the dividend discount method (DDM) and peer group valuation methodology using the Price to Book value (P/BV) multiple.4% higher than the current market price. Based on the current growth potential of the bank.232 at the end of 2004. therefore.568 per share.3x our projected 2005 and 2006 book values per share.Global Research Kuwait Global Investment House forward. while simultaneously bringing in cost efficiencies to improve its margins. Therefore we maintain our earlier recommendation and reiterate a Buy on the stock with a medium term outlook. The intrinsic value of ABK of KD0. At the current stock price of KD0. ABK seems poised to improve its performance further in the coming years and take better advantage of the emerging opportunities in the market.2x.7%. upgrade ABK to a “BUY”.

Global Research Kuwait Global Investment House PLAYERS PROFILES May 2005 Kuwait Banking Sector 19 .

as well as representative offices in Thailand and Vietnam. NBK’s loan portfolio and non-interest income generation is dependent on domestic transactions because its international operations are relatively modest. while the remaining 20% is publicly traded on the Kuwait Stock Exchange.customer deposit taker among Kuwaiti commercial banks. As of year-end 2004. Jordan and Singapore. NBK acquired a 20% stake in International Bank of Qatar (formerly Grindlays Qatar Bank) in addition to management rights of the bank. branches in New York. 20 Kuwait Banking Sector May 2005 . an achievement that has provided the bank with a solid platform for profitability in the current rising interest rate environment. The gamut of products and continuous expansion complements well with the rising domestic liquidity levels which will help to drive the loan book expansion for the bank in the medium term.145mn 1. investment banking and asset management services. NBK has the highest credit rating awarded to banks in the Middle East by rating agencies. NBK’s strong position in domestic retail banking is likely to remain the bank’s primary catalyst for profitability and growth. During 2004.320 fils 24th April 2005 BUY 93 362. (mn) 52 week Lo / Hi (fils) Market Cap (KD mn) Target Price (fils) 0.6 12M Avg. It also has the distinction of being the lowest cost.KW Listing: Kuwait Stock Exchange Current Price 1. vol.497 Key Data EPS (fils) BV (fils) P / E (x) P / BV (x) Source: Global Research Background • National Bank of Kuwait (NBK) commenced operations in 1952 and is the largest financial institution in Kuwait and the fourth largest Arab bank.100 / 1. Regional expansion is at the forefront of NBK’s diversification strategy and may provide the bank with the growth opportunities lacking in its domestic environment. The number of staff employed by the group reached 1. an off-shore and an on-shore branch in Bahrain.754 1. • Shareholding Pattern • Several Kuwaiti merchant families collectively hold 80% of the bank’s shares.400 2.8 14. The shares are widely held and none of the individual shareholders owns more than 5% of the capital. corporate. the bank’s distribution network comprised 47 branches in Kuwait.802 at year-end 2004. NBK is a full service commercial bank and is mainly active in the fields of retail and private banking.Global Research Kuwait Global Investment House National Bank of Kuwait Reuters Code: NBKK.2 3.

Currently the branch network stands at 47. NBK is investing heavily to substantially improve its technology platform. Central Bank’s instructions of compliance for the net loans not to exceed 80% of the total customer deposits and deposits from financial institutions is a major source of worry for local banks in Kuwait.Global Research Kuwait Global Investment House Recent Developments • The operating environment is getting easier for NBK where a rising interest rate environment will benefit the bank most because of its significant low-cost deposit base. NBK is the highest rated bank in the middle-east region with an ‘A+’ rating from Capital Intelligence. NBK is planning to open its first branch in Saudi Arabia in June 2005 and expects to get a license to open a branch in Dubai shortly. To that effect. To meet the expected growth. NBK is planning to increase its branch network in Kuwait by adding 5 new branches in strategic locations during FY2005 and the first quarter of FY06.4mn as compared to KD198mn over the same period last year. As per our discussion with the management of NBK. The growth in fee income was also boosted by strong performance in documentary business. A+ from Fitch. • • • • • Analysis of Financial Performance – 2004 • The interest income of the bank increased by 15. This resulted in the net interest income during FY2004 to increase by 24. Some of the recent changes in the regulatory framework will affect the banks in Kuwait. investment banking and asset management. The interest expenses increased marginally by 1% to reach KD76.1mn as against KD122.4mn was however neutralized by the increase in other expenses. This will increase its reach in Kuwait and improve its ability to service more customers.2mn during the same period. • • • • May 2005 Kuwait Banking Sector 21 . The improvement in other income of KD4.6mn for the full year in the previous fiscal. Currently 24 IT projects are in different stages of development. A2 from Moody’s and A from Standard & Poor’s. Fees and commissions income were higher by 21% as compared to the same period last year.3% during the FY2004 to reach KD228. we believe that revenue momentum will be robust from the retail banking activities.1% to KD152. The bank reported other income of KD11.9% growth in its net profits in the FY2004 owing to a substantial increase in net interest income (24% y-o-y) as compared to the corresponding period in the previous fiscal. we were informed that the subject ratio is well within the mandatory requirements and the bank has still sufficient room to grow its loan book. The bank reported a 23. The fee income from credit card operations was substantial as the bank issues close to 45-50% of the market share in Kuwait for VISA and MasterCard.3mn during the period.

a 24% increase over the corresponding period last year. To meet the expected growth. Even though management was not specific in terms of timing of any share buyback. representing an increase of 2% over Dec end 2003. The charge to profit & loss account for general provisions increased by 77% to reach KD13. • 22 Kuwait Banking Sector May 2005 . This marginal growth is commendable since the book sizes of many local banks have declined during the period to comply with regulatory issues concerning the net inter-bank position of banks while calculating the lending ceilings. NBK bought back 7. However. taxation on overseas branches and minority interests was higher at KD150.5% of the issued share capital of the bank.57bn at the end of Dec2004.83bn at the end of FY2004. • • • • • • Outlook • The operating environment is getting easier for NBK where a rising interest rate environment will benefit the bank most because of its significant low-cost deposit base.2mn. Despite the stiff competition.8mn during the corresponding period in 2003. The bank reported a growth of 10% in total loans and advances (gross) to reach KD2. NBK is planning to increase its branch network in Kuwait by adding 5 new branches in strategic locations during FY2005 and the first quarter of FY06. They will also help the bank to achieve the mandated Kuwaitization ratios. we believe that NBK is no longer cash constrained and hence do not discount future share buybacks.Global Research Kuwait Global Investment House • NBK’s total assets increased marginally to KD5. Capital adequacy ratio (CAR) of NBK remains more than adequate at approx. deposits from customers increased by 8% to KD3.24bn in FY2004. The net profit attributable to shareholders after providing for KFAS.1% in FY2004 thus leading to a NPL coverage ratio of over 200%. We believe that most of the new hires are young local graduates who would be trained to man the massive retail channels of the bank.7bn in 2003 to KD3. 15% levels. To that effect. NBK went on a hiring spree in 2004 by adding a total of 170 personnel over the year. Currently the branch network stands at 47. This will increase its reach in Kuwait and improve its ability to service more customers.9bn in 2004 and hence contributed to the overall growth of the group. NPLs as a percentage of gross loans & advances have decreased significantly to 1.7mn shares in 2004 which is about 0.6bn in 2004 while total assets of NBK’s international operations increased from KD1.5% in FY2004.6bn in 2003 to KD1.8mn at the end of FY2004 as compared to KD7. which have relatively higher cost of servicing grew marginally by 1% during the same period. loan loss reserves as a percentage of gross loans & advances have increased to 3. National Labor Support tax. while the deposits from banks & financial institutions. it is worthwhile to mention here that the total assets of NBK’s domestic operations declined from KD3. Analyzing this further. we believe that revenue momentum will be robust from the retail banking activities.

4% vis-à-vis current market price of the stock.Global Research Kuwait Global Investment House • NBK is planning to open its first branch in Saudi Arabia in June 2005 and expects to get a license to open a branch in Dubai shortly.497fils based on DDM and relative valuation method. Currently 24 IT projects are in different stages of development. Some of the recent changes in the regulatory framework will affect the banks in Kuwait. Our price target represents an implied 2005 P/E multiple of 12.7x based on the current price. As per our discussion with the management of NBK. We maintain our “Buy” recommendation on NBK. Central Bank’s instructions of compliance for the net loans not to exceed 80% of the total customer deposits and deposits from financial institutions is a major source of worry for local banks in Kuwait. we were informed that the subject ratio is well within the mandatory requirements and the bank has still sufficient room to grow its loan book. • • May 2005 Kuwait Banking Sector 23 . • • Valuation • The estimated fair value of NBK’s stock works out to 1. which is higher by 13.25% which has considerably affected the valuations. We have also revised the payouts upwards substantially reaching upto 85% in 2008F primarily believing on the fact that the bank will reward its shareholders and will return to the 2002 levels when we saw a payout of 90%. the discount rates have increased to reach 5. NBK is investing heavily to substantially improve its technology platform. It is worthwhile to note that since our last report of NBK.

710 116.394 (86.334 861.140 97.447 1.928 51.051) 4.981 845.914 1.931 112.947 391.057 1.144 564.739 77.179.023 164.431) 253.583.877 58.827 1.375 260.953 (2.523 5.435 40.462 265.529 37.506.104.831.225.336 147.106 23.256 46.526 3.794 35.431) 134.037 2.392 142.431) 210.983 162.420 73.831.088 20.790 37.080 621.023.862 81.693 243.738.194 16.614 250.454 1.782 2.555 1.000 132.520 56.001 2003 National Bank of Kuwait 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Kuwait 24 147.528.012.031.917.413 654.827 162.435 45.265 117.905 182.510 6.244 5.396 357.188 1.593 5.663 3.686 8.664 104.265 117.279 6.649.225.579) 95.827 1.043 2.756 39.088 220.577 42.423 6.576 (93.597.397.698 23.607 7.419 1.181 977.410 3.332 2.059.654.822 534.013.640 133.114.431) 170.086 16.326 65.529 37.747.198.345 227.419 37.418 3.866 (10.572.360.396 313.266.419 37.753) 6.899 753.165 6.468) 5.303 1.599.235 3.218 459.628 822.873.540 354.513) 5.866 (10.033 23.106 (101.320 55.371 73.234.660 750.179 479.862 81.777 4.026 38.198 2.862 7.916.588.063 5.513 5.404 1.093 1.737 187.377 35.440 3.227 1.965 16.398 16.418) 4.083 4.854 1.695.862 81.285.744 5.776 1.866 (10.509.709 576.350 Total Liabilities .313 936.879.334 147.149 4.502.588.693.592 162.731.350 1.951.000 347.274.002.902 131.951.222 330.170.225.396 153.435 42.451.572.975 8.942 5.728 141.530 418.811 706.143 (153.615 2.262.117 154.580 426.010.285.492 6.591 1.346 7.862 7.934 46.862 73.429 (134.789 4.282.644 158.586 361.586 7.576 133.500 99.737 4.866 (10.271 164.858 39.396 206.216 13.404) 4.216 84.447 5.862 81.592 464.989 6.983 963.096 161.BALANCE SHEET 2002 390.776 121.529 37.556 3.248 39.244.530.329 717.773 96.431) 92.274.451.456.732.547 23.592 1.740 1.116 2.265 117.257 (92.491 921.936 681.265 117.385.866 (10.410 106.435 44.982 165.006 173.426 255.653 23.395 117.434 (117.797.414 1.529 37.710 116.080 1.545 1.435 46.800 340.430 4.897 135.396 261.165.188 Amount in Kuwaiti Dinar'000 Assets: Bank & cash equivalents Deposits with Banks Government Treasury bills Government Treasury bonds Loans and advances Government debt bonds other assets Less : provision Total Current Assets Investment securities Investment securities-Debt Investment securities-Equity Investment in Associates net fixed assets Total Assets Kuwait Banking Sector Liabilities: Deposits from banks and FIs Deposits from customers Long term borrowings Certificate of Deposit Other liabilities Total Current Liabilities Global Investment House May 2005 Minority Interest Owner's Equity: paid-up equity capital share premium account proposed bonus shares statutory reserve general reserve retained earnings cumulative change in fair valuation treasury shares proposed dividends Total Shareholder's Equity 162.829 67.192) 6.891 121.817 202.207.514 16.669 135.

OPERATING STATEMENT Global Research Kuwait 2002 2003 National Bank of Kuwait 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)

May 2005 206,721 (88,325) 118,396 33,256 7,904 1,091 2,038 (4,623) 158,062 (28,512) (13,792) (3,208) 112,550 (2,651) (1,071) (2,645) 106,183 (35) 106,148 55,627 106,148 (95,822) 65,953 65,953 106,216 153,033 206,106 261,698 198,087 (75,481) 122,606 45,977 10,877 7,066 (527) (7,798) 178,201 (31,511) (16,395) (3,051) 127,244 (3,061) (1,237) (1,545) 121,401 (58) 121,343 228,445 (76,251) 152,194 55,605 11,310 11,366 (1,325) (13,785) 215,365 (34,395) (20,660) (2,747) 157,563 (3,783) (1,529) (1,792) 150,459 (170) 150,289 286,200 (90,725) 195,474 65,614 12,215 13,185 (1,391) (15,050) 270,046 (39,157) (26,195) (3,439) 201,256 (4,982) (1,974) (2,228) 192,072 (230) 191,842 339,667 (110,731) 228,935 73,488 13,192 14,767 (1,461) (16,045) 312,876 (42,864) (28,785) (3,542) 237,685 (5,883) (2,377) (2,581) 226,844 (272) 226,573 392,030 (127,998) 264,032 80,836 14,247 16,243 (1,534) (17,240) 356,585 (46,713) (31,023) (3,877) 274,973 (6,806) (2,750) (2,942) 262,476 (315) 262,161 444,248 (147,712) 296,535 88,920 15,387 17,868 (1,611) (18,440) 398,660 (49,833) (32,690) (3,993) 312,144 (7,726) (3,121) (3,289) 298,008 (357) 297,651 313,547 121,343 (73,709) (7,371) 106,216 150,289 (3,685) (92,413) (7,739) 365 153,033 191,842 (3,870) (134,899) 206,106 226,573 (170,981) 261,698 262,161 (210,313) 313,547 297,651 (253,545) 357,653

Amount in Kuwaiti Dinar'000

Kuwait Banking Sector

Global Investment House

25

Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Add : Other operating income Less : Provisions for specific loan loss Less : Provisions for general loan loss Operating income Less : Staff costs Less: Other operating expenses Less: Depreciation Operating profit Less: Labour tax Less : Contribution to KFAS Less : Taxation on Overseas business Net Profit before minority interest Less: Minority Interest Net Profit attributable to shareholders P&L Appropriation Account: Op Balance of Retained Earnings Adjustments Net Profit for the year Trfr to Statutory Reserve Trfr to Voluntary Reserve Dividend KD Proposed Bonus shares Treasury Shares Cl Balance of Retained Earnings

CASH FLOW STATEMENT 2002 112,677 106,148 3,208 35 2,585 701 219,384 (37,057) (253,890) 370,426 (581,907) 44,432 19,953 376,197 207,841 84,500 (11,111) 332,061 15,050 10,179 (262,578) (9,921) (7,294) (339,737) 39,109 (7,712) 111,795 486,696 (20,776) 20,595 220,741 (5,486) (102,551) (108,037) (73,344) (10,431) (83,775) (231,405) 390,181 158,776 232,884 158,776 391,660 (92,413) 14,640 (77,773) 34,931 391,660 426,591 (4,832) (96,358) (101,190) (134,899) 13,296 (121,604) 37,637 426,591 464,227 16,045 13,999 (253,200) (6,812) (5,008) (285,379) 11,733 (8,328) 90,554 447,760 22,679 260,430 17,240 931 (240,540) (6,949) (5,108) (276,501) 7,040 (8,995) 95,987 417,910 18,087 284,524 (5,205) (105,993) (111,198) (170,981) 12,882 (158,099) 15,227 464,227 479,454 132,861 121,343 3,051 58 8,325 84 (269,641) (230,450) 202,926 (63,167) (345,508) 30,509 11,681 (116,481) 85,679 135,500 19,670 (136,780) 169,134 150,289 2,747 170 (168) 15,110 986 300,674 457,308 87,652 (15,334) (265,968) 37,547 (40,818) 11,884 242,064 (199,224) (14,437) 469,808 210,561 191,842 3,439 230 246,431 226,573 3,542 272 283,592 262,161 3,877 315 2003 National Bank of Kuwait 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 320,441 297,651 3,993 357 18,440 (22,137) (241,046) (7,088) (5,211) (298,621) 3,989 (9,714) 101,747 413,731 20,076 298,304 (5,361) (116,593) (121,954)

Global Research Kuwait

26
(2,925) (149,735) 153 (152,507) (88,451) 135,216 46,765 226,319 163,862 390,181 (95,822) (95,822) (3,452) 4,597 52 1,197 (4,144) (16,267) (132,786) 48 (153,149)

Amount in Kuwaiti Dinar'000 Operating Operating Activities Profit from operations Depreciation Profit attributable to minorities Other Income Loan loss provision Translation Adjutments Working Capital Dec/(inc.) in balances with banks Dec/(inc.) treasury bills Dec/(inc.) treasury bonds Dec/ (inc) loans and advances Dec/ (inc) Govt. debt bonds Dec/ (inc) Other assets Inc/(dec) from banks & other financial institutions Inc/(dec) of customers deposits Inc/(dec)Certificate of Deposit issued Inc/(dec) other liabilities Total Operating

Kuwait Banking Sector

Investing Capex Acquisition of Investments in Associates Purchase of investments Proceeds from sale of premises and equipment Total Investing

Financing Dividend paid to shareholders Issue of floating rate bonds Acquisition of own shares Total Financing

Global Investment House

(210,313) 13,912 (196,400) (20,050) 479,454 459,404

May 2005

Net Change in Cash Net Cash at beginning Net Cash at end

Global Research Kuwait

Global Investment House

Ratios
Amount in Kuwaiti Dinar Ending Date: Profitability - Return on Average Assets - Return on Average Equity - Net interest income/Total Op. Income - Non-interest income/ Total Op. Income - Non-interest expense/ Total Op. Income - Commissions/ Total Op. Income - Dividend payout ratio Margins - Net income/ revenues - Operating profit / revenues - Interest Expense to Interest Income - Interest Income to Interest Earning Assets - Interest Expense to Interest Bearing Liabilities - Net Spread - Net Interest Margin Efficiency -Cost to Total Op Income - Staff Expense to Total Op Income - Cost to Average Total Assets Liquidity - Loans to Interest Earning Assets - Loans to Customer Deposits &FIs - Customer Deposits to Equity - Due from Banks to Due to Banks Credit Quality - Provisions to Total Op Income - Non Performing Loans KD'000 - Loan Loss Reserve KD'000 - NPL's to Gross Loans - NPL's to (Equity+Loan loss reserve) - Loan Loss Reserve to Gross Loans - NPL Coverage Capital Adequacy - Equity to Total Assets - Equity to Gross Loans Constitution of Total Income - Net Interest Income to Total Op Income - Fees & Comm. to Total Op. Income - FX Income to Total Op. Income - Other Income to Total Op. Income Operating Performance - Change in Net Interest Income - Change in Fees and Commission - Change in Fx Income - Change in Other Income RATIO'S USED FOR VALUATION - Shares in Issue ('000) (Weighted Avg.) - EPS (fils) - Book Value Per Share (fils) - Market Price Year End (fils) - P/E - P/BV 2002 2.18% 24.3% 73% 27% 29% 21% 90% 2003 2.26% 25.8% 64% 36% 29% 26% 61% National Bank of Kuwait 2004 2005 2006 2.73% 28.2% 64% 36% 27% 26% 62% 3.24% 32.5% 66% 34% 26% 24% 70% 3.42% 35.1% 68% 32% 24% 24% 76% 2007 3.61% 37.4% 69% 31% 23% 23% 80% 2008 3.76% 39.8% 69% 31% 22% 22% 85%

51% 54% 43% 5.1% 2.1% 3.04% 3.01%

61% 64% 38% 4.4% 1.6% 2.83% 2.81%

66% 69% 33% 5.1% 1.6% 3.53% 3.45%

67% 70% 32% 6.2% 1.8% 4.46% 4.30%

67% 70% 33% 6.6% 2.0% 4.64% 4.49%

67% 70% 33% 6.9% 2.1% 4.84% 4.69%

67% 70% 33% 7.1% 2.2% 4.95% 4.81%

29% 18% 0.93%

29% 18% 0.95%

27% 16% 1.05%

26% 15% 1.16%

24% 14% 1.14%

23% 13% 1.12%

22% 13% 1.09%

49% 70% 546% 65%

55% 79% 521% 87%

61% 82% 496% 54%

60% 80% 495% 67%

59% 78% 495% 79%

59% 76% 491% 89%

58% 75% 490% 97%

2% 83,000 100,033 3.7% 3.0% 4.1% 121%

5% 51,000 93,051 2.0% 1.6% 3.6% 183%

7% 43,000 86,418 1.5% 1.2% 3.1% 201%

6% 47,563 101,468 1.5% 1.2% 3.2% 213%

6% 51,844 117,513 1.5% 1.2% 3.4% 227%

5% 55,991 134,753 1.5% 1% 3.6% 241%

5% 60,471 153,192 1.5% 1% 3.8% 253%

10% 24%

11% 22%

12% 23%

12% 24%

12% 25%

12% 25%

12% 25%

73.3% 21.0% 5.0% 0.7%

64.1% 25.8% 6.1% 4.0%

63.7% 25.8% 5.3% 5.3%

66.3% 24.3% 4.5% 4.9%

67.6% 23.5% 4.2% 4.7%

68.8% 22.7% 4.0% 4.6%

69.4% 22.3% 3.9% 4.5%

-2% 7% 9% -56%

4% 38% 38% 548%

24% 21% 4% 61%

28% 18% 8% 16%

17% 12% 8% 12%

15% 10% 8% 10%

12% 10% 8% 10%

1,474,184 1,474,184 1,547,900 1,625,290 1,625,290 1,625,290 1,625,290 72 78 93 118 139 161 183 297.6 340.8 362.8 380.6 414.8 446.7 473.8 1,080 1,500 1,280 1,320 1,320 1,320 1,320 15.00 19.13 13.8 11.2 9.5 8.2 7.2 3.6 4.4 3.5 3.5 3.2 3.0 2.8

May 2005

Kuwait Banking Sector

27

Global Research Kuwait

Global Investment House

Gulf Bank K.S.C
Reuters Code: GBKK.KW Listing: Kuwait Stock Exchange Current Price 1,240 fils

24th April 2005

HOLD
91.3 323.2 13.58 3.83 12M Avg. vol. (mn) 52 week Lo / Hi (Fils) Market Cap (KD mn) Target Price (fils) 0.64 790 / 1,340 1,068.8 1,230

Key Data EPS (Fils) BV (Fils) P / E (x) P / BV (x)
Source: Global Research

Background • Gulf Bank (GB) is a public shareholding company incorporated in Kuwait in 1960 and listed on the Kuwait Stock Exchange. The bank offers a full range of banking services focused on both retail and corporate clients. The bank had 809 employees as of endDec 2004 servicing customers from 33 branches and 79 ATMs spread across strategic locations in Kuwait.

Shareholding Pattern • In 1999, a group led by the prominent Kuwaiti Al Ghanim family acquired a controlling stake in the bank and replaced a large part of the management team. Today, the three largest shareholders, the Al Ghanim family, the Behbehani family, and Mahmoud Haji Haider control a combined 65% stake in the bank, with Al Ghanim family by far the largest shareholder.

Recent Developments • Arab Banking Corporation (B.S.C.) granted a US$100mn, 10 year subordinated term loan facility to Gulf Bank. Other developments in 2004 include further improvements in e-banking channels; adding Western Union services, growing telebanking services; launching of the Red program for university students; and enhancing the Gulf Rewards credit card incentive program. The bank opened 4 new design branches in 2004 which takes its total branch network in the country to 33. In addition, the bank added 27 ATMs in 2004 taking Gulf Bank’s total ATMs to 79. Gulf Bank is one of the top rated banks in the region with an ‘A’ rating from Capital Intelligence, ‘A’ (Fitch), ‘A2’ (Moody’s) and ‘BBB+’ (Standard & Poor’s). The positive

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ratings reflect the bank’s sound profitability, good asset quality, stable retail deposit funding and adequate capitalization. Analysis of Financial Performance – 2004 • The interest income of the bank surged by 22.8% during FY2004 as compared to the same period last year due to the restructuring of its interest earning assets as well as hardening of the interest rates in the later half of the year. The northward movement of the interest rates also raised interest expenses of the bank by 22.1% during the same period. The net interest income during the period increased by a healthy 23.1% to KD67.65mn as a result of strong retail and corporate loan growth, superior corporate loan spreads and improved balance sheet mix. Helped by business volume growth in corporate and retail banking space, fees and commissions income grew higher by 14.9% to KD17.5mn as compared to the same period last year. The growth in letters of credit and guarantee commissions and loan protection insurance income was also strong. Income from disposal of investment securities was KD11.44mn in FY2004 as compared to KD1.28mn in FY2003. This gain was mostly due to the disposal of fixed income securities and the disposal of the bank’s holding in another Kuwaiti financial institution. Foreign exchange earnings were up by 44.3% to KD4.8mn, reflecting increased customer business volumes and increased proprietary trading income. But the dividend income declined by 10% to KD1.6mn during the same period. The total non-interest income rose by 58.6% to KD35.6mn in FY2004. On the back of strong growth in core and non-core businesses the total operating income after provision surged by 42.7% to KD95.9mn. At the same time, the bank was able to control its operating expenses as it grew by only a modest 9.6% in FY2004 to KD18.7mn. Staff expenses grew marginally by 2.7% to KD11.7mn while other operating expenses jumped by 33.1% to KD6mn. The growth in non-staff costs was mainly due to higher marketing expenditure to support the retail customer acquisition programme. The cost to total operating income after provision declined sharply to 19.5%, which is the lowest in Kuwait and possibly one of the best operating efficiency ratio for any bank in the world. The provision for loan losses were down by 28.1% to KD7.3mn. The bank reported 54% growth in its net profit to KD74.64mn, reflecting strong growth in all its business segments. This resulted in its diluted EPS moving up to 86.9 fils from 60.8 fils in 2003. The bank issued 5% bonus shares in FY2004 and distributed 70% cash dividend. GB’s total assets stood at KD2.3bn at the end of FY2004, representing a decline of 7.9% over its Dec 2003 level. The reduction in total assets led to a significant improvement in the balance sheet mix. In FY2004, 63.6% of the total assets were deployed in loans and advances as compared to 57% in FY2003.

May 2005

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Total loans and advances increased by 3.1% to KD1.5bn. The modest growth in loan portfolio was to abide by the new loan to deposit ratio. Non-performing loans also increased to KD45.2mn in FY2004 as compared to KD28.9mn in FY2003. The biggest concern is that the bank’s post-liberation NPLs more than doubled in FY2004 to KD32mn as compared to KD15.7mn in FY2003. However, the growth in NPLs in 2004 was mostly due to two large corporate accounts. The growth in NPLs was fairly modest excluding these two accounts. The proportion of NPLs to total loans stood at 3% in FY2004 while the bank has provided for 122.5% of its NPLs at the end of FY2004. Despite the stiff competition, deposits from customers increased by 13.5% to KD1.39bn during the same period, while the deposits from financial institutions, which have relatively higher cost of servicing increased by around 63.2%. The bank pre-paid medium term loans worth KD50mn in FY2004. Long-term lending was further boosted by issue of subordinated loans amounting to KD44.2mn. As a result of this Tier-II subordinated loan, capital adequacy ratio improved from 15.5% in FY2003 to 17.5% in FY2004. Thus, the bank remained strongly capitalised to exploit the emerging opportunities in the region. The net interest income of the bank is expected to improve by around 19.5% in 2005 due to the further hardening of the interest rates. Gulf Bank posted record results in Q1 2005. Net profit increased by 26%, to KD16.7mn, reflecting strong core earnings growth in all business areas. Net interest income increased by 10%, fees and commissions grew by 15% and treasury income was up 43%.

Outlook • The net interest income of the bank is expected to improve by around 19.5% in 2005 due to the further hardening of the interest rates. GB is expected to continue its focus on improving operating efficiency and asset quality. Over the medium term, GB is expected to post stellar performance buoyed by the improvement in its core and non-core businesses.

• •

Valuation • Since our last investment update in Oct 2004, the stock has moved up sharply by 47.6% to the current 1,240 fils, justifying our earlier buy recommendation. Currently, GB is trading at 3.8x of its estimated book value and 12.6x of its estimated earnings of 2005. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions. The estimated fair value of GB’s stock works out to 1,230 fils based on DDM and peer group valuation method, which is lower by around 0.8% vis-à-vis the current market price of the stock.

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Global Research Kuwait

Global Investment House

Though the fundamentals of the bank remained strong, our valuation lags behind the current market price of the stock. Hence, we revise our earlier rating and recommend a ‘Hold’ on the stock.

May 2005

Kuwait Banking Sector

31

BALANCE SHEET
2002 234,612 484,359 1,509,957 12,836 (55,366) 2,186,398 16,495 71,092 12,179 2,286,164 22,268 92,420 13,032 2,617,751 30,062 120,146 13,944 2,938,848 36,075 144,175 14,920 3,322,835 2003 2004 Gulf Bank 2005 (F) 2006 (F) 2007 (F) 2008 (F)

Global Research Kuwait

32
37,198 66,733 9,919 1,997,108 245,618 159,195 1,150,332 154,915 31,648 1,741,708 82,086 82,086 2,186,025 558,623 102,947 1,228,169 204,205 33,141 58,940 108,208 167,967 1,393,738 154,205 38,465 58,940 44,205 1,965,728 86,190 86,566 327,536 1,573,530 138,785 38,850 58,940 44,205 2,268,411 69,253 491,304 1,730,883 124,906 39,238 58,940 44,205 2,558,730 86,190 39,707 44,935 11,363 2,483,522 76,178 638,695 1,938,589 112,415 43,162 58,940 44,205 2,912,187 86,190 43,350 2,356 46,044 5,885 10,600 4,775 (13,322) 40,042 33,584 255,400 1,997,108 2,483,522 48,368 2,356 46,044 7,115 22,428 8,749 (2,943) 47,371 35,923 297,497 82,086 4,104 56,092 2,356 46,044 7,496 23,844 9,393 (20,937) 53,842 56,116 320,436 2,286,164 64,880 2,356 46,044 7,496 23,844 9,393 (20,937) 65,432 64,643 349,340 2,617,751 74,741 2,356 46,044 7,496 23,844 9,393 (20,937) 77,730 73,262 380,118 2,938,848 85,466 2,356 46,044 7,496 23,844 9,393 (20,937) 84,606 86,190 410,648 3,322,835

Amount in Kuwaiti Dinar'000 Assets Cash & balances with banks Deposits with banks & other FIs Treasury bills & bonds Loans and Advances (Gross) Government Debt Bonds Other Assets Less : Provision Total Current Assets 333,485 10,000 436,186 1,101,218 31,621 11,481 (40,733) 1,883,258 196,272 300,000 452,084 1,460,371 15,780 12,849 (49,839) 2,387,517 325,183 629,667 1,581,680 13,606 (60,104) 2,490,032 361,371 755,600 1,708,214 14,423 (64,912) 2,774,696 454,209 808,492 1,921,741 15,288 (72,065) 3,127,665 448,444 865,087 2,161,959 16,205 (79,993) 3,411,702 43,290 173,010 15,964 3,643,967 83,796 702,564 2,171,220 101,174 43,594 58,940 44,205 3,205,496 86,190

Investment Securities - Debt Investment Securities - Equity Fixed Assets Total Assets

Kuwait Banking Sector

Liabilities Due to Banks Deposits from FIs Deposits from Customers Medium Term Loan from banks Other Liabilities Floating rate notes Subordinated Loan Total Current Liabilities

Global Investment House

May 2005

Owner's Equity Paid-up equity capital Proposed Bonus Shares Statutory reserve General reserve Share premium Property reval reserve Fair valuation reserve Treasury share reserve Treasury shares Retained earnings Proposed dividend Total Shareholder's Equity

97,246 2,356 46,044 7,496 23,844 9,393 (20,937) 92,029 94,809 438,470 3,643,967

Total Liabilities & Shareholders Equity

OPERATING STATEMENT
Gulf Bank 2002 94,076 (42,948) 51,128 13,140 2,764 261 1,726 228 (5,388) 63,859 67,215 95,910 110,263 (10,168) (7,315) (4,738) (4,808) 125,063 828 257 250 250 1,805 1,623 2,310 3,004 1,286 11,440 6,881 7,510 3,312 4,779 5,066 5,319 5,585 7,210 3,604 250 (7,153) 135,863 15,205 17,476 19,661 21,823 24,005 54,947 67,650 80,833 91,965 102,362 (32,162) (39,285) (52,555) (65,780) (83,750) 87,109 106,935 133,388 157,745 186,112 216,468 (103,904) 112,563 26,406 5,864 7,570 4,325 250 (7,927) 149,052 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)

Amount in Kuwaiti Dinar'000

Global Research Kuwait

May 2005
(11,239) (4,198) (1,314) 47,108 (447) (108) (1,046) 45,507 45,507 48,457 48,457 (1,114) (108) (108) (1,716) 74,646 74,646 (502) (772) 50,181 77,242 (1,053) (873) (4,556) (6,065) (7,167) (1,440) 87,873 (791) (108) (1,955) 85,020 85,020 (11,425) (11,730) (13,783) (16,258) (8,754) (1,440) 98,610 (887) (108) (2,194) 95,421 95,421 (17,662) (9,510) (1,440) 107,251 (965) (108) (2,386) 103,791 103,791 (19,377) (10,434) (1,440) 117,802 (1,060) (108) (2,621) 114,012 114,012 32,389 45,507 (4,711) (33,584) 40,042 40,042 (643) 48,457 (5,018) 456 (35,923) 47,371 47,371 (231) 74,646 (7,724) (4,104) (56,116) 53,842 (64,643) 65,432 (73,262) 77,730 (86,190) 84,606 (94,809) 92,029 53,842 85,020 (8,787) 65,432 95,421 (9,861) 77,730 103,791 (10,725) 84,606 114,012 (11,780) -

Interest Income

Interest Expense

Net interest income

- Fees and commission

- Forex

- Gains / (Losses) from sale of investment securities

- Dividend Income

- Other income

- Provisions for loan losses

Total Operating income

Operating Expenses

- Staff costs

- Other operating expenses

Kuwait Banking Sector

- Depreciation

Operating profit

- Contribution to KFAS

- Directors' fees

- Labour tax

Net Profit before minority interest

Net Profit attributable to shareholders

P&L Appropriation Account:

Op Balance of Retained Earnings

Global Investment House

Net realised gains during the year

33

Net Profit for the year

Trfr to Statutory Reserve

Release on disposal of properties

Proposed Bonus Shares

Dividend KD

Cl Balance of Retained Earnings

CASH FLOW STATEMENT
2002 2003 2004 Gulf Bank 2005 (F) 2006 (F) 2007 (F) 2008 (F)

Global Research Kuwait

34
(6,820) 15,072 (74,829) (69,857) 23,689 1,454 (16,497) (39,867) (900) 154,915 43,535 (1,978) (26,035) 700 5,469 1,726 (20,118) (31,985) (31,985) (8,568) 342,053 333,485 (33,584) (4,920) 19,273 (19,231) (137,213) 333,485 196,272 (1,743) (5,894) 1145 37,654 1,805 32,967 (1,308) (23,216) 32,826 1,623 9,925 (35,923) (20,921) 3,571 (53,273) 38,340 196,272 234,612 (150,949) (207,323) (290,000) (15,898) (358,759) 15,841 (1,368) 313,005 (56,248) 77,837 37 49,290 58,940 11,917 300,000 (32,275) (49,418) 15,780 13 (450,415) 65,020 165,569 3,438 (50,000) 44,205 81,688 (2,293) (27,101) 2,311 (27,083) (56,116) (56,116) 90,571 234,612 325,183 (2,352) (35,520) 3,004 (34,868) (64,643) (64,643) 36,188 325,183 361,371 84,883 (145,308) (71,723) (770) (21,642) 159,569 179,792 385 (15,421) 173,770 37,034 (125,933) (126,534) (816) (17,313) 163,768 157,353 389 (13,878) 135,699 86,171 (52,892) (213,527) (865) 6,925 147,391 207,706 3,924 (12,491) 194,952 (2,416) (30,042) 3,604 (28,853) (73,262) (73,262) 92,838 361,371 454,209

Amount in Kuwaiti Dinar'000 Operating Operating Activities Profit from operations Depreciation Dividend Income Loan loss provision Profit on sale of inveastment securities Loss on disposal of premises and equipment 50,355 45,507 1,314 (1,726) 5,388 (261) 133 56,374 48,457 1,053 (1,805) 10,168 (1,286) (213) 69,771 74,646 873 (1,623) 7,315 (11,440) 88,887 85,020 1,440 (2,311) 4,738 98,666 95,421 1,440 (3,004) 4,808 108,781 103,791 1,440 (3,604) 7,153 119,056 114,012 1,440 (4,325) 7,927 (4,421) (56,594) (240,218) (917) 7,618 63,870 232,631 432 (11,242) 114,635 (2,484) (36,050) 4,325 (34,209) (86,190) (86,190) (5,764) 454,209 448,444

Working Capital Deposits with banks and FIs Government treasury bonds Dec/(inc.) treasury bills and bonds Dec/ (inc) loans and advances Dec/ (inc) Govt. debt bonds Dec/ (inc) Other assets Inc/(dec) from banks Inc/(dec) from other financial institutions Inc/(dec) of deposits from other customers Inc/(dec) other liabilities Inc/(dec) Medium Term Loan Inc/(dec) Floating rate notes Inc/(dec) Subordinated loans Total Operating

Kuwait Banking Sector

Investing Capex Purchase of investments Sale of premises and equipment Proceeds from sale and redemption of investments Dividends income from investment securities Total Investing

Global Investment House

Financing Dividend paid to shareholders Purchase of treasury shares Sale of treasury shares Total Financing

May 2005

Net Change in Cash Net Cash at beginning Net Cash at end

2% 28.5% 3.9% 69.2% 17.4% 75.0% 20.Gross Loans to Customer Deposits .7% 99.9% -7.3% 13.8% 23.Equity to Gross Loans Constitution of Total Income .4% 81.81% 20.6% 4.240 1.4% 33.97% 3.0% 18.0% 71.Investment Income to Total Op.2% 71.6% 20.8% 2.3 277.8% 435.7% 3.3% 69.900 861.Interest Expense to Interest Income .3% 0.4% 472.4% 3.3% 10.9% 18.1% 69.86% 21.Global Research Kuwait Global Investment House Ratio Analysis 2002 Profitability .0% 3.2% 13.2% 17.6% 62.1% 495.88% 34.0% 48.39% 30.0% 3.3% 11.8% 68.138 28.5% 20.900 861.0% 69.2% 55.6 110.1% 58.8 12.3 3.0% 1.5 11.Book Value Per Share (fils) .0% 12.0% 2.3% 12.Change in Fees and Commission .7% 19.6% 45.4 2.28% 26.1% 75.16% 19.0% 10.7 3.EPS (fils) .6% 6.4% 412.183 40.7% 5.079 69.82% 2. to Total Op.859 820.5% 12.4 398.Market Price Year End (fils) .9% 52.7% 6.6% 4.Loans to Interest Earning Assets .8% 59.8% 72.0% 5.104 64.6% 81.Interest Income to total Op Income .8% 14.Gross Loans to Total Assets Credit Quality .97% 3.8% 111.900 861.3% 18.Non-interest income/ total Op.1% 7.8% 130.76% 3.Fees & Comm.6% 66.0% 83.13% 3.9% 55.Net Loans to Customer Deposits & FIs .9% 22.733 49.83% 25.Net income/ Interest Income .2% 5.Interest Income/ Avg Interest Earning Assets .5% 0.8 3.3% 6.1% 70.89% 21.7% 118.Return on Average Equity .2% 0.1% 31.5% 69.240 1.2 330.0% 5.3 356.Total Provisions to NPL Capital Adequacy .1 14.0% 11.47% 3.1 73.0% 21.26% 32.0% 7.3% 2.080 1.0% 76.4% 58.859 861.4% 70.4% -13.8% 4.3% 19.3% 12.4% 6.4 132.9% 108.Non-interest expense/ total Op.4% 48.4% 3.2% 36.065 2.NPL's to Gross Loans .8% 14.07% 3.629 796.3 98.9% 68.5% 6.7% 97.7% 22.44% 3.8% 172.5% 70.5 3.0% 450.240 11.3 3.7% 4.0% 106.2% 122.3% 22.2% 25.0% 20.8% 3. Income .P/E .6 11.Cost to Total Op Income .35% 2.Weigthed Avg.1% 99.Cost to Average Total Assets Liquidity .1% 16.Loan Loss Reserves (KD'000) .97% 32.8% 69.0% 0.240 1. of shares ('000) .5% 4.0% 1.859 820.8% 3.1% 45.4% 12.Operating profit / Interest Income .Non Performing Loans (KD'000) .3% 100.Customer Deposits to Equity .9% 1.7% 6.Interest Expense / Avg Interest Bearing Liabilities .Loan Loss Reserve to Gross Loans .1% 80.43% 3.Return on Average Assets .0% 12.8% 57.0 376.1% 3.Equity to Total Assets .3 9.0% 82.Net Interest Margin Efficiency .Staff Expense to Total Op Income .5% 62.9% 5.4 323.0% 7.3% 31.7% 2.9% 3.4% 50.Cash Dividend Payout 2003 Gulf Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2.6% 3.4% 37.4% 3.Net interest income/ total Op.8% 63.5% 118.8% 26.05% 28.4% 455.0% 0.0% 17.1% 3. Income Margins .5% 98.Net Spread .7% 12.8% 66.7 120.37% 20.0% 5.550 817.2% 24.948 45.8% 74.27% 21.8% 3.3% 21.3 2.4% 21.P/BV .90% 3.3% 29.6% 3.7% 17. no.7% 65.1% 13.6% 36.614 58. Income .2% May 2005 Kuwait Banking Sector 35 .8% 83.3% 17. Income .89% 21.900 861.4 328.912 72.6% 57.366 60.7 630 880 1.713 861.7% 54.0% 0.1% 5.2% 3.7% 3.FX Income to Total Op.0% 93.1% 57.0% 55.1% 21.2% 21.9% 29.0% 13.1% 70.4% 15.201 50.5% 41.7% 70.900 799.4% 95.2% 62.0% 74.839 55. Income .1% 17.32% 3.9% 4.Shares in Issue ('000) .3% 70.8 91.16% 3.8% 3.900 861.4% 57.9% 60.9% 44.7% 2.4% 450.Change in Interest Income .Change in Fx Income RATIO'S USED FOR VALUATION .1% 64.7% 3.993 3.9% 39.0% 30.4% 3.2% 12.1% 60.8% 104.6% 0. Income Operating Performance .13% 71.9 60.2 10.900 861.5% 1.900 56.2% 76.8% 72.9% 22.154 79.0% 820.

26% 23.8 3.90 620 / 750 808. the bank is weighing the options of moving to new markets such as Iraq and Turkey in the next couple of years.44 12M Avg. giving it a strong position in the domestic retail banking.00% • 36 Kuwait Banking Sector May 2005 .7 12. Some of the recent changes in the regulatory framework will affect the banks in Kuwait.3 797 Key Data EPS (fils) BVPS (fils) P / E (x) P / BV (x) Source: Global Research Background • Commercial Bank of Kuwait SAK (CBoK) commenced operations in 1961 and is the third largest conventional bank in Kuwait in terms of total assets. CBoK is also planning to increase its branch network in Kuwait by adding 10 new branches in strategic locations during FY2005. Currently. retail & corporate lending will continue to provide the lucrative growth opportunity for the bank. • Shareholding Pattern Al A’meda General Trading and Contracting Company Al Sharq Holding Company Recent Developments and Outlook • CBoK is planning to increase its branch network in Kuwait by adding 10 new branches in strategic locations during FY2005.Global Research Kuwait Global Investment House Commercial Bank of Kuwait Reuters Code: CBKK. Central Bank’s instructions of compliance for the net loans not to exceed 80% of the total customer deposits and deposits from financial institutions is a major source of worry Kuwait Kuwait 6. This should increase its reach in Kuwait and improve its ability to service more customers. with 2 new branches slated to open in the first quarter. As per the bank’s management. The bank is likely to rely on organic growth by introducing innovative product range and delivery mechanism to capture more customers. CBoK is a full service commercial bank which serves both retail and corporate customers. vol. (mn) 52 week Lo / Hi (Fils) Market Cap (KD mn) Target Price (fils) 0. Currently the branch network stands at 39.KW Listing: Kuwait Stock Exchange Current Price 760 fils 24th April 2005 HOLD 59 220. CBoK has the second largest branch network in Kuwait with 39 branches. However.

focus on consumer loan growth and increase in customer deposits. The improvement in net interest income was however neutralized by the decline in investment income. a decrease of 9% over the same period last year.from Fitch. • • • • May 2005 Kuwait Banking Sector 37 . This is because of the unusually high base realized in FY2003 due to one time gains arising out of trading in investment securities. We expect that the significantly improved product portfolio would lead to accelerating income growth and margin expansion. declined significantly by 71% during the same period.4mn at the end of FY04. This has largely been the result of a reduction in corporate lending. consumer loan fees increased from 6. CBoK started the year 2004 with a loans to deposits ratio of 122% and by the end of the year. We expect strong growth to continue throughout 2005.95mn. The interest expenses declined by 15% to reach KD27. • The bank is likely to rely on organic growth by introducing innovative product range and delivery mechanism to capture more customers.2mn arising out of recovery of a previously considered bad debt. As per the bank’s management. This increase was aided by a one-time gain of KD3. however. We expect the bank to meet this regulatory requirement by the stipulated time.6mn during the same period. CBoK is one of the highly rated banks in the region with an ‘A-’ rating from Capital Intelligence. The bank continued its IT infrastructure upgradation program throughout 2004. Card fees constituted 22. A. • • Analysis of Financial Performance – 2004 • The interest income of the bank increased by 15% during the FY2004 to reach KD89.1mn during the period. the ratio was at 95%. the bank is weighing the options of moving to new markets such as Iraq and Turkey in the next couple of years.1mn as compared to KD77.4mn for the full year in the previous fiscal. Fees and commissions income were higher by 8% as compared to the same period last year. leading to a 4% increase in the total operating income to KD83. The bank reported other income of KD1. Net gain from forex transactions stood at KD1. the bank has managed to bring this ratio to mid-80 percentages.2% of the total fee income in FY2004.8mn over the same period last year. Currently. Fee income from credit cards increased by 7%. The net interest income during FY2004 increased by 36% to KD61. Investment income.5% and retail products fees increased by 15. A2 from Moody’s and BBB+ from Standard & Poor’s.4% and retail products fees constituted 39.5mn as against KD45.4% during FY2004. internet banking facilities to customers is made operational whereby a customer can draw his/her account information from the bank’s database through internet and also conduct basic transactions.Global Research Kuwait Global Investment House for local banks in Kuwait. retail & corporate lending will continue to provide the lucrative growth opportunity for the bank. At the time of writing this report. However.

representing a decline of 17% over Dec end 2003. It is worthwhile to note that since our last report of CBoK. which have relatively higher cost of servicing declined by 31. Capital adequacy ratio (CAR) of CBoK remains more than adequate at approx. the discount rates have increased to reach 5.6mn at the end of FY2004 as compared to KD15. which is higher by 4.6mn whereas the bank stopped using CDs as a source of fund during FY2004. depreciation charges declined by 76% during the year to reach KD1.2mn.0% in FY2003 to 11. The estimated fair value of CBoK’s stock works out to 797 fils based on DDM and relative valuation method.2mn at the end of Dec2004. NPLs as a percentage of gross loans & advances have increased marginally from 11.8% to KD963.3% during the same period. Despite the stiff competition. We have revised our earlier projections for CBoK due to the recent regulatory changes which mandated the bank to contain the loan to deposit. 16% levels.6mn during the corresponding period in 2003.825. while the deposits from banks & financial institutions.48mn. • • 38 Kuwait Banking Sector May 2005 .4mn by the end of FY2004. deposits from customers increased by 31. Similarly.4% in FY2004. thus positively contributing to net profit. The bank reported a marginal decrease of 0.9mn in FY2004. loan loss reserves as a percentage of gross loans & advances have increased from 11. The net profit attributable to shareholders after providing for KFAS and National Labor Support tax was higher at KD62. a 10% increase over the corresponding period last year. • • • • • Valuation • • CBoK reported an EPS of 59 fils per share during FY2004.25% which has considerably affected the valuations. The provision for impairments decreased by 19% to reach KD12. CBoK’s total assets decreased significantly to KD1. This decline was in line with the shrinking book size of other local banks to comply with regulatory issues concerning the net inter-bank position of banks while calculating the lending ceilings.3% in total loans and advances (gross) to reach KD1.8% vis-à-vis current market price of the stock. However. Long-term borrowings also saw a major decrease of 56.135.8% in FY2003 to 13.3% to reach KD192.Global Research Kuwait Global Investment House • The bank reported a 10% growth in its net profits in the FY2004 owing to a substantial reduction in depreciation (-76% yoy) and also lower provisioning for impairment (-19% yoy) as compared to the corresponding period in the previous fiscal.4% in FY2004. We revised our recommendation to ‘Hold’ on the stock.

427 96.198.382 963.008 338.556 (151.192 2.622 201.581 211.139.293 238.359 2.776 299.615 64.956 334.916 (22.543 2.001 17.417 1.331 3.528 216.562 221.501) 2.767 1.601 40.334) 20.548 11.313 (182.925 31.600 172.795) 15.713 295.925 31.109.468 481.733 53.548 60.047 9.901.094 32.198.593 (34.492 11.846.115.624 248.234 172.609 106.459 1.debt Investment securities .898 32.631.927 4.231) 67.656 173.846.221 8.927 74.733 53.925 31.182 17.362 30.379 1.635 568.927 59.250 106.442.620 (20.636 69.703 175.978 47.362 30.508 (25.733 53.073 1.324 202.987 89.927 21.000 58.287.948 1.968.809.089 8.090 (46.519 11.345) 2.440 234.109.090 42.927 3.090 (46.182 17.BALANCE SHEET 2002 198.627 134.358 56.924 2.058 189.211 2.885) 17.398 256.634.453.385.956 212.453.231) 49.695.250 2.362 30.496.889 283.961.equity gross fixed assets less: accumulated depreciation net fixed assets Total Assets Kuwait Banking Sector Liabilities: Deposits from banks Deposits from FIs Deposits from customers Long term borrowings Certificate of Deposit Other liabilities Total Current Liabilities Global Investment House 39 Owner's Equity: paid-up equity capital premium reserve statutory reserve general reserve retained earnings property revaluation reserve fair valuation reserve own shares reserve treasury shares proposed dividends Total Shareholder's Equity Total Liabilities .631.891 10.231) 54.231) 60.380 6.986 231.135.589 286.158 236.264 106.668 6.733 53.927 46.203.744.082 14.098 2.125.668 6.542.343) 17.089.927 33.904 192.211 2003 Commercial Bank of Kuwait 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Kuwait May 2005 371.075.837 15.774 (15.386 151.387) 18.545) 2.805 36.710 17.239 27.743 80.157) 29.244 1.668 6.205 767.609 127.184 1.090 (46.211 Amount in Kuwaiti Dinar'000 Assets: Cash and cash equivalents Due from Banks and other Fis Treasury bills and bonds Certificates of Deposits Loans and advances Government debt bonds Other assets Less : provision Total Current Assets Investment securities .681 48.697 1.427 11.844 137.675 106.286.125 1.891 106.182 17.230 188.593 106.607) 2.456 51.359 154.797 13.278.358 77.738 278.825 2.315 211.627 1.361 (226.174 466.835 10.362 30.282.288 10.588 92.861 14.458 (134.733 39.877 (124.378.095 317.362 30.966 241.545 296.090 (46.431 1.697 6.685 130.904 121.362 30.955 1.075) 1.414 151.195 1.013 1.977 100.593 12.852 222.286.668 6.808 379.270 1.733 53.362 30.733 50.904) 1.537 8.686 1.345 (34.630 2.432 204.474.230 11.202 440.314 1.668 6.047 2.125 94.825.221 106.182 17.969 2.000 40.031 1.453 360.246 70.270.144 1.232) 19.231) 74.276 43.925 31.090 (46.976 85.401 (164.298 (203.063 1.714) 21.692 (31.889 653.925 31.251 39.219 11.961 9.182 17.584 12.758) 1.424 (28.561 28.226 110.939 38.327 97.593 222.972 275.131 731.536 2.922 367.822 141.166.122 2.825.

926 (12.492 80.548 19.441 90.045 (21.793) (9.413 (22.492 72.114) (13.017) (10.381) 92.713 344 2.103 6.750 21.381 948 724 (4.409 61.112 20.569) (10.942 (22.294) (927) (148) 89.595 4.715) (693) (148) 66.846) 75.518 57.337 46.548 89.210 23.420 1.292) (4.064) (834) (148) 80.382 (2.885 8.765 25.141 106.297 (2.212 (9.258 1.219 1.383) (27.237 2.274) 122.560) (50.902 4.353 3.581) 37 3.644) (9.750 (54.933) (1.803 138.102) 83.906 (32.993) (2.762 56.652 155.113) (29.489 9.004) (513) (770) (13.785) (6.085 4.713 64.045) (1.333 (74.600 (6.585) (12.030 (13.545) (2.307 (1.954 2.792 89.603) (39.008) 59.886 21.297 4.538 66.427 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in Kuwaiti Dinar'000 Interest Income Interest Expense Global Research Kuwait 40 Net interest income Add : Fees and commission Add : Foreign exchange gains Add : realised & unrealised gains from investments Add : Dividend income Add : Other operating income Reversal of Prior year Property Revaluation Decrease / (Increase) Less : Provisions for loan & non cash credit facilities Less : Provisions for investment losses & others Operating income Less : Staff costs Less: Other operating expenses Less: Depreciation Operating profit Kuwait Banking Sector Less: Labour tax Less : Contribution to KFAS Less : Directors' fees Net Profit attributable to shareholders P&L Appropriation Account: Op Balance of Retained Earnings Adjustments Net Profit for the year Trfr to Statutory Reserve Dividend KD Global Investment House May 2005 Additional Dividend KD Loss/(gain) on disposal of "available for sale" assets Transfer on sale of property Cl Balance of Retained Earnings .427 122.146) (129) 136 (17.889) (265) 6.587 (11.088 (15.704 3.871) (756) (148) 72.854 4.961 62.587 (148) (287) (691) (1.394 9.091 2.908) (8.747) 77.518 66.327) (160) 4.252 38.942 16.801) (1.597) (885) 99.821 (60.429 45.961 56.903) (3.461 2.821 33.570 (56.537 1.849) (10.333 59.OPERATING STATEMENT Commercial Bank of Kuwait 2002 71.157 1.169 2.776) 33.364 15.537 3.095) 46.282) 2.897 (2.700 2.491) (8.181) (2.005 (34.709) (42.534) (621) (148) 62.596 (1.655) 40.472) (49.062) 110.136 1.641) 36.565 22.317) 99.976 1.561 10.044) (1.702 (2.502) 69.219 80.290 24.517 77.988) (3.453) 74.578 56.254 26.337 (67.479) (6.243 87.332 (879) (363) (148) 38.640 2.392 83.910) (45.

482 83.936 (1.468 278.070 50.766) (36.043 149.746) 278.777 58.527 (4.066) (90.095) 10.330 (53.739) 2 82.060 3.307 2.846 104.713 202.211 442.258) 239.398 69.034 (3.600 1.889 (1.545) (247.283) (85.723 250.CASH FLOW STATEMENT 2002 38.129) 67.691 (228.468 (2.282 (2.092 (4.706 (121.702 3.635 275.119) (67.215 (1.844 116.817 (162.569) (96.632 7.788 (985) 25.000) 3.396) 58.833) 286.466) (17.669) 38.751) 11.427 208.295 64.268) (12.592) (17.955) (86.678 Kuwait Banking Sector Amount in Kuwaiti Dinar'000 Operating Operating Activities (a) Profit from operations Depreciation Revaluation of property Income from investment securities Foreign exchange & other loss/(gain) on investment securities Foreign exchange loss on financing activities Gain on sale of premises Loan loss provision Provision for investment securities Other provisions and valuation adjustments National Labour support tax Paid to KFAS Fees paid to Directors Working Capital (b) Dec/(inc.000 14.043 (42.382 3.615) (16.399) (54.781 (1.146 17.064) (834) (148) (45.579 141.754) 164.353 22.789) 54. debt bonds Dec/ (inc) Other assets Inc/(dec) from banks & other financial institutions Inc/(dec) of deposits from other customers Inc/(dec)Certificate of Deposit issued Inc/(dec) other liabilities Total Operating Investing Capex ( c) Sale of assets Purchase of investments Proceeds from sale and redemption of investments Dividends income from investment securities Total Investing Global Investment House 41 Financing Dividend paid to shareholders Short term/ Medium term/Long term loan Acquisition of own shares Total Financing Net Change in Cash Net Cash at beginning Net Cash at end .883) (60.144) (112.408) 118.605 (271.064) 24.283) 142 (27.850) 11 (39.889) 9.182 8.008) 11.263 75.916) (11.540) 60.568) (286.479 (136) (10.000 3.635 (2.294) (927) (148) (45.641 3.808 286.654 114.725) 209 (1.778) 2.102 115.258) 146.296) (31.631 (40.664) (9.483) (15.743 102.332 1.871) (756) (148) (42.826) (59.514 92.451 (91.655 (724) (2.013 (68.723 (3.) in balances with banks Dec/(inc.309) 10.258) 9.540) (102.817) (46.990) 232.420 6.103 27.948) 40.597 21.451 27.847 8.477) (7.133 13.456) 63 (2.854 16.044 49.231) (336.146 295.693 (14.703) (21.058 (845) 138.960 38.596 2.808 (278.101) (59.247) (10.148) 374.112 (44.467) 3.826) (58.951 (2.181 (1.484) (3.232 (4.340) 295.897 36.702 (204.555) (26.692) (10.133) 12.803) (105.908) 107.502 93.045 129 (27.107) 13.149 46.306) (49.709 118.156) 5.801 (309.157) 164.932) 4.590) 225.727 110.627) (92.575) (3.149 (55.953 57.646 (912) 24.585 12.527) (12.605) 59.146 (49.392) (13.018 (1.859) (2.003 (44) 13.099) (135.662 149.170) (84.713 6.319 40.) treasury bills and bonds Dec / (inc) Certificate of Deposits Dec/ (inc) loans and advances Dec/ (inc) Govt.715) (693) (148) 125.637 7.071 (92.554 70.652) (12.381 2003 Commercial Bank of Kuwait 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Kuwait May 2005 22.528 (34.776) 10.593) 122.618 (49.

00 700.033.7 54.6% 60% 40% 24% 24% 83% 59% 62% 37% 6.00 13.7% -16% 32% 0% 33% 4% 19% 1.FX Income to Total Op.5% 61% 39% 24% 23% 83% 58% 60% 37% 6.Fees & Comm.98% 4.1% 1.01 13.0 2.Due from Banks to Due to Banks Credit Quality .30 11.6% 63% 37% 24% 22% 83% 57% 60% 36% 6.4% 141.8% 12.056.Return on Average Assets .7% 12% 7% 7% 7% 20% 20% 1. Income .0% 9% 14.3% 1.501 11.7% 2.07% 3.545 11.4% 2.1 9.5 84. Interest in suspense) Capital Adequacy .063.9 12.6% 12.5 242.0 269.16% 56% 99% 74% 415% 255% 3% 0.0 490.1% 2.6% 151.39% 22.Market Price Year End (fils) .14% 2.202 226.2% 24.684 1.345 11.01% 57% 103% 80% 389% 160% 3.959 134.2 3.2% 1.11% 2.8% 23.607 11.Interest Expense to Interest Income .80% 22.6% 3.4% 79% 11% 11% 19% 57.0 175.8% 31.Equity to Gross Loans Constitution of Total Income .4% 28% 12% 1. Income .Net interest income/ Total Op.Commissions/ Total Op.2% 24% 12% 1.Non-interest income/ Total Op.00 760.Non Performing Loans KD'000 .Change in Other Income RATIO'S USED FOR VALUATION .Operating profit / revenues .Book Value Per Share (fils) .39% 24.7% 2.87% 4.904 11.Global Research Kuwait Global Investment House RATIOS Amount in Kuwaiti Dinar Profitability .063.8 3.0% 9% 14.1 10.94% 62% 118% 93% 341% 93% 3.1% 27.Net Interest Income to total Op Income .00 760.0% 24% 13% 1.5% 59% 41% 23% 25% 80% 70% 73% 31% 4.3% 40% 60% 28% 24% 75% 73% 74% 42% 4. Income .36% 2.Investment Income to Total Op Income .Provisions to Average loans .620 1.51% 25.1% 2.8% 134% 14% 14% 25% 60.73% 3.620 1.7% 125% 14% 14% 25% 58.Net Spread .6% 2.00 760.0% 14% 5% 5% 7% 18% 1.09% 4. to Total Op.2 59.804 151.20% 17.6% 23.7 230.0% 9% 11.8% 57% 43% 28% 27% 76% 55% 57% 49% 4.405 164.NPL Coverage (incl.Dividend payout ratio Margins .4% 13.4% 117% 16% 16% 25% 59.Interest Expense to Interest Bearing Liabilities .9% 11.Staff Expense to Total Op Income .063.4% 2. Income .3% 1.044.6% 8% 8% 15% 7% 25% 19% 1.376 100.00 760.3 3.1 2.1% 132.11% 56% 100% 77% 404% 200% 2007 3.7% 24.9% 12% 7% 6% 7% 20% 20% 1.Equity to (Total Assets + Cont.Return on Average Equity .5% -1% 25% 364% 26% 108% 15% 1.620 37.2% 124.90% 59% 142% 114% 364% 47% 2003 2.84% 1.Net Interest Margin Efficiency -Cost to Total Op Income .) .496 1.Customer Deposits to Equity .4% 140% 14% 14% 25% 62.063.Shares in Issue ('000) (Weighted Avg.2% 129% 14% 14% 25% 59.Change in Fees and Commission .6% 21.7% 4.620 1. Income Operating Performance .Change in Investment Income .Change in Net Interest Income .Other Income to Total Op.NPL's to Gross Loans .1 3.673 182.31% 23.8 68.00 720.0% 9% 13.P/BV 2002 2.4% 9% 13.P/E .Provisions to total Op Income .906 1.3% 24% 12% 1. Liabilities) .5% 3.Loan Loss Reserve to Gross Loans .2% 2.Loans to Interest Earning Assets .2% 1.Net income/ revenues .9% 59% 41% 24% 24% 82% 63% 65% 38% 6.6% 10% 11.4% 126.033 11.5 255.1% 129.99% 2.Non-interest expense/ Total Op.Change in Fx Income .5% 3.Loans to (Customer Deposits+FIs) .12% 56% 100% 75% 410% 229% 2008 3.13% 1.8 220.8 42 Kuwait Banking Sector May 2005 .3% 2.8% 2.12% 52% 156% 121% 247% 127% Commercial Bank of Kuwait 2004 2005 2006 3.NPL's to (Equity+Loan loss reserve) .6 242. Income .0 62.Loan Loss Reserve KD'000 .1% 9. Income .758 11.3% 28% 17% 0.6% 2.5 75.76% 3.8% 108% 14% 14% 26% 39.Equity to Total Assets .7% 23.Cost to Average Total Assets Liquidity .8% 3.0% 9% 15.1 11.4% 55% 8% -60% -9% -43% 15% 1.1% 12.EPS (fils) .Loans to Customer Deposits .0 3.01% 21.9% 24% 12% 1.Interest Income to Interest Earning Assets .6% 162.35% 23% 13% 0.0% 2.590 203.46% 2.

9 235.2 1. The bank had 497 employees as of end-Dec 2004 servicing customers from 18 branches spread across strategic locations in Kuwait.Global Research Kuwait Global Investment House Burgan Bank K. In May 2004. Shareholding Pattern • The principal shareholders of the bank as of Dec 31. 2004 were Kuwait Projects Company with 33. the bank was chosen as the government’s partner for e-government initiatives. The bank opened a new branch in South surra and more branches are due to open during 2005. the bank embarked on a restructuring spree and has developed a new organisational structure to optimally serve the objectives of the bank. In addition.94 335 / 425 365.7%. Another major initiative during 2004 was the establishment of corporate governance practices in the bank.KW Listing: Kuwait Stock Exchange Current Price 425 fils 24th April 2005 BUY 34.4 12. corporate and international banking as well as treasury to reinforce after-sales service and to increase operational efficiency. Recent Developments • Since the last couple of years. Because of its huge investments in technology. The bank offers a full range of banking services focused on both retail and corporate clients.S. vol.C Reuters Code: BURG. Capital Intelligence upgraded bank’s financial strength rating to “BBB” with a positive outlook for the bank’s position in foreign currencies.9% stake and Wafra International Investment Company with a stake of 5.76 503.8 Key Data EPS (fils) BVPS (fils) P / E (x) P / BV (x) Source: Global Research Background • Burgan Bank (BB) is a public shareholding company incorporated in Kuwait and listed on the Kuwait Stock Exchange. • • • • May 2005 Kuwait Banking Sector 43 . The bank was established in 1977 and was privatized in 1997. (mn) 52 week Lo / Hi (fils) Market Cap (KD mn) Target Price (fils) 2.81 12M Avg. Major initiatives have been undertaken for retail. the bank opened a new call centre to serve its growing customers.

2% to KD32. However. The bank has already complied with this ratio and has significant leeway to explore credit opportunities in the country. As a result.27mn.8% to KD74.4% in FY2004 as compared to 47. • • • • • • • • • • 44 Kuwait Banking Sector May 2005 . The deposits with banks and financial institutions declined by 62% to KD114. This decline has more to do with the regulatory issues which requires banks to maintain 80:20 deposits ratio by July 2005.7mn during FY2004 as compared to the same period last year.Global Research Kuwait Global Investment House • Burgan Bank and Wataniya Telecom recently announced the first major step in the region towards mobile commerce. BB’s total assets stood at KD1. The proportion of NPL to gross loans stood at 5.6% to KD41. Analysis of Financial Performance – 2004 • The bank falls short by just 1. As a result. The bank was able to substantially control its expenses as it declined by 8% to KD17.7mn during the same period.3% at KD29.5% of its NPL at the end of Dec 2004.3% to KD3.5% over Dec 2003.7mn. the total non-interest income of the bank declined by 28.5% to KD855mn over December 2003. interest expenses increased by just 5.9mn during the same period. Gross loans and advances portfolio declined by 5. On the back of improved net interest income and substantial decline in provision for loan losses the total operating income after provision increased by 20% to KD48.1mn.3mn as compared to the same period last year. Investment income also declined sharply by 68% to KD3. the cost to operating income after provision of the bank declined to 36. Fees and commissions income reported a drop of 6.74bn at the end of Dec 2004.7% to KD21. As a result.6% while the bank has provided for 84. representing a decline of 9.6% to KD13. the net interest income during the period surged by 32.4% in FY2003.8% of our projected net interest income for FY2004 while beat our forecasts for net profit by 3.6mn.9mn. This decline was due to the substantial decline in deposits with banks and FIs and decline in loans and advances portfolio.6mn over the corresponding period of the last fiscal. The net profit attributable to shareholders after providing for KFAS and National Labor Support tax was higher by 45.4%. The interest income of the bank increased by 15. The decline in deposits with banks and financial institutions was due to the regulatory issue by which CDs/MTLs are to be netted off for 88:12 ratio thus closing the loophole whereby banks were using back-to-back interbank funding to expand retail loan capacity.5mn. Provision for loan losses were declined substantially by 82% to KD2mn while provision for investment losses increased by 15.

05bn over Dec 2003. Some of the positive events which could provide upward momentum to the stock is sustain positive performance. the further hardening of interest rates is likely to result in the bank improving its profitability significantly. • • Valuation • We had recommended a Buy on the stock with a price target of 487 fils in Oct 2004 when the stock was quoting at 375 fils. The estimated fair value of BB’s stock works out to 503. The bank’s management has been perceived to be very unstable as seen from frequent changes in the top management of the bank in the past. This creates a lot of doubts over the continuity of the policies and strategies of the bank. This should result in the bank exploiting the tremendous lending opportunities in the region.8 fils based on DDM and peer group valuation method. BB is expected to continue its focus on improving operating efficiency and asset quality. • • • • May 2005 Kuwait Banking Sector 45 . other external factors weighed negatively on the stock. • Outlook • The current restructuring exercise is expected to positively benefit the bank in the longer term. which have relatively higher cost of servicing declined by around 30% during the same period. Apart from the fundamentals. while the deposits from financial institutions. the stock is quoting at a PE of 12. we reiterate our ‘Buy’ recommendation on the stock. Over the medium term. Since then the stock has been quoting in the range of 340 fils to 380 fils.5% to KD1. Currently.Global Research Kuwait Global Investment House • The bank made great strides in securing lower cost funding as deposits from customers increased by 12.2x and P/BV of 1. The withdrawal of rating by Fitch was also not perceived well by the market. We believe that the bank’s management has the potential to create strong value out of its franchise and hence the current discount to the stock is unwarranted.8% as of FY2004. rating upgrade by an international rating agency and consistency of policies and strategies. Therefore.5% vis-à-vis the current market price of the stock. which is higher by around 18.81x of its actual 2004 earnings. The bank is strongly capitalised with a CAR of 17.

282 211.416 452.097 45.060 64.136.325 2.279 12.932 Total liabilities & Shareholders Equity .759 12.885 1.903 2.957 233.115) 1.956 57.303 42.353 34.055 144.319 50.939.342 94.048.743 1.556 1.863 81.812.932 258.608 32.515 372.894 21.759 14.471 (51.626) 1.065 112.388 (78) 1.209 1.059 3.485.444 2003 2004 Burgan Bank 2005 F 2006 F 2007 F 2008 F 311.599 28.682 4.994 1.822 5.006 4.283 29.386) 24.759 17.104 130.060 64.230 18.Gross Government debt bonds Other Assets Less: Provisions Total Current Assets Investments .940 20.587 309.108) 22.599 30.920.920.157 (9.764 1.805 265.827 (19.146 (11.080 1.257 18.250 (59.025 (17.939.727 1.960 354.455 1.335 1.563 275.671) 1.641 2.002 (40.885 497.195 105.306 8.928 25.127 68.540 86.226 768.010 (23.200.967 1.962 4.759 29.833 27.111.509 243.200 1.952 1.903 64.722 Amounts in KD ' 000 Assets Bank & Cash equivalents T bills & bonds Deposits with banks & FIs Loans & Advances .190) 19.942 119.351) 1.418 18.172 179.320.411.098 64.387 4.979 1.772 93.573.169.599 21.257 109.106 19.759 33.021 95.470 105.458 91.019) 21.798 1.354 (47.290 229.154 101.825.Debt Investments .885 165.819.605 1.265 89.566 109.209 105.222 46.277 326.568 (14.491 30.894.572 175.325 296.275.444 932.087.331 86.464) 20.412 1.226 16.781 38.386 14.351 299.633.708 105.669) 1.585.599 21.865 1.724 3.599 24.661 10.547 6.300 81.901 34.091 80.060 64.400 247.060 64.731 1.580 105.722 250.630 25.990) 21.618 24.528 18.958.201 43.750 (10.547 12.060 (68.750 (10.738.043.689 18.272 5.570 855.759 20.060 64.520 47.723 105.275.825.662 18.418 86.885 Global Research Kuwait 46 78.722 (45.465 128.349 12.484.243 182.115) 1.284 29.095 162.317 1.395 121.034 114.205 80.724 41.346 17.756.778 236.956) 1.611 (26.176 268.912 269.713.297.115) 1.758 831.Equity Gross Fixed Assets Less: Acc Depreciation Net Fixed Assets Kuwait Banking Sector Total Assets Liabilities Deposits from banks Deposits from other FIs Deposits from customers Other liabilities Total current liabilities Other borrowed funds Global Investment House May 2005 Owner's equity Paid-up equity capital Proposed bonus shares Share premium Statutory reserve Voluntary reserve Retained earnings Investment Revaluation Reserve Treasury shares Treasury shares reserve Proposed dividend Total Shareholders Equity 86.768 136.442 18.125 260.211 337.793 321.743 86.225 2.154 1.750 (10.780) 2.738.573 904.885 6.107 46.883 1.916 1.115) 1.750 (10.603) 1.115) 1.759 24.300 1.Balance Sheet 2002 181.837 5.432 96.735 102.360 931.720.509 86.731 58.982 261.416 1.338 136.331 1.756.181) 20.464 (38.740 (224) 1.312 1.642 1.599 33.478.750 (10.589.087.515 221.

665 (4.400) 8.556 (392) (968) (70) 42.356) (4.338 (363) (897) (70) 39.801) (10.327) (6.300 (8.731 1.905 915 (11.179 3.037) (12.488 4.618) (4.417 5.954) (4.548) (3.125 2003 64.903) 1.907 84 (2.769 Burgan Bank 2005 F 88.547 157 (14.008 (9.189) 30.332) (9.786 20.312 20.119) 43.438 (66.292 1.002) (3.622 (8.230 42.008 14.689 8.056 6.665 May 2005 1.019 11.528 .883) 48.599 2008 F 131.978 2006 F 100.596 (190) (468) (70) (276) (680) (70) (319) (789) (70) 34.034 (42.098) 1.222) 40.198 87 (5.143 14.338) (12.940) 60.356) (30.442 34.956) 32.960) (21.099) (11.373) (10.957) 5.319 3.596 (2.262 6.125 (4.869 92 (7.563) 12.368) 40.595) 68.726) 35.751) (11.718) 21.368 29.343 1.548) (24.994) 52.922 (10.226 29.255) 65.734 (50.786 (1.960) (2.982) 5.727 (9.256 95 (9.756) 37.618) (33.648) 55.766 2.143) (3.327) (1.442 3.689 39.662 44.282) 1.442 2007 F 115.177 (416) (1.096 (8.150) (10.008 (4.662 Amounts in KD ' 000 Interest Income Interest Expense Net Interest Income Add: Fees & Commission Add: Foreign Exchange Gain Add: Net gains from investment securities Add: Dividend Income Add: Other Income Less: Prov for loan Less: Prov for investment losses Operating Income Kuwait Banking Sector Less: Staff Costs Less: Other operating expenses Operating profit Less: KFAS Less: NLST Less: Director's fees Net Profit Global Investment House 47 P&L Appropriation Account Opening balance of retained earnings Net profit Trf to statutory reserves Trf to voluntary reserves Dividend Dividend Paid Proposed Bonus Shares cl balance of retained earnings 10.289 1.066) (3.037) (2.515) 55 3.811 1.034) (28.725 (41.312 (4.517 89 (6.921 1.326 12.300 (3.230 10.595 4.561 (57.787 1.316 16.658 17.785 2004 74.027) (70) 44.034) (4.910 3.384 3.243) (3.839) 48.306) 13.708) (60) 32.022) (3.350 5.882 19.701) 43.478 (9.406) 46.226 1.632 1.005 16.368 (2.355 1.Income Statement Global Research Kuwait 2002 64.502 (39.717) 24.664) 21.271 (119) (296) (70) 12.133 13.876 (78.154) (4.

625) 27.290 1.717 (2.839) (35.510) 4.547 (73.166 (779) 13.797 6.880) 5.368 11.)/Dec other liabilities Total Operating Kuwait Banking Sector Investing Capex © Purchase of investments Proceeds from sale & redemptions of investments Dividend received Total Investing Financing Dividend paid to shareholders Other Borrowed Funds Sale (purchase) of treasury shares Total Financiang Global Investment House (30.384 3.227) (13.023 (4.277 90.898 1.108 (3.724) (125.173) 29.731) 3.Cash flow Statement 2002 2003 2004 Burgan Bank 2005 F 2006 F 2007 F 2008 F Global Research Kuwait 48 (31.340 (306.) govt.397 77.325 165.551) 92.793 (3.)/Dec other customers (Inc.756) 6.905) (11.604) 10.454 123.838 (3.515) (21.310 165.513) 29.812 12.178) 38.) loans & advances Dec/(Inc.317 185.759 (12.099) (4.585) (9.212 (866) 99.915 88.596 2.743 (129.287) (111.206 265.256 (4.319) 7.874) (28.595) 9.651) 100.277 165.341 (810) 14.226 (78) 11.)/Dec from banks & Fis (Inc.748 260.576 1.869) (5.384) 5.066 (1.211 268.601) (8.246 46.515) 4.957) (9.594) 116.368 2.271) (12.422) (8.539 1.550 (17.381) 37.256) (4.595 4.528 (146) 23.793 269.277 265.154 (1.260) Working Capital (b) Dec/(Inc.869 (2.043) 253.975 (72.003 40.971 (3.356 40.279 (4.650 191.717) (8.649 13.556 3.626 62.515 May 2005 Net change in Cash Cash & Short-term funds at the beginning of the year Net cash at end Actual cash at end .325 (6.874) (76.330) 44.907 12.271 1.352 (21.910) 6.873 3.179) (120.910 3.554 40.518) (5.623 35.657 17.587 265.555 268.789 (1.907) (3.803) (7.956) 16.766) 3.243) 29.457) (6.587 (3.264) 12.211 260.844 1.400) (28.982) 42.047 (3.118 (3.183) (7.738 41.022 32.187) (128.843) 14.368 181.793 260.090) (1.508) (16.048) 181.232) 20.618 20.518 (1.317 17.873) (7.139 (16.376 718 (10.587 269.478 2.198 (631) (21.986) (16.010 1.202 (6.278 26.143 31.905 (2.070) (7.883 2.009 43.211 (152.338 2.919) (17.982) (30.313 (749) 9.) other assets (Inc.582) 269.913) (30.708 23.748) (49.960 311.361) (6.) in T bills & bonds Dec/(Inc.431) 48. debt bonds Dec/(Inc.718 158.198) (6.896 1.547) (6.515 311.671) (24.749 24.797 (4.131) (98.178 3.146) 25.957) (24.960 268.296) 5.295) 91.545 29.632) 60 14.960 Amounts in KD ' 000 Operating Operating Actvities (a) Operating profit for the year Depreciation Dividend Income Net gains from investment securities Impairment of investment securities Provisions Other mandatory payments 21.877) (166.954 (1.839 (720) 9.002 (1.) deposits with banks & Fis Dec/(Inc.325 181.413 1.375 (1.347) (137.122 120.400) 8.319 3.511) (88.506 2.

3% 10.604 860.9% 63.5% 819.4% 72.6 23.3 10.0% 1.4 242.7% 37.11% 2.3% 0.4% 34.2% 1.90% 3.6% 41.6 43.8% 63.30% 4.1% 39.7% 72.9% 20.Gross Loans to Customer Deposits .034 40.2% 20.5% 27.0% 1.0% 22.0% 5.Cost to Average Total Assets Liquidity .4% -0.669 5.7% 2.54% 12.6% 60.9% 0.0% 83.6% 18.0 10.18% 3.9% 1.780 6.Customer Deposits to Equity .6% 4.5% 15.66% 2.Loan loss provision to Gross Loans Capital Adequacy .Interest Expense to Interest Income .8% Burgan Bank 2004 2005 F 2006 F 1.7% 11.8% 37.4% 23.6% 4.2% 6.96% 61.3% 0.1% 75.8 51.Change in Fees and Commission . Income .7 9.65% 1.2% 83.Return on Average Equity .5% 36.2% 13.4% 0.3% 5.0% 1.5% 4.Weighted Avg.1% 18.5% 27.0% 36. Income .61% 61.604 860.0% 15.1% 27.9% 73.4% 62.8% 5.59 1.7% 62.604 15.7% 20.Return on Average Assets .52% 1.4% 52.1% 41.3% 81.0% 56.Net income/ revenues .0% 23.NPL's to (Equity+Loan loss reserve) .604 860.Provisions to Average loans .4% 17.83% 2.2 1.9% 5.0% 15. to Total Op.8% 20.Loan Loss Reserve (KD'000) .5% 0.8% 10.8% 4.7% 64.8% 40.9% 6.604 860.9 51.7% 25.604 860.Commissions/ Total Op.8% 38.9 39.4% 36.8% 23.2% 0.5% 0.864 68.0% 35.7 8.1% 97.0% 14.8% 7.14% 48.Book Value Per Share (fils) .Market Price Year End (fils) .9% 35.Loans to Interest Earning Assets .7% 1.5% 20.7% 84.Interest Income to Avg Interest Earning Assets .65% 35.1 268.2% 79.92% 33.3% 3.6% 71.0% 2007 F 2.2% 87.5% 16.604 860.87% 2.Loan Loss Reserve to NPL .832 847.Change in Interest Income . of shares ('000) .3% 88.0% 76.3 48.588 51.68% 12.91% 10.0% 0.5% 64.Non Performing Loans (KD'000) .5% 20.603 5.148 59.24% 12.2% 15.1% 80.3% 1.8% 6.07% 2.9% 84.0% 21.8% 40.6% 4.6% 2.5% 28.0% 4.Equity to Total Assets .0% 0.71% 12.0% 0.8% 19.8% 59.0% 21.51 May 2005 Kuwait Banking Sector 49 .FX Income to Total Op.6% 73.1% 18.8% 26.1% 33.58% 47.5% 62.Net Interest Margin Efficiency .4% 28.Shares in Issue ('000) . Income .7% 66.01% 63.3% 1.08% 65.7% 40.0% 18.23% 48.Interest Income to Total Op.0% 2.58% 12.2% 51.4 8.7 231.2% 61. Income Operating Performance .1% 87.83% 33.4% 2.P/BV 0.7 235.1 56.0% 1.9 214.9% 2.33% 54.1% 18.1% 21.9% 72.3% 31.20% 52.1% 2003 1.0% 2008 F 2.0% 1.75 1.Fees & Comm.9% 9.4% 70.4% 4.6% 32.47 1.7 255.14% 36.623 860.2% 3.Net Spread .2% -3.8% 25.9% 63.8% 51.7 34.Net Loans to Customer Deposits & FIs .21% 2.Net interest income/ Total Op.5% 0.74% 77.6% 0.Equity to Gross Loans Constitution of Total Income .9% 7.3% 5.7% 26.6% 78.0% -15.8 53.4% 87.1% 80.72% 70.8% 77.36% 2.6% 2.626 6.0% 7.Change in Fx Income RATIO'S USED FOR VALUATION .1% 2. Income .67 1.3% 48.5% 37.23% 3.97% 2.1% 85.0% 59.0% 69.0% 35.6% 15.9% 2.2% 39.0% 20.Non-interest income/ Total Op.0% 66.2% 26.58% 2.604 859.07% 67.7% 4.9% -14.3% 21.Dividend payout ratio Margins .Staff Expense to Total Op Income .5% 67.53 1.EPS (fils) .0% 5. Income .4 57.1% 59.2 15.246 47.4% 0.0% 5.9% 34.93% 33.351 6.057 45.6% 14.0% 36.03% 2.540 38.0 280.1% 4.P/E .23% 11.9% 16.7% 57.9% 36.Loan Loss Reserve to Gross Loans .9% -6.57% 54.04% 69.8% 61.Gains from investment securities to Total Op.53% 3.7% 38.3% 4.604 860.4% 20.0% 57.7% 61.1% 56.2% 63.1% 10.6% 5.Operating profit / revenues .9 45.Global Research Kuwait Global Investment House Ratios 2002 Profitability .NPL's to Gross Loans .55% 3.01% 1.Cost to Total Op Income .3% 26.671 5.735 860.4 47.4% 88.Gross Loans to Assets .9% 27.7% 58.6% 14.46% 1.9% 5.8% 38.9% 72.04% 54.2% 1.Liquid assets to total Assets Credit Quality .53 1.51% 59.7% 39.93% 3.Gross Loans to total Deposits .6% 28.9 315 355 360 425 425 425 425 20.0% 7.5% 37.2% 8.7 49. Income . no.5% 22.604 860.Interest Expense to Avg Interest Bearing Liabilities .956 6.5% 92.6% 5.

28 420 / 750 Key Data EPS (fils) BVPS (fils) P / E (x) P / BV (x) Source: Global Research 295.6 539.4% 4.5% 100. KIA Others TOTAL Source: Global Research SHARE 47.5 13.4 278. in-line with its internal reporting. private banking and wealth management services to retail customers. securities trading & fiduciary fund management. The latest shareholding pattern is as follows.include full range of credit & deposit services.C International Financial Advisors Wafra International Investment Co. Other services in the retail banking category include credit & internet card products. for retail and corporate customers. money & debt market operations.S.5 12M Avg. Table 1: Shareholding pattern of BKME ENTITY Ahli United Bank B.0% 6.S.0 1. personal & Al-Awsat loans.1 Background • BKME has segregated its primary business into two distinct categories. proprietary investments.0% 50 Kuwait Banking Sector May 2005 . Retail & commercial banking . During the course of privatization. (mn) 52 week Lo / Hi (fils) Market Cap (KD mn) Target Price (fils) 0. forex management.C Reuters Code: BKME. • Shareholding Pattern • Following the sale of the Kuwaiti government's controlling stake in 2002. Treasury & Investment Management .4% 16. Ahli United Bank Bahrain (AUB) started increasing its stake in BKME from 15% it acquired in 2001.7% 25. vol.KW Listing: Kuwait Stock Exchange Current Price 420 fils 24th April 2005 BUY 32.7% in 2004 and now has effective control of the board. AUB increased its stake to its present 47.includes correspondent banking.Global Research Kuwait Global Investment House The Bank of Kuwait and Middle East K.

Global Research Kuwait Global Investment House Recent Developments • Capital Intelligence has upgraded BKME's Foreign Currency Long Term Rating to A-. It is also exploring the option of outsourcing its credit card services to Dubai in the near future. This is further reinforced by the initiatives taken by the bank to increase its branch and ATM network. This is quite impressive as compared to a decline of 1. BKME opened one new branch in 2004. Fee and commissions contributed 14% to the total income in FY2004. BKME has further improved performance in FY2004. and has grown by 27. decreasing marginally from 15% in FY2003.75%). • • • • Analysis of Financial Performance – 2004 • Continuing from its improved performance in FY2003.7% to KD30.9mn).6mn in FY2004. 11.9% from KD67. Interest income is driven by the increase in interest earning assets. by adding another 4 new branches (one in a mall and three stand-alone branches) in FY2005.6mn in FY2003. which is less than the increase in revenues. As part of its core strategy BKME is showing greater focus on its retail & commercial banking segment. hence increasing the net interest income by 27. The 21.7mn in FY2003. BKME is also planning to increase its network of branches in Kuwait to 22. The balance can be explained by the fact that interest rates have increased in 2004 by 125bps during July 2004 (3.3% during FY2000-2004. medium term (3years) loan facility at an interest rate of 37.1% of the total income. to offer on-line trading (internet based) in stocks listed on the KSE and US stock markets. The respective amounts have been pre-paid by the bank in FY2004. BKME is the first bank in Kuwait. much ahead of their respective maturities. investors can trade in KSE stocks from anywhere in the world using the internet. to rein in its operating expenses. BKME's total income increased to KD75. which have grown at a CAGR of 7. Interest expense for the bank increased by only 16. remaining at the FY2003 level.5 basis points above LIBOR. BKME further raised US$200mn (KD58. BKME had raised KD50mn in 2003 (maturing 2006) and further KD100mn (maturing 2007) in 2004. • • May 2005 Kuwait Banking Sector 51 . which contributed 67.6mn (KD21.6mn in the previous year). On 22nd December 2004.4% increase in interest earning assets. As part of this service.5% in interest income during FY2003. Interest income contributed 70% of the total income in FY2004. BKME hopes to capture growth in the coming years from its focus on retail & commercial banking operations.5mn. as its interest income increased by 21. taking the total to 18 branches in Kuwait.7% increase in interest income in FY2004 is partly explained by the 8. This should increase its reach in Kuwait and improve its ability to service more customers.7% to KD27.1mn during the year from KD47.7% to KD58. with a stable outlook.6% in FY2004.5%) and December 2004 (4.

7% to KD955. This is also due to falling interest rates in the Kuwaiti market in latter part if 2004.8% in FY2004.1% to the total revenues in FY2004 (58.6% in FY2003 to 1. while its deposits from customers increased by 22.1%. In December 2004.1mn in FY2003. growing by 27.1%).Global Research Kuwait Global Investment House • Other major component of total income is gains on divestments by bank’s subsidiary.8% and 12.0mn worth of GDBs during the year.0% respectively in FY2004.1% in FY2004. BKME's net interest margin changed marginally from 1.1% in FY2004 from 3.8% in FY2003). Based on its improved performance. ROAE and ROAA has also increased to 12.72% interest in its wholly owned subsidiary.1fils during the same period. This represents realized gains by KMEFIC on sale of 79.6% in FY2003.2% in FY2004.29bn in FY2003.4% to KD22. However the bank has reigned its interest cost over the years.8% & 25. Loan and advances portfolio of the bank have increased by 24. BKME reported a net profit margin of 39.94mn) medium term loan. which contributed KD6.4% respectively in FY2004 from 11. Staff cost and other operating expenses have increased by 6.6% from FY2003. 8% to the total income in FY2004.2%. up 17. declining by 10. as CBK redeemed KD34.8% in FY2002 to 2. However as a % of operating income. Net profit for BKME has increased by 19.2% respectively in FY2004.4% and 1. declining marginally from 40. Further break up of total revenues indicate that revenues from retail & commercial banking segment contributed 67. BKME has increased its net spread in FY2004 to 1.5mn. Other interest bearing assets includes treasury bills & bonds which increased by 5. Deposits from banks and financial institutions have increased by 26. Its interest expense for FY2004 was 2.52bn.2% in FY2004.6% in FY2003. up from 12% (12fils per share) in FY2003. BKME has managed to reduce its operating costs and its staff expenses. • • • • • • • • • 52 Kuwait Banking Sector May 2005 .8% and 1. remaining more or less at the same levels in FY2003 (2.12mn from KD161. BKME has declared a 14% (14fils per share) dividend for FY2004.2% in FY2003). from KD1.1% in FY2004. On back of increase in net profits for the current year. from 43.9% (41. BKME has raised US$200mn (KD58.9% to KD854. Interest bearing liabilities of BKME are worth KD1.6% to KD371. maturing in 2007 at LIBOR-linked rates.3mn.0mn. on back of increase in interest income from interest earning assets to 4.7% & 22. thereby increasing the EPS to 32.4fils from 27.5%. Government debt bonds (GDBs) on BKME's balance sheet declined by 21.9mn during FY2004 as compared to FY2003.4% respectively in FY2003 to 36.0% in FY2003. While its treasury and investment management contributed the balance 32. as its interest expense due to the interest bearing liability has decreased from 2.9% from 1.1mn in FY2003. bringing the total down to KD127.7mn in FY2004 from KD19.3% in FY2003.

HSBC and National Bank of Abu Dhabi (NBAD). providing retail & personal loans. The bank is likely to focus on organic growth by introducing innovative product range and delivery mechanism to capture more customers. BKME has provided more than adequate coverage of its NPLs. These include BNP Paribas. up 6. BKME plans to add 4 new branches (three stand-alone & one in a leading mall) in Kuwait in 2005.1mn in FY2003. • May 2005 Kuwait Banking Sector 53 . The banking sector in Kuwait is expected to become competitive with the onset of three foreign banking entities in Kuwait.1% in FY2004. except for opening 4 branches in FY2005. BKME is also focusing actively on the retail side of the banking business. BKME offers a full range of credit portfolio to service its local clients – both corporate and retail. It has further enhanced its ability to provide US$-denominated credit-lines to its corporate clients. loan loss reserves as a % of gross loans & advances have also decreased from 4% in FY2003 to 3. by way of raising a 3-year medium term loan of US$200mn in 2004. Al-Awsat Investment Portfolio etc. • Outlook • To expand its marketing reach and take the competition head-on. which has been factored into our expectations for dividend payout for FY2005.5mn in FY2004. as provisions as a % of NPLs stand at 122% as of FY2004 up from 110% in FY2003. NPLs as a % of gross loans & advances have decreased from 3. increasing its interest income. which have been allowed to enter the Kuwaiti market. by aggressively marketing its banking & investments products. which includes – ability to trade online in Kuwaiti and International stocks.2% from KD25. and it has further improved its performance during the FY2004. while the loan loss reserves increased by 17.6mn in FY2003.8% to KD32. This is indicative of rising credit quality of the bank's portfolio. which have been recently given license to operate in Kuwait.7% in FY2003 to 3.Global Research Kuwait Global Investment House • Non-performing loans (NPLs) of the bank stood at KD26. will add to the competitive woes of BKME. since it does not have large capex plans in the near future. taking the total to 22 branches in Kuwait by the end of 2005. We expect that the significantly improved product portfolio would lead to accelerating income growth and margin expansion. These along with 2 Islamic banking outfits licensed to operate in the Kuwaiti market. operating profits and net profits. We expect BKME to distribute higher dividends going forward.7mn in FY2004. • • • • Valuation • BKME had a turnaround in FY2003. We expect strong growth to continue throughout 2005.8% in FY2004. from KD27. net interest income. Similarly.

1fils. Therefore we maintain our earlier recommendation and reiterate a Buy on the stock with a medium term outlook.4% higher than the current market price. which implies that the value arrived at. The stock currently trades at around 420fils (24th April 2005). The estimated fair value arrived at is based on the improved performance of BKME and our expectations about its future potential.Global Research Kuwait Global Investment House • Based on the dividend discount method (DDM) and peer group valuation methodology using the Price to Book value (P/BV) multiple. we value the stock of BKME at 539. • 54 Kuwait Banking Sector May 2005 . is around 28.

451 43.000 110.558 854.543 203.781 29.480 70.207 30.871.354) 1.455 1.038 (21.394 12.525 32.641 50.701 256.067.537) 1.657 (36.883 33.012 121.944 1.000 955.841 30.754.C 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Kuwait May 2005 367.239 11.389 138.143 1.797) 8.478 (38.014 12.182 155.173 170.807 2.325.532 4.765) 7.331 70.296 47.723 5.928 0 294.758 1.876.254 111.883 46.096 47.449 7.165 98.561 187.633 233.204 30.542 35.783 30.561 20.325.294 7.128 8.380 21.774 25.394 12.148.474) 8.743 279.922 86.748.007.883 30.997 244.440 13.960 (26.585 0 257.000 3.500 1.680 2.195 1.876 37.007.923 141.BALANCE SHEET 2002 67.340 (32.419.872.955 1.500 107.312.161.435 161.254 293.S.534 145.310 151.673 35.394 12.286 70.693 20.311 5.810 684.425 51.419.849 9.900 6.171 30.087 954 7 (76) (89) 196.092 (22.813 107 6 (717) 152.087 954 7 (76) (89) 269.042 1.998 (29.744 56.843 568.664 219.313 30.026 66.706 70.522 27.277.425) 7.276 (42.980 526.978 71.394 12.934) 10.120 1.883 41.044 58.634.331 116.607 83.394 12.117 478.693 13.883 28.883 26.480 128.192 10.239.653) 6.647 1.598 (32.968 211.495.492 (47.267 75.016 (53.195) 1.286 47.104 1.891 30.487 30.236 70.449 72.646.002.010 0 277.387) 8.444 167.731 2.024 199.913 17.889 2.471 182 7 (616) 170.872.236 80.607 4.796 64.497 2003 The Bank of Kuwait and Middle East K.932 68.843 25.160.076 78.325.268 9.405 7.087 954 7 (76) (89) 247.077 1.000 778.926 118.447 70.780 1.538.170 5.079 103.596 3.748.394 12.024 78.883 37.249 38.173 1.898) 2.562 27.854 83.119 (27.982 16.255.345 1.197 176.489 11.507 303.087 954 7 (76) (89) 228.346 1.404.885 127.376 1.545 21.173 371.520 10.136 267.749 991.940 6.899 219.084 2.129 8.495.010.748 12.315 135.546 631.993 0 32.399 9.246 174.637 205.000 5.267 15.755 7.880 9.360 0 312.408.339 11.053 427.000 676.447 101.079 33.692) 1. Interest in treasury shares of subsidiary Total Shareholder's Equity Total Liabilities & Shareholders Equity .667 63.558 (35.828 3.496 Amount in KD' 000 Assets Bank & cash equivalents Treasury bills Treasury Bonds Treasury bills & bonds Certificate of Deposits Deposits with banks and other financials institutions Short term investments Gross loans and advances Government debt bonds other assets Less : provision Total Current Assets Kuwait Banking Sector Long term investments gross fixed assets less: accumulated depreciation net fixed assets Total Assets Liabilities Deposits from Banks + FIs Certificate of deposit Deposits from customers Medium term Loan Accrued interest payable Other liabilities Total Current Liabilities Global Investment House Employee Indemnity Provision Minority Interest 55 Owner's Equity paid-up equity capital share premium statutory reserve general reserve retained earnings revaluation surplus/reserve treasury shares reserve translation adjustment treasury shares prop.875 1.754.160.516 2.317 6.394 12.530 290.631) 1.014.140.417 31.040 (42.515 1.923 70.362 9.469 185.926 219.976 1.215 9.407 1.087 954 7 (76) (89) 212.390) 2.637 2.737 195.398 79.834 6.124 26.773 39.929 7.086 13.

772) (5.079) 56.081 (1.155) 1.492) 73.806) (9.217 22.220 11.C 2002 48.977) (8.478 56.852 114.890) (2.409) 49.687 (285) 381 2.261 17.805 1.313 (4.207 (6.693 22.487 10.648) (14.504) 57.536) (54.322 750 1.693 (113) (480) (187) 20.188 721 (5.741 (106) (261) (76) 11.949 2.639 (4.863) 22.778 (254) (742) (143) 27.387 15.902) (3.202 (4.220) (3.179 99.783 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in KD' 000 Interest Income Interest Expense Global Research Kuwait 56 Net interest income Add : Fees and commission Add : Foreign exchange gains Add : realised & unrealised gains from short term investments Add : realised gains/ (losses) from long term investments Add : realised gains on divestment of group's subsidiary Add : Dividend income Add : Other income Less : Provisions for loan & non cash credit facilities Operating income Less : Staff costs Less: Depreciation Less: Other operating expenses Operating profit Kuwait Banking Sector Less : Contribution to KFAS Less: NLST Less : Directors' fees Net Profit before minority interest Minority Interest Net Profit attributable to shareholders P&L Appropriation Account: Op Balance of Retained Earnings Net Profit for the year Trfr to Statutory Reserve Trfr to Voluntary Reserve Global Investment House May 2005 Dividend Cl Balance of Retained Earnings .151) (46.588 34.354) (2.339 (3.014 19.272 (4.933 (26.220) (9.677 2.912 45.704) 36.138 (11.045 567 618 2.118) 78.281) 32.870 86.OPERATING STATEMENT The Bank of Kuwait and Middle East K.492 51.776 27.380) (10.863) 43.409 (4.151 (8.409 66.377 838 512 563 620 1.427 1.702) 64.416) (1.171 36.736) (3.719 39.558) 21.648) (3.756 28.920) (2.998) (21.081 21.066 2.863) 36.217 1.190 682 1.442 13.049) (5.610 1.189 (3.998) (4.599) 66.252 1.018) (10.207 30.171 6.282) (4.124) (30.200) (4.976 (895) 19.064 73.309 10.855) 47.478 (4.341 (4.820 (385) (950) (143) 41.716) (4.754) (3.339 47.052 (4.523) (2.357) (6.046) 42.189 37.792) 27.589) (6.602 27.110) (143) 48.479 4.727 (13.863) 30.726 58.490 19.685 11.834 2.138 1.260) 50.144) 18.453 (30.448) 37.750 (64.199 (290) (714) (143) 31.207 36.925 (12.666 3.448) 27.282) (17.515 3.008 668 (5.463 2.476) (39.354) (8.165) (1.360) (4.977) (1.380 779 (5.S.487 43.165) (10.014 19.838 3.642 44.217 (1.918) 47.398 21.776 (2.313 26.298 (81) 11.172 (5.975 (450) (1.323) (6.483 (328) (809) (143) 35.687) 11.491 1.863) 26.

737 (14.781 (1.010) (10.401 (97.920) (12.994) (3.448) 176 50.575) 145.500) 2.525) 42.838) 40.677 (12.390 17.899 (8.000 74.772 (2.387) 174.863 23.716 4.671) (203) (127.CASH FLOW STATEMENT 2002 35.664 Kuwait Banking Sector Global Investment House 57 Amount in KD' 000 Operating Operating Activities (a) Net Profit for the year Depreciation Dividends received Realised losses/(gains) from long term investments Gains on divestment of group's subisdiary Provisions Profit attributable to minorities Gain on sale of premises and equipment Working Capital (b) Dec/(inc.416 (2.478 3.452) 47.561 (9.081 2.470 (1.940 354 (294) 3.086 (5.752 1.845) 3.278 3.782) 63.637 170.951) (1.120 25.004 (5.581) (195) (148.000 41.605) (33.200 (2.118) 0 7.543 138.943) 493 (14.432) 0 (17.558) 522 (569) (10.863 (29.924 132.463 18.728 64.500 (125.539) (118.600) (15.108 17.194 743 65.850) 15.890 (956) (31.479) 6.710) (11.909 67.118 (41.776 1.500) 47.677) 3.825 (7.697 138.141 26.000) 102.748) (170.432 (191.188) 53.697 (13.C 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Kuwait May 2005 17.863 (18.961) (2.792 81 (7.188 (13.727) 15.671) (199) (136.548) (10.099 37.482 11.595) (22.960) (11.427) (381) 6.357 895 (16.547 8.500) 24.825) 80.492 4.629) 5.677 (14.562 (1.504 4.008 (12.242 (9.894 (3.194) 167.133 (1.130) 3.846 1.008) 47.000) 23.970) 5.968 151.863 (13.737 145.216) 41.838 (15.000) 176.795 19.388) (191) (136.747 30.518 (3.323 (3. debt bonds Dec/ (inc) Other assets Inc/(dec) from banks & other financial institutions Inc/(dec) in certificate of deposits Inc/(dec) in customers deposits Inc/(dec) other liabilities Total Operating Investing Capex ( c) Purchase of investments Proceeds from sale and redemption of investments Purchase of intangibles Dividends received Total Investing Financing Dividend paid to shareholders Net (Purchase) / sale of Treasury shares by subsidiary Medium term loan Proceeds from employee share option plan Payment to minority shareholder Total Financing Net Change in Cash Net Cash at beginning Net Cash at end .968 (21.750) 31.589 (3.380 (14.182 1.617) 24.916) 7.339 3.577) (305) (41.467) (6.383) 9.341) 27.010) 100.317) 55.) in Certificate of deposits Dec / (inc) deposits with banks and other financial institutions Dec / (inc) trading securities Dec/ (inc) loans and advances Dec/ (inc) Govt.798) (14.030) (73.637 (8.132 (10.863 (42.974 43.969) 34.543 (17.403 3.049 (3.273) 12.178 36.483 (7.S.131 (3.077 199.877 2.448) 2.198) 91.702 4.214 49.468 (3.824) 170.943) 30.677) (1.380) 2003 The Bank of Kuwait and Middle East K.867 22.675) 60.471 928 4.427 (31.098 1.491) 5.783) 78.425) 0 (20.477 40.851 2.599) 0 7.079) 0 6.) treasury bills and bonds Dec/(inc.855) 0 5.918) 0 (16.409 3.463) (4.680 (56.952) 0 (23.217 2.899 132.712 736 (75.944) (104.717) (11.720) 65.891 (1.155 4.561 167.138) (6.772 (2.827) (23.806 (2.738 67.538 4.189 2.383) 51.231) 2.443) 20.456) (12.845 (13.268 5.891 (1.

2% 9.4% 25.0% 1.5% 14.Interest Expense to Interest Bearing Liabilities .0 8.8% 37.6% 8.1 14.4 1.742 35.8% 58.9% 7.Global Research Kuwait Global Investment House KEY RATIOS 2002 Profitability .573 703.3 17. Banks & FIs .1% 15.1% 1.8% 459.8% 8.0% 26.2% 34.3 1.353 40.4% 2.1% 1.2% 61.898 53.1% 3.2% 467.8% 69.3% 0.5% 4.1% 1.4% 1. Income .1% 1.Income Margins .Interest Expense to Interest Income .960 7.7% 8.Equity to Total Assets .DPS Declared (%) .1% 37.9% 16.3 9.Provisions to Average loans .0% 121.8 2.P/BV 0.8% 3.9% 58.5% 2.0% 57.637.7% 2.1% 2.7% 45.8% 58.Net Interest Margin Efficiency -Cost to Total Op Income .9% 3.Equity to Gross Loans Constitution of Total Income .0% 44.4% 119.8% 1.5% 4.NPL's to Gross Loans .3% 2.3% 36.442.0% 60.939 703.7% 41.0% 12.0% 8.Investment Income to Total Op Income .C 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 1.0% 14.Cost to Average Total Assets Liquidity . Income .8% 15.939 15.7% 26.Net Interest income to Interest Income .0% 47.1 6.0% 19.1% 1.8% 71.3% 110.9 75.Non Performing Loans (NPLs) KD'000 .4% 20.5% 0.6 242.Staff Expense to Total Op Income .5% 19.6% 1.8% 3.2 24.0 420.2% 36.9 8.Fees & Comm.Investment income/total Op.2% The Bank of Kuwait and Middle East K.1% 59.6% 2.447.8 17.7% 8.1% 21.Net interest income/ total Op.0% 69.1% 19.8% 8.685 30.Loan Loss Reserve to Gross Loans .4% 37.5% 0.4% -57.0% 30.0% 66.8% 7.2% 37.6% 9.0 420.4% 12.0% 12.Shares in Issue ('000) .5% 0.4% 1.Net profit / interest income .8% 10.939 703.0% 36.3% 23.4% 26.Return on Average Assets .3% 62.0 420.0 475.855.Market Price Year End (fils) .2% 472.9% 3.0% 11.2% 52.0% 1.5% 55.1% 26.6% 9.4% 59.7% 24.8% 11.0% 5.7% 14.8% 2.Change in Other Income RATIO'S USED FOR VALUATION .5% 58.4% 12.9% 14.0% 20.8% 3.7% 3.2% 26.0% 68.0% 15.0% 25.7 278.8% 68.0% 54.4% 36.0% 1.4% 2.3% 34.0% -17.0 30.2% 8.0% 45.Interest Income to Interest Earning Assets .9% 49. Income .670 25.0% 4.4 37.0 20.0 35.078.4% 32.0 1.9 27.Other Income to Total Op.1% 19.1% 463.5 17.939 703.2% 4.3% 43.939 703.5% 2.0 550.0% 73.8% 8.0% 5.4% 74.8% 54.1 58 Kuwait Banking Sector May 2005 .Book Value Per Share (fils) .6% 2.Total Dividend (KD'000) .Due from Banks to Due to Banks Credit Quality .7 12.2% 2.7% 455.4% 117.Return on Average Equity .7% 2.7% 703.0% 11.2% 22.6% 36.7% 3. Income Growth .Net Spread .6% 19.5% 70.9% 56.7% 21.2 1.0 14.1% 62.8% 31.5% 21.7% 21.2% 9.9% 2.5% 2.8% 443.8% 1.7% 3.3% 3.0 2.7 324.7% 3.3% 69.0% 54.1 51.8% 0.1% 14.NPL's to (Equity + Gross Loans & Advances) .9% 1.0 11.Customer Deposits to Equity .6% 13.0% 14.5% 53.NPL Coverage Capital Adequacy .5 301.Gross Loans to Interest Earning Assets .0% 35.5% 32.8% 56.598.8% 8.1% 3.9% 7.EPS (fils) .4% 13.7% 26.7% 487.390 2.3% 6.1% 9.6% 30.0% 12.4% 60.5% 1.939 703.8% 27.8% 4.2% 1.6% 1.0% 9.126 26.2% 11.1% 40.S.3% 2.6% 56.4% 11.8% 67.P/E .8% 66.1% 2.0% 46.0% 20.429 27.9% 37.2% 18.5% 39.3% 11.2% 17.8% 37.4% -45.Change in Interest Income .4% 67.9% 0.692 42.5% 3.2% 3.0 25.5% 2.2% 54.3% 1.4% 60.1% 26.3% 2.7% 25.0% -28.2% 9.2% 20.Change in Net profits .5% 0.4% 61.2% 9.4% 1.9% 119.2% 26.3% 44.1% 56.8% 2.0 12.0% 5.1% 49.0% 11.9% 25. to Total Op.8% 216.1% -1.5% 4.6 383.2% 1.2 43.Loan Loss Reserve (Provisions) KD'000 .873 44.7% 1.5 21.2% 27.Change in Fees and Commission . Income .9% 25.5% 47.Commissions/ total Op.4% 56.9% 45.1% 3.3% 3.6% 2.2% 3.FX Income to Total Op.8 351.3% 53.2% -13.3 435.2% 58.8% 25.8% 1.3% 21.1% 42.Dividend pay out ratio % .7% 22.2% 62.8% 63.631 32.1% 35.195 47.1 32.Dividend per share (fils) .0% 15.5% 43.8% 35.118.0% 44.9% 7.537 36.Interest Income to Total Op Income .7 8.Net Loans & adv to Customer Deposits.2% 1.0 420.6% 1.0 27.0% 3.2% 16.5% 1.6% 43.Provisions to total Op Income .8% 36.2% 118.8 61.9% 14.0% 27.0 2. Income .3 9.1% 3.1% 4.Non-interest expense/ total Op.

). which it manages in collaboration with the UBS Group of Switzerland. ABK is one of the smaller players in Kuwait’s banking industry. savings account. personal loans. collections.KW Listing: Kuwait Stock Exchange Current Price 500 fils 24th April 2005 BUY 31.6mn shares of face value KD0. in addition to a retail network of 15 branches in Kuwait. overdraft. (mn) 52 week Lo / Hi (fils) Market Cap (KD mn) Target Price (fils) 467.). super accounts. The bank has presence in consumer banking (current account. It is estimated that the Behbehani family and its related businesses own more than 35% of the paid-up capital of the bank. which is dominated by National Bank of Kuwait. Kuwait Finance House and Gulf Bank. vol. • • • • • Shareholding Pattern • ABK has 878.100 each for a paid capital of KD87. fixed deposits.2 12M Avg. etc. These offshore funds have different equity and debt combinations to suit the risk profile of various types of investors.7 15. The total number of employees of ABK stood at 509 as of December 31. etc. treasury & investments (funds. corporate banking (project finance. The Behbehani Group represented by various individuals and companies is the largest shareholder in ABK. cards.349 400 / 560 457 568 Key Data EPS (fils) BVPS (fils) P / E (x) P / BV (x) Source: Global Research Background • Al Ahli Bank of Kuwait (ABK) was incorporated in 1967. children’s account.9mn at the end of 2004.). 2004.). The bank has several offshore funds.6 231. It is the only Kuwaiti Bank with a full-service branch in Dubai. trade finance. • May 2005 Kuwait Banking Sector 59 . international banking (correspondent banking. etc. revolving credit facilities. payments. ABK also has a number of domestic funds.8 2.Global Research Kuwait Global Investment House Al Ahli Bank of Kuwait Reuters Code: ABKK. call account. etc. cash management and foreign exchange transactions.

0% in 2004 from 3.2% growth in the customers' deposits during the year.4% in 2004 from 2.8% to KD29. therefore. ABK successfully implemented a new enterprise application integration (EAI) solution based on Microsoft BizTalk Server in October 2004. The provisions for loan losses at KD5. as well as sustained reductions in the level of related-party exposures.9mn during the previous year.8mn.Global Research Kuwait Global Investment House Recent Developments • Moody's Investors Service upgraded the financial strength rating (FSR) of ABK to "D" with stable outlook from D. the total operating income after provisions for loan losses increased by 21. went up to 2. The upgrade. Net gain from forex transactions stood at KD1. underscored by significant reductions in problem loans.6% in 2003. workforce rationalisation and attention to costs. on the back of a 28. The A2/Prime-2 foreign currency deposit ratings and their outlooks remain unchanged. while dividend income increased by 58.4mn during the year.0% increase in the gross loans during the year. into a single virtual system. according to Moody's. on the other hand.5% during 2004. Moody's said that rating action reflected the continuing improvement in the bank's financial fundamentals and risk profile. However.8%.2004 • The interest income of the bank increased by 25. The cost of interest bearing liabilities.2mn in 2004. greatly enhanced coverage by loan-loss reserves. Gain from investment securities declined by 35. The bank reported other operating income of KD1. helping them improve service to all of the bank's customers. The yield on interest earning assets for the bank went up to 4.5% during the year. an increase of 30. ABK's high capital ratios supported further growth opportunities and remained at a level consistent with the bank's risk profile. • Analysis of Financial Performance . compared to KD23. interest expenses increased at a higher rate of 28. The net interest income during the year increased by 22. giving bank staff a much simpler and more efficient way of accessing customer data.4% than in the previous year. on the back of a 19.in December 2004. also reflected the bank's improved efficiency stemming from investments in technology. The solution reportedly links together all of ABK's banking applications. the net commission income was higher by 11.4% to KD42. • • • • • • 60 Kuwait Banking Sector May 2005 . Helped by higher fee-based activities.2% in 2003. The net spread. went up to 1.9% during 2004 as compared to the previous year.8% during the year.1%. an increase of 26.7mn in 2004 were lower by 1.5% in 2003.6% in 2004 from 1.3mn. Overall.0% as compared to that in the previous year.

5% in the staff costs.5% at the end of 2003. • May 2005 Kuwait Banking Sector 61 . thanks to the net profit growing at a much higher rate than dividends in 2004.5% at the end of 2004.5% and 424. down from 7.2mn was 37.4% in 2003.Global Research Kuwait Global Investment House • The operating costs of the bank went up by 18.7% of its NPLs at the end of 2004. as a percentage of operating income after provisions for loan losses.0% to KD1. Total assets of the bank of KD1.0% in the quarter. Interest income during the quarter of KD19. The net profit after taxes of KD27. which have a relatively higher cost of servicing.1bn over December 2003.2% during 2004 over the previous year. staff costs as a percentage of operating income after provisions for loan losses declined to 17. while the bank provided for 133.8% in 2003.1%. Dividend income and other operating income were up 63.0% during the quarter. As at December 31. while the GDBs fell by 6.7bn at the end of 2004. from 13.4% during the year.5% in the quarter ended March 2005. fell by 14. • • • • • • • • Results of First Quarter of 2005 • The bank announced the results for the first quarter of 2005. However. its costs declined to 33.8% higher.4mn in 2003. customers' deposits were higher by 7. up from 112. The proportion of NPLs to gross loans stood at 5.2mn in 2004 was 23. Deposits from customers increased by 19. The RoAA similarly inched up to 1.0% in the previous year. gross non-performing loans of the bank amounted to KD58.4% in the quarter ended March 2005.6bn.0% for 2004. The RoAE of the bank went up to 14.4% in the previous year. however.7% in 2004 from 1.7% in 2004 from 77.7mn was 49. Net fees and commissions income. 2004.4% in the previous year. The dividend payout ratio for the bank declined to 64. down 9.6% in the previous year.4mn.1% higher than in the previous year. than in the corresponding quarter of 2004. during 2004.4% in 2004. Net profit for the bank of KD9. decreased by 10.0mn grew by 0. ABK’s total assets stood at KD1. The bank increased gross loans and advances to customers by 28.4%. on the other hand. Loans & advances of KD985. while the interest expenses of KD10. The bank declared a cash dividend of 20% and stock dividend of 4. Also. On the other hand.2% over the previous year.0% during the year from 18.7% higher.3% from KD64.3% higher year-on-year.2mn were 41. while the deposits from banks. fell by 4.1% during the year from 34. including a rise of 12.8% respectively during the quarter year-onyear. representing an increase of 15.

The overall changes lead to a higher projected profitability and net • • • 62 Kuwait Banking Sector May 2005 . the high growth in the net interest income and net commissions are likely to drive the bank’s profits. the net spread for the bank is expected to show an uptrend in the medium-term. While the net profit in 2004 exceeded our projections by 3. besides developing alternative channels of delivery for its numerous products and services. The bank has had a healthy performance in the year 2004 as well as in the first quarter of 2005. As a result. issued in our Results Update on the bank at the end of the third Quarter of 2004. thanks to hardening interest rates. ABK is expected to enhance its profitability further by focusing on improving asset quality and by efficiency gains in the coming years. We project the yields to gain more than the increase in costs in the near-term. as it focuses on higher levels of non-interest income. justifying our "HOLD" recommendation. The bank is. customers' deposits.3% year-onyear. the figures in the first quarter of 2005 were even better. Over the medium-term. Both the yield on interest earning assets as well as the cost of interest bearing liabilities are expected to edge up in the years ahead. therefore. The net fees and commissions income for the bank is expected to show a high growth in the medium-term. The loan book of the bank has been projected to grow keeping in mind the cap of 80% on the loans/deposits ratio stipulated by the Central Bank of Kuwait (CBK) to be reached by all banks by July 2005. The bank's deposit franchise could see a consistent growth in the near-term. we have now revised our earlier projections. expected to take a higher exposure in project financing and infrastructure lending in the near-term. Despite increasing competition from local banks and the anticipated entry of foreign banks. The bank is expected to expand its branch and ATM network. The ABK stock simultaneously gained by 13. and our perceptions of the bank's future prospects. The projected rates of growth in loans & advances. The Iraq reconstruction too is likely to have a positive impact on the Kuwaiti banking industry going forward. Based on the results for full year 2004 and first quarter of 2005. while its growth focus remains the retail market.Global Research Kuwait Global Investment House Outlook • The loan book is expected to grow at a healthy rate in the medium-term. • • • • • Valuation • Global currently has a "HOLD" recommendation on the ABK stock.6%. with the net profit increasing by 37. due to an expected strong demand driven by a booming Kuwaiti economy.6% since our above-mentioned report. and interest income and expenses have been modified to more appropriately reflect the changes between our earlier projections and the actual results.

7%.Global Research Kuwait Global Investment House spreads for the bank in the period 2005-'08. ABK seems poised to improve its performance further in the coming years and take better advantage of the emerging opportunities in the market.25% . Though smaller than the other Kuwaiti banks. while simultaneously bringing in cost efficiencies to improve its margins. with a medium-term perspective. as against the average P/BV for the Kuwaiti banking industry of 3. • We have also considered a higher risk-free rate now of 5.3x our projected 2005 and 2006 book values per share. it is quoting at a P/BV of 2.the current CBK discount rate. from our earlier recommendation of "Hold". arrived at by using the Dividend Discounting Method (DDM) and peer valuation method. At the current stock price of KD0. We. The intrinsic value of ABK of KD0. vis-à-vis 4. is higher than the current stock price of KD0.500 by 13.4x and 2.500. upgrade ABK to a "Buy".232 at the end of 2004. The book value per share (BVPS) of ABK was KD0. than in our late-2004 Update.2x. as well as improving its asset quality in the near-term. such as National Bank of Kuwait and Gulf Bank. • • • • May 2005 Kuwait Banking Sector 63 .42x.568 per share. The composite share valuation translates to forward P/BV multiples of 2.50% taken at the time of our late-2004 Update. therefore.

408 33.493 82.447 218.416 1.041 114.935.930 36.742 8.086 48.950 40. WIP) Less: Accumulated Depreciation Net Fixed Assets Total Assets Kuwait Banking Sector Liabilities Deposits from Banks and FIs Deposits from Customers Medium term borrowings / Bonds Certificates of deposit Other Liabilities Total Current Liabilities Proposed dividends Global Investment House May 2005 Owner's Equity Paid-up equity capital Statutory reserve (incl.312.862 14.858 48.860 1.416.281.646 Amount in Kuwaiti Dinar'000 Assets Cash & Bank Balances Treasury bills (<30days) Deposits With Banks (<30 days) Deposits With Banks (>30 days) Treasury bills & bonds Trading Securities Loans and Advances (Gross) Government Debt Bonds Other Assets Less : Provision Total Current Assets 28.455.397 62.262) 17.030 217.918 16.522) 15.380 1.302.153 326.344 826.631 (43.008 31.143 31.484.Debt Investment Securities .917 148.903 256.876 114.508 126.008 2.674) 14.073.935 58.718) 156.414 114.940 120.207) 1.718) 172.680 1.BALANCE SHEET 2002 2003 Al Ahli Bank of Kuwait 2004 2005(F) 2006(F) 2007(F) 2008(F) Global Research Kuwait 64 43.825 Total Liabilities & Owner's Equity .621 98 42.180) 19.742 34. Share premium) General reserve Retained earnings Fair valuation reserve Proposed bonus issue Treasury shares Total Shareholder's Equity 91.572 254.973 653.380 91.607 105.951 28.666 23.665 2.705.329 87.547.263 13.242 125.301 210.809 17.508 91.325) 16.877 2.886 127.687 24.780 15.018.250.093 (84.437 1.933 39.848 (91.132.451 2.380 233.204 1.744 130.597 28.732 258.614 128.348 129.241 (39.791.646 235.215 9.308 19.058.618 44.901 (49.172 (78.867 33.798 214.290.000 24.775 243.934 (71.264 65.426 175.623 2.610 215.372 72.804 52.127 12.592 80.373 1.172.007 2.906 2.570 17.705.851 63.852 1.429 80.720 1.648 (47.422 19.370 1.696 91.625 64.764 102.115 58.364 260.267 51.731 80.228 2.077 87.172 57.410.871 227.247 124.609.142.312.006 (72.186 Investment Securities .306.635 10.117 21.391 17.903.078 17.802.635 900.091 61.335 1.432.772 1.696 190.857 13.676 14.183 13.045.126 2.172 2.514 203.337 746.628.179 (51.045.455.825 238.372 60.867 33.420 (45.061 1.584 1.593 18.290 157.480.208 15.519 141.105 90.121 127.413) 16.385 40.264 1.962 1.685 165.619 217.829 2.687 15.182.362 28.129 1.804) 13.121 34.067 2.933 488 41.727 17.564 9.832) 2.480.549 3.075.352 228.239) 2.858 51.272.306 1.900 22.077 80.552 (6.402 23.724 1.933 1.640 (98.175 124.858 46.000 39.940 63.796 12.798 208.855 11.397 286.088 87.376 2.281.351 222.478 13.032) 2.092) 1.435) 1.837 206.248 12.019 59.611.049 63.372 65.982 (41.264 1.185 30.599 13.372 55.469 222.Equity Gross Fixed Assets (Incldg.045 212.864 (6.329 266.611.777 244 41.584 12.472 (107.279 16.836 25.361) 1.

032) 42.618) (2.810) (4.185 46.597 17.584) 25.157 27.143 53.373 1.187 15.689 37.451 (5.719) (2.656 1.689 2003 49.063 (7.263 27.689 (3.519) (3.157 (7.999) (1.389 5.OPERATING STATEMENT 2002 57.556 1.765 2.302 (32.027 (8.924) (5.189 (7.063 (2.841) 29.524) 59.856 (8.306 12.695 (555) (170) (1.402) (2.524 387 2.530 97.674) (50.613 1.408 Amount in Kuwaiti Dinar'000 Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Gain / (Loss) on Sale of Investment Securities available for trading Add : Dividend income Add : Other operating income Less : Provisions for loan & non cash credit facilities Operating income Kuwait Banking Sector Global Investment House 65 Less : Staff costs Less: Other operating expenses Less: Depreciation Operating profit Less : Contribution to KFAS Less : Directors' fees Less: Labour tax Net Profit before minority interest Net Profit P&L Appropriation Account: Op Balance of Retained Earnings Net Profit for the year Trfr to Statutory Reserve Trfr to Voluntary Reserve Dividend Stock Dividends Loss/(gain) on disposal of "available for sale" assets Cl Balance of Retained Earnings 23.601 325 4.809) 16.267) 19.088) 39.917) (28.732) 21.242 (6.821) (17.344) (2.877 22.309 (8.810) (34.109) 48.185 19.309 (4.190) (4.063 22.352 660 1.714 (57.338 37.153 4.130) 61.074 (5.999) (12.531 2007 (F) 110.238 (6.572) (3.157 (2.291) (2.145) 28.096 (433) (166) (1.446 19.892 10.451 Al Ahli Bank of Kuwait 2004 2005 (F) 2006 (F) 62.446 Global Research Kuwait May 2005 14.221) (41.514) (96) 17.263 17.821) (2.343 2008 (F) 121.302 3.446 59.096) (2.187) 46.640 2.493 4.747 1.238 (1.184 1.392) (3.170) (6.244) (5.143 21.737 (7.559 79.670) (6.036) 58.437 13.115) (7.049 63.911 (206) (127) (515) 22.238 19.888 8.477 560 4.223 (5.787) (2.281) 32.988 (180) (120) (450) 19.633) (2.206 (254) (160) (635) 27.903) 52.930 .030 2.177 880 (6.016) 19.172 (353) (163) (966) 37.083) (5.811 14.690 (25.262 2.174 54.371) 53.078) 17.592) 71.088) 23.414) 24.798) 23.917) (3.693) (5.294 2.025 (33.408 59.291) (17.597 37.491 (499) (170) (1.200) 77.354 2.519 2.451 53.170) (44.751) 34.549) (40.549) (5.184 11.223 (63.446 (6.877 16.856 46.557 5.151) 55.309 46.090) 22.

521 (755) 4.743) 19.475 37.955 (25.010) 5.493 13.804 (17.747 (59.308 11.735) 4.) in balances with banks Dec/(inc.100) (2.670 Working Capital (b) Short term instruments (<30 days) Dec/(inc.266) (60.078) 66.451 2.592 13.063 2.156) (46.446 2.702) 153.035) (73.809) 48.350) 48.016 (660) (2.050) 788 52.192 (832) 2.172 19.735 (110.921) 10.732) (12.000 (1.780 12.751 30.493 (34.832) (2.729) (6.153 (40.389) 8.156) (52.353) (68.557) 5.577 212.689 2.493) 7.524) (2.152) 6.740 37.088 (5. debt bonds Dec/ (inc) Other assets Inc/(dec) from banks & other financial institutions Inc/(dec) of deposits from other customers Inc/(dec) certificates of deposits Inc/(dec) other liabilities Total Operating Kuwait Banking Sector Investing Capex ( c) Sale of assets Purchase of investments Proceeds from sale and redemption of investments Dividends income from investment securities Total Investing (1.267) (28.398) (10.373 (37.968 (97) 72.245) 139 13.172 13.789) (44.088) (12.702 53.462 (1.281) 34.891 27.177) 6.594 6.844) (178.271) (8.008 50.376 1.747) 7.157 2.621 5.229) 15.021 2.494 (3.200 48.731 May 2005 Net Change in Cash & Bank Balances Net Cash & Bank Balances At Beginning Net Cash & Bank Balances At End Actual Cash & Bank Balances At End .) treasury bills and bonds Dec / (inc) Trading Securities Dec/ (inc) loans and advances Dec/ (inc) Govt.236 (5.429 13.121 (48) (36.177 (7.151 65.990 (59.663) 36.572) (17.368 12.045) 4.154 (8.531) (1.647) (4.919 (2.859) (1.153) 6.592 (4.780 28.613) 5.625 35.506) 5.341 (146) 837 114.526) (1.493 13.589) 30.090 (2.281 25.421) (229.698 19.389 (61.696) 105.731 13.570 (82.993 (37.888 (244) 820 110.900) 15.572) (5.032 (4.416) (56.882) (114.429 (28.307) 16.592 13.826) (10.679) 12.918 22.695) (1.437) (52.976) 28.278) (64.613 4.429 13.561 (5.386 59.557) (79.857 51.145 (1.859 11.072) (11.704 46.647) (1.130 2003 Al Ahli Bank of Kuwait 2004 2005(F) 2006(F) 2007(F) 2008(F) Global Research Kuwait 66 9.356 (1.404) (749) (8.309 2.921 28.334 162.037) (396) (1.673) 172.973) (45.358 143.586) (9.373) (1.816 (15.149 2.321) (7.246) 30.570) (287) (33.533) 50.267) 64 13.624) Global Investment House Financing Dividend paid to shareholders Medium term loan Acquisition of own shares Total Financing (40.463) 804 87.872 (73.584) (130.804 12.684 6.493 (63.592 Amount in Kuwaiti Dinar'000 Operating Operating Activities (a) Profit from operations Depreciation (Increase) / decrease in value of investment securities Dividend Income Loan loss provision 24.CASH FLOW STATEMENT 2002 40.109 58.115 11.864) 17.228) (63.898 343.034) (15.888) 99 13.804 19.605 2.386 (4.249) (58) (10.561 (731) (23.639) 4.311) (169.479 (40.253) (66.780 (12.238 2.557 (16.364 60.602) 14.769) (3.769 (792) 2.172 (17.

2005.0% 9.0% 84.389 78.0% Al Ahli Bank of Kuwait 2004 2005(F) 2006(F) 2007(F) 2008(F) 1.5% 476.7% 35.1% 22.3% 35.5% 10.7% 49. Income Margins .2% 91.8% 2.2 231.9% 10.7 13.3% 10.9% 17.6% 13.0% 17.0% 10.0% 41.1% 3.0% 736.2% 42.722 .624 913.Non-interest expense/ total Op.Change in Interest Income .Provisions to Average loans .7% 23.4% 80.361 13.2% 3.Shares in Issue ('000) 853.4% 4.7 235.4% 3.Interest Expense to Interest Bearing Liabilities .NPL Coverage Capital Adequacy .8% 64.Commissions/ total Op.1% 23.3% 50. Income Operating Performance .4% 20.9% 522.5% 10.NPL's to Gross Loans .7% 15.9% 72.9% 9.4% 133.7 249.7% 26.7 1.0% 63.4% 46.9% 11.Dividend payout ratio 66.1% 2003 1.7% 4.207 6.Equity to Gross Loans Constitution of Total Income .9 2.1% 53.1% 0.0% 58.1% 23.7% 11.0% 10.1% 26.0% 10.1% -2.2% * Market price for 2005 and subsequent years is the closing price as on April 24.6% 11.Dividend yield 5.0% 11.5% 1.6% 20.4% 19.Market Price Year End (fils) * .5% 2.Interest Income to total Op Income .Loans to Customer Deposits .1% 20.5 266.6% 76.0% 20.941 98.0% 17.3% 11.0% 36. May 2005 Kuwait Banking Sector 67 .1% 26.0% 115.5% 19.6% -35.4 196.7% 527.7% 74.90 2.8% 2.1% 26.071 107.0% 31.0% 29.0% -9.3% 27.Net income/ revenues .0% 2.1% 51.3% 21.5% 11.1% 4.9% 33.6% 1.1% 1.Interest Income to Interest Earning Assets .4% 7.Investment Income to Investment Assets .1% 6.0% 2.8% 6.0% 11.0% 5.6% 7.832 6.63 2.7% 40.7% 2.6% 73.3% 0.7% 75.8 31.9% 2.2% 8.9 15.722 50.5% 6.3% 47.9% 24.4% 0.4% 68.5% 26.2 500 7.4% 1.0% 913.224 84.9% 6.3% 11.2% 1.6% 7.7% 6.8% Ratios Used for Valuation .2% 69.0% 19.6% 2.4% 69.9% 15.0% 714.2% 13.4% 49.8% 16.Equity to (Total Assets + Cont.06 1.4% 64.9% 2.239 6.1 500 8.5% 11.8% 47.4% 2.0% 47.0% 18.Return on Average Assets .0% 71.7% 38.Non-interest income/ total Op.88 75.3% 5.9% 49.0% 10.6% 85.12 .6% 22.Non Performing Loans (KD'000) .4% 80.4% 4.4% 115.2% 80.3% 21.8% 9.6% 74. Liabilities) .6% 1.1% 10.8% 34.9% 4.4 290 405 440 500 .395 72.6% 7.9% 19.0% 30.5% 1.0% 742.0% 5.2% 11.Staff Expense to Total Op Income Liquidity .00 75.3% 44.092 5.Loan Loss Reserve to Gross Loans .0% 913.6% 58.8% 52.5% 5. Income .0% -2.9% 2.6% 0.Change in Fx Income .722 58.6% 52.0% 50.1% 52.Investment Income to Total Op Income .0% 8.986 71.0% 5.435 7.5 25.8% 33.NPL's to (Equity+Loan loss reserve) .75 75.5% 3.9% 115.2% 3.6 41.6% 4.9% 11.722 65.8% 8.Return on Average Equity . Income .4% 2.2% 30.339 91.4% 64.1% 1.8% 43.Loan Loss Reserve (KD'000) .5% 8.0% 658.Operating profit / revenues .Net Spread .Book Value Per Share (fils) 178.9 12.2 .Customer Deposits to Equity .2% 19.2% 4.3% 6.EPS (fils) 22.6% 5.Change in Investment Income .2% 98.6% 43.0% 7.2% 7.Loans to Interest Earning Assets . Income .4% 45.4% 4.5% 4.0% 35.8% 2.0% 16.Due from Banks to Due to Banks Credit Quality .8% 2.0% 10.902 853.1% 2.4% 6.0% 913.9% 115.0% 70.0% -4.0% 5.0% 26.2% 13.2% 20.5% 5.2% 56.8% 27.5% 33.6% 77.7% 14.1% 2.8% 4.Equity to Total Assets .P/BV 1.3% 52.9% 3.FX Income to Total Op.3% 74.7% 28.Net Interest Margin Efficiency -Cost to Total Op Income .3% 38.5% 2.8% 3.2% 56.5% 7.8% 64.8% 20.0% 18.2% 29.4% 24.7% 14.3% 8.1% 5. to Total Op.9% 28.8% 34.8% 112.8% 19.0% 57.902 858.6% 2.7% 87.3% 2.5% 61.3% 9.6% 18.5% 23.2% 20.2% 80.6% 35.4% 30.Interest Expense to Interest Income .0% 5.Net interest income/ total Op.6% 0.8% 2.Provisions to total Op Income .5% 10.9% 56.4 500 9.032 6.1 285.2% 2.7% 35.5% 0.0% 10.P/E 12.5% 6.0% 70.5 1.4% 8.5% 17.3% 34. Income .6% 77.0% 12.0% .8% 11.8% 28.Other Income to Total Op.9% 84.1 .3% 22.3% 23.Change in Other Income 1.3% 1.9% 52.6% 93.2% 3.9% 3. Income .0% 40.5% 12.0% 9.0% 10.5% 72.6% 34.8% 20.8% 3.Fees & Comm.6% 79.0% 10.Global Research Kuwait Global Investment House RATIOS 2002 Profitability .1% 6.5% 48.Change in Fees and Commission .6% 21.

626 Key Data EPS (fils) BVPS (fils) P / E (x) P / BV (x) Source: Global Research Background • Kuwait Finance House (KFH). Public Authority of Minor Affiars (10. These earnings will be incorporated in the results of the second quarter of 2005. KFH announced the launch of the new electronic mobile Point of Sale (POS) machines VX610 that offers an innovative concept while using the POS machines via KFH Credit Cards.2 12M Avg. • 68 Kuwait Banking Sector May 2005 . (mn) 52 week Lo / Hi (fils) Market Cap (KD mn) Target Price (fils) 1.Global Research Kuwait Global Investment House Kuwait Finance House Reuters Code: KFIN.2 4.540 fils 24th April 2005 HOLD 95.6%). • • Shareholding Pattern • KFH’s share capital was increased to 1. It will be further increased through a rights issues in which the bank will increase its capital by 30% by offering 23. Recent Developments • KFH made a profit of KD11mn (US$38mn). Till recently.684. vol. on the sale of coupons worth KD14.2 367.1% among the banking sector assets in 2004.8%) and Kuwait Awqaf Public Foundation (8. KFH major shareholders include Kuwait Investment Authority (25% stake). as a result of the significant changes regarding the licensing policy of Islamic banks. is the second largest bank in Kuwait with a market share of around 18. has allowed three Islamic banks including KFH to operate in Kuwait.442. The inclination towards religion has corroborated the requirement of Islamic banking and finance which will help in increasing the profitability and asset size of Islamic banks in general and KFH in particular taking into account its leadership position.KW Listing: Kuwait Stock Exchange Current Price 1.09 990/1700 1.53mn.09bn shares of 100fils each through the issuance of 10% bonus shares.7 1.1 16.166 shares for subscription at 850fils/shares (par value of 100fils per share and a premium of 750fils per share). KFH was the sole Islamic Bank in Kuwait but the Central Bank of Kuwait.

We believe that the bank will continue to emphasize on leasing activity as a source of future growth.8% during 2004 as compared to the previous year due to the increase in interest rates.4% (2003: 21.3%) respectively in 2004.2004 • The Murabaha. KFH has decided to distribute 50% cash dividends in addition to 10% stock dividends. fees and commissions income increased by 33.08mn in the previous year. • Analysis of Financial Performance . Istisna & Leasing Income of the bank increased by 24.4mn (which was slightly lower than our expectations).9% to end 2004 with the net profit of KD74. The bank has been maintaining a dividend payout ratio of more than 50% in the last few years and we expect this trend to continue in future.0% on 2004 from 2. Helped by higher underwriting income. the net commission income during the period increased by 31.9mn in 2004. representing an increase of 13.5% during the same period. The package included a US$370mn commercial facility. in addition to a premium of 750fils per share.4% in 2004.3% (2003: 2.7% over Dec-2003.5mn in 2004.7% to KD61.5mn in 2003 to KD1. However. The bank has also decided to increase capital by 30% by offering rights shares for subscription at a par value of 100fils (1KD=1000fils) per share. As a result. The bank reported rise in its spreads to 3.9% in 2004. Indonesia's national oil company. The bank reported an increase in net receivables from KD1. The ROAA and ROE of the bank stood at 2.01bn financing package with a consortium of banks which included KFH for the upgrading of the country's sole oil refinery. a US$330mn Islamic lease facility and a US$311mn tranche guaranteed by Japan Bank for International Cooperation and Nippon Export Credit Agency.98mn as against KD47.5% and amounted to KD505.66mn in 2004.458. The net profit of KFH saw a yearly increase of 27.5% reported in the previous year. The provisions of impairment increased significantly from KD4.06mn at the end of 2004.Global Research Kuwait Global Investment House • KFH announced that it was taking part in a US$322mn plan to finance Pertamina.1%) and 24. The distribution to the depositors too increased by 19.457. The government-owned Bahrain Petroleum Company (Bapco) signed a US$1.484.13mn in 2003 to KD13. KFH’s total assets stood at KD3. net leased assets have shown a strong growth of 75. • • • • • • • • May 2005 Kuwait Banking Sector 69 . As a result provisions to average receivables increased from 9% in 2003 to 9.

Based on the current growth potential of the bank. KFH is trading at 3. The estimated fair value of KFH’s stock works out to 1. • • 70 Kuwait Banking Sector May 2005 . justifying our ‘Buy’ recommendation. • • • Valuation • The stock price of KFH increased by more than 35% to the 1700fils (bonus adjusted) since our last investment update in Oct-2004.6% vis-à-vis current market price of the stock. It is worthwhile to note that since our last report of KFH. The bank has been exploring the possibility of expanding its regional coverage in order to get the maximum share in the increasing Islamic banking activities. It is also expanding its presence internationally especially in the Middle East and Southeast Asia.Global Research Kuwait Global Investment House Outlook • We believe that KFH is well placed to exploit the increase in the Islamic banking activity in Kuwait and the other GCC markets due to its leadership position. Currently.626fils based on DDM method.9x of its estimated earnings of 2005. the discount rates have increased twice to reach 5. we revise our earlier rating and recommend a ‘Hold’ on the stock. management expertise and strategy of using latest technology and improving customer relationship.2x of its estimated book value and 16. The net commission of the bank is expected to improve significantly as we expect the interest rates to continue moving upwards.25% which has considerably affected the valuations. strong deposit franchise. which is up by 5. It has been awarded a license to operate in Malaysia. extensive coverage.

701 121.404 188.030.356 133.390.574 (1.917) 3.016) 39.172 1.025 236.288 3.180 109.471 113.976.414 125.633 31.812 247.917 88.911 3.002 21.196 (159.207 4.162 5.016) 121.610 97.301 137.651.192 (1.389.089 261.410 139.089 80.663 225.458.503 (1.208 192.251.258 (205.052 136.227 108.366.080 92.692 188.683 580.377 12.858 137.782 22.436 91.840 5.041.141 7.708 26.000 1.921 72.837 433.987 108.162 127.895 1.161 193.085 188.218 4.596 109.436 71.736 (142.771 182.403 200.595 (1.094 (1.300.567.814 157.586 3.938 3.847) 4.218 260.110 146.570 25.823 275.572 2.844 284.903 118.195.447 58.680 129.066 289.208 213.365 250.251 7.333 706.668.973 1.164 (111.492 1.592 785.092.680 63.858 2003 Kuwait Finance House 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 177.078 273.371 196.724 18.615 102.000 1.038 127.077 634.159 4.317) 2.000 2.820.216 (175.864 2.533.016) 96.436 42.119 12.145 (902) 32.764.898.039.410 20.124.124.310.742 3.005 188.225 127.161 169.563.275 3.436 55.135 150.556 63.297.684 24.689 4.455 204.947.963 150.640 1.776 189.837 904.732 96.847 62.715 31.772.752 172.208 109.975 114. Murabaha incl Exchange of Deposits International Murabaha (more than 3 months) Gross Receivables Leased Assets Government Debt Bonds Investments Trading Properties Investment Properties Property and Equipment Other assets Less : provision Total Assets Liabilities: Deposits from banks and Fis Depositors Accounts Other liabilities Total Current Liabilities Deferred Revenues Minority Interest Fair Value Reserve Global Investment House 71 Owner's Equity: Paid-up Equity Capital Proposed Issue of Bonus Share Statutory Reserve Share premium reserve Voluntary Reserve Treasury Shares proposed cash dividends Total Shareholder's Equity Total Liabilities & Shareholder's Equity .073 175.676 2.813 124.100.154 187.093 1.066 109.554.043 31.389.670 139.374.016) 59.288.554.564 307.879 1.763 112.618 32.889.208 69.185 204.686 4.656 525.816 3.016) 72.835 105.909.607.268 735.680 May 2005 68.903 246.225 180.240 7.598 565.251.821 2.110 78.807 2.377 71.542 (867) 35.Balance Sheet Global Research Kuwait 2002 147.295 31.637 19.885 1.582 26.638 23.452 192.041.284 260.680 129.061 134.741 2.627 (189.021 (129.915) 5.486 100.861 102.850 31.680 126.356 Kuwait Banking Sector Amount in Kuwaiti Dinar’000 Assets: Bank & cash equivalents Short Term Intl.149 9.733) 3.736.098 104.345 5.826 28.861) 4.620 145.354 200.070 325.651.108) 5.732 1.820.257 2.397 8.809 11.882 183.151 1.519 4.969 2.601 10.458.

337) (140.790 20.850 43.502) 194.933 24.987 76.004 35.130 (56.589 6.193) 286.540 48.025 - Op Balance of Reserves Zakat Cash Dividends paid Net Movement in Treasury Shares Net Profit for the year Trfr to Statutory Reserve Global Investment House May 2005 Trfr to Voluntary Reserve Cash Dividend Issue of Bonus shares Cl Balance of Retained Earnings .089 3.664) (17.880 9.200 101.219) (28.003 199.045) (45.127) 99.383 34.814 (5.705 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in Kuwaiti Dinar’000 Murabaha.193) 159.190) (96.393 12.388 (59.466 161.070) 99.012) 106.594 62.548 9.301 (4.712 93.463 168.163) (12.730 (1.261) 12 54.160 (90) (120) 74.573 10.742 (1.Operating Statement Kuwait Finance House 2002 104.607) (32.333) 187.940) (12.610 81.098) 1.392 118.703) (4.868 7.844 4.297 14.294) (600) (766) 60.660 39.204) (39.613 58.637 79.476) (91.399 19.382 59. Istisna and Leasing Income Payment to Depositors Global Research Kuwait 72 (3.592 (2.613 13.213) (120) 187.752 (10.923 (1.705 23.594 15.433) (120) 154.401 284.844) (149) 74.160 12.092 96.412 19.986) 3.966) 58.929 72.154) (120) 99.226) (113.894) 56.205) (29.613 1.459 833 28.168 197.833) (71.414 (3.151 (1.920 16.800 (80.136) 128.603) (2.561) 129.333 10.678 1.582) 47.409 13.689) (120) 124.629 3.388) (3.082) 102.267) (12.481 103.452 (11.011 (55.917 133.236) (72.683 8.820 (14.789) (33.302 11.320 (562) (1.889) (1.083 47.304) (11.473 (2.683) 124.208 - Net Commission Income Add : Fees and Commission Add : Foreign Exchange Gains Add : realised & unrealised gains from investments Add : Other operating income Less : Provisions for loan & non cash credit facilities Operating income Less : General & Admnistration Expenses Less: Depreciation Operating profit Minority Interest Net Profit After Minority Interest Less : Contribution to KFAS Less: National Labor Support Tax Kuwait Banking Sector Less : Directors' fees Net Profit attributable to shareholders P&L Appropriation Account: (12.746 107.011 6.136 46.055) (90) 54.499) 87.088) (2.286 (1.403) (59.538 241.276 (167.128) (15.553 62.089) 35 58.304 7.412 (1.254 19.499 121.048) 160.777 86.084 61.132) (13.443 (22.263) (6.184 (15.822 (7.077) 154.723) 116.213 1.478 5.034 76.632 32.184) (1.010) (35.740 (872) (2.132 (1.077 9.293 67.070 7.068) 240.592 11.252) 193.994 (1.645 1.966) (5.254 (4.790 10.238 (67.214 (1.

500) (179.624 79.973) (55.941 152.315 289.882 58.980 (158.011 303.060) 100.354 (59.300) (166.391 3.856 314.520) (169.355 (38.560) (5.369) 29.236) (82.517) (5.607) 35 (35.669 (12.613 6.485 263.612) (173.390 100.248 467.914 (10.624) (6.286) (339.895) (5.654) 305.219 12.530) (179.986 220.205) (32.403) (68.260 1.190) (107.077) 1.089) 118 (3.240) (180.088) (278.790 12.705 11.000 32.016 128.454 54.392) (5.802 74.038 323.333) 1.392) (199.057) (119.146) (5.872) (92.411) 3.193 89.265) (29.933) (25.594 124.) in international Murabaha Dec/ (inc) Receivables (Increase) / Decrease in Leased assets (Increase) / decrease in Trading Properties Dec/ (inc) Other assets Inc/(dec) from banks & other financial institutions Inc/(dec) of deposits from customers Inc/(dec) other liabilities Deferred Revenue Total Operating Kuwait Banking Sector Investing Capex Sale of assets Purchase of investments Purchase of Investment Properties Total Investing Global Investment House 73 Financing Dividend paid to shareholders Capital Increase Minority Interest Acquisition of own shares Payment of Zakat Proceeds from disposal of own shares Total Financing Net Change in Cash Net Cash at beginning Net Cash at end .481 22.096) 6.807) (4.023 384.318) (3.136 (10.132 26.128 15.087 6.966 2.261) (3.252 (12.135 (72.335) 11.683) 1.412 99.828) (135.294) 201.476 (128.631) 3.543) (66.951) (43.426 (35.963 39.092) 51.625) (377.070) 199.207) (39.Cash Flow Global Research Kuwait 2002 37.472 12.509) (32.436 (32.906 154.010) (149) (33.121) (65.741 Amount in Kuwaiti Dinar’000 Operating Activities Profit from operations Depreciation Provision for investment securities Other provisions and valuation adjustments Exchange of Deposits Working Capital Dec/(inc.664 17.458 171.135 180.962) 339.254 5.325 2008(F) 214.354 246.067 (49.561 13.790 (6.950) (4.193 (11.413) (6.853) (16.686 176.420 50.460) (8.426 339.990) (360.527 311.940 12.466) (51.315 (39.705 18.862 Kuwait Finance House 2004 2005(F) 2006(F) 94.508) 50.080 238.499 (26.169 508.592 3.442 42.582 2003 96.218) 289.791 May 2005 (11.627) (217.437) (210.091) 362.000 (190.000 (210.904 192.082 (5.609) (5.271) (2.871) (55.160 7.478 442.663) (155.408) (69.022) (27.486 177.584) (4.486 (96.794 13.300 69.649) 246.966 4.160) (9.780 3.149 35.053) (49.401 187.239) (294.204) 156.436 2.557) (180.114) 661 (207.933 197.889 238.068 16.023) (6.020) 58.048 14.940 20.470 2007(F) 180.211 30.844) 6.746) 180.343) (3.144 2.010 4.529 6.263 3.925 18 (4.502 15.738) (20.

1% 59.0% 24.0% 10.3% 9.1% 25.5% 33.3% 3.0% 20.0% 58.3% 59.276.1% 66.EPS (fils) .5% 10.Commissions/ total Op.5% 43.2% 10.2% 32.0% 1.2 121.5% 2005F 2.6% 8.Change in Fees and Commission .Investment Income to Investment Assets .6% 3.9% 2006F 2.0% 35.8% 37.1% 23.0% 2.6% 5.5% 61.Shares in Issue (mn) .2% 3.5% 54.Change in Other Income RATIOS USED FOR VALUATION .P/BV 2.Fees & Comm.Other Income to Total Op.0% 2.8% 54.3% 37.Non-Commission expense/ total Op.Loans to Customer Deposits Credit Quality .0% 27.8% 40.3 136.5% 3.0% 33.7% 37.3% 41.55 61.2 367.5% 4. Income .2 64.4% 48.4% 55.9% 54.2% 0.4% 75.2 16.6% 5.9 481.3% 4.Return on Average Equity .8% 58.4% 9.Commission Expense to Commission Income -Commission Income to Commission Earning Assets .Net Commission Margin Efficiency -Cost to Total Op Income .1 81.7% 3.Equity to (Total Assets + Cont.2% 13.94 3.Change in Fx Income .8% 52.0% 4.0% 47.4 1.8% 11.7% 4. Income .9% 29.7% 33.0% 2. Murabaha etc Income/ Total Op.3% 75.8% 20.Provisions to Average Receivables Capital Adequacy .5% 5.2% 3.2% 40.1% 42.1% 4.9% 5.Equity to Total Assets .0% 20.6% 13.4 1600 19.6% 52.23 3.2% 20.3 321.0% 28.6% 2.6 12.0% 68.General & Administration Expense to Total Op Income Liquidity .9% 8.0% 28. Income .0% 66.9% 28.1 476.6% 56.8% 64.5 1.3% 6.9% 5.6% 23.0 1.Net Spread .0% 20.3% 33.2% 9.8% 1.0% 2.Net Interest Income to Total Op Income .4% 43.Non-Commission income/ total Op.8% 9.1% 42.7% 33.6% 5. Income .2% 21.0 62.3% 34.3% 47.0% 28.0% 2.Loans to Income Earning Assets .4% 3.9% 35.0% 43.1 95.6% 3.3% 9.6% 59.Book Value Per Share (fils) .0% 62.9% 9.9% -14.Change in Investment Income .0% 64.5% 2.4% 9.1% 13.Provisions to Total Operating Income .1% 3.7% 3.0% 5.9% 73.8% 54.7 11. Istisna and Leasing Income .4% 0.2% 62.4% 25.Change in Net Murabahas.Commission Expense to Commission Bearing Liabilities .8 781.5% 25.0% 16.4% 17.2% 38.3% 14.094.Equity to Gross Receivables Constitution of Total Income .2 347.378.0% 25.0 1.7% 58.4% 56.20 74 Kuwait Banking Sector May 2005 .9% 27.6% 9.0% 4.9% 35.9 14.Operating Profit / Revenues .61 52.9 58.3 4.9% 3.0% 29.3% 10.0% 10.9% 18.Dividend Payout (%) .Global Research Kuwait Global Investment House Ratios Kuwait Finance House 2002 Profitability .6% 2004 2.2% 33.23 3.6% 63.5% 27.6% 22.4% 52.1% 9.6 716.7% 40.4% 13.0% 28.1% 21.5% 2.3% 61.3% 64.2% 2008F 3.5% 29.7% 3.6% 2.47 3.1 1140 14.3% 2.1 476.8% 3.8% 6.6% 17.4% 34.9% -27.5% 3.5% 9.6% 53.8% -1.0% 28.Net Ijara.5% 13.1% 18.4% 35.6% 2.3% 21.8 76.8 715. Income .2% 63.Net income/ Revenues .4% 58.7% 12.2 477.7% 1.0% 36.6% 4.70 4.0% 40.22 3.3% 5.3% 24.0% 7.0% 51.0 105.6% 59.0% 15. Income .0% 7.1% 10.0% 25.6% 13.5% 5.8% 0.0% 10.6 1640 1540 1540 1540 1540 17.181.4% 5.8% 2003 2.0% 19.7% 64.1% 35.2% 55.6% 64.3% 19. to Total Op.8% 52. Income Operating Performance .1% -231.4% 13.8% 59.Return on Average Assets .5 59.7% 3.6% 40.2% 5. Liabilities) .0% 2007F 3.0% 28.8% 11.Market Price Year End (fils) .0% 28.0% 17.4% 2.0% 21.Investment Income to Total Op Income .8% 2.8% 32.8% 56.2% 8.7% 32.8% -4.0% 15.0% 15.9% 11.2 91.0% 72% 70% 75% 68% 68% 63% 67% 59% 66% 56% 63% 54% 61% 53% 2.3% 58.4% 10.6% 15.FX Income to Total Op.8% 246.P/E .Dividend payout ratio Margins .

and the financing of local and overseas construction companies operating in Kuwait and the Gulf. vol. Established as the only specialized real estate bank in the country.5 2. contractors. KREB has almost 340 employees. products and services to conduct their business and complete their projects. o Treasury. • • • • May 2005 Kuwait Banking Sector 75 . a variety of deposit products.2 Not Rated Key Data EPS (fils) BVPS (fils) P / E (x) P / BV (x) Source: Global Research Background • The Kuwait Real Estate Bank was established in 1973. evaluation of real estate property.2 12. international banking.KW Listing: Kuwait Stock Exchange Current Price 475 fils 24th April 2005 Not Rated 38. The Bank also provides companies and individuals with products such as the AKARI VISA Advantage card. KREB operates in 3-primary business segments.Global Research Kuwait Global Investment House Kuwait Real Estate Bank Reuters Code: KREB. o Investment management. maintenance & renovation services.06 420 – 670 357. a variety of investment activities secured by real estate. investment activities and property management according to Islamic Sharia principles. KREB provides developers. It is currently operating 6 branches in Kuwait and offering its wide range of products & services through these branches.0 243. real estate lending. consumer & international banking.0 12M Avg. fund management & institutional banking. As part of property management KREB provides services which include – rent collection. as well as other services which compliment the customers’ daily needs. as well as individual property owners with banking facilities. The bank's scope of operations compromises loans and credit facilities to developers and contractors. o Commercial. KREB carries out retail & commercial banking. which include. (mn) 52 week Lo / Hi (fils) Market Cap (KD mn) Target Price (fils) 2.

54% 6.Global Research Kuwait Global Investment House Shareholding Pattern ENTITY Al Hoda for Hotels & Tourism Al Baraka Kuwaiti Trading Co. Others / Public TOTAL Recent Developments • SHARE 9. SMS banking for GSM mobiles and internet banking etc. after the new laws announced by the Central Bank of Kuwait in 2004 allowing conversion to Shariah-based banking. KREB is focusing on improving its operations by integrating IT & automating certain operations in the bank. The following is the break-up of total interest income.up of Interest Income Amount in KD’000 . The following is the break-up of total revenue.Placement with banks TOTAL Source: KREB annual report • Total revenues for KREB amounted to KD52.1% • Break .Treasury bills. KREB has interests in couple of entities.0 35.the third such financial institution in Kuwait. 2003 26. increasing by 13.3mn in FY2004.0% By the end of July 2005.709. Interest income from loans & advances showed a 18. including the branches and to develop the IT infrastructure to cope with future business expansion.2% from KD50.1% from KD30.95mn in FY2003.94mn in FY2004. It has contracted one of the largest local companies to automate its operations.036.0 2004 31.99mn in FY2003. KREB earned a total interest income of KD35.0 731. representing a growth rate of 32%.122. bonds & other investments. increasing by 5. in each of which it holds 50% stake. bonds & other investments . • • Analysis of Financial Performance – 2004 • KREB achieved net profits of KD23.8mn in 2003.0mn in FY2003. KREB also holds 20% stake in Pearl Holding Company.4% 16. Luxembourg.0 1. Arab Real Estate Co.4% rise.946.7% from KD16.5mn for the financial year 2004 compared to KD17.Loans & Advances .42 100.0 3. Kuwait Real Estate Bank will officially become a full-fledged Islamic bank .0 % Change 18.00% 80. 76 Kuwait Banking Sector May 2005 . increasing by 16.936.6mn in FY2004.0% -29.496. including – Kuwait Projects Company for Contracting & Building SAK and the Financial Group of Kuwait KSCC.0 3.0 30.788. including expansion of branch network.04% 4.4% 12. which offers banking & investment related services. followed by a 12% increase in interest income from T-bills. The bank earned a net interest income of KD19.

7% in FY2003 to 3. increasing by almost 3% from KD470.14mn in FY2004. from KD439. The shareholders’ equity has increased by 35.3% respectively for FY2004. This has kept the net spread unchanged at 2. by way of a rights issue of 75.0 2004 % Change 34.1mn in FY2003.6% -16. brings the total revenues down to KD46. followed by 7. This has also resulted in interest expense as a % of interest bearing liabilities increasing from 2.0 52. down from KD9.7mn.3% 5.4% respectively during FY2004 from the previous year. consumer & international banking .5% and 3.33 in FY2004 (KD40.5% in to real estate investor. This is in-line with its mandate as a financing institution for the real estate & construction sector and also the fact that there was tremendous activity reported in this sector in the domestic market in the year 2004.25% from KD674. KREB has managed to increase its interest income from interest earning assets from 5.2% • Of this KD6. • • • • • • May 2005 Kuwait Banking Sector 77 .07mn in FY2003 to KD67.75mn shares of 100fils.5mn in FY2004.0 15. KREB has shown a tremendous growth of 34. Given the hardening of interest rates in the local economy in the second-half of 2004.032. KREB’s total assets have increased by 9.0 50.31mn in FY2003.0 17.0 13.1% from KD120.Investment banking TOTAL Source: KREB annual report 2003 29.0 4.25% to KD449. However KREB has managed to increase its net interest margin from 2.0mn in FY2004.3mn as at end FY2003 to KD736.6mn in FY2003.9% in FY2004.8% and 34.4% in FY2004. Banking .7% and 2. Removing the same. KREB’s net loans & advances portfolio increased marginally by 2.Global Research Kuwait Global Investment House Break – up of Total Revenue Amount in KD’000 .433.1% in FY2003 to 5. increasing from 15.766.548.1mn shares at 300fils and a bonus issue of 80.895.0% 2.1% in advances to the construction & trade business.Treasury.0 4.3mn in FY2004.4% in FY2004.0% in FY2004. fund management & inst.7% in FY2003 to 2. Loans to housing & personal category have shown a marginal increase of 0. KREB has expanded its share capital from KD50.9mn to KD163. However KREB’s gross loans & advances portfolio was KD483. The return on average equity (ROAE) and return on average assets (ROAA) of the bank stood at 16.704.312. while loans to the non-residents & purchased loans declined substantially by 34.3mn was recorded in FY2004 as unrealized gain on investments available for sale.626.Commercial.7%.8% respectively in FY2003.72mn in FY2003).

15mn during the year. The break-up is as follows .Real estate investors Housing & personal loans Facilities to non-residents Purchased loans TOTAL Source: KREB annual report 2003 2004 % Change 46. investment in funds (7%).general Total Source: KREB annual report • KREB had a investment portfolio of KD50.8% • KREB has reported an increase of 10.1% in its total provisions to KD33.0) (8.0 202. KREB is expected to have a strong performance buoyed by the improvement in its core business and rising demand in Islamic Sharia-compliant financial services & products. increasing by 23.521.430.0 17. The Property Management Division of KREB has grown by 23% over the last year as well as recording an increase in the number of properties under management and the number of leased units.463.1% 7.4% 2.445.700. KREB is expected to continue its focus on improving operating efficiency.179.0) (30.0 483.0 182. in the medium to long term. It showed a 12.4% 10.0 34. • • 78 Kuwait Banking Sector May 2005 .0 470.087. it is likely to benefit from the activity in the Islamic financing markets.2mn in FY2003.043.specific .000.3% from KD41. EPS for the year increased by 41% to 38fils from 27fils in FY2003.0 61.0 26.Construction & trade .quoted investments (47%). up from 5fils per share in FY2003.856.Global Research Kuwait Global Investment House Break-up of the gross loans & advances portfolio is as under.015.5% 0. asset quality & overall automation of its core operations and using IT to improve its current product offerings.1% Provisions for impairment .0) (33.0) (8. 2003 (22.7% -34.519.8% -34.150.0 26.029.0 17.0) 2004 (25.1% increase in specific provisions to KD25.0 188. Based on its improved performance. • • Outlook & Valuation • Given the impending conversion of KREB into an Islamic Financing outfit by end-July 2005.0 184. Over the medium term.371. Loans & advances portfolio mix Amount in KD’000 Real Estate Loans .672. and other investments (5%).101.5mn in FY2004.0) % Change 12. not quoted investments (41%). KREB declared a dividend of 18fils per share for FY2004. Given that almost all of KREB’s business is in the Kuwaiti market.611.8mn as at end FY2004.1% 4.

While its closest comparable Islamic Finance competitor – Kuwait Finance House trades at 5. KREB will be the second in the market once the makeover is complete by the end of July 2005.0x its FY2004 book value and 12. KREB is trading at 2.5x its actual FY2004 earnings per share.Global Research Kuwait Global Investment House any increase in activity in the local market will benefit KREB as there is currently only one full-fledged Islamic finance house – KFH. • Currently. May 2005 Kuwait Banking Sector 79 .9x its FY2004 book values and 22. Therefore we believe that there is an reasonable upside in the stock in the short to medium term.6x its FY2004 earnings per share.

650 483.488 11.669 88.889 73.780 60.293 736.891 31.517) 403.072 3.356 1.268 8.400 2.011 8.010 1.356 (3.531 12.734 3.386 42.009 12.649 7.026 470.379 12.308 10.010 124.090 35.522 736.700 145.581 163.446 48.490 12.312 67.698 21.654 553.947 504.198 7.376 16.212 573.144 49.441 120.540 609.900 674.521) 449.541 28.959 151.412 67.043 (33.986 332.445) 439.057 16.142) 2.057 (22.317 11.952 1.312 22.881 7.581 8.787 37.142) 2.132 2.072 28.340 7.669 2002 2003 2004 80 Kuwait Banking Sector May 2005 .831 1.087 (30.463 25.480 8.123 105.308 6.727 (11.Global Research Kuwait Global Investment House BALANCE SHEET Kuwait Real Estate Bank Amount in KD' 000 Assets Bank & cash equivalents Treasury bills & bonds Deposits with banks and other financials institutions Investments available for sale Investments held to maturity Investments in associates Land.650 394.283 426.227 609.840 50.141 14.454 11.642 674.317 50.850 411.566 19.356 (3. premises & equipment Other assets Gross loans and advances Less : provision Net loans & advances TOTAL ASSETS Liabilities & Shareholders equity Deposits from Banks + FIs Certificate of deposit Deposits from customers Term financing & bonds issued Other liabilities Total liabilities Owner's Equity paid-up equity capital share premium proposed bonus shares statutory reserve voluntary reserve retained earnings revaluation surplus/reserve gain on sale of treasury shares treasury shares Proposed dividend Total Shareholder's Equity Total Liabilities & Shareholders Equity 43.784) 11.072 98 8.014 14.297 37.333 2.072 5.

300 1.522 18.858) (10.205) (1.729 148 394 9.118) 24.607) 19.775 (4.185) (2.308) 26.542 4 165 299 943 384 (321) 1.057) (11.Global Research Kuwait Global Investment House OPERATING STATEMENT Kuwait Real Estate Bank Amount in KD' 000 Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Add : realised gains on investments available for sale Add : unrealised gains on investments available for sale Add : Dividend income Add : Other income Add: Share of profit / (loss) from associate Less : Provisions for impairment Operating income Less : Staff costs Less: Depreciation Less: Other operating expenses Operating profit Less : Contribution to KFAS Less: NLST Less : Directors' fees Net Profit P&L Appropriation Account: Op Balance of Retained Earnings Net Profit for the year Trfr to Statutory Reserve Trfr to Voluntary Reserve Proposed issue of bonus shares Proposed cash dividend Cl Balance of Retained Earnings 99 10.581 23.571 (167) (408) (200) 17.936 (16.066) (2.519 May 2005 Kuwait Banking Sector 81 .778 (1.451) (8.939 (20.581) 5.329 3.531) (2.125) (1.487 (5.004 2.441) 3.542 (4.168 (9.997 2.778 2003 30.014) (2.247 (101) (248) (120) 10.370 (2.024) 11.162) 18.949) 16.011 2002 33.532) 33.796 2004 35.679) (1.519 (2.581 3.298 203 407 6.310 896 441 5.946 (13.176) (2.756 356 4.000) (6.935) 13.123) 98 98 17.505 (221) (540) (225) 23.866) (1.796 (1.

337 71.423) (1.618) (4.326) 649 (574) 3.504 49.614 1.369) (43.501 (44.903) (6.123) (12.007 3.208 (4.432) (1.364 42.230 (11.Global Research Kuwait Global Investment House CASH FLOW STATEMENT Amount in KD' 000 Cash flow from operating activities Net Profit for the year Interest on T-bills & bonds Dividends income Realised gain on investments available for sale Unrealised gains on investments available for sale Share of profits of associates Depreciation Unrealised forex loss Provisions for impairment Operating profit before changes in working capital Deposits with banks & other Fis.387 19.366 (3.185 28 2.268) (49.198 (58.778 (3.422) (3.427 (1.347) 28.420 896 (20.939 2.323 3.176 143 9.392) (478) 4.334 1.008 (12.335) (21.796 (3.919 39.666 33. with maturities > 90days Loans & advances to customers Other assets Deposits from banks & other Fis Certificate of deposits Customer deposits Other liabilities Changes in working capital Net cash flow from / (to) operating activities Cash flow from investing activities T-bills & bonds Sale / maturity of investments available for sale Purchase of investments available for sale Redemption / (purchase) of investments held to maturity Cash received from associate Purchase of equipment Interest on T-bills & bonds Dividends received Net cash flow from / (to) investing activity Cash flow from financing Dividend paid to shareholders Repayment of term financing / bonds maturing Issuance of share capital Purchase of treasury shares Proceed from sale of treasury shares Net cash flow from / (to) Financing Net Change in Cash Cash & equivalents at beginning of the year Cash & equivalents at year-end Kuwait Real Estate Bank 2002 2003 2004 10.370) 1.546 (7.273 1.953) 4.300) (4.800) 17.168) 1.636) (76.532 11.019 (3.519 (3.097) 115.485) 39.822 33.855) (943) (165) (299) 321 1.473) 37.133 31.756) (407) (6.076) 874 17.308 9.756 (233) (6.122) 879 (11.822 (2.337 (2.372 (28.654 23.000 68.780) (14.066 (1.236) (5.063) 3.487) 1.748) 933 (872) 1.123) 4.441) (23.040 28.950 2.310) (5.164) (1.041) (896) (394) (9.235) 1.224 943 (27.987) 465 31.878) 3.003 82 Kuwait Banking Sector May 2005 .

6% 4.7% 10.Change in Fees and Commission .Market Price Year End (fils) .0% 5.7% 316.517 20.6% 18.4% 3.5% 17.Dividend pay out ratio % .Commissions/ total Op.4% 6.3% 25.2% 58.Net Spread .8% 2.0 17.0% 1.Equity to Total Assets .9% 5.2 550.3% 70.2% 9.260 22.0 23.7% 38.7% 10.3% 24.3% 13.8% 17.0% 5.DPS Declared (%) .Other Income to Total Op.0% 17.1% -21.Equity to Gross Loans Constitution of Total Income .Interest Expense to Interest Bearing Liabilities .0 2.6% 5.9% 32.2% 33. Banks & FIs . Income .8% 15.720 27.5% 30.Return on Average Assets .Change in Net profits .5% 70.3 May 2005 Kuwait Banking Sector 83 .7% 5.Net interest income/ total Op.EPS (fils) .0 18.0 18.1% 54.0 2.1% 74.5% 45.441.7% 30.8% 5.Interest Income to Interest Earning Assets .409 22.Shares in Issue ('000) .4% 88.8% 9.6% 10.2% 71.9% 0.445 15.9% 0.Provisions to total Op Income .7% 7.Dividend per share (fils) .7% 5.3% 16.9% 57.5% 241.4% 65.1% 16.0 5.5 620.8% 38.Loan Loss Reserve to Gross Loans .2% -0.7% 28.5 2.440 38.Interest Expense to Interest Income .1% 14.7% 1. Income .6% -8.P/E .Total Dividend (KD'000) .123.1% 2. Income Growth .Cost to Average Total Assets Liquidity .7% -8.7% 26.0% 6.7% 93.Staff Expense to Total Op Income .3% 65.Non-interest expense/ total Op.9% 31.1% 39.6% 2.Change in Other Income RATIO'S USED FOR VALUATION .7% 78.0% 2.0% 1.5% 61.Investment income/total Op.9% 13.7% 241.6% 57.Provisions to Average loans .6 2.0 22.3% 671.2 1.2% -19.Non Performing Loans (NPLs) KD'000 .Global Research Kuwait Global Investment House KEY RATIOS Kuwait Real Estate Bank 2002 2003 2004 Profitability .2% 1.1 5.4% 46. Income .Net profit / interest income . Income .NPL's to Gross Loans .NPL's to (Equity + Gross Loans & Advances) .0% 95.6 3.4% 2.6% 1. to Total Op.4% 2.FX Income to Total Op.NPL Coverage Capital Adequacy .8% 500.9% 12.581.8% 50.Net Loans & adv to Customer Deposits.3% 13.P/BV 1.0% 2.2% 53. Income .5% 67.9% 22.Return on Average Equity .Gross Loans to Interest Earning Assets .0% 18.6% 1.4% 28.6% 5.208 33.5% 43.Income Margins .7% 16.9% 10.8% 7.9% 26.Net Interest income to Interest Income .1% 20.7 380.8% 38.8% 252.Due from Banks to Due to Banks Credit Quality .1% 39.7% 102.3% 73.3% 22.Fees & Comm.9% 25.0 47.1% 34.1% 326.9% 49.7% 2.3% 0.0 11.Change in Interest Income .0 14.Loan Loss Reserve (Provisions) KD'000 .Customer Deposits to Equity .6% 0.1% 70.7% 63.2% 58.776 30.Book Value Per Share (fils) .1% 12.8% 61.0 2.Interest Income to Total Op Income .Investment Income to Total Op Income .5% 435.521 13.4% 243.3% 5.Net Interest Margin Efficiency -Cost to Total Op Income .

Global Research Kuwait Global Investment House This Page Intentionally Left Blank 84 Kuwait Banking Sector May 2005 .

The following is a comprehensive list of disclosures which may or may not apply to all our researches.KW CBKK.KW ABKK. An employee of Global Investment House serves on the board of directors of this company. 7. 3.10 1. 2. 8.10 1.KW BKME. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year.10 1.540fils 475fils Disclosure 1.10 The Bank of Kuwait and Middle East K. 5.10 1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 10. 9.240fils 760fils 425fils 500fils 420fils 1.10 1.KW KFIN. Global Investment House acts as a corporate broker or sponsor to this company.KW KREB. The company being researched holds more than 5% stake in Global Investment House. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. Please see special footnote below for other relevant disclosures. Global Investment House has managed or co-managed a public offering for this company.10 1. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months.C Kuwait Finance House Kuwait Real Estate Bank 1. Within the past year . 4. Global Research: Equity Ratings Definitions Global Rating Buy Hold Reduce Sell Definition Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price .320fils 1. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.S.10 1. Disclosure Checklist Company National Bank of Kuwait Gulf Bank Commercial Bank of Kuwait Burgan Bank Al-Ahli Bank of Kuwait Recommendation BUY HOLD HOLD BUY BUY BUY HOLD NOT RATED Ticker NBKK.KW GBKK. 6.KW Price 1.KW BURG. for which it received fees. Global Investment House makes a market in securities issued by this company.

Global Research Sector Oman Oman Banking Sector May 2005 .

com.196 Amit Tripathy Senior Financial Analyst amitt@global.globalinv.com. 2nd Floor P Box 28807 Safat . CFA Executive Vice President omar@global.kw Phone No:(965) 2400551 Ext.104 Shailesh Dash.com.com.kw http://www. CFA Head of Research shaileshdash@global. El-Quqa.kw Phone No:(965) 2400551 Ext.kw Phone No:(965) 2400551 Ext 269 Faisal Hasan.317 . 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: research@global.net Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M.com.com..kw Phone No:(965) 2400551 Ext.Global Investment House KSCC Equities Research Souk Al-Safat Bldg.304 Adham Fayoumi Financial Analyst afayoumi@global. CFA Financial Analyst fhasan@global.kw Phone No:(965) 2400551 Ext.O.

............................................................................................................ 4 Asset & Libility Composition ............................................................................................................................................................................................................................. 15 Players Profiles BankMuscat ...................................................................................................................................................... 6 Banking Sector Valuation .............................................................................. 32 Bank Dhofar ............. 3 Trends in Deposits ....................................................................Table of Contents Oman Banking Sector ................................................................................................................................................................................................................................................ 2 Trends in Credit Facilities ............................................................ 5 Peer Group Comparison ......................................................................................................................................................... 1 Interest Rate Trends ............................................................................................................................................. 38 Alliance Housing Bank . 20 National Bank of Oman ............................................................................................ 44 .................... 27 Oman International Bank .......................................................................................................................................................................................................................................................................................................................................................................................................... 1 Trends in Domestic Liquidity and Investments ........................................................................ 11 Banking Sector Outlook ..........................................................................................................................................

Out of the 14 commercial banks. 5 are locally incorporated and 9 are the local subsidiaries of foreign banks.1% 13.1% Deposits 2003 40. Foreign banks operating in the country have not been included in this report because of lack of available country-specific information for the banks. There are 3 specialized banks in operation. 11 commercial banks were granted approval to engage in specific investment banking activities on a tiered licensing system.9bn as of end 2004. The total banking assets in Oman amounted to around RO4. public and private pension funds.7% 1. Our comparison of the banks in this report would remain confined to only the listed local banks of Oman which accounted for over 78% of the total assets in the local banking industry.5% 0.498% in March 2000 to 1. all the specialized banks operate a network of 26 branches.0% 24. These large banks also have a competitive advantage over the smaller banks on account of their strong brand equity and distribution coverage.4% 2. 86% of total deposits and 89% of total banking credits as of FY2004.2% 13. specialized banks and other financial intermediaries. Together they operate a network of 356 branches.9% 3.8% 18.1% 18. The weighted average Rial Omani deposit rates declined from 5.4% 16. and the third is Alliance Housing Bank which is privately owned.5% of total banking assets.2% Loans 2003 45. Table 1: Market Share of Omani Banks Assets 2003 BankMuscat National Bank of Oman Oman International Bank Bank Dhofar Alliance Housing Bank 43.Global Research Oman Global Investment House Oman Banking Sector Industry Structure… Oman’s financial sector has strengthened considerably and was transformed in recent years to a modern financial system consisting of commercial banks. Oman International Bank and Bank Dhofar which accounted for 78.3% 15.9% 3. Foreign banks’ operations are largely confined to Muscat while local banks serve even in the remote areas with a wide network of branches.2% 15.3% 22. These banks also dominate the banking industry by virtue of their size. the non-banking financial institution sector also includes insurance companies.2% Source: Company Annual Reports & Global Research Interest Rate Trends A declining interest rate environment over the past three years has been favorable to the commercial banks in Oman. During the same period weighted May 2005 Oman Banking Sector Report 1 . Bank Muscat.2% 21. There are also 6 non-banking financial institutions licensed by the Central Bank to engage in hire purchase. capital markets and brokerage companies.131% in December 2004. As of end 2004.4% 22.5% 2004 46.6% 25.4% 2004 44. The banking sector in Oman is dominated by four local banks. of which two are government owned. reach and coverage as they operate 270 branches spread all over the country.1% 19. Together. leasing.7% 18.7% 2004 41. National Bank of Oman.1% 13. Oman Housing Bank and Oman Development Bank.5% 20.1% 14. debt factoring and similar credit based operations.2% 13. In addition to the above.2% 2.

570%.3mn in December 2004. Rial Omani demand deposits witnessed an impressive 22. lack of adequate investment opportunities in the domestic economy. low interest rate environment in the global markets and pegging of the Omani Rial to US dollar. the narrow measure of money stock (M1) comprising the aggregate of currency with the public and local currency demand deposits expanded from RO870. margins and forex deposits. 2 Oman Banking Sector Report May 2005 .277% to 7. In other words.439% in December 2004.% growth to reach RO650. During 2004. This will encourage more government spending on the infrastructure sector leading to higher money supply.7mn as of end January 2005 while currency with the public remained at the same level slightly over RO341mn. comprising Rial Omani savings and time deposits. On the other hand. As a result.03bn in January 2005.Global Research Oman Global Investment House average Rial Omani lending rates declined from 10. a higher than budgeted oil price in 2004 and the expected firming up of oil prices in 2005 should lead to an increase in government revenues and reserves. M1 further expanded to RO992. Fig 1: Interest rate trend 12 10 8 6 4 2 0 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Interest Rates Rial Omani Deposits Rial Omani Lending Spread Source: Central Bank of Oman As the monetary policy in Oman is predominantly a function of the direction of interest rates in USA due to a pegged exchange rate regime where the interest rates have been firming up.7% during the same period.excess liquidity in the domestic system. the broad measure of money (M2) registered an increase of 6. Analyzing the spread between the deposits rates and lending rates reveal that the net spread available to banks has increased from 4.779% to 6. an increase of 4.1mn at the end of January 2005. the rate of decline in deposit rates has increased at a faster rate than that the rate of decline in lending rates.7mn in the beginning of the year to RO907. we expect the interest rate in Oman to show an increasing trend going forward. quasi money. Also. increased by a modest 2. This turning up of the interest rate cycle would lead to a squeeze in the margins for some of the banks initially depending on their asset/liability structure. This decline in interest rates can be primarily attributed to four main factors . This has resulted in the net spread moving from 4.2%. Trends in Domestic Liquidity and Investments The liquidity situation in the banking sector has remained comfortable.2% over the period to reach RO3.439% during the period. which in turn will lead to an inflow of funds into the system.779% in March 2000 to 6.

which rose by 18% and 12.a fallout of the 1998 stock market crash and a weak macroeconomic environment.3% during the same period at RO2.8% increase over the January 2004 data. Construction sector constituted 6.7mn in January 2004 to reach RO422.4bn in 1995 to RO2. CBO announced an increase in the ceiling on personal lending to 42.5mn in January 2005. Holdings in Government development bonds saw a significant rise of 12.5% with effect from January 1. Investments in certificates of deposits (CDs) issued by the Central Bank which was a popular investment among commercial banks till June-2004 saw the numbers decline significantly from a high of RO301.5mn in January 2005.Global Research Oman Global Investment House Due to a favorable liquidity environment in the market. indicating presence of alternative investment opportunities for banks in Oman.3mn in January 2005. Total deposits held with commercial banks stood at RO3. particularly in government securities witnessed movements in the positive territory. Trends in Credit Facilities Oman witnessed rapid credit expansion between 1995 and 1999 both in domestic and corporate accounts. import trade 11.5bn as of end 2004.7% of the total loans disbursed by banks at the end of 2004.1% per annum between January 2000 and January 2005.3% of the total credit off take. the trend was not reflected in the deposits of the public enterprises. This is partly because of asset quality problems which surfaced in the corporate sector over this period .128bn at the end of January 2005 registering a 9. Trend in credit off take suggest that these sectors have been the major growth areas for the banks. However. which dropped by 17% during the period from RO174.1mn in June 2004 to RO122.56bn.3bn at end 2003 to RO3. the positive effect was tempered by a stagnant Rial Omani time deposits for the period. Investments in Treasury bills however declined from RO142mn to RO133mn during the period.1mn in January 2005.5bn as of January 2005. Private sector deposits held with banks increased by 8. An analysis of the components of private sector deposits reveals that despite significant increases in both demand and savings deposits. 2004.9bn in 1999 and stood at RO3. Loan book of banks doubled during this period rising from RO1.2mn in January 2004 to RO512.3% from RO130. The distribution of commercial credit facilities by the banking sector indicates that personal loans constituted about 38.8mn to RO144. Total bank credit to all sectors increased from RO3. Government deposits held with commercial banks for the period witnessed a marked increase of 36. The loan growth in Oman has slowed down considerably and averaged approximately 4.1% and manufacturing 7.8mn in January 2005. At the same time. In October 2003.4% from RO309. Overall. May 2005 Oman Banking Sector Report 3 .3mn in January 2004 to reach RO146. investments in government-securities holdings declined by 11% from RO576. bank investments. restrictions imposed by the Central Bank of Oman (CBO) on personal lending also contributed to the sluggish loan growth during this period.3%.5% respectively.

5% 6.1% 5. the personal loans which have been growing at a rate of over 9% since 2000.1% 1.8% 4.9% 8.7% 8.3% 3.3% 6.6% 81.3% 0.4% 7.9% 7.7% 3.7% 6.3% 100.1% 10.5% 100% 2003 9.1% 1. Gas and water Transport and Communications Financial Institutions Services Personal Loans Agriculture and allied Activities Government Non-resident Lending All others Total Credit Source: Central Bank of Oman 2001 10. the recovery in corporate loan volumes will be slow because the sector remains stretched in terms of liquidity and the major players are expected to focus more on managing credit risk than growing their loan portfolio.0% 2.1% 2.6% 8.08bn in 2004.2% 4.6% 0.0% 4 Oman Banking Sector Report May 2005 .6% 80.4% 6.8% 0.0% 2004 13.6% 4.0% 2002 10.0% 100% 2004 11.3% 7.8% 2.1% 0.5% 4.0% 1. personal loan category constituted 38. However.0% 8.7% 100.2% 4.5% 7.8% 0.7% 3. albeit slowly due to the various structural issues.4% 8. Considering the fact that Oman is one of the lowest penetrated markets in the GCC region in terms of credit as a percentage of GDP.3% 81.3% 0.2% 5.7% 7.9% 0.0% 100% Notwithstanding the current interest rate environment. the overall commercial and domestic credit would grow in the medium term.3% 4.6% 2. would continue to drive the overall loan growth in the industry.4% 2.5% 0. Trends in Deposits Total deposits during 2000-2004 grew at a CAGR of 4% from RO2.3% 5.Global Research Oman Global Investment House Table 2: Distribution of Commercial Bank Credit by Economic Sectors 2000 Import Trade Export Trade Wholesale & Retail Trade Mining and Quarrying Construction Manufacturing Electricity.5% 2.5bn in 2000 to RO3.8% 83.0% 8. This slow growth in total deposits can be partially attributed to low growth in the loan book resulting in low credit multiplier effect.3% 1.2% 2.3% of the total bank credit.2% 7.9% 4.6% 2.8% 5.4% 2.7% 8.0% 81.0% 2001 10.9% 8.0% 100% 2002 9.5% 5. Table 3: Deposit trends of Commercial Banks in % Government Deposits Public Enterprises Deposits Private Sector Deposits Total Deposits Source: Central Bank of Oman 2000 12.1% 0.8% 1.5% 1. Private sector deposits constituted about 82% of total deposits and were the main driver of the total deposit growth.4% 8.7% 4.2% 2.1% 35.1% 4.9% 100.1% 7.2% 6.8% 6.2% 100.4% 38.7% 32.2% 7.0% 0.2% 100% 12.3% 4. As of end 2004.8% 100.2% 32.9% 1.0% 37.5% 1.0% 2003 10.

8 4.8 297.7 433.7 0 35.9 28.2 399 509.8 154 4.4 39.256.8 2.1 4.7 3.5 24.5 2.90 2004 167.70 276.80 -321 486.90 440 485.4 229.009.241.5 1116.3 144. Government Bonds and other foreign and domestic securities provided key avenues of investment and showed a yearly decline of 14.1 140.3 149 146.8 483.3 78.2 2.6 3.0 3.6 46. Credit to private sector grew out of the RO3.159.2 32.4 136.516.1 16.2 3.9 33.5 534.89bn. As of end 2004.362.3 1.3 339.28bn as of 2004.7 416.Global Research Oman Global Investment House Asset & Liability Composition The cumulative assets of Omani commercial banks have recorded a growth of 4.4 4.3 3. an increase of 6. the total assets of commercial banks stood at RO4.3 3.309.4 544.5 236.054.500 625.204. The weak growth in total credit was largely the outcome of cautious lending policies by various commercial banks following previous years’ high provisioning for NPLs.3 179.5% at RO503.885.6 46 169.3 503.891.80 -220.8 2.9 330.36bn in 2004.4 99.8 232.7 2.5 345.4 330.963.2 3.5 0 36.90 May 2005 Oman Banking Sector Report 5 .60 2001 138.7 2.3 28.5 415.6 422.181.90 300 166.90 283.5 372.8 432.4 3.1 3.5 4.510.7 4.6 86 121.2 275.8 83.4 69 118.516.891.278.4 2387.4 368.60 523.271.3 157.9 119 36.7 94.1 87.963.5 4.90 441.5 215.2 588.7 757.7 74.90 285.3 79. Securities.0bn range for the first time since 2001 and reached RO3.4 40 120.362.6 1.7 4.3 202.072.1% (CAGR) during 2000-2004 with most of the growth coming from the credit issues to the domestic private sector.9 497.204.091. which include T-bills. Total credit to private and public enterprises stood at RO3.8 407.4 160 126.3mn in 2004 and accounted for about 10.3 517.980.3 192.3 69 149.1 1.80 -224.90 2002 166.4 83.3% of the total assets of banks in 2004. Table 4: Combined Balance Sheet of Commercial Banks In RO mn Cash and deposits with Central Bank Due from banks abroad Total Credit Credit to Private Sector Credit to Public Enterprises Credit to Government Securities Treasury Bills Government Bonds Other domestic securities Foreign Securities Others Fixed Assets Other Assets Total Assets Government Deposits Deposits of public enterprises Deposits of private sector Demand Savings Time of which in foreign currency Due to banks abroad Core capital and reserves Provisions and reserve interest Other liabilities Total Liabilities Source: Central Bank of Oman 2000 132.3 356.2 138 130.5% over previous year.9 150.7 325.270.4 3.70 2003 131.1 85.1 565.318.8 425.60 306 191.

5% of the total assets in the local banking sector. It further declined to 110% at the end of January 2005. loans & advances and deposits.Global Research Oman Global Investment House On the liabilities side.8% over the past 12 months. in terms of assets size.3% during the five year period 2000-2004. The deposits of public enterprises declined by 17. which consist of deposits from public and private sectors. The following table gives the broad overview of the balance sheet of the listed banks in Oman.7% over 2003. 6 Oman Banking Sector Report May 2005 .08bn. largely driven by deposits from the private sector which increased by 4. total deposits grew by 7.8% in 2004 as compared to previous year. Total provisions to credit ratio however increased from 10. Figure 2: Composition of Assets and Liabilities of the Banking Sector in 2004 Banking Sector Asset Composition 3% 1% 2% 10% 10% Banking Sector Asset Composition 12% 9% 3% 8% 10% 5% 74% 53% Cash and deposits with Bank Total Credit Fixed Assets Due from banks abroad Securities Other Assets Government Deposits Deposits of private sector Core capital and reserves Other liabilities Deposits of public enterprises Due to banks abroad Provisions and reserve interest Source: Central Bank of Oman The credit to deposit ratio of the banking sector decreased from 116% in end 2003 to 114% in end 2004. In 2004.2% to 10. Capital adequacy ratio of the banking sector declined from 17. Peer Comparison Comparison of Listed Banks’ Financials Our comparison of the banks in this section would remain confined to only the five listed local banks of Oman which accounted for 78.8% in 2003 to 17% in January 2005.9% over the previous year. have grown at a CAGR of over 5. total deposits. BankMuscat is the largest bank in Oman. As of end 2004. total deposits stood at RO3.

378 167.902 1. Looking at the NPL levels of all the listed banks in MSM.331 26.086 67.818 49. we expect the NPLs of AHB and hence the provisioning levels to go up in the subsequent years.897 41. Since the provisions have also kept pace with the increase in NPLs. All the banks in Oman except NBO and OIB have over 100% coverage for their NPLs in FY2004.910 634.369 62.3% in 2004.068 (42.110.849.854 814.475 571.340 33. we have witnessed substantial improvement in the asset quality of the banks. this has definitely helped in reducing the systemic risk in the banking sector. Despite that there are some banks whose NPL ratios are much higher as compared to the international standards. May 2005 Oman Banking Sector Report 7 .175 93. As a result.565) 406. AHB continues to have the best asset quality among its peers although its loan book is very small as compared to its peers.415 3. NBO has the highest non-performing loans as a percentage of total loans and advances in 2004 (35%) which was followed by Oman International Bank (14.388 75.784 1.3% followed by AHB with 110.459 102.362 41.570 funds Subordinated Loans 45.823 38. as the loan book increases at a staggering pace.329.823 34.388 The total assets of the banking sector stood at RO4.538 18.648 (68.892 Customer Deposits 1.435.664 1.603 Floating Rate Notes/CDs/ Other borrowed 202.7% and BankMuscat with 101.5%).488 537.833 523.503 25.625 21.594 (1.870 75.177 243 103.403 718. banks in Oman have focused extensively on improving their asset quality.879 11.180 717.789 21.962 14. Around 72% or RO3.000 32.179) (208. In the past few years. public and private sector.000 6.942 6.535 104.852.364 421.344 1.162 552. BankMuscat’s non-performing loans to gross loans stood at 7.106 726.338 70.892 (106.852. However.240 718.830) 454.045 517.557 1.459 598.Global Research Oman Global Investment House Table 5: Comparative Financials of Omani Banks as of 2004 RO’ 000 Assets Cash & Bank Balances Gross Loans & Advances Less: Provisions & Reserved Interest Net Loans & Advances Investments Net Fixed Assets Interest Earning Assets Total Assets Liabilities Due to banks 173.032 28.3%.177 12.306 124.096 449.532.092 1.106 541. In the Omani banking sector. Bank Dhofar has provisioning coverage with 114.032 24.815 78.494 124.093 7.706) 59. it can be seen that AHB has the lowest NPL to Gross Loans ratio thus indicating the quality of its loan book.819 552.432 592.220 717.51bn of the total assets were deployed in lending operation to government.512 8.056) 102.576 194.479 127 124.621 Paid-Up Capital Reserves Shareholders Equity Interest Bearing Liabilities Total Liabilities Source: Company Annual Reports BM NBO OIB BD AHB 39.950 32.771 462.9bn as of Dec 2004. We expect significant reduction in provisioning levels in Omani banks in the medium term.495 29.

5% for Bank Dhofar. 8 Oman Banking Sector Report May 2005 . In a rising interest rate scenario.3% AHB 103. As a percentage of total customer deposits.818 75. However. BankMuscat’s interest income is more than twice that of its nearest banking competitor i.3% 114.648 (68.594 (1.e.538 954 0.435.706) 517. 63% for BM.7% Source: Company Annual Reports and Global Research A look at the composition of customer deposits reveal that Omani commercial banks.e. in general. customer deposits which fall under the short-term deposits (less than 1 year) category constituted over 47% for NBO.900 14.557 (106.068 (42.229 8. other banks have also been able to increase their interest income mainly because of the rise in interest rates since mid-2004.830) 454. In FY2004. have relied mainly on time deposits as their major source of funding. 74% for BD and 40% for OIB.056) 102.5% OIB 523. Moreover.565) 406.3% 101.830 7.7% BD 449. time deposits constituted 59.503 37. BankMuscat continued to lead its peer by a wide margin.045 (208.Global Research Oman Global Investment House Table 6: NPL Ratios in FY2004 (Amt in RO 000) Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL BM 1.3% NBO 726.9% 110.329.340 256. the highest in the banking sector in Oman.179) 1.200 35.378 104. BankMuscat garnered close to 47% of the total interest income generated by the sector.5% 90.3% 81. banks which have a better access to such low-cost funds ( i. Fig 3: Composition of Customer Deposits 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% BM 2002 BM 2003 BM 2004 Current NBO 2002 NBO 2003 Savings NBO 2004 OIB 2002 OIB 2003 Time OIB 2004 BD 2002 Others BD 2003 BD 2004 Source: Company Annual Reports and Global Research In terms of interest income. short-term funds) will see improved margins and spreads. NBO.

439) 19.714 11.493 9.144 (18.7%). Omani banks have been improving their operating performance over the years owing to extensive use of technology.601) 3.660 34.271 (2.765) 26.712 (17.262) 6.541 (30. As a result.375 (7. The bank is also currently working on the Dhofar Power Company IPO and also on the much-awaited Omantel issue.2%).Global Research Oman Global Investment House We believe that the banks in Oman have greater opportunity to increase their fee based income.755) 23. There are number of projects in the pipeline and the economy offers diverse opportunities for the banks who have developed their investment banking divisions. Table 7: Comparative Financials of Omani Banks as of FY 2004 RO’ 000 Operating Statement Interest Income Interest Expense Net Interest Income Non-Interest Income Provisions for loans Recoveries from Provisions Operating Income Operating Expense Operating Profit Net Profit 104. Overall.659 (2.283 98. banks focused heavily on improving operating efficiency and asset quality during the past couple of years.628) 5. BankMuscat(+35.024 3.882) 27.273 36. The total operating income after provisions of the banks have also witnessed excellent growth in FY2004.267) 18. Due to heavy provisioning made by NBO. all 5 banks saw improved profitability during the FY2004. BM was the most profitable bank in the Omani banking sector. and Oman International Bank (+10.678 (29. led by Alliance Housing Bank (+37.192 6. Also. AHB was the most profitable bank and in terms of RoAE.635) 4.243) 12.560 30. particularly in the IPO areas. the RoAE and RoAA were low in 2004. In terms of RoAA. with emphasis on automation and cost initiatives in the banking business. Amongst the mandates that BankMuscat was associated with in 2004 included the Al Kamil Power public issue and AES Barka public issue. profitability of the banking sector (excluding NBO) showed a growth of 29% in 2004 over the previous year.105 45. Thus.008 650 (444) BM NBO OIB BD AHB Source: Company Annual Reports and Global Research A look at the profitability ratios of the banks indicate that except NBO.9%). to improve service levels.403) 6. both of which were very well received by the investing community. May 2005 Oman Banking Sector Report 9 .440) 75. a move that is currently helping them to expand their asset base and boosting expectations in the sector.379 11.376) 39.920 (32. all other banks showed healthy Return on Average Equity (RoAE) and Return on Average Assets (RoAA).019 (6.324) 8.238 22.222 35.798 (20.017 (3.281 (12. Banks will continue to benefit from the further hardening of interest rates.292 5.036 (58.494 37.273 14. BankMuscat stands out in the Omani banking sector in terms of its transactions related to the securities market.264 5. restructuring of business processes.085 28. but BD showed excellent results after it successfully merged with Majan Bank and the results are expected to be better in the current year as well.219 (6.

2% 0.56% 3.1% 320.2% 317.3% 119. Overall.26% 14. we expect that the banks will have ample opportunity to improve their profitability.1% 6.7% 95.05% 4.3% 15.3% 14.34% 27.5% 106.7% 129. the banks are in excellent shape to begin leveraging their capital base in order to provide better return to their shareholders.1% OIB 13.83% 5.51% 17.3% 15.06% 22.4% 28.74% 56% 43. CAR of NBO observed a 5% growth as a result of capital injection by Suhail Bahwan group in 2003 and also owing to a move into lower risk assets by the bank. 10 Oman Banking Sector Report May 2005 . The operational parameters of Omani banks are depicted as below.5% 29.4% 7.4% 53.6% 22.51% 10.93% 23.57% 9. With a number of new projects and investment opportunities coming up in Oman.2% 18.65% 83.3% 25.6% 18.6% 15.68% 41.6% 2.5% 17.9% BD 17.91% 25.53% 0% 79.5% 13.00% 28.16% 2.6% 2.7% 3.32% 4. The CAR of BankMuscat has been relatively stable at over 15% level for the past 3 years.25% 44% 59.45% 55.35% 4.Global Research Oman Global Investment House Table 8: Ratios Indicators in FY2004 BM Profitability Indicators ROAE ROAA Interest Exp / Interest Income Interest Income / Avg Int earning assets Interest Exp / Avg Int bearing liabilities Net Spread Net Interest Margin Net Interest Income / Total Operating Income Non Interest Income / Total Operating Income Cash Dividend Payout Ratio Efficiency Indicators Cost to Operating Income Staff Expenses / Operating Income Liquidity Indicators Net Loans / Customer Deposits & Deposits from FIs Gross Loans / Customer Deposits Capitalization Indicators Capital Adequacy Ratio Equity to Total Assets Equity to Gross Loans Source: Company Annual Reports and Global Research NBO 5. The current CAR levels of Omani banks indicate adequate capital strength and strong solvency levels.40% 12.6% 96.6% 91.5% 134. Among the commercial banks. AHB leads the sector mainly owing to its small operations as it operates only 7 branches and employees 61 personnel.93% 1.9% 45.47% 56.78% 2.75% 1.5% 5.95% 4.1% 2.00% 14.60% 70.5% 44.3% 5.77% 47% 39.4% 79. OIB also improved its CAR by shrinking its loan book. However.98% 2.43% 4. In terms of cost efficiency and profitability per employee. BankMuscat again leads the pack in terms of profitability per employee with Bank Dhofar trailing a close second.11% 94% 47.11% 4.54% 2.43% 55.6% 5.18% 22.73% 23.5% 19.58% 4.0% 19.1% AHB 12.5% The Capital Adequacy Ratios(CAR) of all banks at the end of FY2004 were substantially higher than the minimum 12% stipulated by CBO.

9 BD 48 579 28.5 255.4 NBO 50 1.2 21.222 758.714 11. AHB was trading at 22. BankMuscat enjoyed the highest value of price to book value of 3.660 34.5 4.4x in the MSM. As of April 24.7 161.1% 14.OM Oman BDOF.8x owing to its low earnings in FY2004.920 5.243) Oman Banking Sector Valuations Our valuation analysis includes the listed commercial banks in MSM.712 19.105 1.62 2.635) 4.1 times followed by AHB with 2.7% 5.1 4.024 3.2 77.OM Oman International Bank Oman OIB.4 28. NBO was an outlier as it enjoyed the highest trailing P/E multiple with 41.4x.Global Research Oman Global Investment House Table 9: Operational parameters in FY2004 ( Amounts in RO 000) No.49 2.281 12. of Branches No.218 3. BankMuscat is now the largest bank in Oman. 2005 the average price to earnings ratio for the banking sector stood at 17.1% 13.4 (58.628) (17.089.3% Hold 2. Banking stocks in Oman.2 274.3 AHB 7 61 6.036 39.37 2.OM Oman NBO. while Bank Muscat and Bank Dhofar were trading at 17. which were operating in the Sultanate since 1982 and 1976 respectively. May 2005 Oman Banking Sector Report 11 .76 times the book value based on the year end 2004 results.41 0.830 4.Not Valued BankMuscat BankMuscat (BM) was reconstituted in 1993 as a public joint stock company by the voluntary merger of two established banks .163 37.5.0% 18.2% 17.669 98.6% Hold Hold Hold Oman BMAO.7% 21.650 528.5 14.13 8.8x and 14.273 14.2 43.192 589. of Employees Total Operating Income (Net of Provisions) Operating Expenses Operating Profit Net Profit Operating Income Per Employee Operating Expense Per Employee Profitability Per Employee Source: Company Annual Reports and Global Research BM 90 1.8% -0.527 3.66 2.2 58.3 35.700 3.3% 12.76 2.101 -8.46 3.5 2.659 (2.689 4.OM Oman AHBK. Owing primarily to an inorganic growth strategy through four major mergers and acquisitions.850 3.439) (12.376) (32.2x and OIB was trading at 19.360 3.0 20.6% 15.292 5.3% 9.085 447.8x based on their 2004 earnings.7 times.6 P/ BV* Composite Potential Share RecommUpside/ Value in endation Downside RO 3.5 OIB 82 944 36.1 19.2% 48.7 18. which has the highest price to earnings ratio in the sector had a price to book value of 2.OM . The book values of the banks are likely to improve from current levels owing to the further increase in interest rates over the medium term which would result in higher margins and profits and attractive yields.6% 19. NBO. also being very liquid are attracting the interest of fund managers.560 951. The price to book value of the sector was at 2.Bank of Muscat and Al Bank Al Ahli Al Omani. Table 10: Valuation Summary Name of Bank BankMuscat Alliance Housing Bank Bank Dhofar National Bank of Oman Country Reuters Code MCMP Cap in RoAA RoAE P/E * in RO* ROmn* 8.

The bank’s gross loan book growth during the year was 15% and it reached RO523mn at the end of FY04. AHB was formed as a specialized housing bank with the goal to help the local housing market by providing long term loans for those who wish to buy land/ houses and build/ improve their houses.570 during FY04.224 during FY04.85bn at the end of FY04. NPLs as a percentage of gross loans declined from 17. the bank started lending out with new vigor during 2004.101 mainly to indicate the fact that BankMuscat will benefit from the rising interest rates thus positively impacting its bottom-line and improving its lending spreads.27mn to RO104.7% over the previous year. a 6. The net profit after providing for taxation in 2004 was at RO3.8% and it reached RO1. BankMuscat’s total assets increased substantially to RO1. an increase of 17% over the diluted EPS recorded for the corresponding period last year. representing an increase of 19% over the previous year.2mn. The loan loss coverage has increased to 101. AHB’s total assets increased substantially to RO124.08mn. which represents a discount of 8.4x.Global Research Oman Global Investment House The net interest income during FY2004 increased by 9.43bn at the end of FY04. 12 Oman Banking Sector Report May 2005 .9mn at the end of December 2004. representing an increase of 13. an increase of 6. The bank’s gross loan book growth during the year was at 5. a 37.5% increase over the corresponding period last year. Alliance Housing Bank Alliance Housing Bank (AHB) was incorporated in 1997 and is a publicly held institution listed on the Muscat Securities Market. representing an increase of 41% over the previous year. Oman International Bank Oman International Bank was established in 1979 as Oman Arab African Bank.2mn at the end of FY04. In 1984 it was renamed as Oman International Bank (OIB) to reflect the 100% Omani ownership after a group of Omani shareholders bought the 60% stake held earlier by Arab African International Bank.046 to the current RO8. We have increased our valuation from our earlier projection of RO7. The estimated fair value of OIB’s stock works out to RO4. The loan loss coverage has increased to 91% as of the end of FY04. BankMuscat reported an annualized basic and diluted EPS of RO0. which was mainly aided by a 37% decline in interest expense on its tier-II capital.7% increase over the corresponding period last year. We recommend a Hold on the stock. NPLs declined from RO113. OIB’s total assets increased to RO710.5% during this period.83mn during this period. After a negative loan book growth during 2003. Our price target represents an implied 2005 P/E multiple of 16.3% from the current market price of RO8. Net profit after providing for taxation in 2004 was higher at RO14.527 based on DDM and relative valuation method.3% as of the end of FY04. We revise our earlier recommendation to ‘Hold’.5% to 14. which is higher by 3.2% over the previous year. The estimated fair value of BankMuscat’s stock works out to RO8.830.560mn.3% over the previous year to reach RO75. OIB reported basic EPS of RO0.101 based on DDM and relative valuation method.8% vis-à-vis current market price of the stock.

170 during FY04.1mn in 2004. The loan loss coverage has increased to 114% as of the end of FY04.2% increase over the corresponding period last year. a 10. while certificates of deposits increased by 15% to reach RO26.700.5% in FY2004.Global Research Oman Global Investment House The bank increased its loan book size (gross) by 43% during the last 4 quarters to RO103.2mn. representing an increase of 16. The estimated fair value of Bank Dhofar’s stock works out to RO4.5x and at 2. Time deposits constituted 60% of total deposits. The bank’s gross loan book growth during the year was at 10. the ratio of provisions to average loans also saw a marginal increase from 0. Bank Dhofar With successive years of consistent growth through organic and inorganic strategies. National Bank of Oman National Bank of Oman (NBO) was founded in 1973.689 based on DDM and relative valuation method. Currently the stock is trading at 2005 earnings multiple of 15.3% from the current market price of RO3.9% and it reached RO449mn at the end of FY04. We have revised our fair value of AHB’s stock at RO3. increased lending to emerging enterprises.6mn during the same period. We maintain ‘Hold’ on the stock. envisaged the launch of at least three new independent business units (investment banking.218 based on DDM and relative valuation method. an increase of 10.5% over the previous year.6% vis-à-vis current market price of the stock.4% in FY2003 to 0. Total deposits from customers increased by a healthy 91% to reach RO32. the Suhail Bahwan Group took a 34. Total deposits from customers increased by 21% to reach RO421mn as of end 2004. private banking and structured finance) and several new retail products.1x its book value.6x its 2005 book value. Currently the stock is trading at 2005 earnings multiple of 11. May 2005 Oman Banking Sector Report 13 . Bank Dhofar reported an annualized basic EPS of RO0. which represents a discount of 0. The net profit after providing for taxation was at RO11. A new five-year strategic plan was also approved by the board in 2003 which recommended a panned growth in cross-border exposure. Bank Dhofar has accumulated a critical mass with an impressively expanding network of 48 operational branches.2mn new shares at RO2. However.6mn at the end of FY2004. We revise our earlier recommendation to ‘Hold’.20 for a total value of RO53. B Vasanthan as the bank’s Chief Executive Officer who took over the post in July 2004. which is higher by 9.5x and at 2. an increase of 38% over the basic and diluted EPS of 2003.267 during FY04. In October 2003. AHB reported basic and diluted EPS of RO0.3% over the EPS recorded for the corresponding period last year. The NPL coverage ratio at the end of 2004 was at 100.4%. The bank has a new management team with Mr.3mn as of December end 2004.6% controlling stake in NBO through a private placement of 24. the loan book growth during the last quarter was reduced to RO6mn as against an average of RO8mn during the first 3 quarters of 2004. Bank Dhofar’s total assets reached RO552mn at the end of FY04. Keeping in trend with mortgage accounts.

650 indicating a P/E multiple of 48.4mn at the end of FY01 to reach RO718mn at the end of FY04. from a loss of RO1.7mn for the previous year.Global Research Oman Global Investment House NBO has reported net profit of RO5. recoveries and releases from provisions were significantly higher at RO18.075 during FY04.6 and a P/BV of 2. NBO’s total assets decreased from a high of RO951. Net loans and advances also decreased from RO720. Currently the stock is trading at RO3. The provision for credit losses were significant at RO30.26mn for the year against RO70.5 in FY01 to RO517mn in FY04. NBO reported a basic EPS of RO0.22mn for FY04 against a net loss of RO51. However.037 over the previous year.49mn in FY04 as against RO1.5mn in FY03. 14 Oman Banking Sector Report May 2005 . In the last 3 years.5. Therefore.7mn made in 2003. this is the first time the bank has turned in positive net profits. lower provisioning and higher recoveries played a significant part in bringing the bank back to black in 2004.

g. Moreover. Banks in Oman now have an important role to play in economic development of the country by promoting private sector activities and mobilizing resources for financing productive sectors of the economy. The CBO has also intensified its efforts to expand the monetary and capital markets. It has gradually liberalized the banking sector in line with the evolving economic situation evident from increased private sector participation. the growing sophistication of financial services. particularly in the sphere of E-commerce. The Central Bank of Oman has also undertaken several measures to ensure financial sector’s stability and efficiency in the domestic economy. With the exception of personal loans. in addition to extending credit to the citizens. May 2005 Oman Banking Sector Report 15 . mobilize financial resources. Even so. This underscores the importance of a well-sequenced and gradual opening up of the sector to ensure financial sector stability and sustainable economic growth. These challenges and risks are ever increasing with the new international transformations. In this respect local banks face certain challenges. There has also been an increasing acceleration of the applications in information technology and the internet such as e-commerce and e-banking in providing banking services. floating of shares and bonds).Global Research Oman Global Investment House Omani Banking Sector Outlook Upon joining World Trade Organization (WTO). the interest rates on deposits and loans have been liberalized. large scale mergers and acquisitions among major financial and banking institutions. There are also commercial. Moreover. Oman made extensive commitments to open and liberalize its banking sector. especially those which have strong investment banking and other capital market exposures. Improvement in the capital market would further enhance the fee-based business of banks. as well as measures to counter money laundering. banks which have a large part of their deposits as non-interest-bearing liabilities. The government is initiating privatization of state-owned industries and wants an active private sector participation in financing and operating new projects. and issue government development bonds and treasury bonds. attracting domestic funds currently being invested outside and channeling them towards private sector investments is an opportunity which commercial banks in Oman would not like to miss out on. we expect the interest rate spreads to increase in future. economic and operational risks resulting from changes in the state’s financial and monetary policies. In terms of the banking sector profitability. There has been a gradual shift in focus of bank financing from the predominance of personal loans to industrial financing and in the development of the services sector. commercial banks have also issued certificates of deposits and have undertaken investment-related activities (e. Increasing integration of financial markets and investment activity mean increasing exposure to significant flow of capital to and from the country resulting in financial turbulence. which would enable the local banks to increase the lending rates commensurately. would benefit substantially from the interest rate hike.

the CBO also acts as the advisor to the Government on economic matters in general. supervise commercial banks operating in the country. and RO5mn for foreign banks. formulate and implement the monetary policy and ensure the soundness of the financial system.5% of the bank’s total lending. • • • • • • • 16 Oman Banking Sector Report May 2005 . Individual facilities to related parties is limited to 10% of net worth with total facilities to related parties not exceeding 35% of net worth. subordinated loans. The functions of CBO include issuing the national currency Omani Rial. act as the government’s banker. The banking law was amended in 2002 and the following are some of the main prudential regulations for the Omani Banking Sector: • It has mandated the commercial banks to maintain their minimum capital at RO20mn in the case of local banks. CBO prescribes that the lending ratio be limited to a maximum of 87. and monetary and financial matters in particular. It monitors the Bank Capital Adequacy Ratios on a quarterly basis. The minimum capital requirement ratio for commercial banks is set at 12% of all risk weighted assets. All domestic banks are mandated to transfer 10% of post-tax profits to a non-distributable legal reserve each year till the reserve is equal to one-third of the banks paid-up equity capital. These products can be used in repo and reverse-repo transactions with the CBO as a means of improving liquidity. These can be in the form of cash. considerably higher than the 8% set by the Bank for International Settlements. Banks can invest in Government Development Bonds (GDBs) and T-bills. Banks can invest up to 30% of their net worth in government bonds.5% of Deposits and Net Worth. One of the most progressive and capable supervisors of the banking sector in the Arab world. Total exposure to any single sector or entity is limited to 15% of total lending. the CBO monitors banks closely and prescribes tight controls and high performance standards. There is a cap on personal loans at 42. deposits with the CBO or holdings of T-bills and GDBs (subject to a maximum 3% of the deposits). Deposits are defined as equity. In addition to the above mentioned traditional functions. customer deposits and net borrowings from overseas banks. Banks have to maintain liquid reserves equivalent to at least 5% of their total local and foreign currency deposit liabilities. CBO requires all banks to comply with a number of lending limits in a move to reduce and diversify the bank’s risks.Global Research Oman Global Investment House Annex: Banking Regulation and Supervision The financial sector in Oman is supervised by the Central Bank of Oman (CBO) which was established in 1974 to act as the central bank and the depository agency for the government.

The medium-term borrowings (maturity between 2-5 years) are up to a maximum of 200% of net worth (including limit specified for shortterm). The total of these investments is limited to 20% of net worth (15% domestic and 5% foreign entities). Banks are allowed to invest up to 10% of net worth in corporate bonds. 25%.5% foreign entities). debentures etc (7. CBO encourages banks to classify loans that are 90 days past due as non-performing. CBO can relax the restrictions to 40% of net worth and 60% of time deposits if it feels the bank’s liquidity would not be affected. As a special discretionary measure. Omani banks have the discretion to categorize the loans as to when and which loans should fall into each category. Commercial Banks can go for short-term borrowings (maturity of up to 2 years) up to a maximum of 100% of net worth. 6-12 month (substandard). To encourage a prudent practice. notes. Investments in other companies requires the approval of CBO. All investments other than those in shares traded on the Muscat Securities Market require CBO approval. CBO has been stressing that it is good to state the true and fair value of assets all the time by undertaking need based loan loss provisions as soon as erosion in asset takes place rather than following the conventional practice of postponing loan-loss provisioning to the last quarter of the year.Global Research Oman Global Investment House • Banks are also restricted in the amount of secured loans using property as collateral. • • • • • • May 2005 Oman Banking Sector Report 17 . Interest must not be recognized on classified accounts and banks must set 5%. Long-term borrowings (over 5 years) are up to a maximum of 300% of net worth (including limits specified for short and medium terms). Banks can invest up to 5% shareholding in the equity of companies (excluding other banks and financial institutions). Banks have to make provisions for all investments (both trading and investment portfolios) on a mark-to-market basis. 50% and 100% provisions against accounts classified between 3-6 month. The current limit is the greater of 25% of net worth and 25% of time deposits. Banks can take spot or forward foreign exchange positions of up to 40% of their net worth. Foreign exchange transactions must be business driven.5% domestic and 2. 1-2 years (doubtful) and more than 2 years(bad) respectively. This restriction will be relaxed to allow banks to establish subsidiaries.

Global Research Oman Global Investment House This Page Intentionally Left Blank 18 Oman Banking Sector Report May 2005 .

Global Research Oman Global Investment House PLAYERS PROFILES May 2005 Oman Banking Sector Report 19 .

57 2.13 12M Avg. The Bank has also acquired the operations of Al Ahlia Securities Co (AASC).82 15. has confirmed that the merger talks between BankMuscat and National Bank of Oman (NBO) have been formally called off. This leaves only 17.15% Recent Developments and Outlook • The Chairman of BankMuscat (SAOG).Bank of Muscat and Al Bank Al Ahli Al Omani.42% 15.970 / 5.Global Research Oman Global Investment House BankMuscat Reuters Code: BMAO.279mn 8.830 24th April 2005 HOLD 0. In September 2003. and its relationship with Société Générale gives it access to superior operational and technical standards and cooperation on large project finance deals.101 Key Data EPS (RO) BVPS (RO) P/E P / BV Source: Global Research Background BankMuscat (BM) was reconstituted in 1993 as a public joint stock company by the voluntary merger of two established banks . it took a strategic 26% stake in Centurion Bank in India. after NBO expressed its reluctance to continue with the merger process. vol. 52 week Lo / Hi Market Cap Target Price 0.79% 11.2mn RO8. Shareholding Pattern BM’s association with the Royal Court Affairs provides the bank with easy access to both government and private businesses. Name of Shareholder Royal Court Affairs Sheikh Mustahil Ahmed Al Mashani Group Société Générale Source: BankMuscat % Stake 24. Shaikh AbdulMalik bin Abdullah Al Khalili.17% of the total shares outstanding. BankMuscat is now the largest bank in Oman. a leading securities and brokerage firm in Oman which accounted for over 15% of the turnover on the Muscat Securities Market. 20 Oman Banking Sector Report May 2005 .OM Listing: Muscat Securities Market Current Price RO8.49 3. Owing primarily to an inorganic growth strategy through four major mergers and acquisitions. The total shares held by institutional shareholders constituted 82.200 RO528. which were operating in the Sultanate since 1982 and 1976 respectively.83% as the free float available for trading of the bank’s stock.

a 26% increase over the corresponding period last year.9mn in fees & commissions income from various banking activities and other off-balance sheet commitments. Forex gains also increased by 4.Global Research Oman Global Investment House • The bank was active in various Investment Banking activities in Oman. • Analysis of Financial Performance – 2004 • The interest income of the bank increased by 3.3% as compared to the same period last year. particularly in the IPO areas.83mn during this period. representing an increase of 19% over the previous year.9mn during the same period. The emphasis on recovering NPLs continued with the recoveries for the period standing at RO6. There is no concrete information on this and hence we have not factored this into our valuations. The net profit after providing for taxation was higher at RO34.28mn. Centurion Bank of India in FY04.27mn to RO104. which was mainly aided by a 37% decline in interest expense on its tier-II capital. Deposits from private sector constituted 76% of total deposits and the remaining 24% was received from ministries and other government organizations.8% and it reached RO1. The bank is also currently working on the Dhofar Power Company IPO and also on the much-awaited Omantel issue.3% as of the end of FY04. NPLs declined from RO113.8mn. The bank’s gross loan book growth during the year was at 5.4% to reach RO2. The bank also reported a post-acquisition loss of RO1.85bn at the end of FY04.4mn at the end of FY04 as compared to RO21.67mn as compared to RO101. The bank’s focus on improving the asset quality had a positive impact on the provision for possible credit losses.2mn as against RO68. which was very well received by the investing community and was oversubscribed by 16 times.4% to reach RO1. as compared to RO6.1mn. Total deposits from customers increased by 10. Amongst the mandates that BankMuscat was associated with in the last quarter included the AES Barka public issue. BankMuscat plans to start retail operations in Saudi Arabia and UAE in 2005.11mn over the corresponding period last year.11mn in the previous year. The interest expense on deposits from banks.8mn for the corresponding period in FY03.76mn during the same period. The loan loss coverage has increased to 101. Other Operating Income (which comprises of fees.43bn at the end of FY04.5% during the FY2004 to reach RO104. BankMuscat generated RO15. During the FY2004.3% to RO75.11bn as of end 2004. The net interest income during the period increased by 9. • • • • • • • • May 2005 Oman Banking Sector Report 21 . BankMuscat’s total assets increased substantially to RO1.41mn on the operations of its associate. customers and CDs decreased by approximately 9% to reach RO24. forex and miscellaneous income) jumped by 11.4% to reach RO20. which decreased by 6.

830.9x and at 3. Currently the stock is trading at 2005 earnings (forecast) multiple of 13.3x its 2005 book value (forecast).51% in FY04. We assume a low long-term growth rate for the bank at 3% to reflect the overall mature nature of the Omani banking sector and the established market dominance of BankMuscat in Oman. We recommend a Hold on the stock.101 mainly to indicate the fact that BankMuscat will be benefited from the rising interest rates thus positively impacting its bottom-line and improving its lending spreads.570 during FY04.101 based on DDM and relative valuation method. The estimated fair value of BankMuscat’s stock works out to RO8.3% from the current market price of RO8.Global Research Oman Global Investment House • Capital adequacy ratio declined from 16. which represents a discount of 8.046 to the current RO8. an increase of 17% over the diluted EPS recorded for the corresponding period last year. • • • • 22 Oman Banking Sector Report May 2005 .39% in FY03 to 15. Valuation • BankMuscat reported an annualized basic and diluted EPS of RO0. We have increased our valuation from our earlier projection of RO7.

554.000 1.656.454 Amount in Omani Rial Assets Cash & balances with Central Banks Cash & balances(> 30 days) Placements with banks Loans and advances (Gross) Other assets Provisions Total Current Assets Trading Investments Non trading investments Investments in Associates Goodwill gross fixed assets less: accumulated depreciation tangible net fixed assets Total Assets Oman Banking Sector Report Liabilities Deposits from banks Deposits from customers Certificates of Deposit Unsecured Bonds Floating Rate Notes Subordinated Liabilities Taxation Other liabilities Total Current Liabilities Global Investment House 23 Owner's Equity paid-up equity capital share premium proposed issue of bonus shares convertible bonds general reserve legal reserve subordinated loan reserve revaluation reserve proposed dividends retained earnings Total Shareholder's Equity Total Liabilities .140.000 51.533.822 1.943.919 91.077 21.273.812.006) 2.852.044.114.777.350 27.621.000 96.990 (22.280.700 56.933.181.944 59.159.621.000 1.479 8.000 271.748.860 1.633 1.946.788.160 (30.621.000 33.621.000 1.142.000 1.185) 1.487.153 68.592.481.000.389.787.482.812.836.542.214.799 173.276.413 10.287.113 2.709 17.984.703.792.177.495 (47.228 (176.110.438.597.000 1.962.262 68.363.621.163.928 54.100.989.338 39.359 1.214.009 173.290 4.813.621.420.895.882.421 1.787.803 1.815.319 1.599 142.374.665.717 74.703.542.725.601 249.956 73.568.115 1.000 299.000 1.214.455 1.000) 1.000 10.848.388.623.708.050 1.604.803.199 59.000 2.851 45.390 1.720 54.668.321.823.306 35.389.328.992 138.862) 13.000 1.516.718 96.210.030.354 4.909.437 2003 2004 Bank Muscat 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Oman May 2005 49.417.520.884.145.888 1.228.489.720 41.658.159.760.000 285.458.687.517.125.621.503 96.870.633 2.355 26.179.427 32.353.499 85.720 7.815 61.111.699 (35.000 32.064.665.000 134.200 43.414 1.323.859.262 48.000 8.152.000 15.633.793 48.000 15.621.554.518 1.086.342.000 1.353.407 47.736 61.581.922 62.250.978 39.004.077.703) 1.017 2.056.249.644.185.127.643.505 1.383 153.988.104.000 115.612.000 (112.812.000 349.000 45.538.000 1.839.104.681.104.223 63.000 (26.812.000) 11.954.160 1.278.851 19.566.622 1.621.953.465.962.379.031 14.000 970.204 129.812.262 146.492 8.214.936 161.000 1.169.983.743) 1.242.172 10.932.280.379.496.010.000 46.214.851 28.249.621.000 13.621.108.731.074.525 265.232 2.304.703.718 95.074.250.169.435.291.720 12.454 158.766.870.000 (106.452.332.622 9.082.376.000 14.090 96.031 963.310.586) 12.556.307.115 1.754.571.029.645.342 60.341.000 86.355 26.629.011 28.099 37.675 22.917.130 2.240 (203.900 1.643.787.158 65.853 28.720 37.077 21.055.000 323.043.479 19.210.471.000 45.620.653.135 58.502.214.250.338 12.983.433.077 21.000 19.557.962.004.000 11.355.000 45.628) 9.574 7.038 21.544 1.480 4.888 25.250 54.005.326 1.703.223.325.250.874 27.388.355 26.448.153 48.206 1.616) 12.962.223.107 150.666.662) 12.000 1.787.329.077 21.344.000 45.000 4.719.393 68.812.703.445) 1.546.219 4.263 (41.543.743 51.000 311.112) 12.003 40.000 194.479 19.717.472.577 4.640 124.851 37.262 8.962.355 26.077 21.304.613 36.000 19.388.147.720 14.517.603.985.479 19.259 96.210.777.595.411 8.866.117 (24.941.277.130 2.602 223.000 38.872.149 18.313 (152.701 1.621.851 45.600.851 14.362 1.646 1.326 2.505 165.400 119.527) 1.852.250.574 6.255 56.451.695.851 45.000 168.233.369.104.666.104.000 1.371.077 21.376.621.222 184.024 134.479 19.206.BALANCE SHEET 2002 64.656.743 23.151 2.775 33.963.000 54.367 37.250 (128.205.509 (97.000 45.393 49.447.382.972.408.638.902.735.125.100.409.431 234.975.137 1.621.000 45.037.062.720 48.196.482.272.000 13.478 8.381.359 229.621.000 68.171 42.510 59.151.757.347.160 48.212.329.435.355 26.214.077 21.405 4.353.494.435.355.

602 10.660.000 2.151.163.813) (901.149) 18.609 2007 (F) 156.000) (2.110 (17.187.024.804.461) 87.310.594.750) (58.679.343) (408.406 706.363.000) 70.762.135.000) (14.604.223.353.216) (39.237.334 23.711 121.622) 9.115) (8.894 13.003 2.806.334.139 485.937) 6.277.693.771.494 1.757.440) (12.934 (54.000) (42.053) (365.000) (9.972.666 2003 101.000) 82.743) 26.105.660 (22.424.272.145.295 (3.874) 17.496) 2.570.000 (5.287.766.397.053.000 2.720 379.065.000) 13.821.848.560) 22.636.426.469.496) (11.000 351.969.221) (6.000) (20.009 12.065.397 64.777.861 2004 104.000) (745.863.068.114.916 (24.861 (9.166) (12.376) 108.011) 28.115) (37.124.000) 6.074.499) (8.496) 52.009 34.157.001.831) (37.709.757.209.594 2.690) 62.019.000) 75.321 (2.571.469.151) 30.601 Oman Banking Sector Report Amount in Omani Rial Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Add: Profit on sale of non-trading investments Add : Dividend income Add : Other operating income Add: Unrealized gain/(loss) on investments available for sale Less: Release of / (Provision for) capital guarantee Less: Provision for collateral pending sale Less: Provision for possible credit losses Less: Recoveries from provision for possible credit losses Less: Provision for placements with banks Less: Loss from Associate Net Operating Income Less : Staff wages and salaries Less : Employee's end of service benefits Less : Other Staff costs Less: Contribution to Social Insurance Less: Director's remunration Less: Occupancy costs Less: Other administrative expenses Less: Depreciation and Amortization Operating Expenses Net gain/loss from sale of branches Profit on disposal of Bahrain branch Net Operating Expenses Profit before Taxation Income Tax expense Net Profit attributable to shareholders 2002 104.000) (3.338) 12.495.226 (3.329 (50.000) (10.387.935) (56.158.000 (29.379.996) (11.500) (2.461) (58.268.819.270) (262.601 64.678.646.556.000 (46.901.552.578) (2.710 (47.403.223.912.683) 96.080 666.680.622.934 Global Investment House May 2005 P&L Appropriation Account: Op Balance of Retained Earnings Adjustments Net Profit for the year Trfr to General Reserve Trfr to Subordinated Loan Reserve Proposed issue of bonus shares Liabilities of overeas branch Dividend RO Cl Balance of Retained Earnings 18.431 10.851 (8.265.440.000 (14.800.256.725 (9.729.947.446 (13.262 453.616) (46.666 (4.342.000) 34.080.594.500) (2.062.920 (23.040 2.000) 39.377.595) (777.367) (41.389.969 (12.341.737.954.837.869.451.755) (846.526) (54.964 (16.374 25.273.766.138.383 9.617) (653.319 (48.413) 10.304.060) (819.056 96.000) (600.742 (32.487) 68.450) (21.080.000) (292.379.028.366 18.464) (4.969 (12.295.304.418.272.022) (14.384) (13.319.028 260.042.709) (721.000) (42.092.116) 48.761.743) (37.827 (36.189.434) 27.163.227.609 (7.860) (3.752.283.110) (5.117.960) (8.924.297.458) (20.238.INCOME STATEMENT Global Research Oman 24 833.767 108.072.225) (16.172) 10.000.544.040) (306.433 2.000 623.559) 7.972 3.528) (39.512.562.277.652.719.964.602 48.541) (344.480 12.105) (9.319 2008 (F) 170.470 106.524.000) (2.912.731.953.953.760.202 468.557) 7.804) (991.729 801.774.040.406 3.433 302.802 2.203.436.825.347 (15.124.065 749.600) (10.999 (10.242 (2.568 (12.239) (50.429 (18.044.114 (7.112) (54.383 27.811 438.622.000 (9.896) 4.239) 57.613.555.862.926) (482.927.089.431 56.115) (2.344) (1.709.112) 67.000 Bank Muscat 2005 (F) 123.156.350) 33.994 2006 (F) 139.246.000 15.116.525 .734.302) (324.994 (9.090.993 (42.000 955.872.856 (144.271.105.106 409.000 (1.610 2.461) 76.310 21.580 (175.594) (232.803 1.353.017.703) 7.556.240) (4.804.868 134.170 (41.472.807) (10.185) 6.955) 120.894 43.143) 22.970) (50.546 206.680) 56.607 2.000) (2.545.514.077.387.850.000 (102.035) 64.911) (3.793 (26.341.777.417.696 417.925.949) (3.516.188.521.149.450) (712.017) (3.124.856) 43.737.500) (654.355.255 14.892.826.590 3.

725 21.962.803 26.255 (22.788.628.151.557 (706.487 1.283.107.000) (1.570.349) 485.000) (15.050) (99.663) (3.113.745.719.425) (12.256.268.847 95.009.441) 453.487) (45.698) (11.305.774.430.433) (12.622.668.384.429.000) (2.385) (48.954.142.998.851 48.753) (86.215 1.100) 104.401.451.562) (66.820 5.478 49.278.005.411 (6.959 (5.397) (260.833.574.600.312) (88.731.390.954.894 46.072.078) 72.406) 15.098) (432.807.238.000.183.000) 102.556.300.545 67.584 30.000) (1.306.339.420.000) (12.803.) in Cash & balances with central banks Dec/(inc.680) (36.564) 749.151.000) 112.531) (1.000) 623.616 1.232) 801.699.604.503 17.232 (9.607 (4.821) (37.992) (2.CASH FLOW STATEMENT 2002 2003 2004 Bank Muscat 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Oman May 2005 (3.403 72.564) 1.703 (749.250) (1.283.310.516) (41.785.413) (41.478 (5.847.972.200) (14.295 3.011) (955.273.775.107.856) 102.193. net of cash acquired Investment in Associate Goodwill paid Disposal of Foreign Branch Total Investing Global Investment House 25 Financing Dividend paid to shareholders Proceeds of rights issue Subordinated liabilities paid Total Financing Net Change in Cash Net Cash at beginning Net Cash at end .483 (4.019.063) (4.319.250.706.000 70.172) (37.000 (3.394.693.809 76.916) (5.528 21.078.850.172) 3.999 5.000 (4.000 52.239.937 (6.413 1.114.840.607) (9.676.479) (7.610 (4.000) (4.638.959 30.000 (21.015 46.979.000 62.616 20.666.216.000 45.837.373.494 (11.452.607) (3.838.622) (2.868 890.186 39.000) 5.252.035) (37.090 96.889 30.744.700 29.000 (12.895.542 1.) in deposits with banks Dec/ (inc) loans and advances Dec/ (inc) Other assets Dec / (inc) Trading Investments Inc/(dec) in deposits from banks Inc/(dec) of deposits from customers Inc/(dec) of certificates of deposits Inc/(dec) of unsecured bonds Inc/(dec) of FRNs Inc/(dec) of taxation Inc/(dec) other liabilities Inc/(dec) in translation adjustments Total Operating 44.542.538.748) 46.255 2.258 55.734.209.000) (33.568 29.879) (1.000 22.900.000 4.189.750 26.290) (4.058.160) 666.000) (107.226 1.095.000) (13.494) (21.000.384 Investing Capex (c) Dividends received Sale of non-trading investments Proceeds from sale of tangible fixed assets Acquisition of foreign branch.894 (4.272.530 57.000 (24.203.616) 63.000 94.000) (623.166 48.000) (14.216 (485.272.310.145.896 (4.550 39.008 85.559 (801.719.852.588 (723.312.000) (9.954.688.557.466.594) (60.526 24.613.492 48.725 4.174.000 (2.411 48.873.021.483.579.842.287.961.452.000) (12.043 172.092.945.413) (1.418.970 23.348.545.149) 344.000) (666.145.382 (9.540) 64.676) 51.443.693.539) 706.793) (1.003 (4.644.266.196.796.091.610) (8.160 158.321) (206.831 20.504) 67.594 12.440 64.149) (48.969 6.748) 7.000 1.000) 15.040) (14.194.450 (91.805.631) (8.000) 4.000 (23.127.499 62.003) (10.185 (6.616.744.433 (4.151.697.522) (14.580) 2.961.226 2.533 48.400.988.809 (21.283.805.878.000 175.334.172) 242.059 17.023.403.000) (955.873.371) (86.884 62.239.047) 33.660.975.114.631.114.355.554 58.449.556.723.586 (9.775) (11.000) 1.082) 49.680.845) (3.240 4.116) (27.981.337) 25.006.502.142) 56.865.762.433) 144.564 4.871.068.000) (5.903.496) (854.000) 60.512.262 Oman Banking Sector Report Amount in Omani Rial Operating Operating Activities (a) Profit from operations before Taxation Depreciation & Amortization Provision for possible credit losses Recoveries from Provision for possible credit losses Unrealized (gain)/loss on investments available for sale Provision for placements with banks Provision for collateral pending sale Profit on sale of tangible fixed assets Profit/Loss on sale of branches Dividend Income Income Tax Working Capital (b) Dec/(inc.781.040 (8.574.622) (8.624 76.142.181) 51.487.000 (18.359) 159.760.322.892.929) 379.492 (5.896.784.400 75.076.362) 25.851 3.000 4.435 1.176) (3.205) (95.169.187) 303.499 (7.169.806.170 (16.243.169.114 (15.184) (453.141.458 (76.064 1.

0% 122.0% 1.9% 91.7% 34.P/BV 1.179.4% 2.2% 14.Interest Income/ Average Interest Earning Assets .527 112.1 11.7% 14.6% 46.6% 3.6% 86.830 13.8% 28.6% 2006(F) 2.8% 61.489.355 0.3% 14.0% 18.8% 580.408.75% 16.00% 18. Income .6% 73.4% 25.Non-interest expense/ Total Op.NPL's to (Equity+Loan loss reserve) .1% 37.7% 43.703 106.2% 25.3% 11.0% 1.6% 76.9% 20.91% 24.2% 227.819 2.45% 5.2% 1.Loans to Customer Deposits .Interest Expense/ Interest Income .970 9.7% 30.3% 571.787.6% 25.371.4% 17.Fees & Comm.5% 41.350 11.5% 15.8% 49.69% 56.810 8.0% 128.4% 7.4% 10.0% 1.Change in Fx Income .Equity to Gross Loans Constitution of Total Income .6% 544.3% 7.88% 2.0% 18.Cost to Average Total Assets Liquidity .53% 2.NPL's to Gross Loans .Loan Loss Reserve (RO) .0% 14.704 8.0% 6.4% 8.9 26 Oman Banking Sector Report May 2005 .3% 19.0% 6.0 11.6% 11.Staff Expense to Total Op Income .12% 3.6% 85% 41.0% 77.1% 12.91% 48.355 0.2% 1.4% 9.Return on Average Equity .5% 9.1% 537.3% 114.3% 128. Income Operating Performance .5% 13.47% 2.037.3% 3.0% 4.54% 58.0% 1.Equity to Total Assets .Provisions to Average loans .16% 2.Book Value Per Share (RO) .8% 99.Net interest income/ Total Op.517.4% 76.9% 11.3% 85% 39.Investment Income to Total Op Income .7% 77.0% 24.77% 43.6% 16.Change in Other Income RATIO'S USED FOR VALUATION .4% 19.49% 2.1% 36.9% 7.930 8.6% Bank Muscat 2005(F) 2.9% 12.9% 19.Net Interest Income to Total Op Income .28% 20.3 11.Market Price Year End (RO) .Change in Interest Income .1% 26.2% 35.96% 74.3% 134.1% 7.80% 4.4% 74.1% 2004 2.7% 5.0% 48.636 2.4% 2.5% 31.FX Income to Total Op.3% 16.6% 2003 1.9 3.74% 51.359 113.0% 86% 40.Change in Investment Income .8% 2.699 154.9% 35.15% 4.185 152.32% 4.9% 2.56% 74.6% 14.4% 6.0% 68.8% 17.Non Performing Loans (RO) .4% 20.830 9.355 0.2% 79.238 123.7% 40.830 12.Net Interest Margin Efficiency .4% 5.78% 4.0% 2.3% 8.05% 4.1% 25.8% 14.3% 24.5% 137. Income .787.0% 7.1 11.2% 48% 30. Income .Fees & Commissions/ Total Op.2% 12.27% 75.2% 240.4% 8.9% 6.7% 39.3% 19.Loan Loss Reserve to Gross Loans .Due from Banks to Due to Banks Credit Quality .6% 85.6% 6.9% 2.467 2.8% 9.570 2.5% 75.2% 77.5% 2.006 9.8% 71.0% 68.0% 7.5% 59.9% 51.Other Income to Total Op.0% 24.2% 129.3% 2008(F) 2.0% 101.4% 106.5% 6.5 3.59% 16.0% 2.0% 7.112 4.588.2% 19.787.4% 18.9% -10.Customer Deposits to Equity .0% 3.41% 4.Shares in Issue .3% 14.8% 7.0% 201.800 8.3% 1.Dividend payout ratio Margins .1% 19.5% 216.4% 9.3% 2.9% 28.058 97.4% 628.32% 3.1% 3.0% 2.6% 19.071 8.Global Research Oman Global Investment House Ratios 2002 Profitability .Cost to Total Op Income .87% 76.66% 23.0% 42.830.4% 124.8 3.6% 15.4% 19.9% 17.059 163.1% 56.71% 5.4% 1.1% 2.830 10.23% 74.743 176.Net profit / revenues .480 0.999 6.8% 530.Loans to Interest Earning Assets .1% 540.5% 16.1 1.109 104.2% 15.3% 2007(F) 2.4% 32% 28.269.5 1.355 0.7% 15.4% 9.3% 14.12% 4. to Total Op.56% 4.7% 2.2% 8.5% 1.355 0.4% 44% 34.5% 76.5% 76.Net Spread .74% 4.0% 2.000 128.9% 4.Non-interest income/ Total Op.1% 2.2% 2.3% 18.3% 7.1% 29.EPS (RO) .3% 3.2% 14.4% 7.8% 29.0% 9.1% 14.8% 2.787.8% 48.127. Income .5% 72.0% 68.0% 6.3% 1.2% 34.9% 2.354 0.0% 4.59% 71.0% 8.5% 1.6 10.34% 73.8% 2.3% 19.220.P/E .NPL Coverage Capital Adequacy .6% 12.14% 46.5% 174.7% 19.815.18% 2.40% 21.3% 104.526 3. Income .5 2.33% 5.Provisions to Total Op Income .977 3.3 11.7% 128.859.Interest Expense/ Average Interest Bearing Liabilities .6% 77.457.6% 0.Change in Fees and Commission .Return on Average Assets .177.11% 4.5% 85% 39.1 2. Income .0% 1.4% 19.227.4% 13.0% 5.1% 6.902 143.445 203.0% 68.0% 30.8% 51.5% 74.931 3.8% 127.706 2.9% 58.2% 93.917.46% 44.

C.075 1. this is the first time the bank has turned in positive net profits.6 8.46 48.7 5.5 12M Avg.com. L. Source: www.om Share % 34.650 24th April 2005 Not Rated 0.L.5mn Not Valued Key Data EPS (RO) BVPS (RO) P/E P / BV Source: Global Research Background National Bank of Oman (NBO) was founded in 1973. the Suhail Bahwan Group took a 34.Global Research Oman Global Investment House National Bank of Oman Reuters Code: NBO. Later on.65 RO255. Civil Service Employees Pension fund Abna Sultan Trading Co.2mn. the government stake was divested to various state pension funds in Oman. Total staff strength for NBO as on December 2004 was 1163 employees.2mn new shares at RO2. 52 week Lo / Hi Market Cap Target Price 0.27 / 3.6mn observed in FY01. • The interest income of the bank showed consistent decline and reached RO45.1mn at the end of FY04 against a high of RO68.3 3.4 Analysis of Financial Performance .2004 • NBO has reported net profit of RO5.095mn 2.nbo. The bank has a new management team at the top with Mr. in 1991 the government came to its rescue and bought the 40% stake owned by the BCCI.20 for a total value of RO53. Shareholding Pattern Shareholders Name Suhail Bahwan Group(Holding) LLC Ministry of Defence Pension Fund Public Authority for Social Insurance Al Barwani Investment Co.8 3. B Vasanthan as the bank’s Chief Executive Officer who took over the post in July 2004. vol.6% controlling stake in NBO through a private placement of 24. The interest income May 2005 Oman Banking Sector Report 27 . In October 2003. LLC National Equity Funds Royal Oman Police Pensions Trust L.7 6. After the collapse of its major shareholder. Bank of Credit and Commerce International (BCCI). In the last 3 years.OM Listing: Muscat Securities Market Current Price RO3.6 2.2 6.L.8 7.22mn for FY04 against a net loss of RO51.C.7mn for the previous year.

037 over the previous year. • 28 Oman Banking Sector Report May 2005 .5mn in FY03. The interest expense decreased by 13.6 and a P/BV of 2. forex.075 during FY04.5.9mn in 2004. Other Operating Income (which comprises of fees.7mn made in 2003.6% y-o-y to reach RO18. Therefore.54% in 2004 from 3.9mn.5mn during the FY2004. Net loans and advances also decreased from RO720. lower provisioning and higher recoveries played a significant part in bringing the bank back to black in 2004.15% in 2003. which was mainly aided by the decline in average interest rates on customer deposits during the year to 2.26mn for the year against RO70. NBO’s investment portfolio was at RO33. • As a result.Global Research Oman Global Investment House has continued to shrink on a sequential basis over the past 4 years. The provision for credit losses were significant at RO30. consisting mainly of Treasury Bills and Omani Government Development Bonds. NBO generated RO3. from a loss of RO1. Currently the stock is trading at RO3.4mn at the end of FY01 to reach RO718mn at the end of FY04. Capital gains derived from these investments represented a significant percentage of non-interest income in 2003 and 2004.49mn in FY04 as against RO1.650 indicating a P/E multiple of 48. However. • • • • • Valuation • NBO reported a basic EPS of RO0. recoveries and releases from provisions were significantly higher at RO18.1mn in fees & commissions income from various banking activities and other off-balance sheet commitments. dividend and miscellaneous income) was stagnant at RO11.5mn in FY01 to RO517mn in FY04.7mn during 2004. NBO’s total assets decreased from a high of RO951.8% to RO26.4mn as against RO28. the net interest income during the year declined by 8.

838 668.854.562 592.487.500 12.030 15.795 10.812 10.700 42.523 57.904.000 35.311 892.165.347 23.219 3.272.105.249.477 844.487 178.895 104.000 91.020 4.423.500.057.496 23.619.072 892.225.637.411 7.151.147 718.317.910.673 16.466.855) 8.317 8.459.458.965.544 24.338) (208.032.043 15.136.417.982 728.634) 6.825 810.463.621.994 34.812.862.Global Research Oman Global Investment House BALANCE SHEET National Bank of Oman Amount in Omani Rial Assets Cash & balances with Central Banks Investments held for trading Due from banks and other market placements Loans and advances (Gross) Other assets Provisions Total Current Assets Non trading investments Premises and equipment less: accumulated depreciation Tangible net fixed assets Deferred tax asset Total Assets Liabilities Due to banks and market placememts Deposits from customers Other liabilities Taxation Total Current Liabilities Subordinated Loans Subordinated private placements Owner's Equity Share capital share premium reserve legal reserve other non-distributable reserve.750.896) May 2005 Oman Banking Sector Report 29 .385 170.500 12.132 1.560) (200.705.278 541.237.259 8.804.812 17.837.941.834.032.768.273.840 8.000 815.329.857.948 102.161.421.076 1.951 (17.626 33.056 3.368.647.004.663.500.374 787.000 718.235.670.223 75.276.317.413 16.808 97.965.599.866 594.982) 7.618 12.980 12.541 621.382.868.487 2002 2003 2004 (127.927 (14.556 95.864 (16.837.628 764.464 815.698.867 697.223 70.500 61.068.969.000.635.045.789.931 1.385 70.574 8.844 646.817 39.666 2.063.904.000 15.931.143.000 16.817 726.520.607.837.214.243 26.634.624.973 48.610. general reserve retained earnings Total Shareholder's Equity Total Liabilities 45.594 9.433.000.882 9.619.

778.714) (2.469 (18.343.Global Research Oman Global Investment House INCOME STATEMENT National Bank of Oman Amount in Omani Rial Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Add: Profit on sale of investments Add : Dividend income Add: Income from T-bills & GDBs Add : Miscellaneous Income Less: Release of / (Provision for) on BCCI receivables Less: Provision for credit losses Less: Recoveries and release from provision for credit losses Less: Provision for impairment of due from banks Net Operating Income Less : Staff wages and salaries Less : Operating & Admin Costs Less : Establishment costs Less: Depreciation Recoveries from debts written-off Unrealized gains/(losses) on investments availabnle for sale Net Operating Expenses Profit before Taxation Taxation Net Profit from ordinary activities Extraordinary loss on exchange on CBE placement Net Profit for the year 2002 63.571 74.684) (2.022) 7.302 (89.182) (5.846) (50.520.109 559.277) (1.980 (70.022) 2004 45.468) (2.720.913.342) 1.469) (2.063 2.179) (1.405.927.952.557.051 (30.082 3.681.086.877.958.000) (51.292.541.042.537) 18.165) (20.299) 1.338.683 5.621 (2.486 3.176) (10.000 (42.910) (811.221) 455.210) (4.065 (21.584) 5.935.385.478 319.847) 28.428 1.650.491.317.408) 5.426) 2003 50.033) (20.188.726.935 (9.426) (262.694) (1.579.602.221.493.970.767 1.266.643.358.221.027.924 18.090 57.178.218 3.967 113.462) 262.764.220 310.000) (31.672 (18.520.801 183.512.723) 40.635 (35.776.554.790 3.804.852 229.209 (23.569 971.683 30 Oman Banking Sector Report May 2005 .712 (741.471.813.484 2.221.057.675 (11.022) (8.121.881.039.378.358) 25.818.143.065) 1.113.882) 26.077 4.267 (70.020) (4.137.139.877.916 (262.946 1.497.567 2.708 1.606 1.648.

037 1.8% 117.4% 256. to Total Op.Net Interest Margin Efficiency .9% 13.4% 8.3% 14.0% 528.Global Research Oman Global Investment House Ration Analysis Ratios Profitability .5% 105.9% 5.Interest Expense/ Interest Income .Interest Income/ Average Interest Earning Assets .Shares in Issue .0% 2.Due from Banks to Due to Banks Credit Quality .Return on Average Equity .9% N/A 29.Change in Net Interest Income .Fees & Comm.7% 3.5% 73.3% 14.3 37.5% 18.Other Income to Total Op.1% 6.000 -0.5% 25.075 1.6 200.Loans to Customer Deposits .000 -1.Change in Other Income RATIO'S USED FOR VALUATION .2% -6.1% 55.1% 90.45% 79.0% 70.700 1.Interest Expense/ Average Interest Bearing Liabilities .0% 52.7% -8.95% 2.98% 2.Market Price Year End (RO) . Income Operating Performance .464 2.2 208.006 1.2% -8.7% 11.2% 11.8% -8.Net income/ revenues .300 0. Income Margins .5% 21.389 2.000 0.NPL Coverage Capital Adequacy .95% 4.15% 2.6% 5.8% 23.5% 12.Equity to Total Assets .Provisions to Total Op Income .Customer Deposits to Equity .NPL's to Gross Loans .68 N/A N/A N/A N/A N/A N/A N/A 42.5% 79.P/E .6% 88.6% 92.96% 3.8% N/A 273.9% 45.4% 78. Income .Change in Investment Income .Non-interest income/ Total Op.2% 103.Return on Average Assets .Net interest income/ Total Op.7% 2.000.99% 2.000.7% 7.0% 94.Loan Loss Reserve to Gross Loans .7% 81.Cost to Average Total Assets Liquidity .7% 60.54% 2.Operating profit / revenues .58% N/A N/A 2.FX Income to Total Op.Non Performing Loans (ROmn) .Change in Fx Income .Cost to Total Op Income .3% 41. Income .916 1.6% 56.5% 179.Net Spread .8% 17.65 May 2005 Oman Banking Sector Report 31 .5% 10.8% 164.3 1.4% 15.000.Staff Expense to Total Op Income .09% 105.Change in Fees and Commission .8% 64.0% 27.7 127.21% 5.4 26.94 2004 0.5% 36.3% 89.2% 639.7% 5.3% N/A N/A N/A N/A N/A -27.8% 35.8% 13.2% 48.9% 70.8% 52.8% -6.Equity to Gross Loans Constitution of Total Income .Loan Loss Reserve (RO) .P/BV National Bank of Oman 2002 2003 N/A N/A 214.Book Value Per Share (RO) .Loans to Interest Earning Assets .6% -6.1% 22.6% -39.Investment Income to Total Op Income .3% 28.) to Total Op Income .4% -15.9% 53.Basic EPS (RO) .8% 44.56% 3.5% 14.Net Interest Income(incl Prov.7 35.3% 82.5% 35.7% 618.9% 11.NPL's to (Equity+Loan loss reserve) .9% 136.8% 134.Non-interest expense/ Total Op. Income .3% 210.8% 50. Income .410 32.

holds 8.4mn as compared to RO34.6% during FY2004 to reach RO35. Table 2: Major Shareholders in OIB Name of Shareholder Dr.1% Analysis of Financial Performance – 2004 • The interest income of the bank increased by 2. Omar Al Zawawi Al Waljat International Co. Omar Al Zawawi holds the largest individual shareholding with nearly 10. 32 Oman Banking Sector Report May 2005 .5% and the remaining 66.4% 4. This leaves only 12. Muscat Overseas Co.9% of the total shares outstanding at the end of FY2004.58 / 4.62 12M Avg.8%.36 RO274.4% to reach RO7. In 1984 it was renamed as Oman International Bank (OIB) to reflect the 100% Omani ownership after a group of Omani shareholders bought the 60% stake held earlier by Arab African International Bank.1% of the bank’s stock as the free float available for trading.224 1. while the Al Waljat International Co. Muscat Overseas Co. 52 week Lo / Hi Market Cap Target Price 0.5mn recorded for the corresponding period last year.2% 7. Zawawi Trading Co. The interest expense on deposits from banks and customers decreased by 19.360 24th April 2005 HOLD 0. National Equity Fund Royal Oman Police Pension Fund Source: OIB % Stake 10.2mn RO4.55mn 2.660 19. holds 7.5% 4. The total shares held by institutional shareholders constituted 87. holds 7. vol.Global Research Oman Global Investment House Oman International Bank Reuters Code: OIB.1% stake in the bank.527 Key Data EPS (RO) BVPS (RO) P/E P / BV Source: Global Research Background Oman International Bank was established in 1979 as Oman Arab African Bank.OM Listing: Muscat Securities Market Current Price RO4.46 2.2%. Shareholding Pattern Dr.9mn during the same period.8% 7.4% is owned by others including general public.1% 8. Zawawi Trading Co.

08mn.5% to 14.5% to the total revenue of the bank. The bank has managed to attract new customers and low cost deposits by launching schemes such as “Mandoos” which has helped the bank increase the total deposits from customers by 21% to reach RO571mn as of end 2004. Net profit after providing for taxation was higher at RO14. Retail banking contributed 62. OIB made a general loan loss provision of RO2.Global Research Oman Global Investment House • As a result. Analysis of various business segments indicate that Retail banking still continues to be the major revenue driver for the bank.7mn. The provision for loan impairment increased by 5. NPLs as a percentage of gross loans declined from 17. a 6. The loan loss coverage has increased to 91% as of the end of FY04. with a Financial Strength Rating (FSR) of D and stable outlook while Fitch has assigned BBB-.37% of the total loan book during FY04. Moody's Investor Service has assigned Baa3 rating. Forex gains also increased by 4. OIB’s total assets increased to RO710.7% in 2003. Exposure to construction sector was at RO33.26mn for the corresponding period in FY03.2% as compared to the same period last year.2% in 2004 from 1.191mn during the year.2mn this year. forex. Personal and consumer segment contributed 42. the net interest income during the period increased by 11. The bank’s gross loan book growth during the year was 15% and it reached RO523mn at the end of FY04.3% to RO27.26% in FY04.7mn constituting 6. To meet this requirement. representing an increase of 13. OIB was placed very close to the maximum limit of 42.6mn at the end of FY04 as compared to RO6. After a negative loan book growth during 2003.2mn at the end of FY04.2% over the previous year.3mn during the same period.5% increase over the corresponding period last year. During the FY2004. In FY04. The Central Bank of Oman also requires a general provision of 2% on the performing personal loans and 1% on the performing other loans.5mn as against RO24. This provision is required to be built equally over a 3-year period commencing from the year 2004.5% during this period. • • • • • • • • • • May 2005 Oman Banking Sector Report 33 . Other Operating Income (which comprises of fees. OIB is a highly rated bank in Oman as reflected in the following long-term bank deposit ratings.96% in FY03 to 22.5% to reach RO6. which was mainly aided by the decline in average interest rates on customer deposits during the year to 1.4% mandated by the Central Bank with respect to the exposure in personal lending portfolio.5% of the loan book in FY04. OIB generated RO4.5mn in fees & commissions income from various banking activities and other off-balance sheet commitments. This segment attracted an incremental RO33. the bank started lending out with new vigor during 2004. dividend and miscellaneous income) jumped by 13. Capital adequacy ratio declined from 24.1% to reach RO1. Corporate banking contributed 22% during the same period.

• • • 34 Oman Banking Sector Report May 2005 . Currently the stock is trading at 2005 earnings (forecast) multiple of 15.527 based on DDM and relative valuation method.Global Research Oman Global Investment House Valuation • OIB reported basic EPS of RO0. We have maintained our long-term growth rate for OIB at 3% to reflect the overall mature nature in the Omani banking sector.6x its 2005 book value (forecast). We have also revised the payouts upwards from the earlier 85% and forecasted it to be equal to the payouts of 94% seen in 2004 primarily expecting that the bank would reward its shareholders better going forward when the rise in interest rates will provide a positive impetus to its bottom-line. Our price target represents an implied 2005 P/E multiple of 16.7% over the previous year.4x.224 during FY04. an increase of 6. The estimated fair value of OIB’s stock works out to RO4.8x and at 2. We revise our earlier recommendation to ‘Hold’. which is higher by 3.8% vis-à-vis current market price of the stock.

897 21.326 7.260 (25.803 14.268 523.569 (84.904 (24.700 2.577) 9.199 1.910 710.316 836.663 Amount in '000 Omani Rial Oman International Bank 2005 (F) 2004 Assets Cash & cash equivalents Cash & balances with Central Banks Treasury Bills Due from other banks Loans and advances (Gross) Other assets Provisions & Reserved Interest Total Current Assets Trading Investments Non trading investments Gross fixed assets Less: accumulated depreciation Tangible net fixed assets Total Assets Oman Banking Sector Report Liabilities Due to banks Deposits from customers Certificates of Deposit Provision for taxation Other liabilities Total Liabilities Global Investment House 35 Owner's Equity paid-up equity capital non-distributable reserve general reserve retained earnings Total Shareholder's Equity Total Liabilities & Equity .586 11.097 (93.860 893.086) 897.065 (75.002 11.543 829.679 978.594) 9.199 62.492 13.435 17.799 1.777 167 49.331 911.890 181 85.457 627.580 57.586 (68.521 30.162 62.634 523.788 1.953 626.058 763.961 605.302) 496.472 804.100 27.670 (26.527) 472.465 38.897 21.256) 8.772 62.300 23.310 893.826 38.064.252 10.772 92.462 13.345 31.830) 651.679 699.934 12.648 16.116 1.971) 740.919 38.821 16.245 464.767 22.037 104.947 103.089 (21.668 10.849 15.882 612.498 21.815 3.613 18.488 27.302 25.498 22.859) 968.978 108.523 12.995 95.064.439 82.420 36.872 747.936 (60.043 68.492 103.712 13.833 627.474 22.865 180 57.897 21.615 14.485 6.648 9.834 8.897 21.432 710.346 (22.311 662.266 32.600 (23.240 56.659 689.077 105.814 62.183 35.625 1.814 63.248 62.498 25.823 454.545 472.727 11.581) 9.089) 821.781 174 61.498) 10.696 109.172 1.768 110.145 15.373 978.528) 9.023 804.248 112.897 21.473 83.511 11.465 106.537 954.196 4.498 20.882 10.990 523.663 50.199 93.207 29.349 626.950 (66.163 1.369 1.473 62.434 177 71.605 125 1.851 571.162 90.652 (102.978 870.897 21.250 11.313 786.436) 8.068 454.108 19.312 170 55.500 62.304 14.BALANCE SHEET Global Research Oman May 2005 2002 2003 2006 (F) 2007 (F) 2008 (F) 86.498 23.433 14.481 (19.898 33.791 20.897 21.

085 77 136 (13.780 43.947 14.465 25.085 41.464 Global Investment House May 2005 P&L Appropriation Account: Op Balance of Retained Earnings Adjustments Net Profit for the year Trfr to Retained Profit Effect of currency translation Appropriations required by statute Other Appropriations Dividend RO Cl Balance of Retained Earnings 23.804 1.675) 25.265) 33.768 .293 55 3.INCOME STATEMENT 2002 2003 Oman International Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in '000 Omani Rial Global Research Oman 36 3.676) 41.774) 24.442) 22.860) 14.513 10 85 (3.577) 24.439) 15.870) (1.600 37.472 (9.393 (16.620) (5.891 188 (9.577) (18.126 6.017) (18.973) (18.220 3.037 17.322) (1.345 59 3.381) (4.671 209 (8.807 (2.800 38.578) (19.830 55.945 (1.085) 46.384 (9.978 Oman Banking Sector Report Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Add : Dividend income Add : Other income Add: Gain/(loss) on investments Less: Release of / (Provision for) loan impairment Add: Impact of recoveries Total Operating Income Less : Staff wages and salaries Less : Employee's end of service benefits Less: Contribution to Social Insurance Less: Occupancy costs Less: Other expenses Less: Depreciation Operating Expenses Net Operating Expenses Profit before Taxation Income Tax expense Net Profit attributable to shareholders 40.260) 6.374) (4.190 (12.830 (20.288 (23.314 (11.564 62 2.252 (9.687) 13.464 (27.588) (5.638) (1.773) 4.454 67 3.145) (3.847) (2.175) (17.513 34.827 569 (5.881 (10.077 21.601) 3.530 246 (8.376) 18.027 321 (6.492 13.337 1.273 33.077 21.983 1.149) (120) (468) (1.482 (4.220 35.393 49.969 48.062 5.288 63.037 20.104) (90) (369) (1.208) 18.907 (1.496 1.977) 21.698 3.372) 17.493 4.513 72 3.084 1.327 (6.399 63 3.208) 20.444) (4.978 29.578) 28.192 7.145 54 244 (13.448) 25.947 18.007) 26.018) 29.141) (18.775) 23.145) 15.523 1.880 (10.406 (14.765 (2.889 (1.363) (18.998) 3.527 (10.465) 31.815 1.706) (128) (524) (1.773) 8.802 (14.141) 3.081) (18.118) 3.384 (10.613) (75) (366) (1.401 6.967) (1.353) 21.747 (11.492 15.882) 27.242 34 2.256 33.330 289 (7.736 (3.789) 36.817) (102) (333) (1.363) 19.116) (18.265) (20.265) (987) (19.600 1.116) 19.210) (107) (373) (1.439) (17.361) (5.399 3.465 22.727) (18.415) (4.174 18.375 (7.277 (17.973) 14.168 53.371) (917) (20.618) (114) (418) (1.

Book Value Per Share (RO) .643 1.6% 3.5 13.Market Price Year End (RO) .92% 4.3% 372.8% 12.0% 4.224 1.0% 4. Income .0% 94% 44.9% 82.7% 14.360 9.3% 94.4% 13.9% 1.Change in Interest Income .7% 346.2% 5.7% 27.8% 39.9% 12.4% 26.4% 16.9% 27.4% 9.1% 14.5% 18.4% 150.0% 10.2% 2.0% 80.1% 12.1% 2.4 66.9% 14.6% 52.Provisions to Total Op Income .0% 43.0% 6.5 -4.2% 92.402 1.9 68.5 73.3% 96.7% 56.Customer Deposits to Equity .5% 14.1% 13.1% 8.8% 439.4% -10.6% 2.75% 1.2% 57.3% 91.6% 76.8% 3.0% 7.2% 12.9% 94% 46.0% 75.7% 0.1% 7.294 1.9% 85.8 2.897 0.5% 26.7% 6.4% 76.360 15.0% 83.5% -20.1% 13.380 11.3% 6.5 71.7 69.4% 79.6% 765.00% 4.7% 9.2% 81.Change in Investment Income .8% 13.277 1.5% 74.7% 18.2% 102.1% 827.Non-interest income/ Total Op.9% 19.360 12.1% 82.39% 4.5% 34.4% 2.5% 37.7% 25.4% 10.Net income/ revenues .4% 12.1% 17.Net profit / revenues .9% 17% 45.96% 40.8% 19.0% 6.8% 45.1% 13.1% 85.Return on Average Assets .3% -10.1% 400.0% 4.2% 12. to Total Op.0% 11.6% 14.0 84.Investment Income to Total Op Income .0% 82.1% 10.Net interest income/ Total Op.2% 10.Provisions to Total Op.1 102.3% 39.Shares in Issue (000) .Net Interest Margin Efficiency .Loan Loss Reserve to Gross Loans .Change in Fees and Commission .6% 16.Fees & Commissions/ Total Op.Equity to Total Assets .Staff Expense to Total Op Income .1% 153.347 1.0% 6.Cost to Average Total Assets Liquidity .4% 14.6% 72.9% 1.9% 0.Equity to Gross Loans Constitution of Total Income . Income Operating Performance .Other Income to Total Op.0% 6.1% 56.4% 62.1% 76.0% 16.210 1.9% 23.4% 44. Income .5 20.43% 4.6% 2.6% -20.Loans to Interest Earning Assets .1% 2. Income .2% 13.3% 47.7% 18. Income .8% 2.3% 117.2% -9.7% 21.9% 0.8% 8.3 2.723 4.0% 7.2% 3.8 2.3% 5.6% 83.5% 22.4% 38. Income .1% 42.5% 22.0% 7.7% 13.9% 7.6 18.0% 1.0% 2.Change in Fx Income .9% 27.0% -10.0% 10.0% 62.8% 14.360 10.897 0.5% 31.5% 2.0 60.5% -45.43% 4.0% 14.5% 46.897 0.2% 29.Change in Other Income RATIO'S USED FOR VALUATION .9% 4.4% 7.4% 92.Interest Expense/ Average Interest Bearing Liabilities .3% 134.0% 81.1% 7.1 93.4% 81.570 15.8% 8.0% 25.7% 19. Income .0% -10.Net Interest Income to Total Op Income .Fees & Comm.23% 1.14% 1.P/E .1% -0.0% 29.468 1.38% 1.7% 3.3% 51.9 2.2% 12.9% 41.897 0.NPL's to Gross Loans .8 76.3% -6.6% 0.35% 4.05% 37.2% 61.76% 4.2 May 2005 Oman Banking Sector Report 37 .1% 91.Non-interest expense/ Total Op.2% 103.47% 5.8% -6.6% 81.3 0.1% -8.9 62.5% 308.6 13.1% 48.32% 4.5% 3.P/BV 2003 Oman International Bank 2004 2005(F) 2006(F) 2007(F) 2008(F) 2.NPL Coverage Capital Adequacy .6% 73.1% 3.0% 64.Dividend payout ratio Margins .8% 14.64% 4.1% 628.EPS (RO) .9% 18.897 0.1% 12.3 1.FX Income to Total Op.9% 75.6% 72.4 62.7% 4.897 0.Global Research Oman Global Investment House Ratios 2002 Profitability .5% 24.4% 11.3 17.0% 15.NPL's to (Equity+Loan loss reserve) .4% -15.8% 22.5% 23.0% 9.Provisions to Average loans .4% 2.6% 14.5% 94% 39.1% 12.8% 72.550 5.6% 40.Non Performing Loans (RO mn) .7% 13.0% 2.8% 18.6% 4.99% 1.645 2.67% 3.8% 547.6% 20.6% 92.1% 2.660 3.0% 62.Interest Expense/ Interest Income .1% 14.2% 14.4% 27.0% 15.0% 91.8% 27.4% 12.91% 42.4% 13.4% 28.9% 25.0% 62.677 4.0% 62.6 2.5% 456.0% 9.699 4.5% 11.0% 2.84% 47.9% 18.Return on Average Equity .0% 4.Due from Banks to Due to Banks Credit Quality .897 0.4% 699.Net Spread .89% 52.7% 48.5% 36. Income .4% 5.3 66.8% 34.0% 4.9% 26.5% 4.0% 183.0% 7.81% 4.9 14.6% 7.6% 52.3% 16.1% 4.Cost to Total Op Income .4% 12.2% 72.8% 100% 38.1% 94% 45.4% 12.9% 13.Loans to Customer Deposits .3% 69.Loan Loss Reserve (RO mn) .8% 14.7% 23.8% 24.751 4.1% 94% 41.9% 2.6% 12.91% 4.9% 27.Interest Income/ Average Interest Earning Assets .3% 13.

Bank Dhofar has accumulated a critical mass with an impressively expanding network of 48 operational branches.3%.Paribas.279mn 3. it acquired 16 branches of Commercial Bank of Oman after the latter was merged with BankMuscat. envisaged the launch of at least three new independent business units (investment banking.Bank Dhofar Al Omani Al Fransi SAOG. In 1998. 38 Oman Banking Sector Report May 2005 .850 24th April 2005 HOLD 0. Public Authority for Social Insurance holds 8. In 2001. increased lending to emerging enterprises. 52 week Lo / Hi Market Cap Target Price 0.62 14.030 RO161.OM Listing: Muscat Securities Market Current Price RO3. Malatan Trading holds 6. A new five-year strategic plan was also approved by the board in 2003 which recommended a panned growth in cross-border exposure.Global Research Oman Global Investment House Bank Dhofar Reuters Code: BDOF.37 12M Avg. and was established as an Omani commercial bank.218 Key Data EPS (RO) BVPS (RO) P/E P / BV Source: Global Research Background Bank Dhofar started operations in 1990. It also took over the 11 defunct branches of Bank of Credit & Commerce International (BCCI) in 1992.1% is owned by others including general public. Bank Dhofar is wholly owned and managed by Omanis.3%.100 / 4. Shareholding Pattern Dhofar International Development and Investment Company owns the largest individual shareholding with 30% stake in the bank. Qais Omani Establishment holds 6. With successive years of consistent growth through organic and inorganic strategies.7% and the remaining 33.5mn RO4. vol. private banking and structured finance) and several new retail products. while the Civil Service Pension Fund holds 10%.4%. it divested 40% of its share in a public offer and got listed in the Muscat Securities Market and was converted into a SAOG company . by acquiring the Muscat branch of BNP.41 2. Ministry of Defense Pension Fund holds 5.267 1.

investment miscellaneous income) remained stagnant at RO5mn. The net profit after providing for taxation was higher at RO11.4mn in the previous year. During the FY2004.000 towards provision for investments. The bank’s gross loan book growth during the year was at 10.4% 6.7% to RO23.5% during the FY2004 to reach RO30mn as compared to RO27.4% to reach RO1.7mn during the same period. an increase of 10.7% to reach RO6.8mn in fees & commissions income from various banking activities.9mn for the corresponding period in FY03. forex. Other Income (which comprises of fees.2004 • The interest income of the bank increased by 8.3% over the EPS recorded for the corresponding period last year. a 10. Total deposits from customers increased by 21% to reach RO421mn as of end 2004. The interest expense on deposits from banks and customers also increased by 7.267 during FY04. May 2005 Oman Banking Sector Report 39 .3mn at the end of FY04 as compared to RO3. Time deposits constituted 60% of total deposits.34mn during the same period.3% 5.1mn. Returns from investment securities declined by 21.9% and it reached RO449mn at the end of FY04. representing an increase of 16.2mn as against RO21. the net interest income during the period increased by 8. Bank Dhofar’s total assets reached RO552mn at the end of FY04.7% Analysis of Financial Performance . Ministry of Defense Pension Fund Source: Bank Dhofar % Stake 30.3% 6. As a result.0% 10. The loan loss coverage has increased to 114% as of the end of FY04.6mn over the corresponding period last year.5% over the previous year.2% increase over the corresponding period last year.0% 8. • • • • • • • • Valuation • Bank Dhofar reported an annualized basic EPS of RO0.4% at the end of FY04. The bank also provided RO655. Bank Dhofar generated RO1. Capital adequacy ratio remained at comfortable levels at 15. Provision for impairment decreased by 15% to reach RO3.Global Research Oman Global Investment House Table : Major Shareholders Name of Shareholder Dhofar International Development and Investment Company Civil Service Pension Fund Public Authority for Social Insurance Qais Omani Establishment Malatan Trading & Contracting Co.

Currently the stock is trading at 2005 earnings (forecast) multiple of 11.1x its book value (forecast).218 based on DDM and relative valuation method. We revise our earlier recommendation to ‘Hold’. which is higher by 9. • 40 Oman Banking Sector Report May 2005 .6x.5x and at 2.Global Research Oman Global Investment House • The estimated fair value of Bank Dhofar’s stock works out to RO4. Our price target represents an implied 2005 P/E multiple of 12.6% vis-à-vis current market price of the stock.

916 21.085 41.563 5.566 10.408 344.837 20.428 (4.429 9.429 11.842 3.244 75.039) 4.033 24.499 620.946 21.219 1.003 13.400 25.429 14.210 659.252 5.302 6.860 20.362 1.611 17.807 609.435 (6.122 (47.878 (42.888 10.335 752.532 47.652 63.704 5.271 404.677) 3.844 4.836) 653.962 5.280 4.806 19.318 1.575 348.068 4.437 2.609 53.998) 3.974 23.561 69.563) 708.144 16.803 95.944 6.096 50.362 2.561 604.279 7.099 7.852 21.437 5.983 32.127 474.449 8.429 5.929 (66.392 7.375 752.647 (59.699 6.115 657.416 8.714 41.378 (52.298 10.384 26.614 35.958 (12.817 55.738 15.962 5.832 15.460) 3.708 449.956 5.558 11.580 2.710 12.102 3.020 7.453 2.476 23.565) 518.294 4.360 13.372 28.093 7.177 63.362 1.085 38.177 41.982 7.249 10.853 (18.580 537.962 5.522 694.911 84.331 58.962 5.777 10.394 410.766 8.BALANCE SHEET 2002 2003 2004 Bank Dhofar 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in '000 Omani Rial Global Research Oman May 2005 10.907 579.207 75.874 296.812 7.692 22.449 8.561 41.289) 3.088 Assets Cash & balances with Central Banks Treasury Bills Placements with banks Loans and advances (Gross) Other assets Provisions Total Current Assets Trading Investments Non trading investments gross fixed assets less: accumulated depreciation tangible net fixed assets Intangible assets Total Assets Oman Banking Sector Report Liabilities Deposits from banks Deposits from customers Certificates of Deposit Subordinated Bonds Taxation Other liabilities Total Current Liabilities Global Investment House 41 Owner's Equity paid-up equity capital share premium legal reserve subordinated bond reserve proposed dividends retained earnings Total Shareholder's Equity Total Liabilities .610 4.595 26.705 67.515) 4.524 3.572 560.771 552.800 344.941 29.872 10.207 41.019 553.958 34.002 804.679 7.396) 323.579 502.962 5.685 44.362 1.339 48.575 552.429 7.294 2.225 474.088 6.706 694.374) 755.307 13.962 5.274 41.003 41.583 284.294 1.443 3.362 1.777 (7.703 12.128 5.474 804.800 492.406 37.632 5.155 10.287 (37.008 15.714 70.070 (8.975) 3.519 (9.364 421.543 18.502 695.514 18.026) 598.118 635.581) 442.040 20.141 (11.029 24.857 108.781 484.323 9.700 10.472 6.287 635.488 4.402 5.429 6.230 16.265 61.936 277.

983 15.189 (4.495) (1.273) 21.461) 29.030) (11.016) 11.956 29.240) 43.016) (11.374) (1.472) (254) (6.817 3.374) (1.781 24.918) (57) (28) 22.809) 24.522) 11.652 2.505 (722) (5.762) 20.945 (7.956 (3.900 (11.181) (1.156 (1.439 (5.762) (15.362 Global Investment House May 2005 P&L Appropriation Account: Op Balance of Retained Earnings Net Profit for the year Trfr to Legal Reserve Trfr to Subordinated Bond Reserve Director's Remuneration Dividend Cl Balance of Retained Earnings 15.172) (6.243) 12.217) (15.809) 36.192 (1.294) 1.362 (2.306 (14.737) (1.741 528 1.912 21.714 (1.363) (17.287 (830) (178) (6.088) 29.726) (1.946 571 1.315 (8.065 3.472) (254) (13.714 12.912 10.458) (1.811) 50.705 4.809) (17.707) (834) (8.019 (6.445 1.962) (13.472) (254) (8.804 26.807 66.702 1.983 (1.595) 26.755) 23.472) (254) (6.700) 10.881 57.881 (1.224 1.957 (6.592) 36.391 (655) (2.781 (2.327 (1.946) 21.156 30.294) 2.788) (1.624 1.284 493 1.472) (254) (15.040) 8.827 461 1.532 1.320 (2.423 11.590 (8.728) 42.287 27.426 2.989) (7.918) 14.016) (1.008) 15.392) 7.407) (1.309 2.088) (20.243) (12.313) (3.438) 17.366 (1.854) 9.854) (8.065 (1.640 (6.416) 18.065 47.888) (8.804 Oman Banking Sector Report Interest Income Interest Expense Net interest income Add : Fees and commission Add : Foreign exchange gains Add: Profit on Investment Securities Add : Other operating income Less: Provision for investments Less: Provision for possible credit losses Less: Impairment Less: Provision for property and equipment Net Operating Income Less : Staff wages and salaries Less: Other administrative expenses Less: Depreciation Operating Expenses Net Operating Expenses Net Profit before tax Profit before Taxation Income Tax expense Net Profit attributable to shareholders 24.045 (9.559 (462) (3.082 (8.338 1.400) (4.245 17.267) 10.550 (758) (6.264 1.974) 21.106) (12.296) (5.320 20.858 .532 1.484 (3.612) (4.245 7.450 404 1.721 1.532 10.192 38.606) 49.636) (1.289 549 1.INCOME STATEMENT 2002 2003 2004 Bank Dhofar 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in '000 Omani Rial Global Research Oman 42 917 8.402 1.705 14.294) 4.171) (13.596 (796) (6.675 (6.039 273 1.472) (254) (10.447 (688) (4.889) 29.807 (2.475) (20.423 (16.652 11.119) (1.962) 15.513) (8) (120) 18.335 9.647) (22) 24.197 1.

2% 18.7% 25.6% 42.3% 9.0% 7.962 0.563 66.Return on Average Assets .5% 16.FX Income to Total Op.1% 104.6% 24.2% 6.3% 22.7% 23.06% 5.58% 4.0% 4.Loan Loss Reserve to Gross Loans .8% 1.8% 21.8% 2.Cost to Average Total Assets Liquidity .6% 36.7% 621.Loans to Interest Earning Assets .1% 25.Other Income to Total Op.9% 8.1% 17.5% 85.5% 6. Income .8% 83.P/BV 2003 Bank Dhofar 2004 2005(F) 2006(F) 2007(F) 2008(F) 2.9% 22.10% 19.0% -21.5 May 2005 Oman Banking Sector Report 43 .4% 84.7% 23.43% 2.962 0.2% 7.Due from Banks to Due to Banks Credit Quality .1% 19.38% 24.1% 46.5% 84.3% 83.6% 4.39% 2.6% 1.7 13.4% 635.Loan Loss Reserve (RO) .Equity to Total Assets .9% 39.8% 350.Interest Expense/ Interest Income .0% 81.6% 83.1% 7.1% 121.6% 2.3% 5.1% 5.0% 4.8% 5.5% 8.86% 77. Income .6% 4.Staff Expense to Total Op Income .615 3.9% 10.58% 6.8% 16.6% 15.1% 572.1% 744.3% 85.0 12.Net Interest Income to Total Op Income .24% 25.0% -4.585 3.4 1.EPS (RO) .6% 17.9% 252.0% 41.504 3.3% 110.751 49.38% 46.Change in Fees and Commission .34% 6.850 7.Fees & Commissions/ Total Op.1% 79.3 11.7% 41.3% 17.3% 24.3% 3.2% 20.267 1.7% 77.7% 36.7 13.0% 36.2% 82.8% 102.3% 7.Provisions to Total Op Income .2% 1.9% 26.6% 7.6% 77.Non-interest income/ Total Op.6% 2.520 2.0% 4.1% 18.01% 3.750 14.4% 1.962 0.5 2.1% 3.273 3.1% 24.Cost to Total Op Income .7% 48.1% 49.NPL's to Gross Loans .Fees & Comm.7% 77. Income .8% 551.Return on Average Equity .2% 106.9% 7.7% 6.1% 20.6% 18.93% 2.0% 6.026 52.4% 608.Equity to Gross Loans Constitution of Total Income .13% 5.4% 9.0% 2.242 1.3% 106.842 63.7% 37.2% 15.35% 4.39% 18.6% 43.3% 8.581 42.Interest Income/ Average Interest Earning Assets .7% 15. Income .2% 584.0% 35.0% 354.8% 52.8% 21.5% 7.850 9.6% 26.5% 16.NPL Coverage Capital Adequacy .7% 6.Book Value Per Share (RO) .3% 82.3% 36.5% 22.4% 22.0% 6.4% 20.962 0.46% 49.7% 3.7% 2.Dividend payout ratio Margins .Investment Income to Total Op Income . Income Operating Performance .9% 76% 62% 56% 60% 60% 60% 61% 33.7% 8.NPL's to (Equity+Loan loss reserve) .Loans to Customer Deposits .5% 7.8% 13.0% 83.77% 49.Net interest income/ Total Op.0% 106.9% 17.2% 35.1 2.1% 2.Global Research Oman Global Investment House Ratios 2002 Profitability .Interest Expense/ Average Interest Bearing Liabilities .850 6.6% 116.18% 2.55% 6.4% 38.40% 18.1% 25.9 12.9% 3.6% 7.8% 82.0% 41.37% 2.5% 83.1% 25.374 5.96% 40.0% 7.0% 41.37% 6.235 1.7% 7.0% 6.1% 114.26% 5.0% 9.1% -6.37% 2.P/E .0 1. to Total Op.3% 8.97% 5.2% 48.Net Interest Margin Efficiency .014 3.0% 8.4 2.0% 4.66% 48.344 2.0% 41.8% 6.2% 33.260 9.Change in Investment Income .Change in Other Income RATIO'S USED FOR VALUATION .6% 83.836 59.6% 19.3% 7.2% 18.75% 1.9% 13.97% 5.3% 654.69% 3.3% 41.38% 17.Net income/ revenues .3% 15.85% 4.5% 9.0% 7.4% 36.7% 22.0% 104.64% 2.628 2.115 35.5% 9.8% 103.8% 13.04% 6.1 1.5% 20.2% 15.0% 8.Change in Interest Income .78% 4.280 0.82% 1.5% 312.6% 6.8% 41.93% 1.962 0.396 37.0% 3.850 11.3% 363.5% 5.0% 3.7% 22.335 1.5% 7.Shares in Issue .6% 5.7% 106.4% 9.7% 23.6 1.Market Price Year End (RO) .Non Performing Loans (RO) .426 2.Net Spread .8% 1.935 18.5% 4.229 42.1% 103.4% 323.6% 9.7% 35.8% 14.793 56.6% 1.2% 22.6% 102.5% 7.8% 40.4% 37.Customer Deposits to Equity . Income . Income .8% 15.54% 41.1 12.6% 17.4% 14.7% 49.5% 15.565 47.794 3.5% 39.6% 83.4% 1.5% 9.3% 15.7% 84.6% 4.7% 6.962 0.000 12.Change in Fx Income .Non-interest expense/ Total Op.6% 26.01% 43.412 37.48% 2.66% 22.3% 15.4% 2.

vol. 52 week Lo / Hi Market Cap Target Price 0.7mn RO3.OM Listing: Muscat Securities Market Current Price RO3. In addition to direct business from customers. for Investment .89% of the bank’s paid-up capital.740 / 3.1% 10. the bank has also entered into strategic arrangements with government and few reputed private sector companies for employee housing loan schemes.ONIC Ministry of Defense Pension Fund Securities & Investment Co.170 1. A list of the top-5 shareholders is as follows: Table: Shareholding Structure Name of Shareholder Oman National Holding Co.830 RO77.0% N/A N/A N/A 44 Oman Banking Sector Report May 2005 .42mn 1. AHB was formed as a specialized housing bank with the goal to help the local housing market by providing long term loans for those who wish to buy land/ houses and build/ improve their houses.310 21. AHB operates through its seven branch network.700 24th April 2005 HOLD 12M Avg.with a stable outlook. The branches serve as the principal delivery channels for the products and services.82 Background Alliance Housing Bank (AHB) was incorporated in 1997 and is a publicly held institution listed on the Muscat Securities Market. all in the Sultanate of Oman. National Equity Fund Public Authority for Social Insurance % Stake 10.Global Research Oman Global Investment House Alliance Housing Bank Reuters Code: AHBK. It employs 61 personnel. Capital Intelligence rated AHB and assigned long and short-term foreign currency ratings of BB+ and A3 respectively and a domestic strength rating of BBB.689 Key Data EPS (RO) BVPS (RO) P/E P / BV Source: Global Research 0. Shareholding Pattern The top-20 shareholders of AHB combinedly contribute 63.76 2. It also provides re-mortgage loans to help those customers who wish to consolidate and reduce the cost of their existing housing related loans.

26mn during the same period. we expect the NPLs and hence the provisioning levels to go up in the subsequent years.1% as compared to the same period last year.234mn for the corresponding period in the previous fiscal.560mn. During 2004. However. We also expect AHB to raise fresh funds in terms of long term loans or issuance of new bonds in the current year. mainly aided by a 43% increase in the net mortgage accounts. Analysis of Financial Performance – 2004 • The interest income of the bank increased by 47% during the full year 2004 to reach RO8. Keeping in trend with the increase in mortgage accounts.7% increase over the corresponding period last year. A quick look at the Debt to Equity ratio indicate that the ratio has increased from 0. However. The net profit after providing for taxation was higher at RO3. Total deposits from customers increased by a healthy 91% to reach RO32. As per our forecasts.2x in 2004. To fund its growth in mortgage accounts.465mn in fees & commissions income from various banking activities and other off-balance sheet commitments. the customer deposits reduced by 43% from the levels observed at the end of 3Q04. As a result. Capital adequacy ratio has declined from 67. while certificates of deposits increased by 15% to reach RO26. a 37. we expect AHB to rely on increasing the CD levels.58x in 2001 to 2. However.27mn as compared to RO5.8x in 2008.443mn at the end of FY2004 as compared to RO0.6mn at the end of FY2004. total provisioning charges (net of recoveries) increased by 89% to reach RO0. The interest expense also increased by 65% to reach RO2.73% in December 2004.3mn as of December end 2004. Other income (which comprises of fees and miscellaneous income) jumped by 23.6mn during the same period.5% in FY2004.24x in 2003 and 3. To fund this kind of loan • • • • • • • May 2005 Oman Banking Sector Report 45 . the loan book growth during the last quarter was reduced to RO6mn as against an average of RO8mn during the first 3 quarters of 2004. AHB’s total assets increased substantially to RO124.Global Research Oman Global Investment House Recent Developments and Outlook • Recent news reports indicate that ONIC holdings is considering to increase its stake in AHB to 35%.63mn over the corresponding period last year.26mn in the corresponding period of the previous fiscal. AHB generated RO0.4%.9mn at the end of December 2004.25% in December 2003 to 53. the ratio is likely to reach 4x in 2005 and would reach 4. Keeping in trend with mortgage accounts. representing an increase of 41% over the previous year. net interest income during the period increased by a whopping 41% to RO6mn as against RO4. The NPL coverage ratio at the end of 2004 was at 100. The bank increased its loan book size (gross) by 43% during the last 4 quarters to RO103. the ratio of provisions to average loans also saw a marginal increase from 0.4% in FY2003 to 0. as the loan book increases at a staggering pace.

Global Research Oman Global Investment House book growth and to maintain the debt to equity in control. which represents a discount of 0.6x its 2005 book value. we expect the bank to raise fresh capital in the next couple of years.170 during FY04. We maintain ‘Hold’ on the stock. Currently the stock is trading at 2005 earnings multiple of 15. • • 46 Oman Banking Sector Report May 2005 .3% from the current market price of RO3. an increase of 38% over the basic and diluted EPS of 2003. Valuation • AHB reported basic and diluted EPS of RO0.700.5x and at 2.689 based on DDM and relative valuation method. We have revised our fair value of AHB’s stock at RO3.

BALANCE SHEET
2002 82,623 55,000 1,394,468 1,393,285 800,000 46,317,201 (279,137) (33,787) 613,288 50,342,941 4,590,967 700,000 100,000 2,308,174 334,672 (201,996) 132,676 58,174,758 6,864,214 3,303,593 14,875,000 6,600,000 1,001,127 296,538 32,940,472 11,168,845 5,780,534 23,125,000 20,000,000 1,247,028 410,307 61,731,714 23,559,324 8,772,153 26,625,000 21,400,000 12,950,000 1,922,981 487,794 95,717,252 35,810,173 14,035,445 41,535,000 21,400,000 16,187,500 2,272,709 541,451 131,782,277 7,013,281 3,500,000 230,700 2,797,423 150,948 (62,862) 88,086 88,606,587 7,389,253 8,000,000 330,700 2,759,174 174,898 (47,743) 127,155 124,892,265 8,349,856 10,400,000 413,375 2,924,724 218,623 (89,281) 129,341 164,302,213 9,268,340 12,480,000 475,381 3,070,961 266,720 (126,622) 140,098 204,226,325 49,632,899 20,842,636 54,327,780 21,400,000 17,806,250 3,068,157 601,011 167,678,732 10,195,174 13,728,000 532,427 3,224,509 320,063 (161,829) 158,234 243,977,482 63,033,782 29,012,949 64,867,369 21,400,000 19,586,875 4,142,011 667,122 202,710,108 79,717 63,175 582,542 1,020,000 800,000 72,355,011 (513,873) (82,133) 40,761 631,897 74,977,097 149,133 93,607 1,855,439 800,000 103,593,875 (957,867) (98,133) 56,056 793,873 106,285,983 113,096 93,607 2,040,983 800,000 139,955,325 (1,679,464) (167,946) 56,056 873,260 142,084,917 146,265 93,607 2,204,262 800,000 177,603,308 (2,841,653) (230,884) 56,056 960,586 178,791,546 166,270 93,607 2,380,603 800,000 216,445,151 (4,545,348) (313,846) 56,056 1,056,645 216,139,138 195,325 93,607 2,571,051 800,000 254,777,587 (6,369,440) (407,644) 56,056 1,162,310 252,878,851 11,214,691 15,100,800 575,021 3,385,734 377,675 (195,820) 181,855 283,336,953 76,270,876 37,890,911 73,073,092 21,400,000 21,545,563 5,591,715 740,506 236,512,662 2003 Alliance Housing Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)

Amount in RO

Global Research Oman

May 2005
21,000,000 856,903 2,432,383 945,000 25,234,286 58,174,758 21,000,000 1,115,462 129,279 3,370,132 1,260,000 26,874,873 88,606,587 21,000,000 1,471,476 307,286 4,716,251 1,680,000 29,175,013 124,892,265 21,000,000 1,973,968 558,532 6,362,436 2,625,000 32,519,936 164,302,213 21,000,000 2,639,234 891,165 8,237,194 3,780,000 36,547,593 204,226,325 21,000,000 3,489,212 1,316,154 10,212,008 5,250,000 41,267,374 243,977,482 21,000,000 4,569,904 1,856,500 12,257,887 7,140,000 46,824,291 283,336,953

Assets Cash & balances with Central Bank Cash & balances ( >30 days ) Due from other banks Assets held for trading-certificates of deposits Assets held for trading-bank deposit Mortgage Accounts Provision for loan impairment Reserved Interest Deferred Tax Asset Other assets Total Current Assets

Oman Banking Sector Report

Investment Securities-Government Development Bonds Investment Securities-Government Certificates of Deposit Investment Securities-Other debt security Investment Securities-Securities available for sale gross fixed assets less: accumulated depreciation net fixed assets Total Assets

Liabilities Deposits from customers-Term Deposits Deposits from customers-Other accounts Certificates of Deposit Long-term Bonds Due to other banks Other liabilities Taxation Total Current Liabilities

Global Investment House

47

Owner's Equity paid-up equity capital legal reserve general banking reserve retained earnings proposed dividends Total Shareholder's Equity

Total Liabilities

OPERATING STATEMENT
Alliance Housing Bank 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)

Amount in RO

Global Research Oman

48
4,147,391 (837,258) 3,310,133 5,000 45,666 206,708 203,602 3,771,109 (756,353) (658,369) (115,732) (201,996) (34,800) (1,767,250) 2,003,859 (236,863) 1,766,996 2,585,587 (302,170) 2,887,757 (1,916,266) (2,634,571) 4,024,142 (464,002) 3,560,140 (92,000) (152,000) (62,862) (47,743) (234,736) (443,994) (721,597) (41,538) (159,600) (3,502,187) 5,710,140 (685,217) 5,024,923 (642,684) (777,537) (1,105,479) (883,984) (1,213,297) (1,473,972) 4,804,023 6,658,713 9,212,327 175,223 182,578 219,094 258,530 12,145,506 (1,821,826) (1,396,733) (1,162,189) (37,341) (167,580) (4,585,669) 7,559,837 (907,181) 6,652,657 350,979 465,512 628,441 804,405 32,244 2,209 2,297 2,389 (20,000) 4,265,577 6,008,414 8,362,495 11,080,182 14,229,871 2,485 1,005,506 297,310 15,535,172 (2,252,600) (1,708,869) (1,703,695) (35,207) (175,959) (5,876,330) 9,658,842 (1,159,061) 8,499,781 (1,367,064) (2,262,112) (3,415,667) (4,816,779) (6,333,526) 5,632,641 8,270,526 11,778,161 15,896,961 20,563,397 25,226,326 (7,820,161) 17,406,165 2,584 1,226,717 335,960 18,971,426 (2,656,000) (1,992,000) (1,824,092) (33,991) (184,757) (6,690,839) 12,280,588 (1,473,671) 10,806,917 1,787,088 1,766,996 (176,700) (945,000) 2,432,384 2,432,384 2,585,587 (387,838) (1,260,000) 3,370,133 3,370,133 3,560,140 (534,022) (1,680,000) 4,716,251 4,716,251 5,024,923 (753,739) (2,625,000) 6,362,436 6,362,436 6,652,657 (997,899) (3,780,000) 8,237,194 8,237,194 8,499,781 (1,274,967) (5,250,000) 10,212,008 10,212,008 10,806,917 (1,621,038) (7,140,000) 12,257,887

Interest Income

Interest Expense

Net interest income

Add: Net unrealised gain from assets held for trading

Add: Net unrealised gain from investment securities

Add: Fee Income

Add : Other income

Net Operating income

Less : Staff expenses

Less: Other operating expenses

Less: Provisions- net of recoveries

Less: Depreciation

Oman Banking Sector Report

Less: Board remuneration

Net Operating Expenses

Operating profit before tax

Less: Income tax expense

Net Profit attributable to shareholders

P&L Appropriation Account:

Op Balance of Retained Earnings

Net Profit for the year

Global Investment House

May 2005

Trfr to Legal & General Banking Reserve

Dividend RO

Cl Balance of Retained Earnings

CASH FLOW STATEMENT

Global Research Oman

May 2005
2002 2,303,479 2,003,859 201,996 115,732 7,858 (10,100) (5,000) (45,666) 34,800 2,660,734 1,180,784 (15,263,916) (237,020) 6,184,165 9,175,000 1,425,000 370,986 (708) (21,892) (151,665) 4,964,213 (49,678) 10,100 (4,059,282) (4,098,860) (821,993) (821,993) 43,360 39,263 82,623 (43,154) 13,505 353,285 (3,010,019) (2,686,383) (950,917) (950,917) (1,914,832) 1,994,549 79,717 (87,094) 8,144 1,000,000 (501,130) 419,920 (1,260,000) 21,400,000 20,140,000 4,492,313 79,717 149,133 (18,609) 6,781,572 8,250,000 9,500,000 200,439 (14,569) (34,800) (229,162) 1,722,468 (1,562,768) (8,175) (25,989,464) (20,731,495) (30,432) (31,222,864) (76,362) 15,382,098 3,500,000 (8,400,000) 660,916 8,957 (152,000) (401,808) (16,067,607) (43,725) (3,608,828) (3,652,553) (1,680,000) (1,680,000) (36,037) 149,133 113,096 (491,543) (185,544) (36,361,450) 69,813 (79,387) 17,514,140 14,910,000 3,237,500 349,728 53,657 5,296,516 (1,939,194) (163,279) (37,647,983) 62,938 (87,326) 20,629,917 12,792,780 1,618,750 795,448 59,560 5,912,992 (48,097) (3,206,727) (3,254,824) (2,625,000) (2,625,000) 33,169 113,096 146,265 (3,999,906) (176,341) (38,841,843) 82,961 (96,059) 21,571,196 10,539,589 1,780,625 1,073,855 66,111 6,238,777 (53,344) (2,385,428) (2,438,772) (3,780,000) (3,780,000) 20,006 146,265 166,270 3,285,236 2,887,757 62,862 234,736 8,748 24,202 (12,825) 20,000 (32,244) 92,000 4,663,888 4,024,142 47,743 443,994 6,080 (7,862) (2,209) 152,000 5,788,058 5,710,140 41,538 721,597 (685,217) 7,852,187 7,559,837 37,341 1,162,189 (907,181) 10,238,683 9,658,842 35,207 1,703,695 (1,159,061) 12,664,999 12,280,588 33,991 1,824,092 (1,473,671) (4,732,197) (190,448) (38,332,436) 93,799 (105,665) 22,115,057 8,205,722 1,958,688 1,449,704 73,383 7,932,803 (57,611) (2,596,137) (2,653,748) (5,250,000) (5,250,000) 29,054 166,270 195,325 2003 2006(F) 2007(F) 2008(F)

Amount in RO

Alliance Housing Bank 2004 2005(F)

Operating Operating Activities Profit from operations Depreciation Loan impairment expense net of recoveries End of service benefits provision Tangible fixed assets written-off profit on sale of tangible fixed assets net unrealised gain from assets held for trading net unrealised gain from investment securities Fees paid to Board-proposed Income tax paid

Oman Banking Sector Report

Working Capital Dec/(Inc) in Cash & balances Dec/(Inc) in due from other banks Dec/(Inc) in mortgage accounts Dec/(Inc) in reserved interest Dec/(Inc) in other assets Inc/(Dec) in customers' deposits Inc/(Dec) in Certificates of deposit Inc/(Dec) in due to other banks Inc/(Dec) in other liabilities Payment of end-of-service benefits Board remuneration paid Inc/(Dec) of taxation Total Operating

Global Investment House

Investing Capex Proceeds from sale of tangible fixed assets Disposal of assets held for trading Purchase of securities Total Investing

49

Financing Dividend paid to shareholders Increase in borrowings Total Financing

Net Change in Cash Net Cash at beginning Net Cash at end

Global Research Oman

Global Investment House

Ratios
2002 Profitability - Return on Average Assets - Return on Average Equity - Net interest income/ Total Op. Income - Non-interest income/ Total Op. Income - Non-interest expense/ Total Op. Income - Fee Income/ Total Op. Income - Dividend Payout ratio Margins - Net income/ revenues - Operating profit / revenues - Interest Expense to Interest Income - Interest Income to Interest Earning Assets - Interest Expense to Interest Bearing Liabilities - Net Spread - Net Interest Margin Efficiency - Cost to Total Op Income - Staff Expense to Total Op Income - Cost to Average Total Assets Liquidity - Loans to Interest Earning Assets - Loans to Customer Deposits - Loans to Total Deposits - Customer Deposits to Equity - Due from Banks to Due to Banks Credit Quality - Provisions to Total Op Income - Provisions to Average loans - Non Performing Loans (RO) - Loan Loss Reserve (RO) - NPL's to Gross Mortgages - NPL's to (Equity+Loan loss reserve) - Loan Loss Reserve to Gross Mortgages - NPL Coverage (incl. Interest in suspense) Capital Adequacy - Equity to Total Assets - Equity to Gross Loans Constitution of Total Income - Interest Income to Total Op Income - Fees Income to Total Op. Income - Investment Income to Total Op Income - Other Income to Total Op. Income Operating Performance - Change in Interest Income - Change in Fee Income - Change in Investment Income - Change in Other Income RATIO'S USED FOR VALUATION - Shares in Issue ('000) - EPS (baiza) - Book Value Per Share (RO) - Market Price Year End (RO) - P/E - P/BV 3.63% 7.13% 87.8% 12.2% 43.8% 5.5% 54% 42.6% 48.3% 20.2% 8.60% 3.66% 4.95% 7.72% 44% 20% 3.6% 92.8% 455.5% 146.4% 40.3% 21.1% 3.1% 0.3% 524,576 279,137 1.1% 2.1% 0.6% 53.2% 43.4% 54.5% 87.8% 5.5% 1.3% 5.4% 18.9% 60.1% 14.9% 381.5% 21,000 84 1.16 0.88 10.5 0.8 2003 3.52% 9.92% 88.8% 11.2% 35.0% 7.3% 49% 45.9% 51.3% 24.3% 7.71% 2.98% 4.73% 6.83% 35% 18% 2.6% 96.8% 426.9% 120.4% 63.1% 2.9% 4.9% 0.4% 921,784 513,873 1.3% 3.5% 0.7% 55.7% 30.3% 37.1% 88.8% 7.3% 0.3% 3.6% 28.9% 69.8% -75.8% -13.9% 21,000 123 1.22 1.54 12.5 1.3 Alliance Housing Bank 2004 2005(F) 2006(F) 3.34% 12.70% 90.2% 9.8% 32.9% 7.0% 47% 43.1% 48.7% 27.4% 7.76% 2.95% 4.81% 6.63% 33% 18% 2.5% 97.5% 320.4% 111.0% 110.8% 14.3% 3.48% 16.29% 90.8% 9.2% 30.2% 6.8% 52% 42.7% 48.5% 29.0% 8.13% 3.07% 5.06% 6.71% 30% 16% 2.4% 98.0% 280.8% 108.5% 153.3% 12.6% 3.61% 19.26% 91.2% 8.8% 28.2% 6.6% 57% 41.8% 47.6% 30.3% 8.57% 3.29% 5.28% 6.85% 28% 15% 2.5% 98.4% 252.0% 108.3% 192.8% 12.4% 2007(F) 3.79% 21.85% 91.6% 8.4% 26.9% 6.5% 62% 41.3% 47.0% 30.8% 9.07% 3.50% 5.57% 7.11% 27% 15% 2.6% 98.6% 235.1% 109.4% 223.1% 12.2% 2008(F) 4.10% 24.54% 91.8% 8.3% 25.7% 6.5% 66% 42.8% 48.7% 31.0% 9.41% 3.65% 5.76% 7.28% 26% 14% 2.5% 98.8% 223.2% 110.7% 243.8% 11.9%

6.7% 7.8% 9.6% 11.0% 9.6% 0.5% 0.59% 0.73% 0.86% 0.77% 954,053 1,539,509 2,575,248 3,982,591 5,503,196 957,867 1,679,464 2,841,653 4,545,348 6,369,440 0.9% 1.1% 1.5% 1.9% 2.2% 3.4% 5.0% 7.6% 10.8% 13.6% 0.9% 1.2% 1.6% 2.1% 2.5% 100.4% 109.1% 110.3% 114.1% 115.7% 23.4% 28.2% 90.2% 7.0% 0.0% 2.7% 40.9% 32.6% -82.0% 4.2% 21,000 170 1.31 2.85 16.8 2.2 19.8% 23.2% 90.8% 6.8% 0.0% 2.4% 39.2% 35.0% 4.0% 20.0% 21,000 239.3 1.42 3.70 15.5 2.6 17.9% 20.6% 91.2% 6.6% 0.0% 2.1% 32.5% 28.0% 4.0% 18.0% 21,000 316.8 1.56 3.70 11.7 2.4 16.9% 19.1% 91.6% 6.5% 0.0% 1.9% 28.4% 25.0% 4.0% 15.0% 21,000 404.8 1.72 3.70 9.1 2.2 16.5% 18.4% 91.8% 6.5% 0.0% 1.8% 22.3% 22.0% 4.0% 13.0% 21,000 514.6 1.89 3.70 7.2 2.0

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Oman Banking Sector Report

May 2005

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Oman Banking Sector Report

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Oman Banking Sector Report

May 2005

The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

Disclosure Checklist Company
BankMuscat Oman International Bank Alliance Housing Bank Bank Dhofar National Bank of Oman

Recommendation
Hold Hold Hold Hold Not Valued

Ticker
BMAO.OM OIB.OM AHBK.OM BDOF.OM NBO.OM

Price
RO8.830 RO4.360 RO3.700 RO3.850 RO3.650

Disclosure
1,10 1,10 1,10 1,10 1,10

1.

Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year , Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 10. Please see special footnote below for other relevant disclosures.

Global Research: Equity Ratings Definitions
Global Rating
Buy Hold Reduce Sell

Definition
Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price

Global Research

Sector

Qatar
Qatar Banking Sector
May 2005

Table of Contents
Qatar Banking Sector ..................................................................................................................................... 1

Trend in Credit Facilities ......................................................................................................................................... 3

Interest Rate Trend ....................................................................................................................................................... 5

Asset & Liability Composition ............................................................................................................................. 6

Peer Group Comparison ........................................................................................................................................... 7

Comparative Indicators ............................................................................................................................................. 9

Banking Sector Outlook ............................................................................................................................................ 11

Valuation Matrix ............................................................................................................................................................ 12

Players Profile Qatar National Bank .............................................................................................................................................. 16 Commercial Bank of Qatar ............................................................................................................................... 23 Doha Bank ................................................................................................................................................................... 30 Qatar International Islamic Bank .................................................................................................................. 38 Qatar Islamic Bank ................................................................................................................................................. 44 Ahli Bank ..................................................................................................................................................................... 50

Global Research Qatar

Global Investment House

Qatar Banking Sector
The Qatari banking sector is characterized by a combination of national as well as foreign banks. Qatar has a developed banking sector which consists of 14 banks and 1 specialized industrial bank. The banking sector in Qatar consists of seven Qatari owned banks, one specialized government owned industrial banking institution and seven foreign banks. The Qatari owned banks include five commercial banks and two Islamic institutions, while the specialized government owned institution is the Qatar Industrial Development Bank, which provides financing to the small and medium scale industries. The five Qatari owned commercial banks are Qatar National Bank, Commercial Bank, Doha Bank, Ahli Bank and International Bank of Qatar (formerly Grindlays Qatar Bank) while the two Islamic banks are Qatar Islamic Bank and Qatar International Islamic Bank. Qatar Islamic Bank is the pioneer of Islamic banking in Qatar. The seven foreign banks operating in Qatar include Arab Bank, Mashreqbank, HSBC Bank Middle East, BNP Paribas, United Bank, Saderat Iran Bank and Standard Chartered Bank. Current Scenario In the fast growing Qatari market, the banking sector is becoming highly competitive and challenging, as some of the foreign banks have started to increase their presence in the market. During 2004, the banking sector in Qatar has seen a couple of mergers/acquisitions. National Bank of Kuwait (NBK) became the international shareholder of the erstwhile Grindlays Qatar Bank which is now known as International Bank of Qatar (IBQ). NBK has 20 per cent stake in the capital of IBQ. In another development, Bahrain’s Ahli United Bank (AUB) acquired 40 per cent stake in Al-Ahli Bank of Qatar and it has been renamed as Ahli Bank QSC. Apart from this, Mashreqbank also plans to spread out its foothold in the Qatari market. We believe that with these the banking sector in Qatar will experience a new dimension of competition in retail as well as institutional segments. In a major step for a Qatari bank, QNB went global and bought a key London-based wealth management group. The £135mn deal acquired Ansbacher Holdings, a subsidiary of South Africa’s FirstRand, the country’s second largest bank by assets. The acquisition is a milestone for QNB as it became the first GCC bank to buy an international financial institution of the repute of Ansbacher. To tap the growing importance of Islamic finance, especially in the GCC region, many conventional banks are venturing into Islamic banking which will further change the face of the banking sector in Qatar. Large Banks have a Dominant Presence In Qatar, large banks such as QNB, Doha Bank and Commercial Bank (CB) dominate the banking industry by virtue of their size, reach and coverage. The large banks also have competitive advantage over the smaller banks on account of their strong brand equity and distribution coverage. Our comparison of the banks in this section would remain confined to only the six listed local banks of Qatar which account for almost 87% of the total assets (as of December 2004) in the local banking industry. The Qatari banking sector is dominated by the Qatar National Bank. In terms of assets, QNB has a dominant presence in the domestic banking industry accounting for 49.2% of the total May 2005 Qatar Banking Sector 1

2% 5.7% 13. 4. 2 Qatar Banking Sector May 2005 . rather they compete strongly on deposit front and also focus more on developing their retail banking businesses.7% and 3. customer deposits and loans & advances as of December 2004.3%.5% 10. There are banks negotiating with the Central Bank of Qatar for opening branches in the country.3% respectively.6% 6. Qatar’s gas-centric economy and small market are the constraints within which all banks operate.6% of the total assets and Qatar International Islamic Bank (QIIB) held the remaining 6. Among the six listed banks. In terms of total deposits it accounts for 50. there is intense competition among the existing banks to increase their client base. Qatar Islamic Bank (QIB). The main focus areas of foreign banks are trade financing activities.8% 11.0% 8. gets the lion’s chunk of state-related business. being 50% owned by the State Government and its large resource base. The banking system is developing fast.7% 55. Qatar is becoming a favorite destination for investors.7% 9. Among the six local banks analyzed here.5% 3.5% 5.8% 13.1% 15. The bank held 55. The country has all the regulations that allows banks within the GCC to operate locally.4% 4.9% in loans & advances segment.4% 50.3% 8.8% 7. Table 1: Market Share of Six Listed Qatari Banks Qatar National Bank Commercial Bank Doha Bank Qatar Islamic Bank Qatar International Islamic Bank Ahli Bank Assets 2003 2004 53. especially small banks which may face difficulties and therefore might consider mergers and acquisitions as an alternative. The implementation of the WTO accord could also result in mergers and acquisitions in the banking sector.7% 9.1% 13. which held 9.7% 6. deposits and loans & advances with its market share at 13. QNB is losing its market share in all categories.3% Deposits 2003 2004 50.2% 13. because of the small base of private sector corporates. The other commercial banks enjoy lesser chunk of state-related business.2%.3% 13.1% 3.5% Source: Annual Results of Banks and Global Research Competition In Qatar. Doha bank held third position in terms of all the three categories namely. 13. foreign currency operations and corporate advisory services. Ahli Bank (ABQ) is the smallest bank in terms of asset size.9% 16.6% 14. However. and the banking products that people find in the international markets are available in Qatar. deposits and loans & advances with its market share at 5.1% in deposits and 13. The lack of opportunities in corporate banking. since last few years.Global Research Qatar Global Investment House banking assets of the listed Qatari banks.1% 13.3% 9. compels these banks to continue focusing on big ticket government projects and also on retail banking. the State Government plays a key role in the structure of the banking sector by remaining the largest borrower and depositor.7%.3% of total banking deposits of the listed banks.8% 49. Commercial Bank held second position in terms of size of assets.9% 12.2% 3.8% market share of gross loans & advances.7% Loans 2003 2004 57. However.7% and 12. The bank held 16. namely. The other two medium sized banks are the two listed Islamic banks. Qatar National Bank.0% 7.1% 5. 14.1% market share in terms of assets.5% respectively.8% 14.0% 3. total assets.

1 476. Figure 1: Distribution of Credit Facilities as of December 2003 as of December 2004 1% 1% 4% 5% 1% 2% 26% 28% 38% 45% 8% 2% 13% Personal Services Others Outside Qatar 12% 2% 12% Personal Services Others Outside Qatar Public Sector Merchandise Industry Land.7 1.8bn in the previous year.6 441.660.3 35.865.4 1. While credit granted to others declined significantly during this period.383.3 10.6 16.293.9 246. Housing & Construction Public Sector Merchandise Industry Land.2 9.5 4.287.3 49. Table 2: Trends in Credit Facilities of the Banking Sector (in QR Mn) Public Sector Merchandise Industry Land.5 6.9 14.787.506.1 1.749.5 420.219.201. Housing & Construction Personal Services Others Total Domestic Outside Qatar Total Source: Qatar Central Bank 2000 2001 2002 2003 2004 (2000-2004) CAGR (%) 18.6 8.4 1.065.189.9 1.5bn in 2004 whereas in 2003 it had registered a growth of 18.4 36.7 4. The sector witnessed decline of 7.8 1.531.Global Research Qatar Global Investment House Trends in Credit Facilities During the period 2000-2004.2 27.5 Growth in 2004 over 2003 (%) -7.5 -24.4 27.5 5.639.9 11.3 14. except few such as merchandise.8 1.8 6.0 47.0 43. land.085.5 35. industrial.0 1.9 16. credit outside Qatar and others. total credit facilities of the banking sector grew by 13% to QR49.3% in credit off-take to QR18.448.5 467.5%. were credit facilities granted to public sector.5 48.3 812.2% to reach QR49.5 29.7 14.010.0 936.6 14.4 1. housing & construction and services.4 1.726.7 22.4 43. Almost all the sectors have witnessed double digit CAGR in their credit offtake.3bn.5bn.7% to QR48.180. during 2000-2004.7 7.4 169.482.214. total credit facilities grew at a CAGR of 14.2 607.8 19.114.1 49.912.814.711.529.7 1.9 11.059.3 2.3 13.496.9 5.7 -0.881.9 4. the share of the public sector in the total credit facilities granted has declined to 38% from 45% in the previous year.9 34. which shows the diversification of lending to other businesses/sectors.7 750. while total domestic credit grew by 14.2 1.0 Sectors which saw their share increase as a percentage of the total credit off-take.9 9.6 41. Housing & Construction Source: Qatar Central Bank During the year 2004.746.469.5bn from QR43.2 10.132.327.485.116. May 2005 Qatar Banking Sector 3 .2 71.1 11.967. Breakdown of the distribution of credit facilities shows that. during 20002004.346.503. during 2004.2 3.046.931.9 437.9 26.

the banking sector is becoming highly competitive and challenging as some of the foreign banks have started to increase their presence in the market. in 2004. As part of a diversification of the lending portfolio majority of the banks in Qatar have increased their focus on regional lending by taking participation especially in syndications. It is dominated by a handful of major corporate groups. and a large network of POS terminals. However. industrial and services have also witnessed a significant growth in credit off-take at 41% and 27. as the share of Qatari operations in total asset base of the bank declined to 72% from 80% in the last two years. Retail Banking – a major thrust area Most of the banks in the GCC have increased their focus on the retail banking market in order to drive asset expansion. which creates concentration of assets in the banks’ books by a few corporate groups. experienced new comers in Qatari market such as Ahli United Bank with 4 Qatar Banking Sector May 2005 . Therefore. The thrust area of the retail segment now is to prudently manage personal credit lines. minimize expenses. The banks are experiencing that margins for commercial and corporate banking are fairly tight and continue to narrow. As the country prepares to stage the Asian Games in 2006. dedicated Islamic banking channels and. commercial as well residential. in order to shield against margin pressure and to diversify income. This affects the credit quality. The biggest growth in credit facilities was witnessed by the land. Therefore. The country’s largest bank QNB diversified its assets to other countries in 2004. the external credit of the commercial banks grew by a robust 169% to QR1. housing & construction sector was due to the surge in construction activities in Qatar. Therefore. housing & construction sector. In case of Commercial Bank of Qatar. of course. share dealing. heavy construction activity is going on both in the government and the private sector in the country. which is still at a nascent stage.7% in 2004 and its contribution to the total credit granted also increased from 8% in 2003 to 12% in 2004. Among the other sectors. are likely to see a rapid increase in retail banking during the next few years. The steep rise in facilities to land.7% in 2004 from 68.2bn. ATMs.8% respectively. whose credit facilities grew by 71. This was a trend not only in Qatar but in the whole of the Gulf region. The year 2004 witnessed a significant increase in credit to the personal segment due to the increased focus on consumer loans as part of their thrust on retail banking.6% in 2003.Global Research Qatar Global Investment House The personal segment. Retail finance represents one of the main growth areas for banks not only in Qatar but in the entire region. This together with the need for banks to raise their level of non-interest income. The Sector is becoming highly competitive In the fast growing Qatari market. and add utility to existing products. banks in Qatar are aggressively competing with each other to have a larger share of the retail market.1bn. which had second highest share in the total credit off-take. as majority of the corporate groups are family run businesses.4% over 2003 to QR14. The franchise is rapidly expanding beyond a branch system and includes online banking. direct phone banking. witnessed a marginal growth of 2% in its share to 28% during 2004. widen margins and raise fees and commission income. Small Market Size – compels overseas diversification of assets Qatar is predominantly a smaller market for the banks to diversify their asset base. the share of Qatari operations in its asset base declined to 60. Apart from that. many banks are now focusing more on diversifying their asset base outside the country. develop new products. Competing banks or institutions are continually introducing new products. it witnessed a growth of 22.

We believe that with these the banking sector in Qatar will experience a new dimension of competition in retail as well as institutional segments.8% of total assets of the six listed banks. Figure 2: Trend in Qatar Central Bank’s Monetary Rates 3.60%. Going forward. Islamic Banking As mentioned earlier. Interest Rate Trend The level of interest rates in Qatar follow closely those prevailing in the United States. Therefore. With the rising interest rates in 2004 it rose to 2.28% in 2002 to 1.50% 2.00% 2. at present two banks.50% 1. interest rates in Qatar witnessed a continuous downfall.00% 0.00% 2002 Lending 2003 2004 Deposit Source: Qatar Central Bank The increased liquidity in the system and lower interest rates have resulted in lower deposit rates as well. namely QIB and QIIB.58% in 2002 had declined to 1.25% in 2002 to 1. 17.72% in 2004. margins are likely to expand.6% of loans & advances. Commercial Bank had revised its effective interest rates on customer deposits from 2.81% in 2004. both of them together accounted for about 15. reduced to 6.23% in 2003 and rose to 2.Global Research Qatar Global Investment House Ahli Bank. With the declining interest rates. we believe that interest rates on customer deposits are not likely to increase at the same pace at which it will increase on loans & advances.50% in 2004.50% 0. Therefore. In 2004.00% 1. in the last few years.33% in 2003. QMR on lending which stood at 1. which can be gauged from the movements in Qatar Central Bank’s Monetary Rates (QMR) on lending and borrowing. Out of these two QIB is considered to be largest in terms of all the three parameters discussed before. dominates the Islamic banking sector in Qatar. Mashreqbank plans to spread out their foothold in the Qatari market.51% in 2003 and to 1. While its effective interest rate on loans & advances was at 8% in 2002. which moved from 1. QMR’s rate on deposit moved along the line of rates on lending.51% in 2003 and 5. May 2005 Qatar Banking Sector 5 .2% of total deposits and 14. National Bank of Kuwait with International Bank of Qatar and a Dubai-based.

6% in 2003.997. To tap the growing importance of Islamic finance. 6 Qatar Banking Sector May 2005 .8% to QR10. the banks have reduced their dependence on customer deposits which can be seen from the declining share of resident deposits in the total liabilities to 65.9 99. A major portion of this growth in the asset base was funded through the inflow of funds from resident deposits as it accounted for more than 65% of the total liabilities during 2004. On the liabilities side. In 2004.9 528.9 71.5% from 69.R. especially in the GCC region.2bn in 2000.3bn.9 16.8% in 2004 to QR8. The share of foreign liabilities increased to 8.9% in 2004 from 5.103. The resident deposits of the commercial banking sector increased by 14.6% in 2003.8bn and increased its share to 30.5 During 2004. namely Qatar National Bank.1% from 94. the total assets of the commercial banking sector grew at a CAGR of 16. Whereas the share of foreign liabilities have increased to 8. Commercial Bank and Doha Bank are entering into Islamic banking.026.Global Research Qatar Global Investment House Conventional banks foraying into Islamic Banking.5 19.9 54.1 44.3bn. At the same time the banks have shored up their capital accounts in 2004 especially to meet the Basel-II norms and to increase their capital adequacy ratio. which shows the kind of interest the foreign banks have in Qatar’s flourishing economy.6 452.5% of the total banking assets and it grew by 11. All the three major banks. Table 3: Consolidated Balance Sheet of Commercial Banks in Qatar (in QR mn) Total Assets Cash in Q.8bn.4 1.169. which will further change the face of the banking sector in Qatar.7 2004 Y-o-Y Growth (%) 92.4% in 2003.464.101. Keeping in line with the improved activity in the local stock market the commercial banks’ domestic investments increased by 19.03bn in 2004 from QR50. credit outside Qatar and investments abroad.201. Foreign banks’ dues from Qatari banks had increased by almost 100% to QR7.4% in 2004 to QR60.982.7 27. Asset and Liability Composition During the period 2000-2004.026. The banking sectors’ domestic credit portfolio accounted for 52. Total provisions of the banking sector declined which is despite the growth in loan portfolio.4% in 2003.4% in 2004 to QR48.868.3% to QR92.3 92. the commercial banks have reduced their dependence on domestic liabilities in 2004 as its share in the total liabilities declined to 91. Due from QCB Foreign Assets Domestic Assets Total Liabilities Foreign Liabilities Domestic Liabilities Source: Qatar Central Bank 2003 76.4 42.6bn in 2004 from QR3. The major constituents of the domestic liabilities are resident deposits and capital accounts.7% in total liabilities from 10% in 2003 and it grew by 40.2 20.6 60. The major constituent of the foreign assets are due from banks abroad.6bn. many Qatari banks are venturing into Islamic banking as a window within the conventional bank.2% in 2003.872.756. the foreign assets grew at a faster rate of 42..7bn.8 12.8 76. In 2004.5% to QR3.2% of the total banking assets from 25..9 2.101.0 20.9% in 2004 from 5.6 4.1 16. In 2004.2 83.2 8. provisions of the commercial bank declined by 8. the share of capital accounts increased to 11.857. which suggests strong quality of assets.6% to QR27.8bn in 2003.

40% 1.60% 0.430 403 23. over the last few years its share has May 2005 Qatar Banking Sector 7 . in terms of assets size.995 (607) 5.388 885 14.3% ABQ 1. loans & advances and deposits.5% Source: Bank’s Annual Reports and Global Research Peer Group Comparison Our comparison of the banks in this section would remain confined to only the six listed local banks of Qatar who accounted for 87% of the total assets (as of Dec. Its non-performing loans to gross loans stood at 1.10% 3.17% 11.195 (753) 26.7% 76. Their deposit base grew at the rate of 23%.45% Cash Foreign Assets Domestic Credit Fixed Assets Due from QCB Due from Banks in Qatar Domestic Investments Other Assets Foreign Liabilities Due to Banks in Qatar Capital Accounts Other Liabilities 65.1% QIIB 2.209 298 6.69% 0.79% 8. 2004) in the local banking sector.80% 52. As we have discussed earlier QNB is the largest bank in Qatar.8% 69% CB 6. As usual QNB was at the forefront of providing more for its NPLs as it provided 113%.690 (260) 1.436 (227) 4.50% 9.1%.8% followed by QNB at 2. Over the last few years banks in Qatar have extensively focused on improving their quality of assets which resulted into substantial improvement in the quality of their assets portfolio.442 667 2. In the Qatari banking sector. All the six banks putting together have expanded their asset base by 24% and loans & advances by 18% in FY2004.90% 7. quality of the loan portfolio needs to be studied in terms of performing assets and non performing one and also in terms of coverage provided to NPLs.1% 91.7%.9% 64. It was followed by Commercial Bank with 111% and QIIB with 91.5% 113% DB 5.43% Resident Deposits Due to QCB Provisions Source: Qatar Central Bank Asset Quality As we have discussed earlier.661 (76) 2.89% 30. Therefore.8% 111% QIB 4.3%. Most of the banks in Qatar have adequately provided for their NPLs in FY2004. Commercial Bank had considerably improved its loan portfolio with the lowest NPLs. The table appended below gives the broad overview of the size of the balance sheet of all the listed Qatari banks. In 2004.5% and QIIB with 3. Ahli Bank had the lowest NPL coverage of 64.662 122 1. QIB’s NPL/gross loans was at 6. loan book account for larger portion of the bank’s total assets.797 (135) 6. Ahli Bank has the highest non-performing loans as a percentage of the gross loans which was followed by Doha Bank.80% 3.585 83 3.59% 0. Table 4: Quality of Loan Portfolio (Amt in QR mn) Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL QNB 27.5%. However.Global Research Qatar Global Investment House Figure 3: Composition of Assets and Liabilities of the Banking Sector Banking Sector Assets Composition 2004 Banking Sector Liabilities Composition 2004 1.90% 1.

In 2004.767 DB 318 5.754 39.995 (607) 5.384 4.077 66 6. The most significant part of the operations of the listed local banks in the last couple of years have been the increase in their profitability.430 1.116 8.797 (135) 6.568 10. Doha Bank. Ahli Bank had made private placement of shares to the Bahrain-based. Commercial Bank and Doha Bank.357 27 4.877 7.195 (753) 26. Banks such as Commercial Bank. many companies are planning to tap the capital market and the country has also opened its stock market for foreign investors which will drive the non-interest revenues of the banks.184 CB 401 6.661 (76) 2.744 305 570 875 3.461 324 11.797 QIIB 200 2. Among the two competing banks namely. QIB and QIIB have issued bonus in FY2004 while Commercial Bank had raised equity by way of issuance of rights also.662 1.944 1.040 QIB 334 4.270 570 2.497 6.072 1.314 Source: Banks’ Annual Reports and Global Research As in terms of other financial parameters in case of interest income also QNB continued to lead far ahead of the other banks.398 2.038 5. The hike in interest rates since mid-2004 have helped the bank to increase their interest income though marginally.259 4.034 2. In 2004.962 43 4. almost all the banks have sizably increased their loan book and it also seems that there was a focused approach of all the banks to increase their deposit base to take the advantage of the lowest interest rates prevailed during the year.558 12.797 390 1. all the banks are adequately capitalised to take the advantage of emerging opportunities not only in the local market but in the entire GCC region.335 156 281 438 4. It accounted for about 46% of the net interest of the listed banks.153 29. However.690 (260) 1.388 2.620 96 10. The year 2003 saw the net profits of these banks 8 Qatar Banking Sector May 2005 . The deposit base of all the six listed banks putting together grew at the rate of 23%.304 983 534 2.392 10. most of the banks in Qatar also followed this trend of shoring-up their share capital by way of bonus issues. Ahli United Bank.209 1.625 528 34.138 1.436 (227) 4.335 ABQ 104 1. Table 5: Comparative Snapshot of Balance Sheets of Qatari Banks as of FY2004 (in QR mn) Assets Cash & Bank Balances Gross Loans & Advances Less: Provisions Net Loans & Advances Investments Net Fixed Assets Interest Earning Assets Total Assets Liabilities Due to banks & FIs Customer Deposits Long term loans Paid-Up Capital Reserves Shareholders Equity Interest Bearing Liabilities QNB 1. other banks have also been trying to increase their interest income. Apart from that booming economy offers diverse opportunities for the banks who have developed their investment banking divisions.700 27. the former had grown much faster in terms of the balance sheet size than the later and took over second position in 2004 from the third in the previous year.546 9. Another significant part of the year 2004 was almost all the banks have focused on increasing their non-interest revenues and we believe that which will be the trend in the coming years.585 716 40 4. There are number of projects in the pipeline spanning across the sectors. A phenomenon which has been prevalent all across the GCC region is the increase in the share capital of the banks.068 408 1.614 1.442 7.687 21 5.535 31. most of the banks have also increased their investment portfolio. In Qatar. rights issues and also through private placement to strengthen their capital base and also to comply with the Basel II requirements.Global Research Qatar Global Investment House been declining in terms of all major financial parameters. In order to take the advantage of the bullish stock market.462 5.888 753 8.

Table 6: Comparative Snapshot of Income Statement of Qatari Banks as of FY2004 (in QR mn) Operating Statement Interest Income Interest Expense Net Interest Income Non-Interest Income Provisions for loans Other Provisions / Recoveries Impairment of inv. On Funds Due from Banks & FIs.64% in the banking sector in Qatar.68% while Ahli Bank’s interest margins was lowest at 1.00% 6.414 (505) 909 283 (36) (3) 8 1.10% CB 1.57% 5. For the year ended December 2004. which account for a major portion of the total funds deployed by any bank.95% 5.34% in FY2004. Table 7: Comparative Returns of Three Large Qatari Banks on Different Assets Classes Asset Class (as on December 2004) Due from Banks & FIs Investments Loans & Advances Source: Banks’ Annual Reports and Global Research QNB 1. However. QNB enjoyed the highest effective interest rates 1.27%) and QIIB (3. which was followed by Doha Bank (3.8% and RoAA of 4. In terms of return on assets Commercial Bank and Doha Bank were more advantageously placed as compared to QNB.8%.06% DB 1.4% while QIIB reported the lowest return on assets of 1.10%).81%.70% and 1. we have compared the effective interest rates of the three major banks on different class of assets.81% Comparative Indicators The strong growth in the profitability of listed banks have also boosted their Return on Average Equity (RoAE) and Return on Average Assets (RoAA). effective interest rates of Doha Bank and Commercial Bank were at 6.66%.97%. whereas QNB had the lowest return of 4.06%.160 (335) 825 815 DB 434 (106) 328 239 (29) 538 (173) 366 366 CB 441 (122) 319 212 (4) (2) (3) 523 (196) 327 327 QIB 387 (115) 272 162 (10) (13) (4) 407 (111) 296 288 QIIB 208 (85) 124 39 (16) (1) 1 147 (64) 84 84 ABQ 109 (41) 68 36 14 20 (1) 137 (54) 83 83 Source: Banks’ Annual Reports and Global Research Comparative Returns on Different Class of Assets Here.10% and 5. Ahli Bank reported the lowest spread of 1.95% while the returns of Doha Bank and Commercial Bank were at 1.69% 5.4% and RoAA was at 3. QIB posted the highest returns on equity and also on its assets as it reported RoAE of 28. This may be because QNB had adopted a more conservative approach in lending.70% 6. as compared to other two banks. Doha Bank was at the second position in terms of both these parameters. QIB reported a net spread of 4.48% in FY2004.57% respectively. while in 2004 their net profit increased significantly by 41. exposure to high yield assets in loan portfolio are accompanied with high level of non-performing loans. In Loans & Advances.6%. QNB’s net profit accounted for about 41. Among the six listed banks. QNB reported the lowest RoAE of 13. QIB achieved the highest spread among its banking peers in the country. In terms of net spread.5% of the total net profits of the listed local banks and was also more than twice that of its closest competitor. May 2005 Qatar Banking Sector 9 .Global Research Qatar Global Investment House increase by 28. Securities Operating Income Operating Expense Operating Profit Net Profit QNB 1. Similarly.89%. its RoAE was at 27.53% 4. respectively. in terms of net interest margin QIB leads the pack with 4.

8% 2.9% 74.2% 35.7% 65. QNB has the largest network of branches with 34 branches followed by Commercial Bank.5% 43.5% 32.9% 16.6% 22. Going forward.19% 1.4% 1.71% 31.7% 5.7% 4.9% 19.9% 40. Whereas other two banks namely. Banks have made significant investments on improving customer services and expanding delivery channels in recent years.4% 3.5% 18.0% 39.4% 2.7% 6.3% 43.4% 3. the same was not the case for other banks.8% 37.17% 3. QIIB and Ahli Bank has the lowest network of branches.3% CB 16. In case of QNB we have excluded the employees of subsidiaries from the total number of employees of 1.7% 27. In terms of employee productivity.00% 22.28% 2. In terms of costs QIB is considered to be as the most efficient bank among the listed pack as it had the lowest cost to operating income ratio of 27.70% 2.3% 29.7% 24.4% 76.0% 16.97% 40. QIIB has the lowest operating expense per employee.Global Research Qatar Global Investment House Qatari banks’ cost to operating income after provision is seems to be in line with their regional counterparts.13% 26.51% 1.25% 3. Commercial Bank and Doha Bank have vigorously focused on expanding their network of branches.08% 3.0% 27.4% ABQ 13.5% QIIB 22.4% 51.66% 2.2% 91.69% 24. 10 Qatar Banking Sector May 2005 .8% 3.49% 2.10% 3.0% 8. Doha Bank. we believe that Qatari banks need to focus on cost rationalization aspects to achieve higher operational efficiency.8% 4.096.1% 61.4% 28. Commercial Bank has expanded its branch network very fast as compared to the other banks.6% 14.1% 23.2% 17.4% 37.4% 22.2%.4% 4.8% Operational Performance of Peer Banks Over the last few years two banks namely. QIIB has the lowest operating income per employee while QNB has the highest operating income per employee.7% 4. which was much higher as compared to its peers in Qatar. As can be seen from the table below.8% 33. Table 8: Comparative Indicators of Listed Qatari Banks (as of FY2004) Ratios Profitability Indicators ROAE ROAA Interest Exp / Interest Income Interest Income / Avg Int earning assets Interest Exp / Avg Int bearing liabilities Net Spread Net Interest Margin Non Interest Income / Operating Income Cash Dividend Payout Ratio Efficiency Indicators Cost to Operating Income Staff Expenses / Operating Income Liquidity Indicators Net Loans / Customer Deposits & Deposits from FIs Gross Loans / Total Deposits Capitalisation Indicators Capital Adequacy Ratio Equity to Total Assets Equity to Gross Loans Source: Banks’ Annual Reports and Global Research QNB 13.7% 74.8% DB 27.0% 25.8% 76.27% 3.53% 1.54% 34.64% 1. QIIB reported the highest cost to income of 43.4% 83.41% 44.1% 16.2% 58.9% QIB 28.26% 39.16% 1.8% 72.42% 3. In terms of operating income QNB is way ahead of its rivals.1%.50% 1.7% 73. and QIB.62% 29.6% 81.80% 14. while QNB has the highest considering the size of its operations.48% 4.2% 69.4% 37.0% 61.18% 4.0% 27.5% 24.1% 19.5% 59.8% 20.91% 16.68% 35.

.32 0.On the other hand banks in Qatar have also expanded into retail banking and credit cards on which interest rates range between 18-24% on an annualized basis.Banks operating at Doha Securities Market (DSM).5% growth in its GDP for the year 2004.29 0.78 0. other regional banks have plans to enter the Qatari market. the local conventional banks are venturing into Islamic banking and a few large local banks have also started to spread their wings into foreign markets through acquisitions. .27 0.Large scale growth in credit which increased by 13% to QR49. . The sound economic fundamentals will further trickle growth in the economy which can be gauged from the flourishing activities in almost every sector of the economy and banking sector would be one of the major beneficiaries of this boom.10 DB 19 538 538 (173) 366 1.Apart from the domestic market banks are also concentrating on developing their business abroad which can be gauged from the growth in the size of their overseas assets. This growth in the sector can be attributed to many factors: . as the DSM witnessed a tremendous growth in trading volume.As a result of the strong oil prices over the last few years.69 0. . domestic as well as foreign.Banks have adopted much aggressive approach to capitalize the growth opportunities the economy is offering.42 Factors which have propelled the growth in the Banking Sector during 2004: As discussed earlier. .26 0. of Employees Operating Income (Net of Provisions) Operating Expenses Operating Profit Operating Income Per Employee Operating Expense Per Employee Operating Profit Per Employee Source: Banks’ Annual Reports and Global Research QNB 34 749 1160 (335) 825 1.60%-1. Banking Sector Outlook The economy of Qatar is registering a strong growth over the last few years. To face this changing industry dynamics many banks.5bn. We believe that the banks entry into the fast growing Islamic banking segment could help these conventional banks improve their business levels and enhance profits over the medium term. had recorded another year of astonishing performance by registering a 20. there has been an expansion in public expenditure which has its multiplier effect on the other sectors of the economy.70 QIIB 8 269 147 (64) 84 0. have started May 2005 Qatar Banking Sector 11 .45 1. have witnessed rise in their commission income on trading at the DSM.24 0. .55 0. needless to say due to strong crude oil prices. growth in deposit base as also in profitability.There has been a wide difference between lending and borrowing rate of deposits.31 ABQ 8 199 137 (54) 83 0.Global Research Qatar Global Investment House Table 9: Comparison of Operating Performance of the Listed Banks (FY 2004) (in QR mn) No. The structure of the banking sector in Qatar is in the midst of a change as regional banks have started to put their footprint in the country by taking stakes in the existing banks.96 0. of Branches No. Qatari banking sector has witnessed all round growth mainly aided by credit expansion. the lending rates have been much higher giving the banks a very comfortable positive net spread.00 0.68 CB 23 673 523 (196) 327 0. much of this growth was contributed by the sectors other than the public sector. which helped Qatar record large budget surpluses. While interest rates on deposits were in the range of 1.75%.55 0.49 QIB 9 422 407 (111) 296 0. Also.

815 2.802 6.QA 268.9 3. As of April 24.8% 36.4x is on a lower side among the pack.6 times the book value as of December. This measure will help the banks to shore-up their CAR and to leverage their balance sheet and will help the banks to tap profitable lending opportunities the country would offer in the coming years.8x based on their 2004 earnings. Apart from a change in the market dynamics.8 5.1 times followed by QIB with 7. 2005 the average price earnings ratio for the banking sector stood at 39.6 times.6 11.9x followed by Ahli Bank with 46. Going forward.4% 38.Global Research Qatar Global Investment House to expand their operations especially in the retail banking segment. 2005 Source: Banks’ Annual Reports and Global Research The average price to book value of the sector was at 6.738 15. Therefore. However. We believe that the discounting enjoyed by some of the banks are likely to decline from the current levels due to steep rise in their stock prices.5 300.2% 13. 12 Qatar Banking Sector May 2005 .1 4.1 4.9% -1.7 31.7% Buy 208 224 -4.9% 22.QA AABQ. Doha Bank’s P/E of 24.9 2. Ahli Bank has the lowest price to book value of just 4.4% 55. QIIB enjoys the highest P/E multiple of 55.1 125.4 5.2 5.096 3.3% 28.2 7. local Qatari banks have also concentrated on capital expansions and many banks have increased their capital base in the past few years and this trend is expected to continue in the near future. first quarter report cards of the banks will have its influence on the prices of banking stocks.4 3.8% 46.7 218.2 *Stock prices are as of April 24.0% 16. the valuation of the Qatari banking sector appears to be on a higher side as compared to other GCC markets. Valuation Matrix In the recent past Doha Securities Market has posted robust and rather steep gains in the stock prices.7 Composite Potential Share Upside/ Recommendation Value Downside 363 18.QA 227.QA QIIB.4% 24.976 17.4% 37. Table 10: Comparative Valuation of Qatari Banks (FY 2004) Name of Bank Qatar National Bank Doha Bank Commercial Bank of Qatar Qatar Islamic Bank Qatar International Islamic Bank Ahli Bank Country Qatar Qatar Reuters Code QNBK.1 Qatar Qatar Qatar QISB.165 16.7 times.3 1.4% 13. currently DSM is in correction phase and witnessing profit booking from the investors which might bring the prices of some of the banking stocks to realistic levels.QA CMP * M-Cap * RoAA RoAE P/E * P/BV * (QR) (QR mn) 305.QA DOBK. QIIB enjoys the highest price to book value of 11.4% Hold Hold Not Rated Not Rated Not Rated Qatar COMB.7% 27. 2004 (excluding proposed dividends).2x.

Based on the combination of Discounted Dividend Method and Peer Group Valuation Method. which will further strengthen its business operations in the Qatari as well as in the regional markets. we initiated coverage on QNB and recommended a Buy on the stock with a price target of QR140. the bank’s recent entry into Islamic banking will further widen the product basket of the bank as there is increasing importance of Islamic finance in the region. Doha Bank Since the last the three consecutive years Doha Bank has been reporting over 70% y-o-y growth in its net profit.6mn for FY2003. Since then the stock meet our expectations and witnessed significant run-up in its price. The bank’s net profit was at QR365. 2005) with a price target of QR214. which was backed by all round growth in net interest income. The bank’s expanded capital base will allow the bank to leverage its balance sheet and increase profitable lending opportunities which Qatar would offer in the coming years. the bank registered a robust growth of 105. which was backed by both growing net interest income and also non-interest revenues. It has led to the increase in the earnings per share to QR7. Total operating income (net of provisions) of the bank grew by 65. CB registered an impressive y-o-y jump of 32% in its bottomline to QR326. which will also diversify its revenue streams.60 per share at the then market price of QR120 per share. on the back of substantial boost in non-interest revenues and also a marginal increase in net interest income.4 (as of April 14th. We maintain our earlier rating and recommend a BUY and value the bank’s stock at an intrinsic value of QR363 based on the Discounted Dividend Model (DDM) and peer group valuation method.8.1 is marginally higher by about 1. During 2005.7mn. In January 2004.4mn reported during the previous May 2005 Qatar Banking Sector 13 . The economy is growing at a very healthy rate which will further expand business opportunities for the bank and QNB being the leading bank will have an advantage as compared to the peer in the sector. The intrinsic value arrived by us is at 18. therefore. the bank also plans to expand its branch network with five to six additional branches in Qatar. we re-rate the stock with a HOLD recommendation. We believe that the bank will see successful expansions into wealth management business following the acquisition of Ansbacher. fees & commission income and also a significant jump in income from investments.9 for the FY2004 from QR6. We initiated coverage of Commercial Bank with a buy recommendation at the market price of QR192.6mn for FY2004 as compared to QR214. QNB registered an impressive y-o-y jump of 27% in its bottomline to QR814.9mn.2mn as compared to QR324. Since then the stock price run-up significantly. apart from the conventional banking it has also started providing Islamic banking products. Now. Commercial Bank of Qatar Over the last five years. Expansion and enhancement of branch network through investment in alternative delivery channels are the focus area to capture retail market and will further help the bank to increase its non-interest revenues. As part of its future strategies. CB has witnessed significant growth in its profitability.Global Research Qatar Global Investment House Recommendation Summary Qatar National Bank In FY2004.9% in FY2004 to QR538.7% premium to the current market price. The current market price of QR227.2 achieved in FY2003.4% than the intrinsic value of the stock. During Q1FY 2005.8% in its net profit to QR391. we value the bank’s share at an intrinsic value of QR224. In 2004.7mn.

3 per share at the then market price of QR159 per share. the bank is planning to venture into Islamic banking.9% higher than the intrinsic value of the stock. including Korea. All these will see it increases its branch network to 34 across nine countries as part of a global expansion drive. The bank is planning to open eight more branches in Qatar and it also plans to open branches in overseas markets. we initiated coverage on DB and recommended a Buy on the stock with a price target of QR194.Global Research Qatar Global Investment House year. As part of its expansion plans. In March 2004. and recommend HOLD for the stock as the current market price is about 4. Japan. 14 Qatar Banking Sector May 2005 . we value the bank’s stock at an intrinsic value of QR208. It will soon set up a dedicated division to offer Islamic banking products which will further strengthen its business operations in the Qatari as well as in the regional markets. Now. Since then the stock meet our expectations and witnessed significant run-up in its price. India and Central European countries. based on the Discounted Dividend Model (DDM) and Peer Group Valuation Method.

Global Research Qatar Global Investment House PLAYERS PROFILES May 2005 Qatar Banking Sector 15 .

with the exception of the government.9 QR31. The bank has a network comprising of 32 branches and offices in Qatar and two branches in the United Kingdom and France. vol. In accordance with QNB’s Articles of Incorporation. • • 16 Qatar Banking Sector May 2005 . Shareholding Pattern • The Government of Qatar holds 50 per cent stake in the bank. the bank’s employee strength was at 1.85 56.95 38. Since the inception of the bank.74bn QR363 Key Data EPS (QR) BV (QR) P / E (x) P / BV (x) Source: Global Research Background • Qatar National Bank (QNB) was established in 1964.096 of which 347 were employees of subsidiaries. QNB acquired a London-based wealth management company. Ansbacher Holdings which was a major move that reflects the implementation of the bank’s strategy of expanding its product portfolio. treasury.500 leading Qatari nationals. by Emiri decree and is the oldest and largest local commercial bank in Qatar.Global Research Qatar Global Investment House Qatar National Bank Reuters Code: QNBK. 52 week Lo / Hi (QR) Market Cap Target Price 24. during the second quarter of 2005.0 / 341. there has been a little change in its shareholding pattern. investment advisory services to both domestic as well as international clients. The new bank was to commence its operations in the first quarter of 2005.4 12M Avg.7 24th April 2005 BUY 7. QNB offers a full range of banking and financial services like corporate banking. Recent Developments • In 2004. no person (natural or legal). can own more than 2 per cent in the bank except by way of inheritance or will.9 5. As of end-Dec 2004. QNB Al Islami.QA Listing: Doha Securities Market Current Price QR305. retail banking. It has the distinction of being the first locally incorporated commercial bank in Qatar. This will allow the bank to develop the appropriate wealth management products and services to address the needs of a growing number of high net-worth customers.225 148. while the remaining 50 per cent is held by about 1. Recently. QNB will participate as one of the consortium partners with three Middle Eastern banks which are planning to set up a new private bank in Syria with an initial capital of US$30mn. the bank has ventured into Islamic banking with the launch of a new Islamic banking branch.

160mn as compared to QR972mn reported during the previous year.2% over 2003 and its gross loans & advances grew by 13.9% in 2003. As a part of QNB’s efforts to diversify its revenue base. The bank has more than sufficient coverage to its NPLs as its NPL coverage increased to 159% in 2004 from 154% in 2003. In continuation of its ongoing strategy to use the state of the art technology to modernize its banking services.5% in FY2004 to QR283mn. QNB’s NPLs declined by around 2% to QR666. which was despite the growing loan book and declining exposure to the government sector.8% to QR27. The bank will consolidate revenue statement of Ansbacher from FY2005.5% in interest cost to QR504. • • • • • • • • May 2005 Qatar Banking Sector 17 .9mn in FY2003.6mn from QR679.9mn The cost to total operating income after provision declined to 28. In FY2004. which was an increase of 11% in 2004 over the previous year.3% in FY2004 to QR1. At the end of 2004. the total assets of the bank stood at QR39. QNB implemented a new operational risk management solution from JP Morgan Treasury Services in 2004.5% from 2. to develop a range of insurance products for its clients. QNB has joined hands with one of the world’s largest international life insurance companies.9mn.4% in gross interest income to QR1. Among the major cost components. American Life Insurance Company (Alico). non-interest revenue registered a sharp y-o-y growth of 40. NPLs as a percentage of gross loans declined to 2. Other operating expenses grew by 30.Global Research Qatar Global Investment House • To further enhance its retail banking services. On the back of substantial boost in non-interest revenues and also a marginal increase in net interest income. Total operating income (net of provisions) of the bank grew by 19.4bn representing a growth of 13. The contribution of non-interest income to total operating income increased substantially in 2004 to 23. QNB registered an impressive y-o-y jump of 27% in its bottomline to QR814. It has led to the increase in the earnings per share to QR7.8% in 2003.9 for the FY2004 from QR6. staff expenses stood at QR190.2 achieved in FY2003.9mn.413.2bn.7mn led the bank to report a growth of 6% in its net interest income to QR909mn. • Analysis of Financial Performance – 2004 and Q1 2005 • QNB reported a sharp increase in its non-interest revenues for the year 2004 which substantially boosted its earnings and therefore beat our earlier earnings projections for the year.8mn and lower growth of 4. an increase of 5.6% to QR97. QNB’s revenue streams are expected to see further diversification from 2005 onwards with the acquisition of Ansbacher.9% from 32. In FY2004.8% from 19% during the previous year.

1 Currently.7mn. fees & commission income and also a significant jump in income from investments. QNB is trading at 5. We maintain our earlier rating and recommend a Buy and value the bank’s stock at an intrinsic value of QR363 based on the Discounted Dividend Model (DDM) and peer group valuation method. During Q1 FY2005.Global Research Qatar Global Investment House • In FY2004.1x of its estimated book value and 22. the bank increased its funding from customer deposits to take the advantage of low interest rates.6bn over the previous year.9% to QR29. We believe that the bank will see successful expansions into wealth management business following the acquisition of Ansbacher.6% to QR28. the bank registered a robust growth of 105. The share of customer deposits in total liabilities increased significantly in 2004 to 75% from 69% in 2003 and it grew by 22. It also plans to set up a consumer finance company which will focus not only in the local market but also widen its business in the regional markets. we recommended a buy on the stock at the then market price of QR284. Its customer deposit base witnessed significant growth of 25.4bn. • • Outlook • As part of its future strategies.8% to QR44. The intrinsic value arrived by us is at 18.5% to QR32. • • • Valuation • In February 2005. which was backed by all round growth in net interest income. The total assets of the bank increased significantly by 24. which will also diversify its revenue streams.08bn over corresponding quarter of the previous year and its gross loans & advances grew by 18.7bn. • • 18 Qatar Banking Sector May 2005 . The economy is growing at a very healthy rate which will further expand business opportunities for the bank and QNB being the leading bank will have an advantage as compared to the peer in the sector.6 since then the stock moved as per our expectation and it achieved our target price of QR326.7% premium to the current market price. the bank’s entry into Islamic banking will further widen the product basket of the bank as there is increasing importance of Islamic finance in the region.8x of its estimated earnings of FY2005.8% in its net profit to QR391.

489 (154.901 580.204) (3.806) (1.631 127.245.402 1.725 1.172 52.487) (49.283 3.575 1.160.340 2.OPERATING STATEMENT 2002 1.439 1.000) (14.331 620.585) (190.523.532 911.040 1.755) (23.373.608) (11.110.781) 2003 Qatar National Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in Qatari Riyal ‘000 Interest Income Interest Expense Global Research Qatar 20 839.791) (74.803 (3.448 38.815.894 (106.413.818) (3.322 12.182 2.277.679) (978.534) (407.486 1.587 Retained Earnings Broght Forward Net Profit for the year Global Investment House May 2005 Proposed Dividend Director Fees Cl Balance of Retained Earnings (1.940) (205.685.163.490 16.938) (8.120) (254.461 10.492 2.008 146.361 .123) Net interest income Add : Fees and commission Add : Net Gains from Dealing in Foreign Currencies Add: Income from Investments Less: Loss from Investments in Associates Add : Dividend Income Add : Other Operating Income Total Non-Interest Income Total Operating Income Less: Provision for Impairment of Loans & Advances Add: Recovery of Provision/(Provision) for Properties Acquired against Settlement of Debts Less: Other Provisions / (Recoveries) Less: Investment Revaluation Gains/ (Losses) Operating Income (net of provisions) Less : Staff Expenses Less: Employees’ Termination Benefits Less: Provision for Pension Fund Less: Expenditure on Bank’s Community Support Programme Less: Other Expenses Less: Depreciation (1.587 935.818) (3.132) (17.462.560) (61.117 8.766 2.820) 626.792.591) (1.048.256 24.394) (35.424 1.531 766.997 1.963 92.403.053.439 1.778.551) 825.609 1.547 140.116 2.110.909 201.433 1.391 176.757.355 19.519 25.552 859.815 (67.041) (295.543) (27.335 626.682 1.486 1.617 2.480.435) (18) (28.820) 438.950 438.332) (59.669 78.159) (55.688 283.162) (50.059) (3.988) 7.169 15.941.091 641.426 2.136.193) (3.950 (622.256) Profit Before Taxes 651.390.170 2.887 909.000) 23.997 1.376 34.183) (482.129 1.600) (22.270 164.820) 346.585 (20.449.123 (545.993.340.730) (715.846.826 2.078.659) (33.658 94.670 4.493) 37.044 204.269) (58.541) (870.505.077.690) (26.877 971.204 236.808 159.799 (472.618 1.999) (97.266.556.832 (623.618 1.149 2.710) (31.351) (2.597 477.390.749 14.507 66.478.130 3.763 2.348) Qatar Banking Sector 586.486 2.408.864) (349.911.300) (172.449.818) (3.838) (504.192.200.938 1.059.140) (378.544 986.433 814.477 3.708) (42.363 801.063 1.943) (19.241 857.419 131.492 2.925) (3.555 50.674 (10.180 14.327 (6.355.839) (39.891 1.377) (227.207) (66.762 2.091 641.186 115.150 1.750 (331) (532) 23.299) 2.012) Less : Taxes Net Profit P&L Appropriation Account: 580.213 19.152.335 814.505.245.581.957) 6.941) (44.452.349 97.123 346.951) (75.116 2.557 2.793 1.818) 935.962 (10.092 168.792.301) (55.688 1.255) (82.155 974.800) (23.204 (467.

673 191.712 2.119.786.485 890.818) (16.806) (1.327) Amount in Qatari Riyal ‘000 Operating Operating Activities 731.083) 6.016 2.846.667.001 1.817) (548.967 917.615.961) (1.087 .096) (5.182 49.478.077.451) (299.477 (1.509) 1.018.988 37.369 (622.549 3.210.700) (415.743 203.511 132.267.880.351) 1.696 647.666) (110.560 (3.562 145.739 289.) in available for sale investmenets Inc.388.318 (703.491.738) (13.540) (229.387 4.052 3.125.116 229 Net Increase/Decrease in Operating Activities Total Operating Inc.843 (1.177 1.840 1.159 (7.618 (91.855 5.157) 21.826 55.785 4.418 1.110.948.098 331 (2.524.277 5.269 (3.751) (5.375 587.000 23.818) (25.255.660) 2.) in due from banks (Inc) in originated debt securities (Inc.227) 2.432) (107.308) 1.285 4.271.934) (840.490) (17.025) 890.050 2.915) 2.498 586.639 - Global Investment House Total Investing (23.958 810.544 (32.233.018 1.375 4./(Inc.659 (1.028) (3.154.846.431.CASH FLOW STATEMENT 2002 2003 Qatar National Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 825.178) 920.162) (72.480.904.781) 152.444) 810.960 (6.708 33.388.291.154) (5.710.404 Global Research Qatar May 2005 52.478.040 39.702 3.466.591) (1.659 18 77 3.00.539.249) (85.023 (661.369 3.882) (1.556 120.031 (794.542) (98.165.219) (13.198) (88.351) 21 Financing Dividend paid to shareholders Total Financing (415.256 (3.619) 387.585) (19.159 Net Change in Cash Exchange rate differences Net Cash at beginning Net Cash at end .808 17.947. in customer deposits Dec.818) (14.418) (1.144) (1.260) (12.690) 2.493 66.505.092) 2.) in other liabilities 1.032.588.543 28.674 82.387 679.623.953 Investing Purchase of investments Redemption of held to maturity investments Sale of investments Sale of Associates Acquisition of Subsidiary.808 (548./(Dec.542.986) 1.309 62.976.143.288) 51.591) (1.862 137.925) (1.101 963.144) (6.200 139.390) 1.958 (467.552) (26.686) 109.947) (5.186) (1.897) (186.567 1.925) (1.700.(1.537) (111. in other assets Inc.845.129 42.965 176.609 355.136.270.508 (31.451) (467.348 (3.962 67.390) 3.307 499.) / Dec.481.316) (182.815.077./(Dec.887 1.178) (622.012 5.262 27.184 (1.730.166.477) (1.166.486 144.) in loans and advances (Inc.420) (1.519) (22.611) (85.390) (25.009) (189.508.957 61.806) (1.198. Net of cash acquired Purchase of fixed assets and property Sale of fixed assets and property (993.135.600) 1.900.839 11.818 Qatar Banking Sector (592.123) 651.135.005 (30.301 58.327 106.477) (31.089 4.340 3.000 8.125) (55.378.749) (18.744 (37.486.255 20.203.486.089 222.080) 1.628) (981) 2.012) Profit for the Year (Before Taxes) Provision for impairment of loans and advances Provision for Legal cases Depreciation Directors fees Provision / (release) of provision for impairment of investments Other provisions Release of other provisions Provision for property acquired against settlement of debts Profit on sale of investments Fair value adjustment of investments Amortisation of premium or discount on investments Loss form associates (Profit)/loss on sales of fixed assets Taxes Paid 793.851) (1.710) 2.) in due to banks Dec/(Inc.818) (37.865 8.408.097.487 55.291) (6.833 (703) (14) (9.942 837.

6% 25.Equity to Gross Loans Operating Performance .0 1.2% 6.9 59.8 17.7 305.7% 27.3% 23.9 62.0 13.Change in Fx Income .5% 42% 190% 267% 31% 22% 679.900 756.4% 13% 2.600 753.4% 2.7% 35.5% 12% 24% 11% 18% 15% 36.772 103.7 14.3% 0.5% 2.051 3.9 65.6 43.Staff Expense to Total Op Income .5% 3.9 2.914 871.5% 24% 30% 5% 32% 18% 33% 18% 1% 29% 16% 1% 31% 17% 1% 28% 15% 1% 27% 14% 1% 80% 87.7% 4. Interest in suspense) .2% 14% 14% 20% 59.7 305.530 841.2% 14.5% 2.2% 3.3% 11.216 811.9 13.820.5 48.6 .2% 83.0% 4.Book Value Per Share (QR) .3 20.187 2.NPL’s to Gross Loans .1% 60% 40% 3.Fees & Comm.423 2.Loan Loss Reserve (QR’000) .8% 113% 159% 756.011.6% 3.3% 17% 12% -20% 2% 32% 6% 44% 32% 27% -61% 79.P/E .8% 2.2% 11.9% 5.3 23.Interest Expense to Interest Income .6% 3.7 305.1% 20.Interest Income to Total Op Income .772 103.820.4% 79% 103% 73% 99.5% 3.1% 71% 91% 14% 14% 21% 60.3% 1.4% 14% 1.Cost to Total Op Income .7 15. Income (net of provisions) . Liabilities) .5% 0.6% 5.6% 11.1% 523% 120% 79% 86.5 5.9 4.6 25.6% 2.820. Income .2% 2.0% 85% 15% 42.2% 13.6% 2.1 4.NPL’s to (Equity+Loan loss reserve) .Due from Banks to Due to Banks Qatar Banking Sector Capital Adequacy .Customer Deposits to Equity .Change in Fees and Commission .6% 0.8% 14% 3.8 56.7% 2.1 83 128 199.0% 5.5% 5.9% 32% 18% 1% 59% 87% 474% 240% 609.FX Income to Total Op.Return on Average Assets .7% 13% 17% 97% 58% 657% 15% 15% 22% 60.2% 1.132.Change in Investment Income .9% 13% 13% 19% 58.Interest Income to Interest Earning Assets .Loans to Interest Earning Assets .8% 453% 109% 78% 86.5% 2.0% 3.772 103. Interest in suspense) Constitution of Total Income .623 2.3% 548% 100% 891.3% 2.0% 65.820.5% 2.Investment Income to Total Op Income .8% 14.742 675.Equity to (Total Assets + Cont.420 2.0% 14% 3.Change in Other Income .Interest Expense to Interest Bearing Liabilities .Shares in Issue .Loans to Customer Deposits .8% 60.6% 2.5% 36.836 778.2% 2. Income Global Investment House May 2005 Ratios Used for Valuation .1% 80% 20% 2.3% 35.4 67.607 2.Non Performing Loans (QR’000) .0% 3.Return on Average Equity .4% 12% 2.5% 15% 19% 10% 17% 12% 1.5% 2.4% 59% 41% 3.772 103.EPS (QR) .7% 35.3% 12% 2.4% 75% 25% 3.1% 2.4% 23.4% 3.3% 111% 152% 16% 12% 24% 85.2% 13.5% 570% 86% 1.2% 0.4 17.1% 2.1% 3.NPL Coverage (excl.8 20.1% 16% 16% 23% 17% 17% 24% 75. Income (net of provisions) 2003 Qatar National Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Qatar 22 Margins Efficiency .Cost to Average Total Assets Credit Quality .7 305.2% 26.6 6. Income .3% 0.Non-interest income/ Op.Ratios 2002 2.4 22.5% 12% 2.4% 59% 41% Profitability .Net Spread .5% 597% 77% 1.6% 26% 14% 1% 81% 87.4% 61% 39% 3.772 103.2% 111% 154% 666.Net interest income/ Op.820. to Total Op.Equity to Total Assets .5% 5.7% 27.0% 11.7% 0.820.0% 3.9% 12.203 2.2 7.Loan Loss Reserve to Gross Loans .7% 24.Change in Interest Income .8% 2.772 5.7% 0.P/BV 103.Market Price Year End (QR) .Other Income to Total Op.NPL Coverage (incl.772 103.7 4.3% 76.Net Interest Margin Liquidity .6 3.0% 12.5% 35.5% 0.820.2% 430% 91% 78% 91.

Iran and Yemen in addition to Qatar.vol. Syria.2 12M Avg. The Bank offers a comprehensive range of corporate.10 QR16.477 97. Recent Developments • Among the six listed Qatari banks.QA Listing: Doha Securities Market Current Price QR227. 21 deposit machines and internet home banking. The bank undertook a series of initiatives in the last couple of years which were aimed at modernizing its corporate identity and launched a corporate re-building exercise.98bn QR224 Key Data EPS (QR) BVPS (QR) P / E (x) P / BV (x) Source: Global Research Background • Commercial Bank of Qatar (CB) was incorporated in Qatar in 1975 as a public shareholding company. Shareholding Pattern • Currently. The bank also acts as a holding company for its three overseas subsidiaries which are engaged in credit card business in Egypt. CB has emerged as the second largest bank in terms of asset size.Global Research Qatar Global Investment House Commercial Bank of Qatar Reuters Code: COMB. sales offices/pavilions. Sudan. As of end-Dec 2004. 71 ATMs. retail and investment services through a network of 23 branches.14 / 258. The bank also operates a brokerage office at the Doha Securities Market. CB is focusing on building the strong financial position of the bank. With the new law regarding foreign ownership in listed companies has been effected in Qatar from April 03. It holds the exclusive franchise rights of Diners Club International in Bahrain.1 5. It has also modified its logo and changed its trade name to Commercialbank. 2005. It has the largest Electronic Funds Transfer at Point of Sale (EFTPOS) network in the country. Egypt. deposit base and the share of gross loans & advances in the State of Qatar as of December 2004. foreign investors will be allowed to own up to 25 per cent of the issued share capital of the bank.10 24th April 2005 HOLD 6.12 44. the bank’s employee strength was 673. high net worth Qatari families jointly hold an estimated 40% stock of the bank and the remaining 60% are held by the public at large. 52 week Lo / Hi (QR) Market Cap Target Price 74. Iraq. diversify its business • • May 2005 Qatar Banking Sector 23 . Bermuda and Bahrain.1 37.

In the area of technological advancements. The bank is focusing more on improving its revenue base from non-interest income towards this its non-interest revenue registered a significant growth of 29. while non-interest income accounted for 40%.0 achieved for FY2003.05mn from QR24. In 2004. the bank significantly upgraded customer-facing technologies and expanded and enhanced its branch network. while its interest expenses increased at a higher rate of 50% to QR122. it introduced an advanced IT enabled processing systems in the areas of Trade Finance. Total operating income (net of provisions) of the bank grew by 32. the total assets of the bank stood at QR12. Stock Brokerage and Investments and Personal Loans.9bn representing a decent growth of 47% over 2003 and its gross loans & advances grew significantly by 41% to QR6. In 2004.7mn as compared to QR393.5mn.2mn. At the end of 2004.6% in FY2004 to QR212mn. In 2004. Moody’s have upgraded the bank’s Financial Strength Rating (FSR) to ‘C-’ from ‘D+’ and kept unchanged the bank’s foreign currency deposits rating at A3/ Prime-2.Global Research Qatar Global Investment House and to further strengthen its market share in the banking services. CB has witnessed significant growth in its profitability. Five new branches were opened in 2004 which increased the number of branches to 23. Towards. net interest income accounted for 60% of the total income.7mn. Cash Management.8bn. this growth in profitability did not have much impact on its per share earnings due to a much faster growth in its paid-up capital because of bonus and rights issues.1 from QR7. the bank witnessed a sharp decline in provisions for loans & advances to QR4.7% in FY2004 to QR522. last year.3mn. the bank acted as lead arranger and underwriter for part of the commercial loan of the new Qatar Gas II mega project. The bank is playing a leading role in the industrial expansion of the economy by participating in the State’s financing needs and financing oil and gas related projects.9mn reported during the previous year. In FY2004. • During the year 2004. which was backed by both growing net interest income and also non-interest revenues. • • • Analysis of Financial Performance – 2004 • During 2004. However. this end the bank has diversified into Islamic banking with the launch of Al Safa Islamic Banking branch during the second quarter of 2005. Over the last five years.08mn in FY 2003. • • • • • 24 Qatar Banking Sector May 2005 . In spite of this the bank was able to increase its net interest income by 23% to QR319. Its earnings per share for FY2004 declined to QR6. for instance. the bank’s interest income increased by 29% over 2003 to QR441. In December 2004. CB registered an impressive y-o-y jump of 32% in its bottomline to QR326.

The bank’s capital position continued to remain strong. we re-rate the stock with a HOLD recommendation.62% in 2004 from 25. 2005) with a price target of QR214. due to issuance of 25% bonus shares.1 is marginally higher by about 1.3bn. During 2005. the bank plans to open five to six additional branches in Qatar. • • May 2005 Qatar Banking Sector 25 . which is well above the 10% requirement of Qatar Central Bank and 8% under Basel requirements. therefore. Despite stiff competition the bank increased its customers’ deposit base by 32% in 2004 to QR8. announced at the end of the year 2003. At the end of the year 2004. The current market price of QR227.1x of its estimated earnings of FY2005.8mn in 2004 from QR436. Expansion and enhancement of branch network through investment in alternative delivery channels are the focus area to capture retail market and will further help the bank to increase its non-interest revenues.8.23% in 2003. Based on the combination of Discounted Dividend Method and Peer Group Valuation Method we value the bank’s share at an intrinsic value of QR224. in 2004 it declined to 1.4% than the intrinsic value of the stock. The bank’s NPL coverage improved to 111% in 2004 from 91% in 2003. its share of the total liabilities declined from 71% in 2003 to 64% in 2004. Its capital adequacy ratio (CAR) increased to 34. and issue of 25% rights shares in 2004. CB is trading at 7x of its estimated book value and 36. Over the last two years the bank continuously focused on expanding its capital base through bonus and rights issues.5mn.8% from 4% in 2003. Since then the stock price run-up significantly. Currently. The funds from this avenue increased significantly by 125% to QR982. Expanded capital base will allow the bank to leverage its balance sheet and increase profitable lending opportunities which Qatar would offer in the coming years. the bank has announced further issue of bonus shares of 40% of the bank’s capital which will further strengthen its capital base to QR747. These are aimed to meet the general funding needs of the bank and to bridge the balance sheet mismatch.Global Research Qatar Global Investment House • The bank has a portfolio of strong assets as its NPLs as a percentage of gross loans has been declining consistently.8mn in 2003. which will further strengthen its business operations in the Qatari as well as in the regional markets. However. • • • Outlook • Now apart from the conventional banking it has also started providing Islamic banking products. In 2004. • • Valuation • We initiated coverage of Commercial Bank with a buy recommendation at the market price of QR192.4 (as of April 14th. the bank also increased its funding reliance on medium term borrowings which comprised of syndicated loan facilities raised from consortium of international and regional banks. since last few years. The bank’s paid-up capital increased by 50%.

467.797.370.718 6.247 8.327.211 3.843.440 666.388) 591.555 1.304.154 13.992 (310.238 790.765 430.168 404.611.279 858.878.460 107.653 3.327.646 355.044 (97.875 206.892.137 982.818) 401.281 14.960.042 26.341.498 6.551 59.973 850.460 160.961.784.580 16.818.460 46.888.007 263.418 237.448 147.332.165 16.042 26.064 8.155 2.263 1.317 16.973 213.332.623 111.271 533.466.894 13.522 (182.815.042 26.502) 95.541) 600.416.425 747.141.327 (126.596 8.149.826 1.185.460 144.800 280.562.494.630 2.509 1.152) 604.078) 754.897.832.373.140 26.496 1.935 (135.973 585.099 1.385 (177.701.042 26.130 24.274.378.605 .138 20.063) 154.583 12.327.809 388.326 59.394 14. furniture & equipment less: accumulated depreciation net fixed assets Total Assets 392.541.516.721 2.186 987.567.932) 796.461 1.486 (289.707 10.509 1.570 3.897.802 485.327 106.465 (109.324 (186.757 (188.138 Liabilities Qatar Banking Sector 5.609 7.543) Amount in Qatari Riyal ‘000 2003 Commercial Bank of Qatar 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Assets Global Research Qatar 26 4.871 (393.020 4.204.132 147.509 1.731 747.165 16.217 3.886 19.148 Due to banks and other FIs Deposits from customers Other borrowed funds Other liabilities Total Liabilities 7.460 123.535.973 399.195 209.726 592.debt Investment securities .895.294 607.336 206.585 5.007 944.935 1.957 526.738 6.251 151.574 2.444 450.091 436.320.435 10.115.903 23.402 868.191 1.129 59.989 1.326 786.818.827 24.772 582.933 6.062.939 206.787 88.730.272.410 747.474 281.equity Property.901 12.940 206.493 20.644 193.500 159.536 752.800 134.378 1.115 27.308.509 26.564.172 Cash & balances with Qatar Central Bank Due from Banks and FIs Loans and advances (Gross) Other assets Less : provision Total Current Assets 7.534.284 878.200 17.745 10.411.312 19.060.097 Investment securities .692 242.BALANCE SHEET 2002 203.574 213.356 766.388) 896.034) 257.287.141.005 1.064 8.605 1.312 940.762 4.303.246 Owner’s Equity Global Investment House Paid-up equity capital Statutory reserve General reserve Retained earnings Fair value reserve Proposed dividend Proposed issue of bonus shares Total Shareholder’s Equity May 2005 Total Liabilities & Shareholders’ Equity 6.640 336.500 115.726) 323.819 19.277.917.359 747.263 23.839.327.555 27.054.442.365 11.941 (152.611.327.888.386 177.413 8.784.042 26.206 3.905 (233.542 774.583 12.324.594 288.509 1.564) 455.601 999.444.211.959) 776.166 436.903 1.973 1.711.609 206.800 233.476 (240.354.305 229.533.103.390.

276) (60. for Social Responsibilities Cl Balance of Retained Earnings .755) (2.251 (62.260 (5.510 194.887 113.678) 2003 Commercial Bank of Qatar 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) 1.747) 1.426 (24.726 212.895 (144.633 (7.375) (88.438 61.156 155.138.323 1.263) 20.777 (59.503 483.OPERATING STATEMENT 2002 315.326) (2.446) (14.273) 223.612) (1.322) (145.647 2.821 (2.800 (202.448 326.939 850.989) (4.443 (352.787) (3.875 107.925) 850.842 12.316 5.206 341.890 1.336 470.257) (33.289 21.129 115.868 158.549 26.721) (9.432.163) 248.849) 326.752 84.208 110.295) 1.999) 160.702 1.331) 123.777 (3.161 4.618) (44.327 54.246 (4.073) (246.295 (75.875 650.000) 393.706 (213.124) (56.047) 627.590 19.069 550.671) 1.653 (1.526 407.940 1.877 7.183 (259.079 531.236 (81.876 (273.860 2.587) (8.326) (31.917) 785.000) 107.437) (17.609 Amount in Qatari Riyal ‘000 Qatar Banking Sector Global Investment House 27 Interest Income Interest Expense Net interest income Add : Fees and commission Add: Dividend on shares and investment fund units Add: Gains on Investment Portfolio Add : Foreign Exchange Gain Add: Other Operating Income Total Non-Interest Income Total Income Less: Provision for Impairment of Loans & Advances Add : Recovery of Provision Less: Impairment losses on properties acquired in settlement of debts Less: Provision for Impairment of Investments Less: Other provisions Operating Income (net of provisions) Less : Staff Expenses Less: General & Administration Less: Depreciation Net Profit P&L Appropriation Account: Retained Earnings Broght Forward Adjustment for exchange rate fluctuations Net Profit for the year Proposed Dividend Director Fees Directors’ attendence fees paid for the year 2004 Proposed Issue of Bonus Shares Trfr to Statutory Reserve Cont.584) (59.206 (850.278 9.589) 650.208 (91.063) (113.451 (122.762) 158.158 13.427.999) 144.160 (354.360 334.675) (80.284) 319.935 65.024) 1.719.602) 277.855) 606.711) (46.915 (71.076 12.537 801.106 8.920) 522.633 (585.667 (97.448 159.679 827.701 5.031.450 5.750) (920) (213.000) 46.062.838) 470.525) 115.386) 974.047 (42.882 5.678 642.206) (15.653) (21.082) 441.574) (6.027 40.109 51.570) (11.908 355.674 423.484) 259.000) 159.455 181.062.090.772 (74.218 (52.939 160.260 (399.849 (62.331) 753.479 (181.455 (458.129 (560) 248.326 131.030 (2.706 (92) (4.734) (25.801.034) (187.622 19.337) (2.665 163.940 144.030 (106.167 121.969) 445.589 50.653 Global Research Qatar May 2005 111.336 46.311) 1.547 24.094) (11.062.822) 866.357.936 32.328 291.574) (5.

891 600.001.969.508 158.171 (241./(Dec.331 599.409 337.380) (1.767.009 38.387) (113.155 (465.102 (40) 257.690 824.574) 81.564) 113.) in other liabilities Total Operating (62.822 25.340) 546.365 3.528 (399.891 (106.396 263.827) (174.128.023 (809.314 470.609 Operating Operating Activities Net Profit for the Year Provision for impairment of loans and advances Depreciation Directors fees Provision / (release) of provision for impairment of investments Impairment losses on properties acquired in settlement of debt Other provisions Profit from sale of propertry.549) 420.547) 181.273) (741.589) (271.516) (38. in other assets Inc.382) (301.662) 357.749) (1.438 (2.718 776.141 (8.787) 355.971 2.311 (21.216) 255.450.863) 306.075 (498.747 795.206) (574.838 (9.099 257. subsidiary assets Proceeds from disposals of assets Total Investing Global Investment House Financing Medium term facilities obtained/settled Proceeds from rights issue Dividend paid to shareholders Total Financing May 2005 Net Change in Cash Exchange rate differences Net Cash at beginning Net Cash at end .587 56.CASH FLOW STATEMENT 2002 2003 Commercial Bank of Qatar 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in Qatari Riyal ‘000 Global Research Qatar 28 3.206 62.217 (204.115 17.020) (208.326) 296.296) 321.031.609) 603.609 796.970) (145.) in due to banks Dec/(Inc.000 889.260 42.254) (1.295 998.570) (278.043.099 (445.581) (230.671 33.954) (33.438) - Net Increase/Decrease in Operating Activities Inc.431) (967.163 354.721) (144.145) 33 (375.329.500) 903 (233.740.) in due from banks Balances with banks & FIs Inc.871) 155.879) 35.006.589 (197.032) 42.217 591.860) 131.849) 743.030 49.787) 1.104 144.822) (1.) / Dec.626 1.546) 286.381.882.542 726.) in loans and advances (Inc.497) (2.836) 196 5.631 54.614) (248.718 (229.900 (187.806 1.700 31.174) (49.782) (37.071) (68.193) 9.690) 275.142.192.163 332.214. in customer deposits Dec.459) (1.344 454.936) 175.090) (1.840 (213.983) 38.503 (1.762 (29.710 248.062.452 56.155 401.706 38.517 850.804 776.440) (1.331) 8.133 591.128) 276.936) (131.470) (29.925 (15.613 650.171 89.740.653 74.587) (31.337 92 2./(Dec.288.076) (1.999) 7.571 (515) 203.777 75.024 (181.633 33.853 97.920 (19) (54.936 (157. furniture and equipment Profit on sale of investments and securities Fair value adjustments for investments held for trading Negative fair value of available for sale investments Loss / (profit) on sale of assets Impairment loss on available for sale investments 224.602 263.528 160.324 2.581) (271.585 600.167.663 188.149 263.439) 42./(Inc.366 14.970 (850.634 326.585 (249.957 (59.438 (197.849 2.368 401.752 (8) 2.589 (11.439) (49.612 1.242) 294.413 Qatar Banking Sector Investing Purchase of Investments Proceeds from sale / maturity of investments Acquisition of plant & equipment incl.493.148 67.000 (891) (52.377 80.657.412) 222 (171.678 46.999) 5.263 11.356 (75.236) 19.194) (1.305) (29.318.730 (214.633 52.027) (155.365 2.634 (585.427) 2.266 190.625 (33.809) (2.701) (1.571 203.000) 4.027 (182.

3% 3.7% 236.8 4.1 206.1% 37% 20% 2.9 31% 40% 21% 23% 29% 74.053 310.6% 3.9% 3.Customer Deposits to Equity .Provisions to total Op Income .1% 0.Return on Average Assets .7% 53% 47% 4.8% 9.Investment Income to Total Op Income .1% 23. to Total Op.6% 0.7% 4.4% 30. Income (net of provisions) .7% 4.5% 53% 47% 3.22 32.Change in Interest Income .Ratios Commercial Bank of Qatar 2002 2.Change in Fees and Commission .959 2.Shares in Issue .0 6.8% 21.730.5% 110% 14% 9% 26% 53.3% 23.8% 1.Provisions to Average loans .7% 3.9 24% 35% 16% 23% 31% 74.2% 30.97 36.Non Performing Loans (QR’000) .Fees & Comm.Interest Expense to Interest Income .4% 25. Liabilities) . Income .900 14.818 4.3% 2.Interest Income to Total Op Income .1% 1.0% 162% 5.900 8.9% 26.Interest Expense to Interest Bearing Liabilities .Equity to Gross Loans Constitution of Total Income .Loans to Interest Earning Assets .NPL’s to Gross Loans .8% 3.6 76.388 1.P/E .900 11.3% 0.NPL Coverage Capital Adequacy .8% 0.9% 4.2% 4.541 2.750.1% 101% 17% 11% 33% 53.Other Income to Total Op.7 28% 60% 105% 25% 25% 74.750.3% 59% 76% 498% 484% 4.6% 3.6% 60% 40% 3.7% 15.0% 6.Change in Other Operating Income Ratios Used for Valuation .1% 4.7% 28.0% 3.0% 12.6% 226.3 227.69 30.1 36.1 26.7% 4.9% 5.3% 22.3% 2.4% 4.8% 21.9 33.2% 13.7% 37% 18% 2.8% 38% 19% 1.3 34% 44% 6% 32% 77% 53.000 177.6% 96% 13% 9% 24% 61.Loan Loss Reserve to Gross Loans .0 37% 50% 18% 25% 27% 74.0% 0.Interest Income to Interest Earning Assets .9% 4.2% 54% 46% 3.3% 32.595.900 6.6% 1.643 393.5% 1.5% 335.0% 5.5% 6.3% 52% 48% 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Qatar May 2005 96% 7% -44% 67% 23. Income .1% 31.7% 0.3% 43% 23% 2.Return on Average Equity .Due from Banks to Due to Banks Credit Quality .1 6.8% 27.Staff Expense to Total Op Income .1% 2.932 2.6 157.4% 60% 40% 3.8% 1.7% 3.393.0 11.6% 179.0% 0.01% 16.7% 113% 0.0% 5.Net Spread .Book Value Per Share (QR) .5 227.Cost to Total Op Income .EPS (QR) .6% 0.8% 2.Loans to Customer Deposits .750.Market Price Year End (QR) .750.3% 1.5% 5.7% 23.5 39% 28% 91% 57% 21% 35.2% 17.2% 11.1% 60% 76% 558% 349% 19.1 7.0% 1.2% 2.3% 3.1% 3.4% 13.P/BV .4 2.2% 16% 11% 29% 20% 13% 38% 60.0 227.5% 282.Equity to (Total Assets + Cont.485 240.6% 22.0% 6.6% 117% 13% 8% 23% 52.Net interest income/ Op.2% 3.3% 3.29 32.7% 31.12 44.1% 0.731 188.4% 3.8% 61% 39% 29.Change in Fx Income .7 4.0% 4.70 33.8% 59.034 7.9 22.Cost to Average Total Assets Liquidity .1 20.1% 122.0% 32.FX Income to Total Op.37 32.1% 5.0% 4.000 135.3% 29.0% 0.1 16.700 6.0% 37% 19% 1.2% 2.0% 5.500 6. Income Margins .0 7.0% 11.Net Interest Margin Efficiency .8% 60% 77% 444% 567% 59% 82% 323% 517% 59% 78% 389% 538% 59% 77% 449% 521% 5.Non-interest income/ total Op.Loan Loss Reserve (QR’000) .6% 195.6% 59% 76% 565% 473% 4.543 2.852 182.6% 0.Change in Investment Income .2% 38% 21% 2.500 6.Equity to Total Assets .9% 37% 20% 2.3% 0.3% 106% 15% 10% 29% 53.8 227. Income Operating Performance .0 Qatar Banking Sector Global Investment House 29 Profitability .7% 0.

The bank also had its operations in Pakistan which it sold during 2004. Shareholding Pattern • The bank’s shareholders are represented by its board who are the members of the ruling family. trade financing and also retail banking. Doha Bank’s Pakistan based operations were drag on its asset quality and profitability for a number of years.577 76. vol.QA Listing: Doha Securities Market Current Price QR218. Towards this. The Dubai representative office will facilitate commercial and investment related transactions • • 30 Qatar Banking Sector May 2005 .70 24th April 2005 HOLD 8.47 / 256. prominent businessmen and various Qatari individuals.71 QR15. 52 week Lo / Hi (QR) Market Cap Target Price 81. Recent Developments • Among the six listed Qatari banks.Global Research Qatar Global Investment House Doha Bank Reuters Code: DOBK.4 5. DB has emerged as the third largest bank in terms of asset size. following which it has concluded an agreement with Trust Investment Bank to form Trust Commercial Bank and it merged its Karachi-based branch with Trust Commercial Bank. it closed its Lahore-based branch in 2001. it has reportedly been planning its exit from Pakistan.8 12 M Avg.96 37. the bank’s employee strength was at 538. deposit base and the share of gross loans & advances in the State of Qatar as of December 2004.89 24. As of end-Dec 2004. Doha Bank opened a representative office in Dubai and became the first Qatari bank to have presence in this major commercial and trading hub in the Gulf. During 2004. Therefore. The merger took effect on 7 May. Doha Bank owns a 30% stake in the new bank. The bank has presence primarily in the areas of corporate banking.17bn QR208 Key Data EPS (QR) BVPS (QR) P / E (x) P / BV (x) Source: Global Research Background • Doha Bank (DB) was incorporated in 1979 in the State of Qatar. 2004. Doha Bank has a network comprising of 18 domestic branches and one overseas branch in New York in the United States of America. The bank operates a brokerage office at the Doha Securities Market.

institutes and individuals across the countries. The bank sees its as a major move which will open up many avenues to participate in cross border trading and investment opportunities in the UAE and Qatar. corporate and commercial banking as well as consultancy services. The bank’s future plan encompasses diversification into Islamic banking. health insurance. the bank’s interest income grew marginally by 3. The agreement is aimed at providing services to Lebanese expatriates in Qatar and to Qatari nationals wishing to obtain banking services in Lebanon. Doha Bank. life insurance. recoveries of bad loans and release of provisions from the Pakistan-based operations significantly boosted its earnings and therefore beat our earlier earnings projections for FY2004. Doha Bank has launched Bancassurance services which includes car insurance. including expatriates. The bank is strategically looking at various options and operating models to expand regionally as well as globally.8mn. retirement plans. which is also a licensed broker for local stocks has upgraded its brokerage service capabilities to meet increased demand. the bank expanded its network of branches to 18 local branches from 15 in 2003. the “e-remittance” round the clock without having to visit any branch of Doha Bank. child education plans and Takaful insurance products. During 2004. During FY2004. It will also provide information on commercial activity in Qatar and highlight potential investment opportunities to UAE companies and citizens.8mn. The two banks are also working on developing new services aimed at facilitating banking business between Qatar and Lebanon soon.6mn. With the Doha Securities Market (DSM) has already opened its doors for foreigners. The deal would also allow customers to receive financing to purchase homes in Lebanon and also make transactions through the new electronic remittance service. credit shield. while its interest expenses increased at a higher rate of 12.Global Research Qatar Global Investment House in a highly efficient manner between corporate.8% in the bank’s net interest income to QR327. which resulted into a negligible growth of only 0. • • • • • Analysis of Financial Performance – 2004 • Sharp growth in its non-interest revenues. home insurance. expansion of its branch network in the domestic as well as overseas markets and will continue to focus on advanced banking products and services which would be intended to become a One-Stop Shop for the customers of Doha Bank to meet all their individual financial requirements.5% to QR433. from April 3.7% to QR105. • Doha Bank entered into an agreement with Bank of Beirut on cooperation in various areas including retail. • May 2005 Qatar Banking Sector 31 .

The bank increased its customers’ deposit base by 8.5% in FY2004 from 68.9mn in FY2004 from QR239. Total operating income (net of provisions) of the bank grew by 65.6% in FY2004 to QR8.2mn as compared to QR324. Since last three years the bank has been rewarding its shareholders through issuance of bonus shares.1bn which is on a lower side as compared to other listed banks in Qatar.9% in FY2004 to QR538.4mn achieved in the previous year.7mn.2mn. The bank reported earnings per share of QR8. In 2002 it issued 30% bonus shares and in 2003 & 2004 it issued 70% bonus shares in each of the years. The bank’s net profit was at QR365. The total assets of the bank stood at QR10. The bank reported fees & commission income of QR79.95 reported for FY2003.4mn.9bn at the end of FY2004.1bn for FY2003.6mn for FY2003.Global Research Qatar Global Investment House • The bank’s non-interest income increased significantly during FY2004 by 56% to QR239.3% to QR885. The quality of the bank’s loan book has been improving since last few years as its non-performing loans as a percentage of gross loans has been declining consistently.96% in FY2003. For the three consecutive years the bank has been reporting over 70% y-o-y growth in its net profit. which represented a growth of 27. in FY2004 it declined to 14. 32 Qatar Banking Sector May 2005 . Its NPL coverage improved to 64.9% in FY2003. Its loan book grew by 9% to almost QR6bn.5% in the previous year. NPLs declined by 23. which was mainly driven by 106% growth in gains on financial instruments which was at QR132. The bank’s paid-up capital increased to QR407.8% from 20.8% over QR9.9mn in the previous year.37mn from QR1154. which represented a growth of 20.96 for FY2004 as compared to QR8. however it is well above the 10% requirement of Qatar Central Bank and 8% under Basel requirements. • • • • • • • • • • Outlook • The bank is planning to venture into Islamic banking.54% in FY2004 from 23.4mn reported during the previous year.6mn for FY2004 as compared to QR214.8% over QR62. Its capital adequacy ratio (CAR) declined to 22. It will soon set up a dedicated division to offer Islamic banking products which will further strengthen its business operations in the Qatari as well as in the regional markets.64mn at end of the previous year.

8x of its estimated earnings of FY2005.30 per share at the then market price of QR159 per share. Since then the stock meet our expectations and witnessed significant run-up in its price. DB is trading at 7. We value the bank’s stock at an intrinsic value of QR208. Currently. we initiated coverage on DB and recommended a Buy on the stock with a price target of QR194. Valuation • In March 2004. All these will see it increases its branch network to 34 across nine countries as part of a global expansion drive.9% higher than the intrinsic value of the stock. based on the Discounted Dividend Model (DDM) and Peer Group Valuation Method. Japan. • • May 2005 Qatar Banking Sector 33 . including Korea.Global Research Qatar Global Investment House • The bank is planning to open eight more branches in Qatar and it also plans to open branches in overseas markets.1x of its estimated book value and 25. and revise our earlier rating to HOLD as the current market price is about 4. India and Central European countries.

074.477 (227.652 340.164 261.869 3.545 (1.368 159.309 (1.528 189.914 2.011 Global Investment House May 2005 Owner’s Equity Paid-up equity capital Statutory reserve Other reserve Fair value reserve Proposed bonus Shares Proposed dividends Retained earnings Total Shareholder’s Equity 693.430 558.556) 98.140 159.408.460.310 1.586 6.129.726 12.115 11.581 7.918 3.068 405.871 1.067 1.959 3.235 12.941 208.836 8.780 2.430 159.599) 79.509 863.979 7.Others gross fixed assets less: accumulated depreciation net fixed assets Total Assets Qatar Banking Sector Liabilities Customer deposits Due to banks and other financial institutions Other liabilities Total Liabilities 13.381.278.937.171 259.998.518 4.746 318.Debt Investment securities .950 693.647.430 693.507 210.068 993.015 331.738 (75.547 171.389.987 294.872 293.116.277.696 9.332 6.796 20.807 Investment securities .192 7.046 (750.756 331.804 2.865.063) 94.427 1.727 100.693 (114.441 159.043 14.123.830 5.707 2.232.369) 92.199 15.920.705.706.124 146.057.361) 84.985 17.426.354 1.573 5.900 281.559 540.157 2.835 (658.148.939 10.995.954.595 (161.652 404.381.250 818.438.319 14.892 12.134 1.247.061 454.640 693.213.016 10.272 (905.975 12.005 9.420 337.729 7.157 693.895) 96.830 1.281.115.430 159.688.950 2.038 (606.270 9.497 2.540 1.068 603.008 9.998.227.493 159.342 (192.545.953 4.001 2.361.281.061 Assets Cash & deposits with Central Banks Due from Banks and Other FIs Loans and advances (Gross) Provisions Other assets Total Current Assets 649.743 364.515.116.447.652 404.885.796 3.652 404.068.059 8.093.398.044 1.637.652 404.451 16.079 233.647 671.361.024.869 (136.520.357) 100.963 205.944.613 10.001.530 6.430 397.953.430 693.371 36.068 804.920 214.254.422 235.287 10.455 5.835.888.333.310 239.057.490 9.BALANCE SHEET 2002 2003 Doha Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) Amount in Qatari Riyal ‘000 Global Research Qatar 34 327.408.706 2.589.938.999 164.640 3.316 17.910 62.988 167.523 312.904.596 12.120.221 2.745 184.850 140.570 165.067 407.315 20.718) 73.467 159.586.652 404.875.358 8.948.461 159.377 7.741.439 7.944.350) 60.194.162) 104.617 1.002 215.780 (511.039 14.090.544 9.388 429.677) 96.435 3.110.100 1.055) 86.408.970 1.057.954.434.421) 35.807 Total Liabilities & Shareholders’ Equity .033 55.484.716 10.639 (97.068 285.205 293.549) 104.736 2.

998 419.074) (46.123 8.636 (167.593 518.994 (62.319.OPERATING STATEMENT Global Research Qatar 2002 2003 Doha Bank 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F) May 2005 441.803 (143.263.451) 536.814 153.998 (36.023 5.643) (23.560) (126.287) 303.730 120.006.555 246.239 478.595) 121.385 1.125) 6.082) 324.250) (134.287 399.676 21.964 13.025 (389) 214.530) (3.612 5.989 13.008) 1.605 (155.026 239.227 319.006.970 579.281) (39.910) (2.250) 337.854 191.969) 164.881) 771.265 (170.040) 963.662) 805.371) (24.625 (285.969 1.538.065 (93.727) (2.207 57.218) 580.207) (79.102 95.328 (300.787) 327.970 6.225 (496) 1.049.217) (22.364 (77.114.158) (67.988 915.039 153.006.378 378.613 (169.014 (389) 365.590 9.028 (28.263) 2.541 1.486) 1.164 (87.375 (377) 120.562 398.403 9.704 12.625 707.872 897.356) 685.402 (433) 804.707 62.249 1.046 304.230 567.585 (105.829 12.249 (804.168.342 (189.707 804.796 Amount in Qatari Riyals ‘000 Qatar Banking Sector Global Investment House 35 Interest Income Interest Expense Net interest income Add: Fees and commission Add: Profit on Foreign Exchange Add: Net gains on financial instruments Add: Dividend Income Add: Other income Total Non-Interest Income Total Operating Income Less: Provision for loan losses Operating Income (net of provisions) Less: Staff Cost Less: General and Administrative Expenses Less: Depreciation Add: Non-operating Income (Recoveries from BCCI) Net Profit Before Taxation Taxation (foreign branches) Net Profit P&L Appropriation Account: Retained Earnings Broght Forward Net Profit for the year Proposed Dividend Dividend Proposed by way of bonus share issue Director Fees Trfr to Statutory Reserve Trfr (to)/from General Reserve Cl Balance of Retained Earnings .049 755.169 8.911 (212.994) 100.250) (42.480 132.220) 37.817 (153.357) (98.858) 325.356 24.569 (154.736 164.999) (2.240 233.488.014 1.718.730 (993.637 272.864) 538.931) (144.801) 1.712 (463) 1.795) 852.743) (21.955 14.113 (120.023 (261.100) (73.636 433.446 (154.200) (2.922 (90.959) (2.974) 62.817 636.250) (160.828 (180.427) (17.542 (138.805) 1.104 5.250) (115.376 1.255 41.031 20.315 31.169.780 8.823 15.617 5.100 365.532) (30.706 100.168.915) 350 366.126 13.914) (55.452 64.969 (603.175 6.823) 244.706 1.382) (34.100 3.798 79.203.927) (650) 3.281 (408) 579.250 214.872 (405.420) (2.598 215.456) 1.881 15.250 2.693) (24.

225 180.210.836 805.551 1.910) (405.703) (804.953 1.660 68.290.894 (1.180) (405.218 (408) (2.549.006.712 169.066) 587.065.910) 135.274 1.476 5.236) (632.)/Dec.256 192.195) (603.680) 753.497 472.169.863.107 (576.098) 787.169) 21.688 215.748) 86 54.203) (167.611) 31.337) 422.381.680) (51.805 (496) (2.)/Dec.004 750.220 (389) (2.584) (56.454) (25.176) (599.727) (603.009.096 804 17.808 1.583 (9.001 294.008 30.460 (13.914) (36.163 (1. plants and equipment Total Investing Global Investment House Financing activities Dividend paid Total Financing May 2005 Net Change in Cash Opening Cash balance Net Cash at end .591) 527.737 (612.034 540. in due from banks and other financial institutions Inc.372 (24.078.260.747) (701.328 751.134) (650.199.298 1.572.502 1.971 (667.966 (1.132 1.721 580.212) 2.610) (23.204 (7.250) 422.857) 68.007 (1.727) 111.250) 1.375 153.741 1.918 649.250) 182.771 1.082 23.914) 832.234.186 (7.614) (1.918 389.402 154.801 (463) (2.025 154.371 294.869 212.434) (23.437) 9.915 (389) (3.149.257) (440.473) 38.595 (377) 454.204 366.881 22.416 121.391 (37.014 28.486 34.041 1.168 (479.427 1.640 (875.220 (5.206.160 2.290.681 (8.196 24.625 (935.160 (36.456 24.953 Amount in Qatari Riyal ‘000 36 Operating Operating Activities Profit Before Taxation Provision for imapirment of loans & advances Revaluation loss on financial instruments Provision for impairment of investments Depreciation Income Tax Settled Director Fees Net Increase/Decrease in Operating Activities (Inc./(Dec.281 143.049 429.504) 318.037) (545.448) (33.043 (31.462 (511.468 38.226) (519.449 576.248) (22.008) 96.798 (51.244 (247.203.869 540.564.) in Due to banks Increase in customer deposits (Inc.308 1.100) (357.633) (27.609) 245.250) 981.796) (59.) in other liabilities Net cash from operatig activities Qatar Banking Sector Investing activites Net movement in investments Proceeds from sale of financial Investments (net) Acquisition of property./(Dec.250) 2003 2004 Doha Bank 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Qatar 1.999) (804.796 641.864 12.415.823 21.100) 743.966) 820. in loans and advances to customers (Inc.808. plants and equipment Proceeds from sale of property.569) (38.CASH FLOW STATEMENT 2002 296.860 862.573) 135 912 6.110) 25.726) (537.999) 109.)/Dec. in other assets Inc.497 429.458.382 1.458.662 (433) (2.468 2.919) 326.778 704.

6 Qatar Banking Sector Global Investment House 37 Profitability .0% 39.6% 23.0% 31.37% 24.Cost to Average Total Assets Liquidity . Income .2% 4.2% 6.8% 37% 291% -26% 18.863 1.2% 60% 21% 4% 69.1 35.6 44.Interest Income to Total Op Income .8% 1.5% 1.254.Net interest income/ Op.3% 11.7% 63% 74% 574% 58% 74% 219% 58% 78% 212% 57% 78% 202% 13% 2.074.343 14.4% 80.9% 59.1% 6.5% 38% 195% 12% 23.370 606.1% 1.Interest Income to Average Interest Earning Assets .9% 4.9 5.Equity to Gross Loans Constitution of Total Income .8% 12% 20% 14% 26% 55.76% 44.Return on Average Assets .Interest Expense to Average Interest Bearing Liabilities .Change in Interest Income .Change in Fees and Commission .0% 17.0% 1.2% 5.5% 7.5 42.5% 45.6 218.Loan Loss Reserve to Gross Loans .1% 5.Loans to Interest Earning Assets . Income (net of provisions) .6% 30% 17% 4% 69.0% 18% 61.7 26.6% 23.2% 3.4% 2.1% 68.FX Income to Total Op. Income .8% 24.7 18.5% 50.Change in Investment Income .3% 2.421 20.9% 1.71% 23.7 13.350 16.5% 24.599 12.7% 23.790 9.Change in Other Income Ratios Used for Valuation .4 30.343 11.0% 2.237.3 218.7% 11.1% 23.8% 10. Income Margins .7% 1.52% 2.3% 52.9% 56% 78% 187% 11% 1.9% 49.Cost to Total Op Income .6 36.3% 50.457 6.8% 64% 74% 792% 39% 3.Net Spread .8% 17.4% 6.2 14.343 16.4% 1.Interest Expense to Interest Income .2% 22.5% 101.Shares in Issue (‘000) .8% 7.4% 16% 30% 50.Loan Loss Reserve (QR’000) .3% 23.9% 49.4% 4.8% 47.Return on Average Equity .5% 1.Provisions to Average loans .2 7.0 12.1% 12.5% 44.4 83.9% 4.2% 1.7% 24.5% 16% 2.61% 24.1 218.Ratios 2002 1.4% 2003 2004 Doha Bank 2005 (F) 2006 (F) 2007 (F) 2008 (F) Global Research Qatar May 2005 19.7% 1.5% 4.9% 26.124.48% 50.1% 16.0% 12.0% 11.2% 2.2% 11.74% 19.05% 24. Income .9% 26.84% 35.9 3.9% 51.602 905.Book Value Per Share (QR) .9% 10.8% 1.8% 32.1% 50.0 28.6% 11.063 12.Staff Cost to Total Op.5% 25.9% 19.1% 5.0% 21.0% 57% 79% 174% 11% 1.4% 5.3% 4.Non Performing Loans (QR’000) .Non-interest income/ Total Op.994 8.9 46.P/BV .022.9% 32% 3.4% 4.6% 11.NPL’s to Gross Loans .9 223.4% 95.9 31.7% 16% 30% 50.326 511.9% 22.2% 6.639 750.3% 11.5% 2.Net Interest Margin Efficiency .2% 5% 0.9% 0.5% 4.P/E .6 74.6% 25% 12% 4% 69.Market Price Year End (QR) .0% 0.7% 37% 106% -44% 40.41% 24.4% 61. to Total Op.8% 1.Gross Loans to Customer Deposits .14% 23.Investment Income to Total Op Income .5% 17% 31% 50.0% 5.22% 49.Equity to Total Assets .3% 3.0 18.1% 2.1 24.3% 0.Other Income to Total Op.7% 4.3% 3.2% 1.6% 52.66% 27.2% 3.Fees & Comm.EPS (QR) . Income Operating Performance .0% 66.Loan Provisions to total Op Income .5% 1.112.349 1.7% 771.8% 1.5% 17% 31% 51.5% 14.0 4.4% 55.0% 1.2% 929.8% 48.4% 22.718 14.2% 1.8% 0.3% 6.3 218.7 1.NPL Coverage Capital Adequacy .7% 0.Due from Banks to Due to Banks Credit Quality .8% 26.5% 885.1% 88.9 47.4% 3.2% 11.055 12.9 14.0% 5.23% 53.8 6.343 8.549 11.3% 0.000 658.7 15.0 37.1 5.6% 49.8% 11.7 169.7% 6.4% 93% 45% 7% 69.9% 5.

270 116.64mn reported during the last year.3% to QR208.62 QR6. Provision for impairment of loans increased by 16.76mn during the period under review. The bank operates through its head office in Doha and has a network of 8 local branches. However. • • 38 Qatar Banking Sector May 2005 .51mn in FY2003.37 27. The bank’s employees strength was 269 as of end-Dec 2004. Islamic Shari’a principles and regulations of Qatar Central Bank (QCB). Commissions and fees income increased substantially by 58.48mn in FY2004 as compared to QR14. 52 week Lo / Hi (QR) Market Cap Target Price 24.6% to QR123.1 12M Avg.01 55. In cooperation with the QIIB.9 11. Abu Dhabi Islamic Bank concluded a 9-year Ijara agreement worth USD25mn with the Ministry of Islamic Affairs and Awqaf. Recent Developments • Qatar International Islamic Bank (QIIB) has launched a new shariah-compliant Al Dawli credit card.Global Research Qatar Global Investment House Qatar International Islamic Bank Reuters Code: QIIB.92 / 362. Qatar. Al Dawli card. • Analysis of Financial Performance – 2004 • The profit sharing income of the bank increased by 27.5% to QR23.1 24th April 2005 Not Rated 5.1bn - Key Data EPS (QR) BVPS (QR) P/E P / BV Source: Global Research Background • Qatar International Islamic Bank (QIIB) was incorporated in 1990 in the State of Qatar.58mn. The Bank is engaged in banking activities.81mn reported in the previous year.5% to QR84. vol.QA Listing: Doha Securities Market Current Price QR300.3% to QR15. which does not have any interest clauses embedded.71mn which was at QR13. will meet the needs of a large section of the population who require credit card facilities in line with the provisions of Islamic Shariah. the depositors profit sharing expenses increased at a faster pace of 42. financing and investing activities in accordance with its Articles of Incorporation.34mn during FY2004 as compared to QR163. With this the net profit sharing income of the bank during the period increased by 18.

The bank is expected to report strong gains from its investment income. Deposits from customers increased by 25% to in FY2004 to QR4. • • • May 2005 Qatar Banking Sector 39 . representing an increase of 27% over Dec.3% at QR83.8mn reported in the previous year. portfolio of investment securities surged by a whopping 50. The bank declared a cash dividend of 10% and a stock dividend of 30% for FY2004.6bn over December 2003. This was the result of the all round growth in the major asset class of the bank. Fees and commission of the bank is also expected to remain buoyant.9mn from QR43.6% to QR656. The net profit attributable to shareholders was higher by 30.46bn in FY2003.Global Research Qatar Global Investment House • The bank’s total operating income after provisions increased by 24% to QR147.88mn over the corresponding period of the last fiscal.1% in FY2004 from 2.96bn at the end of Dec 2004. Its cost to operating income after provisions declined to 43% in FY2004 as compared to 46% in FY2003.1% in the previous year. investment in debt was about 42. Qatari operations accounted for about 68.5mn from QR118.5mn at the end of the previous year.1% while rest of the portfolio was in equities and mutual funds.6mn. 2003. QIIB’s total assets stood at QR4.6mn.1 reported for FY2003.9% to QR63.1% to QR2. competition in the Islamic banking will increase as the three major banks have plans to venture into Islamic banking products as a window within conventional banking operations. In FY2004. Its NPL coverage also declined to 91% in FY2004 from 138% in the previous year. • • • • • • • • • Outlook • In the booming Qatari economy the bank is likely to report strong growth in its financing activities. In order to take the advantage of the booming market. The total operating expenses of the bank increased by 16. net receivables from financing activities increased by 26.2% of the total assets in FY2004 which was about 70% in the previous year. The bank reported earnings per share of QR5. The bank’s capital adequacy ratio stood at 14.71% as of FY2004. about 27. Around 52% of the assets were deployed in receivables & balances from financing activities.9% accounted for by balances and investments with banks & other FIs and investments in securities and properties accounted for 14. However.4 for FY2004 as compared to QR5.34bn from QR3. Out of this.4% of the total assets. The proportion of NPLs to gross loans increased to 3. NPLs of the bank increased considerably by 91% to QR82.

653 94.143.906.859 1.413 2.454 881.260 10.512.137 12.913 59.185 (32.711 199.000 241.824 82.381.000 48.407 18.Global Research Qatar Global Investment House BALANCE SHEET Amount in Qatari Riyal ‘000 Assets Cash & balances with Central banks Balances and investments with banks & other FIs Recceivables & balances from financing activities (Gross) Less : provisions Investment securities .000 61.050 1.504 1.080 2.110.784 62.098 100.456 24.452 84.243 (39.660.331 585.663 482.012 1.625 46.595 3.602 30.032 2.962.980 15.906.328 26.670 34.232) 40.583.152 1.512 4.754 1.500 31.647 (60.962.513) 39.039.523 1.098.250 78.498 63.361) 39.842 3.250 312.847 72.213.271.711 156.500 71.730 34.328 40 Qatar Banking Sector May 2005 .696) 276.711 1.624 56.031 62.674 1.776 (75.274 66.914 154.739 379.010.237 954.387.789 43.923) 22.903 (22.117) 280.278 1.849 3.762 175.366 (45.085 79.135 9.668 4.000 25.debt Investment securities .582 51.481 3.762 125.595 2.039.948 23.equity Investment properties gross fixed assets less: accumulated depreciation net fixed assets Other assets Total Assets Liabilities Current accounts from banks & FIs Customers’current accounts Accounts payable Other liabilities Total Liabilities Holders of unrestricted investment deposits’ accounts Equity Paid-up equity capital Legal reserve General reserve Retained earnings Fair value reserve Foreign currency revalution reserve Proposed dividend Proposed bonus shares Total Shareholder’s Equity Total Liabilities & Shareholders’ Equity Qatar International Islamic Bank 2002 2003 2004 123.875 437.671 21.394 51.562 3.

637 980 50.500 May 2005 Qatar Banking Sector 41 .260 163.567 (48.087 15.137) (3.314 5.399 (11.511) (988) (1.377) 1.370 (43.789) 50.408) (9.342 (84.000) (980) (14.639 117.000) 95.878 (62.000) 147.823) (14.878 1.407 83.864) (3.478 (34.370 1.898 (28.500) (3.000) 118.Global Research Qatar Global Investment House OPERATING STATEMENT Amount in Qatari Riyal ‘000 Profit sharing Depositors profit sharing Net profit sharing Add : Fees and commission Add : Net Gains from Dealing in Foreign Currencies Add: Income from Investments Total Non-Interest Income Total Operating Income Less: Provision for impairment of receivables and financing activities Less: Porvision for financials investments Less: Provision for other investments Less: Provision for credit cards / ATM commitments Operating Income (net of provisions) Less : Staff Expenses Less: Other Expenses Less: Depreciation & amoritzations Net Profit P&L Appropriation Account: Retained Earnings Broght Forward Net Profit for the year Proposed Dividend Director Fees Trfr to reserves Cl Balance of Retained Earnings Qatar International Islamic Bank 2002 2003 2004 150.238 1.398 162.260) (19.213) 1.599 141.500) (1.484 997 14.641 (59.509 20.463) 104.486) 83.637 (35.273 37.578 23.407) (19.878) 1.500) (7.608) (20.064) (7.506) (8.789) 64.796) (11.178 14.407 208.807) 101.777 (13.764) 123.817 2.917 39.260 64.750) (1.710) 1.976 (15.760 9.212 (1.778 (27.

435) 396.003 (36.868 (10.137 3.891) 18.424 472.755) 83.878 15.209) 399.409) 56.783 72.500) 677.437 9.027 (12.891 (22. euipment.504) 21.215 11.500 7.363) (18.760 83.924 690.018) 2.370 13.149 (17.000) 37.015) (259.Global Research Qatar Global Investment House CASH FLOW STATEMENT Amount in Qatari Riyal ‘000 Operating Operating Activities Net Profit for the Year Provision for impairment of receivables and financing activities Depreciation & amortisation Provision for financial investments Provision for other investments Provision for creditr card/ATM commitments Gain on sale of investments Gain on sale of fixed assets Net increase (decrease) in Operating Activities Balances with banks & FIs Receivables and balances from financing activities Other assets Net Increase (decrease) in liabilities Current accounts from banks & FIs Customers current accounts Accounts payable and other liabilities Total Operating Cash from Investing Activities Purchase of financial investments Proceeds from repayment and sale of financial investments Purchase of investment properties Proceeds from sale of investment properties Purchase of properties.864 7.602) (60.187.316 1.969 (3.456 1.579 8.317) (604. furniture & fixture for branches Procceds from sale of fixed assets Total Investing Cash from Financing Activities Net increase in holders unrestricted investment deposits accounts Dividends paid Total Financing Net Change in Cash Net Cash at beginning Net Cash at end Qatar International Islamic Bank 2002 2003 2004 75.073 (133.924 1.073 (10.555) 443.603) (43.486 (1.724 25.043 (175.362) (7.974) (331.321.949) (69.000) 317.526) (4.000 (6.507) 52.632) 100.637 11.656) 33.685) (550.341 42 Qatar Banking Sector May 2005 .214 36.000 (15.212) 1.965 462.500 (1.482.169) 73 (274.417 1.527 294.657 (16.282) 25 (95.700 (5.187.456 327.012) 14.735 (7.129) 47.503) (12.975 (287.965 (15.789 988 1.789 3.368) (31.321.532) 1.960) (11) (388.847 64.492 50.140 859.145) 67 (47.

3% 2.7% 5.Other Income to Total Op.1% 2.3% 12.0% 1% 60% 299% 91% 12. Income (net of provisions) Margins .0 181.Staff Expense to Total Op Income .000 5.4% 991% 82.1% 43% 23% 1.3% 1.Return on Average Equity . Income (net of provisions) .Investment Income to Total Op Income .9% 1.Net profit sharing income/ Total Op. Income Operating Performance .Customer Deposits to Equity Credit Quality . to Total Op.Global Research Qatar Global Investment House Ratios Qatar International Islamic Bank 2003 2004 Profitability .2% 3.Return on Average Assets .7% 0.Loans to Customer Deposits .P/E .Non-profit sharing income/ Total Op.4% 3.4% 61.1% 17% 2.5% 17.Loan Loss Reserve to Gross Loans .7 May 2005 Qatar Banking Sector 43 .Market Price Year End (QR) .696 3.Equity to Gross Loans Constitution of Total Income .625.NPL’s to Gross Loans .2% 76% 24% 36.EPS (QR) .8% 138% 8% 15% 76.1% 0.9% 1108% 43.500 60.P/BV 1.46 33.Change in Fx Income Ratios Used for Valuation .Net Profit Sharing Income to Total Op Income .5 4. Income .Loan Loss Reserve (QR’000) .6% 60.4% 73% 27% 40.1% 23% 2.8% 91% 9% 16% 73.Cost to Average Total Assets Liquidity .0 1.Change in Fees and Commission .8 6.Fees & Comm.117 2.9% 23.Non Performing Loans (QR’000) .000 5.500.3% 46% 23% 1.1% 0.15 18.Change in Investment Income .Cost to Total Op Income .9% 10.Equity to Total Assets . Income .Depositors Profit Sharing to Profit Sharing Income .0% 19% 58% -26% -60% 15.Change in Net Profit Sharing Income .Net Interest Margin Efficiency .0 95.4 27.Depositors Profit Sharing to Depositors Profit Sharing Liabilities .1% 3.NPL Coverage Capital Adequacy .3% 3.Profit Sharing Income to Profit Sharing Income Earning Assets .Net Spread .1 24.9% 22.NPL’s to (Equity+Loan loss reserve) .Shares in Issue .FX Income to Total Op.1% 15.Book Value Per Share (QR) .900 75.

In another major deal. investment and financing activities through various Islamic vehicles such as Murabaha.18 QR17.8bn - Key Data EPS (QR) BVPS (QR) P/E P / BV Source: Global Research Background • Qatar Islamic Bank (QIB) started its operations in July 1983 as a Qatari shareholding company. It is believed that major shareholders belonging to the ruling family hold around half of the bank’s capital. • • • 44 Qatar Banking Sector May 2005 . Recent Developments • Qatar Islamic Bank (QIB) has elected a new chairman of the bank. All business activities of the bank are conducted in accordance with the Islamic Shari’a principles and regulations of Qatar Central Bank (QCB).QA Listing: Doha Securities Market Current Price QR268.6 12M Avg. It signed a QR149mn worth Istissna’ Contract for the financing of the Al Jazeera Tower.Global Research Qatar Global Investment House Qatar Islamic Bank Reuters Code: QISB. while the other partners namely RUSD Investment Bank and Global Investment House will be holding 20% and 10% respectively. The bank carries out full banking services.24/ 308. The bank operates through its head office in Doha and has a network of 9 branches. vol. The banks is setting up an Islamic bank in Malaysia in consortium. The bank’s employees strength was 422 as of end-Dec 2004.5 36.3 7. QIB is the largest of the two Islamic banks in Qatar. a basement and a ground floor. Mudaraba. 52 week Lo / Hi (QR) Market Cap Target Price 113. a 500 hotel-residential flats project located in the West Bay area. Musharaka and Musawama. which will be built in the New West Bay area within a period of 18 months.5 24th April 2005 Not Rated 7.430 73.4 35. QIB signed a QR87mn worth Istissna contract for the construction of the Al Waseel Tower. Among the consortium QIB will have the highest stake of 70%. In the first quarter of 2005. the bank signed major financing deals. Shareholding Pattern • QIB’s shareholders include members of the ruling family and prominent businessmen. Sheikh Jassem bin Hamad bin Jassem bin Jabr Al Thani has replaced Khalid Ahmed Al Suwaidi as chairman of Qatar Islamic Bank. The tower will consist of 16 multi-floors.

5% accounted for by balances and investments with banks & other FIs and financial investments accounted for 12.7% in FY2003. The bank’s total operating income after provisions registered a steep jump of 95. around 54. Provision for doubtful financing activities declined significantly by 82.2% of the total assets. However. The bank has declared a cash dividend of 20% and a stock dividend of 70% for FY2004.5mn.3% over Dec.7% of the gross loans for the year.69bn at the end of Dec 2004.9% to QR115mn during the period under review. While its income from investment activities jumped significantly by 244. competition in the Islamic banking will increase as the three major banks have plans to venture into Islamic banking products as a window within conventional banking operations.6% to QR170.8mn from QR207. In FY2004.7% to QR406. On the back of gains achieved through operational efficiency its net profit attributable to shareholders increased significantly by 98.2% in FY2004 as compared to 46.9mn reported in the previous year.9% to QR288. The total operating expenses of the bank increased by 13. representing an increase of 37.3mn in FY2004 as compared to QR19. This was the result of the all round growth in the major asset class of the bank.76bn in FY2003. Among the major class.9mn over QR49. The bank has provided for 76. Depositors profit sharing expenses increased by 40. • • • • • • • • • • Outlook • In the booming Qatari economy the bank is likely to report strong growth in its financing activities. Deposits from customers increased by 21. • • May 2005 Qatar Banking Sector 45 .2mn which was at QR58. Its cost to operating income after provisions declined significantly to 27. The NPLs was at QR298mn in FY2004 which was about 6.8% of the assets were deployed in receivables & balances from financing activities.7% to QR110.6% during FY2004 to QR10.1mn during FY2004 as compared to QR279mn reported during the last year.7% to QR5.1% to QR22. net receivables from financing activities increased by 27.2bn over December 2003.5mn in FY2003. about 24.1% of its NPLs at the end of Dec 2004.9% to QR340. The bank’s capital adequacy ratio stood at 29. Commissions and fees income grew by 16.6mn reported for the previous year. The bank is expected to report strong gains from its investment income. 2003.2mn reported in the previous year.Global Research Qatar Global Investment House Analysis of Financial Performance – 2004 • The bank’s income from financing activities increased 21.5% to QR4.4mn over QR145mn achieved in the last fiscal.8% as of FY2004.8bn in FY2004 from QR4. QIIB’s total assets stood at QR7.

4 65.435.323.722.8 4.887.259.8 78.8) 412.debt Investment securities .1 7.0 50.5 19.9 142.0 113.0 532.5 (226.2) 340.1 4.508.1 20.1 95.598.462.6 28.0 653.686.686.5 1.7 28.8 3.3 17.4 333.5 70.9 18.0 5.1 87.4 1.473.9 865.0 195.0 542.777.Global Research Qatar Global Investment House BALANCE SHEET Amount in Qatari Riyal Mn Assets Cash & balances with Central banks Balances and investments with banks & other FIs Recceivables & balances from financing activities (Gross) Less : provisions Investment securities .0 522.0 66.6 7.4 985.4 3.2 40.6 1.0 5.1 25.9 46 Qatar Banking Sector May 2005 .4 390.0 1.8 1.5 6.0 (207.3 2.4 215.7 114.equity Investment properties net fixed assets Other assets Total Assets Liabilities Current accounts from banks & FIs Customers’current accounts Accounts payable Other liabilities Total Liabilities Holders of unrestricted investment deposits’ accounts Monority interest Equity Paid-up equity capital Legal reserve General reserve Retained earnings Fair value reserve Proposed dividend Proposed bonus shares Total Shareholder’s Equity Total Liabilities & Shareholders’ Equity Qatar Islamic Bank 2003 2004 395.598.4 250.9 312.9 40.1 65.

7 19.7) (1.7 273.3 151.3 May 2005 Qatar Banking Sector 47 .6) 218.0) 406.8 (10.3 (81.4) (28.0) (29.2 7.9 (6.5) (9.3 288.9 (60.3) (1.3 162.0) (1.5) 1.7 (115.2 28.8) 145.8 (72.2) 288.0) 6.7 22.1 145.3 (272.8) (13.3 15.3 54.2) (3.1 (75.1 2004 386.2) 41.9 2003 300.0) 271.1 433.0) (2.Global Research Qatar Global Investment House OPERATING STATEMENT Qatar Islamic Bank Amount in Qatari Riyal Mn Profit sharing Depositors profit sharing Net profit sharing Add : Fees and commission Add : Net Gains from Dealing in Foreign Currencies Add: Income from Investments Total Non-Interest Income Total Operating Income Less: Provision for impairment of receivables and financing activities Less: Porvision for financials investments Less: Provision for other investments Less: Other Provisions Operating Income (net of provisions) Less : Staff Expenses Less: Other Expenses Less: Depreciation & amoritzations Add: Non operating income Profit Before Minority Interest Minority Interest Net Profit P&L Appropriation Account: Retained Earnings Broght Forward Net Profit for the year Proposed Dividend Director Fees Trfr to reserves Cl Balance of Retained Earnings 7.3 6.0) (8.7) 207.1) 18.2 297.5 124.4 (58.5 (9.8) (69.5) (5.

120 630 637 (25) (3) 1.End of the year Qatar Islamic Bank 2003 2004 242 233 53 8 2 5 (41) 7 (24) (1) (849) (15) (15) (857) 37 413 (3) 368 48 (195) (2) (77) (273) (686) 21 21 (23) (668) 360 413 5 10 1 (6) (3) 13 6 (75) (3) (1.012 48 Qatar Banking Sector May 2005 .017) (40) (27) (913) (38) 438 2 338 98 (219) (2) (6) (87) (314) (285) 372 (147) 37 (10) (33) 278 (25) (2) 251 (690) 1.Global Research Qatar Global Investment House CASH FLOW STATEMENT Amount in Qatari Riyal Mn Operating Operating Activities Profit for the year before share of profit for unrestricted investment account holders and minority interest Adjustments For: Provision for impairment of receivables and financing activities Depreciation on fixed assets Depreciation provision for other investments Provision for financial investments Provision for other investments Provision for other assets Provision for end of service indemnity Gain on sale of financial investments Gain on sale of other investments Gain on sale of fixed assets Net increase (decrease) in Operating Assets Balances with banks & FIs Reserves with Central Bank of Qatar Balance and Receivable from financing activities Other assets Net Increase (decrease) in liabilities Current accounts from banks & FIs Customers current accounts Other liabilities Total Operating Paid to Employees Paid to Retirement Fund Paid to Investment Fund Holders Net Cash Used in Operating Activities Cash flow from investing activities Purchase of financial investments Proceeds from sale of financial investments Purchase of other investments Proceeds from sale of other investments Purchase of fixed assets Net cash (used in) investing activities Cash flow from financing activities Increase in share capital Increase in unrestricted investment accounts Dividend distributed Directors remuneration paid Net cash from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents .120 2.810 1.239 892 1.Beginning of the year Cash and cash equivalents .

7% 2.8 6.8% 63% 16% 339% 115% 39.EPS (QR) .000.Equity to Total Assets .7% 24% 5.3% 5.6 May 2005 Qatar Banking Sector 49 .7% 76. Income .Investment Income to Total Op Income .7% 29.5 129.5% 26.Loan Loss Reserve (QR’000) .3% 28.NPL’s to (Equity+Loan loss reserve) .5% 4.Cost to Total Op Income .Change in Net Profit Sharing Income .P/BV 4.Fees & Comm.Staff Expense to Total Op Income . Income (net of provisions) Margins .2% 18% 1.Depositors Profit Sharing to Depositors Profit Sharing Liabilities .FX Income to Total Op.Equity to Gross Loans Constitution of Total Income .Change in Fees and Commission .3% 35.Depositors Profit Sharing to Profit Sharing Income .Change in Investment Income .1% 76% 19% 33% 64.Net Profit Sharing Income to Total Op Income .2% 4.P/E .Non Performing Loans (QR’000) .Net Interest Margin Efficiency .Return on Average Assets .NPL Coverage Capital Adequacy .0 226.Net Spread .5 3.Shares in Issue .4% 3.7% 27.Customer Deposits to Equity Credit Quality .Change in Fx Income Ratios Used for Valuation .000 7. Income (net of provisions) .Cost to Average Total Assets Liquidity .Book Value Per Share (QR) .Return on Average Equity .Loan Loss Reserve to Gross Loans .4 35.Profit Sharing Income to Profit Sharing Income Earning Assets .5% 396% 298. to Total Op.29 17.NPL’s to Gross Loans .Global Research Qatar Global Investment House Ratios Qatar Islamic Bank 2004 Profitability .Non-profit sharing income/ Total Op. Income Operating Performance .Market Price Year End (QR) .Net profit sharing income/ Total Op.7% 6.Loans to Customer Deposits .8% 64.

The Central Bank had injected an amount of QR100mn in 2002 as quasi equity. The bank had been historically running into problems due to the lack of proper monitoring and recovery system for loans & advances and it was overly exposed to margin lending. All these resulted into a bank incurred a huge loss of around QR102mn in 2000. which turned bad. the Central Bank intervened and assumed direct control of the bank. Due to this. the bank allotted 12.8 46. Recent Developments • In 2004. Apart from that Bahrain-based Ahli United Bank (AUB) holds 40% stake in the bank.) was incorporated in 1983 as a public shareholding company.333 87.1 4.81bn - Key Data EPS (QR) BVPS (QR) P / E (x) P / BV (x) Source: Global Research Background • The Ahli Bank Q. As of end-Dec 2004. lower fresh provisions and significant reduction in cost of financing. the bank’s employee strength was 199. the bank witnessed a substantial surge in its non-performing loans.2mn shares to AUB as part of a strategic acquisition by the later. in 2000. The bank also operates a brokerage office at the Doha Securities Market. To avert the problem. In 2002.Global Research Qatar Global Investment House Ahli Bank Reuters Code: AABQ.72 26.4 / 166. • 50 Qatar Banking Sector May 2005 .QA Listing: Doha Securities Market Current Price QR125.S. In addition to the acquisition AUB has signed a ten-year (renewable) management agreement and as per that AUB will oversee the management of the bank and provide technical and marketing services to the bank. The bank is engaged in commercial banking services and operates through its Head Office in Doha and eight branches established in the State of Qatar.7 12M Avg. Shareholding Pattern • The current board and members of their families together hold more than 30% stake in the bank. vol.S. in late 2000.C.2 24th April 2005 Not Rated 2. which is backed by decent recoveries of bad loans.C. (formerly known as Al-Ahli Bank of Qatar Q.8 QR3. 52 week Lo / Hi (QR) Market Cap Target Price 22. the bank returned to good profitability.

1% in its interest expense to QR41. The bank’s recoveries was at QR20.Global Research Qatar Global Investment House • Though DSM has opened its floors for non-Qataris. • • • Analysis of Financial Performance – 2004 • During FY2004.5mn which was nil in FY2004.95mn which was resulted from the 11.97 achieved for FY2003.2mn and a marginal increase of 2. The bank increased its cash dividend for FY2004 to 18. this growth in profitability did not have much impact on its earnings per share earnings due to increase in its paid-up capital resulted from allotment of shares to AUB. from Al-Ahli Bank of Qatar Q.2% to QR35.8mn in FY2003. The previous year’s non-interest income was mainly backed by an income from profit on investments of QR22.72 from QR3.7mn reported in FY2003.4% to QR1. It expanded its investments portfolio by 97.6% to QR1.2mn.75% of the paid-up capital from 10% paid for FY2003.1% to QR67.8mn as compared to QR72.85mn from QR46. the bank’s net interest income declined by 18.S. During 2004.69bn.6mn which was at QR117. The total assets of the bank grew by 67.8% in FY2004 to QR4.3mn in FY2004. However.1% in its net profit to QR82. It has started expanding also into personal loans and credit cards business.6mn reported in FY2003 which was mainly backed by the recoveries of bad loans and other general provisions.36bn in FY2004. Its earnings per share for FY2004 declined to QR2.C.4mn as compared to QR16. the name of the bank was changed to Ahli Bank Q.4mn in FY2003. • • • • • • • May 2005 Qatar Banking Sector 51 . The bank’s funds with banks & FIs grew significantly by 182.1% to QR1.34bn. the shares of Al Ahli Bank would not be available for trading to non-Qataris because of a lock-in period of three years agreed upon between Ahli Bank and AUB. The bank has renewed its focus on expanding its credit to government agencies besides commercial segment.C. The bank’s non-interest income also declined significantly by 23. Total operating income (net of provisions) of the bank increased by 16.3bn mainly backed by a significant growth in major asset components vis-à-vis funds with banks & FIs. In FY2004.S.4% in FY2004 to QR136. fees & commission income remained strong in FY2004 which was at QR27. loan book and investments. However.5% decline in its interest income to QR109. while its loan book grew by 8. the bank registered an increase of 14.

At the end of 2004.79bn in 2003. the bank will focus on expanding its lending business by targeting its existing medium size corporate clients. commercial and private banking businesses.2% in the previous year.6% to QR403. The bank increased its customers’ deposit base significantly by 52. which is well above the 10% requirement of Qatar Central Bank and 8% under Basel requirements. The bank is focusing on opening new branches and develop the existing ones. To expand its retail business the bank is focusing more on improving its delivery channels for retail customers. As part of its future expansion strategies the bank plans to strengthen its human resource by recruiting more employees.69mn from QR182. • • • Outlook • In future.8% in 2004 to QR2. In FY2004 the allotment of 12.3mn from QR508.74bn from QR1.91% from 31.81mn in FY2003. The bank will expand its operations on the back of AUB’s expertise as the later has entered into a management agreement with the bank. the bank’s capital adequacy ratio (CAR) increased marginally to 31.5% in FY2004 from 60. lower fresh provisions and expansion in disbursements of new loans with strict credit control of the risk management division. who are the sub-contractors for government projects and it is also planning to focus more on consumer credit. The increase in capital will allow Ahli Bank to significantly grow its retail. • • • • • 52 Qatar Banking Sector May 2005 . The outlook for the bank looks positive on the back of good recoveries of bad loans.74% in FY2003.2mn shares to AUB increased the bank’s paid-up capital to QR304.3mn at end of the previous year. It is keen to develop and improve its services to its retail customers by introducing new banking services especially in electronic banking. and will improve the quality and depth of services provided to its clients.Global Research Qatar Global Investment House • Non-performing loans declined by 20. The bank’s NPL coverage improved to 64.

283 57.139 66.544.223.422 2.632 103.951 34.435 76.563) 28.Global Research Qatar Global Investment House BALANCE SHEET Amount in Qatari Riyal ‘000 Assets Cash & balances with banks Balances with banks & Fis Loans and advances (Gross) Other assets Less : provision Total Current Assets Investment securities .571.635) 26.890 (39.698 496.885.155.884 (260.155.544.462) 1.316 May 2005 Qatar Banking Sector 53 .915 1.038 130.067 4.equity gross fixed assets less: accumulated depreciation net fixed assets Total Assets Liabilities Due to Qatar Central Bank Due to banks and other FIs Deposits from customers Other liabilities Total Liabilities Owner’s Equity Paid-up equity capital Retained earnings Legal reserve Fair Value Reserve Proposed dividend Total Shareholder’s Equity Total Liabilities & Shareholders’ Equity Ahli Bank 2002 2003 2004 96.251.610 2.281 321.298 472.702 1.632 2.780 81.813 42.971 18.594 3.270.776 79.162 123.000 262.080 28.330 4.567 68.029) 2.743.796.249 182.092 296.129 875.465 49.177 2.027 99.813 3.921 (394.567 182.006 295.560) 27.360 1.689.571 56.316 30.940 410.768 38.936 (34.270.234.267.022 73.124 1.632 304.903.622 1.431 (306.519 31.267 (29.688 3.562.475 2.055 13.791 16.685 1.920 62.375 18.281 252.929 784.045) 1.373 2.395.563 607.727 1.335.debt Investment securities .828.737 18.562 1.

582 (30.176) (12.689) (13.170 (100.974 2.015) (5.834) (30.723 16.666) (329) 64.399) 83.211 2.132 22.248) 67.080 82.281) (12.324 136.443 2.570 (18.000) 3.482 15.940 54 Qatar Banking Sector May 2005 .055 123.477 13.281) (750) (14.001 1.508 304 46.497) (6.000) 100.195) 82.015 2.241 90.203 (41.130 3.250) (25.387 5.121 (53.592) 72.353 (27.955 27.300) 105.446 35.221) 20.675 (1.514) 42.055 72.849 103.785 4.802 (36.804 13.080 2004 109.088) (17.129) (2.002 16.980 37.463) (3.170 64.894 (2.563) (57.401 (40.639) 53.703 129.000 (18.570 3.164) (188) 117.317 (23.802 42.Global Research Qatar Global Investment House OPERATING STATEMENT Amount in Qatari Riyal ‘000 Interest Income Interest Expense Net interest income Add : Fees and commission Add : Gains on foreign exchange activities Add : Dividend income Add: Profit on investments Add : Other operating income Tota non-interest income Total Operating Income Less: Recoveries / Provision for loan losses Less: Provision for decline in value of investment securities Less: Other recoveries Operating Income (net of provisions) Less : Staff Expenses Less: Depreciation Less: Other general and administrative expenses Less: Bad debts Writeen off Net Profit P&L Appropriation Account: Opening Balance of Retained Earnings Net Profit for the year Shortfall in provision for loan losses Qatar Central Bank support Distribution from retained earnings Proposed Dividend Director’s remuneration Trfr to Legal Reserve Trfr to Qatar Central Bank Support Closing Balance of Retained Earnings Ahli Bank 2002 2003 107.705 (12.000) 3.

796 (6.011 319.625 82.502 (48.689 201 65.317 (6.800) (28) (45) 1.742 (108./(Dec.343 902.171 (14.762) 205. plant & equipment Unrealised gain on option (Profit) on sale of investments Changes in Working Capital: Cash reserve with Qatar Central Bank Inc.114 3.374) 67.579) 26 (675.000 12.802 6.Global Research Qatar Global Investment House CASH FLOW STATEMENT Amount in Qatari Riyal ‘000 Operating Activities Net Profit for the Year Depreciation Loss on sale of fied assets Provision for doubtful loans and advances Bad debts written off Provision for decline in value of investment securities Other provisions Provisions no longer required (Profit) on sale of property.095 Ahli Bank 2003 55.182) 14.570 5.592) (17) (109) (22.016 465.121.006 3./(Inc.101 233 172.041 2004 52.718) 1.) in due from banks (Inc.006 (18.437 (57.925) (5.721 83. in placement with banks (Inc.458 947. in other assets Inc.244) 100.251 (654.285 96.) in customers’ accounts Dec.277 1.090 (64.027 1.922 May 2005 Qatar Banking Sector 55 .300 68.) / Dec.000) (48.094) (70.281) (30.136 (3./(Dec.895 465.755) 389.221 110 (69.176 43.000 100.713 (5.083.653) (1.) in available for sale investmenets Inc.341 (217.934 (292.)/Dec.488) 22.530 188 21.170 3.317 64.) in due to banks Dec/(Inc.281) 146.778 185./(Dec.135.292 59.860 (510) 227.261) 25 188 (15.) in loans and advances (Inc.328 72.944) 273.628 329 2.088 32.508) 116.939) (13.) in other liabilities Options derivatives Cash from Operating Activities Investing Activities Proceeds from sales of long term investment Purchase of fixed assets Proceeds from disposal of fixed assets Purchase of long term investments Redemption of held to maturity investments Cash from Investing Activities Financing Activites Capital increase Dividend paid to shareholders Qatar Central Bank Support Cash from Financing Activities Net Change in Cash Net Cash at beginning Net Cash at end 2002 136.374) 44.000) 421.313 19.868) 33.804 472.367.210 (191.349) 39.027 548.

Cost to Average Total Assets Liquidity .Equity to Total Assets .7 12.Loan Loss Reserve to Gross Loans .2% 13% 163% 60.257 306.7% 15.3% 1% 11% -55% 44% -90% 2004 2.2 32.70% 2.9% 3.300 30.5% 20% 60.8% 298% -0.Cost to Total Op Income .800 3.Staff Expense to Total Op Income .Change in Fees and Commission .3% 60% 40% 33% 4.9 2.Loan Provisions to total Op Income .Interest Expense to Interest Income .3% -27% 37% 14% Ahli Bank 2003 3.9% 39% 22% 2% 59% 87% 558% 159% 9% 0.NPL’s to Gross Loans .3% 20. Income Margins .9% 1. Income .0% 38% 23% 2% 40% 62% 314% 269% -13% -0.5 4.Market Price Year End (QR) .P/E .Return on Average Equity .Loans to Customer Deposits .NPL Coverage Capital Adequacy .P/BV 3.281.8% 14.029 23.4% 12.2% 0.300 18.Net Interest Margin Efficiency .0% 67% 33% 50% 4.8 4. to Total Op.468.0% 28.3 56 Qatar Banking Sector May 2005 .Change in Interest Income .714 394.96% 2.Non Performing Loans (QR’000) .9% 15% 63% 42% 1% 376% 18.Net interest income/ total Op. Income Operating Performance .7% 3.8% 2.Book Value Per Share (QR) . Income .310 260.Non-interest income/ total Op.0 2.EPS (QR) .Equity to Gross Loans Constitution of Total Income .9% 508.Net Spread .Change in Investment Income .Interest Income to Interest Earning Assets .6% 2.Loans to Interest Earning Assets .462 37.Global Research Qatar Global Investment House Ratios 2002 Profitability .Investment Income to Total Op Income .8 3.Interest Income to Total Op Income .Change in Fx Income .281.8% 60% 40% 38% 3.Loan Loss Reserve (QR’000) .1% 25.8 36.4% 14.8 16.1% 12% 172% 66.Change in Other Income Ratios Used for Valuation .9% 15% 64.1% 2.045 32.3 20.3 10.6 26.8% 20.Return on Average Assets .0 80.8% 403.9% 32% 83.5% 1. Income .FX Income to Total Op.Other Income to Total Op.4% 13.3% 2.6% 3.Due from Banks to Due to Banks Credit Quality .0 89.7% 100% 56% 2% 54% 80% 623% 113% -19% -1.Provisions to Average loans .3% 474.16% 1.Shares in Issue .5% 20% 253% 59.Fees & Comm.Interest Expense to Interest Bearing Liabilities .8% 4.Customer Deposits to Equity .1% 0.

4. 9.7 QR227.The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Recommendation BUY HOLD HOLD NOT RATED NOT RATED NOT RATED Ticker QNBK.70 QR300. 3. for which it received fees. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company.1 QR268. Within the past year .10 1. Global Investment House has managed or co-managed a public offering for this company.QA AABQ.10 QR218.QA Price QR305. Global Research: Equity Ratings Definitions Global Rarting Buy Hold Reduce Sell Definition Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price . Please see special footnote below for other relevant disclosures. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months. Disclosure Checklist Company Qatar National Bank Commercial Bank of Qatar Doha Bank Qatar International Islamic Bank Qatar Islamic Bank Ahli Bank 1.5 QR125. 7.10 1. The company being researched holds more than 5% stake in Global Investment House. 5. Global Investment House acts as a corporate broker or sponsor to this company. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year.10 1.10 1.QA DOBK. Global Investment House makes a market in securities issued by this company.QA COMB.10 1.QA QISB.QA QIIB. 8.10 Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 6. 10. An employee of Global Investment House serves on the board of directors of this company. 2.2 Disclosure 1.

Global Research Sector Saudi Arabia Saudi Arabia Banking Sector May 2005 .

com.104 Shailesh Dash.globalinv. 2nd Floor P Box 28807 Safat .kw Phone No:(965) 2400551 Ext.304 Raghu Sarma Financial Analyst rsarma@global. CFA Head of Research shaileshdash@global.com.kw Phone No:(965) 2400551 Ext 269 Faisal Hasan..com. El-Quqa.kw http://www.Global Investment House KSCC Equities Research Souk Al-Safat Bldg.com.kw Phone No:(965) 2400551 Ext.com. 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: research@global.kw Phone No:(965) 2400551 Ext.net Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M.O.kw Phone No:(965) 2400551 Ext.196 Amit Tripathy Senior Financial Analyst amitt@global. CFA Financial Analyst fhasan@global. CFA Executive Vice President omar@global.273 .com.

.................................................................................................................................................................................... 43 The Saudi British Bank .......................................................... 64 Banque Saudi Fransi ................................................. 15 Summary of Recommendations .................................................................................................................................................................................................................... 71 Bank Al Jazira .........................................................Table of Contents The Saudi Banking Sector ....................................................................................................................... 29 Riyad Bank ............................................................................. 11 Saudi Banking Sector Outlook .............................................................................................................................................................................................................................................................. 7 Peer Group Comparison .................. ............................................................................... 17 Players Profiles SAMBA Financial Group ............................................................. 36 Arab National Bank ................................................................................................................ Corp............................................................................................................................................................................................. 4 Interest Rates ........................................................................................................................................................... 57 The Saudi Investment Bank ......................................................................................................................................................................................... 78 ...... 22 Al Rajhi Banking & Inv............................................................................................................................................................................................................................... 1 Composition of Aggregate Assets/Liabilities ................................ 3 Credit Portfolio ...... 9 Comparative Indicators ..................................................................... 50 Saudi Hollandi Bank ...............................................................................................................................................................................................................................................

agriculture. To this end. May 2005 Saudi Arabia Banking Sector 1 . Saudi Arabian Agricultural Bank. It also allowed banks to provide full range of financial services through their branches. In 1966. which enabled SAMA with broad supervisory powers to license and regulate all banks operating in Saudi Arabia. Saudi Credit Bank.Saudi Arabia Global Investment House The Saudi Financial System Saudi Arabia’s financial system broadly comprises of Saudi financial institutions and the capital market. and 12 commercial banks (including branches of Gulf Investment Bank and Emirates Bank). the stock market and the newly introduced corporate debt instruments. The financial institutions include mainly the Saudi Arabian Monetary Agency (SAMA) – the Central Bank of Saudi Arabia. With the increase in the country’s oil revenues during this period. and Public Investment Fund.Global Research . Saudi Industrial Development Fund. This law set rules and regulations for the banking system requiring banks to maintain firm capital adequacy. Riyad Bank in 1957. a new Banking Control Law was introduced. The Saudi Banking Sector … an overview The Saudi banking sector has witnessed enormous development and growth during the last five decades. specialized credit institutions were established to cater to the finance requirements of the various economic sectors. lending ratios and reserve requirements. In the early fifties. General Organization of Social Insurance (GOSI). and real estate in addition to supporting entrepreneurs and small businesses thereby promoting sectoral growth and achieving economic diversification. SAMA was established to regulate the financial system and permitted more branches of foreign banks to establish presence in the country. Specialized Credit Institutions – Catering to the niche markets Since mid 1960s. which was founded in early 1960s). whose operations were later merged with that of Riyad Bank. and AlWatany Bank in 1958. the Kingdom has striven to reduce its reliance on oil as a major source for economic growth and development. These specialized credit institutions provide long-term loans to vital sectors of the economy such as industry. there are 45 money exchangers. SAMA played an important role in the establishment of these institutions in early 1970s (with the exception of the Saudi Arabian Agricultural Bank. liquidity. medical and various consumer-related insurance services. In addition. The capital market consists of the government securities. This was followed by the licensing of some local banks such as National Commercial Bank in 1953. In 1952. the demand for financial services rapidly increased. There are also several autonomous government agencies (AGIs) including government owned Pension Fund. which made it essential for the government to create a more sophisticated financial system. the Saudi banking sector comprised of only a few branches of foreign banks and a number of local money exchangers providing all the financial services required to meet the needs of the trading community and the pilgrims. The credit institutions include Real Estate Development Fund. engaged primarily in foreign exchange transactions and a few small leasing and consumer lending companies. and a large number of foreign insurance companies in addition to the National Company for Cooperative Insurance (NCCI) dealing with business. 5 specialized credit institutions.

Saudi Arabia Global Investment House By the beginning of 1980. 3 banks were non-Saudi. the Saudi banking sector included 12 banks. During the late nineties. Currently. which replaced Al Rajhi family’s money changing business. was also given a commercial license in 1987. The new law also extended tax holiday in many cases for foreign banks to encourage them to retain profits. a number of developments to the banks law were introduced requiring banks to buildup statutory reserves equal to their capital base. Liberalizing the sector . This situation called for an action by SAMA to provide more stability in the banking system during future similar economic conditions. points-of-sale and debit. Furthermore. United Saudi Commercial Bank and Saudi Cairo Bank were merged into United Saudi Bank. obtaining SAMA’s approval prior announcing their dividends. SWIFT payment network. These developments and improvements reinvigorated the Saudi banking system which was evident in the number of branches. As such. Gulf International Bank of Bahrain was the first to acquire a license to open a branch in KSA in 2000. SAMA introduced new technology solutions to modernize the banking system. the Saudi banking system passed through a consolidation phase.Global Research . In addition. This situation revealed the lack of adequate credit assessment and monitoring procedures. the Saudi Investment Bank was given full commercial license in 1984 and Al Rajhi Banking and Investment Corporation. out of which 2 banks were fully owned by Saudi nationals. A number of licenses for banks from the GCC countries including Emirates Bank International. banks started to face deterioration in assets quality and profitability was adversely affected. In 1997. lack of qualified human resources and adequate technology within most of the Saudi banks at that time as banks faced difficulties in recovering their loans and in many cases collaterals proved to be unrealizable. National Bank of Kuwait and the National 2 Saudi Arabia Banking Sector May 2005 . With the Saudi economy facing a slowdown in the early eighties as a result of low oil prices. It also encouraged banks to increase their loan loss provisions by obtaining a tax reduction approval for these provisions from the Tax Department on accrual basis. On the technology side. which was merged with Saudi American Bank later in 1999. ATM system. Nine of the banks are publicly traded on the Saudi stock exchange while National Commercial Bank is expected to go public in 2005.A turning point? In the last few years.032 by end of 1990. credit and charge cards. almost half of the banks increased their capital base through new share flotation raising the aggregate capital and reserves from SR15bn in 1988 to SR30bn by the end of the year 1993 resulting in an average capital adequacy ratio of around 20% for the sector. Out of the 10 Saudi commercial banks. and 7 banks had substantial foreign ownership. Saudi Arabia has licensed a number of GCC banks to establish their presence in the Saudi market as a result of the decision by the GCC Summit to permit mutual opening of their banking markets. This included an automated cheque clearing system. which increased from 259 in 1980 to 1. SAMA also issued minimum internal control guidelines and accounting standards for commercial banks that were in line with the International Accounting Standards. there are nine conventional commercial banks and one Islamic Bank. there are 12 commercial banks operating in the Kingdom of Saudi Arabia. including the branches of Gulf International Bank and Emirates Bank.

Composition of Aggregate Assets During the period 1998-2004. Foreign assets increased at a CAGR of 1.75bn. Muhammad Saleh Sairafi Establishment. The two financial organizations will establish an investment banking joint venture to provide equities brokerage and other investment banking services in the kingdom.. The attraction of the Saudi banking sector surpassed the region. which include credit to private sector and investments in private securities. JP Morgan Chase. claims on private sector accounted for 48% of total assets on average while foreign assets accounted for another 14%. It represented 48% of total assets in 2004 compared to 40% in 1998. Injaz Money Exchange (Yousuf Abdul Wahab Niamatullah Company).Global Research . eight money exchange organizations announced their plan to merge under the name Al-Bilad Bank. Abdul Mohsen Saleh Al-Amri Est. The IPO of the bank generated huge investors’ response and was oversubscribed by more than 5 times as the number of subscribers reached 8. further opening up the financial sector. The eight firms.8bn in 2004 representing 14% of total assets compared to a peak of 22% during 1999 and 2000. Al-Rajhi Commercial Foreign Exchange. Al-Muqairen Money Exchange (run by the heirs of Abdul Aziz ibn Suleiman Al-Muqairen). Claims on private sector. increased at a CAGR of 11. Deutsche Bank signed a deal with Al Azizia Commercial Investment Company to become the first licensed foreign bank to operate in Saudi Arabia. that already signed the merger agreement.9% during the same period. and BNP Paribas were allowed to start operations in the Kingdom. For the period under study.7mn with a total investment of SR7. that will be part of the Al-Bilad Bank are Muhammad & Abdullah Ibrahim Al-Subaie Company. New kid on the block… Saudi financial authority (SAMA) has been requiring money exchangers to merge into a single commercial bank. May 2005 Saudi Arabia Banking Sector 3 . as 3 foreign banks namely.9bn in 1998 to SR92.3% during the said period increasing from SR85. Other assets increased at a CAGR of 6. HSBC has been approved to establish an investment banking operation in Saudi Arabia.Saudi Arabia Global Investment House Bank of Bahrain followed. not just in Saudi Arabia. and Ali Hazza & Partners for Trade and Money Exchange. Al-Rajhi Trading Establishment.5% of total claims on private sector on average during the said period while investments in private securities represented 3. The decline in the foreign assets is much more noticeable if compared with the early nineties as it amounted to SR123bn which was a result of Saudi banks’ taking a larger role to participate in the development of the country’s economy rather than investing in foreign assets. It accounted for 33% in 2004 compared to an average of 36% of total assets during the said period. but also in the region. total assets of the Saudi commercial banks have grown at a CAGR of 8. In June 2004. Credit to private sector represented 96.4bn by the end of 2004. Moreover.4% to SR655. Deutsche Bank.8%. Al Bilad public subscription was considered to be the largest.5%.

691 43.035 85.318 218.105 83.644 26.933 281.191 12. The increased liquidity in the market.474 91 572 116 197 1. accounted for 10% of total funding sources in the period 1998-2004.3% CAGR.750 847 3.944 91.238 655.811 47.651 42.655 162.789 237.490 81.382 92. total deposits accounted for the largest portion of funding sources.734 356.976 216.892 4.306 98.432 508.312 40.525 453. driven by high oil revenues.123 28. other liabilities have accounted for 21% of total funding sources on average.621 404.826 10.504 11.131 263.094 5. Composition of Aggregate Liabilities On the funding front. representing a 8.042 43. Capital and reserves amounted to SR52.468 5.082 92.056 12.208 655.658 114.023 545. Other liabilities have been increasing gradually since 1999 when it amounted to SR75. Investments in government securities.415 9.899 43.793 472.453 4.481 149. higher than the increase in total assets.928 145.1% during the same period. Foreign liabilities have increased.257 4.063 101.237 545.670 47.364 130.465 19. but accounted for only 7% of total liabilities in 2004.266 45.0% to SR45.238 187.4% during that period.630 101.7bn until it reached SR135. on average.253 141.612 64.971 3. by a CAGR of 1.522 6.090 0 1 1.208 196.Global Research .614 87.486 313.947 166.574 16.13bn in 2004. during the period 1998-2004.480 246.2bn in 2004 as compared to SR40bn in 1998 representing a CAGR of 4.193 150.010 178. Credit Portfolio – Liquidity dictating terms Total bank claims on the Saudi economy increased by a CAGR of 10. resulted in a low growth rate in credit provided to the government as well as to the private sector.605 2.981 150.747 167.881 178.130 52.085 51.663 32. Total deposits have increased at a CAGR of 10.605 95.823 3.487 101.732 6.975 2.153 75.829 3.444 81.029 2.648 2.237 163.190 172. With Saudi banks also enjoying excess liquidity.228 453.064 205. increased from its lowest level of SR40bn reported in 2003.126 59.999 89.006 160.338 415.272 126.382 Source: SAMA Note: figures in the aggregate balance sheet provided by SAMA would not be comparable to those in the consolidated balance due to different classification and exclusion of branches of foreign banks.948 422.748 135. which resulted in the increase in its weight as a source of funding from 59% of total funding sources in 1998 to 64% in 2004.259 404.Saudi Arabia Global Investment House Table 1: Aggregate Balance Sheet of Commercial Banks (SR mn) Assets Cash in Vault Current Deposits Statutory Deposits Other Deposits Total Bank Reserves Foreign Assets Claims on Private Sector Other Assets Total Assets Liabilities Business and Individual Deposits Official Entities Demand Deposits Quasi Monetary Deposits Total Deposits Foreign Liabilities Other Liabilities Capital & Reserves Total Liabilities 1998 1999 2000 2001 2002 2003 2004 2.270 42.306 415. in-line with foreign assets.796 203. Foreign liabilities have. increased 4 Saudi Arabia Banking Sector May 2005 .874 7.578 188. consequently.545 18.204 99.829 228.432 147.605 144. the alternative investment for most of them were government securities.228 110. Capital and reserves accounted for 8% of total liabilities on average during the said period.798 160.133 145.831 3. over 61% on average.883 19.364 95.8bn in 2004.270 15. With total assets growing at a higher CAGR during the same period.2% during the period 1998-2004.272 472.274 208.900 40.298 508.260 328.657 5.599 14.

which represented a CAGR of 10.7% 93. According to SAMA.8% during the same period.4% 160. Credit to the public sector increased marginally by a CAGR of 3.620 210.347 12.363 10.5% 94.9% -7.5% 3.2% Credit to Private Sector Investments in Private Securities Claims on Private Sector YoY % % of Total Credit to Private Sector Investments in Private Securities Credit to Public Sector Investments in Gov.8% Claims on Public Sector 112.566 175.6% 112. which includes mainly consumer and credit card loans.486 313.6% 3.714 356.2% 3.0% 92.8bn in 1998.439 405. contributed the largest portion to the aggregate credit of the Saudi banking system of 36.533 187.599 14.697 221.4% 83.722 10.094 176.8% 94. the aggregate credit portfolio of the Saudi banks amounted to SR332. at a CAGR of 18.722 146.8% 1.0% 11.229 151.9% in 2004.123 302.6% as a result of a weak demand for bank credit from the public sector due to the increase in the liquidity.7bn in 2004.965 116.712 134.8% 5.613 124.8% 91.657 246.6% 16.064 205.4% 96.599 14.794 7.2% 8.3% 89.5% 96.2% -0.6% 7.9% 14.6%.650 150.273 123.0% 11.998 11.138 3.6% during the mentioned period accounting for almost 83.960 25.1% 85.803 296. aggregate bank credit is classified into eleven economic sectors.6% 79.5% 23.8% 96.928 11.613 124.426 10.347 12.2% 94.967 332.6% 178.8% 5.4% 6.5% 3.656 8.094 176.064 205.238 187.4% 20.803 198. which increased by a CAGR of 11.9% 8.4% of total claims on the public sector in 2004.5% 5. Securities Claims on Public Sector YoY % % of Total Credit to Public Sector Investments in Gov.566 175.189 172.3% 8.9%.650 150.2% 8.13bn as compared to SR178.4% 155.0% 37.266 112.975 161.1% 87.136 10.0% 8. This increase was driven by the expanded credit to the private sector.828 166.817 11.3% 6.2% 6.366 102.610 176.655 162. Miscellaneous sector.214 11.5% 8.803 198.960 25.238 187.929 12.190 172.123 302.9% 17.610 176.144 10.8% In 2004.2% 34.5% 86.132 7.6% 89.4% 92.486 313.6% 93.7% 90.1% 12.0% 7.439 10.998 11.0% 6.Global Research . rising from SR44. Table 2: Banking Sector’s Total Claims (SR mn) 1998 1999 2000 2001 2002 2003 2004 CAGR Claims on Private Sector 160.697 221.138 3.0% 92.2bn in 1998 to SR122.5% 91.261 7.829 228.927 11.5% 3.650 150.833 138.2% 13.0% 4.965 116.620 278.8% 23.229 151.655 162.817 11. Credit extended to this sector recorded a sharp increase within the period 1998-2004. Securities Credit to Private Sector Credit to Public Sector Total Credit YoY % % of Total Credit Credit to Private Sector Credit to Public Sector Source: SAMA & Global Research 155.6% Total Claims 273. Backed by suitable demographics that created a lot of demand.9% 12.975 161.950 321.3% 17.7% 10.844 29.322 173.5% 96.2% 5.6% 10. the personal lending business became very attractive for Saudi banks due to higher profitability and lower risk.052 489.3% 10.829 228.844 29.Saudi Arabia Global Investment House sharply by a CAGR of 8.794 7.439 10.712 134. May 2005 Saudi Arabia Banking Sector 5 .

which include real estate financing.51% CAGR. the total consumer loans aggregated SR86. Building & Construction Govt.6bn in 2003 to SR 28.000 Mining & Quarrying Utilities Agri.9% of the aggregate credit in 2004 down from 26% in 1998.000 300.2bn in 3Q04. and other personal loans amounted to SR64. vehicle and equipment financing.8% and grew at a CAGR of 3. and other consumer loans accounted for 50%. Finance sector accounted for the third largest portion of aggregate credit portfolio (10.6%.9% CAGR).7bn in 2003 as compared to SR9bn in 1998. & Quasi Govt.000 250.78bn at the end of 3Q04.000 100. Credit extended to the commerce sector accounted for 18.Global Research .8% of the aggregate portfolio in 1998 to reach 29. At the end of 3Q04.000 150.2% of the aggregate credit portfolio in 2004. Real Estate Financing increased from SR5. Credit cards loans too increased from SR3.1bn in 1998 representing an increase of 7.0bn in 2003 to SR3. The highest growth between 1998-2004 was recorded by the finance sector (32.44bn. This resulted in a different maturity characteristic for the portfolio between 1998 and 2004.2%) followed by the government and quasi-government sector.000 200. Saudi banks increased their long-term lending from 1999 and onwards. which represented a CAGR of 47. which accounted for 8. Consumer loans.7bn in 3Q04 while Car & Equipment finance increased from SR27. thereby shifting part of their short-term lending into long-term.Saudi Arabia Global Investment House All out to woo the man on the street…. a strong rise of 33% over the previous fiscal.000 50.2bn at the end of 2003 to SR7. 58% of these loans had long-term maturities in 2004 as compared to 29% in 1998.6%. Part of the expansion in the long-term lending happened because of the increase in consumer and credit cards loans. Manufacturing Commerce Miscellaneous 1998 1999 2000 2001 2002 2003 2004 Source: SAMA & Global Research Shifting focus to long-term… As figure 2 illustrates. Credit card loans amounted to SR3bn in 2003 as compared to SR2. which accounted for 10. This decline could be attributable to the slower growth in credit to the commerce sector vis-à-vis other sectors such as transport and communications and the miscellaneous sectors. Real estate financing accounted for 8% of this segment whilst vehicle and equipment financing accounted for 42%. & Fishing Services Finance Transport & Comm. Vehicle and equipment financing witnessed the largest growth during the said period of 69% (CAGR). Long-term lending increased from 9.1% in 6 Saudi Arabia Banking Sector May 2005 . Figure 1: Aggregate Credit by Economic Sector (SR mn) 350.

199 0. SAMA has significant foreign exchange reserves which can be used to maintain the parity in the foreign exchange markets. Fig.089 May 2005 Saudi Arabia Banking Sector 7 .Saudi Arabia Global Investment House 2004.393 0.729 1. Interest Rates – following the Greenback… The GCC countries have agreed to unify their monetary systems to pave the way for an EUstyle Monetary Union by 2010.404 1. To achieve this.Global Research . was 25%.160 2. Table 3: Interest Rate Differential between SR and US$ Deposits 2002 2003 2004 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 (in %) 3 month SR Deposit Rate 2. declined during the same period from a peak of 75% of total in 1998 to reach 58% in 2004.076 2.854 1.354 2.690 Interest Rate Differential 0.879 0.516 1.4% amongst the listed banks. 2: Maturity of the Aggregate Credit Portfolio (SR mn) 350.000 - 1998 1999 2000 2001 2002 2003 2004 Source: SAMA Islamic Banking – the “in” thing Most of Saudi banks’ commission spread improved in 2004 as a result of the decline in their average cost of funds.8% and SAMBA reporting the lowest ratio of 21.000 Long Term Medium Term Short Term 250.626 0.308 2.021 1. They have also decided to temporarily peg all their currencies to the US dollar.506 0.000 300.5% followed by SAMBA & ANB at 3.348 0.561 0.066 1.75).967 3 month US$ Deposit Rate 1.205 1. BJAZ reported the lowest commission spread of 2.000 50. Due to the currency peg.573 1.621 0. Saudi banks started to introduce and expand their Islamic Shariacomplaint products to attract cheaper sources of funds in the form of non-commission bearing deposits.252 0.000 100.000 200. involving the creation of a single currency.7%.022 1.277 Source: SAMA Q4 2. on the other hand.346 1. The Saudi Arabian Monetary Agency (SAMA) has so far pegged Saudi Riyal to the US Dollar (US$1= SR3. they have agreed to align their fiscal systems by 2005 to pave the way for the monetary union five years later.123 1.233 1.468 1.2% while Al Rajhi reported the highest commission spread of 6. excluding Al Rajhi Corp.583 1.219 0.259 1.812 1.824 1.000 150. The average commission expenses-to-commission income in 2004. with BJAZ reporting the highest ratio of 40. Short-term lending. interest rates in Saudi Arabia closely follow the interest rates in the US. Consequently.238 0.

5 2 Per cent 1.5 1 0.219% on US Dollar deposit of similar maturity.Global Research .5 0 Q1-02 Q2-02 Q3-02 Q4-02 Q1-03 Q2-03 Q3-03 Q4-03 Q1-04 Q2-04 Q3-04 Q4-04 3 month SR Deposit Rate 3 month US$ Deposit Rate Interest Rate Differential Source: SAMA The interest rates on the Saudi Riyal 3-month deposits at the end of 2004 was 2.308% as compared with the interest rate of 2. With the recent upward movement of interest rates in USA. 8 Saudi Arabia Banking Sector May 2005 . SAMA is likely to follow suit.Saudi Arabia Global Investment House Fig.089% in favor of Saudi Riyal deposit. 3: Saudi Riyal Interest Rate vs. resulting in an interest rate differential of 0. USD Interest Rate 2.

517 59.857 63.627 17.045 20.479 3.319 2.449 2.925 10.247 Fransi 2. SAMBA.285 23.855 5.301 827 14. Table 4: Comparative balance sheet of Saudi banks (2004) ‘SR mn’ Cash & balances with SAMA Due from banks and other FI's Investment Portfolio Gross loans and advances Provision for loan losses Net Loans and advances Net fixed assets Other assets Total Assets Due to banks and other FI's Customers' deposits Other liabilities Total Liabilities Share capital Statutory reserve Other reserves Retained Earnings Total Shareholders' Equity Total Liabilities and Equity NCB 5.101 34.000 1.444 77.636 5.488 4.971 4.030 (2.94bn was ranked second with a market share of 15% followed by Al Rajhi Corp.234 58.7%.737 3.258 (1.260 2.809 5.312 725 13.000 3.247 11.119 3.336 94.663 2.009 2.000 1.250 2.243 382 7.250 166 295 777 314 948 364 1. only 9 are listed on the Saudi stock exchange.142 46.200 4.043 8.558 48.164 3 6 2.663 837 9.974 98.996 5.572 2.509 2.416 565 144 382 685 145 290 950 641 95 1.269 4.000 4. the Saudi banking system comprises of 12 commercial banks including a branch for Gulf International Bank and a branch of Emirates Bank.925 10.157 2.633 64.813 74.405 5.939 28.513 1. and as per SAMA’s 2004 statistical report.198 38.460 25.704 2.250 1.590 (496) (222) (1.534 65.722 63.734 4.666 8.034 30.296 778 2. With the Saudi Government’s intentions to privatize NCB.400 310 83 18 1. However.010 7 5. May 2005 Saudi Arabia Banking Sector 9 .541 85.178 13.500 750 2.913 116.100 32.171 47.385 1.694 52. NCB is currently unlisted. Of the remaining 10 commercial banks.627 5.000 4.3% market share. with total assets of SR94.000 4.674 British Jazira ANB SAMBA SAIB Hollandi Al Rajhi* 2.427 1.890 8.031 16.591 49.444 77.524 3. the largest listed bank in terms of asset size.463 452 1.944 749 1.722 63.409 28.118 35.404 1.4bn which represented a market share of 20.553 69.774 130.544 33.674 4.72bn and a market share of 1.162 59.936 292 1.796 8.7%.409 360 2.502 9. with 12.375 1. we have included the bank in our peer group comparison analysis.355 130.742 3.945 66.Global Research .958 50.821 13.316 67.751 13.328 57.924 49.314) 33.186 2.211 255 2.414 Riyad 2.618) (2.414 13.794 9.939 28.640 6.732 2.517) 63.689 8.061 3.562 7.336 94.187 28.540 9.184 1.180 21. National Commercial Bank (NCB) is the largest Saudi bank in terms of asset size.544 33.855 * Al Rajhi’s balance sheet was reclassified for appropriate comparison.000 71 975 9.015 2.486 19.008 578 1.053 44.Saudi Arabia Global Investment House Peer Group Comparison As mentioned earlier in the report.174) 31.162 537 31.150 67.574) (596) (517) (3.250 2.357 (847) 34.282 54.752 3.047 74. Source: Tadawul and respective banks’ websites Assets concentrated among top-5… According to the 2004 data.443 5.260 2. Al Jazira Bank is the smallest bank with total assets amounting to SR10. NCB had the largest asset size amongst all Saudi banks with total assets amounting to SR130.536 57.

8% 176.4% 18.6% 4.7% 20.2% 20.0% 14.9% 1.6% 15.2% 13.1% 10.1% 9.8% 11.4% 370 517 2.9% Source: Tadawul and respective banks’ websites Peer Group’s Credit Portfolio In 2004.7% 1.7% 23.3% 14.8% 111. Al Rajhi bank had the largest market share of 19.5% 13.9% 9.1% 9.5% 21. NCB had the second largest loan portfolio with a market share of 18.0% 5.3% Corporation (ALRAJHI) Arab National Bank (ANB) 8. Conservative provisioning….3% 5.2% 5.8% respectively. SAMBA had the highest nonperforming loans (NPLs) amongst the peer group.0% 7.9% 13.0% Saudi American Bank (SAMBA) 15.4bn which represented 2.4% 14.4% 135.4% 5.7% 102.9bn which represented almost 55.1% 22.1% ANB SAMBA 890 1.8% followed by Riyad Bank with 303.6% of the aggregate total assets of the Saudi banking system.1% 5.0% 12.5% 8.8% 303.1% 1.9% and 111. the average coverage ratio (PLLs-to-NPLs) was 177.NPL Coverage Source: Annual Reports & Global Research Riyad Fransi British Jazira 433 1.6% 4.4% 2..6% 333.1% SAIB Holandi Al-Rajhi 219 596 1.9% 10 Saudi Arabia Banking Sector May 2005 .7% 11.Provision for loan losses (SR mn) .0% 18. which is the highest in the sector.9% 7.0% 4. including NCB.4% 10.5% 8.0% 9. Al Rajhi Banking and Investment Corp had the highest coverage ratio of 333.8% coverage.5% 9.0% 1. had a net aggregate credit portfolio of SR350.8% 3.6% 10.6% 10.5% 199 222 3.574 4.0% 7.4% 21. Saudi banks follow a conservative policy regarding provisioning for loan losses.2% with all the banks having coverage ratios of more than 100%.7% 1.9% 12.502 2.0% 4.0% 15.1% 1.2% 3.4% 366 496 1.1% The Saudi Investment Bank (SAIB) 4.2% 3.5% 8.9% 15.5% 9.3% with net loans and advances amounting to SR67.PLL's / Gross Loans .6bn. representing 39% of the sector’s total NPLs and 4.5% 21.7% 1.0% 951 3.1% 1.618 3.4% 4.2% 4.3% of the banks’ aggregate loan portfolio at the end of year 2004.4% 2.9% 272.174 1.3% 3.2% 11.Non Performing Loans (SR mn) .5% 18.9% 5.NPL's /Gross Loans . SAMBA and Al Jazira Bank had the lowest coverage ratios within the peer group with 102.9% 9.8% followed by SAMBA and Riyad Bank.4% 9.0% 5.8% 10.8% National Commercial Bank (NCB) Banque Saudi Fransi (BSF) Al Rajhi Banking and Investment 11.Saudi Arabia Global Investment House Table 5: Saudi Banks’ Market Share Assets Deposits Loans 2002 2003 2004 2002 2003 2004 2002 2003 2004 21.5% Saudi Hollandi Bank (SHB) 5.2% 9.3% 12. Table 6: Credit Quality Ratios for Listed Banks in FY2004 Credit Quality .Global Research . Total non-performing loans of the listed banks amounted to SR6.6% 8. Al Rajhi had the second highest share of non-performing loans amounting to SR951mn in 2004.5% Riyadh Bank (RIBL) 13.7% 480 847 1.8% 3.9% 9.9% of the bank’s gross loans.4% 19.9% Saudi British Bank (SABB) 9.3% 12.3% Bank Al Jazira (BJAZ) 1.3% 14.314 1.4% 10.7% 1.4% 5.5% 3.7% 9.9% 9.4% 10. In 2004.8% 181.3% 8.7% 4.8% 9. Saudi listed banks.8% 139.9% 3.9% 9.3% 5.

Global Research .6% 34.9% 40.1% 32.1% 59.7% 25.7% 59. Al Rajhi Corp.8% 14.2% 65.9% 74. 13.2% 9.4% 2.Return on average equity . which grew at a CAGR of 16.0% 65.2% 20.6% 16.3% 30.6% 21.9% 7.0% 12.7% 11.0% 40.3% 18.2% 2. Aggregate total customers’ deposits.9% 17.2% 67.9% 74.1% 61.3% 13.2% 9.8% 26.2% 3.6% 16. Most of the increase in the peer group’s aggregate loan portfolio was a result of expanding consumer and personal lending rather than corporate lending due to high liquidity in the market and lower interest rates.1% 94.3% 30.4% 40.9% 5.Tier 2 capital ratio ANB SAMBA SAIB Holandi Al-Rajhi 2.6% 48.1% 3. May 2005 Saudi Arabia Banking Sector 11 .3% 107.3% 69.9% 55.9% 22.6% 68.1% 71. had the largest market share of deposits of 21% amongst its peer group followed by SAMBA.8% 24.7% 12.8% 3. The slow growth rate in customers’ deposits was a result of the general decline in the interest rates and the increasing preference of Saudi customers to invest their money in the Saudi stock market in expectations of high returns.9% 12.5% 16.7% 24.4% 65.5% 15.1% 75.0% 34.5% 56.9% 36.6%.5% 70.9% 77.6% 24. SAMA closely monitors the banks’ loans-to-deposits ratio and sets an optional ceiling of 60%.08bn at the end of 2004 increased at a CAGR of 10.3% 16.Net commission income after PLL's/ Total op.Saudi Arabia Global Investment House Comparative Indicators Adequate Loans to Deposits Ratio… Customers’ deposits remained the main source of funding for Saudi banks.Spread .6% 42.0% 15. Table 7: Financial Indicators Riyad Fransi British Jazira Profitability Indicators .Staff Expenses to Total Operating Income Liquidity .4% 57.1% 3.8% 69.4% Source: Annual Reports & Global Research NCB.1% 25.1% 72. The year 2004 saw the loans-to-deposits ratio improve to 74.1% between the period 2000-04.0% 44.1% 75. income .3% 2.1% 1.2% 75.4% 81.3% 63.7% 28.5% 33.Commission expense/ Commission income .4% 51.Non-commission income/ Total op.0% 31.1% 47.7% 3.6% 40.0% 27.7% 15. and 10.2% 3.2% 15.Gross Loans/ Customer Deposits .Tier 1 capital ratio .4% 65.6% 22.4% 21.7% 12.8% 0.6% 71.5% 21. and BSF with 14. This increase in the loans-to-deposits ratio was a result of the increase in loans.6% 14.8% 2.0% 12. 10.3% 67.Dividend Payout Ratio Efficiency Indicators .2%. providing more than 74% of their total assets.1% 12.7% 70.0% 21.9% 73.1% 18. Riyad Bank.5%.1% 91.5% 3.1% 33.9% 66.3% 15.7% 74. income . which amounted to SR470..7% 25.5% 21.3% 17.8% 27.3% 15.2% 70.3% 27.9% 2.7% 22.7% 67.9% 71.5% 66.5% 4.1% 22.0% 20.3% 19.Return on average assets .0% 6.0% 53.4% 27.2% 30.Customer Deposits/ Total assets Capital Adequacy .3%.8% 29.7% 2.1% market shares respectively.1% 32.0% 79.8% 23.Net (or profit) margin .7% from 50% in 2000.Cost to Total Operating Income .0% 71.9% 2.Equity/ Gross Loans .0% 25.0% 34.5% 18.2% 8.8% 14.1% 37.2% 21.6% 10.Equity/ Total Assets (Equity capital ratio) .8% 27.6% 14.

552.5% increase in 2003. which reported the smallest ratio of 12.396 Operating Profit (SR mn) 2. The peer group’s profitability measures improved in 2004 as a result of flourishing economic conditions caused by high oil revenue. achieved a 41% increase in their net income in 2004 compared to 16.7% ratio for the same year.824 246.555 2.031. hence increasing the domestic liquidity.2% with a maximum of 21% for SAIB and a minimum of 12.438 587 743 2. The average equity to total assets ratio for the peer group was 10.044 1. The peer group’s average equity-to-gross loans was 18.557 1.078 Employee Source: Annual Reports & Global Research 12 Saudi Arabia Banking Sector May 2005 .Global Research . these ratios are expected to decline considerably in the short-term horizon.9%. the high ratio for Al Rajhi Bank is primarily due to the mutajara deals with SAMA and if this is taken into account.5% for the Saudi Hollandi Bank.4% in 2004 respectively. of Branches 196 60 61 16 116 65 17 40 383 No.846 987.936 Operating Income Per 945. the ratio will be less than the industry average.253 4.371 Employee Operating Profit Per 563.449 Employee Operating Expense Per 381. had the highest ROAA and ROAE amongst the listed banks of 4.803 845. Al Rajhi Corp.531 758.193 2.536 1. However.1% and 32.7% and 26.356 657 859 250 940 1. higher government expenditure and subsequently greater private sector activity.7% and 74% respectively in 2004.636 188 1.332 Provisions) (SR mn) Operating Expenses (SR mn) 1.024. including NCB.4% and 23..248 514.2% respectively followed by SABB with 3.795 377.283 244.738 390.020 766 2. Saudi banks are adequately capitalized by international standards.420.725 2.5% compared to Al Rajhi Corp..296 520.Saudi Arabia Global Investment House Al Rajhi Corp.711 Operating Income (Net of 3.167 3.548 958.2% at the end of 2004 with Bank AlJazira reported the highest average equity to total assets ratio of 13.3% respectively.494 1.234.463 296 510 1.307 5.6% in 2003 to 2.421 569 1. Saudi listed banks. The sector’s average ROAA and ROAE consequently increased from 2.810 568.737 809. the sole Islamic Bank in the Kingdom.892 571.4% with Bank AlJazira reported the highest ratio amongst the peer group of 27.491 2.006 1.410.83bn in 2004. The average tier-1 capital ratio for the listed banks at the end of year 2004 stood at 16. Table 8: Comparison of Operating Performance of the Banks (FY 2004) Riyad Fransi British Jazira ANB SAMBA SAIB Holandi Al-Rajhi No.107 4.1% and 37. of Employees 3.068 325. … and profitable too…. had the largest gross loans-tocustomers’ deposits ratio amongst the peer group followed by SAMBA and BSF with 75.5%. Highly capitalized….406 1.362 2.2% as compared to a sector average of 74.318 604.198 1.701 425.438 1. Aggregate net income for the listed banks amounted to SR16.901 883 1. ANB had the lowest ratio of 65.198 422.008 468. With most of the Saudi banks currently expanding their loan portfolio especially by targeting the retail banking business.494 438 2.

362 Salaries & employee related (1.494 (542) (46) (65) (203) 0 (2) (859) 1. Al Rajhi Corp.141 697 243 0 0 18 93 1. This is mainly due to the fact that a number of these banks have very small free float.141 0 4.396) 743 2. the banking sector’s market capitalization was SR347.321) 2.636 0 1. Saudi banks started to diversify their income drivers by targeting the retail banking segment more vis-à-vis the corporate as it offers higher returns with comparatively lower risks. May 2005 Saudi Arabia Banking Sector 13 .356) Income before minoity interest 3.072 Special commission expense (1. Bank Al Jazira had the highest non-commission income contribution to total operating income (94.936 Source: Respective banks’ financial statements # Al Rajhi Commission income refers to the investment income Bank Shares on the Saudi Stock Exchange – Rising with the tide Currently there are 9 banks listed on the Saudi securities exchange.006 Al Rajhi # 4.8bn representing 30.315 (405) 911 353 52 47 0 0 0 452 (109) 1. Saudi banking shares. By the end of 2004.253 (315) (39) (46) (111) 0 Special commission income 5. Table 9: Comparative Income Statements for Saudi Banks (2004) SR mn’ NCB Riyad Fransi 2. have a very low share of the market’s total traded volume with only 0.051 (860) 4.110) (664) Net special commission income 4. is a unique in this comparison as its net investment income contributed 75.636 317 (129) 188 299 3 32 16 53 9 412 (162) 438 (123) (18) (18) (84) 0 (7) (250) 189 1 188 ANB SAMBA 2.936 0 0 743 2.006 Minority interest 0 0 Net Income 3.332 (651) (110) (155) (477) 0 0 (2) (510) (1. net Other operating expenses (108) (11) Total operating expenses (2.167 0 1.886 422 93 9 1 8 8 542 (321) 2.055) (1. With the declining interest rate environment.536 0 1.107 (569) (56) (60) (248) 0 (7) (940) 1.Saudi Arabia Global Investment House Net commission income represented 60.535 2.7% of the total operating income since all of its customers’ deposits are non-commission bearing current accounts.531 2.050 Provision for loan losses (383) (97) Net operating income 5.531 2.3% of the total market capitalization of the stock exchange.826 (807) (119) (95) (300) 0 0 (1.1% on average.1%) amongst the peer group followed by SHB with 36. though.408 Fees from banking services 987 612 Exchange income 155 74 Net trading income 241 305 Dividend income 49 0 Net gains on investments 2 38 Other operating income 0 21 Total non-commission income 1.590 465 81 110 1 4 9 671 (68) 2.9% of the Saudi banks’ total operating income while non-commission income represented 39.193 (350) (56) (64) (176) 0 (12) (657) 1.1%.536 SABB Jazira 2.112 (522) 1.506 0 2.056 (183) 3.200 (496) 1.506 SAIB Hollandi 981 (393) 588 335 14 0 16 60 0 426 (130) 883 (167) (27) (17) (85) 0 0 (296) 587 0 587 1.9% of the total volume traded on the exchange in 2004.Global Research .645 3.456 (570) 1.755 (802) 2.167 3.075) (750) expenses Rent & premises related (128) (92) expenses Depreciation and amortization (160) (145) Other G & A expenses (577) (358) Impairment of other financial (7) 0 assets.434 1.704 674 101 0 2 64 9 851 (61) 2.954 797 124 83 0 34 17 1.586 3.

9% of the market’s total capitalization at the end of 2004. (1Q05) SAMBA 21% Telecom 17.8% for the Tadawul All-Share Index (TASI).Saudi Arabia Global Investment House Fig.1% during 1994-2003 compared to 14. We believe that the Saudi bank’s shares are one of the most sought after by the new investors which will help in generating further momentum in the stock markets.0% Al. 13.Global Research . the smallest bank in the Kingdom. By the end of 2004.9bn at the end of 1Q05. By Sector (1Q05) Insurance 0.3% Electricity 6. was last with 1. At the end of 1Q05. Bank Al Jazira. including shares of banks.4 %. Riyad Bank.9bn) followed by SAMBA with the market capitalization of SR83. SAMBA.3% Agriculture 0. Al Rajhi Corporation had the largest market capitalization of SR90. 5: Banking Sector Market Cap.9% of the banking sector’s capitalization and 7. the Banking Sector Index (SABNK) has grown at a CAGR of 14. 4: Market Cap.9% BSF 10% Source: Tadawul & Global Research Within the banking sector.3% Fig. the market capitalization of the Saudi banking sector further soared to SR413.9% for TASI regardless of the adjustments that took place for most of the banks’ share prices during this period as a result of bonus shares issuance.8%.96bn at the end of March-2005.1bn. We believe that this is a positive move and will improve the liquidity profile of the banking stocks. In terms of returns. at the end of 2004. insurance companies and real estate firms. There is also news that the citizens of the Gulf Cooperation Council states will be given equal treatment in purchasing and exchanging Saudi stocks. The outstanding financial results of the Saudi banks in 2004 have increased the demand for their shares.4% Services 2. and SABB followed Al Rajhi Corporation with 18.2bn which represented 25. AlRajhi was again the leader in terms of market capitalization (SR104.9% Banking 28. and 11.Rajhi 26% ANB 8% Riyad 12% SABB 12% SAIB SHB 4% 4% BJAZ 2% Industry 40. 14 Saudi Arabia Banking Sector May 2005 .7% of the sector’s capitalization. The combined market capitalization of the banking sector constituted 28% of the total market capitalization which amounted to SR1. SABNK had recorded a whopping 97% yearly gain as compared to 84. and further increasing their prices.474.8% Cement 3.6% of the banking sector’s capitalization respectively.

The new capital market law is expected to increase the activities of the securities market hence banks’ non-commission income. are also expected to increase the size of foreign direct investments in Saudi Arabia consequently increasing demand for the financial services sector. it augurs well for the banks and other private sector players. Improved services and the financial market conditions will help in the repatriation of the Saudi wealth invested abroad which will be conducive for the further growth of the Saudi banking sector. Fitch Ratings assigned the Kingdom of Saudi Arabia Long-term foreign currency and local currency ratings of ‘A’ with Stable Outlook and Short-term rating of ‘F1’. The debt market is also estimated to grow and provide more liquidity to the Saudi banks in terms of corporate bonds. we are increasingly witnessing the growth in the mutual funds industry with banks taking a lead in introducing funds catering to both the domestic and international markets. Saudi banks are not under high pressure as the market still provides potential opportunities that they cannot fulfill due to their capacity constraints. and a sound banking system. low inflation. Entry in the WTO has been one of the priorities of the government and the government is going all out to impress the international business community by undertaking reform in key sectors like insurance and banking. The new developments on the regulatory front will further push the future developments in the Saudi economy. comfortable liquidity and strong asset quality. high capitalization and strict supervision. as it is based on high profitability. With the oil revenues at its lifetime high and the government focusing its efforts to increase the non-oil sectors’ participation to the country’s economic development and growth. However. coupled with the new executive bylaw. we are expecting a healthy competition that should encourage Saudi banks to better position themselves amongst the forthcoming competition by developing their operations further as well as providing their clients with enhanced range of products and services. In the GCC region especially Saudi Arabia.in particular. a stable exchange rate. Saudi Arabia’s banking sector is one of the strongest in the Middle East and among emerging markets. According to S&P.Saudi Arabia Global Investment House Saudi Banking Sector Outlook Saudi banks are expected to benefit from positive economic conditions currently prevailing in the region. As such. This will further strengthen performance of the key sectors such as banking which is already experiencing strong profitability.Global Research . IPOs of family owned businesses are expected to provide more investment banking and advisory business opportunities and increase the demand for corporate lending. Standard & Poor’s too have indicated that the Kingdom has maintained stability in its economy . This positive economic environment has already increased interest of regional banks as well as large international banks in the Saudi banking sector. or about 20% of GDP. which reduced the taxation rate on foreign investors from 45% to 20%. the strength was partly offset by the risk of operating in May 2005 Saudi Arabia Banking Sector 15 . Despite the forthcoming competition in the sector. The agency forecasted the 2004 fiscal surplus will be nearly 10% of GDP and the current account surplus will be more than USD51 billion. strong liquidity. stable deposit base. In Nov 2004. Narrowing of the foreign investments’ black-list.

Islamic banking is one of the promising areas for Saudi banks in which we are expecting the competition to be fierce.Global Research . Saudi banks are also expanding in providing different types of Islamic Sharia-complaint products to meet the growing demand for such products. We are optimistic about the economic profile of Saudi Arabian economy in the future in view of the comfortable risk profile and attractive investment opportunities that the economy offers. Saudi banks are currently offering a wide range of Islamic products ranging from Islamic corporate loans to Islamic consumer loans and even credit cards. Investment spending and liquidity will remain at high levels. We expect the banks to continue investing heavily in their adoption of the new technology platforms and international best practices which should lead to better customer services. and the Saudi banking sector was never tested by a severe economic downturn and fierce competition.Saudi Arabia Global Investment House an economy sensitive to oil price fluctuations and government spending. the sector’s exposure to potentially volatile real estate and capital markets presented another challenge. Also. Most of the Saudi banks have been working hard during the last few years to capture a slice of this low-cost funding source by introducing new products and services to attract deposits of corporate as well as individual clients. The growth of the Islamic investment avenues will act as a strong motivator for the investors to invest their money in these instruments. which will be conducive to the growth of the banking sector. 16 Saudi Arabia Banking Sector May 2005 .

6 10.6% -4.SE 734.9% 15.5% vis-à-vis the current market price of the stock.9 5.0 1050.5 7.2 1. we recommend a ‘Buy’ on the stock.6 10. The estimated fair value of SAMBA’s stock works out to SR812.9 2.2 134.4% 27.5 21.9 3.492.4 5.6 NOT RATED NOT RATED 10.1% 26.6 2.4 944. Corp.0 786.3 22.9% 27.Saudi Arabia Global Investment House Summary of Recommendations SAMBA Financial Group We project the net commission income of the bank to show strong growth in 2005 as we expect the interest rates to move up in the short to medium term.0 9.130.1 6.3% 12.8 88. Riyad Bank Arab National Bank 1120.1 1.Global Research .9 659.SE 1.1% 32.484.3 6.6 2.7% 29.SE 845.8% 22.6% BUY HOLD HOLD BUY HOLD BUY HOLD SAMBA Financial Group Al Rajhi Banking & Inv.3% 34. We expect SAMBA to post healthy growth in its net profits in 2005 and 2006 as the growth outlook for Saudi economy and banking industry remains positive.1% 37.8% 25.2% 22.SE 677. Tadawul and Global Research May 2005 Saudi Arabia Banking Sector 17 .2 7.2 2. 2005.5% 3.3 56.0 Saudi Hollandi Bank The Saudi Investment Bank Banque Saudi Fransi Bank Al Jazira * As on April 24.8% 54.SE 1.2 2.SE 1.6% 26.0 643.3% 19.SE 1030. Table 10: Recommendation Summary Name of Bank Reuters CMP * M-Cap* RoAA RoAE P/E* P/BV* Composite Potential RecommCode Share Upside/ endation Value Downside (SR) (SR bn) (SR) 1090.8% 2.0 39. The increased investment banking activity and project financing (especially in the infrastructure sector) is likely to increase its fee income.1 1.3% 28.5 1020. SAMBA has one of the lowest commission expense/commission income ratio which will continue to provide it with one of the highest spreads among the conventional banks in Saudi Arabia.3% 23. Hence.6 6.1% 11. which is up by around 10.1 based on DDM and peer group valuation method.5% -0. 1040.5 4.1% 30.SE 1080.0 The Saudi British Bank 1060.8 812.0 651.5 NOT NOT RATED RATED NOT NOT RATED RATED Source: Bank’s financial statements.083.1 885.0 1010.3 63.1 2.1 50.1% 33.SE 630.129. The bank has been making a conscious effort to increase its market in the retail banking business especially in the high-margin consumer financing business.

2% in 2003 to 1. The bank is likely to post strong growth in its non-commission income and take advantage of the booming economy to increase its investments and trading income.1 based on DDM and peer group valuation method. ANB reported a net profit of SR1. strengthening its balance sheet for possible opportunities in long-term project financing.Saudi Arabia Global Investment House Al Rajhi Banking & Investment Corp. Riyad Bank has a comfortable loans-to-deposits ratios which would allow it to further expand its loan portfolio especially in the consumer and personal lending. Although the bank has done a good job in reducing its NPL ratio.5% vis-à-vis the current market price of the stock. entry of new players in Saudi banking sector and conversion of NCB will increase competition in the Islamic banking sector. ANB secured a three-year syndicated loan worth US$350mn. a strong growth of 52. we revise our earlier rating and recommend a ‘Hold’ on the stock. The estimated fair value of ANB’s stock works out to SR885. Riyad Bank Riyad Bank’s assets reported a modest 3. Al Rajhi Banking & Investment Corp is planning to expand overseas and has got Islamic banking license to operate in Malaysia. Arab National Bank ANB has been a front-runner in adopting newer technologies and has made substantial investments in upgrading its IT infrastructure.Global Research .3% vis-à-vis the current market price of the stock.2% as compared to the previous year. which is up by around 3. we revise our earlier rating and recommend a ‘Hold’ on the stock. However. The NPLs to Gross Loans ratio has declined from 2. which is up by around 12. Though the fundamentals of the bank remain strong. However. which is lower by around 0. Hence. Hence.4% during the same period and amounted to SR34. we revise of our earlier rating of ‘Hold” and recommend a ‘Buy’ on the stock with medium term perspective. which exceeded our expectations. we expect it to further go down. Non-performing loans (NPLs) in 2004 amounted to SR432.6% vis-à-vis the current market price of the stock.484 based on DDM valuation.16bn for the year 2004. The gross loans and advances increased by 21.25bn. our valuation lags behind the current market price of the stock. The estimated fair value of ALRAJHI’s stock works out to SR1.8% yearly growth in 2004 (lower than our expected growth). Hence. We expect the bank to increase its market share in term of assets as it introduces new deposits as well as loan products. aggregating to SR74. The estimated fair value of Riyad Bank’s stock works out to SR651.6mn compared to SR651mn in 2003.2% in 2004 which is one of the lowest in Saudi banking sector. High growth in the Saudi economy and the government’s intention to increase infrastructure spending will kick-off medium to big-ticket projects which will provide ALRAJHI with growth opportunities in project financing.2 based on DDM and peer group valuation method. 18 Saudi Arabia Banking Sector May 2005 .8bn at the end of 2004.

4 based on DDM and peer group valuation method. The estimated fair value of SAIB’s stock works out to SR659. On the back of strong growth in the noninterest income as well as increase in its spreads. which is up by around 11.9 based on DDM and peer group valuation method. which is down by around 4. in its latest review. which is up by around 2. it has the limitation of a small branch network which hinders its deposit taking capabilities. The Saudi Investment Bank The bank has traditionally focused on corporate banking activities but has changed its strategy in the last couple of years to concentrate more on retail banking and has therefore entered the retail banking business of credit cards.63bn for the year 2004.Global Research . Hence.6% vis-à-vis the current market price of the stock. the bank’s net profit did not meet our expectations. The estimated fair value of SABB’s stock now works out to SR1083. Capital Intelligence. while maintaining the bank’s current ratings. We have revised upwards our earlier projections and now the estimated fair value of SHB’s stock works out to SR944.8% in 2004 helped by the upward movement in the interest rates. we revise our earlier rating and recommend a ‘Hold” on the stock. which is likely to be instrumental in strengthening the bank’s customer base.0% in 2004. we reiterate our earlier rating and recommend a ‘Buy’ on the stock.Saudi Arabia Global Investment House The Saudi British Bank The bank started the implementation of its strategic plan for 2005-2007 which includes the development of Amanah Islamic banking services and launching new Amanah products in light of the growing demand for this kind of services.1% vis-à-vis the current market price of the stock. SABB reported a net profit of SR1. Hence. However. we reiterate our earlier rating and recommend a ‘Hold’ on the stock. the bank is likely to remain one of the most profitable banks in the Kingdom. The bank is likely to be among the leaders in the corporate banking business in Saudi Arabia as it has a large base of blue-chip corporate clientele. up 30% from the previous year’s profit of SR1. Hence. However.6 based on DDM and peer group valuation method. leasing and consumer lending. May 2005 Saudi Arabia Banking Sector 19 . The bank also witnessed declining interest spreads from 3.8% vis-à-vis the current market price of the stock. The bank has been aggressively marketing its “Fourijat” and “Al Tawarruq” consumer loans. However.25bn. placed SAIB on a Positive Outlook.2% in 2003 to 3. The net commission income of the bank is expected to show strong growth as it increases lending to the high-margin retail lending segment. Saudi Hollandi Bank The net commission income did not exhibit a strong growth as other Saudi banks as it increased by only 7.7% in 2004. we believe that the bank’s loan to deposits ratio is likely to increase to more than 75% in medium term as it expands its lending activities. The net commission income saw a growth of 15.

Global Research .Saudi Arabia Global Investment House This Page Intentionally Left Blank 20 Saudi Arabia Banking Sector May 2005 .

Global Research .Saudi Arabia Global Investment House PLAYERS PROFILES May 2005 Saudi Arabia Banking Sector 21 .

National Commercial Bank (NCB) and Samba Financial Group signed 22 Saudi Arabia Banking Sector May 2005 . daily vol.3 118.042 SR292/SR749.3% market share in terms of the total banking deposits in 2004.2 12M Avg. Earlier Citibank had a 20% stake in the bank but in 2Q04 Citibank sold its entire stake to the government-owned Public Investment Fund. 52 week Lo / Hi Market Cap Target Price 107.2bn SR812. The bank plans to ride on this brand franchise to stop the decline in its market share for banking assets by aggressively marketing its product portfolio.5 SR88. having a market share of 15% of the total banking assets in 2004. Recently.421 employees and around 318 ATMs in the Kingdom and one branch in London.Global Research .5 23.1 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • SAMBA Financial Group (SAMBA) was established on 12 February 1980 to take over the then existing Citibank branches in Riyadh and Jeddah which had established presence in Saudi Arabia since 1955. • SAMBA is one of the largest banks in Saudi Arabia in terms of total assets. Shareholding Pattern • The shareholding pattern of SAMBA is widely distributed with more than 96% of the shares in the hands of the Saudi investors. • SAMBA is considered to be one of the biggest banking brands with strong customer loyalty. Recent Developments • SAMBA has been a major player in financing the government and quasi-government projects. SAMBA had 14.5 6. In 1999 United Saudi Bank (USB) merged with SAMBA to create one of the largest banks in the Middle East. The bank has been able to retain its #2 ranking in terms of asset size despite its relatively smaller branch network (65 branches) which is indicative of its successful marketing of its brand.SE Listing: Saudi Stock Exchange Current Price SR734.75 24th April 2005 BUY 31. Currently SAMBA has 120mn shares outstanding after it awarded 1:2 bonus shares which increased its capital to SR6bn. The bank currently has 65 branches with 2.Saudi Arabia Global Investment House SAMBA Financial Group Reuters Code: 1090. It has been rated as the Best Banking Brand in the GCC by the Gulf Marketing Review.

• Helped by underwriting commissions. • The net commission income during the period increased by 20. • The bank acted as the financial advisor to the Saudi Arabian Fertilizer Co. (SAFCO). The bank has a significant chunk of non-interest bearing deposits which is going to positively affect the net interest income in the future as the interest rates are expected to move up further. May 2005 Saudi Arabia Banking Sector 23 . representing a large increase of 74.Jubail Industrial City. • SAMBA had to make huge provision in 2003 which affected its profitability. fully protected by Visa International’s latest e-security programme.4%. an affiliate of Saudi Basic Industries Corporation (SABIC) and helped it enter into a loan agreement with a consortium of local and Gulf banks to the tune of SR1.8mn during the period. • The bank reported trading income of SR82. deposits from customers increased by 11% during the period over Dec 2003. Analysis of Financial Performance . Sahara Petrochemicals and Bank AlBilad. fees and commissions income were higher by a whopping 95. SAMBA reported a net income of SR2.7% during 2004 as compared to the previous year mainly as the result of the rise in the interest rates. • SAMBA’s total assets stood at SR94. Despite the stiff competition. • The bank acted as the lead manager of the initial public share offerings in Ettihad Etisalat (2nd telecom player in Saudi Arabia). The bank again came back to the normal level of provisioning in 2004.2004 • The commission income of the bank increased by 16.83mn. enabling local merchants to offer online purchase facilities. Al Fareed Fund (local market) and Al Raed Fund (Islamic fund) that increased the number of SAMBA-managed mutual funds to 24.32mn in 2002 to SR621.4bn (US$2.75mn in 2003 which the management indicated was a one-time provisioning.1mn in 2004. • The bank became the first e-commerce acquirer in the Kingdom.Global Research .94bn at the end of 2004.94bn ($3. Net gain from forex transactions stood at SR124.45bn in the previous fiscal.2% as compared to the same period last year.43bn recorded in the previous year.3% during the same period.50bn in 2004 as compared to SR1.Saudi Arabia Global Investment House a SR10. On the back of improved net commission income and fee from banking services. • The bank launched 4 international sector-based funds. The bank increased its provisions from SR101. representing an increase of 20.24bn (US$330mn) for the construction of its fourth fertilizer plant in Al. the total operating income increased by 40.45bn) license fee that it bid recently to win the Kingdom’s second GSM mobile license and third generation (3G) license.1% over Dec 2003. Commission expense too increased but at a lower rate of 5.3% to SR2.77bn) Guarantee Facility Agreement with the Etisalat Consortium to cover 80% of the SR12.9% to SR3.95bn as against SR2.

However. The bank is trying to improve its credit quality and has been writing off loans off its books. though lower than the industry average.Global Research .1x of its estimated book value and 24. which is up by around 10.6% in 2004. • The bank capitalization ratios.6% in 2003 but declined to 5. Hence.4bn in 2004 to SR50. are still at comfortable levels as compared to the international standards. • The increased investment banking activity and project financing (especially in the infrastructure sector) is likely to increase its fee income.9% in 2004.1 based on DDM and peer group valuation method. Valuation • Currently.Saudi Arabia Global Investment House • The bank’s gross loans increased from SR37. • The estimated fair value of SAMBA’s stock works out to SR812. NPL coverage ratio improved from 90.9% for the year 2004. the bank has maintained the dividend payout ratio of 92% till 2003. SAMBA is trading at 7. Outlook • We project the net commission income of the bank to show strong growth in 2005 as we expect the interest rates to move up in the short to medium term. both the ROAA and ROE surged and the bank reported an ROAA of 2.6% in 2002 to 6. • As a result of the increase in the net income.2x of its estimated earnings of 2005. • We expect SAMBA to post healthy growth in its net profits in 2005 and 2006 as the growth outlook for Saudi economy and banking industry remains positive. 24 Saudi Arabia Banking Sector May 2005 . The bank has also decided to augment its capital base from SR4bn to SR6bn through the issue of bonus shares which will make it one of the highest capitalized bank in the country.5% vis-à-vis the current market price of the stock. NPL’s-to-gross loans declined from 7.8% in 2003 to 102. we recommend a ‘Buy’ on the stock. SAMBA has one of the lowest commission expense/commission income ratio which will continue to provide it with one of the highest spreads among the conventional banks in Saudi Arabia. The bank has been making a conscious effort to increase its market in the retail banking business especially in the high-margin consumer financing business.8bn in 2004.9% in 2004 and PLLs-to-gross loans increased from 5.5% in 2002 to 27.3% in 2004.2% in 2003 to 4.1% in 2004. • SAMBA announced record net income of SR816mn for the quarter ended 31 March 2005. SAMBA’s ROAE also increased from 21. • SAMBA is expected to continue its focus on improving operating efficiency and asset quality. The bank’s tier-1 ratio stood at 14.

018.122.540.7 80.4 41.037.721.3 6.815.442.788.384.250.335.250.8 0.1 99.185.000.212.848.159.410.156.250.2 125.936.000.9 70.4 1.9 13.875.9 12.0 776.909.7 0.544.5 107.3 731.3 1.884.490.171.419.491.7 62.3 76.9 128.6 4.7 1.452.0 133.438.034.1 79.3 33.6 May 2005 Saudi Arabia Banking Sector 25 .6 13.043.478.8 4.0 2.110.001.4 1.015.2 2.000.627.662.Global Research .0 4.2 2.250.0 314.665.7 1.6 94.0 4.741.389.9 3.8 1.0 6.4 2.054.037.9 31.0 85.487.9 58.5 4.5 43.1 2004 2005F 2006F 2007F 2008F 3.9 3.878.3 8.142.361.5 37.395.1 45.5 970.9 76.938.7 713.000.6 13.9 1.0 6.9 5.751.3 67.3 697.1 711.2 317.0 6.0 2.0 2.2 685.236.238.8 2.289.0 2.938.172.0 6.8 2.134.4 753.740.335.168.8 60.7 111.0 2.0 2.187.502.9 482.0 4.0 2.0 14.250.6 7.910.7 67.8 99.231.007.3 2.277.3 34.361.000.164.1 4.353.3 4.7 111.4 8.7 39.000.627.5 48.0 644.0 79.Saudi Arabia Global Investment House Balance Sheet SAMBA Financial Group SR mn Cash & Balances with SAMA Due from Banks and other FIs Trading Investments Non-trading Investments Net Loans and Advances Net Fixed Assets Other Assets Total Assets Due to Banks and other FIs Customers' Deposits Term Loan Other Liabilities Total Liabilities Share Capital Statutory Reserve Other Reserves Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 2002 4.823.028.546.044.775.646.9 1.832.0 133.7 262.4 4.2 2.0 6.235.893.2 13.540.000.0 6.2 0.0 2.000.2 14.5 3.2 125.951.0 13.1 1.2 34.9 2.032.2 85.001.2 72.0 119.177.002.6 1.8 4.807.9 9.948.918.000.7 1.000.0 3.7 111.535.517.3 3.216.034.178.6 847.1 142.620.119.4 317.459.4 2.0 4.1 142.2 91.8 1.000.9 79.9 393.2 94.1 2003 5.2 609.241.045.503.9 1.6 13.8 3.853.815.

2) (1.6 0.168.9) 2.2 262.0 0.505.1 1.2 17.0 70.708.2 19.2) (1.1 82.8) (362.5) Rent & premises related expenses (100.182.7 408.1 0.0 0.178.344.1 (250.1) Depreciation and amortization (85.6) (110.7 1.2 1.2 8.Global Research .040.1 20.1 1.3 4.5 126.8 0.8) (157.1 17.6 127.6 2.194.4) (1.397.4 759.7 18.9 1.5 2005F 2006F 2007F 2008F 4.6 2002 2003 2004 2005F 2006F 2007F 2008F 89.278.3 4.6) (3.0 0.9 1.335.6 15.6 3.104.2 7.6) (1.1) (1.1 2003 3.0 0.755.3) (346.737.5 797.9 26 Saudi Arabia Banking Sector May 2005 .2 2.164.3) (5.2 1.3) 3.7 (3.1) (119.4 393.3) (118.9 2.178.172.3) (807.089.7 7.0 0.4) 2.474.715.917.808.0) (142.8) (380.172.4) 24.2) (1.970.2 34.7) (724.8) (1.0) Net Income Statement of Retained Earnings Beginning retained earnings Net income Transfer to statutory reserve Transfer to other reserves Gross dividends Net change in fair value Ending balance 1.675.7 7.826.1 0.320.084.007.1 95.1 39.9) (400.164.545.846.7 5.1 21.953.002.7 5.7 5.6) (1.9 (910.943.641.4) 5.0) (1.6) 0.9 1.614.758.4) (888.9 0.0 0.8 129.1 0.2) (1.808.321.0 0.3 1.9 1.0 0.6) (366.6 2.180.4) Other G & A expenses (235.714.641.2 109.0 262.463.548.846.880.9) (87.196.0) 2.3) (360.7) (1.6 54.5) 0.3 1.0) (343.217.5) (6.7 1.671.2) (299.8 3.8) (329.2 125.1 1.9 7.9) (1.3 (621.3) (1.0 271.5 (802.Saudi Arabia Global Investment House Operating Statement SAMBA Financial Group SR mn Special commission income Special commission expense Net special commission income Fees from banking services Exchange income Net trading income Dividend income Net gains on investments Other operating income Total non-commission income Provision for loan losses Total operating income 2002 3.0) (164.3 285.0 0.340.0 6.5 Salaries & employee related expenses (713.2 47.0) (1.7 3.5 105.0) 3.1 5.6 4.3) 0.0 0.4 1.1 2.857.0 Total operating expenses (1.6 (761.4 1.0 144.2 0.857.0 0.850.3 1.546.218.2) (959.1 1.5 6.3 126.518.3 (101.055.9) (173.8 0.7) 0.8 881.5) (102.4 1.9 (183.8) (4.505.455.524.436.998.850.5 113.0 0.589.2 360.976.168.6) (1.218.3 1.5) (127.776.9) 3.7) 2.2 2004 3.466.4) (742.4 393.436.382.7 (970.0) Other operating expenses (47.5 124.2 5.3) (295.6 (1.8) (94.8) (101.6 125.1 6.0 (2.0 (292.057.185.

6 2008F 7.6) 97.3 4.0 2005F 3.6 102.8 858.3 3.1) (505.058.3) (2.8) (1.6) (106.308.4 3.3 2003 1.940.404.018.135.3 (4.8) 1.808.8 5.0 0.3) (5.4) 1.9) (4.0) 110.5) (355.1 3.846.7) 127.9 3.0 (724.8 7.142.9) (103.3 May 2005 Saudi Arabia Banking Sector 27 .7 80.4 8.6) (1.0 0.993.250.263.3 0.357.850.2 (921.6 3.1) (236.3 385.035.722.641.6 0.5 3.7 0.5) (6.4) 11.7) 635.3 149.8 62.4 9.1 380.6 6.1) 94.4) (13.1) (1.0 7.6) (1.018.5 456.627.4 (34.7) 621.4) (316.6 0.714.857.7) 5.2) (1.4 270.0 250.0) 87.5) (221.232.5 (3.2 (2.006.5) (6.741.850.2) (7.0 346.335.335.0 0.3) (5.490.7) (128.875.633.218.601.0 366.2) 102.5 (846.2 3.007.8 (0.9 4.4 276.5) (6.8) (9.8 5.0 (105.8 (227.6 1.0) (2.5) (1.436.4 0.4 5.5) (1.7 0.4) (2.4) (324.548.5 4.825.5) 1.3 2007F 5.741.7 610.6) (1.125.659.608.6 4.299.7) (112.0 0.2 (271.955.376.0 (70.7) (78.001.641.8 (285.8) (101.442.491.815.327.Global Research .9) 101.035.9 383.4 (1.9 350.3 423.6) (3.001.368.2) (71.774.456.Saudi Arabia Global Investment House Cash Flow SAMBA Financial Group SR mn Net income Accertion of discounts Gains on investments Depreciation and amotization Loss/gain on disposal of fixed assets Provision for loan losses Due from banks and other FI's Trading portfolio Loans and advances Other assets Due to banks and FI's Customers deposits Other liabilities CF from Operations Net sale /purchase of investments Capex CF from Investing Term Loan Dividend and zakat paid CF from Financing Change in cash Beginning cash Ending cash 2002 1.7) (96.2) (201.142.1) (1.5 (2.627.038.6) 2.714.4) 3.887.3 82.5) 118.923.4) (724.906.5 3.7 (1.0 (47.9 13.7 2004 2.5) (684.2 4.9 5.3) (1.6 11.4) 0.4) (14.192.2) 85.062.4) (140.2 288.5 0.5 6.0 (2.080.7) (2.0 (1.497.3 388.0) (253.9 1.548.2 282.272.6) 873.6) (3.0) 183.0) 0.407.8) (130.491.810.1) (210.007.2) (150.505.0 295.8 1.9 (0.920.7 (183.562.0 (39.3 2006F 4.3 0.

9% 0.3% 66.6% 32.6% 11.6% 2003 1. income .4% 19.5% 1.6% 2007F 4.8% 1.6% 1.0% 10.3% 28.6% 71.2% 10.Cost rate on average commission bearing liabilities .453.9% 27. income .9% 23.0 23.2% 32.6% 1.Return on average equity .2 57.Cost/ Total op.8% 28.0 120.6% 4.2% 50.8% 6.1% 37.0 50.9% 80.Yield on average earning assets .2% 77.4% 20.4% 2.5% 57.7% 0.4% 2.7% 70.2% 67.0 800.6% 0.0 88. income .0% 18.2% 2.0% 3.3% 4.7% 4.1% 18.3% 20.7% 3.8% 25.NPL Coverage Capital Adequacy .1% 90.0 2.2% 75.PLL's/ Total op.7% 1.466 3.6% 60.1% 58.170.0 50.2% 17.7% 50.Market price year end (SR) .3% 71.Due from Banks/ Due to Banks Credit Quality .3% 19.9% 8.5% 1.9% 66.1% 75.4% 29.878.5% 4.8% 20.0% 61.2% 22.8 734.1% 34.7% 32.6% 22.8% 19.Provision for loan losses (SR mn) . income .4% 2.3% 95.8% 94.NPL's /Gross Loans .3% 67.6% 5.1% 35.Fees from banking services/ Total op.400.7% 1.2 20.2% 4.0% 24.8% 9.2% 4.EPS (SR) .6% 47.0 120.Net special commission income after PLL's/ Total op.2% 23.P/BV 2002 2.1 111.8 734.Return on average assets .6% 1.3% 67.7 6.3% 15.9% 71.0 50.1% 3.Equity/ Total Assets (Equity capital ratio) .3% -24.5 24.6% 2.0% 66.7% -3.3% 16.Loans/ Customer Deposits . Expenses .0 2.3% 22.0% 30.9% 15.4% 3.573.5% 81. (SRmn) .Special commission expense/ Special commission income .6 7.7% 1.3% 4.8% 69.1% 18.8 28.1% SAMBA Financial Group 2004 2005F 3.8% 71.2% 20.6% 3.9% 1. income .NPL's /(Equity+provision for loan losses) .7% 1.9% 75.0 31.0 118.0 15.2% 4.Global Research .000.0% 5.6 6.2% 16.8% 17.2 3.2% 51.0% 5.0% 70.4% 20.0% 3.6% 34.4% 2.2% 27.Shares in issue (mn) .Spread .4% 3.4% 19.0 88.2% 3.Commission margin (earning assets) Efficiency .5% 4.1% 4.1% 13.9% 2.6% 0.4% 14.5% 21.FX Income/ Total op.4% 33.0 31.5% 1. income .1 2.9% 28.3% 4.2% 109.3% 65.4% 27.Loans / Commission earning assets .1% 4.0 46.824 4.0 734. G&A expenses/ Total Op.2 18.Saudi Arabia Global Investment House Ratios Fact Sheet Profitability .Change in Investment Income .0 50.0% -7.8 734.Par value per share (SR) . income . income .7% 75.2% 4.4 114.0% 11.7% 0.0% 5.Provisions /Average loans .7% 76.9% 2006F 4.5% 52.2% 103.Non Performing Loans (SR mn) .Change in Fx Income .Book value per share (SR) .3% 1.Fees from banking services/ Total op.Equity/ Gross Loans Constitution of Total Operating Income .0 120.7% 4.8% 35.1% 28.0% 2.2% -60.4% 3.0% 12.Net special commission income after PLL's/ Total op.9% 11.3 15.0 88.3% 111.9% 23. Expenses .8 7.2% 70.9% 11.3% 4.0% 25.5% 83.0 50.1% 23.8% 3.1% 0.Non-commission income/ Total op.0 80.5% 19.6% 52.4% 4.0% 0.0% 18.4% 39.Change in Fees from banking services .0% 5.0 355.7% 2008F 5.0% 11.9 25.8% 13.8% 2.520.948 2.7% 3.7% 1.030 3.832 3.0 64.7% 62.3 112.4% 0.0 80.8% 10.1 48.5 6.9 16.9% 60.9% 26.8% 71.9% 76. income .0% 14.9% 92.5% 42.2% 29.502.1% 4.7% 37.1% 31.8% 18.0% 38.701.1 6.1% 1.Market Cap.7% 32.8% 11.5% 0.Provisions /Total op.3% 0.0 50.7% 153.4% 2.7% 60.9% 72.170.5% 1.2 18.4 2.9% 77.3% 2.Dividend payout ratio Margins .Net (or profit) margin .045.4% 21.0% 35.1% 15.8% 102.0% 52.8% 1.4% 4.119 4.4% 4.Rent.8% 60.0 7.6% 23.3 40.6% 61.0% 92.9% 71.7% 13.5% 5.170.6% 0.0 120.9% 4.1% 3.4 6.2% 4. income Operating Performance .4 111.5% 15.9% 29.4% 121.5% 61.4 2.5% 20.0 394.PLL's / Gross Loans .2 28 Saudi Arabia Banking Sector May 2005 .9 118.2% 60. income .0% 5.Customer Deposits/ Total assets .4% 4.0% 25.3% 72.4% 32.3% 74.DPS (SR) .9% 22.7 60.9% 1.Change in special commission income .1% 31.5% 75.6% 1.9% 4.Staff expenses/ Total Op.P/E .4% 4.5% 47.7% 24.0% 27.0% 25.0% 16.Other Income/ Total op.4% 63.6% 81.0 31.7% 83.5% 32.1% 24.5% 61.3 21.0 88.6% 10.Non-commission expense/ Total op.0% 94.7% 23.5% 33.0% 62.3% 4.6% 18.3% 95.1 21.0 80.5% 34.428 3.2% 38.9% 1.3% 32.3% 3.3% 5.5 103.7% 0. income .4% 1.0% 5.2% 0.5% -1.174 3.2 3.Investment Income/ Total op.8% 16.7% 4.9% 73.1% -65.Change in Other Income RATIO'S USED FOR VALUATION .0% 5.3 30.8% 3.2% 16.8% 20.170.3% 65.Non-commission expense/ Average total assets Liquidity .

52 week Lo / Hi Market Cap Target Price 96.3% of the aggregate banking assets at the end of 2004.2 189. In 1978 they amalgamated their money changing operations under Al-Rajhi Company for Currency Exchange and Commerce. The bank is one of the largest capitalized banks in the country.SE Listing: Saudi Stock Exchange Current Price SR1.2bn.9 12M Avg. The bank is also planning to expand overseas and has got Islamic banking license to operate in Malaysia.711 employees.9 7. which in 1987 was converted into a joint stock company and in 1988 the company was developed into Al Rajhi Banking and Investment Corporation.338 SR569/SR1. which represented 25. • • Shareholding Pattern • ALRAJHI has a share capital of SR4. retail and commercial banking products and services in addition to investment banking. (ALRAJHI) is a full-fledged Islamic Bank providing wholesale. the largest ATM network (more than 1100 machines) and over 6. Reuters Code: 1120.7 22.9% of the total banking sector market capitalization and 7. At the end of 2004.492 24th April 2005 HOLD 65. date back to the mid-1900s when four Al Rajhi brothers started a bullion arbitrage and money-changing business. daily vol.3bn SR1.000 POS installed all over the Kingdom.5bn by offering one bonus share for each share outstanding.9% of the total Saudi market capitalization. The bank has one of the largest branch network in the kingdom with 383 branches with 5. Al Rajhi Banking & Investment Corp. having a market share of 12.Saudi Arabia Global Investment House Al Rajhi Banking & Investment Corp. The bank increased its capital to SR4. • May 2005 Saudi Arabia Banking Sector 29 .492 SR134.Global Research .5bn – 90mn shares outstanding of SR50 par value wholly owned by Saudi shareholders.484 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • The origins of Al Rajhi Banking and Investment Corp. ALRAJHI is the 3rd largest bank in the Kingdom in term of the total assets. ALRAJHI had the largest market capitalization of SR90.

up by a whopping 132. up 44.1% of the total investments in 2004 as compared to 27. The net investment income saw a growth of 17. the bank boasts of the highest Return on Average Equity (RoAE) and Return of Average Assets (RoAA) among the Saudi banks at 37.2% and 4.8% as compared to the industry average of 172% in 2004.2% in the previous year. The growth in the net profit exceeded our expectations. The bank has been traditionally very strong in fee-based banking services such as remittances.2004 • ALRAJHI reported a net profit of SR2. As a result. The bank plans to open about 110 high-tech model branches this year in an effort to attract high-worth customers. with the “Best Islamic Banking in the World” award for 2004. As a result.1% in 2004 as compared to the previous year. Also the bank has a strong branch network which helps it maintain its lead in fee-based retail activities. • • Analysis of Financial Performance . representing an increase of 20.Saudi Arabia Global Investment House Recent Developments • ALRAJHI embarked on a major drive to attract more Saudi and expatriate customers to use its remittance services. the NPI to Gross Investments fell from 2.9% in 2003. ALRAJHI’s total assets stood at SR77. The bank has launched a new 'Remittance Discount Card' and a 'VIP Card' besides ensuring better services. The International Convention of Islamic Banks awarded Al Rajhi Banking Investment Corp.1% respectively.8mn in 2004. The bank had the highest coverage ratio among the Saudi banks at 333.25bn in 2003 to SR950.4% over Dec 2003. which reported 35% growth in the volume of remittances last year. ALRAJHI’s net investment showed a solid yearly growth of 18.2%.04bn.7% of the total liabilities as compared to 76.1% from the previous year’s profit of SR2.0% in 2004 helped by the upward movement in the investment yields.Global Research .85bn at the end of 2004. The bank.4% in 2004. Customer accounts in 2004 represented 81.93bn for the year 2004.3% in 2004 on the back of 67.2% in 2003 to 1. The bank has also reported a strong growth in its fee from banking services. • • • • • • 30 Saudi Arabia Banking Sector May 2005 . The banks has been able to grow its customer deposits by strong yearly growth of 29% in 2004 taking advantage of its strong branch network. The bank has done a decent job in reducing its non-performing investments from SR1. The bank maintained its momentum of the previous year when it had notched a growth of 44.7% yearly growth in Installment Sales activities. Installment Sales accounted for 39. currently holds 45% of the market share. speedy delivery of funds to beneficiaries and discounted remittance fees for regular customers.

5% vis-à-vis the current market price of the stock. justifying our earlier ‘Buy’ recommendation.Global Research .Saudi Arabia Global Investment House • The bank’s capitalization ratio in 2004 are among the highest in the banking sector. Though the fundamentals of the bank remain strong. • • • May 2005 Saudi Arabia Banking Sector 31 . • Outlook • • The bank is likely to maintain its coverage ratio of more than 300% in the medium term. The bank’s tier-1 capital ratio at 18. We have revised upwards our earlier projections due to better FY 2004 results of the bank. The estimated fair value of ALRAJHI’s stock works out to SR1. Entry of new players and conversion of NCB will increase competition in the Islamic banking sector. its expansion plans (Malaysia etc.) and improved market conditions.5x of its estimated earnings of 2005.492 (bonus adjusted). ALRAJHI is trading at 12.7x of its estimated book value and 32.2% while its tier-2 ratio is the highest in the Saudi banking sector at 24%.484 based on DDM valuation. ALRAJHI’s net income for the first-quarter of fiscal year 2005 jumped by 49. our valuation lags behind the current market price of the stock. High growth in the Saudi economy and the government’s intention to increase infrastructure spending will kick-off medium to big-ticket projects which will provide ALRAJHI with growth opportunities in project financing. Almost all the conventional banks are promoting their Islamic banking products. Currently.8% is above the industry average of 16.6mn from SR625. which is lower by around 0.3mn for the same period of last year.6% to reach SR935. the stock has moved up by more than 60% to the current SR1. we revise our earlier rating and recommend a ‘Hold’ on the stock. Hence. • Valuation • Since our last investment update in Dec-2004.

528.7 59.1 45.5 1.0 939.534.0 8.9 572.786.3 1.500.521.5 939.5 106.419.3 792.2 8.9 1.636.6 63.585.643.254.3 2004 8.268.0 1.0 1.8 2008F 6.4 86.5 2006F 8.318.250.717.8 851.444.4 59.560.552.6 6.363.9 796.722.0 6.9 827.3 6.932.4 77.678.9 2.7 1.5 4.500.398.7 1.5 182.500.500.449.4 373.0 4.655.0 77.9 1.6 123.534.636.791.831.888.681.1 7.2 903.0 10.572.3 1.9 7.072.785.0 121.747.0 1.0 891.9 701.651.1 75.3 32 Saudi Arabia Banking Sector May 2005 .5 611.8 99.8 654.500.1 108.629.8 4.250.5 57.400.027.6 111.756.0 2.5 1.398.2 908.6 5.9 13.4 79.0 121.743.3 135.4 877.250.Saudi Arabia Global Investment House Balance Sheet Al Rajhi Banking & Investment Corp.0 730.6 1.8 82.530.249.0 1.9 2.882.995.088. other AFS Investments Net Investments Net Fixed Assets Other Assets Total Assets Due to Banks and other FIs Customers' Accounts Other Liabilities Total Liabilities Share Capital Statutory Reserve General Reserves Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 2002 6.4 4.477.632.7 4.9 49.0 4.5 92.017.530.052.500.3 135.678.089.9 2.037.0 1.536.400.694.1 536.683.8 65.1 64.0 1.8 2005F 8.0 1.0 2.2 4.3 121.0 55.618.5 94.2 950.250.5 2003 5.8 1.259.651.688.0 2.854.495.2 2.618.636.138.837.7 110.398.121.854.9 94.932.349.389.8 1.786.0 12.387.0 1.366.8 48.3 638.250.0 537.3 2007F 6.500.601.263.250.795.429.566.907. SR mn Cash & Balances with SAMA Due from Banks and other FIs Investments Property.0 69.5 106.0 4.Global Research .4 1.5 2.2 52.9 1.8 92.4 7.8 2.0 3.282.2 930.8 2.5 1.0 2.126.1 13.1 64.717.

3 157.7) (8.3 2.5 2.295.7) (164.3) (805.4 249.0 0.4) (1.7) Rent & Premises related Expenses (85.636.0 0.3) Other G & A Expenses (295.9 35.5) (336.0 2.0 (1.0 2.1 7.3 Salaries & Employee related Expenses (622.005.061.130.0 2.537.1) (972.636.849.2 2004 2005F 2006F 2007F 2008F 4.3 1.5 99.9) (195.0 0.1) (1.6) 1.2 19.9) Net Income Statement of Retained Earnings Beginning retained earnings Net Income Transfer to Statutory Reserve Transfer to other Reserves Gross Dividends Ending balance 1.884.6 3.9 18.5) (1.2) (160.573.2) (257.0) (827.5) Total Operating Expenses (1.9 4.449.6 186.7 16.1 7.4 254.0 0.0 2.2 2.385.8 0.9) Depreciation and Amortization (154.0) 2.160.6) 0.1 2.0) (224.8) (2.718.4 91.2) (2.649.7) (1.0 0.8 7.463.0 6.5) (1.0 6.9 (865.6 0.6 669.8) (296. SR mn Special Investment Income Special Investment Expense Net Special Investment Income Mudarba Fee Fees from Banking services Exchange Income Net gains on Investments Other Operating Income Total Non-commission Income Provision for Investment Losses Total Operating Income 2002 2.3 0.636.6 27.1) (3.0 2.4 1.038.6 11.935.0) (1.537.636.6) (1.8 1.5) (1.5 247.3) 3.9) (651.331.7 1.9 May 2005 Saudi Arabia Banking Sector 33 .8) (104.139.0 4.9) (145.1 5.2 104.050.8 1.7 106.5) (548.0 0.3) (926.0 0.643.6) (2.1 2.217.965.8 7.4) (126.2) (1.1) (1.6 20.0) (2.8 8.6 21.0 2.9 32.Saudi Arabia Global Investment House Operating Statement Al Rajhi Banking & Investment Corp.413.730.1) (2.849.902.484.0) (110.0 (460.349.Global Research .0 (1.3) (788.7 92.9 4.684.3 1.484.313.5 8.922.014.1 2.2 2.071.7 16.413.5 193.398.065.300.626.5) (477.6 242.552.032.7 0.2) (644.5) (154.349.643.6 493.234.5) (1.6 94.4) (1.8 16.398.153.280.2 (860.6) (1.3 33.552.5 5.8 (805.0 0.6 7.4) (714.055.8 5.5) (626.166.306.1) (2.884.935.1 2.1 2.8 1.3 2002 2003 2004 2005F 2006F 2007F 2008F 1.512.130.038.395.385.760.5) Board of Directors Remuneration (2.100.8 19.5) 0.0) (2.139.4) (868.7 2003 3.7 9.5 8.0 3.8 5.0) (438.9 252.032.760.3 2.8 599.1 1.8 8.636.1 5.4 288.033.9) (2.1 1.0 2.6 22.9) (153.2 109.636.2) (6.140.651.2) (716.500.272.140.418.6) 4.814.7 29.922.

2 5.5 2007F 7.3 14.534.0 2003 2.760.9 154.9 860.3 6.5) (1.0) (1.9) (214.259.4 2008F 8.1 2005F 4.058.6) (26.871.6 11.3) 8.055.4 4.8) (7.005.2) (15.6) (282.1 3.099.430.1) (6.7) (3.0 5.5) (1.8 844.731.2 6.6) (1.259.795.3 11.313. SR mn Net Income Depreciation and Amotization Provision for Investment Losses Due from Banks and other FIs Investments Other Assets Due to Banks and FIs Customers Deposits Other Liabilities CF from Operations Non-trading Investments Capital Expenditure CF from Investing Dividend and Zakat paid CF from Financing Change in Cash Beginning Cash Ending Cash 2002 1.3 138.8 (171.935.8 257.9 8.508.2 1.4 2006F 5.1) (3.2) 413.1) (39.2) (6.2 (294.831.9 4.1 9.1) (33.7) (8.714.7) (477.2 526.7) (8.3) (429.096.763.7 805.7 1.0 1.6 12.795.Saudi Arabia Global Investment House Cash Flow Al Rajhi Banking & Investment Corp.418.9 152.4) (35.8) 2.7) (3.6) 2.Global Research .038.6) (1.718.1 1.2 34 Saudi Arabia Banking Sector May 2005 .8 3.3) (30.771.3) 4.298.1) (202.033.0 6.116.0) (373.3 6.5 865.145.1 164.1) 8.139.014.2) (378.9 971.6 187.3) (27.4) 164.7 (321.587.413.169.068.2) (17.8) 18.484.9 (261.9 8.0) (43.2) (15.295.3 (2.1) (300.3) (14.849.2) (6.4 6.0 (1.683.910.549.8 1.9 3.7) 251.1 (163.418.7 (33.8) (25.922.3 11.718.0 1.733.3 5.7 210.363.4) (2.626.877.298.147.626.1) (35.313.130.0 130.2 154.5 126.534.303.8) (24.6) (1.1 224.714.8) (34.1 (4.1 3.831.011.5 1.316.6) (318.8 8.785.8) 751.683.3 296.7) (47.064.7) (416.112.104.363.117.9 (146.3 2004 2.8 6.4 8.9) (364.1) (3.1) (10.4 13.1) (324.149.773.6) (107.295.1 195.

8% 6.0% 60.4 151. Expenses .8% 1.NPL Coverage Capital Adequacy .Spread .4% 825.6% 0.Customer Deposits/ Total Assets .1 2.1% 114.6% 89.2% 75.2% 56.7% 8.5% 4.5 24.0% 5.0 50.8% 19.Fees From Banking Services/ Total Op.3% 5.9% 81.492.0% 1.0 134.0 6.9 10.173.7% 26.7% 18.0% 1.280.0% 2006F 5.NPL's /Gross Investments .7% 30.Net (Or Profit) Margin .1% 7.0 36.7% 1.6 12.4% 50.2% 74.1% 6.0% 27.0% 74.P/BV 2002 2.3% 1.Fees From Banking Services/ Total Op.G&A Expenses/ Total Op.0% 81.2% 12.0% 71.3% 1.5% 1.Investments Income/ Total Op.0 43.FX Income/ Total Op.EPS (SR) .3 92.0% 357.8% 40.4% 76.7% 54.0% 132.Change In Special Investment Income .0 90.225.0% 22.2% -2.9% 75.9% 5. Income .0 19.492. Income .8% 18.0 50.991.3% 10.0 4.0 1.0 50.0% 13.5% 47.9 2.6% 19.7% 15.1% 17.Non-Investment Expense/ Total Op.0 90.0% 7.8% 25.3% 11.1% 6.7% 8.Non Performing Investments (SR mn) . Income .3% 22.8 3.1% 2.0% 5.Investments/ Customer Deposits .0 2.0% 50.6 21.1% 67.5% -15.7% 1.492.Shares in issue (mn) .Return on Average Equity .Non-Investment Income/ Total Op.6% 99.4% 20.4% 0.3 71.4 150.2% 23.7% 76.875.282.5 18.Change In Fx Income .5% 28.8% 2.246.0 134.0 134.7% 7.1% 19.0% 1.8% 79.1% 7. 2003 2004 2005F 4.8% 37.4% 744.4% 2.005.0 90.3% 5.6% 116.1% 73.4% 40.5% 55.6% 333.0% 5.2% 17.Provisions /Average Investments .0 1.1% Al Rajhi Banking & Investment Corp.0% 26.6% 98.280.9 60.3% 6.1 10.2% 49.2% 99.0% 4.3% 1.2% 2.2% 29.3% 665.6% 761.2 45.9 161.8% 6.8% 62.3% 38.0% 23.6% 82.1% 4.7% 0.7 117.4% 81.8% 49.631.7% 40.8% 107.0 50.6 22.9% 5.6 2.5% 5.3% 37.3% 1.4% 314.Book Value Per Share (SR) .0% 5.0 134.Yield On Average Earning Assets .280.1% 11.9% 59.9% 76.7% -33.4% 1.Provision For Investments Losses (SR mn) .7% 679.4% 4.280.9% 2008F 6. Income .4% 17.7% 699.0% 2.3% 32.3% 117.4% 50.7 10.Saudi Arabia Global Investment House Ratios Profitability .0 90.9 7.0 35.9% -2.8% 80.489.0 1.0 50.0% 42.0% 5.0% 3.7% 24.1% 11.NPL's /(Equity+Provision For Investments Losses) .4% 1.212.2% 7.1% 37.3% 22.8% 65.5% 25.3% 21.361.0% 71.0% 5.PLL's / Gross Investments .0% 5.0% 11.6% 30.3 5.5% 56. Income .0% 5.5 1.0% 18.Equity/ Gross Investments Constitution Of Total Operating Income .4 45.3% 28.2% 13.5% 26.2% 15.Change In Investments Income .1% 0.9 79.1% 32.0 45.0 90.Return on Average Assets .8% 11.9% 4.8% 2.2% 7.5% 20.7% 3.4% 5.0 45.Market Price Year End (SR) .8% 11.2% 117.Non-Investment Expense/ Average Total Assets Liquidity .1% 91.0% 1.Change In Fees From Banking Services .Net Special Investment Income After PIL's/ Total Op.0% 112.3% 4.4% 5.3% 1.0 27.0% 156.0 975.5 30.6% 32.5% 99.Customer Deposits/ Equity .5% 5.0 45.9 41.9 1.6 1.2% 67.8% 71.0% 2007F 6.2% 46.6% 7. Income .3% 80.6% 7.0% 12.8 137.3 65.Change In Other Income RATIO'S USED FOR VALUATION .7% 50.Market Cap.8% 11.1% 67.6% 19.5% 6. Income Operating Performance .P/E .630.8% 0.Due From Banks/ Due To Banks Credit Quality .8% 73.4 614.5% 45.4 145.7% 10. Income .1% 1.1% 10.5% 112.9% 0.7 32.4% 12.1% 6.5% 24.7% 218.7 6.7% 2.6% 81.8 3.6% 83.3 9.6% 12.0 31.207.6% 308.9% 81.4% 8.0 1.3% 3.9% 79.6% 29.3 97.0% 2.267.2% 0.4% 6.3% 20.2% 124.4% 9.Commission Margin (Earning Assets) Efficiency .9% 29.4% 8.7% 78.3 28.8% 35.8% 81.5% 13.Other Income/ Total Op.6% 1.8% 24.3% 45.0% -3.0% 73.3% 350.Staff Expenses/ Total Op.3% 31.3 4.4% 950.5% 99.492.4% 1.0 50. Income .6% 84.1% 63.2% 6.5% 5.Provisions /Total Op. Income .5% 0.Equity/ Total Assets (Equity Capital Ratio) .2% 2.6% 11.9% 2.6% -13.5% 20.8% 1.5% 20.0% 708.4% 98.8% 98. Income .7% 94.Global Research .4 1.8% 37.Net Special Investments Income After PIL's/ Total Op.0% 10.1% 0. Expenses .1% 53.1 189.178.2% 45.7% 10.8% 43.0 1.554.9% 74.Dividend Payout Ratio Margins .0% 8.719.9% 1.5% 8.0% 7.5% 4.9 May 2005 Saudi Arabia Banking Sector 35 .8 15.Cost/ Total Op.Investments / Commission Earning Assets .2% 12.6% 2.8% 74. (SR Mn) .7% 42.Par Value Per Share (SR) .DPS (SR) .1% 48.

• • Shareholding Pattern • Saudi individuals and institutions own 71% of its paid up capital while SAMA. an agency in USA. With total assets of SR74. It also has international operations with a branch in London. Riyad bank provides a full range of banking services through a network of 195 domestic branches with 3.1 113. daily vol.6 12 M Avg. a representative office in Singapore. signed a memorandum of understanding with Riyad Bank whereby IFC will advise to the bank on developing its Small and Medium Enterprise (SME) banking operations. with the approval of the government. acquired a 38% stake in Riyad Bank to prevent its failure. together with the Ministry of Finance owning the remaining 29%.Global Research .180 SR303/SR640 SR63. SAMA. As the bank faced financial difficulties during the beginning of the 1960s.557 employees. Shareholders of Riyad Bank approved the board's recommendation to increase the capital of the bank from SR4bn to SR5bn by offering one bonus share for each 4 shares outstanding. Riyad Bank ranks 4th amongst Saudi commercial banks. 52 week Lo / Hi Market Cap Target Price 115.25bn in 2004. 36 Saudi Arabia Banking Sector May 2005 . in-terms of asset size and holds a market share of 11.8% of the sector’s aggregate total assets.SE Listing: Saudi Stock Exchange Current Price SR630 24th April 2005 HOLD 25.Saudi Arabia Global Investment House Riyad Bank Reuters Code: 1010.1 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • Riyad Bank was established in November 1957 as a Saudi joint stock company and is the oldest fully Saudi owned bank.0bn SR651. • Recent Developments • The International Finance Corporation.1 25. the private sector arm of the World Bank Group.1 5.

2% in 2004. When the bank implements Diebold’s Deposit Automation solutions. with fee from banking activity reporting a yearly growth of 61.5% in 2004 which can be attributed to the decline in the high-interest bearing time-deposits which were replaced by increase in the lower interest-bearing demand deposits.2mn in 2003 to SR96.6% in 2004.1% aggregating to SR612.8bn at the end of 2004.2% in 2003 to 1. Riyad Bank’s assets reported a modest 3.1%. The commission income saw a growth of 7. However.1% in 2004. Riyad Bank’s customer deposits increased from SR45.8% yearly growth in 2004 (lower than our expected growth).8bn in 2003 to SR49.9% in 2004 which gives it a leeway to aggressively grab the lion’s share of the Saudi consumer financer sector.3% in 2003 to 3.2% in 2004 which is one of the lowest in Saudi banking sector.2004 • Riyad Bank reported a net profit of SR2. next only to 333.8mn in 2004 which helped it net commission income after PLL to report an yearly growth of 16. up 26% from the previous year’s profit of SR1. The bank reported a rise in the spreads from 3.4% in 2004. The bank had a comfortable loans to deposit ratio of 70. The gross loans and advances increased by 21.6% in 2003 to 18.6mn compared to SR651mn in 2003. beating our expectations. The NPLs to Gross Loans ratio has declined from 2.Global Research .59bn. Riyad bank also reported strong gain in the fee-based income. Non-performing loans (NPLs) in 2004 amounted to SR432. aggregating to SR74.8% reported by ALRAJHI. with more than 650 ATMs.3% in the above period which resulted in the net commission income show a healthy growth of 10. The fee from banking service as a percentage of operating income increased from 12.0bn for the year 2004. its customers will also have the ability to deposit cash directly into their personal accounts without the need to wait for access to a bank teller. Analysis of Financial Performance . The bank’s NPL coverage of 303.3mn in 2004.4% during the same period and amounted to SR34.Saudi Arabia Global Investment House • Diebold Incorporated was selected by Riyad Bank to deploy 100 Diebold Opteva® automated teller machines (ATMs) across the bank’s network.7bn in 2004 representing a yearly increase of 8. Like other Saudi banks.25bn. just a shade higher than Saudi British Bank at 1. Riyad Bank has an accessible network of around 200 branches.8% in 2004 is also the second highest in the sector.5% in 2004 helped by strong growth in commission income from loans and advances. The bank reduced its provisions of loan losses (PLLs) from SR186. • • • • • • • • May 2005 Saudi Arabia Banking Sector 37 . the commission expense experienced a decline of 2.

We have revised upwards our earlier projections due to better FY 2004 results of the bank and improved market conditions. Riyad Bank is trading at 5.Saudi Arabia Global Investment House • The bank’s average profit per employee showed an increase to SR564. Riyad Bank reported that it increased its first-quarter net profit by around 20% to SR522mn.1 based on DDM and peer group valuation method. We expect the bank to increase its market share in term of assets as it introduces new deposits as well as loan products. Hence.4x of its estimated earnings of 2005.3% vis-à-vis the current market price of the stock. which is up by around 3. • Outlook • The bank is likely to increase its loans-to-deposits ratio. we revise our earlier rating and recommend a ‘Hold’ on the stock. Loans and advances grew to SR36bn at the end of 1Q05.7% to SR640 (bonus adjusted).Global Research . • Valuation • Since our last investment update in Sep-2004. • • • 38 Saudi Arabia Banking Sector May 2005 . The estimated fair value of Riyad Bank’s stock works out to SR651. the stock has moved up by 85.000 per employee in 2004 from SR483. Weak asset growth during the last 3 years has affected its market share.9x of its estimated book value and 24. Riyad Bank has a comfortable loans-to-deposits ratio which would allow it to further expand its loan portfolio especially in the consumer and personal lending.000 per employee as a result of increased commission income coupled with the cost-saving initiatives which lowered the growth in operating expenses in 2004. Currently. justifying our earlier ‘Buy’ recommendation.

5 4.161.1 5.956.523.098.6 30.6 71.8 3.1 1.838.Global Research .246.7 104.000.0 65.5 3.725.952.924.8 749.7 62.878.3 4.034.6 691.5 631.600.1 3.981.4 2.271.064.0 4.5 27.000.0 5.3 500.546.468.000.1 58.0 4.9 47.105.3 93.9 3.676.000.363.436.0 62.588.0 221.000.9 May 2005 Saudi Arabia Banking Sector 39 .4 975.679.6 86.910.823.5 832.9 5.253.046.676.116.177.654.3 12.0 11.2 105.8 2007F 2.1 4.0 8.914.3 10.000.000.116.346.9 74.963.7 567.7 98.5 75.5 33.241.6 2.6 3.4 80.551.773.185.597.423.967.1 57.675.000.9 42.849.956.3 91.671.9 5.7 82.0 4.3 11.171.675.8 5.829.7 3.0 3.000.4 2008F 2.209.218.099.006.0 111.6 86.7 91.9 4.3 86.903.9 2.2 67.0 4.247.7 4.6 5.4 3.167.0 51.4 1.955.000.000.0 136.1 32.417.410.921.0 2005F 3.229.0 13.9 98.578.209.4 3.000.6 3.5 67.400.556.5 1.2 5.943.1 23.534.6 4.5 2006F 3.354.552.454.6 6.7 7.838.942.0 174.0 90.4 74.7 4.2 1.821.247.2 105.0 2004 2.2 49.3 27.6 74.645.2 67.999.742.9 2.5 9.203.728.6 8.6 28.943.254.0 11.0 71.346.2 275.0 5.200.3 9.386.6 455.9 45.6 975.000.3 2003 2.2 29.0 4.960.507.507.6 1.3 788.5 3.9 11.2 71.812.2 5.767.Saudi Arabia Global Investment House Balance Sheet Riyad Bank SR mn Cash & balances with SAMA Due from banks and other FI's Trading investments Non-trading investments Net Loans and advances Net fixed assets Other assets Total Assets Due to banks and other financial institutions Customers' deposits Other liabilities Total Liabilities Share capital Statutory reserve Other reserves Retained Earnings Total shareholders' equity Total liabilities and shareholders' Equity 2002 2.0 5.261.2 1.2 43.332.998.4 33.414.479.9 29.6 3.950.8 8.9 4.

9) (16.1) 455.Global Research .1 2008F 1.0 3.0 (911.7 0.9 (793.0) (1.8 385.402.9) (131.416.6 23.9 4.164.4) (463.0 2005F 975.454.0 (46.0 1.005.7 21.649.1) (11.3) (486.7) (401.692.050.6) (89.0 1.9 78.0) 1.8) 3.8) (150.1 447.4 (96.0 (752.819.0 41.0) 2008F 4.9) (1.591.6 (679.416.6 (354.0) (11.284.6) 0.1 3.527.9 466.7 32.1 56.2 (826.2 79.826.0) 2.177.3 (186.9 1.6 0.261.0 3.0) (92.105.5 0.5 22.5 75.5) (87.7 0.2) (100.2 1.6 2.4) 2004 3.1) (1.3) (11.0) (143.1) 6.1 3.0 380.371.222.430.8) (158.6) (1.679.5) (1.0 975.1 (787.164.8) 2.0 2.3 (1.3) (4.1 0.9 80.7 78.5) (1.3 (852.8 2.4 2002 129.3) (31.1 (125.173.525.7) (163.6) (103.105.6) (29.732.1) 4.938.0 0.3 2.5 2007F 1.3 0.5 1.671.0) (1.Saudi Arabia Global Investment House Operating Statement Riyad Bank SR mn Special commission income Special commission expense Net special commission income Fees from banking services Exchange income Net trading income Dividend income Net gains on investments Other operating income Total non-commission income Provision for loan losses Total operating income Salaries & employee related expenses Rent & premises related expenses Depreciation and amortization Other G & A expenses Impairment of other financial assets.429.6 55.5) (95.2 45.601.9) (19.692.261.8 305.8) (1.005.9 (868.9 4.2) 3.0 1.0 (1.0 (9.8 (145.6) (1.9) 0.6 2006F 975.438.8 89.6 2004 455.0 92.452.8 (663.4 0.4 275.6 (121.486.3 424.322.591.1 0.4 1.692.728.701.0) (904.021.5 (750.285.583.427.030.1) (2.3 0.0 6.9 603.7) (358.0) 2007F 4.8 (160.0) (949.3 350.5 1.0) 2006F 3.033.1) (1.2) 0. net Other operating expenses Total operating expenses Net Income Statement of Retained Earnings Beginning retained earnings Net income Transfer to statutory reserve Transfer to other reserves Gross dividends Net change in fair value Ending balance 2002 3.7 2003 275.5 1.3 73.3) 0.107.6 918.2 26.0 (698.6 1.3) 4.2) 2003 2.0 1.6 2.826.6 3.9 1.0 (132.075.1 1.631.8) (401.9 76.0 (645.3) 2.3 3.4) (1.0) 2005F 3.0) (3.8) 40 Saudi Arabia Banking Sector May 2005 .8) (166.005.0 1.0 975.1 37.071.9 342.0) (11.4 50.5) 5.954.0 32.5) 2.021.1 2.583.0 0.8) (97.8) (441.2) (144.277.0 (38.2 24.3 2.8 1.408.5) (320.361.409.250.7) 3.856.0 612.6 1.6) 2.1) (11.0) (2.209.355.802.

298.5) (1.9) (99.088.5) (904.0 (41.005.7) 131.6) 1.029.1) (1.7 262.8 (37.2 (1.2 (167.4 4.435.005.7) (5.731.7) (280.301.2) 158.0) (78.0) (4.4 2.7 121.9 186.0 16.6 2.4) (2.5) (86.6 (110.7) 144.1) (1.9) (104.063.367.7) (170.362.7 (90.381.4 (1.649.3) (1.7) (264.5 May 2005 Saudi Arabia Banking Sector 41 .9 4.2 2.4 (485.313.8) 3.205.2) 166.406.7 (3.3 2007F 3.9) (2.5 (1.3 2.450.356.4) (1.8 3.9 (1.1 67.5 5.591.381.399.747.523.786.3) (9.416.2 2.8 2005F 2.7) (1.9 2004 2.0) (6.8) 1.0) (3.631.529.5 456.8) (904.0) (3.3 569.5 2.523.990.0) (2.9) (102.164.0) 2.728.0) (90.562.7) (1.5 3.2) (99.064.3 160.8 132.1) (80.2 (620.497.455.8) 1.879.9 3.298.452.4 (172.0) (162.9) (179.747.3) (4.7) 2.1) 2.1 509.4 2.9) (122.510.583.6 (664.897.4 145.205.1 2006F 3.5 0.246.8 (247.6 8.0) (2.777.452.912.5 (50.0 6.1 2.9) (165.631.7) (1.7) (2.906.5 3.490.4 7.505.276.4 277.512.3) (94.3 125.826.954.5) 143.578.246.6) 150.094.1 (55.0 6.879.3) 3.9) (1.032.5) (1.551.4) (1.468.3) (4.1) (2.8 2.Global Research .896.0) (4.6) 2.289.6 3.442.649.3) (1.585.1) (4.3 867.863.008.8) 501.414.0) (249.5) (297.6 2003 1.422.9 1.8) (1.7) 2.728.7) (219.6 (45.4) (1.1 2.0) (385.5 2008F 4.414.6) (95.3 12.596.5) 409.7 (155.Saudi Arabia Global Investment House Cash Flow Riyad Bank SR mn Net Income Accretion Of Discounts Gains On Investments Depreciation And Amortization Loss/Gain On Disposal Of Fixed Assets Provision For Loan Losses Impairment Of Other Financial Assets Due From Banks And Other FI's Trading Portfolio Loans And Advances Other Assets Due To Banks And FI's Customers Deposits Other Liabilities CF From Operations Net Sale /Purchase Of Investments Capex CF From Investing Dividend And Zakat Paid CF From Financing Change In Cash Beginning Cash Ending Cash 2002 1.8 1.662.1) 96.578.4) (1.3) (1.0 (207.5) (1.7) 352.7 (33.0 (1.1 - 6.4) 841.692.064.0) 163.

5 3.7% 12.0% 30.0% 5.3% 671.NPL's /(Equity+provision for loan losses) .0% 50. income .1% 44.Non-commission income/ Total op.8% 56.6% -21.5% 72.3% 432.4% 72.3% 2008F 4.0 80.5% 3.5% 2.6% 0.7 15.9 17.1% 94.7% 58.3% 12.8 630.0 63.4% 14.1% 207. income .0% 5.Equity/ Total Assets (Equity capital ratio) .0 19.9 5.6% 40.2% 12.2% -7.5% 33.6% 27.2 1.0% 2006F 3.3% 5.0% 10.713.7% 65. income .2% 26.7% 512.5% 16.4% 1.9% 0.9% -33.5% 5. income .3% 32.2 114.9 5.2 116.0 25.4% 24.4 5.0% 38.2% 3.6% 1.9% -26.0% 33.6% 56.4% 9.5% 41.7% 303.1% -34.2% 0.Other Income/ Total op.7% 12.0% 4.7% 12.Yield on average earning assets .6% 24.6 25.8% 0.1% 1.2% 4.8% 65.Change in Fx Income .0% 64.Customer Deposits/ Equity .5% 40.4% 194.0 23.1% 47.8 107.8% 61.7% 22.8% 50.6% 2.3% 767.1 1.Change in Other Income RATIO'S USED FOR VALUATION .Net special commission income after PLL's/ Total op.Dividends yield 2002 2.5% 3.Loans / Commission earning assets .3% 0.4% 50.2% 40.7% 3.5% 28.0% 50.3% 9.8 8.0% 2.1% 6.Fees from banking services/ Total op.3% 3.7% 57.9% 15.8 1.4% 47.8% 18.Return on average equity .6 1.9% 22.Par value per share (SR) .4% 3.9% 73.8% 214.8% 1.8% 22.3% 50.1% Riyad Bank 2004 2005F 2.1% 19.0% 3.8% 64.8% 35.4 1.Staff expenses/ Total op.3% 697.2% 3.3 4.9% 73.0% 29.7% 651.2% 213.3% 2.0% 5.7% 90.0 17.0% 14.0% 34.0 1.5% 29.9% 0.0% 1.0 106.6 4.0% 77.7% 0.0% 44.6% 25.9% 34.Fees from banking services/ Total op.5% 1.3% 47.0 21.Cost/ Total op.2% 4.Spread Efficiency .4 630.9% 68.8 272.7% 21.2% 2.3% 1.4% 1.8% 19.3% 5.8 17.Shares in issue (mn ) .0% 10. income .7% 26.Net (or profit) margin .EPS (SR) .5 5.6% 11.0 19.3% 3.0% 2.Dividend payout ratio Margins .9% 76.8% 64.2% 27.0 63.0% 536.8% 2.5% 0.8% 67.2% 62.Global Research .9 43.8% 22.8% 1.8% 1.0% 64.0% 651.5% 11.0 63.4% 3.PLL's/ Total op.4% 34.0 63.9% 549.6 2.5% 4.Market Cap.5% 11.5% 4.0% 2.8% 31.8 348.0 100.Non-commission expense/ Average total assets Liquidity .0 80.0% 579.5% 30.2% 5.7% 6.3 35. income .5% 706.1% 52.0 27.NPL Coverage Capital Adequacy .0% 0.567.3 630.1 1.6% 17.0 16. income .4 2.2% 1.9% 42 Saudi Arabia Banking Sector May 2005 .7% 2.Book value per share (SR) .7% 67.8% 32.Saudi Arabia Global Investment House Ratios Profitability .FX Income/ Total op.1% 12.2% 1.4% 0.7% 71.4% 72.7% 21.2% 74.6% 29.3% 18.6% 88.1% 64.4 630.3% 22.0% 11.0% 702.0% 4.7% 64.1% 59.4% 2.7% 23.P/BV .5 104.8% 77.2% 247.2% 38.7% 70. income Operating Performance .1% 17.1 18.0% 50.5% 1.6 1.0% 10.2% 52.0% 1.0% 1.7% 58.873.Provisions /Total op.0% 5.0 80.7% 59.3% 58.Non Performing Loans (SR mn) .6% 3.7% 3.2% 6.0 113.1 600.394.DPS (SR) .8% 9.3% 50.0% 2.Change in Investment Income .Customer Deposits/ Total assets Credit Quality .8 15.3% 72. income .Change in Fees from banking services .6% 35.5% 32.0% 26.8% 8.Market price year end (SR) .5 5.1% 11.8% 7.9% 7.4 6.Non-commission expense/ Total op.9% 58.Provision for loan losses (SR mn) .Change in special commission income .8% 1.2% 6.8% 12.435.PLL's / Gross Loans .7% 3.1% -2.5% 25.8% 94.0 100.8% 12. income .8% 4.Return on average assets .9% 56.5 2.2% 2003 2.2% 23.1% 8. income .8% 68.4% 3.1% 35.3% 1.0% 2.374.6% 12.8% -19.Special commission expense/ Special commission income .314.0 48.4% 77.3% 24.5 1.0 25.4% 27.2% 40. income .2% 1.5% 2.4% 83.6% 17.0 100.7% 5.9% 40. income .0 46.4% 24.2% 245.NPL's /Gross Loans .2% 244.9% 12.7% 12.5% 61.0 24.1% 1.0% 10. income .0% 5.9 1.3% 634.2% 97.3 3.Net special commission income after PLL's/ Total op.3% 47.0% 50.0 13.2% 3.0 100.P/E .9% 35.Provisions /Average loans .5% 30.2% 22.Investment Income/ Total op.6% 12.8% 2.9% 51.2% 10.9% 70.2% 2.6 1.6 5.3 1.Loans/ Customer Deposits .2% 25.4 5.9% 16.5% 30.5% 61.5% 5.Equity/ Gross Loans Constitution of Total Operating Income .0% 2007F 4.2 1.6% 0.3% 18.6% 4.0 31.7 112.2% 0.1% 3.0% 14.3% 13.G&A expenses/ Total op.Cost rate on average commission bearing liabilities . (SR bn) .0 38.0% 602.3% 5.

thereby increasing its share capital from SR2. The bank has further decided to grant bonus shares (1:4 ratio).9% market share of the total banking deposits. expanding its ATM network and enhancing its technology delivery capabilities. ANB has been a front-runner in adopting newer technologies and has made substantial investments in upgrading its IT infrastructure. distributed over 40mn shares each with a par value of SR50. daily vol. May 2005 Saudi Arabia Banking Sector 43 . ANB now has a branch network of 116 branches in the Kingdom and one branch in London with an employee strength of 2. The management believes that investments important to the future growth of the bank will continue to be made in modernizing its branch network.491 employees.2 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • Arab National Bank (ANB) was established in 1979 upon the Saudization of the six branches of Arab Bank of Jordan that had been operating in the Kingdom for 30 years.0bn in 2004 to SR2.9 6.9 26. The bank had an 9. ANB had a paid-up capital of SR2.6 12M Avg.5bn.Saudi Arabia Global Investment House Arab National Bank Reuters Code: 1080. 52 week Lo / Hi Market Cap Target Price 10. ranking 5th amongst Saudi commercial banks in terms of assets size with a 10% market share of the sector’s aggregate total assets for the year in 2004 (2003: 9. strengthening its balance sheet for possible opportunities in long-term project financing.2 119.SE Listing: Saudi Stock Exchange Current Price SR786. • • Shareholding Pattern • Arab Bank of Jordan holds a 40% stake in ANB while the remaining 60% is distributed among the Saudi investors. • Recent Developments • Arab National Bank (ANB) secured a three-year syndicated loan worth US$350mn.5/SR855.3bn SR885.5 SR39.1%).041 SR443.0 24th April 2005 BUY 29.Global Research . ANB was the first bank in Saudi Arabia to launch Internet banking. ANB is among the medium-sized banks.0bn at the end of 2004.

3mn. a strong growth of 52. ANB reported a net profit of SR1.6% in 2003 to 23. NPLs to gross loans have declined from 4. though at a slightly lower rate of 21.3% during the period over Dec 2003.2% as compared to the SR766. ANB’s ROAE also increased from 20.2004 • The commission income saw a strong growth of 23. The commission expense too increased.Global Research .8% in 2003 to 3.2% in 2004. Commission expense-to-commission income ratio witnessed a drop from 23.2% in 2004 (2003: 17. representing an increase of 28.886. The bank capitalization ratios are at comfortable levels as compared to the international standards.6% in 2004. Net interest income increased by 18% and fee income went up by 42% for the same period.7% in 2004.7% over the previous year.8%). As a result.33bn at the end of 2004. Non-performing loans (NPLs) in 2004 amounted to SR890mn compared to SR1. • • • • • • • • Outlook • We project the net commission income of the bank to continue to show strong growth of more than 25% in 2005 as we expect the interest rates to move up in the short term.4% in 2003 to 26. The deposits from customers increased by 37. ANB’s spreads too witnessed a steep rise from 3. ANB had one of the best spreads in 2004 among the conventional banks. the net commission income increased by 24. both the ROAA and ROE surged and the bank reported an ROAA of 2.16bn for the year 2004.0% in 2004 as a result of the bank’s prudent credit appraisal measures. The bank’s tier-1 ratio stood at 14. This is attributed to the presence of non-commission bearing deposits with the bank and its loan portfolio’s tilt towards the high-margin consumer lending. As a result of the increase in the net income. 44 Saudi Arabia Banking Sector May 2005 .8% in fees from banking activity.Saudi Arabia Global Investment House Analysis of Financial Performance .5mn net profit recorded for the previous year.5% in 2004 helped by the upward movement in the interest rates.02bn in 2003.1% for the year 2004. We believe that this trend is expected to continue as the bank focuses to depend less on commission income which is susceptible to interest rate movements. ANB’s total assets stood at SR63.4% in 2003 to 3.7% over Dec 2003. a 33% increase over the corresponding period of the previous year.1% to end the year 2004 at SR1. which exceeded our expectations. The bank has been able to diversify its income stream which is seen in the strong yearly growth of 59. ANB's net profit for the first quarter of 2005 reached SR362mn.

• • Valuation • Since our last investment update in Sep 2004. The bank is likely to post strong growth in its non-commission income and take advantage of the booming economy to increase its investments and trading income. Currently.25% to a high of SR855. we revise of our earlier rating of ‘Hold” and recommend a ‘Buy’ on the stock with medium term perspective. Hence.5 (bonus adjusted) and is currently trading at SR786.2 based on DDM and peer group valuation method.6% vis-à-vis the current market price of the stock. ANB is trading at 7. We have revised upwards our earlier projections due to better FY2004 results of the bank and improved market conditions. we expect it to further go down as it writes-off NPLs and imparts additional loans with strict credit norms. the stock has moved up sharply by 81. We also believe that bank will continue to improve on its spread as it is growing its deposit base and can leverage on the non-interest bearing deposits growth in the sector. Although the bank has done a good job in reducing its NPL ratio. • • • May 2005 Saudi Arabia Banking Sector 45 . which is up by around 12.4x of its estimated earnings of 2005. The estimated fair value of ANB’s stock works out to SR885.Global Research .0x of its estimated book value and 23.Saudi Arabia Global Investment House • We expect the bank to improve its credit quality further.

7 583.0 44.750.731.7 49.387.383.8 82.794.7 48.0 92.2 23.832.0 2004 7.Global Research .644.547.552.9 63.288.8 1.757.117.8 5.3 5.6 7.741.7 6.403.5 58.0 1.800.8 10.246.0 2.500.1 446.5 4.1 2.9 421.9 10.0 0.7 2.9 2.7 2.8 4.2 20.0 1.8 17.0 2003 1.309.7 5.2 28.794.2 373.351.3 323.1 88.1 298.392.800.0 776.7 98.854.688.4 10.302.877.474.6 3.166.4 44.7 49.194.2 46 Saudi Arabia Banking Sector May 2005 .024.1 88.565.1 1.9 41.6 2.318.791.660.625.991.9 199.134.7 28.4 1.1 2.500.0 2.2 19.977.723.065.3 382.3 25.5 7.8 77.0 46.0 2.1 98.6 102.2 28.791.541.4 1.800.757.0 1.1 10.436.452.414.4 1.4 19.2 9.6 88.040.8 77.500.200.956.6 697.172.543.347.950.0 2.249.8 69.500.4 2.637.6 5.6 104.706.7 3.3 6.061.404.999.8 2.8 472.0 5.677.9 16.1 78.7 59.298.1 2005F 8.020.205.500.9 9.Saudi Arabia Global Investment House Balance Sheet Arab National Bank SR mn Cash & balances with SAMA Due from Banks and other FIs Trading Investments Non-trading Investments Net Loans and Advances Net Fixed Assets Other Assets Total Assets Due to Banks and other FIs Customers' Deposits Other Liabilities Total Liabilities Share Capital Statutory Reserve Other Reserves Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 2002 3.854.7 109.000.335.3 2.839.335.7 4.9 1.500.0 1.443.0 1.7 109.6 27.737.415.315.0 2.108.0 370.483.7 299.327.500.6 2006F 7.0 2.000.548.1 98.650.0 38.3 56.7 20.0 2.3 466.4 45.2 40.0 2.956.7 69.841.5 2008F 5.4 4.2 2007F 6.103.3 33.2 502.2 67.015.200.223.603.9 5.1 1.523.3 2.397.9 91.0 1.8 10.420.502.231.583.9 63.820.4 72.558.298.3 21.

516.2) (63.6) 1.3 41.2 2.2 11.3) 0.8) 584.0) (200.0 295.0 (459.2 2.106.498.7 1.1 675.2) (81.0 10.0) (44.0 0.435.4) (1.6) (1.2 92.3) (63.4 (469.9 171.682.3 4.120.749.1 12.305.187.9) (360.8) (50.2 93.6) (89.3) (1.4) 0.7 2005F 2006F 2007F 2008F 17.0) (839.0 799.1) 3.5 104.0) 6.5 1.1 9.2 972.074.8 100.6) (79.8 11.0) 2.0 2003 1.0 (150.9) (210.9) (1.456.848.4 (0.2 13.1 9.2 12.0 2002 22.7) 0.5 2.0 6.8 844.1 10.3 (547.7 4.9) (897.547.572.1 1.2) (939.409.0 36.6) (703.1) 766.5 2.8 (200.407.0 11.5 77.1) (100.4) 0.4) 2.3 8.844.055.940.198.4) (76.4 7.7 19.6) (549.4 (316.8 (478.3 41.1) (7.1 8.181.4 1.6 May 2005 Saudi Arabia Banking Sector 47 .6 1.814.2 0.6) (202.0) (2.5 1.4 1.0) (550.960.7) (633.4 96.9 98.0) 1.682.3 69.0) (415.6 (500.456.7 2005F 3.7 (532.8 1.1) (327.1 264.166.8) (770.4 584.1) (0.5) (817.7) 17.166.8) 1.2) 2.Global Research .814.0 0.3 69.4 8.5 95.1) (74.0) (390.5) (1.886.9 5.0 (420.3) (2.3 8.6) (574.4 2004 6.5 2003 5.7) (247.0) (15.5 (221.9) (637.Saudi Arabia Global Investment House Operating Statement Arab National Bank SR mn Special Commission Income Special Commission Expense Net Special Commission Income Fees from banking services Exchange Income Net Trading Income Dividend Income Net gains on Investments Other Operating Income Total Non-interest Income Provision for loan losses Total Operating Income Salaries & employee related expenses Rent & premises related expenses Depreciation and amortization Other G & A expenses Other operating expenses Total Operating Expenses Net Income Statement of Retained Earnings Beginning retained earnings Net income Transfer to statutory reserve Transfer to other reserves Gross dividends Net change in fair value Ending balance 2002 1.583.6 380.319.2 4.0 0.198.6) 2.4 (884.1) (1.2 1.9) (848.8) 1.3 4.8) (8.066.385.9 3.1) (700.9 3.251.6 541.6) (1.5 (699.6) 1.4 (420.187.7) (98.069.0) (56.8 9.6) (1.1 1.0 19.4) 1.0 0.3) (83.1) (69.1 7.9) (60.7) (7.481.8) (6.516.8) (63.989.6 2004 2.9) (285.1 1.3 422.952.108.4 3.2) (565.7 (321.520.1 1.7 766.4) (7.0 2006F 2007F 2008F 3.0 (568.5 (150.0 2.7) (396.0) 0.083.4 14.0 (449.3 (570.

5) (2.0 459.0 6.8 (32.5 (39.6) (339.6) (4.3) (93.4) (81.5 (2.5) 316.8 7.0) 63.848.2 0.4 (932.0) (1.3 (537.6 0.0 0.0 128.302.0 0.794.7 7.083.9 1.229.8) 421.733.909.3) (1.677.4) (81.7 2.0) (2.1 0.0 2004 1.2) (473.0 (11.2) 197.6) 1.0 574.8 48 Saudi Arabia Banking Sector May 2005 .6) 1.9 0.1) 5.1 (257.8) (36.4 (617.3) 212.0 (77.0 (106.2) 7.2 0.4 1.415.0 565.9 161.6) (444.2) (108.152.0) 192.302.0 0.990.2 6.4) 60.682.403.309.4) (70.7 0.5 0.3 207.814.383.0) (101.2 7.701.3 (1.6 0.6 (153.1) (1.0 2007F 2.9 (1.677.134.061.592.6 (123.7) 1.1) 63.8 0.1 0.222.1) (8.4 12.198.6) (2.Saudi Arabia Global Investment House Cash Flow Arab National Bank SR mn Net Income Accretion of Discounts Gains on Investments Depreciation and amortization Loss/gain on disposal of Fixed Assets Provision for loan losses Unrealized revaluation loss on Real Estate Due from banks and other FIs Trading portfolio Loans and Advances Other Real Estate Other Assets Due to Banks and FIs Customers Deposits Other Liabilities CF from Operations Net sale /purchase of investments Capex CF from Investing Dividend and Zakat paid CF from Financing Change in Cash Beginning Cash Ending cash 2002 584.233.8) 111.0) 474.547.6) (2.1) (2.022.2 216.6 1.097.8 (1.563.061.0 (12.0 2008F 3.5 10.0 2003 766.3 3.2) 298.6 0.3) (2.4 0.5) (10.4) (10.6) (87.471.581.4) 6.377.083.6 0.8) (113.0 (98.0 (4.6 (0.456.0 547.4) (839.3) (8.572.5 2005F 1.2) 89.1 49.4 4.6) (9.2) 712.2) (73.7 (2.134.414.7 0.5) (74.832.848.3 13.381.902.035.2) 81.320.3) (954.8) (444.0) (2.1) 0.3) (1.229.516.5 50.380.2) (1.6) (339.795.526.Global Research .7 (58.308.166.2) (104.6 (2.3) 98.3) (116.1) (99.5) 0.9 (2.8) (10.2 2.545.4 334.6) 221.1) (617.6 278.6 1.7) 8.414.3 203.377.1) (106.8 5.3) 74.2 0.124.9) (128.111.9) 6.0 3.547.0 51.0 9.3 (2.1 48.0 (10.6) (839.7) (2.0 2006F 2.347.899.108.1 1.702.8 8.3 5.0 321.9) (116.4 3.1 3.235.794.5 8.510.0 (1.8 5.0 (9.5) (2.

4% 0.0% -12.8 288.077 2.1% 26.3% 1.4% 76.202 1.6% 20.7% 41.2% 1.9% 71.2% 3.1% 24.7% 44.4% 1.0% 20.4% 5.2% 23.9% 51.6% 74.6% 60.Investment Income/ Total Op.8% 59.5% 1.1% 62.5% 3.1% 12.6% 4.220.9 14.Non-Commission Expense/ Total Op.0% 51.9 3.9% 70% 64.Cost Rate On Average Commission Bearing Liabilities .0% 73.0% 31.2% 16.8% 70.Cost/ Total Op.0 10.0 50.6 26.9% 1.4% 2007 F 3.532 1.158 1.1% 48.1% 3.Due From Banks/ Due To Banks Credit Quality .624 3.9% 60.5% 2.8% 4.0 50.3% 71.5% 32.3% -31.3% 24.0% 9.6% 2.4% 51.2% 1.0% 5.NPL's /Gross Loans .Saudi Arabia Global Investment House Ratios Profitability .0% 5.1% 7./ Total Op.Change In Commission Income .9% 1.618 2.1% 11.6% 1.1% 1.7% 26.9% 19.0% 0.9% 80.6% 50% 61. Income .0 50.Customer Deposits/ Total Assets .4% 79.6% 0. (SR Mn) .5% 2.48 11.5% 64.9% 74.Change In Fx Income .3% 1.1% 59.2% 16.3 98.0 50.2% 3.0% 5.3 30.0 50.1% 29.7% 46.P/BV 2002 1.300.4% 27. Income Operating Performance .Return on Average Equity .0% 5.0 36.1% 18.395.0% 2.7% 71.3% 70.2% 23.5% 2.0% 33% 55.4% 2008 F 3.Market Price Year End (SR) .2% 28.3% 30.2% 51.9 112.1% 76.4% 76.1% 171.3% 4.7% 11.6% 1.5% 1121.NPL's /(Equity+Provision For Loan Losses) .0% 16.8% 3.9% 966.0 50. G&A Expenses/ Total Op.7% 175.6% 74% 68.Non-Commission Income/ Total Op.2 5.2% 1.0% 9.0 11.6% 14.0 39.1% 3.1% 13.2 21.5% 63.9% 0.7% 16.1% 5.8% 15.6% 60.4% 29.4% 17.4% 32.2% 4.9% 51.4% 23.Fees & Comm.9% 35.7% 135.5% 2. Expenses .0% 5. Income .0% 9.0 50.0 30.0% 1061.5 119.0 40.8% 847. Income .0 786.3% 71.0 6.7% 2006 F 2.P/E .0 50.9% 43.2% 18.0% 63.0% 7.2% 0.9% 15.3% 25.6% 60.7% 44.1% 38. Expenses .5% 5.7% 59.6% 20.4% 0.0% 50.4% 5.8% 0.3% 4.1% 19.0 16.0 50.2% 13.2% 13.NPL Coverage Capital Adequacy .2% 25.8% 78.4% 1.Return on Average Assets .Non-Commission Expense/ Average Total Assets Liquidity .025 890 1.6% 16.5% 54.6% 0.Commission Expense/ Commission Income .Global Research .0% 9.2% 3.7% 80.2% 8.7% 15.2 33.EPS (SR) .8 140.4% 47.9% 23.Provision For Loan Losses/ Gross Loans .Staff Expenses/ Total Op.6% 15.5% 1.1% 1.5% 24.Net Special Commission Income After PLL's/ Total Op.3% 170.0 17.4% 2.5% 5.4% 15.1% 59.4 55.Equity To Total Assets (Equity Capital Ratio) .172 1.6% 29.300.0% 22.7% 1.0% 3.6 110.2% 28.3 12.2% 5.6% 2.Provisions /Total Op.Loans / Commission Earning Assets .4 153.6% 77% 39.5 9.Fees & Commissions/ Total Op.2% 68.1% -3.7% 1155.9% 170.9% 24.9% 4.7% 2.Change In Other Income RATIO'S USED FOR VALUATION .0% 59.Net Commission Income After PLL's/ Total Op. Income .0% 20.6% 1.Shares in Issue (mn) .0 39.0% 0.Provisions /Average Loans .8% 0.Provisions/ Total Op.0% 24.1 May 2005 Saudi Arabia Banking Sector 49 .4% 23.2% 6.190 3.9% 0.1% 24.6% 81% 71.8% 24. Income .Other Income/ Total Op.9% 8.4% 54.2% 244.8 18.0% 15.0% 1.3% 19.5% 61.1% 33.6% 53.6% 0.6% 1.7% 25.840.7% 18.0% 0.8% 70.6% 36.8% 25.8% 31. Income .5% 1.0 40.Loans/ Customer Deposits .0 36.1% 33.Dividend Payout Ratio Margins .0 786.6% 11.Change In Fees And Commission .0 50.6 6.4 17.4% 42.FX Income/ Total Op.0 771.Book Value Per Share (SR) . Income .5% 5.3% 28.866 2.7% Arab National Bank 2004 2005 F 2.7% 25.9% 51.0% 26.0 39.5% 5.3% 20.1% 11.2% 13.0 39.0% 2.7 125.0% 7.Provision For Loan Losses (SR Mn) .6% 26.1% 2003 1.3% 98.3 70.6% 79.Market Cap.0 56.9% 25.5% 7.9% 38.0% 76.8% 15.300.7% 3.2 2.5% 0. Income .5% 59.Rent.4% 19.Customer Deposits/ Equity .0% -54.4% 2.0% 42.9% 3. Income .7% 80.3% 181.DPS Declared (SR) .5% 1110.7% 32.6% 61. Income .0% 5.Non Performing Loans (SR Mn) .6 5.3% 5.5% 73.Equity To Gross Loans Constitution Of Total Income .3 29.4% 2.300.186 1.8% 70.8 395.Spread Efficiency .0 786.9% 29.0 14.2% 11.3% 16.8% 67.0% 33.4 23.764 6.4% 0.4% 5.5% 20.9% 793.8% 1. Income .0% 10.Net (Or Profit) Margin .Yield On Average Earning Assets .2% 22.3% 23.7% 54% 48.Par Value Per Share (SR) .9% 65.7% 35.0 786.4% 16.0% 7.6% 68.Change In Investment Income .6 44.4 7.7% 6.3 16.7% 46.387 1.

020 employees in 2004. SABB recorded rapid growth rates of 28% and 20. SABB ranks 7th amongst Saudi banks in terms of asset size with 9. 50 Saudi Arabia Banking Sector May 2005 . technology and expertise. SABB is one of the most technologically sophisticated banks in the Kingdom of Saudi Arabia thanks to its main shareholder.5% recorded in 2003.6 10. The bank had a network of 61 branches with 2.5bn paid up capital while “HSBC Holding BV” owns the remaining 40% and provides management and technical services assistance to the bank through a management agreement.Saudi Arabia Global Investment House The Saudi British Bank Reuters Code: 1060. up from 8.7 107. Recent Developments • The bank started the implementation of its strategic plan for 2005-2007 which includes the development of Amanah Islamic banking services and launching new Amanah products in light of the growing demand for this kind of services. • • • Shareholding Pattern • Saudi investors own 60% of its SR2.9bn in 2004.5 12M Avg.Global Research .1% of the sector’s aggregate credit portfolio in 2004. daily vol.SE Listing: Saudi Stock Exchange Current Price SR1. With total assets of SR57.130 24th April 2005 HOLD 32. which provides the bank with access to its systems. As result of its aggressive plan to penetrate the retail banking business. HSBC.4 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • The Saudi British Bank (SABB) was established in January 1978 as a Saudi joint stock company to takeover the operations of The British Bank of The Middle East in Saudi Arabia. 52 week Lo / Hi Market Cap Target Price 10.5bn SR1.604 SR500/SR1130 SR56.8% in 2003 and 2004 respectively in its credit portfolio.083.7 34. which resulted in a market share of 9.2% market share of the sector’s aggregate total assets in 2004.

the bank’s spread recorded a decline from 3. SABB was rated as the "Best Bank in the Kingdom of Saudi Arabia for 2004" for the second year in a row by the Euromoney Magazine. The bank reported the highest Return on Average Equity (RoAE) and Return on Average Assets (RoAA) among the conventional Saudi Banks.12bn in 2003 to SR38.1% to reach SR456mn compared with SR364mn for the corresponding period last year.7% in 2004.66bn in 2004. stood at the comfortable levels of 14.Global Research .2% respectively in 2004.000/employee in 2003 to more than SR809.Saudi Arabia Global Investment House • Standard & Poor's Ratings Services assigned its 'A-/A-2' senior unsecured debt ratings to The Saudi British Bank's US$650mn euro medium-term note programme. However. However. In 2004.63bn for the year 2004. from SR36. up 30% from the previous year’s profit of SR1.86bn in 2004 representing an yearly growth of 21%.000/employee in 2004. This is mainly due to the increase in the high-interest time deposits with the bank. The bank has been able to maintain its NPL coverage of more than 130% in the last couple of years.06bn in 2004 which helped the total deposits to witness a growth of 23.7bn in 2004.4% in 2004. Tier-1 and Tier-2 capital ratio.44bn in 2003 to SR26.6mn in 2004. the bank’s net profit did not meet our expectations. This is the first EMTN programme launched by a bank in Saudi Arabia. The bank’s RoAE and RoAA stood at 32. • • • • • • • • • May 2005 Saudi Arabia Banking Sector 51 . 66. SABB's net income for first quarter of fiscal year 2005 increased by 25. The bank’s time deposits increased from SR20.7mn in 2003 to SR365. rising from SR1.1% respectively in 2004. SABB reported a net profit of SR1.2004 • SABB’s net commission income reported the yearly growth of 6. However.1% in 2004 as compared to the industry’s average of 2. Also its profit per employee has increased substantially from SR617. • Analysis of Financial Performance .3% and 3.0% and 14.7% in 2003 to 3. SABB’s total assets reported an yearly growth of 25.25bn.6bn in 2003 to SR1. The banks capitalization ratios.09bn in 2003 to SR44.4% recorded in 2004. The bank boasts of the lowest NPL’s/Gross loans ratio in the Saudi banking sector at 1.2% in 2004.4% in 2003 to 34.3% in 2004. the bank is promoting heavily its Islamic banking products. which is likely to improve its spread in medium term.8% aggregating to SR57. The bank’s gross loans and advances increased from SR32.9bn in 2004.4% of the bank’s non-performing loans were concentrated in the manufacturing sector. SABB has been able to reduce its cost as a percentage of total operating income from 38. The bank’s non-performing loans (NPLs) declined from SR441.

1% vis-à-vis the current market price of the stock. we reiterate our earlier rating and recommend a ‘Hold’ on the stock. the bank is likely to remain one of the most profitable banks in the Kingdom.5x of its estimated book value and 26. SABB is trading at 9. The bank is likely to be among the leaders in the corporate banking business in Saudi Arabia as it has a large base of blue-chip corporate clientele.8% since our last report in Sep-2004. • • Valuation • Currently.Global Research . The bank is expected to increase its loans to deposits ratio to around 75% in coming years. We have changed our earlier projections due to better FY 2004 results of the bank and improved market conditions.5x of its estimated earnings of 2005.4 based on DDM and peer group valuation method. which is down by around 4. • • 52 Saudi Arabia Banking Sector May 2005 .083. The estimated fair value of SABB’s stock now works out to SR1. On the back of strong growth in the non-interest income as well as increase in its spreads. The SABB stock has run up by 60. Hence.Saudi Arabia Global Investment House Outlook • The bank is likely to maintain its momentum in non-interest income. The bank is likely to maintain the dividend payout of more than 80% in medium term.

0 2.980.918.925.5 59.369.6 6.0 2.2 14.8 15.8 53.431.2 2005F 3.3 6.315.359.489.925.0 2.682.409.0 755.879.500.663.5 53.5 76.3 310.7 617.8 57.946.8 61.638.498.905.8 2.437.876.5 679.500.166.939.0 338.000.272.500.1 2.3 5.570.0 176.4 1.500.2 78.9 1.8 85.2 5.420.500.6 May 2005 Saudi Arabia Banking Sector 53 .075.6 2004 2.1 565.0 69.5 634.000.500.089.2 93.9 2.8 52.553.4 11.396.3 76.385.342.0 1.8 75.5 70.6 93.116.7 41.7 4.4 4.084.Saudi Arabia Global Investment House Balance Sheet The Saudi British Bank SR mn Cash & balances with SAMA Due from banks and other FI's Non-trading investments Net Loans and advances Net fixed assets Other assets Total Assets Due to banks and other financial institutions Customers' deposits Other liabilities Total Liabilities Share capital Statutory reserve Other reserves Retained Earnings Total shareholders' equity Total liabilities and shareholders' Equity 2002 3.242.2 544.6 34.0 2.6 6.4 1.4 45.2 85.6 547.3 7.3 41.107.069.2 852.226.3 2.0 166.895.2 36.8 16.663.2 46.598.8 2.282.1 20.7 8.971.6 704.638.0 2.805.061.539.556.092.9 731.226.844.4 2.6 3.2 7.3 57.210.3 44.0 2.5 15.0 10.895.9 1.4 16.1 640.665.0 414.124.681.6 647.0 571.5 4.7 20.8 46.746.1 589.4 156.Global Research .0 2.7 714.0 5.5 5.985.3 2006F 3.000.500.9 67.6 2.3 775.0 2.883.776.9 2.0 126.0 67.819.283.0 2.443.895.087.186.6 39.004.6 6.3 46.243.500.9 61.5 2.1 2.399.5 2003 2.035.5 938.9 85.815.3 2008F 2.061.3 16.4 2.627.000.977.680.500.4 9.342.436.0 283.5 9.879.0 46.6 2007F 3.356.2 26.943.8 569.075.4 31.028.

1 (596.8) (73.6) (1.4) (973.200.8 2.987.013.498.052.7 0.3) (785.1) (2.682.5) (152.0 (830.3 (496.5) (202.3) (45.703.6 2006F 2007F 2008F 3.1) (2.320.2) (101.028.9) 1.6) 1.0 0.412.6) (183.2 9.0) (1.1) 0.2 (74.0) (13.0 0.043.081.0 (117.7) (1.6 4.8) (751.0 13.9 2003 156.0 0.0 9.9 12.5 74.130.757.0 0.7) (65.2 2.2) (253.4 310.6) (57.8) (35.0 103.5 64.5) (46.3) (1.6 67.104.0 (832.7) (1.2 944.3 (648.4) (2.8) (62.3 1.7 2.2 0.1) 156.1) 2.2) (131.0 86.1 1.4 2004 2.0 0.3 101.7) (2.6) 2.498.678.6 1.3) 2.9 674.6 3.Global Research .2 2.3 3.028.0 (192.1 (514.1) (78.903.5 2.635.7) (402.5) 0.127.7) 2.5) (52.1) (4.0 851.130.3 2.6 972.4 377.1) (349.2) 1.0 634.0) (2.257.0) (3.9) 3.2 2.3 105.1 1.2) 569.9 0.9 3.369.4) 1.3) (695.2 2.3 1.6 3.709.308.612.7 1.2 0.4) (2.6 1.3 3.213.6) (43.6 3.445.8 2.604.9) (16.627.1 0.9 281.0 (409.6 4.0 70.8 10.5) (67.6 1.180.4 (472.3) 2.3 (83.189.9) (85.5 2002 76.2 54 Saudi Arabia Banking Sector May 2005 .598.2 0.5 (542.2 70.3) 1.635.Saudi Arabia Global Investment House Operating Statement The Saudi British Bank SR mn Special commission income Special commission expense Net special commission income Fees from banking services Exchange income Net trading income Dividend income Net gains on investments Other operating income Total non-interest income Provision for loan losses Total operating income Salaries & employee related expenses Rent & premises related expenses Depreciation and amortization Other G & A expenses Other operating expenses Total operating expenses Net Income Statement of Retained Earnings Beginning retained earnings Net income Bonus share issue Transfer to statutory reserve Transfer to other reserves Gross dividends Net change in fair value Ending balance 2002 2.4) (304.066.0 0.494.4 2004 2005F 2006F 2007F 2008F 569.9 (99.2 0.3 3.102.4) (2.699.8 3.8 2.5 1.7 1.0 0.6) 3.310.005.0 (664.0 0.2) (784.9 68.0 0.0 0.9 1.4 (500.7) (65.3 107.3 395.2 1.1 77.0 0.198.700.627.505.257.4) (858.9) 972.0 (87.131.5 1.9) (990.3) (64.0 310.131.5 0.257.7 2003 2.0) 0.426.5) 3.0) (91.8 2.5 0.809.416.8) (158.5) (644.5 36.2 4.8 2005F 2.2 (559.6) (114.0) (1.0 634.8 537.822.4) (156.8 (462.4) 1.2 (60.678.6 1.4 109.7 1.5) (68.

369.107.8 1.2 3.242.933.130.0) (1.8 6.3) 65.5 (475.310.6 2004 1.539.0) 745.3 312.257.0 2.8) (800.1) (2.6) (6.422.131.5 4.7) (818.6) (369.576.1 841.511.4) (706.0 2006F 2.0 99.9 10.0) (3.844.0 4.8 0.6 0.598.0) (2.6) 64.5 688.107.7 134.242.9 0.2 0.5) (113.847.9) 1.0) (93.521.4 0.4 May 2005 Saudi Arabia Banking Sector 55 .222.0) (3.372.1 0.2 0.0 (70.6 127.441.7 3.5) 86.0 2.450.5) (1.678.4) 2.6) 3.0 114.903.1) (249.2) 1.1 121.3) (100.124.4 (603.1 283.3 0.2) 3.1 3.356.387.5 83.6) (7.8 (16.5 3.385.0) (1.5 1.7 2003 1.356.9) (7.4) 2.844.6) (900.7 (64.Global Research .903.087.0 2007F 3.2 297.1) 78.275.8 (666.3 3.0) (117.5) (85.413.1) (70.0 (74.0) (2.260.039.7) (509.8 (36.598.8 7.7 2.0 1.4 3.2 3.0 74.6) (5.2) 60.0 (592.856.4) (768.8 (71.5) 73.6 (64.5 (6.0 2008F 3.295.9 (70.0 101.1) (2.627.776.8 (109.0) 65.505.1) (252.102.8 14.6 (7.2 327.0 (77.5) (990.3) (112.6 0.5) (77.0 2005F 2.3 2.3) (699.565.2 8.710.8 3.2) 68.109.6) (4.0 (76.8 8.639.8 8.555.8 (703.8) 85.0 (67.6 0.124.1 221.0 87.7 6.5) (900.6 0.7 3.505.0) 289.5 10.089.0) 3.369.5) 226.618.9) (6.3) (759.396.2 (4.9 27.5) 3.8) (358.0 2.243.3) (108.8 0.3 1.4 737.310.102.7 864.Saudi Arabia Global Investment House Cash Flow The Saudi British Bank SR mn Net Income Accretion Of Discounts Gains On Investments Depreciation And Amortization Loss/Gain On Disposal Of Fixed Assets Provision For Loan Losses Impairment Of Other Financial Assets Due From Banks And Other FI's Loans And Advances Other Assets Due To Banks And FI's Customers Deposits Other Liabilities CF From Operations Net Sale /Purchase Of Investments Capex CF From Investing Dividend And Zakat Paid CF From Financing Change In Cash Beginning Cash Ending Cash 2002 972.6) (1.7) (5.9 0.2) (703.635.0 (119.7) 4.2) 1.6) (900.1 (706.

0 40.6% 72.5% 1021.8% 1.0 107.4% 67.2% 15.0 50.2% 0.1% 71.9 1130.Equity/ Gross Loans Constitution of Total Operating Income .7% 32.8% 73.5% 5.0% 2.7% 760.0% 73.7% 19.6% 77. income .7% 16.8% 74.7% 63.5% 3.2% 23.4% 0.5% 2006F 3.7 805.P/BV .3% 2.Net special commission income after PLL's/ Total op.4 1130.Return on average equity .2 16.0% 78.5% 3.0% 5.0% 80.4% 2.5% 49.6 30.7% 40.2% 3.4% 6. income .0 56.3% 17.2% 1.5% 4.0 118.3% 0.0% 2.8% 8.4% 1.5 2. income .3% 62.3% 2.0% 2.9% 74.2% 31.1% 9.6% 22.9% 73.9% 2.Special commission expense/ Special commission income .8% 9.5 462.4% 31.3% 3.7% 50.0% 5.4% 2.0 40.Change in Fx Income .0% 5.0% 50.3% 16.Net (or profit) margin .8 609.Non Performing Loans (SR mn) .0% 25.1% 3.0 50.0% 0.1% 0.3% 2.0% 10.5 18.4% 4.3 16.4% 62.6% 42.9% 135.0% 2.5% 0.1% 1.Non-commission income/ Total op.4% 3.2% 58.9% 4.0% 0.0% 4.7% 1.4% 13. income .2% 607.5% 1.0 2.0% 1.DPS (SR) .0% 7.5% 6.8 3.5 874.0 14.3% 2.Change in special commission income .9% -55.4% 0.5 8.5% 16.4% 829.Gross Loans/ Customer Deposits .1% 1.Fees from banking services/ Total op.Cost rate on average commission bearing liabilities .0% 75.1% 61.3 24. income .0% 1.7% 78.1% 34.7% 38.4% 17.8% 8.1% 142.2% 26.4% 44.8% 1.1 658.Provisions /Average loans .4% 133.0% 5.5% 44.5% 66.2% 9.7% 33.9% 1.4% 1.0% 64.4% 20.5 26.7% 30.1% 78.5% 10.0% 50.Change in Other Income RATIO'S USED FOR VALUATION .0% 137.3% 31.4 1130.4% 30.8% 25.0 4.6 63.Staff expenses/ Total op. income .0 50.1% 1.3% 38.9% -8.0 56.9% 29.2% 6.Shares in issue (mn) .1 360.Change in Investment Income .2% 0.7% 27.5% 1.Customer Deposits/ Equity .3 4.5% 32.5% 22.6% 4.0% 1.0 42.7% 1.1% 50.7% 2.0 52.8% 27. income .5 441.7% 63. income .9% 27.2% 424.9% 80.0% 72.5% 1.4 760.0 62.Global Research .4% 20.4% 63.8 1130.2% 80.2 141.2% 3.3% 1.Equity/ Total Assets (Equity capital ratio) .6 416.Net charge-offs/ Gross loans Capital Adequacy .1% 9.9% 8.7 148.0 24.1% 2.5% 3.8 3.4% 19.3% 0.Non-commission expense/ Total op.2% 34.1% 90.5% 2008F 4.4% 0.8% 1.4% 2.5 564.4 20.4% 34.4% 905.5 2.FX Income/ Total op.Fees from banking services/ Total op.8% 137.4 7.5% 29.8% 2.1% 4.1% 17. G&A expenses/ Total op.3% 3.5% 5.NPL Coverage .7% 956. income .0% 2.8% 34.Investment Income/ Total op.4% 18.4 14.0 8.7% 36.4% 27. income .Change in Fees from banking services .5% 1.Other Income/ Total op.4% 75.Market Cap.NPL's /(Equity+provision for loan losses) .Market price year end (SR) .7% 26.Return on average assets .4% 2.0% 12.6% 24.9% 34.5% 3.8% 0.3 538.3 496.0% 2.0 50.9% 65.Dividends yield 2002 2.4% 2.4% 21.0% 50.4% 50.1% 31.0% 75.9% 2.3% 27.Gross performing loans / Commission earning assets .9% 0.2% 3.2% 0.5% 62.6% 22.3% 20.4% 56 Saudi Arabia Banking Sector May 2005 .6% 976.1% 4.8% 1.6% 4.7% 18.0% 70. income Operating Performance .0% 2.Net special commission income after PLL's/ Total op.0% 68.8% 2003 2.5% 26.0% 66.0% 50.PLL's / Gross Loans .Saudi Arabia Global Investment House Ratios Profitability .7% 26.3% 0.1% 65.0% 68.0 56.3 571.5% 63.8 118.P/E .6 7.4% 25.5% 23.5 9.8% 4.4% 1.Provisions /Total op.9% 8.7% 14.0 73.Customer Deposits/ Total assets Credit Quality .Dividend payout ratio Margins .3% 1.6% 26.5% -50.Cost/ Total op.1% 36.4% -23.0% 0.EPS (SR) .7 19.2% 0.9% 46.2% 405.Yield on average earning assets .4 4.Rent.0 40.3% 13.4% 20.4% 37.3% 61.6% 62.0 31.6 40.6% 4.7% 78.7% 4.1% 32.9% 59. income .6 48.Par value per share (SR) .6% 25. (SR bn) .4% 55.4% 9.0 32.2% 0.0% 8.5 15.0% 8.8% 2.6 1.0 20.7% 37.7 365.Spread Efficiency .1% 6.7% The Saudi British Bank 2004 2005F 3.8% 38.3% 15.6% -22.3% 65.0% 1.2% 6.5 21.0% 816.9% 11. income .Non-commission expense/ Average total assets Liquidity .1% 0.8% 80.2% 17.6 5.0% 0.4% 144.9% 81.PLL's/ Total op.7% 2007F 3.7% 10.NPL's /Gross Loans .0 107.3% 27.2% 77.0% 10.9% 1.4% 22.0% 10.Book value per share (SR) .0 50.2% 9.5% 16.0% 10.7 505.0 56. income .4 128.5% 1.0% 91.7% 61.2% 0.8% 80.4% 3.Provision for loan losses (SR mn) .0% 50.1 4.0% 9.4% 141.6% 2.6% 27.4% 77.

with ABN (now ABN Amro) holding a 40% stake in return for its local assets. SHB has a network of 40 branches (with 1. 52 week Lo / Hi Market Cap Target Price 3. western and eastern regions of the country.Saudi Arabia Global Investment House Saudi Hollandi Bank Reuters Code: 1040. It was established in 1926 as the Netherlands Trading Society in Jeddah. The bank increased its share capital from SR945mn in 2003 to SR1. In particular.4 12M Avg.5 114. SHB provides wholesale. retail and commercial banking products and services in addition to investment banking.SE Listing: Saudi Stock Exchange Current Price SR845 24th April 2005 BUY 29. In 1964. Olayan Saudi Investment Company holds a 20% stake while the remaining 40% is widely spread among the public. • • Shareholding Pattern • ABN Amro Bank is one of the major shareholders and holds a 40% stake in the bank.6 7. In 1976 SHB was established as a joint venture with local partners. having a market share of 5. daily vol.3bn SR944. the bank is active in arranging financing for quasigovernment and private industrial enterprises and also arranges trade-financing products for companies involved in foreign trade. • May 2005 Saudi Arabia Banking Sector 57 .Global Research .7 28.307 employess) that cover the central.260bn in 2004 through the issuance of bonus shares (1:3). The existing shareholding pattern in not likely to change in the medium-term.9 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • Saudi Hollandi Bank (SHB) is the oldest bank in Saudi Arabia.880 SR425/SR845 21. the Netherlands Trading Society became the Algemene Bank Nederland NV (ABN).3% of the total banking sector assets in 2004. SHB is among the smaller banks of the country in terms of total assets.

apart from the market and credit risks.1% in 2004. priced at 85 basis points above the Saudi Interbank Offered Rate (Sibor). However.2% in 2003 to 3. affirmed SHB’s ratings at Long-term 'BBB+'. 2011. The bank’s loan to deposit has declined from 73. • • • Analysis of Financial Performance . • • • • 58 Saudi Arabia Banking Sector May 2005 . This will go to SHB's tier-II capital strengthening its capital base. the growth in the commission expense (15. SHB’s gross loans increased by a lower rate of 15.9% in 2004. Short-term 'F2'.2mn in 2004.5mn in 2004 which resulted in the net commission income (after PLLs) to show only a marginal growth of 3. The bank’s trading income too went up from SR30. Fitch Ratings.9mn. the bank has increased its fee-income recording a strong yearly growth of 72. unlike other Saudi banks. which is being constructed in the Jubail Industrial City. It was also the first under the new Capital Markets Authorities Regulations. The bank is rated Baa2 by Moody's and BBB+ by Fitch. The bond was a SR700 million issue through joint-lead managers ABN AMRO (which owns 40 percent of the stock of the bank) and the Saudi Hollandi Bank. the international rating agency. As a result the bank witnessed declining interest spreads from 3. The plant is expected to be commissioned by the fourth quarter of 2005. Individual 'B/C' and Support '2' with a stable outlook. In 2004.1%) was more than the growth in the commission income (9. thus readying itself to absorb the operational risk prescribed by the new Basel accord . SHB announced the signing of a US$47mn financing agreement with Gulf Advanced Chemical Industries Company (GACIC).4% in 2004 over the previous year. Saudi businesswoman Lubna Sulaiman Al-Olayan has become the first female board member of a Saudi listed company. The SHB-arranged facility will finance a portion of the cost of GACIC's Butanediol (BDO) project.5% for the same period as compared to deposits which grew by 21% and this is reflected in the lower rate of increase in commission income as compared to the growth in commission expense. The notes were non-callable for five years.9%).7% in 2004.6% from the previous year’s profit of SR600.1mn in 2003 to SR109.7mn in 2003 to SR47. and callable in 2009. The net profit of 2004 were slightly lower than our expectations. The bank also substantially increased it provision for loans losses from SR71.7mn for the year 2004. the Saudi Hollandi Bank.1% recorded in 2003 to 71.0% in 2004. SHB reported a net profit of SR742.2004 • The net commission income did not exhibit a strong growth as other Saudi banks as it increased by only 7. up 23.Global Research .Saudi Arabia Global Investment House Recent Developments • Saudi Hollandi Bank priced the first ever Lower Tier II bond by a Saudi Bank.The maturity of these notes is set for December 28.

representing an increase of 19.8% vis-à-vis the current market price of the stock.5% in 2003 to 16. Hence.3% in 2003 to 2.9mn for the quarter ended March 31.85bn. SHB recorded a net profit of SR202. the bank’s spread is likely to see an upward trend.5% in 2004 as compared to the industry average of 16. The bank’s customer deposits witnessed an yearly growth of 21.2%.6x of its estimated book value and 21.7% in 2004. Currently. • • • May 2005 Saudi Arabia Banking Sector 59 .9mn for the same period the previous year.2% reported in 2004.44bn at the end of 2004. The net commission income of the bank is expected to show strong growth as it increases lending to the high-margin retail lending segment. which is likely to be instrumental in strengthening the bank’s customer base. Fee from banking services amounted to SR94. justifying our earlier buy recommendation.2% in 2003 to 139. up 24% from SR163. 2005. up 30 percent from SR72.5x of its estimated earnings of 2005. SHB’s total assets stood at SR33.9 based on DDM and peer group valuation method. has increased from 130. The estimated fair value of SHB’s stock works out to SR944.7mn. we expect the bank to report strong growth through this business segment. With the introduction of a more regulated framework for the insurance and the increasing tendency of the consumers to go for insurance (especially life insurance) and related products. which is up by around 11.Global Research . • • • Valuation • Since our last investment update in Sep-2004.1% in 2004 amounting to SR23. However. We have revised upwards our earlier projections due to better FY 2004 results of the bank and improved market conditions.2% in 2004. the bank has been trying to improve the situation and has increased its Tier-2 capital ratio from 14. • • • Outlook • We believe that the bank’s loan to deposits ratio is likely to increase to more than 75% in medium term as it expands its lending activities.7mn for the same period of the previous year.9% in 2004 but is below the industry average of 177.6% over Dec 2003. we reiterate our earlier rating and recommend a ‘Buy’ on the stock. the stock has moved up sharply by 65% to SR845.Saudi Arabia Global Investment House • Non-performing loans (NPLs) in 2004 amounted to SR370mn compared to SR338mn recorded in 2003. The bank has been aggressively marketing its "Fourijat" and "Al Tawarruq" consumer loans. SHB is trading at 6. The bank’s coverage ratio. With the increase thrust in retail business. The NPLs to Gross Loans ratio has declined marginally from 2. however. SHB’s capitalization ratio is among the lowest in the banking sector with Tier-1 capital ratio at 12.

545.964.6 33.0 1.0 7.725.015.0 1.6 38.0 407.7 16.882.3 44.122.9 19.431.9 6.0 9.384.017.0 24.0 945.0 4.9 1.7 4.930.2 5.1 937.692.880.7 1.8 3.5 363.260.7 2.633.881.5 28.7 350.7 1.4 20.3 27.0 1.697.2 20.8 2.305.409.6 13.964.7 1.961.899.1 1.7 32.105.545.1 48.0 945.5 23.9 30.9 11.6 33.260.035.9 6.0 2003 2004 2005F 2006F 2007F 2008F 784.4 27.125.2 13.0 700.890.665.246.776.648.087.099.511.830.7 60 Saudi Arabia Banking Sector May 2005 .369.266.6 1.9 52.443.146.568.361.4 1.1 36.344.6 0.905.431.475.963.618.3 1.0 10.0 700.170.749.300.9 52.260.7 5.427.3 6.260.260.2 5.237.1 23.1 4.1 266.342.7 6.9 370.0 2.597.6 1.029.742.260.7 43.7 4.8 771.042.8 2.5 10.103.8 29.8 392.296.0 655.6 38.3 27.2 8.5 258.077.0 700.0 1.Saudi Arabia Global Investment House Balance Sheet Saudi Hollandi Bank SR mn Cash & balances with SAMA Due from banks and other FI's Net Investments Net Loans and advances Net fixed assets Other assets Total Assets Due to banks and other financial institutions Customers' deposits Other liabilities Subordinated Debt Total Liabilities Share capital Statutory reserve General & Other Reserves Retained Earnings Total shareholders' equity Total liabilities and shareholders' Equity 2002 1.905.2 39.2 3.1 48.431.359.9 3.260.1 6.0 1.930.2 5.260.456.143.6 5.655.4 35.5 1.614.9 318.443.1 26.0 11.2 7.1 5.7 2.249.4 1.056.0 700.302.7 289.066.0 1.899.857.6 6.7 43.0 1.7 1.381.3 4.6 945.9 1.8 3.550.6 12.9 2.5 1.413.4 12.260.0 700.8 1.428.596.1 26.0 1.039.260.2 710.0 945.964.162.0 1.5 1.553.898.3 25.3 0.Global Research .2 48.8 40.305.4 1.0 1.0 1.

8) 5.0 1.3 (404.1 59.4) 600.546.7) (54.7) (0.1 (68.7 2008F 10.7 992.2) (273.1) (49.2 2005F (522.0 584.9) 0.4) (3.0) 2.598.2) 555.1) (54.747.0 1.0 (636.8 (124.5) (314.8) 0.8) (3.5) 0.844.529.0) (397.4) (1.1) (287.0 712.0 (693.4 17.9) (1.058.0) (336.5 30.3) (102.8 1.0 1.0) (317.9) (45.7) (152.0 (754.7) 0.7) 352.7) 0.3 54.863.2 0.5) (73.1) 595.3) (346.2) 1.9 (918.3) (468.0 (510.2 (346.226.3 1.3) May 2005 Saudi Arabia Banking Sector 61 .109.2 (306.6 744.315.0 10.7 2004 5.9 0.4 (796.3 600.1 1.197.9 (436.Saudi Arabia Global Investment House Operating Statement Saudi Hollandi Bank SR mn Special commission income Special commission expense Net special commission income Fees from banking services Exchange income Net trading income Net gains on investments Total non-commission income Provision for loan losses Total operating income Salaries & employee related expenses Rent & premises related expenses Depreciation and amortization Other G & A expenses Other operating expenses Total operating expenses Net Income Statement of Retained Earnings Beginning retained earnings Net income Transfer to other reserves Gross dividends Net change in fair value Ending balance 2002 (448.4 1.5 992.5 217.1) (66.3) 476.0) 0.0 (164.5 1.7 (191.2 (237.8) (168.298.0) 1.3 1.632.5 555.1 62.7) (644.8 0.0) (36.9) (38.5 2004 (404.0 11.4) (59.1) 742.5 742.3 4.4) 0.4) (44.2) (60.3 1.6) 845.3 57.226.5 294.5) (32.7 (184.7 930.6 (71.7 1.9 2005F 6.0 6.8 51.964.0 (578.608.844.006.7) 2.7 9.4 1.1) 0.2 2006F 7.7 (109.2) 2006F (648.9) (42.3 (229.222.069.8 62.0 7.1) (3.306.7 (345.315.252.0 451.1 1.658.8) 1.4) (184.0 8.8) 857.343.529.0 910.2 1.9) 0.3 2007F 8.2) (132.4) 0.8 0.2 2002 7.1) (42.6) (110.8 65.2 54.9 (260.8 1.6 (860.Global Research .2) (451.9 49.3 0.8 (207.0 866.5 151.8 1.9 43.2) (374.8) 2007F 2.7) 1.0 59.9 2003 5.7 204.570.0 2008F 2.9 1.6) (99.7 47.3 2003 (351.0) 5.

8 580.722.9 172.0 191.4) 2003 600.8 208.5 937.2 (20.4) 414.4 244.658.5) (1.3 0.0 (326.221.6 (647.8) (1.617.3) (1.1) (21.6) (2.2) (1.9 197.5 10.2 4.1) 16.7 0.143.2 1.0 124.261.511.3 (1.2 1.1) (291.0 (726.042.3) 55.0 0.042.4 2.226.9) (206.0) (3.5 3.4) 0.8) 1.5 189.016.0) 1.7 0.159.781.0 66.0 2007F 1.0) 1.9 784.456.7 (47.204.3) 117.530.3) (20.456.109.2 0.0) 245.0 73.0 0.4) (3.9 (319.7 0.143.5) (1.4 309.6 (75.511.9 (408.2 (24.663.4) 155.Global Research .0 71.0 60.3) (918.1 9.9) (86.028.9 2.5 2.0 0.7 0.4) (2.757.761.6) 236.7 1.3) (3.0 0.1 62 Saudi Arabia Banking Sector May 2005 .7) (21.9 0.4) (50.9) (1.095.0 0.4) 4.9) (1.0 0.5 1.118.3 0.3 1.8) (404.2 (1.862.660.9) (1.0 207.0 0.0 (404.9) (1.4) (1.8 0.3 161.8) 330.695.1) 0.083.844.170.529.3 2.2 0.229.1 71.9 4.0) (42.298.4) (1.0 (455.0 937.3) (82.0 54.806.1) (50.6 68.4) (644.1) (321.9) (92.5 0.7 221.100.4 232.5) (306.0 2008F 1.0 164.087.0 (758.5 256.6) 0.4) (530.7 2005F 992.0 0.8) (68.4 0.0 (644.9) (82.0 3.0 0.6 156.230.9 1.222.6 0.1 256.1 0.4) (1.658.103.7) (95.0) 1.2 1.288.0 45.4) (1.9) (326.6 1.2 1.0 0.1 700.0 1.0 (9.049.2 (13.325.8 (891.1 1.4) (259.298.5) (1.5) 42.103.0 2006F 1.3 0.886.5) (1.9 37.5) 42.688.9) (4.4 812.5 2004 742.0 105.0 109.0 (918.0 0.Saudi Arabia Global Investment House Cash Flow Saudi Hollandi Bank SR mn Net Income Accretion Of Discounts Gains On Investments Depreciation And Amortization Loss/Gain On Disposal Of Fixed Assets Provision For Loan Losses Fair Value Adjustment On Hedged AFS And Originated Debt Securities Due From Banks And Other FI's Trading Portfolio Loans And Advances Other Assets Due To Banks And FI's Customers Deposits Other Liabilities CF From Operations Sale/Purchase Of Investments Capex CF From Investing Issue Of Debt Dividend And Zakat Paid CF From Financing Change In Cash Beginning Cash Ending Cash 2002 555.

5 543.4% 62.9% 8.0% 3.7% 8.5% 74.3 24.5% 15.0 18.8% 4.4% 27.0 149.3% 34.0 25. (SR bn) .0% 5.2% 53.6% 14.2 48.Customer Deposits/ Total assets Credit Quality .3% 25.0% 5.5% 7.6% 18.4% 72.2% 36.0% 3.Cost/ Total op.3% 2.6% 29.0 8. income .2% 3.3 516.7% 31.Provisions /Average loans .4% 75.Special commission expense/ Special commission income .3% 31.2% 34.NPL Coverage Capital Adequacy .8% 89.4 24.3 996.0% 148.4% 19.Net (or profit) margin .1 805.3% 2006F 3.1% 3.Fees from banking services/ Total op.6% -8.5% 2.5% 84.7 35.NPL's /Gross Loans .P/BV 2.Market Cap.8% 37.6% 8.8% 130.4 6.7% 32.9 31.8% 3. income .Net special commission income after PLL's/ Total op.0% 3.8% 19.9% 30.FX Income/ Total op.3 11.0 21.9 3.7% 0.2% 31.9% -28.0% 33.6% 19.0% 15.5 72. income .Non Performing Loans (SR mn) .1% 14.2% 33.0% 57.7% 55.Net special commission income after PLL's/ Total op.0% 31.5 3.8% 6.9% 32.5 6.0% 5.6% 3.2% 34.Shares in issue (mn) .7 50.0% 50.9% 2008F 3.0 25.8% 4.0 25.Return on Average Equity .2% -2.2 63.7% 29.4% 8.6% 43.9 845.9 29.8% 72.0 25.8% 4.7% 28.2% 1.0 496.5% 78.3% 25.5% 4.0% 50.Cost rate on average commission bearing liabilities .6% 0.7% 0.0% 5.7% 0.7% 47.1% 35.0% 3.9 5.2% 55. income .2% 139.5% 2.2% 24.5% 59.2% 76.4% 44.203.6% 3.7% 8.0% 5.8% 38.Change in Fx Income RATIO'S USED FOR VALUATION .0% 33.Change in Investment Income .3% 32.0% 1.0 21.Global Research .7% 15.9% 8.4% 77.Book value per share (SR) .3 845.9% 110.9% 24.7% 50.0% 5.7 727.4% 27.7% 7.6% 2.0% 50.9% 74.0% 50.8% 14.5% 61.9% 2007F 3.1% 36.2% 74.9% 68.0% 5.3% 9.3 114.7% 1.Loans/ Customer Deposits .0 25.3 13. income Operating Performance .6% 14.0 9.5% 60.Market price year end (SR) .3% 8.6% 12. income .7 845.Spread Efficiency .1% 57.6% 56.8% 15.Equity/ Total Assets (Equity capital ratio) .7 6.0% 40.1% 17.3 21.4% 21.1% 11.1% 1.Non-commission expense/ Average total assets Liquidity .0% 5.3% 65.8% 60.9% 125.9% 84.0% 63.0% 35.9% 3.PLL's/ Total op.9% 65.8% 78.4 140.5% 3.9% 71.Change in special commission income .Fees from banking services/ Total op.2% 3.EPS (SR) .0% 76.1% 40.7% 9.9% 36.5% 7.8% 13.0% 14.4% 4.4 16.6% 6.0 18.3% 40.3% 6.5 5.6 59.1% 8.2% 58.8 811.9 157.3% 29.3% 73.Return on Average Assets .2% 2.9% 117.5 15.7% 59.0% 4.2% 56.1 14.7% 3.8 17.0% 0.1% 56.3% 1.8% 2.4% 3.Dividend Payout Ratio Margins .0% 10. income .2 29.6% 16.4% Saudi Hollandi Bank 2004 2005F 2.6% 2003 2.8% 2.5% 0.3% 15.0% 5.0% 36.8% 1.NPL's /(Equity+provision for loan losses) .7% 3. income .0% 50.1% 17.7% 54.0 21.3% 73.6 737.4% 15.Equity/ Gross Loans Constitution of Total Operating Income .8% 59.0 21.3% 35.8% 8.3% 2.2% 43.2% 58.2% 61.1 369.3% 2.6% 1.Yield on average earning assets .6 61.8% 61.4% 71.5% 3.8% 30.6% 8. Expenses .0 61.0 18.PLL's / Gross Loans .8% 20.9% 28.5% 50.3% 3.6% 2.1% 70.Non-commission expense/ Total op.2 73.3% 3.1% 8.8% 75.P/E .4% 29.DPS (SR) .8% 30.2 60.5% 60.7% 1.0% 39.8% 61.8% 31.7% 1. income .7% 61.8 128.1% 2.3 17.8% 34.1% 2.0% 11.Rent and G&A expenses/ Total op.Provision for loan losses (SR mn) .Investment Income/ Total op.3 62.4 440.5% 50.7 641.3% 41.4 15.4 May 2005 Saudi Arabia Banking Sector 63 .6 427.6% 44.5% 7.Par value per share (SR) .2% 32.5% 2.8 427.4% 2.Saudi Arabia Global Investment House Ratios 2002 Profitability .5 845.Provisions /Total op.9% 71.5% 135.8% 33.6 3.1% 25. income .2 39.6% 2.7% 385.3% 10.7% 8.Loans / Commission earning assets .1% 3.3% 63.3% 25.8 641.3 121.2% 29.2 1. income .Staff expenses/ Total op Expenses .2% 3.2% 4.5% 58.5% 2.8% -15.7 63.8 338.Non-commission income/ Total op.7% 0.9% 72.Change in Fees from banking services .2% 34.4% 1.4% 5.6% 1.4% 6.3% 30.7% 29.3 135.

having a market share of 4.375bn in 2004 through the issuance of bonus shares. Saudi Arabia Banking Sector May 2005 64 . pending licensing by the Saudi Arabian Monetary Agency (SAMA).0 24th April 2005 HOLD 21. 52 week Lo / Hi Market Cap Target Price 38. The bank has a small branch network of 17 branches in the Kingdom with 569 employees in 2004. The bank increased its share capital from SR1. JP Morgan Chase had a 7.686 SR245/SR643 SR22. the bank decided to again distribute bonus shares (1:4) and increased its capital to SR1. Its earlier objective was to provide medium to long term financing for industrial projects but in 1984.5% stake in the bank.6 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • The Saudi Investment Bank (SAIB) was established on June 23. Further.2 5.5% stake in the bank while Mizuho Corporate Bank had a 2.3 127. • Shareholding Pattern • The shareholding pattern of SAIB is widely distributed with 90% of the shares in the hands of the Saudi investors.SE Listing: Saudi Stock Exchange Current Price SR643. leasing and consumer lending. daily vol. As of 2004. it approached Saudi Arabian Monetary Authority (SAMA) and was allowed to provide full-fledged conventional banking activities. in the wake of strong profits in 2004.6 30.3% market share in terms of the total banking deposits.4mn shares of SR50 each par value.1bn SR659.Saudi Arabia Global Investment House The Saudi Investment Bank Reuters Code: 1030.1bn in 2003 to SR1.Global Research .0 12M Avg. • Recent Developments • BMG and Saudi Investment Bank (SAIB) have recently signed a memorandum of understanding to act jointly as lead managers and financial advisers for the process of share flotation of new insurance companies. 1976 and began operations in March 1977.718bn consisting of 34.5% of the total banking assets in 2004. The bank has traditionally focused on corporate banking activities but has changed its strategy in the last couple of years to concentrate more on retail banking and has therefore entered the retail banking business of credit cards. SAIB has 4. SAIB is the second-smallest bank in Saudi Arabia in terms of total assets.

while maintaining the bank’s current ratings.8% in 2004 amounting to SR20. in its latest review.6mn in 2003. up by a whopping 105.3% in 2004). Non-performing loans (NPLs) in 2004 amounted to SR219mn compared to SR195.Global Research .4% is also higher than the industry average of 3.6bn in 2004. However. we believe that the bank will focus on consumer banking and will increase its commission income through aggressive deposit mobilization and simultaneously taking increased market share in loans and advances. The bank also increased the thrust on commercial loan which helped the bank increased its gross loans and advances by 27. The bank has reported a strong growth in its fee from banking services. The bank’s Provisions to Gross Loans at 4. However.1mn (exceeding our estimates) for the year 2004. Due to the dominance of wholesale banking in its overall business.1% in 2004.5% in 2003 to 40. the bank has one of the lowest spreads in the sector (2.3% aggregating to SR13.8% in 2004 helped by the upward movement in the interest rates. • • • • • • • • • May 2005 Saudi Arabia Banking Sector 65 . The bank has been able to grow its customer deposits by a strong yearly growth of 40. The long-term foreign currency rating was affirmed at A-. Fee from banking services increased by 61% to reach SR97. we feel that the ratio is not likely to change much in coming periods as the bank increases its market share among the customer deposits as well as loans.2% in 2004 as compared to the previous year.6mn for the same period of 2004. we believe that its spread will increase marginally as it increases the retail portion of its business especially noncommission bearing deposits. up 26. SAIB reported a net profit of SR587.6% in 2004.8%.2004 • The net commission income saw a growth of 15.54bn at the end of 2004. SAIB’s total assets stood at SR28. However. Similarly. However. what is heartening is that the NPLs to Gross Loans ratio has declined from 1. This has not come as a surprise as the bank has been traditionally very strong in fee-based banking services.9mn.Saudi Arabia Global Investment House • Capital Intelligence. the financial strength rating was affirmed at A- Analysis of Financial Performance .28bn.8% in 2003 to 1.5% over Dec 2003. and the short-term foreign currency rating at A2. placed SAIB on a Positive Outlook.6% from the previous year’s profit of SR463. it has the limitation of a small branch network which hinders its deposit taking capabilities.74mn for the same period. SAIB's net income for the first quarter of fiscal year 2005 surged by 68% to reach SR211mn compared with SR125. SAIB’s commission expense-to-commission income dropped from 41. representing an increase of 31. However.

SAIB. which has traditionally been very active in the wholesale banking business. The bank is likely to increase its non-interest income as it is strong in fee-based banking business. justifying our earlier buy recommendation.Global Research . SAIB is trading at 5.6 based on DDM and peer group valuation method.7x of its estimated earnings of 2005. is likely to take an active role in the major project finance deals as Saudi Arabia encourages setting up of new industrial projects to reduce its reliance on oil revenues. • Valuation • Since our last investment update in Sep 2004. which is up by around 2. However. • • 66 Saudi Arabia Banking Sector May 2005 . Hence.Saudi Arabia Global Investment House Outlook • The net commission income of the bank is expected to continue to show strong growth of more than 20% in 2005 as we expect the interest rates to move up. Currently.6x of its estimated book value and 27.6% vis-à-vis the current market price of the stock. the stock has moved up sharply by 60.7% to the current SR643 (bonus adjusted). We have revised upwards our earlier projections due to better FY 2004 results of the bank and improved market conditions. the estimated fair value of SAIB’s stock works out to SR659. we revise our earlier rating and recommend a ‘Hold” on the stock.

2 44.4 3.6 304.4 222.4 292.403.0 1.9 310.338.8 171.9 26.086.718.8 17.0 54.987.8 1.1 297.3 6.6 8.9 4.4 1.0 4.996.9 577.383.8 84.7 115.100.288.295.037.9 303.9 6.0 2.0 3.2 8.9 5.708.288.7 21.5 34.0 1.8 807.285.440.796.8 921.5 38.107.0 48.7 18.971.453.718.5 23.637.8 39.0 97.718.708.3 28.6 3.781.5 4.1 13.225.6 2.824.252.495.076.0 1.6 30.1 40.231.2 35.8 39.0 1.8 1.6 803.4 1.1 3.7 76.6 1.198.2 541.5 1.Saudi Arabia Global Investment House Balance Sheet The Saudi Investment Bank SR mn Cash & Balances with SAMA Due from Banks and other FIs Non-trading Investments Net Loans and Advances Net Fixed Assets Other Assets Total Assets Due to Banks and other FIs Customers' Deposits Other Liabilities Total Liabilities Share Capital Statutory Reserve General & Other Reserves Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 2002 2003 2004 2005F 2006F 2007F 2008F 408.4 25.260.3 43.2 44.031.1 6.8 803.548.6 May 2005 Saudi Arabia Banking Sector 67 .081.924.0 316.7 21.7 7.980.596.543.8 454.6 203.622.Global Research .2 7.065.063.987.4 2.6 12.514.1 25.6 38.375.634.3 1.6 2.076.7 6.262.1 16.8 1.3 28.509.7 19.718.941.548.304.980.230.0 11.169.7 9.8 1.5 40.6 947.034.543.5 4.4 1.7 4.184.230.4 4.313.0 262.8 20.100.9 20.718.7 4.9 100.8 945.718.0 1.0 4.2 19.930.501.1 817.0 3.3 586.1 857.9 900.6 902.956.8 14.868.3 778.5 34.890.8 225.7 34.160.8 1.916.956.6 13.424.375.0 1.0 48.670.9 144.610.1 31.924.8 10.632.8 1.2 19.269.0 14.284.294.

9 565.5) (13.8) (36.6 1.4) (29.7) (296.7) 68 Saudi Arabia Banking Sector May 2005 .5 1.2) (117.235.5) (84.0 18.8 1.4 (81.8) (97.9 (221.6 1.5 Statement Of Retained Earnings Beginning Retained Earnings Net Income Transfer To Statutory Reserve Transfer To Other Reserves Gross Dividends Net Change In Fair Value Ending Balance 2002 55.4 2004 40.1 (147.0) (275.408.6) (476.7) 2.3) (10.2) (175.2 981.3) 440.0) (38.1) (13.3) 2007F (701.7) (21.2) 731.7 2005F 2.0 (741.8 163.4 87.153.4 2003 867.2 1.2 (125.6 167.2 274.3) 587.8) (97.7) 1.8 335.9 (81.6) (383.8) (433.1 101.Global Research .1) (220.2) 0.3) (26.4 469.4 1.6) (75.214.1 15.254.0) 701.3 (183.8 69.0) (343.0 14.7 66.5 (107.9 425.7 1.753.1 2003 54.1) 380.0 100.7) (237.024.8 991.0 38.8 62.6 2006F 18.7 15.2) 1.2 1.0 (178.4 25.3 12.0 8.5 (130.015.669.6) (199.4) 463.4) 2008F 2.6) 0.6) 1.0) 0.7 380.9) (129.235.6 (359.8) (17.4) (98.5 1.9 2004 (393.0 38.5 (993.4) (36.7) 507.0) 2005F (482.3) 2006F (573.0 711.1 463.0) (76.7) (107.4 (167.3) (42.1) (243.9) (34.1 22.7 (52.3 (241.3 (199.8 20.4 (96.2 0.0 115.6 798.8 883.0 1.3) 54.7) (12.3 (410.0 20.488.9 2007F 38.4 587.9) 798.3) 40.9) 771.6 878.3 1.469.1 (200.0 (273.1) (393.051.4 59.4 (809.8) 0.9) 0.8) (32.2 16.2) 609.1 72.294.7 (199.5 18.964.7 (267.2) (24.6 (253.7 2008F 100.9) (35.Saudi Arabia Global Investment House Operating Statement The Saudi Investment Bank SR mn Special Commission Income Special Commission Expense Net Special Commission Income Fees From Banking Services Exchange Income Dividend Income Net Gains On Investments Total Non-Commission Income Provision For Loan Losses Total Operating Income Salaries & Employee Related Expenses Rent & Premises Related Expenses Depreciation And Amortization Other G & A Expenses Total Operating Expenses Net Income 2002 850.9 (116.3) 0.0 896.3) 555.0) (23.1 14.2 1.3 838.8 14.7) (32.015.5) (1.4) (355.6 11.2) 587.488.

8) 413.8) 198.304.Global Research .8) (2.421.658.9 2.4) (51.7 3.3 45.7) 1.0 408.2 0.361.3) (76.0) (2.562.6) 1.7) (273.351.9 (573.9 (29.2 1.4 (330.2) 41.2 (347.6 1.380.7 199.8 183.7) 1.3) (70.015.235.448.2 2003 463.115.791.9) (1.195.342.8) (31.7) (115.0 2004 587.197.415.6 81.9) (759.4) (1.0 2.5) (76.013.0) (3.1 (98.5 130.8 338.9 2.7 52.1 4.6) 510.4) (1.294.7) (992.5) (1.514.8 1.083.2 0.0) (183.5) (1.622.5) (6.514.2) (977.8 3.375.1) 85.5 18.4) (34.0) 29.0 170.1) (55.7 408.015.9 (937.6) (64.881.0) (1.0 (66.5) (273.7) 133.9 2006F 1.6 May 2005 Saudi Arabia Banking Sector 69 .0 (62.0) (59.594.4 (116.9) (3.9) 17.2) (87.280.0 (69.7 38.1) 5.0 (1.Saudi Arabia Global Investment House Cash Flow The Saudi Investment Bank SR mn Net Income Accertion of Discounts Gains on Investments Depreciation And Amotization Provision for Loan Losses Due from Banks and other FIs Loans And Advances Other Assets Due To Banks And FIs Customers Deposits Other Liabilities CF From Operations Net Sale /Purchase Of Investments Capex CF From Investing Dividend And Zakat Paid CF From Financing Change In Cash Beginning Cash Ending Cash 2002 380.2 221.5 0.5 1.2) 13.5 (943.8 42.5 (741.8 872.9 (23.9) 24.9) 2008F 1.5 5.6) (61.3) 35.161.682.304.6 698.403.2) (383.9) (20.7 577.929.7) (993.357.8) (695.6) 13.3) (741.8) (5.2 541.8 (993.0) 83.375.7) 209.3 (2.9) (4.5) (4.8 1.9 241.5) (608.3 (314.2 (482.9 541.5 0.4 4.8) (1.1 (2.3 (299.294.1 2007F 1.0 (72.0) (37.8) 36.5 1.0) (519.3 108.2) 797.8 (383.1 40.488.215.9 2.2) 86.3) 34.0 2005F 798.8) (6.3 1.1) (6.9) (183.9 577.583.1) (35.9 (62.

7% 5.9% 257.8 5.8% 48.1% 24.8 7.Saudi Arabia Global Investment House Ratios Profitability .5 127. Expenses .2% 1.7% 48% 69.Change in Fx Income RATIO'S USED FOR VALUATION .9% 43.4% 1. income .3% 25.2% 2.Book value per share (SR) .4% 30.0% 0.Dividend payout ratio Margins .0% 4.7% 50.0% 15.0 22.2% 2.0% 2. income .441.3 394.3% 578.0% 2.7% 40.5% 21.3% 2.Non-commission income/ Total op.0 27.3% 5.0% 43.8% 1.4% 0.2% 10.4 195.Rent.1% 56.3 3.3 37.0% 14.0% 50.5 2.7% 10.1 3.0% 2003 2.9 5.1% 54.3% 12.0 17.1% 41.8% 10.Global Research .5% 43.DPS (SR) . income .8% 5.5% 51.103 14.5% 37.1% 51.0% 50.P/E .Provisions /Average loans .9% 14. income .9% 52.Change in Investment Income .FX Income/ Total op.8% 2.6% 4. income .0 15.2% 19.8% 30.9% 5.4 43.5 21.3% 31.Non Performing Loans (SR mn) .7% 1.2% 17.9 0.5% 61.Net (or profit) margin .9% 40.3 3.5% 1. income .Net special commission income after PLL's/ Total op.0 34.2% 18.Non-commission expense/ Total op.6% 1.489 14.0 22.0% 11.4 0.PLL's / Gross Loans .4% 4.1% 33.2% 30.5% 18.5% 49. income .5% 4.3% 19.Customer Deposits/ Total assets Credit Quality .6 469.1% 1.4% 60.0 98.2% 32.1% 2006F 2.1% 1. Expenses .0% 49.Yield on average earning assets .0% 18.0% 2.9% 0.Gross Loans / Commission earning assets .4% 153.EPS (SR) .0% 664.7% 87% 75.Fees from banking services/ Total op.0% 12.1% 66.2% 36.0% 6.2% 4.0% 0.Change in Special commission income .2% 70.8 5.6% 1.5% 76. income .1 2.0% 13. income .0% 6.9% 17% 66.1% 39.6 218.455 26.6% 10.7% 43.Special commission expense/ Special commission income .7% 78.4% 11.4% 49.2% 38.2% 10.Spread Efficiency . G&A expenses/ Total op.0 34.1% 9.2% 1.0% 48.7% 49.5% 24.0% 14.6% 105.3% 16% 66.2% 5.2 11. (SR'mn) .8% 37.0% 9.4% 70.8% 2.4% 59.1% 0.6 1.Market price year end (SR) .1% The Saudi Investment Bank 2004 2005F 2.103 27.2% 1.7 134.7 5.9% 23.8 643.3 4.5 278.9% 6.8% 1.5% 730.103 17.5% 44.0% 2.0% 40.1% 1.1% 4.0% 13.7% 51.2% 67.4 29.8% 2.9% 56.2% 2007F 2.673 16.5 21.8% 2.6% 2.9% 23.5% 0.0 34.9 1.0% 49.NPL Coverage Capital Adequacy .Equity/ Gross Loans Constitution of Total Operating Income .3% 5.6 562.6 348.Gross Loans/ Customer Deposits .Cost/ Total op.Par value per share (SR) . income .2% 547.2% 22.0 476.6% 14.8% 40.8% 1.Staff expenses/ Total op.6% 0.3% 15.8% 56.8% 18.1% 61.9% 2.Dividends yield 2002 2.8% 49.0% 4.3% 0.0% 6.5% 19.6% 0.NPL's /Gross Loans .5% 20.0% 30.4 2.3% 79.5% 50.7% 1.5% 48.1% 69.3% 0.6% 12.1% 1.6% 1.5 5% 60.6% 24.4% 4.6% 51.3% 33.0% 74.Investment Income/ Total op.6% 57.3% 14.4 23.0 22.9% 7.8% 279.0% 7.2% 69.2% 31.1% -22.2 643.4% -5.3% 20.Cost rate on average commission bearing liabilities .5% 27.P/BV .3% 33.5 5.5% 37.3% 73% 72.2 643.8% 4.103 21.0 22.9% 27.Shares in issue (mn) .Other Income/ Total op.6 1.8% 0.3% 67.2 249.0% 50.6% 1.6% 10.Equity/ Total Assets (Equity capital ratio) .6% 17.0 4.9% 69.3% 19.1 114.9 28.3% 240.7% 7.2% 13.1% 74.5% 651.6% 1.2% 1.6% 70 Saudi Arabia Banking Sector May 2005 .7% 25.9% 70.9% 2.6 433.8% 23.3% 26.Return on average assets .2% 824.0 21.3% 51.5% 50.Non-commission expense/ Average total assets Liquidity .0% 56. income Operating Performance .Provision for loan losses (SR mn) .PLL's/ Total op.3% 56.0 22.1% 2.4% 275.1% 1.0 779.9% 50.0% 40.0% 36.1% 36.0 22.4% 4.5% 4.7% 15.199.8% 11.7% 41.6% 1.0% 272.6% 49.0% 1.3 12.Change in Fees from banking services .4 35. income .8% 50.5% 50.0% 50.9% 39.2% 2.Net special commission income after PLL's/ Total op.2% 72% 68.9% 8.9 129.0% 4.8% 1.2% 33.Fees from banking services/ Total op.1% 50.3% 9.4% 27.4 596.6 122.Provisions /Total op.5% 58.1% 302.1% 6.9% 28.4% 71.2% 1.Market Cap.0 119.9 4.7% 7.2% 1.5% 30.5% 56.3% 6.5% 26.2% 68.8% 80% 74.3% 128.2% 277.Return on average equity .5% -13.7% 13.9 355.Customer Deposits/ Equity .6% 36.2 978.5% 40.5% 785.3% 44.0 34.8% 0.NPL's /(Equity+provision for loan losses) .1 643.5% 66.3% 12.0% 2008F 3.

the bank employed 1.6bn NOT RATED Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research Background • Banque Saudi Fransi (BSF) was established in June 1977 as a Saudi joint stock company and commenced its operations in December 1977 after taking over the operations of the Banque de I’Indochine et de Suez branches in the Kingdom of Saudi Arabia.2 5.555 personnel. daily vol. • The bank is a leader in the financial advisory.5 24th April 2005 Not Rated 34.1 122.SE Listing: Saudi Stock Exchange Current Price SR1.0 12M Avg. retail and treasury and investment services through a network of 3 regional branches. the bank had increased its paid up capital by SR450mn through a 1:4 bonus share issuance through the capitalization of its general reserves.Global Research . 60 branches located in major cities in the Kingdom and more than 250 ATMs.5 SR50.1% of the bank's capital. Shareholding Pattern • BSF has an authorized.Saudi Arabia Global Investment House Banque Saudi Fransi Reuters Code: 1050.5% market share of the sector's aggregate assets in 2004. At the end of 2004. 52 week Lo / Hi Market Cap Target Price 13. BSF is affiliated with CALYON Corporate & Investment Bank (formerly called Credit Agricole Indosuez) that holds an equity interest of 31.129.6 30.25bn distributed over 45mn shares each having a par value of SR50.129. shipping and industrial sectors. The bank provides a full range of financial services including corporate banking. • BSF is one of the medium sized banks in the Kingdom of Saudi Arabia with total assets of SR59. issued and fully paid up capital of SR2. In 2003. The bank ranks sixth among all Saudi banks in terms of asset size with a 9. project/structured finance and syndicated loans and started these activities in the early 1980s. Recent Developments • BSF and the French insurance company Assurance Generale du France (AGF) signed a May 2005 Saudi Arabia Banking Sector 71 .67bn at the end of 2004.852 SR450/SR1. The bank has been involved in structuring and arranging a number of deals especially in the petrochemicals. construction.

1% in 2004.5% in 2003 to 4.5% in 2004. The bank’s RoAE and RoAA stood at 29.7% respectively in 2004. The bank’s spread recorded a decline from 3.43bn in 2003 to SR1. The bank’s gross loans. Despite a decline in profit margins.6% in 2004. The bank also reported the highest net margin in the sector of 70% in 2004 as compared to the sector’s average of 61.1% in the same period which increased its loans to deposit ratio from 64. total operating income soared by 27% whereas total operating expenses increased by 10% only for the same period. up 29.2% in 2004 while the interest on interest earning liabilities remained flat at around 1. The bank’s capitalization ratio are among the lowest in the Saudi banking sector with both the Tier-1 & Tier-2 Capital Ratios at 12. Analysis of Financial Performance – 2004 • BSF reported an yearly growth of 11.2% in 2004 as the bank increased its fee-based activities taking advantage of the economic growth in the country.4% in the net special commission income which grew from SR1.3% in 2003 to 176. BSF’s net income for the first-quarter of fiscal year 2005 increased by 30% over the same period of last year to reach SR430mn.6% in 2003 to 21. the bank has done considerable improvement in reducing its NPLs/Gross Loans from 2. increased at a higher rate of 29. This is mainly due to the decrease in the yield on average earning assets from 4.9% in 2004. • BSF was mandated within a group of six Saudi banks by the Saudi Electricity Company (SEC) to act as leading responsible parties for a new SR6bn structured term-loan facility with a tenor of 15 years. • • • • • • • • • 72 Saudi Arabia Banking Sector May 2005 .4% in 2004. however. However.59bn in 2004.5bn in 2003 to SR59.4% in 2003 to 3.4% in 2004.4% in 2004. BSF reported a net profit of SR1.1% in the above period.6% in 2003 to 74% in 2004. The bank’s NPL coverage too improved from 145.6% from the previous year’s profit of SR1.Global Research . The fee from banking activity as a percentage of operating income increased from 14. BSF's operations are very cost efficient with the lowest cost-to-income ratio in the sector of 30% in 2004. The bank increased its asset base from SR53. representing an increase of 11.53bn for the year 2004.18bn. They also submitted a formal application to the relevant authorities in Saudi Arabia for a license for this purpose.Saudi Arabia Global Investment House protocol for the establishment of a joint Saudi insurance firm.1% and 2.0% in 2003 to 1. Customers deposits as percentage of total liabilities has remained flat at around 80% in the last couple of years. The bank’s deposit base also reported the in-line growth of 11.7bn in 2004.

5 at around 33.1x. The earnings of 2004 discount the current market price of SR1129. We believe that bank is likely to post another round of strong earning in 2005 as well.13 per share during 2004.Global Research .Saudi Arabia Global Investment House Outlook • BSF reported an EPS of SR34. The bank is likely to be active in trade finance. We expect the bank to increase its fee income to around 30% of its total operating income in 2005. The bank has already established its new Murabaha Trade Forfaiting Fund (Al Qindeel) and is likely to continue offering Sharia-compliant consumer lending. mortgage. and investment banking services as the market is expected to witness a wave of mergers and acquisitions and many family businesses are going public. and insurance products and services. • • May 2005 Saudi Arabia Banking Sector 73 . syndications. BSF is expected to continue its expansion in this area through the introduction of more Sharia-compliant products. Building on the growing demand for Islamic banking in the Kingdom.

100.5 2.3 15.1 1.144.674.3 2003 4.751.009.147.453.961.192.3 2.800.0 691.2 1.2 2.239.5 4.855.Saudi Arabia Global Investment House Balance Sheet Banque Saudi Fransi ‘SR mn’ Cash & balances with SAMA Due from banks and other FI's Trading investments Non-trading investments Net Loans and advances Net fixed assets Other assets Total Assets Due to banks and other financial institutions Customers' deposits Other liabilities Total Liabilities Share capital Statutory reserve Other reserves Retained Earnings Total shareholders' equity Total liabilities and shareholders' Equity 2002 2.713.673.713.9 1.3 1.639.502.634.516.0 2.6 6.7 59.3 2.397.2 47.6 34.157.050.9 3.5 59.8 21.9 1.486.0 1.463.3 1.5 2.Global Research .1 53.8 1.2 2.250.161.673.9 18.0 512.4 451.250.512.0 17.502.0 2.9 2004 2.8 26.861.0 1.2 2.8 453.4 36.3 48.171.4 53.9 5.452.316.281.132.1 456.000.009.291.0 9.8 17.034.9 54.250.673.4 5.517.7 4.0 42.704.725.8 44.0 1.3 44.7 74 Saudi Arabia Banking Sector May 2005 .0 2.0 39.800.

7 (67.1 465.5 1.378.2 72.6) 1.936.9 670.111.3 85.5) (3.9 (150.Global Research .1 (120.427.Saudi Arabia Global Investment House Operating Statement Banque Saudi Fransi ‘SR mn’ Special commission income Special commission expense Net special commission income Fees from banking services Exchange income Net trading income Dividend income Net gains on investments Other operating income Total non-interest income Provision for loan losses Total operating income Salaries & employee related expenses Rent & premises related expenses Depreciation and amortization Other G & A expenses Other operating expenses Total operating expenses Net Income Statement of Retained Earnings Beginning retained earnings Net income transfer to statutory reserve Transfer to other reserves Gross dividends Net change in fair value Ending balance 2002 1.0) (385.185.4 81.8 65.1 439.6 260.3) 0.2 1.8) (6.7) 1.014.014.5 1.4 1.0) (938.4 5.578.0) (564.5 2003 1.0 (605.9 (90.777.2) (592.4 2004 2.2 0.2 (300.2 (317.0 1.9) 1.4 20.6 (493.0 8.5) (82.2 4.9 2004 9.0 19.8) (77.0) 1.3 6.0) (68.0) (794.0) (450.0 209.535.9) (11.185.2) (108.9 May 2005 Saudi Arabia Banking Sector 75 .4) 18.535.0) (66.5 321.193.1) 1.2 2003 18.1) (175.7 (521.6 1.6) 2.7 (558.7) 1.921.6) (657.0) (100.1) (55.0 6.2 2002 1.3) 1.0 110.3 14.6) (64.7) (3.4) 0.2 (350.3) 1.9) (120.0 9.590.9 (309.

137.9) (20.0) 63.7 (4.2 2.3 (5.8 907.8) (737.357.6 6.2) 556.6) (14.5 4.3 (779.2 (1.185.014.2 (0.4) (2.2 5.376.3 76 Saudi Arabia Banking Sector May 2005 .649.0) (356.724.5 2.711.2 2003 1.2 (2.8) 416.4) (418.001.5) (2.8 (365.2) 4.Saudi Arabia Global Investment House Cash Flow Banque Saudi Fransi SR mn Net Income Accretion Of Discounts Gains On Investments Depreciation And Amortization Loss/Gain On Disposal Of Fixed Assets Provision For Loan Losses Due From Banks And Other FI's Trading Portfolio Loans And Advances Other Assets Due To Banks And FI's Customers Deposits Other Liabilities Cash Flow From Operations Net Sale /Purchase Of Investments Capex Cash Flow From Investing Dividend And Zakat Paid Cash Flow From Financing Change In Cash Beginning Cash Ending Cash 2002 1.194.2 2004 1.9 158.128.3 1.2 (5.4 497.6 (1.782.6) 789.9 (0.9 (4.7) (74.5) (230.535.805.1 0.441.474.9) 4.7) (66.Global Research .8) (422.1 1.3 3.7) 277.387.147.1) 90.1) (62.2 67.8) 1.9 2.4) (821.122.563.175.138.069.108.3) 1.2) (737.2 2.2 (2.5) (821.9 16.6 (898.2 (7.673.9 20.009.147.0 4.4) (2.4) 66.3) 68.1) 120.0) 64.1) (422.

3% 11.1 2.00 36.4% 9.Change in special commission income .Change in Investment Income .3% -17. income .4% 30.Return on average assets .2% 5.0 34.8% 24. income .Non-commission expense/ Total op.Gross loans / Commission earning assets .3% 38.Customer Deposits/ Equity .8% 13.Par value per share (SR) .Provisions /Average loans .Market Cap.4% 3.7% 0.4% 24.4% 176.7% 10.6% 5.6% 1.00 122.751 4.Provision for loan losses (SR mn) .Change in Fx Income .Shares in issue (mn) .7% 20.Tier 1 capital ratio .2 10.5% 75.050 34.1% 70.2% 15.4% 26.0% 30.517 43.7 14.4% -50.Rent.7% 4.1% 0.0 34.7 2004 2. G&A expenses/ Total op.1% -2.6% 504 765 2. income .7% 11.0 407.Risk weighted assets (SR mn) .1% 0.Due from Banks/ Due to Banks Credit Quality .Spread . income .Cost/ Total op.2% 33. income .9% 41.9% 59.2% 28.3% 1.8% 5.751 27.6% 37.Investment Income/ Total op.Change in Fees from banking services .050 5.7% 79.4% 21.8% 1.9% 64.Non-commission expense/ Average total assets Liquidity . income .0% 44.3% 2.Book value per share (SR) .7% 29.6% 7.EPS (SR) .7% 25. income . income .924 12.4% 9.6% 21.4% 12.1% 50.8% 4.2 411.929 14.2% 24.9% 5.Equity/ Total Assets (Equity capital ratio) .0% 16.0% 864.2% 59.4% 23.4% 553 803 2.1% 79.6% 3.9% 14.4 3.2% 79.9% 38.0 26.8 22.5% 74.Other Income/ Total op.1 20.Tier 2 capital ratio Constitution of Total Operating Income .791 17.3% 50.Non Performing Loans (SR mn) .0% 147.3% 9.2% 761.4% 35.8% 33.9% 11.4% 18.0 28.Market price year end (SR) .3% 5.1% 17.4% 1.4% 60.0% 24.Saudi Arabia Global Investment House Ratios Fact Sheet Profitability .1% 0.Yield on average earning assets .2% 3.7% 80.5 15.5% 3.2% 61.7% 4.0% 66. income Operating Performance .2% 64.0% 10.00 132.9% 78.8% 19.6% 69.3 17.FX Income/ Total op.1% 3.Special commission expense/ Special commission income .6% 4. (SRbn) .Change in Other Income RATIO'S USED FOR VALUATION .3% -0.Net special commission income after PLL's/ Total op.00 112.3% 17.3% 3.3% 56.5% 151.Tier 1+2 (SR mn) .3% 3.Staff expenses/ Total op.1% 12.7% 4.517 5.Dividend payout ratio Margins .0% 2.0 18.Customer Deposits/ Total assets .9% 145. income .2% 1.NPL's /Gross Loans .DPS (SR) .00 45.6% 0.6% 11.2% 75.0% 21.0% 64.Net (or profit) margin .6% 67.Non-commission income/ Total op. income . income .Return on average equity .6% 5.Tier 1 (SR' mn) . income .1% 69.NPL Coverage Capital Adequacy .7 6.Cost rate on average commission bearing liabilities .7% 3.Gross loans/ Customer Deposits .Net special commission income after PLL's/ Total op.Fees from banking services/ Total op.1% 3.Equity/ Gross Loans .P/BV Banque Saudi Fransi 2002 2003 2.Provisions /Total op.6% 844.PLL's / Gross Loans .1% 0.3% 35.5% 14.3% 50.1% 42.Commission margin (earning assets) Efficiency .1% 79.7% 13.6 3.6% 30.3% 14.6 774.P/E .3 May 2005 Saudi Arabia Banking Sector 77 .6% 12.0 14.5% 1.7% 35.2% 14.Global Research .4% 2.00 45.Fees from banking services/ Total op.2% 480 847 1.

78 Saudi Arabia Banking Sector May 2005 .83% stake.1 6.621 SR271/SR677. The management of Bank AlJazira played a major role to recover the bank from its financial problems and reposition it as one of the well recognized financial institutions in the Kingdom. the bank had a 1. shareholding structure consisted of Saudi investors holding 94. Recent Developments • Bank Aljazira deployed Peribit Networks Peribit Sequence Reducer products to improve application performance on its wide area network (WAN) in more than 16 locations throughout the Kingdom. 52 week Lo / Hi Market Cap Target Price 75. According to the bank's annual report of 2004. daily vol. raising its paid up capital to SR750mn (15mn shares).8 12M Avg. The shares were sold at a price of SR130 per share.2bn NOT RATED Background • Bank AlJazira (BJAZ) was formed in 1976 to takeover the operations of the National Bank of Pakistan's branches in the Kingdom of Saudi Arabia.17% stake and National Bank of Pakistan holding the remaining 5.SE Listing: Saudi Stock Exchange Current Price SR677.5 Key Data EPS (SR) BVPS (SR) P / E (x) P / BV (x) Source: Global Research SR10. The bank provides its clients with a wide range of Islamic Shariaa-compliant products and services through a network of 16 branches and 25 ATMs and employed 766 personnel in 2004. With total assets of SR10.2 54.5 99. which included a premium of SR80 per share over the par value. • • Shareholding Pattern • The bank successfully raised its paid up capital in 2004 by SR150mn through a 1:4 rights issue. Bank AlJazira is the smallest bank in the Kingdom of Saudi Arabia in terms of asset size.Saudi Arabia Global Investment House Bank Al Jazira Reuters Code: 1020. Sheikh Saleh Kamel owns almost 20% of the bank’s capital.7bn as of 2004 end. Amongst the Saudi investors.7% market share of the banking sector's aggregate total assets.5 24th April 2005 Not Rated 12.Global Research .

9% as compared to the previous year. Also the bank has improved its coverage from 59.7mn in the previous year.8% in 2003 to 111. The bank’s spread reported a decline from 2.7mn for the year 2004.7% in 2000 to 66. The bank’s net loans and advances increased from SR4.3%. The bank has substantially improved its credit profile and has reduced its NPL/Gross Loans from 6. in line with Islamic Sharia. the ratio is still much higher than the banking average of 2. up 100. BJAZ’s total assets reported an yearly growth of 19. The bank has the smallest spread in the Saudi banking sector. The bank has undertaken an improvement in its capitalization with the tier-1 capital ratio increasing from 15. The bank’s RoAE and RoAA stood at 15.4% in 2003 to 2.8% in 2004. The bank reported a net profit of SR187. The bank’s deposits increased from SR7.1% in 2004. according to which the bank provided cooperative insurance sponsorship for all the employees of the Group and its subsidiary companies.7% in 2004.2% in 2004. However. the fee from banking services as percent of total operating income increased from 41.3% aggregating to SR10.Global Research .8% in 2003 to 3.1bn in 2004 reporting a growth of only 8% in 2004. BJAZ’s fee-based income increased substantially in 2004 to SR298. This is attributed to the small branch network of the bank which hinders its deposit-taking capability especially of the retail deposits which has a negative effect on the interest margins and profitability.2004 • Bank AlJazira’s reported the net special commission income of SR187.9mn. This is mainly due to the increase in the high-interest time deposits with the bank. • Analysis of Financial Performance . This also gives the bank room to aggressively promote its lending activities especially in the lucrative retail lending segment.8% in 2004.3%.8% from the previous year’s profit of SR93.9% in 2003 to 68. The total number of employees covered by the scheme exceeded 5. Moody's Investors Service upgraded the foreign currency deposit ratings for BJAZ to Baa2/Prime-2 from Baa3/Prime-3.19bn in 2004 representing an yearly growth of 11.8% and 1.9% respectively in 2004.000. The bank’s tier-1 capital ratio in 2004 was #2 among the Saudi banks.4% in 2004 as compared to a sector's average of 74.2% in 2004. • • • • • • • May 2005 Saudi Arabia Banking Sector 79 .1% in 2003 to 20. up 18.8mn in 2004 as compared to SR112.Saudi Arabia Global Investment House • The Savola Group and BJAZ signed cooperation agreement.66bn in 2003 to SR5. where the average spread was 3. just a shade lower than SAIB which had a tier-1 capital ratio of 21%in 2004. BJAZ's liquidity ratios improved noticeably with gross loans-to-customers' deposits falling from 78.7%.7bn in 2004. As a result.5bn in 2003 to SR8.5mn.

Outlook • BJAZ reported an EPS of SR12. The earnings of 2004 discount the current market price of SR677.Global Research . The bank is likely to continue on its expansion plans increasing its branch network. BJAZ is one of the leaders in terms of volume and number of local trades in 2004.1x. • • 80 Saudi Arabia Banking Sector May 2005 . by adding new branches during the next 2 years and relocate to new premises. BJAZ is expected to continue to play a vital role as a leader in the share trading business in Saudi Arabia.5 per share during 2004.5 at around 54.Saudi Arabia Global Investment House • BJAZ was the first bank in the Kingdom to introduce a Sharia-compliant specialized finance for share trading through Murabaha named as "Al Tamam" Program. The bank is likely to witness an increasing activity during 2005 as a result of the ongoing development in the Saudi capital market.

6 4.8 659.368.0 294.2 8.0 10.Global Research .7 2004 382.0 2.2 7.2 1.0 1.191.4 31.9 1.8 1.316.8 4.8 83.8 8.8 May 2005 Saudi Arabia Banking Sector 81 .2 9.4 1.5 751.9 268.988.Saudi Arabia Global Investment House Balance Sheet Bank Al Jazira SR mn Cash & balances with SAMA Due from banks and other FI's Trading investments Non-trading investments Net Loans and advances Net fixed assets Other assets Total Assets Due to banks and other financial institutions Customers' deposits Other liabilities Total Liabilities Minority interest Share capital Statutory reserve Other reserves Retained Earnings Total Shareholders' equity Total Liabilities and Shareholders' Equity 2002 196.2 600.4 2.7 446.1 85.724.0 71.1 91.7 317.5 38.733.988.8 2003 641.174.1 750.4 175.7 196.3 5.141.0 360.0 94.1 8.186.5 8.761.1 5.4 37.535.721.724.4 225.840.4 97.721.5 5.0 48.942.661.7 59.6 196.9 161.2 885.2 600.488.1 888.5 92.6 8.0 10.7 4.912.8 836.3 42.066.7 143.

5 412.4) 187.4) (5.Saudi Arabia Global Investment House Operating Statement Bank Al Jazira SR mn Special commission income Special commission expense Net special commission income Fees from banking services Exchange income Net trading income Dividend income Net gains on investments Other operating income Total non-commission income Provision for loan losses Total operating income Salaries & employee related expenses Rent & premises related expenses Depreciation and amortization Other G & A expenses Other provisions Other operating expenses Total operating expenses Income before minority interest Minority interest Net Income Statement of Retained Earnings Beginning retained earnings Net income Adjustments Transfer to statutory reserve Transfer to other reserves Gross dividends Net change in fair value Ending balance 2002 202.3 3.2 34.4 8.8) (175.5 0.1) (17.0 (122.0) 0.3 19.4 (11.0) (52.0 11.7 3.8) 158.2 187.4 59.0 112.6) (13.5) (18.0 (88.3 0.8) 0.2 2004 317.7) (83.7 2004 38.3 (162.8 (70.6) 0.7) 187.4 16.0 74.4 48.1) (2.7) 5.4) 8.9 298.5) 117.7 (72.1 1.0 (0.0) 180.0 (7.8) (11.7) 269.0 (23.7) 93.0) (2.6) 188.0 (38.0) (6.2 183.0 2.1 32.0 (48.4) (12.5 93.5) (122.2 93.1 53.2 82 Saudi Arabia Banking Sector May 2005 .4) 0.4) 38.8 (88.3) (9.0) (10.8 3.6 24.7) 83.0 (89.4 (6.5 2003 8.8) (18.2 2002 11.2) 438.4 (0.6 59.4) (249.8 0.6) (29.9 (85.2 (23.8) 0.0 (10.Global Research .3 (129.7 0.5 2003 246.0) 58.

5) (397.0 2003 93.9 (8.4) 503.7 (53.5) 390.0 (526.6 606.4 May 2005 Saudi Arabia Banking Sector 83 .7) (53.7) (36.0) 5.9 196.6 111.1 (282.6) 445.5) (48.0) (213.6 415.3) 12.3) 3.4) (103.7) (88.3) (2.365.0 0.2) (13.2) (67.2 119.4) 641.8) (43.6 11.2 (330.2 0.9 (219.2) 22.0 0.5 (0.9) (35.3 (17.7) 544.6) 0.2) (63.8 2004 187.9 0.0 641.2) 179.9 880.1 21.7) 186.8 (16.2 (259.343.Global Research .4) 17.0 76.8 382.0 (36.8 196.0 72.9) (391.7 162.5) (687.2) 9.4) 121.7 71.1 (6.7 (35.Saudi Arabia Global Investment House Cash Flow Bank Al Jazira SR Mn Net Income Accretion Of Discounts Gains On Investments Depreciation And Amortization Provision For Loan Losses Due From Banks And Other FI's Trading Portfolio Loans And Advances Other Assets Due To Banks And FI's Customers Deposits Other Liabilities Minority Interest Cash Flow From Operations Net Sale /Purchase Of Investments Capex Cash Flow From Investing Dividend And Zakat Paid Change In Equity Cash Flow From Financing Change In Cash Beginning Cash Ending Cash 2002 59.2 (892.5) (454.6 (16.

Equity/ Total Assets (Equity capital ratio) .856 15. (SR bn) .8% 1.0% 68.0% 23.PLL's/ Total op.0% 67.Cost rate on average commission bearing liabilities .0% 28.8% 1.0 12.2% 58.Net (or profit) margin .3% 41.8% 41.00 99.8% 13.0% 751 751 3.Loans / Commission earning assets .20 392.6% 134.94 2.Commission margin (earning assets) Efficiency .0% 1.4% 13.2% 75. income .1% 9.1% 22.2% 199 222 3.153 20.00 1.7% 2.8% 9.8% 36.00 5.Yield on average earning assets .Tier 2 capital ratio (min.Provision for loan losses (SR mn) .9% 2. income .Non Performing Loans (SR mn) .3% 0.FX Income/ Total op.1% 8.0% 3.59 121.5% 26.0 4.0% 59.6% 238.Book value per share (SR) .8% 5. income .2% 67.3% 50.1% 31.2% 50.7% 558.75 3.4% 547.Investment Income/ Total op. income .32 3.4% 2.3% 2.0% 28.Change in Investment Income . income .95 50.Non-commission income/ Total op.8% 3.9% 40.Provisions /Average loans .2% 47.0 7.0% 57. G&A expenses/ Total op.Change in Other Income RATIO'S USED FOR VALUATION .8% -2.6% 165.Fees from banking services/ Total op.3% 5.8% 21.Tier 1 capital ratio (min.9% 27.9% 24.3% 24. income .8% 1.1% 57. income Operating Performance .NPL's /Gross Loans .Tier 1+2 (SR mn) .Change in Fx Income .527 7.EPS (SR) .1% 3.3% 65.Non-commission expense/ Average total assets Liquidity .8% 18.3% 11.8% 42. income .Equity/ Gross Loans .5% 851.9% 40.2% 0.4% 165. income .Market Cap.5% 39.7% -38.NPL Coverage Capital Adequacy .Tier 1 (SR mn) .5 24.0% 66.51 6.8% 33.5% 57.7% 8.488 1.Non-commission expense/ Total op.Customer Deposits/ Equity .P/BV 2002 1.2% 1. income .5% 72.9% 68.79 2.6% 64. 8%) Constitution of Total Operating Income .7% 1.PLL's / Gross Loans .0% 21.76 249.3% 33.1% 29.Return on average assets .26 84 Saudi Arabia Banking Sector May 2005 .0% 73.Par value per share (SR) .52 3.Market price year end (SR) .3% 83.Global Research .0 15.0% 2. income .5% 1.1% 42.Customer Deposits/ Total assets Credit Quality .Spread .7% 61.7% 68.Change in special commission income .Staff expenses/ Total op.8% 328 196 6.Other Income/ Total op.Fees from banking services/ Total op.Net special commission income after PLL's/ Total op.Dividend payout ratio Margins .06 5.9% 15.DPS (SR) .Saudi Arabia Global Investment House Ratios Fact Sheet Profitability .3% 48.Change in Fees from banking services .Cost/ Total op.3% 57.8% 179.1% 15.55 73.3% 65.0 32.6% 23.2% 27.8% 4.7% 1.5% 2.3% 2.2% 0.7% 34.6% 0.5% 6.6% 12.3% 0.8% 26.2% 23.Risk weighted assets (SR mn) .Special commission expense/ Special commission income .184 23.7% 4.7% 41.4% 31. income .Net special commission income after PLL's/ Total op. 4%) .9% 94.0 12.9% 1.4% 1.Rent.9% 37.2% 885 885 5.P/E .Return on average equity .Shares in issue (mn) . income .5% Bank Al Jazira 2003 1.9 31.4% 62.0 12.1% 111.50 62.9% 3.1% -26.Loans/ Customer Deposits .31 2004 1.6% 58.4% 302 219 11.6% 7.0% 32.

8 SR1.SE Price SR734.SE 1120.SE 1080.10 1. 7. Recommendation BUY HOLD HOLD BUY HOLD BUY HOLD NOT RATED NOT RATED Ticker 1090.5 SR677. An employee of Global Investment House serves on the board of directors of this company.SE 1010.The following is a comprehensive list of disclosures which may or may not apply to all our researches.10 1. Global Investment House makes a market in securities issued by this company. Global Investment House has managed or co-managed a public offering for this company. Please see special footnote below for other relevant disclosures.SE 1050.10 1.0 SR643. for which it received fees.10 1. 8.SE 1060.130. 9.129.0 SR1. Riyad Bank Arab National Bank The Saudi British Bank Saudi Hollandi Bank The Saudi Investment Bank Banque Saudi Fransi Bank Al Jazira 1. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months.10 1. Global Investment House acts as a corporate broker or sponsor to this company. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 3. 4.10 1.10 1. 6. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year.0 SR786. The company being researched holds more than 5% stake in Global Investment House.492.0 SR845.5 Disclosure 1.0 SR630. Disclosure Checklist Company SAMBA Financial Group Al Rajhi Banking & Inv. Within the past year . Global Research: Equity Ratings Definitions Global Rating Buy Hold Reduce Sell Definition Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price . 2.SE 1040. 10. 5.0 SR1.10 1. Corp.SE 1030.SE 1020.10 Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report.

Global Research Sector UAE UAE Banking Sector May 2005 .

kw Phone No:(965) 2400551 Ext. CFA Head of Research shaileshdash@global.kw Phone No:(965) 2400551 Ext.globalinv.kw http://www.196 Raghu Sarma Financial Analyst rsarma@global..Global Investment House KSCC Equities Research Souk Al-Safat Bldg.O.104 Shailesh Dash.273 .com.com.com.net Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M. 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: research@global. El-Quqa.kw Phone No:(965) 2400551 Ext.com. CFA Executive Vice President omar@global. 2nd Floor P Box 28807 Safat .

.............................................................................................................................................................................................................................................. 37 Bank of Sharjah ............................................................................ 9 UAE Banks ...................................................................................................................................................................................................................................... 121 ............................................................................................................................................................................................... 113 Union National Bank .......................... 69 First Gulf Bank ................................................................................................................................................................................................. 53 Dubai Islamic Bank ............................................................................................................................................................................................................................ 28 Abu Dhabi Islamic Bank ............................................................ 96 National Bank of Dubai ................................................................................. 1 Peer Group Analysis ...........................................................................................................................Table of Contents Banking Sector in UAE ................................................................................................................................... 24 UAE Banks – Profiles .................................. 105 Sharjah Islamic Bank ............................................................................................................................................................................................................................................................................................................................................................................................... 22 UAE Banks – Recommendation Summary .................... 27 Abu Dhabi Commercial Bank ................................................................................................................................ 86 National Bank of Abu Dhabi .................................................................................. 16 Sector Outlook ......................... 78 Mashreqbank ......... 45 Commercial Bank of Dubai ......................................................................... 61 Emirates Bank International .................................................................................................Shifts in Competitive Positioning ........

overseas branches. Government Holding 73% 65% 50% 77% Entity Abu Dhabi Government Abu Dhabi Government Abu Dhabi Government Dubai Government The Governments have minor stakes in other banks too. a growth of 12. etc. Following the closing down of Standard Chartered Grindlays Bank Ltd. Apart from the growth in assets and the resultant increase in net interest income. Large stakes held by the government underline the significance of this sector. and fees arising out of rising consumer banking activities have pushed up revenues in the form of fees and commissions.2bn.0% to AED238. representative offices. Government-related business dominates the balance sheets of these banks (except EBI).. The number of local banks remained the same in 2004 at 21.UAE Global Investment House 1. while the total number of branches (including all forms of operational presence.7bn at the end of September 2004. Four of UAE’s top banks are majority-owned by Governments of Abu Dhabi or Dubai. more so because of the government control on the macro-economy. local and foreign. Sharjah Islamic Bank (27. domestic branches. Consolidated assets of the banking sector grew to AED413. especially NBAD. viz. viz. These have been shown in the following Table.8% from the end of 2003.) of the 12 banks that have been covered in this Report was 330 at the end of 2004. Banking Sector in UAE Banks play a critical role in the economy of UAE. UAE also boasts of large private banks like National Bank of Dubai (NBD) held by prominent May 2005 UAE Banking Sector 1 . and the good performance continued in 2004 too. UAE has the second highest number of banks after Bahrain. The sector had an excellent year in 2003. Good times prevailed predominantly owing to high credit and deposit growths on the back of a favorable interest rate environment. etc. which acts as the official banker of the government. thanks to the total credit growing by 21. estimated at over 125% of the country’s GDP at the end of 2003.2%). as evidenced by the huge banking assets in the country. high oil prices and a flourishing economy. the UAE banking sector was also helped by the steady presence of non-interest revenues. which predominantly relies on oil revenues and trade. Table 1-1 : Government holding in UAE Banks Bank National Bank of Abu Dhabi Abu Dhabi Commercial Bank Union National Bank Emirates Bank International Source : Company Annual Reports. thereby lending stability to its earnings in times of interest rate fluctuations. Space for many in a market led by government-owned banks Banks in UAE primarily belong to two categories.0%). National Bank of Dubai (14. correspondent banking centres. with the latter being restricted from operating more than five branches. (consequent to the merger of Standard Chartered with ANZ Grindlays). the number of foreign banks in the country came down to 25 at the end of ’03. a characteristic of UAE’s banking sector. Higher trade finance. Among the GCC countries.Global Research .

foreign banks continue to operate successfully in the country. However. Though the local banking industry has been protected from foreign competition since 1982. held by the Al Ghurair family. 2 UAE Banking Sector May 2005 . • It played a major role in restoring confidence in the UAE banking system after the Gulf war crisis in 1990-’91. Number of banks 3 8 5 5 4 1 Pivotal role of the central bank within its limitations The Central Bank of UAE. They primarily target large corporate borrowers and the high net worth clients. foreign banks.1bn. After a lower growth in 2003. especially HSBC and Standard Chartered. Table 1-2 : Area of origin-wise break-up of the foreign banks operating in UAE Area of origin Other GCC Non-GCC Middle East Indian sub-continent British Other European American Source: Capital Intelligence Country Banking Report. including the US$750mn Islamic sukuk for Dubai’s Civil Aviation Department to finance the phase-2 expansion of Dubai airport. which has most of its shares held by foreign banks. and Commercial Bank of Dubai (CBD). It has also played an active role in ensuring smooth functioning of the sector through timely interventions in the past. showed an improvement in ’03. which continues to be the regional centre. Dubai Islamic Bank (DIB). March 2004. advises the government on monetary and financial matters. Foreign banks accounted for 24% of the total assets in the banking system at the end of September 2004. A range of Sharia-compliant products were introduced in the market and Islamic finance deals like Ijara transactions have become common in mortgage deals. Mashreqbank. but ahead of Saudi Arabia and Kuwait. In terms of openness to foreign banks. Islamic banking in UAE is still behind Bahrain. UAE is behind Bahrain. the leading Islamic bank in the country. mainly due to reduction in Citibank’s asset base in the wake of the attack on Iraq. has been mandated as the lead manager and arranger of deals worth US$1. formed in 1980.Global Research . Market shares of both Islamic banks. Most of these banks started operations during the oil price-driven economic boom in 1970s and are headquartered in Dubai. • It presided over the takeover of the privately owned Middle-East Bank by Emirates Bank Group in 1992. Another notable feature is the rapid strides made by Islamic banking sector in the country during the last couple of years. recapitalisation of National Bank of Sharjah (NBS) in 1993 and restructuring of the troubled First Gulf Bank (FGB) in 1996.UAE Global Investment House local businessmen and members of the ruling family. are believed to be continuously increasing their market share. within the listed banks’ universe.

it should be noted that credit growth has been higher for the national banks.3bn. UAE’s banking sector is second only to Saudi Arabia within the GCC. Following the passing of moneylaundering law in ’02. when the cash reserve ratio on both the current and call accounts were doubled to 14%. The minimum capital adequacy ratio requirement for banks in UAE is 10%.8% to AED314. However. which has been played by the individual emirates in the past. Growing bigger and faster Led by robust growth in deposits and credit. as any major change had to be approved by the individual emirates. which aligns the regulatory capital requirements with the underlying risk. and restrictions were introduced in lending levels to individual clients. Various initiatives were undertaken by the central bank like. joining hands with the IMF and the World Bank to fight money-laundering in the country.UAE Global Investment House • In 1998. it supported the beleaguered DIB and introduced credit controls on loans against shares to cool an overheated stock market. which mandates all the hawala dealers to register with the central bank.8% to AED413. Also compliance with the new Basle Accord for all banks was further requested by the central bank. which is 2% higher than that required by the Bank for International Settlements and is in line with that in other GCC countries. May 2005 UAE Banking Sector 3 . UAE is the only Gulf state to have a formal hawala regulation system. Also the central bank has been slow to implement a number of reforms in the past. while that of the foreign banks increased by 12. In terms of asset size. However. overall size of the balance sheet increased by 12. the central bank is working on an international regulatory structure for the informal hawala money transfer system.7bn in the first nine months of 2004. Regulatory changes enhance credibility of the system Banking regulations in UAE have not changed much in the last 18 months. the banking law does not confer the role of the lender of last resort to the central bank. The last major change was in 2000. which tightened regulation of the formal financial sector. which effectively delays the process.5bn.Global Research .7% to AED99. Asset size of all the national banks put together increased by 12.

018 113.UAE Global Investment House Table 1-3 : Consolidated Balance Sheet of Banks in UAE (AED mn) Assets Cash & Deposits with CB Due from Resident Banks Foreign Assets Credit Facilities Claims on Government Claims on official entities Claims on the Private Sector Claims on other FIs Domestic Investments Other Assets Total Assets Liabilities Monetary Deposits Quasi-Monetary Deposits Foreign Liabilities Government Deposits Government Lending Funds Due to Central Bank Capital and Reserves Due to Resident Banks Unclassified Liabilities Total Liabilities Source: Central Bank of UAE 24. Private sector lending and foreign assets dominate Asset composition of UAE banking sector is characterised by a high proportion of claims to the private sector and an exceptionally high proportion of foreign assets.985 1. which formed 27.050 107.384 413.770 118.333 10.473 26.209 29.222 6.903 6.995 110.727 196.133 23 163 44.745 7.906 19.581 5.927 117.035 1.101 27.984 3. which formed 57.6% of assets at the end of 3Q04.362 111.184 50.544 191.732 165.565 297.022 331.781 25.584 30.134 13.625 277.521 145.272 6.063 7.786 3.886 8.650 13. Most of this exposure is in the form of bank placements.726 18 781 49.553 47.781 35.382 37 52 36.565 4.454 142.650 12.477 142. 4 UAE Banking Sector May 2005 .624 14.427 46.769 2.273 10.116 126.294 40.908 31.215 162.899 47.550 27.809 9.126 366.016 28.640 97. which is on a slightly higher side compared to other GCC countries.830 127.908 57.701 331.8% during 2000-‘03. losing its share to credit facilities.247 36.032 1. the aggregate balance sheet size has been growing steadily.599 28.749 2000 2001 2002 2003 Sep-04 As can be seen above.059 15.023 17.457 138.744 366.954 413.370 12. it can be seen that the proportion of foreign assets has come down during the last two years.196 43.749 25.455 17. It grew at a CAGR of 9.338 30.281 7.452 7. However.953 5.694 41.Global Research .656 15.775 91.283 15.611 15.901 42.837 41 80 34.679 238. Foreign assets.550 44.862 277. pertain to the investments made abroad by the government and funded by the banks in UAE.972 28 116 41.600 297.593 10.817 15.183 150.5% of the total assets at the end of 3Q04.101 28. and a significant portion of it is to top-rated banks in Western OECD countries.789 27.

225 16.064 12.5%.UAE Global Investment House Chart 1-1 : Composition of assets of UAE banks .832 10. credit facilities have led the asset growth of the UAE banking sector.117 15.761 2.581 80.215 138. total credit increased by 18.9bn. After a sedate growth in 2001.194 18.238 19.471 11.107 205.665 21% 238. Contrary to this trend.953 35. About 22% of the loans and advances fell in the category of others.366 5.208 35.1% and 21. while credit to the government. 2002 190.734 54.457 247. with the credit to residents growing by 18.838 2001 163. This makes the sector fairly market-sensitive.Sep 2004 Domestic Investments 2% Others 13% Claims on the Private Sector 47% Foreign Assets 27% Source : Central Bank of UAE Other Claims 11% Cashing in on the business upturn Over the years.188 273. as can be seen from Table 3-4 above.0% in the first three quarters of 2004.650 113. May 2005 UAE Banking Sector 5 .007 10.134 132.9% to AED196.574 9. which has been increasing. Table 1-4 : Gross credit extended by banks (In AED mn) Gross Credit YoY growth Residents Non-Residents Loans and Advances Government Industrial and Commercial Financial Institutions Other Real estate mortgaged loans Discounted Commercial Bills Source: Central Bank of UAE 2000 155. The total credit and credit to residents grew further by 21.224 147.313 4.864 10.208 1.012 18% 196.969 6.586 10.8% of the total credit. It is risky to the extent that there is lack of clarity about the recourse that banks would be able to take up. growth of total credit accelerated in the following two years.565 83.418 5% 145.222 93. Industry and commerce accounted for the major chunk of the loans and advances at 53.Global Research . in case the borrowers default. with the market risks assuming substantial proportions unlike credit risk.050 11.905 29.188 * During 2000-’03.273 44. constituted 11. which included individual loans.803 2003 Sep 2004 226.990 141.889 17% 165.418 29.984 30.904 38.210 CAGR * 13% 13% 20% 13% 16% 12% 5% 14% 4% 28% Growth patterns for credit to the industrial and commercial sector as well as to the government are clearly the fallouts of the macro economic health.804 1.603 25.200 1.286 172. This is owing to the absence of an efficient legal system which could have helped banks to followup on the mortgage lending in an appropriate manner.433 3. Cashing in on the favourable macro-scenario. it can be seen that real estate mortgage loans has shown staggered growth despite the glowing fortunes of the real estate sector.037 15.4% to AED226bn in 2003.

0% 2.272 19. especially for the big ticket projects.4% 1. Government.0% 2002 1.3% respectively during the period.3% 7.Global Research .110 26. Storage & Communications 3% Government 12% Source : Central Bank of UAE 6 UAE Banking Sector May 2005 .497 13.903 15.6% since 2001. Credit offtake by this segment grew at a CAGR of 16.195 18.325 2.549 8.6% during the period.063 48. These five segments together accounted for over 77% of the gross credit at the end of September 2004.650 23.UAE Global Investment House Table 1-5 : UAE .6% 12.154 2. Trade.Gross Bank Credit to Residents by Economic Activity (In AEDmn) Agriculture Mining & Quarrying Manufacturing Electricity.0% 1.222 20.2% 10. 2001 1.717 9.356 23. personal loans for business. Gas and Water 4% Construction 13% Personal loans for buisness purposes 13% Trade 28% Financial Institutions 2% Transport. Banks) Government Personal Loans for Business Personal Loans for Consumption Others Source: Central Bank of UAE.208 0.856 69. construction.906 Sep-2004 % Share 880 2.660 15.7% 6.907 44. Credit to Government.8% 3.254 196.901 3. owing to the Asian financial crisis. Chart 1-2 : Gross Credit to residents by economic activity at the end of September ‘04 Mining & Quarrying 1% Agriculture 0% Miscellaneous 8% Personal loans for consumption purposes 10% Manufacturing 6% Electricity.487 1. The activity picked up substantially in the recent years. grew at a CAGR of 38.023 238.2% 0.978 1.716 17.604 2003 830 2. Trade took away the largest amount of credit at the end of September 2004.134 30.8% 9.194 % Share 1.3% 14.508 2.545 145. and personal loans for consumption were the five segments which took away the maximum credit. Storage & Communications Financial Institutions (Excldg.565 20.6% 100.7% 7.0% 5. likewise.6% 100.082 11.053 6.546 9.745 29.443 14.5% 30.140 4.8% and 14.127 1.8% 6.1% 1.4% 3.512 165.077 11. The growth in this segment reflects the increasing reliance of the government agencies on bank financing.9% 16.0% A look at the growth in credit by economic activity shows a few sectors which have consistently contributed to overall growth.8% 1.4% 29.845 57.392 23.573 3.870 5.219 27.113 31.083 6. Gas & Water Construction Trade Transport.213 9. after suffering a setback in 1998.965 21.953 10.704 12. Personal loans for consumption and business showed CAGRs of 14.2% 12.8% 13.

4% at the end of September 2004 (with a simultaneous increase in the share of foreign liabilities). from 63% in Dec 2000. This resulted in a lower share of ‘other liabilities’. before declining to 65. besides leading to a reduction in the cost of funds.6%.4% Source : Central Bank of UAE Business sector leads the growth in deposits Growth pattern within the different kinds of deposits also highlighted the effect of a sound macro scenario. The share of deposits in total liabilities increased to 67% in Mar ’04.6% to AED270. the general increase in share of deposits was despite the augmentation of capital by many of the banks in the last two years. the deposits saw a growth of 10. Chart 1-3 : Composition of liabilities over the years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 Total deposits 2001 2002 2003 Sep 2004 Capital & Reserves Foreign liabilities Other liabilities Source : Central Bank of UAE Chart 1-4 : Composition of Liabilities of UAE banks . In an environment of low interest rates and booming capital markets.8bn in the first nine months of 2004.5% Foreign liabilities 10% Capital Reserves 12. This is one of the highest within the GCC countries.Sept 2004 Other Liabilities 12. total deposits increased by 10. In the nine months to September 2004.0% Total Deposits 65. May 2005 UAE Banking Sector 7 .UAE Global Investment House Share of deposits in total liabilities increased over the years High growth in credit was more or less matched by growth in deposits over the last few years.Global Research . Further.

which grew by 11. Interest rates on deposits have come down. Chart 1-6 : Maturity profile of aggregate deposits 100% 75% 50% 25% 0% 2002 2003 Sep 2004 upto 3 months 3-6 months 6-12 months more than 12 months Source : Central Bank of UAE 8 UAE Banking Sector May 2005 .8% of the total deposits. Chart 1-5 : Deposits by ownership in September ‘04 Other residents 3% Non-residents 5% Government 18% Individuals 37% Public Sector 8% Private sector 29% Source : Central Bank of UAE The growth in individual deposits could be considered good.Global Research .3%.UAE Global Investment House The government deposits grew by 18. with around 82% of the time deposits yielding less than 2%. Looking at the nature of the deposits. which found that nationals accounted for 72% of the total deposits. followed by the monetary and quasi-monetary deposits. Longevity of the deposits was highlighted by a study done by the Central Bank. however.2% during the period. Growth of deposits could have been augmented by the general trend of nationals bringing back part of their overseas funds to invest in the region’s equity markets following the economic resurgence. This trend has been further favourable for the banks as this decline in rates were not concurrent with a shortening of maturity. Deposits from banks. In fact there has been a gradual shift towards the longer-term time deposits in the last two years. while Arab nationals accounted for 7.9%. it can be seen that the growth has been all-round. in light of the falling interest rate environment. which underscores the fact that there are few other investment opportunities available in the country. saw a decline of 15. with no drastic shift towards a particular kind of deposit.

5% 10.1% 8.0% 3.6% 8. EBI and DIB. NBD.6% 6.4% 9.1% 3. ADCB.6% 13.2% 1.0% 2004 13.1% 7.6% 9. EBI and MASQ. the top 5 UAE banks in 2004 were NBAD.8% 4. The top five banks in this category were NBAD.3% 100. the top five banks accounted for 67. 17.6% of the total loans.0% 12.6% 12.3% 18.6% 1.3% 15.5% 11.0% 2004 13.0% 8.2% 3.5% of the total interest income of the 12 banks.4% 1. The three Islamic banks – Abu Dhabi Islamic Bank (ADIB).9% 12.0% 100.0% of total loans of the 12 banks.0% 2003 11.4% 1. MASQ.1% 3.4% 3.5% 5.9% 18.6% 1.1% of the total customers’ deposits and 20. These shares have risen over those in 2003.1% 3. In case of loans too.8% 100.8% 17. Though the number of banks in UAE is relatively high.Global Research . These banks were NBAD.1% 11.9% 14.6% 1.3% 3.UAE Global Investment House 2. These were NBAD.4% 15.1% 7.0% 3.. ADCB.6% 4.4% 4. much like elsewhere in the GCC..5% 3.6% 1. DIB and MASQ. signifying the growing importance of the Islamic banks in the overall banking scene in UAE.3% 5.0% 1.6% at the end of 2004.4% 10. Operating performance Interest income-wise.8% 14. May 2005 UAE Banking Sector 9 .9% 19.7% 4.1% 8.9% 1.6% 13.0% Loans 2003 13.2% 1. Dubai Islamic Bank and Sharjah Islamic Bank (formerly National Bank of Sharjah) together constituted 15.8% 12. which together accounted for 66. the top five banks among the afore-mentioned 12 accounted for 67. Peer Group Analysis Market shares Top five banks corner over two-thirds of the market . EBI.0% The deposits too have been concentrated within the top five banks.5% 100.4% 9.3% 1.0% 3..2% 100.6% 100.1% 12. The aggregate share of deposits of the top five banks stood at 67.6% 18.2% 10. ADCB.7% 9. the fragmented nature of the market poses no threat to the position of the larger banks.1% 3.4% of the total assets.3% 3.1% 7.5% 9.6% 1.. Table 2-1 : Market Share of UAE Banks (FY 2004) Assets 2003 ADCB ADIB BS CBD DIB EBI FGB MASQ NBAD NBD SIB UNB TOTAL Source : Global Research Customers’ Deposits 2004 12. ADCB..6% 11.7% of the total assets of the 12 listed banks which have been covered in this Report. NBD.1% 18.7% 15. DIB and MASQ. It is because in 2004.

297 (81.626 (293.775 927. securities Operating Income Operating Expense Operating Profit Net Profit ADCB 1.270 298. FGB.910 BS 135.775 751.948 (110. overall a majority of the banks seem to have seen an increase in their net spreads during the year.122 (19.5%) in 2004.003) 1. Net profit-wise.785 (463.423. CBD had the lowest cost of interest bearing liabilities. however. followed by NBD.009. Table 2-2 : Comparative operating performance of UAE Banks in 2004 (Amounts in AED 000) Interest Income Interest Expense Net Interest Income Non-Interest Income Provisions for loans / impairment of inv. Comparative efficiency indicators Profitability High profitability despite adverse interest rate movements . The combined share of these 5 banks was 73.163.956.177) 537.636 14.940 (568. In spite of the abundant capital and the highly competitive industry.121) 100.639.539 1. Global Research.619 (487.919 (236.316 UNB 826. The yield on interest earning assets as well as the cost of interest bearing liabilities hardened for most banks during the year. NBD and ADCB.705) 927.4% and an average RoAA of 2.024 (26.Global Research .167.980 (143. the top 5 banks in 2004 were NBAD.033 (606.533) 351.4% of that of all the 12 banks put together in 2004.798 (456.010) 452.565 (65.200.810) 846.910 122.137. They were followed by NBAD.763) 614.761 188.913) 280.127 384.656 (363.733) 244.777 (177. ADCB and EBI. EBI. SIB.909 452.584) NBAD 1.651.055 (37. 10 UAE Banking Sector May 2005 .220 (40.506) 461.544) 341.653 972.028 1. MASQ.171.470) 723.909 865.713 800.8%) than they did of the interest income (66. NBD.033.016) 305.135) 688.445 130 FGB 482.594 ADIB 425.049 137.171) 137. EBI and ADIB.111 DIB 1.033 461.138.784 855. vis-à-vis in 2003.985 (88.281 (35.819) 122.338 (341.933) 839.384.011 202. DIB and NBAD.. which together accounted for 72.3% share of the total income in this category in 2004.670 (383.546 129. followed by NBD.716) EBI 1.994 (312. the top 5 banks in 2004 were NBAD.673 1.625) 796.940 244.408. Thus.612 (558.208 607.4% in 2004. the top 5 banks had a larger concentration of the interest expenses (72.9% of the total non-interest income of the 12 banks.049 CBD 398.984 (151.810 (6.480 (139. The combined net profit of these 5 banks was 71.076 1.967) 177.027 (6.036) MASQ 1.432 Source: Company Annual Reports.759) 1.316 71. DIB. ADCB and MASQ.. On the other hand.783) SIB 115.438 26. The 12 UAE banks had an average RoAE of 17.552 1.310.929) 1.111 351.304) 71.555 (57.589) 817.070 306.727 1. MASQ and EBI led the pack with 19.975 311.. UAE banks have been successful in maintaining high levels of returns..081 822.556) 533.692) NBD 1.UAE Global Investment House Interest expenses-wise.160 84. But.586) 88. The highest yield on interest earning assets was earned by MASQ.620 (58. It is worth noting that two of the three Islamic banks in UAE – ADIB and SIB – figure among the five with the lowest cost of interest bearing liabilities.033 (556. Non-interest income-wise.729 (157.077 64.476 (946. The high profitability has been maintained thanks to the favorable interest rate environment.8% of the total interest expenses of the 12 banks.1% and 18.276 (352.354) 824.068) 815.644 (186.903) 282.

8% 49.6% 88.0% 2.9% 2. the consumer segment of the UAE market is not fully penetrated. entering into new areas of businesses and packaging their existing products in more attractive ways.3% 4. Table 2-3 : Comparative efficiency indicators of UAE Banks in 2004 . Retail banking was particularly active.3% 2.5% 31.8% 36.8% 26.4% 21.6% 2. Abu Dhabi Islamic Bank (ADIB).6% 117.4% 29.5% 95.4% 103.9% 14.1% 11.4% 2.1% 69.4% 24.6% 2. with competing banks offering customers a range of incentives from free air tickets and raffles to dream homes and holidays.5% 33.7% 3.1% 1.7% 25.9% 25.4% 2. Several banks also took major steps in the leasing business.5% 2. MASQ and FGB.3% 53.8% 89.9% Source: Company Annual Reports. the top 5 UAE banks with the highest gross loans to customers’ deposits ratio in 2004 were EBI (138.0% 34.1% 60. resulting in robust growth of the non-interest income.8% 18.1% 17.0% 36.5% 87.1% 37.1% 2.3% 4.5% 2.6% 21. May 2005 UAE Banking Sector 11 .9% 54.5% 27.4% 2.0% 20.7% 39. Commercial Bank of Dubai (CBD) and Dubai Islamic Bank (DIB).8% 15.7% 4.0% 47.2% 2.UAE Global Investment House In spite of being a competitive market with a large number of banks in the country.4% 47.2% 23.5% 3.0% 57.6% 2.9% 3.6% 17.2% 4.5% 125.7% 2.7% 88.1% 17.7% 36.4% 2.7% 20.3% 23.5% 44.3% 13.0% 56.5% 20.8% 15. The RoAA of BS was 4.0% 14.5% 11.2% 2.0% 18. EBI. The top 5 banks in terms of RoAA in 2004 were BS.3% 1.4% 30.7% 44.4% 21.4% 94.4% 12.5% 89.1% 4.3%).5% 2.7% 3.8% 3.5% 93.4% 87.6% 5. which was followed by Sharjah Islamic Bank (SIB).4% 103.0% 1.7% 22.3% 93.9% 23.0% 99.9% 19.2% 2.3% 11.5% 36.6% 64.6% 2.3% 12.3% 40.2% 3.3% 28.8% 1.7% 24.4% 2.2% 17.Global Research .5% 0.3%.5% 13.6% 31.0% 0.2% 1.4% 5.7% 19.1% 49.4% 2. The result of all this was a sharp increase in fee income for many banks.2% Liquidity Indicators Gross Loans / Deposits from Customers Customer Deposits / Total Deposits Capitalisation Indicators Capital Adequacy Ratio Equity to Total Assets Equity to Gross Loans 12.6% 35.9% 97.4% 5.4% 3.0% 3.0% 8.4% 2.5% 14.3% 22.6% ADIB BS CBD DIB EBI FGB MASQ NBAD NBD SIB UNB Profitability Indicators ROAE ROAA Interest Exp / Interest Income Interest Income / Avg Int earning assets Interest Exp / Avg Int bearing liabilities Net Spread Net Interest Margin Non Interest Income / Operating Income Dividend Payout Ratio 8.4% 33.2% 48.8% 20. Liquidity On the liquidity front.2% 22.9% 91.3% 19.3% NA NA NA 9.1% 8.6% 2.1% 35.8% 43.6% 39.1% 138.3% 68.6% 16.4% NA NA NA NA 18.2% 6. Banks were quick to cash in on this opportunity as they focused on diversification.7% 33.Part I (Amounts in AED 000) ADCB 18.8% 24.1% 4.7% 1. CBD.8% 43.6% 10.9% 36. Mortgage finance was also a new growth sector as the booming property sector brought in more and more homebuyers.3% 50.0% 45.9% Efficiency Indicators Cost to Operating Income Staff Expenses / Operating Income 30.7% 1.4% 2.0% 46.4% 37.3% 87.6% 2.2% 83.8% 4.9% 16.9% 90.9% 11.1% 30. Global Research.3% 1.6% 24.7% 79.2% 49.0% 21. Good performance in a scenario of favorable interest rate movements was enhanced by a few innovative steps taken by banks.8% 2.8% 3.7% 34.0% 1.3% 14.4% 4.3% 3.6% 2.2% 2.3% 30.7% 4.

All of them had CARs of above 10% at the end of 2004. NBD. overtaking Egypt. NBD and UNB. This increase allowed UAE gain the status as having the second most capitalised banking sector in the Arab world. banks in the country have also bolstered their capital base in the recent past. Apart from the short-term nature of the deposit base. to be able to face growing domestic and global competition. While BS had the least number of employees (148) among the 12 banks. This results in a maturity mismatch. It was followed by NBAD. though. FGB. For the basket of 12 banks covered under this Report. Previously. With the size of the assets increasing rapidly. that BS’ low operating income per employee was driven more by its really low number of employees rather than by a high profitability. It could be expected to be high for 2004 as well. while individual deposits too are highly concentrated. Capital adequacy Exceeds local as well as international regulatory requirements . FGB. the top 5 banks were BS. NBD had 1. according to the IMF.196 employees. while the system-wide CAR exceeded 18% at the end of 2003. which helps the system to tide over temporary problems associated with liquidity or credit quality. NBAD and DIB. however. Medium and long term deposits are practically non-existent in the country. after Saudi Arabia. EBI had the highest CAR among these 5 of 18. These are ADCB. thus making the funding base volatile and vulnerable to external influences. are plugged to some extent by the large capital base. substantial liquid assets and rolling over of deposits at maturity. These mismatches. only 5 banks have provided their CARs in their respective Annual reports. All 46 banks operating in the country met the minimum CAR requirement. banks in the country had solely relied on the strong earnings and moderate dividend payments to build their capital. another concern is the high concentration of deposits among a few accounts. It is believed that Government along with the private sector accounts for a high proportion of the total deposits. it should be noted that most of deposits are of the shorter term. Bank of Sharjah (BS) had the least costs as a proportion of operating income of 22. EBI.. NBD. Most of the banks comfortably exceed the regulatory minimum capital adequacy requirement of 10%. MASQ and NBAD. thereby.UAE Global Investment House However.Global Research .7% during the year. thus adding to the weakness. UAE banks seem adequately capitalised. and allocating a part of their profits to the reserves. DIB’s higher operating expenses compared to ADCB’s led to the former having lesser net profit per employee than the latter. FGB. the top 5 banks were Bank of Sharjah (BS). The bulk of the increase came from the national banks issuing new shares to subscribers. making it difficult for banks to engage in financing projects with long gestation periods. thus putting banks at some risk. Operating efficiency In terms of operating efficiency.. In terms of operating income per employee. NBAD and ADCB. In terms of net profit per employee. ADCB. 12 UAE Banking Sector May 2005 .6%. indicating.

729 BS 3 148 177.617 545.898 27.004.991 839. correspondent banking centres.138.159 6.733) (568.890.435.797. EBI.977.653 461.707 17.942) (231.316 71.064) 7.054 223.010) 71.293 31.728 18.607 (217.067.570.743 888.357 9.941.000 1.660 941.475 16.392 2.707.028 4.619.649 3.658.288.656 384.131 24.111 723 (251) 472 472 15.566 2.087 2.238.266 461.417.313 3.824.354 11.393.974.857 7.166) 2.353.482 35.171) (186. Dubai Islamic Bank (DIB).789.769.404 244.786 787.097 17.713 800.016 20.033 1.924 452.419 1.089. ADCB and EBI.830 385.030 2.432 768 (310) 458 409 17.454.808. Bank of Sharjah was the leader at AED45.606 257. domestic branches.839 1.813.643 Interest Bearing Liabilities 32.Global Research .194.558 10. Estimated no.111 351.532.467 855 (253) 602 589 15.119 791.277.912 (181.2004 4.054) (74.435. of Branches No.331.862 1. of Employees Operating Income (Net of Provisions) Operating Expenses Operating Profit (Net of Provisions) Net Profit Operating Income Per Employee Operating Expense Per Employee Operating Profit Per Employee Net Profit Per Employee Net Profit Per Branch ADCB 38 1.594 833 (250) 583 586 21.195 21.197 (271) 926 926 45.919 824.488.948.269 3.172.552 1.748.192 331.278 2.071.334 Shareholders Equity . including overseas branches and all other forms of operational presence.775 1.904.122 34. representative offices.430.454 604.366 2.060.533.880 1.333 1.835 NBAD 74 1.396 23.944) (691.644 DIB 20 973 EBI 30 2.713 10.120.687 3.933.080.851.216 91.343 12.366 1.760 37.126 25.387 35.506) (606.163.773 2.308.640 2.798 751.000.940 244.942 177.687.407.312 38.417 16.796 25.673 1.454.076 1.448 3.216.279 27.142.304) (236.196 5.222.199 1.534.799 111.964 (793. Global Research.033 847 (373) 474 474 23.Part II (Amounts in AED 000) No.495 17.096) (913.238 16.146 5.651.153) 6.109 364.088 201.172 FGB 7 340 MASQ 43 1.334 17.142.683 351.523 1.568.250.574.824.539 1.366.800 31.629 (58.670.484.443 4.900 2.845. overseas branches.047 45. May 2005 UAE Banking Sector 13 .620 UNB 26 928 688.641 1.285.003) (139. however.192.983.240.121 664.371.2004 1.258.504 3.816.771) 3.777 44.744 26.162 183.628 28.169 9.836 1.179. EBI and CBD.909 452. Sharjah Islamic Bank (SIB).238.361 38.647.682 (40.194 31.910 678 (381) 297 297 7.450 1.UAE Global Investment House NBAD had the largest number of branches.090. It is noteworthy that the top 3 banks in this category are Islamic banks.455 2.114.477.858.861 21.874 2.666 2.332.671 405.220 CBD 23 744 537.393.033.992 34.462 3.811.625) (157.629 12.533) (363.714.477.000 236.371 927.471.775 927.303 389.274 7.633 (326.699.562 12. viz.569.435.819) 796.421 40.267.695 (59.372 ADCB ADIB BS CBD DIB EBI FGB MASQ NBAD NBD SIB UNB 26.829 3.127 755 (279) 476 448 32.933) (487. etc. the top 5 banks with the highest proportion of assets in gross loans and advances were Abu Dhabi Islamic Bank (ADIB).com. Table 2-4 : Comparative efficiency indicators of UAE Banks in 2004 .052 972.319) (713.516.135 29.386 1.296 46.529 90.250.796.300 11.931.727 1.428. Branches include all forms of operational presence.724.706 36.877.481.600 3.423 11.137.338 ADIB 16 414 280.832.232 1. Zawya.989.357.809 1.429 4.068 122. It was followed by MASQ.130. Assets and liabilities As for the deployment of assets.058 38.568 1.979 9. NBD.995) (724.020.821 1. Global Research. DIB and NBD.000 905.684 27.284 Liabilities Due to banks Customer Deposits Long term loans Paid-Up Capital Reserves 3.058.389 14.332 529. based on 2003 figures.909 742 (254) 488 488 17.687.131 (411) 720 720 34.696) 25.630 126.815 2004 8.734.883 30.384.049 137.376 291.101.588 24.000 165.762 Source: Company Annual Reports.134.066 4. In terms of net profit earned per branch.409 7.864 24..705) 137.006.432 25.500.372.896 904.7mn per each of its three branches.832 605.619 1.079.026.932 NBD 41 1.245 2.014 3.113.639. Table 2-5 : Comparative balance sheets of UAE Banks in 2004 (Amounts in AED 000) Assets Cash & Central Bank Balances Gross Loans & Advances Less: Provisions Net Loans & Advances Investments Net Fixed Assets Interest Earning Assets .231 6.210 2.306.910 122.2004 Total Assets .179. of employees for ADIB and DIB.469 1.158 (382) 776 776 22.532.372.787 47.334.176.196 SIB 9 325 129.151. It was followed by FGB.876.267 179.828 56.765 174.178 5.613.316 399 (179) 219 219 7.564 1.049 1.480 (341.940 1.420 Source: Company Annual Reports.679.515 3.444.107.114 750.000 3.929) (456.684 250.631) (825.655 1.500 3.699 11.408.

The average NPLs to gross loans ratio for eight of the banks for which the NPLs data is available witnessed a decline to 3.. like the crash of the Kuwait stock market in late 1980s. UAE has been a late mover compared to other GCC countries like Saudi Arabia. 14 UAE Banking Sector May 2005 . though it should be noted that most of its bad loans relate to local exposures that are covered by an indemnity from the government. since courts sometimes view a bank unfavourably for trying to collect debt that had previously been written off..114.300 11.3% 109. ADCB and ADIB were the top 5 banks with the highest proportion of customers’ deposits in the total liabilities at the end of 2004.250.944) (691. banks substantially increased their investments in marketing initiatives. High exposure to construction sector and defaults in transport and real estate exposures have also contributed to the inferior asset quality.020. Most banks expanded their ATM network while a few have expanded their branch networks too.9% CBD DIB EBI FGB MASQ NBAD NBD SIB UNB 26.995) (724.989.529 66.0% NA NA NA 7.728 18.352 4.607 (217.079. There is an increasing willingness on the part of the banks to enter into long-term big-ticket financing deals.631) (825.166) 2.724.0% 120. either alone or in consortia with other banks. FGB.912 (181. There are a few clear trends seen in the performance of banks in the last two years.532.387 35. As mentioned before.216 NA NA NA 805.475 16. it is also comforting to note that local banks have been successful in recovering some of the bad debts in the past by selling land and property received as security in some of the emirates.706 36.054) (74.5% in 2004 from 9.771) 3. This is due to the reluctance of the banks in UAE to write-off old debt despite providing fully for them. Asset quality NPLs on a decline .201 1.096) (913.428.000 2. as against 178.417 16.319) (713.238 16.8% at the end of 2004. Global Research.086.978 2.454 NA NA NA NA NA NA 572. Apart from the reassuring coverage.013 2.153) 6.734. though in terms of electronic banking.5% 178.3% in 2003. The long-term vision of banks in the country is further apparent from the financing contracts that they have entered into.3% of MASQ. the sharpest decline among all the GCC countries in 2004. NBD.9% 2. DIB.851.UAE Global Investment House On the funding side..0% 276.0% in 2004.. Rapid growth of credit in the last two years has been accompanied by an improvement in asset quality of banks in UAE.2% 88.142.131 24.714..151.126 25.064) 7.8% 38.7% 113.933.238.619. which was the highest among the lot.354 11. Among these eight banks.628 28. Banks seem to have built up sizeable provisions in view of their rising retail credit book.633 (326.176.488.858.942) (231.3% 775.Global Research ..862 298.5% 463. UAE banks still have higher non-performing loans than banks in other countries. Table 2-6 : Non-Performing Loans of UAE Banks (FY 2004) (Amounts in AED 000) Gross Loans Provisions Net Loans Non-performing Loans NPL / Gross Loans Provisions / NPL ADCB ADIB BS 2.900 2. A substantial portion of the bad loans relate to incidents of distant past.6% 83.931.696) 25.684 27.964 (793.670.551 3.179.000 7.845.5% Source: Company Annual Reports.1% 92.097 17.8% 6. Almost all the banks have been creating substantial provisions on their retail loans. ADCB had the highest NPLs to Gross Loans ratio of 7.516.000 4.334 17. Banks increasingly resorting to long-term financing . ADCB also had the lowest NPL coverage ratio of 38. However...695 (59.

0% ADIB CBD 2. ADCB.9 CBD 160. NBAD.3 DIB 151. 2005 prices and end-2004 book value.2 5. 2005.0 3. In terms of dividend yield.9% SIB 2.5 5.1 38.2 1.0 1.9 37.1 SIB 12.3 26.4 37. Chart 2-1 : Market Capitalization of UAE Banks* FGB 6. Global Research.UAE Global Investment House Comparative valuation In terms of comparative valuation of the 12 banks.5 35.0 6.9 24. 2005.4 0.4 2.9 8. * Price as of April 24. It was followed by CBD.0 1. NBD had the highest dividend yield of 4. Excellent performance of UAE banks has been rewarded by stock markets.4 6.9 NBD 226.2 9.0 17.3 4.1% NBD 9. ADCB. Table 2-7 : Comparative Valuation of UAE Banks in 2004 (Amounts in AEDs) Price* EPS BVPS P / E (x) P / BV (x) Dividend yield (%) ADCB ADIB 239.2 2.5 0. It can be seen from the Chart below that the top five banks account for 68% of the total banking sector market capitalization as on that date.0%.8 FGB MASQ NBAD 41.7 44.1bn as on April 24. The sector has given high return over the last 2 years .4 58. As on April 24.8% DIB 8. MASQ and Bank of Sharjah. as on April 24.0 46.1 38.3 6. FGB.4 230.4 5.1 4.7 1.6 UNB 17. Market capitalization of the 12 banks stood at AED254.0% UNB 7..0 1..0 1.8 0.5 Source: Company Annual Reports.0 6. the weighted average P/BV of the 12 banks was 7.0 0. EBI was the largest in terms of market capitalization.4 1. at the April 24.0% MASQ 7. followed by NBAD.0% BS 1.2 37.3% NBAD 17.2 72.0 4.1 EBI 65.1% in 2004 thanks to its 60% cash dividend in 2004..8% Source : Reuters * For 12 Banks.5 2.3 2.4 24..4 3.4 7. May 2005 UAE Banking Sector 15 .7 BS 4.5 58.8% 4..4 3.0 9. with an annual return of 43% in the last two years. DIB and UNB had a P/BV higher than the weighted average as on that date.1 24.6 44.6 4.6 3. NBD and DIB.6% ADCB 14.2 14.9 0.8 8.6% EBI 18.7 10. 2005.4 34.4 65.1 4. Banking sector market value appreciated by 21% in the year ended December 2004.0 1.9 4.3 2.Global Research .0 9. 2005 P/E and P/BVPS after full dilution.

Share in total assets vs. FGB. 2. CBD and BS saw gains in their RoAAs in 2004 from 2003. such as NBD. NBAD. ADCB. A majority of the banks (Nine out of the 12 UAE banks being covered in this Report) gaining RoAAs in 2004 is a reflection of a combination of factors – the increasing spreads. There have been similar increases in respect of the other four banks as well. and lower loan loss provisioning during the year.7% in 2004 from 12. the total market size has been assumed to be the aggregate of all the 12 banks under coverage in this Report. While NBAD leads the pack across all parameters. UAE Banks . up from 2.4% in 2004. interest yields Share in total gross loans vs. MASQ.6% in 2004 from 18. DIB. FGB and ADIB gained market share in terms of total assets in 2004. followed by other leading banks. The weighted average RoAA for the 12 UAE banks being covered in this Report was 2. ADCB. an increasing share of the non-interest income (primarily fees and commissions income) in the total operating income. from their shares in 2003. witnessed shifts in their competitive positioning with respect to each other on various parameters. and Share in total deposits vs. While NBAD’s market share of total assets went up marginally to 18. DIB. loan loss reserve percentages.0% in 2003. RoAA Share in total gross loans vs. 16 UAE Banking Sector May 2005 . NBD.Shifts in Competitive Positioning The 12 UAE banks covered in this Report have. EBI. each of the banks has seen its competitive position shift over the past three years (2002-’04). Some of the parameters we have used for this analysis include: 1. cost efficiencies. UNB. We have analysed these shifts with respect to a few parameters. We analyse the shifts in competitive positioning amongst the 12 UAE banks under each parameter as under: Share in total assets vs.1% in the previous year. The remaining six banks have either remained steady at their 2003 levels or lost market shares during the year. over the years.4% in 2003. interest costs For this analysis. RoAA Banks like NBAD. On the other hand. 4. EBI and ADCB.UAE Global Investment House 3.Global Research . ADCB’s share increased to 12. 3.

On the other hand. UNB. when the shifts in market shares are juxtaposed with the changes in the return on average assets (RoAA) for these banks during the period. NBAD.5% 2.0% 0. The RoAA of DIB and FGB too increased in 2004.6% and ADIB’s share increased to 5. The remaining nine banks either remained steady at their 2003 levels or lost market shares during the year.4% in 2004 from 1.3% in 2004 from 1.5% 0% 2% 4% 6% 2002 8% 10% 2003 12% 14% 2004 16% 18% 20% Share of Total Assets Source : Global Research But.2% in 2004 from 2. While UNB’s market share of total gross loans increased to 8. went up to 2.0% 3.0% 1. ADIB saw its RoAA decline to 1.. Share in total gross loans vs. ADCB’s RoAA.2% in 2003. EBI and ADCB gained in market shares during 2004.0% 2. EBI.4% from 7. similarly.5% 4. the picture is different.4% in 2003.9% in 2003. MASQ. ADCB.6% from 5. NBD’s share increased to 8. DIB.1% in 2004 from 1. CBD. the other two market share gainers – UNB and ADIB – gained market shares in 2004 from 2003 at the cost of an erosion in their respective RoAAs during the period. NBD and ADIB gained market share in 2004. for example.5% 1. While UNB’s RoAA declined to 2.8% in 2003.6% in 2004 from 6.Global Research . Most of the UAE banks gained in Yields in 2004 as a result of a favorable interest rate environment. DIB and FGB score well.5% BS CBD EBI SIB FGB UNB DIB ADIB MASQ ADCB NBD NBAD RoAA 3. It is noteworthy that none of the top 3 banks in terms of gross loans shares.UAE Global Investment House Chart 3-1 : UAE Banks . from their shares in 2003.Shifts in Competitive Positioning (2002 . The RoAA of NBAD.4% in 2003.2%). FGB and BS saw gains in their yield on interest earning assets (Yield) in 2004 from 2003. interest yields In te