Equity | Qatar | Banks

11 April 2011

Change of recommendation

Qatar National Bank
No sign of weakness
QNB's results beat our expectations in terms of growth and profitability, in spite of regulations putting the Islamic Business into run-off. As a result, we upgrade both our forecasts and recommendation after recent price declines. In addition, we update our target price and per share data for the 1Q11 30% bonus issue.
Key forecasts
FY09A Reported PTP (QRm) 4,191 4,202 8.07 8.04 2.37 17.90 3.97 1.64 25.10 FY10A 5,718 5,704 11.00 11.00 3.85 13.10 3.29 2.67 28.00 FY11F FY12F FY13F

Buy (from Hold)
Target price

QR161.14 (from QR215.89)
Price

QR144.00
Short term (0-60 days)

n/a
Market view

No Weighting

7,234 % 9,484 % 10,912 % 7,215 % 9,459 % 10,884 % 13.90 & 18.20 & 20.90 & 13.90 & 18.20 & 20.90 & 4.06 & 10.40 1.84 2.82 5.66 % 7.91 1.58 3.93 6.40 % 6.88 1.37 4.44

Price performance
(1M) Price (QR) Absolute (%) Rel market (%) Rel sector (%)
Apr 08 160 140 120 100 80 60 40 QNBK.QA QE Index Mar 09

Reported net profit (QRm) Reported EPS (QR)
(3M) 150.6 -4.4 -0.5 -1.2
Mar 10

(12M) 106.9 34.7 18.5 11.9

138.0 4.3 -7.5 -6.9

Normalised EPS (QR) Dividend per share (QR) Normalised PE (x) Price/book value (x) Dividend yield (%) Return on avg equity (%)
Use of %& indicates that the line item has changed by at least 5%. Accounting standard: IFRS Source: Company data, Rasmala forecasts

23.20 % 20.30 % 23.50 %
year to Dec, fully diluted

Market capitalisation

QR73.28bn (€13.92bn)
Average (12M) daily turnover

Strong growth continues We were concerned about the impact of Islamic lending restrictions, given 20.5% of year-end 2010 lending was Islamic. QNB itself has been guiding that it could absorb the impact of these regulations, converting some lending and growing in other areas, and the 1Q11 results back this up. Consequently, instead of downgrading our 2011F growth numbers, we upgrade our gross lending forecast to growth of 20.9% from 19.6%, which incorporates a buffer in case conversion becomes more challenging later in the year. Operating profits 12% ahead of our forecast Headline and attributable income of QR1,707m was up 10.1% qoq, handsomely beating our forecast by 4.2%. Net interest income was the main source of outperformance, with QNB holding on to more of its 2H10 spread increase than we had expected. Non-interest income was also strong, although declines in the revaluation reserve suggest this was only booking previously unrealised gains. With costs in line with our forecasts, the 10% revenue beat was increased to a 12% operating income outperformance. Asset impairments minor, but slightly above the anticipated trend This was partially offset by higher provisioning, albeit amounting to a still very low annualised rate of 53bp, but prompting us to revise our 2011F forecast to 38bp from 20bp. Asset quality has not quite levelled off, with NPLs rising to 79bp from 77bp a quarter earlier. However, with coverage rising to a new peak of 155%, this is not an area of concern.

QR20.84m (€7.36m)
Sector: QE Bank Index RIC: QNBK.QA, QNBK QD Priced QR144.00 at close 10 Apr 2011. Source: Bloomberg

Analyst
Raj Madha
United Arab Emirates +971 55 224 8032 raj.madha@rasmala.com

Dubai International Financial Centre, The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates www.rasmala.com

Revisions mostly for bonus issue We upgrade our net profit estimates slightly for 2011-13, but raise the discount rate slightly to reflect rising bond yields, the impact of regulations and the geopolitical risk to overseas expansion. In terms of impact, these net each other off, leaving our target price affected only by the bonus issue and cash dividend. Given recent price declines, we upgrade our recommendation to Buy. We calculate a cum-rights target price of QR161.1, equivalent to an ex-rights value of QR148.9, following the QR12bn rights issue scheduled for 24 April. Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic alliance with Rasmala Investment Bank Ltd.

908) 2011F (10.001 509 161.174 Model numbers ROTCE2 12% Growth 5% Capital req'd 144.Valuation Table 1 : DCF valuation Stage 1 (2010-2013F) Explicit dividends Net CF to shareholders NPV Stage 1 (4.440 Total NPV Stage 1 (2010-2013F) Stage 2 (2014-23F) Stage 3 (2024F+) NPV Shares (m) Target price (QR) Share price (QR) Upside/(downside) XR target price Source: Company data.50% 1.50% 10.256 3.174 82.692 Model numbers ROTCE1 23% Growth 17% Capital req'd 30.865) QRm 2010 1.31% Qatar National Bank | Investment View | 11 April 2011 2 .367) 2012F 2. Rasmala forecasts COE (4.411 53.882 5.049 RWA 198.833 2013F 3.91 US RFR Country risk spread Sector risk spread Stock spread Discount rate 3.865) 33.957 (2.00% 2.14 144.256 Stage 2 (2014-23F) Modelled dividends Excess capital Modelled dividends NPV Stage 2 23.692 53.31% 3.851 Stage 3 (2024F+) Terminal value 2023F NPV Stage 3 190.00 12% 148.655) (5.616 21.609 33.

2 223382 112003 n/a -1572 n/a FY11F 158860 77841 0.8 0.13 0.7 179329 105249 n/a -923.00 110. Rasmala forecasts FY09A 105249 4202 96056 105249 9193 919.5 5029 -1957 0.2 0.00 0.6 265751 135105 n/a -2271 n/a FY12F 190312 89447 0.00 0.00 0.0 10603 309.0 5704 0.5 2.00 7509 -505.00 5718 5704 FY11F 7123 1896 9019 -1511 n/a 0.00 12722 10655 17870 0.6 n/a FY10A 131696 48735 0.00 9033 265751 193809 23769 7494 225072 39882 0.0 -1.00 22280 555.00 46263 925.00 0.00 10884 -3256 0.00 9484 -218.00 149. Rasmala forecasts FY09A 3726 1564 5291 -1107 n/a 0.00 0.00 6038 -536.00 FY10A 112003 5704 105249 112003 6755 675.00 -1204 2078 0.9 -2.7 0.00 4184 -285.3 0.00 10912 -251.00 FY12F 157959 9459 135105 198851 63745 0.00 0.7 7215 0.00 -1957 3072 0.00 4191 -113.00 225.00 year to Dec Qatar National Bank | Key Financial Data | 11 April 2011 .Income statement QRm Net interest income Non-interest income Total income Operating costs Goodwill (amort/impaired) Other costs Pre-prov operating profit Provisions charges Post-prov op prof Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Preference dividends Other post-tax items Reported net profit Tot normalised items Normalised PTP Normalised net profit Source: Company data.00 0.00 10950 -347.00 18481 190.9 -2.00 9524 -321.9 7003 230.00 14474 371034 276563 28734 11000 316296 53665 0.00 118.0 13.62 0.00 39882 797.00 9039 223382 165470 26481 8596 200547 22280 0.3 316894 157959 n/a -2871 n/a FY13F 228564 105140 0.00 7234 7215 FY12F 9406 2445 11850 -2326 n/a 0.00 0.74 0.2 9459 0.8 10884 0.9 5501 216.00 -3256 7628 0.00 9459 -2882 0.00 0.00 10912 10884 year to Dec Balance sheet QRm Net loans to customers Other int earn assets Goodwill Oth non-int earn assets Total assets Total customer deposits Oth int-bearing liabs Non int-bearing liab Total liabilities Share capital Reserves Total equity (excl min) Minority interests Total liab & sh equity Risk weighted assets Est non-perf loans Specific provisions General provisions Source: Company data.2 4191 4188 FY10A 5675 1655 7330 -1292 n/a 0.00 -2882 6577 0.28 0.00 7234 -167.00 7152 179329 125872 29603 5182 160657 18481 0.1 3899 292. Rasmala forecasts FY09A 108783 53514 0.7 9203 281.0 4202 14.00 53665 1073 371034 198851 n/a -3570 n/a year ended Dec Capital QRm Risk weighted assets Reported net profit Opening risk assets Closing risk assets Change in risk assets Capital required Free capital flow Ordinary dividend paid Share buy back/spec div Equity / preference issue Cash flow from financing Net capital flow Tier 1 capital Tier 1 capital ratio (%) Source: Company data.3 3282 -1204 0.00 9484 9459 FY13F 10885 2911 13796 -2846 n/a 0.3 0.3 0.00 FY13F 198851 10884 157959 0.00 5718 -133.00 7215 -2067 0.00 -157959 0.00 196.00 FY11F 135105 7215 112003 135105 23102 0.00 14297 316894 234084 26185 9436 269706 46263 0.

5 8.QR76.1 13.3 7.00 0.1 35.31 0.82 31.85 4.9 4.6 0.609 33.5 13.4 35.6 82.00 0.25 21.1 31.851 Stage 3 (2024F+) Terminal value 2023F NPV Stage 3 190.46 2.07 11.9 0.88 6.97 15.50% 10.73 31.1 4.4 1.1 20.00 0.22 11.35 16.83 28.4 3.50% 1.90 15.957 (2.57 7.6 32.9 3.00 0.00 0.1 20.38 n/a 8.64 30.0 5.7 2.28 3.50 2.09 25.70 14.0 1.66 20.1 3.2 33.1 3.7 3.5 3.0 15.62 13.43 9.6 19.67 2.6 3.0 1.8 17.440 Total NPV Stage 1 (2010-2013F) Stage 2 (2014-23F) Stage 3 (2024F+) NPV Shares (m) Target price (QR) Share price (QR) Upside/(downside) XR target price Source: Company data.2 15.882 5.00 0.98 20.58 n/a 3.6 17.48 8.2 4.8 3.00% 2.84 20.85 3.1 19.5 13.00 0.2 3.31% Qatar National Bank | Performance and Valuation | 11 April 2011 .9 8.00 Source: Company data.9 36.00.4 3.28 2.12 4.0 14.53 12.Standard ratios Performance Non-int inc/gr op inc (%) Cost/income (%) Costs/average assets (%) Net income growth (%) Net cust loan growth (%) Cust deposit growth (%) Net interest margin (%) Return on avg assets (%) Return on avg equity (%) RORWA (%) QNB FY09A FY10A FY11F FY12F FY13F 29.06 5.0 1.0 8.1 3.52 25.29 2.4 90.QA .26 0.6 0.908) 2011F (10.49 3.31 n/a 9.93 15.049 RWA 198.17 year to Dec year to Dec year to Dec Valuation Normalised EPS growth (%) Reported PE (x) Normalised PE (x) Price/book value (x) Price/adjusted BVPS (x) Dividend yield (%) 12.89 3.44 14.5 6.38 2.6 16.89 Comm Bank of Qatar FY11F FY12F FY13F 30.43 1.1 2.8 16.1 7.865) QRm 2010 1.51 1.67 12.66 6.5 86.256 3.48 1.29 n/a 2.6 0.37 n/a 4.1 15.QA .91 1.0 16.001 509 161.52 21.3 9.QR58. Rasmala forecasts COE (4.865) 33. DOBK.57 1.0 13.1 17.0 1.84 n/a 2.68 n/a 8.9 18.3 14.9 508.85 n/a 8.7 35.7 0.QR144.8 18.4 9.00 0.44 23.9 508.9 18.54 12.2 20.87 16.91 US RFR Country risk spread Sector risk spread Stock spread Discount rate 3.00 12% 148.9 105.17 0.692 Model numbers ROTCE1 23% Growth 17% Capital req'd 30.411 53.4 33.3 82.3 5.91 3.1 6.42 15.29 2.655) (5.QA .45 n/a 8.5 2.4 21.77 21.00 0.00 0.00 10.9 508.24 18.96 n/a 7.9 14.70 22.15 year to Dec Priced as follows: QNBK.8 20.82 9.37 3.64 36.2 15.51 8.6 14.82 1.6 9.1 18.4 10.692 53.00 0.73 FY12F 26.48 2.87 14.00 0.5 12.73 20.67 26.95 23.00 0.25 2.2 20.6 0.64 36.6 20.40 0.95 16.88 1.9 8.174 Model numbers ROTCE2 12% Growth 5% Capital req'd 144.00 0.16 22.833 2013F 3.64 18.00 0.00 0.62 26.82 Doha Bank FY11F 25.5 20.9 508.00.174 82.5 10.3 43.14 144.256 Stage 2 (2014-23F) Modelled dividends Excess capital Modelled dividends NPV Stage 2 23.1 3.44 7.75 FY13F 26.91 7. Rasmala forecasts Valuation methodology Stage 1 (2010-2013F) Explicit dividends Net CF to shareholders NPV Stage 1 (4.8 12.0 7.52 3.2 8.7 21.5 8.5 1.5 2.05 11.2 5.44 1.31% 3.0 1. COMB.40 3.00 0.34 19.04 year to Dec year to Dec year to Dec Per share data Tot adj dil sh.367) 2012F 2.97 n/a 1. ave (m) Pre-prov prof/share (QAR) Reported EPS (QAR) Normalised EPS (QAR) Book value per sh (QAR) Dividend per share (QAR) Dividend cover (x) FY09A FY10A FY11F FY12F FY13F 508.00 0.0 13.34 year to Dec Solvency Tier 1 capital ratio (%) Total CAR (%) Equity/assets (%) Net cust loans/dep (%) Rep NPL/gr cus adv (%) Tot prov/rep NPLs (%) Bad debts/advances (%) FY09A FY10A FY11F FY12F FY13F 0.4 79.04 2.00 0.38 31.6 17.7 9.04 11.6 3.616 21.0 81.8 78.

The good news is that with the creation or RERA and the possibility of Strata Law. 11 Islamic and 3 mobile) and an international network (branches. The bad news is such a mechanism did not exist. this could change and facilitate the transfer of properties from speculators to real investors. The diversification is backed by a physical presence with 55 local branches (41 conventional. This substantially increases the supplier power for all banks in Qatar. Source: Bloomberg Substitute products 2+ We believe the availability of substitute products (capital markets and wholesale lending) is on the rise. Rivalry 4+ Competition amongst local banks is low in Qatar. in addition to maintaining sector leadership with a lending market share of 41%. Islamic banking. investment banking. fund management.O. with 2009 lagging emerging markets by a fairly wide margin. allowing it to maintain defensive market share. but only at the margin. Barriers to entry 3+ Strong local government ownership in most banks coupled with branch limits for foreign banks keeps barriers to entry high for this sector.qa/english/ Shares in issue 508. Source: Company data Opportunities 3 Market data Headquarters Qatar National Bank Building. A greater concern is the renewed focus from competitors on its core public sector franchise.qnb. Qatar Website http://www. and that may spark greater competition. Over the past decade. Country rel to M East & Africa 150 140 130 120 110 100 90 80 70 60 Apr 08 Jul 08 Oct 08 Feb May Aug Dec Mar 09 09 09 09 10 MarketIndex Jun 10 Sep Jan 10 11 Competitive position Supplier power Average competitive score: 3+ 5+ Broker recommendations 14 12 10 8 6 4 2 0 Buy Hold Sell The lack of significant regulator control allows the banks to change contract arrangements (such as the base rate). Rising oil prices and budget surpluses drove asset prices across the region higher resulting in a realestate bubble that has negatively impacted speculators and the banking system. brokerage and international banking. private banking. It continues to be the primary banker to the Government and the public sector. Bubbles do pop and recover over time if there is a legal system in place that enables the transfer of assets. Al Doha. Threats 2 Geopolitical instability is an issue. Box 1000.9m Freefloat 50% Majority shareholders Qatar Investment Authority (50%) Capitalising on the US$150bn worth of infrastructure projects being executed by the state. Scoring range is 1-5 (high score is good) Country view: Qatar MENA markets are showing characteristics of a text book case of loss aversion.com. 2010A 1% 15% 6% Qata r Europe Othe rs 3% 2% 73% GCC N. Al Corniche Street.Company description Buy Price relative to country 180 170 160 150 140 130 120 110 100 90 80 Apr 08 Jul 08 Oct 08 Feb May Aug Dec Mar 09 09 09 09 10 Price relative to country Jul 10 Nov 10 Apr 11 Qatar National Bank (QNB) was established in 1964 as the country's first bank and is 50% owned by the Government via the QIA. QNB has the most developed international franchise. This is expected given the magnitude of losses investors experienced since 2008. Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse Qatar National Bank | Strategic and Competitive Overview | 11 April 2011 . Weaknesses 4 Loan and deposit market share loss apart from a conservative and protective business strategy (even in the boom time) is considered as the biggest weakness of QNB. QNB has become the premier regional frontier market bank . but it is currently unclear to what extent Qatar will favour its own banking system. However. America Adjustmen ts QNB has an entrenched position in the public sector.a position it needs to turn into cash flow. low growth rates have forced banks to look for growth wherever they can find it. developing other business segments such as HNW retail. Strategic analysis Strengths Average SWOT company score: 4 5 Asset split. In addition. the bank has been relatively successful in diversifying its concentrated revenue base. The country view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team. In addition. but corporate and the public sectors can be more demanding if they were more price sensitive. Customer power 3+ Retail customer power is weak. P. representative offices and associates) spanning 22 countries. with operations across the Arab World and beyond.

On a general basis. is or will be directly or indirectly related to the specific recommendations or views contained in this research report. the target price abstracts from the need to take a view on the market or sector. a 10-year stage of trend forecasts and a terminal stage based on a GGM. the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by RIB or any other person for any loss howsoever arising. as a broker-dealer or investment advisor. In this way. Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. after having taken perceived risks into consideration. these performance parameters should be interpreted flexibly. or any U. damages.S. incidental. TP: QR161. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. This report has not been approved.S. RIB and its group entities (together and separately. It is not tailored to the specific investment objectives. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any securities referred to in the report. either expressly or impliedly. therefore. Disclaimer This report is prepared by Rasmala Investment Bank Limited ("RIB"). the target price will differ from 'fair' value. special. As a result. or non-U.00.Recommendation structure Absolute performance.S. Rec: Buy. consequential. jurisdiction or any other U. Securities and Exchange Commission. "Rasmala") does and may seek to do business with companies covered in its reports. Upside risks are better-than-expected growth from existing projects and increased contribution from international operations.14): We base our valuation on a three-stage DDM: a three-year stage of explicit forecasts. state authority. Although the information in this report has been obtained from sources that RIB believes to be reliable. RIB is regulated by the Dubai Financial Services Authority ("DFSA"). All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. from any use of such information or opinions or otherwise arising in connection therewith. any state securities commission in the United States. We have conducted reasonable research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capital appreciation. directors and officers shall not be responsible or liable for any liabilities. disapproved or recommended by the U. financial situation or needs of any specific person that may receive this report. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. Our investment recommendations take into account both risk and expected return. This research report is prepared for general circulation and is intended for general information purposes only. or punitive damages) arising out of or in connection with the use of this report or any errors or omissions in its content.QA. and. Valuation and risks to target price Qatar National Bank (RIC: QNBK. Readers should understand that financial projections. CP: QR144. RIB products or services are only made available to customers who RIB is satisfied meet the regulatory criteria to be a " Professional Client". Rasmala and its respective employees.S. Performance in this context only reflects capital appreciation and the horizon is 12 months. (2) no part of his or her compensation was. the securities commission of any non-U. RIB is not registered with the U. Downside risk remains increasing competition from new entrant banks resulting in a decline in market share. The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate. losses. regulatory authority. the efficacy of recommendations is a factor in the performance appraisals of analysts. directly or indirectly. Securities and Exchange Commission. Qatar National Bank | Disclosures Appendix | 11 April 2011 . and falling pricing. although the latter is likely to return lower ROEs than the core business. We base our long-term fair value estimates on a fundamental analysis of a company's future prospects. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. RIB does not represent or warrant.S.S. fair value estimates and statements regarding future prospects may not be realized. causes of action. None of these authorities has passed on or endorsed the merits or the accuracy or adequacy of this report. Investors should consider this report as only a single factor in making their investment decision. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value. as defined under the Rules and Regulations of the Dubai International Financial Centre ("DIFC"). we have not independently verified such information thus it may not be accurate or complete. users should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. claims. or proceedings (including without limitation indirect. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently.

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