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Banking
10 April 2011
Industry Update
MENA Banks Top picks
Qatar
Main investment themes
The QAR50bn QCB bond will likely boost earnings and asset growth
The QCB’s January issue of QAR50bn of conventional and Islamic paper (5% coupon, three
year tenor, zero RW) should be a major theme underlying earnings and assets growth in
FY11. The biggest relative gainers are MAR (QAR10bn allocation) and QIB (QAR9bn
allocation), which will see assets rise significantly in Q1: 31% QoQ growth for the former,
19% QoQ growth for the latter. The allocations should also boost earnings and again the
same two banks will likely be key beneficiaries, though DHB should also see a nice boost to
its bottom line. The smallest allocation was given to CBQ (QAR1.5bn), and consequently, we
expect it to derive comparatively smaller benefits in terms of its assets and earnings growth.
Record liquidity supports low funding costs, but should eventually pressure margins
Peak LNG production capacity was reached in Q4 last year. Combined with rising energy
prices in Q1, this means that state liquidity levels are exceptionally high. Deposit growth is
therefore likely to remain exceedingly solid, given the high share of public sector funding in
the banking system at close to 30%. Deposit costs have already fallen substantially YoY in
FY10 – between 50bps and 150bps at our banks – and are likely to remain subdued this year.
It is therefore only a matter of time before asset yields also come under pressure. Thus, we
expect NIMs to remain broadly flat YoY as the asset pricing lag effect begins to weigh on
margins by H1.
Asset quality remains solid; DHB and CBQ will likely charge lower risk costs
NPLs have never been a defining issue for Qatari banks, with QNB, QIB and MAR at or below
1% NPL. CBQ and DHB, on the other hand, did see a rise in non-performing loans in FY09/10,
and have paid the price in terms of risk costs. CBQ’s risk costs already dropped significantly
in FY10, but we see scope for the bank to further lower these by around 10bps to 40bps of
net loans. Investment provisions should also fall, contributing to better earnings. For DHB this
trend is likely to be more pronounced – we expect it to lower its risk costs by around 20bps
to 90bps of net loans. Lower investment provisions should also help to boost earnings
further. We believe lower risk-cost dynamic will not impact QNB, MAR or QIB, as we think
these names are elsewhere on the asset quality cycle.
Top picks
Our top picks in the sector are QNB and MAR. In essence, we view Qatari banks as a play on
state liquidity and spending. Proximity to the government in terms of ownership and loan
book bias has historically been a good guide as to the direction of governmental flows. This
premise underlies our preference for these names on a thematic basis, as these banks enjoy
the highest government ownership and the highest bias to the public sector in their
respective loan books. The implication of the mix of ownership and proximity to government
is seen in deposit volumes, asset growth and asset quality – on all counts, both QNB and
MAR score exceptionally well.
Saudi Arabia
Main investment themes
How rapidly will credit growth recover?
Loan growth has been extremely weak since mid 2008, but growth rates have steadily
improved since September 2010; credit growth now stands at 5% versus the long-term trend
growth rate of 12%. While retail credit growth has been running at high single-digit levels,
corporate credit (which accounts for two-thirds of system loans) has been broadly stagnant.
We believe improving corporate profitability, strong sales growth and a supportive macro
environment (high oil prices and strong fiscal support), should (over time) lead to a robust
recovery in corporate credit demand.
Top picks
Al Rajhi Bank is the largest retail bank (hence being exposed to current positive consumer
credit trends) with the size and capital strength to participate in public infrastructure projects.
We believe above average profitability and superior loan quality support high valuation
multiples.
Riyad Bank is one of the largest banks in the Kingdom, well capitalized and with strong links
to the public sector. It should be well placed to benefit from growing infrastructure
investment and should also be able to boost market share in the growing retail banking
segment, where the bank is now significantly under-represented.
Least preferred
Bank Albilad is a 2005 start up, which is winning market share as the franchise builds critical
mass. However, the bank’s cost efficiency significantly lags that of its peers (65% cost-
income ratio), while loan quality (5.8% NPLs/loans) and provisions coverage (89%) also
compare unfavourably. We note that the consumer loan book grew by 54% in 2010 (to 36%
of all lending); expansion at this pace could result in additional NPLs crystallizing in the future.
Bank Aljazira – the bank has been winning banking market share in recent years as
management has sought to grow the balance sheet to offset sharply declining brokerage
revenues (to which Aljazira is heavily exposed). However, rapid credit growth may have
contributed to high NPLs (7% of the loan book); high credit risk costs and low operating
efficiency (69% cost-income ratio) have resulted in depressed profitability.
UAE
Main investment themes
Where do we stand in the asset write-down cycle?
UAE banks experienced a significant deterioration in asset quality over the past two years –
the effect of a sharp decline in local real estate values, a dramatic slowdown in economic
growth and much tighter liquidity conditions. In our view, we are likely to see a further
increase in non-performing loans in 2011, although the pace of deterioration is likely to slow
considerably, which in turn could allow for risk costs to decline YoY.
According to the UAE Central Bank data, total assets were up 10%, loans increased 3% and
the deposit base expanded 13% in the year up to February 2011.
Top picks
FGB is structurally one of the most profitable UAE banks, reflecting above average margins
and the lowest cost-income ratio in the system. Unlike many of its peers, the volume of NPLs
trended lower in the latter part of 2010 as the bank ramped up collection efforts. FGB’s CEO
recently commented that the bank may see double digit loan growth in 2011.
ENBD is the largest bank in the UAE and is 56%-owned by ICD, an investment vehicle of the
Dubai government; ENBD’s fortunes are closely linked to those of Dubai. In this context, the
sharp recovery in the trade and tourism industries is positive, although the overhang of an
oversupplied real estate market remains. Management has made positive progress in areas
under its control, namely operating costs (down 14% YoY) and liquidity (loans/deposits now
stand at 105%, versus a peak of 132% previously). Q1 results are likely to benefit from a
significant gain arising from the sale of a minority stake in Network International.
Least preferred
Dubai Islamic Bank took control of mortgage lender, Tamweel, toward the end of 2010. As a
result, real estate-related lending now accounts for over half of the bank’s loan book. We
believe UAE real estate prices will likely remain depressed, which may put further pressure
on the bank’s asset quality.
Lebanon
Main investment themes
Heightened local and regional tensions
Political uncertainty in Lebanon increased following the ousting of Saad Hariri as Prime
Minister and the subsequent appointment of Najib Mikati to this role. However, these events
have subsequently been overshadowed by widespread protests that have taken place across
the MENA region, some of which have resulted in regime change and others which may yet
do so.
Top picks
BLOM Bank is our preferred Lebanese bank. The bank is one of the more profitable in the
Lebanese banking system, on account of disciplined spread management and tight cost
control, while growing strongly in higher margin retail lending. The bank is also investing in
products and services, such as brokerage and asset management, which, over time, should
boost fee income levels.
Following YTD price declines, we believe Bank Audi is also an attractive investment. The bank
has a strong track record of earnings growth, even during times of political turmoil and
economic weakness. Successful revenue diversification efforts, combined with strong risk
management, in our view, should allow this growth trend to persist. While the current turmoil
will affect the bank’s MENA operations in the near term, we believe management is
committed to its regional expansion strategy.
Valuation
Saudi banks are the most highly rated in our MENA coverage universe on a forward PE basis
(UAE and Lebanon the least). In PB terms, Qatar is the most highly rated (UAE the least).
Qatar and Lebanon banks offer the highest likely dividend yields (Saudi and Egypt the least).
Figure 1: Valuation metrics and stock performance for MENA and regional banking sector
P/E (x) P/B (x) Dividend yield (%) ROE (%) US$ Stock Performance
(%)
2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 1M 3M LTM
Al Rajhi Bank 17.4 13.8 11.4 3.8 3.4 3.0 3.9 4.5 5.3 22.4 25.9 28.4 8.7 (7.4) (9.1)
Arab National Bank 11.7 10.2 7.9 1.4 1.3 1.2 2.9 3.3 4.0 12.9 13.6 15.9 23.9 20.3 (0.2)
Bank Albilad 96.4 22.8 11.0 1.9 1.8 1.5 na 0.8 1.5 2.0 8.1 14.9 9.2 0.8 (7.8)
Bank Aljazira 50.7 22.1 12.0 1.2 1.2 1.2 0.8 3.2 4.0 1.4 5.6 9.9 24.4 12.4 (2.9)
Banque Saudi Fransi 13.0 11.3 9.5 2.0 1.8 1.6 2.3 2.6 3.0 16.1 16.5 17.4 25.5 7.6 2.6
Riyad Bank 15.3 11.5 8.6 1.4 1.3 1.2 3.8 5.7 6.8 9.0 11.5 14.6 20.0 (1.1) (13.4)
Samba Financial Group 11.3 10.2 9.0 2.0 1.8 1.6 2.9 3.5 4.2 18.9 18.4 18.4 21.8 (7.7) (3.8)
Saudi British Bank 17.7 14.2 9.5 2.3 2.1 1.8 1.1 1.7 2.4 13.8 15.3 20.1 24.3 11.7 (6.6)
Saudi Hollandi Bank 14.7 11.4 7.2 1.6 1.4 1.3 1.4 2.4 3.7 11.3 13.3 18.6 11.3 - (11.4)
Saudi Investment Bank 28.4 13.4 7.9 1.2 1.1 1.0 2.6 1.7 2.7 4.2 8.5 13.2 22.8 11.9 30.6
Saudi Median 16.3 12.5 9.2 1.8 1.6 1.4 2.6 2.9 3.9 12.1 13.4 16.62 22.3 4.2 -5.2
National Bank of Abu Dhabi 6.7 5.9 5.1 1.2 1.0 0.8 2.1 3.1 4.1 20.3 19.5 19.0 4.8 (0.5) 1.2
Abu Dhabi Commercial Bank 52.3 10.8 5.1 0.8 0.7 0.6 na 4.0 6.0 2.5 8.0 15.5 6.7 1.3 3.7
First Gulf Bank 8.1 6.1 4.6 1.1 0.9 0.8 3.8 4.7 5.6 14.9 17.7 20.3 5.9 (7.7) (6.4)
Emirates NBD 8.9 4.6 3.5 0.6 0.6 0.5 6.0 6.0 7.6 8.1 13.0 15.4 9.6 19.9 11.1
Dubai Islamic Bank 13.4 8.6 5.8 0.9 0.9 0.8 2.3 4.5 6.8 6.6 10.5 14.1 6.7 1.8 (17.6)
UAE Median 8.9 6.1 5.1 0.9 0.9 0.8 3.0 4.5 6.0 8.1 13.0 15.5 6.7 1.3 1.2
Qatar National Bank 9.6 7.9 6.6 2.3 1.9 1.5 2.1 2.5 3.0 26.6 26.4 25.4 1.9 0.6 1.7
Commercial Bank of Qatar 9.7 8.3 6.9 1.6 1.4 1.3 7.7 7.8 7.2 16.4 17.8 19.3 12.8 (16.3) 4.2
Doha Bank 9.8 8.7 7.3 2.1 1.9 1.6 8.2 4.6 5.5 22.0 22.8 24.0 6.4 (3.6) 31.1
Qatar Islamic Bank 14.6 11.0 8.7 2.0 1.8 1.6 5.4 5.7 6.0 14.8 17.5 19.8 20.2 (9.7) 15.5
Masraf Al Rayan 13.9 12.7 10.7 2.3 2.1 1.8 4.7 5.6 na 18.3 17.5 18.0 2.3 16.7 65.2
Qatar Median 9.8 8.7 7.3 2.1 1.9 1.6 5.4 5.6 5.8 18.3 17.8 19.8 6.4 (3.6) 15.5
COMI 8.6 10.3 9.5 2.2 1.9 1.6 3.1 2.4 3.2 28.8 19.7 18.2 (11.5) (32.9) (8.0)
NSGB 11.5 9.2 8.7 2.1 1.7 1.5 3.0 2.7 2.9 19.2 20.3 18.0 (11.8) (25.7) 16.7
EFG Hermes 12.7 25.6 11.0 0.9 0.9 0.8 13.7 4.6 4.6 7.3 3.6 7.9 (18.0) (37.1) (31.9)
Egypt Median 11.5 10.3 9.5 2.1 1.7 1.5 3.1 2.7 3.2 19.2 19.7 18.0 -11.8 -32.9 -8.0
Bank Audi 8.4 7.0 5.8 1.2 1.1 1.0 5.1 6.2 7.5 15.8 17.1 18.5 4.6 (9.5) (15.7)
BLOM Bank 6.3 5.4 4.7 1.2 1.0 0.9 5.1 6.1 7.2 19.7 20.1 20.0 (1.0) (3.7) (7.2)
Lebanon Median 7.4 6.2 5.2 1.2 1.1 0.9 5.1 6.1 7.4 17.8 18.6 19.2 1.8 -6.6 -11.5
Latin America Median 13.6 11.2 9.8 2.6 2.3 2.0 3.0 3.5 3.8 22.3 22.2 22.0 6.1 (2.2) 21.9
EMEA Median 13.2 10.5 8.6 1.8 1.6 1.3 3.3 3.9 4.9 13.5 15.3 17.5 10.0 7.8 3.7
Emerging Asia Median 15.1 13.3 10.9 1.9 1.8 1.5 1.9 2.4 2.9 15.7 15.7 15.8 9.0 3.6 24.3
GEMS Median 14.6 11.5 9.5 1.9 1.7 1.5 2.3 3.1 3.7 14.9 16.1 17.5 9.0 1.0 17.0
Developed Asia Median 13.0 11.9 10.5 1.0 1.0 1.4 3.4 3.7 4.8 8.7 10.1 13.5 -4.3 -5.4 1.6
Developed Europe Median 12.1 10.6 8.1 0.8 0.8 0.7 3.9 4.3 5.0 7.8 7.7 10.7 -2.2 8.9 -12.7
United States Median 14.8 13.7 11.0 1.1 1.0 1.0 0.6 1.0 1.8 8.4 8.1 9.2 -0.1 0.2 2.1
Developed Market Median 13.0 11.7 9.8 1.0 0.9 0.9 2.8 3.4 4.3 8.4 8.6 10.6 -1.5 3.1 -3.0
Source: Deutsche Bank, Bloomberg Finance LP, prices updated as of April 4th 2011
All the MENA banking markets we cover are trading at a discount to their historical PB
averages; the discount is most pronounced in Egypt and the UAE. While consensus earnings
for the UAE and Qatar have proved resilient, expectations for the Saudi banking system have
been significantly curtailed over the past 12 months.
Figure 2: Current and historical PB ratios Figure 3: Consensus estimates for selected MENA
markets
3.5 115
3.1
3.0 2.7
2.5
2.1 2.1 100
2.0 1.8
1.6
x
1.4
1.5 1.2
1.1
0.9 85
1.0
0.5
0.0 70
Saudi Arabia Qatar UAE Egypt Lebanon M ar-10 Jun-10 Sep-10 Dec-10 M ar-11
25%
15%
5%
-5%
-15%
-25%
-35%
Russia
UAE
Egypt
Austria
Hungary
Turkey
South Africa
Saudi Arabia
Poland
Israel
Lebanon
Qatar
Czech
Figure 5: YTD share price performance; selected Saudi and UAE shares have
performed strongly
20%
10%
0%
-10%
-20%
-30%
-40%
MARK
DIB
QNB
AUDI
CIB
CBQ
QIB
Albilad
Aljazira
Riyad
ADCB
SAIB
DHBK
BSF
ANB
SHB
FGB
NSGB
EFG
Al Rajhi
Samba
SABB
ENBD
NBAD
BLOM
Source: Deutsche Bank, Bloomberg Finance LP
10 April 2011
Figure 6: Saudi banks Q1 11 earnings preview (1)
S ARm Al Ra j hi ANB Alj a z ir a Albila d BS F
Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E
Net interest income 2,258 2,219 6% 8% 2,392 803 800 4% 5% 837 168 186 13% 2% 190 148 161 18% 9% 175 723 789 12% 2% 808
Total revenues 2,832 2,852 6% 5% 2,999 1,125 1,129 2% 2% 1,148 305 262 2% 18% 310 276 283 11% 8% 307 1,072 1,084 9% 7% 1,164
Gross operating profit 2,043 2,202 -2% -9% 1,995 728 700 -11% -8% 646 122 38 -29% 128% 86 96 98 -27% -29% 70 768 754 2% 3% 779
Loans 142,408 120,377 -13% 3% 123,408 65,444 66,203 3% 1% 67,152 16,339 18,704 19% 4% 19,403 11,190 12,290 14% 3% 12,717 79,578 80,977 4% 2% 82,732
Deposits 129,465 143,064 13% 3% 146,673 77,651 84,199 10% 1% 85,149 19,203 27,345 46% 3% 28,071 14,317 16,932 23% 4% 17,574 87,709 93,529 9% 2% 95,209
Total assets 172,424 184,841 10% 2% 189,256 110,057 116,035 7% 2% 118,026 27,791 33,018 22% 3% 33,889 18,978 19,175 15% 14% 21,775 121,246 123,218 4% 2% 125,914
Source: Deutsche Bank, Company data
Loans 106,277 106,035 2% 2% 108,276 75,699 74,248 0% 2% 75,686 85,197 80,251 -4% 2% 81,688 36,378 35,039 -2% 2% 35,779 30,654 31,002 4% 2% 31,751
Deposits 128,105 126,945 1% 2% 129,584 90,016 94,673 7% 2% 96,630 137,247 133,463 -1% 1% 135,347 42,484 41,604 0% 2% 42,328 36,511 37,215 4% 2% 38,036
Total assets 174,288 173,556 2% 2% 177,042 126,838 125,373 1% 2% 127,780 185,885 187,416 3% 2% 190,562 59,740 53,882 -10% 0% 53,882 49,492 49,316 6% 7% 52,618
Source: Deutsche Bank, Company data
Loans 11,366 12,885 16% 2% 13,207 6,478 7,809 24% 3% 8,006 17,844 20,694 19% 3% 21,213
Deposits 35,007 37,458 9% 2% 38,311 27,625 29,476 7% 1% 29,689 62,632 66,934 9% 2% 68,000
Total assets 40,446 43,255 10% 3% 44,640 31,843 33,672 8% 2% 34,468 72,289 76,926 9% 3% 79,108
Deutsche Bank AG/London
10 April 2011
Figure 9: UAE banks Q1 11 preview
AE Dm NBAD ADCB FG B E NBD DI B Aggr ega t e
Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E Q1 10 A Q4 10A YoY QoQ Q1 11E
Net interest income 1,239 1,385 11% -1% 1,378 872 1,034 20% 1% 1,042 1,037 1,105 11% 4% 1,153 1,729 1,620 2% 8% 1,756 510 568 17% 5% 598 5,387 5,712 10% 4% 5,926
Total revenues 1,772 1,818 8% 6% 1,919 1,270 1,470 15% -1% 1,461 1,659 1,326 -1% 24% 1,646 2,555 1,754 44% 109% 3,673 712 851 18% -1% 840 7,967 7,218 20% 32% 9,539
Gross operating profit 1,278 1,186 7% 15% 1,363 908 1,091 17% -2% 1,067 1,413 1,008 -3% 36% 1,373 1,665 984 72% 190% 2,860 376 880 29% -45% 487 5,640 5,149 27% 39% 7,150
Loans 133,612 136,833 4% 2% 139,343 117,232 122,772 7% 2% 125,829 93,257 95,628 4% 1% 96,991 209,549 197,095 -5% 1% 199,072 51,016 57,171 13% 0% 57,457 604,666 609,500 2% 2% 618,691
Deposits 114,719 123,131 10% 2% 126,098 90,139 106,134 22% 3% 109,601 89,432 98,742 11% 0% 99,056 178,720 187,388 6% 1% 188,858 64,672 63,447 0% 2% 64,460 537,682 578,842 9% 2% 588,073
Total assets 200,837 211,427 7% 2% 215,820 163,701 178,271 12% 3% 183,078 132,772 140,758 8% 2% 143,819 289,723 286,216 -1% 1% 288,162 84,971 90,138 7% 1% 91,039 872,006 906,810 6% 2% 921,918
Source: Deutsche Bank, Company data
Loans 31,623 33,567 8% 2% 34,271 26,165 26,547 4% 2% 27,086 24,009 29,352 25% 3% 30,128 20,544 25,064 26% 4% 25,985
Deposits 28,808 33,281 19% 3% 34,278 27,223 30,822 15% 2% 31,301 25,306 30,258 37% 15% 34,653 21,558 27,017 36% 9% 29,367
Total assets 55,451 62,520 16% 3% 64,542 44,405 47,230 17% 10% 52,106 39,675 51,840 55% 19% 61,617 28,183 34,683 62% 31% 45,604
Appendix 1
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