MENA Bank Outlook - Arqaam Capital · Resilient banking environment Austerity game only a...

MENA Bank OutlookResilient Banking environment

MENA Bank Sector NoteSector Report | February 2015

Company Ticker ARBK JR Price Target JOD 12.5

Upside (%) 81.4

Company Ticker EMIRATES UH Price Target AED 16.0

Upside (%) 78.2

Company Ticker FAIT EY Price Target EGP 70.5

Upside (%) 71.1

Company Ticker RAKBANK UH Price Target AED 13.2

Upside (%) 61.0

Company Ticker MASQ UH Price Target AED 229.7

Upside (%) 55.4

Company Ticker NBS UH Price Target AED 2.8

Upside (%) 53.7

Company Ticker NBKE EY Price Target EGP 36.7

Upside (%) 64.9

Company Ticker BLOM LB Price Target USD 13.0

Upside (%) 45.0

Company Ticker SAMBA AB Price Target SAR 66.5

Upside (%) 41.5

Company Ticker DIB UH Price Target AED 9.6

Upside (%) 40.1

Company Ticker BSFR AB Price Target SAR 48.9

Upside (%) 38.3

Company Ticker HRHO EY Price Target EGP 23.3

Upside (%) 34.0

Company Ticker QNBA EY Price Target EGP 44.2

Upside (%) 29.3

Company Ticker

KPROJ KK Price Target KWD 0.8

Upside (%) 17.2

Company Ticker

COMI EY Price Target EGP 63.2

Upside (%) 12.1

© Copyright 2015, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

M E N A B a n k S e c t o r O u t l o o k

F e b r u a r y 1 0 2 0 1 5

Jaap Meijer, MBA, CFA [email protected] +9714 507 1744

Leen Antonios Shadi Salman, CFA Nisreen Assi, CFA Janany Vamadeva Zeina Nasreddine Michael Malkoun Karim Kekhia Tarek Sleiman

Resilient banking environment Austerity game only a medium-term risk, with 93% of the GCC,

the core, remaining in a good shape.

Government spending was not the key driver for non-oil GDP, accounting for only 33% in FY 09A-13A non-oil GDP growth.

We become more selective, despite lower valuations reflecting a more modest growth outlook, as there are fewer themes to play. We have removed 5 stocks from our Core Buy list.

We expect real GDP growth to slow down from exceptionally high levels in the last few years, but believe the chances for a collapse are remote. Over the past decade, increased government spending drove only 33% of nominal GDP growth. With this falling way as a driver, we expect real GDP growth to fall to c.4%. We expect all pegs to the USD to hold up, though Oman is looking vulnerable with large twin deficits of c.20%.

Slower deposit growth and a slowdown in projects should reduce balance sheet growth in the GCC from low double-digits to high single-digit growth, or even mid-single digit growth in Oman and Bahrain, over time.

High dependency on government deposits is a risk, especially in countries with limited FX and sovereign wealth fund assets, i.e. Oman and Bahrain, though support from the region is highly likely. In the other countries deposit growth should slow for banks that typically rely on government deposits.

KSA banks to benefit from NIM expansion in various ways: KSA banks should to benefit from rate rises (given a high proportion of assets on floating rates), but we expect the initial rate increase to take place later rather than sooner. However, purchasing sovereign bonds (excluding Al Rajhi and Albilad) could provide a welcome boost to NIMs as well, without too much impact on liquidity ratios. In UAE, Kuwait and Qatar, we expect very limited sovereign borrowing.

Despite de-rating, we become more selective in MENA, as there are fewer themes to play: We continue to be strongly OW on UAE (most diversified economy) and Egypt (U shaped recovery, benefits from fiscal consolidation). KSA should be very resilient as well (expanding NIMs, very low reliance on government deposits), but the price dislocation has not opened up too much of an upside. We are UW on Qatar (government is reducing public sector deposits and borrowing), Oman (fiscal consolidation could be severe in the medium term), Bahrain (with only one Buy with 82% of assets outside Bahrain). We are slightly UW on Kuwait, despite it holding probably the most resilient government finances in the region. We remain Neutral on Jordan (mainly on deep unlocked value at ARBK) and Lebanon (given the security situation, despite benefit from lower fuel bills).

More selective: We have recently removed FGB, UNB, QNB and Bank Muscat from our Core Buy list, given high reliance on government deposits, and QIC on a fuller valuation and slowdown in growth. The remaining Core Buys in MENA are ENBD (best play on CoR normalization), RAKBANK (best cash yield, accelerating NP), NBS (deep value, substantially overcapitalized), DIB (best growth story in the sector), MASQ (second best growth story), Samba and BSF (both offering substantial value vs. KSA peers, and both plays on sovereign bonds and higher rates), Bupa and Tawuniya (secular growth in healthcare, healthier underwriting), and CIB (best play on corporate CAPEX in Egypt), EFG (normalization in turnover rates, increased Foreign Ownership, increased performance fees, IPOs, very low premium over tNAV), QNBA (cheap vs. CIB), FAIT and NBK-E (both highly discounted).

Core Buy MENA Portfolio

February 10 2015

Banks

Banks © Copyright 2015, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2

Table of Contents Investment recommendation- selection more key than ever ................................................................................. 5

Outlook is improving after oil price rebound .......................................................................................................... 8

We expect a slowdown in balance sheet growth.................................................................................................. 18

Despite de-rating, we become more selective with fewer themes. ..................................................................... 24

Core Portfolios ...................................................................................................................................................... 29

NIM evolution per bank ........................................................................................................................................ 31

Non-funded income contribution to Top-line ....................................................................................................... 38

Normalization in investment income .................................................................................................................... 39

Cost of risk still offers scope to taper off .............................................................................................................. 40

Cost/income in KSA to increase due to 2 months of bonuses .............................................................................. 44

DuPont analysis for MENA and Morocco .............................................................................................................. 47

Valuation charts .................................................................................................................................................... 49

Relative Valuations ............................................................................................................................................... 53

MENA banks valuation screen .............................................................................................................................. 56

Abu Dhabi Commercial Bank ................................................................................................................................ 71

Abu Dhabi Islamic Bank ........................................................................................................................................... 75

Commercial Bank of Dubai.................................................................................................................................... 79

Dubai Islamic Bank ................................................................................................................................................ 83

Emirates NBD – TOP MENA PICK .......................................................................................................................... 87

First Gulf Bank ....................................................................................................................................................... 91

National Bank of Abu Dhabi .................................................................................................................................. 95

Union National Bank ............................................................................................................................................. 99

Mashreq Bank ..................................................................................................................................................... 103

National Bank of Ras Al-Khaimah ........................................................................................................................ 107

Bank of Sharjah ................................................................................................................................................... 111

United Arab Bank ................................................................................................................................................ 115

Commercial Bank International .......................................................................................................................... 119

Sharjah Islamic Bank ........................................................................................................................................... 123

Ajman Bank ......................................................................................................................................................... 127

Investbank .......................................................................................................................................................... 131

Commercial Bank of Qatar .............................................................................................................................. 135

Doha Bank ....................................................................................................................................................... 139

Qatar Islamic Bank ........................................................................................................................................... 143

Qatar National Bank ........................................................................................................................................ 147

Masraf Al Rayan .............................................................................................................................................. 151

Al Khaliji Bank .................................................................................................................................................. 155

Ahli Bank Qatar ............................................................................................................................................... 159

February 10 2015

Banks


Qatar International Islamic Bank ..................................................................................................................... 163

Credit Agricole Egypt ....................................................................................................................................... 167

Commercial International Bank ....................................................................................................................... 171

Housing Development Bank ............................................................................................................................ 175

Qatar National Bank Alahly ............................................................................................................................. 179

Al Baraka Bank Egypt ....................................................................................................................................... 183

Faisal Islamic Bank of Egypt ............................................................................................................................. 187

ADIB Egypt (ADIB-E) .......................................................................................................................................... 191

Suez Canal Bank (SCB) ....................................................................................................................................... 195

Union National Bank Egypt .............................................................................................................................. 199

National Bank of Kuwait Egypt (NBK-E) ............................................................................................................. 203

Bank Audi ........................................................................................................................................................ 207

Blom Bank ....................................................................................................................................................... 211

Bank Byblos ..................................................................................................................................................... 215

Bank of Beirut .................................................................................................................................................. 219

SAMBA Financial Group ................................................................................................................................... 223

Riyad Bank ....................................................................................................................................................... 227

Al Rajhi Bank .................................................................................................................................................... 231

Banque Saudi Fransi ........................................................................................................................................ 235

The Saudi British Bank ..................................................................................................................................... 239

Arab National Bank ......................................................................................................................................... 243

Saudi Hollandi Bank ......................................................................................................................................... 247

Saudi Investment Bank .................................................................................................................................... 251

Albilad Bank ..................................................................................................................................................... 255

Bank Al-Jazira .................................................................................................................................................. 259

Alinma Bank .................................................................................................................................................... 263

National Commercial Bank .............................................................................................................................. 267

National Bank of Kuwait ..................................................................................................................................... 271

Kuwait Finance House ...................................................................................................................................... 275

Gulf Bank ............................................................................................................................................................ 279

Burgan: RoE dilution from capital hike ............................................................................................................... 283

Boubyan Bank ................................................................................................................................................. 287

Commercial Bank of Kuwait ................................................................................................................................ 291

Kuwait International Bank ................................................................................................................................ 295

Ahli United Bank (ALMUTAHE) ........................................................................................................................ 299

Kuwait Projects Co Holding KSC ...................................................................................................................... 303

Bank Muscat .................................................................................................................................................... 307

Bank Sohar ...................................................................................................................................................... 311

HSBC Oman ......................................................................................................................................................... 315

February 10 2015

Banks


Bank Dhofar ........................................................................................................................................................ 319

National Bank of Oman .................................................................................................................................. 323

Bank Nizwa ......................................................................................................................................................... 327

Al Izz Islamic Bank ............................................................................................................................................... 331

Ahli United Bank .............................................................................................................................................. 335

National Bank of Bahrain ................................................................................................................................. 339

Ithmaar Bank ................................................................................................................................................... 343

Arab Bank Jordan ................................................................................................................................................ 347

Housing Bank for Trade & Finance ...................................................................................................................... 352

Jordan Islamic Bank ............................................................................................................................................ 356

Attijariwafa Bank ............................................................................................................................................. 360

BMCE Bank .......................................................................................................................................................... 364

BMCI Bank .......................................................................................................................................................... 368

Banque Centrale Populaire .............................................................................................................................. 372

February 10 2015

Banks


Investment recommendation- selection more key than ever

Non-oil GDP growth is set to slowdown, but we do not expect a breakdown, with nominal

non-oil growth falling from 12.6% to c.8.4%, and real non-oil GDP growth slowing down from

6% to c.4%, at best, with government spending effectively frozen. Historical non-oil GDP

growth was only for 33.0% driven by government spending.

Growth in balance sheets should slow from the pace of low double-digits growth rates to

high single-digit growth or even mid-single digit growth in Oman and Bahrain, over time. This

is driven by lower credit demand (lower CAPEX in oil & gas, real estate, construction and

infrastructure by governments) and a reduced growth in funding base, as the government

should no longer be adding to the domestic liquidity pool. High dependency on government

deposits is a risk, especially in countries with limited FX and sovereign wealth fund assets (i.e.

Oman and Bahrain), though support from the region is highly likely. Furthermore, Qatari

authorities are reducing public sector borrowing and reducing deposits held in the banking

system, affecting banks that rely on domestic PSE growth, like QNB, MARK and Khaliji.

But not all is bad. KSA banks are set to benefit from expanding margins in two ways:

(i) KSA banks should benefit from rate rises, but we expect the first rate increase to take place

later rather than sooner, around mid-June at the earliest, with an overall slow pace of US Fed

rate normalization, who is in a careful balance between the GDP acceleration on the one hand,

and strengthening USD and lower (core) inflation on the other hand. BSF is the best play on

rate increases.

(ii) Purchasing sovereign bonds, given the sizeable KSA budget deficit, (excluding Al Rajhi and

Albilad that are not allowed to buy sovereign bonds) could provide welcome boost to NIMs,

without too much effect on liquidity ratios. Best play is Samba, with the most liquid balance

sheet. On the other hand, for UAE, Kuwait and Qatar we expect very limited sovereign

borrowing, if at all.

Plusses and minuses for Fees & Commissions: We expect headwinds with respect to F&C, with

larger than expected cut in F&C from retail regulation in KSA (Al Rajhi worst affected), partly

offset by higher brokerage fees as KSA opens up for QFIs (best play BJAZ and Samba). As lower

loan growth should also reduce the F&C growth for the sector, which is still highly determined

by upfront processing, commitment and redemption fees.

Only a few banks are a play on Cost of Risk (CoR) normalization, but we remain careful for

Commercial and Real Estate exposures, given the potential excess capacity. We no longer see

CoR normalization as a large tailwind, with ENBD being the clear exception, after the

reclassification of DW and hitting a coverage ratio of over 100%. Kuwait, UAE and Jordan

remain best positioned for a further CoR normalization, while we expect CoR to move higher in

Qatar and Oman.

Egypt remains the most exciting turn-around case (Download Report: Second leg of the U

shaped recovery underway): We expect Egypt’s growth story to continue, and Egyptian banks

are ideally positioned to capture an investment spree after years of underinvestment and

underleveraged corporate balance sheets. Fiscal consolidation should work to mitigate the

crowding out of private investment. We strongly reiterate our Core Buy ratings on CIB (best

play on corporate CAPEX in Egypt), EFG (normalization in turnover rates, increased FO,

http://research.arqaamcapital.com/getreportbysecuritytoken?token=e91888ff-6e55-47f6-8a14-f4ebbbf8c3a7

February 10 2015

Banks


increased performance fees, IPOs, very low premium over tNAV Download Report), QNBA

cheap vs. CIB), NBK-E and FAIT (both deep value stocks), FAIT and NBK-E (both deeply

discounted)

Despite de-rating, reflecting the slowdown in outlook for MENA banks, we become more

selective as there are fewer themes to play:

We continue to be strongly OW on UAE (most diversified economy) with many themes to

play, even though we have recently removed FGB and UNB mainly due to a high reliance on

government deposits, which should slowdown the deposit growth. Moreover FGB’s growth

story is no longer exceptional and further growth of the wholesale banking division should

reduce NIMs. Core Buys in UAE are ENBD (best play on CoR normalization, Download Report),

RAKBANK (best cash yield, accelerating net profit growth), NBS (deep value, substantially

overcapitalized), DIB (best growth story in the sector, with 15-20% balance sheet growth in

FY15e) and MASQ (second best growth story at an ever more attractive valuation).

KSA should be very resilient as well (expanding NIMs, very low reliance on government

deposits), but the price dislocation hasn’t opened up too much upside, though CAPEX could be

scaled back/delayed. We play Samba (best positioned to buy sovereigns) and BSF (best

positioned to benefit from rising rates).

We are UW on Qatar (government is reducing public sector deposits and borrowing) and

Oman (fiscal consolidation could be severe in the medium term). We have removed QNB

(Download Report) and Bank Muscat from the Core Buy list given high reliance on government

deposits, and reduced public sector borrowing in Qatar.

We are cautious on Bahrain, but we reiterate the dually listed AUB as a Buy, but with 82% of

assets outside Bahrain, and 46% in Kuwait, and see it is a cheap play into Kuwait. We are

slightly UW on Kuwait, despite probably the most resilient government finances in the region,

given lack of attractively priced bank stocks, despite a strong expected CoR normalization.

We remain Neutral on Jordan (mainly on deep unlocked value at ARBK. Valuing Arab Bank

Jordan at only 1x tNAV, deducting USD1bn for the court case, valuing the 40% of ANB at our

Fair value and taking into account substantial over-provisioning, provides substantial upside to

the CMP. The market over-reacted to the lawsuit (-7.0% of our TP). We are also Neutral on

Lebanon (given security situation, despite benefit from lower fuel bills, with only BLOM as a

Core Buy on strong FCF, capital base, prudent risk management, low valuation and dividend

yield).

We play secular growth in insurance: In insurance we remove QIC from the Core Buys on a

more full valuation and slowdown in growth, but continue to play Bupa and Tawuniya (secular

growth in health care, stronger underwriting). We like Salama as a recovery play, mainly as it

can claw back provisions, though RoE remains low due to the loss in business volume after

scaling down Best RE.

Kenya is expected to show a strong boost from lower oil prices, reducing the external reliance

on capital inflows. We continue to prefer KNCB (NIM resilience, expansion in retail, cheap).

In Nigeria, price dislocation has been vast, and upsides of over 100% are possible if the

economy does not collapse, though fiscal consolidation may be needed given a modest fiscal

deficit of 2.2%, but a gaping current account deficit of 11% even at an oil price of USD60/barrel

is a bigger concern. We prefer a defensive strategy, and play Zenith, GTB and FCMB, which all

http://research.arqaamcapital.com/getreportbysecuritytoken?token=ef108475-3599-4481-beb1-ec98c962ba49http://research.arqaamcapital.com/getreportbysecuritytoken?token=90649887-893e-445b-85b5-0598ad212d95http://research.arqaamcapital.com/getreportbysecuritytoken?token=624c5218-fbb7-4897-875b-2844d1ab36ba

February 10 2015

Banks


benefit from interest rate increases. Banks RoE are still affected by a tough regulatory

environment (high cash reserves, pressure on fees, high AMCON charges) and rising CoR, given

FX and oil & gas sector lending.

February 10 2015

Banks


Outlook is improving after oil price rebound

93% of the GCC is not at risk of severe austerity at USD 60/barrel

Only Oman and Bahrain (together 6.7% of GCC GDP) are at risk, but

support is highly likely given security situation in region

The fall in oil price to USD50/barrel had exposed substantial weaknesses in the GCC region, i.e.

a lack of diversified revenue sources for the governments (with oil accounting for 90% of

revenues) and a lack of a diversified export industry, which is primarily driven by oil exports

and for the remainder by exporting petro-chemicals using subsidized feedstock (which may be

at risk if government starts axing those), and to a much smaller extent re-exports. The lower

crude oil had cast a dark cloud over the outlook for the GCC’s economy.

Oil prices have recently rebounded, driven by the reduced supply out of the US as lower oil

prices did their work, and comments from the OPEC, and a huge transfer of wealth to amongst

others the world’s largest economy, the US, and this has improved the outlook. Imbalances in

the GCC are becoming less severe, and we are not far off where we see current accounts

stabilizing, but still GCC fiscal deficits may reach high single digits on average for the GCC as a

whole. PMI readings from the Gulf also imply that the GCC weathered the plunge in oil prices

satisfactorily.

Exhibit 1: GCC fiscal balances-scenarios

Source: IMF, Arqaam Capital Research

Exhibit 2: GCC Current account-scenarios


-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

80 75 70 65 60 55 50 45

Price of oil (USD/barrel)

-15%

-10%

-5%

0%

5%

10%

80 75 70 65 60 55 50 45

Price of oil (USD/barrel)

February 10 2015

Banks


Exhibit 3: Oil marginal cost curve- suggesting scope for further appreciation

Source: Rystad Energy, Arqaam Capital Research

The core, 93.3% of GCC GDP, is not affected.

KSA (45.8% of GCC GDP), Qatar (12.5%), UAE (24.7%) and Kuwait (10.4%) are not at risk, in

our view, with only modest tweaks to spending over the medium term (modest budget cuts,

additional revenues).

We remain very relaxed about the outlook in the UAE, Qatar and Kuwait. All of those countries

should more or less be able to sustain their budgets at USD 60/barrel. Kuwait has been

notorious with under spending and it could even achieve a substantial budget surplus at USD

50/barrel. Qatar and the UAE are sitting around break-even (-1.0% and +1.2% of GDP) at USD

60/barrel.

KSA should run a larger than expected budget deficit of 11.6%, especially after the announced

2 month bonus on public sector wages, though we cannot rule out tweaks to government

CAPEX, which is the highest in GCC at 32% of total spending, which should be easier to

curb/delay than current spending.

Onshore ME

Offshore Shelf

Heavy oil

Onshore Russia

Onshore RoWDeepwater

Ultradeepwater

NA Shale

Oilsands

20

30

40

50

60

70

80

0 20 40 60 80 100 120

February 10 2015

Banks


Exhibit 4: FY 15e Winners and losers (% GDP)


Exhibit 5: FY 15e Fiscal deficit sensitivity to oil price changes


-40%

-30%

-20%

-10%

0%

10%

Jord

an

Mo

rocc

o

Ke

nya

Leb

ano

n

Sou

th A

fric

a

Egyp

t

Bah

rain

Nig

eri

a

UA

E

KSA

Qat

ar

Ku

wai

t

Iraq

Om

an

Oil = USD 70/barrel Oil = USD 60/barrel Oil = USD 50/barrel

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Jord

an

Leb

ano

n

Mo

rocc

o

Ke

nya

Sou

th A

fric

a

Egyp

t

Nig

eri

a

UA

E

Bah

rain

Qat

ar

KSA

Iraq

Om

an

Ku

wai

t


February 10 2015

Banks


Exhibit 6: Oil breakeven price


Exhibit 7: FY 15e Current account as % of GDP sensitivity to oil price changes


0

20

40

60

80

100

120

140

Nigeria Bahrain Oman KSA Qatar Kuwait UAE

USD

/bar

rel

-30%

-20%

-10%

0%

10%

20%

30%

Leb

ano

n

Jord

an

Mo

rocc

o

Ke

nya

Sou

th A

fric

a

Egyp

t

Bah

rain

UA

E

Nig

eri

a

KSA

Iraq

Ku

wai

t

Qat

ar

Om

an


February 10 2015

Banks


Oman (4.7% of GCC GDP) and Bahrain (2.0%) are vulnerable and a looming

fiscal squeeze can only avoided by outside support

However, in the periphery we see dark clouds emerging, especially for Oman and Bahrain.

Even if prices edge up to USD60/barrel, Oman is likely to run a very large budget and current

account deficits, equivalent to 20.5% and 20.9%% of GDP. Oman has responded in cutting

energy subsidies and seeking additional revenues (e.g. remittance taxes, telecom royalties,

which may be raised further). Moreover, Oman has relatively limited FX reserves, equal to 22%

of GDP and SWF assets of 24% of GDP. We would expect financial support from the rest of the

region, limiting the need for fiscal austerity, especially after the regime change in Yemen.

Nevertheless, we think the risk for a fiscal squeeze is looming and this could severally affect

GDP growth in Oman. We are particularly concerned about possible deposit withdrawals at

Bank Muscat and Bank Dhofar, with government deposits at 31% (35% in YE13A) and even 43%

(YE13A 39%) of total deposits respectively.

The sharp reduction in current account positions could jeopardize the pegs with the USD over

time, as illustrated by a slight weakening in the forward rates. Particularly the Oman Rial might

be vulnerable. However, Oman has effectively managed a fixed peg to the USD since 1994,

even at much larger current account deficits (in ’98).

Exhibit 8: Oman current account as % of GDP- Current Account most likely to test the lows of 98

Source: IMF

Bahrain is in an equivalently gloomy position, with 16.5% fiscal deficit and a 2.1% current

account deficit, but with a greater support factor from KSA.

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

Bank Muscat and Dhofar

could be vulnerable for

deposit withdrawals from

the PSE sector

February 10 2015

Banks


Historical non-oil GDP growth was not all driven by government spending

Historical nominal non-oil GDP growth in GCC was 12.6% pa in FY 99-13A. Only 33% of the

exceptional growth was driven by government spending (if we assume the fiscal multiplier

effect to be 1x, assuming no crowding in effects).

In our base case, we assume freezing of all government spending. This would still allow for

c.8% in nominal growth (and c.4% real GDP growth), purely driven by the private sector. In

reality we would expect the fiscal multiplier effect to be larger than unity in the GCC, though,

and as such we would expect a stronger moderation in non-oil GDP growth.

Exhibit 9: Nominal non-oil GDP growth: private vs public sector contribution FY09-13

Source: IMF, UN Statistics, Arqaam Capital Research

0%

2%

4%

6%

8%

10%

12%

14%

16%

Qatar Nigeria Kuwait UAE Bahrain Oman KSA

Private growth Public growth

February 10 2015

Banks


Financing the deficits: a combination of drawdown on reserves, deposits and

bond issuance

We run a scenario with 60% of funding coming from SWFs, FX reserves and bank deposits,

and 40% from new bond issuance.

Exhibit 10: Combined FX and SWF reserves (USD)

Source: Central Bank, News Sources, Arqaam Capital Research

Exhibit 11: Government deposits as % of total

Source: Central Bank, Arqaam Capital Research

One source of funding that the GCC countries could start to look at is their international

reserves. Over the past few years with oil at very elevated levels, the GCC countries have been

able to accrue sizeable buffers. KSA has ample reserves that we estimate to be equivalent to c.

9.9 years of the estimated FY 15e deficit. With regards to the other countries operating a

deficit, Oman and Bahrain would be able to last for c. 3 years, while Nigeria a bit over 1 year’s

deficit.

The GCC core has ample reserves even if oil hits USD 50/barrel

If we look at our bear case scenario of oil at USD 50/barrel, we get a very different picture as

all of the seven oil producing countries we are looking at would start to operate at a deficit.

We find that the UAE is very comfortable in terms of reserves, being able to use the buffer to

pay the deficit for the next 196 years, followed by Kuwait (68 years), Qatar (40 years) and KSA

(7 years). Oman would only be at 2.4, Bahrain at 2.8 and Nigeria at 1.2 years.

Dipping into the deposits 3-42% is deposited at the banks

The oil producing governments could look towards their deposits at the commercial banks to

help finance the expected deficits. Though this may appear as the most liquid option for the

government to tap into, it does have further reaching ramifications on the economy as lower

deposits should translate into tighter liquidity, wider credit spreads, curbing bank lending and

hence putting further pressure on GDP growth vs. decreasing international reserves held

elsewhere that does not have the same magnitude of an effect on the economy. Furthermore

decreasing foreign investments counterbalances the current account deficits, supporting the

balance of payments and USD pegs.

Nevertheless, this remains an option for the governments to tap into.

0

200

400

600

800

1,000

1,200

UAE KSA Kuwait Qatar Oman Bahrain

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Qatar Nigeria Oman UAE KSA Bahrain Kuwait

February 10 2015

Banks


The largest risk for deposit withdrawals by the government should be felt in Oman, given the

reversal of the fiscal situation and high dependency on government deposits, especially for

Bank Dhofar (43% of deposits) and Bank Muscat (31% of deposits). At an oil price of 60, this

could represent over 6% of total outstanding deposits.

The Qatari (especially Khaliji, MARK and QNB) and the UAE banks (UNB, FGB and NBAD) should

merely expect limited growth in government deposits. Nigeria, on the other hand has very

negligible government deposits in comparison to their expected fiscal deficit, and banks hardly

earn NIMs on those given mandatory cash reserves of 75% on those deposits.

Exhibit 12: Potential withdrawals from government deposits (% of total deposits)

Source: Central Banks, IMF, Arqaam Capital Research

Looming fiscal austerity

Cutbacks on cheap feedstock…

We believe that governments will find it very difficult to cut spending in the near future (in

particular subsidies on food, fuel, public sector wages and benefits), given the very delicate

geopolitical situation. However, access to cheap feedstock for steel, petro-chemicals, fertilizers

and cement could be affected.

If countries were to start looking to cut their expenditures, we would expect them to start by

trimming their capital spending on projects. KSA and Qatar spend most on CAPEX of the GCC

countries, representing over 30% of their spending.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Nigeria Oman Bahrain KSA Qatar Kuwait UAE

Oil=50 Oil=60 Oil=70

February 10 2015

Banks


CAPEX % of government spending

KSA and Qatar spend most of GCC on CAPEX, which are easy to cut/delay

than benefits and salaries

Exhibit 13: GCC government spending breakdown

Source: Datastream IMF

Exhibit 14: FY 13A total government spending as % of GDP


0

100

200

300

400

500

600

2010 2011 2012 2013

Current Spending Capital Spending

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Oman Kuwait KSA Qatar UAE Bahrain Nigeria

February 10 2015

Banks


Exhibit 15: FY 13A government spending breakdown by country-CAPEX are easy to cut


…and additional revenues

We expect governments to start looking at fiscal austerity measures sooner rather than later.

This can come in many forms such as increasing government revenues by implementing taxes.

We view the most likely channel to do so for these countries could be through a sales tax (on

telecom for example), value added tax, or an expatriate remittance tax or telecom royalties.

Oman has been at the forefront of economic reforms this time around, proposing an

expatriate remittance tax, an LNG export tax, while also increasing royalties on telecom

companies and on mineral exploration.

Contrary to Nigeria, exposures to the oil and gas sector in the GCC remain very modest. Even

the oil and gas sector do not represent more than 14.5% of MEED spend. Nigerian banks have

lent substantial amounts to the oil & gas sector, comprising c. 23% of their loan books (up and

downstream combined), with especially FBNH (35%), Sterling (30%) and GTB (29%) exposed.

However, during the slump in 2009/10, the banks had already sold a large proportion of their

NPLs to Asset Management Corporation.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

KSA Qatar Oman Nigeria Bahrain Kuwait UAE

Current Spending Capital Spending

February 10 2015

Banks


We expect a slowdown in balance sheet growth

We cut back asset growth expectations by 2-5%, given lower CAPEX and

reduced public sector borrowing in Qatar.

Deposit growth to slow-down, but less than expected the drop in

domestic savings rates.

We have reduced loan growth across the board by c. 2% in the GCC, reflecting lower non-oil

GDP growth and slower project led growth, and by as much as c.5% in Oman as we expect

some moderate austerity in the next few years, with potentially more tough measures down

the line. In Qatar we expect government to spend more directly on projects and to

disintermediate the banks, as experienced by QNB. The growth in Bahrain is mainly reflecting

the loan growth by AUB, which is 48% driven by Kuwait and only 18% by Bahrain. At the same

time the accelerating growth in morocco is driven by expansion by ATW in SSA area and

improving outlook for the Moroccan economy. The accelerating growth in Jordan is driven

lower FX headwinds as of FY16e, as Arab Bank Jordan should face slower FX headwinds (c.7%

headwind in FY 14e).

Exhibit 16: Gross loans per country

Source: Company Data, Arqaam Capital Research

0%

2%

4%

6%

8%

10%

12%

14%

16%

Qatar Egypt Oman Lebanon KSA Kuwait UAE Bahrain Morocco Jordan

FY 14A FY 15e FY 17e

February 10 2015

Banks


Exhibit 17: Project spending- a 25% cut back should reduce loan growth by 1-2.4%


Oil, chemical & gas sector must vulnerable for cut backs/delays

We expect a substantial reduction and delays in the oil & gas sector, given reduced cashflow

for example giants like Aramco. However, the oil, chemical & gas sector only accounts for 21%

of all projects spend. However, we would also expect a slowdown in the other sectors once

growth moderates further.

Exhibit 18: MEED Project break-down – Oil & gas accounts for 14.5% only

KSA UAE EGP KWT QTR OMN BHR Total % Total

Construction 75 120.8 50.3 35.3 36.6 10.3 13.5 341.7 30.5%

Transport 125.7 56.8 27.7 31.3 46.4 12.8 9.6 310.3 27.7%

Power 86 8.5 29.5 19.2 3.2 5.9 4.6 156.9 14.0%

Oil 6.5 18.1 9.3 26.6 15.3 10.3 9 95 8.5%

Chemical 37.9 2.3 5.3 7.5 6.5 15.5 3.5 78.3 7.0%

Gas 6.2 18.3 10 8 9.2 13.7 2.3 67.6 6.0%

Industrial 18.2 3.2 1.8 0.3 0.4 7.3 5.9 37.1 3.3%

Water 10.6 2.3 2.5 7.4 8 2.1 1.3 34.2 3.1%

Total 366.0 230.4 136.3 135.5 125.5 77.8 49.8 1121.1 100.0%

% of Total 32.6% 20.6% 12.2% 12.1% 11.2% 6.9% 4.4% 100.0%

∆ m/m (%) (0.2%) (3.4%) (0.5%) (0.4%) (0.4%) (3.2%) (1.2%) (1.2%)

∆ y/y (%) 5.8% 59.4% 37.0% N/A 0.1% N/A N/A N/A

Source: Central Banks, IMF, Arqaam Capital Research

Projects (USD) Projects (LCU) Loans (latest) Execution Financed by banks Growth from projects pa Impact 25% cut back

KSA 366 1,373 1,384 70% 50% 6.1% -1.5%

UAE 230 846 1,396 70% 50% 3.9% -1.0%

Egypt 136 1,040 616 70% 50% 9.7% -2.4%

Kuwait 136 41 32 60% 50% 6.7% -1.7%

Qatar 126 457 623 70% 75% 6.7% -1.7%

Oman 78 19 17 70% 50% 7.0% -1.8%

Bahrain 50 19 7 35% 40% 6.4% -1.6%

February 10 2015

Banks


PSE loans coming down-QNB losing market share

The Qatari government is moderating public sector borrowing, with PSE loans stagnating this

year and expected to fall in FY15e, cutting the growth outlook substantially for Qatari banks.

Exhibit 19: Outstanding loans in Qatar – PSE sector stagnating


QNB lost substantial market share in Public Sector Entities (-8.2% fall to 71.0%) to MARK

(+6.2% to 15.3%), Doha (+0.7%) and Khaliji (+0.5%).

Exhibit 20: Market share evolution FY13A-14A-QNB losing market share to MARK, gaining back market share in commercial from CBQ


-20%

-10%

0%

10%

20%

30%

40%

50%

PSE Corporate Retail Private Total

FY 13A FY 14A FY 15e

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

MARK Doha Khaliji QIB CBQ QIIB Ahli QNB

PSE Corporate Retail

February 10 2015

Banks


At the same time CBQ lost substantial market share in the corporate segment (-6.4% to 14.9%),

MARK (-0.6% to 9.1%) to QNB (+7.1% to 59.0%). In retail Doha lost 2.1% market share to 10.7%

and MARK gained 2.1% to 4.2%.

Sovereign bond issuance – very attractive assets for mainly the KSA banks

KSA and Omani banks are best positioned to purchase sovereign bonds, given the sizeable

deficits, (excluding Al Rajhi and Albilad that are not allowed to buy sovereign bonds). This could

provide welcome boost to NIMs, without too much effect on liquidity ratios. Best play is

Samba, with the most liquid balance sheet. On the other hand, for UAE, Kuwait and Qatar we

expect very limited sovereign borrowing, if at all. The Omani banks are also likely to be buyers

of sovereign bonds.

Exhibit 21: Estimated sovereign bond issuance as % of total assets

Source: Company Data, IMF, Arqaam Capital Research

0%

2%

4%

6%

8%

10%

12%

Nigeria Oman KSA Bahrain Kuwait Qatar UAE


February 10 2015

Banks


Government deposit withdrawals – mainly affecting Oman

On our base scenario we also expect a substantial reduction in deposit growth, although less

than the reduction in savings rates, as government savings were mainly invested in SWFs and

assets abroad and only a small proportion were added to the domestic liquidity pool, parked at

the commercial banks. For Omani banks this could slowdown their liability growth

substantially, while the slowdown for Nigeria should not have serious ramifications as 75% was

already held at the central bank, given the cash reserve requirements on those deposits.

Exhibit 22: FY 15e Withdrawals as % of total deposits

Source: Company Data, IMF, Arqaam Capital Research

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Nigeria Oman Bahrain KSA Qatar Kuwait UAE


February 10 2015

Banks


Exhibit 23: Deposits growth (bottom up forecasts) per country


0%

2%

4%

6%

8%

10%

12%

14%

Lebanon KSA Qatar Egypt Oman UAE Bahrain Kuwait Morocco Jordan

FY 14A FY 15e

February 10 2015

Banks


Despite de-rating, we become more selective with fewer themes.

Strong OW UAE, but we become more selective, and have taken out FGB and

UNB from Core Buys, we play growth (DIB), deep value (MASQ, NBS),

turnaround (ENBD) and dividends (RAK)

We continue to play UAE, the most diversified economy in the GCC, with strong value at a

P/E16e of 8.8x and P/PPP of 6.8x, at 14.5% and 13.2% discount respectively to the MENA

average, but avoid names with a high reliance on government deposits, such as UNB and FGB

(we were already cautious on NBAD), and play ENBD (very low reliance on government

deposits, only remaining play on risk normalization, whilst a reduction in GRE would improve

NIMs and RoE). RAKBANK offers the best scope for distributing cash to shareholders, given its

extremely high capital generation and capital ratios, with cash yield of 6.6%, with no exposure

to the government sector. We see DIB as the best growth story in the UAE, with 15-20%

growth in assets and loans expected, and followed by Mashreq with low double digit growth as

both banks target to recapture its natural market shares.

OW Egypt: U shaped recovery, benefits from fiscal consolidation –we play

many stories, CAPEX, turnarounds and deep value

Egypt continues to offer value, despite its re-rating, at a P/E16e of 8.7x and P/PPP of 4.8x, at

15.5% and 38.5% discount respectively to the MENA average. We welcome the weakening of

the EGP vs. the USD, boosting competitiveness as Egypt had a higher inflation rate than its

trading partners, with the main trading partner’s currency, the euro having weakened as well.

This should crack down on the black market, improving the current account balance and raising

incentives for foreign investments. A more realistic level could encourage foreign investors to

buy sovereign bonds. Currently foreigners do not own Egyptian sovereigns. The banks should

benefit as well from legislation to regulate cash circulation outside banking institutions, with

transactions over EGP 20k mandated to be executed via banks and wider spreads in FX

transactions. However, the cash regulation could affect the efficiency of transactions for small

enterprises.

We think the market underestimates the measures already having taking place in Egypt (with

2% additional revenues, 2% cuts on fuel subsidies and 2% benefit from lower oil accruing fully

to the government), and the amount of under-investment and under-leverage of the corporate

sector. We expect debt/GDP to plateau at 87% with a deficit of 8.7%, ending the crowding out

of private sector. We play CIB on a strong expected increase in investments and loan demand,

EFG on a strong improvement in turnover ratio, performance fees and IPOs. We highlight

QNBA, FAIT and NBK-Egypt as deep value plays.

February 10 2015

Banks


Neutral on KSA: we expect a strong resilience, but price dislocation has not

opened up too much of upside- we play Samba and BSF on expanding NIMs

KSA banks should be resilient with KSA government announcing a new spending plan, NIM

pick up on sovereign bond issuance and government borrowing, bolstering NIMs by up to

10bps, except for Al Rajhi and Albilad. KSA banks have the lowest reliance on government

deposits in the GCC. Key drivers are:

KSA is most likely to follow US Fed rate hikes, which are expected to come through by

June 2015 at the earliest, and given ALM mismatches, KSA should be extremely well

positioned, especially BSF, ANB and Samba. Our view is that US Fed is in a careful

balance between US strengthening economic performance on the one hand, and on the

other lower inflation expectations (lower oil, strengthening USD) and increasing risks

abroad (weakening currencies vs. USD, slow growth in Euro zone). With US 30 year

bonds at merely 2.27%, any normalization from ultra low levels should be phased and

moderate, in our view.

New sovereign bond issuance: We see banks as natural buyers of such bonds, which

should provide welcome uptick in asset yield, whilst from a liquidity perspective under

LCR and NSFR sovereign bonds are treated as highly liquid assets, with only a haircut of

5%. This should be positive for banks with ample cash reserves, except Al Rajhi and

Albilad, which are not allowed to invest in treasury bonds due to their strict Sharia’a

boards.

The new spending plan of USD30bn (4.9% of GDP at oil of USD50/barrel) by the new

king delays any austerity by at least 1 year and C/I increases as banks also incorporate a

2 months’ salary hike, hitting Q1 15e.

New consumer regulation impact is larger than expected: we have cut forecasts for

RJHI on higher than expected impact from strengthened consumer regulation.

No further support from Cost of Risk, which is already at mid-cycle levels.

Normalization should be a headwind for Samba, SABB, NCB and ARNB, whilst it should

be a tailwind for BJAZ, and to a lesser extent RJHI given its loan mix.

Potential delays in government spending affecting private sector growth as well as

potential impacting companies that supply to the government, which could pressure

asset quality of the banks. Alinma has the highest CRE exposure, at 26% of loans.

One-off salary payments of 2 months. We expect between 3.0%-11.2% negative effects

on earnings, with most of it felt in Q1 15e. However given caps we expect only 10%

increase in staff costs in FY15e, mostly in Q1 15e.

Selection is key: Share price corrections have not opened up too much of upside, in our view,

but we remain selective on KSA banks and play Samba (single digit trailing P/E, despite

headwinds from CoR normalization, best play to buy sovereign bonds) and BSF (after a strong

improvement in RoE in FY 14A on lower CoR, best play on rate increases) - both beat FY 14e

consensus by 7%.

February 10 2015

Banks


Neutral on Lebanon despite lower oil – we play BLOM on dividends

We remain Neutral on Lebanon, despite the positive effect of lower oil on fiscal and current

account and the resilient banking sector and ample FX reserves. Key challenges remain the

large inflow of Syrian refugees, now accounting for more than one quarter of Lebanon’s

population, with real GDP growth remaining below 2%, not enough to offset growing

unemployment and poverty. Gross debt to GDP is increasing mainly reflecting the slow real

GDP growth, despite some progress son fiscal policies.

BLOM remains our top pick in the country and the most profitable bank, driven by its

conservative balance sheet, prudent credit risk management, cost efficiency and attractive

valuation, and offering the best dividend yield. Although Bank Audi offers substantial, growth

via its Turkish arm, we think it would not warrant a substantial premium over BV, given the

peer group valuation of listed Turkish banks.

Jordan: We play only Arab bank Jordan, with huge unlocked value potential

Our Neutral stance on Jordan is mainly reflecting our continued positive view on Arab bank

Jordan, with Jordan only comprising 22% of its loan book. Despite lower oil prices, the political

and security situation remains highly fragile, with potential ramifications on the tourism sector

and FDIs, as well as continued influx of refugees from Syria. Overall the country’s banking

system remains resilient overall, helped by banks’ strong liquidity levels and adequate capital

bases. Despite a slower than expected RoE improvement of Arab Bank Jordan (as the bank

reinforced again general provisions) and a dividend cut (as the bank positions itself for a new

growth phase), we continue to expect a RoE expansion for Arab Bank Jordan. Valuing the bank

at only 1x tNAV, deducting USD1bn for the court case, valuing the 40% of ANB at our Fair value

and taking into account substantial overprovisioning, provides substantial upside to the CMP.

The market over-reacted to the lawsuit (-7.0% of our TP).

Morocco – improving outlook with accelerating GDP, but valuations are high

Banks generally still have inflated valuations, with an average P/E15e of 15.7x and P/tNAV14e

of 1.8x for the Morocco space vs. 9.8x and 1.8x respectively for our Africa sector, and that is

partly due to a reflection of high allocations of local investors to Morocco due to regulatory

requirements. As a result, the valuations offered are not too attractive to foreign investors.

However, Attijariwafa (ATW) is the only fairly valued stock. We expect loan growth to pick up

gradually, after a tepid growth of only 4.3% in FY 13A and amid a general slowdown in the

Kingdom’s economy that is heavily impacted by the flat growth in Europe, one of its key

markets and the required fiscal consolidation.

Kuwait: resilience, but lack of attractively priced banks, except for AUB.

A large number of projects have been awarded, including mega projects such as Clean fuels

and New Refinery Projects. However, the finance was mainly arranged via global banks. Going

forward local banks are required to finance 50% of projects, limiting the extent of foreign

competition. There has been continued overhang because of large single exposures to certain

conglomerates, stipulating the Kuwaiti Central bank to target higher general provisions, partly

also to offset relatively low specific coverage.

February 10 2015

Banks


We continue to see limited fundamental upside for the Kuwaiti banks as they have the lowest

growth potential among all our covered countries. Kuwait’s valuation remains relatively

expensive, in our view, trading at P/E16e of 13.7x (33% premium), P/PPP16e of 8.4 (7.7%

premium) and P/tNAV15e of 2.0 (20% premium).

Neutral on Bahrain – we only play AUB on Kuwait

We remain very cautious on Bahrain with very large twin deficits, looming fiscal austerity, with

even unsustainable budget deficits at much higher oil price levels. Our positive view on Ahli

United Bank is mainly driven by its exposure to Kuwait (46% of loans) and a very low exposure

to Bahrain (18%). The bank’s above sector average returns mainly driven by higher margins

and better cost efficiency, and attractive valuation at P/tNAV15e of 1.6x against RoE15e of

16.3%, offering the cheapest exposure to Kuwait (46% of assets).

Strong UW Qatar- on reduced public sector borrowing

Qatar remains strongly overvalued, in our view, trading at a premium valuation (P/E and P/PPP

of 12.0x and 9.8x respectively at 17% and 25% premium to the sector). Moreover, Qatari banks

rely to the highest extent on government spending and deposits, with the government

reducing its public sector borrowing and paying for projects outright. As a result we have

downgraded QNB from Core Buy to Hold. We maintain our Core Sell recommendations on CBQ

(stuck between rock and hard place with worsening asset quality and intense competition,

though we welcome giving up market share in corporate and growth in retail, but RoE and

RoRWA remains low) and MARK (inflated following MSCI inflows, and high exposure to

government loans and deposits).

UW on Oman given looming fiscal austerity

We expect a high twin deficit for Oman, equivalent to c.20% of GDP each at USD60/barrel.

Oman has responded in cutting energy subsidies and seeking additional revenues (remittance

taxes, telecom royalties). Moreover, Oman has relatively limited FX and SFW reserves, equal to

44% of GDP. Even though we expect financial support from the rest of the region, we still

expect medium term need for fiscal austerity, potentially affecting GDP growth in Oman. We

are particularly concerned about possible deposit withdrawals at Bank Muscat and Bank

Dhofar, 35% and 43% of total deposits respectively. As a result we remove Bank Muscat from

the Core Buy portfolio, despite its de-rating to P/tNAV of 1x. The Omani banking sector

continues to generate very low RoE (c.10%%) with tight NIMs due to tough regulation on retail,

on relatively tight capital ratios, and we expect RoE dilution from ADT1 issues, with many

banks (Dhofar, Sohar, Muscat) next in line.

February 10 2015

Banks


SSA: Nigeria in a perfect storm, Kenya enjoying benign macro-we play KNCB

Kenya should benefit from lower oil prices, reducing the external reliance on capital inflows.

We prefer KNCB (NIM resilience, retail expansion, RoE and capital generation, cheap).

In Nigeria, price dislocation has been vast, and upsides of over 100% are possible if the

economy does not collapse, though fiscal consolidation may be needed given a modest fiscal

deficit of 2.2%, but we are more worried about a gaping current account deficit of 11% even at

an oil price of USD60/barrel. We prefer a defensive strategy, via and play Zenith, GTB and

FCMB, which all benefit from rate increases. Banks RoE are still affected by a tough regulatory

environment (high cash reserves, pressure on fees, high AMCON charges) and rising CoR, given

FX and oil & gas sector lending.

February 10 2015

Banks


Core Portfolios

Exhibit 24: MENA Core Portfolio

Source: Arqaam Capital Research

Core BUYSCurr TP Upside P/E15e P/tNAV14e Div. Yield YTD Initiation Investment case

BSFR SAR 48.9 38.3% 11.6 1.3 1.9% 12.8% 9.8% Expanding NIMs and normalization in CoR not priced- in

NBS AED 2.8 53.7% 10.4 0.9 5.5% 3.4% (9.9%) Leveraging its strong balance sheet to be translated into earnings capacity

DIB AED 9.6 40.1% 12.9 2.3 5.8% (0.4%) 232.7% Best play on Dubai receovery (high CRE exposure), sharp drop in CoF, capital fixed with purchase Tamweel

CIB EGP 63.2 12.1% 12.6 2.9 2.1% 14.6% 233.8% Best play on capex pick-up

BLOM USD 13.0 45.0% 5.8 0.8 5.7% 1.7% 14.5% Deep value, conservative & well managed

Samba SAR 66.5 41.5% 11.8 1.3 2.6% 21.8% 42.1% Bank re-leveraging, supporting NIMs, well capitalized & liquid, cheapest KSA bank

KIPCO KWD 0.8 17.2% 15.4 3.1 3.2% (2.9%) 36.0% Unlocked value in OSN (sunscriber growth, margin expansion, potential IPO)

RAKBank AED 13.2 61.0% 8.0 1.7 6.1% (1.0%) 140.3% Sector highest RoRWA, strong dividend paying capacity, high FCF and CET1, very cheap on P/E

Tamweel AED 2.0 90.2% 5.5 0.4 5.6% --% (1.8%) Legacy position, we expect DIB to launch an offer for the remaining 13%

MASQ AED 229.7 55.4% 7.7 1.3 3.6% 21.2% 228.6% Extreme value, strong growth on double digit topline, improving JAWs and rapidly improving asset quality

ENBD AED 16.0 78.2% 7.4 1.4 3.9% 1.2% 62.7% Best play on risk normalization, cheapest on P/PPP, very attractive pre-provisioning RoE

QIC QAR 123.0 38.5% 10.4 2.0 2.3% (2.0%) 95.7% Strong RoE on solid growth in direct insurance and reinsurance and well managed investment portfolio

Bupa SAR 212.0 21.1% 17.5 5.4 0.3% 3.7% 211.3% Growth potential still not priced in as Bupa remains persistent in gaining further market share with minimal downside

ARBK JOD 12.5 81.4% 7.6 0.7 2.4% (3.0%) 3.6% Strong recovery and robust RoE expansion (topline, JAWs, cost of risk), cheap entry point into Arab Bank in KSA

EFG EGP 23.3 34.0% 12.3 1.3 2.5% 12.1% 0.9% Still waiting for regulatory approvals, full sale of other assets may take longer as well

Tawuniya SAR 100.0 26.4% 14.0 3.5 --% 58.4% (11.8%) Falling claims and beginning of recovery in GWP

Oman United Insurance OMR 0.8 114.9% 6.2 1.2 9.9% 25.3% (7.4%) Compelling valuations with RoTE of 20% and dividend yield of 8%

QNBA EGP 41.8 31.3% 6.5 1.6 4.2% 23.0% 7.5% Cheap multiples with RoE of c. 22%, trading at 25% discount to CAE and 40-50% to CIB

FAIT EGP 70.5 71.1% 3.2 0.5 6.6% (0.5%) (3.4%) Very cheap multiples with RoE of c. 23% leading to high upside potential and even some recoveries being surprisingly booked

NBKE EGP 35.1 67.5% 5.2 0.9 13.2% 8.9% 6.1% Attractive valuation with double digit dividend yield and higher growth potential with backing of parent

Exited positions:

QNB QAR 227.0 17.6% 12.2 2.1 3.9% (9.3%) 55.8% Reduced government borrowing, high reliance on government deposits

FGB AED 22.1 22.6% 12.7 2.3 5.6% 5.9% 199.5% NIM compression and growth no longer exceptional

Muscat OMR 0.8 26.2% 8.0 1.0 3.9% 9.3% 24.0% Given fiscal austerity and high reliance on government deposits

CAE EGP 26.0 24.2% 9.1 1.6 5.3% 15.7% 130.5% Strong YTD performance but slower growth vs. CIB and QNBA

UNB AED 7.7 36.4% 7.3 1.0 4.4% (2.9%) (100.0%) Did not qualify for MSCI inclusion

SHB SAR 54.4 19.6% 13.5 1.7 2.2% 1.8% 6.3% Taking profits, capital base becoming tight

CBD AED 6.8 (9.4%) 13.9 2.0 3.3% 15.4% 199.8% Strong dividend paying capacity, solid RORWA, profits taking

Alinma SAR 26.9 14.5% 28.4 1.8 2.1% 15.1% 8.8% Profits taking after disappointing growth

ARNB SAR 39.1 16.0% 13.0 1.4 1.3% 10.7% 6.6% Slower than expected growth, we prefer to play via Arab Bank Jordan

Riyad SAR 20.5 14.0% 12.3 1.4 4.2% 5.7% 16.7% Market now re-rated the bank on NIMs stability and accelerating growth

WAHA AED 3.5 19.3% 10.7 1.4 3.4% 11.7% 51.4% Taking profits after very strong run (catching up vs revaluation Aercap, though this gap has opened up again)

Salama AED 0.9 64.2% 19.1 0.6 --% 2.8% 13.9% Thai floods, handset insurance exposures, Best Re needs to be recapitalized, RoE expansion out of window

Al Rajhi SAR 64.2 5.1% 15.2 2.4 3.1% 18.7% 3.1% Sharp NIM compression in retail segment

Burgan KWD 0.5 12.0% 12.4 1.8 4.3% (3.1%) 59.1% Best growth story in Kuwait, at the lowest multiples, but taking profits on Basel III concerns

Total return 47.4% 10.4x 1.9x 4.6% 121.5%

S&P Arabia 5.9% 25.3%

Outperformance (1.4%) 96.3%

Core SELLSCurr TP Upside P/E15e P/tNAV14e Div. Yield YTD Initiation Investment case

ADIB EY EGP 4.1 (41.9%) 13.2x 3.8x --% (9.2%) 15.4% Dilution risk not priced in

Khaliji QAR 19.3 (11.6%) 14.1x 1.3x 4.6% (1.1%) 42.2% Low quality of earnings, high reliance on capital gains, valuation already recognizes the transition

CBQ QAR 61.5 (12.1%) 12.5x 1.3x 5.0% 2.2% 38.2% Lowest adj RoRWA and RoE of Qatar, very low FCF generation, no dividend paying capacity

BOB USD 13.7 (25.7%) 7.4x 1.3x 3.8% --% (4.6%) Weakest capital base of sector due to high reliance on preference shares

EGB USD 1.2 (5.3%) 8.1x 1.1x 5.8% (3.2%) (5.9%) M&A premium largely unjustified, hedging our long position in Egypt

Ajman Bank AED 1.9 (24.4%) 16.2x 1.9x --% (11.4%) 60.0% Lowest profitability in the UAE on the back of troubling C/I ratio

Bank Dhofar OMR 0.3 (28.7%) 14.0x 1.5x 2.7% 4.0% 10.4% Expensive with highest NIM compression, likely to buy Bank Sohar

Al Ahli United Bank KWD 1.0 20.6% 10.2x 1.6x 5.0% 1.6% (9.7%) Overvalued, the stock is trading at expensive multiples

Boubyan KWD 0.3 (38.1%) 28.6x 2.9x 1.0% 17.1% (11.6%) Highest valuation in sector, renewed offer NBK only a possibility

KFH KWD 0.6 (24.9%) 27.3x 1.9x 1.5% 9.7% 22.9% Headwinds from lower capital gains, poor asset quality

Gulf Bank KWD 0.3 (8.9%) 16.4x 1.5x --% 3.4% (12.5%) Valuation fully reflects earnings recovery

Allianz Saudi Fransi SAR 28.2 (37.2%) 19.2x 4.1x --% 31.0% (13.8%) Strongly overvalued, challenging KSA insurance market and hampered by capital deficit.

MARK QAR 37.0 (26.7%) 19.1 2.8 3.5% 14.3% (15.0%) MSCI inflows have inflated MARK's valuation ratios

Ithmaar USD 0.1 (27.4%) 42.4x 1.5x --% 3.1% (29.8%) Strongly overvalued, extremely low RoE

Exited positions:

HBMO OMR 0.1 (15.6%) 22.2x 0.9x 3.8% 2.1% (23.7%) Price has re-rated

MedGulf SAR 47.9 (10.3%) 17.6x 5.4x --% 6.5% 51.3% Strongly overvalued, challenging KSA insurance market and hampered by capital deficit.

NBAD AED 14.3 3.3% 12.0x 1.7x 2.9% (1.1%) 21.7% Unwarranted premium valuation vs FGB, one offs in FY13, RoE down on internationalization, not a play on lower LLPs

Ace SAR 37.5 (41.6%) 33.2x 4.2x --% 21.0% (15.5%) Improving KSA outlook (rate increases in health and motor)

Tawuniya SAR 100.0 26.4% 14.0x 3.5x --% 58.4% 36.8% Strongly overvalued amid diminishing GWP and minuscule investment book

DFM AED 2.8 36.0% 14.3x 5.2x 7.1% 1.5% 21.0% Only option value, but taken out as valuation in line with historical traded volumes

QNBA EGP 44.2 29.3% 7.2x 1.4x 3.9% 8.5% (24.2%) Unjustified take-over premium when we exited

MASQ AED 229.7 55.4% 7.7x 1.3x 3.6% 21.2% (21.4%) Beats estimates on the back of improved margins, driven by better funding management

Shuaa AED 1.8 162.7% 14.1x 0.6x --% 2.4% (17.9%) Covering short position

Salama AED 0.9 64.2% 19.1x 0.6x --% 2.8% 35.3% Covering short position

DIB AED 9.6 40.1% 12.9x 2.3x 5.8% (0.4%) 4.8% Turn-around from Core Sell to Core Buy

BJAZ SAR 34.9 18.8% 17.8x 1.4x --% 5.8% 8.6% Tight capital base, capital increase to be EPS dilutive

Total return (19.3%) 18.1x 1.9x 2.5% 5.4% 1.4%

S&P Arabia 5.9% 25.3%

Outperformance 11.4% (23.9%)

Total return/alpha (Core Buy & Core Sells) 120.2%

February 10 2015

Banks


Exhibit 25: Dividend Portfolio

Source: Arqaam Capital Research

Bank Curr Rating TP Upside P/E15e P/tNAV14e Div Yield 15e Payout Ratio CET1 14e

RAKBANK AED BUY 13.2 61.0% 8.0x 1.7x 7.5% 58% 26.5%

MASHREQ AED BUY 229.7 55.4% 7.7x 1.3x 4.8% 37% 14.4%

BOS AED HOLD 2.3 19.5% 11.7x 0.9x 5.8% 80% 19.6%

FGB AED BUY 22.1 22.6% 12.7x 2.3x 5.5% 70% 11.9%

QIB QAR HOLD 99.5 (8.8%) 14.8x 2.0x 4.6% 64% 12.7%

QIIB QAR HOLD 85.5 0.6% 17.8x 2.3x 4.7% 75% 15.3%

BLOM USD BUY 13.0 45.0% 5.8x 0.8x 6.0% 32% 15.3%

Zenith NGN BUY 28.0 73.6% 4.8x 0.9x 11.9% 57% 21.9%

Total return 33.6% 10.4x 1.5x 6.3% 59.2%

February 10 2015

Banks


NIM evolution per bank

Samba and BSF best positioned to play sovereign bonds and rate hikes

We see better NIMs mainly for ADIB, DIB (on higher asset yields if they

stop grabbing more market share) and BJAZ (on optimization of funding

costs)

Lower NIMs for ADCB, CBD (if they start growing), FGB (mix change), UAB

and Alinma (to keep up loan growth momentum)

We continue to see KSA banks as key beneficiaries of better NIMs:

(i) KSA banks are set to benefit from rate rises, but we expect the initial rate increase to take

place later rather than sooner, around June at the earliest. The pace of US Fed rate

normalization determines NIMs in KSA. On the one hand the GDP acceleration would ask for a

rate hike, but on the other hand lower (core) inflation as a result of oil price falls and weakness

in Ems and Eurozone would require a more phased increase. Best play on rate hikes remains,

as illustrated below.

Exhibit 26: Impact of 25bps increase in interest rate gap


-6%

-4%

-2%

0%

2%

4%

KSA Jordan Oman UAE Egypt Bahrain Qatar Lebanon

% NP % NII

February 10 2015

Banks


Exhibit 27: Impact of 25bps increase in interest rate gap–BSF and Samba most geared


Interest rate sensitivities as published by the banks suggest a different picture, with even

negative impacts following a rate hike, suggesting the path to improving NIMs is nota s straight

forward as ALM gaps suggest.

Exhibit 28: Impact of 100bps increase in SAR on NII & NP


Exhibit 29: Impact of 100bps increase in USD on NII & NP


-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

HB

MO

BSF

R

SAM

BA

AR

NB

SAB

B

BK

SB

AA

AL

CB

D

ENB

D

BO

S

BJA

Z

HD

BK

NB

AD

ALI

NM

A

CIE

B

BK

DB

RIB

L

NB

OB

AR

AB

MA

SQ

CO

MI

UN

B

CB

Q

QN

BA

AD

CB

SIB

C

EGB

E

BK

MB

INV

ESTB

AU

B

QIB

RA

KB

AN

K

QN

B

Al B

arak

a

AH

LI

CB

I

MA

RK

BO

B

BLO

M

DH

B

KH

ALI

JI

AU

DI

HR

HO

BYB

% NP % NII

-15%

-10%

-5%

0%

5%

10%

15%

NC

B

Ban

k A

l-Ja

zira

SAB

B

AN

B

SHB

Ban

k R

iyad

SAIB

BSF

Sam

ba

% impact on NII FY 15e % impact on NP FY 15e

-15%

-10%

-5%

0%

5%

10%

15%

NC

B

Ba

nk

Riy

ad

SH

B

AN

B

SAB

B

Ba

nk

Al-

Jazi

ra

BS

F

SA

IB

Sa

mb

a

% impact on NII FY 15e % impact on NP FY 15e

February 10 2015

Banks


Exhibit 30: Impact of 100bps increase in SAR on shareholders’ equity


Exhibit 31: Impact of 100bps increase in USD on shareholders’ equity


(ii) purchasing sovereign bonds, given the sizeable KSA budget deficit, (excluding Al Rajhi and

Albilad who are not allowed to buy sovereign bonds) could provide welcome boost to NIMs,

without too much effect on liquidity ratios. Best play is Samba, with the most liquid balance

sheet. On the other hand, in UAE, Kuwait and Qatar we expect very limited sovereign

borrowing, if at all. Best play is Samba with the highest cash/asset ratio

Exhibit 32: Cash/total assets YE14e for KSA - Samba best positioned to buy sovereigns


iii) optimization assets yields and cost of funds. Our NIM screen suggests potential for higher

NIMs for ADIB (given its unsecured loan mix), DIB, Ajman, Investbank, QIB, Khaliji, QIIB, SAIB,

and BJAZ (on lower CoF). NIMs should contract for ADCB (as it had optimized asset yields by

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

NCB

Ban

k A

l-R

iyad

Ba

nk

Al-

Jazi

ra

AN

B

SHB

SAIB

SAB

B

Sam

ba

BSF

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

NCB

Ban

k A

l-R

iyad

SH

B

Ban

k A

l-Ja

zira

AN

B

BSF

Sam

ba

SAIB

SAB

B

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

SAM

BA

RIB

L

SAB

B

BSF

R

BJA

Z

RJH

I

AA

AL

ALB

I

AR

NB

ALI

NM

A

SIB

NC

B

February 10 2015

Banks


not competing and letting go market share), UAB and Alinma (particularly of it continues its

strong loan growth).

Exhibit 33: NIMs FY 10-14A


Exhibit 34: NIMs FY 14-18e


-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

RA

KB

AN

K

RJH

I

UA

B

BC

P

MA

RK

AD

IB

QIIB

CB

D

BK

DB

AJM

AN

BA

NK

INV

ESTB

AN

K

HD

BK

BC

I

CB

I

EGB

E

FGB

QN

BA

CO

MI

Att

ijari

waf

a

ALB

I

KFI

N

NB

KE

QIB

DH

B

BK

MB

CIE

B

CB

Q

BC

E

BO

S

KH

ALI

JI

AH

LI

NB

OB

HB

TF

NB

S

HB

MO

FAIT

NB

K

QN

B

AR

NB

DIB

MA

SQ

SIB

C

BO

UB

YAN

BU

RG

NB

AD

BK

SB

BSF

R

SAB

B

Al M

uta

he

d

ENB

D

UN

B

SAM

BA

ALI

NM

A

BJA

Z

KIB

MA

RT

RIB

L

CB

K

AD

CB

HR

HO

BLO

M

AA

AL

NB

B

Al B

arak

a

GB

K

AU

B

JIB

AR

AB

BO

B

BYB

CA

NA

AU

DI

KIP

CO

AD

IB E

gyp

t

BK

NZ

BJK

IZ

Ith

maa

r

FY 10A FY 11A FY 12A FY 13A FY 14A

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

RA

KB

AN

K

CO

MI

UA

B

CIE

B

QN

BA

FAIT

AD

IB E

gyp

t

EGB

E

BC

I

CB

I

HD

BK

BC

P

INV

ESTB

AN

K

HB

TF

Al B

arak

a

CB

D

FGB

AD

IB

DIB

RJH

I

BC

E

MA

SQ

MA

RT

MA

RK

NB

KE

QIB

AJM

AN

BA

NK

Att

ijari

waf

a

UN

B

CA

NA

ALI

NM

A

AD

CB

QIIB JI

B

ENB

D

BO

UB

YAN

NB

OB

KIB

NB

S

DH

B

BK

MB

QN

B

BK

DB

AH

LI

KFI

N

ALB

I

BU

RG

AR

NB

BK

SB

AR

AB

RIB

L

NB

K

Al M

uta

he

d

AU

B

CB

Q

BJA

Z

GB

K

HB

MO

AU

DI

AA

AL

SAB

B

SAM

BA

NB

B

BSF

R

NB

AD

BO

S

BLO

M

CB

K

KIP

CO

SIB

C

HR

HO

KH

ALI

JI

BO

B

BK

NZ

BYB

BJK

IZ

Ith

maa

r

FY 14A FY 15e FY 16e FY 17e FY 18e

February 10 2015

Banks


Exhibit 35: NIMs screen (UAE and Qatar)


Company ADCB ADIB CBD DIB ENBD FGB NBAD UNB MASQ RAKBANK BOS UAB CBI NBS AJMANBAN INVESTB CBQ DOHA QIB QNB MARK KHALIJI AHLI QIIB

Assets

Gross Loans and Advances 147,340 75,760 35,204 79,124 266,751 144,187 200,947 66,489 60,752 25,806 14,987 18,442 14,096 15,460 7,777 10,715 75,372 50,334 60,196 345,056 57,960 27,056 21,663 22,349

Less : Loan Loss Provsions 6,778 3,187 3,037 5,147 20,777 4,478 6,668 2,423 2,706 540 1,108 501 1,560 469 141 859 2,049 1,775 515 6,926 53 179 355 135

Net Loans and Advances 140,562 72,573 32,167 73,977 245,974 139,709 194,279 64,066 58,046 25,266 13,878 17,941 12,536 14,991 7,636 9,856 73,323 48,559 59,682 338,130 57,907 26,877 21,308 22,215

Banks & FIs 11,003 1,269 316 1,350 32,763 - 28,311 7,079 3,847 27 1

Date post:	19-Mar-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

MENA Bank Outlook - Arqaam Capital · Resilient banking environment Austerity game only a...

Documents