The Company
Commercial Bank of Qatar (CBQ) is the country’s second-largest lender with a 12% and 10% market share in loans and deposits, respectively (among listed banks). CBQ, which trades as CBQK on the Qatar Exchange, is a conventional full-service bank offering commercial banking and investment banking services and products to corporate and retail customers. It offers commercial loans, trade and project finance, treasury services, consumer loans, current and savings accounts, time deposits, credit cards, e-cards, internet banking, and phone banking services, and has a total of 30 local branches and 151 ATMs. CBQ offers an attractive dividend yield, with one of the highest yields among its domestic and GCC peers. CBQ has consistently delivered robust dividends since 2008, offering an average dividend payout ratio of 84%. CBQ’s valuation is undemanding. The stock trades at a discount to its five-year average price-to-book and price-to-earnings ratios. Moreover, it is also trading at an unjustifiable discount to its GCC peers. CBQ has announced that it will raise capital by issuing Tier-1 perpetual capital notes worth QR2bn ($547.8m) to boost its Tier-1 capital and propel loan growth. The bank is expected to conclude 2013 with Tier-1 and capital adequacy ratios of 13% and 14.6%. CBQ should also benefit from the building boom, with the banking sector one of the primary beneficiaries and a driver of Qatar’s infrastructure expansion, as current and future projects need to be financed. Given that CBQ is Qatar’s second-largest bank and focuses on the private corporate sector, the bank should continue to be involved in financing future projects.
Financial Forecast
We estimate net operating income to grow at a compound annual growth rate (CAGR) of 11.2% (2012-17e), with growth to come from net interest income, growing at a CAGR of 15.6% ( 2012-17e). The ensuing growth is based on our assumption of an expansion in the loan book by a CAGR of 17.5% (2012-17e). Moreover, we assume fees and commissions and share of profit from associates will contribute, growing at a CAGR (2012-17e) of 10.5% and 10.2%, respectively. Further, we factor in a CAGR of 5.7% for forex income during the same period versus 13.2% growth during 2007-12 due to Alternatifbank’s (AB ank) consistent forex losses. Furthermore, we estimate CBQ will register a CAGR of 15.3% in net profit for 2013e17e and 8.7% over 2012-17e. We see CBQ growing its net income by deploying its funds in the corporate segment and infrastructure projects RISKS: Risks include a potential dividend cut for 2013. We expect QR5.50 ($1.51) in 2013/14 dividends per share versus QR6 ($1.64) in 2012/13. Other risks, meanwhile, include CBQ’s objectives for AB ank not materialising, asset quality worsening, as well as the concentration risk and general risks increasing through regional socio-political issues. There is also a currency risk due to volatility between the Turkish lira and US dollar.
Development Strategy
CBQ acquired AB ank recently, becoming the majority shareholder on July 18, 2013 by acquiring 70.84% of AB ank’s shares for QR1.8bn ($493m), which is twice the book value. It acquired an additional 3.40% stake on September 27, 2013, bringing its total ownership to 74.24%. This deal opened a window of opportunity both regionally and internationally for the bank to capture trade flows between Qatar and Turkey and the GCC and Turkey.
We recall that CBQ acquired minority stakes in the National Bank of Oman (34.9%) during 2005 and in United Arab Bank (40.0%) during 2007 in order to expand within the GCC. The objective of these deals was to extract synergies, while at the same time provide technical support to the banks’ management. So far, CBQ’s investment in these two banks has proven successful and yielded positive results, with income from associates contributing 12.8% and 18.5% to the bottom line in 2012 and the third quarter of 2013, respectively. Management has devised a five-year strategic plan to improve the operational efficiency of AB ank. We forecast AB ank’s net profit will grow at a CAGR of 10%, while contributing 7.1% to CBQ’s bottom line.
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