GCC Banking Sector Detailed Report

Global Research Sector
GCC
GCC Banking Sector

May 2005
Global Investment House KSCC
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Table of Contents
Major Highlights .............................................................................................................................................................. 1
Islamic Banks in GCC .................................................................................................................................................. 10
Role of Foreign Banks .................................................................................................................................................. 13
Competitive Strategies & Other Developments ....................................................................................... 15
Financial Performance ................................................................................................................................................ 19
Outlook .................................................................................................................................................................................... 23
Valuation & Recommendation Summary .................................................................................................... 28

Global Research - GCC Global Investment House
1. Major Highlights
The GCC region has been an important financial center for decades, with the oil and gas
industry playing a critical role. The region has a longstanding active tradition in commerce
and finance. Banking has played an important part in the growth of the region for a long time.
Recent years have witnessed a growth in both the size and sophistication of the region’s
banking industry. The 45 listed banks across the six GCC countries, which we are covering in
this Report, had an aggregate asset size of US$354.3bn at the end of 2004, having grown by
14.8% over 2003. These banks had aggregate net profit of US$8.9bn in 2004, having grown
by a healthy 38.6% over 2003.
The major highlights of the region’s banking industry are as follows:
i. Controlling ownership by government and influential families
The shareholding structures of the GCC banks are often dominated by two groups of owners
– governments or government agencies, and influential ruling or merchant families. Kuwaiti
families own the major Kuwaiti banks – National Bank of Kuwait (NBK), Commercial Bank
of Kuwait (CBK), and Gulf Bank (GB); while the large Saudi bank – National Commercial
Bank (NCB); and banks in UAE – Emirates Bank International (EBI), National Bank of
Abu Dhabi (NBAD) and Abu Dhabi Commercial Bank (ADCB) are majority-state-owned.
In Oman and Qatar, the governments own major stakes in the local banks. Government
ownership enables them to intervene and support their banks during a crisis. On the other
hand, shareholdings of leading business families leave banks vulnerable to potential related-
party lending and shareholder meddling in credit policies. Foreign ownership is more limited
in the banking sectors of the GCC, compared to other emerging market regions.
ii. Low business diversification
The business diversification of the GCC banks remains relatively poor. ‘Plain vanilla’ credit
products and services constitute the bulk of the region’s banking activities, with particular
focus on short-term loans. Investment activities are almost restricted to government bills
and bonds, along with investment-grade securities in mostly international markets. Trading
positions are generally limited. Stock markets in the GCC remain relatively small and
underdeveloped, though there seems to be an increasing tendency towards investing in GCC
stock markets as well; while the bond markets consist almost exclusively of government
paper.
Activities such as sophisticated structured financing, advisory, asset and fund management,
fiduciary and custody services are at a nascent stage, and do not contribute significantly
to profits, which remain highly reliant on interest margins. Top-tier banks are now placing
particular emphasis on the development of domestic asset management competencies.
With economic diversification, modernization and liberalization, banks are under pressure
to respond to more sophisticated client needs. As a result, some banks are developing
aggressive programs to widen their product range. This is reflected in an increasing tendency
for the banks to offer more fee-rich products, to reduce their reliance on interest margins.
Such initiatives are made easier by new communications and upgraded IT networks. Internet
May 2005 GCC Banking Sector 1

banking has reached a high level of use in the GCC, compared with other emerging markets.
Great strides have been made in recent times in the breadth and sophistication of the GCC
banks’ services, including diversification in products aimed at addressing different customer
segments – corporate lending, project financing, and the relatively new retail banking
segment.
iii. Constrained by relatively small size
The GCC banks are characterized by their relatively small size by international standards.
While the balance sheet sizes of most banks in the region have grown in recent years,
reflecting their business growth, they are still small compared to their Western counterparts.
As a result, banking systems in the GCC remain fragmented. GCC banks are, therefore,
primarily domestic players. Their international business is concentrated in trade finance,
intra-regional money market placements, and government and investment-grade corporate
bonds in the US and Europe. The lower exposures abroad have also been exacerbated in
recent years by the growing business at home. The foreign assets as a proportion of total
assets have generally trended down for the GCC as a whole (see Chart later in this section),
though Kuwait, Oman and Qatar are exceptions to this general trend. Efforts in the GCC to
create a fully integrated regional banking market have not been successful so far, particularly
for retail credit and funding.
Legal barriers to entry and family ownership are certainly the main causes of the very slow
emergence of a regional playing field. Most banking activities remain domestic in nature,
except for large government-related infrastructure, power and water projects. But most of the
GCC banks are excluded from the financing of such big-ticket deals, either because they are
too small, or because of their limited international franchise and narrow commercial networks.
As a result, major international banks dominate project finance and syndication business, with
only Arab Banking Corporation (ABC) and Gulf International Bank (GIB), the two off-shore
banking units in Bahrain, reportedly having a significant presence in this segment. Also, the
banks in Saudi Arabia benefit from their larger and more diversified domestic market and, as
such, face less business concentration risks than do their neighboring peers.
iv. High concentration
Banking businesses in the six GCC countries are concentrated locally. The single notable
exception to this trend has been the asset concentration profile of banks in Bahrain, thanks to
the many Offshore Banking Units (OBUs) operating from that country. These OBUs carry
on all banking activities with non-residents, mostly in foreign currency. They do not deal in
any way with residents of Bahrain, other than the Government of Bahrain and its agencies,
and with licensed banks.
The aggregate foreign assets of banks in the six GCC countries, while growing at a CAGR of
4.9% during 2001-’04, have generally trended down as a proportion of the total assets of the
banks during the period, indicating a larger concentration of their business in their respective
geographies. This could also have been a result of the resurgence in all the GCC economies
during the said period.
2 GCC Banking Sector May 2005

Chart 1-1: GCC Banks - Concentration of Assets
100%
Foreign Assests/Total Assets (%)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2001 2002 Year 2003 2004
Bahrain Kuwait Oman

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

The most profitable banks are those in Saudi Arabia, Kuwait, and UAE. The Return on
Average Assets (RoAA) of Saudi banks in 2004 ranged between 1.9% and 4.1%, while that of
Kuwaiti banks ranged between 1.4% and 3.3%, while for the UAE banks, it ranged between
1.1% and 4.2%. The GCC average RoAA in 2004 was 2.6%. Strong profit generation has
resulted from high margins, low cost of funds and labor, and the absence of income tax.
Besides, pricing on deposits is often fixed or adjusted less rapidly than on the asset side, so
interest margins are closely correlated to trends in interest rates.
While GCC countries remain small, outward-oriented economies still heavily reliant on oil
and gas, contagion effects in the aftermath of a global or regional recession have not shaken
banks to pose a threat to their respective economies. The notable exception to this stability in
performance is Kuwait, which was hard hit by the Gulf War in 1990-1991.
Chart 1-2: GCC Banks - Profitability
3.5%
3.0%
2.5%
ROAA (%)
2.0%
1.5%
1.0%
0.5%
0.0%
2001 2002 Year 2003 2004
Bahrain Kuwait Oman
Qatar Saudi Arabia UAE
Gcc Average
vii. Improving asset quality
Asset quality has improved in the recent years. Non-performing loans for banks across GCC
have trended down in the last three years – more than halving from 7.9% of gross loans in
2001 to 3.5% of gross loans in 2004. While the NPLs as a proportion of gross loans remain
the highest for Oman, the ratio has been the lowest for Saudi Arabian banks. However, the
NPLs/gross loans ratio saw the steepest fall in the case of banks in UAE during 2004 – from
9.4% in 2003 to 3.5% in 2004 (based on the figures available for seven of the 12 UAE banks
covered in this Report).
Improving management of credit risk, limited appetite for the most risky sectors and products,
satisfactory economic environment, and high liquidity of recent months have been at the root
of this positive trend. Improving diversification of banking business has also contributed to
the decline in non-performing loans.

Chart 1-3: GCC Banks - Asset Quality
18.0%
16.0%
14.0%
NPLs/Gross Loans (%)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2001 2002 Year 2003 2004
Bahrain Kuwait Oman
Qatar Saudi Arabi UAE
GCC Average
viii. Strong funding profile
The GCC banks have traditionally been characterized by strong funding profiles. The largest
banks are net placers of funds in the international markets. Significant differences exist among
the six countries, however. The main source of funding so far has been customers’ deposits.
Customers’ deposits have traditionally constituted a high proportion of the total liabilities of
banks. Customers’ deposits constituted about 80% of the total deposits and 60% of the total
liabilities in Kuwait in 2004, while these figures were 87% and 75% respectively for Saudi
Arabia, and 88% and 71% respectively for UAE. The highly stable customer deposits have
meant steady deposit-base and low cost of funds for the banks. But this is set to change. The
banks’ lending portfolios are experiencing a gradual increase in maturity following the rapid
expansion of consumer loans accelerating the need for longer-term funds. In addition, large
infrastructure projects pertaining to utilities development, triggered by demographic trends,
and enhanced economic reforms toward more liberalization have fueled demand for long-
term project finance. As a result of high credit growth, GCC banks’ funding is gradually
shifting away from a focus on customers’ deposits.
Alternative funding is developing through certificates of deposits, syndication, and even

international bond issues. It is worth noting that the $450 million three-year Eurobond issue
of National Bank of Kuwait in early 2002 was the first bond issue for a GCC onshore bank.
The NBK bond issue has set an important benchmark, which other banks in the region could
be following. Recent years have seen more such issues. Some of the long-term bond offerings,
completed in the recent past as well as those proposed in 2005, are as under:
Table 1-1 : Long-Term Bond Offerings by GCC Banks

Bank Country Type of Offering Year Amount in $mn
Gulf Bank Kuwait Subordinated Loan 2004 150
Mashreqbank UAE EMTNs 2004 300
Bank Muscat Oman EMTNs 2004 250
Emirates Bank UAE FRNs 2005 750
Mashreqbank UAE EMTNs 2005 325
Saudi British Bank Saudi Arabia FRBs 2005 650
Saudi Hollandi Bank Saudi Arabia FRNs 2005 187
Source: Global Research.

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

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

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

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

2. Islamic Banks in GCC

Islamic banks today represent the majority of Islamic financial institutions, which are spread
worldwide. The emergence of Islamic banking was a result of a revival of interest to develop
an Islamic economic system as well as the increasing demand from Muslims worldwide
for products and modes of investment that are in compliance with Shariah principles. The
pioneering establishment of Islamic banks had been the catalyst for growth and provided the
foundation for the development of the Islamic financial services industry as a whole. Though
the Islamic financial institutions are spread across the world, they are primarily concentrated
in the Middle East region. In our report, we are primarily covering listed commercial
Islamic banks in the GCC region. As of December 2004, the total asset size of these banks
was estimated at US$48.8bn. In 2004, the aggregate net profit of these listed banks was at
US$1.3bn, which represented a growth of about 45% over the previous year. The table below
shows some of the major listed commercial Islamic banks in the GCC region.
Table 2-1: Listed Islamic Banks in the GCC region

Year of
Name of the Institution Country
Incorporation
Dubai Islamic Bank UAE 1975
Sharjah Islamic Bank UAE 1975
Kuwait Finance House Kuwait 1977
Bahrain Islamic Bank Bahrain 1979
Bahraini Saudi Bank Bahrain 1983
Qatar Islamic Bank Qatar 1983
Al Rajhi Banking & Investment Corp Saudi Arabia 1985
Qatar International Islamic Bank Qatar 1990
Abu Dhabi Islamic Bank UAE 1997
Source: Zawya.com, Company Websites.
Performance of listed Islamic banks
Islamic financial institutions (IFIs) in the Gulf Cooperation Council (GCC) countries are
posting spectacular growth. Deposits with IFIs have more than doubled in the five-year
period from 1998 to 2003 while the net profit also more than doubled during the same period.
As Islamic banks are different from conventional banks, it would be interesting to compare
the performance of the listed Islamic banks in the GCC region. Islamic banking is often
subject to variety of questions and perceptions on profitability, liquidity and capital adequacy
measure. According to the World Islamic Banking Competitiveness Report (WIBC) most
of the Islamic banks are growing faster than their respective conventional banking peers.
Comparing the returns on assets of Islamic retail banks to leading conventional banks in
their markets show that while some have strong profitability, others have under-performed as
compared to their conventional peers.
There are several factors that have a significant impact on the bank’s financial performance.
Average wealth levels, level of competition and labour costs have a significant effect on
the overall level of profits enjoyed by the banking sector, including the Islamic banks. In
addition, the business model of the banks also made huge differences to their revenues. This
can be illustrated from the fact that as with the conventional banks, Islamic banks that focus
on retail customers perform better than those focusing on corporate banking. The case in
point is that of Al Rajhi Banking & Investment Corp which has successfully leveraged retail

banking potential as it has one of the largest branch and ATM networks in Saudi Arabia. The
customers perception about the Islamic banking products and their appetite for returns on
Islamic banking products also makes serious difference to the Islamic banks. The other factor
which bodes well for the Islamic banks was that Islamic banks have often enjoyed protection
from competition and have traditionally enjoyed monopoly in their respective regions. In
some countries, they enjoy regulatory advantages such as higher lending limits. But now,
most of the countries have brought out amendments in their Islamic banking regulations so
that the Islamic banking industry is better supervised and regulated.
Table 2-2: Comparative Ratios of Islamic Banks in GCC (as of FY2004)

Al-
BIsB BSB KFH DIB ADIB SIB QIIB QIB
Rajhi
ROAE 8.0% 16.2% 24.4% 21.80% 8.90% 11.00% 22.40% 28.80% 37.20%
ROAA 1.52% 1.48% 2.30% 1.70% 1.10% 2.30% 1.89% 4.34% 4.10%
Net Spread 1.94% 2.01% 3.00% 2.40% 2.70% 2.60% 3.10% 4.48% 6.50%
Net Interest Margin 2.11% 2.71% 2.60% 2.50% 2.80% 2.90% 3.13% 4.68% 5.10%
Cost to Operating Income 55.3% 60.3% 27.9% 44.10% 56.20% 45.00% 43.10% 27.20% 32.20%
Capital Adequacy Ratio - - - - - - 14.71% 29.80% 18.80%
Here it should be noted that banks which have a significant retail customer base such as Al
Rajhi Banking Corporation, Qatar Islamic Bank (QIB) and Kuwait Finance House (KFH)
enjoy superior returns on their equity. Al-Rajhi Bank had the highest Return on Average
Equity of 37.2% followed by Qatar Islamic Bank (28.8%) and Qatar International Islamic
Bank (22.4%). At the same time, Qatar Islamic Bank was highly efficient in utilizing its
assets as it had the Return on Average Assets of 4.34% followed by Al-Rajhi with 4.10%. It
has been observed that, most of the Islamic banks have higher spread and net interest margin
as compared to their Islamic banking counterparts in the region. Al-Rajhi is at the forefront
in this regard as it has net spread of 6.5% and net interest margin of 5.1% followed by Qatar
Islamic Bank with 4.48% and 4.68% respectively.
The profitability of Islamic banks depends significantly on how efficiently they manage their
resources. Many Islamic banks are now resorting to implement cost-saving measures and are
reeling out new cost-cutting initiatives to improve their bottom-lines. One of the major reasons
of the high profitability of some of the banks such as Kuwait Finance House, Qatar Islamic
Bank and Al Rajhi Bank can be seen in their cost structure as they have a lower operating
cost to operating revenue ratios. QIB has the lowest operating expenses as a percentage of
total operating income at 27.2% followed by KFH with 27.9%. Both the banks in Bahrain
have much higher cost to operating income in FY2004. For most of the banks, the higher
total operating expense to operating revenue ratio implies that the Islamic banks still have
a lot to achieve in terms of operating efficiencies. The silver lining is that it directly shows
which area to improve in order to improve their profitability. Most of the Islamic banks are
trying to contain this ratio by generating incremental revenues through e-initiatives such as
Internet Banking, Mobile Banking etc. This makes it easier for banks to shift the customers
from branch banking to ATM-banking or e-banking.
Asset quality in the recent past has been a cause of concern for some of the Islamic banks
in the region. One of the problems that is faced is that most of the banks are wary of giving
information about the asset quality which makes it difficult to analyze bank’s assets and Non-
Performing Loans (NPL) structure. However, the number indicates that some of the banks

have very high NPLs such as Bahraini Saudi Bank and Qatar Islamic Bank. We expect the
NPL levels to go down in future as the Islamic banks are concentrating their efforts towards
retail banking especially consumer loans and credit cards which have relatively lower level
of delinquencies. However, the good point is that banks have been maintaining adequate
provisions in order to counter the problem of high NPLs. Abu Dhabi Islamic bank has a very
low provisioning level as it is a new entrant in the market. As it increases its lending, it will
have to increase its provisioning. We expect the provisions to increase as the banks increase
their lending activity to take advantage of the increased demand for consumer finance. The
corporate sector in the region is also going in for major capacity expansions to take advantage
of the tremendous opportunities available in the region. This is likely to call for increased
cushion of safety by the Islamic banks.
Table 2-3: Asset Quality of Islamic Banks in GCC (FY 2004)

(Amt in US$ 000) BIsB BSB KFH DIB ADIB SIB QIIB QIB Al-Rajhi
Total Assets 677,701 340,719 11,895,747 8,326,834 3,450,910 939,648 264,286 2,111,813 20,761,273
Gross Loans 457,610 244,425 5,530,337 6,994,379 3,060,262 847,099 731,044 1,218,681 18,203,401
Provisions (5,365) (108,416) (491,002) (197,185) (20,145) (49,258) (20,879) (62,363) (846,292)
Net Loans 452,245 136,008 5,039,335 6,797,194 3,040,117 797,841 710,165 1,156,319 17,357,109
Non-performing Loans 10,034 167,154 N.A. N.A. N.A. N.A. 22,802 81,868 253,547.5
NPL / Gross Loans 2.2% 68.4% - - - - 3.1% 6.7% 1.4%
Provisions / NPL 53.5% 64.9% - - - - 91.6% 76.2% 333.8%
Islamic banks have traditionally maintained adequate coverage ratios, higher than those of
their conventional peers. Though some of the banks have remained laggards in this respect.
Al Rajhi Bank has the highest coverage ratio of 333.8% on account of its low level of NPLs
coupled with high provisioning. Non-performing loans of the Al-Rajhi Bank was just 1.4%
of the gross loans in 2004.
The capital adequacy of the banks have gained increased attention through the initiatives
taken by Central banks and the Basel Committee in standardizing the norms. Islamic banks
have kept a high equity to total assets ratio in order to provide comfort to their customers,
correspondent banks and regulatory authorities. However, as banks increase their operations
and increase in size their equity to total asset gradually declines as the growth in equity is not
able to match the pace of growth in assets. The older and established players such as Al Rajhi
Banking & Investment Corp and Kuwait Finance House have lower equity to total assets
ratios although they are still in the comfort zone. The BIS capital adequacy ratio proposed by
the Basle Committee is 8% although some of the regulatory authorities have kept this ratio
more stringent at 12%. It should be noted that Islamic banks have very high capital adequacy
ratios which are being improved further by way of increase in their capital. Going forward,
the banks which will use its capital efficiently, will survive the onslaught of competition.
While Islamic Financial Institutions (IFIs) have enjoyed above-average growth rates in the
recent past, this has been partly due to favourable market factors and regulatory advantages.
However, going forward, Islamic banks need to significantly change their strategies to make
it more competitive. Islamic banks, which have enjoyed monopoly or duopoly positions in
their markets, may not find the going easy as the competitive landscape is becoming more
intense in all countries in the GCC region. Islamic banks need to improve their capabilities
across multiple dimensions, chiefly corporate governance, product innovation, branding and
treasury operations, etc.

3. Role of Foreign Banks

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

Name of the Bank Foreign Bank % Equity Stake
International Bank of Qatar, Qatar National Bank of Kuwait - Kuwait 20%
Ahli Bank, Qatar Ahli United Bank - Bahrain 40%
CALYON Corporate & Investment
Banque Saudi Fransi, Saudi Arabia 31%
Bank
Saudi British Bank, Saudi Arabia HSBC Holding BV 40%
Bank Al Jazira, Saudi Arabia National Bank of Pakistan 6%
Arab National Bank, Saudi Arabia Arab Bank - Jordan 40%
SAMBA Financial Group, Saudi Arabia Banque du Caire - Egypt 2%
Bank Melli - Iran 1%
Saudi Investment Bank, Saudi Arabia JP Morgan Chase 8%
Mizuho Corporate Bank 3%
Saudi Hollandi Bank, Saudi Arabia ABN Amro Bank 40%
Source: Banks’ Annual Reports.

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

4. Competitive Strategies & Other Developments

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

source of income has generally been low as compared to the global standards. For Kuwaiti
banks, this ratio was around 37.5% of the total operating income while for banks in Bahrain it
was around 41% in FY2004. We believe that, going forward, most of the banks in the region
are expected to boost their non-interest income from retail side. To acquire more number of
customers, banks are offering a number of innovative products and services.
Private Banking not too behind as well
The entire GCC region has a large number of High Networth Individuals (HNIs). This
offers excellent ground for banks to tap the market for private banking. As per one estimate,
there are around 200,000 to 225,000 multi-millionaires in the GCC region. By 2008, the
Middle East is predicted to account for US$1.5trillion of the world’s private wealth. Private
banking is generally considered to be a low risk and high return business. Thus there is
intense competition from both regional as well as foreign banks to manage private wealth.
Private banking has always been a lucrative business for the region’s banks and financial
institutions as it has the potential to enhance banks bottomline tremendously. Since GCC
has more affluent people, there is a large demand for these services. The past two years has
seen a number of new players in the private banking sector, as well as more established
players moving into wealth management business. Generally, foreign banks such as BNP
Paribas, Citibank, UBS, HSBC etc. are more active in this segment. In addition, regional
banks have also become more active in the private banking. The vast market potential was
behind Bahrain-based TAIB Bank’s decision to reposition itself from an investment bank to a
fully-fledged private bank. TAIB aims to provide the complete range of wealth-management
services, from various investment products to brokerage and trust services, targeting clients
between US$3-US$15mn to invest.
Foreign banks are more active in private banking because of their expertise in this segment.
However, some of the local banks that offer private banking may be too small to provide the
complete range of products of private banking service. At the same time foreign banks though
they are able to provide most advanced may not be able to tap the market fully because of
their lack of knowledge about the regional market. Some banks are striving for middle path
and have tried partnership route with international wealth management experts. Ahli United
Bank (AUB) is one that has taken the partnership route for its asset management business.
The bank has allied with Mellon Global Investments to offer private banking services to its
clients. In another development, Qatar National Bank has acquired London based wealth
management company called Ansbacher Holding. Regional banks have a great opportunity to
target the customers as they know the customers well and they also have good understanding
of the local market dynamics.
Technology Initiatives
To strengthen and streamline their operations most of the banks in the region are in the
process of implementing core banking solutions. This should result in the banks efficiently
and cost effectively handling the customers needs. The number of regional banks providing
online services has increased rapidly since the past few years. In the beginning of 2003, there
were just under three million regular online banking users in the Middle East. This number
has grown rapidly and online banking transactions have grown to represent around 19% of
all banking transactions in the region. E-statements, internet banking, SMS services made
banking more convenient for the banking customers in the region.

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

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

5. Financial Performance
GCC banking sector showed improved performance on the back of strong macro-economic
performance (thanks to high oil prices), increased liquidity in the banking system and
improvement in both, interest and non-interest based income of respective banks in the
banking sector. The banking sector penetration in the GCC increased as, banks in respective
economies increased their branch network, especially to cater to the lucrative retail segment
of the industry.
Saudi Arabia stands out with the number of branches close to 1000 (for listed banks) which
is understandable keeping in mind the sheer size of the economy and the geographic area the
banking sector needs to cater to. The operating income per employee of the banking sector in
GCC in 2004 ranged from US$0.12mn in Oman to US$0.32mn in Kuwait with the average
being US$0.26mn for the entire banking sector in the GCC. However, it is to be noted that
one of the bank in Oman (NBO) had a very small operating profit which depressed the overall
Omani sector’s operating profit per employee.
Table 5-1:Comparison of Operating Performance of the GCC Banking Sector* (FY 2004)
Saudi
US$ mn Kuwait # Oman Qatar UAE Bahrain
Arabia
No. of Branches 203 954 277 101 330 78
No. of Employees 6,841 20,397 4,416 2,850 12,373 2,121
Operating Income (Net of
2,221 5,857 539 800 2,766 482
Provisions)
Operating Expenses (610) (2,060) (320) (256) (984) (225)
Operating Profit 1,550 3,796 210 544 1,783 256
Operating Income Per Employee 0.32 0.29 0.12 0.28 0.22 0.23
Operating Expense Per Employee (0.09) (0.10) (0.07) (0.09) (0.08) (0.11)
Operating Profit Per Employee 0.23 0.19 0.05 0.19 0.14 0.12
Source : Banks’ financial statements & Global Research
* Only listed banks covered in this Report have been considered.
# For sector’s aggregate branch network we have excluded KREB as data for the bank are not available.
The operating expenses per employee in the GCC averaged at around US$0.09mn for the
combined GCC banking sector which increased as compared to the previous years. This is
attributed to the increase in the staff costs as well as general and administration expenses
as the banks increased their marketing efforts, added new branches and expanded their
employee base. Kuwaiti banking sector reported the highest operating profit per employee
of US$0.23mn per employee as the Kuwaiti banks improved their efficiency through cost-
cutting initiatives coupled with the marked improvement in their operating income.
We expect the GCC banks to increase their branch network, number of employees in the
wake of upcoming competition from foreign banks and also to utilize economies of scale,
and be more competitive regionally. They would also try to improve their operating expenses
per employee so that they are on a better footing once the competition hots up further in the
region. However, we expect the staff expenses to increase as the banks try to retain the staff
from poaching by the competitors and also expand their staff strength in wake of expanding
operations.

GCC Banking Sector Credit Portfolio
In 2004, GCC listed banks had a net aggregate credit portfolio of US$185.9bn. However,
again Saudi Arabian banking sector eclipsed the other with the net loans of US$75.9bn in
2004. The total non-performing loans (NPLs) of the GCC sector combined amounted to
US$6.9bn while the provision for loans losses amounted to US$8.7bn in 2004.
GCC banks have been following a conservative policy regarding provisioning for loan losses.
In 2004, the average coverage ratio (PLLs-to-NPLs) was 126% with Saudi Arabia leading
the pack with the average coverage ratio of 177% in 2004. Kuwait banking sector and UAE
banking sector too had the coverage ratio of more than 100% in 2004 while Oman, Bahrain
and Qatar had an average coverage ratio in the comfortable range of 80%-90%.
Table 5-2: Asset Quality of GCC Banking Sector* (FY 2004)

Saudi
(Amt in US$ mn) Kuwait Oman Qatar UAE Bahrain
Arabia
Gross Loans 35,038 75,975.7 8,408.9 13,399 54,128 7,740
Provisions (2,037) (3,028.5) (1,109.8) (565) (1,553) (444)
Net Loans 33,001 72,947.2 7,299.1 12,834 52,574 7,296
Non-performing Loans 1,342 1,708.8 1,233.9 675 1,443 539
NPL / Gross Loans 4.5% 2.2% 14.7% 5.0% 2.7% 7.0%
Provisions / NPL 121% 177% 89.9% 83.7% 107.7% 82.4%
Source : Banks’ financial statements & Global Research
# NPLs of KFH is not available therefore we have excluded KFH while calculating these ratios.
NPLs and related ratios for UAE only for 8 banks for which data are available.
Non-Performing Loans (NPLs) to Gross Loans ratio for the combined GCC banking sector
stood at 3.6% in 2004. The asset quality of banks in the region has improved considerably in
the last 2 years. A favorable economic environment have kept loan losses at low levels. Rise
in real estate values and better cash flow conditions for borrowers boosted prices of collateral
that banks hold and reduced the percentage of non-performing loans to total loans in 2004.
Banks in the GCC region have become increasingly prudent at improving the quality of their
earnings and have raised provisions, thus bringing down the NPLs.
Despite the sheer size of the loan book, Saudi Arabian banking industry had the lowest NPLs
to Gross Loans ratio of 2.2% in 2004. It is impressive to note that the top-2 countries in terms
of the gross loan portfolio, Saudi Arabia and UAE had the lowest NPLs to Gross Loan ratio
in 2004 at 2.2% and 2.7% respectively.
Oman had a very high NPLs to Gross Loan ratio of 14.7% in 2004. Asset quality of Omani
banks has been a cause of concern which led to the restructuring of the balance sheets over
the past few years. A substantial effort on the part of banks and regulatory authorities has
brought about a marked improvement for the sector in this respect. However, still much
needs to be done if the banking sector in Oman has to bring its NPLs to Gross Loans ratio
in line with its peers in the GCC region. However, increasing provisions have also kept pace
with the increase in NPLs, this has definitely helped in reducing the systemic risk in the
banking sector.

Comparative Indicators
Loans to Deposits Ratio...
Customers’ deposits remained the main source of funding for the GCC banks, providing an
average of more than 85% of their total deposits. Kuwait had the highest customer deposits to
total deposits ratio of 95.4% in 2004 while Qatar had the lowest ratio at 74.6%. However, it
should be noted that there was a growth rate in customers’ deposits in the GCC banking sector
could have been much higher but for the low interest rate scenario (although increasing) and
the increasing preference of the GCC investors to invest their money in the high-yielding
mutual funds and rapidly growing stock markets.
Table 5-3: Comparative Financial Indicators of GCC Banking Sector* (FY2004)

Saudi
Kuwait Oman Qatar UAE Bahrain
Arabia
Profitability Indicators
Return on Average Equity 20.6% 26.4% 9.3% 20.4% 17.4% 13.6%
Return on Average Assets 2.4% 2.7% 1.2% 2.9% 2.4% 1.7%
Interest Exp / Interest Income 45.3% 25.0% 29.1% 32.7% 37.6% 35.9%
Interest Income / Avg Int earning
4.9% 4.6% 6.0% 4.8% 4.5% 3.6%
assets
Interest Exp / Avg Int bearing
2.3% 1.2% 2.1% 1.7% 1.8% 1.5%
liabilities
Net Spread 2.6% 3.5% 3.9% 3.1% 2.7% 2.0%
Net Interest Margin 2.7% 3.0% 4.2% 3.2% 5.0% 2.3%
Non Interest Income / Operating
42.5% 39.1% 23.7% 35.3% 43.8% 41.0%
Income
Dividend Payout Ratio 62.3% 55.8% 57.0% 52.1% 41.1% 70.3%
Efficiency Indicators
Cost to Operating Income 29.3% 38.6% 59.4% 34.7% 35.6% 50.2%
Staff Expenses / Operating Income 17.2% 21.7% 24.2% 16.2% 20.8% 27.9%
Liquidity Indicators
Net Loans / Customer Deposits &
83.4% 63.0% 105.0% 65.0% 90.1% 92.7%
Deposits from FIs
Customer Deposits / Total Deposits 95.4% 87.2% 89.2% 74.6% 88.4% 79.8%
Capitalization Indicators
Capital Adequacy Ratio 16.5% (#) 16.2% 25.2% 25.9% 16.4% 24.8%
Equity to Total Assets 13.0% 10.5% 15.0% 16.5% 12.0% 13.7%
Equity to Gross Loans 22.9% 19.5% 18.2% 31.5% 18.1% 24.9%
Source: Annual Reports & Global Research
# For sector’s average CAR we have excluded ABK, KFH and KREB as data for these banks are not available.
CAR in respect of UAE banks is the median value for 5 banks for which data are available.
The GCC banking sector had a comfortable loans to deposits ratio with only one sector-
Oman reporting the loans to deposit ratio of more than 100% in 2004. However, this ratio in
some countries is also significantly affected by the regulatory statutes wherein the banks are
dictated to maintain a cut-off rate for the loans to deposits ratio.
Saudi Arabia and Qatar had the lowest loans to deposit ratio at 63% and 65% respectively
which provide the banking sector in these countries with a very good opportunity to expand
their lending operation and take advantage of the booming economy especially in the areas
of high-margin retail lending.

Capitalization
GCC banks are adequately capitalized by international standards. All the banking sectors in
the GCC region had the Capital Adequacy Ratio (CAR) much above the BASEL norm of 8%.
Qatar banking sector led the region with the capital adequacy ratio of 25.9% in 2004 followed
by Oman’s banking sector with the CAR of 25.2%. The peer group’s average equity-to-total
assets for the combined GCC banking sector was more than 10% in 2004, with the Qatari
banking sector reporting the highest ratio amongst the peer group of 16.5% compared to
Saudi banking sector which reported the smallest ratio of 10.5%.
We expect the capitalization ratio of the GCC bank to remain at the comfortable levels
even though they increase their lending activities. However, we feel that the impending
implementation of Basel-II norms will put pressure on GCC banks to improve their risk
management practices and measurement. This also calls upon the central banks and banking
regulators to proactively assist the banks in their respective countries, to adopt the reviewing
of bank’s internal capital adequacy assessments and to review and act if the bank’s capital
fall below the level appropriate to its risk characteristics.
Profitability
The peer group’s profitability measures improved in 2004 as a result of flourishing economic
conditions created by high oil revenue, higher government expenditure and subsequently
greater private sector activity, hence increasing the domestic liquidity. The GCC banking
sector’s average ROAA and ROAE stood at 2.2% and 18% in 2004 respectively. Saudi banks
had the highest ROAE amongst the GCC banks at 26.4% while the Qatar banking sector led
in terms of the ROAA which stood at 2.9%, followed by Saudi Arabia at 2.7% in 2004.
The GCC banks have been able to widen their spreads in 2004 on the back of rising interest
rates coupled with the increase in the non-interest bearing deposits in the GCC banking
sector. Spreads in the GCC banking industry has ranged from 3.9% in Oman to 2.0% in
Bahrain. The presence of the huge chunk of Islamic deposits in Saudi Arabia is evident from
the fact that it has the lowest Interest Expense to Interest Income ratio (Commission Expense
to Commission Income as called in Saudi Arabia) of 25% in 2004.
GCC banks have managed the low interest rate environment of the past few years quite
effectively and any pressure on margins now is likely to be offset by growing loan demand.
GCC banks are also looking at cost-cutting as means of boosting profitability. The GCC
banking sector combined have the cost to total operating income above 30% levels which
gives them the opportunity to improve profitability by containing their costs.
The bank have also used the growth in their profitability and improved margins to reward
their shareholders. The dividend payout in the GCC banks was above 50% with the exception
of UAE which stood at 41.1% in 2004. Bahraini banks led the GCC region with the average
payout of 70.3% followed by Kuwaiti banks at 62.3%. Most of the Saudi banks have also
distributed liberal stock and cash dividends in 2004.

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

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

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

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

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

7. Valuation & Recommendation Summary

Out of a total of 45 banks covered in this Report, equity valuations of 28 banks have been
done. A combination of Dividend Discount and Peer Comparison Methods has been employed
for the valuation – the former with an 80% weightage and the latter with a 20% weightage
– to arrive at a Composite Value for each of the banks.
A summary of the values arrived at for each of the banks, along with the recommendation
rationale for each of them, follows.
Bahrain
Ahli United Bank
We believe that AUB’s net interest income is expected to improve strongly due to the further
hardening of the interest rates. The bank is expected to grow in an inorganic way and is
expected to become a pan-GCC bank in near future. Over the medium term, AUB is expected
to post stellar performance buoyed by the improvement in its core and non-core businesses.
We had recommended a price target of 68 cents for the bank in Dec 2003 when the stock was
quoting at 57 cents. Since then the stock moved up as per expectations and reached our target
price in August 2004. Currently, AUB is trading at 1.6x of its estimated book value and 17.2x
of its estimated earnings of 2005. We have revised upwards our earlier projections due to
better FY2004 results of the bank and improved market conditions. The estimated fair value
of AUB’s stock works out to US$1.00 based on DDM and peer group valuation method,
which is higher by around 12.3% vis-à-vis the current market price of the stock. The bank
is all set to take the advantage of the booming regional markets by becoming a pan-GCC
bank. The fundamentals of the bank remained robust and has strong income visibility, going
forward. Hence, we maintain our earlier rating and recommend a ‘Buy’ on the stock.
Bank of Bahrain & Kuwait
The bank is expected to look forward for strategic alliances as well as the opportunity for
mergers and acquisitions, in order to establish cost efficiencies and diversify asset base.
As a part of its rebranding exercise, the bank is expected to launch new and innovative
retail banking concept, which will focus primarily on customer service. Focus on alternative
delivery channels is expected to further boost its efficiency. We had recommended a Buy on
the stock in September 2004 with a target price of 788 fils, when the stock was trading at 695
fils. Since then the stock has moved up as per our expectations and reached its peak of 762
fils, justifying our earlier buy recommendation, though it has yet to reach our targeted price.
Currently, BBK is trading at 2.79x of its estimated book value and 13.1x of its estimated
earnings of 2005. The estimated fair value of BBK’s stock works out to 794 fils based on
DDM and peer group valuation method, which is higher by around 12.8% vis-à-vis the
current market price of the stock. Hence, we maintain our earlier rating and recommend a
‘Buy’ on the stock with a medium term perspective.

Bahrain Islamic Bank
We believe that fees and commission income of the bank is expected to be buoyant due to
the bank’s efforts to launch various new products and services. The bank is also expected
to report strong gains from its investment income. In October 2004, we had recommended
a Hold on the stock, when the stock was trading at 336fils. Since then the stock moved up
smartly to reach its all time high of 480 fils in March 2005. Currently, BIsB is trading at 1.88x
of its estimated book value and 22.3x of its estimated earnings of 2005. We have revised
upwards our earlier projections due to strong outlook of the bank and improved market
conditions. The estimated fair value of BIsB’s stock works out to 418 fils based on DDM and
peer group valuation method, which leaves marginal upside potential of about 3.2% over the
current market price. Therefore, we continue to maintain ‘Hold’ on the stock.
Table 7-1: Recommendation Summary - Bahrain

Composite Potential
Reuters CMP * M-Cap * P/E * P/BV *
Name of Bank RoAA RoAE Share Value Upside/ Recommendation
Code (fils) (BD Mn) (X) (X)
(fils) Downside
Ahli United Bank # AUBB.BH 0.89 870.1 1.48% 11.00% 21.71 2.49 1.00 12.3% Buy
National Bank of
NATB.BH 1,125 607.5 2.18% 15.72% 17.91 2.61 - - Not Rated
Bahrain
Bank of Bahrain &
BBKB.BH 704 400.6 1.88% 17.12% 15.61 2.92 794 12.8% Buy
Kuwait
Bahrain Islamic Bank BISB.BH 405 102.5 1.52% 7.99% 25.14 1.86 418 3.2% Hold
Bahraini Saudi Bank BSBB.BH 134 67.0 1.48% 16.22% 14.23 2.12 - - Not Rated
* As on April 24, 2005. # The stock price of AUB is in US$
Kuwait
Burgan Bank (BB)
We believe that the current restructuring exercise is expected to positively benefit the bank in
the longer term. BB is expected to continue its focus on improving operating efficiency and
asset quality. Over the medium term, the further hardening of interest rates is likely to result
in the bank improving its profitability significantly. We had recommended a Buy on the stock
with a price target of 487 fils in Oct 2004 when the stock was quoting at 375 fils. Since then
the stock has been quoting in the range of 340 fils to 380 fils. Apart from the fundamentals,
other external factors weighed negatively on the stock. The bank’s management has been
perceived to be very unstable as seen from frequent changes in the top management of the
bank in the past. This creates a lot of doubts over the continuity of the policies and strategies
of the bank. The withdrawal of rating by Fitch was also not perceived well by the market.
Currently, the stock is quoting at a PE of 12.2x and P/BV of 1.81x of its actual 2004 earnings.
Some of the positive events which could provide upward momentum to the stock is sustain
positive performance, rating upgrade by an international rating agency and consistency of
policies and strategies. The estimated fair value of BB’s stock works out to 503.8 fils based
on DDM and peer group valuation method, which is higher by around 18.5% vis-à-vis the
current market price of the stock. We believe that the bank’s management has the potential
to create strong value out of its franchise and hence the current discount to the stock is
unwarranted. Therefore, we reiterate our ‘Buy’ recommendation on the stock.

Gulf Bank (GB)
GB is expected to continue its focus on improving operating efficiency and asset quality.
The net interest income of the bank is expected to improve by around 19.5% in 2005 due
to the further hardening of the interest rates. Over the medium term, GB is expected to post
stellar performance buoyed by the improvement in its core and non-core businesses. Since
our last investment update in Oct 2004, the stock has moved up sharply by 47.6% to the
current 1,240 fils, justifying our earlier buy recommendation. Currently, GB is trading at
3.8x of its estimated book value and 12.6x of its estimated earnings of 2005. We have revised
upwards our earlier projections due to better FY2004 results of the bank and improved market
conditions. The estimated fair value of GB’s stock works out to 1,230 fils based on DDM and
peer group valuation method, which is lower by around 0.8% vis-à-vis the current market
price of the stock. Though the fundamentals of the bank remained strong, our valuation
lags behind the current market price of the stock. Hence, we revise our earlier rating and
recommend a ‘Hold’ on the stock.
Commercial Bank of Kuwait
Commercial Bank of Kuwait SAK (CBoK) commenced operations in 1961 and is the
third largest conventional bank in Kuwait in terms of total assets. Currently, CBoK has the
second largest branch network in Kuwait with 39 branches, giving it a strong position in
the domestic retail banking. The bank is likely to rely on organic growth by introducing
innovative product range and delivery mechanism to capture more customers. However, the
bank is weighing the options of moving to new markets such as Iraq and Turkey in the next
couple of years. CBoK is also planning to increase its branch network in Kuwait by adding
10 new branches in strategic locations during FY2005. As per the bank’s management, retail
& corporate lending will continue to provide the lucrative growth opportunity for the bank.
The bank reported a 10% growth in its net profits in the FY2004 owing to a substantial
reduction in depreciation (-76% yoy) and also lower provisioning for impairment (-19% yoy)
as compared to the corresponding period in the previous fiscal. CBoK’s total assets decreased
significantly to KD1,825.2mn at the end of Dec2004, representing a decline of 17% over
Dec end 2003. The bank reported a marginal decrease of 0.3% in total loans and advances
(gross) to reach KD1,135.4mn by the end of FY2004. Deposits from customers increased
by 31.8% to KD963.9mn in FY2004, while the deposits from banks & financial institutions,
which have relatively higher cost of servicing declined by 31.3% during the same period.
NPLs as a percentage of gross loans & advances have increased marginally from 11.0% in
FY2003 to 11.4% in FY2004. CBoK reported an EPS of 59 fils per share during FY2004.
The estimated fair value of CBoK’s stock works out to 817 fils based on DDM and relative
valuation method, which is higher by just about 7.5% vis-à-vis current market price of the
stock. Therefore, we re-rate the stock with a ‘Hold’ recommendation.
National Bank of Kuwait
National Bank of Kuwait (NBK) commenced operations in 1952 and is the largest financial
institution in Kuwait and the fourth largest Arab bank. NBK has the highest credit rating
awarded to banks in the Middle East by rating agencies. NBK’s strong position in domestic retail
banking is likely to remain the bank’s primary catalyst for profitability and growth. The gamut
of products and continuous expansion complements well with the rising domestic liquidity

levels which will help to drive the loan book expansion for the bank in the medium term. It also
has the distinction of being the lowest cost- customer deposit taker among Kuwaiti commercial
banks, an achievement that has provided the bank with a solid platform for profitability in
the current rising interest rate environment. Regional expansion is at the forefront of NBK’s
diversification strategy and may provide the bank with the growth opportunities lacking in its
domestic environment. The bank reported a 23.9% growth in its net profits in the FY2004 owing
to a substantial increase in net interest income (24% y-o-y) as compared to the corresponding
period in the previous fiscal. The bank reported a growth of 10% in total loans and advances
(gross) to reach KD2.83bn at the end of FY2004. Deposits from customers increased by 8%
to KD3.24bn in FY2004. NPLs as a percentage of gross loans & advances have decreased
significantly to 1.5% in FY2004. However, loan loss reserves as a percentage of gross loans
& advances have increased to 3.1% in FY2004 thus leading to a NPL coverage ratio of over
200%. The estimated fair value of NBK’s stock works out to 1,496fils based on DDM and
relative valuation method, which is higher by 13.3% vis-à-vis current market price of the stock.
Therefore, we upgrade our earlier recommendation on NBK to Buy.
Bank of Kuwait & Middle East (BKME)
Continuing from its improved performance in FY2003, BKME has further improved
performance in FY2004, as its interest income increased by 21.7% to KD58.1mn during
the year from KD47.7mn in FY2003. This is quite impressive as compared to a decline
of 1.5% in interest income during FY2003. To expand its marketing reach and take the
competition head-on, BKME plans to add 4 new branches in Kuwait during 2005, taking
the total to 22 branches by the end of 2005. The bank is likely to focus on organic growth
by introducing innovative product range and delivery mechanism to capture more customers
leading to accelerating income growth and margin expansion. We expect strong growth to
continue throughout 2005. We expect BKME to distribute higher dividends going forward,
since it does not have large capex plans in the near future. Based on the dividend discount
method (DDM) and peer group valuation methodology using the Price to Book value (P/BV)
multiple, we value the stock of BKME at 539.1fils. The estimated fair value arrived at is
based on the improved performance of BKME and our expectations about its future potential.
The stock currently trades at around 420fils (24th April 2005), which implies that the value
arrived at, is around 28.4% higher than the current market price. Therefore we maintain our
earlier recommendation and reiterate a Buy on the stock with a medium term outlook.
Kuwait Finance House (KFH)
We believe that KFH is well placed to exploit the increase in the Islamic banking activity in
Kuwait and the other GCC markets. The net commission of the bank is expected to improve
as we expect the interest rates to continue moving upwards. The bank has been exploring
the possibility of expanding its regional coverage in order to get the maximum share in
the increasing Islamic banking activities. It is also expanding its presence internationally
especially in the Middle East and Southeast Asia. It has been awarded a license to operate
in Malaysia. However, the estimated fair value of KFH’s stock works out to 1,626fils based
on DDM method, which is up by 5.6% vis-à-vis current market price of the stock. It is
worthwhile to note that since our last report of KFH, the discount rates have increased twice
to reach 5.25% which has considerably affected the valuations. Based on the current growth
potential of the bank, we revise our earlier rating and recommend a ‘Hold’ on the stock.

Al Ahli Bank of Kuwait (ABK)
Global currently has a “HOLD” recommendation on the ABK stock, issued in our Results
Update on the bank at the end of the third Quarter of 2004. The bank has had a healthy
performance in the year 2004 as well as in the first quarter of 2005. The ABK stock
simultaneously gained by 13.6% since our above-mentioned report, justifying our “HOLD”
recommendation.
Based on the results for full year 2004 and first quarter of 2005, we have now revised our
earlier projections. The overall changes lead to a higher projected profitability and net spreads
for the bank in the period 2005-’08, than in our late-2004 Update. The book value per share
(BVPS) of ABK was KD0.232 at the end of 2004. At the current stock price of KD0.500, it
is quoting at a P/BV of 2.2x, as against the average P/BV for the Kuwaiti banking industry
of 3.42x. The intrinsic value of ABK of KD0.568 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer valuation method, is higher than the current stock price
of KD0.500 by 13.7%. The composite share valuation translates to forward P/BV multiples
of 2.4x and 2.3x our projected 2005 and 2006 book values per share.
Though smaller than the other Kuwaiti banks, such as National Bank of Kuwait and Gulf
Bank, ABK seems poised to improve its performance further in the coming years and take
better advantage of the emerging opportunities in the market, while simultaneously bringing
in cost efficiencies to improve its margins, as well as improving its asset quality in the
near-term. We, therefore, upgrade ABK to a “BUY”, from our earlier recommendation of
“HOLD”, with a medium-term perspective.
Table 7-2: Recommendation Summary - Kuwait

Composite Potential
Reuters CMP * M-Cap *
Name of Bank RoAA RoAE P/E * P/BV * Share Value Upside/ Recommendation
Code (fils) (KDmn)
(X) (X) (fils) Downside
National Bank of Kuwait NBKK.KW 1,320 2,145.0 2.7% 28.2% 14.3 3.6 1,496 13.3% Buy
Gulf Bank GBKK.KW 1,240 1068.8 3.1% 28.4% 13.6 3.8 1,230 -0.8% Hold
Commercial Bank of Kuwait CBKK.KW 760 808.0 3.1% 21.5% 12.9 3.4 817 7.5% Hold
Burgan Bank BURG.KW 425 365.8 1.6% 14.8% 12.2 1.8 504 18.5% Buy
Al-Ahli Bank of Kuwait ABKK.KW 500 457.0 1.7% 14.4% 15.8 2.2 568 13.7% Buy
BKME BKME.KW 420 295.6 1.4% 12.4% 13.0 1.5 539 28.4% Buy
Kuwait Finance House KFIN.KW 1,540 1684.7 2.3% 24.4% 16.2 4.2 1,626 5.6% Hold
KREB KREB.KW 475 357.2 3.3% 16.6% 12.5 2.0 - - Not rated
* As on April 24, 2005

Oman
Table 7-3: Recommendation Summary - Oman
Composite
CMP Potential
Reuters M-Cap in Share
Name of Bank in RO RoAA RoAE P/E * P/BV * Upside/ Recommendation
Code ROmn * Value in
* (X) (X) Downside
RO
Bank Muscat BMAO.OM 8.830 528.2 2.0% 18.6% 15.49 3.13 8.101 -8.3% Hold
Oman International
OIB.OM 4.360 274.2 2.1% 13.6% 19.46 2.62 4.527 3.8% Hold
Bank
Alliance Housing Bank AHBK.OM 3.700 77.7 3.3% 12.7% 21.76 2.82 3.689 -0.3% Hold
Bank Dhofar BDOF.OM 3.850 161.5 2.2% 17.1% 14.41 2.37 4.218 9.6% Hold
National Bank of Oman NBO.OM 3.650 255.5 0.7% 5.2% 48.6 2.5 - - Not Rated
*As on April 24,2005
Bank Muscat
BankMuscat reported an annualized basic and diluted EPS of RO0.570 during FY04, an
increase of 17% over the diluted EPS recorded for the corresponding period last year. We
have increased our valuation from our earlier projection of RO7.046 to the current RO8.101
mainly to indicate the fact that BankMuscat will be benefited from the rising interest rates
thus positively impacting its bottom-line and improving its lending spreads. The estimated
fair value of BankMuscat’s stock works out to RO8.101 based on DDM and relative valuation
method, which represents a discount of -8.3% from the current market price of RO8.830. We
recommend a Hold on the stock.
Oman International Bank
OIB reported basic EPS of RO0.224 during FY04, an increase of 6.7% over the previous
year. The estimated fair value of OIB’s stock works out to RO4.527 based on DDM and
relative valuation method, which is higher by 3.8% vis-à-vis current market price of the
stock. Our price target represents an implied 2005 P/E multiple of 16.4x. We revise our
earlier recommendation to ‘Hold’.
Alliance Housing Bank
AHB reported basic and diluted EPS of RO0.170 during FY04, an increase of 38% over the
basic and diluted EPS of 2003. Currently the stock is trading at 2005 earnings multiple of
15.5x and at 2.6x its 2005 book value. We have revised our fair value of AHB’s stock at
RO3.689 based on DDM and relative valuation method, which represents a discount of 0.3%
from the current market price of RO3.700. We maintain ‘Hold’ on the stock.
Bank Dhofar
Bank Dhofar reported an annualized basic EPS of RO0.267 during FY04, an increase of
10.3% over the EPS recorded for the corresponding period last year. The estimated fair
value of Bank Dhofar’s stock works out to RO4.218 based on DDM and relative valuation
method, which is higher by 9.6% vis-à-vis current market price of the stock. Our price target
represents an implied 2005 P/E multiple of 12.6x. Currently the stock is trading at 2005
earnings (forecast) multiple of 11.5x and at 2.1x its book value (forecast). We revise our

Qatar
Qatar National Bank
In FY2004, on the back of substantial boost in non-interest revenues and also a marginal
increase in net interest income, QNB registered an impressive y-o-y jump of 27% in its
bottomline to QR814.9mn. It has led to the increase in the earnings per share to QR7.9 for the
FY2004 from QR6.2 achieved in FY2003. During Q1FY2005, the bank registered a robust
growth of 105.8% in its net profit to QR391.7mn, which was backed by all round growth in
net interest income, fees & commission income and also a significant jump in income from
investments. As part of its future strategies, the bank’s recent entry into Islamic banking will
further widen the product basket of the bank as there is increasing importance of Islamic
finance in the region. We believe that the bank will see successful expansions into wealth
management business following the acquisition of Ansbacher, which will also diversify its
revenue streams. The economy is growing at a very healthy rate which will further expand
business opportunities for the bank and QNB being the leading bank will have an advantage
as compared to the peer in the sector. In January 2004, we initiated coverage on QNB and
recommended a Buy on the stock with a price target of QR140.60 per share at the then
market price of QR120 per share. Since then the stock meet our expectations and witnessed
significant run-up in its price. We maintain our earlier rating and recommend a Buy and
value the bank’s stock at an intrinsic value of QR363 based on the Discounted Dividend
Model (DDM) and peer group valuation method. The intrinsic value arrived by us is at 18.7%
premium to the current market price.
Commercial Bank of Qatar
Over the last five years, CB has witnessed significant growth in its profitability, which was
backed by both growing net interest income and also non-interest revenues. In 2004, CB
registered an impressive y-o-y jump of 32% in its bottomline to QR326.7mn. Now, apart
from the conventional banking it has also started providing Islamic banking products, which
will further strengthen its business operations in the Qatari as well as in the regional markets.
During 2005, the bank also plans to expand its branch network with five to six additional
branches in Qatar. Expansion and enhancement of branch network through investment in
alternative delivery channels are the focus area to capture retail market and will further help
the bank to increase its non-interest revenues. The bank’s expanded capital base will allow
the bank to leverage its balance sheet and increase profitable lending opportunities which
Qatar would offer in the coming years. We initiated coverage of Commercial Bank with a
buy recommendation at the market price of QR192.4 (as of April 14th, 2005) with a price
target of QR214.8. Since then the stock price run-up significantly. Based on the combination
of Discounted Dividend Method and Peer Group Valuation Method, we value the bank’s
share at an intrinsic value of QR224. The current market price of QR227.1 is marginally
higher by about 1.4% than the intrinsic value of the stock, therefore, we re-rate the stock with
a HOLD recommendation.
Doha Bank
Since the last the three consecutive years Doha Bank has been reporting over 70% y-o-y
growth in its net profit. The bank’s net profit was at QR365.6mn for FY2004 as compared

to QR214.6mn for FY2003. Total operating income (net of provisions) of the bank grew by
65.9% in FY2004 to QR538.2mn as compared to QR324.4mn reported during the previous
year. As part of its expansion plans, the bank is planning to venture into Islamic banking.
It will soon set up a dedicated division to offer Islamic banking products which will further
strengthen its business operations in the Qatari as well as in the regional markets. The bank is
planning to open eight more branches in Qatar and it also plans to open branches in overseas
markets, including Korea, Japan, India and Central European countries. All these will see it
increases its branch network to 34 across nine countries as part of a global expansion drive. In
March 2004, we initiated coverage on DB and recommended a Buy on the stock with a price
target of QR194.3 per share at the then market price of QR159 per share. Since then the stock
meet our expectations and witnessed significant run-up in its price. Now, we value the bank’s
stock at an intrinsic value of QR208, based on the Discounted Dividend Model (DDM) and
Peer Group Valuation Method, and recommend HOLD for the stock as the current market
price is about 4.9% higher than the intrinsic value of the stock.
Table 7-4: Recommendation Summary - Qatar

Composite Potential
Name of Bank RoAA RoAE P/E * P/BV * Share Value Upside/ Recommendation
Code (QR) (QR mn)
(X) (X) (QR) Downside
QNBK.
Qatar National Bank 305.7 31,738 2.2% 13.4% 38.9 5.4 363 18.7% Buy
QA
DOBK.
Doha Bank 218.7 15,165 3.7% 27.4% 24.4 5.8 208 -4.9% Hold
QA
Commercial Bank of COMB.
227.1 16,976 3.0% 16.4% 37.1 5.2 224 -1.4% Hold
Qatar QA
Qatar Islamic Bank QISB.QA 268.5 17,802 4.3% 28.8% 36.3 7.6 - - Not Rated
Qatar International Islamic
QIIB.QA 300.1 6,096 1.9% 22.4% 55.9 11.1 - - Not Rated
Bank
AABQ.
Ahli Bank 125.2 3,815 2.4% 13.8% 46.2 4.7 - - Not Rated
QA
Saudi Arabia
SAMBA Financial Group
We project the net commission income of the bank to show strong growth in 2005 as we
expect the interest rates to move up in the short to medium term. SAMBA has one of the
lowest commission expense/commission income ratio which will continue to provide it with
one of the highest spreads among the conventional banks in Saudi Arabia. The bank has been
making a conscious effort to increase its market in the retail banking business especially in
the high-margin consumer financing business. The increased investment banking activity and
project financing (especially in the infrastructure sector) is likely to increase its fee income.
The estimated fair value of SAMBA’s stock works out to SR812.1 based on DDM and peer
group valuation method, which is up by around 10.5% vis-à-vis the current market price of
the stock. We expect SAMBA to post healthy growth in its net profits in 2005 and 2006 as
the growth outlook for Saudi economy and banking industry remains positive. Hence, we
recommend a ‘Buy’ on the stock.

Table 7-5: Recommendation Summary - Saudi Arabia

Composite Potential
Reuters CMP * M-Cap * P/E * P/BV *
Name of Bank RoAA RoAE Share Upside/ Recommendation
Code (SR) (SR bn) (X) (X)
Value (SR) Downside
SAMBA Financial Group 1090.SE 734.8 88.2 2.9% 27.3% 23.5 6.2 812.1 10.5% BUY
Al Rajhi Banking & Inv.
1120.SE 1,492.0 134.3 4.1% 37.2% 22.9 7.9 1,484.0 -0.5% HOLD
Corp.
Riyad Bank 1010.SE 630.0 63.0 2.8% 22.8% 25.1 5.6 651.1 3.3% HOLD
Arab National Bank 1080.SE 786.0 39.3 2.1% 26.6% 26.9 6.6 885.2 12.6% BUY
The Saudi British Bank 1060.SE 1,130.0 56.5 3.1% 32.3% 34.6 10.5 1,083.4 -4.1% HOLD
Saudi Hollandi Bank 1040.SE 845.0 21.3 2.4% 27.3% 28.6 7.4 944.9 11.8% BUY
The Saudi Investment
1030.SE 643.0 22.1 2.3% 19.1% 30.2 5.0 659.6 2.6% HOLD
Bank
NOT NOT
Banque Saudi Fransi 1050.SE 1,129.5 50.6 2.7% 29.1% 33.1 9.3 NOT RATED
RATED RATED
NOT NOT
Bank Al Jazira 1020.SE 677.5 10.2 1.9% 15.8% 54.1 6.8 NOT RATED
RATED RATED
* As on April 24, 2005.
Source: Banks’ financial statements, Tadawul and Global Research
Al Rajhi Banking & Investment Corp.
Al Rajhi Banking & Investment Corp is planning to expand overseas and has got Islamic
banking license to operate in Malaysia. However, entry of new players in Saudi banking
sector and conversion of NCB will increase competition in the Islamic banking sector. High
growth in the Saudi economy and the government’s intention to increase infrastructure
spending will kick-off medium to big-ticket projects which will provide ALRAJHI with
growth opportunities in project financing. The estimated fair value of ALRAJHI’s stock
works out to SR1,484 based on DDM valuation, which is lower by around 0.5% vis-à-vis
the current market price of the stock. Though the fundamentals of the bank remain strong,
our valuation lags behind the current market price of the stock. Hence, we revise our earlier
rating and recommend a ‘Hold’ on the stock.
Riyad Bank
Riyad Bank’s assets reported a modest 3.8% yearly growth in 2004 (lower than our expected
growth), aggregating to SR74.25bn. The gross loans and advances increased by 21.4% during
the same period and amounted to SR34.8bn at the end of 2004. However, Non-performing
loans (NPLs) in 2004 amounted to SR432.6mn compared to SR651mn in 2003. The NPLs
to Gross Loans ratio has declined from 2.2% in 2003 to 1.2% in 2004 which is one of the
lowest in Saudi banking sector. Riyad Bank has a comfortable loans-to-deposits ratios which
would allow it to further expand its loan portfolio especially in the consumer and personal
lending. We expect the bank to increase its market share in term of assets as it introduces
new deposits as well as loan products. The estimated fair value of Riyad Bank’s stock works
out to SR651.1 based on DDM and peer group valuation method, which is up by around
3.3% vis-à-vis the current market price of the stock. Hence, we revise our earlier rating and

Arab National Bank
ANB has been a front-runner in adopting newer technologies and has made substantial
investments in upgrading its IT infrastructure. ANB secured a three-year syndicated loan
worth US$350mn, strengthening its balance sheet for possible opportunities in long-term
project financing. ANB reported a net profit of SR1.16bn for the year 2004, a strong growth
of 52.2% as compared to the previous year, which exceeded our expectations. Although the
bank has done a good job in reducing its NPL ratio, we expect it to further go down. The
bank is likely to post strong growth in its non-commission income and take advantage of the
booming economy to increase its investments and trading income. The estimated fair value
of ANB’s stock works out to SR885.2 based on DDM and peer group valuation method,
which is up by around 12.6% vis-à-vis the current market price of the stock. Hence, we
revise of our earlier rating of ‘Hold” and recommend a ‘Buy’ on the stock with medium term
perspective.
The Saudi British Bank
The bank started the implementation of its strategic plan for 2005-2007 which includes the
development of Amanah Islamic banking services and launching new Amanah products
in light of the growing demand for this kind of services. SABB reported a net profit of
SR1.63bn for the year 2004, up 30% from the previous year’s profit of SR1.25bn. However,
the bank’s net profit did not meet our expectations. On the back of strong growth in the non-
interest income as well as increase in its spreads, the bank is likely to remain one of the most
profitable banks in the Kingdom. The bank is likely to be among the leaders in the corporate
banking business in Saudi Arabia as it has a large base of blue-chip corporate clientele. The
estimated fair value of SABB’s stock now works out to SR1083.4 based on DDM and peer
group valuation method, which is down by around 4.1% vis-à-vis the current market price of
the stock. Hence, we reiterate our earlier rating and recommend a ‘Hold’ on the stock.
Saudi Hollandi Bank
The net commission income did not exhibit a strong growth as other Saudi banks as it
increased by only 7.7% in 2004. The bank also witnessed declining interest spreads from
3.2% in 2003 to 3.0% in 2004. However, we believe that the bank’s loan to deposits ratio
is likely to increase to more than 75% in medium term as it expands its lending activities.
The net commission income of the bank is expected to show strong growth as it increases
lending to the high-margin retail lending segment. The bank has been aggressively marketing
its “Fourijat” and “Al Tawarruq” consumer loans, which is likely to be instrumental in
strengthening the bank’s customer base. We have revised upwards our earlier projections and
now the estimated fair value of SHB’s stock works out to SR944.9 based on DDM and peer
the stock. Hence, we reiterate our earlier rating and recommend a ‘Buy’ on the stock.
The Saudi Investment Bank
The bank has traditionally focused on corporate banking activities but has changed its strategy
in the last couple of years to concentrate more on retail banking and has therefore entered the
retail banking business of credit cards, leasing and consumer lending. Capital Intelligence,
in its latest review, placed SAIB on a Positive Outlook, while maintaining the bank’s current
ratings. The net commission income saw a growth of 15.8% in 2004 helped by the upward
movement in the interest rates. However, it has the limitation of a small branch network

which hinders its deposit taking capabilities. The estimated fair value of SAIB’s stock works
recommend a ‘Hold” on the stock.
UAE
Abu Dhabi Commercial Bank
The intrinsic value of ADCB of AED253.0 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer set valuation method, is higher than the current stock
price of AED239.0 by 5.9%. Though the composite share valuation translates to forward
P/BV multiples of 7.7x and 7.4x our projected 2005 and 2006 book value per share, the stock
would seem to have a limited upside from its current price levels, since it has had a good run
on the stock market in recent months, gaining 75.7% since the beginning of 2005.
The bank is likely to benefit from aggressively promoting its consumer loan products going
forward. The net fees and commissions income of the bank is also expected to show a high
growth in the medium-term from its funds management, private banking, managing IPOs,
facilities arrangement and loan syndication activities going forward. The new management
of the bank, with considerable experience in the GCC banking industry, is expected to steer
the bank on a high growth curve in the years to come.
We, therefore, initiate our coverage of ADCB with a “HOLD” recommendation, with a
medium-term perspective. We, however, believe that ADCB presents an attractive investment
opportunity at lower price levels.
First Gulf Bank
The intrinsic value of FGB of AED42.6 per share, arrived at by using the Dividend
price of AED41.0 by 3.8%. Though the composite share valuation translates to forward P/BV
multiples of 9.6x and 9.0x our projected 2005 and 2006 book value per share, the stock would
seem to have a marginal upside at its current price levels, since it has had a good run on the
stock market in recent months, gaining 137.0% since the beginning of 2005.
The bank, though growing at a high rate of late, would appear constrained by its relatively
smaller size vis-à-vis the other players in the highly competitive banking industry in UAE.
We, therefore, initiate our coverage of FGB with a “HOLD” recommendation, with a
medium-term perspective.
Table 7-6 : Recommendation Summary - UAE

Composite Potential
Reuters CMP M-Cap RoAA RoAE P/E P/BV Share Upside /
Name of Bank Recommendation
Code (AED)* (AEDmn)* (%) (%) (x)* (x)* Value (Downside)
(AED) (%)
Abu Dhabi Commercial
ADCB.AD 239.0 35,850 2.4 18.2 37.3 6.4 253.0 5.9 HOLD
Bank
First Gulf Bank FGB.AD 41.0 16,763 2.4 20.1 65.2 9.4 42.6 3.8 HOLD
National Bank of Abu
NBAD.AD 46.0 43,267 2.3 25.7 38.0 9.0 51.0 11.0 BUY
Dhabi
Mashreqbank MASB.DU 230.0 19,922 2.6 17.9 24.1 4.0 244.4 6.3 HOLD
Source: Global Research, Reuters. * As on April 24, 2005.

National Bank of Abu Dhabi
The intrinsic value of NBAD of AED51.0 per share, arrived at by using the Dividend
price of AED46.0 by 11.0%. This is despite the stock running up considerably in recent
months – gaining about 120.9% since the beginning of 2005. The composite share valuation
also translates to forward P/BV multiples of 8.3x and 6.8x our projected 2005 and 2006 book
value per share.
NBAD has a strong customer franchise, particularly in the emirate of Abu Dhabi, where
it is a prominent provider of retail banking services. The bank has substantial treasury and
investment banking operations, besides sizeable international presence. The booming project
finance and IPO markets in UAE and its foray soon into the Kuwaiti banking market are
expected to keep it on a high growth trajectory in the years to come.
We, therefore, initiate our coverage of NBAD with a “BUY” recommendation, with a
Mashreqbank
Global had initiated its coverage of Mashreqbank with an equity valuation report in March
2005. We had valued the bank at AED207.9 per share in that report and had recommended a
“HOLD” on its shares. Subsequent to that report, the stock has had a good run on the stock
market, gaining by 21.1%.
We have modified a few of our projections in the wake of the announcement of the first
quarter 2005 results by the bank. Some of these changes include the projected growth rates in
loans and advances, customer deposits, interest income and expense, net commission income,
and net profit. We have, however, retained our projections of the net spreads of the bank more
or less along the same lines as in our March 2005 report. The dividend payout ratios too have
not been changed from the projections in that report. We are of the opinion that the modified
numbers reflect the future earnings potential of the bank in a more appropriate manner.
The intrinsic value of Mashreqbank of AED244.4 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer set valuation method (with a revised P/BV multiple,
based on the weighted average P/BV of 12 UAE banks covered in this report), is higher than
the current stock price of AED230.0 by 6.3%.
We, therefore, reiterate our “HOLD” recommendation on Mashreqbank, with a medium-

term perspective. We still believe that Mashreqbank is a strong brand-based, diversified and
growing earnings story, and presents an attractive investment opportunity at lower price
levels.

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Bahrain
Bahrain Banking Sector

May 2005
Equities Research
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661


omar@global.com.kw
Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
Phone No:(965) 2400551 Ext.196
Pravin Bokade
Phone No:(965) 2400551 Ext 229
Chandresh Bhatt
cbhatt@global.com.kw
Phone No:(965) 2400551 Ext.270
Table of Contents
The Bahraini Banking Sector ................................................................................................................................... 1
Growth in Assets ................................................................................................................................................................ 2
Credit Portfolio ................................................................................................................................................................... 5
Interest Rates ........................................................................................................................................................................ 6
Islamic Banks in Bahrain ............................................................................................................................................. 9
Peer Group Comparison ............................................................................................................................................... 16
Banking Sector Outlook ................................................................................................................................................ 21
Valuation Matrix ................................................................................................................................................................ 22
Players Profiles
Ahli United Bank ...................................................................................................................................................... 26
Bank of Bahrain and Kuwait ............................................................................................................................. 34
Bahrain Islamic Bank ............................................................................................................................................. 42
National Bank of Bahrain .................................................................................................................................... 49
Bahraini Saudi Bank ............................................................................................................................................... 56

Global Research Bahrain Global Investment House
Overview of Banking Sector in Bahrain

Bahrain hosts the largest concentration of banks and other financial institutions in the Middle
East region, with nearly 367 financial institutions offering diverse range of services, including
money market and portfolio management, investment advice and insurance products involving
risk transfer and capital accumulation. Bahrain’s financial sector is growing rapidly and
continues to attract banks and financial institutions from all over the world, representing a
blend of local, regional and international names.
The pre-eminence of Bahrain’s financial sector rests upon the regulatory regime imposed
by the Bahrain Monetary Agency, the financial strength of the individual institutions and
the professional and technical competence of individuals employed in the industry. The
BMA is responsible for the licensing, supervision and regulation of the financial sector and
its supervisory and regulatory framework is fully consistent with international standards.
Bahrain was one of the first countries outside the G10 to apply the BIS’s 8 percent capital
adequacy ratio.
Banking sector further expanding…
Bahrain’s financial services industry continued to develop and expand during 2004, with
23 new licenses issued by the Bahrain Monetary Agency (BMA). This brought to 367 the
total number of financial institutions licensed by the BMA by 2004-end. This comprises
189 banking institutions, 165 insurance firms and 13 capital market brokers. Of the new
licenses issued during 2004, 17 were for banks and banking-related institutions and 6 for
insurance and insurance-related operations. The country attracted a good mix of locally-
incorporated, regional and international institutions during 2004. The business activities of
the new institutions, many of which will serve the Middle East market, also adds value to
Bahrain’s financial center.
Table 1: Total number of Banks and financial institutions in Bahrain

2004
Banking Institutions 189
Insurance Firms 165
Capital Market Brokers 13
Total 367
Source: Bahrain Monetary Agency
The banking system in the region and in Bahrain is witnessing the entry of new players and
some consolidation among the existing players. In 2004, Bahrain granted a number of licenses
to various international banks to operate in the country. Recently, BMA approved the merger
of the Bahrain operations of two top Iranian banks namely Bank Melli Iran and Bank Saderat
Iran. BMA also issued a license for a new bank called Future Bank, which is being created
by these two Iranian banks, along with Bahrain based Ahli United Bank. The new venture
will be equally owned and controlled by the three institutions and will provide all commercial
and investment banking activities. Future Bank will have an authorized capital of US$200mn
and an initial paid up capital of US$99mn. While in another development, the Bank of China,
which is named as the largest emerging market bank by Euromoney, opened its representative
May 2005 Bahrain Banking Sector 1

office in Bahrain in July 2004. ICICI Bank, which is the second largest commercial banking
institution in India, has opened its Offshore Banking Unit in Bahrain in Oct 04.
In Oct 04, Bank Muscat was granted license to establish a locally incorporated full commercial
bank (FCB) in Bahrain. The new bank, which will be called Bank Muscat International, will
have an initial paid up capital of BD20mn, which will be raised to BD50mn in 2007 through
a public offering. Once BMI becomes operational, Bank Muscat’s FCB branch in Bahrain
will cease operations. The new bank is being established to enable Bank Muscat to undertake
expansion in the Middle East and North Africa (MENA) region through a base in Bahrain.
The new found interest in the regional markets are expected to give a further fillip to the
banking industry in the region and particularly in Bahrain.
During December 2004, BMA granted licenses to the Industrial Development Bank of Turkey
(TSKB), UTI International, HC Securities & Investment (HCSI) and The Family Office (FO).
The TSKB will establish an offshore banking unit (OBU) in Bahrain, the bank’s first branch
outside Turkey. UTI International Limited (UTIIL) has been granted a license to establish
a Representative Office in Bahrain. HC Securities & Investment (HCSI) will establish a
Representative Office in Bahrain, to offer investment services to high net worth individuals and
institutional investors in the Gulf region. The Family Office is the first investment company
in the Gulf region that specializes in multi-family wealth services with offices in Geneva and
London. The entry of such diverse financial institutions from across the world demonstrates
the excellent reputation the Kingdom enjoys as an international financial center.
Employment in the banking sector…
According to an annual survey conducted by the Bahrain Monetary Agency (BMA)

employment in Bahrain’s financial services industry grew by 6.3% during 2004. A total 7,406
people were employed by the country’s financial services institutions at 2004-end, compared
with 6,968 at 2003-end. The local Bahrainis represented around 74.5% of total employment
in the financial services industry in 2004. The employment in the banking industry, which
comprises full commercial banks (FCBs), offshore banking units (OBUs), investment banks
(IBs), Representative Offices, Housing Bank and the BDB, grew by 5.4% to 5,498 in 2004,
compared with 5,217 in 2003. The Bahraini workforce in the banking sector grew by 5.4%
to 4,301, which represented 78.2% of the total workforce in this sector. Of the Bahraini
personnel, nearly one-third (or 1,396) were females, while 2,905 were males. FCBs remained
the largest employer in the banking sector in 2004, with 2,520 personnel, of whom 88.3%
were Bahrainis. OBUs employed a total of 1,563 people, of whom 68.1% were Bahrainis,
while IBs employed 1,185 people, of whom 70.1% were Bahrainis.
Strong growth in assets…
With the increase in banking activities, assets of the banks showed robust growth. The asset
size of the consolidated balance sheet of the banking system in Bahrain stood at US$118.9bn
at the end of Dec 2004 compared with US$100.9bn at the end of 2003, representing a jump
of 17.8%. At end-Dec 2004, net foreign assets of the banking system were US$4bn. The total
domestic assets amounted to US$18.2bn at the end of Dec 2004, an increase of 25.3% over
Dec 2003 level.
2 Bahrain Banking Sector May 2005

Table 2: Consolidated Balance Sheet of the Banking System: Full Commercial Banks,
Overseas Banking Units and Investment Banks
In US$ mn 2001 2002 2003 2004
Assets
Banks 5,771.90 5,382.90 6,965.80 8,681.00
Private Non-Banks 4,479.50 5,028.30 5,505.50 7,032.90
General Government 991.7 960 1,382.00 1,786.70
Other Assets 569.3 617.7 693.4 730.5
Foreign Assets 90,917.20 62,007.10 86,388.10 100,682.00
Total Assets 102,729.60 73,996.00 100,934.80 118,913.10
Liabilities
Banks 5,266.20 4,713.30 6,055.40 7,622.10
Private Non-Banks 6,447.30 6,792.40 7,519.90 7,797.30
General Government 1,743.70 1,697.60 2,084.00 2,694.00
Other Liabilities 2,136.00 2,643.30 2,888.30 4,107.50
Foreign Liabilities 87,136.40 58,149.40 82,387.20 96,692.20
Total Liabilities 102,729.60 73,996.00 100,934.80 118,913.10
Offshore Banking Units substantial rise in assets…
The total assets of the OBUs stood at US$98bn at the end of Dec 2004, which represents
17.6% jump from 2003-end level. The total assets of the OBUs witnessed substantial rise
after the end of Iraq war, as it increased by 41.8% to US$83.4bn at the end of 2003. In Dec
2004, the total assets of the OBUs were more than 9 times the country’s GDP. This indicates
the importance of OBUs in the overall economy of Bahrain. The system remains a net external
creditor, with net foreign assets amounting to US$1.9bn as of Dec 2004. Domestic assets
of the OBUs amounted to US$6.6bn at the end of Dec 2004 while the domestic liabilities
amounted to US$8.5bn during the same period.
Table 3: Consolidated Balance Sheet of Offshore Banking Units

In US$ mn 2001 2002 2003 2004
Assets
Banks 3,298.60 3,021.70 3,906.10 5,040.30
Private Non-Banks 529.2 5339 554.4 937.4
General Government 100.4 119.2 263.1 376.5
Other Assets 260.7 293.8 235.5 223.7
Foreign Assets 84,181.80 54,847.20 78,423.10 91,519.50
Total Assets 88,370.70 58,815.80 83,382.20 98,097.40
Liabilities
Banks 4,025.30 3,560.70 4,874.50 5,743.40
Private Non-Banks 425.6 447.1 457.4 411.9
Other Liabilities 668.9 998 1,089.00 1,707.10

Commercial Banks are not far behind too…
Commercial banks in Bahrain recorded outstanding performance in 2004. Most of the local
listed commercial banks showed higher earnings for the period compared to 2003. The trend
that underpinned earnings in 2003 continued into the year 2004 and margins expanded further
as the banks enjoyed record low levels of cost of funds at least in the first half of 2004. This
coupled with an upbeat lending market further supported the banks earnings for the first nine
months of 2004.
Table 4: Consolidated Balance Sheet of the Commercial Banks

In BD mn 2001 2002 2003 2004
Assets
Cash 27 32.2 40.3 39.6
Due to Banks 628.8 542.3 603.5 782.1
Loans to Private Non-Banks 1,410.90 1,606.60 1,754.20 2,172.80
Bahrain Monetary Agency 150.8 172 263.5 256.4
General Government
Loans 116.1 108.4 154.3 207.4
Securities 217.4 203.3 258.4 310.5
Other Assets 79.9 82.8 129.4 135.7
Foreign Assets 1,251.30 1,273.90 1,398.40 1,593.80
Total Assets 3,882.20 4,021.50 4,602.00 5,498.30
Liabilities
Capital & Reserves 311.9 357.5 387.9 463.5
Due from Banks 315.3 233.1 257.6 445.9
Private Non-Banks Deposits 2,195.00 2,314.10 2,565.60 2,664.80
Bahrain Monetary Agency 31.9 44.3 66.4 62.0
Other Liabilities 44.1 54.2 77.2 107.7
Foreign Liabilities 556.5 577.6 732.9 1074.1
The consolidated balance sheet of full commercial banks (FCBs) in Bahrain rose to a 10-year
high to stand at BD5.5bn at the end of Dec 2004, an increase of 19.5% over that of 2003. The
strong performance by FCBs was a reflection of the positive business and economic conditions
prevalent in Bahrain and the quality of assets held by those banks. The consolidated balance
sheets of FCBs rose mainly on account of 23.9% rise in private non-bank assets which stood
at BD2.17bn at the end of Dec 2004.
Table 5: Consolidated Balance Sheet of the Commercial Banks – Selected Banking

Indicators
2001 2002 2003 2004
Loans to Non-Banks / Total Assets 37.3 40.5 39.1 40.6
Loans to Non-Banks / Total Deposits 53.3 57.4 55.7 61.9
Foreign Assets / Total Assets 32.2 31.7 30.4 29.0
Total Deposits / Total Liabilities 70.0 70.6 70.1 65.6
Private Sector Deposits / Total Deposits 80.7 81.4 79.4 73.8

Investment Banks also posted impressive performance…
The consolidated balance sheet of investment banks rose to its 10-year high to US$6.2bn at
the end of Dec 2004, representing an increase of 16.6% over 2003. Domestic assets increased
by 18.9% to US$1.26bn as of Dec 2004. Share of GCC countries in investment banking assets
(excluding Bahrain) was 18%, Western Europe 25.1%, USA 29.8%, and Asia 1.6%, while
their shares in liabilities were 31%, 5.6%, 24.8% and 0.2% respectively as of Dec 2004.
Table 6: Consolidated Balance Sheet of Investment Banks

In US$ mn 2001 2002 2003 2004
Assets
Banks 328.1 375.9 646.8 773.5
Other Assets 96.1 103.5 113.6 146.0
Foreign Assets 3,407.50 3,772.00 4,245.90 4,923.80
Total Assets 4,033.90 4,484.80 5,313.20 6,192.70
Liabilities
Banks 317.5 414.8 319.2 528.0
Expanding credit portfolio…
In line with the increase in economic activity, total loans and advances extended to residents
by commercial banks increased by 24% during FY2004 and stood at BD2.23bn, compared
with BD1.8bn at the end of December 2003. The sectoral distribution of total outstanding
loans indicates that 45.2% of the loans were in the form of business lending, while personal
and government sector accounted for 45.5% and 9.3% respectively. The low interest rate
regime prevalent during the first six months of 2004 induced many retail customers to borrow
at lower interest rate.
Chart 1: Credit to various sectors in percentage as of Dec 2004

13%
8%
46%
16%
3%
9% 2%
3%
Manufacturing Construction & Real Estate

Trade Non-Banking Financial Institutions
Transportation & Communication Other Sectors
Source: Global Research General Government Personal

On the heels of improved demand, the personal segment witnessed sharp increase in lending
as it grew by 25.7% in FY2004 while at the same time business segment also registered an
increase of 20.5% during the same period. Trade sector accounted for the largest pie of the
commercial banks credit to the private sector. It accounted for almost 33.8% of the total credit
to the business segment and was followed by the manufacturing sector, which accounted
for another 29.6% share during the period. The booming real estate and construction sector
witnessed 12.8% jump in lending from BD165.8mn at the 2003-end to BD187.1mn at the end
of Dec 2004. Going forward, investment in and construction of several large-scale projects
is expected to help bolster growth. The credit offtake by the manufacturing sector also
witnessed good growth in FY2004 and it stood at BD298.2mn during the period. Most of the
other sectors barring agriculture & fishing recorded modest credit offtake from the banking
sector. Transportation & communication sector witnessed a sharp increase in credit offtake
as it increased from BD15.1mn in 2003 to BD41.5mn at the end of FY2004. The lending
market is expected to remain buoyant in near term due to increased government spending in
various sectors.
Table 7: Commercial Banks Credit to Various Sectors

In BD mn 2002 2003 2004
Business 842.7 837.1 1,008.6
Manufacturing 255.7 251.1 298.2
Mining & Quarrying 0.6 1 2.3
Agriculture, Fishing & Dairy 5.9 6.3 8.5
Construction & Real Estate 176.9 165.8 187.1
Trade 299.6 286.2 341.3
Non-Banking Financial Institutions 27.9 41.1 71.0
Transportation & Communication 13.2 15.1 41.5
Hotels & Restaurants 24.4 26.7 27.5
Other Sectors 38.5 43.8 31.2
General Government 108.4 154.3 207.4
Personal 678.7 807.5 1014.7
Total 1,629.80 1,798.90 2,230.70
Interest rate scenario…
Taking cue from the global trend, we have witnessed consistent decline in interest rates
in Bahrain since the past few years. However, interest rates started moving northwards
especially in the second half of 2004. The increase was sharp for less than three months
deposits and 3-12 months category. Similar is the trend for business loans as they kept on
sliding till 2003 only to increase in 2004. Under the business loan category, construction and
real estate sector didn’t witnessed any sharp reduction in interest rates and in 2004 as well
rates were highest among its peers in business loan category. This may be due to the more
demand from the sector.
Strangely enough, personal lending rates continued to slide in 2004 despite the increase in
overall interest rates. Mortgage rates fall from 7.57% in 2003 to 6.82% in 2004 while vehicle
loans dropped from 9.47% to 9.27% during the same period. Average credit card rates in
2004 stood at 18.64% as compared to 17.44% in 2003.

Table 8: Commercial banks – interest rates on BD deposit rates

% 2001 2002 2003 2004
Deposits
Savings 1.16 0.60 0.26 0.35
Less than 3 months 1.33 0.86 0.52 1.63
3-12 months 1.54 0.91 0.68 1.96
Business Loans
Construction & Real Estate 6.75 5.96 4.99 5.47
Manufacturing 8.47 4.38 4.20 4.60
Trade 5.94 4.99 4.90 4.93
Other 5.48 5.21 5.18 4.64
Personal Loans
Secured
- By mortgages 9.95 6.26 7.57 6.82
- By vehicle title 10.42 10.15 9.47 9.27
- By deposits 6.26 5.58 5.70 6.59
Unsecured
- Salary Assignments 9.82 8.34 7.93 7.77
- Other 6.94 8.17 6.43 7.11
Credit Cards 17.21 17.40 17.44 18.64

Changing regulatory environment…
BMA continues to undertake a number of regulatory and market development initiatives, to

support the continued growth and advancement of the financial services industry. Recently,
BMA issued new guidelines to govern the Bahraini banks consumer credit business. The
regulations are aimed at bringing in more uniformity and transparency into this line of
business by laying down rules on calculation of interest rates by banks, credit advertising,
procedures on early settlement, as well as limits on an individual’s total borrowing. The
new regulations come into effect from 1st January 2005. The new regulations create new
protections and strengthen existing protections for Bahrain’s borrowers and ensure that banks
compete and operate fairly in the area of consumer finance. The regulations define consumer
finance as any form of credit facility, such as an overdraft, credit card, personal loan or lease,
to an individual or a family. Loans secured against residential property or loans for business
activities are not included.
A highlight of the regulations is the introduction of a uniform methodology for calculating

the total cost of credit to the borrower. The Annual Percentage Rate (APR) is commonly used
to calculate the annual cost of loans, taking into consideration all additional charges, such
as insurance and documentation /processing fees, besides the interest rate applied. The new
regulations limit an individual’s total consumer finance repayments to a maximum of 50% of
a person’s monthly income, while the tenor of a loan may not extend beyond 7 years.

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

Islamic Banks in Bahrain

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

For Islamic Financial Institutions), the International Islamic Financial Market, the Liquidity
Management Centre and the First Islamic Rating Agency. The strengthening and development
of Islamic banking has been, and remains, an important aspect in the government’s policy
in maintaining and enhancing Bahrain’s status as the region’s pre-eminent international
centre.
Key Factors for Global Banks to operate in Bahrain:
• Financial Hub: As a financial capital of the Middle East, Bahrain offers global banks the
right mix of regulatory support and a safe jurisdiction for accessing the regional markets.
Positioned in the convenient time zone between Tokyo, Singapore and Hong Kong
in the East and London and New York in the west, Bahrain based institutions enjoys
global access. International acceptability is further enhanced by the consistent positive
assessment of the financial sector by the major international rating agencies.
• Free Capital flow: There are no exchange controls and movement of capital is unrestricted.
The management of investment is entirely a matter of the commercial judgment of the
individual investor.
• Tax-Free Environment: There are no corporate or individual income taxes. There are
minimal business regulations and a low tariff structure (e.g. 5% import duty on selected
goods). The diversified and market-oriented economy makes Bahrain an attractive
location for private banks.
• International Best Practice: International financial institutions find solace in the truly
international, market driven non-interventionist approach adopted by the Bahrain
Government. The financial sector operates within a transparent legal structure and
Bahrain’s anti-money laundering laws are on par with international standards set by the
Financial Action Task Force (FATF).
• Accounting Standards: Internationally accepted and customized accounting framework

is one of the main business enablers for Islamic banks in Bahrain. All Islamic banks
are required to comply with Financial Accounting Standards (FAS) developed by the
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
Many banks report on a dual basis, in line with IAS and FAS to address the requirements
of the diverse stakeholders.
Regulatory Environment & Enabling Institutions:
With Bahrain at the heart of the growing Islamic banking industry, BMA acknowledges it
responsibility to regulate and supervise Islamic banking standards. BMA is trying to provide
a level playing field for both Islamic and conventional banks. With this in mind, the BMA in
consultation with IMF and the Basle guidelines, has developed the first Prudential Information
and Regulatory framework for Islamic banks (PIRI) in 2000. The framework covers areas
such as capital adequacy, asset quality, the management of investment accounts, corporate
governance and liquidity management.

The initiative creates uniformity within the Islamic banking industry, standardizes
interpretation of risks inherent to unique Islamic contracts, and offers a mechanism for
measuring bank’s performance and enhances corporate governance. Now, all Islamic
financial institutions in Bahrain comply with PIRI guidelines. The international relevance
has created a strong sense of security and confidence in the Islamic banking system for the
major financial markets. The following institutions are the backbone of the Islamic banking
regulatory environment in Bahrain.
a) Accounting and Auditing Organization for Islamic Financial Institutions:

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
was established as an international, autonomous, non-profit-making body. It is the leading
international standard setter for Islamic financial institutions, in the field of accounting,
auditing, governance and transparency. It works closely with bodies such as the International
Accounting Standards Board, and its standards are based on international accounting
standards. All Islamic financial institutions licensed in Bahrain have to comply with AAOIFI
standards.
b) Liquidity Management Centre:

The Liquidity Management Centre (LMC) was established in Bahrain in 2002 to develop an
active secondary market for short-term Sharia compliant treasury products. These comprise
different asset pools with varying risk and return profiles and different tenors. Islamic banks
and corporates with surplus liquidity will form the primary investor base for the sukuks.
Key objectives of the LMC are to:

• Facilitate the creation of an interbank money market that will allow Islamic Financial
Services Institutions (IFSIs) to effectively manage their asset liability mismatch;
• Enable IFSIs to participate as both investors (providers of funds) and borrowers (providers
of assets).
• Provide short-term liquid, tradable, asset-backed treasury instruments (sukuks) where
IFSIs can invest their surplus liquidity.
• Provide short-term investment opportunities that have greater Sharia credibility and are
more competitively priced than commodity Murabaha transactions currently undertaken
in the market.
• Enable IFSIs to assume term risk, securities and liquidate such assets to improve the
quality of their portfolios.
• Endeavour to create secondary market activity with designated market makers where
such instruments can be actively traded.
c) International Islamic Financial Markets:

International Islamic Financial Markets (IIFM) was established to create and develop an
international market for Islamic financial instruments by facilitating cross-border investment
activity. The IIFM began operations in April 2002. It was formed with the agreement
between the Islamic Development Bank, Bahrain Monetary Agency, the Central Bank of
Indonesia, the Labuan Offshore Financial Services Authority (representing Malaysia), the
Central Bank of Sudan and the Ministry of Finance of Brunei Darussalam. The primary
purpose of the IIFM is to provide a cooperative framework to ensure the continued growth
of an Islamic financial market, based on Sharia rules and principles, as a viable alternative to
the conventional banking system.

The roles of the IIFM are as follows

- To promote the harmonisation and convergence of Sharia interpretations in developing
Islamic banking products and practices which are universally acceptable;
- To encourage a large number of Islamic financial institutions to participate in the market
by introducing a wide range of Sharia compliant products and the creation of an active
secondary market thus providing liquidity to the instruments traded in the market.
d) General Council for Islamic Banks and Financial Institutions:

General Council for Islamic Banks and Financial Institutions (GCIBFI) aims to enhance
market understanding of Islamic banking and finance on an international scale. These
include organising seminars and conferences in key financial centres and providing technical
assistance and employee training programmes to its members.
e) International Islamic Rating Agency:

International Islamic Rating Agency (IIRA) was established to evaluate and rate Islamic
banks and instruments and provide an independent assessment of their compliance with
Sharia tenets.
f) Bahrain Institute of Banking & Finance:

Bahrain Institute of Banking & Finance (BIBF) provides training courses for Bahrain’s
financial sector. It develops and facilitates specialist courses on Islamic finance focusing on
risk management, prudential regulations and product development.
Talent Pool:
The presence of support institutions in Bahrain has been the main driving force behind the
thriving financial industry. There is an impressive local talent, with a number of academics
and analysts working in the financial sector. The total employment in the Bahrain’s Islamic
banking industry is estimated to be around 850 at the end of 2003, out of which around 92%
were Bahrainis. Currently, a team led by the private sector is in the process of setting up
a world class Islamic finance R&D institute in Bahrain. The institute would provide and
institutional platform for research on Sharia compliant products, and aims to create a new
generation of highly professional Islamic bankers.
Innovations in Islamic Finance:

BMA has pioneered a series of new Islamic financial instruments designed to broaden the
depth and liquidity of Islamic financial markets. BMA introduced the first tradable sukuk
market in 2001 and since then the pace of issuance has quickened with the BMA tapping
this market seven more times. The total value of sukuks issued by Bahrain has reached close
to US$1bn. Following the footsteps of Bahrain, number of other nations have also issued
Sukuks and some are in the process of issuing it further. Other notable sukuks were the
US$600mn sovereign issue from Malaysia that came to the market in June 2002, US$400mn
sukuk from the Islamic Development Bank issued in July 2003 and US$700mn issue from
Qatar in September 2003. More large scale sukuks of this kind are expected to come in the
coming year, but smaller players have also plans to participate.
Apart from the BMA’s efforts, growth in Islamic finance has largely come from the ability
of private sector Islamic bankers to devise innovative products that meet their customers’
needs while complying with Islamic law. One of these innovations has been in the area of

Islamic collective investments schemes. There are a number of Islamic financial institutions
in Bahrain which have specialised in Islamic collective investment schemes. Examples of
such institutions which manage a number of collective investment schemes are Al Amin
Bank and ABC Islamic Bank. There is a surge in Tawaruq based contracts within the Islamic
banking industry in the GCC region.
In another development, Noriba Bank recently announced the launch of a new product called
Range Murabaha Investments (RaMI). Building on the Murabaha principle, RaMI is a short-
term, Shariah compliant structured yield alternative that offers capital preservation while
providing investors with the potential to earn up to 10% per annum, which is significantly
higher than normal Murabaha investments. RaMI investors select their benchmark commodity
or currency and its performance within a selected price range, thereby planning for a higher
return within a given time period. Periodic Murabaha trades are carried out over the life
of the investments. Once the individual Murabaha deferred sales proceeds are due, any
profit arising from the investment is paid to the investor. The original amount is reinvested
in another Murabaha transaction and so on. RaMI offers investors a number of important
benefits, including capital preservation, the possibility of higher rates of return and a flexible
investment period.
Another area of particular interest is alternative investments, particularly shariah compliant

hedge funds. Until recently, Islamic investors have been unable to invest in hedge funds
because of the lack of shariah compliant equivalents to such strategies as equities shorting and
options. Over the years, however, a number of financial institutions have been researching
viable shariah compliant alternatives to these conventional trading strategies. The result of
these research efforts is the recent development of an innovative short sale structure that is in
accordance with shariah finance principles. This breakthrough means that for the first time,
shariah compliant financial institutions can introduce hedge funds into their product offerings,
thereby providing clients with access to an alternative asset class offering absolute returns.
More recently, Islamic commercial banks have been able to leverage the structure to offer
indirect working capital financing as well as for short-term liquidity management. Islamic
project finance is one area that has caught the attention of Islamic banks in recent years.
Two recent transactions in Bahrain, which involved financing for the expansion of Alba
and Al-Hidd Water plant provide examples of the increased use of Islamic funds. All the
above indicators point to the fact that, while for quite a number of years there has been
a considerable talk of the potential Islamic finance, it now appears that the door to such
potential has finally been unlocked.
Islamic banks in the Middle East boast US$30bn in excess liquidity looking to be deployed.
More and more project finance deals are having Islamic tranches alongside conventional
financing and Islamic debt capital market is emerging as a fast growing alternative funding
source. Several pioneering initiatives being promoted in Bahrain will ensure continued
integration of the industry in global markets over the next decade. At the core of this
Islamic banking offering is enhancement of institutional financial services, facilitating ready
access to regional opportunities. Currently, Bahrain is actively implementing a framework
of strategies to facilitate asset management investment advisory, private banking, project
finance and takaful activities for the Islamic financial industry.

The initiative is driven by a public and private sector working partnership, under the banner
of Islamic Banking & Takaful Taskforce (IB&T). The taskforce ensures that all initiatives
are developed in consultation with relevant stakeholders, thus ensuring their international
application. A case in point is the proposed world-class Islamic Finance Training Institute,
aimed at refining new talents to international standards.
In recent years, it has become acceptable to invest in shares, Islamic credit cards have been
introduced, and the insurance business is starting to grow. There is even a talk of creating
Islamically compatible hedge funds. All these new initiatives are expected to bring new
dynamism to the Islamic banking industry in the region and especially in Bahrain.
Islamic banks, although growing, do not yet offer all the conveniences and choices available
from conventional banks. The Islamic banking industry needs to develop more innovative new
products to meet the customers varied demands. In addition, more Islamic instruments are
needed to aid risk management, including Islamic alternatives to derivatives and insurance.
Thus, these challenges need to be overcome if Islamic banking is to fulfill its true potential.
More and more countries need to adopt common standards for auditing and reporting systems
to ensure the transparency demanded by global regulators and to make comparisons easier.
Market Size
There are currently 29 Islamic financial institutions licensed in Bahrain, including 5 full
commercial banks, 16 investment banks and 3 offshore banking units. Islamic banks provide
a variety of products, ranging from traditional Islamic structures such as Murabaha, Ijara,
Mudaraba, Musharaka, Al Salam and Istisna, restricted and unrestricted investment accounts,
syndications and other structures used in conventional finance, which have been accordingly
modified to comply with Sharia principles. The Islamic banking industry in the region has
gained momentum in recent years and as per one estimate it is growing at the rate of 15%
per annum. Islamic banking and finance is now an established industry in Bahrain and the
government considers it as a growth industry of the future. Globally, the industry witnessed
scorching pace of growth. As per the Chairman of the General Council for Islamic Banks and
Financial Institutions (GCIBFI), the assets of the global Islamic finance companies stood at
over US$260bn with an annual growth rate of 23.5%. The number of Islamic banks in the
world increased from 176 in 1997 to 267 in the first quarter of 2004.
Islamic Banks continue to grow…
As a result of the various initiatives undertaken by the Bahraini government to develop the
country as an Islamic banking hub, the size of Bahrain’s Islamic banking and finance industry
rose sharply in recent years and has continued to grow in 2004 as well. Since the past four
years, the total assets of the Islamic banking industry grew at a CAGR of impressive 30.3%.
The total assets of Islamic banks and financial institutions operating in Bahrain stood at
US$5.43bn at the end of Dec 2004, which was an increase of 30.7% over its 2003-year end
level. The growth in assets was mainly fuelled by 39.4% rise in foreign assets of the banks.
The foreign assets of the banks jumped primarily in the third and the fourth quarter of 2004.

Table 9: Consolidated Balance Sheet of Islamic Banks: Full Commercial Banks,

Overseas Banking Units and Investment Banks
In US$ mn 2001 2002 2003 2004
Assets
Cash 4.3 7.2 10.1 12.6
Banks 733.9 774.1 1,092.30 1,147.50
Other Assets 67.9 87.1 189.8 231.8
Foreign Assets 1,296.60 1,552.80 2,080.30 2,899.00
Total Assets 2,458.10 2,911.80 4,156.90 5,434.20
Liabilities
Capital & Reserves 403.9 536.2 678.4 1,056.6
Banks 117.1 258.2 429.8 817.5
Private Non-Banks 654.4 793.3 1,008.7 1,096.80
The total assets of the Islamic banking has been increasing continuously since the past few
years. It increased from 2.4% of the total banking assets in 2001 to 4.6% as of Dec 2004.
Going forward, we believe that the assets of Islamic banks are set to increase exponentially
in view of the strong demand for Islamic products and services.
Chart 2: Historical trend of assets of Islamic banks as a percentage of total banking

assets
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2001 2002 2003 2004
Assets of Islamic banks as a % of total banking assets

Performance of listed banks

Bahrain has total five banks listed in the commercial banking category. Most banks in Bahrain
have reported healthy growth in assets and earnings during the year ended 2004. The total
assets of the listed Bahraini banks at the end of 2004 stood at BD6.2bn, representing a growth
of 17.9% over 2003. Ahli United Bank (AUB) is the largest bank in terms of asset in Bahrain
and virtually dominate the banking industry in Bahrain. AUB has around 49.1% of the total
assets of the listed banks in Bahrain in FY2004 as compared to 44.8% in FY2003. Bank of
Bahrain & Kuwait (BBK), which overtook National Bank of Bahrain (NBB) in terms of
assets in 1998, was at the second spot with 22.9% closely followed by NBB with 21.9%.
Bahrain Islamic Bank (BIsB) and Bahraini Saudi Bank (BSB), both operate in compliance
with the Islamic Sharia principles, remained a marginal player in the banking industry in
Bahrain in FY2004.
Table 10: Market Share of Listed Bahraini Banks (FY 2004)

Assets Deposits Loans
2003 2004 2003 2004 2003 2004
AUB 44.8% 49.1% 35.2% 42.4% 38.7% 39.1%
NBB 23.5% 21.9% 29.9% 26.9% 22.6% 23.6%
BBK 24.9% 22.9% 25.8% 23.8% 28.7% 28.2%
BIsB 4.4% 4.1% 6.3% 4.5% 6.3% 5.9%
BSB 2.4% 2.1% 2.8% 2.3% 3.7% 3.1%
Source: Bank Reports, Global Research
In terms of customer deposits also, AUB dominated the banking industry in Bahrain with
42.4% share which was followed by NBB with 26.9% and BBK with 23.8%. AUB was
highly successful in increasing its customer deposits in FY2004, as a result its market share
went up from 35.2% in FY2003 to 42.4% in FY2004. AUB continued to have a larger chunk
of the total loans and advances portfolio of the listed banks in FY2004. AUB had 39.1%
share in loans which was followed by BBK (28.2%) and NBB (23.6%).
The following table gives the broad overview of the total balance sheet of all the listed banks
in Bahrain. In recent years all the banks have taken initiatives to restructure their assets as
well as liabilities. In addition, in order to take the advantage of the booming market, most
of the banks have also increased their investment portfolio. A phenomenon which has been
prevalent all across the GCC region is the increase in the share capital of the banks. Some of
the banks in Bahrain followed their counterparts in the GCC region to shore up their share
capital by way of bonus issue or rights issue to comply with the Basel II requirements. Banks
such as BIsB have issued bonus shares in FY2004 while AUB have raised equity by way
of partly convertible non-cumulative preference shares. Because of the shoring up of their
share capital, banks in Bahrain are adequately capitalised to take the advantage of emerging
opportunities not only in Bahrain but in the entire GCC region. However, the focus now
should shift from capital adequacy to capital efficiency. The winner will be those who are
effective in utilizing their capital by providing higher return on equity. The opportunities
are there, the challenge lies in how the banks convert this into a higher topline as well as
bottomline.

Table 11: Comparative Balance sheet of Bahraini Banks (as of FY2004)

BD' 000 AUB NBB BBK BIsB BSB
Assets
Cash & cash equivalents 820,595 40,240 35,682 9,407 10,802
Treasury Bills - 59,400 25,435 - -
Due from banks and other FIs 19,279 306,830 187,153 - 54,653
Gross Loans & Advances 1,141,594 689,111 823,314 172,034 91,889
Less: Provisions (50,501) (15,409) (58,625) (2,017) (40,758)
Net Loans & Advances 1,091,093 673,702 764,689 170,017 51,131
Investments Securities 722,589 229,520 376,131 55,770 10,643
Net Fixed Assets 21,864 18,166 14,580 1,165 486
Interest Earning Assets 1,883,462 1,248,423 1,316,364 208,349 157,185
Total Assets 3,045,600 1,359,470 1,420,775 254,775 128,090
Liabilities
Due to banks & FIs 688,002 185,800 228,852 40,262 9,973
Customer Deposits 1,507,416 957,040 844,502 158,936 83,329
Medium term loans / Other borrowings - 6,830 94,250 - -
Term loans 305,206 - - - -
Paid-Up Capital 244,400 45,000 56,906 23,000 20,000
Reserves 131,636 148,930 100,872 29,750 (7,370)
Shareholders Equity 376,036 193,930 157,778 52,750 12,630
Interest Bearing Liabilities 2,595,163 1,149,670 1,239,780 158,936 93,302
Asset Size and Asset Quality
As mentioned earlier, the total assets of the banking sector stood at BD6.2bn as of Dec
2004 end. Around 47% or BD2.91bn of the total assets were deployed in lending operations.
Since the past few years banks in Bahrain have focused extensively on improving their
asset quality. As a result we have witnessed substantial improvement in the asset quality of
the banks. Despite that there are some banks whose delinquency ratios are much higher as
compared to the international standards. In the Bahraini banking sector, Bahraini Saudi Bank
has the highest non-performing loans as a percentage of gross loans which was followed by
BBK. NBB continued to have the best asset quality among its peers despite its huge size and
outstanding growth. NBB’s non-performing loans to gross loans stood at 1.1% followed by
BIsB at 2.2% and AUB with 4.3% in FY2004.
Table 12: Asset Quality of Bahraini Banks (FY 2004)

(Amt in BD 000) AUB NBB BBK BIsB BSB
Gross Loans 1,141,594 689,111 823,314 172,034 91,889
Provisions (50,501) (15,409) (58,625) (2,017) (40,758)
Net Loans 1,091,093 673,702 764,689 170,017 51,131
Non-performing Loans 49,402 7,850 79,292 3,772 62,840
NPL / Gross Loans 4.3% 1.1% 9.6% 2.2% 68.4%
Provisions / NPL 102.2% 196.3% 73.9% 53.5% 64.9%
Source: Company Reports, Global Research

Except two banks namely NBB and AUB, others have not provided adequately for their
NPLs in FY2004. NBB is as usual were at the forefront of providing more for its NPLs as it
provided 196.3%. NBB was followed by AUB with 102.2% and BBK with 73.9%.
Operating Performance
Most banks in Bahrain have reported healthy growth in interest income and earnings during
the year ended 2004. For example, FY2004 net profit of National Bank of Bahrain surged by
26.1% to BD28.26mn over the corresponding period in 2003, while that of Ahli United Bank
rose by 22.4% to US$106.5mn and BIsB’s profit improved by 50.3% to BD3.7mn during
the same period. Bahraini Saudi Bank, which faced credit irregularities in 2002 and has
got a strong backing from the regulator BMA. In FY2004, the bank reported an impressive
performance as its net profit jumped by 25.4% to BD1.88mn. The bank has worked out a
three-year business plan with the assistance of an external consulting firm to create niche for
itself. Bahraini banks have benefited from the buoyant activities in the domestic and regional
markets. Recent growth in deposits in the banking sector indicates that investors are still less
inclined at taking on overseas equity-risks, resulting in surplus liquidity being kept within
the region. Overall, the banks in Bahrain have prudently managed their interest rate spreads
between assets and liabilities, thereby achieving higher net interest income. In addition to
this, the booming markets also helped the banks in Bahrain to substantially increased their
investment income.
Table 13: Comparative Income Statement of Bahraini Banks (as of FY2004)

BD’ 000 AUB NBB BBK BIsB BSB
Interest Income 95,511 38,790 50,784 6,338 5,775
Interest Expense (48,566) (10,880) (21,259) (2,074) (1,510)
Net Interest Income 46,944 27,910 29,525 4,264 4,265
Non-Interest Income 44,435 17,338 22,411 4,485 655
Provisions for loans (14,080) (550) (2,444) (184) (174)
Impairment of inv. Securities (1,379) - (1,821)
Operating Income 75,920 44,698 47,671 8,564 4,746
Operating Expense (37,675) (16,440) (23,244) (4,737) (2,862)
Operating Profit 38,245 28,258 24,427 3,827 1,884
Net Profit 40,061 28,258 25,678 3,705 1,884
The listed banking segment in Bahrain showed lots of activities during the year ended 2004.
AUB acquired 40 per cent stake in Al-Ahli Bank of Qatar. The acquisition represents an
important milestone in AUB’s strategy to become a major regional bank in the Gulf by
adding a significant presence in Qatar, a new and very promising market, to its existing large
operations in Bahrain and Kuwait. In addition to this, AUB was also active in forming a new
bank in Bahrain called Future Bank. BBK is also planning expansion in the region as the
domestic market is highly competitive.
Overall, most of the Bahraini banks have been improving their operating performance over
the years owing to infusion of IT, process re-engineering with emphasis on automation
and cost initiatives in the banking business, to improve service levels. The banks such as
BIsB have chalked out long-term strategy to make serious dent in the Islamic banking in

Bahrain. It has been observed that recent thrust on implementing core banking solution and
automation of branches have helped the bank to efficiently serve the customers. We believe
that, banks will continue to benefit from the further hardening of interest rates. On account
of falling interest rates till mid-2004, banks were forced to restructure their balance sheets,
growing the size of the loans and advances segments, which increased rapidly. Also, banks
focused heavily on improving operating efficiency and asset quality during the past period, a
move that is currently helping bolster expectations in the sector. As a result, all 5 banks saw
improved profitability during FY2004, aggregately up by around 21% over 2003.
Table 14: Comparative Ratios of Bahraini Banks (as of FY2004)

BD' 000 AUB NBB BBK BIsB BSB
Profitability Indicators
ROAE 11.0% 15.7% 17.1% 8.0% 16.2%
ROAA 1.48% 2.18% 1.88% 1.52% 1.48%
Interest Exp / Interest Income 50.8% 28.0% 41.9% 32.7% 26.1%
Interest Income / Avg Int earning assets 3.90% 3.26% 3.97% 3.13% 3.66%
Interest Exp / Avg Int bearing liabilities 2.10% 0.98% 1.78% 1.19% 1.65%
Net Spread 1.80% 2.28% 2.19% 1.94% 2.01%
Net Interest Margin 1.94% 2.33% 2.31% 2.11% 2.71%
Non Interest Income / Operating Income 56.7% 38.8% 43.2% 52.4% 13.8%
Dividend Payout Ratio 65.9% 63.7% 77.0% 74.5% -
Efficiency Indicators
Cost to Operating Income 49.6% 36.8% 48.8% 55.3% 60.3%
Staff Expenses / Operating Income 23.6% 24.7% 28.0% 32.4% 30.7%
Gross Loans to Customer Deposits 75.7% 72.0% 97.5% 108.2% 110.3%
Customer Deposits / Total Deposits 67.3% 83.7% 72.3% 86.4% 89.3%
Capitalisation Indicators
Capital Adequacy Ratio 23.7% 31.8% 18.8%
Equity to Total Assets 12.35% 14.27% 11.11% 20.70% 9.86%
Equity to Gross Loans 32.94% 28.14% 19.16% 30.66% 13.74%
The strong profitability of the banks have also boosted their Return on Average Equity
(RoAE) and Return on Average Assets (RoAA). BBK has the highest return on equity in
the banking sector in Bahrain as it reported RoAE of 17.1% in FY2004, which was closely
followed by BSB with 16.2% and NBB with 15.7%. AUB and BIsB were the laggards in
this respect as they reported very low RoAE of 11% and 8% respectively in FY2004. NBB
leads the pack in efficiently utilizing its assets as it reported the highest Return on Average
Assets at 2.18%, which was followed by BBK at 1.88%. AUB and BSB were at the bottom
in efficiently utilizing their asset base.
NBB has the highest net spread among its banking peers in the country. NBB reported a net
spread of 2.28% in FY2004, which was followed by BBK (2.2%) and BSB (2.01%). AUB
and BIsB reported the lowest spread in the banking sector in Bahrain. Similarly, NBB has the
highest net interest margin in Bahrain while BBK is at the second spot.
As mentioned earlier, banking sector in Bahrain has been witnessing cost rationalization
since the past few years, though they were late starters in this respect. As a result, their cost

to operating income after provision seems to be on a higher side. NBB was at the forefront
in this regard as it reported the lowest cost to income of 36.8%, which is much lower as
compared to its peers in Bahrain. NBB was followed by BBK with cost to income ratio of
48.8%. BSB and BIsB has the highest cost to income ratio of 60.3% and 55.3% respectively.
Going forward, the banks in Bahrain still have wide scope to improve their cost to income
ratio and thus perk up their profitability as well.
Efficiency Parameters
Bahraini banks have made significant investments in Information Technology infrastructure

in order to improve their operating efficiency and enhance customer satisfaction. This has
resulted in banks being able to improve employee productivity and launch new products and
services faster. As can be seen from the table below, NBB has the largest banking network
in Bahrain, followed by BBK, AUB and BIsB. In terms of operating income AUB and BBK
are way ahead of their rivals. In terms of employee productivity AUB is ahead of its peers
with the highest operating income per employee. Though NBB has higher operating income
per employee as compared to BBK, the latter has higher operating expenses per employee
than NBB. AUB continued to have higher employee productivity as it reported a net profit
per employee of BD71,410.
During the past two to three years most of the banks in Bahrain have been busy upgrading
their technological capabilities. New and sophisticated systems have been introduced which
should allow banks to reap efficiency gains, going forward. Most banks are now able to
monitor sources of costs, profits, and more importantly, risks. In addition, these systems
make the creation of new products easier and faster. They also allow bank employees to
focus on customer services. Since most of the banks seem to have completed their technology
upgradation projects, it would mean large investment outlays needed for these projects are
over. Consequently, banks’ operating costs have been decreasing.
Table 15: Comparison of Operating Performance of the Banks (FY 2004)

(Amt in BD 000) AUB NBB BBK BIsB BSB
No. of Branches 17 25 18 12 6
No. of Employees 561 571 702 186 101
Operating Income (Net of Provisions) 75,920 44,698 47,671 8,564 4,746
Operating Expenses (37,675) (16,440) (23,244) (4,737) (2,862)
Operating Income Per Employee 135.33 78.28 67.91 46.04 46.99
Operating Expense Per Employee 67.16 28.79 33.11 25.47 28.34
Net Profit Per Employee 71.41 49.49 36.58 19.92 18.65

Banking Sector Outlook

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

Valuation Matrix
The valuation of the banking sector in Bahrain appears to be rather realistic, with some
exceptions. Our valuation matrix includes only commercial banks, both conventional and
Islamic. As of April 24, 2005, the average price earnings ratio for the banking sector stood
at 18.9x based on their 2004 earnings. BIsB enjoys the highest P/E multiple with 25.1x
followed by AUB with 21.7x. BBK enjoys much lower P/E of 15.6x in the banking sector
in Bahrain.
Table 16: Comparative Valuation of Bahraini Banks (FY 2004)
Name of Bank Country Reuters CMP* M-Cap* RoAA RoAE P/E * P/BV* Composite Potential Recommendation
Code (fils) BD Mn (x) (x) Share Value Upside/
(fils) Downside
Ahli United Bank # Bahrain AUBB.BH 0.89 870.1 1.48% 11.00% 21.71 2.49 1.00 12.3% Buy
National Bank of
Bahrain NATB.BH 1,125 607.5 2.18% 15.72% 17.91 2.61 - - Not Rated
Bahrain
Bank of Bahrain &
Bahrain BBKB.BH 704 400.6 1.88% 17.12% 15.61 2.92 794 12.8% Buy
Kuwait
Bahrain Islamic
Bahrain BISB.BH 405 102.5 1.52% 7.99% 25.14 1.86 418 3.2% Hold
Bank
Bahraini Saudi
Bahrain BSBB.BH 134 67.0 1.48% 16.22% 14.23 2.12 - - Not Rated
Bank
# The stock price of AUB is in US$

* As on April 24, 2005.
The average price to book value of the sector was at 2.40 times the book value as of December,
2004 (excluding proposed dividends). BBK enjoys the highest price to book value multiple of
2.92 times followed by NBB with 2.61 times. BIsB, which has the highest price to earnings
ratio in the sector has the lowest price to book value of just 1.86 times. Similarly, AUB is also
trading at P/BV of 2.49x. The discounting enjoyed by some of the banks is likely to improve
from the current levels owing to the further increase in interest rates over the medium term
which would result in higher margins and profits and attractive yields. Increase in interest
rates would lead to substantial improvement in the incomes of large banks such as AUB,
NBB & BBK.
Ahli United Bank
We believe that AUB’s net interest income is expected to improve strongly due to the further
hardening of the interest rates. The bank is expected to grow in an inorganic way and is
expected to become a pan-GCC bank in near future. Over the medium term, AUB is expected
to post stellar performance buoyed by the improvement in its core and non-core businesses.
We had recommended a price target of 68 cents for the bank in Dec 2003 when the stock was
quoting at 57 cents. Since then the stock moved up as per expectations and reached our target
price in August 2004. Currently, GB is trading at 1.6x of its estimated book value and 17.2x
of its estimated earnings of 2005. We have revised upwards our earlier projections due to
better FY2004 results of the bank and improved market conditions. The estimated fair value
of AUB’s stock works out to US$1.00 based on DDM and peer group valuation method,
which is higher by around 12.3% vis-à-vis the current market price of the stock. The bank
is all set to take the advantage of the booming regional markets by becoming a pan-GCC

bank. The fundamentals of the bank remained robust and has strong income visibility, going
forward. Hence, we maintain our earlier rating and recommend a ‘Buy’ on the stock.
Bank of Bahrain & Kuwait
The bank is expected to look forward for strategic alliances as well as the opportunity for
As a part of its rebranding exercise, the bank is expected to launch new and innovative
retail banking concept, which will focus primarily on customer service. Focus on alternative
delivery channels is expected to further boost its efficiency. We had recommended a Buy on
the stock in September 2004 with a target price of 788 fils, when the stock was trading at 695
fils. Since then the stock has moved up as per our expectations and reached its peak of 762
fils, justifying our earlier buy recommendation, though it has yet to reach our targeted price.
Currently, BBK is trading at 2.79x of its estimated book value and 13.1x of its estimated
earnings of 2005. The estimated fair value of BBK’s stock works out to 794 fils based on
DDM and peer group valuation method, which is higher by around 12.8% vis-à-vis the
current market price of the stock. Hence, we maintain our earlier rating and recommend a
‘Buy’ on the stock with a medium term perspective.
We believe that fees and commission income of the bank is expected to be buoyant due to
the bank’s efforts to launch various new products and services. The bank is also expected
to report strong gains from its investment income. In October 2004, we had recommended
a Hold on the stock, when the stock was trading at 336fils. Since then the stock moved up
smartly to reach its all time high of 480 fils in March 2005. Currently, BIsB is trading at 1.88x
of its estimated book value and 22.3x of its estimated earnings of 2005. We have revised
upwards our earlier projections due to strong outlook of the bank and improved market
conditions. The estimated fair value of BIsB’s stock works out to 418 fils based on DDM and
peer group valuation method, which leaves marginal upside potential of about 3.2% over the
current market price. Therefore, we continue to maintain ‘Hold’ on the stock.


PLAYERS PROFILES

Ahli United Bank

Reuters Code: 24th April 2005
AUBB.BH
Listing:
Bahrain Stock Exchange BUY
Current Price
US$0.89
Key Data
EPS (Cents) 4.1 12M Avg. vol. 0.424mn
BV (Cents) 35.7 52 week Lo / Hi US$ 0.57 / 1.1
P/E 21.7 Market Cap US$2,314mn
P / BV 2.49 Target Price US$1.00
Background
• Ahli United Bank (AUB) was incorporated in Kuwait in 2000 as a closed company
and changed to a public shareholding company in the same year. It represents a merger
between London-based United Bank of Kuwait and Bahrain based Ahli Commercial
Bank. The bank offers a full range of banking services focused on retail, commercial
and investment banking business, global fund management and private banking services
directly and through its subsidiaries. The bank had 561 employees as of end-Dec 2004
servicing customers from 17 branches spread across strategic locations in Bahrain. AUB
has established strategic alliance with Mellon Global Investments, a major mutual fund
provider, and Henderson Global Investors, a specialist in international real estate fund
management.
Shareholding Pattern
• The major shareholders of the bank include Gulf Projects Investment Company, Public
Institute for Social Security and Pension Fund Commission of Bahrain.
Recent Developments
• AUB is rapidly trying to become a pan-GCC bank with a strong regional focus. In 2004,
the bank acquired 40% stake in Qatar based Al Ahli Bank of Qatar. AUB has signed a
ten-year management agreement which will see the bank oversee the management and
provide technical and marketing services to the bank. As part of the agreement Al Ahli
Bank of Qatar has been renamed as Ahli Bank QSC.
• AUB formed Future Bank in Bahrain based by merging the Bahrain operations of Bank
Melli Iran (BMI) and Bank Saderat Iran (BSI), with each bank having equal stake. The
obvious reason being that this will give AUB entry point in Iran and Oman, where BMI
and BSI has operations. Future Bank have an authorized capital of US$200mn and an
initial paid up capital of US$99mn.

• The end of Dec 2004 mark the bank issuing partly convertible preference shares. The
total subscriptions exceeded 1,031mn shares with total proceeds of US$464mn, thus
representing an oversubscription of approximately 172% of the initial issue size of
600mn shares. However, to accommodate the massive investor demand and its future
growth objectives, AUB increased the final issue size to 1,000mn shares and thus raised
US$450mn. In addition to its significant quantum, the issue is equally divided between
Tier 1 and Tier 2 capital. This injects the required capital for growth without diluting its
earnings per share. The issue is expected to shore up the bank’s CAR tremendously, as a
result the bank can leverage its capital base to take aggressive exposure in the booming
GCC economy.
Analysis of Financial Performance – 2004
• We had recommended a Buy on the stock in our investment update in December 2003.
The bank falls short by just 2.1% in our projected net interest income and 6.2% in our
projected net profit figures for FY2004.
• The interest income of the bank surged by 15.5% to US$254mn during FY2004 as
compared to the same period last year due to the restructuring of its interest earning
assets as well as hardening of the interest rates in the later half of the year. The northward
movement of the interest rates also raised interest expenses of the bank by 19.5% during
the same period.
• The net interest income during the period increased by a 11.5% to US$124.85mn as a
result of strong retail and corporate loan growth, superior corporate loan spreads and
improved balance sheet mix.
• Helped by business volume growth in corporate and retail banking space, fees and
commissions income grew higher by 20% to US$40.2mn as compared to the same period
last year. Trading income of the bank recorded strong growth as it grew by 196.3% to
US$12.16mn. This was due to strong growth in foreign exchange gains in FY2004.
• Similarly, the booming regional markets helped the bank to record US$16.6mn gains on
sale of investments. Income from associates, which formed the highest chunk of non-
interest income, grew by 82.3% to US$41.7mn.
• The provision for loan losses were up sharply by 131.4% to US$37.44mn while provision
for impairment of investment losses were down by 54.3% to US$3.7mn. Despite the huge
jump in provision, the total operating income after provision of the bank increased by
17.9% to US$201.9mn.
• Operating expenses of the bank increased in line with the business volume growth. Staff
expenses grew marginally by 7.7% to US$47.6mn while other operating expenses jumped
by 70% to US$45.35mn. The cost to total operating income after provision increased
sharply to 49.6% in FY2004 as compared to 44.9% in FY2003. We believe that this ratio
is on a much higher side and the bank need to reduce this ratio further in order to remain
competitive.

• The bank reported 22.4% growth in its net profit to US$106.54mn, reflecting strong
growth in all its business segments. This resulted in its EPS moving up to 4.1 cents from
3.35 cents in 2003.
• AUB’s total assets stood at US$8.12bn at the end of FY2004, representing an increase of
29.6% over its Dec 2003 level. Around 35.7% of the assets were deployed in loans and
advances portfolio while 23.7% were in non-trading investments.
• Total loans and advances increased by an impressive 14.5% to US$3.04bn. Around

42.6% of the loans portfolio were deployed in consumer finance while 22.8% were in
trading and manufacturing and 14.8% were in real estate sector. Lending to the consumer
finance recorded strong growth of 21.4% to US$1.29bn. The thrust on retail lending is
expected to be a future growth driver for the bank. Non-performing loans decreased to
US$131.4mn in FY2004 as compared to US$161.2mn in FY2003. The proportion of
NPLs to total loans stood at 4.3% in FY2004 while the bank has provided for 102% of its
NPLs at the end of FY2004.
• Investments in associates of the bank increased by 63.5% to US$820.2mn. This was due
to the fact that AUB acquired 40% stake in Al-Ahli Bank of Qatar. AUB also, together
with Bank Melli Iran and Bank Saderat Iran, formed Future Bank in 2004. Non-trading
investments grew by 11.6% to US$1.92bn.
• Despite the stiff competition, deposits from customers increased by a whopping 42.8% to
US$4bn during the same period, while the deposits from banks and financial institutions,
which have relatively higher cost of servicing increased by around 9.3% to US$1.83bn.
The strong growth in customer deposits is expected to help the bank to improve its margin
going forward.
• The bank raised additional term debt in FY2004, thus it increased by 96% to US$811.7mn
while the subordinated liabilities increased by 4% to US$134.7mn.
• Effective January 1, 2005, the bank allotted 1,000mn non-cumulative partly convertible
preference shares and thus raised US$450mn.
• The bank remained strongly capitalised with a Capital Adequacy Ratio of 23.7% as of
FY2004. CAR is expected to boost further in FY2005 due to the issue of hybrid preference
shares. Thus, the bank remained strongly capitalised to exploit the emerging opportunities
in the region.
Outlook
• The net interest income of the bank is expected to improve strongly due to the further
hardening of the interest rates.
• The bank is expected to grow in an inorganic way and is expected to become a pan-GCC
bank in near future.
• Over the medium term, AUB is expected to post stellar performance buoyed by the
improvement in its core and non-core businesses.

Valuation
• We had recommended a price target of 68 cents for the bank in Dec 2003 when the stock
was quoting at 57 cents. Since then the stock moved up as per expectations and reached
our target price in August 2004.
• Currently, AUB is trading at 1.6x of its estimated book value and 17.2x of its estimated
earnings of 2005.
• We have revised upwards our earlier projections due to better FY2004 results of the bank
and improved market conditions. The estimated fair value of AUB’s stock works out to
US$1.00 based on DDM and peer group valuation method, which is higher by around
12.3% vis-à-vis the current market price of the stock.
• The bank is all set to take the advantage of the booming regional markets by becoming
a pan-GCC bank. The fundamentals of the bank remained robust and has strong income
visibility, going forward. Hence, we maintain our earlier rating and recommend a ‘Buy’
on the stock.

BALANCE SHEET
AUB
Amount in US$ 000 2002 2003 2004 2005F 2006F 2007F 2008F
Assets:
- Cash & balances with central banks & Mandatory
855,438 1,259,266 2,182,434 2,618,130 2,490,171 2,423,418 2,311,967
30
Reserves
- Trading securities 10,831 19,553 - 0 0 0 0
- Deposits with banks & FIs more than 3 months 80,449 60,722 51,275 61,530 73,836 88,603 106,324
- Loans & advances - Gross 2,301,758 2,651,705 3,036,153 3,461,214 3,945,784 4,419,279 4,949,592
- Non-trading Investments 1,430,483 1,721,373 1,921,779 2,152,393 2,410,680 2,699,961 3,023,957
- Investment in associates 438,205 501,527 820,170 1,025,213 1,281,516 1,537,819 1,845,383
- Premises and equipment 47,323 54,958 58,150 62,802 67,198 71,902 76,935
Global Research Bahrain
- Other Assets 104,892 145,722 188,414 216,676 249,178 286,554 329,537

- Less Provisions (133,483) (144,760) (134,311) (173,061) (213,072) (254,109) (296,976)
Total Assets 5,135,896 6,270,066 8,124,064 9,424,897 10,305,290 11,273,427 12,346,719
Liabilities:
- Due to banks 1,395,614 1,674,068 1,829,793 1,957,879 2,094,930 2,241,575 2,398,485
- Customer deposits 2,348,983 2,807,183 4,009,084 4,570,356 5,141,650 5,784,357 6,507,401
- Certificate of deposits 75,293 111,949 116,724 122,560 128,688 135,123 141,879
- Term Debt 233,083 414,242 811,718 892,890 982,179 1,080,397 1,188,436
- Other liabilities 128,985 197,013 221,941 228,599 235,457 242,521 249,797

Total liabilities 4,181,958 5,204,455 6,989,260 7,772,284 8,582,904 9,483,972 10,485,998
Subordinated Liabilities 123,323 129,466 134,709 138,750 142,913 147,200 151,616
Share Capital 650,000 650,000 650,000 650,000 650,000 650,000 775,000

Share Premium 123,752 123,752 123,752 323,752 323,752 323,752 323,752
Preference Share 250,000 250,000 250,000 125,000
Capital Reserve 307 307 307 307 307 307 307
Statutory Reserve 14,822 23,530 34,185 47,628 64,623 85,236 109,376
Foreign Currency Translation Adjst. (11,514) (7,226) (7,258) (7,258) (7,258) (7,258) (7,258)
Retained Earnings 13,858 28,512 54,172 70,817 80,430 91,400 85,110
Proposed Appropriations 41,871 62,746 70,666 104,346 143,346 174,546 223,546
Global Investment House
May 2005
Cumulative changes in fair value (2,481) 54,524 74,272 74,272 74,272 74,272 74,272
Total Shareholders equity 830,615 936,145 1,000,095 1,513,863 1,579,472 1,642,255 1,709,105
Total Liabilities 5,135,896 6,270,066 8,124,064 9,424,897 10,305,290 11,273,427 12,346,719
INCOME STATEMENT
AUB
Amount inUS$ 00 2002 2003 2004 2005F 2006F 2007F 2008F
May 2005
Interest Income 211,672 220,006 254,018 300,878 360,352 417,213 474,750
Interest Expense (115,408) (108,063) (129,166) (154,952) (189,185) (223,209) (256,840)
Net Interest income 96,264 111,943 124,852 145,926 171,167 194,004 217,910
- Fees & Commission (net) 33,849 33,508 40,202 44,624 49,533 55,477 63,798
- Trading Income 3,786 4,104 12,162 13,013 13,924 14,899 15,942

- Gain on sale of investments 8,389 9,842 16,617 17,219 21,696 24,300 27,216
- Income from associates 9,779 22,899 41,748 51,261 64,076 76,891 92,269
- Other operating income 10,965 13,123 7,448 7,671 7,902 8,139 8,383
Total non interest income 66,768 83,476 118,177 133,789 157,131 179,705 207,608
- Provisions for loan losses - net (19,419) (16,185) (37,446) (38,750) (40,012) (41,036) (42,867)
- Provisions for impairment of non-trading invest., other assets and contingencies (4,679) (8,023) (3,668) (5,381) (6,027) (6,750) (7,560)
Total operating income 138,934 171,211 201,915 235,584 282,260 325,923 375,091
Operating expenses:
- Staff costs (39,433) (44,193) (47,605) (54,184) (62,097) (68,444) (75,018)

- Depreciation (6,423) (6,030) (7,240) (6,908) (7,392) (7,909) (8,463)
- Other Operating Expenses (26,145) (26,681) (45,354) (32,982) (33,871) (32,592) (37,509)
Total operating expenses (72,001) (76,904) (100,199) (94,074) (103,360) (108,945) (120,990)
Profit Before Taxation 66,933 94,307 101,716 141,510 178,900 216,978 254,101
- Tax (7,207) (7,231) 4,829 (7,076) (8,945) (10,849) (12,705)
Net profit 59,726 87,076 106,545 134,434 169,955 206,129 241,396
P&L Appropriation Account:

Op Balance of Retained Earnings 2,786 13,858 28,512 54,172 70,817 80,430 91,400
- Net Profit for the year 59,726 87,076 106,545 134,434 169,955 206,129 241,396
31
- Adjst for net gain on sale of available for sale investments (810) (968) 435 - - - -
- Trfr to Statutory reserves (5,973) (8,708) (10,655) (13,443) (16,996) (20,613) (24,140)
- Proposed Dividends (41,553) (62,400) (70,200) (104,000) (143,000) (174,200) (223,200)
- Proposed Director's Remuneration (318) (346) (466) (346) (346) (346) (346)
Cl Balance of Retained Earnings 13,858 28,512 54,172 70,817 80,430 91,400 85,110
Cash Flow Statement
AUB
Amount inUS$ 000 2002 2003 2004 2005F 2006F 2007F 2008F
Operating Activities:
Profit before taxation 66,933 94,307 101,716 141,510 178,900 216,978 254,101
Adjustments for:
32
- Depreciation 6,423 6,030 7,240 6,908 7,392 7,909 8,463
- (Gain) on sale of investments (8,389) (9,842) (16,617) (17,219) (21,696) (24,300) (27,216)
- Provisions 19,419 16,185 37,446 38,750 40,012 41,036 42,867
- Prov. for impairment of non-trading investments 4,679 8,023 3,668 5,381 6,027 6,750 7,560
- Share of profits in associates (9,779) (22,899) (41,748) (51,261) (64,076) (76,891) (92,269)
- Operating profit before WC changes 79,286 91,804 91,705 124,069 146,558 171,483 193,508
Changes in:
- Deposits with banks, FIs & Mandatory Reserves (29,031) 16,781 7,008 (15,210) (17,446) (173,283) (66,616)
- Trading securities (10,476) (8,722) 19,553 - - - -

- Loans and advances (304,995) (354,855) (432,343) (425,061) (484,570) (473,494) (530,313)
- Other assets (33,259) (41,594) (43,010) (28,262) (32,501) (37,377) (42,983)
- Certificate of Deposits 35,088 36,656 4,775 5,836 6,128 6,434 6,756
- Due to banks & FIs 656,714 278,454 155,725 128,086 137,052 146,645 156,910
- Customer deposits (17,103) 458,200 737,013 561,272 571,295 642,706 723,045
- Other liabilities 43,502 69,484 39,181 6,658 6,858 7,064 7,276
Total WC changes 340,440 454,404 487,902 233,318 186,815 118,696 254,074
- Taxes paid (9,348) (9,005) (10,301) (7,076) (8,945) (10,849) (12,705)
Cash from operating activities 410,378 537,203 569,306 350,311 324,427 279,330 434,877
Investing activities:
- Purchase of non-trading investments (711,439) (742,119) (431,715) (230,614) (258,287) (289,282) (323,995)
- Proceeds from sale of non-trading investments 208,571 493,275 228,211 17,219 21,696 24,300 27,216

- Investment in Associates (260,762) (24,613) (240,134) (205,043) (256,303) (256,303) (307,564)
- Proceeds from sale of associates - 51,261 64,076 76,891 92,269
- Purchase of premises and equipment (9,224) (13,577) (10,114) (11,560) (11,788) (12,613) (13,496)
- Sale of premises and equipment 676
Cash from investing activities (772,854) (286,358) (453,752) (378,736) (440,606) (457,007) (525,570)
Financing activities:
- Proceeds from Issue of Share Capital 242,971 - - 450,000 - - -
- Proceeds from Issue of Rights share 464,888
- Increase in Subordinated liabilities 35,088 6,143 5,243 4,041 4,163 4,287 4,416
- Proceeds from FRNs 13,365 181,159 397,476 81,172 89,289 98,218 108,040
- Dividends paid (41,400) (41,553) (62,400) (70,200) (104,000) (143,000) (174,200)
- Changes in fair value - - - -
Cash from financing activities 250,024 145,749 805,207 465,013 (10,549) (40,495) (61,744)
May 2005
- FX translation adjustments 13,870 4,288 (32) - - - -
Increase/Decrease in cash & cash equivalents (98,582) 400,882 920,729 436,588 (126,728) (218,172) (152,437)
Opening Cash Balance 923,120 824,538 1,225,420 2,146,149 2,618,130 2,490,171 2,423,418
Closing balance 824,538 1,225,420 2,146,149 2,618,130 2,490,171 2,423,418 2,311,967
RATIO ANALYSIS
AUB
Amount inUS$ 000 2002 2003 2004 2005F 2006F 2007F 2008F
Profitability ratios:
- Return on Average Assets 1.29% 1.53% 1.48% 1.53% 1.72% 1.91% 2.04%
- Return on Average Equity 8.6% 9.9% 11.0% 10.7% 11.0% 12.8% 14.4%
- Net interest income/total operating income 55.3% 55.9% 43.3% 45.5% 46.5% 46.9% 46.7%
- Non-interest income/total operating income 44.7% 44.1% 56.7% 54.5% 53.5% 53.1% 53.3%
- Total income to average assets 3.0% 3.0% 2.8% 2.7% 2.9% 3.0% 3.2%
Margins:
- Interest expense / Interest income 54.5% 49.1% 50.9% 51.5% 52.5% 53.5% 54.1%
- Interest income / Avg interest earning assets 4.9% 4.2% 3.9% 3.9% 4.2% 4.5% 4.7%
- Interest expense / Avg interest bearing liabilities 3.0% 2.3% 2.1% 2.1% 2.3% 2.5% 2.6%
- Net spread 1.9% 1.9% 1.8% 1.8% 1.8% 2.0% 2.1%
- Net interest margin 2.2% 2.2% 1.9% 1.9% 2.0% 2.1% 2.2%
Efficiency:
- Cost to income ratio 51.8% 44.9% 49.6% 39.9% 36.6% 33.4% 32.3%
- Staff expense to total operating income 28.4% 25.8% 23.6% 23.0% 22.0% 21.0% 20.0%
- Cost to average total assets 1.6% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0%
Liquidity:
- Loans to interest earning assets 49.31% 46.58% 42.22% 41.74% 44.23% 45.88% 47.63%
- Gross Loans to customer deposits 98.0% 94.5% 75.7% 75.7% 76.7% 76.4% 76.1%
- Customer deposits to equity 2.8 3.0 4.0 3.0 3.3 3.5 3.8
Provisions:
- Provision/Interest income 9.2% 7.4% 14.7% 12.9% 11.1% 9.8% 9.0%
- Provisions to total operating income 14.0% 9.5% 18.5% 16.4% 14.2% 12.6% 11.4%
- Provisions to average assets 0.4% 0.3% 0.5% 0.4% 0.4% 0.4% 0.4%
Capital Adequacy:
- Equity to total assets 16.2% 14.9% 12.3% 16.1% 15.3% 14.6% 13.8%
- Equity to loans & advances 36.1% 35.3% 32.9% 43.7% 40.0% 37.2% 34.5%
Asset Quality Ratios:

- NPL 172,464 161,232 131,387 155,755 177,560 198,868 222,732
- Provisions 133,483 144,760 134,311 173,061 213,072 254,109 296,976
- NPL to Gross Loans 7.5% 7.0% 4.3% 4.5% 4.5% 4.5% 4.5%
- NPL to Net Loans 7.08% 5.77% 4.14% 4.29% 4.27% 4.26% 4.25%
- Provision to NPLs 77.4% 89.8% 102.2% 111.1% 120.0% 127.8% 133.3%
- Provision to Gross Loans 5.80% 6.29% 4.42% 5.00% 5.40% 5.75% 6.00%
Constitution of Total income:

- Interest income 55.3% 55.9% 43.3% 45.5% 46.5% 46.9% 46.7%
- Fees and commission 24.4% 19.6% 19.9% 18.9% 17.5% 17.0% 17.0%
- Investment income 2.7% 1.1% 6.4% 5.0% 5.6% 5.4% 5.2%
- Income from associates 7.0% 13.4% 20.7% 21.8% 22.7% 23.6% 24.6%
- Other income 10.6% 10.1% 9.7% 8.8% 7.7% 7.1% 6.5%
Operating Performance:
- Change in interest income 11.7% 16.3% 11.5% 16.9% 17.3% 13.3% 12.3%
- Change in fees and commission 9.9% -1.0% 20.0% 11.0% 11.0% 12.0% 15.0%
- Change in investment income -41.0% 17.3% 68.8% 3.6% 26.0% 12.0% 12.0%
- Change in other income 3.5% 63.6% 52.9% 17.3% 19.4% 16.3% 16.7%
Shareholders' Data
- Par Value of Share (Cents) 25.0 25.0 25.0 25.0 25.0 25.0 25.0
- Weighted Average Number of Shares (mn) 1,807 2,600 2,600 2,600 2,600 2,600 3,100
- Shares in issue (mn) 2,600 2,600 2,600 2,600 2,600 2,600 3,100
- Dividend Payout (%) 69.6 71.7 65.9 77.4 84.1 84.5 92.5
- EPS (cents) 3.31 3.35 4.01 5.17 6.54 7.93 7.79
- Book Value (Cents) 43.7 33.6 35.7 54.2 55.2 56.5 47.9
- Market Price (Cents) 33 58 82 89 89 89 89
- P/E 10.0 17.3 20.0 17.2 13.6 11.2 11.4
- P/BV 0.8 1.7 2.3 1.6 1.6 1.6 1.9

Bank of Bahrain & Kuwait B.S.C

BBKB.BH
Listing:
Bahrain Stock Exchange BUY
Current Price
704 fils
Key Data
EPS (fils) 45.1 12M Avg. vol. 0.141mn
BV (fils) 241.0 52 week Lo / Hi 537 / 762
P/E 15.61 Market Cap BD401.2mn
P / BV 2.92 Target Price 794 fils
Background
• Bank of Bahrain & Kuwait (BBK) is a public shareholding company incorporated in

Bahrain in 1971 and listed on the Bahrain Stock Exchange. The bank offers a full range
of banking services focused on both retail and corporate clients. In 1978 the first branch
outside Bahrain was opened in Kuwait as part of the Bank's regional policy, followed by
the establishment of two branches in India and a representative office in Dubai. In addition
to these, the bank has 18 domestic branches in Bahrain. The Bank is currently looking
at establishing additional branches in the region. BBK is the largest onshore commercial
bank in Bahrain in asset terms. In 1998, after years of steady growth in its balance sheet,
BBK overtook the leading position of National Bank of Bahrain. In the last few years, the
Bank has established a number of subsidiaries in the areas of brokerage, financial services
and credit cards. The bank had 702 employees as of end-Dec 2004 servicing customers
from 18 branches and 26 ATMs spread across strategic locations in Bahrain.
• The principal shareholders of the bank are Pension Fund Commission, Bahrain with
18.89% stake while General Organisation for Social Insurance held 13.42%. In addition
to this, Al-Ahli Bank of Kuwait, Commercial Bank of Kuwait, Gulf Bank, and Bank
of Kuwait and the Middle East, each held 6.75% stake in the bank. In addition to this,
Bahraini citizens held around 19.66% stake in the bank as of Dec 2004.
Recent Developments
• During 2004 the bank continued to implement its three year (2003-2005) Strategic Plan.
• The Bank has launched new Al Hayrat savings certificates to attract customers. The bank
also launched its money transfer services through post offices in alliance with Western
Union Financial.

• The bank has arranged US$125mn medium term credit facility through 14 regional and
international banks. The term loan facility has a tenor of five years.
• The bank initiated the implementation of new core banking and branch automation systems
during 2004. The bank continued its I.T. initiatives in 2004 and offered more products
and services online, such as real time payment of telephone bills, and the purchase of
secura insurance products and Al-Hayrat savings certificate.
• The bank has launched a new smart credit card and also launched its another exclusive
real estate investment fund. The bank continued to provide financing for a range of
industrial, commercial and infrastructural projects, including the Alba potline expansion
and refinery modernisation of Bapco.
• BBK introduced a new employees performance management system, recognizing and

rewarding individual achievement and strengthening the bank’s succession planning
process.
• The bank is expected to implement its corporate rebranding exercise in 2005.
• The bank falls short by just 2.7% of our projected net interest income and 1.87% of our
net earnings estimate for FY2004.
• The interest income of the bank increased by 9.4% to BD50.8mn during FY2004 as
compared to the same period last year. However, interest expenses increased by just
4.4% to BD21.26mn during the same period. As a result, the net interest income during
the period surged by 13.2% to BD29.5mn. The increase in net interest income is mainly
attributable to good growth in core commercial banking businesses and increased interest
rate spreads in the present interest rate environment.
• Fees and commissions income decreased by 12.4% to BD10.7mn as compared to the

same period last year. Dividend income also increased by 15.6% to BD2.54mn during
the same period. The major jump was witnessed by realized gain on investments as it
increased by 128.4% to BD6mn. As a result, the total non-interest income of the bank
increased by 10% to BD22.4mn.
• Provision for loan losses were at BD2.44mn representing an increase of 121.4% while
provision for investment losses increased by 56.4% to BD1.82mn. On the back of improved
net interest income and modest gain from non-interest income the total operating income
after provision increased by 8% to BD47.7mn.
• The bank was able to control its expenses as it increased by 5.5% to BD23.24mn. As
a result, the cost to operating income after provision of the bank declined to 48.8% in
FY2004 as compared to 49.9% in FY2003.
• The net profit attributable to shareholders was higher by 10.2% at BD25.68mn over the
corresponding period of the last fiscal. The improved net income resulted in EPS moving

up from 41 fils in FY2003 to 45.1 fils in FY2004. The bank has declared a cash dividend
of 35% for FY2004.
• BBK’s total assets stood at BD1.42bn at the end of Dec 2004, representing an increase of
8.2% over Dec 2003. Around 53.8% of the assets were deployed in loans and advances
portfolio while 26.5% were deployed in non-trading investment securities.
• Gross loans and advances increased by 11.6% to BD823.3mn over December 2003. Around
34% of the loan portfolio were deployed in trade and manufacturing sector while 24.4%
were loans to retail consumers. Lending to the real estate and construction sector were
actually declined by 13.5% in FY2004. The proportion of NPL to gross loans declined
substantially from 13.63% in FY2003 to 9.63% in FY2004. The bank has provided for
73.94% of its NPL at the end of Dec 2004.
• In order to take the advantage of the booming market, non-trading investment portfolio
increased by 16% to BD376.1mn. The bank’s investments in government debt bond was
particularly responsible for the increase in non-trading investment portfolio.
• Deposits from customers increased by 9.4% to BD844.5mn over Dec 2003, while the
deposits from banks and other financial institutions, which have relatively higher cost
of servicing declined by around 3.5% to BD323.1mn during the same period. The bank
repaid its entire term loan facility of BD37.7mn in FY2004.
• The bank is strongly capitalised with a CAR of 18.82% as of FY2004 as compared to

16.73% in FY2003. As a result, the bank remain well positioned to participate in the
business opportunities stemming from regional growth.
Outlook
• The bank is expected to look forward for strategic alliances as well as the opportunity for
• As a part of its rebranding exercise, the bank is expected to launch new and innovative
retail banking concept, which will focus primarily on customer service.
• Focus on alternative delivery channels is expected to further boost its efficiency.
Valuation
• We had recommended a Buy on the stock in September 2004 with a target price of 788
fils, when the stock was trading at 695 fils. Since then the stock has moved up as per our
expectations and reached its peak of 762 fils, justifying our earlier buy recommendation,
though it has yet to reach our targeted price.
• Currently, BBK is trading at 2.79x of its estimated book value and 13.1x of its estimated
earnings of 2005.
• The estimated fair value of BBK’s stock works out to 794 fils based on DDM and peer

group valuation method, which is higher by around 12.8% vis-à-vis the current market
price of the stock. Hence, we maintain our earlier rating and recommend a ‘Buy’ on the
stock with a medium term perspective.

BALANCE SHEET
BBK
Amount in BD mn 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets
38
Cash & balances with banks 64.88 42.15 35.68 24.84 22.09 27.80 44.19
Treasury bills 69.82 72.97 25.44 26.71 28.04 29.44 30.92
Trading Investments 0.44 4.45 0.002 0.002 0.002 0.002 0.002
Deposits and due from banks & other FIs 195.46 168.05 187.15 194.64 202.42 210.52 218.94
Loans and Advances (Gross) 623.41 738.06 823.31 913.88 1,014.41 1,115.85 1,216.27
Less: provisions (86.53) (78.89) (58.63) (61.23) (63.91) (66.95) (70.18)
Loans and Advances (Net) 536.88 659.17 764.69 852.65 950.50 1,048.89 1,146.09
Non trading investment securities 295.97 324.56 376.13 406.22 430.59 456.43 483.82
Investment in associated company 4.94 5.08 5.81 5.99 6.17 6.35 6.54
Interest receivable & other assets 14.85 13.99 11.29 11.52 11.75 11.98 12.22
Kuwait Government bonds 15.33 7.83 - - - - -
Fixed Assets 16.09 15.37 14.58 15.02 15.47 15.93 16.41
Total Assets 1,214.65 1,313.62 1,420.78 1,537.58 1,667.03 1,807.36 1,959.13
Liabilities
Deposits and due to banks and other FIs 326.14 334.99 323.10 342.49 369.89 399.48 431.44
Borrowings under repurchase agreements 3.48 72.18 72.18 72.18 72.18 72.18

Medium term loans 84.83 37.70 - - - - -
Customers' Deposits 658.40 772.18 844.50 928.95 1,021.85 1,124.03 1,236.44
Interest payable & Other liabilities 14.21 23.03 23.22 23.68 24.15 24.64 25.13
Total Liabilities 1,083.57 1,171.37 1,263.00 1,367.30 1,488.07 1,621.32 1,767.18
Owner's Equity
Share capital 56.91 56.91 56.91 56.91 56.91 56.91 56.91
Treasury stock (1.05) (1.05) (1.05) (1.05) (1.05) (1.05) (1.05)
Statutory Reserves 18.68 21.01 23.57 26.63 30.16 31.16 31.16
General Reserves 20.00 20.00 20.00 20.00 20.00 20.00 20.00
Cumulative changes in fair value (0.59) 3.99 13.45 13.45 13.45 13.45 13.45
May 2005
Foreign currency translation adjustments (1.70) (0.83) (0.51) (0.51) (0.51) (0.51) (0.51)
Retained earnings 22.85 24.44 24.79 28.27 28.34 28.16 27.76
Proposed Appropriations 15.98 17.80 20.62 26.57 31.69 37.95 44.21
Total Shareholder's Equity 131.08 142.25 157.78 170.25 178.97 186.06 191.92

OPERATING STATEMENT
BBK
Amount in BD' mn 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Interest Income 51.29 46.44 50.78 59.65 72.83 87.78 104.42
May 2005
Interest Expense (25.84) (20.36) (21.26) (27.14) (35.25) (44.86) (55.34)
Net interest income 25.45 26.08 29.53 32.51 37.58 42.92 49.08
- Fees and commission income 9.80 12.25 10.73 12.23 14.06 16.17 18.60
- Dividend income 2.12 2.19 2.54 2.74 2.96 3.25 3.58
- Realised gain on investments 0.46 2.63 6.01 8.12 8.61 11.41 12.10
- Income from managed funds 0.20 0.60 0.86 0.94 0.99 1.05 1.12
- Trading income 1.17 0.70 (0.10) 0.00 0.00 0.00 0.00
- Gain on foreign exchange 1.63 1.26 1.39 1.46 1.53 1.61 1.69
- Other income (0.13) 0.71 0.99 1.04 1.09 1.14 1.20
Total non-interest income 15.26 20.35 22.41 26.52 29.25 34.64 38.28
- Provisions for losses on loans & adv. to customers (3.27) (1.10) (2.44) (2.60) (2.68) (3.04) (3.23)
- Write backs of provisions for impairment in other assets & contingencies 1.70
- Provision for impairment in the value of non-trading investment securities (1.16) (1.82) (0.81) (0.86) (0.91) (0.97)
Total Operating income 39.14 44.16 47.67 55.62 63.29 73.61 83.16
Operating Expenses

- Staff costs (11.32) (12.59) (13.33) (15.57) (17.53) (19.87) (21.62)
- Other operating expenses (6.48) (6.97) (7.75) (8.45) (9.37) (10.60) (11.64)
- Depreciation (2.09) (2.47) (2.16) (2.25) (2.32) (2.39) (2.46)
Total Operating Expenses (19.90) (22.04) (23.24) (26.28) (29.22) (32.86) (35.72)
Operating Profit 19.24 22.12 24.43 29.34 34.07 40.74 47.43
- Share of profit in associated company 0.96 1.13 1.25 1.32 1.36 1.40 1.44
Profit before tax & minority interest 20.20 23.26 25.68 30.65 35.43 42.14 48.87
- Tax - foreign units (0.19) 0.05 - (0.12) (0.14) (0.17) (0.20)
Net Income 20.01 23.31 25.68 30.53 35.29 41.97 48.68

Op Balance of Retained Earnings 20.83 22.85 24.44 27.36 28.27 28.34 28.16
Net Profit 20.01 23.31 25.68 30.53 35.29 41.97 48.68
39
Portion of realised gain on sale of investments (1.59) (2.14)
Transfer to statutory reserve (2.00) (2.33) 0.00 (3.05) (3.53) (4.20) (4.87)
Proposed Dividend (15.25) (16.94) (19.76) (25.61) (30.73) (36.99) (43.25)
Proposed Directors Remuneration (0.23) (0.26) (0.26) (0.26) (0.26) (0.26) (0.26)
Proposed Donations (0.50) (0.60) (0.60) (0.70) (0.70) (0.70) (0.70)
Cl Balance of Retained Earnings 22.85 24.44 27.36 28.27 28.34 28.16 27.76
CASH FLOW STATEMENT
BBK
Amount in BD' mn 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Cash Flows from Operating Activities
Profit before taxation and minority interest 20.20 23.26 25.68 30.65 35.43 42.14 48.87
40
Adjustments for
Net provisions (write backs) relating to:
- Loans and advances to customers 3.27 1.10 2.44 2.60 2.68 3.04 3.23
- Non-trading investment securities 1.16 1.82 0.81 0.86 0.91 0.97
- Other assets and contingencies (1.70)
Share of profit in associated company (0.96) (1.13) (1.25) (1.32) (1.36) (1.40) (1.44)
Depreciation 2.09 2.47 2.16 2.25 2.32 2.39 2.46
Negative goodwill amortised (0.04)
Realised (gains) losses on redemption of non-trading investments (0.46) (2.63) (6.01)

Taxation of foreign units (0.19) 0.05 - (0.12) (0.14) (0.17) (0.20)
Increase / Operating Activities
Mandatory reserve deposits with central banks (1.66) (2.10) (0.26)
Treasury bills maturing after 91 days (17.58) (21.92) 34.00 (0.76) (0.80) (0.84) (0.88)
Trading investments (0.44) (4.01) 4.45 0.00 0.00 0.00 0.00
Deposits and due from banks & other FIs 5.07 (48.80) 10.17 (2.62) (2.72) (2.83) (2.95)
Loans and advances to customers (59.36) (123.39) (107.97) (90.56) (100.53) (101.44) (100.43)
Interest receivable and other assets 3.40 1.58 2.64 (0.23) (0.23) (0.23) (0.24)
Kuwait Government bond 17.60 0.00 0.00 0.00 0.00
Increase in operating liabilities
Deposits and due to banks & other FIs 104.50 (38.28) (59.01) 19.39 27.40 29.59 31.96
Borrowings under repurchase agreements 3.48 68.70 0.00 0.00 0.00 0.00

Customer Deposits 6.71 113.78 72.33 84.45 92.90 102.18 112.40
Interest payable and other liabilities 0.24 8.82 0.19 0.46 0.47 0.48 0.49
Net Cash from operating activities 80.69 (86.56) 50.08 45.01 57.27 75.83 97.25
Investing activities
Purchase of non-trading investment securities (231.52) (327.46) (493.25) (30.09) (24.37) (25.84) (27.39)
Maturities and redemptions of non-trading investment securities 189.67 310.48 460.89
Dividends received from associated company 0.57 0.61 0.71
Purchase of fixed assets (2.76) (1.76) (1.37) (2.69) (2.77) (2.85) (2.94)
Investment in subsidiary (1.51) (0.17) (0.18) (0.18) (0.19)
Net Cash from investing activities (45.55) (18.13) (33.01) (32.95) (27.32) (28.87) (30.52)
Financing activities
Medium term deposits form banks 47.13 47.13 0.00 0.00 0.00 0.00
May 2005
Payment of dividend, directors remuneration & donations (14.81) (15.98) (17.80) (20.62) (26.57) (31.69) (37.95)
Term Loans repaid (47.13) (37.70) - - - -
Total Financing (14.81) (15.98) (8.38) (20.62) (26.57) (31.69) (37.95)
Foreign exchange translation adjustment 0.75 0.86 0.32
Net Change in Cash 21.07 (119.81) 9.01 (8.57) 3.38 15.27 28.79
Net Cash at beginning 264.93 286.01 166.20 175.21 141.96 144.25 156.33
Net Cash at end 286.01 166.20 175.21 141.96 144.25 156.33 178.24
Ratio Analysis
BBK
Amount in BD mn 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Net interest income/ total Op. Income 56.7% 56.6% 56.8% 53.8% 55.2% 54.2% 55.1%
- Non-interest income/ total Op. Income 43.3% 43.4% 43.2% 46.2% 44.8% 45.8% 44.9%
- Non-interest expense/ total Op. Income 50.8% 49.9% 48.8% 47.3% 46.2% 44.6% 43.0%
Margins
- Net income / Interest Income 39.0% 50.2% 50.6% 51.2% 48.4% 47.8% 46.6%
- Interest Expense to Interest Income 50.4% 43.8% 41.9% 45.5% 48.4% 51.1% 53.0%
- Interest Income / Avg Interest Earning 4.8% 3.9% 3.97% 4.3% 4.8% 5.4% 5.9%
Assets
- Interest Expense / Avg Interest Bearing 2.5% 1.8% 1.78% 2.1% 2.5% 2.9% 3.3%
Liabilities
- Net Spread 2.30% 2.09% 2.19% 2.23% 2.34% 2.45% 2.61%
- Net Interest Margin 2.41% 2.20% 2.31% 2.36% 2.50% 2.63% 2.79%
Efficiency
- Cost to Total Op Income 50.8% 49.9% 48.8% 47.3% 46.2% 44.6% 43.0%
- Staff Expense to Total Op Income 28.9% 28.5% 28.0% 28.0% 27.7% 27.0% 26.0%
- Cost to Average Total Assets 1.7% 1.7% 1.7% 1.8% 1.8% 1.9% 1.9%
- Staff Expense to Average assets 0.98% 1.00% 0.97% 1.05% 1.09% 1.14% 1.15%
Liquidity
- Loans to Interest Earning Assets 51.95% 56.28% 58.31% 59.29% 60.54% 61.57% 62.37%
- Loans to Customer Deposits 94.69% 95.58% 97.49% 98.38% 99.27% 99.27% 98.37%
- Loans to total Deposits 63.32% 66.66% 70.51% 71.88% 72.89% 73.24% 72.92%
- Customer Deposits to Equity 502.29% 542.82% 535.25% 545.63% 570.96% 604.13% 644.25%
- Gross Loans to Total Assets 51.32% 56.19% 57.95% 59.44% 60.85% 61.74% 62.08%
Credit Quality
- Non Performing Loans (BD mn) 97.87 100.61 79.29 82.25 86.22 89.27 97.30
- Loan Loss Reserves (BD mn) 86.53 78.89 58.63 61.23 63.91 66.95 70.18
- NPL's to Gross Loans 15.70% 13.63% 9.63% 9.00% 8.50% 8.00% 8.00%
- NPL's to Net Loans 18.23% 15.26% 10.37% 9.65% 9.07% 8.51% 8.49%
- Loan Loss Reserve to Gross Loans 13.88% 10.69% 7.12% 6.70% 6.30% 6.00% 5.77%
- Total Provisions to NPL 88.42% 78.42% 73.94% 74.44% 74.12% 75.00% 72.13%
Capital Adequacy
- Equity to Total Assets 10.79% 10.83% 11.11% 11.07% 10.74% 10.29% 9.80%
- Equity to Gross Loans 21.03% 19.27% 19.16% 18.63% 17.64% 16.67% 15.78%
- Total liabilities to shareholders equity 8.3 8.2 8.0 8.0 8.3 8.7 9.2
(times)
- Capital Adequacy 16.8% 16.7% 18.8% - - - -
Constitution of Total Income
- Interest Income to total Op Income 56.7% 56.6% 56.8% 53.8% 55.2% 54.2% 55.1%
- Fees & Comm. to Total Op. Income 25.0% 27.7% 22.5% 22.0% 22.2% 22.0% 22.4%
- FX Income to Total Op. Income 4.2% 2.9% 2.9% 2.6% 2.4% 2.2% 2.0%
- Gain on Invetsment Income to Total Op. 1.2% 3.3% 8.8% 13.1% 12.2% 14.3% 13.4%
Income
- Change in Interest Income -22.1% -9.5% 9.4% 17.5% 22.1% 20.5% 19.0%
- Change in Fees and Commission 18.2% 24.9% -12.4% 14.0% 15.0% 15.0% 15.0%
- Change in Fx Income -4.3% -22.6% 10.2% 5.0% 5.0% 5.0% 5.0%
RATIO'S USED FOR VALUATION
- Shares in Issue (mn) 569 569 569 569 569 569 569
- EPS (fils) 35.2 41.0 45.1 53.7 62.0 73.8 85.5
- Book Value Per Share (fils) 202.3 218.7 241.0 252.5 258.8 260.3 259.6
- Market Price Year End (fils) * 382 545 725 704 704 704 704
- P/E 10.9 13.3 16.1 13.1 11.4 9.5 8.2
- P/BV 1.89 2.49 3.01 2.79 2.72 2.70 2.71
- Dividend 27% 30% 35% 45% 54% 65% 76%
- Dividend Payout 76.2% 72.7% 77.0% 83.9% 87.1% 88.1% 88.8%

Bahrain Islamic Bank B.S.C

BISH.BH
Listing:
Bahrain Stock Exchange HOLD
Current Price
405 fils
Key Data
EPS (Fils) 16.11 12M Avg. vol. 79,625
BV (Fils) 217.3 52 week Lo / Hi 246 / 480 fils
P / BV 1.86 Target Price 418 fils
Background
• Bahrain Islamic Bank (BIsB) was incorporated in 1979 in Bahrain to carry out banking
and other financial trading activities in accordance with the Islamic Shari’a principles. The
bank is considered to be the first Islamic institution established in Bahrain and the third
bank to carry out such kind of business in the Gulf region. The bank operates under an
onshore domestic commercial banking license granted by the Bahrain Monetary Agency
(BMA).
• The bank had 186 employees as of end-Dec 2004 servicing customers from 12 branches
in Bahrain.
• BIsB’s shareholding is widely spread with Investors Bank holding nearly 15.8% stake,
followed by Islamic Development Bank and Kuwait Finance House with 13% each. Other
major shareholders of the bank include Kuwait based International Investment Group
(10.2%) and the Gulf Finance Group (9.2%). The directors of the bank held a 0.5% stake,
through direct and indirect investments.
Recent Developments
• As a part of its initiative to enhance its services, the bank opened its first dedicated women
branch in Bahrain.
• The bank falls short by 6.3% of our projected net earnings for FY2004.
• The profit sharing income of the bank increased by 12.7% to BD6.33mn during FY2004
as compared to the same period last year. However, depositors profit sharing expenses

increased by a whopping 33% to BD2.07mn during the same period. As a result, the net
profit sharing income during the period increased by just 4.9% to BD4.26mn.
• Fees, commissions and other income declined substantially by 40.2% to BD0.54mn as

compared to the same period last year. The biggest gain was recorded by income from
investments in securities as it increased by 92.7% to BD2.78mn. As a result, the total non-
interest income of the bank increased by 37.3% to BD4.48mn.
• Provision for loan losses were declined substantially by 48.8% to BD0.18mn. On the
back of improved investment income and substantial decline in provision for loan losses
the total operating income after provision increased by 22.8% to BD8.56mn.
• The total operating expenses of the bank increased by 8% to BD4.73mn. As a result, the
cost to operating income after provision of the bank declined to 55.3% in FY2004 as
compared to 62.9% in FY2003. Though the cost to income ratio has declined in FY2004,
it remained very high as compared to its conventional banking peers in Bahrain.
corresponding period of the last fiscal. The bank has declared a cash dividend of 12%
and a stock dividend of 10% for FY2004. The latest bonus issue is expected to boost the
bank’s CAR further.
• BIsB’s total assets stood at BD254.7mn at the end of Dec 2004, representing an increase
of 10.1% over Dec 2003. This increase was due to the substantial increase in non-trading
investments portfolio and Murabaha receivables. Around 60% of the assets were deployed
in Murabaha receivables while 22% were in non-trading investments.
• Murabaha receivables portfolio increased by 10.2% to BD157.3mn over December 2003.

The majority of the Murabaha receivables were deployed in international commodity
Murabaha. Banks Mudaraba investments, which consists of investment in funds operated
by other banks and financial institutions and participation in financial transactions,
declined by 30.7% to BD12mn.
• The proportion of NPL to gross loans remained at 2.2% in FY2004. The bank has provided
for just 53.5% of its NPL at the end of Dec 2004. We believe that the bank needs to
provide more in view of the rising interest rate scenario.
• In order to take the advantage of the booming market, non-trading investment portfolio
surged by 35% to BD55.77mn. Out of this, investments in debt was 64.7% while rest of
the portfolio was in equities. Deposits from customers increased by 5.7% to BD199.2mn
over Dec 2003.
Outlook
• The bank is expected to report strong gains from its investment income.
• Fees and commission of the bank is expected to be buoyant due to the bank’s efforts to
launch various new products and services.

Valuation
• We had recommended a Hold on the stock in October 2004, when the stock was trading
at 336fils. Since then the stock moved up smartly to reach its all time high of 480 fils in
March 2005.
• Currently, BIsB is trading at 1.88x of its estimated book value and 22.3x of its estimated
earnings of 2005.
• We have revised upwards our earlier projections due to strong outlook of the bank and
improved market conditions. The estimated fair value of BIsB’s stock works out to 418
fils based on DDM and peer group valuation method, which leaves marginal upside
potential of about 3.2% over the current market price. Therefore, we continue to maintain
‘Hold’ on the stock.

BALANCE SHEET
Bahrain Islamic Bank B.S.C
Amount in BD 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets:
Cash and Balances with the BMA and other Banks 9,019,308 10,629,857 9,406,612 8,215,219 4,838,614 3,661,013 7,010,917
May 2005
Murabaha Receivables 140,451,652 142,762,189 157,283,777 171,439,317 186,868,856 203,687,052 222,018,887
Mudaraba Investments 15,431,327 17,278,157 11,979,116 12,458,281 12,956,612 13,474,876 14,013,871
Musharaka Investments 3,797,416 3,255,999 2,771,396 2,688,254 2,607,607 2,529,378 2,453,497
Non-trading investments 26,903,813 41,325,281 55,770,049 64,135,556 76,962,668 92,355,201 110,826,241
Investments in associates 2,854,997 2,870,057 2,951,431 3,010,460 3,070,669 3,132,082 3,194,724
Investments in Ijarah Assets 5,536,009 5,366,954 4,959,195 4,909,603 4,860,507 4,811,902 4,763,783
Ijarah Muntahia Bittamleek 1,500,000 3,340,977 5,116,228 5,832,500 6,649,050 7,579,917 8,641,105
Investments in Properties 4,376,271 4,806,441 4,208,932 4,377,289 4,552,381 4,734,476 4,923,855
Equipment 1,033,418 905,491 1,165,380 1,200,341 1,236,352 1,273,442 1,311,646
Other assets 767,374 861,754 1,179,938 1,274,333 1,376,280 1,486,382 1,605,293
Less: Provision (1,931,956) (1,923,000) (2,017,190) (2,239,030) (2,449,440) (2,658,265) (2,885,684)
Total Assets 209,739,629 231,480,157 254,774,864 277,302,123 303,530,153 336,067,457 377,878,136
Liabilities, Unrestricted Investment Accounts and Equity

Liabilities:
Customers' current accounts 21,341,021 28,878,182 30,367,929 34,012,081 38,093,530 43,426,624 49,506,352

Other liabilities 2,659,914 3,083,539 2,827,070 3,109,777 3,420,755 3,762,830 4,139,113
Unrestricted Investment Accounts 147,448,653 159,529,878 168,829,498 185,712,448 206,140,817 230,877,715 263,200,595
Equity:
Share Capital 23,000,000 23,000,000 23,000,000 25,300,000 25,300,000 25,300,000 25,300,000
Share Premium 8,061,604 8,061,604 5,761,604 5,761,604 5,761,604 5,761,604 5,761,604
Statutory Reserve 2,872,359 3,118,785 3,489,247 3,947,992 4,504,515 5,234,039 6,206,018
General Reserve 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Investments fair value reserve - 136,996 369,207 369,207 369,207 369,207 369,207
Cumulative changes in fair values 80,788 1,724,642 13,241,836 13,241,836 13,241,836 13,241,836 13,241,836
Retained earnings 975,690 646,531 828,473 799,178 637,888 515,601 551,410
Proposed Bonus 2,300,000
Proposed Dividends 2,300,000 2,300,000 2,760,000 4,048,000 5,060,000 6,578,000 8,602,000
45
Total Equity 38,290,441 39,988,558 52,750,367 54,467,817 55,875,051 58,000,287 61,032,075
Total Liabilities, Unrestricted investment accounts and Equity 209,739,629 231,480,157 254,774,864 277,302,123 303,530,153 336,067,457 377,878,136
OPERATING STATEMENT
Amount in BD 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Income from Murabaha Receivables 4,592,678 4,727,611 5,589,947 6,343,255 7,848,492 9,573,291 11,544,982
46
Income from Mudaraba Investing 402,835 719,168 673,882 716,351 751,483 808,493 875,867
Income from Musharaka Investing 230,436 179,382 74,223 80,648 78,228 80,940 85,872
Income from investments in securities 1,335,994 1,445,779 2,786,088 3,687,794 4,617,760 6,464,864 7,757,837
Ijarah income 698,934 562,415 567,044 540,056 534,656 541,339 535,926
Ijarah Muntahia Bittamleek Income 10,286 201,870 243,744 291,625 332,452 378,996 432,055
Gain on fair value adjustment for investments in properties 94,066 136,996 232,211 - - - -
Gain on sale of investments in properties 234,858 175,092 182,095 189,379 246,193
Net fee, commission income & other income 449,309 905,131 541,034 605,958 690,792 794,411 913,573
Bank's share in the associates (164,753) 15,060 114,815 - - - -
Net gains from foreign currency transactions - - - -
Operating Income 7,884,643 8,893,412 10,822,988 12,440,779 15,035,959 18,831,713 22,392,305
Return on unrestricted investment accounts before Bank's share as a Mudarib 2,442,948 1,957,068 2,417,400 2,785,687 3,607,464 4,617,554 5,264,012
Bank's share as a Mudarib (348,846) (397,258) (342,918) (464,281) (515,352) (577,194) (658,001)
Return on unrestricted investment accounts 2,094,102 1,559,810 2,074,482 2,321,406 3,092,112 4,040,360 4,606,010
Bank's share in operating income (as a Mudarib and Rabalmal) 5,790,541 7,333,602 8,748,506 10,119,373 11,943,847 14,791,353 17,786,294
Staff costs 2,344,310 2,586,035 2,770,763 3,110,195 3,683,810 4,406,621 4,926,307
Depreciation 470,374 634,855 544,560 571,191 605,440 643,991 589,212
Expenses on Ijarah assets 176,429 202,027 180,375 176,746 174,978 173,228 152,441
Expenses on premises and equipment 123,347 144,411 215,800 195,217 202,606 210,277 205,772
Other operating expenses 900,692 817,148 1,025,127 1,119,670 1,353,236 1,694,854 1,791,384

Provisions (412,000) 359,905 184,440 221,840 210,410 208,825 227,419
Write back of provisions against investments in properties -
OPERATING EXPENSES 3,603,152 4,744,381 4,921,065 5,394,859 6,230,480 7,337,796 7,892,535
OPERATING PROFIT BEFORE OTHER INCOME AND ZAKAH 2,187,389 2,589,221 3,827,441 4,724,515 5,713,367 7,453,557 9,893,760
Other income - - - -
Zakah (134,155) (124,958) (122,826) (137,064) (148,133) (158,320) (173,972)
NET PROFIT FOR THE YEAR 2,053,234 2,464,263 3,704,615 4,587,451 5,565,233 7,295,237 9,719,788

Op Balance of Retained Earnings 1,537,780 975,690 646,531 828,473 799,178 637,888 515,601
Net Profit for the year 2,053,234 2,464,263 3,704,615 4,587,451 5,565,233 7,295,237 9,719,788
Trfr to Statutory reserves (205,324) (246,426) (370,462) (458,745) (556,523) (729,524) (971,979)
Unrealised gain on investments in property (136,996) (232,211)
Director's Remuneration (70,000) (70,000) (100,000) (70,000) (70,000) (70,000) (70,000)
Charitable Contributions (40,000) (40,000) (60,000) (40,000) (40,000) (40,000) (40,000)
May 2005
Proposed Dividends (2,300,000) (2,300,000) (2,760,000) (4,048,000) (5,060,000) (6,578,000) (8,602,000)
CASH FLOW STATEMENT
Amount in BD 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Operating Activities
Net profit 2,053,234 2,464,263 3,704,615 4,587,451 5,565,233 7,295,237 9,719,788
Adjustments for non-cash items:
May 2005
Depreciation 470,374 634,855 544,560 571,191 605,440 643,991 589,212
Provisions for Islamic Financing activities - 221,840 210,410 208,825 227,419
Write back of provisions-net (412,000) 359,905 184,440
Bank's share in the loss of an associate 164,753 (15,060) (114,815) - - - -
Gain on fair value adjustment for investments in properties (94,066) (136,996) (232,211)
Gain on sale of investments in properties and Ijarah assets (234,858)
Operating profit before changes in op. assets and liabilities 1,947,437 3,306,967 4,086,589 5,380,482 6,381,084 8,148,052 10,536,418
Changes in:
Mandatory reserve with BMA (295,000) 357,245
Murabaha receivables 3,000,170 (2,681,283) (14,527,398) (14,155,540) (15,429,539) (16,818,197) (18,331,835)
Mudaraba Financing (8,315,399) 4,566,363 5,299,041 (479,165) (498,331) (518,265) (538,995)
Musharaka financing 332,455 541,417 484,603 83,142 80,648 78,228 75,881
Ijarah Muntahia Bittamleek (716,272) (816,550) (930,867) (1,061,188)
Other assets (379,541) (94,380) (318,184) (94,395) (101,947) (110,102) (118,911)
Other liabilities 1,064,460 424,025 (306,469) 282,707 310,978 342,076 376,283
Customer' current accounts 6,322,544 7,537,161 1,489,747 3,644,152 4,081,450 5,333,094 6,079,727
Directors' renumeration and charitable contribution (158,380) (110,000) (110,000) (110,000) (110,000) (110,000) (110,000)
Net Cash From Operating Activities 3,813,746 13,195,270 (3,544,826) (6,164,890) (6,102,208) (4,585,981) (3,092,619)

Investing Activities
Purchase of Ijara Muntahia Bittamleek (1,500,000) (1,963,977) (2,630,894)
Investment in properties and Ijarah assets - 1,417,101 2,541,210 49,592 49,096 48,605 48,119
Disposal of investment in properties 563,122
Purchase of investment properties - (1,710,275) (846,686) (168,357) (175,092) (182,095) (189,379)
Purchase of non-trading investments (10,192,731) (19,169,091) (3,012,014) (8,365,507) (12,827,111) (15,392,534) (18,471,040)
Investment in Associates 33,441 (59,029) (60,209) (61,413) (62,642)
Purchase of equipment (181,349) (214,873) (405,851) (606,152) (641,450) (681,081) (627,415)
Net Cash (used in) Investing activities (11,310,958) (21,641,115) (4,320,794) (9,149,453) (13,654,766) (16,268,518) (19,302,357)
Financing Activities
Increase (decrease) in unrestricted investment accounts 11,490,735 12,081,225 9,299,620 16,882,950 20,428,369 24,736,898 32,322,880
Dividends paid (2,345,128) (2,319,831) (2,300,000) (2,760,000) (4,048,000) (5,060,000) (6,578,000)
47
Sale of treasury stock 56,289 -
Net Cash (used in) Financing activities 9,201,896 9,761,394 6,999,620 14,122,950 16,380,369 19,676,898 25,744,880
NET INCREASE (DECREASE) IN CASH 1,704,684 1,315,549 (866,000) (1,191,393) (3,376,605) (1,177,601) 3,349,905
Cash and cash equivalents & mandatory reserve at 1 January 7,314,624 9,314,308 10,272,612 9,406,612 8,215,219 4,838,614 3,661,013
CASH AND CASH EQUIVALENTS at 1 January 9,019,308 10,629,857 9,406,612 8,215,219 4,838,614 3,661,013 7,010,917
Ratios
2002 2003 2004 F 2005 F 2006 F 2007 F 2008 F
Profitability
- Net profit sharing income/ Gross Income 43.9% 53.1% 47.6% 46.45% 45.82% 42.61% 43.70%
- Non-profit sharing income/ Gross Income 42.9% 46.9% 52.4% 53.6% 54.2% 57.4% 56.3%
- Dividend payout ratio 112.0% 93.3% 74.5% 88.2% 90.9% 90.2% 88.5%
- Operating Expenses / Gross Income 64.7% 62.9% 55.3% 52.3% 51.3% 48.9% 43.7%
- Operating Expenses / Profit Sharing 76.8% 77.9% 74.7% 72.4% 69.4% 68.1% 61.3%
- Gross Income Per Staff (BD) 35,443 38,529 47,315 55,918 66,291 82,387 99,203
- Operating Expenses / Assets 2.00% 1.99% 1.95% 1.94% 2.07% 2.23% 2.15%
Margins
- Net Profit Sharing / Revenues 59.9% 72.3% 67.3% 67.5% 64.4% 61.4% 63.2%
- Gross Income / Revenues 118.7% 124.0% 135.1% 138.6% 135.2% 139.4% 140.4%
- Depositors Profit Sharing to Profit Sharing
40.1% 27.7% 32.7% 32.5% 35.6% 38.6% 36.8%
Income
- Profit Sharing to Profit Sharing Income
3.1% 3.0% 3.13% 3.2% 3.6% 3.9% 4.8%
Earning Assets
- Depositors Profit Sharing to Depositors
Profit Sharing Liabilities 1.3% 0.9% 1.07% 1.1% 1.3% 1.6% 1.6%
- Investment Income to Investment Assets 4.3% 3.4% 5.1% 5.4% 5.8% 6.8% 7.0%
- Net Spread 1.78% 2.15% 2.06% 2.14% 2.23% 2.31% 3.22%
- Net Profit Sharing Margin 1.9% 2.2% 2.1% 2.2% 2.3% 2.4% 3.0%
Efficiency
- Cost to total operating income 64.7% 62.9% 55.3% 52.3% 51.3% 48.9% 43.7%
- Operating Expenses to Gross Income 64.7% 62.9% 55.3% 52.3% 51.3% 48.9% 43.7%
- Staff Expense to Gross Income 37.8% 37.1% 32.4% 31.4% 31.4% 30.2% 28.1%
- Operating Expenses to Average Total 2.0% 2.0% 1.9% 1.9% 2.1% 2.2% 2.1%
Assets
Liquidity
- Gross Loans to Total Deposits 94.6% 86.7% 86.4% 84.9% 82.9% 80.1% 76.3%
- Loans to Customer Deposits 111% 109% 108% 99% 49% 32% 23%
- Customer Deposits to Equity 376% 376% 301% 345% 743% 1201% 1733%
- Customer Deposits to Total Deposits 85% 80% 80% 86% 170% 254% 338%
Credit Quality
- Non Performing Loans BD 3,001,493 3,585,753 3,771,960 4,104,889 4,453,528 5,052,900 5,485,184
- Loan Loss Reserve BD 1,931,956 1,923,000 2,017,190 2,239,030 2,449,440 2,658,265 2,885,684
- NPL's to (Equity+Loan loss reserve) 7.5% 8.6% 6.9% 7.2% 7.6% 8.3% 8.6%
- Provisions to NPL 64.4% 53.6% 53.5% 54.5% 55.0% 52.6% 52.6%
Capital Adequacy
- Equity to (Total Assets + Cont. Liabilities) 17.8% 16.8% 20.3% 19.0% 17.8% 16.7% 15.7%

- Net Profit Sharing Income to Gross Income 43.9% 53.1% 47.6% 46.4% 45.8% 42.6% 43.7%
- Fees & Comm. to Gross Income 7.2% 13.0% 6.3% 6.1% 5.9% 5.4% 5.2%
- Investment Income to Gross Income 35.6% 33.9% 46.1% 47.4% 48.3% 51.9% 51.1%
- Change in Net Profit Sharing Income -31% 30% 5% 13% 16% 15% 23%
- Change in Fees and Commission 78% 101% -40% 12% 14% 15% 15%
- Change in Investment Income 58.7% 6.9% 67.0% 19.0% 20.7% 33.7% 18.4%
RATIOS USED FOR VALUATION

- Shares in Issue (mn) 230 230 230 253 253 253 253
- EPS (fils) 8.9 10.7 16.11 18.1 22.0 28.8 38.4
- Dividend 10% 10% 12% 16% 20% 26% 34%
- Market Price Year End (fils) 175 270 320 405 405 405 405
- P/E 19.6 25.2 19.9 22.3 18.4 14.1 10.5
- P/BV 1.05 1.55 1.47 1.88 1.83 1.77 1.68

National Bank of Bahrain B.S.C

BISH.BH
Listing:
Bahrain Stock Exchange Not Rated
Current Price
1,125 fils
Key Data
EPS (Fils) 62.8 12M Avg. vol. 41,741
BV (Fils) 431.0 52 week Lo / Hi 828 / 1,400 fils
P / BV 2.61 Target Price Not Rated
Background
• National Bank of Bahrain (NBB) is a public shareholding company incorporated in Bahrain

in 1957 and listed on the Bahrain Stock Exchange. The bank offers a full range of banking
services focused on both retail and corporate clients. NBB has grown steadily to become
the country's leading provider of retail and commercial banking services. The bank had
571 employees as of end-Dec 2004 servicing customers from 25 branches and 43 ATMs
spread across strategic locations in Bahrain. In addition, the bank had around 2300 Point
of Sales at different locations in the country. Outside Bahrain, NBB operates one branch in
Abu Dhabi that focuses on corporate customers and middle-income retail customers.
• The principal shareholders of the bank as of Dec 31, 2004 was the government of Bahrain
with 49% stake while the remaining stake was being held by other shareholders.
Recent Developments
• During 2004, the bank implemented the project to replace its core banking computer
system.
• During 2004 the bank commenced the implementation of the Strategic Plan for 2004-
2006. The core theme of this plan is to target known markets and areas more aggressively
and effectively by further strengthening the core capabilities, particularly in sales.
• The bank introduced a new product called Al Baseet loan to target customers who are
fiscally prudent and disciplined borrowers.
• The bank signed an agreement with Bahrain National Insurance Company to provide
insurance products through banking channels. The bank initiated the process by offering
motor insurance with plans to expand the scope of products in the future.

• The bank was mandated to lead arrange in the financing of the Bahrain Petroleum
Company’s modernisation programme with substantial underwriting commitments.
• The bank is expected to launch its first branch in Saudi Arabia in FY2005.
• In 2004 Capital Intelligence, upgraded the bank’s long-term foreign currency rating to
BBB+ from BBB. The agency reaffirmed the bank’s short-term foreign currency rating of
A2 with the financial strength rating remaining at A. Fitch rating also upgraded the long
and short-term ratings to A- from BBB and F2 from F3 respectively.
• The interest income of the bank increased by 15.7% to BD38.8mn during FY2004 as
compared to the same period last year. However, interest expenses increased by just
6.1% to BD10.9mn during the same period. As a result, the net interest income during
the period surged by 20% to BD27.9mn. The increase in net interest income is mainly
attributable to good growth in core commercial banking businesses and increased interest
rate spreads in the present interest rate environment.
• Fees and commissions income increased by an impressive 31.2% to BD9.5mn as

compared to the same period last year. Dividend income also increased sharply by 33.4%
to BD3.27mn during the same period. As a result, the total non-interest income of the
bank increased by 7.5% to BD17.3mn.
• Provision for loan losses were declined substantially by 67.6% to BD0.55mn. On the
back of improved net interest income and substantial decline in provision for loan losses
the total operating income after provision increased by 18.5% to BD44.7mn.
• The bank was able to control its expenses as it increased by 7.4% to BD16.44mn. As
a result, the cost to operating income after provision of the bank declined to 36.8% in
corresponding period of the last fiscal. The bank has declared a cash dividend of 40% and
a stock dividend of 20% for FY2004.
• NBB’s total assets stood at BD1.36bn at the end of Dec 2004, representing an increase
of 9.9% over Dec 2003. This increase was due to the substantial increase in loans and
advances portfolio and available for sale investments.
• Gross loans and advances increased by 18.5% to BD689.1mn over December 2003.
Tremendous opportunities that are available in the region are expected to benefit NBB,
going forward. The proportion of NPL to gross loans declined substantially from 1.92%
in FY2003 to 1.14% in FY2004. The bank has provided for 196.3% of its NPL at the end
of Dec 2004.

• In order to take the advantage of the booming market, available for sale investment
portfolio surged by 51.2% to BD229.52mn. Out of this, investment in debt was 74.4%
while rest of the portfolio was in equities.
• Deposits from customers increased by 6.9% to BD957mn over Dec 2003, while the
deposits from banks and other financial institutions, which have relatively higher cost of
servicing increased by around 15.8% to BD185.8mn during the same period. The highest
growth was recorded by borrowings under repurchase agreements, which grew by 80.7%
to BD6.83mn.
• The bank is strongly capitalised with a CAR of 31.8% as of FY2004. As a result, the
bank remain well positioned to participate in the business opportunities stemming from
regional growth.
Outlook
• The entry of the bank in Saudi market is expected to add further visibility to the banks
earnings. This should also derisk the bank’s business model, which is currently focuses
on domestic market.
• NBB is expected to continue its focus on improving operating efficiency and asset
quality.

Balance Sheet
NBB
Amount in BD 000 2002 2003 2004
Assets
Cash & balances with banks 31,740.0 44,380.0 40,240.0
Treasury bills & bonds 71,440.0 53,490.0 59,400.0
Placements with banks & other FIs 366,990.0 371,180.0 306,830.0
Trading Securities 9,820.0 18,240.0 18,720.0
Loans and Advances (Gross) 478,350.0 581,380.0 689,111.0
Less: provisions (17,136.0) (18,243.0) (15,409.0)
Loans and Advances (Net) 461,214.0 563,137.0 673,702.0
Available for sale investment securities 129,056.0 151,817.0 229,520.0
- Debt 93,152.0 110,554.0 170,832.0
- Equity 35,904.0 41,263.0 58,688.0
Held to maturity investment securities 11,250.0 10,260.0 3,530.0
Accrued interest receivable & other assets 8,860.0 8,170.0 9,360.0
Fixed Assets (Gross) 27,746.0 31,167.0 32,845.0
Less: Depreciation (13,719.0) (14,373.0) (14,679.0)
Fixed Assets (Net) 14,027.0 16,794.0 18,166.0
Total Assets 1,104,400.0 1,237,471.0 1,359,470.0
Liabilities
Due to Banks and other FIs 162,490.0 160,430.0 185,800.0
Borrowings under repurchase agreements 10,390.0 3,780.0 6,830.0
Customer Deposits 760,220.0 895,470.0 957,040.0
Accrued Interest payable & Other liabilities 19,420.0 12,270.0 15,870.0
Total Current Liabilities 952,520.0 1,071,950.0 1,165,540.0
Owner's Equity
Share capital 40,000.0 45,000.0 45,000.0
Statutory Reserves 22,500.0 22,500.0 27,000.0
General Reserves 41,500.0 40,000.0 43,000.0
Retained earnings 10,650.0 12,501.0 13,570.0
Revaluation reserve 22,090.0 28,470.0 45,670.0
Proposed Appropriations 15,140.0 17,050.0 19,690.0
Total Shareholder's Equity 151,880.0 165,521.0 193,930.0
Total Liabilities 1,104,400.0 1,237,471.0 1,359,470.0

OPERATING STATEMENT
NBB
Amount in BD' 000 2002 2003 2004
Interest Income 37,770.0 33,530.0 38,790.0

Interest Expense (14,220.0) (10,250.0) (10,880.0)
Net interest income 23,550.0 23,280.0 27,910.0
- Fees and Commission income 5,692.0 7,232.0 9,489.0

- Dividend income 2,249.0 2,455.0 3,274.0
- Profit on exchange dealing and transactions 801.0 1,010.0 1,057.0
- Profit on sale of available for sale investments 601.0 943.0 129.0
- Profit on trading in securities & returns & commission from
1,038.0 2,270.0 1,108.0
managed funds
- Income from derivatives 50.0 91.0 83.0
- Other income 439.0 2,130.0 2,198.0
Total non-interest income 10,870.0 16,131.0 17,338.0
- Provisions (430.0) (1,700.0) (550.0)
Total Operating income 33,990.0 37,711.0 44,698.0
Operating Expenses
- Staff costs (9,940.0) (10,170.0) (11,040.0)
- Other operating expenses (4,800.0) (5,140.0) (5,400.0)
Total Operating Expenses (14,740.0) (15,310.0) (16,440.0)
Net Income 19,250.0 22,401.0 28,258.0

Op Balance of Retained Earnings 11,670.0 10,650.0 12,501.0
Effect of adopting IAS 39 -
Prior period adjustments (1,130.0)
Net Income 19,250.0 22,401.0 28,258.0
Dividend Proposed (14,000.0) (15,750.0) (18,000.0)
Donations and Contributions (960.0) (1,120.0) (1,410.0)
Directors Remuneration (180.0) (180.0) (280.0)
Transfer to general reserve (4,000.0) (3,500.0) (7,500.0)
Cl Balance of Retained Earnings 10,650.0 12,501.0 13,569.0

CASH FLOW STATEMENT

NBB
Amount in BD' 000 2002 2003 2004
Net Income 19,250 22,400 28,260
Depreciation 1,070 1,250 910
Provisions for loans and advances impairment 430 1,700 550
Net Income after adjustments 20,750.0 25,350.0 29,720.0
Changes in operating assets and liabilities

Treasury bills 29,930.0 18,890.0 6,060
Placements with banks and FIs (14,190.0) (32,450.0) 67,610
Trading Securities (1,550.0) (8,420.0) (480)
Loans and advances (10,340.0) (103,630.0) (111,110)
Available for investment securities 38,630.0 (16,380.0) (60,500)
Accrued interest receivable & other assets 2,280.0 690.0 (1,200)
Due to banks and other FIs (46,900) (2,060) 25,370
Borrowings under repurchase agreements (550) (6,610) 3,050
Customer Deposits 57,260 135,250 61,560
Accrued interest payable & other liabilities 9,040 (7,150) 3,600
Net Cash from operating activities 84,360.0 3,480.0 23,680.0
Cash flows from Investing activities

Purchase of held to maturity investment securities (11,250.0) (6,730.0) -
Proceeds from redemption of held to maturity investment
3,340.0 7,720.0 6,730
securities
Purchase of fixed assets (260.0) (4,010.0) (2,290)
Total Investing (8,170.0) (3,020.0) 4,440.0
Cash flows from financing activities

Dividend paid to shareholders (13,000.0) (14,000.0) (15,750)
Directors remuneration & donations & contributions (1,060.0) (1,140.0) (1,300)
Total Financing (14,060.0) (15,140.0) (17,050.0)
Net Change in Cash 62,130.0 (14,680.0) 11,070.0

Net Cash at beginning 223,980.0 286,110.0 271,430.0
Net Cash at end 286,110.0 271,430.0 282,500

Ratio Analysis - NBB

NBB
Amount in BD 000 2002 2003 2004
Profitability
- Return on Average Assets 1.76% 1.91% 2.18%
- Return on Average Equity 12.93% 14.12% 15.72%
- Net interest income/ total Op. Income 68.0% 57.2% 61.2%
- Non-interest income/ total Op. Income 32.0% 42.8% 38.8%
Margins
- Net income / Interest Income 51.0% 66.8% 72.8%
- Interest Expense to Interest Income 37.6% 30.6% 28.1%
- Interest Income / Avg Interest Earning Assets 3.7% 3.1% 3.26%
- Interest Expense / Avg Interest Bearing Liabilities 1.5% 1.0% 0.99%
- Net Spread 2.2% 2.1% 2.28%
- Net Interest Margin 2.3% 2.1% 2.33%
Efficiency
- Cost to Total Op Income 43.4% 40.6% 36.8%
- Staff Expense to Total Op Income 29.2% 27.0% 24.7%
- Cost to Average Total Assets 1.4% 1.3% 1.3%
Liquidity
- Loans to Interest Earning Assets 51.00% 56.19% 63.95%
- Loans to Customer Deposits 62.92% 64.92% 72.01%
- Loans to total Deposits 51.26% 54.86% 59.94%
- Customer Deposits to Equity 500.54% 541.00% 493.50%
- Gross Loans to Total Assets 43.31% 46.98% 50.69%
Credit Quality
- Non Performing Loans 10,500.0 11,140.0 7,850.0
- Loan Loss Reserves 17,136.0 18,243.0 15,409.0
- NPL's to Gross Loans 2.20% 1.92% 1.14%
- Loan Loss Reserve to Gross Loans 3.58% 3.14% 2.24%
- Total Provisions to NPL 163.20% 163.76% 196.29%
Capital Adequacy
- Equity to Total Assets 13.75% 13.38% 14.27%
- Equity to Gross Loans 31.75% 28.47% 28.14%
- Total liabilities to shareholders equity (times) 6.3 6.5 6.0
- Interest Income to Total Op Income 68.0% 57.2% 61.2%
- Fees & Comm. to Total Op. Income 16.7% 19.2% 21.2%
- FX Income to Total Op. Income 2.4% 2.7% 2.4%
- Dividend Income to Total Op. Income 6.6% 6.5% 7.3%
- Change in Interest Income -30.8% -11.2% 15.7%
- Change in Fees and Commission 57.8% 27.1% 31.2%
- Change in Fx Income -5.2% 26.1% 4.7%
- Shares in Issue (mn) 400 450 450
- EPS (fils) 48.1 49.8 62.8
- Book Value Per Share (fils) 379.7 367.8 431.0
- Market Price Year End (fils) 604 802 1,000
- P/E 12.6 16.1 15.9
- P/BV 1.6 2.2 2.3
- Dividend Payout 72.7% 70.3% 63.7%

Bahraini Saudi Bank B.S.C.

BSBB.BH
Listing:
Bahrain Stock Exchange Not Rated
Current Price
134 fils
Key Data
EPS (Fils) 9.4 12M Avg. vol. 0.16mn
BV (Fils) 63.2 52 week Lo / Hi 125 / 166 fils
P/E 14.2 Market Cap BD67mn
P / BV 2.12 Target Price Not Rated
Background
• Bahraini Saudi Bank (BSB) is a public shareholding company incorporated in Bahrain in

1983 and listed on the Bahrain Stock Exchange. The bank offers a full range of banking
services focused on both retail and corporate clients with Islamic Sharia principles. In view
of the growth over the past few years the bank extended its branch network in the country
to the current six branches in addition to 10 ATMs. The bank had 101 employees as of
Dec 31, 2004. During 2002, BSB was the focus of an official investigation into alleged
irregularities involving BD17mn, which was around 85% of its paid-up capital. Ahli United
Bank, Bank of Bahrain & Kuwait and National Bank of Bahrain supported BSB in time of
crisis. Similarly, BMA also supported the management of the bank.
• The bank is owned 50:50 by Bahraini and Saudi Investors. The bank’s principal
shareholder is the Pension Fund Commission of Bahrain, with a stake of about 10.1%.
Other major stakeholders in BSB include the various shareholders from both Bahrain and
Saudi Arabia, who own approximately 45.3% of BSB’s issued and outstanding shares.
The remaining 54.7% of shares are held by more than 1,000 shareholders in both Bahrain
and Saudi Arabia.
Recent Developments
• The bank has open its new branch in Arad area of Bahrain.
• The bank came out with rights issue in March 2005 to shore up its share capital. The
rights issue resulted in an increase in BSB’s issued capital from BD20mn to BD50mn.
• BSB has introduced for the first time in Bahrain a unique Corporate Card, which provides
enhanced features from MasterCard International. This represents a new banking service
from BSB following its recent acquisition of Arab Financial Services’ (AFS) card

portfolio, which is in line with BSB’s strategy.
• The interest income of the bank decreased by 2% to BD5.77mn during FY2004 as

compared to the same period last year. However, interest expenses decreased by just
11.8% to BD1.5mn during the same period. As a result, the net interest income during the
period almost remained flat at BD4.26mn.
• Fees and commissions income increased by an impressive 39.2% to BD0.3mn as compared

to the same period last year. The total non-interest income of the bank increased by 29.4%
to BD0.65mn. Provision for loan losses were BD0.17mn. The total operating income
after provision increased by 2.4% to BD4.74mn.
• The bank was able to control its expenses as it was down by 8.6% to BD2.86mn. Despite
the decline in total expenses, the cost to operating income after provision of the bank
stood at 60.3% in FY2004 as compared to 67.6% in FY2003.
• The net profit was higher by 25.4% at BD1.88mn over the corresponding period of the
last fiscal. As a result, earnings per share of the bank improved from 7.5 fils in FY2003 to
9.4 fils in FY2004.
• BSB’s total assets stood at BD128mn at the end of Dec 2004, representing an increase
of just 1.8% over Dec 2003. Around 39.9% of the assets were deployed in loans and
advances portfolio while 42.7% were in due to banks and other financial institutions.
• Gross loans and advances declined by 3.5% to BD91.9mn over December 2003. The
decline in loan portfolio was despite the tremendous lending opportunities available in
the region. The bank is saddled with a heavy non-performing loans in its books. As of Dec
2004, the gross NPLs in the bank’s books were BD62.84mn. The proportion of NPLs to
gross loans were at 68.4% in FY2004. The bank has provided for 64.86% of its NPLs at
the end of Dec 2004.
• Cash and balances with central banks, which constitute around 8.4% of total assets in
FY2004, increased by 109.6% to BD10.8mn.
• Deposits from customers decreased by 2% to BD83.33mn over Dec 2003. The bank
has funded most of its assets by higher cost deposits from banks and other financial
institutions. The deposits from banks and financial institution increased by 117% to
BD9.97mn.
Outlook & Valuation
• The bank is expected to focus more on improving its operating efficiency and asset
quality.
• The bank is trading at a P/BV of 2.12x and earnings multiple of 14.2x of its 2004
earnings.

BALANCE SHEET
BSB
Amount in BD 000 2003 2004
Assets
Cash & balances with central bank 5,154.0 10,802.0
Non-trading investments 10,681.0 10,643.0
Loans and Advances (Gross) 95,220.0 91,889.0
Less: provisions (38,778.0) (40,758.0)
Loans and Advances (Net) 56,442.0 51,131.0
Due from banks & other FIs 52,074.0 54,653.0
Investment Property 668.0 -
Premises & Equipment 498.0 486.0
Other Assets 364.0 375.0
Total Assets 125,881.0 128,090.0
Liabilities
Due to Banks and other FIs 4,598.0 9,973.0
Customer Deposits 85,020.0 83,329.0
Other liabilities 5,667.0 2,158.0
Total Liabilities 95,285.0 95,460.0
Owner's Equity
Share capital 20,000.0 20,000.0
Statutory Reserves 4,116.0 4,116.0
General Reserves 6,050.0 6,050.0
Cumulative changes in fair values 427.0 619.0
Accumulated Losses (19,997.0) (18,155.0)
Total Shareholder's Equity 10,596.0 12,630.0
Support from BMA 20,000.0 20,000.0

OPERATING STATEMENT
BSB
Amount in BD' 000 2003 2004
Interest Income 5,891.0 5,775.0
Interest Expense (1,712.0) (1,510.0)
Net interest income 4,179.0 4,265.0
- Fees and Commission income 237.0 330.0

- Profit on exchange dealing and transactions 191.0 177.0
- Realised gain on sale of non-trading investment - 128.0
- Other income 78.0 20.0
Total non-interest income 506.0 655.0
- Provisions/ write backs 62.0 (174.0)
- Loss from fair value adjustment of investment property (114.0)
Total Operating income 4,633.0 4,746.0
Operating Expenses
- Staff costs (1,357.0) (1,456.0)
- Depreciation (168.0) (229.0)
- Premises & Equipment (604.0) (580.0)
- Other operating expenses (1,002.0) (597.0)
Total Operating Expenses (3,131.0) (2,862.0)
Net Income 1,502.0 1,884.0

Op Balance of accumulated losses (21,499.0) (19,997.0)
Net Income 1,502.0 1,884.0
Part of realised profit non-trading investments (42.0)
Cl Balance of Retained Earnings (19,997.0) (18,155.0)

CASH FLOW STATEMENT

BSB
Amount in BD' 000 2003 2004
Net Income 1,502 1,884
Adjustments 168 229
Cancelling Juridical Interest on Loans (915) (511)
Realised Profit - (128)
Provisions (62) 174
Loss from selling real estate investments - 18
Loss from updating the fair value of real estate inv. 114 -
Net Income after adjustments 807.0 1,666.0
Changes in operating assets and liabilities

Legal Reserve with BMA 1,785.0 (110)
Changes in loans 37,166.0 5,648
Other Assets 228.0 (11)
Amt. Due to banks and othet FIs 94.0 (94)
Clients Deposits (83,451.0) (1,691)
Other liabilities (262.0) (3,469)
Net Cash from operating activities (43,633.0) 1,939.0
Cash flows from Investing activities

Proceeds from inveting activity 4,270.0 316
Proceeds from selling real estate - 650
Purchase of fixed assets (228.0) (217)
Total Investing 4,042.0 749.0
Cash flows from financing activities

Support from BMA 20,000.0 -
Paid shares profit (18.0) (40)
Total Financing 19,982.0 (40.0)
Net Change in Cash & others (19,609.0) 2,648.0

Net Cash at beginning 69,518.0 49,909.0
Net Cash at end 49,909.0 52,557

Ratio Analysis
BSB
2004
Profitability
- Return on Average Assets 1.48%
- Return on Average Equity 16.22%
- Net interest income/ total Op. Income 86.2%
- Non-interest income/ total Op. Income 13.8%
Margins
- Net income / Interest Income 32.6%
- Interest Expense to Interest Income 26.1%
- Interest Income / Avg Interest Earning Assets 3.66%
- Interest Expense / Avg Interest Bearing Liabilities 1.65%
- Net Spread 2.01%
- Net Interest Margin 2.71%
Efficiency
- Cost to Total Op Income 60.3%
- Staff Expense to Total Op Income 30.7%
- Cost to Average Total Assets 2.3%
Liquidity
- Loans to Interest Earning Assets 58.46%
- Loans to Customer Deposits 110.3%
- Loans to total Deposits 98.49%
- Customer Deposits to Equity 659.8%
- Gross Loans to Total Assets 71.74%
Credit Quality
- Non Performing Loans (BD 000) 62,840.0
- Loan Loss Reserves (BD 000) 40,758.0
- NPL's to Gross Loans 68.39%
- Loan Loss Reserve to Gross Loans 44.36%
- Total Provisions to NPL 64.86%
Capital Adequacy
- Equity to Total Assets 9.86%
- Equity to Gross Loans 13.74%
- Total liabilities to shareholders equity (times) 7.6
- Change in Interest Income -2.0%
- Change in Fees and Commission 39.2%
- Change in Fx Income -7.3%
- Shares in Issue (mn) 200
- EPS (fils) 9.4
- Book Value Per Share (fils) 63.2
- Market Price Year End (fils) 149
- P/E 15.8
- P/BV 2.36




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Disclosure Checklist
Company Recommendation Ticker Price Disclosure
Ahli United Bank Buy AUBB.BH 89 Cent 1,10
Bank of Bahrain & Kuwait Buy BBKB.BH 704 fils 1,10
Bahrain Islamic Bank Hold BISB.BH 405 fils 1,10
National Bank of Bahrain Not Rated NATB.BH 1,125 fils 1,10
Bahraini Saudi Bank Not Rated BSBB.BH 134 fils 1,10
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Kuwait
Kuwait Banking Sector

May 2005
Equities Research
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661


omar@global.com.kw
Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
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Financial Analyst
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Financial Analyst
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Phone No:(965) 2400551 Ext.317
Table of Contents
Kuwaiti Banking Sector ............................................................................................................................................... 1
Islamic Banking .................................................................................................................................................................. 3
Credit Portfolio .................................................................................................................................................................... 4
Interest Rates ......................................................................................................................................................................... 6
Asset Size .................................................................................................................................................................................. 7
Peer Group Comparison .............................................................................................................................................. 9
Banking Sector Outlook ............................................................................................................................................... 14
Valuation Matrix ............................................................................................................................................................... 15
Players Profiles
National Bank of Kuwait ..................................................................................................................................... 20
Gulf Bank. ....................................................................................................................................................................... 28
Commercial Bank of Kuwait .............................................................................................................................. 36
Burgan Bank .................................................................................................................................................................. 43
Bank of Kuwait and Middle East ..................................................................................................................... 50
Al Ahli Bank of Kuwait ......................................................................................................................................... 59
Kuwait Finance House ............................................................................................................................................ 68
Kuwait Real Estate Bank ....................................................................................................................................... 75
Global Research Kuwait Global Investment House

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

bank deposits, which were previously enacted following a 1982 stock market crash. The
removal was done in view of the local banks having considerably improved their financial
positions with above par financial ratios of solvency, liquidity and profitability and are now
considered better equipped to safeguard their customer deposits. The removal of guarantees
is expected to result in healthier competition between the local banks and expected new
foreign banks, and will undoubtedly motivate managements to improve performance and
standard of services to cope with the new conditions. This liberalisation is combined with
good governance, efficient internal control and risk management systems which constitute
the real guarantee for depositors. With foreign banks now permitted to operate in Kuwait, the
government realized that the time has come to encourage free competition in the sector.
Recent Regulatory Initiatives
In the past two years or so, the country witnessed tremendous regulatory changes which will
have far reaching implications for banking industry in Kuwait. Some of the major regulatory
changes are enumerated below:
• The Central Bank of Kuwait (CBK) liberalizes the banking sector in Kuwait allowing
foreign banks to operate in Kuwait. As a result, three foreign banks have been given
license to operate in Kuwait. They are BNP Paribas, HSBC & National Bank of Abu
Dhabi. The new banks should have minimum capital of KD15mn and will have achieve
50% Kuwaitization within a period of three years of their operation.
• CBK allowed commercial banks to set up Islamic subsidiaries. In another development,

CBK stressed that it would license two new Islamic banks in Kuwait. These include the
newly formed Boubyan Bank, which was launched through an IPO in April; and the
transformation of the small, specialist Kuwait Real Estate Bank into an Islamic bank.
Other Kuwaiti banks will have to endure a grace period which could last anything from
1-3 years before they are permitted to form Islamic subsidiaries.
• In Feb 2004, CBK imposed limits on the ownership structure of Kuwaiti banks by setting
the maximum limit of any individual in a bank at 5% of the bank’s capital, unless prior
consent is obtained from CBK and excluding government entities and positions existing
prior to this law.
• CBK restrictions on loan growth significantly tightened. In June 2004, CBK stressed that
the consumer loan amount should not exceed fifteen times the customers monthly salary
or his monthly stable income with the maximum limit of KD15,000. The maximum term
of a consumer loan should not exceed five years. The loan term, under a scheduling
arrangement, should not be more than one year excluding the original term of five years.
• In July 2004, CBK came out with the guidelines that CDs/Medium Term Loans to be
netted off for 88:12 ratio purposes thus closing the loophole whereby banks were using
back-to-back interbank funding to expand retail loan capacity at nil net of cost.
• The most notable of all regulation, which most of the bank in Kuwait hate to comply with,
is 80:20 customer loan / customer deposit ratio. The banks will have to comply by July
2005.
2 Kuwait Banking Sector May 2005

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

Large banks have a dominant presence
Large banks such as NBK and KFH dominate the banking industry by virtue of their size, reach
and coverage. The large banks also have competitive advantage over the smaller banks on
account of their strong brand equity and distribution coverage. The National Bank of Kuwait
(NBK), Gulf Bank, and Commercial Bank of Kuwait – together with the Islamic financial
institution Kuwait Finance House control nearly 70% of the total bank assets and customer
deposits. NBK has a dominant presence in the domestic banking industry accounting for
over 29% of the total banking assets and 28% of deposits, which is more than twice as much
as its nearest conventional banking competitor. It also has the most extensive international
presence by any Kuwaiti bank. NBK and KFH together account for over half of total bank
deposits in the country. However, over the last two to three years, the smaller banks that have
been in the lower tier have become much stronger and profitable and are now challenging the
top banks for business. Despite that NBK and KFH continue to grow in strength as they have
expanded their operations to Saudi Arabia, Bahrain and Turkey respectively.
Table 1: Kuwaiti Banks Market Share

2003 2004 2003 2004 2003 2004
NBK 29.1% 29.2% 29.2% 27.8% 26.8% 27.4%
GB 13.2% 12.0% 12.0% 12.0% 15.2% 14.6%
COBK 11.7% 9.6% 7.1% 8.3% 11.8% 11.0%
BB 10.2% 9.1% 9.1% 9.0% 9.4% 8.3%
BKME 8.0% 9.2% 7.6% 8.2% 7.1% 8.3%
ABK 7.9% 8.9% 8.8% 9.2% 8.6% 10.2%
KFH 16.2% 18.1% 22.4% 22.0% 16.2% 15.6%
KREB 3.6% 3.9% 3.8% 3.5% 4.9% 4.7%
It is quite difficult for any bank in Kuwait to build a distinctive franchise. The small size of
the Kuwaiti market and lack of a real “non-oil” economy are limiting factors when it comes
to building a banking franchise. This means that all Kuwaiti banks follow similar strategies
and essentially compete for the same business. Also, each bank has its “own”, loyal core
clientele, usually comprising closely related family groups. This is gradually changing, as
clients become more sophisticated, but allows less competitive banks to remain in business.
In addition, there are a large number of banks for a country of Kuwait’s size. Following the
proposed entry of new foreign and Islamic banks, the intensity of competition is likely to
increase further. Thus, a potential for rationalisation exists.
Credit to the private sector
During the last few years, extremely lax monetary policy has spurred corporate demand for
cheap loans. Simultaneously, record high oil prices flooded the banking system with excess
liquidity. Both have matched up to incite growth of credit facilities to the private sector to a
brisk pace of 37.6%, activating the economy into an estimated 14.9% growth in 2004. Enter
Feb 2005, the situation remained in its status quo and credit during the first two month of
the current year, both in terms of short-term and medium-term financing has been readily
available. Credit to the private sector grew by 37.6% in 2004 over the previous year level,

as oil prices continued to trek higher. Leading the growth was additional facilities provided
for trade sector, construction sector as well as additional personal facilities. After evidence
mounted that bank credit growth was feeding growth in the capital and real estate markets
out of control, the CBK stepped in and issued a number of edicts to rein in bank lending. The
CBK mandated commercial banks to limit net loans to 80% of the total customer deposits
and deposits from financial institutions. Due to the fact that the some of banks were already
in excess of 80%, the banks were given a later deadline of July 2005 to comply.
Chart 1: Credit to various sectors as of Feb 2005

9.1%
14.4%
0.6%
4.7%
16.5%
7.1%
0.3%
6.6%
40.8%
Trade Industry
Construction A griculture and Fishing
Non-bank financial Institutions Personal Facilities
Real Estate Crude Oil and Gas
Public Services
Despite this instruction the rate of credit growth could not be curtailed compared with 2003,
the increase in credit extended in 2004 saw a growth of nearly 37.6%. However, this instruction
from CBK will have major effect on credit offtake from banks in 2005. Already, till Feb of
this year, credit growth was only 0.4%. The robust state of the economy had resulted in an
increased appetite for credit by major productive sectors of the economy in 2004. Aside from
personal facilities, which still has the lions share of the total claims extended to the private
sector, other main beneficiaries of increased bank lending are the trade, industry, real estate
and construction sectors. Personal facilities have surged ahead by 41.8% in the FY 2004
period, as purchase of securities and installment loans surged ahead by 98.3% and 58%.
Most of the other sectors barring public services, crude oil and gas, industry and other loans,
also seen double-digit credit expansion. With domestic demand strong and trade with Iraq
mounting, and orders picking up, businesses often need to borrow to build inventory. Banks
have complied, taking a larger exposure to trade, financing the increasing purchase of goods
for traders. Also, the sanguine state of the property market also expanded demand for real
estate and construction loans. As a result, both have seen 25.4% and 41.8% additional credit
facilities.

Table 2 : Credit to Private Sector

End of Period - KDmn 2003 2004 Feb-05
Trade 905.10 1,411.20 1,415.20
Industry 504.2 454.9 460.2
Construction 494.9 701.5 698.8
Agriculture and Fishing 16.7 29.7 30.2
Non-bank Financial Institutions 553.5 641.3 648.7
Personal Facilities 2,831.00 4,015.20 4,014.60
Consumer loans 692.8 736.4 -
Installment Loans 1,313.50 2,074.50 -
Purchase of Securities 430.1 852.8 889.8
Other Loans 394.6 351.5 -
Real Estate 1,296.50 1,625.40 1,620.30
Crude Oil and Gas 73.6 55.1 58.3
Public Services 0.4 0.1 0.1
Other 453.2 873.9 899.6
Total 7,129.10 9,808.30 9,846.00
Source: Central Bank of Kuwait
Interest Rate Environment
The Kuwaiti Dinar (KD) has been officially pegged to the US dollar as part of the creation
of a single GCC currency. The parity rate of the KD exchange rate as against the US Dollar
was set at 299.63 fils per dollar with a margin of ± 3.5%. This parity rate would help absorb
fluctuations in exchange rates of major currencies in world markets. Local rates have been
following US rates and the average rate is expected to rise further in 2005. Following the
recent hike in interest rates by the US Federal Reserve, it is possible that the CBK will also
increase interest rates, which in turn will benefit the interest incomes of banks. Nonetheless,
since July 2004, the discount rate has been raised by seven times to the current rate of 5.25%.
The average inter-bank interest rates on KD deposits, average interest rates on public debt
instruments such as Treasury Bills and Treasury Bonds and the average interest rates in Time
Deposits increased during the past nine months in line with the increase in CBK’s discount
rate.
Table 3:Average Interest Rates on Customer Time Deposits with Local Banks
Maturity 3 months 6 months 12 months
(%) 2002 2003 2004 Feb-05 2002 2003 2004 Feb-05 2002 2003 2004 Feb-05
KD 2.609 1.458 1.888 1.942 2.766 1.506 2.130 2.200 2.906 1.551 2.286 2.380
USD 1.390 0.868 1.773 2.040 1.476 0.907 1.967 2.232 1.883 1.008 2.251 2.514
As seen from the table above, average interest rates on all maturity brackets declined in 2003.
However, after that interest rates started to move up and increased gradually in 2003 and
2004 on all maturity brackets. In the first two months of 2005 as well, rates in Kuwait kept
on imitating US rates as they continued their northward journey. We believe that the central
bank will keep on tightly controlling money supply in the economy by increasing interest
rates. Though the future increase in interest rates will be a measured one rather than any
abrupt hike, it will also depend on the interest rate scenario in US.

The rate increases are part of a gradual process to wean the economy from what was an
extraordinarily low discount rate, which is the CBK’s main tool in influencing the economy.
Low interest rates in recent times have resulted in remarkable gains at the Kuwait Stock
Exchange as well as astronomical increases in the value of real estate in the country and a
general increase in business investment. Although a growth in all of the above is favorable for
the economy, the central bank felt that the abundant liquidity in the system would adversely
affect both the equity market as well as the property market if prices continued to balloon,
therefore, rising rates should in theory check further price increases. We believe a discount
rate of around 5.5% to 6% would be relatively neutral, meaning it would neither slow nor
stimulate economic activity.
Asset Size of Banks
Prompted mainly by regulatory instructions, the total assets of the banking sector decreased
from a high of KD19bn in December 2004 to KD18.47bn in February 2005, a decrease of
KD683mn or 3.3% in two months. Private sector lending continued to form the bulk of
local bank assets, amounting to 58.8% of total assets as of Feb 2005. Private sector lending
has expanded by 35.7% in 2004. This is mainly on account of a quicker pace of loans for
the purchase of securities. However, private sector lending is expected to slow, as the CBK
continues to maneuver bank lending lower.
Table 4: Consolidated Balance Sheet of Local Banks

In KD mn 2002 2003 2004 Feb-05
Total Assets 15,353.30 17,058.10 19,097.80 18,474.80
Cash & Short-term deposits 121.8 135.2 254.3 211.6
Time Deposits with CBK 1626 920.5 125.0 125.0
Foreign Assets 1,994.0 2,376.7 3,453.0 3,136.4
Claims on the Private Sector 6,811.50 7,972.90 10,818.80 10,872.20
Credit Facilities 6,057.60 7,128.90 9,808.30 9,846.10
Other Local Investments 753.9 844.0 1,010.5 1,026.1
Claims on Government 3,301.50 3,213.20 2,750.00 2,778.90
Debt Purchase Bonds 1204.3 985.2 603.7 534.7
Public Debt Instruments 2,097.20 2,228.00 2,146.30 2,244.20
Inter-bank Deposits 1,067.00 2,022.80 1,109.30 763.40
Other Assets 431.5 416.7 587.3 587.5
Private Sector Deposits 9,051.10 9,192.00 10,964.00 11,468.70
Government Deposits 224.1 316.1 575.4 509.4
Inter-bank Deposits 1,231.60 2,188.80 1,330.50 757.50
Other liabilities 1,369.80 1,337.40 2,073.10 1,701.50
Own Funds 1,704.90 1,792.00 2,139.50 2,209.50
Also, new regulatory changes by the Central Bank of Kuwait (CBK) not to include the entire
Inter-bank liability but rather the net Inter-bank position of the banks while calculating the
lending ceilings prompted the local banks to decrease their Inter-bank deposits. Inter-bank
placements of the banks in Kuwait had previously increased substantially from KD1bn
in 2002 to KD2bn in Dec 2003. At the end of December 2004, however, the Inter-bank

placements were at KD1.1bn representing 5.8% of the total banking sector assets but having
fallen by 45.2% over 2003. The high Inter-bank deposits were being used by the local banks
to increase their highly profitable consumer loan book size. In the first two months of 2005,
interbank deposits fallen further by 31.2% to KD763mn.
Chart 2: Composition of assets of the banking system as of Feb 2005
4.1% 3.2% 1.1%

0.7%
15.0%
17.0%
Cash & Short-term Deposits

Time Deposits with CBK
Foreign Assets
Claims on the Private Sector
Claims on Government
Inter Bank Deposits
Other Assets
58.9%
Source: Central Bank of Kuwait, Global Research
The marginal asset growth is being funded from the liability side, mainly from the growth
in private sector and government deposits. The two have grown by quick ticks of 19.3% and
82% respectively. A rising interest rate environment has prompted a portion of investors to
re-channel funds back into the banking system. Also, as the US$ continues tumbling lower
to international currencies, and the interest rate continues to trek higher, banks are expecting
considerable deposits in the coming months, both private sector and government sector.
Chart 3: Composition of liabilities of the banking system as of Feb 2005

12.0%
9.2%
Private Sector Deposits
Inter-bank Deposits
4.1% Government Deposits
Other liabilities
Foreign Liabilities
Own Funds
9.9%
62.0%
2.8%
Source: Central Bank of Kuwait, Global Research
We are also beginning to see a relatively new phenomenon of tapping into international
markets for financing needs. A number of local banks have already mandated international
banks to syndicate sizeable facilities to keep liquidity and additional lending an option. This

would also help banks to exploit the difference between lower US$ dollar borrowing rates
and higher Kuwaiti lending rates.
Asset Size and Asset Quality
As mentioned earlier, the total assets of the banking sector stood at KD19bn as of Dec 2004
end. Around 54.4% or KD10.33mn of the total assets were deployed in lending operation.
Since the past few years banks in Kuwait have focused extensively on improving their asset
quality. As a result we have witnessed substantial improvement in the asset quality of the
banks. Despite that there are some banks whose delinquency ratios are much higher as
compared to the international standards. In the Kuwaiti banking sector, Commercial Bank
of Kuwait has the highest non-performing loans which was followed by Kuwait Real Estate
Bank. NBK continues to have the best asset quality among its peers despite its huge size and
outstanding growth. NBK’s non-performing loans to gross loans stood at 1.5% followed by
Gulf Bank at 3% and BKME with 3.1% in FY2004.
Table 5: Non-Performing Loans of Kuwaiti Banks (FY 2004)

(Amt in KD 000) NBK GB COBK BB ABK BKME KFH KREB
Total Assets 5,572,983 2,286,164 1,825,221 1,738,743 1,705,508 1,754,331 3,458,066 736,669
Gross Loans 2,831,140 1,509,957 1,135,548 855,065 1,058,837 854,885 1,607,656 483,043
Provisions (86,418) (55,366) (151,758) (40,603) (78,092) (32,537) (122,685) (33,521)
Net Loans 2,744,722 1,454,591 983,790 814,462 980,745 822,348 1,484,971 449,522
Non-performing Loans 43,000 45,201 129,804 48,034 58,389 26,685 N/A 44,818.0
NPL / Gross Loans 1.5% 3.0% 11.4% 5.6% 5.5% 3.1% -- 9.3%
Provisions / NPL 201.0% 122.5% 116.9% 84.5% 133.7% 121.9% -- 74.8%
Source: Company Reports, Global Research, N/A – Not Available
We believe that once the market starts its downward trends, non-performing loans of the
banking system may rise gradually. Those banks, which have exposure in real estate,
construction and stock market are expected to suffer the most. Most of the banks in Kuwait
have provided adequately for their NPLs in FY2004. NBK as usual was at the forefront when
it comes to providing more for its NPLs as it provided 201%. NBK was followed by Ahli
Bank of Kuwait with 133.7% and Gulf Bank with 122.5%.
Comparative Snapshot of Kuwaiti Banks
The following table gives the broad overview of the total balance sheet of all the banks in
Kuwait. In recent years all the banks have been taking initiatives to restructure their assets
as well as liabilities. In response to the changing regulatory environment, banks in Kuwait
have reduce their interbank assets and liabilities. Gulf Bank became the first bank in Kuwait
to completely eliminate its entire portfolio of low yielding Government Debt Bonds. Other
banks have also been reducing Government Debt Bonds from their balance sheets, though
pace at which they are declining is a gradual one.
Another interesting phenomenon which has become a sort of short term burden for banks is
the 80:20 deposit ratio, which has been introduced in FY2004. As a result of this ratio, most
of the banks have witnessed a marginal increase or in some cases decline in their lending
portfolio. To comply with this ratio, the banks did try vigorously to increase their customer

base as well as increase the deposits from financial institutions. In order to take the advantage
of the booming market, most of the banks have also increased their investment portfolio. A
phenomenon which has been prevalent all across the GCC region is the increase in the share
capital of the banks. Most of the banks in Kuwait followed their counterparts in the GCC
region to shore up their share capital by way of bonus issue or rights issue to comply with
the Basel II requirements. Banks such as NBK, Gulf Bank, and Al Ahli Bank of Kuwait have
issued bonus shares in FY2004 while some others like KFH have raised capital by way of
rights issue. Because of the shoring up of their share capital, banks in Kuwait are adequately
capitalised to take the advantage of emerging opportunities not only in Kuwait but in the
entire GCC region. We believe that the fluid use of capital will be a key factor in the return on
equity strategy for banks in the years ahead. With the Basel II norms placing banks on track
for transition from the traditional regulatory and market led capital adequacy to one based on
the most efficient use of capital, banks may have to firm up new strategies. Future plans of
banks could, therefore, encompass efficient balance sheet management in which capital flows
quickly to its most efficient use.
Besides the shift in trend from the capital adequacy to capital efficiency, banks are also now
witnessing transition from deposit banking to financial services, and from physical distribution
to virtual distribution. These changes will imply a new found emphasis on marketing of
products, whether it will be investment, insurance and other products. Considering that banks
have advantages, thanks to their image of trustworthiness and their extensive distribution
systems, the challenge lies in how they can convert this into a marketing advantage.
Table 6: Comparative snapshot of Kuwaiti Banks (as of FY2004)

KD' 000 NBK GB CoBK BB BKME AABK KFH KREB
Assets
Cash & Bank Balances 391,660 234,612 238,528 265,587 170,561 207,767 113,072 22,959
GDBs 97,773 - 60,288 112,257 127,124 206,127 - -
Gross Loans & Advances 2,831,140 1,509,957 1,135,548 855,065 854,885 1,058,837 1,607,656 483,043
Less: Provisions (86,418) (55,366) (151,758) (40,603) (32,537) (78,092) (122,685) (33,521)
Net Loans & Advances 2,744,722 1,454,591 983,790 814,462 822,348 980,745 1,484,971 449,522
Investments 861,026 87,587 112,477 84,444 101,542 94,354 565,038 39,406
Net Fixed Assets 40,942 12,179 17,031 20,387 6,345 16,306 72,208 12,010
Interest Earning Assets 5,027,552 2,010,811 1,559,106 1,395,017 1,472,522 1,641,596 2,371,167 684,240
Total Assets 5,572,983 2,286,164 1,825,221 1,738,743 1,754,331 1,705,508 3,458,066 736,669
Liabilities
Due to banks 1,295,000 108,208 231,987 229,458 371,315 142,929 121,821 20,528
Due to FIs 102,000 167,967 89,382 91,412 - 75,033 - 46,858
Customer Deposits 3,244,640 1,393,738 963,904 1,048,303 955,044 1,073,041 2,563,185 411,787
Medium Term Loans - 154,205 - - 58,940 114,933
Floating Rate Notes /
133,088 58,940 192,615 105,885 - 39,000 - 37,141
Other borrowed funds
Subordinated Loans - 44,205 - - - - -
Paid-Up Capital 154,790 82,086 106,362 86,060 70,394 87,858 78,141 67,144
Proposed Bonus Shares 7,739 4,104 - - - 3,514 7,814 8,057
Reserves 361,259 234,246 173,043 135,020 112,765 94,615 200,913 88,295
Shareholders Equity 561,650 320,436 233,174 221,080 196,042 203,584 325,938 163,293
Interest Bearing Liabilities 4,795,944 1,883,058 1,477,888 1,475,058 1,520,299 1,444,936 2,685,006 559,164
Source: Banks Annual Report, Global Research

In terms of interest income, NBK continued to lead its peer by a wide margin. NBK’s interest
income is more than twice that of its nearest conventional banking competitor i.e. Gulf Bank.
However, other smaller banks have also been trying to increase their interest income. The
hike in interest rates since mid-2004 have helped the bank to increase their interest income.
We believe that the banks in Kuwait have greater opportunity to increase their fee based
income. There are number of projects in the pipeline and the booming economy offers diverse
opportunities for the banks which have developed their investment banking divisions. The
total operating income after provisions of the banks witnessed excellent growth in FY2004,
though the banks like Commercial Bank of Kuwait, Burgan Bank, etc. have reduced their
provision for loan losses dramatically. This is the reason why operating income after provision
of some of the banks was inflated in FY2004.

KD’ 000 NBK GB CoBK BB BKME AABK KFH KREB
Operating Statement
Interest Income 228,445 106,935 89,141 74,725 58,064 62,559 133,463 35,936
Interest Expense (76,251) (39,285) (27,603) (41,956) (30,476) (33,221) (71,476) (16,607)
Net Interest Income 152,194 67,650 61,538 32,769 27,588 29,338 61,987 19,329
Non-Interest Income 78,281 35,575 34,394 21,279 24,620 18,506 47,178 12,320
Provisions for loans (15,110) (7,315) (12,491) (2,022) (6,403) (5,670) (13,664) (2,532)
Impairment of inv. Securities - (3,883) (313) -
Operating Income 215,365 95,910 83,441 48,143 45,492 42,174 95,501 29,117
Operating Expense (57,802) (18,668) (18,841) (17,521) (16,714) (13,968) (27,349) (8,982)
Operating Profit 157,563 77,242 64,600 30,622 28,778 28,206 50,038 20,135
Net Profit 150,289 74,646 62,297 29,596 22,776 27,157 74,412 23,519
Overall, Kuwaiti banks have been improving their operating performance over the years
owing to infusion of IT, process re-engineering with emphasis on automation and cost
initiatives in the banking business, to improve service levels. Thus, profits of the banking
sector, which trailed all other sectors in 2003 picked up in 2004. Banks will continue to
benefit from the further hardening of interest rates, with the latest rate hike occurring in
March 2005 bringing the discount rate to 5.25%. On account of falling interest rates till mid-
2004, banks were forced to restructure their balance sheets, growing the size of the loans
and advances segments, which increased rapidly. Also, banks focused heavily on improving
operating efficiency and asset quality during the past period, a move that is currently helping
bolster expectations in the sector. As a result, all 8 banks saw improved profitability during
the FY2004, aggregately up 27.7%, led by Gulf Bank (+54%), Burgan Bank (+45.3%), and
Kuwait Real Estate Bank (+32.2%).


NBK GB CoBK BB BKME AABK KFH KREB
ROAE 28.2% 28.4% 25.6% 14.8% 12.4% 14.4% 24.4% 16.6%
ROAA 2.73% 3.13% 3.10% 1.62% 1.40% 1.70% 2.29% 3.33%
Interest Exp / Interest Income 33.4% 36.7% 31.0% 56.1% 52.5% 53.1% 53.6% 46.2%
Interest Income / Avg Int earning assets 4.47% 5.00% 5.08% 4.87% 4.08% 4.00% 5.60% 5.42%
Interest Exp / Avg Int bearing liabilities 1.60% 1.93% 1.66% 2.66% 2.16% 2.45% 2.60% 3.02%
Net Spread 2.87% 3.07% 3.42% 2.21% 1.92% 1.60% 3.00% 2.41%
Net Interest Margin 2.98% 3.16% 3.51% 2.14% 1.94% 1.90% 2.60% 2.92%
Net Interest Income / Total Operating
63.65% 62.91% 58.78% 63.87% 46.57% 69.6% 50.60% 57.69%
Income
Non Interest Income / Total Operating
36.35% 37.09% 41.22% 36.13% 53.43% 43.88% 49.40% 42.31%
Income
Cash Dividend Payout Ratio 61.00% 75.20% 80.00% 72.70% 43.30% 64.70% 52.50% 49.24%
Cost to Operating Income 26.8% 19.5% 22.6% 36.4% 36.7% 28.0% 28.6% 30.8%
Staff Expenses / Operating Income 16.0% 12.2% 12.7% 17.3% 22.0% 17.0% 27.9% 19.5%
Net Loans / Customer Deposits &
82.0% 93.1% 93.4% 71.5% 86.1% 85.4% 57.9% 98.0%
Deposits from FIs
Gross Loans / Customer Deposits 87.3% 108.3% 117.8% 81.6% 89.5% 98.7% 62.7% 117.3%
Capital Adequacy Ratio 15.00% 17.5% 16.00% 17.80% 16.00% 15.86% N.A. N.A.
Equity to Total Assets 10.1% 14.0% 12.8% 12.7% 11.2% 11.9% 9.4% 22.2%
Equity to Gross Loans 19.8% 21.2% 20.5% 25.9% 22.9% 19.2% 20.3% 33.8%
The strong profitability of banks have also boosted their Return on Average Equity (RoAE)
and Return on Average Assets (RoAA). Gulf Bank has the highest return on equity in the
banking sector in Kuwait as it reported RoAE of 28.4% in FY2004, which was closely
followed by NBK with 28.2%. BKME, AABK and Burgan Bank were the laggards in this
respect as they reported RoAE of less than 15% in FY2004. KFH leads the pack in efficiently
utilizing its assets as it reported the highest Return on Average Assets at 3.33%, which was
followed by Gulf Bank at 3.13%. BKME, Burgan Bank and AABK continued to be at the
bottom three in efficiently utilizing their asset base.
CoBK has the highest net spread among its banking peers in the country. CoBK reported a
net spread of 3.42% in FY2004, which was followed by Gulf Bank (3.07%) and KFH (3%).
BKME and AABK reported the lowest spread in the banking industry in Kuwait. Similarly,
CoBK has the highest net interest margin in Kuwait while Gulf Bank is at the second spot.
As mentioned earlier, banking sector in Kuwait has been witnessing cost rationalization since
the past few years. As a result, cost to operating income after provision for Kuwaiti banks
is on a lower side as compared to their regional counterparts. Gulf Bank reported the lowest
cost to income of 19.5%, which is much lower as compared to its peers in Kuwait. Gulf Bank
was followed by CoBK with cost to income ratio of 22.6%. BKME and Burgan Bank has the
highest cost to income ration of 36.7% and 36.4% respectively. Going forward, we believe
that it will be difficult for banks in Kuwait to lower their costs as they will have to make more

efforts to increase their customer base in view of the impending competition and possible
poaching of staff by foreign banks.
Operational Performance
Kuwaiti banks have made significant investments in Information Technology infrastructure

in order to improve their operating efficiency and enhance customer satisfaction. This has
resulted in banks being able to control their costs, improve employee productivity and
launch new products and services faster. This has enabled banks to compete in the highly
competitive banking environment in Kuwait. As can be seen from the table below, NBK is
Kuwait’s largest commercial bank and has the largest banking network in Kuwait, followed
by CoBK, Gulf Bank and KFH, the Islamic banking institution. In terms of operating income
and operating profit, NBK is way ahead of its rivals. In terms of employee productivity too,
NBK is ahead of its peers with the highest operating income. Though NBK is ahead in terms
of operating income per employee, Gulf Bank is fast catching up NBK in terms of employee
efficiency. The recent right-sizing of the people by Gulf Bank has really helped the bank,
though it would be interesting to see the sustainability of these indicators. Gulf Bank reported
the lowest expenses per employee while it has the highest net profit per employee.
During the past two to three years most banks in Kuwait have been busy upgrading their
technological capabilities. New and sophisticated systems have been introduced allowing
banks to reap efficiency gains. Most banks are now able to monitor sources of costs, profits,
and more importantly, risks. In addition, these systems make the creation of new products
easier and faster. They also allow bank employees to focus on customer service. Since most
of the banks seem to have completed their technology upgradation projects, it would mean
large investment outlays needed for these projects are over. Consequently, banks’ operating
costs have been decreasing. Though in future, with all probability, this will not be the case
and we may witness some increase in cost for some of the banks as they have to incur heavy
marketing costs due to impeding competition from foreign banks.

(Amt in KD 000) NBK GB CoBK BB BKME ABK KFH KREB
No. of Branches 47 33 39 18 18 15 33 6
No. of Employees 1,802 809 765 497 525 509 1,594 340
Total Operating Income (Net of
215,365 95,910 83,441 48,143 45,492 42,174 95,501 29,117
Provisions)
Operating Expenses (57,802) (18,668) (18,841) (17,521) (16,714) (13,968) (27,349) (8,982)
Operating Profit 157,563 77,242 64,600 30,622 28,778 28,206 50,038 20,135
Net Profit 150,289 74,646 62,297 29,596 22,776 27,157 74,412 23,519
Operating Income Per Employee 119.5 118.6 109.1 96.9 86.7 82.9 59.9 85.6
Operating Expense Per Employee 32.1 23.1 24.6 35.3 31.8 27.4 17.2 26.4
Profitability Per Employee 83.4 92.3 81.4 59.5 43.4 53.4 46.7 69.2
Kuwaiti nationals make up only a small proportion of the financial-sector work force, although
they make up a much higher percentage of the managerial staff. The large number of foreign
workers means that banks’ personnel costs are, on the whole, relatively low and that they
have more flexibility in reducing staff to maximize efficiency. However, the banks in Kuwait
are making vigorous efforts to increase Kuwaiti staff due to government’s Kuwaitization

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

Valuation Matrix
The valuation of the banking sector in Kuwait appears to be rather realistic compared to other
related sectors such as Investment companies. Our valuation matrix includes only commercial
banks, both conventional and Islamic. As of April 24h, 2005 the average price earnings ratio
for the banking sector stood at 13.8x based on their 2004 earnings. KFH enjoys the highest
P/E multiple of 16.2x followed by AABK with 15.8x. Burgan Bank enjoys much lower P/E
of 12.2x in the banking industry in Kuwait.
Table 10: Comparative Valuation of Kuwaiti Banks (FY 2004)

Composite Potential
CMP* M-Cap* P/E * P/BV*
Name of Bank Country Reuters Code RoAA RoAE Share Value Upside/ Recommendation
(fils) (KDmn) (x) (x)
(fils) Downside
National Bank of
Kuwait NBKK.KW 1,320 2,145.0 2.7% 28.2% 14.3 3.6 1,497 13.4% Buy
Kuwait
Gulf Bank Kuwait GBKK.KW 1,240 1068.8 3.1% 28.4% 13.6 3.8 1,230 -0.8% Hold
Commercial Bank of
Kuwait CBKK.KW 760 808.0 3.1% 21.5% 12.9 3.4 797 4.8% Hold
Kuwait
Burgan Bank Kuwait BURG.KW 425 365.8 1.6% 14.8% 12.2 1.8 504 18.5% Buy
Al-Ahli Bank of
Kuwait ABKK.KW 500 457.0 1.7% 14.4% 15.8 2.2 568 13.7% Buy
Kuwait
BKME Kuwait BKME.KW 420 295.6 1.4% 12.4% 13.0 1.5 539 28.4% Buy
Kuwait Finance
Kuwait KFIN.KW 1,540 1684.7 2.3% 24.4% 16.2 4.2 1,626 5.6% Hold
House
KREB Kuwait KREB.KW 475 357.2 3.3% 16.6% 12.5 2.0 - - Not rated
The price to book value of the sector was at 2.8 times the book value as of December, 2004
(excluding proposed dividends). KFH enjoys the highest price to book value multiple of 4.2
times followed by Gulf Bank with 3.8 times. BKME has the lowest price to book value of just
1.5 times. The discounting enjoyed by some of the banks is likely to improve from current
levels owing to the further increase in interest rates over the medium term which would result
in higher margins and profits and attractive yields. Increase in interest rates would lead to
substantial improvement in the incomes of large banks such as NBK, KFH and Gulf Bank as
compared to the smaller banks. Another factor which could improve the valuation of banks is
the proposed entry of several of these banks into the fast growing Islamic banking segment.
The entry into this segment could help conventional banks improve their business levels and
enhance profits over the medium term.
The commercial banking sector in Kuwait is saturated and highly competitive. Hence, it is
likely that foreign banks would prefer to buy out the promoters of existing banks than set up
new operations. We expect the sector to witness consolidation over the medium term with
large regional banks and foreign banks acquiring controlling stakes in local banks. Recently,
the Bahrain based Ahli United Bank (AUB) acquired a substantial stake in Bank of Kuwait
and the Middle East (BKME). The likely consolidation in the industry could help improve
valuations especially of small banks which are potential targets for mergers / acquisitions.
Having said that, it should be noted that consolidation in the sector will not be an easy one.
We are going to see a lot more resistance from the existing management of the banks before
they succumb to the competitive pressure of the market. One example in this respect should
be interesting, AUB having taken 48% stake in BKME is not able to take additional 3% stake
to become a controlling entity in the bank.

Burgan Bank
We believe that the current restructuring exercise is expected to positively benefit the bank in
the longer term. Burgan Bank (BB) is expected to continue its focus on improving operating
efficiency and asset quality. Over the medium term, the further hardening of interest rates
is likely to result in the bank improving its profitability significantly. We had recommended
a Buy on the stock with a price target of 487 fils in Oct 2004 when the stock was quoting
at 375 fils. Since then the stock has been quoting in the range of 340 fils to 380 fils. Apart
from the fundamentals, other external factors weighed negatively on the stock. The bank’s
management has been perceived to be very unstable as seen from frequent changes in the top
management of the bank in the past. This creates a lot of doubts over the continuity of the
policies and strategies of the bank. The withdrawal of rating by Fitch was also not perceived
well by the market. Currently, the stock is quoting at a PE of 12.2x and P/BV of 1.81x of its
actual 2004 earnings. Some of the positive events which could provide upward momentum
to the stock is sustain positive performance, rating upgrade by an international rating agency
and consistency of policies and strategies. The estimated fair value of BB’s stock works out
to 503.8 fils based on DDM and peer group valuation method, which is higher by around
18.5% vis-à-vis the current market price of the stock. We believe that the bank’s management
has the potential to create strong value out of its franchise and hence the current discount to
the stock is unwarranted. Therefore, we reiterate our ‘Buy’ recommendation on the stock.
Gulf Bank
Gulf Bank (GB) is expected to continue its focus on improving operating efficiency and
asset quality. The net interest income of the bank is expected to improve by around 19.5%
in 2005 due to the further hardening of the interest rates. Over the medium term, GB is
expected to post stellar performance buoyed by the improvement in its core and non-core
businesses. Since our last investment update in Oct 2004, the stock has moved up sharply by
47.6% to the current 1,240 fils, justifying our earlier buy recommendation. Currently, GB is
trading at 3.8x of its estimated book value and 12.6x of its estimated earnings of 2005. We
have revised upwards our earlier projections due to better FY2004 results of the bank and
improved market conditions. The estimated fair value of GB’s stock works out to 1,230 fils
based on DDM and peer group valuation method, which is lower by around 0.8% vis-à-vis
the current market price of the stock. Though the fundamentals of the bank remained strong,
Commercial Bank of Kuwait (CBoK) commenced operations in 1961 and is the third largest
conventional bank in Kuwait in terms of total assets. Currently, CBoK has the second largest
branch network in Kuwait with 39 branches, giving it a strong position in the domestic retail
banking. The bank is likely to rely on organic growth by introducing innovative product
range and delivery mechanism to capture more customers. However, the bank is weighing
the options of moving to new markets such as Iraq and Turkey in the next couple of years.
CBoK is also planning to increase its branch network in Kuwait by adding 10 new branches
in strategic locations during FY2005. As per the bank’s management, retail & corporate
lending will continue to provide the lucrative growth opportunity for the bank. The bank

reported a 10% growth in its net profits in the FY2004 owing to a substantial reduction
in depreciation (-76% yoy) and also lower provisioning for impairment (-19% yoy) as
compared to the corresponding period in the previous fiscal. CBoK’s total assets decreased
significantly to KD1,825.2mn at the end of Dec2004, representing a decline of 17% over
Dec end 2003. The bank reported a marginal decrease of 0.3% in total loans and advances
(gross) to reach KD1,135.4mn by the end of FY2004. Deposits from customers increased
by 31.8% to KD963.9mn in FY2004, while the deposits from banks & financial institutions,
which have relatively higher cost of servicing declined by 31.3% during the same period.
NPLs as a percentage of gross loans & advances have increased marginally from 11.0% in
FY2003 to 11.4% in FY2004. CBoK reported an EPS of 59 fils per share during FY2004.
The estimated fair value of CBoK’s stock works out to 817 fils based on DDM and relative
valuation method, which is higher by just about 7.5% vis-à-vis current market price of the
stock. Therefore, we re-rate the stock with a ‘Hold’ recommendation.
National Bank of Kuwait (NBK) commenced operations in 1952 and is the largest financial
institution in Kuwait and the fourth largest Arab bank. NBK has the highest credit rating
awarded to banks in the Middle East by rating agencies. NBK’s strong position in domestic retail
banking is likely to remain the bank’s primary catalyst for profitability and growth. The gamut
of products and continuous expansion complements well with the rising domestic liquidity
levels which will help to drive the loan book expansion for the bank in the medium term. It also
has the distinction of being the lowest cost- customer deposit taker among Kuwaiti commercial
banks, an achievement that has provided the bank with a solid platform for profitability in
the current rising interest rate environment. Regional expansion is at the forefront of NBK’s
diversification strategy and may provide the bank with the growth opportunities lacking in its
domestic environment. The bank reported a 23.9% growth in its net profits in the FY2004 owing
to a substantial increase in net interest income (24% y-o-y) as compared to the corresponding
period in the previous fiscal. The bank reported a growth of 10% in total loans and advances
(gross) to reach KD2.83bn at the end of FY2004. Deposits from customers increased by 8%
to KD3.24bn in FY2004. NPLs as a percentage of gross loans & advances have decreased
significantly to 1.5% in FY2004. However, loan loss reserves as a percentage of gross loans
& advances have increased to 3.1% in FY2004 thus leading to a NPL coverage ratio of over
200%. The estimated fair value of NBK’s stock works out to 1,496fils based on DDM and
relative valuation method, which is higher by 13.3% vis-à-vis current market price of the stock.
Therefore, we upgrade our earlier recommendation on NBK to Buy.
Bank of Kuwait & Middle East
Continuing from its improved performance in FY2003, Bank of Kuwait & Middle East
(BKME) has further improved performance in FY2004, as its interest income increased by
21.7% to KD58.1mn during the year from KD47.7mn in FY2003. This is quite impressive as
compared to a decline of 1.5% in interest income during FY2003. To expand its marketing
reach and take the competition head-on, BKME plans to add 4 new branches in Kuwait during
2005, taking the total to 22 branches by the end of 2005. The bank is likely to focus on organic
growth by introducing innovative product range and delivery mechanism to capture more
customers leading to accelerating income growth and margin expansion. We expect strong
growth to continue throughout 2005. We expect BKME to distribute higher dividends going

forward, since it does not have large capex plans in the near future. Based on the dividend
discount method (DDM) and peer group valuation methodology using the Price to Book value
(P/BV) multiple, we value the stock of BKME at 539.1fils. The estimated fair value arrived
at is based on the improved performance of BKME and our expectations about its future
potential. The stock currently trades at around 420fils (24th April 2005), which implies that the
value arrived at, is around 28.4% higher than the current market price. Therefore we maintain
our earlier recommendation and reiterate a Buy on the stock with a medium term outlook.
Al Ahli Bank of Kuwait
Global currently has a “HOLD” recommendation on the ABK stock, issued in our Results Update
on the bank at the end of the third Quarter of 2004. The bank has had a healthy performance in
the year 2004 as well as in the first quarter of 2005. The ABK stock simultaneously gained by
13.6% since our above-mentioned report, justifying our “HOLD” recommendation.
Based on the results for full year 2004 and first quarter of 2005, we have now revised our
earlier projections. The overall changes lead to a higher projected profitability and net spreads
for the bank in the period 2005-’08, than in our late-2004 Update. The book value per share
(BVPS) of ABK was KD0.232 at the end of 2004. At the current stock price of KD0.500, it
is quoting at a P/BV of 2.2x, as against the average P/BV for the Kuwaiti banking industry
of 3.42x. The intrinsic value of ABK of KD0.568 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer valuation method, is higher than the current stock price
of KD0.500 by 13.7%. The composite share valuation translates to forward P/BV multiples
of 2.4x and 2.3x our projected 2005 and 2006 book values per share.
Though smaller than the other Kuwaiti banks, such as National Bank of Kuwait and Gulf
Bank, ABK seems poised to improve its performance further in the coming years and take
better advantage of the emerging opportunities in the market, while simultaneously bringing
in cost efficiencies to improve its margins, as well as improving its asset quality in the
near-term. We, therefore, upgrade ABK to a “BUY”, from our earlier recommendation of
“HOLD”, with a medium-term perspective.
Kuwait Finance House
We believe that Kuwait Finance House (KFH) is well placed to exploit the increase in the
Islamic banking activity in Kuwait and the other GCC markets. The net commission of the
bank is expected to improve as we expect the interest rates to continue moving upwards. The
bank has been exploring the possibility of expanding its regional coverage in order to get the
maximum share in the increasing Islamic banking activities. It is also expanding its presence
internationally especially in the Middle East and Southeast Asia. It has been awarded a license
to operate in Malaysia. However, the estimated fair value of KFH’s stock works out to 1,626fils
based on DDM method, which is up by 5.6% vis-à-vis current market price of the stock. It is
worthwhile to note that since our last report of KFH, the discount rates have increased twice
to reach 5.25% which has considerably affected the valuations. Based on the current growth
potential of the bank, we revise our earlier rating and recommend a ‘Hold’ on the stock.

PLAYERS PROFILES


NBKK.KW
Listing:
Kuwait Stock Exchange BUY
Current Price
1,320 fils
Key Data
EPS (fils) 93 12M Avg. vol. (mn) 0.754
BV (fils) 362.8 52 week Lo / Hi (fils) 1,100 / 1,400
P / E (x) 14.2 Market Cap (KD mn) 2,145mn
P / BV (x) 3.6 Target Price (fils) 1,497
Background
• National Bank of Kuwait (NBK) commenced operations in 1952 and is the largest
financial institution in Kuwait and the fourth largest Arab bank. NBK has the highest
credit rating awarded to banks in the Middle East by rating agencies. NBK is a full
service commercial bank and is mainly active in the fields of retail and private banking,
corporate, investment banking and asset management services. As of year-end 2004,
the bank’s distribution network comprised 47 branches in Kuwait, an off-shore and an
on-shore branch in Bahrain, branches in New York, Jordan and Singapore, as well as
representative offices in Thailand and Vietnam. The number of staff employed by the
group reached 1,802 at year-end 2004.
• NBK’s strong position in domestic retail banking is likely to remain the bank’s primary
catalyst for profitability and growth. The gamut of products and continuous expansion
complements well with the rising domestic liquidity levels which will help to drive the
loan book expansion for the bank in the medium term. It also has the distinction of being
the lowest cost- customer deposit taker among Kuwaiti commercial banks, an achievement
that has provided the bank with a solid platform for profitability in the current rising
interest rate environment. Regional expansion is at the forefront of NBK’s diversification
strategy and may provide the bank with the growth opportunities lacking in its domestic
environment. NBK’s loan portfolio and non-interest income generation is dependent on
domestic transactions because its international operations are relatively modest. During
2004, NBK acquired a 20% stake in International Bank of Qatar (formerly Grindlays
Qatar Bank) in addition to management rights of the bank.
• Several Kuwaiti merchant families collectively hold 80% of the bank’s shares, while the
remaining 20% is publicly traded on the Kuwait Stock Exchange. The shares are widely
held and none of the individual shareholders owns more than 5% of the capital.

Recent Developments
• The operating environment is getting easier for NBK where a rising interest rate environment
will benefit the bank most because of its significant low-cost deposit base. To that effect,
we believe that revenue momentum will be robust from the retail banking activities.
• To meet the expected growth, NBK is planning to increase its branch network in Kuwait
by adding 5 new branches in strategic locations during FY2005 and the first quarter of
FY06. This will increase its reach in Kuwait and improve its ability to service more
customers. Currently the branch network stands at 47.
• NBK is planning to open its first branch in Saudi Arabia in June 2005 and expects to get
a license to open a branch in Dubai shortly.
• Some of the recent changes in the regulatory framework will affect the banks in Kuwait.
Central Bank’s instructions of compliance for the net loans not to exceed 80% of the
total customer deposits and deposits from financial institutions is a major source of worry
for local banks in Kuwait. As per our discussion with the management of NBK, we were
informed that the subject ratio is well within the mandatory requirements and the bank
has still sufficient room to grow its loan book.
• NBK is investing heavily to substantially improve its technology platform. Currently 24

IT projects are in different stages of development.
• NBK is the highest rated bank in the middle-east region with an ‘A+’ rating from Capital
Intelligence, A+ from Fitch, A2 from Moody’s and A from Standard & Poor’s.
• The interest income of the bank increased by 15.3% during the FY2004 to reach
KD228.4mn as compared to KD198mn over the same period last year. The interest
expenses increased marginally by 1% to reach KD76.2mn during the same period.
• This resulted in the net interest income during FY2004 to increase by 24.1% to KD152.1mn
as against KD122.6mn for the full year in the previous fiscal.
• Fees and commissions income were higher by 21% as compared to the same period last
year. The fee income from credit card operations was substantial as the bank issues close
to 45-50% of the market share in Kuwait for VISA and MasterCard. The growth in fee
income was also boosted by strong performance in documentary business, investment
banking and asset management.
• The bank reported other income of KD11.3mn during the period. The improvement in
other income of KD4.4mn was however neutralized by the increase in other expenses.
• The bank reported a 23.9% growth in its net profits in the FY2004 owing to a substantial
increase in net interest income (24% y-o-y) as compared to the corresponding period in
the previous fiscal.

• NBK’s total assets increased marginally to KD5.57bn at the end of Dec2004, representing
an increase of 2% over Dec end 2003. This marginal growth is commendable since the
book sizes of many local banks have declined during the period to comply with regulatory
issues concerning the net inter-bank position of banks while calculating the lending
ceilings. Analyzing this further, it is worthwhile to mention here that the total assets
of NBK’s domestic operations declined from KD3.7bn in 2003 to KD3.6bn in 2004
while total assets of NBK’s international operations increased from KD1.6bn in 2003 to
KD1.9bn in 2004 and hence contributed to the overall growth of the group.
• The bank reported a growth of 10% in total loans and advances (gross) to reach KD2.83bn
at the end of FY2004.
• Despite the stiff competition, deposits from customers increased by 8% to KD3.24bn in

FY2004, while the deposits from banks & financial institutions, which have relatively
higher cost of servicing grew marginally by 1% during the same period.
• NBK went on a hiring spree in 2004 by adding a total of 170 personnel over the year.
We believe that most of the new hires are young local graduates who would be trained to
man the massive retail channels of the bank. They will also help the bank to achieve the
mandated Kuwaitization ratios.
• NPLs as a percentage of gross loans & advances have decreased significantly to 1.5%
in FY2004. However, loan loss reserves as a percentage of gross loans & advances have
increased to 3.1% in FY2004 thus leading to a NPL coverage ratio of over 200%.
• Capital adequacy ratio (CAR) of NBK remains more than adequate at approx. 15% levels.
NBK bought back 7.7mn shares in 2004 which is about 0.5% of the issued share capital
of the bank. Even though management was not specific in terms of timing of any share
buyback, we believe that NBK is no longer cash constrained and hence do not discount
future share buybacks.
• The charge to profit & loss account for general provisions increased by 77% to reach
KD13.8mn at the end of FY2004 as compared to KD7.8mn during the corresponding
period in 2003. The net profit attributable to shareholders after providing for KFAS,
National Labor Support tax, taxation on overseas branches and minority interests was
higher at KD150.2mn, a 24% increase over the corresponding period last year.
Outlook
• The operating environment is getting easier for NBK where a rising interest rate
environment will benefit the bank most because of its significant low-cost deposit base.
To that effect, we believe that revenue momentum will be robust from the retail banking
activities.
• To meet the expected growth, NBK is planning to increase its branch network in Kuwait
by adding 5 new branches in strategic locations during FY2005 and the first quarter of
FY06. This will increase its reach in Kuwait and improve its ability to service more

• NBK is planning to open its first branch in Saudi Arabia in June 2005 and expects to get
a license to open a branch in Dubai shortly.
for local banks in Kuwait. As per our discussion with the management of NBK, we were
informed that the subject ratio is well within the mandatory requirements and the bank
has still sufficient room to grow its loan book.
• NBK is investing heavily to substantially improve its technology platform. Currently 24

IT projects are in different stages of development.
Valuation
• The estimated fair value of NBK’s stock works out to 1,497fils based on DDM and
relative valuation method, which is higher by 13.4% vis-à-vis current market price of
the stock. Our price target represents an implied 2005 P/E multiple of 12.7x based on the
current price.
• It is worthwhile to note that since our last report of NBK, the discount rates have increased
to reach 5.25% which has considerably affected the valuations. We have also revised the
payouts upwards substantially reaching upto 85% in 2008F primarily believing on the
fact that the bank will reward its shareholders and will return to the 2002 levels when we
saw a payout of 90%.
• We maintain our “Buy” recommendation on NBK.

BALANCE SHEET
Amount in Kuwaiti Dinar'000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets:
Bank & cash equivalents 390,181 158,776 391,660 426,591 464,227 479,454 459,404
24
Deposits with Banks 977,080 1,207,530 750,222 1,012,800 1,266,000 1,506,540 1,747,586
Government Treasury bills 621,271 418,345 330,693 340,614 347,426 354,375 361,462
Government Treasury bonds 164,615 227,782 243,116 250,410 255,418 260,526 265,737
Loans and advances 2,234,982 2,583,669 2,831,140 3,170,877 3,456,256 3,732,756 4,031,377
Government debt bonds 165,829 135,320 97,773 58,664 46,931 39,891 35,902
other assets 67,257 55,576 96,394 104,106 112,434 121,429 131,143
Less : provision (92,404) (93,051) (86,418) (101,468) (117,513) (134,753) (153,192)
Total Current Assets 4,528,811 4,693,947 4,654,580 5,262,592 5,831,179 6,360,218 6,879,419
Global Research Kuwait
Investment securities 706,392 717,794 861,026 963,577 1,059,934 1,165,928 1,282,520

Investment securities-Debt 142,144 35,936 38,628 42,491 46,740 51,414 56,555
Investment securities-Equity 564,248 681,858 822,398 921,086 1,013,194 1,114,514 1,225,965
Investment in Associates - - 16,435 16,435 16,435 16,435 16,435
net fixed assets 39,244 39,593 40,942 42,989 44,279 45,607 46,975
Total Assets 5,274,447 5,451,334 5,572,983 6,285,592 6,951,827 7,588,188 8,225,350
Liabilities:
Deposits from banks and FIs 1,502,037 1,385,556 1,397,440 1,509,235 1,599,789 1,695,777 1,797,523
Deposits from customers 2,916,897 3,002,576 3,244,640 3,731,336 4,179,096 4,597,006 5,010,737
Long term borrowings 135,216 133,088 133,088 147,728 161,023 173,905 187,817
Certificate of Deposit 84,500 220,000 20,776 - - - -

Other liabilities 99,430 132,083 121,149 141,744 164,423 182,510 202,586
Total Current Liabilities 4,738,080 4,873,303 4,917,093 5,530,043 6,104,332 6,649,198 7,198,663
Minority Interest 1,854 1,914 1,827 2,057 2,329 2,644 3,001

Owner's Equity:
paid-up equity capital 147,419 147,419 154,790 162,529 162,529 162,529 162,529
share premium account 37,862 37,862 37,862 37,862 37,862 37,862 37,862
proposed bonus shares - 7,371 7,739 - - - -
statutory reserve 73,710 73,710 77,395 81,265 81,265 81,265 81,265
general reserve 116,326 116,410 117,396 117,396 117,396 117,396 117,396
retained earnings 65,953 106,216 153,033 206,106 261,698 313,547 357,653
cumulative change in fair valuation (2,579) 13,420 23,866 23,866 23,866 23,866 23,866
treasury shares - - (10,431) (10,431) (10,431) (10,431) (10,431)
May 2005
proposed dividends 95,822 73,709 92,413 134,899 170,981 210,313 253,545
Total Shareholder's Equity 534,513 576,117 654,063 753,492 845,165 936,346 1,023,686

OPERATING STATEMENT
May 2005
Interest Income 206,721 198,087 228,445 286,200 339,667 392,030 444,248
Net interest income 118,396 122,606 152,194 195,474 228,935 264,032 296,535
Add : Fees and commission 33,256 45,977 55,605 65,614 73,488 80,836 88,920
Add : Foreign exchange gains 7,904 10,877 11,310 12,215 13,192 14,247 15,387
Add : Other operating income 1,091 7,066 11,366 13,185 14,767 16,243 17,868
Less : Provisions for specific loan loss 2,038 (527) (1,325) (1,391) (1,461) (1,534) (1,611)
Less : Provisions for general loan loss (4,623) (7,798) (13,785) (15,050) (16,045) (17,240) (18,440)
Operating income 158,062 178,201 215,365 270,046 312,876 356,585 398,660
Less : Staff costs (28,512) (31,511) (34,395) (39,157) (42,864) (46,713) (49,833)
Less: Other operating expenses (13,792) (16,395) (20,660) (26,195) (28,785) (31,023) (32,690)
Less: Depreciation (3,208) (3,051) (2,747) (3,439) (3,542) (3,877) (3,993)
Operating profit 112,550 127,244 157,563 201,256 237,685 274,973 312,144
Less: Labour tax (2,651) (3,061) (3,783) (4,982) (5,883) (6,806) (7,726)

Less : Contribution to KFAS (1,071) (1,237) (1,529) (1,974) (2,377) (2,750) (3,121)
Less : Taxation on Overseas business (2,645) (1,545) (1,792) (2,228) (2,581) (2,942) (3,289)
Net Profit before minority interest 106,183 121,401 150,459 192,072 226,844 262,476 298,008
Less: Minority Interest (35) (58) (170) (230) (272) (315) (357)
Net Profit attributable to shareholders 106,148 121,343 150,289 191,842 226,573 262,161 297,651
Adjustments
Net Profit for the year 106,148 121,343 150,289 191,842 226,573 262,161 297,651
Trfr to Statutory Reserve - - (3,685) (3,870) - - -
Trfr to Voluntary Reserve - - - - - -
25
Dividend KD (95,822) (73,709) (92,413) (134,899) (170,981) (210,313) (253,545)
Proposed Bonus shares - (7,371) (7,739) - - - -
Treasury Shares - - 365 - - - -
CASH FLOW STATEMENT
Operating
Operating Activities 112,677 132,861 169,134 210,561 246,431 283,592 320,441
26
Profit from operations 106,148 121,343 150,289 191,842 226,573 262,161 297,651
Depreciation 3,208 3,051 2,747 3,439 3,542 3,877 3,993
Profit attributable to minorities 35 58 170 230 272 315 357
Other Income - - (168)
Loan loss provision 2,585 8,325 15,110 15,050 16,045 17,240 18,440
Translation Adjutments 701 84 986 - - - -
Working Capital 219,384 (269,641) 300,674 10,179 13,999 931 (22,137)
Dec/(inc.) in balances with banks (37,057) (230,450) 457,308 (262,578) (253,200) (240,540) (241,046)
Dec/(inc.) treasury bills (253,890) 202,926 87,652 (9,921) (6,812) (6,949) (7,088)
Dec/(inc.) treasury bonds 370,426 (63,167) (15,334) (7,294) (5,008) (5,108) (5,211)
Dec/ (inc) loans and advances (581,907) (345,508) (265,968) (339,737) (285,379) (276,501) (298,621)
Dec/ (inc) Govt. debt bonds 44,432 30,509 37,547 39,109 11,733 7,040 3,989
Dec/ (inc) Other assets 19,953 11,681 (40,818) (7,712) (8,328) (8,995) (9,714)
Inc/(dec) from banks & other financial institutions 376,197 (116,481) 11,884 111,795 90,554 95,987 101,747
Inc/(dec) of customers deposits 207,841 85,679 242,064 486,696 447,760 417,910 413,731
Inc/(dec)Certificate of Deposit issued 84,500 135,500 (199,224) (20,776) - - -
Inc/(dec) other liabilities (11,111) 19,670 (14,437) 20,595 22,679 18,087 20,076
Total Operating 332,061 (136,780) 469,808 220,741 260,430 284,524 298,304
Investing

Capex (2,925) (3,452) (4,144) (5,486) (4,832) (5,205) (5,361)
Acquisition of Investments in Associates - - (16,267)
Purchase of investments (149,735) 4,597 (132,786) (102,551) (96,358) (105,993) (116,593)
Proceeds from sale of premises and equipment 153 52 48
Total Investing (152,507) 1,197 (153,149) (108,037) (101,190) (111,198) (121,954)
Financing
Dividend paid to shareholders (88,451) (95,822) (73,344) (92,413) (134,899) (170,981) (210,313)
Issue of floating rate bonds 135,216 - - 14,640 13,296 12,882 13,912
Acquisition of own shares - - (10,431) - - - -
Total Financing 46,765 (95,822) (83,775) (77,773) (121,604) (158,099) (196,400)
Net Change in Cash 226,319 (231,405) 232,884 34,931 37,637 15,227 (20,050)
Net Cash at beginning 163,862 390,181 158,776 391,660 426,591 464,227 479,454
May 2005
Net Cash at end 390,181 158,776 391,660 426,591 464,227 479,454 459,404
Ratios
Amount in Kuwaiti Dinar National Bank of Kuwait
Ending Date: 2002 2003 2004 2005 2006 2007 2008
Profitability
- Net interest income/Total Op. Income 73% 64% 64% 66% 68% 69% 69%
- Non-interest income/ Total Op. Income 27% 36% 36% 34% 32% 31% 31%
- Non-interest expense/ Total Op. Income 29% 29% 27% 26% 24% 23% 22%
- Commissions/ Total Op. Income 21% 26% 26% 24% 24% 23% 22%
- Dividend payout ratio 90% 61% 62% 70% 76% 80% 85%
Margins
- Net income/ revenues 51% 61% 66% 67% 67% 67% 67%
- Operating profit / revenues 54% 64% 69% 70% 70% 70% 70%
- Interest Expense to Interest Income 43% 38% 33% 32% 33% 33% 33%
- Interest Income to Interest Earning Assets 5.1% 4.4% 5.1% 6.2% 6.6% 6.9% 7.1%
- Interest Expense to Interest Bearing Liabilities 2.1% 1.6% 1.6% 1.8% 2.0% 2.1% 2.2%
- Net Spread 3.04% 2.83% 3.53% 4.46% 4.64% 4.84% 4.95%
Efficiency
-Cost to Total Op Income 29% 29% 27% 26% 24% 23% 22%
- Staff Expense to Total Op Income 18% 18% 16% 15% 14% 13% 13%
Liquidity
- Loans to Interest Earning Assets 49% 55% 61% 60% 59% 59% 58%
- Loans to Customer Deposits &FIs 70% 79% 82% 80% 78% 76% 75%
- Due from Banks to Due to Banks 65% 87% 54% 67% 79% 89% 97%
Credit Quality
- Provisions to Total Op Income 2% 5% 7% 6% 6% 5% 5%
- Non Performing Loans KD'000 83,000 51,000 43,000 47,563 51,844 55,991 60,471
- Loan Loss Reserve KD'000 100,033 93,051 86,418 101,468 117,513 134,753 153,192
- NPL's to (Equity+Loan loss reserve) 3.0% 1.6% 1.2% 1.2% 1.2% 1% 1%
- NPL Coverage 121% 183% 201% 213% 227% 241% 253%
Capital Adequacy
- Equity to Total Assets 10% 11% 12% 12% 12% 12% 12%
- Equity to Gross Loans 24% 22% 23% 24% 25% 25% 25%

- Net Interest Income to Total Op Income 73.3% 64.1% 63.7% 66.3% 67.6% 68.8% 69.4%
- Other Income to Total Op. Income 0.7% 4.0% 5.3% 4.9% 4.7% 4.6% 4.5%
- Change in Net Interest Income -2% 4% 24% 28% 17% 15% 12%
- Change in Fees and Commission 7% 38% 21% 18% 12% 10% 10%
- Change in Fx Income 9% 38% 4% 8% 8% 8% 8%
- Change in Other Income -56% 548% 61% 16% 12% 10% 10%

- Shares in Issue ('000) (Weighted Avg.) 1,474,184 1,474,184 1,547,900 1,625,290 1,625,290 1,625,290 1,625,290
- EPS (fils) 72 78 93 118 139 161 183
- Market Price Year End (fils) 1,080 1,500 1,280 1,320 1,320 1,320 1,320
- P/E 15.00 19.13 13.8 11.2 9.5 8.2 7.2
- P/BV 3.6 4.4 3.5 3.5 3.2 3.0 2.8

Gulf Bank K.S.C

GBKK.KW
Listing:
Kuwait Stock Exchange HOLD
Current Price
1,240 fils
Key Data
EPS (Fils) 91.3 12M Avg. vol. (mn) 0.64
BV (Fils) 323.2 52 week Lo / Hi (Fils) 790 / 1,340
P / E (x) 13.58 Market Cap (KD mn) 1,068.8
Background
• Gulf Bank (GB) is a public shareholding company incorporated in Kuwait in 1960 and
listed on the Kuwait Stock Exchange. The bank offers a full range of banking services
focused on both retail and corporate clients. The bank had 809 employees as of end-
Dec 2004 servicing customers from 33 branches and 79 ATMs spread across strategic
locations in Kuwait.
• In 1999, a group led by the prominent Kuwaiti Al Ghanim family acquired a controlling
stake in the bank and replaced a large part of the management team. Today, the three
largest shareholders, the Al Ghanim family, the Behbehani family, and Mahmoud Haji
Haider control a combined 65% stake in the bank, with Al Ghanim family by far the
largest shareholder.
Recent Developments
• Arab Banking Corporation (B.S.C.) granted a US$100mn, 10 year subordinated term loan
facility to Gulf Bank.
• Other developments in 2004 include further improvements in e-banking channels; adding

Western Union services, growing telebanking services; launching of the Red program for
university students; and enhancing the Gulf Rewards credit card incentive program.
• The bank opened 4 new design branches in 2004 which takes its total branch network in
the country to 33. In addition, the bank added 27 ATMs in 2004 taking Gulf Bank’s total
ATMs to 79.
• Gulf Bank is one of the top rated banks in the region with an ‘A’ rating from Capital
Intelligence, ‘A’ (Fitch), ‘A2’ (Moody’s) and ‘BBB+’ (Standard & Poor’s). The positive

ratings reflect the bank’s sound profitability, good asset quality, stable retail deposit
funding and adequate capitalization.
• The interest income of the bank surged by 22.8% during FY2004 as compared to the same
period last year due to the restructuring of its interest earning assets as well as hardening
of the interest rates in the later half of the year. The northward movement of the interest
rates also raised interest expenses of the bank by 22.1% during the same period.
• The net interest income during the period increased by a healthy 23.1% to KD67.65mn
as a result of strong retail and corporate loan growth, superior corporate loan spreads and
improved balance sheet mix.
• Helped by business volume growth in corporate and retail banking space, fees and
commissions income grew higher by 14.9% to KD17.5mn as compared to the same period
last year. The growth in letters of credit and guarantee commissions and loan protection
insurance income was also strong.
• Income from disposal of investment securities was KD11.44mn in FY2004 as compared to

KD1.28mn in FY2003. This gain was mostly due to the disposal of fixed income securities
and the disposal of the bank’s holding in another Kuwaiti financial institution.
• Foreign exchange earnings were up by 44.3% to KD4.8mn, reflecting increased customer

business volumes and increased proprietary trading income. But the dividend income
declined by 10% to KD1.6mn during the same period. The total non-interest income rose
by 58.6% to KD35.6mn in FY2004. On the back of strong growth in core and non-core
businesses the total operating income after provision surged by 42.7% to KD95.9mn.
• At the same time, the bank was able to control its operating expenses as it grew by only
a modest 9.6% in FY2004 to KD18.7mn. Staff expenses grew marginally by 2.7% to
KD11.7mn while other operating expenses jumped by 33.1% to KD6mn. The growth
in non-staff costs was mainly due to higher marketing expenditure to support the retail
customer acquisition programme. The cost to total operating income after provision
declined sharply to 19.5%, which is the lowest in Kuwait and possibly one of the best
operating efficiency ratio for any bank in the world.
• The provision for loan losses were down by 28.1% to KD7.3mn. The bank reported
54% growth in its net profit to KD74.64mn, reflecting strong growth in all its business
segments. This resulted in its diluted EPS moving up to 86.9 fils from 60.8 fils in 2003.
The bank issued 5% bonus shares in FY2004 and distributed 70% cash dividend.
• GB’s total assets stood at KD2.3bn at the end of FY2004, representing a decline of 7.9%
over its Dec 2003 level. The reduction in total assets led to a significant improvement in
the balance sheet mix. In FY2004, 63.6% of the total assets were deployed in loans and
advances as compared to 57% in FY2003.

• Total loans and advances increased by 3.1% to KD1.5bn. The modest growth in loan
portfolio was to abide by the new loan to deposit ratio. Non-performing loans also
increased to KD45.2mn in FY2004 as compared to KD28.9mn in FY2003. The biggest
concern is that the bank’s post-liberation NPLs more than doubled in FY2004 to KD32mn
as compared to KD15.7mn in FY2003. However, the growth in NPLs in 2004 was mostly
due to two large corporate accounts. The growth in NPLs was fairly modest excluding
these two accounts. The proportion of NPLs to total loans stood at 3% in FY2004 while
the bank has provided for 122.5% of its NPLs at the end of FY2004.
• Despite the stiff competition, deposits from customers increased by 13.5% to KD1.39bn
during the same period, while the deposits from financial institutions, which have
relatively higher cost of servicing increased by around 63.2%.
• The bank pre-paid medium term loans worth KD50mn in FY2004. Long-term lending
was further boosted by issue of subordinated loans amounting to KD44.2mn. As a result
of this Tier-II subordinated loan, capital adequacy ratio improved from 15.5% in FY2003
to 17.5% in FY2004. Thus, the bank remained strongly capitalised to exploit the emerging
opportunities in the region.
• The net interest income of the bank is expected to improve by around 19.5% in 2005 due
to the further hardening of the interest rates.
• Gulf Bank posted record results in Q1 2005. Net profit increased by 26%, to KD16.7mn,
reflecting strong core earnings growth in all business areas. Net interest income increased
by 10%, fees and commissions grew by 15% and treasury income was up 43%.
Outlook
• The net interest income of the bank is expected to improve by around 19.5% in 2005 due
to the further hardening of the interest rates.
• GB is expected to continue its focus on improving operating efficiency and asset quality.
• Over the medium term, GB is expected to post stellar performance buoyed by the
improvement in its core and non-core businesses.
Valuation
• Since our last investment update in Oct 2004, the stock has moved up sharply by 47.6%
to the current 1,240 fils, justifying our earlier buy recommendation.
• Currently, GB is trading at 3.8x of its estimated book value and 12.6x of its estimated
earnings of 2005.
and improved market conditions. The estimated fair value of GB’s stock works out to
1,230 fils based on DDM and peer group valuation method, which is lower by around

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

BALANCE SHEET
Gulf Bank
Assets
Cash & balances with banks 333,485 196,272 234,612 325,183 361,371 454,209 448,444
32
Deposits with banks & other FIs 10,000 300,000 - - - -
Treasury bills & bonds 436,186 452,084 484,359 629,667 755,600 808,492 865,087
Loans and Advances (Gross) 1,101,218 1,460,371 1,509,957 1,581,680 1,708,214 1,921,741 2,161,959
Government Debt Bonds 31,621 15,780 - - - - -
Other Assets 11,481 12,849 12,836 13,606 14,423 15,288 16,205
Less : Provision (40,733) (49,839) (55,366) (60,104) (64,912) (72,065) (79,993)
Investment Securities - Debt 37,198 39,707 16,495 22,268 30,062 36,075 43,290
Investment Securities - Equity 66,733 44,935 71,092 92,420 120,146 144,175 173,010
Fixed Assets 9,919 11,363 12,179 13,032 13,944 14,920 15,964
Total Assets 1,997,108 2,483,522 2,286,164 2,617,751 2,938,848 3,322,835 3,643,967
Liabilities
Due to Banks 245,618 558,623 108,208 86,566 69,253 76,178 83,796
Deposits from FIs 159,195 102,947 167,967 327,536 491,304 638,695 702,564
Deposits from Customers 1,150,332 1,228,169 1,393,738 1,573,530 1,730,883 1,938,589 2,171,220
Medium Term Loan from banks 154,915 204,205 154,205 138,785 124,906 112,415 101,174
Other Liabilities 31,648 33,141 38,465 38,850 39,238 43,162 43,594
Floating rate notes - 58,940 58,940 58,940 58,940 58,940 58,940
Subordinated Loan 44,205 44,205 44,205 44,205 44,205

Owner's Equity
Paid-up equity capital 82,086 82,086 82,086 86,190 86,190 86,190 86,190
Proposed Bonus Shares 4,104
Statutory reserve 43,350 48,368 56,092 64,880 74,741 85,466 97,246
General reserve 2,356 2,356 2,356 2,356 2,356 2,356 2,356
Share premium 46,044 46,044 46,044 46,044 46,044 46,044 46,044
Property reval reserve 5,885 7,115 7,496 7,496 7,496 7,496 7,496
Fair valuation reserve 10,600 22,428 23,844 23,844 23,844 23,844 23,844
Treasury share reserve 4,775 8,749 9,393 9,393 9,393 9,393 9,393
Treasury shares (13,322) (2,943) (20,937) (20,937) (20,937) (20,937) (20,937)
May 2005
Proposed dividend 33,584 35,923 56,116 64,643 73,262 86,190 94,809
Total Shareholder's Equity 255,400 297,497 320,436 349,340 380,118 410,648 438,470
Total Liabilities & Shareholders Equity 1,997,108 2,483,522 2,286,164 2,617,751 2,938,848 3,322,835 3,643,967
OPERATING STATEMENT
Gulf Bank
Interest Income 94,076 87,109 106,935 133,388 157,745 186,112 216,468
May 2005
- Fees and commission 13,140 15,205 17,476 19,661 21,823 24,005 26,406
- Forex 2,764 3,312 4,779 5,066 5,319 5,585 5,864
- Gains / (Losses) from sale of investment securities 261 1,286 11,440 6,881 7,510 7,210 7,570
- Dividend Income 1,726 1,805 1,623 2,310 3,004 3,604 4,325

- Other income 228 828 257 250 250 250 250
- Provisions for loan losses (5,388) (10,168) (7,315) (4,738) (4,808) (7,153) (7,927)
Total Operating income 63,859 67,215 95,910 110,263 125,063 135,863 149,052
Operating Expenses
- Staff costs (11,239) (11,425) (11,730) (13,783) (16,258) (17,662) (19,377)
- Other operating expenses (4,198) (4,556) (6,065) (7,167) (8,754) (9,510) (10,434)
- Depreciation (1,314) (1,053) (873) (1,440) (1,440) (1,440) (1,440)

Operating profit 47,108 50,181 77,242 87,873 98,610 107,251 117,802
- Contribution to KFAS (447) (502) (772) (791) (887) (965) (1,060)
- Directors' fees (108) (108) (108) (108) (108) (108) (108)
- Labour tax (1,046) (1,114) (1,716) (1,955) (2,194) (2,386) (2,621)

Net realised gains during the year - (643) (231) - - - -
33
Trfr to Statutory Reserve (4,711) (5,018) (7,724) (8,787) (9,861) (10,725) (11,780)
Release on disposal of properties - 456 - - - - -
Proposed Bonus Shares (4,104)
Dividend KD (33,584) (35,923) (56,116) (64,643) (73,262) (86,190) (94,809)
CASH FLOW STATEMENT
Gulf Bank
Operating
Depreciation 1,314 1,053 873 1,440 1,440 1,440 1,440
34
Dividend Income (1,726) (1,805) (1,623) (2,311) (3,004) (3,604) (4,325)
Profit on sale of inveastment securities (261) (1,286) (11,440) - - - -
Loss on disposal of premises and equipment 133 (213) - - - - -
Working Capital (6,820) (207,323) 11,917 84,883 37,034 86,171 (4,421)

Deposits with banks and FIs 15,072 (290,000) 300,000 - - - -
Government treasury bonds - - - - - - -
Dec/(inc.) treasury bills and bonds (74,829) (15,898) (32,275) (145,308) (125,933) (52,892) (56,594)
Dec/ (inc) Govt. debt bonds 23,689 15,841 15,780 - - - -
Dec/ (inc) Other assets 1,454 (1,368) 13 (770) (816) (865) (917)
Inc/(dec) from banks (16,497) 313,005 (450,415) (21,642) (17,313) 6,925 7,618
Inc/(dec) from other financial institutions (56,248) 65,020 159,569 163,768 147,391 63,870
Inc/(dec) of deposits from other customers (39,867) 77,837 165,569 179,792 157,353 207,706 232,631
Inc/(dec) other liabilities (900) 37 3,438 385 389 3,924 432
Inc/(dec) Medium Term Loan 154,915 49,290 (50,000) (15,421) (13,878) (12,491) (11,242)
Inc/(dec) Floating rate notes 58,940 - - - - -
Inc/(dec) Subordinated loans 44,205 - - - -
Total Operating 43,535 (150,949) 81,688 173,770 135,699 194,952 114,635

Investing
Capex (1,978) (1,743) (1,308) (2,293) (2,352) (2,416) (2,484)
Purchase of investments (26,035) (5,894) (23,216) (27,101) (35,520) (30,042) (36,050)
Sale of premises and equipment 700 1145 - - - - -
Proceeds from sale and redemption of investments 5,469 37,654 32,826 - - - -
Dividends income from investment securities 1,726 1,805 1,623 2,311 3,004 3,604 4,325
Total Investing (20,118) 32,967 9,925 (27,083) (34,868) (28,853) (34,209)
Financing
Purchase of treasury shares - (4,920) (20,921) - - -
Sale of treasury shares - 19,273 3,571 - - - -
Total Financing (31,985) (19,231) (53,273) (56,116) (64,643) (73,262) (86,190)
May 2005
Net Change in Cash (8,568) (137,213) 38,340 90,571 36,188 92,838 (5,764)
Net Cash at end 333,485 196,272 234,612 325,183 361,371 454,209 448,444
Ratio Analysis
Gulf Bank
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
Margins
- Net income/ Interest Income 48.4% 55.6% 69.8% 63.7% 60.5% 55.8% 52.7%
- Operating profit / Interest Income 50.1% 57.6% 72.2% 65.9% 62.5% 57.6% 54.4%
- Interest Income/ Avg Interest Earning Assets 6.0% 4.5% 5.0% 6.3% 6.7% 7.1% 7.4%
- Interest Expense / Avg Interest Bearing Liabilities 2.6% 1.7% 1.9% 2.5% 2.8% 3.1% 3.4%
- Net Spread 3.44% 2.82% 3.07% 3.76% 3.90% 3.97% 3.97%
Efficiency
Liquidity
- Gross Loans to Customer Deposits 95.7% 118.9% 108.3% 100.5% 98.7% 99.1% 99.6%
- Net Loans to Customer Deposits & FIs 81.0% 106.0% 93.1% 80.0% 74.0% 71.8% 72.4%
- Gross Loans to Total Assets 55.1% 58.8% 66.1% 60.4% 58.1% 57.8% 59.3%
Credit Quality
- Non Performing Loans (KD'000) 31,138 28,948 45,201 50,614 58,079 69,183 82,154
- Loan Loss Reserves (KD'000) 40,733 49,839 55,366 60,104 64,912 72,065 79,993
- Total Provisions to NPL 130.8% 172.2% 122.5% 118.8% 111.8% 104.2% 97.4%
Capital Adequacy
- Investment Income to Total Op. Income 0.4% 1.9% 11.9% 6.2% 6.0% 5.3% 5.1%
- Change in Fees and Commission 7.4% 15.7% 14.9% 12.5% 11.0% 10.0% 10.0%
- Change in Fx Income 57.3% 19.8% 44.3% 6.0% 5.0% 5.0% 5.0%
- Shares in Issue ('000) 820,859 820,859 820,859 861,900 861,900 861,900 861,900
- Weigthed Avg. no. of shares ('000) 799,629 796,550 817,713 861,900 861,900 861,900 861,900
- EPS (fils) 56.9 60.8 91.3 98.6 110.7 120.4 132.3
- Market Price Year End (fils) 630 880 1,080 1,240 1,240 1,240 1,240
- P/E 11.1 14.5 11.8 12.6 11.2 10.3 9.4
- P/BV 2.3 2.7 3.3 3.8 3.5 3.3 3.1
- Cash Dividend Payout 73.8% 74.1% 75.2% 76.0% 76.8% 83.0% 83.2%


CBKK.KW
Listing:
Current Price
760 fils
Key Data
EPS (fils) 59 12M Avg. vol. (mn) 0.90
BVPS (fils) 220.7 52 week Lo / Hi (Fils) 620 / 750
P / E (x) 12.8 Market Cap (KD mn) 808.3
P / BV (x) 3.44 Target Price (fils) 797
Background
• Commercial Bank of Kuwait SAK (CBoK) commenced operations in 1961 and is the
third largest conventional bank in Kuwait in terms of total assets. CBoK is a full service
commercial bank which serves both retail and corporate customers. Currently, CBoK has
the second largest branch network in Kuwait with 39 branches, giving it a strong position
in the domestic retail banking.
• The bank is likely to rely on organic growth by introducing innovative product range
and delivery mechanism to capture more customers. However, the bank is weighing the
options of moving to new markets such as Iraq and Turkey in the next couple of years.
CBoK is also planning to increase its branch network in Kuwait by adding 10 new
branches in strategic locations during FY2005. As per the bank’s management, retail
& corporate lending will continue to provide the lucrative growth opportunity for the
bank.
Al A’meda General Trading and Contracting Company Kuwait 6.26%

Al Sharq Holding Company Kuwait 23.00%
Recent Developments and Outlook
• CBoK is planning to increase its branch network in Kuwait by adding 10 new branches
in strategic locations during FY2005, with 2 new branches slated to open in the first
quarter. This should increase its reach in Kuwait and improve its ability to service more

for local banks in Kuwait. CBoK started the year 2004 with a loans to deposits ratio of
122% and by the end of the year, the ratio was at 95%. At the time of writing this report,
the bank has managed to bring this ratio to mid-80 percentages. This has largely been the
result of a reduction in corporate lending, focus on consumer loan growth and increase
in customer deposits. We expect the bank to meet this regulatory requirement by the
stipulated time.
• The bank is likely to rely on organic growth by introducing innovative product range
and delivery mechanism to capture more customers. However, the bank is weighing the
options of moving to new markets such as Iraq and Turkey in the next couple of years.
As per the bank’s management, retail & corporate lending will continue to provide the
lucrative growth opportunity for the bank. We expect that the significantly improved
product portfolio would lead to accelerating income growth and margin expansion. We
expect strong growth to continue throughout 2005.
• The bank continued its IT infrastructure upgradation program throughout 2004. Currently,
internet banking facilities to customers is made operational whereby a customer can draw
his/her account information from the bank’s database through internet and also conduct
basic transactions.
• CBoK is one of the highly rated banks in the region with an ‘A-’ rating from Capital
Intelligence, A- from Fitch, A2 from Moody’s and BBB+ from Standard & Poor’s.
• The interest income of the bank increased by 15% during the FY2004 to reach KD89.1mn
as compared to KD77.8mn over the same period last year. The interest expenses declined
by 15% to reach KD27.6mn during the same period.
• The net interest income during FY2004 increased by 36% to KD61.5mn as against
KD45.4mn for the full year in the previous fiscal. This increase was aided by a one-time
gain of KD3.2mn arising out of recovery of a previously considered bad debt.
• Fees and commissions income were higher by 8% as compared to the same period last
year. Fee income from credit cards increased by 7%, consumer loan fees increased from
6.5% and retail products fees increased by 15.4% during FY2004. Card fees constituted
22.4% and retail products fees constituted 39.2% of the total fee income in FY2004.
• Investment income, however, declined significantly by 71% during the same period. This
is because of the unusually high base realized in FY2003 due to one time gains arising out
of trading in investment securities.
• The bank reported other income of KD1.1mn during the period. Net gain from forex
transactions stood at KD1.95mn, a decrease of 9% over the same period last year. The
improvement in net interest income was however neutralized by the decline in investment
income, leading to a 4% increase in the total operating income to KD83.4mn at the end of
FY04.

• The bank reported a 10% growth in its net profits in the FY2004 owing to a substantial
reduction in depreciation (-76% yoy) and also lower provisioning for impairment (-19%
yoy) as compared to the corresponding period in the previous fiscal.
• CBoK’s total assets decreased significantly to KD1,825.2mn at the end of Dec2004,

representing a decline of 17% over Dec end 2003. This decline was in line with the
shrinking book size of other local banks to comply with regulatory issues concerning the
net inter-bank position of banks while calculating the lending ceilings.
• The bank reported a marginal decrease of 0.3% in total loans and advances (gross) to
reach KD1,135.4mn by the end of FY2004.
• Despite the stiff competition, deposits from customers increased by 31.8% to KD963.9mn
in FY2004, while the deposits from banks & financial institutions, which have relatively
higher cost of servicing declined by 31.3% during the same period. Long-term borrowings
also saw a major decrease of 56.3% to reach KD192.6mn whereas the bank stopped using
CDs as a source of fund during FY2004.
• NPLs as a percentage of gross loans & advances have increased marginally from 11.0%
in FY2003 to 11.4% in FY2004. However, loan loss reserves as a percentage of gross
loans & advances have increased from 11.8% in FY2003 to 13.4% in FY2004. Capital
adequacy ratio (CAR) of CBoK remains more than adequate at approx. 16% levels.
• The provision for impairments decreased by 19% to reach KD12.6mn at the end of FY2004
as compared to KD15.6mn during the corresponding period in 2003, thus positively
contributing to net profit. Similarly, depreciation charges declined by 76% during the
year to reach KD1.48mn. The net profit attributable to shareholders after providing for
KFAS and National Labor Support tax was higher at KD62.2mn, a 10% increase over the
corresponding period last year.
Valuation
• CBoK reported an EPS of 59 fils per share during FY2004.
• We have revised our earlier projections for CBoK due to the recent regulatory changes
which mandated the bank to contain the loan to deposit. The estimated fair value of
CBoK’s stock works out to 797 fils based on DDM and relative valuation method, which
is higher by 4.8% vis-à-vis current market price of the stock.
• It is worthwhile to note that since our last report of CBoK, the discount rates have
increased to reach 5.25% which has considerably affected the valuations.
• We revised our recommendation to ‘Hold’ on the stock.

BALANCE SHEET
Assets:
Cash and cash equivalents 198,656 127,174 238,528 295,808 286,468 278,635 275,889
Due from Banks and other Fis 173,234 466,852 216,703 379,230 481,622 568,315 653,562
May 2005
Treasury bills and bonds 172,588 222,414 175,835 188,144 201,314 211,379 221,948
Certificates of Deposits 92,627 151,195 10,013 - - - -
Loans and advances 1,089,844 1,139,427 1,135,548 1,203,681 1,287,939 1,378,094 1,474,561
Other assets 3,877 6,458 10,556 11,401 12,313 13,298 14,361
Less : provision (124,075) (134,607) (151,758) (164,904) (182,501) (203,545) (226,345)
Investment securities - debt 14,636 9,327 2,226 8,904 10,685 12,822 15,386
Investment securities - equity 69,898 97,805 110,251 121,276 130,978 141,456 151,358
gross fixed assets 32,774 36,620 39,916 43,508 47,424 51,692 56,345
less: accumulated depreciation (15,343) (20,795) (22,885) (25,387) (28,232) (31,334) (34,714)
net fixed assets 17,431 15,825 17,031 18,122 19,192 20,359 21,630
Total Assets 1,846,047 2,198,250 1,825,221 2,109,891 2,286,593 2,453,609 2,631,211
Liabilities:
Deposits from banks 371,743 367,977 231,987 236,627 241,359 248,600 256,058

Deposits from FIs 80,205 100,131 89,382 134,073 154,184 172,686 189,955
Deposits from customers 767,956 731,202 963,904 1,166,324 1,282,956 1,385,593 1,496,440
Long term borrowings 334,601 440,432 192,615 202,246 212,358 222,976 234,125
Certificate of Deposit 40,000 204,000 - - - - -
Owner's Equity:
premium reserve 30,733 30,733 30,733 30,733 30,733 30,733 30,733
general reserve 17,927 17,927 17,927 17,927 17,927 17,927 17,927
39
property revaluation reserve 8,089 9,239 11,925 11,925 11,925 11,925 11,925
fair valuation reserve 8,459 27,697 31,668 31,668 31,668 31,668 31,668
own shares reserve 1,593 6,090 6,090 6,090 6,090 6,090 6,090
treasury shares (34,157) - (46,231) (46,231) (46,231) (46,231) (46,231)

OPERATING STATEMENT
Interest Income 71,005 77,792 89,141 106,427 122,803 138,652 155,570
40
Add : realised & unrealised gains from investments 344 24,103 6,885 8,489 9,169 9,902 10,595
Add : Dividend income 2,381 3,353 3,854 4,085 4,290 4,461 4,640
Add : Other operating income 948 1,976 1,136 1,420 1,704 2,045 2,413
Reversal of Prior year Property Revaluation Decrease / (Increase) 724 (129) 136 - - - -
Less : Provisions for loan & non cash credit facilities (4,282) (13,585) (12,114) (13,146) (17,597) (21,044) (22,801)
Less : Provisions for investment losses & others 2,762 (2,004) (513) (770) (885) (1,062) (1,274)
Less : Staff costs (9,292) (9,849) (10,569) (10,908) (12,491) (13,644) (15,017)
Operating profit 40,332 57,713 64,600 69,307 75,596 83,382 92,702
Less: Labour tax (879) (691) (1,534) (1,715) (1,871) (2,064) (2,294)

Less : Contribution to KFAS (363) (287) (621) (693) (756) (834) (927)
Less : Directors' fees (148) (148) (148) (148) (148) (148) (148)
Adjustments - 1,578 - - - - -
Trfr to Statutory Reserve (22,113) (11,709) (2,472) - - - -
Dividend KD (29,581) (42,545) (49,889) (54,776) (60,095) (67,008) (74,453)
Additional Dividend KD - (2,327) - - - - -
May 2005
Loss/(gain) on disposal of "available for sale" assets 37 (160) (265) - - - -
Transfer on sale of property - - 6,886 - - - -
CASH FLOW STATEMENT
Operating
Operating Activities (a) 38,319 49,953 67,295 82,398 93,263 104,482 115,514
May 2005
Depreciation 1,655 6,045 1,479 2,502 2,846 3,102 3,381
Revaluation of property (724) 129 (136)
Income from investment securities (2,725) (27,456) (10,739)
Foreign exchange & other loss/(gain) on investment securities 209 63 2
Foreign exchange loss on financing activities (1,932) (2,129) -
Gain on sale of premises
Provision for investment securities
Other provisions and valuation adjustments (2,778) 2,003 (44)
National Labour support tax (1,715) (1,871) (2,064) (2,294)
Paid to KFAS (693) (756) (834) (927)
Fees paid to Directors (148) (148) (148) (148)
Working Capital (b) (309,803) (278,101) 374,723 125,817 (42,540) (45,955) (45,283)
Dec/(inc.) in balances with banks (105,605) (59,306) 250,149 (162,527) (102,392) (86,692) (85,247)
Dec/(inc.) treasury bills and bonds 59,071 (49,826) 46,579 (12,309) (13,170) (10,066) (10,569)
Dec / (inc) Certificate of Deposits (92,627) (58,568) 141,182 10,013 - - -
Dec/ (inc) loans and advances (92,789) (286,948) 8,897 (68,133) (84,258) (90,156) (96,467)
Dec/ (inc) Other assets (1,144) (2,575) (4,099) (845) (912) (985) (1,064)

Inc/(dec) from banks & other financial institutions (112,826) (3,766) (135,990) 138,713 24,844 25,743 24,727
Inc/(dec) of deposits from other customers (59,669) (36,754) 232,702 202,420 116,632 102,637 110,847
Inc/(dec)Certificate of Deposit issued 38,000 164,000 (204,000) - - - -
Inc/(dec) other liabilities 3,605 14,691 3,211 6,427 7,070 7,777 8,554
Total Operating (271,484) (228,148) 442,018 208,215 50,723 58,527 70,232
Investing
Capex ( c) (1,283) (1,850) (3,751) (3,592) (3,916) (4,268) (4,652)
Sale of assets 142 11 11,330
Proceeds from sale and redemption of investments 13,693 60,060 58,641
Dividends income from investment securities 3,353 3,854
Total Investing (14,555) 22,034 16,678 (21,296) (15,399) (16,883) (17,119)
Financing
41
Short term/ Medium term/Long term loan 225,528 107,960 (247,817) 9,631 10,112 10,618 11,149
Acquisition of own shares (34,157) 38,654 (46,231) - - - -
Total Financing 164,781 114,706 (336,593) (40,258) (44,664) (49,477) (55,859)
Net Change in Cash (121,258) (91,408) 122,103 146,662 (9,340) (7,833) (2,746)
Net Cash at end 118,451 27,043 149,146 295,808 286,468 278,635 275,889
RATIOS
Amount in Kuwaiti Dinar 2002 2003 2004 2005 2006 2007 2008
Profitability
- Net interest income/ Total Op. Income 57% 40% 59% 59% 60% 61% 63%
- Non-interest income/ Total Op. Income 43% 60% 41% 41% 40% 39% 37%
- Non-interest expense/ Total Op. Income 28% 28% 23% 24% 24% 24% 24%
- Commissions/ Total Op. Income 27% 24% 25% 24% 24% 23% 22%
Margins
- Net income/ revenues 55% 73% 70% 63% 59% 58% 57%
- Operating profit / revenues 57% 74% 73% 65% 62% 60% 60%
- Interest Expense to Interest Income 49% 42% 31% 38% 37% 37% 36%
- Net Spread 2.11% 2.14% 3.07% 3.73% 3.87% 3.98% 4.09%
Efficiency
-Cost to Total Op Income 28% 28% 23% 24% 24% 24% 24%
Liquidity
- Loans to (Customer Deposits+FIs) 114% 121% 93% 80% 77% 75% 74%
Credit Quality
- Provisions to total Op Income 3% 19% 15% 15% 19% 20% 20%
- Provisions to Average loans 0.4% 1.2% 1.1% 1.1% 1.4% 1.6% 1.6%
- Non Performing Loans KD'000 126,376 124,959 129,804 132,405 141,673 151,590 162,202
- Loan Loss Reserve KD'000 100,033 134,607 151,758 164,904 182,501 203,545 226,345
- NPL's to (Equity+Loan loss reserve) 10% 9% 9% 9% 9% 9% 9%
- NPL Coverage (incl. Interest in suspense) 79% 108% 117% 125% 129% 134% 140%
Capital Adequacy
- Equity to (Total Assets + Cont. Liabilities) 11% 14% 16% 14% 14% 14% 14%

- Net Interest Income to total Op Income 57.1% 39.6% 59.2% 58.7% 59.7% 60.8% 62.6%
- Investment Income to Total Op Income 9.8% 31.7% 12.3% 13.0% 12.6% 12.1% 11.4%
- Change in Net Interest Income -16% -1% 55% 8% 12% 12% 14%
- Change in Investment Income 0% 364% -60% 15% 7% 6% 5%
- Change in Fx Income 33% 26% -9% 7% 7% 7% 7%
- Change in Other Income 4% 108% -43% 25% 20% 20% 18%

- Shares in Issue ('000) (Weighted Avg.) 1,033,684 1,044,906 1,056,496 1,063,620 1,063,620 1,063,620 1,063,620
- EPS (fils) 37.7 54.2 59.0 62.8 68.5 75.5 84.0
- Market Price Year End (fils) 490.00 720.00 700.00 760.00 760.00 760.00 760.00
- P/E 13.01 13.30 11.9 12.1 11.1 10.1 9.1
- P/BV 2.8 3.0 3.2 3.3 3.1 3.0 2.8

Burgan Bank K.S.C

BURG.KW
Listing:
Current Price
425 fils
Key Data
EPS (fils) 34.9 12M Avg. vol. (mn) 2.94
BVPS (fils) 235.4 52 week Lo / Hi (fils) 335 / 425
P / BV (x) 1.81 Target Price (fils) 503.8
Background
• Burgan Bank (BB) is a public shareholding company incorporated in Kuwait and listed
on the Kuwait Stock Exchange. The bank was established in 1977 and was privatized
in 1997. The bank offers a full range of banking services focused on both retail and
corporate clients. The bank had 497 employees as of end-Dec 2004 servicing customers
from 18 branches spread across strategic locations in Kuwait.
• The principal shareholders of the bank as of Dec 31, 2004 were Kuwait Projects Company
with 33.9% stake and Wafra International Investment Company with a stake of 5.7%.
Recent Developments
• Since the last couple of years, the bank embarked on a restructuring spree and has
developed a new organisational structure to optimally serve the objectives of the bank.
Major initiatives have been undertaken for retail, corporate and international banking as
well as treasury to reinforce after-sales service and to increase operational efficiency.
• Another major initiative during 2004 was the establishment of corporate governance
practices in the bank.
• The bank opened a new branch in South surra and more branches are due to open during
2005. In addition, the bank opened a new call centre to serve its growing customers.
• Because of its huge investments in technology, the bank was chosen as the government’s
partner for e-government initiatives.
• In May 2004, Capital Intelligence upgraded bank’s financial strength rating to “BBB”
with a positive outlook for the bank’s position in foreign currencies.

• Burgan Bank and Wataniya Telecom recently announced the first major step in the region
towards mobile commerce.
• The bank falls short by just 1.8% of our projected net interest income for FY2004 while
beat our forecasts for net profit by 3.4%.
• The interest income of the bank increased by 15.8% to KD74.7mn during FY2004 as
compared to the same period last year. However, interest expenses increased by just 5.6%
to KD41.9mn during the same period. As a result, the net interest income during the
period surged by 32.2% to KD32.7mn.
• Fees and commissions income reported a drop of 6.6% to KD13.3mn as compared to

the same period last year. Investment income also declined sharply by 68% to KD3.7mn
during the same period. As a result, the total non-interest income of the bank declined by
28.7% to KD21.27mn.
• Provision for loan losses were declined substantially by 82% to KD2mn while provision
for investment losses increased by 15.3% to KD3.9mn.
• On the back of improved net interest income and substantial decline in provision for loan
losses the total operating income after provision increased by 20% to KD48.1mn.
• The bank was able to substantially control its expenses as it declined by 8% to KD17.5mn.
As a result, the cost to operating income after provision of the bank declined to 36.4% in
• The net profit attributable to shareholders after providing for KFAS and National Labor
Support tax was higher by 45.3% at KD29.6mn over the corresponding period of the last
fiscal.
• BB’s total assets stood at KD1.74bn at the end of Dec 2004, representing a decline of
9.5% over Dec 2003. This decline was due to the substantial decline in deposits with
banks and FIs and decline in loans and advances portfolio.
• Gross loans and advances portfolio declined by 5.5% to KD855mn over December 2003.
This decline has more to do with the regulatory issues which requires banks to maintain
80:20 deposits ratio by July 2005. The bank has already complied with this ratio and has
significant leeway to explore credit opportunities in the country.
• The deposits with banks and financial institutions declined by 62% to KD114.6mn. The
decline in deposits with banks and financial institutions was due to the regulatory issue by
which CDs/MTLs are to be netted off for 88:12 ratio thus closing the loophole whereby
banks were using back-to-back interbank funding to expand retail loan capacity.
• The proportion of NPL to gross loans stood at 5.6% while the bank has provided for
84.5% of its NPL at the end of Dec 2004.

• The bank made great strides in securing lower cost funding as deposits from customers
increased by 12.5% to KD1.05bn over Dec 2003, while the deposits from financial
institutions, which have relatively higher cost of servicing declined by around 30% during
the same period.
• The bank is strongly capitalised with a CAR of 17.8% as of FY2004. This should result
in the bank exploiting the tremendous lending opportunities in the region.
Outlook
• The current restructuring exercise is expected to positively benefit the bank in the longer
term.
• BB is expected to continue its focus on improving operating efficiency and asset quality.
• Over the medium term, the further hardening of interest rates is likely to result in the bank
improving its profitability significantly.
Valuation
• We had recommended a Buy on the stock with a price target of 487 fils in Oct 2004 when
the stock was quoting at 375 fils. Since then the stock has been quoting in the range of 340
fils to 380 fils. Apart from the fundamentals, other external factors weighed negatively
on the stock. The bank’s management has been perceived to be very unstable as seen
from frequent changes in the top management of the bank in the past. This creates a lot
of doubts over the continuity of the policies and strategies of the bank. The withdrawal of
rating by Fitch was also not perceived well by the market.
• Currently, the stock is quoting at a PE of 12.2x and P/BV of 1.81x of its actual 2004
earnings.
• Some of the positive events which could provide upward momentum to the stock is sustain
positive performance, rating upgrade by an international rating agency and consistency of
policies and strategies.
• The estimated fair value of BB’s stock works out to 503.8 fils based on DDM and peer
group valuation method, which is higher by around 18.5% vis-à-vis the current market
price of the stock.
• We believe that the bank’s management has the potential to create strong value out of
its franchise and hence the current discount to the stock is unwarranted. Therefore, we
reiterate our ‘Buy’ recommendation on the stock.

Balance Sheet
Burgan Bank
Amounts in KD ' 000 2002 2003 2004 2005 F 2006 F 2007 F 2008 F
Assets
46
Bank & Cash equivalents 181,325 165,277 265,587 269,793 260,211 268,960 311,515
T bills & bonds 296,172 326,351 309,034 321,395 337,465 354,338 372,055
Deposits with banks & FIs 179,226 299,573 114,570 121,444 128,731 136,455 144,642
Loans & Advances - Gross 768,095 904,768 855,065 932,021 1,043,863 1,169,127 1,297,731
Other Assets 25,464 27,354 18,002 18,722 19,471 20,250 21,060
Less: Provisions (38,956) (47,351) (40,603) (45,669) (51,671) (59,626) (68,780)
Investments - Debt 57,209 6,205 4,091 4,418 4,772 5,154 5,566

Investments - Equity 105,284 80,608 80,353 86,781 93,724 101,222 109,319
Gross Fixed Assets 29,157 32,146 34,568 38,025 41,827 46,010 50,611
Less: Acc Depreciation (9,190) (11,464) (14,181) (17,019) (19,990) (23,108) (26,386)
Net Fixed Assets 19,967 20,682 20,387 21,006 21,837 22,903 24,225
Total Assets 1,756,416 1,920,300 1,738,743 1,825,331 1,939,509 2,087,722 2,275,932
Liabilities
Deposits from other FIs 175,758 130,360 91,412 94,154 96,979 102,798 109,994
Deposits from customers 831,618 931,491 1,048,303 1,111,201 1,200,097 1,320,107 1,478,520

Total current liabilities 1,484,265 1,589,290 1,411,778 1,485,580 1,585,708 1,720,195 1,894,723
Other borrowed funds 89,942 119,470 105,885 105,885 105,885 105,885 105,885
Owner's equity
Proposed bonus shares 3,903 4,098 - - - - -
Share premium 64,759 64,759 64,759 64,759 64,759 64,759 64,759
Voluntary reserve 12,727 14,764 17,724 21,272 25,306 29,661 34,279
Investment Revaluation Reserve 1,388 16,740 18,750 18,750 18,750 18,750 18,750
Treasury shares (78) (224) (10,115) (10,115) (10,115) (10,115) (10,115)
May 2005
Treasury shares reserve 1,547 1,547 1,599 1,599 1,599 1,599 1,599
Proposed dividend 6,243 12,282 21,515 24,957 28,400 30,982 33,563
Total Shareholders Equity 182,209 211,540 221,080 233,865 247,916 261,641 275,325
Total liabilities & Shareholders Equity 1,756,416 1,920,300 1,738,743 1,825,331 1,939,509 2,087,722 2,275,932
Income Statement
Burgan Bank
Interest Income 64,034 64,502 74,725 88,734 100,561 115,438 131,876
May 2005
Net Interest Income 21,316 24,785 32,769 37,978 43,442 48,599 52,882
Add: Fees & Commission 16,787 14,289 13,343 14,811 16,292 17,921 19,355
Add: Foreign Exchange Gain 1,056 1,019 1,179 1,262 1,350 1,417 1,488
Add: Net gains from investment securities 6,632 11,731 3,766 6,384 5,910 5,319 4,595
Add: Dividend Income 1,547 1,905 2,907 3,198 3,517 3,869 4,256
Add: Other Income 157 915 84 87 89 92 95
Less: Prov for loan (14,708) (11,143) (2,022) (5,066) (6,002) (7,954) (9,154)
Less: Prov for investment losses (60) (3,368) (3,883) (3,648) (3,940) (4,255) (4,595)
Operating Income 32,727 40,133 48,143 55,005 60,658 65,008 68,922
Less: Staff Costs (9,150) (8,373) (8,332) (8,801) (9,099) (9,751) (10,338)
Operating profit 13,271 21,096 30,622 35,478 40,338 43,556 46,177

Less: KFAS (119) (190) (276) (319) (363) (392) (416)
Less: NLST (296) (468) (680) (789) (897) (968) (1,027)
Less: Director's fees (70) (70) (70) (70) (70) (70) (70)
Net Profit 12,786 20,368 29,596 34,300 39,008 42,125 44,665
P&L Appropriation Account

Opening balance of retained earnings 1,326 1,312 1,226 3,442 5,689 8,230 10,662
Net profit 12,786 20,368 29,596 34,300 39,008 42,125 44,665
Trf to statutory reserves (1,327) (2,037) (2,960) (3,548) (4,034) (4,356) (4,618)
Trf to voluntary reserves (1,327) (2,037) (2,960) (3,548) (4,034) (4,356) (4,618)
47
Dividend (6,243) (12,282) (21,515) (24,957) (28,400) (30,982) (33,563)
Dividend Paid 55
Proposed Bonus Shares (3,903) (4,098)
cl balance of retained earnings 1,312 1,226 3,442 5,689 8,230 10,662 12,528
Cash flow Statement
Burgan Bank
Operating
Operating Actvities (a) 21,649 23,618 31,545 32,623 38,554 44,009 48,246
Operating profit for the year 13,271 20,368 29,596 35,478 40,338 43,556 46,178
48
Depreciation 1,789 2,375 2,717 2,838 2,971 3,118 3,279
Dividend Income (1,547) (1,905) (2,907) (3,198) (3,518) (3,869) (4,256)
Net gains from investment securities (6,632) (11,731) (3,766) (6,384) (5,910) (5,319) (4,595)
Impairment of investment securities 60 3,368 3,883 - - - -
Provisions 14,708 11,143 2,022 5,066 6,002 7,954 9,154
Other mandatory payments - - (1,178) (1,330) (1,431) (1,513)
Working Capital (b) (31,748) (152,913) 91,657 (6,271) (21,508) (3,986) 29,550
Dec/(Inc.) in T bills & bonds (49,511) (30,179) 17,317 (12,361) (16,070) (16,873) (17,717)
Dec/(Inc.) deposits with banks & Fis (88,877) (120,347) 185,003 (6,874) (7,287) (7,724) (8,187)
Dec/(Inc.) loans & advances (166,381) (137,146) 40,749 (76,956) (111,843) (125,264) (128,604)
Dec/(Inc.) govt. debt bonds 37,539 25,797 24,576 16,839 14,313 12,166 10,341
Dec/(Inc.) other assets 1,650 6,212 1,340 (720) (749) (779) (810)
(Inc.)/Dec from banks & Fis 191,738 (866) (306,594) 9,626 9,915 13,122 14,718
(Inc.)/Dec other customers 41,376 99,873 116,812 62,898 88,896 120,010 158,413
(Inc.)/Dec other liabilities 718 3,743 12,454 1,278 1,317 1,356 1,397
Total Operating (10,099) (129,295) 123,202 26,352 17,047 40,023 77,797
Investing
Capex © (4,131) (3,090) (2,422) (3,457) (3,803) (4,183) (4,601)

Proceeds from sale & redemptions of investments 27,290 92,844 20,506 6,384 5,910 5,319 4,595
Dividend received 1,547 1,905 2,907 3,198 3,518 3,869 4,256
Total Investing (73,919) 90,108 12,759 (631) (1,671) (2,874) (4,260)
Financing
Other Borrowed Funds 29,226 29,528 (13,585) - - - -
Sale (purchase) of treasury shares (78) (146) (9,839) - - - -
Total Financiang 11,975 23,139 (35,651) (21,515) (24,957) (28,400) (30,982)
Net change in Cash (72,043) (16,048) 100,310 4,206 (9,582) 8,748 42,555
Cash & Short-term funds at the beginning of the year 253,368 181,325 165,277 265,587 269,793 260,211 268,960
May 2005
Net cash at end 181,325 165,277 265,587 269,793 260,211 268,960 311,515
Actual cash at end 181,325 165,277 265,587 269,793 260,211 268,960 311,515
Ratios
Burgan Bank
2002 2003 2004 2005 F 2006 F 2007 F 2008 F
Profitability
- Net interest income/ Total Op. Income 20.2% 34.0% 63.9% 59.8% 61.7% 62.5% 63.4%
- Non-interest income/ Total Op. Income 79.8% 66.0% 36.1% 40.2% 38.3% 37.5% 36.6%
- Commissions/ Total Op. Income 51.3% 35.6% 27.7% 26.9% 26.9% 27.6% 28.1%
Margins
- Net income/ revenues 20.0% 31.6% 39.6% 38.7% 38.8% 36.5% 33.9%
- Operating profit / revenues 20.7% 32.7% 41.0% 40.0% 40.1% 37.7% 35.0%
- Interest Income to Avg Interest Earning Assets 4.53% 4.11% 4.87% 6.18% 6.55% 6.93% 7.30%
- Interest Expense to Avg Interest Bearing Liabilities 3.01% 2.46% 2.66% 3.36% 3.58% 3.90% 4.23%
- Net Spread 1.52% 1.65% 2.21% 2.83% 2.97% 3.03% 3.07%
Efficiency
Liquidity
- Gross Loans to Customer Deposits 92.4% 97.1% 81.6% 83.9% 87.0% 88.6% 87.8%
- Net Loans to Customer Deposits & FIs 72.4% 80.7% 71.5% 73.5% 76.5% 78.0% 77.4%
- Gross Loans to total Deposits 52.6% 58.0% 62.5% 64.6% 67.8% 69.9% 70.3%
- Customer Deposits to Equity 4.6 4.4 4.7 4.8 4.8 5.1 5.4
- Gross Loans to Assets 43.7% 47.1% 49.2% 51.1% 53.8% 56.0% 57.0%
- Liquid assets to total Assets 37.4% 41.2% 39.6% 39.0% 37.5% 36.4% 36.4%
Credit Quality
- Loan Loss Reserve (KD'000) 38,956 47,351 40,603 45,669 51,671 59,626 68,780
- Loan Loss Reserve to NPL 80.3% 87.3% 84.5% 84.5% 83.9% 85.0% 88.3%
- Loan loss provision to Gross Loans 1.91% 1.23% 0.24% 0.54% 0.58% 0.68% 0.71%
Capital Adequacy
- Interest Income to Total Op. Income 20.2% 34.0% 63.9% 59.8% 61.7% 62.5% 63.4%
- Gains from investment securities to Total Op. Income 20.1% 20.8% -0.2% 5.0% 3.2% 1.6% 0.0%
- Change in Interest Income -15.0% 0.7% 15.9% 18.7% 13.3% 14.8% 14.2%
- Change in Fees and Commission 64.9% -14.9% -6.6% 11.0% 10.0% 10.0% 8.0%
- Change in Fx Income 9.2% -3.5% 15.7% 7.0% 7.0% 5.0% 5.0%
- Shares in Issue ('000) 819,623 860,604 860,604 860,604 860,604 860,604 860,604
- Weighted Avg. no. of shares ('000) 859,832 847,735 860,604 860,604 860,604 860,604
- EPS (fils) 15.6 23.7 34.9 39.9 45.3 48.9 51.9
- P/E 20.2 15.0 10.3 10.7 9.4 8.7 8.2
- P/BV 1.47 1.53 1.53 1.75 1.67 1.59 1.51

The Bank of Kuwait and Middle East K.S.C

BKME.KW
Listing:
Current Price
420 fils
Key Data
BVPS (fils) 278.5 52 week Lo / Hi (fils) 420 / 750
P / BV (x) 1.5 Target Price (fils) 539.1
Background
• BKME has segregated its primary business into two distinct categories, in-line with its
internal reporting. Retail & commercial banking - include full range of credit & deposit
services, for retail and corporate customers. Other services in the retail banking category
include credit & internet card products, personal & Al-Awsat loans, private banking and
wealth management services to retail customers.
• Treasury & Investment Management - includes correspondent banking, money & debt
market operations, forex management, proprietary investments, securities trading &
fiduciary fund management.
• Following the sale of the Kuwaiti government's controlling stake in 2002, Ahli United
Bank Bahrain (AUB) started increasing its stake in BKME from 15% it acquired in 2001.
During the course of privatization, AUB increased its stake to its present 47.7% in 2004
and now has effective control of the board. The latest shareholding pattern is as follows,
Table 1: Shareholding pattern of BKME

ENTITY SHARE
Ahli United Bank B.S.C 47.7%
International Financial Advisors 25.0%
Wafra International Investment Co. 6.4%
KIA 4.4%
Others 16.5%
TOTAL 100.0%

Recent Developments
• Capital Intelligence has upgraded BKME's Foreign Currency Long Term Rating to A-,
with a stable outlook. BKME had raised KD50mn in 2003 (maturing 2006) and further
KD100mn (maturing 2007) in 2004. The respective amounts have been pre-paid by the
bank in FY2004, much ahead of their respective maturities. On 22nd December 2004,
BKME further raised US$200mn (KD58.9mn), medium term (3years) loan facility at an
interest rate of 37.5 basis points above LIBOR.
• As part of its core strategy BKME is showing greater focus on its retail & commercial
banking segment, which contributed 67.1% of the total income, and has grown by 27.6%
in FY2004. This is further reinforced by the initiatives taken by the bank to increase its
branch and ATM network. BKME opened one new branch in 2004, taking the total to 18
branches in Kuwait.
• BKME is the first bank in Kuwait, to offer on-line trading (internet based) in stocks listed
on the KSE and US stock markets. As part of this service, investors can trade in KSE
stocks from anywhere in the world using the internet.
• BKME is also planning to increase its network of branches in Kuwait to 22, by adding
another 4 new branches (one in a mall and three stand-alone branches) in FY2005. This
should increase its reach in Kuwait and improve its ability to service more customers.
• BKME hopes to capture growth in the coming years from its focus on retail & commercial
banking operations. It is also exploring the option of outsourcing its credit card services to
Dubai in the near future, to rein in its operating expenses.
• Continuing from its improved performance in FY2003, BKME has further improved
performance in FY2004, as its interest income increased by 21.7% to KD58.1mn during
the year from KD47.7mn in FY2003. This is quite impressive as compared to a decline of
1.5% in interest income during FY2003. Interest expense for the bank increased by only
16.7% to KD30.5mn, which is less than the increase in revenues, hence increasing the net
interest income by 27.7% to KD27.6mn (KD21.6mn in the previous year).
• Interest income is driven by the increase in interest earning assets, which have grown at a
CAGR of 7.3% during FY2000-2004. The 21.7% increase in interest income in FY2004
is partly explained by the 8.4% increase in interest earning assets. The balance can be
explained by the fact that interest rates have increased in 2004 by 125bps during July
2004 (3.5%) and December 2004 (4.75%).
• BKME's total income increased to KD75.6mn in FY2004, 11.9% from KD67.6mn in

FY2003. Interest income contributed 70% of the total income in FY2004, remaining at
the FY2003 level. Fee and commissions contributed 14% to the total income in FY2004,
decreasing marginally from 15% in FY2003.

• Other major component of total income is gains on divestments by bank’s subsidiary,

which contributed KD6.5mn, 8% to the total income in FY2004. This represents realized
gains by KMEFIC on sale of 79.72% interest in its wholly owned subsidiary.
• Further break up of total revenues indicate that revenues from retail & commercial banking
segment contributed 67.1% to the total revenues in FY2004 (58.8% in FY2003), growing
by 27.6% from FY2003. While its treasury and investment management contributed the
balance 32.9% (41.2% in FY2003), declining by 10.5%.
• Staff cost and other operating expenses have increased by 6.8% and 12.2% respectively
in FY2004. However as a % of operating income, BKME has managed to reduce its
operating costs and its staff expenses, from 43.8% & 25.4% respectively in FY2003 to
36.7% & 22.0% respectively in FY2004.
• Net profit for BKME has increased by 19.4% to KD22.7mn in FY2004 from KD19.1mn in
FY2003, thereby increasing the EPS to 32.4fils from 27.1fils during the same period. On
back of increase in net profits for the current year, ROAE and ROAA has also increased
to 12.4% and 1.4% respectively in FY2004 from 11.8% and 1.3% in FY2003.
• BKME reported a net profit margin of 39.2% in FY2004, declining marginally from 40.0%
in FY2003. Based on its improved performance, BKME has declared a 14% (14fils per
share) dividend for FY2004, up from 12% (12fils per share) in FY2003.
• BKME has increased its net spread in FY2004 to 1.9% from 1.6% in FY2003, on back of
increase in interest income from interest earning assets to 4.1% in FY2004 from 3.6% in
FY2003. Its interest expense for FY2004 was 2.2%, remaining more or less at the same
levels in FY2003 (2.1%).
• BKME's net interest margin changed marginally from 1.6% in FY2003 to 1.8% in
FY2004. However the bank has reigned its interest cost over the years, as its interest
expense due to the interest bearing liability has decreased from 2.8% in FY2002 to 2.2%
in FY2004. This is also due to falling interest rates in the Kuwaiti market in latter part if
2004.
• In December 2004, BKME has raised US$200mn (KD58.94mn) medium term loan,
maturing in 2007 at LIBOR-linked rates. Deposits from banks and financial institutions
have increased by 26.6% to KD371.3mn, while its deposits from customers increased
by 22.7% to KD955.0mn. Interest bearing liabilities of BKME are worth KD1.52bn, up
17.1% in FY2004, from KD1.29bn in FY2003.
• Loan and advances portfolio of the bank have increased by 24.9% to KD854.9mn during
FY2004 as compared to FY2003. Other interest bearing assets includes treasury bills &
bonds which increased by 5.1%.
• Government debt bonds (GDBs) on BKME's balance sheet declined by 21.1% in FY2004,
as CBK redeemed KD34.0mn worth of GDBs during the year, bringing the total down to
KD127.12mn from KD161.1mn in FY2003.

• Non-performing loans (NPLs) of the bank stood at KD26.7mn in FY2004, up 6.2% from
KD25.1mn in FY2003, while the loan loss reserves increased by 17.8% to KD32.5mn
in FY2004, from KD27.6mn in FY2003. NPLs as a % of gross loans & advances have
decreased from 3.7% in FY2003 to 3.1% in FY2004.
• Similarly, loan loss reserves as a % of gross loans & advances have also decreased from
4% in FY2003 to 3.8% in FY2004. BKME has provided more than adequate coverage
of its NPLs, as provisions as a % of NPLs stand at 122% as of FY2004 up from 110% in
FY2003. This is indicative of rising credit quality of the bank's portfolio.
Outlook
• To expand its marketing reach and take the competition head-on, BKME plans to add 4
new branches (three stand-alone & one in a leading mall) in Kuwait in 2005, taking the
total to 22 branches in Kuwait by the end of 2005.
• BKME offers a full range of credit portfolio to service its local clients – both corporate
and retail. It has further enhanced its ability to provide US$-denominated credit-lines
to its corporate clients, by way of raising a 3-year medium term loan of US$200mn in
2004.
• BKME is also focusing actively on the retail side of the banking business, by aggressively
marketing its banking & investments products, which includes – ability to trade online in
Kuwaiti and International stocks, providing retail & personal loans, Al-Awsat Investment
Portfolio etc.
• The banking sector in Kuwait is expected to become competitive with the onset of three
foreign banking entities in Kuwait, which have been recently given license to operate in
Kuwait. These include BNP Paribas, HSBC and National Bank of Abu Dhabi (NBAD),
which have been allowed to enter the Kuwaiti market. These along with 2 Islamic banking
outfits licensed to operate in the Kuwaiti market, will add to the competitive woes of
BKME.
• The bank is likely to focus on organic growth by introducing innovative product range and
delivery mechanism to capture more customers. We expect that the significantly improved
product portfolio would lead to accelerating income growth and margin expansion. We
expect strong growth to continue throughout 2005.
Valuation
• BKME had a turnaround in FY2003, and it has further improved its performance during
the FY2004, increasing its interest income, net interest income, operating profits and net
profits.
• We expect BKME to distribute higher dividends going forward, since it does not have
large capex plans in the near future, except for opening 4 branches in FY2005, which has
been factored into our expectations for dividend payout for FY2005.

• Based on the dividend discount method (DDM) and peer group valuation methodology
using the Price to Book value (P/BV) multiple, we value the stock of BKME at 539.1fils.
The estimated fair value arrived at is based on the improved performance of BKME and
our expectations about its future potential.
• The stock currently trades at around 420fils (24th April 2005), which implies that the
value arrived at, is around 28.4% higher than the current market price. Therefore we
maintain our earlier recommendation and reiterate a Buy on the stock with a medium term
outlook.

BALANCE SHEET
Amount in KD' 000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets
May 2005
Treasury bills - 205,249 187,932 195,449 203,267 211,398 219,854
Treasury Bonds 219,926 38,997 68,701 72,136 75,743 79,530 83,507
Certificate of Deposits 118,000 174,500 - 0 0 0 0
Deposits with banks and other financials institutions 110,129 107,929 233,880 257,268 277,849 294,520 312,192
Short term investments 8,546 7,810 9,558 9,749 9,944 10,143 10,346
Gross loans and advances 631,469 684,435 854,885 991,667 1,140,417 1,277,267 1,404,993
Government debt bonds 185,900 161,128 127,124 63,562 31,781 15,891 0
other assets 6,092 8,119 26,340 27,657 29,040 30,492 32,016
Less : provision (22,354) (27,631) (32,537) (36,692) (42,195) (47,898) (53,390)
Long term investments 83,525 80,079 101,542 116,773 128,451 141,296 155,425
net fixed assets 10,104 7,195 6,345 7,173 8,084 8,680 8,889
Total Assets 1,419,236 1,495,447 1,754,331 1,872,480 2,007,923 2,160,286 2,325,497
Liabilities

Deposits from Banks + FIs 367,024 293,197 371,315 427,012 478,254 526,079 568,165
Certificate of deposit 199,000 176,000 135,000 121,500 111,780 103,955 98,758
Deposits from customers 676,170 778,641 955,044 1,002,796 1,067,978 1,148,076 1,239,922
Medium term Loan - 50,000 58,940 64,834 71,317 78,449 86,294
Accrued interest payable 5,755 5,215 6,239 6,489 6,748 7,086 7,440
Employee Indemnity Provision 3,405 3,399 3,982 4,380 4,774 5,204 5,673
Owner's Equity
share premium 12,883 12,883 12,883 12,883 12,883 12,883 12,883
55
general reserve 9,545 11,522 13,876 17,096 20,744 25,026 30,024
revaluation surplus/reserve 12,813 20,471 30,087 30,087 30,087 30,087 30,087
treasury shares reserve 107 182 954 954 954 954 954
translation adjustment 6 7 7 7 7 7 7
treasury shares - - (76) (76) (76) (76) (76)
prop. Interest in treasury shares of subsidiary (717) (616) (89) (89) (89) (89) (89)
Total Liabilities & Shareholders Equity 1,419,236 1,495,447 1,754,331 1,872,480 2,007,923 2,160,286 2,325,496
OPERATING STATEMENT
Amount in KD' 000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Interest Income 48,453 47,726 58,064 73,870 86,179 99,852 114,750
56
Add : realised & unrealised gains from short term investments (285) 838 512 563 620 682 750
Add : realised gains/ (losses) from long term investments 381 4,491 1,138 1,252 1,377 1,515 1,666
Add : realised gains on divestment of group's subsidiary - - 6,479 - - - -
Add : Other income 1,207 1,045 567 618 668 721 779
Less : Staff costs (8,523) (9,380) (10,018) (10,920) (11,902) (12,736) (13,754)
Operating profit 11,741 20,756 28,778 32,199 36,483 42,820 49,975

Less: NLST (261) (480) (742) (714) (809) (950) (1,110)
Minority Interest (81) (895) (4,863) (4,863) (4,863) (4,863) (4,863)
Trfr to Voluntary Reserve (1,165) (1,977) (2,354) (3,220) (3,648) (4,282) (4,998)
Dividend (10,558) (8,448) (8,448) (9,855) (14,079) (17,599) (21,118)
May 2005
CASH FLOW STATEMENT
Amount in KD' 000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Operating
May 2005
Depreciation 2,200 2,416 1,806 2,772 3,049 3,323 3,589
Dividends received (2,427) (2,463) (2,677) (2,838) (3,008) (3,188) (3,380)
Realised losses/(gains) from long term investments (381) (4,491) (1,138)
Gains on divestment of group's subisdiary - - (6,479) - - - -
Provisions 6,792 5,357 6,716 4,155 5,504 5,702 5,492
Profit attributable to minorities 81 895 4,863 4,863 4,863 4,863 4,863

Gain on sale of premises and equipment - - - - - - -
Working Capital (b) (7,944) (16,675) 23,401 (18,010) (42,717) (29,710) (13,456)
Dec/(inc.) treasury bills and bonds (104,539) 60,680 (97,387) (10,952) (11,425) (11,918) (12,432)
Dec/(inc.) in Certificate of deposits (118,000) (56,500) 174,500 0 0 0 0
Dec / (inc) deposits with banks and other financial institutions 23,278 24,712 (125,951) (23,388) (20,581) (16,671) (17,671)
Dec / (inc) trading securities 3,432 736 (1,748) (191) (195) (199) (203)
Dec/ (inc) Other assets 743 (2,030) (5,783) (1,317) (1,383) (1,452) (1,525)
Inc/(dec) from banks & other financial institutions 65,077 (73,827) 78,118 55,697 51,242 47,825 42,086
Inc/(dec) in certificate of deposits 199,000 (23,000) (41,000) (13,500) (9,720) (7,825) (5,198)

Inc/(dec) in customers deposits 74,470 102,471 176,403 47,752 65,182 80,098 91,846
Inc/(dec) other liabilities (1,383) 928 3,214 1,108 1,133 1,390 1,477
Total Operating 9,538 4,120 49,268 17,131 (1,970) 17,468 40,518
Investing
Capex ( c) (305) 493 (956) (3,600) (3,960) (3,920) (3,798)
Purchase of intangibles - - (12,500) - - - -
Dividends received 2,427 2,463 2,677 2,838 3,008 3,188 3,380
Total Investing (31,943) 18,890 (14,443) (15,994) (12,629) (13,577) (14,548)
Financing
Net (Purchase) / sale of Treasury shares by subsidiary 522 176 2,547 0 0 0 0
57
Medium term loan - 50,000 8,940 5,894 6,483 7,132 7,845
Proceeds from employee share option plan - - 354 - - - -
Payment to minority shareholder (569) - (294) - - - -
Total Financing (10,605) 41,728 3,099 (3,961) (7,595) (10,467) (13,273)
Net Change in Cash (33,010) 64,738 37,924 (2,824) (22,194) (6,575) 12,697
Net Cash at end 67,899 132,637 170,561 167,737 145,543 138,968 151,664
KEY RATIOS
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Commissions/ total Op. Income 37.6% 27.7% 25.2% 26.2% 26.7% 26.8% 26.9%
- Investment income/total Op.Income 9.3% 21.1% 9.5% 9.1% 8.8% 8.3% 7.9%
Margins
- Net profit / interest income 23.2% 40.0% 39.2% 35.5% 35.2% 36.5% 37.8%
- Net Interest income to Interest Income 37.8% 45.3% 47.5% 47.0% 46.0% 45.0% 44.0%
- Net Spread 1.5% 1.6% 1.9% 2.3% 2.4% 2.5% 2.5%
Efficiency
-Cost to Total Op Income 56.8% 43.8% 36.7% 37.1% 36.2% 34.1% 32.2%
Liquidity
- Gross Loans to Interest Earning Assets 49.9% 49.9% 58.1% 62.8% 66.0% 68.0% 69.5%
- Net Loans & adv to Customer Deposits, Banks & FIs 58.4% 61.3% 62.0% 66.8% 71.0% 73.4% 74.8%
- Due from Banks to Due to Banks 30.0% 36.8% 63.0% 60.2% 58.1% 56.0% 54.9%
Credit Quality
- Provisions to total Op Income 25.0% 14.5% 14.8% 8.1% 9.6% 8.8% 7.5%
- Non Performing Loans (NPLs) KD'000 13,670 25,126 26,685 30,742 35,353 40,873 44,960
- Loan Loss Reserve (Provisions) KD'000 7,429 27,631 32,537 36,692 42,195 47,898 53,390
- NPL's to (Equity + Gross Loans & Advances) 1.7% 2.9% 2.5% 2.6% 2.6% 2.7% 2.7%
- NPL Coverage 54.3% 110.0% 121.9% 119.4% 119.4% 117.2% 118.8%
Capital Adequacy
- Interest Income to Total Op Income 42.4% 44.0% 45.9% 59.7% 59.7% 60.4% 61.0%
Growth
- Change in Net profits -28.5% 70.1% 19.4% 15.0% 15.8% 20.2% 19.0%
- Change in Other Income -57.2% -13.4% -45.7% 9.0% 8.0% 8.0% 8.0%
- Shares in Issue ('000) 703,573 703,939 703,939 703,939 703,939 703,939 703,939
- EPS (fils) 15.9 27.1 32.4 37.2 43.1 51.8 61.7
- DPS Declared (%) 12.0% 12.0% 14.0% 20.0% 25.0% 30.0% 35.0%
- Dividend per share (fils) 12.0 12.0 14.0 20.0 25.0 30.0 35.0
- Total Dividend (KD'000) 8,442.9 8,447.3 9,855.1 14,078.8 17,598.5 21,118.2 24,637.9
- Dividend pay out ratio % 75.3% 44.3% 43.3% 53.8% 58.0% 57.9% 56.8%
- Market Price Year End (fils) 435.0 475.0 550.0 420.0 420.0 420.0 420.0
- P/E 27.3 17.5 17.0 11.3 9.7 8.1 6.8
- P/BV 2.0 2.0 2.0 1.4 1.3 1.2 1.1


ABKK.KW
Listing:
Current Price
500 fils
Key Data
EPS (fils) 31.6 12M Avg. vol. (mn) 467,349
BVPS (fils) 231.7 52 week Lo / Hi (fils) 400 / 560
P / E (x) 15.8 Market Cap (KD mn) 457
P / BV (x) 2.2 Target Price (fils) 568
Background
• Al Ahli Bank of Kuwait (ABK) was incorporated in 1967. The Behbehani Group
represented by various individuals and companies is the largest shareholder in ABK.
• ABK is one of the smaller players in Kuwait’s banking industry, which is dominated by
National Bank of Kuwait, Kuwait Finance House and Gulf Bank.
• It is the only Kuwaiti Bank with a full-service branch in Dubai, in addition to a retail
network of 15 branches in Kuwait.
• The bank has presence in consumer banking (current account, savings account, children’s
account, super accounts, fixed deposits, call account, personal loans, cards, etc.),
corporate banking (project finance, trade finance, overdraft, revolving credit facilities,
etc.), treasury & investments (funds, etc.), international banking (correspondent banking,
payments, collections, cash management and foreign exchange transactions, etc.).
• The bank has several offshore funds, which it manages in collaboration with the UBS
Group of Switzerland. These offshore funds have different equity and debt combinations
to suit the risk profile of various types of investors. ABK also has a number of domestic
funds.
• The total number of employees of ABK stood at 509 as of December 31, 2004.
• ABK has 878.6mn shares of face value KD0.100 each for a paid capital of KD87.9mn at
the end of 2004.
• It is estimated that the Behbehani family and its related businesses own more than 35% of
the paid-up capital of the bank.

Recent Developments
• Moody's Investors Service upgraded the financial strength rating (FSR) of ABK to "D"
with stable outlook from D- in December 2004. The A2/Prime-2 foreign currency deposit
ratings and their outlooks remain unchanged. Moody's said that rating action reflected
the continuing improvement in the bank's financial fundamentals and risk profile,
underscored by significant reductions in problem loans, greatly enhanced coverage by
loan-loss reserves, as well as sustained reductions in the level of related-party exposures.
ABK's high capital ratios supported further growth opportunities and remained at a level
consistent with the bank's risk profile. The upgrade, according to Moody's, also reflected
the bank's improved efficiency stemming from investments in technology, workforce
rationalisation and attention to costs.
• ABK successfully implemented a new enterprise application integration (EAI) solution

based on Microsoft BizTalk Server in October 2004. The solution reportedly links together
all of ABK's banking applications, into a single virtual system, giving bank staff a much
simpler and more efficient way of accessing customer data, helping them improve service
to all of the bank's customers.
Analysis of Financial Performance - 2004
• The interest income of the bank increased by 25.9% during 2004 as compared to the
previous year, on the back of a 28.0% increase in the gross loans during the year. However,
interest expenses increased at a higher rate of 28.8% during the year, on the back of a
19.2% growth in the customers' deposits during the year.
• The yield on interest earning assets for the bank went up to 4.0% in 2004 from 3.6% in
2003. The cost of interest bearing liabilities, on the other hand, went up to 2.4% in 2004
from 2.2% in 2003. The net spread, therefore, went up to 1.6% in 2004 from 1.5% in
2003.
• The net interest income during the year increased by 22.8% to KD29.3mn, compared to
KD23.9mn during the previous year.
• Helped by higher fee-based activities, the net commission income was higher by 11.0%
as compared to that in the previous year. Gain from investment securities declined by
35.8%, while dividend income increased by 58.5% during the year.
• The bank reported other operating income of KD1.4mn during the year, an increase of
26.1%. Net gain from forex transactions stood at KD1.8mn, an increase of 30.5% during
2004.
• The provisions for loan losses at KD5.7mn in 2004 were lower by 1.4% than in the
previous year.
• Overall, the total operating income after provisions for loan losses increased by 21.4% to
KD42.2mn in 2004.

• The operating costs of the bank went up by 18.1%, including a rise of 12.5% in the staff
costs, during 2004. However, as a percentage of operating income after provisions for
loan losses, its costs declined to 33.1% during the year from 34.0% in the previous year.
Also, staff costs as a percentage of operating income after provisions for loan losses
declined to 17.0% during the year from 18.4% in the previous year.
• The net profit after taxes of KD27.2mn in 2004 was 23.1% higher than in the previous
year.
• The RoAE of the bank went up to 14.4% in 2004, from 13.4% in 2003. The RoAA
similarly inched up to 1.7% in 2004 from 1.6% in the previous year.
• ABK’s total assets stood at KD1.7bn at the end of 2004, representing an increase of
15.2% over the previous year.
• The bank increased gross loans and advances to customers by 28.0% to KD1.1bn over
December 2003.
• As at December 31, 2004, gross non-performing loans of the bank amounted to KD58.4mn,
down 9.3% from KD64.4mn in 2003.
• The proportion of NPLs to gross loans stood at 5.5% at the end of 2004, down from 7.8%
in 2003; while the bank provided for 133.7% of its NPLs at the end of 2004, up from
112.5% at the end of 2003.
• Deposits from customers increased by 19.2% during 2004 over the previous year, while
the deposits from banks, which have a relatively higher cost of servicing, fell by 14.4%
during the year.
• The bank declared a cash dividend of 20% and stock dividend of 4.0% for 2004. The
dividend payout ratio for the bank declined to 64.7% in 2004 from 77.4% in the previous
year, thanks to the net profit growing at a much higher rate than dividends in 2004.
Results of First Quarter of 2005
• The bank announced the results for the first quarter of 2005. Interest income during the
quarter of KD19.7mn was 49.7% higher, while the interest expenses of KD10.2mn were
41.8% higher, than in the corresponding quarter of 2004. Dividend income and other
operating income were up 63.5% and 424.8% respectively during the quarter year-on-
year. Net fees and commissions income, on the other hand, decreased by 10.0% during
the quarter. Net profit for the bank of KD9.2mn was 37.3% higher year-on-year.
• Loans & advances of KD985.0mn grew by 0.4%, while the GDBs fell by 6.5% in the
quarter ended March 2005. On the other hand, customers' deposits were higher by 7.0%
in the quarter. Total assets of the bank of KD1.6bn, however, fell by 4.4% in the quarter
ended March 2005.

Outlook
• The loan book is expected to grow at a healthy rate in the medium-term, due to an expected
strong demand driven by a booming Kuwaiti economy. The Iraq reconstruction too is
likely to have a positive impact on the Kuwaiti banking industry going forward. The bank
is, therefore, expected to take a higher exposure in project financing and infrastructure
lending in the near-term.
• The bank's deposit franchise could see a consistent growth in the near-term, while its
growth focus remains the retail market. The bank is expected to expand its branch and
ATM network, besides developing alternative channels of delivery for its numerous
products and services.
• Both the yield on interest earning assets as well as the cost of interest bearing liabilities
are expected to edge up in the years ahead, thanks to hardening interest rates. We project
the yields to gain more than the increase in costs in the near-term. As a result, the net
spread for the bank is expected to show an uptrend in the medium-term.
• The net fees and commissions income for the bank is expected to show a high growth in
the medium-term, as it focuses on higher levels of non-interest income.
• Over the medium-term, the high growth in the net interest income and net commissions
are likely to drive the bank’s profits.
• Despite increasing competition from local banks and the anticipated entry of foreign
banks, ABK is expected to enhance its profitability further by focusing on improving
asset quality and by efficiency gains in the coming years.
Valuation
• Global currently has a "HOLD" recommendation on the ABK stock, issued in our Results
Update on the bank at the end of the third Quarter of 2004.
• The bank has had a healthy performance in the year 2004 as well as in the first quarter of
2005. While the net profit in 2004 exceeded our projections by 3.6%, the figures in the
first quarter of 2005 were even better, with the net profit increasing by 37.3% year-on-
year. The ABK stock simultaneously gained by 13.6% since our above-mentioned report,
justifying our "HOLD" recommendation.
• Based on the results for full year 2004 and first quarter of 2005, we have now revised our
earlier projections. The projected rates of growth in loans & advances, customers' deposits,
and interest income and expenses have been modified to more appropriately reflect the
changes between our earlier projections and the actual results, and our perceptions of the
bank's future prospects.
• The loan book of the bank has been projected to grow keeping in mind the cap of 80% on
the loans/deposits ratio stipulated by the Central Bank of Kuwait (CBK) to be reached by
all banks by July 2005. The overall changes lead to a higher projected profitability and net

spreads for the bank in the period 2005-'08, than in our late-2004 Update.
• We have also considered a higher risk-free rate now of 5.25% - the current CBK discount
rate, vis-à-vis 4.50% taken at the time of our late-2004 Update.
• The book value per share (BVPS) of ABK was KD0.232 at the end of 2004. At the current
stock price of KD0.500, it is quoting at a P/BV of 2.2x, as against the average P/BV for
the Kuwaiti banking industry of 3.42x.
• The intrinsic value of ABK of KD0.568 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer valuation method, is higher than the current stock
price of KD0.500 by 13.7%. The composite share valuation translates to forward P/BV
multiples of 2.4x and 2.3x our projected 2005 and 2006 book values per share.
• Though smaller than the other Kuwaiti banks, such as National Bank of Kuwait and Gulf
Bank, ABK seems poised to improve its performance further in the coming years and
take better advantage of the emerging opportunities in the market, while simultaneously
bringing in cost efficiencies to improve its margins, as well as improving its asset quality
in the near-term.
• We, therefore, upgrade ABK to a "Buy", from our earlier recommendation of "Hold",
with a medium-term perspective.

BALANCE SHEET
Amount in Kuwaiti Dinar'000 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Assets
Cash & Bank Balances 28,780 12,804 19,172 13,429 13,493 13,592 13,731
Treasury bills (<30days) 15,917 52,940 57,175 80,045 82,447 80,798 80,798
Deposits With Banks (<30 days) 148,635 120,049 124,851 212,247 218,614 214,242 208,886
Deposits With Banks (>30 days) 10,685 63,348 63,744 124,301 128,030 125,469 127,351
64
Trading Securities 2,973 9,344 14,335 24,370 31,680 33,264 33,264
Loans and Advances (Gross) 653,397 826,903 1,058,837 1,132,426 1,302,290 1,432,519 1,547,121
Government Debt Bonds 286,742 256,248 206,127 175,208 157,687 141,918 127,727
Other Assets 8,934 12,006 12,172 15,093 15,848 16,640 17,472
Less : Provision (71,361) (72,435) (78,092) (84,207) (91,239) (98,832) (107,032)
Investment Securities - Debt - - - - - - -

Gross Fixed Assets (Incldg. WIP) 58,241 58,982 59,631 61,420 62,648 63,901 65,179
Less: Accumulated Depreciation (39,180) (41,262) (43,325) (45,413) (47,522) (49,674) (51,804)
Net Fixed Assets 19,061 17,720 16,306 16,007 15,126 14,228 13,376
Total Assets 1,312,329 1,480,077 1,705,508 2,045,696 2,281,380 2,455,646 2,611,825
Liabilities
Deposits from Banks and FIs 266,337 254,635 217,962 228,860 233,437 235,772 238,129
Deposits from Customers 746,607 900,086 1,073,041 1,416,414 1,628,876 1,791,764 1,935,105
Medium term borrowings / Bonds - 48,625 114,933 114,933 114,933 102,777 90,621
Certificates of deposit 105,000 64,900 39,000 1,950 488 244 98

Proposed dividends 12,809 17,078 17,572 28,267 34,732 40,088 44,584
Owner's Equity
Statutory reserve (incl. Share premium) 46,564 48,855 51,676 55,593 60,402 65,951 72,121
General reserve 9,279 11,570 14,391 18,308 23,117 28,666 34,836
Proposed bonus issue - - 3,514 - - - -
Treasury shares (6,718) (6,718) - - - - -
May 2005
Total Liabilities & Owner's Equity 1,312,329 1,480,077 1,705,508 2,045,696 2,281,380 2,455,646 2,611,825
OPERATING STATEMENT
May 2005
Interest Income 57,302 49,690 62,559 79,530 97,025 110,714 121,223
Gain / (Loss) on Sale of Investment Securities available for trading 660 2,373 1,524 387 560 325
Add : Other operating income 880 1,074 1,354 2,302 3,223 4,189 5,027
Less : Staff costs (6,519) (6,392) (7,190) (7,693) (7,924) (8,083) (8,244)
Operating profit 19,988 22,911 28,206 39,172 48,096 55,491 61,695

Less: Labour tax (450) (515) (635) (966) (1,187) (1,371) (1,524)
Net Profit 19,238 22,063 27,157 37,689 46,309 53,451 59,446
Trfr to Voluntary Reserve (1,999) (2,291) (2,821) (3,917) (4,810) (5,549) (6,170)
Dividend (12,809) (17,078) (17,572) (28,267) (34,732) (40,088) (44,584)
65
Stock Dividends - - (3,514) - - - -
Loss/(gain) on disposal of "available for sale" assets - - (96) - - - -
CASH FLOW STATEMENT
Amount in Kuwaiti Dinar'000 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Operating
Depreciation 2,016 2,090 2,145 2,088 2,109 2,151 2,130
66
(Increase) / decrease in value of investment securities (660) (2,373) (1,524)
Dividend Income (2,177) (1,613) (2,557) (5,153) (4,747) (4,493) (4,389)
Working Capital (b) 9,872 (82,271) (68,586) 11,735 37,154 51,684 48,621
Short term instruments (<30 days) (73,570) (8,437) (9,037) (110,266) (8,769) 6,021 5,356
Dec/(inc.) in balances with banks (287) (52,663) (396) (60,557) (3,729) 2,561 (1,882)
Dec/(inc.) treasury bills and bonds (33,832) 36,236 (1,647) (79,826) (6,321) (5,859) -
Dec / (inc) Trading Securities (2,973) (5,844) (4,421) (10,035) (7,311) (1,584) -
Dec/ (inc) Other assets (97) (3,072) (48) (2,921) (755) (792) (832)
Inc/(dec) from banks & other financial institutions 72,990 (11,702) (36,673) 10,898 4,577 2,334 2,358
Inc/(dec) of deposits from other customers (59,696) 153,479 172,955 343,373 212,462 162,888 143,341
Inc/(dec) certificates of deposits 105,000 (40,100) (25,900) (37,050) (1,463) (244) (146)
Inc/(dec) other liabilities (1,281) (2,416) 15,993 788 804 820 837
Total Operating 34,570 (56,353) (37,695) 52,475 87,857 110,386 114,008
Investing

Capex ( c) (1,034) (749) (731) (1,789) (1,228) (1,253) (1,278)
Sale of assets - - - - - - -
Dividends income from investment securities 2,177 1,613 2,557 5,153 4,747 4,493 4,389
Total Investing (7,404) 4,561 (16,531) (40,647) (59,526) (63,398) (61,624)
Financing
Medium term loan - 48,625 66,308 - - (12,156) (12,156)
Acquisition of own shares (58) - 11,364 - - - -
Total Financing (10,307) 35,816 60,594 (17,572) (28,267) (46,888) (52,245)
May 2005
Net Change in Cash & Bank Balances 16,859 (15,976) 6,368 (5,743) 64 99 139
Net Cash & Bank Balances At Beginning 11,921 28,780 12,804 19,172 13,429 13,493 13,592
Net Cash & Bank Balances At End 28,780 12,804 19,172 13,429 13,493 13,592 13,731
Actual Cash & Bank Balances At End 28,780 12,804 19,172 13,429 13,493 13,592 13,731
RATIOS
2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
Margins
- Net Spread 1.6% 1.5% 1.6% 1.8% 2.1% 2.3% 2.5%
Efficiency
Liquidity
Credit Quality
- Loan Loss Reserve (KD'000) 71,361 72,435 78,092 84,207 91,239 98,832 107,032
- NPL Coverage 84.0% 112.5% 133.7% 115.0% 115.0% 115.0% 115.0%
Capital Adequacy

- Change in Interest Income 28.8% -2.5% 30.5% 34.1% 23.3% 15.5% 10.5%
- Change in Investment Income 35.8% 40.5% 2.4% 35.7% -4.2% -9.2% -2.0%
- Change in Other Income -35.1% 22.0% 26.1% 70.0% 40.0% 30.0% 20.0%
Ratios Used for Valuation

- Shares in Issue ('000) 853,902 853,902 858,624 913,722 913,722 913,722 913,722
- EPS (fils) 22.5 25.8 31.6 41.2 50.7 58.5 65.1
- Market Price Year End (fils) * 290 405 440 500 500 500 500
- P/E 12.9 15.7 13.9 12.1 9.9 8.5 7.7
- P/BV 1.63 2.06 1.90 2.12 2.00 1.88 1.75
- Dividend yield 5.2% 4.9% 4.7% 6.2% 7.6% 8.8% 9.8%
* Market price for 2005 and subsequent years is the closing price as on April 24, 2005.


KFIN.KW
Listing:
Current Price
1,540 fils
Key Data
BVPS (fils) 367.1 52 week Lo / Hi (fils) 990/1700
P / E (x) 16.2 Market Cap (KD mn) 1,684.7
Background
• Kuwait Finance House (KFH), is the second largest bank in Kuwait with a market share
of around 18.1% among the banking sector assets in 2004.
• Till recently, KFH was the sole Islamic Bank in Kuwait but the Central Bank of Kuwait,
as a result of the significant changes regarding the licensing policy of Islamic banks, has
allowed three Islamic banks including KFH to operate in Kuwait.
• The inclination towards religion has corroborated the requirement of Islamic banking and
finance which will help in increasing the profitability and asset size of Islamic banks in
general and KFH in particular taking into account its leadership position.
• KFH’s share capital was increased to 1.09bn shares of 100fils each through the issuance
of 10% bonus shares. It will be further increased through a rights issues in which the
bank will increase its capital by 30% by offering 23,442,166 shares for subscription at
850fils/shares (par value of 100fils per share and a premium of 750fils per share). KFH
major shareholders include Kuwait Investment Authority (25% stake), Public Authority
of Minor Affiars (10.8%) and Kuwait Awqaf Public Foundation (8.6%).
Recent Developments
• KFH made a profit of KD11mn (US$38mn), on the sale of coupons worth KD14.53mn.
These earnings will be incorporated in the results of the second quarter of 2005.
• KFH announced the launch of the new electronic mobile Point of Sale (POS) machines
VX610 that offers an innovative concept while using the POS machines via KFH Credit
Cards.

• KFH announced that it was taking part in a US$322mn plan to finance Pertamina,
Indonesia's national oil company.
• The government-owned Bahrain Petroleum Company (Bapco) signed a US$1.01bn

financing package with a consortium of banks which included KFH for the upgrading of
the country's sole oil refinery. The package included a US$370mn commercial facility, a
US$330mn Islamic lease facility and a US$311mn tranche guaranteed by Japan Bank for
International Cooperation and Nippon Export Credit Agency.
• The Murabaha, Istisna & Leasing Income of the bank increased by 24.8% during 2004 as
compared to the previous year due to the increase in interest rates.
• The distribution to the depositors too increased by 19.5% during the same period. As a
result, the net commission income during the period increased by 31.7% to KD61.98mn
as against KD47.08mn in the previous year. The bank reported rise in its spreads to 3.0%
on 2004 from 2.5% reported in the previous year.
• Helped by higher underwriting income, fees and commissions income increased by

33.9% in 2004. The net profit of KFH saw a yearly increase of 27.9% to end 2004 with
the net profit of KD74.4mn (which was slightly lower than our expectations).
• The ROAA and ROE of the bank stood at 2.3% (2003: 2.1%) and 24.4% (2003: 21.3%)
respectively in 2004.
• KFH’s total assets stood at KD3,458.06mn at the end of 2004, representing an increase of
13.7% over Dec-2003. KFH has decided to distribute 50% cash dividends in addition to
10% stock dividends.
• The bank reported an increase in net receivables from KD1,457.5mn in 2003 to

KD1,484.9mn in 2004. However, net leased assets have shown a strong growth of
75.5% and amounted to KD505.5mn in 2004. We believe that the bank will continue to
emphasize on leasing activity as a source of future growth.
• The provisions of impairment increased significantly from KD4.13mn in 2003 to

KD13.66mn in 2004. As a result provisions to average receivables increased from 9% in
2003 to 9.4% in 2004.
• The bank has also decided to increase capital by 30% by offering rights shares for
subscription at a par value of 100fils (1KD=1000fils) per share, in addition to a premium
of 750fils per share.
• The bank has been maintaining a dividend payout ratio of more than 50% in the last few
years and we expect this trend to continue in future.

Outlook
• We believe that KFH is well placed to exploit the increase in the Islamic banking activity in
Kuwait and the other GCC markets due to its leadership position, strong deposit franchise,
extensive coverage, management expertise and strategy of using latest technology and
improving customer relationship.
• The net commission of the bank is expected to improve significantly as we expect the
interest rates to continue moving upwards.
• The bank has been exploring the possibility of expanding its regional coverage in order to
get the maximum share in the increasing Islamic banking activities.
• It is also expanding its presence internationally especially in the Middle East and Southeast
Asia. It has been awarded a license to operate in Malaysia.
Valuation
• The stock price of KFH increased by more than 35% to the 1700fils (bonus adjusted)
since our last investment update in Oct-2004, justifying our ‘Buy’ recommendation.
• The estimated fair value of KFH’s stock works out to 1,626fils based on DDM method,
which is up by 5.6% vis-à-vis current market price of the stock. Currently, KFH is trading
at 3.2x of its estimated book value and 16.9x of its estimated earnings of 2005.
• It is worthwhile to note that since our last report of KFH, the discount rates have increased
twice to reach 5.25% which has considerably affected the valuations. Based on the current
growth potential of the bank, we revise our earlier rating and recommend a ‘Hold’ on the
stock.

Balance Sheet
Amount in Kuwaiti Dinar’000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets:
May 2005
Short Term Intl. Murabaha incl Exchange of Deposits 183,823 109,218 193,154 - - - -
International Murabaha (more than 3 months) 275,093 260,151 187,492 200,000 150,000 100,000 -
Gross Receivables 1,389,975 1,567,564 1,607,656 1,736,268 1,909,895 2,100,885 2,310,973
Leased Assets 114,365 307,837 525,598 735,837 1,030,172 1,390,732 1,668,879
Government Debt Bonds - - - - - - -

Investments 250,763 433,410 565,038 904,061 1,039,670 1,195,620 1,374,963
Trading Properties 112,098 139,615 127,835 134,227 139,596 145,180 150,987
Investment Properties 104,684 102,447 105,921 108,732 109,471 109,162 108,052
Property and Equipment 24,847 58,556 72,208 96,089 113,917 127,080 136,610
Other assets 62,164 63,021 69,736 80,196 88,216 92,627 97,258
Less : provision (111,317) (129,917) (142,733) (159,861) (175,847) (189,915) (205,108)
Total Assets 2,554,377 3,041,110 3,458,066 4,124,903 4,651,225 5,251,858 5,820,356
Liabilities:
Deposits from banks and Fis 12,640 63,676 121,821 124,257 126,742 129,911 133,159

Depositors Accounts 1,976,861 2,300,161 2,563,185 2,947,663 3,389,812 3,898,284 4,366,078
Deferred Revenues 175,724 182,410 189,002 192,782 196,638 200,570 204,582

Fair Value Reserve 5,771 19,776 31,680 31,680 31,680 31,680 31,680
Owner's Equity:
Paid-up Equity Capital 68,275 71,689 78,141 109,397 118,149 127,601 137,809
Proposed Issue of Bonus Share 3,414 4,301 7,814 8,752 9,452 10,208 11,025
71
Statutory Reserve 125,240 137,251 157,119 172,692 192,085 213,005 236,404
Share premium reserve 7,708 7,826 12,618 188,436 188,436 188,436 188,436
Voluntary Reserve 26,145 28,542 32,192 42,574 55,503 71,595 91,094
Treasury Shares (902) (867) (1,016) (1,016) (1,016) (1,016) (1,016)
proposed cash dividends 32,089 35,844 39,070 59,683 72,077 96,333 121,592
Total Liabilities & Shareholder's Equity 2,554,377 3,041,110 3,458,066 4,124,903 4,651,225 5,251,858 5,820,356
Operating Statement
Amount in Kuwaiti Dinar’000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Murabaha, Istisna and Leasing Income 104,130 106,917 133,463 168,003 199,538 241,401 284,276
Payment to Depositors (56,582) (59,833) (71,476) (91,226) (113,337) (140,012) (167,723)
72
Net Commission Income 47,548 47,084 61,987 76,777 86,200 101,388 116,553
Add : Fees and Commission 9,459 10,409 13,933 24,383 34,136 46,083 62,213
Add : Foreign Exchange Gains 833 (1,098) 1,613 1,645 1,678 1,712 1,746
Add : realised & unrealised gains from investments 28,629 43,540 48,293 67,610 81,132 93,302 107,297

Less : General & Admnistration Expenses (22,263) (28,789) (33,045) (45,127) (55,163) (67,267) (80,304)
Operating profit 58,214 62,637 79,481 103,822 129,286 160,923 194,994
Minority Interest (1,894) (2,603) (2,889) (1,082) (1,136) (1,193) (1,252)
Net Profit After Minority Interest 56,320 60,034 76,592 102,740 128,151 159,730 193,742
Less : Contribution to KFAS (562) (600) (766) (872) (1,088) (1,388) (1,703)
Less: National Labor Support Tax (1,055) (1,184) (1,294) (2,154) (2,689) (3,433) (4,213)


Op Balance of Reserves
Zakat (3,205) (3,607) (4,010) (5,204) (10,403) (11,236) (12,190)
Cash Dividends paid (29,261) (32,089) (35,844) (39,070) (59,683) (72,077) (96,333)
Net Movement in Treasury Shares 12 35 (149) - - - -
Trfr to Statutory Reserve 13,478 12,011 19,868 15,573 19,393 20,920 23,399
Trfr to Voluntary Reserve 5,632 6,004 7,660 10,382 12,929 16,092 19,499
May 2005
Cash Dividend 32,089 35,844 39,070 59,683 72,077 96,333 121,592
Issue of Bonus shares 3,414 4,301 7,814 8,752 9,452 10,208 11,025
Cl Balance of Retained Earnings - - - - - - -
Cash Flow
Amount in Kuwaiti Dinar’000 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
May 2005
Depreciation 6,966 7,966 5,940 12,219 12,561 12,048 11,502
Provision for investment securities 2,499 4,132 13,664 - - - -
Other provisions and valuation adjustments - - - 17,128 15,986 14,068 15,193
Exchange of Deposits (26,624) 26,624 - - - - -
Working Capital (6,872) 79,980 220,442 42,963 39,669 16,420 89,390
Dec/(inc.) in international Murabaha - - - (12,508) 50,000 50,000 100,000

Dec/ (inc) Receivables (92,871) (158,500) 32,476 (128,612) (173,627) (190,990) (210,088)
(Increase) / Decrease in Leased assets (55,318) (179,022) (217,437) (210,239) (294,335) (360,560) (278,146)
(Increase) / decrease in Trading Properties (3,160) (27,517) 11,790 (6,392) (5,369) (5,584) (5,807)
Dec/ (inc) Other assets (9,408) (5,092) 29,914 (10,460) (8,020) (4,411) (4,631)
Inc/(dec) from banks & other financial institutions (69,294) 51,038 58,144 2,436 2,485 3,169 3,248
Inc/(dec) of deposits from customers 201,705 323,300 263,023 384,478 442,149 508,472 467,794
Inc/(dec) other liabilities 18,263 69,087 35,940 20,481 22,529 12,391 13,010
Deferred Revenue 3,211 6,686 6,592 3,780 3,856 3,933 4,011
Total Operating 30,582 176,862 314,458 171,904 192,470 197,325 303,791
Investing

Capex (11,096) (39,520) (55,057) (32,286) (25,828) (20,663) (16,530)
Sale of assets 6,355 - - - - - -
Purchase of Investment Properties (6,053) 661 (5,557) (6,625) (5,300) (4,240) (3,392)
Total Investing (49,207) (207,973) (180,509) (377,933) (166,738) (180,853) (199,265)
Financing
Capital Increase - - 6,925 199,260 - - -
Minority Interest - - - 1,082 1,136 1,193 1,252
Acquisition of own shares - 118 18 - - - -
Payment of Zakat (3,205) (3,607) (4,010) (5,204) (10,403) (11,236) (12,190)
73
Proceeds from disposal of own shares 35 (149) - - - -
Total Financing (32,466) (35,543) (33,060) 156,067 (68,951) (82,121) (107,271)
Net Change in Cash (51,091) (66,654) 100,889 (49,962) (43,218) (65,649) (2,746)
Net Cash at end 311,436 238,426 339,315 289,354 246,135 180,486 177,741
Ratios
2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
- Net Ijara, Murabaha etc Income/ Total Op. Income 54.4% 47.4% 52.3% 47.6% 43.8% 42.2% 40.6%
- Non-Commission income/ total Op. Income 48.5% 56.8% 59.2% 63.0% 64.4% 63.7% 64.7%
- Non-Commission expense/ total Op. Income 33.4% 37.0% 32.9% 35.6% 34.4% 33.0% 32.0%
Margins
- Net income/ Revenues 52.4% 54.4% 55.8% 59.3% 62.3% 64.1% 66.0%
- Operating Profit / Revenues 55.9% 58.6% 59.6% 61.8% 64.8% 66.7% 68.6%
- Commission Expense to Commission Income 54.3% 56.0% 53.6% 54.3% 56.8% 58.0% 59.0%
-Commission Income to Commission Earning Assets 5.4% 5.1% 5.6% 6.5% 6.9% 7.2% 7.5%
- Commission Expense to Commission Bearing Liabilities 2.8% 2.6% 2.6% 2.9% 3.2% 3.5% 3.7%
- Net Spread 2.6% 2.5% 3.0% 3.5% 3.7% 3.7% 3.8%
- Net Commission Margin 2.5% 2.2% 2.6% 3.0% 3.0% 3.0% 3.1%
Efficiency
- General & Administration Expense to Total Op Income 25.5% 29.0% 27.9% 28.0% 28.0% 28.0% 28.0%
Liquidity
- Loans to Income Earning Assets 72% 75% 68% 67% 66% 63% 61%
Credit Quality
- Provisions to Total Operating Income 2.9% 4.2% 11.5% 10.6% 8.1% 5.9% 5.3%
- Provisions to Average Receivables 8.3% 8.8% 9.0% 9.6% 9.6% 9.5% 9.3%
Capital Adequacy
- Equity to Gross Receivables 18.8% 18.2% 20.3% 33.4% 33.2% 33.6% 34.0%

- FX Income to Total Op. Income 1.0% -1.1% 1.4% 1.0% 0.9% 0.7% 0.6%
- Change in Net Murabahas, Istisna and Leasing Income -14.8% -4.7% 12.5% 23.4% 17.7% 24.4% 16.1%
- Change in Other Income 29.3% 3.3% 75.6% 25.0% 25.0% 20.0% 20.0%
RATIOS USED FOR VALUATION

- Dividend Payout (%) 58.8 61.6 52.5 59.9 58.0 62.2 64.8
- Shares in Issue (mn) 715.8 716.1 781.4 1,094.0 1,181.5 1,276.0 1,378.1
- EPS (fils) 76.3 81.2 95.2 91.0 105.2 121.3 136.2
- P/E 14.94 19.70 17.2 16.9 14.6 12.7 11.3
- P/BV 3.55 4.61 4.47 3.23 3.23 3.22 3.20

Kuwait Real Estate Bank

KREB.KW
Listing:
Kuwait Stock Exchange Not Rated
Current Price
475 fils
Key Data
BVPS (fils) 243.2 52 week Lo / Hi (fils) 420 – 670
P / BV (x) 2.0 Target Price (fils) Not Rated
Background
• The Kuwait Real Estate Bank was established in 1973. Established as the only specialized
real estate bank in the country, KREB provides developers, contractors, as well as
individual property owners with banking facilities, products and services to conduct their
business and complete their projects. KREB carries out retail & commercial banking,
international banking, real estate lending, investment activities and property management
according to Islamic Sharia principles.
• KREB operates in 3-primary business segments, which include,

o Commercial, consumer & international banking.
o Treasury, fund management & institutional banking.
o Investment management.
• The bank's scope of operations compromises loans and credit facilities to developers and
contractors, a variety of investment activities secured by real estate, and the financing
of local and overseas construction companies operating in Kuwait and the Gulf. The
Bank also provides companies and individuals with products such as the AKARI VISA
Advantage card, a variety of deposit products, as well as other services which compliment
the customers’ daily needs.
• As part of property management KREB provides services which include – rent collection,
maintenance & renovation services, evaluation of real estate property.
• KREB has almost 340 employees. It is currently operating 6 branches in Kuwait and
offering its wide range of products & services through these branches.

ENTITY SHARE
Al Hoda for Hotels & Tourism 9.54%
Al Baraka Kuwaiti Trading Co. 6.04%
Arab Real Estate Co. 4.00%
Others / Public 80.42
TOTAL 100.0%
Recent Developments
• By the end of July 2005, Kuwait Real Estate Bank will officially become a full-fledged
Islamic bank - the third such financial institution in Kuwait, after the new laws announced
by the Central Bank of Kuwait in 2004 allowing conversion to Shariah-based banking.
• KREB has interests in couple of entities, including – Kuwait Projects Company for
Contracting & Building SAK and the Financial Group of Kuwait KSCC, in each of which
it holds 50% stake. KREB also holds 20% stake in Pearl Holding Company, Luxembourg,
which offers banking & investment related services.
• KREB is focusing on improving its operations by integrating IT & automating certain

operations in the bank. It has contracted one of the largest local companies to automate
its operations, including the branches and to develop the IT infrastructure to cope with
future business expansion, including expansion of branch network, SMS banking for
GSM mobiles and internet banking etc.
• KREB achieved net profits of KD23.5mn for the financial year 2004 compared to
KD17.8mn in 2003, representing a growth rate of 32%. The bank earned a net interest
income of KD19.3mn in FY2004, increasing by 13.7% from KD16.99mn in FY2003.
• KREB earned a total interest income of KD35.94mn in FY2004, increasing by 16.1% from
KD30.95mn in FY2003. Interest income from loans & advances showed a 18.4% rise,
followed by a 12% increase in interest income from T-bills, bonds & other investments.
The following is the break-up of total interest income,
Break - up of Interest Income 2003 2004 % Change

Amount in KD’000
- Loans & Advances 26,788.0 31,709.0 18.4%
- Treasury bills, bonds & other investments 3,122.0 3,496.0 12.0%
- Placement with banks 1,036.0 731.0 -29.4%
TOTAL 30,946.0 35,936.0 16.1%
Source: KREB annual report
• Total revenues for KREB amounted to KD52.6mn in FY2004, increasing by 5.2% from
KD50.0mn in FY2003. The following is the break-up of total revenue,

Break – up of Total Revenue 2003 2004 % Change

Amount in KD’000
- Commercial, consumer & international banking 29,704.0 34,766.0 17.0%
- Treasury, fund management & inst. Banking 4,433.0 4,548.0 2.6%
- Investment banking 15,895.0 13,312.0 -16.3%
TOTAL 50,032.0 52,626.0 5.2%
• Of this KD6.3mn was recorded in FY2004 as unrealized gain on investments available

for sale, down from KD9.31mn in FY2003. Removing the same, brings the total revenues
down to KD46.33 in FY2004 (KD40.72mn in FY2003).
• Given the hardening of interest rates in the local economy in the second-half of 2004,
KREB has managed to increase its interest income from interest earning assets from 5.1%
in FY2003 to 5.4% in FY2004. This has also resulted in interest expense as a % of interest
bearing liabilities increasing from 2.7% in FY2003 to 3.0% in FY2004. This has kept the
net spread unchanged at 2.4% in FY2004. However KREB has managed to increase its
net interest margin from 2.7% in FY2003 to 2.9% in FY2004.
• The shareholders’ equity has increased by 35.1% from KD120.9mn to KD163.3mn

in FY2004. KREB has expanded its share capital from KD50.07mn in FY2003 to
KD67.14mn in FY2004, by way of a rights issue of 75.1mn shares at 300fils and a bonus
issue of 80.75mn shares of 100fils.
• The return on average equity (ROAE) and return on average assets (ROAA) of the bank
stood at 16.5% and 3.3% respectively for FY2004, increasing from 15.7% and 2.8%
respectively in FY2003.
• KREB’s total assets have increased by 9.25% from KD674.3mn as at end FY2003 to
KD736.7mn. KREB’s net loans & advances portfolio increased marginally by 2.25% to
KD449.5mn in FY2004, from KD439.6mn in FY2003.
• However KREB’s gross loans & advances portfolio was KD483.0mn in FY2004,
increasing by almost 3% from KD470.1mn in FY2003. KREB has shown a tremendous
growth of 34.1% in advances to the construction & trade business, followed by 7.5% in to
real estate investor. This is in-line with its mandate as a financing institution for the real
estate & construction sector and also the fact that there was tremendous activity reported
in this sector in the domestic market in the year 2004.
• Loans to housing & personal category have shown a marginal increase of 0.7%, while
loans to the non-residents & purchased loans declined substantially by 34.8% and 34.4%
respectively during FY2004 from the previous year.

Break-up of the gross loans & advances portfolio is as under.

Loans & advances portfolio mix 2003 2004 % Change
Amount in KD’000
Real Estate Loans
- Construction & trade 46,000.0 61,700.0 34.1%
- Real estate investors 188,519.0 202,672.0 7.5%
Housing & personal loans 182,856.0 184,179.0 0.7%
Facilities to non-residents 26,101.0 17,029.0 -34.8%
Purchased loans 26,611.0 17,463.0 -34.4%
TOTAL 470,087.0 483,043.0 2.8%
• KREB has reported an increase of 10.1% in its total provisions to KD33.5mn in FY2004.
It showed a 12.1% increase in specific provisions to KD25.15mn during the year.
Provisions for impairment 2003 2004 % Change

- specific (22,430.0) (25,150.0) 12.1%
- general (8,015.0) (8,371.0) 4.4%
Total (30,445.0) (33,521.0) 10.1%
• KREB had a investment portfolio of KD50.8mn as at end FY2004, increasing by 23.3%

from KD41.2mn in FY2003. The break-up is as follows - quoted investments (47%), not
quoted investments (41%), investment in funds (7%), and other investments (5%).
• The Property Management Division of KREB has grown by 23% over the last year as
well as recording an increase in the number of properties under management and the
number of leased units.
• EPS for the year increased by 41% to 38fils from 27fils in FY2003. Based on its improved
performance, KREB declared a dividend of 18fils per share for FY2004, up from 5fils per
share in FY2003.
Outlook & Valuation
• Given the impending conversion of KREB into an Islamic Financing outfit by end-July
2005, it is likely to benefit from the activity in the Islamic financing markets, in the
medium to long term.
• KREB is expected to continue its focus on improving operating efficiency, asset quality
& overall automation of its core operations and using IT to improve its current product
offerings.
• Over the medium term, KREB is expected to have a strong performance buoyed by the
improvement in its core business and rising demand in Islamic Sharia-compliant financial
services & products. Given that almost all of KREB’s business is in the Kuwaiti market,

any increase in activity in the local market will benefit KREB as there is currently only
one full-fledged Islamic finance house – KFH. KREB will be the second in the market
once the makeover is complete by the end of July 2005.
• Currently, KREB is trading at 2.0x its FY2004 book value and 12.5x its actual FY2004
earnings per share. While its closest comparable Islamic Finance competitor – Kuwait
Finance House trades at 5.9x its FY2004 book values and 22.6x its FY2004 earnings per
share. Therefore we believe that there is an reasonable upside in the stock in the short to
medium term.

BALANCE SHEET
Amount in KD' 000 2002 2003 2004
Assets
Bank & cash equivalents 16,010 11,700 22,959
Treasury bills & bonds 124,463 145,698 151,446
Deposits with banks and other financials institutions 25,566 21,891 48,297
Investments available for sale 19,831 31,333 37,952
Investments held to maturity 1,400 2,881 1,454
Investments in associates 2,490 7,009 11,379
Land, premises & equipment 12,734 12,132 12,010
Other assets 3,283 2,026 1,650
Gross loans and advances 426,057 470,087 483,043
Less : provision (22,517) (30,445) (33,521)
Net loans & advances 403,540 439,642 449,522
TOTAL ASSETS 609,317 674,312 736,669
Liabilities & Shareholders equity

Deposits from Banks + FIs 88,986 35,840 67,386
Certificate of deposit - 50,650 42,850
Deposits from customers 332,889 394,780 411,787
Term financing & bonds issued 73,268 60,488 37,141
Other liabilities 8,947 11,654 14,212
Total liabilities 504,090 553,412 573,376
Owner's Equity
paid-up equity capital 43,541 50,072 67,144
share premium 28,308 28,308 49,480
proposed bonus shares 6,531 10,014 8,057
statutory reserve 12,340 14,198 16,649
voluntary reserve 7,072 7,072 7,072
retained earnings 98 3,581 5,011
revaluation surplus/reserve 8,356 8,356 8,356
gain on sale of treasury shares - - 1,727
treasury shares (3,142) (3,142) (11,784)
Proposed dividend 2,123 2,441 11,581
Total Shareholder's Equity 105,227 120,900 163,293
Total Liabilities & Shareholders Equity 609,317 674,312 736,669

OPERATING STATEMENT
Amount in KD' 000 2002 2003 2004
Interest Income 33,939 30,946 35,936

Interest Expense (20,935) (13,949) (16,607)
Net interest income 13,004 16,997 19,329
Add : Fees and commission 2,542 2,729 3,298
Add : Foreign exchange gains 4 148 203
Add : realised gains on investments available for sale 165 394 407
Add : unrealised gains on investments available for sale 299 9,310 6,300
Add : Dividend income 943 896 1,756
Add : Other income 384 441 356
Add: Share of profit / (loss) from associate (321) 5,168 4,370
Less : Provisions for impairment 1,522 (9,308) (2,532)
Operating income 18,542 26,775 33,487
Less : Staff costs (4,205) (4,866) (5,679)
Less: Depreciation (1,066) (1,176) (1,185)
Less: Other operating expenses (2,024) (2,162) (2,118)
Operating profit 11,247 18,571 24,505
Less : Contribution to KFAS (101) (167) (221)
Less: NLST (248) (408) (540)
Less : Directors' fees (120) (200) (225)
Net Profit 10,778 17,796 23,519

Op Balance of Retained Earnings 99 98 3,581
Net Profit for the year 10,778 17,796 23,519
Trfr to Statutory Reserve (1,125) (1,858) (2,451)
Trfr to Voluntary Reserve (1,000) - -
Proposed issue of bonus shares (6,531) (10,014) (8,057)
Proposed cash dividend (2,123) (2,441) (11,581)
Cl Balance of Retained Earnings 98 3,581 5,011

CASH FLOW STATEMENT

Amount in KD' 000 2002 2003 2004
Cash flow from operating activities

Interest on T-bills & bonds (3,855) (3,041) (3,423)
Dividends income (943) (896) (1,756)
Realised gain on investments available for sale (165) (394) (407)
Unrealised gains on investments available for sale (299) (9,310) (6,300)
Share of profits of associates 321 (5,168) (4,370)
Depreciation 1,066 1,176 1,185
Unrealised forex loss - 143 28
Provisions for impairment (1,953) 9,308 2,532
Operating profit before changes in working capital 4,950 9,614 11,008
Deposits with banks & other Fis, with maturities > 90days 2,323 1,501 -
Loans & advances to customers 3,939 (44,122) (12,987)
Other assets 2,504 879 465
Deposits from banks & other Fis 49,198 (11,878) 31,546
Certificate of deposits - 3,000 (7,800)
Customer deposits (58,422) 68,273 17,007
Other liabilities (3,618) 1,387 3,133
Changes in working capital (4,076) 19,040 31,364
Net cash flow from / (to) operating activities 874 28,654 42,372
Cash flow from investing activities

T-bills & bonds (28,487) (21,235) (5,748)
Sale / maturity of investments available for sale 1,019 1,366 933
Purchase of investments available for sale (3,164) (3,432) (872)
Redemption / (purchase) of investments held to maturity (1,392) (1,326) 1,427
Cash received from associate - 649 -
Purchase of equipment (478) (574) (1,063)
Interest on T-bills & bonds 4,224 3,420 3,334
Dividends received 943 896 1,756
Net cash flow from / (to) investing activity (27,335) (20,236) (233)
Cash flow from financing

Dividend paid to shareholders (6,369) (2,123) (2,441)
Repayment of term financing / bonds maturing (43,268) (12,780) (23,347)
Issuance of share capital - - 28,230
Purchase of treasury shares - - (11,123)
Proceed from sale of treasury shares - - 4,208
Net cash flow from / (to) Financing (49,636) (14,903) (4,473)
Net Change in Cash (76,097) (6,485) 37,666
Cash & equivalents at beginning of the year 115,919 39,822 33,337
Cash & equivalents at year-end 39,822 33,337 71,003

KEY RATIOS
2002 2003 2004
Profitability
- Net interest income/ total Op. Income 70.1% 63.5% 57.7%
- Non-interest expense/ total Op. Income 39.3% 30.6% 26.8%
- Commissions/ total Op. Income 13.7% 10.2% 9.8%
- Investment income/total Op.Income 5.9% 58.9% 38.3%
Margins
- Net profit / interest income 31.8% 57.5% 65.4%
- Net Interest income to Interest Income 38.3% 54.9% 53.8%
- Interest Income to Interest Earning Assets 5.6% 5.1% 5.4%
- Interest Expense to Interest Bearing Liabilities 4.0% 2.7% 3.0%
- Net Spread 1.6% 2.4% 2.4%
Efficiency
-Cost to Total Op Income 39.3% 30.6% 26.8%
- Staff Expense to Total Op Income 22.7% 18.2% 17.0%
Liquidity
- Gross Loans to Interest Earning Assets 74.0% 73.7% 70.7%
- Net Loans & adv to Customer Deposits, Banks & FIs 95.7% 102.1% 93.8%
- Due from Banks to Due to Banks 28.7% 61.1% 71.7%
Credit Quality
- Provisions to total Op Income -8.2% 34.8% 7.6%
- Provisions to Average loans -0.4% 2.1% 0.5%
- Non Performing Loans (NPLs) KD'000 88,260 70,776 67,208
- Loan Loss Reserve (Provisions) KD'000 22,517 30,445 33,521
- NPL's to (Equity + Gross Loans & Advances) 16.6% 12.0% 10.4%
- NPL Coverage 25.5% 43.0% 49.9%
Capital Adequacy
- Investment Income to Total Op Income 5.9% 58.9% 38.3%
- Other Income to Total Op. Income 2.1% 1.6% 1.1%
Growth
- Change in Interest Income -21.9% -8.8% 16.1%
- Change in Fees and Commission 12.9% 7.4% 20.9%
- Change in Net profits 13.6% 65.1% 32.2%
- Change in Other Income 5.5% 14.8% -19.3%
- Shares in Issue ('000) 435,409 500,720 671,440
- EPS (fils) 22.1 27.0 38.0
- DPS Declared (%) 5.0% 5.0% 18.0%
- Dividend per share (fils) 5.0 5.0 18.0
- Total Dividend (KD'000) 2,123.0 2,441.0 11,581.0
- Dividend pay out ratio % 22.7% 18.5% 47.4%
- Book Value Per Share (fils) 241.7 241.5 243.2
- Market Price Year End (fils) 380.0 620.0 550.0
- P/E 17.2 23.0 14.5
- P/BV 1.6 2.6 2.3


National Bank of Kuwait BUY NBKK.KW 1,320fils 1,10
Gulf Bank HOLD GBKK.KW 1,240fils 1,10
Commercial Bank of Kuwait HOLD CBKK.KW 760fils 1,10
Burgan Bank BUY BURG.KW 425fils 1,10
Al-Ahli Bank of Kuwait BUY ABKK.KW 500fils 1,10
The Bank of Kuwait and Middle East K.S.C BUY BKME.KW 420fils 1,10
Kuwait Finance House HOLD KFIN.KW 1,540fils 1,10
Kuwait Real Estate Bank NOT RATED KREB.KW 475fils 1,10

Oman
Oman Banking Sector

May 2005
Equities Research
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661


omar@global.com.kw
Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
Phone No:(965) 2400551 Ext.196
Amit Tripathy
amitt@global.com.kw
Phone No:(965) 2400551 Ext 269
Faisal Hasan, CFA

Financial Analyst
Phone No:(965) 2400551 Ext.304
Adham Fayoumi
Financial Analyst
afayoumi@global.com.kw
Phone No:(965) 2400551 Ext.317
Table of Contents
Oman Banking Sector .................................................................................................................................................. 1
Interest Rate Trends ...................................................................................................................................................... 1
Trends in Domestic Liquidity and Investments .......................................................................................... 2
Trends in Credit Facilities ......................................................................................................................................... 3
Trends in Deposits ........................................................................................................................................................... 4
Asset & Libility Composition .................................................................................................................................. 5
Peer Group Comparison ............................................................................................................................................. 6
Banking Sector Valuation .......................................................................................................................................... 11
Banking Sector Outlook .............................................................................................................................................. 15
Players Profiles
BankMuscat ................................................................................................................................................................ 20
National Bank of Oman ...................................................................................................................................... 27
Oman International Bank ................................................................................................................................... 32
Bank Dhofar ............................................................................................................................................................... 38
Alliance Housing Bank ....................................................................................................................................... 44

Global Research Oman Global Investment House
Oman Banking Sector

Industry Structure…
Oman’s financial sector has strengthened considerably and was transformed in recent years
to a modern financial system consisting of commercial banks, specialized banks and other
financial intermediaries. Out of the 14 commercial banks, 5 are locally incorporated and 9
are the local subsidiaries of foreign banks. Together they operate a network of 356 branches.
There are 3 specialized banks in operation, of which two are government owned, Oman
Housing Bank and Oman Development Bank, and the third is Alliance Housing Bank which
is privately owned. Together, all the specialized banks operate a network of 26 branches. As
of end 2004, 11 commercial banks were granted approval to engage in specific investment
banking activities on a tiered licensing system. There are also 6 non-banking financial
institutions licensed by the Central Bank to engage in hire purchase, leasing, debt factoring
and similar credit based operations. In addition to the above, the non-banking financial
institution sector also includes insurance companies, public and private pension funds, capital
markets and brokerage companies.
The banking sector in Oman is dominated by four local banks, Bank Muscat, National
Bank of Oman, Oman International Bank and Bank Dhofar which accounted for 78.5% of
total banking assets, 86% of total deposits and 89% of total banking credits as of FY2004.
These banks also dominate the banking industry by virtue of their size, reach and coverage
as they operate 270 branches spread all over the country. These large banks also have a
competitive advantage over the smaller banks on account of their strong brand equity and
distribution coverage. Foreign banks operating in the country have not been included in this
report because of lack of available country-specific information for the banks. Foreign banks’
operations are largely confined to Muscat while local banks serve even in the remote areas
with a wide network of branches. Our comparison of the banks in this report would remain
confined to only the listed local banks of Oman which accounted for over 78% of the total
assets in the local banking industry. The total banking assets in Oman amounted to around
RO4.9bn as of end 2004.
Table 1: Market Share of Omani Banks

2003 2004 2003 2004 2003 2004
BankMuscat 43.4% 46.7% 40.6% 41.5% 45.0% 44.3%
National Bank of Oman 22.8% 18.1% 25.1% 20.2% 24.2% 22.4%
Oman International Bank 18.2% 18.1% 19.1% 21.3% 15.1% 16.2%
Bank Dhofar 13.2% 13.9% 14.5% 15.7% 13.4% 13.9%
Alliance Housing Bank 2.5% 3.1% 0.7% 1.2% 2.4% 3.2%
Source: Company Annual Reports & Global Research
Interest Rate Trends
A declining interest rate environment over the past three years has been favorable to the
commercial banks in Oman. The weighted average Rial Omani deposit rates declined from
5.498% in March 2000 to 1.131% in December 2004. During the same period weighted
May 2005 Oman Banking Sector Report 1

average Rial Omani lending rates declined from 10.277% to 7.570%. This decline in interest
rates can be primarily attributed to four main factors - excess liquidity in the domestic
system, lack of adequate investment opportunities in the domestic economy, low interest rate
environment in the global markets and pegging of the Omani Rial to US dollar. Analyzing
the spread between the deposits rates and lending rates reveal that the net spread available
to banks has increased from 4.779% in March 2000 to 6.439% in December 2004. In other
words, the rate of decline in deposit rates has increased at a faster rate than that the rate of
decline in lending rates. This has resulted in the net spread moving from 4.779% to 6.439%
during the period.
Fig 1: Interest rate trend

12
10
8
6
4
2
0
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Interest Rates
Rial Omani Deposits Rial Omani Lending Spread
Source: Central Bank of Oman
As the monetary policy in Oman is predominantly a function of the direction of interest rates
in USA due to a pegged exchange rate regime where the interest rates have been firming up,
we expect the interest rate in Oman to show an increasing trend going forward. Also, a higher
than budgeted oil price in 2004 and the expected firming up of oil prices in 2005 should lead
to an increase in government revenues and reserves. This will encourage more government
spending on the infrastructure sector leading to higher money supply, which in turn will lead
to an inflow of funds into the system. This turning up of the interest rate cycle would lead
to a squeeze in the margins for some of the banks initially depending on their asset/liability
structure.
Trends in Domestic Liquidity and Investments
The liquidity situation in the banking sector has remained comfortable. During 2004, the
narrow measure of money stock (M1) comprising the aggregate of currency with the public
and local currency demand deposits expanded from RO870.7mn in the beginning of the year
to RO907.3mn in December 2004, an increase of 4.2%. M1 further expanded to RO992.1mn
at the end of January 2005. Rial Omani demand deposits witnessed an impressive 22.%
growth to reach RO650.7mn as of end January 2005 while currency with the public remained
at the same level slightly over RO341mn. On the other hand, quasi money, comprising Rial
Omani savings and time deposits, margins and forex deposits, increased by a modest 2.7%
during the same period. As a result, the broad measure of money (M2) registered an increase
of 6.2% over the period to reach RO3.03bn in January 2005.
2 Oman Banking Sector Report May 2005

Due to a favorable liquidity environment in the market, bank investments, particularly in

government securities witnessed movements in the positive territory. Holdings in Government
development bonds saw a significant rise of 12.3% from RO130.3mn in January 2004 to reach
RO146.5mn in January 2005. Investments in Treasury bills however declined from RO142mn
to RO133mn during the period. Investments in certificates of deposits (CDs) issued by the
Central Bank which was a popular investment among commercial banks till June-2004 saw
the numbers decline significantly from a high of RO301.1mn in June 2004 to RO122.3mn
in January 2005. Overall, investments in government-securities holdings declined by 11%
from RO576.2mn in January 2004 to RO512.1mn in January 2005, indicating presence of
alternative investment opportunities for banks in Oman.
Total deposits held with commercial banks stood at RO3.128bn at the end of January 2005
registering a 9.8% increase over the January 2004 data. Government deposits held with
commercial banks for the period witnessed a marked increase of 36.4% from RO309.7mn
in January 2004 to reach RO422.5mn in January 2005. However, the trend was not reflected
in the deposits of the public enterprises, which dropped by 17% during the period from
RO174.8mn to RO144.8mn in January 2005. Private sector deposits held with banks
increased by 8.3% during the same period at RO2.56bn. An analysis of the components of
private sector deposits reveals that despite significant increases in both demand and savings
deposits, which rose by 18% and 12.5% respectively, the positive effect was tempered by a
stagnant Rial Omani time deposits for the period.
Trends in Credit Facilities
Oman witnessed rapid credit expansion between 1995 and 1999 both in domestic and corporate
accounts. Loan book of banks doubled during this period rising from RO1.4bn in 1995 to
RO2.9bn in 1999 and stood at RO3.5bn as of January 2005. The loan growth in Oman has
slowed down considerably and averaged approximately 4.1% per annum between January
2000 and January 2005. This is partly because of asset quality problems which surfaced in
the corporate sector over this period - a fallout of the 1998 stock market crash and a weak
macroeconomic environment. At the same time, restrictions imposed by the Central Bank of
Oman (CBO) on personal lending also contributed to the sluggish loan growth during this
period. In October 2003, CBO announced an increase in the ceiling on personal lending to
42.5% with effect from January 1, 2004.
The distribution of commercial credit facilities by the banking sector indicates that personal
loans constituted about 38.3%, import trade 11.1% and manufacturing 7.7% of the total loans
disbursed by banks at the end of 2004. Construction sector constituted 6.3% of the total
credit off take. Trend in credit off take suggest that these sectors have been the major growth
areas for the banks. Total bank credit to all sectors increased from RO3.3bn at end 2003 to
RO3.5bn as of end 2004.

Table 2: Distribution of Commercial Bank Credit by Economic Sectors

2000 2001 2002 2003 2004
Import Trade 12.8% 10.0% 9.6% 9.9% 11.1%
Export Trade 0.3% 0.2% 0.2% 0.1% 0.2%
Wholesale & Retail Trade 5.6% 5.4% 4.2% 4.1% 4.2%
Mining and Quarrying 2.5% 2.5% 2.4% 2.3% 2.8%
Construction 6.9% 7.1% 6.9% 6.4% 6.3%
Manufacturing 8.1% 10.1% 8.8% 8.5% 7.7%
Electricity, Gas and water 0.5% 1.6% 2.0% 2.9% 3.3%
Transport and
1.4% 2.2% 1.7% 1.3% 1.3%
Communications
Financial Institutions 8.1% 6.1% 4.7% 4.9% 4.7%
Services 5.7% 7.2% 7.1% 7.0% 6.4%
Personal Loans 32.8% 32.5% 35.8% 37.3% 38.3%
Agriculture and allied
1.0% 0.6% 0.8% 0.8% 0.9%
Activities
Government 2.7% 4.3% 5.4% 4.5% 4.1%
Non-resident Lending 3.7% 3.2% 2.0% 1.7% 1.4%
All others 8.0% 7.0% 8.5% 8.0% 7.2%
Total Credit 100% 100% 100% 100% 100%
Notwithstanding the current interest rate environment, the recovery in corporate loan
volumes will be slow because the sector remains stretched in terms of liquidity and the major
players are expected to focus more on managing credit risk than growing their loan portfolio.
However, the personal loans which have been growing at a rate of over 9% since 2000, would
continue to drive the overall loan growth in the industry. As of end 2004, personal loan
category constituted 38.3% of the total bank credit. Considering the fact that Oman is one of
the lowest penetrated markets in the GCC region in terms of credit as a percentage of GDP,
the overall commercial and domestic credit would grow in the medium term, albeit slowly
due to the various structural issues.
Trends in Deposits
Total deposits during 2000-2004 grew at a CAGR of 4% from RO2.5bn in 2000 to RO3.08bn
in 2004. This slow growth in total deposits can be partially attributed to low growth in the
loan book resulting in low credit multiplier effect. Private sector deposits constituted about
82% of total deposits and were the main driver of the total deposit growth.
Table 3: Deposit trends of Commercial Banks

in % 2000 2001 2002 2003 2004
Government Deposits 12.2% 10.6% 10.0% 10.5% 13.5%
Public Enterprises Deposits 7.6% 8.0% 8.3% 5.8% 4.6%
Private Sector Deposits 80.2% 81.3% 81.8% 83.7% 81.9%
Total Deposits 100.0% 100.0% 100.0% 100.0% 100.0%

Asset & Liability Composition
The cumulative assets of Omani commercial banks have recorded a growth of 4.1% (CAGR)
during 2000-2004 with most of the growth coming from the credit issues to the domestic
private sector. Total credit to private and public enterprises stood at RO3.36bn in 2004, an
increase of 6.5% over previous year. Securities, which include T-bills, Government Bonds
and other foreign and domestic securities provided key avenues of investment and showed
a yearly decline of 14.5% at RO503.3mn in 2004 and accounted for about 10.3% of the
total assets of banks in 2004. As of end 2004, the total assets of commercial banks stood
at RO4.89bn. The weak growth in total credit was largely the outcome of cautious lending
policies by various commercial banks following previous years’ high provisioning for NPLs.
Credit to private sector grew out of the RO3.0bn range for the first time since 2001 and
reached RO3.28bn as of 2004.
Table 4: Combined Balance Sheet of Commercial Banks

In RO mn 2000 2001 2002 2003 2004
Cash and deposits with Central Bank 132.2 138.3 166.7 131.4 167.8
Due from banks abroad 275.8 202.4 325.2 330.6 483.4
Total Credit 2,980.7 3,241.0 3,270.3 3,309.7 3,510.1
Credit to Private Sector 2,885.1 3,072.3 3,054.6 3,091.3 3,278.1
Credit to Public Enterprises 16.3 28.1 46 69 87.3
Credit to Government 79.3 140.6 169.7 149.4 144.3
Securities 356.4 422.4 416.4 544.2 503.3
Treasury Bills 40 160 69 138 149
Government Bonds 120.9 126.2 118.5 130.3 146.6
Other domestic securities 33.3 32.7 24.1 192.4 86
Foreign Securities 78.8 74.9 85.9 83.5 121.7
Others 83.4 28.6 119 0 0
Fixed Assets 39.3 46.8 36.9 36.7 35.4
Other Assets 179.2 154 150.1 94.7 99.4
Total Assets 3,963.60 4,204.90 4,362.70 4,516.90 4,891.90
Government Deposits 306 285.5 276.4 300 441.4
Deposits of public enterprises 191.5 215.7 229.2 166.4 136.8
Deposits of private sector 2,009.90 2,181.90 2,271.60 2387.2 2,500
Demand 283.8 440 523.2 - 625.7
Savings 407.3 485.1 588.6 - 757.5
Time 1,318.80 1,256.80 1,159.80 - 1116.5
of which in foreign currency -220.5 -224.3 -321 - -
Due to banks abroad 534.7 517.8 486.8 399 236.9
Core capital and reserves 433.3 425.8 432.8 509.3 497.5
Provisions and reserve interest 157.9 232.5 297.4 339.5 372.1
Other liabilities 330.3 345.7 368.5 415.5 565.8
Total Liabilities 3,963.60 4,204.90 4,362.70 4,516.90 4,891.90

On the liabilities side, total deposits, which consist of deposits from public and private
sectors, have grown at a CAGR of over 5.3% during the five year period 2000-2004. In
2004, total deposits grew by 7.9% over the previous year, largely driven by deposits from
the private sector which increased by 4.7% over 2003. The deposits of public enterprises
declined by 17.8% in 2004 as compared to previous year. As of end 2004, total deposits stood
at RO3.08bn.
Figure 2: Composition of Assets and Liabilities of the Banking Sector in 2004
Banking Sector Asset Composition Banking Sector Asset Composition

3% 9%
1% 2% 10% 12%
3%
10%
8%
10%
5%
74% 53%
Cash and deposits with Bank Due from banks abroad Government Deposits Deposits of public enterprises
Total Credit Securities Deposits of private sector Due to banks abroad
Fixed Assets Other Assets Core capital and reserves Provisions and reserve interest
Other liabilities
The credit to deposit ratio of the banking sector decreased from 116% in end 2003 to 114%
in end 2004. It further declined to 110% at the end of January 2005. Capital adequacy ratio of
the banking sector declined from 17.8% in 2003 to 17% in January 2005. Total provisions to
credit ratio however increased from 10.2% to 10.8% over the past 12 months.
Peer Comparison
Comparison of Listed Banks’ Financials
Our comparison of the banks in this section would remain confined to only the five listed
local banks of Oman which accounted for 78.5% of the total assets in the local banking
sector. BankMuscat is the largest bank in Oman, in terms of assets size, loans & advances
and deposits. The following table gives the broad overview of the balance sheet of the listed
banks in Oman.

Table 5: Comparative Financials of Omani Banks as of 2004

RO’ 000 BM NBO OIB BD AHB
Assets
Cash & Bank Balances
39,092 75,106 24,833 38,096 243
Gross Loans & Advances 1,435,557 726,045 523,648 449,068 103,594
Less: Provisions & Reserved Interest (106,179) (208,706) (68,830) (42,565) (1,056)
Net Loans & Advances 1,329,378 517,340 454,818 406,503 102,538
Investments 167,879 33,942 49,512 25,415 18,479
Net Fixed Assets 11,902 6,854 8,910 3,488 127
Interest Earning Assets 1,849,784 814,240 634,180 537,162 124,494
Total Assets 1,852,388 718,032 717,823 552,177 124,892
Liabilities
Due to banks 173,870 75,106 28,475 34,364 12,950
Customer Deposits 1,110,603 541,789 571,369 421,093 32,331
Floating Rate Notes/CDs/ Other borrowed
202,570 - - - 26,625
funds
Subordinated Loans 45,621 21,338 - 7,362 -
Paid-Up Capital 59,815 70,000 62,897 41,962 21,000
Reserves 78,576 32,459 41,535 14,086 6,495
Shareholders Equity 194,344 102,459 104,432 67,771 29,175
Interest Bearing Liabilities 1,532,664 598,403 592,220 462,819 93,306
Total Liabilities 1,852,388 718,032 717,823 552,177 124,892
Source: Company Annual Reports
The total assets of the banking sector stood at RO4.9bn as of Dec 2004. Around 72% or
RO3.51bn of the total assets were deployed in lending operation to government, public and
private sector. In the past few years, banks in Oman have focused extensively on improving
their asset quality. As a result, we have witnessed substantial improvement in the asset
quality of the banks. Despite that there are some banks whose NPL ratios are much higher as
compared to the international standards. In the Omani banking sector, NBO has the highest
non-performing loans as a percentage of total loans and advances in 2004 (35%) which was
followed by Oman International Bank (14.5%). AHB continues to have the best asset quality
among its peers although its loan book is very small as compared to its peers. However, as
the loan book increases at a staggering pace, we expect the NPLs of AHB and hence the
provisioning levels to go up in the subsequent years. BankMuscat’s non-performing loans to
gross loans stood at 7.3% in 2004.
Since the provisions have also kept pace with the increase in NPLs, this has definitely helped
in reducing the systemic risk in the banking sector. Looking at the NPL levels of all the
listed banks in MSM, it can be seen that AHB has the lowest NPL to Gross Loans ratio thus
indicating the quality of its loan book. All the banks in Oman except NBO and OIB have
over 100% coverage for their NPLs in FY2004. Bank Dhofar has provisioning coverage with
114.3% followed by AHB with 110.7% and BankMuscat with 101.3%. We expect significant
reduction in provisioning levels in Omani banks in the medium term.

Table 6: NPL Ratios in FY2004

(Amt in RO 000) BM NBO OIB BD AHB
Gross Loans 1,435,557 726,045 523,648 449,068 103,594
Provisions (106,179) (208,706) (68,830) (42,565) (1,056)
Net Loans 1,329,378 517,340 454,818 406,503 102,538
Non-performing Loans 104,830 256,200 75,900 37,229 954
NPL / Gross Loans 7.3% 35.3% 14.5% 8.3% 0.9%
Provisions / NPL 101.3% 81.5% 90.7% 114.3% 110.7%
Source: Company Annual Reports and Global Research
A look at the composition of customer deposits reveal that Omani commercial banks, in
general, have relied mainly on time deposits as their major source of funding. As a percentage
of total customer deposits, time deposits constituted 59.5% for Bank Dhofar, the highest in
the banking sector in Oman. Moreover, customer deposits which fall under the short-term
deposits (less than 1 year) category constituted over 47% for NBO, 63% for BM, 74% for BD
and 40% for OIB. In a rising interest rate scenario, banks which have a better access to such
low-cost funds ( i.e. short-term funds) will see improved margins and spreads.
Fig 3: Composition of Customer Deposits
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
BM BM BM NBO NBO NBO OIB OIB OIB BD BD BD
2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004
Current Savings Time Others
In terms of interest income, BankMuscat continued to lead its peer by a wide margin.
BankMuscat’s interest income is more than twice that of its nearest banking competitor i.e.
NBO. In FY2004, BankMuscat garnered close to 47% of the total interest income generated
by the sector. However, other banks have also been able to increase their interest income
mainly because of the rise in interest rates since mid-2004.

We believe that the banks in Oman have greater opportunity to increase their fee based income.
There are number of projects in the pipeline and the economy offers diverse opportunities
for the banks who have developed their investment banking divisions, particularly in the IPO
areas. BankMuscat stands out in the Omani banking sector in terms of its transactions related
to the securities market. Amongst the mandates that BankMuscat was associated with in 2004
included the Al Kamil Power public issue and AES Barka public issue, both of which were
very well received by the investing community. The bank is also currently working on the
Dhofar Power Company IPO and also on the much-awaited Omantel issue.
The total operating income after provisions of the banks have also witnessed excellent growth
in FY2004. Overall, Omani banks have been improving their operating performance over the
years owing to extensive use of technology, restructuring of business processes, with emphasis
on automation and cost initiatives in the banking business, to improve service levels. Thus,
profitability of the banking sector (excluding NBO) showed a growth of 29% in 2004 over
the previous year. Banks will continue to benefit from the further hardening of interest rates.
Also, banks focused heavily on improving operating efficiency and asset quality during the
past couple of years, a move that is currently helping them to expand their asset base and
boosting expectations in the sector. As a result, all 5 banks saw improved profitability during
the FY2004, led by Alliance Housing Bank (+37.7%), BankMuscat(+35.9%), and Oman
International Bank (+10.2%).
Table 7: Comparative Financials of Omani Banks as of FY 2004

RO’ 000 BM NBO OIB BD AHB
Operating Statement
Interest Income 104,678 45,144 35,375 30,019 8,271
Interest Expense (29,440) (18,765) (7,882) (6,755) (2,262)
Net Interest Income 75,238 26,379 27,493 23,264 6,008
Non-Interest Income 22,798 11,541 9,219 5,017 650
Provisions for loans (20,403) (30,267) (6,601) (3,324) (444)
Recoveries from Provisions 6,283 18,494 3,273
Operating Income 98,036 37,920 36,712 28,281 6,659
Operating Expense (58,376) (32,628) (17,439) (12,243) (2,635)
Operating Profit 39,660 5,292 19,273 12,714 4,024
Net Profit 34,105 5,222 14,085 11,192 3,560
A look at the profitability ratios of the banks indicate that except NBO, all other banks showed
healthy Return on Average Equity (RoAE) and Return on Average Assets (RoAA). Due to
heavy provisioning made by NBO, the RoAE and RoAA were low in 2004, but BD showed
excellent results after it successfully merged with Majan Bank and the results are expected
to be better in the current year as well. In terms of RoAA, AHB was the most profitable bank
and in terms of RoAE, BM was the most profitable bank in the Omani banking sector.

Table 8: Ratios Indicators in FY2004

BM NBO OIB BD AHB
ROAE 18.6% 5.2% 13.6% 17.1% 12.7%
ROAA 2.00% 0.68% 2.06% 2.18% 3.34%
Interest Exp / Interest Income 28.1% 41.6% 22.3% 22.5% 27.4%
Interest Income / Avg Int earning assets 6.16% 5.54% 5.75% 5.93% 7.78%
Interest Exp / Avg Int bearing liabilities 2.05% 2.98% 1.43% 1.58% 2.95%
Net Spread 4.11% 2.56% 4.32% 4.35% 4.83%
Net Interest Margin 4.43% 3.45% 4.47% 4.60% 5.65%
Net Interest Income / Total Operating Income 55.93% 55.5% 56.91% 70.51% 83.57%
Non Interest Income / Total Operating Income 23.25% 44.53% 25.11% 17.74% 9.77%
Cash Dividend Payout Ratio 44% 0% 94% 56% 47%
Cost to Operating Income 59.5% 79.9% 47.5% 43.3% 39.6%
Staff Expenses / Operating Income 17.3% 45.7% 29.4% 25.6% 18.2%
Net Loans / Customer Deposits & Deposits from FIs 119.7% 95.5% 79.6% 96.5% 317.1%
Gross Loans / Customer Deposits 129.3% 134.0% 91.6% 106.6% 320.4%
Capitalization Indicators
Capital Adequacy Ratio 15.51% 19.00% 22.26% 15.40% 53.73%
Equity to Total Assets 10.5% 14.3% 14.5% 12.3% 23.4%
Equity to Gross Loans 13.5% 14.1% 19.9% 15.1% 28.2%
The Capital Adequacy Ratios(CAR) of all banks at the end of FY2004 were substantially
higher than the minimum 12% stipulated by CBO. The current CAR levels of Omani banks
indicate adequate capital strength and strong solvency levels. The CAR of BankMuscat has
been relatively stable at over 15% level for the past 3 years. However, CAR of NBO observed
a 5% growth as a result of capital injection by Suhail Bahwan group in 2003 and also owing
to a move into lower risk assets by the bank. OIB also improved its CAR by shrinking its loan
book. Overall, the banks are in excellent shape to begin leveraging their capital base in order
to provide better return to their shareholders. With a number of new projects and investment
opportunities coming up in Oman, we expect that the banks will have ample opportunity to
improve their profitability.
The operational parameters of Omani banks are depicted as below. In terms of cost efficiency
and profitability per employee, AHB leads the sector mainly owing to its small operations
as it operates only 7 branches and employees 61 personnel. Among the commercial banks,
BankMuscat again leads the pack in terms of profitability per employee with Bank Dhofar
trailing a close second.

Table 9: Operational parameters in FY2004

( Amounts in RO 000) BM NBO OIB BD AHB
No. of Branches 90 50 82 48 7
No. of Employees 1,669 1,163 944 579 61
Total Operating Income (Net of Provisions) 98,036 37,920 36,712 28,281 6,659
Operating Expenses (58,376) (32,628) (17,439) (12,243) (2,635)
Operating Profit 39,660 5,292 19,273 12,714 4,024
Net Profit 34,105 5,222 14,085 11,192 3,560
Operating Income Per Employee 1,089.3 758.4 447.7 589.2 951.2
Operating Expense Per Employee 35.0 28.1 18.5 21.1 43.2
Profitability Per Employee 20.4 4.5 14.9 19.3 58.4
Oman Banking Sector Valuations
Our valuation analysis includes the listed commercial banks in MSM. As of April 24, 2005
the average price to earnings ratio for the banking sector stood at 17.8x based on their 2004
earnings. NBO was an outlier as it enjoyed the highest trailing P/E multiple with 41.8x owing
to its low earnings in FY2004. AHB was trading at 22.2x and OIB was trading at 19.4x, while
Bank Muscat and Bank Dhofar were trading at 17.8x and 14.4x in the MSM.
The price to book value of the sector was at 2.76 times the book value based on the year
end 2004 results. BankMuscat enjoyed the highest value of price to book value of 3.1 times
followed by AHB with 2.7 times. NBO, which has the highest price to earnings ratio in the
sector had a price to book value of 2.5. The book values of the banks are likely to improve
from current levels owing to the further increase in interest rates over the medium term which
would result in higher margins and profits and attractive yields. Banking stocks in Oman, also
being very liquid are attracting the interest of fund managers.
Table 10: Valuation Summary

Composite
M- Potential
Reuters CMP P/ Share Recomm-
Name of Bank Country Cap in RoAA RoAE P/E * Upside/
Code in RO* BV* Value in endation
ROmn* Downside
RO
BankMuscat Oman BMAO.OM 8.830 528.2 2.0% 18.6% 15.49 3.13 8.101 -8.3% Hold
Oman International Bank Oman OIB.OM 4.360 274.2 2.1% 13.6% 19.46 2.62 4.527 3.8% Hold
Alliance Housing Bank Oman AHBK.OM 3.700 77.7 3.3% 12.7% 21.76 2.66 3.689 -0.3% Hold
Bank Dhofar Oman BDOF.OM 3.850 161.5 2.2% 17.1% 14.41 2.37 4.218 9.6% Hold
National Bank of Oman Oman NBO.OM 3.650 255.5 0.7% 5.2% 48.6 2.5 - - Not Valued
BankMuscat
BankMuscat (BM) was reconstituted in 1993 as a public joint stock company by the voluntary
merger of two established banks - Bank of Muscat and Al Bank Al Ahli Al Omani; which
were operating in the Sultanate since 1982 and 1976 respectively. Owing primarily to an
inorganic growth strategy through four major mergers and acquisitions, BankMuscat is now
the largest bank in Oman.

The net interest income during FY2004 increased by 9.3% over the previous year to reach
RO75.2mn, which was mainly aided by a 37% decline in interest expense on its tier-II
capital. BankMuscat’s total assets increased substantially to RO1.85bn at the end of FY04,
representing an increase of 19% over the previous year. The bank’s gross loan book growth
during the year was at 5.8% and it reached RO1.43bn at the end of FY04. NPLs declined
from RO113.27mn to RO104.83mn during this period. The loan loss coverage has increased
to 101.3% as of the end of FY04.
BankMuscat reported an annualized basic and diluted EPS of RO0.570 during FY04, an
increase of 17% over the diluted EPS recorded for the corresponding period last year. We
have increased our valuation from our earlier projection of RO7.046 to the current RO8.101
mainly to indicate the fact that BankMuscat will benefit from the rising interest rates thus
positively impacting its bottom-line and improving its lending spreads. The estimated fair
value of BankMuscat’s stock works out to RO8.101 based on DDM and relative valuation
method, which represents a discount of 8.3% from the current market price of RO8.830. We
recommend a Hold on the stock.
Oman International Bank was established in 1979 as Oman Arab African Bank. In 1984
it was renamed as Oman International Bank (OIB) to reflect the 100% Omani ownership
after a group of Omani shareholders bought the 60% stake held earlier by Arab African
International Bank.
Net profit after providing for taxation in 2004 was higher at RO14.08mn, a 6.5% increase
over the corresponding period last year. OIB’s total assets increased to RO710.2mn at the
end of FY04, representing an increase of 13.2% over the previous year. After a negative
loan book growth during 2003, the bank started lending out with new vigor during 2004.
The bank’s gross loan book growth during the year was 15% and it reached RO523mn at the
end of FY04. NPLs as a percentage of gross loans declined from 17.5% to 14.5% during this
period. The loan loss coverage has increased to 91% as of the end of FY04.
OIB reported basic EPS of RO0.224 during FY04, an increase of 6.7% over the previous
year. The estimated fair value of OIB’s stock works out to RO4.527 based on DDM and
relative valuation method, which is higher by 3.8% vis-à-vis current market price of the
stock. Our price target represents an implied 2005 P/E multiple of 16.4x. We revise our
Alliance Housing Bank (AHB) was incorporated in 1997 and is a publicly held institution
listed on the Muscat Securities Market. AHB was formed as a specialized housing bank with
the goal to help the local housing market by providing long term loans for those who wish to
buy land/ houses and build/ improve their houses.
The net profit after providing for taxation in 2004 was at RO3.560mn, a 37.7% increase over
the corresponding period last year. AHB’s total assets increased substantially to RO124.9mn
at the end of December 2004, representing an increase of 41% over the previous year.

The bank increased its loan book size (gross) by 43% during the last 4 quarters to RO103.6mn
at the end of FY2004. However, the loan book growth during the last quarter was reduced to
RO6mn as against an average of RO8mn during the first 3 quarters of 2004. Keeping in trend
with mortgage accounts, the ratio of provisions to average loans also saw a marginal increase
from 0.4% in FY2003 to 0.5% in FY2004. The NPL coverage ratio at the end of 2004 was
at 100.4%. Total deposits from customers increased by a healthy 91% to reach RO32.3mn as
of December end 2004, while certificates of deposits increased by 15% to reach RO26.6mn
during the same period.
AHB reported basic and diluted EPS of RO0.170 during FY04, an increase of 38% over the
basic and diluted EPS of 2003. Currently the stock is trading at 2005 earnings multiple of
15.5x and at 2.6x its 2005 book value. We have revised our fair value of AHB’s stock at
RO3.689 based on DDM and relative valuation method, which represents a discount of 0.3%
from the current market price of RO3.700. We maintain ‘Hold’ on the stock.
Bank Dhofar
With successive years of consistent growth through organic and inorganic strategies,
Bank Dhofar has accumulated a critical mass with an impressively expanding network of
48 operational branches. A new five-year strategic plan was also approved by the board
in 2003 which recommended a panned growth in cross-border exposure, increased lending
to emerging enterprises, envisaged the launch of at least three new independent business
units (investment banking, private banking and structured finance) and several new retail
products.
The net profit after providing for taxation was at RO11.1mn in 2004, a 10.2% increase over
the corresponding period last year. Bank Dhofar’s total assets reached RO552mn at the end
of FY04, representing an increase of 16.5% over the previous year. The bank’s gross loan
book growth during the year was at 10.9% and it reached RO449mn at the end of FY04.
The loan loss coverage has increased to 114% as of the end of FY04. Total deposits from
customers increased by 21% to reach RO421mn as of end 2004. Time deposits constituted
60% of total deposits.
Bank Dhofar reported an annualized basic EPS of RO0.267 during FY04, an increase of
10.3% over the EPS recorded for the corresponding period last year. The estimated fair value
of Bank Dhofar’s stock works out to RO4.218 based on DDM and relative valuation method,
which is higher by 9.6% vis-à-vis current market price of the stock. Currently the stock is
trading at 2005 earnings multiple of 11.5x and at 2.1x its book value. We revise our earlier
recommendation to ‘Hold’.
National Bank of Oman
National Bank of Oman (NBO) was founded in 1973. In October 2003, the Suhail Bahwan
Group took a 34.6% controlling stake in NBO through a private placement of 24.2mn new
shares at RO2.20 for a total value of RO53.2mn. The bank has a new management team
with Mr. B Vasanthan as the bank’s Chief Executive Officer who took over the post in July
2004.

NBO has reported net profit of RO5.22mn for FY04 against a net loss of RO51.7mn for
the previous year. In the last 3 years, this is the first time the bank has turned in positive
net profits. The provision for credit losses were significant at RO30.26mn for the year
against RO70.7mn made in 2003. However, recoveries and releases from provisions were
significantly higher at RO18.49mn in FY04 as against RO1.5mn in FY03. Therefore, lower
provisioning and higher recoveries played a significant part in bringing the bank back to
black in 2004. NBO’s total assets decreased from a high of RO951.4mn at the end of FY01
to reach RO718mn at the end of FY04. Net loans and advances also decreased from RO720.5
in FY01 to RO517mn in FY04.
NBO reported a basic EPS of RO0.075 during FY04, from a loss of RO1.037 over the
previous year. Currently the stock is trading at RO3.650 indicating a P/E multiple of 48.6
and a P/BV of 2.5.

Omani Banking Sector Outlook

Upon joining World Trade Organization (WTO), Oman made extensive commitments to open
and liberalize its banking sector. Increasing integration of financial markets and investment
activity mean increasing exposure to significant flow of capital to and from the country
resulting in financial turbulence. This underscores the importance of a well-sequenced and
gradual opening up of the sector to ensure financial sector stability and sustainable economic
growth.
The Central Bank of Oman has also undertaken several measures to ensure financial sector’s
stability and efficiency in the domestic economy, as well as measures to counter money
laundering. It has gradually liberalized the banking sector in line with the evolving economic
situation evident from increased private sector participation. With the exception of personal
loans, the interest rates on deposits and loans have been liberalized. The CBO has also
intensified its efforts to expand the monetary and capital markets, mobilize financial resources,
and issue government development bonds and treasury bonds. Moreover, commercial banks
have also issued certificates of deposits and have undertaken investment-related activities
(e.g. floating of shares and bonds).
The government is initiating privatization of state-owned industries and wants an active

private sector participation in financing and operating new projects. Banks in Oman now
have an important role to play in economic development of the country by promoting private
sector activities and mobilizing resources for financing productive sectors of the economy,
in addition to extending credit to the citizens. There has been a gradual shift in focus of
bank financing from the predominance of personal loans to industrial financing and in the
development of the services sector. Even so, attracting domestic funds currently being
invested outside and channeling them towards private sector investments is an opportunity
which commercial banks in Oman would not like to miss out on.
There are also commercial, economic and operational risks resulting from changes in the
state’s financial and monetary policies. These challenges and risks are ever increasing with
the new international transformations, the growing sophistication of financial services, large
scale mergers and acquisitions among major financial and banking institutions. There has
also been an increasing acceleration of the applications in information technology and the
internet such as e-commerce and e-banking in providing banking services. In this respect
local banks face certain challenges, particularly in the sphere of E-commerce.
In terms of the banking sector profitability, we expect the interest rate spreads to increase in
future, which would enable the local banks to increase the lending rates commensurately.
Moreover, banks which have a large part of their deposits as non-interest-bearing liabilities,
would benefit substantially from the interest rate hike. Improvement in the capital market
would further enhance the fee-based business of banks, especially those which have strong
investment banking and other capital market exposures.

Annex:
Banking Regulation and Supervision
The financial sector in Oman is supervised by the Central Bank of Oman (CBO) which was
established in 1974 to act as the central bank and the depository agency for the government.
One of the most progressive and capable supervisors of the banking sector in the Arab
world, the CBO monitors banks closely and prescribes tight controls and high performance
standards. The functions of CBO include issuing the national currency Omani Rial, act as
the government’s banker, supervise commercial banks operating in the country, formulate
and implement the monetary policy and ensure the soundness of the financial system. In
addition to the above mentioned traditional functions, the CBO also acts as the advisor to
the Government on economic matters in general, and monetary and financial matters in
particular. The banking law was amended in 2002 and the following are some of the main
prudential regulations for the Omani Banking Sector:
• It has mandated the commercial banks to maintain their minimum capital at RO20mn in
the case of local banks, and RO5mn for foreign banks.
• It monitors the Bank Capital Adequacy Ratios on a quarterly basis. The minimum
capital requirement ratio for commercial banks is set at 12% of all risk weighted assets,
considerably higher than the 8% set by the Bank for International Settlements.
• All domestic banks are mandated to transfer 10% of post-tax profits to a non-distributable
legal reserve each year till the reserve is equal to one-third of the banks paid-up equity
capital.
• CBO prescribes that the lending ratio be limited to a maximum of 87.5% of Deposits and
Net Worth. Deposits are defined as equity, subordinated loans, customer deposits and net
borrowings from overseas banks.
• Banks can invest in Government Development Bonds (GDBs) and T-bills. These products
can be used in repo and reverse-repo transactions with the CBO as a means of improving
liquidity. Banks can invest up to 30% of their net worth in government bonds.
• Banks have to maintain liquid reserves equivalent to at least 5% of their total local and
foreign currency deposit liabilities. These can be in the form of cash, deposits with the
CBO or holdings of T-bills and GDBs (subject to a maximum 3% of the deposits).
• CBO requires all banks to comply with a number of lending limits in a move to reduce
and diversify the bank’s risks. There is a cap on personal loans at 42.5% of the bank’s
total lending. Total exposure to any single sector or entity is limited to 15% of total
lending.
• Individual facilities to related parties is limited to 10% of net worth with total facilities to
related parties not exceeding 35% of net worth.

• Banks are also restricted in the amount of secured loans using property as collateral. The
current limit is the greater of 25% of net worth and 25% of time deposits. As a special
discretionary measure, CBO can relax the restrictions to 40% of net worth and 60% of
time deposits if it feels the bank’s liquidity would not be affected.
• Investments in other companies requires the approval of CBO. Banks can invest up to 5%
shareholding in the equity of companies (excluding other banks and financial institutions).
The total of these investments is limited to 20% of net worth (15% domestic and 5%
foreign entities). This restriction will be relaxed to allow banks to establish subsidiaries.
• Banks are allowed to invest up to 10% of net worth in corporate bonds, notes, debentures
etc (7.5% domestic and 2.5% foreign entities). All investments other than those in shares
traded on the Muscat Securities Market require CBO approval.
• Foreign exchange transactions must be business driven. Banks can take spot or forward
foreign exchange positions of up to 40% of their net worth.
• Commercial Banks can go for short-term borrowings (maturity of up to 2 years) up to a

maximum of 100% of net worth. The medium-term borrowings (maturity between 2-5
years) are up to a maximum of 200% of net worth (including limit specified for short-
term). Long-term borrowings (over 5 years) are up to a maximum of 300% of net worth
(including limits specified for short and medium terms).
• CBO encourages banks to classify loans that are 90 days past due as non-performing.
Interest must not be recognized on classified accounts and banks must set 5%, 25%,
50% and 100% provisions against accounts classified between 3-6 month, 6-12 month
(substandard), 1-2 years (doubtful) and more than 2 years(bad) respectively. Omani banks
have the discretion to categorize the loans as to when and which loans should fall into
each category. To encourage a prudent practice, CBO has been stressing that it is good
to state the true and fair value of assets all the time by undertaking need based loan loss
provisions as soon as erosion in asset takes place rather than following the conventional
practice of postponing loan-loss provisioning to the last quarter of the year.
• Banks have to make provisions for all investments (both trading and investment portfolios)
on a mark-to-market basis.


PLAYERS PROFILES

BankMuscat
BMAO.OM
Listing:
Muscat Securities Market HOLD
Current Price
RO8.830
Key Data
EPS (RO) 0.57 12M Avg. vol. 0.279mn
BVPS (RO) 2.82 52 week Lo / Hi 8.970 / 5.200
P/E 15.49 Market Cap RO528.2mn
P / BV 3.13 Target Price RO8.101
Background
BankMuscat (BM) was reconstituted in 1993 as a public joint stock company by the voluntary
merger of two established banks - Bank of Muscat and Al Bank Al Ahli Al Omani; which
were operating in the Sultanate since 1982 and 1976 respectively. Owing primarily to an
inorganic growth strategy through four major mergers and acquisitions, BankMuscat is now
the largest bank in Oman. In September 2003, it took a strategic 26% stake in Centurion Bank
in India. The Bank has also acquired the operations of Al Ahlia Securities Co (AASC), a
leading securities and brokerage firm in Oman which accounted for over 15% of the turnover
on the Muscat Securities Market.
BM’s association with the Royal Court Affairs provides the bank with easy access to both
government and private businesses, and its relationship with Société Générale gives it access to
superior operational and technical standards and cooperation on large project finance deals. The
total shares held by institutional shareholders constituted 82.17% of the total shares outstanding.
This leaves only 17.83% as the free float available for trading of the bank’s stock.
Name of Shareholder % Stake

Royal Court Affairs 24.42%
Sheikh Mustahil Ahmed Al Mashani Group 15.79%
Société Générale 11.15%
Source: BankMuscat
• The Chairman of BankMuscat (SAOG), Shaikh AbdulMalik bin Abdullah Al Khalili, has
confirmed that the merger talks between BankMuscat and National Bank of Oman (NBO)
have been formally called off, after NBO expressed its reluctance to continue with the
merger process.

• The bank was active in various Investment Banking activities in Oman, particularly in the
IPO areas. Amongst the mandates that BankMuscat was associated with in the last quarter
included the AES Barka public issue, which was very well received by the investing
community and was oversubscribed by 16 times. The bank is also currently working on
the Dhofar Power Company IPO and also on the much-awaited Omantel issue.
• BankMuscat plans to start retail operations in Saudi Arabia and UAE in 2005. There is no
concrete information on this and hence we have not factored this into our valuations.
• The interest income of the bank increased by 3.5% during the FY2004 to reach
RO104.67mn as compared to RO101.11mn over the corresponding period last year. The
interest expense on deposits from banks, customers and CDs decreased by approximately
9% to reach RO24.9mn during the same period.
• The net interest income during the period increased by 9.3% to RO75.2mn as against
RO68.8mn, which was mainly aided by a 37% decline in interest expense on its tier-II
capital.
• Other Operating Income (which comprises of fees, forex and miscellaneous income)
jumped by 11.3% as compared to the same period last year. During the FY2004,
BankMuscat generated RO15.9mn in fees & commissions income from various banking
activities and other off-balance sheet commitments. Forex gains also increased by 4.4%
to reach RO2.76mn during the same period.
• The bank’s focus on improving the asset quality had a positive impact on the provision
for possible credit losses, which decreased by 6.4% to reach RO20.4mn at the end of
FY04 as compared to RO21.8mn for the corresponding period in FY03. The emphasis on
recovering NPLs continued with the recoveries for the period standing at RO6.28mn, as
compared to RO6.11mn in the previous year.
• The bank also reported a post-acquisition loss of RO1.41mn on the operations of its
associate, Centurion Bank of India in FY04.
• The net profit after providing for taxation was higher at RO34.1mn, a 26% increase over
the corresponding period last year.
• BankMuscat’s total assets increased substantially to RO1.85bn at the end of FY04,

representing an increase of 19% over the previous year.
• The bank’s gross loan book growth during the year was at 5.8% and it reached RO1.43bn
at the end of FY04. NPLs declined from RO113.27mn to RO104.83mn during this period.
The loan loss coverage has increased to 101.3% as of the end of FY04.
• Total deposits from customers increased by 10.4% to reach RO1.11bn as of end 2004.
Deposits from private sector constituted 76% of total deposits and the remaining 24% was
received from ministries and other government organizations.

• Capital adequacy ratio declined from 16.39% in FY03 to 15.51% in FY04.
Valuation
• BankMuscat reported an annualized basic and diluted EPS of RO0.570 during FY04, an
increase of 17% over the diluted EPS recorded for the corresponding period last year.
• We have increased our valuation from our earlier projection of RO7.046 to the current
RO8.101 mainly to indicate the fact that BankMuscat will be benefited from the rising
interest rates thus positively impacting its bottom-line and improving its lending
spreads.
• We assume a low long-term growth rate for the bank at 3% to reflect the overall mature
nature of the Omani banking sector and the established market dominance of BankMuscat
in Oman. Currently the stock is trading at 2005 earnings (forecast) multiple of 13.9x and
at 3.3x its 2005 book value (forecast).
• The estimated fair value of BankMuscat’s stock works out to RO8.101 based on DDM
and relative valuation method, which represents a discount of 8.3% from the current
market price of RO8.830.
• We recommend a Hold on the stock.

BALANCE SHEET
Bank Muscat
Amount in Omani Rial 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets
Cash & balances with Central Banks 64,114,499 62,108,031 23,389,000 46,169,478 49,452,492 48,142,411 48,487,262
Cash & balances(> 30 days) 85,417,158 14,533,919 8,703,000 8,703,000 8,703,000 8,703,000 8,703,000
May 2005
Placements with banks 65,409,505 91,520,390 271,481,000 285,055,050 299,307,803 311,280,115 323,731,319
Loans and advances (Gross) 1,323,347,709 1,355,988,038 1,435,557,000 1,543,223,775 1,629,644,306 1,717,645,099 1,813,633,978
Other assets 17,725,509 21,332,000 32,325,000 33,941,250 35,638,313 37,420,228 39,291,240
Provisions (97,517,527) (112,177,703) (106,179,000) (128,859,185) (152,371,743) (176,917,445) (203,127,006)
Total Current Assets 1,458,496,853 1,433,304,675 1,665,276,000 1,788,233,367 1,870,374,171 1,946,273,407 2,030,719,793
Global Research Oman
Trading Investments 28,717 22,494,000 33,836,000 37,963,992 42,595,599 47,792,262 48,748,107

Non trading investments 74,152,427 86,600,000 134,043,000 138,064,290 142,206,219 146,472,405 150,866,577
Investments in Associates - - 4,962,000 4,962,000 4,962,000 4,962,000 4,962,000
Goodwill - 349,613 2,369,000 1,895,200 1,516,160 1,212,928 970,342
gross fixed assets 32,465,990 36,086,117 38,568,000 43,196,160 48,379,699 54,185,263 60,687,495
less: accumulated depreciation (22,708,628) (24,056,662) (26,666,000) (30,985,616) (35,823,586) (41,242,112) (47,310,862)
tangible net fixed assets 9,757,362 12,029,455 11,902,000 12,210,544 12,556,113 12,943,151 13,376,633
Total Assets 1,542,435,359 1,554,777,743 1,852,388,000 1,983,329,393 2,074,210,262 2,159,656,153 2,249,643,454
Liabilities
Deposits from banks 229,546,031 184,566,622 173,870,000 168,653,900 165,280,822 161,975,206 158,735,701
Deposits from customers 963,321,718 1,005,623,956 1,110,603,000 1,205,004,255 1,277,304,510 1,341,169,736 1,408,228,223
Certificates of Deposit 95,471,250 73,592,888 51,517,000 56,668,700 59,502,135 61,287,199 63,125,815
Unsecured Bonds - 25,000,000 54,803,000 56,447,090 58,140,503 59,884,718 61,681,259
Oman Banking Sector Report

Floating Rate Notes - - 96,250,000 96,250,000 96,250,000 96,250,000 96,250,000
Subordinated Liabilities 54,010,574 45,620,574 45,621,000 45,621,000 45,621,000 45,621,000 45,621,000
Taxation 6,353,003 7,933,338 10,376,000 11,932,400 13,125,640 14,438,204 15,882,024
Total Current Liabilities 1,389,082,222 1,381,665,799 1,658,044,000 1,760,181,505 1,839,612,936 1,909,989,922 1,984,062,437
Owner's Equity
paid-up equity capital 49,037,480 51,489,354 59,815,355 68,787,355 68,787,355 68,787,355 68,787,355
share premium 4,482,130 4,482,130 26,104,479 26,104,479 26,104,479 26,104,479 26,104,479
proposed issue of bonus shares 2,451,874 2,848,350 8,972,000 - - - -
convertible bonds 27,100,000 27,100,000 - - - - -
general reserve 15,382,077 19,812,077 19,812,077 19,812,077 19,812,077 19,812,077 19,812,077
23
legal reserve 21,621,851 21,621,851 21,621,851 21,621,851 21,621,851 21,621,851 21,621,851
subordinated loan reserve 14,754,000 19,448,115 28,571,518 37,695,633 45,621,000 45,621,000 45,621,000
revaluation reserve 1,214,720 1,214,720 1,214,720 1,214,720 1,214,720 1,214,720 1,214,720
proposed dividends 7,355,622 12,872,338 14,954,000 37,145,172 41,272,413 48,151,149 54,342,011
retained earnings 9,953,383 12,223,009 13,278,000 10,766,602 10,163,431 18,353,601 28,077,525
Total Shareholder's Equity 153,353,137 173,111,944 194,344,000 223,147,888 234,597,326 249,666,232 265,581,017
Total Liabilities 1,542,435,359 1,554,777,743 1,852,388,000 1,983,329,393 2,074,210,262 2,159,656,153 2,249,643,454

INCOME STATEMENT
Bank Muscat
Interest Income 104,469,170 101,116,742 104,678,000 123,771,827 139,516,993 156,040,710 170,863,329
Interest Expense (41,924,690) (32,295,487) (29,440,000) (36,636,461) (42,552,683) (47,436,376) (50,062,955)
Net interest income 62,544,480 68,821,255 75,238,000 87,135,366 96,964,310 108,604,334 120,800,374
Add : Fees and commission 12,426,803 14,265,802 15,969,000 18,524,040 21,117,406 23,017,972 25,089,590
24
Add : Foreign exchange gains 1,947,470 2,646,696 2,762,000 2,927,720 3,074,106 3,227,811 3,389,202
Add: Profit on sale of non-trading investments 106,262 417,139 351,000 379,080 409,406 438,065 468,729
Add : Other operating income 2,024,028 1,804,546 2,138,000 2,287,660 2,424,920 2,521,916 2,622,793
Add: Unrealized gain/(loss) on investments available for sale 260,433 206,580 955,000 - - - -
Less: Release of / (Provision for) capital guarantee 302,856 - - - - - -
Less: Provision for collateral pending sale (144,458) (175,450) (102,000) - - - -
Less: Provision for possible credit losses (20,693,896) (21,806,937) (20,403,000) (22,680,185) (23,512,557) (24,545,703) (26,209,559)
Less: Recoveries from provision for possible credit losses 4,774,397 6,114,321 6,283,000 6,804,056 7,053,767 7,363,711 7,862,868
Less: Provision for placements with banks - (2,310,000) - - - - -
Less: Loss from Associate - - (1,417,000) - - - -
Net Operating Income 64,001,969 70,469,446 82,397,000 96,044,347 108,237,964 121,377,110 134,825,429
Less : Staff wages and salaries (12,157,270) (13,297,594) (14,272,000) (15,271,040) (16,187,302) (17,158,541) (18,188,053)
Less : Employee's end of service benefits (262,499) (232,960) (292,000) (306,600) (324,996) (344,496) (365,166)
Less : Other Staff costs (8,514,617) (8,719,709) (9,901,000) (10,495,060) (11,019,813) (11,570,804) (12,149,344)
Less: Contribution to Social Insurance (653,343) (721,926) (745,000) (819,500) (901,450) (991,595) (1,090,755)
Less: Director's remunration (408,500) (482,500) (600,000) (654,000) (712,860) (777,017) (846,949)
Less: Occupancy costs (2,761,105) (2,734,807) (2,562,000) (2,869,440) (3,156,384) (3,472,022) (3,819,225)
Less: Other administrative expenses (9,729,578) (10,273,911) (10,752,000) (12,042,240) (13,246,464) (14,571,110) (16,028,221)
Less: Depreciation and Amortization (2,892,831) (3,189,528) (3,613,000) (4,319,616) (4,837,970) (5,418,526) (6,068,750)
Operating Expenses (37,379,743) (39,652,935) (42,737,000) (46,777,496) (50,387,239) (54,304,112) (58,556,461)

Net gain/loss from sale of branches - (56,216) - - - - -
Profit on disposal of Bahrain branch - - - 2,826,000 - - -
Net Operating Expenses (37,379,743) (39,709,151) (42,737,000) (46,777,496) (50,387,239) (54,304,112) (58,556,461)
Profit before Taxation 26,622,226 30,760,295 39,660,000 52,092,851 57,850,725 67,072,999 76,268,969
Income Tax expense (3,709,560) (3,679,434) (5,555,000) (8,334,856) (9,256,116) (10,731,680) (12,203,035)
Net Profit attributable to shareholders 22,912,666 27,080,861 34,105,000 43,757,994 48,594,609 56,341,319 64,065,934

Op Balance of Retained Earnings 833,242 9,953,383 12,223,009 13,277,894 10,766,602 10,163,431 18,353,601
Adjustments (2,143) - - - - - -
Trfr to General Reserve (4,000,000) - - - - - -
Trfr to Subordinated Loan Reserve - (9,124,115) (9,124,115) (9,124,115) (7,925,367) - -
May 2005
Proposed issue of bonus shares (2,451,874) (2,848,350) (8,972,000) - - - -
Liabilities of overeas branch 17,114 33,568 - - - - -
Dividend RO (7,355,622) (12,872,338) (14,954,000) (37,145,172) (41,272,413) (48,151,149) (54,342,011)
Cl Balance of Retained Earnings 9,953,383 12,223,009 13,277,894 10,766,602 10,163,431 18,353,601 28,077,525
CASH FLOW STATEMENT
Bank Muscat
Operating
Operating Activities (a) 44,788,803 51,400,889 55,896,000 70,091,186 76,238,530 85,556,545 95,542,809
Profit from operations before Taxation 26,622,226 30,760,295 39,660,000 52,092,851 57,850,725 67,072,999 76,268,969
Depreciation & Amortization 2,892,831 3,189,528 3,613,000 4,319,616 4,837,970 5,418,526 6,068,750
May 2005
Provision for possible credit losses 20,693,896 21,806,937 20,403,000 22,680,185 23,512,557 24,545,703 26,209,559
Recoveries from Provision for possible credit losses (4,774,397) (6,114,321) (6,283,000) - - - -
Unrealized (gain)/loss on investments available for sale (260,433) (206,580) (955,000) - - - -
Provision for placements with banks - 2,310,000 - - - - -
Provision for collateral pending sale 144,458 175,450 102,000 - - - -
Profit on sale of tangible fixed assets (76,184) (91,142) (21,000) - - - -
Profit/Loss on sale of branches - 56,216 - - - - -
Dividend Income (453,594) (485,494) (623,000) (666,610) (706,607) (749,003) (801,433)

Income Tax - - - (8,334,856) (9,256,116) (10,731,680) (12,203,035)
Working Capital (b) (60,734,479) (21,638,631) 102,273,000 (24,847,562) (27,570,522) (36,574,698) (37,194,425)
Dec/(inc.) in Cash & balances with central banks - - - - - - -
Dec/(inc.) in deposits with banks (7,430,371) (8,483,487) (66,078,000) (13,574,050) (14,252,753) (11,972,312) (12,451,205)
Dec/ (inc) loans and advances (86,744,564) (45,322,496) (99,688,000) (107,666,775) (86,420,531) (88,000,793) (95,988,879)
Dec/ (inc) Other assets 1,706,550 (854,337) (11,095,000) (1,616,250) (1,697,063) (1,781,916) (1,871,011)
Dec / (inc) Trading Investments 39,382 25,000 (1,000) (4,127,992) (4,631,607) (5,196,663) (955,845)
Inc/(dec) in deposits from banks (9,842,406) (18,306,181) (2,384,000) (5,216,100) (3,373,078) (3,305,616) (3,239,504)
Inc/(dec) of deposits from customers 15,961,725 51,278,809 104,979,000 94,401,255 72,300,255 63,865,226 67,058,487
Inc/(dec) of certificates of deposits 21,723,588 (21,878,362) (22,076,000) 5,151,700 2,833,435 1,785,064 1,838,616
Inc/(dec) of unsecured bonds - 25,000,000 29,803,000 1,644,090 1,693,413 1,744,215 1,796,542
Inc/(dec) of FRNs - - 96,250,000 - - - -
Inc/(dec) of taxation (723,000) (2,699,098) (3,113,000) 1,556,400 1,193,240 1,312,564 1,443,820
Inc/(dec) other liabilities 4,557,503 (432,047) 75,676,000 4,600,160 4,784,166 4,975,533 5,174,554

Inc/(dec) in translation adjustments 17,114 33,568 - - - - -
Total Operating (15,945,676) 29,762,258 158,169,000 45,243,624 48,668,008 48,981,847 58,348,384
Investing
Capex (c) (3,579,441) (5,604,349) (3,005,000) (4,628,160) (5,183,539) (5,805,564) (6,502,232)
Dividends received 453,594 485,494 623,000 666,610 706,607 749,003 801,433
Sale of non-trading investments 12,807,043 (11,954,359) (23,466,000) (4,021,290) (4,141,929) (4,266,187) (4,394,172)
Proceeds from sale of tangible fixed assets 172,884 159,868 60,000 - - - -
Acquisition of foreign branch, net of cash acquired 62,429,403 - - - - - -
Investment in Associate - - (4,961,000) (4,962,000) - - -
Goodwill paid - - (2,538,000) (1,895,200) 379,040 303,232 242,586
Disposal of Foreign Branch - 890,170 - - - - -
Total Investing 72,283,483 (16,023,176) (33,287,000) (14,840,040) (8,239,821) (9,019,516) (9,852,385)
25
Financing
Dividend paid to shareholders (4,903,748) (7,355,622) (12,873,000) (14,954,000) (37,145,172) (41,272,413) (48,151,149)
Proceeds of rights issue 7,805,000 - - - - - -
Subordinated liabilities paid (12,900,000) (8,390,000) - - - - -
Total Financing (9,998,748) (15,745,622) (12,873,000) (14,954,000) (37,145,172) (41,272,413) (48,151,149)
Net Change in Cash 46,339,059 (2,006,540) 112,009,000 15,449,584 3,283,015 (1,310,082) 344,851
Net Cash at beginning 17,775,440 64,114,499 62,107,959 30,719,894 46,169,478 49,452,492 48,142,411
Net Cash at end 64,114,499 62,107,959 30,719,894 46,169,478 49,452,492 48,142,411 48,487,262
Ratios
Bank Muscat
2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
- Non-interest expense/ Total Op. Income 58.4% 56.4% 51.9% 48.7% 46.6% 43.3% 42.0%
- Fees & Commissions/ Total Op. Income 19.4% 20.2% 19.4% 19.3% 19.5% 19.0% 18.6%
Margins
- Net profit / revenues 28.7% 30.5% 34.8% 39.1% 39.0% 40.7% 41.8%
- Interest Expense/ Interest Income 40.1% 31.9% 28.1% 29.6% 30.5% 30.4% 29.3%
- Interest Income/ Average Interest Earning 7.12% 6.53% 6.16% 6.47% 6.88% 7.18% 7.49%
Assets
- Interest Expense/ Average Interest Bearing 3.32% 2.41% 2.05% 2.32% 2.56% 2.74% 2.78%
Liabilities
- Net Spread 3.80% 4.12% 4.11% 4.15% 4.33% 4.45% 4.71%
Efficiency
Liquidity
Credit Quality
- Provisions to Total Op Income 24.6% 25.8% 17.3% 16.5% 15.2% 15.2% 14.2%
- Non Performing Loans (RO) 122,220,359 113,269,109 104,830,238 123,457,902 143,408,699 154,588,059 163,227,058
- Loan Loss Reserve (RO) 97,517,527 112,177,703 106,179,000 128,859,185 152,371,743 176,917,445 203,127,006
- NPL Coverage 79.8% 99.0% 101.3% 104.4% 106.3% 114.4% 124.4%
Capital Adequacy
- Change in Interest Income 77.5% 12.3% 16.6% 17.5% 14.0% 14.4% 12.5%
- Change in Other Income 77.8% -10.8% 18.5% 7.0% 6.0% 4.0% 4.0%
- Shares in Issue 49,037,480 51,489,354 59,815,355 68,787,355 68,787,355 68,787,355 68,787,355
- EPS (RO) 0.467 0.526 0.570 0.636 0.706 0.819 0.931
- Book Value Per Share (RO) 2.977 3.112 2.999 2.704 2.810 2.930 3.071
- Market Price Year End (RO) 3.800 4.970 6.350 8.830 8.830 8.830 8.830
- P/E 8.1 9.5 11.1 13.9 12.5 10.8 9.5
- P/BV 1.3 1.6 2.1 3.3 3.1 3.0 2.9


NBO.OM
Listing:
Muscat Securities Market Not Rated
Current Price
RO3.650
Key Data
EPS (RO) 0.075 12M Avg. vol. 0.095mn
BVPS (RO) 1.46 52 week Lo / Hi 2.27 / 3.65
P / BV 2.5 Target Price Not Valued
Background
National Bank of Oman (NBO) was founded in 1973. After the collapse of its major
shareholder, Bank of Credit and Commerce International (BCCI), in 1991 the government
came to its rescue and bought the 40% stake owned by the BCCI. Later on, the government
stake was divested to various state pension funds in Oman. In October 2003, the Suhail
Bahwan Group took a 34.6% controlling stake in NBO through a private placement of 24.2mn
new shares at RO2.20 for a total value of RO53.2mn. The bank has a new management team
at the top with Mr. B Vasanthan as the bank’s Chief Executive Officer who took over the post
in July 2004. Total staff strength for NBO as on December 2004 was 1163 employees.
Shareholders Name Share %
Suhail Bahwan Group(Holding) LLC 34.6
Ministry of Defence Pension Fund 8.8
Public Authority for Social Insurance 7.2
Al Barwani Investment Co. L.L.C. 6.7
Civil Service Employees Pension fund 6.7
Abna Sultan Trading Co. LLC 5.3
National Equity Funds 3.8
Royal Oman Police Pensions Trust L.L.C. 3.4
Source: www.nbo.com.om
• NBO has reported net profit of RO5.22mn for FY04 against a net loss of RO51.7mn for
the previous year. In the last 3 years, this is the first time the bank has turned in positive
net profits.
• The interest income of the bank showed consistent decline and reached RO45.1mn at
the end of FY04 against a high of RO68.6mn observed in FY01. The interest income

has continued to shrink on a sequential basis over the past 4 years. The interest expense
decreased by 13.6% y-o-y to reach RO18.7mn during 2004.
• As a result, the net interest income during the year declined by 8.8% to RO26.4mn as
against RO28.9mn, which was mainly aided by the decline in average interest rates on
customer deposits during the year to 2.54% in 2004 from 3.15% in 2003.
• Other Operating Income (which comprises of fees, forex, dividend and miscellaneous
income) was stagnant at RO11.5mn during the FY2004. NBO generated RO3.1mn in
fees & commissions income from various banking activities and other off-balance sheet
commitments.
• The provision for credit losses were significant at RO30.26mn for the year against
RO70.7mn made in 2003. However, recoveries and releases from provisions were
significantly higher at RO18.49mn in FY04 as against RO1.5mn in FY03. Therefore,
lower provisioning and higher recoveries played a significant part in bringing the bank
back to black in 2004.
• NBO’s total assets decreased from a high of RO951.4mn at the end of FY01 to reach
RO718mn at the end of FY04.
• Net loans and advances also decreased from RO720.5mn in FY01 to RO517mn in
FY04.
• NBO’s investment portfolio was at RO33.9mn in 2004, consisting mainly of Treasury

Bills and Omani Government Development Bonds. Capital gains derived from these
investments represented a significant percentage of non-interest income in 2003 and
2004.
Valuation
• NBO reported a basic EPS of RO0.075 during FY04, from a loss of RO1.037 over the
previous year.
• Currently the stock is trading at RO3.650 indicating a P/E multiple of 48.6 and a P/BV of
2.5.

BALANCE SHEET
Amount in Omani Rial 2002 2003 2004
Assets
Cash & balances with Central Banks 91,423,132 170,249,076 75,105,931
Investments held for trading 1,647,700 1,768,973 1,607,523
Due from banks and other market placements 42,057,825 48,214,982 57,910,817
Loans and advances (Gross) 810,382,243 728,634,673 726,045,413
Other assets 26,621,477 16,273,628 16,635,838
Provisions (127,433,560) (200,272,338) (208,705,896)
Total Current Assets 844,698,817 764,868,994 668,599,626
Non trading investments 39,063,496 34,151,347 33,941,544
Premises and equipment 23,520,927 23,610,864 24,317,951
less: accumulated depreciation (14,663,855) (16,143,982) (17,463,634)
Tangible net fixed assets 8,857,072 7,466,882 6,854,317
Deferred tax asset - 9,417,000 8,637,000
Total Assets 892,619,385 815,904,223 718,032,487
Liabilities
Due to banks and market placememts 178,670,562 61,225,541 35,276,278
Deposits from customers 592,862,618 621,750,795 541,789,030
Other liabilities 12,068,020 10,421,056 15,165,666
Taxation 4,368,374 3,931,867 2,004,866
Total Current Liabilities 787,969,574 697,329,259 594,235,840
Subordinated Loans 8,837,500 8,837,500 8,837,500
Subordinated private placements - 12,500,000 12,500,000
Owner's Equity
Share capital 45,804,594 70,000,000 70,000,000
share premium reserve 9,458,043 - -
legal reserve 15,965,812 15,965,812 16,487,980
other non-distributable reserve. 17,317,411 10,624,844 12,834,219
general reserve 7,161,895 - -
retained earnings 104,556 646,808 3,136,948
Total Shareholder's Equity 95,812,311 97,237,464 102,459,147
Total Liabilities 892,619,385 815,904,223 718,032,487

INCOME STATEMENT
Amount in Omani Rial 2002 2003 2004
Interest Income 63,221,209 50,648,065 45,143,672
Interest Expense (23,178,723) (21,720,847) (18,764,882)
Net interest income 40,042,486 28,927,218 26,378,790
Add : Fees and commission 3,512,606 3,086,428 3,121,569
Add : Foreign exchange gains 1,137,090 1,039,571 971,946
Add: Profit on sale of investments 57,478 74,967 1,681,801
Add : Dividend income 319,484 113,567 183,767
Add: Income from T-bills & GDBs 2,813,077 2,804,063 1,881,082
Add : Miscellaneous Income 4,188,220 2,554,708 3,471,852
Less: Release of / (Provision for) on BCCI
310,635 1,358,980 229,051
receivables
Less: Provision for credit losses (35,317,065) (70,726,299) (30,266,537)
Less: Recoveries and release from provision for
1,579,924 1,520,621 18,493,712
credit losses
Less: Provision for impairment of due from banks - (2,139,000) (741,358)
Net Operating Income 18,643,935 (31,385,176) 25,405,675
Less : Staff wages and salaries (9,877,182) (10,877,020) (11,602,210)
Less : Operating & Admin Costs (5,497,468) (4,491,469) (4,778,179)
Less : Establishment costs (2,027,684) (2,541,714) (1,970,694)
Less: Depreciation (2,343,910) (2,057,221) (1,935,462)
Recoveries from debts written-off - 455,109 262,302
Unrealized gains/(losses) on investments availabnle
(811,033) 559,469 (89,165)
for sale
Net Operating Expenses (20,557,277) (18,952,846) (20,113,408)
Profit before Taxation (1,913,342) (50,338,022) 5,292,267
Taxation 1,650,916 7,520,000 (70,584)
Net Profit from ordinary activities (262,426) (42,818,022) 5,221,683
Extraordinary loss on exchange on CBE
- (8,958,000) -
placement
Net Profit for the year (262,426) (51,776,022) 5,221,683

Ration Analysis
Ratios 2002 2003 2004
Profitability
- Return on Average Assets N/A N/A 0.7%
- Return on Average Equity N/A N/A 5.2%
- Net interest income/ Total Op. Income 214.8% N/A 103.8%
- Non-interest income/ Total Op. Income 64.5% N/A 44.5%
- Non-interest expense/ Total Op. Income 105.9% N/A 79.9%
Margins
- Net income/ revenues N/A N/A 11.6%
- Operating profit / revenues 29.5% N/A 56.3%
- Interest Expense/ Interest Income 36.7% 42.9% 41.6%
- Interest Income/ Average Interest Earning Assets 7.15% 5.95% 5.54%
- Interest Expense/ Average Interest Bearing Liabilities 2.95% 2.99% 2.98%
- Net Spread 4.21% 2.96% 2.56%
Efficiency
- Cost to Total Op Income 105.9% N/A 79.9%
- Staff Expense to Total Op Income 53.0% N/A 45.7%
Liquidity
Credit Quality
- Provisions to Total Op Income 179.3% N/A 48.4%
- Non Performing Loans (ROmn) 210.7 273.6 256.2
- Loan Loss Reserve (RO) 127.4 200.3 208.7
- NPL's to (Equity+Loan loss reserve) 94.4% 92.0% 82.3%
- NPL Coverage 60.5% 73.2% 81.5%
Capital Adequacy
- Net Interest Income(incl Prov.) to Total Op Income 35.5% N/A 55.5%
- Fees & Comm. to Total Op. Income 18.8% N/A 12.3%
- Investment Income to Total Op Income 17.1% N/A 14.7%
- FX Income to Total Op. Income 6.1% N/A 3.8%
- Other Income to Total Op. Income 22.5% N/A 13.7%
- Change in Net Interest Income 21.0% -27.8% -8.8%
- Change in Fees and Commission 52.4% -8.6% -6.5%
- Change in Investment Income -15.8% -6.2% 25.2%
- Change in Fx Income 52.4% -8.6% -6.5%
- Change in Other Income 8.8% -39.0% 35.9%
- Shares in Issue 50,000,000 70,000,000 70,000,000
- Basic EPS (RO) -0.006 -1.037 0.075
- Book Value Per Share (RO) 1.916 1.389 1.464
- Market Price Year End (RO) 1.300 2.700 2.410
- P/E - - 32.3
- P/BV 0.68 1.94 1.65


OIB.OM
Listing:
Current Price
RO4.360
Key Data
BVPS (RO) 1.660 52 week Lo / Hi 2.58 / 4.36
Background
Oman International Bank was established in 1979 as Oman Arab African Bank. In 1984
it was renamed as Oman International Bank (OIB) to reflect the 100% Omani ownership
after a group of Omani shareholders bought the 60% stake held earlier by Arab African
International Bank.
Dr. Omar Al Zawawi holds the largest individual shareholding with nearly 10.1% stake in the
bank, while the Al Waljat International Co. holds 8.2%, Muscat Overseas Co. holds 7.8%,
Zawawi Trading Co. holds 7.5% and the remaining 66.4% is owned by others including
general public. The total shares held by institutional shareholders constituted 87.9% of the
total shares outstanding at the end of FY2004. This leaves only 12.1% of the bank’s stock as
the free float available for trading.
Table 2: Major Shareholders in OIB

Dr. Omar Al Zawawi 10.1%
Al Waljat International Co. 8.2%
Muscat Overseas Co. 7.8%
Zawawi Trading Co. 7.5%
National Equity Fund 4.4%
Royal Oman Police Pension Fund 4.1%
Source: OIB
• The interest income of the bank increased by 2.6% during FY2004 to reach RO35.4mn
as compared to RO34.5mn recorded for the corresponding period last year. The interest
expense on deposits from banks and customers decreased by 19.4% to reach RO7.9mn
during the same period.

• As a result, the net interest income during the period increased by 11.3% to RO27.5mn
as against RO24.7mn, which was mainly aided by the decline in average interest rates on
customer deposits during the year to 1.2% in 2004 from 1.7% in 2003.
• Other Operating Income (which comprises of fees, forex, dividend and miscellaneous
income) jumped by 13.2% as compared to the same period last year. During the FY2004,
OIB generated RO4.5mn in fees & commissions income from various banking activities
and other off-balance sheet commitments. Forex gains also increased by 4.1% to reach
RO1.3mn during the same period.
• The provision for loan impairment increased by 5.5% to reach RO6.6mn at the end of
FY04 as compared to RO6.26mn for the corresponding period in FY03. The Central Bank
of Oman also requires a general provision of 2% on the performing personal loans and
1% on the performing other loans. This provision is required to be built equally over a
3-year period commencing from the year 2004. To meet this requirement, OIB made a
general loan loss provision of RO2.191mn during the year.
• Analysis of various business segments indicate that Retail banking still continues to be
the major revenue driver for the bank. In FY04, Retail banking contributed 62.5% to the
total revenue of the bank. Corporate banking contributed 22% during the same period.
• Net profit after providing for taxation was higher at RO14.08mn, a 6.5% increase over the
corresponding period last year.
• OIB’s total assets increased to RO710.2mn at the end of FY04, representing an increase
of 13.2% over the previous year.
• After a negative loan book growth during 2003, the bank started lending out with new
vigor during 2004. The bank’s gross loan book growth during the year was 15% and
it reached RO523mn at the end of FY04. Personal and consumer segment contributed
42.37% of the total loan book during FY04. OIB was placed very close to the maximum
limit of 42.4% mandated by the Central Bank with respect to the exposure in personal
lending portfolio. This segment attracted an incremental RO33.2mn this year. Exposure
to construction sector was at RO33.7mn constituting 6.5% of the loan book in FY04.
• NPLs as a percentage of gross loans declined from 17.5% to 14.5% during this period.
The loan loss coverage has increased to 91% as of the end of FY04.
• The bank has managed to attract new customers and low cost deposits by launching
schemes such as “Mandoos” which has helped the bank increase the total deposits from
customers by 21% to reach RO571mn as of end 2004.
• Capital adequacy ratio declined from 24.96% in FY03 to 22.26% in FY04.
• OIB is a highly rated bank in Oman as reflected in the following long-term bank deposit
ratings. Moody's Investor Service has assigned Baa3 rating, with a Financial Strength
Rating (FSR) of D and stable outlook while Fitch has assigned BBB-.

Valuation
• OIB reported basic EPS of RO0.224 during FY04, an increase of 6.7% over the previous
year.
• The estimated fair value of OIB’s stock works out to RO4.527 based on DDM and relative
valuation method, which is higher by 3.8% vis-à-vis current market price of the stock.
Our price target represents an implied 2005 P/E multiple of 16.4x.
• We have also revised the payouts upwards from the earlier 85% and forecasted it to be
equal to the payouts of 94% seen in 2004 primarily expecting that the bank would reward
its shareholders better going forward when the rise in interest rates will provide a positive
impetus to its bottom-line.
• We have maintained our long-term growth rate for OIB at 3% to reflect the overall mature
nature in the Omani banking sector. Currently the stock is trading at 2005 earnings
(forecast) multiple of 15.8x and at 2.6x its 2005 book value (forecast). We revise our

BALANCE SHEET
Amount in '000 Omani Rial 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
May 2005
Assets
Cash & cash equivalents 86,615 63,849 112,712 93,803 92,648 90,435 83,108
Cash & balances with Central Banks 14,834 15,488 13,474 14,821 16,304 17,934 19,727
Treasury Bills 8,826 27,580 22,919 16,043 14,439 12,995 11,696
Due from other banks 38,245 57,823 38,268 68,882 82,659 95,058 109,316
Loans and advances (Gross) 464,485 454,326 523,648 612,668 689,252 763,002 836,250
Other assets 6,936 7,950 9,586 10,065 10,569 11,097 11,652
Provisions & Reserved Interest (60,527) (66,302) (68,830) (75,971) (84,089) (93,086) (102,859)
Total Current Assets 472,799 496,865 651,777 740,312 821,781 897,434 968,890
Trading Investments 1,240 180 167 170 174 177 181
Non trading investments 56,207 57,521 49,345 55,266 61,898 71,183 85,420
Gross fixed assets 29,481 30,089 31,346 32,600 33,904 35,260 36,670
Less: accumulated depreciation (19,528) (21,256) (22,436) (23,577) (24,594) (25,581) (26,498)
Tangible net fixed assets 9,953 8,833 8,910 9,023 9,310 9,679 10,172
Total Assets 626,814 627,248 710,199 804,772 893,162 978,473 1,064,663

Liabilities
Due to banks 50,068 38,545 20,851 22,311 23,872 25,543 27,331
Deposits from customers 454,196 472,605 571,369 662,788 747,625 829,116 911,199
Certificates of Deposit 4,700 125 - - - - -
Provision for taxation 2,511 1,882 1,586 1,523 1,492 1,462 1,433
Total Liabilities 523,465 523,791 605,767 699,300 786,302 870,100 954,500
Owner's Equity
35
non-distributable reserve 21,815 21,613 21,498 21,498 21,498 21,498 21,498
general reserve 3,145 - - - - - -
Total Liabilities & Equity 626,814 627,248 710,199 804,772 893,162 978,473 1,064,663
INCOME STATEMENT
Interest Income 40,406 34,472 35,375 41,527 49,190 55,802 63,277
36
Add : Dividend income 62 34 55 59 63 67 72
Add : Other income 2,827 2,600 3,027 3,330 3,530 3,671 3,891
Add: Gain/(loss) on investments 569 1,327 321 289 246 209 188
Less: Release of / (Provision for) loan impairment (5,773) (6,260) (6,601) (7,141) (8,118) (8,998) (9,773)
Add: Impact of recoveries 8,800 6,256 3,273 3,600 3,780 3,969 4,168
Total Operating Income 38,252 33,880 33,384 37,881 43,384 48,314 53,747
Less : Staff wages and salaries (9,613) (10,104) (9,817) (10,210) (10,618) (11,149) (11,706)
Less : Employee's end of service benefits (75) (90) (102) (107) (114) (120) (128)
Less: Contribution to Social Insurance (366) (369) (333) (373) (418) (468) (524)
Less: Occupancy costs (1,381) (1,361) (1,374) (1,415) (1,444) (1,588) (1,620)
Less: Other expenses (4,847) (5,322) (4,638) (4,870) (4,967) (5,265) (5,371)
Less: Depreciation (2,081) (1,727) (1,175) (1,141) (1,017) (987) (917)
Operating Expenses (18,363) (18,973) (17,439) (18,116) (18,577) (19,578) (20,265)
Net Operating Expenses (18,363) (18,973) (17,439) (18,116) (18,577) (19,578) (20,265)

Profit before Taxation 19,889 14,907 15,945 19,765 24,807 28,736 33,482
Income Tax expense (1,376) (1,687) (1,860) (2,372) (2,977) (3,448) (4,018)

Adjustments - - - - - - -
Trfr to Retained Profit - 3,145 - - - - -
Effect of currency translation 10 54 77 - - - -
May 2005
Appropriations required by statute 85 244 136 - - - -
Other Appropriations (3,145) - - - - - -
Dividend RO (3,145) (13,208) (13,208) (16,353) (20,442) (23,775) (27,675)
Ratios
2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
Margins
- Net profit / revenues 45.8% 38.4% 39.8% 41.9% 44.4% 51.5% 52.9%
- Interest Income/ Average Interest 6.6% 5.9% 5.75% 5.99% 6.14% 6.23% 6.38%
Earning Assets
- Interest Expense/ Average Interest 2.67% 1.92% 1.43% 1.64% 1.76% 1.81% 1.91%
Bearing Liabilities
- Net Spread 3.9% 4.00% 4.32% 4.35% 4.39% 4.43% 4.47%
Efficiency
Liquidity
Credit Quality
- Non Performing Loans (RO mn) 94.0 79.3 75.5 73.5 71.7 69.4 66.9
- Loan Loss Reserve (RO mn) 60.5 66.3 68.8 76.0 84.1 93.1 102.9
- NPL Coverage 64.4% 83.6% 91.2% 103.3% 117.3% 134.1% 153.8%
Capital Adequacy
- Provisions to Total Op. Income 7.9% -0.0% -10.0% -9.3% -10.0% -10.4% -10.4%
- Change in Interest Income -4.3% -6.4% -15.4% 14.5% 18.2% 13.6% 13.4%
- Change in Investment Income -20.5% -45.2% 61.8% 7.0% 7.0% 7.0% 7.0%
- Shares in Issue (000) 62,897 62,897 62,897 62,897 62,897 62,897 62,897
- EPS (RO) 0.294 0.210 0.224 0.277 0.347 0.402 0.468
- P/E 5.3 11.3 15.9 15.8 12.6 10.8 9.3
- P/BV 0.9 1.4 2.2 2.6 2.6 2.5 2.5

Bank Dhofar
BDOF.OM
Listing:
Current Price
RO3.850
Key Data
EPS (RO) 0.267 12M Avg. vol. 0.279mn
BVPS (RO) 1.62 52 week Lo / Hi 3.100 / 4.030
Background
Bank Dhofar started operations in 1990, by acquiring the Muscat branch of BNP- Paribas,
and was established as an Omani commercial bank. It also took over the 11 defunct branches
of Bank of Credit & Commerce International (BCCI) in 1992. Bank Dhofar is wholly owned
and managed by Omanis. In 1998, it divested 40% of its share in a public offer and got listed
in the Muscat Securities Market and was converted into a SAOG company - Bank Dhofar Al
Omani Al Fransi SAOG. In 2001, it acquired 16 branches of Commercial Bank of Oman after
the latter was merged with BankMuscat.
With successive years of consistent growth through organic and inorganic strategies,
Bank Dhofar has accumulated a critical mass with an impressively expanding network of
48 operational branches. A new five-year strategic plan was also approved by the board
in 2003 which recommended a panned growth in cross-border exposure, increased lending
to emerging enterprises, envisaged the launch of at least three new independent business
units (investment banking, private banking and structured finance) and several new retail
products.
Dhofar International Development and Investment Company owns the largest individual
shareholding with 30% stake in the bank, while the Civil Service Pension Fund holds 10%,
Public Authority for Social Insurance holds 8.3%, Qais Omani Establishment holds 6.4%,
Malatan Trading holds 6.3%, Ministry of Defense Pension Fund holds 5.7% and the remaining
33.1% is owned by others including general public.

Table : Major Shareholders

Dhofar International Development and Investment Company 30.0%
Civil Service Pension Fund 10.0%
Public Authority for Social Insurance 8.3%
Qais Omani Establishment 6.4%
Malatan Trading & Contracting Co. 6.3%
Ministry of Defense Pension Fund 5.7%
Source: Bank Dhofar
• The interest income of the bank increased by 8.5% during the FY2004 to reach RO30mn
as compared to RO27.6mn over the corresponding period last year. The interest expense
on deposits from banks and customers also increased by 7.7% to reach RO6.7mn during
the same period.
• As a result, the net interest income during the period increased by 8.7% to RO23.2mn as
against RO21.4mn in the previous year.
• Other Income (which comprises of fees, forex, investment miscellaneous income)

remained stagnant at RO5mn. During the FY2004, Bank Dhofar generated RO1.8mn in
fees & commissions income from various banking activities. Returns from investment
securities declined by 21.4% to reach RO1.34mn during the same period.
• Provision for impairment decreased by 15% to reach RO3.3mn at the end of FY04 as
compared to RO3.9mn for the corresponding period in FY03. The bank also provided
RO655,000 towards provision for investments.
• The net profit after providing for taxation was higher at RO11.1mn, a 10.2% increase over
the corresponding period last year.
• Bank Dhofar’s total assets reached RO552mn at the end of FY04, representing an increase
• The bank’s gross loan book growth during the year was at 10.9% and it reached RO449mn
at the end of FY04. The loan loss coverage has increased to 114% as of the end of FY04.
• Total deposits from customers increased by 21% to reach RO421mn as of end 2004. Time
deposits constituted 60% of total deposits.
• Capital adequacy ratio remained at comfortable levels at 15.4% at the end of FY04.
Valuation
• Bank Dhofar reported an annualized basic EPS of RO0.267 during FY04, an increase of
10.3% over the EPS recorded for the corresponding period last year.

• The estimated fair value of Bank Dhofar’s stock works out to RO4.218 based on DDM
and relative valuation method, which is higher by 9.6% vis-à-vis current market price of
the stock. Our price target represents an implied 2005 P/E multiple of 12.6x.
• Currently the stock is trading at 2005 earnings (forecast) multiple of 11.5x and at 2.1x its
book value (forecast). We revise our earlier recommendation to ‘Hold’.

BALANCE SHEET
Bank Dhofar
May 2005
Assets
Cash & balances with Central Banks 10,372 13,983 38,096 63,609 69,817 75,331 70,265
Treasury Bills 28,710 32,837 50,514 53,040 55,692 58,476 61,400
Placements with banks 12,583 20,271 18,708 20,579 22,019 23,561 25,210
Loans and advances (Gross) 284,402 404,766 449,068 502,956 553,252 604,704 659,128
Other assets 5,853 8,287 4,878 5,122 5,378 5,647 5,929

Provisions (18,396) (37,581) (42,565) (47,026) (52,836) (59,563) (66,374)
Total Current Assets 323,524 442,563 518,699 598,279 653,323 708,155 755,558
Trading Investments 3,777 5,611 6,543 7,852 9,029 10,384 11,941
Non trading investments 10,449 17,249 18,872 21,703 24,307 26,738 29,144
tangible net fixed assets 3,453 3,437 3,488 3,610 3,842 4,102 4,443
Intangible assets 2,800 5,225 4,575 4,118 3,706 3,335 3,002
Total Assets 344,003 474,085 552,177 635,561 694,207 752,714 804,088
Liabilities

Deposits from customers 277,219 348,298 421,093 492,679 537,020 579,982 620,580
Certificates of Deposit - 10,099 - - - - -
Subordinated Bonds - 7,362 7,362 7,362 7,362 7,362 -
Taxation 1,566 2,230 1,806 1,860 1,916 1,974 2,033
Total Current Liabilities 296,595 410,958 484,406 560,274 609,685 657,339 695,614
Owner's Equity
share premium - 5,429 5,429 5,429 5,429 5,429 5,429
legal reserve 4,302 5,318 6,437 7,844 9,632 11,812 14,449
41
subordinated bond reserve - 1,472 2,944 4,416 5,888 7,360 8,832

INCOME STATEMENT
Bank Dhofar
Interest Income 24,640 27,675 30,019 38,315 47,900 57,306 66,423
42
Add : Foreign exchange gains 273 404 461 493 528 549 571
Add: Profit on Investment Securities 1,197 1,702 1,338 1,445 1,532 1,624 1,721
Less: Provision for investments (462) - (655) (688) (722) (758) (796)
Less: Provision for possible credit losses (3,513) (3,918) (2,647) (4,461) (5,809) (6,728) (6,811)
Less: Impairment (8) (57) (22) - - - -
Less: Provision for property and equipment (120) (28) - - - - -
Net Operating Income 18,189 22,439 24,957 29,945 36,082 42,590 50,045
Less : Staff wages and salaries (4,313) (5,612) (6,400) (7,296) (8,172) (8,989) (9,888)
Less: Other administrative expenses (3,707) (4,374) (4,737) (5,495) (6,374) (7,458) (8,726)
Less: Depreciation (834) (1,030) (1,106) (1,171) (1,217) (1,363) (1,475)
Operating Expenses (8,854) (11,016) (12,243) (13,962) (15,762) (17,809) (20,088)
Net Operating Expenses (8,854) (11,016) (12,243) (13,962) (15,762) (17,809) (20,088)
Net Profit before tax 9,335 11,423 12,714 15,983 20,320 24,781 29,956

Profit before Taxation 9,327 11,366 12,714 15,983 20,320 24,781 29,956
Income Tax expense (1,040) (1,267) (1,522) (1,918) (2,438) (2,974) (3,595)

Op Balance of Retained Earnings 917 1,532 2,652 4,705 7,245 10,912 15,804
Trfr to Legal Reserve (830) (1,016) (1,119) (1,407) (1,788) (2,181) (2,636)
Trfr to Subordinated Bond Reserve - (1,472) (1,472) (1,472) (1,472) (1,472) (1,472)
Director's Remuneration (178) (254) (254) (254) (254) (254) (254)
May 2005
Dividend (6,294) (6,294) (6,294) (8,392) (10,700) (13,008) (15,946)
Ratios
Bank Dhofar
2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
Margins
- Interest Income/ Average Interest Earning Assets 7.39% 6.82% 5.93% 6.75% 7.64% 8.37% 8.93%
- Interest Expense/ Average Interest Bearing Liabilities 2.26% 1.85% 1.58% 1.78% 2.06% 2.34% 2.55%
- Net Spread 5.13% 4.97% 4.35% 4.97% 5.58% 6.04% 6.37%
Efficiency
Liquidity
Credit Quality
- Non Performing Loans (RO) 15,115 35,412 37,229 42,751 49,793 56,842 63,935
- Loan Loss Reserve (RO) 18,396 37,581 42,565 47,026 52,836 59,563 66,374
- NPL Coverage 121.7% 106.1% 114.3% 110.0% 106.1% 104.8% 103.8%
Capital Adequacy
- Change in Investment Income 52.9% 42.2% -21.4% 8.0% 6.0% 6.0% 6.0%
- Change in Other Income 15.2% -4.8% -6.3% 4.0% 4.0% 3.0% 3.0%
- Shares in Issue 35,280 41,962 41,962 41,962 41,962 41,962 41,962
- EPS (RO) 0.235 0.242 0.267 0.335 0.426 0.520 0.628
- P/E 9.6 12.4 14.1 11.5 9.0 7.4 6.1
- P/BV 1.7 2.0 2.3 2.1 1.9 1.7 1.5


AHBK.OM
Listing:
Current Price
RO3.700
Key Data
BVPS (RO) 1.310 52 week Lo / Hi 1.740 / 3.830
Background
Alliance Housing Bank (AHB) was incorporated in 1997 and is a publicly held institution
listed on the Muscat Securities Market. AHB was formed as a specialized housing bank with
the goal to help the local housing market by providing long term loans for those who wish
to buy land/ houses and build/ improve their houses. It also provides re-mortgage loans to
help those customers who wish to consolidate and reduce the cost of their existing housing
related loans.
AHB operates through its seven branch network, all in the Sultanate of Oman. It employs
61 personnel. The branches serve as the principal delivery channels for the products and
services. In addition to direct business from customers, the bank has also entered into strategic
arrangements with government and few reputed private sector companies for employee
housing loan schemes.
Capital Intelligence rated AHB and assigned long and short-term foreign currency ratings of
BB+ and A3 respectively and a domestic strength rating of BBB- with a stable outlook.
The top-20 shareholders of AHB combinedly contribute 63.89% of the bank’s paid-up capital.
A list of the top-5 shareholders is as follows:
Table: Shareholding Structure

Oman National Holding Co. for Investment - ONIC 10.1%
Ministry of Defense Pension Fund 10.0%
Securities & Investment Co. N/A
National Equity Fund N/A
Public Authority for Social Insurance N/A

• Recent news reports indicate that ONIC holdings is considering to increase its stake in
AHB to 35%.
• The interest income of the bank increased by 47% during the full year 2004 to reach
RO8.27mn as compared to RO5.63mn over the corresponding period last year, mainly
aided by a 43% increase in the net mortgage accounts. The interest expense also increased
by 65% to reach RO2.26mn during the same period.
• As a result, net interest income during the period increased by a whopping 41% to RO6mn
as against RO4.26mn in the corresponding period of the previous fiscal.
• Other income (which comprises of fees and miscellaneous income) jumped by 23.1%
as compared to the same period last year. During 2004, AHB generated RO0.465mn in
fees & commissions income from various banking activities and other off-balance sheet
commitments.
• Keeping in trend with the increase in mortgage accounts, total provisioning charges (net
of recoveries) increased by 89% to reach RO0.443mn at the end of FY2004 as compared
to RO0.234mn for the corresponding period in the previous fiscal. The net profit after
providing for taxation was higher at RO3.560mn, a 37.7% increase over the corresponding
period last year.
• AHB’s total assets increased substantially to RO124.9mn at the end of December 2004,
representing an increase of 41% over the previous year.
• The bank increased its loan book size (gross) by 43% during the last 4 quarters to
RO103.6mn at the end of FY2004. However, the loan book growth during the last quarter
was reduced to RO6mn as against an average of RO8mn during the first 3 quarters of 2004.
Keeping in trend with mortgage accounts, the ratio of provisions to average loans also saw
a marginal increase from 0.4% in FY2003 to 0.5% in FY2004. The NPL coverage ratio at
the end of 2004 was at 100.4%. However, as the loan book increases at a staggering pace,
we expect the NPLs and hence the provisioning levels to go up in the subsequent years.
• Total deposits from customers increased by a healthy 91% to reach RO32.3mn as of

December end 2004, while certificates of deposits increased by 15% to reach RO26.6mn
during the same period. However, the customer deposits reduced by 43% from the levels
observed at the end of 3Q04. To fund its growth in mortgage accounts, we expect AHB
to rely on increasing the CD levels. We also expect AHB to raise fresh funds in terms of
long term loans or issuance of new bonds in the current year.
• Capital adequacy ratio has declined from 67.25% in December 2003 to 53.73% in
December 2004. A quick look at the Debt to Equity ratio indicate that the ratio has
increased from 0.58x in 2001 to 2.24x in 2003 and 3.2x in 2004. As per our forecasts, the
ratio is likely to reach 4x in 2005 and would reach 4.8x in 2008. To fund this kind of loan

book growth and to maintain the debt to equity in control, we expect the bank to raise
fresh capital in the next couple of years.
Valuation
• AHB reported basic and diluted EPS of RO0.170 during FY04, an increase of 38% over
the basic and diluted EPS of 2003. Currently the stock is trading at 2005 earnings multiple
of 15.5x and at 2.6x its 2005 book value.
• We have revised our fair value of AHB’s stock at RO3.689 based on DDM and relative
valuation method, which represents a discount of 0.3% from the current market price of
RO3.700.
• We maintain ‘Hold’ on the stock.

BALANCE SHEET
Amount in RO 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets
Cash & balances with Central Bank 82,623 79,717 149,133 113,096 146,265 166,270 195,325
May 2005
Cash & balances ( >30 days ) 55,000 63,175 93,607 93,607 93,607 93,607 93,607
Due from other banks 1,394,468 582,542 1,855,439 2,040,983 2,204,262 2,380,603 2,571,051
Assets held for trading-certificates of deposits 1,393,285 1,020,000 - - - - -
Assets held for trading-bank deposit 800,000 800,000 800,000 800,000 800,000 800,000 800,000
Mortgage Accounts 46,317,201 72,355,011 103,593,875 139,955,325 177,603,308 216,445,151 254,777,587
Provision for loan impairment (279,137) (513,873) (957,867) (1,679,464) (2,841,653) (4,545,348) (6,369,440)
Reserved Interest (33,787) (82,133) (98,133) (167,946) (230,884) (313,846) (407,644)
Deferred Tax Asset - 40,761 56,056 56,056 56,056 56,056 56,056
Other assets 613,288 631,897 793,873 873,260 960,586 1,056,645 1,162,310
Investment Securities-Government Development Bonds 4,590,967 7,013,281 7,389,253 8,349,856 9,268,340 10,195,174 11,214,691
Investment Securities-Government Certificates of Deposit 700,000 3,500,000 8,000,000 10,400,000 12,480,000 13,728,000 15,100,800
Investment Securities-Other debt security 100,000 230,700 330,700 413,375 475,381 532,427 575,021
Investment Securities-Securities available for sale 2,308,174 2,797,423 2,759,174 2,924,724 3,070,961 3,224,509 3,385,734
net fixed assets 132,676 88,086 127,155 129,341 140,098 158,234 181,855
Total Assets 58,174,758 88,606,587 124,892,265 164,302,213 204,226,325 243,977,482 283,336,953

Liabilities
Deposits from customers-Term Deposits 6,864,214 11,168,845 23,559,324 35,810,173 49,632,899 63,033,782 76,270,876
Deposits from customers-Other accounts 3,303,593 5,780,534 8,772,153 14,035,445 20,842,636 29,012,949 37,890,911
Certificates of Deposit 14,875,000 23,125,000 26,625,000 41,535,000 54,327,780 64,867,369 73,073,092
Long-term Bonds - - 21,400,000 21,400,000 21,400,000 21,400,000 21,400,000
Due to other banks 6,600,000 20,000,000 12,950,000 16,187,500 17,806,250 19,586,875 21,545,563
Taxation 296,538 410,307 487,794 541,451 601,011 667,122 740,506
Owner's Equity
paid-up equity capital 21,000,000 21,000,000 21,000,000 21,000,000 21,000,000 21,000,000 21,000,000
legal reserve 856,903 1,115,462 1,471,476 1,973,968 2,639,234 3,489,212 4,569,904
47
general banking reserve - 129,279 307,286 558,532 891,165 1,316,154 1,856,500
retained earnings 2,432,383 3,370,132 4,716,251 6,362,436 8,237,194 10,212,008 12,257,887
proposed dividends 945,000 1,260,000 1,680,000 2,625,000 3,780,000 5,250,000 7,140,000
Total Shareholder's Equity 25,234,286 26,874,873 29,175,013 32,519,936 36,547,593 41,267,374 46,824,291

OPERATING STATEMENT
Amount in RO 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
48
Interest Income 4,147,391 5,632,641 8,270,526 11,778,161 15,896,961 20,563,397 25,226,326
Interest Expense (837,258) (1,367,064) (2,262,112) (3,415,667) (4,816,779) (6,333,526) (7,820,161)
Net interest income 3,310,133 4,265,577 6,008,414 8,362,495 11,080,182 14,229,871 17,406,165
Add: Net unrealised gain from assets held for trading 5,000 (20,000) - - - - -
Add: Net unrealised gain from investment securities 45,666 32,244 2,209 2,297 2,389 2,485 2,584
Add: Fee Income 206,708 350,979 465,512 628,441 804,405 1,005,506 1,226,717
Add : Other income 203,602 175,223 182,578 219,094 258,530 297,310 335,960
Net Operating income 3,771,109 4,804,023 6,658,713 9,212,327 12,145,506 15,535,172 18,971,426
Less : Staff expenses (756,353) (883,984) (1,213,297) (1,473,972) (1,821,826) (2,252,600) (2,656,000)
Less: Other operating expenses (658,369) (642,684) (777,537) (1,105,479) (1,396,733) (1,708,869) (1,992,000)
Less: Provisions- net of recoveries (115,732) (234,736) (443,994) (721,597) (1,162,189) (1,703,695) (1,824,092)
Less: Board remuneration (34,800) (92,000) (152,000) (159,600) (167,580) (175,959) (184,757)

Net Operating Expenses (1,767,250) (1,916,266) (2,634,571) (3,502,187) (4,585,669) (5,876,330) (6,690,839)
Operating profit before tax 2,003,859 2,887,757 4,024,142 5,710,140 7,559,837 9,658,842 12,280,588
Less: Income tax expense (236,863) (302,170) (464,002) (685,217) (907,181) (1,159,061) (1,473,671)
Net Profit attributable to shareholders 1,766,996 2,585,587 3,560,140 5,024,923 6,652,657 8,499,781 10,806,917
Op Balance of Retained Earnings 1,787,088 2,432,384 3,370,133 4,716,251 6,362,436 8,237,194 10,212,008
Trfr to Legal & General Banking Reserve (176,700) (387,838) (534,022) (753,739) (997,899) (1,274,967) (1,621,038)
May 2005
Dividend RO (945,000) (1,260,000) (1,680,000) (2,625,000) (3,780,000) (5,250,000) (7,140,000)
CASH FLOW STATEMENT
Amount in RO 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Operating
May 2005
Operating Activities 2,303,479 3,285,236 4,663,888 5,788,058 7,852,187 10,238,683 12,664,999
Profit from operations 2,003,859 2,887,757 4,024,142 5,710,140 7,559,837 9,658,842 12,280,588
Depreciation 201,996 62,862 47,743 41,538 37,341 35,207 33,991
Loan impairment expense net of recoveries 115,732 234,736 443,994 721,597 1,162,189 1,703,695 1,824,092
End of service benefits provision 7,858 8,748 6,080 - - - -
Tangible fixed assets written-off - 24,202 - - - - -
profit on sale of tangible fixed assets (10,100) (12,825) (7,862) - - - -

net unrealised gain from assets held for trading (5,000) 20,000 - - - - -
net unrealised gain from investment securities (45,666) (32,244) (2,209) - - - -
Fees paid to Board-proposed 34,800 92,000 152,000 - - - -
Income tax paid - - - (685,217) (907,181) (1,159,061) (1,473,671)
Working Capital 2,660,734 (1,562,768) (20,731,495) (491,543) (1,939,194) (3,999,906) (4,732,197)

Dec/(Inc) in Cash & balances - (8,175) (30,432) - - - -
Dec/(Inc) in due from other banks 1,180,784 - - (185,544) (163,279) (176,341) (190,448)
Dec/(Inc) in mortgage accounts (15,263,916) (25,989,464) (31,222,864) (36,361,450) (37,647,983) (38,841,843) (38,332,436)
Dec/(Inc) in reserved interest - 69,813 62,938 82,961 93,799
Dec/(Inc) in other assets (237,020) (18,609) (76,362) (79,387) (87,326) (96,059) (105,665)
Inc/(Dec) in customers' deposits 6,184,165 6,781,572 15,382,098 17,514,140 20,629,917 21,571,196 22,115,057
Inc/(Dec) in Certificates of deposit 9,175,000 8,250,000 3,500,000 14,910,000 12,792,780 10,539,589 8,205,722

Inc/(Dec) in due to other banks 1,425,000 9,500,000 (8,400,000) 3,237,500 1,618,750 1,780,625 1,958,688
Inc/(Dec) in other liabilities 370,986 200,439 660,916 349,728 795,448 1,073,855 1,449,704
Payment of end-of-service benefits (708) (14,569) 8,957 - - - -
Board remuneration paid (21,892) (34,800) (152,000) - - - -
Inc/(Dec) of taxation (151,665) (229,162) (401,808) 53,657 59,560 66,111 73,383
Total Operating 4,964,213 1,722,468 (16,067,607) 5,296,516 5,912,992 6,238,777 7,932,803
Investing
Capex (49,678) (43,154) (87,094) (43,725) (48,097) (53,344) (57,611)
Proceeds from sale of tangible fixed assets 10,100 13,505 8,144 - - - -
Disposal of assets held for trading - 353,285 1,000,000 - - - -
Purchase of securities (4,059,282) (3,010,019) (501,130) (3,608,828) (3,206,727) (2,385,428) (2,596,137)
Total Investing (4,098,860) (2,686,383) 419,920 (3,652,553) (3,254,824) (2,438,772) (2,653,748)
49
Financing
Dividend paid to shareholders (821,993) (950,917) (1,260,000) (1,680,000) (2,625,000) (3,780,000) (5,250,000)
Increase in borrowings - - 21,400,000 - - - -
Total Financing (821,993) (950,917) 20,140,000 (1,680,000) (2,625,000) (3,780,000) (5,250,000)
Net Change in Cash 43,360 (1,914,832) 4,492,313 (36,037) 33,169 20,006 29,054
Net Cash at beginning 39,263 1,994,549 79,717 149,133 113,096 146,265 166,270
Net Cash at end 82,623 79,717 149,133 113,096 146,265 166,270 195,325
Ratios

2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
- Fee Income/ Total Op. Income 5.5% 7.3% 7.0% 6.8% 6.6% 6.5% 6.5%
- Dividend Payout ratio 54% 49% 47% 52% 57% 62% 66%
Margins
- Net Spread 4.95% 4.73% 4.81% 5.06% 5.28% 5.57% 5.76%
Efficiency
- Cost to Total Op Income 44% 35% 33% 30% 28% 27% 26%
Liquidity
- Loans to Total Deposits 146.4% 120.4% 111.0% 108.5% 108.3% 109.4% 110.7%
Credit Quality
- Non Performing Loans (RO) 524,576 921,784 954,053 1,539,509 2,575,248 3,982,591 5,503,196
- Loan Loss Reserve (RO) 279,137 513,873 957,867 1,679,464 2,841,653 4,545,348 6,369,440
- NPL's to Gross Mortgages 1.1% 1.3% 0.9% 1.1% 1.5% 1.9% 2.2%
- Loan Loss Reserve to Gross Mortgages 0.6% 0.7% 0.9% 1.2% 1.6% 2.1% 2.5%
- NPL Coverage (incl. Interest in suspense) 53.2% 55.7% 100.4% 109.1% 110.3% 114.1% 115.7%
Capital Adequacy
- Fees Income to Total Op. Income 5.5% 7.3% 7.0% 6.8% 6.6% 6.5% 6.5%
- Change in Fee Income 60.1% 69.8% 32.6% 35.0% 28.0% 25.0% 22.0%
- Change in Investment Income 14.9% -75.8% -82.0% 4.0% 4.0% 4.0% 4.0%
- Shares in Issue ('000) 21,000 21,000 21,000 21,000 21,000 21,000 21,000
- EPS (baiza) 84 123 170 239.3 316.8 404.8 514.6
- P/E 10.5 12.5 16.8 15.5 11.7 9.1 7.2
- P/BV 0.8 1.3 2.2 2.6 2.4 2.2 2.0



BankMuscat Hold BMAO.OM RO8.830 1,10
Oman International Bank Hold OIB.OM RO4.360 1,10
Alliance Housing Bank Hold AHBK.OM RO3.700 1,10
Bank Dhofar Hold BDOF.OM RO3.850 1,10
National Bank of Oman Not Valued NBO.OM RO3.650 1,10
1. Global Investment House did not receive and will not receive any compensation from the company or
anyone else for the preparation of this report.
5. The author of or an individual who assisted in the preparation of this report (or a member of his/her
household) has a direct ownership position in securities issued by this company.
7. Within the past year , Global Investment House has managed or co-managed a public offering for this
company, for which it received fees.
8. Global Investment House has received compensation from this company for the provision of investment
banking or financial advisory services within the past year.
9. Global Investment House expects to receive or intends to seek compensation for investment banking
services from this company in the next three months.

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This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global
may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers
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Qatar
Qatar Banking Sector

May 2005
Equities Research
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661


omar@global.com.kw
Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
Phone No:(965) 2400551 Ext.196
Chandresh Bhatt
cbhatt@global.com.kw
Phone No:(965) 2400551 Ext 270
Pravin Bokade
Phone No:(965) 2400551 Ext 229
Table of Contents
Qatar Banking Sector ..................................................................................................................................... 1
Trend in Credit Facilities ......................................................................................................................................... 3
Interest Rate Trend ....................................................................................................................................................... 5
Asset & Liability Composition ............................................................................................................................. 6
Peer Group Comparison ........................................................................................................................................... 7
Comparative Indicators ............................................................................................................................................. 9
Banking Sector Outlook ............................................................................................................................................ 11
Valuation Matrix ............................................................................................................................................................ 12
Players Profile
Qatar National Bank .............................................................................................................................................. 16
Commercial Bank of Qatar ............................................................................................................................... 23
Doha Bank ................................................................................................................................................................... 30
Qatar International Islamic Bank .................................................................................................................. 38
Qatar Islamic Bank ................................................................................................................................................. 44
Ahli Bank ..................................................................................................................................................................... 50

Global Research Qatar Global Investment House

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

In Qatar, large banks such as QNB, Doha Bank and Commercial Bank (CB) dominate the
banking industry by virtue of their size, reach and coverage. The large banks also have
competitive advantage over the smaller banks on account of their strong brand equity and
distribution coverage. Our comparison of the banks in this section would remain confined to
only the six listed local banks of Qatar which account for almost 87% of the total assets (as
of December 2004) in the local banking industry.
The Qatari banking sector is dominated by the Qatar National Bank. In terms of assets, QNB
has a dominant presence in the domestic banking industry accounting for 49.2% of the total
May 2005 Qatar Banking Sector 1

banking assets of the listed Qatari banks. In terms of total deposits it accounts for 50.3% of
total banking deposits of the listed banks. The bank held 55.8% market share of gross loans
& advances. However, since last few years, QNB is losing its market share in all categories.
Among the six listed banks, Commercial Bank held second position in terms of size of assets,
customer deposits and loans & advances as of December 2004. The bank held 16.1% market
share in terms of assets, 14.1% in deposits and 13.9% in loans & advances segment. Doha
bank held third position in terms of all the three categories namely, total assets, deposits and
loans & advances with its market share at 13.7%, 13.7% and 12.3% respectively.
Among the six local banks analyzed here, Ahli Bank (ABQ) is the smallest bank in terms
of asset size, deposits and loans & advances with its market share at 5.3%, 4.7% and 3.5%
respectively. The other two medium sized banks are the two listed Islamic banks, namely,
Qatar Islamic Bank (QIB), which held 9.6% of the total assets and Qatar International Islamic
Bank (QIIB) held the remaining 6.2%.
Table 1: Market Share of Six Listed Qatari Banks

2003 2004 2003 2004 2003 2004
Qatar National Bank 53.8% 49.2% 50.4% 50.3% 57.7% 55.8%
Commercial Bank 13.6% 16.1% 13.1% 14.1% 11.7% 13.9%
Doha Bank 14.0% 13.7% 15.5% 13.7% 13.3% 12.3%
Qatar Islamic Bank 8.7% 9.6% 10.0% 9.8% 8.5% 9.1%
Qatar International Islamic Bank 6.0% 6.2% 7.2% 7.4% 5.1% 5.5%
Ahli Bank 3.9% 5.3% 3.8% 4.7% 3.8% 3.5%
Source: Annual Results of Banks and Global Research
Competition
In Qatar, the State Government plays a key role in the structure of the banking sector by
remaining the largest borrower and depositor. Qatar National Bank, being 50% owned by the
State Government and its large resource base, gets the lion’s chunk of state-related business.
The other commercial banks enjoy lesser chunk of state-related business, rather they compete
strongly on deposit front and also focus more on developing their retail banking businesses.
The lack of opportunities in corporate banking, because of the small base of private sector
corporates, compels these banks to continue focusing on big ticket government projects and
also on retail banking. The main focus areas of foreign banks are trade financing activities,
foreign currency operations and corporate advisory services.
Qatar is becoming a favorite destination for investors. The banking system is developing
fast, and the banking products that people find in the international markets are available
in Qatar. The country has all the regulations that allows banks within the GCC to operate
locally. There are banks negotiating with the Central Bank of Qatar for opening branches in
the country. However, there is intense competition among the existing banks to increase their
client base. Qatar’s gas-centric economy and small market are the constraints within which
all banks operate. The implementation of the WTO accord could also result in mergers and
acquisitions in the banking sector, especially small banks which may face difficulties and
therefore might consider mergers and acquisitions as an alternative.
2 Qatar Banking Sector May 2005

Trends in Credit Facilities

During the period 2000-2004, total credit facilities grew at a CAGR of 14.2% to reach
QR49.5bn, while total domestic credit grew by 14.7% to QR48.3bn. Almost all the sectors
have witnessed double digit CAGR in their credit offtake, during 2000-2004, except few
such as merchandise, credit outside Qatar and others.
Table 2: Trends in Credit Facilities of the Banking Sector

2000 2001 2002 2003 2004 (2000-2004) Growth in
(in QR Mn) CAGR (%) 2004 over
2003 (%)
Public Sector 10,660.6 16,529.9 16,814.8 19,931.5 18,469.5 14.7 -7.3
Merchandise 4,506.7 4,046.9 4,726.5 5,531.5 6,116.4 7.9 10.6
Industry 420.2 607.0 936.7 750.4 1,059.9 26.0 41.2
Land, Housing & Construction 1,219.9 1,132.8 1,287.2 3,327.2 5,711.7 47.1 71.7
Personal 9,180.6 8,881.9 9,639.9 11,503.1 14,085.3 11.3 22.4
Services 476.7 1,065.3 812.4 1,865.1 2,383.5 49.5 27.8
Others 1,448.2 1,746.7 1,749.9 437.2 467.5 -24.6 6.9
Total Domestic 27,912.9 34,010.5 35,967.4 43,346.0 48,293.8 14.7 11.4
Outside Qatar 1,201.4 1,485.9 246.6 441.5 1,189.1 -0.3 169.3
Total 29,114.3 35,496.4 36,214.0 43,787.5 49,482.9 14.2 13.0
Source: Qatar Central Bank
Sectors which saw their share increase as a percentage of the total credit off-take, during 2000-
2004, were credit facilities granted to public sector; industrial; land, housing & construction
and services. While credit granted to others declined significantly during this period.
Figure 1: Distribution of Credit Facilities

as of December 2003 as of December 2004
1% 1% 1% 2%
4% 5%
26% 38%
28%
45%
8%
2% 12%
13% 2% 12%
Public Sector Personal Public Sector Personal

Merchandise Services Merchandise Services
Industry Others Industry Others
Land, Housing & Construction Outside Qatar Land, Housing & Construction Outside Qatar
During the year 2004, total credit facilities of the banking sector grew by 13% to QR49.5bn
from QR43.8bn in the previous year. Breakdown of the distribution of credit facilities shows
that, during 2004, the share of the public sector in the total credit facilities granted has
declined to 38% from 45% in the previous year, which shows the diversification of lending to
other businesses/sectors. The sector witnessed decline of 7.3% in credit off-take to QR18.5bn
in 2004 whereas in 2003 it had registered a growth of 18.5%.

The personal segment, which had second highest share in the total credit off-take, witnessed
a marginal growth of 2% in its share to 28% during 2004. However, it witnessed a growth
of 22.4% over 2003 to QR14.1bn. The year 2004 witnessed a significant increase in credit
to the personal segment due to the increased focus on consumer loans as part of their thrust
on retail banking. This was a trend not only in Qatar but in the whole of the Gulf region. The
biggest growth in credit facilities was witnessed by the land, housing & construction sector,
whose credit facilities grew by 71.7% in 2004 and its contribution to the total credit granted
also increased from 8% in 2003 to 12% in 2004. The steep rise in facilities to land, housing
& construction sector was due to the surge in construction activities in Qatar, commercial
as well residential. As the country prepares to stage the Asian Games in 2006, heavy
construction activity is going on both in the government and the private sector in the country.
Among the other sectors, industrial and services have also witnessed a significant growth
in credit off-take at 41% and 27.8% respectively. As part of a diversification of the lending
portfolio majority of the banks in Qatar have increased their focus on regional lending by
taking participation especially in syndications. Therefore, in 2004, the external credit of the
commercial banks grew by a robust 169% to QR1.2bn.
Small Market Size – compels overseas diversification of assets

Qatar is predominantly a smaller market for the banks to diversify their asset base. It is
dominated by a handful of major corporate groups, which creates concentration of assets
in the banks’ books by a few corporate groups. This affects the credit quality, as majority
of the corporate groups are family run businesses. Therefore, many banks are now focusing
more on diversifying their asset base outside the country. The country’s largest bank QNB
diversified its assets to other countries in 2004, as the share of Qatari operations in total asset
base of the bank declined to 72% from 80% in the last two years. In case of Commercial
Bank of Qatar, the share of Qatari operations in its asset base declined to 60.7% in 2004 from
68.6% in 2003.
Retail Banking – a major thrust area

Most of the banks in the GCC have increased their focus on the retail banking market in
order to drive asset expansion, widen margins and raise fees and commission income. Retail
finance represents one of the main growth areas for banks not only in Qatar but in the entire
region. Competing banks or institutions are continually introducing new products. The banks
are experiencing that margins for commercial and corporate banking are fairly tight and
continue to narrow. This together with the need for banks to raise their level of non-interest
income, in order to shield against margin pressure and to diversify income, are likely to see
a rapid increase in retail banking during the next few years. Therefore, banks in Qatar are
aggressively competing with each other to have a larger share of the retail market, which
is still at a nascent stage. The thrust area of the retail segment now is to prudently manage
personal credit lines, minimize expenses, develop new products, and add utility to existing
products. The franchise is rapidly expanding beyond a branch system and includes online
banking, direct phone banking, share dealing, dedicated Islamic banking channels and, of
course, ATMs, and a large network of POS terminals.
The Sector is becoming highly competitive

In the fast growing Qatari market, the banking sector is becoming highly competitive and
challenging as some of the foreign banks have started to increase their presence in the market.
Apart from that, experienced new comers in Qatari market such as Ahli United Bank with

Ahli Bank, National Bank of Kuwait with International Bank of Qatar and a Dubai-based,
Mashreqbank plans to spread out their foothold in the Qatari market. We believe that with
these the banking sector in Qatar will experience a new dimension of competition in retail as
well as institutional segments.
Interest Rate Trend

The level of interest rates in Qatar follow closely those prevailing in the United States.
Therefore, in the last few years, interest rates in Qatar witnessed a continuous downfall,
which can be gauged from the movements in Qatar Central Bank’s Monetary Rates (QMR)
on lending and borrowing. QMR on lending which stood at 1.58% in 2002 had declined to
1.33% in 2003. With the rising interest rates in 2004 it rose to 2.60%. QMR’s rate on deposit
moved along the line of rates on lending, which moved from 1.28% in 2002 to 1.23% in 2003
and rose to 2.50% in 2004.
Figure 2: Trend in Qatar Central Bank’s Monetary Rates

3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2002 2003 2004
Lending Deposit
The increased liquidity in the system and lower interest rates have resulted in lower deposit
rates as well. With the declining interest rates, Commercial Bank had revised its effective
interest rates on customer deposits from 2.25% in 2002 to 1.51% in 2003 and to 1.72% in
2004. While its effective interest rate on loans & advances was at 8% in 2002, reduced to
6.51% in 2003 and 5.81% in 2004.
Going forward, we believe that interest rates on customer deposits are not likely to increase
at the same pace at which it will increase on loans & advances. Therefore, margins are likely
to expand.
Islamic Banking
As mentioned earlier, at present two banks, namely QIB and QIIB, dominates the Islamic
banking sector in Qatar. In 2004, both of them together accounted for about 15.8% of total
assets of the six listed banks, 17.2% of total deposits and 14.6% of loans & advances. Out
of these two QIB is considered to be largest in terms of all the three parameters discussed
before.

Conventional banks foraying into Islamic Banking...

To tap the growing importance of Islamic finance, especially in the GCC region, many Qatari
banks are venturing into Islamic banking as a window within the conventional bank. All
the three major banks, namely Qatar National Bank, Commercial Bank and Doha Bank are
entering into Islamic banking, which will further change the face of the banking sector in
Qatar.
Asset and Liability Composition

During the period 2000-2004, the total assets of the commercial banking sector grew at a
CAGR of 16.3% to QR92.03bn in 2004 from QR50.2bn in 2000. A major portion of this
growth in the asset base was funded through the inflow of funds from resident deposits as it
accounted for more than 65% of the total liabilities during 2004.
Table 3: Consolidated Balance Sheet of Commercial Banks in Qatar

(in QR mn) 2003 2004 Y-o-Y Growth (%)
Total Assets 76,101.6 92,026.2 20.9
Cash in Q.R. 452.4 528.9 16.9
Due from QCB 1,982.5 2,868.1 44.7
Foreign Assets 19,464.9 27,756.4 42.6
Domestic Assets 54,201.8 60,872.8 12.3
Total Liabilities 76,101.6 92,026.2 20.9

Foreign Liabilities 4,103.9 8,169.2 99.1
Domestic Liabilities 71,997.7 83,857.0 16.5
During 2004, the foreign assets grew at a faster rate of 42.6% to QR27.8bn and increased its
share to 30.2% of the total banking assets from 25.6% in 2003. The major constituent of the
foreign assets are due from banks abroad, credit outside Qatar and investments abroad. The
banking sectors’ domestic credit portfolio accounted for 52.5% of the total banking assets
and it grew by 11.4% in 2004 to QR48.3bn. Keeping in line with the improved activity in
the local stock market the commercial banks’ domestic investments increased by 19.8% in
2004 to QR8.8bn.
On the liabilities side, the commercial banks have reduced their dependence on domestic
liabilities in 2004 as its share in the total liabilities declined to 91.1% from 94.6% in 2003.
Whereas the share of foreign liabilities have increased to 8.9% in 2004 from 5.4% in 2003.
Foreign banks’ dues from Qatari banks had increased by almost 100% to QR7.6bn in 2004
from QR3.8bn in 2003, which shows the kind of interest the foreign banks have in Qatar’s
flourishing economy. The major constituents of the domestic liabilities are resident deposits
and capital accounts. In 2004, the banks have reduced their dependence on customer deposits
which can be seen from the declining share of resident deposits in the total liabilities to
65.5% from 69.2% in 2003. The resident deposits of the commercial banking sector increased
by 14.4% in 2004 to QR60.3bn. At the same time the banks have shored up their capital
accounts in 2004 especially to meet the Basel-II norms and to increase their capital adequacy
ratio. In 2004, the share of capital accounts increased to 11.7% in total liabilities from 10%
in 2003 and it grew by 40.8% to QR10.7bn. Total provisions of the banking sector declined
which is despite the growth in loan portfolio, which suggests strong quality of assets. In
2004, provisions of the commercial bank declined by 8.5% to QR3.6bn. The share of foreign
liabilities increased to 8.9% in 2004 from 5.4% in 2003.

Figure 3: Composition of Assets and Liabilities of the Banking Sector

Banking Sector Assets Composition 2004 Banking Sector Liabilities Composition 2004
0.80%
0.60%
1.50% 3.10% 7.79% 8.89%
9.59% 3.90%
30.17% 11.69%
0.40%
1.90%
1.80%
52.45%
65.43%
Cash Due from QCB Foreign Liabilities Resident Deposits

Foreign Assets Due from Banks in Qatar Due to Banks in Qatar Due to QCB
Domestic Credit Domestic Investments Capital Accounts Provisions
Fixed Assets Other Assets Other Liabilities
Asset Quality
As we have discussed earlier, loan book account for larger portion of the bank’s total assets.
Therefore, quality of the loan portfolio needs to be studied in terms of performing assets and
non performing one and also in terms of coverage provided to NPLs. Over the last few years
banks in Qatar have extensively focused on improving their quality of assets which resulted
into substantial improvement in the quality of their assets portfolio.
In the Qatari banking sector, Ahli Bank has the highest non-performing loans as a percentage
of the gross loans which was followed by Doha Bank. In 2004, Commercial Bank had
considerably improved its loan portfolio with the lowest NPLs. Its non-performing loans to
gross loans stood at 1.8% followed by QNB at 2.5% and QIIB with 3.1%. QIB’s NPL/gross
loans was at 6.7%. Most of the banks in Qatar have adequately provided for their NPLs in
FY2004. As usual QNB was at the forefront of providing more for its NPLs as it provided
113%. It was followed by Commercial Bank with 111% and QIIB with 91.3%. Ahli Bank
had the lowest NPL coverage of 64.5%.
Table 4: Quality of Loan Portfolio

(Amt in QR mn) QNB DB CB QIB QIIB ABQ
Gross Loans 27,195 5,995 6,797 4,436 2,661 1,690
Provisions (753) (607) (135) (227) (76) (260)
Net Loans 26,442 5,388 6,662 4,209 2,585 1,430
Non-performing Loans 667 885 122 298 83 403
NPL / Gross Loans 2.5% 14.8% 1.8% 6.7% 3.1% 23.9%
Provisions / NPL 113% 69% 111% 76.1% 91.3% 64.5%
Source: Bank’s Annual Reports and Global Research
Peer Group Comparison

Our comparison of the banks in this section would remain confined to only the six listed
local banks of Qatar who accounted for 87% of the total assets (as of Dec. 2004) in the
local banking sector. The table appended below gives the broad overview of the size of the
balance sheet of all the listed Qatari banks. All the six banks putting together have expanded
their asset base by 24% and loans & advances by 18% in FY2004. Their deposit base grew
at the rate of 23%. As we have discussed earlier QNB is the largest bank in Qatar, in terms
of assets size, loans & advances and deposits. However, over the last few years its share has

been declining in terms of all major financial parameters. Among the two competing banks
namely, Commercial Bank and Doha Bank, the former had grown much faster in terms of
the balance sheet size than the later and took over second position in 2004 from the third in
the previous year. In 2004, almost all the banks have sizably increased their loan book and it
also seems that there was a focused approach of all the banks to increase their deposit base to
take the advantage of the lowest interest rates prevailed during the year. The deposit base of
all the six listed banks putting together grew at the rate of 23%.
In order to take the advantage of the bullish stock market, most of the banks have also
increased their investment portfolio. A phenomenon which has been prevalent all across the
GCC region is the increase in the share capital of the banks. In 2004, most of the banks in
Qatar also followed this trend of shoring-up their share capital by way of bonus issues, rights
issues and also through private placement to strengthen their capital base and also to comply
with the Basel II requirements. Banks such as Commercial Bank, Doha Bank, QIB and QIIB
have issued bonus in FY2004 while Commercial Bank had raised equity by way of issuance
of rights also. Ahli Bank had made private placement of shares to the Bahrain-based, Ahli
United Bank. In Qatar, all the banks are adequately capitalised to take the advantage of
emerging opportunities not only in the local market but in the entire GCC region.
Table 5: Comparative Snapshot of Balance Sheets of Qatari Banks as of FY2004

(in QR mn) QNB DB CB QIB QIIB ABQ
Assets
Cash & Bank Balances 1,700 318 401 334 200 104
Gross Loans & Advances 27,195 5,995 6,797 4,436 2,661 1,690
Less: Provisions (753) (607) (135) (227) (76) (260)
Net Loans & Advances 26,442 5,388 6,662 4,209 2,585 1,430
Investments 7,625 2,620 1,461 1,077 716 1,357
Net Fixed Assets 528 96 324 66 40 27
Interest Earning Assets 34,754 10,392 11,558 6,877 4,384 4,259
Total Assets 39,398 10,944 12,888 7,687 4,962 4,270
Liabilities
Due to banks & FIs 2,153 1,116 753 21 43 570
Customer Deposits 29,614 8,068 8,304 5,797 4,335 2,744
Long term loans - - 983 - - -
Paid-Up Capital 1,038 408 534 390 156 305
Reserves 5,497 1,138 2,034 1,072 281 570
Shareholders Equity 6,535 1,546 2,568 1,462 438 875
Interest Bearing Liabilities 31,767 9,184 10,040 5,797 4,335 3,314
Source: Banks’ Annual Reports and Global Research
As in terms of other financial parameters in case of interest income also QNB continued to
lead far ahead of the other banks. It accounted for about 46% of the net interest of the listed
banks. However, other banks have also been trying to increase their interest income. The hike
in interest rates since mid-2004 have helped the bank to increase their interest income though
marginally. Another significant part of the year 2004 was almost all the banks have focused
on increasing their non-interest revenues and we believe that which will be the trend in the
coming years. There are number of projects in the pipeline spanning across the sectors, many
companies are planning to tap the capital market and the country has also opened its stock
market for foreign investors which will drive the non-interest revenues of the banks. Apart
from that booming economy offers diverse opportunities for the banks who have developed
their investment banking divisions.
The most significant part of the operations of the listed local banks in the last couple of years
have been the increase in their profitability. The year 2003 saw the net profits of these banks

increase by 28.8%, while in 2004 their net profit increased significantly by 41.6%. For the
year ended December 2004, QNB’s net profit accounted for about 41.5% of the total net
profits of the listed local banks and was also more than twice that of its closest competitor.
Table 6: Comparative Snapshot of Income Statement of Qatari Banks as of FY2004

Operating Statement
Interest Income 1,414 434 441 387 208 109
Interest Expense (505) (106) (122) (115) (85) (41)
Net Interest Income 909 328 319 272 124 68
Non-Interest Income 283 239 212 162 39 36
Provisions for loans (36) (29) (4) (10) (16) 14
Other Provisions / Recoveries (3) - (2) (13) (1) 20
Impairment of inv. Securities 8 - (3) (4) 1 (1)
Operating Income 1,160 538 523 407 147 137
Operating Expense (335) (173) (196) (111) (64) (54)
Operating Profit 825 366 327 296 84 83
Net Profit 815 366 327 288 84 83
Comparative Returns on Different Class of Assets

Here, we have compared the effective interest rates of the three major banks on different
class of assets. In terms of return on assets Commercial Bank and Doha Bank were more
advantageously placed as compared to QNB. In Loans & Advances, which account for a
major portion of the total funds deployed by any bank, effective interest rates of Doha Bank
and Commercial Bank were at 6.10% and 5.81%, respectively, whereas QNB had the lowest
return of 4.06%. This may be because QNB had adopted a more conservative approach in
lending, as compared to other two banks. However, exposure to high yield assets in loan
portfolio are accompanied with high level of non-performing loans. On Funds Due from
Banks & FIs, QNB enjoyed the highest effective interest rates 1.95% while the returns of
Doha Bank and Commercial Bank were at 1.70% and 1.57% respectively.
Table 7: Comparative Returns of Three Large Qatari Banks on Different Assets

Classes
Asset Class (as on December 2004) QNB DB CB
Due from Banks & FIs 1.95% 1.70% 1.57%
Investments 5.53% 6.00% 5.69%
Loans & Advances 4.06% 6.10% 5.81%
The strong growth in the profitability of listed banks have also boosted their Return on
Average Equity (RoAE) and Return on Average Assets (RoAA). Among the six listed banks,
QIB posted the highest returns on equity and also on its assets as it reported RoAE of 28.8%
and RoAA of 4.34% in FY2004. Doha Bank was at the second position in terms of both these
parameters, its RoAE was at 27.4% and RoAA was at 3.66%. QNB reported the lowest
RoAE of 13.4% while QIIB reported the lowest return on assets of 1.89%.
In terms of net spread, QIB achieved the highest spread among its banking peers in the
country. QIB reported a net spread of 4.48% in FY2004, which was followed by Doha Bank
(3.27%) and QIIB (3.10%). Ahli Bank reported the lowest spread of 1.64% in the banking
sector in Qatar. Similarly, in terms of net interest margin QIB leads the pack with 4.68%
while Ahli Bank’s interest margins was lowest at 1.97%.

Qatari banks’ cost to operating income after provision is seems to be in line with their regional
counterparts. QIIB reported the highest cost to income of 43.1%, which was much higher as
compared to its peers in Qatar. In terms of costs QIB is considered to be as the most efficient
bank among the listed pack as it had the lowest cost to operating income ratio of 27.2%.
Going forward, we believe that Qatari banks need to focus on cost rationalization aspects to
achieve higher operational efficiency.
Table 8: Comparative Indicators of Listed Qatari Banks (as of FY2004)

Ratios QNB DB CB QIB QIIB ABQ
Profitability Indicators
ROAE 13.4% 27.4% 16.4% 28.8% 22.4% 13.8%
ROAA 2.2% 3.7% 3.0% 4.3% 1.9% 2.4%
Interest Exp / Interest Income 35.7% 24.4% 27.7% 29.7% 40.7% 37.8%
Interest Income / Avg Int earning assets 4.19% 4.51% 4.50% 6.66% 5.28% 3.16%
Interest Exp / Avg Int bearing liabilities 1.70% 1.25% 1.42% 2.18% 2.17% 1.53%
Net Spread 2.49% 3.27% 3.08% 4.48% 3.10% 1.64%
Net Interest Margin 2.69% 3.41% 3.26% 4.68% 3.13% 1.97%
Non Interest Income / Operating Income 24.8% 44.5% 39.7% 35.7% 26.9% 40.2%
Cash Dividend Payout Ratio 76.4% - 65.4% 27.0% 74.5% 69.0%
Cost to Operating Income 28.9% 32.1% 37.5% 27.2% 43.1% 39.4%
Staff Expenses / Operating Income 16.4% 16.2% 18.7% 17.8% 23.5% 22.3%
Net Loans / Customer Deposits & Deposits from FIs 83.2% 58.7% 73.6% 72.4% 59.0% 43.1%
Gross Loans / Total Deposits 91.8% 74.3% 81.9% 76.5% 61.4% 61.6%
Capital Adequacy Ratio 22.00% 22.54% 34.62% 29.80% 14.71% 31.91%
Equity to Total Assets 16.6% 14.1% 19.9% 19.0% 8.8% 20.5%
Equity to Gross Loans 24.0% 25.8% 37.8% 33.0% 16.4% 51.8%
Operational Performance of Peer Banks

Over the last few years two banks namely, Commercial Bank and Doha Bank have vigorously
focused on expanding their network of branches, the same was not the case for other banks.
Commercial Bank has expanded its branch network very fast as compared to the other banks.
Banks have made significant investments on improving customer services and expanding
delivery channels in recent years. As can be seen from the table below, QNB has the largest
network of branches with 34 branches followed by Commercial Bank, Doha Bank, and QIB.
Whereas other two banks namely, QIIB and Ahli Bank has the lowest network of branches.
In terms of operating income QNB is way ahead of its rivals.
In terms of employee productivity, QIIB has the lowest operating income per employee while
QNB has the highest operating income per employee. In case of QNB we have excluded
the employees of subsidiaries from the total number of employees of 1,096. QIIB has the
lowest operating expense per employee, while QNB has the highest considering the size of
its operations.

Table 9: Comparison of Operating Performance of the Listed Banks (FY 2004)

No. of Branches 34 19 23 9 8 8
No. of Employees 749 538 673 422 269 199
Operating Income (Net of Provisions) 1160 538 523 407 147 137
Operating Expenses (335) (173) (196) (111) (64) (54)
Operating Profit 825 366 327 296 84 83
Operating Income Per Employee 1.55 1.00 0.78 0.96 0.55 0.69
Operating Expense Per Employee 0.45 0.32 0.29 0.26 0.24 0.27
Operating Profit Per Employee 1.10 0.68 0.49 0.70 0.31 0.42
Factors which have propelled the growth in the Banking Sector during 2004:
As discussed earlier, Qatari banking sector has witnessed all round growth mainly aided by
credit expansion, growth in deposit base as also in profitability. This growth in the sector can
be attributed to many factors:
- Large scale growth in credit which increased by 13% to QR49.5bn, much of this growth
was contributed by the sectors other than the public sector.
- As a result of the strong oil prices over the last few years, which helped Qatar record
large budget surpluses, there has been an expansion in public expenditure which has its
multiplier effect on the other sectors of the economy.
- There has been a wide difference between lending and borrowing rate of deposits. While
interest rates on deposits were in the range of 1.60%-1.75%, the lending rates have been
much higher giving the banks a very comfortable positive net spread.
- Banks have adopted much aggressive approach to capitalize the growth opportunities the
economy is offering.
- Apart from the domestic market banks are also concentrating on developing their business
abroad which can be gauged from the growth in the size of their overseas assets.
- On the other hand banks in Qatar have also expanded into retail banking and credit cards
on which interest rates range between 18-24% on an annualized basis.
- Banks operating at Doha Securities Market (DSM), have witnessed rise in their commission
income on trading at the DSM, as the DSM witnessed a tremendous growth in trading
volume.
Banking Sector Outlook

The economy of Qatar is registering a strong growth over the last few years, needless to
say due to strong crude oil prices, had recorded another year of astonishing performance by
registering a 20.5% growth in its GDP for the year 2004. The sound economic fundamentals
will further trickle growth in the economy which can be gauged from the flourishing
activities in almost every sector of the economy and banking sector would be one of the
major beneficiaries of this boom.
The structure of the banking sector in Qatar is in the midst of a change as regional banks
have started to put their footprint in the country by taking stakes in the existing banks, the
local conventional banks are venturing into Islamic banking and a few large local banks
have also started to spread their wings into foreign markets through acquisitions. Also, other
regional banks have plans to enter the Qatari market. We believe that the banks entry into
the fast growing Islamic banking segment could help these conventional banks improve their
business levels and enhance profits over the medium term.
To face this changing industry dynamics many banks, domestic as well as foreign, have started

to expand their operations especially in the retail banking segment. Apart from a change in
the market dynamics, local Qatari banks have also concentrated on capital expansions and
many banks have increased their capital base in the past few years and this trend is expected
to continue in the near future. This measure will help the banks to shore-up their CAR and
to leverage their balance sheet and will help the banks to tap profitable lending opportunities
the country would offer in the coming years.
Valuation Matrix
In the recent past Doha Securities Market has posted robust and rather steep gains in the
stock prices. Therefore, the valuation of the Qatari banking sector appears to be on a higher
side as compared to other GCC markets. However, currently DSM is in correction phase and
witnessing profit booking from the investors which might bring the prices of some of the
banking stocks to realistic levels. As of April 24, 2005 the average price earnings ratio for
the banking sector stood at 39.8x based on their 2004 earnings. QIIB enjoys the highest P/E
multiple of 55.9x followed by Ahli Bank with 46.2x. Doha Bank’s P/E of 24.4x is on a lower
side among the pack.
Table 10: Comparative Valuation of Qatari Banks (FY 2004)

Composite Potential
Name of Bank Country RoAA RoAE P/E * P/BV * Share Upside/ Recommendation
Code (QR) (QR mn)
Value Downside
Qatar National Bank Qatar QNBK.QA 305.7 31,738 2.2% 13.4% 38.9 5.4 363 18.7% Buy
Doha Bank Qatar DOBK.QA 218.7 15,165 3.7% 27.4% 24.4 5.8 208 -4.9% Hold
Commercial Bank of
Qatar COMB.QA 227.1 16,976 3.0% 16.4% 37.1 5.2 224 -1.4% Hold
Qatar
Qatar Islamic Bank Qatar QISB.QA 268.5 17,802 4.3% 28.8% 36.3 7.6 - - Not Rated
Qatar International
Qatar QIIB.QA 300.1 6,096 1.9% 22.4% 55.9 11.1 - - Not Rated
Islamic Bank
Ahli Bank Qatar AABQ.QA 125.2 3,815 2.4% 13.8% 46.2 4.7 - - Not Rated
*Stock prices are as of April 24, 2005
The average price to book value of the sector was at 6.6 times the book value as of December,
2004 (excluding proposed dividends). QIIB enjoys the highest price to book value of 11.1
times followed by QIB with 7.6 times. Ahli Bank has the lowest price to book value of just
4.7 times.
We believe that the discounting enjoyed by some of the banks are likely to decline from the
current levels due to steep rise in their stock prices. Going forward, first quarter report cards
of the banks will have its influence on the prices of banking stocks.

Recommendation Summary
Qatar National Bank
In FY2004, on the back of substantial boost in non-interest revenues and also a marginal
increase in net interest income, QNB registered an impressive y-o-y jump of 27% in its
bottomline to QR814.9mn. It has led to the increase in the earnings per share to QR7.9 for the
FY2004 from QR6.2 achieved in FY2003. During Q1FY 2005, the bank registered a robust
growth of 105.8% in its net profit to QR391.7mn, which was backed by all round growth in
net interest income, fees & commission income and also a significant jump in income from
investments. As part of its future strategies, the bank’s recent entry into Islamic banking will
further widen the product basket of the bank as there is increasing importance of Islamic
finance in the region. We believe that the bank will see successful expansions into wealth
management business following the acquisition of Ansbacher, which will also diversify its
revenue streams. The economy is growing at a very healthy rate which will further expand
business opportunities for the bank and QNB being the leading bank will have an advantage
as compared to the peer in the sector. In January 2004, we initiated coverage on QNB and
recommended a Buy on the stock with a price target of QR140.60 per share at the then
market price of QR120 per share. Since then the stock meet our expectations and witnessed
significant run-up in its price. We maintain our earlier rating and recommend a BUY and
value the bank’s stock at an intrinsic value of QR363 based on the Discounted Dividend
Model (DDM) and peer group valuation method. The intrinsic value arrived by us is at 18.7%
premium to the current market price.

Over the last five years, CB has witnessed significant growth in its profitability, which was
registered an impressive y-o-y jump of 32% in its bottomline to QR326.7mn. Now, apart
from the conventional banking it has also started providing Islamic banking products, which
will further strengthen its business operations in the Qatari as well as in the regional markets.
During 2005, the bank also plans to expand its branch network with five to six additional
branches in Qatar. Expansion and enhancement of branch network through investment in
alternative delivery channels are the focus area to capture retail market and will further help
the bank to increase its non-interest revenues. The bank’s expanded capital base will allow
the bank to leverage its balance sheet and increase profitable lending opportunities which
Qatar would offer in the coming years. We initiated coverage of Commercial Bank with a
buy recommendation at the market price of QR192.4 (as of April 14th, 2005) with a price
target of QR214.8. Since then the stock price run-up significantly. Based on the combination
of Discounted Dividend Method and Peer Group Valuation Method, we value the bank’s
share at an intrinsic value of QR224. The current market price of QR227.1 is marginally
higher by about 1.4% than the intrinsic value of the stock, therefore, we re-rate the stock with
a HOLD recommendation.
Doha Bank
Since the last the three consecutive years Doha Bank has been reporting over 70% y-o-y
growth in its net profit. The bank’s net profit was at QR365.6mn for FY2004 as compared
to QR214.6mn for FY2003. Total operating income (net of provisions) of the bank grew by
65.9% in FY2004 to QR538.2mn as compared to QR324.4mn reported during the previous

year. As part of its expansion plans, the bank is planning to venture into Islamic banking.
It will soon set up a dedicated division to offer Islamic banking products which will further
strengthen its business operations in the Qatari as well as in the regional markets. The bank is
planning to open eight more branches in Qatar and it also plans to open branches in overseas
markets, including Korea, Japan, India and Central European countries. All these will see it
increases its branch network to 34 across nine countries as part of a global expansion drive. In
March 2004, we initiated coverage on DB and recommended a Buy on the stock with a price
target of QR194.3 per share at the then market price of QR159 per share. Since then the stock
meet our expectations and witnessed significant run-up in its price. Now, we value the bank’s
stock at an intrinsic value of QR208, based on the Discounted Dividend Model (DDM) and
Peer Group Valuation Method, and recommend HOLD for the stock as the current market
price is about 4.9% higher than the intrinsic value of the stock.

PLAYERS PROFILES

Qatar National Bank

QNBK.QA
Listing:
Doha Securities Market BUY
Current Price
QR305.7
Key Data
EPS (QR) 7.85 12M Avg. vol. 24,225
BV (QR) 56.95 52 week Lo / Hi (QR) 148.0 / 341.9
P / E (x) 38.9 Market Cap QR31.74bn
P / BV (x) 5.4 Target Price QR363
Background
• Qatar National Bank (QNB) was established in 1964, by Emiri decree and is the oldest
and largest local commercial bank in Qatar. It has the distinction of being the first locally
incorporated commercial bank in Qatar. QNB offers a full range of banking and financial
services like corporate banking, retail banking, treasury, investment advisory services to
both domestic as well as international clients. The bank has a network comprising of 32
branches and offices in Qatar and two branches in the United Kingdom and France. As of
end-Dec 2004, the bank’s employee strength was at 1,096 of which 347 were employees
of subsidiaries.
• The Government of Qatar holds 50 per cent stake in the bank, while the remaining 50 per
cent is held by about 1,500 leading Qatari nationals. Since the inception of the bank, there
has been a little change in its shareholding pattern. In accordance with QNB’s Articles
of Incorporation, no person (natural or legal), with the exception of the government, can
own more than 2 per cent in the bank except by way of inheritance or will.
Recent Developments
• In 2004, QNB acquired a London-based wealth management company, Ansbacher

Holdings which was a major move that reflects the implementation of the bank’s strategy
of expanding its product portfolio. This will allow the bank to develop the appropriate
wealth management products and services to address the needs of a growing number of
high net-worth customers.
• Recently, the bank has ventured into Islamic banking with the launch of a new Islamic
banking branch, QNB Al Islami, during the second quarter of 2005.
• QNB will participate as one of the consortium partners with three Middle Eastern
banks which are planning to set up a new private bank in Syria with an initial capital of
US$30mn. The new bank was to commence its operations in the first quarter of 2005.

• To further enhance its retail banking services, QNB has joined hands with one of the
world’s largest international life insurance companies, American Life Insurance Company
(Alico), to develop a range of insurance products for its clients.
• In continuation of its ongoing strategy to use the state of the art technology to modernize
its banking services, QNB implemented a new operational risk management solution
from JP Morgan Treasury Services in 2004.
Analysis of Financial Performance – 2004 and Q1 2005
• QNB reported a sharp increase in its non-interest revenues for the year 2004 which
substantially boosted its earnings and therefore beat our earlier earnings projections for
the year.
• In FY2004, an increase of 5.4% in gross interest income to QR1,413.8mn and lower

growth of 4.5% in interest cost to QR504.7mn led the bank to report a growth of 6% in its
net interest income to QR909mn.
• As a part of QNB’s efforts to diversify its revenue base, non-interest revenue registered
a sharp y-o-y growth of 40.5% in FY2004 to QR283mn. The contribution of non-interest
income to total operating income increased substantially in 2004 to 23.8% from 19%
during the previous year.
• Total operating income (net of provisions) of the bank grew by 19.3% in FY2004 to
QR1,160mn as compared to QR972mn reported during the previous year.
• QNB’s revenue streams are expected to see further diversification from 2005 onwards
with the acquisition of Ansbacher. The bank will consolidate revenue statement of
Ansbacher from FY2005.
• Among the major cost components, staff expenses stood at QR190.9mn, which was an
increase of 11% in 2004 over the previous year. Other operating expenses grew by 30.6%
to QR97.9mn The cost to total operating income after provision declined to 28.9% from
32.9% in 2003.
• On the back of substantial boost in non-interest revenues and also a marginal increase in
net interest income, QNB registered an impressive y-o-y jump of 27% in its bottomline to
QR814.9mn. It has led to the increase in the earnings per share to QR7.9 for the FY2004
from QR6.2 achieved in FY2003.
• At the end of 2004, the total assets of the bank stood at QR39.4bn representing a growth
of 13.2% over 2003 and its gross loans & advances grew by 13.8% to QR27.2bn.
• In FY2004, QNB’s NPLs declined by around 2% to QR666.6mn from QR679.9mn

in FY2003, which was despite the growing loan book and declining exposure to the
government sector. NPLs as a percentage of gross loans declined to 2.5% from 2.8%
in 2003. The bank has more than sufficient coverage to its NPLs as its NPL coverage
increased to 159% in 2004 from 154% in 2003.

• In FY2004, the bank increased its funding from customer deposits to take the advantage of
low interest rates. The share of customer deposits in total liabilities increased significantly
in 2004 to 75% from 69% in 2003 and it grew by 22.9% to QR29.6bn over the previous
year.
• During Q1 FY2005, the bank registered a robust growth of 105.8% in its net profit
to QR391.7mn, which was backed by all round growth in net interest income, fees &
commission income and also a significant jump in income from investments.
• The total assets of the bank increased significantly by 24.8% to QR44.08bn over
corresponding quarter of the previous year and its gross loans & advances grew by
18.6% to QR28.7bn. Its customer deposit base witnessed significant growth of 25.5% to
QR32.4bn.
Outlook
• As part of its future strategies, the bank’s entry into Islamic banking will further widen
the product basket of the bank as there is increasing importance of Islamic finance in the
region.
• It also plans to set up a consumer finance company which will focus not only in the local
market but also widen its business in the regional markets.
• We believe that the bank will see successful expansions into wealth management business
following the acquisition of Ansbacher, which will also diversify its revenue streams.
• The economy is growing at a very healthy rate which will further expand business
opportunities for the bank and QNB being the leading bank will have an advantage as
compared to the peer in the sector.
Valuation
• In February 2005, we recommended a buy on the stock at the then market price of
QR284.6 since then the stock moved as per our expectation and it achieved our target
price of QR326.1
• Currently, QNB is trading at 5.1x of its estimated book value and 22.8x of its estimated
earnings of FY2005.
• We maintain our earlier rating and recommend a Buy and value the bank’s stock at an
intrinsic value of QR363 based on the Discounted Dividend Model (DDM) and peer
group valuation method. The intrinsic value arrived by us is at 18.7% premium to the
current market price.

BALANCE SHEET
Qatar National Bank
Amount in Qatari Riyal ‘000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
May 2005
Assets
Cash & balances with banks 890,958 810,808 1,700,369 3,486,388 4,166,089 4,388,375 4,976,160
Due from Banks and Other FIs 4,840,842 3,315,875 2,345,936 3,049,717 2,897,231 2,752,369 2,614,751
Loans and advances (Gross) 20,628,160 23,897,522 27,194,984 32,905,931 37,924,085 43,043,837 48,209,097
Global Research Qatar
Other assets 173,343 364,019 756,996 946,245 1,031,407 1,103,606 1,191,894

Less : provisions (675,051) (756,187) (753,423) (778,420) (811,203) (841,607) (871,623)
Investment securities - debt 4,498,470 5,562,885 5,213,275 6,158,285 7,020,445 7,949,621 8,744,583
Investment securities - equity 612,771 1,454,550 2,411,549 2,898,016 3,303,739 3,406,981 3,747,679
gross fixed assets 277,181 364,033 897,219 1,004,885 1,115,423 1,226,965 1,325,122
net fixed assets 86,432 139,374 528,435 580,833 632,810 683,004 714,905
Total Assets 31,055,925 34,788,846 39,398,121 49,246,994 56,164,603 62,486,185 69,327,446

Liabilities
Due to banks and other FIs 2,020,887 3,644,546 2,153,383 2,540,992 2,896,731 3,186,404 3,377,588
Other liabilities 453,935 1,436,554 1,095,555 1,205,111 1,325,622 1,458,184 1,604,002
Owner’s Equity
Paid-up equity capital 1,038,208 1,038,208 1,038,208 1,038,208 1,038,208 1,038,208 1,038,208
Statutory reserve 1,038,208 1,038,208 1,038,208 1,038,208 1,038,208 1,038,208 1,038,208
General reserve 1,770,034 1,770,034 1,770,034 1,770,034 1,770,034 1,770,034 1,770,034
Retained earnings 346,092 438,335 626,588 935,618 1,245,486 1,505,433 1,685,361
19
Fair value reserve 321,178 777,871 1,439,387 1,439,387 1,439,387 1,439,387 1,439,387
Proposed dividend 467,193 545,059 622,925 1,077,591 1,478,806 1,846,351 2,266,204
Total Shareholder’s Equity 4,980,913 5,607,715 6,535,350 7,299,046 8,010,129 8,637,621 9,237,402
Total Liabilities & Shareholders’ Equity 31,055,925 34,788,846 39,398,121 49,246,994 56,164,603 62,486,185 69,327,446
OPERATING STATEMENT
Qatar National Bank
Interest Income 1,462,424 1,340,725 1,413,793 1,993,149 2,452,617 2,757,130 3,200,832

Interest Expense (623,183) (482,838) (504,730) (715,541) (870,679) (978,781)
20
(1,152,299)
Net interest income 839,241 857,887 909,063 1,277,609 1,581,938 1,778,349 2,048,532
Add : Net Gains from Dealing in Foreign Currencies 19,256 24,448 38,555 50,507 66,669 78,670 92,044
Add: Income from Investments 4,170 2,213 19,092 168,808 159,391 176,750 204,419
Less: Loss from Investments in Associates (331) (532) - - - - -
Add : Dividend Income 23,376 34,172 52,658 94,186 115,631 127,762 131,169
Add : Other Operating Income 2,891 1,117 8,461 10,322 12,180 14,008 15,688
Total Non-Interest Income 146,909 201,688 283,363 801,155 974,402 1,163,544 1,355,283
Total Operating Income 986,150 1,059,575 1,192,426 2,078,763 2,556,340 2,941,894 3,403,815
Less: Provision for Impairment of Loans & Advances (106,255) (82,708) (42,839) (39,487) (49,301) (55,957) (67,493)
Add: Recovery of Provision/(Provision) for Properties Acquired against Settlement of Debts - - 6,585 - - - -
Less: Other Provisions / (Recoveries) (20,000) 23,803 (3,435) - - - -
Less: Investment Revaluation Gains/ (Losses) (18) (28,988) 7,749 14,490 16,519 25,552 37,477
Operating Income (net of provisions) 859,877 971,682 1,160,486 2,053,766 2,523,557 2,911,489 3,373,799
Less : Staff Expenses (154,300) (172,585) (190,864) (349,140) (378,534) (407,608) (472,332)
Less: Employees’ Termination Benefits (11,800) - - - - - -
Less: Provision for Pension Fund - (23,938) - - - - -

Less: Expenditure on Bank’s Community Support Programme (8,000) (14,943) (19,394) (35,941) (44,162) (50,951) (59,041)
Less: Other Expenses (75,791) (74,999) (97,940) (205,377) (227,120) (254,755) (295,207)
Profit Before Taxes 586,327 651,674 825,129 1,408,040 1,815,182 2,136,826 2,480,962
Less : Taxes (6,123) (10,551) (10,132) (17,600) (22,690) (26,710) (31,012)
Net Profit 580,204 641,123 814,997 1,390,439 1,792,492 2,110,116 2,449,950
Retained Earnings Broght Forward 236,901 346,091 438,335 626,587 935,618 1,245,486 1,505,433
Net Profit for the year 580,204 641,123 814,997 1,390,439 1,792,492 2,110,116 2,449,950
Proposed Dividend (467,193) (545,059) (622,925)
(1,077,591) (1,478,806) (1,846,351) (2,266,204)
Director Fees (3,820) (3,820) (3,820) (3,818) (3,818) (3,818) (3,818)
May 2005
Cl Balance of Retained Earnings 346,091 438,335 626,587 935,618 1,245,486 1,505,433 1,685,361
CASH FLOW STATEMENT
Qatar National Bank
Operating
Operating Activities 731,498 793,942 837,567 1,466,887 1,880,016 2,198,050 2,542,404
Profit for the Year (Before Taxes) 586,327 651,674 825,129 1,408,040 1,815,182 2,136,826 2,480,962
Provision for impairment of loans and advances 106,255 82,708 42,839 39,487 49,301 55,957 67,493
Provision for Legal cases 20,000 - 11,262 - - - -
May 2005
Depreciation 23,659 33,543 27,159 55,269 58,560 61,348 66,256
Directors fees - - - (3,818) (3,818) (3,818) (3,818)
Provision / (release) of provision for impairment of investments 18 28,988 (7,749) (14,490) (16,519) (25,552) (37,477)
Other provisions - 37,508 - - - - -
Release of other provisions - (31,628) (18,291) - - - -
Provision for property acquired against settlement of debts - - (6,585) - - - -

Profit on sale of investments - (981) (19,092) - - - -
Fair value adjustment of investments 77 - - - - - -
Amortisation of premium or discount on investments 3,098 2,833 2,960 - - - -
Loss form associates 331 (703) - - - - -
(Profit)/loss on sales of fixed assets (2,144) (14) (6,738) - - - -
Taxes Paid (6,123) (9,986) (13,327) (17,600) (22,690) (26,710) (31,012)
Net Increase/Decrease in Operating Activities (592,080) 1,154,023 (661,227) 2,481,200 1,255,696 647,001 1,125,549
Inc./(Dec.) in due to banks 52,177 1,623,659 (1,615,619) 387,609 355,739 289,673 191,184
Dec/(Inc.) in due from banks (1,508,509) 1,524,967 917,318 (703,781) 152,486 144,862 137,618
(Inc) in originated debt securities (91,316) - - - - - -
(Inc.) in available for sale investmenets (182,915) - - - - - -
Inc. in customer deposits 2,210,307 499,840 1,900,865 8,588,012 5,730,277 5,271,855 5,904,477
Dec./(Inc.) in loans and advances (1,110,028) (3,270,934) (840,096) (5,710,947) (5,018,154) (5,119,751) (5,165,260)

(Inc.) / Dec. in other assets (12,897) (186,540) (229,009) (189,249) (85,162) (72,198) (88,288)
Inc./(Dec.) in other liabilities 51,101 963,031 (794,686) 109,556 120,511 132,562 145,818
Total Operating 139,418 1,947,965 176,340 3,948,087 3,135,712 2,845,052 3,667,953
Investing
Purchase of investments - (1,491,390) (993,851) (1,431,477) (1,267,882) (1,032,418) (1,135,660)
Redemption of held to maturity investments 3,309 - - - - - -
Sale of investments - 62,000 2,097,743 - - - -
Sale of Associates - 8,544 - - - - -
Acquisition of Subsidiary, Net of cash acquired - - 203,744 - - - -
Purchase of fixed assets and property (32,611) (85,083) (37,432) (107,666) (110,537) (111,542) (98,157)
Sale of fixed assets and property 6,116 229 21,639 - - - -
Total Investing (23,186) (1,505,700) 1,291,843 (1,539,144) (1,378,420) (1,143,961) (1,233,817)
21
Financing
Dividend paid to shareholders (415,451) (467,390) (548,178) (622,925) (1,077,591) (1,478,806) (1,846,351)
Total Financing (415,451) (467,390) (548,178) (622,925) (1,077,591) (1,478,806) (1,846,351)
Net Change in Cash (299,219) (25,125) 920,005 1,786,018 679,702 222,285 587,785
Exchange rate differences (13,308) (55,025) (30,444) - - - -
Net Cash at beginning 1,203,485 890,958 810,808 1,700,369 3,486,387 4,166,089 4,388,375
Net Cash at end 890,958 810,808 17,00,369 3,486,387 4,166,089 4,388,375 4,976,159
Ratios
Qatar National Bank
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Net interest income/ Op. Income (net of provisions) 85% 80% 75% 60% 61% 59% 59%
- Non-interest income/ Op. Income (net of provisions) 15% 20% 25% 40% 39% 41% 41%
22
Margins
- Net Spread 2.6% 2.5% 2.5% 3.2% 3.5% 3.5% 3.6%
Efficiency
- Cost to Average Total Assets 1% 1% 1% 1% 1% 1% 1%
Liquidity
- Loans to Customer Deposits 87% 99.2% 91.8% 86.1% 86.3% 87.5% 87.5%
Credit Quality
- Non Performing Loans (QR’000) 609,742 679,900 666,600 756,836 891,216 1,011,530 1,132,914
- Loan Loss Reserve (QR’000) 675,051 756,187 753,423 778,420 811,203 841,607 871,623
- NPL’s to Gross Loans 3.0% 2.8% 2.5% 2.3% 2.4% 2.4% 2.4%
- NPL’s to (Equity+Loan loss reserve) 14% 14% 12% 12% 12% 13% 14%
- NPL Coverage (incl. Interest in suspense) 111% 111% 113% 79% 71% 65.2% 60.3%
- NPL Coverage (excl. Interest in suspense) 152% 154% 159% 103% 91% 83.2% 76.9%
Capital Adequacy

- Change in Interest Income 17% 6% 13% 42% 24% 12% 15%
- Change in Investment Income -20% 32% 97% 267% 5% 11% 10%
- Change in Other Income 32% -61% 657% 22% 18% 15% 12%
- Shares in Issue 103,820,772 103,820,772 103,820,772 103,820,772 103,820,772 103,820,772 103,820,772
May 2005
- EPS (QR) 5.6 6.2 7.9 13.4 17.3 20.3 23.6
- Book Value Per Share (QR) 43.5 48.8 56.9 59.9 62.9 65.4 67.1
- Market Price Year End (QR) 83 128 199.7 305.7 305.7 305.7 305.7
- P/E 14.8 20.6 25.4 22.8 17.7 15.0 13.0
- P/BV 1.9 2.6 3.5 5.1 4.9 4.7 4.6

COMB.QA
Listing:
Doha Securities Market HOLD
Current Price
QR227.10
Key Data
EPS (QR) 6.12 12M Avg.vol. 74,477
BVPS (QR) 44.1 52 week Lo / Hi (QR) 97.14 / 258.10
Background
• Commercial Bank of Qatar (CB) was incorporated in Qatar in 1975 as a public shareholding
company. The Bank offers a comprehensive range of corporate, retail and investment
services through a network of 23 branches, sales offices/pavilions, 71 ATMs, 21 deposit
machines and internet home banking. It has the largest Electronic Funds Transfer at Point
of Sale (EFTPOS) network in the country. The bank also acts as a holding company
for its three overseas subsidiaries which are engaged in credit card business in Egypt,
Bermuda and Bahrain. It holds the exclusive franchise rights of Diners Club International
in Bahrain, Egypt, Syria, Sudan, Iraq, Iran and Yemen in addition to Qatar. The bank
also operates a brokerage office at the Doha Securities Market. As of end-Dec 2004, the
bank’s employee strength was 673.
• Currently, high net worth Qatari families jointly hold an estimated 40% stock of the
bank and the remaining 60% are held by the public at large. With the new law regarding
foreign ownership in listed companies has been effected in Qatar from April 03, 2005,
foreign investors will be allowed to own up to 25 per cent of the issued share capital of
the bank.
Recent Developments
• Among the six listed Qatari banks, CB has emerged as the second largest bank in terms
of asset size, deposit base and the share of gross loans & advances in the State of Qatar as
of December 2004.
• The bank undertook a series of initiatives in the last couple of years which were aimed at
modernizing its corporate identity and launched a corporate re-building exercise. It has
also modified its logo and changed its trade name to Commercialbank.
• CB is focusing on building the strong financial position of the bank, diversify its business

and to further strengthen its market share in the banking services. Towards, this end the
bank has diversified into Islamic banking with the launch of Al Safa Islamic Banking
branch during the second quarter of 2005.
• During the year 2004, the bank significantly upgraded customer-facing technologies and
expanded and enhanced its branch network. Five new branches were opened in 2004
which increased the number of branches to 23.
• In the area of technological advancements, last year, it introduced an advanced IT enabled

processing systems in the areas of Trade Finance, Cash Management, Stock Brokerage
and Investments and Personal Loans.
• The bank is playing a leading role in the industrial expansion of the economy by
participating in the State’s financing needs and financing oil and gas related projects.
In 2004, for instance, the bank acted as lead arranger and underwriter for part of the
commercial loan of the new Qatar Gas II mega project.
• In December 2004, Moody’s have upgraded the bank’s Financial Strength Rating (FSR)
to ‘C-’ from ‘D+’ and kept unchanged the bank’s foreign currency deposits rating at A3/
Prime-2.
• During 2004, the bank’s interest income increased by 29% over 2003 to QR441.5mn,
while its interest expenses increased at a higher rate of 50% to QR122.3mn. In spite of
this the bank was able to increase its net interest income by 23% to QR319.2mn.
• The bank is focusing more on improving its revenue base from non-interest income
towards this its non-interest revenue registered a significant growth of 29.6% in FY2004
to QR212mn. In 2004, net interest income accounted for 60% of the total income, while
non-interest income accounted for 40%.
QR522.7mn as compared to QR393.9mn reported during the previous year.
• In FY2004, the bank witnessed a sharp decline in provisions for loans & advances to
QR4.05mn from QR24.08mn in FY 2003.
• Over the last five years, CB has witnessed significant growth in its profitability, which was
registered an impressive y-o-y jump of 32% in its bottomline to QR326.7mn. However,
this growth in profitability did not have much impact on its per share earnings due to a
much faster growth in its paid-up capital because of bonus and rights issues. Its earnings
per share for FY2004 declined to QR6.1 from QR7.0 achieved for FY2003.
• At the end of 2004, the total assets of the bank stood at QR12.9bn representing a decent
growth of 47% over 2003 and its gross loans & advances grew significantly by 41% to
QR6.8bn.

• The bank has a portfolio of strong assets as its NPLs as a percentage of gross loans has
been declining consistently, since last few years; in 2004 it declined to 1.8% from 4% in
2003. The bank’s NPL coverage improved to 111% in 2004 from 91% in 2003.
• Despite stiff competition the bank increased its customers’ deposit base by 32% in 2004 to
QR8.3bn. However, its share of the total liabilities declined from 71% in 2003 to 64% in 2004.
• In 2004, the bank also increased its funding reliance on medium term borrowings which
comprised of syndicated loan facilities raised from consortium of international and
regional banks. These are aimed to meet the general funding needs of the bank and to
bridge the balance sheet mismatch. The funds from this avenue increased significantly by
125% to QR982.8mn in 2004 from QR436.8mn in 2003.
• The bank’s capital position continued to remain strong. Over the last two years the bank
continuously focused on expanding its capital base through bonus and rights issues. The
bank’s paid-up capital increased by 50%, due to issuance of 25% bonus shares, announced
at the end of the year 2003, and issue of 25% rights shares in 2004. At the end of the year
2004, the bank has announced further issue of bonus shares of 40% of the bank’s capital
which will further strengthen its capital base to QR747.5mn. Its capital adequacy ratio
(CAR) increased to 34.62% in 2004 from 25.23% in 2003, which is well above the 10%
requirement of Qatar Central Bank and 8% under Basel requirements.
Outlook
• Now apart from the conventional banking it has also started providing Islamic banking
products, which will further strengthen its business operations in the Qatari as well as in
the regional markets.
• During 2005, the bank plans to open five to six additional branches in Qatar. Expansion
and enhancement of branch network through investment in alternative delivery channels
are the focus area to capture retail market and will further help the bank to increase its
non-interest revenues.
• Expanded capital base will allow the bank to leverage its balance sheet and increase
profitable lending opportunities which Qatar would offer in the coming years.
Valuation
• We initiated coverage of Commercial Bank with a buy recommendation at the market

price of QR192.4 (as of April 14th, 2005) with a price target of QR214.8. Since then the
stock price run-up significantly.
• Currently, CB is trading at 7x of its estimated book value and 36.1x of its estimated
earnings of FY2005.
• Based on the combination of Discounted Dividend Method and Peer Group Valuation
Method we value the bank’s share at an intrinsic value of QR224. The current market
price of QR227.1 is marginally higher by about 1.4% than the intrinsic value of the stock,
therefore, we re-rate the stock with a HOLD recommendation.

BALANCE SHEET
Assets
26
Cash & balances with Qatar Central Bank 203,099 257,155 401,217 591,585 600,718 776,609 796,413
Due from Banks and FIs 1,370,211 2,444,020 3,892,498 5,060,247 6,274,707 7,466,901 8,960,281
Other assets 151,757 111,385 147,935 177,522 209,476 242,992 281,871
Less : provision (188,034) (177,818) (135,388) (182,541) (240,959) (310,932) (393,543)
Investment securities - debt 878,594 774,809 868,726 999,440 1,149,356 1,287,279 1,416,007
Investment securities - equity 288,644 388,007 592,444 666,294 766,238 858,186 944,005
Property, furniture & equipment 193,044 263,465 450,327 607,941 790,324 987,905 1,185,486
net fixed assets 95,542 154,402 323,601 455,378 604,172 754,827 896,097
Total Assets 6,141,064 8,784,583 12,888,165 16,332,312 19,897,903 23,611,555 27,818,605
Liabilities
Due to banks and other FIs 392,762 430,933 752,596 940,745 1,204,154 1,541,317 1,895,819
Other borrowed funds 436,800 436,800 982,800 1,277,640 1,533,168 1,839,802 2,115,772

Owner’s Equity
Statutory reserve 229,509 526,140 1,327,042 1,327,042 1,327,042 1,327,042 1,327,042
General reserve 26,500 26,500 26,460 26,460 26,460 26,460 26,460
Fair value reserve 59,551 147,327 206,973 206,973 206,973 206,973 206,973
Proposed dividend 59,326 106,787 213,574 399,721 585,570 850,206 1,062,653
Proposed issue of bonus shares 59,326 88,989 213,574 - - - -
Total Shareholder’s Equity 786,646 1,411,148 2,567,894 2,815,580 3,054,493 3,303,130 3,494,246
May 2005
OPERATING STATEMENT
May 2005
Interest Income 315,208 341,236 441,451 627,479 866,183 1,138,443 1,432,455
Add: Dividend on shares and investment fund units 5,547 5,109 5,327 8,887 13,326 19,156 21,455
Add: Gains on Investment Portfolio 24,076 51,590 54,549 113,936 131,027 155,589 181,438
Add : Foreign Exchange Gain 12,647 19,860 26,161 32,701 40,877 50,278 61,842
Add: Other Operating Income 2,208 2,665 4,726 5,908 7,503 9,678 12,679
Total Non-Interest Income 110,360 163,674 212,079 355,537 483,890 642,323 827,702
Total Income 334,295 423,426 531,246 801,047 1,090,218 1,427,849 1,801,772
Less: Provision for Impairment of Loans & Advances (75,263) (24,082) (4,047) (42,822) (52,671) (62,678) (74,587)
Add : Recovery of Provision 20,821 - - - - - -
Less: Impairment losses on properties acquired in
- (92) - - - - -
settlement of debts
Less: Provision for Impairment of Investments (2,602) (3,337) (2,612) (4,331) (5,747) (7,295) (8,024)
Less: Other provisions - (2,000) (1,920) - - - -

Operating Income (net of provisions) 277,251 393,915 522,667 753,895 1,031,800 1,357,876 1,719,160
Less : Staff Expenses (62,618) (71,276) (97,675) (144,063) (202,322) (273,034) (354,073)
Less: General & Administration (44,094) (60,446) (80,437) (113,734) (145,257) (187,711) (246,124)
Net Profit 158,777 248,030 326,706 470,260 650,633 850,206 1,062,653
Retained Earnings Broght Forward 111,868 115,129 159,448 46,336 107,875 160,939 144,940
Adjustment for exchange rate fluctuations - (560) - - - - -
Net Profit for the year 158,777 248,030 326,706 470,260 650,633 850,206 1,062,653
Proposed Dividend (59,326) (106,787) (213,574) (399,721) (585,570) (850,206) (1,062,653)
Director Fees (2,584) (3,375) (6,750) (9,000) (11,999) (15,999) (21,331)
27
Directors’ attendence fees paid for the year 2004 - - (920) - - - -
Proposed Issue of Bonus Shares (59,326) (88,989) (213,574) - - - -
Trfr to Statutory Reserve (31,755) - - - - - -
Cont. for Social Responsibilities (2,525) (4,000) (5,000) - - - -
CASH FLOW STATEMENT
Operating
Net Profit for the Year 158,777 248,030 326,706 470,260 650,633 850,206 1,062,653
Provision for impairment of loans and advances 75,263 49,366 38,115 42,822 52,671 62,678 74,587
28
Depreciation 11,762 14,163 17,849 25,838 33,589 46,925 56,311
Directors fees - - (9,000) (11,999) (15,999) (21,331)
Provision / (release) of provision for impairment of investments - 3,337 2,612 4,331 5,747 7,295 8,024
Impairment losses on properties acquired in settlement of debt - 92 - - - - -
Other provisions - 2,000 1,920 - - - -
Profit from sale of propertry, furniture and equipment - (891) (19)
Profit on sale of investments and securities (29,836) (52,387) (54,549) (113,936) (131,027) (155,589) (181,438)
Fair value adjustments for investments held for trading 196 - - - - - -
Negative fair value of available for sale investments 5,752 - - - - - -
Loss / (profit) on sale of assets (8) - - - - - -

Impairment loss on available for sale investments 2,602 - - - - - -
Net Increase/Decrease in Operating Activities 38,633 (271,983) (62,970) (145,071) (68,827) (174,076)
(1,142,296)
Inc./(Dec.) in due to banks 33,009 38,171 321,663 188,149 263,409 337,163 354,503
Dec/(Inc.) in due from banks (241,440) (1,006,020) (1,450,090) (1,167,749) (1,214,459) (1,192,194) (1,493,380)
Balances with banks & FIs (208,431) (967,849) (1,128,427) - - - -
Inc. in customer deposits 743,626 1,882,075 2,031,971 2,657,324 2,740,365 2,740,365 3,288,438
Dec./(Inc.) in loans and advances (498,701) (1,318,305) (2,043,822) (1,767,254) (1,969,809) (2,001,497) (2,381,782)
(Inc.) / Dec. in other assets (29,032) 42,700 (37,470) (29,587) (31,954) (33,516) (38,879)
Inc./(Dec.) in other liabilities 31,171 89,396 35,452 56,148 67,377 80,853 97,023
Total Operating 263,141 (8,273) (809,662) 357,344 454,542 726,690 824,730

Investing
Purchase of Investments (741,609) (445,546) (465,128) (204,564) (249,860) (229,871) (214,547)
Proceeds from sale / maturity of investments 603,625 286,356 276,900 113,936 131,027 155,589 181,438
Acquisition of plant & equipment incl. subsidiary assets (33,412) (75,500) (187,145) (157,614) (182,382) (197,581) (197,581)
Proceeds from disposals of assets 222 903 33 - - - -
Total Investing (171,174) (233,787) (375,340) (248,242) (301,216) (271,863) (230,690)
Financing
Medium term facilities obtained/settled - - 546,000 294,840 255,528 306,634 275,970
Proceeds from rights issue - 355,957 889,891 - - - -
Total Financing (49,439) 296,631 1,329,104 81,266 (144,193) (278,936) (574,236)
Net Change in Cash 42,528 54,571 144,102 190,368 9,133 175,891 19,804
Exchange rate differences - (515) (40) - - - -
May 2005
Net Cash at end 203,099 257,155 401,217 591,585 600,718 776,609 796,413
Ratios
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Net interest income/ Op. Income (net of provisions) 61% 60% 60% 53% 54% 53% 52%
- Non-interest income/ total Op. Income 39% 40% 40% 47% 46% 47% 48%
Margins
May 2005
- Net Spread 4.2% 3.7% 3.1% 3.2% 3.6% 3.9% 4.0%
Efficiency
Liquidity
Credit Quality
- Non Performing Loans (QR’000) 236,731 195,000 122,000 179,852 226,485 282,053 335,643
- Loan Loss Reserve (QR’000) 188,034 177,818 135,388 182,541 240,959 310,932 393,543

- NPL Coverage 96% 113% 162% 101% 106% 110% 117%
Capital Adequacy
- Change in Interest Income 96% 39% 34% 28% 37% 31% 24%
29
- Change in Investment Income -44% 91% 6% 105% 18% 21% 16%
- Change in Other Operating Income - 21% 77% 25% 27% 29% 31%
- Shares in Issue 23,730,500 35,595,700 53,393,500 74,750,900 74,750,900 74,750,900 74,750,900
- EPS (QR) 6.69 6.97 6.12 6.29 8.70 11.37 14.22
- Market Price Year End (QR) 76.0 157.9 206.9 227.1 227.1 227.1 227.1
- P/E 11.4 22.7 33.8 36.1 26.1 20.0 16.0
- P/BV 2.5 4.3 4.7 7.0 6.9 6.9 7.0
Doha Bank
DOBK.QA
Listing:
Doha Securities Market HOLD
Current Price
QR218.70
Key Data
EPS (QR) 8.96 12 M Avg. vol. 81,577
Background
• Doha Bank (DB) was incorporated in 1979 in the State of Qatar. The bank has presence
primarily in the areas of corporate banking, trade financing and also retail banking. Doha
Bank has a network comprising of 18 domestic branches and one overseas branch in New
York in the United States of America. The bank also had its operations in Pakistan which
it sold during 2004. The bank operates a brokerage office at the Doha Securities Market.
As of end-Dec 2004, the bank’s employee strength was at 538.
• The bank’s shareholders are represented by its board who are the members of the ruling
family, prominent businessmen and various Qatari individuals.
Recent Developments
• Among the six listed Qatari banks, DB has emerged as the third largest bank in terms of
asset size, deposit base and the share of gross loans & advances in the State of Qatar as of
December 2004.
• Doha Bank’s Pakistan based operations were drag on its asset quality and profitability
for a number of years. Therefore, it has reportedly been planning its exit from Pakistan.
Towards this, it closed its Lahore-based branch in 2001, following which it has concluded
an agreement with Trust Investment Bank to form Trust Commercial Bank and it merged
its Karachi-based branch with Trust Commercial Bank. The merger took effect on 7 May,
2004. Doha Bank owns a 30% stake in the new bank.
• During 2004, Doha Bank opened a representative office in Dubai and became the first
Qatari bank to have presence in this major commercial and trading hub in the Gulf. The
Dubai representative office will facilitate commercial and investment related transactions

in a highly efficient manner between corporate, institutes and individuals across the
countries. It will also provide information on commercial activity in Qatar and highlight
potential investment opportunities to UAE companies and citizens. The bank sees its as a
major move which will open up many avenues to participate in cross border trading and
investment opportunities in the UAE and Qatar.
• Doha Bank entered into an agreement with Bank of Beirut on cooperation in various
areas including retail, corporate and commercial banking as well as consultancy services.
The agreement is aimed at providing services to Lebanese expatriates in Qatar and to
Qatari nationals wishing to obtain banking services in Lebanon. The deal would also allow
customers to receive financing to purchase homes in Lebanon and also make transactions
through the new electronic remittance service, the “e-remittance” round the clock without
having to visit any branch of Doha Bank. The two banks are also working on developing
new services aimed at facilitating banking business between Qatar and Lebanon soon.
• Doha Bank has launched Bancassurance services which includes car insurance, credit
shield, home insurance, health insurance, life insurance, retirement plans, child education
plans and Takaful insurance products.
• During 2004, the bank expanded its network of branches to 18 local branches from 15 in
2003.
• With the Doha Securities Market (DSM) has already opened its doors for foreigners,
including expatriates, from April 3, Doha Bank, which is also a licensed broker for local
stocks has upgraded its brokerage service capabilities to meet increased demand.
• The bank’s future plan encompasses diversification into Islamic banking, expansion of its
branch network in the domestic as well as overseas markets and will continue to focus on
advanced banking products and services which would be intended to become a One-Stop
Shop for the customers of Doha Bank to meet all their individual financial requirements.
• The bank is strategically looking at various options and operating models to expand
regionally as well as globally.
• Sharp growth in its non-interest revenues, recoveries of bad loans and release of provisions
from the Pakistan-based operations significantly boosted its earnings and therefore beat
our earlier earnings projections for FY2004.
• During FY2004, the bank’s interest income grew marginally by 3.5% to QR433.6mn, while
its interest expenses increased at a higher rate of 12.7% to QR105.8mn, which resulted into
a negligible growth of only 0.8% in the bank’s net interest income to QR327.8mn.

• The bank’s non-interest income increased significantly during FY2004 by 56% to

QR239.2mn, which was mainly driven by 106% growth in gains on financial instruments
which was at QR132.4mn.
• The bank reported fees & commission income of QR79.7mn, which represented a growth
of 27.8% over QR62.4mn achieved in the previous year.
QR538.2mn as compared to QR324.4mn reported during the previous year.
• For the three consecutive years the bank has been reporting over 70% y-o-y growth
in its net profit. The bank’s net profit was at QR365.6mn for FY2004 as compared to
QR214.6mn for FY2003.
• The bank reported earnings per share of QR8.96 for FY2004 as compared to QR8.95
reported for FY2003.
• The total assets of the bank stood at QR10.9bn at the end of FY2004, which represented
a growth of 20.8% over QR9.1bn for FY2003.
• Its loan book grew by 9% to almost QR6bn. The quality of the bank’s loan book has been
improving since last few years as its non-performing loans as a percentage of gross loans
has been declining consistently, in FY2004 it declined to 14.8% from 20.9% in FY2003.
• NPLs declined by 23.3% to QR885.37mn from QR1154.64mn at end of the previous

year. Its NPL coverage improved to 64.5% in FY2004 from 68.5% in the previous year.
• The bank increased its customers’ deposit base by 8.6% in FY2004 to QR8.1bn which is
on a lower side as compared to other listed banks in Qatar.
• Since last three years the bank has been rewarding its shareholders through issuance
of bonus shares. In 2002 it issued 30% bonus shares and in 2003 & 2004 it issued 70%
bonus shares in each of the years. The bank’s paid-up capital increased to QR407.9mn in
FY2004 from QR239.9mn in the previous year.
• Its capital adequacy ratio (CAR) declined to 22.54% in FY2004 from 23.96% in FY2003,
however it is well above the 10% requirement of Qatar Central Bank and 8% under Basel
requirements.
Outlook
• The bank is planning to venture into Islamic banking. It will soon set up a dedicated
division to offer Islamic banking products which will further strengthen its business
operations in the Qatari as well as in the regional markets.

• The bank is planning to open eight more branches in Qatar and it also plans to open
branches in overseas markets, including Korea, Japan, India and Central European
countries. All these will see it increases its branch network to 34 across nine countries as
part of a global expansion drive.
Valuation
• In March 2004, we initiated coverage on DB and recommended a Buy on the stock with
a price target of QR194.30 per share at the then market price of QR159 per share. Since
then the stock meet our expectations and witnessed significant run-up in its price.
• Currently, DB is trading at 7.1x of its estimated book value and 25.8x of its estimated
earnings of FY2005.
• We value the bank’s stock at an intrinsic value of QR208, based on the Discounted
Dividend Model (DDM) and Peer Group Valuation Method, and revise our earlier rating
to HOLD as the current market price is about 4.9% higher than the intrinsic value of the
stock.

BALANCE SHEET
Doha Bank
Assets
34
Cash & deposits with Central Banks 327,427 454,780 318,001 294,497 429,869 540,918 649,953
Due from Banks and Other FIs 1,361,518 2,090,573 2,447,830 2,888,439 3,408,358 3,953,696 4,586,287
Provisions (511,350) (658,421) (606,718) (750,599) (905,055) (1,074,063) (1,254,549)
Other assets 60,455 35,979 73,836 79,005 86,115 94,726 104,199
Investment securities - Debt 1,232,963 1,213,523 1,948,647 2,333,509 2,706,871 3,281,617 3,741,044
Investment securities - Others 205,140 312,528 671,507 863,079 1,001,171 1,093,872 1,247,015
gross fixed assets 159,738 189,639 210,693 233,869 259,595 293,342 331,477
net fixed assets 84,377 92,270 96,016 96,975 98,039 100,985 104,315
Total Assets 7,408,310 9,057,067 10,944,157 12,998,950 14,954,640 17,381,061 20,116,807
Liabilities
Customer deposits 6,277,547 7,426,743 8,068,134 9,278,354 10,484,540 12,057,221 13,865,804
Due to banks and other financial institutions 171,850 364,124 1,115,920 1,361,422 1,688,164 2,110,205 2,637,756

Owner’s Equity
Other reserve 159,002 159,652 159,652 159,652 159,652 159,652 159,652
Fair value reserve 215,033 340,988 404,068 404,068 404,068 404,068 404,068
Proposed bonus Shares 55,371 167,959 285,530 - - - -
Proposed dividends 36,914 - - 405,910 603,727 804,999 993,420
May 2005
Total Shareholder’s Equity 818,581 1,120,008 1,545,613 2,123,235 2,520,043 2,920,316 3,281,796
OPERATING STATEMENT
Doha Bank
Amount in Qatari Riyals ‘000 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
May 2005
Interest Income 441,542 419,065 433,585 707,265 897,911 1,114,023 1,263,328
Add: Fees and commission 41,881 57,989 79,704 153,829 246,126 319,964 399,955
Add: Profit on Foreign Exchange 15,676 13,452 12,480 12,854 13,240 13,637 14,046
Add: Net gains on financial instruments 21,780 64,169 132,403 191,823 233,031 272,356 304,315
Add: Dividend Income 8,123 8,590 9,617 15,104 20,023 24,612 31,175
Add: Other income 8,102 9,039 5,026 5,378 5,593 5,817 6,049
Total Non-Interest Income 95,562 153,239 239,230 378,988 518,014 636,385 755,541
Total Operating Income 398,817 478,446 567,028 915,803 1,203,569 1,488,613 1,718,828
Less: Provision for loan losses (153,823) (154,082) (28,864) (143,881) (154,456) (169,008) (180,486)
Operating Income (net of provisions) 244,994 324,364 538,164 771,922 1,049,113 1,319,605 1,538,342
Less: Staff Cost (62,281) (77,074) (87,158) (90,207) (120,357) (155,560) (189,931)

Less: General and Administrative Expenses (39,743) (46,643) (67,427) (79,217) (98,693) (126,532) (144,382)
Add: Non-operating Income (Recoveries from BCCI) - 37,598 350 - - - -
Net Profit Before Taxation 121,375 215,025 366,014 580,281 805,402 1,006,712 1,169,225
Taxation (foreign branches) (377) (389) (389) (408) (433) (463) (496)
Net Profit 120,998 214,636 365,625 579,872 804,969 1,006,249 1,168,730
Retained Earnings Broght Forward - 2,250 3,100 6,970 62,707 100,706 164,376
Net Profit for the year 120,998 214,636 365,625 579,872 804,969 1,006,249 1,168,730
Proposed Dividend (36,914) - - (405,910) (603,727) (804,999) (993,420)
35
Dividend Proposed by way of bonus share issue (55,371) (167,959) (285,530) - - - -
Director Fees - (2,250) (3,100) (2,250) (2,250) (2,250) (2,250)
Trfr to Statutory Reserve (24,200) (42,927) (73,125) (115,974) (160,994) (134,969) -
Trfr (to)/from General Reserve (2,263) (650) - - - - -
CASH FLOW STATEMENT
Doha Bank
36
Operating
Operating Activities 296,416 389,688 422,204 743,721 981,836 1,203,808 1,381,771
Profit Before Taxation 121,375 215,025 366,014 580,281 805,402 1,006,712 1,169,225
Provision for imapirment of loans & advances 153,823 154,082 28,864 143,881 154,456 169,008 180,486
Revaluation loss on financial instruments - - 12,096 - - - -
Provision for impairment of investments - - 804 - - - -
Depreciation 21,595 23,220 17,915 22,218 24,662 30,801 34,805
Income Tax Settled (377) (389) (389) (408) (433) (463) (496)
Director Fees - (2,250) (3,100) (2,250) (2,250) (2,250) (2,250)
Net Increase/Decrease in Operating Activities 454,244 472,640 587,168 (167,614) 96,625 212,163 182,966
(Inc.)/Dec. in loans and advances to customers (247,796) (875,066) (479,203) (1,199,008) (935,226) (1,260,037) (1,549,236)
(Inc.)/Dec. in due from banks and other financial
(59,633) (24,100) (357,257) (440,609) (519,919) (545,337) (632,591)
institutions
Inc./(Dec.) in Due to banks (27,098) 192,274 751,796 245,502 326,741 422,041 527,551
Increase in customer deposits 787,204 1,149,196 641,391 1,210,220 1,206,186 1,572,681 1,808,583
(Inc.)/Dec. in other assets (7,437) 24,476 (37,857) (5,169) (7,110) (8,611) (9,473)
Inc./(Dec.) in other liabilities 9,004 5,860 68,298 21,449 25,953 31,427 38,132
Net cash from operatig activities 750,660 862,328 1,009,372 576,107 1,078,462 1,415,971 1,564,737

Investing activites
Net movement in investments 68,460 38,007 (1,863,966) (576,434) (511,454) (667,448) (612,569)
Proceeds from sale of financial Investments (net) - - 820,043 - - - -
Acquisition of property, plants and equipment (13,748) (31,248) (22,573) (23,176) (25,726) (33,747) (38,134)
Proceeds from sale of property, plants and equipment 86 135 912 - - - -
Total Investing 54,798 6,894 (1,065,584) (599,610) (537,180) (701,195) (650,703)
Financing activities
Dividend paid (51,680) (36,914) - - (405,910) (603,727) (804,999)
Total Financing (51,680) (36,914) - - (405,910) (603,727) (804,999)
May 2005
Net Change in Cash 753,778 832,308 (56,212) (23,504) 135,371 111,049 109,034
Opening Cash balance 704,382 1,458,160 2,290,468 318,001 294,497 429,869 540,918
Net Cash at end 1,458,160 2,290,468 2,234,256 294,497 429,869 540,918 649,953
Ratios
Doha Bank
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Net interest income/ Op. Income (net of provisions) 61.0% 52.8% 55.5% 50.9% 50.6% 51.8% 50.9%
May 2005
Margins
- Interest Income to Average Interest Earning Assets 6.5% 5.2% 4.5% 6.2% 6.7% 7.2% 7.0%
- Interest Expense to Average Interest Bearing Liabilities 2.3% 1.3% 1.2% 1.7% 1.9% 2.0% 2.0%
- Net Spread 4.2% 3.9% 3.3% 4.5% 4.9% 5.2% 5.1%
Efficiency
- Staff Cost to Total Op. Income 25.4% 23.8% 16.2% 11.7% 11.5% 11.8% 12.3%
Liquidity
- Gross Loans to Customer Deposits 74% 74% 74% 78% 78% 78% 79%
Credit Quality
- Loan Provisions to total Op Income 39% 32% 5% 16% 13% 11% 11%
- Non Performing Loans (QR’000) 771,326 1,112,000 885,370 929,639 1,022,602 1,124,863 1,237,349
- Loan Loss Reserve (QR’000) 511,350 658,421 606,718 750,599 905,055 1,074,063 1,254,549

- NPL Coverage 66.3% 59.2% 68.5% 80.7% 88.5% 95.5% 101.4%
Capital Adequacy
- Equity to Total Assets 11.0% 12% 14% 16% 17% 17% 16%
37
- Change in Investment Income 291% 195% 106% 45% 21% 17% 12%
- Change in Other Income -26% 12% -44% 7% 4% 4% 4%
- Shares in Issue (‘000) 18,457 23,994 40,790 69,343 69,343 69,343 69,343
- EPS (QR) 6.6 8.9 9.0 8.4 11.6 14.5 16.9
- Market Price Year End (QR) 83.0 169.0 223.1 218.7 218.7 218.7 218.7
- P/E 12.7 18.9 24.9 26.2 18.8 15.1 13.0
- P/BV 1.9 3.6 5.9 7.1 6.0 5.2 4.6
Qatar International Islamic Bank

QIIB.QA
Listing:
Doha Securities Market Not Rated
Current Price
QR300.1
Key Data
EPS (QR) 5.37 12M Avg. vol. 24,270
P/E 55.9 Market Cap QR6.1bn
P / BV 11.1 Target Price -
Background
• Qatar International Islamic Bank (QIIB) was incorporated in 1990 in the State of Qatar.
The bank operates through its head office in Doha and has a network of 8 local branches.
The Bank is engaged in banking activities, financing and investing activities in accordance
with its Articles of Incorporation, Islamic Shari’a principles and regulations of Qatar
Central Bank (QCB). The bank’s employees strength was 269 as of end-Dec 2004.
Recent Developments
• Qatar International Islamic Bank (QIIB) has launched a new shariah-compliant Al Dawli
credit card. Al Dawli card, which does not have any interest clauses embedded, will meet
the needs of a large section of the population who require credit card facilities in line with
the provisions of Islamic Shariah.
• In cooperation with the QIIB, Abu Dhabi Islamic Bank concluded a 9-year Ijara agreement
worth USD25mn with the Ministry of Islamic Affairs and Awqaf, Qatar.
• The profit sharing income of the bank increased by 27.3% to QR208.34mn during FY2004
as compared to QR163.64mn reported during the last year. However, the depositors
profit sharing expenses increased at a faster pace of 42.5% to QR84.76mn during the
period under review. With this the net profit sharing income of the bank during the period
increased by 18.6% to QR123.58mn.
• Commissions and fees income increased substantially by 58.5% to QR23.48mn in FY2004

as compared to QR14.81mn reported in the previous year.
• Provision for impairment of loans increased by 16.3% to QR15.71mn which was at

QR13.51mn in FY2003.

• The bank’s total operating income after provisions increased by 24% to QR147.5mn from
QR118.8mn reported in the previous year.
• The total operating expenses of the bank increased by 16.9% to QR63.6mn. Its cost to
operating income after provisions declined to 43% in FY2004 as compared to 46% in
FY2003.
• The net profit attributable to shareholders was higher by 30.3% at QR83.88mn over the
corresponding period of the last fiscal. The bank reported earnings per share of QR5.4 for
FY2004 as compared to QR5.1 reported for FY2003. The bank declared a cash dividend
of 10% and a stock dividend of 30% for FY2004.
• QIIB’s total assets stood at QR4.96bn at the end of Dec 2004, representing an increase of
27% over Dec. 2003. This was the result of the all round growth in the major asset class of
the bank. Around 52% of the assets were deployed in receivables & balances from financing
activities, about 27.9% accounted for by balances and investments with banks & other FIs
and investments in securities and properties accounted for 14.4% of the total assets.
• Qatari operations accounted for about 68.2% of the total assets in FY2004 which was
about 70% in the previous year.
• In FY2004, net receivables from financing activities increased by 26.1% to QR2.6bn over
December 2003. NPLs of the bank increased considerably by 91% to QR82.9mn from
QR43.5mn at the end of the previous year.
• The proportion of NPLs to gross loans increased to 3.1% in FY2004 from 2.1% in the
previous year. Its NPL coverage also declined to 91% in FY2004 from 138% in the
previous year.
• In order to take the advantage of the booming market, portfolio of investment securities
surged by a whopping 50.6% to QR656.6mn. Out of this, investment in debt was about
42.1% while rest of the portfolio was in equities and mutual funds.
• Deposits from customers increased by 25% to in FY2004 to QR4.34bn from QR3.46bn

in FY2003.
• The bank’s capital adequacy ratio stood at 14.71% as of FY2004.
Outlook
• In the booming Qatari economy the bank is likely to report strong growth in its financing
activities.
• However, competition in the Islamic banking will increase as the three major banks have plans to
venture into Islamic banking products as a window within conventional banking operations.
• Fees and commission of the bank is also expected to remain buoyant.

BALANCE SHEET
Amount in Qatari Riyal ‘000 2002 2003 2004
Assets
Cash & balances with Central banks 123,859 175,754 199,674
Balances and investments with banks & other FIs 1,271,523 1,098,413 1,387,595
Recceivables & balances from financing activities (Gross) 1,512,366 2,110,647 2,660,776
Less : provisions (45,923) (60,117) (75,696)
Investment securities - debt 22,031 280,914 276,739
Investment securities - equity 62,602 154,948 379,913
Investment properties 30,784 23,847 59,085
gross fixed assets 62,903 72,185 79,243
less: accumulated depreciation (22,232) (32,361) (39,513)
net fixed assets 40,671 39,824 39,730
Other assets 21,849 82,481 34,512
Total Assets 3,039,762 3,906,711 4,962,328
Liabilities
Current accounts from banks & FIs 26,663 9,454 43,237
Customers’current accounts 482,456 881,670 954,394
Accounts payable 24,582 34,452 51,653
Total Liabilities 585,032 1,010,080 1,143,562
Holders of unrestricted investment deposits’ accounts 2,213,135 2,583,789 3,381,098
Equity
Paid-up equity capital 100,000 125,000 156,250
Legal reserve 48,624 61,498 78,274
General reserve 56,711 63,050 66,152
Retained earnings 1,260 1,407 1,500
Fair value reserve - 18,137 71,012
Foreign currency revalution reserve - - 1,980
Proposed bonus shares 25,000 31,250 46,875
Total Shareholder’s Equity 241,595 312,842 437,668
Total Liabilities & Shareholders’ Equity 3,039,762 3,906,711 4,962,328

OPERATING STATEMENT
Profit sharing 150,567 163,641 208,342

Depositors profit sharing (48,807) (59,463) (84,764)
Net profit sharing 101,760 104,178 123,578
Add : Net Gains from Dealing in Foreign Currencies 1,314 2,509 997
Add: Income from Investments 5,087 20,273 14,917
Total Non-Interest Income 15,639 37,599 39,398
Total Operating Income 117,399 141,777 162,976
Less: Provision for impairment of receivables and
(11,864) (13,511) (15,710)
financing activities
Less: Porvision for financials investments (3,137) (988) 1,212
Less: Provision for other investments (3,500) (1,500) -
Less: Provision for credit cards / ATM commitments (3,000) (7,000) (1,000)
Operating Income (net of provisions) 95,898 118,778 147,478
Less : Staff Expenses (28,408) (27,823) (34,608)
Less: Other Expenses (9,064) (14,796) (20,506)
Less: Depreciation & amoritzations (7,789) (11,789) (8,486)
Net Profit 50,637 64,370 83,878
Retained Earnings Broght Forward 980 1,260 1,407
Net Profit for the year 50,637 64,370 83,878
Director Fees (980) (1,260) (1,407)
Trfr to reserves (14,377) (19,213) (19,878)
Cl Balance of Retained Earnings 1,260 1,407 1,500

CASH FLOW STATEMENT

Operating
Operating Activities 75,492 83,847 100,760
Net Profit for the Year 50,637 64,370 83,878
Provision for impairment of receivables and financing
11,864 13,215 15,579
activities
Depreciation & amortisation 7,789 11,789 8,486
Provision for financial investments 3,137 988 (1,212)
Provision for other investments 3,500 1,500 -
Provision for creditr card/ATM commitments - 7,000 1,000
Gain on sale of investments (1,435) (15,015) (6,960)
Gain on sale of fixed assets - - (11)
Net increase (decrease) in Operating Activities 396,657 (259,503) (388,363)

Balances with banks & FIs (16,368) (12,317) (18,685)
Receivables and balances from financing activities (31,526) (604,602) (550,129)
Other assets (4,755) (60,632) 47,969
Net Increase (decrease) in liabilities

Current accounts from banks & FIs (3,555) (17,209) 33,783
Customers current accounts 443,437 399,214 72,724
Accounts payable and other liabilities 9,424 36,043 25,975
Total Operating 472,149 (175,656) (287,603)
Cash from Investing Activities

Purchase of financial investments (43,018) (331,409) (69,891)
Proceeds from repayment and sale of financial
2,891 56,700 18,003
investments
Purchase of investment properties (22,504) (5,012) (36,362)
Proceeds from sale of investment properties 21,735 14,868 -
Purchase of properties, euipment, furniture & fixture
(7,145) (10,169) (7,282)
for branches
Procceds from sale of fixed assets 67 73 25
Total Investing (47,974) (274,949) (95,507)
Cash from Financing Activities

Net increase in holders unrestricted investment deposits
52,965 327,073 690,027
accounts
Dividends paid (15,000) (10,000) (12,500)
Total Financing 37,965 317,073 677,527
Net Change in Cash 462,140 (133,532) 294,417

Net Cash at beginning 859,316 1,321,456 1,187,924
Net Cash at end 1,321,456 1,187,924 1,482,341

Ratios
2003 2004
Profitability
- Return on Average Assets 1.9% 1.9%
- Return on Average Equity 23.2% 22.4%
- Net profit sharing income/ Total Op. Income (net of provisions) 76% 73%
- Non-profit sharing income/ Total Op. Income (net of provisions) 24% 27%
Margins
- Depositors Profit Sharing to Profit Sharing Income 36.3% 40.7%
- Profit Sharing Income to Profit Sharing Income Earning Assets 3.3% 5.3%
- Depositors Profit Sharing to Depositors Profit Sharing Liabilities 1.9% 2.2%
- Net Spread 1.4% 3.1%
- Net Interest Margin 3.3% 3.1%
Efficiency
- Cost to Total Op Income 46% 43%
- Staff Expense to Total Op Income 23% 23%
- Cost to Average Total Assets 1.6% 1.4%
Liquidity
- Loans to Customer Deposits 60.9% 61.4%
- Customer Deposits to Equity 1108% 991%
Credit Quality
- Non Performing Loans (QR’000) 43,500 82,900
- Loan Loss Reserve (QR’000) 60,117 75,696
- NPL’s to Gross Loans 2.1% 3.1%
- NPL’s to (Equity+Loan loss reserve) 17% 23%
- Loan Loss Reserve to Gross Loans 2.8% 2.8%
- NPL Coverage 138% 91%
Capital Adequacy
- Equity to Total Assets 8% 9%
- Equity to Gross Loans 15% 16%
- Net Profit Sharing Income to Total Op Income 76.3% 73.1%
- Fees & Comm. to Total Op. Income 12.5% 15.9%
- Investment Income to Total Op Income 17.1% 10.1%
- FX Income to Total Op. Income 2.1% 0.7%
- Other Income to Total Op. Income 0.0% 0.0%
- Change in Net Profit Sharing Income 1% 19%
- Change in Fees and Commission 60% 58%
- Change in Investment Income 299% -26%
- Change in Fx Income 91% -60%
- Shares in Issue 12,500,000 15,625,000
- EPS (QR) 5.1 5.4
- Book Value Per Share (QR) 24.0 27.0
- Market Price Year End (QR) 95.15 181.46
- P/E 18.5 33.8
- P/BV 4.0 6.7

Qatar Islamic Bank

QISB.QA
Listing:
Current Price
QR268.5
Key Data
EPS (QR) 7.4 12M Avg. vol. 113,430
BVPS (QR) 35.5 52 week Lo / Hi (QR) 73.24/ 308.18
P/E 36.3 Market Cap QR17.8bn
P / BV 7.6 Target Price -
Background
• Qatar Islamic Bank (QIB) started its operations in July 1983 as a Qatari shareholding
company. The bank operates through its head office in Doha and has a network of 9
branches. The bank carries out full banking services, investment and financing activities
through various Islamic vehicles such as Murabaha, Mudaraba, Musharaka and Musawama.
All business activities of the bank are conducted in accordance with the Islamic Shari’a
principles and regulations of Qatar Central Bank (QCB). QIB is the largest of the two
Islamic banks in Qatar. The bank’s employees strength was 422 as of end-Dec 2004.
• QIB’s shareholders include members of the ruling family and prominent businessmen. It
is believed that major shareholders belonging to the ruling family hold around half of the
bank’s capital.
Recent Developments
• Qatar Islamic Bank (QIB) has elected a new chairman of the bank, Sheikh Jassem bin
Hamad bin Jassem bin Jabr Al Thani has replaced Khalid Ahmed Al Suwaidi as chairman
of Qatar Islamic Bank.
• The banks is setting up an Islamic bank in Malaysia in consortium. Among the consortium
QIB will have the highest stake of 70%, while the other partners namely RUSD Investment
Bank and Global Investment House will be holding 20% and 10% respectively.
• In the first quarter of 2005, the bank signed major financing deals. It signed a QR149mn
worth Istissna’ Contract for the financing of the Al Jazeera Tower, a 500 hotel-residential
flats project located in the West Bay area.
• In another major deal, QIB signed a QR87mn worth Istissna contract for the construction
of the Al Waseel Tower, which will be built in the New West Bay area within a period of
18 months. The tower will consist of 16 multi-floors, a basement and a ground floor.

• The bank’s income from financing activities increased 21.9% to QR340.1mn during
FY2004 as compared to QR279mn reported during the last year. While its income from
investment activities jumped significantly by 244.6% to QR170.9mn over QR49.6mn
reported for the previous year.
• Depositors profit sharing expenses increased by 40.9% to QR115mn during the period
under review.
• Commissions and fees income grew by 16.1% to QR22.3mn in FY2004 as compared to

QR19.2mn reported in the previous year.
• Provision for doubtful financing activities declined significantly by 82.6% during FY2004
to QR10.2mn which was at QR58.5mn in FY2003.
• The bank’s total operating income after provisions registered a steep jump of 95.7% to
QR406.8mn from QR207.9mn reported in the previous year.
• The total operating expenses of the bank increased by 13.7% to QR110.5mn. Its cost to
operating income after provisions declined significantly to 27.2% in FY2004 as compared
to 46.7% in FY2003.
• On the back of gains achieved through operational efficiency its net profit attributable to
shareholders increased significantly by 98.9% to QR288.4mn over QR145mn achieved
in the last fiscal. The bank has declared a cash dividend of 20% and a stock dividend of
70% for FY2004.
• QIIB’s total assets stood at QR7.69bn at the end of Dec 2004, representing an increase
of 37.3% over Dec. 2003. This was the result of the all round growth in the major asset
class of the bank. Among the major class, around 54.8% of the assets were deployed in
receivables & balances from financing activities, about 24.5% accounted for by balances
and investments with banks & other FIs and financial investments accounted for 12.2%
of the total assets.
• In FY2004, net receivables from financing activities increased by 27.5% to QR4.2bn over
December 2003. The NPLs was at QR298mn in FY2004 which was about 6.7% of the gross
loans for the year. The bank has provided for 76.1% of its NPLs at the end of Dec 2004.
• Deposits from customers increased by 21.7% to QR5.8bn in FY2004 from QR4.76bn in FY2003.
• The bank’s capital adequacy ratio stood at 29.8% as of FY2004.
Outlook
• In the booming Qatari economy the bank is likely to report strong growth in its financing
activities.
• However, competition in the Islamic banking will increase as the three major banks have plans to
venture into Islamic banking products as a window within conventional banking operations.

BALANCE SHEET
Qatar Islamic Bank
Amount in Qatari Riyal Mn 2003 2004
Assets
Cash & balances with Central banks 395.9 333.6
Balances and investments with banks & other FIs 865.4 1,887.1
Recceivables & balances from financing activities (Gross) 3,508.0 4,435.5
Less : provisions (207.2) (226.8)
Investment securities - debt 340.0 412.0
Investment securities - equity 532.7 522.9
Investment properties 28.1 142.4
net fixed assets 65.5 65.7
Other assets 70.0 114.6
Total Assets 5,598.4 7,686.9
Liabilities
Current accounts from banks & FIs 18.4 20.5
Customers’current accounts 985.2 1,323.0
Accounts payable 40.4 66.9
Other liabilities 215.8 312.4
Holders of unrestricted investment deposits’ accounts 3,777.5 4,473.6
Monority interest 19.1 28.4
Equity
Paid-up equity capital 250.0 390.0
Legal reserve 113.1 653.1
General reserve 95.5 87.3
Retained earnings 6.3 17.9
Fair value reserve 2.1 40.8
Proposed dividend 25.0 78.0
Proposed bonus shares 50.0 195.0
Total Shareholder’s Equity 542.0 1,462.1
Total Liabilities & Shareholders’ Equity 5,598.4 7,686.9

OPERATING STATEMENT
Qatar Islamic Bank
Profit sharing 300.3 386.7
Depositors profit sharing (81.6) (115.0)
Net profit sharing 218.7 271.7
Add : Fees and commission 19.2 22.3
Add : Net Gains from Dealing in Foreign Currencies 7.2 15.5
Add: Income from Investments 28.3 124.3
Total Non-Interest Income 54.7 162.1
Total Operating Income 273.4 433.8
Less: Provision for impairment of receivables and financing activities (58.5) (10.2)
Less: Porvision for financials investments (5.3) -
Less: Provision for other investments (1.7) (3.8)
Less: Other Provisions - (13.0)
Operating Income (net of provisions) 207.9 406.8
Less : Staff Expenses (60.0) (72.4)
Less: Other Expenses (29.0) (28.5)
Less: Depreciation & amoritzations (8.2) (9.5)
Add: Non operating income 41.3 1.2
Profit Before Minority Interest 151.9 297.5
Minority Interest (6.8) (9.2)
Net Profit 145.1 288.3
Retained Earnings Broght Forward 7.1 6.3
Net Profit for the year 145.1 288.3
Proposed Dividend (75.0) (272.0)
Director Fees (1.8) (2.7)
Trfr to reserves (69.0) (1.1)
Cl Balance of Retained Earnings 6.3 18.9

CASH FLOW STATEMENT

Qatar Islamic Bank
Operating
Operating Activities 242 360
Profit for the year before share of profit for unrestricted investment
233 413
account holders and minority interest
Adjustments For:
Provision for impairment of receivables and financing activities 53 5
Depreciation on fixed assets 8 10
Depreciation provision for other investments 2 1
Provision for financial investments 5 (6)
Provision for other investments - (3)
Provision for other assets (41) 13
Provision for end of service indemnity 7 6
Gain on sale of financial investments (24) (75)
Gain on sale of other investments (1) (3)
Gain on sale of fixed assets - -
Net increase (decrease) in Operating Assets (849) (1,017)

Balances with banks & FIs (15) (40)
Reserves with Central Bank of Qatar (15) (27)
Balance and Receivable from financing activities (857) (913)
Other assets 37 (38)
Net Increase (decrease) in liabilities 413 438

Current accounts from banks & FIs (3) 2
Customers current accounts 368 338
Other liabilities 48 98
Total Operating (195) (219)
Paid to Employees (2) (2)

Paid to Retirement Fund - (6)
Paid to Investment Fund Holders (77) (87)
Net Cash Used in Operating Activities (273) (314)
Cash flow from investing activities

Purchase of financial investments (686) (285)
Proceeds from sale of financial investments 21 372
Purchase of other investments - (147)
Proceeds from sale of other investments 21 37
Purchase of fixed assets (23) (10)
Net cash (used in) investing activities (668) (33)
Cash flow from financing activities

Increase in share capital - 630
Increase in unrestricted investment accounts 278 637
Dividend distributed (25) (25)
Directors remuneration paid (2) (3)
Net cash from financing activities 251 1,239
Net increase / (decrease) in cash and cash equivalents (690) 892

Cash and cash equivalents - Beginning of the year 1,810 1,120
Cash and cash equivalents - End of the year 1,120 2,012

Ratios
Qatar Islamic Bank
2004
Profitability
- Return on Average Assets 4.3%
- Return on Average Equity 28.8%
- Net profit sharing income/ Total Op. Income (net of provisions) 64.3%
- Non-profit sharing income/ Total Op. Income (net of provisions) 35.7%
Margins
- Depositors Profit Sharing to Profit Sharing Income 29.7%
- Profit Sharing Income to Profit Sharing Income Earning Assets 6.7%
- Depositors Profit Sharing to Depositors Profit Sharing Liabilities 2.2%
- Net Spread 4.5%
- Net Interest Margin 4.7%
Efficiency
- Cost to Total Op Income 27.2%
- Staff Expense to Total Op Income 18%
- Cost to Average Total Assets 1.7%
Liquidity
- Loans to Customer Deposits 76.5%
- Customer Deposits to Equity 396%
Credit Quality
- Non Performing Loans (QR’000) 298.0
- Loan Loss Reserve (QR’000) 226.8
- NPL’s to Gross Loans 6.7%
- NPL’s to (Equity+Loan loss reserve) 24%
- Loan Loss Reserve to Gross Loans 5.1%
- NPL Coverage 76%
Capital Adequacy
- Equity to Total Assets 19%
- Equity to Gross Loans 33%
- Net Profit Sharing Income to Total Op Income 64.3%
- Fees & Comm. to Total Op. Income 5.5%
- Investment Income to Total Op Income 26.4%
- FX Income to Total Op. Income 3.8%
- Change in Net Profit Sharing Income 63%
- Change in Fees and Commission 16%
- Change in Investment Income 339%
- Change in Fx Income 115%
- Shares in Issue 39,000,000
- EPS (QR) 7.4
- Book Value Per Share (QR) 35.5
- Market Price Year End (QR) 129.29
- P/E 17.5
- P/BV 3.6

Ahli Bank
AABQ.QA
Listing:
Current Price
QR125.2
Key Data
EPS (QR) 2.72 12M Avg. vol. 22,333
P / BV (x) 4.7 Target Price -
Background
• The Ahli Bank Q.S.C. (formerly known as Al-Ahli Bank of Qatar Q.S.C.) was incorporated
in 1983 as a public shareholding company. The bank is engaged in commercial banking
services and operates through its Head Office in Doha and eight branches established
in the State of Qatar. The bank had been historically running into problems due to the
lack of proper monitoring and recovery system for loans & advances and it was overly
exposed to margin lending, which turned bad. Due to this, in 2000, the bank witnessed
a substantial surge in its non-performing loans. All these resulted into a bank incurred a
huge loss of around QR102mn in 2000. To avert the problem, in late 2000, the Central
Bank intervened and assumed direct control of the bank. The Central Bank had injected
an amount of QR100mn in 2002 as quasi equity. In 2002, the bank returned to good
profitability, which is backed by decent recoveries of bad loans, lower fresh provisions
and significant reduction in cost of financing. The bank also operates a brokerage office at
the Doha Securities Market. As of end-Dec 2004, the bank’s employee strength was 199.
• The current board and members of their families together hold more than 30% stake in
the bank. Apart from that Bahrain-based Ahli United Bank (AUB) holds 40% stake in the
bank.
Recent Developments
• In 2004, the bank allotted 12.2mn shares to AUB as part of a strategic acquisition by the
later.
• In addition to the acquisition AUB has signed a ten-year (renewable) management

agreement and as per that AUB will oversee the management of the bank and provide
technical and marketing services to the bank.

• Though DSM has opened its floors for non-Qataris, the shares of Al Ahli Bank would not
be available for trading to non-Qataris because of a lock-in period of three years agreed
upon between Ahli Bank and AUB.
• During 2004, the name of the bank was changed to Ahli Bank Q.S.C. from Al-Ahli Bank
of Qatar Q.S.C.
• The bank has renewed its focus on expanding its credit to government agencies besides
commercial segment.
• It has started expanding also into personal loans and credit cards business.
• During FY2004, the bank’s net interest income declined by 18.1% to QR67.95mn which
was resulted from the 11.5% decline in its interest income to QR109.2mn and a marginal
increase of 2.1% in its interest expense to QR41.2mn.
• The bank’s non-interest income also declined significantly by 23.2% to QR35.85mn

from QR46.7mn reported in FY2003. The previous year’s non-interest income was
mainly backed by an income from profit on investments of QR22.5mn which was nil in
FY2004. However, fees & commission income remained strong in FY2004 which was at
QR27.4mn as compared to QR16.8mn in FY2003.
• Total operating income (net of provisions) of the bank increased by 16.4% in FY2004 to
QR136.6mn which was at QR117.4mn in FY2003.
• In FY2004, the bank registered an increase of 14.1% in its net profit to QR82.8mn as
compared to QR72.6mn reported in FY2003 which was mainly backed by the recoveries
of bad loans and other general provisions. The bank’s recoveries was at QR20.3mn in
FY2004.
• However, this growth in profitability did not have much impact on its earnings per share
earnings due to increase in its paid-up capital resulted from allotment of shares to AUB. Its
earnings per share for FY2004 declined to QR2.72 from QR3.97 achieved for FY2003.
• The bank increased its cash dividend for FY2004 to 18.75% of the paid-up capital from
10% paid for FY2003.
• The total assets of the bank grew by 67.8% in FY2004 to QR4.3bn mainly backed by a
significant growth in major asset components vis-à-vis funds with banks & FIs, loan book
and investments.
• The bank’s funds with banks & FIs grew significantly by 182.6% to QR1.34bn, while its
loan book grew by 8.1% to QR1.69bn. It expanded its investments portfolio by 97.4% to
QR1.36bn in FY2004.

• Non-performing loans declined by 20.6% to QR403.3mn from QR508.3mn at end of the

previous year. The bank’s NPL coverage improved to 64.5% in FY2004 from 60.2% in
the previous year.
• The bank increased its customers’ deposit base significantly by 52.8% in 2004 to
QR2.74bn from QR1.79bn in 2003.
• In FY2004 the allotment of 12.2mn shares to AUB increased the bank’s paid-up capital
to QR304.69mn from QR182.81mn in FY2003.
• At the end of 2004, the bank’s capital adequacy ratio (CAR) increased marginally to
31.91% from 31.74% in FY2003, which is well above the 10% requirement of Qatar
Central Bank and 8% under Basel requirements.
Outlook
• In future, the bank will focus on expanding its lending business by targeting its existing
medium size corporate clients, who are the sub-contractors for government projects and
it is also planning to focus more on consumer credit.
• To expand its retail business the bank is focusing more on improving its delivery channels
for retail customers. The bank is focusing on opening new branches and develop the
existing ones. It is keen to develop and improve its services to its retail customers by
introducing new banking services especially in electronic banking.
• The bank will expand its operations on the back of AUB’s expertise as the later has
entered into a management agreement with the bank.
• As part of its future expansion strategies the bank plans to strengthen its human resource
by recruiting more employees.
• The increase in capital will allow Ahli Bank to significantly grow its retail, commercial
and private banking businesses, and will improve the quality and depth of services
provided to its clients.
• The outlook for the bank looks positive on the back of good recoveries of bad loans,
lower fresh provisions and expansion in disbursements of new loans with strict credit
control of the risk management division.

BALANCE SHEET
Ahli Bank
Assets
Cash & balances with banks 96,006 68,298 103,915
Balances with banks & Fis 295,727 472,360 1,335,124
Loans and advances (Gross) 1,251,737 1,562,519 1,689,791
Other assets 18,921 31,431 16,884
Less : provision (394,462) (306,045) (260,029)
Investment securities - debt 784,435 607,776 1,234,162

Investment securities - equity 76,571 79,920 123,139
gross fixed assets 56,267 62,936 66,890
less: accumulated depreciation (29,635) (34,563) (39,560)
net fixed assets 26,632 28,373 27,330
Total Assets 2,155,567 2,544,632 4,270,316
Liabilities
Due to Qatar Central Bank 30,000 - 73,698
Due to banks and other FIs 262,702 296,562 496,177
Deposits from customers 1,571,768 1,796,038 2,743,780
Total Liabilities 1,903,092 2,223,022 3,395,249
Owner’s Equity
Legal reserve 13,951 28,465 410,027
Fair Value Reserve 34,375 49,971 99,283
Total Liabilities & Shareholders’ Equity 2,155,567 2,544,632 4,270,316

OPERATING STATEMENT
Ahli Bank
Interest Income 107,121 123,401 109,203

Add : Gains on foreign exchange activities 3,443 4,974 5,015
Add : Dividend income 2,477 2,132 2,001
Add: Profit on investments 13,211 22,508 -
Add : Other operating income 2,980 304 1,446
Tota non-interest income 37,241 46,703 35,849
Total Operating Income 90,723 129,705 103,804
Less: Recoveries / Provision for loan losses 16,894 (12,164) 13,675
Less: Provision for decline in value of investment securities (2,300) (188) (1,221)
Less: Other recoveries - - 20,324
Operating Income (net of provisions) 105,317 117,353 136,582
Less : Staff Expenses (23,463) (27,015) (30,497)
Less: Other general and administrative expenses (13,666) (12,592) (17,195)
Less: Bad debts Writeen off (329) - -
Net Profit 64,170 72,570 82,802
Opening Balance of Retained Earnings - 3,055 42,080
Net Profit for the year 64,170 72,570 82,802
Shortfall in provision for loan losses (100,000) - -
Qatar Central Bank support 100,000 - -
Distribution from retained earnings - - (36,563)
Director’s remuneration - (750) (2,250)
Trfr to Legal Reserve (12,834) (14,514) -
Trfr to Qatar Central Bank Support (30,000) - (25,000)
Closing Balance of Retained Earnings 3,055 42,080 3,940

CASH FLOW STATEMENT

Ahli Bank
Operating Activities 136,317 55,328 52,625

Net Profit for the Year 64,170 72,570 82,802
Loss on sale of fied assets 201 - -
Provision for doubtful loans and advances 65,628 43,530 32,277
Bad debts written off 329 - -
Provision for decline in value of investment securities 2,300 188 1,221
Other provisions - 21,090 110
Provisions no longer required - (64,592) (69,800)
(Profit) on sale of property, plant & equipment - (17) (28)
Unrealised gain on option - (109) (45)
(Profit) on sale of investments - (22,508) -
Changes in Working Capital: 68,778 116,713 1,083,171

Cash reserve with Qatar Central Bank - (5,868) (14,944)
Inc./(Dec.) in due to banks 185,114 33,860 273,313
Dec/(Inc.) in due from banks - (510) 19,458
(Inc.) in available for sale investmenets 3,341 - -
Inc./(Dec.) in customers’ accounts (217,349) 227,210 947,742
Dec./(Inc.) in loans and advances 39,292 (191,939) (108,182)
(Inc.)/Dec. in placement with banks 59,006 - -
(Inc.) / Dec. in other assets 3,136 (13,374) 14,502
Inc./(Dec.) in other liabilities (3,762) 67,101 (48,718)
Options derivatives - 233 -
Cash from Operating Activities 205,095 172,041 1,135,796
Investing Activities
Proceeds from sales of long term investment - 44,804 472,317
Purchase of fixed assets (6,579) (6,925) (5,261)
Proceeds from disposal of fixed assets 26 25 188
Purchase of long term investments (675,755) (15,653) (1,121,488)
Redemption of held to maturity investments 389,934 - -
Cash from Investing Activities (292,374) 22,251 (654,244)
Financing Activites
Capital increase - - 548,437
Dividend paid to shareholders - (18,281) (57,094)
Qatar Central Bank Support 100,000 (30,000) (70,000)
Cash from Financing Activities 100,000 (48,281) 421,343
Net Change in Cash 12,721 146,011 902,895

Net Cash at beginning 83,285 319,016 465,027
Net Cash at end 96,006 465,027 1,367,922

Ratios
Ahli Bank
2002 2003 2004
Profitability
- Net interest income/ total Op. Income 67% 60% 60%
- Non-interest income/ total Op. Income 33% 40% 40%
Margins
- Interest Expense to Interest Income 50% 33% 38%
- Net Spread 1.8% 2.9% 1.6%
Efficiency
- Cost to Total Op Income 100% 39% 38%
- Staff Expense to Total Op Income 56% 22% 23%
- Cost to Average Total Assets 2% 2% 2%
Liquidity
- Loans to Interest Earning Assets 54% 59% 40%
- Loans to Customer Deposits 80% 87% 62%
- Customer Deposits to Equity 623% 558% 314%
- Due from Banks to Due to Banks 113% 159% 269%
Credit Quality
- Loan Provisions to total Op Income -19% 9% -13%
- Provisions to Average loans -1.3% 0.9% -0.8%
- Non Performing Loans (QR’000) 474,714 508,257 403,310
- Loan Loss Reserve (QR’000) 394,462 306,045 260,029
- NPL’s to Gross Loans 37.9% 32.5% 23.9%
- Loan Loss Reserve to Gross Loans 32% 20% 15%
- NPL Coverage 83.1% 60.2% 64.5%
Capital Adequacy
- Equity to Total Assets 12% 13% 20%
- Equity to Gross Loans 172% 163% 253%
- Investment Income to Total Op Income 12.7% 20.8% 0.6%
- Other Income to Total Op. Income 2.8% 0.3% 15.9%
- Change in Interest Income 298% 1% 15%
- Change in Fees and Commission -0.3% 11% 63%
- Change in Investment Income -27% -55% 42%
- Change in Fx Income 37% 44% 1%
- Change in Other Income 14% -90% 376%
- Shares in Issue 18,281,300 18,281,300 30,468,800
- EPS (QR) 3.5 4.0 2.7
- Book Value Per Share (QR) 12.8 16.6 26.8
- Market Price Year End (QR) 36.0 80.0 89.3
- P/E 10.3 20.2 32.9
- P/BV 2.8 4.8 3.3

Qatar National Bank BUY QNBK.QA QR305.7 1,10
Commercial Bank of Qatar HOLD COMB.QA QR227.10 1,10
Doha Bank HOLD DOBK.QA QR218.70 1,10
Qatar International Islamic Bank NOT RATED QIIB.QA QR300.1 1,10
Qatar Islamic Bank NOT RATED QISB.QA QR268.5 1,10
Ahli Bank NOT RATED AABQ.QA QR125.2 1,10


Global Rarting Definition
Saudi Arabia
Saudi Arabia Banking Sector

May 2005
Equities Research
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661


omar@global.com.kw
Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
Phone No:(965) 2400551 Ext.196
Amit Tripathy
amitt@global.com.kw
Phone No:(965) 2400551 Ext 269
Faisal Hasan, CFA

Financial Analyst
Phone No:(965) 2400551 Ext.304
Raghu Sarma
Financial Analyst
Phone No:(965) 2400551 Ext.273
Table of Contents
The Saudi Banking Sector ......................................................................................................................................... 1
Composition of Aggregate Assets/Liabilities .............................................................................................. 3
Credit Portfolio ................................................................................................................................................................... 4
Interest Rates ....................................................................................................................................................................... 7
Peer Group Comparison .............................................................................................................................................. 9
Comparative Indicators ............................................................................................................................................... 11
Saudi Banking Sector Outlook ............................................................................................................................... 15
Summary of Recommendations ............................................................................................................................. 17
Players Profiles
SAMBA Financial Group ..................................................................................................................................... 22
Al Rajhi Banking & Inv. Corp. ......................................................................................................................... 29
Riyad Bank ..................................................................................................................................................................... 36
Arab National Bank .................................................................................................................................................. 43
The Saudi British Bank .......................................................................................................................................... 50
Saudi Hollandi Bank ................................................................................................................................................ 57
The Saudi Investment Bank ................................................................................................................................. 64
Banque Saudi Fransi ................................................................................................................................................. 71
Bank Al Jazira .............................................................................................................................................................. 78
Global Research - Saudi Arabia Global Investment House
The Saudi Financial System

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

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

Bank of Bahrain followed. The attraction of the Saudi banking sector surpassed the region, as
3 foreign banks namely, Deutsche Bank, JP Morgan Chase, and BNP Paribas were allowed
to start operations in the Kingdom, further opening up the financial sector. Moreover, HSBC
has been approved to establish an investment banking operation in Saudi Arabia.
Deutsche Bank signed a deal with Al Azizia Commercial Investment Company to become
the first licensed foreign bank to operate in Saudi Arabia. The two financial organizations
will establish an investment banking joint venture to provide equities brokerage and other
investment banking services in the kingdom.
New kid on the block…
Saudi financial authority (SAMA) has been requiring money exchangers to merge into a
single commercial bank. In June 2004, eight money exchange organizations announced
their plan to merge under the name Al-Bilad Bank. The eight firms, that already signed
the merger agreement, that will be part of the Al-Bilad Bank are Muhammad & Abdullah
Ibrahim Al-Subaie Company, Al-Muqairen Money Exchange (run by the heirs of Abdul
Aziz ibn Suleiman Al-Muqairen), Al-Rajhi Trading Establishment, Al-Rajhi Commercial
Foreign Exchange, Muhammad Saleh Sairafi Establishment, Abdul Mohsen Saleh Al-Amri
Est., Injaz Money Exchange (Yousuf Abdul Wahab Niamatullah Company), and Ali Hazza
& Partners for Trade and Money Exchange.
The IPO of the bank generated huge investors’ response and was oversubscribed by more
than 5 times as the number of subscribers reached 8.7mn with a total investment of SR7.75bn.
Al Bilad public subscription was considered to be the largest, not just in Saudi Arabia, but
also in the region.
Composition of Aggregate Assets
During the period 1998-2004, total assets of the Saudi commercial banks have grown at a
CAGR of 8.4% to SR655.4bn by the end of 2004. For the period under study, claims on
private sector accounted for 48% of total assets on average while foreign assets accounted
for another 14%.
Foreign assets increased at a CAGR of 1.3% during the said period increasing from SR85.9bn
in 1998 to SR92.8bn in 2004 representing 14% of total assets compared to a peak of 22%
during 1999 and 2000. The decline in the foreign assets is much more noticeable if compared
with the early nineties as it amounted to SR123bn which was a result of Saudi banks’ taking
a larger role to participate in the development of the country’s economy rather than investing
in foreign assets.
Claims on private sector, which include credit to private sector and investments in private
securities, increased at a CAGR of 11.8%. It represented 48% of total assets in 2004 compared
to 40% in 1998. Credit to private sector represented 96.5% of total claims on private sector
on average during the said period while investments in private securities represented 3.5%.
Other assets increased at a CAGR of 6.9% during the same period. It accounted for 33% in
2004 compared to an average of 36% of total assets during the said period.

Table 1: Aggregate Balance Sheet of Commercial Banks

(SR mn) 1998 1999 2000 2001 2002 2003 2004
Assets
Cash in Vault 2,657 5,468 5,971 3,453 4,892 4,257 4,474
Current Deposits 91 572 116 197 1,750 847 3,415
Statutory Deposits 9,826 10,504 11,191 12,599 14,270 15,465 19,090
Other Deposits 0 1 1,605 2,874 7,732 6,094 5,056
Total Bank Reserves 12,574 16,545 18,883 19,123 28,644 26,663 32,035
Foreign Assets 85,944 91,487 101,204 99,364 95,490 81,082 92,798
Claims on Private Sector 160,655 162,190 172,238 187,064 205,829 228,486 313,928
Other Assets 145,133 145,006 160,947 166,881 178,274 208,976 216,621
Total Assets 404,306 415,228 453,272 472,432 508,237 545,208 655,382
Liabilities
Business and Individual Deposits 92,648 98,975 110,823 126,829 147,029 163,831 196,522
Official Entities 2,605 2,630 3,658 3,364 2,981 3,747 6,796
Demand Deposits 95,253 101,605 114,481 130,193 150,010 167,578 203,318
Quasi Monetary Deposits 141,789 144,480 149,131 150,933 178,260 188,734 218,948
Total Deposits 237,042 246,085 263,612 281,126 328,270 356,312 422,266
Foreign Liabilities 43,105 51,153 64,444 59,614 42,999 40,063 45,748
Capital & Reserves 40,259 42,338 43,525 43,793 47,298 47,023 52,238
Source: SAMA
Note: figures in the aggregate balance sheet provided by SAMA would not be comparable to those in the
consolidated balance due to different classification and exclusion of branches of foreign banks.
Composition of Aggregate Liabilities
On the funding front, total deposits accounted for the largest portion of funding sources, over
61% on average, during the period 1998-2004. Total deposits have increased at a CAGR
of 10.1% during the same period, higher than the increase in total assets, which resulted in
the increase in its weight as a source of funding from 59% of total funding sources in 1998
to 64% in 2004. Foreign liabilities have increased, in-line with foreign assets, by a CAGR
of 1.0% to SR45.8bn in 2004, increased from its lowest level of SR40bn reported in 2003.
Foreign liabilities have, on average, accounted for 10% of total funding sources in the period
1998-2004, but accounted for only 7% of total liabilities in 2004.
Other liabilities have been increasing gradually since 1999 when it amounted to SR75.7bn
until it reached SR135.13bn in 2004, representing a 8.3% CAGR. With total assets growing
at a higher CAGR during the same period, other liabilities have accounted for 21% of total
funding sources on average. Capital and reserves amounted to SR52.2bn in 2004 as compared
to SR40bn in 1998 representing a CAGR of 4.4% during that period. Capital and reserves
accounted for 8% of total liabilities on average during the said period.
Credit Portfolio – Liquidity dictating terms
Total bank claims on the Saudi economy increased by a CAGR of 10.2% during the period
1998-2004. The increased liquidity in the market, driven by high oil revenues, resulted in
a low growth rate in credit provided to the government as well as to the private sector.
With Saudi banks also enjoying excess liquidity, the alternative investment for most of them
were government securities. Investments in government securities, consequently, increased

sharply by a CAGR of 8.6% during the mentioned period accounting for almost 83.4% of
total claims on the public sector in 2004.
Table 2: Banking Sector’s Total Claims

(SR mn) 1998 1999 2000 2001 2002 2003 2004 CAGR
Claims on Private Sector 160,655 162,190 172,238 187,064 205,829 228,486 313,928 11.8%
Claims on Public Sector 112,965 116,613 124,712 134,650 150,610 176,566 175,794 7.6%
Total Claims 273,620 278,803 296,950 321,714 356,439 405,052 489,722 10.2%
Credit to Private Sector 155,229 151,975 161,094 176,803 198,697 221,123 302,998 11.8%
Investments in Private
5,426 10,214 11,144 10,261 7,132 7,363 10,929 12.4%
Securities
Claims on Private Sector 160,655 162,189 172,238 187,064 205,829 228,486 313,927 11.8%
YoY % 1.0% 6.2% 8.6% 10.0% 11.0% 37.4%
% of Total
Credit to Private Sector 96.6% 93.7% 93.5% 94.5% 96.5% 96.8% 96.5%
Investments in Private
3.4% 6.3% 6.5% 5.5% 3.5% 3.2% 3.5%
Securities
Credit to Public Sector 23,599 14,347 12,439 10,817 11,960 25,844 29,138 3.6%
Investments in Gov. Securities 89,366 102,266 112,273 123,833 138,650 150,722 146,656 8.6%
Claims on Public Sector 112,965 116,613 124,712 134,650 150,610 176,566 175,794 7.6%
YoY % 3.2% 6.9% 8.0% 11.9% 17.2% -0.4%
% of Total
Credit to Public Sector 20.9% 12.3% 10.0% 8.0% 7.9% 14.6% 16.6%
Investments in Gov. Securities 79.1% 87.7% 90.0% 92.0% 92.1% 85.4% 83.4%
Credit to Private Sector 155,229 151,975 161,094 176,803 198,697 221,123 302,998 11.8%
Credit to Public Sector 23,599 14,347 12,439 10,817 11,960 25,844 29,138 3.6%
Total Credit 178,828 166,322 173,533 187,620 210,657 246,967 332,136 10.9%
YoY % -7.0% 4.3% 8.1% 12.3% 17.2% 34.5%
% of Total Credit
Credit to Private Sector 86.8% 91.4% 92.8% 94.2% 94.3% 89.5% 91.2%
Credit to Public Sector 13.2% 8.6% 7.2% 5.8% 5.7% 10.5% 8.8%
Source: SAMA & Global Research
In 2004, the aggregate credit portfolio of the Saudi banks amounted to SR332.13bn as
compared to SR178.8bn in 1998, which represented a CAGR of 10.9%. This increase was
driven by the expanded credit to the private sector, which increased by a CAGR of 11.8%
during the same period. Credit to the public sector increased marginally by a CAGR of 3.6%
as a result of a weak demand for bank credit from the public sector due to the increase in the
liquidity. Backed by suitable demographics that created a lot of demand, the personal lending
business became very attractive for Saudi banks due to higher profitability and lower risk.
According to SAMA, aggregate bank credit is classified into eleven economic sectors.
Miscellaneous sector, which includes mainly consumer and credit card loans, contributed the
largest portion to the aggregate credit of the Saudi banking system of 36.9% in 2004. Credit
extended to this sector recorded a sharp increase within the period 1998-2004, rising from
SR44.2bn in 1998 to SR122.7bn in 2004, at a CAGR of 18.6%.

All out to woo the man on the street….
Consumer loans, which include real estate financing, vehicle and equipment financing, and
other personal loans amounted to SR64.7bn in 2003 as compared to SR9bn in 1998, which
represented a CAGR of 47.6%. Real estate financing accounted for 8% of this segment whilst
vehicle and equipment financing accounted for 42%, and other consumer loans accounted for
50%. Vehicle and equipment financing witnessed the largest growth during the said period
of 69% (CAGR). Credit card loans amounted to SR3bn in 2003 as compared to SR2.1bn in
1998 representing an increase of 7.51% CAGR. At the end of 3Q04, the total consumer loans
aggregated SR86.44bn, a strong rise of 33% over the previous fiscal. Real Estate Financing
increased from SR5.2bn at the end of 2003 to SR7.7bn in 3Q04 while Car & Equipment
finance increased from SR27.6bn in 2003 to SR 28.2bn in 3Q04. Credit cards loans too
increased from SR3.0bn in 2003 to SR3.78bn at the end of 3Q04.
Credit extended to the commerce sector accounted for 18.9% of the aggregate credit in 2004
down from 26% in 1998. This decline could be attributable to the slower growth in credit to
the commerce sector vis-à-vis other sectors such as transport and communications and the
miscellaneous sectors. Finance sector accounted for the third largest portion of aggregate
credit portfolio (10.2%) followed by the government and quasi-government sector, which
accounted for 8.8% and grew at a CAGR of 3.6%. The highest growth between 1998-2004
was recorded by the finance sector (32.9% CAGR), which accounted for 10.2% of the
aggregate credit portfolio in 2004.
Figure 1: Aggregate Credit by Economic Sector (SR mn)

350,000
Mining & Quarrying
300,000 Utilities
Agri. & Fishing

250,000
Services
200,000 Finance
Transport & Comm.

150,000
Building & Construction
Govt. & Quasi Govt.

100,000
Manufacturing
50,000
Commerce
Miscellaneous
-
1998 1999 2000 2001 2002 2003 2004
Source: SAMA & Global Research
Shifting focus to long-term…
As figure 2 illustrates, Saudi banks increased their long-term lending from 1999 and onwards,
thereby shifting part of their short-term lending into long-term. Part of the expansion in the
long-term lending happened because of the increase in consumer and credit cards loans, 58%
of these loans had long-term maturities in 2004 as compared to 29% in 1998.
This resulted in a different maturity characteristic for the portfolio between 1998 and 2004.
Long-term lending increased from 9.8% of the aggregate portfolio in 1998 to reach 29.1% in

2004. Short-term lending, on the other hand, declined during the same period from a peak of
75% of total in 1998 to reach 58% in 2004.
Fig. 2: Maturity of the Aggregate Credit Portfolio (SR mn)

350,000
300,000
Long Term
Medium Term
250,000
Short Term
200,000
150,000
100,000
50,000
-
1998 1999 2000 2001 2002 2003 2004
Source: SAMA
Islamic Banking – the “in” thing
Most of Saudi banks’ commission spread improved in 2004 as a result of the decline in their
average cost of funds. Saudi banks started to introduce and expand their Islamic Sharia-
complaint products to attract cheaper sources of funds in the form of non-commission bearing
deposits. The average commission expenses-to-commission income in 2004, excluding Al
Rajhi Corp. was 25%, with BJAZ reporting the highest ratio of 40.8% and SAMBA reporting
the lowest ratio of 21.4% amongst the listed banks. Consequently, BJAZ reported the lowest
commission spread of 2.2% while Al Rajhi reported the highest commission spread of 6.5%
followed by SAMBA & ANB at 3.7%.
Interest Rates – following the Greenback…
The GCC countries have agreed to unify their monetary systems to pave the way for an EU-
style Monetary Union by 2010, involving the creation of a single currency. To achieve this,
they have agreed to align their fiscal systems by 2005 to pave the way for the monetary union
five years later. They have also decided to temporarily peg all their currencies to the US
dollar. The Saudi Arabian Monetary Agency (SAMA) has so far pegged Saudi Riyal to the
US Dollar (US$1= SR3.75). SAMA has significant foreign exchange reserves which can be
used to maintain the parity in the foreign exchange markets. Due to the currency peg, interest
rates in Saudi Arabia closely follow the interest rates in the US.
Table 3: Interest Rate Differential between SR and US$ Deposits

2002 2003 2004
(in %) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
3 month SR Deposit Rate 2.160 2.076 2.354 2.346 1.854 1.516 1.583 1.573 1.259 1.404 1.967 2.308
3 month US$ Deposit Rate 1.812 1.824 1.729 1.468 1.233 1.123 1.022 1.066 1.021 1.205 1.690 2.219
Interest Rate Differential 0.348 0.252 0.626 0.879 0.621 0.393 0.561 0.506 0.238 0.199 0.277 0.089
Source: SAMA

Fig. 3: Saudi Riyal Interest Rate vs. USD Interest Rate

2.5
1.5
Per cent
0.5
0
Q1-02 Q2-02 Q3-02 Q4-02 Q1-03 Q2-03 Q3-03 Q4-03 Q1-04 Q2-04 Q3-04 Q4-04
3 month SR Deposit Rate 3 month US$ Deposit Rate Interest Rate Differential
Source: SAMA
The interest rates on the Saudi Riyal 3-month deposits at the end of 2004 was 2.308% as
compared with the interest rate of 2.219% on US Dollar deposit of similar maturity, resulting
in an interest rate differential of 0.089% in favor of Saudi Riyal deposit. With the recent
upward movement of interest rates in USA, SAMA is likely to follow suit.

Peer Group Comparison

As mentioned earlier in the report, and as per SAMA’s 2004 statistical report, the Saudi banking
system comprises of 12 commercial banks including a branch for Gulf International Bank and
a branch of Emirates Bank. Of the remaining 10 commercial banks, only 9 are listed on the
Saudi stock exchange. National Commercial Bank (NCB) is the largest Saudi bank in terms
of asset size. However, NCB is currently unlisted. With the Saudi Government’s intentions to
privatize NCB, we have included the bank in our peer group comparison analysis.
Table 4: Comparative balance sheet of Saudi banks (2004)

‘SR mn’ NCB Riyad Fransi British Jazira ANB SAMBA SAIB Hollandi Al Rajhi*
Cash & balances with SAMA 5,562 2,524 2,009 2,243 382 7,061 3,008 578 1,043 8,796
Due from banks and other FI's 7,591 3,100 2,486 8,186 2,734 4,732 2,443 5,996 5,301 827
Investment Portfolio 49,945 32,118 19,101 14,663 2,180 21,198 38,689 8,502 9,162 537
Gross loans and advances 66,030 35,258 34,357 31,809 5,409 28,958 50,751 13,627 17,150 67,590
Provision for loan losses (2,517) (1,314) (847) (496) (222) (1,618) (2,574) (596) (517) (3,174)
Net Loans and advances 63,513 33,944 34,463 31,627 5,187 28,558 48,178 13,031 16,633 64,416
Net fixed assets 1,449 749 452 565 144 382 685 145 290 950
Other assets 2,355 1,813 1,162 641 95 1,404 1,936 292 1,015 2,328
Total Assets 130,414 74,247 59,674 57,925 10,722 63,336 94,939 28,544 33,444 77,855
Due to banks and other FI's 13,974 11,924 4,171 5,663 837 9,821 13,119 3,971 4,427 1,053
Customers' deposits 98,752 49,742 47,704 44,666 8,142 46,316 67,045 20,285 23,857 63,572
Other liabilities 3,913 3,534 2,282 2,211 255 2,405 5,296 778 2,269 4,694
Total Liabilities 116,640 65,200 54,157 52,540 9,234 58,541 85,460 25,034 30,553 69,319
Share capital 6,000 4,000 2,250 2,500 750 2,000 4,000 1,375 1,260 2,250
Statutory reserve 3,737 4,000 2,250 2,409 360 2,000 4,000 1,184 1,260 2,250
Other reserves 3,312 71 1,010 166 295 777 314 948 364 1,400
Retained Earnings 725 975 7 310 83 18 1,164 3 6 2,636
Total Shareholders' Equity 13,774 9,047 5,517 5,385 1,488 4,794 9,479 3,509 2,890 8,536
Total Liabilities and Equity 130,414 74,247 59,674 57,925 10,722 63,336 94,939 28,544 33,444 77,855
* Al Rajhi’s balance sheet was reclassified for appropriate comparison.
Source: Tadawul and respective banks’ websites
Assets concentrated among top-5…
According to the 2004 data, NCB had the largest asset size amongst all Saudi banks with total
assets amounting to SR130.4bn which represented a market share of 20.7%.
SAMBA, the largest listed bank in terms of asset size, with total assets of SR94.94bn was
ranked second with a market share of 15% followed by Al Rajhi Corp. with 12.3% market
share. Al Jazira Bank is the smallest bank with total assets amounting to SR10.72bn and a
market share of 1.7%.

Table 5: Saudi Banks’ Market Share

2002 2003 2004 2002 2003 2004 2002 2003 2004
National Commercial Bank (NCB) 21.5% 21.7% 20.7% 23.1% 22.4% 21.0% 18.4% 18.5% 18.8%
Banque Saudi Fransi (BSF) 9.0% 9.9% 9.5% 9.8% 10.6% 10.1% 9.1% 9.9% 9.8%
Al Rajhi Banking and Investment
11.9% 12.0% 12.3% 12.3% 12.2% 13.5% 21.2% 20.4% 19.3%
Corporation (ALRAJHI)
Arab National Bank (ANB) 8.9% 9.1% 10.0% 7.6% 8.4% 9.9% 7.0% 7.5% 8.3%
Bank Al Jazira (BJAZ) 1.1% 1.7% 1.7% 1.1% 1.9% 1.7% 1.0% 1.7% 1.5%
Riyadh Bank (RIBL) 13.5% 13.2% 11.8% 11.7% 11.4% 10.6% 10.4% 10.4% 10.0%
Saudi American Bank (SAMBA) 15.4% 14.6% 15.0% 15.9% 15.3% 14.3% 14.9% 13.0% 14.5%
Saudi Hollandi Bank (SHB) 5.4% 5.2% 5.3% 5.0% 5.4% 5.1% 5.3% 5.2% 4.9%
Saudi British Bank (SABB) 9.3% 8.5% 9.2% 9.5% 8.9% 9.5% 8.9% 9.7% 9.1%
The Saudi Investment Bank (SAIB) 4.0% 4.0% 4.5% 3.8% 3.6% 4.3% 3.9% 3.8% 3.9%
Source: Tadawul and respective banks’ websites
Peer Group’s Credit Portfolio
In 2004, Saudi listed banks, including NCB, had a net aggregate credit portfolio of SR350.9bn
which represented almost 55.6% of the aggregate total assets of the Saudi banking system. Al
Rajhi bank had the largest market share of 19.3% with net loans and advances amounting to
SR67.6bn. NCB had the second largest loan portfolio with a market share of 18.8% followed
by SAMBA and Riyad Bank.
Conservative provisioning…..
Saudi banks follow a conservative policy regarding provisioning for loan losses. In 2004,
the average coverage ratio (PLLs-to-NPLs) was 177.2% with all the banks having coverage
ratios of more than 100%. Al Rajhi Banking and Investment Corp had the highest coverage
ratio of 333.8% followed by Riyad Bank with 303.8% coverage. SAMBA and Al Jazira Bank
had the lowest coverage ratios within the peer group with 102.9% and 111.8% respectively.
Total non-performing loans of the listed banks amounted to SR6.4bn which represented 2.3%
of the banks’ aggregate loan portfolio at the end of year 2004. SAMBA had the highest non-
performing loans (NPLs) amongst the peer group, representing 39% of the sector’s total
NPLs and 4.9% of the bank’s gross loans, which is the highest in the sector. Al Rajhi had the
second highest share of non-performing loans amounting to SR951mn in 2004.
Table 6: Credit Quality Ratios for Listed Banks in FY2004

Credit Quality Riyad Fransi British Jazira ANB SAMBA SAIB Holandi Al-Rajhi
- Non Performing Loans (SR mn) 433 480 366 199 890 2,502 219 370 951
- Provision for loan losses (SR mn) 1,314 847 496 222 1,618 2,574 596 517 3,174
- NPL's /Gross Loans 1.2% 1.4% 1.1% 3.7% 3.0% 4.9% 1.6% 2.2% 1.4%
- PLL's / Gross Loans 3.7% 2.4% 1.5% 4.1% 5.4% 5.1% 4.4% 3.0% 4.6%
- NPL Coverage 303.8% 176.4% 135.8% 111.8% 181.7% 102.9% 272.8% 139.9% 333.8%

Adequate Loans to Deposits Ratio…
Customers’ deposits remained the main source of funding for Saudi banks, providing more
than 74% of their total assets. Aggregate total customers’ deposits, which amounted to
SR470.08bn at the end of 2004 increased at a CAGR of 10.1% between the period 2000-04.
The slow growth rate in customers’ deposits was a result of the general decline in the interest
rates and the increasing preference of Saudi customers to invest their money in the Saudi
stock market in expectations of high returns.
Table 7: Financial Indicators

Riyad Fransi British Jazira ANB SAMBA SAIB Holandi Al-Rajhi
- Return on average assets 2.8% 2.7% 3.1% 1.9% 2.1% 2.9% 2.3% 2.4% 4.1%
- Return on average equity 22.8% 29.1% 32.3% 15.8% 26.6% 27.3% 19.1% 27.3% 37.2%
- Net commission income after
68.8% 69.4% 65.9% 5.9% 74.3% 72.4% 51.8% 63.9% 75.7%
PLL's/ Total op. income
- Non-commission income/
31.2% 30.6% 34.1% 94.1% 25.7% 27.6% 48.2% 36.1% 24.3%
Total op. income
- Net (or profit) margin 59.7% 70.0% 65.6% 42.9% 55.4% 65.5% 66.5% 59.3% 67.8%
- Commission expense/
21.6% 24.7% 22.6% 40.8% 23.2% 21.4% 40.1% 30.8% 0.0%
Commission income
- Spread 3.5% 3.1% 3.4% 2.2% 3.7% 3.7% 2.3% 3.0% 6.5%
- Dividend Payout Ratio 74.1% 61.1% 91.1% 47.1% 33.0% 69.3% 17.0% 53.5% 56.2%
- Cost to Total Operating
40.3% 30.0% 34.4% 57.0% 44.6% 34.5% 33.5% 40.7% 32.2%
Income
- Staff Expenses to Total
22.3% 16.0% 21.7% 28.0% 27.0% 21.1% 18.9% 25.1% 15.5%
Operating Income
Liquidity
- Gross Loans/ Customer
70.9% 74.0% 71.9% 66.4% 65.2% 75.7% 67.2% 71.9% 107.4%
Deposits
- Customer Deposits/ Total
67.0% 79.9% 77.1% 75.9% 73.1% 70.6% 71.1% 71.3% 81.7%
assets
Capital Adequacy
- Equity/ Total Assets (Equity
12.2% 9.2% 9.3% 13.9% 7.6% 10.0% 12.3% 8.6% 11.0%
capital ratio)
- Equity/ Gross Loans 25.7% 15.6% 16.8% 27.5% 15.9% 18.7% 25.8% 16.9% 12.5%
- Tier 1 capital ratio 17.7% 12.6% 14.0% 20.8% 14.2% 14.6% 21.0% 12.5% 18.8%
- Tier 2 capital ratio 20.1% 12.6% 14.2% 21.3% 15.4% 15.9% 22.2% 16.7% 24.0%
NCB, had the largest market share of deposits of 21% amongst its peer group followed by
SAMBA, Al Rajhi Corp., Riyad Bank, and BSF with 14.3%, 13.5%, 10.6%, and 10.1%
market shares respectively. The year 2004 saw the loans-to-deposits ratio improve to 74.7%
from 50% in 2000. This increase in the loans-to-deposits ratio was a result of the increase in
loans, which grew at a CAGR of 16.2%. Most of the increase in the peer group’s aggregate
loan portfolio was a result of expanding consumer and personal lending rather than corporate
lending due to high liquidity in the market and lower interest rates. SAMA closely monitors
the banks’ loans-to-deposits ratio and sets an optional ceiling of 60%.

Al Rajhi Corp., the sole Islamic Bank in the Kingdom, had the largest gross loans-to-
customers’ deposits ratio amongst the peer group followed by SAMBA and BSF with 75.7%
and 74% respectively in 2004. However, the high ratio for Al Rajhi Bank is primarily due
to the mutajara deals with SAMA and if this is taken into account, the ratio will be less than
the industry average. ANB had the lowest ratio of 65.2% as compared to a sector average of
74.7% ratio for the same year.
Highly capitalized…..
Saudi banks are adequately capitalized by international standards. The average tier-1 capital
ratio for the listed banks at the end of year 2004 stood at 16.2% with a maximum of 21%
for SAIB and a minimum of 12.5% for the Saudi Hollandi Bank. The average equity to total
assets ratio for the peer group was 10.2% at the end of 2004 with Bank AlJazira reported the
highest average equity to total assets ratio of 13.9%.
The peer group’s average equity-to-gross loans was 18.4% with Bank AlJazira reported the
highest ratio amongst the peer group of 27.5% compared to Al Rajhi Corp. which reported
the smallest ratio of 12.5%. With most of the Saudi banks currently expanding their loan
portfolio especially by targeting the retail banking business, these ratios are expected to
decline considerably in the short-term horizon.
… and profitable too….
The peer group’s profitability measures improved in 2004 as a result of flourishing economic
conditions caused by high oil revenue, higher government expenditure and subsequently
greater private sector activity, hence increasing the domestic liquidity. Saudi listed banks,
including NCB, achieved a 41% increase in their net income in 2004 compared to 16.5%
increase in 2003. Aggregate net income for the listed banks amounted to SR16.83bn in 2004.
The sector’s average ROAA and ROAE consequently increased from 2.4% and 23.6% in
2003 to 2.7% and 26.4% in 2004 respectively. Al Rajhi Corp. had the highest ROAA and
ROAE amongst the listed banks of 4.1% and 37.2% respectively followed by SABB with
3.1% and 32.3% respectively.

Riyad Fransi British Jazira ANB SAMBA SAIB Holandi Al-Rajhi
No. of Branches 196 60 61 16 116 65 17 40 383
No. of Employees 3,557 1,555 2,020 766 2,491 2,421 569 1,307 5,711
Operating Income (Net of
3,362 2,193 2,494 438 2,107 4,901 883 1,253 4,332
Provisions) (SR mn)
Operating Expenses (SR mn) 1,356 657 859 250 940 1,463 296 510 1,396
Operating Profit (SR mn) 2,006 1,536 1,636 188 1,167 3,438 587 743 2,936
Operating Income Per
945,044 1,410,438 1,234,892 571,803 845,725 2,024,494 1,552,548 958,531 758,449
Employee
Operating Expense Per
381,198 422,701 425,068 325,795 377,318 604,296 520,738 390,283 244,371
Employee
Operating Profit Per
563,846 987,737 809,824 246,008 468,406 1,420,198 1,031,810 568,248 514,078
Employee

Net commission income represented 60.9% of the Saudi banks’ total operating income while
non-commission income represented 39.1% on average. With the declining interest rate
environment, Saudi banks started to diversify their income drivers by targeting the retail
banking segment more vis-à-vis the corporate as it offers higher returns with comparatively
lower risks.
Bank Al Jazira had the highest non-commission income contribution to total operating income
(94.1%) amongst the peer group followed by SHB with 36.1%. Al Rajhi Corp. is a unique in
this comparison as its net investment income contributed 75.7% of the total operating income
since all of its customers’ deposits are non-commission bearing current accounts.
Table 9: Comparative Income Statements for Saudi Banks (2004)

Al
SR mn’ NCB Riyad Fransi SABB Jazira ANB SAMBA SAIB Hollandi
Rajhi #
Special commission income 5,645 3,072 2,112 2,200 317 2,456 3,755 981 1,315 4,141
Special commission expense (1,110) (664) (522) (496) (129) (570) (802) (393) (405) 0
Net special commission income 4,535 2,408 1,590 1,704 188 1,886 2,954 588 911 4,141
Fees from banking services 987 612 465 674 299 422 797 335 353 697
Exchange income 155 74 81 101 3 93 124 14 52 243
Net trading income 241 305 110 0 32 9 83 0 47 0
Dividend income 49 0 1 2 16 1 0 16 0 0
Net gains on investments 2 38 4 64 53 8 34 60 0 18
Other operating income 0 21 9 9 9 8 17 0 0 93
Total non-commission income 1,434 1,050 671 851 412 542 1,056 426 452 1,051
Provision for loan losses (383) (97) (68) (61) (162) (321) (183) (130) (109) (860)
Net operating income 5,586 3,362 2,193 2,494 438 2,107 3,826 883 1,253 4,332
Salaries & employee related
(1,075) (750) (350) (542) (123) (569) (807) (167) (315) (651)
expenses
Rent & premises related
(128) (92) (56) (46) (18) (56) (119) (27) (39) (110)
expenses
Depreciation and amortization (160) (145) (64) (65) (18) (60) (95) (17) (46) (155)
Other G & A expenses (577) (358) (176) (203) (84) (248) (300) (85) (111) (477)
Impairment of other financial
(7) 0 0 0 0 0 0 0 0 0
assets, net
Other operating expenses (108) (11) (12) (2) (7) (7) 0 0 0 (2)
Total operating expenses (2,055) (1,356) (657) (859) (250) (940) (1,321) (296) (510) (1,396)
Income before minoity interest 3,531 2,006 1,536 1,636 189 1,167 2,506 587 743 2,936
Minority interest 0 0 0 0 1 0 0 0 0 0
Net Income 3,531 2,006 1,536 1,636 188 1,167 2,506 587 743 2,936
Source: Respective banks’ financial statements
# Al Rajhi Commission income refers to the investment income
Bank Shares on the Saudi Stock Exchange – Rising with the tide
Currently there are 9 banks listed on the Saudi securities exchange. By the end of 2004, the
banking sector’s market capitalization was SR347.8bn representing 30.3% of the total market
capitalization of the stock exchange. Saudi banking shares, though, have a very low share of
the market’s total traded volume with only 0.9% of the total volume traded on the exchange in
2004. This is mainly due to the fact that a number of these banks have very small free float.

Fig. 4: Market Cap. By Sector (1Q05) Fig. 5: Banking Sector Market Cap. (1Q05)
Insurance Agriculture SAMBA

0.3% 0.3%
Telecom 21%
17.3% Al- Rajhi
Banking 26%
Electricity 28.0%
6.4%
Services ANB
2.8% 8%
Cement Riyad
3.9% 12%
SABB
12% BJAZ
BSF SAIB 2%
Industry SHB
10% 4%
40.9% 4%
Source: Tadawul & Global Research
Within the banking sector, at the end of 2004, Al Rajhi Corporation had the largest market
capitalization of SR90.2bn which represented 25.9% of the banking sector’s capitalization
and 7.9% of the market’s total capitalization at the end of 2004. SAMBA, Riyad Bank, and
SABB followed Al Rajhi Corporation with 18.4 %, 13.8%, and 11.6% of the banking sector’s
capitalization respectively. Bank Al Jazira, the smallest bank in the Kingdom, was last with
1.7% of the sector’s capitalization.
At the end of 1Q05, the market capitalization of the Saudi banking sector further soared to
SR413.1bn. The combined market capitalization of the banking sector constituted 28% of
the total market capitalization which amounted to SR1,474.96bn at the end of March-2005.
AlRajhi was again the leader in terms of market capitalization (SR104.9bn) followed by
SAMBA with the market capitalization of SR83.9bn at the end of 1Q05.
In terms of returns, the Banking Sector Index (SABNK) has grown at a CAGR of 14.1%
during 1994-2003 compared to 14.8% for the Tadawul All-Share Index (TASI). By the
end of 2004, SABNK had recorded a whopping 97% yearly gain as compared to 84.9%
for TASI regardless of the adjustments that took place for most of the banks’ share prices
during this period as a result of bonus shares issuance. The outstanding financial results of
the Saudi banks in 2004 have increased the demand for their shares, and further increasing
their prices.
There is also news that the citizens of the Gulf Cooperation Council states will be given equal
treatment in purchasing and exchanging Saudi stocks, including shares of banks, insurance
companies and real estate firms. We believe that this is a positive move and will improve the
liquidity profile of the banking stocks. We believe that the Saudi bank’s shares are one of the
most sought after by the new investors which will help in generating further momentum in
the stock markets.

Saudi Banking Sector Outlook

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

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

Summary of Recommendations
We project the net commission income of the bank to show strong growth in 2005 as we
lowest commission expense/commission income ratio which will continue to provide it with
one of the highest spreads among the conventional banks in Saudi Arabia. The bank has been
making a conscious effort to increase its market in the retail banking business especially in
the high-margin consumer financing business. The increased investment banking activity and
project financing (especially in the infrastructure sector) is likely to increase its fee income.
The estimated fair value of SAMBA’s stock works out to SR812.1 based on DDM and peer
the stock. We expect SAMBA to post healthy growth in its net profits in 2005 and 2006 as
the growth outlook for Saudi economy and banking industry remains positive. Hence, we
Table 10: Recommendation Summary

Name of Bank Reuters CMP * M-Cap* RoAA RoAE P/E* P/BV* Composite Potential Recomm-
Code Share Upside/ endation
Value Downside
(SR) (SR bn) (SR)
SAMBA Financial
1090.SE 734.8 88.2 2.9% 27.3% 23.5 6.2 812.1 10.5% BUY
Group
Al Rajhi Banking &
1120.SE 1,492.0 134.3 4.1% 37.2% 22.9 7.9 1,484.0 -0.5% HOLD
Inv. Corp.
Riyad Bank 1010.SE 630.0 63.0 2.8% 22.8% 25.1 5.6 651.1 3.3% HOLD
Arab National Bank 1080.SE 786.0 39.3 2.1% 26.6% 26.9 6.6 885.2 12.6% BUY
The Saudi British Bank 1060.SE 1,130.0 56.5 3.1% 32.3% 34.6 10.5 1,083.4 -4.1% HOLD
Saudi Hollandi Bank 1040.SE 845.0 21.3 2.4% 27.3% 28.6 7.4 944.9 11.8% BUY
The Saudi Investment

1030.SE 643.0 22.1 2.3% 19.1% 30.2 5.0 659.6 2.6% HOLD
Bank
NOT NOT NOT
Banque Saudi Fransi 1050.SE 1,129.5 50.6 2.7% 29.1% 33.1 9.3
RATED RATED RATED
NOT NOT NOT
Bank Al Jazira 1020.SE 677.5 10.2 1.9% 15.8% 54.1 6.8
RATED RATED RATED
* As on April 24, 2005.
Source: Bank’s financial statements, Tadawul and Global Research

Al Rajhi Banking & Investment Corp is planning to expand overseas and has got Islamic
banking license to operate in Malaysia. However, entry of new players in Saudi banking
sector and conversion of NCB will increase competition in the Islamic banking sector. High
growth in the Saudi economy and the government’s intention to increase infrastructure
growth opportunities in project financing. The estimated fair value of ALRAJHI’s stock
works out to SR1,484 based on DDM valuation, which is lower by around 0.5% vis-à-vis
the current market price of the stock. Though the fundamentals of the bank remain strong,
Riyad Bank
Riyad Bank’s assets reported a modest 3.8% yearly growth in 2004 (lower than our expected
growth), aggregating to SR74.25bn. The gross loans and advances increased by 21.4% during
the same period and amounted to SR34.8bn at the end of 2004. However, Non-performing
loans (NPLs) in 2004 amounted to SR432.6mn compared to SR651mn in 2003. The NPLs
to Gross Loans ratio has declined from 2.2% in 2003 to 1.2% in 2004 which is one of the
lowest in Saudi banking sector. Riyad Bank has a comfortable loans-to-deposits ratios which
would allow it to further expand its loan portfolio especially in the consumer and personal
lending. We expect the bank to increase its market share in term of assets as it introduces
new deposits as well as loan products. The estimated fair value of Riyad Bank’s stock works
Arab National Bank
ANB has been a front-runner in adopting newer technologies and has made substantial
investments in upgrading its IT infrastructure. ANB secured a three-year syndicated loan
worth US$350mn, strengthening its balance sheet for possible opportunities in long-term
project financing. ANB reported a net profit of SR1.16bn for the year 2004, a strong growth
of 52.2% as compared to the previous year, which exceeded our expectations. Although the
bank has done a good job in reducing its NPL ratio, we expect it to further go down. The
bank is likely to post strong growth in its non-commission income and take advantage of the
booming economy to increase its investments and trading income. The estimated fair value of
ANB’s stock works out to SR885.2 based on DDM and peer group valuation method, which
is up by around 12.6% vis-à-vis the current market price of the stock. Hence, we revise of our
earlier rating of ‘Hold” and recommend a ‘Buy’ on the stock with medium term perspective.

The bank started the implementation of its strategic plan for 2005-2007 which includes the
in light of the growing demand for this kind of services. SABB reported a net profit of
SR1.63bn for the year 2004, up 30% from the previous year’s profit of SR1.25bn. However,
the bank’s net profit did not meet our expectations. On the back of strong growth in the non-
interest income as well as increase in its spreads, the bank is likely to remain one of the most
profitable banks in the Kingdom. The bank is likely to be among the leaders in the corporate
banking business in Saudi Arabia as it has a large base of blue-chip corporate clientele. The
estimated fair value of SABB’s stock now works out to SR1083.4 based on DDM and peer
group valuation method, which is down by around 4.1% vis-à-vis the current market price of
the stock. Hence, we reiterate our earlier rating and recommend a ‘Hold’ on the stock.
Saudi Hollandi Bank
The net commission income did not exhibit a strong growth as other Saudi banks as it
increased by only 7.7% in 2004. The bank also witnessed declining interest spreads from
3.2% in 2003 to 3.0% in 2004. However, we believe that the bank’s loan to deposits ratio
is likely to increase to more than 75% in medium term as it expands its lending activities.
The net commission income of the bank is expected to show strong growth as it increases
lending to the high-margin retail lending segment. The bank has been aggressively marketing
its “Fourijat” and “Al Tawarruq” consumer loans, which is likely to be instrumental in
strengthening the bank’s customer base. We have revised upwards our earlier projections and
now the estimated fair value of SHB’s stock works out to SR944.9 based on DDM and peer
the stock. Hence, we reiterate our earlier rating and recommend a ‘Buy’ on the stock.
The bank has traditionally focused on corporate banking activities but has changed its strategy
in the last couple of years to concentrate more on retail banking and has therefore entered the
retail banking business of credit cards, leasing and consumer lending. Capital Intelligence,
in its latest review, placed SAIB on a Positive Outlook, while maintaining the bank’s current
ratings. The net commission income saw a growth of 15.8% in 2004 helped by the upward
which hinders its deposit taking capabilities. The estimated fair value of SAIB’s stock works
recommend a ‘Hold” on the stock.


PLAYERS PROFILES


1090.SE
Listing:
Saudi Stock Exchange BUY
Current Price
SR734.75
Key Data
EPS (SR) 31.3 12M Avg. daily vol. 107,042
BVPS (SR) 118.5 52 week Lo / Hi SR292/SR749.5
P / E (x) 23.5 Market Cap SR88.2bn
P / BV (x) 6.2 Target Price SR812.1
Background
• SAMBA Financial Group (SAMBA) was established on 12 February 1980 to take over
the then existing Citibank branches in Riyadh and Jeddah which had established presence
in Saudi Arabia since 1955. In 1999 United Saudi Bank (USB) merged with SAMBA to
create one of the largest banks in the Middle East.
• SAMBA is one of the largest banks in Saudi Arabia in terms of total assets, having a
market share of 15% of the total banking assets in 2004. SAMBA had 14.3% market share
in terms of the total banking deposits in 2004. The bank currently has 65 branches with
2,421 employees and around 318 ATMs in the Kingdom and one branch in London.
• SAMBA is considered to be one of the biggest banking brands with strong customer
loyalty. It has been rated as the Best Banking Brand in the GCC by the Gulf Marketing
Review. The bank plans to ride on this brand franchise to stop the decline in its market
share for banking assets by aggressively marketing its product portfolio. The bank has
been able to retain its #2 ranking in terms of asset size despite its relatively smaller branch
network (65 branches) which is indicative of its successful marketing of its brand.
• The shareholding pattern of SAMBA is widely distributed with more than 96% of the
shares in the hands of the Saudi investors. Earlier Citibank had a 20% stake in the bank
but in 2Q04 Citibank sold its entire stake to the government-owned Public Investment
Fund. Currently SAMBA has 120mn shares outstanding after it awarded 1:2 bonus shares
which increased its capital to SR6bn.
Recent Developments
• SAMBA has been a major player in financing the government and quasi-government
projects. Recently, National Commercial Bank (NCB) and Samba Financial Group signed

a SR10.4bn (US$2.77bn) Guarantee Facility Agreement with the Etisalat Consortium

to cover 80% of the SR12.94bn ($3.45bn) license fee that it bid recently to win the
Kingdom’s second GSM mobile license and third generation (3G) license.
• The bank acted as the lead manager of the initial public share offerings in Ettihad Etisalat
(2nd telecom player in Saudi Arabia), Sahara Petrochemicals and Bank AlBilad.
• The bank launched 4 international sector-based funds, Al Fareed Fund (local market)
and Al Raed Fund (Islamic fund) that increased the number of SAMBA-managed mutual
funds to 24.
• The bank acted as the financial advisor to the Saudi Arabian Fertilizer Co. (SAFCO), an
affiliate of Saudi Basic Industries Corporation (SABIC) and helped it enter into a loan
agreement with a consortium of local and Gulf banks to the tune of SR1.24bn (US$330mn)
for the construction of its fourth fertilizer plant in Al- Jubail Industrial City.
• The bank became the first e-commerce acquirer in the Kingdom, enabling local merchants
to offer online purchase facilities, fully protected by Visa International’s latest e-security
programme.
• The commission income of the bank increased by 16.7% during 2004 as compared to the
previous year mainly as the result of the rise in the interest rates. Commission expense too
increased but at a lower rate of 5.3% during the same period. The bank has a significant
chunk of non-interest bearing deposits which is going to positively affect the net interest
income in the future as the interest rates are expected to move up further.
• The net commission income during the period increased by 20.3% to SR2.95bn as against
SR2.45bn in the previous fiscal.
• Helped by underwriting commissions, fees and commissions income were higher by a

whopping 95.2% as compared to the same period last year.
• The bank reported trading income of SR82.8mn during the period. Net gain from forex
transactions stood at SR124.1mn in 2004. On the back of improved net commission
income and fee from banking services, the total operating income increased by 40.9% to
SR3.83mn. SAMBA reported a net income of SR2.50bn in 2004 as compared to SR1.43bn
recorded in the previous year, representing a large increase of 74.4%.
• SAMBA’s total assets stood at SR94.94bn at the end of 2004, representing an increase of
20.1% over Dec 2003. Despite the stiff competition, deposits from customers increased
by 11% during the period over Dec 2003.
• SAMBA had to make huge provision in 2003 which affected its profitability. The bank
increased its provisions from SR101.32mn in 2002 to SR621.75mn in 2003 which the
management indicated was a one-time provisioning. The bank again came back to the
normal level of provisioning in 2004.

• The bank’s gross loans increased from SR37.4bn in 2004 to SR50.8bn in 2004. The
bank is trying to improve its credit quality and has been writing off loans off its books.
NPL’s-to-gross loans declined from 7.2% in 2003 to 4.9% in 2004 and PLLs-to-gross
loans increased from 5.6% in 2002 to 6.6% in 2003 but declined to 5.1% in 2004. NPL
coverage ratio improved from 90.8% in 2003 to 102.9% in 2004.
• The bank capitalization ratios, though lower than the industry average, are still at
comfortable levels as compared to the international standards. The bank’s tier-1 ratio
stood at 14.6% in 2004. The bank has also decided to augment its capital base from
SR4bn to SR6bn through the issue of bonus shares which will make it one of the highest
capitalized bank in the country.
• As a result of the increase in the net income, both the ROAA and ROE surged and the
bank reported an ROAA of 2.9% for the year 2004. SAMBA’s ROAE also increased
from 21.5% in 2002 to 27.3% in 2004. However, the bank has maintained the dividend
payout ratio of 92% till 2003.
• SAMBA announced record net income of SR816mn for the quarter ended 31 March
2005.
Outlook
• We project the net commission income of the bank to show strong growth in 2005 as we
lowest commission expense/commission income ratio which will continue to provide it
with one of the highest spreads among the conventional banks in Saudi Arabia.
• SAMBA is expected to continue its focus on improving operating efficiency and asset
quality. The bank has been making a conscious effort to increase its market in the retail
banking business especially in the high-margin consumer financing business.
• The increased investment banking activity and project financing (especially in the
infrastructure sector) is likely to increase its fee income.
Valuation
• Currently, SAMBA is trading at 7.1x of its estimated book value and 24.2x of its estimated
earnings of 2005.
• The estimated fair value of SAMBA’s stock works out to SR812.1 based on DDM and
peer group valuation method, which is up by around 10.5% vis-à-vis the current market
price of the stock.
• We expect SAMBA to post healthy growth in its net profits in 2005 and 2006 as the
growth outlook for Saudi economy and banking industry remains positive. Hence, we

Balance Sheet
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & Balances with SAMA 4,142.8 5,001.2 3,007.5 3,018.6 4,627.3 3,491.9 3,875.3
Due from Banks and other FIs 4,122.7 2,823.6 2,442.9 1,832.2 2,015.4 2,216.9 2,438.6
Trading Investments 0.9 847.3 1,171.8 1,487.8 1,740.9 1,951.0 2,187.5
Non-trading Investments 31,646.2 33,028.3 37,517.7 39,884.4 41,741.5 43,627.1 45,620.5
Net Loans and Advances 34,231.7 34,918.3 48,177.7 62,848.2 72,043.0 79,054.0 85,289.2
Net Fixed Assets 713.7 697.7 685.1 711.3 731.4 753.0 776.3
Other Assets 1,503.9 1,721.1 1,936.0 2,032.8 2,134.4 2,241.2 2,353.2
Total Assets 76,361.9 79,037.6 94,938.7 111,815.2 125,034.0 133,335.1 142,540.6
Due to Banks and other FIs 5,807.9 7,212.8 13,119.2 13,389.6 13,665.9 13,948.0 14,236.3
Customers' Deposits 58,751.2 60,410.8 67,044.7 80,277.2 91,775.1 99,110.5 107,235.8
Term Loan 0.0 0.0 2,250.0 2,250.0 2,250.0 2,250.0 2,250.0
Other Liabilities 2,893.7 2,535.9 3,045.9 3,502.8 3,853.1 4,238.4 4,662.2
Share Capital 4,000.0 4,000.0 4,000.0 6,000.0 6,000.0 6,000.0 6,000.0
Statutory Reserve 4,002.0 4,001.9 4,000.0 4,910.3 6,000.0 6,000.0 6,000.0
Other Reserves 644.7 482.9 314.4 317.2 317.2 609.5 970.4
Retained Earnings 262.4 393.3 1,164.4 1,168.1 1,172.9 1,178.7 1,185.9
Total Shareholders' Equity 8,909.1 8,878.1 9,478.9 12,395.6 13,490.0 13,788.2 14,156.3
Total Liabilities and
76,361.9 79,037.6 94,938.7 111,815.2 125,034.0 133,335.1 142,540.6
Shareholders' Equity

Operating Statement
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special commission income 3,466.6 3,217.6 3,755.5 4,850.7 5,970.1 6,675.2 7,545.7
Special commission expense (1,084.4) (761.9) (802.0) (970.1) (1,194.0) (1,335.0) (1,546.9)
Net special commission income 2,382.2 2,455.7 2,953.5 3,880.6 4,776.1 5,340.2 5,998.9
Fees from banking services 360.5 408.6 797.5 1,196.2 1,614.9 2,180.1 2,943.2
Exchange income 113.7 125.6 124.1 125.3 126.6 127.8 129.1
Net trading income (3.5) 54.9 82.8 95.2 109.5 126.0 144.8
Dividend income 0.0 0.3 0.2 0.1 0.1 0.1 0.1
Net gains on investments 271.2 285.0 34.1 39.2 47.0 70.5 105.7
Other operating income 17.4 6.8 17.3 18.2 19.1 20.1 21.1
Total non-commission income 759.3 881.3 1,055.9 1,474.2 1,917.2 2,524.6 3,344.1
Provision for loan losses (101.3) (621.7) (183.0) (250.3) (295.3) (346.6) (366.4)
Total operating income 3,040.1 2,715.2 3,826.5 5,104.5 6,397.9 7,518.2 8,976.5
Salaries & employee related expenses (713.4) (742.3) (807.4) (888.2) (959.2) (1,007.2) (1,057.5)
Rent & premises related expenses (100.8) (101.1) (119.0) (142.8) (157.0) (164.9) (173.1)
Depreciation and amortization (85.9) (87.8) (94.5) (102.6) (110.3) (118.5) (127.4)
Other G & A expenses (235.0) (343.2) (299.8) (329.8) (362.8) (380.9) (400.0)
Other operating expenses (47.8) (4.3) 0.0 0.0 0.0 0.0 0.0
Total operating expenses (1,182.8) (1,278.6) (1,320.6) (1,463.2) (1,589.2) (1,671.4) (1,758.0)
Net Income 1,857.3 1,436.6 2,505.8 3,641.3 4,808.7 5,846.7 7,218.6
Statement of Retained Earnings 2002 2003 2004 2005F 2006F 2007F 2008F
Beginning retained earnings 89.2 262.4 393.3 1,164.4 1,168.1 1,172.9 1,178.7
Net income 1,857.3 1,436.6 2,505.7 3,641.3 4,808.7 5,846.7 7,218.6
Transfer to statutory reserve 0.0 0.1 1.9 (910.3) (1,089.6) 0.0 0.0
Transfer to other reserves 0.0 0.0 0.0 (2,002.7) 0.0 (292.3) (360.9)
Gross dividends (1,708.7) (1,321.6) (1,737.7) (724.6) (3,714.3) (5,548.5) (6,850.4)
Net change in fair value 24.6 15.9 1.2 0.0 0.0 0.0 0.0
Ending balance 262.4 393.4 1,164.4 1,168.1 1,172.9 1,178.7 1,185.9

Cash Flow
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net income 1,857.3 1,436.6 2,505.7 3,641.3 4,808.7 5,846.7 7,218.6
Accertion of discounts 82.2 102.8 80.4 0.0 0.0 0.0 0.0
Gains on investments (271.2) (285.0) (34.1) (39.2) (47.0) (70.5) (105.7)
Depreciation and amotization 85.9 87.8 94.5 102.6 110.3 118.5 127.4
Loss/gain on disposal of fixed assets (0.9) (0.7) (3.0) 0.0 0.0 0.0 0.0
Provision for loan losses 101.3 621.7 183.0 250.3 295.3 346.6 366.4
Due from banks and other FI's 5,058.8 1,299.1 380.7 610.7 (183.2) (201.5) (221.7)
Trading portfolio 635.5 (846.4) (324.4) (316.0) (253.1) (210.1) (236.5)
Loans and advances (684.2) (1,308.4) (13,442.4) (14,920.8) (9,490.2) (7,357.5) (6,601.6)
Other assets 97.8 (227.5) (355.7) (96.8) (101.6) (106.7) (112.1)
Due to banks and FI's (505.5) 1,404.9 5,906.4 270.4 276.2 282.2 288.2
Customers deposits (921.8) 1,659.6 6,633.9 13,232.6 11,497.8 7,335.4 8,125.3
Other liabilities 388.8 62.3 149.5 456.9 350.3 385.3 423.8
CF from Operations 5,923.9 4,006.9 1,774.5 3,192.0 7,263.5 6,368.4 9,272.2
Net sale /purchase of investments (2,722.6) (1,335.9) (4,562.7) (2,327.5) (1,810.1) (1,815.1) (1,887.7)
Capex (103.2) (71.0) (78.9) (128.8) (130.4) (140.2) (150.7)
CF from Investing (2,825.8) (1,407.0) (4,641.6) (2,456.3) (1,940.5) (1,955.3) (2,038.4)
Term Loan 0.0 0.0 2,250.0 0.0 0.0 0.0 0.0

Dividend and zakat paid (2,035.6) (1,741.4) (1,376.6) (724.6) (3,714.3) (5,548.5) (6,850.4)
CF from Financing (2,035.6) (1,741.4) 873.4 (724.6) (3,714.3) (5,548.5) (6,850.4)
Change in cash 1,062.6 858.5 (1,993.7) 11.1 1,608.7 (1,135.4) 383.4

Beginning cash 3,080.2 4,142.8 5,001.2 3,007.5 3,018.6 4,627.3 3,491.9
Ending cash 4,142.8 5,001.3 3,007.5 3,018.6 4,627.3 3,491.9 3,875.3

Ratios
Fact Sheet 2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
- Return on average assets 2.4% 1.8% 2.9% 3.5% 4.1% 4.5% 5.2%
- Return on average equity 21.5% 16.2% 27.3% 33.3% 37.2% 42.9% 51.7%
- Net special commission income after PLL's/ Total 75.0% 67.5% 72.4% 71.1% 70.0% 66.4% 62.7%
op. income
- Non-commission income/ Total op. income 25.0% 32.5% 27.6% 28.9% 30.0% 33.6% 37.3%
- Non-commission expense/ Total op. income 38.9% 47.1% 34.5% 28.7% 24.8% 22.2% 19.6%
- Fees from banking services/ Total op. income 11.9% 15.0% 20.8% 23.4% 25.2% 29.0% 32.8%
Margins
- Net (or profit) margin 61.1% 52.9% 65.5% 71.3% 75.2% 77.8% 80.4%
- Special commission expense/ Special commission 31.3% 23.7% 21.4% 20.0% 20.0% 20.0% 20.5%
income
- Yield on average earning assets 4.9% 4.6% 4.7% 5.1% 5.5% 5.6% 5.9%
- Cost rate on average commission bearing liabilities 1.7% 1.2% 1.1% 1.1% 1.2% 1.2% 1.3%
- Spread 3.3% 3.4% 3.7% 4.0% 4.3% 4.4% 4.6%
- Commission margin (earning assets) 3.2% 2.6% 3.5% 3.8% 4.1% 4.2% 4.4%
Efficiency
- Cost/ Total op. income 38.9% 47.1% 34.5% 28.7% 24.8% 22.2% 19.6%
- Staff expenses/ Total Op. Expenses 60.3% 58.1% 61.1% 60.7% 60.4% 60.3% 60.2%
- Rent, G&A expenses/ Total Op. Expenses 28.4% 34.7% 31.7% 32.3% 32.7% 32.7% 32.6%
- Non-commission expense/ Average total assets 1.5% 1.6% 1.5% 1.4% 1.3% 1.3% 1.3%
Liquidity
- Loans / Commission earning assets 52.5% 52.6% 57.9% 63.5% 65.6% 66.7% 67.5%
- Loans/ Customer Deposits 61.7% 61.9% 75.7% 81.8% 81.9% 83.3% 83.1%
- Customer Deposits/ Total assets 76.9% 76.4% 70.6% 71.8% 73.4% 74.3% 75.2%
- Due from Banks/ Due to Banks 71.0% 39.1% 18.6% 13.7% 14.7% 15.9% 17.1%
Credit Quality
- Provisions /Total op. income 3.3% 22.9% 4.8% 4.9% 4.6% 4.6% 4.1%
- Provisions /Average loans 0.3% 1.7% 0.4% 0.4% 0.4% 0.4% 0.4%
- Non Performing Loans (SR mn) 2,878.4 2,701.0 2,502.0 2,948 3,030 3,174 3,428
- Provision for loan losses (SR mn) 2,045.0 2,453.4 2,573.6 2,824 3,119 3,466 3,832
- NPL's /Gross Loans 7.9% 7.2% 4.9% 4.5% 4.0% 3.8% 3.8%
- NPL's /(Equity+provision for loan losses) 26.3% 23.8% 20.8% 19.4% 18.2% 18.4% 19.1%
- PLL's / Gross Loans 5.6% 6.6% 5.1% 4.3% 4.2% 4.2% 4.3%
- NPL Coverage 71.0% 90.8% 102.9% 95.8% 103.0% 109.2% 111.8%
Capital Adequacy
- Equity/ Total Assets (Equity capital ratio) 11.7% 11.2% 10.0% 11.1% 10.8% 10.3% 9.9%
- Equity/ Gross Loans 24.6% 23.8% 18.7% 18.9% 17.9% 16.7% 15.9%
Constitution of Total Operating Income

- Net special commission income after PLL's/ Total 75.0% 67.5% 72.4% 71.1% 70.0% 66.4% 62.7%
op. income
- Investment Income/ Total op. income 8.8% 12.5% 3.1% 2.6% 2.4% 2.6% 2.8%
- FX Income/ Total op. income 3.7% 4.6% 3.2% 2.5% 2.0% 1.7% 1.4%
- Other Income/ Total op. income 0.6% 0.3% 0.5% 0.4% 0.3% 0.3% 0.2%
- PLL's/ Total op. income 3.3% 22.9% 4.8% 4.9% 4.6% 4.6% 4.1%
- Change in special commission income -24.7% -7.2% 16.7% 29.2% 23.1% 11.8% 13.0%
- Change in Fees from banking services -3.1% 13.3% 95.2% 50.0% 35.0% 35.0% 35.0%
- Change in Fx Income 16.4% 10.5% -1.2% 1.0% 1.0% 1.0% 1.0%

- Par value per share (SR) 50.0 50.0 50.0 50.0 50.0 50.0 50.0
- Shares in issue (mn) 80.0 80.0 80.0 120.0 120.0 120.0 120.0
- EPS (SR) 23.2 18.0 31.3 30.3 40.1 48.7 60.2
- DPS (SR) 20.9 16.1 21.7 6.0 31.0 46.2 57.1
- Book value per share (SR) 111.4 111.0 118.5 103.3 112.4 114.9 118.0
- Market price year end (SR) 355.0 394.0 800.0 734.8 734.8 734.8 734.8
- Market Cap. (SRmn) 28,400.0 31,520.0 64,000.0 88,170.0 88,170.0 88,170.0 88,170.0
- P/E 15.3 21.9 25.5 24.2 18.3 15.1 2.2
- P/BV 3.2 3.6 6.8 7.1 6.5 6.4 6.2


1120.SE
Listing:
Saudi Stock Exchange HOLD
Current Price
SR1,492
Key Data
BVPS (SR) 189.7 52 week Lo / Hi SR569/SR1,492
P / BV (x) 7.9 Target Price SR1,484
Background
• The origins of Al Rajhi Banking and Investment Corp. date back to the mid-1900s
when four Al Rajhi brothers started a bullion arbitrage and money-changing business.
In 1978 they amalgamated their money changing operations under Al-Rajhi Company
for Currency Exchange and Commerce, which in 1987 was converted into a joint stock
company and in 1988 the company was developed into Al Rajhi Banking and Investment
Corporation.
• Al Rajhi Banking & Investment Corp. (ALRAJHI) is a full-fledged Islamic Bank providing
wholesale, retail and commercial banking products and services in addition to investment
banking. ALRAJHI is the 3rd largest bank in the Kingdom in term of the total assets,
having a market share of 12.3% of the aggregate banking assets at the end of 2004.
• The bank has one of the largest branch network in the kingdom with 383 branches with
5,711 employees, the largest ATM network (more than 1100 machines) and over 6,000
POS installed all over the Kingdom. The bank is also planning to expand overseas and has
got Islamic banking license to operate in Malaysia.
• ALRAJHI has a share capital of SR4.5bn – 90mn shares outstanding of SR50 par value
wholly owned by Saudi shareholders. The bank is one of the largest capitalized banks in
the country. The bank increased its capital to SR4.5bn by offering one bonus share for
each share outstanding.
• At the end of 2004, ALRAJHI had the largest market capitalization of SR90.2bn, which
represented 25.9% of the total banking sector market capitalization and 7.9% of the total
Saudi market capitalization.

Recent Developments
• ALRAJHI embarked on a major drive to attract more Saudi and expatriate customers to
use its remittance services. The bank has launched a new 'Remittance Discount Card' and
a 'VIP Card' besides ensuring better services, speedy delivery of funds to beneficiaries
and discounted remittance fees for regular customers. The bank, which reported 35%
growth in the volume of remittances last year, currently holds 45% of the market share.
• The bank plans to open about 110 high-tech model branches this year in an effort to
attract high-worth customers.
• The International Convention of Islamic Banks awarded Al Rajhi Banking Investment

Corp. with the “Best Islamic Banking in the World” award for 2004.
• ALRAJHI reported a net profit of SR2.93bn for the year 2004, up 44.1% from the previous
year’s profit of SR2.04bn. The growth in the net profit exceeded our expectations. The
bank maintained its momentum of the previous year when it had notched a growth of
44.2%.
• As a result, the bank boasts of the highest Return on Average Equity (RoAE) and Return
of Average Assets (RoAA) among the Saudi banks at 37.2% and 4.1% respectively.
• The net investment income saw a growth of 17.0% in 2004 helped by the upward
movement in the investment yields.
• The bank has also reported a strong growth in its fee from banking services, up by a
whopping 132.1% in 2004 as compared to the previous year. The bank has been
traditionally very strong in fee-based banking services such as remittances. Also the
bank has a strong branch network which helps it maintain its lead in fee-based retail
activities.
• The bank has done a decent job in reducing its non-performing investments from SR1.25bn
in 2003 to SR950.8mn in 2004. As a result, the NPI to Gross Investments fell from 2.2%
in 2003 to 1.4% in 2004. The bank had the highest coverage ratio among the Saudi banks
at 333.8% as compared to the industry average of 172% in 2004.
• ALRAJHI’s total assets stood at SR77.85bn at the end of 2004, representing an increase
of 20.4% over Dec 2003. The banks has been able to grow its customer deposits by strong
yearly growth of 29% in 2004 taking advantage of its strong branch network. Customer
accounts in 2004 represented 81.7% of the total liabilities as compared to 76.2% in the
previous year.
• ALRAJHI’s net investment showed a solid yearly growth of 18.3% in 2004 on the back
of 67.7% yearly growth in Installment Sales activities. Installment Sales accounted for
39.1% of the total investments in 2004 as compared to 27.9% in 2003.

• The bank’s capitalization ratio in 2004 are among the highest in the banking sector. The
bank’s tier-1 capital ratio at 18.8% is above the industry average of 16.2% while its tier-2
ratio is the highest in the Saudi banking sector at 24%.
• ALRAJHI’s net income for the first-quarter of fiscal year 2005 jumped by 49.6% to reach
SR935.6mn from SR625.3mn for the same period of last year.
Outlook
• The bank is likely to maintain its coverage ratio of more than 300% in the medium term.
• Entry of new players and conversion of NCB will increase competition in the Islamic
banking sector. Almost all the conventional banks are promoting their Islamic banking
products.
• High growth in the Saudi economy and the government’s intention to increase infrastructure
growth opportunities in project financing.
Valuation
• Since our last investment update in Dec-2004, the stock has moved up by more than 60%
to the current SR1,492 (bonus adjusted), justifying our earlier ‘Buy’ recommendation.
• Currently, ALRAJHI is trading at 12.7x of its estimated book value and 32.5x of its
estimated earnings of 2005.
• We have revised upwards our earlier projections due to better FY 2004 results of the
bank, its expansion plans (Malaysia etc.) and improved market conditions. The estimated
fair value of ALRAJHI’s stock works out to SR1,484 based on DDM valuation, which is
lower by around 0.5% vis-à-vis the current market price of the stock.
• Though the fundamentals of the bank remain strong, our valuation lags behind the current
market price of the stock. Hence, we revise our earlier rating and recommend a ‘Hold’
on the stock.

Balance Sheet
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & Balances with SAMA 6,831.3 5,683.9 8,795.9 8,534.8 8,363.4 6,259.2 6,785.2
Due from Banks and other FIs 792.0 796.4 827.1 851.9 877.5 903.8 930.9
Investments Property, other
537.8 373.0 536.8 572.4 611.5 654.5 701.8
AFS Investments
Net Investments 48,743.2 55,027.0 65,089.2 79,932.9 94,072.7 110,888.6 123,932.8
Net Fixed Assets 908.7 891.0 950.3 1,037.9 1,138.6 1,254.5 1,387.7
Other Assets 1,585.4 1,907.1 1,655.4 1,688.5 1,722.3 1,756.8 1,791.9
Total Assets 59,398.5 64,678.3 77,854.8 92,618.5 106,786.0 121,717.3 135,530.3
Due to Banks and other FIs 939.1 638.9 1,052.6 1,263.1 1,389.4 1,528.4 1,681.2
Customers' Accounts 45,495.6 49,268.9 63,572.2 75,121.6 86,552.0 99,651.6 111,747.5
Share Capital 2,250.0 2,250.0 2,250.0 4,500.0 4,500.0 4,500.0 4,500.0
General Reserves 939.4 1,400.0 1,400.0 182.5 730.9 1,444.9 1,882.9
Retained Earnings 1,398.3 1,349.1 2,636.0 2,636.0 2,636.0 2,643.1 2,651.9
Total Liabilities and
59,398.5 64,678.3 77,854.8 92,618.5 106,786.0 121,717.3 135,530.3
Shareholders' Equity

Operating Statement
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special Investment Income 2,884.8 3,537.7 4,140.8 5,385.0 6,552.8 7,849.5 8,922.6
Special Investment Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Special Investment Income 2,884.8 3,537.7 4,140.8 5,385.0 6,552.8 7,849.5 8,922.6
Mudarba Fee 19.3 16.4 27.7 29.9 32.3 33.9 35.6
Fees from Banking services 157.5 288.6 669.8 1,071.7 1,500.3 2,100.5 2,730.6
Exchange Income 193.8 186.7 242.5 247.4 249.9 252.4 254.9
Net gains on Investments 16.7 16.4 18.2 19.6 20.6 21.6 22.7
Other Operating Income 106.6 91.8 92.6 94.5 99.2 104.2 109.4
Total Non-commission Income 493.8 599.9 1,050.8 1,463.1 1,902.3 2,512.6 3,153.2
Provision for Investment Losses (805.0) (865.3) (860.1) (1,033.4) (1,005.5) (1,055.4) (1,014.6)
Total Operating Income 2,573.7 3,272.2 4,331.5 5,814.6 7,449.7 9,306.6 11,061.3
Salaries & Employee related Expenses (622.5) (626.9) (651.2) (716.3) (788.0) (827.4) (868.7)
Rent & Premises related Expenses (85.8) (104.0) (110.4) (126.9) (145.9) (153.2) (160.9)
Depreciation and Amortization (154.7) (164.5) (154.9) (195.0) (224.2) (257.8) (296.5)
Board of Directors Remuneration (2.1) (2.2) (1.9) (2.0) (2.1) (2.2) (2.3)
Other G & A Expenses (295.5) (336.5) (477.2) (644.3) (805.3) (926.1) (972.5)
Total Operating Expenses (1,160.5) (1,234.1) (1,395.6) (1,684.5) (1,965.6) (2,166.8) (2,300.9)
Net Income 1,413.2 2,038.1 2,935.9 4,130.1 5,484.1 7,139.8 8,760.3
Beginning retained earnings 1,280.8 1,398.3 1,349.1 2,636.0 2,636.0 2,636.0 2,643.1
Net Income 1,413.2 2,038.1 2,935.9 4,130.1 5,484.1 7,139.8 8,760.3
Transfer to Statutory Reserve 0.0 0.0 0.0 (1,032.5) (1,217.5) 0.0 0.0
Transfer to other Reserves 0.0 (460.6) 0.0 (1,032.5) (548.4) (714.0) (438.0)
Gross Dividends (1,295.6) (1,626.7) (1,649.0) (2,065.1) (3,718.2) (6,418.7) (8,313.6)
Ending balance 1,398.3 1,349.1 2,636.0 2,636.0 2,636.0 2,643.1 2,651.9

Cash Flow
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net Income 1,413.2 2,038.1 2,935.9 4,130.1 5,484.1 7,139.8 8,760.3
Depreciation and Amotization 154.7 164.5 154.9 195.0 224.2 257.8 296.5
Provision for Investment Losses 805.0 865.3 860.1 1,033.4 1,005.5 1,055.4 1,014.6
Due from Banks and other FIs 11.1 (4.3) (30.8) (24.8) (25.6) (26.3) (27.1)
Investments (6,508.8) (7,149.1) (10,922.2) (15,877.2) (15,145.2) (17,871.3) (14,058.8)
Other Assets 751.7 (321.7) 251.7 (33.1) (33.8) (34.4) (35.1)
Due to Banks and FIs (202.1) (300.2) 413.7 210.5 126.3 138.9 152.8
Customers Deposits 6,011.1 3,773.3 14,303.3 11,549.3 11,430.4 13,099.6 12,096.0
Other Liabilities 1,733.1 1,064.3 (2,849.8) 2,587.8 844.9 971.7 1,117.4
CF from Operations 4,169.0 130.2 5,116.8 3,771.1 3,910.9 4,731.1 9,316.6
Non-trading Investments 187.2 164.9 (163.9) (35.6) (39.1) (43.0) (47.3)

Capital Expenditure (294.6) (146.8) (214.2) (282.6) (324.9) (373.7) (429.7)
CF from Investing (107.4) 18.1 (378.1) (318.1) (364.0) (416.7) (477.0)
Dividend and Zakat paid (1,298.5) (1,295.6) (1,626.7) (3,714.1) (3,718.2) (6,418.7) (8,313.6)
CF from Financing (1,298.5) (1,295.6) (1,626.7) (3,714.1) (3,718.2) (6,418.7) (8,313.6)
Change in Cash 2,763.0 (1,147.3) 3,112.0 (261.1) (171.4) (2,104.3) 526.0

Beginning Cash 4,068.3 6,831.3 5,683.9 8,795.9 8,534.8 8,363.4 6,259.2
Ending Cash 6,831.3 5,683.9 8,795.9 8,534.8 8,363.4 6,259.2 6,785.2

Ratios
2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
- Net Special Investment Income After PIL's/ 80.8% 81.7% 75.7% 74.8% 74.5% 73.0% 71.5%
Total Op. Income
- Non-Investment Income/ Total Op. Income 19.2% 18.3% 24.3% 25.2% 25.5% 27.0% 28.5%
- Non-Investment Expense/ Total Op. Income 45.1% 37.7% 32.2% 29.0% 26.4% 23.3% 20.8%
- Fees From Banking Services/ Total Op. 6.1% 8.8% 15.5% 18.4% 20.1% 22.6% 24.7%
Income
- Dividend Payout Ratio 91.7% 79.8% 56.2% 50.0% 67.8% 89.9% 94.9%
Margins
- Net (Or Profit) Margin 54.9% 62.3% 67.8% 71.0% 73.6% 76.7% 79.2%
- Yield On Average Earning Assets 5.9% 6.4% 6.5% 7.0% 7.1% 7.2% 7.1%
- Spread 5.9% 6.4% 6.5% 7.0% 7.1% 7.2% 7.1%
- Commission Margin (Earning Assets) 4.3% 4.8% 5.1% 5.6% 6.0% 6.2% 6.3%
Efficiency
- Cost/ Total Op. Income 45.1% 37.7% 32.2% 29.0% 26.4% 23.3% 20.8%
- Staff Expenses/ Total Op. Expenses 53.6% 50.8% 46.7% 42.5% 40.1% 38.2% 37.8%
- G&A Expenses/ Total Op. Expenses 32.9% 35.7% 42.1% 45.8% 48.4% 49.8% 49.3%
- Non-Investment Expense/ Average Total 2.1% 2.0% 2.0% 2.0% 2.0% 1.9% 1.8%
Assets
Liquidity
- Investments / Commission Earning Assets 98.5% 98.6% 98.8% 99.0% 99.1% 99.2% 99.3%
- Investments/ Customer Deposits 112.3% 116.7% 107.4% 112.0% 114.7% 117.6% 117.4%
- Customer Deposits/ Equity 665.4% 679.7% 744.8% 708.6% 699.9% 761.4% 825.6%
- Customer Deposits/ Total Assets 76.6% 76.2% 81.7% 81.1% 81.1% 81.9% 82.5%
- Due From Banks/ Due To Banks 84.3% 124.7% 78.6% 67.4% 63.2% 59.1% 55.4%
Credit Quality
- Provisions /Total Op. Income 31.3% 26.4% 19.9% 17.8% 13.5% 11.3% 9.2%
- Provisions /Average Investments 1.7% 1.6% 1.4% 1.4% 1.1% 1.0% 0.8%
- Non Performing Investments (SR mn) 1,631.6 1,246.1 950.8 1,178.0 1,489.3 1,991.7 2,361.9
- Provision For Investments Losses (SR mn) 2,554.8 2,719.9 3,173.6 4,207.0 5,212.5 6,267.9 7,282.4
- NPL's /Gross Investments 3.2% 2.2% 1.4% 1.4% 1.5% 1.7% 1.8%
- NPL's /(Equity+Provision For Investments 17.4% 12.5% 8.1% 8.0% 8.5% 10.3% 11.3%
Losses)
- PLL's / Gross Investments 5.0% 4.7% 4.6% 5.0% 5.3% 5.4% 5.6%
- NPL Coverage 156.6% 218.3% 333.8% 357.1% 350.0% 314.7% 308.3%
Capital Adequacy
- Equity/ Total Assets (Equity Capital Ratio) 11.5% 11.2% 11.0% 11.4% 11.6% 10.8% 10.0%
- Equity/ Gross Investments 13.4% 12.6% 12.5% 12.6% 12.5% 11.2% 10.3%
Constitution Of Total Operating Income

- Net Special Investments Income After PIL's/ 80.8% 81.7% 75.7% 74.8% 74.5% 73.0% 71.5%
Total Op. Income
- Fees From Banking Services/ Total Op. 6.1% 8.8% 15.5% 18.4% 20.1% 22.6% 24.7%
Income
- Investments Income/ Total Op. Income 0.6% 0.5% 0.4% 0.3% 0.3% 0.2% 0.2%
- FX Income/ Total Op. Income 7.5% 5.7% 5.6% 4.3% 3.4% 2.7% 2.3%
- Other Income/ Total Op. Income 4.9% 3.3% 2.1% 1.6% 1.3% 1.1% 1.0%
- Change In Special Investment Income -2.4% 22.6% 17.0% 30.0% 21.7% 19.8% 13.7%
- Change In Fees From Banking Services 50.7% 83.2% 132.1% 60.0% 40.0% 40.0% 30.0%
- Change In Investments Income -33.6% -2.0% 10.9% 8.0% 5.0% 5.0% 5.0%
- Change In Fx Income 19.5% -3.6% 29.9% 2.0% 1.0% 1.0% 1.0%
- Change In Other Income -15.0% -13.9% 0.9% 2.0% 5.0% 5.0% 5.0%

- Par Value Per Share (SR) 50.0 50.0 50.0 50.0 50.0 50.0 50.0
- EPS (SR) 31.4 45.3 65.2 45.9 60.9 79.3 97.3
- DPS (SR) 28.0 35.0 36.6 22.9 41.3 71.3 92.4
- Book Value Per Share (SR) 151.9 161.1 189.7 117.8 137.4 145.4 150.4
- Market Price Year End (SR) 614.0 975.0 2,005.0 1,492.0 1,492.0 1,492.0 1,492.0
- Market Cap. (SR Mn) 27,630.0 43,875.0 90,225.0 134,280.0 134,280.0 134,280.0 134,280.0
- P/E 19.6 21.5 30.7 32.5 24.5 18.8 15.3
- P/BV 4.0 6.1 10.6 12.7 10.9 10.3 9.9

Riyad Bank
1010.SE
Listing:
Current Price
SR630
Key Data
EPS (SR) 25.1 12 M Avg. daily vol. 115,180
BVPS (SR) 113.1 52 week Lo / Hi SR303/SR640
Background
• Riyad Bank was established in November 1957 as a Saudi joint stock company and is
the oldest fully Saudi owned bank. As the bank faced financial difficulties during the
beginning of the 1960s, SAMA, with the approval of the government, acquired a 38%
stake in Riyad Bank to prevent its failure.
• Riyad bank provides a full range of banking services through a network of 195 domestic
branches with 3,557 employees. It also has international operations with a branch in
London, an agency in USA, a representative office in Singapore.
• With total assets of SR74.25bn in 2004, Riyad Bank ranks 4th amongst Saudi commercial
banks, in-terms of asset size and holds a market share of 11.8% of the sector’s aggregate
total assets.
• Saudi individuals and institutions own 71% of its paid up capital while SAMA, together
with the Ministry of Finance owning the remaining 29%.
• Shareholders of Riyad Bank approved the board's recommendation to increase the

capital of the bank from SR4bn to SR5bn by offering one bonus share for each 4 shares
outstanding.
Recent Developments
• The International Finance Corporation, the private sector arm of the World Bank Group,
signed a memorandum of understanding with Riyad Bank whereby IFC will advise to the
bank on developing its Small and Medium Enterprise (SME) banking operations.

• Diebold Incorporated was selected by Riyad Bank to deploy 100 Diebold Opteva®
automated teller machines (ATMs) across the bank’s network. Riyad Bank has an
accessible network of around 200 branches, with more than 650 ATMs. When the bank
implements Diebold’s Deposit Automation solutions, its customers will also have the
ability to deposit cash directly into their personal accounts without the need to wait for
access to a bank teller.
• Riyad Bank reported a net profit of SR2.0bn for the year 2004, up 26% from the previous
year’s profit of SR1.59bn, beating our expectations.
• The commission income saw a growth of 7.5% in 2004 helped by strong growth in
commission income from loans and advances. However, the commission expense
experienced a decline of 2.3% in the above period which resulted in the net commission
income show a healthy growth of 10.6% in 2004.
• The bank reported a rise in the spreads from 3.3% in 2003 to 3.5% in 2004 which can be
attributed to the decline in the high-interest bearing time-deposits which were replaced by
increase in the lower interest-bearing demand deposits.
• Riyad Bank’s assets reported a modest 3.8% yearly growth in 2004 (lower than our
expected growth), aggregating to SR74.25bn. The gross loans and advances increased by
21.4% during the same period and amounted to SR34.8bn at the end of 2004.
• The bank reduced its provisions of loan losses (PLLs) from SR186.2mn in 2003 to
SR96.8mn in 2004 which helped it net commission income after PLL to report an yearly
growth of 16.1%.
• Like other Saudi banks, Riyad bank also reported strong gain in the fee-based income, with
fee from banking activity reporting a yearly growth of 61.1% aggregating to SR612.3mn
in 2004. The fee from banking service as a percentage of operating income increased
from 12.6% in 2003 to 18.2% in 2004.
• Non-performing loans (NPLs) in 2004 amounted to SR432.6mn compared to SR651mn

in 2003. The NPLs to Gross Loans ratio has declined from 2.2% in 2003 to 1.2% in 2004
which is one of the lowest in Saudi banking sector, just a shade higher than Saudi British
Bank at 1.1% in 2004.
• The bank’s NPL coverage of 303.8% in 2004 is also the second highest in the sector, next
only to 333.8% reported by ALRAJHI.
• Riyad Bank’s customer deposits increased from SR45.8bn in 2003 to SR49.7bn in 2004
representing a yearly increase of 8.4% in 2004. The bank had a comfortable loans to
deposit ratio of 70.9% in 2004 which gives it a leeway to aggressively grab the lion’s
share of the Saudi consumer financer sector.

• The bank’s average profit per employee showed an increase to SR564,000 per employee
in 2004 from SR483,000 per employee as a result of increased commission income
coupled with the cost-saving initiatives which lowered the growth in operating expenses
in 2004.
• Riyad Bank reported that it increased its first-quarter net profit by around 20% to
SR522mn. Loans and advances grew to SR36bn at the end of 1Q05.
Outlook
• The bank is likely to increase its loans-to-deposits ratio. Riyad Bank has a comfortable
loans-to-deposits ratio which would allow it to further expand its loan portfolio especially
in the consumer and personal lending.
• Weak asset growth during the last 3 years has affected its market share. We expect the
bank to increase its market share in term of assets as it introduces new deposits as well as
loan products.
Valuation
• Since our last investment update in Sep-2004, the stock has moved up by 85.7% to SR640
(bonus adjusted), justifying our earlier ‘Buy’ recommendation.
• Currently, Riyad Bank is trading at 5.9x of its estimated book value and 24.4x of its
estimated earnings of 2005.
• We have revised upwards our earlier projections due to better FY 2004 results of the bank
and improved market conditions. The estimated fair value of Riyad Bank’s stock works
• Hence, we revise our earlier rating and recommend a ‘Hold’ on the stock.

Balance Sheet
Riyad Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & balances with SAMA 2,414.2 2,246.4 2,523.5 3,728.6 3,064.4 2,578.6
2,468.5
Due from banks and other FI's 5,921.8 3,967.6 3,099.9 3,254.9 3,417.6 3,588.5 3,767.9
Trading investments 3,556.6 3,942.2 4,161.3 4,410.9 4,675.6 4,956.1 5,253.5
Non-trading investments 28,600.1 29,955.5 27,956.4 29,354.2 30,821.9 32,363.0 33,981.1
Net Loans and advances 23,849.5 27,952.3 33,943.8 43,332.6 47,229.5 51,963.7 57,171.3
Net fixed assets 832.9 788.4 749.2 691.6 631.1 567.6 500.9
Other assets 2,034.2 2,654.6 1,812.9 1,903.6 1,998.7 2,098.7 2,203.6
Total Assets 67,209.3 71,507.0 74,247.0 86,676.5 91,838.8 98,116.2 105,346.9
Due to banks and other
12,552.9 13,914.9 11,924.2 9,829.7 8,423.5 7,218.4 6,185.7
financial institutions
Customers' deposits 42,999.0 45,878.9 49,742.1 62,177.7 67,773.7 74,551.0 82,006.1
Other liabilities 3,271.1 3,167.0 3,534.0 3,943.5 4,400.4 4,910.3 5,479.3
Share capital 4,000.0 4,000.0 4,000.0 5,000.0 5,000.0 5,000.0 5,000.0
Statutory reserve 4,000.0 4,000.0 4,000.0 4,645.7 5,000.0 5,000.0 5,000.0
Other reserves 111.2 90.6 71.4 104.6 136.2 174.5 221.4
Retained Earnings 275.0 455.6 975.3 975.3 1,105.0 1,261.9 1,454.3
Total shareholders' equity 8,386.2 8,546.2 9,046.6 10,725.6 11,241.3 11,436.4 11,675.7
Total liabilities and
67,209.3 71,507.0 74,247.0 86,676.5 91,838.8 98,116.2 105,346.9
shareholders' Equity

Operating Statement
Riyad Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special commission expense (852.5) (679.6) (663.8) (793.3) (949.1) (1,107.5) (1,209.8)
Fees from banking services 342.1 380.0 612.3 918.5 1,285.9 1,671.7 2,173.2
Exchange income 56.8 92.1 73.8 75.3 76.8 78.3 79.9
Net trading income 89.7 447.1 305.1 350.8 385.9 424.5 466.9
Dividend income 0.9 0.9 - 1.0 1.2 1.4 1.6
Total non-commission income 603.1 1,030.3 1,050.4 1,409.6 1,819.0 2,250.8 2,802.8
Salaries & employee related expenses (698.5) (752.6) (750.0) (787.5) (826.8) (868.2) (911.6)
Impairment of other financial assets,
(16.6) (2.9) - - - - -
net
Other operating expenses (29.2) (19.4) (11.0) (11.0) (11.0) (11.0) (11.0)
Total operating expenses (1,284.6) (1,429.4) (1,355.9) (1,438.1) (1,527.6) (1,601.5) (1,679.0)
Net Income 1,416.4 1,591.7 2,005.6 2,583.0 3,164.6 3,826.5 4,692.1
Beginning retained earnings 129.2 275.0 455.6 975.3 975.3 1,105.0 1,261.9
Net income 1,416.4 1,591.7 2,005.6 2,583.0 3,164.6 3,826.5 4,692.1
Transfer to statutory reserve 0.0 0.0 0.0 (645.7) (354.3) 0.0 0.0
Transfer to other reserves 0.0 0.0 0.0 (1,033.2) (31.6) (38.3) (46.9)
Gross dividends (1,277.0) (1,402.0) (1,486.0) (904.0) (2,649.0) (3,631.3) (4,452.8)
Net change in fair value 6.4 (9.1) 0.0 0.0 0.0 0.0 0.0
Ending balance 275.0 455.6 975.3 975.3 1,105.0 1,261.9 1,454.3

Cash Flow
Riyad Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net Income 1,416.4 1,591.7 2,005.6 2,583.0 3,164.6 3,826.5 4,692.1
Accretion Of Discounts (172.1) (33.0) 8.8 - - - -
Gains On Investments (80.7) (78.0) (41.5) (45.6) (50.2) (55.2)
(37.7)
Depreciation And Amortization 131.5 163.8 144.7 143.7 150.8 158.4 166.3
Loss/Gain On Disposal Of Fixed Assets 0.3 2.9 (3.1) - - - -
Provision For Loan Losses 125.0 186.2 96.8 121.1 132.3 145.5 160.1
Impairment Of Other Financial Assets 16.6 2.9 - - - - -
Due From Banks And Other FI's 6,301.8 1,954.3 867.7 (155.0) (162.7) (170.9) (179.4)
Trading Portfolio (1,450.0) (385.7) (219.0) (249.7) (264.7) (280.5) (297.4)
Loans And Advances (2,786.0) (4,289.0) (6,088.3) (9,510.0) (4,029.1) (4,879.7) (5,367.7)
Other Assets 352.2 (620.4) 841.7 (90.6) (95.2) (99.9) (104.9)
Due To Banks And FI's (2,505.8) 1,362.0 (1,990.7) (2,094.5) (1,406.3) (1,205.1) (1,032.7)
Other Liabilities 67.4 (207.6) 262.8 409.5 456.9 509.9 569.0
CF From Operations 4,313.0 2,529.7 (247.5) 3,551.5 3,497.1 4,731.3 6,005.2
Net Sale /Purchase Of Investments (1,897.4) (1,276.9) 2,008.9 (1,356.3) (1,422.1) (1,490.9) (1,562.9)
Capex (165.9) (122.1) (102.5) (86.0) (90.3) (94.9) (99.6)
CF From Investing (2,063.3) (1,399.0) 1,906.4 (1,442.4) (1,512.4) (1,585.7) (1,662.5)
Dividend And Zakat Paid (1,747.7) (1,298.5) (1,381.8) (904.0) (2,649.0) (3,631.3) (4,452.8)
CF From Financing (1,747.7) (1,298.5) (1,381.8) (904.0) (2,649.0) (3,631.3) (4,452.8)
Change In Cash 501.9 (167.7) 277.1 1,205.1 (664.3) (485.8) (110.1)

Beginning Cash 1,912.3 2,414.2 2,246.4 2,523.5 3,728.6 3,064.4 2,578.6
Ending Cash 2,414.2 2,246.4 2,523.5 3,728.6 3,064.4 2,578.6 2,468.5

Ratios
Riyad Bank
2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
- Net special commission income after PLL's/ Total op. 77.7% 65.9% 68.8% 64.9% 61.2% 58.5% 56.0%
income
Margins
- Special commission expense/ Special commission income 27.7% 23.8% 21.6% 22.5% 24.0% 25.0% 24.5%
- Cost rate on average commission bearing liabilities 1.5% 1.2% 1.1% 1.2% 1.3% 1.4% 1.4%
- Spread 3.4% 3.3% 3.5% 3.6% 3.5% 3.6% 3.7%
Efficiency
- Staff expenses/ Total op. income 25.9% 24.9% 22.3% 19.6% 17.6% 16.0% 14.3%
- G&A expenses/ Total op. income 15.1% 16.2% 13.4% 12.3% 11.5% 10.4% 9.3%
Liquidity
Credit Quality
- Non Performing Loans (SR mn) 706.0 651.1 432.6 671.5 634.4 697.8 767.6
- Provision for loan losses (SR mn) 1,374.5 1,394.6 1,314.2 1,435.3 1,567.6 1,713.1 1,873.2
- NPL's /Gross Loans 2.8% 2.2% 1.2% 1.5% 1.3% 1.3% 1.3%
- PLL's / Gross Loans 5.4% 4.8% 3.7% 3.2% 3.2% 3.2% 3.2%
- NPL Coverage 194.7% 214.2% 303.8% 213.7% 247.1% 245.5% 244.0%
Capital Adequacy

- Net special commission income after PLL's/ Total op. 77.7% 65.9% 68.8% 64.9% 61.2% 58.5% 56.0%
income
- Change in Fees from banking services 32.9% 11.1% 61.1% 50.0% 40.0% 30.0% 30.0%
- Change in Investment Income -26.0% 207.2% -34.8% 14.7% 10.0% 10.0% 10.0%
- Change in Fx Income 38.2% 62.1% -19.9% 2.0% 2.0% 2.0% 2.0%
- Change in Other Income 97.4% -2.3% -33.3% 5.0% 5.0% 5.0% 5.0%

- Shares in issue (mn ) 80.0 80.0 80.0 100.0 100.0 100.0 100.0
- EPS (SR) 17.7 19.9 25.1 25.8 31.6 38.3 46.9
- DPS (SR) 15.5 17.0 18.0 8.8 25.7 35.2 43.2
- Market Cap. (SR bn) 21.8 27.8 48.0 63.0 63.0 63.0 63.0
- P/E 15.4 17.5 23.9 24.4 19.9 16.5 13.4
- P/BV 2.6 3.3 5.3 5.9 5.6 5.5 5.4
- Dividends yield 5.7% 4.9% 3.0% 1.5% 4.3% 5.9% 6.9%

Arab National Bank

1080.SE
Listing:
Current Price
SR786.0
Key Data
BVPS (SR) 119.9 52 week Lo / Hi SR443.5/SR855.5
Background
• Arab National Bank (ANB) was established in 1979 upon the Saudization of the six
branches of Arab Bank of Jordan that had been operating in the Kingdom for 30 years.
ANB now has a branch network of 116 branches in the Kingdom and one branch in
London with an employee strength of 2,491 employees.
• ANB is among the medium-sized banks, ranking 5th amongst Saudi commercial banks
in terms of assets size with a 10% market share of the sector’s aggregate total assets for
the year in 2004 (2003: 9.1%). The bank had an 9.9% market share of the total banking
deposits.
• ANB has been a front-runner in adopting newer technologies and has made substantial
investments in upgrading its IT infrastructure. The management believes that investments
important to the future growth of the bank will continue to be made in modernizing its
branch network, expanding its ATM network and enhancing its technology delivery
capabilities. ANB was the first bank in Saudi Arabia to launch Internet banking.
• Arab Bank of Jordan holds a 40% stake in ANB while the remaining 60% is distributed
among the Saudi investors.
• ANB had a paid-up capital of SR2.0bn at the end of 2004, distributed over 40mn shares
each with a par value of SR50. The bank has further decided to grant bonus shares (1:4
ratio), thereby increasing its share capital from SR2.0bn in 2004 to SR2.5bn.
Recent Developments
• Arab National Bank (ANB) secured a three-year syndicated loan worth US$350mn,
strengthening its balance sheet for possible opportunities in long-term project financing.

• The commission income saw a strong growth of 23.5% in 2004 helped by the upward
movement in the interest rates. The commission expense too increased, though at a
slightly lower rate of 21.7% over the previous year. As a result, the net commission
income increased by 24.1% to end the year 2004 at SR1,886.3mn.
• ANB reported a net profit of SR1.16bn for the year 2004, a strong growth of 52.2% as
compared to the SR766.5mn net profit recorded for the previous year, which exceeded
our expectations.
• ANB’s spreads too witnessed a steep rise from 3.4% in 2003 to 3.7% in 2004. ANB had
one of the best spreads in 2004 among the conventional banks. This is attributed to the
presence of non-commission bearing deposits with the bank and its loan portfolio’s tilt
towards the high-margin consumer lending. Commission expense-to-commission income
ratio witnessed a drop from 23.6% in 2003 to 23.2% in 2004.
• The bank has been able to diversify its income stream which is seen in the strong yearly
growth of 59.8% in fees from banking activity. We believe that this trend is expected to
continue as the bank focuses to depend less on commission income which is susceptible
to interest rate movements.
• Non-performing loans (NPLs) in 2004 amounted to SR890mn compared to SR1.02bn in

2003. NPLs to gross loans have declined from 4.8% in 2003 to 3.0% in 2004 as a result
of the bank’s prudent credit appraisal measures.
• ANB’s total assets stood at SR63.33bn at the end of 2004, representing an increase of
28.7% over Dec 2003. The deposits from customers increased by 37.3% during the period
over Dec 2003.
• The bank capitalization ratios are at comfortable levels as compared to the international
standards. The bank’s tier-1 ratio stood at 14.2% in 2004 (2003: 17.8%).
• As a result of the increase in the net income, both the ROAA and ROE surged and the
bank reported an ROAA of 2.1% for the year 2004. ANB’s ROAE also increased from
20.4% in 2003 to 26.6% in 2004.
• ANB's net profit for the first quarter of 2005 reached SR362mn, a 33% increase over the
corresponding period of the previous year. Net interest income increased by 18% and fee
income went up by 42% for the same period.
Outlook
• We project the net commission income of the bank to continue to show strong growth of
more than 25% in 2005 as we expect the interest rates to move up in the short term.

• We expect the bank to improve its credit quality further. Although the bank has done a
good job in reducing its NPL ratio, we expect it to further go down as it writes-off NPLs
and imparts additional loans with strict credit norms.
• The bank is likely to post strong growth in its non-commission income and take advantage
of the booming economy to increase its investments and trading income.
• We also believe that bank will continue to improve on its spread as it is growing its
deposit base and can leverage on the non-interest bearing deposits growth in the sector.
Valuation
• Since our last investment update in Sep 2004, the stock has moved up sharply by 81.25%
to a high of SR855.5 (bonus adjusted) and is currently trading at SR786.
• Currently, ANB is trading at 7.0x of its estimated book value and 23.4x of its estimated
earnings of 2005.
and improved market conditions. The estimated fair value of ANB’s stock works out to
SR885.2 based on DDM and peer group valuation method, which is up by around 12.6%
vis-à-vis the current market price of the stock.
• Hence, we revise of our earlier rating of ‘Hold” and recommend a ‘Buy’ on the stock with
medium term perspective.

Balance Sheet
Arab National Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & balances with SAMA 3,134.4 1,677.8 7,061.5 8,794.7 7,414.0 6,302.8 5,347.9
Trading Investments 0.0 98.0 199.1 298.6 373.2 466.5 583.2
Net Fixed Assets 299.0 323.1 382.4 421.8 446.1 472.9 502.4
Other Assets 1,397.4 1,351.9 1,403.9 1,474.1 1,547.8 1,625.2 1,706.4
Total Assets 44,298.7 49,200.9 63,335.8 77,956.1 88,854.1 98,757.7 109,791.2
Share Capital 1,800.0 1,800.0 2,000.0 2,500.0 2,500.0 2,500.0 2,500.0
Other Reserves 92.6 370.7 776.8 697.4 1,246.9 1,950.7 2,583.6
Retained Earnings 5.7 6.6 17.7 19.3 41.3 69.5 104.6
Total Liabilities and Shareholders' Equity 44,298.7 49,200.9 63,335.8 77,956.1 88,854.1 98,757.7 109,791.2

Operating Statement
Arab National Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special Commission Income 1,940.7 1,989.4 2,456.3 3,108.5 3,844.7 4,572.9 5,251.4
Special Commission Expense (532.8) (469.4) (570.0) (699.4) (884.3) (1,074.6) (1,181.6)
Net Special Commission Income 1,407.9 1,520.1 1,886.3 2,409.1 2,960.4 3,498.2 4,069.8
Fees from banking services 171.5 264.2 422.2 675.5 844.4 1,055.5 1,319.4
Exchange Income 77.4 92.4 93.1 95.0 96.9 98.8 100.8
Net Trading Income (0.4) 14.2 9.2 10.1 11.1 12.2 13.4
Dividend Income 0.0 0.0 1.1 1.1 1.1 1.1 1.1
Net gains on Investments 36.0 2.1 8.4 9.3 10.2 11.2 12.3
Other Operating Income 11.0 7.6 7.6 8.0 8.4 8.8 9.2
Total Non-interest Income 295.5 380.4 541.7 799.0 972.1 1,187.7 1,456.3
Total Operating Income 1,481.8 1,583.6 2,106.7 2,749.0 3,385.3 4,120.3 4,952.0
Total Operating Expenses (897.8) (817.1) (939.9) (1,066.6) (1,187.1) (1,305.5) (1,435.6)
Net Income 584.0 766.5 1,166.8 1,682.5 2,198.2 2,814.9 3,516.4
Beginning retained earnings 22.4 5.7 6.6 17.7 19.3 41.3 69.5
Net income 584.0 766.5 1,166.8 1,682.5 2,198.2 2,814.9 3,516.4
Transfer to statutory reserve (150.0) (150.0) (200.0) (420.6) (79.4) 0.0 0.0
Transfer to other reserves 0.0 (200.0) (550.0) (420.6) (549.6) (703.7) (633.0)
Gross dividends (449.4) (415.7) (390.0) (839.6) (1,547.3) (2,083.0) (2,848.3)
Net change in fair value (1.0) 0.0 (15.7) 0.0 0.0 0.0 0.0
Ending balance 6.0 6.6 17.7 19.3 41.3 69.5 104.6

Cash Flow
Arab National Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net Income 584.0 766.5 1,166.8 1,682.5 2,198.2 2,814.9 3,516.4
Accretion of Discounts (4.8) (39.7) (32.1) 0.0 0.0 0.0 0.0
Gains on Investments (36.0) (2.1) (8.4) (9.3) (10.2) (11.2) (12.3)
Depreciation and amortization 63.9 63.6 60.1 74.2 81.6 89.7 98.7
Loss/gain on disposal of Fixed Assets (1.6) (0.5) 0.0 0.0 0.0 0.0 0.0
Provision for loan losses 221.6 316.8 321.2 459.0 547.2 565.6 574.1
Unrealized revaluation loss on Real Estate 0.0 0.0 6.5 0.0 0.0 0.0 0.0
Due from banks and other FIs (1,572.0) 192.3 (537.2) (473.2) (104.1) (106.2) (108.3)
Trading portfolio 0.0 (98.0) (101.1) (99.5) (74.6) (93.3) (116.6)
Loans and Advances (2,377.6) (4,471.3) (8,701.4) (10,545.8) (10,229.8) (9,229.5) (10,832.5)
Other Real Estate 111.7 (58.4) 6.6 0.0 0.0 0.0 0.0
Other Assets 128.9 161.1 (257.4) (70.2) (73.7) (77.4) (81.3)
Due to Banks and FIs 1,902.4 (932.2) 712.3 203.3 207.7 212.2 216.8
CF from Operations 1,377.6 1,308.8 5,702.4 4,795.2 2,581.6 3,124.3 3,403.6
Net sale /purchase of investments 278.9 (2,233.4) 421.6 (2,108.8) (2,309.1) (2,035.9) (1,381.9)
Capex (81.6) (87.2) (123.2) (113.5) (106.0) (116.6) (128.2)
CF from Investing 197.3 (2,320.6) 298.4 (2,222.4) (2,415.1) (2,152.5) (1,510.1)
Dividend and Zakat paid (339.6) (444.8) (617.1) (839.6) (1,547.3) (2,083.0) (2,848.3)
CF from Financing (339.6) (444.8) (617.1) (839.6) (1,547.3) (2,083.0) (2,848.3)
Change in Cash 1,235.3 (1,456.6) 5,383.6 1,733.2 (1,380.7) (1,111.2) (954.9)

Beginning Cash 1,899.1 3,134.4 1,677.8 7,061.5 8,794.7 7,414.0 6,302.8
Ending cash 3,134.4 1,677.8 7,061.5 8,794.7 7,414.0 6,302.8 5,347.9

Ratios
Arab National Bank
2002 2003 2004 2005 F 2006 F 2007 F 2008 F
Profitability
- Net Special Commission Income After PLL's/ Total Op. 80.1% 76.0% 74.3% 70.9% 71.3% 71.2% 70.6%
Income
- Non-Commission Income/ Total Op. Income 19.9% 24.0% 25.7% 29.1% 28.7% 28.8% 29.4%
- Non-Commission Expense/ Total Op. Income 60.6% 51.6% 44.6% 38.8% 35.1% 31.7% 29.0%
- Dividend Payout Ratio 77% 54% 33% 50% 70% 74% 81%
Margins
- Net (Or Profit) Margin 39.4% 48.4% 55.4% 61.2% 64.9% 68.3% 71.0%
- Commission Expense/ Commission Income 27.5% 23.6% 23.2% 22.5% 23.0% 23.5% 22.5%
- Yield On Average Earning Assets 5.1% 4.6% 4.8% 5.0% 5.1% 5.2% 5.3%
- Cost Rate On Average Commission Bearing Liabilities 1.5% 1.2% 1.2% 1.1% 1.2% 1.3% 1.3%
- Spread 3.6% 3.4% 3.7% 3.9% 3.9% 4.0% 4.1%
Efficiency
- Cost/ Total Op. Income 60.6% 51.6% 44.6% 38.8% 35.1% 31.7% 29.0%
- Staff Expenses/ Total Op. Expenses 53.2% 61.3% 60.5% 59.7% 59.0% 59.1% 59.1%
- Rent, G&A Expenses/ Total Op. Expenses 28.4% 30.9% 32.4% 32.6% 33.5% 33.5% 33.5%
- Non-Commission Expense/ Average Total Assets 2.1% 1.7% 1.7% 1.5% 1.4% 1.4% 1.4%
Liquidity
- Loans / Commission Earning Assets 42.7% 46.4% 54.1% 59.1% 62.5% 64.8% 67.5%
- Customer Deposits/ Total Assets 63.6% 68.5% 73.1% 76.8% 78.6% 79.7% 80.9%
- Due From Banks/ Due To Banks 43.7% 46.1% 48.2% 51.9% 51.9% 51.9% 51.8%
Credit Quality
- Provisions /Total Op. Income 15.0% 20.0% 15.2% 16.7% 16.2% 13.7% 11.6%
- Provisions /Average Loans 1.4% 1.6% 1.2% 1.3% 1.2% 1.0% 0.9%
- Non Performing Loans (SR Mn) 1,172 1,025 890 1,186 1,532 1,866 2,202
- Provision For Loan Losses (SR Mn) 1,158 1,387 1,618 2,077 2,624 3,190 3,764
- NPL's /Gross Loans 6.8% 4.8% 3.0% 2.9% 3.0% 3.1% 3.1%
- NPL's /(Equity+Provision For Loan Losses) 24.9% 19.1% 13.9% 15.4% 17.2% 18.3% 19.2%
- Provision For Loan Losses/ Gross Loans 6.7% 6.4% 5.4% 5.1% 5.2% 5.3% 5.3%
- NPL Coverage 98.7% 135.3% 181.7% 175.1% 171.3% 170.9% 170.9%
Capital Adequacy
- Equity To Total Assets (Equity Capital Ratio) 8.0% 8.1% 7.6% 7.2% 7.1% 7.1% 7.0%
- Equity To Gross Loans 20.7% 18.4% 15.9% 13.8% 12.3% 11.7% 10.8%
Constitution Of Total Income

- Net Commission Income After PLL's/ Total Op. Income 80.1% 76.0% 74.3% 70.9% 71.3% 71.2% 70.6%
- Fees & Comm./ Total Op. Income 11.6% 16.7% 20.0% 24.6% 24.9% 25.6% 26.6%
- Investment Income/ Total Op. Income 2.4% 1.0% 0.9% 0.7% 0.7% 0.6% 0.5%
- FX Income/ Total Op. Income 5.2% 5.8% 4.4% 3.5% 2.9% 2.4% 2.0%
- Other Income/ Total Op. Income 0.7% 0.5% 0.4% 0.3% 0.2% 0.2% 0.2%
- Provisions/ Total Op. Income 15.0% 20.0% 15.2% 16.7% 16.2% 13.7% 11.6%
- Change In Commission Income -12.1% 2.5% 23.5% 26.6% 23.7% 18.9% 14.8%
- Change In Fees And Commission -3.2% 54.0% 59.8% 60.0% 25.0% 25.0% 25.0%
- Change In Investment Income 244.5% -54.4% 15.4% 9.4% 9.4% 9.5% 9.5%
- Change In Fx Income 24.7% 19.3% 0.8% 2.0% 2.0% 2.0% 2.0%
- Change In Other Income 41.2% -31.1% 0.5% 5.0% 5.0% 5.0% 5.0%

- Par Value Per Share (SR) 50.0 50.0 50.0 50.0 50.0 50.0 50.0
- Shares in Issue (mn) 36.0 36.0 40.0 50.0 50.0 50.0 50.0
- EPS (SR) 16.2 21.3 29.2 33.6 44.0 56.3 70.3
- DPS Declared (SR) 12.48 11.5 9.3 16.3 30.0 40.4 55.3
- Book Value Per Share (SR) 98.6 110.5 119.9 112.7 125.8 140.4 153.8
- Market Price Year End (SR) 288.8 395.0 771.0 786.0 786.0 786.0 786.0
- Market Cap. (SR Mn) 10,395.0 14,220.0 30,840.0 39,300.0 39,300.0 39,300.0 39,300.0
- P/E 17.8 18.6 26.4 23.4 17.9 14.0 11.2
- P/BV 2.9 3.6 6.4 7.0 6.2 5.6 5.1


1060.SE
Listing:
Current Price
SR1,130
Key Data
P / BV (x) 10.5 Target Price SR1,083.4
Background
• The Saudi British Bank (SABB) was established in January 1978 as a Saudi joint stock
company to takeover the operations of The British Bank of The Middle East in Saudi
Arabia.
• With total assets of SR57.9bn in 2004, SABB ranks 7th amongst Saudi banks in terms of
asset size with 9.2% market share of the sector’s aggregate total assets in 2004, up from
8.5% recorded in 2003. The bank had a network of 61 branches with 2,020 employees in
2004.
• As result of its aggressive plan to penetrate the retail banking business, SABB recorded
rapid growth rates of 28% and 20.8% in 2003 and 2004 respectively in its credit portfolio,
which resulted in a market share of 9.1% of the sector’s aggregate credit portfolio in
2004.
• SABB is one of the most technologically sophisticated banks in the Kingdom of Saudi
Arabia thanks to its main shareholder, HSBC, which provides the bank with access to its
systems, technology and expertise.
• Saudi investors own 60% of its SR2.5bn paid up capital while “HSBC Holding BV” owns
the remaining 40% and provides management and technical services assistance to the
bank through a management agreement.
Recent Developments
• The bank started the implementation of its strategic plan for 2005-2007 which includes the
in light of the growing demand for this kind of services.

• Standard & Poor's Ratings Services assigned its 'A-/A-2' senior unsecured debt ratings to
The Saudi British Bank's US$650mn euro medium-term note programme. This is the first
EMTN programme launched by a bank in Saudi Arabia.
• SABB was rated as the "Best Bank in the Kingdom of Saudi Arabia for 2004" for the
second year in a row by the Euromoney Magazine.
• SABB’s net commission income reported the yearly growth of 6.2% in 2004, rising from
SR1.6bn in 2003 to SR1.7bn in 2004.
• SABB reported a net profit of SR1.63bn for the year 2004, up 30% from the previous
year’s profit of SR1.25bn. However, the bank’s net profit did not meet our expectations.
• The bank reported the highest Return on Average Equity (RoAE) and Return on Average
Assets (RoAA) among the conventional Saudi Banks. The bank’s RoAE and RoAA stood
at 32.3% and 3.1% respectively in 2004.
• However, the bank’s spread recorded a decline from 3.7% in 2003 to 3.4% recorded in
2004. This is mainly due to the increase in the high-interest time deposits with the bank.
However, the bank is promoting heavily its Islamic banking products, which is likely to
improve its spread in medium term.
• The bank’s time deposits increased from SR20.44bn in 2003 to SR26.06bn in 2004 which
helped the total deposits to witness a growth of 23.7% in 2004, from SR36.09bn in 2003
to SR44.66bn in 2004.
• SABB has been able to reduce its cost as a percentage of total operating income from
38.4% in 2003 to 34.4% in 2004. Also its profit per employee has increased substantially
from SR617,000/employee in 2003 to more than SR809,000/employee in 2004.
• SABB’s total assets reported an yearly growth of 25.8% aggregating to SR57.9bn in 2004.
The bank’s gross loans and advances increased from SR32.12bn in 2003 to SR38.86bn in
2004 representing an yearly growth of 21%.
• The bank’s non-performing loans (NPLs) declined from SR441.7mn in 2003 to

SR365.6mn in 2004. The bank boasts of the lowest NPL’s/Gross loans ratio in the Saudi
banking sector at 1.1% in 2004 as compared to the industry’s average of 2.3% in 2004. In
2004, 66.4% of the bank’s non-performing loans were concentrated in the manufacturing
sector. The bank has been able to maintain its NPL coverage of more than 130% in the
last couple of years.
• The banks capitalization ratios, Tier-1 and Tier-2 capital ratio, stood at the comfortable
levels of 14.0% and 14.2% respectively in 2004.
• SABB's net income for first quarter of fiscal year 2005 increased by 25.1% to reach
SR456mn compared with SR364mn for the corresponding period last year.

Outlook
• The bank is likely to maintain its momentum in non-interest income. On the back of
strong growth in the non-interest income as well as increase in its spreads, the bank is
likely to remain one of the most profitable banks in the Kingdom.
• The bank is expected to increase its loans to deposits ratio to around 75% in coming years.
The bank is likely to be among the leaders in the corporate banking business in Saudi
Arabia as it has a large base of blue-chip corporate clientele.
• The bank is likely to maintain the dividend payout of more than 80% in medium term.
Valuation
• Currently, SABB is trading at 9.5x of its estimated book value and 26.5x of its estimated
earnings of 2005.
• The SABB stock has run up by 60.8% since our last report in Sep-2004. We have changed
our earlier projections due to better FY 2004 results of the bank and improved market
conditions.
• The estimated fair value of SABB’s stock now works out to SR1,083.4 based on DDM
and peer group valuation method, which is down by around 4.1% vis-à-vis the current
market price of the stock. Hence, we reiterate our earlier rating and recommend a ‘Hold’
on the stock.

Balance Sheet
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & balances with SAMA 3,124.0 2,356.0 2,242.7 3,107.4 3,844.5 3,369.0 2,776.4
Due from banks and other FI's 1,084.1 338.5 8,186.2 9,004.8 9,905.3 10,895.8 11,985.4
Non-trading investments 20,399.7 15,971.2 14,663.4 15,396.6 16,166.4 16,489.8 16,819.5
Net fixed assets 544.7 547.9 565.1 589.6 617.3 647.2 679.5
Other assets 714.8 731.3 640.8 704.9 775.3 852.9 938.2
Total Assets 46,226.5 46,061.6 57,925.2 67,895.3 76,879.6 85,342.3 93,075.6
Due to banks and other financial institutions 4,680.6 3,420.2 5,663.3 5,946.5 6,243.8 6,556.0 6,883.8
Share capital 2,000.0 2,000.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0
Statutory reserve 2,000.0 2,000.0 2,409.0 2,500.0 2,500.0 2,500.0 2,500.0
Other reserves 126.4 176.8 166.3 283.5 414.9 571.4 755.4
Retained Earnings 156.7 569.4 310.0 634.5 1,028.6 1,498.3 1,682.2
Total liabilities and shareholders' Equity 46,226.5 46,061.6 57,925.2 67,895.3 76,879.6 85,342.3 93,075.6

Operating Statement
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special commission expense (559.3) (462.4) (496.4) (648.1) (830.6) (1,013.0) (1,213.3)
Fees from banking services 281.9 377.0 674.3 944.0 1,180.1 1,416.1 1,699.3
Exchange income 68.8 86.1 101.2 103.2 105.3 107.4 109.5
Dividend income 2.5 2.2 2.5 2.6 2.8 2.9 3.0
Total non-interest income 395.3 537.9 851.2 1,127.2 1,369.7 1,612.6 1,903.0
Total operating expenses (784.9) (785.2) (858.6) (973.7) (1,081.7) (1,189.3) (1,308.7)
Net Income 972.5 1,257.9 1,635.8 2,130.8 2,627.6 3,131.3 3,678.4
Beginning retained earnings 76.6 156.7 569.4 310.0 634.5 1,028.6 1,498.3
Net income 972.5 1,257.9 1,635.8 2,130.8 2,627.6 3,131.3 3,678.4
Bonus share issue 0.0 0.0 (500.0) 0.0 0.0 0.0 0.0
Transfer to statutory reserve (192.5) 0.0 (409.0) (91.1) 0.0 0.0 0.0
Transfer to other reserves 0.0 0.0 0.0 (117.2) (131.4) (156.6) (183.9)
Gross dividends (664.8) (832.0) (990.0) (1,598.1) (2,102.0) (2,505.0) (3,310.5)
Net change in fair value (35.1) (13.2) 3.7 0.0 0.0 0.0 0.0
Ending balance 156.7 569.4 310.0 634.5 1,028.6 1,498.3 1,682.2

Cash Flow
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net Income 972.5 1,257.9 1,635.8 2,130.8 2,627.6 3,131.3 3,678.4
Accretion Of Discounts 10.8 10.9 6.6 0.0 0.0 0.0 0.0
Gains On Investments (36.3) (70.6) (64.0) (67.2) (70.5) (74.1) (77.8)
Loss/Gain On Disposal Of Fixed Assets 14.5 4.0 (6.2) 0.0 0.0 0.0 0.0
Impairment Of Other Financial Assets 27.7 3.6 0.0 0.0 0.0 0.0 0.0
Due From Banks And Other FI's (119.0) 745.6 (7,847.7) (818.6) (900.5) (990.5) (1,089.6)
Other Assets 226.8 (16.5) 86.7 (64.1) (70.5) (77.5) (85.3)
Due To Banks And FI's (112.6) (1,260.4) 2,243.1 283.2 297.3 312.2 327.8
CF From Operations 841.2 (4,511.7) (509.2) 3,222.2 3,639.3 2,387.7 3,087.5
Net Sale /Purchase Of Investments 1,385.8 4,521.8 1,372.0 (666.0) (699.3) (249.3) (252.0)
Capex (109.9) (71.7) (76.2) (93.3) (100.8) (108.8) (117.6)
CF From Investing 1,275.8 4,450.1 1,295.8 (759.3) (800.1) (358.1) (369.6)
Dividend And Zakat Paid (703.2) (706.4) (900.0) (1,598.1) (2,102.0) (2,505.0) (3,310.5)
CF From Financing (703.2) (706.4) (900.0) (1,598.1) (2,102.0) (2,505.0) (3,310.5)
Change In Cash 1,413.8 (768.0) (113.4) 864.7 737.1 (475.5) (592.6)

Beginning Cash 1,710.2 3,124.0 2,356.0 2,242.7 3,107.4 3,844.5 3,369.0
Ending Cash 3,124.0 2,356.0 2,242.7 3,107.4 3,844.5 3,369.0 2,776.4

Ratios
2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
- Net special commission income after PLL's/ 77.5% 73.7% 65.9% 63.7% 63.1% 62.7% 61.8%
Total op. income
Margins
- Special commission expense/ Special 27.9% 22.4% 22.6% 24.0% 25.5% 26.5% 27.5%
commission income
- Cost rate on average commission bearing 1.5% 1.2% 1.1% 1.2% 1.3% 1.4% 1.5%
liabilities
- Spread 3.4% 3.7% 3.4% 3.4% 3.5% 3.6% 3.6%
Efficiency
- Staff expenses/ Total op. income 26.9% 25.2% 21.7% 19.2% 17.4% 16.1% 15.1%
- Rent, G&A expenses/ Total op. income 11.5% 9.7% 10.0% 9.9% 9.8% 9.5% 9.4%
Liquidity
- Gross performing loans / Commission earning 49.4% 62.2% 58.5% 62.0% 64.0% 66.4% 67.9%
assets
- Gross Loans/ Customer Deposits 59.8% 74.1% 71.9% 74.0% 75.0% 78.0% 80.0%
Credit Quality
- Provision for loan losses (SR mn) 564.8 609.3 496.3 571.1 658.4 760.0 874.6
- NPL's /Gross Loans 2.0% 1.7% 1.1% 1.1% 1.0% 1.0% 1.0%
- PLL's / Gross Loans 2.7% 2.3% 1.5% 1.4% 1.4% 1.4% 1.4%
- NPL Coverage 133.0% 137.9% 135.8% 137.1% 142.4% 141.1% 144.0%
- Net charge-offs/ Gross loans 0.3% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0%
Capital Adequacy

Total op. income
- Change in special commission income -22.2% 3.1% 6.5% 22.7% 20.6% 17.4% 15.4%
- Change in Investment Income -55.6% 72.9% -8.7% 5.0% 5.0% 5.0% 5.0%
- Change in Other Income -50.4% -23.2% 405.7% 10.0% 10.0% 10.0% 10.0%

- EPS (SR) 24.3 31.4 32.7 42.6 52.6 62.6 73.6
- DPS (SR) 16.0 20.0 19.0 30.8 40.4 48.2 63.7
- Market Cap. (SR bn) 14.4 20.2 40.3 56.5 56.5 56.5 56.5
- P/E 14.8 16.1 24.6 26.5 21.5 18.0 15.4
- P/BV 3.4 4.3 7.5 9.5 8.8 8.0 7.6
- Dividends yield 4.4% 4.0% 2.4% 2.7% 3.6% 4.3% 5.6%

Saudi Hollandi Bank

1040.SE
Listing:
Current Price
SR845
Key Data
P / E (x) 28.6 Market Cap 21.3bn
Background
• Saudi Hollandi Bank (SHB) is the oldest bank in Saudi Arabia. It was established in
1926 as the Netherlands Trading Society in Jeddah. In 1964, the Netherlands Trading
Society became the Algemene Bank Nederland NV (ABN). In 1976 SHB was established
as a joint venture with local partners, with ABN (now ABN Amro) holding a 40% stake
in return for its local assets.
• SHB provides wholesale, retail and commercial banking products and services in addition
to investment banking. In particular, the bank is active in arranging financing for quasi-
government and private industrial enterprises and also arranges trade-financing products
for companies involved in foreign trade.
• SHB is among the smaller banks of the country in terms of total assets, having a market
share of 5.3% of the total banking sector assets in 2004. SHB has a network of 40
branches (with 1,307 employess) that cover the central, western and eastern regions of
the country.
• ABN Amro Bank is one of the major shareholders and holds a 40% stake in the bank.
Olayan Saudi Investment Company holds a 20% stake while the remaining 40% is widely
spread among the public. The existing shareholding pattern in not likely to change in the
medium-term.
• The bank increased its share capital from SR945mn in 2003 to SR1.260bn in 2004 through
the issuance of bonus shares (1:3).

Recent Developments
• Saudi Hollandi Bank priced the first ever Lower Tier II bond by a Saudi Bank. It was also
the first under the new Capital Markets Authorities Regulations. The bond was a SR700
million issue through joint-lead managers ABN AMRO (which owns 40 percent of the
stock of the bank) and the Saudi Hollandi Bank. The bank is rated Baa2 by Moody's and
BBB+ by Fitch. The notes were non-callable for five years, priced at 85 basis points above
the Saudi Interbank Offered Rate (Sibor).The maturity of these notes is set for December
28, 2011, and callable in 2009. This will go to SHB's tier-II capital strengthening its
capital base, thus readying itself to absorb the operational risk prescribed by the new
Basel accord - apart from the market and credit risks.
• Saudi businesswoman Lubna Sulaiman Al-Olayan has become the first female board
member of a Saudi listed company, the Saudi Hollandi Bank.
• Fitch Ratings, the international rating agency, affirmed SHB’s ratings at Long-term
'BBB+', Short-term 'F2', Individual 'B/C' and Support '2' with a stable outlook.
• SHB announced the signing of a US$47mn financing agreement with Gulf Advanced
Chemical Industries Company (GACIC). The SHB-arranged facility will finance a
portion of the cost of GACIC's Butanediol (BDO) project, which is being constructed in
the Jubail Industrial City. The plant is expected to be commissioned by the fourth quarter
of 2005.
• The net commission income did not exhibit a strong growth as other Saudi banks as
it increased by only 7.7% in 2004. In 2004, unlike other Saudi banks, the growth in
the commission expense (15.1%) was more than the growth in the commission income
(9.9%). As a result the bank witnessed declining interest spreads from 3.2% in 2003 to
3.0% in 2004.
• SHB reported a net profit of SR742.7mn for the year 2004, up 23.6% from the previous
year’s profit of SR600.9mn. The net profit of 2004 were slightly lower than our
expectations.
• The bank also substantially increased it provision for loans losses from SR71.1mn in
2003 to SR109.5mn in 2004 which resulted in the net commission income (after PLLs) to
show only a marginal growth of 3.4% in 2004 over the previous year.
• However, the bank has increased its fee-income recording a strong yearly growth of 72.1%
in 2004. The bank’s trading income too went up from SR30.7mn in 2003 to SR47.2mn in
2004.
• SHB’s gross loans increased by a lower rate of 15.5% for the same period as compared
to deposits which grew by 21% and this is reflected in the lower rate of increase in
commission income as compared to the growth in commission expense. The bank’s loan
to deposit has declined from 73.1% recorded in 2003 to 71.9% in 2004.

• Non-performing loans (NPLs) in 2004 amounted to SR370mn compared to SR338mn

recorded in 2003. The NPLs to Gross Loans ratio has declined marginally from 2.3% in
2003 to 2.2% in 2004. The bank’s coverage ratio, however, has increased from 130.2% in
2003 to 139.9% in 2004 but is below the industry average of 177.2% reported in 2004.
• SHB’s capitalization ratio is among the lowest in the banking sector with Tier-1 capital
ratio at 12.5% in 2004 as compared to the industry average of 16.2%. However, the bank
has been trying to improve the situation and has increased its Tier-2 capital ratio from
14.5% in 2003 to 16.7% in 2004.
• SHB’s total assets stood at SR33.44bn at the end of 2004, representing an increase of
19.6% over Dec 2003. The bank’s customer deposits witnessed an yearly growth of
21.1% in 2004 amounting to SR23.85bn.
• SHB recorded a net profit of SR202.9mn for the quarter ended March 31, 2005, up 24% from
SR163.9mn for the same period the previous year. Fee from banking services amounted to
SR94.7mn, up 30 percent from SR72.7mn for the same period of the previous year.
Outlook
• We believe that the bank’s loan to deposits ratio is likely to increase to more than 75% in
medium term as it expands its lending activities.
• The net commission income of the bank is expected to show strong growth as it increases
lending to the high-margin retail lending segment.
• With the increase thrust in retail business, the bank’s spread is likely to see an upward trend.
The bank has been aggressively marketing its "Fourijat" and "Al Tawarruq" consumer
loans, which is likely to be instrumental in strengthening the bank’s customer base.
• With the introduction of a more regulated framework for the insurance and the increasing
tendency of the consumers to go for insurance (especially life insurance) and related
products, we expect the bank to report strong growth through this business segment.
Valuation
• Since our last investment update in Sep-2004, the stock has moved up sharply by 65% to
SR845, justifying our earlier buy recommendation.
• Currently, SHB is trading at 6.6x of its estimated book value and 21.5x of its estimated
earnings of 2005.
• We have revised upwards our earlier projections due to better FY 2004 results of the bank
and improved market conditions. The estimated fair value of SHB’s stock works out to
SR944.9 based on DDM and peer group valuation method, which is up by around 11.8%
vis-à-vis the current market price of the stock.
• Hence, we reiterate our earlier rating and recommend a ‘Buy’ on the stock.

Balance Sheet
Saudi Hollandi Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & balances with SAMA 1,143.0 937.1 1,042.5 1,456.7 1,511.9 1,103.9 784.1
Due from banks and other FI's 6,105.0 4,409.2 5,300.6 5,830.6 6,122.1 6,428.3 6,749.7
Net Investments 6,475.0 7,361.0 9,162.0 10,249.9 11,266.4 12,384.6 13,614.6
Net fixed assets 258.1 266.7 289.9 318.7 350.9 370.8 392.8
Other assets 771.9 1,029.0 1,015.4 1,035.7 1,056.4 1,077.5 1,099.1
Total Assets 26,899.3 27,964.6 33,443.6 38,930.7 43,905.1 48,431.9 52,305.7
Due to banks and other financial institutions 2,882.1 4,170.7 4,427.3 4,648.7 4,881.1 5,125.2 5,381.4
Subordinated Debt 0.0 0.0 700.0 700.0 700.0 700.0 700.0
Share capital 945.0 945.0 1,260.0 1,260.0 1,260.0 1,260.0 1,260.0
Statutory reserve 945.0 945.0 1,260.0 1,260.0 1,260.0 1,260.0 1,260.0
General & Other Reserves 407.7 655.2 363.9 710.7 1,017.4 1,246.8 1,431.2
Total liabilities and shareholders' Equity 26,899.3 27,964.6 33,443.6 38,930.7 43,905.1 48,431.9 52,305.7

Operating Statement
Saudi Hollandi Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special commission expense (448.8) (351.6) (404.7) (522.3) (648.1) (796.7) (860.8)
Net special commission income 857.5 845.7 910.7 1,109.8 1,315.9 1,546.6 1,747.7
Fees from banking services 151.9 204.9 352.8 476.2 595.3 744.1 930.1
Exchange income 43.4 49.5 51.7 54.3 57.0 59.8 62.8
Total non-commission income 217.1 294.6 451.7 584.8 712.0 866.7 1,058.8
Other operating expenses (3.2) (0.3) 0.0 0.0 0.0 0.0 0.0
Total operating expenses (451.2) (468.4) (510.1) (578.2) (636.8) (693.0) (754.2)
Net Income 555.2 600.9 742.7 992.1 1,226.9 1,529.3 1,844.7
Beginning retained earnings 7.5 5.3 5.5 6.2 7.2 8.5 10.0
Net income 555.2 600.9 742.7 992.1 1,226.9 1,529.3 1,844.7
Transfer to other reserves (237.0) (260.0) (345.0) (346.7) (306.7) (229.4) (184.5)
Gross dividends (317.4) (336.8) (397.0) (644.4) (918.9) (1,298.4) (1,658.3)
Net change in fair value (3.0) (3.8) 0.0 0.0 0.0 0.0 0.0
Ending balance 5.3 5.5 6.2 7.2 8.5 10.0 11.8

Cash Flow
Saudi Hollandi Bank
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net Income 555.2 600.9 742.7 992.1 1,226.9 1,529.3 1,844.7
Accretion Of Discounts (24.9) 37.0 (47.6) 0.0 0.0 0.0 0.0
Gains On Investments (4.5) (9.5) 0.0 0.0 0.0 0.0 0.0
Loss/Gain On Disposal Of Fixed Assets 0.0 0.0 0.0 0.0 0.0 0.0
Fair Value Adjustment On Hedged AFS
(13.4) 9.5 10.7 0.0 0.0 0.0 0.0
And Originated Debt Securities
Due From Banks And Other FI's (758.0) 1,695.8 (891.4) (530.1) (291.5) (306.1) (321.4)
Trading Portfolio (50.3) 117.6 (75.1) 0.0 0.0 0.0 0.0
Loans And Advances (726.5) (1,886.6) (2,781.0) (3,530.3) (3,722.4) (3,660.4) (2,806.3)
Other Assets (82.4) (259.1) 16.2 (20.3) (20.7) (21.1) (21.6)
Due To Banks And FI's 236.2 1,288.5 256.7 221.4 232.4 244.1 256.3
Customers Deposits 1,028.6 (647.4) 4,159.9 4,761.2 4,261.5 3,862.0 3,222.4
Other Liabilities 309.3 161.1 71.6 156.9 172.5 189.8 208.8
CF From Operations 580.0 1,221.2 1,617.9 2,229.4 2,083.5 2,095.3 2,663.9
Sale/Purchase Of Investments 197.3 (1,049.5) (1,688.5) (1,087.9) (1,016.5) (1,118.2) (1,230.0)

Capex (42.1) (50.8) (68.9) (82.9) (92.9) (86.7) (95.4)
CF From Investing 155.2 (1,100.3) (1,757.4) (1,170.8) (1,109.4) (1,204.9) (1,325.4)
Issue Of Debt 0.0 0.0 700.0 0.0 0.0 0.0 0.0

Dividend And Zakat Paid (404.8) (326.9) (455.0) (644.4) (918.9) (1,298.4) (1,658.3)
CF From Financing (404.8) (326.9) 245.0 (644.4) (918.9) (1,298.4) (1,658.3)
Change In Cash 330.4 (206.0) 105.5 414.2 55.2 (408.0) (319.8)

Beginning Cash 812.6 1,143.0 937.1 1,042.5 1,456.7 1,511.9 1,103.9
Ending Cash 1,143.0 937.1 1,042.5 1,456.7 1,511.9 1,103.9 784.1

Ratios
Saudi Hollandi Bank
2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
Total op. income
- Dividend Payout Ratio 57.2% 56.1% 53.5% 65.0% 74.9% 84.9% 89.9%
Margins
commission income
liabilities
- Spread 3.4% 3.2% 3.0% 3.1% 3.2% 3.3% 3.4%
Efficiency
- Staff expenses/ Total op Expenses 60.6% 61.3% 61.7% 59.9% 58.7% 58.3% 57.9%
- Rent and G&A expenses/ Total op. Expenses 29.2% 29.6% 29.3% 30.7% 31.7% 32.1% 32.4%
Liquidity
Credit Quality
- Provision for loan losses (SR mn) 427.4 440.3 516.8 641.1 805.3 996.2 1,203.9
- NPL's /Gross Loans 3.1% 2.3% 2.2% 2.6% 2.6% 2.6% 2.6%
- PLL's / Gross Loans 3.4% 3.1% 3.0% 3.1% 3.3% 3.6% 3.9%
- NPL Coverage 110.8% 130.2% 139.9% 117.9% 125.5% 135.0% 148.3%
Capital Adequacy

Total op. income
- Change in Fees from banking services -2.9% 34.9% 72.1% 35.0% 25.0% 25.0% 25.0%
- Change in Investment Income -28.5% 84.6% 17.5% 15.0% 10.0% 5.0% 5.0%

- EPS (SR) 29.4 31.8 29.5 39.4 48.7 60.7 73.2
- DPS (SR) 16.3 17.3 15.3 24.8 35.4 50.0 63.9
- Market Cap. (SR bn) 8.1 9.4 18.3 21.3 21.3 21.3 21.3
- P/E 14.5 15.6 24.7 21.5 17.4 13.9 11.5
- P/BV 3.5 3.7 6.3 6.6 6.0 5.6 5.4


1030.SE
Listing:
Current Price
SR643.0
Key Data
Background
• The Saudi Investment Bank (SAIB) was established on June 23, 1976 and began operations
in March 1977. Its earlier objective was to provide medium to long term financing for
industrial projects but in 1984, it approached Saudi Arabian Monetary Authority (SAMA)
and was allowed to provide full-fledged conventional banking activities.
• SAIB is the second-smallest bank in Saudi Arabia in terms of total assets, having a market
share of 4.5% of the total banking assets in 2004. SAIB has 4.3% market share in terms
of the total banking deposits. The bank has traditionally focused on corporate banking
activities but has changed its strategy in the last couple of years to concentrate more
on retail banking and has therefore entered the retail banking business of credit cards,
leasing and consumer lending. The bank has a small branch network of 17 branches in the
Kingdom with 569 employees in 2004.
• The shareholding pattern of SAIB is widely distributed with 90% of the shares in the
hands of the Saudi investors. As of 2004, JP Morgan Chase had a 7.5% stake in the bank
while Mizuho Corporate Bank had a 2.5% stake in the bank.
• The bank increased its share capital from SR1.1bn in 2003 to SR1.375bn in 2004 through
the issuance of bonus shares. Further, in the wake of strong profits in 2004, the bank
decided to again distribute bonus shares (1:4) and increased its capital to SR1.718bn
consisting of 34.4mn shares of SR50 each par value.
Recent Developments
• BMG and Saudi Investment Bank (SAIB) have recently signed a memorandum of
understanding to act jointly as lead managers and financial advisers for the process of
share flotation of new insurance companies, pending licensing by the Saudi Arabian
Monetary Agency (SAMA).

• Capital Intelligence, in its latest review, placed SAIB on a Positive Outlook, while
maintaining the bank’s current ratings. The long-term foreign currency rating was
affirmed at A-, and the short-term foreign currency rating at A2. Similarly, the financial
strength rating was affirmed at A-
• The net commission income saw a growth of 15.8% in 2004 helped by the upward
which hinders its deposit taking capabilities.
• SAIB’s commission expense-to-commission income dropped from 41.5% in 2003 to

40.1% in 2004. However, we feel that the ratio is not likely to change much in coming
periods as the bank increases its market share among the customer deposits as well as
loans.
• SAIB reported a net profit of SR587.1mn (exceeding our estimates) for the year 2004, up
26.6% from the previous year’s profit of SR463.9mn.
• The bank has reported a strong growth in its fee from banking services, up by a whopping
105.2% in 2004 as compared to the previous year. This has not come as a surprise as the
bank has been traditionally very strong in fee-based banking services.
• However, we believe that the bank will focus on consumer banking and will increase its
commission income through aggressive deposit mobilization and simultaneously taking
increased market share in loans and advances.
• Due to the dominance of wholesale banking in its overall business, the bank has one
of the lowest spreads in the sector (2.3% in 2004). However, we believe that its spread
will increase marginally as it increases the retail portion of its business especially non-
commission bearing deposits.
• SAIB’s total assets stood at SR28.54bn at the end of 2004, representing an increase of
31.5% over Dec 2003. The bank has been able to grow its customer deposits by a strong
yearly growth of 40.8% in 2004 amounting to SR20.28bn.
• The bank also increased the thrust on commercial loan which helped the bank increased
its gross loans and advances by 27.3% aggregating to SR13.6bn in 2004.
• Non-performing loans (NPLs) in 2004 amounted to SR219mn compared to SR195.6mn

in 2003. However, what is heartening is that the NPLs to Gross Loans ratio has declined
from 1.8% in 2003 to 1.6% in 2004. The bank’s Provisions to Gross Loans at 4.4% is also
higher than the industry average of 3.8%.
• SAIB's net income for the first quarter of fiscal year 2005 surged by 68% to reach
SR211mn compared with SR125.6mn for the same period of 2004. Fee from banking
services increased by 61% to reach SR97.74mn for the same period.

Outlook
• The net commission income of the bank is expected to continue to show strong growth of
more than 20% in 2005 as we expect the interest rates to move up.
• The bank is likely to increase its non-interest income as it is strong in fee-based banking
business. SAIB, which has traditionally been very active in the wholesale banking
business, is likely to take an active role in the major project finance deals as Saudi Arabia
encourages setting up of new industrial projects to reduce its reliance on oil revenues.
Valuation
• Since our last investment update in Sep 2004, the stock has moved up sharply by 60.7%
to the current SR643 (bonus adjusted), justifying our earlier buy recommendation.
• Currently, SAIB is trading at 5.6x of its estimated book value and 27.7x of its estimated
earnings of 2005.
• We have revised upwards our earlier projections due to better FY 2004 results of the
bank and improved market conditions. However, the estimated fair value of SAIB’s stock
works out to SR659.6 based on DDM and peer group valuation method, which is up by
around 2.6% vis-à-vis the current market price of the stock. Hence, we revise our earlier
rating and recommend a ‘Hold” on the stock.

Balance Sheet
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Cash & Balances with SAMA 408.2 541.9 577.8 1,375.5 1,304.8 1,514.3 1,622.6
Net Fixed Assets 76.0 97.9 144.8 171.6 203.8 225.4 222.6
Other Assets 304.0 262.4 292.1 297.9 303.9 310.0 316.2
Total Assets 19,956.7 21,708.3 28,543.5 34,987.8 39,980.2 44,548.0 48,230.6
Other Liabilities 807.3 586.3 778.1 817.1 857.9 900.8 945.8
Share Capital 1,100.0 1,100.0 1,375.0 1,718.8 1,718.8 1,718.8 1,718.8
Statutory Reserve 921.0 1,037.0 1,184.0 1,383.6 1,637.4 1,718.8 1,718.8
General & Other Reserves 84.8 454.6 947.8 803.6 803.6 902.4 1,081.0
Total Liabilities and Shareholders' Equity 19,956.7 21,708.3 28,543.5 34,987.8 39,980.2 44,548.0 48,230.6

Operating Statement
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Special Commission Income 850.3 867.6 981.0 1,254.2 1,469.8 1,753.0 2,024.4
Special Commission Expense (410.3) (359.7) (393.2) (482.9) (573.2) (701.2) (809.7)
Net Special Commission Income 440.1 507.8 587.8 771.4 896.6 1,051.8 1,214.6
Fees From Banking Services 101.0 163.3 335.0 469.1 609.8 731.7 878.1
Exchange Income 8.0 12.6 14.2 14.5 14.8 15.1 15.4
Dividend Income 38.0 11.4 16.4 18.8 20.7 22.8 25.1
Net Gains On Investments 20.6 87.2 59.9 62.9 66.0 69.3 72.8
Total Non-Commission Income 167.7 274.4 425.5 565.3 711.3 838.9 991.3
Provision For Loan Losses (52.3) (81.0) (130.0) (183.3) (199.3) (221.4) (241.2)
Total Operating Income 555.5 701.2 883.4 1,153.3 1,408.6 1,669.4 1,964.7
Salaries & Employee Related Expenses (107.7) (125.0) (167.3) (200.8) (220.9) (243.0) (267.3)
Rent & Premises Related Expenses (21.5) (23.1) (26.8) (32.2) (35.4) (38.9) (42.8)
Depreciation And Amortization (13.7) (13.6) (17.5) (24.8) (29.7) (34.2) (36.9)
Other G & A Expenses (32.2) (75.7) (84.7) (97.4) (107.1) (117.8) (129.6)
Total Operating Expenses (175.1) (237.4) (296.3) (355.1) (393.1) (433.9) (476.6)
Net Income 380.4 463.9 587.1 798.2 1,015.5 1,235.5 1,488.2
Statement Of Retained Earnings 2002 2003 2004 2005F 2006F 2007F 2008F
Beginning Retained Earnings 55.7 54.1 40.4 2.7 18.6 38.9 100.7
Net Income 380.4 463.9 587.1 798.2 1,015.5 1,235.5 1,488.2
Transfer To Statutory Reserve (96.0) (116.0) (147.0) (199.6) (253.9) (81.4) 0.0
Transfer To Other Reserves 0.0 (275.0) (343.8) (199.6) 0.0 (98.8) (178.6)
Gross Dividends (273.7) (76.3) (97.4) (383.2) (741.3) (993.5) (1,294.7)
Net Change In Fair Value (12.3) (10.3) (36.7) 0.0 0.0 0.0 0.0
Ending Balance 54.1 40.4 2.7 18.6 38.9 100.7 115.6

Cash Flow
SR mn 2002 2003 2004 2005F 2006F 2007F 2008F
Net Income 380.4 463.9 587.1 798.2 1,015.5 1,235.5 1,488.2
Accertion of Discounts (116.9) (62.2) (98.0) 0.0 0.0 0.0 0.0
Gains on Investments (20.6) (87.2) (59.9) (62.9) (66.0) (69.3) (72.8)
Depreciation And Amotization 13.7 13.6 17.5 24.8 29.7 34.2 36.9
Provision for Loan Losses 52.3 81.0 130.0 183.3 199.3 221.4 241.2
Due from Banks and other FIs (2,658.8) 510.1 (2,682.2) (299.8) (314.8) (330.5) (347.1)
Other Assets (31.6) 41.6 (29.7) (5.8) (6.0) (6.1) (6.2)
Due To Banks And FIs 1,361.7 1,161.8 (115.1) 198.5 83.4 85.1 86.8
Customers Deposits 3,115.5 338.9 5,881.0 5,791.7 4,594.1 4,197.8 3,357.3
CF From Operations 698.2 1,015.9 872.0 2,583.9 2,013.1 2,195.9 2,380.5
Net Sale /Purchase Of Investments (482.0) (573.1) (695.4) (1,351.4) (1,280.6) (937.1) (943.4)
Capex (37.0) (35.5) (64.4) (51.6) (61.9) (55.7) (34.2)
CF From Investing (519.0) (608.5) (759.8) (1,403.0) (1,342.5) (992.9) (977.6)
Dividend And Zakat Paid (183.9) (273.7) (76.3) (383.2) (741.3) (993.5) (1,294.7)
CF From Financing (183.9) (273.7) (76.3) (383.2) (741.3) (993.5) (1,294.7)
Change In Cash (4.8) 133.7 35.9 797.7 (70.7) 209.5 108.2

Beginning Cash 413.0 408.2 541.9 577.8 1,375.5 1,304.8 1,514.3
Ending Cash 408.2 541.9 577.8 1,375.5 1,304.8 1,514.3 1,622.6

Ratios
2002 2003 2004 2005F 2006F 2007F 2008F
Profitability
Total op. income
Margins
commission income
liabilities
- Spread 2.3% 2.3% 2.3% 2.4% 2.4% 2.5% 2.6%
Efficiency
- Staff expenses/ Total op. Expenses 61.5% 52.7% 56.5% 56.6% 56.2% 56.0% 56.1%
- Rent, G&A expenses/ Total op. Expenses 30.7% 41.6% 37.6% 36.5% 36.2% 36.1% 36.2%
Liquidity
- Gross Loans / Commission earning assets 48.3% 51.5% 50.1% 54.1% 56.5% 58.4% 59.1%
- Gross Loans/ Customer Deposits 66.0% 74.3% 67.2% 67.9% 69.4% 70.2% 70.5%
Credit Quality
- Provision for loan losses (SR mn) 394.6 469.4 596.0 779.2 978.6 1,199.9 1,441.1
- NPL's /Gross Loans 2.8% 1.8% 1.6% 1.6% 1.7% 1.8% 1.8%
- PLL's / Gross Loans 4.2% 4.4% 4.4% 4.4% 4.6% 4.9% 5.4%
- NPL Coverage 153.3% 240.0% 272.8% 279.4% 275.2% 277.1% 302.6%
Capital Adequacy

Total op. income
- Change in Special commission income -5.6% 2.0% 13.1% 27.9% 17.2% 19.3% 15.5%
- Change in Fx Income -13.8% 57.7% 13.1% 2.0% 2.0% 2.0% 2.0%

- EPS (SR) 17.3 21.1 21.3 23.2 29.5 35.9 43.3
- DPS (SR) 12.0 3.0 3.5 11.1 21.6 28.9 37.7
- Market Cap. (SR'mn) 5,489 7,673 15,455 22,103 22,103 22,103 22,103
- P/E 14.4 16.5 26.3 27.7 21.8 17.9 14.9
- P/BV 2.5 2.9 4.4 5.6 5.3 5.0 4.8
- Dividends yield 5% 0.9% 0.6% 1.7% 3.4% 4.5% 5.9%

Banque Saudi Fransi

1050.SE
Listing:
Saudi Stock Exchange Not Rated
Current Price
SR1,129.5
Key Data
BVPS (SR) 122.6 52 week Lo / Hi SR450/SR1,129.5
P / BV (x) 5.0 Target Price NOT RATED
Background
• Banque Saudi Fransi (BSF) was established in June 1977 as a Saudi joint stock company
and commenced its operations in December 1977 after taking over the operations of the
Banque de I’Indochine et de Suez branches in the Kingdom of Saudi Arabia. The bank
provides a full range of financial services including corporate banking, retail and treasury
and investment services through a network of 3 regional branches, 60 branches located
in major cities in the Kingdom and more than 250 ATMs. At the end of 2004, the bank
employed 1,555 personnel.
• BSF is one of the medium sized banks in the Kingdom of Saudi Arabia with total assets
of SR59.67bn at the end of 2004. The bank ranks sixth among all Saudi banks in terms of
asset size with a 9.5% market share of the sector's aggregate assets in 2004.
• The bank is a leader in the financial advisory, project/structured finance and syndicated
loans and started these activities in the early 1980s. The bank has been involved in
structuring and arranging a number of deals especially in the petrochemicals, construction,
shipping and industrial sectors.
• BSF has an authorized, issued and fully paid up capital of SR2.25bn distributed over
45mn shares each having a par value of SR50. In 2003, the bank had increased its paid
up capital by SR450mn through a 1:4 bonus share issuance through the capitalization
of its general reserves. BSF is affiliated with CALYON Corporate & Investment Bank
(formerly called Credit Agricole Indosuez) that holds an equity interest of 31.1% of the
bank's capital.
Recent Developments
• BSF and the French insurance company Assurance Generale du France (AGF) signed a

protocol for the establishment of a joint Saudi insurance firm. They also submitted a formal
application to the relevant authorities in Saudi Arabia for a license for this purpose.
• BSF was mandated within a group of six Saudi banks by the Saudi Electricity Company
(SEC) to act as leading responsible parties for a new SR6bn structured term-loan facility
with a tenor of 15 years.
• BSF reported an yearly growth of 11.4% in the net special commission income which
grew from SR1.43bn in 2003 to SR1.59bn in 2004.
• BSF reported a net profit of SR1.53bn for the year 2004, up 29.6% from the previous year’s
profit of SR1.18bn. The bank’s RoAE and RoAA stood at 29.1% and 2.7% respectively in
2004.
• The bank increased its asset base from SR53.5bn in 2003 to SR59.7bn in 2004, representing
an increase of 11.5% in 2004. The bank’s deposit base also reported the in-line growth of
11.9% in 2004. Customers deposits as percentage of total liabilities has remained flat at
around 80% in the last couple of years.
• The bank’s gross loans, however, increased at a higher rate of 29.1% in the same period
which increased its loans to deposit ratio from 64.6% in 2003 to 74% in 2004.
• The bank’s spread recorded a decline from 3.4% in 2003 to 3.1% in 2004. This is mainly
due to the decrease in the yield on average earning assets from 4.5% in 2003 to 4.2% in
2004 while the interest on interest earning liabilities remained flat at around 1.1% in the
above period.
• However, the bank has done considerable improvement in reducing its NPLs/Gross
Loans from 2.0% in 2003 to 1.4% in 2004. The bank’s NPL coverage too improved from
145.3% in 2003 to 176.4% in 2004.
• The bank’s capitalization ratio are among the lowest in the Saudi banking sector with
both the Tier-1 & Tier-2 Capital Ratios at 12.6% in 2004.
• BSF's operations are very cost efficient with the lowest cost-to-income ratio in the sector
of 30% in 2004. The bank also reported the highest net margin in the sector of 70% in
2004 as compared to the sector’s average of 61.4% in 2004.
• The fee from banking activity as a percentage of operating income increased from 14.6%
in 2003 to 21.2% in 2004 as the bank increased its fee-based activities taking advantage
of the economic growth in the country.
• BSF’s net income for the first-quarter of fiscal year 2005 increased by 30% over the same
period of last year to reach SR430mn. Despite a decline in profit margins, total operating
income soared by 27% whereas total operating expenses increased by 10% only for the
same period.

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

Balance Sheet
Banque Saudi Fransi
‘SR mn’ 2002 2003 2004
Cash & balances with SAMA 2,673.0 4,147.2 2,009.3
Due from banks and other FI's 512.0 1,291.3 2,486.1
Trading investments 2,639.3 1,517.0 1,239.8
Non-trading investments 15,397.8 17,512.8 17,861.6
Net Loans and advances 21,034.1 26,725.8 34,463.4
Net fixed assets 456.2 453.8 451.9
Other assets 2,000.8 1,855.1 1,161.7
Total Assets 44,713.3 53,502.9 59,673.7
Due to banks and other financial institutions 1,316.4 3,674.0 4,171.2
Customers' deposits 36,192.5 42,634.3 47,704.2
Other liabilities 2,453.0 2,144.3 2,281.9
Total Liabilities 39,961.9 48,452.5 54,157.2
Share capital 1,800.0 2,250.0 2,250.0
Statutory reserve 1,800.0 2,100.0 2,250.0
Other reserves 1,132.9 691.0 1,009.6
Retained Earnings 18.5 9.4 6.9
Total shareholders' equity 4,751.3 5,050.4 5,516.5
Total liabilities and shareholders' Equity 44,713.3 53,502.9 59,673.7

Operating Statement
Banque Saudi Fransi
‘SR mn’ 2002 2003 2004
Special commission income 1,936.7 1,921.6 2,111.7
Special commission expense (558.7) (493.9) (521.6)
Net special commission income 1,378.0 1,427.6 1,590.1
Fees from banking services 209.8 260.2 465.4
Exchange income 65.0 72.3 81.0
Net trading income 19.0 85.6 110.2
Dividend income 1.4 1.3 1.2
Net gains on investments 20.4 14.3 4.0
Other operating income 5.5 6.1 8.9
Total non-interest income 321.1 439.9 670.7
Provision for loan losses (120.1) (90.3) (67.6)
Total operating income 1,578.9 1,777.2 2,193.2
Salaries & employee related expenses (309.8) (317.5) (350.1)

Rent & premises related expenses (77.0) (82.0) (55.6)
Depreciation and amortization (66.2) (68.9) (64.1)
Other G & A expenses (108.7) (120.5) (175.9)
Other operating expenses (3.0) (3.2) (11.6)
Total operating expenses (564.7) (592.0) (657.3)
Net Income 1,014.2 1,185.2 1,535.9
Statement of Retained Earnings 2002 2003 2004

Beginning retained earnings 1.5 18.5 9.4
Net income 1,014.2 1,185.2 1,535.9
transfer to statutory reserve 0.0 (300.0) (150.0)
Transfer to other reserves (605.0) (100.0) (450.0)
Gross dividends (385.8) (794.3) (938.4)
Net change in fair value (6.4) 0.0 0.0
Ending balance 18.5 9.4 6.9

Cash Flow
Banque Saudi Fransi
SR mn 2002 2003 2004
Net Income 1,014.2 1,185.2 1,535.9
Accretion Of Discounts (5.9) (1.6) 16.9
Gains On Investments (20.4) (14.3) (4.0)
Depreciation And Amortization 66.2 68.9 64.1
Loss/Gain On Disposal Of Fixed Assets (0.1) (0.1) 0.2
Provision For Loan Losses 120.1 90.3 67.6
Due From Banks And Other FI's 1,001.8 (779.3) (1,194.7)

Trading Portfolio 907.7 1,122.3 277.2
Loans And Advances (4,376.5) (5,782.0) (7,805.2)
Other Assets (230.6) 63.5 556.4
Due To Banks And FI's 789.5 2,357.6 497.2
Customers Deposits 4,138.9 6,441.8 5,069.9
Other Liabilities 158.3 (365.2) 20.6
Cash Flow From Operations 3,563.2 4,387.2 (898.0)
Net Sale /Purchase Of Investments (2,649.7) (2,108.7) (356.1)

Capex (74.4) (66.5) (62.4)
Cash Flow From Investing (2,724.1) (2,175.2) (418.5)
Dividend And Zakat Paid (422.8) (737.8) (821.4)

Cash Flow From Financing (422.8) (737.8) (821.4)
Change In Cash 416.3 1,474.2 (2,137.9)

Beginning Cash 1,711.9 2,673.0 4,147.2
Ending Cash 2,128.2 4,147.2 2,009.3

Ratios
Banque Saudi Fransi
Fact Sheet 2002 2003 2004
Profitability
- Return on average assets 2.4% 2.4% 2.7%
- Return on average equity 23.1% 24.2% 29.1%
- Net special commission income after PLL's/ Total op. income 79.7% 75.2% 69.4%
- Non-commission income/ Total op. income 20.3% 24.8% 30.6%
- Non-commission expense/ Total op. income 35.8% 33.3% 30.0%
- Fees from banking services/ Total op. income 13.3% 14.6% 21.2%
- Dividend payout ratio 38.0% 67.0% 61.1%
Margins
- Net (or profit) margin 64.2% 66.7% 70.0%
- Special commission expense/ Special commission income 28.8% 25.7% 24.7%
- Yield on average earning assets 5.3% 4.5% 4.2%
- Cost rate on average commission bearing liabilities 1.6% 1.2% 1.1%
- Spread 3.7% 3.4% 3.1%
- Commission margin (earning assets) 3.4% 3.2% 3.0%
Efficiency
- Cost/ Total op. income 35.8% 33.3% 30.0%
- Staff expenses/ Total op. income 19.6% 17.9% 16.0%
- Rent, G&A expenses/ Total op. income 11.8% 11.4% 10.6%
- Non-commission expense/ Average total assets 1.3% 1.2% 1.2%
Liquidity
- Gross loans / Commission earning assets 56.4% 59.9% 64.5%
- Gross loans/ Customer Deposits 60.2% 64.6% 74.0%
- Customer Deposits/ Equity 761.7% 844.2% 864.7%
- Customer Deposits/ Total assets 80.9% 79.7% 79.9%
- Due from Banks/ Due to Banks 38.9% 35.1% 59.6%
41.6% 42.9% 37.5%
Credit Quality
- Provisions /Total op. income 7.6% 5.1% 3.1%
- Provisions /Average loans 0.6% 0.4% 0.2%
- Non Performing Loans (SR mn) 504 553 480
- Provision for loan losses (SR mn) 765 803 847
- NPL's /Gross Loans 2.3% 2.0% 1.4%
- PLL's / Gross Loans 3.5% 2.9% 2.4%
- NPL Coverage 151.7% 145.3% 176.4%
Capital Adequacy
- Equity/ Total Assets (Equity capital ratio) 10.6% 9.4% 9.2%
- Equity/ Gross Loans 21.8% 18.3% 15.6%
- Tier 1 (SR' mn) 4,751 5,050 5,517
- Tier 1+2 (SR mn) 4,751 5,050 5,517
- Risk weighted assets (SR mn) 27,791 34,929 43,924
- Tier 1 capital ratio 17.1% 14.5% 12.6%
- Tier 2 capital ratio 17.1% 14.5% 12.6%

- Investment Income/ Total op. income 2.6% 5.7% 5.3%
- FX Income/ Total op. income 4.1% 4.1% 3.7%
- Other Income/ Total op. income 0.3% 0.3% 0.4%
- Change in special commission income -17.4% -0.8% 9.9%
- Change in Fees from banking services 12.4% 24.0% 78.9%
- Change in Investment Income -50.4% 147.7% 14.1%
- Change in Fx Income 26.1% 11.3% 12.0%
- Change in Other Income -2.1% 11.3% 44.3%

- Par value per share (SR) 50.00 50.00 50.00
- Shares in issue (mn) 36.0 45.0 45.0
- EPS (SR) 28.2 26.3 34.1
- DPS (SR) 10.00 17.00 20.00
- Book value per share (SR) 132.0 112.2 122.6
- Market price year end (SR) 407.0 411.0 774.0
- Market Cap. (SRbn) 14.7 18.5 34.8
- P/E 14.4 15.6 22.7
- P/BV 3.1 3.7 6.3

Bank Al Jazira
1020.SE
Listing:
Saudi Stock Exchange Not Rated
Current Price
SR677.5
Key Data
BVPS (SR) 99.2 52 week Lo / Hi SR271/SR677.5
P / BV (x) 6.8 Target Price NOT RATED
Background
• Bank AlJazira (BJAZ) was formed in 1976 to takeover the operations of the National
Bank of Pakistan's branches in the Kingdom of Saudi Arabia. The bank provides its clients
with a wide range of Islamic Shariaa-compliant products and services through a network
of 16 branches and 25 ATMs and employed 766 personnel in 2004.
• The management of Bank AlJazira played a major role to recover the bank from its
financial problems and reposition it as one of the well recognized financial institutions in
the Kingdom.
• Bank AlJazira is the smallest bank in the Kingdom of Saudi Arabia in terms of asset size.
With total assets of SR10.7bn as of 2004 end, the bank had a 1.7% market share of the
banking sector's aggregate total assets.
• The bank successfully raised its paid up capital in 2004 by SR150mn through a 1:4 rights
issue, raising its paid up capital to SR750mn (15mn shares). The shares were sold at a
price of SR130 per share, which included a premium of SR80 per share over the par value.
According to the bank's annual report of 2004, shareholding structure consisted of Saudi
investors holding 94.17% stake and National Bank of Pakistan holding the remaining
5.83% stake. Amongst the Saudi investors, Sheikh Saleh Kamel owns almost 20% of the
bank’s capital.
Recent Developments
• Bank Aljazira deployed Peribit Networks Peribit Sequence Reducer products to improve
application performance on its wide area network (WAN) in more than 16 locations
throughout the Kingdom.

• The Savola Group and BJAZ signed cooperation agreement, according to which the bank
provided cooperative insurance sponsorship for all the employees of the Group and its
subsidiary companies, in line with Islamic Sharia. The total number of employees covered
by the scheme exceeded 5,000.
• Moody's Investors Service upgraded the foreign currency deposit ratings for BJAZ to
Baa2/Prime-2 from Baa3/Prime-3.
• Bank AlJazira’s reported the net special commission income of SR187.9mn, up 18.9%
as compared to the previous year. The bank reported a net profit of SR187.7mn for the
year 2004, up 100.8% from the previous year’s profit of SR93.5mn. The bank’s RoAE
and RoAA stood at 15.8% and 1.9% respectively in 2004.
• The bank’s spread reported a decline from 2.4% in 2003 to 2.2% in 2004. This is mainly
due to the increase in the high-interest time deposits with the bank. The bank has the
smallest spread in the Saudi banking sector, where the average spread was 3.1% in
2004.
• BJAZ’s fee-based income increased substantially in 2004 to SR298.8mn in 2004 as

compared to SR112.7mn in the previous year. As a result, the fee from banking services
as percent of total operating income increased from 41.9% in 2003 to 68.2% in 2004.
• The bank’s deposits increased from SR7.5bn in 2003 to SR8.1bn in 2004 reporting a
growth of only 8% in 2004. This is attributed to the small branch network of the bank
which hinders its deposit-taking capability especially of the retail deposits which has a
negative effect on the interest margins and profitability.
• The bank has undertaken an improvement in its capitalization with the tier-1 capital ratio
increasing from 15.1% in 2003 to 20.8% in 2004. The bank’s tier-1 capital ratio in 2004
was #2 among the Saudi banks, just a shade lower than SAIB which had a tier-1 capital
ratio of 21%in 2004.
• BJAZ’s total assets reported an yearly growth of 19.3% aggregating to SR10.7bn in 2004.
The bank’s net loans and advances increased from SR4.66bn in 2003 to SR5.19bn in
2004 representing an yearly growth of 11.3%.
• The bank has substantially improved its credit profile and has reduced its NPL/Gross
Loans from 6.8% in 2003 to 3.7% in 2004. However, the ratio is still much higher than the
banking average of 2.3%. Also the bank has improved its coverage from 59.8% in 2003
to 111.8% in 2004.
• BJAZ's liquidity ratios improved noticeably with gross loans-to-customers' deposits

falling from 78.7% in 2000 to 66.4% in 2004 as compared to a sector's average of 74.7%.
This also gives the bank room to aggressively promote its lending activities especially in
the lucrative retail lending segment.

• BJAZ was the first bank in the Kingdom to introduce a Sharia-compliant specialized
finance for share trading through Murabaha named as "Al Tamam" Program. BJAZ is one
of the leaders in terms of volume and number of local trades in 2004.
Outlook
• BJAZ reported an EPS of SR12.5 per share during 2004. The earnings of 2004 discount
the current market price of SR677.5 at around 54.1x.
• The bank is likely to continue on its expansion plans increasing its branch network, by
adding new branches during the next 2 years and relocate to new premises.
• BJAZ is expected to continue to play a vital role as a leader in the share trading business
in Saudi Arabia. The bank is likely to witness an increasing activity during 2005 as a
result of the ongoing development in the Saudi capital market.

Balance Sheet
Bank Al Jazira
SR mn 2002 2003 2004
Cash & balances with SAMA 196.0 641.8 382.4
Due from banks and other FI's 1,912.5 1,840.9 2,733.7
Trading investments 92.1 161.4 196.9
Non-trading investments 888.0 1,316.7 1,761.3
Net Loans and advances 2,368.3 4,661.4 5,186.7
Net fixed assets 42.4 97.9 143.7
Other assets 225.5 268.5 317.0
Total Assets 5,724.8 8,988.7 10,721.8
Due to banks and other financial institutions 659.6 446.2 836.8
Customers' deposits 4,191.1 7,535.1 8,141.6
Other liabilities 91.8 85.2 196.2
Total Liabilities 4,942.4 8,066.4 9,174.7
Minority interest 31.2 37.2 59.1
Share capital 600.0 600.0 750.0
Statutory reserve 48.0 71.4 360.0
Other reserves 94.6 175.5 294.8
Retained Earnings 8.5 38.2 83.2
Total Shareholders' equity 751.1 885.1 1,488.0
Total Liabilities and Shareholders' Equity 5,724.8 8,988.7 10,721.8

Operating Statement
Bank Al Jazira
SR mn 2002 2003 2004
Special commission income 202.9 246.8 317.3
Special commission expense (85.5) (88.8) (129.4)
Net special commission income 117.4 158.0 187.9
Fees from banking services 48.0 112.7 298.8
Exchange income 2.4 3.2 3.1
Net trading income (6.7) 34.0 32.4
Dividend income 5.6 11.3 16.1
Net gains on investments 24.1 19.3 53.4
Other operating income 1.0 3.2 8.5
Total non-commission income 74.4 183.7 412.3
Provision for loan losses (11.0) (72.7) (162.2)
Total operating income 180.8 269.0 438.0
Salaries & employee related expenses (70.8) (89.6) (122.5)
Rent & premises related expenses (11.3) (13.4) (18.1)
Depreciation and amortization (9.6) (12.0) (17.7)
Other G & A expenses (29.8) (52.0) (83.8)
Other provisions 0.0 (6.1) 0.0
Other operating expenses (0.5) (2.8) (7.4)
Total operating expenses (122.0) (175.7) (249.6)
Income before minority interest 58.8 93.3 188.4
Minority interest 0.4 0.2 (0.7)
Net Income 59.2 93.5 187.7
Statement of Retained Earnings 2002 2003 2004

Beginning retained earnings 11.6 8.5 38.2
Net income 59.2 93.5 187.7
Adjustments (23.8) 0.0 0.0
Transfer to statutory reserve (18.0) (23.4) (48.6)
Transfer to other reserves (10.0) 0.0 0.0
Gross dividends 0.0 (38.0) (88.4)
Net change in fair value (10.4) (2.4) (5.7)
Ending balance 8.5 38.2 83.2

Cash Flow
Bank Al Jazira
SR Mn 2002 2003 2004
Net Income 59.2 93.5 187.7
Accretion Of Discounts 0.3 (0.7) -
Gains On Investments (17.2) (53.3) (53.4)
Depreciation And Amortization 9.6 12.0 17.7
Provision For Loan Losses 11.0 72.7 162.2
Due From Banks And Other FI's (526.4) 71.7 (892.9)

Trading Portfolio 121.1 (35.3) (35.5)
Loans And Advances (282.2) (2,365.8) (687.5)
Other Assets 22.8 (43.0) (48.5)
Due To Banks And FI's (16.7) (213.3) 390.6
Customers Deposits 544.6 3,343.9 606.6
Other Liabilities (16.2) (8.0) 111.1
Minority Interest (13.4) 5.9 21.9
Cash Flow From Operations (103.7) 880.2 (219.9)
Net Sale /Purchase Of Investments 186.1 (330.2) (391.2)

Capex (6.2) (67.5) (63.5)
Cash Flow From Investing 179.9 (397.7) (454.7)
Dividend And Zakat Paid 0.0 (36.6) (88.4)

Change In Equity 0.0 0.0 503.6
Cash Flow From Financing 0.0 (36.6) 415.2
Change In Cash 76.2 445.9 (259.4)

Beginning Cash 119.8 196.0 641.8
Ending Cash 196.0 641.8 382.4

Ratios
Bank Al Jazira
Fact Sheet 2002 2003 2004
Profitability
- Return on average assets 1.1% 1.3% 1.9%
- Return on average equity 8.2% 11.4% 15.8%
- Non-commission income/ Total op. income 41.2% 68.3% 94.1%
- Non-commission expense/ Total op. income 67.5% 65.3% 57.0%
- Dividend payout ratio 0.0% 40.7% 47.1%
Margins
- Net (or profit) margin 32.8% 34.8% 42.9%
- Special commission expense/ Special commission income 42.1% 36.0% 40.8%
- Yield on average earning assets 3.9% 3.8% 3.7%
- Cost rate on average commission bearing liabilities 1.9% 1.4% 1.5%
- Spread 2.0% 2.4% 2.2%
- Commission margin (earning assets) 2.0% 1.3% 0.3%
Efficiency
- Cost/ Total op. income 67.5% 65.3% 57.0%
- Staff expenses/ Total op. income 39.1% 33.3% 28.0%
- Rent, G&A expenses/ Total op. income 22.7% 24.3% 23.3%
- Non-commission expense/ Average total assets 2.3% 2.4% 2.5%
Liquidity
- Loans / Commission earning assets 48.7% 62.6% 57.0%
- Loans/ Customer Deposits 61.7% 64.5% 66.4%
- Customer Deposits/ Equity 558.0% 851.3% 547.2%
- Customer Deposits/ Total assets 73.2% 83.8% 75.9%
Credit Quality
- Provisions /Average loans 0.4% 1.8% 3.2%
- Non Performing Loans (SR mn) 302 328 199
- Provision for loan losses (SR mn) 219 196 222
- NPL's /Gross Loans 11.7% 6.8% 3.7%
- PLL's / Gross Loans 8.5% 4.0% 4.1%
- NPL Coverage 72.4% 59.8% 111.8%
Capital Adequacy
- Equity/ Total Assets (Equity capital ratio) 13.1% 9.8% 13.9%
- Equity/ Gross Loans 29.0% 18.2% 27.5%
- Tier 1 (SR mn) 751 885 1,488
- Tier 1+2 (SR mn) 751 885 1,527
- Risk weighted assets (SR mn) 3,184 5,856 7,153
- Tier 1 capital ratio (min. 4%) 23.6% 15.1% 20.8%
- Tier 2 capital ratio (min. 8%) 23.6% 15.1% 21.3%

- Investment Income/ Total op. income 12.8% 24.0% 23.3%
- FX Income/ Total op. income 1.3% 1.2% 0.7%
- Other Income/ Total op. income 0.5% 1.2% 1.9%
- PLL's/ Total op. income 6.1% 27.0% 37.0%
- Change in special commission income -26.1% 21.6% 28.6%
- Change in Fees from banking services 9.7% 134.8% 165.0%
- Change in Investment Income -38.6% 179.8% 57.8%
- Change in Fx Income 7.5% 33.6% -2.4%
- Change in Other Income 238.3% 165.2%

- Par value per share (SR) 50.0 50.0 50.0
- Shares in issue (mn) 12.0 12.0 15.0
- EPS (SR) 4.94 7.79 12.52
- DPS (SR) 2.50 2.55 3.00
- Book value per share (SR) 62.59 73.76 99.20
- Market price year end (SR) 121.00 249.75 392.00
- Market Cap. (SR bn) 1.5 3.0 5.9
- P/E 24.51 32.06 31.32
- P/BV 6.26 5.31 3.95

SAMBA Financial Group BUY 1090.SE SR734.8 1,10
Al Rajhi Banking & Inv. Corp. HOLD 1120.SE SR1,492.0 1,10
Riyad Bank HOLD 1010.SE SR630.0 1,10
Arab National Bank BUY 1080.SE SR786.0 1,10
The Saudi British Bank HOLD 1060.SE SR1,130.0 1,10
Saudi Hollandi Bank BUY 1040.SE SR845.0 1,10
The Saudi Investment Bank HOLD 1030.SE SR643.0 1,10
Banque Saudi Fransi NOT RATED 1050.SE SR1,129.5 1,10
Bank Al Jazira NOT RATED 1020.SE SR677.5 1,10

UAE
UAE Banking Sector

May 2005
Equities Research
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661

omar@global.com.kw
Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
Phone No:(965) 2400551 Ext.196
Raghu Sarma
Financial Analyst
Phone No:(965) 2400551 Ext.273
Table of Contents
Banking Sector in UAE ............................................................................................................................................... 1
Peer Group Analysis ..................................................................................................................................................... 9
UAE Banks - Shifts in Competitive Positioning ......................................................................................... 16
Sector Outlook .................................................................................................................................................................. 22
UAE Banks – Recommendation Summary ................................................................................................... 24
UAE Banks – Profiles ................................................................................................................................................... 27
Abu Dhabi Commercial Bank ........................................................................................................................ 28
Abu Dhabi Islamic Bank ................................................................................................................................... 37
Bank of Sharjah ....................................................................................................................................................... 45
Commercial Bank of Dubai ............................................................................................................................. 53
Dubai Islamic Bank ............................................................................................................................................... 61
Emirates Bank International ............................................................................................................................ 69
First Gulf Bank ........................................................................................................................................................ 78
Mashreqbank ............................................................................................................................................................. 86
National Bank of Abu Dhabi .......................................................................................................................... 96
National Bank of Dubai ...................................................................................................................................... 105
Sharjah Islamic Bank ........................................................................................................................................... 113
Union National Bank ........................................................................................................................................... 121

Global Research - UAE Global Investment House
1. Banking Sector in UAE
Banks play a critical role in the economy of UAE, as evidenced by the huge banking assets in
the country, estimated at over 125% of the country’s GDP at the end of 2003. Consolidated
assets of the banking sector grew to AED413.7bn at the end of September 2004, a growth of
12.8% from the end of 2003, thanks to the total credit growing by 21.0% to AED238.2bn.
The sector had an excellent year in 2003, and the good performance continued in 2004 too.
Good times prevailed predominantly owing to high credit and deposit growths on the back of
a favorable interest rate environment, high oil prices and a flourishing economy.
Apart from the growth in assets and the resultant increase in net interest income, the UAE
banking sector was also helped by the steady presence of non-interest revenues, thereby
lending stability to its earnings in times of interest rate fluctuations. Higher trade finance,
a characteristic of UAE’s banking sector, and fees arising out of rising consumer banking
activities have pushed up revenues in the form of fees and commissions.
Space for many in a market led by government-owned banks
Banks in UAE primarily belong to two categories, local and foreign, with the latter being
restricted from operating more than five branches. The number of local banks remained the
same in 2004 at 21, while the total number of branches (including all forms of operational
presence, viz., domestic branches, overseas branches, correspondent banking centres,
representative offices, etc.) of the 12 banks that have been covered in this Report was 330
at the end of 2004. Following the closing down of Standard Chartered Grindlays Bank Ltd.
(consequent to the merger of Standard Chartered with ANZ Grindlays), the number of foreign
banks in the country came down to 25 at the end of ’03. Among the GCC countries, UAE has
the second highest number of banks after Bahrain.
Four of UAE’s top banks are majority-owned by Governments of Abu Dhabi or Dubai.
These have been shown in the following Table.
Table 1-1 : Government holding in UAE Banks

Bank Government Holding Entity
National Bank of Abu Dhabi 73% Abu Dhabi Government
Abu Dhabi Commercial Bank 65% Abu Dhabi Government
Union National Bank 50% Abu Dhabi Government
Emirates Bank International 77% Dubai Government
Source : Company Annual Reports.
The Governments have minor stakes in other banks too, viz. National Bank of Dubai (14.2%),
Sharjah Islamic Bank (27.0%), etc.
Government-related business dominates the balance sheets of these banks (except EBI),
especially NBAD, which acts as the official banker of the government. Large stakes held by
the government underline the significance of this sector, more so because of the government
control on the macro-economy, which predominantly relies on oil revenues and trade. UAE
also boasts of large private banks like National Bank of Dubai (NBD) held by prominent
May 2005 UAE Banking Sector 1

local businessmen and members of the ruling family; Mashreqbank, held by the Al Ghurair
family; and Commercial Bank of Dubai (CBD), which has most of its shares held by foreign
banks.
Another notable feature is the rapid strides made by Islamic banking sector in the country
during the last couple of years. A range of Sharia-compliant products were introduced in the
market and Islamic finance deals like Ijara transactions have become common in mortgage
deals. Dubai Islamic Bank (DIB), the leading Islamic bank in the country, has been mandated
as the lead manager and arranger of deals worth US$1.1bn, including the US$750mn Islamic
sukuk for Dubai’s Civil Aviation Department to finance the phase-2 expansion of Dubai
airport. Market shares of both Islamic banks, within the listed banks’ universe, showed
an improvement in ’03. However, Islamic banking in UAE is still behind Bahrain, which
continues to be the regional centre.
Though the local banking industry has been protected from foreign competition since 1982,
foreign banks continue to operate successfully in the country. Most of these banks started
operations during the oil price-driven economic boom in 1970s and are headquartered in
Dubai. In terms of openness to foreign banks, UAE is behind Bahrain, but ahead of Saudi
Arabia and Kuwait. Foreign banks accounted for 24% of the total assets in the banking
system at the end of September 2004. After a lower growth in 2003, mainly due to reduction
in Citibank’s asset base in the wake of the attack on Iraq, foreign banks, especially HSBC
and Standard Chartered, are believed to be continuously increasing their market share. They
primarily target large corporate borrowers and the high net worth clients.
Table 1-2 : Area of origin-wise break-up of the foreign banks operating in UAE
Area of origin Number of banks
Other GCC 3
Non-GCC Middle East 8
Indian sub-continent 5
British 5
Other European 4
American 1
Source: Capital Intelligence Country Banking Report, March 2004.
Pivotal role of the central bank within its limitations
The Central Bank of UAE, formed in 1980, advises the government on monetary and financial
matters. It has also played an active role in ensuring smooth functioning of the sector through
timely interventions in the past.
• It played a major role in restoring confidence in the UAE banking system after the
Gulf war crisis in 1990-’91.
• It presided over the takeover of the privately owned Middle-East Bank by Emirates
Bank Group in 1992, recapitalisation of National Bank of Sharjah (NBS) in 1993
and restructuring of the troubled First Gulf Bank (FGB) in 1996.
2 UAE Banking Sector May 2005

• In 1998, it supported the beleaguered DIB and introduced credit controls on loans
against shares to cool an overheated stock market.
However, the banking law does not confer the role of the lender of last resort to the central
bank, which has been played by the individual emirates in the past. Also the central bank
has been slow to implement a number of reforms in the past, as any major change had to be
approved by the individual emirates, which effectively delays the process.
Regulatory changes enhance credibility of the system
Banking regulations in UAE have not changed much in the last 18 months. The last major
change was in 2000, when the cash reserve ratio on both the current and call accounts were
doubled to 14%, and restrictions were introduced in lending levels to individual clients.
The minimum capital adequacy ratio requirement for banks in UAE is 10%, which is 2%
higher than that required by the Bank for International Settlements and is in line with that in
other GCC countries. Also compliance with the new Basle Accord for all banks was further
requested by the central bank, which aligns the regulatory capital requirements with the
underlying risk.
Various initiatives were undertaken by the central bank like, joining hands with the IMF and
the World Bank to fight money-laundering in the country. Following the passing of money-
laundering law in ’02, which tightened regulation of the formal financial sector, the central
bank is working on an international regulatory structure for the informal hawala money
transfer system. UAE is the only Gulf state to have a formal hawala regulation system, which
mandates all the hawala dealers to register with the central bank.
Growing bigger and faster
Led by robust growth in deposits and credit, overall size of the balance sheet increased by
12.8% to AED413.7bn in the first nine months of 2004. In terms of asset size, UAE’s banking
sector is second only to Saudi Arabia within the GCC. Asset size of all the national banks
put together increased by 12.8% to AED314.3bn, while that of the foreign banks increased
by 12.7% to AED99.5bn. However, it should be noted that credit growth has been higher for
the national banks.

Table 1-3 : Consolidated Balance Sheet of Banks in UAE

(AED mn) 2000 2001 2002 2003 Sep-04
Assets
Cash & Deposits with CB 25,593 27,624 25,059 27,283 31,650
Due from Resident Banks 10,775 14,640 15,995 15,362 13,018
Foreign Assets 91,457 97,521 110,732 111,727 113,679
Credit Facilities 138,370 145,333 165,611 196,906 238,209
Claims on Government 12,581 10,565 15,222 19,650 29,134
Claims on official entities 5,770 4,830 6,454 12,215 13,544
Claims on the Private Sector 118,035 127,985 142,032 162,769 191,786
Claims on other FIs 1,984 1,953 1,903 2,272 3,745
Domestic Investments 3,281 5,063 6,452 6,886 7,809
Other Assets 7,625 7,600 7,701 8,744 9,384
Total Assets 277,101 297,781 331,550 366,908 413,749
Liabilities
Monetary Deposits 24,050 28,927 35,116 44,477 57,183
Quasi-Monetary Deposits 107,473 117,016 126,599 142,338 150,694
Foreign Liabilities 26,584 28,789 28,247 30,294 41,553
Government Deposits 30,837 27,382 36,972 40,133 47,726
Government Lending Funds 41 37 28 23 18
Due to Central Bank 80 52 116 163 781
Capital and Reserves 34,273 36,817 41,023 44,455 49,656
Due to Resident Banks 10,901 15,196 17,427 17,899 15,184
Unclassified Liabilities 42,862 43,565 46,022 47,126 50,954
Total Liabilities 277,101 297,781 331,550 366,908 413,749
Source: Central Bank of UAE
As can be seen above, the aggregate balance sheet size has been growing steadily. It grew at
a CAGR of 9.8% during 2000-‘03.
Private sector lending and foreign assets dominate
Asset composition of UAE banking sector is characterised by a high proportion of claims

to the private sector and an exceptionally high proportion of foreign assets. Foreign assets,
which formed 27.5% of the total assets at the end of 3Q04, pertain to the investments made
abroad by the government and funded by the banks in UAE. Most of this exposure is in the
form of bank placements, and a significant portion of it is to top-rated banks in Western OECD
countries. However, it can be seen that the proportion of foreign assets has come down during
the last two years, losing its share to credit facilities, which formed 57.6% of assets at the end
of 3Q04, which is on a slightly higher side compared to other GCC countries.

Chart 1-1 : Composition of assets of UAE banks - Sep 2004

Others
13%
Domestic
Investments
2%
Claims on the
Private Sector
47%
Foreign Assets
27%
Other Claims
11%
Source : Central Bank of UAE
Cashing in on the business upturn
Over the years, credit facilities have led the asset growth of the UAE banking sector. After a
sedate growth in 2001, growth of total credit accelerated in the following two years. Cashing
in on the favourable macro-scenario, total credit increased by 18.4% to AED226bn in 2003,
with the credit to residents growing by 18.9% to AED196.9bn. The total credit and credit to
residents grew further by 21.1% and 21.0% in the first three quarters of 2004. Industry and
commerce accounted for the major chunk of the loans and advances at 53.5%, while credit to
the government, which has been increasing, constituted 11.8% of the total credit. About 22%
of the loans and advances fell in the category of others, which included individual loans.
Table 1-4 : Gross credit extended by banks

(In AED mn) 2000 2001 2002 2003 Sep 2004 CAGR *
Gross Credit 155,215 163,418 190,889 226,012 273,665 13%
YoY growth 5% 17% 18% 21%
Residents 138,225 145,194 165,603 196,905 238,208 13%
Non-Residents 16,990 18,224 25,286 29,107 35,457 20%
Loans and Advances 141,064 147,864 172,117 205,238 247,418 13%
Government 12,581 10,565 15,222 19,650 29,134 16%
Industrial and Commercial 80,200 83,208 93,804 113,761 132,433 12%
Financial Institutions 1,984 1,953 1,904 2,273 3,734 5%
Other 30,574 35,007 38,050 44,832 54,471 14%
Real estate mortgaged loans 9,313 10,366 11,969 10,586 11,037 4%
Discounted Commercial Bills 4,838 5,188 6,803 10,188 15,210 28%
Source: Central Bank of UAE * During 2000-’03.
Growth patterns for credit to the industrial and commercial sector as well as to the government
are clearly the fallouts of the macro economic health, as can be seen from Table 3-4 above.
This makes the sector fairly market-sensitive, with the market risks assuming substantial
proportions unlike credit risk. Contrary to this trend, it can be seen that real estate mortgage
loans has shown staggered growth despite the glowing fortunes of the real estate sector. This
is owing to the absence of an efficient legal system which could have helped banks to follow-
up on the mortgage lending in an appropriate manner. It is risky to the extent that there is
lack of clarity about the recourse that banks would be able to take up, in case the borrowers
default.

Table 1-5 : UAE - Gross Bank Credit to Residents by Economic Activity

(In AEDmn) 2001 % Share 2002 2003 Sep-2004 % Share
Agriculture 1,508 1.0% 1,154 830 880 0.4%
Mining & Quarrying 2,549 1.8% 2,213 2,077 2,497 1.0%
Manufacturing 8,978 6.2% 9,901 11,082 13,717 5.8%
Electricity, Gas & Water 1,356 0.9% 3,219 11,110 9,113 3.8%
Construction 23,907 16.5% 27,063 26,845 31,856 13.4%
Trade 44,140 30.4% 48,870 57,053 69,083 29.0%
Transport, Storage & Communications 4,487 3.1% 5,127 6,325 6,573 2.8%
Financial Institutions (Excldg. Banks) 1,953 1.3% 1,903 2,272 3,745 1.6%
Government 10,565 7.3% 15,222 19,650 29,134 12.2%
Personal Loans for Business 20,660 14.2% 20,716 23,965 30,392 12.8%
Personal Loans for Consumption 15,546 10.7% 17,704 21,443 23,195 9.7%
Others 9,545 6.6% 12,512 14,254 18,023 7.6%
145,194 100.0% 165,604 196,906 238,208 100.0%
Source: Central Bank of UAE.
A look at the growth in credit by economic activity shows a few sectors which have
consistently contributed to overall growth. Trade, construction, personal loans for business,
Government, and personal loans for consumption were the five segments which took away
the maximum credit. These five segments together accounted for over 77% of the gross credit
at the end of September 2004.
Trade took away the largest amount of credit at the end of September 2004. The activity
picked up substantially in the recent years, after suffering a setback in 1998, owing to the
Asian financial crisis. Credit offtake by this segment grew at a CAGR of 16.6% since 2001.
Credit to Government, likewise, grew at a CAGR of 38.6% during the period. The growth in
this segment reflects the increasing reliance of the government agencies on bank financing,
especially for the big ticket projects. Personal loans for consumption and business showed
CAGRs of 14.8% and 14.3% respectively during the period.
Chart 1-2 : Gross Credit to residents by economic activity at the end of September ‘04
Mining &
Quarrying
1%
Agriculture Manufacturing
0% 6%
Electricity, Gas
Miscellaneous and Water
8% 4%
Personal loans Construction

for consumption 13%
purposes
10%
Personal loans
for buisness
purposes
13%
Trade
28%
Government
12% Financial Transport,
Institutions Storage &
2% Communications
Source : Central Bank of UAE 3%

Share of deposits in total liabilities increased over the years
High growth in credit was more or less matched by growth in deposits over the last few years.
In an environment of low interest rates and booming capital markets, total deposits increased
by 10.6% to AED270.8bn in the first nine months of 2004. The share of deposits in total
liabilities increased to 67% in Mar ’04, from 63% in Dec 2000, before declining to 65.4% at
the end of September 2004 (with a simultaneous increase in the share of foreign liabilities).
This is one of the highest within the GCC countries. This resulted in a lower share of ‘other
liabilities’, besides leading to a reduction in the cost of funds. Further, the general increase
in share of deposits was despite the augmentation of capital by many of the banks in the last
two years.
Chart 1-3 : Composition of liabilities over the years
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 Sep 2004
Total deposits Foreign liabilities Other liabilities Capital & Reserves
Chart 1-4 : Composition of Liabilities of UAE banks - Sept 2004
Other Capital
Liabilities Reserves
12.5% 12.0%
Foreign
liabilities
10%
Total
Deposits
65.4%
Business sector leads the growth in deposits

Growth pattern within the different kinds of deposits also highlighted the effect of a sound
macro scenario. In the nine months to September 2004, the deposits saw a growth of 10.6%.

The government deposits grew by 18.9%, followed by the monetary and quasi-monetary
deposits, which grew by 11.3%. Deposits from banks, however, saw a decline of 15.2%
during the period.
Chart 1-5 : Deposits by ownership in September ‘04

Non-residents
Other residents 5%
3%
Government
18%
Individuals
37% Public Sector
8%
Private sector
29%
The growth in individual deposits could be considered good, in light of the falling interest rate
environment, which underscores the fact that there are few other investment opportunities
available in the country. Growth of deposits could have been augmented by the general trend
of nationals bringing back part of their overseas funds to invest in the region’s equity markets
following the economic resurgence.
Looking at the nature of the deposits, it can be seen that the growth has been all-round,
with no drastic shift towards a particular kind of deposit. Interest rates on deposits have
come down, with around 82% of the time deposits yielding less than 2%. This trend has
been further favourable for the banks as this decline in rates were not concurrent with a
shortening of maturity. In fact there has been a gradual shift towards the longer-term time
deposits in the last two years. Longevity of the deposits was highlighted by a study done by
the Central Bank, which found that nationals accounted for 72% of the total deposits, while
Arab nationals accounted for 7.8% of the total deposits.
Chart 1-6 : Maturity profile of aggregate deposits

100%
75%
50%
25%
0%
2002 2003 Sep 2004
upto 3 months 3-6 months 6-12 months more than 12 months

2. Peer Group Analysis
Market shares
Top five banks corner over two-thirds of the market ......

Though the number of banks in UAE is relatively high, the fragmented nature of the market
poses no threat to the position of the larger banks. It is because in 2004, the top five banks
accounted for 67.7% of the total assets of the 12 listed banks which have been covered in this
Report. These were NBAD, NBD, ADCB, EBI and MASQ.
In case of loans too, the top five banks among the afore-mentioned 12 accounted for 67.6%
of the total loans. The top five banks in this category were NBAD, EBI, ADCB, DIB and
MASQ.
Table 2-1 : Market Share of UAE Banks (FY 2004)

Assets Customers’ Deposits Loans
2003 2004 2003 2004 2003 2004
ADCB 12.1% 12.7% 11.3% 13.8% 13.5% 13.3%
ADIB 3.9% 4.2% 3.6% 4.4% 5.2% 5.6%
BS 1.3% 1.1% 1.2% 1.1% 1.0% 1.0%
CBD 3.7% 3.5% 3.6% 3.5% 3.8% 3.9%
DIB 9.6% 10.1% 11.6% 11.5% 12.7% 12.8%
EBI 13.5% 12.6% 12.0% 9.4% 15.4% 14.1%
FGB 3.1% 4.2% 3.4% 4.6% 3.4% 3.4%
MASQ 11.1% 10.6% 10.9% 9.8% 9.9% 9.3%
NBAD 18.4% 18.6% 18.3% 17.9% 19.1% 18.0%
NBD 15.0% 13.3% 15.6% 14.6% 7.6% 8.4%
SIB 1.1% 1.1% 1.1% 1.1% 1.6% 1.6%
UNB 7.2% 8.0% 7.5% 8.3% 6.8% 8.6%
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source : Global Research
The deposits too have been concentrated within the top five banks. The aggregate share of
deposits of the top five banks stood at 67.6% at the end of 2004. These banks were NBAD,
NBD, ADCB, DIB and MASQ.
The three Islamic banks – Abu Dhabi Islamic Bank (ADIB), Dubai Islamic Bank and Sharjah
Islamic Bank (formerly National Bank of Sharjah) together constituted 15.4% of the total
assets, 17.1% of the total customers’ deposits and 20.0% of total loans of the 12 banks. These
shares have risen over those in 2003, signifying the growing importance of the Islamic banks
in the overall banking scene in UAE, much like elsewhere in the GCC.
Operating performance
Interest income-wise, the top 5 UAE banks in 2004 were NBAD, MASQ, ADCB, EBI and
DIB, which together accounted for 66.5% of the total interest income of the 12 banks.

Interest expenses-wise, the top 5 banks in 2004 were NBAD, MASQ, DIB, ADCB and EBI,
which together accounted for 72.8% of the total interest expenses of the 12 banks. Thus, the
top 5 banks had a larger concentration of the interest expenses (72.8%) than they did of the
interest income (66.5%) in 2004.
Table 2-2 : Comparative operating performance of UAE Banks in 2004

(Amounts in AED 000) ADCB ADIB BS CBD DIB EBI FGB MASQ NBAD NBD SIB UNB
Interest Income 1,310,785 425,980 135,281 398,555 1,171,033 1,200,670 482,777 1,423,612 1,956,476 1,167,276 115,024 826,626
Interest Expense (463,810) (143,903) (35,121) (57,544) (556,763) (383,589) (177,016) (558,584) (946,692) (352,068) (26,586) (293,556)
Net Interest Income 846,975 282,077 100,160 341,011 614,270 817,081 305,761 865,028 1,009,784 815,208 88,438 533,070
Non-Interest Income 311,122 64,565 84,027 202,810 298,985 822,445 188,948 855,994 723,297 607,055 26,636 306,984
Provisions for loans / impairment of inv. securities (19,759) (65,913) (6,967) (6,177) (88,716) 130 (110,036) (312,470) (81,354) (37,783) 14,546 (151,135)
Operating Income 1,138,338 280,729 177,220 537,644 824,539 1,639,656 384,673 1,408,552 1,651,727 1,384,480 129,620 688,919
Operating Expense (341,625) (157,819) (40,171) (186,533) (363,506) (606,003) (139,733) (568,933) (487,929) (456,705) (58,304) (236,010)
Operating Profit 796,713 122,910 137,049 351,111 461,033 1,033,653 244,940 839,619 1,163,798 927,775 71,316 452,909
Net Profit 800,594 122,910 137,049 351,111 461,033 972,127 244,940 751,076 1,137,432 927,775 71,316 452,909
Source: Company Annual Reports, Global Research.
Non-interest income-wise, however, MASQ and EBI led the pack with 19.1% and 18.3%
share of the total income in this category in 2004. They were followed by NBAD, NBD and
ADCB. The combined share of these 5 banks was 73.9% of the total non-interest income of
the 12 banks.
Net profit-wise, the top 5 banks in 2004 were NBAD, EBI, NBD, ADCB and MASQ. The
combined net profit of these 5 banks was 71.4% of that of all the 12 banks put together in
2004.
Comparative efficiency indicators
Profitability
High profitability despite adverse interest rate movements .....

In spite of the abundant capital and the highly competitive industry, UAE banks have been
successful in maintaining high levels of returns. The 12 UAE banks had an average RoAE
of 17.4% and an average RoAA of 2.4% in 2004. The high profitability has been maintained
thanks to the favorable interest rate environment.
The yield on interest earning assets as well as the cost of interest bearing liabilities hardened
for most banks during the year, vis-à-vis in 2003. But, overall a majority of the banks seem
to have seen an increase in their net spreads during the year. The highest yield on interest
earning assets was earned by MASQ, followed by NBD, FGB, DIB and NBAD. On the other
hand, CBD had the lowest cost of interest bearing liabilities, followed by NBD, SIB, EBI and
ADIB. It is worth noting that two of the three Islamic banks in UAE – ADIB and SIB – figure
among the five with the lowest cost of interest bearing liabilities.

In spite of being a competitive market with a large number of banks in the country, the
consumer segment of the UAE market is not fully penetrated. Good performance in a scenario
of favorable interest rate movements was enhanced by a few innovative steps taken by banks,
resulting in robust growth of the non-interest income. Banks were quick to cash in on this
opportunity as they focused on diversification, entering into new areas of businesses and
packaging their existing products in more attractive ways. Retail banking was particularly
active, with competing banks offering customers a range of incentives from free air tickets
and raffles to dream homes and holidays. Mortgage finance was also a new growth sector as
the booming property sector brought in more and more homebuyers. Several banks also took
major steps in the leasing business. The result of all this was a sharp increase in fee income
for many banks.
The top 5 banks in terms of RoAA in 2004 were BS, CBD, EBI, MASQ and FGB. The RoAA
of BS was 4.3%.
Table 2-3 : Comparative efficiency indicators of UAE Banks in 2004 - Part I

ROAE 18.2% 8.9% 14.3% 6.6% 21.8% 18.0% 20.1% 17.9% 25.7% 19.3% 11.0% 21.5%
ROAA 2.4% 1.1% 4.3% 3.7% 1.7% 2.8% 2.4% 2.6% 2.3% 2.4% 2.3% 2.2%
Interest Exp / Interest Income 35.4% 33.8% 26.0% 14.4% 47.5% 31.9% 36.7% 39.2% 48.4% 30.2% 23.1% 35.5%
Interest Income / Avg Int earning assets 4.0% 4.2% 4.3% 4.5% 4.8% 3.7% 5.0% 5.6% 4.6% 5.1% 3.7% 4.0%
Interest Exp / Avg Int bearing liabilities 1.6% 1.5% 1.6% 0.8% 2.4% 1.4% 2.1% 2.4% 2.2% 1.1% 1.2% 1.6%
Net Spread 2.3% 2.7% 2.7% 3.7% 2.4% 2.4% 2.9% 3.2% 2.4% 4.0% 2.6% 2.4%
Net Interest Margin 2.6% 2.8% 3.2% 3.8% 2.5% 2.5% 3.2% 3.4% 2.4% 3.6% 2.9% 2.6%
Non Interest Income / Operating Income 27.3% 23.0% 47.4% 37.7% 36.3% 50.2% 49.1% 60.8% 43.8% 43.8% 20.5% 44.6%
Dividend Payout Ratio 39.0% 57.0% 0.0% 46.6% 64.9% 23.6% 31.8% 36.7% 33.1% 69.9% 54.1% 49.9%
Cost to Operating Income 30.0% 56.2% 22.7% 34.7% 44.1% 37.0% 36.3% 40.4% 29.5% 33.0% 45.0% 34.3%
Staff Expenses / Operating Income 19.5% 36.8% 15.3% 22.7% 25.7% 20.4% 21.7% 24.6% 17.5% 14.1% 30.7% 22.5%
Gross Loans / Deposits from Customers 89.6% 117.6% 88.4% 103.4% 103.1% 138.3% 68.7% 88.5% 93.3% 53.5% 125.5% 95.9%
Customer Deposits / Total Deposits 90.4% 87.0% 99.8% 89.4% 94.7% 79.9% 97.5% 87.2% 83.9% 91.3% 93.3% 87.9%
Capital Adequacy Ratio 16.4% NA NA NA NA 18.6% 16.1% 17.9% 11.1% NA NA NA
Equity to Total Assets 12.1% 11.3% 30.0% 18.0% 8.8% 15.3% 13.3% 14.3% 8.5% 11.9% 19.2% 9.2%
Equity to Gross Loans 17.4% 12.8% 49.4% 24.6% 10.5% 20.6% 24.8% 24.5% 13.3% 28.4% 21.3% 12.9%
Liquidity
On the liquidity front, the top 5 UAE banks with the highest gross loans to customers’ deposits
ratio in 2004 were EBI (138.3%), which was followed by Sharjah Islamic Bank (SIB), Abu
Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD) and Dubai Islamic Bank
(DIB).

However, it should be noted that most of deposits are of the shorter term, thus making the
funding base volatile and vulnerable to external influences. Medium and long term deposits
are practically non-existent in the country. This results in a maturity mismatch, making
it difficult for banks to engage in financing projects with long gestation periods. These
mismatches, though, are plugged to some extent by the large capital base, substantial liquid
assets and rolling over of deposits at maturity. Apart from the short-term nature of the deposit
base, another concern is the high concentration of deposits among a few accounts, thus adding
to the weakness. It is believed that Government along with the private sector accounts for a
high proportion of the total deposits, while individual deposits too are highly concentrated,
thus putting banks at some risk.
Capital adequacy
Exceeds local as well as international regulatory requirements ...

UAE banks seem adequately capitalised, which helps the system to tide over temporary
problems associated with liquidity or credit quality. Most of the banks comfortably exceed
the regulatory minimum capital adequacy requirement of 10%. All 46 banks operating in the
country met the minimum CAR requirement, while the system-wide CAR exceeded 18% at
the end of 2003, according to the IMF. It could be expected to be high for 2004 as well. For
the basket of 12 banks covered under this Report, only 5 banks have provided their CARs
in their respective Annual reports. These are ADCB, EBI, FGB, MASQ and NBAD. All of
them had CARs of above 10% at the end of 2004. EBI had the highest CAR among these 5
of 18.6%.
Previously, banks in the country had solely relied on the strong earnings and moderate
dividend payments to build their capital. With the size of the assets increasing rapidly, banks
in the country have also bolstered their capital base in the recent past, to be able to face
growing domestic and global competition. This increase allowed UAE gain the status as
having the second most capitalised banking sector in the Arab world, after Saudi Arabia,
overtaking Egypt. The bulk of the increase came from the national banks issuing new shares
to subscribers, and allocating a part of their profits to the reserves.
Operating efficiency
In terms of operating efficiency, Bank of Sharjah (BS) had the least costs as a proportion of
operating income of 22.7% during the year. It was followed by NBAD, ADCB, NBD and
UNB.
In terms of operating income per employee, the top 5 banks were Bank of Sharjah (BS),
NBD, FGB, NBAD and DIB. While BS had the least number of employees (148) among the
12 banks, NBD had 1,196 employees, indicating, thereby, that BS’ low operating income
per employee was driven more by its really low number of employees rather than by a high
profitability.
In terms of net profit per employee, however, the top 5 banks were BS, NBD, FGB, NBAD
and ADCB. DIB’s higher operating expenses compared to ADCB’s led to the former having
lesser net profit per employee than the latter.

NBAD had the largest number of branches, including overseas branches and all other forms
of operational presence. It was followed by MASQ, NBD, ADCB and EBI. In terms of net
profit earned per branch, however, Bank of Sharjah was the leader at AED45.7mn per each
of its three branches. It was followed by FGB, EBI, DIB and NBD.
Table 2-4 : Comparative efficiency indicators of UAE Banks in 2004 - Part II

No. of Branches 38 16 3 23 20 30 7 43 74 41 9 26
No. of Employees 1,366 414 148 744 973 2,172 340 1,835 1,932 1,196 325 928
Operating Income (Net of Provisions) 1,138,338 280,729 177,220 537,644 824,539 1,639,656 384,673 1,408,552 1,651,727 1,384,480 129,620 688,919
Operating Expenses (341,625) (157,819) (40,171) (186,533) (363,506) (606,003) (139,733) (568,933) (487,929) (456,705) (58,304) (236,010)
Operating Profit (Net of Provisions) 796,713 122,910 137,049 351,111 461,033 1,033,653 244,940 839,619 1,163,798 927,775 71,316 452,909
Net Profit 800,594 122,910 137,049 351,111 461,033 972,127 244,940 751,076 1,137,432 927,775 71,316 452,909
Operating Income Per Employee 833 678 1,197 723 847 755 1,131 768 855 1,158 399 742
Operating Expense Per Employee (250) (381) (271) (251) (373) (279) (411) (310) (253) (382) (179) (254)
Operating Profit Per Employee 583 297 926 472 474 476 720 458 602 776 219 488
Net Profit Per Employee 586 297 926 472 474 448 720 409 589 776 219 488
Net Profit Per Branch 21,068 7,682 45,683 15,266 23,052 32,404 34,991 17,467 15,371 22,629 7,924 17,420
Source: Company Annual Reports, Zawya.com, Global Research. Estimated no. of employees for ADIB and DIB, based on 2003 figures.
Branches include all forms of operational presence, viz., domestic branches, overseas branches, correspondent banking centres, representative offices, etc.
Assets and liabilities
As for the deployment of assets, the top 5 banks with the highest proportion of assets in
gross loans and advances were Abu Dhabi Islamic Bank (ADIB), Sharjah Islamic Bank
(SIB), Dubai Islamic Bank (DIB), EBI and CBD. It is noteworthy that the top 3 banks in this
category are Islamic banks.
Table 2-5 : Comparative balance sheets of UAE Banks in 2004

Assets
Cash & Central Bank Balances 1,679,832 605,523 1,120,773 1,238,640 2,067,210 2,570,809 1,285,515 3,058,500 3,277,429 4,308,054 223,469 1,532,372
Gross Loans & Advances 26,724,354 11,250,964 2,079,695 7,734,126 25,714,628 28,179,607 6,858,728 18,670,706 36,142,417 16,851,633 3,114,334 17,151,912
Less: Provisions (793,054) (74,064) (59,166) (217,995) (724,944) (691,153) (326,631) (825,319) (713,942) (231,771) (181,096) (913,696)
Net Loans & Advances 25,931,300 11,176,900 2,020,529 7,516,131 24,989,684 27,488,454 6,532,097 17,845,387 35,428,475 16,619,862 2,933,238 16,238,216
Investments 2,533,088 791,777 90,707 604,192 1,371,630 2,142,267 1,089,162 5,240,765 6,974,389 14,101,109 91,992 2,194,799
Net Fixed Assets 201,119 44,274 17,504 331,386 126,455 179,231 183,196 174,159 364,671 405,087 34,030 111,760
Interest Earning Assets - 2004 37,306,423 11,797,312 3,332,568 9,707,279 27,824,482 35,454,562 12,288,898 27,407,787 47,824,796 25,769,313 3,444,396 23,813,687
Total Assets - 2004 38,393,343 12,687,169 3,417,713 10,569,883 30,613,361 38,060,629 12,796,800 31,948,828 56,331,421 40,267,284 3,454,588 24,113,269
Liabilities
Due to banks 3,172,135 1,435,979 3,874 888,880 1,393,178 5,134,606 257,462 3,090,409 7,430,829 3,006,942 177,366 2,471,857
Customer Deposits 29,811,564 9,568,836 2,353,743 7,477,864 24,941,016 20,372,357 9,977,195 21,107,058 38,748,293 31,477,303 2,481,495 17,890,830
Long term loans - - - 45,786 - - - -
Paid-Up Capital 1,250,000 1,000,000 750,000 545,641 1,500,000 1,435,014 389,376 787,450 941,600 1,080,649 385,684 904,332
Reserves 3,130,655 236,114 165,000 1,258,333 905,566 3,876,146 291,232 1,222,443 3,832,066 3,192,028 250,121 529,666
Shareholders Equity - 2004 4,647,821 1,435,643 1,026,392 1,904,839 2,687,419 5,816,448 1,699,047 4,574,660 4,808,199 4,789,278 664,896 2,216,334
Interest Bearing Liabilities -
32,983,699 11,004,815 2,357,617 8,366,744 26,334,194 31,071,558 10,877,432 25,534,296 46,179,122 34,484,245 2,658,861 21,372,762
2004

On the funding side, DIB, NBD, FGB, ADCB and ADIB were the top 5 banks with the
highest proportion of customers’ deposits in the total liabilities at the end of 2004.
Banks increasingly resorting to long-term financing ....
There are a few clear trends seen in the performance of banks in the last two years. As
mentioned before, banks substantially increased their investments in marketing initiatives,
though in terms of electronic banking, UAE has been a late mover compared to other GCC
countries like Saudi Arabia. Most banks expanded their ATM network while a few have
expanded their branch networks too. The long-term vision of banks in the country is further
apparent from the financing contracts that they have entered into. There is an increasing
willingness on the part of the banks to enter into long-term big-ticket financing deals, either
alone or in consortia with other banks.
Asset quality
NPLs on a decline ......

Rapid growth of credit in the last two years has been accompanied by an improvement in
asset quality of banks in UAE. The average NPLs to gross loans ratio for eight of the banks
for which the NPLs data is available witnessed a decline to 3.5% in 2004 from 9.3% in 2003,
the sharpest decline among all the GCC countries in 2004. However, UAE banks still have
higher non-performing loans than banks in other countries. This is due to the reluctance of the
banks in UAE to write-off old debt despite providing fully for them, since courts sometimes
view a bank unfavourably for trying to collect debt that had previously been written off. A
substantial portion of the bad loans relate to incidents of distant past, like the crash of the
Kuwait stock market in late 1980s. High exposure to construction sector and defaults in
transport and real estate exposures have also contributed to the inferior asset quality. Among
these eight banks, ADCB had the highest NPLs to Gross Loans ratio of 7.8% at the end of
2004, though it should be noted that most of its bad loans relate to local exposures that are
covered by an indemnity from the government. ADCB also had the lowest NPL coverage
ratio of 38.0% in 2004, as against 178.3% of MASQ, which was the highest among the lot.
Table 2-6 : Non-Performing Loans of UAE Banks (FY 2004)

Gross Loans 26,724,354 11,250,964 2,079,695 7,734,126 25,714,628 28,179,607 6,858,728 18,670,706 36,142,417 16,851,633 3,114,334 17,151,912
Provisions (793,054) (74,064) (59,166) (217,995) (724,944) (691,153) (326,631) (825,319) (713,942) (231,771) (181,096) (913,696)
Net Loans 25,931,300 11,176,900 2,020,529 7,516,131 24,989,684 27,488,454 6,532,097 17,845,387 35,428,475 16,619,862 2,933,238 16,238,216
Non-performing Loans 2,086,000 NA 66,551 NA NA 572,013 298,352 463,000 775,978 276,201 NA 805,000
NPL / Gross Loans 7.8% NA 3.2% NA NA 2.0% 4.3% 2.5% 2.1% 1.6% NA 4.7%
Provisions / NPL 38.0% NA 88.9% NA NA 120.8% 109.5% 178.3% 92.0% 83.9% NA 113.5%
Almost all the banks have been creating substantial provisions on their retail loans. Banks
seem to have built up sizeable provisions in view of their rising retail credit book. Apart from
the reassuring coverage, it is also comforting to note that local banks have been successful in
recovering some of the bad debts in the past by selling land and property received as security
in some of the emirates.

Comparative valuation
In terms of comparative valuation of the 12 banks, at the April 24, 2005 prices and end-2004
book value, the weighted average P/BV of the 12 banks was 7.0%. FGB, NBAD, DIB and
UNB had a P/BV higher than the weighted average as on that date.
Table 2-7 : Comparative Valuation of UAE Banks in 2004

(Amounts in AEDs) ADCB ADIB BS CBD DIB EBI FGB MASQ NBAD NBD SIB UNB
Price* 239.0 72.0 4.5 160.0 151.0 65.0 41.0 230.0 46.0 226.9 12.9 17.8
EPS 6.4 1.2 0.2 6.4 4.0 1.7 0.6 9.5 1.2 8.6 0.3 0.5
BVPS 37.2 14.4 1.4 34.9 17.9 10.1 4.4 58.1 5.1 44.3 2.7 2.5
P / E (x) 37.3 58.5 24.4 24.9 37.8 38.4 65.2 24.1 38.0 26.4 44.3 35.4
P / BV (x) 6.4 5.0 3.3 4.6 8.4 6.4 9.4 4.0 9.0 5.1 4.7 7.2
Dividend yield (%) 3.2 1.7 2.9 3.3 2.1 0.8 1.4 3.0 1.9 4.1 1.6 2.5
Source: Company Annual Reports, Global Research. * Price as of April 24, 2005
P/E and P/BVPS after full dilution.
In terms of dividend yield, NBD had the highest dividend yield of 4.1% in 2004 thanks to its
60% cash dividend in 2004. It was followed by CBD, ADCB, MASQ and Bank of Sharjah.
The sector has given high return over the last 2 years ......
Excellent performance of UAE banks has been rewarded by stock markets. Market
capitalization of the 12 banks stood at AED254.1bn as on April 24, 2005. Banking sector
market value appreciated by 21% in the year ended December 2004, with an annual return of
43% in the last two years.
As on April 24, 2005, EBI was the largest in terms of market capitalization, followed by
NBAD, ADCB, NBD and DIB. It can be seen from the Chart below that the top five banks
account for 68% of the total banking sector market capitalization as on that date.
Chart 2-1 : Market Capitalization of UAE Banks*
FGB NBD
6.6% 9.6%
ADCB
14.1% EBI
18.3%
MASQ
7.8%
NBAD
17.0%
UNB
7.0%
ADIB
DIB CBD 2.8%
8.9% 4.0%
SIB
2.0%
BS
1.8%
Source : Reuters * For 12 Banks, as on April 24, 2005.

3. UAE Banks - Shifts in Competitive Positioning
The 12 UAE banks covered in this Report have, over the years, witnessed shifts in their
competitive positioning with respect to each other on various parameters. While NBAD leads
the pack across all parameters, followed by other leading banks, such as NBD, EBI and
ADCB, each of the banks has seen its competitive position shift over the past three years
(2002-’04). We have analysed these shifts with respect to a few parameters. Some of the
parameters we have used for this analysis include:
1. Share in total assets vs. RoAA

2. Share in total gross loans vs. interest yields
3. Share in total gross loans vs. loan loss reserve percentages, and
4. Share in total deposits vs. interest costs
For this analysis, the total market size has been assumed to be the aggregate of all the 12
banks under coverage in this Report.
We analyse the shifts in competitive positioning amongst the 12 UAE banks under each
parameter as under:
Share in total assets vs. RoAA
Banks like NBAD, ADCB, DIB, UNB, FGB and ADIB gained market share in terms of
total assets in 2004, from their shares in 2003. The remaining six banks have either remained
steady at their 2003 levels or lost market shares during the year. While NBAD’s market
share of total assets went up marginally to 18.6% in 2004 from 18.4% in 2003, ADCB’s
share increased to 12.7% in 2004 from 12.1% in the previous year. There have been similar
increases in respect of the other four banks as well.
On the other hand, NBAD, NBD, ADCB, EBI, MASQ, DIB, FGB, CBD and BS saw gains
in their RoAAs in 2004 from 2003. A majority of the banks (Nine out of the 12 UAE banks
being covered in this Report) gaining RoAAs in 2004 is a reflection of a combination of
factors – the increasing spreads, an increasing share of the non-interest income (primarily
fees and commissions income) in the total operating income, cost efficiencies, and lower loan
loss provisioning during the year. The weighted average RoAA for the 12 UAE banks being
covered in this Report was 2.4% in 2004, up from 2.0% in 2003.

Chart 3-1 : UAE Banks - Shifts in Competitive Positioning (2002 - ‘04)

(Share of Total Assets vs. RoAA)
4.5%
4.0%
BS
3.5%
CBD
3.0%
RoAA
EBI
2.5%
FGB MASQ NBD
2.0% SIB
UNB ADCB
1.5% NBAD
DIB
1.0%
ADIB
0.5%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Share of Total Assets
2002 2003 2004
But, when the shifts in market shares are juxtaposed with the changes in the return on average
assets (RoAA) for these banks during the period, the picture is different. The RoAA of NBAD,
for example, went up to 2.3% in 2004 from 1.9% in 2003. ADCB’s RoAA, similarly, went up
to 2.4% in 2004 from 1.4% in 2003. The RoAA of DIB and FGB too increased in 2004. But,
the other two market share gainers – UNB and ADIB – gained market shares in 2004 from
2003 at the cost of an erosion in their respective RoAAs during the period. While UNB’s
RoAA declined to 2.2% in 2004 from 2.4% in 2003, ADIB saw its RoAA decline to 1.1% in
2004 from 1.2% in 2003. Thus, in terms of both a gain in market share of total assets as well
as a gain in the RoAA between 2003 and 2004, four banks – NBAD, ADCB, DIB and FGB
score well. While FGB gained the highest in market share in the period (1.2%), the highest
gainer in terms of RoAA was ADCB (0.9%).
Share in total gross loans vs. interest yields
In terms of total gross loans, UNB, NBD and ADIB gained market share in 2004, from
their shares in 2003. The remaining nine banks either remained steady at their 2003 levels
or lost market shares during the year. It is noteworthy that none of the top 3 banks in terms
of gross loans shares, viz., NBAD, EBI and ADCB gained in market shares during 2004.
While UNB’s market share of total gross loans increased to 8.6% in 2004 from 6.8% in 2003,
NBD’s share increased to 8.4% from 7.6% and ADIB’s share increased to 5.6% from 5.2%
during the period.
On the other hand, NBAD, EBI, ADCB, DIB, MASQ, ADIB, CBD, FGB and BS saw gains
in their yield on interest earning assets (Yield) in 2004 from 2003. Most of the UAE banks
gained in Yields in 2004 as a result of a favorable interest rate environment.


(Share of Total Gross Loans vs. Interest Yields)
6.0%
5.5%
Yield on Interest Earning Assets
MASQ
5.0% NBD
4.5% DIB
SIB CBD UNB
ADCB NBAD
4.0% BS
FGB
EBI
3.5%
ADIB
3.0%
2.5%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Share of Total Gross Loans
2002 2003 2004
Once again, when the shifts in market shares in gross loans are taken in conjunction with
the changes in the Yield for these banks during the period, the picture changes. The Yield of
UNB, even though the bank gained in gross loans market share during 2004, was flat at 4.0%
during 2003-’04. ADIB’s Yield went up to 4.2% in 2004 from 2.6% in 2003, while NBD saw
a decline in its Yield to 5.1% in 2004 from 5.4% in 2003. BS, though not gaining in market
share, gained in terms of interest yields – its Yield going up to 4.3% in 2004 from 3.8% in
the previous year. NBAD, EBI and ADCB, the leaders in gross loans market shares, saw
increased Yields at the expense of a loss in their respective market shares in 2004. Thus, only
ADIB, among the 12 banks, witnessed both a gain (of 0.5%) in its market share of total gross
loans as well as a gain (of 1.6%) in the Yield between 2003 and 2004.
Share in total gross loans vs. loan loss reserve percentages
In terms of total gross loans, like we mentioned in the earlier section, DIB, UNB, NBD,
ADIB and CBD, out of the 12 UAE banks we have analysed in this Report, gained market
share in 2004, from their shares in 2003. The remaining seven banks either remained steady
at their 2003 levels or lost market shares during the year. While DIB’s market share of total
gross loans went up marginally to 12.8% in 2004 from 12.7% in 2003, UNB’s share increased
to 8.6% in 2004 from 6.8% in the previous year. The gross loans shares of NBD and ADIB
too were higher in 2004 at 8.4% and 5.6% respectively, from their shares of 7.6% and 5.2%
respectively at the end of 2003.


(Share of Total Gross Loans vs. Loan Loss Reserves/Gross Loans)
14.0%
Loan Loss Reserves / Gross Loans
12.0%
10.0%
8.0%
SIB FGB MASQ ADCB
UNB
6.0%
4.0%
CBD EBI
BS DIB NBAD
2.0%
ADIB
NBD
0.0%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Share of Total Gross Loans
2002 2003 2004
The loan loss reserves as a proportion of gross loans could be taken as a measure of the risk
prudence of the banks. The quantum of loan loss reserves could depend on any regulatory
stipulations on the banks. They could also be reflective of the loan book constitution of the
banks – banks with a higher proportion of retail loans are likely to make higher provisions
than those with a higher proportion of corporate loan book. They could also indicate the level
of write-offs, recoveries and write-backs by the bank during the year. Thus, there may not be
a generally prescribed level of this ratio for all the banks. In general, however, a high loan
loss reserves/gross loans ratio could be taken to indicate conservative provisioning practices
being followed by the bank, while a low ratio could be indicative of aggressive provisioning.
As a corollary, a low ratio could also give the bank the comfort of going for more aggressive
or riskier lending going forward. We, for the limited purpose of our analysis, will go with the
latter interpretation of the loan loss reserves/gross loans ratio and see what the changes in this
ratio of the 12 UAE banks in 2004 over 2003 indicate when taken in tandem with the shifts
in the gross loans share of the respective banks.
The weighted average loan loss reserves/gross loans ratio for the 12 UAE banks was 2.9% in
2004. In terms of this ratio for each of the individual banks, we observe that all banks except
MASQ and ADIB had lower ratios in 2004 than in 2003. MASQ’s loan loss reserves/gross
loans ratio marginally increased to 4.4% in 2004 from 4.3% in 2003, while that for ADIB
increased to 0.7% in 2004 from 0.3% in the previous year. Some of the notable cases of
banks with lower loan loss reserves/gross loans ratios in 2004 than in 2003 were ADCB, with
a decline of 5.4% (thanks to much higher write-offs and recoveries in 2004); UNB, with a
decline of 2.8%; and SIB, with a decline of 1.4% (thanks to higher recoveries and write-backs
in 2004) from their respective levels in 2003. Other banks had lesser declines in this ratio in
2004 from 2003.
Combining a more aggressive loan loss reserves/gross loans ratio with a gain in the share
of gross loans, we find that DIB, UNB and NBD gained in gross loans market shares, along

with more aggressive loan loss reserves/gross loans ratios in 2004, compared to 2003. UNB
led the pack with a 1.7% gain in market share, coupled with the most aggressive decline of
2.8% in its loan loss reserves/gross loans ratio during 2004. Though ADIB, another gainer in
market share of gross loans in 2004, had a higher loan loss reserves/gross loans ratio in 2004
than in 2003, its ratio at 0.7% was still much lower compared to the weighted average ratio
for the 12 UAE banks of 2.9% in 2004.
Share in total deposits vs. interest costs
In terms of total deposits (from banks as well as customers), six banks gained market shares
in 2004 from 2003. These were ADCB, DIB, UNB, ADIB, FGB and SIB. The remaining
six banks either remained steady at their 2003 levels or lost market shares during the year.
While ADCB’s market share of total deposits went up to 13.5% in 2004 from 11.7% in 2003,
DIB’s share went up to 10.8% from 10.4%, and UNB’s share increased to 8.3% from 7.2%
respectively. There were similar increases in respect of the other three banks as well.
On the other hand, NBAD, NBD, ADCB, EBI, MASQ, UNB, ADIB, FGB, CBD and BS saw
increased costs of their interest bearing liabilities in 2004 from 2003. Understandably, the
interest costs went up on the back of tightening interest rates during the year. The two notable
exceptions to this general trend were the two Islamic banks – DIB and SIB, with access to
low-cost funds.
Once again, when the shifts in market shares in total deposits are taken in combination with
the changes in the costs of interest bearing liabilities (Costs) for these banks during the period,
we see that only two banks – DIB and SIB – gained market shares as well as managed to
lower their Costs in 2004 vis-à-vis 2003. While DIB increased its share of total deposits by a
marginal 0.3% with a simultaneous reduction in its Cost by 0.4% in 2004, the other Islamic
bank – SIB – increased its market share by a wafer-thin 0.1%, simultaneously lowering its
Cost by 0.6%. Of the two, thus, SIB witnessed a steeper decline in its Cost in 2004 from that
prevailing in 2003.

(Share of Total Deposits vs. Interest Costs)
3.5%
Cost of Interest Bearing Liabilities
3.0%
DIB
2.5%
MASQ
2.0%
FGB NBAD
UNB ADCB
1.5% BS
ADIB NBD
EBI
1.0% SIB
CBD
0.5%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Share of Total Deposits
2002 2003 2004


Summary
The above analysis indicates that the relatively smaller banks seem to be gradually coming
into their own in the UAE banking industry. Banks such as FGB, ADIB, UNB and SIB
have performed well in 2004 across various parameters, gaining market shares in some
instances, and lowering costs/increasing yields in some others. Most of them seem poised for
a robust performance in 2005, on the heels of a healthy performance in 2004. Admittedly,
most small banks seem to be riding on the base effect, which enables them to show high
growth, while banks like ADIB and SIB also have the added benefit of being Islamic banks.
All the same, while the big players such as NBAD, NBD, ADCB, EBI, DIB and MASQ are
widely visible, well-entrenched, well-known and highly regarded brands, with the necessary
size and customer loyalty to back their future growth, the relatively smaller players seem
to be gradually gaining in importance too. The industry majors, on their part, seem to be
re-inventing themselves and exploring newer relationships/markets to be able to maintain
their leadership position. The recent moves by some of the big players to venture into foreign
markets could be seen as a part of this strategy. While NBAD has acquired a license to enter
Kuwait, DIB has launched a wholly-owned subsidiary in Pakistan, and MASQ is bolstering
its presence in Qatar. Similarly, ADCB’s new joint venture with Australia’s Macquarie Bank
is expected to bring the benefits of Macquarie’s expertise in treasury and commodities to
ADCB’s extensive franchise in GCC. Going forward, the industry majors could also look at
mergers and acquisitions to further consolidate their position.
While it could be awhile before the smaller banks reach a position from where they could
challenge the might of the bigger banks, many of them seem to be putting the necessary
strategies in place to reap the benefits of the emerging opportunities in the economy. Instances
of the smaller banks running shoulder-to-shoulder with the big players in attracting retail
accounts and pitching for large-sized mandates and syndication deals in consortium lending
could become more commonplace going forward. Many of the smaller conventional banks
have also announced their intentions/plans to enter Islamic banking, which is fast emerging
as the new and more lucrative alternative to conventional banking in this part of the world. In
the emerging post-WTO scenario, some of them could also attract the attention of the global
majors. These impending alliances/partnerships could benefit either partner, but, possibly,
be more beneficial to the local partner and, thereby, to the stakeholders in the local partner
bank. They could also attract their peers in the local banking industry going forward, as any
prospective alliance/partnership/merger could help both the partners protect their home turf
as well as collectively take on the might of the global majors. Thus, the relatively smaller
banks could be the ones to watch out for in the coming years.

4. Sector Outlook
With a booming economy to support, a number of large long-term financing contracts, and the
catching up of Islamic financing, one can safely say that the future is bright for the banking
industry in UAE. Significant long-term developments such as Dubai International Financial
Centre (DIFC), Burj Dubai and Dubailand projects would further fuel the growth of UAE’s
already robust economy, and in turn increase project financing opportunities for banks. At
the same time, managing IPOs and loan syndications could offer fee-earning opportunities to
the banks. The extent by which each of the banks benefits from these new opportunities could
differ, though, depending on the areas of strength of each of the banks, and the strategies put
in place by each of them to diversify its future revenue streams. For big ticket projects, the
size of the bank too could be a deciding factor.
The emergence of DIFC could, however, increase competition, as many of the large foreign
financial institutions like Deutsche bank, Credit Suisse and AON have already expressed
their interest in joining DIFC. Further, the current restrictions on foreign banks would be fully
relaxed as and when UAE complies with the WTO regulations.
In terms of the core business profitability, we expect the interest rate spreads to increase in
future, as the interest rates have already started going up, and it is likely that banks would
be able to increase the loan rates commensurately through re-pricing of their loans portfolio.
In fact, a large number of UAE banks seem to have already prepared themselves for this
eventuality by pricing their loans on floating basis. Moreover, banks, which have a large
part of their deposits as non-interest-bearing liabilities, would benefit substantially from
the interest rate hike. Improvement in the capital market could enhance returns from the
investment portfolios of banks. It could further enhance the fee-based business of banks,
especially for those with a strong presence in the IPO market.
Moody’s recently upgraded the long-term foreign currency country ceilings for bonds and
bank deposits of the UAE to ‘A1’ from ‘A2’. Moody’s also upgraded the short-term foreign
currency country ceiling to ‘Prime-1’ from ‘Prime-2’, as well as the foreign currency issuer
rating of the government to ‘A1’ from ‘A2’. The outlook on all of these ratings is stable.
Even in a highly competitive environment, retail banking in UAE holds a lot of promise,
according to the banking system outlook by Moody’s Investor Services. As per the IMF,
robust credit growth is expected to continue buoyed by the retail opportunity. The trend of
banks in UAE moving away from government originated business to retail and investment
banking is also expected to continue. Opportunity in the investment banking would get a
boost, with the development of bond market in UAE, which is already on track, with large
issues from Emirate Airline Group, Emirates CMS Power, Mashreqbank and a few others.
However, everything in not hunky dory for the banking sector in UAE. Even though the
banks have a strong home presence, they are extremely low on diversification in terms of
geographical, customer and product point of view. Currently, we are of the view that the
UAE market is overcrowded and the situation is exacerbated by the lack of incentives for
consolidation. This could see an improvement, subject to the fructification of the common
standards for licensing the operation of banks in GCC, which would provide opportunities
for the national banks wishing to operate in the regional market. Compulsions of slowing

growth prospects over a long-term in an already-overcrowded domestic market and more

intensified competition from foreign players expected in a post-WTO scenario too could
drive consolidation in the UAE banking industry in the coming years.

5. UAE Banks – Recommendation Summary
Out of a total of 12 banks covered in UAE in this Report, equity valuations of 4 banks have
been done. A combination of Dividend Discount and Peer Comparison Methods has been
employed for the valuation – the former with an 80% weightage and the latter with a 20%
weightage – to arrive at a Composite Value for each of the banks.
A summary of the values arrived at for each of the banks, along with the recommendation
rationale for each of them, follows.
The intrinsic value of ADCB of AED253.0 per share, arrived at by using the Dividend
price of AED239.0 by 5.9%. Though the composite share valuation translates to forward
P/BV multiples of 7.7x and 7.4x our projected 2005 and 2006 book value per share, the stock
would seem to have a limited upside from its current price levels, since it has had a good run
on the stock market in recent months, gaining 75.7% since the beginning of 2005
The bank is likely to benefit from aggressively promoting its consumer loan products going
forward. The net fees and commissions income of the bank is also expected to show a high
growth in the medium-term from its funds management, private banking, managing IPOs,
facilities arrangement, loan syndications activities going forward. The new management of
the bank, with considerable experience in the GCC banking industry, is expected to steer the
bank on a high growth curve in the years to come.
We, therefore, initiate our coverage of ADCB with a “HOLD” recommendation, with a
medium-term perspective. We, however, believe that ADCB presents an attractive investment
First Gulf Bank
The intrinsic value of FGB of AED42.6 per share, arrived at by using the Dividend
price of AED41.0 by 3.8%. Though the composite share valuation translates to forward P/BV
multiples of 9.6x and 9.0x our projected 2005 and 2006 book value per share, the stock would
seem to have a marginal upside at its current price levels, since it has had a good run on the
stock market in recent months, gaining 137.0% since the beginning of 2005.
The bank, though growing at a high rate of late, would appear constrained by its relatively
smaller size vis-à-vis the other players in the highly competitive banking industry in UAE.
We, therefore, initiate our coverage of FGB with a “HOLD” recommendation, with a

Table 5-1 : UAE Banks - Recommendation Summary

Potential
Composite
M-Cap Upside /
Name of Bank Reuters Code CMP (AED)* RoAA (%) RoAE (%) P/E (x)* P/BV (x)* Share Value Recommendation
(AEDmn)* (Downside)
(AED)
(%)
Abu Dhabi Commercial Bank ADCB.AD 239.0 35,850 2.4 18.2 37.3 6.4 253.0 5.9 HOLD
First Gulf Bank FGB.AD 41.0 16,763 2.4 20.1 65.2 9.4 42.6 3.8 HOLD
National Bank of Abu Dhabi NBAD.AD 46.0 43,267 2.3 25.7 38.0 9.0 51.0 11.0 BUY
Mashreqbank MASB.DU 230.0 19,922 2.6 17.9 24.1 4.0 244.4 6.3 HOLD
Source: Global Research. * As on April 24, 2005.
The intrinsic value of NBAD of AED51.0 per share, arrived at by using the Dividend
price of AED46.0 by 11.0%. This is despite the stock running up considerably in recent
months – gaining about 120.9% since the beginning of 2005. The composite share valuation
also translates to forward P/BV multiples of 8.3x and 6.8x our projected 2005 and 2006 book
value per share.
NBAD has a strong customer franchise, particularly in the emirate of Abu Dhabi, where
it is a prominent provider of retail banking services. The bank has substantial treasury and
investment banking operations, besides sizeable international presence. The booming project
finance and IPO markets in UAE and its foray soon into the Kuwaiti banking market are
expected to keep it on a high growth trajectory in the years to come.
We, therefore, initiate our coverage of NBAD with a “BUY” recommendation, with a
Mashreqbank
Global had initiated its coverage of Mashreqbank with an equity valuation report in March
2005. We had valued the bank at AED207.9 per share in that report and had recommended a
“HOLD” on its shares. Subsequent to that report, the stock has had a good run on the stock
market, gaining by 21.1% since the date of the report.
We have now modified a few of our projections in the wake of the announcement of the
first quarter 2005 results by the bank. Some of these changes include the projected growth
rates in loans and advances, customer deposits, interest income and expense, net commission
income, and net profit. We have, however, retained our projections of the net spreads of the
bank more or less along the same lines as in our March 2005 report. The dividend payout
ratios too have not been changed from the projections contained in that report. We are of the
opinion that the modified numbers reflect the future earnings potential of the bank in a more
appropriate manner.
The intrinsic value of Mashreqbank of AED244.4 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer set valuation method (with a revised P/BV multiple,
based on the weighted average P/BV of 12 UAE banks covered in this Report), is higher than

the current stock price of AED230.0 by 6.3%.
We, therefore, reiterate our “HOLD” recommendation on Mashreqbank, with a medium-

term perspective. We still believe that Mashreqbank is a strong brand-based, diversified and
growing earnings story, and presents an attractive investment opportunity at lower price
levels.

PLAYERS PROFILES

6.1 Abu Dhabi Commercial Bank

Reuters Code:
ADCB.AD April 2005
Listing:
Abu Dhabi Securities Market
CMP (AED) :
HOLD
239.0
Key Data
EPS (AED) 6.4 12-Month Avg. Daily Volume (Nos.) 59,969
BVPS (AED) 37.2 52-Week High / Low (AED) 247.0 / 68.5
P / E (X) 37.3 Market Capitalization (AEDmn) 35,850
P / BV (X) 6.4 Target Price (AED) 253.0
Source: Global Research. All date related to stock price and stock market as on April 24, 2005,
EPS and BVPS as at end of 2004.
Background
• Abu Dhabi Commercial Bank PJSC (ADCB) is a public joint stock company with
limited liability, incorporated in the Emirate of Abu Dhabi, United Arab Emirates.
The Bank changed its name from Khalij Commercial Bank to Abu Dhabi Commercial
Bank, after merging with Emirates Commercial Bank and Federal Commercial Bank
on 1 July 1985.
• The Bank provides retail, commercial, investment and merchant banking services,
through its network of 36 branches in the United Arab Emirates and two branches in
India.
• The bank has presence in retail (personal accounts, debit cards, credit cards and
loans), corporate banking (investment banking, commercial banking, treasury and
trade finance), private banking and wealth management segments.
• The senior management has had a change in the last two or so years, with M/s. Ervin
Knox and Darren Robinson taking over as the Chief Executive Officer and Chief
Financial Officer respectively of the bank. The new management has considerable
experience in the GCC banking industry.
• It had 1,366 employees as of 31 December, 2004.
• ADCB had 125mn shares of face value AED10 each for a paid capital of AED1.25bn
at the end of 2004. Abu Dhabi Investment Authority held 64.8% of the issued and
fully paid-up share capital of ADCB, with the balance held by UAE institutions and
UAE nationals, at the end of 2004.

• The total number of shares of the bank outstanding at the end of 1Q2005 was
150mn.
Recent Developments
• During the year, the bank and the Government of Abu Dhabi entered into an
agreement, whereby the Government acquired AED1.2bn of non-performing loans
of the bank that were previously indemnified by the Government through a guarantee
for an identical amount. In exchange for the passing of direct credit risk from the
bank to the Government, the bank received an immediate settlement of AED483mn.
Effective 2005, the bank is also entitled to receive an amount equivalent to the annual
interest payable on the Government deposit of AED717mn from the proceeds of the
sale of the non-performing loans.
• During the year, the bank also repaid AED483mn of long-term loans to the
Government. The remaining balance of AED717mn of long-term loans was
converted to a customer deposit. Interest is payable annually to the Government on
this amount; the interest for the year amounted to AED12mn, at an effective interest
rate of 1.67%.
• The bank has entered into a joint venture with Australia’s Macquarie Bank for
financial products. The venture is expected to bring the benefits of Macquarie’s
expertise in treasury and commodities, products, staff and resources to ADCB’s
extensive franchise in GCC. The JV has been structured to provide appropriate
solutions to contractors who have significant offset obligations in the UAE. This
could significantly boost the capability of GCC companies in managing their
currency and commodity strategies and risks.
• The interest income of the bank increased by 23.5% during 2004 as compared to the
previous year, on the back of a 27.0% increase in the gross loans during the year.
However, interest expenses increased at a higher rate of 39.1% during the year, on
the back of a 53.9% growth in the customers’ deposits during the year.
• The yield on interest earning assets for the bank went up to 4.0% in 2004 from 3.8%
in 2003. The cost of interest bearing liabilities, on the other hand, went up to 1.6%
in 2004 from 1.4% in 2003. The net spread, therefore, remained steady at 2.3% in
2004.
• The net interest income during the year increased by 16.3% to AED847.0mn, as
against AED728.1mn during the previous year.
• Aided by IPOs, loan syndications, etc., the net commission income was higher by
58.7% as compared to that in the previous year. Investment income also surged by
79.7% during the year, on the back of dividend and net trading incomes.
• The bank reported other operating income of AED9.8mn during the year, an

increase of 34.3% over the previous year. Net gain from forex transactions stood at
AED50.2mn, an increase of 22.3% during 2004.
• Higher net write-offs and recoveries in 2004 lead to lower provisions for loan losses
during the year. The provisions for loan losses at AED19.8mn in 2004 were lower
by 93.0% than in the previous year, thus, adding to the net profit.
• Overall, the total operating income after provisions for loan losses increased by
73.6% to AED1.1bn.
• The operating costs of the bank went up by 37.1%, including a rise of 26.5% in
the staff costs, during 2004. However, as a percentage of operating income after
provisions for loan losses, its costs declined to 30.0% during the year from 37.9%
in the previous year. Staff costs on a similar basis declined to 19.5% during the year
from 26.8% in the previous year.
• The bank’s net profit of AED800.6mn in 2004 was higher by 97.7% over the previous
year.
• The RoAE of the bank shot up to 18.2% in 2004, from 9.8% in 2003. The RoAA
similarly increased to 2.4% in 2004 from 1.4% in the previous year.
• ADCB’s total assets stood at AED38.4bn at the end of 2004, representing an increase
• The bank increased gross loans and advances to customers by 27.0% to AED26.7bn
over December 2003.
• The top three sectors to which the bank had the maximum exposure at the end of
2004 were personal (40.3%), government (21.4%) and trading (8.3%).
• As at December 31, 2004, gross non performing loans of the bank amounted to
AED2.1bn, down 72.9% from AED7.7bn in 2003.
• The proportion of NPLs to gross loans stood at 7.8% at the end of 2004, down from
36.6% in 2003; while the bank provided for 38.0% of its NPLs at the end of 2004,
up from 22.9% at the end of 2003.
• Despite the stiff competition, deposits from customers increased by 53.9% during
2004 over the previous year, while the deposits from banks, which have a relatively
higher cost of servicing, declined by 5.7% during the year.
• The Capital Adequacy Ratio of the bank, calculated as per UAE Central Bank
guidelines, stood at 16.4% in 2004, down from 19.9% in 2003.
• The bank declared a cash dividend of 25% and stock dividend of 20% for 2004. The
dividend payout ratio for the bank almost halved to 39.0% in 2004, from 77.2% in
the previous year, thanks to the net profit almost doubling in 2004.

Results for First Quarter of 2005
• The bank has announced its first quarter results for 2005. Operating income in the
quarter rose to AED250mn from AED157mn in the previous year, up 50.4% year-
on-year. Net profit of AED221mn in the first quarter of 2005 was 52.1% higher than
AED145mn in the same period last year.
• Net loans & advances increased by 15.8% to AED30.0bn and the total assets increased
by 13.5% to AED43.6bn during the quarter, over those at the end of 2004.
Outlook
• The loan book is expected to grow by about 30% in 2005, based on the aggressive
lending programme the banking is embarking on. We believe that the increasing
thrust on lending activities will be a major revenue booster for the bank in the years
to come.
• The bank is expected to push its consumer loan products going forward, as these are
relatively high-margin, low-risk products.
• The customers’ deposits could, however, grow at a lower rate in 2005 than in 2004,
as they are relatively costlier.
• Both, the yield on interest earning assets as well as the cost of interest bearing
liabilities are expected to trend up in the years ahead, thanks to the hardening of
interest rates. As a result, the net spread for the bank is expected to show an uptrend
in the medium-term.
• The net fees and commissions income for the bank is expected to show a high
growth in the medium-term. The bank could be expected to aggressively pursue
new cards business, funds management, private banking, managing IPOs, facilities
arrangement, loan syndications, etc. during the year.
• However, the total operating income after provisions for loan losses is expected to
grow at a lower rate in 2005 than in 2004, thanks primarily to higher provisions for
loan losses assumed on a higher amount of gross loans outstanding at the end of the
year.
are likely to keep the bank on a high profit-growth trajectory.
• The bank is expected to continue its focus on improving operating efficiency and
asset quality in the coming years as well.
• The bank is planning to expand its existing network of 36 branches in UAE by

opening six new premises in 2005.
• The bank does not have any plans to enter Islamic banking at this stage.

Valuation & Recommendation
• The book value per share (BVPS) of ADCB was AED37.2 during 2004. At the
current stock price of AED239.0, it is quoting at a P/BV of 6.4x, as against the
weighted average P/BV for the UAE banking industry (including 12 listed banks in
the country covered in this Report) of 7.0x.
• The intrinsic value of ADCB of AED253.0 per share, arrived at by using the
Dividend Discounting Method (DDM) and peer set valuation method, is higher than
the current stock price of AED239.0 by 5.9%. Though the composite share valuation
translates to forward P/BV multiples of 7.7x and 7.4x our projected 2005 and 2006
book value per share, the stock would seem to have a limited upside from its current
price levels, since it has had a good run on the stock market in recent months, gaining
75.7% since the beginning of 2005.
• The bank is likely to benefit from aggressively promoting its consumer loan products
going forward. The net fees and commissions income of the bank is also expected
to show a high growth in the medium-term from its funds management, private
banking, managing IPOs, facilities arrangement and loan syndication activities
going forward.
• The senior management of the bank has changed in the last couple of years. The
new management, with considerable experience in the GCC banking industry, is
expected to steer the bank on a high growth curve in the years to come.
• We, therefore, initiate our coverage of ADCB with a “HOLD” recommendation,

with a medium-term perspective. We believe that ADCB presents an attractive
investment opportunity at lower price levels.

BALANCE SHEET
(In AED ‘000) 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets
Cash balances 210,847 169,001 279,174 177,827 189,805 188,373 155,980
Balances with central bank 1,087,584 1,145,839 1,400,658 1,568,737 1,725,611 1,863,660 2,012,752
May 2005
Deposits with banks 5,286,298 4,633,181 7,584,197 9,821,535 11,589,411 13,443,717 15,527,493
Trading Securities 4,408 - 297,011 386,114 444,031 510,636 536,168
Gross Loans and Advances 18,988,923 21,036,722 26,724,354 42,758,966 53,448,708 64,138,450 75,683,371
Other Assets 368,081 430,999 463,807 510,188 535,697 562,482 590,606
Less : Loan Loss Reserve (1,588,429) (1,766,222) (793,054) (857,192) (937,366) (1,033,573) (1,147,098)
Global Research - UAE
Investment Securities - Debt 2,192,280 2,232,590 1,597,214 1,836,796 1,965,372 2,063,640 2,125,550
Accumulated Depreciation (177,067) (171,358) (188,518) (217,137) (246,354) (275,824) (306,322)
Net Fixed Assets 144,072 144,971 201,119 273,806 278,955 270,497 256,388
Total Assets 27,683,363 28,751,194 38,393,343 57,206,906 70,066,716 82,892,812 96,652,821
Liabilities
Deposits from Banks 3,430,693 3,363,606 3,172,135 3,267,299 3,332,645 3,399,298 3,433,291
UAE Banking Sector

Long-term loans 1,200,000 1,200,000 - - - - -

Proposed dividend 312,500 312,500 312,500 905,346 1,537,399 2,272,102 3,082,578
Owner’s Equity
Paid-up equity capital 1,250,000 1,250,000 1,250,000 1,500,000 1,500,000 1,500,000 1,500,000
Proposed bonus shares - - 250,000 - - - -
Statutory & legal reserves 943,273 1,024,279 1,184,397 1,419,552 1,500,000 1,500,000 1,500,000
General reserve 1,850,000 1,850,000 1,925,000 1,950,000 1,975,000 2,000,000 2,025,000
33
Total Liabilities & Owner’s Equity 27,683,363 28,751,194 38,393,343 57,206,906 70,066,716 82,892,812 96,652,821
OPERATING STATEMENT
(In AED ‘000) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Interest Income 1,194,700 1,061,454 1,310,785 1,939,650 2,730,104 3,375,711 4,081,802
34
Interest Expense (464,457) (333,374) (463,810) (724,798) (1,027,852) (1,285,434) (1,566,234)
Net commission income 132,503 155,599 246,939 469,184 703,776 1,055,664 1,477,930
Investment securities income (311) 2,669 4,796 5,130 4,774 3,999 4,265
Gain on sale of non-trading investments 16,177 4,509 (606) 2,052 2,387 2,666 2,843
Less : Provisions for Loan Losses (139,942) (283,305) (19,759) (64,138) (80,173) (96,208) (113,525)
Net operating income 796,354 655,890 1,138,338 1,690,073 2,399,158 3,125,848 3,960,003
Less : Staff costs (143,744) (175,858) (222,511) (301,947) (368,617) (398,660) (404,660)
Operating profit 588,491 407,521 796,713 1,181,683 1,716,805 2,342,071 3,098,068
Profit before tax and minority interest 588,491 407,521 796,713 1,181,683 1,716,805 2,342,071 3,098,068
UAE Banking Sector

Less: Provision for tax 1,846 (2,496) 3,881 (5,908) (8,584) (11,710) (15,490)
Net Profit before minority interest 590,337 405,025 800,594 1,175,774 1,708,221 2,330,361 3,082,578
Net Profit 590,337 405,025 800,594 1,175,774 1,708,221 2,330,361 3,082,578

Realised gain on sale of available for sale investments (10,925) (2,236) 520 - - - -
Differences arising out of overseas branches 258 2,857 2,348 - - - -
Trfr to Statutory & legal reserves (118,068) (81,006) (160,118) (235,155) (80,448) - -
Trfr to general reserve (150,000) (75,000) (25,000) (25,000) (25,000) (25,000)
Board of Directors remuneration (1,850) (1,850) (1,850) - - - -
May 2005
Cash Dividend (312,500) (312,500) (312,500) (905,346) (1,537,399) (2,272,102) (3,082,578)
Dividend % 25% 25% 25% 60% 103% 152% 206%
Stock Dividends - - (250,000) - - - -
Dividend % 20% 0% 0% 0% 0%
CASH FLOW STATEMENT
(In AED ‘000) 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Operating
Operating Activities (a) 711,047 719,479 545,009 1,268,532 1,817,611 2,456,038 3,226,601
May 2005
Profit before tax and minority interest 588,491 407,521 796,713 1,181,683 1,716,805 2,342,071 3,098,068
Depreciation 17,856 18,377 20,323 28,619 29,217 29,470 30,498
Decrease in trading investments 9,114 4,408 (297,011)
Overseas taxation refunded / (paid) (27,122) 9,891 4,943 (5,908) (8,584) (11,710) (15,490)
Forex adjustment 232 2,535 2,117
Impairment of loans & advances 156,357 305,762 133,074 64,138 80,173 96,208 113,525
Recovery of provisions for doubtful loans & advances (16,415) (22,457) (113,315)
Gain on sale of fixed assets (14) (199) (591)
Gain on sale of non-trading investments (16,177) (4,509) 606
Directors remuneration (1,275) (1,850) (1,850)
Working Capital (b) (2,667,730) (647,618) (758,886) (563,501) (606,416) (692,861) (865,364)
Dec/ (inc) Other assets (33,338) (74,789) (36,222) (46,381) (25,509) (26,785) (28,124)
Inc/(dec) in deposits to banks (2,170,516) 359,749 (3,400,076) (2,405,417) (1,924,750) (1,992,355) (2,232,869)
Inc/(dec) in deposits from banks 212,645 168,026 2,770 95,164 65,346 66,653 33,993
Inc/(dec) in deposits from customers 537,229 1,105,292 9,726,352 17,737,881 11,887,361 11,887,361 12,838,350
UAE Banking Sector

Inc/(dec) in other liabilities (28,830) (52,585) 111,849 89,865 80,878 62,007 68,207
Total operating (1,956,683) 71,861 (213,877) 705,031 1,211,195 1,763,178 2,361,237
Investing
Additions to fixed assets, net of disposals (16,496) (19,720) (76,254) (101,306) (34,366) (21,012) (16,390)
Sale of fixed assets 170 965 605
Purchase of non-trading investments (1,063,119) (865,892) (717,528) (303,468) (201,589) (139,593) (79,608)
Change in trading securities (89,103) (57,917) (66,605) (25,532)
Sale of non-trading investments 1,059,570 1,083,440 1,429,727
Total investing (19,875) 198,793 636,550 (493,877) (293,872) (227,210) (121,529)
Financing
35
Dividend paid to shareholders (312,500) (312,500) (312,500) (312,500) (905,346) (1,537,399) (2,272,102)
Total financing (312,500) (312,500) (312,500) (312,500) (905,346) (1,537,399) (2,272,102)
Net change in cash balances (2,289,058) (41,846) 110,173 (101,347) 11,977 (1,431) (32,394)
Net cash balances at beginning 2,499,905 210,847 169,001 279,174 177,827 189,805 188,373
Net cash balances at end 210,847 169,001 279,174 177,827 189,805 188,373 155,980
RATIOS
2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
- Net interest income / Op. Income after Provisions for 74.1% 67.8% 72.7% 68.1% 67.6% 63.8% 60.7%
Loan Losses
- Non-interest income / Op. Income after Provisions 25.9% 32.2% 27.3% 31.9% 32.4% 36.2% 39.3%
for Loan Losses
Margins
- Net income / Revenues 49.4% 38.2% 61.1% 60.6% 62.6% 69.0% 75.5%
- Operating profit / Revenues 49.3% 38.4% 60.8% 60.9% 62.9% 69.4% 75.9%
- Investment Income to Investment Assets -0.0% 0.3% 0.6% 0.5% 0.4% 0.3% 0.3%
- Net Spread 2.4% 2.3% 2.3% 2.4% 2.6% 2.6% 2.7%
Efficiency
- Cost / Op. Income after Provisions for Loan Losses 26.1% 37.9% 30.0% 30.1% 28.4% 25.1% 21.8%
- Staff Expense / Op. Income after Provisions for Loan 18.1% 26.8% 19.5% 17.9% 15.4% 12.8% 10.2%
Losses
Liquidity
Credit Quality
- Provisions to Average Gross Loans 0.8% 1.4% 0.1% 0.2% 0.2% 0.2% 0.2%
- Non Performing Loans (AED `000) 7,350,000 7,698,000 2,086,000 1,904,872 1,874,731 1,879,224 1,911,830
- Loan Loss Reserve (AED `000) 1,588,429 1,766,222 793,054 857,192 937,366 1,033,573 1,147,098
- NPLs to Gross Loans 38.7% 36.6% 7.8% 4.5% 3.5% 2.9% 2.5%
- NPLs to (Equity + Loan loss reserve) 129.5% 129.7% 38.3% 32.8% 30.8% 30.1% 30.0%
- NPL Coverage 21.6% 22.9% 38.0% 45.0% 50.0% 55.0% 60.0%
Capital Adequacy
- Capital Adequacy Ratio (CAR) --- 19.9% 16.4%

- Net commission income / Op. Income after 16.6% 23.7% 21.7% 27.8% 29.3% 33.8% 37.3%
Provisions for Loan Losses
- Investment securities income / Op. Income after -0.0% 0.4% 0.4% 0.3% 0.2% 0.1% 0.1%
- Other operating income / Op. Income after Provisions 7.2% 7.4% 5.3% 3.7% 2.8% 2.2% 1.8%
for Loan Losses
- Change in Net Interest Income after Provisions for -3.4% -24.7% 86.0% 39.1% 41.0% 22.9% 20.5%
Loan Losses

- Shares in Issue (`000) 12,500 125,000 125,000 150,000 150,000 150,000 150,000
- EPS (AED) 4.7 3.2 6.4 7.8 11.4 15.5 20.6
- Book Value Per Share (AED) 326.8 33.3 37.2 33.0 34.3 34.8 34.8
- Market Price Year End (AED) * 56.6 61.0 136.0 239.0 239.0 239.0 239.0
- P/E (x) 12.0 18.8 21.2 30.5 21.0 15.4 11.6
- P/BV (x) 0.2 1.8 3.7 7.2 7.0 6.9 6.9
- Dividend yield (%) 44.2 4.1 3.3 2.5 4.3 6.3 8.6
- Dividend pay-out ratio (%) 52.9 77.2 39.0 77.0 90.0 97.5 100.0
* Market price for 2005 and subsequent years as per last closing price available on April 24, 2005.

6.2 Abu Dhabi Islamic Bank

Reuters Code: April 2005
ADIB.AD
Listing:
CMP (AED) :
72.0
Key Data
P / BV (X) 5.0 Target Price Not Rated
Source: Global Research All data related to stock price and stock market as on April 24, 2005.
Background
• Abu Dhabi Islamic Bank (ADIB) was established in 1997 as a Public Joint Stock
Company through an Amiri Decree. The Bank commenced commercial operations
in November 1998.
• All contracts, operations and transactions of ADIB are carried out in accordance with
Islamic Shari’a principles.
• The bank has 16 branches and seven ATMs in UAE.
• The bank offers a variety of Sharia-compliant banking solutions to corporate and

individual clients, including personal banking (financing and investment products,
savings and current accounts, cards, private banking, etc.), corporate banking
(deposits, financing products, etc.), investment banking (funds), real estate services
(financing products, real estate services, etc.).
• The bank has a 26% shareholding in Abu Dhabi National Takaful Company, which
serves the insurance needs of the Sharia-conscious market. It also has a 10% stake
in Bosnia-Herzegovina-based Bosnia Bank International.
• According to Zawya.com, the bank had 402 employees at the end of 2003.
• ADIB had 100.0mn shares outstanding of face value AED10 each, for a paid capital
of AED1.0bn at the end of 2004.
• Among the prominent shareholders of the bank are the members of the Al Nahyan
royal family (29%), Abu Dhabi Investment Authority (10%), and public (the balance
61%).

Recent Developments
• ADIB, along with other prominent banks in the region, including Samba Financial
Group, ARABIC, National Commercial Bank, Citigroup, Dubai Islamic Bank, Bank
Al-Jazira, Kuwait Finance House and Emirates Bank, arranged what is being hailed
as the world’s largest Islamic financing transaction in September 2004. The $2.35bn
Islamic transaction was to finance UAE’s Ettihad-Etisalat Company, which has
been awarded the second GSM license and the first 3G license in Saudi Arabia. The
murabaha transaction – a Sharia-compliant bank loan in two tranches – will partly
fund the $3.45bn license fees, besides contributing to operational costs projected to
be $1bn during the company’s first year in business.
• ADIB’s Individual rating has been upgraded by Fitch Ratings in August 2004,
reflecting the bank’s steady performance improvement since it was established in
1997. The rating agency announced upgrading the bank’s Individual rating to C
from its previous rating of C/D. In addition ADIB has maintained it’s ratings for
the Long-term (A-), Short-term F2 and Support 2. The bank achieved this upgrade
reportedly through a positive record of profit growth, good asset quality over a five-
year period, sound liquidity, strong capital ratios and a growing franchise.
• The income from murabaha, and Islamic & ijara financing of the bank increased by
105.8% to AED426.0mn during 2004 as compared to the previous year, on the back
of a 39.7% increase in the murabaha, and Islamic & ijara financing during the year.
However, depositors’ share of profits increased by 212.5% to AED143.9mn during
the year, on the back of a 56.3% growth in the customers’ deposits during the year.
• The yield on murabaha, and Islamic & ijara financing for the bank went up to 4.2%
in 2004 from 2.6% in 2003. The cost of commission bearing liabilities, on the other
hand, more than doubled to 1.5% in 2004 from 0.7% in 2003. The net spread, thus,
increased to 2.7% in 2004 from 2.0% in 2003.
• The net income from murabaha, and Islamic & ijara financing during the year grew
by 75.2% to AED282.1mn, as against AED161.0mn during the previous year.
• The net commission income at AED24.8mn declined by 32.0% during 2004.
• The provisions for loan losses were AED51.4mn in 2004. This was about 15 times the
amount of AED3.4mn in the previous year, due to a higher charge on the impaired
receivables made during the year.
• Overall, the total operating income after the loan loss provisions increased by 26.8%
to AED280.7mn in 2004.
• The operating costs of the bank increased by 30.6%, including an increase of 31.6%
in the staff costs, during 2004. As a percentage of operating income after loan loss
provisions, its costs increased to 56.2% during the year from 54.6% in the previous

year. Staff costs on a similar basis rose to 36.8% during the year from 35.5% in the
previous year.
• The net profit after taxes at AED122.9mn in 2004 was higher by 22.2% over the
previous year.
• The RoAE of the bank went up to 8.9% in 2004, from 7.8% in 2003. The RoAA,
on the other hand, declined marginally to 1.1% in 2004 from 1.2% in the previous
year.
• ADIB’s total assets stood at AED12.7bn at the end of 2004, representing an increase
• The bank increased its exposure to murabaha, and Islamic & ijara financing by 39.7%
to AED11.3bn in 2004 over 2003. The bank’s murabaha placements with banks and
financial institutions are believed to be highly liquid and of high quality.
• Deposits from customers increased by 56.3% during 2004 over the previous year,
while the deposits from banks, which have a relatively higher cost of servicing,
decreased by 9.4% during the year.
• The bank declared a cash dividend of 7% for 2004 (2003 : 7%). Despite maintaining
the dividend rate, the dividend payout ratio for the bank went down to 57.0% in
2004 from 69.6% in the previous year, thanks to an increase of 22.2% in the net
profit in 2004.
• Total assets of ADIB grew to AED22.2bn at the end of March 2005, an increase of
74.8% during the quarter. This included a temporary increase of AED7.8bn related
to subscriptions to shares in an initial public offering. With the exclusion of this
extraordinary item, assets grew by 13.4% to AED14.4bn during the first quarter of
2005.
• Customer deposits rose to AED18.7bn, an increase of 95.8% during the quarter. As

in the case of the assets, deposits too included a temporary increase of AED7.8bn,
representing a deposit in the name of a company under establishment for which the
bank acted as a receiving bank for the purpose of collecting subscriptions from the
public. With the exclusion of this extraordinary item, deposits grew by 13.5% to
AED10.9bn in the quarter.
• Operating income increased by 104.9% to AED153.4mn. Revenues from murabaha,

mudaraba, istisna and ijara transactions comprised 88.6% of total revenues compared
with 76.4% in the first quarter of 2004. The bank earned a net profit of AED41.4mn
during the quarter, up 57.8% from the same period last year.

Outlook
• ADIB’s exposure to murabaha, and Islamic & ijara financing is expected to grow at
a healthy rate in the medium-term, due to a sustained business appetite in a growing
economy such as UAE’s. The bank is expected to focus on project finance and
infrastructure lending in the coming years to cash in on the emerging opportunities
in the country. With the economy growing at a much faster pace, a larger number of
opportunities for Islamic financing deals are expected.
• The bank’s deposits also could grow at a good rate in the coming years. The bank is
likely to expand its network of branches and ATMs in the coming months towards
this end.
• Both the yield on murabaha, and Islamic & ijara financing as well as the cost of
commission bearing liabilities could be expected to trend up in the years ahead,
thanks to hardening interest rates. As a result, the net spread for the bank is expected
to show an uptrend in the medium-term.
growth in the medium-term, as it is expected to focus on higher levels of fee-based
activities.
• Over the medium-term, the growth in the net income from murabahas and Islamic
financing, and net commissions are likely to keep the bank on a high growth
trajectory.

BALANCE SHEET
Abu Dhabi Islamic Bank
(In ‘000 AEDs) 2002 2003 2004
Assets
Cash balances 38,396 49,928 64,778
Balances with central bank 305,093 424,657 540,745
Deposits with banks 9,673 10,496 5,603
Other Assets 29,248 39,626 63,092
Gross murabaha, and Islamic & ijara financing 6,990,133 8,055,469 11,250,964
Less : Loan Loss Reserve (19,516) (22,897) (74,064)
Investment Securities - Equity 421,759 628,677 791,777
Gross Fixed Assets 66,703 82,283 101,990

Accumulated Depreciation (37,945) (47,526) (57,716)
Net Fixed Assets 28,758 34,757 44,274
Total Assets 7,803,544 9,220,713 12,687,169
Liabilities
Deposits from Banks 1,221,495 1,585,107 1,435,979
Deposits from Customers 5,200,716 6,123,526 9,568,836
Other Liabilities 78,361 111,661 176,711
Owner’s Equity
Paid-up equity capital 1,000,000 1,000,000 1,000,000
Statutory & legal reserves 33,814 43,870 56,161
General reserve 33,814 43,870 56,161
Fair valuation reserve 22,791 70,578 123,792
Total Shareholder’s Equity 1,252,972 1,330,419 1,435,643
Total Liabilities & Owner’s Equity 7,803,544 9,220,713 12,687,169

OPERATING STATEMENT
(In ‘000 AEDs) 2002 2003 2004
Income from murabaha, and Islamic & ijara financing 192,600 207,036 425,980
Distribution to depositors (63,238) (46,055) (143,903)
Net income from murabaha, and Islamic & ijara financing 129,362 160,981 282,077
Net commission income 22,699 36,421 24,782

Investment securities income 31,486 23,935 34,084
Add : Other operating income 3,784 4,960 5,699
Less : Provisions for Loan Losses (9,825) (3,438) (51,409)
Less : Provisions for Investment Losses - (1,482) (14,504)
Less : Staff costs (63,881) (78,586) (103,417)

Operating profit 75,628 100,560 122,910
Profit before tax and minority interest 75,628 100,560 122,910
Net Profit before minority interest 75,628 100,560 122,910
Net Profit 75,628 100,560 122,910

Op Balance of Retained Earnings 152,951 162,553 172,101
Trfr to Statutory & legal reserves (7,563) (10,056) (12,291)
Trfr to General reserve (7,563) (10,056) (12,291)
Directors’ remuneration (900) (900) (900)
Cash Dividend (50,000) (70,000) (70,000)
Dividend % 5% 7% 7%

CASH FLOW STATEMENT

(In ‘000 AEDs) 2002 2003 2004
Operating
Operating Activities (a) 87,845 110,929 190,171
Net profit 75,628 100,560 122,910
Depreciation 11,224 10,044 11,895
Impairment of loans & advances 9,825 4,920 65,913
Gain on sale of fixed assets - (13) 39
Gain on sale of trading investments (7,932) (3,682) -9686
Working Capital (b) 349,627 (640,806) 838,407

Dec/ (inc) loans and advances (595,606) (1,679,956) (2,467,039)
Dec/ (inc) Other assets (10,086) (10,378) (23,466)
Inc/(dec) in deposits from banks 25,509 93,418 (181,448)
Inc/(dec) in deposits from customers 914,053 922,810 3,445,310
Inc/(dec) in other liabilities 15,757 33,300 65,050
Total operating 437,472 (529,877) 1,028,578
Investing
Additions to fixed assets, net of disposals (10,945) (16,030) (21,451)
(Purchase)/Sale of non-trading investments 43,012 (156,931) (114,704)
Change in deposits with banks (409,481) 764,370 (807,573)
Total investing (377,414) 591,409 (943,728)
Financing
Total financing (50,000) (50,000) (70,000)
Net change in cash balances 10,058 11,532 14,850

Net cash balances at beginning 28,338 38,396 49,928
Net cash balances at end 38,396 49,928 64,778

RATIOS
2002 2003 2004
Profitability
- Net interest income / Op. Income after Provisions for Loan Losses 67.3% 71.2% 82.2%
- Non-interest income / Op. Income after Provisions for Loan Losses 32.7% 29.5% 23.0%
Margins
- Net income / Revenues 39.3% 48.6% 28.9%
- Operating profit / Revenues 39.3% 48.6% 28.9%
- Investment Income to Investment Assets 7.1% 4.6% 4.8%
- Net Spread 1.9% 2.0% 2.7%
Efficiency
-Cost / Op. Income after Provisions for Loan Losses 57.4% 54.6% 56.2%
- Staff Expense / Op. Income after Provisions for Loan Losses 36.0% 35.5% 36.8%
Liquidity
Credit Quality
- Provisions to Average Gross Loans 0.2% 0.1% 0.5%
- Loan Loss Reserve (AED ‘000) 19,516 22,897 74,064
- NPLs to Gross Loans 0.0% 0.0% 0.0%
- NPLs to (Equity + Loan Loss Reserve) 0.0% 0.0% 0.0%
Capital Adequacy

- Net commission income / Op. Income after Provisions for Loan Losses 12.8% 16.5% 8.8%
- Investment securities income / Op. Income after Provisions for Loan Losses 17.7% 10.8% 12.1%
- Other operating income / Op. Income after Provisions for Loan Losses 2.1% 2.2% 2.0%
- Change in Net Interest Income after Provisions for Loan Losses -13.6% 31.8% 46.4%
- Change in Other Income 58.7% 31.1% 14.9%

- Shares in Issue (‘000) 100,000 100,000 100,000
- EPS (AED) 0.8 1.0 1.2
- Book Value Per Share (AED) 12.5 13.3 14.4
- Market Price Year End (AED) * 16.7 24.2 42.1
- P/E (x) 22.0 24.1 34.3
- P/BV (x) 1.3 1.8 2.9
- Dividend yield (%) 3.0 2.9 1.7
- Dividend pay-out ratio (%) 66.1 69.6 57.0

6.3 Bank of Sharjah

BOS.AD
Listing:
CMP (AED) :
4.5
Key Data
EPS (AED) 0.2 12-Month Average Daily Volume (Nos.) 541,557
Background
• Bank of Sharjah (BS) was established on December 22, 1973 with the Government
of Sharjah, French bank Banque de Paris et des Pays Bas, and the Mubarak Al
Hassawi Group as the three main founding members.
• The Government of Sharjah and the ruling family currently hold the largest
shareholding of 30% in the bank.
• BS is the largest financial institution in Sharjah in terms of capital and equity and
Sharjah’s biggest private company.
• The bank operates three branches in the UAE – one each in Sharjah, Dubai and Abu
Dhabi respectively.
• The bank concentrates on corporate and commercial banking.
• It had 148 employees as of 31 December, 2004.
• BS had 750.0mn shares outstanding of face value AED1 each, for a paid capital of
AED750.0mn at the end of 2004.
• The total number of shares of the bank outstanding at the end of first quarter of 2005
was one billion.
Recent Developments
• BS has announced in January 2005 an increase in share capital from AED750mn to

AED1bn, in line with its aggressive development and expansion strategy for 2005.

The capital increase will be funded in the form of a 13.3% bonus issue, equivalent to
AED100mn, and a rights issue for AED150mn with a premium of AED1 per share.
• Four Sharjah-based banks, including the Bank of Sharjah, have reportedly got together
to create a large Islamic financial institution in the Emirate. BS and the other three
banks – Sharjah Islamic Bank, United Arab Bank and InvestBank are reportedly
setting up an Islamic financial institution – the Islamic Finance Company (IFC),
to cater to the country’s wholesale Islamic finance requirements. The new Islamic
financial institution’s headquarters are expected to be in Sharjah. It is expected to
be capitalised at AED1bn, with its four promoter banks, along with some high net
worth UAE investors, expected to hold 45% of the capital. Once established, it could
be the second largest Islamic financial institution in UAE after Dubai Islamic Bank
(DIB), which has a paid up equity capital of AED1.5bn.
• Fitch Ratings in December 2004 affirmed BS’ ratings at Long-term ‘BBB+’, Short-
term ‘F2’, Individual ‘C’ and Support ‘2’, with ‘Stable’ outlook. The Long-term,
Short-term and Individual ratings reflect BS’ consistent performance, satisfactory
asset quality, low-cost base and strong capitalisation. These factors are, however,
partially offset by its small franchise and concentrations in the loan portfolio. The
Support rating reflects the high probability of support from the UAE authorities,
should it ever be required.
• The interest income of the bank increased by 20.1% to AED135.3mn during 2004,
as compared to the previous year, on the back of a 30.1% increase in the gross
loans during the year. However, interest expenses increased at a lower rate of 16.3%
during the year, on the back of a 16.5% growth in the customers’ deposits and
130.3% growth in banks’ deposits during the year.
• The yield on interest earning assets for the bank declined to 4.3% in 2004 from 7.7%
in 2003. The cost of interest bearing liabilities, on the other hand, declined to 1.6%
in 2004 from 3.0% in 2003. The net spread, therefore, declined to 2.7% in 2004 from
4.7% in 2003.
compared to AED82.4mn during the previous year.
• Helped by IPOs, loan syndications deals, etc., the net commission income was higher
by 53.8% in 2004 than in the previous year.
• Gains on investments went up by 90.0% during the year on the back of an increase
in the fair value of investments in equity portfolio and managed funds, riding on the
stock market boom.
• There was also an amount of AED7.4mn by way of gain on disposal of premises and
equipment in 2004.

• Net gains from forex transactions stood at AED7.6mn, an increase of 11.5% during
2004.
• The provisions for loan losses at AED7.0mn in 2004 were lower by 5.8% than in the
previous year, as there was no provision for impairment on subsidiaries during the
year.
43.9% to AED177.2mn in 2004.
previous year.
also increased to 4.3% in 2004 from 2.9% in the previous year.
• BS’ total assets stood at AED3.4bn at the end of 2004, representing an increase of
• The bank increased its gross loans and advances portfolio to customers by 30.1% to
AED2.1bn over December 2003.
2004 were trade (30.2%), government (15.4%) and personal loans (12.1%).
• As at December 31, 2004, gross non-performing loans of the bank amounted to

AED66.6mn, up 33.9% from AED49.7mn in 2003.
• The proportion of NPLs to gross loans stood at 3.2% at the end of 2004, marginally
up from 3.1% in 2003; while the bank provided for 88.9% of its NPLs at the end of
2004, down from 106.1% at the end of 2003.
increased by 130.3% during the year.
• BS declared a stock dividend of 13.3% but no cash dividend for 2004. The dividend
payout ratio for the bank, thus, declined to nil in 2004, from 85.8% in the previous
year.

• Loans and advances grew by 53.1% from AED1.6bn at the end of March 2004
to AED2.4bn at the end of March 2005, while customer deposits posted a 20.2%
increase to reach AED2.4bn at the end of March 2005, compared to AED2.0bn a
year earlier.
• The bank announced a 50.9% increase in the net profit posting AED44.3mn in the
first three months of 2005, compared to AED29.4mn in the same period of the
previous year.
Outlook
• The loan book of BS is expected to grow at a healthy rate in the medium-term, in

line with the expected demand growth in UAE. Its enhanced capital should enable
the bank to take larger exposures in the big-ticket infrastructure/real estate projects
in the UAE.
• The bank’s customers’ deposits too could grow at a good rate in the coming years. The
bank already has a private banking division. It reportedly has plans to strengthen its
private banking operations by further stepping up its cooperation with BNP Paribas,
which held a stake in BS until early last year.
• Both the yield on interest earning assets as well as the cost of interest bearing
liabilities are expected to trend up in the years ahead, thanks to hardening interest
rates. As a result, the net spread for the bank is expected to show an uptrend in
the medium-term. This could only be further helped along by its planned Islamic
banking foray.
• The net fees and commissions income for the bank is expected to show a high growth
in the medium-term, as it focuses on higher levels of non-interest income. BS is
reportedly venturing into investment banking by setting up an independent company
for its investment banking operations. The bank also plans to expand its presence
into other areas of financial services.
• The bank is reportedly looking for opportunities in the other GCC countries as
well.
are likely to drive the bank’s growth.

BALANCE SHEET
Bank of Sharjah
(In AED ‘000) 2003 2004
Assets
Cash balances 21,091 26,032
Balances with central bank 1,161,844 1,094,741
Deposits with banks 158,553 142,632
Trading Securities 6,764 12,953
Other Assets 47,853 25,568
Gross Loans and Advances 1,598,160 2,079,695
Less : Loan Loss Reserve (52,699) (59,166)
Total Current Assets 2,941,566 3,322,455
Investment Securities - Debt 15,704 15,500

Investment Securities - Equity 47,802 62,254
Gross Fixed Assets 54,058 41,951

Accumulated Depreciation (34,785) (24,447)
Net Fixed Assets 19,273 17,504
Total Assets 3,024,345 3,417,713
Liabilities
Deposits from Banks 1,682 3,874
Deposits from Customers 2,019,605 2,353,743
Other Liabilities 36,515 33,704
Total Current Liabilities 2,057,802 2,391,321
Proposed dividend 75,000 -
Owner’s Equity
Paid-up equity capital 750,000 750,000
Proposed bonus shares - 100,000
Statutory & legal reserves 8,745 22,449
Special reserve 8,745 22,449
General reserve 4,186 5,778
Retained earnings 119,867 125,716
Total Shareholder’s Equity 891,543 1,026,392
Total Liabilities & Owner’s Equity 3,024,345 3,417,713

OPERATING STATEMENT
Bank of Sharjah
(In AED ‘000) 2003 2004
Interest Income 112,619 135,281

Interest Expense (30,206) (35,121)
Net interest income 82,413 100,160
Net commission income 28,527 43,872

Investment securities income - 1,942
Gains on investments 12,043 22,877
Add : Other operating income 7,546 7,975
Add : Other income - 7,361
Less : Provisions for Loan Losses (7,397) (6,967)
Operating income 123,132 177,220
Less : Staff costs (24,170) (27,104)

Less: Other operating expenses (9,067) (10,434)
Less: Depreciation (2,450) (2,633)
Operating profit 87,445 137,049
Profit before tax and minority interest 87,445 137,049
Net Profit before minority interest 87,445 137,049
Net Profit 87,445 137,049

Op Balance of Retained Earnings 127,112 119,867
Net Profit for the year 87,445 137,049
Trfr to Statutory & legal reserves (8,745) (13,704)
Trfr to Special reserve (8,745) (13,704)
Trfr to General reserve - (1,592)
Directors’ remuneration (2,200) (2,200)
Cash Dividend (75,000) -
Dividend % 10% 0%
Stock Dividends - (100,000)
Dividend % 0% 13.3%
Cl Balance of Retained Earnings 119,867 125,716

CASH FLOW STATEMENT

Bank of Sharjah
(In AED ‘000) 2003 2004
Operating
Operating Activities (a) 83,849 114,211
Net profit 87,445 137,049
Depreciation 2,450 2,633
Fair value adjustments - trading investment (9,161) (8,376)
Impairment of loans & advances 6,197 6,967
Directors’ remuneration (1,650) (2,200)
Gain on sale of fixed assets - (7,361)
Gain on sale of trading investments (2,882) -14501
Losses/impairment in associates/subsidiaries 1,450 -
Working Capital (b) 12,559 (148,459)

Dec/ (inc) loans and advances (224,372) (482,035)
Dec/ (inc) Other assets (30,335) 22,285
Inc/(dec) in deposits from banks (6,606) (20,036)
Inc/(dec) in deposits from customers 259,929 334,138
Inc/(dec) in other liabilities 13,943 (2,811)
Total operating 96,408 (34,248)
Investing
Additions to fixed assets, net of disposals (1,110) 6,497
(Purchase)/Sale of non-trading investments 3,355 204
Change in trading securities 5,961 2,236
Change in deposits with banks (544,723) 105,252
Total investing (536,517) 114,189
Financing
Increase in share capital 490,000 -
Dividend paid to shareholders (28,800) (75,000)
Total financing 461,200 (75,000)
Net change in cash balances 21,091 4,941

Net cash balances at beginning - 21,091
Net cash balances at end 21,091 26,032

RATIOS
Bank of Sharjah
2003 2004
Profitability
- Return on Average Assets 2.9% 4.3%
- Return on Average Equity 9.8% 14.3%
- Net interest income / Op. Income after Provisions for Loan Losses 60.9% 52.6%
- Non-interest income / Op. Income after Provisions for Loan Losses 29.3% 30.4%
Margins
- Net income / Revenues 77.6% 101.3%
- Operating profit / Revenues 77.6% 101.3%
- Interest Expense to Interest Income 26.8% 26.0%
- Interest Income to Interest Earning Assets 3.8% 4.3%
- Investment Income to Investment Assets 0.0% 3.0%
- Interest Expense to Interest Bearing Liabilities 1.5% 1.6%
- Net Spread 2.3% 2.7%
- Net Interest Margin 2.8% 3.2%
Efficiency
-Cost / Op. Income after Provisions for Loan Losses 29.0% 22.7%
- Staff Expense / Op. Income after Provisions for Loan Losses 19.6% 15.3%
- Cost to Average Total Assets 1.2% 1.2%
Liquidity
- Loans to Interest Earning Assets 54.5% 62.4%
- Loans to Customer Deposits 79.1% 88.4%
- Customer Deposits to Equity 226.5% 229.3%
- Due from Banks to Due to Banks 9426.5% 3681.8%
Credit Quality
- Provisions to Average Gross Loans 0.5% 0.4%
- Non Performing Loans (AED ‘000) 49,686 66,551
- Loan Loss Reserve (AED ‘000) 52,699 59,166
- NPLs to Gross Loans 3.1% 3.2%
- NPLs to (Equity + Loan Loss Reserve) 5.3% 6.1%
- Loan Loss Reserve to Gross Loans 3.3% 2.8%
- NPL Coverage 106.1% 88.9%
Capital Adequacy
- Equity to Total Assets 29.5% 30.0%
- Equity to Gross Loans 55.8% 49.4%

- Net commission income / Op. Income after Provisions for Loan Losses 23.2% 24.8%
- Investment securities income / Op. Income after Provisions for Loan Losses 0.0% 1.1%
- Other operating income / Op. Income after Provisions for Loan Losses 6.1% 4.5%
- Change in Net Interest Income after Provisions for Loan Losses --- 24.2%
- Change in Other Income --- 5.7%

- Shares in Issue (‘000) 750,000 750,000
- EPS (AED) 0.1 0.2
- Book Value Per Share (AED) 1.2 1.4
- Market Price Year End (AED) * --- 4.7
- P/E (x) 0.0 25.4
- P/BV (x) 0.0 3.4
- Dividend yield (%) --- 2.9
- Dividend pay-out ratio (%) 85.8 0.0
Average ratios for 2003 based on stand alone figures for that year.

6.4 Commercial Bank of Dubai

CBD.DU
Listing:
Dubai Financial Market
CMP (AED) :
160.0
Key Data
Background
• Commercial Bank of Dubai (CBD) was established in 1969, as a Public

Shareholding Company by an Emiri Decree. In the beginning, the Bank was owned
by Commerzbank, Chase Manhattan Bank and Commercial Bank of Kuwait, with
UAE businessmen holding a minority stake.
• In 1982, it reached a major milestone in its development when it transformed itself

into a National Public Shareholding Company, leading to a major restructuring of its
operations and an increase in its capital base. This was a major turning point in the
bank’s history, as, in addition to the increase in the bank’s capital, the Government
of Dubai became a major shareholder.
• The bank offers full commercial banking services including current and savings
accounts, personal loans, credit cards, home banking, remittances and safe deposit
lockers.
• It has 18 branches in Dubai, besides branches in Abu Dhabi, Ras Al Khaimah,

Sharjah, Ajman and Al Ain.
• CBD had 54.56mn shares outstanding of face value AED10 each, for a paid capital
of AED545.6mn at the end of 2004. The major shareholders of the bank include the
Government of Dubai (20% holding) and UAE investors (the balance 80%).

Recent Developments
• CBD has implemented the CityNet Reconciliation module as part of its strategy to
achieve automation in all areas of reconciliation across the bank. Initially used for
reconciliations in the Financial Control Department, the solution will be extended
to other departments. With the implementation and subsequent automation of
the process, valuable resources could be diverted to other areas of the bank. The
automation of reconciliation is a part of the ongoing strategy of the bank to align
itself with the Basel II requirements.
• Humansoft e-Learning and CBD recently signed an agreement to deliver e-Learning

training to employees of the bank.
• The bank has successfully implemented a new system for operations in its trade
finance centre. The Trade Wind System enables the bank to implement important
facilities in a number of sectors such as letter of credits, guarantees, collection and
financial reports.
• The interest income of the bank increased by 19.8% to AED398.6mn during 2004 as
compared to the previous year, on the back of a 29.3% increase in the gross loans
during the year. However, interest expenses increased at a higher rate of 48.7%
to AED57.5mn during the year, on the back of a 21.8% growth in the customers’
deposits during the year.
in 2004 from 0.6% in 2003. The net spread, therefore, went up marginally to 3.7%
in 2004 from 3.6% in 2003.
• Helped by IPOs, loan syndications deals, etc., the net commission income of
AED105.0mn was higher by 20.1% as compared to that in the previous year.
Investment income from trading and equity investments of AED76.1mn increased
by a hefty 330.5% during the year.
increase of 44.5%.
• The provisions for loan losses were AED6.2mn in 2004. This was against a net
recovery of AED7.5mn in the previous year.
27.8% to AED537.6mn in 2004.

provisions for loan losses, its costs increased marginally to 34.7% during the year
from 34.5% in the previous year. Staff costs on a similar basis declined marginally
to 22.7% during the year from 22.8% in the previous year.
previous year.
• The RoAE of the bank increased to 20.6% in 2004, from 19.4% in 2003. The RoAA
similarly increased to 3.7% in 2004 from 3.3% in the previous year.
• CBD’s total assets stood at AED10.6bn at the end of 2004, representing an increase
in 2004 over 2003.
• The top three sectors to which the bank had the maximum exposure at the end of 2004
were commercial & business (56.9%), others (33.2%) and personal loans (7.7%).
• The bank declared a cash dividend of 30% and stock dividend of 15% for 2004.
The dividend payout ratio for the bank declined to 46.6% in 2004, from 54.1% in
the previous year, thanks to the net profit growing at a higher rate than dividends in
2004.
• CBD’s total assets rose by 0.4% in the quarter ended March 2005. Its loans and
advances increased by 7.2% during the quarter. While investments declined by
2.5%, the customer deposits increased by 10.1% during the quarter. Shareholders’
equity witnessed a decline of 3.2% in the quarter ended March 2005.
• The bank posted a 23.4% growth in the net interest income to AED97.8mn on
a year-on-year basis. While the fees & commission income rose by 15.5%,
investment income shot up by 339.4% year-on-year. The net profit grew by 44.1%
to AED107.3mn in the March 2005 quarter on a year-on-year basis.
Outlook
• CBD’s loan book is expected to grow in the medium-term, driven by the surge in
demand in UAE. The bank is expected to focus on project finance and infrastructure
lending in the coming years to cash in on the emerging opportunities in the country,
though its relatively smaller size could keep it out of big ticket financing.

• The bank’s customers’ deposits also could grow at a good rate in the coming years.
The bank is expected to expand its branch and ATM network, besides developing
alternative channels of delivery for its numerous products and services.
rates. As a result, the net spread for the bank is expected to continue showing an
uptrend in the medium-term.
in the medium-term, as it focuses on higher levels of fee-based activities. Once
again, the relatively smaller size of its balance sheet could prevent it from playing
among the larger players of the industry.
• Over the medium-term, the bank could be expected to show moderate growth, on the
back of a low-to-medium growth in its net interest and net commission incomes.

BALANCE SHEET
Commercial Bank of Dubai
(In AED ‘000) 2002 2003 2004
Assets
Cash balances 122,736 159,431 253,417
Balances with central bank 1,086,114 916,104 985,223
Deposits with banks 1,241,970 1,115,069 821,242
Trading Securities 1,251 32,741 64,627
Gross Loans and Advances 5,125,511 5,983,721 7,734,126
Other Assets 33,191 29,188 58,292
Investment Securities - Debt 77,019 163,841 166,688


Net Fixed Assets 292,768 330,411 331,386
Total Assets 7,869,254 8,663,976 10,569,883
Liabilities
Deposits from Banks 944,054 777,821 888,880
Directors’ remuneration 2,400 2,400 2,400

Owner’s Equity
Proposed bonus shares 45,094 49,604 81,846
Other reserves 583,638 633,638 708,638

OPERATING STATEMENT
(In AED ‘000) 2002 2003 2004
Interest Income 330,584 332,600 398,555


Less : Provisions for Loan Losses (7,589) 7,539 (6,177)
Less : Provisions for investment losses - (967) -
Less : Staff costs (84,717) (95,781) (121,894)

Operating profit 233,419 275,317 351,111
Net Profit 233,419 275,317 351,111

Trfr to Statutory & legal reserves - (22,547) (24,802)
Trfr to other reserves (50,000) (50,000) (75,000)
Directors’ remuneration (2,400) (2,400) (2,400)
Cash Dividend (135,283) (148,811) (163,692)
Dividend % 30% 30% 30%
Stock Dividends (45,094) (49,604) (81,846)
Dividend % 10% 10% 15%

CASH FLOW STATEMENT

(In AED ‘000) 2002 2003 2004
Operating
Net profit 233,419 275,317 351,111
Depreciation 14,886 15,328 24,782
Investment securities income (5,676) (9,740) (43,840)
Fair value adjustments - trading investment 20 (3,418) -20897
Impairment of loans & advances & investments - 590 -
Gain on sale of fixed assets (167) (115) (206)
Gain on sale of trading investments (479) (3,320) -8834
Directors remuneration (2,100) (2,400) (2,400)
Working Capital (b) 14,055 42,159 (63,186)

Dec/ (inc) loans and advances (352,027) (866,585) (1,754,024)
Dec/ (inc) Other assets 36,787 4,003 (29,104)
Inc/(dec) in deposits from banks 41,617 130,678 335,767
Inc/(dec) in deposits from customers 257,026 789,454 1,338,529
Inc/(dec) in other liabilities 30,652 (15,391) 45,646
Total operating 253,958 314,401 236,530
Investing
(Purchase)/Sale of non-trading investments (3,018) (99,307) (12,022)
Total investing (99,521) (142,423) 6,267
Financing
Total financing (135,283) (135,283) (148,811)


RATIOS
2002 2003 2004
Profitability
- Net interest income / Op. Income after Provisions for Loan 71.9% 71.7% 62.3%
Losses
- Non-interest income / Op. Income after Provisions for Loan 28.1% 28.6% 37.7%
Losses
Margins
- Net Spread 3.5% 3.6% 3.7%
Efficiency
Liquidity
Credit Quality
- Provisions to Average Gross Loans 0.2% -0.1% 0.1%
Capital Adequacy

- Net commission income / Op. Income after Provisions for Loan 20.5% 20.8% 19.5%
Losses
- Investment securities income / Op. Income after Provisions for 3.0% 4.2% 14.2%
Loan Losses
- Other operating income / Op. Income after Provisions for Loan 4.6% 3.6% 4.1%
Losses
- Change in Net Interest Income after Provisions for Loan Losses 0.1% 15.1% 11.1%

- Shares in Issue (‘000) 45,094 49,604 54,564
- EPS (AED) 4.7 5.1 6.4
- Market Price Year End (AED) * --- 92.0 135.0
- P/E (x) --- 18.2 21.0
- P/BV (x) --- 3.0 3.9
- Dividend yield (%) --- 4.3 3.3

6.5 Dubai Islamic Bank

DISB.DU
Listing:
Dubai Financial Market
CMP (AED) :
151.0
Key Data
Background
• Dubai Islamic Bank (DIB), which was established in 1975 as a publicly owned
company, is the first Islamic bank to have incorporated the principles of Islamic
Shari’a in all its practices.
• DIB currently has branches in Dubai (7), Abu Dhabi (3), Al Ain (2), Sharjah (3),
Fujairah (2), Ajman, Ras Al Khaimah and Umm Al Quwain.
• The bank has presence in retail banking (current accounts, saving accounts, investment
accounts, ladies’ banking, murabaha cars/goods, cards, ijara services, sakan, etc.),
corporate banking (trade finance, etc.), investment & treasury (structure & project
finance, syndications, treasury & financial instruments, asset management, etc.),
and real estate services (real estate financing, property management, strategic equity
stakes, contracting finance, etc.) segments. It has electronic banking channels, such
as ATMs, on-line banking, mobile banking, etc. in place.
• The bank enjoys a reputation as a leader and innovator in Islamic banking services in
the region. It has created partnerships and alliances at local and international level and
has been involved in providing Islamic financing to a number of major infrastructure
projects in the region in recent times. The bank is believed to have mandated or
lead managed deals worth AED25bn since June 2004. The figure includes some
big-ticket, prestigious Islamic financing deals – Government of Dubai - Department
of Civil Aviation’s US$1.2bn Sukuk, Nakheel’s US$350mn ijara syndication deal,
the US$530mn Islamic finance tranche for Qatar Gas II, Pakistani Government’s
US$600mn Sukuk (which raised US$1.2bn), and underwriting of AED3.59bn credit
facilities for the Dubai International Airport expansion project, to name a few.
• Deyaar, a fully-owned subsidiary of DIB, provides the complete range of property

development, management, leasing and brokerage services for residential and
commercial properties segments. Besides Deyaar, the bank has a host of other

subsidiaries spanning such varied industries as printing, trading, Islamic financial

services, Islamic investments, aluminium, mineral water, etc.
• DIB had 150.0mn shares outstanding of face value AED10 each, for a paid capital
of AED1.5bn at the end of 2004. Among the major shareholders of the bank are the
Government of Dubai (30%), Government of Kuwait (10%) and General Pension
and Social Security Authority (UAE) (4%). There are other major individual
shareholders as well.
Recent Developments
• The bank announced in March 2005 the establishment of DIB Pakistan Limited, a
wholly-owned subsidiary of DIB. The announcement marks a first step in the bank’s
ambitious plans to roll out its operations into regional and international markets as
part of its overall strategic plan. The subsidiary is expected to target corporate, retail,
commercial and SME business segments and investment banking opportunities in
Pakistan.
• Dubai Properties, part of the Dubai Holding Group of the Government of Dubai, has
recently formed a joint venture company with Deyaar, the real estate arm of DIB,
to invest in and develop real estate projects in the UAE. The venture is expected to
benefit from the opportunities available in the growing real estate sector.
• The bank has solely underwritten the credit facilities required by the joint venture
that has been awarded the Dubai International Airport Expansion Project (Phase II).
The size of the project is AED3.59bn. The bank entered the project finance business
in 2004, as it saw immense potential in this important and growing sector in the
UAE and region.
• DIB early this year has also been mandated as one of the lead arrangers for the Islamic
finance tranche of US$530mn for Qatar Gas II - a US$12bn Liquid Natural Gas
(LNG) joint venture between Qatar Petroleum and Exxon Mobil Corporation. The
project will develop two trains for the LNG supply from Qatar to United Kingdom.
• The bank has also been appointed the Mandated Lead Arranger for an innovative,
gold related, Islamic sukuk, announced by the Dubai Metals & Commodities Centre
(DMCC). The issue has been assigned an ‘A’ rating by Standard & Poor’s Rating
Services.
• The income from financing, investments & murabahas of the bank increased by
41.7% to AED1.2bn during 2004 as compared to the previous year, on the back
of a 30.2% increase in the financing, investments & murabahas during the year.
However, depositors’ share of profits increased at a much lower rate of 7.9% during
the year, on the back of a 25.4% growth in the customers’ deposits during the year.

• The yield on financing, investments & murabahas for the bank increased to 4.8% in
2004 from 4.2% in 2003. The cost of commission bearing liabilities, on the other
hand, declined to 2.4% in 2004 from 2.8% in 2003. The net spread, thus, increased
to 2.4% in 2004 from 1.5% in 2003.
• The net income from financing, investments & murabahas during the year almost
doubled to AED614.3mn, as against AED310.3mn during the previous year.
• Helped by IPOs, loan syndications deals, etc., the net commission income increased
by 31.0% to AED112.8mn as compared to that in the previous year.
• The provisions for loan losses were AED88.7mn in 2004.
• Overall, the total operating income after provisions for investment losses increased
by 49.0% to AED824.5mn in 2004.
in the staff costs, during 2004. As a percentage of operating income after provisions
for investment losses, its costs declined to 44.1% during the year from 56.8% in the
previous year. Staff costs on a similar basis declined to 25.7% during the year from
30.5% in the previous year.
previous year.
increased to 1.7% in 2004 from 1.1% in the previous year.
• DIB’s total assets stood at AED30.6bn at the end of 2004, representing an increase
• The bank increased its exposure to financing, investments & murabahas by 30.2% to
AED25.7bn in 2004 over 2003.
2004 were real estate (32.2%), industrial & services (18.1%) and personal financing
(14.5%).
• Deposits from customers increased by 25.4% to AED24.9bn during 2004 over the
previous year, while the deposits from banks, which have a relatively higher cost of
servicing, increased by 334.4% to AED1.4bn during the year.
• The bank declared a cash dividend of 20% for 2004, up from 15% in 2003. The
dividend payout ratio for the bank marginally went up to 64.9% in 2004, from 64.0%
in the previous year, thanks to the net profit growing at a marginally lower rate than
the cash dividend in 2004.

• DIB’s total assets grew by 21% to AED30.5bn in the first quarter of 2005 from
AED25.3bn in the first quarter of 2004. The bank’s investment and financing
activities also reported a growth of 32% to AED17.8bn, up from AED13.5bn for the
same period last year. Customer deposits also grew during the quarter, climbing by
16% to AED26.3bn from AED22.7bn in the first quarter of 2004.
• The bank’s total revenue witnessed a growth of 63% reaching AED412mn in the
quarter, as compared to AED253mn in the same period of 2004. The bank’s net
profits (including depositors’ profit) for the year’s first quarter soared by 71% to
AED305mn, against AED180mn in the same period of 2004.
Outlook
• The bank’s exposure to financing, investments & murabahas is expected to grow at

a healthy rate in the medium-term, on the back of a sustained demand in UAE. The
bank is expected to focus on project finance and infrastructure lending in the coming
years to cash in on the emerging opportunities in the country, especially in Islamic
financing market.
• Both the yield on financing, investments & murabahas as well as the cost of interest
bearing liabilities could be expected to trend up in the years ahead, thanks to
hardening interest rates. As a result, the net spread for the bank is expected to show
an uptrend in the medium-term.
• The net fees and commissions income of the bank is expected to show a high growth
in the medium-term, as it focuses on higher levels of fee-based activities.
• Over the medium-term, the growth in the net income from financing, investments
& murabahas and net commissions are likely to keep the bank on a high growth
curve.

BALANCE SHEET
Dubai Islamic Bank
(In AED ‘000) 2002 2003 2004
Assets
Cash balances 125,280 183,968 233,218
Balances with central bank 921,502 1,060,807 1,833,992
Other Assets 302,057 293,486 477,726
Financing, investments & murabahas 16,937,599 19,847,584 25,714,628
Investment Securities - Debt - - 50,103

Investment Securities - Equity 260,118 544,627 1,321,527
Investment property 1,390,091 1,252,247 1,354,897

Net Fixed Assets 119,307 117,427 126,455
Total Assets 19,597,790 22,778,319 30,613,361
Liabilities
Deposits from Banks 242,406 320,736 1,393,178
Other Liabilities 786,067 871,882 1,292,561
Minority interest 8,522 4,268 10

Owner’s Equity
Bonus shares - 284,701 284,701
Treasury shares - - (8,226)
General reserve 130,000 180,000 280,000
Donated land reserve 284,701 - -

OPERATING STATEMENT
Dubai Islamic Bank
(In AED ‘000) 2002 2003 2004
Income from financing, investments & murabahas 742,517 826,464 1,171,033

Depositors’ share of profits (441,136) (516,208) (556,763)
Net income from financing, investments & murabahas 301,381 310,256 614,270

Less : Provisions for Loan Losses (26,000) 44,829 (88,716)
Less : Staff costs (132,655) (168,625) (212,033)

Operating profit 168,320 238,807 461,033
Minority interest (8,522) (4,351) -

Net Profit 159,798 234,456 461,033

Zakat (5,623) (7,412) (11,541)
Cash Dividend (100,000) (150,000) (299,177)
Dividend % 10% 15% 20%

CASH FLOW STATEMENT

Dubai Islamic Bank
(In AED ‘000) 2002 2003 2004
Operating
Net profit 159,798 234,456 461,033
Depreciation 20,251 20,237 22,671
Impairment of loans & advances 26,000 (44,829) 88,716
Fair value adjustments - property investment 26,818 28,304 27,887
Minority interest 8,522 (4,254) (4,258)
Working Capital (b) 2,021,820 983,027 1,038,345

Dec/ (inc) in Islamic financing assets (1,759,853) (2,075,871) (5,313,908)
Dec/ (inc) Other assets (130,568) 8,571 (184,240)
Inc/(dec) in deposits from banks 26,151 78,330 1,072,442
Inc/(dec) in deposits from customers 3,794,200 2,896,444 5,057,763
Inc/(dec) in accrued zakat (3,699) (4,618) (10,039)
Inc/(dec) in other liabilities 95,589 80,171 416,327
Total operating 2,263,209 1,216,941 1,634,394
Investing
Change in deposits with banks (1,748,461) (864,927) (1,412,188)
Investment property (225,835) 109,540 (130,537)
Total investing (2,162,207) (1,058,253) (2,426,918)
Financing
Increase in share capital - - 991,774
Total financing (100,000) (100,000) 841,774


RATIOS
Dubai Islamic Bank
2002 2003 2004
Profitability
Margins
- Net Spread 1.7% 1.5% 2.4%
Efficiency
Liquidity
Credit Quality
- Provisions to Average Gross Loans 0.2% -0.2% 0.4%
Capital Adequacy

- Change in Net Interest Income after Provisions for Loan Losses 8.6% 28.9% 48.0%

- Shares in Issue (‘000) 100,000 100,000 150,000
- EPS (AED) 1.6 2.3 4.0
- P/E (x) 16.3 20.2 23.2
- P/BV (x) 1.8 3.0 5.2

6.6 Emirates Bank International PJSC

EBIL.DU
Listing:
Dubai FInancial Market
CMP (AED) :
65.0
Key Data
Background
• Emirates Bank International (EBI) is a part of the Emirates Bank Group (EBG),
which is based in Dubai, UAE. EBG has diverse business interests in banking and
finance.
• Besides EBI, which is involved in commercial banking, the Group consists of

Emirates Islamic Bank (Islamic banking), Dubai Bank (commercial banking),
Emirates Financial Services (funds management), Emirates International Brokerage
(brokerage services), E-Commerce & Trade Services (Middle East) (trade finance
services), Heritage Insurance Brokers (insurance brokerage), Network International
(card services), Diners Club (UAE) (international charge card), and Global Training
Centre (training services). All these nine companies are subsidiaries of EBI. In
addition to these, there are three associate companies of EBI: Union Properties
(property development), Emirates Loyalty Company (customer loyalty smart card
services), and National General Insurance Company (general & life insurance).
• EBI was incorporated in Dubai as Union Bank of the Middle East – a commercial
bank with limited liability – by a decree of the Ruler of Dubai in 1977. The Bank
was subsequently registered as a Public Joint Stock Company in June 1995.
• EBI currently has 30 branches in UAE. The bank also has a branch in London and
representative offices in Mumbai and Teheran. In August 2004, the Bank commenced
operations in the Kingdom of Saudi Arabia by opening a branch in Riyadh.
• EBI is organised into the following main business segments: Government, Corporate
and Commercial Banking (structured finance, current and savings accounts, customer
deposits, overdrafts, trade finance and term loans for Government, corporate and
commercial customers), Retail Banking (current and savings accounts, customer
deposits, overdrafts, personal and installment credit loans, foreign currency and trade
finance related facilities), Investment and Funds Management (proprietary portfolio

of investments, funds management, and inter bank treasury operations), Real Estate
activities (property development, property management and maintenance, rental
income and property related services), Islamic Bank activities, and Other operations
(insurance services, credit card facilities and other banking related services).
• Segment-wise, Government, Corporate and Commercial Banking (50.5%), Retail

Banking (24.6%), and Real Estate activities (8.9%) were the three top-most income-
contributors in 2004. Government, Corporate and Commercial Banking; Retail
Banking; and Investment and Funds Management together had 94.7% of the total
assets and 93.2% of the total liabilities of the Group at the end of 2004.
• The EBI Group had 2,172 employees as of 31 December, 2004.
• EBI had 574.0mn shares outstanding of face value AED2.50 each, for a paid capital
of AED1.4bn at the end of 2004. The Government of Dubai held 77.0% of shares of
the bank at the end of 2004.
was 717.5 million.
Recent Developments
• Emirates Bank launched the Emirates Bank Capital Protected Indian Equity Note in
April 2005. The product is being offered through the Al Shaheen Club, the priority
banking service of Emirates Bank for its high net worth clients. The note is structured
as a capital protected, 3-year maturity note, investing in a diversified basket of three
renowned international Indian equity funds. The product was designed for investors
who want to participate in the booming Indian economy.
• The bank launched its third bond issue for US$750mn by way of a five-year Floating
Rate Notes (FRN) in February 2005, with a coupon of three months LIBOR + 40bp.
The bank had established a Euro Medium Term Note (EMTN) Programme for
US$1bn in May 2002. The EMTN is listed in Luxembourg. The bank launched its
first bond issue under the Programme in July 2002 for US$230mn and the second
bond issue in January 2004 for US$500mn. With the approval of its shareholders,
the bank had subsequently increased the size of the Programme to US$3.5bn in
December 2004.
• The bank’s credit rating was recently upgraded by Moody’s to A1/P1, putting its
rating on par with the sovereign rating of UAE. Along the way, EBI also became the
highest rated issuer of international bonds from the Middle-East and North Africa
(MENA) region.
• In October 2004, EBI’s subsidiary, Middle East Bank PJSC converted itself from a
conventional bank to an Islamic Bank called Emirates Islamic Bank PJSC.

• During 2004, the bank gradually reduced its shareholding in Union Properties PJSC
from 61.5% as at 31 December 2003 to 48.9% as at 31 December 2004. The company
has, thus, moved from being a subsidiary to an associate company of the bank.
• As per the Group’s consolidated accounts for 2004, the interest income of the bank,
including income from Islamic financing and investment products, increased by
27.2% to AED1.2bn during 2004 as compared to the previous year, on the back of
a 17.3% increase in the gross loans during the year. However, interest expenses,
including distribution to depositors, which is the share of profits due to depositors
of the bank’s Islamic banking subsidiary, Emirates Islamic Bank PJSC, increased
at a higher rate of 39.3% during the year. The bank saw a decline of 0.8% in the
customers’ deposits, a growth of 125.7% in bank deposits and a growth of 11.8% in
the total deposits during the year.
in 2003. The cost of interest bearing liabilities, on the other hand, increased to 1.4%
in 2004 from 1.2% in 2003. The net spread, therefore, inched up to 2.4% in 2004
from 2.3% in 2003.
• Helped by IPOs, loan syndications deals, etc., the net commission income of the bank
increased by 60.4% as compared to that in the previous year.
• The bank reported other operating income of AED86.8mn during the year, an increase
of 31.4%.
• Other income of AED473.4mn saw a growth of 79.0% over the previous year. It
included the proceeds from the sale of its holdings in its subsidiary Union Properties,
sale of land, property-related income, share of profit of associate companies,
brokerage income and other income.
• Overall, the total operating income including other income after net recoveries on
advances increased by 43.5% to AED1.6bn in 2004.
• The operating costs of the bank went up by 22.8%, including a rise of 24.9% in the
staff costs, during 2004. However, as a percentage of operating income after net
recoveries on advances, its costs declined to 37.0% during the year from 43.2% in
the previous year. Staff costs on a similar basis declined to 20.4% during the year
previous year.

similarly went up to 2.8% in 2004 from 2.1% in the previous year.
• EBI’s total assets stood at AED38.1bn at the end of 2004, representing an increase
• The bank increased its gross loans and advances portfolio, including Islamic financing
and investment products, to customers by 17.3% to AED28.2bn in 2004 over 2003.
2004 were personal (26.8%), services (20.6%) and government (11.9%).

AED572.0mn, down 4.4% from AED598.1mn in 2003.
up marginally from 118.0% at the end of 2003.
• Deposits from customers declined by 0.8% during 2004 over the previous year, while
the deposits from banks, which have a relatively higher cost of servicing, increased
by 125.7% during the year. Deposits from Government and public sector entities
accounted for 42.2% of total customer deposits in 2004.
The dividend payout ratio for the bank declined to 23.6% in 2004, from 29.7% in
the previous year, thanks to the net profit growing at a higher rate than dividends in
2004.
• Total interest income, including from Islamic financing products, of EBI had a
robust growth of 62.9% in the first quarter of 2005 on a year-on-year basis. Interest
expense, including that on Islamic products, on the other hand, shot up by 120.3%
during the quarter year-on-year, while the net interest income increased by 39.8%.
Fees and commissions income too posted a 51.8% growth during the quarter year-
on-year. The Group’s net profit registered a growth of 62.4% during the March
quarter year-on-year.
• Total assets of EBI grew by 10.4% in the March 2005 quarter. The growth in
assets was driven by a 17.1% growth in net loans and advances during the period.
Customers’ deposits, however, fell by 5.1% during the quarter. Thanks to the EMTN
raising, the bank’s medium-term borrowings rose by 34.7% during the quarter. IPO
money received of AED4.0bn during the quarter too boosted its liabilities during the
quarter.

Outlook
• The loan book of EBI is expected to grow at a healthy rate in the medium-term, on
the back of a sustained demand. The bank is expected to focus on project finance,
infrastructure lending and personal banking as its thrust areas to cash in on the
emerging opportunities in the country.
• The bank intends to be a frequent issuer under the EMTN Programme, which is
versatile enough for different types of financial instruments.
• The bank is also expected to expand its branch and ATM network, besides developing
rates. As a result, the net spread for the bank is expected to show an uptrend in the
medium-term.
in the medium-term, as it focuses on higher levels of non-interest income. The bank
is expected to focus on wealth management as an important thrust area in the coming
years. The paid-up capital of Emirates Financial Services (EFS), the wholly-owned
subsidiary of EBI, has been increased to AED125mn, with a view to strengthening
its capital market and fund management capabilities and to expand its presence in
the region. EFS intends to establish a presence in Saudi Arabia, Qatar and Abu
Dhabi. Detailed plans are reportedly being formulated to avail of the opportunities
emerging in the region. EFS has helped diversify Emirates Bank Group’s fee income
streams by participating in bond issues and IPOs, by arranging and lead managing
many of the major fixed income and equity placement transactions in UAE in recent
times.

BALANCE SHEET
Emirates Bank International PJSC
(In AED ‘000) 2002 2003 2004
Assets
Cash balances 194,408 213,332 502,845
Balances with central bank 928,816 1,094,954 2,067,964
Deposits with banks 2,709,415 2,826,668 4,510,074
Other Assets 275,366 432,210 997,339
Investment Securities - Debt 1,239,007 1,195,095 696,917

Investment Securities - Equity 1,029,059 679,568 1,445,350
Investment & development properties 1,683,703 1,924,658 172,455

Net Fixed Assets 223,279 212,112 179,231
Total Assets 27,198,441 31,905,128 38,060,629
Liabilities
Other Liabilities 549,225 670,654 1,169,223
Medium-term loans 2,754,750 2,901,670 5,564,595

Minority interest 517,653 554,902 3,400
Proposed dividend 183,682 - -
Owner’s Equity
Paid-up equity capital 918,409 1,148,011 1,435,014
Proposed bonus shares 229,602 - -
General reserve 2,589,369 2,889,369 3,102,366
Fair valuation reserve 38,253 154,575

OPERATING STATEMENT
(In AED ‘000) 2002 2003 2004
Interest Income 931,490 943,793 1,200,670


Gain from sale of avlbl-for-sale securities (25,379) 36,189
Add : Other income 264,439 473,448
Less : Provisions for Loan Losses 42,164 28,054 130
Operating income 1,041,899 1,142,387 1,639,656
Less : Staff costs (248,400) (267,900) (334,600)

Operating profit 608,553 648,868 1,033,653
Profit before tax and minority interest 608,553 648,868 1,033,653
Less: Provision for tax (19,669) - -

Net Profit before minority interest 588,884 648,868 1,033,653
Minority interest (27,458) (31,051) (61,526)

Net Profit 561,426 617,817 972,127

Cash Dividend (183,682) (183,682) (229,602)
Dividend % 20% 20% 20%

CASH FLOW STATEMENT

(In AED ‘000) 2002 2003 2004
Operating
Net profit 561,426 617,817 972,127
Depreciation 44,116 55,268 44,048
Fair value adjustments - trading investment (15,940)
Forex adjustment (370)
Fair value adjustments - property investment (9,543) 25,379 (36,189)
Directors’ remuneration (2,585)
(Gain)/loss on revaluation of derivatives 5,714
Minority interest 20,451 37,249 (551,502)
Working Capital (b) (1,733,542) (35,305) (4,449,899)

Dec/ (inc) loans and advances (4,420,533) (4,474,848) (4,212,459)
Dec/ (inc) Other assets (43,425) (84,952) 289,333
Inc/(dec) in deposits from banks (52,384) 525,809 (258,442)
Inc/(dec) in deposits from customers 2,596,978 4,036,873 (171,214)
Inc/(dec) in other liabilities 185,822 (38,187) (97,117)
Total operating (1,065,338) 772,589 (3,927,522)
Investing
Share of profits of associate company (4,059) (40,377)
Change in trading securities (216,496) 418,538 (40,946)
Change in deposits with banks 379,933 (659,761) 672,212
Change in deposits with central bank 13,127 (246,138) (223,010)
Investment property (215,288) (181,382) 1,462,870
Total investing (99,382) (716,903) 1,783,712
Financing
Changes in medium-term loans 1,340,645 146,920 2,662,925
Total financing 1,156,963 (36,762) 2,433,323
Net change in cash balances (7,757) 18,924 289,513


RATIOS
2002 2003 2004
Profitability
Margins
- Net Spread 2.5% 2.3% 2.4%
Efficiency
Liquidity
Credit Quality
- Provisions to Average Gross Loans -0.2% -0.1% 0.0%
- Non Performing Loans (AED ‘000) 577,518 598,087 572,013
- NPL Coverage 138.3% 118.0% 120.8%
Capital Adequacy
- Capital Adequacy Ratio (CAR) 21.4% 18.6%

- Change in Net Interest Income after Provisions for Loan Losses -2.6% 7.2% 17.3%

- Shares in Issue (‘000) 367,363 459,204 574,005
- EPS (AED) 1.2 1.1 1.7
- P/E (x) 16.4 19.4 29.6
- P/BV (x) 1.7 1.9 4.9

6.7 First Gulf Bank

FGB.AD
Listing:
Abu Dhabi Securities Market HOLD
CMP (AED) :
41.0
Key Data
Background
• First Gulf Bank (FGB) is a public joint stock company incorporated in Abu Dhabi in
1984.
• FGB currently has branch network consisting of seven branches in UAE. It has an
ATM network of about ten ATMs concentrated mostly in the Emirates of Abu Dhabi
and Dubai.
• The bank has presence in personal banking (accounts, fixed deposits, credit cards,
personal banking, personal loans, etc.), corporate banking (project finance, real
estate finance, corporate finance, industrial finance, trade finance and services,
loan syndications, etc.), and treasury (foreign exchange, derivatives, portfolio
management, local and international brokerage, etc.) segments.
• FGB had 389.4mn shares outstanding of face value AED1 each for a paid capital of
AED389.4mn at the end of 2004.
was 408.8 million.
Recent Developments
• FGB along with The National Investor has won the mandate for lead managing the
initial public offering (IPO) of Surouh Real Estate, a new real estate company, with
an authorized capital AED2.5bn. Surouh Real Estate has reportedly won approval

from the Abu Dhabi Planning and Economy Department and is expected to be
established soon in Abu Dhabi, with plans to launch an AED1.375bn IPO next
month. The company is expected to soon embark on its first flagship project – the
prestigious Al Reem (Abu Shuoom) Island Project.
• The bank has recapitalized itself by raising AED800.0mn through mandatory

convertible bonds in 2004. The bonds have a par value of AED8.6 each. They are
subject to compulsory conversion into shares after 5 years from the date of their
issue at the rate of one share per bond. The bonds carry a coupon of 1.5% per year.
• The interest income of the bank more than doubled with a growth of 116.7% during
2004 to AED482.8mn as compared to the previous year, on the back of a 28.1%
increase in the gross loans during the year. However, interest expenses shot up by
274.7% to AED177.0mn during the year, on the back of a 69.9% growth in the
customers’ deposits during the year.
in 2004 from 0.9% in 2003. The net spread, therefore, went up marginally to 2.9%
in 2004 from 2.8% in 2003.
• The net interest income during the year increased by 74.1% to AED305.8mn from
AED175.6mn during the previous year.
by 114.0% as compared to that in the previous year. Investment income from trading
and equity investments increased by 117.0% during the year.
increase of 58.5% from the previous year.
• The provisions for loan losses at AED110.0mn in 2004 were higher by 224.1% than
in the previous year.
64.0% to AED384.7mn in 2004.
previous year.

similarly went up to 2.4% in 2004 from 2.0% in the previous year.
• FGB’s total assets stood at AED12.8bn at the end of 2004, representing an increase
over December 2003.
2004 were trading (19.0%), real estate (15.7%) and construction (13.6%).

up from 90.8% at the end of 2003.
declined by 47.3% during the year.
guidelines, stood at 16.1% in 2004, up from 10.9% in 2003.
dividend payout ratio for the bank declined marginally to 31.8% in 2004, from
32.2% in the previous year, thanks to the net profit growing at a marginally higher
rate than dividends in 2004.
• FGB has announced its first quarter results for 2005. The total operating income of
the bank increased by 87% to reach AED165.2mn, compared to AED88.2mn in the
first quarter of 2004. The net interest income increased by 38% to AED74.1mn,
while other income increased by 165% to AED91.1mn during the quarter. Its net
profit of AED107.2mn was 109% higher compared to AED51.3mn in the first
quarter of 2004.
• The bank saw an increase of 51.3% in the loans & advances portfolio to AED8.6bn
at the end of March 2005, compared to AED5.7bn at the end of March 2004.
Furthermore, the total assets recorded a growth of 62.6% reaching AED13.1bn at
the end of March 2005, compared to AED8.1bn at the end of March 2004. The
customers’ deposits went up by 45.1% to AED9.9bn at the end of March 2005,
compared to AED6.8bn at the end of March 2004.

Outlook
• The loan book is expected to grow at a healthy rate in the medium-term, due to
a sustained business appetite in a growing economy such as UAE’s. The bank is
expected to focus on increasing its exposure in project finance and infrastructure
lending. Though constrained by its relatively smaller size, the bank is looking to
cash in on the emerging opportunities in the country in this area. The personal loan
portfolio of the bank too could grow at a good pace going forward, as the bank views
the booming real estate market in the UAE to be a potential growth opportunity.
• The bank expects its customers’ deposits to grow at a good rate in the coming years.
It is planning to expand its branch network to 12 by the end of 2005. It is also
expected to expand its ATM network, besides developing alternative channels of
delivery for its numerous products and services.
liabilities are expected to trend up in the years ahead, thanks to hardening of interest
medium-term.
in the medium-term. The bank is expected to launch wealth management products in
the near future.
• The bank is also expected to enter Islamic banking in the coming months.
• Over the medium-term, high growth in the net interest income and net commissions
• The book value per share (BVPS) of FGB was AED4.4 at the end of 2004. At the
current stock price of AED41.0, it is quoting at a P/BV of 9.4x, as against the
weighted average P/BV for the UAE banking industry (including 12 listed banks in
the country covered in this Report) of 7.0x.
• The intrinsic value of FGB of AED42.6 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer set valuation method, is higher than the current
stock price of AED41.0 by 3.8%. Though the composite share valuation translates to
forward P/BV multiples of 9.6x and 9.0x our projected 2005 and 2006 book value
per share, the stock would seem to have a marginal upside at its current price levels,
since it has had a good run on the stock market in recent months, gaining 137.0%
since the beginning of 2005.
• The bank, though growing at a high rate of late, would appear constrained by its
relatively smaller size vis-à-vis the other players in the highly competitive banking
industry in UAE.
• We, therefore, initiate our coverage of FGB with a “HOLD” recommendation, with
a medium-term perspective.

BALANCE SHEET
First Gulf Bank
(‘000 AED) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
82
Assets
Cash balances 16,312 21,427 53,468 19,438 21,631 19,954 22,506
Balances with central bank 125,483 194,797 1,232,047 1,663,263 2,079,079 2,390,941 2,630,035
Deposits with banks 848,280 544,800 3,497,520 3,637,421 3,873,853 3,943,583 3,860,767
Other Assets 37,972 51,360 209,310 282,569 310,825 326,367 342,685
Less : Loan Loss Reserve (442,473) (298,591) (326,631) (458,319) (629,512) (834,945) (1,071,193)
Investment Securities - Debt 776,907 977,338 700,603 1,050,905 1,155,995 1,213,795 1,274,484
Net Fixed Assets 112,227 128,817 183,196 236,582 278,081 294,394 293,922
Total Assets 4,983,887 7,233,588 12,796,800 17,988,663 22,084,654 25,347,731 28,002,183
Liabilities
Deposits from Banks 242,214 488,385 257,462 566,416 611,730 642,316 661,586
UAE Banking Sector

Medium-term loans 642,775 642,775 642,775 642,775 642,775

Proposed dividend 7,488 38,938 77,875 376,946 649,868 1,078,083 1,600,065
Owner’s Equity
Proposed bonus shares 14,976 - 19,469 - - - -
Legal reserves 48,971 61,063 85,557 135,816 204,422 204,422 204,422
Statutory reserves 78,359 90,451 114,945 165,204 204,422 204,422 204,422
General reserve 20,000 20,000 20,000 20,000 20,000 20,000 20,000
Mandatory convertible bonds 800,000 800,000 800,000 800,000 800,000
Total Shareholder’s Equity 661,126 740,874 1,699,045 1,821,695 1,932,878 1,985,619 1,981,619
May 2005
OPERATING STATEMENT
First Gulf Bank
(‘000 AED) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Interest Income 153,427 222,825 482,777 768,357 1,066,644 1,324,259 1,549,900
May 2005
Net commission income 24,357 49,669 106,277 239,123 418,466 669,545 1,004,318
Investment securities income 11,618 23,980 52,046 77,712 39,342 32,056 27,539
Operating income 156,378 234,598 384,673 707,443 1,025,367 1,435,135 1,921,427
Less : Staff costs (47,845) (67,318) (83,390) (119,248) (150,252) (177,974) (192,479)
Operating profit 80,580 120,920 244,940 502,595 764,550 1,134,824 1,600,065
Profit before tax and minority interest 80,580 120,920 244,940 502,595 764,550 1,134,824 1,600,065
Net Profit before minority interest 80,580 120,920 244,940 502,595 764,550 1,134,824 1,600,065
UAE Banking Sector

Net Profit 80,580 120,920 244,940 502,595 764,550 1,134,824 1,600,065

Net Profit for the year 80,580 120,920 244,940 502,595 764,550 1,134,824 1,600,065
Trfr to legal reserves (8,058) (12,092) (24,494) (50,260) (68,606) - -
Trfr to statutory reserves (8,058) (12,092) (24,494) (50,260) (39,218) - -
Board of directors remuneration (2,110) (2,234) (2,792) (3,000) (3,500) (4,000) (4,000)
Cash Dividend (7,488) (38,938) (77,875) (376,946) (649,868) (1,078,083) (1,600,065)
Dividend % 2% 10% 20% 92% 159% 264% 391%
Interest on mandatory convertible bonds (6,100) - - - -
Stock Dividends (14,976) - (19,469) - - - -
Dividend % 4% 0% 5% 0% 0% 0% 0%
83
CASH FLOW STATEMENT
First Gulf Bank
(‘000 AED) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Operating
Operating Activities (a) 81,794 133,313 310,448 566,229 908,643 1,322,231 1,824,134
84
Net profit 80,580 120,920 244,940 502,595 764,550 1,134,824 1,600,065
Depreciation 5,031 6,470 7,715 12,659 15,741 18,030 19,361
Investment securities income (77,712) (39,342) (32,056) (27,539)
Gain on sale of fixed assets (357) (3,319) - - - - -
Gain on sale of trading investments (9,923) (22,596) (50,009) - - - -
Board of directors remuneration (3,000) (3,500) (4,000) (4,000)
Board of directors remuneration (1,688) (2,110) (2,234) - - - -
Working Capital (b) (581,064) 48,899 (1,768,421) 581,648 391,441 (86,652) (447,756)
Dec/ (inc) deposits with banks (93,247) 93,247 50,000 - - - -
Inc/(dec) in deposits from banks (651,105) 387,090 (4,220,893) 308,954 45,313 30,587 19,270
Inc/(dec) in deposits from customers 1,220,699 1,861,753 4,106,147 4,389,966 3,591,790 2,693,843 2,065,279
Inc/(dec) in other liabilities 26,305 30,042 39,627 71,223 74,784 57,691 51,922
Total operating (499,270) 182,212 (1,457,973) 1,147,877 1,300,084 1,235,579 1,376,379
Investing
Investment securities income 77,712 39,342 32,056 27,539
UAE Banking Sector

Sale of fixed assets 544 7,283 4 - - - -
(Purchase)/Sale of non-trading investments (375,225) (150,281) 196,453 (544,581) (250,800) (203,509) (148,116)
Change in deposits with banks (139,901) (236,432) (69,729) 82,815
Change in deposits with central bank (431,217) (415,816) (311,862) (239,094)
Total investing (388,013) (170,022) 134,359 (1,104,031) (920,946) (587,388) (295,744)
Financing
Mandatory convertible bonds - - 800,000 - - - -
Changes in long-term loans - - (50,000) - - - -
Changes in medium-term loans - - 642,775 - - - -
Dividend paid to shareholders (6,730) (7,075) (37,120) (77,875) (376,946) (649,867) (1,078,083)
Total financing (6,730) (7,075) 1,355,655 (77,875) (376,946) (649,867) (1,078,083)

May 2005
Net change in cash balances (894,013) 5,115 32,041 (34,030) 2,193 (1,677) 2,551
Net cash balances at beginning 910,325 16,312 21,427 53,468 19,438 21,631 19,954
RATIOS
First Gulf Bank
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Net interest income / Op. Income after 67.6% 60.4% 50.9% 47.9% 47.7% 43.5% 38.9%
- Non-interest income / Op. Income after 32.4% 39.6% 49.1% 52.1% 52.3% 56.5% 61.1%
Margins
- Interest Expense to Interest Bearing
1.1% 0.9% 2.1% 2.3% 2.3% 2.4% 2.5%
Liabilities
- Net Spread 2.5% 2.8% 2.9% 2.9% 3.2% 3.3% 3.5%
Efficiency
- Cost / Op. Income after Provisions for 48.5% 48.5% 36.3% 29.0% 25.4% 20.9% 16.7%
Loan Losses
- Staff Expense / Op. Income after 30.6% 28.7% 21.7% 16.9% 14.7% 12.4% 10.0%
Liquidity
Credit Quality
- Non Performing Loans (AED ‘000) 508,017 328,867 298,352 366,655 419,675 521,841 595,107
- Loan Loss Reserve (AED ‘000) 442,473 298,591 326,631 458,319 629,512 834,945 1,071,193
- NPLs to (Equity + Loan Loss Reserve) 46.0% 31.6% 14.7% 16.1% 16.4% 18.5% 19.5%
- NPL Coverage 87.1% 90.8% 109.5% 125.0% 150.0% 160.0% 180.0%
Capital Adequacy
- Capital Adequacy Ratio (CAR) 15.6% 10.9% 16.1%

- Net commission income / Op. Income after 15.6% 21.2% 27.6% 33.8% 40.8% 46.7% 52.3%
- Investment securities income / Op. Income 7.4% 10.2% 13.5% 11.0% 3.8% 2.2% 1.4%
after Provisions for Loan Losses
- Other operating income / Op. Income after 9.4% 8.2% 8.0% 7.4% 7.6% 7.6% 7.4%
- Change in Net Interest Income after 27.5% 34.0% 38.2% 73.0% 44.6% 27.5% 19.7%

- Shares in Issue (‘000) 374,400 389,376 389,376 408,845 408,845 408,845 408,845
- EPS (AED) 0.2 0.3 0.6 1.2 1.9 2.8 3.9
- Market Price Year End (AED) * --- 8.2 17.3 41.0 41.0 41.0 41.0
- P/E (x) 0.0 26.4 27.5 33.4 21.9 14.8 10.5
- P/BV (x) 0.0 4.3 4.0 9.2 8.7 8.4 8.5
- Dividend yield (%) --- 1.2 1.4 2.2 3.9 6.4 9.5
* Market price for 2005 and subsequent years as per last closing price available on April 24, 2005.

6.8 Mashreqbank psc

MASB.DU
Listing:
Dubai Financial Market HOLD
CMP (AED) :
230.0
Key Data
Background
• Mashreqbank psc is one of the leading banks in United Arab Emirates (UAE), with
total assets of AED31.95bn (US$8.71bn) as at end of 2004, making it the largest
private bank in UAE. It is the second oldest commercial bank in the country, having
originally been established as Bank of Oman Ltd. in 1967 in Dubai.
• The bank currently has 34 branches in UAE, with branches in all the Emirates –
Dubai (13), Abu Dhabi (8), Al Ain (2), Ajman (1), Fujairah (3), Ras Al Khaimah
(2), Sharjah (4) and Umm Al Qawain (1). The bank also has branches in Bahrain,
Egypt, and Qatar. In addition, it has correspondent banking centres in Bangladesh
and Pakistan, and branches which function as correspondent banking centres in
Hong Kong (China), India, UK and USA. The bank also has a network of 94 ATMs
spread across UAE.
• The diverse range of products and services offered by the bank currently include credit
cards, consumer lending, trade finance, project finance, electronic funds transfer
at points-of-sales, automated teller machines, call center, treasury, correspondent
banking, online banking and GSM banking.
• In the early 1990s, Mashreqbank became the first bank in the UAE to launch retail
banking. The bank is a strong brand name in retail banking, with nearly one in every
two households in the country banking with Mashreqbank.
• Mashreqbank was the first bank to enter the mortgage financing segment in December
2003. Mortgage finance has since become one of the most important and sizeable
components of the retail banking portfolio of the bank. It offers mortgage finance in
the UAE market in association with almost all the major property developers.

• The credit card and merchant sales business contributes strongly to the Mashreqbank
brand. The bank is now a market leader in the share of new cards issued, though
currently it is behind both Citibank and Stanchart in terms of card volumes.
• The franchise of the bank has also been enhanced with the launch of its new website, a
highly contemporary internet banking solution – mashreqonline, and MashreqMobile
– a mobile phone banking service using SMS messaging. The bank’s internet and
SMS banking channels are said to be now used by over 30% of its customers.
• Trade finance and contracting finance, the bank’s two traditional areas of expertise,
have continued to generate good growth, helped by the strong fundamentals of the
UAE economy. Mashreqbank offers trade finance, remittances and related payments
services as a part of its correspondent bank business.
• Mashreqbank also offers treasury and capital markets products, which supplement
the needs of its corporate and retail customers.
• It has two subsidiaries – Oman Insurance, the insurance arm of Mashreqbank is the
second largest among the insurance companies in the country. Mashreqbank has
63.6% stake in the company. The other subsidiary is Mashreq Securities, which is
fully-owned by Mashreqbank. The company deals in brokerage services. It also has
subsidiaries involved in distribution and information technology services.
• Mashreqbank’s primary strategic objective is to continue to develop its profitable

business in the UAE, Qatar and other GCC States. Diversification of revenue, faster
growth in fee and commission income, and enhanced risk management continue to
be its major strategic priorities.
• The employee strength of the bank as at the end of 2004 was 1,913.
• The bank has a paid up capital of AED866.2mn, consisting of 86.62mn ordinary

shares of AED10 each.
• Mashreqbank is majority-owned by the prominent Al Ghurair family, which heads

one of the largest business groups in the UAE. The family has been closely associated
with the bank since its inception.
Recent Developments
• Ratings agency Moody’s upgraded Mashreqbank’s foreign currency deposit ratings

in December 2004 to A2/Prime-1 from A3/Prime-2, based on the bank’s improving
intrinsic financial strength and its significance to the UAE banking system. This
followed the upgrade by Moody’s of UAE’s sovereign rating.
• Gowealthy.com, the premium online marketing website for Dubai freehold properties,
has signed up with Mashreqbank to provide home financing for its customers.

Mashreqbank and Damac Properties signed a memorandum of understanding

(MoU) under which Mashreqbank will provide mortgage finance for customers to
purchase Damac apartments in Dubai. Mashreqbank has also established UAE’s
first dedicated Home Loan Centre at its new branch in Jumeirah to cater to Dubai’s
booming freehold real estate market.
• Diners Club has recently entered into an agreement with Mashreqbank to widen
access for Diners Club cardholders in the UAE. The tie-up allows Diners Club
cardholders to use their cards at more shops and retail outlets through point-of-sale
terminals distributed by the bank.
• The bank has also set up a new investment company specializing in establishing,
managing and promoting mutual funds, called Makaseb Funds Company BSC (C)
(MFC). Incorporated in Bahrain as an exempt stock company and approved by
the Bahraini Monetary Agency (BMA) and UAE Central Bank, MFC will provide
an umbrella structure enabling it to establish several mutual funds tailored to suit
different investment strategies. Mashreqbank is the investment manager of MFC.
• To further diversify its range of savings products, the bank launched the region’s first
ever UnFixed Deposit programme in the first quarter of 2005, to enable savers to
enjoy higher returns while still retaining liquidity.
• The interest income of the bank increased by 28.3% to AED1.4bn during 2004 as
during the year. However, interest expenses increased at a higher rate of 55.2% to
AED558.6mn during the year, on the back of a 12.5% growth in the customers’
deposits and 35.2% in banks’ deposits during the year.
in 2004 from 1.8% in 2003. The net spread, therefore, went marginally up to 3.2%
in 2004 from 3.1% in 2003.
• Helped by IPOs, loan syndication deals, etc., the net commission income increased
by 28.8% to AED245.7mn in 2004, as compared to that in the previous year.
Investment income from trading and equity investments increased by 79.9% during
the year.
increase of 13.5% over the previous year.

in the previous year, on the back of a 35.3% increase in the loan loss provisions, and
137.2% increase in write-offs to the income statement during the year.
13.5% to AED1.4bn in 2004.
provisions for loan losses, its costs declined to 40.4% during the year from 41.8% in
the previous year. Staff costs on a similar basis declined marginally to 24.6% during
the year from 24.7% in the previous year.
previous year.
• Mashreqbank’s total assets stood at AED31.9bn at the end of 2004, representing an

increase of 21.8% over the previous year.
• The bank increased its gross loans and advances portfolio to customers by 21.2% to
AED18.7bn over December 2003.
2004 were personal (30.9%), trade (22.7%) and manufacturing (11.2%).

• The proportion of NPLs to gross loans stood at 2.5% at the end of 2004, decreasing
substantially from 3.7% in 2003; while the bank provided for 178.3% of its NPLs at
the end of 2004, up from 117.6% at the end of 2003.
The dividend payout ratio for the bank went up to 36.7% in 2004, from 29.8% in
the previous year, thanks to the dividends growing at a higher rate than net profit in
2004.

• The Mashreqbank Group’s total assets rose by 19.6% during the first quarter of 2005,
while net loans and advances increased by 7.8%.
• During the quarter, the bank’s net interest income increased by 19.4% year-on-year to
AED232.6mn, while total income went up by 61.8% year-on-year to AED517.7mn.
The bank has reported a net profit of AED272.4mn for the first quarter of 2005,
64.8% higher than AED165.3mn in the first quarter of 2004.
Outlook
• The loan book of Mashreqbank is expected to grow at a healthy rate in the medium-
term, taking advantage of the emerging opportunities in the high growth economy of
UAE. The bank plans to further improve the quality of its loan portfolio and decrease
credit and operational risks. To achieve these objectives, the bank has invested in
upgrading its information technology infrastructure and has augmented its credit
appraisal and delivery processes.
• Diversification of revenue and faster growth in fee and commission income are
expected to drive its earnings and profits growth in the coming years. The bank plans
to aggressively boost its fee-based income by pushing its correspondent banking
products, launching mutual fund products and building advisory capabilities in the
years ahead.
• The bank also intends to expand its offering of Islamic banking products in the near-
term.
• Keeping in mind the increasingly competitive banking environment that it is operating

in, Mashreqbank plans to focus on improving profitability through cost control and
higher operational efficiency.
• The banks has indicated that it would be raising about $300mn through the second
issue of Floating Rate Notes (FRNs) under its Euro Medium-Term Note (EMTN)
Programme, in the follow-up to its first issue, in which the bank had raised $300mn
in February 2004. The bank views the EMTN Programme as a part of its strategy to
diversify its sources of funding.
• Both its yield on interest earning assets as well as cost of interest bearing liabilities
are expected to trend up in the years ahead, thanks to the hardening of interest rates.
As a result, the net spread for the bank is expected to show an uptrend in the medium-
term.

• Global had initiated its coverage of Mashreqbank with an equity valuation report in
March 2005. We had valued the bank at AED207.9 per share in that report and had
recommended a “HOLD” on its shares.
• Subsequent to that report, the stock has had a good run on the stock market, gaining
by 21.1% since the date of that report, and a total of 53.3% since the beginning of
2005.
• We have modified a few of our projections in the wake of the announcement of the
first quarter 2005 results by the bank. Some of these changes include the projected
growth rate in loans and advances, customer deposits, interest income and expense,
net commission income and net profit. We have, however, retained our projections
of the net spreads of the bank more or less along the same lines as in our March 2005
report. The dividend payout ratios too have not been changed from the projections
contained in that report. We are of the opinion that the modified numbers reflect the
future earnings potential of the bank in a more appropriate manner.
• The book value per share (BVPS) of Mashreqbank was AED58.1 at the end of 2004.
At the current stock price of AED230.0, it is quoting at a P/BV of 4.0x, as against
the weighted average P/BV for the UAE banking industry (including 12 listed banks
in the country covered in this Report) of 7.0x.
• For the peer group valuation, while we had taken a BVPS of AED58.1 (as at end of
2004) in our March 2005 report, we have taken a BVPS of AED60.5 (projected for
2005) for this update.
• Similarly, for the peer group valuation, while we had taken a P/BV multiple of
5.2x – the average of 10 listed banks in UAE in respect of which annual financial
statements for 2004 were then available – in our March 2005 report, we have taken
a P/BV multiple of 7.0x – the weighted average for 12 UAE banks – in this update.
• The intrinsic value of Mashreqbank of AED244.4 per share, arrived at by using

the Dividend Discounting Method (DDM) and peer group valuation method (with
the revised BVPS and P/BV multiple), is higher than the current stock price of
AED230.0 by 6.3%.
• We, therefore, reiterate our “HOLD” recommendation on Mashreqbank, with a

medium-term perspective. We still believe that Mashreqbank is a strong brand-
based, diversified and growing earnings story, and presents an attractive investment

BALANCE SHEET
Mashreqbank psc
(In AED ‘000) 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Assets
Cash balances 114,004 126,851 132,967 118,840 109,840 126,461 115,466
Balances with central bank for reg. purposes 476,326 563,094 690,033 848,741 976,052 1,093,178 1,202,496
Balances with central bank other than for reg. purposes 2,488,848 1,793,786 2,235,500 2,503,760 2,879,324 3,224,843 3,547,327
Deposits with banks maturing in less than 3 months 3,304,015 4,052,093 3,400,733 4,352,938 5,397,643 6,477,172 7,157,275
92
Deposits with banks maturing after 3 months 1,259,563 853,092 1,248,773 1,610,917 1,997,537 2,436,996 2,705,065
Trading Securities 1,402,235 1,414,955 2,935,689 4,697,102 5,824,407 6,960,166 8,178,195
Other Assets 503,484 537,870 835,018 1,043,773 1,200,338 1,320,372 1,386,391
Less : Loan Loss Reserve (1,337,845) (667,024) (825,319) (1,212,549) (1,670,962) (2,199,053) (2,796,090)
Investment Securities - Debt 718,659 1,110,907 1,162,042 1,743,063 1,882,508 2,033,109 2,195,757
Investment Securities - Equity 540,022 732,894 1,143,034 1,281,584 1,333,365 1,383,122 1,439,006
Investment property 112,099 140,942 145,493 146,948 148,417 149,902 151,401
Net Fixed Assets 181,915 171,481 174,159 157,506 159,764 158,879 162,029
Total Assets 23,683,180 26,236,595 31,948,828 40,070,883 46,433,235 52,503,546 57,716,559
Liabilities
Other Liabilities 766,874 800,311 1,159,461 1,391,353 1,808,759 2,080,073 2,288,080
UAE Banking Sector

Insurance & life assurance funds 97,273 129,173 189,143 340,457 510,686 714,961 929,449
Long-term loans 57,065 51,678 45,786 43,039 40,457 38,029 35,747
Medium-term loans - - 1,101,900 2,295,625 2,295,625 2,295,625 1,515,113
Minority interest 139,474 216,606 404,803 568,252 862,460 1,333,193 1,992,220
Proposed dividend 214,759 178,966 275,608 524,271 765,934 1,070,310 1,457,372
Owner’s Equity
Proposed bonus shares - 71,586 78,745 - - - -
Statutory & legal reserves 366,770 371,323 393,984 433,098 433,098 433,098 433,098
General reserve 312,000 312,000 312,000 312,000 312,000 312,000 312,000
Foreign currency adjustments (119,387) (23,624) (9,845) (11,814) (12,995) (13,645) (14,327)
May 2005
Retained earnings 1,762,349 2,121,805 2,495,867 3,097,529 3,863,464 4,739,172 5,710,753
OPERATING STATEMENT
Mashreqbank psc
(In AED ‘000) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
May 2005
Interest Income 1,073,687 1,109,633 1,423,612 1,861,077 2,335,926 2,753,594 3,129,325
Interest Expense (398,756) (359,881) (558,584) (720,340) (890,348) (1,026,079) (1,144,760)
Net commission income 168,983 190,833 245,701 393,122 628,995 943,492 1,320,889
Investment securities income 40,122 84,545 152,133 301,722 295,570 310,021 359,210
Operating income 1,031,012 1,240,881 1,408,552 1,975,234 2,507,109 3,119,762 3,814,470
Less : Staff costs (285,480) (305,930) (346,232) (381,582) (408,675) (425,144) (437,984)
Less: Occupancy cost (30,377) (28,995) (30,639) (32,478) (33,452) (34,455) (35,145)
Operating profit 533,822 722,247 839,619 1,355,608 1,853,885 2,441,163 3,119,171
UAE Banking Sector

Profit on sale of assets net of write-offs - (83,791) (10,165) - - - -
Profit before tax and minority interest 533,822 638,456 829,454 1,355,608 1,853,885 2,441,163 3,119,171
Less: Provision for tax (13,531) 1,669 (4,083) (27,112) (27,808) (24,412) (31,192)
Net Profit before minority interest 520,291 640,125 825,371 1,328,496 1,826,076 2,416,751 3,087,980
Minority interest (15,393) (39,441) (74,295) (163,449) (294,208) (470,733) (659,026)

Net Profit 504,898 600,684 751,076 1,165,047 1,531,868 1,946,018 2,428,953

Op Balance of Retained Earnings 1,476,656 1,762,349 2,121,805 2,495,867 3,097,530 3,863,464 4,739,172
Trfr to Statutory & legal reserves (4,446) (4,553) (22,661) (39,114) - - -
Cash Dividend (214,759) (178,966) (275,608) (524,271) (765,934) (1,070,310) (1,457,372)
93
Dividend % 30% 25% 35% 61% 88% 124% 168%
Change in accounting policy - 13,877 - - - - -
Stock Dividends - (71,586) (78,745) - - - -
Dividend % 0% 10% 10% 0% 0% 0% 0%
CASH FLOW STATEMENT
Mashreqbank psc
(In AED ‘000) 2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Operating
Operating Activities (a) 764,663 879,398 1,193,304 1,451,925 2,026,531 2,675,698 3,366,273
Net profit 504,898 600,684 751,076 1,165,047 1,531,868 1,946,018 2,428,953
94
Depreciation 47,911 35,791 35,763 39,890 38,794 41,526 41,148
Fair value adjustments - trading investment (14,447) (37,699) (24,034)
Forex adjustment 1,812 4,719 3,614 (1,969) (1,181) (650) (682)
Fair value adjustments - property investment (3,141) (35,441) (15,505)
Gain on sale of fixed assets (39,610) (7,235) 1,765
Gain on sale of trading investments (25,675) (28,700)
Cumulative forex adjustment written off - 91,044 10,165
Minority interest 28,788 77,132 188,197 163,449 294,208 470,733 659,026
Working Capital (b) (1,749,029) (498,261) (78,866) 1,539,602 1,464,855 1,136,048 950,739
Inc/(dec) in deposits from banks (136,910) (243,108) 804,414 618,082 556,274 341,181 184,238
Inc/(dec) in deposits from customers 601,881 2,049,619 2,343,768 4,854,623 3,894,252 3,582,712 3,343,865
Inc/(dec) in insurance & life assurance funds 20,019 31,900 59,970 151,314 170,229 204,274 214,488
Inc/(dec) in other liabilities 125,627 33,437 359,150 231,892 417,406 271,314 208,007
Total operating (984,366) 381,137 1,114,438 2,991,527 3,491,386 3,811,745 4,317,012
Investing
UAE Banking Sector

Sale of fixed assets 53,970 20,704 447
(Purchase)/Sale of non-trading investments 40,726 (450,388) (175,484) (695,324) (165,077) (177,268) (190,311)
Change in trading securities (808,690) 53,679 (1,496,700) (1,761,413) (1,127,305) (1,135,759) (1,218,029)
Change in deposits with banks (866,294) (341,608) 255,679 (1,314,349) (1,431,325) (1,518,987) (948,173)
Change in deposits with central bank 2,833,779 608,294 (568,653) (426,968) (502,875) (462,645) (431,802)
Investment property (1,455) (1,470) (1,484) (1,499)
Total investing 1,222,422 (148,145) (2,025,364) (3,921,024) (2,973,532) (3,026,763) (2,474,903)
Financing
Changes in long-term loans (5,839) (5,387) (5,892) (2,747) (2,582) (2,427) (2,282)
Changes in medium-term loans 1,101,900 1,193,725 - - (780,513)
Dividend paid to shareholders (214,759) (214,759) (178,966) (275,608) (524,271) (765,934) (1,070,310)
Total financing (220,598) (220,146) 917,042 915,370 (526,853) (768,362) (1,853,104)

May 2005
Net change in cash balances 17,459 12,847 6,116 (14,127) (9,000) 16,621 (10,995)
Net cash balances at beginning 96,545 114,004 126,851 132,967 118,840 109,840 126,461
RATIOS
Mashreqbank psc
2002 2003 2004 2005 (F) 2006 (F) 2007 (F) 2008 (F)
Profitability
- Net interest income / Op. Income after 45.6% 45.3% 39.2% 38.1% 39.4% 38.4% 36.4%
- Non-interest income / Op. Income after 54.4% 54.7% 60.8% 61.9% 60.6% 61.6% 63.6%
Margins
- Yield on interest earning assets 4.87% 4.83% 5.56% 6.08% 6.39% 6.56% 6.68%
- Cost of interest bearing liabilities 2.08% 1.77% 2.39% 2.49% 2.57% 2.63% 2.69%
- Net Spread 2.79% 3.06% 3.17% 3.59% 3.82% 3.93% 3.99%
Efficiency
- Cost / Op. Income after Provisions for 48.2% 41.8% 40.4% 31.4% 26.1% 21.8% 18.2%
Loan Losses
- Staff Expense / Op. Income after 27.7% 24.7% 24.6% 19.3% 16.3% 13.6% 11.5%
Liquidity
Credit Quality
- Non Performing Loans (AED ‘000) 1,373,000 567,000 463,000 673,639 879,454 1,099,527 1,398,045
- Loan Loss Reserve (AED ‘000) 1,337,845 667,024 825,319 1,212,549 1,670,962 2,199,053 2,796,090
- NPL Coverage 97.4% 117.6% 178.3% 180.0% 190.0% 200.0% 200.0%
Capital Adequacy
- Capital Adequacy Ratio (CAR) --- 18.4% 17.9%

- Net commission income / Op. Income 16.4% 15.4% 17.4% 19.9% 25.1% 30.2% 34.6%
- Investment securities income / Op. 3.9% 6.8% 10.8% 15.3% 11.8% 9.9% 9.4%
Income after Provisions for Loan Losses
- Other operating income / Op. Income 34.1% 32.5% 32.5% 26.7% 23.7% 21.4% 19.6%
- Change in Net Interest Income after 14.5% 19.5% -1.7% 36.4% 31.0% 21.5% 15.7%

- Shares in Issue (‘000) 7,159 71,586 78,745 86,620 86,620 86,620 86,620
- EPS (AED) 7.1 7.6 9.5 13.5 17.7 22.5 28.0
- P/E (x) 10.5 15.4 15.7 17.1 13.0 10.2 8.2
- P/BV (x) 1.7 2.2 2.6 3.8 3.3 2.9 2.5
- Dividend yield (%) 4.1 3.0 3.0 2.6 3.8 5.4 7.3
* Market price for 2005 and subsequent years as per last closing price available on DFM as on April 24, 2005.

6.9 National Bank of Abu Dhabi

NBAD.AD
Listing:
Abu Dhabi Securities Market BUY
CMP (AED) :
46.0
Key Data
EPS and BVPS as at end of 2004, unadjusted for 1:10 share split of March 2005.
Background
• National Bank of Abu Dhabi (NBAD), founded by the government in 1968, is one of
the oldest banks in UAE. NBAD is today the biggest bank in the UAE, in terms of
total assets, deposits and branch network.
• NBAD currently has the largest domestic branch network among UAE banks,
with 58 branches, cash offices and kiosks, and about 120 ATMs in the United
Arab Emirates. Besides this, it has a network of 16 overseas branches in Egypt,
Oman, Sudan, UK, France and Bahrain (OBU). The overseas network also includes
Abu Dhabi International Bank, a subsidiary incorporated in Curacao, Netherlands
Antilles, but which functions as a branch in Washington. Abu Dhabi International
Bank is an active player in US and North America in loan syndications, treasury
services, private banking and financing.
• The bank has presence in personal banking (current accounts, saving accounts,
elite banking, fixed deposit accounts, credit cards, personal installment loans, car
loans, remittances, bancassurance, etc.), corporate banking (project finance, trade
finance, etc.), international banking (loan syndications, correspondent banking, etc.)
and investment banking (structured products, corporate advisory, funds, treasury
products, capital market services, etc.) segments.
• It has a strong customer franchise, particularly in the emirate of Abu Dhabi, where it
is a prominent provider of retail banking services. The bank has substantial treasury
operations and is a leading provider of investment banking services.
• NBAD is a banker to the Abu Dhabi government, and government and public sector
business constitutes a major portion of its balance sheet.
• It has a well-diversified business base with strategies focusing on retail, corporate,

international and investment banking.

• Besides Abu Dhabi International Bank, NBAD has two other subsidiaries – Abu
Dhabi Financial Services, which is a brokerage services company with about 40%
market share in the brokerage services in UAE; and Abu Dhabi National Leasing,
which is involved in financial leasing of equipment.
• NBAD had 94.16mn shares outstanding of face value AED10 each for a paid capital
of AED941.6mn at the end of 2004.
• Abu Dhabi Investment Authority (ADIA) held 72.3% of the issued and fully paid-up
share capital of NBAD, with the balance held by UAE nationals, at the end of 2004.
By an Emiri Decree, ADIA will always hold not less than 51% of the total issued
capital of NBAD.
• The bank has split its shares 1:10 effective from March 2005, taking the total number
of shares outstanding to 941.6mn of AED1 each.
Recent Developments
• NBAD is one of the three foreign banks permitted by the Central Bank of Kuwait to
open a branch in Kuwait. This has been possible due to the amended banks’ law in
2004 by which branches of foreign banks are allowed to operate in Kuwait. Under
the amended laws, foreign banks wishing to open branches in the country are no
longer required to have the Kuwaiti government or financial or banking institutions
as shareholders.
• Standard & Poor’s has assigned ‘A/A-1’ long- and short-term credit ratings to
NBAD earlier this year. The rating reflects the bank’s high profitability, strong asset
quality, ownership structure, importance to the economy, and status of flagship
bank. According to the NBAD, this is the first full interactive rating assigned to a
bank in UAE. The rating is the strongest amongst Middle-East commercial banks.
It compares favourably with ratings of other banks in Europe, North America and
Australasia, and underlines the strength of NBAD, Abu Dhabi and UAE.
• NBAD has signed a contract with Card Tech Limited (CTL), a UK-based bankcard
systems provider, to migrate to PRIME 3.0, the latest version of CTL’s card and
merchant management system. The cost-effective suite of systems provides
advantages such as enhanced scalability and flexibility. More than 170 banking
clients from 70 countries, including in the Middle East, use CTL’s systems. CTL’s
card solutions address every aspect of the card management business chain.

• The interest income of the bank increased by 37.9% during 2004 to AED2.0bn as
during the year. However, interest expenses increased at a higher rate of 46.2%
during the year, on the back of a 23.3% growth in the customers’ deposits during the
year.
in 2004 from 1.8% in 2003. The net spread, therefore, went up to 2.4% in 2004 from
2.2% in 2003.
• The net interest income during the year increased by 31.0% to AED1.0bn, as against
by 60.5% as compared to that in the previous year. Investment income from trading
investments also increased by 13.8% during the year.
increase of 20.8%. Net gain from forex transactions stood at AED86.1mn, an
increase of 32.9% during 2004.
• The impaired assets charge of AED81.4mn in 2004 was higher by 330.5% than in
the previous year, due to a higher charge and despite a higher write-back during the
year.
32.8% to AED1.7bn in 2004.
• The net profit after taxes at AED1.1bn in 2004 was higher by 41.3% over the previous
year.
• NBAD’s total assets stood at AED56.3bn at the end of 2004, representing an increase
• The bank increased gross loans and advances (net of interest in suspense) to customers
by 21.4% to AED36.1bn over December 2003.

• The top three sectors to which the bank had the maximum exposure at the end of 2004
were corporate/private sector (45.9%), government (21.2%) and retail (16.4%).
• As at December 31, 2004, gross non-performing loans (net of interest in suspense) of

the bank amounted to AED776.0mn, down 3.4% from AED803.2mn in 2003. This
was on the back of higher suspended interest during the year.
• The proportion of NPLs to gross loans (net of interest in suspense) stood at 2.1% at
the end of 2004, down from 2.7% in 2003; while the bank provided for 92.0% of its
NPLs at the end of 2004, up from 83.4% at the end of 2003.
while the deposits from banks, which have a relatively higher cost of servicing
(including the cost of interest rate swaps), increased by 10.5% during the year.
guidelines, stood at 11.1% in 2004, marginally lower than 11.3% in 2003.
• The bank declared a cash dividend of 40% for 2004. The dividend payout ratio of the
bank declined to 33.1% in 2004, from 40.9% in the previous year, thanks to the net
profit growing at a higher rate than dividends in 2004.
• The bank has had a good performance in the first quarter of 2005 as well. Among
different business divisions, domestic banking division’s operating profits rose
51% to AED171mn, international division’s profits were up 14% to AED66mn,
and investment banking performed well too, driven by the asset management and
brokerage business in UAE, with profits reaching AED270mn. Operating income
rose 96% to AED0.67bn on the back of substantial growth in non-interest income.
Expenses rose 25% over the corresponding quarter in 2004. The bank reported net
profit of AED0.5bn in the first quarter of 2005, a 132% increase over the first quarter
of 2004.
• Total assets of the bank reached AED56.5bn at the end of the first quarter, 20%
higher than in the first quarter of 2004. Loans increased by 19% from AED32bn
in the first quarter of 2004 to AED38bn in the first quarter of 2005, while deposits
increased 23% from AED33bn to AED41bn for the same period.
Outlook
• The loan book is expected to grow at a healthy rate in the medium-term, due to a
sustained appetite from business in a growing economy like that of UAE. The bank
is expected to focus on private sector corporate customer base in the coming years,
with increasing exposure in project finance and infrastructure lending. This is both
to de-risk its existing government-centric business model, as well as to cash in on
the emerging opportunities in the country.

• The bank could also continue to develop its relationships with international
companies, besides providing a window to Arab businesses overseas.
• The bank expects its customers’ deposits also to grow at a good rate in the coming
years. The bank is expected to expand its branch and ATM network, besides
developing alternative channels of delivery for its numerous products and services.
medium-term.
in the medium-term, as it focuses on higher levels of non-interest income. The bank
is expected to focus on wealth management as an important thrust area in the coming
years.
• The bank is expected to continue its focus on improving operating efficiency and
asset quality in the coming years as well.
• The book value per share (BVPS) of NBAD was AED5.1 (adjusted for share split of
March 2005) at the end of 2004. At the current stock price of AED46.0, it is quoting
at a P/BV of 9.0x, as against the weighted average P/BV for the UAE banking
industry (including 12 listed banks in the country covered in this Report) of 7.0x.
• The intrinsic value of NBAD of AED51.0 per share, arrived at by using the Dividend
Discounting Method (DDM) and peer set valuation method, is higher than the
current stock price of AED46.0 by 11.0%. This is despite the stock running up
considerably in recent months – gaining about 120.9% since the beginning of 2005.
The composite share valuation also translates to forward P/BV multiples of 8.3x and
6.8x our projected 2005 and 2006 book value per share.
• NBAD has a strong customer franchise, particularly in the emirate of Abu Dhabi,
where it is a prominent provider of retail banking services. The bank has substantial
treasury and investment banking operations, besides sizeable international presence.
The booming project finance and IPO markets in UAE and its foray soon into the
Kuwaiti banking market are expected to keep it on a high growth trajectory in the
years to come.
• We, therefore, initiate our coverage of NBAD with a “BUY” recommendation, with
a medium-term perspective.

BALANCE SHEET
(‘000 AED) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Assets
Cash balances 280,147 307,853 337,160 322,945 294,529 332,389 326,446
May 2005
Balances with central banks 2,022,115 1,941,808 2,940,269 3,528,323 4,410,404 5,292,484 6,139,282
Deposits with banks 5,870,103 4,384,665 8,742,110 7,736,767 8,433,076 9,951,030 12,886,584
Trading Securities 1,572,464 1,632,260 404,025 606,038 818,151 981,781 1,079,959
Other Assets 525,657 479,300 1,544,347 1,698,782 1,868,660 2,055,526 2,261,078
Less : Loan Loss Reserve (692,931) (669,905) (713,942) (804,298) (905,949) (1,007,599) (1,085,531)
Investment Securities - Debt 1,185,642 1,012,282 - - - - -

Investment Securities - Equity 2,393,720 4,407,067 6,570,364 7,562,985 8,705,567 9,585,270 10,074,363
Net Fixed Assets 372,825 363,451 364,671 395,531 401,228 376,138 351,857
Total Assets 39,046,144 43,622,679 56,331,421 66,225,094 80,498,193 95,334,050 109,966,124
UAE Banking Sector

Liabilities
Other Liabilities 1,144,204 1,084,868 4,967,460 5,116,484 5,269,978 5,428,078 5,590,920
Proposed dividend 282,480 329,560 376,640 997,233 1,842,237 2,911,432 4,108,573
Owner’s Equity
Reserves 2,624,726 3,099,726 3,859,726 4,856,959 6,095,438 7,663,132 9,423,949
101
Foreign currency adjustments 674 5,379 7,779 9,335 10,735 12,345 14,197
Fair valuation reserve (27,884) (21,214) (27,660) (20,593) (12,459) (3,314) 6,516
OPERATING STATEMENT
(‘000 AED) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
102
Interest Income 1,367,850 1,418,349 1,956,476 2,642,550 3,429,656 4,390,596 5,417,998
Interest Expense (653,289) (647,657) (946,692) (1,278,667) (1,655,523) (2,094,106) (2,535,750)
Net interest income 714,561 770,692 1,009,784 1,363,883 1,774,133 2,296,490 2,882,247
Net commission income 261,790 327,910 526,307 1,105,245 1,878,916 2,818,374 3,663,886
Dividend income 2,483 2,251 1,141 1,514 1,769 1,005 1,086
Operating income 1,038,188 1,244,121 1,651,727 2,615,305 3,823,439 5,311,517 6,796,316
Less : Staff costs (225,667) (249,586) (289,577) (334,461) (372,055) (402,377) (430,946)
Less: Other expenses (3,594) (2,715) (8,280) (13,248) (19,872) (27,821) (34,776)
Operating profit 660,495 830,032 1,163,798 2,045,607 3,175,586 4,593,976 6,019,886
UAE Banking Sector

Profit before tax and minority interest 660,495 830,032 1,163,798 2,045,607 3,175,586 4,593,976 6,019,886
Less: Provision for tax (6,305) (24,806) (26,366) (51,140) (79,390) (114,849) (150,497)
Net Profit before minority interest 654,190 805,226 1,137,432 1,994,467 3,096,197 4,479,126 5,869,389
Net Profit 654,190 805,226 1,137,432 1,994,467 3,096,197 4,479,126 5,869,389

Net Profit for the year 654,190 805,226 1,137,432 1,994,467 3,096,197 4,479,127 5,869,389
Trfr to general reserves (300,000) (475,000) (760,000) (997,233) (1,238,479) (1,567,694) (1,760,817)
Trfr to special reserves (63,079) - - - - - -
Trfr of cumulative changes in fair value of securities (56) (159) (225) - - - -
May 2005
Directors’ remuneration (2,595) (2,862) (2,795) (3,000) (3,500) (4,000) (4,000)
Cash Dividend (282,480) (329,560) (376,640) (997,233) (1,842,237) (2,911,432) (4,108,573)
Dividend % 30% 35% 40% 106% 196% 309% 436%
CASH FLOW STATEMENT
(‘000 AED) 2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Operating
Operating Activities (a) 971,091 830,689 2,497,722 2,135,784 3,251,583 4,636,657 6,003,919
Profit before tax and minority interest 660,495 830,032 1,163,798 2,045,607 3,175,586 4,593,976 6,019,887
Depreciation 36,913 41,728 50,015 53,920 57,605 59,274 59,832
May 2005
Provision for impaired non-trading investment 19,391 18,739 2,530 - - - -
Forex adjustment 3,434 4,705 2,400 - - - -
Write-back of provisions (57,107) (55,470) - - - -
Directors’ remuneration (3,000) (3,500) (4,000) (4,000)
Gain on sale of trading investments 224,341 (59,115) 1,229,010 - - - -
Foreign currency adjustments 1,556 1,400 1,610 1,852

Tax paid (28,176) (9,139) (32,436) (51,140) (79,390) (114,849) (150,497)
Working Capital (b) (3,056,968) 1,397,937 (871,031) (919,815) 703,717 710,840 1,295,828
Operating profit before changes operating assets & liabilities
Dec/ (inc) in loans and advances (4,484,517) (4,295,083) (6,417,240) (9,035,604) (11,294,505) (11,294,505) (10,165,055)
Dec/ (inc) in dues from banks & central banks 591,162 1,292,282 151,901 - - - -
Dec/ (inc) Other assets (30,087) 26,892 (1,067,456) (154,435) (169,878) (186,866) (205,553)
Inc/(dec) in deposits from banks (7,138,898) 2,545,165 (4,802,882) 371,542 390,119 409,624 344,085
Inc/(dec) in deposits from customers 8,029,245 1,833,453 7,319,644 7,749,659 11,624,488 11,624,488 11,159,508
Inc/(dec) in other liabilities (23,873) (4,772) 3,945,002 149,024 153,495 158,099 162,842
UAE Banking Sector

Total operating (2,085,877) 2,228,626 1,626,691 1,215,969 3,955,301 5,347,497 7,299,747
Investing
(Purchase)/Sale of non-trading investments (510,560) (1,886,086) (1,216,589) (985,555) (1,134,448) (870,557) (479,264)
Change in trading securities (202,013) (212,113) (163,630) (98,178)
Change in deposits with banks 1,005,343 (696,309) (1,517,954) (2,935,554)
Change in deposits with central bank (588,054) (882,081) (882,081) (846,798)
Total investing (675,107) (1,918,440) (1,267,824) (853,544) (2,986,484) (3,467,400) (4,394,257)
Financing
Dividend paid to shareholders (282,480) (282,480) (329,560) (376,640) (997,233) (1,842,237) (2,911,432)
103
Total financing (282,480) (282,480) (329,560) (376,640) (997,233) (1,842,237) (2,911,432)
Net change in cash balances (3,043,464) 27,706 29,307 (14,215) (28,416) 37,860 (5,943)
Net cash balances at beginning 3,323,611 280,147 307,853 337,160 322,945 294,529 332,389
RATIOS
2002 2003 2004 2005(F) 2006(F) 2007(F) 2008(F)
Profitability
- Net interest income / Op. Income after Provisions for 62.2% 60.4% 56.2% 48.7% 43.7% 41.3% 41.3%
Loan Losses
- Non-interest income / Op. Income after Provisions for 37.8% 39.6% 43.8% 51.3% 56.3% 58.7% 58.7%
Loan Losses
Margins
- Net Spread 2.2% 2.2% 2.4% 2.5% 2.7% 2.9% 3.0%
Efficiency
-Cost / Op. Income after Provisions for Loan Losses 36.4% 33.3% 29.5% 21.8% 16.9% 13.5% 11.4%
- Staff Expense / Op. Income after Provisions for Loan 21.7% 20.1% 17.5% 12.8% 9.7% 7.6% 6.3%
Losses
Liquidity
Credit Quality
- Non Performing Loans (AED ‘000) 781,822 803,194 775,978 804,298 823,590 839,666 835,024
- Loan Loss Reserve (AED ‘000) 692,931 669,905 713,942 804,298 905,949 1,007,599 1,085,531
- NPL Coverage 88.6% 83.4% 92.0% 100.0% 110.0% 120.0% 130.0%
Capital Adequacy
- Capital Adequacy Ratio (CAR) 10.8% 11.3% 11.1%

- Net commission income / Op. Income after Provisions 25.2% 26.4% 31.9% 42.3% 49.1% 53.1% 53.9%
for Loan Losses
- Investment securities income / Op. Income after 0.2% 0.2% 0.1% 0.1% 0.1% 0.0% 0.0%
- Other operating income / Op. Income after Provisions 12.3% 13.0% 11.9% 9.0% 7.1% 5.6% 4.8%
for Loan Losses
- Change in Net Interest Income after Provisions for Loan -9.1% 16.3% 23.5% 37.2% 31.3% 31.2% 27.8%
Losses

- Shares in Issue (‘000) 94,160 94,160 94,160 941,600 941,600 941,600 941,600
- EPS (AED) 6.9 8.6 12.1 2.1 3.3 4.8 6.2
- P/E (x) 1.3 1.4 1.7 21.7 14.0 9.7 7.4
- P/BV (x) 0.2 0.3 0.4 7.4 6.1 5.0 4.2
- Dividend yield (%) 3.4 3.0 1.9 2.3 4.3 6.7 9.5
* Market price for 2005 and subsequent years as per last closing price available on ADSM as on April 24, 2005.
All valuation-related data post-share split of March 2005.

6.10 The National Bank of Dubai

NBDD.DU
Listing:
Dubai FInancial Market
CMP (AED) :
226.9
Key Data
Background
• The National Bank of Dubai (NBD) was established in 1963 as The National Bank
of Dubai Limited under a charter of the Ruler of Dubai, with one branch on the other
side of the Dubai creek. The bank was intended to play a vital role in developing
Dubai into a leading business centre.
• It was registered in 1994 under the Commercial Companies Law as a Public Joint
Stock Company.
• NBD is today among the biggest banks in the UAE, in terms of total assets, deposits
and branch network.
• NBD currently has a domestic branch network consisting of 39 branches in UAE. It

also maintains a branch in London, as well as a representative office in Tehran.
• The bank offers personal banking (current accounts, saving accounts, private banking,
credit cards, personal loans, car loans, etc.), corporate banking, and investment
banking (treasury products, funds, etc.) services.
• It has a strong franchise, particularly in the emirate of Dubai, where it is a prominent

provider of retail banking services. Besides its branches, its alternative delivery
channels include call centres, tele-banking, mobile banking and on-line banking.
• The bank has three fully-owned subsidiaries – National Financial Services LLC,
which provides broking services in financial instruments and commodities; National
Bank of Dubai Trust Company (Jersey) Ltd., which provides trustee and trust and
company administration services for trusts and companies established under the
laws of Jersey and other jurisdictions for bank’s clients; and Aqarat LLC, which is
involved in the development and management of real estate projects.

• NBD had 108.06mn shares outstanding of face value AED10 each for a paid capital
of AED1.08bn at the end of 2004. The major shareholders of the bank include the
Government of Dubai (14.2%) and public (the balance 85.8%).
Recent Developments
• NBD has signed a contract for implementing Customer Relationship Management

(CRM) software with Mindscape Information Technology (MIT), a leading
solutions provider and systems integrator. This CRM tool is aimed at improving
service quality for customers. It will provide the service staff with a view of all the
customer’s products and recent contracts, and offers a single point of resolution for
their enquiries. It will also enable the bank to cost-effectively offer its clients other
products and services that are both personalized and timed to meet their needs.
• The bank is reportedly looking at setting up a call centre and back-office operation in
India to outsource a part of its business activities to take advantage of India’s lower
telecom costs, vast talent pool and an established BPO space.
• It has recently entered into a partnership with Level Four Software, a leading
provider of ATM test and development software, to enable faster delivery of new
ATM content and customer services.
• It has recently launched Home Loans for purchase and refinance of freehold residential
properties in the UAE. Available both to UAE residents and non-residents, NBD
Home Loans will offer customers loan amounts up to AED4mn, flexible tenors of
up to 20 years, competitive interest rates and attractive pre-payment options.
• The interest income of the bank increased by 5.0% to AED1.2bn during 2004 as
deposits during the year.
• The yield on interest earning assets for the bank declined to 5.1% in 2004 from 5.4%
in 2003. The cost of interest bearing liabilities, on the other hand, went up to 1.1% in
2004 from 0.9% in 2003. The net spread, thus, declined to 4.0% in 2004 from 4.5%
in 2003.
• The net interest income during the year declined by 3.4% to AED815.2mn, as against
• Helped by IPOs, loan syndication deals, etc., the net commission income increased by
26.3% to AED211.4mn as compared to that in the previous year. Investment income
from trading and equity investments increased by 8.5% to AED39.9mn, while gains

from the sale of available-for-sale securities went up by 16.6% to AED308.4mn

during the year.
• The provisions for loan losses were AED37.8mn in 2004. This was lower than the
provisions of AED47.9mn in the previous year, due to no provisions on dues from
banks during the year.
• Overall, the total operating income after provisions for loan losses increased by 6.4%
to AED1.4bn in 2004.
• The operating costs of the bank declined by 8.0%, including a fall of 27.8% in the
staff costs, during 2004. As a percentage of operating income after provisions for
loan losses, its costs declined to 33.0% during the year from 38.2% in the previous
year. Staff costs on a similar basis declined to 14.1% during the year from 20.7% in
the previous year.
previous year.
• The RoAE of the bank rose to 19.3% in 2004, from 16.3% in 2003. The RoAA
marginally increased to 2.4% in 2004 from 2.3% in the previous year.
• NBD’s total assets stood at AED40.3bn at the end of 2004, growing by 13.0% over
the previous year.
in 2004 over 2003.
• The top three sectors to which NBD had the maximum exposure at the end of 2004
were construction & real estate (23.2%), trade (17.8%) and transport & services
(16.0%).

2.4% in 2003; while the bank provided for 83.9% of its NPLs at the end of 2004, up
from 69.2% at the end of 2003.
• NBD declared a cash dividend of 60% for 2004. The dividend payout ratio for the
bank declined to 69.9% in 2004, from 80.6% in the previous year, thanks to the net
profit growing in 2004, while the cash dividend has been maintained at the previous
year’s level in 2004.

• The bank’s net profit in the quarter ended March 2005 of AED291.4mn was higher
by 2.9% over the same period last year. Net interest income of AED211.6mn during
the quarter was higher by 6.6% in the same period last year. However, excluding
the one-off income of AED106mn in 2004 & AED79mn in 2005, included under
“Other Income”, the Bank’s core net profit was 20.0% higher than the same period
last year.
• Total assets of the bank rose by 3.3% in the first quarter of 2005. Loans and advances
grew by 8.30%, while the investment securities increased by 17.1% during the
quarter. Customers’ deposits increased by 3.3% during the quarter.
Outlook
• The bank’s loan book is expected to grow at a healthy rate in the medium-term,
with the bank poised to take advantage of newer opportunities in UAE. Besides the
government business that it is expected to continue to get, the bank is expected to
focus on project finance and infrastructure lending in the coming years to cash in on
the emerging opportunities in the country.
liabilities could be expected to trend up in the years ahead, thanks to hardening
interest rates. As a result, the net spread for the bank is expected to show an uptrend
in the medium-term.
in the medium-term, as it focuses on higher levels of fee-based activities.
• Over the medium-term, the growth in the net interest income and net commissions
are likely to keep NBD on a growth trajectory, although the profit growth could be
more subdued than in the case of its peers in the UAE banking industry.

BALANCE SHEET
The National Bank of Dubai
(In AED ‘000) 2002 2003 2004
Assets
Cash balances 141,444 201,815 247,448
Balances with central bank 1,781,889 1,634,212 4,060,606
Other Assets 484,853 497,698 662,017
Investment Securities - Debt 277,766 753,378 685,919

Investment Securities - Equity 12,125,185 14,313,031 12,461,618

Net Fixed Assets 469,144 444,882 405,087
Total Assets 35,164,370 35,623,407 40,267,284
Liabilities
Owner’s Equity
Special reserve 540,325 540,325 540,325
General reserve 1,769,116 1,769,116 1,769,116
Reserve for general banking risks 300,000 300,000 300,000

OPERATING STATEMENT
(In AED ‘000) 2002 2003 2004
Interest Income 1,151,286 1,111,476 1,167,276


Gain from sale of avlbl-for-sale securities 31,311 264,383 308,375
Less : Provisions for Investment Losses - (23,000) -
Operating income 936,679 1,301,563 1,384,480
Less : Staff costs (191,991) (269,966) (194,903)

Operating profit 568,885 804,948 927,775
Less: Provision for tax (127) - -

Net Profit 568,758 804,948 927,775

Trfr to Statutory & legal reserves (108,066) - -
Trfr to Special reserve (108,066) - -
Cash Dividend (432,260) (648,389) (648,389)
Dividend % 40% 60% 60%
Change in accounting policy 10,101 3,646 2,850

CASH FLOW STATEMENT

(In AED ‘000) 2002 2003 2004
Operating
Net profit 568,758 804,948 927,775
Depreciation 46,667 61,831 67,536
Fair value adjustments - trading investment 9,807 8,464 8,352
Tax paid (240) (217) -
Impairment of loans & advances - 29,500 37,783
Gain on sale of trading investments - (35,160) -759860
Working Capital (b) 2,274,339 2,442,184 (1,434,066)

Dec/ (inc) loans and advances (2,051,947) (2,533,881) (4,913,347)
Dec/ (inc) Other assets (66,119) (18,380) (145,309)
Inc/(dec) in deposits from banks 2,528,333 5,194,210 (963,478)
Inc/(dec) in deposits from customers 2,026,123 (287,222) 4,605,974
Inc/(dec) in other liabilities (162,051) 87,457 (17,906)
Total operating 2,896,031 3,308,550 (1,155,480)
Investing
(Purchase)/Sale of non-trading investments (2,876,459) (2,302,738) 1,809,784
Change in trading securities 273,683 - -
Originated & held-to-maturity securities 118,283 (475,612) 67,459
Total investing (2,540,435) (2,815,919) 1,849,502
Financing
Total financing (345,807) (432,260) (648,389)


RATIOS
2002 2003 2004
Profitability
Margins
- Net Spread 3.9% 4.5% 4.0%
Efficiency
- Cost / Op. Income after Provisions for Loan Losses 39.3% 38.2% 33.0%
Liquidity
Credit Quality
- NPL Coverage 44.9% 69.2% 83.9%
Capital Adequacy

- Investment securities income / Op. Income after Provisions for Loan 1.6% 2.8% 2.9%
Losses
- Change in Net Interest Income after Provisions for Loan Losses 25.6% 12.6% -2.3%
- Change in Other Income 15.2% 20.3% -21.2%

- Shares in Issue (‘000) 108,065 108,065 108,065
- EPS (AED) 5.2 7.4 8.6
- P/E (x) 18.4 16.8 17.0
- P/BV (x) 2.1 2.8 3.3

6.11 Sharjah Islamic Bank

NBS.AD
Listing:
CMP (AED) :
12.9
Key Data
Background
• Sharjah Islamic Bank (SIB) was incorporated in 1975 as a public joint stock company
by an Emiri Decree in Sharjah, United Arab Emirates.
• The bank had passed a resolution in March 2001 to transform its activities in full
compliance with the Islamic Shari’a rules and principles. The entire process was
completed on June 30th, 2002. As a result the bank transformed its conventional
banking products into Islamic banking products during the 6-month period ended
30 June 2002, after negotiating with its customers. Primarily, this resulted in a
reduction in its loans and advances, which were transformed into leased assets and
financing receivables.
• The bank has branches in Sharjah (4), Abu Dhabi, Dubai, Dibba, Kalba and
Khorfakkan. The bank has a network of more than 25 ATMs located at branches
and off-site points.
• It has presence in personal deposits (current, saving, fixed term), commercial deposits
(current, fixed term), personal financing (including home financing), corporate
financing (ijara, murabaha, istisna, musharaka, mudharaba, trade finance), credit
and charge cards segments.
• SIB had 154.3mn shares outstanding of face value AED2.5 each, for a paid capital
of AED385.7mn at the end of 2004.
• Among the prominent shareholders of the bank are Government of Sharjah (27%
holding) and Kuwait Finance House (KFH) (20% holding).

• The bank has recently enhanced its paid-up capital to AED1.0bn by a rights issue in
the ratio of 1.593 shares for each existing share. The total number of shares of the
bank outstanding at the end of first quarter of 2005 was 400.0 mn.
Recent Developments
• The National Bank of Sharjah (NBS) changed its corporate identity with a new name,
Sharjah Islamic Bank, in February 2005.
• Capital Intelligence raised the foreign currency long-term rating of SIB to investment
grade BBB- from BB+ in December 2004. The CI report confirmed that the short-term
support foreign currency rating of the bank has been retained at A3, while outlook
has been reaffirmed as “Stable” for all ratings. The upgrade reflects the bank’s good
capitalisation and high liquidity levels, in addition to good financial performance
over the past two years. The new rating has also taken into consideration the bank’s
competent management, conservative credit policies, strong cover provisions and
overall sound financial standing. Another positive factor taken into account was the
bank’s strong shareholder base - the Government of Sharjah and Kuwait Finance
House together hold 47% stake.
• The shares of SIB were listed on the Abu Dhabi Securities Market (ADSM) on
October 10, 2004.
• SIB, which had till then been focusing more on corporate banking, established a
dedicated retail banking group in September 2004 to boost the personal finance
portfolio of the bank .
• The bank launched a new educational product in September 2004. Called ‘Shahadati’,
the scheme provides Islamic finance for all levels of education needs - from school
and university to post-graduate and re-training courses. The finance is made
available under the ‘Ijara of services’ principle of Islamic banking, which is one
of the financing systems in Islamic banking. The Shahadati service entails adding a
profit margin to the transaction, agreed to by the bank and the customer according to
Ijara rules.
• The income from murabahas & leasing of the bank increased by 10.0% to
AED115.0mn during 2004 as compared to the previous year, on the back of a 22.2%
increase in the murabahas, leased assets, and loans & advances during the year.
However, depositors’ share of profits declined by 14.8% to AED26.6mn during the
year, on the back of a 33.6% growth in the customers’ deposits and 369.9% growth
in the banks’ deposits during the year.
• The yield on murabahas, leased assets, and loans & advances for the bank declined
to 3.7% in 2004 from 4.1% in 2003. The cost of commission bearing liabilities also
declined to 1.2% in 2004 from 1.8% in 2003. The net spread, thereby, increased to
2.6% in 2004 from 2.3% in 2003.

• The net income of SIB from murabahas & leasing during the year grew by 20.5% to
AED88.4mn from AED73.4mn during the previous year.
• The net commission income was flat at AED14.8mn during 2004.
• The recoveries on loans were AED14.5mn in 2004. This was higher by 109.2% over
the recoveries of AED7.0mn in the previous year, due to higher recoveries, and
earnings on the present value of the impaired receivables and despite much higher
provisions made during the year.
• Overall, the total operating income after the loan recoveries increased by 17.0% to
AED129.6mn in 2004.
in the staff costs, during 2004. As a percentage of operating income after loan
recoveries, its costs marginally increased to 45.0% during the year from 44.7% in
the previous year. Staff costs on a similar basis rose to 30.7% during the year from
29.9% in the previous year.
previous year.
on the other hand, declined marginally to 2.3% in 2004 from 2.4% in the previous
year.
• SIB’s total assets stood at AED3.5bn at the end of 2004, representing an increase of
• The bank increased its exposure to murabahas, leased assets, and loans & advances
by 22.2% to AED3.1bn in 2004 over 2003.
• The top three sectors to which SIB had the maximum exposure in its leased assets
and financing receivables portfolios at the end of 2004 were Other Government
Departments and Authorities (30.3%), Government of Sharjah (16.4%) and personal
financing (14.4%).
• The bank declared a cash dividend of 10% for 2004. The dividend payout ratio for
the bank went down to 54.1% in 2004, from 63.0% in the previous year, thanks to
the net profit growing while the cash dividend remaining steady in 2004.
• SIB reported an increase of 52.3% in the total interest income in the first quarter of
2005 year-on-year, while the distribution to depositors went up by 84.1% during the
period year-on-year. The bank reported a net profit of AED46.8mn in the quarter – a
164.2% increase over AED17.7mn earned in the same period last year.

• The bank also reported a 34.4% rise in total assets and 58.5% rise in investments
during the quarter. International murabaha increased by 77.9%, while customer
deposits grew by 3.3% during the quarter.
Outlook
• SIB’s exposure to murabahas, leased assets, and loans & advances is expected to
grow at a healthy rate in the medium-term, due to a sustained business demand in
UAE. The bank is expected to focus on project finance and infrastructure lending in
the coming years to cash in on the emerging opportunities in the country. With the
economy growing at a much faster pace, a larger number of opportunities for Islamic
financing deals are expected.
• The bank’s deposits also could grow at a good rate in the coming years. It is believed
to have chalked out an ambitious growth plan, including the expansion of the branch
network to 15 in the coming months. It could open new branches in Al Ain, Ras Al
Khaimah, Umm Al Quwain and Fujairah, and relocate a few others.
• Both the yield on murabahas, leased assets, and loans & advances as well as the cost
of interest bearing liabilities could be expected to trend up in the years ahead, thanks
to hardening interest rates. As a result, the net spread for the bank is expected to
show an uptrend in the medium-term.
growth in the medium-term, as it is expected to focus on higher levels of fee-based
activities.
• Over the medium-term, the growth in the net income from murabahas and leasing,
and net commissions are likely to drive the bank’s growth.
• SIB is likely to venture into the AGCC countries, particularly Kuwait.
• The bank seems to be also eyeing the fast-growing international Islamic finance
market, where it hopes to have a strong presence in the future.

BALANCE SHEET
Sharjah Islamic Bank
(In ‘000 AED) 2002 2003 2004
Assets
Cash balances 51,690 37,139 43,800
Balances with central bank 80,754 127,512 179,669
Other Assets 22,744 20,030 35,642
Murabahas, leased assets, and loans & advances 2,300,376 2,548,482 3,114,334
Investment Securities - Debt - 7,500 25,865

Investment property - - 11,689

Net Fixed Assets 36,956 34,436 34,030
Total Assets 2,375,516 2,638,403 3,454,588
Liabilities
Deposits from Banks 56,749 37,743 177,366
Directors’ remuneration 900 900 1,350

Owner’s Equity
Proposed bonus shares 18,366 - -
General reserve 38,118 31,296 23,851
Fair valuation reserve - 1,496 5,345

OPERATING STATEMENT
(In ‘000 AED) 2002 2003 2004
Income from murabahas and leasing 106,915 104,582 115,024

Distribution to depositors (30,136) (31,212) (26,586)
Net income from murabahas and leasing 76,779 73,370 88,438

Investment securities income 1,238 - 4,062
Gain from sale of avlbl-for-sale securities 5,448 9,945 -
Less : Provisions for Loan Losses 3,922 6,953 14,546
Less : Staff costs (30,865) (33,148) (39,741)

Operating profit 56,008 61,259 71,316
Net Profit 56,008 61,259 71,316

Trfr to General reserve (5,601) (6,126) -
Directors’ remuneration (900) (900) (1,350)
Trfr to Revaluation reserve (1,000) - -
Cash Dividend (36,732) (38,568) (38,568)
Dividend % 10.0% 10.0% 10.0%
Gain on sale of avlbl-for-sale investments (5,298) (9,000) -

CASH FLOW STATEMENT

(In ‘000 AED) 2002 2003 2004
Operating
Net profit 56,008 61,259 71,316
Impairment of loans & advances (6) - -
Gain on sale of trading investments (5,448) (9,945) -
Working Capital (b) 20,735 327,286 (203,553)

Dec/ (inc) loans and advances (329,887) 77,242 (970,949)
Dec/ (inc) Other assets 899 1,698 (13,092)
Inc/(dec) in deposits from banks (142,529) (19,006) 139,623
Inc/(dec) in deposits from customers 478,751 275,700 624,003
Inc/(dec) in other liabilities 13,501 (8,348) 16,862
Total operating 74,959 382,331 (128,357)
Investing
(Purchase)/Sale of non-trading investments 6,916 (20,453) (59,438)
Change in deposits with banks 23,826 (337,586) 237,398
Total investing 26,260 (360,150) 173,586
Financing
Total financing (69,965) (36,732) (38,568)
Net change in cash balances 31,254 (14,551) 6,661


RATIOS
2002 2003 2004
Profitability
Margins
- Net Spread 2.6% 2.3% 2.6%
Efficiency
Liquidity
Credit Quality
- Provisions to Average Gross Loans -0.2% -0.3% -0.5%
Capital Adequacy

- Change in Net Interest Income after Provisions for Loan Losses -6.4% -0.5% 28.2%

- Shares in Issue (‘000) 146,927 154,274 154,274
- EPS (AED) 0.4 0.4 0.5
- Market Price Year End (AED) * --- --- 15.3
- P/E (x) --- --- 33.2
- P/BV (x) --- --- 3.6
- Dividend yield (%) --- --- 1.6

6.12 Union National Bank

UNB.AD
Listing:
CMP (AED) :
17.8
Key Data
P / BV (X) 7.2 Target Price Not Rated.
EPS and BVPS as at end of 2004, unadjusted for 1:10 share split of January 2005.
Background
• Union National Bank (UNB) was established as a Public Joint Stock Company in
1982, with its headquarters in Abu Dhabi. It is the only bank that is jointly owned by
the Governments of Abu Dhabi and Dubai.
• The bank has an extensive branch network spread across 26 locations in UAE. It is
believed to have an agreement with Emirates Post through which the bank’s services
are expected to be available at about 72 post offices throughout the UAE.
• The bank has presence in personal banking (current accounts, saving accounts,
deposit accounts, credit cards, personal loans, personal banking, etc.), corporate
banking (correspondent banking, trade finance, etc.), and investment banking
(structured products, treasury and investment products, etc.) segments.
• The bank has electronic banking channels, such as ATMs, on-line banking, call
centres, phone banking, etc. in place.
• UNB had 90.4mn shares of face value AED10 each for a paid capital of AED904.3mn
at the end of 2004. The bank, which was earlier wholly-owned by the government
of Abu Dhabi, is now 60% owned by the government. In 2004, the bank offered
40% of its stock to expatriates, to widen the shareholding and boost the liquidity and
attractiveness of the stock.
• The bank split its shares in the ratio of 1:10 in March 2005 in order to make the stock
more liquid.
• The total number of shares of the bank outstanding at the end of 1Q2005 was 1bn.

Recent Developments
• UNB has installed latest generation of ATMs in its branches nationwide in November
2004. The state-of-the-art machines are multi-function ATMs for interior locations,
delivering the widest combination of transactions.
• The bank recently signed an agreement with Reuters to take Reuters integrated
front to back office trade and risk management solution. UNB plans to use Reuters
Kondor+ and Reuters Kondor Trade Processing solution for its treasury, brokerage,
derivatives and capital markets activities.
• Arab Trade Financing Programme (ATFP) has accorded a $25 million credit line to
UNB to finance the UAE’s foreign trade. The number of lines of credit provided by
the programe to national agencies in the UAE, including this line has now reached
eight amounting to $142 million.
• The bank is reportedly setting up an Islamic finance company with an initial capital
of AED500mn and plans to raise the capital through an initial public offering.
• The interest income of the bank increased by 29.6% to AED826.6mn during 2004 as
deposits and 139.5% growth in the bank deposits during the year.
• The yield on interest earning assets for the bank was 4.0% in 2004, the same as in the
previous year, due possibly to a high growth in the high-cost bank deposits during
the year. The cost of interest bearing liabilities, on the other hand, went up to 1.6%
in 2004 from 1.2% in 2003. The net spread, therefore, declined to 2.4% in 2004 from
2.8% in 2003.
• Helped by IPOs, loan syndication deals, etc., the net commission income increased
by 80.3% to AED199.2mn as compared to that in the previous year.
increase of 34.6%.
in the previous year due to a higher charge during the year.
14.7% to AED688.9mn in 2004.

provisions for loan losses, its costs declined to 34.3% during the year from 37.4% in
the previous year. Staff costs on a similar basis declined marginally to 22.5% during
the year from 22.9% in the previous year.
previous year.
on the contrary, declined to 2.2% in 2004 from 2.4% in the previous year. This was
on the back of a 29.5% growth in the average assets, driven by a growth of 38.4%
in the average loans, in 2004.
• UNB’s total assets stood at AED24.1bn at the end of 2004, representing an increase
over December 2003.

AED805.0mn, up 3.7% from AED776.0mn in 2003.
• The proportion of NPLs to gross loans was 4.7% at the end of 2004, decreasing from
7.3% in 2003. However, the bank provided for 113.5% of its NPLs at the end of
2004, up marginally from 111.8% at the end of 2003.
dividend payout ratio for the bank jumped to 49.9% in 2004, from 21.9% in the
previous year, thanks to a 175.0% jump in the cash dividends in 2004.
• UNB’s net interest income rose by 9.7% in the first quarter of 2005 year-on-year. Its
net profit for the quarter increased by 30.3% year-on-year.
• The bank’s loans and advances witnessed a growth of 4.0% in the March 2005
quarter, while investments increased by 7.5% during the quarter. The total assets,
however, declined by 4.8% during the period, mainly on the back of declining
balances with banks. As for the liabilities, customers’ deposits declined by 6.4%
during the period.

Outlook
• The bank is expected to focus on overseas expansion in the coming years. The bank
seems to be planning to move outside the UAE, mainly to GCC (Qatar) and Arab
countries (Iraq, Iran, Libya, Sudan and Egypt).
• The year 2005 could be expected to be the same as 2004 in terms of growth. Growth
in all segments and balance sheet items is likely. It could be fueled by, among others,
a solid economy that has been growing continuously over the last many years,
booming stock markets, a high level of activity in the real estate and infrastructure
sectors, etc.
• The loan book of the bank is expected to grow at a healthy rate in the medium-term,
due to an increased exposure in project finance and infrastructure lending.
medium-term.
in the medium-term, as it focuses on higher levels of non-interest income.
are likely to drive the bank’s growth.

BALANCE SHEET
Union National Bank
(In AED ‘000) 2002 2003 2004
Assets
Cash balances 69,614 68,244 75,595
Balances with central bank 690,461 763,175 1,456,777
Other Assets 95,136 132,006 434,670
Investment Securities - Debt 763,791 1,268,484 1,603,546


Net Fixed Assets 113,743 113,176 111,760
Total Assets 14,715,184 17,123,447 24,113,269
Liabilities
Medium-term loans - 1,010,075 1,010,075
Owner’s Equity
Proposed bonus shares 82,212 - 95,668
General reserve 75,000 75,000 75,000

OPERATING STATEMENT
Union National Bank
(In AED ‘000) 2002 2003 2004
Interest Income 642,171 637,977 826,626


Investment securities income (87) 1,318 9,692
Gain from sale of avlbl-for-sale securities 13,151 32,240 20,798
Less : Staff costs (129,178) (137,277) (155,183)

Operating profit 300,268 376,057 452,909
Net Profit 300,268 376,057 452,909

Cash Dividend (74,738) (82,212) (226,082)
Dividend % 9% 9% 25%
Stock Dividends (82,212) - (95,668)
Dividend % 10% 0% 11%

CASH FLOW STATEMENT

Union National Bank
(In AED ‘000) 2002 2003 2004
Operating
Net profit 300,268 376,057 452,909
Depreciation 27,923 27,447 18,778
Gain on sale of fixed assets - - (3,460)
Gain on sale of non-trading investments (13,151) (32,240) -20798
Working Capital (b) 155,910 80,504 (1,250,129)

Dec/ (inc) loans and advances (860,766) (1,184,447) (6,589,983)
Dec/ (inc) Other assets 26,777 (36,441) (302,664)
Inc/(dec) in deposits from banks 146,920 73,460 312,205
Inc/(dec) in deposits from customers 833,838 1,228,688 4,976,509
Inc/(dec) in other liabilities 9,141 (756) 353,804
Total operating 563,947 518,866 (652,765)
Investing
Sale of fixed assets 504 - 26,666
Change in trading securities (15,389) 11,386 (20,747)
Change in deposits with banks (319,798) (1,018,311) 1,214,445
Total investing (419,595) (1,448,099) 886,198
Financing
Changes in medium-term loans - 1,010,075 -
Total financing (74,738) 927,863 (226,082)
Net change in cash balances 69,614 (1,370) 7,351

Net cash balances at beginning - 69,614 68,244

RATIOS
Union National Bank
2002 2003 2004
Profitability
Margins
- Investment Income to Investment Assets -0.0% 0.2% 1.6%
- Net Spread 2.9% 2.8% 2.4%
Efficiency
- Cost / Op. Income after Provisions for Loan Losses 41.6% 37.4% 34.3%
Liquidity
Credit Quality
- NPL Coverage 85.2% 111.8% 113.5%
Capital Adequacy

- Investment securities income / Op. Income after Provisions for Loan Losses -0.0% 0.2% 1.4%
- Change in Net Interest Income after Provisions for Loan Losses --- 15.0% -4.3%
- Change in Other Income --- 5.7% 34.6%

- Shares in Issue (‘000) 82,212 90,433 90,433
- EPS (AED) 3.7 4.2 5.0
- Market Price Year End (AED) * --- 6.4 12.8
- P/E (x) 0.0 1.5 2.6
- P/BV (x) 0.0 0.3 0.5
- Dividend yield (%) --- 1.3 2.5
Average ratios for 2002 based on stand alone figures for that year.

Company Recommendation Ticker Price(AED) Disclosure
Abu Dhabi Commercial Bank HOLD ADCB.AD 239.0 1,10
Abu Dhabi Islamic Bank Not Rated ADIB.AD 72.0 1,10
Bank of Sharjah Not Rated BOS.AD 4.5 1,10
Commercial Bank of Dubai Not Rated CBD.DU 160.0 1,10
Dubai Islamic Bank Not Rated DISB.DU 151.0 1,10
Emirates Bank International Not Rated EBIL.DU 65.0 1,10
First Gulf Bank HOLD FGB.AD 41.0 1,10
Mashreqbank HOLD MASB.DU 230.0 1,10
National Bank of Abu Dhabi BUY NBAD.AD 46.0 1,10
The National Bank of Dubai Not Rated NBDD.DU 226.9 1,10
Sharjah Islamic Bank Not Rated NBS.AD 12.9 1,10
Union National Bank Not Rated UNB.AD 17.8 1,10

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GCC Banking Sector

Global Investment House stock market indices can be accessed

Omar M. El-Quqa, CFA

Shailesh Dash, CFA

Faisal Hasan, CFA

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

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

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

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

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

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

The major highlights of the region’s banking industry are as follows:

i. Controlling ownership by government and inﬂuential families

ii. Low business diversiﬁcation

May 2005 GCC Banking Sector 1

iii. Constrained by relatively small size

iv. High concentration

2 GCC Banking Sector May 2005

Chart 1-1: GCC Banks - Concentration of Assets

Bahrain Kuwait Oman

vi. High proﬁtability

May 2005 GCC Banking Sector 3

Chart 1-2: GCC Banks - Profitability

Source: Global Research

vii. Improving asset quality

4 GCC Banking Sector May 2005

Chart 1-3: GCC Banks - Asset Quality

viii. Strong funding proﬁle

Alternative funding is developing through certiﬁcates of deposits, syndication, and even

Table 1-1 : Long-Term Bond Offerings by GCC Banks

May 2005 GCC Banking Sector 5

ix. High proportion of non-interest bearing deposits

x. Healthy liquidity proﬁle

xi. Unrealized potential of corporate banking

6 GCC Banking Sector May 2005

xii. Retail banking coming into its own

May 2005 GCC Banking Sector 7

xiii. Mortgage lending in early stages

xiv. Islamic banking

xv. Nascent stage of capital markets

8 GCC Banking Sector May 2005

xvi. Benefit of high growth trajectory of GCC countries

xvii. Strong systemic support by governments

xviii. Poor disclosure levels

May 2005 GCC Banking Sector 9

2. Islamic Banks in GCC

Table 2-1: Listed Islamic Banks in the GCC region

Performance of listed Islamic banks

10 GCC Banking Sector May 2005

Table 2-2: Comparative Ratios of Islamic Banks in GCC (as of FY2004)

May 2005 GCC Banking Sector 11

Table 2-3: Asset Quality of Islamic Banks in GCC (FY 2004)

12 GCC Banking Sector May 2005

3. Role of Foreign Banks

Table 3-1 : Foreign Banks’ Shareholding in GCC Banks

May 2005 GCC Banking Sector 13

14 GCC Banking Sector May 2005

4. Competitive Strategies & Other Developments

Thrust on retail banking

May 2005 GCC Banking Sector 15

Private Banking not too behind as well

16 GCC Banking Sector May 2005