The bullish case for Qatar National Bank

A major catalyst for QNB’s acquisition spree is its low cost funding, given its role as the flagship bank of Middle East’s leading LNG exporter and the owner of world’s third largest natural gas reserves.

The Qatar National Bank (QNB) has evolved into a global bank with $100bn in assets and a footprint in 25 countries. QNB’s purchase of National Societe Generale Bank (NSGB) will close in mid-2013, if the Egyptian central bank and securities regulator approves the deal. This is a transformational acquisition for QNB, as NSGB, with its $10.50bn assets and 160-branch network, significantly increases its Egyptian banking footprint. In fact, assuming the NSGB deal is approved, Egypt will be 10 per cent of QNB loans and deposit. This adds higher risk profile to Qatar’s flagship bank since it is now exposed to political and currency risks that have not dampened since the election of President Mursi and the drafting of a new constitution. QNB has also increased its strategic stakes in Abu Dhabi’s CBI, Iraq’s Mansoor Bank and Libya’s Bank of Commerce and Development. It makes perfect strategic sense for QNB to build a pan-Arab regional network that now accounts for 30 per cent of total assets and 20 per cent of net profits but this exposes the bank to the political and social risks of the Arab spring.
Yet Egypt is the most populous nation in the Arab world; Iraq is an emerging oil and gas superpower; Libya is North Africa’s wealthiest state – all potential growth engine for QNB since banking penetration rates are miniscule in all three Arab states. It is also not coincidental that Qatar is playing an increasingly activist role in the wider politics and economics of the Arab world. Qatar’s recent decision to deposit $2.5bn in the Egypt Central Bank to boost its hard currency reserves on the eve of an IMF team’s arrival in Cairo is a testament to Doha’s new role in Arab financial diplomacy and the QNB – NSGB deal can only benefit once Egyptian economic growth resumes.

A major catalyst for QNB’s acquisition spree is its low cost funding, given its role as the flagship bank of Middle East’s leading LNG exporter and the owner of world’s third largest natural gas reserves. However, Qatar has 18 banks operating in a banking market that is nowhere near the size of the UAE or Kuwait, let alone Saudi Arabia. Moreover, Qatar’s economic growth rate has fallen to 5-6 per cent, down from the 10-12 per cent hyper growth rates two years ago. So the strategic ballast to expand abroad is compelling for QNB management.

QNB obviously benefits from the Qatari government’s $135bn project and infrastructure spending programme, particularly the stadiums, hotels, rail networks and airports needed for the 2022 soccer World Cup. This is a EPS growth ballast for QNB in the next decade as the de facto government bank in Qatar. Qatari shares were the worst performing in the GCC (ex Bahrain) in 2013, with bank shares hit hardest. QNB missed its earnings estimates though it has increased its dividend to 6 Qatari riyals a share. Yet QNB boasts a capital adequacy ratio of 21per cent and it is now the leading bank in the Arab world, an argument for a premium valuation, given its sovereign ownership and evolving emerging markets finance growth model with a potential secular ROE of 15 per cent. This valuation rerating will only manifest itself once QNB successfully closes the NSGB deal and Egypt’s economic crisis improves, possibly after the IMF loan is completed. If I am right, QNB shares have the potential to rise as high as QR 170-180 in the next twelve months.

Apart from QNB, I believe Industries Qatar is another blue chip core holding in Qatar. This is Qatar’s leading petrochemical, fertiliser and steel conglomerate whose projects benefit from sovereign backing and the lowest coast energy feedstocks in the Middle East. Industries Qatar’s project pipeline in 2013-14 means capex declines while earnings rise. However, the shares could drift tower into the QR 140-150 range as the global pricing environment for both fertiliser and steel is still weak, though the economic rebound in China will clearly act as a catalyst for price rises. A dividend yield in the 5 per cent range should also attract regional fund managers to accumulate Industries Qatar if it trades in 140-150 Qatari riyal range, in Doha.

Saudi banks also offer compelling value in 2013 as beneficiaries of 15 per cent loan growth and the $500bn Saudi infrastructure spending programme. SAMBA Financial is the leading corporate and investment bank in the kingdom, with a stellar balance sheet, a 18 per cent Basle Tier One capital base and a loan/deposit ratio of only 68 per cent. Hit by provisions in 2012, SAMBA can well rise in 2013 as it trades at a mere 1.4 times book value and 8 times earnings. An optimal buy/sell range for the bank could well be 45-56 Saudi riyals in 2013.


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