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Commercial Bank of Qatar

Source: HC Securities & Investment

3Q09 Review – Improving Performance

• CBQ’s third quarter earnings were 9% higher than our expectations at QAR394 million on the back of better- than-expected investment income and loan loss provisioning.

• Business activities are expected to pick up in the coming quarter but hinge on budget deployment.

• We maintain our Buy recommendation on the stock. Our target price is QAR91.8, giving an upside potential of 27%.

CBQ reported 3Q09 net income of QAR394 million, up 18% from QAR333 million in 2Q09 but down 25% from QAR523 million in 3Q08. Earnings were 9% above our estimates due to lower than expected loan loss provisioning and higher investment income. Loan loss provisioning stood at QAR86.6 million, 14% lower than our expectations and 40% lower than the previous quarter. Meanwhile, non-performing loans to total loans (NPL ratio) increased to 2.1% from 1.46% in 2Q09 and 1.04% in 1Q09 as a result of the macro environment. We were expecting the bank to maintain the coverage ratio (loan loss provision / NPL) at 2Q09 levels of 91%, but it was reduced to 79% in the third quarter. However, we gain comfort from the fact that when the risk reserve is included the coverage ratio increases to 174%. Risk reserve is a mandatory requirement of the Qatari central bank to reserve for bad loans amounting to 1.5% of net loans. Of the total loan loss provisioning during the quarter, QAR50 million relates to one possible domestic corporate customer default taken on prudent terms. The entire outstanding amount at the end of the quarter was considered as bad loans. Note the bank is left with QAR120 million falling due in future periods from the same customer, which may have to be written off depending on the developments. Positively, provisioning on the retail side fell by 22% to QAR36 million. Improvement in economic conditions would mean loan loss provisioning is likely to move south on a QoQ basis, but we believe it will take another few quarters for it to get back to normal from the current elevated levels.

Investment income was QAR37 million vs. our estimate of QAR15 million and losses of QAR1 million in the second quarter. CBQ sold some equities in its international investment portfolio and would continue to pursue this strategy if the opportunity arises. At the same time, the bank provided QAR56 million on its available for sale investment portfolio for permanent impairments on its bonds. CBQ’s investment portfolio, similar to other Qatari banks, is geared to state bonds and CDs with only 9% and 5% of the entire investment portfolio (QAR9,214) invested in other bonds and equity, respectively. Fee income was strong at QAR186 million, up 11% from the previous quarter and 8% higher than our expectations. Increase in fee income was partly helped by new lending of QAR1.8 billion during the quarter and should continue to support bottom line.

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