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Doha Bank

Source: HC Securities & Investment

4Q09 Review - Legacy Cleansing

Lower-than-expected earnings due to rise in provisioning

Core operating performance stable, likely to improve with stronger economic activities expected this year

Maintain our Buy recommendation, reduce target price to QAR60.8

Results highlight: Earnings were 42% lower than street estimates and 39% lower than our estimates on the back of higher-than-expected provisioning on both, the investment portfolio and loan book. Impairment charges on financial investments during the quarter included one-off write-offs amounting to QAR67 million. Excluding these non-recurring events, earnings would have been only 6% lower than our estimates.

Retail legacy loans led to an increase in loan loss provisioning as the bank increased its coverage ratio to 84% from 77% in the previous quarter, on prudent terms. We believe the bank will see additional provisioning in the coming quarters as it attempts to cleanse its legacy retail loans. Positively, corporate segment’s asset quality improved during the quarter/year and is fully provided for. Corporate represents 47% of the loan portfolio while retail 30%.

Net interest income was stronger than expected due to margin improvement. Net interest margin increased by 30 bps to 2.9%, supported by pricing power and improved liquidity conditions. Although competition is likely to mitigate loan pricing power in the market, going forward, margins are likely to be maintained due to continuous improvement in funding costs.

Valuation and catalyst: Stock offers attractive valuations trading at a FY10f PB of 1.3x, a 25% discount to the Qatar sector average and a 18% discount to its implied PB. Any government bailout package for bad retail loans similar to the real estate portfolio last year and international expansion would act as catalysts to the stock.

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