NBK Capital MENA maintains 'Hold' recommendation on CBQ

18/12/2014 20:36 AST

“We have decreased our fair value for CBQ by 12 per cent mainly on a lower dividend payout in the forecast horizon coupled with a slight decrease in our net profit forecast. Our fair value implies upside potential of six per cent, and therefore we maintain our ‘Hold’ recommendation on the stock. The decrease in dividend payouts was mainly due to an increase in the minimum CAR in Qatar, following the transition to Basel III; for CBQ, the additional buffer (over the minimum CAR requirement of 12.5 per cent) stands at one per cent, to be implemented on a gradual basis between 2016 and 2019. We note that the Qatar Central Bank (QCB) might require further buffers in the future. The bank’s CAR stood at 14.7 per cent at the end of September 2014, and management mentioned that they might need to increase capital in some form toward the end of 2015 or early 2016.

“The bank recently announced that it has initiated the formal squeeze out process of its subsidiary in Turkey, Abank; CBQ will own an additional 0.75 per cent, bringing its total stake to 75 per cent (25 per cent is held by CBQ’s Turkish partners), which will result in the delisting of Abank from Bourse Istanbul. While exposure to Turkey brings growth and diversification benefits in the long term, it is also resulting in headwinds in the short term, especially given the sharp currency volatility (the Turkish lira has depreciated by around 13 per cent against the QAR since mid-May 2014. We highlight that CBQ’s stake in Abank increases the downside risk in the short term, which could have a material impact on the consolidated financial results.

“We expect provisioning to remain high in 4Q2014. Historically, loan provisioning has tended to be highest in the fourth quarter for CBQ. An additional factor this year is the need to increase NPL coverage, which stood at 68 per cent by the end of September 2014. We forecast around 10 per cent loan growth in 2015 and a broadly flat NIM in that year. We expect net interest income as well as non-interest income to expand by low double-digits in 2015, resulting in a 13 per cent increase in operating income in that year. Loan provisioning has remained high in 2014 after it spiked in 2013, and we expect it to remain broadly similar in 2015. Coupled with normalizing cost growth in 2015 (after the spikes in 2013 and 2014F), we forecast around a 20 per cent net profit increase in 2015.”

CPI Financial