Commercial Bank of Qatar

Source: HC Securities & Investment

3Q09 Preview – A Quiet Quarter

• Delay in the fiscal year ’09 budget deployment and the impact of the festive season are likely to have slowed down activities in the economy in the third quarter.

• NPLs (non-performing loans) should slightly edge up during the quarter due to the macro environment. Provisioning charges, however, are likely to be less pronounced than the previous quarter, after sale of bad loan portfolios to the government in 2Q which resulted in one-off write-downs.

• We would expect the fourth quarter to see pick up in lending activities depending on the budget implementation.

So far the government has not implemented the fiscal ’09 budget to a great extent and this we believe should have slowed down economic activities in the third quarter. Although the government has started spending its fiscal budget gradually, it has not filtered down through the economy and thus will have limited impact on economic activities in this quarter. For some reason, there is a delay in full implementation of the fiscal budget for ’09. As such, the banks are likely to exhibit marginal growth in their loan books in the third quarter. Another factor is the festive season, during the months of August/September, which usually leads to lower level of activities. We expect average loan growth for banks under our coverage to be in the region of 2%. Soft loan book expansion and the macro environment will consequently impact fee income activities as well.

NPLs are likely to increase in the third quarter due to the global economic environment. Yet we find Qatar’s asset quality one of the best in the region, underpinned by a benevolent government. NPL ratio (NPLs to total loans) for the sector increased to 1.5% in the second quarter from 1.3% in the previous quarter. We expect it to rise to 1.8% in the third quarter as bad loans increase amid the current global economic environment. On the other hand, slow credit expansion will limit deterioration in asset quality. During the second quarter, the banks sold off some of their real estate and bad loan portfolios to the government. This caused the provisioning levels to increase significantly in the second quarter. We believe that this exercise should have removed bad loans that are causing uncertainty in provisioning levels in some regional counterparts. As such, we expect provisioning levels to be lower than the previous quarter, though relatively higher than earlier quarters due to the economic environment.

Lending activities should pick up towards the latter part of the year as the budget is implemented. Despite the global crisis, the Qatari budget expenditure was estimated at QAR94.5 billion during fiscal year ’09. Since the fiscal year spans April to March, we would expect budget implementation to a greater extent by the fourth quarter of this year. Already during the third quarter, a few infrastructure projects were announced in Qatar showing that the momentum will increase in the fourth quarter.

We maintain our positive view on the Qatari banking sector and CBQ remains our top pick. The stock is trading at a 28% discount to its implied FY09e PB and 19% discount to the Qatari sector average. Budget implementation in the fourth quarter would act as a catalyst for the banking stocks. More importantly, asset quality is less of a concern in Qatar when compared with the rest of the region.

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