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3Q09 Review – Benign credit costs
• Third quarter earnings were QAR204 million, in line with our expectations. Profits were driven by strong fee income and benign credit costs.
• In order to comply with the regulatory requirements of the Qatar central bank, the bank increased its deposit base during the quarter.
• We reiterate our Buy recommendation on the stock and maintain our target price (TP) at QAR64.60.
Doha Bank (DHB) reported 3Q09 net income of QAR204.5 million vs. our expectation of QAR208.9 million, 20% and 35% lower than 3Q08 and 2Q09, respectively. Higher loan loss provisioning led to the drop in yearly profits, while a one-off gain from bond buy-back boosted earnings in the second quarter. Loan book grew by 6% to QAR25.6 billion from the previous quarter with credit expansion primarily driven by contracts on government projects. Yet, net interest income was 6% lower than our estimates as the net interest margin shrank to 3.1% from 3.3% in the second quarter. Earnings, however, were helped by strong fee income which rose by 15% quarterly to QAR99 million vs. our expectation of QAR78 million.
Operating expenses were 23% higher than our expectations with the cost to income ratio at 37% compared with 28% in the previous quarter and our forecast of 31%. Third quarter’s operating expenses were affected by a one-off provision related to an operational loss. Note the 2Q09 cost to income ratio was positively influenced by the one-off gain included in non-interest income.
We maintain our Buy recommendation and our TP of QAR64.60, giving an upside potential of 40%. The stock offers attractive valuation trading at a FY10e PB multiple of 1.4x vs. FY10e ROE of 24%, a 19% and 15% discount to its implied PB and Qatar sector average, respectively. Overall, the third quarter earnings were good, notably lower loan loss provisioning given its retail tilt in the loan portfolio, and robust loan growth in a slow macro environment.