Qatar International Islamic Bank (QIIK) Company Report - 26 April

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1. Qatar International Islamic Bank (QIIK) Recommendation Share Price Implied Upside MARKET PERFORM QR62.40 +1.0% Risk Rating Target Price R-4 QR63.00 1Q2017 In-Line; Sharp Drop in Provisions & Opex Boosts Earnings Key Data Current Market Price (QR) Highlights 52wk High/52wk Low (QR)  Surge in profitability on a QoQ basis was driven by a sharp drop in provisions and opex, while YoY growth (+6.0%) was limited by a spike in opex. Net operating income gained by 10.4% QoQ to QR239.03mn due to a 18.9% drop in opex (QR81.56mn vs. QR100.60mn in 4Q2016). Total revenue only grew by 1.1% as investment income receded by 3.5% and net interest income ticked up by only 1.0%. On the other hand, the surge in the bottom-line QoQ was attributable to muted provisions. QIIK booked net provisions of QR2.52mn vs. QR98.22mn in 4Q2016. Spike in opex prevented further growth YoY. Net profit grew by 6.0% only due to 32.5% spike in opex.  Net loans and deposits displayed strong performance. QIIK’s loan book expanded by 7.6% YTD to QR29.31bn while deposits followed suit and grew by 8.4% YTD to QR28.88bn. Hence, LDR remained at 102% at the end of 1Q2017 vs. 2016 year-end. We are of the view that the aggressive growth in deposits was led by expensive deposits.  Asset quality continues to deteriorate, although not alarming. QIIK’s NPL ratio increased to 1.84% in1Q 2017 vs. 1.74% at the end of 2016. Although the NPL ratio is low, NPLs expanded by 13.1% QoQ to QR577mn after jumping by 11.7% YoY in 2016 (we are of the view that there is a legacy NPL of ~QR150mn which is most likely provisioned for). Moreover, the coverage ratio declined to 64% vs. 72% at the end of 2016.  Capitalization remains robust. QIIK’s CAR stood at 17.9% at the end of 1Q2017 vs. 19.5% at the end of 2016. QIIK QD ADR/GDR Ticker Reuters Ticker QIIK reports in-line net profit for 1Q2017. QIIK generated a net profit of QR236.51mn vs. QR118.37mn in 4Q2016 (+6.0% YoY) , in-line with our estimate of QR228.91mn (+3.3% variation). Moreover, net operating income was also in-line at QR239.03mn vs. our estimate of QR230.91mn (+3.5% variation). 6.4 Bloomberg Ticker Qatar International Islamic Bank (QIIK) is the smallest Shari’ah compliant bank among listed banks. The bank has a market share of 3% and 14% among listed banks and Shari’ah compliant banks, respectively. QIIK is focused on the real estate and retail segments which collectively make up 66% of the bank’s loan book. Currently, the bank is in the process of expanding into Morocco.  62.40 Dividend Yield (%) ISIN Sector* N/A QIIB.QA QA0006929879 Banks & Financial Svcs. 3-m Average Volume (‘000) Mkt. Cap. ($ bn/QR bn) Shares Outstanding (mn) 71.50/58.10 260.2 2.6/9.4 151.4 FO Limit* (%) 25.0 Current FO* (%) 11.0 1-Year Total Return (%) +5.9 Fiscal Year End December 31 Source: Bloomberg (as of April 25, 2017), *Qatar Exchange (as of April 25, 2017); Note: FO is foreign ownership Catalysts  Limited catalysts; Beyond a stabilization/recovery in oil prices, the following developments could be perceived positively by the market: 1) Clarity/progress on Morocco expansion and 2) significant increase in traded volumes. Recommendation, Valuation and Risks  Recommendation and valuation: We maintain our Price Target of QR63.00. QIIK is trading at a 2017e P/B and P/E of 1.6x and 12.6x, respectively. The stock offers an attractive yield of 6.4% in 2017. The market is currently factoring in a RoE of 15.6% (P/B of 1.6x) which is in-line with our estimates. Moreover, the stock trades at a 2018e PEG of 1.3x (based on a 2016-2021e earnings CAGR of 8.6% vs. 3.1% in the previous 5 years. This implies, the stock is trading around its fair value.  Risks: 1) Exposure to the real estate and consumer segments creates concentration risk which further results in impairments. Key Financial Data and Estimates Reported/Headline EPS (QR) EPS Growth (%) P/E (x) Tangible BVPS (QR) P/TB (x) DPS (QR) Dividend Yield (%) FY2016 5.18 0.1 12.0 37.4 1.7 4.00 6.4 FY2017e 5.45 5.2 11.4 38.4 1.6 4.00 6.4 FY2018e 5.92 8.6 10.5 39.8 1.6 4.25 6.8 FY2019e 6.83 15.4 9.1 41.9 1.5 4.50 7.2 Shahan Keushgerian +974 4476 6509 shahan.keushgerian@qnbfs.com.qa Saugata Sarkar +974 4476 6534 saugata.sarkar@qnbfs.com.qa Source: Company data, QNBFS Research; Note: All data based on current number of shares Wednesday, 26 April 2017 1
2. Detailed Financial Statements FY2016 FY2017e FY2018e FY2019e RoAE (Attributable) 13.2 13.0 13.8 15.4 RoAA (Attributable) 1.8 1.7 1.7 1.8 RoRWA (Attributable) 2.5 2.4 2.4 2.5 NIM (% of IEAs) 2.7 2.7 2.7 2.7 NIM (% of RWAs) 3.4 3.4 3.4 3.4 NIM (% of AAs) 2.4 2.4 2.4 2.4 Spread 2.3 2.3 2.2 2.1 Cost-to-Income (Headline) 25.3 24.2 23.6 23.4 Cost-to-Income (Core) 26.0 25.3 24.7 24.4 Ratios Profitability (%) Efficiency (%) Liquidity (%) LDR 102.2 102.2 99.0 98.3 Loans/Assets 64.0 62.8 64.3 65.8 Cash & Interbank Loans-to-Total Assets 13.7 15.3 13.2 11.4 Deposits to Assets 62.6 61.5 64.9 66.9 Wholesale Funding to Loans 31.5 35.4 30.5 28.3 132.0 127.2 130.5 129.4 NPL Ratio 1.8 2.0 2.0 1.6 NPLs to Shareholder's Equity 9.0 9.9 10.8 9.6 NPLs to Tier 1 Capital 8.6 9.9 10.8 9.7 IEAs to IBLs Asset Quality (%) Coverage Ratio 71.5 86.0 98.9 123.3 ALL/Average Loans 1.3 1.6 2.0 2.0 Cost of Risk 0.4 0.4 0.4 0.3 Tier 1 Ratio 19.5 17.7 16.9 16.1 CAR 19.5 17.7 16.9 16.1 Tier 1 Capital to Assets 13.9 12.7 12.2 11.3 Tier 1 Capital to Loans 21.7 20.1 18.9 17.2 Tier 1 Capital to Deposits 22.2 20.6 18.8 16.9 7.5 8.0 8.2 8.8 3.8 5.4 8.1 10.8 Capitalization (%) Leverage (x) Growth (%) Net Interest Income Non-Interest Income -17.6 7.9 8.5 1.1 OPEX -0.7 1.1 5.9 8.0 Net Operating Income -0.2 7.4 8.9 9.6 Net Income (Attributable) -2.9 1.0 9.3 16.4 Loans 9.0 7.0 9.4 15.2 -0.1 7.0 13.0 16.0 Assets 5.0 9.0 7.0 12.5 RWAs 7.0 9.2 7.6 9.9 Deposits Source: Company data, QNBFS Research Wednesday, 26 April 2017 2
3. Income Statement (In QR mn) FY2016 FY2017e FY2018e FY2019e Net Interest Income 1,014 1,069 1,155 1,280 Fees & Commissions 118 127 140 131 FX Income 41 25 28 34 Other Income 34 56 58 64 193 208 226 228 Total Revenue 1,207 1,277 1,381 1,509 Operating Expenses (305) (308) (327) (353) 1,156 Non-Interest Income Net Operating Income Net Provisions Net Profit Before Taxes, Non-Recurring Items & Minority Interest Minority Interest 902 968 1,055 (117) (143) (158) (121) 785 825 897 1,035 0 0 0 0 Net Profit (Headline/Reported) 785 825 897 1,035 Payment on Tier-1 Sukuk (23) (55) (55) (55) Social & Sports Contribution Fund (20) (21) (22) (26) Net Profit (Attributable) 742 750 819 954 FY2016 FY2017e FY2018e FY2019e Cash & Balances with Central Bank 2,038 2,138 2,094 1,943 Interbank Loans 3,771 4,953 4,464 4,408 Net Investments 7,375 7,954 8,905 10,311 27,233 29,135 31,882 36,731 Investment In Associates 337 338 339 340 Other Assets 686 626 679 776 Net PP&E 681 794 828 910 Source: Company data, QNBFS Research Balance Sheet (In QR mn) Assets Net Loans Investment in Real Estate Total Assets 431 427 424 420 42,551 46,364 49,614 55,838 Liabilities Interbank Deposits 6,039 7,778 7,177 7,834 Customer Deposits 26,640 28,505 32,210 37,364 Other Borrowings 2,548 2,548 2,548 2,548 Tier-1 Sukuk 1,000 1,000 1,000 1,000 Other Liabilities 647 713 644 747 Total Liabilities 36,874 40,543 43,579 49,493 5,677 5,821 6,035 6,345 42,551 46,364 49,614 55,838 Total Shareholders’ Equity Total Liabilities & Shareholders’ Equity Source: Company data, QNBFS Research Wednesday, 26 April 2017 3
4. Recommendations Risk Ratings Based on the range for the upside / downside offered by the 12 month target price of a stock versus the current market price Reflecting historic and expected price volatility versus the local market average and qualitative risk analysis of fundamentals OUTPERFORM Greater than +20% R -1 Significantly lower than average ACCUMULATE Between +10% to +20% R -2 Lower than average MARKET PERFORM Between -10% to +10% R -3 Medium / In-line with the average REDUCE Between -10% to -20% R -4 Above average UNDERPERFORM Lower than -20% R -5 Significantly above average Contacts Saugata Sarkar Shahan Keushgerian Zaid Al Nafoosi, CMT, CFTe Head of Research Senior Research Analyst Senior Research Analyst Tel: (+974) 4476 6534 Tel: (+974) 4476 6509 Tel: (+974) 4476 6535 saugata.sarkar@qnbfs.com.qa shahan.keushgerian@qnbfs.com.qa zaid.alnafoosi@qnbfs.com.qa Mohamed Abo Daff QNB Financial Services Co. WLL Senior Research Analyst Contact Center: (+974) 4476 6666 Tel: (+974) 4476 6589 PO Box 24025 mohamed.abodaff@qnbfs.com.qa Doha, Qatar Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services Co. WLL (“QNBFS”) a wholly-owned subsidiary of Qatar National Bank Q.P.S.C. (“QNB”). QNBFS is regulated by the Qatar Financial Markets Authority and the Qatar Exchange QNB is regulated by the Qatar Central Bank. This publication expresses the views and opinions of QNBFS at a given time only. It is not an offer, promotion or recommendation to buy or sell securities or other investments, nor is it intended to constitute legal, tax, accounting, or financial advice. QNBFS accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. We therefore strongly advise potential investors to seek independent professional advice before making any investment decision. Although the information in this report has been obtained from sources that QNBFS believes to be reliable, we have not independently verified such information and it may not be accurate or complete. QNBFS does not make any representations or warranties as to the accuracy and completeness of the information it may contain, and declines any liability in that respect. For reports dealing with Technical Analysis, expressed opinions and/or recommendations may be different or contrary to the opinions/recommendations of QNBFS Fundamental Research as a result of depending solely on the historical technical data (price and volume). QNBFS reserves the right to amend the views and opinions expressed in this publication at any time. It may also express viewpoints or make investment decisions that differ significantly from, or even contradict, the views and opinions included in this report. This report may not be reproduced in whole or in part without permission from QNBFS COPYRIGHT: No part of this document may be reproduced without the explicit written permission of QNBFS. 4