KSA Research

BANQUE SAUDI FRANSI (BSFR) August 3, 2010

CMP: SAR 45.6
Sound fundamentals and growth at discount
Banque Saudi Fransi (BSFR) has established itself as a niche corporate bank in the
country and is an associate company of the Credit Agricole Group. It is the 4th largest
bank with a market share of 12% in Total Assets and 11% in terms of credit. Report Purpose
Coverage Initiation
Investment Highlights
• We are bullish on Saudi Fransi and believe that its credit growth could continue on
back of:
− Re-positioning itself from Niche to Mass Bank – This would widen its client Recommendation
base and offer cross-selling opportunities. Target Price: SR 56.0
− Strong presence in project finance – It enjoys a strong corporate finance BUY
franchise which in our view would be beneficial in 2011e
− Renewed focus on retail banking – a key positive – BSFR was virtually non-
existent in the retail space and thus offers tremendous scope of growth
Stock Details
Exchange / Code TASI / 1050
• Fee Income drivers in place; positive for bottom-line – We opine that fee income
should benefit from increased focus on retail banking and rising POS transactions; Bloomberg Code BSFR AB
overall positive trend for trade related activities and due to its strong franchise in Equity Capital SAR 7.23bn
corporate finance and equity markets Face Value SAR 10
52-Week H/L SAR 48.50 / 38.00
• Cost Management is much better – BSFR has been a very efficient bank with its Market Cap SAR 32.98bn
cost-to-income ratio being the lowest among its local peers which gives it an edge in
terms of profitability
Shareholding Pattern
Key Negatives
• Retail to shape up a muted NPL trend– With increased retail focus and absence of Calyon 31.11%
any one-off corporate defaults, we believe that going forward, NPL’s could remain flat GOSI 12.84%
primarily driven by retail segment, under the assumption that retail book will be grown Rashed Abdul Rahman Al 9.83%
Rashed and Sons Company
diligently. Mohammed Ibrahim 5.02%
Mohammed Al Issa
• Declining Asset Yields should offset the low funding cost advantage thereby keeping Public 41.2%
margins flat
48.00

46.00

Initiate with BUY rating; Target price SAR 56.00 44.00

We initiate on Banque Saudi Fransi with a BUY rating and use residual income method to 42.00

value it at SAR 56.00 per share. At 2010e, PB of 1.9x the stock trades at par to its local 40.00

peers, but in our view should trade at a premium primarily because of its higher 38.00
BSFR TASI
profitability, better cost control and relatively better asset quality. 36.00
May-10
Mar-10
Sep-09

Jan-10

Feb-10
Aug-09

Nov-09

Jul-10

Aug-10
Apr-10

Jun-10
Dec-09
Oct-09

Vishal Gupta
Vishal@bankmuscat.com
+968 24767158

Investment Banking Division August 2010

Equity Research 1
 KSA Research
Investment Summary
Credit outlook positive
Saudi Fransi reported a modest growth in loans as it ended H1’10 with a loan book of SAR 82bn translating to
4.7% growth on YTD basis. This compares favorably to the industry, which saw its credit, grow by 3.1% (until
June) as per SAMA. We are bullish on Saudi Fransi’s credit growth outlook due to the following factors:

Re-positioning itself from Niche to Mass Bank

Historically, Banque Saudi Fransi (BSFR) has maintained its image as a niche service provider for the
corporate sector. However, our recent interaction with the management makes us believe that the bank is trying
to re-position itself from being a niche corporate bank to a more mass oriented bank on both corporate and
retail side. The bank seems to be eyeing cross selling opportunities through its existing strong corporate
relationships. Moreover, the management seems to have made inroads into tapping the second rung of Saudi
Corporate sector and thus lending width to its client base. This in our view would further enable it to rebalance
its credit portfolio and accordingly capitalize on growth across different sectors.

We take support from the fact that in 2009, though total corporate credit declined by 2.9%, we observe that
while the bank has seen a decline in recession prone sectors such as commerce (decline of 9% Y-o-Y) and
building & construction (decline of 22.5% Y-o-Y), it managed to successfully grow its presence in other
sectors such as transport & communications (Y-o-Y growth of 20%); utilities & healthcare sectors (38.8% Y-o-
Y); and Mining & Quarrying sector (88% Y-o-Y). Saudi Fransi bank captured 62% of total net adds to Mining
& Quarrying sector; 24% of net adds to Utilities and Healthcare segments and outstripped the industry level
growth to Transport & Communications segment.
Movement in BSFR's credit book during 2009 (SAR mn) Movement in credit during 2009 for the sector (SAR mn)
1,500 15,000
1,000
10,000
500
5,000
-
(500) -
(1,000)
(5,000)
(1,500)
(10,000)
(2,000)
(2,500) (15,000)

Transprt & Comm

Manfcrng

Mining & Quarry

Transprt & Comm
Building & Const

Manfcrng

Commerce
Mining & Quarry

Consumer

Building & Const

Commerce
Govt

Utilities & Health

Consumer
Services

Other
Govt

FIG

Agri

Utilities & Health

Services
Other
FIG

Agri

Source: Company Reports; SAMA; BankMuscat Equity Research

As we had mentioned earlier (in our Saudi Banking Initiation report dated 26 May, 2010) around 3/4th of total
corporate credit in the system is short-term in nature representing core business loans to finance working
capital needs of the corporate sector. Credit book for Saudi Fransi is similarly skewed towards working capital
finance driven corporate demand with short-term loans forming 62% of total corporate book (as at end of
2009). We continue to believe that as the upfront payments made by government to the contractors/developers
involved in key projects are utilized the contractors and developers could again start approaching banks to re-
finance their working capital needs to ensure the timely completion of these key strategic projects thereby
driving credit growth in 2010e.

Strong presence in project finance

As per MEED estimates, the total project finance market in Saudi should be around SAR 113bn and taking
cues from the pipeline of financial closure deals in the country we believe that project finance could be the
main demand driver for medium to long term credit growth (Please refer to our Saudi banking Initiation report
dated 26 May, 2010 for a more detailed discussion). Saudi Fransi has remained active in the project finance
market benefitting from its parent – “Credit Agricole’s” strong corporate finance franchise. We thus opine that
the bank is in an advantageous position to play out its strengths going forward and thus forecast a corporate
credit growth for BSFR of 7.7% in 2010e and 9.5% for 2011e.

Investment Banking Division August 2010

Equity Research 2
 KSA Research
Renewed focus on retail banking – a key positive
Saudi Fransi has predominantly operated as a corporate bank which is evident from the credit portfolio mix
which is corporate heavy with an average contribution of 92% to total loan book over the last 5 years.
Additionally, corporate banking forms 58% of total assets in Q1’10, 29% contribution was from Treasury
segment while retail banking contributed 10%. In our view this offers a tremendous scope for the bank to
expand its retail franchise in the country.
Breakdown of Net Loans Breakdown of Total Assets - Q1'10 Retail Loans per Branch (FY09)
220 250
100%

6.1%
7.3%
7.6%

7.7%
95% 180 200

90% 140 150

Corporate
85%

93.9%
58%
92.7%
92.4%

92.3%
Retail 100 100
80% 10%
IB & 60 50
75%
Brokerage
70% 3% Treasury 20 -
29%
FY06 FY07 FY08 FY09 BSFR SHB RIBL ANB SABB
Corporate Retail No. of Branches - (LHS) CL/Branch (SAR mn) - (RHS)
Source: Company Reports; SAMA; BankMuscat Equity Research

BSFR has recently revamped its branches and in our view is well placed to capitalize on its strong brand
recognition to successfully tap in to the retail segment. With an aggressive capex plan of expanding its branch
network by 14% to 90 by end of 2011e from the current 79 branches, in our view should be seen in positive
light. We believe that overall Saudi market offers tremendous scope of growth in retail banking on back of
attractive demographics, increasing income levels and relatively low retail penetration (among GCC countries)
and thus are bullish on retail banking prospects in the country. (Please refer to our Saudi Banking Initiation
report dated 26 May, 2010 for a more detailed discussion).

KSA has the least retail penetration in the region BSFR expanding its retail network BSFR expanding its ATM network
Retail Credit Penetration - 2009

35.0% 100 16.0% 400 50.0%

30.0% UAE 350 40.0%
90 12.0%
Kuwait 300 30.0%
25.0% Bahrain
Oman
80 20.0%
20.0% 8.0% 250
70 10.0%
Qatar 200
15.0% 4.0% 0.0%
KSA 60 150 -10.0%
10.0%
50 0.0% 100 -20.0%
5.0%
2011e
May-10

May-10
2005

2006

2007

2008

2009

2005

2006

2007

2008

2009
0.0%
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%
Retail Loan Growth - 2009 BSFR (No of Branches) Growth (%) No of ATM's (BSFR) Growth (%)
Source: Company Reports; Central Bank Publications; BankMuscat Equity Research

We would like to point out that while total loan book for BSFR declined by 2.6% in 2009, consumer loans
grew by 22% Y-o-Y over the same period thereby mitigating the impact of declining corporate book.
Additionally, retail banking seems to be more profitable as despite its low share in total assets, it contributes
31% to Total Operating Income (as at end of Q1’10) as compared to corporate banking’s share of 45%.
Moreover, retail segment enjoys relatively higher ROA of 4.0% (as of Q1’10) as against corporate segment’s
ROA of 2.2%.

Investment Banking Division August 2010

Equity Research 3
 KSA Research
Breakdown of Net Special Commission Income - 2009 Breakdown of Total Income - Q1'10

IB & Brokerage IB & Brokerage

4% 3%

Retail Retail
Treasury 31% Treasury 31%
19% 21%

Corporate Corporate
46% 45%

50.0% Retail loans steadily rising Retail Banking more profitable - yields higher ROA

40.0% 100%
90%
30.0% 80%

4.0%
3.7%
4.0%
70%

7.3%
20.0% 60%
50%
10.0% 40%
30%
0.0%

2.2%
1.8%
1.9%
20%

2.1%
10%
-10.0%
0%
FY05 FY06 FY07 FY08 FY09
FY07 FY08 FY09 Q110

Retail (Y-o-Y) Corporate (Y-o-Y) Corporate Retail

Source: Company Reports; BankMuscat Equity Research

We thus remain bullish on Saudi Fransi’s efforts to aggressively grow its retail presence and forecast BSFR to
achieve 25% growth in retail credit in 2010e and 27.8% in 2011e. Our growth assumptions translate to total
credit growth of 9% for 2010e and 10.5% for 2011e for Banque Saudi Fransi.

Deposits need to grow in-line with loans

A faster sequential growth of 4.9% in deposits as compared to 3.0% Q-o-Q growth in loans marginally
improved the LTD ratio to 89.1% from 90.7% in Q110 which continues to remain higher than its local peers
which average around 87% for Q210. Moreover, on YTD basis, while deposit base grew only 0.8%, loan
growth of 4.7% outpaced deposit growth. However, we opine that with increased retail focus and funding costs
being at an all time low, the bank could look to hoard liquidity in order to secure growth going forward and
thus estimate deposits to grow at a faster rate than loans in H2’10 and 2011e. Thus, our assumptions translate
to deposit growth of 7.5% for 2010e and 11% for 2011e.

NPL’s to be driven by retail but at a much lower pace

In 2009, Saudi Fransi too was a victim of twin defaults from SAAD and AHAB groups, which surged the gross
provisioning charges to SAR 621mn (up 220% Y-o-Y). Though NPLs also saw a similar trend but the quantum
of increase was much lower (compared to provisioning charges) at 32% Y-o-Y increasing from SAR 764mn in
2008 to SAR 1,008mn in 2009. As a result, coverage ratio improved from 111% in 2008 to 127% as at end of
2009.

Saudi Fransi has one of the best asset book quality among its peers (under our coverage) and ended 2009 with a
NPL/GL ratio of 1.3% as compared to 5.9% for Saudi Hollandi bank; 4.5% for Saudi British bank and 1.2%
for Riyad Bank. Moreover, its coverage continued to remain healthy at 127% second only to Riyad Bank’s
coverage of 141%.

Investment Banking Division August 2010

Equity Research 4
 KSA Research

BSFR - Coverage remains healthy BSFR - NPL/GL ratio among the best
1.4% 2.0x 6.0%
1.2% 1.8x 5.0%
1.0% 4.0%
1.5x
0.8%
1.3x 3.0%
0.6%
1.0x 2.0%
0.4%
0.8x 1.0%
0.2%
0.0% 0.5x 0.0%
2007 2008 2009 2007 2008 2009

NPL/GL (LHS) Cost of Risk (LHS) Coverage (RHS) BSFR RIBL SABB SHB

BSFR - Coverage adequate BSFR - Increase in LLP manageable

3.0x 3.0%
2.5x 2.5%
2.0x 2.0%
1.5x 1.5%
1.0x 1.0%
0.5x 0.5%
0.0x 0.0%
2007 2008 2009 2007 2008 2009

BSFR RIBL SABB SHB BSFR RIBL SABB SHB

Source: Company Reports; BankMuscat Equity Research

However, we believe that this asset quality deterioration from the corporate book was more one-off and believe
that asset quality should improve going forward. We take support from the fact that the bank has aggressively
reduced its corporate exposure to relatively riskier and recession prone sectors such as commerce (where
NPL/GL averaged at 1.3%); Building & Construction sectors (where NPL/GL averaged at around 3.4%) and
Services sector (where NPL/GL averaged at 2.0%). Moreover, BSFR diverted its resources to more stable and
low risk sectors such as Transport & Communications (Where NPL/GL averaged at around 0.5%); Utilities &
Healthcare sector (which has average NPL/GL of 0%) and Mining & Quarrying sector (where NPL/GL
averaged at 0.6%). We thus believe that going forward; quantum of corporate NPLs should be lower due to the
reallocation of sector exposure.

Consumer loans have seen an average NPL/GL of 2.8% that increased to 3.2% during the financial turmoil.
With increased focus on retail banking, we could see incrementally higher NPLs coming from retail segment
(in absolute terms) but we anticipate an overall improvement in asset quality on back of improving spending
power and macro conditions and thus forecast declining NPL/GL for retail segment. Historically, retail NPLs
have contributed to around 20% of total NPLs and we assume this to increase to 22.4% over the next 3 years.
BSFR increased exposure to lower risk sectors 1.30% 80.0%
100.0% 5.0%
80.0% 3.5% 70.0%
60.0% 1.17%
2.0% 60.0%
40.0%
0.5% 50.0%
20.0% 1.04%
0.0% -1.0%
40.0%
-20.0% -2.5%
0.91% 30.0%
-40.0% -4.0%
20.0%
Manfcrng

Building & Const

Transprt & Comm

Mining & Quarry

Consumer
Commerce
Govt

Utilities & Health

Services

Other
FIG
Agri

0.78%
10.0%
0.65% 0.0%
FY08 FY09 FY10e FY11e FY12e

NPL/GL (%) - LHS NPL (Y-o-Y %) - RHS

Credit Y-o-Y (%) - (LHS) Avg NPL/GL (RHS)
Source: Company Reports; BankMuscat Equity Research

We thus, estimate the growth rate of NPLs to slow down going forward from 32% in 2009 to 12% in 2010e
and further to 7% in 2011e. As a result, we expect the NPL/GL ratio to peak at 1.30% in 2010e and marginally
improve thereafter to 1.26% and 1.20% in 2011e and 2012e respectively.

Investment Banking Division August 2010

Equity Research 5
 KSA Research
Credit impairment charges in 2009 increased 5x over 2008 levels to SAR 575mn thereby mirroring the trend of
NPLs. As a result, cost of risk (net of recoveries) increased from 0.12% in 2008 to 0.72% in 2009. While in
2008, retail segment dominated the credit impairment charges, the trend reversed in 2009 with corporate sector
forming the bulk of the charges. While the retail’s average quarterly rate of LLP charges increased from SAR
31mn in 2008 to SAR 38mn in 2009, it was the corporate sector, which went from net recoveries of SAR
8.7mn in 2008 to provisions of SAR 105mn in 2009. This was primarily due to the twin corporate defaults of
SAAD and AHAB groups.

Looking at Q1’10, segmental information, we find that contribution of retail book (at SAR 31mn) to total
credit impairment charges increased from 27% for 2009 to 58% in Q1’10 but remained lower than average
quarterly rate of 2009. On the other hand, share of corporate sector of SAR 22.5mn declined from 73% in 2009
to 42% in Q1’10 and was much lower than average quarterly rate for 2009. This is in-line with our view that
NPLs and provisioning should be retail driven going forward. However, absence of one-off charges such as
SAAD and AHAB exposures and a healthy coverage ratio could see the cost of risk declining from 0.8% in
2009 to 0.6% in 2010e and 0.5% in 2011e.

LLP charges - Retail vs. Corporate Credit Losses (net) - SAR (mn)
100% 800 0.8%
16%

39%

42%
80%
600 0.6%
75%

86%
60%
400 0.4%
84%

40%
61%

58% 200 0.2%

20%
22%

15%

0% - 0.0%
Q109 Q209 Q309 Q409 Q110 FY08 FY09 FY10e FY11e FY12e
Retail (LLP Charges) Corporate (LLP Charges) Credit Losses, Net (SAR mn) - (LHS) Cost of Risk (%) - (RHS)
Source: Company Reports; BankMuscat Equity Research

Two Opposing forces to keep margins flattish

BSFR’s average effective cost of funds have been on a declining trend as it declined from 2.6% in 2008 to
1.0% in 2009 primarily driven by reducing interest rates and improving deposit mix. During 2009, Saudi Fransi
improved its deposit mix as it increased its Demand and Savings Deposits by 19% and 14% respectively while
focusing on drawing down its time and other deposits, which declined by 9% and 43% respectively. As a
result, proportion of demand deposits improved from 31% in 2008 to 37% in 2009. While the proportion of
time deposits reduced from 65% to 60%. This further helped BSFR to reduce its funding costs to 0.5% in
Q110. Moreover, the proportion of free funds increased from 28% in 2008 to 39% in 2009. We thus believe
that despite an overall higher pace of deposit growth the overall low costs could keep costs under check.

BSFR Deposit mix improved in 2009 Proportion of free funds increased

100% 45.0%
38.8%
90% 40.0%
80% 35.0% 30.6%
70% 30.0% 27.9%
60%
25.0%
50%
40% 20.0%
30% 15.0%
20% 10.0%
10% 5.0%
0%
0.0%
FY06 FY07 FY08 FY09
FY07 FY08 FY09
Demand Savings Time Other
Source: Company Reports; BankMuscat Equity Research

Investment Banking Division August 2010

Equity Research 6
 KSA Research
On the other hand, asset yields have also experienced a downhill journey as they declined from 5.3% in 2008 to
3.8% in 2009 and further to 3.1% in Q110. Our analysis reveals that in addition to lower investment yields in
general, downward re-pricing of loan book could be the main reason for this. We are of the view that as
increased lending goes towards relatively safer government backed projects, improving yields may not be easy.
We thus forecast margins to remain flat in 2010e as lower asset yields offset the low cost benefit. However, we
believe that as interest rates start moving up by H2’11, BSFR could benefit on back of its asset yields moving
up faster than its costs thereby expanding margins and we thereby forecast margins to gradually improve from
2011e onwards.

7.0% Margins Trend Net special commission income - Trend

4,500 25.0%
6.0% 4,000
5.0% 3,500 20.0%
3,000
4.0% 15.0%
2,500
3.0% 2,000
10.0%
2.0% 1,500
1,000 5.0%
1.0%
500
0.0% - 0.0%
FY07 FY08 FY09 FY10e FY11e FY12e FY07 FY08 FY09 FY10e FY11e FY12e

Effective Asset Yield Effective Cost of Funds NII (LHS) - SAR mn Y-o-Y (%) - RHS

Source: Company Reports; BankMuscat Equity Research

Fee Income drivers in place; positive for bottom-line

Almost a third of total income comes from fee and investment income for Saudi Fransi bank out of which fee
income contributes around 82.5% (average of last 5 quarters) and the remaining is investment income.
Moreover, majority of its fee income comes from Trade Finance, Corporate Finance & Advisory Services and
Share trading & Fund Management activities contributing 27%, 25% and 23% respectively to gross Fee
income from banking services. We are optimistic for fee income on back of improving trade activities, rising
POS transactions and a strong 2011e outlook for project financing activities.

POS Transactions picking up POS Sales increasing Trade Activity seems to be picking up
40,000 15.0% 20,000 30.0% 60,000 40.0%
35,000 10.0% 20.0% 50,000
30,000 15,000 20.0%
25,000 5.0% 40,000
10.0%
20,000 0.0% 10,000 30,000 0.0%
15,000 0.0% 20,000
-5.0% -20.0%
10,000 5,000 10,000
-10.0% -10.0%
5,000
- -40.0%
- -15.0% - -20.0%
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210

Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210

New LC's Opened (SARmn) - (LHS)

POS Transactions (mn) Q-o-Q (%) - RHS POS Sales (SAR mn) Q-o-Q (%)-LHS Q-o-Q (%) - RHS
Source: SAMA; BankMuscat Equity Research

Fee income should benefit from increased focus on retail banking and rising POS transactions
As per SAMA data, point of sale transactions and value continued to show an uptrend clocking the highest
quarterly growth of 9.4% and 15.1% respectively in Q2’10. Moreover, as mentioned earlier in the report with
its increased focus on retail banking, we believe that Saudi Fransi bank is well placed to benefit from this trend.

Overall LC’s trend remains positive

Though the new LC’s opened for the month of Jun 2010, declined (M-o-M basis) but the overall trend during
the year has remained positive thereby reflecting an overall improvement in trade related activities. Moreover,
on back of buoyant macro environment, ongoing government spending and a vibrant construction sector could
further enhance the demand for Bank Guarantees and LC’s which in turn would act as a driver for bank’s fee
income.

Investment Banking Division August 2010

Equity Research 7
 KSA Research
Strong franchise in corporate finance and equity markets
Corporate finance and advisory (CFA) has been a forte for Saudi Fransi bank and as a result, fee income from
CFA activities grew by 28% in 2009 despite an overall poor market in 2009. Additionally, as mentioned
earlier, project financing activity in the country in our view should remain strong over the medium to long
term, which makes us optimistic on BSFR to generate strong investment banking fee income.

Saudi Fransi also enjoys a strong franchise in the brokerage activities with a market share ranging between 9%
- 10.5% over the last few months. It has consistently remained in the top-five brokerage houses in Saudi in
terms of both volumes and value traded. Though the equity markets in Saudi Arabia have remained lower on a
Y-o-Y basis, but it continues to remain a steady source of income for the bank contributing around 23% of total
fee income in 2009. Moreover, the IPO and Sukuk markets are expected to remain strong in Saudi with
estimated SAR 2.6bn worth of IPO’s and SAR 2.1bn worth of Sukuk issues being still in the pipeline.

We thus remain optimistic on fee income growth on back of above-mentioned factors together with the loan
and banking services linked portion of fees and commission and forecast fee income to grow at a healthy pace
for BSFR at 10% and 11% for 2010e and 2011e respectively.
Fee income drives Non-Int Income Non-Interest Income growth Trend BSFR - Breakdown of Fee Income
100% 2,000 20.0% Share trading and
10.0% fund management
80% 1,500
12% Trade finance
60% 0.0% 25%
1,000 11%
40% -10.0% Corporate finance
and advisory
20% 500
-20.0% 25% 27% Cards products
0% - -30.0%
FY10e

FY11e

FY12e
FY07

FY08

FY09

FY10e Other banking

FY11e

FY12e
FY07

FY08

FY09

services
Fee Based Income Investment & Trading Income Total Non-Interest Income
Source: Company Reports; BankMuscat Equity Research

Cost Management is much better

Banque Saudi Fransi has always managed to control its operating costs better than its peers which is evident
from its relatively lower cost-to-income ratio which has averaged around 27.2% over the last five quarters as
compared to 33.5% for is comparable peers. We are bullish on overall efficiency of the bank and thus opine
that despite the incremental capex required to ramp up its branch network and enhance its retail presence, the
bank would ensure the cost-to-income ratio to remain well under control and thus retain its competitiveness
and efficiency.

BSFR's cost management is better

38.0%
35.0%
32.0%
29.0%
26.0%
23.0%
20.0%
Q109 Q209 Q309 Q409 Q110 Q210e

Consolidated Saudi Fransi

Source: Company Reports; BankMuscat Equity Research

Investment Banking Division August 2010

Equity Research 8
 KSA Research
Initiate with BUY; Target price at SAR 56.00
We value Banque Saudi Fransi (BSFR) using a residual income approach in which the intrinsic value of a bank
is the sum of current NAV and the present value of future excess earnings. We use a risk free rate of 5%, risk
premium of 7.5% and a beta of 0.96 (which is calculated over the last 3 years) to arrive at a cost of equity of
12.2%. We further assume a terminal ROE of 20% and thus value BSFR at SAR 56.0 per share translating to
an implied PB 2010e of 2.4x and 2011e PB of 2.1x.

At 2010e PB of 1.9x the stock trades at par to its local peers, however due to higher 2010e ROE expectation of
17.7% (as compared to local peer group average of 12.6%) together with better cost control and superior asset
quality, we feel that the stock should trade at a premium to its peers. We therefore, initiate BSFR with a BUY
rating. Moreover, if we compare the 2011e ROE vs. P/B parameters for all the banks under our coverage, we
find that BSFR, which trades at par with other banks, offers the maximum ROE and thus supports our BUY
rating on the stock. Our sensitivity analysis of our target price by varying the terminal ROE with the cost of
equity yields the most probable price range of SAR 48.24 – 65.31 per share.
PE PB ROE % PE PB ROE %
QATAR BANKS OMAN BANKS
2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e
Qat. National Bank 10.5x 8.9x 2.4x 2.1x 23.8% 23.3% Bank Muscat 10.4x 8.1x 1.4x 1.3x 14.6% 15.7%
Qat. Islamic Bank 9.1x 7.7x 1.9x 1.7x 17.9% 20.0% Bank Dhofar 17.2x 15.1x 2.6x 2.3x 15.0% 15.4%
Comm. Bank Of Qatar 9.2x 7.6x 1.3x 1.2x 13.9% 15.9% Nat. Bk. Of Oman 9.9x 8.5x 1.4x 1.3x 14.3% 15.5%
Rayan 12.1x 10.7x 1.5x 1.5x 13.7% 14.2% Oman Int. Bk. 11.5x 11.0x 1.5x 1.5x 12.9% 13.4%
Doha Bank 8.1x 6.7x 1.5x 1.3x 17.7% 19.5% Bank Sohar 17.9x 14.4x 1.9x 1.7x 11.2% 12.5%
Intl. Islamic Bank 9.6x 7.7x 1.6x 1.5x 16.6% 19.8% Ahli Bank 15.2x 12.7x 1.9x 1.8x 13.2% 14.8%
Mean 9.8x 8.2x 1.7x 1.6x 17.3% 18.8% Mean 13.7x 11.6x 1.8x 1.6x 13.5% 14.6%
Median 9.4x 7.7x 1.6x 1.5x 17.2% 19.7% Median 13.4x 11.9x 1.7x 1.6x 13.8% 15.1%

PE PB ROE % PE PB ROE %
SAUDI BANKS UAE BANKS
2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e
Al Rajhi Bank 16.5x 13.1x 3.9x 3.4x 23.6% 26.7% National Bank of AD 7.9x 6.5x 1.4x 1.2x 18.4% 18.9%
Samba Financial Group 11.4x 9.6x 2.1x 1.9x 19.5% 20.0% First Gulf Bank 5.9x 4.6x 0.9x 0.9x 16.1% 18.7%
Riyad Bank 13.9x 12.5x 1.4x 1.3x 10.6% 10.9% Emirates NBD 5.8x 3.6x 0.5x 0.4x 7.6% 12.0%
The Saudi British Bank 15.2x 12.4x 2.3x 2.1x 16.1% 17.7% Dubai Islamic Bank 8.0x 6.3x 0.8x 0.7x 11.0% 11.2%
Banque Saudi Fransi 11.4x 9.9x 1.9x 1.7x 17.7% 18.2% AD Commercial Bank - 5.5x 0.6x 0.6x 0.3% 8.3%
Arab National Bank 11.5x 9.7x 1.6x 1.5x 15.2% 15.5% Union National Bank 5.8x 4.6x 0.7x 0.6x 12.8% 13.8%
Saudi Hollandi Bank 20.3x 16.5x 1.9x 1.7x 9.6% 11.0% AD Islamic Bank 6.9x 4.6x 1.0x 0.9x 15.2% 20.6%
The Saudi Investment Bank 18.6x 11.6x 1.2x 1.1x 6.7% 10.1% Mean 6.7x 5.1x 0.8x 0.8x 11.6% 14.8%
Bank AlBilad 46.4x 23.6x 1.9x 1.7x 4.2% 7.6% Median 6.4x 4.6x 0.8x 0.7x 12.8% 13.8%
Bank AlJazira 32.8x 13.3x 1.1x 1.0x 3.4% 8.0%
Mean 19.8x 13.2x 1.9x 1.7x 12.6% 14.6% PE PB ROE %
BAHRAIN BANKS
Median 15.9x 12.5x 1.9x 1.7x 12.9% 13.2% 2010e 2011e 2010e 2011e 2010e 2011e
Ahli United Bank 11.5x 8.9x 1.4x 1.3x 12.4% 14.8%
PE PB ROE % National Bank of Bahrain 9.8x 9.2x 2.0x 1.8x 18.9% 18.4%
KUWAIT BANKS
2010e 2011e 2010e 2011e 2010e 2011e Bahrain Islamic Bank 18.2x 9.4x 0.8x 0.8x 4.0% 7.2%
National Bank Of Kuwait 12.5x 11.0x 2.0x 1.8x 16.5% 18.3% Gulf Finance House - - 0.7x 0.7x -5.0% -1.5%
Commercial Bank Of Kuwait 37.8x 15.2x 2.4x 2.2x 4.3% 13.9% Mean 13.2x 9.2x 1.2x 1.1x 7.6% 9.7%
Al-Ahli Bank Of Kuwait 16.3x 13.6x 1.6x 1.5x 11.4% 11.3% Median 11.5x 9.2x 1.1x 1.0x 8.2% 11.0%
Burgan Bank 17.0x 11.1x 1.1x 1.0x 7.2% 9.5%
Kuwait International Bank 30.3x 17.8x 1.2x 1.1x 4.5% 7.2%
Mean 22.8x 13.8x 1.7x 1.5x 8.8% 12.0% Combined Mean 14.8x 10.4x 1.6x 1.4x 12.3% 14.4%
Median 17.0x 13.6x 1.6x 1.5x 7.2% 11.3% Combined Median 11.5x 9.7x 1.5x 1.4x 13.4% 14.8%
Source: Bloomberg Consensus Estimates; BankMuscat Equity Research
Note: 2010e and 2011e numbers for Omani Banks (excl. BKMB); SABB; RIBL and SHB are our estimates while others are consensus estimates

2011e ROE - P/B Mapping

20.0%
Terminal Return on Equity
BSFR
56.00 16.0% 18.0% 20.0% 22.0% 24.0%
SABB
Cost of Equity

17.5% 11.2% 51.04 57.41 63.78 70.14 76.51

NBOB 11.7% 48.10 53.84 59.57 65.31 71.05
15.0% BKDB 12.2% 45.62 50.81 56.00 61.19 66.38
ABOB
12.7% 43.53 48.24 52.95 57.65 62.36
OIBB
12.5% BKSB
13.2% 41.76 46.04 50.33 54.61 58.89

RIBL SHB
10.0%
1.0x 1.3x 1.5x 1.8x 2.0x 2.3x 2.5x

Source: Bloomberg Consensus Estimates; BankMuscat Equity Research

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 KSA Research
Financial Statements
Income Statement (SAR mn) FY08 FY09 FY10e FY11e FY12e Balance Sheet (SAR mn) FY08 FY09 FY10e FY11e FY12e
Special commission income 5,298 4,089 3,667 4,447 5,372 Cash and balances with SAMA 5,773 12,631 15,367 16,914 18,316
Y-o-Y Growth 7.2% -22.8% -10.3% 21.2% 20.8% Due from banks and other financial institutions 4,246 7,111 6,044 6,346 6,854
Special commission expense 2,478 1,039 528 869 1,285 Investments, net 27,710 17,481 18,749 20,277 22,203
Y-o-Y Growth -6.3% -58.1% -49.1% 64.5% 47.8% Y-o-Y Growth 23.2% -36.9% 7.3% 8.1% 9.5%
Net special commission income 2,821 3,050 3,139 3,577 4,088 Loans and advances, net 80,866 78,315 85,270 94,250 105,662
Y-o-Y Growth 22.8% 8.1% 2.9% 14.0% 14.3% Y-o-Y Growth 35.1% -3.2% 8.9% 10.5% 12.1%
Investment in associates 177 144 144 145 147
Fee Based Income 1,125 1,036 1,132 1,251 1,387 Property and equipment, net 591 606 618 631 643
Y-o-Y Growth 3.2% -7.9% 9.3% 10.5% 10.8% Other assets 6,502 4,284 5,226 6,272 7,401
Fees from banking services, net 834 840 916 1,012 1,123 Total assets 125,865 120,572 131,419 144,834 161,225
Exchange income, net 241 186 205 225 247
Other operating income 50 10 12 14 17 Due to banks and other financial institutions 8,402 4,832 4,928 5,249 5,642
Customer deposits 92,791 91,237 98,080 108,869 122,477
Investment & Trading Income 446 208 240 273 306 Y-o-Y Growth 25.4% -1.7% 7.5% 11.0% 12.5%
Y-o-Y Growth 41.8% -53.3% 15.1% 14.0% 12.0% Debt securities in issue - - 2,421 2,421 2,421
Income (Loss) from FVIS financial instruments, net - - - - - Term Loans 4,927 4,946 4,946 4,946 4,946
Trading income, net 500 210 241 275 308 Other liabilities 5,675 3,806 3,939 3,919 3,860
Dividend income 2 0 0 0 0 Total liabilities 111,796 104,821 114,315 125,404 139,348
Gains (Losses) on non-trading investments, net (56) (2) (2) (2) (2)
Total Non-Interest Income 1,571 1,245 1,372 1,525 1,693 Total shareholders’ equity 14,047 15,733 17,085 19,411 21,859
Y-o-Y Growth 11.8% -20.8% 10.2% 11.1% 11.0% Total liabilities and shareholders’ equity 125,865 120,572 131,419 144,834 161,225

Total Income 4,392 4,295 4,511 5,102 5,780

Ratios FY08 FY09 FY10e FY11e FY12e
Y-o-Y Growth 18.7% -2.2% 5.0% 13.1% 13.3%
Capital Adequacy
Equity/Assets 11.2% 13.0% 13.0% 13.4% 13.6%
Total Operating Expenses 1,096 1,158 1,272 1,458 1,710
Equity/Average Net Loans 20.0% 19.8% 20.9% 21.6% 21.9%
Y-o-Y Growth 15.6% 5.7% 9.9% 14.6% 17.3%
Earnings
ROAA 2.5% 2.0% 2.3% 2.4% 2.5%
Total Operating Income 3,296 3,137 3,239 3,644 4,070
ROAE 22.2% 16.6% 17.7% 18.2% 18.2%
Y-o-Y Growth 19.7% -4.8% 3.2% 12.5% 11.7%
NIM 2.8% 2.8% 2.9% 3.1% 3.2%
Liquidity
Share in earnings of associates 12 (27) (0) 1 1
LTD Ratio 87.1% 85.8% 86.9% 86.6% 86.3%
Profit before LLP and Inv Impairments 3,308 3,109 3,239 3,644 4,072
Customer Deposits/Equity 6.6x 5.8x 5.7x 5.6x 5.6x
Y-o-Y Growth 20.2% -6.0% 4.2% 12.5% 11.7%
Customer Deposits/Total assets 73.7% 75.7% 74.6% 75.2% 76.0%
Net Loans / Total Assets 64.2% 65.0% 64.9% 65.1% 65.5%
Provision for credit losses, net 94 575 338 321 306
Liquid Assets / Total Assets 26.6% 25.0% 26.0% 25.7% 25.1%
Impairment of other financial assets 410 67 - - -
Due from Banks/Due to Banks 50.5% 147.2% 122.6% 120.9% 121.5%
PBT 2,804 2,468 2,900 3,323 3,766
PAT 2,804 2,468 2,900 3,323 3,766 Efficiency
Y-o-Y Growth 3.4% -12.0% 17.5% 14.6% 13.3% Cost to Income 25.0% 27.0% 28.2% 28.6% 29.6%
Shares 563 723 723 723 723 Non-Interest Income/Total Income 35.8% 29.0% 30.4% 29.9% 29.3%
EPS 4.98 3.41 4.01 4.60 5.21 Fee Income/Non-Interest Income 71.6% 83.3% 82.5% 82.1% 81.9%
Credit Quality
Source: Company Reports; BankMuscat Equity Research NPL/Gross Loans 0.9% 1.3% 1.3% 1.3% 1.2%
Provision Coverage Ratio 111.0% 126.6% 131.6% 133.6% 132.3%
LLP Charges, Net / Gross Loans 0.1% 0.7% 0.4% 0.3% 0.3%
Provisions / Gross Loans 1.0% 1.6% 1.7% 1.7% 1.6%
Valuation
P/E 11.4x 9.9x 8.8x
P/BV 1.9x 1.7x 1.5x
Implied P/E 14.0x 12.2x 10.8x
Implied P/BV 2.4x 2.1x 1.9x

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 KSA Research

Disclosure
The author(s) certifies(y) that the opinion(s) on the subject security (ies) or issuer(s) and any other views or forecasts expressed herein accurately
reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or
views contained in this research report. We also certify that neither the analyst nor his/her spouse or dependants (if relevant) hold any beneficial
interest in the security (ies) mentioned in this report.

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Investment Banking Division August 2010

Equity Research 11