middle east credit compendium 2011_07_03_11_09_22

Middle East Credit Compendium 2011

| Global Research |

All rights reserved. Standard Chartered Bank 2011


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Preface This is our second Middle East Credit Compendium. Since we published the first one in October 2009, a lot has happened. We saw a significant debt restructuring at the end of 2009, and have more recently seen political change sweep through the wider MENA region. More than anything, recent events highlight the need to generate strong and inclusive economic growth. Demographics can be a boon as well as a bane if not managed well. While the region continues to dominate the hydrocarbon sector (a theme we explore in more detail in one of the sections herein), it is increasingly important for its economies to diversify away from the oil and gas sector in order to generate high, sustainable and inclusive growth. A number of countries in the region have done this very well, and others are in the midst of ambitious long-term development and diversification plans. That said, the hydrocarbon sector remains the region’s primary growth engine. The region is very important to the oil and gas sector; equally, the oil and gas sector is very important to the outlook for the MENA region. It is important to understand that there is considerable differentiation – both economic and political – within the region. Investors need to recognise this and apply increased levels of differentiation in their analysis. We hope this publication, in which we cover 57 credits, gives investors a more informed view of issuers from the region. In this compendium, we have increased coverage to include 14 sovereigns, 25 financials and 18 corporates. We also examine the region’s macroeconomic backdrop and explore various drivers, including the hydrocarbon sector, the banking sector and contingent liabilities. We discuss market technicals (supply-and-demand dynamics) and present opportunities from a valuation standpoint. We would like to take this opportunity to thank all of our research and other colleagues based in the region, who provided us with support, guidance and additional local insight. Kaushik Rudra Global Head of Credit Research Standard Chartered Bank


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Contents

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MENA macroeconomic overview 1

Sector themes Oil and gas – Dominant credit driver 7

Quasi-sovereigns – One too many? 12

Banking system – Slowly emerging from the rubble 18

Credit strategy Technicals – The deepening of the Middle East credit markets 27

Middle East bond valuations – Attractive as ever 38

Credit analysis (in alphabetical order) Sovereigns 1. Algeria 50 2. Bahrain 52 3. Egypt 54 4. Jordan 56 5. Kuwait 58 6. Lebanon 60 7. Morocco 62

8. Oman 64 9. Pakistan 66 10. Qatar 68 11. Saudi Arabia 70 12. Tunisia 72 13. Turkey 74 14. United Arab Emirates 76

Financials1. Abu Dhabi Commercial Bank 80 2. Abu Dhabi Islamic Bank 82 3. Arab Banking Corporation 84 4. Arab National Bank 86 5. Banque Saudi Fransi 88 6. BBK 90 7. Burgan Bank 92 8. Commercial Bank Of Qatar 94 9. Doha Bank 96 10. Dubai Islamic Bank 98 11. Emirates NBD 100 12. First Gulf Bank 102 13. Gulf International Bank 104

14. Gulf Investment Corporation 106 15. Kuwait Projects Company (Holding) 108 16. Mashreqbank 110 17. National Bank Of Abu Dhabi 112 18. Qatar Islamic Bank 114 19. Qatar National Bank 116 20. Riyad Bank 118 21. Samba Financial Group 120 22. Saudi British Bank 122 23. Türkiye Garanti Bankasi 124 24. Türkiye Vakiflar Bankasi 126 25. Yapi ve Kredi Bankasi 128

Corporates 1. Abu Dhabi National Energy Company (TAQA) 132 2. Aldar Properties 134 3. Bahrain Mumtalakat Holding Company 136 4. Dar Al-Arkan 138 5. DIFC Investments 140 6. Dolphin Energy 142 7. DP World 144 8. Dubai Electricity and Water Authority 146 9. Dubai Holding Commercial Operations Group 148

10. International Petroleum Investment Company 150 11. Jebel Ali Free Zone 152 12. MB Petroleum Services 154 13. Mubadala Development Company 156 14. Nakilat Inc. 158 15. Qatar Telecom 160 16. Saudi Basic Industries Corporation 162 17. Tourism Development and Investment Company 164 18. Yüksel n aat 166

Appendix: Islamic finance – A primer on sukuks 168

Glossary of abbreviations 175

Contact details

Credit Research 176

Middle East Economic Research 176

Disclosures appendix 177


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MENA macroeconomic overview


MENA macroeconomic overview Analyst: Marios Maratheftis (+9714 508 3311)

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Differentiation will be key At times of elevated risk, markets often adopt a ‘one-size-fits-all’ approach. When fear takes over and positions are indiscriminately closed, opportunities eventually arise. We have always favoured the theme of differentiation across the MENA region. The GCC, the Maghreb and the Levant – the sub-regions that make up MENA – are economically diverse, and such differentiation should be also applied within these sub-regions. Even within the oil-rich GCC, for example, economic, demographic and political dynamics can differ across countries.

Politics and economics are interlinked, and political developments in the Middle East are in flux. The political unrest in Egypt is running its course, and stability is slowly returning to the country. Nevertheless, the economy will be impacted, given the important role of investment. Growth is

gaining momentum in the GCC, with the exception of Bahrain, where the economy is dependent on the financial sector. Higher oil prices are a significant contributor to growth for most GCC countries. They are also important because hydrocarbon revenues enable higher spending on non-oil infrastructure.

Demographics and diversification are potent drivers of economic activity in the GCC, despite the importance of hydrocarbons. Dubai, given its limited oil reserves, has led the way. But economic diversification is also gaining momentum in oil-rich Saudi Arabia, Qatar and Abu Dhabi. The region has a young population, and diversification is necessary for job creation. Demographic challenges need to be addressed through structural measures. Investment in non-oil sectors is set to continue.

Chart 1: Population below 24 years of age Chart 2: GDP per capita (2010)

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Sources: IMF, Standard Chartered Research

Chart 3: Fiscal balances, 2010 (% of GDP) Chart 4: Current account balances, 2010 (% of GDP)

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Sources: IMF, Standard Chartered Research Sources: IMF, Standard Chartered Research


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MENA’s demographic challenge

MENA’s vibrant young population presents both a challenge and an opportunity. In Egypt, the most populous country in the MENA region, 32% of the population is less than 15 years old. In Saudi Arabia, the largest country in the GCC, over 50% of the population is less than 24 years old. While a young population offers a promising future for a country, it can also weigh heavily on economic fundamentals. Essentially, governments must provide jobs to sustain this population and prevent unemployment from straining government resources in the future. The lack of jobs leads to higher dependency ratios and puts the working population under strain. Economic problems can soon turn into sociopolitical problems.

Youth unemployment in Egypt has been well documented. According to official statistics, 86.7% of the unemployed are less than 30 years old. But these statistics can be misleading, and Egypt exemplifies another social phenomenon that is present in most MENA countries: the participation of women in the labour force is very low. If women of working age do not participate in the labour market, they are not picked up by the unemployment figures. We estimate that Egypt has approximately 31mn people of working age without employment, either because they are unemployed or because they choose not to participate in the labour force. Of these 31mn, approximately 75% are women. Looking at the proportion of Egypt’s population that works, every 100 employed people have to support approximately 220 people who are not employed. This dependency ratio is far too high, and cannot lead to sustainable growth.

The phenomenon of low female participation in labour markets is present throughout the MENA region, not just Egypt. The situation in the GCC may be even more serious, as the participation of local men is also relatively low in many countries which rely mostly on imported workers. For example, in Qatar, the numbers of economically active local men and women are 45,980 and 26,308, respectively. This compares with a non-Qatari labour force of 1.193mn. There story is similar in the UAE, where only 57.6% and 19.8% of local men and women are employed, respectively. In Saudi Arabia, of the total local population of around 19.1mn people, less than 4mn people are employed. Population growth is expected to continue on an upward trajectory – the Saudi Ministry of Planning projects that the number of Saudi nationals will increase by more than 50% to 29.7mn by 2020.

A key short-term advantage of GCC countries is that they can still rely on oil wealth and immigrants to compensate for this shortfall. In the UAE, for example, about 80% of the

population is foreign. But this is not a sustainable model, especially when one takes into account the transient nature of foreign labour in the GCC. Granting citizenship to foreigners is rare in most GCC countries. The focus will need to shift towards the skills and participation of the domestic labour force.

The demographic challenge should be tackled from three angles: incentives, education and job creation. The focus until now has been mostly on education and job creation. When it comes to incentives, the vast majority of the local population is employed in the government sector, which is dependent on hydrocarbon revenues. Raising civil servants’ salaries in response to social pressures can ease tensions in the short run. But it creates long-term distortions in the local labour force by widening the gap between private- and public-sector salaries, acting as a disincentive for locals to take private-sector jobs.

However, significant progress and investment are taking place in education and in the development of a non-oil sector. Dubai is already a fully diversified economy with world-class infrastructure.

Saudi Arabia is also investing heavily in the non-oil sector. In 2009, it announced an ambitious USD 400bn fiscal plan aimed at developing non-oil projects. A new ‘economic city’ is being built in Jizan, a less wealthy city near the border with Yemen.

Education is also a priority. In 2011, Saudi Arabia will spend more than USD 40bn on education, including physical infrastructure – 610 new schools will be built, in addition to the 3,200 already under construction – and scholarships for students to study abroad. The King Abdulla University of Science and Technology, the country’s first-mixed gender higher education institute, opened in 2009. It was given a USD 10bn endowment, highlighting the kingdom’s push for human capital development.

Qatar, having being awarded the FIFA 2022 World Cup, will resume heavy investment in its non-oil–and-gas sectors following a significant deceleration in 2010. The hosting of the World Cup is also likely to have a positive spillover effect on the rest of the region.

In oil-rich Abu Dhabi, we expect a resumption of investment in key projects. A government subsidiary responsible for implementing technology-related investments has started accepting bids for a USD 6bn semiconductor factory in the emirate. The plant, due to start production in 2015, will


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employ 1,500 people directly and have the potential to create 4,500 jobs indirectly at the surrounding technology clusters. The Abu Dhabi government has actively invested in semiconductor and technology companies in Singapore and the US as it seeks to develop technology-related industries to diversify its economy away from hydrocarbons.

The focus on technology-related investments is in line with a broader drive to diversify into engineering-intensive and innovation-driven industries. Renewable energy is high on

that agenda. In January 2011, Abu Dhabi held an alternative energy summit where a number of world leaders discussed renewable energies. The emirate plans to build a USD 20bn renewable energy city.

In the short term, cyclical measures such as subsidies can ease tensions and pressures, but investment in education and diversification is needed to drive sustainable long-term growth.

Chart 5: Oil reserves (2009) Chart 6: GCC planned projects, 2011-13

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Source: BP Statistical Review of World Energy Sources: MEED Projects, Standard Chartered Research

Chart 7: Saudi Arabia’s manpower forecasts Chart 8: OPEC output and spare capacity

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Source: Saudi Ministry of Economy and Planning Sources: IEA, Standard Chartered Research


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Market impact and economic outlook

The recent geopolitical events in MENA will impact some of the region’s economies, particularly those that have experienced the most serious social unrest. Egypt’s economy is likely to take a hit from the disruptions caused by political events, mainly because they are likely to affect investment and, to some extent, tourism – two key drivers of the economy. Bahrain could also underperform, as it is heavily dependent on the banking sector, with banking assets approximately 10 times the size of the economy. The key risk in Bahrain is that almost 90% of bank deposits are held by foreigners.

Despite the risk that markets may, in the short run, view MENA as a single bloc and indiscriminately reduce exposure to the region, some economies may emerge as winners. Dubai, Abu Dhabi and Qatar all enjoy per-capita GDP ratios that are among the highest in the world. Their populations are small, and social tensions are non-existent. Abu Dhabi and Qatar will benefit directly from higher oil prices and production, which will boost both growth and government finances. Even if investors are deterred in the short run, both economies are naturally hedged by being hydrocarbon exporters.

Dubai’s economy is recovering, and growth has returned to positive territory. When Abu Dhabi and other GCC economies perform well on the back of a robust oil market, so does Dubai, given its role as the region’s services hub. Historically, Dubai tends to benefit from a flight to quality at times of higher risk in the Middle East.

Logistics is one of Dubai’s key strengths, and the trade sector makes up 40% of the emirate’s GDP. Total trade performed strongly in 2010, rising 19% y/y in the first 10 months of the year. Direct exports rose 36% y/y to USD 15.3bn, and imports gained 14% to USD 81.7bn. Re-exports grew by 22%, reaching USD 32bn. This pick-up in trade activity was a significant contributor to economic activity, and it is likely to continue – the government forecasts that non-oil

exports may grow 20% in 2011. Tapping new trade opportunities with Africa will help Dubai to maintain its status as a regional trade hub, especially given strengthening trade links between Asia, Africa, the Middle East and Latin America.

Dubai’s hospitality sector is also performing well, with China emerging as a key market. Airport traffic, a key indicator of visitor levels to the emirate, rose 15% in 2010. Tourist reservations for the first nine months of 2010 rose 16% y/y to 7mn people. Tensions in Egypt and other tourist destinations in the region could also indirectly benefit Dubai’s tourism sector. This is especially the case for regional tourism. Indeed, tourist arrivals from Saudi Arabia rose in January and February 2011, a time of escalated risk in Lebanon and Egypt (this period also coincided with a long public holiday in Saudi Arabia).

Dubai’s main challenge is leverage, especially given significant maturities in 2011 and 2012. But there are two positives this year compared to 2010 and 2009. First, the housing-market bubble has already burst, and the shock to the economy has taken place. Growth has turned positive and is gaining momentum. Even if growth is likely to remain within the 3-4% range, far below the rates seen during Dubai’s boom, it is positive and broad-based. Second, the uncertainty surrounding restructuring has been reduced, as a clear plan is now in place. Dubai faces significant maturities of around USD 18bn in 2011. Most of these are related to loans rather than bonds. This will probably reduce market concerns, but any rollovers or restructuring of bank loans would likely keep credit conditions tight across the UAE, detracting from growth dynamics.

2011 has started with challenges for MENA. But opportunities arise during times of uncertainty, Beyond the losers, there will be winners. Differentiation and timing will be important.


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Sector themes


Oil and gas – Dominant credit driver Analyst: Kaushik Rudra (+65 6596 8260)

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Middle East has the world’s largest oil and gas reserves

The Middle East, in particular the GCC, plays a dominant role in the international oil and gas markets. As of end-2009, the region accounted for nearly 60% of proven oil reserves and about 40% of proven gas reserves globally. The six-nation GCC is endowed with about 40% and 23% of the world’s proven oil and gas reserves, respectively.

The region is also a dominant player in oil and gas production. The Middle East accounts for around 30% of total oil production globally, with the GCC representing

around 21%. On the natural gas front, the Middle East represents around 14% of global production, and the GCC around 9%.

Given its size and relative importance to the hydrocarbon sector, the region is the primary driver of production growth globally. Saudi Arabia, with about 20% of the world’s proven oil reserves, will likely drive future growth in the oil sector. We expect Qatar (14% of global proven reserves) to drive incremental growth in the natural gas sector.

Chart 1: Proven oil reserves – breakdown by region, end-2009

Chart 2: Proven gas reserves – breakdown by region, end-2009

North America5%

S. & Cent. America 15%

Europe & Eurasia 10%

Middle East57%

Asia 3%

Africa 10%

North America5%

Europe &Eurasia

34%

Middle East40%

Africa8%

Asia9% S. & Cent.

America4%

Sources: BP Statistical Review, Standard Chartered Research Sources: BP Statistical Review, Standard Chartered Research

Chart 3: Oil production – breakdown by region, 2009 Chart 4: Gas production – breakdown by region, 2009

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Oil and gas – Dominant credit driver

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Oil and gas league tables

The countries of the Middle East dominate the global league tables for both oil and natural gas. Saudi Arabia, which has around 264bn barrels of proven oil reserves (around 20% of the global total), leads the pack. It is followed by other Middle Eastern countries, such as Iran (138bn barrels), Iraq (115bn barrels), Kuwait (102bn barrels), and the UAE (98bn barrels). As highlighted above, the region as a whole accounts for around 60% of the global total.

The region also dominates oil production, with Saudi Arabia, Iran, the UAE, Iraq and Kuwait figuring prominently among the world’s top 10 oil producers. Saudi Arabia, which in 2009 produced just under 10mbd (against production capacity of 12.5mbd), is expected to increase its production capacity to around 15mbd by end-2015. This increase is likely to represent the lion’s share of the increase in global production capacity.

The Middle East also dominates the natural gas landscape. Although Russia (44trn cubic metres, or tcm) has the largest natural gas reserves globally, Iran (30tcm), Qatar (25tcm), Saudi Arabia (8tcm) and the UAE (6tcm) all figure prominently among the top 10.

While the region’s natural gas production levels are relatively modest at this point (given its large reserves), we expect this to be a significant growth area for the sector. A number of countries in the region, most notably Qatar, have undertaken significant investment in natural gas over the past few years. We expect this to bear fruit in the coming years, helping to boost the region’s production appreciably from current levels. Only Iran, Qatar and Saudi Arabia are currently among the top 10 producers of natural gas.

Chart 5: Proven oil reserves (top 20), end-2009 Chart 6: Top 20 oil producers, 2009

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AzerbaijanNorwayM exicoAlgeria

BrazilAngola

ChinaQatar

USCanadaNigeria

KazakhstanLibya

RussiaUAE

KuwaitIraqIran

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million barrels per day


Chart 7: Proven gas reserves (top 20), end-2009 Chart 8: Gas production (top 20), 2009

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ChinaAustralia

IraqIndonesia

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VenezuelaUAE

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IranRussia

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Trinidad & TobagoArgentinaAustralia

United ArabM exico

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Table 1: Middle East oil and gas production, 2000-09Million tonnes, equivalent 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Oil production

Iran 191.3 191.4 180.9 203.7 207.8 206.3 208.2 209.7 209.9 202.4Iraq 128.8 123.9 104.0 66.1 100.0 90.0 98.1 105.2 119.3 121.8Kuwait 109.1 105.8 98.2 114.8 122.3 129.3 132.7 129.9 137.2 121.3Oman 46.4 46.1 43.4 39.6 38.1 37.4 35.7 34.5 35.9 38.5Qatar 36.1 35.7 35.2 40.8 46.0 47.3 50.9 53.6 60.8 57.9Saudi Arabia 456.3 440.6 425.3 485.1 506.0 526.8 514.3 494.2 515.3 459.5Syria 27.3 28.9 27.2 26.2 24.7 22.4 21.6 20.6 19.8 18.7United Arab Emirates 119.3 114.4 105.4 119.4 125.1 129.0 139.0 135.1 137.3 120.6Yemen 21.3 21.5 21.5 21.1 19.9 19.6 17.9 16.3 14.4 14.0Other Middle East 2.2 2.2 2.2 2.2 2.2 1.6 1.4 1.6 1.5 1.7

Total Middle East 1,138.1 1,110.5 1,043.5 1,119.1 1,192.3 1,209.6 1,220.0 1,200.8 1,251.5 1,156.4 Gas production

Bahrain 7.9 8.2 8.5 8.7 8.8 9.6 10.2 10.6 11.4 11.5Iran 54.2 59.4 67.5 73.4 76.4 93.2 97.7 100.7 104.7 118.1Kuwait 8.6 9.5 8.5 9.9 10.7 11.0 11.3 10.9 11.5 11.3Oman 7.8 12.6 13.5 14.9 16.7 17.8 21.3 21.6 21.7 22.3Qatar 21.3 24.3 26.6 28.3 35.3 41.2 45.6 56.9 69.3 80.4Saudi Arabia 44.8 48.3 51.0 54.1 59.1 64.1 66.2 67.0 72.4 69.7Syria 4.9 4.5 5.5 5.6 5.8 4.9 5.1 5.0 4.9 5.2United Arab Emirates 34.5 40.4 39.1 40.3 41.7 43.0 44.1 45.3 45.2 44.0Other Middle East 3.1 2.7 2.4 1.6 2.3 3.1 3.7 3.7 4.0 4.1

Total Middle East 187.3 209.9 222.5 236.6 256.6 287.9 305.2 321.7 345.0 366.4

Sources: BP Statistical Review, Standard Chartered Research

Middle East is the world’s primary exporter of hydrocarbons

The Middle East as a whole is the world’s largest oil exporter, accounting for 34% of global exports in 2009. Although the US and Russia are significant oil producers (as Chart 6 shows), given relatively large domestic consumption in those countries, their export levels are much lower than those of the Middle East, where total production dwarfs domestic consumption. Given the region’s large export

position, it is not surprising that the Middle East is the leading price-setter for oil globally.

The US, the largest consumer of oil globally, is the largest importer of oil. Europe and Japan have also traditionally been relatively large oil importers. Increasingly, the emerging economies of Asia are also becoming large oil importers – and exercising a degree of influence on global oil prices.

Chart 9: Oil exports by region, 2009 Chart 10: Oil imports by region, 2009

Total Exports: 52.9 mbd

US4%Asia-Pacific

10%

West Africa8%

North Africa5%

Canada5%Mexico

3%

S. & Cent.America

7%

Europe4%

Former SovietUnion17%

Rest of world3%

Middle East34%

Total Imports: 52.9 mbd

Europe25%

Japan8%

Rest of world45%

US22%



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Oil and gas reserve life stable for the foreseeable future

Given the scale of their reserves and current utilisation rates, we expect most GCC countries to remain dominant players in the sector for the foreseeable future. According to the BP Statistical Review, Kuwait and the UAE in particular have close to 100 years of projected life for their oil reserves, while Saudi Arabia’s reserves have around 70 years of projected life. Bahrain and Oman, in contrast, have a very limited remaining shelf life for their oil.

On the natural gas front, Qatar stands out both regionally and globally. At the current utilisation rate, according to the BP Statistical Review, Qatar’s gas reserves are likely to last well beyond the year 2500. Although the gas reserves of the UAE, Kuwait, and Saudi Arabia are expected to last more than 100 years, these numbers pale in comparison with almost 500 years for Qatar.

Chart 11: Middle East oil – projected life of oil reserves Chart 12: Middle East gas – projected life of gas reserves

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The region is heavily dependent on oil and gas

It is safe to say that the oil and gas sector is as important to the Middle East as the Middle East is to the oil and gas sector. While the region dominates the hydrocarbon sector, the oil and gas sector also remains crucial to the region’s well-being. As Chart 13 below shows, the hydrocarbon sector represents a high proportion of total exports, budget revenues and GDP for the GCC countries. With the exception of Bahrain, Oman and the UAE, which are more diversified economies, the hydrocarbon sector accounts for more than 50% of the GDP of the GCC countries. All six GCC countries derive at least 60% of their exports and budget revenues from the sector, with Kuwait, Qatar and Saudi Arabia having the highest dependence.

Budget revenues in particular are wholly dependent on the hydrocarbon sector, with oil prices a highly influential factor in determining budget balances. To that extent, it is helpful to look at the oil breakeven prices for the fiscal accounts of these countries. The breakeven price is the price at which a country would achieve a balanced budget. Based on our estimates for 2011, Bahrain’s breakeven point will be in

excess of USD 90/bbl. Consequently, Bahrain’s fiscal balance is more vulnerable to oil-price declines than those of other countries in the region. Given the expansionary counter-cyclical fiscal spending programmes of recent years, breakeven prices have been rising in the region.

In our view, the hydrocarbon sector is one of the region’s primary credit drivers. While a number of countries have tried to diversify away from the oil and gas sector – and some have succeeded to an extent – the hydrocarbon sector remains the key driver of the region’s fortunes. Having accumulated extremely large sovereign wealth funds, the GCC countries can survive sharp declines in oil prices. That said, liquidity conditions and the general well-being of the region do tend to deteriorate when oil prices are lower.

Given current concerns about supply disruptions in the oil sector, oil-price declines are less of a focus. On the contrary, current elevated hydrocarbon prices – which are in excess of regional breakeven levels – are clearly supportive of the external and fiscal balances of all of the region’s oil-exporting countries.


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Chart 13: Sensitivity to hydrocarbons, 2010

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Note: Based on latest figures where 2010 data is unavailable; * Export numbers exclude re-exports; Sources: National authorities, IMF, Standard Chartered Research


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Quasi-sovereigns – One too many? Analyst: Simrin Sandhu (+65 6596 6281)

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Brave new world

Since we published our last Middle East Credit Compendium in 2009, the ‘unthinkable’ has come to pass in the region. We came within hours of the region’s first major bond default and saw a high-profile, strategic quasi-sovereign entity go through a large debt restructuring. We have also witnessed the emergence of a new high-yield quasi-sovereign sector in the region as rating agencies downgraded Dubai Inc. names to below investment grade on the back of the Dubai World debt restructuring. Recently added to the mix has been the political turmoil in North Africa, with regimes being toppled and social unrest even touching parts of the GCC.

Yet, as the saying goes, the more things change, the more they stay the same. The events of the past 1.5 years have reinforced the theme of differentiation, which we have repeatedly highlighted in our conversations with investors. In this section, we apply this theme to the topics we have found to be of paramount concern to investors: (1) the rising contingent liabilities of the region’s sovereigns, particularly in light of the events in Dubai; and (2) distinguishing among the ever-increasing number of quasi-sovereign issuers in the region.

Mounting contingent liabilities Preserving sovereign balance sheets From being relatively debt-free at the beginning of the last decade, GCC countries together now have external debt estimated at close to 45% of GDP. Issuers from the UAE, Saudi Arabia and Qatar together account for approximately 76% of the GCC’s external debt. Most of the borrowing in the GCC has been undertaken to fund investments in the hydrocarbon and infrastructure sectors, both of which have heavy government participation. However, borrowing directly attributable to sovereigns remains low given the region’s tendency to raise debt via quasi-sovereign entities. Such borrowing is typically on the basis of implicit rather than explicit government guarantees, thereby avoiding the

accumulation of debt on sovereign balance sheets. Accordingly, the rise in external debt is not really reflected in sovereign debt metrics, which remain fairly moderate compared to overall external debt ratios (government debt-to-GDP ratios are under 25% in Saudi Arabia, Kuwait, the UAE and Qatar). By contrast, high-grade Asian sovereigns’ external debt ratios are significantly lower (with the exception of Korea) than their government debt ratios (Chart 2). This also reflects the strength of the local debt markets in Asia.

Chart 1: External debt is on the rise Chart 2: Government borrowing remains low (2010F)

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General govt. debt/GDP External debt/GDP

Sources: Moody’s, IMF, Standard Chartered Research Sources: Moody’s, IMF, Standard Chartered Research

Loans have been the weapon of choice Over the past few years, both sovereigns and corporates have increasingly tapped the bond market as a means of diversifying their funding bases. More recently, the move to the bond market has been less a matter of choice and more a result of tightening credit conditions in local banking

systems. However, despite the pick-up in bond issuance, the loan market continues to be the dominant source of financing in the region (Chart 3). Given the heavy reliance on loans, the contingent liability burden on the region’s sovereigns has to be viewed in light of total debt raised – i.e., bonds plus loans.


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Quasi-sovereigns – One too many?

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Taking both bonds and loans into account, the pace of borrowing in the region declined in the aftermath of the global financial crisis, with total debt raised falling about 30% in 2008 from 2007 (Chart 4). Since then, debt raised annually has averaged approximately USD 85bn. Serial borrowers during the 2007-10 period continued to be entities from Saudi Arabia, Qatar, Abu Dhabi and Dubai. However, Dubai, which went on an issuance spree in 2007 and 2008, has found the going much tougher since the Dubai World debt restructuring in 2009.

This implies that the contingent liability burden on the region’s governments is substantial and rising. Debt is largely being raised by government-owned entities, many of which have weak standalone credit profiles. Investors, for the most part, assume that the government in question will be willing and able to bail out these companies should the need arise – which explains the relatively cheap funding these entities are able to secure.

Chart 3: Non-bank debt issuance by type (2007-10) Chart 4: Total non-bank debt (bonds and loans) raised by country

28%

72%

Bonds Loans

0

50

100

150

2007 2008 2009 2010

USD

bn

Saudi Arabia Qatar Abu Dhabi Dubai Bahrain Kuwait Others

Includes all currencies; Sources: Dealogic, LoanConnector,Bloomberg, Standard Chartered Research


Time to pay up – Dubai feels the heat Turning to redemptions, we estimate that an average of approximately USD 40bn is due annually in the region over the next five years (Chart 5), with Qatar, Abu Dhabi and Dubai accounting for about 60%. Dubai clearly faces the biggest challenge, with a heavily front-loaded debt redemption schedule – close to 70% of its non-bank debt matures in the next five years (Chart 6). Material redemptions loom in 2011 and 2012 in the loan and bond markets, respectively. 2011 maturities include a government guaranteed USD 4bn loan due from Investment Corporation of Dubai (ICD). 2012 will be a major test for Dubai Inc.’s bond market, with repayments due from three large quasi-sovereign entities: Dubai Holding COG (February 2012, USD 500mn), DIFC Investments (June 2012, USD 1.25bn) and JAFZ (November 2012, AED 7.5bn). The manner in which Dubai deals with these redemptions will be key to investor sentiment towards the emirate – particularly after the uncertain experience many investors had with the Nakheel 2009s. Dubai’s debt woes have been the subject of much market discussion. However, it is important to highlight that most of these maturities are in loans. Admittedly, in a distress situation, dealing with bank debt is considerably easier than dealing with bonds, which

are much more widely held. A clear example of this has been the Dubai World restructuring, in which bondholders were made whole while bank debt was restructured. Rather than face the wrath of international investors (who now have sizeable positions in some of the 2012 maturities) and risk closing its capital markets, we expect Dubai to eventually muddle through and service its 2012 obligations. However, we anticipate that external assistance will be required, particularly to deal with the larger maturities.

Qatar, by comparison, has a much more manageable redemption schedule, with most of its big maturities due after 2015 (Chart 7). Abu Dhabi Inc. faces a number of redemptions in 2013 and 2014. 2013 will see multi-billion-dollar loan maturities from Mubadala, IPIC, Aabar and TAQA. 2014 is a big year for bond maturities, with a total of USD 7.3bn due from the government and quasi-sovereigns such as TDIC, Aldar Properties, Mubadala and TAQA (Chart 8).


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Chart 5: Total redemptions by country (bonds and loans) Chart 6: Dubai redemption schedule

0

50

100

150

200

250

Mar-Dec2011

2012 2013 2014 2015 2016 andbeyond

USD

bn

Saudi Arabia Qatar Abu Dhabi Dubai Bahrain Kuwait Others

0

5

10

15

20

25

30

Mar-Dec2011

2012 2013 2014 2015 >2015

USD

bn

Bonds Loans

Includes all currencies; Sources: Dealogic, LoanConnector, Bloomberg, Standard Chartered Research


Chart 7: Qatar redemption schedule Chart 8: Abu Dhabi redemption schedule

0

10

20

30

40

50

60

Mar-Dec2011

2012 2013 2014 2015 >2015

USD

bn

Bonds Loans

0

10

20

30

40

Mar-Dec2011

2012 2013 2014 2015 >2015

USD

bn

Bonds Loans

Includes all currencies; Sources: Dealogic, LoanConnector, Bloomberg, Standard Chartered Research


Two sides to every coin Although the region’s debt levels have increased rapidly in the past few years, it is important to view this rise in the context of the foreign assets accumulated by GCC governments over the same period. Given the region’s heavy exposure to the hydrocarbon sector (for details, see the ‘Oil and gas’ section of this compendium) and limited local investment opportunities, governments have actively sought foreign assets as a means of financial diversification. On a GCC-wide basis, while foreign liabilities increased from USD 153bn in 2005 to an estimated USD 420bn in 2009 (according to the IIF), the region’s foreign assets have also risen, from USD 820bn in 2005 to USD 1.47trn in 2009. Accordingly, the GCC remains a strong net creditor, with a net foreign asset position of over USD 1trn.

Drilling down to individual countries, the UAE, Saudi Arabia and Kuwait have comfortable net asset positions, holding foreign assets many times their external debt – 5x for the UAE, 5x for Saudi Arabia and 4x for Kuwait. Qatar is in a

less favourable position, with little cushion between its external debt and foreign assets. This is largely explained by the relatively recent discovery of gas in the country and heavy investment in the hydrocarbon sector over the past few years, against which returns are likely to materialise in the coming years.

The strong sovereigns in the region – such as Saudi Arabia, Kuwait and Qatar – clearly have the capacity to support their contingent liabilities given the substantial resources at their disposal (although we point out that the liquidity of these assets remains unclear). In the case of the UAE, the dynamics are a bit less clear given the difference between the asset and liability positions of Abu Dhabi and Dubai. Nevertheless, Abu Dhabi, which has one the world’s largest sovereign wealth funds, is well positioned from a debt-service standpoint.


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Chart 9: GCC assets vs. liabilities Chart 10: Assets in excess of external debt

0

400

800

1,200

1,600

2005 2006 2007 2008 2009E

USD

bn

Foreign liabilities Foreign assets

0

100

200

300

400

500

600

700

Qatar Kuwait Saudi Arabia UAE

USD

bn

External debt Foreign assets (official reserves + SWF holdings)

Sources: IIF, Standard Chartered Research Sources: Moody’s, SWF Institute, Standard Chartered Research

The region’s quasi-sovereigns – Similar, yet different

Even though the region’s sovereigns are able to support their companies, this does not warrant complacency in credit selection. The universe of GCC bond issuers is dominated by quasi-sovereign entities, most of which share characteristics including significant government ownership and heavy government influence on policy and strategy. Many of these companies are viewed as vehicles of government policy or are involved in sectors that are strategic to their governments. Accordingly, not all operate on a purely commercial basis. However, despite these similarities, it is important to note that issuer profiles vary significantly in the three main pockets of issuance in the region – Qatar, Abu Dhabi and Dubai. Qatar Inc. Qatari issuers, by and large, have the strongest standalone credit profiles in the region. The universe of credits in Qatar Inc. is fairly small, with issuance primarily from the hydrocarbon and telecom sectors. In addition to having solid standalone businesses, these companies enjoy strong government support. We view Qatar’s issuance programme as well co-ordinated, with stronger credits coming to the bond market independently and the funding needs of weaker companies being met via direct issuance by the sovereign or by explicit government guarantees. Abu Dhabi Inc. With a few exceptions, current issuers from Abu Dhabi are fairly weak on a standalone basis. Many of these companies are essentially agents of government policy or investment vehicles for the government. Accordingly, they rely heavily on the government for funding and support, in the absence of which many businesses would not be viable. We expect issuance from Abu Dhabi to become more co-ordinated as

the newly formed Debt Management Office (DMO) becomes more active. However, it remains to be seen whether issuance will become more centralised at the sovereign level, or whether it will continue to be undertaken largely by government-owned entities. Given heavy dependence on the government, sovereign support linkages in Abu Dhabi are of key importance and, in our view, will remain the primary driver of credit spreads. To this end, the government made its first formal, public statement of support for its quasi-sovereigns in March 2010 in response to rating downgrades triggered by the Dubai World restructuring. In the statement, the government expressed its strong support for Mubadala, IPIC and TDIC – companies whose credit risk the government felt was indistinguishable from its own. It also mentioned the “important” role played by TAQA. In a more recent statement issued following the bailout of Aldar Properties in early 2011, the government reiterated its pledge of “broad and ongoing support” for Mubadala, IPIC, TDIC and TAQA. While we remain comfortable with the government’s ability to support these companies, we expect credit differentiation in Abu Dhabi Inc. to become extremely challenging as more state-owned enterprises with similar or overlapping mandates and ownership structures tap the market. Dubai Inc. Dubai Inc. presents a more mixed credit picture than Qatar or Abu Dhabi. There are strong credits like DP World and (to a lesser extent) DEWA, credits with good businesses but excessive leverage (JAFZ), and credits with very weak business models but with access to some monetisable assets (DHCOG) or with strong links to the government (DIFCI).


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While the Dubai government’s willingness to help service the debt of its quasi-sovereigns is not in question, the key issue is its ability to do so. As the events with Dubai World have demonstrated, the government’s financial resources are clearly constrained, particularly in light of the onerous debt redemption schedule highlighted above. Accordingly, we expect continuing reliance on external sources. In Table 1 below, we provide a snapshot of the sovereign linkages and standalone credit profiles of the key quasi- sovereigns in the region. It is also worth mentioning that

transparency and disclosure in the region, which has long been a cause of concern for investors, is improving gradually, but on a case-by-case basis. Listed companies understandably tend to be more geared towards dealing with investors (DP World, Qtel and TAQA do a fairly good job). Among the privately owned credits, while dialogue with the investor community has improved in some cases, many companies continue to view engagement with investors as a fairly low priority, and we believe this will continue to deter investors from selected names.

Table 1: Key quasi-sovereign issuers from the GCCGovt.

holding Ratings Ratings uplift (notches)

(direct & indirect) Moody's/S&P Moody's S&P

Importance to sovereign Standalone credit profile

Qatar

RasGas 63-70% Aa3/A 1 0

High – One of the key LNG production companies in Qatar. Important source of government revenue.

Strong – Robust operational and financial performance, low breakeven prices, solid debt-service coverage ratios.

Nakilat Inc. 50% Aa3/AA- 3 6 High – Crucial role in transporting Qatar’s LNG to customers around the world.

Strong – Benefits from long-term charter agreements with LNG producers; operating performance is improving following completion of its vessel delivery programme.

Qtel 68% A2/A 3 3

Moderate – Largest telecom operator in the country, flagship international brand; supports diversification away from hydrocarbons.

Strong – Diversified portfolio and healthy margins. However, acquisitions remain a risk given ambitious growth plans.

Abu Dhabi

Mubadala 100% Aa3/AA NA NA

High – Entrusted with the task of diversifying Abu Dhabi’s domestic economy; funded by the government and chaired by the Crown Prince.

Weak – Cash-flow generation is poor, reflecting the early stages of a number of projects and large capex needs.

IPIC 100% Aa3/AA 51 NA

High – Conduit for the government’s investments in the global energy industry, long history of government funding and support; undertaking strategic local projects.

Weak – High debt, acquisitive strategy, exposure to cyclical downstream industry. However, portfolio of well-established international investments has value.

TDIC 100% A1/AA 6 6

Moderate – Vehicle for execution of the government’s tourism development agenda, which it views as a means of diversification away from hydrocarbons.

Weak – Constrained cash-flow prospects due to non-commercial nature of a number of projects, large capex needs.

Dolphin Energy 51% A1/NR 3 0

High – Vital role to play in bridging the gas deficit in UAE and Oman; among the largest cross-border commercial initiatives in the region, Mubadala’s flagship venture.

Strong – Good cash-flow visibility, high degree of resilience to volatility in hydrocarbon prices; long-term sales agreements with government entities in Abu Dhabi, Dubai and Oman.

TAQA 72% A3/A 4 8

Moderate – Controls the entities responsible for the provision of most of the emirate’s electricity and water; government recently expressed strong support for the company.

Moderate – Strong downstream business provides stable recurring cash flow. However, upstream segment is volatile given high breakevens. Acquisitions remain a risk, though the recent management change could signal a shift in strategy.


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Govt. holding Ratings Ratings uplift

(notches)

(direct & indirect) Moody's/S&P Moody's S&P

Importance to sovereign Standalone credit profile

Aldar Properties 38%2 Ba3/B 3 2

Moderate – Largest developer in Abu Dhabi; involved in a number of high-profile developments such as Yas Island in addition to building housing infrastructure for locals.

Weak – High leverage combined with the downturn in the real-estate sector resulted in a liquidity squeeze. The recent government bailout has helped to address near-term liquidity concerns. However, business remains under pressure.

Dubai

DP World 81% Ba1/BB 0 0

High – Dubai’s flagship corporate, with a large international presence; operates the largest container port in the GCC; trade-related activities are a significant contributor to Dubai’s GDP.

Strong – Competitive strength on account of EM- focused port portfolio; trade volumes are making an impressive comeback; strong liquidity position. Commitment to deleveraging to be tested.

DEWA 100% Ba2/BBB-3 1 4

High – Monopoly provider of electricity and water to Dubai; history of government support in the form of subsidised feedstock and explicit guarantees on borrowings.

Moderate – Profitable operations on account of low-price feedstock, strong cash-flow generation. However, capex for capacity expansion could weigh on debt metrics.

DIFC Investments 100% B3/B+ 1 2

High – Central to Dubai’s ambitions of cementing its position as an international financial-services centre; government has extended loans to cover funding requirements.

Weak – Unclear business strategy, high leverage and poor liquidity, all of which are exacerbated by poor disclosure and transparency.

JAFZ 100% B2/B 1 0

High – Important role in establishing Dubai as the region’s trade and logistics hub; businesses in the zone contribute significantly to employment and GDP.

Weak – Longer-term prospects are good: strong business and a long and well-established track record. However, material refinancing exists, with the looming maturity of the AED 7.5bn sukuk in 2012.

Dubai Holding COG

0%4 B2/NR NA NA

Low – Played an important role in developing Dubai’s real-estate and hospitality infrastructure. However, current operations are of low strategic significance.

Weak – Battered by the downturn in Dubai’s property sector. With refinancing risk within the next 12 months (when two bonds fall due), fate of creditors is likely to rest on whether the company pursues asset sales.

Others

SABIC 70% A1/A+ 1 1 High – Largest non-oil contributor to Saudi Arabia’s GDP, also among the biggest employers in the country.

Strong – Among the strongest credits in the GCC, huge competitive advantage due to heavily subsidized feedstock, solid credit metrics with low leverage and robust liquidity.

Mumtalakat 100% NR/A- NA 5

High – Tasked with managing Bahrain’s key state-owned companies, undertaking major restructuring efforts at these companies to improve competitiveness.

Weak – Large portfolio but few contributors to dividend, saddled with weak assets such as Gulf Air, limited visibility on a large part of the portfolio.

1After taking into account ongoing state support; 2as of end-2010; 3reflects rating of Thor; 497.4% held by ruler of Dubai; Sources: Rating agencies, Standard Chartered Research


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Banking system – Slowly emerging from the rubbleAnalyst: Victor Lohle (+65 6596 8263)

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Challenges remain, but 2011 should be a better year

2010 could have been worse. From a credit perspective, 2010 broadly played out as we had anticipated for the GCC banks. Reported asset-quality indicators deteriorated because of the economic slowdown, receiving an extra blow from high-profile defaults and/or restructurings. In Kuwait and the UAE, asset quality deteriorated quite sharply. Liquidity management became paramount and loan-to-deposit ratios improved. Surprisingly, earnings did not deteriorate across the board, although the Dubai-based banks did see a decline in profits. In fact, all of the banks we cover reported full-year profits, and only a few institutions reported quarterly losses. As a result, the banks’ high capital bases remained intact.

More importantly, confidence in banking systems across the region has been maintained, even if funding costs remain high for some banks. Obstacles remain. The main challenges for the banks in the region centre on asset quality. First, there is potential for further restructurings, particularly in Dubai. Second, it is unclear whether property prices – to which the banks have significant indirect exposure – have reached the bottom. Finally, it is debatable whether the banks have fully disclosed the extent of their exposure to troubled sectors and borrowers.

Chart 1: Total banking-system assets (end-2010) Chart 2: Banking assets/GDP (end-2010)

0 100 200 300 400 500

Kuwait

Qatar

Bahrain

Saudi Arabia

UAE

USD bn

0

50

100

150

200

250

300

350

Saudi Arabia Kuwait Qatar UAE Bahrain(retail)

%

Sources: Central banks, Standard Chartered Research Sources: Central banks, Standard Chartered Research

Banks’ fundamentals to improve in 2011. Notwithstanding the challenges highlighted above, we expect the fundamentals of most of the region’s banks to start recovering in 2011. We believe that higher economic growth will be the key driver of the recovery, with the caveat that it will be a long process. Credit growth is likely to pick up later in 2011 as the

benefits of better economic growth trickle down and confidence returns. Qatar and Saudi Arabia are already leading the way, and we expect other countries in the region to follow.

NPLs will likely peak in 2011. We could see a further increase of up to 50% in NPLs in the UAE, but for the rest of the countries, we expect only a gradual increase in NPLs, peaking sometime in late 2011.

Capital adequacy will remain robust. Based on reported NPL numbers, capital adequacy is not a concern for the banks in the GCC. However, the true test of capital adequacy is whether the reported NPL ratios are accurate in the first place.

The funding positions of most of the region’s banks should improve on the back of higher customer deposits and support from sovereigns (if necessary). External funding positions have improved, as most banks can again tap the offshore debt capital markets.

Material improvements in profitability are likely to take longer. We expect provisions to decline as asset quality improves. However, in some jurisdictions, the decline in provisions will take longer as banks aim to increase general/portfolio provisions. Therefore, significant improvements in profitability are likely to be more of a story for 2012, when we expect revenue growth to pick up and provisions to decline.

Basel III is unlikely to have a material impact on the banks from a capital point of view, as their capital adequacy ratios are very high and their capital bases are almost entirely made up of equity. The existing Tier 1 debt in the region was issued by banks from the UAE (the Abu Dhabi banks and Emirates NBD) to their shareholders. However, Basel III


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Banking system – Slowly emerging from the rubble

19

could have an impact on liquidity, as the banks’ funding tends to be short-term. Opportunistic issuance. Regional banks’ issuance tends to be opportunistic rather than driven by refinancing. In 2011, we expect around USD 8bn of issuance from banks in the GCC, roughly the same amount as in 2010.

Sovereign support remains high. Throughout the crisis, the sovereigns in the region were very supportive of their banking systems. This was again made evident when Qatar announced in Q1-2011 that it would inject additional equity capital into its banks. We expect support to continue to be high.

2010 – Acknowledging reality

Regional economic growth is picking up. A full recovery will take time, and GDP growth is unlikely to reach the levels seen in 2007 or 2008 in the near future. Despite the uptick in economic growth already seen in 2010, credit growth in the region was fairly anaemic. This was a result of banks deleveraging their balance sheets and hoarding cash to improve liquidity, as well as weak private-sector demand. Even in Qatar, which experienced the fastest rate of credit growth in the region, credit growth in 2010 was still lower

than in 2009. Also, a large portion of Qatar’s credit growth went to the public sector rather than the private sector. In Saudi Arabia, although credit growth is picking up gradually, the change in absolute terms is still relatively small. In the UAE, credit growth came from Abu Dhabi, as the Dubai banks are still shrinking their balance sheets. In Kuwait, credit growth is stagnant. As economic growth picks up and confidence returns, we expect credit-sector growth to follow, albeit with a lag.

Chart 3: Real GDP growth Chart 4: Private-sector credit growth

-5

5

15

25

Bahrain Kuwait Qatar Saudi Arabia United ArabEmirates

%

2008 2009 2010 2011F

-10

0

10

20

30

40

50

60

2007 2008 2009 2010

%

Bahrain (retail) Kuwait QatarSaudi Arabia UAE

Sources: IMF, Standard Chartered Research Sources: Central banks, companies, IIF, Standard Chartered Research

Stimulus packages will help. In the medium term, the government stimulus packages announced in the region should provide further impetus to the economic recovery. In Saudi Arabia, the government announced a SAR 1.2trn (USD 386bn) development plan for 2010-14 mostly directed at infrastructure spending. This plan represents a 66% increase over the 2005-09 development plan. In Kuwait, a

KWD 30bn (USD 100bn) development plan aimed at financing infrastructure development projects was approved in 2010. Finally, Qatar’s hosting of the FIFA 2022 World Cup will require up to USD 100bn of infrastructure expenditure. Even if the stimulus packages are not implemented in full, the banks – as financing conduits – should benefit from higher volumes of economic activity.

Asset quality The countries that experienced the sharpest economic slowdowns (i.e., Kuwait and the UAE) were also the ones whose banks experienced the sharpest deterioration in asset quality. In Kuwait, we estimate reported system-wide NPLs to be around 10%, while the estimate for the UAE is 8%. In both countries, asset quality deteriorated across the board. The situation was exacerbated by exposure to investment

companies in Kuwait and to real estate and Dubai World in the UAE. Qatari banks, despite experiencing by far the most rapid credit growth in the region (a cumulative 200% between 2006 and 2010), have seen minimal asset-quality deterioration. This is due to pre-emptive measures by the


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Qatari government to remove potentially troublesome assets from the banks’ balance sheets, as well as relatively robust economic growth. In Saudi Arabia, NPL did not deteriorate as much as expected, despite problems with the Saad and Al-Gosaibi groups. This partly reflects the strong regulatory framework, in our opinion.

In terms of loan-loss coverage, Kuwait is the only country in the region worth highlighting, with coverage well below 100% (estimated at 55% at end-2010). In the other countries in the region, loan-loss coverage is close to 100%. We also think banks are under pressure from regulators behind the scenes to increase portfolio provisions.

Chart 5: NPL ratios Chart 6: Loan-loss coverage

0

2

4

6

8

10

12

Qatar Saudi Arabia Bahrain UAE Kuwait

%

2007 2010 (est.)

0

40

80

120

160

Bahrain Kuwait Qatar Saudi Arabia UAE

%

2007 2010 (est.)

Sources: Central banks, IIF, Standard Chartered Research Sources: Central banks, IIF, Standard Chartered Research

Chart 7: Cumulative credit growth (end-2006 to end-2010) Chart 8: Private-sector credit/total credit

0

50

100

150

200

250

Saudi Arabia Kuwait Bahrain(retail)

UAE Qatar

%

0

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50

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100

Qatar UAE Kuwait Bahrain(retail)

Saudi Arabia

%

2008 2010

Sources: Central banks, Standard Chartered Research Sources: Central banks, Standard Chartered Research Do the numbers tell the whole story? One of our concerns has been that asset-quality indicators in some countries (e.g. the UAE) might not reflect the full extent of asset-quality deterioration. Banks might have engaged in renegotiations or restructurings as a way to manage asset quality. Perversely, the longer it takes the banks to recognise NPLs, the more time they have to build up provisions. Dubai World restructuring. The Dubai World restructuring set the template for further restructurings not only in Dubai, but also in the rest of the region. The banks extended the maturity of their loans to Dubai World to 2015 and 2018 at below market rates and took impairment charges of around 10-15%. Also, some of the banks took relatively small hits to

their earnings because of the use of low discount rates to calculate the impairment.

What about the other Dubai Inc. entities? The level of disclosure on the banks’ exposure to Dubai World was fairly limited, and the same is the case for other Dubai Inc. entities. Beyond estimating that the bulk of the exposure will reside with Dubai-based banks and that the larger banks will have greater notional exposure simply because of their size, determining where exposure to these entities resides is guesswork.

Exposure to the real-estate market will remain a source of concern. One lingering concern for the banks in the region is their significant exposure to the construction and


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real-estate sectors, which in most countries represent around 30% of private-sector loans. Although in some countries (such as the UAE), reported exposure to real estate appears to be below 20% of private-sector credit, we believe the actual level may be higher, as some borrowers take out

personal loans for non-consumption purposes. In other words, some exposures to wealthy individuals may be classified as personal loans but be real estate-related in practice.

Chart 9: Real-estate/private-sector credit (end-2010) Chart 10: Dubai property prices

0

10

20

30

40

Saudi Arabia UAE Kuwait Bahrain(retail)

Qatar

%

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010AE

D ps

f

Office Residential

Sources: Central banks, Standard Chartered Research Sources: Jones Lang LaSalle, Standard Chartered Research

The challenge of real-estate data. There is limited comprehensive data on the real-estate markets in GCC countries. One of the few pieces of data available shows that Dubai real-estate prices have declined by around 60% from their peak in late 2008. Other countries in the region have also experienced price declines. However, it is very hard to quantify the declines in each market and whether prices have bottomed yet. Regardless, a recovery is probably not imminent. For example, in Dubai, significant supply of real estate is still under construction and is expected to be released to the market over the next few years, which should delay a recovery.

Outlook for asset quality. Asset quality is probably nearing the worst point of the cycle in most GCC markets, in our view. This is not to say that there will be no further increases in NPLs, but rather that these increases will be less dramatic than those seen in 2010. In the majority of the countries, we expect only gradual further rises in NPLs, peaking in late 2011. The main exception is the UAE, given the potential for further corporate restructurings. In our opinion, reported NPLs for Dubai-based banks could deteriorate by as much as 50% by end-2011.

FundingAfter the liquidity challenges to the system in 2009, a main focus for the banks in 2010 – partly induced by regulatory guidance – was liquidity management. As a result, loan-to-deposits ratios improved considerably and were, by and large, below 100% at end-2010. Customer deposits as a percent of the banks’ funding bases also improved during the period. On average, the region’s banks derive over 75% of their funding from customer deposits, with the remainder coming from interbank funding and, to a lesser extent, bonds and loans. A key strength of the region’s banks is that a significant percentage of customer deposits is derived from government

and public-sector entities – ranging from around 13-15% for the Kuwaiti banking system to 30-40% for Qatar. One of the challenges for banks in countries with large expatriate populations (the UAE, Qatar and Kuwait) is managing their funding bases, as a meaningful percentage of the customer deposit base tends to be repatriated every month. In this regard, Islamic banks have a clear advantage over conventional banks – not only from a cost-of-funding point of view, but also from a stability point of view – as the majority of the customer base is local.


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Chart 11: Loan-to-deposit ratios Chart 12: Funding base*

0 25 50 75 100

Saudi Arabia

Bahrain (retail)

Kuwait

UAE

Qatar

%

2010 2008

0%

20%

40%

60%

80%

100%

2008 2010 2008 2010 2008 2010 2008 2010

Saudi Arabia Abu Dhabi Dubai QatarCustomer deposits Other funding

Sources: Central banks, Standard Chartered Research * Average for the banks under our coverage; figures for Mashreqbank,Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010.

Sources: Companies, Standard Chartered Research

Chart 13: Public-sector deposits/customer deposits Chart 14: Interest expense/total funding*

0

10

20

30

40

50

Kuwait Bahrain(retail)

UAE Saudi Arabia Qatar

%

2008 2010

0

1

2

3

4

5

2008 2009 2010

%

Dubai Abu Dhabi Saudi Qatar

Sources: Central banks, Standard Chartered Research * Average for the banks under our coverage; figures for Mashreqbank, Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010.


Looking ahead, we expect deposit growth to eventually pick up across most of the region on the back of faster economic growth. Liquidity management will remain an area of focus for the banks (although less so than in 2010), and we do not foresee a material deterioration in the banks’ loan-to-deposit ratios. The only question mark is around Qatar, given the strong credit growth expected. In our view, private-sector deposit growth is unlikely to be able to keep up with credit growth. However, the government and public sector as the largest depositors in the system will probably step in to ensure that strong liquidity in the system is maintained.

Qatari Islamic banking. In early 2011, Qatar announced that it would require commercial banks to close their Islamic banking businesses by end-2011. While the conventional banks will be able to maintain Islamic loans on their balance sheets until maturity, Islamic deposits that mature cannot be renewed, and all Islamic deposits are required to be phased out by end-2011. In the short term, this will put some pressure on conventional banks’ earnings and funding, but this will not be material. The change will be a boon for the Islamic banks in Qatar. However, we do not expect similar moves in other countries.

Profitability In broad terms, banks’ earnings in the region did not deteriorate as much as we had expected in 2010. All of the banks we cover reported profits for the year and, on average, ROAs were well in excess of 1%. However, there were some clear differences across countries. The banks in Dubai were the worst-affected because of lower revenues and high provisions. Revenues declined because of balance-sheet

shrinkage, and funding costs did not decline as much as in other countries because of aggressive competition for deposits. On the provisioning front, provisions as a percentage of pre-provision profits remained elevated. However, the provisions booked were lower than we had expected and, as a result, the banks reported better-than-anticipated profits.


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For the Abu Dhabi banks, while provisions remained elevated, this was more than offset by higher revenues thanks to slightly higher business volumes and lower funding costs. As a result, the Abu Dhabi banks reported higher earnings in 2010 than in 2009. The Qatari banks as a group also reported higher profits for 2010, mostly driven by higher

business volumes and lower funding costs. In Saudi Arabia, the picture varied across institutions. However, the overriding trend was one of declining NIMs and, in most cases, elevated provisions in the Saudi Arabian context (although they were lower than in the UAE).

Chart 15: Provisions* Chart 16: ROA*

0%

20%

40%

60%

80%

100%

2008 2010 2008 2010 2008 2010 2008 2010

Qatar Saudi Arabia Abu Dhabi DubaiProv isions Profits

0

1

2

3

4

5

2008 2009 2010%

Dubai Abu Dhabi Saudi Qatar

* Average for the banks under our coverage; figures for Mashreqbank,Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010


* Average for the banks under our coverage; figures for Mashreqbank, Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010


We expect the banks’ profitability to start improving in 2011 as a result of higher business volumes and lower provisioning costs. However, meaningful improvements are unlikely to be apparent until 2012. First, provisions might

remain high in some jurisdictions as banks aim to increase general/portfolio provisions. Second, we expect business volumes to pick up in late 2011, and this is only likely to be reflected in the banks’ 2012 results.

Capital The region’s banks remain well capitalised by international standards, with Tier 1 capital ratios averaging around 15% at end-2010. More importantly, the bulk of the banks’ capital base is in the form of equity, with an equity-to-assets ratios of around 14%. Also, throughout the crisis, sovereigns in the region were supportive of their banking systems in terms of both liquidity and, in some cases, capital. This was most recently made evident when Qatar announced in Q1-2011 that it would inject additional equity capital into its banks.

Despite high capital adequacy ratios, a concern with the GCC banks is their large concentrations to a small number of large corporates. This was evident in the cases of Saad and Al-Gosaibi in Saudi Arabia and Dubai World in Dubai, where defaults or restructurings by a small number of companies had a meaningful impact on banks’ results.

Chart 17: Regulatory capital ratios* Chart 18: Equity-to-assets*

0

5

10

15

20

25

2008 2010 2008 2010 2008 2010 2008 2010

Abu Dhabi Qatar Saudi Arabia Dubai

%

Tier 1 Tier 20

5

10

15

20

Qatar Saudi Arabia Abu Dhabi Dubai

%

* Average for the banks under our coverage; figures for Mashreqbank,Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010


* Average for the banks under our coverage; figures for Mashreqbank, Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010



23



24

Resolution regimes. There is considerable discussion in the West about the declining boost to bank’s credit ratings from sovereign support. This is likely to put pressure on global banks’ ratings in the medium term. In our opinion, the GCC as a region has historically been interventionist, and this will continue to be the case. Therefore, we expect GCC banks to be less affected by global revisions to bank ratings. Table 1 shows the current ratings of the banks we cover in the GCC, as well as their unsupported ratings. In the absence of support, the Saudi banks would be rated in the single-A range, while the majority of the banks in the rest of the region would be rated in the BBB/Baa range.

Basel III. The region’s implementation of Basel II was relatively slow, and we expect a similar situation with Basel III. At this stage, we think Basel III will be more of a consideration in 2012 and beyond, rather than in 2011. We do not expect Basel III implementation to have a material impact on the GCC banks because the banks are already so well capitalised. The region’s banks have an Tier 1 capital ratio of around 15%, and with the exception of the UAE banks – where some hybrid Tier 1 is owned by governments – the capital consists mostly of equity.

Issuance and redemptions

Upcoming redemptions. The GCC banks have approximately USD 7bn of bond maturities in 2011, with USD 4bn in USD and the remainder in a broad range of currencies. Our refinancing numbers do not include callable LT2 bonds, as we believe that the banks will not call their outstanding callable LT2s. There is already a precedent for a bank (Gulf International Bank) not calling its LT2 securities, and the majority of the banks are inclined to pay the stepped-up funding costs rather than call and refinance the bonds, in our view. Issuance. We expect the banks in the region to issue c. USD 8.3bn of debt in 2011 across a range of currencies. The main caveat is that issuance in the offshore markets tends to be opportunistic rather than refinancing-driven. In 2010, the banks that had the greatest refinancing needs (some of the

UAE banks) were absent from the USD offshore market and had negative net issuance. In contrast, a number of the Qatari banks – which had no refinancing needs – came to the market to take advantage of very attractive levels for term funding. Emergence of alternative currencies. The bulk of the offshore funding for the Middle East banks has historically been in USD, partly because most of the region’s currencies are pegged to the dollar. In an interesting development, banks from the region have started to tap the growing Malaysian ringgit (MYR) market (as there is appetite from Islamic investors) and the Swiss franc (CHF) market (on the back of interest from private banks). While both markets remain small as a share of the overall market, we expect them to continue to develop in 2011.

Chart 19: Upcoming USD bond redemptions Chart 20: Upcoming bond redemptions – all currencies

0

2

4

6

8

10

2011 2012 2013 2014 2015 2016<

USD

bn

Dubai Abu Dhabi Bahrain Kuwait Qatar Saudi Arabia Oman

0

2

4

6

8

10

2011 2012 2013 2014 2015 2016<

USD

bn

Dubai Abu Dhabi Bahrain Kuwait Qatar Saudi Arabia Oman

Sources: Companies, Bloomberg, Standard Chartered Research Sources: Companies, Bloomberg, Standard Chartered Research


24



25

Table 1: Supported and unsupported ratings for GCC banksRatings Notch-up Unsupported rating

S&P Moody's S&P Moody's S&P Moody's Abu Dhabi

National Bank of Abu Dhabi A+ Aa3 2 3 A- A3 Abu Dhabi Commercial Bank A- A1 3 6 BBB- Ba1 First Gulf Bank NR A2 - 5 NR Ba1 Abu Dhabi Islamic Bank NR A2 - 6 NR Ba2

BahrainGulf International Bank BBB+ A3 2 4 BBB- Ba1 BBK - A3 - 3 NR Baa2 Arab Banking Corporation BBB Baa3 - 1 BBB Ba1

Dubai Emirates NBD NR A3 - 4 NR Ba1 Mashreqbank BBB+ Baa1 2 2 BBB- Baa3 Dubai Islamic Bank BBB- Baa1 2 5 BB Ba3

Kuwait Burgan Bank BBB+ A2 1 4 BBB Baa3

Qatar Qatar National Bank A+ Aa3 2 4 A- Baa1 Commercial Bank of Qatar A- A1 1 3 BBB+ Baa1 Doha Bank A- A2 1 4 BBB+ Baa3 Qatar Islamic Bank NR NR - - NR NR

Saudi Arabia Samba Financial Group A+ Aa3 1 2 A A2 Riyad Bank A+ A1 1 2 A A3 Saudi British Bank A Aa3 1 2 A- A2 Banque Saudi Fransi A Aa3 1 2 A- A2 Arab National Bank A A1 1 2 A- A3

Sources: Rating agencies, Standard Chartered Research


25

Credit strategy


Technicals – The deepening of the Middle East credit markets Analysts: Vijay Chander (+852 3983 8569), Sandeep Tharian (+44 20 7885 5171)

1

Middle East gradually gains global investor interestThe region’s credit markets have grown substantially but remain small relative to peers Bond markets in the Middle East have grown substantially over the past decade, powered mainly by debt issuance from sovereigns and quasi-sovereigns. While the region’s bond markets are still small in absolute terms compared to emerging markets like Asia, Latam and emerging Europe,

they have grown faster over the past decade than these markets, attracting increasing numbers of benchmarked and non-benchmarked investors. The region’s international bond markets have led the growth, while local-currency markets have expanded more slowly.

Chart 1: Size of international bond and note markets Chart 2: Size of local-currency bond markets

0 5 10 15 20 25

Developed countries

AfricaMiddle East

Emerging EuropeAsia

Latam

USD trn

0 100 200 300 400 500USD bn

2000 Q3-2010

0 10 20 30 40 50 60

Developed countries

Africa & Middle EastEmerging Europe

LatamAsia

USD trn

0 1 2 3 4 5 6 7USD trn

2000 Q2-2010

Sources: BIS, Standard Chartered Research Sources: BIS, Standard Chartered Research Economic diversification is a key driver of supply in the region Sovereigns and quasi-sovereigns from Abu Dhabi, Qatar and Dubai dominate the space, with c.USD 68bn of outstanding bonds (out of the region’s total of USD 117bn as at February 2011). Sovereign and quasi-sovereign issuers from Abu Dhabi and Qatar, which have strong budget and current account surpluses, have also regularly tapped the bond markets for the following purposes: (1) to set sovereign

benchmarks for the benefit of other issuers; (2) to borrow in the international fixed income markets, taking advantage of their strong sovereign ratings and using their surpluses to invest internationally to diversify their portfolios; and (3) to make quasi-sovereign issuers more commercial and disciplined and to subject them to closer market scrutiny.

Chart 3: Stellar international bond-market growth … Middle East international bond and note market growth

Chart 4: … powered by UAE and Qatar sovereigns and quasi-sovereigns GCC international bond market size (as of February 2011)

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q3-2010

USD

bn

05

10152025303540

AbuDhabi

Qatar Dubai Saudi Bahrain Kuwait Oman Ras-al-Khaimah

Sharjah

USD

bn

Sovereigns Quasi-sovereigns Financials Corporates

Sources: BIS, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research

Note: Does not include local-currency domestic bonds or the USD 20bn issued by Dubai to the UAE central bank and Abu Dhabi


27


Technicals – The deepening of the Middle East credit markets

2

Middle East bond-market size metrics Sovereigns and quasi-sovereigns dominate While a portion of the region’s bond proceeds has been invested in the development of hydrocarbon assets, a larger share has been invested in infrastructure development and other projects aimed at diversifying these economies away from the hydrocarbon sector. Infrastructure sectors like utilities and transportation are big bond issuers, as well as real-estate

names from markets including Dubai, Abu Dhabi, Qatar and Saudi Arabia. Financials also account for a substantial share of bonds outstanding. Non-quasi-sovereign corporate issues have been few and far between. However, we expect this sector to grow as the region’s corporates become better established and investors get more comfortable with the names.

Chart 5: Real estate, oil & gas, and utilities are the biggestnon-financial, non-sovereign issuers (as of February 2011)

Chart 6: Quasi-sovereigns are the biggest issuers (as of February 2011)

0 5 10 15 20 25 30 35

Govt inv. companiesTelecommunications

TransportationOthersUtilities

Oil & gasReal estateSovereignsFinancials

USD bn

0 10 20 30 40 50 60

Corporates

Sovereigns

Financials

Quasi-sovereigns

USD bn

Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research


The region’s international bond market is predominantly USD-focused, with the UAE dirham (AED) also being a preferred issuance currency. AED issuance and investor participation were in vogue in 2007-08 due to expectations of a dollar de-peg, but have slowed to a trickle since then. Issues in other

currencies have been small, and are used mainly as a diversification tool by frequent issuers in the financial space. The bond market has increasingly become fixed-rate-centric, with declining participation by traditional floating-rate investors. Banks represent a big share of the region’s floating-rate paper.

Chart 7: USD issuance dominates … Composition of GCC bond market by currency type

Chart 8: … while floaters are comparatively small Composition of GCC bond market by coupon type

GBP 2.2

MYR 1.0

EUR 5.1

AED 10.2

Others 1.3

USD 94.2

SAR 1.7CHF 1.3

FloatingUSD 29bn

FixedUSD 88bn

Note: ‘Others’ include SGD, JPY, HKD, THB, AUD, SKK, TRY andZAR; Source: Standard Chartered Research

Source: Standard Chartered Research


Qatar and Abu Dhabi names have dominated new issues over the last two years. While Qatar borrows on behalf of its fledgling quasi-sovereign entities and on-lends to them, Abu Dhabi

encourages the quasi-sovereigns to borrow on their own and become financially independent as standalone entities.


28



3

Chart 9: Qatar becomes a bigger issuer Bond issuance by the region’s 3 major issuers (since 2007)

Chart 10: Quasi-sovereign issuance increases GCC bond issuance by type of issuer (since 2007)

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010

USD

bn

Abu Dhabi Dubai Qatar

0

5

10

15

20

25

30

35

2007 2008 2009 2010

USD

bn

Sovereign Quasi-sovereign Financial Corporate

Note: Does not include the USD 20bn issued by Dubai in 2009 andsubscribed by Abu Dhabi; Sources: Bloomberg, Standard Chartered

Research

Note: Does not include the USD 20bn issued by Dubai in 2009 andsubscribed by Abu Dhabi; Sources: Bloomberg, Standard Chartered

Research

GCC bond issuance and redemption in 2010 Qatar and Abu Dhabi continue to dominate issuance Gross issuance from the Middle East totalled USD 28.0bn in 2010, much lower than the USD 34.6bn in 2009. The overhang of the Dubai World restructuring caused issuers to stay away from the market in H1-2010, while the unusually large USD 10bn of Qatar sovereign issuance in 2009 inflated the overall number for that year. In contrast, the Qatar sovereign stayed away from the bond markets in 2010, with Qatari Diar (sovereign-guaranteed), Qatar Telecom and the Qatari banks being the main issuers. Issuance out of Abu

Dhabi had a similar profile in 2010; the main issuers were the sovereign-guaranteed Waha Aerospace (a lessor of military aircraft), IPIC (the hydrocarbon-sector holding company), and Abu Dhabi-based banks. Redemptions from Abu Dhabi were mostly out of the banking sector. While H1-2010 was relatively quiet for issuance as the markets awaited details of the Dubai World restructuring, Q4-2010 was a sweet spot as tight spreads and low Treasury yields attracted issuers to the market (this phenomenon was also witnessed in Asia).

Chart 11: GCC issuance picked up towards end-2010 GCC issuance/redemptions in 2010 by quarter

Chart 12: Qatar saw increased issuance in 2010 GCC issuance/redemptions in 2010 by country

-6

-3

0

3

6

9

12

15

18

Q1 Q2 Q3 Q4

USD

bn

Issuance Redemptions Net issuance

-4

-2

0

2

4

6

8

10

Qatar AbuDhabi

Dubai Bahrain Saudi Kuwait Ras-al-Khaimah

Oman

USD

bn



Saudi and Bahraini issuers provide diversity; Dubai names come back After a relatively quiet 2009 and H1-2010 due to the overhang from the property-sector meltdown, Dubai-based borrowers issued almost USD 5bn in 2010. The Dubai sovereign and quasi-sovereign utility DEWA were the main issuers. Dubai

borrowers also had significant redemptions from the banking and property sectors, with Nakheel redeeming its AED bond. Bahraini and Saudi entities were the region’s other large issuers. In Bahrain, issuance was led by the sovereign,


29



4

government investment company Mumtalakat, and banks, while Saudi issuers included petro-chemical major SABIC and

banks. These new issuers bring diversity and help to improve the liquidity of the Middle East debt markets.

Chart 13: Bahrain was the biggest sovereign issuer in 2010 GCC issuance/redemptions in 2010 by sovereigns

Chart 14: Qatari quasi-sovereigns were the biggest issuers GCC issuance/redemptions in 2010 by quasi-sovereigns

-2

-1

1

2

Bahrain Dubai Ras-al-Khaimah

Abu Dhabi Qatar

USD

bn


-2

0

2

4

6

8

Qatar Abu Dhabi Dubai Saudi Bahrain

USD

bnIssuance Redemptions Net issuance


Issuance and redemptions in the financials space finely balanced Issuance and redemptions were finely balanced overall last year, at a little over USD 8.5bn each. That said, the distribution of financial-sector issuance and redemptions was far from even across markets. Abu Dhabi and Dubai both had relatively high redemptions in 2010, but Abu Dhabi banks issued more than USD 2bn, keeping net redemptions low. Saudi Arabia’s issuance and redemption profile was balanced. Saudi British Bank refinanced its 2010 redemption;

the other issuer was Banque Saudi Fransi, while the state-owned National Commercial Bank redeemed its 2010 maturity. Qatar was the largest issuer of bank paper, with Qatar Islamic Bank and Qatar National Bank tapping the USD bond markets for the first time. Other issuers in the financial space included the Kuwaiti financial holding company KIPCO; its subsidiary, Burgan Bank, which issued a LT2 bond; and Bahraini bank BBK.

Chart 15: Financials in Dubai failed to issue GCC issuance/redemptions in 2010 by financials

Chart 16: Corporate issuance was comparatively small GCC issuance/redemptions in 2010 by corporates

-4

-3

-2

-1

0

1

2

3

Qatar AbuDhabi

Bahrain Saudi Kuwait Dubai Ras-al-Khaimah

USD

bn


-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Dubai Saudi Oman Kuwait Bahrain AbuDhabi

USD

bn



Corporate redemptions exceed issuance The non-quasi-sovereign corporate space in the Middle East remains small, reflecting the sector’s relative lack of development as sovereign-linked entities continue to dominate. However, we expect this segment to grow significantly as first-time issuers look to tap the market.

Increasing comfort with the region among international investors, improved corporate governance and a well-tested debt resolution mechanism are essential to the growth of this sector, and are still evolving, in our view.


30



5

Middle East new-issue bond allocation and performance in 2010

Chart 17: Middle East 2010 new-issue allocation profile by geography

0%

20%

40%

60%

80%

100%

BAHR

AIN

'20

DUGB

'15

DUGB

'20

DEW

A '15

MUMT

AK '1

5

QATA

RI '1

5

QATA

RI '2

0

QTEL

'16

QTEL

'21

QTEL

'25

DEW

A '16

DEW

A '20

SABI

C '15

IPIC

'15

IPIC

'20

NBAD

'15

BSFR

'15

KIPC

O '20

AKBN

K '15

BURG

N '20

QIB

'15

YKBN

K '15

ISDB

'15

BBK

'15

ADIB

'15

SABB

AB '1

5

QNB

'15

YUKS

EL '1

5

MBPS

'15

US Europe Asia ME

Chart 18: Middle East 2010 new-issue allocation profile by investor type

0%

20%

40%

60%

80%

100%

BAHR

AIN

'20

DUGB

'15

DUGB

'20

DEW

A '15

MUMT

AK '1

5

QATA

RI '1

5

QATA

RI '2

0

QTEL

'16

QTEL

'21

QTEL

'25

DEW

A '16

DEW

A '20

SABI

C '15

IPIC

'15

IPIC

'20

NBAD

'15

BSFR

'15

KIPC

O '20

AKBN

K '15

BURG

N '20

QIB

'15

YKBN

K '15

ISDB

'15

BBK

'15

ADIB

'15

SABB

AB '1

5

QNB

'15

YUKS

EL '1

5

MBPS

'15

AM/HF Banks Insurance/Pension Retail/PB

Chart 19: Middle East 2010 new-issue performance since issue

-250

-200

-150

-100

-50

0

50

100

BAHR

AIN

'20

DUGB

'15

DUGB

'20

DEW

A '15

MUMT

AK '1

5

QATA

RI '1

5

QATA

RI '2

0

QTEL

'16

QTEL

'21

QTEL

'25

DEW

A '16

DEW

A '20

SABI

C '15

IPIC

'15

IPIC

'20

NBAD

'15

BSFR

'15

KIPC

O '20

AKBN

K '15

BURG

N '20

QIB

'15

YKBN

K '15

ISDB

'15

BBK

'15

ADIB

'15

SABB

AB '1

5

QNB

'15

YUKS

EL '1

5

MBPS

'15

Spre

ad m

ovem

ent o

ver T

reas

ury (

bps)

Sources (for Charts 17-19): Bloomberg, Standard Chartered Research




144A eligible bonds


31



6

US investors prefer longer-dated quasi-sovereigns; Middle East investors prefer shorter-dated paper The allocation profiles for the Middle East transactions concluded in 2010 (including two from Turkey) provide some interesting insights. US investors seem to prefer the relatively longer-dated

quasi-sovereign names, including the Qatari quasi-sovereign complex, IPIC and Bahrain sovereign paper.

European investors have taken up the slack in Reg-S-only issues of similar profile, with prime examples including the MUMTALAK 15, SABIC 15, and DUGB 15 and 20.

Middle East investors seldom venture into maturities of more than 5Y given the absence of traditional long-only asset managers and insurance companies. The BURGN 20 and QATARI 20 are the exceptions.

Middle East investors also seem to prefer bank paper which gets placed with local banks.

Asian investors are becoming increasingly active in the Middle East space, though their participation remains relatively small. Saudi British Bank’s USD 600mn transaction in 2010 was one exception, possibly due to HSBC’s 40% stake in the bank.

Other deals with significant Asian participation in 2010 included the DUGB 15 and 20, in which Asian private banks were big investors, and sukuk transactions from Islamic banks, which attracted strong interest from Malaysian Islamic investors.

Last year’s two Turkish transactions attracted strong European participation. The AKBANK 15 found favour with US investors as well.

Looking at allocations by investor type in the four Middle East sectors we have evaluated, a distinctive pattern emerges:

Asset managers and hedge funds were more prominent investors in the quasi-sovereign bond issues.

Banks were more prominent as an investor class in the financials.

Insurance and pension funds were less prominent investors in the Middle East.

With the exception of a handful of deals (such as the DUBAI 15 sovereign issue), retail and private banking investors were conspicuous in their absence.

Expected supply and redemptions in 2011

GCC 2011 redemptions are unevenly distributed 2011 bond redemptions for the GCC region total around USD 11.9bn, with the banking sector representing the majority (USD 7.3bn). In terms of geography, Abu Dhabi (USD 5.4bn) and Dubai (USD 2.3bn) have large redemptions, mainly from the banking and quasi-sovereign sectors. The Saudi banks also have large redemptions of USD 1.5bn due in 2011. We expect total issuance of around USD 33.5bn from the GCC region in 2011 (we have excluded non-GCC

sovereign issuance from this calculation). Abu Dhabi and Dubai dominate, with combined expected issuance of USD 18.6bn. By sector, we expect quasi-sovereign issuers to continue to dominate new issues, with large bond issues from quasi-sovereigns domiciled in Qatar and Saudi Arabia, as well as Abu Dhabi and Dubai. The financial sector is also expected to be a large issuer, though net issuance will be marginal given large maturities. Table 1 at the end of this section shows expected supply at the individual issuer level.

Chart 20: GCC expected redemptions of USD 11.9bn GCC expected redemptions in 2011 by quarter

Chart 21: Qatar and Abu Dhabi to see issuance GCC expected issuance/redemptions in 2011 by country

0

1

2

3

4

5

6

Q1 Q2 Q3 Q4

USD

bn

-10

-5

0

5

10

15

AbuDhabi

Qatar Dubai Saudi Bahrain Kuwait Oman

USD

bn




32



7

Abu Dhabi and Dubai likely to be the dominant issuers among GCC sovereigns Dubai and Abu Dhabi are likely to dominate this year’s expected GCC sovereign issuance of USD 5.0bn. Abu Dhabi’s expected USD 1.5bn issue is motivated by the need to set a long-dated benchmark, while Dubai is likely to issue USD 1.5bn in order to fund its budget gap. In the quasi-sovereign space, we expect Abu Dhabi to be the leading issuer, with USD 8.0bn in issuance to meet refinancing

requirements, acquisition financing and capital expenditure. Quasi-sovereigns from Qatar, Dubai and Saudi Arabia are also likely to be prominent issuers. Almost 45% of expected quasi-sovereign issuance is expected to be from new entities in the infrastructure and non-petroleum industrial sectors, which should support the diversification of these economies.

Chart 22: Sovereign issuance expected to be high GCC expected issuance/redemptions in 2011 by sovereigns

Chart 23: High net issuance for quasi-sovereigns GCC expected issuance/redemptions in 2011 by quasi-sovereigns

-0.5

0.0

0.5

1.0

1.5

2.0

Abu Dhabi Dubai Qatar Bahrain

USD

bn


-4-202468

10

Abu Dhabi Qatar Dubai Saudi Bahrain

USD

bn



GCC financials are expected to see net redemptions in 2011 While we expect supply of c.USD 8.3bn from the GCC financial sector in 2011, net supply is likely to be flat given large redemptions. The bulk of the issuance in the space is expected to be for refinancing of upcoming maturities. Qatar, where banks are still growing strongly, is the only notable

exception. The Saudi banking sector remains liquid, and new issuance is likely to be limited to the refinancing of upcoming maturities. Bahrain’s banking sector, with its large wholesale banks, may be another pocket of issuance in the GCC space.

Chart 24: Financial issuance likely to be opportunistic GCC expected issuance/redemptions in 2011 by financials

Chart 25: Limited corporate issuance in the GCC GCC expected issuance/redemptions in 2011 by corporates

-3

-2

-1

0

1

2

3

AbuDhabi

Qatar Saudi Bahrain Dubai Kuwait

USD

bn


-0.8-0.6-0.4-0.20.00.20.40.6

Saudi Dubai Abu Dhabi Bahrain

USD

bn



Corporates are less prominent issuers than quasi-sovereigns in the GCC The non quasi-sovereign corporate sector is still a small portion of the GCC bond market, reflecting the absence of large, independent corporates with strong businesses.

Having said that, we expect a few first-time issuers in this space to tap the USD market in 2011. Apart from these new names, we could also see refinancing-related issuance from


33



8

Saudi Arabia and Dubai. While this sector is relatively small in the context of the overall GCC bond market, we expect alpha returns through fundamental value discovery, which

could drive portfolio returns in the current environment of low fixed income returns.

Chart 26: Sovereign, quasi-sovereign and corporate redemptions in GCC (bond maturity profile)

0

2

4

6

8

10

12

14

Q1 20

11

Q2 20

11

Q3 20

11

Q4 20

11

Q1 20

12

Q2 20

12

Q3 20

12

Q4 20

12

Q1 20

13

Q2 20

13

Q3 20

13

Q4 20

13

Q1 20

14

Q2 20

14

Q3 20

14

Q4 20

14

Q1 20

15

Q2 20

15

Q3 20

15

Q4 20

15

USD

bn

Abu Dhabi Bahrain Dubai Kuwait Oman Qatar Ras-al-Khaimah Saudi Sharjah

Note: Excludes callable bonds; Includes USD 20bn bond issued by Dubai and subscribed by Abu Dhabi; Sources: Bloomberg, Standard Chartered Research

Sovereign, quasi-sovereign and corporate redemptions are back-ended The maturity profile for GCC sovereign, quasi-sovereign and corporate issuers differs from that of the financial sector over the next five years (through the final quarter of 2015). Redemptions in the sovereign, quasi-sovereign and corporate sectors are back-loaded for the most part, and are relatively well contained until Q4-2013. Except for an average of around USD 4.0bn in Q3 and Q4-2012 and another brief spike in redemptions to USD 4.4bn in Q2-2013, redemptions average USD 2.0bn or less through the end of 2013. It is only after 2013 that redemptions pick up sharply, with 2014 seeing the bulk of the maturities. More significantly, the 2014 redemptions are concentrated in Dubai, Abu Dhabi and Qatar, whose biggest refinancing

needs fall within this window. The maturity profile of the financials is very different. Redemption volume is relatively front-loaded through the end of 2012, followed by a lull until the end of Q2-2014 before redemptions pick up again. While Abu Dhabi financial-sector redemptions are evenly distributed throughout the five-year period, redemptions out of Dubai and Saudi Arabia are front-loaded. Those from the Qatar and Oman financial sectors are back-loaded, with the bulk of redemptions from these two countries occurring in 2015. By volume, the largest quarterly amount of financial-sector redemptions for the GCC as a whole occurs in Q4-2015, at USD 4.6bn.

Chart 27: Financial redemptions in GCC (bond maturity profile)

0

1

2

3

4

5

Q1 20

11

Q2 20

11

Q3 20

11

Q4 20

11

Q1 20

12

Q2 20

12

Q3 20

12

Q4 20

12

Q1 20

13

Q2 20

13

Q3 20

13

Q4 20

13

Q1 20

14

Q2 20

14

Q3 20

14

Q4 20

14

Q1 20

15

Q2 20

15

Q3 20

15

Q4 20

15

USD

bn

Abu Dhabi Bahrain Dubai Kuwait Oman Qatar Saudi

Note: Excludes callable bonds; Sources: Bloomberg, Standard Chartered Research


34



9

Flows into Middle East are on the rise

Asia and Middle East allocations grow within the overall EM space Emerging markets as an asset class came into their own in 2010. As a consequence, EM bond funds attracted sizeable inflows in excess of USD 53.5bn during the year. Within the EM space, the Middle East and Asia have continued to increase their shares of inflows and flows to both regions have grown strongly, even though they still lag the larger EM space in terms of overall allocations. It is important to note that the GCC region remains an off-index investment for most index

investors. Thus, even a small shift in fund manager allocations towards the GCC region can have a large positive impact on regional bond-market performance. With the world’s attention currently focused on the Middle East, once the unrest ceases, we believe investors will look to buy on dips as they see the Middle East in a more positive light and redirect more of their flows to the region.

Chart 28: EM bond funds saw significant inflows in 2010 Cumulative flows into EM bond funds (2010)

Chart 29: Middle East allocations have been rising Allocation profile of EM bond funds

0

10

20

30

40

50

60

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

USD

bn

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010

%

Emerging Asia Emerging EuropeLatam Middle East

Sources: EPFR Global, Standard Chartered Research Sources: EPFR Global, Standard Chartered Research

Table 1: Expected issuance in 2011

Credit H1(USD mn)

H2(USD mn) Comments

Sovereign Abu Dhabi 0 1,500 Has a maturity coming due in 2012; issuance would be primarily to set a new long-

end benchmark; Abu Dhabi did an NDR in Sep 2010 Algeria 0 0 Unlikely to come to the market Bahrain 0 1,000 Looking to tap the market in early 2011 Dubai 0 1,500 Expected to come to the market to fund budget gap; announced budget deficit is

USD 1bn Egypt 0 0 Unlikely to come to the market Kuwait 0 0 Unlikely to come to the market Lebanon 1,000 1,000 Has a maturity coming due in May 2011; already issued USD 265mn Morocco 0 0 Unlikely to come to the market Oman 0 0 Unlikely to come to the market Pakistan 0 0 While fiscal deficit remains large, Pakistan is unlikely to be in a position to tap the

international bond markets and will depend primarily on multilateral/bilateral assistance Qatar 0 1,000 Could possibly come to the market later this year to issue a benchmark Ras-al-Khaimah 0 0 Unlikely to come to the market Saudi Arabia 0 0 Unlikely to come to the market Tunisia 0 1,000 While Tunisia must fund its fiscal deficit, political turmoil could delay funding plans

this year Turkey 2,000 2,000 Expected to come to the market to fund budget gap; has already issued USD 1bn


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10

Credit H1(USD mn)

H2(USD mn) Comments

Quasi-sovereigns Abu Dhabi

TAQA 0 1,000 Refinanced 2011 maturities at the end of 2010; could look to refinance USD 1.5bn 2012 bond

Aldar Properties 0 0 Unlikely to come to the market Dolphin Energy 0 500 May look to tap the market to refinance existing debt IPIC 2,500 0 Looking to issue to fund CEPSA acquisition; issuance will continue to be largely

acquisition- and refinancing-driven Mubadala 0 1,000 Has maturities of c.USD 2.4bn in 2011-12, large capex needs; could issue to

refresh benchmarks TDIC 0 1,000 Issuance to be capex-driven Others 0 2,000

Dubai DIFC Investments 0 0 Unlikely to come to the market DP World 0 1,250 Could look to refinance USD 3bn facility maturing in 2012 DEWA 0 1,000 Issuance to be capex- and refinancing-driven (maturities include a USD 2.2bn loan

in 2012 and a AED 3.2bn sukuk in 2013) DHCOG 0 0 Unlikely to come to the market JAFZ 0 0 Unlikely to come to the market Others 500 1,000 Qatar Nakilat Inc. 0 0 Unlikely to come to the market Qtel 0 0 Unlikely to come to the market RasGas 0 0 Unlikely to come to the market Others 1,000 3,000

Other

Mumtalakat 0 500 Could look to refinance USD 1.7bn of debt maturing between 2011-14 SABIC 0 1,000 Could look to refinance 2012 maturities Others 0 2,000

Financials Abu Dhabi

Abu Dhabi Commercial Bank

200 400 Likely to tap the non-USD market to meet USD 1.8bn (equiv.) in refinancing of both loans and bonds; has almost USD 1.8bn (equiv.) of refinancing of loans and bonds in 2011, with USD 1.4bn (equiv.) in foreign currencies. These figures exclude USD 362mn of a LT2 callable in May 2011 which we do not expect the bank to call

Abu Dhabi Islamic Bank 0 350 Could opportunistically tap the non-USD Islamic market; has USD 800mn bond refinancing in Q4-2011

First Gulf Bank 0 400 FGB only has a USD 150mn loan refinancing in 2011 but could opportunistically tap the market; has almost USD 1.7bn (equiv.) maturing across both loans and bonds in 2012

National Bank of Abu Dhabi

0 750 No refinancing of term debt due in 2011, but could issue to fund future growth; NBAD has a GBP 350mn bond refinancing in February 2012

Others 500 0 Bahrain

Arab Banking Corp. 0 0 Unlikely to come to the market in 2011; has a USD 277mn bond maturity in Q3-2011

BBK 0 0 Unlikely to come to the market in 2011; has a USD 500mn bond maturing in March 2011

Gulf International Bank 0 400 Could opportunistically tap the market to refinance USD 350mn loan maturing in 2011; has a USD 350mn loan maturing in 2011 and almost USD 1.8bn of loans and bonds maturing in 2012

Others 500 0


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11

Credit H1(USD mn)

H2(USD mn) Comments

Dubai Dubai Islamic Bank 300 0 Could potentially tap the non-USD Islamic market; does not have refinancing of

term debt in 2011 but has c.USD 650mn of bonds maturing in March 2012 and could opportunistically tap the MYR market

Emirates NBD 0 500 Could opportunistically start pre-funding for 2012 in non-USD; has slightly more than USD1bn in bond maturities in 2011 and USD 2.2bn (equiv.) in 2012

Mashreqbank 0 0 Unlikely to come to the market; USD 300mn bond maturity in April 2011, USD 370mn of a callable LT2 in January 2012

Kuwait Burgan Bank 0 0 Unlikely to come to the market in 2011; no material refinancing due in 2011 Gulf Investment Corp. 0 300 Has USD 535mn (equiv.) of bonds maturing in May 2011 Kuwait Projects Co. Holdings

0 500 Could opportunistically tap the market; has a USD 350mn bond maturity in April 2011 and USD 340mn (equiv.) of loan maturities over the year

Qatar Commercial Bank of Qatar 0 750 Has a USD 500mn bond maturity in November 2011 Doha Bank 0 500 Doha Bank doest not have refinancing of term debt in 2011, but it could

opportunistically tap the market; does not have refinancing of term debt in 2011 (excluding USD 210mn of a LT2 callable in December 2011, which we do not expect the bank to call)

Qatar Islamic Bank 0 0 Unlikely to come to the market; doest not have refinancing of term debt in 2011 Qatar National Bank 0 0 Unlikely to come to the market, unless opportunistically; doest not have

refinancing of term debt in 2011 Others 0 1,000

Saudi Arabia Arab National Bank 0 0 Unlikely to come to the market in 2011; does not have refinancing of term debt in

2011 (excluding a USD 500mn LT2 callable in December 2011) Banque Saudi Fransi 0 400 Could opportunistically tap the market; has a loan refinancing of USD 183mn in

September 2011 Riyad Bank 0 0 Unlikely to come to the market in 2011; has a USD 500mn bond maturing in May

2011 Samba Financial Group 0 0 Unlikely to come to the market in 2011; has a USD 500mn bond maturing in May

2011 Saudi British Bank 0 500 Could opportunistically tap the market; has a EUR 325mn bond maturing in April

2011 Corporates Oman

MB Petroleum Services 0 0 Unlikely to come to the market Saudi Arabia

Dar Al-Arkan 0 500 Could look to refinance USD 1bn 2012 sukuk Turkey

Yüksel In aat AS 0 0 Unlikely to come to the market Others

Others 0 500



37


Middle East bond valuations – Attractive as ever Analysts: Vijay Chander (+852 3983 8569), Sandeep Tharian (+44 20 7885 5171)

12

The Middle East offers value following spread widening in wake of regional unrest

Tightening trend on Middle East cash bonds upset by regional unrest Market sentiment in the Middle East generally improved throughout 2010. Early 2011 has seen an abrupt negative shift in sentiment, largely as a knee-jerk reaction to the tensions unfolding in the region. However, once markets discount the fact that the unrest is unlikely to spread further, and particularly that countries like the UAE are likely to remain calm, spreads should start compressing again.

Towards the end of 2010, sentiment towards the region was on a clearly improving trajectory, as demonstrated by the significant pick-up in bond issuance in Q4-2010. Investors were increasingly differentiating between credits and focusing on standalone credit quality. While recent events have hurt sentiment towards the region, causing spreads to widen, we expect investors to continue to differentiate between credits – and use the current weakness to go long the region’s fundamentally stronger names.

Chart 1: Dubai complex yield Chart 2: Abu Dhabi complex spread

3

5

7

9

11

13

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

%

Sovereigns (3.8) Quasi-sovereigns (4.8) Financials (NA)

0

50

100

150

200

250

300

350

Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

Z-sp

read

(bps

)

Sovereigns (3.4) Quasi-sovereigns (4.8) Financials (3.5)

Note: Dubai financials are FRNs; Average duration given in brackets;Source: Standard Chartered Research

Note: Average duration given in brackets

Source: Standard Chartered Research All sectors performed well throughout most of 2010, in particular in H2. In the Dubai space, all three sectors – sovereigns, quasi-sovereigns and financials – have traded in line with each other for the entire period since the beginning of 2010, except for the past month or so, when financials outperformed sovereigns and quasi-sovereigns. This is largely because they are short-dated FRNs, where the pull-to par effect has dominated. In Abu Dhabi, while quasi-sovereign and the financial-sector spreads have narrowed versus the sovereigns and are unlikely to tighten further, the quasi-sovereigns continue to be good proxies for the sovereign. In a pattern similar to that seen in Dubai and Abu Dhabi, Qatar sovereigns, quasi-sovereigns and financials all traded tighter throughout 2010 and have only recently

widened out on the back of the regional unrest. It is only in Qatar that the spread differentials across sectors follow the global norm – i.e., sovereigns are the tightest, followed by quasi-sovereigns, with financials trading the widest. In Abu Dhabi, quasi-sovereigns trade wider than financials, while in Dubai, financials are the tightest. One reason for this is that all the Dubai financials are short-dated FRNs. In terms of the spread differential between sovereigns and quasi-sovereigns, higher-rated GCC quasi-sovereigns such as those from Abu Dhabi and Qatar are trading relatively wide to the sovereign, while in lower-rated Dubai, the quasi-sovereigns are quoted inside the sovereign. Both DP World and DEWA (the two Dubai quasi-sovereign names evaluated here) trade inside the sovereign, reflecting investor confidence in their strong standalone balance-sheet strength.


38


Middle East bond valuations – Attractive as ever

13

Chart 3: Qatar complex spread Chart 4: Sovereign/quasi-sovereign spread differential

0

100

200

300

400

500


Z-sp

read

(bps

)

Sovereigns (7.2) Quasi-sovereigns (5.6) Financials (4.5)

-40-20

020406080

100120140

Russ

ia

Braz

il

Abu D

habi

Qatar

Kore

a

Malay

sia

Duba

i

Z-sp

read

(bps

)

Note: Average duration given in brackets; Source: Standard CharteredResearch

Note: Comparable bonds of similar maturities used; Source: Standard Chartered Research

GCC bonds deliver mixed risk-adjusted returns

Dubai quasi-sovereigns tightened in the most, but Abu Dhabi sovereigns are less volatile Evaluating GCC performance across key sectors, Dubai quasi-sovereigns tightened in the most in 2010 (162bps), followed by Qatar financials (85bps) and Abu Dhabi quasi-sovereigns (64bps). While Dubai quasi-sovereigns outperformed on a spread basis (attributable to the fact that they were at their wides after the Dubai World crisis), they were the worst performers on a risk-adjusted basis – as shown in Chart 6, where we plot risk-adjusted returns versus average

duration. The Dubai complex suffered the highest volatility, as indicated by the size of the bubble in the chart. The Abu Dhabi quasi-sovereigns held up relatively well on a volatility basis (fundamentally weaker names like TAQA were well supported by strong technicals), while Qatar quasi-sovereigns underperformed. Qatar-based financials were the strongest performers on a risk-adjusted basis, with Abu Dhabi sovereign bonds in second place.

Chart 5: GCC spread performance since January 2010 Chart 6: GCC risk-adjusted returns for 2010

-200

-150

-100

-50

0

50

AD s

ov

AD q

uasi

AD fi

n

DU s

ov

DU q

uasi

QA s

ov

QA q

uasi

QA fi

n

Spre

ad m

ovem

ent (

bps)

AD fin

AD sov

AD quasiDU sov

DU quasi

QA fin

QA sov

QA quasi

0

1

2

3

4

1 2 3 4 5 6 7 8 9Average duration

Risk

-adj

uste

d re

turn

AD, DU and QA stand for Abu Dhabi, Dubai and Qatar, respectively;Source: Standard Chartered Research

Note: Risk-adjusted return calculated as total return over price volatility; Volatility indicated by bubble size; AD, DU and QA stand for

Abu Dhabi, Dubai and Qatar, respectively; Source: Standard Chartered Research

Recent widening in ME sovereigns and financials provides a good entry point

ME financials have been consistently more volatile than Asian financial-sector issues Financial-sector spreads in the Middle East converged with those in Asia at two points over the past year – in May-June 2010 and earlier this year. The recent unrest in the Middle East has caused Middle Eastern spreads to widen out to the

point where Middle East senior financial names are 66bps wider than spreads currently prevailing in Asia (in early 2010, Middle East senior financial names were over 100bps wider). In the CDS space, the clear underperformers have been


39



14

Bahrain (which has been hit by unrest) and Saudi Arabia (which has widened out on regional concerns). At these levels, we believe that Saudi Arabia offers value given that it

is not susceptible to the same political pressures seen in some parts of the Middle East.

Chart 7: Financial senior spreads in Asia and Middle East Chart 8: Select Middle East CDS performance

100

150

200

250

300

350


Z-sp

read

(bps

)

Middle East Asia

050

100150200250300350


bps

0100200300400500600700

Abu Dhabi Qatar BahrainSaudi Dubai (RHS)

Source: Standard Chartered Research Sources: Bloomberg, Standard Chartered Research

GCC bonds expected to deliver modest returns

Spread tightening can be expected once the current wave of unrest ends In order to assess expected returns for Middle Eastern credits over the next 12 months, we have attempted to create an index of GCC credits that includes 11 sub-sectors. We divided Abu Dhabi and Qatar credits into sovereigns, quasi-sovereigns and financials (a total of six sub-sectors), and grouped Dubai names into sovereigns and quasi-sovereigns (two sub-sectors; Dubai financials have been excluded due to the lack of fixed-rate bonds). Given the low number of bonds in Saudi Arabia, Bahrain and Kuwait, we combined sovereigns, quasi-sovereigns and financials from each of these three countries into one category (three sub-sectors). We included only fixed-rate bonds (except those

that are short-dated) and excluded issuers which are outliers. We then looked at the weighting of each of these sub-sectors in our index and assessed the average spreads and duration of each of the index components. Based on where these credits currently trade, we have estimated how much spreads will likely tighten over the next 12 months, which then allows us to calculate expected total returns for each sub-sector. Finally, since we do not expect US Treasuries to make any contribution to total returns, we have not considered the effect of Treasuries in our return calculations (we believe that US Treasuries will end the 12-month period at or near where they are currently quoted).

Table 1: Expected performance within the GCC bond space

Sub-sector Spread(02-Mar-11, bps)

Yield(02-Mar-11, %)

Duration (02-Mar-11)

Weight (02-Mar-11, %)

Expected spread tightening (bps)

Expected total return (%)

Abu Dhabi sovereign 124 3.0 3.4 6.2 15 3.51 Abu Dhabi quasi-sovereigns 242 4.7 4.8 22.5 25 5.94

Abu Dhabi financials 206 4.0 3.5 5.2 25 4.87 Dubai sovereign 495 7.4 3.8 4.9 75 10.24 Dubai quasi-sovereigns 468 7.3 4.8 4.6 50 9.71

Qatar sovereign 165 4.5 7.2 17.6 25 6.25 Qatar quasi-sovereigns 208 5.0 5.6 21.1 30 6.74

Qatar financials 271 5.2 4.5 5.9 25 6.36 Saudi credits 274 4.7 3.6 5.0 25 5.60 Bahrain credits 309 5.5 4.4 5.0 45 7.44 Kuwait credits 450 7.6 5.7 2.2 35 9.61 Total 100.0 30 6.51

Note: Fixed-rate bonds are used for the analysis above; Excludes short-dated bonds and outliers; Source: Standard Chartered Research


40



15

Looking at each of the individual sectors with a greater degree of granularity, we believe that the highly rated Abu Dhabi sovereigns, quasi-sovereigns and financials will tighten between 15bps and 25bps over the next 12 months. In Dubai, we expect the sovereign and quasi-sovereigns to tighten in 50-75bps. Given that Dubai quasi-sovereigns such as DP World and DEWA trade inside the sovereign, the expected spread compression for the quasi-sovereign sector is assumed to be lower. With regard to the Abu Dhabi quasi-sovereigns and financials, we see relatively low spread compression potential given the strong relative performance already witnessed over the past year. Similarly, we expect Qatar credits to tighten by 25-30bps over the next 12 months, since these are also relatively low-beta

names. Expected supply in 2011 is high for both Abu Dhabi and Qatar, which could also weigh on spread performance. We expect a similar spread performance for Bahraini and Kuwaiti credits over the next 12 months. The long-duration credits (Qatar sovereign, Qatar quasi-sovereigns and Kuwait credits) could suffer from bouts of volatility from a total return perspective since they are more sensitive to fluctuations in rates. The largest index weightings are accorded to the Abu Dhabi and Qatar quasi-sovereigns and the Qatar sovereign, in that order. Given our expectations of supply from the Abu Dhabi and Qatar quasi-sovereigns, we expect their weightings to be maintained, if not increased.

Value in the Middle East USD bond space

Table 2: Recommendations for the Middle East credit space in 2011 Sector Recommendation(1) Rationale Picks PansAbu Dhabi Sovereigns Underweight Although Abu Dhabi sovereign bonds are cheap for their rating,

the short end of the Abu Dhabi sovereign curve is trading tight versus the long end. With only one bond in the long-end space offering relative value, we remain underweight the sector.

ADGB 19 ADGB 14

Quasi-sovereigns Market weight The spread differential between sovereigns and quasi-sovereigns mostly played out over the course of 2010, but quasi-sovereigns offer marginal value over the sovereign and remain a good proxy for Abu Dhabi risk.

MUBAUH 19 DOLNRG 19 TAQAUH 12

Financials Market weight The relative value between National Bank of Abu Dhabi and the sovereign is now compelling, following the relative widening in the former. While there is strong demand for Islamic debt, we believe the recent spread tightening in the Islamic names is overdone.

NBADUH 14 ADIB 15

Dubai Sovereigns Overweight The Dubai sovereign curve has widened recently on unrest in the

Middle East. Given continued interest in high-yielding names from emerging markets, we expect the Dubai sovereign to outperform from a total return perspective.

DUGB 20

Quasi-sovereigns(2) Overweight The quasi-sovereigns in Dubai trade tighter than the sovereigns and offer lower relative value. However, stronger standalone names such as DP World appear attractive.

DPWDU 17

Qatar Sovereigns Market weight Qatar is one of the most stable credits in the region. Qatar

sovereign spreads have widened slightly on the back of recent unrest in the Middle East. The longer-dated Qatar bonds offer good value for its rating on a spread and total return basis.

QATAR 20

Quasi-sovereigns Market weight While the spread differential between sovereigns and quasi-sovereigns is not that attractive, explicitly guaranteed Qatari Diar bonds offer good pick-up over the sovereign.

QATDIA 15 RASGAS 19

Financials Market weight While there is strong demand for Islamic debt, the relative value play between Commercial Bank of Qatar and Qatar Islamic Bank is appealing.

COMQAT 14 QIBK 15

Others(3) Saudi credits Market weight While the Saudi credits do not offer value on a relative basis and

could be susceptible to further supply, strong credits offer good diversification from other credits in the Middle East.

SABIC 15 SABBAB 15

Bahrain credits Market weight Bahraini names have borne the brunt of the spread widening. Although there are limited ways to express a view, we believe the best value lies with the banks.

BBK 15

Kuwait credits Market weight Kuwaiti credits have widened recently as a result of regional unrest. On a relative basis, we see limited value.

Note: (1) Our recommendations are in the context of the GCC credit universe – see Table 1 above for the relative weights of the respective sub-sectors; (2) Includes DP World and DEWA. In the absence of fixed-rate bonds from the Dubai financial space, we exclude the sector from this

analysis; (3) For Saudi Arabia, Bahrain and Kuwait credits, given the relatively low number of bonds, we combine sovereigns, quasi-sovereignsand financials; Source: Standard Chartered Research


41



16

Middle East sovereign CDS and cash bonds are the cheapest across ratings classes A close analysis of sovereign scatter plots of duration versus Z-spreads across both cash bonds and CDS reveals that Middle East names are trading well wide of their sovereign counterparts across the world. They are accordingly among the cheapest credits and offer the best value in the sector. This is true across the credit spectrum, from highly rated credits such as Abu Dhabi and Qatar to lower-rated issuers such as Dubai. Among the cash bonds, the names we highlight among the higher-rated issues are the AA-rated ADGB 19 and QATAR 20, which are trading more than 30bps wider than BBB-rated Latam sovereigns such as Mexico, Brazil, Peru and Colombia. At the other end of the ratings scale, the DUBAI 20 is also trading well wide of its peers given its implied shadow rating in the BB range. By way of comparison, the DUBAI 20 is trading significantly wider than

lower-rated Vietnamese and Sri Lankan sovereign paper of similar maturity. Turning to CDS, AA-rated Abu Dhabi and Qatar are trading well wide of single-A-rated Malaysia and Korea and in line with the BBB-rated Latam countries. Furthermore, Saudi Arabia, which is rated AA- and currently quoted at 140bps, is trading well wide of single-A-rated Asian names like Malaysia and Korea, Thailand (BBB+), and the entire Latam BBB-rated space. While it is true that some of the perceived value is a ‘risk premium’ for the further tensions markets are discounting in the Middle East, we believe that the current unrest is unlikely to affect GCC countries such as the UAE and Saudi Arabia. Therefore, investors should consider going long select Middle East sovereign issues (such as the ADGB 19, one of our picks) on the back of the current weakness impacting this sector.

Chart 9: Benchmark EM sovereign cash bonds

* Implied shadow rating for Dubai; Source: Standard Chartered Research

Chart 10: 5Y EM sovereign CDS

* Implied shadow rating for Dubai; Source: Standard Chartered Research

Dubai appears cheap on a duration-adjusted basis

DUBAI*

M EXICO PERUABU DHABI

QATAR

SAUDI ARABIA

CHINA

BAHRAIN

M ALAYSIATHAILAND

COLOM BIA

KAZAKHSTANPOLAND

RUSSIA

BRAZILKOREA

VIETNAM

PHILIPPINESINDONESIA

TURKEY

0

100

200

300

400

500

AA AA- A A- BBB+ BBB BBB- BB BB-

S&P Rating

Spre

ad (b

ps)

VIETNM 20

SRILAN20

DUBAI 20*

UKRAINE 20

RUSSIA 20ABU DHABI 19

QATAR 20 KOREA 19BRAZIL 21

COLOM BIA 19NM EXICO 20

PERU 19

PHILIP20

POLAND 19TURKEY 21

INDON20

0

100

200

300

400

500

600

AA A A- BBB BBB- BB BB- B+ B-S&P Rating

Z-sp

read

(bps

)


42



17

We have an Overweight recommendation on the Dubai sovereign space, based on the fact that across the curve, the Dubai sovereign is trading cheap relative not just to its Middle Eastern peer group (see Chart 11 below), but also to EM peers

in other regions. On a duration-adjusted basis, we like the DUGB 20, which is one of our picks. We have already highlighted the higher-rated ADGB 19 as a pick. The QATAR 20 sovereign is also one of our picks among the higher-rated names.

Chart 11: GCC sovereign bonds


Dubai quasi-sovereigns also appear cheap, justifying our Overweight position Among the quasi-sovereigns, we have a Market weight position in Abu Dhabi and Qatar, while we have an Overweight position in Dubai. On a duration-adjusted basis, our top pick is the DPWDU 17, which is currently quoted at a Z-spread of over 400bps. Although the bond trades inside the sovereign, we still think it offers value in the regional and global context – and remains attractive given its outright yield level. We like a

number of the Abu Dhabi-based quasi-sovereigns, despite the fact that spread compression versus the sovereign has largely played out. Names we like include the TAQAUH 12 (which offers a good yield for short-duration paper), the DOLNRG 19 and the MUBAUH 19. Finally, in Qatar, we like the explicitly guaranteed QATDIA 15, which offers value versus the sovereign given still-wide relative spreads.

Chart 12: GCC quasi-sovereign bonds

Note: Excludes DUBAIH 12, DIFC 12 and JAFZ 12 and select non-benchmark names; Source: Standard Chartered Research

INTPET 15

DEWA 16DPWDU 17

DEWA 20

QTEL 25

NAKILAT 6.0 33

TAQA 36

DPWDU 37

TAQA 12 TAQA 13

RASGAS 8.2 14M UB 14

QTEL 14

TDIC 14TAQA 14

RASGAS 14

TDIC Sukuk 14

DEWA 15

M UM 15

QATDIA 15

SABIC 15 QTEL 16

TAQA 17TAQA 18

M UB 19QTEL 19DOLNRG 19

TAQA 19

RASGAS 19 QATDIA 20WAHA 20INTPET 20

QTEL 21

RASGAS 5.8 27

RASGAS 56.3 27

NAKILAT 6.2 33

100

150

200

250

300

350

400

450

500

550

0 2 4 6 8 10 12 14Duration (yrs)

Z-sp

read

(bps

)

ADGB 12

BAHRAIN 13 FRN

DUGB 13 (AED)

DUGB 13 FRN

ADGB 14

QATAR 14

BAHRAIN 14

RAK 14

DUGB 14 FRN

DUGB 14

QATAR 15

DUGB 15

ADGB 19QATAR 19

QATAR 20

BAHRAIN 20

DUGB 20

QATAR 30QATAR 40

0

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300

400

500

600

0 2 4 6 8 10 12 14Duration/maturity (yrs)

Z-sp

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/ di

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18

Select financials offer absolute value; there are a handful of relative value plays In the financials space, we have a Market weight position in both the Abu Dhabi and Qatar bank issuers. In Abu Dhabi, the spread differential between National Bank of Abu Dhabi and the sovereign has widened from a tight of around 50ps to almost 85bps. We recommend a relative value play where investors switch out of the ADGB 14 and buy the NBADUH 14 for a spread pick-up of 85bps, for an issue of similar duration. NBAD is 75% owned by the government of Abu

Dhabi. We continue to believe that the spread differential between the NBADUH 14 and the ADCB 14 remains too wide, though we see little catalyst for it to tighten. In Qatar, we reflect our Market weight position in the financials space via exposure to the COMQAT 14. Finally, in Bahrain, we think the BBK bonds offer the best value relative to other issuers.

Chart 13: GCC financial bonds


Within the Dubai complex, the quasi-sovereigns offer value While the Dubai quasi-sovereigns are trading tighter than the sovereign, strong names like DP World (rated BB by S&P) offer value on a standalone basis. While the shorter-dated DIFCDU 12 and the DUBAIH 12 offer yields in the double-

digit range for very short-dated paper, the risks are high. For investors with higher risk appetite, these shorter-dated issues might make sense.

Chart 14: Dubai complex yields


DEWA 20

DEWA 15 DEWA 16DUGB 14

DUGB 15

DUGB 20

DUBAIH 12

JAFZ 12

DPWDU 17

DIFC 12

DPWDU 37

DUGB 13 (AED)

EM AAR 16

DUGB 13 FRN

DEWA 13 FRNDUGB 14 FRN (AED)

4

6

8

10

12

14

16

0 2 4 6 8 10 12Duration/maturity (yrs)

Yiel

d (%

)

KIPCO 20

BURGN 20

NBADUH 14

ADCB 14

COM QAT 14NBADUH 15

BSFR 15

AKBNK 15

QIB 15

BBK 15

ADIB 15

SABBAB 15

QNB 15

ISCTR 16

ADCB 16 FRN

KIPCO 16EBIUH OCT 16 FRN

EBIUH DEC 16 FRNM ASREQ 17 FRN

BBK 17 FRN

COM QAT 19

0

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600

3 3.5 4 4.5 5 5.5 6 6.5 7Duration/maturity (yrs)

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19

Abu Dhabi quasi-sovereigns across the curve offer value As we have highlighted above, while the Abu Dhabi sovereign is cheap for its rating (with the exception of the ADGB 19 at the long end of the curve), all of the other sovereign bond issues are trading relatively tight. In the quasi-sovereign space too, spread compression between the quasi-sovereigns and the sovereign has largely played out.

Nonetheless, a number of quasi-sovereign issues are trading between 50bps and 150bps wide of the sovereign and offer good value. Most of these quasi-sovereigns enjoy sovereign support. We like the short-dated TAQAUH 12 and the DOLNRG 19 and MUBAUH 19.

Chart 15: Abu Dhabi complex spreads

Note: Excludes TAQA 36; Source: Standard Chartered Research

Qatar sovereign is among the most stable credits in the region We have a Market weight position in all Qatari sectors. Given that the Qatar sovereign is one of the most stable in the region, we like the QATAR 20. In the quasi-sovereign space,

the explicitly guaranteed QATDIA 15 is trading about 30bps wider than the QATAR 15 issue and therefore offers value, in our view.

Chart 16: Qatar complex spreads


QATAR 30QATAR 40

QATDIA 20

QTEL 19QTEL 16

COM QAT 14

COM QAT 19

RASGAS 16RASGAS 20

QIB 15

QNB 15

QATAR 14

QATAR 15

QATAR 19QATAR 20

QATDIA 15

QTEL 14 QTEL 21

QTEL 25

RASGAS 14 RASGAS 19

NAKILAT 6.2 33

NAKILAT 6.0 33RASGAS 5.8 27

RASGAS 6.3 27

100

150

200

250

300

350

2 4 6 8 10 12 14Duration (yrs)

Z-sp

read

(bps

)

ALDAR 14

ADGB 12

ADGB 14

ADGB 19INTPET 15

INTPET 20

M UB 14M UB 19

TAQA 12TAQA 13 TAQA 14 TAQA 16

TAQA 17TAQA 18 TAQA 19TDIC 14

TDIC Sukuk 14

ADCB 14

NBADUH 14NBADUH 15

DOLNRG 19

ADIB 15WAHA 20

0

100

200

300

400

500

600

700

800

1 2 3 4 5 6 7 8Duration (yrs)

Z-sp

read

(bps

)


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20

Saudi credits offer diversification benefits Generally speaking, Saudi Arabian credits are quoted relatively tight compared to other Middle Eastern issuers. This has to do with both fundamentals and scarcity value. Although there could be further supply from Saudi Arabia this year, we expect any potential new issues to attract good demand given diversification considerations. In our view, a strong credit like SABIC provides diversification benefits to

investors – and offers value on those grounds. In the financials space our pick is the SABB 15. Finally, in Bahrain we like the BBK 15 senior bank bonds. As one of the largest retail banks in Bahrain, BBK is comparable to ADCB in Abu Dhabi and COMQAT in Qatar in terms of its importance to the domestic banking system, in our view, though it is considerably smaller.

Chart 17: Other bonds within the Middle East


GCC oil and gas names look attractive for their ratings The main hydrocarbon-sector credits from the GCC are RasGas, Dolphin Energy and TAQA. These credits look attractive compared with their peers from other emerging markets given their higher ratings – RasGas (Aa3/A),

Dolphin (A1/NR) and TAQA (A3/A). We like both the TAQAUH 12 (purely as high-yielding short-dated paper) and the DOLNRG 19.

Chart 18: GCC oil and gas spreads versus comparables


LUKOIL 19

PEM EX 21

PETROL 14S PETROL 19

KOROIL15 KORGAS 20PETBRA 14

NAKILAT 6.2 33

NAKILAT 6.0 33

TAQA 12TAQA 13

RASGAS 8.2 14

TAQA 14

RASGAS 14

RASGAS 16

TAQA 18

DOLNRG 19

TAQA 19

RASGAS 19

RASGAS 20

RASGAS 5.8 27

RASGAS 56.3 27

TAQA 36

LUKOIL 14 GAZPRU 16

GAZPRU 18

KZOLKZ 15

PEM EX 15TNEFT 12

TNEFT 14

TNEFT 18 PETBRA 20

100

150

200

250

300

350

1 3 5 7 9 11Duration (yrs)

Z-sp

read

(bps

)

BAHRAIN 14

M UM 15BBK 15

BAHRAIN 20

KIPCO 16KIPCO 20

BURGN 20

M BPS 15

BSFR 15 SABIC 15

SABBAB 15

AKBNK 15

YUKSEL 15

ISCTR 16

0

200

400

600

800

1,000

2 3 4 5 6 7 8Duration (yrs)

Z-sp

read

(bps

)


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21

Middle Eastern banking-sector issues are cheap versus global EM comparables On a duration-adjusted basis, Middle Eastern banking-sector names are also cheap versus their EM counterparts. Among Middle Eastern senior banking credits, on a duration-adjusted basis, the BBK 15 issue stands out as particularly cheap, at a Z-spread of 380bps. Among the shorter-dated bonds, we like the ADCB 14 on a relative value basis, and in Qatar, we like the COMQAT 14 bond. Although we also like the ADCB 14 versus the NBADUH 14, we see little catalyst for spread tightening in

the short term. In terms of global comparables, some Indian banking-sector issues (the ICICI 15, the EXIMBK 15 and BOBIN 15) and Turkish bank issues (the AKBNK 15 and ISCTR 16) do appear cheap in absolute yield terms. But on a ratings-adjusted basis, the GCC banks we have highlighted as our top picks are comfortably ahead given their higher ratings (in line with those of their respective sovereigns).

Chart 19: Middle East bank senior spreads versus comparables


BOBIN15ICICI 5.5 15

SHNHAN 15BBLTB 15

WSTP 3 15

ANZ 3.125 15

BNS 3.4 15

ACAFP 3.5 15

SANBBZ 4.5 15

BANBRA 4.5 15

BRADES 4.1 15

EXIM BK15

EIBKOR 16

KDB 16

NBADUH 14

ADCB 14

COM QAT 14

NBADUH 15

BSFR 15

AKBNK 15

QIB 15

BBK 15

ADIB 15

SABBAB 15

QNB 15

ISCTR 16

0

50

100

150

200

250

300

350

400

450

3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0Duration (yrs)

Z-sp

read

(bps

)


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48

Credit analysis – Sovereigns


Algeria (NR; NR; NR)Analysts: Shankar Narayanaswamy (+65 6596 8249), Philippe Dauba-Pantanacce (+9714 508 3740)

1

Credit outlook – stableWe initiate coverage of Algeria with a stable credit outlook. Algeria’s economy and fiscal position are strong but highly dependent on the hydrocarbon sector. Over the last decade, the government has maintained prudent fiscal policies and used hydrocarbon surpluses judiciously to build a strong external position. However, the government has turned expansionary in the last two years as it attempts to diversify the economy away from the hydrocarbon sector. Despite recent efforts, structural issues abound. Algeria needs to diversify its economy and encourage private investment to mitigate risks related to high unemployment. This will be key to future fiscal and political stability.

Country profile

Algeria, known officially as the People’s Democratic Republic of Algeria, is located in Northern Africa, bordering the Mediterranean Sea to the north, between Morocco and Tunisia. Algeria is a secular democratic state with an elected government. The state dominates the economy. Algeria is highly dependent on hydrocarbons. It has the world’s tenth-largest natural gas reserves and is one of the largest exporters of gas. Politics is dominated by the ruling National Liberation Front (FLN). Directly elected President Abdelaziz Bouteflika has been in power since 1999 and was last re-elected in 2009. The president is both the head of state and government.

Key credit considerations

Oil-dependent economy: Algeria’s economy is heavily dependent on hydrocarbons (97% of export receipts and 45% of GDP). Growth is likely to have reached 4.0% in 2010, driven by the improved outlook for the hydrocarbon sector and a pick-up in demand. However, the country has generally underperformed relative to its growth potential. Non-hydrocarbon growth likely reached 5% in 2010. The hydrocarbon sector has benefited from a gradual pick-up in both demand and prices. Inflation needs to be watched: Inflation has settled in a range higher than historical levels (2.5% for 2000-07). It likely reached 5% in 2010, driven by food-price pressures and structural economic rigidities such as monopolistic sectors and bans on certain goods. Inflation should revert gradually to trend. Algeria’s monetary policy informally targets inflation at 3%. While there is no official money supply growth target, the central bank closely watches monetary aggregates. Of late, however, the authorities have preferred to control inflation though price controls rather than interest rates. Domestic debt dynamics are under control: Aided by strong surpluses generated by the hydrocarbon sector, the government has successfully reduced public-sector indebtedness, lowering general government debt from more than 60% of GDP in 2000 to less than 10% as of 2010. Expansionary policies in the last two years aimed at boosting investment and diversifying the economy have led to a fiscal deficit. The country’s fiscal breakeven oil price has increased from USD 34/bbl in 2005 to USD 88/bbl given the increase in government expenditure. External position continues to improve with strong oil prices: Algeria’s external position continues to improve. Hydrocarbon exports have ensured strong current account balances throughout the last decade. This has helped the country accumulate huge international reserves (including the oil reserve fund) – they were close to USD 155bn in December 2010, representing more than four years of imports. Financial system is still relatively underdeveloped: The Algerian banking system has the highest government ownership in MENA, at 85%. Capital markets are underdeveloped, as the authorities have eschewed public debt (the debt/GDP ratio is less than 8%). Credit to the private sector is virtually non-existent, with a ban on all credit outside housing mortgages. Structural issues abound: The Algerian economy is dominated by the state. After pledging to conduct market-friendly reforms in the early 2000s, the government backtracked and in 2008, foreign ownership of domestic companies was limited to 49%. Since July 2010, it has been mandatory to give preference to local firms in private- and public-sector bids. The tax regime is unfavourable to foreign investors, and restrictions on certain imports remain in place.Unemployment remains a big concern: Unemployment is high (10.2% as at end-2009), especially among the youth, and this remains a concern. Algeria experienced moderate street protests in early 2011. The government responded by pledging substantial cuts in staple food prices, more subsidies, and a temporary reduction in customs duties and taxes in hopes of dampening upward pressure on prices.


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Algeria (NR; NR; NR)

2

Summary of economic indicators Growth rate

0

1

2

3

4

5

2007 2008 2009 2010F 2011F

% ch

ange

Real GDP

Current account balance

%, unless stated 2008 2009 2010F 2011F

Economic indicators

Nominal GDP (USD bn) 170.2 139.8 159.0 171.6

Population (mn) 34.5 35.0 35.5 36.0

GDP per capita (USD) 4,940 3,995 4,477 4,762

Real GDP, change 2.4 2.4 4.0 4.3

Inflation (yearly average) 4.9 5.8 5.0 4.5

Government finances

Gen. govt. revenue/GDP 47.2 36.2 38.3 38.2

Fiscal balance/GDP 9.1 (5.3) (10.0) (8.5)

Primary balance/GDP 8.9 (5.8) (10.3) (8.9)

Gen. (direct) govt. debt (USD bn) 11.5 11.3 12.7 NA

Gen. (direct) govt. debt/GDP 6.8 8.1 8.0 NA

External indicators

Current account balance (USD bn) 34.5 0.4 3.0 3.6

Current account bal./GDP 20.2 0.3 1.9 2.1

External debt (USD bn) 4.3 3.6 3.5 NA

External debt/GDP 2.7 2.7 2.2 NA

Short-term external debt/external debt 8.2 11.1 5.8 NA

Official FX reserves(USD bn) 143.1 149.4 155.0 NA

USD-DZD (end-period) 70.46 71.91 71.75 71.25

0

5

10

15

20

25

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP

FX reserves vs. external debt Government balances

0

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010F

USD

bn

Intl. reserves External debt

-12

-8

-4

0

4

8

12

2007 2008 2009 2010F 2011F

%

0

3

6

9

12

15

18

%

Govt. bal./GDP Govt. debt/GDP (RHS)

Note: Credit ratings are presented in the following order throughout this report: Moody’s/Outlook; S&P/Outlook; Fitch/Outlook; NR = not rated; Sources: IMF, Moody’s Investors Service, Standard Chartered Research


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Bahrain (A3/RFD; A-/CWN; A-/Neg)Analysts: Kaushik Rudra (+65 6596 8260), Nancy Fahim (+9714 508 3627)

3

Credit outlook – negativeWe have a negative outlook on the sovereign. The country is fast depleting its oil reserves and needs to resort to borrowing to fund its budgetary requirements. Despite Bahrain’s relatively low level of oil, both its fiscal position and its export sector remain highly reliant on the outlook for the hydrocarbon sector. Although the sovereign has provided strong and timely support to the banking sector, we remain concerned about the size of its total potential contingent liabilities. Finally, Bahrain’s financial centre – one of the best in the region, which was set up to offset the decline in the oil sector – faces serious competition from other regional centres.

Country profile

The Kingdom of Bahrain is the smallest country in the Gulf Cooperation Council (GCC) in terms of land mass and economic size. An island in the northern part of the Gulf, it neighbours Saudi Arabia to the west (with which it shares a causeway) and Qatar to the south. It is ruled as a constitutional monarchy by the al-Khalifa family. It was the first country to start diversifying its economy away from oil, forced to do so by the near-complete depletion of its hydrocarbon reserves. One of the factors behind Bahrain’s success has been its vibrant non-oil economy focused on the financial sector, tourism and manufacturing.


Economy was showing signs of recovery: In the years leading up to the recent global financial crisis, GDP growth consistently improved in real terms – average real annual GDP growth increased from 4.1% between 1996-99 to around 7.1% from 2004-07. The economy, however, saw much lower growth rates in 2009-10. Prolonged social instability is likely to have an adverse impact on Bahrain’s banking system. Banking assets are 10 times the size of the economy, and the vast majority of depositors are foreign. Proactive policy: The authorities were proactive in supporting the banking system in 2008-10. Accommodative monetary policy, combined with strong central bank guidance for distressed financial institutions, has again proven the high quality of Bahrain’s supervisory environment. Constrained fiscal position: The country’s fiscal position is the weakest among its GCC peers. Bahrain is more likely to borrow in order to fund its expansionary budget (driven by rising current expenditures) – particularly given the rising breakeven oil price in the budget in recent years. Reduced fiscal flexibility due to higher breakevens makes the country more vulnerable to potential contingent liabilities, including those from the financial sector. That said, with oil prices likely to remain supportive, we expect the fiscal deficit to shrink over the next couple of years. Current account is in surplus but weaker than peers: The current account surplus averaged 11.2% of GDP between 2004 and 2007, and 10.3% in 2008. With export earnings coming mostly from oil, the current account has recorded a healthy surplus in light of the strength of the hydrocarbon sector. After declining to around 2.7% of GDP in 2009, the current account surplus is set to increase to around 7.5% of GDP in 2010-11. Reserves do not tell the whole story: Official FX reserves have increased from the USD 1.5-2.0bn range in the early 2000s to USD 3.0-3.5bn in recent years. Given the strength of its current account position, the country’s reserves ended 2010 at around USD 3.2bn (IMF estimates). Bahrain also has a state holding company, Mumtalakat, which acts as a de facto wealth fund. Depleting oil reserves: The country’s oil reserves have been declining fast. Oil and refining still represent around 75% of Bahrain’s export receipts and 80% of its government revenues, even though the sector constitutes less than 25% of GDP – the smallest figure in the Gulf. Bahrain has stabilised its oil production at around 35 thousand barrels per day (kbd), with reserves estimated at around 125mb (with a time horizon of about 10 years). Bahrain’s refineries have processing capacity five times bigger than the island’s oil production, with all of the extra crude coming directly from Saudi Arabia. Aluminium is the second major export after oil, and Bahrain has tried to position itself as a strong regional player in the downstream sector. The most diversified GCC economy: With oil reserves declining, Bahrain is moving away from its reliance on hydrocarbons by establishing a strong financial sector, which is seen as one of the best-regulated in the region. Financial services now represent more than a quarter of GDP. Sectarian unrest grabs the headlines: Bahrain enjoys friendly relations with other GCC countries, in particular Saudi Arabia. Its strong position in Islamic finance and its proximity to Saudi Arabia are key sources of support. However, the recent unrest, which has its roots in sectarian politics, needs to be watched. The authorities have announced cash awards (BHD 1,000) and various other concessions for every Bahraini family.


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Bahrain (A3/RFD; A-/CWN; A-/Neg)

4


0

2

4

6

8

10

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 0.8 1.0 1.1 1.1



Inflation (yearly, end-period) 5.1 2.8 2.5 3.5

Government finances


Fiscal balance/GDP 4.5 (10.0) (0.3) (0.4)

Primary balance/GDP 5.2 (9.3) 0.3 0.2

Gen. (direct) govt. debt (USD bn) 3.2 5.4 7.1 7.2

Gen. (direct) govt. debt/GDP 14.7 26.6 32.8 29.9

External indicators



External debt (USD bn) 33.6 32.5 30.3 34.1

External debt/GDP 153.3 157.7 139.6 139.8

Short-term external debt/external debt 73.0 70.6 66.0 65.4

Official FX reserves(USD bn) 3.8 3.8 3.2 2.9

USD-BHD (end-period) 0.38 0.38 0.38 0.38

0

3

6

9

12

15

18

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010F

USD

bn


-12

-9

-6

-3

0

3

6

2007 2008 2009 2010F 2011F

%

0

6

12

18

24

30

36

%


Note: Ratings are presented in the following order throughout this report: Moody’s/Outlook; S&P/Outlook; Fitch/Outlook; NR = not rated;

Sources: Moody’s Investors Service, Standard Chartered Research


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Egypt (Ba2/Neg; BB/CWN; BB/RWN) Analysts: Shankar Narayanaswamy (+65 6596 8249), Nancy Fahim (+9714 508 3627)

5

Credit outlook – negativeWe initiate coverage of Egypt with a negative outlook given the uncertain political situation. Structurally, Egypt has a large and diversified economy, though per-capita GDP is low. Egypt runs a large fiscal deficit owing to a narrow tax base, large subsidies and a bloated bureaucracy. Public debt is high, although most of it is domestically financed given ample liquidity in the local financial system. Low foreign debt and a moderate current account deficit have ensured a relatively strong external position, which supports Egypt’s ratings. Structural challenges such as unemployment, spiralling inflation and poverty are key concerns.

Country profile

Egypt, known officially as the Arab Republic of Egypt, is located in Northern Africa, bordering the Mediterranean Sea between Libya and the Gaza Strip. Egypt is the most populous country in the Middle East, with its c.80mn people concentrated mainly around the Nile and Suez region. Islam is the predominant religion. Egypt has one of the region’s more diversified economies, with industry, agriculture, tourism and services contributing almost equal shares of GDP. Multi-party elections have been in place since 2005, but amendments to electoral laws are being drafted to ease restrictions on presidential candidates. The next presidential elections are due later in 2011. The country is currently ruled by a military council.


Large and diversified economy, but plagued by structural issues: Egypt has a large and diversified economy, although per-capita GDP is low.Proactive policy responses and key reforms following the global financial crisis drove economic growth of 5.1% in FY10 (ended June 2010). However, public debt has been rising, and is likely to rise further as the government implements fiscal stimulus plans to boost the economy. We have cut our FY11 growth forecast to 3.8% from 5.5% to reflect the likely impact of political instability on tourism and investment. Chronically high inflation: After peaking at 13.6% in January 2010, CPI inflation slowed to 10.8% as of January 2011, though core inflation inched up to 9.7% – well above the central bank’s comfort zone of 6-8%. Rising international commodity prices, a weaker currency and cutbacks in energy subsidies pose upside risks to inflation. Spiralling inflation and continued high unemployment (averaging 9.1% over the 16 quarters ended December 2010) are key concerns. Accommodative monetary policy: Monetary policy remained accommodative in 2010 after the Central Bank of Egypt (CBE) cut rates six times in 2009, bringing the overnight deposit rate to 8.25% and the lending rate to 9.75%. While inflation remains an issue, the recent political instability could lead to a hiatus in monetary policy actions. High level of public debt: Public debt increased to 81.1% of GDP as of June 2010 from 79% in June 2009. The government had planned to reduce the fiscal deficit to 7.9% of GDP in FY11 from 8.3% in FY10 in a bid to limit the build-up of debt. This was dependent on cuts in energy subsidies, which amount to 9% of GDP. However, these plans are likely to be shelved, leading to large fiscal deficits in the near term. That said, 82% of Egypt’s debt is in local currency, and it is largely owned by domestic banks. Foreign debt is mostly from bilateral and multilateral creditors, with long tenors and low rates.Stable external position despite recent weakening: Despite a persistent negative trade balance, Egypt’s external position has been supported by low external debt, portfolio flows, and inflows from the pillars of tourism, oil and the Suez Canal. After a period of current account surpluses, the current account has turned to a deficit due to the rise in domestic demand-driven imports (led by food) and lower remittance and service inflows. The balance-of-payments position could come under further pressure if political instability leads to a significant drop in tourist arrivals.Stable financial system: The Financial Sector Reform Program (2004-08) helped the domestic financial system to weather the global financial crisis. The programme forced banks to strengthen their capital and clean up NPLs, and led to a consolidation of the banking system. The sector-wide NPL ratio declined further to 14.7% in 2009 from 14.8% in 2008, while banks’ risk-weighted capital increased to 15.3% from 14.7% over the same period. Politics: Egypt is in a transition period as the current military leadership prepares to step down when elections are held later this year. The military was handed power after the resignation of President Hosni Mubarak, following 18 days of large-scale street protests. At the time of writing, constitutional amendments are being drafted to ease restrictions on presidential candidates; these will need to be confirmed through a public referendum.


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Egypt (Ba2/Neg; BB/CWN; BB/RWN)

6


0

2

4

6

8

FY07 FY08 FY09 FY10 FY11F

% c

hang

e

Real GDP


%, unless stated FY08 FY09 FY10 FY11F

Economic indicators


Population (mn) 75.2 76.7 78.2 79.8




Government finances


Fiscal balance/GDP (7.5) (7.0) (8.1) (8.3)

Primary balance/GDP (3.0) (2.8) (3.0) (2.6)



External indicators

Current account balance (USD bn) 0.9 (4.4) (4.3) (3.8)

Current account bal./GDP 0.5 (2.4) (1.6) (1.2)





USD-EGP (end-period) 5.49 5.48 5.71 5.70

-3

-2

-1

0

1

2

FY07 FY08 FY09 FY10 FY11

% o

f GDP

Current account/GDP


0

5

10

15

20

25

30

35

40


USD

bn


-10

-8

-6

-4

-2

0


%

62

66

70

74

78

82

%


Note: Fiscal year ends 30 June; Sources: IMF, Moody’s Investors Service, Standard Chartered Research


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Jordan (Ba2/Neg; BB/Neg; NR)Analysts: Kaushik Rudra (+65 6596 8260), Sayem Ali (+92 3245 7839)

7

Credit outlook – stableWe initiate coverage of Jordan with a stable outlook. Jordan’s economy is one of the most diversified in the region and has exhibited strong growth rates over the past five years. The country suffers from twin deficits, which are fairly structural in nature. Given increased subsidies on the budget side and rising oil prices (the country is an energy importer), the twin deficits are set to worsen in 2011. That said, current debt levels are manageable. As the country continues to attract strong capital inflows and support via grants from the US and Saudi Arabia, financing these deficits should not be a major issue.

Country profile

Jordan, officially the Hashemite Kingdom of Jordan, is a kingdom in western Asia. It shares borders with Saudi Arabia, Iraq, Syria, the West Bank and Israel. Jordan is a constitutional monarchy. King Abdullah II succeeded his father, King Hussein, following his death in 1999. The king exercises his executive authority through the prime minister and the Council of Ministers. Jordan has a population of around 6.3mn; non-Jordanians comprise only 7% of the population. The majority of the population is Muslim. Jordan’s exports include vegetables, textiles, fertilisers, medical products and pharmaceuticals, with the US and Iraq being the largest export markets.


Well-diversified economy: Jordan’s economy is one of the most diversified in the region. Commodity-producing sectors account for a quarter of GDP and services account for the rest. The services sector is dominated by the financial sector, tourism and transportation. Over the 2004-08 period, Jordan’s economic growth averaged around 8%. While the economy slowed in 2009 on account of the global credit crisis, growth has recovered since then.Fiscal balance set to worsen: Jordan’s central government deficit has been quite high for most of the last decade. It worsened further in 2009-10 on account of spending hikes aimed at stimulating growth to offset the impact of the global credit crisis. Faced with domestic unrest, the authorities have also introduced a subsidy package (1.5% of GDP) to shield the population from rising food and energy prices. The measures, announced in January 2011, also include salary increases for civil servants, military personnel and pensioners. Although the initial budget for 2011 called for a reduction of the deficit to 5.5% of GDP, in light of the above measures, we expect the deficit to rise to around 7.0% of GDP. While the fiscal financing gap remains large, a combination of bilateral grants and surpluses generated by government agencies helps to cover some of it. Public-sector indebtedness is manageable: High growth rates, fairly high inflation and the surplus generated by government agencies have helped to keep debt levels manageable. The authorities’ decision to buy back Jordan’s USD 2.4bn of external debt to the Paris Club in 2008 further improved debt metrics. However, debt metrics are likely to worsen in 2011 due to fiscal slippage. The external debt component of Jordan’s debt is manageable; most of it is owed to bilateral and multilateral creditors on favourable terms. Capital inflows help to cover the current account deficit: Jordan is a large oil importer and runs a fairly large current account deficit. The current account deficit, after shrinking somewhat in 2009 to around 5% of GDP, is expected to have increased to around 8% of GDP in 2010. Given elevated oil prices, this is likely to worsen further in 2011. Relatively stable capital account inflows (including FDI and portfolio investment) over the years have helped to cover the current account imbalance. International reserves stand at around USD 11bn, equivalent to around eight months of imports. Well-managed banking sector: The country’s sizeable banking sector is reasonably well managed. The space is conservatively regulated and has managed to avoid some of the recent shocks from both within and outside the region. The banks are largely deposit-funded, with deposits coming from across the Gulf region. Although Jordan’s banks are well capitalised, rapid credit growth between 2003 and 2008 could result in a deterioration in asset quality going forward. History of political stability: Jordan has had very few instances of domestic political strife in its 64-year history. Although the country has ethnic and tribal divisions, the king is popular among the masses. While the most recent elections (held in November 2010) were boycotted by the main opposition party, they had a relatively high turnout (53%). In response to street protests in January 2011, King Abdullah II removed the PM and the cabinet, reinstated former PM Maruf Bakhit, and initiated political reforms. The government also announced a subsidy package to shield the population from energy- and food-price increases, including salary increases for public-sector employees and pensioners.


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Jordan (Ba2/Neg; BB/Neg; NR)

8


0

2

4

6

8

10

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 5.8 6.0 6.1 6.3



Inflation (year-end) 13.9 (0.7) 5.7 5.0

Government finances



Primary balance/GDP 1.5 (4.8) (3.5) (4.7)



External indicators

Current account balance (USD bn) (2.2) (1.3) (2.2) (2.8)

Current account bal./GDP (9.6) (5.0) (7.9) (9.2)





USD-JOD (end-period) 0.71 0.71 0.71 0.71

-18

-15

-12

-9

-6

-3

0

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010F

USD

bn


-8

-6

-4

-2

0

2007 2008 2009 2010F 2011F

%

50

55

60

65

70

%




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Kuwait (Aa2/Sta; AA-/Sta; AA/Sta)Analysts: Kaushik Rudra (+65 6596 8260), Nancy Fahim (+9714 508 3627)

9

Credit outlook – stableWe have a stable view on Kuwait as a credit. The country is blessed with large oil reserves and has built up a sizeable war chest of foreign assets over the years. Moreover, given its relatively low level of international debt, Kuwait is a large net external creditor. Similarly, government indebtedness remains very low, providing the authorities with significant flexibility. Although potential contingent liabilities from the financial sector (banks and investment companies) remain a source of concern for investors, their size is very small in the context of the overall government balance sheet.

Country profile

Kuwait, also known as the State of Kuwait, is an emirate bordered by Saudi Arabia to the south and Iraq to the north west. The country has been ruled by the Al Sabah family since the 18th century and is a constitutional emirate, with the only directly elected parliament in the GCC. Since the discovery of oil in the 1930s, Kuwait’s economy has been transformed from a pearl and trading hub into one of the world’s richest countries on a per-capita GDP basis. Kuwait enjoys good relations with most of its regional neighbours and with the US. About 30 percent of its 3.6mn population is of Kuwaiti origin; the rest are split between other Arabs and expatriates (largely from south Asia).


Oil exports power the economy: Kuwait has the world’s fifth-largest proven reserves of oil, at around 8% of the world total, according to the latest BP Statistical Review of World Energy. Its proven oil and gas reserves as of end-2009 stood at 113bboe, and the country produced 2.5mbd of oil at the end of 2009. Oil exports power the economy, accounting for 90% of export earnings. Kuwait channels 10% of its annual oil earnings to the Kuwait Investment Authority (KIA), one of the world’s largest sovereign wealth funds. Budgetary oil breakeven prices are kept higher than regional GCC peers to allow for these transfers. Steady fiscal surpluses: Kuwait has recorded fiscal surpluses since the beginning of the 2000s, with the 2009 budget surplus at close to 20% of GDP. This is largely attributable to growth in export receipts, which account for about four-fifths of government revenue; these have in turn been driven by strong oil prices. Given the robust outlook for the hydrocarbon sector, we expect the fiscal surplus to remain strong over the next couple of years. Extremely strong current account balance: We expect Kuwait to post a current account surplus of around USD 35bn, or about 27% of GDP, in 2011. Kuwait’s current account balance averaged around 40% of GDP between 2005 and 2008. Although the number dropped marginally in 2009, it is set to return to normal levels for 2010 and 2011. Strong reserves: Official reserves have increased over the past decade (to around USD 20bn as of end-2010), in line with the strong performance of the current account. Kuwait holds substantial assets, estimated at close to USD 200bn, in the KIA. Though it is labelled a fund for future generations, the KIA has been asked to use its resources to support the economy; this has included taking stakes in troubled lenders and pumping funds into the local bourse. Vulnerable to oil-price declines: Given Kuwait’s high dependence on the oil sector (oil accounts for about 90% of export earnings and close to 60% of nominal GDP), hydrocarbon-sector prices play a crucial role in determining the health of the economy. Kuwait’s 2011 budget will be based on crude price assumption of USD 60/barrel. Contingent liabilities are manageable: The government’s direct debt is very low, amounting to around 8% of GDP as of end-2009 (it has no guaranteed debt). External debt, however, has risen in recent years and represents around 50% of GDP. Short-term debt accounts for nearly 50% of Kuwait’s total external indebtedness. Although the government’s direct liabilities are very small, contingent liabilities have increased somewhat in recent years. That said, total potential contingent liabilities are still manageable in the context of the government’s fairly large balance sheet. While the authorities have supported the banking system via various measures, they have chosen not to support a few of the investment houses which ended up defaulting. The government has stated that it will provide support only to solvent companies. Investment drive dogged by politics: Weak institutional and administrative capacity and tense relations between the government and the parliament have limited both domestic investment activity and international investment in Kuwait. That said, this relationship has improved somewhat, resulting in the approval of several pieces of economic legislation. Strong state coffers offer flexibility: Given the ample resources available, the state is able to shield the population from rising food prices and other inflationary shocks. In early 2011, the authorities announced that each of Kuwait’s 1.12mn citizens would receive KWD 1,000 (USD 3,572) in cash, as well as free essential food items until end-March 2012.


58

SO

VE

RE

IGN

S


Kuwait (Aa2/Sta; AA-/Sta; AA/Sta)

10


-6

-4

-2

0

2

4

6

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 3.4 3.5 3.6 3.7


Real GDP, change 5.5 (4.8) 3.0 3.5


Government finances


Fiscal balance/GDP 19.9 19.6 20.0 22.0

Primary balance/GDP 21.1 19.8 20.2 22.2



External indicators







USD-KWD (end-period) 0.28 0.29 0.29 0.29

20

25

30

35

40

45

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010F

USD

bn


15

20

25

30

35

40

45

2007 2008 2009 2010F 2011F

%

3

4

5

6

7

8

9

%




59

SO

VE

RE

IGN

S


Lebanon (B1/Sta; B/Sta; B/Sta)Analysts: Kaushik Rudra (+65 6596 8260), Philippe Dauba-Pantanacce (+971 4508 3740)

11

Credit outlook – stableWe initiate coverage of Lebanon with a stable credit outlook. The country is beset with a very high level of government indebtedness. This causes structural problems for the fiscal account and seriously limits the government’s ability to undertake essential infrastructure spending. The high level of indebtedness also implies that the country will have a large financing gap for the foreseeable future. That said, funding sources appear to be stable and deep, and have supported the government through difficult periods over the past decade. To the extent that Lebanon’s banking sector remains healthy and continues to see growth in deposits, we do not anticipate any issues with respect to funding the deficit.

Country profile

Lebanon is a relatively small country in western Asia, located between Syria and Israel. It has a population of around 4mn people, most of whom are Muslim. There are 18 state-recognised religious groups (including Muslim, Christian, Druze and Jewish). Lebanon has a fairly large diaspora spread across the world. The country is a parliamentary democracy and attempts to fairly represent the demographic distribution of its 18 religious groups. The president is required to be a Maronite Christian, the prime minister a Sunni Muslim and the speaker of the parliament a Shia Muslim. Lebanon experienced a 15-year civil war from 1975 to 1990. The country’s high level of indebtedness is a legacy of reconstruction throughout the 1990s following its long civil war.


Economic expansion on track: Following the Doha agreement in May 2008, Lebanon’s economy rebounded sharply, buoyed by strong capital inflows that fuelled activity in the construction, tourism and financial-services sectors. This allowed the economy to catch up rapidly following a couple of years of slow growth on account of civil unrest. Although growth is set to moderate from the levels seen in 2009-10, we forecast that it will still be a respectable 6.5% in 2011. The economy is fairly concentrated, with two-thirds of GDP coming from financial services and tourism. Slow pace of reforms: Despite the recent strong economic performance, growth in Lebanon remains volatile and highly susceptible to political shocks. In our view, pursuing reforms would allow the country to move onto a more sustainable growth track. However, due to the political deadlock, the pace of reforms remains very slow, and has fallen short of Lebanon’s commitment to multilateral agencies. Major structural reforms such as reforming the state electricity company, privatising the telecom companies and increasing VAT have been on the agenda for a number of years.Government indebtedness remains a huge burden: The government’s indebtedness is close to 130% of GDP, one of the highest in the world, and is a significant burden on the budget. Servicing interest payments alone accounts for around half of the government’s revenues. This indebtedness continues to crowd out more efficient public expenditure, including on capital investments and infrastructure. Improving fiscal picture: The authorities have generated a healthy primary surplus over the past few years. The budget, however, remains in deficit. Subsidies to the state electricity company (on account of high fuel costs) are close to 4% of GDP. The combination of a healthy primary surplus and liability management exercises by the authorities have improved the structure of government indebtedness, and government debt denominated in foreign exchange has fallen to 45% of the total. Financing gap is covered: Despite structural weakness on the fiscal side, the financing gap is covered, and sources of funding are stable and deep. Lebanon’s large banking sector (with assets of more than three times GDP) remains the primary creditor of the government. Official-sector creditors – both bilateral and multilateral – are very supportive and have demonstrated strong support over the past decade via a number of donor conferences. Lebanon received commitments of around USD 7.5bn (half of which has been disbursed) at the Paris III donors’ conference in early 2007. Although international investors have largely shied away from Lebanese eurobond debt, the diaspora has been very supportive over the years. Banking sector remains a strength: The banking sector is very liquid and enjoys strong capitalisation. Although the sector is large in the context of the economy, its ability to continue to roll over government debt ultimately relies on the ability to grow its deposit base. The level of deposits has grown strongly over the past decade, despite economic and political shocks. Difficult political environment: A combination of fractious domestic politics (the country has been mired in civil strife since 2005, when former PM Hariri was assassinated) and a challenging geopolitical environment (Lebanon is often used as the stage for a proxy war between neighbouring countries) has resulted in regular political shocks.


60

SO

VE

RE

IGN

S


Lebanon (B1/Sta; B/Sta; B/Sta)

12


0

2

4

6

8

10

2007 2008 2009 2010F 2011F

% ch

ange

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 3.8 3.9 3.9 4.0



Inflation (year-end) 10.8 1.2 5.0 5.3

Government finances






External indicators







USD-LBP (end-period) 1,507 1,507 1,507 1,507

-15

-12

-9

-6

-3

0

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010F

USD

bn


-12

-10

-8

-6

-4

-2

0

2007 2008 2009 2010F 2011F

%

100

110

120

130

140

150

160

%




61

SO

VE

RE

IGN

S


Morocco (Ba1/Sta; BBB-/Sta; BBB-/Sta)Analysts: Shankar Narayanaswamy (+65 6596 8249), Philippe Dauba-Pantanacce (+971 4508 3740)

13

Credit outlook – stableWe initiate coverage of Morocco with a stable credit outlook. The domestic economy is supported by resilient domestic demand and increased public spending, which have taken up the slack from weak external demand. Sound fiscal policy has been a key focus for Morocco over the past decade, and has helped to maintain macroeconomic stability. Despite these measures, the fiscal deficit has widened in the last couple of years due to the higher subsidy burden and increased government investment. Morocco’s bond market is one of the deepest and most active in the region, and its banking system is more developed than regional peers’. However, Morocco still needs to lift a substantial part of its population out of illiteracy and poverty.

Country profile

Morocco, known officially as the Kingdom of Morocco, is located in Northern Africa, bordering the North Atlantic and the Mediterranean, west of Algeria. Morocco is a constitutional monarchy but has yet to become a mature democracy. While the first real election was held in September 2008, power is still concentrated in royal circles. Morocco's market economy benefits from the country's relatively low labour costs and proximity to Europe, boosting key areas of the economy such as agriculture, light manufacturing, tourism and remittances. Morocco is also the world's largest exporter of phosphate, which has long provided a source of export earnings and economic stability.


Economy dominated by agriculture: The economy is supported by resilient domestic demand and increased public spending, which have taken up the slack from weak external demand. However, Morocco’s GDP growth depends heavily on the agricultural harvest, which results in volatile and unpredictable GDP figures. Moreover, continued weakness in Europe, its main trading partner, is likely to continue to be a drag on non-agricultural growth. We expect 4.5% growth in 2011, moderately higher than the projected 4% print in 2010. Stable inflation: Inflation is low (we forecast 2.2% on average for 2010-13) owing to food subsidies and a managed exchange rate, but also due to a likely failure of official statistics to fully reflect rises in the cost of living.Monetary policy: Conditions are in place for Morocco to move to its preferred policy of inflation targeting. However, this is unlikely to happen before 2012 or 2013, at best. Interest rates tend to be very stable. Sound fiscal policy: Sound fiscal policy over the past decade has helped to maintain macroeconomic stability. The authorities have tried to cap spending in the face of an uncertain economic outlook and have attempted to reform the subsidy system. However, the target of capping subsidies at 2% of GDP (from an all-time high of 5% in 2008) is unlikely to be met in the short term. On the revenue side, the government has substantially improved tax revenues in recent years by enforcing compliance and widening the tax base. Improving debt position: Public debt levels remain high, though efforts to improve the fiscal position over the past decade have led to an improvement in the debt/GDP and interest payment/revenue ratios. From a structural perspective, the debt position looks comfortable, with a low reliance on external and short-term debt. While the fiscal position has been under pressure in 2009, the longer-term aim is to restrict the deficit to 3% of GDP; we could see some slippage in the short term. Stable external position: Morocco’s external position remains stable, although high oil prices and the impact of the slowdown in Europe have kept the current account deficit high. Foreign exchange reserves are moderate and cover seven months of exports. One of the better-developed financial systems in the region: Morocco’sbond market is one of the most active in the region, and is also deeper than those of regional peers. It is supported by a healthy banking sector, along with a growing culture of disintermediation. Morocco’s banking sector and capital markets are comparatively advanced, with the highest private-sector credit to GDP (80%) and the lowest state ownership of banks (27%) in North Africa. A constitutional monarchy: Since the accession of King Mohamed VI in 1999, the kingdom has pursued an ambitious reform and modernisation programme, ranging from family law and justice to economics. The king has an established power base and largely controls the defence, foreign affairs and interior ministries. The unemployment situation is better than others in the region; however, youth unemployment remains high and is cause for concern, especially given the recent unrest in the region. Morocco has seen a few protests, primarily focused on basic issues like food and unemployment.


62

SO

VE

RE

IGN

S


Morocco (Ba1/Sta; BBB-/Sta; BBB-/Sta)

14


0

2

4

6

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 31.6 32.0 32.4 32.8




Government finances


Fiscal balance/GDP 1.2 (2.6) 1.5 2.2




External indicators







USD-MAD (end-period) 8.01 7.90 8.20 8.53

-8

-6

-4

-2

0

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

5

10

15

20

25

30

2006 2007 2008 2009 2010F

USD

bn


-3

-2

-1

0

1

2

3

2007 2008 2009 2010F 2011F

%

42

44

46

48

50

52

54

%


Sources: IMF, Moody’s Investors Service, Standard Chartered Research


63

SO

VE

RE

IGN

S


Oman (A1/Sta; A/Sta; NR)Analysts: Kaushik Rudra (+65 6596 8260), Shady Shaher (+971 4508 3647)

15

Credit outlook – stableWe initiate coverage of Oman with a stable outlook. The country is heavily dependent on the hydrocarbon sector. With oil prices at current elevated levels, Oman’s credit metrics are set to improve in 2011. The country has very low levels of external and domestic indebtedness, providing a large degree of policy flexibility. Moreover, the combination of large international reserves and offshore-based external assets results in a very comfortable external position and a strong net creditor position. While domestic politics have been stable for the past 30 years, the country has a young population, making healthy economic growth and rapid job creation critical.

Country profile

Oman is located on the Arabian peninsula and shares borders with the UAE, Saudi Arabia and Yemen. Oman has a population of around 3mn, with Omanis comprising 60%. 75% of the population consists of Ibadhi Muslims, a form of Islam distinct from the Sunni and Shia denominations. Sultan Qaboos bin Said Al Said is chief of state and head of government. According to the latest BP Statistical Review, Oman’s proven oil and gas reserves stand at around 12bboe. Its existing hydrocarbon reserves are expected to last around 30 years at current production levels.


Growth linked to the hydrocarbon sector: More than 40% of Oman’s GDP is linked to the hydrocarbon sector. While the country benefits during periods of elevated oil prices, it is also more vulnerable to declines in hydrocarbon prices. Oman’s GDP has grown at a relatively healthy pace since 2006, and while the pace of growth moderated in 2009 on oil-price declines, it has since recovered. Per-capita income levels are fairly healthy and are in line with those of Saudi Arabia and Bahrain. Well-managed economy: The authorities continue to manage the economy very prudently. Thanks to sound policy management, Oman weathered the global credit crisis well, registering only a slight dip in growth despite a sharp fall in oil prices. Over the past 10 years, the authorities have strengthened the supervisory and regulatory framework and advanced the economic diversification programme. The government has also been disciplined in focusing on long-term development objectives, largely concentrating on investment expenditure rather than current expenditure. Diminishing hydrocarbon wealth: Based on the 2010 BP Statistical Review of World Energy, Oman had reserves of about 12bboe as of end-2009. The reserves are expected to last about another 30 years. Although the country appears to have discovered some additional oil reserves, they are relatively small. Oman’s fast-depleting hydrocarbon reserves are both limited and increasingly expensive to produce (difficult to extract and more widely dispersed). The average unit cost of oil production has more than doubled over the past five years as a result. As a result, the drive to diversify the economy away from the hydrocarbon sector is crucial. Low levels of indebtedness: Oman’s government indebtedness is very low, at around 5% of GDP, providing a high degree of fiscal flexibility. Although fiscal expenditures have gradually increased (as reflected in the increase in the oil breakeven price in the budget), low government debt provides an ample cushion for this. Moreover, as highlighted above, the bulk of the spending is focused on investment. After almost balancing the budget in 2009, Oman is expected to record healthy surpluses in 2010 and 2011. Oman is a net creditor nation: Oman’s external debt remains low by global standards. Moreover, its external debt outstanding remains lower than its international reserves, making the country a net creditor. It is also important to note that the international reserves do not capture the country’s full external strength. The accumulation of fiscal surpluses in past years has enabled the government to amass a large stock of offshore financial assets (managed by several offshore funds). As of end-2009, Oman’s foreign financial assets stood at around 55% of GDP, according to the government. Sound banking sector: Oman’s banking sector is relatively healthy and has low levels of external exposure. Although the banks do have exposure to the local real-estate market, healthy capitalisation ratios and prudent central bank regulations have allowed them to navigate any stress. Politics has been stable, but job creation is crucial: Oman has enjoyed a stable domestic political environment since the civil war in the 1970s. That said, the country’s relatively large young population may potentially represent a challenge should job creation slow down. In February 2011, Sultan Qaboos ordered the government to provide employment to 50,000 citizens and pay registered job-seekers the equivalent of USD 390 a month until they find employment.


64

SO

VE

RE

IGN

S


Oman (A1/Sta; A/Sta; NR)

16


0

3

6

9

12

15

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 2.8 2.9 3.0 3.1


Real GDP, change 12.8 3.6 4.8 5.0


Government finances






External indicators







USD-OMR (end-period) 0.38 0.38 0.38 0.38

0

2

4

6

8

10

12

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010F

USD

bn


0

4

8

12

16

2007 2008 2009 2010F 2011F

%

0

2

4

6

8

%




65

SO

VE

RE

IGN

S


Pakistan (B3/Sta; B-/Sta; NR)Analysts: Bharat Shettigar (+65 6596 8251), Sayem Ali (+92 3245 7839)

17

Credit outlook – negativeWe initiate coverage of Pakistan with a negative credit outlook. Given the devastating floods in 2010, economic growth is expected to slow to 2.5% in FY11 (ends 30 June 2011). Political instability and the fragile security situation have made it difficult for the authorities to push through fiscal reforms. As a result, the fiscal deficit will likely increase to 6.5% of GDP in FY11. The continuous monetisation of the deficit has fuelled inflation and threatens monetary stability. That said, the current account deficit has narrowed on the back of a smaller trade gap and high remittances. Also, while Pakistan’s overall debt metrics appear challenging, external debt dynamics are manageable given continued access to concessional multilateral and bilateral funding.

Country profile

Pakistan, officially known as the Islamic Republic of Pakistan, is a country in South Asia with a land area of 796,095 sq km. Pakistan is the sixth most populous country in the world, with around 173mn people. Since independence in 1947, Pakistan's history has been characterised by periods of military rule, political instability and conflicts with neighbouring India. Pakistan is a federal parliamentary republic consisting of four provinces and four federal territories. The country held parliamentary elections in February 2008, and Asif Ali Zardari of the Pakistan People’s Party (PPP) was elected president in September 2008.


Floods have affected economic growth: Devastating floods in August 2010 affected one-fifth of Pakistan’s territory and displaced c.20mn people. Preliminary estimates placed the total damage at USD 9.7bn, with a widespread impact on crops and rural infrastructure. We expect GDP growth to slow to 2.5% in FY11, although it is likely to pick up in FY12 on the back of reconstruction work and higher agricultural output. Factious politics and fragile security situation: More than four years after Pakistan’s transition from military rule to democracy, political instability persists. President Zardari’s PPP-led coalition has weakened after key allies walked out in protest against difficult economic reforms. The security environment has remained difficult as insurgents have targeted key urban centres, although the number of attacks declined markedly in 2010 due to gains made by the army through targeted operations. Fiscal reforms required: The primary challenges for the Pakistan credit are high public debt and a low revenue base (debt-to-revenue ratio of 428% in FY10). Large segments of the economy are outside the tax net, and political pressures have forced the government to delay key reforms aimed at broadening the tax base, including changes to the sales tax regime and the introduction of a flood tax. The FY11 budget targeted a 26% y/y increase in tax collection to PKR 1.9trn (or 11.2% of GDP), which appears unrealistic. The large defence and subsidy bills exacerbate the problems, and we expect the FY11 fiscal deficit to reach 6.5% of GDP. The high deficit and its monetisation exert pressure on Pakistan’s macroeconomic stability – central bank claims on the government had risen to 78% of the monetary base as at December 2010. This will likely push headline inflation to 15.6% by June 2011.Balance-of-payments position has improved: Pakistan’s external liquidity position has improved since it faced a precipitous decline in FX reserves in 2008. We expect the current account deficit to narrow to 0.5% of GDP in FY11 (from 5.5% in FY09) due to a smaller trade gap and high remittances. While a sustained rise in oil prices poses a risk to these numbers, remittances (which rose 18% in H1-FY11) provide an important and stable cushion. The capital account has been bolstered in recent years by external aid, including the IMF's USD 11.3bn commitment under the Stand-By Arrangement, USD 5.3bn from the Friends of Pakistan group, and other multilateral loans. As a result, net FX reserves stood at USD 13.9bn (6.2 months of imports) as at February 2011. That said, the sustainability of the balance of payments will depend on the resumption of rapid economic growth and higher capital inflows. External debt dynamics are manageable: Pakistan’s government debt-to-GDP ratio has deteriorated in the last three years. The maturity profile of domestic debt has also changed unfavourably as the authorities have issued more short-term debt due to a rise in interest rates. As at December 2010, 52% of the domestic debt was short-term, which could lead to rollover pressures. On the external debt front, while the absolute level of borrowings has increased due to limited domestic resources, only 2.7% of Pakistan’s external debt is on commercial terms. As a result of long repayment schedules and low interest rates on multilateral and bilateral funding, external debt-service commitments in FY11 are only USD 1.7bn, or 0.9% of GDP. Given the humanitarian and geopolitical imperatives, we expect Pakistan to receive continued access to donor funding, which will help to sustain external debt dynamics.


66

SO

VE

RE

IGN

S


Pakistan (B3/Sta; B-/Sta; NR)

18


0

1

2

3

4

5

FY09 FY10 FY11F FY12F

% ch

ange

Real GDP


%, unless stated FY09 FY10 FY11F FY12F

Economic indicators


Population (mn) 169.7 172.8 176.0 179.0

GDP per capita (USD) 955 1,010 1,104 1,198



Government finances



Primary balance/GDP (0.9) (2.4) (2.5) (1.3)



External indicators







USD-PKR (end-period) 81.4 85.5 88.0 91.0

-6

-4

-2

0


% o

f GDP

Current account/GDP


0

20

40

60


USD

bn

Intl. reserv es Ex ternal debt

-8

-6

-4

-2

0


%

50

55

60

65

70

%




67

SO

VE

RE

IGN

S


Qatar (Aa2/Sta; AA/Sta; NR) Analyst: Kaushik Rudra (+65 6596 8260)

19

Credit outlook – positiveWe have a positive outlook on Qatar as a credit. The country is the world’s largest exporter of LNG. Buoyed by a strong hydrocarbon sector, it has built up significant external and fiscal cushions and has a strong capacity to service its debt obligations. Qatar’s sovereign debt issuance programme has been well co-ordinated, and given ample liquidity in the local banking system, eurobonds issued by various Qatar-based entities – sovereign or otherwise – enjoy strong local sponsorship. Although Qatar’s external and public-sector indebtedness has increased appreciably in recent years, it is worth noting that much of the debt is linked to the hydrocarbon sector.

Country profile

Qatar, also known as the State of Qatar, is an Arab emirate in the Middle East, occupying the small Qatar Peninsula on the coast of the larger Arabian Peninsula. It is bordered by Saudi Arabia to the south. An absolute monarchy, Qatar has been ruled by the al-Thani family since the mid-1800s and has transformed itself from a poor British protectorate into one of the world’s wealthiest nations on the back of its large oil and gas reserves. Qatar has the third-largest reserves of natural gas and is the largest exporter of LNG globally. Only 20% of Qatar’s 1.7mn population is of local ethnic origin; the rest consists of expatriates.


Hydrocarbon sector holds the key: Qatar has the world’s third-highest proven reserves of natural gas, according to the latest BP Statistical Review of World Energy. Its proven reserves as of end-2009 were around 194bboe. Although oil previously represented a high share of Qatar’s total hydrocarbon production, LNG is expected to be the primary driver going forward. Qatar is currently the world’s largest exporter of LNG. Following investments in the gas sector in recent years, its production and exports (which are not subject to OPEC quotas) have increased significantly. Qatar’s gas production has increased from around 20mtoe in 2000 to more than 80mtoe as of end-2009. High growth for the past decade: Driven by a rapid increase in LNG exports, Qatar’s economic growth has been very strong, at around 15% p.a. over the past five years. As a result, its per-capita income is among the world’s highest. Growth slowed to around 8.6% in 2009, and we expect it to moderate further in the coming years as LNG production peaks in Q1-2011. We see government spending on infrastructure as a key driver of future growth as the country prepares to host the 2022 FIFA World Cup; this is also in line with longer-term diversification plans. Given Qatar’s high dependence on the hydrocarbon sector (which accounts for about 60% of nominal GDP), hydrocarbon prices play a key role in determining the health of the economy. Steady fiscal surpluses: Qatar has recorded fiscal surpluses since the beginning of the 2000s, with the surplus exceeding 12% of GDP for the past couple of years. This is largely attributable to growth in export receipts, which account for around 80% of government revenues. Extremely strong current account balance: Qatar’s current account surplus as a percentage of GDP has averaged more than 20% over the past five years. With gas exports picking up and hydrocarbon-sector prices firm, we expect the surplus to remain close to double digits over the next few years, further strengthening an already-healthy external position.Reserves do not tell the whole story: Official reserves have increased over the past decade, in line with the strong performance of the current account. That said, the reserves do not fully capture the extent of the resources available to the authorities to service their debt obligations should the need arise. Qatar has additional assets under its sovereign wealth fund (managed by the Qatar Investment Authority, QIA) which could potentially be called upon to meet its direct and contingent liabilities. Contingent liabilities: Although Qatar’s sovereign debt remains very low, its external debt and contingent liabilities have increased in recent years. Given that a number of strategically important entities have issued debt over the past few years, contingent liabilities have to be considered when assessing sovereign indebtedness. If recent experience is anything to go by, the authorities remain fairly interventionist – they were highly proactive in supporting government entities and the banking sector during the latest global financial crisis. They injected capital into local banks and purchased securities portfolios and real-estate loans from banks (via the QIA) to shore them up. Political stability: Qatar’s politics have been relatively stable since the country gained independence in 1971. The path of succession is clear and is enshrined in the constitution. Qatar enjoys healthy relations with the US and the West, and with its GCC neighbours.


68

SO

VE

RE

IGN

S


Qatar (Aa2/Sta; AA/Sta; NR)

20


0

4

8

12

16

20

24

28

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 1.4 1.6 1.7 1.8


Real GDP, change 25.4 8.6 8.0 5.0

Inflation (yearly, end-period) 15.0 (4.9) (5.0) 2.0

Government finances






External indicators







USD-QAR (end-period) 3.64 3.64 3.64 3.64

0

5

10

15

20

25

30

35

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

25

50

75

100

125

2006 2007 2008 2009 2010F

USD

bn


0

3

6

9

12

15

2007 2008 2009 2010F 2011F

%

0

7

14

21

28

35

%




69

SO

VE

RE

IGN

S


Saudi Arabia (Aa3/Sta; AA-/Sta; AA-/Sta) Analyst: Kaushik Rudra (+65 6596 8260)

21

Credit outlook – positiveWe maintain our positive outlook on Saudi Arabia as a credit. Over the years, Saudi Arabia has built up a strong foreign-asset cushion, and is in a strong position to withstand near-term shocks. The country has very low debt levels and is a strong net creditor. While the sovereign faces some potential contingent liabilities via the banking sector, we consider them to be easily manageable in the context of the resources available to the authorities. As one of the world’s largest oil producers, the country remains highly dependent on hydrocarbon prices; given the relatively strong outlook for hydrocarbon prices over the next few years, we expect Saudi Arabia’s ample resources to grow and its debt metrics to improve further.

Country profile

The Kingdom of Saudi Arabia is the largest country in the Arabian Peninsula. It occupies an area about one-quarter that of the US. Saudi Arabia’s population is around 26mn, 97% of whom follow Islam. Islam’s two holiest sites, Mecca and Medina, are located in the country. The energy sector is the backbone of the Saudi economy. The country possesses 20% of the world’s proven oil reserves and is one of the world’s largest producers and exporters of oil. Its dominant position in OPEC, with the largest amount of spare capacity, makes it a primary driver of oil prices, ensuring the country a strong geopolitical and strategic role on the world stage.


One of the world’s largest oil producers: Saudi Arabia accounts for 12% of global production and 20% of the world’s oil reserves (265bn barrels). Given its large spare production capacity – current production is around 10mbd, versus production capacity of 12.5mbd – and its important position within OPEC, Saudi Arabia plays a major role in influencing oil prices. The country also possesses some associated gas reserves, most of which are used to meet domestic demand. Vulnerability to oil-price declines: With 88% of its budget revenues and 85% of its export earnings coming from the oil industry, Saudi Arabia’s dependence on oil is extremely high. Hydrocarbon-sector dividends include strong growth: Thanks to the hydrocarbon sector, the economy has exhibited decent growth rates over the past few years. The economy has managed to recover well from the slowdown of 2009, and is expected to grow at around 4% in 2010 and 2011. Given the country’s relatively young population and high unemployment rate, high growth rates are needed to address the employment deficit. Fiscal surplus continues to reduce indebtedness: After a record fiscal surplus (C.32% of GDP) in 2008, the fiscal balance slipped into a deficit in 2009. Saudi Arabia pursued counter-cyclical policies (increased spending on social projects and infrastructure) in 2009 to combat the global financial crisis, and consequently recorded a deficit of 6.3% of GDP. Its fiscal performance has since improved, and a budget surplus of USD 28.9bn is forecast for 2010. The authorities continue to use any budget surplus to pay down domestic debt (estimated at USD 44.5bn, or 10.2% of 2010 GDP). External balances supported by the hydrocarbon sector: Buoyed by higher oil prices, Saudi Arabia recorded a current account surplus of around USD 132bn (28% of GDP) in 2008. Although this number has since declined, it remained in the double digits in 2010. Additionally, Saudi Arabia continues to benefit from strong net FDI, mostly targeted at the energy sector. Low levels of indebtedness: Saudi Arabia has relatively low levels of external indebtedness. Total gross external debt stood at USD 86bn at the end of 2010; this represented only 20% of GDP. Total government debt remains very low, averaging around 13% of GDP over the 2009-10 period. SAMA has significant resources: Although Saudi Arabia does not have a formal sovereign wealth fund, it has been accumulating foreign assets for a number of years and has close to USD 450bn in foreign assets, including the Saudi Arabian Monetary Agency’s (SAMA’s) foreign-exchange reserves. Sound banking system: Led by prudent regulation from SAMA, the Saudi banking sector is very conservatively run for the most part. The banking sector is fairly liquid and well capitalised, and has relatively low levels of leverage. While bank balance sheets have taken hits over the past couple of years, the numbers are manageable given their healthy capitalisation ratios. Political landscape: The country’s relatively young population and high unemployment rate (10.5%) continue to pose a challenge to the government. Since his accession in 2005, King Abdullah has tried to modernise and reform the government. Moreover, ample resources are available to the authorities to cushion price and other shocks for extended periods. In early 2011, King Abdullah unveiled a series of benefits for citizens estimated to be worth USD 36bn. These included a 15% salary increase for public employees and financial aid for the unemployed and students.


70

SO

VE

RE

IGN

S


Saudi Arabia (Aa3/Sta; AA-/Sta; AA-/Sta)

22


0

2

4

6

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 24.8 25.4 26.0 26.6




Government finances


Fiscal balance/GDP 32.6 (6.3) 7.0 6.5




External indicators







USD-SAR (end-period) 3.75 3.75 3.75 3.75

0

7

14

21

28

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

90

180

270

360

450

2006 2007 2008 2009 2010F

USD

bn


-10

0

10

20

30

40

2007 2008 2009 2010F 2011F

%

10

11

12

13

14

15

%




71

SO

VE

RE

IGN

S


Tunisia (Baa3/Neg; BBB/CWN; BBB-/Neg)Analysts: Shankar Narayanaswamy (+65 6596 8249), Philippe Dauba-Pantanacce (+971 4508 3740)

23

Credit outlook – negativeWe initiate coverage of Tunisia with a negative outlook. Tunisia benefits from a diversified and resilient economy, supported by strong domestic demand and a long-established relationship with Europe. The country has benefited from pragmatic and prudent economic policy-making, though debt levels remain high for its ratings, driven by a persistent fiscal deficit over the past decade. High unemployment, limited public political participation and corruption have plagued the country. Popular discontent and protests over these issues led to the overthrow of the government in January 2011. A sustainable solution to the unemployment problem and related social discontent will be crucial to Tunisia’s long-term stability.

Country profile

Tunisia, known officially as the Tunisian Republic, is located in Northern Africa, bordering the Mediterranean Sea between Algeria and Libya. Tunisia’s social and human development metrics are among the best in the region, which has ensured economic stability. Market reforms have been on the agenda, and state involvement, though high, has declined over the past decade. Tunisia is undergoing a regime change after being under single-party rule since independence. Recent street protests led to the overthrow of President Zine al-Abidine Ben Ali, who had led the country for more than 23 years. Tunisia is currently ruled by an interim unity government, with a proposed power transition following multi-party elections proposed for July 2011.


Resilient economy, though linked to European fortunes: Tunisia’s resilient exports and policy-induced private demand helped to maintain stable growth of 4.0% in 2010, according to our forecast. Tunisia’s growing economic integration with its European partners has contributed to the country’s modernisation, but it also represents an external vulnerability due to its heavy dependence on Europe. The EU is by far Tunisia’s largest partner, accounting for more than three-quarters of goods exports, tourism receipts, workers’ remittances and FDI.High inflation: Inflation remains high (4.8% in 2010) compared to the historical trend due to higher oil prices and more expensive imported food items, compounded by a poor harvest. Recent developments, including salary hikes and public aid, are likely to exacerbate the situation, leading to a spike in inflation over previous levels. Proactive monetary policy: The authorities target moderate money supply growth, with the underlying aim of keeping inflation at low levels. Tunisia has repeated its commitment to adopting an inflation-targeting framework and is putting the necessary conditions in place for this. The authorities have also expressed their commitment to a free-floating currency over the medium term. However, we do not expect either of these goals to be achieved anytime soon. Fiscal policy: The government’s push to prop up domestic demand in the face of weaker export growth due to the crisis in Europe caused the fiscal deficit to widen to about 3% of GDP in 2010 from 1% in 2008. The current situation is likely to lead to further fiscal slippage, and public debt to GDP, which is already high for Tunisia’s rating category, could rise further.Current account in surplus but weaker than peers: Strong policy-induced private demand to offset export weakness has led to a widening current account deficit over the last few years. We expect this situation to correct itself as the euro-area economies pick up steam.Weak debt position: Tunisia’s debt levels remain high for its rating category. Debt reduction has been a key focus for Tunisia in the last decade, and low fiscal deficits helped to bring down the debt level to c.43% in 2010 from 54% in 2005. However, recent events are likely to add to the fiscal burden and push up debt levels. Stable financial system: The banking system is generally stable, well capitalised and very liquid. However, high NPLs (around 15%) and relatively low NPL provisions (around 58%) are cause for concern. Credit to the economy has grown in a consistently healthy 10% range in recent years, helped by prudent regulations. Under a major financial-sector reform, the country’s three majority government-owned banks (38% of banking assets) will be merged into one conglomerate. Politics: The country is unique within the Maghreb in terms of social development. It has a very high level of education, the most advanced laws regarding women in the Arab world, and a large middle class. However, high and rising unemployment has been a festering issue; this, coupled with a lack of political freedoms, triggered severe street protests that led to the ouster of the regime in January 2011. Greater political freedom and successful measures to tackle youth unemployment, along with a successful transition to a democratic government, will be crucial to the country’s long-term political stability.


72

SO

VE

RE

IGN

S


Tunisia (Baa3/Neg; BBB/CWN; BBB-/Neg)

24


0

2

4

6

8

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 10.3 10.4 10.5 10.6




Government finances



Primary balance/GDP 1.1 0.1 (0.8) (0.6)



External indicators







USD-TND (end-period) 1.32 1.32 1.39 1.45

-5

-4

-3

-2

-1

0

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

5

10

15

20

25

2006 2007 2008 2009 2010F

USD

bn


-4

-3

-2

-1

0

2007 2008 2009 2010F 2011F

%

42

43

44

45

46

%


Sources: IMF, Moody’s Investors Service, Standard Chartered Research


73

SO

VE

RE

IGN

S


Turkey (Ba2/Pos; BB/Pos; BB+/Pos) Analyst: Kaushik Rudra (+65 6596 8260)

25

Credit outlook – positiveWe initiate coverage of Turkey with a positive credit outlook. Turkey’s large, dynamic and diversified economy weathered the global financial crisis extremely well and is poised to be the growth leader of the OECD. The authorities have pursued prudent fiscal and monetary policies since the early 2000s – a key factor behind the economy’s resilience to shocks in recent years. Turkey’s increased economic integration with the EU and its strategic geopolitical role, straddling Europe and the Middle East, support both private and official-sector inflows. Turkey’s banking sector remains healthy and extremely well capitalised, and has been a strong sponsor of locally originated debt paper.

Country profile

Turkey, known officially as the Republic of Turkey, is a Eurasian country that stretches across the Anatolian peninsula in western Asia and Thrace in the Balkan region of south eastern Europe. Although Islam is the predominant religion, the country is a staunchly secular state (enshrined in the constitution). Turkey is a constitutional republic and has become increasingly integrated with the West through its membership in organisations such as the Council of Europe, NATO, OECD and the G20. Turkey began full membership negotiations with the EU in 2005, having been an associate member of the EEC since 1963. The ruling Justice and Development (AK) party has been in power since 2002. A presidential election is due in 2012, the first by direct popular vote.


Resurgent economy: The Turkish economy rebounded sharply from the 2009 recession that followed the global financial crisis. Partly aided by a favourable base effect, the growth rate averaged in excess of 10% in H1-2010. Although growth is expected to moderate from double-digit levels, we expect it to remain healthy, and we expect Turkey to be one of the fastest-growing economies in the OECD. Inflation needs to be watched: Headline inflation has picked up on the back of elevated food prices and the strong post-crisis recovery. Core inflation, however, remains well behaved, largely due to favourable base effects, exchange rate appreciation and price regulation. We expect the central bank, which remains comfortable with core inflation at current levels, to continue to use non-interest-rate tools such as bank reserve requirements to dampen credit growth. Responsible fiscal policy needed: The government’s Medium-Term Programme (MTP) for 2011-13 outlines its commitment to continued fiscal consolidation. That said, we do not find the rules to be particularly restrictive. In the absence of a restrictive fiscal anchor, we remain concerned about the government’s ability to exercise spending restraint in the run-up to the elections in mid-2011. The absence of a fiscal anchor is especially worrisome at a time when the external balance looks set to worsen. Domestic debt dynamics are under control: The authorities have made huge strides in reducing public-sector indebtedness, bringing down general government debt (as a percentage of GDP) from more than 50% in 2005 to below 40% as of 2008. Although the number rose somewhat in 2009, we expect it to fall back to around 40% over the next few years. Moreover, given the transformation of the debt mix over the past decade, Turkey’s domestic debt is now much more resilient to shocks. Current account remains a worry: With cheap external financing readily available and constraints on residents’ borrowing relaxed, the external imbalance worsened sharply in 2010. Because of the sharp economic recovery, combined with the inadequate competitiveness of exports due to structural factors, the current account deficit for 2010 is expected to have risen to around 6.0% of GDP, from around 2.3% in 2009. Funding has been on a more robust footing: A number of factors – including interest rate differentials, favourable near-term growth expectations, prospects for currency appreciation, the healthy balance sheets of the government and banks, and increased economic integration with the EU – will likely continue to support capital inflows into the country. While these inflows have helped to largely cover the current account gap, the mix in recent years has swung more in favour of portfolio flows, increasing Turkey’s vulnerability to market sentiment. That said, Turkey’s resilience to shocks has strengthened in recent years, as evidenced by the markets’ ability to withstand volatile capital inflows and ongoing domestic political infighting. Healthy banking sector: The banking sector is well capitalised, with a healthy loan-to-deposit ratio of 75%. The ratio of FX deposits to overall deposits has declined to around 30%, demonstrating increased public confidence in the banking system and the overall economic outlook. Elections will increase political risks: National elections scheduled for mid-2011 will likely bring tensions between the society’s secular and religious elements to the fore.


74

SO

VE

RE

IGN

S


Turkey (Ba2/Pos; BB/Pos; BB+/Pos)

26


-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 73.9 74.8 75.8 76.8


Real GDP, change 0.7 (4.7) 6.5 5.0


Government finances






External indicators







USD-TRY (end-period) 1.53 1.49 1.52 1.56

-8

-6

-4

-2

0

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

50

100

150

200

250

300

2006 2007 2008 2009 2010F

USD

bn


-8

-6

-4

-2

0

2007 2008 2009 2010F 2011F

%

38

40

42

44

46

%




75

SO

VE

RE

IGN

S


United Arab Emirates (Aa2/Sta; NR; NR)Analysts: Simrin Sandhu (+65 6596 6281), Shady Shaher (+971 4508 3647)

27

Credit outlook – stable Our stable outlook on the UAE primarily reflects the strong balance-sheet position of Abu Dhabi, the largest economy of the seven emirates and the biggest contributor to the federal budget. The hydrocarbon sector, which has been the mainstay of the UAE economy, is likely to continue to drive revenue, although significant efforts are underway to diversify the economy. The authorities have demonstrated a strong commitment to supporting the banking sector and strategic quasi-sovereign entities. Offsetting these strengths are the country’s relatively large contingent liabilities, via the external debt of both quasi-sovereign entities and the banking system.

Country profile

The United Arab Emirates (UAE) is a federation of seven emirates situated in the south east of the Arabian peninsula, bordering Oman and Saudi Arabia. The emirates comprising the UAE are Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah. The emirates merged to form the UAE in 1971. In addition to the federal government, each emirate has a local government and is headed by its own ruler. The ruler of Abu Dhabi, His Highness Sheikh Khalifa bin Zayed Al Nahyan, has been the president of the UAE since 2004. The ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, is the country’s vice president and prime minister. The UAE is home to the world's sixth-largest oil reserves and is one of the world’s wealthiest countries by per-capita income.


Underpinned by Abu Dhabi: Although the UAE is one of the most diversified economies in the GCC, the country’s fortunes are inextricably linked to the hydrocarbon sector. The UAE derives its credit strength from Abu Dhabi’s strong balance sheet. Abu Dhabi is the largest economy in the UAE and is the biggest contributor to the federal budget. The emirate’s strong position in the hydrocarbon sector has been the mainstay of the UAE economy, and will remain a major revenue earner well into the future due to the vast reserves at the country’s disposal (the hydrocarbon sector represents around 60% and 80% of exports and budget revenues, respectively). The UAE is home to 7% (98bn barrels) of the world’s crude oil reserves and 3% (6.4tcm) of global gas reserves. At the current rate of utilisation, and excluding any new discoveries, these reserves will last for around 100 years. On the road to recovery: After posting growth rates comfortably in excess of 5% since 2005, the UAE economy slowed considerably in 2009, with GDP growing by a lower 1.3%. The economy was hit hard by the global credit crisis, which impacted its key sectors – oil and gas, and construction and real estate. The banking system also came under considerable pressure. Although the economy is picking up, we are likely to see appreciably lower levels of growth for the next few years. We expect the economic recovery to be driven by government spending in Abu Dhabi and by a gradual recovery in the trade and services sector in Dubai. Strong fiscal and current account surpluses: Although the Abu Dhabi government budget ran a deficit in 2009 on account of lower oil prices and production, surpluses in the preceding few years were extremely strong. It is also worth highlighting that the fiscal accounts understate the country’s actual fiscal position since they exclude the profits of Abu Dhabi National Oil Company (ADNOC) and the investment income of Abu Dhabi Investment Authority (ADIA), both of which are directly paid into ADIA. Reserves do not tell the whole story: In our view, while international reserves are quite healthy, they significantly underestimate the UAE’s total foreign assets. The UAE is a substantial net creditor, with total foreign assets on the order of USD 662bn (including ADIA’s estimated foreign assets). Total external debt at end-2009 stood at around USD 140bn. Rising contingent liabilities: Although the UAE’s sovereign and government debt is very low, contingent liabilities via the debt obligations of the banks and corporates – most of which are quasi-sovereign entities – are very high (see ‘Quasi-sovereigns - One too many?’). Dubai-based entities account for about two-thirds of the external debt of the UAE. While this represents a major contingent liability for both Dubai and the federation, support from the UAE government is strong – and, given the country’s sizeable net creditor position, this should be manageable.Political stability: The UAE enjoys a stable political environment. The seven emirates are intricately connected, with the political system enshrined under the 1971 constitution. The risk of social unrest is low given the high percentage of expatriates and the relative prosperity of the general population.


76

SO

VE

RE

IGN

S


United Arab Emirates (Aa2/Sta; NR; NR)

28


0

2

4

6

8

10

2007 2008 2009 2010F 2011F

% c

hang

e

Real GDP


%, unless stated 2008 2009 2010F 2011F

Economic indicators


Population (mn) 4.8 4.9 5.1 5.2




Government finances


Fiscal balance/GDP 12.3 (12.4) (2.5) 4.0




External indicators







USD-AED (end-period) 3.67 3.67 3.67 3.67

0

2

4

6

8

10

2007 2008 2009 2010F 2011F

% o

f GDP

Current account/GDP


0

25

50

75

100

125

150

2006 2007 2008 2009 2010F

USD

bn


-15

-10

-5

0

5

10

15

2007 2008 2009 2010F 2011F

%

0

5

10

15

20

25

30

%


Sources: UAE central bank, Moody’s Investors Service, EIU, IMF, Standard Chartered Research


77

SO

VE

RE

IGN

S


78

SO

VE

RE

IGN

S


Credit analysis – Financials


Abu Dhabi Commercial Bank (A1/Neg; A-/Sta; NR) Analyst: Victor Lohle (+65 6596 8263)

1

Credit outlook – negativeADCB has been among the banks worst affected by the economic slowdown in the UAE. Our negative view is based on the potential for further one-off provisions if other Dubai-related entities restructure their obligations, limited disclosure and transparency, reasonable but declining capital adequacy, and the bank’s above-average – albeit improving – dependence on wholesale markets for funding. Our view also incorporates the bank’s majority ownership by the government of Abu Dhabi and demonstrated support from Abu Dhabi for its banks.

Company profile

Abu Dhabi Commercial Bank (ADCB) is the second-largest bank in Abu Dhabi and the third-largest in the UAE, with an estimated 10% market share of deposits and total assets at end-2010 of AED 178bn (c. USD 49bn). The bank is the result of a 1985 merger of three troubled banks and is 65% owned by Abu Dhabi Investment Council (ADIC, Abu Dhabi’s investment arm). Members of the ruling family own a stake estimated at c.10%. Despite its ownership, the bank is operated on a commercial basis. Its main business was historically corporate and commercial banking, but in recent years the bank has broadened its revenue mix by expanding its presence in retail banking and banking to high-net -worth individuals. The bank’s operations are mainly domestic in nature. ADCB operates from over 50 branches in the UAE.


• Asset-quality deterioration: A new management team was hired in 2003 to revitalise ADCB, and the bank expanded its product offering, but also increased its risk appetite. Going into the global crisis, ADCB had one of the highest reported exposures to the construction, real-estate and contractor finance sectors – including Dubai real estate. Since 2008, ADCB’s asset quality has deteriorated more than that of its Abu Dhabi peers, mainly as a result of exposures in the bank’s corporate loan portfolio, including privately owned Saudi conglomerates and Dubai-related entities. As a result, at end-2010, the bank’s reported impaired loan ratio (including Dubai World) stood at 11%, one of the highest for the UAE banks we cover. Its loan-loss coverage, at 44%, was among the lowest. We believe the bank’s impaired loan ratio may continue to deteriorate this year if additional corporate restructurings materialise. However, 2011 is likely to be the worst point in the asset-quality cycle, in our view.

• Earnings volatility: While the bank’s earnings capacity at a pre-provision level is helped by high efficiency levels, large risk provisions since 2008 have translated into significant earnings volatility. The bank reported a loss in 2009, and profits in 2010 were relatively small (AED 391mn, ROA of 0.2%), as risk provisions ate up 89% of pre-provision profits.

• Dependence on market funding: ADCB had a higher-than-average reliance on market funding going into the crisis, and its funding costs rose sharply when liquidity dried up in late 2008 and early 2009. In 2010, the bank aggressively grew its customer deposit base (up 22%). However, the bulk of the growth has come from corporate rather than retail customers, which tend to be stickier. Customer deposits provided 75% of funding at end-2010, with corporate customers accounting for 56%. The remainder was almost evenly split between retail customers and the government. Although the loan-to-deposit ratio has improved, at 122% at end-2010, it remains considerably above average.

• Growth in retail banking: As the second-largest bank in Abu Dhabi, ADCB has a strong franchise, particularly among commercial customers. The bank has expanded its product offering since the mid-2000s, particularly in the consumer and Islamic segments. In 2010 the bank announced the acquisition of RBS’ retail banking business in the UAE, which should further bolster its retail banking offering. Consumer banking generated 44% of revenues in 2010.

• Reasonable capital base: The bank’s capital base improved following the injection of Tier 1 capital in early 2009. However, the combination of continued loan growth and losses in 2009 has led to a slight decline in capital adequacy ratios. At end-2010, the bank’s equity-to-assets ratio was 11%, and its Tier 1 capital ratio stood at 12%. While these are reasonable by international standards, they are lower than the average for the other Abu Dhabi banks. Also, given the bank’s high NPL ratio and low loan-loss coverage, higher ratios would be desirable. However, implicit support from the government of Abu Dhabi mitigates this risk.

• Supportive framework: There is a strong tradition of support for banks in the UAE, and no bank has been allowed to fail. This was demonstrated through the Tier 1 capital injection by Abu Dhabi into five of its banks in 2009 (including AED 4bn into ADCB), and by the conversion into LT2 capital of deposits injected into the system by the UAE Ministry of Finance. In our opinion, given the bank’s ownership by ADIC and its size relative to the Abu Dhabi market, there is implicit support for ADCB.


80

FIN

AN

CIA

LS


Abu Dhabi Commercial Bank (A1/Neg; A-/Sta; NR)

2

Summary financials Loans by type (Dec-2010)

73%

12%

12%1%2%

Corporate

Overdrafts

Retail

Credit cards

Other

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Customer deposits Interbank Debt securities and loans

NIM and average interest earned

2007 2008 2009 2010Balance sheet (AED mn) Total assets (USD mn) 28,941 40,444 43,654 48,575 Total assets 106,214 148,430 160,209 178,271 Loans 75,676 109,081 116,610 122,772 Investments 3,091 3,423 4,459 8,263 Total liabilities 94,802 132,515 141,119 158,698 Deposits 53,938 84,361 86,300 106,134 Interbank 5,598 6,905 4,738 4,842 Debt 30,593 30,735 37,650 29,955 Equity 11,412 15,915 19,090 19,573 Income statement (AED mn) Net interest income 2,288 2,481 3,276 3,682 Other income 1,511 1,910 1,507 1,654 Total income 3,800 4,390 4,783 5,336 Overheads (1,009) (1,525) (1,539) (1,649)Pre-provision profits (PPP) 2,791 2,865 3,243 3,687 Impairments (703) (1,498) (3,753) (3,287)Profit before tax 2,088 1,367 (510) 400 Net income 2,085 1,358 (513) 391 Key ratios (%) Net interest margin 2.6 2.1 2.4 2.5Fee income-to-income 23.0 22.4 20.6 17.9Costs-to-income 26.5 34.7 32.2 30.9Costs-to-average assets 1.1 1.2 1.0 1.0Provisions-to-PPP 25.2 52.3 115.7 89.2ROE 18.8 9.9 (2.9) 2.0ROA 2.2 1.1 (0.3) 0.2Impaired loans-to-loans 1.4 1.1 5.2 11.1Loan-loss coverage 109.0 157.9 67.8 44.1Loan-to-deposit 142.5 131.7 140.0 121.6Equity-to-assets 10.7 10.7 11.9 11.0Tier 1 capital 12.2 11.4 12.4 12.0Total capital 14.2 11.4 17.4 16.7

0

2

4

6

8

2006 2007 2008 2009 2010

%

Net interest margin Avg. interest earned

Asset quality Asset mix (Dec-2010)

0

3

6

9

12


%

0

40

80

120

160

200

%

NPL ratio Loan-loss coverage (RHS)

3%

10%

5%

69%

13% Cash

Interbank

Investment securities

Customer loans

Other

Capital adequacy and ROE Revenues by type of income (2010)

0

10

20


%

-10

0

10

20

30

%

Tier 1 capital ratio Total 2 capital ROE (RHS)

69%

18%

13%

Net interest income

Fees/commissions

Other income

Sources: Company reports, Standard Chartered Research


81

FIN

AN

CIA

LS


Abu Dhabi Islamic Bank (A2/Sta; NR; A+/Sta) Analyst: Victor Lohle (+65 6596 8263)

3

Credit outlook – stable We initiate coverage of ADIB with a stable credit outlook. Our view takes into account the bank’s ownership (directly and indirectly) by the Abu Dhabi ruling family, strong franchise in the Islamic segment, robust liquidity, sound capital adequacy, and above-average disclosure and transparency. Our view also takes into account rapid loan growth over the last few years, the recent deterioration in asset quality (particularly among private banking clients), and the high concentrations of loans and deposits.

Company profile

Abu Dhabi Islamic Bank is the largest Islamic bank in Abu Dhabi and the eighth-largest domestic bank in the UAE, with total assets of AED 71bn (USD 19bn) at end-September 2010 and a market share of deposits in the UAE of 5%. ADIB is 40% owned by Emirates International Investment Co., an investment vehicle controlled by the Abu Dhabi ruling family. The Abu Dhabi Investment Council (ADIC) has a further 8% stake, and members of the ruling family control another 11%. The bank was established in 1997 and operates from a network of over 60 branches. Although it offers a broad range of services, its activities are skewed towards the retail market. The bank’s operations are mostly domestic in nature, though it is keen to increase its overseas presence.


• Strong domestic retail franchise: Because some customers prefer to conduct business with Islamic institutions, Islamic banks have a competitive advantage over conventional banks. As a result, ADIB’s cost of funding is lower than for most of the other Abu Dhabi banks. At end-September 2010, customer deposits provided 89% of total funding. Approximately 50% of customer deposits were retail (mainly individuals rather than SMEs), with a further 15% being sourced from the government and the public sector.

• Repositioning for growth: A new management team was appointed in late 2007 and has embarked on a restructuring process. The bank’s strategy is to increase its market share in the UAE, expand into complementary Shariah-compliant financial services (e.g. insurance and stockbroking), and expand its international operations.

• Good earnings generation capacity: Although ADIB’s cost efficiency is below average (partly reflecting new branch openings in recent years), its pre-provision earnings generation capacity is good thanks to NIMs that are among the highest for UAE banks. 2009 net income was affected by high provisions stemming from the recognition of NPLs and management’s intention to build up collective provisions ahead of a change in regulation. Profits recovered in 2010, and the bank’s ROA for 9M-2010 was 1.8%.

• Rapid loan growth: ADIB’s loan portfolio has grown faster than the average for the other Abu Dhabi banks (3.5-fold between end-2005 and September 2010). Although the bank’s loan portfolio has been growing rapidly, customer deposit growth has kept pace. As a result, the bank’s loan-to-deposit ratio is the lowest among the Abu Dhabi banks we cover, at 91% as of end-September 2010.

• High retail loan exposure: 60% of the bank’s loan portfolio at end-September 2010 was to individuals, which is above average for the Abu Dhabi banks and reflects the bank’s Islamic franchise. The majority of the bank’s retail customers are UAE nationals, where the bank would have a charge on their salaries. Retail banking assets accounted for 32% of total assets at end-September 2010 and generated 67% of 9M-2010 revenues.

• Asset-quality deterioration: Since the management change, ADIB has been aggressively recognising its non-performing exposures. As a result, the bank’s NPL ratio has deteriorated faster and is higher than the average for the Abu Dhabi banks. The impaired loan ratio stood at 5.9% at end-September 2010, with loan-loss cover of 71%.

• Sound capital adequacy: ADIB is well capitalised by international standards, with a Tier 1 capital ratio of 13.2% and an equity-to-assets ratio of 11.3% at end-September 2010. Although these numbers are slightly lower than the average for the other Abu Dhabi banks, this is mitigated by implicit support from the government of Abu Dhabi.

• Supportive framework: There is a strong tradition of support in the UAE, and no bank has been allowed to fail. This was demonstrated through the Tier 1 capital injection by Abu Dhabi into five of its banks in 2009 (including AED 2bn into ADIB). In our opinion, given the direct and indirect ownership by the Abu Dhabi ruling family, there is implicit support for ADIB.

• Geographic diversification: The bank has expanded abroad by acquiring minority stakes in banks in Egypt (49% stake) and Bosnia (27%), and has applied for banking licences in Algeria, Iraq, Qatar and the UK. Although the contribution from foreign businesses is small, it is expected to grow over time.


82

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AN

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Abu Dhabi Islamic Bank (A2/Sta; NR; A+/Sta)

4

Summary financials Revenues by segment (Sep-2010)

67%

21%

5%7%

Retail banking

Wholesale banking

Private banking

Capital Markets

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Sep-10



2007 2008 2009 9M-10Balance sheet (AED mn) Total assets (USD mn) 12,000 13,954 17,462 19,394 Total assets 44,040 51,210 64,084 71,175 Loans 24,327 34,179 40,474 47,159 Investments 1,259 1,209 1,010 1,223 Total liabilities 38,619 45,573 56,939 63,111 Deposits 29,629 37,486 48,220 54,038 Interbank 4,620 3,576 1,279 1,317 Debt 2,938 2,938 5,145 5,145 Equity 5,421 5,637 7,145 8,064 Income statement (AED mn) Net interest income 952 1,728 2,109 1,888 Other income 485 470 412 347 Total income 1,438 2,199 2,520 2,235 Overheads (551) (888) (993) (920)Pre-provision profits (PPP) 886 1,311 1,527 1,315 Impairments (117) (460) (1,449) (405)Profit before tax 769 851 78 909 Net income 769 851 78 909 Key ratios (%) Net interest margin 2.5 3.9 4.0 4.0Fee income-to-income 10.1 7.0 9.4 12.3Costs-to-income 38.4 40.4 39.4 41.2Costs-to-average assets 1.4 1.9 1.7 1.8Provisions-to-PPP 13.2 35.1 94.9 30.8ROE 18.8 15.4 1.2 15.9ROA 1.9 1.8 0.1 1.8Impaired loans-to-loans 0.7 3.5 6.0 5.9Loan-loss coverage 207.0 48.6 69.3 71.1Loan-to-deposit 83.3 92.7 87.6 91.1Equity-to-assets 12.3 11.0 11.1 11.3Tier 1 capital NA 13.5 13.5 13.2Total capital NA 11.6 17.0 16.5

0

2

4

6

8

2006 2007 2008 2009 9M-2010

%


Asset quality Asset mix (Sep-2010)

0

2

4

6

8


%

0

50

100

150

200

250

%


9%

16%

2%

66%

7%Cash

Interbank


Customer loans

Other

Capital adequacy and ROE Revenues by type of income (9M-2010)

0

5

10

15

20

25


%

0

5

10

15

20

25

%

Tier 1 capital ratio Tier 2 capital ROE (RHS)

85%

12%3%

Net interest income

Fee and commission income

Trading income



83

FIN

AN

CIA

LS


Arab Banking Corporation (Baa3/RFD; BBB/CWN; BBB-/RWN) Analyst: Victor Lohle (+65 6596 8263)

5

Credit outlook – negativeOur view is driven mostly by uncertainties regarding ABC’s controlling shareholder, the Central Bank of Libya. It also takes into account the absence of a core domestic market for ABC and the challenges in executing the bank’s ‘universal banking’ model in the Middle East. On the other hand, the bank’s balance sheet has been considerably de-risked since 2008, and its financial metrics have improved (in particular in terms of capital adequacy).

Company profile

Arab Banking Corporation (ABC) is a wholesale bank based in Bahrain with end-2010 total assets of USD 28bn. The bank, established in 1980, is today mainly a wholesale bank active in trade finance, project and structured finance, treasury, syndications, and corporate and institutional banking. The bank has a significant Brazilian subsidiary and also has small retail and SME presences in Algeria, Egypt, Jordan and Tunisia. In the wake of losses on its investment portfolio, which necessitated a capital infusion of USD 1.1bn from its shareholders in June 2008, the bank has put greater emphasis on developing its retail banking business. Following the exit of the Abu Dhabi Investment Council (ADIC) in December 2010, ABC’s main shareholders are the Central Bank of Libya (CBL, 59.4%) and the Kuwait Investment Authority (29.7%).


• Balance-sheet de-risking: In 2007 and 2008, ABC’s results were marred by a combined USD 1.2bn of losses on its investment securities portfolio, forcing the bank to post a net loss of USD 836mn in 2008. As a result of the losses, the bank de-risked and shrank its balance sheet by writing off or selling investments. Total assets declined from a high of USD 33bn at end-2007 to USD 26bn at end-2009. Although the bank’s securities portfolio has been steadily declining, it still represented 29% of total assets at end-2010. Over 40% of the securities portfolio was made up of US government agency securities, with the remainder comprised of bank senior and subordinated debt and regional corporate bonds. With loan growth having picked up in 2010, the bank has begun to grow its balance sheet again.

• Strong shareholder support, but changing structure: The support framework for wholesale banks in Bahrain (and throughout the world) tends to be less extensive than that for banks with retail banking operations. Wholesale banks have failed in Bahrain in the past. In the wake of ABC’s losses in 2008, its shareholders at the time – ADIC, CBL and KIA – demonstrated strong support by injecting USD 1bn of new capital through a rights issue. However, ADIC sold its stake in ABC to CBL in 2010, leaving CBL as the main shareholder.

• Strategic challenges: ABC has a large presence throughout the Arab world and a solid customer base made up of governments, large corporates, multinationals, and – increasingly – retail customers. The bank also has an important presence in Brazil via its 56% stake in Banco ABC Brasil. However, the bank lacks a core domestic market. Other medium-term strategic challenges include reducing its reliance on short-term wholesale funding – customer deposits provided 48% of total funding at end-2010 – and being able to generate recurrent earnings streams.

• Universal banking strategy: In order to address these challenges, ABC intends to develop a universal banking model by increasing the revenue contribution of retail banking (particularly SME banking), expanding its existing operations and selectively acquiring operations in MENA. Conceptually, the strategy is sound, as it aims to develop more recurrent and stable sources of income. In practice, it could take considerable time to implement. In December 2010, ABC announced the acquisition of a 49% stake in a small Libyan bank.

• Low earnings generation capacity: ABC’s profitability is relatively low because of narrow margins and a relatively high cost base. Pre-provision ROA has averaged 1% since 2005, while pre-provision ROE has averaged 11.6%. (These numbers are not meaningful on a net income basis because of the losses incurred in 2008). Profitability improved in 2010 on higher net interest income – driven by lower funding costs and higher loan volumes – and lower provisions. However, ROA was still low, at 0.7%.

• Improved capital adequacy: The bank’s capital base has strengthened following the capital infusion from its shareholders in 2008 and a rights issue in 2010. The bank’s Tier 1 capital ratio stood at 18.4% at end-2010, with an equity-to-assets ratio of 13.7%.

• Stable asset quality: Asset quality deteriorated in 2009 as a result of exposure to Awal and TIBC, two smaller wholesale banks controlled by the Saudi groups Saad and Al-Gosaibi, respectively. However, asset quality has remained stable since then. The bank’s NPL ratio stood at 3.5% at end-2010, with loan-loss cover of 128%.


84

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AN

CIA

LS


Arab Banking Corporation (Baa3/RFD; BBB/CWN; BBB-/RWN)

6

Summary financials Revenues by segment (2010)

18%

13%

4%

22%43%

MENA subsidiaries

Wholesale banking

Treasury

ABC Brasil

Other

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Customer deposits Repos Interbank Debt securities and loans


2007 2008 2009 2010Balance sheet (USD mn) Total assets 32,744 28,486 25,965 28,105 Loans 12,329 11,931 10,949 12,186 Investments 13,637 10,749 9,687 8,122 Total liabilities 30,587 26,398 23,384 24,245 Deposits 10,791 10,728 9,909 11,175 Interbank 8,811 6,210 6,224 6,283 Debt 2,579 2,498 2,344 2,183 Equity 2,157 2,088 2,581 3,860 Income statement (USD mn) Net interest income 298 431 391 440 Other income 393 176 250 279 Total income 691 607 641 719 Overheads (275) (352) (326) (359)Pre-provision profits (PPP) 416 255 315 360 Impairments (230) (1,055) (115) (77)Profit before tax 186 (800) 200 283 Net income 149 (836) 154 199 Key ratios (%) Net interest margin 1.1 1.4 1.5 1.7Fee income-to-income 19.7 23.4 24.5 24.2Costs-to-income 39.8 58.0 50.9 49.9Costs-to-average assets 1.0 1.1 1.2 1.3Provisions-to-PPP 55.3 413.7 36.5 21.4ROE 7.0 (39.4) 6.6 6.2ROA 0.5 (2.7) 0.6 0.7Impaired loans-to-loans 1.3 1.9 3.5 3.5Loan-loss coverage 196.9 181.7 131.1 127.6Loan-to-deposit 114.3 111.2 110.5 109.0Equity-to-assets 6.6 7.3 9.9 13.7Tier 1 capital 10.9 12.8 13.4 18.4Total capital 14.4 16.2 16.9 23.1

0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2

3

4

5


%

0

50

100

150

200

250

%


2%

23%

29%

43%

3%Cash

Interbank


Customer loans

Other


0

5

10

15

20

25


%

-60

-40

-20

0

20

%


61%24%

8%7%

Net interest income


Trading income

Other



85

FIN

AN

CIA

LS


Arab National Bank (A1/Sta; A/Sta; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

7

Credit outlook – stable Our stable credit outlook on ANB is predicated on the bank’s strong franchise, particularly in retail banking; its better business mix than some of its peers; its good earnings generation capacity; and the strong regulatory framework in Saudi Arabia. Our view also takes into account recent asset-quality deterioration, high concentrations of loans and deposits, and the bank’s almost entirely domestic franchise.

Company profile

Arab National Bank (ANB) is the seventh-largest bank in Saudi Arabia, with total assets of SAR 116bn (USD 31bn) as of end-2010. It has the fourth-largest branch network in the country (139 branches) and a market share of deposits of 10%. ANB has a particularly strong franchise among smaller corporates and retail customers, and derives a greater percentage of its profits from retail banking than some of its larger competitors. ANB is 40% owned by Jordan’s Arab Bank (BBB/Ba3/A-), though the two have no technical services agreement. Saudi investors control the remaining 60%, with the General Organisation for Social Insurance (GOSI) owning an 11% stake. The bank’s franchise is primarily domestic, though it aims to expand outside of Saudi Arabia.


• Strong retail franchise: ANB is a mid-sized bank by Saudi Arabian standards. Although it provides a broad range of services, it has a particularly strong franchise in the retail and middle-market segments, leveraging off of its relatively broad branch network. Retail loans account for approximately 25% of the bank’s loan portfolio; partly as a result of this, ANB has a better business mix than some of its peers. The bank derived 48% of revenues from retail banking in 2010, considerably more than some of its larger competitors.

• Asset-quality deterioration: Like other Saudi banks, ANB experienced rapid loan growth in the years leading up to the economic slowdown. The bank’s corporate loan portfolio more than doubled between 2005 and 2008. Also, as is common among Saudi banks, the loan portfolio is somewhat concentrated due to the dominance of a few high-profile family-owned groups or public-sector entities. The bank’s asset quality deteriorated in 2009 as a result of defaults by a handful of corporates and privately owned companies, and asset quality indicators are now slightly worse than average. The bank’s NPL ratio stood at 3% at end-2010, with loan-loss cover of 108%.

• Solid funding base: The bank’s funding base is strong, benefiting from a large branch network. Customer deposits provided 86% of total funding at end-2010. We estimate that around half of customer deposits are sourced from retail customers, with the remainder sourced from corporate customers. The loan-to-deposit ratio is reasonable, at 79% at end-2010, and has been fairly stable for a few years.

• Good earnings generation capacity: The bank’s earnings generation capacity is strong thanks to high NIMs – reflecting the relatively large weighting of retail loans on its balance sheet – and good efficiency levels. Despite stagnant loan volumes in 2010 and higher loan-loss provisions, the bank has maintained reasonable levels of profitability. Its reported ROA for 2010 was 1.7%.

• Good capital adequacy: The bank’s capital adequacy ratios are good by international standards, and are broadly in line with the average of the large Saudi banks. ANB’s Tier 1 capital ratio was 15.1% at end-2010, with an equity-to-assets ratio of 13.3%.

• Limited geographic diversification: As a purely domestic player, ANB is more exposed than some of its peers to the performance of the Saudi economy. Although the economy is large and the banking system can achieve high profits due to features such as a large percentage of unremunerated deposits, the economy is heavily dependent on the hydrocarbon sector. ANB appears to be keen to expand outside of Saudi Arabia. It attempted to buy two Egyptian banks in 2006 and in 2008 in joint bids with Arab Bank, its cornerstone shareholder.

• Strong regulatory framework: In our opinion, the Saudi Arabian Monetary Authority (SAMA) is one of the more competent and proactive regulators in the GCC, which strengthens the credit profiles of the Saudi banks. There is also a strong tradition of support in Saudi Arabia, and no bank has ever failed.


86

FIN

AN

CIA

LS


Arab National Bank (A1/Sta; A/Sta; A/Sta)

8

Summary financials Revenues by type of business (2010)

48%

28%

10%

12%

2%Retail banking

Corporate banking

Treasury

Investment and brokerageservicesOther

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Customer deposits Interbank Debt securities and loans


2007 2008 2009 2010Balance sheet (SAR mn) Total assets (USD mn) 25,191 32,349 29,413 30,943 Total assets 94,468 121,307 110,297 116,035 Loans 61,122 74,662 66,811 66,203 Investments 21,025 28,228 23,261 32,841 Total liabilities 83,943 108,636 95,819 100,638 Deposits 73,692 92,743 82,680 84,199 Interbank 4,447 10,509 8,714 12,097 Debt 3,188 1,875 1,688 1,688 Equity 10,525 12,671 14,478 15,397 Income statement (SAR mn) Net interest income 2,904 3,354 3,456 3,158 Other income 1,052 1,576 1,037 1,346 Total income 3,956 4,930 4,493 4,504 Overheads (1,428) (1,582) (1,601) (1,644)Pre-provision profits (PPP) 2,528 3,341 2,894 2,872 Impairments (67) (855) (527) (964)Profit before tax 2,461 2,486 2,367 1,908 Net income 2,461 2,486 2,367 1,908 Key ratios (%) Net interest margin 3.5 3.2 3.1 2.9Fee income-to-income 19.6 17.0 12.5 12.1Costs-to-income 36.1 32.1 35.6 36.4Costs-to-average assets 1.7 1.5 1.4 1.5Provisions-to-PPP 2.7 25.6 18.2 33.6ROE 26.6 21.4 17.4 12.8ROA 2.9 2.3 2.0 1.7Impaired loans-to-loans 0.5 0.4 2.8 3.0Loan-loss coverage 354.0 349.0 75.9 108.1Loan-to-deposit 82.9 80.5 80.8 78.6Equity-to-assets 11.1 10.4 13.1 13.3Tier 1 capital 13.9 11.9 14.3 15.1Total capital 17.1 14.1 16.3 17.0

0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2

3

4


%

0

100

200

300

400

%


58%

28%

1%3% 10% Cash

Interbank


Customer loans

Other


0

5

10

15

20


%

0

10

20

30

40

%


70%

18%

12%

Net interest income


Other



87

FIN

AN

CIA

LS


Banque Saudi Fransi (Aa3/Sta; A/Sta; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

9

Credit outlook – positiveWe initiate coverage of BSFR with a positive outlook. Despite the recent economic slowdown in Saudi Arabia, BSFR’s financial metrics have remained intact. Our positive outlook reflects the bank’s strong franchise in Saudi Arabia’s corporate market, its close links with the Crédit Agricole group, its good track record, its sound financial fundamentals, and Saudi Arabia’s strong regulatory framework. Our view also takes into account systemic features in the region, such as high concentrations of loans and deposits, limited transparency and limited geographic diversification.

Company profile

Banque Saudi Fransi (BSFR) traces its roots back to 1949 and is the country’s sixth-largest bank, with total assets of SAR 123bn (USD 33bn) at end-2010 and a market share of deposits of 9%. The bank is 31% owned by Crédit Agricole Corporate and Investment Bank, which manages BSFR under a technical service agreement. The General Organisation for Social Insurance (GOSI), a government-related entity, owns a further 12.8%, while two prominent families own 16%. The remaining 40% is widely held. The bank’s operations are almost entirely domestic, and it operates through a network of 81 branches. Although BSFR has a particularly strong franchise in corporate banking, it offers a full suite of financial services, including retail banking and wealth management, investment banking and brokerage.


• Robust corporate banking franchise: Although BSFR is a mid-sized bank by local standards, it has a strong presence in the corporate segment, and has long-standing relationships with some of the country’s largest companies. Its links with the Crédit Agricole group give BSFR a competitive advantage over some domestic competitors in terms of management know-how and technical support.

• Sound asset-quality indicators: Saudi banks’ loan books tend to be concentrated, as the economy is dominated by a few private groups and public-sector entities. Because of its traditional focus on corporate banking, BSFR is vulnerable to infrequent but high-profile corporate headlines. Notwithstanding this, the bank was not materially affected by the economic slowdown and its exposures to the Saad and Al-Gosaibi groups, and its asset-quality indicators are among the best for Saudi banks. The bank’s NPL ratio was 1.3% at end-2010, with loan-loss cover of about 140%. We do not expect asset quality to deteriorate materially in 2011.

• Above-average profitability: Historically, BSFR has had a relatively high dependence on net interest income due to the larger percentage of loans on its balance sheet. Although its NIMs are narrower than those of its peers because of the preponderance of corporate lending, profitability has been above average due to better cost efficiency and lower cost of risk. However, like the other banks, BSFR reported declining profitability in 2008 and 2009 as a result of rising provisions on loans and investments. Profitability started to improve in 2010 thanks to lower provisions. The bank has offset the impact of low interest rates through a lower overall cost of funding, achieved by increasing the percentage of non-interest-bearing deposits in its funding base (from 31% at end-2008 to 46% at end-2010). ROA for 2010 was 2.3%.

• Growing retail banking franchise: BSFR’s exposure to the retail segment is relatively small, particularly on the asset side of the business. While its market share of retail deposits is c.7%, its market share of retail loans is only about 3%. A key element of the bank’s strategy since 2006 has been to expand its retail franchise targeting wealthier customers, partly leveraging off Crédit Agricole’s retail banking expertise. Although the percentage of retail loans in its portfolio increased from 6% at end-2008 to around 9-10% at end-2010, this is still below average, and there is scope for further growth. Retail banking accounted for 31% of operating income in 2010.

• Good capital adequacy: The bank’s capital adequacy compares favourably with its Saudi peers’ and is good on a standalone basis. At end-2010, the Tier 1 capital ratio stood at 14%, with an equity-to-assets ratio of 14.6%.

• Solid funding base: The bank’s funding base is strong, with customer deposits providing 93% of total funding at end-2010. We estimate that approximately 45% of customer deposits are sourced from retail customers, with corporates accounting for most of the remainder. As is the case for its Saudi peers, its corporate deposit base is likely to be concentrated in a few large corporates and public-sector entities. Because of the large percentage of loans on the bank’s balance sheet, its loan-to-deposit ratio is slightly above average, at 87%, but is still reasonable by international standards.

• Strong regulatory framework: In our opinion, the Saudi Monetary Authority (SAMA) is one of the more competent and proactive regulators in the GCC, which strengthens the credit profiles of the Saudi banks. There is also a strong tradition of support in Saudi Arabia, and no bank has ever failed.


88

FIN

AN

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Banque Saudi Fransi (Aa3/Sta; A/Sta; A/Sta)

10

Summary financials Loans by industry (Dec-2010)

82%

1%9%

8% Overdrafts &Commercial

Credit Cards

Consumer

Other

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (SAR mn) Total assets (USD mn) 26,615 33,564 32,153 32,858 Total assets 99,808 125,865 120,572 123,218 Loans 59,850 80,866 78,315 80,977 Investments 22,501 27,710 17,481 19,841 Total liabilities 88,567 111,796 104,821 105,195 Deposits 74,007 92,791 91,237 93,529 Interbank 8,123 8,402 4,832 2,313 Debt 2,438 4,927 4,946 4,894 Equity 11,241 14,069 15,752 18,023 Income statement (SAR mn) Net interest income 2,296 2,821 3,050 3,066 Other income 1,405 1,571 1,245 1,329 Total income 3,701 4,404 4,267 4,399 Overheads (948) (1,096) (1,158) (1,259)Pre-provision profits (PPP) 2,753 3,308 3,109 3,141 Impairments (42) (504) (642) (339)Profit before tax 2,711 2,804 2,468 2,801 Net income 2,711 2,804 2,468 2,801 Key ratios (%) Net interest margin 2.7 2.6 2.6 2.6Fee income-to-income 24.2 18.9 19.7 20.2Costs-to-income 25.6 24.9 27.1 28.6Costs-to-average assets 1.1 1.0 0.9 1.0Provisions-to-PPP 1.5 15.2 20.6 10.8ROE 26.3 22.2 16.6 16.6ROA 3.0 2.5 2.0 2.3Impaired loans-to-loans 0.7 0.9 1.3 1.3Loan-loss coverage 189.6 111.0 126.6 141.4Loan-to-deposit 80.9 87.1 85.8 86.6Equity-to-assets 11.3 11.2 13.1 14.6Tier 1 capital 12.2 11.0 13.1 14.2Total capital 12.2 11.6 13.7 14.7

0

2

4

6

8

2006 2007 2008 2009 2010

%



0.0

1.0

2.0


%

0

50

100

150

200

%


9%

4%

16%

66%

5%Cash

Interbank


Customer loans

Other

Capital adequacy and ROE Revenues by business (2010)

0

5

10

15

20


%

0

10

20

30

40

%


31%

46%

20%

3% Retail banking

Corporate banking

Treasury

Investment banking andbrokerage



89

FIN

AN

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LS


BBK (A3/RFD; NR; A-/RWN) Analyst: Victor Lohle (+65 6596 8263)

11

Credit outlook – stableWe are revising our credit outlook on BBK to stable from negative.Our stable outlook reflects the bank’s good franchise in its domestic market and the potential for an improvement in asset quality in 2011, which should filter through to earnings via lower provisioning charges. Our view also takes into account the bank’s high NPL ratio, its large exposure to the construction and real-estate sectors, and the concentrated nature of Bahrain’s economy.

Company profile

BBK, established in 1971, is one of the largest domestic retail banks in Bahrain, with total assets of BHD 2.5bn (USD 6.5bn) at end-2010 and a market share of deposits of c.18%. Either directly or through subsidiaries and associates, BBK provides a full range of financial services, including commercial, retail and Islamic banking and insurance. The bank has a network of 15 branches in Bahrain, branches in Kuwait and India, and a representative office in Dubai. BBK’s main shareholders are Ithmaar Bank, a Bahraini wholesale bank (25%); the Social Insurance Organisation, a government-linked body (32%); and the Kuwait Investment Authority (18.7%). The remainder is held by Bahraini and Kuwaiti investors.


• Small economy, small size: With a population of 1mn, Bahrain’s economy is relatively small and is not well diversified, which leads to concentrations in both assets and liabilities. As a result, on an absolute basis, BBK is a relatively small bank and one of the smallest issuers in the GCC.

• Good domestic franchise: BBK enjoys strong name recognition in its domestic market. Although the bank’s loan portfolio is skewed towards the commercial segment (85% of total loans at end-2010), retail banking contributed 27% of 2010 pre-provision operating income.

• Asset-quality deterioration: Like a number of banks in the region, BBK experienced an increase in NPLs in 2009. In BBK’s case, this was related to non-Bahraini exposures. Although asset quality began to improve gradually in 2010, the bank’s 9% reported NPL ratio at end-2010 was among the highest for the banks we cover in the region. Loan-loss cover stood at 67%, which is below average. However, asset-quality indicators are expected to improve in 2011.

• High exposure to construction and real estate: The bank’s exposure to construction and commercial real estate represented 14% and 16.5%, respectively, of end-2010 total loans. Residential mortgages accounted for a further 5%. The bulk of this exposure is to the Bahraini real-estate market – which has experienced some price correction, although not as much as other markets. Exposure to the Dubai real-estate market represented around 5% of total loans.

• Average profitability: The bank’s profitability is broadly in line with the regional average. BBK’s fairly large share of the domestic retail market gives it access to a pool of stable and relatively inexpensive deposits, and its cost efficiency is above average. In addition, over the last few years, results have been negatively affected by higher impairments on investment and loan portfolios. The bank’s ROA for 2010 was 1.7%.

• High capital adequacy: BBK’s capital adequacy ratios are sound by regional standards. The bank’s Tier 1 capital ratio was 14% at end-2010, with an equity-to-assets ratio of 9.8%.

• Improving funding: Customer deposits are the bank’s main source of funding, providing 74% of total funding at end-2010. In addition, the bank’s loan-to-deposit ratio – which deteriorated in 2008 and 2009 – has been steadily improving and stood at 80% at end-2010, which compares favourably in the region. We understand that approximately one-third of customer deposits are sourced from Bahraini and Kuwaiti government-related entities, which provides some stability to the funding base.

• Rundown of CDS portfolio: BBK has a CDS portfolio written mostly on corporates and sovereigns. The bank saw this portfolio as a proxy for lending, and in 2008 it represented almost 100% of the bank’s equity. The portfolio has been shrinking since then as no further positions have been added, and it stood at USD 300mn at end-2010.

• Likelihood of support if required: Although banks have failed in Bahrain in the past (most recently in 2009), they have tended to be niche players, wholesale banks without systemic importance, or foreign-owned institutions. As one of the larger domestic retail banks in Bahrain, we believe that BBK would be supported if the need arose.


90

FIN

AN

CIA

LS


BBK (A3/RFD; NR; A-/RWN)

12


85%

15%

Commercial loans andoverdrafts

Consumer loans

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (BHD mn) Total assets (USD mn) 5,551 5,745 6,045 6,492 Total assets 2,093 2,166 2,279 2,447 Loans 1,128 1,352 1,269 1,276 Investments 460 287 357 425 Total liabilities 1,855 1,957 2,048 2,207 Deposits 1,118 1,337 1,517 1,594 Interbank 354 251 240 196 Debt 339 329 257 370 Equity 237 209 231 241 Income statement (BHD mn) Net interest income 51 57 61 56 Other income 37 58 31 53 Total income 88 115 93 109 Overheads (31) (35) (43) (46)Pre-provision profits (PPP) 57 80 50 63 Impairments (27) (52) (14) (24)Profit before tax 30 27 35 40 Net income 30 27 35 39 Key ratios (%) Net interest margin 2.7 2.8 2.8 2.4Fee income-to-income 17.9 17.4 21.8 21.0Costs-to-income 35.0 30.6 46.4 41.8Costs-to-average assets 1.6 1.6 1.9 1.9Provisions-to-PPP 48.1 65.7 28.7 37.4ROE 14.1 12.1 15.9 16.6ROA 1.6 1.3 1.6 1.7Impaired loans-to-loans 5.9 5.1 10.5 9.1Loan-loss coverage 72.5 78.2 46.0 66.8Loan-to-deposit 100.9 101.2 83.6 80.1Equity-to-assets 11.3 9.7 10.1 9.8Tier 1 capital 12.7 12.9 13.0 14.0Total capital 23.3 20.1 17.5 18.6

1

3

5

7

2006 2007 2008 2009 2010

%



0

3

6

9

12


%

0

25

50

75

100

%


20%

7%

17%

53%

3%

Cash

Interbank


Customer loans

Other

Capital adequacy and ROE Operating income by segment (2010)

05

10152025


%

0510152025

%


27%

8%

29%

6%

30%

Retail banking

Corporate banking

International banking

Investments, treasury, others

Income from associates



91

FIN

AN

CIA

LS


Burgan Bank (A2/Neg; BBB+/Neg; NR) Analyst: Victor Lohle (+65 6596 8263)

13

Credit outlook – stableWe initiate coverage of Burgan Bank with stable outlook. Our stable view is predicated on the expected benefits to the Kuwaiti private sector from increased government spending on infrastructure projects, an expected improvement in asset quality and earnings, and the positive earnings impact of the bank’s geographic diversification outside of its home market. However, the performance of the bank’s Kuwaiti operations – its core business – remains weak because of elevated provisions to deal with the sharp deterioration in asset quality in 2009. Also, NPLs, while declining, remain elevated.

Company profile

Burgan Bank is the fourth-largest bank in Kuwait, with total assets of KWD 4.1bn (USD 14.8bn) at end-2010 and a domestic market share of deposits of around 10%. Burgan Bank is 41% owned by Kuwait Projects Company (Holding) (KIPCO), one of Kuwait’s largest investment companies, which is indirectly controlled by the two sons of the Amir of Kuwait. A further 17% is owned by United Gulf Bank (UGB), a Bahrain-based sister bank also controlled by KIPCO. Burgan offers a full range of banking services, but it has a particular focus on corporate lending. Burgan operates through a network of 21 domestic branches and has controlling stakes in banks in Jordan, Algeria, Iraq and Tunisia.


• Stimulus package: In early 2010, the Kuwaiti parliament approved a four-year, KWD 30bn (USD 100bn) development plan aimed at financing infrastructure development projects. Even if it is only partially implemented, the plan should boost Kuwait’s private sector, and this should ultimately benefit the banks. Our view on Burgan is largely predicated on the implementation of the stimulus package and its positive impact on the economy.

• Reorganisation and regional expansion: Burgan is one of KIPCO’s four core businesses. The aim is for Burgan to serve as the umbrella organisation for the group’s commercial banking activities. Since 2008, the bank has increased its stakes in, or acquired from UGB (a Bahrain-based wholesale bank also controlled by KIPCO), stakes in banks in Jordan, Algeria, Iraq and Tunisia. The bank’s strategy is to continue to expand its footprint in the region. However, Kuwait remains Burgan’s key market, accounting for over 70% of the bank’s loan portfolio.

• Systemic importance: Burgan is a mid-sized player by regional standards, and it is roughly one-third the size of the country’s largest bank. However, as the fourth-largest bank, it has systemic importance to the Kuwaiti banking system, in our view. Kuwait was slower than some other GCC countries to provide support to its banking system after the onset of the global financial crisis. However, government-related entities have proven to be supportive of Kuwaiti banks from a liquidity point of view and, like its peers, Burgan has benefited from this.

• Asset-quality deterioration: Along with Dubai, Kuwait was particularly affected by the economic slowdown in 2008 and 2009. Like a number of other Kuwaiti banks, Burgan experienced asset-quality deterioration in 2009 due to exposures to (1) investment companies, (2) troubled sectors such as construction and real estate, and (3) indirect exposure to losses from weak equity markets. After peaking at 10% at end-2009, Burgan’s NPL ratio has begun to decline and stood at 6.1% at end-2010, with loan-loss cover of 73%. Our expectation is that the worst part of the asset quality cycle is over.

• Weak profitability, particularly in Kuwait: Burgan’s performance has weakened since 2008 due to rising loan-loss provisions. Profitability remained weak in 2010 as a result of high provisions, higher overheads due to consolidation of the results of the operations acquired from UGB, and amortisation of intangibles. 2010 results were also flattered by a mark-to-market gain of KWD 10.9mn on its 45.3% holding in Bank of Baghdad following the acquisition from UGB of a further 6.5% stake, and by a KWD 4.2mn gain from the consolidation of the results of Bank of Baghdad and Tunis International Bank, two banks previously controlled by UGB. In the absence of these two items, Burgan would have reported negligible profits for 2010. The bank’s foreign operations have helped to offset the negative earnings impact of the domestic Kuwaiti business. We expect the bank’s earnings to start to improve in H2-2011, as it appears that NPLs have peaked, and provisions should start declining.

• Shareholder support through capital increase: The bank’s capital base was bolstered by a KWD 100mn (USD 340mn) rights issue in May 2010, which put the bank on a much better footing to deal with deteriorating asset quality. The Tier 1 capital ratio stood at 15.6% at end-2010, with an equity-to-assets ratio of 13%.


92

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LS


Burgan Bank (A2/Neg; BBB+/Neg; NR)

14


46%

10%

44%

Banking

Treasury andinvestments

International banking

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (KWD mn) Total assets (USD mn) 10,423 14,273 14,260 14,757 Total assets 2,848 3,943 4,094 4,150 Loans 1,421 2,133 2,247 2,136 Investments 544 495 558 600 Total liabilities 2,496 3,557 3,666 3,609 Deposits 1,649 2,416 2,425 2,565 Interbank 732 795 978 811 Debt 43 198 123 109 Equity 351 386 428 541 Income statement (KWD mn) Net interest income 51 68 102 107 Other income 55 53 53 58 Total income 106 121 155 165 Overheads (28) (34) (44) (65)Pre-provision profits (PPP) 78 88 111 100 Impairments (0) (47) (83) (72)Profit before tax 77 41 28 28 Net income 75 36 21 16 Key ratios (%) Net interest margin 2.1 2.1 2.7 2.8Fee income-to-income 16.2 18.5 19.4 19.8Costs-to-income 26.4 27.7 28.2 39.6Costs-to-average assets 1.1 1.0 1.1 1.6Provisions-to-PPP 0.3 53.2 74.6 72.1ROE 24.5 9.7 5.1 3.2ROA 3.0 1.1 0.5 0.4Impaired loans-to-loans 1.7 1.4 10.0 6.1Loan-loss coverage 164.8 199.0 49.5 72.9Loan-to-deposit 86.2 88.3 92.7 83.3Equity-to-assets 12.3 9.8 10.5 13.0Tier 1 capital 14.9 9.0 12.1 15.6Total capital 16.6 13.8 16.9 21.0

1

3

5

7

2006 2007 2008 2009 2010

%



0

3

6

9

12


%

0

60

120

180

240

%


18%

9%

14%52%

7%Cash

Interbank


Customer loans

Other


05

10152025

Dec-07 Dec-08 Dec-09 Dec-10

%

0510152025

%


70%

21%

9%

Net interest income

Fees/commissions

Other income



93

FIN

AN

CIA

LS


Commercial Bank Of Qatar (A1/Sta; A-/Sta; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

15

Credit outlook – positiveWe are changing our outlook on CBQ to positive from stable. This reflects the bank’s strong franchise as Qatar’s largest private-sector bank, its good metrics, and Qatar’s strong support for its financial institutions. We expect CBQ to benefit over the medium term from infrastructure development for the 2022 FIFA World Cup. Our view also incorporates the bank’s relatively low exposure to the government sector; very rapid growth in the bank’s loan portfolio; the recent deterioration in the quality of its retail loan book; and the impact of the central bank requirement that conventional banks close their Islamic banking operations by end-2011.

Company profile

Commercial Bank of Qatar (CBQ) was set up in 1975 and is the second-largest bank in the country, with end-2010 total assets of QAR 63bn (USD 17bn) and a market share of assets of around 15%. The bank’s main shareholders are the Qatar Investment Authority (QIA), the country’s sovereign wealth fund, with (16.7% stake); and a group of prominent local families that founded the bank (28% stake). The remainder is widely held. Although corporate banking is the main contributor to earnings, CBQ also offers a broad range of retail and Islamic banking services through its 26 branches in Qatar. CBQ has a 35% stake in National Bank of Oman, Oman’s second-largest bank, and a 40% stake in United Arab Bank, a small bank in the UAE, which it manages under a technical agreement.


• Supportive framework: During the recent financial crisis, Qatar was one of the most interventionist countries in the GCC. Support measures included capital injections, the removal of poorly performing portfolios of local equity investments made in Q1-2009 (amounting to QAR 938mn in the case of CBQ), and the purchase of real-estate and other loans in Q2-2009 (amounting to QAR 3bn for CBQ). No Qatari bank has ever failed, and as the country’s second-largest bank, CBQ has strong implicit support, in our view. This drives our positive view on CBQ despite some challenges on the asset quality front.

• Systemic importance: Although CBQ is a mid-sized player by regional standards, we believe it has systemic importance as the country’s second-largest bank and largest private-sector bank.

• Strong domestic franchise in the private sector: CBQ has a strong brand and good name recognition in both the corporate and retail segments. Its exposure to the public sector is relatively small, representing only about 15% of total loans at end-2010. In the retail segment – which accounted for 20% of the bank’s loan portfolio at end-2010 – the bank has a particularly strong franchise among expatriates and affluent Qataris.

• Rapid loan growth: CBQ’s loan portfolio grew five-fold between 2004 and 2008, in line with the growth rate of other Qatari banks. Loan growth was negligible in 2009 and 2010 as the private sector, CBQ’s traditional stronghold, slowed. Despite the sale of real-estate loans to the government, CBQ – like some of the other banks – has significant exposure to real estate (20% of total loans at end-2010). This sector experienced particularly strong growth in the run-up to the economic slowdown. We expect loan growth to gradually pick up in 2011, with the momentum accelerating in 2012-13 as infrastructure spending related to the 2022 World Cup picks up.

• Good metrics: CBQ’s profitability is underpinned by wide NIMs, reflecting its private-sector exposure. Although earnings declined in 2009 due to negligible loan growth, rising funding costs and higher provisions, they improved in 2010 as funding costs and provisions declined. ROA for 2010 was a healthy 2.7%. The bank’s NPL ratio deteriorated to 3.2% at end-2010 from 2.2% at end-2009, with loan-loss cover of 90%; this was partly driven by the change in the criteria for recognising NPLs from 180 days to 90 days. However, including renegotiated/restructured loans, problem loans represent 7% of CBQ’s total loans, the highest among the big four Qatari banks. Over 60% of the bank’s NPLs were in the retail book, and at end-2010, retail NPLs represented 14% of retail loans. Further asset-quality deterioration is expected in 2011. Although CBQ has a strong domestic funding base, deposit growth in 2008 and 2009 did not keep pace with loan growth, and the bank become more reliant on wholesale funding. Since then, conditions have improved. At end-2010, customer deposits provided 68% of total funding and the bank’s loan-to-deposit ratio was 101%, the highest among the big four banks. Capital adequacy ratios are strong, with a Tier 1 capital ratio of 16.6% at end-2010 and an equity-to-assets ratio of 20%. Capital will be further strengthened following the QIA injection in Q1-2011.

• Geographic diversification: CBQ has taken steps to expand outside the relatively small Qatari market by acquiring controlling stakes and taking management control of overseas banks. While the contribution from its non-Qatari businesses is still relatively small (less than 5% of 2010 revenues), we expect it to increase over time.


94

FIN

AN

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LS


Commercial Bank Of Qatar (A1/Sta; A-/Sta; A/Sta)

16


15%

13%

21%

8%

11%

4%8%

20%

Government andagenciesServices

Consumer

Real estate

Contracting

Commerce trading

Industry

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (QAR mn) Total assets (USD mn) 12,472 16,841 15,747 17,176 Total assets 45,397 61,302 57,317 62,520 Loans 25,021 33,898 31,929 33,567 Investments 4,665 4,775 9,747 10,024 Total liabilities 39,169 51,323 45,307 50,020 Deposits 25,766 32,186 26,272 33,281 Interbank 4,908 10,923 7,391 3,553 Debt 7,623 6,096 9,924 10,994 Equity 6,228 9,978 12,010 12,500 Income statement (QAR mn) Net interest income 929 1,292 1,661 1,778 Other income 1,147 1,684 1,270 939 Total income 2,076 2,976 2,931 2,717 Overheads (540) (750) (759) (787)Pre-provision profits (PPP) 1,536 2,226 2,171 1,930 Impairments (145) (524) (648) (295)Profit before tax 1,391 1,702 1,524 1,635 Net income 1,391 1,702 1,524 1,635 Key ratios (%) Net interest margin 2.7 2.7 3.1 3.3Fee income-to-income 32.1 31.7 23.2 19.4Costs-to-income 26.0 25.2 25.9 29.0Costs-to-average assets 1.4 1.4 1.3 1.3Provisions-to-PPP 8.7 23.5 29.8 15.3ROE 23.5 21.0 13.9 13.3ROA 3.7 3.2 2.6 2.7Impaired loans-to-loans 0.8 0.8 2.2 3.2Loan-loss coverage 96.9 99.0 99.7 89.7Loan-to-deposit 97.1 105.3 121.5 100.9Equity-to-assets 13.7 16.3 21.0 20.0Tier 1 capital 10.9 15.2 17.2 16.6Total capital 11.9 15.7 18.9 18.5

0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2

3

4


%

0

30

60

90

120

%


14%

16%

53%

10%

7%

Cash

Interbank


Customer loans

Other


0

10

20


%

0

10

20

30

%


66%

19%

6%9%

Net interest income


Share of associates

Other



95

FIN

AN

CIA

LS


Doha Bank (A2/Sta; A-/Sta; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

17

Credit outlook – positiveWe initiate coverage of Doha Bank with a positive outlook, which reflects the bank’s strong domestic franchise, its good metrics and the positive outlook for the Qatari economy. Our view incorporates the proactive steps taken by the Qatari authorities to support the country’s banks, and an expected surge in lending to meet infrastructure demand for the 2022 FIFA World Cup. Our credit outlook also takes into account very rapid growth in the bank’s loan portfolio in recent years; the deterioration in the quality of its retail loan portfolio; its relatively low exposure to the public sector; and the impact of the central bank requirement that conventional banks close their Islamic banking operations by end-2011.

Company profile

Doha Bank is Qatar’s fourth-largest bank, with total assets at end-2010 of QAR 47bn (USD 13bn) and a 10% market share of deposits. Following two capital injections, the State of Qatar – through the Qatar Investment Authority (QIA) – is the bank’s largest shareholder, with a 16.7% stake. The remaining shares are widely held. Although the bank offers a broad range of retail and corporate banking services, its activities are more geared towards the retail segment than those of its peers, catering to both locals and expatriates. Domestic loans accounted for over 90% of total loans at end-2010.


• Supportive framework: Qatar was one of the most interventionist countries in the GCC during the financial crisis. Support provided to the banks included (1) capital injections into most listed banks, with the government acquiring 10% stakes; (2) the removal of poorly performing portfolios of local equity investments (QAR 536mn in the case of Doha Bank), and (3) the purchase of real-estate and other loans (QAR 1.664bn for Doha Bank). A further capital injection of 10% of outstanding capital into the banks was announced in early 2011.

• Systemic importance: Although Doha Bank is a mid-sized player by regional standards, it has systemic importance as the fourth-largest bank in Qatar, in our view. This is especially true in the run-up to the 2022 World Cup, which will require significant resources to finance infrastructure building.

• Above-average exposure to retail lending: Compared with its domestic peers, Doha Bank’s loan portfolio has a larger percentage of exposure to retail customers (31% at end-2010). Conversely, exposure to the government and government-related sector is relatively small, at 7%. As a result, the bank has had above-average NIMs over the last few years, but also a higher cost of risk.

• Rapid loan growth: Although growth in Doha Bank’s loan portfolio has been slower than that of its Qatari peers, the bank has grown rapidly by regional standards. Its loan portfolio has grown three-fold since 2005, which, among other factors, reflects rapid growth in the Qatari economy. We believe the bank’s good asset-quality indicators may (like those of its peers) be flattered by rapid loan growth, which can mask potential asset-quality issues, and by the removal of potentially troublesome real-estate assets as part of the government’s support package. We expect loan growth to gradually pick up in 2011, with the momentum accelerating in 2012-13 as infrastructure spending related to the World Cup picks up.

• Sound metrics: Although Doha Bank’s profitability is below average by local standards, it is good by regional standards, with a ROA of 2.3% in 2010. In addition to above-average cost of risk, the bank’s profitability is affected by a higher cost base, in line with its greater retail focus. The bank’s asset-quality indicators are sound, although worse than the local average. At end-2010, the NPL ratio stood at 3.9%, with loan-loss cover of 92%. The higher-than-average NPL ratio is driven by higher exposure to the retail segment, which bore the brunt of the economic slowdown in 2009 and 2010. However, retail NPLs at end-2010 stood at 7.1%. The bank’s capital adequacy ratios are sound, though slightly below the average of its private-sector peers. At end-2010, the bank’s Tier 1 capital ratio stood at 11%, with an equity-to-assets ratio of 12.8%. (These numbers do not reflect the second capital injection from the QIA in early 2011.) Capital adequacy ratios could decline as a result of increased lending for projects related to the 2022 FIFA World Cup. The bank’s funding base is good, with customer deposits accounting for 77% of total funding at end-2010 and a loan-to-deposit ratio of 86%. Customer deposits sourced from the government and government-related entities represented 22% of total customer deposits, slightly below average compared with local peers. We expect the loan-to-deposit ratio to deteriorate over the medium term if the expected increase in lending related to the 2022 FIFA World Cup materialises without a proportionate increase in the system’s deposit base.


96

FIN

AN

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Doha Bank (A2/Sta; A-/Sta; A/Sta)

18

Summary financials Loans by industry (Dec-2010) 7%

6%

31%

14%

26%

16%


Consumer

Real estate

Contracting

Others

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (QAR mn) Total assets (USD mn) 8,258 10,706 12,636 12,975 Total assets 30,058 38,970 45,996 47,230 Loans 19,140 23,933 25,896 26,547 Investments 3,104 3,380 3,825 5,217 Total liabilities 26,439 34,058 40,145 41,195 Deposits 20,043 23,244 27,890 30,822 Interbank 4,371 8,161 10,489 8,683 Debt 1,231 1,232 825 768 Equity 3,619 4,913 5,851 6,034 Income statement (QAR mn) Net interest income 833 1,107 1,241 1,532 Other income 639 568 804 607 Total income 1,472 1,675 2,044 2,139 Overheads (487) (540) (645) (723)Pre-provision profits (PPP) 985 1,135 1,400 1,416 Impairments (58) (188) (425) (359)Profit before tax 927 947 975 1,056 Net income 926 947 974 1,054 Key ratios (%) Net interest margin 3.3 3.3 3.0 3.4Fee income-to-income 20.2 20.3 20.2 18.4Costs-to-income 33.1 32.2 31.5 33.8Costs-to-average assets 1.9 1.6 1.5 1.6Provisions-to-PPP 5.9 16.6 30.4 25.4ROE 29.0 22.2 18.1 17.7ROA 3.6 2.7 2.3 2.3Impaired loans-to-loans 3.1 2.9 3.2 3.9Loan-loss coverage 89.3 77.9 84.3 92.3Loan-to-deposit 95.5 103.0 92.8 86.1Equity-to-assets 12.0 12.6 12.7 12.8Tier 1 capital 10.0 11.1 11.5 11.0Total capital 15.5 13.5 14.4 13.6

0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2

3

4

5


%

0

30

60

90

120

%


22%

11%56%

3%

8%

Cash

Interbank


Customer loans

Other


0

10

20


%

0

10

20

30

%

Tier 1 capital ratio Total capital ratio ROE (RHS)

72%

18%

10%

Net interest income


Other



97

FIN

AN

CIA

LS


Dubai Islamic Bank (Baa1/Sta; BBB-/Neg; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

19

Credit outlook – negativeOur negative credit view on DIB is predicated on its very high exposure to the construction and real-estate sectors amid a sharp price correction in the Dubai property market; the acquisition of a majority stake in Tamweel, which will further increase the bank’s exposure to the real-estate market; and limited disclosure and transparency. Our view also takes into account the bank’s franchise in Islamic financing, which gives it one of the strongest retail funding bases among UAE banks, and the bank’s reasonable earnings generation capacity to date.

Company profile

Dubai Islamic Bank (DIB) is the sixth-largest domestic bank in the UAE, with total assets of AED 82bn (c. USD 22bn) and an estimated market share deposits of 7% at end-September 2010. The bank, set up in 1975, is the largest Islamic bank in the UAE and one of the leading Islamic banks in the world, offering a broad range of Shariah-compliant products from a network of 68 branches. DIB is 30% owned by the Dubai government and 4.3 owned by the General Pensions and Social Security Authority, a UAE federal body. The remainder is widely held. Historically, DIB’s core competence has been in the real-estate market, and as a result, its exposure to this sector (both direct and indirect) is among the highest for UAE banks.


• Strong Islamic franchise provides funding advantage: As the largest Islamic bank in the UAE, DIB has a competitive advantage, as some customers prefer to conduct their business with Islamic institutions. The bank’s strong Islamic franchise translates into a robust funding structure. Customer deposits accounted for 93% of DIB’s total funding at end-September 2010 – one of the highest in the UAE. We estimate that over two-thirds of these deposits are retail-driven. As a result, compared to the other Dubai-based banks, DIB has a below-average cost of funding. Finally, on account of its strong retail franchise and restrictions on Islamic banks’ ability to manage their liquidity, the bank has one of the lowest loan-to-deposit ratios in the UAE: 81% at-end-September 2010.

• High exposure to real estate: Direct exposure to real estate accounted for 40% of DIB’s total loans at end-2009, the last date for which this data is available. This is almost double the average for the other banks in the UAE. This exposure is likely to be concentrated in Dubai, which has experienced a significant property price correction. DIB also has indirect real-estate exposure through its 43% stake in Deyaar Development, a real-estate development company, and through investment properties held on its balance sheet (3% of total assets at end-September 2010.)

• Sovereign exposure: The bank’s reported sovereign exposure – presumably mostly to Dubai – is more manageable than that of the other Dubai banks, representing 8% of DIB’s total loans at end-2009. However, on an absolute basis, this exposure is material.

• Increase in Tamweel stake: In late 2010, DIB announced an increase in its stake in Tamweel, a troubled Dubai-based mortgage lender with total assets of AED 10bn, to 58% from 21%. As a result of this, we estimate that DIB’s overall exposure to the real-estate market will increase to around 50% of total loans.

• Asset-quality deterioration: Because of its high exposure to real estate, the bank’s reported asset-quality indicators deteriorated sooner and more sharply than those of some of the other Dubai-based banks. Impaired loans represented 6% of total loans at end-2009, with loan-loss cover of 63%. However, the bank was not affected by exposure to the Saudi groups Saad and Al-Gosaibi, or by exposure to the Dubai World restructuring. Although we expect DIB’s asset quality to have deteriorated over the course of 2010, it likely deteriorated less than that of its peers with exposure to the aforementioned groups.

• Reasonable earnings generation capacity: Wide NIMs – on the back of low funding costs – give DIB reasonable earnings generation capacity at a pre-provision level. The bank’s provisions were relatively low until September 2009 (36% of pre-provision profits). This enabled DIB to report an ROA of 1.2% for 9M-2010, despite limited loan growth and tighter margins.

• Capital adequacy: DIB’s Tier 1 capital ratio has been increasing since 2008, and stood at 13.5% at end-September 2010. While this is reasonable on a regional basis, higher capital adequacy ratios would be welcome given the bank’s high real-estate exposure and relatively low loan-loss coverage ratio.

• Supportive framework: There is a strong tradition of support in the UAE, and no bank has been allowed to fail. This was evident in the 2008 injection of AED 50bn (USD 13.6bn) of deposits into the system by the Ministry of Finance, and by the subsequent offer in 2009 for banks to convert these deposits into LT2 capital. In our view, Tamweel is a good example of the willingness to find a market solution for institutions facing difficulties. As a large retail deposit-taking institution and the largest Islamic bank in the UAE, DIB enjoys some implicit support, in our view.


98

FIN

AN

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LS


Dubai Islamic Bank (Baa1/Sta; BBB-/Neg; A/Sta)

20

Summary financials Revenues by segment (9M-2010)

53%34%

13%

Retail and businessbanking

Corporate andinvestment banking

Treasury

Funding mix

0%

25%

50%

75%

100%




2007 2008 2009 9M-10Balance sheet (AED mn) Total assets (USD mn) 22,986 23,094 22,971 22,302 Total assets 84,360 84,757 84,304 81,848 Loans 40,535 52,659 49,925 50,235 Investments 12,594 13,334 11,217 10,165 Total liabilities 73,695 76,007 75,323 72,622 Deposits 65,176 66,329 64,196 61,658 Interbank 2,241 3,331 1,449 2,003 Debt 2,755 2,755 2,415 2,357 Equity 10,665 8,749 8,981 9,226 Income statement (AED mn) Net interest income 1,486 2,244 2,339 1,578 Other income 2,203 1,248 1,055 633 Total income 3,688 3,493 3,394 2,212 Overheads (1,505) (1,420) (1,357) (992)Pre-provision profits (PPP) 2,183 2,073 2,037 1,220 Impairments (301) (521) (818) (444)Profit before tax 1,882 1,552 1,219 776 Net income 2,513 1,554 1,212 773 Key ratios (%) Net interest margin 2.2 3.0 3.1 2.8Fee income-to-income 21.6 25.0 22.2 23.0Costs-to-income 40.8 40.6 40.0 44.9Costs-to-average assets 2.0 1.7 1.6 1.6Provisions-to-PPP 13.8 25.1 40.2 36.4ROE 25.8 16.0 13.7 11.3ROA 3.4 1.8 1.4 1.2Impaired loans-to-loans 4.0 4.1 6.0 NALoan-loss coverage 66.8 55.9 62.7 NALoan-to-deposit 62.2 79.4 77.8 81.5Equity-to-assets 12.6 10.3 10.7 11.3Tier 1 capital 12.6 11.1 12.4 13.5Total capital 13.1 10.7 17.5 18.4

0

2

4

6

8

2006 2007 2008 2009 9M-2010

%



0

2

4

6

8


%

0

20

40

60

80

%


9%

2%

12%

66%

11%Cash

Interbank


Customer loans

Other


0

5

10

15

20

25

Dec-07 Dec-08 Dec-09 Sep-10

%

0

10

20

30

%


71%

23%

6%

Net interest income

Fees/commissions

Other income



99

FIN

AN

CIA

LS


Emirates NBD (A3/Neg; NR; A+/Sta) Analyst: Victor Lohle (+65 6596 8263)

21

Credit outlook – negativeENBD was among the banks worst affected by the economic downturn in Dubai. Our negativeview reflects the deterioration in the bank’s asset quality since 2009, the potential for further asset-quality deterioration in 2011 if other corporate restructurings in Dubai materialise, and the bank’s moderate earnings generation capacity. These factors are partly mitigated by ENBD’s strong franchise in Dubai, its systemic importance to the UAE banking system, and the improvement in the bank’s funding base and liquidity.

Company profile

Emirates NBD (ENBD) is the largest bank in the UAE and the GCC, with end-2010 total assets of AED 286bn (USD 78bn) and UAE market shares of about 20% of loans and 18% of deposits. ENBD is the result of the 2007 merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD). It is 56% owned by the government of Dubai through Investment Corporation of Dubai (ICD), with the remainder widely held. The bank has the largest branch network in the UAE (135 branches) and is active in wholesale banking, retail banking, Islamic banking (through its 99.8%-owned subsidiary Emirates Islamic Bank), and investment management.


• Systemic importance: There is a strong tradition of support in the UAE, and no bank has been allowed to fail. In our opinion, as the largest bank in the UAE, ENBD has systemic importance not only to Dubai but to the entire UAE banking system. This support was evident in the injection of AED 50bn (USD 13.6bn) of deposits into the system by the Ministry of Finance in late 2008, and the subsequent offer for banks to convert these deposits into LT2 capital. In addition, in mid-2009, ICD injected AED 4bn (USD 1.1bn) of Tier 1 capital into ENBD. We believe that further support, if required, would be forthcoming from either the Dubai or the UAE government.

• Asset-quality deterioration: Like the other Dubai-based banks, ENBD’s asset quality has been hit hard by the Dubai economic slowdown. This has been mainly the result of (1) strong loan growth in the run-up to the crisis (44% p.a. on a pro-forma basis between 2005 and 2008); (2) high exposure to government-related entities; (3) large exposure to construction and real estate; and (4) high exposure to retail loans. The bank’s reported impaired loan ratio (including Dubai World exposure and exposure to the Saad and Al Gosaibi groups) stood at 10% at end-2010 – among the highest for UAE banks. Loan-loss cover was 41%, considerably lower than the UAE average. Given the potential for additional corporate restructurings in 2011, the bank’s asset-quality indicators are likely to deteriorate over the course of 2011.

• High sovereign exposure: Sovereign exposure in the bank’s loan portfolio has been creeping up and stood at almost 26% of total loans at end-2010, up from 17% at end-2008. This is among the highest for UAE banks. We understand that this exposure is mainly to the Dubai government.

• Improved funding: In the run-up to the crisis, ENBD was more dependent than its peers on wholesale funding. As a result, it was particularly affected by the dislocation in the funding markets. Since then, the bank has increased the weight of liquid assets on its balance sheet, strengthened its funding base by increasing the weight of customer deposits and, over the course of 2010, shrunk its loan portfolio. The bank’s loan-to-deposit ratio, as calculated by us, stood at 105% at end-2010 – down considerably from 130% at end-2009 – and customer deposits provided 78% of total funding (up from 63% at end-2007).

• Moderate earnings generation capacity: At a pre-provision level, ENBD’s earnings capacity is moderate and was hampered in 2010 by the shrinkage in its loan portfolio and higher funding costs. Although the bank’s cost of risk has been manageable since 2009, this has been at the expense of lower loan-loss coverage ratios, particularly in 2010. In order to achieve loan-loss cover of 100% at end-2010, the bank would have had to report a loss of AED 12bn.

• Increased capital adequacy: The bank’s capital ratios strengthened considerably in 2009 following the Tier 1 capital increase by ICD and the conversion of Ministry of Finance deposits into LT2. In 2010, capital adequacy ratios benefited from the contraction in the bank’s loan portfolio. At end-2010, the bank’s Tier 1 capital ratio stood at 12.8%, with an equity-to-assets ratio of 11.8%. Given its relatively high NPL ratio and low loan-loss coverage ratio, higher capital adequacy ratios would be desirable.


100

FIN

AN

CIA

LS


Emirates NBD (A3/Neg; NR; A+/Sta)

22


55%

10%

26%

9%

Corporate Retail

Sovereign Islamic

Funding mix

0%

25%

50%

75%

100%

Dec-07 Dec-08 Dec-09 Dec-10Customer deposits Repos Interbank Debt securities and loans


2007 2008 2009 2010Balance sheet (AED mn) Total assets (USD mn) 69,159 76,952 76,724 77,988 Total assets 253,812 282,414 281,576 286,216 Loans 166,474 208,930 214,614 197,096 Investments 23,549 19,635 16,764 14,961 Total liabilities 228,653 256,652 249,606 252,466 Deposits 138,646 162,315 169,660 188,470 Interbank 46,328 48,426 29,995 18,857 Debt 28,929 30,070 36,841 32,185 Equity 25,159 25,762 31,971 33,750 Income statement (AED mn) Net interest income 2,594 5,834 7,412 6,795 Other income 2,179 2,613 3,381 2,927 Total income 5,149 8,785 10,632 9,057 Overheads (1,946) (3,452) (3,645) (3,147)Pre-provision profits (PPP) 3,202 5,334 6,987 5,910 Impairments (618) (1,653) (3,635) (3,550)Profit before tax 2,585 3,681 3,352 2,360 Net income 2,585 3,681 3,343 2,339 Key ratios (%) Net interest margin NA 2.4 2.9 2.6Fee income-to-income NA 25.6 18.0 20.3Costs-to-income 37.8 39.3 34.3 34.7Costs-to-average assets NA 1.3 1.3 1.1Provisions-to-PPP 19.3 31.0 52.0 60.1ROE NA 14.5 11.6 7.1ROA NA 1.4 1.2 0.8Impaired loans-to-loans 1.1 1.5 2.6 10.0Loan-loss coverage 107.1 100.7 102.0 40.5Loan-to-deposit 120.1 128.7 126.5 104.6Equity-to-assets 9.9 9.1 11.4 11.8Tier 1 capital NA 8.5 11.9 12.8Total capital NA 10.5 18.7 20.1

1

3

5

7

2008 2009 2010

%



0

5

10

15


%

0

50

100

150

%


13%

5%

5%

69%

8%Cash

Interbank


Customer loans

Other

Capital adequacy and ROE Revenues by segment (2010)

0

5

10

15

20

25

Dec-08 Dec-09 Dec-10

%

0

5

10

15

20

25

%


45%

7%

4% 2%

34%

8% Corporate bankingConsumer bankingTreasuryIslamic BankingCards processingOthers



101

FIN

AN

CIA

LS


First Gulf Bank (A2/Neg; NR; A+/Sta) Analyst: Victor Lohle (+65 6596 8263)

23

Credit outlook – stableWe are revising our credit outlook on FGB to stable from negative.Our view incorporates the bank’s ownership by senior members of the Abu Dhabi ruling family, the support demonstrated by Abu Dhabi for its banks, the bank’s high capital adequacy, and its consistently high profitability. However, our view also takes into account the extremely rapid growth in the bank’s loan portfolio over the past five years, above-average exposure to the construction and real-estate sectors and the ongoing economic slowdown in the UAE.

Company profile

First Gulf Bank (FGB) is the third-largest bank in Abu Dhabi and the fourth-largest bank in the UAE, with an estimated 9% market share of deposits and total assets at end-2010 of AED 141bn (c.USD 38bn). The bank was set up in 1979. Following asset-quality problems in the mid-1990s, senior members of the Abu Dhabi ruling family acquired a 45% stake and now hold 66%. FGB is mainly a domestic bank and operates through a relatively small network of 19 branches. Although the bank was historically a corporate bank, since the mid-2000s it has pursued an aggressive strategy to expand its retail banking activities. Today, FGB has one of the highest exposures to the retail sector among UAE banks, accounting for an estimated 40% of its loan book.


• Strong implicit support: There is a strong tradition of support in the UAE, and no bank has failed. Because of its majority ownership by members of the ruling family, we believe there is implicit support for FGB. The bank also plays a policy role as the conduit for the UAE government’s national housing scheme. Support was demonstrated in early 2009, when Abu Dhabi made a AED 16bn (USD 4.4bn) Tier 1 capital injection into five of its banks (FGB received AED 4bn).

• Very rapid loan growth: FGB has been one of the fastest-growing banks in the UAE. Its loan portfolio grew more than 14-fold from AED 6.5bn at end-2004 to AED 141bn at end-2010. This is twice the growth rate in the overall system. Although loan growth slowed to a more moderate 6% in 2010, we are concerned that, in light of the economic slowdown in the UAE since 2009, asset quality could suffer once loans season.

• Asset-quality deterioration: The bank’s NPL ratio more than doubled in 2010 to 3.7%, while loan-loss cover declined to 89%. Some of the increase in NPLs was driven by a change in NPL classification criteria. Unlike other banks in the UAE, until November 2010 FGB used 180 days rather than 90 days to define non-performance of loans. Although the bank’s asset-quality indicators have been flattered by very strong loan growth in recent years, they still compare favourably with the average for the Abu Dhabi banks.

• Above-average exposure to potentially vulnerable sectors: In recent years FGB has had above-average exposure to the construction and real-estate sectors. Direct exposure to these sectors was 23.5% of total loans at end-2010. The bank’s investment property portfolio accounted for 5% of total assets at end-2010. The bank also has high exposures to the consumer sector (22.8% of total loans at end-2010), the non-retail personal loan sector (6%) and share financing (4%). However, we understand that its personal loan exposures are mostly to UAE nationals and high-net-worth foreigners.

• High earnings generation capacity: Despite increasing provisions since 2008, FGB has remained one of the most consistently profitable banks in the UAE. This is due to a combination of strong loan growth, wide NIMs, a low cost base and, to a lesser extent, exceptional gains on revaluations of its real-estate portfolio. In 2010 the bank reported healthy net income of AED 3.5bn, which translates to a ROA of almost 2.7% – one of the highest among the UAE banks.

• High capital adequacy: FGB is among the best-capitalised banks in the UAE, with an equity-to-assets ratio of 17.5% at end-2010 and a Tier 1 capital ratio of 19.6% (using Central Bank of the UAE guidelines rather than Basel II guidelines). However, because of rapid loan growth at some points, the bank’s capital base has been tight in the past. For example, its capital ratio fell to the regulatory minimum of 10% at end-June 2008.

• Good funding base, but high loan-to-deposit ratio: Despite having a relatively small branch network, FGB has a good funding base, with customer deposits accounting for 87% of total funding at end-2010. Although the bank’s loan-to-deposit ratio is high by international standards (107% at end-2010), it is in line with the average for the other Abu Dhabi banks.


102

FIN

AN

CIA

LS


First Gulf Bank (A2/Neg; NR; A+/Sta)

24


38%

7%

45%

3%7%

Corporate banking

Treasury

Retail banking

Real estate

Other

Funding mix

0%

25%

50%

75%

100%


Customer deposits Repos Interbank Debt securities and loans


2007 2008 2009 2010Balance sheet (AED mn) Total Assets (USD mn) 19,945 29,297 34,189 38,354 Total Assets 73,198 107,522 125,473 140,758 Total Loans 44,409 79,363 90,386 95,628 Investment securities 10,110 9,980 13,482 14,988 Total Liabilities 63,077 90,902 102,570 116,127 Customer Deposits 46,373 70,403 79,036 89,564 Interbank 2,786 3,113 1,941 1,527 Debt securities and loans 5,785 5,785 9,820 11,724 Total Equity 10,120 16,620 22,903 24,631 Income statement (AED mn) Net interest income 1,331 2,581 3,834 4,257 Other income 1,142 2,214 2,245 2,041 Total income 2,826 4,698 6,164 6,305 Overheads (611) (1,135) (1,081) (1,122)Pre-provision profits (PPP) 2,215 3,564 5,083 5,183 Impairments (207) (566) (1,680) (1,639)Profit before tax 2,008 2,997 3,313 3,544 Net income 2,008 2,997 3,313 3,544 Key ratios (%) Net interest margin 2.3 3.1 3.6 3.5Fee income-to-income 16.3 23.7 19.6 23.6Costs-to-income 21.6 24.2 17.5 17.8Costs-to-average assets 1.0 1.3 0.9 0.8Provisions-to-PPP 9.3 15.9 34.8 31.6ROE 21.0 22.4 16.8 14.9ROA 3.3 3.3 2.8 2.7Impaired loans-to-loans 1.0 0.6 1.6 3.7Loan-loss coverage 144.4 232.9 174.4 89.4Loan-to-deposit 95.8 112.7 114.4 106.8Equity-to-assets 13.8 15.5 18.3 17.5Tier 1 capital* 15.4 14.6 19.2 19.6Total capital * 15.1 14.1 22.6 22.9

0

2

4

6

8

10

2006 2007 2008 2009 2010

%



0

1

2

3

4


%

0

60

120

180

240

%


6%

7%

11%

68%

8%Cash

Interbank


Customer loans

Other


0

5

10

15

20

25


%

0

10

20

30

%

Tier 1 capital Tier 2 capital ROE (RHS)

24%

9%

67%

Net interest income


Other

* Central Bank of the UAE guidelines; Sources: Company reports, Standard Chartered Research


103

FIN

AN

CIA

LS


Gulf International Bank (A3/RFD; BBB+/Sta; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

25

Credit outlook – stableWe are revising our outlook on GIB to stable from negative. Our view takes into account strong support from the Saudi Arabian government, the significant de-risking of GIB’s investment portfolio, the bank’s robust capital adequacy and its strong franchise in the businesses in which operates. Our view also incorporates the bank’s low earnings generation capacity, the long-term strategic challenges affecting wholesale banks throughout the world, and challenges in implementing GIB’s strategy of expanding into retail banking.

Company profile

Gulf International Bank (GIB) is a wholesale bank based in Bahrain with total assets of USD 15.5bn at end-2010. Its customers are financial institutions, local corporations, governments and multinationals. Geographically, GIB’s main focus is the GCC region, where it has strong expertise in project and trade finance and syndicated lending. Exposure to the Bahrain market is relatively small. The bank is active in corporate advisory, capital markets and asset management. Saudi Arabia’s Public Investment Fund (PIF) is the main shareholder, with a 97.2% stake, following GIB’s recapitalisation in late 2008. The other five GCC governments own the remainder. GIB aims to become a universal bank by developing its retail banking presence, initially in Saudi Arabia.


• Strong shareholder support: Like a number of financial institutions in the GCC, GIB suffered considerable losses from its investment securities portfolio in 2007 and 2008. In late 2007, GIB’s existing shareholders committed to a capital increase of USD 1bn. However, three of the shareholders did not take part, leaving Saudi government-related entities to increase their aggregate stake to 55%. In early 2009, GIB sold its entire USD 4.8bn portfolio of CDOs, asset-backed securities and subordinated bank debt to the Saudi Monetary Authority (SAMA). As a result, SAMA’s stake increased to 97.2%. In 2009, SAMA’s stake was transferred to PIF. In our view, with a Saudi government-related entity being virtually the sole shareholder, support for GIB is very strong.

• Significant balance-sheet de-risking: GIB’s total assets almost halved to USD 15.5bn at end-2010 from USD 30bn at end-2007. Following the USD 4.8bn transfer of assets, GIB’s investment portfolio is now comprised mainly of senior debt from financial institutions and government debt. At end-2010 the investment portfolio represented only 20% of total assets, down from more than 30% at end-2007.

• Long-term strategic challenges: GIB has recognised expertise in the areas in which it operates. The bank’s high-level relationships with governments and institutions throughout the region are a key strength. However, the wholesale banking model is under pressure, not only in the GCC but throughout the world. In our view, GIB’s key strategic challenges remain its reliance on wholesale funding and its low earnings generation capacity.

• Reliance on wholesale funding: Although the bank’s balance sheet is very liquid and its shareholders and depositors proved loyal during the bank’s most difficult period, GIB remains reliant on the wholesale market for its funding needs. Since 2010, the bank has reduced its reliance on short-term funding by tapping the Saudi term market.

• Low earnings generation capacity: Although GIB has a relatively low cost base, its earnings generation capacity is hampered by the narrow margins of its core businesses. Excluding provisions for its investment securities and loan portfolio, the bank’s return on assets has hovered below 0.75% since 2006. At the bottom-line level, the bank’s results between 2007 and 2009 were marred by provisions of USD 1.3bn from its investment securities portfolio and USD 600mn on its loan portfolio. As a result, GIB reported three consecutive years of losses. Lower provisions enabled GIB to return to profit in 2010, despite continued shrinkage in its loan portfolio.

• Universal banking strategy: GIB aims to reposition itself by capitalising on its strong links with governments in the region – particularly Saudi Arabia, the largest market in the region and GIB’s main shareholder. The bank aims to diversify its loan portfolio and increase loan granularity by expanding into mid-sized corporates. It also aims to develop a retail banking franchise, initially in Saudi Arabia and also in some of the other GCC markets in the medium term.

• Solid capital base: GIB’s capital ratios have been steadily improving since 2007 and are now significantly higher. At end-2010, the bank’s Tier 1 capital ratio stood at 18.7%, with an equity-to-assets ratio of 12.4%.

• Non-call of LT2 bonds: In 2009, GIB became the first issuer in the GCC to announce that it would not call a callable LT2 debt issue.


104

FIN

AN

CIA

LS


Gulf International Bank (A3/RFD; BBB+/Sta; A/Sta)

26

Summary financials Revenue by business (2010)

61%16%

8%

15%

Merchant banking

Treasury

Financial markets

Corporate and other

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (USD mn) Total assets 29,954 25,034 16,208 15,528 Loans 12,602 12,972 9,298 7,510 Investments 9,413 2,428 2,068 3,148 Total liabilities 27,739 23,108 14,428 13,610 Deposits 13,674 15,009 7,495 6,479 Interbank 5,971 3,386 2,554 2,224 Debt 3,208 2,982 3,519 3,688 Equity 2,215 1,926 1,779 1,918

Income statement (USD mn) Net interest income 306 288 207 156 Other income 37 34 80 68 Total income 342 323 286 224 Overheads (141) (143) (123) (113)Pre-provision profits (PPP) 201 180 163 111 Impairments (959) (567) (314) (4)Profit before tax (758) (387) (151) 107 Net income (757) (396) (153) 100

Key ratios (%) Net interest margin 1.7 1.5 1.3 1.2Fee income-to-income 25.7 22.7 14.2 18.9Costs-to-income 41.2 44.3 42.9 50.6Costs-to-average assets 0.5 0.5 0.6 0.7Provisions-to-PPP 476.5 315.2 192.2 3.6ROE (37.2) (19.1) (8.2) 5.4ROA (2.8) (1.4) (0.7) 0.6Impaired loans-to-loans 0.1 0.0 3.7 7.8Loan-loss coverage 443.5 4,570.0 174.1 101.6Loan-to-deposit 92.2 86.4 124.1 115.9Equity-to-assets 7.4 7.7 11.0 12.4Tier 1 capital 9.5 12.5 16.4 18.7Total capital 12.0 17.3 22.3 24.3

0

2

4

6

8

2006 2007 2008 2009 2010

%



0

2

4

6

8

10


%

0

1,200

2,400

3,600

4,800

%


7%

23%

20%

48%

2%Cash

Interbank


Customer loans

Other


0

10

20

30


%

-40

-20

0

20

%


69%

19%

6% 6%

Net interest income


Trading income

Other



105

FIN

AN

CIA

LS


Gulf Investment Corporation (Baa2/Sta; NR; BBB/Sta) Analyst: Victor Lohle (+65 6596 8263)

27

Credit outlook – stableWe are revising our outlook on GIC to stable from negative. Our view takes into account the significant de-risking of GIC’s balance sheet, the company’s significantly improved credit metrics – in particular reduced leverage – and ongoing support from its shareholders, both from a capital and liquidity point of view. Our view also incorporates the company’s dependence on wholesale funding.

Company profile

GIC is an investment company headquartered in Kuwait with total assets of USD 5.8bn at end-2010. GIC is owned equally by the six GCC governments (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE). It was set up in 1983 with the aim of creating a regional financial institution that would stimulate private enterprise and fund projects to underpin economic and social development. GIC is not a bank, and its commercial lending activities ceased a few years ago. Its main businesses are principal investing (investments in projects and equity participations) and global markets (including treasury and proprietary investment in fixed income, equities and private equity funds).


• Balance-sheet de-risking: Like a number of institutions in the GCC, GIC experienced considerable losses on its portfolio of investment securities in 2008. The portfolio has since been de-risked following significant provisioning and impairment charges, and the company’s balance sheet shrank from USD 9.1bn at end-2007 to USD 5.8bn at end-2010.

• Shareholder support: GIC’s shareholders were supportive in the aftermath of the 2008 losses, injecting deposits to offset the outflow from traditional depositors. The shareholders also showed strong support by injecting USD 1.1bn of fresh capital in 2009, despite administrative delays by some countries in disbursing the funds. Although GIC’s government ownership is a positive, the fragmented nature of this ownership means that the company cannot rely on a single shareholder for support, in our view.

• Refocusing of activities: The company is refocusing on its core mission of identifying and investing in companies or sectors to help develop the GCC. This will entail increasing principal investments in companies in niche sectors such as metals, chemicals, power, telecommunications and financial services. The de-risked portfolio of investment securities will remain in place to maintain liquidity, generate recurrent income and diversify the company’s overall risk.

• Investment portfolio: In broad terms, GIC’s USD 4.8bn investment portfolio is comprised of principal investments in the GCC and a securities/funds portfolio. The principal investments portion consists of a portfolio of 28 companies. It accounted for 37% of the overall portfolio at end-2010 and generated around 77% of 2010 profits. The principal investments are long-term in nature, and the exit strategy is mainly through IPOs or private sales. The securities/funds portfolio is comprised mainly of debt securities (40% of the overall portfolio), managed funds (13%) and investments in private equity funds (6%).

• Reduction in leverage: The company’s leverage increased in 2008 following losses on its debt securities investment portfolio. However, leverage has improved considerably following the capital injection from its shareholders and the deleveraging of the balance sheet. Leverage stood at 2.7x at end-2010. Although GIC is not required to report capital under Basel guidelines, it does so in order to adhere to best practices. Its Tier 1 capital ratio stood at 30% at end-2010.

• Wholesale funding profile: GIC derives its funding from a variety of sources, including customer deposits (33% of total funding at end-2010), the repo market (25%) and the term debt market (34%). Its shareholders and customers were supportive during the company’s most difficult period. The company has been able to continue to tap the term markets, and had USD 1.2bn in term funding at end-2010. (GIC tapped the term debt market again in February 2011, raising MYR 600mn). However, the wholesale nature of its funding base exposes the company to the vagaries of the markets.

• Improving profitability: Based on preliminary numbers for 2010 (which are subject to revision), earnings improved considerably, mainly reflecting the stronger underlying performance of the principal investments portfolio. The company’s earnings generation capacity is aided by a very low cost base and a relatively low cost of funding. We expect the contribution from the principal investments portfolio to become more recurrent in future, which should reduce earnings volatility.


106

FIN

AN

CIA

LS


Gulf Investment Corporation (Baa2/Sta; NR; BBB/Sta)

28

Summary financials Asset mix (Dec-2010)

61%

5%1%

11%

22%

Cash and interbank

Loans

Securities

Investments inassociatesOther

Investment portfolio (Dec-2010)

26%

41%

11%

13%6%

3%

Debt securities

Investments inassociatesEquity participations

Equities and equityfundsManaged funds

Private equity funds

Funding mix

2007 2008 2009 2010Balance sheet (USD mn) Total assets 9,175 7,211 6,113 5,776 Loans 40 110 85 74 Investments 8,125 5,790 4,739 4,761 Total liabilities 7,217 6,549 4,363 3,659 Deposits 1,333 2,482 1,237 1,158 Interbank 1,471 414 123 271 Debt 1,820 2,071 1,587 1,179 Equity 1,958 662 1,750 2,117 Income statement (USD mn) Net interest income (25) (13) (1) (7)Other income 472 22 154 230 Total income 447 9 153 223 Overheads (52) (48) (46) (50)Pre-provision profits (PPP) 395 (39) 107 173 Impairments (246) (958) (16) (22)Profit before tax 149 (997) 91 151 Net income 252 (997) 91 151 Key ratios (%) Net interest margin NM NM NM NMFee income-to-income 9.4 170.0 14.4 3.1Costs-to-income 11.6 480.0 30.1 22.4Costs-to-average assets 0.6 0.6 0.7 0.8Provisions-to-PPP 62.3 NM 15.0 12.7ROE 13.0 (76.0) 7.5 7.8ROA 2.9 (12.2) 1.4 2.5Impaired loans-to-loans NM NM NM NMLoan-loss coverage NM NM NM NMLoan-to-deposit 3.0 4.4 6.9 6.4Leverage (Assets-to-equity) 4.7x 10.9x 3.5x 2.7x

0%

25%

50%

75%

100%


Profits by segment (2010) Funding maturity (Dec-2010)

77%

6%

15%2% Principal investments

Debt capital markets

Equity and alternativeinvestments

Treasury

74%

22%

4%

> 1Y 1-5Y

< 5Y

Leverage and ROE Term debt maturity (Dec-2010)

0

5

10

15


X

-100-80-60-40-2002040

%

Leverage ROE (RHS)

0

250

500

750

2011 2012 2013 2014

USD

mn

Term debt



107

FIN

AN

CIA

LS


Kuwait Projects Company (Holding) (Baa2/Neg; BBB-/Sta; NR) Analyst: Victor Lohle (+65 6596 8263)

29

Credit outlook – negative Our view takes into account the deterioration in some of KIPCO’s core businesses (most notably Burgan Bank) in 2009 and 2010 and its increased reliance on other group companies for dividends. Our view also takes into account KIPCO’S good liquidity profile, reasonable credit metrics, and close links with members of the Kuwaiti ruling family, as well as the streamlining of the company’s financial-services businesses and the positive impact on the Kuwaiti private sector of the expected government stimulus package.

Company profile Kuwait Projects Company (Holding) (KIPCO) is a Kuwait-based investment company with a portfolio of investments in the MENA region. The company was set up in 1975 and had total assets of KWD 5.3bn (USD 19bn) at end-September 2010. Al Futtooh Holding Company (AFH) – a vehicle controlled by the two sons of the Amir of Kuwait – is the main shareholder, with a 57.9% stake. KIPCO currently has direct and indirect ownership interests in a portfolio of over 60 companies operating in eight sectors across more than 20 countries. However, its core investments are two banks (Burgan Bank and United Gulf Bank, or UGB), an insurance company (Gulf Insurance Company), and a media company (Orbit Showtime).


• Portfolio of investments: KIPCO has evolved from a diversified portfolio investor into a strategic investor with controlling stakes in its core businesses. The company aims to have board control over the companies in which it invests so that it can influence dividend policy. The group’s core businesses are: (1) commercial banking (46% of 9M-2010 consolidated revenues and 72% of consolidated assets at end-September 2010); (2) asset management and investment banking (27% and 18%, respectively); (3) insurance (8% and 1%, respectively); and (4) media via Orbit Showtime Network (10% and 3%, respectively). KIPCO’s core investments are rated in the BBB/Baa range or are unrated. Its non-core activities include a portfolio of investments in the real-estate, industrial and services sectors.

• Streamlining of investments in financial services: KIPCO is a complex structure with multiple intra-group linkages and transactions. In 2009 and 2010, the group reorganised its financial-services businesses to group the various companies into three segments: commercial banking under Burgan Bank, investment banking and asset management under UGB, and KAMCO and insurance under Gulf Insurance. This entailed transfers of assets across subsidiaries.

• Presentation of accounts: At a consolidated level, KIPCO’s financials resemble those of a bank because of its large investments in financial-services companies. As an investment company, KIPCO is dependent on dividends from its subsidiaries and income from its investments. Therefore, bondholders of the parent company are in effect subordinated to bondholders of the operating companies. Also, KIPCO’s profile could change materially based on purchases and/or disposals. However, investments in financial services have been a core activity for KIPCO for over 10 years.

• Reasonable financial metrics: Kuwait’s investment companies experienced significant turmoil in 2009 and 2010, including a number of defaults. KIPCO successfully navigated this difficult period, but its performance has deteriorated, mainly on account of weaker performance at Burgan Bank. Although UGB and Burgan Bank have historically provided the bulk of the dividends, Burgan Bank did not declare cash dividends in 2009 and 2010; as a result, KIPCO has to rely mainly on dividends from UGB. Credit metrics at the unconsolidated level were reasonable at end-September 2010, with low leverage (debt/capital: 52%, net debt/portfolio value: 21%) and very good liquidity (cash/short-term debt: 533%). However, because of the reduction in dividends, coverage has weakened considerably (dividends and interest received/gross interest paid: 0.8x). (Note that 2007 financials were distorted by the sale of the company’s stake in Wataniya to Qatar Telecom, which resulted in net gains of KWD 468mn, or c.USD 1.6bn.)

• Refinancing: KIPCO’s debt refinancing requirements at the parent-company level over the next two years do not look particularly onerous given the existing cash balances on its balance sheet. At end-September 2010, the company had cash balances of KWD 366mn, versus debt maturities of KWD 68.9mn for the remainder of 2010 (which were repaid), KWD 184mn for 2011 and KWD 16mn for 2012. The covenants on the loans contain no requirements that the company maintain these cash balances, and it could use the cash for acquisitions. Cash balances can also be placed on deposit with subsidiary banks.


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Kuwait Projects Company (Holding) (Baa2/Neg; BBB-/Sta; NR)

30

Summary financials (parent company) Revenues and coverage

0

150

300

450

600

2006 2007 2008 2009 9M-10

KWD

mn

0

10

20

30

40

50

X

Revenue EBITDA/interest coverage (RHS)

Debt metrics

2006 2007 2008 2009 9M-10Income statement (KWD mn) Revenues 75.3 583.9 44.7 71.7 62.8 EBITDA 68.1 560.0 43.1 63.6 53.4Gross interest expense 11.3 17.9 18.4 14.8 12.8Profit before tax 38.2 50.1 521.7 24.1 46.3Net income 38.2 50.1 521.7 24.1 46.3 Balance sheet (KWD mn) Cash and equivalents 20.9 260.2 105.0 313.6 366.8Total assets 517.7 980.0 834.2 1,079.7 1,194.3Total debt 326.6 265.9 259.2 485.9 602.2Net debt 356.2 57.8 179.0 172.4 235.4Shareholders’ equity 232.9 674.0 554.5 557.0 545.4 Cash flow (KWD mn) Dividends received 32.5 31.8 64.3 40.1 7.1Cash interest received 2.4 14.4 13.3 6.4 4.8Gross interest paid (17.6) (18.0) (13.8) (12.7) (15.1)Dividends paid (25.8) (51.4) (91.5) (42.4) (26.7) Key ratios Net debt/portfolio value (%) 41 5 15 19 21Dividends received/net financing charges (x) 2.1 8.7 113.1 6.4 0.7

Debt/equity (%) 119 39 47 87 110Cash/ST debt (%) 35 515 263 421 533EBITDA/interest cover (x) 3.9 31.1 3.1 5.0 3.5

0

30

60

90

120

150

2006 2007 2008 2009 9M-2010

%

0

10

20

30

40

50

%Debt/equity Ned debt/portfolio value

Estimated portfolio value Debt maturity (Sep-2010)

0

250

500

750

1,000

1,250

2005 2006 2007 2008 2009 Q3-2010

KWD

mn

0

60

120

180

240

300

2010 2011 2012 2013 2014 >2014

KWD

mn

Total debt



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Mashreqbank (Baa1/Neg; BBB+/Neg; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

31

Credit outlook – negativeLike the other Dubai banks, Mashreqbank was particularly affected by the economic downturn in Dubai. Our negative view reflects the deterioration in the bank’s asset quality since 2009, and the negative earnings impact of rising provisions and high funding costs. Our view also factors in the potential for further asset-quality deterioration in 2011. Partly offsetting these factors, the bank has more diversified earnings streams than its peers, a very liquid balance sheet, and above-average capital adequacy ratios.

Company profile

Mashreqbank is the fifth-largest domestic bank and the largest privately-owned bank in the UAE by total assets (AED 87bn, or c.USD 24bn, at end-September 2010), and it has a market share of deposits of c.5%. The bank was founded in 1967 and is 82% owned by the Al Ghurair family, a prominent UAE family. Mashreqbank is the only major bank in which the government or a ruling family does not have a stake. It has more diversified revenue streams than its peers, as it was one of the first UAE banks to expand actively into retail banking. It also has exposure to life and P&C insurance through its 64% stake in Oman Insurance Company. The bank’s main businesses are wholesale banking, retail banking, insurance and Islamic banking. Mashreqbank operates through a relatively large network of 55 branches in the UAE and offices in 11 countries.


• Supportive framework: Although Mashreqbank is the only major UAE bank without a stake owned by the government or the ruling families, we believe that it has systemic importance because of its large retail deposit-taking network. No bank has failed in the UAE, and the Ministry of Finance recently supported the system by injecting AED 50bn (USD 13.6bn) of deposits and subsequently giving banks the option to convert those deposits into LT2 capital.

• High exposure to retail lending: The bank is recognised as a leader in the retail lending space and has traditionally had a strong franchise, particularly with foreign borrowers. Retail loans represented almost 27% of conventional loans at end-September 2010. Although the risk profile of retail lending is attractive on paper because lenders have direct claims on borrowers’ salaries, foreign borrowers carry a higher risk, as they can leave the country.

• Asset-quality deterioration: Like the other Dubai-based banks, Mashreqbank suffered a hit to its asset quality because of Dubai’s recent economic slowdown. Beginning in 2009, the bank’s asset-quality indicators deteriorated sharply on account of retail exposures, as well as exposures to the Saad and Al-Gosaibi groups. Although the bank’s NPL ratio is not disclosed, we estimate that it stood at around 8% at end-September 2010, with loan-loss cover of around 75%. There is a risk that NPLs will continue to rise in view of the challenging operating environment and the potential for additional corporate restructurings in Dubai in 2011.

• Above-average exposure to the government: The bank’s reported exposure to the government and public sector is above average, at 21% of total conventional loans at end-September 2010. A large percentage of this exposure is presumably to the Dubai government, in our view.

• High cost of funding: Since the dislocation in the funding markets in 2008, the bank has increased the weight of liquid assets on its balance sheet and shrunk its loan portfolio by more than 25%. However, this has come at a cost, and its cost of funding has been among the highest for the UAE banks over the past two years. Also, customer deposits represent a smaller percentage of the bank’s overall funding base (71% of total funding at end-September 2010) relative to peers.

• Diversified earnings streams: Because of its retail banking and insurance businesses, Mashreqbank has more diversified earnings streams than some of its peers. Net interest income accounted for only 54% of revenues in 9M-2010, compared with an average of over 70% for the other UAE banks we cover. Domestic retail banking was the largest contributor to revenues, accounting for 37% of total revenues.

• Pressure on earnings: The relatively high percentage of retail loans in Mashreqbank’s loan portfolio has historically translated into above-average interest income. This allowed the bank to offset worse-than-average cost efficiency stemming from its large branch network. However, since 2008, shrinking volumes, higher funding costs and rising provisions have affected the bank’s earnings. In 2009 and 9M-2010, the bank’s ROA hovered around 1%, which is around average for the Dubai banks.

• Highest capital adequacy: Mashreqbank has traditionally been one of the better-capitalised banks in the UAE. Its Tier 1 capital ratio stood at 15.6% at end-September 2010, with an equity-to-assets ratio of 14%, which is higher than the other Dubai banks.


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Mashreqbank (Baa1/Neg; BBB+/Neg; A/Sta)

32

Summary financials Revenues by segment (9M-2010)

37%

25%

11%

4%

11%6%

6%

Domestic retail

Domestic corporate

International

Treasury and capital markets

Islamic banking

Insurance

Other

Funding mix

0%

25%

50%

75%

100%


Customer deposits Repos Interbank Debt securities and loans


2007 2008 2009 9M-10Balance sheet (AED mn) Total assets (USD mn) 23,877 25,407 25,783 23,732 Total assets 87,627 93,244 94,622 87,096 Loans 35,995 48,434 42,121 37,733 Investments 14,772 13,409 2,212 2,106 Total liabilities 77,143 82,561 82,774 74,868 Deposits 48,287 51,478 53,658 49,233 Interbank 13,397 12,336 6,972 7,365 Debt 5,251 5,246 7,188 5,960 Equity 10,484 10,682 11,847 12,229 Income statement (AED mn) Net interest income 1,200 2,084 2,104 1,744 Other income 2,650 1,900 2,859 1,492 Total income 3,850 3,984 4,962 3,236 Overheads (1,410) (1,874) (1,770) (1,308)Pre-provision profits (PPP) 2,441 2,110 3,192 1,928 Impairments (299) (341) (1,990) (1,209)Profit before tax 2,132 1,748 1,077 719 Net income 2,126 1,732 1,065 708 Key ratios (%) Net interest margin 1.8 2.5 2.5 2.8Fee income-to-income 28.3 31.4 28.9 27.1Costs-to-income 36.6 47.0 35.7 40.4Costs-to-average assets 2.0 2.1 1.9 1.9Provisions-to-PPP 12.6 17.2 66.3 62.7ROE 23.1 16.4 9.5 7.8ROA 2.9 1.9 1.1 1.0Impaired loans-to-loans 0.7 0.2 6.9 NALoan-loss coverage 382.3 1,209.1 58.4 NALoan-to-deposit 74.5 94.1 78.5 76.6Equity-to-assets 12.0 11.5 12.5 14.0Tier 1 capital* 14.6 12.9 14.0 15.6Total capital* 17.8 14.1 20.2 22.3

0

2

4

6

8

2006 2007 2008 2009 9M-2010

%



0

2

4

6

8


%

0

300

600

900

1,200

1,500

%


18%

12%

12%51%

7%Cash

Interbank


Customer loans

Other


0

5

10

15

20

25


%

0

10

20

30

%


54%

27%

19%

Net interest income

Fees/commissions

Other income

* Central Bank of the UAE guidelines, Sources: Company reports, Standard Chartered Research


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National Bank Of Abu Dhabi (Aa3/Sta; A+/Sta; AA-/Sta) Analyst: Victor Lohle (+65 6596 8263)

33

Credit outlook – stableOur stable view on NBAD takes into account the bank’s good track record, consistent earnings, conservative management and sound fundamentals. We view NBAD as one of the strongest bank credits in the GCC. Historically, NBAD has been one of the more conservative banks in the UAE. Compared with some of its competitors, the bank did not experience significant losses on its investment portfolio or exposure to Saudi family-owned corporate groups or Dubai-related entities. Our view also takes into account the bank’s exposure to the real-estate sectors in both Abu Dhabi and Dubai and the recent deterioration in asset quality.

Company profile

National Bank of Abu Dhabi (NBAD), founded in 1968, is the largest bank in Abu Dhabi and the second-largest bank in the UAE, with total assets of AED 211bn (USD 58bn) at end-2010 and a market share of deposits of 13%. NBAD is 70.5% owned by Abu Dhabi Investment Council (ADIC), the investment arm of the Abu Dhabi government, and has historically been the main banker to the Abu Dhabi government and its companies. The rest of the company is widely held. Despite its significant government ownership, the bank operates on a commercial basis. Like a number of UAE banks, NBAD is primarily a wholesale bank, though it has expanded into retail banking in recent years and intends to continue growing that business. The bank offers a broad range of services, including corporate, retail and private banking, brokerage, and international banking.


• Strong ties with the government of Abu Dhabi: NBAD was set up to be the banker to the Abu Dhabi government, and it remains the emirate’s flagship bank. A large portion of government-related business (both on the asset and liability sides) is channelled through NBAD. There is also a strong tradition of support in the UAE, and no bank has been allowed to fail. Because of its links and ownership, we believe that NBAD has strong implicit support. This support was demonstrated in 2009, when Abu Dhabi made a Tier 1 capital injection into its banks, including AED 4bn into NBAD.

• Low cost of funding: NBAD has one of the lowest funding costs in the UAE, and also in the broader GCC. In our view, this is one of the bank’s key competitive advantages. It enables the bank to have lower-yielding assets and still have good earnings generation capacity. The government and public-sector entities accounted for 44% of customer deposits at end-2010; because of this concentration, there have been large fluctuations in the deposit base.

• Strong franchise: NBAD has one of the strongest franchises in the UAE, with good brand-name recognition and a strong reputation. Compared to its peers, the bank is particularly strong in the government and public sectors in Abu Dhabi. 39% of its loan portfolio at end-2010 was to the public sector, which we view as positive, while retail loans represented a further 18%.

• Rapid loan growth has led to high loan-to-deposit ratio: Like most other UAE banks, NBAD has reported very strong loan growth in recent years. Between 2005 and 2010, average annual loan growth was 21%; while this is below the UAE average, it is still high by international standards. Although the bank’s funding base is strong, deposit growth has not kept up with loan growth over the last two years. The bank’s loan-to-deposit ratio has steadily deteriorated and stood at 111% at end-2010, higher than the average for the other UAE banks.

• High exposure to the construction and real-estate sectors: NBAD’s exposure to the construction and real-estate sectors was 22% at end-2010, slightly higher than the average reported by the other UAE banks. The UAE real-estate sector – particularly in Dubai – has experienced a significant price correction since end-2008. We estimate that slightly more than half of NBAD’s real-estate exposure is to Abu Dhabi, while Dubai represents about a fourth.

• Above-average asset quality: NBAD has been relatively unaffected by recent high-profile exposures that have forced other banks to take significant write-downs (e.g. investment securities, Saudi conglomerates, Dubai-related entities). Although the bank’s reported asset quality indicators have deteriorated slightly since 2008, they remain better than the UAE average. The bank’s reported NPL ratio stood at 2.3% at end-2010, with loan-loss cover of 113%. Including renegotiated exposures and loans more than 90 days overdue but not classified as impaired, the bank’s problem loans would represent 6% of total loans.

• Reasonable earnings generation capacity: Low cost of risk, combined with above-average NIMs and good cost efficiency, has enabled NBAD to report reasonably healthy and consistent profits. The bank’s ROA for 2010 was 1.8%.

• Improving capital: Until 2008, NBAD tended to run a slightly more leveraged balance sheet than its peers from a pure equity-to-assets point of view. However, this has improved, and capital adequacy is now in line with the peer average. The bank’s equity-to-assets ratio was 11.4% at end-2010, while its Tier 1 capital ratio stood at 16%.


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National Bank Of Abu Dhabi (Aa3/Sta; A+/Sta; AA-/Sta)

34

Summary financials Operating income by segment (2010)

25%

13%

11%

9%2%

2%

38%

Domestic banking

International

Financial markets

Corporate and investment banking

Global wealth

Islamic business

Head office

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (AED mn) Total assets (USD mn) 37,992 44,865 53,636 57,610 Total assets 139,431 164,654 196,845 211,427 Loans 79,729 111,764 132,258 136,833 Investments 11,255 16,278 20,049 22,689 Total liabilities 128,216 150,298 176,404 187,314 Deposits 81,737 103,481 121,205 123,131 Interbank 27,041 25,797 30,777 31,551 Debt 9,845 11,719 16,264 22,806 Equity 11,214 14,357 20,441 24,113 Income statement (AED mn) Net interest income 2,405 3,608 4,571 5,249 Other income 1,261 1,694 1,828 1,930 Total income 3,666 5,301 6,399 7,179 Overheads (1,054) (1,493) (1,898) (2,186)Pre-provision profits (PPP) 2,611 3,808 4,501 4,993 Impairments (42) (717) (1,408) (1,207)Profit before tax 2,570 3,091 3,093 3,786 Net income 2,505 3,019 3,020 3,683 Key ratios (%) Net interest margin 2.1 2.5 2.7 2.7Fee income-to-income 24.2 21.3 17.7 17.6Costs-to-income 28.8 28.2 29.7 30.5Costs-to-average assets 0.9 1.0 1.1 1.1Provisions-to-PPP 1.6 18.8 31.3 24.2ROE 24.8 23.6 17.4 16.5ROA 2.1 2.0 1.7 1.8Impaired loans-to-loans 1.0 0.9 1.2 2.3Loan-loss coverage 106.0 144.6 157.6 112.8Loan-to-deposit 97.5 108.0 109.1 111.1Equity-to-assets 8.0 8.7 10.4 11.4Tier 1 capital 13.3 12.6 14.9 16.2Total capital 16.5 15.4 17.4 22.6

1

3

5

7

2006 2007 2008 2009 2010

%



0

1

2

3

4


%

0

40

80

120

160

%


9%

7%

11%

69%

4%Cash

Interbank


Customer loans

Other


0

5

10

15

20

25


%

051015202530

%


73%

18%

9%

Net interest income

Fees/commissions

Other income



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Qatar Islamic Bank (NR; NR; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

35

Credit outlook – stable Our stable outlook reflects QIB’s strong franchise in the Islamic banking segment in Qatar, its good fundamentals, and steps by Qatari policy makers to support the country’s financial institutions – including a second capital injection into the banks in Q1-2011. Our credit outlook also takes into account the bank’s rapid loan growth in recent years, at a time when private-sector credit growth was relatively stagnant; its high exposure to the retail segment; limited disclosure and transparency; and relatively low exposure to the public sector.

Company profile

Qatar Islamic Bank (QIB) is Qatar’s largest Islamic bank and the country’s third-largest, with total assets of QAR 52bn (USD 14bn) at end-2010. The bank has deposit market shares of 10% overall and 50% in the Islamic segment. The bank’s operations were traditionally oriented towards the retail market. However, since the mid-2000s, it has actively diversified its operations into corporate and investment banking. Growth in recent years has been rapid, and QIB has displaced Doha Bank as the country’s third-largest bank. QIB’s main shareholder is the Qatar Investment Authority (16.7%), with the remainder widely held. The bank’s operations are mostly domestic in nature, with domestic loans accounting for 93% of total loans at end-2010. Gradual expansion abroad is likely in the coming years.


• Strong track record of sovereign support: During the recent global financial crisis, Qatar was one of the most interventionist countries in the GCC. A number of support measures were unveiled, including (1) capital injections, with the government acquiring 9-10% stakes in listed banks (including QIB); (2) the removal of poorly performing portfolios of local equity investments; and (3) the purchase of real-estate and other loans. A further 10% capital injection into the banks was announced in early 2011. Although QIB is a mid-sized player by regional standards, we believe it has systemic importance as Qatar’s third-largest bank and largest Islamic financial institution.

• Rapid loan growth could be a source of concern: Qatar’s banks have grown rapidly over the last five years. QIB has been the fastest-growing of the big four Qatari banks over this period, displacing Doha Bank in 2010 as the third-largest bank by total assets. In 2010, while private-sector banks like Commercial Bank of Qatar and Doha Bank reported moderate loan growth, QIB’s loan portfolio grew by 31%. Although loans to the public sector accounted for some of this growth, more than 40% of the growth during the period was housing-related, and a further 20% was consumer-related.

• Strong Islamic franchise is a competitive advantage: As the largest Islamic bank in Qatar, QIB has a competitive advantage over its conventional peers, as some customers prefer to conduct their business with Islamic institutions. Because of its brand and reputation, QIB has one of the country’s strongest retail funding franchises, and its cost of funding is by far the lowest among Qatar’s big four banks. Customer deposits provided 73% of total funding at end-2010. Although the loan-to-deposit ratio is at the higher end of the range for the sector (97% at end-2010), it has been declining since 2008, despite rapid loan growth. This highlights the strength of the bank’s funding base, in our view. The bank will be one of the main beneficiaries if conventional banks are forced to close their Islamic operations.

• High retail exposure: Among the Qatari banks, QIB has the highest exposure to individuals. At end-2010, 33% of its loan portfolio was housing-related, with consumer financing making up another 17%. The majority of the bank’s customers are Qatari nationals rather than expatriates. This is one reason why the bank’s cost of risk has been below average, in our view. Exposure to the public sector is relatively low, at 11% of total loans.

• Sound financial metrics: QIB’s fundamentals are underpinned by high earnings generation capacity, good reported asset-quality indicators, a strong funding base and robust capital adequacy. The bank’s earnings generation capacity is high thanks to wide NIMs, reasonable efficiency levels and, in recent years, low cost of risk. The bank’s capital adequacy is sound and is among the highest for Qatari banks, with a Tier 1 capital ratio of 17% and an equity-to-assets ratio of 18% at end-2010. Reported asset-quality indicators are sound and compare favourably with the peer average. However, there is a risk that rapid loan growth in recent years may mask potential asset-quality issues with over-leveraged retail customers. Like its peers, QIB benefited from the government support package, which removed potentially troublesome real-estate assets from the banks’ balance sheets. At end-2010, the bank’s NPL ratio stood at 1.3%, with loan-loss cover of 92%.


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Qatar Islamic Bank (NR; NR; A/Sta)

36

Summary financials Loans by industry (Dec-2010) 11%

17%

3%

33%

36%

Government andagenciesHousing

Consumer

Other

Contracting

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (QAR mn) Total assets (USD mn) 5,861 9,215 10,789 14,242 Total assets 21,336 33,543 39,273 51,840 Loans 11,679 18,866 22,663 29,352 Investments 2,117 2,947 1,819 3,488 Total liabilities 16,589 26,174 30,074 42,507 Deposits 12,201 16,592 20,361 30,258 Interbank 3,604 8,697 8,691 8,412 Debt 0 0 0 2,713 Equity 4,747 7,369 9,199 9,333 Income statement (QAR mn) Net interest income 820 1,297 1,543 1,483 Other income 421 93 337 288 Total income 1,241 1,390 1,880 1,771 Overheads (318) (444) (487) (479)Pre-provision profits (PPP) 923 946 1,392 1,291 Impairments (18) (17) (131) (40)Profit before tax 1,323 1,643 1,311 1,335 Net income 1,323 1,643 1,322 1,335 Key ratios (%) Net interest margin 4.9 5.1 4.6 3.5Fee income-to-income 7.1 16.1 13.8 16.3Costs-to-income 19.2 21.1 25.3 25.8Costs-to-average assets 1.8 1.6 1.3 1.1Provisions-to-PPP 0.4 1.0 9.1 2.9ROE 29.2 27.1 16.0 14.4ROA 7.3 6.0 3.6 2.9Impaired loans-to-loans 2.1 1.4 1.1 1.3Loan-loss coverage 94.7 75.4 84.2 91.5Loan-to-deposit 95.7 113.7 111.3 97.0Equity-to-assets 22.2 22.0 23.4 18.0Tier 1 capital 18.3 16.4 17.3 17.4Total capital 18.8 17.0 17.3 17.4

0

2

4

6

8

10

2006 2007 2008 2009 2010

%



0

1

2

3

4

5


%

0

30

60

90

120

%


4%

24%

7%

56%

9%Cash

Interbank


Customer loans

Other


0

5

10

15

20

25


%

0

10

20

30

40

%


80%

16%

4%

Net interest income


Other



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Qatar National Bank (Aa3/Sta; A+/Sta; A+/Sta) Analyst: Victor Lohle (+65 6596 8263)

37

Credit outlook – positiveWe initiate coverage of Qatar National Bank with a positiveoutlook. This reflects the bank’s dominant position in the Qatari banking system, its sound fundamentals, and its majority ownership by the Qatari government. Our view also takes into account proactive steps by the Qatari authorities to support the country’s banks and, over the medium term, the impact of infrastructure spending for the 2022 FIFA World Cup. Our outlook also takes into account very rapid growth in the bank’s loan portfolio in recent years – which is admittedly mostly to the public sector – and high concentrations on the asset and liability sides of the business.

Company profile

Qatar National Bank (QNB) is the largest bank in Qatar and the fourth-largest in the GCC, with total assets at end-2010 of QAR 223bn (USD 61bn). The bank was established in 1964 as the first Qatari-owned bank and is 50% owned by Qatar Investment Authority (QIA), the investment arm of the State of Qatar. By total assets, QNB is three times the size of its nearest competitor and is the dominant player in Qatar, with a market share of deposits in excess of 40%. Despite its government ownership, the bank operates on a commercial basis and offers a broad range of services catering to government entities, corporates and individuals. The bank has a c.70% market share in the government and government-related sector. It is also the most international of the Qatari banks following a number of acquisitions in recent years.


• Supportive framework: Qatar was one of the most interventionist countries in the GCC during the financial crisis, unveiling a number of measures to support its banks. These included (1) capital injections, with the government acquiring 10% stakes in listed banks (except for QNB, in which it already owned a 50% stake); (2) the removal of poorly performing portfolios of local equity investments (QAR 4bn for QNB); and (3) the purchase of real-estate and other loans (QAR 3.9bn). In early 2011, the government announced a further 10% capital injection into the banks, except QNB. However, given its size and government stake, we believe QNB enjoys strong implicit support.

• Dominance in the public sector: QNB’s large size relative to its peers gives it a competitive advantage in financing large transactions. As a result, it has larger exposure to government and government-related entities (the public sector) than its peers, and a smaller exposure to the retail segment. We view this as a strength. At end-2010, 52% of the bank’s loan portfolio was to the Qatari public sector, while personal loans represented only around 11%. (The majority of retail loans are to Qatari nationals, most of whom are employed in the public sector.) The bank’s market share in the public sector is c.70%.

• Rapid loan growth: Like other Qatari banks, QNB has experienced very strong growth in recent years. Its loan portfolio has grown four-fold since 2005. This mainly reflects the continued strength of the Qatari public sector and the bank’s dominance in that sector. Unlike the private sector, Qatar’s public sector continued to grow during the 2009-10 slowdown. In 2011, we expect loan growth to be in the region of 15-20%. The lending impact of Qatar’s hosting of the 2022 FIFA World Cup is likely to become noticeable after 2012.

• Sound metrics: QNB’s fundamentals are sound. Although the bank’s NIM is lower than its peers’ – reflecting the high share of government-related lending – its efficiency levels are better and its cost of risk is lower, enabling QNB to report reasonable profits (2010 ROA: 2.8%). Asset-quality indicators are good, with an end-2010 NPL ratio of 0.9% and loan-loss cover of 118%. Although not disclosed, we estimate the NPL ratio in the bank’s retail loan portfolio at 5-10% at end-2010. QNB’s capital adequacy ratios are sound, with a Tier 1 capital ratio of 15% at end-2010 and an equity/assets ratio of 11%. The bank’s capital base will strengthen following a 25% rights issue in Q1-2011. Finally, QNB’s funding base is strong, with customer deposits representing 86% of total funding at end-2010. There is some funding concentration, and approximately 40% of customer deposits were sourced from the government and government-related entities. The bank’s loan-to-deposit ratio is considerably lower than its peers’ (80% at end-2010), though it could deteriorate in the medium term if the expected surge in loan growth materialises without accompanying deposit growth.

• International diversification: QNB has actively expanded abroad over the last 10 years, mainly in the MENA region. We expect this trend to continue. In addition to a wholly owned UK wealth management firm (Ansbacher Holdings), the bank has stakes in banks in Jordan, Tunisia, the UAE and Syria. However, Qatar remains its core market, accounting for 81% of total loans at end-2010. Even though the bank is expanding into arguably riskier countries, we view its diversification as positive, as it reduces the bank’s exposure to Qatar’s relatively small and concentrated market.


116

FIN

AN

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LS


Qatar National Bank (Aa3/Sta; A+/Sta; A+/Sta)

38


52%

17%

10%

2% 7%

12%


Consumer

Real estate

Contracting

Others

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (QAR mn) Total assets (USD mn) 31,418 41,751 49,266 61,369 Total assets 114,361 151,974 179,329 223,382 Loans 66,064 100,053 108,783 131,696 Investments 11,309 11,815 23,333 24,048 Total liabilities 100,502 135,330 159,357 198,590 Deposits 79,364 104,253 125,872 165,470 Interbank 9,928 19,721 20,794 12,160 Debt 6,715 6,719 6,724 12,136 Equity 13,858 16,643 19,972 24,793 Income statement (QAR mn) Net interest income 1,932 2,836 3,726 5,675 Other income 1,537 2,257 1,945 1,934 Total income 3,469 5,093 5,671 7,609 Overheads (900) (1,042) (1,107) (1,292)Pre-provision profits (PPP) 2,570 4,050 4,564 6,317 Impairments (44) (378) (359) (600)Profit before tax 2,525 3,672 4,206 5,718 Net income 2,506 3,653 4,188 5,702 Key ratios (%) Net interest margin 2.1 2.2 2.3 2.9Fee income-to-income 20.9 18.0 17.1 14.7Costs-to-income 25.9 20.5 19.5 17.0Costs-to-average assets 1.0 0.8 0.7 0.6Provisions-to-PPP 1.6 9.3 7.9 9.5ROE 22.5 23.9 22.9 25.5ROA 2.7 2.7 2.5 2.8Impaired loans-to-loans 0.7 0.7 0.7 0.9Loan-loss coverage 90.5 85.4 108.8 117.7Loan-to-deposit 83.2 96.0 86.4 79.6Equity-to-assets 12.1 11.0 11.1 11.1Tier 1 capital 13.7 13.7 13.2 15.3Total capital 16.2 13.9 13.2 15.3

1

2

3

4

5

6

2006 2007 2008 2009 2010

%



0

1

2


%

0

30

60

90

120

%


15%

11%

11%59%

4%Cash

Interbank


Customer loans

Other


0

10

20


%

0

10

20

30

%


74%

15%

3%8%

Net interest income


Share of associates

Other



117

FIN

AN

CIA

LS


Riyad Bank (A1/Sta; A+/Sta; A+/Sta) Analyst: Victor Lohle (+65 6596 8263)

39

Credit outlook – stableWe are revising our credit outlook to stable from negative. Despite above-average loan growth between 2005 and 2008, Riyad Bank’s asset quality has not deteriorated as much as we had anticipated. Our stable view reflects the bank’s solid domestic position, sound capital base, strong regulatory framework and implicit sovereign support. It also takes into account the bank’s rapid loan growth in the run-up to the economic slowdown and lower-than-average earnings generation capacity.

Company profile

Riyad Bank was established in 1957 and is currently the fourth-largest bank in Saudi Arabia, with total assets of SAR 173bn (USD 46bn) at end-2010. The bank has the third-largest branch network in the country, with over 241 branches, and has a 13% market share of deposits. Its largest shareholders are government-related entities: the Public Invest Fund (PIF) and the General Organisation for Social Insurance (GOSI) own almost 22% each, and the Saudi Arabian Monetary Authority (SAMA) holds a further 6.5% stake. The remainder is held by Saudi investors. The bank has strong franchises in corporate banking, retail banking and asset management, and is currently expanding its corporate finance business and setting up joint ventures in the insurance sector. The bank’s operations are mainly domestic.


• Solid domestic market position: Riyad Bank has a solid commercial franchise in both the retail and corporate sectors. The bank is recognised as a market leader in asset management. Rather than expanding geographically, Riyad Bank aims to further expand its domestic franchise into new products such as insurance and leasing. Although its large retail branch network is a competitive advantage from a scale point of view, the bank’s retail banking operations contribute a smaller proportion of earnings than those of other Saudi banks (28% of 2010 revenues).

• Sound capital base: A SAR 13bn rights issue in mid-2008 effectively doubled Riyad Bank’s capital base and made it one of best-capitalised banks in the country. Although the bank has experienced rapid loan growth since then, it has maintained high capital adequacy ratios. Its Tier 1 capital ratio stood at 16% at end-2010, while its equity-to-assets ratio was 16.8%.

• Above-average asset quality, despite rapid loan growth: The bank’s corporate loan book tripled in size between 2005 and 2008; in 2008 alone, total loans grew by 40% on the back of the rights issue, allowing Riyad Bank to pursue an aggressive growth strategy. Like the other Saudi banks, Riyad Bank has high borrower concentrations, as the economy is dominated by a few large family-owned and public-sector entities. Despite rapid loan growth in the run-up to the recent economic slowdown and high borrower concentrations, the bank was relatively unaffected by the slowdown, and its asset quality indicators are better than average. The bank’s NPL ratio was 1.7% at end-2010, with loan-loss cover of 126%.

• Moderate profitability: Riyad Bank’s profitability is adequate by international standards. However, it is slightly below the average of Saudi banks, due to a higher-than-average cost base – partly reflecting its large branch network – and slightly lower NIMs. These factors would reduce the bank’s ability to absorb higher provisions should asset quality deteriorate. Until 2010, the bank partly offset the impact of higher loan-loss provisions and lower interest rates by growing its loan portfolio. With stagnant loan growth in 2010, profitability dipped slightly, mainly due to lower net interest revenue. The bank’s reported ROA for 2010 was 1.6%

• Strong funding base: The bank’s funding base is strong by international standards; customer deposits accounted for 91% of total funding at end-2010, and the loan-to-deposit ratio stood at 84%, which is good by regional standards.

• Purely domestic franchise: Some features of the Saudi banking system, such as a high percentage of unremunerated deposits, have enabled Saudi banks to be very profitable without expanding abroad. While the foreign operations of all Saudi banks are limited, Riyad Bank is more exposed than its peers to any volatility in the Saudi economy.

• Strong regulatory framework: In our opinion, SAMA is one of the most competent and proactive regulators in the GCC, which strengthens the credit profiles of the Saudi banks. There is also a strong tradition of support, and no bank has ever failed. On account of its absolute size and large retail branch network, and the large stake held by government-related entities, we believe that Riyad Bank has systemic importance and therefore enjoys strong implicit support.


118

FIN

AN

CIA

LS


Riyad Bank (A1/Sta; A+/Sta; A+/Sta)

40


75%

19%

1%5%

Commercial

Consumer

Overdrafts

Credit Cards

Funding mix

0%

25%

50%

75%

100%




0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2


%

0

50

100

150

200

%


13%

3%

19%

62%

3%Cash

Interbank


Customer loans

Other


0

5

10

15

20


%

0

10

20

30

40

%


28%

4%

13%

41%

14%

Retail banking

Investment banking andbrokerageCorporate

Treasury and investments

Other



119

FIN

AN

CIA

LS


Samba Financial Group (Aa3/Sta; A+/Sta; A+/Sta) Analyst: Victor Lohle (+65 6596 8263)

41

Credit outlook – positiveWe are revising our credit outlook on Samba to positive from stable.Our view takes into account Samba’s robust fundamentals, its strong franchise in Saudi Arabia, its good track record, the country’s strong regulatory framework, and implicit sovereign support for the bank. Despite the recent economic slowdown in Saudi Arabia, Samba’s financial metrics have not deteriorated considerably. Our view is tempered by the high loan concentrations common in Saudi Arabia and potentially high exposures to some large corporate groups.

Company profile

Samba Financial Group (Samba) is the second-largest bank in Saudi Arabia, with total assets of SAR 187bn (USD 50bn) at end-2010 and a market share of deposits of about 13%. It was set up in 1980 as a joint venture with Citibank, which had a 40% stake and managed Samba under a technical management agreement. In 2004, Citibank sold its stake and the management agreement ended. Samba is majority owned by government-related bodies: 23.8% by the Public Investment Fund (PIF), 15% by a public pension fund and 11.5% by the General Organisation for Social Insurance. (GOSI) The remainder is held by the general public, with no single individual holding more than 5%. Samba offers a full range of banking services and operates from a comparatively small network of 68 branches. The bank’s operations are predominantly domestic.


• Strong franchise and balanced business mix: As one of Saudi Arabia’s leading banks, Samba has a strong franchise, particularly with corporates and wealthier retail customers. The bank’s revenue mix is well balanced. Retail banking contributed 39% of 2010 revenues, while corporate banking and other wholesale business accounted for the remainder.

• High profitability: The profitability of Saudi banks has been steadily declining since 2006. However, Samba has remained one the most profitable banks due to high efficiency (a five-year average cost-to-income ratio of 25%), reasonably wide NIMs (five-year average: 3.2%), and below-average cost of risk. Despite higher impairment charges in 2009 and 2010 and the impact of lower interest rates, the bank’s ROA for 2009 and 2010 was around 2.4%, among the highest of the Saudi banks we cover.

• Robust asset-quality indicators: Like other Saudi banks, Samba has high borrower concentrations, as the economy is dominated by a few public-sector entities and large groups owned by prominent families. Although these exposures would typically be to the strongest entities in Saudi Arabia, given the high degree of borrower concentration, only a few defaults would be needed in order for a bank to experience difficulties. Although Samba’s asset-quality indicators deteriorated in 2009 and 2010, they are still better than average. The bank’s NPL ratio stood at 3.7% at end-2010, with loan-loss cover of 118%. In our view, this highlights better risk management. Samba was also more restrained than some of its peers in growing its loan portfolio, which expanded by about 17% p.a. between 2005 and 2008.

• Solid funding base: Despite its relatively small branch network, Samba has a strong funding base catering mostly to wealthier individuals. Customer deposits represented 82% of total funding at end-2010. Samba has some borrower concentration within its deposit base (although this is common in the Saudi market). The bank’s loan-to-deposit ratio is one of the lowest in the country, at 63%, but also reflects the lower-than-average percentage of loans on the bank’s balance sheet.

• Good capital adequacy: The bank’s capital ratios are among the highest for the Saudi banks we cover. However, this partly reflects the relatively low percentage of loans on the bank’s balance sheet (43% of total loans at end-2010) and the higher percentage of securities. While the bank’s Tier 1 capital ratio is considerably higher than average (17.8% at end-2010), its equity-to-assets ratio (13.7%) is in line with the peer average.

• Larger-than-average investment portfolio: Compared to its peers, Samba has tended to invest a larger percentage of its assets in non-government securities (12% of total assets at end-2010). In our view, this highlights not only the dwindling availability of Saudi government debt, but also higher market risk appetite. Notwithstanding this, the bank appears to manage its risk better than some of its peers, as losses in relation to the portfolio size were lower than the industry average in 2007 and 2008.

• Strong regulatory framework: In our opinion, the Saudi Arabian Monetary Authority (SAMA) is one of the more competent and proactive regulators in the GCC, which strengthens the credit profiles of the Saudi banks. There is also a strong tradition of support, and no bank has ever failed. Although Samba does not have a vast branch network, it is a large retail deposit-taking institution. We believe that this, coupled with the large stake owned by government-related entities, translates into high implicit support.


120

FIN

AN

CIA

LS


Samba Financial Group (Aa3/Sta; A+/Sta; A+/Sta)

42

Summary financials Loans by borrower type (Dec-2010)

81%

17%2%

Corporate

Consumer

Credit Cards

Funding mix

0%

25%

50%

75%

100%




0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2

3

4


%

0

50

100

150

200

%


17%

1%

35%

43%

4%Cash

Interbank


Customer loans

Other


0

5

10

15

20


%

0

10

20

30

40

%


39%

37%

18%

6%

Consumer Banking

Corporate

Treasury

Investment banking



121

FIN

AN

CIA

LS


Saudi British Bank (Aa3/Sta; A/Sta; A/Sta) Analyst: Victor Lohle (+65 6596 8263)

43

Credit outlook – stableOur stable credit view on SABB takes into account the bank’s close links with HSBC, its high recurrent earnings generation capacity, the relative diversity of its earnings streams, and the strong regulatory framework in Saudi Arabia. Our view also takes into account the bank’s rapid loan growth prior to the economic slowdown, high concentration in the corporate sector, asset-quality deterioration in 2009, lower capital adequacy than its peers, and relatively high loan-to-deposit ratio.

Company profile

The Saudi British Bank (SABB) is the fifth-largest bank in Saudi Arabia, with total assets of SAR 125bn (USD 33bn). Although its branch network is relatively small (80 branches), SABB has an estimated market share of deposits of 10%. HSBC is a cornerstone shareholder, with a 40% stake. The General Organisation for Social Insurance (GOSI), a government-related entity, owns about 10%, with the remainder owned by the Saudi public. HSBC is responsible for managing the bank under a comprehensive technical services agreement. Either directly or through associate companies, SABB provides a broad range of financial services, including corporate and retail banking, investment banking, insurance, and securities services. The bank has a particularly strong franchise in corporate banking and can capitalise on its links with the HSBC group.


• Close links with HSBC strengthen corporate franchise: While SABB is a mid-sized bank by local standards – albeit with a strong presence in the corporate sector – we believe its links with HSBC give it a competitive advantage over some domestic competitors in terms of systems, processes and access to a global network. The bank’s target markets are large corporate clients and the upper end of the retail market.

• Asset-quality recovery: The bank’s loan book grew by 46% in 2007 and a further 29% in 2008, faster than most of the other banks we cover in Saudi Arabia. Growth was focused on the corporate loan sector, and SABB’s corporate loan book more than tripled between 2005 and 2008. As is common among Saudi banks, SABB’s loan portfolio is concentrated due to the dominance of a few high-profile family-owned groups and public-sector entities. Although SABB has a strong franchise in the corporate sector, the bank’s asset quality deteriorated more than average in 2009 due to defaults by a handful of privately owned groups, and exposure to large corporates that faced difficulties. Asset quality began to improve in 2010, and asset-quality indicators are now more in line with the sector. The bank’s NPL ratio declined from a high of 4.5% at end-2009 to 3.4% at end-2010, with loan-loss cover of 100%.

• High earnings generation capacity: The bank’s earnings generation capacity is good thanks to wide NIMs and good cost controls. However, in 2009 and 2010, net income was negatively affected by stagnant loan growth, shrinking margins and high loan-loss provisions. In both 2009 and 2010, provisions ate up about 40% of pre-provision profits. Nevertheless, the bank reported reasonable profits, with an average ROA of around 1.5% in both years.

• Earnings diversity: Compared to the other large Saudi banks, SABB derives a slightly higher percentage of its revenues from non-interest income (34% in 2010 versus a system-wide average of 29%), reflecting the breadth of the bank’s business franchise. This has allowed SABB to partly withstand the impact of contracting loan volumes and low interest rates.

• Strong funding base: The bank’s funding base is strong by international standards and at end-2010, customer deposits provided 90% of total funding. However, the bank has made greater use of the wholesale markets than its peers. Also, like those of its peers, SABB’s deposit base is concentrated in a few large corporates and public-sector entities. Its loan-to-deposit ratio has also been steadily improving as a result of limited loan growth, and stood at 78% at end-2010. This compares favourably with the average for the other large Saudi banks.

• More leveraged balance sheet: Compared to the other large Saudi banks, SABB has tended to have a more leveraged balance sheet, both in terms of absolute capital and Tier 1 capital levels. However, the bank’s capital adequacy is adequate by regional standards, with a Tier 1 capital ratio of 11.9% and an equity-to-assets ratio of 12.1% at end-2010.

• Strong regulatory framework: In our opinion, the Saudi Arabian Monetary Authority (SAMA) is one of the more competent and proactive regulators in the GCC, which strengthens the credit profiles of the Saudi banks. There is also a strong tradition of support in Saudi Arabia, and no bank has ever failed. Notwithstanding its smaller size, we believe that SABB is of systemic importance to the Saudi banking system.


122

FIN

AN

CIA

LS


Saudi British Bank (Aa3/Sta; A/Sta; A/Sta)

44


16%

45%

39%

0%

Retail banking

Corporate

Treasury

Others

Funding mix

0%

25%

50%

75%

100%



2007 2008 2009 2010Balance sheet (SAR mn) Total assets (USD mn) 26,190 35,110 33,823 33,433 Total assets 98,213 131,661 126,838 125,373 Loans 62,001 80,237 76,382 74,248 Investments 14,859 29,604 23,818 24,972 Total liabilities 87,788 120,027 113,793 110,201 Deposits 71,848 92,678 89,187 94,673 Interbank 8,045 16,069 13,606 4,661 Debt 4,226 5,844 5,897 5,663 Equity 10,425 11,634 13,045 15,172 Income statement (SAR mn) Net interest income 3,059 3,207 3,437 3,243 Other income 1,315 1,704 1,724 1,596 Total income 4,374 4,912 5,206 4,880 Overheads (1,429) (1,642) (1,678) (1,754)Pre-provision profits (PPP) 3,003 3,378 3,529 3,126 Impairments (396) (458) (1,496) (1,243)Profit before tax 2,607 2,920 2,032 1,883Net income 2,607 2,920 2,032 1,883 Key ratios (%) Net interest margin 3.6 2.9 2.7 2.7Fee income-to-income 19.4 25.0 23.3 24.2Costs-to-income 32.2 32.7 32.2 35.9Costs-to-average assets 1.6 1.4 1.3 1.4Provisions-to-PPP 13.2 13.6 42.4 39.8ROE 26.3 26.5 16.5 13.3ROA 3.0 2.5 1.6 1.5Impaired loans-to-loans 0.3 0.2 4.5 3.4Loan-loss coverage 289.7 325.0 50.3 100.0Loan-to-deposit 86.3 86.6 85.6 78.4Equity-to-assets 10.6 8.8 10.3 12.1Tier 1 capital 13.5 8.3 10.1 11.9Total capital 13.5 11.2 12.8 14.2

0

2

4

6

8

2006 2007 2008 2009 2010

%



0

1

2

3

4

5


%

0

75

150

225

300

375

%


12%

6%

20%

59%

3%Cash

Interbank


Customer loans

Other


0

5

10

15

20


%

0

10

20

30

40

%


24%

9%

67%

Net interest income


Other



123

FIN

AN

CIA

LS


Türkiye Garanti Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos) Analyst: Shilpa Singhal (+65 6596 8259)

45

Credit outlook – stableGaranti’s credit profile is underpinned by its strong position in a competitive and consolidated market and its good fundamentals, including strong profitability and robust capitalisation. As a structural feature, the bank has very short-duration deposits, which it is increasingly looking to term out by tapping wholesale funding sources. On the liquidity front, its holdings of government securities are high (27% of assets) and the loan-to-deposit ratio has been increasing, with loan growth outstripping deposit growth. Strong loan growth is expected to continue in 2011, especially in the riskier consumer and SME loan segments. The bank could face some pressure on profitability and asset quality, but the overall operating environment in Turkey is expected to remain supportive of its credit profile.

Company profile

Türkiye Garanti Bankasi (Garanti) is the second-largest private bank in Turkey in terms of assets, and the largest in terms of loans. It had total assets of TRY 137bn (USD 88bn) at end-2010 (13.6% market share). Its branch network consists of 853 domestic branches and 10 branches/offices abroad. Although the bank has a diversified loan book, it is a leader in mortgages, credit cards (acquiring and issuing), project finance, foreign-currency corporate lending and trade finance. In November 2010, Do u Group (30.5% stake) and GE Capital Corp. (19.85% stake) entered into a share sale plan with Banco Bilbao Vizcaya Argentaria S.A. (BBVA), under which BBVA will buy 24.9% of the shares from GE and Do u Group. As a result, Do u Group’s stake will fall to 24.9%.


• Ownership structure: Garanti is likely to benefit from BBVA’s (Aa2/Neg; AA/Neg; AA-/Sta) retail lending experience in emerging markets such as Latin America, provided the share purchase by BBVA is approved by regulators (expected in Q1-2011). Garanti contributes 68% to ahenk family-owned Do u Group’s (Ba3/Sta; BB/Sta; BB-/Neg) portfolio, according to an estimate from S&P, and a ahenk family member is chairman of Garanti’s board of directors.

• Good market position but stiff competition: Garanti has a 14% loan market share and a c.12% deposit market share. The bank has a strong retail franchise, especially in the mortgage and credit card (acquiring and issuing) businesses, in which it had end-2010 market shares of 14% and 20%, respectively. Project finance, foreign-currency corporate lending and trade finance are also strengths of the bank. However, Garanti continues to face strong competition from similar-sized peers, particularly in the retail segment, where all banks are trying to grow actively.

• Strong loan growth ahead: After a flat 2009 in the aftermath of the crisis, Garanti’s loan book grew by a steep 31% in 2010, with higher growth in the consumer and SME segments. Deposit growth has not kept pace with strong loan growth, and as a result, the loan-to-deposit ratio jumped to 91% as at end-2010 from 80% at end-2009. The bank forecasts loan growth in 2011 at c.30%, with a focus on the riskier general-purpose consumer loan segment. The deposit growth target for 2011 is 20%, which would lead to a further increase in the loan-to-deposit ratio.

• NIM and profitability to come under some pressure: Due to the short duration of deposits (43% with maturities of less than one month), rate cuts reprice deposits faster than loans. As a result, Garanti’s NIM improved significantly in 2009 on initial rate cuts, and has declined since as loan repricing has caught up. We expect NIM to come under further pressure if rates start rising. The bank continues to focus on the higher-yielding consumer and SME segments as it seeks to boost margins. The ratio of costs to average assets has remained stable at 2.7% in the last two years, making Garanti one of Turkey’s most cost-efficient banks (second only to Akbank among the big four private banks). However, costs are unlikely to improve near-term as the bank continues to invest in expanding its branch network. On balance, pressure on NIM and the normalisation of provisioning costs could dent profitability to some extent, although we do not expect a significant deterioration in the bank’s earnings capacity in the next 6-12 months.

• Low NPL ratio, but coverage is weaker than peers’: The bank’s end-2010 NPL ratio of 3.1% was lower than the sector-wide 3.6%. Loan-loss coverage has been maintained at 81% for the last two years (versus an 85% sector average at end-2010). Unlike some peers, Garanti does not follow the policy of 100% specific provisioning for its NPLs. Although we could see some worsening of NPL ratios as loans extended during the recent growth phase start to season, we do not expect a significant deterioration in asset quality.

• Adequate capitalisation is supportive of growth: The bank had a strong capital position at end-2010 (15.7% Tier 1 ratio, 18.1% total capital ratio). Basel II, if implemented in 2011, is likely to have a limited effect on capital ratios, resulting in a decline of less than 200bps. Strong margins will continue to support the current pace of growth without materially reducing capital ratios, in our view.


124

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Türkiye Garanti Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos)

46


49%

8%

1%12%7%

11%

12%

MortgageConsumer vehicleOther consumerCredit cardsSMECorporateForeign

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Deposits Debt Other


2007 2008 2009 2010Balance sheet (TRY mn) Total assets (USD mn) 64,984 65,385 77,007 88,128 Total assets 76,148 99,038 116,334 136,784 Loans 40,948 54,854 55,018 71,884 Investments 19,410 28,147 40,335 42,965 Total liabilities 69,023 89,296 102,649 120,066 Deposits 43,690 57,960 68,782 79,070 Interbank 0 0 0 34 Debt 11,630 14,420 16,458 20,809 Equity 7,126 9,743 13,686 16,718 Income statement (TRY mn) Net interest income 3,098 3,508 5,406 5,170 Other income 2,279 2,213 3,201 3,211 Total income 5,377 5,721 8,607 8,381 Overheads (2,108) (2,756) (2,952) (3,382)Pre-provision profits (PPP) 3,269 2,965 5,655 4,999 Impairments (350) (618) (1,716) (696)Profit before tax 2,919 2,347 3,939 4,303 Net income 2,422 1,891 3,100 3,402 Key ratios (%) Net interest margin 4.8 4.2 5.2 4.2Fee income-to-income 24.0 26.2 21.5 22.8Costs-to-income 39.2 48.2 34.3 40.4Costs-to-average assets 3.2 3.1 2.7 2.7Provisions-to-PPP 10.7 20.8 30.3 13.9ROE 40.5 22.4 26.5 22.4ROA 3.6 2.2 2.9 2.7Impaired loans-to-loans 2.2 2.4 4.1 3.1Loan-loss coverage 64.0 64.4 81.4 80.8Loan-to-deposit 93.7 94.6 80.0 90.9Equity-to-assets 9.4 9.8 11.8 12.2Tier 1 capital 12.9 13.5 16.6 15.7Total capital 14.0 14.9 19.2 18.1

0

3

6

9

12

15

2006 2007 2008 2009 2010

%



0

1

2

3

4

5


%

0

20

40

60

80

100

%


6%

7%

30%

4%

53%

CashInterbankInvestment securitiesTotal loansOthers


0

5

10

15

20


%

0

10

20

30

40

%


61%23%

5%11%

Net interest income

Fees/commissions

Trading

Other income



125

FIN

AN

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LS


Türkiye Vakiflar Bankasi (Ba3/Sta; BB/Pos; BB+/Pos) Analyst: Shilpa Singhal (+65 6596 8259)

47

Credit outlook – stableAs a sovereign-linked entity, Vakifbank would be supported by the government in a stress scenario, in our view. The bank has a well-established franchise and a strong captive deposit and business base of public-sector employees and corporates. The bank has a moderate credit profile with a diverse loan book, but its asset quality, income diversity and profitability are weaker than peers’. Vakifbank resumed strong loan growth in 2010, but its current capital levels and loan-to-deposit ratio may cause growth to moderate in 2011. Like that of its peers, the bank’s liquidity is underscored by large government securities holdings and very short-duration deposits. The operating environment in Turkey remains stable and will support of the bank’s credit profile in the near term.

Company profile Established in 1954 with the intent of managing the assets of Turkey’s charitable institutions, Türkiye Vakiflar Bankasi (Vakifbank) is the second-largest public-sector bank in Turkey and the sixth-largest overall in asset terms, with end-September 2010 assets of TRY 75bn (USD 52bn) and a 9% loan market share. As of end-2010, the bank had 634 domestic and two foreign branches (in New York and Bahrain). The bank also has a subsidiary in Austria, although foreign loans are a very small proportion of the total book. Vakifbank is 58.45% owned by the General Directorate of Foundations (GDF), which is in turn owned by the Turkish state. 16.1% of shares are held by the bank’s employees’ provident fund. Although government owned, the bank is commercially run and its loan book is diversified across all major loan segments.


• Ownership structure: Vakifbank is majority owned by the GDF (the umbrella organisation for Turkey’s charitable institutions), which is fully controlled by the Turkish state. The office of the prime minister directly appoints one board member and the CEO of Vakifbank. Half of the remaining board members are appointed by the GDF. Despite government involvement at the board level, Vakifbank is run as a full-service commercial bank. We believe the bank’s government ownership would make it a direct beneficiary of support in the event of a crisis, as happened in 2001. Over the medium to long term, the bank could be privatised (as per the plan set out in 2001), though only 25.19% of its shares are free-floating at present.

• Established market position, but competition remains intense: With market shares of 9% of loans and 8.3% of deposits, Vakifbank has a strong position in the Turkish banking sector. It is well positioned in almost all the loan segments in which the private commercial banks operate, and is trying to improve its shares in markets like credit cards, where it lags peers. Due to its government links, Vakifbank has a good position in providing services to state enterprises, including cash management, trade finance and payroll services. Like the other large banks in the sector, Vakifbank reported strong loan growth in 2010, at 29%. The bank continues to focus on growth in general-purpose consumer and SME loans. As all Turkish banks aim to grow strongly in these higher-yielding segments to defend margins, competition remains intense. However, the under-banked nature of the sector (40% ratio of loans to GDP) offers growth opportunities.

• Strong deposit base, though loan-to-deposit ratio is rising: Vakifbank’s deposit base is buttressed by a strong contribution from the public sector (30% of deposits). However, deposit growth has not kept pace with strong loan growth – 2010 deposit growth was only c.7%. This has pushed the bank’s loan-to-deposit ratio to a relatively high 94%, and it could hit 100% in 2011, according to management estimates.

• NIM and profitability could face pressure going forward: After Vakifbank’s NIM recovered following steep rate cuts in 2009 (36% of the bank’s deposits mature in less than one month, resulting in deposits repricing faster than loans), NIM declined to 4% in 2010, which is weak compared to peers. NIM could face further pressure going forward if rates start rising. The bank’s expansion plans also continue to put pressure on costs, and provisioning as a proportion of income remains higher than peers.

• Weaker asset-quality metrics than the sector: The bank’s end-2010 NPL ratio of 4.8% was higher than the sector’s 3.6%, but this is because of Vakifbank’s relatively high legacy NPL holdings. Loan-loss coverage improved to c.99% in 2010 as the NPL ratio fell, although the ratio of provisioning costs to pre-provisioning profits remained high, at 40%. We also note that the bank follows a slightly less conservative provisioning policy than the 100% provisioning for NPLs adopted by some competitors. Looking ahead, while the NPL ratio could worsen somewhat as loans season, we do not expect a significant deterioration in asset quality.

• Capitalisation is adequate but not sufficient for strong growth: The bank had a reasonable capital position at end-2010 (13.2% Tier 1 ratio, 14.4% total capital ratio), although weaker than peers’. Basel II implementation could put further downward pressure on these ratios (up to 200bps). The current capital position may not be supportive of strong loan growth unless the bank effectively disposes of non-core and foreclosed assets.


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Türkiye Vakiflar Bankasi (Ba3/Sta; BB/Pos; BB+/Pos)

48


13%

3%

16%

55%

13%

Mortgage

Other consumer

Credit cards

SME

Corporate

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Deposits Debt Repo


2007 2008 2009 2010*Balance sheet (TRY mn) Total assets (USD mn) 37,733 36,008 44,586 47,653 Total assets 44,215 54,542 67,356 73,962 Loans 24,145 31,361 35,124 44,861 Investments 12,468 15,465 22,441 20,197 Total liabilities 38,867 48,609 59,778 65,403 Deposits 29,149 37,714 45,101 47,701 Interbank 0 16 22 0 Debt 5,038 6,103 4,613 6,327 Equity 5,348 5,932 7,579 8,559 Income statement (TRY mn) Net interest income 1,765 2,080 3,186 2,730 Other income 1,375 1,358 1,455 1,396 Total income 3,141 3,438 4,641 4,126 Overheads (1,415) (1,803) (2,070) (1,690)Pre-provision profits (PPP) 1,725 1,635 2,572 2,436 Impairments (456) (641) (1,010) (973)Profit before tax 1,269 995 1,562 1,463 Net income 1,034 810 1,295 1,157 Key ratios (%) Net interest margin 4.5 4.4 5.5 4.0Fee income-to-income 11.5 13.6 9.3 10.7Costs-to-income 45.1 52.4 44.6 41.0Costs-to-average assets 3.4 3.7 3.4 2.4Provisions-to-PPP 26.5 39.2 39.3 40.0ROE 20.6 14.4 19.2 14.3ROA 2.5 1.6 2.1 1.6Impaired loans-to-loans 5.0 4.9 6.2 4.8Loan-loss coverage 100.0 93.9 94.0 98.9Loan-to-deposit 82.8 83.2 77.9 94.0Equity-to-assets 12.1 10.9 11.3 11.6Tier 1 capital 15.4 14.8 14.8 13.2Total capital 14.7 14.1 15.2 14.4

0

3

6

9

12

15

2006 2007 2008 2009 2010

%



0

2

4

6

8


%

90

92

94

96

98

100

%


27%

2%6%4%

61%

CashInterbankInvestment securitiesTotal loansOther


0

3

6

9

12

15


%

0

10

20

30

40

%

Tier 1 capital ratio ROE (RHS)

66%11%

8%

15%

Net interest income

Fees/commissions

Trading

Other income

*2010 data are for bank only (not consolidated) due to unavailability of data; Sources: Company reports, Standard Chartered Research


127

FIN

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LS


Yapi ve Kredi Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos) Analyst: Shilpa Singhal (+65 6596 8259)

49

Credit outlook – stableYapi Kredi’s credit profile is supported by its strong market position, particularly in retail loans and asset management. The bank’s good fundamentals – strong margins and fee income, good accretion and strong capitalisation – support its relatively large operations in riskier loan segments. Like that of its peers, the bank’s liquidity is characterised by large holdings of Turkish government securities and maturity mismatches arising from very short-duration deposits. Strong loan growth has resulted in a loan-to-deposit ratio in excess of 100%. Competition is expected to remain intense, and the bank could face some pressure on profitability. Asset quality is unlikely to improve further. However, strong capital adequacy and a stable economic environment should support the bank’s credit profile in the near term.

Company profile

Yapi ve Kredi Bankasi (Yapi Kredi), founded in 1944, is the fourth-largest private bank in Turkey in terms of assets. It had total assets of TRY 93bn (USD 64bn) and a 9.2% market share of assets as of end-2010, with a network of 868 branches. The bank’s loan book is strong in credit cards, asset management, and leasing and factoring. The Savings and Deposit Insurance Fund took over the bank’s management in 2002 after it faced a crisis. Koçbank (under Koç Financial Services, or KFS) acquired 57.4% of Yapi Kredi in 2005. Following some restructuring, KFS now holds 81.8% of Yapi Kredi. KFS in turn is 50% held by the Austrian subsidiary of UniCredit SpA (UCI, end-2009 assets of EUR 929bn), with the rest held by Koç Holdings (end-2009 assets of USD c.45bn).


• Ownership structure: KFS, the majority shareholder of Yapi Kredi, is equally owned by UCI (A3/Sta; A/Sta; A/Sta) and Koç Holdings (not rated). Koç Holdings is one of the largest and most diversified conglomerates in Turkey, and the financials business remains a key component of the group’s business. Yapi Kredi also benefits from UCI’s pan-European banking expertise, particularly in the areas of operational and risk management, through the presence of UCI officials on Yapi Kredi’s management team.

• Strong market position but intense competition: Yapi Kredi had a more than 10% market share of system loans and an 8.9% share of system deposits as at end- 2010. The bank is Turkey’s largest credit-card lender (in terms of outstanding balance) and is a market leader in factoring (c.23% share) and leasing (c.19% share). The bank is also a leader in many private banking services in Turkey and is ranked second in asset management. However, competition in the sector is intense, as all players are trying to increase their market share in higher-margin retail segments.

• Strong loan growth has taken loan-to-deposit ratio above 100%: After a 2% decline during the crisis in 2009, Yapi Kredi’s loan book grew 36% in 2010. Its loan-to-deposit ratio was the highest among Turkey’s big four private banks, at 106% as of end-2010. We expect the bank, like the sector as a whole, to continue to experience strong growth (management expects 25% in 2011) and more modest deposit growth (19-20%), resulting in a higher loan-to-deposit ratio and a greater dependence on wholesale markets for funding.

• Asset quality is somewhat weaker than peers’: As of end-2010, Yapi Kredi’s NPL ratio was one of the highest among the big four banks (3.4%), and its coverage was the lowest (77%). This is likely due to its focus on loan segments with slightly higher risk-return. The bank also has a less conservative provisioning policy than some peers. Due to the benign economic outlook, the resumption of strong loan growth, and NPL sales and recoveries, the bank’s NPL trend has been improving since 2009. While the 2010 numbers may show a further improvement in line with the sector as a whole, the seasoning of loans going into 2011 could lead to an increase in new NPL formation.

• Potential NIM pressures ahead, but profitability is expected to hold up: The bank has one of the highest NIMs among peers, partly due to its focus on higher-yielding loan segments. After a strong NIM performance in 2009 (as rate cuts caused deposits to reprice faster than loans due to the short maturity of deposits – 46% maturing in less than one month), Yapi Kredi’s NIM declined from 6% in 2009 to 4.7% in 2010. Looking ahead, NIM is expected to come under further pressure, particularly if rates start rising. Despite effective cost management, pressure on NIM and a rise in provisioning costs could pressure the bottom line, although the bank’s overall earnings capacity is expected to hold up.

• Adequate capitalisation: At end-2010, the bank had a strong capital position (11.7% Tier 1 ratio, 15.4% total capital ratio). However, these are the weakest among the big four private banks. Basel II, if implemented in 2011, is likely to have a limited effect on total capital and Tier 1 ratios, with declines of 100-150bps. Despite some pressure on profitability, the bank’s strong margins should support robust asset growth in 2011 without materially impacting capitalisation.


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Yapi ve Kredi Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos)

50


55%

6%2%

10%2%

9%

16%

Mortgage

Consumer vehicle

Other consumer

Credit cards

SME

Corporate

Foreign

Funding mix

0%

25%

50%

75%

100%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Deposits Debt Interbank Repos


2007 2008 2009 2010Balance sheet (TRY mn) Total assets (USD mn) 39,076 48,877 49,472 64,010 Total assets 56,660 70,872 71,734 92,814 Loans 31,428 42,259 41,456 58,490 Investments 13,731 13,955 17,282 18,941 Total liabilities 51,656 64,009 63,248 82,068 Deposits 33,707 44,278 43,375 55,207 Interbank 398 13 47 432 Debt 8,502 11,418 10,329 13,578 Equity 5,004 6,864 8,486 10,746 Income statement (TRY mn) Net interest income 2,473 2,841 3,897 3,582 Other income 2,484 1,960 2,174 3,067 Total income 4,957 4,802 6,071 6,649 Overheads (3,327) (2,560) (2,510) (2,693)Pre-provision profits (PPP) 1,630 2,241 3,561 3,956 Impairments (421) (627) (1,652) (1,162)Profit before tax 1,209 1,614 1,908 2,794 Net income 1,019 1,265 1,553 2,255 Key ratios (%) Net interest margin 4.9 5.0 6.0 4.7Fee income-to-income 31.8 28.9 25.8 26.1Costs-to-income 67.1 53.3 41.3 40.5Costs-to-average assets 5.9 4.0 3.5 3.3Provisions-to-PPP 25.8 28.0 46.4 29.4ROE 22.4 21.3 20.2 23.4ROA 1.8 2.0 2.2 2.7Impaired loans-to-loans 5.8 4.3 6.3 3.4Loan-loss coverage 79.8 63.1 84.5 77.3Loan-to-deposit 93.2 95.4 95.6 105.9Equity-to-assets 8.8 9.7 11.8 11.6Tier 1 capital 10.9 9.7 11.7 11.7Total capital 12.8 14.2 16.5 15.4

0

3

6

9

12

15

2006 2007 2008 2009 2010

%



0

2

4

6

8


%

0

20

40

60

80

100

%


7% 3%

20%

7%

63%

CashInterbankInvestment securitiesTotal loansOther


0

5

10

15

20

25


%

0

5

10

15

20

25

%


54%

26%

20%

Net interest income

Fees/commissions

Other income



129

FIN

AN

CIA

LS


130

FIN

AN

CIA

LS


Credit analysis – Corporates


Abu Dhabi National Energy Company (TAQA) (A3/Sta; A/Sta; NR) Analyst: Simrin Sandhu (+65 6596 6281)

1

Credit outlook – negative TAQA’s value lies in its downstream business, which provides stable, recurring cash flow. Our negative outlook on the credit reflects our concerns regarding TAQA’s oil and gas business segments: (1) earnings volatility arising from exposure to commodity prices, given the company’s relatively high break-even prices; and (2) the potential for the company’s shift towards international oil and gas operations and away from the core domestic electricity and water business to dilute sovereign support. We are encouraged by management’s recent emphasis on consolidating the business, and would consider a reduction in the significance of the oil and gas segments to be credit-positive for TAQA.

Company profile

Through its majority-owned independent water and power producers (IWPPs), Abu Dhabi National Energy Company (TAQA) has a near monopoly in the provision of water and electricity in Abu Dhabi. TAQA is 72.1% owned by the Abu Dhabi government via Abu Dhabi Water and Electricity Authority (ADWEA) and the Farmers’ Fund and is listed in Abu Dhabi, with a market cap of AED 8.78bn as of 3 March 2011. Since 2006, TAQA has made a number of upstream (oil and gas exploration and production) and midstream (gas storage) acquisitions in Europe and North America. In addition, it has bought stakes in downstream assets in Ghana, Morocco, India and Saudi Arabia. In 9M-2010, TAQA reported oil and gas production of 133.7mboe/day and power generation of 42,459 GWh.


• Stability in the downstream business: TAQA’s domestic downstream (power and water) business provides a stable and predictable revenue stream and has helped to offset the volatility of the company’s oil and gas segment in the past few years. Profitability is high, as feedstock for the plants is provided free of cost by ADWEA. On the supply front, full offtake is guaranteed under long-term agreements between the IWPPs and Abu Dhabi Water and Electricity Company (ADWEC), with the latter making arrangements for transmission and distribution.

• Upstream volatility: TAQA’s average daily oil and gas production has increased significantly from 42.5mboe/day in 2007 to 133.7mboe/day in 9M-2010 on the back of acquisitions, particularly in North America. The relatively high breakeven commodity prices of the company’s oil and gas ventures (approximately USD 40-45 per barrel of oil) make TAQA particularly sensitive to low energy prices, as was the case in early 2009.

• Sovereign backing is supportive: TAQA is strategic to the sovereign, given that it controls the entities responsible for the provision of most of the emirate’s electricity and water. In the first public statement of support released by the Abu Dhabi government for its quasi-sovereign entities in March 2010, it acknowledged the important role the company plays in the emirate’s energy policy.

• Management reshuffle holds promise: TAQA has restructured its senior management team over the past two years in a move that is expected to herald a change in the company’s growth strategy. The new management has expressed its intention to focus on the integration and optimisation of its existing portfolio following TAQA’s very rapid growth over the past few years. Going forward, the company intends to move towards a model based on organic growth rather than acquisition-driven growth.

• High leverage, comfortable liquidity: TAQA’s numerous debt-backed acquisitions have resulted in elevated debt levels, with debt/capital of 86% and net debt/EBITDA of 6.4x as of Q3-2010. A significant proportion of debt is located at the downstream subsidiaries, resulting in a fair degree of structural subordination for bondholders. TAQA’s liquidity position is comfortable, with AED 5.7bn in cash and access to over AED 8.4bn in committed unutilised credit facilities as of Q3-2010. In December 2010, the company extended its debt maturity profile by replacing its USD 3.15bn August 2011 credit facility with a USD 3bn revolving multi-tranche facility with tenors of three (USD 2bn) and five (USD 1bn) years.

Power generation (GWh) Oil and gas production (mboe/day)

0

10,000

20,000

30,000

40,000

50,000

60,000

2007 2008 2009 9M-2010

Domestic International

0

25

50

75

100

125

150

2007 2008 2009 9M-2010

TAQA North TAQA Bratani TAQA Energy


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Abu Dhabi National Energy Company (TAQA) (A3/Sta; A/Sta; NR)

2

Summary financials Profitability

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

2007 2008 2009 9M-2010

AED

mn

0

25

50

75

100

%

Revenue EBITDA margin (RHS)

Debt metrics

2007 2008 2009 9M-10

Income statement (AED mn)

Revenue 8,337 16,806 16,855 15,118

Gross profit 3,450 6,674 4,183 4,931

EBITDA 4,469 9,823 7,951 7,654

Gross interest expense (2,498) (3,648) (3,460) (2,909)

Net income 1,376 2,195 773 1,335

Balance sheet (AED mn)

Cash and equivalents 7,601 4,191 4,374 5,691

Total assets 68,870 85,097 91,845 105,289

Total debt 51,689 59,448 62,557 70,944

Net debt 44,088 55,257 58,183 65,253

Equity 8,129 7,747 12,410 11,482

Cash flow (AED mn) Net cash from operating activities 1,375 4,084 4,617 3,660

Net cash from investing activities (17,945) (21,848) (5,515) (3,946)

Net cash from financing activities 8,596 13,243 1,103 1,541

Key ratios

Gross profit margin (%) 41.4 39.7 24.8 32.6

EBITDA margin (%) 53.6 58.4 47.2 50.6

Total debt/capital (%) 86.4 88.5 83.4 86.1

Total debt/EBITDA (x) 11.6 6.1 7.9 7.0*

EBITDA/interest (x) 1.8 2.7 2.3 2.6

Total cash/ST debt (%) 162.7 210.9 97.1 109.2

.

0

25

50

75

100

2007 2008 2009 9M-10

%

0

2

4

6

8

10

12

14

xDebt/capital Debt/EBITDA (RHS)

EBITDA breakdown (9M-10) Debt maturity** (Sep-10)

22%

23%

50%

5%

Oil and gas - NorthAmerica

Oil and gas - UK

Oil and gas -Netherlands

Power and water

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013 2014 >2014

USD

mn

Loans - draw n portion Loans - undraw n portion Bonds

*Annualised; **Excluding downstream subsidiaries; Sources: Company reports, Standard Chartered Research


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Aldar Properties (Ba3/Dev; B/Dev; NR) Analyst: Simrin Sandhu (+65 6596 6281)

3

Credit outlook – negative The liquidity support package for Aldar announced by the Abu Dhabi government in conjunction with Mubadala in early 2011 will materially alleviate near-term refinancing concerns. Following the asset sales to the government and recognition of impairment charges, the company’s balance sheet is likely to be more reflective of fair value. The measures announced also reinforced Aldar’s strong association with the government. However, despite the easing of liquidity pressure, Aldar’s business is likely to continue to underperform at the operating level given the persistent weakness in the UAE real-estate sector. Further, liquidity concerns could resurface over the medium term in the event of a lacklustre recovery in the sector.

Company profile

Aldar Properties was set up by the government of Abu Dhabi in 2005, with a mandate to develop commercial and residential infrastructure in the emirate. The government owns approximately 38% of Aldar (as of Q3-2010; its ownership is set to increase following support measures announced in early 2011) via Mubadala, ADIC and other government-related entities. The company is listed in Abu Dhabi, with a market cap of AED 3.66bn as of 3 March 2011. Aldar operates across real-estate segments, and its portfolio comprises residential, commercial, retail and infrastructure projects. The company sells land to sub-developers in addition to selling completed properties. It is also building out an investment property portfolio with a view to establishing a recurring source of revenue.


• Government to the rescue: In January 2011, Aldar announced a long-awaited framework to address liquidity concerns facing the company. The package included asset transfers and sales to the government (totalling AED 16.4bn), issuance of a convertible bond to Mubadala (AED 2.8bn) and recognition of impairment charges (AED 10.5bn). The announcement allayed market fears that Aldar would not be supported by its largest shareholder, the government. The government’s actions indicated that it is willing and able to extend financial assistance to the company. While equity holders face further dilution from another convertible being issued to Mubadala, debt holders appear to have received a better deal.

• Liquidity pressure eases: Aldar expects to receive cash against approximately 75% of the planned asset sales to the government in 2011, with the balance to be paid in 2012. This, together with the proceeds of the convertible, should see the company through its debt maturities over the next two years (during which period over half of the company’s total debt falls due). However, taking capital expenditure into account, the liquidity cushion is considerably lower.

• A leaner balance sheet: Given impairments and asset sales of AED 26.9bn, Aldar’s fixed-asset base is set to decline considerably (part of which has already been reflected in Q4-2010). The impairment charge is likely to make the balance sheet more reflective of fair value.

• Not out of the woods yet: While the support extended to Aldar is positive from a near-term liquidity standpoint, the company’s business profile is likely to remain under considerable pressure given the weakness of Abu Dhabi’s real-estate sector. In addition, refinancing risks could re-emerge after 2012-13 in the absence of a marked recovery in the sector.

• A semi-quasi-sovereign: Notwithstanding the display of support and the imminent (indirect) majority government ownership of the company, the government’s rhetoric on Aldar remains guarded. In a statement released following the announcement of the asset purchases, the government stated that “This purchase does not signal a change of government policy towards Aldar, nor towards any other commercial enterprise. Government policy remains that broad and ongoing support will be offered exclusively to Mubadala, IPIC, TDIC and TAQA.”

• Long road to investment grade: While an increased government stake in Aldar could result in rating upgrades, we do not expect ratings to return to investment grade (which would require an upgrade of three or more notches) in the near future. Note that the coupon on the ALDAR 2014 (B1/B), which stepped up by 2% as a result of the rating downgrades, will start stepping down if the ratings go back to investment grade.

Ownership structure (Aug-10)

Mubadala*19%

Others62%

Other govt-related7%

NBAD5%

ADIC7%

*Mubadala’s stake has increased to 27.7% post the bond conversion in January 2011


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Aldar Properties (Ba3/Dev; B/Dev; NR)

4


0

2,000

4,000

6,000

2007 2008 2009 2010

AED

mn

0

25

50

75

100

%

Revenue Gross profit margin (RHS)

Debt metrics

2007 2008 2009 2010


Revenue 1,227 4,978 1,979 1,791

Gross profit 560 2,683 437 288

EBITDA 215 2,096 (302) (296)

Gross interest expense (462) (274) (275) (718)

Net income 1,941 3,447 837 (12,658)


Cash and bank balances 7,616 12,066 10,313 2,432

Total assets 22,627 49,767 66,345 47,344

Total debt 10,508 22,591 38,697 32,572

Net debt 2,892 10,525 28,384 30,140

Equity 7,689 16,032 16,801 4,247

Cash flow (AED mn) Net cash from operating activities (1,990) 1,350 (1,056) (2,715)

Net cash from investing activities (5,836) (19,385) (13,485) 1,975

Net cash from financing activities 12,014 16,202 13,978 (1,275)

Key ratios


EBITDA margin (%) 17.5 42.1 NM NM


Total debt/EBITDA (x) 49.0 10.8 NM NM

EBITDA/interest (x) 0.5 7.7 NM NM

Total cash/ST debt (%) 1,006.1 453.1 219.6 16.4

.

0

8,000

16,000

24,000

32,000

40,000

2007 2008 2009 2010

AED

mn

0

25

50

75

100

%Total debt Total cash Total debt/cap. (RHS)

Debt structure (Dec-10) Debt maturity (Dec-10)

Secured51%

Unsecured49%

0

4,000

8,000

12,000

16,000

2011 2012 2013 2014 >2014

AED

mn

loans bonds



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Bahrain Mumtalakat Holding Company (NR; A-/RWN; A-/Neg) Analyst: Simrin Sandhu (+65 6596 6281)

5

Credit outlook – negative We initiate coverage of Mumtalakat with a negative outlook. Our view is based on the company’s relatively weak standalone credit profile and our negative outlook on the Bahrain sovereign (see the ‘Sovereigns’ section). Mumtalakat’s Achilles’ heel has been its ownership of the loss-making Gulf Air. While the airline has been a significant financial drain on the company, the government’s commitment to directly support Gulf Air going forward is a positive development. Apart from Gulf Air, Mumtalakat’s portfolio comprises valuable assets including Alba, Batelco and NBB. However, visibility on the rest of the portfolio is poor. Mumtalakat’s credit profile, although constrained, improved after it termed out its debt maturities via a bond issuance in 2010. Its liquidity was also recently enhanced by receipts from the Alba IPO.

Company profile

Mumtalakat was established by the Bahraini government in 2006 to manage the country’s non-oil and gas businesses. On Mumtalakat’s incorporation, the government transferred its stake in 29 assets to the company. As of end-2009, Mumtalakat had stakes in 35 enterprises across sectors including metals, transportation, telecommunications, real estate and financial services, with a total portfolio value of USD 9bn. The company’s key investments are Alba (an aluminium smelter), Gulf Air (a regional airline), Batelco (a telecom services provider), NBB (a bank) and Edamah (a real-estate developer). Its major international holding is a 42% stake in the McLaren Group. Alba, Batelco and NBB are listed, with a combined market cap of BHD 2.53bn as of 3 March 2011.


• Strong government linkage: Acting on behalf of the Bahraini government, Mumtalakat has been entrusted with the task of managing and enhancing the competitiveness of the country’s strategic state-owned companies. Given the rapid depletion of Bahrain’s oil reserves, the government is keen to diversify the economy into other sectors, and Mumtalakat has a key role to play in this strategy. Accordingly, the government has a close association with the company, with significant influence over the execution of its operations and strategy. Mumtalakat’s board of directors is appointed by the government and is chaired by Bahrain’s finance minister. All key investment and strategic decisions require the government’s blessing, and the company has limited flexibility to act independently of the government.

• Mixed portfolio: Mumtalakat has a vast portfolio across a number of sectors, with limited visibility on a number of its smaller investments. However, close to 85% of its portfolio value is concentrated in six companies: Alba, Gulf Air, Batelco, NBB, Edamah and the McLaren Group. Gulf Air is the weakest of these, with many years of losses behind it. Mumtalakat is undertaking a major restructuring of the airline with a view to increasing its profitability. The only major dividend contributors to Mumtalakat have been Alba, Batelco and NBB, which paid combined dividends of USD 85.4mn in 2008 and USD 151mn in 2009. Mumtalakat’s share in the combined market cap of these three companies was BHD 1.48bn as of 3 March 2011. In general, we believe the company would hesitate to sell large stakes in its strategic assets, limiting their monetisable value.

• Negative sovereign outlook: While we believe the Bahraini government would be willing to extend support to Mumtalakat, the sovereign is in a fairly constrained position given the rapid decline in its oil reserves and relatively high oil breakevens. The reduced fiscal flexibility also makes the country more vulnerable to potential contingent liabilities, including those from the financial sector.

• Financial profile is constrained: Mumtalakat’s financial metrics have been weighed down by years of losses at Gulf Air and the cash injections needed to turn the airline around. However, the pressure should ease following the government’s commitment to support the airline directly. Mumtalakat termed out its debt maturities with the issuance of a USD 750mn bond in the middle of 2010. The company’s liquidity has also improved since it sold 10% of its stake in Alba via an IPO in November 2010 which raised approximately USD 338mn.

Dividends received from key portfolio companies

0

50

100

150

200

250

300

2007 2008 2009

USD

mn

Alba Batelco NBB


136

CO

RP

OR

ATE

S


Bahrain Mumtalakat Holding Company (NR; A-/RWN; A-/Neg)

6


-500

0

500

1,000

1,500

2,000

2,500

2007* 2008 2009 H1-10

BHD

mn

Revenue Net income

Debt metrics

2007* 2008 2009 H1-10

Income statement (BHD mn)

Revenue 1,764 1,448 1,038 582

Gross profit 633 301 50 64

EBITDA 693 299 75 53


Net income 246 (69) (183) 26

Balance sheet (BHD mn)

Cash and bank balances 120 160 118 452

Total assets 5,289 4,883 4,861 5,207

Total debt 896 954 1,148 1,440

Net debt 776 794 1,030 988

Equity 3,044 2,853 2,886 3,053

Cash flow (BHD mn) Net cash from operating activities 396 81 68 34

Net cash from investing activities (257) 4 (158) (13)

Net cash from financing activities (176) (11) (68) 307

Key ratios



Total debt/EBITDA (x) 0.6 3.2 15.2 13.6**

Net debt/EBITDA (x) 0.6 2.7 13.7 9.3**


Total cash/ST debt (%) 29.4 38.7 21.4 NA

.

0

500

1,000

1,500

2,000

2007 2008 2009 H1-10

BHD

mn

0

20

40

60

80

100

%Total debt Total cash Total debt/cap. (RHS)

Debt distribution (Dec-09) Debt maturity (Dec-09)

45%

55%

Parent

Subsidiaries

0

200

400

600

800

2010 2011-2014 >2014

BHD

mn

*From 29-Jun to 31-Dec-2007;**annualised; Sources: Company reports, Standard Chartered Research


137

CO

RP

OR

ATE

S


Dar Al-Arkan (NR; BB-/Sta; NR) Analyst: Simrin Sandhu (+65 6596 6281)

7

Credit outlook – stable Dar Al-Arkan’s competitive strength in Saudi Arabia’s property market and its focus on the undersupplied middle-income housing segment should allow it to capitalise on expected growth in the country’s real-estate sector. The company operates with relatively high margins given its land developer model. However, going forward, margins are expected to come under pressure as it shifts its focus to the build-out of residential and commercial projects. Our key concern is related to the funding requirements for DAAR’s large-scale projects. Given that internal cash flow will likely be insufficient to meet these funding needs, we expect the company to remain active in the debt market, and accordingly, leverage levels are expected to rise.

Company profile Incorporated in 1994, Dar Al-Arkan (DAAR) is a leading real-estate developer in Saudi Arabia’s highly fragmented property sector. DAAR was founded by six Saudi families and was listed on the Saudi stock exchange in 2007 (the founding families continue to own 70% of the company). DAAR’s market cap stood at SAR 7.99bn as of 3 March 2011. Its principal business is land development, i.e., purchasing raw land, undertaking basic infrastructure development and selling the developed land to third-party investors or developers. Land sales have historically accounted for approximately 85% of the company’s revenue. DAAR also undertakes residential and commercial projects targeted at the middle-income segment.


• Supportive sector fundamentals: DAAR is well placed to benefit from the strong long-term prospects of the Saudi real-estate sector. Unlike other parts of the region, where speculative buying by non-nationals has been a key driver of the property market, in Saudi Arabia, domestic demand – driven by a young population, historical undersupply and the likely introduction of a mortgage law – is expected to propel the sector forward. In addition to pure housing demand, real estate is largely considered to be the investment of choice among Saudis given few lucrative alternative investment options.

• Well-located land bank: DAAR’s development activity is confined entirely to Saudi Arabia, and the company’s land bank is centred in the densely populated cities of Jeddah, Riyadh, Dammam, Medina and Mecca. The land bank is valued at cost on the balance sheet, and as of end-2010, it consisted of approximately SAR 3bn of developed land and SAR 10bn of undeveloped or partly developed land.

• Margins to weaken: DAAR’s bread and butter has been its land sales business, where it has a strong track record. Going forward, the company intends to strike more of a balance between revenue from land sales and completed projects. The transition from a heavy reliance on land sales will clearly be negative for margins and profitability. However, it should introduce greater stability and visibility to DAAR’s revenue stream.

• Cash on completion: Sales of property projects in Saudi Arabia take place largely on completion. This differs significantly from other parts of the region, where off-plan sales have been the norm. While receiving close to full payment on completion reduces customer default risk, it also exposes DAAR to considerable market risk, as the developer could end up with a number of completed and unsold properties in its inventory.

• Funding is a concern: Our key concern with DAAR is related to the funding requirements for its large-scale projects (Shams Al-Arous, Qasr Khozam and Shams Ar Riyadh), due to (1) the absence of off-plan sales as a source of pre-funding; (2) the company’s private ownership (while DAAR plays an important role in building the country’s housing infrastructure, there is no visible precedent for financial assistance from the government); (3) the tightening of credit for corporates in Saudi Arabia, especially in light of recent defaults by family-owned conglomerates in the country; (4) high borrowing costs (the company’s last sukuk was issued at a coupon of 10.75% p.a.); and (5) the likely deterioration of debt ratios. The funding issue is exacerbated by the company’s high dividend payouts.

Land sales dominate revenue

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010

SAR

mn

Land sales Sale of residential units


138

CO

RP

OR

ATE

S


Dar Al-Arkan (NR; BB-/Sta; NR)

8


0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010

SAR

mn

0

25

50

75

100

%

Revenue Net income EBITDA margin (RHS)

Coverage ratios (x)

2007 2008 2009 2010*

Income statement (SAR mn)

Revenue 4,926 5,611 5,464 4,142

EBITDA 2,325 2,694 2,361 1,658


Gross profit 2,408 2,845 2,507 1,764

Net income 2,009 2,356 2,123 1,456

Balance sheet (SAR mn)

Cash and equivalents 3,347 716 2,223 1,189

Total assets 18,374 20,164 23,597 23,348

Total debt 6,400 7,635 8,355 7,679

Net debt 3,053 6,919 6,132 6,491

Equity 11,000 11,736 14,124 14,500

Cash flow (SAR mn)

Net cash from operating activities (999) (874) 1,497 1,211

Net cash from investing activities (281) (1,372) (975) (561)

Net cash from financing activities 4,366 (385) 984 (1,685)

Key ratios


EBITDA margin (%) 47.2 48.0 43.2 40.0


Total debt/EBITDA (x) 2.8 2.8 3.5 4.6



0

1

2

3

4

5

2007 2008 2009 20100

4

8

12

16

20

Total debt/EBITDA EBITDA/interest (RHS)

Debt metrics Debt maturity (Dec-10)

0

2,000

4,000

6,000

8,000

10,000

2007 2008 2009 2010

SAR

mn

0

20

40

60

80

100

%

Total debt Total cash Total debt/cap. (RHS)

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013-15

SAR

mn

*SOCPA standards; Sources: Company reports, Standard Chartered Research


139

CO

RP

OR

ATE

S


DIFC Investments (B3/Neg; B+/Neg; NR) Analyst: Simrin Sandhu (+65 6596 6281)

9

Credit outlook – negative We view DIFCI’s standalone credit profile as weak, characterised by an unclear business strategy, high leverage and poor liquidity, all of which are exacerbated by poor disclosure and transparency. While the company’s core business of leasing space within the DIFC has potential, losses on its investment portfolio have had a significant negative impact on its credit profile. The announcement of the proposed business restructuring of DIFCI is a positive development, although it involves considerable execution risk. A successful restructuring, combined with ongoing financial support from its parent (which is likely to be forthcoming given the DIFC’s high-profile mandate), could eventually put the credit on a stronger footing.

Company profile

DIFC (Dubai International Financial Centre) was established by the Dubai government in 2004 with a view to developing the emirate into a leading regional hub for financial services. DIFC is presided over by the deputy ruler of Dubai. DIFC Investments (DIFCI) manages the revenue-generating operations and the physical infrastructure of the DIFC. The company is fully owned by the government, which granted the DIFC 110 acres of land in Dubai on which to build the financial centre. DIFC holds a substantial investment portfolio, which comprised over one-fifth of its assets as of end-2009. It also has a number of subsidiaries across various industries, including Aptec Holdings, Art Dubai, SmartStream Technologies and Despec International.


• Core business has potential: DIFCI’s core property management business is sound and has continued to perform reasonably well, despite the sharp downturn in the Dubai real-estate market. As of end-2010, the number of registered companies in the DIFC increased to 792 from 745 as of H1-2010. Occupancy levels in the Gate District remained strong, at over 95% (although occupancy of other commercial space was much lower, at 44%). Retail space occupancy rose to approximately 71% from 66% as of H1-2010.

• Strategy remains unclear: DIFC-related operations account for a small share of the company’s revenue (23% in 2009), and our concerns are centred on the investment side of the business. Over the years, DIFCI has acquired stakes in companies across a spectrum of industries, ranging from aerospace, asset management, and aviation to luxury retail and printer supplies. Many of these lack synergies with its core business and have negatively impacted the company’s financial performance.

• Asset disposals in the pipeline: In 2010, management announced a USD 1bn asset disposal programme aimed at shedding the company’s non-core assets. If successful and achieved by the stated deadline of 2011, the restructuring will be positive for the credit. However, the plan entails considerable execution risk and will be highly dependent on market conditions.

• Strategic mandate: The DIFC is central to Dubai’s ambitions of cementing its position as an international financial-services centre and the regional gateway for capital and investment. DIFCI is closely tied to the DIFC due to its role in managing the centre’s physical infrastructure. DIFC’s leadership is comprised of senior government officials who maintain a close operational relationship with the company. The government has also provided financial support to DIFCI in the form of loans.

• Refinancing concerns: DIFCI’s ability to service its debt depends on a successful asset disposal programme and ongoing government assistance, which we think will be required to meet both operational and debt-service requirements. To this end, the government has already provided the company with two USD 500mn loans. A successful restructuring, resulting in DIFCI operating a single line of business with a clear strategy would also make it easier for the company to refinance the sukuk (although this would likely be at a significantly higher level than the current coupon of LIBOR+37.5bps).

• Poor transparency: DIFCI reports results annually and we regard its disclosure and transparency as poor relative to peers in the region.

Revenue by segment (2009) Asset breakdown (2009)

Sale of goods76%

Licence and maintenance

revenue9%

Income from investmentproperties

12%

Fee and other income

3%

Others22%

Investmentsin associates

and JVs3%

Investmentproperties

46%

Investmentsecurities

21%

Intangible assets

8%


140

CO

RP

OR

ATE

S


DIFC Investments (B3/Neg; B+/Neg; NR)

10


0

250

500

750

1,000

1,250

1,500

2007 2008 2009

USD

mn

0

25

50

75

100

%


Coverage ratios (x)

2007 2008 2009

Income statement (USD mn)

Revenue 237 1,030 1,044

Gross profit 217 442 245

EBITDA 122 200 86

Gross interest expense (71) (109) (102)

Net income (80) 839 (562)

Balance sheet (USD mn)

Cash and equivalents 367 78 346

Total assets 3,725 4,790 4,336

Total debt 2,175 2,698 3,066

Net debt 1,808 2,621 2,720

Equity 1,111 1,665 820

Cash flow (USD mn)

Net cash from operating activities 92 (142) 244

Net cash from investing activities (965) (498) (268)

Net cash from financing activities 1,110 350 297

Key ratios

EBITDA margin (%) 51.3 19.4 8.3

Total debt/capital (%) 66.2 61.8 78.9

Total debt/EBITDA (x) 17.9 13.5 35.6

Net debt/EBITDA (x) 14.8 13.1 31.6

EBITDA/interest (x) 1.7 1.8 0.8

Total cash/ST debt (%) 115.4 22.4 509.0

.

0

10

20

30

40

2007 2008 20090

1

2

3

4



0

1,000

2,000

3,000

4,000

2007 2008 2009

USD

mn

0

20

40

60

80

100

%


0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014

USD

mn

Government loan Commercial debt*

*Assuming bank debt is amortised over four years; Sources: Company reports, Standard Chartered Research


141

CO

RP

OR

ATE

S


Dolphin Energy (A1/Sta; NR; A+/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

11

Credit outlook – positiveWe like Dolphin Energy on account of its strong credit metrics and short but successful operating history. The project benefits from an attractive combination of fixed-price, long-term contracts with government entities for its gas sales, and low breakeven prices for its by-product sales. Accordingly, cash-flow visibility is good, with a high degree of resilience to volatility in hydrocarbon prices. As one of the GCC’s most high-profile cross-border commercial initiatives, the project has strong support from both the Abu Dhabi and Qatari governments. It has a vital role to play in bridging the gas deficit in its key markets, and we expect stakeholders to remain committed to ensuring the success of the project.

Company profile

The Dolphin project is a cross-border energy project established in 2001 to extract gas from the North Field in Qatar and deliver it to government-owned utility companies in Abu Dhabi, Dubai and Oman. The project is jointly owned by Mubadala (51%), Total (24.5%) and Occidental (24.5%). It started delivering gas in mid-2007 and reached its average daily production rate of 2,000mmscfd in early 2008. The project comprises both upstream and midstream operations which, although legally separate, are integrated for operational and debt-service purposes. In addition to export gas, the project produces substantial quantities of by-products such as condensate, LPG and sulfur, which are sold internationally via Qatar International Petroleum Marketing Company (TASWEEQ).


• Long-term contracts and low breakevens: Approximately 93% of Dolphin’s gas production has been secured by 25-year take-or-pay agreements (at pre-determined prices) with government-owned entities. Contracted gas sales contribute approximately one-third of the project’s revenues and provide a stable and predictable source of income. The balance of export gas is sold under more lucrative short-term interruptible agreements. Condensate and LPG, which are sold at market prices, account for over half of the project’s revenues. The breakeven prices for both condensate and LPG (to achieve a DSCR of 1x) are low (see chart on the next page). Given the combination of fixed-price contracted sales and low-breakeven by-product sales, we believe the project has significant headroom to withstand volatility in hydrocarbon prices.

• Strong regional gas demand: Gas demand in the region is high, particularly in Dolphin’s key markets. Despite Abu Dhabi’s substantial gas reserves, it faces a deficit, as the gas produced in the emirate is primarily used for oil re-injection. Similarly, in Dubai, gas demand is expected to increase at an annual rate of 4.5% until 2025, according to Wood Mackenzie.

• Stakeholder support: The success of the Dolphin project is of key importance to each of the stakeholders involved – Qatar, the sponsors and the offtakers. This project is Mubadala’s flagship venture and its largest source of revenue. Further, as a principal subsidiary of Mubadala, Dolphin cross-defaults into Mubadala debt. Dolphin has strong ties to the Abu Dhabi government (which is required to maintain majority ownership of the project) given that the project supplies approximately 60% of Abu Dhabi’s non-oil-related gas requirements.

• Strong debt-service metrics: Dolphin’s financial metrics are strong, with the base-case DSCR not falling below 2.4x over the life of the debt programme. Cash flow was stress-tested by the project’s independent technical consultants, with scenarios including operating availability of 85%; increases of 20% in operating costs and maintenance capex; and an increase in debt to the maximum permissible amount of USD 5.1bn. Under each of these scenarios, the minimum DSCR does not fall below 1.8x.

• Expansion expenditure: The export pipeline has a capacity of 3,200mmscfd. Expanding operations to accommodate an additional 1,200mmscfd would require further capital investment in the upstream operations. In addition, an amendment or supplement to the Development and Production Sharing Agreement (DPSA) would be required. Additional secured debt is subject to a minimum forecast DSCR of 1.75x.

Volume offtake – Export gas

Interruptible gas supply

agreements7%

Abu Dhabi Water &

Electricity Company

47%

Dubai Supply Authority

36%

Oman Oil Company

10%


142

CO

RP

OR

ATE

S


Dolphin Energy (A1/Sta; NR; A+/Sta)

12

Summary financials* Profitability

0

500

1,000

1,500

2,000

2,500

2007 2008 2009

USD

mn

0

25

50

75

100

%


Coverage ratios (x)

2007 2008 2009


Revenue 380 1,449 1,575

Gross profit 96 581 626

EBITDA 87 590 637


Net income 31 499 547


Cash and bank balances 9 92 129

Total assets 3,925 4,312 4,725

Total debt 3,331 3,450 3,518

Net debt 3,323 3,358 3,390

Equity 243 502 716

Cash flow (USD mn)

Net cash from operating activities (132) 528 532


Net cash from financing activities 321 (186) (201)

Key ratios

Gross profit margin (%) 25.2 40.1 39.8

EBITDA margin (%) 22.8 40.7 40.5




Total cash/ST debt (%) NA 0.0 0.3

.

0

10

20

30

40

50

2007 2008 20090

10

20

30

40

Total Debt/EBITDA EBITDA/interest (RHS)

Condensate base-case vs. breakeven price Base-case projections

0

15

30

45

60

75

90

2009

2011

2013

2015

2017

2019

USD/

bbl

Price used for base-case projectionsBreakeven price

0

500

1,000

1,500

2,000

2,500

2010 2012 2014 2016 2018

USD

mn

0

1

2

3

4

5

x

EBITDA DSCR (RHS)

*Midstream operations; Sources: Company reports, Standard Chartered Research


143

CO

RP

OR

ATE

S


DP World (Ba1/Pos; BB/Sta; NR) Analyst: Simrin Sandhu (+65 6596 6281)

13

Credit outlook – stable DP World is the strongest credit in the Dubai Inc. complex, in our view. The company’s competitive strength is underscored by its well-diversified port portfolio, which is exposed to high-growth emerging markets. While its ownership by Dubai World remains an overhang for the credit, DP World and its creditors have remained ring-fenced so far. On the operational front, the business is doing well, and growth resumed in many of the company’s markets in 2010 after the slowdown in 2009. While liquidity is robust, the company’s significant capacity expansion plans over the next decade are likely to slow the pace of deleveraging. Given the dependence of container traffic on global GDP growth, the key risk to the business would be another macroeconomic shock.

Company profile

Following the multi-billion-dollar acquisitions of CSX World Terminals in 2005 and P&O in 2006, DP World has established itself as one of the world’s largest and most geographically diversified container terminal operators. The company is 80.5% owned by the Dubai government via Dubai World and is listed in Dubai, with a market cap of USD 8.90bn as of 3 March 2011. DP World’s port portfolio comprises 50 terminals across 28 countries with a gross annual capacity of 59.7mn TEU. The company’s flagship facility is its home port of Jebel Ali, the seventh-largest container terminal in the world. In 2010, DP World handled 49.6mn TEU across its ports. The Middle East, Europe and Africa region, where the company operates 25 terminals, accounted for 56% of revenue in H1-2010.


• Strong business fundamentals: DP World is among the world’s most geographically diversified container terminal operators. Large barriers to industry entry, combined with the company’s high-growth portfolio focused on emerging markets, put DP World in a strong competitive position. Unlike many of its competitors, DP World’s cargo is predominantly comprised of origin and destination (O&D) traffic, which allows for more pricing power and lower throughput volatility.

• Volumes pick up: After posting a 6% decline in gross volumes (8% in consolidated volumes) in 2009, DP World is emerging from the global economic slowdown in good shape. Volumes across the company’s port portfolio made an impressive comeback in 2010, with gross throughput of 49.6mn TEU, up 14% from 2009. Consolidated throughput rose 9% to 27.8mn TEU. A focus on keeping costs in check, combined with the improvement in the top line, has allowed DP World to maintain healthy margins, at close to 40% in H1-2010.

• Robust liquidity: While absolute debt levels are high, a substantial part of DP World’s USD 8bn debt is long-dated in nature. The company’s next large debt maturity is a USD 3bn credit facility due in Q4-2012. Liquidity is strong, with approximately USD 2.7bn in cash (as of H1-2010) and USD 1.5bn in expected proceeds from the recently announced sale of 75% of its Australian ports business. The company is expected to use part of these proceeds to reduce its overall indebtedness (a key pre-condition for potential rating upgrades).

• Expansion plans on track: DP World has 11 new development projects underway which could raise gross capacity to more than 92mn TEU (an increase of 54%) over the next 10 years, with about half coming online by 2015. The company anticipates capital expenditure of USD 2.5bn between 2010 and 2012, of which USD 411mn was spent in H1-2010. Barring large acquisitions, operating cash flow and existing liquidity should be adequate to cover capex funding requirements.

• Dubai World risk recedes: Despite concerns about interference from Dubai World (chief among which was the risk of cash being upstreamed), DP World has so far remained ring-fenced from the restructuring at the parent level. However, Dubai World’s 81% ownership of the company remains an overhang given the parent’s weak financial position. We would consider a reduction in the stake (potentially as part of the London listing expected to take place in H1-2011) to be positive for the credit.

Consolidated throughput

0

5

10

15

20

25

30

Middle East, Europeand Africa

Asia-Pacific andIndian subcontinent

Australia andAmericas

Total

mn

TEU

2008 2009 2010


144

CO

RP

OR

ATE

S


DP World (Ba1/Pos; BB/Sta; NR)

14


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 H1-10

USD

mn

0

25

50

75

100

%


Coverage ratios (x)

2007 2008 2009 H1-10


Revenue 2,731 3,283 2,929 1,524

Gross profit 848 1,140 865 445

EBITDA 1,121 1,322 1,066 569


Net income 1150 531 370 219



Total assets 17,190 15,499 18,961 18,502

Total debt 5,902 5,419 7,969 8,043

Net debt 2,843 4,215 5,059 5,365

Equity 8,373 7,173 8,037 7,537

Cash flow (USD mn) Net cash from operating activities 955 1,069 572 487

Net cash from investing activities 4,354 (2,007) (915) (490)

Net cash from financing activities (2,433) (686) 1,963 (190)

Key ratios


EBITDA margin (%) 41.0 40.3 36.4 37.3





.

0

2

4

6

8

10

2007 2008 2009 H1-100

3

6

9

12

15


EBITDA by geography (H1-10) Debt maturity (Jun-10)

18%

17%

65%

Asia Pacific and Indiansubcontinent

Australia and Americas

Middle East, Europe andAfrica

0

1,000

2,000

3,000

4,000

2010 2011 2012 2013 2014 2015 2016 2017 2037

USD

mn

*Annualised; Sources: Company reports, Standard Chartered Research


145

CO

RP

OR

ATE

S


Dubai Electricity and Water Authority (DEWA) (Ba2/Pos; NR; BBB-/Neg) Analyst: Simrin Sandhu (+65 6596 6281)

15

Credit outlook – stable As the monopoly provider of electricity and water to Dubai, DEWA has a fairly defensive business profile. The company’s operating performance has been sound despite the economic downturn in Dubai, and it continues to report strong margins and healthy operating cash flow. After tapping multiple sources of funding in 2010, DEWA has extended its debt maturity profile. Given its strategic role, the company has the strong backing of the Dubai government. Our key concern with DEWA is the capex involved in its expansion programme. While internal cash-flow generation is strong, it will be insufficient to meet the company’s investment requirements. Accordingly, we expect borrowing to remain on an upward trend.

Company profile

Dubai Electricity and Water Authority (DEWA) is the emirate’s monopoly provider of electricity and potable water. As a vertically integrated entity, DEWA is responsible for the generation, transmission, and distribution of electricity and the desalination and supply of water. The company was formed in 1992 and is fully owned by the government of Dubai. DEWA reported installed electricity capacity of 7,829MW and installed desalination capacity of 330MIGD as of 31 August 2010. The electricity segment contributes approximately three-quarters of DEWA’s revenue, with the commercial and residential sectors accounting for approximately 45% and 27% of electricity consumed, respectively.


• Healthy operating performance: DEWA’s financial performance has improved over the past few years, with the company reporting strong margins and healthy operating cash flow. Despite the economic slowdown in Dubai, electricity and water demand in the emirate continues to rise (although the pace of growth has slowed). DEWA’s top line has benefited from a tariff structure revision in 2008 following a decade-long freeze. Meanwhile, the cost of sales has come down sharply from its 2007 peak as subsidised natural gas received from the Dolphin pipeline has replaced more expensive fuel oil as a feedstock.

• Government influence is a double-edged sword: Given the strategic role DEWA plays in the emirate’s development, the government has supported the company in numerous ways, including by providing explicit guarantees for some of its debt obligations. The government maintains close oversight of DEWA through its control of the company’s board. While sovereign backing has clearly benefited DEWA in the past, it could potentially prevent the company from operating on purely commercial terms. For example, DEWA does not have the authority to increase its tariffs (which are among the lowest in the world) without government approval. It is required to purchase natural gas only from a government supplier, Dubai Supply Authority (DUSUP), and this arrangement is based on informal agreements rather than formal contracts.

• Aggressive expansion plans: DEWA intends to increase its installed production capacity for electricity and water by 20% and 40%, respectively, by end-2012; it anticipates that this will enable it to meet demand until 2015. The capital expenditure for this expansion is estimated at AED 26-28bn between 2010-12 (committed capex until 2015 is AED 9.4bn, of which approximately AED 3.3bn had been spent as of H1-2010). While DEWA’s internal cash-flow generation is strong (AED 6.6bn in 2010), it is likely to be insufficient to meet the company’s investment requirements. Accordingly, we expect debt levels to remain on an upward trend. Profitability could also come under pressure in the event that natural gas supplied by DUSUP (at significantly below market rates) falls short of the company’s increased feedstock requirements. DEWA expects supply to be sufficient through 2012.

• Liquidity improves: DEWA raised funding from multiple sources in 2010, including USD 3bn from the bond market. As of end-2010, DEWA’s total debt was AED 31bn, of which AED 6bn was short-term in nature.

DEWA electricity and water sales

0

5,000

10,000

15,000

20,000

25,000

30,000

2007 2008 2009 H1-09 H1-10

'000 M

Wh

0

20

40

60

80

100

'000 M

IG

Electricity Water (RHS)


146

CO

RP

OR

ATE

S


Dubai Electricity and Water Authority (DEWA) (Ba2/Pos; NR; BBB-/Neg)

16


0

3,000

6,000

9,000

12,000

2007 2008 2009 2010

AED

mn

0

25

50

75

100

%


Debt metrics

2007 2008 2009 2010


Revenue 6,123 9,287 10,286 10,869

Gross profit (226) 4,943 5,151 4,972

EBITDA 294 5,563 6,394 6,174

Gross interest expense (583) (578) (886) (1,239)

Net income (744) 4,235 4,468 3,512


Cash and bank balances 111 2,733 1,438 7,848

Total assets 31,760 69,383 82,632 95,758

Total debt 9,655 19,131 23,251 31,078

Net debt 9,544 16,398 21,813 23,230

Equity 12,829 36,214 40,507 44,191

Cash flow (AED mn) Net cash from operating activities (690) 4,081 6,771 6,616


Net cash from financing activities 6,012 9,764 325 8,205

Key ratios

Gross profit margin (%) (3.7) 53.2 50.1 45.7

EBITDA margin (%) 4.8 59.9 62.2 56.8





.

0

12

24

36

48

60

2007 2008 2009 2010

%

0

10

20

30

40

50


Revenue by segment (2010) Debt maturity (Jun-10)

4%

22%

74%

Electricity

Water

Others

0

2,500

5,000

7,500

10,000

<1 year 1-3 years 3-5 years >5 years

AED

mn



147

CO

RP

OR

ATE

S


Dubai Holding Commercial Operations Group (DHCOG) (B2/Neg; NR; B/Neg) Analyst: Simrin Sandhu (+65 6596 6281)

17

Credit outlook – negative DHCOG’s real-estate business has come under severe pressure due to the sharp downturn in Dubai’s property market. Given the continued weak sentiment in the sector, a meaningful recovery appears unlikely in the near term. However, away from its substantial real-estate exposure, the company’s hospitality and telecom assets are of significantly better quality and could be used to raise cash should the company choose to monetise them. With two bond maturities coming up within the next 12 months, the company’s ability to tide over the refinancing depends on successful asset sales. While there remains a risk of contagion from the restructuring of its sister companies, DHCOG has so far been ring-fenced.

Company profile

Dubai Holding Commercial Operations Group (DHCOG) is a real-estate and hospitality company 97.4% owned by the ruler of Dubai. The ruler’s stake is held via Dubai Holding, which, in addition to DHCOG, has a number of financial investments managed by Dubai Holding Investment Group. DHCOG’s business is organised under three subsidiaries: Dubai Properties Group (one of Dubai’s three largest property companies, along with Nakheel and Emaar), Jumeirah Group (owner and operator of hotels under the Jumeirah brand in Dubai and overseas) and TECOM Investments (which manages media, telecom and health-care free zones in Dubai and holds a portfolio of minority stakes in local and international telecom companies).


• Some valuable assets: DHCOG has two key assets which could enable it to raise cash – the Jumeirah Group and its telecom investments (held via TECOM). The Jumeirah Group holds a strong portfolio of hotels and resorts in Dubai, including the Burj Al Arab, Jumeirah Beach Hotel and Jumeirah Emirates Towers. The company also operates two hotels in London and one in New York. DHCOG reported occupancy rates of 73% across its hospitality business in 2009. The company also has a substantial telecom portfolio comprised of minority stakes in telecommunications companies in the UAE (du, Axiom Telecom), Tunisia (Tunisie Telecom), Greece (Forthnet), Europe (Interoute) and Malta (GO), among others. Together, the hospitality and telecom portfolios have significant realisable value. However, the company has not publicly indicated its willingness or a timeframe for monetising these assets.

• Real-estate dominates balance sheet: Apart from the above-mentioned ventures, DHCOG’s operations are dominated by its real-estate business, which accounted for over 90% of assets in 2009. The sharp downturn in Dubai’s real-estate sector has had a significant negative impact on operations, and a meaningful recovery is unlikely in the near term given continued market weakness. Reflecting the pressure on the sector, the company booked impairments of close to AED 19bn on its real-estate portfolio in 2008-09.

• Relatively low debt but large payables: The company’s AED 15bn of debt as of end-2009 comprised AED 10bn in bonds and AED 5bn in bank borrowings. In 2009, DHCOG breached two covenants on its bank borrowings, which were subsequently waived by the lenders. While debt levels are relatively low, with maturities staggered over a number of years, payables (AED 15bn) and project commitments (AED 11bn) represent substantial obligations for the company. DHCOG also faces significant near-term refinancing risk, with upcoming bond maturities of CHF 250mn and USD 500mn in July 2011 and February 2012, respectively.

• Contagion concerns: DHCOG has stated that it is operationally independent from the other companies under the Dubai Holding umbrella, and that it is ring-fenced from the restructuring taking place at those entities. However, we note that there is a precedent for financial relations between DHCOG and its sister companies, with DHCOG having previously invested in funds managed by the latter (which were subsequently impaired).

Ownership structure

100%

Dubai Holding

Dubai Holding COG

Dubai Properties

Group

Dubai Holding Investment Group

Jumeirah Group

Dubai International

CapitalDubai Group

TECOMInvestments

97.4%

Ruler of Dubai


148

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Dubai Holding Commercial Operations Group (DHCOG) (B2/Neg; NR; B/Neg)

18


0

5,000

10,000

15,000

20,000

25,000

2007 2008 2009

AED

mn

0

8

16

24

32

40

%

Rev enue EBITDA margin (RHS)

Debt metrics

2007 2008 2009


Revenue 19,914 13,220 9,500

Gross profit 8,050 5,565 3,309

EBITDA 5,289 2,791 1,733


Net income 13,902 9,822 (23,568)


Cash and equivalents 11,637 2,317 1,706

Total assets 140,113 171,437 124,485

Total debt 15,890 16,349 15,199

Net debt 4,252 14,032 13,493

Equity 29,909 37,062 14,589

Government grants 58,012 63,905 38,241

Cash flow (AED mn)

Net cash from operating activities 19,011 9,964 502

Net cash from investing activities (12,355) (17,444) 766

Net cash from financing activities 481 (1,381) (878)

Key ratios

Gross profit margin (%) 40.4 42.1 34.8

EBITDA margin (%) 26.7 21.1 18.2




Total cash/ST debt (%) 271.8 42.1 54.7

0

12

24

36

48

60

2007 2008 2009

%

0

5

10

15

x

Debt/capital Debt/EBITDA (RHS)

Revenue breakdown (2009) Debt maturity (Dec-09)

7%

21%

10%

11%

38%13%

Property and land sales

Room revenue

Rental income

Food and beverages

Telecom, IT

Others

0

2,500

5,000

7,500

10,000

2010 2011-14 >2014

AED

mn



149

CO

RP

OR

ATE

S


International Petroleum Investment Company (IPIC) (Aa3/Sta; AA/Sta; AA/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

19

Credit outlook – stable We initiate coverage of IPIC with a stable outlook. As a conduit for Abu Dhabi’s investments in the global energy industry, IPIC has strong support from the government. The company has a long history of close links with the sovereign, and while there are no explicit government guarantees for its debt obligations, the government has provided the company with funding on numerous occasions in the past. IPIC’s portfolio of companies is geographically diversified and includes some listed entities, which we believe could be used as potential sources of liquidity should the need arise. On a standalone basis, IPIC’s credit profile is weak, characterised by high leverage and a front-loaded debt maturity profile.

Company profile

International Petroleum Investment Company (IPIC) was set up by the government of Abu Dhabi in 1984 with a mandate to invest globally in energy and energy-related industries. The government continues to own 100% of the company. IPIC holds stakes in over 15 companies across more than 10 countries. Its key holdings include a 100% stake in Nova Chemicals; majority stakes in Ferrostaal, Aabar and Borealis; and minority stakes in OMV, Cosmo Oil and EDP. In February 2011, IPIC made a bid for the outstanding shares of CEPSA, in which it owned a minority stake. IPIC is also undertaking strategic projects in Abu Dhabi, such as the construction of a crude oil pipeline to bypass the Strait of Hormuz and a multi-billion-dollar petrochemical complex (ChemaWEyaat).


• Investing for the government: Under the government’s direction, IPIC is responsible for maintaining Abu Dhabi’s market share in the global hydrocarbon sector, securing end markets for the emirate’s oil, and executing strategic domestic projects. The company also plays a role in fostering diplomatic ties through the projects and investments it undertakes with government entities in the region. IPIC’s board is chaired by a senior member of the ruling family and has four members from the Supreme Petroleum Council and two members from the emirate’s Executive Council. All of the company’s key investments require approval from senior members of the Abu Dhabi government.

• History of government support and funding: Over the past 26 years, IPIC has benefited from multiple equity injections by the government, totalling USD 3.5bn as of H1-2010. The government has pledged another USD 1bn for the company’s investment in QADIC, a joint venture with the State of Qatar. IPIC has never paid dividends to the government. In March 2010, the government released a statement expressing its “full and unconditional” support for IPIC, claiming that the company’s credit risk is indistinguishable from that of the government.

• Portfolio of listed entities: IPIC views itself as a long-term strategic investor, with much of its portfolio dating back to the late 1980s and early 1990s. Many of the companies in which IPIC has minority stakes are listed (and thus reasonably liquid). The combined market value of IPIC’s stakes in CEPSA (before the recent acquisition of outstanding shares), OMV, Cosmo Oil and EDP was approximately USD 8.13bn as of 3 March 2011. As a holding company, IPIC relies on dividend and interest income from its investments. To this end, it seeks to influence dividend policies by maintaining board representation. In 2009, it earned dividend and interest income of USD 345mn (excluding income from Barclays instruments), of which OMV and CEPSA accounted for 53%.

• Significant debt: IPIC’s leverage has increased sharply, in line with its aggressive investment activities over the past few years. Total debt as of H1-2010 was USD 20.6bn (of which parent level debt and Aabar’s debt accounted for 84%), and debt/capital was 59%. The debt maturity profile is front-loaded, with over USD13bn maturing between mid-2011 and 2014.

• Aabar dilutes primary mandate: Optically, IPIC’s ownership of Aabar (whose investments include Daimler, UniCredit and Virgin Galactic) is at odds with its core mandate of investing in hydrocarbon-related sectors.

IPIC’s key investments (as of Jun-10)

Investment Sector Date of initial investment

% ownership Headquarters Public/

private Borealis Petrochemicals 1997 64.0 Austria Private Nova Chemicals Petrochemicals 2009 100.0 Canada Private

Ferrostaal Industrial services 2009 70.0 Germany Private Aabar Diversified investments 2009 86.2 UAE Private

CEPSA Integrated oil and petrochemicals 1988 47.1 Spain Public

OMV Integrated oil and petrochemicals 1994 20.0 Austria Public

Cosmo Oil Refining and marketing 2007 20.8 Japan Public EDP Power 2008 4.1 Portugal Public PARCO Refining and marketing 1995 30.0 Pakistan Private SUMED Oil transportation 1995 15.0 Egypt Private GEM Commercial tankers 2004 30.0 UAE Private


150

CO

RP

OR

ATE

S


International Petroleum Investment Company (IPIC) (Aa3/Sta; AA/Sta; AA/Sta)

20

Summary financials Dividend and interest income versus interest expense*

0

200

400

600

800

2008 2009 H1-10

USD

mn

Dividend and interest income Interest expense

Debt metrics

2007 2008 2009 H1-10


Revenue 19,111 9,852 9,917 7,380

Net income 1,197 49 4,149 414


Cash and bank balances 708 1,958 2,533 2,636

Total assets 20,494 23,268 46,271 48,179

Total debt 3,692 9,730 17,690 20,578

Equity 12,086 10,254 15,318 14,600

Cash flow (USD mn) Net cash from operating activities 1,209 (86) (58) (507)


Net cash from financing activities 269 8,462 5,574 4,652

Key ratios



Unconsolidated numbers (USD mn)

Assets NA 16,480 21,766 21,992

Equity NA 9,745 11,373 12,007

Cash NA 1,534 956 685Dividend and interest income NA 377 647 243

Interest expense NA 134 359 145

.

0

25

50

75

100

2007 2008 2009 H1-10

%

0

20

40

60

xDebt/capital Cash/ST debt (RHS)

Debt distribution (Jun-10) Debt maturity (Jun-10)

47%

37%

7%

9%IPIC

Aabar

Nova Chemicals

Borealis

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

<1 year 1-3 years 3-5 years >5 years

USD

mn

*Unconsolidated; Sources: Company reports, Standard Chartered Research


151

CO

RP

OR

ATE

S


Jebel Ali Free Zone (JAFZ) (B2/Neg; B/Neg; NR) Analyst: Simrin Sandhu (+65 6596 6281)

21

Credit outlook – negative JAFZ has a strong business and a long and well-established track record built on the company’s competitive strengths, such as its strategic location and operating efficiencies. The company has weathered the economic downturn well, with continued demand from tenants to lease space in the free zone. Despite these strengths, we have a negative outlook on JAFZ, based on the significant refinancing risk in 2012. Both the company and its cash-strapped parent, Dubai World, are unlikely to be able to refinance the entire AED 7.5bn sukuk. We believe JAFZ will ultimately have to rely on an external equity infusion in order to make its capital structure more sustainable.

Company profile

Jebel Ali Free Zone Authority (JAFZA) was established in 1985 by a Dubai government decree granting it the power to operate, administer and supervise the Jebel Ali Free Zone. Spread over an area of 48 square km adjacent to the Jebel Ali port and home to over 6,400 companies, the free zone is a major trade and industrial area in Dubai and is the largest of its kind in the region. As part of a 2007 restructuring plan designed to separate the regulatory and day-to-day commercial activities of JAFZA, all revenue-generating operations and associated assets were transferred to a separate entity, JAFZ, fully owned by the Dubai government via Dubai World. JAFZ earns more than 80% of its revenue from leasing land, warehouses, light industrial units, offices and staff accommodation to its tenants.


• Strong operations: JAFZ’s lease-based model provides a relatively stable and predictable revenue stream. Demand for space in the free zone is driven by its strategic location straddling the port, major highways and the new Al Maktoum International Airport. Furthermore, JAFZ has a strong competitive advantage in the region due to its operating efficiencies, physical infrastructure and successful track record exceeding 20 years. Despite Dubai’s economic woes, the company has continued to see net client inflows. Occupancy rates remain reasonably high, with a healthy waiting list of clients.

• Strategically important: JAFZ has a key role to play in establishing Dubai as the region’s trade and logistics hub. Its operations are closely inter-related with the port, and the ultimate objective is to create an integrated logistics hub by seamlessly linking the port and the free zone with the new airport. JAFZ has a significant impact on the local economy – in addition to being a large employer, business in the free zone accounts for a quarter of Dubai’s GDP and 20% of FDI inflows into the UAE.

• Refinancing risk looms: With AED 30mn in cash (at end-2009) and operating cash flow of AED 929mn, JAFZ will clearly be unable to repay the AED 7.5bn 2012 sukuk from internal sources. Refinancing the full amount at at market yields of close to 12% (versus the last coupon of 3.67%) seems improbable, based on 2009 earnings. Furthermore, banks may have limited appetite to take out a bond of this size given the constrained liquidity environment and concerns around Dubai World credit risk. JAFZ has few monetisable assets, as it does not own the land forming part of its facilities in Jebel Ali (the government has provided the land to the company under a 99-year lease). JAFZ would clearly need a substantial equity infusion in order to make its leverage more sustainable.

• Parent overhang: JAFZ’s relationship with the Dubai World group is complex and unpredictable. Historically, the company has upstreamed its cash to the parent for central cash management purposes, leaving very little liquidity at the operating company level. As of end-2009, the Dubai World group owed JAFZ AED 2.1bn. JAFZ has stated that it will no longer upstream cash, and while it impaired part of its receivables in 2009, it expects the remaining amount to be repaid eventually. However, we are less optimistic given the financial difficulties facing Dubai World.

Ownership structure*

* Not exhaustive

Government of Dubai

Ports, Customs and Free Zone Corporation

Dubai Ports Authority

Port and Free Zone World FZE

Dubai World Corporation

Jebel Ali Free Zone Authority

Economic Zones World DP World

JAFZ FZE


152

CO

RP

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Jebel Ali Free Zone (JAFZ) (B2/Neg; B/Neg; NR)

22


0

500

1,000

1,500

2,000

2007 2008 2009

AED

mn

0

25

50

75

100

%


Liquidity

2007* 2008 2009


Lease rental income 71 940 1,052

Revenue 83 1,186 1,253

EBITDA 67 912 902


Net income 9 354 287


Cash and bank balances 29 35 30

Total assets 13,253 13,853 14,632

Total debt 7,500 7,500 7,868

Net debt 7,471 7,465 7,838

Equity 4,773 4,864 5,197

Cash flow (AED mn)

Net cash from operating activities (276) 1,209 929


Net cash from financing activities 367 (407) (82)

Key ratios

EBITDA margin (%) 80.1 76.9 71.5


Total debt/EBITDA (x) NM 8.2 8.7

Net debt/EBITDA (x) NM 8.2 8.7


Total cash/ST debt (%) NM NM 8.0

0

3,000

6,000

9,000

2007 2008 2009

AED

mn

Total debt Due from Dubai World entities

Revenue breakdown (2009) Debt maturity (Dec-09)

84%

9%

7%

Lease rental income

License and registration fee

Administration servicerevenue

0

2,500

5,000

7,500

10,000

2010 2011 2012

AED

mn

*No comparative financials exist for 2007, as JAFZ only commenced operations in Nov-2007 (post-restructuring); Sources: Company reports, Standard Chartered Research


153

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MB Petroleum Services (NR; B+/Sta; BB-/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

23

Credit outlook – stable MBPS is well positioned to benefit from rising demand for oilfield services as oil companies increase exploration and production activity. The company has a strong franchise in Oman, where it is the dominant provider of oilfield services. Over the past 25 years, it has built strong relationships with both national and international oil companies. Although the oilfield services industry is inherently cyclical, we expect MBPS’ operating performance to improve as it extends the tenor of its rig contracts and executes a turnaround at MB Century. While recent bond issuance has eased near-term refinancing risk, MBPS’ free cash flow is likely to remain constrained given its ongoing capex requirements and increased financing costs.

Company profile

MB Petroleum Services (MBPS) is an Oman-based oilfield services company. It is privately owned by the MB Holding Group, which also has interests in oil exploration and production, copper mining, manufacturing and engineering services. MBPS’ primary operations include onshore drilling services, workover services (well maintenance), production services (well testing, etc.) and provision of drilling fluids and geological services. The company operates a fleet of 24 drilling rigs, 44 workover rigs and 74 production service units. While MBPS’ principal area of operations is Oman, it has a presence in 17 other countries. In 2007, the group acquired the drilling business of Downer EDI Resource Holdings (subsequently renamed to MB Century) which has operations in Asia and Australia.


• Competitive strength of Omani operations: MBPS enjoys a strong competitive position in its home market of Oman, where it is one of the largest operators of oilfield services. It is also the country’s only integrated oilfield services operator in what is otherwise a fairly fragmented sector. Barriers to entry are high and include significant initial capital expenditure and availability of skilled local labour in addition to relationships with oil-field operators. MBPS intends to expand its operations into other geographies such as Kuwait, Qatar, Romania and the UAE. It recently signed a MoU with an Iraqi company to pursue business opportunities in Iraq, a market where it anticipates significant demand.

• Strong client relationships: While MBPS’ largest client is Petroleum Development Oman (PDO), it has well-established relationships with a number of other national and international oil companies, including Saudi Aramco, Total SA and ONGC. Close to 63% of MBPS’ 2009 revenue was derived from long-term contracts (of four years or more) with its customers.

• Shareholder support: MB Holding, MBPS’ 100% owner, has provided considerable financial and operational support to MBPS over the years. Management is actively involved in MBPS’ operations and the parent has extended explicit guarantees for MBPS’ debt obligations.

• Commodity play: While growing demand for oil is positive for MBPS (particularly given its expertise with mature fields), the dependence on the commodity cycle exposes the company’s earnings to considerable volatility (for example, in 2009, its average rig utilisation rate fell sharply as oil companies cut back on investment spending).

• Recovery at MB Century is crucial: MB Century posted a loss of USD 20mn in 2009 due to exposure to short-term contracts and a sharp decline in rig utilisation rates. Management is working to increase contract lengths to reduce earnings volatility. MB Century reported positive EBITDA towards the end of 2010, and management expects the subsidiary’s performance to continue to improve over the near term.

• Refinancing pressure eases: The recently issued USD 320mn bond materially reduced near-term refinancing risk by extending MBPS’ debt maturity profile. However, the company has been free cash flow-negative since 2007, reflecting the capital-intensive nature of the oilfield services business. While MBPS’ operating cash flow is likely to improve over the next few years, higher financing costs and ongoing capital expenditure requirements are likely to continue to put pressure on free cash flow.

EBITDA contributions from MB Holding subsidiaries (9M-10)

MBPS revenue by geography (9M-10)

Others2%

UES4%

MBPS25%

Petrogas52%

Mawarid Mining17%

Australia and New Zealand

12%

Europe22%

Middle East60%

Far East and South

Asia6%


154

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MB Petroleum Services (NR; B+/Sta; BB-/Sta)

24


0

100

200

300

400

500

2007 2008 2009 9M-10

USD

mn

0

5

10

15

20

25

30

%


Coverage ratios (x)

2007 2008 2009 9M-10


Revenue 300 315 354 323

EBITDA 68 58 63 49


Profit before tax 23 6 19 2

Net income 19 2 15 0


Cash and bank balances 9 5 10 7

Total assets 336 389 418 589

Total debt 192 230 247 379*

Net debt 183 225 237 372

Equity 65 65 82 83

Cash flow (USD mn)

Net cash from operating activities 45 35 55 (7)

Net cash from investing activities (104) (44) (52) (72)

Net cash from financing activities 55 8 3 73

Key ratios


EBITDA margin (%) 22.7 18.4 17.7 15.3


Total debt/EBITDA (x) 2.8 4.0 3.9 5.8**



0

1

2

3

4

5

6

7

2007 2008 2009 9M-10*0

3

6

9

12

15


Debt metrics Average rig utilisation rates

0

100

200

300

400

500

2007 2008 2009 9M-10

USD

mn

0

20

40

60

80

100

%


30

40

50

60

70

80

90

100

2007 2008 2009 H1-2010

%

Oman Germany MB Century

*MBPS raised a USD 320mn bond in Nov-2010; **annualised; Sources: Company reports, Standard Chartered Research


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Mubadala Development Company (Aa3/Sta; AA/Sta; AA/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

25

Credit outlook – stable Our stable outlook on Mubadala is based on its strong association with the Abu Dhabi government, which has consistently provided explicit support for the company. As the principal entity executing the government’s plan to develop and diversify the domestic economy, Mubadala has strong operational and financial ties with the government. On a standalone basis, Mubadala’s ventures carry significant risks given their exposure to multiple sectors and the nascent nature and heavy investment requirements of the projects. While we expect the company’s credit profile to improve over time as its ventures start generating meaningful returns, over the medium term, we expect the credit to trade primarily as a proxy for Abu Dhabi sovereign risk.

Company profile

Mubadala was established by the government of Abu Dhabi in 2002 to implement its strategy of developing and diversifying the local economy. The company operates through nine business units across a variety of sectors, including oil and gas, real estate and hospitality, infrastructure, aerospace, and health care. In addition to forming new companies, Mubadala makes investments in local and international companies, which are typically long-term in nature and are undertaken with a view to combining financial returns with social development. The company’s flagship projects include Dolphin Energy, Emirates Aluminium, the Masdar project, university campus development projects in Abu Dhabi, and a USD 8bn commercial finance JV with GE.


• Public policy agent: Mubadala’s strong association with the government of Abu Dhabi remains its primary credit-supportive factor. Although it is set up as a corporate, we view Mubadala as a government agency entrusted with the task of reducing Abu Dhabi’s dependence on oil revenues, in line with the government’s policy agenda. Mubadala is chaired by the Crown Prince of Abu Dhabi, and its board comprises five members of the emirate’s Executive Council. The government intends to retain full ownership of the company, as evidenced by the change-of-control clause in the bond documentation.

• Government funding: The Abu Dhabi government has consistently provided explicit financial support for Mubadala. It has been the primary financing source for the company’s ventures, with a cumulative contribution of AED 49.9bn (and 356mn square feet of land) as of June 2010.

• Hydrocarbon prices and equities drive financial performance: While Mubadala’s dependence on hydrocarbon-related revenues has declined as its other business ventures gain momentum, the oil and gas segment (primarily comprised of the Dolphin Project and Pearl Energy) still accounts for a significant share of revenues (36% in H1-2010). Accordingly, commodity prices remain a driver of the company’s top line. On the assets side, the company’s investment portfolio (22% of assets as of June 2010) introduces a significant degree of volatility to earnings.

• Significant capex requirements: Given the nascent nature of a large number of its projects, Mubadala has large capex requirements. Its average annual capital and investment expenditure was AED 15.8bn in 2007-09, and the company anticipates a similar number for 2010 (excluding opportunistic acquisitions). Committed capital and investment expenditure was close to AED 40bn H1-2010.

• Debt on the upswing: While total debt escalated sharply to AED 27.2bn in H1-2010 from AED 10.2bn at end-2008, Mubadala’s gearing remains moderate, with a debt/capital ratio of 37%. In 2010, the company closed a USD 2.5bn revolving credit facility (to refinance a USD 2bn corporate revolver), established a Euro Commercial Paper (ECP) programme, and issued its first bond in the Asian markets (SGD 25mn). Mubadala reported a cash balance of AED 5.6bn as of H1-2010, which comfortably covers short-term debt maturities of AED 2.67bn. Going forward, we expect borrowing to remain on an upward trend given the company’s ambitious investment programme (although the government will likely continue to be the main source of funding).

Revenue from goods and services (H1-10)

Government contribution to Mubadala

Others7%

Hydrocarbons36%

Aircraft maintenance and repairs

31%

Service concession

revenue26%

0

10,000

20,000

30,000

40,000

50,000

60,000

2004 2005 2006 2007 2008 2009 H1-10

AED

mn

Govt. capital contributionCumulative govt. capital contribution


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Mubadala Development Company (Aa3/Sta; AA/Sta; AA/Sta)

26


-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

2007 2008 2009 H1-10

AED

mn

Revenue from goods and services Net income

Debt metrics

2007 2008 2009 H1-10

Income statement (AED mn) Revenue from sale of goods and services 1,789 6,661 13,093 8,016

Cost of sales of goods and services (907) (3,422) (8,399) (5,677)

Gross interest expense (546) (691) (1,153) (826)

Net income 1,332 (11,767) 4,649 (1,508)

Total comprehensive income NA (19,806) (8,612) (4,549)



Total assets 39,246 50,441 88,466 86,134

Total debt 12,294 10,199 27,104 27,188

Net debt 11,204 7,179 15,328 21,561

Equity 25,753 31,325 48,975 46,593

Cash flow (AED mn) Net cash from operating activities (841) 169 (1,543) (1,534)



Key ratios


Operating cash flow/interest expense 0.2 4.9 2.0 1.9


.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2007 2008 2009 H1-10

AED

mn

0

10

20

30

40

50

60

%Total debt Cash Debt/capital (RHS)

Debt distribution (Jun-10) Debt maturity (Jun-10)

48%

28%

24%

Unsecured bank loans

Secured bank loans

Bonds (unsecured)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2029

AED

mn



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Nakilat Inc. (Aa3/Sta; AA-/Sta; A+/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

27

Credit outlook – stable Nakilat benefits from long-term agreements for the charter of its ships by Qatari LNG producers RasGas and Qatargas. As the entity responsible for transporting Qatar’s LNG around the world, Nakilat plays a crucial role in the country’s LNG value chain. Accordingly, we expect strong sovereign support for the credit. With the completion of its vessel delivery programme in 2010, Nakilat is well placed to reap the benefits of its heavy investment over the past few years. We therefore expect leverage, which is currently high, to be on a declining trend. The key risks to Nakilat are potential disruptions to its shipping routes caused by geopolitical events or prolonged technical failure at the LNG producers.

Company profile

Nakilat Inc. (Nakilat) was incorporated in 2006 to acquire and operate a fleet of LNG tankers to transport natural gas produced by Qatar’s gas companies – RasGas and Qatargas. Nakilat is a wholly owned subsidiary of Qatar Gas Transport Company (QGTC), which is 50% owned by Qatari government-related entities. In addition to Nakilat’s 25 wholly owned vessels, QGTC jointly owns another 29 LNG carriers. Nakilat’s fleet comprises Q-Flex and Q-Max vessels, which are the largest and most advanced LNG carriers in the world. Delivery of all 25 vessels, which were built by Korean shipyards, has been completed. One of these vessels has been chartered by RasGas 3, while the rest have been chartered by Qatargas 2, 3 and 4.


• Long-term charter agreements: Nakilat’s revenue is underpinned by 25-year charter agreements with Qatari LNG producers Qatargas and RasGas, lending considerable stability and predictability to the company’s earnings. While it could be argued that Nakilat is exposed to customer concentration, the charterers themselves are strong credits and have entered into long-term take-or-pay agreements with their customers for the supply of LNG.

• Improving operating performance: Nakilat has reported consistently improving numbers in the past few years, in line with the completion of its vessel delivery programme and the subsequent deployment of its fleet. Revenue from its wholly owned vessels more than doubled y/y during 9M-2010 to QAR 1.98bn. Coverage ratios remain strong, with an average DSCR of 1.43x for senior debt and 1.26x for total debt, according to S&P.

• Priority in cash-flow waterfall: Under the vessel charterers’ cash-flow waterfall structure, payments to Nakilat for the charter of ships rank senior to the charterers’ own debt service. Thus, Nakilat bondholders effectively get paid before RasGas and Qatargas make payments to their own debt holders, assuming contractual obligations are met.

• Limitations on indebtedness: Nakilat’s bonds are secured by first and second lien interests in the LNG vessels. Further debt to finance the construction of new vessels can be raised only if a charter agreement is secured with an approved charterer. Additional debt must also meet the DSCR test of 1.25x for senior debt and 1.7x for subordinate debt.

• High but declining leverage: The total funding requirement for Nakilat’s fleet of 25 vessels was USD 7.5bn, of which 90% was debt-financed (raised through a combination of loans, bonds and ECA financing). Although the absolute level of debt is high, cash flow should be able to support the amortisation schedule of the debt (however, the company does have large repayments of USD 1bn in 2019 and USD 2.2bn in 2025 that will need to be refinanced). We do not anticipate material capital expenditure going forward given the completion of the vessel delivery programme.

• Qatari government support: Nakilat has a critical role to play in delivering Qatar’s largest source of earnings, natural gas (all of which has to be transported by tankers), to customers across the world. The government is keen to maintain control over the entire LNG value chain in Qatar. Accordingly, we expect strong government support for the company.

Project structure

Finance parties

Qatar Gas Transport Company (Parent)

RefundGuarantors

STASCONakilat Inc.(Issuer)

Refund guarantees

Shipbuilders(Hyundai, Samsung, Daewoo)

Charterers(RasGas, Qatargas)

Vessel owners (Guarantor)

Shipbuilding contracts Time Charters

Master Services Agreement

Purchaser’s guarantee Deeds of Guarantee


158

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Nakilat Inc. (Aa3/Sta; AA-/Sta; A+/Sta)

28

Summary financials (Qatar Gas Transport Company) Profitability

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 9M-10

QAR

mn

0

25

50

75

100

%

Revenue from wholly owned vessels Gross profit margin (RHS)

Debt metrics

2007 2008 2009 9M-10

Income statement (QAR mn) Revenue from wholly owned vessels 0 29 1,494 1,988

Share of operating profit from JVs 15 119 281 180

Gross profit on wholly owned vessels 0 16 981 1,273

EBITDA 6 129 1,540 1,818

Net income 90 130 588 502

Balance sheet (QAR mn)


Total assets 15,998 24,478 31,249 32,337

Total debt 10,077 19,232 25,015 25,821

Net debt 7,602 17,241 23,236 23,298

Equity* 5,813 5,915 6,519 6,740

Cash flow (QAR mn) Net cash from operating activities (404) (770) 40 886

Net cash from investing activities (6,120) (9,505) (6,022) (682)

Net cash from financing activities 5,096 10,468 5,782 530

Key ratios Gross profit margin on wholly owned vessels (%) NA 56.7 65.7 64.0


Total debt/EBITDA (x) 1,569.0 149.2 16.2 10.7**

EBITDA/interest (x) NA 11.0 2.2 1.9

Total cash/ST debt (%) NA 17.3 3.9 3.1

0

25

50

75

100

2008 2009 9M-10

%

0

2

4

6

8

10

xDebt/capital EBITDA/Int (RHS)

QGTC ownership structure QGTC debt (Jun-10)

15%

50%15%

7%

5%4%4%

Qatar Shipping Co.

Qatar Navigation Co.

Qatar Pension Fund

Qatar Petroleum

Qatar Foundation Fund

Other govt. entities

Public

Debt Amount (QAR mn) Maturity

Senior bank facilities 14,344 2010-25

Subordinated bank facilities 1,526 2010-25

Senior bonds 3,095 2021-33

Subordinated bonds 1,092 2010-33

KEXIM facility 1,662 2009-20

KEIC covered facility 2,387 2009-21

Loan 1,803 NA

Total 25,909

*Before hedge reserve;**annualised; Sources: Company reports, Standard Chartered Research


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Qatar Telecom (Qtel) (A2/Sta; A/Sta; A+/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

29

Credit outlook – stable Qtel’s portfolio offers an attractive mix of high-margin developed-market assets and emerging-market assets with attractive growth opportunities. The company has successfully leveraged its strong association with the Qatar government in executing its international expansion programme. Qtel continues to report strong operating performance and healthy margins, although competitive pressure is building rapidly in both domestic and international markets. Following the bond issuance at the end of 2010, Qtel has substantial cash at its disposal, and large acquisitions remain a risk given the company’s aggressive growth strategy.

Company profile

From its origins as Qatar’s incumbent telecommunications provider, Qatar Telecom (Qtel) has grown within five years into an international telecom group with operations in 16 countries. Qtel aims to be among the world’s top 20 telecom companies by 2020. To this end, it has made a number of acquisitions, mostly concentrated in MENA and South East Asia. Its largest purchases have been stakes in Indosat (Indonesia), Wataniya (Kuwait) and Asiacell (Iraq). As of end-2010, Qtel’s subscriber base stood at 74mn (of which the company’s proportionate interest was 42mn). Qatar, Indonesia, Iraq and Kuwait accounted for 78% of Qtel’s 2010 revenue. The company is 68% indirectly owned by the Qatari government and is listed in Qatar, with a market cap of QAR 20.83bn as of 3 March 2011.


• Attractive portfolio: After a series of international acquisitions over the past few years, Qtel has gained exposure to both relatively mature markets (such as Qatar and Kuwait) and high-growth emerging markets (such as Indonesia and Iraq). While the mature markets are a source of high and stable cash flow, the emerging markets are characterised by large populations and low mobile penetration rates, offering significant growth opportunities. Qtel holds strong market positions in most of its geographies. It is the largest operator in Qatar and the second-largest in Kuwait, Indonesia, Iraq and Oman.

• Strong financial performance in the face of growing competition: Qtel continues to report strong numbers. 2010 revenue and EBITDA rose by about 12%, with Qatar, Iraq, Indonesia and Kuwait together accounting for 87% of the group’s EBITDA. While margins have been declining (in line with industry trends, and also due to the company’s foray into more competitive markets), they remain healthy, at close to 46%. Qtel is facing growing competition, particularly in its home market of Qatar following the entry of Vodafone in 2009 (which has already gained a market share of about 25%). EBITDA in Qatar declined 13% in 2010 versus a 5% fall in revenue.

• Liquidity improves, acquisitions remain a risk: In 2010, Qtel tapped both the bond and loan markets. It raised USD 2.75bn in bonds to help refinance the USD 3bn syndicated loan maturing in 2012 and closed a USD 2bn revolving credit facility to replace a forward start facility which was due to mature in 2011. While refinancing risks have receded, the considerable cash on its balance sheet (over USD 7bn as of end-2010) is likely to be deployed for further acquisitions, delaying meaningful deleveraging.

• Debt metrics are weaker at parent level: While leverage at the group level is moderate, and net debt/EBITDA at 1.6x is well within the board-approved range of 2.5-3x, the ratio is considerably higher (over 10x) at the parent level, where most of the borrowing has been undertaken. Qtel is also subject to cross-default clauses in its loan documentation from Indosat.

• Sovereign backing: Qtel’s association with the Qatari government (whose golden share gives it the exclusive right to appoint and remove five of the 10 board members, as well as the right to veto and reverse certain decisions) is supportive of the credit. It is particularly useful when dealing with the political aspects of the company’s international expansion.

EBITDA by geography (2010) Blended ARPU by geography

Others1%

Algeria7%Oman

8%

Kuwait10%

Indonesia31%

Qatar22%

Iraq21%

Qatar

Kuwait

Indonesia

Iraq

Oman

Algeria

0

10

20

30

40

50

Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10

USD


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Qatar Telecom (Qtel) (A2/Sta; A/Sta; A+/Sta)

30


0

5,000

10,000

15,000

20,000

25,000

30,000

2007 2008 2009 2010

QAR

mn

0

25

50

75

100

%


Debt metrics

2007 2008 2009 2010

Income statement (QAR mn)

Revenue 10,543 20,319 24,025 27,179

EBITDA 4,925 9,591 11,231 12,594

Gross interest expense (975) (1,560) (1,808) (2,203)

Profit before tax 1,824 3,119 4,546 4,633

Net income 1,878 2,928 3,929 4,088

Balance sheet (QAR mn)


Total assets 47,275 73,150 84,961 101,399

Total debt 21,625 27,975 35,683 46,262

Net debt 18,375 20,130 24,171 20,686

Equity 16,517 26,938 29,454 34,227

Cash flow (QAR mn) Net cash from operating activities 6,522 5,598 9,968 10,195



Key ratios

EBITDA margin (%) 46.7 47.2 46.7 46.3



Net debt/EBITDA (x) 3.7 2.1 2.2 1.6


Total cash/ST debt (%) 450.7 100.3 610.9 1,015.4

.

0

25

50

75

100

2007 2008 2009 2010

%

0

2

4

6

8

10


Debt distribution (Dec-10) Debt maturity* (Dec-10)

72%

21%

7%

Qatar

Indonesia

Others

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013 2014 2015 >2015

USD

mn

Loans Bonds

*Qtel Q.S.C only; Sources: Company reports, Standard Chartered Research


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Saudi Basic Industries Corporation (SABIC) (A1/Sta; A+/Sta; A+/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

31

Credit outlook – stable We initiate coverage on SABIC with a stable outlook. SABIC is one of the strongest credits in the GCC on a stand-alone basis. The company has a substantial cost advantage over its competitors, largely on account of heavily subsidised feedstock prices. Accordingly, SABIC’s margins are well above those of other global petrochemical majors, and the company is more resilient to downturns in the industry, which is cyclical by nature. Credit metrics are strong, with relatively low leverage on account of robust internal cash-flow generation. SABIC also enjoys strong government support due to the important role it plays in the local economy. The key risk facing SABIC, in addition to industry cyclicality, is the potential scarcity of feedstock provided by Saudi Aramco, particularly in light of new capacity coming on-stream.

Company profile

Saudi Basic Industries Corporation (SABIC) is among the world’s largest petrochemical companies. It is 70% owned by the government of Saudi Arabia via the Public Investment Fund and is listed in Saudi Arabia with a market cap of SAR 255.75bn (as of 3 March 2011). The company has manufacturing and compounding facilities in 25 countries across the Middle East, Asia, Europe and the Americas, with 17 manufacturing facilities in Saudi Arabia. The company’s product suite includes basic chemicals, performance chemicals, polymers, specialty plastics, fertilisers and metals. SABIC aims to be the world leader in chemicals and is seeking to diversify its product range into higher-value specialty chemicals, with the target of generating 20% of its revenues from specialty chemicals by 2020.


• Middle Eastern behemoth: With an asset base of more than SAR 317bn, SABIC is the largest non-oil company in the Middle East. Over the past few years, the company has made a number of international acquisitions in order to broaden its product and customer base, including DSM in Europe, Huntsman Petrochemicals of the UK and GE Plastics. Today, SABIC is among the world’s largest petrochemical companies, and it enjoys a market-leading position in a number of products. The company is in the process of significantly ramping up domestic production, with new capacity recently added at Yansab (4mtpa) and SHARQ (3mtpa) while Saudi Kayan (6mtpa) is expected to come on-stream in 2011.

• Huge cost advantage: SABIC has posted margins well above its peers’ (average EBITDA margin of 33% from 2007-10), thanks to its access to fixed-price, low-cost feedstock under long-term agreements with government-owned oil company Saudi Aramco, combined with economies of scale. Saudi Aramco supplies SABIC with ethane at a price of USD 0.75 per MBTU, which has been fixed since 1999 and is significantly lower than the prevailing market prices paid by the company’s competitors.

• Solid financial metrics: After coming under some pressure in 2009, SABIC’s financial metrics rebounded strongly in 2010, with revenue and EBITDA rising by 47% and 57%, respectively. Strong cash-flow generation has historically kept SABIC’s borrowing requirements relatively low, despite aggressive capex and high dividend payouts. While leverage has risen over the past few years on account of acquisitions and the company’s investment programme, it remains at fairly modest levels (net debt/EBITDA of 1.2x as of end-2010). SABIC has sufficient liquidity, with its SAR 51bn cash balance comfortably covering debt maturing over the next few years.

• Strategic state asset: SABIC is a key contributor to Saudi Arabia’s economy and is also among the largest employers in the country. Five of the company’s seven board members (including the chairman) are appointed by the government. In addition to providing heavily subsidised feedstock, the government has extended long-term funding to the company via loans from state-owned entities.

• Industry cyclicality: SABIC is exposed to volatility on account of the cyclical nature of the petrochemical industry. However, we believe that the company is better placed to ride out industry cycles than its competitors, as was evident in its 2009 performance. With new capacity coming on-stream, a bigger concern for SABIC going forward will be to maintain its competitive advantage given the scarcity of cheap feedstock (ethane).

Annual production volumes (mtpa) Production breakdown (2009)

0

20

40

60

80

1985

1990

1995

2000

2005

2008

2009

Fertilizers10%

Polymers15%

Chemicals65%

Metals8%

Innovativeplastics

2%


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Saudi Basic Industries Corporation (SABIC) (A1/Sta; A+/Sta; A+/Sta)

32


0

50,000

100,000

150,000

200,000

2007 2008 2009 2010

SAR

mn

0

25

50

75

100

%


Coverage ratios (x)

2007 2008 2009 2010

Income statement (SAR mn)

Revenue 126,204 150,810 103,062 151,711

EBITDA 48,653 48,142 30,758 48,226

EBIT 41,047 38,090 19,986 37,832

Gross interest expense (2,869) (3,801) (3,026) (3,382)

Net income 27,022 22,030 9,074 21,585

Balance sheet (SAR mn)


Total assets 253,731 271,760 296,861 317,214

Total debt 80,109 92,656 107,015 110,652

Net debt 34,232 41,629 50,637 60,007

Equity 134,496 146,642 152,630 166,181

Cash flow (SAR mn) Net cash from operating activities 46,655 46,230 26,012 30,489


Net cash from financing activities 33,521 (11,272) 3,973 (16,083)

Key ratios

EBITDA margin (%) 38.6 31.9 29.8 31.8



Net debt/EBITDA (x) 0.7 0.9 1.6 1.2


Total cash/ST debt (%) 982.1 1,189.8 870.4 304.7

.

0

1

2

3

4

5

2007 2008 2009 20100

4

8

12

16

20



0

25,000

50,000

75,000

100,000

125,000

150,000

2007 2008 2009 2010

SAR

mn

0

20

40

60

80

100

%


0

15,000

30,000

45,000

60,000

2010 2011 2012 2013 2014 >2014

SAR

mn



163

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Tourism Development and Investment Company (TDIC) (A1/Sta; AA/Sta; AA/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

33

Credit outlook – stable TDIC’s strong association with the Abu Dhabi government is its primary source of credit support, given its otherwise poor standalone metrics. Because a large number of TDIC’s projects are non-commercial in nature and are consequently not sources of strong cash flow, we expect the company to continue to rely heavily on the government for funding. The most significant risk to the business is a reduction in the government’s commitment to the tourism agenda.

Company profile

Tourism Development & Investment Company (TDIC) was set up by the government of Abu Dhabi in 2005 to implement its strategy of diversifying the domestic economy through tourism. It is fully owned by the government via the Abu Dhabi Tourism Authority (ADTA). The company is developing multiple projects in and around Abu Dhabi at an estimated cost of USD 34bn. TDIC’s focus on cultural and high-end tourism differentiates it from developers in other parts of the region. Its flagship projects are Saadiyat Island (a 27 sq km island off the coast of Abu Dhabi) and the Desert Islands (a group of seven islands approximately 200km west of Abu Dhabi island), which together account for 87% of capital costs.


• Fulfilling the government’s tourism goals: The Abu Dhabi government has identified tourism as a key sector in its economic diversification strategy (as outlined in ‘The Abu Dhabi Economic Vision 2030’). TDIC is the chief vehicle for the execution of the government’s tourism development agenda. TDIC does not source projects on its own – each one is mandated by the government and built by the company on the government’s behalf. The company maintains close working links with the government, and its five-member board of directors comprises senior officials from the Abu Dhabi government and related entities. It is chaired by Sheikh Sultan Bin Tahnoon Al Nahyan, who is chairman of the Abu Dhabi Tourism Authority (ADTA) and is a member of the Executive Council, the emirate’s highest executive authority.

• Government funding: Although TDIC has recently tapped commercial borrowing sources, its primary source of funding is and will remain the government. Financial assistance from the government has come in the form of land contributions, monetary grants and soft loans.

• Sustainability in absence of government support is questionable: TDIC’s ability to generate strong cash flow is limited, given the non-commercial nature of a large number of its projects (such as the museums). The company has been loss-making since inception, and we expect this to remain the case for the next few years. Accordingly, we do not believe the company will find it difficult to service its debt obligations in the absence of continuing government assistance.

• Ambitious projections: TDIC’s projects are being built on the assumption that tourist inflows to Abu Dhabi will increase to 3.3mn visitors per year by 2013 and to 4.9mn by 2020. If these ambitious targets are not met, and if the government’s commitment to using tourism as a channel for economic diversification consequently weakens, TDIC’s business could be adversely affected.

• Large capex requirements: Given TDIC’s project pipeline, it has substantial funding requirements, of which approximately 25-30% will likely be met via commercial borrowings. The company has significant headroom to increase leverage, given its targeted maximum debt/equity ratio of 1:1 (this stood at 0.5:1 as of H1-2010). We expect debt levels to maintain an upward trend.

TDIC’s key developments

Project Infrastructure Culture Hospitality Residential Commercial/Mixed-use

Saadiyat Island

Saadiyat Island Infrastructure

-Louvre Abu Dhabi -Guggenheim Abu Dhabi -Zayed National Museum

-Gary Player Golf Course and Academy -St. Regis Resort

- Saadiyat Marina SM4-11 - Saadiyat Beach Villas and Apartments - Saadiyat Construction Village

- Cultural District Souk and Canal

Desert Islands

Desert Islands Infrastructure Sir Bani Yas

Lodges

Sir Bani Yas Royal Bay Residences

Others Hodariyat Crossing

U.A.E. Military Museum

-Qasr Al Ain Palace Hotel -Abu Dhabi Golf Club -Angsana Resort and Spa Eastern Mangroves

TDIC/ADTA Headquarters


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Tourism Development and Investment Company (TDIC) (A1/Sta; AA/Sta; AA/Sta)

34


-800

-600

-400

-200

0

200

400

600

800

2007 2008 2009 H1-10

AED

mn

Revenue EBITDA

Debt metrics

2007 2008 2009 H1-10


Revenue 27 436 235 102

Gross profit 16 (33) 32 44

EBITDA (35) (271) (463) (272)


Net income (32) (369) (551) (534)


Cash and bank balances 1,232 920 4,371 2,109

Total assets 20,396 26,373 37,014 36,628

Total debt 1,925 2,863 9,437 8,939

Net debt 693 1,943 5,066 6,831

Equity 17,596 18,287 17,824 17,290

Cash flow (AED mn) Net cash from operating activities (1,046) (494) (2,818) (552)

Net cash from investing activities 23 (2,518) (6,759) (1,394)

Net cash from financing activities 1,969 2,763 11,025 (146)

Key ratios

Gross profit margin (%) 61.3 NM 13.5 42.7

EBITDA margin (%) NM NM NM NM


Total debt/EBITDA (x) NM NM NM NM

EBITDA/interest (x) NM NM NM NM


.

0

3,000

6,000

9,000

12,000

2007 2008 2009 H1-100

20

40

60

80

100

AED

mn

%


Revenue by segment (H1-10) Debt maturity (Dec-09)

37%

35%

28% Propertydevelopment andland sales

Hospitality

Leisure

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013 2014

AED

mn



165

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Yüksel n aat (B1/Sta; NR; B/Sta) Analyst: Simrin Sandhu (+65 6596 6281)

35

Credit outlook – stable With a successful track record of 47 years, Yüksel has a well-established presence in the infrastructure construction industry in Turkey and in regional markets. Its target markets offer good growth opportunities, with considerable infrastructure spending being undertaken on the back of hydrocarbon-related earnings. Yüksel’s client base largely comprises governments and government-related entities, reducing counterparty risk. The company’s earnings have been volatile in recent years due to industry cyclicality and rising competition. While the recently issued USD 200mn bond has helped to extend its debt maturity profile (which was previously front-loaded), free cash flow remains constrained.

Company profile

Yüksel n aat A. . (Yüksel) is a Turkish construction company specialising in infrastructure projects, both within Turkey and internationally (primarily across the MENA and CIS regions). Yüksel undertakes various types of infrastructure projects, including roads, motorways, highways, bridges, dams, piers, ports, airports and hydroelectric power plants. Its current international construction sites are located in Saudi Arabia, Qatar, Iraq, Afghanistan, Libya, Jordan and Uzbekistan. The company was established in Ankara in 1963 and is privately owned by two Turkish families (Sazak and Sert). Based on 2009 revenue, Yüksel is the 10th-largest contractor in Turkey.


• Government-focused client base reduces counterparty risk: Given the strategic nature of the projects undertaken by Yüksel, its client base is primarily comprised of government-related entities. As of 30 June 2010, 81% of the company’s completed projects (measured by Yüksel’s share of the contract value) and 84% of its order book had been awarded by government entities. Some of Yüksel’s key government clients include Saudi Arabia’s Saline Water Conversion Corporation (SWCC), the Qatari Public Works Authority, the US government and NATO (in Afghanistan and Iraq).

• Good track record: Yüksel has built a strong reputation over the past 47 years by successfully completing large and complex projects across a variety of sectors. With respect to financial performance, the company’s top line has been relatively healthy, with revenue on an upward trend since 2007. Profitability, however, has been more volatile – EBITDA margin declined from 12% in 2007 to 6% in 2008 before recovering to 9% in 2009.

• Exposure to high-growth markets: Yüksel’s revenue streams are geographically diversified, and most of the international markets in which the company is active have strong growth prospects based on hydrocarbon wealth and post-war reconstruction work.

• Highly competitive, cyclical industry: The construction industry is characterised by relatively low barriers to entry, high levels of competition and, accordingly, low margins. Yüksel faces competition from a number of market participants, ranging from large multinational construction companies to local construction firms. Many of Yüksel’s clients are based in economies whose fortunes are linked to hydrocarbon prices. Hence, a sustained downturn in energy prices could cause governments in these countries to reduce infrastructure spending.

• Uncertain end-game in Libya: Yüksel has four projects in Libya (two are at fairly advanced stages of development) and considers the country to be an important growth market. Given recent events, Yüksel’s financial performance could come under some pressure in 2011 if it has to write off its Libya-related receivables (approximately USD 21mn) and unbilled contract amounts (c.USD 150mn). While the company’s absolute exposure to Libya is not very large, considerable uncertainty remains over how events in the country will unfold.

• Moderate leverage, constrained free cash flow: Despite the sharp increase in debt over the past few years, Yüksel’s leverage metrics are fairly moderate (debt/capital of 41%). However, the company has generated negative free cash flow since 2008 as a result of capital expenditure on new investments in energy projects and renovation of fixed assets.

Yüksel’s order book (Jun-10)

Uzbekistan1%

Turkey39%

Saudi Arabia18%

Qatar12%

Afghanistan9%

Iraq7%

Libya14%

Pipelines14%

Transport39%

Power,Dams & Industrial

21%Buildings

7%

Airports8%

Others11%


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Yüksel n aat (B1/Sta; NR; B/Sta)

36


0

250

500

750

1,000

2007 2008 2009 H1-10

USD

mn

0

10

20

30

40

%


Coverage ratios (x)

2007 2008 2009 H1-10


Revenue 713 734 779 407

EBITDA 84 41 69 44


Profit before tax 59 17 27 18

Net income 55 13 24 18


Cash and equivalents 85 61 85 49

Total assets 963 963 1,111 1,127

Total debt 124 189 239 250

Net debt 39 128 154 201

Equity 459 334 361 368

Cash flow (USD mn) Net cash from operating activities 133 2 17 (23)

Net cash from investing activities (179) (52) (41) 24

Net cash from financing activities 93 46 48 (33)

Key ratios


EBITDA margin (%) 11.8 5.5 8.8 10.9





0

1

2

3

4

5

2007 2008 2009 H1-10*0

4

8

12

16

20


Debt metrics Debt maturity** (Jun-10)

0

50

100

150

200

250

300

2007 2008 2009 H1-10

USD

mn

0

20

40

60

80

100

%

Total debt Total Cash Total debt/capital (RHS)

0

50

100

150

200

Within one year Between Jul-Dec 2011

USD

mn

* Annualised;** Yüksel raised a USD 200mn bond in Nov-2010; Sources: Company reports, Standard Chartered Research


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Appendix


Islamic finance – A primer on sukuks Analyst: Vijaykumar Chander (+852 3983 8569)

Overview – The basics of Islamic finance

Islam gives a complete code of life to its followers. Shariah law applies to all aspects of a Muslim's life, and business/finance is no exception. Under the tenets of Shariah, Riba (interest) is prohibited because in Islam, all income must be determined by the supply of work effort associated by the factors of production. If money is lent for interest, then capital is augmented without effort. As a practical matter, the injunction against the payment of interest can be avoided by structuring the transaction as a sale or a lease, with payments structured as rentals, lease payments or profits. Profit/loss-sharing in Islam encourages Muslims to invest their money and become partners in order to share the profits and risks of the business.

Thus, unlike conventional banking, Islamic banking necessarily has to be asset-based – i.e., at the most basic level, there has to be an exchange of goods or services for money. An exchange of money for money (for instance, leaving funds on deposit which can then be redeemed at maturity for the total of principal plus interest) is not allowed, but engaging in a partnership to share in the profits of a venture is specifically permitted. Excessive uncertainty (Gharar) is prohibited so as to avoid a resemblance to gambling, which is also forbidden under Islam.

Chart 1: In conventional banking, money itself is a commodity

Chart 2: In Islamic banking, goods/services are exchanged for money

Source: Standard Chartered Research Source: Standard Chartered Research

Development of Islamic banking In 1975, Dubai Islamic Bank was founded by businessmen who did not want to deal with an interest-based banking system. In the 1980s, the government of Malaysia and Bank Negara Malaysia started actively promoting Islamic banking in the country, and in the 1990s, the Central Bank of Bahrain developed a regulatory regime for Islamic financial institutions.

Islamic banking products mirror the pricing and other terms and conditions prevalent in conventional markets, and as a consequence, there are no additional costs to clients. In recent years, the development of Islamic banking in the Middle East and Asia has gained momentum because of

increasing customer awareness, a larger number of service providers, a comprehensive product suite and government support. Riding the development curve, governments and corporates are looking for Islamic banking solutions to tap the Islamic investor base.

S&P estimates the total size of the Islamic finance market at about USD 1.0trn as of May 2010 (‘Islamic Finance Outlook 2010’). With a worldwide Muslim population in excess of 1.4bn, there is still tremendous room for growth. The table below shows estimated sizes of Islamic banking assets in selected countries at end-2009.

Table 1: Key centres of Islamic banking – Islamic assets as a percentage of total assets (end-2009) Country Total banking-system assets

(USD bn) Islamic finance as % of total banking-

system assets Saudi Arabia 365 40%Kuwait 140 25% Qatar 129 16%UAE 414 14% Malaysia 457 12%Pakistan 77 4% Indonesia 270 2%

Sources: McKinsey, central bank websites, Standard Chartered Research

Bank Client

Islamic banking

Money

Goods & services

Bank Client

Money + Money (Interest)

Money

Conventional banking


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Islamic finance – A primer on sukuks

2

Sukuks have been the fastest-growing segment, with strong growth in the number and size of issues and investor appetite. The size of the international sukuk market is estimated at around USD 75bn (as of February 2011, according to Bloomberg). With support from governments and regulators worldwide, product structures are evolving, and the relatively simple and straightforward structures of the

past are giving way to more complex and innovative products. A number of sovereigns – including Dubai, Indonesia, Malaysia, Thailand and Ras al-Khaimah – have tapped the market. Non-traditional issuers such as GE Capital and Tesco have also utilised the sukuk structure to tap the market.

Chart 3: International sukuk issuance

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010

USD

bn

Middle East Non-Middle East

Sources: Bloomberg, Standard Chartered Research

Sukuks were issued in a wide range of currencies in 2010. In addition to the Malaysian ringgit (MYR), which dominates issuance, the Saudi Arabian riyal (SAR), US dollar (USD) and Singapore dollar (SGD) all have respectable market shares. A number of GCC countries have chosen to issue in MYR as they have become more familiar with the Shariah standards applicable in Malaysia. As a consequence, they

have tailored their issuance to meet the needs of Malaysian investors, who also constitute a large investor base for GCC sukuks. Because of the GCC presence in Malaysia, MYR-denominated issuance of MYR 28.5bn accounted for 47% of all international issuance in 2010, solidifying Malaysia’s leading position in the sukuk market.

Chart 4: Currencies of sukuk issuance, 2010

MYR47%

SGD13%

IDR1%

USD25%

SAR11%

PKR4%

Sources: Bloomberg, Zawya

Sukuks Definition of sukuk Sukuks are Islamic investment certificates. They are similar to conventional bonds in most respects (e.g., trading, listing and ratings) but are structured in a Shariah-compliant manner. While trading in bonds is not allowed under Shariah law, trading of sukuks is generally allowed because it is

treated as a sale/purchase of the holder’s proportionate share of the assets.

Sukuks are based on the premise that any Islamic financing contract representing ownership of a tangible asset can be


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bought or sold. The asset is there to generate income streams to pay off the coupons on the security, without a legal ‘true sale’ of the underlying asset to investors. (Securitisations – with a true sale of assets in which investors have recourse to the pool of assets – can also be executed under an Islamic format.)

A sukuk represents: • An undivided proportionate beneficial ownership

interest in an asset or portfolio• The corresponding right to the Islamically

acceptable income streams generated by the asset/portfolio

The bulk of the sukuk structures outstanding are in an ‘asset-based’ format rather than under a securitisation/true sale format. In an asset-based format, investors do not own the underlying assets, as the sale of these assets to investors has not been ‘perfected’. Instead, investors can put the options back to the obligor at the assets’ original value in the event of default. At the end of the sukuk’s tenure, the obligor buys the assets back from the investors at face value.

Sukuks are considered comparable to conventional bonds by non-Islamic investors in Europe, the US and Asia. They also provide access to a growing Islamic liquidity pool, in addition to the conventional investor base. Status of sukuk holders in case of default To date, there have been few test cases of sukuk defaults. The two most prominent sukuk defaults in the Middle East have been Investment Dar in Kuwait and Golden Belt in Saudi Arabia. Key questions about the rights of creditors in the event of sukuk default are as follows:

(1) Are the sukuk holders ‘secured’ creditors, or do they rank pari passu with senior unsecured creditors? In transactions where a ‘true sale’ of assets to a trust or special purpose vehicle (SPV) has occurred (i.e. asset-backed) and where investors have legal recourse to the underlying assets, sukuk holders would rank senior to unsecured bondholders. These transactions are, in essence, Islamic securitisations. The USD 210mn Shariah-compliant RMBS securitisation carried out by Tamweel (Tamweel RMBS) meets this test, in our opinion. In this transaction, freehold titles to the underlying properties were transferred to the sukuk holders along with the associated cash flows. Only a handful of sukuk transactions qualify as ‘true sales’.

In transactions where there has not been a ‘true sale’ of the underlying assets to the investors, investors would rank paripassu with other senior creditors. For instance, the USD

300mn Tamweel Sukuk, Limited (TSL) would not qualify as an ‘asset-backed’ structure.

(2) Will sukuk holders have access to the assets underlying the sukuk transactions, and what are the recovery rates following a sukuk default? Sukuk holders will have recourse to the underlying assets only if there has been a ‘true sale’ of assets and the legal ownership of the assets has been legally registered for the benefit of the sukuk holders. Recovery in the case of asset-backed structures will depend on the performance of the underlying assets, which may or may not be related to the overall financial health of the originator. For asset-based sukuks, recovery rates will be limited to what senior unsecured bondholders receive.

(3) Should there be a ratings differential between sukuk and other senior creditors? Generally speaking, in a fully securitised sukuk transaction where a ‘true sale’ has occurred, the rating of the sukuk structure will be dependent on the quality of the underlying assets that constitute the pool of assets owned by the investors. In this instance, investors are in the position of ‘secured creditors’ and would typically rank ahead of other senior unsecured creditors. In asset-based structures, the sukuk rating will be tied to that of the obligor – i.e., sukuk investors rank pari passu with other senior unsecured creditors.

S&P’s ratings address the probability of default and not the loss in the event of default. S&P has pointed out that its ratings of sukuks with full credit enhancement mechanisms are not based on the underlying assets, but on the credit enhancement mechanisms provided by the sponsor of the transaction. Since the sponsor’s obligations under these mechanisms typically rank pari passu with their other senior unsecured claims, S&P ratings on these sukuks will, in principle, continue to reflect the senior unsecured ratings of their sponsors.

Moody’s ratings focus on expected loss and make a distinction between asset-based and asset-backed structures. For example, Moody’s viewed the two Tamweel sukuks differently and provided different ratings for the transactions. In August 2009, when Moody’s downgraded Tamweel from to Baa1 from A3, the asset-based sukuk was also lowered to Baa1 from A3. However, the Tamweel RMBS was not downgraded since the assets underlying the structure continued to perform.

(4) For sukuks issued locally but under foreign laws (e.g., English law), will local courts be willing to uphold the


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decisions of foreign jurisdictions? Are precedents set by rulings in local jurisdictions on defaulted sukuks binding? Sukuks will be treated like conventional bonds in that local courts might not uphold the rulings of foreign jurisdictions, given that the rules on reciprocity in the enforcement of foreign judgments in local courts are still evolving. Also, even if a foreign court provides a judgment favourable to the creditors, the local courts might not enforce it without re-examining the merits of the case. Unlike a number of common-law jurisdictions, precedents set in the local courts are not necessarily binding. Future judgments in a case with facts similar to another case may not necessarily be decided the same way as in the previous case. Key characteristics of sukuks Sukuks have several characteristics in common with conventional bonds. • Issuer: Typically a SPV that issues sukuk certificates on

the back of a Shariah-compliant asset/contract with the obligor. The investors purchase sukuk certificates to fund the issuer, who passes the funds to the obligor. This is unlike a conventional bond issue, where the obligor is also the issuer. However, in both instances (conventional and Islamic), the recourse of investors is back to the obligor.

• Obligor: The beneficiary of the funds or the entity that is raising these funds through the sukuk. Typically, as in a conventional bond, investors take ultimate credit risk on the obligor for both coupon and principal repayments.

• Profits versus interest: As interest is not allowed under Shariah principles, the contracts are structured so that

the investor has a share in the profits generated from the use of the underlying asset or financial contracts. These are distributed as regular ‘profit’ or ‘coupon’ payments on the sukuk on pre-determined dates (comparable to regular coupon servicing in conventional bonds).

• Ratings: The certificates issued by the SPV can be rated by a recognised rating agency. Typically, for a straight unsecured senior sukuk, the rating is the same as the rating of the obligor, since the ultimate creditor is the obligor. Hence, ratings are usually at par with those of conventional bonds.

• Clearing: This is done through Euroclear, Clearstream or any such mechanism, as for conventional bonds.

• Listing: Like conventional bonds, sukuk certificates can be listed on most major stock exchanges (i.e., Luxembourg, London, Singapore, Dubai).

• Governing law: Like conventional bonds, sukuk certificates are typically governed by English law for eurobond issues, or by local laws for local-currency issues.

• Trustee: In a eurobond, a trustee may be appointed to represent the interests of the bondholders. In a sukuk structure, this role is often effected by a delegate (an independent third party) who performs the same function.

• Basis of profit payment: Sukuk certificates can be either on a fixed-rate or floating-rate basis, and are priced against a benchmark such as USD LIBOR, EURIBOR or swap rates (same as conventional bonds).

Types of sukuks

Sukuks can be structured in a number of ways, depending on the underlying assets and business purpose. Table 2 below summarises the most prevalent sukuk types. The most

prevalent type of sukuk structure is the Ijara sukuk, and our discussion will focus exclusively on this category.

Table 2: Concepts underlying the main types of sukuks Sukuk type Concept Examples Ijara sukuk Certificate of equal value based on sale and

leaseback of an asset International sovereign issues: Malaysia, Qatar, PakistanDomestic issuers: Bahrain, Malaysia

Musharaka sukuk Certificate of proportionate ownership, with the aim of using the funds to establish a new project or develop an existing project

Emirates Airlines

Istisna’a sukuk Certificate of proportionate ownership, with the aim of using the funds to produce goods

Murabahah sukuk Certificate of equal value for the purpose of financing the purchase of an asset

DIFC Investments



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5

Ijara financing (Sukuk-al-Ijara) – Key concepts Ijara financing can be either fixed-rate or floating-rate. The lessor bears all ownership-related expenses of the asset and all damages, except those incurred through the negligence or misuse of the lessee. Although ownership-related expenses are borne by the lessor, the lessor appoints the client as its servicing agent to perform major maintenance and structural repairs, pay ownership taxes and procure insurance. Any actual servicing agency expenses incurred by the agent are set off against the next rental payments due

from the lessee. The rent must be determined either for the full lease term or for a definite period of the lease. Rent starts when the commodity is delivered to the lessee. In case of a delay in payment, any late payment charges are paid to charity. After the expiry of the lease term, the asset remains in the ownership of the lessor until he gives it to the client as a gift or the client purchases it with his free consent. Chart 5 below shows an example of Ijara financing.

Chart 5: Ijara-based financing


Discussion of the Sukuk-al-Ijara (sale and leaseback structure) The sale and leaseback sukuk structure is the most widely used, as it is tried, tested and accepted by most Shariah scholars in both the GCC and Asia. All sovereign sukuks issued to date have been based on the sale and leaseback structure. The documentation is fairly standard, with a broad consensus among the majority of Shariah scholars and Shariah Boards. Brief description of the structure:

• A SPV may be formed to purchase assets from the obligor.

• The assets are then leased to the obligor against periodic rental payments.

• The SPV is usually incorporated in a tax-friendly jurisdiction such as the Cayman Islands or Jersey, and is usually an orphan SPV with a single share issued in favour of a charitable trust.

• It can be structured in one of two ways: o amortising issue o bullet repayment at maturity

• The payment obligations of the obligor remain similar to any other full-recourse financing – i.e., the issue amount is reflected as a liability, and the profit payments are expensed out through the income statement.

Underlying assets in the Sukuk-al-Ijara structure: • Limited to fixed/real assets (such as land, office

buildings, plant and machinery, etc.), where the ownership remains with the obligor.

• Limited to sale of existing assets – i.e., the underlying asset pool should be in existence at the time of sale.

• The underlying asset pool should consist of unencumbered assets with a market value at least equal to the sukuk issue amount.

• The underlying asset pool is used for structuring purposes only and is not to be construed as security.

Bank as lessor

1. Asset title

4. Lease payments (principal + profit)

Customer as lessee

3. Equipment lease

Floating or fixed-rate financing

Supplier

2. Payment for equipment


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6

The flow charts below outline the mechanics of the Sukuk-al-Ijara structure in greater detail.

Chart 6: Sukuk al-Ijara at inception 1. SPV is formed for the sukuk issue. 2. The SPV (acting on behalf of the sukuk holders) enters into a

purchase agreement with the obligor for purchase of existing assets. (‘asset pool’).

3. The SPV issues sukuk certificates to finance the purchase of the asset pool.

4. Obligor enters into a master lease agreement with the SPV for a period equal to the sukuk tenor.

5. The SPV enters into a servicing agency agreement with the obligor, through which it appoints the obligor as its agent responsible for major maintenance and structural repairs and the procurement of insurance on the asset pool.

6. The obligor also provides a purchase undertaking wherein the obligor undertakes to purchase the asset pool from the SPV, either at the end of the lease term or on the occurrence of an event of default.

7. The SPV may provide a sale undertaking to the obligor wherein it undertakes to sell the asset pool back to the obligor upon occurrence of certain events.


Chart 7: Sukuk al-Ijara periodic payments through to maturity 1. Obligor makes semi-annual lease rental payments (‘rentals’) to the

SPV during the lease term. Rentals may consist of either fixed orfloating payments benchmarked to, say, LIBOR.

2. The SPV distributes the rentals to the sukuk holders (as coupon payments). Amortising sukuk:

- In case of an amortising structure, the periodic rentals shall comprise profit payments (benchmarked to LIBOR)and principal redemptions, as per an agreed schedule.

Bullet redemption: - In case of bullet repayment, periodic rentals shall consist

of only profit payments. 1. At maturity, the SPV transfers the asset pool back to

the obligor at an agreed price equal to the outstanding amount under the sukuk certificates and any accrued and unpaid rentals (pursuant to the exercise of the purchase undertaking). Hence, ownership of the asset pool reverts back to the obligor.

2. SPV redeems the sukuk certificates.


Periodic payment

Obligor (lessee)

SPV 1 Sukuk holders

2

Obligor

SPV

1

$ Sukuk

holders

2

$

At maturity

4. Master lease agreement 5. Servicing agency agreement

SPV (Issuer)

Obligor (Seller) (Lessee) (Service Agent)

$

Sukuk holders

3. Sukuk certificates issued

$

6. P

urch

ase

unde

rtak

ing

1. SPV formed

2. Purchase agreement

7.

Sale

und

erta

king

Issuance of sukuk


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Glossary of abbreviations

ARPU: average revenue per user bboe: billion barrels of oil equivalent CDS: credit default swap CWN: credit watch negative DSCR: debt service coverage ratio ECA: export credit agency EM: emerging markets FRN: floating-rate note GCC: Gulf Cooperation Council GWh: gigawatt hours IIF: Institute of International Finance kbd: thousand barrels per day kboed: thousand barrels of oil equivalent per day LT2: Lower Tier 2 mb: million barrels mbd: million barrels per day mboe: million barrels of oil equivalent MENA: Middle East and North Africa MIGD: million imperial gallons per day mmscfd: million standard cubic feet per day mtoe: million tonnes of oil equivalent MTN: medium-term note mtpa: million tonnes per annum NIM: net interest margin NM: not meaningful NPL: non-performing loan RFD: review for possible downgrade ROA: return on assets ROE: return on equity RWN: rating watch negative tcm: trillion cubic metres TEU: twenty-foot equivalent unit


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Contributors Credit Research Team

Kaushik Rudra Global Head of Credit Research

+65 6596 8260 [email protected]

Standard Chartered Bank, Singapore

Vijay Chander Head of Credit Strategy


Standard Chartered Bank (Hong Kong) Limited

Shankar Narayanaswamy Head of Credit Analysis



Bharat Shettigar Senior Credit Analyst



Bret Rosen Senior Credit Strategist, Latin America

+1 646 845 1311 [email protected]

Standard Chartered Bank, United States

Feng Zhi Wei Senior Credit Analyst



Victor Lohle Senior Credit Analyst



Sandeep Tharian Credit Strategist


Standard Chartered Bank, United Kingdom

Shilpa Singhal Credit Analyst +65 6596 8259

[email protected] Chartered Bank, Singapore

Simrin Sandhu Credit Analyst +65 6596 6281

[email protected] Chartered Bank, Singapore

Hee Jeong Lee Credit Analyst



Justinus Rahardjo Credit Analyst +65 6596 8253

[email protected] Standard Chartered Bank, Singapore

Neo Li Shan Credit Analyst +65 6596 8257

[email protected] Standard Chartered Bank, Singapore

Economics Research Middle East

Marios Maratheftis Head of Research, West


Standard Chartered Bank, Dubai

Philippe Dauba-Pantanacce Senior Economist +971 4 508 3740

[email protected] Standard Chartered Bank, Dubai

Shady Shaher Economist



Nancy Fahim Economist



Sayem Ali Economist


Standard Chartered Bank (Pakistan) Limited


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Disclosures Appendix

Recommendations structure

Standard Chartered terminology Impact Definition

Positive Improve Stable Remain stable Issuer –

Credit outlook Negative Deteriorate

We expect the fundamental credit profile of the issuer to <Impact> over the next 12 months

Apart from trade ideas described below, Standard Chartered Research no longer offers specific bond and CDS recommendations. Any previously-offered recommendations on instruments are withdrawn forthwith and should not be relied upon.

Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may or may not include price targets.

Credit trend distribution (as at 2 March 2011)

Coverage total (IB%)

Positive 10 (20.0%)

Stable 159 (20.8%)

Negative 22 (4.5%)

Total (IB%) 191 (18.8%)

Credit trend history (past 12 months) Company Date Credit outlook

- - -

Please see the individual company reports for other credit trend history PLEASE NOTE THAT THIS DOCUMENT IS NOT TO BE DISTRIBUTED INTO KOREA.


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Regulatory Disclosure: Subject companies: Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Abu Dhabi National Energy Company (TAQA), Aldar Properties, Algeria, Arab Banking Corporation, Arab National Bank, Bahrain, Bahrain Mumtalakat Holding Company, Banque Saudi Fransi, BBK, Burgan Bank, Commercial Bank Of Qatar, Dar Al-Arkan, DIFC Investments, Doha Bank, Dolphin Energy, DP World, Dubai Electricity and Water Authority (DEWA), Dubai Holding Commercial Operations Group (DHCOG), Dubai Islamic Bank, Egypt, Emirates NBD, First Gulf Bank, Gulf International Bank, Gulf Investment Corporation, International Petroleum Investment Company (IPIC), Jebel Ali Free Zone (JAFZ), Jordan, Kuwait, Kuwait Projects Company (Holding), Lebanon, Mashreqbank, MB Petroleum Services, Morocco, Mubadala Development Company, Nakilat Inc., National Bank Of Abu Dhabi, Oman, Pakistan, Qatar, Qatar Islamic Bank, Qatar National Bank, Qatar Telecom (Qtel), Qatari Diar, Riyad Bank, Samba Financial Group, Saudi Arabia, Saudi Basic Industries Corporation (SABIC), Saudi British Bank, Tourism Development and Investment Company (TDIC), Tunisia, Turkey, Türkiye Garanti Bankasi, Türkiye Vakiflar Bankasi , United Arab Emirates, Yapi ve Kredi Bankasi, Yüksel n aat A. . SCB was a lead manager of a public offering for this issuer within the past 12 months, for which it received fees: Qatari Diar, MB Petroleum Services, Qatar/State of Qatar, Yüksel n aat SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year: Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Dubai Electricity and Water Authority (DEWA), International Petroleum Investment Company (IPIC), Mubadala Development Company, Qatar National Bank

Analyst Certification Disclosure:

The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

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Document approved by Kaushik Rudra Global Head of Credit Research

Data available as of 09:00 GMT 07 March 2011

Document is released at 09:00 GMT 07 March 2011


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