As Qatar’s second largest bank by market capitalization, Qatar Islamic Bank (QIB) should be riding high from the loss of competition due to the Qatar Central Bank’s (QCB) directive for the closure of conventional banks’ Islamic operations.
However the bank, which was among the first from the Middle East to report full-year 2011 results this month, surprised on the downside with fourth quarter financials that were below expectations.
This year, as Qatar builds itself up in preparation to host the 2022 World Cup and fresh off the back of a 60% increase in salaries for Qatari nationals, can QIB capitalize on the good tidings or will it fall short yet again?
Earnings hiccup
QIB reported a net profit of QAR1.37 billion (US$376.2 million) in the year ended the 31st December 2011, an 8% increase from a year earlier.
The growth was driven by QAR631 million (US$173.27 million)-worth of investment income and an 18% year-on-year increase in net operating income to QAR2.68 billion (US$735.92 million).
According to Sheikh Jassim Hamad Jassim Jaber Al Thani, the chairman of QIB, the bank’s performance follows a transformation program implemented with a view to restructuring its local operations and affiliates to build its regional and international presence.
However, its fourth quarter profit of QAR256 million (US$70.3 million) was lower than the QAR393 million (US$107.92 million) posted in the same period of 2010; and represented a shortfall against market expectations of QAR394.2 million (US$108.25 million).
Underperforming investments
One shortcoming of QIB is the dismal performance of its associates. It owns 33% each in Lebanon’s Arab Finance House (AFH) and Malaysia’s Asian Finance Bank (AFB); 70% in the European Finance House; 25% in Al Daman Islamic Insurance; 40% in Durat Al Doha and 30% in Al Jazeera Finance. It is also a majority shareholder of QInvest.
“QIB’s contribution from associates has been declining steadily since 2008, when 89% of the profit contribution came from the subsequently disposed Shard Funding operation and the now consolidated QInvest. The only extant associate which has made any contribution of note is Al Jazeera, although the return dropped 87% in 2010.
The contribution from other associates was either minimal (Al Daman) or significantly negative (AFH, AFB),” noted Raj Madha, an analyst at Rasmala Investment Bank, in a January 2012 report on Qatari banks.
Madha also commented that while there remains limited information on the performance of QIB’s associates, Al Jazeera and AFB show potential for positive returns.
However, he acknowledged that at even at the top range of a forecast of associate earnings contributions rising to QAR50 million (US$13.73 million) in 2014, this will only contribute 4% to earnings, “making it largely non-material”.
Cards left to play
Despite its current limitations, QIB still has an ace in the hole: the opening up of further room for growth from the closure of Qatar’s conventional banks’ Islamic businesses.
“Lower levels of competition in Islamic banking may also allow QIB to benefit from more favorable pricing,” said Madha.
In addition, the bank has reorganized its corporate banking division and further strengthened the business by acquiring the Islamic corporate portfolio of conventional bank, the International Bank of Qatar.
“Beyond immediate results, we expect QIB to continue to benefit from strong growth as a leading Islamic bank in Qatar. We expect the bank’s broadening systemic growth and reorganization of its corporate division to improve competitiveness, driving high-teen loan volume growth (2012F:19%, 2013F:18%).
In addition, significant assets are allocated to property, which should eventually produce revenues, while we believe QInvest revenues will come closer to covering its costs.
“Overall we forecast a two-year net income compounded annual growth rate of 16%,” noted Madha.
On top of QIB’s own strengths, it is also expected to benefit from the strong growth momentum currently driving Qatar and its banking sector, mainly due to the construction of projects planned for the 2022 World Cup and in response to the salary increase for local employees announced last year.
Although the QCB ruling plunged the local banking sector into a short period of uncertainty last year, it seems now that there is no better time to be an Islamic bank in Qatar; and QIB seems to be in a strong position to capitalize on opportunities ahead. — EB