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Doha Bank – Bond Repurchasing Boosts Bottom Line
Global Arab Network -
Doha Bank reported 2Q09 net income of QAR317 million, up 4% from 2Q08 and 14% above expectations. Earnings were helped by non-interest income, increasing by 26% YoY and 68% above expectations. Net interest income, however, was 13% lower than expectations, as the margins during 2Q09 slightly declined to 3.10% from 3.20% in 1Q09 and were below expectation of 3.24%. Non-interest income was mainly driven by repurchase of subordinated debt securities, which helped offset the decline in income from the bank's investment portfolio. HC Brokerage estimates the bond repurchase to have added QAR131 million, the difference between the reduction in debt level and the purchase consideration. The bank is left with QAR851 million in subordinated debt and should continue its repurchasing activity in the coming quarters, given benign market conditions.

Operating income (excluding loan loss charges) was 405 million, up 22% YoY. Loan loss charges, however, were QAR40 million in 2Q09 vs. QAR9 million in 2Q08 and QAR7 million in 1Q09, weighing on YoY earnings growth. HC Brokerage’s provisioning estimate was at QAR45 million, given the bank's retail tilt amid the current economic environment. Nonperforming loans to total loans (NPL ratio) increased to 3.05% during the quarter from 2.83% in 1Q09. HC Brokerage has already modeled in an NPL ratio of 3.5% for FY09e and FY10e and as such are comfortable with the current level of increase in bad loans and related charges.

During the quarter, DHB sold off QAR1.7 billion of real estate loans to the government. Adjusting for this, the loan book grew by 4% quarterly and HC Brokerage remains positive on loan book expansion during the rest of the year, as the bank can resume real estate lending activities. The bank ceased lending to the real state sector in 2Q08, since its real estate loan portfolio exceeded the statutory limit of 15% of deposits. In 2Q09, deposits increased by 7% quarterly, further supporting real estate lending activities. Therefore, HC Brokerage has increased loan growth assumption for FY09e to 7% from the previous 5%.

Nonetheless, HC Brokerage expect the increase in deposit to put some pressure on margins in the coming quarters as well.

HC Brokerage has raised FY09e earnings estimate by 9% to QAR1,120 as HC Brokerage expects non-interest income to increase in 2H09. Although bond repurchasing cannot go on forever, it will offset the temporary decline seen in investment income. Additionally, higher loan growth during the latter part of the year, would help earnings. Overall, HC Brokerage  finds 2Q09 results to be comfortable with core operations remaining solid.

HC Brokerage reiterates “Buy” recommendation and increase TP to QAR64.60 from QAR63.77.  TP provides an upside of 66.5%. The stock is trading at a 14% discount to its implied FY09E PB multiple of 1.6x.

Global Arab Network

This article is an extract from report (2Q09 Earnings Review – Bond Repurchasing Boosts Bottom Line) by HC Brokerage


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