August 2011 GCC Outlook 2H11 - GulfBase.com€¦ · (Kuwait CMA, MSCI not upgrading of UAE and...

Kuwait Financial Centre “Markaz” R E S E A R C H

GCC Outlook 2H11 Semi-annual Review

Of 2010, we said that it “simply lacked any triggers”... well, in that case 2011

seems set to be nothing but triggers (mostly negative). From natural disasters to ongoing financial ones (e.g. Greece, US debt, GCC corporate and sovereign

debt) in addition to political turmoil; the first half of 2011 has not lacked in

terms of headlines, highs or lows.

In our previous note we upgraded our outlook to a mostly Positive view on the region. This was due to many factors including; healthy economic growth,

expected recovery in key sectors like Banking and Real Estate in addition to

healthy valuations. We had adopted a Neutral stance on Dubai (due to persisting debt overhang and a struggling Real Estate sector), Bahrain (due to

lesser corporate recovery), and Saudi Arabia (due to muted banking performance and investor sentiment).

We were wrong on all counts. The political turmoil which swept the region at

the beginning of the year brought down all markets and proved a drag on

earnings. Additionally, various corporate issues (in terms of M&A, debt restructuring etc) in addition to some regulatory and market developments

(Kuwait CMA, MSCI not upgrading of UAE and Qatari markets etc) has dampened investor sentiment across the board.

Previous Recommendations & Market performance

Saudi Arabia Kuwait

Abu Dhabi Dubai Qatar Oman Bahrain

January 2011 Neutral Positive Positive Neutral Positive Positive Neutral

2011 Return (YTD %) -2.25 -12.8,

- 14%* -3.01 -6.39 -3.10 -13.66 -9.93

*Kuwait Weighted Index return

Source: Markaz Research, Stock Exchanges: Tadawul, Kuwait Price & Weighted Indices, ADX, DFM, DSM, MSM, BAX

Note: All indices use a market cap weighted methodology except Kuwait which also uses a Price index. Hence, we have shown both for Kuwait.

For the rest of 2011, we have adopted a rather Neutral view of the markets due mainly to muted earnings growth and lackluster market liquidity and

activity. We remain Positive on Abu Dhabi and Qatar due to positive economic

growth and earnings potential.

Table 1: Current Recommendations

August 2011

Research Highlights: Reviewing the first half of 2011

and projecting the remainder of the year based on an

assessment of various drivers

that specifically affect the performance of GCC stock

markets.

Markaz Research is

available on Bloomberg Type “MRKZ” <Go>

M.R. Raghu CFA, FRM

Head of Research

+965 2224 8280 [email protected]

Layla Al-Ammar

Assistant Manager

+965 2224 8000 Ext: 1205 [email protected]

Kuwait Financial Centre

“Markaz”

P.O. Box 23444, Safat 13095,

Kuwait Tel: +965 2224 8000

Fax: +965 2242 5828 markaz.com

http://www.markaz.com/DesktopModules/CRD/Attachments/Whattoexpectin2011-MarkazResearch-January2011.pdf

R E S E A R C H August 2011

Kuwait Financial Centre “Markaz”

2

A. So what happened in 1H11?

The first half of 2011 saw markets reacting to a myriad of news, mostly local

but also regional and international in origin. Perhaps the most significant trigger during the period was the high political turmoil seen in Q1, beginning

with Egypt in late January and extending to Bahrain and Oman later in the

quarter.

The effects of the unrest on the markets were immediately evident; crude oil prices shot up about 25% from the beginning of the year, CDS rates jumped,

markets declined across the region and various sovereigns and entities saw their credit ratings cut.

An almost instantaneous reaction was seen in the CDS market where rates surged in a matter of days. Saudi 5 Yr CDS rates jumped 80% while Bahrain

almost doubled. MVX levels (a Volatility indicator designed by Markaz Research) saw extraordinary surges in January/February; MVX Egypt shot up

5x while MVX Saudi surged 4x its pre-crisis level.

Figure 1: Volatility Spikes – Pre and Post Crisis

Source: Reuters, Markaz Research

Oil prices jumped 26% in the first quarter of 2011, specifically following the eruption of the Libyan crisis which supplies about 1.8mn bbls/day (mainly to

Europe). Consequently oil prices have remained high, despite Saudi Arabia upping production to an average of 9.5mn bbls/day (June 2011) to

compensate for lost production.

Furthermore, the International Energy Agency (IEA) has approved the

release of 60 mn barrels of reserve to compensate for lost oil production, which should keep oil prices in the $90-$100/bbl range for the rest of the

year.



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Figure 2: S&P Pan Arab Vs Oil Price

Source: Thomson Datastream

Other factors negatively affecting the markets were:

- The Etisalat/Zain deal in which the former was looking to acquire a 46% stake in the latter for around USD 12bn. The saga played out over several

months of negotiations. The due diligence deadline passed in February and

was followed by Etisalat officially walking away from the deal in March. The failed deal has negatively affected the Blue Chips; Etisalat is flat for the year

while Zain has lost 33%.

- The Kuwait Capital Market Authority Law came into effect in March, with

compliance deadlines set for September 2011. The enacting of the Law has caused contention and implementation woes in the investment sector.

Consequently, the market has been trading down on the uncertainty.

- Uncertainty has prevailed in the UAE and Qatar as well as investors awaited

judgment from MSCI as to whether it would upgrade the markets to Emerging status. In June, the Index provider decided to delay judgment to

the end of the year pending further review. Qatar is currently in talks with firms to raise Foreign Ownership Limits (FOL), which is seen as a

prerequisite to MSCI Emerging Market inclusion while the UAE is dealing with system requirements. Upgrading the markets would be a positive for

the two countries but is unlikely to materialize until sometime in 2012.



4

B. Looking back

The overall GCC markets as measured by the S&P GCC index have lost 6%

in the YTD period for 2011 after gaining 13% in 2010. All six GCC markets are down for the year; the largest decline is in Kuwait’s Weighted Index,

down 14%, followed by Oman with a loss of 13.6% thus far in 2011.

At the beginning of the year we were Neutral on Saudi Arabia. This was

mainly due to a slowing of economic growth, fueled by stagnant private sector lending. Although earnings growth showed some signs of recovery,

these were not translated to the market which remained skittish and sideways bound.

We turned Positive on Kuwait at the start of 2011 as economic activity picked up while corporate earnings stabilized somewhat, especially in the

financial services arena. Negative implications on our assessment came from valuations which remained stretched in 2010 and early into 2011

coupled with low liquidity and negative corporate news.

We had a mixed view on the UAE at the start of the year; Positive on Abu

Dhabi while Neutral on Dubai. Downside risks came mainly from Dubai, which continues to grapple with a debt overhang of about $30bn over the

next two years while the Real Estate sector and broader economy continue to struggle. We had a positive view on corporate earnings but these did not

materialize as a significant loss was seen in the Real Estate segment (AlDar

Properties) while Telecoms showed weakness.

We were Positive on Qatar due to high economic growth fueled by large-scale government projects to build and enhance all manner of

infrastructure; from Power & Water to IT to Roads and Real Estate as

evidenced by its USD 125 bn National Development Strategy (2011-2016).

We had turned Positive on Oman at the start of the year owing to attractive valuations and strong earnings growth. These failed to materialize

as the Sultanate was negatively impacted by political turmoil. We

maintained a Neutral view on Bahrain (although it is verging on Negative) due to economic forecasts which are holding up for the time being and

neutral earnings growth. Negatives in our forecast center on low market liquidity and geopolitical risks which are denting investor sentiment.

According to Moody’s, the political situation is likely to have damaged economic growth significantly, especially in service sectors such as tourism,

trade and financial services1, although IMF maintains an adequate GDP

growth forecast of 3.1% in 2011 and 5.1.% in 2012. In May, Bahrain’s sovereign credit rating was cut by Moody’s to Baa1 (from A3) with a

Negative outlook due to continued political unrest.

1 GCC Fixed Income Update – 29 May 2011, Markaz

The overall GCC markets as

measured by the S&P GCC index have lost 6% in the YTD

period for 2011 after gaining

13% in 2010

We had a mixed view on the

UAE at the start of the year; Positive on Abu Dhabi while

Neutral on Dubai

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C. What to expect for the rest of 2011 The most important question is what to expect for the remainder of 2011.

We believe that there are host of factors that influence the markets. We have identified six such factors that we feel will directly impact market

performance. Based on its importance, we provide subjective weights to

each of these seven factors (Figure 3). An explanatory description for all the six factors can be found in Appendix 1.

Figure 3: 6-Force Framework

Source: Markaz Research

1. Economic Parameters The overall economic scenario is Neutral for all GCC nations except Abu

Dhabi and Qatar which remain Positive in our view owing to healthy economics and earnings growth potential.

i. Real GDP Growth Forecast

Real GDP across the GCC is likely to show a growth of about 5% in 2011 followed by a growth of between 5%-7% in 2012. Growth in 2011 has been

driven by spiking crude oil prices at the beginning of the year coupled with

some return in private credit and broad money growth in addition to increased government spending.

Growth in Saudi Arabia is expected to show a surge of 7.5% in 2011 due to

high oil revenues, however, this is expected to fall to about 3% in 2012.

Kuwait GDP growth is expected to remain stable at about 5% for 2011/2012. Qatar, which has had the world’s highest growth rates over the

last few years is expected to show another year of double digit growth at 20% for 2011 before dropping to the more sustainable 7% in 2012.

The overall economic scenario is Neutral for all GCC nations

except Abu Dhabi and Qatar

which remain Positive

Real GDP across the GCC is likely to show a growth of

about 5% in 2011 followed by

a growth of between 5%-7% in 2012



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ii. Inflation Both Saudi Arabia and Kuwait saw jumps in inflation during 2011 due to

government grants and subsidies; according to the IMF, CPI is expected to

show an increase of 6% for each country in 2011. This should moderate in 2012 as economic growth slows; coming in at 5.6% for Saudi Arabia and

3% for Kuwait. The remaining GCC countries should see inflation stay in the 3%-4% range.

iii. Fiscal Balance Fiscal balances are expected to show a jump in 2011 due to high oil prices

at the beginning of the year (crude oil was up about 25% in the first quarter) which boosted coffers before declining in 2012 as governments

engage in increased public spending as per development plans.

Saudi fiscal balance is expected to decline from 13% of GDP in 2011 to 9%

in 2012. Kuwait’s fiscal balance as a % of GDP is expected to stay in the 20%-25% range in 2012.

iv. Current Account Balance

According to the IIF, the consolidated current account balance of the GCC is

estimated to reach over $150 bn in 2011 (from $124 bn in 2010) on account of a positive commodities environment. As a % of GDP, Kuwait

continues to maintain the highest ratio, at 30% expected for 2012 while Saudi Arabia would see its Current Account Balance fall from 20% of GDP in

2011 to 14% in 2012.

v. Broad money growth

Money supply growth remained sorely below average in 2010, except in the case of Qatar which saw M2 grow at 23% for the year while other GCC

countries saw growth as low as 3% (Kuwait) to 11% (Oman and Bahrain).

However, some signs of pick up are being seen as of 1Q11; on a YoY basis

Saudi Arabia and Qatar M2 has grown 15%, followed by UAE at 12%. There is still a bit of a lag in the case of Kuwait with 1Q11 M2 growth at 5% YoY.

Table: 2 – Economic Parameters Summary

Overall Scores - Economic

Weights Saudi Arabia

Kuwait UAE Qatar Oman Bahrain

Economic Growth

40% Neutral Positive Positive Positive Positive Positive

Inflation 20% Neutral Positive Positive Positive Positive Positive

Fiscal Balance

20% Neutral Positive Neutral Neutral Positive Negative

Current Acc. Balance

10% Neutral Positive Neutral Positive Neutral Neutral

Broad Money Growth

10% Positive Neutral Positive Positive Neutral Neutral

Assessment Neutral Positive Positive Positive Positive Neutral

Source: Markaz research

Both Saudi Arabia and Kuwait saw jumps in inflation during

2011 due to government grants and subsidies

On a YoY basis Saudi Arabia

and Qatar M2 has grown 15%, followed by UAE at 12%



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2. Valuation Attraction

Normalizing earnings growth coupled with poor market performance is stretching valuations in some cases. GCC corporate earnings came in at

USD 13.78 bn in 1Q11, a 19% YoY growth. The highest growth is expected from the UAE, recovering from losses sustained in the Real Estate sector in

2010.

We expect full year net profit of around USD 48 bn, a 15% annual growth.

Consequently, the GCC-wide PE should stay in the 14x-15x range, on par with 14x for MSCI EM and 15x for the S&P 500.

Kuwait is likely to remain stretched at about 20x as earnings normalize

while market conditions remain lackluster.

Table 3: Valuation Factors

P/E Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2010 16 20 11 12 12 12

2011e 16 21 13 11 9 16

P/B Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2011 1.9 1.5 1.1 2.1 1.7 1.1

Dividend Yield

Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2010 2.4 3.5 3.1 2.9 5.1 2.4

2011 3.2 4.3 3.4 3.3 4.7 4.1

Assessment Neutral Neutral Positive Positive Positive Positive


3. Earnings Growth Potential

In our January 2011 report, we expected to see an overall growth of 23%

in GCC corporate earnings in 2011, fueled by a turnaround in Kuwait and a

return to positive growth in Oman and the UAE.

In 1Q11, GCC earnings came in at USD 13.78 bn, a 19% YoY growth. Using an adjusted average of the last four quarters, we expect full year 2011 net

profit of USD 48 bn, a 15% annual growth, which would underperform our

forecast.

Oman and Bahrain have suffered the implications of political turmoil in the two countries at the start of the year. Oman and Bahrain both saw 1Q11

earnings fall, by 26% and 10%, respectively. Financial Services declining 66% YoY, in addition to a 20% decline in Telecom earnings brought down

Q1 earnings in Oman; however, Banking provided some support,

maintaining a YoY growth of 10%.

Telecom was the main drag in Bahrain, down 28%, while Financial Services were down 72%.

Consequently, we expect full year earnings growth to decline by 5% in Oman.

Normalizing earnings growth

coupled with poor market performance is stretching

valuations in some cases

In 1Q11, GCC earnings came in

at USD 13.78 bn, a 19% YoY

growth

http://www.markaz.com/DesktopModules/CRD/Attachments/Whattoexpectin2011-MarkazResearch-January2011.pdf



8

Kuwait saw some extraordinary income in 2010, mainly pertaining to the Zain/Bharti Airtel deal which inflated earnings. Consequently, our

expectation of a full year 2011 net profit of USD 5.6 bn would result in a

3.3% decline in earnings. However, if we remove extraordinary earnings from the picture, the 2011 forecast would actually be a growth of about

80%, provided Financial Services and Real Estate resume positive profit. Figure: 4 – Consolidated GCC Earnings Trend (USD Mn)

Among sectors, banks are expected to show a growth of 12% in 2011 (versus our initial forecast of 30%) due to a more muted recovery than we

had expected (Figure 5). Telecoms managed to push through an impressive 36% annual growth in 2010 (albeit due to booking of extraordinary

investment-related profits from Zain). However, 2011 is looking to be flat

for the sector, when excluding extraordinary income.

The commodities sector received a boon in Q1 as crude prices spiked on political turmoil in the region. 1Q earnings gained 51% to USD 3.3 bn; we

expect full year growth to even out to about 11%. Figure 5: Consolidated GCC Earnings Trend (USD Mn)

Among sectors, banks are expected to show a growth of

12% in 2011

The commodities sector

received a boon in Q1 as crude

prices spiked on political turmoil in the region



9

At the beginning of the year, we were quite positive on all countries in terms of earnings growth due to several rebound stories. However, despite

a more or less positive Q1; we have a Neutral view on Saudi Arabia, Kuwait

and Bahrain earnings going forward. We maintain positive views on UAE and Qatar due to a turnaround story in the former (Real Estate) and healthy

growth in the latter (Table: 4).

4. I4. Investor Sentiment We have used the Bayt’s Consumer Confidence Index to determine investor sentiment (Table 5). The Index is survey based and reveals the economic

well–being of a country. 2010 saw a fluctuation in consumer confidence across the GCC; rising in 1Q before declining through 3Q.

The first quarter of 2011 has seen confidence rise substantially in Saudi, by

about 13% YTD. Kuwait and UAE have seen respectable increases as well however; political turmoil in Oman and Bahrain brought confidence down.

Table 5: Bayt Consumer Confidence Index


May-08 517 522 549 551 580 544

Jul-08 504 541 497 549 568 515

Nov-08 504 520 475 557 547 526

Feb-09 498 413 379 496 528 454

May-09 540 503 481 523 605 514

Aug-09 562 567 539 584 652 545

Dec-09 569 549 509 579 623 557

Mar-10 553 554 537 577 643 568

Jun-10 533 529 534 589 608 588

Sep-10 539 569 537 583 587 470

Dec-10 542 542 551 600 646 532

Mar-11 612 586 588 612 639 524

YTD 13% 8% 7% 2% -1% -2%

Assessment Positive Positive Positive Neutral Negative Negative

Source: Bayt.com, Markaz Research

Table 4: Earnings Growth Potential

Earnings Growth


Overall GCC

2003 64% 105% 46% 73% 0% 123% 72%

2004 48% 21% 72% 65% 150% 95% 48%

2005 45% 107% 137% 72% 26% 6% 72%

2006 17% -26% 8% 25% 17% 21% 5%

2007 7% 74% 38% 22% 48% 34% 30%

2008 -46% -97% -7% 31% -15% -62% -42%

2009 26% 109% -26% 17% -10% 7% 4%

2010E 34% 654% -53% -18% 26% 24% 12%

2011F 1% -3% 111% 12% -5% 3% 15%

Assessment Neutral Neutral Positive Positive Negative Neutral


Despite a more or less positive Q1; we have a Neutral view on

Saudi Arabia, Kuwait and

Bahrain earnings going forward

The first quarter of 2011 has seen confidence rise

substantially in Saudi, by about 13% YTD



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5. Geopolitical Developments

We have used two of Economist Intelligence Unit’s ratings – Political risk and Economic Structure. Economic structure risk ratings for all GCC

countries have remained constant through 2009/2010. (See Section A for closer look at geopolitical developments in 1H11).

Given the political turmoil at the beginning of 2011; Oman and Bahrain’s

rating were downgraded in terms of Political Risks. Oman was brought to

BB while Bahrain down to B. However, Economic Structure Risk has remained the same despite the upheaval.

Table 6: Risk Ratings

Political Risk Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2002 C C C C B C

2003 D C C B B C

2004 D C C B B C

2005 D C C B B C

2006 B BBB BBB BBB BBB BB

2007 B BBB A BBB BBB BB

2008 B BBB A BBB BBB BB

2009 B BB BBB BBB BBB BB

2010 B BB BBB BBB BBB BB

2011 B BB BBB BBB BB B

Economic Structure Risk


2002 B B B B B B

2003 B B B B C B

2004 B B B B B B

2005 B B B B B B

2006 BBB BBB A A A BBB

2007 BBB BBB BBB A A BBB

2008 BBB BBB BBB A A BB

2009 BBB BBB BB A A BB

2010 BBB BBB B A BBB BB

2011 BBB BBB B A BBB BB

Assessment Positive Positive Positive Positive Neutral Neutral

Source: EIU, Markaz Research

Given the political turmoil at the beginning of 2011; Oman

and Bahrain’s rating were downgraded in terms of

Political Risks



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6. Market Liquidity

Liquidity has been on a downward trend for the last four years, culminating in just USD 296 bn in 2010 as opposed to a high of USD 1.6 tn back in

2006.

Value traded has picked up somewhat in 2011; 1H11 value traded came in at USD 194 bn, a 10% YoY growth. This was led by Saudi Arabia, where

value traded in the first half of the year grew 28% YoY to USD 155 bn.

Qatar was the only other GCC country to show a YoY growth in liquidity, at 33%. Kuwait registered a 47% YoY decline in 1H11 value traded to USD

13.5 bn.

Figure 6: Value Traded Trends (USD Bn)

Given the positive YoY growth in liquidity so far this year, we have a

Positive view on the same for Saudi Arabia and Qatar while maintaining our

Negative view on other markets.

Table 7: Market Liquidity

Value Traded ($m)


CAGR (2001-2005)

136% 39% 214% 118% 45% 51%

Growth - 2005 133% 86% 663% 345% 85% 54%

Growth - 2006 46% -35% -9% -29% -25% 116%

Growth - 2007 -58% 103% 20% 48% 86% -39%

Growth - 2008 -23% 2% -3% 61% 70% 120%

Growth - 2009 -36% -43% -54% -47% -33% -77%

Growth - 2010 -40% -42% -58% -28% -43% -39%

2011 YoY 28% -47% -43% 33% -8% -26%

Assessment Positive Negative Negative Positive Negative Negative

Source: Zawya, GulfBase

1H11 value traded came in at

USD 194 bn, a 10% YoY growth

Kuwait registered a 47% YoY

decline in 1H11 value traded to

USD 13.5 bn



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D. Country Views Saudi Arabia – Neutral

We maintain a Neutral outlook on Saudi Arabia for 2H11 due to moderate

economic activity (especially inflation and the fiscal balance) in addition to

moderate earnings growth. Positive factors arise in valuation and market liquidity which has been picking up.

The 2011 Saudi fiscal budget is expected to run a deficit of USD 10 bn, with

spending forecasted at USD 154.7 bn (7% lower than actual 2010

expenditures of USD 167 bn). The budget is expected to show increased infrastructure spending. The Kingdom’s $385 bn, 5 yr development plan is

expected to spur economic activity by encouraging construction/real estate projects, which in turn should spur lending by banks. The program includes

housing, ports, and upgrading the educational system.

Additionally, the government has ramped up spending on welfare programs

and Saudization plans in order to quell civil unrest and address its unemployment issues. Consequently, the fiscal balance is expected to drop

from 13% of GDP in 2011 to 9% in 2012.

As for corporate earnings, these are expected to be flat in 2011 versus a

30% growth in 2010 (which was largely driven by Commodities). We expect support to come from the Banking sector, which we expect will grow at

10% in 2011 while slower growth in telecoms may be a drag on overall earnings. Investor sentiment (as measured by Bayt.com) was up 13% as of

March 2011 while the geopolitical outlook (as measured by EIU) remains

stable despite some signs of unrest at the beginning of the year.

As previously mentioned, market liquidity is up in the Kingdom. Value Traded came in at USD 155 bn for 1H11, a 28% YoY growth, which would

translate to over USD 300 bn if the pace keeps up to the end of the year.

Kuwait – Neutral

We have downgraded our outlook on Kuwait from Positive to Neutral for the

remainder of 2011 due to poor market conditions, more muted earnings growth and continued weakness in market liquidity.

The economy is expected to grow by 5.3% in 2011 following a growth of 2.3% in the previous year, aided by high oil prices and increased

government spending. This growth is expected to be maintained through 2012. Inflation, which is expected to have jumped to 6.1% in 2011, due to

subsidies and grants, is forecasted to come back down to 2.7% in 2012. This is below the long-term average of about 4%.

Fiscal and Current Balances are expected to remain the highest in the Gulf, at 23% and 37% of GDP, respectively, in 2011 and holding steady through

2012.

Corporate earnings in Q1 were fairly positive; aggregate net profit was at

USD 2.14 bn, boosted by extraordinary telecom earnings and a return to positive results for the financial sector. However, we expect full year 2011

results to come in at USD 5.6 bn, a 3% decline from last year.

We have a Neutral outlook on Saudi Arabia for 2011 due to

moderate economic activity

We have downgraded our

outlook on Kuwait from

Positive to Neutral for the remainder of 2011



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UAE – Abu Dhabi: Positive, Dubai: Neutral

We remain Positive on Abu Dhabi while being Neutral on Dubai. The

economy grew at an estimated 2.4% in 2010 and is expected to show a growth of 3.3% in 2011 followed by 3.8% in 2012. Inflation is expected to

jump to 4.5% in 2011 versus 2% in 2010. The geopolitical and regulatory arenas are considered to be stable. However, lack of liquidity remains a

problem as value traded in the UAE continues to dry up.

Corporate earnings are expected to rebound in 2011 after the Real Estate

sector suffered a significant loss in 2010 (due to Aldar Properties). 1Q11 was a little weak, aggregate net profit was at USD 2.8bn, a 1% decline.

However, a return to profitability in the Real Estate segment should push

aggregate net earnings in 2011 to USD 10.2 bn. We expect banks to show a net profit of USD 5.36bn, a 17% annual growth.

Qatar – Positive

We remain Positive on Qatar owing to its high economic growth prospects,

healthy banking sector and heavy government support in addition to

increasing liquidity.

The economy is expected to show another year of double-digit growth, boosted to a forecasted 20% in 2011 (due to high commodity prices) before

falling back to a more sustainable 7% in 2012. Inflation remains well under

control despite the growing economy, remaining at a steady 4% through 2012.

1Q11 net profits came out to USD 2.4bn, a 23% YoY growth. We expect

corporate earnings to continue growing at a healthy pace to USD 8.5bn by the end of the year, which would translate to an annual growth of 12%.

Bucking the GCC trend; Qatar value traded grew in 1H11 to USD 12.95bn, a 33% YoY growth. Should the government be successful in raising Foreign

Ownership Limits (a prerequisite for MSCI Emerging Market inclusion), we could see liquidity increase significantly in the coming year.

Oman – Neutral

We have downgraded our view on Oman from Positive to Neutral due to the political situation which impacted corporate earnings, sentiment and

geopolitical perception.

Real GDP is expected to have grown at 4.7% in 2010 to decline to 4.4% in

2011 and down to about 4% in 2012 as economic growth slows. Consequently, inflation is also expected to decline through the years; it is

forecasted at 3.5% in 2011 before declining to 3% in 2012. Given healthy oil prices, the government balance is expected to remain quite healthy, at

about 17% of GDP in 2011 before declining slightly to 14% in 2012.

As previously mentioned, corporate earnings in Oman were impacted by the

political turmoil at the beginning of the year, coming in at USD 338 mn, a 26% YoY decline. We expect some weakness to remain throughout the

year, specifically in the financial services and Telecom sectors, with full year

net earnings at USD 1.5 bn, a 5% annual decline versus our beginning of the year outlook, which forecasted a 21% increase.

We have segregated our UAE

outlook and are Positive on

Abu Dhabi while being Neutral on Dubai

Bucking the GCC trend; Qatar value traded grew in 1H11 to

USD 12.95bn, a 33% YoY growth



14

Bahrain – Neutral

Our outlook on Bahrain is Neutral but verging on Negative due to weakened

corporate earnings outlook in addition to a less than favorable geopolitical environment which is negatively impacting investor sentiment and market

liquidity.

From a 24% annual growth in 2010 we expect FY 2011 corporate earnings

to grow just 3% in 2011 due to financial services weakness. Q1 results came in at USD 315 mn, a 10% YoY decline.

The Final Analysis

Our view on market attractiveness is summarized in the table below. As per

the six force framework assessment, we are positive on Abu Dhabi and Qatar while remaining Neutral on all other markets for the rest of the year

(Table 8).

Table: 8 – Final Ranking

Our outlook on Bahrain is Neutral but verging on

Negative



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Appendix 1: Key Events

January (-2.6%2)

- Egyptian protests erupted over the last week of January; the Egyptian market shed close to 20% before being closed, while S&P, Fitch and Moody all downgraded Egypt credit and placed it on

Negative outlook. Kuwait, Saudi and UAE markets, which all have close ties to Egypt, saw their stocks fall in the final week of the month.

- The 11 Arab bourses3 lost nearly USD 45 bn between 25th and 31st of January.

- Saudi 5 Yr CDS–one of the world’s 10 safest debt issuing sovereigns – rocketed more than 46% on the 28th of Jan and ended at around 110bps, up from 75bps. Qatar saw its CDS rate shoot up by 15% the

same day, ending at 102bps while Dubai CDS inched up to 453 bps before declining to 425 by month end.

February (-6.5%)

- Political unrest spread from Egypt and Tunisia to Libya, Bahrain, Oman and portions of the Levant. - CDS rates continued to rise; Saudi 5 Yr CDS rocketed more than 46% on the 28th of Jan and is up

81% for the year. Dubai 5 yr CDS was up 7% for the month. - Bahrain 5 Yr CDS rates are up 65% YTD as unrest continues. Moody’s has placed the Kingdom under

review for a possible downgrade on its A3 rating. S&P has already cut Bahrain’s Long term rating to A-

and Short-term to A-2. - The Zain/Etisalat deal continued to dominate headlines in Kuwait, crowding out most news in the

country. The telecom firm rejected three bids for its Saudi unit; from Kingdom Holding, Batelco and a consortium of investors, which brought down blue chips on the KSE. The February 28th due diligence

deadline passed without comment from Zain or Etisalat, which prompted a rapid sell-off as investors

considered the deal to be scrapped.

March (6.06%)

- The Egyptian market reopened on the 23rd of March, primarily to avoid exclusion from MSCI indices for lack of trading, after being closed for nearly two months following political unrest earlier this year.

- S&P cut Bahrain’s rating by two notches to BBB (long-term foreign currency) with a Negative outlook.

- The arrival of foreign troops into Bahrain in mid-March caused the CDS spread to jump 46 bps to a 20-month high as the government instituted a 3 month State of Emergency.

- Kuwait Investment Authority announced a plan to inject over USD 3.5 bn into the local property market through a portfolio to be managed by Kuwait Finance House.

- The Kuwait Capital Market Authority regulations came into effect during the month.

- Etisalat officially walked away from its proposed USD 12 bn offer for a 46% Zain stake, citing everything from regional unrest to a divided Zain board and due diligence issues.

April (3.16%)

- According to the Institute of International Finance (IIF), the GCC will see a combined current account

surplus of over USD 290 bn this year, more than double that of 2010, as oil prices strengthen.

- The Kuwait government resigned in April, lending uncertainty to the market in the face of the Kuwait Development Plan implementation and pending approval for the second plan’s budget.

2 MSCI GCC Index monthly return 3 GCC markets (7), plus Egypt, Morocco, Jordan, Lebanon



16

May (-1.72%)

- Bahrain’s sovereign credit rating was cut by Moody’s to Baa1 (from A3) with a Negative outlook due to

continued political unrest. According to the rating agency, these events are likely to have damaged economic growth significantly, especially in service sectors such as tourism, trade and financial

services4. - During the month, the Kuwait market was hit by speculation that the Zain deal to sell its stake in Zain

Saudi Arabia to Batelco and Kingdom Holding for USD 950 mn was hitting roadblocks. Batelco and

Kingdom Holding stated that negotiations were ongoing and rumors of difficulties were “unsubstantiated and speculative in nature.”

June (-1.99%)

- In response to the IEA measure of releasing 60 mn barrels of crude oil to compensate Libyan

production, Kuwait Supreme Petroleum Council said that it expected oil prices to settle in the USD 90 – USD 100 per barrel range for the rest of 2011, which could put a dent in GCC growth for the year.

Despite the IEA move, Saudi Arabia pumped an average of 9.5 mn barrels a day in June. - MSCI upgrading of the UAE and Qatar to Emerging Market status was put on hold until the end of

2011 pending further review. Increased Foreign Ownership Limits (FOL) are seen as a vital component

to inclusion, which is more of an issue in Qatar versus the UAE. Qatar is currently in talks with various firms to consider raising the FOLs.

4 GCC Fixed Income Update – 29 May 2011, Markaz



17

Appendix 2: Index Movers Given the high degree of concentration in GCC markets, there are a handful of companies which, due to

their size and scope of influence, are pivotal in moving the overall market. We have identified 8 such firms and present a short brief on each below;

Sabic

Code: 2010.SE |Current market Price: SAR 106 | Mcap: USD 85 Bn

Saudi Basic Industrial Corporation (SABIC) is one of the top 10 largest petrochemical manufacturers in the

world. SABIC has 6 main strategic business units which include: Basic Chemicals, Intermediates, Polymers, Specialized Products, Fertilizers, and Metals. According to Zawya, SABIC is the most profitable petrochemical

company in the world and it is worthy to note that the Government of KSA owns over 70% of SABIC which

will ensure cheap feedstock and continuous support in the foreseeable future.

Table 1-Historical Financial Highlights

All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY

Income Statement

Revenues 20,815 22,963 33,570 40,115 27,414 40,526 11,967 31%

COGS 12,015 13,593 20,816 27,942 19,802 27,580 7,853 34%

Net profit 5,096 5,398 7,188 5,860 2,414 5,741 2,051 42%

Balance Sheet

Total Assets 36,429 44,313 67,492 72,288 78,965 84,690 89,139 10%

Total Liabilities 19,846 24,926 43,245 44,908 50,169 52,481 54,879 9%

Total Shareholder's Equity

16,583 19,387 24,247 27,380 28,796 32,209 34,260 13%

Sources: Reuters, Zawya and Gulfbase

On a historical view, SABIC continues to post positive growing numbers and is aiming to reach the scheduled 2020 vision of doubling output and sales. Net income bounced back in 2010 after a poor 2009, totaling USD

5.74 bn, more than double that of the previous year, as Revenues grew by 48% to USD 40.5bn.

High commodity prices in 1Q11 boosted earnings further; net income was at USD 2bn, 42% high than 1Q10,

as Revenue grew by 31% YoY to USD 12 bn.

Looking forward:

2011 remains healthy in terms of commodity prices which should allow for positive results for SABIC.

Analysts are expecting positive earnings growth for the company and have issued Buy/Overweight recommendations.

Consensus Estimate Table (2011 f)

Annual (USD mn) NCB Capital EFG Hermes Nomura Al Rajhi Capital

Jun-11 Jul-11 Jun-11 May-11

ROA: 8.70% - - -

ROE: 22% 21.60% - 21.20%

Revenue: 50,794 49,324 50,216 49,169

Net Profit 8,331 7,269 8,076 6,698

EPS(SAR) 10.41 9.3 10.1 9.09

Growth 45% 27% 41% 17%

Fair value 128.6 133 145 131.2

Recommendation Overweight BUY BUY Overweight

Sources: Reuters Knowledge



18

Al Rajhi Bank Code: 1120.SE |Current market Price: SAR 74.5 | Mcap: USD 29.7 Bn

Al Rajhi Bank is the largest lender in the Kingdom with a financing book worth USD 33 bn as of 1Q11. Al Rajhi offers a wide range of commercial banking and investment services complying with Islamic law.

Ownership is stable with AlRajhi family owning 39.9%. A stable ownership structure especially for banks in

the region gives positive signals to investors, due to management stability and continuity, thus, strategies are usually followed through.

Historical Financial highlights-


Income Statement

Income from Banking activities 1,516 2,042 2,171 2,512 2,613 3,171 592 1.91%

Operating Expense 484 521 647 752 793 509 93 -2.64%

Net profit 1,502 1,947 1,720 1,739 1,804 1,806 453 0.96%

Balance Sheet

Financing (Gross) 21,430 24,076 28,210 38,188 37,330 39,805 33,134* 5%

Total Assets 25,343 28,056 33,312 43,543 45,516 49,292 54,143 18%

Deposits 19,039 19,494 23,927 31,097 32,764 38,151 42,784 22%


Total Shareholder's Equity 3,592 5,381 6,297 7,205 7,662 8,085 7,738 4.2%

*Net Source: Reuters Knowledge and Zawya

2010 did not see the banking sector recover as well as most would have hoped. Prudential provisioning among the banks led to mitigated net profit growth. Al Rajhi’s bottom line was flat in 2010 and into Q1,

coming in at USD 453mn.

The bank’s Financing book is at USD 33bn, 5% higher than the same quarter in 2010 while Deposits were

up 22% in the same period to USD 42bn, giving a Financing to Deposit ratio of 77%.

Looking forward

The Saudi banking sector is expected to perform significantly better this year due to lower provisioning and healthier economic activity.

Al Rajhi Bank net profit expectations range from -1% to 16% growth for 2011 though should Q2 be as

muted as Q1, these estimates may subsequently be tempered.

Consensus Estimate Table (2011f)

Annual (USD mn) Global Inv

House NCB Capital Taib

Jul-11 Jun-11 Jun-11

ROA: 4.00% 3.80% 3.70%

ROE: 27.70% 23.50% 22%

Revenue: 3,347 3,252 3,097

Net Profit 2,089 1,789 1,867

EPS(SAR) 5.2 4.5 4.67

Growth (EST)5 16% -1% 3%

Target price (SAR) 70.3 84.9 80

Recommendation HOLD Overweight Neutral

Source: Reuters Knowledge

5 Based on Projected 2010 net income



19

Zain Group Code: ZAIN; Current market Price: KWD1.02; Mcap: USD16Bn

Zain group was established in 1985 and was the first telecommunication company in the GCC. Zain started its robust expansion in the MENA region, with operations in 6 ME countries and 13 African counties including

Sudan. Earlier this year Zain sold the majority of its African assets to focus on regional expansion.

Historical Financial highlights- All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY

Income Statement

Gross Revenues 2,119 4,744 6,133 7,324 4,618 4,942 1,186 -2%

COGS 332 1,004 1,394 2,088 1,190 1,297 316 2%

Net profit 665 1,079 1,172 1,177 713 3,886 256 36%

Balance Sheet

Total Assets 7,519 12,764 15,967 20,167 20,829 13,565 14,540 -30%

Total Liabilities 3,183 7,812 10,183 12,052 12,432 3,886 5,050 -59%

Total Shareholder's Equity 4,335 4,952 5,784 8,115 8,397 9,678 9,490 11%

Source: Zawya

Zain booked the earnings from its USD 10.7bn sale of African assets to India’s Bharti Airtel resulting in net earnings of USD 3.88bn for 2010.

Q1 results came in at USD 1.2bn in revenues, a 2% YoY decline, while net profits were up 36% YoY to USD

256 mn.

Looking forward

With the sale of its African assets, a new strategy has arisen; in the past, Zain wanted to a be a strong

global player and compete head to head with the big names in telecommunication, however now, Zain plans

to focus on the regional segment were ARPU’s are still high.

Broker recommendations remain Neutral given current market conditions.


Annual (USD mn) Global Inv House SICO

Jun-11 May-11

ROA: 9.70% 8.60%

ROE: 12.60% 12.90%

Revenue: 4,892 5,367

Net Profit 1,163 1,137

EPS(KWD) 0.08 0.08

Growth [1](EST) NM NM

Target price (KWD) 1.00 1.06

Recommendation HOLD HOLD




20

Industries Qatar Code: IQCD.DSM | Current Market Price: QAR 139.5| Mcap: USD21Bn

Industries Qatar was established in 2003, the main objective of the company is to act as a holding company, for different industrial corporations, including; Qatar Steel Company Limited (QASCO), an integrated steel

manufacturer; Qatar Petrochemical Company Limited (QAPCO), a producer and seller of ethylene, polyethylene, hexane and other related products; Qatar Fertilizer Company (QAFCO), a producer and seller

of ammonia and urea, and Qatar Fuel Additives Company Limited (QAFAC), which is engaged in the

production and export of methyl-tertiary-butyl-ether and methanol.6


All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11

Income Statement

YoY

Revenue 1807 2137 2561 4048 2651 3386 1099 48%

COGS 707 980 1108 1920 1581 1758 492 27%

Net Operating profits 853 899 1235 1853 916 1416 544 79%

Net income 883 994 1369 1998 1339 1531 575 72%

Balance Sheet

Assets 3345 4088 5532 7537 7447 8762 8582 6%

Liabilities 714 1,010 1,733 2,476 2,130 2,789 2,862 11%

Shareholder’s Equity 2,570 3,042 3,754 5,009 5,230 5,972 5,719 3%

Source: Zawya

2010 net income was at USD 1.5bn, a 14% annual growth. High commodity prices have boosted Q1 earnings as well, with net profit at USD 575mn, a 72% YoY growth, driven by Q1 Revenue growth of 48%.

Looking forward

High commodity prices are expected to hold through the remainder of the year, giving a boost to industrials across the region.

Brokers expect high earnings for Industries Qatar in 2011, ranging from 21% - 60% growth on the back of high commodities and healthy economic growth.


Annual (USD mn) EFG Nomura TAIB

Jul-11 Jun-11 May-11

ROA: 21.00%

ROE: 37.00% 30.60%

Revenue: 4,389 4,729 4,111

Net Profit 2,232 2,440 1,857

EPS(QAR) 14.8 16.2 12.3

Growth Est 46% 59% 21%

Target price (QAR) 170 142 164

Recommendation BUY Underperform Overweight


6 Excerpt from www. gulf base.com on Industries Qatar



21

Qatar National Bank Code: QNBK | Current Market Price: QAR 143.3| Mcap: USD25Bn

Qatar National Bank (QNB) was established in 1964 and is the largest lender; currently QNB employs 1330 personnel, serving 65 local branches and 9 international branches. Its business units include; full range retail

banking, treasury, Wealth management, corporate finance and Islamic finance solutions which are offered to individuals, corporations and Governments.


All Figures in USD Mn 2005 2006 2007 2008 2009 2010 2Q11 Income Statement

YoY

Interest income 597 933 1,270 1,679 1,756 2,166 655 4%

Interest expense 244 493 784 990 846 890 184 -29%

Provisions - - - 68.03 77.26 147 57 115%

Total Operating profits 604 724 936 1362 1533 1411 423 21%

Net income 422 549 689 1003 1154 1566 497 26%

Balance Sheet

Gross Loans & Advances 8,648 12,700 18,150 27,488 29,898 29,136 41,886 30%

Assets 13,753 19,688 31,409 41,728 49,239 61,343 72,388 42%

Deposits & CD's 10,016 14,267 20,380 26,092 29,895 38,469 53,900 68%

Liabilities 11,360 17,364 27,603 37,158 43,755 54,687 61,856 37%


Source: Zawya

In 2010, QNB saw a 36% growth in its bottom line as Interest Income was up 23% and despite a 90%

increase in provisioning. Loans growth was rather flat while Deposits were up 29% to USD 38.5bn.

In 2Q11, the bank saw a robust 30% YoY growth in lending coupled with a 68% YoY growth in Deposits, giving a Loans to Deposit ratio of 78%. Additionally, the bank saw a 26% YoY growth in net profit to USD

423mn.

Looking forward

Given the high degree of government support afforded the bank, in addition to its ranking in the Qatari banking sector, analysts are positive on the bank for the rest of the year. Net profit growth forecasts range

from flat to around 25% which is in line with performance for the year thus far.


Annual (USD mn) Beltone EFG-Hermes NBK Capital

Jul-11 Jul-11 Jul-11

ROA: 2.80% 2.78% 2.80%

ROE: 21.70% 22.12% 21%

Revenue: 2,423 2,407 2,626

Net Profit 1,566 1,859 1,946

EPS(QAR) 10.54 10.64 11.89

Growth7](EST) 0% 19% 24%

Target price (QAR) 163.7 176.4 156.3

Recommendation Outperform BUY Outperform


7 Based on projected 2010 Projected numbers.



22

NBK Code: NBK |Current market Price:KWD1.160| Mcap: USD17Bn

National Bank of Kuwait (NBK), established in 1952, in the state’s largest lender; today NBK employs 4,900 personnel, serving 69 local branches and 17 international branches. The bank offers a wide array of

products including, retail banking, Corporate banking, wealth management, structured and trade Finance. Moreover, NBK has a dedicated investment center, which offers portfolio management, fund management

and brokerage services.



Income Statement

%

Interest income 1,160 1,676 2,132 2,387 1,907 1,762 445 -5%

Interest expense 473 867 1,222 1,108 593 450 103 -22%

Net interest income 687 809 910 1,279 1,314 1,312 342 2%

Provisions 87 113 87 295 137 43 24 NM

Net profit 721 887 959 891 925 1,103 295 6%

Balance Sheet

Total Assets 21,234 27,330 42,115 43,382 44,973 47,163 50,857 9%

Loans 11,788 15,104 20,748 24,258 27,263 28,714 28,927 2%

Deposits 13,799 15,271 19,205 19,340 23,019 23,346 26,182 13%


Total Shareholder's Equity

2,634 5,381 6,297 7,205 7,662 8,108 7,808 19%

Source: Zawya

Net income for the bank topped USD 1bn in 2010 despite flat top-line performance, aided by a 69% decline

in provisions to USD 43mn. Loans were up 5% for 2010 while Deposits grew just 1%.

In 1Q11, provisions were back up, coming in at USD 24mn, over half the total for 2010. Interest Income

was down 5% while Interest Express shed 22% resulting in a 2% increase in Net Interest Income to USD 342mn. Net Income gained 6% YoY to USD 295mn. Lending was up 2% while Deposits were up 13%.

Looking forward

Analysts are Neutral with an optimistic bias on the stock. Brokers expect 2011 net income growth of around 4%, which is considerably lower than the 19% seen in 2010.


Annual (USD mn) Beltone EFG-Hermes Taib

Jun-11 Jun-11 Jun-11

ROA: 2.40% 2.35% 2.50%

ROE: 14.70% 13.50% 16.40%

Revenue: 1,949 2,347 1,989

Net Profit 1,152 1,134 -

EPS(KWD) 0.07 0.11 NA

Growth (EST) 4% 3% NA

Target price (KWD) 1.4 1.22 1.25

Recommendation Outperform Hold Hold




23

National Bank of Abu Dhabi Code: NBAD.ADX| Current Market Price: AED11.00 |Mcap: USD8.59Bn

In 1968 NBAD was established to act as the government bank and to some extent the central bank of Abu Dhabi, however, after the formation of the currency board in 1975; NBAD started serving the public through

3 main segments, Investment banking, retail banking and corporate banking (which includes international banking unit). NBAD is the second largest lender in the UAE and the largest in Abu Dhabi; it currently

employs 3200 personnel serving local and international branches (23).



Income Statement

%

Interest income 1,049 1,486 1,929 2,010 1,823 1,946 507 12%

Interest expense 592 936 1,274 1,028 614 580 154 21%

Net Interest Income 457 550 655 982 1,209 1,366 353 9%

Provisions 42 26 11 195 383 328 99 62%

Net income 702 573 682 822 822 1,003 252 -10%

Balance Sheet

Gross Loans & Advances 14,243 16,390 22,478 30,638 35,714 38,361 40,192 10%

Assets 22,777 27,489 37,961 44,828 53,592 57,559 63,565 16%

Deposits & CD's 16,219 19,259 22,253 28,173 32,583 33,521 38,400 23%


Source: Zawya

In 2010, NBAD saw a 22% growth in net income to just over USD 1 bn as Interest Income grew 7% while Interest Expense was down 6%. Provisions were lowered by 14% to USD 328mn, or 0.86% of loans.

Lending grew 7% for the year while Deposits were up 3%.

In 1Q11, net income was down 10% to USD 252mn as provisions were up 62% to USD 99mn. Interest

Income growth was strong at 12% YoY, but a 21% YoY growth in Interest Expense resulted in Net Interest Income growing just 9% YoY to USD 353mn. Loans were up 10% YoY to USD 40bn while Deposits were up

23% to USD 38.4bn.

Looking forward

Analysts are mostly positive on the bank with Target Prices in the AED12.4-AED14.1 range. Net profit growth forecasts are fairly neutral though, from a low of -2% to 7% annual growth forecasted for 2011.


Annual (USD mn) NBK Capital Beltone EFG-Hermes Global Inv House

Jul-11 Jun-11 Jun-11 Jun-11

ROA: 1.8% 1.7% 1.7% 1.6%

ROE: 15.0% 15.8% 18.7% 16.9%

Revenue: 2,112 2,049 2,121 2,049

Net Profit 1,070 980 1,063 989

EPS(AED) 1.37 1.5 1.36 1.3

Growth(EST) 7% -2% 6% -1%

Target price (AED) 12.4 14.1 13 13.5

Recommendation Outperform BUY HOLD BUY




24

Emaar Properties Code: EMAR.DU | Current Market Price: AED 3.06| Mcap: USD5.07Bn

Established in 1997 Emaar Properties (Emaar) is now one of the leading Real Estate development companies in the region. Recently Emaar added new segments such as Hospitality and Malls to enhance revenue

streams.

Historical Financial highlights- All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY

Income Statement

Revenues 2,277 3,813 4,865 2,918 2,291 3,308 540 -31%

COGS 976 1,917 2,945 1,494 1,175 2,070 261 -43%

Net profit 1,288 1,735 1,790 45 89 666 114 -45%

Balance Sheet

Total Assets 8,769 11,351 16,602 18,156 17,465 17,016 17,219 -1%

Total Liabilities 1,809 3,189 8,017 10,504 9,658 8,558 8,810 -6%

Total Shareholder's Equity 6,960 8,163 8,586 7,653 7,809 8,458 8,409 5%

Source: Zawya

After two years of depressed performance due to a struggling Real Estate sector, Emaar saw net profit of

USD 666mn in 2010 as Revenues grew 44%. However, some weakness has emerged in 1Q11 with Revenues declining 31% YoY to USD 540mn while net income has declined 45% YoY to USD 114mn.

Looking Forward

Analysts are optimistic on the stock with Buy/Outperform recommendations across the board. However, net profit forecasts for 2011 vary widely; from -53% to a growth of 41% for the current year. Annualizing Q1

results would bring a full year net profit of USD 458mn, a 31% annual decline.


Annual (USD mn) NBK Capital Taib

Global Inv House

Nomura EFG -

Hermes

Jul-11 Jul-11 Jun-11 Jun-11 Jun-11

ROA: - 3.2% 2.8% - -

ROE: - 6.7% 5.0% 4.6% 10.4%

Revenue: 2,115 2,352 2,304 2,483 3,382

Net Profit 316 554 467 393 942

EPS (AED) 0.19 0.33 0.28 0.33 0.53

Growth -53% -17% -30% -41% 41%

Target price (AED) 3.67 3.6 3.91 4.26 5.15

Recommendation Outperform Outperform - BUY BUY




25

Appendix 3: Markaz 6-Force Framework 1. Economic parameters

Even though this is a very broad parameter to evaluate, we have taken in five criterions with weightings to evaluate the attractiveness of the

economy. These five parameters are mostly forward looking and the

estimates are arrived at by taking into consideration forecast data from International Institute of Finance (IIF) in corroboration with the IMF.

a. Forecasted Real GDP Growth b. Forecasted Inflation

c. Forecasted Fiscal balance as % of GDP d. Forecasted Current account balance as % of GDP

e. Historical broad money growth trend (M2)

2. Valuation attraction

We have considered the levels of valuation on an historical basis (TTM) to arrive at ascertaining the attractiveness of the markets. The valuation

parameters used are:

a. Price to Earnings b. Price to Book

c. Dividend Yield

3. Earnings growth potential Earnings growth potential provides the forecasted earnings expectation for

the year. We have arrived at these forecasts using a bottom up approach of

aggregating earnings data for companies listed in GCC stock markets.

4. Investor sentiment We have used the consumer confidence survey results over a period of time

provided by Bayt.com to ascertain the trend in investor sentiments.

5. Geopolitical Developments

Due to the changing nature of the geo political scenario in the region we have used two different equally weighted parameters provided by EIU to

arrive at a score for geo political risk.

a. Political risk b. Economic structure risk

6. Market liquidity

Due to the change in liquidity levels in the markets post the credit crisis, we have included this parameter to evaluate attractiveness in terms of liquidity.

We have used value traded to ascertain the same.

All the parameters are scored on a scale of 0-5, wherein 0 would mean the lowest score implying negative assessment and 5 would mean the highest

implying positive assessment.

We have taken in six criterions

with weightings to evaluate the

attractiveness of the economy.


Appendix-4 Economic Factors

Real GDP Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Real GDP Growth (2000-2009 Avg) % GDP 3.5 5.4 6.1 13.2 5.3 5.8

Real GDP Growth (2010 e) % GDP 3.4 2.3 2.4 16.0 4.7 4.0

2011 f 7.5 5.3 3.3 20.0 4.4 3.1

2012f 3 5.1 3.8 7.1 4.1 5.1

Source: IMF

Inflation Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Inflation (2000-2009 Avg) annual change 3.1 3.9 5.5 6.3 4.3 2.1

Inflation (2010 e) annual change 5.5 4.1 2.0 1.0 4.4 2.6

2011 f 6.0 6.1 4.5 4.2 3.5 3.0

2012f 5.6 2.7 3.0 4.1 3.0 2.8

Source: IMF

Fiscal Balance % of GDP Saudi Arabia Kuwait UAE Qatar Oman Bahrain

(2000-2009 Avg) 11 27 12 9 8 3

2010 e 7 21 -1 11 7 -7

2011 f 13 23 7 9 17 2

2012f 9 21 6 6 14 0

Source: IMF, IIF

Current Account Balance % of GDP


(2000-2009 Avg) 9 27 11 9 7 2

2010 e 9 29 9 17 12 3

2011 f 20 37 14 20 15 12

2012f 14 31 11 16 15 13

Source: IMF, IIF

Broad Money Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Average (1998-2002)-% change 8 5 12 16 7 10

Average (2003-2009)-% Change 15 15 24 24 17 16

2010 e 9 3 6 23 11 11

1Q11 YoY 15 5 12 15 5 9

Source: Central Banks


Disclaimer

This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by

the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial

instruments or to participate in any particular trading strategy in any jurisdiction.

The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is accurate or

complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this

report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update,

modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes

inaccurate, or if research on the subject company is withdrawn.

This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice

regarding the appropriateness of investing in any securities or investment strategies discussed or

recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each

security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance

is historical and is not necessarily indicative of future performance.

Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals,

with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.


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