Subsequent to our last report on Qatar National Bank covered under the GCC Banking Sector report in May 2005, where we recommended a buy on the stock with a price target of QR363 at the then market price of QR305.7, the stock underwent a sharp bull run and reached our target price with a steep rally in Doha Securities Market (DSM). During FY2005, the bank performed more or less inline with our estimates with regard to assets, deposits and gross loans & advances, with a variations (actual v/s projection) of 1.65%, -3.9% and -4.3% respectively. Sharp increase in non-interest revenues and net reversal of provision for loans & advances for FY2005 substantially boosted QNB’s earnings and therefore beat our earning projections for the year.

In FY2005, QNB lagged behind the commercial banking sector in terms of growth intotal assets, deposits and credit facilities granted. The sector achieved a growth rate of 41.6% in total assets, 40.5% in deposit base and 40.9% in credit facilities granted vis-à-vis these QNB’s growth rate for all the respective parameters were at 27.1%, 23.9% and 18.1%. In FY2005, QNB’s total interest income grew by 53.7% to QR2,172.3mn while its interest cost grew by 75.8% to QR887.5mn. Therefore, despite the higher growth in interest expense as compared to interest income, the bank reported an increase of 41.3% in its net interest income to QR1,284.8mn. Non-interest revenue registered a sharp y-o-y growth of 219% in FY2005 to QR904mn. Gain on sale of investments and fees & commission income were the two major contributors to the non-interest income. QNB registered a y-o-y growth of 85.7% in its bottomline to reach QR1.54bn. This growth in the bottomline led to an increased earnings per share of QR18.4in FY2005 from QR7.9 achieved in the preceding year.

Strategic Initiatives During 2005

·QNB was the first commercial bank in Qatar to start Islamic Banking services. `QNB Al Islami’, the first ever Islamic branch in Qatar operated by a commercial bank, was launched in April 2005. This branch offers fully compliant Islamic services approved by the Sharia Committee. In 2006, the bank will open one more Islamic banking branch, for which it has already submitted an application to the Qatar Central Bank.

·In September 2005, Ansbacher & Co Ltd, a wholly owned subsidiary of Qatar National Bank (QNB), was granted the first ever licence to conduct business in the newly established Qatar Financial Centre in Doha. The licence enables Ansbacher toestablish a permanent presence in Qatar and provide advice on and access to the wide range of the Ansbacher Group's products and services to individuals and organizations in Qatar.

·QNB was the first Qatari bank to issue equity funds earmarked for local market called `Al Watani Funds’. The fund has two schemes, Al Watani Fund and Al Watani Fund II, the first one was designed for Qatari nationals and companies, while Fund II has been tailored for residents, expatriates and non-resident foreign nationals. Both Al Watani Funds are managed by the London-based Ansbacher & Co, a subsidiary of QNB.

·As part of QNB's regional growth program, in March 2005, it took a 25% stake in Mansour Bank, a newly formed commercial bank in Iraq. London-based merchant banker MerchantBridge & Company Limited has launched Mansour Bank, which is due to start its operations during the current year. The bank has been initially capitalised at US$38.5mn. QNB also plans to enter Syria through a new private bank Syria & Gulf Bank. In 2006, the bank also plans to open representative offices in Singapore, Iran, and Libya.

Outlook

We believe that the bank’s successful expansion into wealth management business will further help it to expand fees and commission income and diversify its revenue stream. The economy of Qatar offers lot of opportunities for the banking sector to expand further in institutional as well as retail segments and though QNB is in an advantageous position as compared to peer banks, it has to compete aggressively in all the facets of banking to stay ahead in the sector. The outlook for QNB continues to be optimistic, and we expect further growth to continue throughout 2006 and also in 2007. Based on the strong fundamentals and future growth potential, we believe that QNB’s stock is presently trading below its intrinsic value. Therefore, we maintain our earlier Buy recommendation of the bank’s stock for a medium term perspective and value the stock at an intrinsic value of QR254.82 based on the combination of Discounted Dividend Method (DDM) and Relative Valuation Method (P/BV multiple).

*Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Doha Securities Market as on March 27, 2006.

Source: QNB and "Global’s" Estimates