Bahrain Banking 06 2007 PDF

Global Research
June 2007
Banking
Bahrain Banking Sector Report
B
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Competitive banking environment
Global Investment House KSCC
Banking Research
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Omar M. El-Quqa, CFA
Executive Vice President
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Phone No:(965) 2400551 Ext.104
Faisal Hasan, CFA
Head of Research
fhasan@global.com.kw
Phone No:(965) 2400551 Ext.304
Burhan Ali
Financial Analyst
bali@global.com.kw
Phone No:(965) 2400551 Ext.229
Mihir J. Marfatia
Financial Analyst
mihir@global.com.kw
Phone No:(965) 2400551 Ext.421
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Global Research - Bahrain t|cc+| laestaeat hcuse
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Investment Summary
Bahrains banking sector has remained to be a cornerstone for growth of the domestic
economy. After the oil and gas sector, the financial institution sector remains the highest
contributor to the countrys GDP. Central Bank of Bahrain (CBB) replaced the Bahrain
Monetary Agency (BMA) on 7 September 2006. The introduction of new central bank in
the country, with the objective to monitor and enhance the banking sector regulations.
Bahrains financial services industry continued to develop and expand during 2005 and
2006, with 7 new licenses issued in 2005 and 9 new licenses issued at the end of 3Q-06.
The total number of banks and financial institutions at the of end of 3Q-06 was 371.
This comprises 150 banking institutions, 151 insurance firms, 36 capital market brokers
and 34 others. The country has continued to attract a good mix of locally incorporated,
regional and international institutions.
In J uly-2006, the Bahrain Monetary Agency (BMA) announced details of a comprehensive
package of regulatory reforms to modernize and strengthen the licensing framework for
banks operating in the Kingdom. This is line with BMAs effort to create a clearer, more
modern bank licensing regime, whilst strengthening Bahrains position as the leading
international finance centre in the Gulf. Similar licensing reforms have already been
implemented for the insurance and investment business sectors, in April 2005 and April
2006 respectively.
The total assets of the banking system grew at a CAGR of 22.9% during the period 2003-
2006. The total assets of the banking system (Retail and Wholesale) at the end of 2006
stood at BD70.43bn (US$187.35bn), a substantial increase of 33.5% as compared to the
previous year. The growth of the asset size is comparatively higher when compared to the
growth attained during the last two years, which was 17.8% in 2004 and 18.1% in 2005.
Wholesale banks dominates the banking system in Bahrain and contributes 87.7% of the
total Bahrain banking assets. The contribution of the wholesale banks have remained in
the range of 88.2% - 87.7% during the period 2003-2006. Market share of retail banks in
terms of total assets was 12.3% at the end of 2006.
The total assets of the Islamic banks grew at a CAGR of 43.2% during the period 2003-
2006, which has exceeded the growth of the entire banking system of Bahrain. The total
assets of Islamic banks operating in Bahrain stood at BD4.59bn (US$12.21bn) at the end
of 2006, which was an increase of 52.4% over its 2005-year end level.
The importance of Islamic banking can be further substantiated with the increasing
contribution of Islamic banking assets to the total banking system. The total assets of the
Islamic banks have grown at a much faster rate than the Bahrain banking system assets.
As a result, the contribution of Islamic banking to total assets increased from 4.1% in
2003 to 6.5% in 2006. Going forward, we believe that Islamic banks will continue to
grow at a faster pace than the conventional banking assets, as many investors are migrated
from conventional banking to Islamic banking.
BAHRAIN BANKING SECTOR REPORT
Outlook: Positive
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The total loans and advances of the banking system grew at a CAGR of 19.0% from
BD1.79bn (US$4.79bn) in 2003 to BD3.03bn (US$8.07bn) in 2006. In the year 2006,
it increased by 15.6% and stood at BD3.03bn (US$8.07bn) as compared to BD2.62bn
(US$6.98bn) at the end of December 2005. The lending to business sector accounted for
53.4% of the total credit, while personal and government sector accounted for 41.3% and
5.3% respectively.
The peer group comparison is done on five banks, namely Ahli United Bank (AUB),
Bank of Bahrain and Kuwait (BBK), National Bank of Bahrain (NBB), Bahrain Islamic
Bank (BIsB) and Bahraini Saudi Bank (BSB). Al Salam Bank was not included in the
peer group comparison.
The size of the banks under our coverage increased from BD5.3bn in 2003 to BD11.8bn
in 2006, registering a CAGR of 30.9%. In the year 2006, the size of banks under coverage
increased by 35.9% as compared to the previous year. Over the next four years (2006-
2010), we expect the banking assets for the banks under review to register a CAGR of
11.3% to reach BD18.14bn in 2010.
Deposits for banks under review grew at a CAGR of 26.3% for the period 2003-06
from BD2.8bn in 2003 to BD5.7bn in 2006. The top three banks (NBB, BBK and AUB)
deposits grew at a CAGR of 10.2%, 7.7% and 47.7% respectively for the period under
review. Over the next four years (2006-2010), deposits are likely to grow at a CAGR of
15.7% for the banks under review to reach BD10.24bn in 2010
On the lending side, gross loans and advances grew at a CAGR of 29.3% for the period
2003-06. Gross loans increased from BD2.6bn in 2003 to BD5.5bn in 2006. Net loans for
the banks under review grew at a CAGR of 31.5% for the period 2003-06, from BD2.4bn
in 2003 to BD5.4bn in 2006. Over the next four years (2006-2010), gross loans are likely
to record a CAGR of 15.3% for the period 2006-2010 to reach BD9.79bn in 2010.
Profits of the banks under review, increased from BD82.5mn in 2003 to BD182.9mn
in 2006, growing at a CAGR of 30.4% for the period under review. In 2006, profit of
the banks under review witnessed a growth of 29.8% from BD141.03mn in 2005 to
BD182.9mn in 2006Over the next four years (2006-2010), net profits of the bank under
review are likely to record a CAGR of 16.8% to reach BD340.29mn in 2010.
The return on average equity (ROAE) improved from 12.8% in 2003 to 15.2% in 2006.
The return on average assets improved from 1.50% in 2003 to 1.78% in 2006. BBK
had the highest ROAE of 18.2% in 2006, followed by BIsB with 17.8%. In terms of
average ROAA, BIsB was leading the way with RoAA of 3.4% followed by NBB at 2.3%
respectively in 2006.
Table 1: Global Valuation Matrix
Price Target Reco.
Change
%
BV EPS P/BV P/E
AUB 1.30 1.26 HOLD -2.8% 0.53 0.09 2.5 13.8
BBK 670 811 BUY 21.1% 294.4 58.0 2.3 11.6
BIsB 448 539 BUY 20.4% 248.9 69.8 1.8 6.4
Note: * Based on 2007E
Source: Global Research, Market prices as on May 31, 2007
All in fils except for AUB, which is US$
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Bahrain Economy
Bahrains nominal Gross Domestic Product (GDP) increased to BD5.03bn in 2005 from
BD4.21bn reported in the previous year, recording a growth of 19.7% on the back of improved
performance seen in financial, real estate and construction sector. It is worth noting that this
was the highest nominal growth reported in the last five years by the country. In terms of real
GDP, the country witnessed a growth of 7.8% in 2005.
Table 1: Gross Domestic Product
2002 2003 2004 2005*
GDP at current market prices (BD bn) 3.18 3.65 4.21 5.03
- (% change) 6.6 14.8 15.3 19.7
GDP at constant market prices (BD bn) 2.87 3.07 3.24 3.50
- (% change) 5.2 7.2 5.6 7.8
Crude oil production (US Barrels 000) 86,500 87,481 76,337 68,096
GDP Per Capita (BD) 4,726.0 5,290.0 5,945.7 6,943.0
Source: Ministry of Finance & National Economy, *Provisional Data
The total revenue for the year 2005 registered an yearly increase of 28.5% and stood at
BD1.67bn as compared to BD1.30bn reported for 2004. This is attributed mainly to better-
than-expected oil revenues, which was projected at around US$28 per barrel, and ended up at
an average of US$55 per barrel. Oil revenue, which was projected at BD895.7mn for the year
2005, actually contributed BD1.27bn to the total revenue of the government. The contribution
of oil and gas to the total revenue of the government in 2005 was higher than the year 2004,
which had seen an increase due to higher high oil prices in the year 2005. Oil revenue for
the year 2006 would also continue to be higher due to higher oil prices through out the year
2006. The government projected a deficit of BD208.6mn for 2005, but the country recorded
a surplus of BD257.3mn or 5.1% of GDP. This surplus is one of the highest recorded by the
country in the past five years.
The total exports of Bahrain in 2006 stood at BD4.35bn and oil exports contributed BD3.46bn
of the total exports during the period. The total exports in 2006 were up by 15.3%, on account
of higher oil prices in the year 2006. The total non-oil exports stood at BD0.88bn or around
20.3% of the total exports in 2006. The non-oil exports reported an increase of 4.7% in 2006
and hence the contribution to the total exports has been the lowest since 2002. The total
imports increased by 12.6% in 2006 to reach BD3.36bn. The total oil imports during 2006
stood at BD1.84bn, witnessing an increase of 17.6%, while non-oil imports witnessed an
increase of 7.0% and stood at BD1.52bn as compared to BD1.42bn recorded in 2005. As
a result, the non-oil imports contribution to the total imports declined from 66.6% in 2002
to 45.2% in 2006. The resultant trade balance in 2006 stood at BD984.80mn, registering an
increase of 26.0%. Thus on an external front, higher oil prices allowed maintaining a healthy
balance of trade. In our opinion, 2007 is likely to have a higher trade surplus as oil prices
have remained at high level, although not at the same levels seen in 2006.
The broad money supply as measured by M2 has grown at a high rate, which is primarily
attributed to the increase in private sector time and savings (Quasi Money) as well as demand
deposits. Keeping in-line with the rising demand deposits, the money (M1) increased by
21.4% at the end of 2006 to reach BD1.06bn. At the end of 2006, quasi money witnessed an
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increase of 12.2% to reach BD2.75bn, whereas it increased by 21.4% in 2005 as compared
to 2004. The broad money supply (M2) had increased from BD3.51bn at the end of 2005 to
BD4.04bn at the end of 2006, an increase of 14.9%. There has also been a consistent rise in
the money supply as measured by M3, which was primarily due to a substantial rise witnessed
in deposits from the government in the year 2006. At the end of 2006, M3 witnessed an
increase of 17.4% to reach BD4.89bn as compared with BD4.17bn in 2005. The growth in
money supply as measured by M3 in the year 2006 has been in line with the growth of 17.6%
witnessed at the of 2005.

Interest on interbank deposits increased from 2.8% (3-6 month offered rate) in 2004 to 4.7%
in 2006, which is in line with the increasing interest rate environment in the US (currency
peg). Following the same trend the deposit rates for the 3-12 months period also inched up
sharply from 2.62% in the first quarter of 2005 to reach 3.70% by the end of fourth quarter
of 2005, which was further increased up to 4.40% by the end of forth quarter of 2006. The
interest rates for construction and real estate sector lending jumped from 5.47% in the fourth
quarter 2004 to 8.82% at the end of fourth quarter of 2006. The highest rate was seen in the
second quarter of 2006, where it reached 9.14%, the highest rate seen in the last couple of
years. These trends suggests that gradually domestic interest rates are moving northwards,
however, the rise in rates will be a measured one rather than any drastic surge.
Bahrain has been the hub for foreign banks to operate from to tap the Middle Eastern markets.
2006. The total assets of the banking system (Retail and Wholesale) at the end of 2006 stood
at BD70.43bn (US$187.35bn), a substantial increase of 33.5% as compared to the end of
2005. The growth of the asset size is comparatively higher when compared to the growth
attained during the last two years, which was 17.8% in 2004 and 18.1% in 2005. At end of
2006, net foreign assets of the banking system were at BD2.41bn (US$6.41bn) at the end of
2006 as compared to BD2.21bn (US$5.87bn) at the end of 2005, an increase of 9.2%. The
total domestic assets amounted to BD10.40bn (US$27.67bn) at the end of 2006, an increase
of 29.5% over Dec 2005. It is worth noting that foreign assets accounted for 85.2% of the
total banking assets, indicating its significance for the Bahrain banking system.
Bahrains economy has been one of the most diversified economies in the region, particularly
its financial sector, which has developed strongly, and increased its contribution to GDP and
employment in the country. Bahrains economy is supported by prudent fiscal discipline
characterized by restraint on current expenditure and improved budget balances along with
an effective system of resource allocation for health, education and infrastructure projects. It
is worth mentioning that Bahrain is comparatively less dependent on oil compared to other
GCC countries. So, in other words, Bahrain will be the less vulnerable if the oil prices start
dropping in near future.
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Bahrain Banking Sector
Bahrains banking sector has remained to be a cornerstone for economic growth. After the oil
and gas sector, the financial institution sector remains the highest contributor to the countrys
GDP. Central Bank of Bahrain (CBB) replaced the Bahrain Monetary Agency (BMA) on 7
September 2006. The introduction of new central bank in the country, with the objective to
monitor and enhance the banking sector regulations. Now, CBB is responsible for licensing,
supervision and regulation of the financial sector and its new supervisory and regulatory
framework has played a significant role in liberalizing the sector to international banks.
The banking system in the region and in Bahrain is witnessing the entry of new players
and some consolidation among the existing players. Bahrains financial services industry
continued to develop and expand during 2005 and 2006, with 7 new licenses issued in 2005
and 9 new licenses issued till the end of 3Q-06. The total number of banks and financial
institutions at the of end of 3Q-06 was 371. This comprises 150 banking institutions, 151
insurance firms, 36 capital market brokers and 34 others. The country continued to attract a
good mix of locally incorporated, regional and international institutions.
In J uly-2006, the Bahrain Monetary Agency (BMA) announced details of a comprehensive
package of regulatory reforms to modernize and strengthen the licensing framework for banks
operating in the Kingdom. This is in-line with BMAs effort to create a clearer, more modern
bank licensing regime, whilst strengthening Bahrains position as the leading international
finance centre in the Gulf. Similar licensing reforms have already been implemented for the
insurance and investment business sectors, in April 2005 and April 2006 respectively. A
key feature of the revised framework for banks is the simplification of existing categories
of onshore and offshore banking licenses, enabling offshore banks to undertake onshore
business in a controlled manner. The existing bank license sub-category of Full Commercial
Bank is replaced by Retail Bank. Meanwhile, the two-existing offshore sub-categories of
Offshore Banking Unit and Investment Banking License are to be merged and replaced with
one unified Wholesale Bank license sub-category.
Recently, BMA has granted three new licenses to international banks that will offer a diverse
range of banking activities. CBB granted a license to the Royal Bank of Scotland (RBS) for
establishing a Representative Office in Bahrain. CBB also granted a license, separately, to
Coutts & Co, the private banking arm of The RBS Group. RBS & Coutts & Co will focus
on mainly two lines of business, wholesale banking and private banking from Bahrain. The
Bahrain office will also support RBS activities in the area of project finance and explore
opportunities in Islamic banking. This will be RBSs first on-ground representation in the
Middle East and North Africa (MENA) region. Another license was granted to the leading
international private bank, EFG Bank to establish a Representative Office in Bahrain. EFG
Bank is a wholly-owned subsidiary of EFG International, a global private banking group
headquartered in Zurich, Switzerland. The bank will provide wealth management solutions to
their clients, both institutional and individual in the region through their Bahrain office. The
bank believes that surge in liquidity and increase in wealth levels in recent years is providing
a new growth momentum for private banking services and Bahrain would be the ideal place
to do business in the region. The entry of such diverse financial institutions from across the
world demonstrates the excellent reputation the Kingdom enjoys as an international financial
center.
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Banking sector assets growing at a faster pace.
2006. The total assets of the banking system (Retail and Wholesale) at the end of 2006 stood
at BD70.43bn (US$187.35bn), a substantial increase of 33.5% as compared to the end of
2005. The growth of the asset size is comparatively higher when compared to the growth
attained during the last two years, which was 17.8% in 2004 and 18.1% in 2005. At end of
2006, net foreign assets of the banking system were at BD2.41bn (US$6.41bn) at the end
of 2006 as compared to BD2.21bn (US$5.87bn) recorded at the end of 2005, an increase of
9.2%. The total domestic assets amounted to BD10.40bn (US$27.67bn) at the end of 2006,
an increase of 29.5% over 2005. It is worth noting that foreign assets accounted for 85.2% of
the total banking assets, indicating its significance for the Bahrain banking system.
Table 2: Consolidated Balance Sheet: Retail and Wholesale Banks
US$ mn 2003 2004 2005 2006
Banks 6,965.8 8,681.0 10,099.8 13,784.9
Private Non-Banks 5,505.5 7,032.9 8,403.5 10,417.7
General Government 1,382.0 1,786.7 1,872.1 1,883.7
Other Assets 693.4 730.5 984.1 1,584.3
Foreign Assets 86,388.1 100,682.0 119,022.2 159,684.3
Total Assets 100,934.8 118,913.1 140,381.7 187,354.9
Banks 6,055.4 7,622.1 9,175.4 12,892.2
General Government 2,084.0 2,694.0 2,703.5 3,065.6
Other Liabilities 2,888.3 4,107.5 5,413.6 6,484.3
Foreign Liabilities 82,387.2 96,692.2 113,149.3 153,274.0
Total Liabilities 100,934.8 118,913.1 140,381.7 187,354.9
Source: Central Bank of Bahrain
Banks in Bahrain is categorized by wholesale retails banks. Wholesale banks dominates the
banking system in Bahrain. Wholesale banks contributes 87.7% of the total Bahrain banking
assets. The contribution of the wholesale banks have remained in the range of 88.2% - 87.7%
during the period 2003-2006. Market share of retail banks in terms of total assets was 12.3%
at the end of 2006. During the period 2003-2006, the market share of retail banks remained
in the range of 11.8% 12.3%. This indicates that the growth in the banking assets has been
across the board, which means that wholesale and retails banks are exhibiting more or less
the same growth over the last few years.

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Chart 1 : Wholesale and retails banking assets
Liability mix all about foreign liabilities
Liabilities grew at a CAGR of 22.9% for the period 2003-06 from BD37.94bn (US$100.93bn)
in 2003 to BD70.43bn (US$187.35bn) in 2006. In the year 2006, total liabilities grew by
33.5% as compared to end of 2005. Foreign liabilities accounted for about 81.8% of the total
liabilities. From 2003 to 2006, foreign liabilities have remained in the rage of 80%-82%.
Private non-banks contribution declined during 2006 to 6.2% from 7.1% at the end of 2005.
Banks contribution to the total liabilities increased from 6.5% in 2005 to reach 6.9% at the
end of 2006.
Chart 2: Liability Mix

Source: Central Bank of Bahrain, Global Research
Wholesale banks dominates the banking sector.
In the latest regulatory reform by the BMA, Offshore Banking Unit and Investment Banks
are merged and replaced as Wholesale Banks. The total assets of the wholesale banks grew
at a CAGR of 22.8% during the period 2003-2006. The total assets of the wholesale banks
stood at BD61.74bn (US$164.26bn) at the end of 2006, which represents 32.6% increase as
compared to BD46.55bn (US$123.85bn) at end of 2005. The total assets of the wholesale bank
witnessed substantial rise in the year 2006, mainly from the foreign assets, which contributes
100.0%
95.0%
90.0%
85.0%
80.0%
2003 2004 2005 2006
Wholesale Banks Retail Banks
87.9%
12.1% 12.3%
87.7% 88.2%
11.8% 12.3%
87.7%
100%
90%
80%
70%
2003 2004 2005 2006
Foreign Liabilities Banks Private Non-Banks General Government Other Liabilities
81.6%
6.0%
7.5%
2.1%
2.9% 3.5%
2.3%
6.6%
6.4%
81.3%
80.6%
6.5%
7.1%
1.9%
3.9%
3.5%
1.6%
6.2%
6.9%
81.8%
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about 92.0% of the total assets of the wholesale banks. This indicates the important role
played by foreign banks in the overall economy of Bahrain, which is also the back-bone of
the entire banking sector of Bahrain.
Table 3: Consolidated Balance Sheet of Wholesale Banks
I n US$ mn 2003 2004 2005 2006
Assets
Banks 4,552.8 5,813.8 7,089.0 9,802.8
Private Non-Banks 840.1 1,254.3 1,427.6 2,113.2
General Government 284.4 409.0 426.1 347.5
Other Assets 349.1 369.7 535.9 853.5
Foreign Assets 82,669.0 96,443.3 114,366.8 151,146.2
Total Assets 88,695.4 104,290.1 123,845.4 164,263.2
Liabilities
Banks 5,193.8 6,271.3 7,798.9 9,942.2
Private Non-Banks 696.6 710.1 1,228.4 1,460.5
General Government 715.9 884.8 945.5 1,013.3
Other Liabilities 1,651.1 2,588.3 3,533.8 3,878.3
The system remains a net external creditor, with net foreign assets of wholesale banks
amounting to BD1.19bn (US$3.18bn) at end of 2006, however it declined by 21.1% when
compared to 2005 level. Domestic assets of the wholesale banks amounted to BD4.93bn
(US$13.18bn) at the end of 2006 as compared to BD3.56bn (US$9.48bn) reported at the
end of Dec-2005, while the domestic liabilities amounted to BD6.13bn (US$16.29bn) as
compared to BD5.08bn (US$13.51bn) recorded at the end of 2005.
Retail banks growing in-line with the system assets.
In the latest regulatory reform by the BMA, Full Commercial Banks are replaced as Retail
Banks. The total assets of the retail banks grew at a CAGR of 23.6% during the period
2003-2006. Retail banks in Bahrain continued to show outstanding growth in 2006, as the
total assets of retail banks stood at BD8.68bn (US$23.09bn) as compared to BD6.22bn
(US$16.54bn) at the end of Dec-2005, an increase of 39.6%. The strong performance by
retail banks was a reflection of the positive business and economic conditions prevalent in
Bahrain and the quality of assets held by those banks. As a result, most of the local listed
banks showed higher earnings growth during the year 2006. This was due to low cost of
funds prevailing in the market coupled with an upbeat lending market, further supported the
banks earnings for the year 2006.
}uae ! )
Table 4: Consolidated Balance Sheet of the Retail Banks
I n BD mn 2003 2004 2005 2006
Cash 40.3 39.6 41.8 52.0
Banks 603.5 782.1 745.3 1,091.7
Bahrain Monetary Agency 263.5 256.4 344.9 353.6
Other Assets 129.4 135.7 168.5 274.8
Foreign Assets 1,398.4 1,593.8 1,750.4 3,210.3
Total Assets 4,602.0 5,498.3 6,217.6 8,682.5
Capital & Reserves 387.9 463.5 565.4 797.5
Banks 257.6 445.9 420.3 1,071.7
Bahrain Monetary Agency 66.4 62.0 97.3 37.5
Other Liabilities 77.2 107.7 141.4 182.4
Foreign Liabilities 732.9 1,074.1 1,056.7 1,994.7
The net foreign assets of the retail banks were BD1.22bn (US$3.23bn) at the end of 2006,
recording a whopping increase of 75.2% as compared to 2005-end level. Domestic assets
of the retail banks amounted to BD5.47bn (US$14.56bn) at the end of 2006 as compared to
BD4.47bn (US$11.88bn) at the end of Dec-2005 while the domestic liabilities amounted to
BD6.69bn (US$17.79bn) as compared to BD5.16bn (US$13.73bn) at the end of 2005.
I slamic banking increasing its penetration..
Liquidity in the GCC region has fuelled growth for both Islamic and conventional banking,
but Islamic banking has grown at a much faster pace when compared to conventional banking
over the last couple of years. The Islamic banking industry in Bahrain has witnessed growing
desire of customers to transact their financial activities in accordance with the Islamic Sharia
principles. Bahrain, which has spearheaded the Islamic banking activities in the region, has
become the natural and convenient location for Islamic finance in the Middle East region
with 27 Islamic financial institutions.
The strong growth of Islamic banking and its impact on financial markets has prompted a
number of traditional local and international banks to seek stronger relationships and joint
project financing arrangements with their Islamic counterparts. The Islamic banking industry
in Bahrain is becoming highly competitive and more multinational banks are entering in the
Islamic banking arena, thus changing the competitive setting of the commercial banking
sector in Bahrain.
According to the latest regulations, Islamic retail banks in Bahrain have been granted a key
exemption, which will considerably facilitate the Islamic mortgage business in the Kingdom.
The move will eliminate the payment of stamp duty twice on mortgages extended in
accordance with Islamic principles. The strengthening and development of Islamic banking
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has been, and remains, an important aspect in the governments policy in maintaining and
enhancing Bahrains status as the regions pre-eminent international centre. As a result of
the various initiatives undertaken by the Bahraini government to develop the country as an
Islamic banking hub, the size of Bahrains Islamic banking and finance industry rose sharply
in 2005 and has continued to grow in 2006.
Table 5: Consolidated Balance Sheet of I slamic Banks
I n US$ mn 2003 2004 2005 2006
Cash 10.1 12.6 14.8 21.2
Banks 1,092.3 1,147.5 1,737.2 3,065.6
Private Non-Banks 678.8 1,022.5 1,585.3 1,986.5
Other Assets 189.8 231.8 392.8 651.7
Foreign Assets 2,080.3 2,899.0 4,116.5 6,401.4
Total Assets 4,156.9 5,434.2 8,009.4 12,208.3
Capital & Reserves 678.4 1,056.6 1,286.4 2,238.5
Banks 429.8 817.5 1,212.9 2,253.5
Other Liabilities 48.1 61.8 231.5 258.4
The total assets of the Islamic banks grew at a CAGR of 43.2% during the period 2003-2006,
which has exceeded the growth of the entire banking system of Bahrain. The total assets of
Islamic banks operating in Bahrain stood at BD4.59bn (US$12.21bn) at the end of 2006,
which was an increase of 52.4% over its 2005-year end level. The growth in assets was
mainly fuelled by 55.5% rise in foreign assets of the banks, which also contributes more than
half of the total assets of Islamic banks. At the end of 2006, the net foreign assets of the banks
jumped from BD291.2bn (US$774.6mn) in 2005 to BD387.5bn (US$1.03bn), an increase of
33.1%. The growth in the Islamic banks during the last three years augurs well for Bahrain,
as Bahrain expects to become the preferred destination of Islamic banking in the region.
Chart 3: Consolidated Balance Sheet of I slamic Banks

5.2
4.2
3.2
2.2
1.2
2003 2004 2005 2006
7.0%
6.0%
5.0%
4.0%
4.1%
4.6%
5.7%
6.5%
Islamic Banking Islamic Banking % of Banking system
B
D

b
n
CAGR - 43.2% (2003-06)
}uae ! 11
The importance of Islamic banking can be further substantiated with the increasing
contribution of Islamic banking assets to the total banking system. The total assets of the
Islamic banks have grown at a much faster rate than the Bahrain banking system assets. As
a result, the contribution of Islamic banking to total assets increased from 4.1% in 2003 to
6.5% in 2006. Going forward, we believe that Islamic banks will continue to grow at a faster
pace than the conventional banking assets, as many investors are migrated from conventional
banking to Islamic banking.
Credit portfolio - getting bigger
The total loans and advances of the banking system grew at a CAGR of 19.0% from BD1.79bn
(US$4.79bn) in 2003 to BD3.03bn (US$8.07bn) in 2006. In the year 2006, it increased by
15.6% and stood at BD3.03bn (US$8.07bn) as compared to BD2.62bn (US$6.98bn) at the
end of December 2005. The lending to business sector accounted for 53.4% of the total
credit, while personal and government sector accounted for 41.3% and 5.3% respectively.
The contribution of business lending has increased from 46.8% in 2005 to 53.4% in 2006,
which plays an important role in driving the credit growth especially in favorable macro-
economic conditions. On the other hand, contribution of credit to government sector has
declined from 7.7% in 2005 to 5.3% in 2006. The credit to personal segment accounted for
41.3% in 2006 as compared to 45.5% at the end of 2005. Going forward, we believe that the
new regulation will smoothen the unprecedented growth seen in the consumer lending in the
last couple of years.
Chart 4: Credit Portfolio Break up

The personal segment witnessed an increase in lending by 4.9% at the end of 2006. The
lending to the personal segment has witnessed healthy growth in the last three years, but the
growth in the personal lending slowed down in the year 2006. Lending to personal segment
plays a significant role in the growth of commercial bank earnings as the interest rates
charged on the personal segment is much higher compared to the business segment during
the year 2005. The slower growth in personal lending during 2006 can be attributed to the
new regulation on consumer lending by the CBB.
100%
80%
60%
40%
20%
2003 2004 2005 2006
Business Personal General Government
46.5%
44.9%
8.6% 9.3%
45.5%
45.2%
46.8%
45.5%
7.7%
5.3%
41.3%
53.4%
1! }uae !
Lending from government witnessed a decline from BD202.6mn (US$539.0mn) in 2005 to
BD161.5mn (US$429.6mn) in 2006, recording a drop of 20.3%. In lending to government
segment, there has been a declining trend since 2004, which continued in the year 2006 as
well.
Table 6: Commercial Banks Credit to Various Sectors
BD mn 2002 2003 2004 2005 2006
Business 842.7 837.1 1,008.6 1,226.9 1,619.1
Manufacturing 255.7 251.1 298.2 282.6 312.3
Mining & Quarrying 0.6 1.0 2.3 2.3 1.8
Agriculture, Fishing & Dairy 5.9 6.3 8.5 9.0 6.5
Construction & Real Estate 176.9 165.8 187.1 302.1 484.2
Trade 299.6 286.2 341.3 436.2 551.6
Non-Banking Financial Institutions 27.9 41.1 71.0 67.7 75.1
Transportation & Communication 13.2 85.6 41.5 44.4 49.0
Hotels & Restaurants 24.4 15.1 27.5 27.0 22.0
Other Sectors 38.5 26.7 31.2 55.6 116.6
General Government 108.4 154.3 207.4 202.6 161.5
Personal 678.7 807.5 1,014.7 1,194.0 1,252.9
Total 1,629.8 1,798.8 2,230.7 2,623.5 3,033.5
Business segment registered a CAGR of 24.6% from BD837.1mn (US$2.2bn) in 2003 to
BD1.62bn (US$4.3bn) in 2006. In the year 2006, the business segment continued to be the
main source of growth for bank credit portfolio. The business segment has registered an
increase of 32.0% in 2006 as compared to the previous year. The growth in business sector is
mainly driven by trade, manufacturing and construction and real estate sector, as collectively
they account for almost 83.3% of the total business segment lending at the end of 2006.
The trade sector accounted for the largest pie among the three sectors of the commercial banks
credit to the private sector. It accounted for almost 34.1% of the total credit to the business
segment and followed by the manufacturing and construction and real estate sector, which
accounted for another 19.3% and 29.9% respectively during the same period. In absolute
terms, lending to trade sector grew at a CAGR of 24.4% from BD286.2mn (US$761.4mn) in
2003 to BD551.6mn (US$1,467.4mn) in 2006. As a result, the contribution of trade sector to
the overall credit has been increasing since 2003, from 15.9% in 2003 to 16.6% in 2005, and
further increased to 18.2% at the end of 2006.
Lending to real estate and construction grew at a CAGR of 42.9% to BD165.8mn
(US$441.1mn) in 2003 to BD484.2mn (US$1.3bn) in 2006. In the year 2006, it increased by
60.3% from BD302.1mn (US$803.7mn) reported in 2005 to BD484.2mn (US$1.3bn). It is
worth noting that the lending to the construction and real estate sector has more than doubled
since the end of 2004. In our opinion, several large-scale construction projects are expected
to further bolster growth and lending from the construction and real estate sector, which will
also be the driving force for the growth in business segment.
Lending to manufacturing sector grew at a CAGR of 7.5% from BD251.1mn (US$668.0mn)
in 2003 to BD312.3mn (US$830.8mn) in 2006. In the year 2006, the lending to manufacturing
sector increased by 10.5% as compared to the previous year. It is worth noting that the
}uae ! 1|
contribution of manufacturing sector to total credit of the banking system declined from
14.0% in 2003 to 10.3% in 2006.
In our opinion, the lending market is expected to remain buoyant in near term due to increased
government spending in various sectors, which will further bolster the lending portfolio of
the banking system.
Banks in Bahrain are expected to shore up their retail businesses by expanding their operations
in other parts of the region. Banks are also expected to refocus on their target market through a
process of re-engineering its retail capabilities, upgrading human resources, improve product
range delivery and enhanced client segmentation. Consequently, prospects for Bahrains
commercial banks are challenging given their relative size and lending opportunities. As
banks in Bahrain have shown their intentions to grow, banks needs to look aggressively
for opportunities elsewhere in the region. Since the banking sector in the region is still in a
consolidating phase Bahraini banks would have an early mover advantage.
1+ }uae !
Peer Group Comparison
The peer group comparison is done on five banks, namely Ahli United Bank (AUB), Bank of
Bahrain and Kuwait (BBK), National Bank of Bahrain (NBB), Bahrain Islamic Bank (BIsB)
and Bahraini Saudi Bank (BSB). Al Salam Bank was incorporated on 19th J anuary 2006 in
the Kingdom of Bahrain with a paid-up capital of BD120mn (US$318mn), and commenced
commercial operations on 17th April 2006, which we have not included in the peer group
comparison. The size of the banks under coverage increased from BD5.3bn in 2003 to
BD11.8bn in 2006, registering a CAGR of 30.9%. In the year 2006, the size of banks under
coverage increased by 35.9% as compared to the previous year.
Chart 5: Balance Sheet Size

Source: Company Reports
The top three banks namely NBB, BBK and AUB assets grew at a CAGR of 10.6%, 8.8% and
49.1% respectively for the period 2003-2006. AUB increased its presence in various regions
by acquiring stakes in banks, which helped the bank in increasing its total asset size. In 2005,
the bank increased its stake in the Bank of Kuwait and the Middle East to 75%. Although,
Bahrain has the maximum number of foreign banks in the region, the top three local banks
have been able to maintain their market share through increasing branch networks and strong
relationship network with the local Bahrainis.

Going forward, we believe that the growth in Bahraini economy augurs well for the banking
industry as it will be flushed with liquidity. The opportunities for lending will continue due to
the strong growth in the corporate sector coupled with changing demographics in the country.
Banks have also started concentrating on Small and Medium Enterprises (SMEs), which will
be the trend going forward.
12,500
11,500
9,500
8,000
6,500
5,000
3,500
5,272.3
6,226.2
8,710.6
11,837.1
2006 2005 2004 2003
B
D
m
n
CAGR - 30.9% (2003-06)
}uae ! 1]
Chart 6: Deposits growth Banks Under Review

Deposits of banks under review grew at a CAGR of 26.3% for the period 2003-06 from
BD2.8bn in 2003 to BD5.7bn in 2006. The top three banks (NBB, BBK and AUB) deposits
grew at a CAGR of 10.2%, 7.7% and 47.7% respectively for the period under review. The
other two banks under review, namely BIsB and BSB deposits grew at a CAGR of 21.2% and
4.4% respectively. In 2006, customer deposits of the banks under review reached BD5.7bn
as compared to BD4.5bn in 2005, registering an increase of 26.6%. AUB, NBB and BBK,
deposits registered an increase of 35.7%, 18.3% and 11.6% respectively in 2006 as compared
to the previous year.
In order to support strong loan growth in the banking sector, resource mobilization is the key.
Due to the strong network and improved relationships with corporate and retail customer,
banks have been able to increase their deposits. In addition, banks have also increased their
branch and ATM network throughout the Kingdom. This will further help banks to shore up
their loan book.
Chart 7: Gross Loans and Advances Banks Under Review

On the lending side, gross loans and advances grew at a CAGR of 29.3% for the period
2003-06. Gross loans increased from BD2.6bn in 2003 to BD5.5bn in 2006. In 2006, gross
loans grew by 34.5% as compared to 2005. Net loans for the banks under review grew at
6,000.0
5,000.0
4,000.0
3,000.0
2,000.0
36.0%
32.0%
28.0%
24.0%
20.0%
2003 2004 2005 2006
Deposits Growth in deposits
20.7%
31.9%
26.6%
B
D
m
n
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
2003 2004 2005 2006
2,557.1
2,906.2
4,111.2
5,531.1
I
n

B
D

m
n
1e }uae !
a CAGR of 31.5% for the period 2003-06, from BD2.4bn in 2003 to BD5.4bn in 2006. In
2006, the net loans increased by 35.8% as compared to 2005. However, in 2006 the regulator
issued guidelines on lending to the consumer segment. It was issued with the objective of
limiting the rapid expansion of consumer loans. Banks that followed prudent lending norms
for consumer loans did not witness any slow down in the consumer loans.
We believe banks will continue to witness strong lending requirements from the service
and real estate sectors, especially the services sector. Governments efforts to diversify the
economy and improve the investment climate through regulatory and structural measures in
various sectors will also augur well for the banking sector going forward.
Chart 8: Credit Deposits Ratio

The growth in loans and advances has been in line with the growth in deposits. Gross loans as
a percentage of deposits increased from 90.0% in 2003 to 96.8% in 2006. However, there is
still room for the banks to expand their loan portfolio. Growth in loan book will be facilitated
by the banks provided banks are able to maintain their deposit growth.
Total non-performing loans of the banks under review amounted to BD203.1mn in 2004
as compared to BD173.2mn in 2006, which represented 3.1% of the banks aggregate loan
portfolio at the end of year 2006 as compared with 7.0% in 2004. BBK had the highest non-
performing loans (NPLs) amongst the peer group, representing 39.44% of the sectors total
NPLs and 6.9% of the banks gross loans, which is well above the average in the sector. It is
worth noting that BBK had done a commendable job in reducing its NPLs from BD100.6mn
in 2003 to BD68.3mn at the end of 2006. This is further expected to drop as the bank has
taken major initiatives to reduce the NPLs. Even BSB has done commendable job in reducing
its NPLs to Gross Loans ratio from 68.4% reported in 2004 to 48.9% at the end of 2006. BSB
NPLs to gross loans is very high as compared to peers. It is worth noting that the NPLs to
gross loans would have been 2.2% at the end of 2006, excluding BSB.

6,500
5,500
4,500
3,500
2,500
1,500
100.0%
96.0%
92.0%
88.0%
84.0%
80.0%
2003 2004 2005 2006
90.0%
84.8%
91.2%
96.8%
Customer Deposits Gross Loans & advances Gross Loans % of Customer deposits
B
D

m
n
}uae ! 1
Chart 9: Asset Quality

NBB has the lowest ratio compared to the banks under review. NPLs as a percentage of gross
loans for NBB declined from 2.2% in 2003 to 1.1% in 2006. Despite the growth in the loan
book, the conservative credit risk policies and the success of recovery efforts has helped the
bank improve its credit risk during the last three year. AUB and BIsB are not far away from
NBB in improving asset quality over the last three years. At end of 2006, AUB and BIsB
were at 1.2% and 1.1% respectively. The average NPL/Gross Loans ratio in the Bahraini
banking sector is 3.1%, which is higher than most of the largest banking sector in the GCC,
such as UAE and Saudi Arabia.
Bahraini banks coverage ratio was 91.5% in 2006 as compared to 85.5% at the end of 2005.
Except NBB and AUB, the other three banks had coverage ratios of less than 100%. NBB
had the highest coverage ratio of 173.5% followed by AUB with 122.8% coverage. BBK had
the lowest coverage ratio of 69.4%, followed by BIsB (71.6%) and BSB (83.5%).
Net profits growing by double digits in 2006
Profits of the banks under review, grew from BD82.5mn in 2003 to BD182.9mn in 2006,
growing at a CAGR of 30.4% for the period under review. In 2006, profit of the banks under
review witnessed a growth of 29.8% from BD141.0mn in 2005 to BD182.9mn in 2006. It
is worth noting that all the banks under review reported a double digit growth in net profit
during the year 2006. The profit margins of the banks under review improved from 48.1% in
2003 to 54.7% in 2006.
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
94.0%
92.0%
90.0%
88.0%
86.0%
84.0%
82.0%
80.0%
78.0%
76.0%
2003 2004 2005 2006
6.9%
7.0%
4.4%
3.1%
91.5%
85.5%
82.5%
87.3%
NPL/Gross Loans Coverage
1~ }uae !
Chart 10: Profit Margin

Net interest income grew from BD102.0mn in 2003 to BD203.4mn in 2006, increasing at a
CAGR of 25.9%. In the year 2006, the net interest income increased by 36.6% as compared
to the previous year. In our opinion, banks will continue to witness growth in the core banking
activities.
Chart 11: Margins

Yield on average interest earnings assets for the banks under review increased from 4.04%
in 2003 to 6.21% in 2006. At the same time, the cost of average bearing liabilities increased
from 1.84% in 2003 to 4.30% in 2006. However, with the general increase in interest rates,
cost of funds for the bank has gone up in the past few years. In addition, the banks have been
attracting deposits by paying higher interest rates. As a result of this, the net spread for the
banks under coverage declined from 2.20% in 2003 to 1.99% in 2005 and further dropped to
1.91% in 2006.
In 2006, net interest margin (commission margin in case of BIsB) of the banks under review
ranged between 1.7% and 6.9%. The range for these banks in 2003 were 2.1% and 3.9%. The net
interest margin (commission margins in case of BIsB) of the banks under review dropped from
2.33% in 2003 to 2.16% in 2006. AUB and BSB witnessed a drop in net interest margin during
this period, whereas NBB, BBK and BIsB witnessed an increase during the same period.
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
57.0%
55.0%
53.0%
51.0%
49.0%
47.0%
45.0%
2003 2004 2005 2006
54.7%
54.7%
49.7%
48.1%
Net Profit Profit margin
B
D

m
n
7.00%
5.00%
3.00%
1.00%
2.30%
2.15%
2.00%
0.85%
2003 2004 2005 2006
Interest on average earnings assets Cost on interest bearing liabilities Net Spread
2.20%
2.04%
1.99%
1.91%
}uae ! 1)
Non-interest income of banks under review grew at a CAGR of 23.5% from BD70.5mn in
2003 to BD132.7mn in 2006. In the year 2006, the non-interest income increased by 19.6%
as compared to the previous year. Fees and commission income from banking services was
main determinant for the growth in non-interest income.
Chart 12: Fees and Commission I ncome (2006)
Fees and commission income grew at a CAGR of 27.0% from BD33.3mn in 2003 to
BD68.12mn in 2006. In 2006, fees and commission income increased by 47.5% as compared
to the previous year. Contribution of fee based income of total non-interest income for the
banks under review increased from 47.9% in 2003 to 51.2% in 2006. During the year 2006,
most of the bank increased participation in syndicated facilities and IPO financing, which
helped the banks to increase its fees and commission income.
Operating expenses (Opex) of the banks under review increased from BD74.2mn in 2003 to
BD133.3mn in 2006, grew at a CAGR of 21.6%. In the year 2006, the operating cost increased
by 32.3% as compared to the previous year. The increase in operating expenses was mainly
due to the increase in manpower along with other expenses on business development.
Chart 13: Operating Efficiency for Banks Under Review

Source: Global Research
100.0
80.0
60.0
40.0
20.0
-
80.5%
60.5%
40.5%
20.5%
0.5%
NBB BBK AUB BIsB BSB
Non-Interest income Fee income % of Non-Interest income
47.2%
59.6%
54.3%
60.0%
13.5%
45.00%
43.00%
41.00%
39.00%
37.00%
35.00%
1.57%
1.36%
1.15%
2003 2004 2005 2006
Cost to Income Opex. to Average Assets
43.30%
1.35%
1.48%
42.50%
1.35%
39.02%
39.80%
1.30%
! }uae !
Cost to income ratio of the banks under review declined from 43.3% in 2003 to 39.8% in
2006. Cost to income ratio increased on the back of increasing business development costs.
In 2006, the lowest cost to income ratio was for NBB at 36.0%, which is below the average
of the banks under review. The highest was for BSB at 61.9%, which witnessed an increase
in manpower costs as well as expenses on developing IT platforms for business segments.
Opex as a percentage of average assets (AA) ratio declined from 1.35% in 2003 to 1.30% in
2006. The lowest ratio was for AUB at 1.1% and highest was for BSB at 2.4% at the end of
2006.
Chart 14: Return Ratios Banks Under Review

The year 2006 has been a good year for Bahraini banks, as all the banks under review
witnessed a double digit growth in net profit. As a result, the return ratios for the banks under
review improved during the year 2006. The return on average equity (ROAE) improved from
12.8% in 2003 to 15.2% in 2006. The return on average assets improved from 1.50% in 2003
to 1.78% in 2006. BBK had the highest ROAE of 18.2% in 2006, followed by BIsB with
17.8%. In terms of average ROAA, BIsB was leading the way with RoAA of 3.4% followed
by NBB at 2.3% respectively in 2006.
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
16.0%
15.0%
14.0%
13.0%
12.0%
11.0%
10.0%
2003 2004 2005 2006
15.2%
14.4%
13.2%
12.8%
ROAA ROAE
}uae ! !1
Bahraini Banking Sector Outlook
Banks in Bahrain have benefited from strong economic growth witnessed during the last
three years on the back of high oil prices. During the last three years, the credit deployment
to consumer, construction & real estate and manufacturing segments was particularly strong.
A number of real estate friendly regulations were initiated which further complemented the
real estate sector in Bahrain.
Bahrain is in the midst of a diversification stage, which indicates that the banking sector
will continue to see more demand from the corporate as well as the consumer segment.
Manufacturing and construction sectors are likely to be the key growth drivers for the entire
banking system. Real Estate and construction sector, one of the main sectors in Bahrain
is likely to attract attention as there are lot of projects in the pipeline. Bahrain has been
promoting its tourism sector over the year, which will further encourage more hotels and
resorts in the country. Even changing demographics and the increasing expatriate population
is likely to boost the consumer lending segment.
On the funding side, deposit franchise of Bahraini banks registered a CAGR of 26.3% during
the last three years. Banks in Bahrain are able to raise sufficient funds through paying higher
interest rates, which the banks will be able to support the loan growth with a longer duration.
The above mentioned big-ticket projects are long-term in nature and hence in order to avoid
asset-liability mismatches, banks are raising funds either through fixed deposits or long term
debt.
On the profitability, during the last three years, profits grew at a CAGR of 30.4% on the back
of core income growth of 25.9% and non-interest income growth of 23.8%. Core income
will continue to be the driving force for earnings growth. However, most of the banks have
also started participated in syndication facilities and IPO financing, which boosted their non-
interest income. In order to increase fees from banking activities, banks will continue to
participate in syndication facilities as well as IPO financing. In our opinion, core banking
operations are likely to be the key focus areas in the years to come.
Core income registered a strong growth of 36.6% in 2006 as compared to the previous year.
Non-interest income also increased by 20.4% in 2006 as compared to the previous year.
Banks are taking appropriate initiatives in order to increase its non-interest income, either
through the introduction of new products such as trading online or through credits cards
fees.
Going forward, government thrust towards providing further impetus to economic growth is
likely to benefit the banking sector. However, the banks will continue to face competition
in the market with international banks, but the domestic banks will continue to leverage
its brand as well as strong customer relationship to continue the growth trajectory. In our
opinion, the outlook for the banking sector is positive on the back of buoyant core banking
activities.

!! }uae !
Valuation & Recommendation
For arriving at the fair value of the banks under review, we have used two valuation
methods:
1. Cash flow approach represented by the Dividend Discounting Model

2. Market approach represented by Peer Group valuation.
Dividend Discounting Model - DDM
The DDM model constructed is based on a 4-year forecast of dividends as cash flows (2007-
10). The dividends for the forecasted period and the terminal value are then discounted back
at the cost of equity to arrive at the total net present value (NPV) of the company. In our
calculations, we have made the following assumptions in order to arrive at the equity value
of individual banks:
1. Cost of Equity of 11.62% derived using Capital Asset Pricing Model.
2. Risk free rate of 6.62%.
3. Equity risk premium of 5.0%.
4. Beta of 1. The actual beta of the banks is less than 1, but to more appropriately reflect the
market risk we have taken it as 1.
5. Terminal growth rate of 3.0%. (4.0% for BIsB being an Islamic Bank)
Table 7: Value as per DDM Approach
DDM Value
AUB (US$) 1.25
BBK (Fils) 831.5
BIsB (Fils) 519.6
}uae ! !|
Peer Group Valuation
The peer group valuation is done by comparing the price to book value (P/BV) multiples
enjoyed by similar companies.
Table 8: Companies average P/BV ratios in the banking sector
Equity
2007
Shares O/S BV/Sh. Price Market
Cap.
P/BV
(BD mn) (mn) (BD) (BD) (BD mn) (x)
AUB 581.7 2,860.0 0.203 0.490 1,401.7 2.41
BBK 187.7 672.2 0.279 0.670 450.4 2.40
BIsB 66.7 602.1 0.111 0.448 269.8 4.05
NBB 203.9 648.0 0.315 0.800 518.4 2.54
BSB 53.1 500.0 0.106 0.150 75.0 1.41
Total/Average 1,093.0 5,282.3 0.207 2,715.2 2.48
Source: Global Research,
Market prices as on May 31, 2007
As indicated in the table 2, the average P/BV multiple for the banks in Bahrain is around
2.48x. Therefore, on the basis on industry average P/BV of 2.48x, the value of the banks
under review is given in the table below.
Table 9: Value as per Market Approach
P/B value
AUB (US$) 1.31
BBK (Fils) 731.3
BIsB (Fils) 618.2
As the book value multiples vary with time and are dependent on several factors such as
market sentiment and other qualitative factors, we have provided 20% weightage to the P/BV
multiple and 80% to the DDM method.
Table 10: Valuation
DDM Value P/B Value Weighted Price
AUB (US$) 1.25 1.31 1.26
BBK (Fils) 831.5 731.3 811.5
BIsB (Fils) 519.6 618.2 539.3
Table 11: Global Valuation Matrix
Price Target Reco.
%
Change
BVPS EPS P/BV P/E
AUB 1.30 1.26 HOLD -2.8% 0.53 0.09 2.5 13.8
BBK 670 811 BUY 21.1% 294.4 58.0 2.3 11.6
BIsB 448 539 BUY 20.4% 248.9 69.8 1.8 6.4
Note: * Based on 2007E
Source: Global Research, Market prices as on May 31, 2007
All in fils except for AUB, which is US$
!+ }uae !
Players Profle
}uae ! !]
Key Data
EPS (US cents)* 9.39 Avg. daily vol.(000) 700,537
BVPS (US cents)* 473.1 52 week Lo / Hi 0.79/1.36
P / E (x) 13.8 Market Cap (US$ mn) 3,718
P / BV (x) 2.7 Target Price (US$) 1.26
* Projected (2007)
Company Background
Ahli United Bank (AUB) is a Bahrain based bank operating under a retail banking license
and is regulated by the Central Bank of Bahrain. The bank provides retail, commercial and
investment banking business, global fund management and private banking services. AUB
is among the top three local banks in the Kingdom. Banks growth strategy encompasses
a merger and acquisition model which entails assessing and pursuing strategy fit banks
in the region.
AUBs businesses consist of the operations in Bahrain, subsidiaries in the UK and Kuwait
and associates in Bahrain, Qatar, Iraq and Egypt. AUB holds 75 percent stake in the Bank
of Kuwait and the Middle East (BKME). The banks also has a 40 percent stake in Ahli
Bank Q.S.C. a commercial bank in Qatar. AUB has a 10-year management contract with
Ahli Bank Q.S.C.
Apart from the banks, AUB has now an enhanced nominal stake of 73% in Kuwait and
Middle East Financial Investment Company (KMEFIC) a brokerage, asset management
and corporate finance company based in Kuwait with operations around the Arabian Gulf.
The AUB Group, through its subsidiaries and associates, operates through a network of
78 branch offices and employs over 2,800 people.
This development has helped accelerate progress in the delivery of financial services and
penetration into targeted geographical markets. The business area strategies are geared
to achieve stable and sustainable income growth, operational competitiveness, a higher
quality of service, maximum cost efficiencies and greater risk assessment capabilities.
It is worth noting that the bank is actively traded stock on the Bahrain Stock Exchange
(BSE). At the end of March 2007, AUB is one of the largest in terms of market capitalization
as it accounted for 15.74% of the total market capitalization of the Bahraini index.
Reuters Code:
AUB.BH
Listing:
Bahrain Stock Exchange
Current Price
US$1.30 (May 31
st
, 2007)
Recommendation
HOLD
Ahli United Bank
!e }uae !
The banks new headquarters in Al-Seef district of Bahrain, includes a full service branch
facility and the Group support functions of audit, compliance, IT & operations, finance
and human resources. In addition, it also provides the private banking as well as wealth
management business across the Gulf, as well as the treasury, commercial banking and
retail banking departments.
Recent Developments
In March 2007, AUB was awarded Best Bank in the Middle East 2007 by Global
Finance for the second year in a row. This demonstrates the continuing success of business
strategies and the soundness of management principles to be the leader in this industry.
In December 2006, AUB was named Best Bank of the Year in the Middle East for
2006 by The Banker magazine ahead of all other regional banks besides being the Best
Bank in Bahrain 2006 and the Best Local Private Bank Middle East for 2006 under
a private banking survey by Euromoney. The Bank also earned accolades as the best
Foreign Exchange Bank Middle East for 2006 by Global Finance.
AUB also earned Her Highness Shaikha Sabeeka bint Ibrahim Al Khalifas Award for
Empowering Bahraini Women.
In November 2006, Fitch upgraded AUB and its subsidiaries to A- rating. Fitch also
upgraded the Issuer Default Rating (IDR) of AUB from BBB+ to A- with a Stable
outlook. Similarly, AUBs subsidiary in the UK, Ahli United Bank (UK) PLC, and in
Kuwait, Bank of Kuwait and the Middle East (BKME) were both upgraded to A- from
BBB+.
In November 2006, AUB signed a US$200mn loan agreement with the International
Finance Corporation (IFC), the private sector arm of the World Bank Group. This will be
IFCs single largest investment in the MENA region. This has been fully drawn down in
December 2006.
In October 2006, AUB announced a US$1.2bn 3-year syndicated deposit facility, the
largest ever syndicated financing deal by any financial institution in the Middle East. 51
banks participated in the syndicated deposit facility, which was arranged by ABN Amro,
BNP Paribas, Commerzbank, Lloyds TSB Bank and Mizuho Corporate Bank.
Financial Performance - 2006
AUBs financial statements comprise of financial statements of the bank as well as its
subsidiaries namely AUB United Kingdom (100%), Bank of Kuwait and Middle East
(75%) and Kuwait and Middle East Financial Investment Company (48%). The bank
started consolidation of financial statements from the date of control, where the bank has
the power to govern the financial and operating policies of respective entities.
AUBs asset size increased from BD2.36bn (US$6.27bn) in 2003 to BD7.84bn
(US$20.79bn) in 2006, registering a CAGR of 49.1%. The banks total deposit (includes
customer deposits and certificate of deposits) increased from BD1.10bn (US$2.92bn) in
2003 to BD3.56bn (US$9.45bn) in 2006, registering a CAGR of 47.9%. The banks loan
}uae ! !
book increased from BD0.99bn (US$2.65bn) in 2003 to BD3.39bn (US$9.01bn) in 2006,
registering a CAGR of 50.3%.
In 2006, the total assets stood at BD7.84bn (US$20.79bn) as compared to BD5.23bn
(US$13.87bn) in the previous year, registering an increase of 49.9%. The growth in
total assets was mainly driven by the growth in the loan book, increasing investment
in securities and investment in associates (acquiring stake in banks, which is part of the
banks strategy).
The total funding of the bank grew at a CAGR of 53.4% for the period 2003-06, from
BD1.94bn (US$5.14bn) in 2003 to BD6.92bn (US$18.53bn) in 2006. On a yearly basis,
the total funding of the bank increased by 55.6% in 2006, from BD4.45bn (US$11.81bn)
in 2005 to BD6.99bn (US$18.53bn) at the end of 2006.
The banks total deposit (includes customer deposits and certificate of deposits) increased
from BD1.10bn (US$2.92bn) in 2003 to BD3.56bn (US$9.45bn) in 2006, registering a
CAGR of 47.9%. The banks customer deposit increased from BD1.06bn (US$2.81bn)
in 2003 to BD3.41bn (US$9.04bn) in 2006, registering a CAGR of 47.7%, whereas
certificate of deposits grew at a CAGR of 53.8% from BD42.21mn (US$111.95mn) in
2003 to BD153.44mn (US$406.99mn) in 2006. Mobilizing deposits is the main source
of funding for the bank, as it accounted for about 50% of the total funding at the end of
2006.
In 2006, customer deposits increased by 35.7% from BD2.51bn (US$6.66bn) in 2005 to
BD3.41bn (US$9.04bn) in 2006. Certificate of deposits registered a whopping increase
of 845.8% to BD153.44mn (US$406.99mn) in 2006 as compared to BD16.22mn
(US$43.04mn) in 2005. Total deposits accounted for about 50.98% of total funding of
the bank at the end of 2006.
Customer deposits accounted for 48.78% in 2006, whereas certificate of deposits
accounted for 2.20% in 2006. Due from banks and other financial institutions accounted
for 37.34% in 2006. Term debt contribution to the total funding declined from 11.76% in
2004 to 8.32% in 2006.

Chart 1: Total Funding Break up

100.00%
80.00%
60.00%
40.00%
2003 2004 2005 2006
Customer deposits Due to banks Certificate of deposits Term Debt Subordinated Liabilities
2.52%
8.06%
2.18%
32.59%
54.65% 58.09%
26.51%
1.69%
11.76%
1.95% 3.69%
8.12%
0.36%
31.88%
55.95%
48.78%
37.34%
8.32%
3.36%
!~ }uae !
On the lending side, the banks loan book increased from BD0.99bn (US$2.65bn) in 2003
to BD3.39bn (US$9.01bn) in 2006, registering a CAGR of 50.3%. Favorable economic
conditions resulted in strong demand for credit, both from the corporate as well as from
the consumer segment. Net loans and advances grew at a CAGR of 52.4% from BD0.95bn
(US$2.51bn) in 2003 to BD3.35bn (US$8.87bn) in 2006. The banks gross loan and
advances to total customer deposits increased from 91.0% in 2005 to 95.4% in 2006, but
the contribution declined from 51.2% in 2005 to 48.6% in terms of total funding of the
bank.
Chart 2: Gross Loans and Advances as a percentage of Total deposits

Lending to personal/consumer, trading and manufacturing and construction and real estate
sector accounted 80.38% of the total loan portfolio in 2006, which declined as compared
to 82.50% recorded in the previous year. The lending to personal/consumer witnessed a
drop in 2006, from 41.8% in 2005 to 32.1% in 2006, which can be attributed to the new
regulation by CBB on consumer lending.

Chart 3: Gross Loans and Advances Break up

3,600
3,200
2,800
2,400
2,000
1,600
1,200
800
100.0%
95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
2003 2004 2005 2006
Total deposits Gross loans and advances As a % of total deposits
90.8%
73.6%
91.2%
95.4%
B
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m
n
100%
75%
50%
25%
2004 2005 2006
Consumer/Personal
Banks & other financial insitutions
Others
Trading and manufacturing
Construction
Real Estate
Government/Public Sector
12.79%
6.83%
14.84%
22.83%
42.55%
41.85%
20.57%
13.06%
8.51%
7.58% 8.41%
3.92%
7.56%
20.89%
23.52%
32.06%
}uae ! !)
The contribution of real estate and construction sector to total loan book increased from
20.0% in 2005 to 24.8% in 2006. In our opinion, looking at the real estate projects in the
pipeline in the region, the demand for real estate financing will continue to buoyant in
the mid term. Contribution of trading and manufacturing sector to total loan book also
increased from 20.6% in 2005 to 23.5% in 2006.

During the last four years, the banks asset quality has improved significantly. Gross Non-
Performing Loans (NPLs) as a percentage of gross loans declined from a high of 6.08%
in 2003 to 1.22% in 2006, which is also one of the lowest among its peers. This indicates
that the growth in the loan book was not at the cost of quality. In absolute terms, NPLs
have declined from BD60.78mn (US$161.23mn) in 2003 to BD41.29mn (US$109.53mn)
in 2006. The conservative credit risk policies and recovery efforts has helped the bank in
improving its credit risk during the last three year.
Chart 5: Coverage ratio

3,500
2,500
1,500
500
7.0%
5.0%
3.0%
1.0%
2003 2004 2005 2006
6.08%
4.33%
1.99%
1.22%
Gross loans and advances NPLs to Gross loans
B
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m
n
65.0
60.0
55.0
50.0
45.0
40.0
35.0
130%
120%
110%
100%
90%
80%
2003 2004 2005 2006
122.8%
95.5%
102.2%
89.8%
B
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m
n
NPLs Coverage ratio
| }uae !
NPL coverage ratio of the bank was above the 100% at the end of 2006. The coverage
ratio of the bank increased from 89.8% in 2003 to 122.8% in 2006. It is worth nothing that
AUBs coverage is higher than the average for the peers, which was 91.5% at the end of
2006.
The banks non-trading investment securities increased by a CAGR of 24.7%, from
BD0.65bn (US$1.72bn) in 2003 to BD1.26bn (US$3.34bn) in 2006. In 2006, non-
trading investment securities increased by 31.5% from BD0.96bn (US$2.53bn) in 2005
to BD1.26bn (US$3.34bn). Non-trading investment securities comprised of 56.7% of
floating rate notes and certificate of deposits, 22.7% in GCC and US government bonds,
12.9% in equities and the remaining 7.7% in funds and other investments.
During the period (2003-2006), the banks net profit grew at a CAGR of 33.6% from
BD32.83 (US$87.08mn) in 2003 to BD78.22mn (US$207.48mn) in 2006. During the
same period, operating income of the bank registered a CAGR of 38.8%, where as total
expense registered a CAGR of 36.7%.
Chart 6: Net Profit

In the year 2006, the net profit of the bank increased by 25.8% to BD78.22mn
(US$207.48mn) as compared to BD62.15mn (US$164.87mn) reported in the previous
year. As a result of consolidated financial statements, the performance of subsidiaries
is also reflected in the groups income statement. Due to increase in operating expenses
during the year 2006, profit margin dropped from 50.4% in 2005 to 45.4% in 2006.
The bank continued to show healthy growth in the core banking activities in the last three
years, as it grew at a CAGR of 35.5%. The net interest income of the bank increased
by 59.5% to BD104.98mn (US$278.46mn) in 2006 as compared to BD65.81mn
(US$174.56mn) in the previous year, which was supported by the strong growth in
business volume of the group (includes subsidiaries).

90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
-
54.0%
52.0%
50.0%
48.0%
46.0%
44.0%
42.0%
40.0%
2003 2004 2005 2006
Net Profit Profit margin
50.9%
52.8%
50.4%
45.4%
B
D

m
n
}uae ! |1
Chart 7: Margins

Source: Company Report, Global Research
The banks yield on interest earnings assets increased from 4.85% in 2005 to 6.05% in
2006. Similarly, the cost of interest bearing liabilities increased from 3.25% in 2005 to
4.52% in 2006. As a result of this, the net spread for the bank declined from 1.61% in
2005 to 1.53% in 2006. Going forward, we expect that the net spread to be under pressure
due to the increased competition in the market.
Chart 8: Total I ncome Break Up

The non-interest income of bank registered a CAGR of 36.9% from BD31.47mn
(US$83.48mn) in 2003 to BD80.83mn (US$214.40mn) in 2006. In the 2006, the non-
interest income reported a growth of 16.3% from BD69.48mn (US$184.29mn) in 2005 to
BD80.83mn (US$214.40mn) in 2006. Non-interest income contribution to total income
was 43.5% in 2006 as compared to 42.7% in 2003. However, the contribution declined
from 51.4% in 2005 to 43.5% in 2006, which can be attributed to performance of groups
subsidiary, which showed a decline in its non-interest income for the year 2006.
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2003 2004 2005 2006
3.02%
2.25%
1.61%
1.53%
Interest income/Avg interest earning assets
Interest expense/Avg interest bearning liabilities
Net spread
S
p
r
e
a
d
100%
80%
60%
40%
20%
0%
2003 2004 2005 2006
Net interest Income Non-interest Income
42.7%
57.3%
51.4%
48.6%
51.4%
48.6%
56.5%
43.5%
|! }uae !
Fees and commission income increased by a CAGR of 51.4% from BD12.63mn
(US$33.51mnl) in 2003 to BD43.88mn (US$116.38mn) in 2006. In the year 2006, fees
and commission income increased by 53.9% from BD28.50mn (US$75.60mn) in 2005 to
BD43.88mn (US$116.38mn) in 2006. The contribution of fees and commission income
to total non-interest income was 54.3% in 2006 as compared to 40.1% in 2003.
Income from associates, which is one of the main determinants of the non-interest income,
as the banks strategy is to acquire and merge with banks to increase its presence in
the region. As a result, the income from associates increased at a CAGR of 7.3% from
BD8.63mn (US$22.89mn) in 2003 to BD10.67mn (US$28.29mn) in 2006. On a yearly
basis, the income from associates declined from BD22.71mn (US$60.24mn) in 2005 to
BD10.67mn (US$28.29mn) in 2006. This can be attributed to the fact that in August
2005, the bank increased its minority stake to a controlling 75% stake in BKME, which
then became a subsidiary and was accounted in the consolidated financial statements of
the group in accordance with International Financial Reporting Standards.

Chart 9: Operating Efficiency

Source: Company Report
Operating expenses (Opex) grew at a CAGR of 36.7% from BD28.99mn (US$76.90mn)
in 2003 to BD74.00mn (US$196.29mn) in 2006. In the year 2006, opex increased by
48.8% from BD49.73mn (US$131.91mn) in 2005 to BD74.00mn (US$196.29mn) in
2006. As a result, cost to income ratio of the bank increased from 36.8% in 2005 to 39.8%
in 2006, whereas the opex to average assets declined from 1.20% in 2005 to 1.13% in
2006.
53.0%
50.0%
47.0%
44.0%
41.0%
38.0%
35.0%
2003 2004 2005 2006
1.6%
1.4%
1.2%
1.0%
0.8%
1.13%
1.20%
1.39%
1.35%
Cost to income ratio Opex to average assets
}uae ! ||
Chart 10: Return Ratios

BD32.83 (US$87.08mn) in 2003 to BD78.22mn (US$207.48mn) in 2006. Due to this,
the banks return ratios (return on average equity (ROAE) and Return on average assets
(ROAA)) have improved during the period under consideration. ROAA declined from
2.1% in 2005 to 1.70% in 2006 essentially due to the BKME consolidation effect, whereas
ROAE increased from 13.5% in 2005 to 15.1% in 2006. On a proforma consolidation basis
for full year of 2005, the adjusted proforma ROAA of c.1.7% for 2005 was comparable
to 2006.
Chart 11: Capital Adequacy Ratio

As at end 2006, the banks Capital Adequacy Ratio (CAR) stood at 14.8% as compared
to that of 16.4% in 2005. The banks capital adequacy ratio is well above the Basel
requirement of 8% and also above the minimum required rate of 12% by the Central Bank
of Bahrain (CBB).

1.6%
1.5%
1.4%
1.3%
1.2%
1.1%
1.0%
15.0%
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
2006 2005 2004 2003
10.60%
11.00%
13.92%
14.26%
Return on Average Assets Return on Average Eguity
R
O
A
A
R
O
A
E
24.0%
22.0%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
2003 2004 2005 2006
14.8%
16.4%
23.7%
20.6%
Minimum requirement by CBB-12%
Capital Adequacy Ratio (CAR)
|+ }uae !
Financial Performance First Quarter of 2007
AUBs asset size increased by 4.2% to reach BD8.17bn (US$21.68mn) at the end of 1Q-
07 as compared to BD7.84bn (US$20.79mn) report ed at the end of 2006. Total funding
base of the bank increased by 3.9% to BD7.02bn (US$18.61mn) in 1Q-07 as compared to
BD6.75bn (US$17.91mn) in 2006.
Total deposits of the bank increased by 8.0% to BD3.85bn (US$10.20bn) at end of 1Q-
07 as compared with BD3.56bn (US$9.45bn) at the end of year 2006. As a result, the
contribution of total Despite to total assets increased from 45.4% at the end of 2006 to
47.1% at the end of 1Q-07.
Customer deposits increased by 11.1% from BD3.41bn (US$9.04bn) in 2006 to
BD3.79bn (US$10.04bn), whereas the certificate of deposits dropped from BD153.44mn
(US$406.99mn) in 2006 to BD61.24mn (US$162.43mn) at the end of 1Q-07.
On the lending side, the net loans and advances increased by 5.4% to BD3.52bn
(US$9.35bn) at the end of 1Q-07 as compared with BD3.35bn (US$8.87bn) reported
at the end of 2006. As a result of this marginal growth compared to the total deposits,
the contribution of loans and advances to total deposits declined from 93.9% in 2006 to
91.6% at the end of 1Q-07.
The non-trading investment securities of the bank declined by 7.1% to BD1.17bn
(US$3.10bn) in 1Q-07 as compared to BD1.26mn (US$3.34bn) at the end of 2006. Trading
securities, on the other hand, increased by 15.9% to BD33.14mn (US$87.89mn) in 1Q-
07 as compared to BD28.58mn (US$75.83mn) in 2006. Treasury bills also increased
during the 1Q-07 by 10.6% to BD400.07mn (US$1.06bn) as compared to BD361.81mn
(US$0.96bn) at end of 2006.
On the earnings side, net interest income of the bank increased by 19.7% to BD27.28mn
(US$72.35mn) in 1Q-07 as compared BD22.79mn (US$60.47mn) reported in the
corresponding period of the previous year. On other hand, the non-interest income of the
bank increased by 15.0% to BD24.53mn (US$65.06mn) for the period under review. As
a result, the total income of the bank increased by 17.4% to BD51.80mn (US$137.41mn)
as compared to BD44.12mn (US$117.04mn) reported in the corresponding period of the
previous year on the back of income from core banking activities.
}uae ! |]
Table 1 : First Quarter of 2007
1Q 1Q %
Amount in BD000 2006 2007 Change
Interest Income 67,989 113,708 67.2%
Interest Expense (45,192) (86,432) 91.3%
Net I nterest income 22,796 27,276 19.7%
- Fees & Commission (net) 9,297 10,619 14.2%
- Trading Income 885 1,808 104.3%
- Gain on sale of non-trading investments 3,920 2,371 -39.5%
- Dividend income 3,738 3,164 -15.3%
- Income from associates 2,620 5,818 122.0%
- Other operating income 868 747 -14.0%
Total non interest income 21,328 24,526 15.0%
- Provisions for loan losses, impairment of non-trading invt 310 (1,136)
Total operating income 44,434 50,667 14.0%
- Staff costs (9,593) (11,320) 18.0%
- Depreciation (1,005) (1,084) 7.8%
- Other Operating Expenses (5,398) (5,850) 8.4%
Total operating expenses (15,996) (18,254) 14.1%
- Tax (653) (938) 43.6%
Net profit for the perid 27,785 31,476 13.3%
Minority interest (4,966) (5,482) 10.4%
Net Profit to equity shareholders 22,819 25,993 13.9%
The total operating expenses have also grown by 14.1% to BD18.25mn (US$48.42mn) in
1Q-07 as compared to BD15.99mn (US$42.43mn) recorded in the corresponding period
of the previous year. The resultant net profit of the bank to equity shareholders registered
a growth of 13.9% to BD25.99mn (US$68.95mn) at the end of 1Q-07 as compared to
BD22.82mn (US$60.53mn) during the corresponding period of the previous year.
Earnings per share of the bank increased to 70fils at the end of 1Q-07 as compared to
61fils reported at the end of 1Q-06.

Outlook
AUB has emerged itself as one of the best banks in Bahrain. In addition, AUB has
increased its presence in Qatar, Kuwait, Iraq, Egypt and UK. The bank is looking at good
opportunities and the next target for the bank is to enter Saudi Arabia, UAE, Oman, and
Switzerland. The banks has and will continue to explore new opportunities in these region
either by acquiring or merging with the local banks in these respective countries. The
bank will also continue to focus on its core areas of business in the kingdom.
One of the banks strategy is to maintain a profitable UK presence and establish its
presence in the Swiss market as a non-regional banking arm, which will also profitably
complement regional expansion and support the commercial and private banking activities
of the bank.
|e }uae !
Looking at all these factors, we believe that AUB is well positioned in the Bahraini market
to further continue its growth momentum witnessed in the last few years. This will be
further complemented by the Governments thrust towards providing further impetus to
economic growth is likely to benefit the banking sector as a whole. In our opinion, the
outlook for the bank is positive on the back of buoyant core banking activities.
Valuation:
Based on the current market price of US$1.30, the stock is trading at 13.8x 2007E earnings
and 2.5x 2007E book value. The stock is trading at 12.1x 2008E earnings and 2.4x 2008E
book value. Based on our expectations about the future potential of AUB, we have valued
AUBs share price at US$1.26. The stock currently trades at US$1.30, which implies that the
value arrived at using the weighted average method is around 2.8% lower than the current
market price. We recommend HOLD on AUBs stock.
}uae ! |
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}uae ! +1
Key Data
EPS (BD fils)* 58.00 Avg. daily vol.(000) 79,707
BVPS (BD)* 294.4 52 week Lo / Hi 0.620/0.752
P / E (x) 11.6 Market Cap (BD mn) 450.4
P / BV (x) 2.28 Target Price (Fils) 811.5
* Projected (2007)
Company Background
Bank of Bahrain and Kuwait (BBK) was incorporated in 1971 to carry out commercial
banking activities. The bank provides a full range of corporate and commercial banking
services to the Government, medium and small business enterprises, individuals and to
employees.
The bank has one of the largest retail delivery network established at different strategic
locations in Bahrain. In addition to the 16 domestic branches, it has 40 ATMs. BBK is
second to National Bank of Bahrain in terms of branch network in Bahrain. In 1978 for
the first time the bank forayed outside Bahrain by setting up its branch in Kuwait as part
of the banks expansion policy. Since then the bank has entered some other regional
markets. The bank has two branches in India at Mumbai and Hyderabad. In addition, the
bank has a representative office in Dubai.
CrediMax: CrediMax is the card division of the bank. CrediMax targets all retail
customers, besides BBK customers. CrediMax offers a host of products and services to its
customers including Visa Card, Master Card, Gold Card for Classic Cards and Credinet
the Internet credit card. CrediMax is considering forming a joint venture to do third
party processing.
The banks have a strategic stake of 20.25% shareholding in Bahrain Commercial
Facilities Company, 2.40% stake in Bahrain Telecommunications Company, 10% stake
in Securities and Investment Company and 6.83% in Bahrain Kuwait Reinsurance
Company.
Recommendation
BUY
Bank of Bahrain and Kuwait
Reuters Code:
BBK.BH
Listing:
Current Price
670 Fils (May 31
st
, 2007)
+! }uae !
Recent Developments

BBK is in the process of reviving is wholly owned Islamic Banking subsidiary Al Khaleej
Islamic Investment Bank (AKIIB). A detailed feasibility study is under way.
BBK entered into a joint venture with Shamil Bank, to established a new company
Sakana. The new company started operations in December-2006, which will offer a
range of sharia compliant services.
BBKs strategy to offer state-of-art financial mall, a one-stop-shop banking platform was
opened in Budaiya. The first of eight such financial malls was opened in Adliya. The new
financial mall emphasizes the banks new focus on customer service. In addition, a 24-
hour drive-through automatic teller machine is also available in the financial mall. This
new concept by the bank will improve the operating efficiency of the branches and will
also improve the customer service provided by the bank. Two new similar facilities are
currently under construction in different parts of Muharraq.
BBK acted as the lead manager for the IPO financing of Al-Salam Bank, which hit the
market in the year 2006. In addition, the bank acted as co-lead manager for the Ithmaar
Bank IPO.
Financial Performance - 2006
BBKs asset size increased from BD1.31bn in 2003 to BD1.69bn in 2006, registering a
CAGR of 8.8% for the period 2003-2006. The banks customer deposit increased from
BD772.2mn in 2003 to BD963.9mn in 2006, registering a CAGR of 7.7% during the same
period. The banks gross loan book increased from BD738.1mn in 2003 to BD985.4mn
in 2006, a CAGR growth of 10.1% for the period under review. In 2006, the total assets
stood at BD1.69bn as compared with BD1.49bn in the previous year, registering an
increase of 13.0%.
Chart 1: Funding Mix

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
2003 2004 2005 2006
65.1% 66.5% 68.1% 67.2%
18.4% 26.1% 29.2%
3.3%
5.8%
7.9%
7.3% 15.9%
17.8%
Customers Deposits Deposits and due to banks and other Fls
Borrowings under repurchase agreements Medium term loans
}uae ! +|
The total external funding of the bank increased at a CAGR of 8.8% from BD1.15bn
in 2003 to BD1.48bn in 2006. On a yearly basis, the total external funding of the bank
increased by 14.0% from BD1.29bn in 2005 to BD1.48bn in 2006. The main source of
funding for the bank was through deposits and medium term loans.
Although, the contribution of customer deposit contribution to the total funding declined
from 67.2% in 2003 to 65.1% in 2006, it remains the main source of funding for the bank.
The contribution of medium term loans, on the other hand, increased from 3.3% in 2003
to 15.9% in 2006.
Customer deposits grew at a CAGR of 7.7% from BD772.2mn in 2003 to BD963.9mn
in 2006. In 2006, customer deposits increased by 11.6% from BD863.4mn in 2005 to
BD963.9mn in 2006.
Medium term loan increased by 150.0% to BD235.6mn in 2006 as compared to
BD94.25mn in 2005. In the year 2006, the bank issued unsecured floating notes deposit
notes amounting to US$500mn as a part of its US1bn Euro Medium Term deposits. This
will help the bank in diversifying the funding base for the growing balance sheet size as
well as help the bank in easing liquidity mismatch.
Deposits and due to banks and other financial institutions contributed 17.8% of the total
funding in 2006 as compared with 18.4% in the previous year.
On the lending side, the banks gross loan book grew at a CAGR of 10.1% from
BD738.1mn in 2003 to BD985.4mn in 2006. In the year 2006, the gross loan book
increased by 16.7% from BD844.4mn in 2005 to BD985.4mn in 2006. Strong demand
for credit was witnessed both from the corporate as well as from the consumer segment.
Net loans and advances grew at a CAGR of 12.1% from BD659.2mn in 2003 to
BD938.0mn in 2006. In 2006, net loans increased by 18.0% from BD795.0mn in 2005 to
BD938.0mn in 2006. The banks gross loan and advances to total funding increased from
64.3% in 2003 to 66.6% in 2006.
Chart 2: Loans and Advances as a percentage of Total funding

1,600
1,400
1,200
1,000
800
600
69.0%
66.0%
63.0%
60.0%
2003 2004 2005 2006
66.6%
65.1%
66.4%
64.3
Total Funding Gross Loans & advances
Gross Loans & advances as a % of total funding
B
D

m
n
++ }uae !
Lending to construction and real estate sector accounted for 16.9% of the total loan
portfolio in 2006 as compared to 12.3% in the year 2005. In absolute terms, lending to
construction and real estate increased by 60.2% from BD103.7mn in 2005 to BD166.1mn
in 2006.
Lending to banks and other financial institutions increased by 46.0% from BD83.6mn in
2005 to BD122.0mn in 2006. As a result, the contribution to the total loan book increased
from 9.9% in 2005 to 12.4%.
Chart 3: Loans and Advances Break-up by sectors

Lending to trading and manufacturing sector increased by 12.4% from BD273.7mn in
2005 to BD307.7mn in 2006. Despite increasing in absolute terms, the contribution to
total loan book declined from 32.4% in 2005 to 31.2% in 2006.
Lending to individuals, on the other hand, declined in terms of both contribution as well
as in absolute terms. In absolute terms, lending to individuals declined from BD210.7mn
in 2005 to BD207.7mn in 2006.
The contribution of lending to individuals to the total loan book declined from 25.0% in
2005 to 21.1% in 2006. The drop in lending to individuals is due to the recent regulations
on consumer lending from the central bank. However, it should be noted that the bank was
not impacted much by this new regulation as the bank followed strict internal guidelines
on lending to individuals.
100%
80%
60%
40%
20%
2005 2006
Trading and manufacturing Banks and other FLs Construction and real estate
Government and public sector Individuals Other
32.4%
9.9%
12.3%
9.1%
25.0%
11.4% 11.9%
21.1%
6.6%
16.9%
12.4%
31.2%
}uae ! +]

During the last three years, the banks asset quality has improved significantly. Gross Non-
Performing Loans (NPLs) as a percentage of gross loans declined from a high of 13.6%
in 2003 to 6.9% in 2006, which is still higher when compared to its peers. However, the
improving asset quality indicates that the growth in the loan book was not at the cost of
quality.
In absolute terms, NPLs have declined from BD100.6mn in 2003 to BD68.3mn in 2006.
The conservative credit risk policies and the success of recovery efforts has helped the
bank in improving its credit risk during the last three year. Going forward, we are expected
to see substantial decrease in non-performing loans, as the bank is continuing its efforts
on recovering a huge part of the NPLs.
Chart 5: Coverage ratio

1,000.0
900.0
800.0
700.0
600.0
500.0
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2003 2004 2005 2006
13.6%
9.6%
8.1%
6.9%
Gross Loans and Advances NPLs as a % of Gross loans & advances
B
D

m
n
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2003 2004 2005 2006
78.4%
80.0%
78.0%
76.0%
74.0%
72.0%
70.0%
68.0%
66.0%
64.0%
Non-Performing Loans NPL coverage ratio
73.9%
72.2%
69.4%
B
D

m
n
+e }uae !
Of the total gross NPLs, the bank has provided almost 70% and is expected to recover
significant chunk of bad loans over the next two years.
The banks investment portfolio is classified into Held for trading, available for sale and
investment stated at amortized cost. The investment portfolio consist of bonds, equities
and managed funds. Non-trading securities declined by 2.6% from BD457.5mn in 2005
to BD445.6mn in the year 2006, mainly due to the drop in government bonds. The banks
investment portfolio comprised of 36.5% of government bonds, 46.8% in bonds, 10.9%
in equities and the remaining 5.8% in funds and others.
BD23.3mn in 2003 to BD32.8mn in 2006. During the same period, operating income of
the bank grew by 10.6%, where as total expense increased at a CAGR of 9.2%.

Chart 6: Net Profit

Source: Company Reports, Global Research
In the year 2006, the net profit of the bank improved by 11.88% to reach BD32.8mn as
compared to BD29.3 reported in the previous year. The bank was able to register a double
digit growth in the year 2006, despite having additional expenses on developing new
businesses as well as providing prudently for impaired assets. This is quite evident from
the drop in profit margin, as it dropped from 52.4% in 2005 to 50.8% in 2006.
The net interest income of the bank grew at a CAGR of 17.4% from BD26.1mn in
2003 to BD42.2mn in 2006. The net interest income of the bank increased by 18.26%
to BD42.23mn in 2006 as compared to BD35.71mn in the previous year, which was
supported by the strong growth in business volume.

36.0
33.0
30.0
27.0
24.0
21.0
18.0
53.0%
52.0%
51.0%
50.0%
49.0%
48.0%
2003 2004 2005 2006
Net Profit Profit Margin
49.0%
48.3%
52.4%
50.8%
}uae ! +
Chart 7: Margins

2006. At the same time, the cost of average bearing liabilities increased from 3.07% in
2005 to 4.55% in 2006. As a result of this, the net spread for the bank increased from
2.14% in 2005 to 2.27% in 2006, where as the net interest margin of the bank improved
from 2.49% in 2005 to 2.73% in 2006.
Chart 8: Total I ncome Break Up

Source: Company reports
The non-interest income of bank increased by 10.0% from BD20.18mn in 2005 to
BD22.2mn in the year 2006. Non-interest income contributed 34.5% of the total income
of the bank. The fees and commission income increased by 20.10% to BD13.3mn in
2006 as compared to BD11.1mn in 2005. Due to higher income from the banks credit
card business as well as corporate and retail bank fees has helped in registering a healthy
growth in fees and commission income.
9.0%
7.0%
6.5%
3.0%
1.0%
2.4%
2.2%
2.0%
1.8%
2006 2005 2004 2003
1.90%
1.96%
2.14%
2.27%
Inerest Income/Avg Interest Earning Assets
Inerest Expense/Avg Interest Bearning Liabilities
Net Spread
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.00
2003 2004 2005 2006
Net interest incomme Non - interest incomme
B
D

m
n
CAGR-10.6% (2003-06)
26.08
21.48
23.66
29.53 35.71
20.18
22.20
42.23
+~ }uae !

In 2006, operating costs increased by 12.2% from BD23.8mn in 2005 to BD26.7mn in
2006 on the back of additional expenses on developing new businesses. However, the
cost to income ratio of the bank declined from 42.6% in 2005 to 41.4% in 2006, whereas
the operating cost to average assets increased marginally from 1.63% in 2005 to 1.67% in
2006.


BD23.3mn in 2003 to BD32.8mn in 2006. As a result, the banks return ratios (ROAA
and ROAE) have improved during the period under consideration. ROAA increased from
1.84% in 2003 to 2.05% in 2006, whereas ROAE increased from 17.1% in 2003 to 18.2%
in 2006.
47.0%
45.0%
43.0%
41.0%
39.0%
1.8%
1.7%
1.6%
1.5%
2003 2004 2005 2006
Cost to Income Cost to Average Total Assets
46.3%
1.74%
1.70%
1.63%
1.67%
41.4% 42.6% 43.7%
18.0%
17.5%
17.0%
16.5%
16.0%
2.1%
2.0%
1.9%
1.8%
1.7%
2006 2005 2004 2003
Return on Average Equity Return on Average Assets
17.1% 17.1% 17.7% 18.2%
2.05%
2.01%
1.88%
1.84%
}uae ! +)

BBK is well capitalized to support growth in risk-adjusted assets. As at end 2006, the
banks Capital Adequacy Ratio (CAR) stood at 16.20% as compared to that of 19.57% in
2005. The banks capital adequacy ratio is well above the Basel I requirement of 8% and
also above the minimum required rate of 12% by the Central Bank of Bahrain.
BBKs asset size increased by 9.8% to reach BD1.86bn at the end of 1Q-07 as compared
to BD1.69bn reported at the end of 2006. Customer deposits of the bank increased by
4.2% to BD1.00bn at end of 1Q-07 as compared with BD0.96bn at the end of year 2006.
Despite registering a growth of 4.2% in customer deposits, the contribution to the total
assets declined from 56.9% at the end of 2006 to 54.0% at the end of 1Q-07. This is due to
the 53.4% increase witnessed in deposits and due to banks and other financial institutions
from BD263.76mn in 2006 to BD404.66mn at the end of 1Q-07. The total funding of the
bank increased by 12.2% to BD1.66bn as compared to BD1.48bn at the end of 2006.
On the lending side, the gross loans and advances increased marginally by 1.9% to
BD956.11mn at the end of 1Q-07 as compared with BD938.04mn reported at the end
of 2006. As a result of this marginal growth compared to the customer deposits, the
contribution of gross loans and advances to customer deposits declined from 97.3% in
2006 to 95.2% at the end of 1Q-07.
The non-trading investment securities of the bank increased by 14.1% to BD508.53mn in
1Q-07 as compared to BD445.62mn at the end of 2006.
On the earnings side, net interest income of the bank increased by 19.4% to BD11.54mn
in 1Q-07 as compared BD9.66mn reported in the corresponding period of the previous
year. On other hand, the non-interest income of the bank declined by 5.2% to BD5.87mn
for the period under review.
20.0%
19.0%
18.0%
17.0%
16.0%
15.0%
14.0%
2003 2004 2005 2006
16.73%
18.82%
19.57%
16.20%
] }uae !
Table 1 : Summary of 1Q-07 results
1Q 1Q %
Amount in BD mn 2006 2006 Change
Interest Income 22.96 27.97 21.8%
Interest Expense (13.30) (16.43) 23.6%
Net interest income 9.66 11.54 19.4%
- Share of profit in associated company & J V 0.34 0.20 -39.9%
- Other income 5.85 5.67 -3.2%
Total non-interest income 6.19 5.87 -5.2%
Total Operating income 15.85 17.41 9.8%
- Staff costs (3.29) (4.30) 30.7%
- Other operating expenses (2.17) (2.12) -2.0%
- Depreciation (0.54) (0.49) -8.9%
- Provisions for losses on loans & adv. to customers (0.70) (0.77) 9.6%
- Provision for impairment in non-trading investment 0.04 (0.17) -
Total Operating Expenses (6.66) (7.85) 17.9%
Profit Before Taxation 9.19 9.56 4.0%
- Tax - foreign units (0.20) (0.01) -
- Kuwait National Labour support tax - (0.04) -
Net I ncome 8.99 9.51 5.8%
The total income of the bank increased by 9.8% to BD17.4mn as compared to BD15.85mn
reported in the corresponding period of the previous year on the back of income from core
banking activities.
The total operating expenses have also grown by only 17.9% to BD7.85mn in 1Q-07 as
compared to BD6.66mn recorded in the corresponding period of the previous year. As a
result, the cost to income ratio increased from 37.9% in 1Q-06 to 39.7% in 1Q-07.
The resultant net profit of the bank registered a growth of 5.8% to BD9.51mn at the end
of 1Q-07 as compared to BD9.19mn during the corresponding period of the previous
year. Earnings per share of the bank increased to 14fils at the end of 1Q-07 as compared
to 13fils reported at the end of 1Q-06.

Outlook
BBK has been able to maintain its market share among the listed banks. The bank has also
maintained its steady growth rate in such a competitive environment and a small Bahraini
market. BBK is expected to shore up its retail business in the region through a process
of re-engineering its retail capabilities, improve product range delivery and enhanced
client segmentation. The bank is also looking at bringing in senior management with
international experience, which will further improve the business activities of the bank.
In addition, the recent decision of rationalizing its branches will also help the bank in
providing superior quality of service to the clients. Earlier locations were not able to service
the clients in an efficient manner due to the locations of the bank. BBK has expansion
plans in the pipeline for the future, both organic and inorganic but these expansions will
be implemented with depending on the opportunities. The bank is looking forward to
}uae ! ]1
converting its representative office in Dubai to a full fledged bank, which will allow the
bank to tap the UAE market, and also allow to participate in syndication faculties. .
The bank is expected to realize significant operating efficiencies by leveraging its new
technology platforms as the bank grows both domestically and internationally. In addition,
the bank is expected to invest more on cutting edge technology to support its growth
initiatives. This will especially benefit the bank in terms of its retail business.
The banks credit card unit is expected to do well as it caters to more gulf based customers
and contributes more to the bottom-line of the bank. Outside Bahrain, CrediMax will
remain focused on Kuwait, Qatar, and Oman as possible destinations for its products
and services. During the last couple of years, this segment of the banks operation has
generated revenues, which the bank is now looking at increasing its revenue stream.
The bank is expected to continue developing its partnerships with global players to expand
its asset management business and to explore similar arrangements for new investment
banking and wholesale financial products and services.

Valuation:
Based on the current market price of 670fils, the stock is trading at 11.6x 2007E earnings and
2.3x 2007E book value. The stock is trading at 9.8x 2008E earnings and 2.2x 2008E book
value. Keeping in line with the improved performance of the bank and our expectations about
its future potential, we have valued BBKs share price at 811fils. The stock currently trades at
670fils, which implies that the value arrived at using the weighted average method is around
21.1% higher than the current market price. We recommend BUY on BBKs stock.
]! }uae !
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]e }uae !
Key Data
EPS (BD fils)* 69.78 Avg. daily vol.(000) 47,778
BVPS (BD)* 248.87 52 week Lo / Hi 0.371/0.498
P / E (x) 6.4 Market Cap (BD mn) 142.81
P / BV (x) 1.80 Target Price (Fils) 0.539
* Projected (2007)
Company Overview
Bahrain I slamic Bank (BIsB) was incorporated in 1979 in Bahrain, which was the first
Islamic bank to list on Bahrain Stock Exchange. The bank provides banking services
in accordance with the Islamic Sharia principles. The bank is considered to be the first
Islamic institution established in Bahrain and the third bank to carry out such kind of
business in the Gulf region. The bank operates under an onshore domestic commercial
banking license granted by the Bahrain Monetary Agency (BMA).
The bank operates under a retail bank license issued by Central Bank of Bahrain
(formerly known as Bahrain Monetary Agency). The bank has established leadership
in the application of Islamic modes of investment and financing a diversified range of
products and services for retail customers.
The bank has a strong and growing network of branches, 12 at the end of 2006. The bank is
well positioned to meet the strong and growing demand with highest ethical standards.
Shareholding Pattern
BIsBs shareholding was changed during the year 2005, with the sale by a strategic
investor to Al-Madar Finance and Investment Company, which is a subsidiary of The
Investment Dar of Kuwait. Al-Madar Finance and Investment Company now holds
40% stake, followed by Islamic Development Bank with 13.0%, Kuwait Awqaf Public
Foundation with 8.65%, Securities House with 7.59 and Dubai Islamic Bank with 4.3%.
The remaining 19.38% stake of the bank is held by public.
Recommendation
BUY
Bahrain Islamic Bank
Reuters Code:
BI sB.BH
Listing:
Current Price
448 Fils (May 31
th
, 2007)
}uae ! ]
Recent Developments
BIsB signed a joint co-operation contract with the International Turn Key Systems (ITS).
The contract covers the provision of state-of-the-art technologies and solutions that will
enable the bank to meet the growing challenges in the regional financial markets.
In May 2006, Bahrain Islamic Bank (BIsB), signed an agreement with the Islamic
International Rating Agency (IIRA), a Bahraini joint stock company. IIRA will provide
an independent evaluation on BIsBs credit risk and capacity to honor all its financial
obligations.
BIsB announced that the rating agency Capital Intelligence recently raised BIsBs credit
rating. The rating upgrades were A3 for short term rating, BBB for long term foreign
currency, BBB financial strength and a stable outlook for the bank. The earlier ratings
by the agency released in October 2005 was BBB-. The new positive ratings of the bank
are attributed to several factors, which include the significant improvement of the banks
profitability and improved quality of the banks assets.
In September 2006, BIsB signed a Memorandum of Understanding with Montreal Cars,
offering credit facilities to all buyers wishing to buy new 2007 Toyotas sold through
Montreal Cars Centre, an authorized Toyota dealership in Bahrain. The lender will pay
a competitively low rate of profit of 3.75% (equal to a declining annual percentage rate-
APR starting from 7.5% inclusive of all fees), and monthly installments to be repaid over
periods of up to seven years without down payment.
In March 2007, BIsBs Board of Directors recommendation to increase the capital by
100 percent by issuing new shares on the basis of preference right to the Shareholders
registered on the date of the General Meeting. The share issue price has been fixed at 300
fils per share which includes 200 fils as issue premium.
Financial Performance 2006
BIsB showed good results in 2006, as the bank reported net profit of BD13.1mn, in
increase 76.6% as compared to the previous year. The balance sheet size of the bank
increased by 36.1% to BD436.5mn as compared to BD320.7mn in the previous year.

Stable deposit base
BIsB has been increasing its deposits using its extensive branch network, technological
innovations and aggressive marketing strategies. BIsB has benefited from customers
changing preference and migration from the conventional banking products towards
Islamic banking products. Customers current account grew at a CAGR of 21.2%, from
BD28.9mn in 2003 to reach BD51.4mn at the end of 2006.
In addition, the bank was also able to increase its external funding through the unrestricted
investments accounts, which grew at a CAGR of 24.0% from BD159.5mn in 2003 to
reach BD304.1mn in 2006. In 2006, the unrestricted investment accounts increased by
53.7% from BD197.9mn in 2005 to BD304.1mn in 2006.
]~ }uae !
Customers contribution to the total unrestricted investment account declined from 71.2%
in 2005 to 50.2% to 2006, whereas the banks and financial institutions contribution
increased from 27.5% in 2005 to 49.0% in 2006. Going forward, we believe the bank will
be able to increase its funding base with strong relationships as well as extensive branch
network, which will further support the loan growth.
Receivables portfolio healthy growth
BIsB receivables portfolio grew at a CAGR of 19.5% from BD142.8mn in 2006 to
BD243.6mn in 2006. In the year 2006, the receivables portfolio reported a healthy growth
of 54.0% from BD158.2mn in 2005 to reach BD243.6mn at the end of 2006.
Chart 1: Receivables Portfolio Sector wise break up

Lending to financial institutions accounted for 63.3% of the total receivables portfolio in
2005, which increased to 71.2% at the end of 2006. In absolute terms, lending to financial
institution increased from BD105.3mn in 2005 to BD179.5mn in 2006, representing an
increase of 70.5%.
Lending to commercial sector increased in absolute terms, however declined in terms of
contribution to the total receivables portfolio. Lending to commercial sector increased
from BD18.1mn in 2005 to BD23.3mn in 2006, reporting an increase of 29.3%, whereas
in terms of contribution declined from 10.9% in 2005 to 9.3% at the end of 2006.
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
2005 2006
10.9%
63.3%
16.7%
9.0%
12.5%
7.0%
71.2%
9.3%
Commercial Financial Instituions Real Estate Other
}uae ! ])
Chart 2: NPLs to Gross Receivables

During the last three years, the banks asset quality has improved. Gross Non-Performing
Loans (NPLs) as a percentage of gross loans declined from 1.3% in 2003 to 1.1% in
2006. This suggest that the growth in the receivables portfolio has not been on the cost of
quality. The conservative credit risk policies has helped the bank improve its credit risk
during the last three year. It is also worth noting that the bank has one of the lowest ratios
compared to its peers.
Asset - strong growth
BIsBs total assets grew at a CAGR of 23.5% during the period 2003-2006, from
BD231.5mn in 2003 to BD436.5mn at the end of 2006. In the year 2006, the balance
sheet size increased by 36.1% to BD436.7mn as compared to BD320.7mn at the end of
previous year. Around 55.8% of the assets were deployed in receivables and 22.3% of
assets were classified as non-trading investment.
Non-trading investments of the bank grew at a CAGR of 33.1% for the period 2003-
2006, from BD41.3mn in 2003 to BD97.4mn at the end of 2006. In 2006, the non-trading
investments increased by 20.6% to BD97.4mn as compared to BD80.7mn at the end of
the previous year. About 62.3% of non-trading investments was in the form of sukuks,
whereas the remaining 37.7% was in equities.
Majority of BIsBs assets are in the Middle East region, but the bank is also increasing
its presence in Europe and North America. Collectively, the assets deployment in Europe
and North America was around 5.7% of the total assets at the end of 2006 as compared to
3.7% in the previous year. Going forward, we believe that BIsB will continue to increase
its market presence in the Middle East markets especially where it has a strong foothold
and increased market share.

260,000
220,000
180,000
140,000
100,000
2.00%
1.80%
1.60%
1.40%
1.20%
1.00%
2003 2004 2005 2006
Gross receivables NPLs
1.3%
1.8%
1.4%
1.1%
e }uae !
I ncome & Profitability growing at a good pace.
Income from Islamic finances grew at a CAGR of 46.6% for the period under review,
from BD7.8mn in 2003 to BD24.7mn in 2006. In the year 2006, income from Islamic
finances increased by 86.8% to reach BD24.7mn as compared to BD13.2mn recorded
in the previous year. Income from Islamic finances includes income from Murahaba
receivables, Mudaraba financing, Mishraka investments, investments in Sukuk, and
Ijarah muntahia bittamleek.
The income from Murabaha receivables of the bank grew at a CAGR of 49.4% during
the period 2003-2006, from BD4.7mn in 2003 to BD15.8mn in 2006. In the year 2006,
income from murahaba receivables increased significantly by 87.8% to BD15.8mn as
compared to BD8.4mn recorded in the previous year. Income from Murahaba receivables
accounts for 63.9% of the total income from Islamic finances and 46.6% of the total
operating income of the bank.
Investment income of the bank also registered a significant increase of 146.6%, from
BD2.2mn in 2006 to BD5.5mn in the 2006. As a result, the operating income of the
bank grew at a CAGR of 56.7% for the period under review, from BD8.9mn in 2003 to
BD34.2mn in 2006.
In 2006, the operating income registered a significant increase of 84.6%, from BD18.5mn
in 2005 to BD34.2mn in 2006. In-line with the hardening of yields, the return on unrestricted
investment accounts witnessed a strong increase of 150.4% to reach BD12.7mn in 2006
as compared to BD5.1mn recorded in the previous year.

9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
70.0%
60.0%
50.0%
40.0%
30.0%
2003 2004 2005 2006
Operating Expenses As a % of Operating income
64.7%
56.3%
45.2%
38.8%
}uae ! e1
On the efficiency front, the ratio of operating expense to operating income (banks share in
operating income) decreased from 64.7% in 2003 to 38.8% in 2006. Despite the operating
expenses increasing at a CAGR of 20.8% during the period under review.
BIsBs net profit of bank grew at a CAGR of 74.3%, from BD2.5mn in 2003 to reach
BD13.1mn in 2006. In the year 2006, the bank registered a growth of 76.6%, from
BD7.4mn in 2005 to BD13.1mn in 2006. The improved net income resulted in EPS
moving up from 29.89fils in 2005 to 47.33fils in 2006.


BD2.5mn in 2003 to BD13.1mn in 2006. Due to this, the banks return ratios have
improved during this period. Return on average assets increased from 1.1% in 2003 to
3.4% in 2006. Also return on average equity increased from 6.3% in 2003 to 17.8% in
2006.
BIsBs asset size increased by 13.8% to reach BD496.6mn at the end of first quarter
of 2007 as compared to BD436.5mn at the end of 2006. The bank reported a strong
sequential growth of 45.3% in 1Q-2007 as compared to BD341.8mn recorded at the end
of 1Q-06.
On the funding side, the total funding for the bank increased by 18.9% to BD429.9mn
at end of 1Q-07 as compared with BD361.6mn at the end of year 2006. As a result, the
contribution of total funding to the total assets increased from 82.8% at the end of 2006
to 86.6% at the end of 1Q-07.
The growth in total funding was driven by the growth in unrestricted investment accounts,
which increased from BD304.1mn at the end of 2006 to BD370.7mn at the end of 1Q-07.
The customers current account witnessed a decline during the first quarter of 2007 from
BD51.4mn at end of 2006 to BD46.6mn, a drop of 9.3%.
4.0%
3.0%
2.0%
1.0%
0.0%
20.0%
16.0%
12.0%
8.0%
4.0%
2003 2004 2005 2006
Return on Average Assets Return on Average Equity
6.3%
8.0%
11.9%
17.8%
e! }uae !
Table 1 : 1Q- Performance
1Q 1Q %
Amount in BD 2006 2007 Change
Income from Islamic Finances 4,275 7,317 71.2%
Gain on fair value adjustment for investments in properties 239 265 10.9%
Income from investments 2,161 2,946 36.3%
Banks share in the associates 46 41 -10.9%
Other income 459 516 12.4%
Operating I ncome 7,180 11,085 54.4%
Return on unrestricted investment accounts before Banks
share as a Mudarib
3,479 5,962 71.4%
Banks share as a Mudarib (1,512) (1,972) 30.4%
Return on unrestricted investment accounts 1,967 3,990 102.8%
Banks share in operating income (as a Mudarib & Rabalmal) 5,213 7,095 36.1%
Staff costs 904 1,192 31.9%
Depreciation 131 144 9.9%
Other operating expenses 358 528 47.5%
OPERATI NG EXPENSES 1,393 1,864 33.8%
NET PROFI T FOR THE YEAR 3,820 5,231 36.9%
BIsB receivables portfolio grew by 23.9% from BD243.6mn in 2006 to BD301.8mn
at end of 1Q-07. Mudaraba investments of the bank increased by 13.2% to BD25.1mn
in 1Q-07 as compared to BD22.2mn as the end of 2006. The non-trading investments
portfolio of the bank declined during the 1Q-07, from BD97.4mn at the end of 2006 to
BD93.0mn.
On the earnings side, the bank was able to register a healthy growth in the 1Q-07 as
compared to the corresponding period of the previous year. Income from Islamic finances
increased by 71.2% to BD7.3mn in 1Q-07 as compared to BD4.3mn recorded in the
corresponding year of the previous year.
Investment income of the bank also registered an increase of 36.3%, from BD2.2mn in
2006 to BD2.9mn at the end of 1Q-07. In-line with the hardening of yields, the return
on unrestricted investment accounts witnessed a strong increase of 102.8% to reach
BD3.9mn in 1Q-07 as compared to BD1.9mn recorded in the corresponding period of the
previous year.
BIsBs total operating expenses have also grown by 33.8% in 1Q-07 over the corresponding
period of the previous year on the back of 31.9% rise in staff costs as well as 47.5% in
other expenses.
In the first quarter of 2007, BIsB reported net profit of BD5.2mn, reporting an increase
of 36.9% as compared to the corresponding period of the previous year. As a result of
healthy growth in net profit, the EPS increased to 16.88fils in 1Q-07 as compared to
}uae ! e|
13.85fils in the corresponding period of previous year. Going forward, we believe that the
bank will continue to perform well due to the growing demand in the Bahraini market.

Outlook
The Islamic banking sector, though increasing at a rapid pace, will see increased
competition in Bahrain with most the banks starting to provide Islamic banking activities
to their clients. We believe that BIsB is well positioned in the Bahraini market to
maintain its market share, which will done through increasing the branch network as
well as development of new products. In addition, the bank will also require to adhere
to the latest technological innovation in the banking sector, besides vigorously pursuing
development of new products.
BIsB is also concentrating on improving the corporate relationships with the help of The
Investment Dar, which is the major shareholder in the bank. We believe that with the TID
being an active player in the Kuwaiti market, will the bank to capitalize Islamic banking
activities in Kuwait.
We believe that BIsB is well placed to exploit the increase in the Islamic banking activity
in Bahrain and the other GCC markets due to its current position, strong deposit franchise,
management expertise and strategy of using latest technology and improving customer
relationship. We believe that revenue momentum will be robust from the retail banking
activities.
The bank enjoys a loyal investor base who have been transacting with the bank for a
long time. Although now all banks offer Islamic banking products and services, many
investors still transact through BIsB due to its image of being the pure-play Islamic
Bank in the country.
Valuation:
Based on the current market price of 448fils, the stock is trading at 6.4x 2007E earnings and
1.8x 2007E book value. The stock is trading at 4.9x 2008E earnings and 1.5x 2008E book
value. Keeping in line with the improved performance of the bank and our expectations about
its future potential, we have valued BIsBs share price at 539fils. The stock currently trades at
448fils, which implies that the value arrived at using the weighted average method is around
20.4% higher than the current market price. We recommend BUY on BIsBs stock.
e+ }uae !
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e~ }uae !
Background
National Bank of Bahrain (NBB) was the first Bahraini bank incorporated in Bahrain
in 1957. Government of Bahrain owns 49% of the bank and the remaining 51% is held
by the Bahraini citizens. The bank offers a full range of banking services focused on
both retail and corporate clients through a wide network of 25 branches and 43 ATMs
(including the Abu Dhabi branch). Outside Bahrain, NBB operates one branch in Abu
Dhabi that focuses on corporate customers and middle-income retail customers.
In the year 2006, the bank completed 50 years of operations and existence in the country.
NBB has grown steadily to become the countrys leading provider of retail and commercial
banking services. Currently the bank has 535 employees, of which around 92% staff is
Bahraini nationals.
NBB launched new products to serve the retail clients to provide attractive tailored
products in a competitive industry. The key priority for the banks remained superior
quality of customer service coupled with advertising and promotion campaigns.

NBBs asset size increased from BD1.24bn in 2003 to BD1.68bn in 2006, a CAGR growth
of 10.6%. The banks total deposit increased from BD895.5mn in 2003 to BD1,199.8mn in
2006, a CAGR growth of 10.2% during the same period. The banks loan book increased
from BD581.4mn in 2003 to BD799.2mn in 2006, a CAGR growth of 11.2%. In 2006,
the total assets stood at BD1.68bn as compared with BD1.49bn in the previous year,
registering an increase of 11.9%.
Recommendation
NOT RATED
National Bank of Bahrain
Reuters Code:
NBB.BH
Listing:
Current Price
800 Fils (May 31
st
, 2007)
}uae ! e)
Chart 1: Deposit - Maturity Profile

In 2006, customer deposits grew by 18.26% to BD1.19bn as compared with BD1.01bn in
the previous year. As a result, the contribution of customer deposits to the total balance
sheet increased from 67.7% in 2005 to 71.6% at the end of 2006. The share of deposits
maturing within 3 months declined from 48.9% in 2005 to 44.0% in 2006, whereas
repayable on demand also declined from 50.0% in 2005 to 47.5% in the year 2006.

On the funding side, NBB increased its external funding base from BD1.26bn in 2005 to
BD1.43bn in the year 2006, an increase of 13.5%. However, the growth in the funding
base was through the mobilization of deposits. The contribution of customers deposits to
total funding increased from 80.7% in 2005 to 84.1% in 2006.
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
2005 2006
Repayable on demand Up to 3 months 3 monthe to 1 year
47.8%
44.0%
8.5%
1.1%
48.9%
50.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
17.1%
2006
Due to Banks & other FIs Customer Deposits Borrowings under repurchase agreements
80.7%
2.1%
2.9%
84.1%
13.0%
2005
}uae !
Due to banks and other financial institutions and borrowings under the repurchase
agreements contributed 15.9% of the total funding in 2006 as compared with 19.3% in
the previous year. Going forward, we might witness the bank increasing its funding base
through medium term loans as we have seen the trend in the Bahrain banking sector,
which will also ease the liquidity mismatch issues for banks.


On the lending side, the banks gross loan book grew by 12.2% from BD712.5mn in 2005
to BD799.2mn in 2006. Demand for credit both from the corporate as well as from the
consumer segment remained buoyant. In addition, the bank was able to increase its loan
book through participating in project financing deals and through strengthening lending
relationship with existing customers. Net loans and advances as a percentage of total
assets increased marginally from 46.6% in 2005 to 46.8% in 2006.
The banks gross loan and advances to total funding declined from 56.7% in 2005 to 56.0%
in 2006. Going forward, the bank will be able to grow its loan book by capitalizing further
on buoyant economic environment coupled with booming real estate and infrastructure
projects in the pipeline.

1,500.0
1,250.0
1,000.0
750.0
500.0
62.0%
60.0%
58.0%
56.0%
54.0%
52.0%
50.0%
2003 2004 2005 2006
Gross Loans Total Funding Gross Loans as a % of total funding
54.9%
59.9%
56.7%
56.0%
B
D

m
n
900.0
800.0
700.0
600.0
500.0
400.0
300.0
2.4%
2.0%
1.6%
1.2%
0.8%
2003 2004 2005 2006
Gross Loans NPLs to Gross Loans
2.18%
1.24%
1.25%
1.07%
I
n

B
D

m
n
}uae ! 1
During the last three years, the banks asset quality improved. Gross Non-Performing
Loans (NPLs) as a percentage of gross loans declined from 2.18% in 2003 to 1.07% in
2006. Despite the growth in the loan book, the NPLs declined from BD12.67mn in 2003
to BD8.57mn in 2006. The conservative credit risk policies and the success of recovery
efforts has helped the bank improve its credit risk during the last three year.
The banks investment portfolio increased by 39.1% from BD258.2mn in 2005 to
BD359.1mn in the year 2006. The banks investment portfolio comprised of 82.2%
of debt securities and the remaining 17.8% was in equities. About 90% of the banks
investment securities have investment grade rating of A and above.
Chart 5: Net Profit

BD22.4mn in 2003 to BD36.9mn in 2006. During the same period, operating income
of the bank grew by 13.5% (CAGR), where as total expense increased at a CAGR of
10.6%.
The bank has been able to show healthy growth in the core banking activities in the last
three years. During the period (2003-2006), the net interest income increased at a CAGR
of 18.3% from BD23.3mn in 2003 to BD38.6mn in 2006. In the year 2006, net interest
income increased by 14.1% to BD38.59mn in 2006 as compared to BD33.81mn in the
previous year. Improved yields on money market and investments couple with growth in
loan book has helped the bank in reporting healthy growth in the banks core activities.
Non-interest income contributed 32.94% of the total operating income in the year 2006.
Non-interest income increased by 23.8% from BD15.3mn in 2005 to BD18.96mn in 2006.
The fees and commission income increased by 60.2% to BD8.95mn in 2006 as compared
to BD5.59mn in 2005. During the year, the bank increased its participation in syndicated
facilities and IPO financing, which helped the bank to increase its fees and commission
income. Other important component of non-interest was income from trading in securities
increased by 121.0% to BD4.22mn as compared to BD1.91mn in the previous year.
40.0
35.0
30.0
25.0
20.0
66.0%
64.0%
62.0%
60.0%
58.0
2006 2005 2004 2003
Net Profit Profit Margin
59.4%
63.2%
62.2%
64.0%
! }uae !
Chart 6: Margins

The banks yield on average earnings assets increased from 4.66% in 2005 to 5.88% in
2006. On the same time, the cost of average bearing liabilities increased from 2.14% in
2005 to 3.34% in 2006. However, with the general increase in interest rates, cost of funds
for the bank has gone up in the past few years. As a result of this, the net spread for the
bank increased from 2.52% in 2005 to 2.54% in 2006.

In 2006, operating costs increased from BD18.6mn in 2005 to BD20.7mn in 2006. Cost to
income ratio of the bank declined from 37.82% in 2005 to 35.95% in 2006. The operating
cost to average assets remained at the same level as 2005 at 1.30%.
8.0%
6.0%
4.0%
2.0%
0.0%
2.6%
2.5%
2.4%
2.3%
2.2%
2003 2004 2005 2006
Inerest Income/Avg Interest Earning Assets
Inerest Expense/Avg Interest Bearning Liabilities
Net Spread
2.26%
2.33%
2.52%
2.54%
40.0%
38.0%
36.0%
34.0%
1.47%
1.26%
1.05%
2003 2004 2005 2006
Cost to income Cost to Average Total Assets
1.30%
1.30%
1.27%
1.31%
38.8%
36.3%
37.8%
36.0%
}uae ! |

BD22.4mn in 2003 to BD36.9mn in 2006. Due to this, the banks return ratios improved
during this period. Return on average assets increased from 2.14% in 2005 to 2.32% in
2006. Also return on average equity increased from 14.8% in 2005 to 16.7% in 2006.
As at end 2006, the banks Capital Adequacy Ratio (CAR) stood at 28.7% as compared to
31.6% recorded in the previous year. The banks capital adequacy ratio is well above the
Basel requirement of 8% and also above the minimum required rate of 12% by the Central
Bank of Bahrain.
NBBs asset size increased marginally by 1.0% to reach BD1.69bn at the end of 1Q-07
as compared to BD1.68bn at end of 2006. The bank reported a y-o-y growth of 11.2%
in 1Q-07 as compared to BD1.52bn reported in the corresponding period of the previous
year.
Customer deposits grew by 1.7% to BD1.22bn at end of 1Q-07 as compared with
BD1.19bn at the end of year 2006. On a y-o-y basis, customer deposits of the bank
increased by 10.5% in 1Q-07 as compared to BD1.10bn recorded in the corresponding
period of the previous year. As a result, the contribution of customer deposits to the total
assets increased from 71.6% at the end of 2006 to 72.1% at the end of 1Q-07.
On the lending side, the net gross loans and advances increased by 4.0% to BD816.03mn
at the end of 1Q-07 as compared with BD784.31mn at the end of 2006. On a y-o-y basis,
the net loans and advances increased by 13.1% in 1Q-07 as compared to the corresponding
period in the previous year. The contribution of net loans and advances to the total assets
increased from 46.8% in 2006 to 48.2% at end of 1Q-07.
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
17.0%
16.5%
16.0%
15.5%
15.0%
14.5%
14.0%
13.5%
13.0%
12.5%
2003 2004 2005 2006
16.74%
14.83%
15.72%
14.12%
+ }uae !
On the earnings side, NBB reported a double digit growth in net profit on y-o-y basis. The
net interest income of the bank increased by 14.6% to BD10.27mn in 1Q-07 as compared
BD8.96mn reported in the corresponding period of the previous year.
The non-interest income of the bank also registered a growth of 18.5% to BD6.85mn for
the period under review. As a result, the total operating income of the bank increased by
16.1% to BD17.12mn as compared to BD14.74mn reported in the corresponding period
of the previous year.
The total operating expenses have also grown by only 7.6% to BD5.12mn in 1Q-07 as
compared to BD4.76mn recorded in the corresponding period of the previous year. The
resultant net profit of the bank registered a healthy growth of 20.2% to BD12.0mn at the
end of 1Q-07 as compared to BD9.98mn during the corresponding period of the previous
year.
}uae ! ]
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~ }uae !
FACT SHEET
NATI ONAL BANK OF BAHRAI N
2003 2004 2005 2006
Profitability
- Return on Average Assets 1.91% 2.18% 2.14% 2.32%
- Return on Average Equity 14.12% 15.72% 14.83% 16.74%
- Net interest income/ total Op. Income 57.2% 61.2% 68.8% 67.1%
- Non-interest income/ total Op. Income 42.8% 38.8% 31.2% 32.9%
Margins
- Net income / Interest Income 66.8% 72.8% 51.3% 44.2%
- Interest Expense to Interest Income 30.6% 28.0% 43.2% 53.7%
- Interest Income / Avg Interest Earning Assets 3.28% 3.31% 4.66% 5.88%
- Interest Expense / Avg Interest Bearing Liabilities 1.02% 0.98% 2.14% 3.34%
- Net Spread 2.26% 2.33% 2.52% 2.54%
- Net Interest Margin 2.28% 2.38% 2.65% 2.72%
Efficiency
-Cost to Total Op Income 38.85% 36.33% 37.8% 36.0%
- Staff Expense to Total Op Income 27.0% 24.7% 26.3% 24.4%
- Cost to Average Total Assets 1.31% 1.27% 1.30% 1.30%
Liquidity
- Loans to Interest Earning Assets 52.07% 56.20% 53.58% 53.05%
- Loans to Customer Deposits 64.92% 72.00% 70.23% 66.61%
- Loans to total Funding 54.86% 59.94% 56.70% 56.03%
- Customer Deposits to Equity 541.00% 493.50% 465.09% 540.10%
- Gross Loans to Total Assets 46.98% 50.69% 47.56% 47.67%
Credit Quality
- Non Performing Loans (BD mn) 12.67 8.54 8.93 8.57
- Loan Loss Reserves (BD mn) 18.2 15.4 15.1 14.9
- NPLs to Gross Loans 2.18% 1.24% 1.25% 1.07%
- Loan Loss Reserve to Gross Loans 3.14% 2.24% 2.12% 1.86%
- NPL coverage ratio 143.99% 180.43% 169.42% 173.53%
Capital Adequacy
- Equity to Total Assets 13.38% 14.27% 14.56% 13.25%
- Equity to Gross Loans 28.47% 28.14% 30.62% 27.80%
- Equity to Gross Loans
RATI OS USED FOR VALUATI ON
- Shares in Issue (mn) 450 450 540 540
- EPS (fils) 49.8 52.3 56.6 68.3
- Book Value Per Share (fils) 367.8 431.0 403.9 411.4
- Market Price Year End (fils) 802 833 850 822
- P/E 16.1 15.9 15.0 12.0
- P/BV 2.2 1.9 2.1 2.0
}uae ! )
Company Overview
Bahraini Saudi Bank (BSB) was incorporated between Bahraini and Saudi shareholders
in year 1983 and started operations in 1985. BSB operates as a commercial bank offering
both commercial and Retail Banking services in Bahrain. The bank started operation with
a capital of BD20mn, which was later raised to BD50mn in March 2005 through rights
issue.
The bank mainly focuses on the needs of small to medium sized customers in the trade,
retail, manufacturing, construction, services and real estate sectors through a full range
of services such as overdrafts, loans, import letters of credit, trust loans and guarantees.
The bank offers a full range of retail banking services through its six branches and its
ATM network (both at on-site and off-site). The banks branches are strategically located
at Government Avenue, Exhibition Avenue, Central Market, Arad, East Riffa, and Souk
Waqif.
Recent Developments
In J anuary 2006, BSB launched an attractive Credit Card balance transfer campaign,
which offers customers unique benefits, some of which are for the first time in Bahrain.
The main feature of this is that when a customer transfers his balance outstanding with
another bank, no interest will be charged on the balance transferred for the first two
months. In addition to that, BSB is the first bank to lower monthly minimum payment
from 5 per cent to 3 per cent.
BSB implemented KASTLE, 3i Infotechs advanced treasury management solution in the
bank. This will provide the bank with an integrated treasury management solution. This
will also allow the bank in improving its treasury operations and back-office support.
In March 2006, the board of directors of BSB elected eight members to the board for a
three-year term (2006-09) as part of a strategy to reduce the existing 12-member board to
only eight members. Newly elected members are Shaikh Fahad M. S. Al Athel, Shaikh
Abdelelah Mohammed Saleh Kaki, Hussain Mohammed Amer, Bassam M. J abr, A. Latif
Ahmed Al Zayani, Salman Saleh Al Mahmeed, Sulaiman Abdulla Al Amro and Rashid
Ali Al Ameen.
Recommendation
NOT RATED
Bahrini Saudi Bank
Reuters Code:
BSB.BH
Listing:
Current Price
150 Fils (May 31
st
, 2007)
~ }uae !
BSBs asset size increased from BD125.8mn in 2003 to BD189.3mn in 2006, a CAGR
of 14.6% during the period 2003-2006. The banks customer deposit increased from
BD85.0mn in 2003 to BD96.8mn in 2006, a CAGR of 4.4% for the period under review.
The banks loan book increased from BD95.2mn in 2003 to BD106.9mn in 2006, a CAGR
of 3.9% for the period under review.
In 2006, the total assets stood at BD189.3mn as compared with BD163.2mn in the
previous year, registering an increase of 16.0%.The growth in total assets was mainly
driven by the growth in the loan book as well as increasing non-trading investment.
On the funding side, the total funding base of the bank increased from BD89.6mn in
2003 to BD130.9mn in 2006, registering a CAGR of 13.5% during the period 2003-
2006. In the year 2006, total funding increased by 45.5% to BD130.9mn as compared to
BD89.9mn at the end of previous year.

The banks customer deposit increased from BD85.0mn in 2003 to BD96.8mn in 2006, a
CAGR of 4.4% for the period under review. In 2006, customer deposits grew by 19.4%
to BD96.8mn as compared with BD81.0mn in the previous year. The growth in customer
deposits was mainly in fixed deposits, which the bank attracts by paying competitive
interest rates to their clients.
The contribution of customer deposits to the total funding was 73.9% in 2006 as compared
to 90.1% in 2005. The customer deposits continues to be the major source of funding for
the bank. Going forward, the bank is likely to continue witnessing growth in customer
deposits, which will again be attracted by paying higher interest rates. This will however
impact the cost of funding, thus the overall interest margins of the bank.
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
2004 2005 2006
Customer Deposits Due to banks & Fis
89.3% 90.1% 73.9%
26.1% 9.9% 10.7%
}uae ! ~1
Another external source of funding for the bank was due to banks and financial institutions,
registered a CAGR of 95.2%, from BD4.6mn in 2003 to BD34.2mn in 2006. During the
year 2006, the bank focused on interbank deposits in order to improve its margins, as
inter bank deposits interest rates are much lower. As a result, due to banks and financial
institutions registered a whopping increase of 282.5% to reach BD34.2mn as compared
to BD8.9mn in the previous year. As a result, the share of due to banks and financial
institutions to total funding increased from 9.9% in 2005 to 26.1% in 2006.


On the lending side, The banks loan book increased from BD95.2mn in 2003 to
BD106.9mn in 2006, a CAGR of 3.9% for the period under review. Banks gross loan
book grew by 12.0% from BD95.5mn in 2005 to BD106.9mn in 2006. High oil prices
resulted in strong demand for credit both from the corporate as well as from the consumer
segment. The bank also participated in international syndicated loans, which helped in
increasing the loan book. Net loans and advances registered an increase of 21.7%, from
BD52.0mn in 2005 to BD63.3mn in 2006.
The contribution of gross loan and advances to total funding declined from 106.1% in
2005 to 81.6% in 2006. Going, forward, we believe that bank will increase its loan by
capitalizing further on buoyant economic environment coupled with booming real estate
and infrastructural projects in the pipeline.

140,000
130,000
120,000
110,000
100,000
90,000
80,000
70,000
60,000
110.0%
105.0%
100.0%
95.0%
90.0%
85.0%
80.0%
75.0%
2004 2005 2006
81.6%
106.1%
98.5%
Gross Loans & advances Total funding As a % of total funding
~! }uae !
Chart 3: Loans and Advances Sector Break up

Trade and manufacturing and construction and real estate sectors contributed about
71.8% of the total loan book for the year 2006, which actually dropped from 77.7% in
the previous year. Personal lending portfolio of the bank registered a growth of 61.9% in
2006 and accounted for 7.9% of the total loan book. The new regulations on consumer
lending have not impacted the growth in retail portfolio of the bank, as the bank had strict
internal lending norms on consumer lending.
During the last three years, the banks asset quality has improved but it is still very high
compared to the peers. Gross Non-Performing Loans (NPLs) as a percentage of gross
loans declined from 68.4% in 2004 to 48.9% in 2006. Even in absolute terms, the gross
NPLs of the bank has declined from BD62.8mn in 2004 to BD52.3mn in 2006. In 2006,
the bank was able to recover BD2.4mn. The bank was able to reduce the bad loans by
intensive account management and collection procedures from risk management. The
ratio of provisions to NPLs was 83.5% in 2006 as compared to 80.1% in the previous
year. Both the NPLs to gross loans ratio as well as the coverage ratio of the bank is one
of the highest compared to its peers.
One of the banks strategy has been creating a stable investment portfolio, which has
increased significantly in the last year. In 2006, banks investment portfolio increased
by 151.9% from BD13.5mn in 2005 to BD33.9mn. The banks investment portfolio
comprised of 68.9% in mutual funds, 27.7% in bonds and debt securities and the remaining
3.3% was in equities.
100.0%
80.0%
60.0%
40.%
20.0%
0.0%
2005 2006
50.6% 44.3%
27.1% 27.5%
5.5%
13.5%
9.8%
3.7%
6.7%
7.9%
Trade & manufacturing
Banks & FIs
Construction & real estate
Consumer finance
Personal
Others
}uae ! ~|
Chart 4: Net Profit

BD1.5mn in 2003 to BD3.1mn in 2006. In 2006, the net profit of the bank registered a
growth of 37.4% from BD2.3mn in 2005 to reach BD3.1mn.
Operating income of the bank increased from BD4.6mn in 2003 to BD7.3mn in 2006,
registering a CAGR of 16.2% for the period under review. In 2006, the operating income
of the bank increased from BD5.7mn in 2005 to BD7.3mn in 2006, recording an increase
of 27.1%.
The bank registered healthy growth in the core banking activities in the last three years.
The net interest income of the bank increased from BD4.2mn in 2003 to BD5.5mn in
2006, a CAGR of 9.7mn for the period under review. In 2006, the net interest income
of the bank registered a modest growth of 2.3% from BD5.4mn in 2005 to BD5.5mn in
2006.
Chart 5: Margins

3,400
3,100
2,800
2,500
2,200
1,900
1,600
1,300
45.0%
42.5%
40.0%
37.5%
35.0%
32.5%
30.5%
27.5%
25.0%
2006 2005 2004 2003
Net Profit Net Profit margin
42.8%
39.6% 39.7%
32.4%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
2.4%
2.0%
1.6%
1.2%
0.8%
2006 2005 2004
1.1%
1.8%
2.3%
Net Spread
Interest Expense / Avg Interest Bearing Liabilities
Interest Income / Avg Interest Earning Assets
~+ }uae !
2006. At the same time, the cost of interest bearing liabilities increased from 1.65% in
2004 to 4.1% in 2006. As a result of this, the net spread for the bank continued to decline
from 2.3% in 2004 to 1.1% in 2006. Going forward, we believe that the banks focus
on increasing customer deposits by way of paying higher interest on fixed deposits will
continue to impact the banks net spread.
The non-interest income of the bank increased from BD0.5mn in 2003 to BD1.2mn in
2006, registering a CAGR of 33.4% for the period under review. In 2006, non-interest
income helped the bank in reporting a healthy growth, as it increased by 87.2% from
BD0.6mn in 2005 to BD1.2mn in 2006.
The fees and commission income increased by 73.9% to BD0.7mn in 2006 as compared
to BD0.4mn in 2005. During the year, the bank was able to increase arrangement fees
on new corporate and retail borrowings, along with fees and commission from the new
service on-line trading which was introduced in 2006. Fees and commission accounted
for about 60.0% of the total non-interest income.
Due to the banks strategy of increasing investment portfolio, there was a substantial
increase in dividend income during the year, which contributed to the growth in non-
interest income. In 2006, dividend income was BD0.3mn as compared to 0.04mn in
the previous year. Going forward, non-interest income will continue to register healthy
growth from fees and commission and dividend income, thus resulting in overall growth
in earnings.

Operating costs increased from BD3.1mn in 2003 to BD4.2mn in 2006, registering a
BAGR of 9.9%. In 2006, the operating expenses increase by 20.3% from BD3.5mn in
2005 to BD4.2mn in 2006. The increase in operating expenses was mainly due to the
increase in manpower along with other expenses on business and IT development.
64.0%
60.0%
56.0%
52.0%
2.4%
2.3%
2.2%
2004 2005 2006
Cost to Total Op Income Cost to Average Total Assets
2.36%
2.37%
2.25%
}uae ! ~]
Due to the increase in operating expenses, the cost to income ratio of the bank increased from
57.3% in 2005 to 61.9% in 2006. However, it is worth noting that it is still much higher than
its peers. The operating cost to average assets remained in with the year 2005 at 2.4%.


BD1.5mn in 2003 to BD3.1mn in 2006. Return on average assets increased from 1.6% in
2005 to 1.8% in 2006. The return on average equity declined from 7.1% in 2005 to 5.9%
in 2006, which is due to the rights issue during the year 2005 to increase the capital from
BD20mn to BD50mn. However, when we look at the return on equity, it will show an
increase from 4.5% in 2005 to 5.7% in 2006.

Post rights issue in 2005, the bank has surplus capital. As a result, the banks Capital
Adequacy Ratio (CAR) stood at 50.3% in 2006 as compared to that of 85.8% in 2005.
The banks capital adequacy ratio is well above the Basel requirement of 8% and also
above the minimum required rate of 12% by the Central Bank of Bahrain. The bank is
well capitalized even under the Basel II regulations.
1.80%
1.70%
1.60%
1.50%
1.40%
1.30%
20.00%
16.00%
12.00%
8.00%
4.00%
2004 2005 2006
5.90%
1.77%
1.55%
7.14%
16.22%
1.48%
Return on Average Assets Return on Average Equity
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
2003 2004 2005 2006
Capital Adequacy ratio (CAR)
50.3%
85.8%
44.9%
36.2%
~e }uae !
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}uae ! ~)
FACT SHEET
BAHRAI NI SAUDI BANK
2004 2005 2006
Profitability
- Return on Average Assets 1.48% 1.55% 1.77%
- Return on Average Equity 16.22% 7.14% 5.90%
- Net interest income/ total Op. Income 89.9% 94.2% 75.9%
- Non-interest income/ total Op. Income 13.8% 11.2% 16.5%
Margins
- Net income / Interest Income 32.6% 27.8% 31.1%
- Interest Expense to Interest Income 26.1% 33.9% 44.9%
- Interest Income / Avg Interest Earning Assets 3.93% 4.80% 5.17%
- Interest Expense / Avg Interest Bearing Liabilities 1.65% 3.01% 4.06%
- Net Spread 2.28% 1.79% 1.11%
- Net Interest Margin 2.90% 3.17% 2.85%
Efficiency
-Cost to Total Op Income 60.3% 60.4% 57.2%
- Staff Expense to Total Op Income 30.7% 29.3% 29.4%
- Cost to Average Total Assets 2.3% 2.4% 2.4%
Liquidity
- Loans to Interest Earning Assets 58.46% 48.61% 48.88%
- Loans to Customer Deposits 110.3% 117.8% 110.5%
- Loans to total Deposits 98.49% 106.12% 81.63%
- Customer Deposits to Equity 659.8% 159.5% 177.2%
- Gross Loans to Total Assets 71.74% 58.52% 56.47%
Credit Quality
- Non Performing Loans (BD 000) 62,840 54,293 52,268
- Loan Loss Reserves (BD 000) 40,758 43,477 43,623
- NPLs to Gross Loans 68.39% 56.86% 48.90%
- Loan Loss Reserve to Gross Loans 44.36% 45.54% 40.81%
- Total Provisions to NPL 64.86% 80.08% 83.46%
RATI OS USED FOR VALUATI ON
- Shares in Issue (mn) 200 500 500
- EPS (fils) 9.4 5.2 6.2
- Book Value Per Share (fils) 63.2 101.6 109.2
- Market Price Year End (fils) 149 138 127
- P/E 15.8 26.5 20.5
- P/BV 2.36 1.36 1.16
This page is left blank intentionally
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Company
Ahli United Bank
Bank of Bahrain and Kuwait
Bahrain Islamic Bank
Recommendation
Hold
Buy
Buy
Ticker
AUB.BH
BBK.BH
BIsB.BH
Price
1.30US$
670fils
448fils
Disclosure
1,10
1,10
1,10
Disclosure Checklist
1. Global Investment House did not receive and will not receive any compensation from the company
or anyone else for the preparation of this report.
2. The company being researched holds more than 5% stake in Global Investment House.
3. Global Investment House makes a market in securities issued by this company.
4. Global Investment House acts as a corporate broker or sponsor to this company.
5. The author of or an individual who assisted in the preparation of this report (or a member of his/her
household) has a direct ownership position in securities issued by this company.
6. An employee of Global Investment House serves on the board of directors of this company.
7. Within the past year , Global Investment House has managed or co-managed a public offering for
this company, for which it received fees.
8. Global Investment House has received compensation from this company for the provision of
investment banking or financial advisory services within the past year.
9. Global Investment House expects to receive or intends to seek compensation for investment banking
services from this company in the next three months.
10. Please see special footnote below for other relevant disclosures.
The following is a comprehensive list of disclosures which may or may not apply to all our researches.
Only the relevant disclosures which apply to this particular research has been mentioned in the table
below under the heading of disclosure.
Global Research: Equity Ratings Definitions
Global Rarting Definition
Buy Fair value of the stock is >10% from the current market price
Hold Fair value of the stock is between +10% and -10% from the current market price
Reduce Fair value of the stock is between -10% and -20% from the current market price
Sell Fair value of the stock is < -20% from the current market price
Global Investment House
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