Initiating a position in Qatar National Bank

We are initiating a position in Qatar National Bank (QNBK QD). The position’s size is 5.1% of the portfolio. We have turned cautiously positive on the Qatari market as it shows some recovery potential despite the significant geopolitical risk.

Qatar National Bank (QNB) is the leading bank in Qatar with operations in Africa (through a 20% stake in Ecobank) and across the Middle East and North Africa region through subsidiaries and stakes in associates. Operations in Qatar represented 64% of the bank’s profits in 2017.

The bank’s valuation is compelling on both a price to book multiple (P/B) basis, as well as using a dividend discount model (DDM). QNB trades at a forward P/B multiple of 1.7x, coupled with a forward return of tangible equity (ROTE) of 21%.

The compelling valuation is supported by a strong balance sheet with a capital adequacy ratio (CAR) of 16.5%. The minimum requirement under Basel III and Qatar Central Bank guidelines is 10%. In addition, 46% of the loan book exposure is to government and government agencies, and 45% of investments are in Qatar treasuries. The strong and committed government support is key to the investment case.

It is fair to expect some increase in non-performing loans (NPLs) over the next few years, which we have included in our model, but that increase does not take away from the compelling valuation.

The investment case is also supported by a number of catalysts that should support the Qatari economy in the medium term, including the government spending on infrastructure and in preparation for the 2022 World Cup, as well as any improvement in the geopolitics in the region.