Turkish Operations And Retail Lending Will Secure Future Stability

Key Takeaways

• Performance improvements in its Turkish subsidiary and associate banks like National Bank of Oman are set to enhance earnings.
  
• A focus on high-quality loan growth and strengthened risk management improves revenue streams and stabilizes future costs.
  
• Significant challenges from hyperinflation, global tax changes, and increased funding costs could pressure earnings, though conservative provisioning anticipates heightened asset risks.

Catalysts

Engages in the conventional banking, brokerage, and credit card businesses in Qatar and internationally.

• The bank is expecting its Turkish subsidiary to move into a more positive performance, potentially breaking even by the end of the year, which would improve overall profitability. Impact: earnings.
  
• Management is exploring ways to mitigate the impact of the global tax charge on its Turkish subsidiary, which could result in a lower effective tax rate, thus improving net margins. Impact: net margins.
  
• Increased focus on high-quality loan growth, particularly in the retail segment where lending grew by 11.9% year-on-year, positions the bank for enhanced revenue streams in the future. Impact: revenue.
  
• Performance improvement in associate banks like National Bank of Oman and United Arab Bank is expected to contribute positively, which could enhance the bank's earnings. Impact: earnings.
  
• The bank's reduction in net provisions and improved NPL ratio show a strengthened risk management approach, which can stabilize or potentially reduce future cost of risk, positively affecting earnings. Impact: earnings.

Commercial Bank (P.S.Q.C.) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Commercial Bank (P.S.Q.C.)'s revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 61.4% today to 55.0% in 3 years time.
• Analysts expect earnings to reach QAR 2.9 billion (and earnings per share of QAR 0.7) by about April 2028, up from QAR 2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 6.5x today. This future PE is greater than the current PE for the GB Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.86%, as per the Simply Wall St company report.

Commercial Bank (P.S.Q.C.) Future Earnings Per Share Growth

Risks

• The Turkish subsidiary, Alternatif Bank, has faced significant challenges due to hyperinflation and reported a substantial loss, impacting the bank's overall earnings.
  
• The implementation of a global minimum tax rate has introduced additional financial pressure, potentially affecting net margins until mitigating strategies are successfully executed.
  
• The net interest margin has decreased due to a faster asset repricing compared to liabilities and higher funding costs, which could continue to weigh on future revenue performance.
  
• A conservative approach to provisioning, despite improved recoveries, suggests potential anticipation of increased risks in asset quality, which could elevate the cost of risk and reduce net earnings.
  
• The high cost of funding and bond reissuances at significantly higher rates than past years could exert continued pressure on the bank’s financial expenses, affecting net profits.

Valuation

• The analysts have a consensus price target of QAR5.058 for Commercial Bank (P.S.Q.C.) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of QAR6.9, and the most bearish reporting a price target of just QAR3.33.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be QAR5.3 billion, earnings will come to QAR2.9 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 19.9%.
  
• Given the current share price of QAR4.2, the analyst price target of QAR5.06 is 17.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.