Qatar's Economic Expansion Will Strengthen Bank's Future Despite Turkey Risks

Key Takeaways

• Strategic initiatives in technology and asset management aim to drive future growth and improve profitability across business lines.
  
• Positive regional performances, particularly in Turkey, UAE, and Oman, boost earnings and enhance financial stability.
  
• Exposure to Turkey's hyperinflation and rising NPL ratio threaten earnings, while dependence on Qatari GDP growth and government projects poses risks to future loan growth.

Catalysts

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

• Qatar's economy is expected to grow significantly in the coming years, with GDP growth projected to reach 4% in 2026 and 5% in 2027, which could drive loan growth in line with or above GDP, positively influencing revenue.
  
• The bank's focus on cleaning up its legacy loan book and improving stage 3 recoveries over the next two to three years could lead to a reduction in cost of risk, improving net margins and earnings.
  
• Continued investment in technology, wealth management, and asset management units is expected to position the bank for future growth across its business lines, potentially enhancing revenue and profitability.
  
• Positive contributions from subsidiaries and associates, specifically as the Turkish economy stabilizes and other regions like UAE and Oman show growth, could boost earnings and strengthen overall financial performance.
  
• A focus on low-cost funding and efforts to maintain or improve Net Interest Margins (NIM) through strategic deposit initiatives could support earnings stability and growth in a lower interest rate environment.

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 8.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 64.2% today to 50.7% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being QAR 2.8 billion (with an earnings per share of QAR 0.66). However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as QAR2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from 6.5x today. This future PE is greater than the current PE for the GB Banks industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 2.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.94%, as per the Simply Wall St company report.

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

Risks

• The impact from Turkey's hyperinflation resulted in a significant loss for its Turkish subsidiary, leading to a decreased net consolidated profit, and can continue to affect earnings if not controlled.
  
• The non-performing loan (NPL) ratio increased to 6.2%, which can reflect negatively on asset quality and could elevate the cost of risk, affecting net margins.
  
• The net interest income decreased by 14% due to higher cost of funding, and if interest rates continue to rise, this could further pressure revenue growth.
  
• The company's operating income decreased by 17%, influenced by reduced FX and trading income particularly from Turkey, indicating potential volatility in revenue streams.
  
• There is a reliance on economic growth in Qatar and government projects, meaning shifts in public spending or GDP growth rates could impact loan growth projections, potentially affecting future earnings.

Valuation

• The analysts have a consensus price target of QAR5.1 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 QAR5.6 billion, earnings will come to QAR2.8 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 19.9%.
  
• Given the current share price of QAR4.48, the analyst's price target of QAR5.1 is 12.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.