IT Digitization And Liquid Assets Will Secure Future Success

Key Takeaways

• Investments in IT upgrades aim to enhance efficiency and potentially improve margins or reduce future operating expenses.
  
• Strong liquidity and capital adequacy support potential expansion, sustained earnings, and increased asset growth in wholesale banking.
  
• Pressure on net interest margins and reliance on government financing and debt recoveries could impact revenue stability and profitability amidst rising costs.

Catalysts

Engages in Islamic banking, financing, and investing activities in Qatar and internationally.

• The bank expects loan growth of 4% to 5% for the year 2025, driven across various segments including government, retail, and international markets, which could positively impact revenue.
  
• Investments in IT digitization and core banking upgrades are anticipated to complete by mid to Q3 next year, subsequently enhancing operational efficiency and potentially improving net margins or reducing future operating expenses.
  
• The bank foresees a stable capital adequacy with a robust capital adequacy ratio of 25.5%, which supports potential future expansion and sustained earnings.
  
• Recoveries from old written-off debts have been contributing to other income, which may provide unexpected returns and positively affect earnings if such trends continue.
  
• The bank’s liquidity position is strong, with high-quality liquid assets of around QAR 38 billion, allowing for potential future asset growth in wholesale banking, which could enhance overall earnings.

Masraf Al Rayan (Q.P.S.C.) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Masraf Al Rayan (Q.P.S.C.)'s revenue will decrease by 19.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 47.7% in 3 years time.
• Analysts expect earnings to reach QAR 2.2 billion (and earnings per share of QAR 0.23) by about May 2028, up from QAR 1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as QAR1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, up from 14.2x today. This future PE is greater than the current PE for the QA Banks industry at 11.0x.
• 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 19.95%, as per the Simply Wall St company report.

Masraf Al Rayan (Q.P.S.C.) Future Earnings Per Share Growth

Risks

• The pressure on net interest margins (NIMs) due to interest rate volatility could negatively impact earnings and profitability.
  
• The cost-to-income ratio has increased due to ongoing IT digitization and transformation projects, which could pressure net margins if revenue does not sufficiently cover these costs.
  
• The flat loan growth compared to broader banking sector growth could impact revenue growth targets.
  
• Although asset quality indicators are relatively strong, a significant portion of the loan book involves government financing, which may limit diversification and risk-adjusted returns impacting net margins.
  
• Dependencies on recoveries from previously written-off debts, as a contributor to other income, may not be sustainable, potentially affecting future revenue stability.

Valuation

• The analysts have a consensus price target of QAR2.633 for Masraf Al Rayan (Q.P.S.C.) based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be QAR4.6 billion, earnings will come to QAR2.2 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 19.9%.
  
• Given the current share price of QAR2.23, the analyst price target of QAR2.63 is 15.2% 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.