Middle East Credit Compendium 2011

| Global Research |
Middle East Credit Compendium 2011
All rights reserved. Standard Chartered Bank 2011

Preface
This is our second Middle East Credit Compendium. Since we published the first one in October
2009, a lot has happened. We saw a significant debt restructuring at the end of 2009, and have
more recently seen political change sweep through the wider MENA region.
More than anything, recent events highlight the need to generate strong and inclusive economic
growth. Demographics can be a boon as well as a bane if not managed well. While the region
continues to dominate the hydrocarbon sector (a theme we explore in more detail in one of the
sections herein), it is increasingly important for its economies to diversify away from the oil and
gas sector in order to generate high, sustainable and inclusive growth. A number of countries in
the region have done this very well, and others are in the midst of ambitious long-term
development and diversification plans. That said, the hydrocarbon sector remains the region’s
primary growth engine. The region is very important to the oil and gas sector; equally, the oil
and gas sector is very important to the outlook for the MENA region.
It is important to understand that there is considerable differentiation – both economic and

political – within the region. Investors need to recognise this and apply increased levels of
differentiation in their analysis. We hope this publication, in which we cover 57 credits, gives
investors a more informed view of issuers from the region.
In this compendium, we have increased coverage to include 14 sovereigns, 25 financials and

18 corporates. We also examine the region’s macroeconomic backdrop and explore various
drivers, including the hydrocarbon sector, the banking sector and contingent liabilities. We
discuss market technicals (supply-and-demand dynamics) and present opportunities from a
valuation standpoint.
We would like to take this opportunity to thank all of our research and other colleagues based in
the region, who provided us with support, guidance and additional local insight.
Kaushik Rudra
Global Head of Credit Research
Standard Chartered Bank
i
Contents
MENA macroeconomic overview 1
Sector themes
Oil and gas – Dominant credit driver 7
Quasi-sovereigns – One too many? 12
Banking system – Slowly emerging from the rubble 18
Credit strategy
Technicals – The deepening of the Middle East credit markets 27
Middle East bond valuations – Attractive as ever 38
Credit analysis (in alphabetical order)
Sovereigns
1. Algeria 50 8. Oman 64
2. Bahrain 52 9. Pakistan 66
3. Egypt 54 10. Qatar 68
4. Jordan 56 11. Saudi Arabia 70
5. Kuwait 58 12. Tunisia 72
6. Lebanon 60 13. Turkey 74
7. Morocco 62 14. United Arab Emirates 76
Financials
1. Abu Dhabi Commercial Bank 80 14. Gulf Investment Corporation 106
2. Abu Dhabi Islamic Bank 82 15. Kuwait Projects Company (Holding) 108
3. Arab Banking Corporation 84 16. Mashreqbank 110
4. Arab National Bank 86 17. National Bank Of Abu Dhabi 112
5. Banque Saudi Fransi 88 18. Qatar Islamic Bank 114
6. BBK 90 19. Qatar National Bank 116
7. Burgan Bank 92 20. Riyad Bank 118
8. Commercial Bank Of Qatar 94 21. Samba Financial Group 120
9. Doha Bank 96 22. Saudi British Bank 122
10. Dubai Islamic Bank 98 23. Türkiye Garanti Bankasi 124
11. Emirates NBD 100 24. Türkiye Vakiflar Bankasi 126
12. First Gulf Bank 102 25. Yapi ve Kredi Bankasi 128
13. Gulf International Bank 104
Corporates
1. Abu Dhabi National Energy Company (TAQA) 132 10. International Petroleum Investment Company 150
2. Aldar Properties 134 11. Jebel Ali Free Zone 152
3. Bahrain Mumtalakat Holding Company 136 12. MB Petroleum Services 154
4. Dar Al-Arkan 138 13. Mubadala Development Company 156
5. DIFC Investments 140 14. Nakilat Inc. 158
6. Dolphin Energy 142 15. Qatar Telecom 160
7. DP World 144 16. Saudi Basic Industries Corporation 162
8. Dubai Electricity and Water Authority 146 17. Tourism Development and Investment Company 164
9. Dubai Holding Commercial Operations Group 148 18. Yüksel ønúaat 166
Appendix: Islamic finance – A primer on sukuks 168
Glossary of abbreviations 175
Contact details
Credit Research 176
Middle East Economic Research 176
Disclosures appendix 177
ii
MENA macroeconomic overview
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Analyst: Marios Maratheftis (+9714 508 3311)
Differentiation will be key

At times of elevated risk, markets often adopt a ‘one-size-fits- gaining momentum in the GCC, with the exception of
all’ approach. When fear takes over and positions are Bahrain, where the economy is dependent on the financial
indiscriminately closed, opportunities eventually arise. We sector. Higher oil prices are a significant contributor to
have always favoured the theme of differentiation across the growth for most GCC countries. They are also important
MENA region. The GCC, the Maghreb and the Levant – the because hydrocarbon revenues enable higher spending on
sub-regions that make up MENA – are economically diverse, non-oil infrastructure.
and such differentiation should be also applied within these
sub-regions. Even within the oil-rich GCC, for example, Demographics and diversification are potent drivers of
economic, demographic and political dynamics can differ economic activity in the GCC, despite the importance of
across countries. hydrocarbons. Dubai, given its limited oil reserves, has led
the way. But economic diversification is also gaining
Politics and economics are interlinked, and political momentum in oil-rich Saudi Arabia, Qatar and Abu Dhabi.
developments in the Middle East are in flux. The political The region has a young population, and diversification is
unrest in Egypt is running its course, and stability is slowly necessary for job creation. Demographic challenges need to
returning to the country. Nevertheless, the economy will be be addressed through structural measures. Investment in
impacted, given the important role of investment. Growth is non-oil sectors is set to continue.
Chart 1: Population below 24 years of age Chart 2: GDP per capita (2010)
70 80
60
60
USD Thousands
50
40 40
%
30
20
20
10 0
Qatar
Bahrain
Oman
Saudi Arabia
Algeria
Morocco
UAE
Kuwait
Egypt
0
Egypt Iraq Lebanon Morocco Saudi UAE
2010 2030
Sources: UN World Population Prospects (2008 revision), Sources: IMF, Standard Chartered Research
Standard Chartered Research
Chart 3: Fiscal balances, 2010 (% of GDP) Chart 4: Current account balances, 2010 (% of GDP)
20 33
15
24
10
5 15
%
0 6
-5
-3
-10
-15 -12
Algeria Bahrain Egypt Kuwait Morocco Oman Qatar Saudi UAE Algeria Bahrain Egypt Kuwait Morocco Oman Qatar Saudi UAE
Arabia Arabia
Sources: IMF, Standard Chartered Research Sources: IMF, Standard Chartered Research
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MENA’s demographic challenge
MENA’s vibrant young population presents both a challenge population is foreign. But this is not a sustainable model,
and an opportunity. In Egypt, the most populous country in especially when one takes into account the transient nature
the MENA region, 32% of the population is less than 15 of foreign labour in the GCC. Granting citizenship to
years old. In Saudi Arabia, the largest country in the GCC, foreigners is rare in most GCC countries. The focus will need
over 50% of the population is less than 24 years old. While a to shift towards the skills and participation of the domestic
young population offers a promising future for a country, it labour force.
can also weigh heavily on economic fundamentals.
The demographic challenge should be tackled from three
Essentially, governments must provide jobs to sustain this
angles: incentives, education and job creation. The focus
population and prevent unemployment from straining
until now has been mostly on education and job creation.
government resources in the future. The lack of jobs leads to
When it comes to incentives, the vast majority of the local
higher dependency ratios and puts the working population
population is employed in the government sector, which is
under strain. Economic problems can soon turn into
dependent on hydrocarbon revenues. Raising civil servants’
sociopolitical problems.
salaries in response to social pressures can ease tensions in
Youth unemployment in Egypt has been well documented. the short run. But it creates long-term distortions in the local
According to official statistics, 86.7% of the unemployed are labour force by widening the gap between private- and
less than 30 years old. But these statistics can be public-sector salaries, acting as a disincentive for locals to
misleading, and Egypt exemplifies another social take private-sector jobs.
phenomenon that is present in most MENA countries: the
However, significant progress and investment are taking
participation of women in the labour force is very low. If
place in education and in the development of a non-oil
women of working age do not participate in the labour
sector. Dubai is already a fully diversified economy with
market, they are not picked up by the unemployment figures.
world-class infrastructure.
We estimate that Egypt has approximately 31mn people of
working age without employment, either because they are Saudi Arabia is also investing heavily in the non-oil sector. In
unemployed or because they choose not to participate in the 2009, it announced an ambitious USD 400bn fiscal plan
labour force. Of these 31mn, approximately 75% are women. aimed at developing non-oil projects. A new ‘economic city’
Looking at the proportion of Egypt’s population that works, is being built in Jizan, a less wealthy city near the border with
every 100 employed people have to support approximately Yemen.
220 people who are not employed. This dependency ratio is
far too high, and cannot lead to sustainable growth. Education is also a priority. In 2011, Saudi Arabia will spend
more than USD 40bn on education, including physical
The phenomenon of low female participation in labour infrastructure – 610 new schools will be built, in addition to
markets is present throughout the MENA region, not just the 3,200 already under construction – and scholarships for
Egypt. The situation in the GCC may be even more serious, students to study abroad. The King Abdulla University of
as the participation of local men is also relatively low in many Science and Technology, the country’s first-mixed gender
countries which rely mostly on imported workers. For higher education institute, opened in 2009. It was given a
example, in Qatar, the numbers of economically active local USD 10bn endowment, highlighting the kingdom’s push for
men and women are 45,980 and 26,308, respectively. This human capital development.
compares with a non-Qatari labour force of 1.193mn. There
story is similar in the UAE, where only 57.6% and 19.8% of Qatar, having being awarded the FIFA 2022 World Cup, will
local men and women are employed, respectively. In Saudi resume heavy investment in its non-oil–and-gas sectors
Arabia, of the total local population of around 19.1mn people, following a significant deceleration in 2010. The hosting of
less than 4mn people are employed. Population growth is the World Cup is also likely to have a positive spillover effect
expected to continue on an upward trajectory – the Saudi on the rest of the region.
Ministry of Planning projects that the number of Saudi
In oil-rich Abu Dhabi, we expect a resumption of investment
nationals will increase by more than 50% to 29.7mn by 2020.
in key projects. A government subsidiary responsible for
A key short-term advantage of GCC countries is that they implementing technology-related investments has started
can still rely on oil wealth and immigrants to compensate for accepting bids for a USD 6bn semiconductor factory in the
this shortfall. In the UAE, for example, about 80% of the emirate. The plant, due to start production in 2015, will
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employ 1,500 people directly and have the potential to create that agenda. In January 2011, Abu Dhabi held an alternative
4,500 jobs indirectly at the surrounding technology clusters. energy summit where a number of world leaders discussed
The Abu Dhabi government has actively invested in renewable energies. The emirate plans to build a USD 20bn
semiconductor and technology companies in Singapore and renewable energy city.
the US as it seeks to develop technology-related industries
In the short term, cyclical measures such as subsidies can
to diversify its economy away from hydrocarbons.
ease tensions and pressures, but investment in education
The focus on technology-related investments is in line with a and diversification is needed to drive sustainable long-term
broader drive to diversify into engineering-intensive and growth.
innovation-driven industries. Renewable energy is high on
Chart 5: Oil reserves (2009) Chart 6: GCC planned projects, 2011-13
300 250
250 200
200 150
USD bn
bn bbl
150 100
50
100
0
50
Industrial
Power & Water

Infrastructure
Oil & Gas
Petrochemicals
0
Iraq Kuwait Oman Qatar Saudi UAE Yemen
Arabia
Source: BP Statistical Review of World Energy Sources: MEED Projects, Standard Chartered Research
Chart 7: Saudi Arabia’s manpower forecasts Chart 8: OPEC output and spare capacity
12 15
10 12
9
8
6
6
mn
3
4
0
Qatar
Ecuador
UAE
Kuwait
Saudi Arabia
Iran
Venezuela
Angola
Nigeria
Libya
Algeria
0
2004 2009 2014 2019 2024
Saudis Non-Saudis Jan 2011 output Spare capacity
Source: Saudi Ministry of Economy and Planning Sources: IEA, Standard Chartered Research
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Market impact and economic outlook
The recent geopolitical events in MENA will impact some of exports may grow 20% in 2011. Tapping new trade
the region’s economies, particularly those that have opportunities with Africa will help Dubai to maintain its status
experienced the most serious social unrest. Egypt’s as a regional trade hub, especially given strengthening trade
economy is likely to take a hit from the disruptions caused by links between Asia, Africa, the Middle East and Latin
political events, mainly because they are likely to affect America.
investment and, to some extent, tourism – two key drivers of
the economy. Bahrain could also underperform, as it is Dubai’s hospitality sector is also performing well, with China
emerging as a key market. Airport traffic, a key indicator of
heavily dependent on the banking sector, with banking
assets approximately 10 times the size of the economy. The visitor levels to the emirate, rose 15% in 2010. Tourist
key risk in Bahrain is that almost 90% of bank deposits are reservations for the first nine months of 2010 rose 16% y/y
held by foreigners. to 7mn people. Tensions in Egypt and other tourist
destinations in the region could also indirectly benefit Dubai’s
Despite the risk that markets may, in the short run, view tourism sector. This is especially the case for regional
MENA as a single bloc and indiscriminately reduce exposure tourism. Indeed, tourist arrivals from Saudi Arabia rose in
to the region, some economies may emerge as winners. January and February 2011, a time of escalated risk in
Dubai, Abu Dhabi and Qatar all enjoy per-capita GDP ratios Lebanon and Egypt (this period also coincided with a long
that are among the highest in the world. Their populations public holiday in Saudi Arabia).
are small, and social tensions are non-existent. Abu Dhabi
and Qatar will benefit directly from higher oil prices and Dubai’s main challenge is leverage, especially given
production, which will boost both growth and government significant maturities in 2011 and 2012. But there are two
positives this year compared to 2010 and 2009. First, the
finances. Even if investors are deterred in the short run, both
economies are naturally hedged by being hydrocarbon housing-market bubble has already burst, and the shock to
exporters. the economy has taken place. Growth has turned positive
and is gaining momentum. Even if growth is likely to remain
Dubai’s economy is recovering, and growth has returned to within the 3-4% range, far below the rates seen during
positive territory. When Abu Dhabi and other GCC Dubai’s boom, it is positive and broad-based. Second, the
economies perform well on the back of a robust oil market, uncertainty surrounding restructuring has been reduced, as a
so does Dubai, given its role as the region’s services hub. clear plan is now in place. Dubai faces significant maturities
Historically, Dubai tends to benefit from a flight to quality at of around USD 18bn in 2011. Most of these are related to
times of higher risk in the Middle East. loans rather than bonds. This will probably reduce market
concerns, but any rollovers or restructuring of bank loans
Logistics is one of Dubai’s key strengths, and the trade would likely keep credit conditions tight across the UAE,
sector makes up 40% of the emirate’s GDP. Total trade detracting from growth dynamics.
performed strongly in 2010, rising 19% y/y in the first 10
months of the year. Direct exports rose 36% y/y to USD 2011 has started with challenges for MENA. But
15.3bn, and imports gained 14% to USD 81.7bn. Re-exports opportunities arise during times of uncertainty, Beyond the
grew by 22%, reaching USD 32bn. This pick-up in trade losers, there will be winners. Differentiation and timing will be
activity was a significant contributor to economic activity, and important.
it is likely to continue – the government forecasts that non-oil
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5
Sector themes
6
Oil and gas – Dominant credit driver

Analyst: Kaushik Rudra (+65 6596 8260)
Middle East has the world’s largest oil and gas reserves
The Middle East, in particular the GCC, plays a dominant around 21%. On the natural gas front, the Middle East
role in the international oil and gas markets. As of end-2009, represents around 14% of global production, and the GCC
the region accounted for nearly 60% of proven oil reserves around 9%.
and about 40% of proven gas reserves globally. The six-
nation GCC is endowed with about 40% and 23% of the Given its size and relative importance to the hydrocarbon
world’s proven oil and gas reserves, respectively. sector, the region is the primary driver of production growth
globally. Saudi Arabia, with about 20% of the world’s proven
The region is also a dominant player in oil and gas oil reserves, will likely drive future growth in the oil sector.
production. The Middle East accounts for around 30% of We expect Qatar (14% of global proven reserves) to drive
total oil production globally, with the GCC representing incremental growth in the natural gas sector.
Chart 1: Proven oil reserves – breakdown by region, Chart 2: Proven gas reserves – breakdown by region,
end-2009 end-2009
Asia 3% North America Asia North America

5% 9% 5% S. & Cent.
Africa America
Africa 10% S. & Cent. 8% 4%
America 15%
Europe & Europe &

Eurasia 10% Eurasia
34%
Middle East
Middle East 40%
57%
Sources: BP Statistical Review, Standard Chartered Research Sources: BP Statistical Review, Standard Chartered Research
Chart 3: Oil production – breakdown by region, 2009 Chart 4: Gas production – breakdown by region, 2009
30 1,200
25 1,000
bn cubic metres annually
20 800
mn barrels daily
15 600
10 400
5 200
0 0
North S & Cent. Europe & Middle East Africa Asia North S & Cent. Europe & Middle Africa Asia
America America Eurasia America America Eurasia East
7
Oil and gas league tables
The countries of the Middle East dominate the global league The Middle East also dominates the natural gas landscape.
tables for both oil and natural gas. Saudi Arabia, which has Although Russia (44trn cubic metres, or tcm) has the largest
around 264bn barrels of proven oil reserves (around 20% of natural gas reserves globally, Iran (30tcm), Qatar (25tcm),
the global total), leads the pack. It is followed by other Middle Saudi Arabia (8tcm) and the UAE (6tcm) all figure
Eastern countries, such as Iran (138bn barrels), Iraq (115bn prominently among the top 10.
barrels), Kuwait (102bn barrels), and the UAE (98bn barrels).
As highlighted above, the region as a whole accounts for While the region’s natural gas production levels are relatively
around 60% of the global total. modest at this point (given its large reserves), we expect this
to be a significant growth area for the sector. A number of
The region also dominates oil production, with Saudi Arabia, countries in the region, most notably Qatar, have undertaken
Iran, the UAE, Iraq and Kuwait figuring prominently among the significant investment in natural gas over the past few years.
world’s top 10 oil producers. Saudi Arabia, which in 2009 We expect this to bear fruit in the coming years, helping to
produced just under 10mbd (against production capacity of boost the region’s production appreciably from current levels.
12.5mbd), is expected to increase its production capacity to Only Iran, Qatar and Saudi Arabia are currently among the
around 15mbd by end-2015. This increase is likely to represent top 10 producers of natural gas.
the lion’s share of the increase in global production capacity.
Chart 5: Proven oil reserves (top 20), end-2009 Chart 6: Top 20 oil producers, 2009
Saudi A rabia Russia
Venezuela Saudi A rabia
Iran US
Iraq Iran
Kuwait China
UA E Canada
Russia M exico
Libya UA E
Kazakhstan Iraq
Nigeria Kuwait
Canada Venezuela
US No rway
Qatar Nigeria
China B razil
A ngo la A lgeria
B razil A ngo la
A lgeria Kazakhstan
M exico Libya
No rway UK
A zerbaijan Qatar
0 50 100 150 200 250 300 0 2 4 6 8 10 12

bn barrels million barrels per day
Chart 7: Proven gas reserves (top 20), end-2009 Chart 8: Gas production (top 20), 2009
Russia US
Iran Russian Federatio n
Qatar Canada
Turkmenistan Iran
Saudi A rabia No rway
US Qatar
UA E China
Venezuela A lgeria
Nigeria Saudi A rabia
A lgeria Indo nesia
Indo nesia Uzbekistan
Iraq Netherlands
A ustralia Egypt
China M alaysia
M alaysia United Kingdo m
Egypt M exico
No rway United A rab
Kazakhstan A ustralia
Kuwait A rgentina
Canada Trinidad & To bago
0 10 20 30 40 50 0 100 200 300 400 500 600 700

trn cubic metres bn cubic metres
8
Table 1: Middle East oil and gas production, 2000-09

Million tonnes, equivalent 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Oil production
Iran 191.3 191.4 180.9 203.7 207.8 206.3 208.2 209.7 209.9 202.4
Iraq 128.8 123.9 104.0 66.1 100.0 90.0 98.1 105.2 119.3 121.8
Kuwait 109.1 105.8 98.2 114.8 122.3 129.3 132.7 129.9 137.2 121.3
Oman 46.4 46.1 43.4 39.6 38.1 37.4 35.7 34.5 35.9 38.5
Qatar 36.1 35.7 35.2 40.8 46.0 47.3 50.9 53.6 60.8 57.9
Saudi Arabia 456.3 440.6 425.3 485.1 506.0 526.8 514.3 494.2 515.3 459.5
Syria 27.3 28.9 27.2 26.2 24.7 22.4 21.6 20.6 19.8 18.7
United Arab Emirates 119.3 114.4 105.4 119.4 125.1 129.0 139.0 135.1 137.3 120.6
Yemen 21.3 21.5 21.5 21.1 19.9 19.6 17.9 16.3 14.4 14.0
Other Middle East 2.2 2.2 2.2 2.2 2.2 1.6 1.4 1.6 1.5 1.7
Total Middle East 1,138.1 1,110.5 1,043.5 1,119.1 1,192.3 1,209.6 1,220.0 1,200.8 1,251.5 1,156.4
Gas production
Bahrain 7.9 8.2 8.5 8.7 8.8 9.6 10.2 10.6 11.4 11.5
Iran 54.2 59.4 67.5 73.4 76.4 93.2 97.7 100.7 104.7 118.1
Kuwait 8.6 9.5 8.5 9.9 10.7 11.0 11.3 10.9 11.5 11.3
Oman 7.8 12.6 13.5 14.9 16.7 17.8 21.3 21.6 21.7 22.3
Qatar 21.3 24.3 26.6 28.3 35.3 41.2 45.6 56.9 69.3 80.4
Saudi Arabia 44.8 48.3 51.0 54.1 59.1 64.1 66.2 67.0 72.4 69.7
Syria 4.9 4.5 5.5 5.6 5.8 4.9 5.1 5.0 4.9 5.2
United Arab Emirates 34.5 40.4 39.1 40.3 41.7 43.0 44.1 45.3 45.2 44.0
Other Middle East 3.1 2.7 2.4 1.6 2.3 3.1 3.7 3.7 4.0 4.1
Total Middle East 187.3 209.9 222.5 236.6 256.6 287.9 305.2 321.7 345.0 366.4
Sources: BP Statistical Review, Standard Chartered Research
Middle East is the world’s primary exporter of hydrocarbons
The Middle East as a whole is the world’s largest oil position, it is not surprising that the Middle East is the leading
exporter, accounting for 34% of global exports in 2009. price-setter for oil globally.
Although the US and Russia are significant oil producers (as
Chart 6 shows), given relatively large domestic consumption The US, the largest consumer of oil globally, is the largest
in those countries, their export levels are much lower than importer of oil. Europe and Japan have also traditionally
those of the Middle East, where total production dwarfs been relatively large oil importers. Increasingly, the emerging
economies of Asia are also becoming large oil importers –
domestic consumption. Given the region’s large export
and exercising a degree of influence on global oil prices.
Chart 9: Oil exports by region, 2009 Chart 10: Oil imports by region, 2009
Total Exports: 52.9 mbd Total Imports: 52.9 mbd

Rest of world Canada
US
3% 5% S. & Cent. US
Asia-Pacific 4% Europe
Mexico America 22%
10% 25%
3% 7%
West Africa Europe
8% 4%
North Africa Japan

5% 8%
Former Soviet
Union
17%
Middle East Rest of world
34% 45%
9
Oil and gas reserve life stable for the foreseeable future
Given the scale of their reserves and current utilisation rates, On the natural gas front, Qatar stands out both regionally
we expect most GCC countries to remain dominant players and globally. At the current utilisation rate, according to the
in the sector for the foreseeable future. According to the BP BP Statistical Review, Qatar’s gas reserves are likely to last
Statistical Review, Kuwait and the UAE in particular have well beyond the year 2500. Although the gas reserves of the
close to 100 years of projected life for their oil reserves, while UAE, Kuwait, and Saudi Arabia are expected to last more
Saudi Arabia’s reserves have around 70 years of projected than 100 years, these numbers pale in comparison with
life. Bahrain and Oman, in contrast, have a very limited almost 500 years for Qatar.
remaining shelf life for their oil.
Chart 11: Middle East oil – projected life of oil reserves Chart 12: Middle East gas – projected life of gas reserves
UAE UAE
Bahrain Bahrain
Kuwait Kuwait
Oman Oman
Qatar Qatar
Saudi Arabia Saudi Arabia
2000 2020 2040 2060 2080 2100 2120 2000 2100 2200 2300 2400 2500 2600
The region is heavily dependent on oil and gas
It is safe to say that the oil and gas sector is as important to excess of USD 90/bbl. Consequently, Bahrain’s fiscal
the Middle East as the Middle East is to the oil and gas balance is more vulnerable to oil-price declines than those of
sector. While the region dominates the hydrocarbon sector, other countries in the region. Given the expansionary
the oil and gas sector also remains crucial to the region’s counter-cyclical fiscal spending programmes of recent years,
well-being. As Chart 13 below shows, the hydrocarbon breakeven prices have been rising in the region.
sector represents a high proportion of total exports, budget
In our view, the hydrocarbon sector is one of the region’s
revenues and GDP for the GCC countries. With the
exception of Bahrain, Oman and the UAE, which are more primary credit drivers. While a number of countries have tried
diversified economies, the hydrocarbon sector accounts for to diversify away from the oil and gas sector – and some
more than 50% of the GDP of the GCC countries. All six have succeeded to an extent – the hydrocarbon sector
GCC countries derive at least 60% of their exports and remains the key driver of the region’s fortunes. Having
accumulated extremely large sovereign wealth funds, the
budget revenues from the sector, with Kuwait, Qatar and
Saudi Arabia having the highest dependence. GCC countries can survive sharp declines in oil prices. That
said, liquidity conditions and the general well-being of the
Budget revenues in particular are wholly dependent on the region do tend to deteriorate when oil prices are lower.
hydrocarbon sector, with oil prices a highly influential factor
Given current concerns about supply disruptions in the oil
in determining budget balances. To that extent, it is helpful to
look at the oil breakeven prices for the fiscal accounts of sector, oil-price declines are less of a focus. On the contrary,
these countries. The breakeven price is the price at which a current elevated hydrocarbon prices – which are in excess of
country would achieve a balanced budget. Based on our regional breakeven levels – are clearly supportive of the
external and fiscal balances of all of the region’s oil-exporting
estimates for 2011, Bahrain’s breakeven point will be in
countries.
10
Chart 13: Sensitivity to hydrocarbons, 2010
100 100
80 80
Hydrocarbon sector as a % of
Oil breakeven price (USD/bbl)

60 60
40 40
20 20
0 0
Kuwait Saudi Arabia Qatar Bahrain UAE * Oman *
Exports Budget revenue GDP Breakeven oil price (RHS)
Note: Based on latest figures where 2010 data is unavailable; * Export numbers exclude re-exports;
Sources: National authorities, IMF, Standard Chartered Research
11
Quasi-sovereigns – One too many?

Analyst: Simrin Sandhu (+65 6596 6281)
Brave new world
Since we published our last Middle East Credit Yet, as the saying goes, the more things change, the more
Compendium in 2009, the ‘unthinkable’ has come to pass they stay the same. The events of the past 1.5 years have
in the region. We came within hours of the region’s first reinforced the theme of differentiation, which we have
major bond default and saw a high-profile, strategic quasi- repeatedly highlighted in our conversations with investors.
sovereign entity go through a large debt restructuring. We In this section, we apply this theme to the topics we have
have also witnessed the emergence of a new high-yield found to be of paramount concern to investors: (1) the
quasi-sovereign sector in the region as rating agencies rising contingent liabilities of the region’s sovereigns,
downgraded Dubai Inc. names to below investment grade particularly in light of the events in Dubai; and (2)
on the back of the Dubai World debt restructuring. Recently distinguishing among the ever-increasing number of quasi-
added to the mix has been the political turmoil in North sovereign issuers in the region.
Africa, with regimes being toppled and social unrest even
touching parts of the GCC.
Mounting contingent liabilities

Preserving sovereign balance sheets
From being relatively debt-free at the beginning of the last accumulation of debt on sovereign balance sheets.
decade, GCC countries together now have external debt Accordingly, the rise in external debt is not really reflected
estimated at close to 45% of GDP. Issuers from the UAE, in sovereign debt metrics, which remain fairly moderate
Saudi Arabia and Qatar together account for approximately compared to overall external debt ratios (government debt-
76% of the GCC’s external debt. Most of the borrowing in to-GDP ratios are under 25% in Saudi Arabia, Kuwait, the
the GCC has been undertaken to fund investments in the UAE and Qatar). By contrast, high-grade Asian sovereigns’
hydrocarbon and infrastructure sectors, both of which have external debt ratios are significantly lower (with the
heavy government participation. However, borrowing exception of Korea) than their government debt ratios
directly attributable to sovereigns remains low given the (Chart 2). This also reflects the strength of the local debt
region’s tendency to raise debt via quasi-sovereign entities. markets in Asia.
Such borrowing is typically on the basis of implicit rather
than explicit government guarantees, thereby avoiding the
Chart 1: External debt is on the rise Chart 2: Government borrowing remains low (2010F)
200 100
150 75
USD bn
50
%
100
25
50
0
0
Saudi Kuwait UAE Qatar China Malaysia South India
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F2011F Arabia Korea
Saudi Arabia UAE Kuwait Qatar General govt. debt/GDP External debt/GDP
Sources: Moody’s, IMF, Standard Chartered Research Sources: Moody’s, IMF, Standard Chartered Research
Loans have been the weapon of choice

Over the past few years, both sovereigns and corporates systems. However, despite the pick-up in bond issuance, the
have increasingly tapped the bond market as a means of loan market continues to be the dominant source of financing in
diversifying their funding bases. More recently, the move to the region (Chart 3). Given the heavy reliance on loans, the
the bond market has been less a matter of choice and more contingent liability burden on the region’s sovereigns has to be
a result of tightening credit conditions in local banking viewed in light of total debt raised – i.e., bonds plus loans.
12
Taking both bonds and loans into account, the pace of This implies that the contingent liability burden on the
borrowing in the region declined in the aftermath of the global region’s governments is substantial and rising. Debt is
financial crisis, with total debt raised falling about 30% in 2008 largely being raised by government-owned entities, many of
from 2007 (Chart 4). Since then, debt raised annually has which have weak standalone credit profiles. Investors, for the
averaged approximately USD 85bn. Serial borrowers during most part, assume that the government in question will be
the 2007-10 period continued to be entities from Saudi Arabia, willing and able to bail out these companies should the need
Qatar, Abu Dhabi and Dubai. However, Dubai, which went on arise – which explains the relatively cheap funding these
an issuance spree in 2007 and 2008, has found the going entities are able to secure.
much tougher since the Dubai World debt restructuring in
2009.
Chart 3: Non-bank debt issuance by type (2007-10) Chart 4: Total non-bank debt (bonds and loans) raised by
country
150
28%
100
USD bn
50
72% 0
2007 2008 2009 2010
Bonds Loans Saudi Arabia Qatar Abu Dhabi Dubai Bahrain Kuwait Others
Includes all currencies; Sources: Dealogic, LoanConnector, Includes all currencies; Sources: Dealogic, LoanConnector,
Bloomberg, Standard Chartered Research Bloomberg, Standard Chartered Research
Time to pay up – Dubai feels the heat

Turning to redemptions, we estimate that an average of are much more widely held. A clear example of this has been
approximately USD 40bn is due annually in the region over the Dubai World restructuring, in which bondholders were
the next five years (Chart 5), with Qatar, Abu Dhabi and made whole while bank debt was restructured. Rather than
Dubai accounting for about 60%. Dubai clearly faces the face the wrath of international investors (who now have
biggest challenge, with a heavily front-loaded debt sizeable positions in some of the 2012 maturities) and risk
redemption schedule – close to 70% of its non-bank debt closing its capital markets, we expect Dubai to eventually
matures in the next five years (Chart 6). Material muddle through and service its 2012 obligations. However,
redemptions loom in 2011 and 2012 in the loan and bond we anticipate that external assistance will be required,
markets, respectively. 2011 maturities include a government particularly to deal with the larger maturities.
guaranteed USD 4bn loan due from Investment Corporation
of Dubai (ICD). 2012 will be a major test for Dubai Inc.’s Qatar, by comparison, has a much more manageable
bond market, with repayments due from three large quasi- redemption schedule, with most of its big maturities due after
sovereign entities: Dubai Holding COG (February 2012, USD 2015 (Chart 7). Abu Dhabi Inc. faces a number of
500mn), DIFC Investments (June 2012, USD 1.25bn) and redemptions in 2013 and 2014. 2013 will see multi-billion-
JAFZ (November 2012, AED 7.5bn). dollar loan maturities from Mubadala, IPIC, Aabar and
TAQA. 2014 is a big year for bond maturities, with a total of
The manner in which Dubai deals with these redemptions will USD 7.3bn due from the government and quasi-sovereigns
be key to investor sentiment towards the emirate – such as TDIC, Aldar Properties, Mubadala and TAQA
particularly after the uncertain experience many investors (Chart 8).
had with the Nakheel 2009s. Dubai’s debt woes have been
the subject of much market discussion. However, it is
important to highlight that most of these maturities are in
loans. Admittedly, in a distress situation, dealing with bank
debt is considerably easier than dealing with bonds, which
13
Chart 5: Total redemptions by country (bonds and loans) Chart 6: Dubai redemption schedule
250 30
200 25
20
150
USD bn
USD bn
15
100
10
50 5
0 0
Mar-Dec 2012 2013 2014 2015 2016 and Mar-Dec 2012 2013 2014 2015 >2015
2011 beyond 2011
Saudi Arabia Qatar Abu Dhabi Dubai Bahrain Kuwait Others Bonds Loans
Chart 7: Qatar redemption schedule Chart 8: Abu Dhabi redemption schedule
60 40
50
30
40
USD bn
USD bn
30 20
20
10
10
0 0
Mar-Dec 2012 2013 2014 2015 >2015 Mar-Dec 2012 2013 2014 2015 >2015
2011 2011
Bonds Loans Bonds Loans
Two sides to every coin

Although the region’s debt levels have increased rapidly in less favourable position, with little cushion between its
the past few years, it is important to view this rise in the external debt and foreign assets. This is largely explained by
context of the foreign assets accumulated by GCC the relatively recent discovery of gas in the country and
governments over the same period. Given the region’s heavy heavy investment in the hydrocarbon sector over the past
exposure to the hydrocarbon sector (for details, see the ‘Oil few years, against which returns are likely to materialise in
and gas’ section of this compendium) and limited local the coming years.
investment opportunities, governments have actively sought
foreign assets as a means of financial diversification. On a The strong sovereigns in the region – such as Saudi Arabia,
GCC-wide basis, while foreign liabilities increased from USD Kuwait and Qatar – clearly have the capacity to support their
153bn in 2005 to an estimated USD 420bn in 2009 contingent liabilities given the substantial resources at their
(according to the IIF), the region’s foreign assets have also disposal (although we point out that the liquidity of these
risen, from USD 820bn in 2005 to USD 1.47trn in 2009. assets remains unclear). In the case of the UAE, the
Accordingly, the GCC remains a strong net creditor, with a dynamics are a bit less clear given the difference between
net foreign asset position of over USD 1trn. the asset and liability positions of Abu Dhabi and Dubai.
Nevertheless, Abu Dhabi, which has one the world’s largest
Drilling down to individual countries, the UAE, Saudi Arabia sovereign wealth funds, is well positioned from a debt-
and Kuwait have comfortable net asset positions, holding service standpoint.
foreign assets many times their external debt – 5x for the
UAE, 5x for Saudi Arabia and 4x for Kuwait. Qatar is in a
14
Chart 9: GCC assets vs. liabilities Chart 10: Assets in excess of external debt
1,600 700
600
1,200
500
400
USD bn
USD bn
800
300
400 200
100
0 0
2005 2006 2007 2008 2009E Qatar Kuwait Saudi Arabia UAE
Foreign liabilities Foreign assets External debt Foreign assets (official reserves + SWF holdings)
Sources: IIF, Standard Chartered Research Sources: Moody’s, SWF Institute, Standard Chartered Research
The region’s quasi-sovereigns – Similar, yet different
Even though the region’s sovereigns are able to support their the newly formed Debt Management Office (DMO) becomes
companies, this does not warrant complacency in credit more active. However, it remains to be seen whether
selection. The universe of GCC bond issuers is dominated issuance will become more centralised at the sovereign
by quasi-sovereign entities, most of which share level, or whether it will continue to be undertaken largely by
characteristics including significant government ownership government-owned entities.
and heavy government influence on policy and strategy.
Many of these companies are viewed as vehicles of Given heavy dependence on the government, sovereign
government policy or are involved in sectors that are support linkages in Abu Dhabi are of key importance and, in
strategic to their governments. Accordingly, not all operate our view, will remain the primary driver of credit spreads. To
on a purely commercial basis. However, despite these this end, the government made its first formal, public
similarities, it is important to note that issuer profiles vary statement of support for its quasi-sovereigns in March 2010
significantly in the three main pockets of issuance in the in response to rating downgrades triggered by the Dubai
region – Qatar, Abu Dhabi and Dubai. World restructuring. In the statement, the government
expressed its strong support for Mubadala, IPIC and TDIC –
Qatar Inc. companies whose credit risk the government felt was
Qatari issuers, by and large, have the strongest standalone indistinguishable from its own. It also mentioned the
credit profiles in the region. The universe of credits in Qatar “important” role played by TAQA. In a more recent statement
Inc. is fairly small, with issuance primarily from the issued following the bailout of Aldar Properties in early 2011,
hydrocarbon and telecom sectors. In addition to having solid the government reiterated its pledge of “broad and ongoing
standalone businesses, these companies enjoy strong support” for Mubadala, IPIC, TDIC and TAQA.
government support. We view Qatar’s issuance programme
as well co-ordinated, with stronger credits coming to the While we remain comfortable with the government’s ability to
bond market independently and the funding needs of weaker support these companies, we expect credit differentiation in
companies being met via direct issuance by the sovereign or Abu Dhabi Inc. to become extremely challenging as more
by explicit government guarantees. state-owned enterprises with similar or overlapping
mandates and ownership structures tap the market.
Abu Dhabi Inc.
With a few exceptions, current issuers from Abu Dhabi are Dubai Inc.
fairly weak on a standalone basis. Many of these companies Dubai Inc. presents a more mixed credit picture than Qatar or
are essentially agents of government policy or investment Abu Dhabi. There are strong credits like DP World and (to a
vehicles for the government. Accordingly, they rely heavily lesser extent) DEWA, credits with good businesses but
on the government for funding and support, in the absence of excessive leverage (JAFZ), and credits with very weak
which many businesses would not be viable. We expect business models but with access to some monetisable assets
issuance from Abu Dhabi to become more co-ordinated as (DHCOG) or with strong links to the government (DIFCI).
15
While the Dubai government’s willingness to help service the transparency and disclosure in the region, which has long
debt of its quasi-sovereigns is not in question, the key issue been a cause of concern for investors, is improving gradually,
is its ability to do so. As the events with Dubai World have but on a case-by-case basis. Listed companies
demonstrated, the government’s financial resources are understandably tend to be more geared towards dealing with
clearly constrained, particularly in light of the onerous debt investors (DP World, Qtel and TAQA do a fairly good job).
redemption schedule highlighted above. Accordingly, we Among the privately owned credits, while dialogue with the
expect continuing reliance on external sources. investor community has improved in some cases, many
companies continue to view engagement with investors as a
In Table 1 below, we provide a snapshot of the sovereign fairly low priority, and we believe this will continue to deter
linkages and standalone credit profiles of the key quasi- investors from selected names.
sovereigns in the region. It is also worth mentioning that
Table 1: Key quasi-sovereign issuers from the GCC

Govt. Ratings uplift
Ratings
holding (notches)
Importance to sovereign Standalone credit profile
(direct &
Moody's/S&P Moody's S&P
indirect)
Qatar
High – One of the key LNG Strong – Robust operational and

production companies in Qatar. financial performance, low breakeven
RasGas 63-70% Aa3/A 1 0
Important source of government prices, solid debt-service coverage
revenue. ratios.
Strong – Benefits from long-term
High – Crucial role in transporting charter agreements with LNG
Nakilat Inc. 50% Aa3/AA- 3 6 Qatar’s LNG to customers around producers; operating performance is
the world. improving following completion of its
vessel delivery programme.
Moderate – Largest telecom
Strong – Diversified portfolio and
operator in the country, flagship
healthy margins. However,
Qtel 68% A2/A 3 3 international brand; supports
acquisitions remain a risk given
diversification away from
ambitious growth plans.
hydrocarbons.
Abu Dhabi
Weak – Cash-flow generation is

High – Entrusted with the task of
poor, reflecting the early stages of a
diversifying Abu Dhabi’s domestic
Mubadala 100% Aa3/AA NA NA number of projects and large capex
economy; funded by the government
needs.
and chaired by the Crown Prince.
High – Conduit for the government’s Weak – High debt, acquisitive

investments in the global energy strategy, exposure to cyclical
1
IPIC 100% Aa3/AA 5 NA industry, long history of government downstream industry. However,
funding and support; undertaking portfolio of well-established
strategic local projects. international investments has value.
Moderate – Vehicle for execution of
Weak – Constrained cash-flow
the government’s tourism
prospects due to non-commercial
TDIC 100% A1/AA 6 6 development agenda, which it views
nature of a number of projects, large
as a means of diversification away
capex needs.
from hydrocarbons.
Strong – Good cash-flow visibility,
High – Vital role to play in bridging
high degree of resilience to volatility
the gas deficit in UAE and Oman;
Dolphin in hydrocarbon prices; long-term
51% A1/NR 3 0 among the largest cross-border
Energy sales agreements with government
commercial initiatives in the region,
entities in Abu Dhabi, Dubai and
Mubadala’s flagship venture.
Oman.
Moderate – Strong downstream
business provides stable recurring
Moderate – Controls the entities
cash flow. However, upstream
responsible for the provision of most
segment is volatile given high
TAQA 72% A3/A 4 8 of the emirate’s electricity and water;
breakevens. Acquisitions remain a
government recently expressed
risk, though the recent management
strong support for the company.
change could signal a shift in
strategy.
16
Govt. Ratings uplift

Ratings
holding (notches)
Importance to sovereign Standalone credit profile
(direct &
Moody's/S&P Moody's S&P
indirect)
Weak – High leverage combined with
Moderate – Largest developer in the downturn in the real-estate sector
Abu Dhabi; involved in a number of resulted in a liquidity squeeze. The
Aldar 2
38% Ba3/B 3 2 high-profile developments such as recent government bailout has
Properties
Yas Island in addition to building helped to address near-term liquidity
housing infrastructure for locals. concerns. However, business
remains under pressure.
Dubai
High – Dubai’s flagship corporate, Strong – Competitive strength on

with a large international presence; account of EM- focused port
operates the largest container port in portfolio; trade volumes are making
DP World 81% Ba1/BB 0 0
the GCC; trade-related activities are an impressive comeback; strong
a significant contributor to Dubai’s liquidity position. Commitment to
GDP. deleveraging to be tested.
Moderate – Profitable operations on
High – Monopoly provider of
account of low-price feedstock,
electricity and water to Dubai; history
3 strong cash-flow generation.
DEWA 100% Ba2/BBB- 1 4 of government support in the form of
However, capex for capacity
subsidised feedstock and explicit
expansion could weigh on debt
guarantees on borrowings.
metrics.
High – Central to Dubai’s ambitions
Weak – Unclear business strategy,
of cementing its position as an
DIFC high leverage and poor liquidity, all of
100% B3/B+ 1 2 international financial-services
Investments which are exacerbated by poor
centre; government has extended
disclosure and transparency.
loans to cover funding requirements.
Weak – Longer-term prospects are
High – Important role in establishing
good: strong business and a long
Dubai as the region’s trade and
and well-established track record.
JAFZ 100% B2/B 1 0 logistics hub; businesses in the zone
However, material refinancing exists,
contribute significantly to
with the looming maturity of the AED
employment and GDP.
7.5bn sukuk in 2012.
Weak – Battered by the downturn in
Low – Played an important role in Dubai’s property sector. With
Dubai developing Dubai’s real-estate and refinancing risk within the next 12
4
Holding 0% B2/NR NA NA hospitality infrastructure. However, months (when two bonds fall due),
COG current operations are of low fate of creditors is likely to rest on
strategic significance. whether the company pursues asset
sales.
Others
Strong – Among the strongest credits

High – Largest non-oil contributor to in the GCC, huge competitive
SABIC 70% A1/A+ 1 1 Saudi Arabia’s GDP, also among the advantage due to heavily subsidized
biggest employers in the country. feedstock, solid credit metrics with
low leverage and robust liquidity.
High – Tasked with managing
Weak – Large portfolio but few
Bahrain’s key state-owned
contributors to dividend, saddled with
companies, undertaking major
Mumtalakat 100% NR/A- NA 5 weak assets such as Gulf Air, limited
restructuring efforts at these
visibility on a large part of the
companies to improve
portfolio.
competitiveness.
1 2 3 4
After taking into account ongoing state support; as of end-2010; reflects rating of Thor; 97.4% held by ruler of Dubai;
Sources: Rating agencies, Standard Chartered Research
17
Banking system – Slowly emerging from the rubble

Analyst: Victor Lohle (+65 6596 8263)
Challenges remain, but 2011 should be a better year
2010 could have been worse. From a credit perspective, More importantly, confidence in banking systems across the
2010 broadly played out as we had anticipated for the GCC region has been maintained, even if funding costs remain
banks. Reported asset-quality indicators deteriorated high for some banks.
because of the economic slowdown, receiving an extra blow
from high-profile defaults and/or restructurings. In Kuwait and Obstacles remain. The main challenges for the banks in the
the UAE, asset quality deteriorated quite sharply. Liquidity region centre on asset quality. First, there is potential for
management became paramount and loan-to-deposit ratios further restructurings, particularly in Dubai. Second, it is
improved. Surprisingly, earnings did not deteriorate across unclear whether property prices – to which the banks have
the board, although the Dubai-based banks did see a decline significant indirect exposure – have reached the bottom.
in profits. In fact, all of the banks we cover reported full-year Finally, it is debatable whether the banks have fully disclosed
profits, and only a few institutions reported quarterly losses. the extent of their exposure to troubled sectors and borrowers.
As a result, the banks’ high capital bases remained intact.
Chart 1: Total banking-system assets (end-2010) Chart 2: Banking assets/GDP (end-2010)
350
UAE
300
Saudi Arabia
250
Bahrain 200
%
150
Qatar
100
Kuwait 50
0
0 100 200 300 400 500 Saudi Arabia Kuwait Qatar UAE Bahrain
USD bn (retail)
Sources: Central banks, Standard Chartered Research Sources: Central banks, Standard Chartered Research
Banks’ fundamentals to improve in 2011. Notwithstanding x The funding positions of most of the region’s banks
the challenges highlighted above, we expect the should improve on the back of higher customer deposits
fundamentals of most of the region’s banks to start and support from sovereigns (if necessary). External
recovering in 2011. We believe that higher economic growth funding positions have improved, as most banks can
will be the key driver of the recovery, with the caveat that it again tap the offshore debt capital markets.
will be a long process. x Material improvements in profitability are likely to take
x Credit growth is likely to pick up later in 2011 as the longer. We expect provisions to decline as asset quality
benefits of better economic growth trickle down and improves. However, in some jurisdictions, the decline in
confidence returns. Qatar and Saudi Arabia are already provisions will take longer as banks aim to increase
leading the way, and we expect other countries in the general/portfolio provisions. Therefore, significant
region to follow. improvements in profitability are likely to be more of a
x NPLs will likely peak in 2011. We could see a further story for 2012, when we expect revenue growth to pick
increase of up to 50% in NPLs in the UAE, but for the up and provisions to decline.
rest of the countries, we expect only a gradual increase
in NPLs, peaking sometime in late 2011. Basel III is unlikely to have a material impact on the banks
x Capital adequacy will remain robust. Based on reported from a capital point of view, as their capital adequacy ratios
NPL numbers, capital adequacy is not a concern for the are very high and their capital bases are almost entirely
banks in the GCC. However, the true test of capital made up of equity. The existing Tier 1 debt in the region was
adequacy is whether the reported NPL ratios are issued by banks from the UAE (the Abu Dhabi banks and
accurate in the first place. Emirates NBD) to their shareholders. However, Basel III
18
could have an impact on liquidity, as the banks’ funding Sovereign support remains high. Throughout the crisis, the
tends to be short-term. sovereigns in the region were very supportive of their banking
systems. This was again made evident when Qatar
Opportunistic issuance. Regional banks’ issuance tends to announced in Q1-2011 that it would inject additional equity
be opportunistic rather than driven by refinancing. In 2011, capital into its banks. We expect support to continue to be
we expect around USD 8bn of issuance from banks in the high.
GCC, roughly the same amount as in 2010.
2010 – Acknowledging reality
Regional economic growth is picking up. A full recovery than in 2009. Also, a large portion of Qatar’s credit growth
will take time, and GDP growth is unlikely to reach the levels went to the public sector rather than the private sector. In
seen in 2007 or 2008 in the near future. Despite the uptick in Saudi Arabia, although credit growth is picking up gradually,
economic growth already seen in 2010, credit growth in the the change in absolute terms is still relatively small. In the
region was fairly anaemic. This was a result of banks UAE, credit growth came from Abu Dhabi, as the Dubai
deleveraging their balance sheets and hoarding cash to banks are still shrinking their balance sheets. In Kuwait,
improve liquidity, as well as weak private-sector demand. credit growth is stagnant. As economic growth picks up and
Even in Qatar, which experienced the fastest rate of credit confidence returns, we expect credit-sector growth to follow,
growth in the region, credit growth in 2010 was still lower albeit with a lag.
Chart 3: Real GDP growth Chart 4: Private-sector credit growth
60
25 50
40
15 30
%
%
20
5 10
0
-5 -10
Bahrain Kuwait Qatar Saudi Arabia United Arab 2007 2008 2009 2010
Emirates Bahrain (retail) Kuwait Qatar
2008 2009 2010 2011F Saudi Arabia UAE
Sources: IMF, Standard Chartered Research Sources: Central banks, companies, IIF, Standard Chartered Research
Stimulus packages will help. In the medium term, the KWD 30bn (USD 100bn) development plan aimed at
government stimulus packages announced in the region financing infrastructure development projects was approved
should provide further impetus to the economic recovery. In in 2010. Finally, Qatar’s hosting of the FIFA 2022 World Cup
Saudi Arabia, the government announced a SAR 1.2trn will require up to USD 100bn of infrastructure expenditure.
(USD 386bn) development plan for 2010-14 mostly directed Even if the stimulus packages are not implemented in full,
at infrastructure spending. This plan represents a 66% the banks – as financing conduits – should benefit from
increase over the 2005-09 development plan. In Kuwait, a higher volumes of economic activity.
Asset quality
The countries that experienced the sharpest economic companies in Kuwait and to real estate and Dubai World in
slowdowns (i.e., Kuwait and the UAE) were also the ones the UAE.
whose banks experienced the sharpest deterioration in asset
quality. In Kuwait, we estimate reported system-wide NPLs Qatari banks, despite experiencing by far the most rapid
to be around 10%, while the estimate for the UAE is 8%. In credit growth in the region (a cumulative 200% between
both countries, asset quality deteriorated across the board. 2006 and 2010), have seen minimal asset-quality
The situation was exacerbated by exposure to investment deterioration. This is due to pre-emptive measures by the
19
Qatari government to remove potentially troublesome assets In terms of loan-loss coverage, Kuwait is the only country in
from the banks’ balance sheets, as well as relatively robust the region worth highlighting, with coverage well below 100%
economic growth. In Saudi Arabia, NPL did not deteriorate (estimated at 55% at end-2010). In the other countries in the
as much as expected, despite problems with the Saad and region, loan-loss coverage is close to 100%. We also think
Al-Gosaibi groups. This partly reflects the strong regulatory banks are under pressure from regulators behind the scenes
framework, in our opinion. to increase portfolio provisions.
Chart 5: NPL ratios Chart 6: Loan-loss coverage
12 160
10
120
8
6 80
%
%
4
40
2
0 0
Qatar Saudi Arabia Bahrain UAE Kuwait Bahrain Kuwait Qatar Saudi Arabia UAE
2007 2010 (est.) 2007 2010 (est.)
Sources: Central banks, IIF, Standard Chartered Research Sources: Central banks, IIF, Standard Chartered Research
Chart 7: Cumulative credit growth (end-2006 to end-2010) Chart 8: Private-sector credit/total credit
250 100
200
75
150
50
%
%
100
25
50
0 0
Saudi Arabia Kuwait Bahrain UAE Qatar Qatar UAE Kuwait Bahrain Saudi Arabia
(retail) (retail)
2008 2010
Sources: Central banks, Standard Chartered Research Sources: Central banks, Standard Chartered Research
Do the numbers tell the whole story? One of our concerns their earnings because of the use of low discount rates to
has been that asset-quality indicators in some countries (e.g. calculate the impairment.
the UAE) might not reflect the full extent of asset-quality
deterioration. Banks might have engaged in renegotiations or What about the other Dubai Inc. entities? The level of
restructurings as a way to manage asset quality. Perversely, disclosure on the banks’ exposure to Dubai World was fairly
the longer it takes the banks to recognise NPLs, the more limited, and the same is the case for other Dubai Inc. entities.
time they have to build up provisions. Beyond estimating that the bulk of the exposure will reside
with Dubai-based banks and that the larger banks will have
Dubai World restructuring. The Dubai World restructuring greater notional exposure simply because of their size,
set the template for further restructurings not only in Dubai, determining where exposure to these entities resides is
but also in the rest of the region. The banks extended the guesswork.
maturity of their loans to Dubai World to 2015 and 2018 at
below market rates and took impairment charges of around Exposure to the real-estate market will remain a source
10-15%. Also, some of the banks took relatively small hits to of concern. One lingering concern for the banks in the
region is their significant exposure to the construction and
20
real-estate sectors, which in most countries represent around personal loans for non-consumption purposes. In other
30% of private-sector loans. Although in some countries words, some exposures to wealthy individuals may be
(such as the UAE), reported exposure to real estate appears classified as personal loans but be real estate-related in
to be below 20% of private-sector credit, we believe the practice.
actual level may be higher, as some borrowers take out
Chart 9: Real-estate/private-sector credit (end-2010) Chart 10: Dubai property prices
40 3,000
2,500
30
2,000
AED psf
20 1,500
%
1,000
10
500
0 0
Saudi Arabia UAE Kuwait Bahrain Qatar 2008 2009 2010
(retail) Office Residential
Sources: Central banks, Standard Chartered Research Sources: Jones Lang LaSalle, Standard Chartered Research
The challenge of real-estate data. There is limited

comprehensive data on the real-estate markets in GCC Outlook for asset quality. Asset quality is probably nearing
countries. One of the few pieces of data available shows that the worst point of the cycle in most GCC markets, in our view.
Dubai real-estate prices have declined by around 60% from This is not to say that there will be no further increases in
their peak in late 2008. Other countries in the region have NPLs, but rather that these increases will be less dramatic
also experienced price declines. However, it is very hard to than those seen in 2010. In the majority of the countries, we
quantify the declines in each market and whether prices expect only gradual further rises in NPLs, peaking in late
have bottomed yet. Regardless, a recovery is probably not 2011. The main exception is the UAE, given the potential for
imminent. For example, in Dubai, significant supply of real further corporate restructurings. In our opinion, reported NPLs
estate is still under construction and is expected to be for Dubai-based banks could deteriorate by as much as 50%
released to the market over the next few years, which should by end-2011.
delay a recovery.
Funding
After the liquidity challenges to the system in 2009, a main and public-sector entities – ranging from around 13-15% for
focus for the banks in 2010 – partly induced by regulatory the Kuwaiti banking system to 30-40% for Qatar. One of the
guidance – was liquidity management. As a result, loan-to- challenges for banks in countries with large expatriate
deposits ratios improved considerably and were, by and populations (the UAE, Qatar and Kuwait) is managing their
large, below 100% at end-2010. Customer deposits as a funding bases, as a meaningful percentage of the customer
percent of the banks’ funding bases also improved during the deposit base tends to be repatriated every month. In this
period. On average, the region’s banks derive over 75% of regard, Islamic banks have a clear advantage over
their funding from customer deposits, with the remainder conventional banks – not only from a cost-of-funding point of
coming from interbank funding and, to a lesser extent, bonds view, but also from a stability point of view – as the majority
and loans. of the customer base is local.
A key strength of the region’s banks is that a significant

percentage of customer deposits is derived from government
21
Chart 11: Loan-to-deposit ratios Chart 12: Funding base*
Qatar 100%
80%
UAE
60%
Kuwait 40%
Bahrain (retail) 20%
0%
Saudi Arabia
2008 2010 2008 2010 2008 2010 2008 2010
% 0 25 50 75 100 Saudi Arabia Abu Dhabi Dubai Qatar
2010 2008 Customer deposits Other funding
Sources: Central banks, Standard Chartered Research * Average for the banks under our coverage; figures for Mashreqbank,
Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010.
Sources: Companies, Standard Chartered Research
Chart 13: Public-sector deposits/customer deposits Chart 14: Interest expense/total funding*
50 5
40 4
30
3
%
%
20
2
10
1
0
Kuwait Bahrain UAE Saudi Arabia Qatar 0
(retail) 2008 2009 2010
2008 2010 Dubai Abu Dhabi Saudi Qatar
Sources: Central banks, Standard Chartered Research * Average for the banks under our coverage; figures for Mashreqbank,
Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010.
Sources: Companies, Standard Chartered Research
Looking ahead, we expect deposit growth to eventually pick Qatari Islamic banking. In early 2011, Qatar announced
up across most of the region on the back of faster economic that it would require commercial banks to close their Islamic
growth. Liquidity management will remain an area of focus banking businesses by end-2011. While the conventional
for the banks (although less so than in 2010), and we do not banks will be able to maintain Islamic loans on their balance
foresee a material deterioration in the banks’ loan-to-deposit sheets until maturity, Islamic deposits that mature cannot be
ratios. The only question mark is around Qatar, given the renewed, and all Islamic deposits are required to be phased
strong credit growth expected. In our view, private-sector out by end-2011. In the short term, this will put some
deposit growth is unlikely to be able to keep up with credit pressure on conventional banks’ earnings and funding, but
growth. However, the government and public sector as the this will not be material. The change will be a boon for the
largest depositors in the system will probably step in to Islamic banks in Qatar. However, we do not expect similar
ensure that strong liquidity in the system is maintained. moves in other countries.
Profitability
In broad terms, banks’ earnings in the region did not shrinkage, and funding costs did not decline as much as in
deteriorate as much as we had expected in 2010. All of the other countries because of aggressive competition for
banks we cover reported profits for the year and, on average, deposits. On the provisioning front, provisions as a
ROAs were well in excess of 1%. However, there were some percentage of pre-provision profits remained elevated.
clear differences across countries. The banks in Dubai were However, the provisions booked were lower than we had
the worst-affected because of lower revenues and high expected and, as a result, the banks reported better-than-
provisions. Revenues declined because of balance-sheet anticipated profits.
22
For the Abu Dhabi banks, while provisions remained business volumes and lower funding costs. In Saudi Arabia,
elevated, this was more than offset by higher revenues the picture varied across institutions. However, the overriding
thanks to slightly higher business volumes and lower funding trend was one of declining NIMs and, in most cases,
costs. As a result, the Abu Dhabi banks reported higher elevated provisions in the Saudi Arabian context (although
earnings in 2010 than in 2009. The Qatari banks as a group they were lower than in the UAE).
also reported higher profits for 2010, mostly driven by higher
Chart 15: Provisions* Chart 16: ROA*
100% 5
80%
4
60%
3
40%
%
2
20%
0% 1
2008 2010 2008 2010 2008 2010 2008 2010
0
Qatar Saudi Arabia Abu Dhabi Dubai 2008 2009 2010
Prov isions Profits Dubai Abu Dhabi Saudi Qatar
* Average for the banks under our coverage; figures for Mashreqbank, * Average for the banks under our coverage; figures for Mashreqbank,
Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010 Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010
Sources: Companies, Standard Chartered Research Sources: Companies, Standard Chartered Research
We expect the banks’ profitability to start improving in 2011 remain high in some jurisdictions as banks aim to increase
as a result of higher business volumes and lower general/portfolio provisions. Second, we expect business
provisioning costs. However, meaningful improvements are volumes to pick up in late 2011, and this is only likely to be
unlikely to be apparent until 2012. First, provisions might reflected in the banks’ 2012 results.
Capital
The region’s banks remain well capitalised by international Despite high capital adequacy ratios, a concern with the
standards, with Tier 1 capital ratios averaging around 15% at GCC banks is their large concentrations to a small number of
end-2010. More importantly, the bulk of the banks’ capital large corporates. This was evident in the cases of Saad and
base is in the form of equity, with an equity-to-assets ratios Al-Gosaibi in Saudi Arabia and Dubai World in Dubai, where
of around 14%. Also, throughout the crisis, sovereigns in the defaults or restructurings by a small number of companies
region were supportive of their banking systems in terms of had a meaningful impact on banks’ results.
both liquidity and, in some cases, capital. This was most
recently made evident when Qatar announced in Q1-2011
that it would inject additional equity capital into its banks.
Chart 17: Regulatory capital ratios* Chart 18: Equity-to-assets*
25 20
20
15 15
%
10
10
%
0
5
2008 2010 2008 2010 2008 2010 2008 2010
Abu Dhabi Qatar Saudi Arabia Dubai 0

Tier 1 Tier 2 Qatar Saudi Arabia Abu Dhabi Dubai
* Average for the banks under our coverage; figures for Mashreqbank, * Average for the banks under our coverage; figures for Mashreqbank,
Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010 Dubai Islamic Bank and Abu Dhabi Islamic Bank are as of Q3-2010
Sources: Companies, Standard Chartered Research Sources: Companies, Standard Chartered Research
23
Resolution regimes. There is considerable discussion in the Basel III. The region’s implementation of Basel II was
West about the declining boost to bank’s credit ratings from relatively slow, and we expect a similar situation with Basel
sovereign support. This is likely to put pressure on global III. At this stage, we think Basel III will be more of a
banks’ ratings in the medium term. In our opinion, the GCC consideration in 2012 and beyond, rather than in 2011.
as a region has historically been interventionist, and this will We do not expect Basel III implementation to have a material
continue to be the case. Therefore, we expect GCC banks to impact on the GCC banks because the banks are already so
be less affected by global revisions to bank ratings. Table 1 well capitalised. The region’s banks have an Tier 1 capital
shows the current ratings of the banks we cover in the GCC, ratio of around 15%, and with the exception of the UAE
as well as their unsupported ratings. In the absence of banks – where some hybrid Tier 1 is owned by governments
support, the Saudi banks would be rated in the single-A – the capital consists mostly of equity.
range, while the majority of the banks in the rest of the region
would be rated in the BBB/Baa range.
Issuance and redemptions
Upcoming redemptions. The GCC banks have UAE banks) were absent from the USD offshore market and
approximately USD 7bn of bond maturities in 2011, with USD had negative net issuance. In contrast, a number of the
4bn in USD and the remainder in a broad range of Qatari banks – which had no refinancing needs – came to
currencies. Our refinancing numbers do not include callable the market to take advantage of very attractive levels for
LT2 bonds, as we believe that the banks will not call their term funding.
outstanding callable LT2s. There is already a precedent for a
bank (Gulf International Bank) not calling its LT2 securities, Emergence of alternative currencies. The bulk of the
and the majority of the banks are inclined to pay the stepped- offshore funding for the Middle East banks has historically
up funding costs rather than call and refinance the bonds, in been in USD, partly because most of the region’s currencies
our view. are pegged to the dollar. In an interesting development,
banks from the region have started to tap the growing
Issuance. We expect the banks in the region to issue c. Malaysian ringgit (MYR) market (as there is appetite from
USD 8.3bn of debt in 2011 across a range of currencies. The Islamic investors) and the Swiss franc (CHF) market (on the
main caveat is that issuance in the offshore markets tends to back of interest from private banks). While both markets
be opportunistic rather than refinancing-driven. In 2010, the remain small as a share of the overall market, we expect
banks that had the greatest refinancing needs (some of the them to continue to develop in 2011.
Chart 19: Upcoming USD bond redemptions Chart 20: Upcoming bond redemptions – all currencies
10 10
8 8
6 6
USD bn
USD bn
4 4
2 2
0 0
2011 2012 2013 2014 2015 2016< 2011 2012 2013 2014 2015 2016<
Dubai Abu Dhabi Bahrain Kuwait Qatar Saudi Arabia Oman Dubai Abu Dhabi Bahrain Kuwait Qatar Saudi Arabia Oman
Sources: Companies, Bloomberg, Standard Chartered Research Sources: Companies, Bloomberg, Standard Chartered Research
24
Table 1: Supported and unsupported ratings for GCC banks

Ratings Notch-up Unsupported rating
S&P Moody's S&P Moody's S&P Moody's
Abu Dhabi
National Bank of Abu Dhabi A+ Aa3 2 3 A- A3
Abu Dhabi Commercial Bank A- A1 3 6 BBB- Ba1
First Gulf Bank NR A2 - 5 NR Ba1
Abu Dhabi Islamic Bank NR A2 - 6 NR Ba2
Bahrain
Gulf International Bank BBB+ A3 2 4 BBB- Ba1
BBK - A3 - 3 NR Baa2
Arab Banking Corporation BBB Baa3 - 1 BBB Ba1
Dubai
Emirates NBD NR A3 - 4 NR Ba1
Mashreqbank BBB+ Baa1 2 2 BBB- Baa3
Dubai Islamic Bank BBB- Baa1 2 5 BB Ba3
Kuwait
Burgan Bank BBB+ A2 1 4 BBB Baa3
Qatar
Qatar National Bank A+ Aa3 2 4 A- Baa1
Commercial Bank of Qatar A- A1 1 3 BBB+ Baa1
Doha Bank A- A2 1 4 BBB+ Baa3
Qatar Islamic Bank NR NR - - NR NR
Saudi Arabia
Samba Financial Group A+ Aa3 1 2 A A2
Riyad Bank A+ A1 1 2 A A3
Saudi British Bank A Aa3 1 2 A- A2
Banque Saudi Fransi A Aa3 1 2 A- A2
Arab National Bank A A1 1 2 A- A3
Sources: Rating agencies, Standard Chartered Research
25
Credit strategy
Technicals – The deepening of the Middle East credit markets

Analysts: Vijay Chander (+852 3983 8569), Sandeep Tharian (+44 20 7885 5171)
Middle East gradually gains global investor interest

The region’s credit markets have grown substantially but remain small relative to peers
Bond markets in the Middle East have grown substantially they have grown faster over the past decade than these
over the past decade, powered mainly by debt issuance from markets, attracting increasing numbers of benchmarked and
sovereigns and quasi-sovereigns. While the region’s bond non-benchmarked investors. The region’s international bond
markets are still small in absolute terms compared to markets have led the growth, while local-currency markets
emerging markets like Asia, Latam and emerging Europe, have expanded more slowly.
Chart 1: Size of international bond and note markets Chart 2: Size of local-currency bond markets
USD bn USD trn

0 100 200 300 400 500 0 1 2 3 4 5 6 7
Latam Asia
Asia Latam
Emerging Europe
Emerging Europe
Middle East
Africa & Middle East
Africa
Developed countries Developed countries
0 5 10 15 20 25 0 10 20 30 40 50 60
USD trn USD trn
2000 Q3-2010 2000 Q2-2010
Sources: BIS, Standard Chartered Research Sources: BIS, Standard Chartered Research
Economic diversification is a key driver of supply in the region

Sovereigns and quasi-sovereigns from Abu Dhabi, Qatar and benchmarks for the benefit of other issuers; (2) to borrow in
Dubai dominate the space, with c.USD 68bn of outstanding the international fixed income markets, taking advantage of
bonds (out of the region’s total of USD 117bn as at February their strong sovereign ratings and using their surpluses to
2011). Sovereign and quasi-sovereign issuers from Abu invest internationally to diversify their portfolios; and (3) to
Dhabi and Qatar, which have strong budget and current make quasi-sovereign issuers more commercial and
account surpluses, have also regularly tapped the bond disciplined and to subject them to closer market scrutiny.
markets for the following purposes: (1) to set sovereign
Chart 3: Stellar international bond-market growth … Chart 4: … powered by UAE and Qatar sovereigns and
Middle East international bond and note market growth quasi-sovereigns
GCC international bond market size (as of February 2011)
160 40
140 35
30
120
25
100
USD bn
20
USD bn
80 15
60 10
40 5
20 0
Abu Qatar Dubai Saudi Bahrain Kuwait Oman Ras-al- Sharjah
0
Dhabi Khaimah
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q3-
2010 Sovereigns Quasi-sovereigns Financials Corporates
Sources: BIS, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
Note: Does not include local-currency domestic bonds or the USD 20bn issued by Dubai to the UAE central bank and Abu Dhabi
1
27
Middle East bond-market size metrics

Sovereigns and quasi-sovereigns dominate
While a portion of the region’s bond proceeds has been names from markets including Dubai, Abu Dhabi, Qatar and
invested in the development of hydrocarbon assets, a larger Saudi Arabia. Financials also account for a substantial share of
share has been invested in infrastructure development and bonds outstanding. Non-quasi-sovereign corporate issues have
other projects aimed at diversifying these economies away been few and far between. However, we expect this sector to
from the hydrocarbon sector. Infrastructure sectors like utilities grow as the region’s corporates become better established and
and transportation are big bond issuers, as well as real-estate investors get more comfortable with the names.
Chart 5: Real estate, oil & gas, and utilities are the biggest Chart 6: Quasi-sovereigns are the biggest issuers
non-financial, non-sovereign issuers (as of February 2011) (as of February 2011)
Financials
Quasi-sovereigns
Sovereigns
Real estate
Oil & gas Financials
Utilities
Others Sovereigns
Transportation
Telecommunications
Corporates
Govt inv. companies
0 5 10 15 20 25 30 35 0 10 20 30 40 50 60
USD bn USD bn
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
The region’s international bond market is predominantly USD- currencies have been small, and are used mainly as a
focused, with the UAE dirham (AED) also being a preferred diversification tool by frequent issuers in the financial space.
issuance currency. AED issuance and investor participation The bond market has increasingly become fixed-rate-centric,
were in vogue in 2007-08 due to expectations of a dollar de- with declining participation by traditional floating-rate investors.
peg, but have slowed to a trickle since then. Issues in other Banks represent a big share of the region’s floating-rate paper.
Chart 7: USD issuance dominates … Chart 8: … while floaters are comparatively small
Composition of GCC bond market by currency type Composition of GCC bond market by coupon type
MYR 1.0
CHF 1.3
SAR 1.7 Others 1.3 Floating
GBP 2.2 USD 29bn
EUR 5.1
AED 10.2
Fixed
USD 88bn
USD 94.2
Note: ‘Others’ include SGD, JPY, HKD, THB, AUD, SKK, TRY and Source: Standard Chartered Research
ZAR; Source: Standard Chartered Research
Qatar and Abu Dhabi names have dominated new issues over encourages the quasi-sovereigns to borrow on their own and
the last two years. While Qatar borrows on behalf of its fledgling become financially independent as standalone entities.
quasi-sovereign entities and on-lends to them, Abu Dhabi
2
28
Chart 9: Qatar becomes a bigger issuer Chart 10: Quasi-sovereign issuance increases
Bond issuance by the region’s 3 major issuers (since 2007) GCC bond issuance by type of issuer (since 2007)
16 35
14 30
12
25
10
20
USD bn
USD bn
8
15
6
10
4
2 5
0 0
2007 2008 2009 2010 2007 2008 2009 2010
Abu Dhabi Dubai Qatar Sovereign Quasi-sovereign Financial Corporate
Note: Does not include the USD 20bn issued by Dubai in 2009 and Note: Does not include the USD 20bn issued by Dubai in 2009 and
subscribed by Abu Dhabi; Sources: Bloomberg, Standard Chartered subscribed by Abu Dhabi; Sources: Bloomberg, Standard Chartered
Research Research
GCC bond issuance and redemption in 2010

Qatar and Abu Dhabi continue to dominate issuance
Gross issuance from the Middle East totalled USD 28.0bn in Dhabi had a similar profile in 2010; the main issuers were the
2010, much lower than the USD 34.6bn in 2009. The sovereign-guaranteed Waha Aerospace (a lessor of military
overhang of the Dubai World restructuring caused issuers to aircraft), IPIC (the hydrocarbon-sector holding company),
stay away from the market in H1-2010, while the unusually and Abu Dhabi-based banks. Redemptions from Abu Dhabi
large USD 10bn of Qatar sovereign issuance in 2009 inflated were mostly out of the banking sector. While H1-2010 was
the overall number for that year. In contrast, the Qatar relatively quiet for issuance as the markets awaited details of
sovereign stayed away from the bond markets in 2010, with the Dubai World restructuring, Q4-2010 was a sweet spot as
Qatari Diar (sovereign-guaranteed), Qatar Telecom and the tight spreads and low Treasury yields attracted issuers to the
Qatari banks being the main issuers. Issuance out of Abu market (this phenomenon was also witnessed in Asia).
Chart 11: GCC issuance picked up towards end-2010 Chart 12: Qatar saw increased issuance in 2010
GCC issuance/redemptions in 2010 by quarter GCC issuance/redemptions in 2010 by country
18 10
15 8
12 6
USD bn
9 4
USD bn
6 2
3 0
0 -2
-3 -4
-6 Qatar Abu Dubai Bahrain Saudi Kuwait Ras-al- Oman
Dhabi Khaimah
Q1 Q2 Q3 Q4
Issuance Redemptions Net issuance Issuance Redemptions Net issuance
Saudi and Bahraini issuers provide diversity; Dubai names come back
After a relatively quiet 2009 and H1-2010 due to the overhang borrowers also had significant redemptions from the banking
from the property-sector meltdown, Dubai-based borrowers and property sectors, with Nakheel redeeming its AED bond.
issued almost USD 5bn in 2010. The Dubai sovereign and Bahraini and Saudi entities were the region’s other large
quasi-sovereign utility DEWA were the main issuers. Dubai issuers. In Bahrain, issuance was led by the sovereign,
3
29
government investment company Mumtalakat, and banks, banks. These new issuers bring diversity and help to improve
while Saudi issuers included petro-chemical major SABIC and the liquidity of the Middle East debt markets.
Chart 13: Bahrain was the biggest sovereign issuer in 2010 Chart 14: Qatari quasi-sovereigns were the biggest issuers
GCC issuance/redemptions in 2010 by sovereigns GCC issuance/redemptions in 2010 by quasi-sovereigns
2 8
6
1
USD bn
USD bn
-1 2
0
-2
Bahrain Dubai Ras-al- Abu Dhabi Qatar -2
Khaimah Qatar Abu Dhabi Dubai Saudi Bahrain
Issuance and redemptions in the financials space finely balanced

Issuance and redemptions were finely balanced overall last the other issuer was Banque Saudi Fransi, while the state-
year, at a little over USD 8.5bn each. That said, the owned National Commercial Bank redeemed its 2010
distribution of financial-sector issuance and redemptions was maturity. Qatar was the largest issuer of bank paper, with
far from even across markets. Abu Dhabi and Dubai both Qatar Islamic Bank and Qatar National Bank tapping the
had relatively high redemptions in 2010, but Abu Dhabi USD bond markets for the first time. Other issuers in the
banks issued more than USD 2bn, keeping net redemptions financial space included the Kuwaiti financial holding
low. Saudi Arabia’s issuance and redemption profile was company KIPCO; its subsidiary, Burgan Bank, which issued
balanced. Saudi British Bank refinanced its 2010 redemption; a LT2 bond; and Bahraini bank BBK.
Chart 15: Financials in Dubai failed to issue Chart 16: Corporate issuance was comparatively small
GCC issuance/redemptions in 2010 by financials GCC issuance/redemptions in 2010 by corporates
3 0.6
2 0.4
1 0.2
USD bn
USD bn
0 0.0
-1 -0.2
-2 -0.4
-3 -0.6
-4 -0.8
Qatar Abu Bahrain Saudi Kuwait Dubai Ras-al- Dubai Saudi Oman Kuwait Bahrain Abu
Dhabi Khaimah Dhabi
Corporate redemptions exceed issuance

The non-quasi-sovereign corporate space in the Middle East Increasing comfort with the region among international
remains small, reflecting the sector’s relative lack of investors, improved corporate governance and a well-tested
development as sovereign-linked entities continue to debt resolution mechanism are essential to the growth of this
dominate. However, we expect this segment to grow sector, and are still evolving, in our view.
significantly as first-time issuers look to tap the market.
4
30
Spread movement over Treasury (bps)
0%
20%
40%
60%
80%
100%
0%
20%
40%
60%
80%
100%
100
-250
-200
-150
-100
-50
0
50
BAHRAIN '20 BAHRAIN '20
BAHRAIN '20
DUGB '15 DUGB '15
DUGB '15
Sovereigns
Sovereigns
Sovereigns
DUGB '20 DUGB '20
DUGB '20
DEWA '15 DEWA '15

DEWA '15
MUMTAK '15 MUMTAK '15
MUMTAK '15
QATARI '15 QATARI '15
QATARI '15
QATARI '20 QATARI '20
QATARI '20
QTEL '16 QTEL '16
QTEL '16
QTEL '21 QTEL '21

QTEL '21
US
AM/HF
QTEL '25 QTEL '25
QTEL '25
DEWA '16 DEWA '16 DEWA '16
Quasi-sovereigns
Quasi-sovereigns
Quasi-sovereigns
DEWA '20 DEWA '20 DEWA '20
Banks
SABIC '15 SABIC '15 SABIC '15
Europe
IPIC '15 IPIC '15 IPIC '15
5
31
IPIC '20 IPIC '20
Chart 19: Middle East 2010 new-issue performance since issue

IPIC '20
Asia
Chart 17: Middle East 2010 new-issue allocation profile by geography
NBAD '15 NBAD '15
Insurance/Pension
NBAD '15
Chart 18: Middle East 2010 new-issue allocation profile by investor type
BSFR '15 BSFR '15 BSFR '15
KIPCO '20 KIPCO '20 KIPCO '20

ME
AKBNK '15 AKBNK '15 AKBNK '15
Retail/PB
BURGN '20 BURGN '20 BURGN '20

Middle East new-issue bond allocation and performance in 2010
QIB '15 QIB '15 QIB '15
Financials
Financials
Financials
YKBNK '15 YKBNK '15 YKBNK '15

ISDB '15 ISDB '15 ISDB '15
BBK '15 BBK '15 BBK '15
ADIB '15 ADIB '15 ADIB '15
SABBAB '15 SABBAB '15 SABBAB '15
144A eligible bonds
QNB '15 QNB '15 QNB '15
YUKSEL '15 YUKSEL '15 YUKSEL '15

MBPS '15 MBPS '15 MBPS '15
Corporates
Corporates
Corporates
Sources (for Charts 17-19): Bloomberg, Standard Chartered Research

US investors prefer longer-dated quasi-sovereigns; Middle East investors prefer shorter-dated paper
The allocation profiles for the Middle East transactions x Other deals with significant Asian participation in 2010
concluded in 2010 (including two from Turkey) provide included the DUGB 15 and 20, in which Asian private
some interesting insights. banks were big investors, and sukuk transactions from
x US investors seem to prefer the relatively longer-dated Islamic banks, which attracted strong interest from
quasi-sovereign names, including the Qatari quasi- Malaysian Islamic investors.
sovereign complex, IPIC and Bahrain sovereign paper.
x European investors have taken up the slack in Reg-S- Last year’s two Turkish transactions attracted strong
only issues of similar profile, with prime examples European participation. The AKBANK 15 found favour with
including the MUMTALAK 15, SABIC 15, and DUGB US investors as well.
15 and 20.
x Middle East investors seldom venture into maturities of Looking at allocations by investor type in the four Middle East
more than 5Y given the absence of traditional long- sectors we have evaluated, a distinctive pattern emerges:
only asset managers and insurance companies. The
x Asset managers and hedge funds were more prominent
BURGN 20 and QATARI 20 are the exceptions.
investors in the quasi-sovereign bond issues.
x Middle East investors also seem to prefer bank paper
x Banks were more prominent as an investor class in the
which gets placed with local banks.
financials.
x Asian investors are becoming increasingly active in the
Middle East space, though their participation remains x Insurance and pension funds were less prominent
relatively small. Saudi British Bank’s USD 600mn investors in the Middle East.
transaction in 2010 was one exception, possibly due to x With the exception of a handful of deals (such as the
HSBC’s 40% stake in the bank. DUBAI 15 sovereign issue), retail and private banking
investors were conspicuous in their absence.
Expected supply and redemptions in 2011

GCC 2011 redemptions are unevenly distributed
2011 bond redemptions for the GCC region total around sovereign issuance from this calculation). Abu Dhabi and
USD 11.9bn, with the banking sector representing the Dubai dominate, with combined expected issuance of USD
majority (USD 7.3bn). In terms of geography, Abu Dhabi 18.6bn. By sector, we expect quasi-sovereign issuers to
(USD 5.4bn) and Dubai (USD 2.3bn) have large continue to dominate new issues, with large bond issues
redemptions, mainly from the banking and quasi-sovereign from quasi-sovereigns domiciled in Qatar and Saudi
sectors. The Saudi banks also have large redemptions of Arabia, as well as Abu Dhabi and Dubai. The financial
USD 1.5bn due in 2011. sector is also expected to be a large issuer, though net
issuance will be marginal given large maturities. Table 1 at
We expect total issuance of around USD 33.5bn from the the end of this section shows expected supply at the
GCC region in 2011 (we have excluded non-GCC individual issuer level.
Chart 20: GCC expected redemptions of USD 11.9bn Chart 21: Qatar and Abu Dhabi to see issuance
GCC expected redemptions in 2011 by quarter GCC expected issuance/redemptions in 2011 by country
6 15
5 10
5
USD bn
4
USD bn
3 0
2 -5
1 -10
Abu Qatar Dubai Saudi Bahrain Kuwait Oman
0 Dhabi
Q1 Q2 Q3 Q4 Issuance Redemptions Net issuance
6
32
Abu Dhabi and Dubai likely to be the dominant issuers among GCC sovereigns
Dubai and Abu Dhabi are likely to dominate this year’s requirements, acquisition financing and capital expenditure.
expected GCC sovereign issuance of USD 5.0bn. Abu Quasi-sovereigns from Qatar, Dubai and Saudi Arabia are
Dhabi’s expected USD 1.5bn issue is motivated by the need also likely to be prominent issuers. Almost 45% of expected
to set a long-dated benchmark, while Dubai is likely to issue quasi-sovereign issuance is expected to be from new entities
USD 1.5bn in order to fund its budget gap. In the quasi- in the infrastructure and non-petroleum industrial sectors,
sovereign space, we expect Abu Dhabi to be the leading which should support the diversification of these economies.
issuer, with USD 8.0bn in issuance to meet refinancing
Chart 22: Sovereign issuance expected to be high Chart 23: High net issuance for quasi-sovereigns
GCC expected issuance/redemptions in 2011 by sovereigns GCC expected issuance/redemptions in 2011 by quasi-
sovereigns
2.0 10
8
1.5
6
1.0
USD bn
USD bn
4
0.5 2
0
0.0
-2
-0.5 -4
Abu Dhabi Dubai Qatar Bahrain Abu Dhabi Qatar Dubai Saudi Bahrain
GCC financials are expected to see net redemptions in 2011

While we expect supply of c.USD 8.3bn from the GCC exception. The Saudi banking sector remains liquid, and new
financial sector in 2011, net supply is likely to be flat given issuance is likely to be limited to the refinancing of upcoming
large redemptions. The bulk of the issuance in the space is maturities. Bahrain’s banking sector, with its large wholesale
expected to be for refinancing of upcoming maturities. Qatar, banks, may be another pocket of issuance in the GCC
where banks are still growing strongly, is the only notable space.
Chart 24: Financial issuance likely to be opportunistic Chart 25: Limited corporate issuance in the GCC
GCC expected issuance/redemptions in 2011 by financials GCC expected issuance/redemptions in 2011 by corporates
3 0.6
2 0.4
1 0.2
USD bn
USD bn
0.0
0
-0.2
-1
-0.4
-2
-0.6
-3
-0.8
Abu Qatar Saudi Bahrain Dubai Kuwait
Saudi Dubai Abu Dhabi Bahrain
Dhabi
Corporates are less prominent issuers than quasi-sovereigns in the GCC

The non quasi-sovereign corporate sector is still a small Having said that, we expect a few first-time issuers in this
portion of the GCC bond market, reflecting the absence of space to tap the USD market in 2011. Apart from these new
large, independent corporates with strong businesses. names, we could also see refinancing-related issuance from
7
33
Saudi Arabia and Dubai. While this sector is relatively small could drive portfolio returns in the current environment of low
in the context of the overall GCC bond market, we expect fixed income returns.
alpha returns through fundamental value discovery, which
Chart 26: Sovereign, quasi-sovereign and corporate redemptions in GCC (bond maturity profile)
14
12
10
8
USD bn
0
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Abu Dhabi Bahrain Dubai Kuwait Oman Qatar Ras-al-Khaimah Saudi Sharjah
Note: Excludes callable bonds; Includes USD 20bn bond issued by Dubai and subscribed by Abu Dhabi;
Sources: Bloomberg, Standard Chartered Research
Sovereign, quasi-sovereign and corporate redemptions are back-ended

The maturity profile for GCC sovereign, quasi-sovereign and needs fall within this window. The maturity profile of the
corporate issuers differs from that of the financial sector over financials is very different. Redemption volume is relatively
the next five years (through the final quarter of 2015). front-loaded through the end of 2012, followed by a lull until
Redemptions in the sovereign, quasi-sovereign and the end of Q2-2014 before redemptions pick up again. While
corporate sectors are back-loaded for the most part, and are Abu Dhabi financial-sector redemptions are evenly
relatively well contained until Q4-2013. Except for an distributed throughout the five-year period, redemptions out
average of around USD 4.0bn in Q3 and Q4-2012 and of Dubai and Saudi Arabia are front-loaded. Those from the
another brief spike in redemptions to USD 4.4bn in Q2-2013, Qatar and Oman financial sectors are back-loaded, with the
redemptions average USD 2.0bn or less through the end of bulk of redemptions from these two countries occurring in
2013. It is only after 2013 that redemptions pick up sharply, 2015. By volume, the largest quarterly amount of financial-
with 2014 seeing the bulk of the maturities. More sector redemptions for the GCC as a whole occurs in Q4-
significantly, the 2014 redemptions are concentrated in 2015, at USD 4.6bn.
Dubai, Abu Dhabi and Qatar, whose biggest refinancing
Chart 27: Financial redemptions in GCC (bond maturity profile)
3
USD bn
0
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Abu Dhabi Bahrain Dubai Kuwait Oman Qatar Saudi
Note: Excludes callable bonds; Sources: Bloomberg, Standard Chartered Research
8
34
Flows into Middle East are on the rise

Asia and Middle East allocations grow within the overall EM space
Emerging markets as an asset class came into their own in investors. Thus, even a small shift in fund manager allocations
2010. As a consequence, EM bond funds attracted sizeable towards the GCC region can have a large positive impact on
inflows in excess of USD 53.5bn during the year. Within the regional bond-market performance. With the world’s attention
EM space, the Middle East and Asia have continued to currently focused on the Middle East, once the unrest ceases,
increase their shares of inflows and flows to both regions have we believe investors will look to buy on dips as they see the
grown strongly, even though they still lag the larger EM space Middle East in a more positive light and redirect more of their
in terms of overall allocations. It is important to note that the flows to the region.
GCC region remains an off-index investment for most index
Chart 28: EM bond funds saw significant inflows in 2010 Chart 29: Middle East allocations have been rising
Cumulative flows into EM bond funds (2010) Allocation profile of EM bond funds
60 60
50
50
40
40
30
%
USD bn
30 20
20 10
0
10
2005 2006 2007 2008 2009 2010
0 Emerging Asia Emerging Europe
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Latam Middle East
Sources: EPFR Global, Standard Chartered Research Sources: EPFR Global, Standard Chartered Research
Table 1: Expected issuance in 2011

H1 H2
Credit Comments
(USD mn) (USD mn)
Sovereign
Abu Dhabi 0 1,500 Has a maturity coming due in 2012; issuance would be primarily to set a new long-
end benchmark; Abu Dhabi did an NDR in Sep 2010
Algeria 0 0 Unlikely to come to the market
Bahrain 0 1,000 Looking to tap the market in early 2011
Dubai 0 1,500 Expected to come to the market to fund budget gap; announced budget deficit is
USD 1bn
Egypt 0 0 Unlikely to come to the market
Kuwait 0 0 Unlikely to come to the market
Lebanon 1,000 1,000 Has a maturity coming due in May 2011; already issued USD 265mn
Morocco 0 0 Unlikely to come to the market
Oman 0 0 Unlikely to come to the market
Pakistan 0 0 While fiscal deficit remains large, Pakistan is unlikely to be in a position to tap the
international bond markets and will depend primarily on multilateral/bilateral assistance
Qatar 0 1,000 Could possibly come to the market later this year to issue a benchmark
Ras-al-Khaimah 0 0 Unlikely to come to the market
Saudi Arabia 0 0 Unlikely to come to the market
Tunisia 0 1,000 While Tunisia must fund its fiscal deficit, political turmoil could delay funding plans
this year
Turkey 2,000 2,000 Expected to come to the market to fund budget gap; has already issued USD 1bn
9
35
H1 H2
Credit Comments
(USD mn) (USD mn)
Quasi-sovereigns
Abu Dhabi
TAQA 0 1,000 Refinanced 2011 maturities at the end of 2010; could look to refinance USD 1.5bn
2012 bond
Aldar Properties 0 0 Unlikely to come to the market
Dolphin Energy 0 500 May look to tap the market to refinance existing debt
IPIC 2,500 0 Looking to issue to fund CEPSA acquisition; issuance will continue to be largely
acquisition- and refinancing-driven
Mubadala 0 1,000 Has maturities of c.USD 2.4bn in 2011-12, large capex needs; could issue to
refresh benchmarks
TDIC 0 1,000 Issuance to be capex-driven
Others 0 2,000
Dubai
DIFC Investments 0 0 Unlikely to come to the market
DP World 0 1,250 Could look to refinance USD 3bn facility maturing in 2012
DEWA 0 1,000 Issuance to be capex- and refinancing-driven (maturities include a USD 2.2bn loan
in 2012 and a AED 3.2bn sukuk in 2013)
DHCOG 0 0 Unlikely to come to the market
JAFZ 0 0 Unlikely to come to the market
Others 500 1,000
Qatar
Nakilat Inc. 0 0 Unlikely to come to the market
Qtel 0 0 Unlikely to come to the market
RasGas 0 0 Unlikely to come to the market
Others 1,000 3,000
Other
Mumtalakat 0 500 Could look to refinance USD 1.7bn of debt maturing between 2011-14
SABIC 0 1,000 Could look to refinance 2012 maturities
Others 0 2,000
Financials
Abu Dhabi
Abu Dhabi Commercial 200 400 Likely to tap the non-USD market to meet USD 1.8bn (equiv.) in refinancing of both
Bank loans and bonds; has almost USD 1.8bn (equiv.) of refinancing of loans and bonds in
2011, with USD 1.4bn (equiv.) in foreign currencies. These figures exclude USD
362mn of a LT2 callable in May 2011 which we do not expect the bank to call
Abu Dhabi Islamic Bank 0 350 Could opportunistically tap the non-USD Islamic market; has USD 800mn bond
refinancing in Q4-2011
First Gulf Bank 0 400 FGB only has a USD 150mn loan refinancing in 2011 but could opportunistically
tap the market; has almost USD 1.7bn (equiv.) maturing across both loans and
bonds in 2012
National Bank of Abu 0 750 No refinancing of term debt due in 2011, but could issue to fund future growth;
Dhabi NBAD has a GBP 350mn bond refinancing in February 2012
Others 500 0
Bahrain
Arab Banking Corp. 0 0 Unlikely to come to the market in 2011; has a USD 277mn bond maturity in Q3-
2011
BBK 0 0 Unlikely to come to the market in 2011; has a USD 500mn bond maturing in March
2011
Gulf International Bank 0 400 Could opportunistically tap the market to refinance USD 350mn loan maturing in
2011; has a USD 350mn loan maturing in 2011 and almost USD 1.8bn of loans
and bonds maturing in 2012
Others 500 0
10
36
H1 H2
Credit Comments
(USD mn) (USD mn)
Dubai
Dubai Islamic Bank 300 0 Could potentially tap the non-USD Islamic market; does not have refinancing of
term debt in 2011 but has c.USD 650mn of bonds maturing in March 2012 and
could opportunistically tap the MYR market
Emirates NBD 0 500 Could opportunistically start pre-funding for 2012 in non-USD; has slightly more
than USD1bn in bond maturities in 2011 and USD 2.2bn (equiv.) in 2012
Mashreqbank 0 0 Unlikely to come to the market; USD 300mn bond maturity in April 2011, USD
370mn of a callable LT2 in January 2012
Kuwait
Burgan Bank 0 0 Unlikely to come to the market in 2011; no material refinancing due in 2011
Gulf Investment Corp. 0 300 Has USD 535mn (equiv.) of bonds maturing in May 2011
Kuwait Projects Co. 0 500 Could opportunistically tap the market; has a USD 350mn bond maturity in April
Holdings 2011 and USD 340mn (equiv.) of loan maturities over the year
Qatar
Commercial Bank of Qatar 0 750 Has a USD 500mn bond maturity in November 2011
Doha Bank 0 500 Doha Bank doest not have refinancing of term debt in 2011, but it could
opportunistically tap the market; does not have refinancing of term debt in 2011
(excluding USD 210mn of a LT2 callable in December 2011, which we do not
expect the bank to call)
Qatar Islamic Bank 0 0 Unlikely to come to the market; doest not have refinancing of term debt in 2011
Qatar National Bank 0 0 Unlikely to come to the market, unless opportunistically; doest not have
refinancing of term debt in 2011
Others 0 1,000
Saudi Arabia
Arab National Bank 0 0 Unlikely to come to the market in 2011; does not have refinancing of term debt in
2011 (excluding a USD 500mn LT2 callable in December 2011)
Banque Saudi Fransi 0 400 Could opportunistically tap the market; has a loan refinancing of USD 183mn in
September 2011
Riyad Bank 0 0 Unlikely to come to the market in 2011; has a USD 500mn bond maturing in May
2011
Samba Financial Group 0 0 Unlikely to come to the market in 2011; has a USD 500mn bond maturing in May
2011
Saudi British Bank 0 500 Could opportunistically tap the market; has a EUR 325mn bond maturing in April
2011
Corporates
Oman
MB Petroleum Services 0 0 Unlikely to come to the market
Saudi Arabia
Dar Al-Arkan 0 500 Could look to refinance USD 1bn 2012 sukuk
Turkey
Yüksel Inúaat AS 0 0 Unlikely to come to the market
Others
Others 0 500
Source: Standard Chartered Research
11
37
Middle East bond valuations – Attractive as ever

Analysts: Vijay Chander (+852 3983 8569), Sandeep Tharian (+44 20 7885 5171)
The Middle East offers value following spread widening in wake of regional unrest
Tightening trend on Middle East cash bonds upset by regional unrest
Market sentiment in the Middle East generally improved Towards the end of 2010, sentiment towards the region was
throughout 2010. Early 2011 has seen an abrupt negative on a clearly improving trajectory, as demonstrated by the
shift in sentiment, largely as a knee-jerk reaction to the significant pick-up in bond issuance in Q4-2010. Investors
tensions unfolding in the region. However, once markets were increasingly differentiating between credits and
discount the fact that the unrest is unlikely to spread further, focusing on standalone credit quality. While recent events
and particularly that countries like the UAE are likely to have hurt sentiment towards the region, causing spreads to
remain calm, spreads should start compressing again. widen, we expect investors to continue to differentiate
between credits – and use the current weakness to go long
the region’s fundamentally stronger names.
Chart 1: Dubai complex yield Chart 2: Abu Dhabi complex spread
13 350
300
11
250
Z-spread (bps)
9 200
%
7 150
100
5
50
3 0
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
Sovereigns (3.8) Quasi-sovereigns (4.8) Financials (NA) Sovereigns (3.4) Quasi-sovereigns (4.8) Financials (3.5)
Note: Dubai financials are FRNs; Average duration given in brackets; Note: Average duration given in brackets
Source: Standard Chartered Research Source: Standard Chartered Research
All sectors performed well throughout most of 2010, in widened out on the back of the regional unrest. It is only in
particular in H2. In the Dubai space, all three sectors – Qatar that the spread differentials across sectors follow the
sovereigns, quasi-sovereigns and financials – have traded global norm – i.e., sovereigns are the tightest, followed by
in line with each other for the entire period since the quasi-sovereigns, with financials trading the widest. In Abu
beginning of 2010, except for the past month or so, when Dhabi, quasi-sovereigns trade wider than financials, while
financials outperformed sovereigns and quasi-sovereigns. in Dubai, financials are the tightest. One reason for this is
This is largely because they are short-dated FRNs, where that all the Dubai financials are short-dated FRNs. In terms
the pull-to par effect has dominated. In Abu Dhabi, while of the spread differential between sovereigns and quasi-
quasi-sovereign and the financial-sector spreads have sovereigns, higher-rated GCC quasi-sovereigns such as
narrowed versus the sovereigns and are unlikely to tighten those from Abu Dhabi and Qatar are trading relatively wide
further, the quasi-sovereigns continue to be good proxies to the sovereign, while in lower-rated Dubai, the quasi-
for the sovereign. sovereigns are quoted inside the sovereign. Both DP World
and DEWA (the two Dubai quasi-sovereign names
In a pattern similar to that seen in Dubai and Abu Dhabi, evaluated here) trade inside the sovereign, reflecting
Qatar sovereigns, quasi-sovereigns and financials all investor confidence in their strong standalone balance-
traded tighter throughout 2010 and have only recently sheet strength.
12
38
Chart 3: Qatar complex spread Chart 4: Sovereign/quasi-sovereign spread differential
500 140
120
400 100
Z-spread (bps)
80
Z-spread (bps)
300 60
40
200 20
0
100
-20
-40
0
Abu Dhabi
Qatar
Dubai
Brazil
Russia
Korea
Malaysia
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
Sovereigns (7.2) Quasi-sovereigns (5.6) Financials (4.5)
Note: Average duration given in brackets; Source: Standard Chartered Note: Comparable bonds of similar maturities used; Source: Standard
Research Chartered Research
GCC bonds deliver mixed risk-adjusted returns

Dubai quasi-sovereigns tightened in the most, but Abu Dhabi sovereigns are less volatile
Evaluating GCC performance across key sectors, Dubai duration. The Dubai complex suffered the highest volatility, as
quasi-sovereigns tightened in the most in 2010 (162bps), indicated by the size of the bubble in the chart. The Abu Dhabi
followed by Qatar financials (85bps) and Abu Dhabi quasi- quasi-sovereigns held up relatively well on a volatility basis
sovereigns (64bps). While Dubai quasi-sovereigns (fundamentally weaker names like TAQA were well supported
outperformed on a spread basis (attributable to the fact that by strong technicals), while Qatar quasi-sovereigns
they were at their wides after the Dubai World crisis), they underperformed. Qatar-based financials were the strongest
were the worst performers on a risk-adjusted basis – as shown performers on a risk-adjusted basis, with Abu Dhabi sovereign
in Chart 6, where we plot risk-adjusted returns versus average bonds in second place.
Chart 5: GCC spread performance since January 2010 Chart 6: GCC risk-adjusted returns for 2010
50 4
Spread movement (bps)
0 QA fin
Risk-adjusted return
3
AD sov
-50
2 AD quasi
DU sov QA sov
-100
AD fin
-150 1
DU quasi QA quasi
-200
0
AD fin
AD quasi
DU quasi
QA fin
QA quasi
AD sov
DU sov
QA sov
1 2 3 4 5 6 7 8 9
Average duration
AD, DU and QA stand for Abu Dhabi, Dubai and Qatar, respectively; Note: Risk-adjusted return calculated as total return over price
Source: Standard Chartered Research volatility; Volatility indicated by bubble size; AD, DU and QA stand for
Abu Dhabi, Dubai and Qatar, respectively; Source: Standard
Chartered Research
Recent widening in ME sovereigns and financials provides a good entry point

ME financials have been consistently more volatile than Asian financial-sector issues
Financial-sector spreads in the Middle East converged with point where Middle East senior financial names are 66bps
those in Asia at two points over the past year – in May-June wider than spreads currently prevailing in Asia (in early 2010,
2010 and earlier this year. The recent unrest in the Middle Middle East senior financial names were over 100bps wider).
East has caused Middle Eastern spreads to widen out to the In the CDS space, the clear underperformers have been
13
39
Bahrain (which has been hit by unrest) and Saudi Arabia is not susceptible to the same political pressures seen in
(which has widened out on regional concerns). At these some parts of the Middle East.
levels, we believe that Saudi Arabia offers value given that it
Chart 7: Financial senior spreads in Asia and Middle East Chart 8: Select Middle East CDS performance
350 350 700

300 600
300
250 500
Z-spread (bps)
250 200 400
bps
150 300
200 100 200
150 50 100
0 0
100 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
Abu Dhabi Qatar Bahrain
Middle East Asia Saudi Dubai (RHS)
Source: Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
GCC bonds expected to deliver modest returns

Spread tightening can be expected once the current wave of unrest ends
In order to assess expected returns for Middle Eastern that are short-dated) and excluded issuers which are outliers.
credits over the next 12 months, we have attempted to We then looked at the weighting of each of these sub-sectors
create an index of GCC credits that includes 11 sub-sectors. in our index and assessed the average spreads and duration
We divided Abu Dhabi and Qatar credits into sovereigns, of each of the index components. Based on where these
quasi-sovereigns and financials (a total of six sub-sectors), credits currently trade, we have estimated how much
and grouped Dubai names into sovereigns and quasi- spreads will likely tighten over the next 12 months, which
sovereigns (two sub-sectors; Dubai financials have been then allows us to calculate expected total returns for each
excluded due to the lack of fixed-rate bonds). Given the low sub-sector. Finally, since we do not expect US Treasuries to
number of bonds in Saudi Arabia, Bahrain and Kuwait, we make any contribution to total returns, we have not
combined sovereigns, quasi-sovereigns and financials from considered the effect of Treasuries in our return calculations
each of these three countries into one category (three sub- (we believe that US Treasuries will end the 12-month period
sectors). We included only fixed-rate bonds (except those at or near where they are currently quoted).
Table 1: Expected performance within the GCC bond space

Spread Yield Duration Weight Expected spread Expected total
Sub-sector
(02-Mar-11, bps) (02-Mar-11, %) (02-Mar-11) (02-Mar-11, %) tightening (bps) return (%)
Abu Dhabi sovereign 124 3.0 3.4 6.2 15 3.51
Abu Dhabi quasi-
242 4.7 4.8 22.5 25 5.94
sovereigns
Abu Dhabi financials 206 4.0 3.5 5.2 25 4.87
Dubai sovereign 495 7.4 3.8 4.9 75 10.24
Dubai quasi-
468 7.3 4.8 4.6 50 9.71
sovereigns
Qatar sovereign 165 4.5 7.2 17.6 25 6.25
Qatar quasi-
208 5.0 5.6 21.1 30 6.74
sovereigns
Qatar financials 271 5.2 4.5 5.9 25 6.36
Saudi credits 274 4.7 3.6 5.0 25 5.60
Bahrain credits 309 5.5 4.4 5.0 45 7.44
Kuwait credits 450 7.6 5.7 2.2 35 9.61
Total 100.0 30 6.51
Note: Fixed-rate bonds are used for the analysis above; Excludes short-dated bonds and outliers; Source: Standard Chartered Research
14
40
Looking at each of the individual sectors with a greater names. Expected supply in 2011 is high for both Abu Dhabi
degree of granularity, we believe that the highly rated Abu and Qatar, which could also weigh on spread performance.
Dhabi sovereigns, quasi-sovereigns and financials will
tighten between 15bps and 25bps over the next 12 months. We expect a similar spread performance for Bahraini and Kuwaiti
In Dubai, we expect the sovereign and quasi-sovereigns to credits over the next 12 months. The long-duration credits (Qatar
tighten in 50-75bps. Given that Dubai quasi-sovereigns such sovereign, Qatar quasi-sovereigns and Kuwait credits) could
as DP World and DEWA trade inside the sovereign, the suffer from bouts of volatility from a total return perspective since
expected spread compression for the quasi-sovereign sector they are more sensitive to fluctuations in rates.
is assumed to be lower. With regard to the Abu Dhabi quasi-
sovereigns and financials, we see relatively low spread The largest index weightings are accorded to the Abu Dhabi
compression potential given the strong relative performance and Qatar quasi-sovereigns and the Qatar sovereign, in that
already witnessed over the past year. order. Given our expectations of supply from the Abu Dhabi
and Qatar quasi-sovereigns, we expect their weightings to be
Similarly, we expect Qatar credits to tighten by 25-30bps over maintained, if not increased.
the next 12 months, since these are also relatively low-beta
Value in the Middle East USD bond space
Table 2: Recommendations for the Middle East credit space in 2011

(1)
Sector Recommendation Rationale Picks Pans
Abu Dhabi
Sovereigns Underweight Although Abu Dhabi sovereign bonds are cheap for their rating, ADGB 19 ADGB 14
the short end of the Abu Dhabi sovereign curve is trading tight
versus the long end. With only one bond in the long-end space
offering relative value, we remain underweight the sector.
Quasi-sovereigns Market weight The spread differential between sovereigns and quasi- MUBAUH 19
sovereigns mostly played out over the course of 2010, but quasi- DOLNRG 19
sovereigns offer marginal value over the sovereign and remain a TAQAUH 12
good proxy for Abu Dhabi risk.
Financials Market weight The relative value between National Bank of Abu Dhabi and the NBADUH 14 ADIB 15
sovereign is now compelling, following the relative widening in the
former. While there is strong demand for Islamic debt, we believe the
recent spread tightening in the Islamic names is overdone.
Dubai
Sovereigns Overweight The Dubai sovereign curve has widened recently on unrest in the DUGB 20
Middle East. Given continued interest in high-yielding names
from emerging markets, we expect the Dubai sovereign to
outperform from a total return perspective.
(2)
Quasi-sovereigns Overweight The quasi-sovereigns in Dubai trade tighter than the sovereigns DPWDU 17
and offer lower relative value. However, stronger standalone
names such as DP World appear attractive.
Qatar
Sovereigns Market weight Qatar is one of the most stable credits in the region. Qatar QATAR 20
sovereign spreads have widened slightly on the back of recent
unrest in the Middle East. The longer-dated Qatar bonds offer
good value for its rating on a spread and total return basis.
Quasi-sovereigns Market weight While the spread differential between sovereigns and quasi- QATDIA 15 RASGAS 19
sovereigns is not that attractive, explicitly guaranteed Qatari Diar
bonds offer good pick-up over the sovereign.
Financials Market weight While there is strong demand for Islamic debt, the relative value COMQAT 14 QIBK 15
play between Commercial Bank of Qatar and Qatar Islamic Bank
is appealing.
(3)
Others
Saudi credits Market weight While the Saudi credits do not offer value on a relative basis and SABIC 15
could be susceptible to further supply, strong credits offer good SABBAB 15
diversification from other credits in the Middle East.
Bahrain credits Market weight Bahraini names have borne the brunt of the spread widening. BBK 15
Although there are limited ways to express a view, we believe
the best value lies with the banks.
Kuwait credits Market weight Kuwaiti credits have widened recently as a result of regional
unrest. On a relative basis, we see limited value.
Note: (1) Our recommendations are in the context of the GCC credit universe – see Table 1 above for the relative weights of the respective sub-
sectors; (2) Includes DP World and DEWA. In the absence of fixed-rate bonds from the Dubai financial space, we exclude the sector from this
analysis; (3) For Saudi Arabia, Bahrain and Kuwait credits, given the relatively low number of bonds, we combine sovereigns, quasi-sovereigns
and financials; Source: Standard Chartered Research
15
41
Middle East sovereign CDS and cash bonds are the cheapest across ratings classes
A close analysis of sovereign scatter plots of duration versus lower-rated Vietnamese and Sri Lankan sovereign paper of
Z-spreads across both cash bonds and CDS reveals that similar maturity. Turning to CDS, AA-rated Abu Dhabi and
Middle East names are trading well wide of their sovereign Qatar are trading well wide of single-A-rated Malaysia and
counterparts across the world. They are accordingly among Korea and in line with the BBB-rated Latam countries.
the cheapest credits and offer the best value in the sector. Furthermore, Saudi Arabia, which is rated AA- and currently
This is true across the credit spectrum, from highly rated quoted at 140bps, is trading well wide of single-A-rated Asian
credits such as Abu Dhabi and Qatar to lower-rated issuers names like Malaysia and Korea, Thailand (BBB+), and the
such as Dubai. Among the cash bonds, the names we entire Latam BBB-rated space. While it is true that some of the
highlight among the higher-rated issues are the AA-rated perceived value is a ‘risk premium’ for the further tensions
ADGB 19 and QATAR 20, which are trading more than 30bps markets are discounting in the Middle East, we believe that the
wider than BBB-rated Latam sovereigns such as Mexico, current unrest is unlikely to affect GCC countries such as the
Brazil, Peru and Colombia. At the other end of the ratings UAE and Saudi Arabia. Therefore, investors should consider
scale, the DUBAI 20 is also trading well wide of its peers given going long select Middle East sovereign issues (such as the
its implied shadow rating in the BB range. By way of ADGB 19, one of our picks) on the back of the current
comparison, the DUBAI 20 is trading significantly wider than weakness impacting this sector.
Chart 9: Benchmark EM sovereign cash bonds
600
DUB A I 20*
500
UKRA INE 20
400
Z-spread (bps)
VIETNM 20
300 SRILA N20
200 A B U DHA B I 19 P OLA ND 19 RUSSIA 20 INDON20

P ERU 19 TURKEY 21
QA TA R 20 KOREA 19 COLOM B IA 19N
100 M EXICO 20 B RA ZIL 21 P HILIP 20
0
AA A A- BBB BBB- BB BB- B+ B-
S&P Rating
* Implied shadow rating for Dubai; Source: Standard Chartered Research
Chart 10: 5Y EM sovereign CDS
500
DUB A I*
400
VIETNA M
B A HRA IN
Spread (bps)
300
200 KA ZA KHSTA N TURKEY

P OLA ND INDONESIA
SA UDI A RA B IA
A B U DHA B I THA ILA ND RUSSIA COLOM B IA P HILIP P INES
KOREA M EXICO P ERU
100 QA TA R CHINA M A LA YSIA B RA ZIL
0
AA AA- A A- BBB+ BBB BBB- BB BB-
S&P Rating
* Implied shadow rating for Dubai; Source: Standard Chartered Research
Dubai appears cheap on a duration-adjusted basis
16
42
We have an Overweight recommendation on the Dubai in other regions. On a duration-adjusted basis, we like the DUGB
sovereign space, based on the fact that across the curve, the 20, which is one of our picks. We have already highlighted the
Dubai sovereign is trading cheap relative not just to its Middle higher-rated ADGB 19 as a pick. The QATAR 20 sovereign is
Eastern peer group (see Chart 11 below), but also to EM peers also one of our picks among the higher-rated names.
Chart 11: GCC sovereign bonds
600
DUGB 20
DUGB 13 FRN DUGB 15
500
Z-spread / discount-margin (bps)
DUGB 14
DUGB 13 (AED)
400
DUGB 14 FRN BAHRAIN 20
300
BAHRAIN 14 QATAR 30
200 BAHRAIN 13 FRN RAK 14 QATAR 19
QATAR 40
QATAR 15 ADGB 19 QATAR 20

QATAR 14
100 ADGB 12 ADGB 14
0
0 2 4 6 8 10 12 14
Duration/maturity (yrs)
Dubai quasi-sovereigns also appear cheap, justifying our Overweight position

Among the quasi-sovereigns, we have a Market weight number of the Abu Dhabi-based quasi-sovereigns, despite the
position in Abu Dhabi and Qatar, while we have an Overweight fact that spread compression versus the sovereign has largely
position in Dubai. On a duration-adjusted basis, our top pick is played out. Names we like include the TAQAUH 12 (which
the DPWDU 17, which is currently quoted at a Z-spread of offers a good yield for short-duration paper), the DOLNRG 19
over 400bps. Although the bond trades inside the sovereign, and the MUBAUH 19. Finally, in Qatar, we like the explicitly
we still think it offers value in the regional and global context – guaranteed QATDIA 15, which offers value versus the
and remains attractive given its outright yield level. We like a sovereign given still-wide relative spreads.
Chart 12: GCC quasi-sovereign bonds
550
500 DEWA 15 DEWA 20
450
DEWA 16
M UM 15 DPWDU 17
400 DPWDU 37
Z-spread (bps)
350
300 TDIC 14
TAQA 18 TAQA 36
TAQA 12 TAQA 13 TAQA 17 TAQA 19
TAQA 14
250 DOLNRG 19 QTEL 21
NAKILAT 6.2 33
QTEL 25
TDIC Sukuk 14 QTEL 19
SABIC 15 INTPET 20 RASGAS 56.3 27 NAKILAT 6.0 33
200 QTEL 14RASGAS 14 WAHA QTEL
20
16 M UB 19
RASGAS 8.2 14 QATDIA 20 RASGAS 5.8 27
M UB 14 INTPET 15 RASGAS 19
150 QATDIA 15
100
0 2 4 6 8 10 12 14
Duration (yrs)
Note: Excludes DUBAIH 12, DIFC 12 and JAFZ 12 and select non-benchmark names; Source: Standard Chartered Research
17
43
Select financials offer absolute value; there are a handful of relative value plays
In the financials space, we have a Market weight position in Dhabi. We continue to believe that the spread differential
both the Abu Dhabi and Qatar bank issuers. In Abu Dhabi, between the NBADUH 14 and the ADCB 14 remains too
the spread differential between National Bank of Abu Dhabi wide, though we see little catalyst for it to tighten. In Qatar,
and the sovereign has widened from a tight of around 50ps we reflect our Market weight position in the financials space
to almost 85bps. We recommend a relative value play where via exposure to the COMQAT 14. Finally, in Bahrain, we
investors switch out of the ADGB 14 and buy the NBADUH think the BBK bonds offer the best value relative to other
14 for a spread pick-up of 85bps, for an issue of similar issuers.
duration. NBAD is 75% owned by the government of Abu
Chart 13: GCC financial bonds
600 EBIUH DEC 16 FRN

EBIUH OCT 16 FRN M ASREQ 17 FRN
KIPCO 20
500 KIPCO 16
Z-spread / discount-margin (bps)
ADCB 16 FRN BBK 17 FRN

400 BBK 15 BURGN 20
AKBNK 15 ISCTR 16
300 ADCB 14
COM QAT 19
COM QAT 14 SABBAB 15

200 NBADUH 15
QNB 15
ADIB 15
NBADUH 14
BSFR 15 QIB 15
100
0
3 3.5 4 4.5 5 5.5 6 6.5 7
Within the Dubai complex, the quasi-sovereigns offer value

While the Dubai quasi-sovereigns are trading tighter than the digit range for very short-dated paper, the risks are high. For
sovereign, strong names like DP World (rated BB by S&P) investors with higher risk appetite, these shorter-dated
offer value on a standalone basis. While the shorter-dated issues might make sense.
DIFCDU 12 and the DUBAIH 12 offer yields in the double-
Chart 14: Dubai complex yields
16
DIFC 12
14
DUBAIH 12
JAFZ 12
12
Yield (%)
10
EM AAR 16 DUGB 20
DEWA 20 DPWDU 37
8
DUGB 13 (AED) DUGB 15
DUGB 13 FRN DEWA 15 DEWA 16
DPWDU 17
6 DUGB 14
DUGB 14 FRN (AED)
DEWA 13 FRN
4
0 2 4 6 8 10 12
18
44
Abu Dhabi quasi-sovereigns across the curve offer value

As we have highlighted above, while the Abu Dhabi Nonetheless, a number of quasi-sovereign issues are trading
sovereign is cheap for its rating (with the exception of the between 50bps and 150bps wide of the sovereign and offer
ADGB 19 at the long end of the curve), all of the other good value. Most of these quasi-sovereigns enjoy sovereign
sovereign bond issues are trading relatively tight. In the support. We like the short-dated TAQAUH 12 and the
quasi-sovereign space too, spread compression between the DOLNRG 19 and MUBAUH 19.
quasi-sovereigns and the sovereign has largely played out.
Chart 15: Abu Dhabi complex spreads
800
700 ALDAR 14
600
500
Z-spread (bps)
400
300 TAQA 12 TDIC 14 ADCB 14 TAQA 18

TAQA 19
TAQA 13
TAQA 14 DOLNRG 19 TAQA 16 TAQA 17
TDIC Sukuk 14 INTPET 20
200 NBADUH 15 WAHA 20
M UB 19
ADGB 19
M UB 14 NBADUH 14 ADIB 15 INTPET 15
ADGB 12
100
ADGB 14
0
1 2 3 4 5 6 7 8
Duration (yrs)
Note: Excludes TAQA 36; Source: Standard Chartered Research
Qatar sovereign is among the most stable credits in the region

We have a Market weight position in all Qatari sectors. Given the explicitly guaranteed QATDIA 15 is trading about 30bps
that the Qatar sovereign is one of the most stable in the wider than the QATAR 15 issue and therefore offers value, in
region, we like the QATAR 20. In the quasi-sovereign space, our view.
Chart 16: Qatar complex spreads
350
300 COM QAT 19
250 COM QAT 14

Z-spread (bps)
QTEL 25
NAKILAT 6.2 33
QTEL 14 RASGAS 20
RASGAS 16 QTEL 19 QTEL 21 RASGAS 6.3 27
QTEL 16 QATAR 30
200 QATDIA 20
NAKILAT 6.0 33 QATAR 40
RASGAS 14 RASGAS 19 RASGAS 5.8 27
QNB 15
QATDIA 15 QATAR 19
QIB 15 QATAR 20
150 QATAR 15
QATAR 14
100
2 4 6 8 10 12 14
Duration (yrs)
19
45
Saudi credits offer diversification benefits

Generally speaking, Saudi Arabian credits are quoted investors – and offers value on those grounds. In the
relatively tight compared to other Middle Eastern issuers. financials space our pick is the SABB 15. Finally, in Bahrain
This has to do with both fundamentals and scarcity value. we like the BBK 15 senior bank bonds. As one of the largest
Although there could be further supply from Saudi Arabia this retail banks in Bahrain, BBK is comparable to ADCB in Abu
year, we expect any potential new issues to attract good Dhabi and COMQAT in Qatar in terms of its importance to
demand given diversification considerations. In our view, a the domestic banking system, in our view, though it is
strong credit like SABIC provides diversification benefits to considerably smaller.
Chart 17: Other bonds within the Middle East
1,000
M BPS 15
YUKSEL 15
800
600
Z-spread (bps)
KIPCO 20
KIPCO 16
M UM 15
400 BBK 15 BURGN 20
AKBNK 15 BAHRAIN 20
ISCTR 16
BAHRAIN 14 SABBAB 15
200
BSFR 15 SABIC 15
0
2 3 4 5 6 7 8
Duration (yrs)
GCC oil and gas names look attractive for their ratings
The main hydrocarbon-sector credits from the GCC are Dolphin (A1/NR) and TAQA (A3/A). We like both the
RasGas, Dolphin Energy and TAQA. These credits look TAQAUH 12 (purely as high-yielding short-dated paper) and
attractive compared with their peers from other emerging the DOLNRG 19.
markets given their higher ratings – RasGas (Aa3/A),
Chart 18: GCC oil and gas spreads versus comparables
350
300 TAQA 36
KZOLKZ 15 TAQA 19
TAQA 12 TAQA 18
TAQA 13 TAQA 14 LUKOIL 19
GAZPRU 18
250
Z-spread (bps)
DOLNRG 19
NAKILAT 6.2 33
RASGAS 20
TNEFT 14 LUKOIL 14 GAZPRU 16 RASGAS 56.3 27
RASGAS 16 NAKILAT 6.0 33
200 TNEFT 18 PETBRA 20
PEM EX 21
RASGAS 14 RASGAS 5.8 27
RASGAS 8.2 14 RASGAS 19
150 TNEFT 12 PEM EX 15 KOROIL15 KORGAS 20

PETBRA 14
PETROL 14S PETROL 19

100
1 3 5 7 9 11
Duration (yrs)
20
46
Middle Eastern banking-sector issues are cheap versus global EM comparables

On a duration-adjusted basis, Middle Eastern banking- the short term. In terms of global comparables, some
sector names are also cheap versus their EM counterparts. Indian banking-sector issues (the ICICI 15, the EXIMBK 15
Among Middle Eastern senior banking credits, on a and BOBIN 15) and Turkish bank issues (the AKBNK 15
duration-adjusted basis, the BBK 15 issue stands out as and ISCTR 16) do appear cheap in absolute yield terms.
particularly cheap, at a Z-spread of 380bps. Among the But on a ratings-adjusted basis, the GCC banks we have
shorter-dated bonds, we like the ADCB 14 on a relative highlighted as our top picks are comfortably ahead given
value basis, and in Qatar, we like the COMQAT 14 bond. their higher ratings (in line with those of their respective
Although we also like the ADCB 14 versus the sovereigns).
NBADUH 14, we see little catalyst for spread tightening in
Chart 19: Middle East bank senior spreads versus comparables
450
400
BBK 15
350
AKBNK 15
300 ISCTR 16
ADCB 14
Z-spread (bps)
ICICI 5.5 15 BOBIN15

250 COM QAT 14 SABBAB 15
EXIM BK15 SANBBZ 4.5 15
200 NBADUH 14 NBADUH 15
BRADES 4.1 15 ADIB 15 QNB 15
EIBKOR 16
BSFR 15 SHNHAN 15
150 BANBRA 4.5 15 QIB 15 BBLTB 15 KDB 16
ACAFP 3.5 15 ANZ 3.125 15
100
BNS 3.4 15 WSTP 3 15
50
0
3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0
Duration (yrs)
21
47
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48
Credit analysis – Sovereigns
Algeria (NR; NR; NR)

Analysts: Shankar Narayanaswamy (+65 6596 8249), Philippe Dauba-Pantanacce (+9714 508 3740)
Credit outlook – stable Key credit considerations

We initiate coverage of Algeria with
x Oil-dependent economy: Algeria’s economy is heavily dependent on
a stable credit outlook. Algeria’s
hydrocarbons (97% of export receipts and 45% of GDP). Growth is likely to
economy and fiscal position are
have reached 4.0% in 2010, driven by the improved outlook for the
strong but highly dependent on the
hydrocarbon sector and a pick-up in demand. However, the country has
hydrocarbon sector. Over the last
generally underperformed relative to its growth potential. Non-hydrocarbon
decade, the government has
growth likely reached 5% in 2010. The hydrocarbon sector has benefited from
maintained prudent fiscal policies
a gradual pick-up in both demand and prices.
and used hydrocarbon surpluses
x Inflation needs to be watched: Inflation has settled in a range higher than
judiciously to build a strong
historical levels (2.5% for 2000-07). It likely reached 5% in 2010, driven by
external position. However, the
food-price pressures and structural economic rigidities such as monopolistic
government has turned
sectors and bans on certain goods. Inflation should revert gradually to trend.
expansionary in the last two years
Algeria’s monetary policy informally targets inflation at 3%. While there is no
as it attempts to diversify the
SOVEREIGNS
official money supply growth target, the central bank closely watches
economy away from the
monetary aggregates. Of late, however, the authorities have preferred to
hydrocarbon sector. Despite recent
control inflation though price controls rather than interest rates.
efforts, structural issues abound.
x Domestic debt dynamics are under control: Aided by strong surpluses
Algeria needs to diversify its
generated by the hydrocarbon sector, the government has successfully
economy and encourage private
reduced public-sector indebtedness, lowering general government debt from
investment to mitigate risks related
more than 60% of GDP in 2000 to less than 10% as of 2010. Expansionary
to high unemployment. This will be
policies in the last two years aimed at boosting investment and diversifying
key to future fiscal and political
the economy have led to a fiscal deficit. The country’s fiscal breakeven oil
stability.
price has increased from USD 34/bbl in 2005 to USD 88/bbl given the
increase in government expenditure.
x External position continues to improve with strong oil prices: Algeria’s
external position continues to improve. Hydrocarbon exports have ensured
Country profile strong current account balances throughout the last decade. This has helped
the country accumulate huge international reserves (including the oil reserve
Algeria, known officially as the fund) – they were close to USD 155bn in December 2010, representing more
People’s Democratic Republic of than four years of imports.
Algeria, is located in Northern Africa, x Financial system is still relatively underdeveloped: The Algerian banking
bordering the Mediterranean Sea to system has the highest government ownership in MENA, at 85%. Capital
the north, between Morocco and markets are underdeveloped, as the authorities have eschewed public debt
Tunisia. Algeria is a secular (the debt/GDP ratio is less than 8%). Credit to the private sector is virtually
democratic state with an elected non-existent, with a ban on all credit outside housing mortgages.
government. The state dominates the x Structural issues abound: The Algerian economy is dominated by the state.
economy. Algeria is highly dependent After pledging to conduct market-friendly reforms in the early 2000s, the
on hydrocarbons. It has the world’s government backtracked and in 2008, foreign ownership of domestic
tenth-largest natural gas reserves
companies was limited to 49%. Since July 2010, it has been mandatory to
and is one of the largest exporters of
give preference to local firms in private- and public-sector bids. The tax
gas. Politics is dominated by the
regime is unfavourable to foreign investors, and restrictions on certain imports
ruling National Liberation Front
remain in place.
(FLN). Directly elected President
x Unemployment remains a big concern: Unemployment is high (10.2% as at
Abdelaziz Bouteflika has been in
end-2009), especially among the youth, and this remains a concern. Algeria
power since 1999 and was last re-
experienced moderate street protests in early 2011. The government
elected in 2009. The president is both
responded by pledging substantial cuts in staple food prices, more subsidies,
the head of state and government.
and a temporary reduction in customs duties and taxes in hopes of
dampening upward pressure on prices.
1
50
Algeria (NR; NR; NR)
Summary of economic indicators Growth rate

%, unless stated 2008 2009 2010F 2011F 5
Economic indicators
Nominal GDP (USD bn) 170.2 139.8 159.0 171.6 4
Population (mn) 34.5 35.0 35.5 36.0
% change
3
GDP per capita (USD) 4,940 3,995 4,477 4,762
Real GDP, change 2.4 2.4 4.0 4.3

2
Inflation (yearly average) 4.9 5.8 5.0 4.5
1
Government finances
Gen. govt. revenue/GDP 47.2 36.2 38.3 38.2 0

2007 2008 2009 2010F 2011F
SOVEREIGNS
Fiscal balance/GDP 9.1 (5.3) (10.0) (8.5)
Real GDP
Primary balance/GDP 8.9 (5.8) (10.3) (8.9)
Gen. (direct) govt. debt

11.5 11.3 12.7 NA
(USD bn)
Current account balance
Gen. (direct) govt.
6.8 8.1 8.0 NA 25
debt/GDP
20
External indicators

34.5 0.4 3.0 3.6 15
(USD bn)
% of GDP
Current account bal./GDP 20.2 0.3 1.9 2.1

10
External debt (USD bn) 4.3 3.6 3.5 NA
External debt/GDP 2.7 2.7 2.2 NA

5
Short-term external
8.2 11.1 5.8 NA
debt/external debt
0
Official FX reserves 2007 2008 2009 2010F 2011F
143.1 149.4 155.0 NA
(USD bn)
Current account/GDP
USD-DZD (end-period) 70.46 71.91 71.75 71.25
FX reserves vs. external debt Government balances
180 12 18
160
8 15
140
120 4 12
100
USD bn
0 9
%
80
60 -4 6
40
-8 3
20
0 -12 0
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
Intl. reserves External debt Govt. bal./GDP Govt. debt/GDP (RHS)
Note: Credit ratings are presented in the following order throughout this report: Moody’s/Outlook; S&P/Outlook; Fitch/Outlook; NR = not rated;
Sources: IMF, Moody’s Investors Service, Standard Chartered Research
2
51
Bahrain (A3/RFD; A-/CWN; A-/Neg)

Analysts: Kaushik Rudra (+65 6596 8260), Nancy Fahim (+9714 508 3627)
Credit outlook – negative Key credit considerations

We have a negative outlook on the
x Economy was showing signs of recovery: In the years leading up to the
sovereign. The country is fast
recent global financial crisis, GDP growth consistently improved in real terms
depleting its oil reserves and needs
– average real annual GDP growth increased from 4.1% between 1996-99 to
to resort to borrowing to fund its
around 7.1% from 2004-07. The economy, however, saw much lower growth
budgetary requirements. Despite
rates in 2009-10. Prolonged social instability is likely to have an adverse
Bahrain’s relatively low level of oil,
impact on Bahrain’s banking system. Banking assets are 10 times the size of
both its fiscal position and its
the economy, and the vast majority of depositors are foreign.
export sector remain highly reliant
x Proactive policy: The authorities were proactive in supporting the banking
on the outlook for the hydrocarbon
system in 2008-10. Accommodative monetary policy, combined with strong
sector. Although the sovereign has
central bank guidance for distressed financial institutions, has again proven
provided strong and timely support
the high quality of Bahrain’s supervisory environment.
to the banking sector, we remain
x Constrained fiscal position: The country’s fiscal position is the weakest
concerned about the size of its total
SOVEREIGNS
among its GCC peers. Bahrain is more likely to borrow in order to fund its
potential contingent liabilities.
expansionary budget (driven by rising current expenditures) – particularly
Finally, Bahrain’s financial centre –
given the rising breakeven oil price in the budget in recent years. Reduced
one of the best in the region, which
fiscal flexibility due to higher breakevens makes the country more vulnerable
was set up to offset the decline in
to potential contingent liabilities, including those from the financial sector. That
the oil sector – faces serious
said, with oil prices likely to remain supportive, we expect the fiscal deficit to
competition from other regional
shrink over the next couple of years.
centres.
x Current account is in surplus but weaker than peers: The current account
surplus averaged 11.2% of GDP between 2004 and 2007, and 10.3% in 2008.
With export earnings coming mostly from oil, the current account has recorded
a healthy surplus in light of the strength of the hydrocarbon sector. After
declining to around 2.7% of GDP in 2009, the current account surplus is set to
increase to around 7.5% of GDP in 2010-11.
Country profile x Reserves do not tell the whole story: Official FX reserves have increased
from the USD 1.5-2.0bn range in the early 2000s to USD 3.0-3.5bn in recent
The Kingdom of Bahrain is the years. Given the strength of its current account position, the country’s
smallest country in the Gulf reserves ended 2010 at around USD 3.2bn (IMF estimates). Bahrain also has
Cooperation Council (GCC) in terms a state holding company, Mumtalakat, which acts as a de facto wealth fund.
of land mass and economic size. An x Depleting oil reserves: The country’s oil reserves have been declining fast.
island in the northern part of the Gulf, Oil and refining still represent around 75% of Bahrain’s export receipts and
it neighbours Saudi Arabia to the 80% of its government revenues, even though the sector constitutes less than
west (with which it shares a 25% of GDP – the smallest figure in the Gulf. Bahrain has stabilised its oil
causeway) and Qatar to the south. It production at around 35 thousand barrels per day (kbd), with reserves
is ruled as a constitutional monarchy estimated at around 125mb (with a time horizon of about 10 years). Bahrain’s
by the al-Khalifa family. It was the refineries have processing capacity five times bigger than the island’s oil
first country to start diversifying its production, with all of the extra crude coming directly from Saudi Arabia.
economy away from oil, forced to do Aluminium is the second major export after oil, and Bahrain has tried to
so by the near-complete depletion of position itself as a strong regional player in the downstream sector.
its hydrocarbon reserves. One of the x The most diversified GCC economy: With oil reserves declining, Bahrain is
factors behind Bahrain’s success has moving away from its reliance on hydrocarbons by establishing a strong
been its vibrant non-oil economy financial sector, which is seen as one of the best-regulated in the region.
focused on the financial sector, Financial services now represent more than a quarter of GDP.
tourism and manufacturing. x Sectarian unrest grabs the headlines: Bahrain enjoys friendly relations with
other GCC countries, in particular Saudi Arabia. Its strong position in Islamic
finance and its proximity to Saudi Arabia are key sources of support.
However, the recent unrest, which has its roots in sectarian politics, needs to
be watched. The authorities have announced cash awards (BHD 1,000) and
various other concessions for every Bahraini family.
3
52
Bahrain (A3/RFD; A-/CWN; A-/Neg)

%, unless stated 2008 2009 2010F 2011F 10
Economic indicators
Population (mn) 0.8 1.0 1.1 1.1
% change
6

4
Inflation (yearly, end-
5.1 2.8 2.5 3.5
period)
2
Government finances
0
Gen. govt. revenue/GDP 32.9 22.6 25.4 24.1 2007 2008 2009 2010F 2011F
SOVEREIGNS
Fiscal balance/GDP 4.5 (10.0) (0.3) (0.4) Real GDP
Primary balance/GDP 5.2 (9.3) 0.3 0.2

(USD bn)
3.2 5.4 7.1 7.2 Current account balance
Gen. (direct) govt. 18

14.7 26.6 32.8 29.9
debt/GDP
15
External indicators
12
% of GDP
2.3 0.6 1.1 2.4

(USD bn) 9
6
External debt (USD bn) 33.6 32.5 30.3 34.1
External debt/GDP 153.3 157.7 139.6 139.8 3

Short-term external
73.0 70.6 66.0 65.4
debt/external debt 0
2007 2008 2009 2010F 2011F
Official FX reserves
3.8 3.8 3.2 2.9
(USD bn) Current account/GDP
USD-BHD (end-period) 0.38 0.38 0.38 0.38
40 6 36
35
3 30
30
0 24
25
USD bn
20 -3 18
%
15
-6 12
10
-9 6
5
0 -12 0
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
Note: Ratings are presented in the following order throughout this report: Moody’s/Outlook; S&P/Outlook; Fitch/Outlook; NR = not rated;
Sources: Moody’s Investors Service, Standard Chartered Research
4
53
Egypt (Ba2/Neg; BB/CWN; BB/RWN)

Analysts: Shankar Narayanaswamy (+65 6596 8249), Nancy Fahim (+9714 508 3627)

We initiate coverage of Egypt with a
x Large and diversified economy, but plagued by structural issues: Egypt
negative outlook given the
has a large and diversified economy, although per-capita GDP is low.
uncertain political situation.
Proactive policy responses and key reforms following the global financial crisis
Structurally, Egypt has a large and
drove economic growth of 5.1% in FY10 (ended June 2010). However, public
diversified economy, though per-
debt has been rising, and is likely to rise further as the government
capita GDP is low. Egypt runs a
implements fiscal stimulus plans to boost the economy. We have cut our FY11
large fiscal deficit owing to a narrow
growth forecast to 3.8% from 5.5% to reflect the likely impact of political
tax base, large subsidies and a
instability on tourism and investment.
bloated bureaucracy. Public debt is
x Chronically high inflation: After peaking at 13.6% in January 2010, CPI
high, although most of it is
inflation slowed to 10.8% as of January 2011, though core inflation inched up
domestically financed given ample
to 9.7% – well above the central bank’s comfort zone of 6-8%. Rising
liquidity in the local financial
international commodity prices, a weaker currency and cutbacks in energy
system. Low foreign debt and a
SOVEREIGNS
subsidies pose upside risks to inflation. Spiralling inflation and continued high
moderate current account deficit
unemployment (averaging 9.1% over the 16 quarters ended December 2010)
have ensured a relatively strong
are key concerns.
external position, which supports
x Accommodative monetary policy: Monetary policy remained
Egypt’s ratings. Structural
accommodative in 2010 after the Central Bank of Egypt (CBE) cut rates six
challenges such as unemployment,
times in 2009, bringing the overnight deposit rate to 8.25% and the lending
spiralling inflation and poverty are
rate to 9.75%. While inflation remains an issue, the recent political instability
key concerns.
could lead to a hiatus in monetary policy actions.
x High level of public debt: Public debt increased to 81.1% of GDP as of June
2010 from 79% in June 2009. The government had planned to reduce the
fiscal deficit to 7.9% of GDP in FY11 from 8.3% in FY10 in a bid to limit the
build-up of debt. This was dependent on cuts in energy subsidies, which
amount to 9% of GDP. However, these plans are likely to be shelved, leading
Country profile to large fiscal deficits in the near term. That said, 82% of Egypt’s debt is in
local currency, and it is largely owned by domestic banks. Foreign debt is
Egypt, known officially as the Arab mostly from bilateral and multilateral creditors, with long tenors and low rates.
Republic of Egypt, is located in x Stable external position despite recent weakening: Despite a persistent
Northern Africa, bordering the negative trade balance, Egypt’s external position has been supported by low
Mediterranean Sea between Libya external debt, portfolio flows, and inflows from the pillars of tourism, oil and
and the Gaza Strip. Egypt is the most the Suez Canal. After a period of current account surpluses, the current
populous country in the Middle East, account has turned to a deficit due to the rise in domestic demand-driven
with its c.80mn people concentrated imports (led by food) and lower remittance and service inflows. The balance-
mainly around the Nile and Suez of-payments position could come under further pressure if political instability
region. Islam is the predominant leads to a significant drop in tourist arrivals.
religion. Egypt has one of the x Stable financial system: The Financial Sector Reform Program (2004-08)
region’s more diversified economies, helped the domestic financial system to weather the global financial crisis.
with industry, agriculture, tourism and The programme forced banks to strengthen their capital and clean up NPLs,
services contributing almost equal and led to a consolidation of the banking system. The sector-wide NPL ratio
shares of GDP. Multi-party elections declined further to 14.7% in 2009 from 14.8% in 2008, while banks’ risk-
have been in place since 2005, but weighted capital increased to 15.3% from 14.7% over the same period.
amendments to electoral laws are x Politics: Egypt is in a transition period as the current military leadership
being drafted to ease restrictions on prepares to step down when elections are held later this year. The military was
presidential candidates. The next handed power after the resignation of President Hosni Mubarak, following 18
presidential elections are due later in days of large-scale street protests. At the time of writing, constitutional
2011. The country is currently ruled amendments are being drafted to ease restrictions on presidential candidates;
by a military council. these will need to be confirmed through a public referendum.
5
54
Egypt (Ba2/Neg; BB/CWN; BB/RWN)

%, unless stated FY08 FY09 FY10 FY11F 8
Economic indicators
Nominal GDP (USD bn) 162.4 188.0 218.4 241.0

6
Population (mn) 75.2 76.7 78.2 79.8
% change
4

2
Government finances

FY07 FY08 FY09 FY10 FY11F
SOVEREIGNS
Fiscal balance/GDP (7.5) (7.0) (8.1) (8.3)
Real GDP
Primary balance/GDP (3.0) (2.8) (3.0) (2.6)
Gen. (direct) govt. debt (USD bn) 118.1 136.1 155.5 170.7
Gen. (direct) govt. debt/GDP 70.2 79.0 81.1 83.0 Current account balance
External indicators
1
0.9 (4.4) (4.3) (3.8)
(USD bn)
Current account bal./GDP 0.5 (2.4) (1.6) (1.2) 0

% of GDP

-1
External debt/GDP 20.9 16.7 15.4 14.9
Short-term external debt/external

7.4 6.7 6.7 6.7 -2
debt
34.6 31.3 35.2 31.0
(USD bn) -3
FY07 FY08 FY09 FY10 FY11
USD-EGP (end-period) 5.49 5.48 5.71 5.70
Current account/GDP
40 0 82
35
-2 78
30
25 -4 74
USD bn
20
%
%
15 -6 70
10
-8 66
5
0 -10 62
FY07 FY08 FY09 FY10 FY11F FY07 FY08 FY09 FY10 FY11F
Note: Fiscal year ends 30 June; Sources: IMF, Moody’s Investors Service, Standard Chartered Research
6
55
Jordan (Ba2/Neg; BB/Neg; NR)

Analysts: Kaushik Rudra (+65 6596 8260), Sayem Ali (+92 3245 7839)

We initiate coverage of Jordan with
x Well-diversified economy: Jordan’s economy is one of the most diversified
a stable outlook. Jordan’s economy
in the region. Commodity-producing sectors account for a quarter of GDP and
is one of the most diversified in the
services account for the rest. The services sector is dominated by the financial
region and has exhibited strong
sector, tourism and transportation. Over the 2004-08 period, Jordan’s
growth rates over the past five
economic growth averaged around 8%. While the economy slowed in 2009 on
years. The country suffers from twin
account of the global credit crisis, growth has recovered since then.
deficits, which are fairly structural
x Fiscal balance set to worsen: Jordan’s central government deficit has been
in nature. Given increased
quite high for most of the last decade. It worsened further in 2009-10 on
subsidies on the budget side and
account of spending hikes aimed at stimulating growth to offset the impact of
rising oil prices (the country is an
the global credit crisis. Faced with domestic unrest, the authorities have also
energy importer), the twin deficits
introduced a subsidy package (1.5% of GDP) to shield the population from
are set to worsen in 2011. That said,
rising food and energy prices. The measures, announced in January 2011,
current debt levels are manageable.
SOVEREIGNS
also include salary increases for civil servants, military personnel and
As the country continues to attract
pensioners. Although the initial budget for 2011 called for a reduction of the
strong capital inflows and support
deficit to 5.5% of GDP, in light of the above measures, we expect the deficit to
via grants from the US and Saudi
rise to around 7.0% of GDP. While the fiscal financing gap remains large, a
Arabia, financing these deficits
combination of bilateral grants and surpluses generated by government
should not be a major issue.
agencies helps to cover some of it.
x Public-sector indebtedness is manageable: High growth rates, fairly high
inflation and the surplus generated by government agencies have helped to
keep debt levels manageable. The authorities’ decision to buy back Jordan’s
USD 2.4bn of external debt to the Paris Club in 2008 further improved debt
metrics. However, debt metrics are likely to worsen in 2011 due to fiscal
slippage. The external debt component of Jordan’s debt is manageable; most
of it is owed to bilateral and multilateral creditors on favourable terms.
x Capital inflows help to cover the current account deficit: Jordan is a large
Country profile
oil importer and runs a fairly large current account deficit. The current account
Jordan, officially the Hashemite deficit, after shrinking somewhat in 2009 to around 5% of GDP, is expected to
Kingdom of Jordan, is a kingdom in have increased to around 8% of GDP in 2010. Given elevated oil prices, this
western Asia. It shares borders with is likely to worsen further in 2011. Relatively stable capital account inflows
Saudi Arabia, Iraq, Syria, the West (including FDI and portfolio investment) over the years have helped to cover
Bank and Israel. Jordan is a the current account imbalance. International reserves stand at around USD
constitutional monarchy. King 11bn, equivalent to around eight months of imports.
Abdullah II succeeded his father, x Well-managed banking sector: The country’s sizeable banking sector is
King Hussein, following his death in reasonably well managed. The space is conservatively regulated and has
1999. The king exercises his managed to avoid some of the recent shocks from both within and outside the
executive authority through the prime region. The banks are largely deposit-funded, with deposits coming from
minister and the Council of Ministers. across the Gulf region. Although Jordan’s banks are well capitalised, rapid
Jordan has a population of around credit growth between 2003 and 2008 could result in a deterioration in asset
6.3mn; non-Jordanians comprise only quality going forward.
7% of the population. The majority of x History of political stability: Jordan has had very few instances of domestic
the population is Muslim. Jordan’s political strife in its 64-year history. Although the country has ethnic and tribal
exports include vegetables, textiles, divisions, the king is popular among the masses. While the most recent
fertilisers, medical products and elections (held in November 2010) were boycotted by the main opposition
pharmaceuticals, with the US and party, they had a relatively high turnout (53%). In response to street protests
Iraq being the largest export markets. in January 2011, King Abdullah II removed the PM and the cabinet, reinstated
former PM Maruf Bakhit, and initiated political reforms. The government also
announced a subsidy package to shield the population from energy- and food-
price increases, including salary increases for public-sector employees and
pensioners.
7
56
Jordan (Ba2/Neg; BB/Neg; NR)

%, unless stated 2008 2009 2010F 2011F 10
Economic indicators
Population (mn) 5.8 6.0 6.1 6.3
% change
6

4
Inflation (year-end) 13.9 (0.7) 5.7 5.0
2
Government finances

2007 2008 2009 2010F 2011F
SOVEREIGNS
Real GDP
Primary balance/GDP 1.5 (4.8) (3.5) (4.7)

12.5 14.6 15.3 17.9
(USD bn)
Gen. (direct) govt.
debt/GDP
55.1 58.0 56.0 60.0 0
-3
External indicators
Current account balance -6

(2.2) (1.3) (2.2) (2.8)
% of GDP
(USD bn)
-9
Current account bal./GDP (9.6) (5.0) (7.9) (9.2)
External debt (USD bn) 13.8 14.5 14.6 14.7 -12

-15
Short-term external
53.2 53.1 53.5 53.8
debt/external debt
-18
7.7 10.9 10.9 11.5
(USD bn)
Current account/GDP
USD-JOD (end-period) 0.71 0.71 0.71 0.71
16 0 70
14
12 -2 65
10
USD bn
8 -4 60
%
4 -6 55
0 -8 50
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
8
57
Kuwait (Aa2/Sta; AA-/Sta; AA/Sta)

Analysts: Kaushik Rudra (+65 6596 8260), Nancy Fahim (+9714 508 3627)

We have a stable view on Kuwait as
x Oil exports power the economy: Kuwait has the world’s fifth-largest proven
a credit. The country is blessed with
reserves of oil, at around 8% of the world total, according to the latest BP
large oil reserves and has built up a
Statistical Review of World Energy. Its proven oil and gas reserves as of end-
sizeable war chest of foreign assets
2009 stood at 113bboe, and the country produced 2.5mbd of oil at the end of
over the years. Moreover, given its 2009. Oil exports power the economy, accounting for 90% of export earnings.
relatively low level of international Kuwait channels 10% of its annual oil earnings to the Kuwait Investment
debt, Kuwait is a large net external Authority (KIA), one of the world’s largest sovereign wealth funds. Budgetary
creditor. Similarly, government oil breakeven prices are kept higher than regional GCC peers to allow for
indebtedness remains very low, these transfers.
providing the authorities with x Steady fiscal surpluses: Kuwait has recorded fiscal surpluses since the
significant flexibility. Although beginning of the 2000s, with the 2009 budget surplus at close to 20% of GDP.
potential contingent liabilities from This is largely attributable to growth in export receipts, which account for
the financial sector (banks and
SOVEREIGNS
about four-fifths of government revenue; these have in turn been driven by

investment companies) remain a strong oil prices. Given the robust outlook for the hydrocarbon sector, we
source of concern for investors, expect the fiscal surplus to remain strong over the next couple of years.
their size is very small in the x Extremely strong current account balance: We expect Kuwait to post a current
context of the overall government account surplus of around USD 35bn, or about 27% of GDP, in 2011. Kuwait’s
balance sheet. current account balance averaged around 40% of GDP between 2005 and 2008.
Although the number dropped marginally in 2009, it is set to return to normal
levels for 2010 and 2011.
x Strong reserves: Official reserves have increased over the past decade (to
around USD 20bn as of end-2010), in line with the strong performance of the
current account. Kuwait holds substantial assets, estimated at close to USD
200bn, in the KIA. Though it is labelled a fund for future generations, the KIA has
been asked to use its resources to support the economy; this has included taking
stakes in troubled lenders and pumping funds into the local bourse.
Country profile x Vulnerable to oil-price declines: Given Kuwait’s high dependence on the oil
sector (oil accounts for about 90% of export earnings and close to 60% of nominal
Kuwait, also known as the State of GDP), hydrocarbon-sector prices play a crucial role in determining the health of
Kuwait, is an emirate bordered by the economy. Kuwait’s 2011 budget will be based on crude price assumption of
Saudi Arabia to the south and Iraq to USD 60/barrel.
the north west. The country has been x Contingent liabilities are manageable: The government’s direct debt is very
ruled by the Al Sabah family since low, amounting to around 8% of GDP as of end-2009 (it has no guaranteed debt).
the 18th century and is a External debt, however, has risen in recent years and represents around 50% of
constitutional emirate, with the only GDP. Short-term debt accounts for nearly 50% of Kuwait’s total external
directly elected parliament in the indebtedness. Although the government’s direct liabilities are very small,
GCC. Since the discovery of oil in the contingent liabilities have increased somewhat in recent years. That said, total
1930s, Kuwait’s economy has been potential contingent liabilities are still manageable in the context of the
transformed from a pearl and trading government’s fairly large balance sheet. While the authorities have supported
hub into one of the world’s richest the banking system via various measures, they have chosen not to support a
countries on a per-capita GDP basis. few of the investment houses which ended up defaulting. The government has
stated that it will provide support only to solvent companies.
Kuwait enjoys good relations with
x Investment drive dogged by politics: Weak institutional and administrative
most of its regional neighbours and
capacity and tense relations between the government and the parliament
with the US. About 30 percent of its
have limited both domestic investment activity and international investment in
3.6mn population is of Kuwaiti origin;
Kuwait. That said, this relationship has improved somewhat, resulting in the
the rest are split between other Arabs
approval of several pieces of economic legislation.
and expatriates (largely from south
x Strong state coffers offer flexibility: Given the ample resources available,
Asia).
the state is able to shield the population from rising food prices and other
inflationary shocks. In early 2011, the authorities announced that each of
Kuwait’s 1.12mn citizens would receive KWD 1,000 (USD 3,572) in cash, as
well as free essential food items until end-March 2012.
9
58
Kuwait (Aa2/Sta; AA-/Sta; AA/Sta)

%, unless stated 2008 2009 2010F 2011F 6
Economic indicators
4
Population (mn) 3.4 3.5 3.6 3.7 2
% change
0
Real GDP, change 5.5 (4.8) 3.0 3.5
Inflation (yearly, end- -2

9.0 1.2 3.5 4.0
period)
-4
Government finances
-6
SOVEREIGNS
Fiscal balance/GDP 19.9 19.6 20.0 22.0 Real GDP
Primary balance/GDP 21.1 19.8 20.2 22.2

(USD bn)

5.7 7.7 6.5 6.0
debt/GDP
40
External indicators
Current account balance 35

% of GDP
60.2 28.7 30.5 34.5

(USD bn)
Current account bal./GDP 40.7 29.2 26.0 27.0 30

External debt/GDP 40.9 58.5 46.2 43.4 25
Short-term external
48.5 48.5 48.1 47.4
2007 2008 2009 2010F 2011F
16.6 17.6 19.8 21.1
USD-KWD (end-period) 0.28 0.29 0.29 0.29
70 45 9
60 40 8
50
35 7
40
USD bn
30 6
%
30
25 5
20
10 20 4
0 15 3
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
10
59
Lebanon (B1/Sta; B/Sta; B/Sta)

Analysts: Kaushik Rudra (+65 6596 8260), Philippe Dauba-Pantanacce (+971 4508 3740)

We initiate coverage of Lebanon
x Economic expansion on track: Following the Doha agreement in May 2008,
with a stable credit outlook. The
Lebanon’s economy rebounded sharply, buoyed by strong capital inflows that
country is beset with a very high
fuelled activity in the construction, tourism and financial-services sectors. This
level of government indebtedness.
allowed the economy to catch up rapidly following a couple of years of slow
This causes structural problems for
growth on account of civil unrest. Although growth is set to moderate from the
the fiscal account and seriously
levels seen in 2009-10, we forecast that it will still be a respectable 6.5% in
limits the government’s ability to
2011. The economy is fairly concentrated, with two-thirds of GDP coming from
undertake essential infrastructure
financial services and tourism.
spending. The high level of
x Slow pace of reforms: Despite the recent strong economic performance,
indebtedness also implies that the
growth in Lebanon remains volatile and highly susceptible to political shocks.
country will have a large financing
In our view, pursuing reforms would allow the country to move onto a more
gap for the foreseeable future. That
sustainable growth track. However, due to the political deadlock, the pace of
said, funding sources appear to be
SOVEREIGNS
reforms remains very slow, and has fallen short of Lebanon’s commitment to
stable and deep, and have
multilateral agencies. Major structural reforms such as reforming the state
supported the government through
electricity company, privatising the telecom companies and increasing VAT
difficult periods over the past
have been on the agenda for a number of years.
decade. To the extent that
x Government indebtedness remains a huge burden: The government’s
Lebanon’s banking sector remains
indebtedness is close to 130% of GDP, one of the highest in the world, and is
healthy and continues to see
a significant burden on the budget. Servicing interest payments alone
growth in deposits, we do not
accounts for around half of the government’s revenues. This indebtedness
anticipate any issues with respect
continues to crowd out more efficient public expenditure, including on capital
to funding the deficit.
investments and infrastructure.
x Improving fiscal picture: The authorities have generated a healthy primary
surplus over the past few years. The budget, however, remains in deficit.
Subsidies to the state electricity company (on account of high fuel costs) are
close to 4% of GDP. The combination of a healthy primary surplus and liability
Country profile
management exercises by the authorities have improved the structure of
Lebanon is a relatively small country government indebtedness, and government debt denominated in foreign
in western Asia, located between exchange has fallen to 45% of the total.
Syria and Israel. It has a population x Financing gap is covered: Despite structural weakness on the fiscal side,
of around 4mn people, most of whom the financing gap is covered, and sources of funding are stable and deep.
are Muslim. There are 18 state- Lebanon’s large banking sector (with assets of more than three times GDP)
recognised religious groups remains the primary creditor of the government. Official-sector creditors – both
(including Muslim, Christian, Druze bilateral and multilateral – are very supportive and have demonstrated strong
and Jewish). Lebanon has a fairly support over the past decade via a number of donor conferences. Lebanon
large diaspora spread across the received commitments of around USD 7.5bn (half of which has been
world. The country is a parliamentary disbursed) at the Paris III donors’ conference in early 2007. Although
democracy and attempts to fairly international investors have largely shied away from Lebanese eurobond debt,
represent the demographic the diaspora has been very supportive over the years.
distribution of its 18 religious groups. x Banking sector remains a strength: The banking sector is very liquid and
The president is required to be a enjoys strong capitalisation. Although the sector is large in the context of the
Maronite Christian, the prime minister economy, its ability to continue to roll over government debt ultimately relies
a Sunni Muslim and the speaker of on the ability to grow its deposit base. The level of deposits has grown
the parliament a Shia Muslim. strongly over the past decade, despite economic and political shocks.
Lebanon experienced a 15-year civil x Difficult political environment: A combination of fractious domestic politics
war from 1975 to 1990. The country’s (the country has been mired in civil strife since 2005, when former PM Hariri
high level of indebtedness is a legacy was assassinated) and a challenging geopolitical environment (Lebanon is
of reconstruction throughout the often used as the stage for a proxy war between neighbouring countries) has
1990s following its long civil war. resulted in regular political shocks.
11
60
Lebanon (B1/Sta; B/Sta; B/Sta)

%, unless stated 2008 2009 2010F 2011F 10
Economic indicators
Population (mn) 3.8 3.9 3.9 4.0

6
% change

4
Inflation (year-end) 10.8 1.2 5.0 5.3
2
Government finances

2007 2008 2009 2010F 2011F
SOVEREIGNS
Real GDP

43.7 47.1 50.7 55.4
(USD bn)
Gen. (direct) govt.
145.9 136.4 129.8 130.9 0
debt/GDP
-3
External indicators

(2.9) (3.3) (4.4) (6.3) -6
(USD bn)
% of GDP

-9

-12
Short-term external
50.1 53.6 53.0 51.5
debt/external debt
-15
17.0 25.7 32.0 34.0
(USD bn)
Current account/GDP
USD-LBP (end-period) 1,507 1,507 1,507 1,507
40 0 160
35
-2 150
30
-4 140
25
USD bn
20 -6 130
%
15
-8 120
10
-10 110
5
0 -12 100
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
12
61
Morocco (Ba1/Sta; BBB-/Sta; BBB-/Sta)


We initiate coverage of Morocco
x Economy dominated by agriculture: The economy is supported by resilient
with a stable credit outlook. The
domestic demand and increased public spending, which have taken up the
domestic economy is supported by
slack from weak external demand. However, Morocco’s GDP growth depends
resilient domestic demand and
heavily on the agricultural harvest, which results in volatile and unpredictable
increased public spending, which
GDP figures. Moreover, continued weakness in Europe, its main trading
have taken up the slack from weak
partner, is likely to continue to be a drag on non-agricultural growth. We
external demand. Sound fiscal
expect 4.5% growth in 2011, moderately higher than the projected 4% print in
policy has been a key focus for
2010.
Morocco over the past decade, and
x Stable inflation: Inflation is low (we forecast 2.2% on average for 2010-13)
has helped to maintain
owing to food subsidies and a managed exchange rate, but also due to a
macroeconomic stability. Despite
likely failure of official statistics to fully reflect rises in the cost of living.
these measures, the fiscal deficit
x Monetary policy: Conditions are in place for Morocco to move to its preferred
has widened in the last couple of
SOVEREIGNS
policy of inflation targeting. However, this is unlikely to happen before 2012 or

years due to the higher subsidy
2013, at best. Interest rates tend to be very stable.
burden and increased government
x Sound fiscal policy: Sound fiscal policy over the past decade has helped to
investment. Morocco’s bond market
maintain macroeconomic stability. The authorities have tried to cap spending
is one of the deepest and most
in the face of an uncertain economic outlook and have attempted to reform
active in the region, and its banking
the subsidy system. However, the target of capping subsidies at 2% of GDP
system is more developed than
(from an all-time high of 5% in 2008) is unlikely to be met in the short term. On
regional peers’. However, Morocco
the revenue side, the government has substantially improved tax revenues in
still needs to lift a substantial part
recent years by enforcing compliance and widening the tax base.
of its population out of illiteracy and
x Improving debt position: Public debt levels remain high, though efforts to
poverty.
improve the fiscal position over the past decade have led to an improvement
in the debt/GDP and interest payment/revenue ratios. From a structural
perspective, the debt position looks comfortable, with a low reliance on
Country profile external and short-term debt. While the fiscal position has been under
pressure in 2009, the longer-term aim is to restrict the deficit to 3% of GDP;
Morocco, known officially as the we could see some slippage in the short term.
Kingdom of Morocco, is located in x Stable external position: Morocco’s external position remains stable,
Northern Africa, bordering the although high oil prices and the impact of the slowdown in Europe have kept
North Atlantic and the Mediterranean, the current account deficit high. Foreign exchange reserves are moderate and
west of Algeria. Morocco is a cover seven months of exports.
constitutional monarchy but has yet x One of the better-developed financial systems in the region: Morocco’s
to become a mature democracy. bond market is one of the most active in the region, and is also deeper than
While the first real election was held those of regional peers. It is supported by a healthy banking sector, along with
in September 2008, power is still a growing culture of disintermediation. Morocco’s banking sector and capital
concentrated in royal circles. markets are comparatively advanced, with the highest private-sector credit to
Morocco's market economy benefits GDP (80%) and the lowest state ownership of banks (27%) in North Africa.
from the country's relatively low x A constitutional monarchy: Since the accession of King Mohamed VI in
labour costs and proximity to Europe, 1999, the kingdom has pursued an ambitious reform and modernisation
boosting key areas of the economy programme, ranging from family law and justice to economics. The king has
such as agriculture, light an established power base and largely controls the defence, foreign affairs
manufacturing, tourism and and interior ministries. The unemployment situation is better than others in the
remittances. Morocco is also the region; however, youth unemployment remains high and is cause for concern,
world's largest exporter of phosphate, especially given the recent unrest in the region. Morocco has seen a few
which has long provided a source of protests, primarily focused on basic issues like food and unemployment.
export earnings and economic
stability.
13
62
Morocco (Ba1/Sta; BBB-/Sta; BBB-/Sta)

%, unless stated 2008 2009 2010F 2011F 6
Economic indicators
Population (mn) 31.6 32.0 32.4 32.8 4
% change
Inflation (yearly average) 4.2 1.2 1.0 2.5 2
Government finances

2007 2008 2009 2010F 2011F
SOVEREIGNS
Fiscal balance/GDP 1.2 (2.6) 1.5 2.2
Real GDP
External indicators
Current account balance -2

(5.7) (5.0) (7.3) (6.7)
(USD bn)

% of GDP

9.1 9.1 10.3 10.0 -6
debt
22.0 21.9 21.0 22.5
(USD bn) -8
2007 2008 2009 2010F 2011F
USD-MAD (end-period) 8.01 7.90 8.20 8.53
Current account/GDP
30 3 54
25 2 52
20 1 50
USD bn
15 0 48
%
10 -1 46
5 -2 44
0 -3 42
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
14
63
Oman (A1/Sta; A/Sta; NR)

Analysts: Kaushik Rudra (+65 6596 8260), Shady Shaher (+971 4508 3647)

We initiate coverage of Oman with a
x Growth linked to the hydrocarbon sector: More than 40% of Oman’s GDP
stable outlook. The country is
is linked to the hydrocarbon sector. While the country benefits during periods
heavily dependent on the
of elevated oil prices, it is also more vulnerable to declines in hydrocarbon
hydrocarbon sector. With oil prices
prices. Oman’s GDP has grown at a relatively healthy pace since 2006, and
at current elevated levels, Oman’s
while the pace of growth moderated in 2009 on oil-price declines, it has since
credit metrics are set to improve in
recovered. Per-capita income levels are fairly healthy and are in line with
2011. The country has very low
those of Saudi Arabia and Bahrain.
levels of external and domestic
x Well-managed economy: The authorities continue to manage the economy
indebtedness, providing a large
very prudently. Thanks to sound policy management, Oman weathered the
degree of policy flexibility.
global credit crisis well, registering only a slight dip in growth despite a sharp
Moreover, the combination of large
fall in oil prices. Over the past 10 years, the authorities have strengthened the
international reserves and offshore-
supervisory and regulatory framework and advanced the economic
based external assets results in a
SOVEREIGNS
diversification programme. The government has also been disciplined in

very comfortable external position
focusing on long-term development objectives, largely concentrating on
and a strong net creditor position.
investment expenditure rather than current expenditure.
While domestic politics have been
x Diminishing hydrocarbon wealth: Based on the 2010 BP Statistical Review
stable for the past 30 years, the
of World Energy, Oman had reserves of about 12bboe as of end-2009. The
country has a young population,
reserves are expected to last about another 30 years. Although the country
making healthy economic growth
appears to have discovered some additional oil reserves, they are relatively
and rapid job creation critical.
small. Oman’s fast-depleting hydrocarbon reserves are both limited and
increasingly expensive to produce (difficult to extract and more widely
dispersed). The average unit cost of oil production has more than doubled
over the past five years as a result. As a result, the drive to diversify the
economy away from the hydrocarbon sector is crucial.
x Low levels of indebtedness: Oman’s government indebtedness is very low,
at around 5% of GDP, providing a high degree of fiscal flexibility. Although
Country profile
fiscal expenditures have gradually increased (as reflected in the increase in
Oman is located on the Arabian the oil breakeven price in the budget), low government debt provides an
peninsula and shares borders with ample cushion for this. Moreover, as highlighted above, the bulk of the
the UAE, Saudi Arabia and Yemen. spending is focused on investment. After almost balancing the budget in 2009,
Oman has a population of around Oman is expected to record healthy surpluses in 2010 and 2011.
3mn, with Omanis comprising 60%. x Oman is a net creditor nation: Oman’s external debt remains low by global
75% of the population consists of standards. Moreover, its external debt outstanding remains lower than its
Ibadhi Muslims, a form of Islam international reserves, making the country a net creditor. It is also important to
distinct from the Sunni and Shia note that the international reserves do not capture the country’s full external
denominations. Sultan Qaboos bin strength. The accumulation of fiscal surpluses in past years has enabled the
Said Al Said is chief of state and government to amass a large stock of offshore financial assets (managed by
head of government. According to the several offshore funds). As of end-2009, Oman’s foreign financial assets
latest BP Statistical Review, Oman’s stood at around 55% of GDP, according to the government.
proven oil and gas reserves stand at x Sound banking sector: Oman’s banking sector is relatively healthy and has
around 12bboe. Its existing low levels of external exposure. Although the banks do have exposure to the
hydrocarbon reserves are expected local real-estate market, healthy capitalisation ratios and prudent central bank
to last around 30 years at current regulations have allowed them to navigate any stress.
production levels. x Politics has been stable, but job creation is crucial: Oman has enjoyed a
stable domestic political environment since the civil war in the 1970s. That
said, the country’s relatively large young population may potentially represent
a challenge should job creation slow down. In February 2011, Sultan Qaboos
ordered the government to provide employment to 50,000 citizens and pay
registered job-seekers the equivalent of USD 390 a month until they find
employment.
15
64
Oman (A1/Sta; A/Sta; NR)

%, unless stated 2008 2009 2010F 2011F 15
Economic indicators
Population (mn) 2.8 2.9 3.0 3.1
% change
9
Real GDP, change 12.8 3.6 4.8 5.0

6
3
Government finances

2007 2008 2009 2010F 2011F
SOVEREIGNS
Fiscal balance/GDP 14.0 0.2 7.0 8.8
Real GDP

2.8 3.0 2.5 2.3
(USD bn)
Gen. (direct) govt.
debt/GDP
4.7 6.5 4.5 3.9 12
10
External indicators

5.5 0.2 3.7 6.6
% of GDP
(USD bn)
6
External debt (USD bn) 13.5 13.0 12.0 11.8 4

2
Short-term external
45.4 43.3 44.6 44.9
debt/external debt
0
11.5 11.9 12.5 14.0
(USD bn)
Current account/GDP
USD-OMR (end-period) 0.38 0.38 0.38 0.38
16 16 8
14
12 12 6
10
USD bn
8 8 4
%
4 4 2
0 0 0
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
16
65
Pakistan (B3/Sta; B-/Sta; NR)

Analysts: Bharat Shettigar (+65 6596 8251), Sayem Ali (+92 3245 7839)

We initiate coverage of Pakistan
x Floods have affected economic growth: Devastating floods in August 2010
with a negative credit outlook.
affected one-fifth of Pakistan’s territory and displaced c.20mn people.
Given the devastating floods in
Preliminary estimates placed the total damage at USD 9.7bn, with a
2010, economic growth is expected
widespread impact on crops and rural infrastructure. We expect GDP growth
to slow to 2.5% in FY11 (ends 30
to slow to 2.5% in FY11, although it is likely to pick up in FY12 on the back of
June 2011). Political instability and
reconstruction work and higher agricultural output.
the fragile security situation have
x Factious politics and fragile security situation: More than four years after
made it difficult for the authorities
Pakistan’s transition from military rule to democracy, political instability
to push through fiscal reforms. As a
persists. President Zardari’s PPP-led coalition has weakened after key allies
result, the fiscal deficit will likely
walked out in protest against difficult economic reforms. The security
increase to 6.5% of GDP in FY11.
environment has remained difficult as insurgents have targeted key urban
The continuous monetisation of the
centres, although the number of attacks declined markedly in 2010 due to
deficit has fuelled inflation and
SOVEREIGNS
gains made by the army through targeted operations.

threatens monetary stability. That
x Fiscal reforms required: The primary challenges for the Pakistan credit are
said, the current account deficit has
high public debt and a low revenue base (debt-to-revenue ratio of 428% in
narrowed on the back of a smaller
FY10). Large segments of the economy are outside the tax net, and political
trade gap and high remittances.
pressures have forced the government to delay key reforms aimed at
Also, while Pakistan’s overall debt
broadening the tax base, including changes to the sales tax regime and the
metrics appear challenging,
introduction of a flood tax. The FY11 budget targeted a 26% y/y increase in
external debt dynamics are
tax collection to PKR 1.9trn (or 11.2% of GDP), which appears unrealistic. The
manageable given continued
large defence and subsidy bills exacerbate the problems, and we expect the
access to concessional multilateral
FY11 fiscal deficit to reach 6.5% of GDP. The high deficit and its monetisation
and bilateral funding.
exert pressure on Pakistan’s macroeconomic stability – central bank claims on
the government had risen to 78% of the monetary base as at December 2010.
This will likely push headline inflation to 15.6% by June 2011.
x Balance-of-payments position has improved: Pakistan’s external liquidity
Country profile
position has improved since it faced a precipitous decline in FX reserves in
Pakistan, officially known as the 2008. We expect the current account deficit to narrow to 0.5% of GDP in FY11
Islamic Republic of Pakistan, is a (from 5.5% in FY09) due to a smaller trade gap and high remittances. While a
country in South Asia with a land sustained rise in oil prices poses a risk to these numbers, remittances (which
area of 796,095 sq km. Pakistan is rose 18% in H1-FY11) provide an important and stable cushion. The capital
the sixth most populous country in account has been bolstered in recent years by external aid, including the
the world, with around 173mn people. IMF's USD 11.3bn commitment under the Stand-By Arrangement, USD 5.3bn
Since independence in 1947, from the Friends of Pakistan group, and other multilateral loans. As a result,
Pakistan's history has been net FX reserves stood at USD 13.9bn (6.2 months of imports) as at February
characterised by periods of military 2011. That said, the sustainability of the balance of payments will depend on
rule, political instability and conflicts the resumption of rapid economic growth and higher capital inflows.
with neighbouring India. Pakistan is a x External debt dynamics are manageable: Pakistan’s government debt-to-
federal parliamentary republic GDP ratio has deteriorated in the last three years. The maturity profile of
consisting of four provinces and four domestic debt has also changed unfavourably as the authorities have issued
federal territories. The country held more short-term debt due to a rise in interest rates. As at December 2010,
parliamentary elections in February 52% of the domestic debt was short-term, which could lead to rollover
2008, and Asif Ali Zardari of the pressures. On the external debt front, while the absolute level of borrowings
Pakistan People’s Party (PPP) was has increased due to limited domestic resources, only 2.7% of Pakistan’s
elected president in September 2008. external debt is on commercial terms. As a result of long repayment
schedules and low interest rates on multilateral and bilateral funding, external
debt-service commitments in FY11 are only USD 1.7bn, or 0.9% of GDP.
Given the humanitarian and geopolitical imperatives, we expect Pakistan to
receive continued access to donor funding, which will help to sustain external
debt dynamics.
17
66
Pakistan (B3/Sta; B-/Sta; NR)

%, unless stated FY09 FY10 FY11F FY12F 5
Economic indicators
Population (mn) 169.7 172.8 176.0 179.0
% change
3
GDP per capita (USD) 955 1,010 1,104 1,198

2
1
Government finances

FY09 FY10 FY11F FY12F
SOVEREIGNS
Real GDP
Primary balance/GDP (0.9) (2.4) (2.5) (1.3)

94.2 109.0 124.4 133.2
(USD bn)
Gen. (direct) govt.
58.1 62.4 64.0 62.1 0
debt/GDP
External indicators
-2
(8.9) (3.5) (1.0) (2.0)
% of GDP
(USD bn)

Short-term external
1.2 1.4 1.2 1.2
debt/external debt
-6
Official FX reserves FY09 FY10 FY11F FY12F
9.1 13.0 13.4 13.3
(USD bn)
Current account/GDP
USD-PKR (end-period) 81.4 85.5 88.0 91.0
60 0 70
-2 65
40
USD bn
-4 60
%
20
-6 55
0
-8 50
Intl. reserv es Ex ternal debt Govt. bal./GDP Govt. debt/GDP (RHS)
18
67
Qatar (Aa2/Sta; AA/Sta; NR)

Credit outlook – positive Key credit considerations

We have a positive outlook on Qatar
as a credit. The country is the x Hydrocarbon sector holds the key: Qatar has the world’s third-highest
world’s largest exporter of LNG. proven reserves of natural gas, according to the latest BP Statistical Review
Buoyed by a strong hydrocarbon of World Energy. Its proven reserves as of end-2009 were around 194bboe.
sector, it has built up significant Although oil previously represented a high share of Qatar’s total hydrocarbon
external and fiscal cushions and production, LNG is expected to be the primary driver going forward. Qatar is
has a strong capacity to service its currently the world’s largest exporter of LNG. Following investments in the gas
debt obligations. Qatar’s sovereign sector in recent years, its production and exports (which are not subject to
debt issuance programme has been OPEC quotas) have increased significantly. Qatar’s gas production has
well co-ordinated, and given ample increased from around 20mtoe in 2000 to more than 80mtoe as of end-2009.
liquidity in the local banking x High growth for the past decade: Driven by a rapid increase in LNG
system, eurobonds issued by exports, Qatar’s economic growth has been very strong, at around 15% p.a.
various Qatar-based entities – over the past five years. As a result, its per-capita income is among the
SOVEREIGNS
sovereign or otherwise – enjoy world’s highest. Growth slowed to around 8.6% in 2009, and we expect it to
strong local sponsorship. Although moderate further in the coming years as LNG production peaks in Q1-2011.
Qatar’s external and public-sector We see government spending on infrastructure as a key driver of future
indebtedness has increased growth as the country prepares to host the 2022 FIFA World Cup; this is also
in line with longer-term diversification plans. Given Qatar’s high dependence
appreciably in recent years, it is
on the hydrocarbon sector (which accounts for about 60% of nominal GDP),
worth noting that much of the debt
hydrocarbon prices play a key role in determining the health of the economy.
is linked to the hydrocarbon sector.
x Steady fiscal surpluses: Qatar has recorded fiscal surpluses since the
beginning of the 2000s, with the surplus exceeding 12% of GDP for the past
couple of years. This is largely attributable to growth in export receipts, which
account for around 80% of government revenues.
x Extremely strong current account balance: Qatar’s current account surplus
as a percentage of GDP has averaged more than 20% over the past five
years. With gas exports picking up and hydrocarbon-sector prices firm, we
Country profile
expect the surplus to remain close to double digits over the next few years,
Qatar, also known as the State of further strengthening an already-healthy external position.
Qatar, is an Arab emirate in the x Reserves do not tell the whole story: Official reserves have increased over
Middle East, occupying the small the past decade, in line with the strong performance of the current account.
Qatar Peninsula on the coast of the That said, the reserves do not fully capture the extent of the resources
larger Arabian Peninsula. It is available to the authorities to service their debt obligations should the need
bordered by Saudi Arabia to the arise. Qatar has additional assets under its sovereign wealth fund (managed
south. An absolute monarchy, Qatar by the Qatar Investment Authority, QIA) which could potentially be called upon
has been ruled by the al-Thani family to meet its direct and contingent liabilities.
since the mid-1800s and has x Contingent liabilities: Although Qatar’s sovereign debt remains very low, its
transformed itself from a poor British external debt and contingent liabilities have increased in recent years. Given
protectorate into one of the world’s that a number of strategically important entities have issued debt over the
wealthiest nations on the back of its past few years, contingent liabilities have to be considered when assessing
large oil and gas reserves. Qatar has sovereign indebtedness. If recent experience is anything to go by, the
the third-largest reserves of natural authorities remain fairly interventionist – they were highly proactive in
gas and is the largest exporter of supporting government entities and the banking sector during the latest global
LNG globally. Only 20% of Qatar’s financial crisis. They injected capital into local banks and purchased securities
1.7mn population is of local ethnic portfolios and real-estate loans from banks (via the QIA) to shore them up.
origin; the rest consists of x Political stability: Qatar’s politics have been relatively stable since the country
expatriates. gained independence in 1971. The path of succession is clear and is enshrined
in the constitution. Qatar enjoys healthy relations with the US and the West, and
with its GCC neighbours.
19
68
Qatar (Aa2/Sta; AA/Sta; NR)

%, unless stated 2008 2009 2010F 2011F 28
Economic indicators
24
20
Population (mn) 1.4 1.6 1.7 1.8
% change
GDP per capita (USD) 76,459 59,984 75,885 88,696 16
Real GDP, change 25.4 8.6 8.0 5.0 12

15.0 (4.9) (5.0) 2.0 8
period)
4
Government finances
0
SOVEREIGNS
Fiscal balance/GDP 11.5 13.6 10.0 8.0 Real GDP

(USD bn)

11.9 34.0 25.3 21.8
debt/GDP
30
External indicators 25

% of GDP
34.6 14.1 24.9 42.3

(USD bn)
Current account bal./GDP 31.2 14.3 19.3 27.0 15
External debt (USD bn) 59.2 87.8 102.0 111.2 10

5
Short-term external
48.2 41.1 40.0 40.1
2007 2008 2009 2010F 2011F
9.6 17.9 21.4 24.1
USD-QAR (end-period) 3.64 3.64 3.64 3.64
125 15 35
100 12 28
75 9 21
USD bn
50 6 14
25 3 7
0 0 0
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
20
69
Saudi Arabia (Aa3/Sta; AA-/Sta; AA-/Sta)


We maintain our positive outlook on
x One of the world’s largest oil producers: Saudi Arabia accounts for 12% of
Saudi Arabia as a credit. Over the
global production and 20% of the world’s oil reserves (265bn barrels). Given
years, Saudi Arabia has built up a
its large spare production capacity – current production is around 10mbd,
strong foreign-asset cushion, and is
versus production capacity of 12.5mbd – and its important position within
in a strong position to withstand
OPEC, Saudi Arabia plays a major role in influencing oil prices. The country
near-term shocks. The country has
also possesses some associated gas reserves, most of which are used to
very low debt levels and is a strong
meet domestic demand.
net creditor. While the sovereign
x Vulnerability to oil-price declines: With 88% of its budget revenues and
faces some potential contingent
85% of its export earnings coming from the oil industry, Saudi Arabia’s
liabilities via the banking sector, we
dependence on oil is extremely high.
consider them to be easily
x Hydrocarbon-sector dividends include strong growth: Thanks to the
manageable in the context of the
hydrocarbon sector, the economy has exhibited decent growth rates over the
resources available to the
SOVEREIGNS
past few years. The economy has managed to recover well from the
authorities. As one of the world’s
slowdown of 2009, and is expected to grow at around 4% in 2010 and 2011.
largest oil producers, the country
Given the country’s relatively young population and high unemployment rate,
remains highly dependent on
high growth rates are needed to address the employment deficit.
hydrocarbon prices; given the
x Fiscal surplus continues to reduce indebtedness: After a record fiscal
relatively strong outlook for
surplus (C.32% of GDP) in 2008, the fiscal balance slipped into a deficit in
hydrocarbon prices over the next
2009. Saudi Arabia pursued counter-cyclical policies (increased spending on
few years, we expect Saudi Arabia’s
social projects and infrastructure) in 2009 to combat the global financial crisis,
ample resources to grow and its
and consequently recorded a deficit of 6.3% of GDP. Its fiscal performance
debt metrics to improve further.
has since improved, and a budget surplus of USD 28.9bn is forecast for 2010.
The authorities continue to use any budget surplus to pay down domestic debt
(estimated at USD 44.5bn, or 10.2% of 2010 GDP).
x External balances supported by the hydrocarbon sector: Buoyed by
Country profile higher oil prices, Saudi Arabia recorded a current account surplus of around
USD 132bn (28% of GDP) in 2008. Although this number has since declined,
The Kingdom of Saudi Arabia is the it remained in the double digits in 2010. Additionally, Saudi Arabia continues
largest country in the Arabian to benefit from strong net FDI, mostly targeted at the energy sector.
Peninsula. It occupies an area about x Low levels of indebtedness: Saudi Arabia has relatively low levels of
one-quarter that of the US. Saudi external indebtedness. Total gross external debt stood at USD 86bn at the
Arabia’s population is around 26mn, end of 2010; this represented only 20% of GDP. Total government debt
97% of whom follow Islam. Islam’s remains very low, averaging around 13% of GDP over the 2009-10 period.
two holiest sites, Mecca and Medina, x SAMA has significant resources: Although Saudi Arabia does not have a
are located in the country. The formal sovereign wealth fund, it has been accumulating foreign assets for a
energy sector is the backbone of the number of years and has close to USD 450bn in foreign assets, including the
Saudi economy. The country Saudi Arabian Monetary Agency’s (SAMA’s) foreign-exchange reserves.
possesses 20% of the world’s proven x Sound banking system: Led by prudent regulation from SAMA, the Saudi
oil reserves and is one of the world’s banking sector is very conservatively run for the most part. The banking
largest producers and exporters of sector is fairly liquid and well capitalised, and has relatively low levels of
oil. Its dominant position in OPEC, leverage. While bank balance sheets have taken hits over the past couple of
with the largest amount of spare years, the numbers are manageable given their healthy capitalisation ratios.
capacity, makes it a primary driver of x Political landscape: The country’s relatively young population and high
oil prices, ensuring the country a
unemployment rate (10.5%) continue to pose a challenge to the government.
strong geopolitical and strategic role
Since his accession in 2005, King Abdullah has tried to modernise and reform
on the world stage.
the government. Moreover, ample resources are available to the authorities to
cushion price and other shocks for extended periods. In early 2011, King
Abdullah unveiled a series of benefits for citizens estimated to be worth USD
36bn. These included a 15% salary increase for public employees and
financial aid for the unemployed and students.
21
70
Saudi Arabia (Aa3/Sta; AA-/Sta; AA-/Sta)

%, unless stated 2008 2009 2010F 2011F 6
Economic indicators
Population (mn) 24.8 25.4 26.0 26.6 4
% change
Inflation (yearly, end- 2

8.6 3.9 5.5 5.0
period)
Government finances
0
SOVEREIGNS
Fiscal balance/GDP 32.6 (6.3) 7.0 6.5 Real GDP

(USD bn)

13.6 13.2 13.7 11.0
debt/GDP
21
External indicators

% of GDP
132.3 22.8 42.0 48.7

(USD bn) 14

7
Short-term external
24.0 25.1 30.7 36.2
2007 2008 2009 2010F 2011F
442.6 409.7 445.0 450.7
USD-SAR (end-period) 3.75 3.75 3.75 3.75
450 40 15
360 30 14
270 20 13
USD bn
180 10 12
90 0 11
0 -10 10
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
22
71
Tunisia (Baa3/Neg; BBB/CWN; BBB-/Neg)


We initiate coverage of Tunisia with
x Resilient economy, though linked to European fortunes: Tunisia’s resilient
a negative outlook. Tunisia benefits
exports and policy-induced private demand helped to maintain stable growth
from a diversified and resilient
of 4.0% in 2010, according to our forecast. Tunisia’s growing economic
economy, supported by strong
integration with its European partners has contributed to the country’s
domestic demand and a long-
modernisation, but it also represents an external vulnerability due to its heavy
established relationship with
dependence on Europe. The EU is by far Tunisia’s largest partner, accounting
Europe. The country has benefited
for more than three-quarters of goods exports, tourism receipts, workers’
from pragmatic and prudent
remittances and FDI.
economic policy-making, though
x High inflation: Inflation remains high (4.8% in 2010) compared to the
debt levels remain high for its
historical trend due to higher oil prices and more expensive imported food
ratings, driven by a persistent fiscal
items, compounded by a poor harvest. Recent developments, including salary
deficit over the past decade. High
hikes and public aid, are likely to exacerbate the situation, leading to a spike
unemployment, limited public
SOVEREIGNS
in inflation over previous levels.

political participation and
x Proactive monetary policy: The authorities target moderate money supply
corruption have plagued the
growth, with the underlying aim of keeping inflation at low levels. Tunisia has
country. Popular discontent and
protests over these issues led to repeated its commitment to adopting an inflation-targeting framework and is
the overthrow of the government in putting the necessary conditions in place for this. The authorities have also
January 2011. A sustainable expressed their commitment to a free-floating currency over the medium term.
solution to the unemployment However, we do not expect either of these goals to be achieved anytime soon.
problem and related social x Fiscal policy: The government’s push to prop up domestic demand in the
discontent will be crucial to face of weaker export growth due to the crisis in Europe caused the fiscal
Tunisia’s long-term stability. deficit to widen to about 3% of GDP in 2010 from 1% in 2008. The current
situation is likely to lead to further fiscal slippage, and public debt to GDP,
which is already high for Tunisia’s rating category, could rise further.
x Current account in surplus but weaker than peers: Strong policy-induced
Country profile private demand to offset export weakness has led to a widening current
account deficit over the last few years. We expect this situation to correct itself
Tunisia, known officially as the as the euro-area economies pick up steam.
Tunisian Republic, is located in x Weak debt position: Tunisia’s debt levels remain high for its rating category.
Northern Africa, bordering the Debt reduction has been a key focus for Tunisia in the last decade, and low
Mediterranean Sea between Algeria fiscal deficits helped to bring down the debt level to c.43% in 2010 from 54%
and Libya. Tunisia’s social and in 2005. However, recent events are likely to add to the fiscal burden and
human development metrics are push up debt levels.
among the best in the region, which
x Stable financial system: The banking system is generally stable, well
has ensured economic stability.
capitalised and very liquid. However, high NPLs (around 15%) and relatively
Market reforms have been on the
low NPL provisions (around 58%) are cause for concern. Credit to the
agenda, and state involvement,
economy has grown in a consistently healthy 10% range in recent years,
though high, has declined over the
helped by prudent regulations. Under a major financial-sector reform, the
past decade. Tunisia is undergoing a
country’s three majority government-owned banks (38% of banking assets)
regime change after being under
will be merged into one conglomerate.
single-party rule since independence.
x Politics: The country is unique within the Maghreb in terms of social
Recent street protests led to the
development. It has a very high level of education, the most advanced laws
overthrow of President Zine al-
regarding women in the Arab world, and a large middle class. However, high
Abidine Ben Ali, who had led the
and rising unemployment has been a festering issue; this, coupled with a lack
country for more than 23 years.
of political freedoms, triggered severe street protests that led to the ouster of
Tunisia is currently ruled by an
the regime in January 2011. Greater political freedom and successful
interim unity government, with a
measures to tackle youth unemployment, along with a successful transition to
proposed power transition following
a democratic government, will be crucial to the country’s long-term political
multi-party elections proposed for
stability.
July 2011.
23
72
Tunisia (Baa3/Neg; BBB/CWN; BBB-/Neg)

%, unless stated 2008 2009 2010F 2011F 8
Economic indicators

6
Population (mn) 10.3 10.4 10.5 10.6
% change
4

2
Government finances

2007 2008 2009 2010F 2011F
SOVEREIGNS
Real GDP
Primary balance/GDP 1.1 0.1 (0.8) (0.6)
External indicators
-1
(1.7) (1.2) (1.1) (0.5)
(USD bn)
Current account bal./GDP (3.8) (4.0) (2.3) (1.1) -2

% of GDP

-3

20.7 22.4 22.1 22.5 -4
debt
8.8 10.7 10.1 10.6
(USD bn) -5
2007 2008 2009 2010F 2011F
USD-TND (end-period) 1.32 1.32 1.39 1.45
Current account/GDP
25 0 46
20
-1 45
15
USD bn
-2 44
%
10
-3 43
5
0 -4 42
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
24
73
Turkey (Ba2/Pos; BB/Pos; BB+/Pos)


We initiate coverage of Turkey with
x Resurgent economy: The Turkish economy rebounded sharply from the
a positive credit outlook. Turkey’s
2009 recession that followed the global financial crisis. Partly aided by a
large, dynamic and diversified
favourable base effect, the growth rate averaged in excess of 10% in H1-
economy weathered the global
2010. Although growth is expected to moderate from double-digit levels, we
financial crisis extremely well and is
expect it to remain healthy, and we expect Turkey to be one of the fastest-
poised to be the growth leader of
growing economies in the OECD.
the OECD. The authorities have
x Inflation needs to be watched: Headline inflation has picked up on the back
pursued prudent fiscal and
of elevated food prices and the strong post-crisis recovery. Core inflation,
monetary policies since the early
however, remains well behaved, largely due to favourable base effects,
2000s – a key factor behind the
exchange rate appreciation and price regulation. We expect the central bank,
economy’s resilience to shocks in
which remains comfortable with core inflation at current levels, to continue to
recent years. Turkey’s increased
use non-interest-rate tools such as bank reserve requirements to dampen
economic integration with the EU
SOVEREIGNS
credit growth.
and its strategic geopolitical role,
x Responsible fiscal policy needed: The government’s Medium-Term
straddling Europe and the Middle
Programme (MTP) for 2011-13 outlines its commitment to continued fiscal
East, support both private and
consolidation. That said, we do not find the rules to be particularly restrictive.
official-sector inflows. Turkey’s
In the absence of a restrictive fiscal anchor, we remain concerned about the
banking sector remains healthy and
government’s ability to exercise spending restraint in the run-up to the
extremely well capitalised, and has
elections in mid-2011. The absence of a fiscal anchor is especially worrisome
been a strong sponsor of locally
at a time when the external balance looks set to worsen.
originated debt paper.
x Domestic debt dynamics are under control: The authorities have made
huge strides in reducing public-sector indebtedness, bringing down general
government debt (as a percentage of GDP) from more than 50% in 2005 to
below 40% as of 2008. Although the number rose somewhat in 2009, we
expect it to fall back to around 40% over the next few years. Moreover, given
the transformation of the debt mix over the past decade, Turkey’s domestic
Country profile
debt is now much more resilient to shocks.
Turkey, known officially as the x Current account remains a worry: With cheap external financing readily
Republic of Turkey, is a Eurasian available and constraints on residents’ borrowing relaxed, the external
country that stretches across the imbalance worsened sharply in 2010. Because of the sharp economic
Anatolian peninsula in western Asia recovery, combined with the inadequate competitiveness of exports due to
and Thrace in the Balkan region of structural factors, the current account deficit for 2010 is expected to have
south eastern Europe. Although risen to around 6.0% of GDP, from around 2.3% in 2009.
Islam is the predominant religion, the x Funding has been on a more robust footing: A number of factors –
country is a staunchly secular state including interest rate differentials, favourable near-term growth expectations,
(enshrined in the constitution). prospects for currency appreciation, the healthy balance sheets of the
Turkey is a constitutional republic government and banks, and increased economic integration with the EU – will
and has become increasingly likely continue to support capital inflows into the country. While these inflows
integrated with the West through its have helped to largely cover the current account gap, the mix in recent years
membership in organisations such as has swung more in favour of portfolio flows, increasing Turkey’s vulnerability
the Council of Europe, NATO, OECD to market sentiment. That said, Turkey’s resilience to shocks has
and the G20. Turkey began full strengthened in recent years, as evidenced by the markets’ ability to withstand
membership negotiations with the EU volatile capital inflows and ongoing domestic political infighting.
in 2005, having been an associate x Healthy banking sector: The banking sector is well capitalised, with a
member of the EEC since 1963. The healthy loan-to-deposit ratio of 75%. The ratio of FX deposits to overall
ruling Justice and Development (AK) deposits has declined to around 30%, demonstrating increased public
party has been in power since 2002. confidence in the banking system and the overall economic outlook.
A presidential election is due in 2012, x Elections will increase political risks: National elections scheduled for mid-
the first by direct popular vote. 2011 will likely bring tensions between the society’s secular and religious
elements to the fore.
25
74
Turkey (Ba2/Pos; BB/Pos; BB+/Pos)

%, unless stated 2008 2009 2010F 2011F 8
Economic indicators
6
4
Population (mn) 73.9 74.8 75.8 76.8
% change
GDP per capita (USD) 9,881 8,215 9,645 10,292 2
Real GDP, change 0.7 (4.7) 6.5 5.0 0

10.1 6.5 7.6 6.2 -2
period)
-4
Government finances
-6
SOVEREIGNS
Fiscal balance/GDP (2.5) (5.8) (4.1) (3.2) Real GDP

(USD bn)

39.5 45.5 43.4 42.4
debt/GDP
-2
External indicators

% of GDP
(41.9) (13.9) (45.8) (55.2)

(USD bn) -4

-6
Short-term external
17.8 18.8 18.4 17.7
debt/external debt -8
2007 2008 2009 2010F 2011F
70.2 68.2 68.0 70.5
USD-TRY (end-period) 1.53 1.49 1.52 1.56
300 0 46
250
-2 44
200
USD bn
150 -4 42
%
100
-6 40
50
0 -8 38
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
26
75
United Arab Emirates (Aa2/Sta; NR; NR)

Analysts: Simrin Sandhu (+65 6596 6281), Shady Shaher (+971 4508 3647)

Our stable outlook on the UAE
x Underpinned by Abu Dhabi: Although the UAE is one of the most diversified
primarily reflects the strong balance-
economies in the GCC, the country’s fortunes are inextricably linked to the
sheet position of Abu Dhabi, the
hydrocarbon sector. The UAE derives its credit strength from Abu Dhabi’s
largest economy of the seven
strong balance sheet. Abu Dhabi is the largest economy in the UAE and is the
emirates and the biggest contributor
biggest contributor to the federal budget. The emirate’s strong position in the
to the federal budget. The
hydrocarbon sector has been the mainstay of the UAE economy, and will
hydrocarbon sector, which has been
remain a major revenue earner well into the future due to the vast reserves at
the mainstay of the UAE economy, is
the country’s disposal (the hydrocarbon sector represents around 60% and
likely to continue to drive revenue,
80% of exports and budget revenues, respectively). The UAE is home to 7%
although significant efforts are
(98bn barrels) of the world’s crude oil reserves and 3% (6.4tcm) of global gas
underway to diversify the economy.
reserves. At the current rate of utilisation, and excluding any new discoveries,
The authorities have demonstrated a
these reserves will last for around 100 years.
strong commitment to supporting the
SOVEREIGNS
x On the road to recovery: After posting growth rates comfortably in excess of

banking sector and strategic quasi-
5% since 2005, the UAE economy slowed considerably in 2009, with GDP
sovereign entities. Offsetting these
growing by a lower 1.3%. The economy was hit hard by the global credit
strengths are the country’s relatively
crisis, which impacted its key sectors – oil and gas, and construction and real
large contingent liabilities, via the
estate. The banking system also came under considerable pressure. Although
external debt of both quasi-sovereign
the economy is picking up, we are likely to see appreciably lower levels of
entities and the banking system.
growth for the next few years. We expect the economic recovery to be driven
by government spending in Abu Dhabi and by a gradual recovery in the trade
and services sector in Dubai.
x Strong fiscal and current account surpluses: Although the Abu Dhabi
government budget ran a deficit in 2009 on account of lower oil prices and
production, surpluses in the preceding few years were extremely strong. It is
also worth highlighting that the fiscal accounts understate the country’s actual
Country profile fiscal position since they exclude the profits of Abu Dhabi National Oil
The United Arab Emirates (UAE) is a Company (ADNOC) and the investment income of Abu Dhabi Investment
federation of seven emirates situated Authority (ADIA), both of which are directly paid into ADIA.
in the south east of the Arabian x Reserves do not tell the whole story: In our view, while international
peninsula, bordering Oman and Saudi reserves are quite healthy, they significantly underestimate the UAE’s total
Arabia. The emirates comprising the foreign assets. The UAE is a substantial net creditor, with total foreign assets
UAE are Abu Dhabi, Dubai, Sharjah, on the order of USD 662bn (including ADIA’s estimated foreign assets). Total
Ajman, Umm al-Quwain, Ras al- external debt at end-2009 stood at around USD 140bn.
Khaimah and Fujairah. The emirates x Rising contingent liabilities: Although the UAE’s sovereign and government
merged to form the UAE in 1971. In debt is very low, contingent liabilities via the debt obligations of the banks and
addition to the federal government, corporates – most of which are quasi-sovereign entities – are very high (see
each emirate has a local government ‘Quasi-sovereigns - One too many?’). Dubai-based entities account for about
and is headed by its own ruler. The two-thirds of the external debt of the UAE. While this represents a major
ruler of Abu Dhabi, His Highness contingent liability for both Dubai and the federation, support from the UAE
Sheikh Khalifa bin Zayed Al Nahyan, government is strong – and, given the country’s sizeable net creditor position,
has been the president of the UAE this should be manageable.
since 2004. The ruler of Dubai, His x Political stability: The UAE enjoys a stable political environment. The seven
Highness Sheikh Mohammed bin emirates are intricately connected, with the political system enshrined under
Rashid Al Maktoum, is the country’s the 1971 constitution. The risk of social unrest is low given the high
vice president and prime minister. The percentage of expatriates and the relative prosperity of the general
UAE is home to the world's sixth- population.
largest oil reserves and is one of the
world’s wealthiest countries by per-
capita income.
27
76
United Arab Emirates (Aa2/Sta; NR; NR)

%, unless stated 2008 2009 2010F 2011F 10
Economic indicators
Population (mn) 4.8 4.9 5.1 5.2
% change
6

4
2
Government finances

2007 2008 2009 2010F 2011F
SOVEREIGNS
Fiscal balance/GDP 12.3 (12.4) (2.5) 4.0
Real GDP

(USD bn) 35.9 50.3 54.4 54.4
Gen. (direct) govt.
debt/GDP 14.1 22.5 22.7 21.3 10
8
External indicators

(USD bn) 21.6 7.8 13.2 15.3 6
% of GDP

4

2
Short-term external
debt/external debt 70.0 66.9 66.2 66.4
0
(USD bn) 30.9 29.9 33.2 35.2
Current account/GDP
USD-AED (end-period) 3.67 3.67 3.67 3.67
150 15 30
125 10 25
100 5 20
USD bn
75 0 15
%
50 -5 10
25 -10 5
0 -15 0
2006 2007 2008 2009 2010F 2007 2008 2009 2010F 2011F
Sources: UAE central bank, Moody’s Investors Service, EIU, IMF, Standard Chartered Research
28
77

SOVEREIGNS
78
Credit analysis – Financials
Abu Dhabi Commercial Bank (A1/Neg; A-/Sta; NR)


ADCB has been among the banks
• Asset-quality deterioration: A new management team was hired in 2003 to
worst affected by the economic
revitalise ADCB, and the bank expanded its product offering, but also
slowdown in the UAE. Our
increased its risk appetite. Going into the global crisis, ADCB had one of the
negative view is based on the
highest reported exposures to the construction, real-estate and contractor
potential for further one-off finance sectors – including Dubai real estate. Since 2008, ADCB’s asset quality
provisions if other Dubai-related has deteriorated more than that of its Abu Dhabi peers, mainly as a result of
entities restructure their exposures in the bank’s corporate loan portfolio, including privately owned
obligations, limited disclosure and Saudi conglomerates and Dubai-related entities. As a result, at end-2010, the
transparency, reasonable but bank’s reported impaired loan ratio (including Dubai World) stood at 11%, one
declining capital adequacy, and of the highest for the UAE banks we cover. Its loan-loss coverage, at 44%, was
the bank’s above-average – albeit among the lowest. We believe the bank’s impaired loan ratio may continue to
improving – dependence on deteriorate this year if additional corporate restructurings materialise. However,
wholesale markets for funding. 2011 is likely to be the worst point in the asset-quality cycle, in our view.
Our view also incorporates the • Earnings volatility: While the bank’s earnings capacity at a pre-provision
bank’s majority ownership by the level is helped by high efficiency levels, large risk provisions since 2008 have
government of Abu Dhabi and translated into significant earnings volatility. The bank reported a loss in
demonstrated support from Abu 2009, and profits in 2010 were relatively small (AED 391mn, ROA of 0.2%),
Dhabi for its banks. as risk provisions ate up 89% of pre-provision profits.
• Dependence on market funding: ADCB had a higher-than-average reliance
on market funding going into the crisis, and its funding costs rose sharply
when liquidity dried up in late 2008 and early 2009. In 2010, the bank
aggressively grew its customer deposit base (up 22%). However, the bulk of
FINANCIALS
the growth has come from corporate rather than retail customers, which tend
to be stickier. Customer deposits provided 75% of funding at end-2010, with
corporate customers accounting for 56%. The remainder was almost evenly
split between retail customers and the government. Although the loan-to-
deposit ratio has improved, at 122% at end-2010, it remains considerably
Company profile
above average.
Abu Dhabi Commercial Bank (ADCB) is • Growth in retail banking: As the second-largest bank in Abu Dhabi, ADCB
the second-largest bank in Abu Dhabi has a strong franchise, particularly among commercial customers. The bank
and the third-largest in the UAE, with an has expanded its product offering since the mid-2000s, particularly in the
estimated 10% market share of deposits consumer and Islamic segments. In 2010 the bank announced the acquisition
and total assets at end-2010 of AED of RBS’ retail banking business in the UAE, which should further bolster its
178bn (c. USD 49bn). The bank is the retail banking offering. Consumer banking generated 44% of revenues in 2010.
result of a 1985 merger of three troubled • Reasonable capital base: The bank’s capital base improved following the
banks and is 65% owned by Abu Dhabi injection of Tier 1 capital in early 2009. However, the combination of
Investment Council (ADIC, Abu Dhabi’s continued loan growth and losses in 2009 has led to a slight decline in capital
investment arm). Members of the ruling adequacy ratios. At end-2010, the bank’s equity-to-assets ratio was 11%,
family own a stake estimated at c.10%. and its Tier 1 capital ratio stood at 12%. While these are reasonable by
international standards, they are lower than the average for the other Abu
Despite its ownership, the bank is
Dhabi banks. Also, given the bank’s high NPL ratio and low loan-loss
operated on a commercial basis. Its
coverage, higher ratios would be desirable. However, implicit support from
main business was historically corporate
the government of Abu Dhabi mitigates this risk.
and commercial banking, but in recent
• Supportive framework: There is a strong tradition of support for banks in the
years the bank has broadened its
UAE, and no bank has been allowed to fail. This was demonstrated through
revenue mix by expanding its presence
the Tier 1 capital injection by Abu Dhabi into five of its banks in 2009
in retail banking and banking to high-net
(including AED 4bn into ADCB), and by the conversion into LT2 capital of
-worth individuals. The bank’s
deposits injected into the system by the UAE Ministry of Finance. In our
operations are mainly domestic in
opinion, given the bank’s ownership by ADIC and its size relative to the Abu
nature. ADCB operates from over 50 Dhabi market, there is implicit support for ADCB.
branches in the UAE.
1
80
Abu Dhabi Commercial Bank (A1/Neg; A-/Sta; NR)
Summary financials Loans by type (Dec-2010)

2007 2008 2009 2010
Balance sheet (AED mn) 2% 1%
12%
Total assets (USD mn) 28,941 40,444 43,654 48,575
Corporate
Total assets 106,214 148,430 160,209 178,271
Loans 75,676 109,081 116,610 122,772 12% Overdrafts
Investments 3,091 3,423 4,459 8,263
Retail
Total liabilities 94,802 132,515 141,119 158,698
Deposits 53,938 84,361 86,300 106,134 Credit cards
Interbank 5,598 6,905 4,738 4,842
73% Other
Debt 30,593 30,735 37,650 29,955
Equity 11,412 15,915 19,090 19,573
Income statement (AED mn) Funding mix

Net interest income 2,288 2,481 3,276 3,682 100%
Other income 1,511 1,910 1,507 1,654
Total income 3,800 4,390 4,783 5,336 75%
Overheads (1,009) (1,525) (1,539) (1,649)
50%
Pre-provision profits (PPP) 2,791 2,865 3,243 3,687
Impairments (703) (1,498) (3,753) (3,287) 25%
Profit before tax 2,088 1,367 (510) 400
0%
Net income 2,085 1,358 (513) 391
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Key ratios (%) Customer deposits Interbank Debt securities and loans
Net interest margin 2.6 2.1 2.4 2.5
Fee income-to-income 23.0 22.4 20.6 17.9
Costs-to-income 26.5 34.7 32.2 30.9
NIM and average interest earned
Costs-to-average assets 1.1 1.2 1.0 1.0 8
FINANCIALS
Provisions-to-PPP 25.2 52.3 115.7 89.2
ROE 18.8 9.9 (2.9) 2.0 6
ROA 2.2 1.1 (0.3) 0.2
Impaired loans-to-loans 1.4 1.1 5.2 11.1 4
%
Loan-loss coverage 109.0 157.9 67.8 44.1

Loan-to-deposit 142.5 131.7 140.0 121.6 2
Equity-to-assets 10.7 10.7 11.9 11.0
0
Tier 1 capital 12.2 11.4 12.4 12.0
2006 2007 2008 2009 2010
Total capital 14.2 11.4 17.4 16.7
Net interest margin Avg. interest earned
Asset quality Asset mix (Dec-2010)
12 200
13% 3%
10% Cash
9 160
120 5%
Interbank
6
%
80
Investment securities
3 40
Customer loans
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Other
NPL ratio Loan-loss coverage (RHS) 69%
Capital adequacy and ROE Revenues by type of income (2010)
20 30
13%
20
10 10 Net interest income

%
%
18%
0
Fees/commissions
0 -10
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 69% Other income
Tier 1 capital ratio Total 2 capital ROE (RHS)
Sources: Company reports, Standard Chartered Research
2
81
Abu Dhabi Islamic Bank (A2/Sta; NR; A+/Sta)


We initiate coverage of ADIB with
• Strong domestic retail franchise: Because some customers prefer to conduct
a stable credit outlook. Our view
business with Islamic institutions, Islamic banks have a competitive advantage
takes into account the bank’s
over conventional banks. As a result, ADIB’s cost of funding is lower than for
ownership (directly and indirectly)
most of the other Abu Dhabi banks. At end-September 2010, customer
by the Abu Dhabi ruling family,
deposits provided 89% of total funding. Approximately 50% of customer
strong franchise in the Islamic
deposits were retail (mainly individuals rather than SMEs), with a further 15%
segment, robust liquidity, sound
being sourced from the government and the public sector.
capital adequacy, and above-
• Repositioning for growth: A new management team was appointed in late
average disclosure and
2007 and has embarked on a restructuring process. The bank’s strategy is to
transparency. Our view also takes
increase its market share in the UAE, expand into complementary Shariah-
into account rapid loan growth
compliant financial services (e.g. insurance and stockbroking), and expand its
over the last few years, the recent
international operations.
deterioration in asset quality
• Good earnings generation capacity: Although ADIB’s cost efficiency is
(particularly among private
below average (partly reflecting new branch openings in recent years), its pre-
banking clients), and the high
provision earnings generation capacity is good thanks to NIMs that are among
concentrations of loans and
the highest for UAE banks. 2009 net income was affected by high provisions
deposits.
stemming from the recognition of NPLs and management’s intention to build up
collective provisions ahead of a change in regulation. Profits recovered in 2010,
and the bank’s ROA for 9M-2010 was 1.8%.
• Rapid loan growth: ADIB’s loan portfolio has grown faster than the average for
the other Abu Dhabi banks (3.5-fold between end-2005 and September 2010).
FINANCIALS
Although the bank’s loan portfolio has been growing rapidly, customer deposit
growth has kept pace. As a result, the bank’s loan-to-deposit ratio is the lowest
among the Abu Dhabi banks we cover, at 91% as of end-September 2010.
• High retail loan exposure: 60% of the bank’s loan portfolio at end-September
2010 was to individuals, which is above average for the Abu Dhabi banks and
Company profile reflects the bank’s Islamic franchise. The majority of the bank’s retail customers
Abu Dhabi Islamic Bank is the largest are UAE nationals, where the bank would have a charge on their salaries. Retail
Islamic bank in Abu Dhabi and the banking assets accounted for 32% of total assets at end-September 2010 and
eighth-largest domestic bank in the generated 67% of 9M-2010 revenues.
UAE, with total assets of AED 71bn • Asset-quality deterioration: Since the management change, ADIB has been
(USD 19bn) at end-September 2010 aggressively recognising its non-performing exposures. As a result, the bank’s
NPL ratio has deteriorated faster and is higher than the average for the Abu
and a market share of deposits in the
Dhabi banks. The impaired loan ratio stood at 5.9% at end-September 2010,
UAE of 5%. ADIB is 40% owned by
with loan-loss cover of 71%.
Emirates International Investment Co.,
• Sound capital adequacy: ADIB is well capitalised by international standards,
an investment vehicle controlled by the
with a Tier 1 capital ratio of 13.2% and an equity-to-assets ratio of 11.3% at
Abu Dhabi ruling family. The Abu Dhabi
end-September 2010. Although these numbers are slightly lower than the
Investment Council (ADIC) has a further
average for the other Abu Dhabi banks, this is mitigated by implicit support from
8% stake, and members of the ruling
the government of Abu Dhabi.
family control another 11%. The bank
• Supportive framework: There is a strong tradition of support in the UAE, and
was established in 1997 and operates
no bank has been allowed to fail. This was demonstrated through the Tier 1
from a network of over 60 branches.
capital injection by Abu Dhabi into five of its banks in 2009 (including AED 2bn
Although it offers a broad range of
into ADIB). In our opinion, given the direct and indirect ownership by the Abu
services, its activities are skewed
Dhabi ruling family, there is implicit support for ADIB.
towards the retail market. The bank’s
• Geographic diversification: The bank has expanded abroad by acquiring
operations are mostly domestic in
minority stakes in banks in Egypt (49% stake) and Bosnia (27%), and has
nature, though it is keen to increase its
applied for banking licences in Algeria, Iraq, Qatar and the UK. Although the
overseas presence.
contribution from foreign businesses is small, it is expected to grow over time.
3
82
Abu Dhabi Islamic Bank (A2/Sta; NR; A+/Sta)
Summary financials Revenues by segment (Sep-2010)

2007 2008 2009 9M-10
Balance sheet (AED mn) 7%
Total assets (USD mn) 12,000 13,954 17,462 19,394 5%
Retail banking
Total assets 44,040 51,210 64,084 71,175
Loans 24,327 34,179 40,474 47,159 Wholesale banking
Investments 1,259 1,209 1,010 1,223 21%
Total liabilities 38,619 45,573 56,939 63,111 Private banking
Deposits 29,629 37,486 48,220 54,038
Interbank 4,620 3,576 1,279 1,317 Capital Markets
67%
Debt 2,938 2,938 5,145 5,145
Equity 5,421 5,637 7,145 8,064

Net interest income 952 1,728 2,109 1,888
100%
Other income 485 470 412 347
Total income 1,438 2,199 2,520 2,235 75%
Overheads (551) (888) (993) (920)
50%
Pre-provision profits (PPP) 886 1,311 1,527 1,315
Impairments (117) (460) (1,449) (405) 25%
Profit before tax 769 851 78 909
0%
Net income 769 851 78 909
Dec-06 Dec-07 Dec-08 Dec-09 Sep-10
Costs-to-income 38.4 40.4 39.4 41.2 NIM and average interest earned
FINANCIALS
ROE 18.8 15.4 1.2 15.9 6
ROA 1.9 1.8 0.1 1.8
%

Loan-to-deposit 83.3 92.7 87.6 91.1 2
Equity-to-assets 12.3 11.0 11.1 11.3
0
Tier 1 capital NA 13.5 13.5 13.2
2006 2007 2008 2009 9M-2010
Total capital NA 11.6 17.0 16.5
Asset quality Asset mix (Sep-2010)
8 250
7% 9%
200 Cash
6
150 16% Interbank
4
%
100
2 50 2%
Customer loans
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Sep-10 Other
66%
NPL ratio Loan-loss coverage (RHS)
Capital adequacy and ROE Revenues by type of income (9M-2010)
25 25 3%
20 20 12%
15 15
Net interest income
%
%
10 10
5 5 Fee and commission income
0 0
Trading income
Tier 1 capital ratio Tier 2 capital ROE (RHS) 85%
4
83
Arab Banking Corporation (Baa3/RFD; BBB/CWN; BBB-/RWN)


Our view is driven mostly by
• Balance-sheet de-risking: In 2007 and 2008, ABC’s results were marred by
uncertainties regarding ABC’s
a combined USD 1.2bn of losses on its investment securities portfolio, forcing
controlling shareholder, the
the bank to post a net loss of USD 836mn in 2008. As a result of the losses,
Central Bank of Libya. It also takes
the bank de-risked and shrank its balance sheet by writing off or selling
into account the absence of a core
investments. Total assets declined from a high of USD 33bn at end-2007 to
domestic market for ABC and the
USD 26bn at end-2009. Although the bank’s securities portfolio has been
challenges in executing the bank’s
steadily declining, it still represented 29% of total assets at end-2010. Over
‘universal banking’ model in the
40% of the securities portfolio was made up of US government agency
Middle East. On the other hand,
securities, with the remainder comprised of bank senior and subordinated
the bank’s balance sheet has been
debt and regional corporate bonds. With loan growth having picked up in
considerably de-risked since 2008,
2010, the bank has begun to grow its balance sheet again.
and its financial metrics have
• Strong shareholder support, but changing structure: The support
improved (in particular in terms of
framework for wholesale banks in Bahrain (and throughout the world) tends to
capital adequacy).
be less extensive than that for banks with retail banking operations. Wholesale
banks have failed in Bahrain in the past. In the wake of ABC’s losses in 2008, its
shareholders at the time – ADIC, CBL and KIA – demonstrated strong support
by injecting USD 1bn of new capital through a rights issue. However, ADIC sold
its stake in ABC to CBL in 2010, leaving CBL as the main shareholder.
• Strategic challenges: ABC has a large presence throughout the Arab world
and a solid customer base made up of governments, large corporates,
multinationals, and – increasingly – retail customers. The bank also has an
FINANCIALS
important presence in Brazil via its 56% stake in Banco ABC Brasil. However,
the bank lacks a core domestic market. Other medium-term strategic
challenges include reducing its reliance on short-term wholesale funding –
customer deposits provided 48% of total funding at end-2010 – and being
able to generate recurrent earnings streams.
Company profile
• Universal banking strategy: In order to address these challenges, ABC
Arab Banking Corporation (ABC) is a intends to develop a universal banking model by increasing the revenue
wholesale bank based in Bahrain with contribution of retail banking (particularly SME banking), expanding its
end-2010 total assets of USD 28bn. The existing operations and selectively acquiring operations in MENA.
bank, established in 1980, is today Conceptually, the strategy is sound, as it aims to develop more recurrent and
mainly a wholesale bank active in trade stable sources of income. In practice, it could take considerable time to
finance, project and structured finance, implement. In December 2010, ABC announced the acquisition of a 49%
treasury, syndications, and corporate stake in a small Libyan bank.
and institutional banking. The bank has • Low earnings generation capacity: ABC’s profitability is relatively low
a significant Brazilian subsidiary and because of narrow margins and a relatively high cost base. Pre-provision
also has small retail and SME ROA has averaged 1% since 2005, while pre-provision ROE has averaged
presences in Algeria, Egypt, Jordan and 11.6%. (These numbers are not meaningful on a net income basis because of
Tunisia. In the wake of losses on its the losses incurred in 2008). Profitability improved in 2010 on higher net
investment portfolio, which necessitated interest income – driven by lower funding costs and higher loan volumes –
a capital infusion of USD 1.1bn from its and lower provisions. However, ROA was still low, at 0.7%.
shareholders in June 2008, the bank • Improved capital adequacy: The bank’s capital base has strengthened
has put greater emphasis on developing following the capital infusion from its shareholders in 2008 and a rights issue
its retail banking business. Following the in 2010. The bank’s Tier 1 capital ratio stood at 18.4% at end-2010, with an
exit of the Abu Dhabi Investment equity-to-assets ratio of 13.7%.
Council (ADIC) in December 2010, • Stable asset quality: Asset quality deteriorated in 2009 as a result of
ABC’s main shareholders are the exposure to Awal and TIBC, two smaller wholesale banks controlled by the
Central Bank of Libya (CBL, 59.4%) and Saudi groups Saad and Al-Gosaibi, respectively. However, asset quality has
the Kuwait Investment Authority remained stable since then. The bank’s NPL ratio stood at 3.5% at end-2010,
(29.7%). with loan-loss cover of 128%.
5
84
Arab Banking Corporation (Baa3/RFD; BBB/CWN; BBB-/RWN)
Summary financials Revenues by segment (2010)

2007 2008 2009 2010 4%
Balance sheet (USD mn) 18%
Total assets 32,744 28,486 25,965 28,105
MENA subsidiaries
Loans 12,329 11,931 10,949 12,186
Investments 13,637 10,749 9,687 8,122 Wholesale banking
43% Treasury
Deposits 10,791 10,728 9,909 11,175 22%
Interbank 8,811 6,210 6,224 6,283 ABC Brasil
Debt 2,579 2,498 2,344 2,183
Other
Equity 2,157 2,088 2,581 3,860
13%
Income statement (USD mn)
Net interest income 298 431 391 440 Funding mix
Other income 393 176 250 279
100%
Total income 691 607 641 719
Overheads (275) (352) (326) (359) 75%
Pre-provision profits (PPP) 416 255 315 360
Impairments (230) (1,055) (115) (77) 50%
Profit before tax 186 (800) 200 283
Net income 149 (836) 154 199 25%
0%
Key ratios (%)
Fee income-to-income 19.7 23.4 24.5 24.2 Customer deposits Repos Interbank Debt securities and loans
Costs-to-income 39.8 58.0 50.9 49.9
Costs-to-average assets 1.0 1.1 1.2 1.3
Provisions-to-PPP 55.3 413.7 36.5 21.4 8
FINANCIALS
ROE 7.0 (39.4) 6.6 6.2
ROA 0.5 (2.7) 0.6 0.7 6
Impaired loans-to-loans 1.3 1.9 3.5 3.5
4
%

Loan-to-deposit 114.3 111.2 110.5 109.0
2
Equity-to-assets 6.6 7.3 9.9 13.7
Tier 1 capital 10.9 12.8 13.4 18.4 0
Total capital 14.4 16.2 16.9 23.1 2006 2007 2008 2009 2010
5 250
3% 2%
4 200 Cash
23%
3 150 Interbank
%
2 100
43% Investment securities
1 50
Customer loans
0 0
29%
25 20
7%
20 8%
0
15 Net interest income
-20
%
%
10
Fee and commission income
5 -40
24%
61% Trading income
0 -60
Tier 1 capital ratio Tier 2 capital ROE (RHS)
6
85
Arab National Bank (A1/Sta; A/Sta; A/Sta)


Our stable credit outlook on ANB
• Strong retail franchise: ANB is a mid-sized bank by Saudi Arabian
is predicated on the bank’s strong
standards. Although it provides a broad range of services, it has a particularly
franchise, particularly in retail
strong franchise in the retail and middle-market segments, leveraging off of its
banking; its better business mix
relatively broad branch network. Retail loans account for approximately 25%
than some of its peers; its good
of the bank’s loan portfolio; partly as a result of this, ANB has a better
earnings generation capacity; and
business mix than some of its peers. The bank derived 48% of revenues from
the strong regulatory framework in
retail banking in 2010, considerably more than some of its larger competitors.
Saudi Arabia. Our view also takes
• Asset-quality deterioration: Like other Saudi banks, ANB experienced rapid
into account recent asset-quality
loan growth in the years leading up to the economic slowdown. The bank’s
deterioration, high concentrations
corporate loan portfolio more than doubled between 2005 and 2008. Also, as
of loans and deposits, and the
is common among Saudi banks, the loan portfolio is somewhat concentrated
bank’s almost entirely domestic
due to the dominance of a few high-profile family-owned groups or public-
franchise.
sector entities. The bank’s asset quality deteriorated in 2009 as a result of
defaults by a handful of corporates and privately owned companies, and asset
quality indicators are now slightly worse than average. The bank’s NPL ratio
stood at 3% at end-2010, with loan-loss cover of 108%.
• Solid funding base: The bank’s funding base is strong, benefiting from a
large branch network. Customer deposits provided 86% of total funding at
end-2010. We estimate that around half of customer deposits are sourced
from retail customers, with the remainder sourced from corporate customers.
The loan-to-deposit ratio is reasonable, at 79% at end-2010, and has been
FINANCIALS
fairly stable for a few years.

• Good earnings generation capacity: The bank’s earnings generation
capacity is strong thanks to high NIMs – reflecting the relatively large
weighting of retail loans on its balance sheet – and good efficiency levels.
Despite stagnant loan volumes in 2010 and higher loan-loss provisions, the
Company profile
bank has maintained reasonable levels of profitability. Its reported ROA for
Arab National Bank (ANB) is the 2010 was 1.7%.
seventh-largest bank in Saudi Arabia, • Good capital adequacy: The bank’s capital adequacy ratios are good by
with total assets of SAR 116bn (USD international standards, and are broadly in line with the average of the large
31bn) as of end-2010. It has the fourth- Saudi banks. ANB’s Tier 1 capital ratio was 15.1% at end-2010, with an
largest branch network in the country equity-to-assets ratio of 13.3%.
(139 branches) and a market share of • Limited geographic diversification: As a purely domestic player, ANB is
deposits of 10%. ANB has a particularly more exposed than some of its peers to the performance of the Saudi
strong franchise among smaller economy. Although the economy is large and the banking system can achieve
corporates and retail customers, and high profits due to features such as a large percentage of unremunerated
derives a greater percentage of its deposits, the economy is heavily dependent on the hydrocarbon sector. ANB
profits from retail banking than some of appears to be keen to expand outside of Saudi Arabia. It attempted to buy two
its larger competitors. ANB is 40% Egyptian banks in 2006 and in 2008 in joint bids with Arab Bank, its
owned by Jordan’s Arab Bank cornerstone shareholder.
(BBB/Ba3/A-), though the two have no • Strong regulatory framework: In our opinion, the Saudi Arabian Monetary
technical services agreement. Saudi Authority (SAMA) is one of the more competent and proactive regulators in
investors control the remaining 60%, the GCC, which strengthens the credit profiles of the Saudi banks. There is
with the General Organisation for Social also a strong tradition of support in Saudi Arabia, and no bank has ever failed.
Insurance (GOSI) owning an 11% stake.
The bank’s franchise is primarily
domestic, though it aims to expand
outside of Saudi Arabia.
7
86
Arab National Bank (A1/Sta; A/Sta; A/Sta)
Summary financials Revenues by type of business (2010)

2007 2008 2009 2010
Balance sheet (SAR mn) 10% Retail banking
Total assets 94,468 121,307 110,297 116,035 Corporate banking
Loans 61,122 74,662 66,811 66,203 12%
Investments 21,025 28,228 23,261 32,841 Treasury
48%
Deposits 73,692 92,743 82,680 84,199 Investment and brokerage
Interbank 4,447 10,509 8,714 12,097 services
Other
Debt 3,188 1,875 1,688 1,688
28%
Equity 10,525 12,671 14,478 15,397
Income statement (SAR mn) Funding mix

Net interest income 2,904 3,354 3,456 3,158
Other income 1,052 1,576 1,037 1,346 100%
Total income 3,956 4,930 4,493 4,504
Overheads (1,428) (1,582) (1,601) (1,644) 75%
50%
Impairments (67) (855) (527) (964)
Profit before tax 2,461 2,486 2,367 1,908 25%
Net income 2,461 2,486 2,367 1,908
0%
Key ratios (%) Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Net interest margin 3.5 3.2 3.1 2.9 Customer deposits Interbank Debt securities and loans
FINANCIALS
ROE 26.6 21.4 17.4 12.8
6
ROA 2.9 2.3 2.0 1.7
4
%

Loan-to-deposit 82.9 80.5 80.8 78.6 2
Equity-to-assets 11.1 10.4 13.1 13.3
Tier 1 capital 13.9 11.9 14.3 15.1 0
Total capital 17.1 14.1 16.3 17.0 2006 2007 2008 2009 2010
4 400
3% 10%
1% Cash
3 300
Interbank
2 200
%
1 100
28%
Customer loans
0 0 58%
20 40
18%
15 30

%
%
12%
0 0 Other
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 70%
8
87
Banque Saudi Fransi (Aa3/Sta; A/Sta; A/Sta)


We initiate coverage of BSFR with
• Robust corporate banking franchise: Although BSFR is a mid-sized bank
a positive outlook. Despite the
by local standards, it has a strong presence in the corporate segment, and
recent economic slowdown in
has long-standing relationships with some of the country’s largest companies.
Saudi Arabia, BSFR’s financial
Its links with the Crédit Agricole group give BSFR a competitive advantage
metrics have remained intact. Our
over some domestic competitors in terms of management know-how and
positive outlook reflects the
technical support.
bank’s strong franchise in Saudi
• Sound asset-quality indicators: Saudi banks’ loan books tend to be
Arabia’s corporate market, its
concentrated, as the economy is dominated by a few private groups and
close links with the Crédit Agricole
public-sector entities. Because of its traditional focus on corporate banking,
group, its good track record, its BSFR is vulnerable to infrequent but high-profile corporate headlines.
sound financial fundamentals, and Notwithstanding this, the bank was not materially affected by the economic
Saudi Arabia’s strong regulatory slowdown and its exposures to the Saad and Al-Gosaibi groups, and its asset-
framework. Our view also takes quality indicators are among the best for Saudi banks. The bank’s NPL ratio
into account systemic features in was 1.3% at end-2010, with loan-loss cover of about 140%. We do not expect
the region, such as high asset quality to deteriorate materially in 2011.
concentrations of loans and • Above-average profitability: Historically, BSFR has had a relatively high
deposits, limited transparency and dependence on net interest income due to the larger percentage of loans on
limited geographic diversification. its balance sheet. Although its NIMs are narrower than those of its peers
because of the preponderance of corporate lending, profitability has been
above average due to better cost efficiency and lower cost of risk. However,
like the other banks, BSFR reported declining profitability in 2008 and 2009 as
FINANCIALS
a result of rising provisions on loans and investments. Profitability started to

improve in 2010 thanks to lower provisions. The bank has offset the impact of
low interest rates through a lower overall cost of funding, achieved by
increasing the percentage of non-interest-bearing deposits in its funding base
(from 31% at end-2008 to 46% at end-2010). ROA for 2010 was 2.3%.
Company profile • Growing retail banking franchise: BSFR’s exposure to the retail segment is
Banque Saudi Fransi (BSFR) traces its relatively small, particularly on the asset side of the business. While its market
roots back to 1949 and is the country’s share of retail deposits is c.7%, its market share of retail loans is only about
sixth-largest bank, with total assets of 3%. A key element of the bank’s strategy since 2006 has been to expand its
SAR 123bn (USD 33bn) at end-2010 retail franchise targeting wealthier customers, partly leveraging off Crédit
and a market share of deposits of 9%. Agricole’s retail banking expertise. Although the percentage of retail loans in
its portfolio increased from 6% at end-2008 to around 9-10% at end-2010, this
The bank is 31% owned by Crédit
is still below average, and there is scope for further growth. Retail banking
Agricole Corporate and Investment
accounted for 31% of operating income in 2010.
Bank, which manages BSFR under a
• Good capital adequacy: The bank’s capital adequacy compares favourably
technical service agreement. The
with its Saudi peers’ and is good on a standalone basis. At end-2010, the Tier
General Organisation for Social
1 capital ratio stood at 14%, with an equity-to-assets ratio of 14.6%.
Insurance (GOSI), a government-related
• Solid funding base: The bank’s funding base is strong, with customer
entity, owns a further 12.8%, while two
deposits providing 93% of total funding at end-2010. We estimate that
prominent families own 16%. The
approximately 45% of customer deposits are sourced from retail customers,
remaining 40% is widely held. The
with corporates accounting for most of the remainder. As is the case for its
bank’s operations are almost entirely
Saudi peers, its corporate deposit base is likely to be concentrated in a few
domestic, and it operates through a
large corporates and public-sector entities. Because of the large percentage
network of 81 branches. Although BSFR
of loans on the bank’s balance sheet, its loan-to-deposit ratio is slightly above
has a particularly strong franchise in
average, at 87%, but is still reasonable by international standards.
corporate banking, it offers a full suite of
• Strong regulatory framework: In our opinion, the Saudi Monetary Authority
financial services, including retail
(SAMA) is one of the more competent and proactive regulators in the GCC,
banking and wealth management,
which strengthens the credit profiles of the Saudi banks. There is also a
investment banking and brokerage.
strong tradition of support in Saudi Arabia, and no bank has ever failed.
9
88
Banque Saudi Fransi (Aa3/Sta; A/Sta; A/Sta)
Summary financials Loans by industry (Dec-2010)

2007 2008 2009 2010
8% Overdrafts &
Balance sheet (SAR mn)
9% Commercial
Total assets 99,808 125,865 120,572 123,218 1%
Credit Cards
Loans 59,850 80,866 78,315 80,977
Investments 22,501 27,710 17,481 19,841
Total liabilities 88,567 111,796 104,821 105,195 Consumer
Deposits 74,007 92,791 91,237 93,529
Interbank 8,123 8,402 4,832 2,313
Other
Debt 2,438 4,927 4,946 4,894 82%
Equity 11,241 14,069 15,752 18,023

100%
Other income 1,405 1,571 1,245 1,329
Total income 3,701 4,404 4,267 4,399 75%
Overheads (948) (1,096) (1,158) (1,259)
Pre-provision profits (PPP) 2,753 3,308 3,109 3,141 50%
Impairments (42) (504) (642) (339)
Net income 2,711 2,804 2,468 2,801
0%
Key ratios (%)
FINANCIALS
ROE 26.3 22.2 16.6 16.6 6
ROA 3.0 2.5 2.0 2.3
%

Loan-to-deposit 80.9 87.1 85.8 86.6 2
Equity-to-assets 11.3 11.2 13.1 14.6
0
Tier 1 capital 12.2 11.0 13.1 14.2
2006 2007 2008 2009 2010
Total capital 12.2 11.6 13.7 14.7

2.0 200
5% 9%
4% Cash
150
Interbank
1.0 100
%
16%
50
Customer loans
0.0 0
66%
Capital adequacy and ROE Revenues by business (2010)
20 40 3%
Retail banking
15 30 20%
31%
10 20
Corporate banking
%
%
5 10 Treasury
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Investment banking and
brokerage
10
89
BBK (A3/RFD; NR; A-/RWN)


We are revising our credit outlook
• Small economy, small size: With a population of 1mn, Bahrain’s economy is
on BBK to stable from negative.
relatively small and is not well diversified, which leads to concentrations in
Our stable outlook reflects the
both assets and liabilities. As a result, on an absolute basis, BBK is a
bank’s good franchise in its
relatively small bank and one of the smallest issuers in the GCC.
domestic market and the potential
• Good domestic franchise: BBK enjoys strong name recognition in its
for an improvement in asset
domestic market. Although the bank’s loan portfolio is skewed towards the
quality in 2011, which should filter
commercial segment (85% of total loans at end-2010), retail banking
through to earnings via lower
contributed 27% of 2010 pre-provision operating income.
provisioning charges. Our view
• Asset-quality deterioration: Like a number of banks in the region, BBK
also takes into account the bank’s
experienced an increase in NPLs in 2009. In BBK’s case, this was related to
high NPL ratio, its large exposure
non-Bahraini exposures. Although asset quality began to improve gradually in
to the construction and real-estate
2010, the bank’s 9% reported NPL ratio at end-2010 was among the highest
sectors, and the concentrated
for the banks we cover in the region. Loan-loss cover stood at 67%, which is
nature of Bahrain’s economy.
below average. However, asset-quality indicators are expected to improve in
2011.
• High exposure to construction and real estate: The bank’s exposure to
construction and commercial real estate represented 14% and 16.5%,
respectively, of end-2010 total loans. Residential mortgages accounted for a
further 5%. The bulk of this exposure is to the Bahraini real-estate market –
which has experienced some price correction, although not as much as other
markets. Exposure to the Dubai real-estate market represented around 5% of
FINANCIALS
total loans.
• Average profitability: The bank’s profitability is broadly in line with the
regional average. BBK’s fairly large share of the domestic retail market gives
it access to a pool of stable and relatively inexpensive deposits, and its cost
Company profile efficiency is above average. In addition, over the last few years, results have
been negatively affected by higher impairments on investment and loan
BBK, established in 1971, is one of the portfolios. The bank’s ROA for 2010 was 1.7%.
largest domestic retail banks in Bahrain, • High capital adequacy: BBK’s capital adequacy ratios are sound by regional
with total assets of BHD 2.5bn (USD standards. The bank’s Tier 1 capital ratio was 14% at end-2010, with an
6.5bn) at end-2010 and a market share equity-to-assets ratio of 9.8%.
of deposits of c.18%. Either directly or • Improving funding: Customer deposits are the bank’s main source of
through subsidiaries and associates, funding, providing 74% of total funding at end-2010. In addition, the bank’s
BBK provides a full range of financial loan-to-deposit ratio – which deteriorated in 2008 and 2009 – has been
services, including commercial, retail steadily improving and stood at 80% at end-2010, which compares favourably
and Islamic banking and insurance. The in the region. We understand that approximately one-third of customer
bank has a network of 15 branches in deposits are sourced from Bahraini and Kuwaiti government-related entities,
Bahrain, branches in Kuwait and India, which provides some stability to the funding base.
and a representative office in Dubai. • Rundown of CDS portfolio: BBK has a CDS portfolio written mostly on
BBK’s main shareholders are Ithmaar corporates and sovereigns. The bank saw this portfolio as a proxy for lending,
Bank, a Bahraini wholesale bank (25%); and in 2008 it represented almost 100% of the bank’s equity. The portfolio has
the Social Insurance Organisation, a been shrinking since then as no further positions have been added, and it
government-linked body (32%); and the stood at USD 300mn at end-2010.
Kuwait Investment Authority (18.7%). • Likelihood of support if required: Although banks have failed in Bahrain in
The remainder is held by Bahraini and
the past (most recently in 2009), they have tended to be niche players,
Kuwaiti investors.
wholesale banks without systemic importance, or foreign-owned institutions.
As one of the larger domestic retail banks in Bahrain, we believe that BBK
would be supported if the need arose.
11
90
BBK (A3/RFD; NR; A-/RWN)

2007 2008 2009 2010
Balance sheet (BHD mn) 15%
Total assets (USD mn) 5,551 5,745 6,045 6,492 Commercial loans and
Total assets 2,093 2,166 2,279 2,447 overdrafts
Loans 1,128 1,352 1,269 1,276
Investments 460 287 357 425
Deposits 1,118 1,337 1,517 1,594
Consumer loans
Interbank 354 251 240 196
Debt 339 329 257 370
85%
Equity 237 209 231 241
Income statement (BHD mn) Funding mix

Net interest income 51 57 61 56
100%
Other income 37 58 31 53
Total income 88 115 93 109 75%
Overheads (31) (35) (43) (46)
Pre-provision profits (PPP) 57 80 50 63 50%
Impairments (27) (52) (14) (24)
Profit before tax 30 27 35 40 25%
Net income 30 27 35 39
0%
Net interest margin 2.7 2.8 2.8 2.4 Customer deposits Repos Interbank Debt securities and loans
FINANCIALS
7
ROE 14.1 12.1 15.9 16.6
ROA 1.6 1.3 1.6 1.7
5
%

3
Loan-to-deposit 100.9 101.2 83.6 80.1
1
Tier 1 capital 12.7 12.9 13.0 14.0
2006 2007 2008 2009 2010
Total capital 23.3 20.1 17.5 18.6
12 100
3%
20%
9 75 Cash
6 50 Interbank
%
3 25
53% Customer loans
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 17% Other
Capital adequacy and ROE Operating income by segment (2010)

25 25 6%
20 20 27%
Retail banking
15 15
%
Corporate banking
%
10 10 30%
5 5 International banking
0 0 8% Investments, treasury, others
Income from associates
12
91
Burgan Bank (A2/Neg; BBB+/Neg; NR)


We initiate coverage of Burgan
• Stimulus package: In early 2010, the Kuwaiti parliament approved a four-
Bank with stable outlook. Our
year, KWD 30bn (USD 100bn) development plan aimed at financing
stable view is predicated on the
infrastructure development projects. Even if it is only partially implemented,
expected benefits to the Kuwaiti
the plan should boost Kuwait’s private sector, and this should ultimately
private sector from increased
benefit the banks. Our view on Burgan is largely predicated on the
government spending on
implementation of the stimulus package and its positive impact on the
infrastructure projects, an
economy.
expected improvement in asset
• Reorganisation and regional expansion: Burgan is one of KIPCO’s four
quality and earnings, and the
core businesses. The aim is for Burgan to serve as the umbrella organisation
positive earnings impact of the
for the group’s commercial banking activities. Since 2008, the bank has
bank’s geographic diversification
increased its stakes in, or acquired from UGB (a Bahrain-based wholesale
outside of its home market.
bank also controlled by KIPCO), stakes in banks in Jordan, Algeria, Iraq and
However, the performance of the
Tunisia. The bank’s strategy is to continue to expand its footprint in the region.
bank’s Kuwaiti operations – its
However, Kuwait remains Burgan’s key market, accounting for over 70% of
core business – remains weak
the bank’s loan portfolio.
because of elevated provisions to
• Systemic importance: Burgan is a mid-sized player by regional standards,
deal with the sharp deterioration in
and it is roughly one-third the size of the country’s largest bank. However, as
asset quality in 2009. Also, NPLs,
the fourth-largest bank, it has systemic importance to the Kuwaiti banking
while declining, remain elevated.
system, in our view. Kuwait was slower than some other GCC countries to
provide support to its banking system after the onset of the global financial
crisis. However, government-related entities have proven to be supportive of
FINANCIALS
Kuwaiti banks from a liquidity point of view and, like its peers, Burgan has
benefited from this.
• Asset-quality deterioration: Along with Dubai, Kuwait was particularly
affected by the economic slowdown in 2008 and 2009. Like a number of other
Kuwaiti banks, Burgan experienced asset-quality deterioration in 2009 due to
Company profile
exposures to (1) investment companies, (2) troubled sectors such as
Burgan Bank is the fourth-largest construction and real estate, and (3) indirect exposure to losses from weak
bank in Kuwait, with total assets of equity markets. After peaking at 10% at end-2009, Burgan’s NPL ratio has
KWD 4.1bn (USD 14.8bn) at end- begun to decline and stood at 6.1% at end-2010, with loan-loss cover of 73%.
2010 and a domestic market share of Our expectation is that the worst part of the asset quality cycle is over.
deposits of around 10%. Burgan • Weak profitability, particularly in Kuwait: Burgan’s performance has
Bank is 41% owned by Kuwait weakened since 2008 due to rising loan-loss provisions. Profitability remained
Projects Company (Holding) weak in 2010 as a result of high provisions, higher overheads due to
(KIPCO), one of Kuwait’s largest consolidation of the results of the operations acquired from UGB, and
investment companies, which is amortisation of intangibles. 2010 results were also flattered by a mark-to-
indirectly controlled by the two sons market gain of KWD 10.9mn on its 45.3% holding in Bank of Baghdad
of the Amir of Kuwait. A further 17% following the acquisition from UGB of a further 6.5% stake, and by a KWD
is owned by United Gulf Bank (UGB), 4.2mn gain from the consolidation of the results of Bank of Baghdad and
a Bahrain-based sister bank also Tunis International Bank, two banks previously controlled by UGB. In the
controlled by KIPCO. Burgan offers a absence of these two items, Burgan would have reported negligible profits for
full range of banking services, but it 2010. The bank’s foreign operations have helped to offset the negative
has a particular focus on corporate earnings impact of the domestic Kuwaiti business. We expect the bank’s
lending. Burgan operates through a earnings to start to improve in H2-2011, as it appears that NPLs have peaked,
network of 21 domestic branches and and provisions should start declining.
has controlling stakes in banks in • Shareholder support through capital increase: The bank’s capital base
Jordan, Algeria, Iraq and Tunisia. was bolstered by a KWD 100mn (USD 340mn) rights issue in May 2010,
which put the bank on a much better footing to deal with deteriorating asset
quality. The Tier 1 capital ratio stood at 15.6% at end-2010, with an equity-to-
assets ratio of 13%.
13
92
Burgan Bank (A2/Neg; BBB+/Neg; NR)

2007 2008 2009 2010
Balance sheet (KWD mn)
Banking
Total assets 2,848 3,943 4,094 4,150
Loans 1,421 2,133 2,247 2,136 44% 46%
Investments 544 495 558 600
Treasury and
Total liabilities 2,496 3,557 3,666 3,609 investments
Deposits 1,649 2,416 2,425 2,565
Interbank 732 795 978 811 International banking
Debt 43 198 123 109
Equity 351 386 428 541 10%
Income statement (KWD mn) Funding mix

100%
Total income 106 121 155 165 75%
Overheads (28) (34) (44) (65)
Pre-provision profits (PPP) 78 88 111 100 50%
Impairments (0) (47) (83) (72)
Profit before tax 77 41 28 28 25%
0%
Key ratios (%)
Costs-to-income 26.4 27.7 28.2 39.6
FINANCIALS
ROE 24.5 9.7 5.1 3.2
ROA 3.0 1.1 0.5 0.4 5
%

3
Loan-to-deposit 86.2 88.3 92.7 83.3
1
Tier 1 capital 14.9 9.0 12.1 15.6
2006 2007 2008 2009 2010
Total capital 16.6 13.8 16.9 21.0
12 240
7%
18% Cash
9 180
Interbank
6 120
%
3 60
Customer loans
0 0
52% 14%
25 25
9%
20 20
15 15
%
Net interest income

%
10 10 21%
5 5
0 0 Fees/commissions
Dec-07 Dec-08 Dec-09 Dec-10
70% Other income
14
93
Commercial Bank Of Qatar (A1/Sta; A-/Sta; A/Sta)


We are changing our outlook on
• Supportive framework: During the recent financial crisis, Qatar was one of
CBQ to positive from stable. This
the most interventionist countries in the GCC. Support measures included
reflects the bank’s strong
capital injections, the removal of poorly performing portfolios of local equity
franchise as Qatar’s largest
investments made in Q1-2009 (amounting to QAR 938mn in the case of
private-sector bank, its good
CBQ), and the purchase of real-estate and other loans in Q2-2009 (amounting
metrics, and Qatar’s strong
to QAR 3bn for CBQ). No Qatari bank has ever failed, and as the country’s
support for its financial
second-largest bank, CBQ has strong implicit support, in our view. This drives
institutions. We expect CBQ to
our positive view on CBQ despite some challenges on the asset quality front.
benefit over the medium term from
• Systemic importance: Although CBQ is a mid-sized player by regional
infrastructure development for the
standards, we believe it has systemic importance as the country’s second-largest
2022 FIFA World Cup. Our view
bank and largest private-sector bank.
also incorporates the bank’s
• Strong domestic franchise in the private sector: CBQ has a strong brand
relatively low exposure to the
and good name recognition in both the corporate and retail segments. Its
government sector; very rapid
exposure to the public sector is relatively small, representing only about 15%
growth in the bank’s loan
of total loans at end-2010. In the retail segment – which accounted for 20% of
portfolio; the recent deterioration the bank’s loan portfolio at end-2010 – the bank has a particularly strong
in the quality of its retail loan franchise among expatriates and affluent Qataris.
book; and the impact of the central • Rapid loan growth: CBQ’s loan portfolio grew five-fold between 2004 and
bank requirement that 2008, in line with the growth rate of other Qatari banks. Loan growth was
conventional banks close their negligible in 2009 and 2010 as the private sector, CBQ’s traditional
Islamic banking operations by stronghold, slowed. Despite the sale of real-estate loans to the government,
FINANCIALS
end-2011. CBQ – like some of the other banks – has significant exposure to real estate
(20% of total loans at end-2010). This sector experienced particularly strong
growth in the run-up to the economic slowdown. We expect loan growth to
gradually pick up in 2011, with the momentum accelerating in 2012-13 as
infrastructure spending related to the 2022 World Cup picks up.
Company profile • Good metrics: CBQ’s profitability is underpinned by wide NIMs, reflecting its
Commercial Bank of Qatar (CBQ) was private-sector exposure. Although earnings declined in 2009 due to negligible
set up in 1975 and is the second-largest loan growth, rising funding costs and higher provisions, they improved in 2010
bank in the country, with end-2010 total as funding costs and provisions declined. ROA for 2010 was a healthy 2.7%.
assets of QAR 63bn (USD 17bn) and a The bank’s NPL ratio deteriorated to 3.2% at end-2010 from 2.2% at end-
market share of assets of around 15%. 2009, with loan-loss cover of 90%; this was partly driven by the change in the
The bank’s main shareholders are the criteria for recognising NPLs from 180 days to 90 days. However, including
Qatar Investment Authority (QIA), the renegotiated/restructured loans, problem loans represent 7% of CBQ’s total
country’s sovereign wealth fund, with loans, the highest among the big four Qatari banks. Over 60% of the bank’s
(16.7% stake); and a group of prominent NPLs were in the retail book, and at end-2010, retail NPLs represented 14%
local families that founded the bank of retail loans. Further asset-quality deterioration is expected in 2011.
(28% stake). The remainder is widely Although CBQ has a strong domestic funding base, deposit growth in 2008
held. Although corporate banking is the and 2009 did not keep pace with loan growth, and the bank become more
main contributor to earnings, CBQ also reliant on wholesale funding. Since then, conditions have improved. At end-
offers a broad range of retail and Islamic 2010, customer deposits provided 68% of total funding and the bank’s loan-to-
banking services through its 26 deposit ratio was 101%, the highest among the big four banks. Capital
branches in Qatar. CBQ has a 35% adequacy ratios are strong, with a Tier 1 capital ratio of 16.6% at end-2010
stake in National Bank of Oman, and an equity-to-assets ratio of 20%. Capital will be further strengthened
Oman’s second-largest bank, and a following the QIA injection in Q1-2011.
40% stake in United Arab Bank, a small • Geographic diversification: CBQ has taken steps to expand outside the
bank in the UAE, which it manages relatively small Qatari market by acquiring controlling stakes and taking
under a technical agreement. management control of overseas banks. While the contribution from its non-
Qatari businesses is still relatively small (less than 5% of 2010 revenues), we
expect it to increase over time.
15
94
Commercial Bank Of Qatar (A1/Sta; A-/Sta; A/Sta)

2007 2008 2009 2010
8% 15% Government and
Balance sheet (QAR mn) 4% agencies
Total assets (USD mn) 12,472 16,841 15,747 17,176 Services
Total assets 45,397 61,302 57,317 62,520 11%
Consumer
Loans 25,021 33,898 31,929 33,567 13%
Investments 4,665 4,775 9,747 10,024 Real estate
Total liabilities 39,169 51,323 45,307 50,020 8%
Contracting
Deposits 25,766 32,186 26,272 33,281
Interbank 4,908 10,923 7,391 3,553 Commerce trading
Debt 7,623 6,096 9,924 10,994 21%
20% Industry
Equity 6,228 9,978 12,010 12,500
Income statement (QAR mn) Funding mix

Net interest income 929 1,292 1,661 1,778 100%
Other income 1,147 1,684 1,270 939
Total income 2,076 2,976 2,931 2,717 75%
Overheads (540) (750) (759) (787)
Impairments (145) (524) (648) (295)
Net income 1,391 1,702 1,524 1,635
0%
Key ratios (%)
Costs-to-income 26.0 25.2 25.9 29.0
FINANCIALS
ROE 23.5 21.0 13.9 13.3 6
ROA 3.7 3.2 2.6 2.7
%

2
Loan-to-deposit 97.1 105.3 121.5 100.9
Equity-to-assets 13.7 16.3 21.0 20.0
0
Tier 1 capital 10.9 15.2 17.2 16.6
2006 2007 2008 2009 2010
Total capital 11.9 15.7 18.9 18.5
4 120
10% 14%
Cash
3 90
7% Interbank
2 60
%
1 30
16% Customer loans
0 0
20 30
9%
6%
20
Net interest income
10
%
%
10 Fee and commission income

19%
0 0 Share of associates
66%
Other
16
95
Doha Bank (A2/Sta; A-/Sta; A/Sta)


We initiate coverage of Doha Bank
• Supportive framework: Qatar was one of the most interventionist countries in
with a positive outlook, which
the GCC during the financial crisis. Support provided to the banks included (1)
reflects the bank’s strong
capital injections into most listed banks, with the government acquiring 10%
domestic franchise, its good
stakes; (2) the removal of poorly performing portfolios of local equity investments
metrics and the positive outlook
(QAR 536mn in the case of Doha Bank), and (3) the purchase of real-estate and
for the Qatari economy. Our view
other loans (QAR 1.664bn for Doha Bank). A further capital injection of 10% of
incorporates the proactive steps
outstanding capital into the banks was announced in early 2011.
taken by the Qatari authorities to
• Systemic importance: Although Doha Bank is a mid-sized player by regional
support the country’s banks, and
standards, it has systemic importance as the fourth-largest bank in Qatar, in our
an expected surge in lending to
view. This is especially true in the run-up to the 2022 World Cup, which will
meet infrastructure demand for the
require significant resources to finance infrastructure building.
2022 FIFA World Cup. Our credit
• Above-average exposure to retail lending: Compared with its domestic
outlook also takes into account
peers, Doha Bank’s loan portfolio has a larger percentage of exposure to
very rapid growth in the bank’s
retail customers (31% at end-2010). Conversely, exposure to the government
loan portfolio in recent years; the
and government-related sector is relatively small, at 7%. As a result, the bank
deterioration in the quality of its
has had above-average NIMs over the last few years, but also a higher cost of
retail loan portfolio; its relatively
risk.
low exposure to the public sector;
• Rapid loan growth: Although growth in Doha Bank’s loan portfolio has been
and the impact of the central bank
slower than that of its Qatari peers, the bank has grown rapidly by regional
requirement that conventional
standards. Its loan portfolio has grown three-fold since 2005, which, among other
banks close their Islamic banking
factors, reflects rapid growth in the Qatari economy. We believe the bank’s good
FINANCIALS
operations by end-2011.
asset-quality indicators may (like those of its peers) be flattered by rapid loan
growth, which can mask potential asset-quality issues, and by the removal of
potentially troublesome real-estate assets as part of the government’s support
package. We expect loan growth to gradually pick up in 2011, with the
momentum accelerating in 2012-13 as infrastructure spending related to the
Company profile
World Cup picks up.
Doha Bank is Qatar’s fourth-largest • Sound metrics: Although Doha Bank’s profitability is below average by local
bank, with total assets at end-2010 of standards, it is good by regional standards, with a ROA of 2.3% in 2010. In
QAR 47bn (USD 13bn) and a 10% addition to above-average cost of risk, the bank’s profitability is affected by a
market share of deposits. Following two higher cost base, in line with its greater retail focus. The bank’s asset-quality
capital injections, the State of Qatar – indicators are sound, although worse than the local average. At end-2010, the
through the Qatar Investment Authority NPL ratio stood at 3.9%, with loan-loss cover of 92%. The higher-than-
(QIA) – is the bank’s largest average NPL ratio is driven by higher exposure to the retail segment, which
shareholder, with a 16.7% stake. The bore the brunt of the economic slowdown in 2009 and 2010. However, retail
remaining shares are widely held. NPLs at end-2010 stood at 7.1%. The bank’s capital adequacy ratios are
Although the bank offers a broad range sound, though slightly below the average of its private-sector peers. At end-
of retail and corporate banking services, 2010, the bank’s Tier 1 capital ratio stood at 11%, with an equity-to-assets
its activities are more geared towards ratio of 12.8%. (These numbers do not reflect the second capital injection
the retail segment than those of its from the QIA in early 2011.) Capital adequacy ratios could decline as a result
peers, catering to both locals and of increased lending for projects related to the 2022 FIFA World Cup. The
expatriates. Domestic loans accounted bank’s funding base is good, with customer deposits accounting for 77% of
for over 90% of total loans at end-2010. total funding at end-2010 and a loan-to-deposit ratio of 86%. Customer
deposits sourced from the government and government-related entities
represented 22% of total customer deposits, slightly below average compared
with local peers. We expect the loan-to-deposit ratio to deteriorate over the
medium term if the expected increase in lending related to the 2022 FIFA
World Cup materialises without a proportionate increase in the system’s
deposit base.
17
96
Doha Bank (A2/Sta; A-/Sta; A/Sta)

2007 2008 2009 2010 7% Government and
Balance sheet (QAR mn) 6% agencies
26%
Services
Total assets 30,058 38,970 45,996 47,230
Loans 19,140 23,933 25,896 26,547 Consumer
Investments 3,104 3,380 3,825 5,217
Total liabilities 26,439 34,058 40,145 41,195 Real estate
31%
Deposits 20,043 23,244 27,890 30,822
14% Contracting
Interbank 4,371 8,161 10,489 8,683
Debt 1,231 1,232 825 768 Others
Equity 3,619 4,913 5,851 6,034 16%

Net interest income 833 1,107 1,241 1,532
100%
Other income 639 568 804 607
Total income 1,472 1,675 2,044 2,139 75%
Overheads (487) (540) (645) (723)
Pre-provision profits (PPP) 985 1,135 1,400 1,416 50%
Impairments (58) (188) (425) (359)
Profit before tax 927 947 975 1,056 25%
Net income 926 947 974 1,054
0%
8
FINANCIALS
ROE 29.0 22.2 18.1 17.7 6
ROA 3.6 2.7 2.3 2.3
%

Loan-to-deposit 95.5 103.0 92.8 86.1 2
Equity-to-assets 12.0 12.6 12.7 12.8
0
Tier 1 capital 10.0 11.1 11.5 11.0
2006 2007 2008 2009 2010
Total capital 15.5 13.5 14.4 13.6
5 120
3%
4 22% Cash
90
3 Interbank
60
%
2
1 30 8%
Customer loans
0 0 56%
20 30
10%
20
10 18% Net interest income
%
%
10
0 0
72%
Tier 1 capital ratio Total capital ratio ROE (RHS)
18
97
Dubai Islamic Bank (Baa1/Sta; BBB-/Neg; A/Sta)


Our negative credit view on DIB is
• Strong Islamic franchise provides funding advantage: As the largest Islamic
predicated on its very high
bank in the UAE, DIB has a competitive advantage, as some customers prefer
exposure to the construction and
to conduct their business with Islamic institutions. The bank’s strong Islamic
real-estate sectors amid a sharp
franchise translates into a robust funding structure. Customer deposits
price correction in the Dubai
accounted for 93% of DIB’s total funding at end-September 2010 – one of the
property market; the acquisition of
highest in the UAE. We estimate that over two-thirds of these deposits are retail-
a majority stake in Tamweel, which
driven. As a result, compared to the other Dubai-based banks, DIB has a below-
will further increase the bank’s
average cost of funding. Finally, on account of its strong retail franchise and
exposure to the real-estate market;
restrictions on Islamic banks’ ability to manage their liquidity, the bank has one
and limited disclosure and of the lowest loan-to-deposit ratios in the UAE: 81% at-end-September 2010.
transparency. Our view also takes
• High exposure to real estate: Direct exposure to real estate accounted for
into account the bank’s franchise
40% of DIB’s total loans at end-2009, the last date for which this data is
in Islamic financing, which gives it available. This is almost double the average for the other banks in the UAE.
one of the strongest retail funding This exposure is likely to be concentrated in Dubai, which has experienced a
bases among UAE banks, and the significant property price correction. DIB also has indirect real-estate exposure
bank’s reasonable earnings through its 43% stake in Deyaar Development, a real-estate development
generation capacity to date. company, and through investment properties held on its balance sheet (3% of
total assets at end-September 2010.)
• Sovereign exposure: The bank’s reported sovereign exposure – presumably
mostly to Dubai – is more manageable than that of the other Dubai banks,
representing 8% of DIB’s total loans at end-2009. However, on an absolute
FINANCIALS
basis, this exposure is material.

• Increase in Tamweel stake: In late 2010, DIB announced an increase in its
stake in Tamweel, a troubled Dubai-based mortgage lender with total assets of
AED 10bn, to 58% from 21%. As a result of this, we estimate that DIB’s overall
exposure to the real-estate market will increase to around 50% of total loans.
Company profile • Asset-quality deterioration: Because of its high exposure to real estate, the
Dubai Islamic Bank (DIB) is the sixth- bank’s reported asset-quality indicators deteriorated sooner and more sharply
largest domestic bank in the UAE, with than those of some of the other Dubai-based banks. Impaired loans represented
total assets of AED 82bn (c. USD 22bn) 6% of total loans at end-2009, with loan-loss cover of 63%. However, the bank
and an estimated market share deposits was not affected by exposure to the Saudi groups Saad and Al-Gosaibi, or by
exposure to the Dubai World restructuring. Although we expect DIB’s asset
of 7% at end-September 2010. The
quality to have deteriorated over the course of 2010, it likely deteriorated less
bank, set up in 1975, is the largest
than that of its peers with exposure to the aforementioned groups.
Islamic bank in the UAE and one of the
• Reasonable earnings generation capacity: Wide NIMs – on the back of low
leading Islamic banks in the world,
funding costs – give DIB reasonable earnings generation capacity at a pre-
offering a broad range of Shariah-
provision level. The bank’s provisions were relatively low until September 2009
compliant products from a network of 68
(36% of pre-provision profits). This enabled DIB to report an ROA of 1.2% for
branches. DIB is 30% owned by the
9M-2010, despite limited loan growth and tighter margins.
Dubai government and 4.3 owned by
• Capital adequacy: DIB’s Tier 1 capital ratio has been increasing since 2008,
the General Pensions and Social
and stood at 13.5% at end-September 2010. While this is reasonable on a
Security Authority, a UAE federal body.
regional basis, higher capital adequacy ratios would be welcome given the
The remainder is widely held.
bank’s high real-estate exposure and relatively low loan-loss coverage ratio.
Historically, DIB’s core competence has
• Supportive framework: There is a strong tradition of support in the UAE, and
been in the real-estate market, and as a
no bank has been allowed to fail. This was evident in the 2008 injection of AED
result, its exposure to this sector (both
50bn (USD 13.6bn) of deposits into the system by the Ministry of Finance, and
direct and indirect) is among the highest
by the subsequent offer in 2009 for banks to convert these deposits into LT2
for UAE banks.
capital. In our view, Tamweel is a good example of the willingness to find a
market solution for institutions facing difficulties. As a large retail deposit-taking
institution and the largest Islamic bank in the UAE, DIB enjoys some implicit
support, in our view.
19
98
Dubai Islamic Bank (Baa1/Sta; BBB-/Neg; A/Sta)
Summary financials Revenues by segment (9M-2010)

2007 2008 2009 9M-10
13%
Balance sheet (AED mn)
Retail and business
Total assets 84,360 84,757 84,304 81,848 banking
Loans 40,535 52,659 49,925 50,235
Investments 12,594 13,334 11,217 10,165 Corporate and
Total liabilities 73,695 76,007 75,323 72,622 53% investment banking
Deposits 65,176 66,329 64,196 61,658 34%
Interbank 2,241 3,331 1,449 2,003 Treasury
Debt 2,755 2,755 2,415 2,357
Equity 10,665 8,749 8,981 9,226

100%
Other income 2,203 1,248 1,055 633
Total income 3,688 3,493 3,394 2,212 75%
Overheads (1,505) (1,420) (1,357) (992)
50%
Impairments (301) (521) (818) (444) 25%
Profit before tax 1,882 1,552 1,219 776
0%
Net income 2,513 1,554 1,212 773
Costs-to-income 40.8 40.6 40.0 44.9
FINANCIALS
ROE 25.8 16.0 13.7 11.3 6
ROA 3.4 1.8 1.4 1.2
Impaired loans-to-loans 4.0 4.1 6.0 NA 4
%
Loan-loss coverage 66.8 55.9 62.7 NA

2
Loan-to-deposit 62.2 79.4 77.8 81.5
Equity-to-assets 12.6 10.3 10.7 11.3 0
Tier 1 capital 12.6 11.1 12.4 13.5
2006 2007 2008 2009 9M-2010
Total capital 13.1 10.7 17.5 18.4
8 80
11% 9%
2% Cash
6 60
12% Interbank
4 40
%
2 20
Customer loans
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Other
25 30
6%
20
20
%
%
10
10
5 Fees/commissions
0 0
Other income
Dec-07 Dec-08 Dec-09 Sep-10 71%
20
99
Emirates NBD (A3/Neg; NR; A+/Sta)


ENBD was among the banks worst
• Systemic importance: There is a strong tradition of support in the UAE, and
affected by the economic
no bank has been allowed to fail. In our opinion, as the largest bank in the
downturn in Dubai. Our negative
UAE, ENBD has systemic importance not only to Dubai but to the entire UAE
view reflects the deterioration in
banking system. This support was evident in the injection of AED 50bn (USD
the bank’s asset quality since
13.6bn) of deposits into the system by the Ministry of Finance in late 2008,
2009, the potential for further
and the subsequent offer for banks to convert these deposits into LT2 capital.
asset-quality deterioration in 2011
In addition, in mid-2009, ICD injected AED 4bn (USD 1.1bn) of Tier 1 capital
if other corporate restructurings in
into ENBD. We believe that further support, if required, would be forthcoming
Dubai materialise, and the bank’s
from either the Dubai or the UAE government.
moderate earnings generation
• Asset-quality deterioration: Like the other Dubai-based banks, ENBD’s
capacity. These factors are partly
asset quality has been hit hard by the Dubai economic slowdown. This has
mitigated by ENBD’s strong
been mainly the result of (1) strong loan growth in the run-up to the crisis
franchise in Dubai, its systemic
(44% p.a. on a pro-forma basis between 2005 and 2008); (2) high exposure to
importance to the UAE banking
government-related entities; (3) large exposure to construction and real
system, and the improvement in
estate; and (4) high exposure to retail loans. The bank’s reported impaired
the bank’s funding base and
loan ratio (including Dubai World exposure and exposure to the Saad and Al
liquidity.
Gosaibi groups) stood at 10% at end-2010 – among the highest for UAE
banks. Loan-loss cover was 41%, considerably lower than the UAE average.
Given the potential for additional corporate restructurings in 2011, the bank’s
asset-quality indicators are likely to deteriorate over the course of 2011.
• High sovereign exposure: Sovereign exposure in the bank’s loan portfolio
FINANCIALS
has been creeping up and stood at almost 26% of total loans at end-2010, up
from 17% at end-2008. This is among the highest for UAE banks. We
understand that this exposure is mainly to the Dubai government.
• Improved funding: In the run-up to the crisis, ENBD was more dependent than
its peers on wholesale funding. As a result, it was particularly affected by the
Company profile
dislocation in the funding markets. Since then, the bank has increased the
Emirates NBD (ENBD) is the largest weight of liquid assets on its balance sheet, strengthened its funding base by
bank in the UAE and the GCC, with end- increasing the weight of customer deposits and, over the course of 2010, shrunk
2010 total assets of AED 286bn (USD its loan portfolio. The bank’s loan-to-deposit ratio, as calculated by us, stood at
78bn) and UAE market shares of about 105% at end-2010 – down considerably from 130% at end-2009 – and
20% of loans and 18% of deposits. customer deposits provided 78% of total funding (up from 63% at end-2007).
ENBD is the result of the 2007 merger of • Moderate earnings generation capacity: At a pre-provision level, ENBD’s
Emirates Bank International (EBI) and earnings capacity is moderate and was hampered in 2010 by the shrinkage in
National Bank of Dubai (NBD). It is 56% its loan portfolio and higher funding costs. Although the bank’s cost of risk has
owned by the government of Dubai been manageable since 2009, this has been at the expense of lower loan-loss
through Investment Corporation of coverage ratios, particularly in 2010. In order to achieve loan-loss cover of
Dubai (ICD), with the remainder widely 100% at end-2010, the bank would have had to report a loss of AED 12bn.
held. The bank has the largest branch • Increased capital adequacy: The bank’s capital ratios strengthened
network in the UAE (135 branches) and considerably in 2009 following the Tier 1 capital increase by ICD and the
is active in wholesale banking, retail conversion of Ministry of Finance deposits into LT2. In 2010, capital adequacy
banking, Islamic banking (through its ratios benefited from the contraction in the bank’s loan portfolio. At end-2010,
99.8%-owned subsidiary Emirates the bank’s Tier 1 capital ratio stood at 12.8%, with an equity-to-assets ratio of
Islamic Bank), and investment 11.8%. Given its relatively high NPL ratio and low loan-loss coverage ratio,
management. higher capital adequacy ratios would be desirable.
21
100
Emirates NBD (A3/Neg; NR; A+/Sta)

2007 2008 2009 2010
9%
Total assets 253,812 282,414 281,576 286,216
Corporate Retail
Loans 166,474 208,930 214,614 197,096 26%
Investments 23,549 19,635 16,764 14,961
Deposits 138,646 162,315 169,660 188,470 Sovereign Islamic
Interbank 46,328 48,426 29,995 18,857
Debt 28,929 30,070 36,841 32,185 10%
Equity 25,159 25,762 31,971 33,750
Funding mix
Income statement (AED mn)
Net interest income 2,594 5,834 7,412 6,795 100%
Other income 2,179 2,613 3,381 2,927
Total income 5,149 8,785 10,632 9,057 75%
Overheads (1,946) (3,452) (3,645) (3,147)
Impairments (618) (1,653) (3,635) (3,550)
25%
Profit before tax 2,585 3,681 3,352 2,360
Net income 2,585 3,681 3,343 2,339 0%
Key ratios (%)
Customer deposits Repos Interbank Debt securities and loans
Net interest margin NA 2.4 2.9 2.6
Fee income-to-income NA 25.6 18.0 20.3
Costs-to-income 37.8 39.3 34.3 34.7
Costs-to-average assets NA 1.3 1.3 1.1
FINANCIALS
ROE NA 14.5 11.6 7.1
ROA NA 1.4 1.2 0.8 5
%
Loan-loss coverage 107.1 100.7 102.0 40.5 3

Loan-to-deposit 120.1 128.7 126.5 104.6
Equity-to-assets 9.9 9.1 11.4 11.8 1
Tier 1 capital NA 8.5 11.9 12.8
2008 2009 2010
Total capital NA 10.5 18.7 20.1
15 150
8% 13%
Cash
10 100 5%
Interbank
%
5%
5 50 Investment securities
Customer loans
0 0
Capital adequacy and ROE Revenues by segment (2010)

25 25
4% 2%
20 20 8%
Corporate banking
15 15 7% Consumer banking
%
%
10 10 45% Treasury
5 5 Islamic Banking
0 0 Cards processing
Dec-08 Dec-09 Dec-10 34% Others
22
101
First Gulf Bank (A2/Neg; NR; A+/Sta)


• Strong implicit support: There is a strong tradition of support in the UAE,
on FGB to stable from negative.
and no bank has failed. Because of its majority ownership by members of the
Our view incorporates the bank’s
ruling family, we believe there is implicit support for FGB. The bank also plays
ownership by senior members of
a policy role as the conduit for the UAE government’s national housing
the Abu Dhabi ruling family, the
scheme. Support was demonstrated in early 2009, when Abu Dhabi made a
support demonstrated by Abu
AED 16bn (USD 4.4bn) Tier 1 capital injection into five of its banks (FGB
Dhabi for its banks, the bank’s
received AED 4bn).
high capital adequacy, and its
• Very rapid loan growth: FGB has been one of the fastest-growing banks in
consistently high profitability.
the UAE. Its loan portfolio grew more than 14-fold from AED 6.5bn at end-
However, our view also takes into
2004 to AED 141bn at end-2010. This is twice the growth rate in the overall
account the extremely rapid
system. Although loan growth slowed to a more moderate 6% in 2010, we are
growth in the bank’s loan portfolio
concerned that, in light of the economic slowdown in the UAE since 2009,
over the past five years, above-
asset quality could suffer once loans season.
average exposure to the
• Asset-quality deterioration: The bank’s NPL ratio more than doubled in
construction and real-estate
2010 to 3.7%, while loan-loss cover declined to 89%. Some of the increase in
sectors and the ongoing economic
NPLs was driven by a change in NPL classification criteria. Unlike other banks
slowdown in the UAE.
in the UAE, until November 2010 FGB used 180 days rather than 90 days to
define non-performance of loans. Although the bank’s asset-quality indicators
have been flattered by very strong loan growth in recent years, they still
compare favourably with the average for the Abu Dhabi banks.
• Above-average exposure to potentially vulnerable sectors: In recent
FINANCIALS
years FGB has had above-average exposure to the construction and real-
estate sectors. Direct exposure to these sectors was 23.5% of total loans at
end-2010. The bank’s investment property portfolio accounted for 5% of total
assets at end-2010. The bank also has high exposures to the consumer
sector (22.8% of total loans at end-2010), the non-retail personal loan sector
Company profile
(6%) and share financing (4%). However, we understand that its personal loan
First Gulf Bank (FGB) is the third-largest exposures are mostly to UAE nationals and high-net-worth foreigners.
bank in Abu Dhabi and the fourth-largest • High earnings generation capacity: Despite increasing provisions since
bank in the UAE, with an estimated 9% 2008, FGB has remained one of the most consistently profitable banks in the
market share of deposits and total UAE. This is due to a combination of strong loan growth, wide NIMs, a low
assets at end-2010 of AED 141bn cost base and, to a lesser extent, exceptional gains on revaluations of its real-
(c.USD 38bn). The bank was set up in estate portfolio. In 2010 the bank reported healthy net income of AED 3.5bn,
1979. Following asset-quality problems which translates to a ROA of almost 2.7% – one of the highest among the
in the mid-1990s, senior members of the UAE banks.
Abu Dhabi ruling family acquired a 45% • High capital adequacy: FGB is among the best-capitalised banks in the
stake and now hold 66%. FGB is mainly UAE, with an equity-to-assets ratio of 17.5% at end-2010 and a Tier 1 capital
a domestic bank and operates through a ratio of 19.6% (using Central Bank of the UAE guidelines rather than Basel II
relatively small network of 19 branches. guidelines). However, because of rapid loan growth at some points, the bank’s
Although the bank was historically a capital base has been tight in the past. For example, its capital ratio fell to the
corporate bank, since the mid-2000s it regulatory minimum of 10% at end-June 2008.
has pursued an aggressive strategy to • Good funding base, but high loan-to-deposit ratio: Despite having a
expand its retail banking activities. relatively small branch network, FGB has a good funding base, with customer
Today, FGB has one of the highest deposits accounting for 87% of total funding at end-2010. Although the bank’s
exposures to the retail sector among loan-to-deposit ratio is high by international standards (107% at end-2010), it
UAE banks, accounting for an estimated is in line with the average for the other Abu Dhabi banks.
40% of its loan book.
23
102
First Gulf Bank (A2/Neg; NR; A+/Sta)

2007 2008 2009 2010
3%
Total Assets (USD mn) 19,945 29,297 34,189 38,354
Corporate banking
Total Assets 73,198 107,522 125,473 140,758
38%
Total Loans 44,409 79,363 90,386 95,628 Treasury
Investment securities 10,110 9,980 13,482 14,988
Retail banking
Total Liabilities 63,077 90,902 102,570 116,127
Customer Deposits 46,373 70,403 79,036 89,564 Real estate
45%
Interbank 2,786 3,113 1,941 1,527
Other
Debt securities and loans 5,785 5,785 9,820 11,724
7%
Total Equity 10,120 16,620 22,903 24,631

100%
Other income 1,142 2,214 2,245 2,041
Total income 2,826 4,698 6,164 6,305 75%
Overheads (611) (1,135) (1,081) (1,122)
50%
Impairments (207) (566) (1,680) (1,639) 25%
0%
Net income 2,008 2,997 3,313 3,544
Key ratios (%) Customer deposits Repos Interbank Debt securities and loans
Costs-to-income 21.6 24.2 17.5 17.8
FINANCIALS
ROE 21.0 22.4 16.8 14.9 8
ROA 3.3 3.3 2.8 2.7 6
%
4
Loan-to-deposit 95.8 112.7 114.4 106.8 2
Equity-to-assets 13.8 15.5 18.3 17.5
0
Tier 1 capital* 15.4 14.6 19.2 19.6
2006 2007 2008 2009 2010
Total capital * 15.1 14.1 22.6 22.9
4 240
8% 6%
7%
3 180 Cash
2 120 11% Interbank

%
1 60
Customer loans
0 0
25 30
9%
20
20
%
%
10 24%
10
0 0 Other
67%
Tier 1 capital Tier 2 capital ROE (RHS)
* Central Bank of the UAE guidelines; Sources: Company reports, Standard Chartered Research
24
103
Gulf International Bank (A3/RFD; BBB+/Sta; A/Sta)


We are revising our outlook on
• Strong shareholder support: Like a number of financial institutions in the
GIB to stable from negative. Our
GCC, GIB suffered considerable losses from its investment securities portfolio
view takes into account strong
in 2007 and 2008. In late 2007, GIB’s existing shareholders committed to a
support from the Saudi Arabian
capital increase of USD 1bn. However, three of the shareholders did not take
government, the significant de-
part, leaving Saudi government-related entities to increase their aggregate
risking of GIB’s investment
stake to 55%. In early 2009, GIB sold its entire USD 4.8bn portfolio of CDOs,
portfolio, the bank’s robust capital
asset-backed securities and subordinated bank debt to the Saudi Monetary
adequacy and its strong franchise
Authority (SAMA). As a result, SAMA’s stake increased to 97.2%. In 2009,
in the businesses in which
SAMA’s stake was transferred to PIF. In our view, with a Saudi government-
operates. Our view also
related entity being virtually the sole shareholder, support for GIB is very
incorporates the bank’s low
strong.
earnings generation capacity, the
• Significant balance-sheet de-risking: GIB’s total assets almost halved to
long-term strategic challenges
USD 15.5bn at end-2010 from USD 30bn at end-2007. Following the USD
affecting wholesale banks
4.8bn transfer of assets, GIB’s investment portfolio is now comprised mainly
throughout the world, and
of senior debt from financial institutions and government debt. At end-2010
challenges in implementing GIB’s
the investment portfolio represented only 20% of total assets, down from more
strategy of expanding into retail
than 30% at end-2007.
banking.
• Long-term strategic challenges: GIB has recognised expertise in the areas
in which it operates. The bank’s high-level relationships with governments and
institutions throughout the region are a key strength. However, the wholesale
banking model is under pressure, not only in the GCC but throughout the
FINANCIALS
world. In our view, GIB’s key strategic challenges remain its reliance on
wholesale funding and its low earnings generation capacity.
• Reliance on wholesale funding: Although the bank’s balance sheet is very
liquid and its shareholders and depositors proved loyal during the bank’s most
difficult period, GIB remains reliant on the wholesale market for its funding
Company profile
needs. Since 2010, the bank has reduced its reliance on short-term funding
Gulf International Bank (GIB) is a by tapping the Saudi term market.
wholesale bank based in Bahrain with • Low earnings generation capacity: Although GIB has a relatively low cost
total assets of USD 15.5bn at end-2010. base, its earnings generation capacity is hampered by the narrow margins of
Its customers are financial institutions, its core businesses. Excluding provisions for its investment securities and
local corporations, governments and loan portfolio, the bank’s return on assets has hovered below 0.75% since
multinationals. Geographically, GIB’s 2006. At the bottom-line level, the bank’s results between 2007 and 2009
main focus is the GCC region, where it were marred by provisions of USD 1.3bn from its investment securities
has strong expertise in project and trade portfolio and USD 600mn on its loan portfolio. As a result, GIB reported three
finance and syndicated lending. consecutive years of losses. Lower provisions enabled GIB to return to profit
Exposure to the Bahrain market is in 2010, despite continued shrinkage in its loan portfolio.
relatively small. The bank is active in • Universal banking strategy: GIB aims to reposition itself by capitalising on its
corporate advisory, capital markets and strong links with governments in the region – particularly Saudi Arabia, the
asset management. Saudi Arabia’s largest market in the region and GIB’s main shareholder. The bank aims to
Public Investment Fund (PIF) is the diversify its loan portfolio and increase loan granularity by expanding into mid-
main shareholder, with a 97.2% stake, sized corporates. It also aims to develop a retail banking franchise, initially in
following GIB’s recapitalisation in late Saudi Arabia and also in some of the other GCC markets in the medium term.
2008. The other five GCC governments • Solid capital base: GIB’s capital ratios have been steadily improving since
own the remainder. GIB aims to become 2007 and are now significantly higher. At end-2010, the bank’s Tier 1 capital
a universal bank by developing its retail ratio stood at 18.7%, with an equity-to-assets ratio of 12.4%.
banking presence, initially in Saudi • Non-call of LT2 bonds: In 2009, GIB became the first issuer in the GCC to
Arabia. announce that it would not call a callable LT2 debt issue.
25
104
Gulf International Bank (A3/RFD; BBB+/Sta; A/Sta)
Summary financials Revenue by business (2010)

2007 2008 2009 2010
Balance sheet (USD mn) 15%
Total assets 29,954 25,034 16,208 15,528
Loans 12,602 12,972 9,298 7,510 Merchant banking
8%
Investments 9,413 2,428 2,068 3,148 Treasury
Financial markets
Deposits 13,674 15,009 7,495 6,479
61% Corporate and other
Interbank 5,971 3,386 2,554 2,224 16%
Debt 3,208 2,982 3,519 3,688
Equity 2,215 1,926 1,779 1,918
Income statement (USD mn) Funding mix

Other income 37 34 80 68 100%
Total income 342 323 286 224
Overheads (141) (143) (123) (113) 75%
Pre-provision profits (PPP) 201 180 163 111
50%
Impairments (959) (567) (314) (4)
Profit before tax (758) (387) (151) 107 25%
Net income (757) (396) (153) 100
0%
8
FINANCIALS
ROE (37.2) (19.1) (8.2) 5.4 6
ROA (2.8) (1.4) (0.7) 0.6
%
Loan-loss coverage 443.5 4,570.0 174.1 101.6

Loan-to-deposit 92.2 86.4 124.1 115.9 2
0
Tier 1 capital 9.5 12.5 16.4 18.7
2006 2007 2008 2009 2010
Total capital 12.0 17.3 22.3 24.3
10 4,800
2% 7%
8 Cash
3,600
6 23% Interbank
2,400
%
4
2 1,200 48%
Customer loans
0 0
20%
30 20
6%
6%
20 0
Net interest income
%
%
10 -20 19%
0 -40 Trading income

Other
26
105
Gulf Investment Corporation (Baa2/Sta; NR; BBB/Sta)


We are revising our outlook on
• Balance-sheet de-risking: Like a number of institutions in the GCC, GIC
GIC to stable from negative. Our
experienced considerable losses on its portfolio of investment securities in
view takes into account the
2008. The portfolio has since been de-risked following significant provisioning
significant de-risking of GIC’s
and impairment charges, and the company’s balance sheet shrank from USD
balance sheet, the company’s
9.1bn at end-2007 to USD 5.8bn at end-2010.
significantly improved credit
• Shareholder support: GIC’s shareholders were supportive in the aftermath
metrics – in particular reduced
of the 2008 losses, injecting deposits to offset the outflow from traditional
leverage – and ongoing support
depositors. The shareholders also showed strong support by injecting USD
from its shareholders, both from a
1.1bn of fresh capital in 2009, despite administrative delays by some countries
capital and liquidity point of view. in disbursing the funds. Although GIC’s government ownership is a positive,
Our view also incorporates the the fragmented nature of this ownership means that the company cannot rely
company’s dependence on on a single shareholder for support, in our view.
wholesale funding. • Refocusing of activities: The company is refocusing on its core mission of
identifying and investing in companies or sectors to help develop the GCC.
This will entail increasing principal investments in companies in niche sectors
such as metals, chemicals, power, telecommunications and financial services.
The de-risked portfolio of investment securities will remain in place to maintain
liquidity, generate recurrent income and diversify the company’s overall risk.
• Investment portfolio: In broad terms, GIC’s USD 4.8bn investment portfolio
is comprised of principal investments in the GCC and a securities/funds
portfolio. The principal investments portion consists of a portfolio of 28
FINANCIALS
companies. It accounted for 37% of the overall portfolio at end-2010 and

generated around 77% of 2010 profits. The principal investments are long-
term in nature, and the exit strategy is mainly through IPOs or private sales.
The securities/funds portfolio is comprised mainly of debt securities (40% of
the overall portfolio), managed funds (13%) and investments in private equity
Company profile funds (6%).
• Reduction in leverage: The company’s leverage increased in 2008 following
GIC is an investment company
losses on its debt securities investment portfolio. However, leverage has
headquartered in Kuwait with total
improved considerably following the capital injection from its shareholders and
assets of USD 5.8bn at end-2010. GIC
the deleveraging of the balance sheet. Leverage stood at 2.7x at end-2010.
is owned equally by the six GCC
Although GIC is not required to report capital under Basel guidelines, it does
governments (Bahrain, Kuwait, Oman,
so in order to adhere to best practices. Its Tier 1 capital ratio stood at 30% at
Qatar, Saudi Arabia and the UAE). It
end-2010.
was set up in 1983 with the aim of
• Wholesale funding profile: GIC derives its funding from a variety of sources,
creating a regional financial institution
including customer deposits (33% of total funding at end-2010), the repo
that would stimulate private enterprise
market (25%) and the term debt market (34%). Its shareholders and
and fund projects to underpin economic
customers were supportive during the company’s most difficult period. The
and social development. GIC is not a
company has been able to continue to tap the term markets, and had USD
bank, and its commercial lending 1.2bn in term funding at end-2010. (GIC tapped the term debt market again in
activities ceased a few years ago. Its February 2011, raising MYR 600mn). However, the wholesale nature of its
main businesses are principal investing funding base exposes the company to the vagaries of the markets.
(investments in projects and equity • Improving profitability: Based on preliminary numbers for 2010 (which are
participations) and global markets subject to revision), earnings improved considerably, mainly reflecting the
(including treasury and proprietary stronger underlying performance of the principal investments portfolio. The
investment in fixed income, equities and company’s earnings generation capacity is aided by a very low cost base and a
private equity funds). relatively low cost of funding. We expect the contribution from the principal
investments portfolio to become more recurrent in future, which should reduce
earnings volatility.
27
106
Gulf Investment Corporation (Baa2/Sta; NR; BBB/Sta)
Summary financials Asset mix (Dec-2010)

2007 2008 2009 2010 5%
11% Cash and interbank
Balance sheet (USD mn)
1%
Total assets 9,175 7,211 6,113 5,776
Loans 40 110 85 74 22% Loans
Investments 8,125 5,790 4,739 4,761
Total liabilities 7,217 6,549 4,363 3,659 Securities
Deposits 1,333 2,482 1,237 1,158
Interbank 1,471 414 123 271 Investments in
Debt 1,820 2,071 1,587 1,179 associates
Equity 1,958 662 1,750 2,117 Other
61%
Net interest income (25) (13) (1) (7) Investment portfolio (Dec-2010)
Other income 472 22 154 230 Debt securities
Total income 447 9 153 223 6%
Overheads (52) (48) (46) (50) 13% Investments in
Pre-provision profits (PPP) 395 (39) 107 173 associates
41% Equity participations
Impairments (246) (958) (16) (22) 3%
Profit before tax 149 (997) 91 151
Equities and equity
Net income 252 (997) 91 151
11% funds
Managed funds
Key ratios (%)
Net interest margin NM NM NM NM Private equity funds
Fee income-to-income 9.4 170.0 14.4 3.1 26%
Costs-to-income 11.6 480.0 30.1 22.4
Funding mix
Provisions-to-PPP 62.3 NM 15.0 12.7 100%
FINANCIALS
ROE 13.0 (76.0) 7.5 7.8
ROA 2.9 (12.2) 1.4 2.5 75%
Impaired loans-to-loans NM NM NM NM
Loan-loss coverage NM NM NM NM 50%
Loan-to-deposit 3.0 4.4 6.9 6.4
25%
Leverage (Assets-to-equity) 4.7x 10.9x 3.5x 2.7x
0%
Customer deposits Repos Interbank Debt securities and loans
Profits by segment (2010) Funding maturity (Dec-2010)
2% Principal investments 4%
15%
22%
Debt capital markets > 1Y 1-5Y
6%
Equity and alternative

investments
< 5Y
Treasury
74%
77%
Leverage and ROE Term debt maturity (Dec-2010)
15 40 750
20
10 0 500
USD mn
-20
%
X
-40
5 -60 250
-80
0 -100 0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 2011 2012 2013 2014
Leverage ROE (RHS) Term debt
28
107
Kuwait Projects Company (Holding) (Baa2/Neg; BBB-/Sta; NR)


Our view takes into account the
• Portfolio of investments: KIPCO has evolved from a diversified portfolio
deterioration in some of KIPCO’s
investor into a strategic investor with controlling stakes in its core businesses.
core businesses (most notably
The company aims to have board control over the companies in which it
Burgan Bank) in 2009 and 2010
invests so that it can influence dividend policy. The group’s core businesses
and its increased reliance on other
are: (1) commercial banking (46% of 9M-2010 consolidated revenues and
group companies for dividends.
72% of consolidated assets at end-September 2010); (2) asset management
Our view also takes into account
and investment banking (27% and 18%, respectively); (3) insurance (8% and
KIPCO’S good liquidity profile,
1%, respectively); and (4) media via Orbit Showtime Network (10% and 3%,
reasonable credit metrics, and
respectively). KIPCO’s core investments are rated in the BBB/Baa range or
close links with members of the
are unrated. Its non-core activities include a portfolio of investments in the
Kuwaiti ruling family, as well as
real-estate, industrial and services sectors.
the streamlining of the company’s
• Streamlining of investments in financial services: KIPCO is a complex
financial-services businesses and
structure with multiple intra-group linkages and transactions. In 2009 and
the positive impact on the Kuwaiti
2010, the group reorganised its financial-services businesses to group the
private sector of the expected
various companies into three segments: commercial banking under Burgan
government stimulus package.
Bank, investment banking and asset management under UGB, and KAMCO
and insurance under Gulf Insurance. This entailed transfers of assets across
subsidiaries.
• Presentation of accounts: At a consolidated level, KIPCO’s financials
resemble those of a bank because of its large investments in financial-
services companies. As an investment company, KIPCO is dependent on
FINANCIALS
dividends from its subsidiaries and income from its investments. Therefore,
bondholders of the parent company are in effect subordinated to bondholders
of the operating companies. Also, KIPCO’s profile could change materially
based on purchases and/or disposals. However, investments in financial
services have been a core activity for KIPCO for over 10 years.
Company profile
• Reasonable financial metrics: Kuwait’s investment companies experienced
Kuwait Projects Company (Holding)
significant turmoil in 2009 and 2010, including a number of defaults. KIPCO
(KIPCO) is a Kuwait-based investment
successfully navigated this difficult period, but its performance has
company with a portfolio of investments
deteriorated, mainly on account of weaker performance at Burgan Bank.
in the MENA region. The company was
Although UGB and Burgan Bank have historically provided the bulk of the
set up in 1975 and had total assets of
dividends, Burgan Bank did not declare cash dividends in 2009 and 2010; as
KWD 5.3bn (USD 19bn) at end-
a result, KIPCO has to rely mainly on dividends from UGB. Credit metrics at
September 2010. Al Futtooh Holding
the unconsolidated level were reasonable at end-September 2010, with low
Company (AFH) – a vehicle
leverage (debt/capital: 52%, net debt/portfolio value: 21%) and very good
controlled by the two sons of the Amir
liquidity (cash/short-term debt: 533%). However, because of the reduction in
of Kuwait – is the main shareholder,
dividends, coverage has weakened considerably (dividends and interest
with a 57.9% stake. KIPCO currently
received/gross interest paid: 0.8x). (Note that 2007 financials were distorted
has direct and indirect ownership
by the sale of the company’s stake in Wataniya to Qatar Telecom, which
interests in a portfolio of over 60
resulted in net gains of KWD 468mn, or c.USD 1.6bn.)
companies operating in eight sectors
• Refinancing: KIPCO’s debt refinancing requirements at the parent-company
across more than 20 countries.
level over the next two years do not look particularly onerous given the
However, its core investments are
existing cash balances on its balance sheet. At end-September 2010, the
two banks (Burgan Bank and United
company had cash balances of KWD 366mn, versus debt maturities of KWD
Gulf Bank, or UGB), an insurance
68.9mn for the remainder of 2010 (which were repaid), KWD 184mn for 2011
company (Gulf Insurance Company),
and KWD 16mn for 2012. The covenants on the loans contain no
and a media company (Orbit Showtime).
requirements that the company maintain these cash balances, and it could
use the cash for acquisitions. Cash balances can also be placed on deposit
with subsidiary banks.
29
108
Kuwait Projects Company (Holding) (Baa2/Neg; BBB-/Sta; NR)
Summary financials (parent company) Revenues and coverage

2006 2007 2008 2009 9M-10
Income statement (KWD mn) 600 50
Revenues 75.3 583.9 44.7 71.7 62.8
EBITDA 68.1 560.0 43.1 63.6 53.4 40
Gross interest expense 11.3 17.9 18.4 14.8 12.8
450
Profit before tax 38.2 50.1 521.7 24.1 46.3 30
KWD mn
Net income 38.2 50.1 521.7 24.1 46.3 300
X
20
Balance sheet (KWD mn)
Cash and equivalents 20.9 260.2 105.0 313.6 366.8 150
10
Total assets 517.7 980.0 834.2 1,079.7 1,194.3
Total debt 326.6 265.9 259.2 485.9 602.2
0 0
Net debt 356.2 57.8 179.0 172.4 235.4
2006 2007 2008 2009 9M-10
Shareholders’ equity 232.9 674.0 554.5 557.0 545.4
Revenue EBITDA/interest coverage (RHS)
Cash flow (KWD mn)

Dividends received 32.5 31.8 64.3 40.1 7.1 Debt metrics
Cash interest received 2.4 14.4 13.3 6.4 4.8 150 50
Gross interest paid (17.6) (18.0) (13.8) (12.7) (15.1)
Dividends paid (25.8) (51.4) (91.5) (42.4) (26.7)
120 40
Key ratios
FINANCIALS
Net debt/portfolio value (%) 41 5 15 19 21 90 30
Dividends received/net
%
%
2.1 8.7 113.1 6.4 0.7
financing charges (x)
60 20
Debt/equity (%) 119 39 47 87 110
Cash/ST debt (%) 35 515 263 421 533
EBITDA/interest cover (x) 3.9 31.1 3.1 5.0 3.5 30 10
0 0
2006 2007 2008 2009 9M-2010
Debt/equity Ned debt/portfolio value
Estimated portfolio value Debt maturity (Sep-2010)
1,250 300
1,000 240
180
KWD mn
750
KWD mn
120
500
60
250
0
0 2010 2011 2012 2013 2014 >2014
2005 2006 2007 2008 2009 Q3-2010 Total debt
30
109
Mashreqbank (Baa1/Neg; BBB+/Neg; A/Sta)


Like the other Dubai banks,
• Supportive framework: Although Mashreqbank is the only major UAE bank
Mashreqbank was particularly
without a stake owned by the government or the ruling families, we believe
affected by the economic
that it has systemic importance because of its large retail deposit-taking
downturn in Dubai. Our negative
network. No bank has failed in the UAE, and the Ministry of Finance recently
view reflects the deterioration in
supported the system by injecting AED 50bn (USD 13.6bn) of deposits and
the bank’s asset quality since
subsequently giving banks the option to convert those deposits into LT2
2009, and the negative earnings
capital.
impact of rising provisions and
• High exposure to retail lending: The bank is recognised as a leader in the
high funding costs. Our view also
retail lending space and has traditionally had a strong franchise, particularly
factors in the potential for further with foreign borrowers. Retail loans represented almost 27% of conventional
asset-quality deterioration in 2011. loans at end-September 2010. Although the risk profile of retail lending is
Partly offsetting these factors, the attractive on paper because lenders have direct claims on borrowers’ salaries,
bank has more diversified foreign borrowers carry a higher risk, as they can leave the country.
earnings streams than its peers, a • Asset-quality deterioration: Like the other Dubai-based banks,
very liquid balance sheet, and Mashreqbank suffered a hit to its asset quality because of Dubai’s recent
above-average capital adequacy economic slowdown. Beginning in 2009, the bank’s asset-quality indicators
ratios. deteriorated sharply on account of retail exposures, as well as exposures to
the Saad and Al-Gosaibi groups. Although the bank’s NPL ratio is not
disclosed, we estimate that it stood at around 8% at end-September 2010,
with loan-loss cover of around 75%. There is a risk that NPLs will continue to
rise in view of the challenging operating environment and the potential for
FINANCIALS
additional corporate restructurings in Dubai in 2011.

• Above-average exposure to the government: The bank’s reported
exposure to the government and public sector is above average, at 21% of
total conventional loans at end-September 2010. A large percentage of this
exposure is presumably to the Dubai government, in our view.
Company profile • High cost of funding: Since the dislocation in the funding markets in 2008, the
bank has increased the weight of liquid assets on its balance sheet and shrunk
Mashreqbank is the fifth-largest
its loan portfolio by more than 25%. However, this has come at a cost, and its
domestic bank and the largest privately-
cost of funding has been among the highest for the UAE banks over the past
owned bank in the UAE by total assets
two years. Also, customer deposits represent a smaller percentage of the
(AED 87bn, or c.USD 24bn, at end-
bank’s overall funding base (71% of total funding at end-September 2010)
September 2010), and it has a market
relative to peers.
share of deposits of c.5%. The bank
• Diversified earnings streams: Because of its retail banking and insurance
was founded in 1967 and is 82% owned
businesses, Mashreqbank has more diversified earnings streams than some
by the Al Ghurair family, a prominent
of its peers. Net interest income accounted for only 54% of revenues in 9M-
UAE family. Mashreqbank is the only
2010, compared with an average of over 70% for the other UAE banks we
major bank in which the government or
cover. Domestic retail banking was the largest contributor to revenues,
a ruling family does not have a stake. It
accounting for 37% of total revenues.
has more diversified revenue streams
• Pressure on earnings: The relatively high percentage of retail loans in
than its peers, as it was one of the first
Mashreqbank’s loan portfolio has historically translated into above-average
UAE banks to expand actively into retail
interest income. This allowed the bank to offset worse-than-average cost
banking. It also has exposure to life and efficiency stemming from its large branch network. However, since 2008,
P&C insurance through its 64% stake in shrinking volumes, higher funding costs and rising provisions have affected
Oman Insurance Company. The bank’s the bank’s earnings. In 2009 and 9M-2010, the bank’s ROA hovered around
main businesses are wholesale banking, 1%, which is around average for the Dubai banks.
retail banking, insurance and Islamic • Highest capital adequacy: Mashreqbank has traditionally been one of the
banking. Mashreqbank operates better-capitalised banks in the UAE. Its Tier 1 capital ratio stood at 15.6% at
through a relatively large network of 55 end-September 2010, with an equity-to-assets ratio of 14%, which is higher
branches in the UAE and offices in 11 than the other Dubai banks.
countries.
31
110
Mashreqbank (Baa1/Neg; BBB+/Neg; A/Sta)
Summary financials Revenues by segment (9M-2010)

2007 2008 2009 9M-10 6% Domestic retail
Total assets (USD mn) 23,877 25,407 25,783 23,732 Domestic corporate
Total assets 87,627 93,244 94,622 87,096 4% 37%
Loans 35,995 48,434 42,121 37,733 International
Investments 14,772 13,409 2,212 2,106 6% Treasury and capital markets
Deposits 48,287 51,478 53,658 49,233 Islamic banking
11%
Interbank 13,397 12,336 6,972 7,365 Insurance
Debt 5,251 5,246 7,188 5,960
Equity 10,484 10,682 11,847 12,229 25% Other

100%
Other income 2,650 1,900 2,859 1,492
Total income 3,850 3,984 4,962 3,236 75%
Overheads (1,410) (1,874) (1,770) (1,308)
50%
Impairments (299) (341) (1,990) (1,209) 25%
Profit before tax 2,132 1,748 1,077 719
0%
Net income 2,126 1,732 1,065 708
Key ratios (%) Customer deposits Repos Interbank Debt securities and loans
FINANCIALS
ROE 23.1 16.4 9.5 7.8 6
ROA 2.9 1.9 1.1 1.0
Impaired loans-to-loans 0.7 0.2 6.9 NA 4
%
Loan-loss coverage 382.3 1,209.1 58.4 NA

Loan-to-deposit 74.5 94.1 78.5 76.6 2
Equity-to-assets 12.0 11.5 12.5 14.0
0
Tier 1 capital* 14.6 12.9 14.0 15.6
2006 2007 2008 2009 9M-2010
Total capital* 17.8 14.1 20.2 22.3
8 1,500
7%
1,200 18% Cash
6
900 Interbank
4
%
600
2 300
Customer loans
0 0 51%
12%

25 30
20 19%
20
15
Net interest income
%
%
10
10
5 54% Fees/commissions
0 0
27%
Dec-06 Dec-07 Dec-08 Dec-09 Sep-10 Other income
* Central Bank of the UAE guidelines, Sources: Company reports, Standard Chartered Research
32
111
National Bank Of Abu Dhabi (Aa3/Sta; A+/Sta; AA-/Sta)


Our stable view on NBAD takes
• Strong ties with the government of Abu Dhabi: NBAD was set up to be the
into account the bank’s good track
banker to the Abu Dhabi government, and it remains the emirate’s flagship
record, consistent earnings,
bank. A large portion of government-related business (both on the asset and
conservative management and
liability sides) is channelled through NBAD. There is also a strong tradition of
sound fundamentals. We view
support in the UAE, and no bank has been allowed to fail. Because of its links
NBAD as one of the strongest
and ownership, we believe that NBAD has strong implicit support. This
bank credits in the GCC.
support was demonstrated in 2009, when Abu Dhabi made a Tier 1 capital
Historically, NBAD has been one
injection into its banks, including AED 4bn into NBAD.
of the more conservative banks in
• Low cost of funding: NBAD has one of the lowest funding costs in the UAE,
the UAE. Compared with some of
and also in the broader GCC. In our view, this is one of the bank’s key
its competitors, the bank did not
competitive advantages. It enables the bank to have lower-yielding assets and
experience significant losses on
still have good earnings generation capacity. The government and public-
its investment portfolio or sector entities accounted for 44% of customer deposits at end-2010; because
exposure to Saudi family-owned of this concentration, there have been large fluctuations in the deposit base.
corporate groups or Dubai-related
• Strong franchise: NBAD has one of the strongest franchises in the UAE, with
entities. Our view also takes into good brand-name recognition and a strong reputation. Compared to its peers,
account the bank’s exposure to the bank is particularly strong in the government and public sectors in Abu
the real-estate sectors in both Abu Dhabi. 39% of its loan portfolio at end-2010 was to the public sector, which we
Dhabi and Dubai and the recent view as positive, while retail loans represented a further 18%.
deterioration in asset quality. • Rapid loan growth has led to high loan-to-deposit ratio: Like most other
UAE banks, NBAD has reported very strong loan growth in recent years.
FINANCIALS
Between 2005 and 2010, average annual loan growth was 21%; while this is
below the UAE average, it is still high by international standards. Although the
bank’s funding base is strong, deposit growth has not kept up with loan
growth over the last two years. The bank’s loan-to-deposit ratio has steadily
deteriorated and stood at 111% at end-2010, higher than the average for the
Company profile other UAE banks.
National Bank of Abu Dhabi (NBAD), • High exposure to the construction and real-estate sectors: NBAD’s
founded in 1968, is the largest bank in exposure to the construction and real-estate sectors was 22% at end-2010,
Abu Dhabi and the second-largest bank slightly higher than the average reported by the other UAE banks. The UAE
in the UAE, with total assets of AED real-estate sector – particularly in Dubai – has experienced a significant price
correction since end-2008. We estimate that slightly more than half of NBAD’s
211bn (USD 58bn) at end-2010 and a
real-estate exposure is to Abu Dhabi, while Dubai represents about a fourth.
market share of deposits of 13%. NBAD
is 70.5% owned by Abu Dhabi • Above-average asset quality: NBAD has been relatively unaffected by
recent high-profile exposures that have forced other banks to take significant
Investment Council (ADIC), the
write-downs (e.g. investment securities, Saudi conglomerates, Dubai-related
investment arm of the Abu Dhabi
entities). Although the bank’s reported asset quality indicators have
government, and has historically been
deteriorated slightly since 2008, they remain better than the UAE average.
the main banker to the Abu Dhabi
The bank’s reported NPL ratio stood at 2.3% at end-2010, with loan-loss
government and its companies. The rest
cover of 113%. Including renegotiated exposures and loans more than 90
of the company is widely held. Despite
days overdue but not classified as impaired, the bank’s problem loans would
its significant government ownership, the
represent 6% of total loans.
bank operates on a commercial basis.
• Reasonable earnings generation capacity: Low cost of risk, combined with
Like a number of UAE banks, NBAD is
above-average NIMs and good cost efficiency, has enabled NBAD to report
primarily a wholesale bank, though it has
reasonably healthy and consistent profits. The bank’s ROA for 2010 was
expanded into retail banking in recent
1.8%.
years and intends to continue growing
• Improving capital: Until 2008, NBAD tended to run a slightly more leveraged
that business. The bank offers a broad
balance sheet than its peers from a pure equity-to-assets point of view.
range of services, including corporate,
However, this has improved, and capital adequacy is now in line with the peer
retail and private banking, brokerage,
average. The bank’s equity-to-assets ratio was 11.4% at end-2010, while its
and international banking.
Tier 1 capital ratio stood at 16%.
33
112
National Bank Of Abu Dhabi (Aa3/Sta; A+/Sta; AA-/Sta)
Summary financials Operating income by segment (2010)

2007 2008 2009 2010
9% Domestic banking
Balance sheet (AED mn) 2% 25%
Total assets (USD mn) 37,992 44,865 53,636 57,610 2% International
Total assets 139,431 164,654 196,845 211,427
Financial markets
Loans 79,729 111,764 132,258 136,833
Investments 11,255 16,278 20,049 22,689 Corporate and investment banking
Deposits 81,737 103,481 121,205 123,131 13% Global wealth
Interbank 27,041 25,797 30,777 31,551 38% Islamic business
Debt 9,845 11,719 16,264 22,806
11% Head office
Equity 11,214 14,357 20,441 24,113

100%
Other income 1,261 1,694 1,828 1,930
Total income 3,666 5,301 6,399 7,179 75%
Overheads (1,054) (1,493) (1,898) (2,186)
Impairments (42) (717) (1,408) (1,207)
Net income 2,505 3,019 3,020 3,683
0%
Key ratios (%)
Costs-to-income 28.8 28.2 29.7 30.5
FINANCIALS
ROE 24.8 23.6 17.4 16.5
ROA 2.1 2.0 1.7 1.8 5
%

3
Loan-to-deposit 97.5 108.0 109.1 111.1
1
Tier 1 capital 13.3 12.6 14.9 16.2
2006 2007 2008 2009 2010
Total capital 16.5 15.4 17.4 22.6
4 160
4% 9%
Cash
3 120 7%
Interbank
2 80
%
11%
1 40
Customer loans
0 0
69%

25 30
9%
20 25
20
15
%
%
10
10
5 5 Fees/commissions
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 73% Other income
34
113
Qatar Islamic Bank (NR; NR; A/Sta)


Our stable outlook reflects QIB’s
• Strong track record of sovereign support: During the recent global financial
strong franchise in the Islamic
crisis, Qatar was one of the most interventionist countries in the GCC. A number
banking segment in Qatar, its
of support measures were unveiled, including (1) capital injections, with the
good fundamentals, and steps by
government acquiring 9-10% stakes in listed banks (including QIB); (2) the
Qatari policy makers to support
removal of poorly performing portfolios of local equity investments; and (3) the
the country’s financial institutions
purchase of real-estate and other loans. A further 10% capital injection into the
– including a second capital
banks was announced in early 2011. Although QIB is a mid-sized player by
injection into the banks in Q1-
regional standards, we believe it has systemic importance as Qatar’s third-
2011. Our credit outlook also takes
largest bank and largest Islamic financial institution.
into account the bank’s rapid loan
• Rapid loan growth could be a source of concern: Qatar’s banks have grown
growth in recent years, at a time
rapidly over the last five years. QIB has been the fastest-growing of the big four
when private-sector credit growth
Qatari banks over this period, displacing Doha Bank in 2010 as the third-largest
was relatively stagnant; its high
bank by total assets. In 2010, while private-sector banks like Commercial Bank
exposure to the retail segment;
of Qatar and Doha Bank reported moderate loan growth, QIB’s loan portfolio
limited disclosure and
grew by 31%. Although loans to the public sector accounted for some of this
transparency; and relatively low
growth, more than 40% of the growth during the period was housing-related,
exposure to the public sector.
and a further 20% was consumer-related.
• Strong Islamic franchise is a competitive advantage: As the largest Islamic
bank in Qatar, QIB has a competitive advantage over its conventional peers, as
some customers prefer to conduct their business with Islamic institutions.
Because of its brand and reputation, QIB has one of the country’s strongest
FINANCIALS
retail funding franchises, and its cost of funding is by far the lowest among
Qatar’s big four banks. Customer deposits provided 73% of total funding at end-
2010. Although the loan-to-deposit ratio is at the higher end of the range for the
sector (97% at end-2010), it has been declining since 2008, despite rapid loan
growth. This highlights the strength of the bank’s funding base, in our view. The
Company profile
bank will be one of the main beneficiaries if conventional banks are forced to
Qatar Islamic Bank (QIB) is Qatar’s close their Islamic operations.
largest Islamic bank and the country’s • High retail exposure: Among the Qatari banks, QIB has the highest exposure
third-largest, with total assets of QAR to individuals. At end-2010, 33% of its loan portfolio was housing-related, with
52bn (USD 14bn) at end-2010. The consumer financing making up another 17%. The majority of the bank’s
bank has deposit market shares of 10% customers are Qatari nationals rather than expatriates. This is one reason why
overall and 50% in the Islamic segment. the bank’s cost of risk has been below average, in our view. Exposure to the
The bank’s operations were traditionally public sector is relatively low, at 11% of total loans.
oriented towards the retail market. • Sound financial metrics: QIB’s fundamentals are underpinned by high
However, since the mid-2000s, it has earnings generation capacity, good reported asset-quality indicators, a strong
actively diversified its operations into funding base and robust capital adequacy. The bank’s earnings generation
corporate and investment banking. capacity is high thanks to wide NIMs, reasonable efficiency levels and, in recent
Growth in recent years has been rapid, years, low cost of risk. The bank’s capital adequacy is sound and is among the
and QIB has displaced Doha Bank as highest for Qatari banks, with a Tier 1 capital ratio of 17% and an equity-to-
the country’s third-largest bank. QIB’s assets ratio of 18% at end-2010. Reported asset-quality indicators are sound
main shareholder is the Qatar and compare favourably with the peer average. However, there is a risk that
Investment Authority (16.7%), with the rapid loan growth in recent years may mask potential asset-quality issues with
remainder widely held. The bank’s over-leveraged retail customers. Like its peers, QIB benefited from the
operations are mostly domestic in government support package, which removed potentially troublesome real-
nature, with domestic loans accounting estate assets from the banks’ balance sheets. At end-2010, the bank’s NPL
for 93% of total loans at end-2010. ratio stood at 1.3%, with loan-loss cover of 92%.
Gradual expansion abroad is likely in the
coming years.
35
114
Qatar Islamic Bank (NR; NR; A/Sta)

2007 2008 2009 2010 3% 11% Government and
Balance sheet (QAR mn) agencies
Housing
Total assets 21,336 33,543 39,273 51,840
Loans 11,679 18,866 22,663 29,352 36%
Investments 2,117 2,947 1,819 3,488 Consumer
Deposits 12,201 16,592 20,361 30,258 Other
Interbank 3,604 8,697 8,691 8,412
Debt 0 0 0 2,713 Contracting
Equity 4,747 7,369 9,199 9,333 17%
Funding mix
Income statement (QAR mn)
Net interest income 820 1,297 1,543 1,483 100%
Total income 1,241 1,390 1,880 1,771 75%
Overheads (318) (444) (487) (479)
Pre-provision profits (PPP) 923 946 1,392 1,291 50%
Impairments (18) (17) (131) (40)
25%
Net income 1,323 1,643 1,322 1,335 0%
Key ratios (%)
Customer deposits Interbank Debt securities and loans
Costs-to-income 19.2 21.1 25.3 25.8
FINANCIALS
8
ROE 29.2 27.1 16.0 14.4
ROA 7.3 6.0 3.6 2.9 6
%

2
Loan-to-deposit 95.7 113.7 111.3 97.0
Equity-to-assets 22.2 22.0 23.4 18.0 0
Tier 1 capital 18.3 16.4 17.3 17.4 2006 2007 2008 2009 2010
Total capital 18.8 17.0 17.3 17.4
5 120
9% 4%
4 Cash
90
24%
3 Interbank
60
%
2 Investment securities
1 30
Customer loans
0 0 7%
56%

25 40 4%
20 30 16%
20
%
%
10
5 10
0 0
36
115
Qatar National Bank (Aa3/Sta; A+/Sta; A+/Sta)


We initiate coverage of Qatar
• Supportive framework: Qatar was one of the most interventionist countries in
National Bank with a positive
the GCC during the financial crisis, unveiling a number of measures to support its
outlook. This reflects the bank’s
banks. These included (1) capital injections, with the government acquiring 10%
dominant position in the Qatari
stakes in listed banks (except for QNB, in which it already owned a 50% stake);
banking system, its sound
(2) the removal of poorly performing portfolios of local equity investments (QAR
fundamentals, and its majority
4bn for QNB); and (3) the purchase of real-estate and other loans (QAR 3.9bn).
ownership by the Qatari
In early 2011, the government announced a further 10% capital injection into the
government. Our view also takes
banks, except QNB. However, given its size and government stake, we believe
into account proactive steps by
QNB enjoys strong implicit support.
the Qatari authorities to support
• Dominance in the public sector: QNB’s large size relative to its peers gives it
the country’s banks and, over the
a competitive advantage in financing large transactions. As a result, it has larger
medium term, the impact of
exposure to government and government-related entities (the public sector)
infrastructure spending for the
than its peers, and a smaller exposure to the retail segment. We view this as a
2022 FIFA World Cup. Our outlook
strength. At end-2010, 52% of the bank’s loan portfolio was to the Qatari
also takes into account very rapid
public sector, while personal loans represented only around 11%. (The
growth in the bank’s loan portfolio
majority of retail loans are to Qatari nationals, most of whom are employed in
in recent years – which is
the public sector.) The bank’s market share in the public sector is c.70%.
admittedly mostly to the public
• Rapid loan growth: Like other Qatari banks, QNB has experienced very strong
sector – and high concentrations
growth in recent years. Its loan portfolio has grown four-fold since 2005. This
on the asset and liability sides of
mainly reflects the continued strength of the Qatari public sector and the bank’s
the business.
dominance in that sector. Unlike the private sector, Qatar’s public sector
FINANCIALS
continued to grow during the 2009-10 slowdown. In 2011, we expect loan growth
to be in the region of 15-20%. The lending impact of Qatar’s hosting of the 2022
FIFA World Cup is likely to become noticeable after 2012.
• Sound metrics: QNB’s fundamentals are sound. Although the bank’s NIM is
lower than its peers’ – reflecting the high share of government-related lending
Company profile
– its efficiency levels are better and its cost of risk is lower, enabling QNB to
Qatar National Bank (QNB) is the report reasonable profits (2010 ROA: 2.8%). Asset-quality indicators are
largest bank in Qatar and the fourth- good, with an end-2010 NPL ratio of 0.9% and loan-loss cover of 118%.
largest in the GCC, with total assets at Although not disclosed, we estimate the NPL ratio in the bank’s retail loan
end-2010 of QAR 223bn (USD 61bn). portfolio at 5-10% at end-2010. QNB’s capital adequacy ratios are sound, with
The bank was established in 1964 as a Tier 1 capital ratio of 15% at end-2010 and an equity/assets ratio of 11%.
the first Qatari-owned bank and is 50% The bank’s capital base will strengthen following a 25% rights issue in Q1-
owned by Qatar Investment Authority 2011. Finally, QNB’s funding base is strong, with customer deposits
(QIA), the investment arm of the State of representing 86% of total funding at end-2010. There is some funding
Qatar. By total assets, QNB is three concentration, and approximately 40% of customer deposits were sourced
times the size of its nearest competitor from the government and government-related entities. The bank’s loan-to-
and is the dominant player in Qatar, with deposit ratio is considerably lower than its peers’ (80% at end-2010), though it
a market share of deposits in excess of could deteriorate in the medium term if the expected surge in loan growth
40%. Despite its government ownership, materialises without accompanying deposit growth.
the bank operates on a commercial • International diversification: QNB has actively expanded abroad over the last
basis and offers a broad range of 10 years, mainly in the MENA region. We expect this trend to continue. In
services catering to government entities, addition to a wholly owned UK wealth management firm (Ansbacher Holdings),
corporates and individuals. The bank the bank has stakes in banks in Jordan, Tunisia, the UAE and Syria. However,
has a c.70% market share in the Qatar remains its core market, accounting for 81% of total loans at end-2010.
government and government-related Even though the bank is expanding into arguably riskier countries, we view its
sector. It is also the most international of diversification as positive, as it reduces the bank’s exposure to Qatar’s relatively
the Qatari banks following a number of small and concentrated market.
acquisitions in recent years.
37
116
Qatar National Bank (Aa3/Sta; A+/Sta; A+/Sta)

2007 2008 2009 2010 7%
2% Government and
Balance sheet (QAR mn) agencies
Total assets (USD mn) 31,418 41,751 49,266 61,369 12% Services
Total assets 114,361 151,974 179,329 223,382
Loans 66,064 100,053 108,783 131,696 Consumer
Investments 11,309 11,815 23,333 24,048 10% 52% Real estate
Deposits 79,364 104,253 125,872 165,470 Contracting
Interbank 9,928 19,721 20,794 12,160
Debt 6,715 6,719 6,724 12,136 17% Others
Equity 13,858 16,643 19,972 24,793

100%
Other income 1,537 2,257 1,945 1,934
Total income 3,469 5,093 5,671 7,609 75%
Overheads (900) (1,042) (1,107) (1,292)
Impairments (44) (378) (359) (600)
Net income 2,506 3,653 4,188 5,702
0%
Key ratios (%)
FINANCIALS
ROE 22.5 23.9 22.9 25.5 5
ROA 2.7 2.7 2.5 2.8 4
%
3
Loan-to-deposit 83.2 96.0 86.4 79.6 2
Equity-to-assets 12.1 11.0 11.1 11.1
1
Tier 1 capital 13.7 13.7 13.2 15.3
2006 2007 2008 2009 2010
Total capital 16.2 13.9 13.2 15.3
2 120
4%
15%
Cash
90
Interbank
1 60
%
11%
30
Customer loans
0 0 11%
59% Other
20 30 8%
3%
20
15% Net interest income
10
%
%
0 0 Share of associates
74% Other
38
117
Riyad Bank (A1/Sta; A+/Sta; A+/Sta)


• Solid domestic market position: Riyad Bank has a solid commercial
to stable from negative. Despite
franchise in both the retail and corporate sectors. The bank is recognised as a
above-average loan growth
market leader in asset management. Rather than expanding geographically,
between 2005 and 2008, Riyad
Riyad Bank aims to further expand its domestic franchise into new products
Bank’s asset quality has not
such as insurance and leasing. Although its large retail branch network is a
deteriorated as much as we had
competitive advantage from a scale point of view, the bank’s retail banking
anticipated. Our stable view
operations contribute a smaller proportion of earnings than those of other
reflects the bank’s solid domestic
Saudi banks (28% of 2010 revenues).
position, sound capital base,
• Sound capital base: A SAR 13bn rights issue in mid-2008 effectively doubled
strong regulatory framework and
Riyad Bank’s capital base and made it one of best-capitalised banks in the
implicit sovereign support. It also
country. Although the bank has experienced rapid loan growth since then, it
has maintained high capital adequacy ratios. Its Tier 1 capital ratio stood at
rapid loan growth in the run-up to
16% at end-2010, while its equity-to-assets ratio was 16.8%.
the economic slowdown and
• Above-average asset quality, despite rapid loan growth: The bank’s
lower-than-average earnings
corporate loan book tripled in size between 2005 and 2008; in 2008 alone, total
generation capacity.
loans grew by 40% on the back of the rights issue, allowing Riyad Bank to
pursue an aggressive growth strategy. Like the other Saudi banks, Riyad Bank
has high borrower concentrations, as the economy is dominated by a few large
family-owned and public-sector entities. Despite rapid loan growth in the run-up
to the recent economic slowdown and high borrower concentrations, the bank
was relatively unaffected by the slowdown, and its asset quality indicators are
FINANCIALS
better than average. The bank’s NPL ratio was 1.7% at end-2010, with loan-
loss cover of 126%.
• Moderate profitability: Riyad Bank’s profitability is adequate by international
standards. However, it is slightly below the average of Saudi banks, due to a
higher-than-average cost base – partly reflecting its large branch network –
Company profile
and slightly lower NIMs. These factors would reduce the bank’s ability to
Riyad Bank was established in 1957 absorb higher provisions should asset quality deteriorate. Until 2010, the bank
and is currently the fourth-largest bank in partly offset the impact of higher loan-loss provisions and lower interest rates
Saudi Arabia, with total assets of SAR by growing its loan portfolio. With stagnant loan growth in 2010, profitability
173bn (USD 46bn) at end-2010. The dipped slightly, mainly due to lower net interest revenue. The bank’s reported
bank has the third-largest branch ROA for 2010 was 1.6%
network in the country, with over 241 • Strong funding base: The bank’s funding base is strong by international
branches, and has a 13% market share standards; customer deposits accounted for 91% of total funding at end-2010,
of deposits. Its largest shareholders are and the loan-to-deposit ratio stood at 84%, which is good by regional
government-related entities: the Public standards.
Invest Fund (PIF) and the General • Purely domestic franchise: Some features of the Saudi banking system, such
Organisation for Social Insurance as a high percentage of unremunerated deposits, have enabled Saudi banks to
(GOSI) own almost 22% each, and the be very profitable without expanding abroad. While the foreign operations of all
Saudi Arabian Monetary Authority Saudi banks are limited, Riyad Bank is more exposed than its peers to any
(SAMA) holds a further 6.5% stake. The volatility in the Saudi economy.
remainder is held by Saudi investors. • Strong regulatory framework: In our opinion, SAMA is one of the most
The bank has strong franchises in competent and proactive regulators in the GCC, which strengthens the credit
corporate banking, retail banking and profiles of the Saudi banks. There is also a strong tradition of support, and no
asset management, and is currently bank has ever failed. On account of its absolute size and large retail branch
expanding its corporate finance network, and the large stake held by government-related entities, we believe
business and setting up joint ventures in that Riyad Bank has systemic importance and therefore enjoys strong implicit
the insurance sector. The bank’s support.
operations are mainly domestic.
39
118
Riyad Bank (A1/Sta; A+/Sta; A+/Sta)

2007 2008 2009 2010
Balance sheet (SAR mn) 1%
Commercial
Total assets 121,351 159,653 176,399 173,556
19%
Loans 67,340 96,430 106,515 106,035
Consumer
Investments 27,742 40,329 32,308 33,822
Overdrafts
Deposits 84,331 105,056 125,278 126,945
Interbank 17,798 21,213 16,163 10,637
Credit Cards
Debt 1,872 1,874 4,849 1,874 75%
Equity 13,187 25,690 28,235 29,233

100%
Other income 1,915 1,302 1,613 1,839
Total income 5,181 5,248 5,960 5,980 75%
Overheads (1,824) (2,086) (2,193) (2,306)
Impairments (346) (523) (736) (850)
Net income 3,011 2,639 3,030 2,825
0%
Key ratios (%)
FINANCIALS
ROE 23.9 13.6 11.2 9.8 6
ROA 2.8 1.9 1.8 1.6
%

2
Loan-to-deposit 79.9 91.8 85.0 83.5
Equity-to-assets 10.9 16.1 16.0 16.8 0
Tier 1 capital 14.5 13.9 15.7 16.0
2006 2007 2008 2009 2010
Total capital 15.7 16.1 18.2 18.3
2 200
3% 13%
Cash
150
3%
Interbank
1 100
%
50 19%
Customer loans
0 0
62% Other
20 40
13% Retail banking
15 30 28%
Investment banking and
10 20 brokerage
%
14%
%
Corporate
5 10
4% Treasury and investments
0 0
41%
40
119
Samba Financial Group (Aa3/Sta; A+/Sta; A+/Sta)


• Strong franchise and balanced business mix: As one of Saudi Arabia’s
on Samba to positive from stable.
leading banks, Samba has a strong franchise, particularly with corporates and
Our view takes into account
wealthier retail customers. The bank’s revenue mix is well balanced. Retail
Samba’s robust fundamentals, its
banking contributed 39% of 2010 revenues, while corporate banking and
strong franchise in Saudi Arabia,
other wholesale business accounted for the remainder.
its good track record, the
• High profitability: The profitability of Saudi banks has been steadily declining
country’s strong regulatory
since 2006. However, Samba has remained one the most profitable banks
framework, and implicit sovereign
due to high efficiency (a five-year average cost-to-income ratio of 25%),
support for the bank. Despite the
reasonably wide NIMs (five-year average: 3.2%), and below-average cost of
recent economic slowdown in
risk. Despite higher impairment charges in 2009 and 2010 and the impact of
Saudi Arabia, Samba’s financial
lower interest rates, the bank’s ROA for 2009 and 2010 was around 2.4%,
metrics have not deteriorated
among the highest of the Saudi banks we cover.
considerably. Our view is
• Robust asset-quality indicators: Like other Saudi banks, Samba has high
tempered by the high loan
borrower concentrations, as the economy is dominated by a few public-sector
concentrations common in Saudi
entities and large groups owned by prominent families. Although these
Arabia and potentially high
exposures would typically be to the strongest entities in Saudi Arabia, given
exposures to some large corporate
the high degree of borrower concentration, only a few defaults would be
groups.
needed in order for a bank to experience difficulties. Although Samba’s asset-
quality indicators deteriorated in 2009 and 2010, they are still better than
average. The bank’s NPL ratio stood at 3.7% at end-2010, with loan-loss
cover of 118%. In our view, this highlights better risk management. Samba
FINANCIALS
was also more restrained than some of its peers in growing its loan portfolio,
which expanded by about 17% p.a. between 2005 and 2008.
• Solid funding base: Despite its relatively small branch network, Samba has a
strong funding base catering mostly to wealthier individuals. Customer
deposits represented 82% of total funding at end-2010. Samba has some
Company profile
borrower concentration within its deposit base (although this is common in the
Samba Financial Group (Samba) is the Saudi market). The bank’s loan-to-deposit ratio is one of the lowest in the
second-largest bank in Saudi Arabia, country, at 63%, but also reflects the lower-than-average percentage of loans
with total assets of SAR 187bn (USD on the bank’s balance sheet.
50bn) at end-2010 and a market share • Good capital adequacy: The bank’s capital ratios are among the highest for
of deposits of about 13%. It was set up the Saudi banks we cover. However, this partly reflects the relatively low
in 1980 as a joint venture with Citibank, percentage of loans on the bank’s balance sheet (43% of total loans at end-
which had a 40% stake and managed 2010) and the higher percentage of securities. While the bank’s Tier 1 capital
Samba under a technical management ratio is considerably higher than average (17.8% at end-2010), its equity-to-
agreement. In 2004, Citibank sold its assets ratio (13.7%) is in line with the peer average.
stake and the management agreement • Larger-than-average investment portfolio: Compared to its peers, Samba
ended. Samba is majority owned by has tended to invest a larger percentage of its assets in non-government
government-related bodies: 23.8% by securities (12% of total assets at end-2010). In our view, this highlights not
the Public Investment Fund (PIF), 15% only the dwindling availability of Saudi government debt, but also higher
by a public pension fund and 11.5% by market risk appetite. Notwithstanding this, the bank appears to manage its
the General Organisation for Social risk better than some of its peers, as losses in relation to the portfolio size
Insurance. (GOSI) The remainder is were lower than the industry average in 2007 and 2008.
held by the general public, with no single • Strong regulatory framework: In our opinion, the Saudi Arabian Monetary
individual holding more than 5%. Samba Authority (SAMA) is one of the more competent and proactive regulators in
offers a full range of banking services the GCC, which strengthens the credit profiles of the Saudi banks. There is
and operates from a comparatively also a strong tradition of support, and no bank has ever failed. Although
small network of 68 branches. The Samba does not have a vast branch network, it is a large retail deposit-taking
bank’s operations are predominantly institution. We believe that this, coupled with the large stake owned by
domestic. government-related entities, translates into high implicit support.
41
120
Samba Financial Group (Aa3/Sta; A+/Sta; A+/Sta)
Summary financials Loans by borrower type (Dec-2010)

2007 2008 2009 2010
17%
Total assets 154,414 178,891 185,518 187,416 Corporate
Loans 80,553 98,147 84,147 80,251
Investments 53,574 54,213 54,967 64,883
Consumer
Deposits 115,811 134,228 147,129 133,463
Interbank 11,425 12,090 7,319 19,801 Credit Cards
Debt 2,039 1,873 1,874 1,875
Equity 17,976 20,062 22,502 25,603 81%

100%
Other income 2,252 1,951 2,040 2,364
Total income 7,196 7,012 7,110 6,901 75%
Overheads (1,966) (2,111) (1,951) (1,910)
Impairments (423) (458) (605) (559)
Net income 4,808 4,443 4,553 4,432
0%
Key ratios (%)
FINANCIALS
ROE 28.9 23.4 21.4 18.4 6
ROA 3.5 2.7 2.5 2.4
%

Loan-to-deposit 72.1 75.4 59.5 62.9 2
Equity-to-assets 11.6 11.2 12.1 13.7
0
Tier 1 capital 15.2 13.1 16.0 17.8
2006 2007 2008 2009 2010
Total capital 16.5 14.1 17.1 18.9
4 200
4%
17% Cash
3 150
1% Interbank
2 100
%
1 50 43%
Customer loans
0 0
20 40
6%
15 30
18%
Consumer Banking
10 20 39%
%
%
Corporate
5 10
Treasury
0 0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Investment banking
42
121
Saudi British Bank (Aa3/Sta; A/Sta; A/Sta)


Our stable credit view on SABB
• Close links with HSBC strengthen corporate franchise: While SABB is a
mid-sized bank by local standards – albeit with a strong presence in the
close links with HSBC, its high
corporate sector – we believe its links with HSBC give it a competitive
recurrent earnings generation
advantage over some domestic competitors in terms of systems, processes
capacity, the relative diversity of
and access to a global network. The bank’s target markets are large corporate
its earnings streams, and the
clients and the upper end of the retail market.
strong regulatory framework in
• Asset-quality recovery: The bank’s loan book grew by 46% in 2007 and a
Saudi Arabia. Our view also takes
further 29% in 2008, faster than most of the other banks we cover in Saudi
into account the bank’s rapid loan
Arabia. Growth was focused on the corporate loan sector, and SABB’s
growth prior to the economic
corporate loan book more than tripled between 2005 and 2008. As is common
slowdown, high concentration in
among Saudi banks, SABB’s loan portfolio is concentrated due to the
the corporate sector, asset-quality
dominance of a few high-profile family-owned groups and public-sector
deterioration in 2009, lower capital
entities. Although SABB has a strong franchise in the corporate sector, the
adequacy than its peers, and
bank’s asset quality deteriorated more than average in 2009 due to defaults
relatively high loan-to-deposit
by a handful of privately owned groups, and exposure to large corporates that
ratio.
faced difficulties. Asset quality began to improve in 2010, and asset-quality
indicators are now more in line with the sector. The bank’s NPL ratio declined
from a high of 4.5% at end-2009 to 3.4% at end-2010, with loan-loss cover of
100%.
• High earnings generation capacity: The bank’s earnings generation
capacity is good thanks to wide NIMs and good cost controls. However, in
FINANCIALS
2009 and 2010, net income was negatively affected by stagnant loan growth,
shrinking margins and high loan-loss provisions. In both 2009 and 2010,
provisions ate up about 40% of pre-provision profits. Nevertheless, the bank
reported reasonable profits, with an average ROA of around 1.5% in both
years.
Company profile
• Earnings diversity: Compared to the other large Saudi banks, SABB derives
The Saudi British Bank (SABB) is the a slightly higher percentage of its revenues from non-interest income (34% in
fifth-largest bank in Saudi Arabia, with 2010 versus a system-wide average of 29%), reflecting the breadth of the
total assets of SAR 125bn (USD 33bn). bank’s business franchise. This has allowed SABB to partly withstand the
Although its branch network is relatively impact of contracting loan volumes and low interest rates.
small (80 branches), SABB has an • Strong funding base: The bank’s funding base is strong by international
estimated market share of deposits of standards and at end-2010, customer deposits provided 90% of total funding.
10%. HSBC is a cornerstone However, the bank has made greater use of the wholesale markets than its
shareholder, with a 40% stake. The peers. Also, like those of its peers, SABB’s deposit base is concentrated in a
General Organisation for Social few large corporates and public-sector entities. Its loan-to-deposit ratio has
Insurance (GOSI), a government-related also been steadily improving as a result of limited loan growth, and stood at
entity, owns about 10%, with the 78% at end-2010. This compares favourably with the average for the other
remainder owned by the Saudi public. large Saudi banks.
HSBC is responsible for managing the • More leveraged balance sheet: Compared to the other large Saudi banks,
bank under a comprehensive technical SABB has tended to have a more leveraged balance sheet, both in terms of
services agreement. Either directly or absolute capital and Tier 1 capital levels. However, the bank’s capital
through associate companies, SABB adequacy is adequate by regional standards, with a Tier 1 capital ratio of
provides a broad range of financial 11.9% and an equity-to-assets ratio of 12.1% at end-2010.
services, including corporate and retail • Strong regulatory framework: In our opinion, the Saudi Arabian Monetary
banking, investment banking, insurance, Authority (SAMA) is one of the more competent and proactive regulators in
and securities services. The bank has a the GCC, which strengthens the credit profiles of the Saudi banks. There is
particularly strong franchise in corporate also a strong tradition of support in Saudi Arabia, and no bank has ever failed.
banking and can capitalise on its links Notwithstanding its smaller size, we believe that SABB is of systemic
with the HSBC group. importance to the Saudi banking system.
43
122
Saudi British Bank (Aa3/Sta; A/Sta; A/Sta)

2007 2008 2009 2010
16%
Retail banking
Total assets 98,213 131,661 126,838 125,373
Loans 62,001 80,237 76,382 74,248
39% Corporate
Investments 14,859 29,604 23,818 24,972
Treasury
Deposits 71,848 92,678 89,187 94,673
Interbank 8,045 16,069 13,606 4,661
Others
Debt 4,226 5,844 5,897 5,663
45%
Equity 10,425 11,634 13,045 15,172

100%
Other income 1,315 1,704 1,724 1,596
Total income 4,374 4,912 5,206 4,880 75%
Overheads (1,429) (1,642) (1,678) (1,754)
Impairments (396) (458) (1,496) (1,243)
Net income 2,607 2,920 2,032 1,883
0%
FINANCIALS
ROE 26.3 26.5 16.5 13.3 6
ROA 3.0 2.5 1.6 1.5
%

Loan-to-deposit 86.3 86.6 85.6 78.4 2
0
Tier 1 capital 13.5 8.3 10.1 11.9
2006 2007 2008 2009 2010
Total capital 13.5 11.2 12.8 14.2
5 375
3% 12%
4 300 Cash
6%
3 225
Interbank
%
2 150
1 75 20%
Customer loans
0 0 59%
20 40
9%
15 30

%
%
24%
0 0 Other
67%
44
123
Türkiye Garanti Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos)

Analyst: Shilpa Singhal (+65 6596 8259)

Garanti’s credit profile is
• Ownership structure: Garanti is likely to benefit from BBVA’s (Aa2/Neg;
underpinned by its strong position in
AA/Neg; AA-/Sta) retail lending experience in emerging markets such as Latin
a competitive and consolidated
America, provided the share purchase by BBVA is approved by regulators
market and its good fundamentals,
(expected in Q1-2011). Garanti contributes 68% to ùahenk family-owned
including strong profitability and
robust capitalisation. As a structural Do÷uú Group’s (Ba3/Sta; BB/Sta; BB-/Neg) portfolio, according to an estimate
feature, the bank has very short- from S&P, and a ùahenk family member is chairman of Garanti’s board of
duration deposits, which it is directors.
increasingly looking to term out by • Good market position but stiff competition: Garanti has a 14% loan market
tapping wholesale funding sources. share and a c.12% deposit market share. The bank has a strong retail
On the liquidity front, its holdings of franchise, especially in the mortgage and credit card (acquiring and issuing)
government securities are high (27% businesses, in which it had end-2010 market shares of 14% and 20%,
of assets) and the loan-to-deposit respectively. Project finance, foreign-currency corporate lending and trade
ratio has been increasing, with loan finance are also strengths of the bank. However, Garanti continues to face
growth outstripping deposit growth. strong competition from similar-sized peers, particularly in the retail segment,
Strong loan growth is expected to where all banks are trying to grow actively.
continue in 2011, especially in the • Strong loan growth ahead: After a flat 2009 in the aftermath of the crisis,
riskier consumer and SME loan Garanti’s loan book grew by a steep 31% in 2010, with higher growth in the
segments. The bank could face some consumer and SME segments. Deposit growth has not kept pace with strong
pressure on profitability and asset loan growth, and as a result, the loan-to-deposit ratio jumped to 91% as at
quality, but the overall operating end-2010 from 80% at end-2009. The bank forecasts loan growth in 2011 at
environment in Turkey is expected to
c.30%, with a focus on the riskier general-purpose consumer loan segment.
FINANCIALS
remain supportive of its credit profile.

The deposit growth target for 2011 is 20%, which would lead to a further
increase in the loan-to-deposit ratio.
• NIM and profitability to come under some pressure: Due to the short
duration of deposits (43% with maturities of less than one month), rate cuts
reprice deposits faster than loans. As a result, Garanti’s NIM improved
Company profile
significantly in 2009 on initial rate cuts, and has declined since as loan
Türkiye Garanti Bankasi (Garanti) is repricing has caught up. We expect NIM to come under further pressure if
the second-largest private bank in rates start rising. The bank continues to focus on the higher-yielding
Turkey in terms of assets, and the consumer and SME segments as it seeks to boost margins. The ratio of costs
largest in terms of loans. It had total to average assets has remained stable at 2.7% in the last two years, making
assets of TRY 137bn (USD 88bn) at Garanti one of Turkey’s most cost-efficient banks (second only to Akbank
end-2010 (13.6% market share). Its among the big four private banks). However, costs are unlikely to improve
branch network consists of 853 near-term as the bank continues to invest in expanding its branch network. On
domestic branches and 10 balance, pressure on NIM and the normalisation of provisioning costs could
branches/offices abroad. Although dent profitability to some extent, although we do not expect a significant
the bank has a diversified loan book, deterioration in the bank’s earnings capacity in the next 6-12 months.
it is a leader in mortgages, credit • Low NPL ratio, but coverage is weaker than peers’: The bank’s end-2010
cards (acquiring and issuing), project NPL ratio of 3.1% was lower than the sector-wide 3.6%. Loan-loss coverage
finance, foreign-currency corporate has been maintained at 81% for the last two years (versus an 85% sector
lending and trade finance. In average at end-2010). Unlike some peers, Garanti does not follow the policy
November 2010, Do÷uú Group of 100% specific provisioning for its NPLs. Although we could see some
(30.5% stake) and GE Capital Corp. worsening of NPL ratios as loans extended during the recent growth phase
(19.85% stake) entered into a share start to season, we do not expect a significant deterioration in asset quality.
sale plan with Banco Bilbao Vizcaya • Adequate capitalisation is supportive of growth: The bank had a strong
Argentaria S.A. (BBVA), under which capital position at end-2010 (15.7% Tier 1 ratio, 18.1% total capital ratio).
BBVA will buy 24.9% of the shares Basel II, if implemented in 2011, is likely to have a limited effect on capital
from GE and Do÷uú Group. As a ratios, resulting in a decline of less than 200bps. Strong margins will continue
result, Do÷uú Group’s stake will fall to to support the current pace of growth without materially reducing capital
24.9%. ratios, in our view.
45
124
Türkiye Garanti Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos)

2007 2008 2009 2010
Balance sheet (TRY mn) 7% 12%
1% Mortgage
Total assets 76,148 99,038 116,334 136,784 Consumer vehicle
8%
Loans 40,948 54,854 55,018 71,884 Other consumer
Investments 19,410 28,147 40,335 42,965 Credit cards
Total liabilities 69,023 89,296 102,649 120,066 12% SME
Deposits 43,690 57,960 68,782 79,070
49% Corporate
Interbank 0 0 0 34
Debt 11,630 14,420 16,458 20,809 Foreign
11%
Equity 7,126 9,743 13,686 16,718
Income statement (TRY mn) Funding mix

Other income 2,279 2,213 3,201 3,211 100%
Total income 5,377 5,721 8,607 8,381
75%
Overheads (2,108) (2,756) (2,952) (3,382)
Impairments (350) (618) (1,716) (696)
Net income 2,422 1,891 3,100 3,402
0%
Net interest margin 4.8 4.2 5.2 4.2 Deposits Debt Other
FINANCIALS
ROE 40.5 22.4 26.5 22.4 12
ROA 3.6 2.2 2.9 2.7
%

Loan-to-deposit 93.7 94.6 80.0 90.9
Equity-to-assets 9.4 9.8 11.8 12.2 3
Tier 1 capital 12.9 13.5 16.6 15.7 0
Total capital 14.0 14.9 19.2 18.1 2006 2007 2008 2009 2010
5 100 4% 6%
7%
4 80
Cash
3 60
Interbank
%
2 40
1 20 53% 30% Total loans
0 0
Others
20 40 11%
15 30 5%
Net interest income
10 20
%
Fees/commissions
5 10 23% Trading
61%
0 0 Other income
46
125
Türkiye Vakiflar Bankasi (Ba3/Sta; BB/Pos; BB+/Pos)


As a sovereign-linked entity,
• Ownership structure: Vakifbank is majority owned by the GDF (the umbrella
Vakifbank would be supported by the
organisation for Turkey’s charitable institutions), which is fully controlled by
government in a stress scenario, in
the Turkish state. The office of the prime minister directly appoints one board
our view. The bank has a well-
member and the CEO of Vakifbank. Half of the remaining board members are
established franchise and a strong
appointed by the GDF. Despite government involvement at the board level,
captive deposit and business base of
Vakifbank is run as a full-service commercial bank. We believe the bank’s
public-sector employees and
government ownership would make it a direct beneficiary of support in the
corporates. The bank has a moderate
credit profile with a diverse loan event of a crisis, as happened in 2001. Over the medium to long term, the
book, but its asset quality, income bank could be privatised (as per the plan set out in 2001), though only 25.19%
diversity and profitability are weaker of its shares are free-floating at present.
than peers’. Vakifbank resumed • Established market position, but competition remains intense: With
strong loan growth in 2010, but its market shares of 9% of loans and 8.3% of deposits, Vakifbank has a strong
current capital levels and loan-to- position in the Turkish banking sector. It is well positioned in almost all the
deposit ratio may cause growth to loan segments in which the private commercial banks operate, and is trying to
moderate in 2011. Like that of its improve its shares in markets like credit cards, where it lags peers. Due to its
peers, the bank’s liquidity is government links, Vakifbank has a good position in providing services to state
underscored by large government enterprises, including cash management, trade finance and payroll services.
securities holdings and very short- Like the other large banks in the sector, Vakifbank reported strong loan
duration deposits. The operating growth in 2010, at 29%. The bank continues to focus on growth in general-
environment in Turkey remains purpose consumer and SME loans. As all Turkish banks aim to grow strongly
stable and will support of the bank’s in these higher-yielding segments to defend margins, competition remains
FINANCIALS
credit profile in the near term. intense. However, the under-banked nature of the sector (40% ratio of loans
to GDP) offers growth opportunities.
• Strong deposit base, though loan-to-deposit ratio is rising: Vakifbank’s
deposit base is buttressed by a strong contribution from the public sector
(30% of deposits). However, deposit growth has not kept pace with strong
Company profile loan growth – 2010 deposit growth was only c.7%. This has pushed the
Established in 1954 with the intent of bank’s loan-to-deposit ratio to a relatively high 94%, and it could hit 100% in
managing the assets of Turkey’s 2011, according to management estimates.
charitable institutions, Türkiye • NIM and profitability could face pressure going forward: After Vakifbank’s
Vakiflar Bankasi (Vakifbank) is the NIM recovered following steep rate cuts in 2009 (36% of the bank’s deposits
second-largest public-sector bank in mature in less than one month, resulting in deposits repricing faster than
Turkey and the sixth-largest overall in loans), NIM declined to 4% in 2010, which is weak compared to peers. NIM
asset terms, with end-September could face further pressure going forward if rates start rising. The bank’s
2010 assets of TRY 75bn (USD expansion plans also continue to put pressure on costs, and provisioning as a
52bn) and a 9% loan market share. proportion of income remains higher than peers.
As of end-2010, the bank had 634 • Weaker asset-quality metrics than the sector: The bank’s end-2010 NPL
domestic and two foreign branches ratio of 4.8% was higher than the sector’s 3.6%, but this is because of
(in New York and Bahrain). The bank Vakifbank’s relatively high legacy NPL holdings. Loan-loss coverage improved
also has a subsidiary in Austria, to c.99% in 2010 as the NPL ratio fell, although the ratio of provisioning costs
although foreign loans are a very to pre-provisioning profits remained high, at 40%. We also note that the bank
small proportion of the total book. follows a slightly less conservative provisioning policy than the 100%
Vakifbank is 58.45% owned by the provisioning for NPLs adopted by some competitors. Looking ahead, while the
General Directorate of Foundations NPL ratio could worsen somewhat as loans season, we do not expect a
(GDF), which is in turn owned by the significant deterioration in asset quality.
Turkish state. 16.1% of shares are • Capitalisation is adequate but not sufficient for strong growth: The bank
held by the bank’s employees’ had a reasonable capital position at end-2010 (13.2% Tier 1 ratio, 14.4% total
provident fund. Although government capital ratio), although weaker than peers’. Basel II implementation could put
owned, the bank is commercially run further downward pressure on these ratios (up to 200bps). The current capital
and its loan book is diversified across position may not be supportive of strong loan growth unless the bank
all major loan segments. effectively disposes of non-core and foreclosed assets.
47
126
Türkiye Vakiflar Bankasi (Ba3/Sta; BB/Pos; BB+/Pos)

2007 2008 2009 2010*
Balance sheet (TRY mn) 13%
Total assets (USD mn) 37,733 36,008 44,586 47,653 Mortgage
Total assets 44,215 54,542 67,356 73,962
16%
Deposits 29,149 37,714 45,101 47,701 55% SME
3%
Interbank 0 16 22 0
Corporate
Debt 5,038 6,103 4,613 6,327
13%
Equity 5,348 5,932 7,579 8,559

Other income 1,375 1,358 1,455 1,396 100%
Total income 3,141 3,438 4,641 4,126
75%
Overheads (1,415) (1,803) (2,070) (1,690)
Impairments (456) (641) (1,010) (973)
Profit before tax 1,269 995 1,562 1,463 25%
Net income 1,034 810 1,295 1,157
0%
Net interest margin 4.5 4.4 5.5 4.0 Deposits Debt Repo
FINANCIALS
ROE 20.6 14.4 19.2 14.3 12
ROA 2.5 1.6 2.1 1.6
%

Loan-to-deposit 82.8 83.2 77.9 94.0
Equity-to-assets 12.1 10.9 11.3 11.6 3
Tier 1 capital 15.4 14.8 14.8 13.2 0
Total capital 14.7 14.1 15.2 14.4 2006 2007 2008 2009 2010
8 100 6% 2%
4%
6 98
Cash
96
4 Interbank
%
94 27%
2 92
Total loans
0 90 Other
61%
40
15 15%
12 30
Net interest income
9 8%
20
%
Fees/commissions
6
10 Trading
3 11%
0 0 66% Other income
Tier 1 capital ratio ROE (RHS)
*2010 data are for bank only (not consolidated) due to unavailability of data; Sources: Company reports, Standard Chartered Research
48
127
Yapi ve Kredi Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos)


Yapi Kredi’s credit profile is
• Ownership structure: KFS, the majority shareholder of Yapi Kredi, is equally
supported by its strong market
owned by UCI (A3/Sta; A/Sta; A/Sta) and Koç Holdings (not rated). Koç
position, particularly in retail loans
Holdings is one of the largest and most diversified conglomerates in Turkey,
and asset management. The bank’s
good fundamentals – strong margins and the financials business remains a key component of the group’s business.
and fee income, good accretion and Yapi Kredi also benefits from UCI’s pan-European banking expertise,
strong capitalisation – support its particularly in the areas of operational and risk management, through the
relatively large operations in riskier presence of UCI officials on Yapi Kredi’s management team.
loan segments. Like that of its peers, • Strong market position but intense competition: Yapi Kredi had a more
the bank’s liquidity is characterised than 10% market share of system loans and an 8.9% share of system
by large holdings of Turkish deposits as at end- 2010. The bank is Turkey’s largest credit-card lender (in
government securities and maturity terms of outstanding balance) and is a market leader in factoring (c.23%
mismatches arising from very short- share) and leasing (c.19% share). The bank is also a leader in many private
duration deposits. Strong loan banking services in Turkey and is ranked second in asset management.
growth has resulted in a loan-to-
However, competition in the sector is intense, as all players are trying to
deposit ratio in excess of 100%.
increase their market share in higher-margin retail segments.
Competition is expected to remain
• Strong loan growth has taken loan-to-deposit ratio above 100%: After a
intense, and the bank could face
2% decline during the crisis in 2009, Yapi Kredi’s loan book grew 36% in
some pressure on profitability. Asset
quality is unlikely to improve further. 2010. Its loan-to-deposit ratio was the highest among Turkey’s big four private
However, strong capital adequacy banks, at 106% as of end-2010. We expect the bank, like the sector as a
and a stable economic environment whole, to continue to experience strong growth (management expects 25% in
2011) and more modest deposit growth (19-20%), resulting in a higher loan-
FINANCIALS
should support the bank’s credit

profile in the near term. to-deposit ratio and a greater dependence on wholesale markets for funding.
• Asset quality is somewhat weaker than peers’: As of end-2010, Yapi
Kredi’s NPL ratio was one of the highest among the big four banks (3.4%),
and its coverage was the lowest (77%). This is likely due to its focus on loan
segments with slightly higher risk-return. The bank also has a less
Company profile
conservative provisioning policy than some peers. Due to the benign
Yapi ve Kredi Bankasi (Yapi Kredi), economic outlook, the resumption of strong loan growth, and NPL sales and
founded in 1944, is the fourth-largest recoveries, the bank’s NPL trend has been improving since 2009. While the
private bank in Turkey in terms of 2010 numbers may show a further improvement in line with the sector as a
assets. It had total assets of TRY whole, the seasoning of loans going into 2011 could lead to an increase in
93bn (USD 64bn) and a 9.2% market new NPL formation.
share of assets as of end-2010, with • Potential NIM pressures ahead, but profitability is expected to hold up:
a network of 868 branches. The The bank has one of the highest NIMs among peers, partly due to its focus on
bank’s loan book is strong in credit higher-yielding loan segments. After a strong NIM performance in 2009 (as
cards, asset management, and rate cuts caused deposits to reprice faster than loans due to the short maturity
leasing and factoring. The Savings of deposits – 46% maturing in less than one month), Yapi Kredi’s NIM
and Deposit Insurance Fund took declined from 6% in 2009 to 4.7% in 2010. Looking ahead, NIM is expected to
over the bank’s management in 2002 come under further pressure, particularly if rates start rising. Despite effective
after it faced a crisis. Koçbank (under cost management, pressure on NIM and a rise in provisioning costs could
Koç Financial Services, or KFS) pressure the bottom line, although the bank’s overall earnings capacity is
acquired 57.4% of Yapi Kredi in expected to hold up.
2005. Following some restructuring, • Adequate capitalisation: At end-2010, the bank had a strong capital position
KFS now holds 81.8% of Yapi Kredi. (11.7% Tier 1 ratio, 15.4% total capital ratio). However, these are the weakest
KFS in turn is 50% held by the among the big four private banks. Basel II, if implemented in 2011, is likely to
Austrian subsidiary of UniCredit SpA have a limited effect on total capital and Tier 1 ratios, with declines of 100-
(UCI, end-2009 assets of EUR 150bps. Despite some pressure on profitability, the bank’s strong margins
929bn), with the rest held by Koç should support robust asset growth in 2011 without materially impacting
Holdings (end-2009 assets of USD capitalisation.
c.45bn).
49
128
Yapi ve Kredi Bankasi (Ba3/Sta; BB/Pos; BBB-/Pos)

2007 2008 2009 2010
Balance sheet (TRY mn) 2% 10% Mortgage
2%
Total assets (USD mn) 39,076 48,877 49,472 64,010 Consumer vehicle
Total assets 56,660 70,872 71,734 92,814 6%
Deposits 33,707 44,278 43,375 55,207 55% SME
Interbank 398 13 47 432
Corporate
Debt 8,502 11,418 10,329 13,578 9%
Equity 5,004 6,864 8,486 10,746 Foreign

Other income 2,484 1,960 2,174 3,067 100%
Total income 4,957 4,802 6,071 6,649
75%
Overheads (3,327) (2,560) (2,510) (2,693)
Impairments (421) (627) (1,652) (1,162)
Net income 1,019 1,265 1,553 2,255
0%
Net interest margin 4.9 5.0 6.0 4.7 Deposits Debt Interbank Repos
FINANCIALS
ROE 22.4 21.3 20.2 23.4 12
ROA 1.8 2.0 2.2 2.7
%

Loan-to-deposit 93.2 95.4 95.6 105.9
Equity-to-assets 8.8 9.7 11.8 11.6 3
Tier 1 capital 10.9 9.7 11.7 11.7 0
Total capital 12.8 14.2 16.5 15.4 2006 2007 2008 2009 2010
8 100
7% 7%
3%
6 80
Cash
60
4 20% Interbank
%
40
2 20
Total loans
0 0
Other
25 25
20 20 20%

%
10 10
Fees/commissions
5 5 54%
0 0 Other income
26%
50
129

FINANCIALS
130
Credit analysis – Corporates
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Abu Dhabi National Energy Company (TAQA) (A3/Sta; A/Sta; NR)


TAQA’s value lies in its downstream
• Stability in the downstream business: TAQA’s domestic downstream
business, which provides stable,
(power and water) business provides a stable and predictable revenue stream
recurring cash flow. Our negative
and has helped to offset the volatility of the company’s oil and gas segment in
outlook on the credit reflects our
the past few years. Profitability is high, as feedstock for the plants is provided
concerns regarding TAQA’s oil and
free of cost by ADWEA. On the supply front, full offtake is guaranteed under
gas business segments: (1)
long-term agreements between the IWPPs and Abu Dhabi Water and
earnings volatility arising from
Electricity Company (ADWEC), with the latter making arrangements for
exposure to commodity prices,
transmission and distribution.
given the company’s relatively high
• Upstream volatility: TAQA’s average daily oil and gas production has
break-even prices; and (2) the
potential for the company’s shift increased significantly from 42.5mboe/day in 2007 to 133.7mboe/day in 9M-
towards international oil and gas 2010 on the back of acquisitions, particularly in North America. The relatively
operations and away from the core high breakeven commodity prices of the company’s oil and gas ventures
domestic electricity and water (approximately USD 40-45 per barrel of oil) make TAQA particularly sensitive
business to dilute sovereign to low energy prices, as was the case in early 2009.
support. We are encouraged by • Sovereign backing is supportive: TAQA is strategic to the sovereign, given that
management’s recent emphasis on it controls the entities responsible for the provision of most of the emirate’s
consolidating the business, and electricity and water. In the first public statement of support released by the Abu
would consider a reduction in the Dhabi government for its quasi-sovereign entities in March 2010, it acknowledged
significance of the oil and gas the important role the company plays in the emirate’s energy policy.
segments to be credit-positive for • Management reshuffle holds promise: TAQA has restructured its senior
TAQA. management team over the past two years in a move that is expected to
herald a change in the company’s growth strategy. The new management has
expressed its intention to focus on the integration and optimisation of its
existing portfolio following TAQA’s very rapid growth over the past few years.
Company profile Going forward, the company intends to move towards a model based on
organic growth rather than acquisition-driven growth.
Through its majority-owned
• High leverage, comfortable liquidity: TAQA’s numerous debt-backed
independent water and power
acquisitions have resulted in elevated debt levels, with debt/capital of 86%
producers (IWPPs), Abu Dhabi
and net debt/EBITDA of 6.4x as of Q3-2010. A significant proportion of debt is
CORPORATES
National Energy Company (TAQA)

located at the downstream subsidiaries, resulting in a fair degree of structural
has a near monopoly in the provision
subordination for bondholders. TAQA’s liquidity position is comfortable, with
of water and electricity in Abu Dhabi.
AED 5.7bn in cash and access to over AED 8.4bn in committed unutilised
TAQA is 72.1% owned by the Abu
credit facilities as of Q3-2010. In December 2010, the company extended its
Dhabi government via Abu Dhabi
debt maturity profile by replacing its USD 3.15bn August 2011 credit facility
Water and Electricity Authority
with a USD 3bn revolving multi-tranche facility with tenors of three (USD 2bn)
(ADWEA) and the Farmers’ Fund and
and five (USD 1bn) years.
is listed in Abu Dhabi, with a market
cap of AED 8.78bn as of 3 March
2011. Since 2006, TAQA has made a Power generation (GWh) Oil and gas production (mboe/day)
number of upstream (oil and gas
60,000 150
exploration and production) and
50,000 125
midstream (gas storage) acquisitions
in Europe and North America. In 40,000 100
addition, it has bought stakes in 30,000 75

downstream assets in Ghana, 20,000 50
Morocco, India and Saudi Arabia. In
10,000 25
9M-2010, TAQA reported oil and gas
0 0
production of 133.7mboe/day and
2007 2008 2009 9M-2010 2007 2008 2009 9M-2010
power generation of 42,459 GWh.
Domestic International TAQA North TAQA Bratani TAQA Energy
1
132
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Abu Dhabi National Energy Company (TAQA) (A3/Sta; A/Sta; NR)
Summary financials Profitability

2007 2008 2009 9M-10 20,000 100
17,500
Revenue 8,337 16,806 16,855 15,118
15,000 75
Gross profit 3,450 6,674 4,183 4,931
12,500
EBITDA 4,469 9,823 7,951 7,654
AED mn
Gross interest expense (2,498) (3,648) (3,460) (2,909) 10,000 50
%
Net income 1,376 2,195 773 1,335 7,500
5,000 25
2,500
Cash and equivalents 7,601 4,191 4,374 5,691
0 0
Total assets 68,870 85,097 91,845 105,289
2007 2008 2009 9M-2010
Total debt 51,689 59,448 62,557 70,944
Revenue EBITDA margin (RHS)
Net debt 44,088 55,257 58,183 65,253
Equity 8,129 7,747 12,410 11,482
Debt metrics
Cash flow (AED mn)
100 14
Net cash from operating
1,375 4,084 4,617 3,660
activities
12
Net cash from investing
(17,945) (21,848) (5,515) (3,946)
activities 75
Net cash from financing 10
8,596 13,243 1,103 1,541
activities
8
50
%
x
Key ratios 6
Gross profit margin (%) 41.4 39.7 24.8 32.6
4
EBITDA margin (%) 53.6 58.4 47.2 50.6 25
Total debt/capital (%) 86.4 88.5 83.4 86.1 2
Total debt/EBITDA (x) 11.6 6.1 7.9 7.0* 0 0

EBITDA/interest (x) 1.8 2.7 2.3 2.6 2007 2008 2009 9M-10
CORPORATES
Total cash/ST debt (%) 162.7 210.9 97.1 109.2 Debt/capital Debt/EBITDA (RHS)
.
EBITDA breakdown (9M-10) Debt maturity** (Sep-10)
5,000
4,000
22% Oil and gas - North
America
3,000
USD mn
Oil and gas - UK

2,000
50%
Oil and gas - 1,000
Netherlands
23%
0
Power and water
2011 2012 2013 2014 >2014
5%
Loans - draw n portion Loans - undraw n portion Bonds
*Annualised; **Excluding downstream subsidiaries; Sources: Company reports, Standard Chartered Research
2
133
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Aldar Properties (Ba3/Dev; B/Dev; NR)


The liquidity support package for
• Government to the rescue: In January 2011, Aldar announced a long-
Aldar announced by the Abu Dhabi
awaited framework to address liquidity concerns facing the company. The
government in conjunction with
package included asset transfers and sales to the government (totalling AED
Mubadala in early 2011 will
16.4bn), issuance of a convertible bond to Mubadala (AED 2.8bn) and
materially alleviate near-term
recognition of impairment charges (AED 10.5bn). The announcement allayed
refinancing concerns. Following the
market fears that Aldar would not be supported by its largest shareholder, the
asset sales to the government and
government. The government’s actions indicated that it is willing and able to
recognition of impairment charges, extend financial assistance to the company. While equity holders face further
the company’s balance sheet is dilution from another convertible being issued to Mubadala, debt holders
likely to be more reflective of fair appear to have received a better deal.
value. The measures announced • Liquidity pressure eases: Aldar expects to receive cash against approximately
also reinforced Aldar’s strong 75% of the planned asset sales to the government in 2011, with the balance to
association with the government. be paid in 2012. This, together with the proceeds of the convertible, should see
However, despite the easing of the company through its debt maturities over the next two years (during which
liquidity pressure, Aldar’s business period over half of the company’s total debt falls due). However, taking capital
is likely to continue to underperform expenditure into account, the liquidity cushion is considerably lower.
at the operating level given the • A leaner balance sheet: Given impairments and asset sales of AED 26.9bn,
persistent weakness in the UAE Aldar’s fixed-asset base is set to decline considerably (part of which has
real-estate sector. Further, liquidity already been reflected in Q4-2010). The impairment charge is likely to make
concerns could resurface over the the balance sheet more reflective of fair value.
medium term in the event of a • Not out of the woods yet: While the support extended to Aldar is positive
lacklustre recovery in the sector. from a near-term liquidity standpoint, the company’s business profile is likely
to remain under considerable pressure given the weakness of Abu Dhabi’s
real-estate sector. In addition, refinancing risks could re-emerge after 2012-13
in the absence of a marked recovery in the sector.
• A semi-quasi-sovereign: Notwithstanding the display of support and the
Company profile imminent (indirect) majority government ownership of the company, the
government’s rhetoric on Aldar remains guarded. In a statement released
Aldar Properties was set up by the following the announcement of the asset purchases, the government stated
government of Abu Dhabi in 2005, that “This purchase does not signal a change of government policy towards
CORPORATES
with a mandate to develop Aldar, nor towards any other commercial enterprise. Government policy
commercial and residential remains that broad and ongoing support will be offered exclusively to
infrastructure in the emirate. The Mubadala, IPIC, TDIC and TAQA.”
government owns approximately 38% • Long road to investment grade: While an increased government stake in
of Aldar (as of Q3-2010; its Aldar could result in rating upgrades, we do not expect ratings to return to
ownership is set to increase following investment grade (which would require an upgrade of three or more notches)
support measures announced in in the near future. Note that the coupon on the ALDAR 2014 (B1/B), which
early 2011) via Mubadala, ADIC and stepped up by 2% as a result of the rating downgrades, will start stepping
other government-related entities. down if the ratings go back to investment grade.
The company is listed in Abu Dhabi,
with a market cap of AED 3.66bn as Ownership structure (Aug-10)
of 3 March 2011. Aldar operates Mubadala*
across real-estate segments, and its 19%
portfolio comprises residential, ADIC

commercial, retail and infrastructure 7%
Others
projects. The company sells land to 62% NBAD
5%
sub-developers in addition to selling
completed properties. It is also Other govt-related
7%
building out an investment property
portfolio with a view to establishing a
recurring source of revenue.
*Mubadala’s stake has increased to 27.7% post the bond conversion in January 2011
3
134
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Aldar Properties (Ba3/Dev; B/Dev; NR)

2007 2008 2009 2010 6,000 100
Revenue 1,227 4,978 1,979 1,791
75
Gross profit 560 2,683 437 288
4,000
EBITDA 215 2,096 (302) (296)
AED mn
Gross interest expense (462) (274) (275) (718) 50
%
Net income 1,941 3,447 837 (12,658)
2,000
25
Cash and bank balances 7,616 12,066 10,313 2,432
0 0
Total assets 22,627 49,767 66,345 47,344
2007 2008 2009 2010
Total debt 10,508 22,591 38,697 32,572
Revenue Gross profit margin (RHS)
Net debt 2,892 10,525 28,384 30,140
Equity 7,689 16,032 16,801 4,247
Debt metrics
Cash flow (AED mn)
40,000 100
(1,990) 1,350 (1,056) (2,715)
activities
Net cash from investing 32,000
(5,836) (19,385) (13,485) 1,975
activities 75
Net cash from financing
12,014 16,202 13,978 (1,275)
activities 24,000
AED mn
50
%
Key ratios
16,000
25
EBITDA margin (%) 17.5 42.1 NM NM 8,000
Total debt/capital (%) 57.7 58.5 69.7 88.5
Total debt/EBITDA (x) 49.0 10.8 NM NM 0 0
EBITDA/interest (x) 0.5 7.7 NM NM 2007 2008 2009 2010
CORPORATES
Total cash/ST debt (%) 1,006.1 453.1 219.6 16.4 Total debt Total cash Total debt/cap. (RHS)
.
Debt structure (Dec-10) Debt maturity (Dec-10)
16,000
12,000
AED mn
8,000
Unsecured Secured
49% 51%
4,000
0
2011 2012 2013 2014 >2014
loans bonds
4
135
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Bahrain Mumtalakat Holding Company (NR; A-/RWN; A-/Neg)


We initiate coverage of Mumtalakat
• Strong government linkage: Acting on behalf of the Bahraini government,
with a negative outlook. Our view is
Mumtalakat has been entrusted with the task of managing and enhancing the
based on the company’s relatively
competitiveness of the country’s strategic state-owned companies. Given the
weak standalone credit profile and
rapid depletion of Bahrain’s oil reserves, the government is keen to diversify
our negative outlook on the Bahrain
the economy into other sectors, and Mumtalakat has a key role to play in this
sovereign (see the ‘Sovereigns’
strategy. Accordingly, the government has a close association with the
section). Mumtalakat’s Achilles’ heel
company, with significant influence over the execution of its operations and
has been its ownership of the loss-
strategy. Mumtalakat’s board of directors is appointed by the government and
making Gulf Air. While the airline
is chaired by Bahrain’s finance minister. All key investment and strategic
has been a significant financial drain
decisions require the government’s blessing, and the company has limited
on the company, the government’s
flexibility to act independently of the government.
commitment to directly support Gulf
Air going forward is a positive • Mixed portfolio: Mumtalakat has a vast portfolio across a number of sectors,
development. Apart from Gulf Air, with limited visibility on a number of its smaller investments. However, close to
Mumtalakat’s portfolio comprises 85% of its portfolio value is concentrated in six companies: Alba, Gulf Air,
valuable assets including Alba, Batelco, NBB, Edamah and the McLaren Group. Gulf Air is the weakest of
Batelco and NBB. However, visibility these, with many years of losses behind it. Mumtalakat is undertaking a major
on the rest of the portfolio is poor. restructuring of the airline with a view to increasing its profitability. The only
Mumtalakat’s credit profile, although major dividend contributors to Mumtalakat have been Alba, Batelco and NBB,
constrained, improved after it which paid combined dividends of USD 85.4mn in 2008 and USD 151mn in
termed out its debt maturities via a 2009. Mumtalakat’s share in the combined market cap of these three
bond issuance in 2010. Its liquidity companies was BHD 1.48bn as of 3 March 2011. In general, we believe the
was also recently enhanced by company would hesitate to sell large stakes in its strategic assets, limiting
receipts from the Alba IPO. their monetisable value.
• Negative sovereign outlook: While we believe the Bahraini government would
be willing to extend support to Mumtalakat, the sovereign is in a fairly constrained
position given the rapid decline in its oil reserves and relatively high oil
Company profile
breakevens. The reduced fiscal flexibility also makes the country more vulnerable
Mumtalakat was established by the to potential contingent liabilities, including those from the financial sector.
Bahraini government in 2006 to • Financial profile is constrained: Mumtalakat’s financial metrics have been
CORPORATES
manage the country’s non-oil and gas weighed down by years of losses at Gulf Air and the cash injections needed to
businesses. On Mumtalakat’s turn the airline around. However, the pressure should ease following the
incorporation, the government government’s commitment to support the airline directly. Mumtalakat termed out
transferred its stake in 29 assets to its debt maturities with the issuance of a USD 750mn bond in the middle of
the company. As of end-2009, 2010. The company’s liquidity has also improved since it sold 10% of its stake in
Mumtalakat had stakes in 35 Alba via an IPO in November 2010 which raised approximately USD 338mn.
enterprises across sectors including
metals, transportation,
Dividends received from key portfolio companies
telecommunications, real estate and
financial services, with a total 300
portfolio value of USD 9bn. The
250
company’s key investments are Alba
(an aluminium smelter), Gulf Air (a 200
USD mn
regional airline), Batelco (a telecom

150
services provider), NBB (a bank) and
Edamah (a real-estate developer). Its 100
major international holding is a 42%
50
stake in the McLaren Group. Alba,
Batelco and NBB are listed, with a 0
combined market cap of BHD 2.53bn 2007 2008 2009
Alba Batelco NBB
as of 3 March 2011.
5
136
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Bahrain Mumtalakat Holding Company (NR; A-/RWN; A-/Neg)

2007* 2008 2009 H1-10 2,500
Income statement (BHD mn)
Revenue 1,764 1,448 1,038 582 2,000
Gross profit 633 301 50 64

1,500
EBITDA 693 299 75 53
BHD mn
Gross interest expense (81) (43) (39) (17) 1,000
Net income 246 (69) (183) 26

500
Balance sheet (BHD mn) 0

Cash and bank balances 120 160 118 452
-500
Total assets 5,289 4,883 4,861 5,207
2007* 2008 2009 H1-10
Total debt 896 954 1,148 1,440
Revenue Net income
Net debt 776 794 1,030 988
Equity 3,044 2,853 2,886 3,053
Debt metrics
Cash flow (BHD mn)
2,000 100
396 81 68 34
activities
Net cash from investing 80
(257) 4 (158) (13)
activities 1,500
(176) (11) (68) 307
activities 60
BHD mn
1,000
%
Key ratios
40
500
Total debt/EBITDA (x) 0.6 3.2 15.2 13.6**
Net debt/EBITDA (x) 0.6 2.7 13.7 9.3** 0 0
EBITDA/interest (x) 8.5 7.0 1.9 3.2 2007 2008 2009 H1-10
CORPORATES
Total cash/ST debt (%) 29.4 38.7 21.4 NA Total debt Total cash Total debt/cap. (RHS)
.
Debt distribution (Dec-09) Debt maturity (Dec-09)
800
600
45%
BHD mn
Parent
400
Subsidiaries
200
55%
0
2010 2011-2014 >2014
*From 29-Jun to 31-Dec-2007;**annualised; Sources: Company reports, Standard Chartered Research
6
137
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dar Al-Arkan (NR; BB-/Sta; NR)


Dar Al-Arkan’s competitive strength
• Supportive sector fundamentals: DAAR is well placed to benefit from the
in Saudi Arabia’s property market
strong long-term prospects of the Saudi real-estate sector. Unlike other parts
and its focus on the undersupplied
of the region, where speculative buying by non-nationals has been a key
middle-income housing segment
driver of the property market, in Saudi Arabia, domestic demand – driven by a
should allow it to capitalise on
young population, historical undersupply and the likely introduction of a
expected growth in the country’s
mortgage law – is expected to propel the sector forward. In addition to pure
real-estate sector. The company
housing demand, real estate is largely considered to be the investment of
operates with relatively high
choice among Saudis given few lucrative alternative investment options.
margins given its land developer
• Well-located land bank: DAAR’s development activity is confined entirely to
model. However, going forward,
Saudi Arabia, and the company’s land bank is centred in the densely
margins are expected to come
populated cities of Jeddah, Riyadh, Dammam, Medina and Mecca. The land
under pressure as it shifts its focus
bank is valued at cost on the balance sheet, and as of end-2010, it consisted
to the build-out of residential and of approximately SAR 3bn of developed land and SAR 10bn of undeveloped
commercial projects. Our key or partly developed land.
concern is related to the funding
• Margins to weaken: DAAR’s bread and butter has been its land sales
requirements for DAAR’s large- business, where it has a strong track record. Going forward, the company
scale projects. Given that internal intends to strike more of a balance between revenue from land sales and
cash flow will likely be insufficient completed projects. The transition from a heavy reliance on land sales will
to meet these funding needs, we clearly be negative for margins and profitability. However, it should introduce
expect the company to remain greater stability and visibility to DAAR’s revenue stream.
active in the debt market, and • Cash on completion: Sales of property projects in Saudi Arabia take place
accordingly, leverage levels are largely on completion. This differs significantly from other parts of the region,
expected to rise. where off-plan sales have been the norm. While receiving close to full
payment on completion reduces customer default risk, it also exposes DAAR
to considerable market risk, as the developer could end up with a number of
completed and unsold properties in its inventory.
Company profile • Funding is a concern: Our key concern with DAAR is related to the funding
Incorporated in 1994, Dar Al-Arkan requirements for its large-scale projects (Shams Al-Arous, Qasr Khozam and
(DAAR) is a leading real-estate Shams Ar Riyadh), due to (1) the absence of off-plan sales as a source of
CORPORATES
developer in Saudi Arabia’s highly pre-funding; (2) the company’s private ownership (while DAAR plays an
fragmented property sector. DAAR important role in building the country’s housing infrastructure, there is no
was founded by six Saudi families visible precedent for financial assistance from the government); (3) the
and was listed on the Saudi stock tightening of credit for corporates in Saudi Arabia, especially in light of recent
exchange in 2007 (the founding defaults by family-owned conglomerates in the country; (4) high borrowing
families continue to own 70% of the costs (the company’s last sukuk was issued at a coupon of 10.75% p.a.); and
company). DAAR’s market cap stood (5) the likely deterioration of debt ratios. The funding issue is exacerbated by
at SAR 7.99bn as of 3 March 2011. the company’s high dividend payouts.
Its principal business is land
development, i.e., purchasing raw Land sales dominate revenue
land, undertaking basic infrastructure 6,000
development and selling the
5,000
developed land to third-party
investors or developers. Land sales 4,000
SAR mn
have historically accounted for 3,000

approximately 85% of the company’s
2,000
revenue. DAAR also undertakes
residential and commercial projects 1,000
targeted at the middle-income 0
segment. 2006 2007 2008 2009 2010
Land sales Sale of residential unit s
7
138
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dar Al-Arkan (NR; BB-/Sta; NR)

2007 2008 2009 2010* 6,000 100
Income statement (SAR mn)
Revenue 4,926 5,611 5,464 4,142 5,000
75
EBITDA 2,325 2,694 2,361 1,658
4,000
Gross interest expense (319) (272) (169) (240)
SAR mn
3,000 50
%
Gross profit 2,408 2,845 2,507 1,764
Net income 2,009 2,356 2,123 1,456
2,000
25
Balance sheet (SAR mn) 1,000
Cash and equivalents 3,347 716 2,223 1,189
0 0
Total assets 18,374 20,164 23,597 23,348 2007 2008 2009 2010
Total debt 6,400 7,635 8,355 7,679
Revenue Net income EBITDA margin (RHS)
Net debt 3,053 6,919 6,132 6,491
Equity 11,000 11,736 14,124 14,500
Coverage ratios (x)
Cash flow (SAR mn) 5 20
Net cash from operating activities (999) (874) 1,497 1,211

4 16
Net cash from investing activities (281) (1,372) (975) (561)
Net cash from financing activities 4,366 (385) 984 (1,685)
3 12
Key ratios
2 8
EBITDA margin (%) 47.2 48.0 43.2 40.0
1 4
Total debt/EBITDA (x) 2.8 2.8 3.5 4.6
0 0
EBITDA/interest (x) 7.3 9.9 14.0 6.9 2007 2008 2009 2010
CORPORATES
Total cash/ST debt (%) 836.7 43.8 82.4 118.9 Total debt/EBITDA EBITDA/interest (RHS)
Debt metrics Debt maturity (Dec-10)
10,000 100 5,000
8,000 80 4,000
6,000 60
3,000
SAR mn
SAR mn
%
4,000 40
2,000
2,000 20
1,000
0 0
2007 2008 2009 2010
0
Total debt Total cash Total debt/cap. (RHS) 2011 2012 2013-15
*SOCPA standards; Sources: Company reports, Standard Chartered Research
8
139
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
DIFC Investments (B3/Neg; B+/Neg; NR)


We view DIFCI’s standalone credit
• Core business has potential: DIFCI’s core property management business
profile as weak, characterised by an
is sound and has continued to perform reasonably well, despite the sharp
unclear business strategy, high
downturn in the Dubai real-estate market. As of end-2010, the number of
leverage and poor liquidity, all of
registered companies in the DIFC increased to 792 from 745 as of H1-2010.
which are exacerbated by poor
Occupancy levels in the Gate District remained strong, at over 95% (although
disclosure and transparency. While
occupancy of other commercial space was much lower, at 44%). Retail space
the company’s core business of
occupancy rose to approximately 71% from 66% as of H1-2010.
leasing space within the DIFC has
• Strategy remains unclear: DIFC-related operations account for a small
potential, losses on its investment
share of the company’s revenue (23% in 2009), and our concerns are centred
portfolio have had a significant
on the investment side of the business. Over the years, DIFCI has acquired
negative impact on its credit profile.
stakes in companies across a spectrum of industries, ranging from aerospace,
The announcement of the proposed
asset management, and aviation to luxury retail and printer supplies. Many of
business restructuring of DIFCI is a
these lack synergies with its core business and have negatively impacted the
positive development, although it
company’s financial performance.
involves considerable execution
• Asset disposals in the pipeline: In 2010, management announced a USD
risk. A successful restructuring,
1bn asset disposal programme aimed at shedding the company’s non-core
combined with ongoing financial
assets. If successful and achieved by the stated deadline of 2011, the
support from its parent (which is
restructuring will be positive for the credit. However, the plan entails
likely to be forthcoming given the
considerable execution risk and will be highly dependent on market conditions.
DIFC’s high-profile mandate), could
• Strategic mandate: The DIFC is central to Dubai’s ambitions of cementing its
eventually put the credit on a
position as an international financial-services centre and the regional gateway
stronger footing.
for capital and investment. DIFCI is closely tied to the DIFC due to its role in
managing the centre’s physical infrastructure. DIFC’s leadership is comprised
of senior government officials who maintain a close operational relationship
Company profile with the company. The government has also provided financial support to
DIFCI in the form of loans.
DIFC (Dubai International Financial • Refinancing concerns: DIFCI’s ability to service its debt depends on a
Centre) was established by the Dubai successful asset disposal programme and ongoing government assistance,
government in 2004 with a view to which we think will be required to meet both operational and debt-service
CORPORATES
developing the emirate into a leading requirements. To this end, the government has already provided the company
regional hub for financial services. with two USD 500mn loans. A successful restructuring, resulting in DIFCI
DIFC is presided over by the deputy operating a single line of business with a clear strategy would also make it
ruler of Dubai. DIFC Investments easier for the company to refinance the sukuk (although this would likely be at
(DIFCI) manages the revenue- a significantly higher level than the current coupon of LIBOR+37.5bps).
generating operations and the • Poor transparency: DIFCI reports results annually and we regard its
physical infrastructure of the DIFC. disclosure and transparency as poor relative to peers in the region.
The company is fully owned by the
government, which granted the DIFC Revenue by segment (2009) Asset breakdown (2009)
110 acres of land in Dubai on which
to build the financial centre. DIFC
Fee and Income from
holds a substantial investment other income investment Others
properties 22%
3%
portfolio, which comprised over one- Investment
12% Investments
properties
fifth of its assets as of end-2009. It Licence and in associates
46%
maintenance and JVs
also has a number of subsidiaries revenue 3%
across various industries, including 9%
Intangible
Aptec Holdings, Art Dubai, Sale of
assets
8%
goods
SmartStream Technologies and
76%
Investment
Despec International. securities
21%
9
140
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
DIFC Investments (B3/Neg; B+/Neg; NR)

2007 2008 2009 1,500 100
1,250
Revenue 237 1,030 1,044
75
Gross profit 217 442 245 1,000
EBITDA 122 200 86
USD mn
750 50
%
Gross interest expense (71) (109) (102)
Net income (80) 839 (562) 500
25
Balance sheet (USD mn) 250
Cash and equivalents 367 78 346

0 0
Total assets 3,725 4,790 4,336 2007 2008 2009
Total debt 2,175 2,698 3,066 Revenue EBITDA margin (RHS)
Net debt 1,808 2,621 2,720
Equity 1,111 1,665 820
Coverage ratios (x)
Cash flow (USD mn) 40 4

Net cash from operating activities 92 (142) 244
Net cash from investing activities (965) (498) (268)
30 3
Net cash from financing activities 1,110 350 297
20 2
Key ratios
EBITDA margin (%) 51.3 19.4 8.3
Total debt/capital (%) 66.2 61.8 78.9 10 1
Total debt/EBITDA (x) 17.9 13.5 35.6

Net debt/EBITDA (x) 14.8 13.1 31.6 0 0
EBITDA/interest (x) 1.7 1.8 0.8 2007 2008 2009
CORPORATES
Total cash/ST debt (%) 115.4 22.4 509.0 Total debt/EBITDA EBITDA/interest (RHS)
.
4,000 100 2,000
80
3,000 1,500
60
USD mn
USD mn
2,000 1,000
%
40
1,000 500
20
0 0 0
2007 2008 2009 2010 2011 2012 2013 2014
Total debt Total cash Total debt/cap. (RHS) Government loan Commercial debt*
*Assuming bank debt is amortised over four years; Sources: Company reports, Standard Chartered Research
10
141
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dolphin Energy (A1/Sta; NR; A+/Sta)


We like Dolphin Energy on account
• Long-term contracts and low breakevens: Approximately 93% of Dolphin’s
of its strong credit metrics and short
gas production has been secured by 25-year take-or-pay agreements (at pre-
but successful operating history.
determined prices) with government-owned entities. Contracted gas sales
The project benefits from an
contribute approximately one-third of the project’s revenues and provide a
attractive combination of fixed-price,
stable and predictable source of income. The balance of export gas is sold
long-term contracts with
under more lucrative short-term interruptible agreements. Condensate and LPG,
government entities for its gas
which are sold at market prices, account for over half of the project’s revenues.
sales, and low breakeven prices for
The breakeven prices for both condensate and LPG (to achieve a DSCR of 1x)
its by-product sales. Accordingly,
are low (see chart on the next page). Given the combination of fixed-price
cash-flow visibility is good, with a
contracted sales and low-breakeven by-product sales, we believe the project
high degree of resilience to volatility
has significant headroom to withstand volatility in hydrocarbon prices.
in hydrocarbon prices. As one of the
• Strong regional gas demand: Gas demand in the region is high, particularly
GCC’s most high-profile cross-
in Dolphin’s key markets. Despite Abu Dhabi’s substantial gas reserves, it
border commercial initiatives, the
faces a deficit, as the gas produced in the emirate is primarily used for oil re-
project has strong support from
injection. Similarly, in Dubai, gas demand is expected to increase at an annual
both the Abu Dhabi and Qatari
rate of 4.5% until 2025, according to Wood Mackenzie.
governments. It has a vital role to
• Stakeholder support: The success of the Dolphin project is of key
play in bridging the gas deficit in its
importance to each of the stakeholders involved – Qatar, the sponsors and
key markets, and we expect
the offtakers. This project is Mubadala’s flagship venture and its largest
stakeholders to remain committed
source of revenue. Further, as a principal subsidiary of Mubadala, Dolphin
to ensuring the success of the
cross-defaults into Mubadala debt. Dolphin has strong ties to the Abu Dhabi
project.
government (which is required to maintain majority ownership of the project)
given that the project supplies approximately 60% of Abu Dhabi’s non-oil-
related gas requirements.
• Strong debt-service metrics: Dolphin’s financial metrics are strong, with the
Company profile
base-case DSCR not falling below 2.4x over the life of the debt programme.
The Dolphin project is a cross-border Cash flow was stress-tested by the project’s independent technical
energy project established in 2001 to consultants, with scenarios including operating availability of 85%; increases
extract gas from the North Field in of 20% in operating costs and maintenance capex; and an increase in debt to
CORPORATES
Qatar and deliver it to government- the maximum permissible amount of USD 5.1bn. Under each of these
owned utility companies in Abu scenarios, the minimum DSCR does not fall below 1.8x.
Dhabi, Dubai and Oman. The project • Expansion expenditure: The export pipeline has a capacity of 3,200mmscfd.
is jointly owned by Mubadala (51%), Expanding operations to accommodate an additional 1,200mmscfd would
Total (24.5%) and Occidental require further capital investment in the upstream operations. In addition, an
(24.5%). It started delivering gas in amendment or supplement to the Development and Production Sharing
mid-2007 and reached its average Agreement (DPSA) would be required. Additional secured debt is subject to a
daily production rate of 2,000mmscfd minimum forecast DSCR of 1.75x.
in early 2008. The project comprises
both upstream and midstream Volume offtake – Export gas
operations which, although legally
Interruptible
separate, are integrated for
gas supply
operational and debt-service agreements
Oman Oil 7%
purposes. In addition to export gas, Co mpany
the project produces substantial 10%
quantities of by-products such as A bu Dhabi

condensate, LPG and sulfur, which Water &
Dubai Supply Electricity
are sold internationally via Qatar A utho rity Co mpany
International Petroleum Marketing 36% 47%
Company (TASWEEQ).
11
142
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Middle East Credit
Credit Compendium
Compendium 2011
2011
Dolphin Energy (A1/Sta; NR; A+/Sta)
Summary financials* Profitability

2007 2008 2009 2,500 100
Revenue 380 1,449 1,575 2,000
75
Gross profit 96 581 626
EBITDA 87 590 637 1,500
USD mn
50
%
1,000
Net income 31 499 547
25
500
Cash and bank balances 9 92 129
0 0
Total assets 3,925 4,312 4,725 2007 2008 2009
Total debt 3,331 3,450 3,518 Revenue EBITDA margin (RHS)
Net debt 3,323 3,358 3,390
Equity 243 502 716
Coverage ratios (x)
Net cash from operating activities (132) 528 532

Net cash from investing activities (183) (259) (295) 40
30
Net cash from financing activities 321 (186) (201)
30
20
Key ratios
20
Gross profit margin (%) 25.2 40.1 39.8
EBITDA margin (%) 22.8 40.7 40.5 10
10
Total debt/capital (%) 93.2 87.3 83.1
Total debt/EBITDA (x) 38.5 5.8 5.5 0 0
EBITDA/interest (x) 2.1 12.4 15.2 2007 2008 2009
CORPORATES
Total cash/ST debt (%) NA 0.0 0.3 Total Debt/EBITDA EBITDA/interest (RHS)
.
Condensate base-case vs. breakeven price Base-case projections
90 2,500 5
75
2,000 4
60
USD/bbl
1,500 3
45
USD mn
30 1,000 2
15
500 1
0
2009
2011
2013
2015
2017
2019
0 0
2010 2012 2014 2016 2018
Price used for base-case projections
Breakeven price EBITDA DSCR (RHS)
*Midstream operations; Sources: Company reports, Standard Chartered Research
12
143
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
DP World (Ba1/Pos; BB/Sta; NR)


DP World is the strongest credit in
• Strong business fundamentals: DP World is among the world’s most
the Dubai Inc. complex, in our view.
geographically diversified container terminal operators. Large barriers to
The company’s competitive strength
industry entry, combined with the company’s high-growth portfolio focused on
is underscored by its well-
emerging markets, put DP World in a strong competitive position. Unlike many
diversified port portfolio, which is
of its competitors, DP World’s cargo is predominantly comprised of origin and
exposed to high-growth emerging
destination (O&D) traffic, which allows for more pricing power and lower
markets. While its ownership by
throughput volatility.
Dubai World remains an overhang
• Volumes pick up: After posting a 6% decline in gross volumes (8% in
for the credit, DP World and its
consolidated volumes) in 2009, DP World is emerging from the global
creditors have remained ring-fenced
so far. On the operational front, the economic slowdown in good shape. Volumes across the company’s port
business is doing well, and growth portfolio made an impressive comeback in 2010, with gross throughput of
resumed in many of the company’s 49.6mn TEU, up 14% from 2009. Consolidated throughput rose 9% to 27.8mn
markets in 2010 after the slowdown TEU. A focus on keeping costs in check, combined with the improvement in
in 2009. While liquidity is robust, the the top line, has allowed DP World to maintain healthy margins, at close to
company’s significant capacity 40% in H1-2010.
expansion plans over the next • Robust liquidity: While absolute debt levels are high, a substantial part of DP
decade are likely to slow the pace of World’s USD 8bn debt is long-dated in nature. The company’s next large debt
deleveraging. Given the dependence maturity is a USD 3bn credit facility due in Q4-2012. Liquidity is strong, with
of container traffic on global GDP approximately USD 2.7bn in cash (as of H1-2010) and USD 1.5bn in expected
growth, the key risk to the business proceeds from the recently announced sale of 75% of its Australian ports
would be another macroeconomic business. The company is expected to use part of these proceeds to reduce
shock. its overall indebtedness (a key pre-condition for potential rating upgrades).
• Expansion plans on track: DP World has 11 new development projects
underway which could raise gross capacity to more than 92mn TEU (an
increase of 54%) over the next 10 years, with about half coming online by
2015. The company anticipates capital expenditure of USD 2.5bn between
Company profile
2010 and 2012, of which USD 411mn was spent in H1-2010. Barring large
Following the multi-billion-dollar acquisitions, operating cash flow and existing liquidity should be adequate to
acquisitions of CSX World Terminals cover capex funding requirements.
CORPORATES
in 2005 and P&O in 2006, DP World • Dubai World risk recedes: Despite concerns about interference from Dubai
has established itself as one of the World (chief among which was the risk of cash being upstreamed), DP World
world’s largest and most has so far remained ring-fenced from the restructuring at the parent level.
geographically diversified container However, Dubai World’s 81% ownership of the company remains an overhang
terminal operators. The company is given the parent’s weak financial position. We would consider a reduction in
80.5% owned by the Dubai the stake (potentially as part of the London listing expected to take place in
government via Dubai World and is H1-2011) to be positive for the credit.
listed in Dubai, with a market cap of
USD 8.90bn as of 3 March 2011. DP Consolidated throughput
World’s port portfolio comprises 50 30
terminals across 28 countries with a
25
gross annual capacity of 59.7mn
TEU. The company’s flagship facility 20
mn TEU
is its home port of Jebel Ali, the 15

seventh-largest container terminal in
10
the world. In 2010, DP World handled
49.6mn TEU across its ports. The 5
Middle East, Europe and Africa 0

region, where the company operates Middle East, Europe Asia-Pacific and Australia and Total
25 terminals, accounted for 56% of and Africa Indian subcontinent Americas
revenue in H1-2010. 2008 2009 2010
13
144
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
DP World (Ba1/Pos; BB/Sta; NR)

2007 2008 2009 H1-10 4,000 100
3,500
Revenue 2,731 3,283 2,929 1,524
3,000 75
Gross profit 848 1,140 865 445
2,500
EBITDA 1,121 1,322 1,066 569
USD mn
Gross interest expense (546) (349) (354) (191) 2,000 50
%
Net income 1150 531 370 219 1,500
1,000 25
500
0 0
Total assets 17,190 15,499 18,961 18,502
2007 2008 2009 H1-10
Total debt 5,902 5,419 7,969 8,043
Net debt 2,843 4,215 5,059 5,365
Equity 8,373 7,173 8,037 7,537
Coverage ratios (x)

Cash flow (USD mn)
10 15
955 1,069 572 487
activities
Net cash from investing 8 12
4,354 (2,007) (915) (490)
activities
(2,433) (686) 1,963 (190)
activities
6 9
Key ratios
4 6
EBITDA margin (%) 41.0 40.3 36.4 37.3
2 3
Total debt/EBITDA (x) 5.3 4.1 7.5 7.1* 0 0
EBITDA/interest (x) 2.1 3.8 3.0 3.0 2007 2008 2009 H1-10
CORPORATES
Total cash/ST debt (%) 1039.8 541.4 588.4 398.7 Total debt/EBITDA EBITDA/interest (RHS)
.
EBITDA by geography (H1-10) Debt maturity (Jun-10)
4,000
18%
3,000
Asia Pacific and Indian
subcontinent
USD mn
2,000
Australia and Americas
17%
Middle East, Europe and 1,000

Africa
65%
0
2010 2011 2012 2013 2014 2015 2016 2017 2037
*Annualised; Sources: Company reports, Standard Chartered Research
14
145
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dubai Electricity and Water Authority (DEWA) (Ba2/Pos; NR; BBB-/Neg)


As the monopoly provider of
• Healthy operating performance: DEWA’s financial performance has
electricity and water to Dubai,
improved over the past few years, with the company reporting strong margins
DEWA has a fairly defensive
and healthy operating cash flow. Despite the economic slowdown in Dubai,
business profile. The company’s
electricity and water demand in the emirate continues to rise (although the
operating performance has been
pace of growth has slowed). DEWA’s top line has benefited from a tariff
sound despite the economic
structure revision in 2008 following a decade-long freeze. Meanwhile, the cost
downturn in Dubai, and it continues
of sales has come down sharply from its 2007 peak as subsidised natural gas
to report strong margins and
received from the Dolphin pipeline has replaced more expensive fuel oil as a
healthy operating cash flow. After
feedstock.
tapping multiple sources of funding
in 2010, DEWA has extended its • Government influence is a double-edged sword: Given the strategic role
debt maturity profile. Given its DEWA plays in the emirate’s development, the government has supported the
strategic role, the company has the company in numerous ways, including by providing explicit guarantees for some
strong backing of the Dubai of its debt obligations. The government maintains close oversight of DEWA
government. Our key concern with through its control of the company’s board. While sovereign backing has clearly
DEWA is the capex involved in its benefited DEWA in the past, it could potentially prevent the company from
expansion programme. While operating on purely commercial terms. For example, DEWA does not have the
internal cash-flow generation is authority to increase its tariffs (which are among the lowest in the world) without
strong, it will be insufficient to meet government approval. It is required to purchase natural gas only from a
the company’s investment government supplier, Dubai Supply Authority (DUSUP), and this arrangement is
requirements. Accordingly, we based on informal agreements rather than formal contracts.
expect borrowing to remain on an • Aggressive expansion plans: DEWA intends to increase its installed
upward trend. production capacity for electricity and water by 20% and 40%, respectively, by
end-2012; it anticipates that this will enable it to meet demand until 2015. The
capital expenditure for this expansion is estimated at AED 26-28bn between
2010-12 (committed capex until 2015 is AED 9.4bn, of which approximately
AED 3.3bn had been spent as of H1-2010). While DEWA’s internal cash-flow
Company profile
generation is strong (AED 6.6bn in 2010), it is likely to be insufficient to meet
Dubai Electricity and Water Authority the company’s investment requirements. Accordingly, we expect debt levels to
(DEWA) is the emirate’s monopoly remain on an upward trend. Profitability could also come under pressure in the
CORPORATES
provider of electricity and potable event that natural gas supplied by DUSUP (at significantly below market
water. As a vertically integrated rates) falls short of the company’s increased feedstock requirements. DEWA
entity, DEWA is responsible for the expects supply to be sufficient through 2012.
generation, transmission, and • Liquidity improves: DEWA raised funding from multiple sources in 2010,
distribution of electricity and the including USD 3bn from the bond market. As of end-2010, DEWA’s total debt
desalination and supply of water. The was AED 31bn, of which AED 6bn was short-term in nature.
company was formed in 1992 and is
fully owned by the government of
Dubai. DEWA reported installed DEWA electricity and water sales
electricity capacity of 7,829MW and 30,000 100
installed desalination capacity of
25,000
330MIGD as of 31 August 2010. The 80
electricity segment contributes 20,000
approximately three-quarters of 60
'000 MIG
'000 MWh
15,000
DEWA’s revenue, with the
40
commercial and residential sectors 10,000
accounting for approximately 45% 20
5,000
and 27% of electricity consumed,
respectively. 0 0
2007 2008 2009 H1-09 H1-10
Electricity Water (RHS)
15
146
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dubai Electricity and Water Authority (DEWA) (Ba2/Pos; NR; BBB-/Neg)

2007 2008 2009 2010 12,000 100
Revenue 6,123 9,287 10,286 10,869
9,000 75
Gross profit (226) 4,943 5,151 4,972
EBITDA 294 5,563 6,394 6,174
AED mn
Gross interest expense (583) (578) (886) (1,239) 6,000 50
%
Net income (744) 4,235 4,468 3,512
3,000 25
Cash and bank balances 111 2,733 1,438 7,848
0 0
Total assets 31,760 69,383 82,632 95,758
2007 2008 2009 2010
Total debt 9,655 19,131 23,251 31,078
Net debt 9,544 16,398 21,813 23,230
Equity 12,829 36,214 40,507 44,191
Debt metrics
Cash flow (AED mn)
60 50
(690) 4,081 6,771 6,616
activities
Net cash from investing 48 40
(6,644) (10,443) (9,926) (6,806)
activities
6,012 9,764 325 8,205
activities
36 30
%
x
Key ratios
24 20
Gross profit margin (%) (3.7) 53.2 50.1 45.7
EBITDA margin (%) 4.8 59.9 62.2 56.8
12 10
Total debt/EBITDA (x) 32.8 3.4 3.6 5.0 0 0
CORPORATES
Total cash/ST debt (%) 1.8 31.6 33.6 130.5 Debt/capital Debt/EBITDA (RHS)
.
Revenue by segment (2010) Debt maturity (Jun-10)
10,000
4%
7,500
22%
Electricity
AED mn
5,000
Water
Others 2,500
74%
0
<1 year 1-3 years 3-5 years >5 years
16
147
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dubai Holding Commercial Operations Group (DHCOG) (B2/Neg; NR; B/Neg)


DHCOG’s real-estate business has
• Some valuable assets: DHCOG has two key assets which could enable it to
come under severe pressure due to
raise cash – the Jumeirah Group and its telecom investments (held via
the sharp downturn in Dubai’s
TECOM). The Jumeirah Group holds a strong portfolio of hotels and resorts in
property market. Given the
Dubai, including the Burj Al Arab, Jumeirah Beach Hotel and Jumeirah
continued weak sentiment in the
Emirates Towers. The company also operates two hotels in London and one
sector, a meaningful recovery
in New York. DHCOG reported occupancy rates of 73% across its hospitality
appears unlikely in the near term.
business in 2009. The company also has a substantial telecom portfolio
However, away from its substantial
comprised of minority stakes in telecommunications companies in the UAE
real-estate exposure, the company’s
(du, Axiom Telecom), Tunisia (Tunisie Telecom), Greece (Forthnet), Europe
hospitality and telecom assets are of
(Interoute) and Malta (GO), among others. Together, the hospitality and
significantly better quality and could
telecom portfolios have significant realisable value. However, the company
be used to raise cash should the
has not publicly indicated its willingness or a timeframe for monetising these
company choose to monetise them.
With two bond maturities coming up assets.
within the next 12 months, the • Real-estate dominates balance sheet: Apart from the above-mentioned
company’s ability to tide over the ventures, DHCOG’s operations are dominated by its real-estate business,
refinancing depends on successful which accounted for over 90% of assets in 2009. The sharp downturn in
asset sales. While there remains a Dubai’s real-estate sector has had a significant negative impact on operations,
risk of contagion from the and a meaningful recovery is unlikely in the near term given continued market
restructuring of its sister weakness. Reflecting the pressure on the sector, the company booked
companies, DHCOG has so far been impairments of close to AED 19bn on its real-estate portfolio in 2008-09.
ring-fenced. • Relatively low debt but large payables: The company’s AED 15bn of debt
as of end-2009 comprised AED 10bn in bonds and AED 5bn in bank
borrowings. In 2009, DHCOG breached two covenants on its bank
borrowings, which were subsequently waived by the lenders. While debt
Company profile levels are relatively low, with maturities staggered over a number of years,
payables (AED 15bn) and project commitments (AED 11bn) represent
Dubai Holding Commercial
substantial obligations for the company. DHCOG also faces significant near-
Operations Group (DHCOG) is a
term refinancing risk, with upcoming bond maturities of CHF 250mn and USD
real-estate and hospitality company
500mn in July 2011 and February 2012, respectively.
CORPORATES
97.4% owned by the ruler of Dubai.

• Contagion concerns: DHCOG has stated that it is operationally independent
The ruler’s stake is held via Dubai
from the other companies under the Dubai Holding umbrella, and that it is
Holding, which, in addition to
ring-fenced from the restructuring taking place at those entities. However, we
DHCOG, has a number of financial
note that there is a precedent for financial relations between DHCOG and its
investments managed by Dubai
sister companies, with DHCOG having previously invested in funds managed
Holding Investment Group. DHCOG’s
by the latter (which were subsequently impaired).
business is organised under three
subsidiaries: Dubai Properties Group
Ownership structure
(one of Dubai’s three largest property
companies, along with Nakheel and Ruler of Dubai
Emaar), Jumeirah Group (owner and
operator of hotels under the Jumeirah Dubai Holding
brand in Dubai and overseas) and 97.4% 100%
TECOM Investments (which
Dubai Holding COG Dubai Holding Investment
manages media, telecom and health- Group
care free zones in Dubai and holds a
portfolio of minority stakes in local
and international telecom Dubai Jumeirah TECOM Dubai
International Dubai
companies). Properties Group Investments Group
Capital
Group
17
148
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Dubai Holding Commercial Operations Group (DHCOG) (B2/Neg; NR; B/Neg)

2007 2008 2009 25,000 40
Revenue 19,914 13,220 9,500 20,000 32
Gross profit 8,050 5,565 3,309
15,000 24
EBITDA 5,289 2,791 1,733
AED mn
%
10,000 16
Net income 13,902 9,822 (23,568)
5,000 8
Cash and equivalents 11,637 2,317 1,706 0 0
Total assets 140,113 171,437 124,485 2007 2008 2009
Total debt 15,890 16,349 15,199 Rev enue EBITDA margin (RHS)
Net debt 4,252 14,032 13,493
Equity 29,909 37,062 14,589
Government grants 58,012 63,905 38,241
Debt metrics
60 15
Cash flow (AED mn)

Net cash from operating activities 19,011 9,964 502 48
Net cash from investing activities (12,355) (17,444) 766 10

36
Net cash from financing activities 481 (1,381) (878)
%
x
24
Key ratios 5
Gross profit margin (%) 40.4 42.1 34.8
12
EBITDA margin (%) 26.7 21.1 18.2
Total debt/capital (%) 34.7 30.6 51.0 0 0
Total debt/EBITDA (x) 3.0 5.9 8.8 2007 2008 2009
CORPORATES
EBITDA/interest (x) 5.7 3.2 2.0 Debt/capital Debt/EBITDA (RHS)
Total cash/ST debt (%) 271.8 42.1 54.7
Revenue breakdown (2009) Debt maturity (Dec-09)
10,000
38%
13%
Property and land sales
7,500
7%
Room revenue
AED mn
Rental income 5,000

10%
Food and beverages
2,500
Telecom, IT
21% 11% Others

0
2010 2011-14 >2014
18
149
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
International Petroleum Investment Company (IPIC) (Aa3/Sta; AA/Sta; AA/Sta)


We initiate coverage of IPIC with a
• Investing for the government: Under the government’s direction, IPIC is
stable outlook. As a conduit for Abu
responsible for maintaining Abu Dhabi’s market share in the global
Dhabi’s investments in the global
hydrocarbon sector, securing end markets for the emirate’s oil, and executing
energy industry, IPIC has strong
strategic domestic projects. The company also plays a role in fostering
support from the government. The
diplomatic ties through the projects and investments it undertakes with
company has a long history of close
government entities in the region. IPIC’s board is chaired by a senior member
links with the sovereign, and while
of the ruling family and has four members from the Supreme Petroleum
there are no explicit government
Council and two members from the emirate’s Executive Council. All of the
guarantees for its debt obligations,
company’s key investments require approval from senior members of the Abu
the government has provided the
Dhabi government.
company with funding on numerous
occasions in the past. IPIC’s • History of government support and funding: Over the past 26 years, IPIC has
portfolio of companies is benefited from multiple equity injections by the government, totalling USD 3.5bn
geographically diversified and as of H1-2010. The government has pledged another USD 1bn for the company’s
includes some listed entities, which investment in QADIC, a joint venture with the State of Qatar. IPIC has never paid
we believe could be used as dividends to the government. In March 2010, the government released a
potential sources of liquidity should statement expressing its “full and unconditional” support for IPIC, claiming that the
the need arise. On a standalone company’s credit risk is indistinguishable from that of the government.
basis, IPIC’s credit profile is weak, • Portfolio of listed entities: IPIC views itself as a long-term strategic investor,
characterised by high leverage and with much of its portfolio dating back to the late 1980s and early 1990s. Many
a front-loaded debt maturity profile. of the companies in which IPIC has minority stakes are listed (and thus
reasonably liquid). The combined market value of IPIC’s stakes in CEPSA
(before the recent acquisition of outstanding shares), OMV, Cosmo Oil and
EDP was approximately USD 8.13bn as of 3 March 2011. As a holding
company, IPIC relies on dividend and interest income from its investments. To
Company profile this end, it seeks to influence dividend policies by maintaining board
representation. In 2009, it earned dividend and interest income of USD 345mn
International Petroleum Investment
(excluding income from Barclays instruments), of which OMV and CEPSA
Company (IPIC) was set up by the
accounted for 53%.
government of Abu Dhabi in 1984
• Significant debt: IPIC’s leverage has increased sharply, in line with its
CORPORATES
with a mandate to invest globally in

aggressive investment activities over the past few years. Total debt as of H1-
energy and energy-related industries.
2010 was USD 20.6bn (of which parent level debt and Aabar’s debt
The government continues to own
accounted for 84%), and debt/capital was 59%. The debt maturity profile is
100% of the company. IPIC holds
front-loaded, with over USD13bn maturing between mid-2011 and 2014.
stakes in over 15 companies across
• Aabar dilutes primary mandate: Optically, IPIC’s ownership of Aabar
more than 10 countries. Its key
(whose investments include Daimler, UniCredit and Virgin Galactic) is at odds
holdings include a 100% stake in
with its core mandate of investing in hydrocarbon-related sectors.
Nova Chemicals; majority stakes in
Ferrostaal, Aabar and Borealis; and IPIC’s key investments (as of Jun-10)
minority stakes in OMV, Cosmo Oil Date of initial % Public/
Investment Sector Headquarters
and EDP. In February 2011, IPIC investment ownership private
Borealis Petrochemicals 1997 64.0 Austria Private
made a bid for the outstanding Nova
Petrochemicals 2009 100.0 Canada Private
shares of CEPSA, in which it owned Chemicals
Ferrostaal Industrial services 2009 70.0 Germany Private
a minority stake. IPIC is also Aabar Diversified investments 2009 86.2 UAE Private
undertaking strategic projects in Abu CEPSA
Integrated oil and
1988 47.1 Spain Public
petrochemicals
Dhabi, such as the construction of a Integrated oil and
OMV 1994 20.0 Austria Public
crude oil pipeline to bypass the Strait petrochemicals
Cosmo Oil Refining and marketing 2007 20.8 Japan Public
of Hormuz and a multi-billion-dollar EDP Power 2008 4.1 Portugal Public
petrochemical complex PARCO Refining and marketing 1995 30.0 Pakistan Private
(ChemaWEyaat). SUMED Oil transportation 1995 15.0 Egypt Private
GEM Commercial tankers 2004 30.0 UAE Private
19
150
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Middle East Credit
Credit Compendium
Compendium 2011
2011
International Petroleum Investment Company (IPIC) (Aa3/Sta; AA/Sta; AA/Sta)
Summary financials Dividend and interest income versus interest expense*

2007 2008 2009 H1-10 800
Revenue 19,111 9,852 9,917 7,380
600
Net income 1,197 49 4,149 414
USD mn
Cash and bank balances 708 1,958 2,533 2,636

Total assets 20,494 23,268 46,271 48,179 200
Total debt 3,692 9,730 17,690 20,578
Equity 12,086 10,254 15,318 14,600
0
2008 2009 H1-10
Cash flow (USD mn)
Net cash from operating Dividend and interest income Interest expense
1,209 (86) (58) (507)
activities
(1,246) (6,963) (4,654) (3,782)
activities
Net cash from financing Debt metrics
269 8,462 5,574 4,652
activities
100 60
Key ratios
Total cash/ST debt (%) 43.4 28.4 35.1 47.4 40
50
%
x
Unconsolidated numbers (USD mn)
Assets NA 16,480 21,766 21,992 20
Equity NA 9,745 11,373 12,007 25
Cash NA 1,534 956 685

Dividend and interest
NA 377 647 243 0 0
income
2007 2008 2009 H1-10
CORPORATES
Interest expense NA 134 359 145
. Debt/capital Cash/ST debt (RHS)
Debt distribution (Jun-10) Debt maturity (Jun-10)
20,000
7% 17,500
9%
IPIC 15,000
12,500
USD mn
Aabar
10,000
47%
7,500
Nova Chemicals
5,000
37%
Borealis 2,500
0
<1 year 1-3 years 3-5 years >5 years
*Unconsolidated; Sources: Company reports, Standard Chartered Research
20
151
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Middle East Credit
Credit Compendium
Compendium 2011
2011
Jebel Ali Free Zone (JAFZ) (B2/Neg; B/Neg; NR)


JAFZ has a strong business and a
• Strong operations: JAFZ’s lease-based model provides a relatively stable
long and well-established track
and predictable revenue stream. Demand for space in the free zone is driven
record built on the company’s
by its strategic location straddling the port, major highways and the new Al
competitive strengths, such as its
Maktoum International Airport. Furthermore, JAFZ has a strong competitive
strategic location and operating
advantage in the region due to its operating efficiencies, physical
efficiencies. The company has
weathered the economic downturn infrastructure and successful track record exceeding 20 years. Despite
well, with continued demand from Dubai’s economic woes, the company has continued to see net client inflows.
tenants to lease space in the free Occupancy rates remain reasonably high, with a healthy waiting list of clients.
zone. Despite these strengths, we • Strategically important: JAFZ has a key role to play in establishing Dubai as
have a negative outlook on JAFZ, the region’s trade and logistics hub. Its operations are closely inter-related
based on the significant refinancing with the port, and the ultimate objective is to create an integrated logistics hub
risk in 2012. Both the company and by seamlessly linking the port and the free zone with the new airport. JAFZ
its cash-strapped parent, Dubai has a significant impact on the local economy – in addition to being a large
World, are unlikely to be able to employer, business in the free zone accounts for a quarter of Dubai’s GDP
refinance the entire AED 7.5bn and 20% of FDI inflows into the UAE.
sukuk. We believe JAFZ will • Refinancing risk looms: With AED 30mn in cash (at end-2009) and
ultimately have to rely on an operating cash flow of AED 929mn, JAFZ will clearly be unable to repay the
external equity infusion in order to AED 7.5bn 2012 sukuk from internal sources. Refinancing the full amount at
make its capital structure more at market yields of close to 12% (versus the last coupon of 3.67%) seems
sustainable. improbable, based on 2009 earnings. Furthermore, banks may have limited
appetite to take out a bond of this size given the constrained liquidity
environment and concerns around Dubai World credit risk. JAFZ has few
monetisable assets, as it does not own the land forming part of its facilities in
Jebel Ali (the government has provided the land to the company under a 99-
Company profile year lease). JAFZ would clearly need a substantial equity infusion in order to
make its leverage more sustainable.
Jebel Ali Free Zone Authority
• Parent overhang: JAFZ’s relationship with the Dubai World group is complex
(JAFZA) was established in 1985 by
and unpredictable. Historically, the company has upstreamed its cash to the
a Dubai government decree granting
parent for central cash management purposes, leaving very little liquidity at
CORPORATES
it the power to operate, administer

the operating company level. As of end-2009, the Dubai World group owed
and supervise the Jebel Ali Free
JAFZ AED 2.1bn. JAFZ has stated that it will no longer upstream cash, and
Zone. Spread over an area of 48
while it impaired part of its receivables in 2009, it expects the remaining
square km adjacent to the Jebel Ali
amount to be repaid eventually. However, we are less optimistic given the
port and home to over 6,400
financial difficulties facing Dubai World.
companies, the free zone is a major
trade and industrial area in Dubai and
is the largest of its kind in the region. Ownership structure*
As part of a 2007 restructuring plan
Government of Dubai
designed to separate the regulatory
and day-to-day commercial activities
of JAFZA, all revenue-generating Ports, Customs and Free Dubai World
operations and associated assets Zone Corporation Corporation
were transferred to a separate entity,
JAFZ, fully owned by the Dubai
Dubai Ports Jebel Ali Free Port and Free Zone World FZE
government via Dubai World. JAFZ Authority Zone Authority
earns more than 80% of its revenue
Economic Zones World DP World
from leasing land, warehouses, light
industrial units, offices and staff
JAFZ FZE
accommodation to its tenants.
* Not exhaustive
21
152
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Jebel Ali Free Zone (JAFZ) (B2/Neg; B/Neg; NR)

2007* 2008 2009 2,000 100
Lease rental income 71 940 1,052
1,500 75
Revenue 83 1,186 1,253
EBITDA 67 912 902
AED mn
Gross interest expense (43) (410) (439) 1,000 50
%
Net income 9 354 287
500 25
Cash and bank balances 29 35 30
0 0
Total assets 13,253 13,853 14,632
2007 2008 2009
Total debt 7,500 7,500 7,868
Net debt 7,471 7,465 7,838
Equity 4,773 4,864 5,197
Liquidity
Cash flow (AED mn) 9,000
Net cash from operating activities (276) 1,209 929

Net cash from investing activities (63) (796) (851)
6,000
Net cash from financing activities 367 (407) (82)
AED mn
Key ratios
3,000
EBITDA margin (%) 80.1 76.9 71.5
Total debt/capital (%) 61.1 60.7 60.2
Total debt/EBITDA (x) NM 8.2 8.7 0
Net debt/EBITDA (x) NM 8.2 8.7 2007 2008 2009
EBITDA/interest (x) 1.5 2.2 2.1
Total debt Due from Dubai World entities
CORPORATES
Total cash/ST debt (%) NM NM 8.0
Revenue breakdown (2009) Debt maturity (Dec-09)
10,000
7%
9%
7,500
Lease rental income
AED mn
License and registration fee 5,000
Administration service
revenue 2,500
84%
0
2010 2011 2012
*No comparative financials exist for 2007, as JAFZ only commenced operations in Nov-2007 (post-restructuring); Sources: Company reports,
Standard Chartered Research
22
153
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
MB Petroleum Services (NR; B+/Sta; BB-/Sta)


MBPS is well positioned to benefit
• Competitive strength of Omani operations: MBPS enjoys a strong
from rising demand for oilfield
competitive position in its home market of Oman, where it is one of the largest
services as oil companies increase
operators of oilfield services. It is also the country’s only integrated oilfield
exploration and production activity.
services operator in what is otherwise a fairly fragmented sector. Barriers to
The company has a strong franchise
entry are high and include significant initial capital expenditure and availability
in Oman, where it is the dominant
of skilled local labour in addition to relationships with oil-field operators. MBPS
provider of oilfield services. Over the
intends to expand its operations into other geographies such as Kuwait,
past 25 years, it has built strong
Qatar, Romania and the UAE. It recently signed a MoU with an Iraqi company
relationships with both national and
to pursue business opportunities in Iraq, a market where it anticipates
international oil companies. Although
significant demand.
the oilfield services industry is
• Strong client relationships: While MBPS’ largest client is Petroleum
inherently cyclical, we expect MBPS’
Development Oman (PDO), it has well-established relationships with a number
operating performance to improve as
of other national and international oil companies, including Saudi Aramco, Total
it extends the tenor of its rig
SA and ONGC. Close to 63% of MBPS’ 2009 revenue was derived from long-
contracts and executes a turnaround
term contracts (of four years or more) with its customers.
at MB Century. While recent bond
• Shareholder support: MB Holding, MBPS’ 100% owner, has provided
issuance has eased near-term
considerable financial and operational support to MBPS over the years.
refinancing risk, MBPS’ free cash
Management is actively involved in MBPS’ operations and the parent has
flow is likely to remain constrained
extended explicit guarantees for MBPS’ debt obligations.
given its ongoing capex
• Commodity play: While growing demand for oil is positive for MBPS
requirements and increased
(particularly given its expertise with mature fields), the dependence on the
financing costs.
commodity cycle exposes the company’s earnings to considerable volatility
(for example, in 2009, its average rig utilisation rate fell sharply as oil
companies cut back on investment spending).
• Recovery at MB Century is crucial: MB Century posted a loss of USD 20mn
Company profile
in 2009 due to exposure to short-term contracts and a sharp decline in rig
MB Petroleum Services (MBPS) is an utilisation rates. Management is working to increase contract lengths to reduce
Oman-based oilfield services earnings volatility. MB Century reported positive EBITDA towards the end of
company. It is privately owned by the 2010, and management expects the subsidiary’s performance to continue to
CORPORATES
MB Holding Group, which also has improve over the near term.
interests in oil exploration and • Refinancing pressure eases: The recently issued USD 320mn bond
production, copper mining, materially reduced near-term refinancing risk by extending MBPS’ debt
manufacturing and engineering maturity profile. However, the company has been free cash flow-negative since
services. MBPS’ primary operations 2007, reflecting the capital-intensive nature of the oilfield services business.
include onshore drilling services, While MBPS’ operating cash flow is likely to improve over the next few years,
workover services (well higher financing costs and ongoing capital expenditure requirements are likely
maintenance), production services to continue to put pressure on free cash flow.
(well testing, etc.) and provision of
EBITDA contributions from MB MBPS revenue by geography (9M-10)
drilling fluids and geological services.
Holding subsidiaries (9M-10)
The company operates a fleet of 24
Far East
drilling rigs, 44 workover rigs and 74
and South
UES Others Australia
production service units. While Asia
4% 2% and New
MBPS’ principal area of operations is Mawarid 6%
Zealand Middle
MBPS
Oman, it has a presence in 17 other Mining 12% East
25%
17% 60%
countries. In 2007, the group
acquired the drilling business of
Downer EDI Resource Holdings Europe
22%
(subsequently renamed to MB
Petrogas
Century) which has operations in
52%
Asia and Australia.
23
154
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
MB Petroleum Services (NR; B+/Sta; BB-/Sta)

2007 2008 2009 9M-10 500 30
Revenue 300 315 354 323 25
400
EBITDA 68 58 63 49
20
USD mn
15
%
Profit before tax 23 6 19 2
Net income 19 2 15 0 200
10
100
Cash and bank balances 9 5 10 7
0 0
Total assets 336 389 418 589
2007 2008 2009 9M-10
Total debt 192 230 247 379*
Net debt 183 225 237 372
Equity 65 65 82 83
Coverage ratios (x)

Cash flow (USD mn)
7 15
Net cash from operating activities 45 35 55 (7)
6
Net cash from investing activities (104) (44) (52) (72)
12
Net cash from financing activities 55 8 3 73 5
9
4
Key ratios
Gross profit margin (%) 13.9 4.2 13.3 11.9 3
6
EBITDA margin (%) 22.7 18.4 17.7 15.3 2
1
Total debt/EBITDA (x) 2.8 4.0 3.9 5.8**
EBITDA/interest (x) 5.9 4.9 4.0 2.9 0 0
2007 2008 2009 9M-10*
CORPORATES
Total cash/ST debt (%) 10.1 4.3 10.1 3.5
Total debt/EBITDA EBITDA/interest (RHS)
Debt metrics Average rig utilisation rates
500 100 100
90
400 80
80
300 60
70
USD mn
%
%
60
200 40
50
100 20
40
0 0 30
2007 2008 2009 9M-10 2007 2008 2009 H1-2010
Total debt Total cash Total debt/cap. (RHS) Oman Germany MB Century
*MBPS raised a USD 320mn bond in Nov-2010; **annualised; Sources: Company reports, Standard Chartered Research
24
155
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Mubadala Development Company (Aa3/Sta; AA/Sta; AA/Sta)


Our stable outlook on Mubadala is
• Public policy agent: Mubadala’s strong association with the government of
based on its strong association with
Abu Dhabi remains its primary credit-supportive factor. Although it is set up as
the Abu Dhabi government, which
a corporate, we view Mubadala as a government agency entrusted with the
has consistently provided explicit
task of reducing Abu Dhabi’s dependence on oil revenues, in line with the
support for the company. As the
government’s policy agenda. Mubadala is chaired by the Crown Prince of Abu
principal entity executing the
Dhabi, and its board comprises five members of the emirate’s Executive
government’s plan to develop and
Council. The government intends to retain full ownership of the company, as
diversify the domestic economy,
evidenced by the change-of-control clause in the bond documentation.
Mubadala has strong operational
• Government funding: The Abu Dhabi government has consistently provided
and financial ties with the
explicit financial support for Mubadala. It has been the primary financing
government. On a standalone basis,
source for the company’s ventures, with a cumulative contribution of AED
Mubadala’s ventures carry
49.9bn (and 356mn square feet of land) as of June 2010.
significant risks given their
• Hydrocarbon prices and equities drive financial performance: While
exposure to multiple sectors and the
Mubadala’s dependence on hydrocarbon-related revenues has declined as its
nascent nature and heavy
other business ventures gain momentum, the oil and gas segment (primarily
investment requirements of the
comprised of the Dolphin Project and Pearl Energy) still accounts for a
projects. While we expect the
significant share of revenues (36% in H1-2010). Accordingly, commodity
company’s credit profile to improve
prices remain a driver of the company’s top line. On the assets side, the
over time as its ventures start
company’s investment portfolio (22% of assets as of June 2010) introduces a
generating meaningful returns, over
significant degree of volatility to earnings.
the medium term, we expect the
• Significant capex requirements: Given the nascent nature of a large
credit to trade primarily as a proxy
number of its projects, Mubadala has large capex requirements. Its average
for Abu Dhabi sovereign risk.
annual capital and investment expenditure was AED 15.8bn in 2007-09, and
the company anticipates a similar number for 2010 (excluding opportunistic
acquisitions). Committed capital and investment expenditure was close to
Company profile AED 40bn H1-2010.
• Debt on the upswing: While total debt escalated sharply to AED 27.2bn in
Mubadala was established by the
H1-2010 from AED 10.2bn at end-2008, Mubadala’s gearing remains
government of Abu Dhabi in 2002 to
moderate, with a debt/capital ratio of 37%. In 2010, the company closed a
implement its strategy of developing
USD 2.5bn revolving credit facility (to refinance a USD 2bn corporate
CORPORATES
and diversifying the local economy. revolver), established a Euro Commercial Paper (ECP) programme, and
The company operates through nine issued its first bond in the Asian markets (SGD 25mn). Mubadala reported a
business units across a variety of cash balance of AED 5.6bn as of H1-2010, which comfortably covers short-
sectors, including oil and gas, real term debt maturities of AED 2.67bn. Going forward, we expect borrowing to
estate and hospitality, infrastructure, remain on an upward trend given the company’s ambitious investment
aerospace, and health care. In programme (although the government will likely continue to be the main
addition to forming new companies, source of funding).
Mubadala makes investments in local
and international companies, which Revenue from goods and services Government contribution to Mubadala
(H1-10)
are typically long-term in nature and
are undertaken with a view to Others 60,000
7%
combining financial returns with 50,000
social development. The company’s Service Hydrocarbons
concession 40,000
36%
flagship projects include Dolphin
AED mn
revenue
30,000
26%
Energy, Emirates Aluminium, the
20,000
Masdar project, university campus
10,000
development projects in Abu Dhabi,
0
and a USD 8bn commercial finance Aircraft
2004 2005 2006 2007 2008 2009 H1-10
maintenance
JV with GE. and repairs
Govt. capital contribution
31%
Cumulative govt. capital contribution
25
156
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Mubadala Development Company (Aa3/Sta; AA/Sta; AA/Sta)

2007 2008 2009 H1-10 20,000
15,000
Revenue from sale of
1,789 6,661 13,093 8,016
goods and services 10,000
Cost of sales of goods
(907) (3,422) (8,399) (5,677)
and services 5,000
AED mn
Gross interest expense (546) (691) (1,153) (826)
0
Net income 1,332 (11,767) 4,649 (1,508)
Total comprehensive -5,000
NA (19,806) (8,612) (4,549)
income
-10,000
Balance sheet (AED mn) -15,000

Cash and equivalents 1,090 3,019 11,777 5,627 2007 2008 2009 H1-10
Total assets 39,246 50,441 88,466 86,134 Revenue from goods and services Net income
Total debt 12,294 10,199 27,104 27,188
Net debt 11,204 7,179 15,328 21,561

Debt metrics
Equity 25,753 31,325 48,975 46,593
40,000 60
35,000
Cash flow (AED mn) 50
30,000
(841) 169 (1,543) (1,534) 40
activities
25,000
AED mn
%
(13,487) (19,348) (10,000) (6,283)
activities 20,000 30
15,474 21,740 20,055 2,403
activities 15,000
20
10,000
Key ratios 10
5,000
0 0
Operating cash
0.2 4.9 2.0 1.9 2007 2008 2009 H1-10
CORPORATES
flow/interest expense
Total cash/ST debt (%) 58.0 38.8 403.5 211.6 Total debt Cash Debt/capital (RHS)
.
Debt distribution (Jun-10) Debt maturity (Jun-10)
9,000
8,000
24% 7,000
6,000
Unsecured bank loans
5,000
AED mn
48% 4,000
Secured bank loans
3,000
Bonds (unsecured) 2,000
1,000
28%
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2029
26
157
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Nakilat Inc. (Aa3/Sta; AA-/Sta; A+/Sta)


Nakilat benefits from long-term
• Long-term charter agreements: Nakilat’s revenue is underpinned by 25-year
agreements for the charter of its
charter agreements with Qatari LNG producers Qatargas and RasGas,
ships by Qatari LNG producers
lending considerable stability and predictability to the company’s earnings.
RasGas and Qatargas. As the entity
While it could be argued that Nakilat is exposed to customer concentration,
responsible for transporting Qatar’s
the charterers themselves are strong credits and have entered into long-term
LNG around the world, Nakilat plays
take-or-pay agreements with their customers for the supply of LNG.
a crucial role in the country’s LNG
• Improving operating performance: Nakilat has reported consistently
value chain. Accordingly, we expect
improving numbers in the past few years, in line with the completion of its
strong sovereign support for the
vessel delivery programme and the subsequent deployment of its fleet.
credit. With the completion of its
vessel delivery programme in 2010, Revenue from its wholly owned vessels more than doubled y/y during 9M-
Nakilat is well placed to reap the 2010 to QAR 1.98bn. Coverage ratios remain strong, with an average DSCR
benefits of its heavy investment of 1.43x for senior debt and 1.26x for total debt, according to S&P.
over the past few years. We • Priority in cash-flow waterfall: Under the vessel charterers’ cash-flow
therefore expect leverage, which is waterfall structure, payments to Nakilat for the charter of ships rank senior to
currently high, to be on a declining the charterers’ own debt service. Thus, Nakilat bondholders effectively get
trend. The key risks to Nakilat are paid before RasGas and Qatargas make payments to their own debt holders,
potential disruptions to its shipping assuming contractual obligations are met.
routes caused by geopolitical • Limitations on indebtedness: Nakilat’s bonds are secured by first and
events or prolonged technical failure second lien interests in the LNG vessels. Further debt to finance the
at the LNG producers. construction of new vessels can be raised only if a charter agreement is
secured with an approved charterer. Additional debt must also meet the
DSCR test of 1.25x for senior debt and 1.7x for subordinate debt.
• High but declining leverage: The total funding requirement for Nakilat’s fleet
of 25 vessels was USD 7.5bn, of which 90% was debt-financed (raised
Company profile through a combination of loans, bonds and ECA financing). Although the
absolute level of debt is high, cash flow should be able to support the
Nakilat Inc. (Nakilat) was
amortisation schedule of the debt (however, the company does have large
incorporated in 2006 to acquire and
repayments of USD 1bn in 2019 and USD 2.2bn in 2025 that will need to be
operate a fleet of LNG tankers to
refinanced). We do not anticipate material capital expenditure going forward
CORPORATES
transport natural gas produced by

given the completion of the vessel delivery programme.
Qatar’s gas companies – RasGas
• Qatari government support: Nakilat has a critical role to play in delivering
and Qatargas. Nakilat is a wholly
Qatar’s largest source of earnings, natural gas (all of which has to be
owned subsidiary of Qatar Gas
transported by tankers), to customers across the world. The government is
Transport Company (QGTC), which
keen to maintain control over the entire LNG value chain in Qatar.
is 50% owned by Qatari government-
Accordingly, we expect strong government support for the company.
related entities. In addition to
Nakilat’s 25 wholly owned vessels,
QGTC jointly owns another 29 LNG Project structure
carriers. Nakilat’s fleet comprises Q- Qatar Gas Transport Company
(Parent)
Purchaser’s guarantee Deeds of Guarantee
Flex and Q-Max vessels, which are
Master Services
the largest and most advanced LNG Agreement
Finance parties Nakilat Inc.
STASCO
carriers in the world. Delivery of all 25 (Issuer)
vessels, which were built by Korean

shipyards, has been completed. One Refund guarantees
Refund Vessel owners
of these vessels has been chartered Guarantors (Guarantor)
by RasGas 3, while the rest have Shipbuilding contracts Time Charters
been chartered by Qatargas 2, 3 and

Shipbuilders Charterers
4. (Hyundai, Samsung, Daewoo) (RasGas, Qatargas)
27
158
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Nakilat Inc. (Aa3/Sta; AA-/Sta; A+/Sta)
Summary financials (Qatar Gas Transport Company) Profitability

2007 2008 2009 9M-10 3,000 100
Revenue from wholly 2,500
0 29 1,494 1,988
owned vessels 75
Share of operating profit
15 119 281 180 2,000
from JVs
Gross profit on wholly
QAR mn
0 16 981 1,273
owned vessels 1,500 50
%
EBITDA 6 129 1,540 1,818
Net income 90 130 588 502 1,000
25
500
Balance sheet (QAR mn)
Cash and bank balances 2,475 1,990 1,779 2,523 0 0
Total assets 15,998 24,478 31,249 32,337 2008 2009 9M-10
Total debt 10,077 19,232 25,015 25,821 Revenue from wholly owned vessels Gross profit margin (RHS)
Net debt 7,602 17,241 23,236 23,298
Equity* 5,813 5,915 6,519 6,740
Debt metrics
Cash flow (QAR mn)
100 10
(404) (770) 40 886
activities
(6,120) (9,505) (6,022) (682)
activities 75
5,096 10,468 5,782 530
activities 6
50
%
x
Key ratios
4
Gross profit margin on
NA 56.7 65.7 64.0
wholly owned vessels (%)
25
Total debt/EBITDA (x) 1,569.0 149.2 16.2 10.7**
EBITDA/interest (x) NA 11.0 2.2 1.9 0 0
Total cash/ST debt (%) NA 17.3 3.9 3.1 2008 2009 9M-10
CORPORATES
Debt/capital EBITDA/Int (RHS)
QGTC ownership structure QGTC debt (Jun-10)
15% Debt Amount (QAR mn) Maturity

Qatar Shipping Co.
Senior bank facilities 14,344 2010-25
Qatar Navigation Co.
Subordinated bank facilities 1,526 2010-25
15% Qatar Pension Fund Senior bonds 3,095 2021-33

50% Subordinated bonds 1,092 2010-33
Qatar Petroleum
KEXIM facility 1,662 2009-20
Qatar Foundation Fund KEIC covered facility 2,387 2009-21
7%
Loan 1,803 NA
5% Other govt. entities
Total 25,909
4%
4% Public
*Before hedge reserve;**annualised; Sources: Company reports, Standard Chartered Research
28
159
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Qatar Telecom (Qtel) (A2/Sta; A/Sta; A+/Sta)


Qtel’s portfolio offers an attractive
• Attractive portfolio: After a series of international acquisitions over the past
mix of high-margin developed-
few years, Qtel has gained exposure to both relatively mature markets (such
market assets and emerging-market
as Qatar and Kuwait) and high-growth emerging markets (such as Indonesia
assets with attractive growth
and Iraq). While the mature markets are a source of high and stable cash
opportunities. The company has
flow, the emerging markets are characterised by large populations and low
successfully leveraged its strong
mobile penetration rates, offering significant growth opportunities. Qtel holds
association with the Qatar
strong market positions in most of its geographies. It is the largest operator in
government in executing its
Qatar and the second-largest in Kuwait, Indonesia, Iraq and Oman.
international expansion programme.
• Strong financial performance in the face of growing competition: Qtel
Qtel continues to report strong
operating performance and healthy continues to report strong numbers. 2010 revenue and EBITDA rose by about
margins, although competitive 12%, with Qatar, Iraq, Indonesia and Kuwait together accounting for 87% of
pressure is building rapidly in both the group’s EBITDA. While margins have been declining (in line with industry
domestic and international markets. trends, and also due to the company’s foray into more competitive markets),
Following the bond issuance at the they remain healthy, at close to 46%. Qtel is facing growing competition,
end of 2010, Qtel has substantial particularly in its home market of Qatar following the entry of Vodafone in
cash at its disposal, and large 2009 (which has already gained a market share of about 25%). EBITDA in
acquisitions remain a risk given the Qatar declined 13% in 2010 versus a 5% fall in revenue.
company’s aggressive growth • Liquidity improves, acquisitions remain a risk: In 2010, Qtel tapped both
strategy. the bond and loan markets. It raised USD 2.75bn in bonds to help refinance
the USD 3bn syndicated loan maturing in 2012 and closed a USD 2bn
revolving credit facility to replace a forward start facility which was due to
mature in 2011. While refinancing risks have receded, the considerable cash
on its balance sheet (over USD 7bn as of end-2010) is likely to be deployed
for further acquisitions, delaying meaningful deleveraging.
Company profile • Debt metrics are weaker at parent level: While leverage at the group level
is moderate, and net debt/EBITDA at 1.6x is well within the board-approved
From its origins as Qatar’s incumbent
range of 2.5-3x, the ratio is considerably higher (over 10x) at the parent level,
telecommunications provider, Qatar
where most of the borrowing has been undertaken. Qtel is also subject to
Telecom (Qtel) has grown within five
cross-default clauses in its loan documentation from Indosat.
CORPORATES
years into an international telecom

• Sovereign backing: Qtel’s association with the Qatari government (whose
group with operations in 16 countries.
golden share gives it the exclusive right to appoint and remove five of the 10
Qtel aims to be among the world’s
board members, as well as the right to veto and reverse certain decisions) is
top 20 telecom companies by 2020.
supportive of the credit. It is particularly useful when dealing with the political
To this end, it has made a number of
aspects of the company’s international expansion.
acquisitions, mostly concentrated in
MENA and South East Asia. Its
largest purchases have been stakes
in Indosat (Indonesia), Wataniya EBITDA by geography (2010) Blended ARPU by geography
(Kuwait) and Asiacell (Iraq). As of 50
end-2010, Qtel’s subscriber base Algeria Others
7% 1%
stood at 74mn (of which the Oman 40 Kuwait
company’s proportionate interest was 8%
Indonesia
30
42mn). Qatar, Indonesia, Iraq and Kuwait 31% Qatar
USD
10%
Kuwait accounted for 78% of Qtel’s Oman
20
2010 revenue. The company is 68%
indirectly owned by the Qatari Iraq
10
Iraq Algeria
government and is listed in Qatar,
21% Qatar Indonesia
with a market cap of QAR 20.83bn as 0
22% Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10
of 3 March 2011.
29
160
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Qatar Telecom (Qtel) (A2/Sta; A/Sta; A+/Sta)

2007 2008 2009 2010 30,000 100
Revenue 10,543 20,319 24,025 27,179 25,000
75
EBITDA 4,925 9,591 11,231 12,594
20,000
Gross interest expense (975) (1,560) (1,808) (2,203)
QAR mn
Profit before tax 1,824 3,119 4,546 4,633 15,000 50
%
Net income 1,878 2,928 3,929 4,088
10,000
25
Balance sheet (QAR mn) 5,000
0 0
Total assets 47,275 73,150 84,961 101,399
2007 2008 2009 2010
Total debt 21,625 27,975 35,683 46,262
Net debt 18,375 20,130 24,171 20,686
Equity 16,517 26,938 29,454 34,227
Debt metrics
Cash flow (QAR mn)
100 10
6,522 5,598 9,968 10,195
activities
(22,455) (9,098) (9,055) (5,320)
activities 75
16,934 8,460 3,638 9,383
activities
6
50
%
x
Key ratios
4
EBITDA margin (%) 46.7 47.2 46.7 46.3
2
Net debt/EBITDA (x) 3.7 2.1 2.2 1.6 0 0
CORPORATES
Total cash/ST debt (%) 450.7 100.3 610.9 1,015.4 Debt/capital Debt/EBITDA (RHS)
.
Debt distribution (Dec-10) Debt maturity* (Dec-10)
5,000
7%
4,000
21% Qatar 3,000

USD mn
2,000
Indonesia
1,000
Others
72% 0
2011 2012 2013 2014 2015 >2015
Loans Bonds
*Qtel Q.S.C only; Sources: Company reports, Standard Chartered Research
30
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Compendium 2011
2011
Saudi Basic Industries Corporation (SABIC) (A1/Sta; A+/Sta; A+/Sta)


We initiate coverage on SABIC with
• Middle Eastern behemoth: With an asset base of more than SAR 317bn,
a stable outlook. SABIC is one of the
SABIC is the largest non-oil company in the Middle East. Over the past few
strongest credits in the GCC on a
years, the company has made a number of international acquisitions in order
stand-alone basis. The company has
to broaden its product and customer base, including DSM in Europe,
a substantial cost advantage over its
Huntsman Petrochemicals of the UK and GE Plastics. Today, SABIC is
competitors, largely on account of
among the world’s largest petrochemical companies, and it enjoys a market-
heavily subsidised feedstock prices.
leading position in a number of products. The company is in the process of
Accordingly, SABIC’s margins are significantly ramping up domestic production, with new capacity recently
well above those of other global added at Yansab (4mtpa) and SHARQ (3mtpa) while Saudi Kayan (6mtpa) is
petrochemical majors, and the expected to come on-stream in 2011.
company is more resilient to • Huge cost advantage: SABIC has posted margins well above its peers’
downturns in the industry, which is (average EBITDA margin of 33% from 2007-10), thanks to its access to fixed-
cyclical by nature. Credit metrics are price, low-cost feedstock under long-term agreements with government-
strong, with relatively low leverage owned oil company Saudi Aramco, combined with economies of scale. Saudi
on account of robust internal cash- Aramco supplies SABIC with ethane at a price of USD 0.75 per MBTU, which
flow generation. SABIC also enjoys has been fixed since 1999 and is significantly lower than the prevailing market
strong government support due to prices paid by the company’s competitors.
the important role it plays in the • Solid financial metrics: After coming under some pressure in 2009, SABIC’s
local economy. The key risk facing financial metrics rebounded strongly in 2010, with revenue and EBITDA rising
SABIC, in addition to industry by 47% and 57%, respectively. Strong cash-flow generation has historically
cyclicality, is the potential scarcity kept SABIC’s borrowing requirements relatively low, despite aggressive capex
of feedstock provided by Saudi and high dividend payouts. While leverage has risen over the past few years
Aramco, particularly in light of new on account of acquisitions and the company’s investment programme, it
capacity coming on-stream. remains at fairly modest levels (net debt/EBITDA of 1.2x as of end-2010).
SABIC has sufficient liquidity, with its SAR 51bn cash balance comfortably
covering debt maturing over the next few years.
• Strategic state asset: SABIC is a key contributor to Saudi Arabia’s economy
Company profile
and is also among the largest employers in the country. Five of the company’s
Saudi Basic Industries Corporation seven board members (including the chairman) are appointed by the
(SABIC) is among the world’s largest government. In addition to providing heavily subsidised feedstock, the
CORPORATES
petrochemical companies. It is 70% government has extended long-term funding to the company via loans from
owned by the government of Saudi state-owned entities.
Arabia via the Public Investment • Industry cyclicality: SABIC is exposed to volatility on account of the cyclical
Fund and is listed in Saudi Arabia nature of the petrochemical industry. However, we believe that the company
with a market cap of SAR 255.75bn is better placed to ride out industry cycles than its competitors, as was evident
(as of 3 March 2011). The company in its 2009 performance. With new capacity coming on-stream, a bigger
has manufacturing and compounding concern for SABIC going forward will be to maintain its competitive advantage
facilities in 25 countries across the given the scarcity of cheap feedstock (ethane).
Middle East, Asia, Europe and the
Americas, with 17 manufacturing Annual production volumes (mtpa) Production breakdown (2009)
facilities in Saudi Arabia. The
80
company’s product suite includes Innovative
Metals plastics
basic chemicals, performance
60 8% 2%
chemicals, polymers, specialty
Fertilizers
plastics, fertilisers and metals. SABIC 40 10%
aims to be the world leader in
chemicals and is seeking to diversify 20 Polymers
15%
its product range into higher-value Chemicals
specialty chemicals, with the target of 65%
0
1985
1990
1995
2000
2005
2008
2009
generating 20% of its revenues from

specialty chemicals by 2020.
31
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Middle East Credit
Credit Compendium
Compendium 2011
2011
Saudi Basic Industries Corporation (SABIC) (A1/Sta; A+/Sta; A+/Sta)

2007 2008 2009 2010 200,000 100
Income statement (SAR mn)
Revenue 126,204 150,810 103,062 151,711
150,000 75
EBITDA 48,653 48,142 30,758 48,226
EBIT 41,047 38,090 19,986 37,832
SAR mn
Gross interest expense (2,869) (3,801) (3,026) (3,382) 100,000 50
%
Net income 27,022 22,030 9,074 21,585
50,000 25
Balance sheet (SAR mn)
Cash and equivalents 45,877 51,028 56,377 50,645
0 0
Total assets 253,731 271,760 296,861 317,214
2007 2008 2009 2010
Total debt 80,109 92,656 107,015 110,652
Net debt 34,232 41,629 50,637 60,007
Equity 134,496 146,642 152,630 166,181
Coverage ratios (x)

Cash flow (SAR mn)
5 20
46,655 46,230 26,012 30,489
activities
(73,704) (29,807) (24,636) (20,139) 4 16
activities
33,521 (11,272) 3,973 (16,083)
activities
3 12
Key ratios
2 8
EBITDA margin (%) 38.6 31.9 29.8 31.8
1 4
Net debt/EBITDA (x) 0.7 0.9 1.6 1.2 0 0
CORPORATES
Total cash/ST debt (%) 982.1 1,189.8 870.4 304.7 Total debt/EBITDA EBITDA/interest (RHS)
.
150,000 100 60,000
125,000
80
45,000
100,000
60
SAR mn
SAR mn
75,000
%
30,000
40
50,000
20 15,000
25,000
0 0
2007 2008 2009 2010 0
Total debt Total cash Total debt/cap. (RHS) 2010 2011 2012 2013 2014 >2014
32
163
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Compendium 2011
2011
Tourism Development and Investment Company (TDIC) (A1/Sta; AA/Sta; AA/Sta)


TDIC’s strong association with the
• Fulfilling the government’s tourism goals: The Abu Dhabi government has
Abu Dhabi government is its
identified tourism as a key sector in its economic diversification strategy (as
primary source of credit support,
outlined in ‘The Abu Dhabi Economic Vision 2030’). TDIC is the chief vehicle
given its otherwise poor standalone
for the execution of the government’s tourism development agenda. TDIC
metrics. Because a large number of
does not source projects on its own – each one is mandated by the
TDIC’s projects are non-commercial
government and built by the company on the government’s behalf. The
in nature and are consequently not
company maintains close working links with the government, and its five-
sources of strong cash flow, we
member board of directors comprises senior officials from the Abu Dhabi
expect the company to continue to
government and related entities. It is chaired by Sheikh Sultan Bin Tahnoon Al
rely heavily on the government for
Nahyan, who is chairman of the Abu Dhabi Tourism Authority (ADTA) and is a
funding. The most significant risk to
member of the Executive Council, the emirate’s highest executive authority.
the business is a reduction in the
government’s commitment to the • Government funding: Although TDIC has recently tapped commercial
tourism agenda. borrowing sources, its primary source of funding is and will remain the
government. Financial assistance from the government has come in the form
of land contributions, monetary grants and soft loans.
• Sustainability in absence of government support is questionable: TDIC’s
ability to generate strong cash flow is limited, given the non-commercial
nature of a large number of its projects (such as the museums). The company
has been loss-making since inception, and we expect this to remain the case
for the next few years. Accordingly, we do not believe the company will find it
difficult to service its debt obligations in the absence of continuing government
assistance.
• Ambitious projections: TDIC’s projects are being built on the assumption
that tourist inflows to Abu Dhabi will increase to 3.3mn visitors per year by
Company profile 2013 and to 4.9mn by 2020. If these ambitious targets are not met, and if the
government’s commitment to using tourism as a channel for economic
Tourism Development & Investment
diversification consequently weakens, TDIC’s business could be adversely
Company (TDIC) was set up by the
affected.
government of Abu Dhabi in 2005 to
• Large capex requirements: Given TDIC’s project pipeline, it has substantial
CORPORATES
implement its strategy of diversifying

funding requirements, of which approximately 25-30% will likely be met via
the domestic economy through
commercial borrowings. The company has significant headroom to increase
tourism. It is fully owned by the
leverage, given its targeted maximum debt/equity ratio of 1:1 (this stood at
government via the Abu Dhabi
0.5:1 as of H1-2010). We expect debt levels to maintain an upward trend.
Tourism Authority (ADTA). The
company is developing multiple
TDIC’s key developments
projects in and around Abu Dhabi at
Commercial/
an estimated cost of USD 34bn. Project Infrastructure Culture Hospitality Residential
Mixed-use
TDIC’s focus on cultural and high- - Saadiyat
Marina
end tourism differentiates it from -Louvre Abu
SM4-11
Dhabi -Gary Player Golf - Cultural
- Saadiyat Beach
developers in other parts of the Saadiyat Saadiyat Island -Guggenheim Course and
Villas and
District Souk
Island Infrastructure Abu Dhabi Academy and Canal
region. Its flagship projects are -Zayed National -St. Regis Resort
Apartments
- Saadiyat
Saadiyat Island (a 27 sq km island off Museum
Construction
Village
the coast of Abu Dhabi) and the
Sir Bani Yas
Desert Islands (a group of seven Desert Desert Islands Sir Bani Yas
Royal Bay
Islands Infrastructure Lodges
Residences
islands approximately 200km west of
-Qasr Al Ain Palace
Abu Dhabi island), which together Hotel
-Abu Dhabi Golf
account for 87% of capital costs. Others
Hodariyat U.A.E. Military
Club
TDIC/ADTA
Crossing Museum Headquarters
-Angsana Resort
and Spa Eastern
Mangroves
33
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Credit Compendium
Compendium 2011
2011
Tourism Development and Investment Company (TDIC) (A1/Sta; AA/Sta; AA/Sta)

2007 2008 2009 H1-10 800
600
Revenue 27 436 235 102
400
Gross profit 16 (33) 32 44
200
EBITDA (35) (271) (463) (272)
AED mn
Net income (32) (369) (551) (534) -200
-400
-600
Cash and bank balances 1,232 920 4,371 2,109
-800
Total assets 20,396 26,373 37,014 36,628
2007 2008 2009 H1-10
Total debt 1,925 2,863 9,437 8,939
Revenue EBITDA
Net debt 693 1,943 5,066 6,831
Equity 17,596 18,287 17,824 17,290
Debt metrics
Cash flow (AED mn)
12,000 100
(1,046) (494) (2,818) (552)
activities
23 (2,518) (6,759) (1,394)
activities 9,000
1,969 2,763 11,025 (146)
activities 60
AED mn
6,000
%
Key ratios 40
Gross profit margin (%) 61.3 NM 13.5 42.7
3,000
EBITDA margin (%) NM NM NM NM 20

0 0
Total debt/EBITDA (x) NM NM NM NM
2007 2008 2009 H1-10
EBITDA/interest (x) NM NM NM NM
CORPORATES
Total debt Total cash Total debt/cap. (RHS)
.
Revenue by segment (H1-10) Debt maturity (Dec-09)
8,000
7,000
28% Property 6,000

development and
land sales 5,000
37%
AED mn
4,000
Hospitality
3,000
2,000
Leisure
1,000
0
35%
2010 2011 2012 2013 2014
34
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Compendium 2011
2011
Yüksel ønúaat (B1/Sta; NR; B/Sta)

Key credit considerations

Credit outlook – stable
With a successful track record of 47 • Government-focused client base reduces counterparty risk: Given the
years, Yüksel has a well-established strategic nature of the projects undertaken by Yüksel, its client base is
presence in the infrastructure primarily comprised of government-related entities. As of 30 June 2010, 81%
construction industry in Turkey and of the company’s completed projects (measured by Yüksel’s share of the
in regional markets. Its target contract value) and 84% of its order book had been awarded by government
markets offer good growth entities. Some of Yüksel’s key government clients include Saudi Arabia’s
opportunities, with considerable Saline Water Conversion Corporation (SWCC), the Qatari Public Works
infrastructure spending being Authority, the US government and NATO (in Afghanistan and Iraq).
undertaken on the back of • Good track record: Yüksel has built a strong reputation over the past
hydrocarbon-related earnings. 47 years by successfully completing large and complex projects across a
Yüksel’s client base largely variety of sectors. With respect to financial performance, the company’s top
comprises governments and line has been relatively healthy, with revenue on an upward trend since
government-related entities, 2007. Profitability, however, has been more volatile – EBITDA margin
reducing counterparty risk. The declined from 12% in 2007 to 6% in 2008 before recovering to 9% in 2009.
company’s earnings have been • Exposure to high-growth markets: Yüksel’s revenue streams are
volatile in recent years due to geographically diversified, and most of the international markets in which the
industry cyclicality and rising company is active have strong growth prospects based on hydrocarbon
competition. While the recently wealth and post-war reconstruction work.
issued USD 200mn bond has helped • Highly competitive, cyclical industry: The construction industry is
to extend its debt maturity profile characterised by relatively low barriers to entry, high levels of competition
(which was previously front- and, accordingly, low margins. Yüksel faces competition from a number of
loaded), free cash flow remains market participants, ranging from large multinational construction companies
constrained. to local construction firms. Many of Yüksel’s clients are based in economies
whose fortunes are linked to hydrocarbon prices. Hence, a sustained
downturn in energy prices could cause governments in these countries to
reduce infrastructure spending.
Company profile • Uncertain end-game in Libya: Yüksel has four projects in Libya (two are at
fairly advanced stages of development) and considers the country to be an
Yüksel ønúaat A.ù. (Yüksel) is a
important growth market. Given recent events, Yüksel’s financial performance
Turkish construction company
CORPORATES
could come under some pressure in 2011 if it has to write off its Libya-related
specialising in infrastructure projects,
receivables (approximately USD 21mn) and unbilled contract amounts (c.USD
both within Turkey and internationally 150mn). While the company’s absolute exposure to Libya is not very large,
(primarily across the MENA and CIS considerable uncertainty remains over how events in the country will unfold.
regions). Yüksel undertakes various • Moderate leverage, constrained free cash flow: Despite the sharp
types of infrastructure projects, increase in debt over the past few years, Yüksel’s leverage metrics are fairly
including roads, motorways, moderate (debt/capital of 41%). However, the company has generated
highways, bridges, dams, piers, negative free cash flow since 2008 as a result of capital expenditure on new
ports, airports and hydroelectric investments in energy projects and renovation of fixed assets.
power plants. Its current international
construction sites are located in Yüksel’s order book (Jun-10)
Saudi Arabia, Qatar, Iraq,
Afghanistan, Libya, Jordan and
Uzbekistan. The company was Uzbekistan Afghanistan Others
9% Power,
1% 11%
Iraq Dams &
established in Ankara in 1963 and is Airports
7% 8% Industrial
privately owned by two Turkish Turkey 21%
39% Libya Buildings
families (Sazak and Sert). Based on 7%
14%
2009 revenue, Yüksel is the 10th-
largest contractor in Turkey. Pipelines
Qatar 14%
12% Transport
Saudi
39%
Arabia
18%
35
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Credit Compendium
Compendium 2011
2011
Yüksel ønúaat (B1/Sta; NR; B/Sta)

2007 2008 2009 H1-10 1,000 40
Revenue 713 734 779 407
750 30
EBITDA 84 41 69 44
Gross interest expense (11) (17) (12) (9)
USD mn
Profit before tax 59 17 27 18 500 20
%
250 10
Cash and equivalents 85 61 85 49
0 0
Total assets 963 963 1,111 1,127
2007 2008 2009 H1-10
Total debt 124 189 239 250
Net debt 39 128 154 201
Equity 459 334 361 368
Coverage ratios (x)

133 2 17 (23)
activities 4 16
(179) (52) (41) 24
activities
93 46 48 (33) 3 12
activities
Key ratios 2 8

1 4
EBITDA margin (%) 11.8 5.5 8.8 10.9
0 0
Total debt/EBITDA (x) 1.5 4.7 3.5 2.8*
2007 2008 2009 H1-10*
EBITDA/interest (x) 7.6 2.4 5.9 4.8
CORPORATES
Total debt/EBITDA EBITDA/interest (RHS)
Debt metrics Debt maturity** (Jun-10)
300 100 200
250
80
150
200
60
USD mn
150
USD mn
%
100
40
100
20 50
50
0 0
2007 2008 2009 H1-10 0
Total debt Total Cash Total debt/capital (RHS) Within one year Between Jul-Dec 2011
* Annualised;** Yüksel raised a USD 200mn bond in Nov-2010; Sources: Company reports, Standard Chartered Research
36
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Appendix
Middle East
Middle East Credit
Credit Compendium
Compendium 2011
2011
Islamic finance – A primer on sukuks

Analyst: Vijaykumar Chander (+852 3983 8569)
Overview – The basics of Islamic finance
Islam gives a complete code of life to its followers. Shariah Thus, unlike conventional banking, Islamic banking
law applies to all aspects of a Muslim's life, and necessarily has to be asset-based – i.e., at the most basic
business/finance is no exception. Under the tenets of level, there has to be an exchange of goods or services for
Shariah, Riba (interest) is prohibited because in Islam, all money. An exchange of money for money (for instance,
income must be determined by the supply of work effort leaving funds on deposit which can then be redeemed at
associated by the factors of production. If money is lent for maturity for the total of principal plus interest) is not allowed,
interest, then capital is augmented without effort. As a but engaging in a partnership to share in the profits of a
practical matter, the injunction against the payment of venture is specifically permitted. Excessive uncertainty
interest can be avoided by structuring the transaction as a (Gharar) is prohibited so as to avoid a resemblance to
sale or a lease, with payments structured as rentals, lease gambling, which is also forbidden under Islam.
payments or profits. Profit/loss-sharing in Islam encourages
Muslims to invest their money and become partners in order
to share the profits and risks of the business.
Chart 1: In conventional banking, money itself is a Chart 2: In Islamic banking, goods/services are
commodity exchanged for money
Conventional banking Islamic banking
Money
Bank Client Goods &

Bank Client
services
Money + Money (Interest) Money
Source: Standard Chartered Research Source: Standard Chartered Research
Development of Islamic banking

In 1975, Dubai Islamic Bank was founded by businessmen increasing customer awareness, a larger number of service
who did not want to deal with an interest-based banking providers, a comprehensive product suite and government
system. In the 1980s, the government of Malaysia and Bank support. Riding the development curve, governments and
Negara Malaysia started actively promoting Islamic banking corporates are looking for Islamic banking solutions to tap
in the country, and in the 1990s, the Central Bank of Bahrain the Islamic investor base.
developed a regulatory regime for Islamic financial
institutions. S&P estimates the total size of the Islamic finance market at
about USD 1.0trn as of May 2010 (‘Islamic Finance Outlook
Islamic banking products mirror the pricing and other terms 2010’). With a worldwide Muslim population in excess of
and conditions prevalent in conventional markets, and as a 1.4bn, there is still tremendous room for growth. The table
consequence, there are no additional costs to clients. In below shows estimated sizes of Islamic banking assets in
recent years, the development of Islamic banking in the selected countries at end-2009.
Middle East and Asia has gained momentum because of
Table 1: Key centres of Islamic banking – Islamic assets as a percentage of total assets (end-2009)
Country Total banking-system assets Islamic finance as % of total banking-
(USD bn) system assets
Saudi Arabia 365 40%
Kuwait 140 25%
Qatar 129 16%
UAE 414 14%
Malaysia 457 12%
Pakistan 77 4%
Indonesia 270 2%
Sources: McKinsey, central bank websites, Standard Chartered Research
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2011
Sukuks have been the fastest-growing segment, with strong past are giving way to more complex and innovative
growth in the number and size of issues and investor products. A number of sovereigns – including Dubai,
appetite. The size of the international sukuk market is Indonesia, Malaysia, Thailand and Ras al-Khaimah – have
estimated at around USD 75bn (as of February 2011, tapped the market. Non-traditional issuers such as GE
according to Bloomberg). With support from governments Capital and Tesco have also utilised the sukuk structure to
and regulators worldwide, product structures are evolving, tap the market.
and the relatively simple and straightforward structures of the
Chart 3: International sukuk issuance

30
25
20
USD bn
15
10
0
2004 2005 2006 2007 2008 2009 2010
Middle East Non-Middle East
Sources: Bloomberg, Standard Chartered Research
Sukuks were issued in a wide range of currencies in 2010. In have tailored their issuance to meet the needs of Malaysian
addition to the Malaysian ringgit (MYR), which dominates investors, who also constitute a large investor base for GCC
issuance, the Saudi Arabian riyal (SAR), US dollar (USD) sukuks. Because of the GCC presence in Malaysia, MYR-
and Singapore dollar (SGD) all have respectable market denominated issuance of MYR 28.5bn accounted for 47% of
shares. A number of GCC countries have chosen to issue in all international issuance in 2010, solidifying Malaysia’s
MYR as they have become more familiar with the Shariah leading position in the sukuk market.
standards applicable in Malaysia. As a consequence, they
Chart 4: Currencies of sukuk issuance, 2010
SGD
13% USD
25%
IDR
1%
SAR
11%
MYR
PKR
47%
4%
Sources: Bloomberg, Zawya
Sukuks
Definition of sukuk
Sukuks are Islamic investment certificates. They are similar treated as a sale/purchase of the holder’s proportionate
to conventional bonds in most respects (e.g., trading, listing share of the assets.
and ratings) but are structured in a Shariah-compliant
manner. While trading in bonds is not allowed under Shariah Sukuks are based on the premise that any Islamic financing
law, trading of sukuks is generally allowed because it is contract representing ownership of a tangible asset can be
2
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Credit Compendium
Compendium 2011
2011
bought or sold. The asset is there to generate income 300mn Tamweel Sukuk, Limited (TSL) would not qualify as
streams to pay off the coupons on the security, without a an ‘asset-backed’ structure.
legal ‘true sale’ of the underlying asset to investors.
(Securitisations – with a true sale of assets in which (2) Will sukuk holders have access to the assets
investors have recourse to the pool of assets – can also be underlying the sukuk transactions, and what are the
executed under an Islamic format.) recovery rates following a sukuk default?
Sukuk holders will have recourse to the underlying assets
A sukuk represents: only if there has been a ‘true sale’ of assets and the legal
• An undivided proportionate beneficial ownership ownership of the assets has been legally registered for the
interest in an asset or portfolio benefit of the sukuk holders. Recovery in the case of asset-
• The corresponding right to the Islamically backed structures will depend on the performance of the
acceptable income streams generated by the underlying assets, which may or may not be related to the
asset/portfolio overall financial health of the originator. For asset-based
sukuks, recovery rates will be limited to what senior
The bulk of the sukuk structures outstanding are in an ‘asset- unsecured bondholders receive.
based’ format rather than under a securitisation/true sale
format. In an asset-based format, investors do not own the (3) Should there be a ratings differential between sukuk
underlying assets, as the sale of these assets to investors and other senior creditors?
has not been ‘perfected’. Instead, investors can put the Generally speaking, in a fully securitised sukuk transaction
options back to the obligor at the assets’ original value in the where a ‘true sale’ has occurred, the rating of the sukuk
event of default. At the end of the sukuk’s tenure, the obligor structure will be dependent on the quality of the underlying
buys the assets back from the investors at face value. assets that constitute the pool of assets owned by the
investors. In this instance, investors are in the position of
Sukuks are considered comparable to conventional bonds by ‘secured creditors’ and would typically rank ahead of other
non-Islamic investors in Europe, the US and Asia. They also senior unsecured creditors. In asset-based structures, the
provide access to a growing Islamic liquidity pool, in addition sukuk rating will be tied to that of the obligor – i.e., sukuk
to the conventional investor base. investors rank pari passu with other senior unsecured
creditors.
Status of sukuk holders in case of default
To date, there have been few test cases of sukuk defaults. S&P’s ratings address the probability of default and not the loss
The two most prominent sukuk defaults in the Middle East in the event of default. S&P has pointed out that its ratings of
have been Investment Dar in Kuwait and Golden Belt in sukuks with full credit enhancement mechanisms are not based
Saudi Arabia. Key questions about the rights of creditors in on the underlying assets, but on the credit enhancement
the event of sukuk default are as follows: mechanisms provided by the sponsor of the transaction. Since
the sponsor’s obligations under these mechanisms typically
(1) Are the sukuk holders ‘secured’ creditors, or do they rank pari passu with their other senior unsecured claims, S&P
rank pari passu with senior unsecured creditors? ratings on these sukuks will, in principle, continue to reflect the
In transactions where a ‘true sale’ of assets to a trust or senior unsecured ratings of their sponsors.
special purpose vehicle (SPV) has occurred (i.e. asset-
backed) and where investors have legal recourse to the Moody’s ratings focus on expected loss and make a
underlying assets, sukuk holders would rank senior to distinction between asset-based and asset-backed
unsecured bondholders. These transactions are, in essence, structures. For example, Moody’s viewed the two Tamweel
Islamic securitisations. The USD 210mn Shariah-compliant sukuks differently and provided different ratings for the
RMBS securitisation carried out by Tamweel (Tamweel transactions. In August 2009, when Moody’s downgraded
RMBS) meets this test, in our opinion. In this transaction, Tamweel from to Baa1 from A3, the asset-based sukuk was
freehold titles to the underlying properties were transferred to also lowered to Baa1 from A3. However, the Tamweel RMBS
the sukuk holders along with the associated cash flows. Only was not downgraded since the assets underlying the
a handful of sukuk transactions qualify as ‘true sales’. structure continued to perform.
In transactions where there has not been a ‘true sale’ of the (4) For sukuks issued locally but under foreign laws (e.g.,
underlying assets to the investors, investors would rank pari English law), will local courts be willing to uphold the
passu with other senior creditors. For instance, the USD
3
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Compendium 2011
2011
decisions of foreign jurisdictions? Are precedents set by the investor has a share in the profits generated from
rulings in local jurisdictions on defaulted sukuks binding? the use of the underlying asset or financial contracts.
Sukuks will be treated like conventional bonds in that local These are distributed as regular ‘profit’ or ‘coupon’
courts might not uphold the rulings of foreign jurisdictions, payments on the sukuk on pre-determined dates
given that the rules on reciprocity in the enforcement of (comparable to regular coupon servicing in conventional
foreign judgments in local courts are still evolving. Also, even bonds).
if a foreign court provides a judgment favourable to the • Ratings: The certificates issued by the SPV can be
creditors, the local courts might not enforce it without re- rated by a recognised rating agency. Typically, for a
examining the merits of the case. Unlike a number of straight unsecured senior sukuk, the rating is the same
common-law jurisdictions, precedents set in the local courts as the rating of the obligor, since the ultimate creditor is
are not necessarily binding. Future judgments in a case with the obligor. Hence, ratings are usually at par with those
facts similar to another case may not necessarily be decided of conventional bonds.
the same way as in the previous case. • Clearing: This is done through Euroclear, Clearstream
or any such mechanism, as for conventional bonds.
Key characteristics of sukuks • Listing: Like conventional bonds, sukuk certificates can
Sukuks have several characteristics in common with be listed on most major stock exchanges (i.e.,
conventional bonds. Luxembourg, London, Singapore, Dubai).
• Issuer: Typically a SPV that issues sukuk certificates on • Governing law: Like conventional bonds, sukuk
the back of a Shariah-compliant asset/contract with the certificates are typically governed by English law for
obligor. The investors purchase sukuk certificates to eurobond issues, or by local laws for local-currency
fund the issuer, who passes the funds to the obligor. issues.
This is unlike a conventional bond issue, where the • Trustee: In a eurobond, a trustee may be appointed to
obligor is also the issuer. However, in both instances represent the interests of the bondholders. In a sukuk
(conventional and Islamic), the recourse of investors is structure, this role is often effected by a delegate (an
back to the obligor. independent third party) who performs the same
• Obligor: The beneficiary of the funds or the entity that is function.
raising these funds through the sukuk. Typically, as in a • Basis of profit payment: Sukuk certificates can be
conventional bond, investors take ultimate credit risk on either on a fixed-rate or floating-rate basis, and are
the obligor for both coupon and principal repayments. priced against a benchmark such as USD LIBOR,
• Profits versus interest: As interest is not allowed under EURIBOR or swap rates (same as conventional bonds).
Shariah principles, the contracts are structured so that
Types of sukuks
Sukuks can be structured in a number of ways, depending prevalent type of sukuk structure is the Ijara sukuk, and our
on the underlying assets and business purpose. Table 2 discussion will focus exclusively on this category.
below summarises the most prevalent sukuk types. The most
Table 2: Concepts underlying the main types of sukuks

Sukuk type Concept Examples
Ijara sukuk Certificate of equal value based on sale and International sovereign issues: Malaysia, Qatar,
leaseback of an asset Pakistan
Domestic issuers: Bahrain, Malaysia
Musharaka sukuk Certificate of proportionate ownership, with the Emirates Airlines
aim of using the funds to establish a new project
or develop an existing project
Istisna’a sukuk Certificate of proportionate ownership, with the
aim of using the funds to produce goods
Murabahah sukuk Certificate of equal value for the purpose of DIFC Investments
financing the purchase of an asset
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Ijara financing (Sukuk-al-Ijara) – Key concepts

Ijara financing can be either fixed-rate or floating-rate. The from the lessee. The rent must be determined either for the
lessor bears all ownership-related expenses of the asset and full lease term or for a definite period of the lease. Rent starts
all damages, except those incurred through the negligence when the commodity is delivered to the lessee. In case of a
or misuse of the lessee. Although ownership-related delay in payment, any late payment charges are paid to
expenses are borne by the lessor, the lessor appoints the charity. After the expiry of the lease term, the asset remains
client as its servicing agent to perform major maintenance in the ownership of the lessor until he gives it to the client as
and structural repairs, pay ownership taxes and procure a gift or the client purchases it with his free consent. Chart 5
insurance. Any actual servicing agency expenses incurred by below shows an example of Ijara financing.
the agent are set off against the next rental payments due
Chart 5: Ijara-based financing

Floating or fixed-rate financing
Supplier
1. Asset title 2. Payment for

equipment
Bank as lessor
3. Equipment lease 4. Lease payments

(principal + profit)
Customer as lessee
Discussion of the Sukuk-al-Ijara (sale and leaseback • The payment obligations of the obligor remain
structure) similar to any other full-recourse financing – i.e., the
The sale and leaseback sukuk structure is the most widely issue amount is reflected as a liability, and the profit
used, as it is tried, tested and accepted by most Shariah payments are expensed out through the income
scholars in both the GCC and Asia. All sovereign sukuks statement.
issued to date have been based on the sale and leaseback
structure. The documentation is fairly standard, with a broad Underlying assets in the Sukuk-al-Ijara structure:
consensus among the majority of Shariah scholars and • Limited to fixed/real assets (such as land, office
Shariah Boards. buildings, plant and machinery, etc.), where the
ownership remains with the obligor.
Brief description of the structure: • Limited to sale of existing assets – i.e., the
• A SPV may be formed to purchase assets from the underlying asset pool should be in existence at the
obligor. time of sale.
• The assets are then leased to the obligor against • The underlying asset pool should consist of
periodic rental payments. unencumbered assets with a market value at least
• The SPV is usually incorporated in a tax-friendly equal to the sukuk issue amount.
jurisdiction such as the Cayman Islands or Jersey, • The underlying asset pool is used for structuring
and is usually an orphan SPV with a single share purposes only and is not to be construed as
issued in favour of a charitable trust. security.
• It can be structured in one of two ways:
o amortising issue
o bullet repayment at maturity
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The flow charts below outline the mechanics of the Sukuk-al-Ijara structure in greater detail.
Chart 6: Sukuk al-Ijara at inception

Issuance of sukuk 1. SPV is formed for the sukuk issue.
2. The SPV (acting on behalf of the sukuk holders) enters into a
Obligor purchase agreement with the obligor for purchase of existing
(Seller) (Lessee) (Service Agent)
assets. (‘asset pool’).
3. The SPV issues sukuk certificates to finance the purchase of the
6. Purchase undertaking
1. SPV formed 4. Master

lease asset pool.
7. Sale undertaking
$ agreement
4. Obligor enters into a master lease agreement with the SPV for a
2. Purchase 5. Servicing
agreement agency period equal to the sukuk tenor.
agreement
5. The SPV enters into a servicing agency agreement with the
obligor, through which it appoints the obligor as its agent
responsible for major maintenance and structural repairs and the
SPV
(Issuer) procurement of insurance on the asset pool.
6. The obligor also provides a purchase undertaking wherein the
3. Sukuk certificates obligor undertakes to purchase the asset pool from the SPV,
$
issued
either at the end of the lease term or on the occurrence of an
event of default.
Sukuk holders
7. The SPV may provide a sale undertaking to the obligor wherein it
undertakes to sell the asset pool back to the obligor upon
occurrence of certain events.
Chart 7: Sukuk al-Ijara periodic payments through to maturity

1. Obligor makes semi-annual lease rental payments (‘rentals’) to the
Periodic payment SPV during the lease term. Rentals may consist of either fixed or
floating payments benchmarked to, say, LIBOR.
Obligor 1 SPV 2 Sukuk 2. The SPV distributes the rentals to the sukuk holders (as coupon
(lessee) holders payments).
Amortising sukuk:
- In case of an amortising structure, the periodic rentals
shall comprise profit payments (benchmarked to LIBOR)
and principal redemptions, as per an agreed schedule.
At maturity
Bullet redemption:
$ - In case of bullet repayment, periodic rentals shall consist
SPV $ Sukuk of only profit payments.
Obligor holders
1. At maturity, the SPV transfers the asset pool back to
the obligor at an agreed price equal to the outstanding
1 2 amount under the sukuk certificates and any accrued
and unpaid rentals (pursuant to the exercise of the
purchase undertaking). Hence, ownership of the asset
pool reverts back to the obligor.
2. SPV redeems the sukuk certificates.
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Glossary of abbreviations
ARPU: average revenue per user

bboe: billion barrels of oil equivalent
CDS: credit default swap
CWN: credit watch negative
DSCR: debt service coverage ratio
ECA: export credit agency
EM: emerging markets
FRN: floating-rate note
GCC: Gulf Cooperation Council
GWh: gigawatt hours
IIF: Institute of International Finance
kbd: thousand barrels per day
kboed: thousand barrels of oil equivalent per day
LT2: Lower Tier 2
mb: million barrels
mbd: million barrels per day
mboe: million barrels of oil equivalent
MENA: Middle East and North Africa
MIGD: million imperial gallons per day
mmscfd: million standard cubic feet per day
mtoe: million tonnes of oil equivalent
MTN: medium-term note
mtpa: million tonnes per annum
NIM: net interest margin
NM: not meaningful
NPL: non-performing loan
RFD: review for possible downgrade
ROA: return on assets
ROE: return on equity
RWN: rating watch negative
tcm: trillion cubic metres
TEU: twenty-foot equivalent unit
vii
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Contributors
Credit Research Team
Kaushik Rudra
+65 6596 8260
Kaushik.Rudra@sc.com
Standard Chartered Bank, Singapore
Vijay Chander Shankar Narayanaswamy

Head of Credit Strategy Head of Credit Analysis
+852 3983 8569 +65 6596 8249
Vijay.Chander@sc.com Shankar.Narayanaswamy@sc.com
Standard Chartered Bank (Hong Kong) Limited Standard Chartered Bank, Singapore
Bharat Shettigar Bret Rosen

Senior Credit Analyst Senior Credit Strategist, Latin America
+65 6596 8251 +1 646 845 1311
Bharat.Shettigar@sc.com Bret.Rosen@sc.com
Standard Chartered Bank, Singapore Standard Chartered Bank, United States
Feng Zhi Wei Victor Lohle

Senior Credit Analyst Senior Credit Analyst
+65 6596 8248 +65 6596 8263
Zhi-Wei.Feng@sc.com Victor.Lohle@sc.com
Standard Chartered Bank, Singapore Standard Chartered Bank, Singapore
Sandeep Tharian Shilpa Singhal

Credit Strategist Credit Analyst
+44 20 7885 5171 +65 6596 8259
Sandeep.Tharian@sc.com Shilpa.Singhal@sc.com
Standard Chartered Bank, United Kingdom Standard Chartered Bank, Singapore
Simrin Sandhu Hee Jeong Lee

Credit Analyst Credit Analyst
+65 6596 6281 +822 3703 5162
Simrin.Sandhu@sc.com HeeJeong.Lee@sc.com
Justinus Rahardjo Neo Li Shan

Credit Analyst Credit Analyst
+65 6596 8253 +65 6596 8257
Justinus.Rahardjo@sc.com Li-Shan.Neo@sc.com
Economics Research Middle East
Marios Maratheftis
Head of Research, West
+971 4 508 3311
Marios.Maratheftis@sc.com
Standard Chartered Bank, Dubai
Philippe Dauba-Pantanacce Shady Shaher

Senior Economist Economist
+971 4 508 3740 +971 4 508 3647
Philippe.Dauba-Pantanacce@sc.com Shady.Shaher@sc.com
Standard Chartered Bank, Dubai Standard Chartered Bank, Dubai
Nancy Fahim Sayem Ali

Economist Economist
+971 4 508 3647 +92 3245 7839
Nancy.Fahim@sc.com Sayem.Ali@sc.com
Standard Chartered Bank, Dubai Standard Chartered Bank (Pakistan) Limited
8
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2011
Disclosures Appendix
Recommendations structure
Standard Chartered terminology Impact Definition
Positive Improve We expect the fundamental credit profile

Issuer –
Stable Remain stable of the issuer to <Impact> over the next
Credit outlook
12 months
Negative Deteriorate
Apart from trade ideas described below, Standard Chartered Research no longer offers specific bond and CDS
recommendations. Any previously-offered recommendations on instruments are withdrawn forthwith and should not
be relied upon.
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade
recommendations among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on
prevailing market conditions and may or may not include price targets.
Credit trend distribution (as at 2 March 2011)

Coverage total (IB%)
Positive 10 (20.0%)
Stable 159 (20.8%)
Negative 22 (4.5%)
Total (IB%) 191 (18.8%)
Credit trend history (past 12 months)

Company Date Credit outlook
- - -
Please see the individual company reports for other credit trend history
PLEASE NOTE THAT THIS DOCUMENT IS NOT TO BE DISTRIBUTED INTO KOREA.
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2011
Regulatory Disclosure:
Subject companies: Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Abu Dhabi National Energy Company (TAQA), Aldar
Properties, Algeria, Arab Banking Corporation, Arab National Bank, Bahrain, Bahrain Mumtalakat Holding Company, Banque Saudi
Fransi, BBK, Burgan Bank, Commercial Bank Of Qatar, Dar Al-Arkan, DIFC Investments, Doha Bank, Dolphin Energy, DP World, Dubai
Electricity and Water Authority (DEWA), Dubai Holding Commercial Operations Group (DHCOG), Dubai Islamic Bank, Egypt, Emirates
NBD, First Gulf Bank, Gulf International Bank, Gulf Investment Corporation, International Petroleum Investment Company (IPIC), Jebel
Ali Free Zone (JAFZ), Jordan, Kuwait, Kuwait Projects Company (Holding), Lebanon, Mashreqbank, MB Petroleum Services, Morocco,
Mubadala Development Company, Nakilat Inc., National Bank Of Abu Dhabi, Oman, Pakistan, Qatar, Qatar Islamic Bank, Qatar
National Bank, Qatar Telecom (Qtel), Qatari Diar, Riyad Bank, Samba Financial Group, Saudi Arabia, Saudi Basic Industries
Corporation (SABIC), Saudi British Bank, Tourism Development and Investment Company (TDIC), Tunisia, Turkey, Türkiye Garanti
Bankasi, Türkiye Vakiflar Bankasi , United Arab Emirates, Yapi ve Kredi Bankasi, Yüksel ønúaat A.ù.
SCB was a lead manager of a public offering for this issuer within the past 12 months, for which it received fees: Qatari Diar, MB Petroleum
Services, Qatar/State of Qatar, Yüksel ønúaat
SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one
year: Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Dubai Electricity and Water Authority (DEWA), International Petroleum
Investment Company (IPIC), Mubadala Development Company, Qatar National Bank
Analyst Certification Disclosure:

The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the
research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or
other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific
recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance
appraisals of analysts.
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The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to
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The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may
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SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for
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Document approved by Data available as of Document is released at

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It is important to understand that there is considerable differentiation – both economic and

In this compendium, we have increased coverage to include 14 sovereigns, 25 financials and

MENA macroeconomic overview

Differentiation will be key

MENA macroeconomic overview

MENA’s demographic challenge

MENA macroeconomic overview

Chart 5: Oil reserves (2009) Chart 6: GCC planned projects, 2011-13

Power & Water

Oil & Gas

MENA macroeconomic overview

Market impact and economic outlook

Oil and gas – Dominant credit driver

Asia 3% North America Asia North America

Europe & Europe &

Oil and gas – Dominant credit driver

Oil and gas league tables

0 50 100 150 200 250 300 0 2 4 6 8 10 12

0 10 20 30 40 50 0 100 200 300 400 500 600 700

Oil and gas – Dominant credit driver

Table 1: Middle East oil and gas production, 2000-09

Middle East is the world’s primary exporter of hydrocarbons

Total Exports: 52.9 mbd Total Imports: 52.9 mbd

North Africa Japan

Oil and gas – Dominant credit driver

Saudi Arabia Saudi Arabia

The region is heavily dependent on oil and gas

Oil and gas – Dominant credit driver

Chart 13: Sensitivity to hydrocarbons, 2010

Oil breakeven price (USD/bbl)

Quasi-sovereigns – One too many?

Brave new world

Mounting contingent liabilities

Loans have been the weapon of choice

Quasi-sovereigns – One too many?

Time to pay up – Dubai feels the heat

Quasi-sovereigns – One too many?

Chart 7: Qatar redemption schedule Chart 8: Abu Dhabi redemption schedule

Two sides to every coin

Quasi-sovereigns – One too many?

The region’s quasi-sovereigns – Similar, yet different

Quasi-sovereigns – One too many?

Table 1: Key quasi-sovereign issuers from the GCC

High – One of the key LNG Strong – Robust operational and

Weak – Cash-flow generation is

High – Conduit for the government’s Weak – High debt, acquisitive

Quasi-sovereigns – One too many?

Govt. Ratings uplift

High – Dubai’s flagship corporate, Strong – Competitive strength on

Strong – Among the strongest credits

Banking system – Slowly emerging from the rubble

Challenges remain, but 2011 should be a better year

Chart 1: Total banking-system assets (end-2010) Chart 2: Banking assets/GDP (end-2010)

Banking system – Slowly emerging from the rubble

2010 – Acknowledging reality

Chart 3: Real GDP growth Chart 4: Private-sector credit growth

Banking system – Slowly emerging from the rubble

Chart 5: NPL ratios Chart 6: Loan-loss coverage

2007 2010 (est.) 2007 2010 (est.)