BLOM BANK - Current price*: USD 9.14 Equity Research March 2nd, 2011 - Target price: USD 12.00 Sector : Banking - Recommendation: OVERWEIGHT Countr y: Lebanon Conservative approach to growth and high cost- Share Data efficiencies to translate into favorable stock returns Common shares listing: Beirut Stock Exchange Ticker symbol: BLOM GDRs listing: BSE & Luxembourg Stock Exchange A prominent player in Lebanon, with a significant presence abroad Ticker symbol: BLBD With a conservative approach to growth revolving around a predominantly organic growth strategy, Market cap*: USD 1,965.1 mn a cautious lending activity and a tight cost-control policy, Blom Bank gradually grew to become Number of common shares: 215.0 mn one the leading players in the Lebanese banking sector, where the Bank currently operates a nd Estimated float %: 55% network of 71 branches and ranks 2 in terms of assets, deposits and loans while delivering one the 12-month average daily volume 43,746 highest profitability ratios in the market. With its expanding international reach, Blom Bank currently operates a network of 87 branches abroad spread in 11 European and Middle-Eastern countries outside Lebanon. Share Price Information* Two-pronged organic growth strategy by business line and geography to become a leading bank in the region ∆ YTD -2.77% The Bank has added to its traditional business model (retail and commercial) a wide range of ∆ 1M -11.86% banking services including asset management, private banking, insurance and Islamic banking. ∆ 3M +1.56% Furthermore, Blom Bank has, beyond its decades old presence in Europe, embarked on a regional ∆ 12M +1.56% expansion starting in the early 2000’s by (i) adding footprints in key Levant markets (Syria, Egypt 52 – Wk range USD 8.50 -10.45 and Jordan) for retail and commercial banking and (ii) more recently, establishing a presence in the nd GCC (KSA and Qatar) in view of further developing its investment and private banking activities. *Blom Bank shares as of market close on March 2 2011 Blom Bank generates 15% of its profits abroad and is targeting an equal share between domestic and foreign operations over the medium term, seeking to become a leading regional bank. Share Price Performance Solid results in 2010 draw a positive outlook for the coming years 11 While Blom Bank saw a moderate balance sheet expansion compared to previous years, 2010 remained solid in terms of lending and bottom line income growth. Assets and deposits grew by 8% 10 and 9% respectively in 2010 while lending activity was robust, registering a 29% progression over 9 the same period. The Bank’s assets, deposits and loans amounted to USD 22,336 million (mn), USD 19,553 mn and USD 5,180 mn respectively. Net profits totaled USD 331 mn for 2010, 13% USD 8 higher yoy. 7 Expect continued balance sheet growth and earnings generation over the medium term Between 2010 and 2012e, we anticipate Blom Bank will grow its assets at 10.8% CAGR to USD 6 27.5 billion (bn), following a similar CAGR (10.5%) for deposits expansion to reach USD 23.9 bn. M M Ju S N Ja M We expect private sector lending to remain dynamic judging by a CAGR of 15.6% to USD 6.9 bn a a l ep o n a r- y -1 - v- -1 r- over the same period, which should be mainly driven by sustained economic activity in its domestic 1 -1 0 10 1 1 1 0 0 0 1 market, and efforts for a more diversified asset mix away from sovereign securities and lower yielding bank placements, as well as from the contribution of foreign entities. Coupled with this continued trend for balance sheet growth, we expect improvements in interest spreads and cost- efficiencies, which should translate into net profits growing at a ~14% CAGR to reach USD 430 Key Performance Indicators mn in 2012e. We like Blom Bank’s high returns and improving risk profile and view the valuation of its in USD millions 2009a 2010a 2011e 2012e shares as attractive Net Interest Income 419 495 551 622 We recognize Blom Bank’ solid positioning in its domestic market and improving risk profile stemming from its efforts at better earnings diversification across products and markets. We like the Non-Interest Income 148 185 216 256 firm’s superior profitability and return ratios in Lebanon relative to its domestic peers despite Net Profits 293 331 376 430 sizeable liquidity buffers. We notice improving credit quality and yoy cost-efficiency ratios despite a growing asset base, a validation of management's conservative approach and capacity to improve ROAA (%) 1.52% 1.54% 1.59% 1.65% less performing foreign operations. ROAE (%) 18.5% 18.3% 18.4% 18.6% BVPS 7.55 8.46 9.67 10.98 We rate Blom Bank shares at Overweight with a fair value estimate of USD 12.00 per share Based on our revised forecasts and discount rate assumptions to our Dividend Discount Model, our EPS diluted 1.29 1.42 1.62 1.87 fair value estimate is USD 12.00 per share, which implies a P/B of 1.24x on our book value per P/BV (x) 1.21x 1.08x 0.94x 0.83x share 2011 estimates, in line with its 3 year historical average of 1.22x, while above its current trading of 1.08x. We accordingly assign an Overweight recommendation given that the current P/E (x) 7.1x 6.4x 5.6x 4.9x price is at a discount of more than 10% of our fair value estimate. Contacts Disclaimer Head of Research: Nadim Kabbara, CFA This document has been issued by FFA Private Bank for informational purposes only. This document is not an offer [email protected] +961 1 985 195 or a solicitation to buy or sell the securities mentioned. Although FFA Private Bank s.a.l. makes reasonable efforts to provide accurate information and projections, certain statements in this document constitute forward-looking Analyst: Raya Freyha statements or statements which may be deemed or construed to be forward-looking statements. These forward-looking [email protected] +961 1 985 195 statements involve, and are subject to known and unknown risks, uncertainties and other 1factors which could cause Sales and Trading, FFA Private Bank (Beirut) the actual results, performance (financial or operating) or achievements to differ from the future results, +961 1 985225 performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Sales and Trading, FFA Dubai ltd (DIFC) Therefore, FFA Private Bank makes no guarantee or warranty to the accuracy and thoroughness of the information + 971 4 3230300 mentioned, and accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on information presented in this document. All opinions expressed herein are subject to change without prior notice. TABLE OF CONTENTS INVESTMENT OPINION ..............................................................................3 COMPANY OVERVIEW ...............................................................................5 Brief background ................................................................................................................5 Ownership structure............................................................................................................6 Corporate structure .............................................................................................................7 GROWTH STRATEGY..................................................................................8 Geographic expansion ........................................................................................................8 Business lines ...................................................................................................................11 RECENT DEVELOPMENTS.......................................................................14 Relevant news in 2010......................................................................................................14 Financial performance ......................................................................................................14 SWOT ANALYSIS.........................................................................................17 FINANCIAL HIGHLIGHTS AND REVISED FORECASTS ..................18 Balance sheet snapshots ...................................................................................................18 Income statement snapshots .............................................................................................24 REVISED VALUATION...............................................................................29 KEY INVESTMENT RISKS ........................................................................30 FINANCIAL STATEMENTS.......................................................................31 Balance sheet ....................................................................................................................31 Income statement..............................................................................................................32 2 INVESTMENT OPINION We like Blom Bank’s high returns and improving risk profile and view the valuation of its shares as attractive We recognize Blom Bank’ solid positioning in its domestic market and improving risk profile stemming from its efforts at better earnings diversification across products and markets. We like the firm’s superior profitability and return ratios in Lebanon relative to its domestic peers, with estimated domestic net interest margins and ROAs at ~2.33% and ~1.7%, respectively despite sizeable liquidity buffers. We notice improving credit quality and cost-efficiency ratios despite a growing asset