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Burgan Bank (BURG.KW)

CMP KWD 0.77 Target KWD 0.99 Potential Upside 28.5%

MSCI GCC Index 418.12 Kuwait Stock Exchange 8,763.70

Key Stock Data Sector Banking Reuters Code BURG.KW Bloomberg Code BURG KK Equity No. of Shares (mn) 941.98 Market Cap (KWD bn) 0.725 Market Cap (USD bn) 2.636 Avg. 12m Vol. (mn) 2.064 Volatility (30 day) 72.280 Volatility (180 day trend) 42.331

Stock Performance (%) 52 week high / low (KWD) 1.236 / 0.560

1M 3M 12M Absolute (%) 14.9% -17.2% -17.0% Relative (%) -11.2% -37.5% -28.3%

Shareholding Pattern (%)

Kuwait Projects Company (Holding) 51.00

Public 49.00

BURG and KSE Movement

Executive Summary Established as a public shareholding company in 1977, Burgan Bank is the fourth largest bank in Kuwait with the current assets base of KWD 3.82 billion. With a network of 21 modern branches and one of the widest ATM networks with 120 ATMs, spread across the country, the retail banking segment is the high focus area for the bank. Innovative products and services, contemporary technology, and the customer-centric approach have led to a sustained performance by the bank. Burgan Bank is the only bank in the GCC region with ISO 9001:2000 certification in all its banking businesses. Net income up 9% in 9M08 Burgan Bank reported a net profit of KWD 66.25 million generating a bottom-line growth of 9.4%. As a result, the reported annualized earnings per share (EPS) improved to KWD 0.093 from KWD 0.088. In 9M08, the bank’s net interest income registered an increase of 13.1% reaching KWD 49.85 million as growth in interest expenses surpassed the rise in interest income. Burgan bank’s yield on average interest earning assets decreased to 5.6% from 6.1% in 9M07, even as cost of average interest bearing liabilities slipped to 3.6% from 3.9%. Accordingly, both NIM and net spread dropped 28 and 27 bps to 1.8% and 2.0% from 2.1% and 2.3%, respectively. Paralleling its cost efficient strategies, cost to income ratio continued to improve considerably by 498 bps to 19.8% from 24.8%, pushing the operating profit up by 17.0% to KWD 73.32 million from KWD 62.68 million.

Outlook and valuation Burgan bank is committed to developing diversified and innovative investment and financial products, enhancing treasury operations, increasing syndication activities and establishing itself as a commercial bank franchise across the MENA region through expansion. The bank’s customer-centric strategy while designing and developing new tailor-made products along with a wide network of branches and ATMs differentiates it from its competitors. It also continues to enhance its position in the market through proper implementation of its ‘Bright Future’ strategy, which includes a 360 degree approach aimed at modernizing its retail business, achieving customer satisfaction, leveraging process and technology and improving skill sets of its employees. To determine the value of the company, we have used two valuation methods, i.e. Target P/BV multiple approach based on the Gordon Growth Model (GGM), and TTM P/E multiple valuation approach. Currently, Burgan Bank’ stock is trading at a P/E multiple of 9.61x based on its 2008E earnings and at a P/B multiple of 2.07x on its 2008E BVPS; and at a P/E multiple of 8.63x based on its 2009E earnings and at a P/B multiple of 1.92x on its 2009E BVPS. The stock has lost 18.6% since the beginning of this year, as compared to the KSE index YTD negative return of 29.9%. On an equal weight basis (GGM – 50% and P/BV – 50%), we have arrived at a Fair Value per share of KWD 0.99, which represents a 28.5% upside from its closing price of KWD 0.77 (as on December 02, 2008) however, lower than our earlier fair value of KWD 1.19 (28 November, 2007). We reiterate our earlier investment opinion of OVERWEIGHT on Burgan Bank.

KWD Million 2006A 2007A 2008E 2009E 2010E Total Operating Income 87.59 105.69 126.98 139.46 157.48 % Change YoY 25.8% 20.7% 20.1% 9.8% 12.9% Net Profit 55.73 74.82 88.39 98.40 112.82 % Change YoY 31.5% 34.3% 18.1% 11.3% 14.7% Net Spread 2.5% 1.7% 1.6% 1.3% 1.2% Net Interest Margin 2.8% 2.2% 1.9% 1.5% 1.3% EPS (KWD) 0.070 0.087 0.080 0.089 0.102 ROAE 22.0% 24.5% 22.8% 22.3% 23.4%

OVERWEIGHT

Background Established as a public shareholding company in 1977, Burgan Bank is the fourth largest bank in Kuwait with the current assets base of KWD 3.82 billion. Despite being the youngest and most dynamic commercial bank in the country, the bank now ranks among the top Kuwaiti banks. For nearly 20 years the bank largely remained a Government-owned entity, until the privatization wave in 1997, which saw a major shift in the bank’s ownership structure, as the Government holdings in the Bank were diluted from a majority 61% to nil. Currently, Kuwait Investment Projects Company (KIPCO), a leading investment institution in Kuwait, is the largest single shareholder of the bank. The change in ownership structure paved the way for an automatic change in the strategic focus and management style with (a) the aim (strategic focus) on the establishment of a service-oriented, technology-driven, state-of-art private bank in the country. In 2003-2004, Burgan Bank underwent a major management reshuffling, bringing about a new focus to its growth strategy. The new management’s concentration on corporate governance, risk management, asset quality, and retail banking has enhanced the bank’s financial performance. With a network of 21 modern branches and one of the widest ATM networks in the GCC with 120 ATMs, spread across the country, the retail banking segment is the high focus area for the bank. Innovative products and services, contemporary technology, and the customer-centric approach have led to a sustained performance by the bank. In November 2008, Standard & Poor’s Ratings Services revised its outlook on the bank from ‘Positive’ to ‘Stable’ in addition to affirming its 'BBB+' long-term and 'A-2' short-term counterparty credit ratings on the bank. Additionally, Moody's Investors Service maintained the review of ‘A1/Prime-1’ for deposit ratings and ‘C-‘ for bank financial strength rating (BFSR) but amended the direction of the review from ‘Direction Uncertain’ to ‘Possible Downgrade’. Burgan Bank is the only bank in the GCC region with ISO 9001:2000 certification in all its banking businesses. Moreover, the bank won the award of 'Most Innovative Retail Bank' by the Middle East Retail Banking Awards 2008 and 'Best Corporate Finance Bank Award' from Al Mazaya Holding at the latter's Third Finance Transparency Conference. It also has, to its credit, the distinction of being the only bank in Kuwait to have won the JP Morgan Chase Quality Recognition Award for 10 years in succession and was also acknowledged as the ‘Best Local Private Bank’ in Kuwait in the Fourth Annual Euromoney Private Banking Survey 2007. Business Model Burgan Bank has adopted the following business model:

• The bank is committed to developing activities with diversified and innovative investment and

financial products, enhancing treasury operations, increasing syndication activities and expanding the retail network throughout Kuwait and to a wider region.

• The bank’s customer-centric commitment creates a foundation of real values of trust, commitment, excellence and progression to remind the high standards to which the bank adheres.

• ‘People come first’ is the foundation on which products and services are developed and are further augmented by three pillars of innovative technology, staff competency and customer service. In addition, the bank seeks to offer an enhanced banking experience at every stage of operation, as it endeavours to realize the motto of being ‘driven by you’.

Subsidiaries/Affiliates of Burgan Bank Burgan Bank has a number of subsidiaries, affiliates and strategic investments.

SUBSIDIARIES / ASSOCIATES / AFFILIATES COUNTRY % SHARE

Burgan International Holdings Kuwait 100.0

Jordan Kuwait Bank Jordan 51.1

Kuwait Investments Projects Holding Kuwait - Source: Zawya.com

Fourth largest bank in Kuwait by asset base Received an award of 'Most Innovative Retail Bank' by the Middle East Retail Banking Awards 2008 Board of Directors • Chaired by Mr. Tariq Mohammed Abdul Salam

• Vice Chairman - Mr. Majed Essa Al-Ajeel

• H.E. Abdul Kareem Al Kabarity

• Sheikh Hamad Sabah Al Ahmad Al Sabah

• Mr. Abdul Salam Mohammed Al Bahar

• Mr. Sadoon Abdullah Al Ali • Mr. Antony Miles Strover Source: Company website

Industry Scenario Kuwait’s nominal GDP grew at a CAGR of 22.2% over 2003-2007 and is likely to grow at nearly 9.9% to KWD 35.01 billion in 2008 mainly due to rise in average crude oil prices during the year, which rose to USD 66.4/barrel at the end of 2007 and averaged USD 104.75/barrel in the first eleven months of 2008. Kuwait's economy is primarily dependent on hydrocarbon-related activities (oil & natural gas sector and refined petroleum products industry), which together accounted for 56.8% of nominal GDP and 94.9% of total export earnings in 2007. The large increase in oil revenue generated substantial fiscal and external current account surpluses, enabling the country to build up its net foreign assets to as high as KWD 5.72 billion in 2007 (accounting for 18.0% of nominal GDP). However, in contrast to a robust 4-year average nominal GDP growth rate of 26.4% over 2003-2006 period, the country’s nominal GDP advanced at a relatively slower growth rate of 8% in 2007 mainly due to dampening crude oil and liquefied gas production in the country in tandem with the OPEC decisions. Consequently, the relative contribution of the crude and natural gas sector in nominal GDP declined to 54.5% in 2007 from 55.7% in 2006. While the average price of the Kuwait export crude oil per barrel increased USD 7.27 (or 12.5%) to USD 65.51 in 2007 from USD 58.24 a year ago, crude oil production decreased 2.7% to 2.574 mbpd on average in 2007 from 2.644 mbpd in 2006. On the other hand, the healthy growth in non-oil sectors (excluding refined petroleum products industry) contributed the largest portion (64.4%) of the nominal GDP growth during 2007, accordingly its share in nominal GDP improved to 42.6% in 2007 from 40.8% in 2006. Within non-oil sectors (excluding the refined petroleum products industry), financial services, real-estate and business services sector maintained its lead in terms of relative contribution to nominal GDP (improved to 17.8% in 2007 from 16.5% in 2006). The value added by the community, social and personal services sector grew 16.7% in 2007 to KWD 5.66 billion (accounting for 17.8% of nominal GDP).

Kuwait’s Key Economic and Banking Indicators (in KWD Billions) 2003 2004 2005 2006 2007

Nominal Account: Nominal GDP 14.27 17.52 23.59 29.49 31.84 Nominal GDP Growth (%) 23.1 22.8 34.7 25.0 8.0 Crude Oil & Natural Gas Sector 5.80 7.82 12.23 16.43 17.35 % of Nominal GDP 40.6 44.7 51.8 55.7 54.5 Non-Oil Sector (excluding Refined Petroleum Products) 7.76 8.74 10.22 12.05 13.56

% of Nominal GDP 54.4 49.9 43.3 40.8 42.6 Refined Petroleum Products Industry 0.57 0.80 0.97 0.83 0.75 % of Nominal GDP 4.0 4.5 4.1 2.8 2.4 Real GDP 14.01 15.51 17.28 18.37 19.21 Real GDP Growth (%) 17.3 10.7 11.4 6.3 4.6 Population (Million) 2.55 2.75 2.99 3.18 3.40 % YoY Growth 5.2 8.1 8.6 6.4 6.8 Per Capita Nominal GDP (KWD) 5,602 6,361 7,888 9,266 9,366 % YoY Growth 17.0 13.5 24.0 17.5 1.1 Per Capita Real GDP (KWD) 5,503 5,633 5,777 5,770 5,651 % YoY Growth 11.5 2.4 2.5 -0.1 -2.1 Foreign Trade: Balance of Trade 2.89 4.71 8.49 11.25 11.68 Total Exports 6.16 8.43 13.10 16.25 17.68 Oil Exports 5.66 7.86 12.39 15.43 16.78 % of Total Exports 91.9 93.3 94.6 94.9 94.9 Total Imports 3.27 3.72 4.61 5.00 5.99 Prices: Consumer Price Index (CPI) 103.20 104.50 108.80 112.10 118.30 Inflation (measured by % Change in CPI) 1.0 1.3 4.1 3.0 5.5

Nominal GDP grew at a relatively slower growth rate of 8.0% with decrease in crude oil and liquefied gas production

Consolidated balance sheet of local banks continued its impressive growth in 9M 2008

Balance of Payments: Current Account Surplus 2.81 5.35 10.02 14.96 13.49 % of Nominal GDP 19.7 30.6 42.5 50.7 42.4 Money and Banking: Average Exchange Rate (KWD/USD) 0.298 0.295 0.292 0.290 0.284 Money Supply (M2) 10.40 11.66 13.09 15.92 18.99 % YoY Growth 7.8 12.1 12.3 21.7 19.3 % of Nominal GDP 72.9% 66.5% 55.5% 54.0% 59.6% Money (M1) 2.61 3.17 3.73 3.55 4.15 % YoY Growth 26.4 21.5 17.4 -4.8 16.8 Quasi Money 7.79 8.48 9.36 12.37 14.84 % YoY Growth 2.8 8.9 10.4 32.2 20.0 Net Foreign Assets 2.47 3.53 3.90 5.55 5.72 % of Nominal GDP 17.3 20.2 16.5 18.8 18.0 Aggregate Assets of Local Banks 18.81 19.14 21.61 26.99 35.56 Assets to Nominal GDP Ratio (%) 131.9 109.3 91.6 91.5 111.7 Local Banks Credit Facilities to Residents 8.42 9.87 11.83 14.93 20.14 % of Nominal GDP 59.0 56.3 50.1 50.6 63.2 Private Sector Deposits with Local Banks 9.91 11.12 12.51 15.26 18.35 % of Nominal GDP 69.4 63.5 53.0 51.8 57.6 Source: Central Bank of Kuwait

The banking sector in Kuwait presently comprises 17 banks, which include six local conventional banks, one specialized bank (namely Industrial Bank of Kuwait (IBK), three Islamic Shariah-compliant banks, and seven branches of conventional foreign banks. The six local conventional banks are National Bank of Kuwait (NBK), Gulf Bank (GBK), Commercial Bank of Kuwait (CBK), Al Ahli Bank of Kuwait (ABK), The Bank of Kuwait & Middle East (BKME) and Burgan Bank (BURG). The Islamic Shariah-compliant banks include Kuwait Finance House (KFH), Boubyan bank (BOUBYAN) and the recently converted Kuwait International Bank (KIB). In July 2007, KIB (formerly known as Kuwait Real Estate Bank) was listed under the new name in the CBK Islamic Banks Register and started its operations according to the provisions of Islamic Shariah. The seven foreign banks are Bank of Bahrain & Kuwait (BBK), BNP Paribas Bank, HSBC Bank Middle East Ltd., National Bank of Abu Dhabi, Citibank, Qatar National Bank (QNB); and Doha Bank. The institutional structure of the banking system in Kuwait expanded, with local branch network of conventional and Islamic banks adding 31 additional branches during 2007, bringing the total number of local branches (excluding head offices) to 275 from 244 in 2006. Over 2003-2007, the consolidated balance sheet of the local banks in Kuwait advanced at a healthy 5-year CAGR of 17.2% to reach KWD 35.56 billion in 2007, on the back of impressive growth in claims on private sector and foreign assets, accounting for 61.4% and 21.5% of the sector’s aggregate assets in 2007, respectively, as compared to 49.8% and 12.9% in 2003. The bulk of this impressive growth in claims on private sector was contributed by the healthy expansion in credit facilities to residents, which advanced at a 5-year CAGR of 24.4% during 2003-2007. The sector’s foreign assets more than tripled at a 5-year CAGR of 33.2% with growing exposure to foreign assets and investments, by increasing their deposits with foreign banks, foreign investments, and credit facilities to non-residents. Continuing the healthy growth momentum, the sector’s aggregate assets surged 17.7% to KWD 39.16 billion in 9M 2008, owing to a 23.4% jump in credit facilities to residents (accounting for 58.9% of the sector’s aggregate banking assets) and a 39.3% upsurge in foreign assets (23.6% of the sector’s aggregate banking assets).

Total private sector deposits accelerated 18.2% in 9M 2008 as compared to 5-year CAGR of 16.7% over 2003-2007 Instalment loans and credit to real estate sector witnessed a relatively slower growth

Consolidated Balance Sheet of Local Banks in Kuwait (in KWD Millions) 2003 2004 2005 2006 2007 9M 07 9M 08 Assets: Cash 91 75 106 149 115 115 180 Sight Deposits with CBK 108 175 112 50 484 329 382 Time Deposits with CBK 348 126 440 926 813 1,665 45 CBK Bonds 0 0 124 356 591 645 436 Claims on Government: Public Debt Instruments 2,232 2,146 2,085 1,989 1,912 1,887 2,012 Debt Purchase Bonds 818 604 378 176 0 72 0 Total 3,050 2,750 2,463 2,165 1,912 1,959 2,012 Claims on Private Sector: Other Local Investments 959 1,019 1,109 1,215 1,683 1,525 1,816 Credit Facilities to Residents 8,419 9,867 11,827 14,934 20,139 18,689 23,055 Total 9,379 10,886 12,937 16,148 21,822 20,214 24,871 Foreign Assets 2,425 3,192 3,794 5,246 7,633 6,638 9,249 Local Interbank Deposits 2,914 1,405 1,014 1,291 1,390 960 951 Other Assets 498 535 622 659 797 736 1,037 Total Assets 18,814 19,144 21,612 26,990 35,555 33,261 39,163 Liabilities: Private Sector Deposits: Sight Deposits in KWD 2,117 2,643 3,149 2,894 3,505 3,426 4,001 Quasi Money 7,790 8,481 9,359 12,370 14,841 14,177 16,798 Total 9,907 11,124 12,508 15,264 18,346 17,603 20,798 Government Deposits 634 842 996 1,434 1,959 1,803 2,175 Foreign Liabilities 1,925 1,822 2,260 3,116 6,241 6,045 7,545 Own Funds 2,009 2,311 2,800 3,170 4,494 3,992 4,557 Local Interbank Deposits 2,561 1,369 853 1,302 1,374 960 870 Other Liabilities 1,778 1,676 2,195 2,703 3,142 2,858 3,218 Total Liabilities 18,814 19,144 21,612 26,990 35,555 33,261 39,163 Source: Central Bank of Kuwait

In contrast to 5-year CAGR of 16.7% over 2003-2007, the total private sector deposits (both sight deposits in KWD and quasi-money deposits) witnessed an upsurge of 18.2% and its contribution to the sector’s total liabilities advanced to 53.1% in 9M 2008.. Within private sector deposits, quasi-money deposits advanced 18.5% (as against 5-year CAGR of 17.5%) while its share in total private sector deposits grew to 80.8% in 9M 2008 from 80.5% in 9M 2007. Similarly, surpassing the 5-year CAGR of 14.6% over 2003-2007, the private sector foreign currency deposits soared 21.1% in 9M 2008, and marginally improved its proportion in total private sector deposits to 9.2% in 9M 2008. On the contrary, the proportion of sight deposits in KWD to total private sector deposits declined somewhat to 19.2% in 9M 2008. However, the share of foreign liabilities in the sector’s total liabilities maintained its growth momentum reaching 19.3% in 9M 2008 as compared to 18.2% in 9M 2007. This was partially attributable to the branches of foreign banks operating in the country, commencing their activities and their role in attracting non-resident deposits. Own funds reported relatively slower growth of 14.2% in 9M 2008 as against 5-year CAGR of 22.3% over 2003-2007), reducing the proportion of own funds in the sector’s total liabilities to 11.6% in 9M 2008. In particular, credit to personal facilities (mainly installment loans and purchase of securities), real estate, construction, industry sectors, and non-banking financial institutions spurred the strong growth in total credit facilities to residents. Together they constituted 84.1% of total credit facilities to residents in 2007, surging from 78.4% in 2003. However, the share of credit to these sectors marginally shrank to 84.0% in 9M 2008, on relatively slower growth in personal credit facilities (in particular installment loans) and credit to real estate sector. However, installment loans as a percentage of total credit facilities to residents declined to 17.2% in 9M 2008 as against 18.5% in 9M 2007 adversely impacted by the recent fundamental changes in consumer and installment loans instructions by the Central Bank of Kuwait (CBK) in March 2008.

9M08 net spread improved to 3.08%, but likely to be under pressure on 150 bps decline in CBK discount rate in October 2008 Effective banking regulations

Sectoral Distribution of Balances of Utilized Cash Credit Facilities by Residents (in KWD Millions) 2003 2004 2005 2006 2007 9M 07 9M 08

Trade 1,072 1,276 1,371 1,702 1,900 1,918 2,180 Industry 442 447 468 609 1,071 946 1,332 Construction 633 592 770 1,070 1,367 1,363 1,757 Agriculture and Fishing 49 23 19 36 15 14 13 Non-Bank Financial Institutions 650 781 933 1,427 2,409 2,198 2,831 Personal Facilities: Consumer Loans 749 736 789 756 631 647 613 Installment Loans 1,558 2,075 2,448 3,154 3,891 3,449 3,977 Purchase of Securities 755 908 1,248 1,605 2,157 1,924 2,794 Other Loans 380 451 653 538 413 525 390 Total 3,443 4,169 5,138 6,052 7,093 6,544 7,773 Real Estate 1,434 2,030 2,539 3,288 5,002 4,664 5,673 Crude Oil & Gas 73 55 52 51 59 44 90 Public Services 1 0 5 5 3 4 1 Other 623 495 534 694 1,222 994 1,404 Total Credit Facilities to Residents 8,419 9,867 11,827 14,934 20,139 18,689 23,055 Source: Central Bank of Kuwait The CBK discount rate is a pivotal rate to which, within specific margins, the ceilings of KWD lending interest rates are linked. Accordingly, any cut in the discount rates automatically leads to proportionate in the maximum KWD lending interest rates in the domestic banking and financial units. In tandem with the 50 bps decrease in the discount rate to 5.75% from 6.25% in January 2008, the local banks have also lowered their lending rates; as a result the weighted average interest rate on credit facilities in KWD to residents and non-residents dropped to 7.98% in 9M 2008 from 8.48% in 9M 2007 and 8.54% in 2007. However, weighted average interest rate on private sector KWD deposits to residents and non-residents shrank at a relatively higher rate to 4.90% in 9M 2008 from 5.60% in 9M 2007 and 5.45% in 2007. Consequently, the sector’s net spread increased to 3.08% in 9M 2008 from 2.87% in 9M 2007 and was in line with 3.09% in 2007. However, in response to the prevailing global financial turmoil and liquidity crisis, the CBK has decided to cut discount rate by another 25 bps to 4.25% from 4.50% effective October 30, 2008 (after cutting 125 bps on October 08, 2008), to bolster confidence in the national economy and strengthen the role of the banking system in meeting the funding needs of the local economic sectors. Consequent to the total cut of 150 bps in discount rate in October 2008, we expect that going forward the sector’s net spread is likely to decline, mainly on account of a likely 150 bps decrease in weighted average interest rate on credit facilities in KWD to residents and non-residents. However, the CBK’s decision to cut its repo rate (benchmark deposit rate) on October 8, 2008, by 100 bps to 2.50% from 3.50%, may reduce this net spread contraction.

Interest Rate Scenario 2003 2004 2005 2006 2007 9M 07 9M 08

Weighted Average Interest Rate on Credit Facilities in KWD to Residents & Non-Residents

5.42% 5.64% 7.50% 8.58% 8.54% 8.48% 7.98%

Weighted Average Interest Rate on Private Sector (Residents & Non-Residents) KWD-Deposits

2.42% 2.65% 3.47% 4.92% 5.45% 5.60% 4.90%

Net Spread 3.00% 2.98% 4.03% 3.65% 3.09% 2.87% 3.08% Source: Central Bank of Kuwait

On November 19, 2008, the Central Bank of Kuwait (CBK), the regulator, introduced two new Repo agreements with maturities of ‘overnight’ at 1.00% and 1-month at 3.00% respectively, in addition to the already existing 1-week facility at 2.00%. These facilities can however only be used by banks on the reserves that are in excess to the 20%, according to the rules set by the CBK. On September 29, 2008, the CBK announced to inject funds into the banking system, in the form of 1-week and 1-month deposits. On October 5, 2008, the regulator announced to inject more funds into the system, in the form of 1-week, 1-month and overnight funds. On October 29, 2008, Kuwait's National Assembly passed a law to guarantee all forms of deposits at national and foreign banks operating in the country.

On October 16, 2008, the CBK Board of Directors specified a number of resolutions, that include - raising of the maximum limit for the ratio of credit facilities to deposits to 85% from 80%, increasing the rate of growth set for bank credit portfolios during 2008 by 5% for each bank, and considering real estate as one of the acceptable items for the collateral qualified for inclusion in the calculation of the capital adequacy ratio. On March 23, 2008, the CBK made some fundamental changes to the consumer and installment loan instructions; such as (i) changing the method of charging interest by fixing the interest rate for five years from the date of the loan, to be then reviewed and revised by not more than 2%, instead of the current method of changing the interest rate whenever the discount rate changes; (ii) upfront charge of interest on consumer loans is prohibited. Effective March 30, 2008, these instructions are applicable only to new consumer and installment loans, and would curb excessive growth of these loans to the benefits of the citizen. Financial Performance FY 2007 Operating income driven by healthy growth in non-interest income During 2007, Burgan Bank’s operating income increased 20.7% to KWD 105.69 million on account of decent upsurges in interest income and non-interest income components. Its interest income advanced on the back of 50.2% expansion in loans & advances to customers that stood at KWD 1,421.10 million as compared to KWD 946.32 million in 2006. Meanwhile, the bank’s non-interest income progressed, mainly on capital gains - net gains from foreign currencies more than doubled to KWD 4.36 million, net gains from investments at fair value stood at KWD 3.48 million as against a loss of KWD 0.28 million in the previous year, and gains from AFS investments increased multiple times to KWD 23.90 million. Whereas, it’s net fees and commission income dipped 14.5% to KWD 17.09 million. In addition, the bank’s operating income from treasury & investment segment zoomed 103.3%, while its operating income from banking segment reported a slump of 17.8%. The bank’s interest income advanced 29.1% to KWD 167.71 million; however, it was offset by interest expenses that escalated 52.5% to KWD 116.60 million, thereby declining the net interest income 4.3% to KWD 51.11 million. Consequently, the share of net interest income in total operating income declined to 48.4% from 61.0%. On the other hand, despite a 17.6% increase in the bank’s operating expenses to KWD 27.88 million; its cost to income ratio declined 70 bps to 26.4%, reflecting efficient operational efficiency. Net Spread and NIM Increasing competition and surging cost of funds have been exerting pressure on the industry’s net spread and NIM. The bank’s yield on average interest earning assets improved fractionally to 8.0% from 7.9%; however a sharp increase of 103 bps in average cost of funds to 5.4% slashed the net spread by 99 bps to 2.6% from 3.6% in 2006. The bank’s net interest margin (NIM) also reduced 83 bps to 2.4% from 3.3% in 2006. Asset quality improved significantly The asset quality of Burgan Bank improved significantly over the years as is evident from its NPL ratio, which shrank 174 bps to 1.7% in 2007 from 3.5% in 2006, one of the lowest in the Kuwaiti banking sector. To minimize credit risk, the bank made adequate provisions for its non-performing loans, with loan loss coverage ratio at 164.8% as against 119.4% in 2006. Net Profit During 2007, Burgan bank’s bottom-line registered a growth of 34.3% to KWD 74.82 million from KWD 55.73 million in 2006. These profits translated into earnings per share of KWD 0.087 as against KWD 0.070 in 2006. The bank’s bottom-line advanced at 4-year CAGR of 36.2% and over the last 4 years its total operating income scaled at a 4-year CAGR of 25.0%. Return on average equity (ROAE) and average assets (ROAA) continued their up trend and reached 24.5% and 3.0% from 22.0% and 2.7% respectively, in 2006.

FY07 operating income increased 20.7% to KWD 105.69 million NIM declined by 83 bps and net spread shrank 99 bps The bank’s asset quality improved significantly with NPL of 1.7% Bottom-line advanced at 4-year CAGR of 36.2%, and total operating income scaled at a 4-year CAGR of 25.0%.

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Chart Gallery

Size of the Company The salient points about the balance sheet of Burgan Bank are as follows:

Burgan Bank’s total asset base appreciated 34.8% to KWD 3.82 billion augmented by a regional expansion strategy that it has recently embarked upon. Of these total assets, Jordan Kuwait Bank (JKB) accounted for 21.2%, contributing KWD 808.46 million. During the period, the bank acquired a 43.86% equity interest in JKB (previously classified as financial assets available for sale with equity interest of 7.24%), and accordingly the bank’s effective equity interest in JKB increased to 51.1% as of July 10, 2008. As a result, the company acquired goodwill of KWD 95.51 million.

Amidst healthy upsurges in its loan book and deposit book, Burgan Bank’s overall business

volume swelled 60.1% to KWD 4.51 billion in 9M 2008. While its loans & advances portfolio expanded 62.2% to KWD 2.09 billion accounting for 54.8% of total assets, an increase of 928 bps, deposits from customers’ ascended 58.3% to KWD 2.41 billion, reflecting the bank’s enlarged customer base.

For 9M08, the shareholders’ equity was KWD 342.96 million from KWD 334.15 million over the

corresponding period last year, mainly on 10.0% rise in share capital and a 6.8% climb in retained earnings.

The bank’s return on investments declined with annualized ROAE and ROAA slumping to 25.5%

and 2.7% as compared to 27.2% and 3.2% in similar period last year respectively.

The bank’s total liabilities surged 37.1% to KWD 3.42 billion, on account of 58.3% ascent in deposits from customers’. The share of deposits from customers’ jumped to 63.2% from 53.8% in 9M07. Other borrowed funds spiraled over four times to KWD 192.40 million as the bank entered a 6-year loan subordination for USD 350 million that carries an interest at LIBOR +1.5% per annum. However due to banks and other financial institutions declined 22.5% to KWD 671.72 million.

Financial Performance Analysis – 9M 2008 For the nine months ended September 30, 2008, Burgan Bank reported a net profit of KWD 66.25 million generating a bottom-line growth of 9.4%. As a result, the reported annualized earnings per share (EPS) improved to KWD 0.093 from KWD 0.088. In 9M08, the bank’s net interest income registered an increase of 13.1% reaching KWD 49.85 million as interest expenses grew at a higher rate (22.0%) as compared to a 19.0% growth in interest income. For the nine months, Burgan bank’s yield on average interest earning assets decreased to 5.6% from 6.1% in 9M07, even as cost of average interest bearing liabilities slipped to 3.6% from 3.9%. Accordingly, both NIM and net spread dropped 28 and 27 bps to 1.8% and 2.0% from 2.1% and 2.3%, respectively. Paralleling its cost efficient strategies, cost to income ratio continued to improve considerably by 498 bps to 19.8% from 24.8%, pushing the operating profit up by 17.0% to KWD 73.32 million from KWD 62.68 million. Meanwhile, the banks net fees & commission income jumped 31.0% to KWD 16.26 million. The bank’s total non-interest income grew 3.3% in 9M 2008 to KWD 50.16 million from KWD 48.79 million in similar period last year. In particular, gains from foreign currencies exhibited further improvement, growing 64.3% to KWD 4.44 million; net gains from investments at fair value escalated 64.9% to KWD 3.21 million; and other income advanced nearly five times to KWD 3.43 million.

The bank’s total assets registered a CAGR of 17.9% over 2004-2007. Surging net profit and improved cost efficiency in 9M 2008

Peer Comparison In order to do a peer comparison of the commercial banks of Kuwait, we have considered National Bank of Kuwait (NBK), Gulf Bank (GBK), Al Ahli Bank of Kuwait (ABK), Commercial Bank of Kuwait (CBK) and Burgan Bank (BURG).

Peer Analysis (in KWD' Millions) NBK GBK ABK CBK BURG 2007 9M '08 2007 9M '08 2007 9M '08 2007 9M '08 2007 9M '08 Net Interest Income 283.56 285.73 106.55 92.27 66.39 54.08 89.19 91.46 51.11 49.85 % YoY Growth 8.4% 22.8% -1.8% 2.1% 11.8% 3.6% -3.8% 24.6% 23.7% 13.1% Total Operating Income 424.37 392.73 195.57 127.16 103.60 89.32 162.31 158.58 105.69 100.02 % YoY Growth 7.4% 16.0% 26.8% -11.8% -0.1% 8.8% 12.5% 18.3% 25.8% 7.9% Net Profit 273.57 243.69 130.44 85.96 76.04 70.39 120.36 104.89 74.82 66.25 % YoY Growth 8.0% 10.5% 23.2% -18.2% 26.7% 0.5% 20.3% 13.8% 31.5% 9.4% Loans & Advances (Net) 5,920.31 6,712.68 3,306.79 3,516.10 1,870.01 2,133.60 2,214.22 2,444.70 1,421.10 2,092.37 % YoY Growth 37.4% 27.4% 27.9% 15.5% 30.4% 17.1% 38.1% 15.4% 50.2% 62.2% Total Assets 11,539.42 12,363.24 5,082.91 5,186.64 2,961.16 3,116.21 4,289.29 4,344.26 2847.55 3816.27 % YoY Growth 46.1% 26.2% 25.2% 5.8% 22.1% 9.9% 47.0% 13.4% 28.8% 34.7% Customers' Deposits 5,716.10 5,646.67 3,191.33 3,654.56 2,230.43 2,218.49 2,635.85 2,703.53 1648.54 2413.39 % YoY Growth 30.5% 13.8% 12.4% 15.4% 38.0% 10.2% 50.6% 19.2% 33.2% 58.3% Shareholders' Equity 1,685.87 1,653.64 490.62 445.48 319.09 334.91 527.02 479.51 351.14 342.96 % YoY Growth 59.1% 36.0% 23.0% -6.0% 21.2% 7.8% 8.8% -4.2% 34.9% 2.6%

Yield on Average Interest Earning Assets 7.4% 7.0% 8.0% 7.3% 6.4% 6.3% 6.6% 6.5% 7.1% 6.7% Average Cost of Funds 4.0% 3.1% 5.2% 4.7% 4.7% 4.5% 4.4% 3.8% 5.4% 4.8% Net Spread 3.4% 3.9% 2.8% 2.6% 1.7% 1.9% 2.2% 2.7% 1.7% 1.9% Net Interest Margin 3.5% 3.9% 2.7% 2.7% 2.4% 2.4% 2.7% 3.0% 2.2% 2.2% Cost to Income Ratio -26.7% -29.3% -18.6% -20.8% 26.0% 24.4% -19.1% -16.1% 26.4% 19.8% Credit-Deposit (C/D) Ratio 107.1% 118.9% 106.3% 96.2% 88.4% 96.2% 90.4% 90.4% 88.7% 86.7% Loan Loss Reserve to Gross Loans & Advances Ratio 3.3% 0.0% 2.6% 0.0% 5.1% 0.0% 7.0% 0.0% 2.8% 0.0% Equity to Total Assets Ratio 14.6% 13.4% 9.7% 8.6% 10.8% 10.7% 12.3% 11.0% 12.3% 9.0% Capital Adequacy Ratio 17.9% NA 19.0% NA 14.0% NA 14.6% NA 16.6% NA ROAE 19.9% 19.5% 29.3% 24.5% 26.1% 28.7% 23.8% 27.8% 24.5% 25.5% ROAA 2.8% 2.7% 2.9% 2.2% 2.8% 3.1% 3.3% 3.2% 3.0% 2.7% # NBK = National Bank of Kuwait, GBK = Gulf Bank, ABK = Al Ahli Bank of Kuwait, CBK = Commercial Bank of Kuwait, and BURG = Burgan Bank Source : Zawya.com, Burgan Bank financial statements and Capital IQ

Lowest non-performing loans ratio; wide presence through 21 branches and nearly 120 ATMs Impetus on regional expansion to lead to increase in asset base resulting in enhanced profitability

New Projects and Strategy Burgan Bank strives for more flexibility in terms of remaining in sync with the dynamically changing operating environment in Kuwait by leveraging its small size. The bank has effectively achieved risk management excellence as evident from its lowest non-performing loans ratio of 1.7% (in 2007) amongst the local banks. Additionally, it has also embarked upon regional expansion, revamping its branches, increasing of the number of ATMs, new product offerings, technological excellence and incorporating best practices. The bank currently caters through a network of 21 branches and nearly 120 ATMs. It is expanding its presence in retail, corporate and investment banking sector through the introduction of highly innovative products and technologically advanced delivery channels. With these, the bank aims to increase its asset base while maintaining high quality. The long-term growth strategy includes establishing itself as a commercial bank franchise across the MENA region through expansion. In line with this, it has planned to acquire a majority stake in four commercial banking entities, namely Algeria Gulf Bank, Bank of Baghdad, Jordan Kuwait Bank, and Tunis International Bank from United Gulf Bank for a cash consideration of USD 725 million. On July 15, 2008, the bank completed the acquisition of Jordon Kuwait Bank. These acquisitions are likely to enhance profitability by increasing its asset base and geographical diversification. The bank has sought an approval from the Central Bank of Kuwait for the sale of 20% of its capital to United Gulf Bank. Burgan Bank has embarked upon a long-term growth project over 2006-11 (Bright Future), which includes a 360 degree approach aimed at modernizing its retail business, achieving customer satisfaction, leveraging process and technology and improving skill sets of its employees. The project commenced emphasizing on Branch Network Strategy in 2006 in a bid to reorganize its retail business and was completed in the first quarter of 2008. The strategy encompassed differentiating branches based on demand and income group in a particular area. While Solutions Branches catered to middle/higher income group, Financial Center and Transaction Branches offered services to high networth individuals and corporate clients, respectively. Furthermore, the bank remains committed to following the route of technological innovations in order to offer a differentiated customer experience. In line with this, in November 2008, it has launched a state-of-art corporate website with a completely new look and feel. Additional features include fund transfers, balance inquiry, credit card payment amongst others. The website also provides information regarding various products, while the online information request tool collects feedback and suggestions, which are routed to relevant officials thereby generating scope for more business opportunities. In addition to this, the bank has been setting up new generation ATM machines that provide features like cash deposit and instant access to cash and enquiries. The bank’s customer-centric strategy while designing and developing new tailor-made products differentiates it from its competitors. In October 2008, it introduced Burgan Value Account, specifically designed and developed to cater to the needs of the vast expatriate community in Kuwait, a segment little explored by many banks. The account offers host of benefits, which include life insurance cover in association with Gulf Insurance Company, attractive exchange rates while remitting funds to home country, credit card and chance to win cash prizes from monthly draws. SWOT Analysis Strength:

Presence across retail, corporate and investment banking sector Innovative products in offing based on the varied customers needs Technologically advanced delivery channels. Wide reach through network of 21 branches

and 120 ATMs Flexible to the changing economic environment Impetus on regional expansion through acquisition of banks in Algeria, Iraq, Jordan and

Tunisia Lowest non-performing loans ratio of 1.7% among regional banks depicting assets of high

quality Growth strategy aimed at enhancing customer satisfaction Diversifying funding sources and strong capital base Only bank in GCC with ISO 9001:2000 certification across all its businesses

Weakness:

Expansion in countries like Iraq, which are prone to political uncertainty may hamper growth Small size compared to other regional banks Decline in net spread to negatively impact profitability

Opportunities:

Macroeconomic growth on the back of infrastructure spending plans is likely to drive the future growth for banking sector

Focus on diversification to a non-oil economy is likely to generate enhanced opportunities of credit growth

Government’s initiatives to inject liquidity in the economy through regulatory changes and other monetary policies to present increased interest earning opportunities

Threats:

The decrease in the oil prices may result in less infrastructure spending than budgeted, although the effect is supposed to be least for Kuwait due to lowest break-even oil price in the GCC

Slower growth in personal credit facilities (in particular installment loans) and credit to real estate sector may affect the profitability

Intensified competition on account of expansion initiatives by local and foreign banks

Risks and Concerns:

The global financial turmoil and liquidity crisis has forced CBK to cut the discount rate by another 25 bps to 4.25% effective from October 30, 2008 subsequent to the 125 bps reduction on October 8, 2008 to increase liquidity and bolster investor confidence. However, measures like these keep the net spread of banks under pressure thereby negatively impacting profitability.

Decline in oil revenues is driving away investments from the infrastructure sector. It is speculated that 60% of the projects in GCC have been shelved. This is likely to decrease the credit requirements of the sector thereby limiting the bottom-line growth of the banks.

Oil revenues have plunged approximately 50% in a month wiping out the budget surplus of the country. According to CBK, there has been an 85% decline in the budget surplus in September. Furthermore, only 14% of the state planned investments have been started or concluded. According to Reuters, the government is planning to invest funds to the tune of USD 3.7 billion in domestic stocks in order to restore confidence in the domestic market. However, effectiveness of these restoration works will depend on how the liquidity crunch shapes up moving ahead.

Cost of Equity: 9.54%

Valuation Methodology: We have used two valuation methods for arriving at the fair value of Burgan Bank, as discussed below:

I. Target P/BV approach based on the Gordon Growth Model (GGM), and II. TTM P/E valuation approach.

Target P/BV Multiple Approach using the Gordon Growth Model (GGM) The model uses the sustainable return on average equity (ROAE), cost of equity (Ke) and expected growth in earnings (g) to arrive at the target P/BV of the bank under review using the formula:

Target P/BV = (ROAE - g) / (Ke - g) Subsequently, we have multiplied the target P/BV multiple for 2008E with the 2008E BVPS to arrive at the fair value of the bank over a medium-term investment horizon. We have made the following assumptions to arrive at the target P/B multiple for 2008 of the bank:

i. For sustainable ROAE, we have considered the 5-year average return on average equity (ROAE) of the bank over 2008E-2012E.

ii. We have estimated the cost of equity (Ke) using Capital Asset Pricing Model (CAPM):

a. Risk free rate of return (Rf) of 2.76% b. Cost of Equity – 9.54%

iii. We have assumed a terminal growth rate (g) of 2.0%.

GGM Valuation Summary Sustainable ROAE (%) 23.01% Cost of Equity (Ke) (%) 9.54% Perpetual Growth Rate (%) 2.00% Target P/BV Multiple for 2008E (x) 2.79 2008E BVPS (KWD) 0.372 Fair Value per Share using Target P/BV (KWD) 1.036 CMP (KWD) 0.770 Upside/(Downside) 34.59%

Sensitivity AnalysisThe tables below exhibits the sensitivity analysis for the estimated fair value per share based on various terminal growth rates, cost of equity and ROAE. The shaded area represents the most probable outcomes. Sensitivity Analysis - GGM (Ke vs. g) Terminal/Perpetual Growth Rate (g)

Cost of Equity (Ke)

1.00% 1.50% 2.00% 2.50% 3.00% 7.54% 1.251 1.324 1.410 1.513 1.638 8.54% 1.085 1.136 1.194 1.262 1.342 9.54% 0.958 0.995 1.036 1.084 1.138 10.54% 0.858 0.884 0.914 0.948 0.986 11.54% 0.776 0.796 0.819 0.843 0.871

Sensitivity Analysis - GGM (Ke vs. ROAE) Return on Average Equity (ROAE)

Cost of Equity (Ke)

21.01% 22.01% 23.01% 24.01% 25.01% 7.54% 1.276 1.343 1.410 1.477 1.544 8.54% 1.081 1.137 1.194 1.251 1.308 9.54% 0.938 0.987 1.036 1.086 1.135 10.54% 0.828 0.871 0.914 0.958 1.002 11.54% 0.741 0.780 0.819 0.858 0.897

Sensitivity Analysis - GGM (ROAE vs. g) Terminal Growth Rate (g)

Return on Average Equity (ROAE)

1.00% 1.50% 2.00% 2.50% 3.00% 21.01% 0.872 0.903 0.938 0.978 1.025 22.01% 0.915 0.949 0.987 1.031 1.081 23.01% 0.958 0.995 1.036 1.084 1.138 24.01% 1.002 1.041 1.086 1.137 1.195 25.01% 1.046 1.088 1.135 1.189 1.252

TTM P/E Multiple Based Valuation

TTM P/E Multiple Based Valuation Summary Burgan Bank's 2008E EPS (KWD) 0.080Target P/E (x) 11.70Fair Value per Share using Target P/E 0.942CMP (KWD) 0.770Upside/(Downside) 22.34%

Banks

Outstanding Shares (million)

# CMP (KWD)

Market Capitalization

(KWD 'million)

EPS (TTM) (KWD)

P/E (TTM) (x)

National Bank of Kuwait (NBK) 2,692 1.480 3,984 0.110 13.42 Gulf Bank (GBK) 1,254 0.950 1,191 0.089 10.70 Commercial Bank of Kuwait (CBK) 1,272 1.240 1,577 0.105 11.85 Al Ahli Bank of kuwait (ABK) 1,318 0.790 1,041 0.048 16.60 Burgan Bank (BURG) 942 0.770 725 0.085 9.01 The Bank of Kuwait & Middle East (BKME) 887 0.580 514 0.067 8.63 Average TTM P/E 11.70 Sources: Zawya Site and Banks' Financial Statements, # CMP as on December 02, 2008

Weighted Average Fair Value On an equal weight basis (GGM – 50% and P/BV – 50%), we have arrived at a final fair value or target price of KWD 0.99, which provides a potential upside of 28.5% from its current market price of KWD 0.77 (as on December 02, 2008).

Weighted Average Fair Value (KWD)

Valuation Method

Fair Value per Share

(KWD) Weight Weighted Value per Share (KWD)

Target P/BV Multiple Method 1.036 50% 0.518 TTM P/E Multiple Based Valuation Method 0.942 50% 0.471

0.989

0.770

28.46% Investment Opinion The banking sector in Kuwait registered a healthy growth in 9M08 as the sector’s aggregate assets surged 17.7% to KWD 39.16 billion in 9M 2008. However, instalment loans and credit to real estate sector witnessed a relatively slower growth due to the impending global turmoil, which has negatively impacted the investments in the infrastructure sector. Despite this, the government initiatives such as reduction in the discount rate, introduction of two new Repo agreements with maturities of ‘overnight’ at 1.00% and 1-month at 3.00%, respectively and investment being planned to the tune of USD 3.7 billion (source Reuters) in domestic stocks all aim to restore confidence in the economy. Capitalizing on its small size, Burgan bank can adapt easily to the dynamically changing environment it operates in. The banks bottom-line advanced at 4-year CAGR of 36.2% and its total operating income scaled at a 4-year CAGR of 25.0%, on successful revamping of it branches across Kuwait and incorporating best practices across businesses. The wide network of branches and ATMs along with customer-centric strategy while designing and developing new tailor-made products defines it from its competitors and is likely to boost customer base significantly. It has also enhanced its position in the market through proper implementation of its ‘Bright Future’ strategy, which includes a 360 degree approach aimed at modernizing its retail business, achieving customer satisfaction, leveraging process and technology and improving skill sets of its employees. Further, the bank is aiming to expand across geographies by establishing itself as a commercial bank franchise across the MENA region with the acquisitions of Jordan Kuwait Bank, Tunis International Bank, Algeria Gulf Bank and the Bank of Baghdad, from United Gulf bank. This is likely to present enhanced growth opportunities for the bank and strengthen its balance sheet thereby boosting its bottom-line considerably. Currently, Burgan Bank stock is trading at a P/E multiple of 9.61x based on its 2008E earnings and at a P/B multiple of 2.07x on its 2008E BVPS; and at a P/E multiple of 8.63x based on its 2009E earnings and at a P/B multiple of 1.92x on its 2009E BVPS. The stock has lost 18.6% since the beginning of this year, as compared to the KSE index YTD negative return of 29.9%. On an equal weight basis (GGM – 50% and P/BV – 50%), we have arrived at a Fair Value per share of KWD 0.99, which represents a 28.5% upside from its closing price of KWD 0.77 (as on December 02, 2008) however, lower than our earlier fair value of KWD 1.19 (28 November, 2007). We reiterate our earlier investment opinion of OVERWEIGHT on Burgan Bank.

Fair Value: KWD 0.99 Investment Opinion: OVERWEIGHT

Financial Statements

Consolidated Balance Sheet (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E ASSETS Cash and Cash Equivalents 288,328 431,190 436,442 485,921 509,439 632,312 772,577Treasury Bills and Bonds 388,909 433,709 380,130 388,542 406,732 463,789 506,009Due from banks and other financial institutions 411,801 380,568 550,958 503,176 526,888 634,055 741,697Loans and Advances to Customers 946,317 1,421,104 1,290,048 2,092,369 2,258,974 2,896,140 3,556,786Government debt bonds 13,063 0 165 0 0 0 0Investment securities 107,672 110,146 104,513 135,288 178,158 224,720 271,110Other Assets 36,063 53,026 51,761 92,670 96,745 134,942 177,185Property and Equipment 18,062 17,804 18,007 22,799 23,150 25,804 26,757Goodwill 0 0 0 95,505 95,505 95,505 95,505Total Assets 2,210,215 2,847,547 2,832,024 3,816,270 4,095,590 5,107,268 6,147,625 LIABILITIES Due to Banks 291,521 374,681 386,420 294,176 311,265 434,118 565,582Due to other financial institutions 234,438 357,431 479,999 377,540 385,077 518,502 673,303Certificates of deposits 63,000 0 0 0 0 0 0Deposits from Customers 1,237,936 1,648,538 1,524,607 2,413,393 2,595,937 3,246,801 3,887,278Other borrowed funds 75,540 42,998 43,982 192,396 192,493 222,166 242,831Other Liabilities 47,626 72,759 62,869 147,057 137,524 178,576 222,716Total Liabilities 1,950,061 2,496,407 2,497,877 3,424,562 3,622,296 4,600,163 5,591,710 EQUITY Share Capital 86,060 86,060 86,060 94,666 114,666 114,666 114,666Share Premium 64,759 64,759 64,759 64,759 64,759 64,759 64,759Treasury shares -29,039 -297 -339 -4,428 -4,428 -4,428 -4,428Reserves 88,641 131,213 112,995 112,500 131,213 131,213 131,213Retained Earnings 49,733 69,405 70,672 75,463 118,336 152,147 200,957Equity attributable to equity holders of the bank 260,154 351,140 334,147 342,960 424,546 458,357 507,167Non controlling interest 0 0 0 48,748 48,748 48,748 48,748Total Equity 260,154 351,140 334,147 391,708 473,294 507,105 555,915Total Liabilities and Shareholders' Equity 2,210,215 2,847,547 2,832,024 3,816,270 4,095,590 5,107,268 6,147,625

Consolidated Income Statement (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Interest Income 129,862 167,713 128,370 152,714 198,989 229,633 269,431Interest Expense -76,468 -116,600 -84,294 -102,861 -138,569 -169,613 -202,692Net Interest Income 53,394 51,113 44,076 49,853 60,420 60,020 66,738 Net Fees & Commissions Income 19,988 17,089 12,412 16,257 22,019 25,195 27,879Net Gains from Foreign Currencies 2,024 4,363 2,700 4,436 6,315 8,374 10,342Net Gains / (Loss) from Investments at Fair Value through Income Statement -276 3,484 1,949 3,214 4,346 5,324 6,416Net Gains from AFS Investments 2,845 23,895 26,158 20,922 26,942 30,107 33,043Dividend Income 4,229 4,877 4,608 1,903 2,371 3,934 4,442Other Income 5,382 868 751 3,430 4,564 6,506 8,621Total Operating Income 87,586 105,689 92,654 100,015 126,977 139,462 157,481Staff Expenses -11,870 -12,641 -10,568 -11,654 -15,441 -17,238 -18,836Other Expenses -11,849 -15,241 -12,417 -8,180 -10,184 -10,837 -11,844Operating Profit before Provisions 63,867 77,807 69,669 80,181 101,351 111,386 126,802Provision for Impairment of Loans & Advances -6,124 -264 -6,991 -6,863 -3,234 -2,164 -1,580Provision for Impairment of Investment Securities -5 0 0 0 0 0 0Operating Profit 57,738 77,543 62,678 73,318 98,117 109,222 125,221Total Taxation -1,940 -2,655 -2,103 -4,421 -6,128 -6,822 -7,822Board of Directors' Remuneration -70 -70 0 0 -70 -70 -70Net Profit 55,728 74,818 60,575 68,897 91,919 102,330 117,329Attributable to: Equity Holders of the Bank 55,728 74,818 60,575 66,247 88,387 98,398 112,821Non-Controlling Interest 0 0 0 -2,650 -3,532 -3,932 -4,508

Cash Flow Statement

(in KWD '000) 2006A 2007A 9M07A 9M08A 2008E 2009E 2010E Operating activities Profit for the year 55,728 74,818 60,575 68,897 91,919 102,330 117,329Adjustments: Net (gains)/loss from investment at fair value through income statement 276 -3,484 -1,949 -3,214 -4,346 -5,324 -6,416Net gains from investment available for sale -2,845 -23,895 -26,158 -20,922 -26,942 -30,107 -33,043Provision for impairment of investment securities 5 0 0 0 0 0 0Provision for impairment of loans and advances 6,124 264 6,991 6,863 3,234 2,164 1,580Dividend income -4,229 -4,877 -4,608 -1,903 -2,371 -3,934 -4,442Depreciation 2,261 2,431 1,822 1,599 1,624 1,810 1,743Provision for share based compensation 36 140 99 141 0 0 0Operating profit before changes in operating assets and liabilities 57,356 45,397 36,772 51,461 63,118 66,939 76,752 Changes in operating assets and liabilities:

Treasury bills and bonds -

106,703 -44,800 8,779 84,984 26,977 -57,058 -42,220Due from banks and other financials institutions

-202,160 31,233 -136,286 -75,640 -146,320 -107,167 -107,641

Loans and advances to customers -

123,540 -475,051 -353,593 -205,786 -841,104 -639,331 -662,226Government debt bonds 48,558 13,063 12,898 0 0 0 0Other asset -12,463 -16,963 -15,698 -19,493 -43,719 -38,198 -42,242Due to banks 48,236 83,160 94,899 -175,442 -63,416 122,853 131,464Due to other financial institutions 142,000 122,993 245,561 18,942 27,646 133,425 154,801Certificates of deposit 38,000 -63,000 0 0 0 0 0Deposit from customers 70,737 410,602 223,671 244,281 928,637 686,295 679,936Other liabilities 9,126 25,133 15,243 -21,083 64,765 41,052 44,140Net cash from/ (used in) operating activities -30,853 131,767 132,246 -97,776 16,585 208,810 232,763 Investing activities Purchase of investment securities -82,429 -605,903 -473,630 -569,465 -68,012 -46,562 -46,390Sale of investment securities 70,568 621,111 492,564 598,088 0 0 0Acquisition of a subsidiary, net of cash 0 0 0 36,374 36,374 0 0Additions to property and equipment -1,721 -2,173 -1,767 -1,742 -6,970 -4,464 -2,696Dividends received 4,229 4,877 4,608 1,903 2,371 3,934 4,442Net cash from/ (used in) investing activities -9,353 17,912 21,775 65,158 -36,237 -47,091 -44,644 Financing activities Other borrowed funds -450 -32,542 -31,558 143,735 149,495 29,673 20,665Purchase of treasury shares -11,200 0 0 -6,617 0 0 0Sale of treasury shares 989 65,361 65,287 1,288 0 0 0Cash dividend paid -32,194 -39,636 -39,636 -51,583 -51,595 -68,519 -68,519Net cash used in financing activities -42,855 -6,817 -5,907 86,823 97,900 -38,845 -47,854Effect of foreign currency translation 0 0 0 526 0 0 0Net increase/(decrease) in cash and cash equivalents -83,061 142,862 148,114 54,731 78,249 122,873 140,265Cash and cash equivalents at 1 January 371,389 288,328 288,328 431,190 431,190 509,439 632,312Cash and cash equivalents at 31 December 288,328 431,190 436,442 485,921 509,439 632,312 772,577

Common-Size Financial Statements

Common-Size Balance Sheet 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E ASSETS Cash and Cash Equivalents 13.0% 15.1% 15.4% 12.7% 12.4% 12.4% 12.6%Treasury Bills and Bonds 17.6% 15.2% 13.4% 10.2% 9.9% 9.1% 8.2%Due from banks and other financial institutions 18.6% 13.4% 19.5% 13.2% 12.9% 12.4% 12.1%Loans and Advances to Customers 42.8% 49.9% 45.6% 54.8% 55.2% 56.7% 57.9%Government debt bonds 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Investment securities 4.9% 3.9% 3.7% 3.5% 4.4% 4.4% 4.4%Other Assets 1.6% 1.9% 1.8% 2.4% 2.4% 2.6% 2.9%Property and Equipment 0.8% 0.6% 0.6% 0.6% 0.6% 0.5% 0.4%Goodwill 0.0% 0.0% 0.0% 2.5% 2.3% 1.9% 1.6%Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES Due to Banks 13.2% 13.2% 13.6% 7.7% 7.6% 8.5% 9.2%Due to other financial institutions 10.6% 12.6% 16.9% 9.9% 9.4% 10.2% 11.0%Certificates of deposits 2.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Deposits from Customers 56.0% 57.9% 53.8% 63.2% 63.4% 63.6% 63.2%Other borrowed funds 3.4% 1.5% 1.6% 5.0% 4.7% 4.4% 4.0%Other Liabilities 2.2% 2.6% 2.2% 3.9% 3.4% 3.5% 3.6%Total Liabilities 88.2% 87.7% 88.2% 89.7% 88.4% 90.1% 91.0% EQUITY Share Capital 3.9% 3.0% 3.0% 2.5% 2.8% 2.2% 1.9%Share Premium 2.9% 2.3% 2.3% 1.7% 1.6% 1.3% 1.1%Treasury shares -1.3% 0.0% 0.0% -0.1% -0.1% -0.1% -0.1%Reserves 4.0% 4.6% 4.0% 2.9% 3.2% 2.6% 2.1%Retained Earnings 2.3% 2.4% 2.5% 2.0% 2.9% 3.0% 3.3%Equity attributable to equity holders of the bank 11.8% 12.3% 11.8% 9.0% 10.4% 9.0% 8.2%Non controlling interest 0.0% 0.0% 0.0% 1.3% 1.2% 1.0% 0.8%Total Equity 11.8% 12.3% 11.8% 10.3% 11.6% 9.9% 9.0%Total Liabilities and Shareholders' Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Common-Size Income Statement

2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Interest Income 148.3% 158.7% 138.5% 152.7% 156.7% 164.7% 171.1%Interest Expense -87.3% -110.3% -91.0% -102.8% -109.1% -121.6% -128.7%Net Interest Income 61.0% 48.4% 47.6% 49.8% 47.6% 43.0% 42.4% Net Fees & Commissions Income 22.8% 16.2% 13.4% 16.3% 17.3% 18.1% 17.7%Net Gains from Foreign Currencies 2.3% 4.1% 2.9% 4.4% 5.0% 6.0% 6.6%Net Gains / (Loss) from Investments at Fair Value through Income Statement -0.3% 3.3% 2.1% 3.2% 3.4% 3.8% 4.1%Net Gains from AFS Investments 3.2% 22.6% 28.2% 20.9% 21.2% 21.6% 21.0%Dividend Income 4.8% 4.6% 5.0% 1.9% 1.9% 2.8% 2.8%Other Income 6.1% 0.8% 0.8% 3.4% 3.6% 4.7% 5.5%Total Operating Income 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Staff Expenses -13.6% -12.0% -11.4% -11.7% -12.2% -12.4% -12.0%Other Expenses -13.5% -14.4% -13.4% -8.2% -8.0% -7.8% -7.5%Operating Profit before Provisions 72.9% 73.6% 75.2% 80.2% 79.8% 79.9% 80.5%Provision for Impairment of Loans & Advances -7.0% -0.2% -7.5% -6.9% -2.5% -1.6% -1.0%Provision for Impairment of Investment Securities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Operating Profit 65.9% 73.4% 67.6% 73.3% 77.3% 78.3% 79.5%Total Taxation -2.2% -2.5% -2.3% -4.4% -4.8% -4.9% -5.0%Board of Directors' Remuneration -0.1% -0.1% 0.0% 0.0% -0.1% -0.1% 0.0%Net Profit 63.6% 70.8% 65.4% 68.9% 72.4% 73.4% 74.5%Attributable to: Equity Holders of the Bank 63.6% 70.8% 65.4% 66.2% 69.6% 70.6% 71.6%Non-Controlling Interest 0.0% 0.0% 0.0% -2.6% -2.8% -2.8% -2.9%

Financial Ratios

FINANCIAL RATIOS 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E

Profitability Return on Average Assets (ROAA) 2.7% 3.0% 3.2%* 2.8%* 2.6% 2.2% 2.1%Return on Average Equity (ROAE) 22.0% 24.5% 27.2%* 26.5%* 23.7% 23.2% 24.3%Net Interest Income / Total Operating Income 61.0% 48.4% 47.6% 49.8% 47.6% 43.0% 42.4%Non-Interest Income / Total Operating Income 39.0% 51.6% 52.4% 50.2% 52.4% 57.0% 57.6%Dividend Payout Ratio 15.4% 17.3% 21.3% 34.4% 23.4% 28.0% 24.4%Margins Interest Expense / Interest Income 58.9% 69.5% 65.7% 67.4% 69.6% 73.9% 75.2%Interest Income / Average Interest Earning Assets 6.8% 7.1% 7.3% 6.7% 6.3% 5.6% 5.3%Interest Expense/ Average Interest Bearing Liabilities 4.4% 5.4% 5.2% 4.8% 4.7% 4.3% 4.1%Net Spread 2.5% 1.7% 2.1% 1.9% 1.6% 1.3% 1.2%Net Interest Margin 2.8% 2.2% 2.5% 2.2% 1.9% 1.5% 1.3%Total Operating Expenses to Total Operating Income Ratio 27.1% 26.4% 24.8% 19.8% 20.2% 20.1% 19.5%

Staff Expense to Total Operating Income 13.6% 12.0% 11.4% 11.7% 12.2% 12.4% 12.0%Liquidity & Assets Quality Credit to Deposit (C/D) Ratio 79.8% 88.7% 84.6% 86.7% 88.8% 90.7% 92.8%Customers' Deposits to Shareholders' Equity 475.8% 469.5% 456.3% 703.7% 611.5% 708.4% 766.5%Loans & Advances to Banks / Due to Banks 141.3% 101.6% 142.6% 171.0% 169.3% 146.1% 131.1%Loan Loss Reserve / Gross Loans & Advances 4.1% 2.8% 0.0% 0.0% 1.9% 1.6% 1.3%Capital Adequacy Shareholders' Equity to Total Assets 11.8% 12.3% 11.8% 9.0% 10.4% 9.0% 8.2%Shareholders' Equity to Gross Loans & Advances 26.4% 24.0% 25.9% 16.4% 18.4% 15.6% 14.1%Operating Performance % Change in Interest Income 42.0% 29.1% NA 19.0% 18.6% 15.4% 17.3%% Change in Other Income 316.9% -83.9% NA 356.7% 425.8% 42.6% 32.5%% Change in Total Operating Income 25.8% 20.7% NA 7.9% 20.1% 9.8% 12.9%% Change in Net Profit 31.5% 34.3% NA 13.7% 22.9% 11.3% 14.7%Valuation Ratios Outstanding Shares ('000) 792,725 859,909 859,810 941,981 1,141,981 1,141,981 1,141,981Adj. EPS (KWD) 0.105 0.141 0.152* 0.173* 0.080 0.089 0.102Adj. BVPS (KWD) 0.276 0.373 0.355 0.364 0.372 0.401 0.444P/E (x) 7.33 5.46 5.06 4.45 9.61 8.63 7.53P/BV (x) 2.79 2.07 2.17 2.11 2.07 1.92 1.73CMP (KWD) 0.77 0.77 0.77 0.77 0.77 0.77 0.77

*Annualised

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