Global Investment House.

Global Investment House- Kuwait - Bahrain Islamic Bank (BISB) -Bahrain Islamic Bank (BIsB) was incorporated in 1979 in Bahrain, which was the first Islamic bank to list on Bahrain Stock Exchange. The bank provides banking services in accordance with the Islamic Shari'a principles and operates under a retail bank license issued by Central Bank of Bahrain. The bank is considered to be the first Islamic institution established in Bahrain and the third bank to carry out such kind of business in the Gulf region. The bank currently with 12 branches in operation in Bahrain is well positioned to meet the strong and growing demand with highest ethical standards and was voted the Best Islamic Bank in Bahrain for the year 2007 at 'Islamic Finance News' annual poll. Stehwaz Holding Company, a subsidiary of Investment Dar, Kuwait holds 40% stake in the bank, followed by Islamic Development Bank with 13.0% and Securities House with 7.6%. Around 27.9% stake of the bank is held by public.

Based on the current market price of 515 fils/share (as on May 18, 2008), BISB is trading at a 2008E P/E and P/BV multiple of 9.1x and 1.7x respectively. Our estimated value for this banking scrip is worked out to be 646fils based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 25.4% on the closing price of 515fils per share; we therefore recommend a BUY on the scrip.

During 2007, BISB floated a wholly owned subsidiary, Abaad Real Estate Company with a paid up with a paid up capital of BD10mn which has now been increased to BD25mn. Abaad is a fully integrated real estate investment, development and management company operating in accordance with Islamic Sharia and is focused on residential, commercial and industrial properties throughout the Gulf Cooperation Council (GCC) and Middle East and North African (MENA) region.

The banks also come up with a Strategic Plan in July 2007 in which the corporate entity of the bank was changed with a brand new logo. As a part of the new strategy, the bank has implemented fully automated comprehensive banking system. The new core banking system is likely to help the bank in providing better customer service and also help re-design products meeting the varied needs of the customers. The bank is now set to expand its operations and intends to set up six financial malls in the next two years. The management expects that two of these malls would be operational by the end of 2008.

Financial PerformanceBISB continued to show good results in 2007 as well, as the bank reported net profit of BD25.0mn, an increase of 91.7% as compared to the previous year. What is noteworthy is that this has come at the back of 99.5% and 76.6% growth rates achieved in 2005 and 2006 respectively. The balance sheet size of the bank increased by 51.0% to BD659.0mn in 2007 as compared to BD436.5mn in the previous year with the total assets having grown at a CAGR of 37.3% during the period 2004-2007, from BD320.7mn in 2004 to BD659.0mn at the end of 2007.

Majority of BISB's assets are in the Middle East region, but the bank is also increasing its presence in Europe and North America. However, during 2007, the share of the Europe and North America has come down as the asset growth of the bank in the Middle East was a whopping 53.6%. Collectively, the assets deployment in Europe and North America was around 4.1% of the total assets at the end of 2007 as compared to 5.7% in the previous year. Going forward, we believe that BISB will continue to increase its market presence in the Middle East markets especially where it has a strong foothold.

Income from Islamic finances increased by 27.4% to reach BD31.5mn as compared to BD24.7mn recorded in the previous year. Income from Islamic finances includes income from Murahaba receivables, Mudaraba investing, Musharaka investments, investments in Sukuk, and Ijarah muntahia bittamleek.

In 2007, the operating income registered a significant increase of 53.8%, from BD34.2mn in 2006 to BD52.6mn in 2007. The return on unrestricted investment accounts witnessed an increase of 23.3% to reach BD15.6mn in 2007 as compared to BD12.7mn recorded in the previous year. Due to the net profit growth, the bank's return ratios have improved during 2007. Return on average assets increased from 3.4% in 2006 to 4.6% in 2007. Also return on average equity increased from 17.8% in 2006 to 19.1% in 2007.In the recently announced interim results, the total operating income of the bank recorded a healthy Y-o-Y growth of 61.1% in 1Q-2008 to reach BD17.9mn. Income from Islamic finances increased by 16.6% to BD8.5mn in 1Q-2008 as compared to BD7.3mn achieved in 1Q-2007. However, the main driver for growth was the investment income of the bank which increased substantially and registered an increase of 101.3%, from BD2.9mn in 1Q-2007 to BD5.9mn at the end of 1Q-2008.

The earnings of the bank continued to surge with the bank reporting net profit for 1Q-2008 at BD10.1mn, an impressive growth of 92.3% over BD5.2mn reported for 1Q-2007.Investment income of the bank also registered a significant increase of 112.0%, from BD5.5mn in 2006 to BD11.7mn in 2007. It is important to note that this has come on the back of Y-o-Y growth of 146.6% achieved in the previous year. This has come mainly due to the bank realizing attractive returns on its various investment activities. As a result, the operating income of the bank grew at a CAGR of 79.2% during the period 2004-2007, from BD9.1mn in 2004 to BD52.6mn in 2007.

The near term outlook of the bank remains positive with growing customer base wanting to transact their financial activities in accordance with the Islamic Shari'a principles and the bank's image of being a "pure-play Islamic Bank". Along with this, the bank's heightened emphasis on real estate activity in the GCC region and also expansion of its network of branches further with the likely setting up of six financial malls in the next two years will be the key drivers for future growth.

Investment IndicatorPrice (May 18, 2008) - fils Shares in issue (mn) Market Cap - BD mn 52 - week price range 515 659.3 339.5 274 - 539filsYear Operating Revenues Operating Profit Net Profit EPS BVPS ROAA ROAE P/E P/BV (BD mn) (BD mn) (BD mn) (fils) (fils) (%) (%) (x) (x)2009F 82.0 59.3 44.7 68 340 4.8% 21.0% 7.6 1.52008F 69.0 50.4 37.2 56 306 4.9% 19.1% 9.1 1.72007A 52.6 37.0 25.0 64 311 4.6% 19.1% 7.3 1.52006A 34.2 21.6 13.1 41 264 3.4% 17.8% 9.9 1.5Source: Global Research

[c] 2008 Al Bawaba (www.albawaba.com)