Jordan Commercial Bank (JOGB) Yearly Equity Valuation Report 27 November 2008 Jordan Commercial Bank (JOGB) previously known as Jordan Gulf Bank was established in 1977 as a public shareholding company to carry out commercial banking activities and was renamed during the restructuring process undergone in 2004. The bank provides conventional banking services such as accepting deposits and extending loans to retail and corporate clients. Among other unconventional services provided by the bank are insurance products. JOGB has vast distribution channels consisting of 28 local branches and three branches in Palestine. Mean Recommendation Risk Profile Technical Evaluation Fair Share Value BUY MODERATE SIDEWAYS JD 1.900 * Chart is extracted from Amman Stock Exchange web site Banking Key Ratios Profitability Ratios (Pre-Provisioned Income – Preferred Dividends) / (Total Banking Operational Assets) (Net Income from Operations + Depreciation and Amortization) / (Total Banking Operational Assets) (Net Interest Income / Total Banking Operational Assets) Management Efficiency Yearly Provisions Expense / Pre-Provision Profits Yearly Provisions Expense/ (Common Equity + Loan Loss Reserves) Cost Ratio Non-Interest Expense / Total Revenues Working Capital Management (Banks Deposits + Customer’s Deposits) / Loans Equity Coverage Ratio Common Equity / Total Banking Operational Assets Growth Growth Rate (GR) Actual Growth Economic Value Added (EVA): GR - Actual Growth 2003 7.04% 2004 5.66% Five Year Market Chart 2005 8.40% 2006 4.54% 2007 5.26% -0.41% 4.89% 2003 30.97% -5.92% 2003 125.1% 2003 1.39 2003 -36.83% 2003 3.22% -55.10% 58.32% 3.21% 2.46% 2004 -12.99% -3.02% 2004 74.9% 2004 1.52 2004 24.30% 2004 -215.81% 88.52% -304.32% 4.70% 2.92% 2005 5.40% 2.24% 2005 49.2% 2005 1.22 2005 20.22% 2005 13.54% 64.66% -51.12% 2.79% 3.29% 2006 1.58% 0.46% 2006 57.4% 2006 1.36 2006 15.76% 2006 2.74% 41.32% -38.58% 2.96% 3.36% 2007 1.60% 0.54% 2007 51.8% 2007 1.26 2007 15.64% 2007 -1.15% 7.03% -8.18% Profitability: JOGB's profitability is outstanding when compared to other local commercial banks, as JOGB achieved a profitability ratio of 5.26% in 2007. The "average pre-provisioned income to total assets" amounted to 6.07% over the past three fiscal years. In 2007, JOGB's "net income to total assets" ratio amounted to 2.96%, also, JOGB has managed to achieve an average of 3.48% for the same period. "Net interest income to total assets" ratio was found 3.36% in 2007 and the bank has managed to maintain relatively the same ratio as an average over the analyzed time series. Management Efficiency: JOGB's provisioning expense management ratios are found outstanding, "yearly provisions expense to preprovisioned profits" amounted to 1.6% and " yearly provisions expense to common equity and loan loss reserves" amounted to 0.54% in the year 2007. These ratios imply an increased awareness on the management's part towards the quality of credit facilities granted and provisions expense management. Another positive indicator is illustrated when measuring "suspended interest revenue plus nonworking loan provisions to JOGB's loan portfolio" ratio that amounted to 10% in 2007 which is found on a moderate risk scale. Costs: JOGB's 2007 costs were found consistent with the industry cost benchmark (45%-55%), the past three year's "non-interest expense to total revenues average" resulted in 52% which is considered reasonable. Working Capital Management: JOGB's "deposits to loans" multiple amounted to 1.26 times in the year 2007 which means that the bank adopted an aggressive lending strategy yet maintained a low provisional expense on its income statement. However, further increase in loan market share acquisition may affect the bank's liquidity especially in a declining economy. Equity Coverage: JOGB's "common equity to total assets" was found 15.64% in 2007, while JOGB has managed to maintain an average of 17.21% "equity to assets" in the past three years. JOGB is properly capitalized with regards to Bank of International Settlements (BIS I) minimum capital adequacy proposals, and it exceeds CBJ's capital requirements of 12%, moreover, if cash is taken out of JOGB's assets then this ratio will increase to 18%. JOGB's "Average Return on Equity" was found 16.81% for the past three years. 32.1% Growth: JOGB had a substantial negative average EVA growth rate at -32 1% due to persistent restructuring and capital injection versus prospected business growth achieved through existing operational assets. This negative result does not affect the fact that JOGB has been deploying strong and fruitful strategies in the last 3 operational years that significantly strengthened JOGB's competitive position in the market. Fair Share Value JOGB's Earning Per Share (EPS) ratios were found average when compared to its peers of local commercial banks, JOGB has managed to achieve an EPS of JD 0.196 in 2007 and maintained an EPS of JD 0.214 on average basis. Price / Earnings multiple reveals that JOGB's share can recover its market value in 12 years which is considered a short recovery period. As for Enterprise Value (EV) Multiples, EV / EBIT reveals that JOGB's EBIT covers EV in 25 years as stated in 2007 which is a long period due to the fact that the bank has witnessed an increase in market capitalization, increase in debt and a shrinking cash account. Also, EV / Revenues indicates the same pattern of the previous multiple, pointing out that gross revenue covers JOGB's EV in 12 years as stated in 2007. Overall, JOGB's share has a moderate risk profile (due to the 10% non-working loans to total credit portfolio ratio for the year 2007), the fair value of JOGB's share is found reasonable on JD 1.900 market price based on 2007 number of shares out-standing. Net Discounted Cash Flows (NDCF) have indicated that JOGB's share is worth JD 1.902 on 63.25 Million shares outstanding by 31 December 2007. Capital Asset Pricing Model (CAPM) shows that JOGB's share is worth a lower value and Enterprise Value (EV) shows that the share is reasonable on JD 5.183. Since the market price of JOGB's share is JD 2.01 on 27 November 2008 (report production date), this report's recommendation is BUY due to the fact that JOGB's share still has potential to grow in market value terms. However, Investors should consider JOGB's restructuring process riskiness nature along with the sufficiency of the bank's retained earnings to fulfill capitalization requirements. EPS P/E Total Number of Shares Outstanding Market Capitalization Enterprise Value per Share Net Discounted Cash Flow (NDCF) per Share Capital Asset Pricing Model (CAPM) Enterprise Value / (EBIT per Share) Enterprise Value / (Revenues per Share) -71 18 43 11 18 9 26 11 -0.029 -7 40,000,000 8,400,000 3.122 0.092 17 40,000,000 63,600,000 2.853 0.260 10 50,000,000 128,500,000 4.937 0.186 9 57,500,000 98,900,000 4.226 0.196 12 63,250,000 154,330,000 5.183 1.902 0.822 25 12 *Issuers of this report will not be held accountable or be liable of any discretionary acts undertaken by investors maintaining positions in the share reviewed herein prior or after the production date of this report. This report recommendations will only be serving long term investment objectives and will not be a useful tool for stock speculation. Moreover, this report can not facilitate institutional management review purposes use nor will serve corporate and institutional client valuation objectives. Some of the values presented herein maybe considered extreme case scenarios that individual investors (not institutional investors) may need to consider. **Note that the time series being analyzed excludes the years (2003-2004) as they both represent a different independent statutory body previously known as Jordan Gulf Bank that was run by a different management while JOGB's first operational year was 2005. ***Note that JOGB has recently raised its capital to reach JD 69.575 million ( JD 1 per share par value) by capitalizing retained earnings and premium account, the new total number of shares outstanding is expected to further dilute the fair value of the share having had the remaining assumptions constant. © Tuhama Consultants LLC. Methodology Description Three pricing methodologies have been used in this report to indicate a fair market price among which are Net Discounted Cash Flows (NDCF), Capital Pricing Model (CAPM) and Enterprise Value (EV). NDCF have been based on the firm's free cash flows, CAPM have used a past five years base price and applied a regression analysis in order to value the share reviewed in this report, EV per share have been adjusted to total number of shares outstanding. Some of the banking ratios listed above apply Moody's Investor Services banking ratios methodology. Recommendations Explanations Buy: Means that the share under revision in this report is under priced and a valid up side share price trend opportunity do exist and an investor (Long Term Investor) should buy the share for dividends and / or price appreciation objectives. However, a buy recommendation do not apply for an investors maintaining positions in the share prior of report production date, investors should hold or dispose of previous positions on their sole discretion. Sell: Means that the share under revision in this report is overpriced and a valid down side share price trend opportunity do exist and an investor (Long Term Investor) that holds a position in the share reviewed in this report should sell the share to realize gains or stop losses depending on his / her position. If an investor is not maintaining a position in this share then he / she should avoid buying the share reviewed until the share rebounds to its fair value. Hold: Means that share maybe close or far from fair value depending on the scenario, there are two scenarios in this case: 1. If the share is close to fair value: then an investor (Long Term Investor) holding no position in the share should wait until price gets closer to fair value in order to buy the share. If an investor is maintaining a position in the share then holding or disposing of the share is on the investor's sole discretion. 2. If the share is far from fair value: then an investor with no position should avoid buying the share until it rebounds to fair value. If the investor maintains a position in the share then he / she hold or dispose of the position on his / her sole discretion. Prepared by: Samer Akkawi - MA. Fin. & Inv. © Tuhama Consultants LLC. Disclaimers This material is based upon information that is reliable, but neither Tuhama nor its executives warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither Tuhama nor its executives are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their p y , p y issue. This report should not form the basis of an investment decision made by an individual, company and / or institution.
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