Executive Summary Established in 1957 and headquartered in Riyadh, Al Rajhi Bank is now the second largest commercial bank in the GCC, in terms of market capitalisation, and is the world’s largest Islamic bank with total assets worth SAR 162.21 billion. It is primarily engaged in the commercial banking operations in accordance to the Islamic Shariah principles. The bank provides these services through its six regional offices along with a network of over 500 branches, 2,318 ATMs & 17,209 POS terminals across Saudi Arabia, along with 19 branches in Malaysia. The bank’s net income rose 8.1% to SAR 1.73 billion in 1Q09 During 1Q09, Al Rajhi Bank’s net income increased 8.1% to SAR 1.73 billion in 1Q09 on account of higher operating income. The bank’s total operating income grew 10.3% to SAR 2.74 billion, as net investment income increase 12.5% to SAR 2.28 billion. The rise in net investment income was attributable to the 16.4% YoY jump in investment income to SAR 2.53 billion in 1Q09 on growing investment assets. However, the bank’s annualised yield on average investment assets declined 51 bps to 7.1%, while the annualised cost of average deposits and financing increased 21 bps to 0.77%. As a result, annualised net spread and net income from investment margin dropped 73 bps and 71 bps to 6.3% and 6.4%, respectively. On the other hand, non-investment income rose a marginal 0.3% to SAR 0.46 billion mainly led by a 10.3% increase in fees from banking services (net). On the expenses side, its operating expenses increased 3.5% to SAR 0.72 billion, while taking into account the recent financial crisis, the bank has increased its impairment charge for investments & others by 54.3% to SAR 0.29 billion. Outlook and Valuation Even amidst a negative assets growth in banks across the GCC, Saudi banking assets have reported a marginal increase of 1.7% QoQ to SAR 1,323.93 billion, thus reflecting strong fundamentals within the country’s banking sector. However, crumbling financial markets raised concerns over the quality of investments and increased impairment losses. On the positive, the central bank has taken many initiatives to boost liquidity in the system. Through its wide presence in Saudi Arabia, Al Rajhi Bank looks better positioned to reach a larger customer-base than its peers. Following its organic expansion plan, the bank has opened 6 new branches in 1Q09. Moreover, the bank weathered the financial turmoil better than its peers as its bottom-line grew 8.1% in 1Q09 thereby indicating the sound fundamentals. Meanwhile, Al Rajhi Bank’s stock is trading at a P/B multiple of 3.98x at 2008 BVPS, far above the industry average of 1.81x, that makes the stock less attractive. Currently, it is trading at a P/E multiple of 15.22x and 13.70x on 2009E and 2010E earnings, and at a P/B multiple of 3.48x and 3.04x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has registered an YTD gain of 24.1%, in line with the Saudi market’s rebound which has seen the Tadawul rise 25.6%. Considering the above factors, we arrive at a price target of SAR 74.37, which exhibits an upside of 3.6% from its closing price of SAR 71.75 (as on June 02, 2009). Accordingly, we initiate our coverage with a NEUTRAL recommendation on Al Rajhi Bank.

SAR Millions 2007A 2008A 2009E 2010E 2011E Total Operating Income 9,321.10 10,575.27 11,242.79 12,241.95 13,717.57 % Change YoY -2.0 13.5 6.3 8.9 12.1 Net Profit 6,449.66 6,524.60 7,071.80 7,855.09 9,166.97 % Change YoY -11.7 1.2 8.4 11.1 16.7 Net Spread (%) 7.6 6.6 6.2 6.5 6.7 Net Investment income Margin (%) 7.7 6.7 6.3 6.6 6.8 Adj. EPS (SAR) 4.30 4.35 4.71 5.24 6.11 ROAE (%) 29.5 25.8 24.4 23.7 24.2

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Al Rajhi Bank (1120.SE)

CMP SAR 71.75 Target SAR 74.37 Potential Downside 3.6%

MSCI GCC Index 409.74 Tadawul All Share Index 6,031.46

Key Stock Data Sector Banking Reuters Code 1120.SE Bloomberg Code RJHI AB Equity Net outstanding Shares (bn) 1.500 Market Cap (SAR bn) 107.625 Market Cap (USD bn) 28.731 Avg. 12m Vol. (mn) 1.975 Volatility (30 day) 30.895 Volatility (180 day) 56.968

Stock Performance (%) 52 week high / low (SAR) 93.00 / 41.70

1M 3M 12M Absolute (%) -1.1 54.1 -20.3

Relative (%) -7 7 10 3 25 5

Shareholding Pattern (%) General Organization for Social Insurance - Saudi Arabia 9.90 Private 44.10 Public 46.00

Al Rajhi Bank and Tadawul

NEUTRAL

Source: Taib Research Expanding its international presence, Al Rajhi Bank stepped into the Malaysian market in 2006 and was the first foreign bank to be awarded a full-banking license by the Bank Negara Malaysia. This was the bank’s first venture into the South East Asian banking market, through which the core Islamic banking products were introduced to the Asian markets. In May 2009, Fitch Ratings reaffirmed the bank’s long-term issuer default rating (IDR) at ‘A+’, short-term IDR at ‘F1’ and individual rating at ‘B/C’. Its support rating at ‘1’ and support rating floor at ‘A+’ with a ‘Stable’ outlook.

Business Model

Background Founded in 1957, Al Rajhi Bank is the largest Islamic bank in the world with total assets of SAR 162.21 billion (USD 43.0 billion) and a paid up capital of SAR 15.00 billion (USD 4.0 billion). During 1978, various individual establishments under the name of Al Rajhi merged into the umbrella of ‘Al Rajhi Trading & Exchange Corporation’. In 1987, it was converted into a joint stock company and renamed to Al-Rajhi Banking & Investment Corp. Again in 2006, the bank’s name was changed to Al Rajhi Bank. Headquartered in Riyadh, Al Rajhi Bank has six regional offices and has a network of more than 500 branches, 2,318 ATMs & 17,209 point-of-sale (POS) terminals across Saudi Arabia and 19 branches in Malaysia. The company is primarily engaged in commercial banking operations in accordance to the Islamic Shariah principles.

Al Rajhi is the largest Islamic banks in the world Board of Directors • Chaired by - Sulaiman Bin Abdul Aziz Al Rajhi

• Abdullah Bin Sulaiman Al Rajhi

• Sulaiman Bin Saleh Al Rajhi

• Abdullah Bin Abdul Aziz Al Rajhi

• Salah Bin Ali Aba Al-Khail • Mohammed Bin Ibrahim Al Issa

• Mohammed Bin Abdul Aziz Al Rajhi

• Mohamed Bin Abdullah Al Rajhi

• Ali Bin Ahmed Al Shiddi • Saeed Bin Omar Al Esayi • Mohammed Bin Othman Al Bishr

Source: Al Rajhi Bank

Al Rajhi Bank(Operating Divisions)

Personal Division Business Division

Accounts Sub-division

• Current Accounts

• Affluent Accounts

• Private Accounts

Financing Solutions

Sub-division • Car finance • Real estate

finance • Personal

finance • Credit cards

Treasury Sub-division

• Treasury

Corporate Banking

Sub-division • Cash

management • Finance

products • SME • Trade finance

products

Growing organically by opening new branches AL RAJHI

BANK

Al Rajhi Bank is primarily engaged in providing commercial Isalmic banking services

The bank has entered into advisory and brokerage business through its subsidiary

Expanding into Asian region through setting up subsidiaries

Subsidiaries of Al Rajhi Al Rajhi has a number of subsidiaries.

SUBSIDIARIES COUNTRY % SHARE

Al Rajhi Banking & Investment Corporation BHD - Malaysia Malaysia 100.00 Al Rajhi Company for Development Limited Saudi Arabia 99.00 Al Rajhi Financial Services Company Saudi Arabia 99.00

Source: Al Rajhi Bank Industry Scenario In the wake of the recent financial turmoil and subsequent economic slowdown, the International Monetary Fund (IMF) expects the global economy to grow a negative 1.3% for 2009 after witnessing an estimated growth of 3.2% in 2008 and 5.2% in 2007. However, the trend is likely to reverse with the growth rebounding to 1.9% in 2010. The Middle East region’s GDP registered a healthy real growth rate of 5.7% and 6.4% during 2006 and 2007; however, it is likely to slow from 5.9% in 2008 to 2.5% in 2009. The GCC countries are expected to grow at an average 4.5% over the next two years. Rapid credit growth and increased leverage witnessed in a period of booming economy has in turn exposed the GCC banks to a global and domestic downturn. At the same time, weakening real estate sector, which was a front-runner in scripting the growth for banks has become a key concern. On the other hand, exposure to investments has led to huge impairment losses and write-downs for the banking sector. As per preliminary estimates, Saudi Arabia’s nominal GDP advanced 22.0% YoY to reach SAR 1,753.50 billion in 2008 from SAR 1,437.68 billion in 2007, driven by soaring oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel in 2008 from USD 67.6 per barrel in 2007. However, in light of the current financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts negative real growth of 0.9% in 2009. However, a reversal in the trend is expected as the economic growth is likely to be around 2.9% in 2010.

Saudi Arabia's Nominal GDP

0

400

800

1,200

1,600

2,000

2004 2005 2006 2007 2008E0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Nominal GDP (SAR Billions) Nominal GDP Grow th (%)

Contribution to GDP (%)

0.0%

14.0%

28.0%

42.0%

56.0%

70.0%

2004 2005 2006 2007 2008E

Oil to GDP Non-oil to GDP

Source: SAMA, Central Department of Statistics & Information During 2008, the country’s money supply (M3) rose 17.6% YoY to SAR 929.13 billion in 2008 on rising time and savings deposits mainly during the last two-quarters of 2008. Similarly, the total banking assets follows the same trend over the period. Moreover, during 1Q09, M3 continued the growth trend and increased 3.9% to SAR 965.60 billion over the last quarter helped by a 10.1% increase in demand deposits, whereas total banking assets grew at a slower rate of 1.7%. Simultaneously, growth in claims to the private sector deteriorated to a negative 0.9% reflecting the impact of the financial crisis.

Q-over-Q Growth in Money Supply (M3) and Total Banking Assets

0.0%

2.5%

5.0%

7.5%

10.0%

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Money Supply (M3) Total Assets

Source: SAMA

GCC countries are expected to grow at an average 4.5% over the next two years GDP grew 22% on higher oil prices Saudi’s money supply (M3) increased 4% in 1Q09 due to a 10% spurt in demand deposits

The banking sector in Saudi Arabia comprises of local and foreign banks, which provide both conventional as well as Islamic banking services. The sector’s aggregate total assets grew at a healthy 5-year CAGR of 19.0% reaching SAR 1,302.27 billion during 2003-08 - increasing 21.1% during 2008. The reported growth was on account of a healthy expansion in credit to the private sector, which grew at a CAGR of 26.3% to SAR 734.56 billion over 2003-08. Overall, the sector’s total credit rose 29.0% YoY to SAR 997.62 billion in 2008, higher than the 5-year CAGR of 19.1% over 2003-08. On the other hand, total deposits grew 17.9% to SAR 846.12 billion, while the 5-year CAGR stood at 18.5% over 2003-08. The credit to deposits ratio also increased in 2008 to reach 117.9% from 107.8%, a year earlier in line with the growth in the credit in a booming economy. However, due to the current economic downturn banks have been cautious in extending credit, which has resulted in a decline in credit to deposit ratio to 110.4% in 1Q09.

Credit to Deposits Ratio

100%

106%

112%

118%

124%

130%

2003 2004 2005 2006 2007 2008 1Q09

Source: SAMA The country’s banking penetration has improved over the last few years. The penetration level, total assets to GDP ratio, stood at 74.3% in 2008 as against 67.8% in 2003, total deposits to GDP ratio advanced to 48.3% in 2008 over the last 6 years and the ratio of credit deployment to GDP increased to 56.9% in 2008 from 51.8% in 2003. Moreover, population to branch ratio improved to 17,594 people per branch in 2008 from 17,918 people per branch in 2007, while population to ATMs has also bettered to 2,759 per ATM from 3,214 per ATM in 2007.

Banking Penetration Level - 2008

0%

16%

32%

48%

64%

80%

2003 2004 2005 2006 2007 2008

Nominal GDP Grow th A sset to GDPDepos it to GDP Credit to GDP

Source: SAMA The ongoing global financial crisis has limited the sector’s foreign assets growth, which increased 4.2% YoY to SAR 153.99 billion in 2008 as a result of decline in investments made abroad. On the other hand, the bank’s foreign liabilities rose 6.9% to SAR 112.47 billion, owing to higher outstanding amount to branches abroad and others. Consequently, net foreign assets declined 2.3% to SAR 41.52 billion in 2008. However, in 1Q09 foreign assets witnessed a sequential 5.0% growth to SAR 161.76 billion led by higher investments abroad and due from banks abroad, while foreign liabilities declined 23.8% to SAR 85.66 billion on decrease in due to branches abroad. As a result, net foreign assets reported a sequential growth of 83.3% to SAR 76.10 billion. As the liquidity crunch intensified during 2H08, the banks reduced their balances with the Saudi Arabian Monetary Agency (SAMA), in line with the reduced reserve requirements. As a result, cash & deposits with the central bank declined 12.6% to SAR 86.16 billion in 2008, due to a 30.7% decrease in other deposits with the SAMA to SAR 41.12 billion.

Cautious approach in extending credit led to a decline in credit to deposit to 110.4% in 1Q09 Significant improvement in banking penetration levels Decline in foreign liabilities contributed to an 83.3% sequential growth in net foreign assets

9.1% 7.3% 21.4% 33.9% 3.5% 24.7%

10.7% 7.3% 23.7% 38.8% 5.1% 14.4%

0% 20% 40% 60% 80% 100%

FY 2007

FY 2008

Banks Credit to Resident by Economic Activity

Manufacturing and Processing Buiding and ConstructionCommerce MiscellaneousTransport and Communications Others

Source: SAMA Further, advancing at a healthy CAGR of 3.7% over 2003-08, total population in Saudi Arabia is expected to reach 26.42 million in 2008, owing to 9.0% rise in population in 2008 as against 2.4% increase in 2007. In tandem, the rising population along with increasing per capita GDP provides immense growth potential for the retail banking business.

Unemployment and Per capita GDP

0

15

30

45

60

75

2004 2005 2006 2007 2008E4.0%

4.6%

5.2%

5.8%

6.4%

7.0%

Per Capita Nominal GDP ('000) Unemployment rate

Source: SAMA Over the last few years, Islamic banking has gained immense popularity both in the Islamic and western countries. This popularity is driven by the benefits offered by Islamic banking and is also because it has taken banking services to the population which otherwise refrained from availing banking services due to religious constraints. Financial institutions around the globe are trying to keep pace with the growing demand for Shariah-compliant products and services. The demand from the world’s 1.3 billion Muslims for investments that comply with Islamic law range between USD 700 billion and USD 1 trillion, with some estimates seeing assets growing to USD 1.6 trillion by 2012. The value of Shariah-compliant assets in the GCC amounts to more than USD 262 billion.

Population grew at a CAGR of 3.7% to reach 26.42 million Value of Shariah-compliant assets in the GCC amounts to around USD 262 billion

-75.0%

-50.0%

-25.0%

0.0%

25.0%

50.0%

75.0%

100.0%

Total Income Net Profit Total Assets

GCC Islamic Banks Performance (%) 2008

Al Rajhi Bank Abu Dhabi Islamic Bank Albaraka Banking Group Bank Al BiladBank Al Jazira Dubai Islamic Bank Emirates Islamic Bank Kuw ait Finance HouseMasraf Al Rayan Qatar Islamic Bank

Industry Average

Economic downturn negatively impacts the performance of Islamic banks; Sukuks follow the declining path Government efforts aimed at increasing liquidity in the system

According to Samba Financial Group, total projects worth an estimated USD 600 billion have been announced during the past 2 years and about USD 26 billion worth of industrial infrastructure projects have either been cancelled or put on hold. Amidst the financial turmoil, the banking sector is witnessing loss on investments and curtailed loan growth. Apart from its core business of lending and deposits, non-interest operations have also been severely hit. Consequently, banks have become more cautious towards lending to the real estate sector. The impact of the crisis was more severe towards the latter part of 2008 with most of the banks reporting negative earnings during 4Q08 as decline in the quality of assets called for higher provisioning, and huge impairments have been booked on account of investment losses. The combined profits of all the banks contracted 12.8% to SAR 26.3 billion in 2008 from SAR 30.2 billion in 2007. Further, according to the central bank’s regulations, banks have to maintain a credit to deposit ratio of 85%, thus implying further reduction in credit availability. Islamic banks are perceived to be relatively less exposed to assets of lower credit rating than their conventional counterparts. Also, rising demand and increasing popularity of Shariah-complaint products has contributed to the growth of Islamic finance. There has been a rise in demand for Shariah-based products from various infrastructure projects including petrochemical complexes, housing and construction projects. Despite this, the ongoing economic recession, which has led to a severe liquidity crunch across sectors, especially the construction and real estate, is likely to significantly impact the performance of the sector. Simultaneously, competition is likely to intensify as commercial banks are venturing into Islamic financing. In addition to this, the global Sukuk market suffered a double blow with controversy looming large on their compliance to the Shariah principles and a decline due to the liquidity crisis. There has been a decline in the number of Sukuks issued in 4Q08 to USD 584 million, lowest since 4Q02. Overall, the Sukuk issued in 2008 was down 66.2% to USD 15.77 billion, the first YoY decline since 2000. Whereas, Sukuk issuance in the GCC and South East Asia region witnessed a fall of 51% and 76% to USD 9.06 billion and USD 6.57 billion, respectively.

Value of Sukuk (USD billion)

(20)

(10)

-

10

20

30

40

50

2005 2006 2007 2008-100%

-50%

0%

50%

100%

150%

200%

Value % increase/decrease

Source: Islamic Finance Information Service On a positive note, Moody’s supported its A1 ratings underlined by economic strength along with financial stability of the government. Also, as per Capital Intelligence, the outlook on the Saudi Arabia’s ‘AA-’ sovereign rating remains stable, supported by large net asset position of the government, a strong external balance sheet and a sound banking system. However, at the same time, risks to sovereign creditworthiness from the banking and corporate sectors have increased as a result of the global crisis and the macroeconomic performance is likley to weaken in 2009. Further, in order to shore up confidence in the sector and alleviate liquidity strains, the government injected USD 3 billion into the banking system to finance private sector projects and reduce liquidity crisis. Further, in response to the periodic cuts in the US Federal reserve rates, the Saudi central bank SAMA has consistently lowered its repo rate since October 12, 2008, from 5.5% to the present level of 2.0% in order to boost liquidity in the system. In contrast, the central bank has considerably reduced its reverse repo rate since January 23, 2008, from 4.0% to 0.5% as of April 14, 2009. It has twice reduced the reserve requirements on demand deposits to 7%. In addition to this, the banks have also been resorting to branch closures and layoffs in order to cut down on expenses and boost profitability. The restoration work by the government through its refinancing efforts promises a ray of hope, however, the effectiveness of the initiatives will depend on the how cautiously and diligently the banks follow the norms aimed at making their fundamentals sound. Moreover, over the last few months, regional capital markets have performed a recovery act with a gain of around USD 108 billion on the back of a rebound in the global financial markets. Meanwhile, the recent spurt in oil prices of about 50% over the last five months reaching nearly USD 68 per barrel may take the Gulf economies into a comfort zone than earlier. Though these short-term gains project some positive signs, it is still uncertain whether the econmy will achieve any positive real growth this year.

Financial Performance – FY08

Operating income During 2008, despite the liquidity turmoil and economic slowdown in the Saudi banking sector, Al Rajhi Bank reported an impressive 13.5% YoY increase in its total operating income to SAR 10.58 billion from SAR 9.32 billion in 2007, owing to its high capital base and strong market presence. The increase was far more than the peer group’s average YoY increase of 5.3%. As a result of 9.8% increase in total income from investments, the bank’s net income from investments rose 10.0% to SAR 8.49 billion in 2008. The increase was mainly supported by the rise in income from murabaha, mutajara and instalment sale. On the other hand, total income distributed rose 7.6% to SAR 0.93 billion from SAR 0.86 billion due to a 9.0% rise in income paid to customers and banks on time investments to SAR 0.82 billion, countered by a 2.3% decline in income paid to syndicated murabaha financing from banks. At the non-investment income side, in contrast to the peer group’s average YoY decline of 0.6%, the bank’s non-sharing income rose 30.1% YoY to SAR 2.08 billion in 2008. Al Rajhi Bank’s net fees from banking services rose 26.6% YoY to SAR 1.24 billion, while net exchange income increased a marginal 2.7% to SAR 0.48 billion in 2008.

17.7%

70.7%

5.0%6.5%

22.6%

69.5%

3.1%4.7%

32.7%

63.8%

2.3%1.3%

32.4%

60.9%

1.6%5.1%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008

Composition of Total Income from Investments

Mutajara Installmet sale Istisnaa Murabaha

Source: Al Rajhi Bank Net spread and net income from investment margin In line with softening interest rate environment in Saudi Arabia (in response to the periodic cuts in the US Federal Reserve rates) along with time-based deposits book clearly pressurised the bank’s net spread and commission margins. Starting October 30, 2008, the SAMA lowered its repo rate by an overall 350 bps to 2.0%, while reducing its reverse repo rate by an overall 350 bps to 0.5%. In tandem, a considerable 111 bps decline in yield on average investment assets to 7.5% outweighed the advantage of 16 bps decrease in cost of average deposits and financing to 0.8%. As a result, both net spread and net investment income margin, for the bank, dropped 95 bps and 98 bps to 6.6% and 6.7%, respectively. Operating Expenses On the other hand, rise in operating expenses deteriorated the cost-to-income ratio by 21 bps to 26.2% in 2008, well above the four-year average of 23.3% over 2005-2008. Salaries & employees-related expenses rose 13.6% YoY to SAR 1.65 billion, while other general & administrative expenses advanced 6.4% to SAR 0.60 billion in 2008. Furthermore, rent & premises related expenses and depreciation & amortisation charges increased 16.0% and 33.1% to SAR 0.14 billion and SAR 0.38 billion, respectively. Provisions and Impairments The crumbling in capital markets and global economic slowdown has raised serious doubts on the quality of assets and future of investments. This has forced various companies to create higher provisions on its assets for the future contingencies and to recognise impairment losses. In tandem, Al Rajhi Bank increased its impairment charge for investments and other by nearly three-fold to SAR 1.27 billion from SAR 0.44 billion in 2007. However, its non performing investments declined 42.5% to SAR 1.80 billion from SAR 3.13 billion in the previous year. As a result, non-performing investments to gross investments ratio fell to 1.2% YoY from 2.9%. Net Profit Driven by increased operating income, the bank’s net income rose a marginal 1.2% to SAR 6.52 billion from SAR 6.50 billion that was partially offset by a 41.1% increase in expenses. The increase was in contrast to the industry’s average net loss of 1.6% in 2008. In-line with this, adjusted EPS reached SAR 4.35 from SAR 4.30 last year.

Total operating income advanced 14% to SAR 10.6 billion in 2008 Net spreads and net investment income margins fell 95 bps and 98 bps in 2008, respectively Net income improves a marginal 1% to SAR 6.5 billion in 2008

0

2,120

4,240

6,360

8,480

10,600

2006 2007 2008 1Q08 1Q09

Total Operating Income (SAR Millions)

0

1320

2640

3960

5280

6600

2006 2007 2008 1Q08 1Q09

Net Profit (SAR Millions)

0

30,000

60,000

90,000

120,000

150,000

2006 2007 2008 1Q08 1Q09

Overall Business Volume (SAR Millions)

Total Investments, Net Customer deposits

0

34,000

68,000

102,000

136,000

170,000

2006 2007 2008 1Q08 1Q09

Total Assets (SAR Millions)

Return on Investment Ratios (ROAA and ROAE)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2006 2007 2008 1Q08 1Q09

ROAA ROAE

Interest Margins

6.0%

6.4%

6.8%

7.2%

7.6%

8.0%

2006 2007 2008 1Q08 1Q09

Net Spread Net Interest Margin

Chart Gallery

Size of the Company

The salient features of the balance sheet are as follows:

Al Rajhi Bank’s total investments (net) soared 16.6% to SAR 143.12 billion in 1Q09 compared to SAR 122.70 billion in 1Q08 mainly on account of rise across investments except Istisnaa. Property and equipment increased 10.9% YoY to SAR 2.97 billion, while its cash position improved 5.6% to SAR 3.28 billion in 1Q08.

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 1Q08 1Q09

Composition of Total Investments

Mutajara Installment Sale Istisnaa Murabaha Other

0.0

13.0

26.0

39.0

52.0

65.0

Mutajara InstallmentSale

Istisnaa Murabaha Other

Total Investments, Net (SAR Billions)

2005 2006 2007 2008 1Q08 1Q09

However, balances with SAMA declined 12.1% to SAR 7.53 billion, whereas customer debit

current accounts (net) plunged 49.4% to SAR 0.41 billion from SAR 0.82 billion in 1Q08. Subsequently, total assets grew 13.4% to SAR 162.21 billion from SAR 143.05 billion during last year.

Customer deposits swelled 18.2% to SAR 119.88 billion in 1Q09 from SAR 101.44 billion, while

due to banks rose 13.2% YoY to SAR 4.61 billion.

On the other hand, other customer accounts (including margins on letter of credit, third party funds, certified checks and transfers) fell 14.5% to SAR 3.21 billion, whereas other liabilities declined 10.9% to SAR 7.06 billion in 1Q09. As a result, total liabilities plummeted 14.8% to SAR 136.63 billion from SAR 119.06 billion in 1Q08.

Shareholders’ equity increased 6.7% to SAR 25.58 billion from SAR 23.98 billlion on account of

increased statutory reserves and retained earnings. The bank’s retained earnings increased 15.7% to SAR 1.85 billion from SAR 1.60 billion owing to higher net income. Statutory reserves jumped 23.0% YoY to SAR 8.72 billion in 1Q09. Conversely, the contribution of shareholders’ equity in the total balance sheet dipped to 15.8% in 1Q09 from 16.8% in the same quarter of the previous year.

Financial Performance Analysis – 1Q09 During 1Q09, Al Rajhi Bank’s total operating income witnessed a growth of 10.3% to SAR 2.74 billion led by a 12.5% increase in net investment income. The bank’s annualised yield on average investment assets declined 51 bps to 7.1%, while annualised cost of average deposits and financing increased 21 bps to 0.77%. As a result, annualised net spread and net income from investment margin dropped 73 bps and 71 bps to 6.3% and 6.4%, respectively. However, total investment income soared 16.4% to SAR 2.53 billion from SAR 2.17 billion owing to increased income across investments except Istisnaa. Consequently, net investment income was SAR 2.28 billion, up 12.5% from SAR 2.03 billion in 1Q08 driven by increased income on higher assets. On the other hand, non-sharing income rose a marginal 0.3% to SAR 0.3% to SAR 0.46 billion, led by a 10.3% increase in fees from banking services (net) to SAR 0.31 billion in 1Q09. On the expenses side, its operating expenses increased 3.5% to SAR 0.72 billion on account of a 6.4% increase in depreciation & amortisation and 9.8% rise in other general & administrative expenses. Meanwhile, taking into account the recent financial crisis, the bank has increased its impairment charge for investments & other by 54.3% to SAR 0.29 billion as against SAR 0.19 billion during the same period last year. Subsequently, its net income advanced 8.1% to SAR 1.73 billion in 1Q09 from SAR 1.60 billion in 1Q08. The bank’s adjusted annualised EPS was reported at SAR 4.62 as against SAR 4.27 in the prior’s year quarter.

Despite the recent financial turmoil, operating income grew 10% to SAR 2.7 billion in 1Q09 Adjusted annualised EPS was SAR 4.62 in 1Q09 as against SAR 4.27 in 1Q08

Peer Comparison In order to do a peer comparison for Al Rajhi Bank, we have taken comparable Islamic banks operating in the GCC region including Kuwait Finance House (KFH) and Dubai Islamic Bank (DIB).

Peer Analysis (in USD Millions) KFH DIB Al Rajhi Bank 2008 1Q09 2008 1Q09 2008 1Q09 Net Investment Income 1,248 242 584 145 2,264 610 % YoY Growth 52.4 11.9 44.4 49.3 9.9 12.5 Total Operating Income 3,040 548 1,368 356 2,819 732 % YoY Growth 1.1 -33.9 -13.1 -8.5 13.4 10.3 Net Profit 569 135 471 101 1,739 462 % YoY Growth -43.4 -50.9 6.3 -33.3 1.1 8.1 Total Financing & Investing Activities 21,741 21,174 19,033 18,705 38,380 38,215 % YoY Growth 20.0 -0.7 27.6 18.9 37.2 16.6 Total Assets 38,203 36,072 23,150 25,824 43,958 43,314 % YoY Growth 19.0 2.7 0.8 11.5 32.0 13.4 Customers' Deposits 23,955 23,024 18,085 20,863 31,080 32,010 % YoY Growth 22.4 4.3 1.9 15.6 29.9 18.2 Shareholders' Equity 4,508 3,886 2,430 2,283 7,205 6,831 % YoY Growth -4.9 -17.7 -14.3 -11.5 14.4 6.7 Income from Financing & Investing Assets/ Average Financing & Investing Assets 8.1% 6.8%* 5.5% 5.6%* 7.5% 7.1%* Income from Financing & Investing Assets/ Average Financing & Investing Assets 2.9% 2.9%* 2.7% 2.7%* 0.8% 0.8%* Net Spread 5.2% 3.9%* 2.8% 2.9%* 6.6% 6.3%* Net investment income Margin 5.0% 3.7%* 3.0% 2.9%* 6.7% 6.4%* Cost to Income Ratio 33.0% 35.3% 28.3% 25.7% 26.2% 26.2% Credit-Deposit (C/D) Ratio 90.8% 92.0% 105.2% 89.7% 122.6% 116.3% Loan Loss Reserve to Gross Loans & Advances Ratio 5.2% NA 2.0% 1.9% 2.3% NA Equity to Total Assets Ratio 11.8% 10.8% 10.5% 8.8% 16.4% 15.8% Capital Adequacy Ratio 22.0% NA 10.7% NA 21.4% NA RoAE 12.3% 12.8%* 17.9% 17.1%* 25.8% 26.3%* RoAA 1.6% 1.4%* 2.0% 1.6%* 4.5% 4.2%* Sources: Zawya, Banks’ financial Statements * Annualised

Al Rajhi opened 6 new branches in 1Q09

New Projects and Strategies In April 2009, Al Rajhi Bank expanded its network by opening six new branches during 1Q09. In order to reach larger customer base in Saudi Arabia, it has developed two branches and moved 16 other branches to new locations. With this expansion plan, the bank focuses on maintaining its current status of being the largest Islamic bank in the world and the biggest bank branch network in the Arab World and Middle East. In April 2009, Al Rajhi Bank – Malaysia (subsidiary of Al Rajhi Bank) became the first foreign Islamic bank to join the Malaysian Electronic Payment System (MEPS) Shared ATM Network. The service will provide an extended ATM reach across Malaysia and access to ATMs in Saudi Arabia for the customers. The MEPS switch for Al Rajhi Bank customers is scheduled to be activated by 3Q09. In February 2009, the bank raised the paid-up capital for its Malaysian subsidiary to fund its expansion plans. The paid-up capital increased to MYR 1.00 billion from MYR 0.60 billion. In May 2008, Al Rajhi Bank deployed the Cisco’s Unified Contact Center Solution to streamline its processes for communicating with its customers. In March 2008, the bank obtained license from the Central Bank of Kuwait to open a branch in Kuwait and become the first Saudi Arabian, the fourth Gulf and the seventh foreign bank to obtain a permit in Kuwait. SWOT Analysis

Risks and Concerns:

The contractual complexity of Islamic banking transactions raises operational risks, and the uncertainties associated with Shariah-compliance leave them exposed to fiduciary and reputational risks.

Financial instability and economic slowdown may increase defaults that would further deteriorate the banks’ assets quality.

The negative outlook on the banking sector by credit agencies, in the wake of exposure to real estate sector, illiquid assets and distressed investment companies pose a potential threat.

THREATS

The current economic downturn could curb the expansion plans of the banks Intensified competition on account of expansion initiatives taken by regional and international players

OPPORTUNITIES

Rising popularity for Shariah-complaint products would provide enormous space to increase its revenue Government’s initiatives to inject liquidity in the economy expected to boost credit, thereby increasing the activities of banks

WEAKNESS

Rising operating expenses leads to increase in cost-to-income ratio

STRENGTHS

Rich history of nearly five-decades Wide network of over 500 branches and 2,318 ATMs across Saudi Arabia Strong initiatives to expand its customer base and the number of branches

Cost of Equity: 11.83%

Valuation Methodology: We have used two valuation methods for arriving at the fair value of Al Rajhi Bank, as explained 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 2009E with the 2009E 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 2009E of the bank:

i. For sustainable RoAE, we have considered the 5-year average RoAE of the bank over 2009E-2013E.

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

a. Risk free rate of return (Rf) of 3.31%, which is 12-months average yield on 10-year US T-bill.

b. Cost of Equity – 11.83%

iii. We have assumed a terminal growth rate (g) of 2.00%.

GGM Valuation Summary Sustainable RoAE (%) 24.16%Cost of Equity (Ke) (%) 11.83%Perpetual Growth Rate (%) 2.00%Target P/BV Multiple for 2009E (x) 2.262009E BVPS (SAR) 20.614Fair Value per Share using Target P/BV (SAR) 46.485CMP (SAR) 71.750Upside/(Downside) -35.2%

Sensitivity Analysis The 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% 9.83% 54.088 56.098 58.365 60.942 63.896 10.83% 48.583 50.083 51.752 53.622 55.731 11.83% 44.095 45.232 46.485 47.872 49.416 12.83% 40.367 41.239 42.191 43.236 44.387 13.83% 37.219 37.893 38.624 39.419 40.287

Sensitivity Analysis - GGM (Ke vs. RoAE)

Return on Average Equity (RoAE)

Cost of Equity (Ke)

22.16% 23.16% 24.16% 25.16% 26.16% 9.83% 53.097 55.731 58.365 60.999 63.633 10.83% 47.081 49.416 51.752 54.088 56.423 11.83% 42.289 44.387 46.485 48.583 50.681 12.83% 38.383 40.287 42.191 44.095 45.999 13.83% 35.137 36.880 38.624 40.367 42.110

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% 22.16% 40.287 41.240 42.289 43.451 44.745 23.16% 42.191 43.236 44.387 45.662 47.081 24.16% 44.095 45.232 46.485 47.872 49.416 25.16% 45.999 47.229 48.583 50.083 51.752 26.16% 47.904 49.225 50.681 52.293 54.088

TTM P/E Multiple Based Valuation

TTM P/E Multiple Based Valuation Summary Al Rajhi Bank’s 2009E EPS (SAR) 4.72 Target P/E (x) 21.69 Fair Value per Share using Target P/E (SAR) 102.25 CMP (SAR) 71.75 Upside/(Downside) 42.5%

Banks

Outstanding Shares

(Millions) CMP# (USD)

Market Cap. (USD Millions)

EPS TTM

(USD)

P/E TTM (x)

Al Rajhi Bank 1,500.00 19.154 28,730.60 1.185 16.17 Samba Financial Group 900.00 13.481 12,132.92 1.341 10.05 Bank Al Bilad 300.00 6.500 1,950.08 0.111 58.58 Kuwait Finance House 2,305.42 4.531 10,445.09 0.186 24.40 Bank Al Jazira 300.00 6.287 1,886.01 0.152 41.26 National Bank of Kuwait 2,973.50 4.252 12,642.89 0.278 15.32 Riyad Bank 1,500.00 6.620 9,930.58 0.425 15.57 SABB 750.00 14.082 10,561.25 1.040 13.54 Masraf Al Rayan 749.94 3.492 2,619.02 0.333 10.49 Qatar Islamic Bank 206.76 23.511 4,861.18 2.044 11.50 Average TTM P/E 21.69 Sources: Zawya #CMP as on June 02, 2009

Weighted Average Fair Value On an equal weight basis (GGM – 50% and P/E – 50%), we have arrived at a final fair value of SAR 74.37 for Al Rajhi Bank, which provides a upside of 3.6% from its current market price of SAR 71.75 (as on June 02, 2009).

Weighted Average Fair Value

Valuation Method

Fair Value per Share

(SAR) Weight Weighted Value per Share (SAR)

Target P/BV Multiple Method 46.49 50% 23.24 TTM P/E Multiple Method 102.25 50% 51.12 Target 74.37 CMP 71.75 Upside/(Downside) 3.6%

Investment Opinion Driven by the rising popularity and demand among the Muslims, Islamic Banking across the globe has gained popularity over the last few years. Moreover, non-Muslims are also opting for Islamic banking services due to the benefits it offers. Financial institutions around the globe are trying to keep pace with the growing demand for Shariah-compliant products and services. The demand from the world's 1.3 billion Muslims for investments that comply with Islamic law range between USD 700 billion and USD 1 trillion, with some estimates seeing assets growing to USD 1.6 trillion by 2012. The value of Shariah-compliant assets in the GCC amounts to more than USD 262 billion. Like the GCC, the money supply (M3) in the Saudi Arabian economy also rose that enabled the Saudi banking sector to attain a healthy CAGR of 19.0% over the last five years. As a result, the sector’s total credit rose at a 5-year CAGR of 19.1% over 2003-08 after achieving a 29.0% YoY growth in 2008. On the other hand, the recent global financial turmoil and subsequent economic downturn has restricted the previous high growth witnessed by the sector. In addition to this, increase in the default risk has further raised concerns over the quality of assets. The banking sector was also hurt by the troubled real estate sector, which impacted the growth of the banks’ financing and investment assets. Similar to the conventional banking, the Islamic banking is also impacted by financial crisis and economic slowdown, as reflected by the declining number Sukuks issued. With commercial banks extending their presence to Shariah-compliant products and services, competition is only likely to intensify for Islamic banks, moving ahead. Nevertheless, the central government initiatives aim to restore confidence. Recently, in an effort to boost liquidity, the government injected USD 3 billion into the banking system to finance private sector projects and lowered the repo rate from 5.5% to 2%. With a wide presence in Saudi Arabia and Malaysia, Al Rajhi Bank is one of the world’s largest Islamic banks. Despite the recent financial crunch and economic slowdown, it has continued its organic expansion plan and opened six new branches in 1Q09 and developed and re-located another 18 branches to reach the larger customer-base. On the financial front, Al Rajhi Bank withered the financial turmoil better than its peers as its bottom-line grew 8.1% in 1Q09 thereby indicating the sound fundamentals. Furthermore, investment assets grew 16.6% QoQ to SAR 143.12 billion in 1Q09, while its asset base soared 13.4% to SAR 162.21 billion. Meanwhile, Al Rajhi Bank’s stock is trading at a price-to-book value (P/B) multiple of 3.98x at 2008 book value per share (BVPS), far above the industry average of 1.81x, that makes the stock less attractive. Currently, it is trading at a P/E multiple of 15.22x and 13.70x on 2009E and 2010E earnings, and at a P/B multiple of 3.48x and 3.04x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has registered an YTD gain of 24.1%, in line with the Saudi market’s rebound which has seen the Tadawul rise 25.6%. Considering the above factors, we arrive at a price target of SAR 74.37, which exhibits an upside of 3.6% from its closing price of SAR 71.75 (as on June 02, 2009). Accordingly, we initiate our coverage with a NEUTRAL recommendation on Al Rajhi Bank.

Fair Value: SAR 74.37 Investment Opinion: NEUTRAL

Financial Statements

Consolidated Balance Sheet (in SAR Millions) 2007A 2008A 1Q08A 1Q09A 2009E 2010E 2011E

ASSETS Cash 3,486 3,630 3,100 3,275 3,553 4,217 4,672 Balances with Saudi Arabian Monetary Agency (SAMA) 9,655 7,672 8,564 7,528 7,544 8,046 8,939 Due from Banks 791 2,892 1,488 1,415 2,719 2,770 2,976 Investments, Net: Mutajara 41,587 67,456 54,002 64,729 68,270 73,883 81,981 Installment Sale 55,990 59,070 57,437 61,181 60,373 65,672 73,358 Istisnaa 1,630 1,290 1,549 1,190 942 627 291 Murabaha 4,078 13,020 8,062 13,034 14,056 15,768 17,690 Other 1,590 3,167 1,647 2,982 3,219 3,499 3,900 Total Investments, Net 104,875 144,004 122,697 143,116 146,860 159,449 177,220 Customer debit current accounts, net 910 754 815 413 634 688 825 Investment properties 0 0 0 0 0 0 0 Property and equipment, net 2,591 2,868 2,675 2,967 3,004 3,226 3,560 Other assets, net 2,578 3,110 3,708 3,496 3,594 3,905 4,339 Total Assets 124,886 164,930 143,048 162,211 167,908 182,300 202,530 LIABILITIES Due to banks 2,593 7,902 4,071 4,608 5,105 5,178 5,449 Syndicate murabaha financing from banks 1,875 1,875 1,875 1,875 0 0 0 Customer deposits 89,725 116,611 101,439 119,877 121,266 130,551 144,312 Other customer accounts (including margins on letter of credit, third party funds, certified checks and transfers) 3,031 3,687 3,757 3,211 3,769 4,197 4,793 Other liabilities 4,056 7,824 7,923 7,060 6,847 6,930 7,528 Total Liabilities 101,280 137,898 119,064 136,631 136,988 146,856 162,082 EQUITY Capital and reserves attributable to the Bank’s equity holders Share capital 13,500 15,000 15,000 15,000 15,000 15,000 15,000 Statutory reserves 7,096 8,727 7,096 8,727 10,495 12,459 14,751 General reserves 198 0 286 0 0 0 0 Retained earnings 1,588 121 1,602 1,853 2,094 3,822 5,700 Proposed gross dividends 1,224 3,183 0 0 3,331 4,164 4,997 Total Shareholder's Equity 23,606 27,032 23,984 25,580 30,921 35,445 40,448 Total equity and liabilities 124,886 164,930 143,048 162,211 167,908 182,300 202,530

Consolidated Income Statement (in SAR Millions) 2007A 2008A 1Q08A 1Q09A 2009E 2010E 2011E

INCOME Investment income (expenses): Mutajara 2,798 3,049 667 862 3,595 4,060 4,690 Installmet sale 5,468 5,740 1,395 1,478 5,823 6,219 6,931 Istisnaa 194 151 42 31 116 83 49 Murabaha 108 483 68 147 625 721 843 Other 16 -2 -2 8 38 45 57 Total income from investments 8,583 9,421 2,170 2,526 10,198 11,127 12,570 Income paid to customers and banks on time investments -752 -819 -113 -216 -869 -934 -1,046 Income paid to syndicated murabaha financing from banks -110 -107 -27 -27 -45 0 0 Income from investments, net 7,722 8,494 2,030 2,284 9,284 10,193 11,524 Income from investment properties 0 0 0 0 0 0 0 Murabaha fees 71 76 24 9 38 51 67 Fees from banking services, net 981 1,241 277 306 1,272 1,336 1,436 Exchange income, net 471 483 138 130 435 444 462 Other operating income 77 280 15 12 213 218 229 Total Operating Income 9,321 10,575 2,485 2,740 11,243 12,242 13,718 EXPENSES Salaries and employees related benefits 1,451 1,649 422 425 1,730 1,884 2,125 Rent and premises related expenses 118 137 34 35 145 161 183 Impairment charge for investments and other 443 1,274 187 288 1,223 1,165 921 Depreciation and amortisation 288 383 88 94 393 444 507 Other general and administrative expenses 568 604 151 166 676 730 811 Board of directors' remunerations 3 3 1 1 3 3 3 Total Operating expenses 2,871 4,051 883 1,008 4,171 4,387 4,551 NET INCOME 6,450 6,525 1,602 1,732 7,072 7,855 9,167

Consolidated Cash Flow Statement (in SAR Millions) 2007A 2008A 1Q08A 1Q09A 2009E 2010E 2011E

CASH FLOW FROM OPERATING ACTIVITIES NET INCOME 6,450 6,525 1,602 1,732 7,072 7,855 9,167 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortisation 288 383 88 94 393 444 507 Impairment for investments and others 443 1,274 187 288 1,223 1,165 921 Net (increase) decrease in operating assets: Statutory deposits with SAMA -2,683 -593 -1,484 144 128 -502 -893 Customer debit current accounts -198 70 94 342 121 -54 -137 Other Assets -342 -572 -1,134 -386 -484 -311 -434 Net increase (decrease) operating liabilities Due to banks -880 5,309 1,478 -3,294 -2,796 73 271 Customer deposits 16,327 26,886 11,713 3,266 4,210 8,910 13,427 Other customer accounts 547 656 726 -476 83 428 596 Other liabilities -73 3,172 3,317 -1,379 -977 83 598 Net cash provided by operating activities 19,880 43,109 16,588 330 8,972 18,091 24,024 CASH FLOW FROM INVESTING ACTIVTIES Mutajara -7,343 -26,172 -12,450 2,653 -1,259 -5,987 -8,432 Installment sale -4,900 -3,879 -1,597 -2,259 -1,748 -5,673 -8,020 Istisnaa 534 340 81 100 348 315 336 Murabaha -2,873 -8,973 -3,986 -23 -1,481 -2,086 -2,256 Other Investments -1,159 -1,577 -57 185 -52 -280 -401 Purchase of property and equipment -885 -630 -168 -192 -529 -666 -841 Net cash used in investing activities -16,626 -40,890 -18,176 464 -4,722 -14,376 -19,613 CASH FLOW FROM FINANCING ACTIVITIES Dividends paid -2,700 -2,550 -675 -2,625 -2,625 -3,000 -3,750 Syndicate murabaha financing from banks paid 0 0 0 0 -1,875 0 0 Net cash provided by financing activities -2,700 -2,550 -675 -2,625 -4,500 -3,000 -3,750 Net increase/(decrease) in cash and cash equivalents 553 -331 -2,264 -1,832 -250 715 661 Cash and cash equivalents at beginning of year 6,300 6,853 6,853 6,522 6,522 6,272 6,987 Cash and cash equivalents at end of year 6,853 6,522 4,589 4,690 6,272 6,987 7,647

Common-Size Financial Statements

Common-Size Consolidated Balance Sheet 2007A 2008A 1Q08A 1Q09A 2009E 2010E 2011E

ASSETS Cash 2.8% 2.2% 2.2% 2.0% 2.1% 2.3% 2.3% Balances with Saudi Arabian Monetary Agency (SAMA) 7.7% 4.7% 6.0% 4.6% 4.5% 4.4% 4.4% Due from Banks 0.6% 1.8% 1.0% 0.9% 1.6% 1.5% 1.5% Investments, Net: Mutajara 33.3% 40.9% 37.8% 39.9% 40.7% 40.5% 40.5% Installment Sale 44.8% 35.8% 40.2% 37.7% 36.0% 36.0% 36.2% Istisnaa 1.3% 0.8% 1.1% 0.7% 0.6% 0.3% 0.1% Murabaha 3.3% 7.9% 5.6% 8.0% 8.4% 8.6% 8.7% Other 1.3% 1.9% 1.2% 1.8% 1.9% 1.9% 1.9% Total Investments, Net 84.0% 87.3% 85.8% 88.2% 87.5% 87.5% 87.5% Customer debit current accounts, net 0.7% 0.5% 0.6% 0.3% 0.4% 0.4% 0.4% Investment properties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Property and equipment, net 2.1% 1.7% 1.9% 1.8% 1.8% 1.8% 1.8% Other assets, net 2.1% 1.9% 2.6% 2.2% 2.1% 2.1% 2.1% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES Due to banks 2.1% 4.8% 2.8% 2.8% 3.0% 2.8% 2.7% Syndicate murabaha financing from banks 1.5% 1.1% 1.3% 1.2% 0.0% 0.0% 0.0% Customer deposits 71.8% 70.7% 70.9% 73.9% 72.2% 71.6% 71.3% Other customer accounts (including margins on letter of credit, third party funds, certified checks and transfers) 2.4% 2.2% 2.6% 2.0% 2.2% 2.3% 2.4% Other liabilities 3.2% 4.7% 5.5% 4.4% 4.1% 3.8% 3.7% Total Liabilities 81.1% 83.6% 83.2% 84.2% 81.6% 80.6% 80.0% EQUITY Capital and reserves attributable to the Bank’s equity holders Share capital 10.8% 9.1% 10.5% 9.2% 8.9% 8.2% 7.4% Statutory reserves 5.7% 5.3% 5.0% 5.4% 6.3% 6.8% 7.3% General reserves 0.2% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% Retained earnings 1.3% 0.1% 1.1% 1.1% 1.2% 2.1% 2.8% Proposed gross dividends 1.0% 1.9% 0.0% 0.0% 2.0% 2.3% 2.5% Total Shareholder's Equity 18.9% 16.4% 16.8% 15.8% 18.4% 19.4% 20.0% Total equity and liabilities 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Common-Size Consolidated Income Statement 2007A 2008A 1Q08A 1Q09A 2009E 2010E 2011E

INCOME Investment income (expenses): Mutajara 30.0% 28.8% 26.9% 31.4% 32.0% 33.2% 34.2% Installmet sale 58.7% 54.3% 56.1% 53.9% 51.8% 50.8% 50.5% Istisnaa 2.1% 1.4% 1.7% 1.1% 1.0% 0.7% 0.4% Murabaha 1.2% 4.6% 2.7% 5.4% 5.6% 5.9% 6.1% Other 0.2% 0.0% -0.1% 0.3% 0.3% 0.4% 0.4% Total income from investments 92.1% 89.1% 87.4% 92.2% 90.7% 90.9% 91.6% Income paid to customers and banks on time investments -8.1% -7.7% -4.6% -7.9% -7.7% -7.6% -7.6% Income paid to syndicated murabaha financing from banks -1.2% -1.0% -1.1% -1.0% -0.4% 0.0% 0.0% Income from investments, net 82.8% 80.3% 81.7% 83.4% 82.6% 83.3% 84.0% Income from investment properties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Murabaha fees 0.8% 0.7% 1.0% 0.3% 0.3% 0.4% 0.5% Fees from banking services, net 10.5% 11.7% 11.2% 11.2% 11.3% 10.9% 10.5% Exchange income, net 5.1% 4.6% 5.6% 4.7% 3.9% 3.6% 3.4% Other operating income 0.8% 2.6% 0.6% 0.4% 1.9% 1.8% 1.7% Total Operating Income 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EXPENSES Salaries and employees related benefits 15.6% 15.6% 17.0% 15.5% 15.4% 15.4% 15.5% Rent and premises related expenses 1.3% 1.3% 1.4% 1.3% 1.3% 1.3% 1.3% Impairment charge for investments and other 4.8% 12.1% 7.5% 10.5% 10.9% 9.5% 6.7% Depreciation and amortisation 3.1% 3.6% 3.5% 3.4% 3.5% 3.6% 3.7% Other general and administrative expenses 6.1% 5.7% 6.1% 6.0% 6.0% 6.0% 5.9% Board of directors' remunerations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Operating expenses 30.8% 38.3% 35.5% 36.8% 37.1% 35.8% 33.2% NET INCOME 69.2% 61.7% 64.5% 63.2% 62.9% 64.2% 66.8%

Financial Ratios

2007A 2008A 1Q08A 1Q09A 2009E 2010E 2011E Profitability Return on Average Assets (RoAA) 5.6% 4.5% 4.8%* 4.2%* 4.2% 4.5% 4.8% Return on Average Equity (RoAE) 29.5% 25.8% 26.9%* 26.3%* 24.4% 23.7% 24.2% Net Interest Income / Total Operating Income 82.8% 80.3% 81.7% 83.4% 82.6% 83.3% 84.0% Non-Interest Income / Total Operating Income 17.2% 19.7% 18.3% 16.6% 17.4% 16.7% 16.0% Margins Income paid on deposits & financing / Total Financing and investment Income 10.0% 9.8% 6.5% 9.6% 9.0% 8.4% 8.3% Income from Financing & Investing Assets/ Average Financing & Investing Assets 8.6% 7.5% 7.6%* 7.1%* 7.0% 7.2% 7.4% Income from Financing & Investing Assets/ Average Financing & Investing Assets 1.0% 0.8% 0.6%* 0.8%* 0.7% 0.7% 0.7% Net Spread 7.6% 6.6% 7.0%* 6.3%* 6.2% 6.5% 6.7% Net investment income Margin 7.7% 6.7% 7.1%* 6.4%* 6.3% 6.6% 6.8% Total Operating Expenses to Total Operating Income Ratio 26.0% 26.2% 28.0% 26.2% 26.2% 26.3% 26.4% Liquidity & Assets Quality Credit to Deposit (C/D) Ratio 116.7% 122.6% 116.6% 116.3% 120.6% 121.6% 122.1% Customers' Deposits to Shareholders' Equity 380.1% 431.4% 422.9% 468.6% 392.2% 368.3% 356.8% Deposits and balances due from banks / Due to Banks 30.5% 36.6% 36.6% 30.7% 53.3% 53.5% 54.6% Provisions / Gross Investment in Financings -3.2% -2.3% NA NA -2.6% -2.7% -2.6% Capital Adequacy Shareholders' Equity to Total Assets 18.9% 16.4% 16.8% 15.8% 18.4% 19.4% 20.0% Shareholders' Equity to Gross Investments 21.8% 18.3% 19.5% 17.9% 20.5% 21.6% 22.2% Operating Performance % Change in Net-Investment Income 13.1 10.0 11.4 12.5 9.3 9.8 13.1 % Change in Non-Investment Income -40.4 30.1 18.0 0.3 -5.9 4.6 7.0 % Change in Total Operating Income -2.0 13.5 12.5 10.3 6.3 8.9 12.1 % Change in Net Profit -11.7 1.2 2.1 8.1 8.4 11.1 16.7 Valuation Ratios Adj. EPS (SAR) 4.30 4.35 4.27* 4.62* 4.71 5.24 6.11 Adj. BVPS (SAR) 15.74 18.02 15.99 17.05 20.61 23.63 26.97 P/E (x) 16.69 16.50 16.80 15.54 15.22 13.70 11.74 P/BV (x) 4.56 3.98 4.49 4.21 3.48 3.04 2.66 CMP** (SAR) 71.75 71.75 71.75 71.75 71.75 71.75 71.75

* Annualised ** As on June 02, 2009

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