• Earnings up 20% Q-o-Q as provisioning costs fall Burgan Bank reported 2Q16 net income of KWD17.1mn, up 20% Q-o-Q and 16% above our estimate of KWD14.7mn on lower-than-expected provisioning. Lower provisioning costs were also the key driver of Q-o-Q earnings growth. Net income fell 14% Y-o-Y, but we note that Burgan Bank deconsolidated Jordan Kuwait Bank in Dec 2015 as it sold its majority stake to another entity of the KIPCO group to boost Burgan’s capital adequacy ratios, and hence Y-o-Y comparisons of the income statement and balance sheet are not like-for-like. Revenue growth was weak, down 1% Q-o-Q on lower net interest income, and missed our estimate by 6%.
• Burgan Bank did not book precautionary provisions in 2Q16 There were no additional or precautionary provisions booked by Burgan Bank in 2Q16, compared to KWD5mn in additional provisions in 1Q16. Provisioning continues to be an area of potential negative earnings surprises, as the central bank could ask for further precautionary provisions in the coming quarters. We reiterate our view that according to management guidance from several Kuwait banks, that this type of provision is likely set to continue in 2016-17.
• Better than sector loan growth, but spreads surprise negatively Customer loans increased 3% Q-o-Q, better than what other larger Kuwait banks have reported so far. It saw large net interest spread compression, down 23bps Q-o-Q on lower asset yields and higher funding costs, with net interest income down 7% Q-o-Q. The spread compression is a negative surprise as Kuwait banks have not seen a significant worsening in the liquidity environment. International operations were the likely driver of weak net interest income. Fee income was strong this quarter, up 15% Q-o-Q from 1Q16.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel