• Cut forecasts and lower FV to KWD0.37; reiterate Neutral rating We have cut our earnings estimates to reflect the deconsolidation of Jordan Kuwait Bank (sold at end of December 2015), but also to reflect weaker-than-previously-expected fee income and other non-interest income and higher provisioning costs. We now expect 2016 earnings to fall 17% Y-o-Y. The bank’s P/E is in our view unattractive at 12.8x in 2016; its 2016 P/B is 1.2x, but with the bank’s ROE at 9%-10% in 2016-17, we do not see much upside potential for the stock. We have cut our FV by 12% to KWD0.37, and reiterate our Neutral rating.
• Potential rights issue or slow loan growth in 2016, as CET1 is tight After the sale of JKB to another company of the parent group, KIPCO, Burgan’s CET1 ratio improved to 11.7% in December 2015. We estimate the ratio will fall to 10.7% by end of 2016 (the press release for March 2016 states that CET1 was 10.5% in 1Q2016), vs the minimum 10.5% required by the Central Bank of Kuwait (CBK). We believe a rights issue in 2016 cannot be discarded, and if avoided, we see downside risks for loan growth and dividends this year.
• 1Q2016 results: Earnings fall Y-o-Y on consolidation changes, but Kuwait earnings are also weak Burgan reported a 19% Y-o-Y decline in 1Q2016 net income to KWD14.3 million, mainly as a result of lower revenues. We attribute the sharp Y-o-Y revenue fall of 19% (-14% Y-o-Y fall in net interest income and -29% Y-o-Y fall in non-interest income) to the deconsolidation of JKB. This makes it difficult to assess the quality of results in 1Q2016, but Kuwait’s earnings, which were not affected by consolidation changes, also fell 34% Y-o-Y on lower revenues and higher provisions, including precautionary provisions requested by the Central Bank (KWD5 million in 1Q2016). The press release also mentioned a slowdown in growth in Algeria and Iraq.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel