• Best credit quality metrics in Kuwait…. CBK reported FY2015 net income of KWD46.1 million, down 6% Y-o-Y, and just 1% below our forecast (4Q2015 net income of KWD20.8 million fell 13% Y-o-Y, although it rebounded strongly Q-o-Q from low earnings in 3Q2015). The Board proposed a cash DPS of 13 fils, down from 18 fils in 2014, and 6% bonus shares. CBK’s NPL ratio inched up slightly Y-o-Y to 0.9% from 0.8% in 2014, but NPL coverage stands at 571% (76% specific provisions coverage and 494% general provisions coverage), and CBK now has the best credit quality indicators in Kuwait banks under coverage. CBK reported general provisions write-backs, but specific provisions increased Y-o-Y, most likely driven, in our view, by the decline in collateral values due to falling equity markets in Kuwait and the GCC.
• … but focus on loan growth not a key priority in the short-term Customer loans fell 1% Y-o-Y (+3% Q-o-Q), while deposits were flat Y-o-Y (-2% Q-o-Q). CBK has been very conservative on loan growth post-global financial crisis with Y-o-Y loan growth negative or flat since then (barring 2013), and underperforming the system level (which stood at 5-6% Y-o-Y in 2015). Net interest income fell 1% Y-o-Y in FY2015, due to the contracting loan book as well as a c5bps decline in the net interest spread owing to lower asset yields. Funding costs were flat Y-o-Y, with the Kuwait banking system not experiencing any major tightening in liquidity last year.
• Excess capital drives low ROE of c8.5% CBK’s ROA of 1.1% is close to that of its larger peer National Bank of Kuwait (NBK) of 1.2%, but balance sheet leverage is very low at CBK, leading to a low ROE of 8.5%, compared to NBK’s 11%. We do not expect balance sheet leverage to increase as CBK’s loan growth is likely to also remain slow in 2016. We reiterate our Neutral rating on the stock.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel