• Cut FV to KWD0.49, reiterate Neutral rating Commercial Bank of Kuwait (CBK) reported a 23% Y-o-Y increase in net income to KWD7.8 million in 1Q16. The Y-o-Y increase stems from a low earnings base in 1Q15, with 1Q16 earnings missing our forecast by 12% due to higher-than-expected provisioning costs, as CBK continued to set a large amount of general or judgemental provisions requested by the central bank. We cut our earnings estimates slightly to incorporate higher provisioning costs and lower our FV to KWD0.49. We reiterate our Neutral rating on the stock, as our new FV offers just 8% potential upside.
• Lowest ROE in Kuwait banks; but precautionary provisions continue to be a risk for profitability Its 2015 ROE was low at 8.5%, and we expect a similar number in 2016. Kuwait’s credit quality environment has normalised since 2014, and Kuwait banks, and in particular CBK, have seen a strong improvement in credit quality indicators, due to write-offs. CBK’s NPL ratio was flat Q-o-Q in 1Q16 at 0.9%, and NPL coverage rose to 678% in March 2016, compared to 571% in December 2015. Despite this high NPL coverage, judgemental provisions remain a risk to earnings as they appear to be a recurrent feature for Kuwait banks now.
• Excess capital unlikely to be deployed rapidly in short term CBK is very strongly capitalised, with a capital adequacy ratio of 17%, the bulk of it being common equity. Loan growth remains subdued and we understand from management that there is not a strong focus on loan growth in the short term, unless there are lending opportunities linked to the Kuwait Development Plan. We do not factor into our estimates ROE gains driven by higher balance sheet leverage, but we believe loan growth could be an area of positive surprise, as we have seen an increase in capital expenditure by the Kuwait government given its stronger focus on projects.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel