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26-Jul-2017

Kuwait Banks: 2Q17 results support our positive investment case - we like NBK, KFH and Burgan

Kuwait banks’ aggregate earnings rose 12% Y-o-Y in 2Q17, up from 6% Y-o-Y in 1Q17, thanks to stronger momentum in net interest income growth (stronger spreads and volume growth). Aggregate earnings came in slightly below our estimate (-6%), with higher-than-expected provisioning driving earnings misses for NBK (precautionary provisions; credit quality was stable Q-o-Q) and CBK (provisions linked to the ongoing legal case with Investment Dar over the sale of a stake in Boubyan Bank). Burgan Bank and KFH delivered bottom-line beats on strong revenues and costs efficiency gains.
 
Positive surprises in key operating trends
The 2Q17/1H17 results confirm our view that: i) Kuwait banks are beneficiaries of higher rates, with asset yields higher in 1H17 following rate hikes in Dec-16 and March-17; and that ii) the loan growth environment, while not buoyant, is recovering vs 2016 (when it was negatively impacted by a number of one-offs). Retail loan growth has slowed sharply, but we have seen stronger corporate loan growth in 1H17, with capital spending by the govt. starting to trickle down to corporate lending demand. Our top picks in Kuwait are: NBK, the strongest corporate franchise, which is set to benefit from the current loan growth trends; KFH, an ongoing restructuring story, with disposals of non-core assets continuing to streamline its balance sheet and Burgan, which despite the recent re-rating, trades at discounted multiples.
 
Spreads and loan growth trends healthy across the board
The key positive surprise was generally the healthy growth in net interest income (10% Y-o-Y, from 5% in 1Q17), thanks to stronger asset yields and spreads in 2Q17. Loan growth also surprised positively, particularly for KFH, which is refocusing on the corporate sector (loans up 5% Q-o-Q) and Burgan (+3% Q-o-Q). Fee income was however weak for most of the banks.
 
Provisioning trends slightly worse than expected
Precautionary provisioning trends, particularly for NBK were worse-than-expected (see latest report). We reiterate our view that it is yet early to factor into our numbers a large fall in provisioning for Kuwait banks as IFRS comes into effect in Jan-2018: the central bank could relax precautionary provisioning only gradually over the course of 2018 /2019. Kuwait banks are however well placed for the transition to IFRS9 next year as they have very large provisioning buffers.

 

Elena Sanchez-Cabezudo, CFA
 
Ahmed El-Shazly