Kuwait Finance House (KFH)
 
Rating: Buy
Target Price: KWD0.555
Closing Price: KWD0.501 

Higher-than-expected revenue drives earnings beat
KFH reported 2Q17 net income of KWD43.1mn, up 17% Y-o-Y and 12% Q-o-Q, beating our estimate of KWD39.3mn by 10% on higher-than-expected net interest income and investment income. On a Y-o-Y basis, revenue growth was weak, down 1% Y-o-Y on lower fee income; however, there were a number of positive operational trends, including: i) Q-o-Q recovery in net interest income growth (+11% Q-o-Q; +2% Y-o-Y) on higher spreads; ii) strong loan growth (+5% Q-o-Q); and iii) continued focus on costs efficiency (opex down 4% Y-o-Y). Earnings growth was strong at 17% Y-o-Y despite an increase in provisioning costs.
 
Strong momentum in loan growth since beginning of year
The loan book has increased 9% since December 2016, with 5% Q-o-Q growth in 2Q17, well ahead of our estimate. KFH, traditionally a strong retail franchise, has increased its focus on the corporate sector and has increased its market share in segments, where, historically, its presence has been weak, including trade, services and oil and gas. The net interest spread rose 23bps Q-o-Q (to 295bps) on higher asset yields. This is a trend we have seen for Kuwait banks that have reported 2Q17 results so far: asset yields have benefitted from the two recent interest rate hikes by the Central Bank of Kuwait in December 2016 and March 2017.
 
Talks of merger with Bahrain’s Ahly United Bank: what’s new?
KFH issued a press release yesterday, stating that the bank is looking into different strategic alternatives to improve profitability, and that as part of these, it is studying a merger with Ahly United Bank, but no agreement has been reached on whether to pursue or not a merger. This is a very similar statement to the one issued at end of May. The strategic fit between the two banks is not obvious to us: it would lead to stronger presence and market share in Kuwait (where some cost synergies would be reached), but the merger would also give KFH access to Bahrain, a low growth market and Egypt, which could pose a challenge for a Sharia-compliant bank like KFH because of the absence of a sukuk market.