• Weak revenues; FY2015 earnings rise on lower other opex KFH reported 4Q2015 net income of KWD40.1 million, up 10% Y-o-Y (-7% Q-o-Q), and 15% above our forecast of KWD34.8 million (6% below Bloomberg consensus).  FY2015 net income of KWD145.8 million increased 15% Y-o-Y (3% above of our forecast of KWD141.5 million), mainly due to lower ‘other’ operating expenses Y-o-Y and lower tax charges. The lower tax charge was most likely due to lower earnings contribution from KFH Turkey, as the Turkish Lira depreciated vs the USD in 2015. Revenue fell 2% Y-o-Y in 2015 on lower fee income and investment income. We will be reviewing our estimates and fair value after the full disclosure of NPLs.
• Loan book flat; net interest spread increases on lower funding costs Customer loans increased 2% Q-o-Q, but were flat Y-o-Y. Deposits fell 1% Q-o-Q and were also flat Y-o-Y. KFH does not report a country split of its loan book, but we assume that the slow growth in group loans was partly attributable to the depreciation of the Turkish Lira (we estimate that KFH Turkey accounts for 30% of total loans). By sectors, construction and real estate loans, which represent 30% of the book, fell Y-o-Y. Despite weak loan growth, net interest income in FY2015 increased by 8% Y-o-Y, with the 2015 net interest spread increasing by 9bps on lower funding costs.
• NPLs trends seem to be improving KFH has not yet disclosed its gross NPLs for 2015. Both NPLs net of collaterals and NPLs net of provisions fell Y-o-Y, pointing towards an improvement in credit quality in 2015. Provisioning costs through the income statement continued to be high, with loan loss provisioning costs increasing Y-o-Y. High provisioning continues to drive a low ROE for KFH of 8.4% in 2015, although this is up from 7.7% in 2014. With collateral values falling due to the negative performance in GCC equity markets, it is likely that provisioning costs will also be high in 2016, and we see this a downside risks to earnings.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel