• Net loss on discontinued operations drives earnings miss KFH reported 2Q16 net income of KWD36.8mn, up 13% Y-o-Y (+8% Q-o-Q). Revenue rose 6% Y-o-Y on higher net interest income and fee income, with earnings growth also driven by lower Y-o-Y operating expenses. The actual earnings came in 6% below our estimate; this was mainly a result of a net loss from discontinued operations of KWD29mn, linked to the ongoing sale of KFH’s subsidiary Aref Investment Group, for which the sale was approved by KFH’s Board of Directors on 30 June. Excluding this non-recurring loss, earnings were better than expected with net interest income, fee income and operating costs surprising positively. 
• Weak loan and deposit growth, but strong spreads in 2Q16  Loan growth was slow, up 2% Y-o-Y and 1% Q-o-Q. We had expected stronger loan growth at KFH as NBK recently led a large loan to KNPC in which KFH participated with KWD500mn, but the actual numbers suggest that it will be booked over several quarters. Deposits were flat Y-o-Y (2% Q-o-Q). The key positive surprise was spreads, up 31bps Q-o-Q due to a strong increase in asset yields. Strong spreads drove net interest income up 14% Y-o-Y and 13% Q-o-Q. Fee income was also strong this quarter, up 35% Y-o-Y and 37% Q-o-Q.
• Provisioning costs rise, but limited disclosure on NPLs makes a proper judgement of credit quality trends difficult Provisioning costs increased Y-o-Y and Q-o-Q, but given the limited information available on a quarterly basis (unlike other Kuwait banks, KFH does not report a quarterly split of general, specific or investment provisions; it does not report NPLs either), it is difficult to have a view on credit quality trends YTD. As of Dec 2015, the NPL ratio was 7.3%, the highest in our Kuwait banks coverage, with NPL coverage ex collateral at 77%. The bank’s ROE remains low at just 8.4%, although it has improved by almost one percentage point Y-o-Y.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel