• Cut FV to KWD0.87 after increasing provisioning estimates We cut our FV on NBK from KWD0.87 to KWD0.97, but reiterate our Buy rating, with our FV implying 20% upside. The new FV reflects lower earnings in 2016-17 (6-9%) compared to our previous estimates as we have upped precautionary provisions. Judging how conservative the CBK has been in the past two years and with a backdrop of falling GCC equity markets, and hence, lower collateral values, we believe that precautionary provisions could be broadly flat in 2015 (total cost of risk of 95bps).
• Heathy growth in pre-provisions income on sustained loan growth Credit quality was stable for NBK in 2015, and we do not expect credit quality trends in Kuwait to change materially in 2016, with credit expansion having been fairly slow post 2008. We therefore do not expect a sharp swing in specific provisions in 2016. Precautionary provisions are not at the discretion of Kuwait banks, and hence we see relevant focusing also on pre-provisions income growth. We forecast 6% growth for 2016, or 10% when adjusting for 2015 one-offs (capital gain on IBQ sale). We expect loan growth of 10% in 2016-17 to continue to be well supported by Kuwait retail, Kuwait corporate (government spending), Boubyan Bank, and Egypt.
• NIMs stable; rights issue likely in 2016 Liquidity has so far been at comfortable levels in Kuwait, and while it could deteriorate due to tight liquidity in GCC, we believe that the recent increase in the Kuwait discount rate after the Fed move will drive asset yields up and offset potential pressure in funding costs. As we highlighted in our November 2015 note, NBK is well capitalised (CET1 of 13.2%, vs min required of 11.5% by end-2016), but we believe it is likely that NBK will increase common equity so as to maintain buffers. The recent announcement of the plan to increase authorised capital to KWD600 million from KWD504 million suggests a potential rights issue in 2016. We estimate a rights issue of KWD150-200 million could imply a slight c1% ROE dilution in the short-term.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel