• Earnings in line; recurring net income up 6.7% Y-o-Y NBK reported 1Q16 net income of KWD78.9mn, down 18% Y-o-Y but up 45% Q-o-Q, broadly in line with our forecast of KWD79.5mn. The Y-o-Y decline in earnings was expected as NBK booked a pre-tax gain of KWD28 mn in 1Q15 from the sale of its previous associate IBQ. Excluding one-offs, Y-o-Y earnings growth was 6.7%. The earnings rebound Q-o-Q comes after NBK booked a large impairment on its Turkish associate during 4Q15.
• Loan growth weak in 1Q16 due to one-offs; 9-11% guidance for 2016 Loan growth was 10% Y-o-Y but was flat Q-o-Q, after good loan growth momentum over the past year. 1Q16 was negatively impacted by the devaluation of the EGP, a larger than usual amount of repayments, and also by the timing of booking several corporate loans, which has been delayed to 2Q16 (including NBK’s KWD0.6bn loan to KNPC). Management reiterated its 9-11% loan growth guidance for 2016, which should be in our view, the strongest loan growth in Kuwait. NBK continues to be our preferred play in Kuwait banks.
• Healthy revenue trends: 9% Y-o-Y increase in core banking income Both net interest income and fee income rose 9% Y-o-Y. The net interest margin was flat Y-o-Y but fell by c10bps Q-o-Q, due to a slight increase in funding costs. Liquidity dynamics in Kuwait continue to be comfortable, and management expects broadly flat NIMs this year. Potential pressure on funding costs due to tight liquidity in GCC should be offset by upward re-pricing of assets after the 25bps rate increase by the CBK in Dec 2015.
• Further improvement in credit quality The NPL ratio fell Q-o-Q to 1.32% and the NPL coverage improved to a high 335%. Provisioning charges were in line with our forecast, and continued to include a relatively large amount of general provisions; the bulk of these are precautionary provisions requested by the CBK, which were flat Y-o-Y. This is a trend we expect to see continue in FY2016.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel