• Earnings miss on higher-than-expected operating costs and weaker-than-expected top-line NBK reported 2Q16 net income of KWD71.2mn, up 7% Y-o-Y (-9% Q-o-Q), missing our estimate of KWD80.1mn by 11%. The operating costs line, which was above the average range in the past few quarters, included some adjustments to the bank’s salary structure and other one-off operating expenses. Net interest income, up 6% Y-o-Y and 1% Q-o-Q was slightly weaker than our forecast on lower-than-expected loan growth. Provisioning was bang in line with our estimate. While earnings in 1H16 were below expectations, we feel comfortable with our net income growth forecast for FY16 of 10%, as we factor in a stronger 2H16 vs. 1H16 on the back of the booking of government loans and a resumption to stronger economic activity post-Ramadan.
• Loan growth recovers in 2Q16, but was below our estimate Loans rose 8% Y-o-Y and 1.1% Q-o-Q, below our forecast of 3% Q-o-Q. The booking of the KWD400mn loan to the Kuwait National Petroleum Company (KNPC), which we had factored in 2Q16, will be spread over 3 to 4 quarters. Our estimate for loan growth is 9.7% for FY16, and looking at loan growth so far in 1H16, we believe there are just minor downside risks to our forecast. The net interest spread was flat Q-o-Q, with higher funding costs being offset by higher asset yields. Previous management guidance calls for flat spreads in FY16 even in the absence of further rate increases.
• High general provisioning highlights conservative provisioning requirements by Central Bank Provisioning costs increased slightly Q-o-Q, with the bulk being general provisioning expenses, which increased Y-o-Y in 1H16. This confirms NBK’s view that precautionary provisioning requirements from the central bank are set to continue in 2016 and possibly also in 2017. Specific provisioning charges were low this quarter, with credit quality likely stable Q-o-Q.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel