• Cut 2016e earnings by 7% on weak fee income; cut FV to KWD0.70 We lower our 2016e earnings by 7% as we cut fee income, which has been slow in 9M16. We still assume flat NIMs and loan loss provisioning in FY16, and we are looking at flat earnings (after cost of tier-1 bond) and at 10% growth excluding 2015 one-off gains. We reiterate our Buy on NBK, with our FV of KWD0.7 (down from KWD0.77) offering 23% upside. Key aspects of our positive view on the stock are: i) supportive environment for loan growth (high-single digits), driven by government spending; ii) scope for lower provisioning post IFRS 9, and existing large provisioning buffers; iii) no evidence of tightening liquidity conditions in Kuwait, which should continue to support NIM stability; and iv) attractive dividend yield of 4.4%.
• IFRS 9 in Jan-18 could trigger lower provisioning costs Judgemental provisions requested by the CBK have kept NBK’s cost of risk high in 2014-9M16 (114bps in 2014, 95bps in 2015, 92bps in FY16e), despite improving credit quality (NPL ratio at 1.2% vs. 1.5% in 2014). NPL coverage has jumped to 370%. Judgmental provisions accounted for 50-55% of loan loss provisions and for c25% of earnings in 2013-FY16. We believe both judgmental and IFRS 9 provisions are unlikely to coexist, as they imply upfront provisioning for performing loans. With IFRS 9, these are based on a probability of default, and given NBK’s strong credit quality history (NPL ratio below 2.8% for past 15 years), IFRS 9 provisioning requirements should be less onerous than precautionary provisions.
• Loan growth outlook still supported by government spending NBK’s loan growth slowed in 9M16 to 5% Y-o-Y vs. 14% in 2015, despite improving credit growth in Kuwait, due to: i) high level of corporate settlements; ii) lower loan growth in its branches outside of Kuwait; and iii) slowdown in retail growth. Management continues to see a good pipeline for loan growth in Kuwait and is looking at 6-7% in 2017, driven by government spending. Our assumptions factor in a continuation of good relations between the government and Parliament, which will be elected in the upcoming 26-Nov. elections.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel