Earnings up 17% Y-o-Y; missed our estimate by 6% due to accounting reclassification of associate: NBK has reported 3Q18 net income of  KWD86.5mn, up 17% Y-o-Y (-6% Q-o-Q), 6% below our estimate of KWD91.8mn. The earnings miss was driven by an investment loss booked in non-interest income of KWD5mn (loss from reclassifying an associate to available for sale investment due to loss of significant influence; the financial statements do not mention which associate this refers to).
 
Good growth in net interest income and fee income; loan growth in high single digits: Excluding the KWD5mn one-off, earnings would have been in line with our forecast of KWD92mn, and up 25% Y-o-Y. Key positive surprises this quarter were: i) net interest income; ii) fee income; and iii) operating costs. Provisioning costs and minority expenses came in slightly higher than our estimate. Operating growth trends were overall better than expected. We have a Buy rating on the stock.
 
Loan growth at 7% Y-o-Y, in line: 3Q18 was a slow quarter for loan growth (+1% Q-o-Q), as typically business activity quietens in Kuwait in the third quarter. Y-o-Y loan growth of 7% is in line with management indications of mid to high single digits for the FY2018.
 
Higher spreads Q-o-Q: Spreads came as a positive surprise this quarter (+4bps spread increase, +7bps increase in margins vs 2Q18), despite no rate hike in June by the CBK (latest 25bps rate hike was March 2018): the Q-o-Q increase in asset yields outpaced the increase in funding costs. Net interest income increased 11% Y-o-Y and 3% Q-o-Q. Y-o-Y growth in fee income remains healthy, at 8% in 3Q18 (-4% Q-o-Q as 2Q18 fees included some one-offs)
 
Slow growth in operating expenses: Operating costs increased just 2% Y-o-Y (-5% Q-o-Q).
 
Provisioning costs broadly unchanged Q-o-Q: Provisioning costs in 3Q18 were very similar than 2Q18; similarly to previous quarters, most of the provisioning expenses were specific, as opposed to general (precautionary provisions), which was the case in previous years. In preparation for IFRS9, NBK has been writing off riskier loans since the end of 2017 using existing precautionary provisions accumulated in previous years, while adding new specific provisions so that NPL coverage does not deteriorate.  The NPL coverage and NPL ratio for 3Q18 are not disclosed in the quarterly financial statements. Kuwait banks have not yet implemented IFRS9 for the loan book. Implementation will be most likely on 1st January 2019.
 
Good growth in consumer banking and Islamic banking: The segmental breakdown shows good growth in earnings for consumer banking (+10% Y-o-Y), Islamic banking (+11% Y-o-Y) and international operations (+25% Y-o-Y). Corporate banking earnings fell Y-o-Y (no details provided on what drover the earnings decline this quarter). 
 
National Bank of Kuwait: KWD0.83 as of 9 Oct. 2018, Rating: Buy, TP: KWD0.87/share, MCap: USD17,231mn, NBK KK/NBKK.KW