24-Jul-2017
Burgan Bank - 2Q17: Loan growth, spreads, and net interest income growth surprise positively
Rating: Buy
Target Price: KWD0.409
Closing Price: KWD0.342
Strong net interest income and lower opex drive 2Q17 net income up 23% Y-o-Y
Burgan Bank reported 2Q17 net income of KWD21.1mn, up 23% Y-o-Y (+18% Q-o-Q), coming in 22% ahead of our estimate of KWD17.2mn. The key drivers of Y-o-Y earnings growth were net interest income, up 17% Y-o-Y and 12% Q-o-Q, and operating expenses, which fell 11% Y-o-Y and 9% Q-o-Q (because of lower “other” operating costs). Provisioning costs were higher Y-o-Y, mainly because of an increase in provisions for available-for-sale investments. Net interest income, spreads, loan growth and operating expenses were key positive surprises relative to our forecasts. We reiterate our Buy rating on the stock.
Loan growth picks up after a weak 1Q17
The loan book rose 3% Q-o-Q (+3% Y-o-Y) after a weak 1Q17. Burgan Bank’s capital position, particularly its common equity tier-1 ratio, is more stretched than that of other Kuwait banks, but we believe it can finance growth in loans and risk-weighted assets in the range of 6-8% this year, which is our estimate for the Kuwait banking system, without the need to raise further capital. We estimate CET1 at 11.2% by year-end 2017, 60bps above the minimum required, and assuming a slight increase in the dividend payout from 15% in 2016 to 20% in 2017. The net interest spread increased by 26bps Q-o-Q, with asset yields increasing following two rate hikes by the Central Bank of Kuwait in December 2016 and March 2017. Fee income was weak, falling both Y-o-Y and Q-o-Q (1Q17 fee income was exceptionally high because of a high contribution of trade finance income from Burgan Bank Iraq).
Provisioning costs higher Y-o-Y, but within expectations
The absolute amount of loan loss provisions through the income statement was slightly higher Y-o-Y, although as a percentage of operating income, the provisioning burden declined from 29% in 2Q16 to 22% in 2Q17. In addition to precautionary provisions (of KWD2mn in 2Q17 out of a total loan loss provisioning figure of KWD9.3mn), we believe that management has allocated conservative provisions this quarter as a result of a strong top line (net interest income and other income drove revenue growth in 2Q17).
Target Price: KWD0.409
Closing Price: KWD0.342
Burgan Bank reported 2Q17 net income of KWD21.1mn, up 23% Y-o-Y (+18% Q-o-Q), coming in 22% ahead of our estimate of KWD17.2mn. The key drivers of Y-o-Y earnings growth were net interest income, up 17% Y-o-Y and 12% Q-o-Q, and operating expenses, which fell 11% Y-o-Y and 9% Q-o-Q (because of lower “other” operating costs). Provisioning costs were higher Y-o-Y, mainly because of an increase in provisions for available-for-sale investments. Net interest income, spreads, loan growth and operating expenses were key positive surprises relative to our forecasts. We reiterate our Buy rating on the stock.
Loan growth picks up after a weak 1Q17
The loan book rose 3% Q-o-Q (+3% Y-o-Y) after a weak 1Q17. Burgan Bank’s capital position, particularly its common equity tier-1 ratio, is more stretched than that of other Kuwait banks, but we believe it can finance growth in loans and risk-weighted assets in the range of 6-8% this year, which is our estimate for the Kuwait banking system, without the need to raise further capital. We estimate CET1 at 11.2% by year-end 2017, 60bps above the minimum required, and assuming a slight increase in the dividend payout from 15% in 2016 to 20% in 2017. The net interest spread increased by 26bps Q-o-Q, with asset yields increasing following two rate hikes by the Central Bank of Kuwait in December 2016 and March 2017. Fee income was weak, falling both Y-o-Y and Q-o-Q (1Q17 fee income was exceptionally high because of a high contribution of trade finance income from Burgan Bank Iraq).
Provisioning costs higher Y-o-Y, but within expectations
The absolute amount of loan loss provisions through the income statement was slightly higher Y-o-Y, although as a percentage of operating income, the provisioning burden declined from 29% in 2Q16 to 22% in 2Q17. In addition to precautionary provisions (of KWD2mn in 2Q17 out of a total loan loss provisioning figure of KWD9.3mn), we believe that management has allocated conservative provisions this quarter as a result of a strong top line (net interest income and other income drove revenue growth in 2Q17).
Elena Sanchez-Cabezudo, CFA