Rating: Neutral
Target Price: KWD0.372
Closing Price: KWD0.330

2Q17 net income down 68% Y-o-Y, well below our estimateCommercial Bank of Kuwait (CBK) reported 2Q17 net income of KWD1.2mn, down 68% Y-o-Y (and up from KWD0.8mn in 1Q17), coming in well below our estimate of KWD12.7mn (and Bloomberg consensus of KWD8.9mn), due to higher-than-expected provisioning costs. Our 2Q17 estimate assumed that 1Q17 provisioning costs were exceptionally high, but they have remained at similar levels in 2Q17. 

 
Provisioning costs linked to legal case, rather than deterioration in credit quality
Investment Dar has been in legal dispute with CBK over part of its c20% stake in Boubyan Bank, and we understand that CBK set provisions aside in 1H17 for this legal case. The appeal court has recently given its verdict against the bank and now the case is in the court of cessation. There might be need for more provisions in 2H17 depending on how quickly the court delivers its verdict. On a different note, CBK’s credit quality indicators are very healthy: NPL ratio of just 0.6% and NPL coverage of over 1000% as of December 2016 (latest available).
 
Weak loan growth; spreads improve Q-o-Q on higher asset yields
Customer loans fell 1% Y-o-Y and increased just 1% Q-o-Q. CBK management has said that it continues to reduce lending exposure to some customers/segments, particularly in real estate. CBK has had a very conservative lending stance in the past few years. Asset yields have increased following the two recent rate hikes by the central bank of Kuwait in December 2016 and March 2017, and net interest income increased by 13% Y-o-Y and by 6% Q-o-Q. Fee income growth was also healthy, up 11% Y-o-Y and 3% Q-o-Q.
Elena Sanchez-Cabezudo, CFA