Global Research Result Update Equity - Kuwait Banking Sector 23 July, 2012 Market Data Bloomberg Code: NBK KK Reuters Code: NBKK KW CMP (24 th July 2012): 1.000 O/S (mn) 4,353.5 Market Cap (KWD mn): 4,353.5 Market Cap (USD mn): 15,437.9 P/E 2012e (x): 18.1 P/BV 2012e (x): 2.0 Price Performance 1-Yr High (KWD): 1.109 Low (KWD): 0.909 Average Volume ( 000): 1,365.1 1m 3m 12m Absolute (%) -2.0-7.4 0.0 Relative (%) -3.0-2.9 5.0 Price Volume Performance Net income misses analyst expectations Asset quality deteriorates Lack of visibility in earnings is a major concern Fair value slashed by 4%, HOLD maintained HOLD Target Price KWD0.988 2Q12 bottom-line tumbles, misses analyst expectations reported profit of KWD39.8mn down 40%YoY and 51%QoQ. Net income fell significantly short of meeting analyst expectations whereby Bloomberg consensus estimates were of KWD81.5mn. Earnings shrank on high voluntary provisions taken in anticipation of continuation of a challenging operating environment. Asset quality deteriorates but still in better shape than local peers NBK s NPL ratio which was reported at 1.55% for 2011, saw massive deterioration with the same being reported at 2.95% for 2Q12. Albeit, we expected a rise in the NPL ratio in 2012, this exceeds by far, our expectations for the year. We believe that this is was the eventual outcome of the spilling over of a large portion of the loans amounting to KWD165mn which were categorized in the 61-90 days bracket (past due and not impaired loans) in the financials for 2011 into the impaired category. Specific provisions have however not kept up to pace with the requirements pertaining to the level of deterioration, likely due to the massive build up of collateral which we saw in 2011. As a result, coverage ratio dropped from 243% in 2011 to just 129% in 2Q12; despite the drop, the bank s NPLs coverage remains within comfortable levels. High general provisions erode bottom-line performance NBK took high general provisions amounting to KWD28mn in 2Q12 citing challenges and weaknesses in the operating environment pertaining to Kuwait, which still contributes around two-thirds of its income. With little expected to be done to alleviate NBK s concerns, we believe that further voluntary provisioning during the course of the year cannot be ruled out. We further anticipate a sharp rise in specific provisions during the second half, owing to step up in regulatory provisioning associated with the age of the delinquent account. Moreover, prevalent financial market conditions in Kuwait are likely to reduce the value of the collateral, leading to pressure on the bank to either increase the collateral or increase provisions against the impaired loan. In the absence of clear guidance on things to come, we have taken a pessimistic view on the bank s performance. Reported figures for provisions for the half year have already exceeded our full year projections for 2012, prompting us to increase our estimates by 115%. Source: Zawya Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel.: (965) 22951270 Naveed Ahmed, CFA Senior Financial Analyst nahmed@global.com.kw Tel.: (965) 22951280 Global Investment House www.globalinv.net Net interest stands largely unchanged, NIM under pressure NBK s top-line inched up by just 1.2%YoY but fell 1.1%QoQ owing to pressure on net interest margin which declined by 8bps YoY and 13bps QoQ. Easing interbank liquidity which has brought down pricing benchmarks has had its impact on the bank s yield on assets which dropped by 20bps during the quarter against 2Q11 as per our calculations. That combined with an increase in the cost of funds by 11bps has squeezed the bank s spreads. The impact has been partially mitigated by a 7%YoY increase in lending volumes but trivial quarterly growth in lending likely to help maintain pressure on the bank s net interest income. Investment related losses possibly one-time only NBK suffered an impairment loss of KWD8.1mn in 2Q12 related to its investment portfolio which we believe to be one-off and related to the equity portion of its investments. Unless price weakness persists, we do not expect NBK to take further provisions against this investment security.
Global Research - Kuwait Income Statement KWD mn 2Q12 2Q11 YoY 1Q12 QoQ Interest Income 125.4 120.1 4.4% 126.6-1.0% Interest Expense 31.2 27.0 15.5% 31.3-0.6% Net Interest Income 94.3 93.1 1.2% 95.3-1.1% Fees & Commission Income 25.2 25.7-1.7% 26.0-3.0% Foreign Exchange Gains 5.6 5.9-4.6% 6.0-6.5% Gains from investment securities 1.0 2.3-56.7% 1.4-27.1% Other Income 4.3 6.4-33.2% 5.0-15.3% Non Interest Income 36.1 40.2-10.2% 38.4-6.0% Operating Expenses 43.3 41.0 5.6% 38.9 11.2% Provisions 42.9 21.8 96.7% 8.0 435.5% Operating Profit 44.1 70.5-37.4% 86.7-49.1% Taxation & Minority Interest 4.3 4.6-5.6% 5.7-24.2% Net Profit attributable to the parent 39.8 65.9-39.6% 81.0-50.9% Source: Company Accounts Valuation update Maintain HOLD, fair value slashed We have slashed our fair value for NBK to KWD0.988/share from KWD1.027 previously which signifies a reduction of 4%. This comes as a result of lack of clarity regarding the bank s financial performance especially since most of the concerns highlighted by the bank are not likely to be addressed anytime in the near future. We have therefore decreased our bottom-line projections for the bank by 26% driven by a 6% reduction in the top-line and doubling of provisions from previous estimates. We reiterate our previous stance of dullness in loan and asset growth in 2012 and into a large part of 2013. Changes in the risk free rate (US 10- yr Treasury yield) and in the risk premium for the US has also had some bearing on our valuation. At the market price of KWD1.000/share as on July 23, 2012, the bank s shares seem fairly valued (downside of 1.2%). Resultantly, we maintain our recommendation on NBK at HOLD. Estimates Revision - 2012e KWD mn Earlier Estimates Revised Estimates % Change Loans 9.2 9.2 0.5% Deposits 7,064.6 7,395.5 4.7% Net Interest Income 394.9 371.2-6.0% Operating Income 516.1 426.2-17.4% Provisions 48.3 104.2 115.5% Net Profit 324.0 239.9-26.0% Source: Company Accounts, Global Research July 2012 2
Ratio Analysis Balance Sheet Income Statement Global Research - Kuwait Financial Statements (KWD mn) 2009 2010 2011 2012e 2013e 2014e 2015e Interest/Financing Income 547 482 490 498 522 601 694 Interest Expense/Payment to Depositors (170) (123) (109) (127) (124) (177) (223) Net Interest/Financing Income 377 359 381 371 397 424 472 Fee & Commission Income 103 98 104 109 117 129 141 Investment Income 13 3 9 6 7 8 9 Other Income 25 38 46 44 48 55 61 Total Non-Interest/Financing Income 142 140 159 159 173 192 211 Total Operating Income 518 499 540 530 570 616 683 Provisions expense (56) (20) (57) (104) (73) (48) (36) Operating Expenses (180) (159) (162) (170) (180) (193) (207) Profit Before Taxation 283 320 321 256 318 374 441 Taxation & Minority Interest (18) (18) (19) (16) (20) (24) (28) Net Profit Attributable to Parent 265 302 302 240 298 351 412 Cash Balances 1,622 1,172 1,271 1,469 1,791 2,229 2,750 Deposits with Banks & FIs 724 716 788 906 996 1,076 1,130 Investment Securities 1,858 2,177 2,354 2,699 3,021 3,331 3,670 Gross Loans & Financings 8,113 8,133 8,502 8,854 9,226 9,798 10,595 Loan Loss Reserve (296) (279) (320) (414) (482) (527) (563) Net Loans & Financings 7,817 7,853 8,182 8,440 8,744 9,271 10,032 Investment in Associates 388 504 528 554 582 611 642 Investment Properties 0 0 0 0 0 0 0 Net Fixed Assets 153 174 174 192 220 253 291 Other Assets 345 301 330 337 345 355 366 Total Assets 12,907 12,899 13,627 14,596 15,701 17,126 18,882 Deposits from Banks & FIs 4,269 4,074 4,310 4,569 4,843 5,231 5,649 Deposits from Customers 6,600 6,385 6,799 7,395 8,061 8,867 9,931 Other Borrowings 0 0 0 0 0 0 0 Other Liabilities 316 353 338 328 362 407 454 Paid-up Capital 297 360 396 435 435 435 435 Retained Earnings 553 644 730 821 975 1,158 1,381 Other Reserves 858 1,070 1,042 1,035 1,009 1,011 1,012 Shareholders' Equity 1,708 2,074 2,168 2,291 2,419 2,605 2,829 Minority Interest 13 13 12 13 15 16 18 Total Equity & Liability 12,907 12,899 13,627 14,596 15,701 17,126 18,882 Return on Average Assets 2.1% 2.3% 2.3% 1.7% 2.0% 2.1% 2.3% Return on Average Equity 18.2% 17.1% 15.3% 11.5% 13.4% 14.9% 16.2% Fee Income Yield 1.4% 1.2% 1.3% 1.3% 1.3% 1.4% 1.4% Recurring Income/Operating Income 92.6% 91.7% 89.8% 90.6% 90.2% 89.8% 89.8% Interest Earning/Financing Assets Yield 5.5% 4.7% 4.5% 4.4% 4.3% 4.7% 5.0% Cost of Funds 1.6% 1.2% 1.0% 1.1% 1.0% 1.3% 1.5% Net Spread 3.9% 3.5% 3.5% 3.3% 3.3% 3.4% 3.5% Cost to Income Ratio 34.7% 31.9% 30.0% 32.1% 31.5% 31.3% 30.3% Net Loans to Customer Deposits 118.4% 123.0% 120.3% 114.1% 108.5% 104.6% 101.0% Non Performing Loans 143 134 132 262 258 255 222 Loan Loss Reserve 296 279 320 414 482 527 563 NPLs to Gross Loans 1.8% 1.6% 1.55% 3.0% 2.8% 2.6% 2.1% NPL Coverage 207.8% 208.7% 243.0% 157.9% 186.6% 206.9% 252.9% Provisions/Total Income 10.7% 4.0% 10.6% 19.6% 12.8% 7.9% 5.2% Cost of Risk (bps) 49 15 63 108 75 47 35 Equity to Gross Loans 21.1% 25.5% 25.5% 25.9% 26.2% 26.6% 26.7% Equity to Total Assets 13.2% 16.1% 15.9% 15.7% 15.4% 15.2% 15.0% Dividend Payout Ratio 44.2% 47.6% 51.9% 53.7% 48.3% 47.6% 45.9% Adjusted EPS (fils) 60.9 69.3 69.5 55.1 68.3 80.5 94.7 Adjusted BVPS (fils) 365.4 443.5 461.8 496.6 522.7 559.9 606.4 Market Price (fils) * 1,120.0 1,440.0 1,120.0 1,000.0 1,000.0 1,000.0 1,000.0 Dividend Yield 4.4% 3.5% 4.4% 3.0% 3.3% 3.8% 4.3% P/E Ratio (x) 12.6 17.2 14.7 18.1 14.6 12.4 10.6 P/BV Ratio (x) 2.1 2.7 2.2 2.0 1.9 1.8 1.6 Source: Company Reports & Global Research * Market price for 2012 and subsequent years as per closing prices on KSE on July 23, 2012 July 2012 3
Global Research - Kuwait Disclosure The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research have been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Bloomberg Ticker Reuters Ticker Price Disclosure National Bank of Kuwait HOLD NBK KK NBKK.KW KWD 1.000 1,10 1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY BUY HOLD SELL Fair value of the stock is >20% from the current market price Fair value of the stock is between +10% and +20% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is < -10% from the current market price Disclaimer This material was produced by Global Investment House KSCC ( Global ),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. July 2012 4
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