National Bank of Kuwait (NBK)

National Bank of Kuwait (NBK) Recommendation ACCUMULATE Risk Rating R-3 Share Price KWD748 Target Price KWD856 Implied Upside +14.5% Dominant Franchise with Strong Fundamentals NBK is the most profitable banking franchise in Kuwait vs. its peers in terms of its RoE and the only bank with RoE>CoE. Moreover, the name remains a leading cost-efficient bank in the GCC, along with strong asset quality. Most notably, NBK is the only bank in Kuwait that offers both conventional and Islamic banking via its Boubyan Bank acquisition. We initiate coverage with an Accumulate & a PT of KWD856. Highlights Strong earnings growth on the horizon. We pencil in a bottom-line CAGR of 12.6% in 2017-2022e vs. 0.1% (2012-2017). This accelerating growth forecast in net income should be driven by net interest income, which we model to grow by 9.8% and flat provisions. Having said this, there could be further upside to our estimates if NBK reduces provisions more than our model expectations. First of its kind. Following the consolidation of Boubyan Bank (58.4% stake) in 2012, NBK is the only conventional bank in Kuwait that offers both conventional and Islamic banking services. This gives the bank a competitive advantage vs. it peers given the significance and growth of Islamic banking in Kuwait. Kuwait s most profitable bank: NBK s RoE has consistently declined from its most recent high of ~20% (2009) to ~13% in 2017, primarily due to high general provisions imposed by the central bank. We are of the view this trend will reverse in 2018 as the bank fully applies IFRS 9 and general provisions are discontinued. The bank generated a tangible RoE of 13.3% in 2017 (13.5% in 2016) vs. a CoE of 11.03%, generating economic profits vs. economic losses by its local peers. We expect NBK s RoEs to increase; based on our model, we forecast RoEs of 14.5% (2018), 15.9% (2019) and 16.1% (2020). IFRS 9 is a positive for NBK, leading to lower CoR and stronger profitability. NBK, along with all other banks in Kuwait, has been booking excessive general provisions since 2012 at the request of the central bank. With IFRS 9, rather than booking a one-time impairment charge against equity, banks have been using the buffers built to write off Stage 2 loans that are expected to be impaired. As such, going forward, NBK would not have to book general provisions, resulting in a significant drop in CoR. We expect CoR to drop from 118bps in 2017 to 105 bps in 2018, 92bps (2019) and 82bps (2020). It should be noted that we are being conservative as CoR can decline well below our estimates. NBK s operating efficiency at optimal levels. Cost-to-income ratio has hovered around 32/33% since 2012 as management has managed costs effectively. We expect the bank s C/I ratio to decline to the 31% levels as revenue growth strengthens. Hence, we expect NBK to continue generating positive JAWs (4.9% in 2017, 2.3% and 1% in 2018e and 2019e, respectively). Asset quality improved although it was always healthy; continued write-offs along with prudent risk control contributed positively. NBK s NPL ratio receded to 1.42% in 2017 from 2.75% in 2012, while the coverage ratio jumped to 288% vs. 157% (2012). We pencil in NPL ratios around the 1.4% level going forward. Robust capitalization position. NBK enjoys one of the highest Tier-1 and CAR levels in Kuwait, maintaining it at 15.8% and 17.8% levels for the past couple of years. We expect this trend to persist while not being a significant drag on RoE. Catalysts 1) Revival of bid for the remaining 42% stake in Boubyan Bank and 2) Clarity on implementation of IFRS 9 on loan book. Recommendation, Valuation and Risks Recommendation and valuation: We assign a Price Target of KWD856 and an Accumulate rating. NBK is trading at a 2018e P/B and P/E of 1.4x and 13.1x, respectively. The stock offers a healthy yield of 4.0%. Risks: 1) Geo-political factors, 2) unexpected asset quality deterioration & 3) CoR does not improve. Key Financial Data and Estimates FY2017 FY2018e FY2019e FY2020e EPS (KWD) 53.00 56.95 67.39 74.16 EPS Growth (%) 8.2 7.5 18.3 10.1 P/E (x) 14.1 13.1 11.1 10.1 BVPS (KWD) 487.6 516.4 553.8 598.0 P/B (x) 1.5 1.4 1.4 1.3 DPS (KWD) 30.00 30.00 30.00 30.00 Dividend Yield (%) 3.8 4.0 4.0 4.0 Key Data Current Market Price (KWD) 748 Dividend Yield (%) 4.0 Bloomberg Ticker ADR/GDR Ticker Reuters Ticker ISIN Sector NBK KK N/A NBKK.KW KW0EQ0100010 Banks & Financial Svcs. 52wk High/52wk Low (KWD) 762/631 3-m Average Volume ( 000) 2,476.7 Mkt. Cap. ($ bn/kwd bn) 15.4/4.6 Shares Outstanding (mn) 6,213.3 1-Year Total Return (%) +22.3 Fiscal Year End December 31 Source: Bloomberg (as of June 10, 2018) Shahan Keushgerian +974 4476 6509 shahan.keushgerian@qnbfs.com.qa Saugata Sarkar, CFA, CAIA +974 4476 6534 saugata.sarkar@qnbfs.com.qa Monday, 11 June 2018 1

NBK is the Most Profitable Bank in Kuwait with a RoE of 13.3% 16.0% 13.3% 12.3% 12.0% 10.7% 10.4% 11.2% 9.2% 8.4% 8.0% 7.0% 6.7% 6.6% 4.0% 0.0% NBK Boubyan AUB KFH CBK Average GBK KIB Burg ABK NBK is Among the Leading Cost-Efficient Banks 60% 51.0% 42.1% 42.9% 45.6% 40% 30.9% 32.0% 32.3% 35.4% 37.7% 20% 0% CBK AUB NBK GBK ABK Boubyan KFH Burg KIB Cost-to-Income Monday, 11 June 2018 2

NBK Enjoys Robust Asset Quality 3.0% 2.52% 2.57% 2.70% 2.0% 1.74% 1.79% 1.39% 1.42% 1.0% 0.80% 0.53% 0.0% CBK Boubyan AUB NBK GBK ABK KFH KIB Burg Boasts Largest Market Share in Loans..... And Deposits 10% 3% 5% 6% 9% 3% 5% 8% 6% 5% 21% 25% 33% 31% 7% 9% 6% 8% CBK Boubyan AUB NBK GBK ABK KFH Burg KIB CBK Boubyan AUB NBK GBK ABK KFH Burg KIB Monday, 11 June 2018 3

Jan- 07 Sep- 07 May -08 Jan- 09 Sep- 09 May -10 Jan- 11 Sep- 11 May -12 Jan- 13 Sep- 13 May -14 Jan- 15 Sep- 15 May -16 Jan- 17 Sep- 17 May -18 Valuation We value NBK using 2 variations of the Residual Income Model (RI); 1) Warranted Equity Valuation and 2) RI based on a fundamental P/B: a) We utilize a WEV technique derived from the Gordon Growth Model: P/B = (RoAE-g)/(Ke-g). This model uses sustainable return on average equity (RoAE) based on the mean forecast over the next seven years, cost of equity (Ke), expected long-term growth in earnings (g) and present value of interim dividends to arrive at a fair value for this stock. We consider this method best suited to arriving at an intrinsic valuation through the economic cycle. b) We derive NBK's fair value by employing the RI valuation technique (based on a fundamental P/B), which is calculated based on the sum of its beginning book value, present value of interim residuals (net income minus equity charge) and the present value of the terminal value (we apply a fundamental P/B multiple based on the Gordon Growth Model to the ending book value at the end of our forecast horizon). We derive the P/B from the Gordon Growth Model: P/B = (RoAE-g)/(Ke-g). This model uses sustainable tangible return on beginning equity (RoE) based on the mean over our forecast period, cost of equity (Ke) and expected long-term growth in earnings (g) to arrive at fundamental/justified P/B. Based on this method we arrive at a fundamental P/B of 1.9x. The RI model is suitable for the following reasons: 1) when the company does not pay dividends or the pattern of dividend payments is unpredictable; 2) the company is expected to generate negative free cash flows for the foreseeable future and 3) as the traditional free cash flow to equity (FCFE) formula does not apply to banks. A major advantage of RI in equity valuation is that a greater portion of the company's intrinsic value is recognized from the beginning BVPS as opposed to the terminal value (common in traditional FCFE methodology). We add Kuwait s 10 year CDS of 1.05% to the 10 year US Treasury (2.97%) to arrive at a risk free rate of 4.0% and factor in an adjusted beta of 1.0. Finally, we add an equity risk premium of 7.0% to arrive at a Ke of 11.03%. Valuation Methodologies Fundamental P/B (WEV) RI Based on Fundamental P/B Sustainable RoE (%) 16.2 Beginning BVPS (2018e) (KWD) 488 Estimated Cost of Equity (%) 11.03 Present Value of Interim Residuals (KWD) 115 Terminal Growth Rate (%) 5.0 Present Value of Terminal Value (KWD) 341 Fundamental P/B 1.9x Less: Goodwill & Intangibles 94 Less: Goodwill & Intangibles 94 Fundamental P/B 1.9x Intrinsic Value (KWD) 862 Intrinsic Value (KWD) 850 Current Market Price (KWD) 748 Current Market Price (KWD) 748 Upside/(Downside) Potential (%) +15.3 Upside/(Downside) Potential (%) +13.6 Source: QNBFS Research Trading at a 23% discount to its Historical PB 6 5 4 Historical Median 1.9x P/B 2018e 1.4x 3 2 1 0 Source: Bloomberg, QNBFS Research Monday, 11 June 2018 4

And a 13% discount to its Historical P/E 25 20 Historical Average 15.0x Headline P/E 2018e 13.1x 15 10 5 0 Source: Bloomberg, QNBFS Research Consistent Dividends 40.0 100% Healthy Dividend Yield 6.0% 30.0 30.00 30.00 30.00 30.00 30.00 30.00 59% 57% 54% 53% 75% 4.0% 3.6% 3.8% 4.0% 4.0% 4.0% 20.0 45% 40% 50% 2.0% 10.0 25% 0.0 2015 2016 2017 2018e 2019e 2020e DPS (LHS) Payout Ratio (RHS) 0% 0.0% 2016 2017 2018e 2019e 2020e Monday, 11 June 2018 5

Key Forecasts Loan Portfolio NBK is the dominant bank in Kuwait and has a 32% market share in loans and 31% market share in deposits; we pencil in a loan book CAGR (2017-22e) of 8.3%. NBK has generally focused on Kuwait s blue chip corporates, mass retail (north of 30% market share) and HNIs through its extensive private banking network. The company has recently ventured off into lending to Tier 2 and Tier 3 firm in order to further diversify its loan portfolio, resulting in margin expansion. Loans (KWD mn) to Exhibit 8.3% CAGR vs. 8.0% (2012-17) 25,000 22,500 20,000 17,500 15,000 13,551 13,611 14,503 15,562 16,923 18,353 20,128 21,560 12,500 10,000 7,500 5,000 2,500 0 2015 2016 2017 2018e 2019e 2020e 2021e 2022e Retail Book Increasing in Size Well Diversified Loan Book 100% Manufacturing 75% 12% 6% 5% 2% Financial Institutions 72% 73% 71% 69% 69% 69% 68% 67% 10% Eng. & Construction 50% Retail 21% 33% Other 25% Real Estate 28% 27% 29% 31% 31% 31% 32% 33% 11% Retail & Trade 0% 2010 2011 2012 2013 2014 2015 2016 2017 Telecoms, Utilities & Transport Retail Corporate Monday, 11 June 2018 6

Operating Performance We pencil in a bottom-line CAGR of 12.6% in 2017-2022e vs. 0.1% (2012-2017). The growth in net income is expected to be driven by net interest income which we model in a growth of 9.8% and flat provisions. Having said this, there could be further upside to our estimates if NBK reduces provisions more than our model expectations. Net Profit (KWD) Total Revenue (KWD mn) 1,200 12% 500 400 300 282 295 322 370 435 477 900 600 8% 708 746 5% 10% 822 889 8% 969 9% 1,036 7% 10% 8% 6% 200 4% 300 100 2% 0 2015 2016 2017 2018e 2019e 2020e 0 2015 2016 2017 2018e 2019e 2020e Revenue (LHS) Growth (RHS) 0% Net Interest Income (KWD mn) 1,200 13.0% 14.0% 1,000 800 600 469 530 7.5% 570 10.4% 629 11.1% 699 10.4% 771 841 9.0% 11.2% 8.4% 5.6% 400 4.0% 200 2.8% 0 2014 2015 2016 2017 2018e 2019e 2020e 0.0% Net Interest Income (LHS) Growth (RHS) Monday, 11 June 2018 7

NIMs To Further Expand With Expected Rate Hikes 4.00% 3.50% 3.00% 3.66% 3.96% 3.80% 3.47% 3.53% 3.28% 3.27% 2.99% 2.98% 2.95% 3.01% 3.12% 3.21% 3.24% 3.29% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e Spreads To Strengthen In The Near Term & Stabilize Afterwards 8.00% 7.39% 6.00% 4.00% 3.88% 3.51% 5.52% 3.74% 4.67% 4.55% 3.40% 3.46% 4.29% 4.07% 3.22% 3.23% 5.19% 4.93% 4.71% 4.49% 4.30% 4.10% 3.82% 3.89% 2.96% 2.95% 2.89% 2.93% 3.02% 3.10% 3.11% 3.13% 2.00% 1.77% 1.27% 1.09% 1.07% 0.84% 0.87% 0.94% 1.21% 1.37% 1.48% 1.61% 1.82% 2.07% 0.00% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e Yield on IEAs CoFs Spread Monday, 11 June 2018 8

One of the Highest RoEs in Kuwait; We Expect RoE to Increase as Provisions Decline 18.0% 3.7% 16.0% 3.2% 15.9% 16.1% 16.2% 3.2% 14.0% 14.5% 14.0% 14.5% 14.1% 13.5% 13.3% 14.5% 2.7% 12.0% 2.2% 2.1% 2.0% 1.8% 1.9% 2.1% 2.2% 2.3% 2.3% 2.2% 10.0% 1.7% 8.0% 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e Tangible RoE (LHS) RoRWA (RHS) 1.2% Efficiency NBK Operating Within an Optimal Range 40% 32.0% 33.2% 32.7% 33.1% 33.8% 32.3% 31.6% 31.3% 31.8% 31.8% 30% 20% 10% 0% 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e Monday, 11 June 2018 9

Asset Quality Healthy Asset Quality & We Expect the NPL Ratio to Continue its Downward Trajectory 3% 365.2% 322.4% 328.6% 334.9% 352.8% 319.6% 378% 276.1% 287.5% 315% 2% 1.96% 252% 199.8% 1.50% 1.34% 1.28% 1.42% 1.40% 1.44% 1.38% 1.34% 189% 1% 126% 63% 0% 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 0% NPL Ratio (LHS) Coverage Ratio (RHS) Cost of Risk Markedly Improved; We Foresee CoR below Historical Range From 2018 and Beyond 40.0% 134 140 30.0% 20.0% 34.4% 115 30.6% 98 27.5% 88 25.5% 119 31.4% 105 27.1% 92 23.6% 82 21.5% 120 100 80 60 10.0% 40 20 0.0% 2013 2014 2015 2016 2017 2018e 2019e 2020e Provisions to PPP (LHS) CoR (RHS) - Monday, 11 June 2018 10

Capitalization Capitalization Levels Remain Good 20.0% 17.5% 15.0% 16.8% 14.7% 17.7% 17.8% 15.7% 15.8% 16.8% 16.8% 17.1% 14.7% 14.8% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% 2015 2016 2017 2018e 2019e 2020e CAR Tier-1 Ratio Company Description National Bank of Kuwait is a first full service bank established in 1952 as the first local bank; NBK is the dominant bank in Kuwait and has a 32% market share in loans and 31% market share in deposits. NBK is a universal bank offering services to corporates and retail customers, private banking, investment banking, brokerage and asset management. The bank operates across a spectrum of 15 countries with a focus on the MENA region and has a network of ~145 branches (68 in Kuwait & 43 in Egypt) and ~600 ATMs. Stable Shareholder base. The bank was established by leading Kuwaiti merchants and has maintained the same core shareholder base since inception. Major Shareholders Shareholders Investor Type Country Share (%) The Public Institution for Social Security Government Kuwait 5.5 Source: Company data Subsidiaries/Associates Company Country Share (%) Boubyan Bank Kuwait 58.4 NBK Egypt Egypt 98.5 Watani Investment Company Kuwait 99.9 NBK Banque Privée (Suisse) S.A. Switzerland 100.0 National Bank of Kuwait (International) plc United Kingdom 100.0 Turkish Bank A.S. Turkey 34.3 Bank Syariah Muamalat Indonesia T.B.K. Indonesia 30.5 Source: Company data Monday, 11 June 2018 11

Detailed Financial Statements Ratios FY2017 FY2018e FY2019e FY2020e Profitability (%) RoAE 10.4 11.3 12.6 12.9 RoAA 1.3 1.4 1.5 1.5 RoRWA 1.9 2.1 2.2 2.3 NIM (% of IEAs) 3.01 3.12 3.21 3.24 NIM (% of RWAs) 3.90 4.05 4.14 4.17 NIM (% of AAs) 2.50 2.60 2.68 2.73 Spread 2.9 3.0 3.1 3.1 Efficiency (%) Cost-to-Income (Headline) 32.3 31.6 31.3 31.8 Cost-to-Income (Core) 33.1 32.1 31.7 32.2 Liquidity (%) LDR 101.6 101.6 101.1 101.5 Loans/Assets 55.7 56.1 56.8 57.6 Cash & Interbank Loans-to-Total Assets 20.1 20.5 19.3 17.1 Deposits to Assets 54.8 55.2 56.2 56.8 Wholesale Funding to Loans 53.9 51.6 50.4 48.3 IEAs to IBLs 1.1x 1.1x 1.1x 1.1x Asset Quality (%) NPL Ratio 1.42 1.40 1.44 1.38 NPLs to Shareholder's Equity 7.1 7.1 7.4 7.2 NPLs to Tier 1 Capital 9.1 9.6 9.8 9.2 Coverage Ratio 287.5 328.6 334.9 352.8 ALL/Average Loans 0.7 1.0 1.1 1.0 Cost of Risk 119 105 92 82 Capitalization (%) Tier 1 Ratio 15.8 14.7 14.8 15.0 CAR 17.8 16.8 16.8 17.1 Tier 1 Capital to Assets 10.0 9.5 9.6 9.9 Tier 1 Capital to Loans 18.0 16.9 16.9 17.1 Tier 1 Capital to Deposits 18.3 17.2 17.1 17.4 Leverage (x) 8.6 8.6 8.7 8.6 Growth (%) Net Interest Income 10.4 11.1 10.4 9.0 Non-Interest income 9.6-1.5 3.8-1.1 Total Revenue 10.2 8.1 9.0 7.0 Opex 5.3 5.8 8.1 8.5 Net Operating Income 12.7 9.2 9.4 6.3 Net Provisions & Impairments 9.2 14.7 17.7 9.7 Net Income 9.1 15.2 18.3 10.1 Loans 6.5 7.3 8.7 8.4 Deposits 9.6 7.3 9.3 8.0 Assets 7.4 6.5 7.5 6.9 RWAs 6.1 7.7 8.3 8.0 Monday, 11 June 2018 12

Income Statement (In KWD mn) FY2017 FY2018e FY2019e FY2020e Net Interest Income 629 699 771 841 Fees & Commissions 139 140 147 148 FX Income 34 35 37 34 Other Income 21 16 13 13 Non-Interest Income 194 190 198 195 Total Revenue 823 889 969 1,036 Operating Expenses (265) (281) (304) (329) Net Operating Income 557 608 665 707 Net Provisions & Investment Impairments (188) (185) (167) (162) Net Profit Before Tax & Minority Interest 369 423 498 545 Tax (27) (31) (36) (40) Net Profit Before Minority Interest 342 392 462 505 Minority Interest (20) (23) (27) (28) Net Profit (Headline/Reported) 322 370 435 477 Interest on Tier-1 Note (15) (16) (16) (16) Net Profit (Attributable) 307 354 419 461 Balance Sheet (In KWD mn) FY2017 FY2018e FY2019e FY2020e Assets Cash & Balances with Central Bank 2,744 3,062 3,180 3,254 Interbank Loans 2,488 2,614 2,572 2,202 Net Investments 5,081 5,211 5,794 6,652 Net Loans 14,503 15,562 16,923 18,353 Investment in Associates 63 64 65 66 Other Assets 250 274 291 312 Net PP&E 324 350 385 424 Goodwill & Intangibles 582 579 576 573 Total Assets 26,035 27,717 29,786 31,835 Liabilities Interbank Deposits 7,469 7,683 8,180 8,511 Customer Deposits 14,270 15,312 16,736 18,075 Global MTNs & Subordinated Tier-2 Notes 346 346 346 346 Other Liabilities 388 612 502 578 Tier-1 Notes 211 211 211 211 Total Liabilities 22,684 24,164 25,975 27,721 Shareholders Equity 3,029 3,209 3,441 3,715 Total Liabilities & Shareholders Equity 26,035 27,717 29,786 31,835 Monday, 11 June 2018 13

Recommendations Based on the range for the upside / downside offered by the 12 - month target price of a stock versus the current market price Risk Ratings Reflecting historic and expected price volatility versus the local market average and qualitative risk analysis of fundamentals OUTPERFORM Greater than +20% R-1 Significantly lower than average ACCUMULATE Between +10% to +20% R-2 Lower than average MARKET PERFORM Between -10% to +10% R-3 Medium / In-line with the average REDUCE Between -10% to -20% R-4 Above average UNDERPERFORM Lower than -20% R-5 Significantly above average Contacts Saugata Sarkar, CFA, CAIA Shahan Keushgerian Zaid Al Nafoosi, CMT, CFTe Head of Research Senior Research Analyst Senior Research Analyst Tel: (+974) 4476 6534 Tel: (+974) 4476 6509 Tel: (+974) 4476 6535 saugata.sarkar@qnbfs.com.qa shahan.keushgerian@qnbfs.com.qa zaid.alnafoosi@qnbfs.com.qa QNB Financial Services Co. WLL Contact Center: (+974) 4476 6666 PO Box 24025 Doha, Qatar Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services Co. WLL ( QNBFS ) a wholly-owned subsidiary of Qatar National Bank Q.P.S.C. ( QNB ). QNBFS is regulated by the Qatar Financial Markets Authority and the Qatar Exchange QNB is regulated by the Qatar Central Bank. This publication expresses the views and opinions of QNBFS at a given time only. It is not an offer, promotion or recommendation to buy or sell securities or other investments, nor is it intended to constitute legal, tax, accounting, or financial advice. QNBFS accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. We therefore strongly advise potential investors to seek independent professional advice before making any investment decision. Although the information in this report has been obtained from sources that QNBFS believes to be reliable, we have not independently verified such information and it may not be accurate or complete. QNBFS does not make any representations or warranties as to the accuracy and completeness of the information it may contain, and declines any liability in that respect. For reports dealing with Technical Analysis, expressed opinions and/or recommendations may be different or contrary to the opinions/recommendations of QNBFS Fundamental Research as a result of depending solely on the historical technical data (price and volume). QNBFS reserves the right to amend the views and opinions expressed in this publication at any time. It may also express viewpoints or make investment decisions that differ significantly from, or even contradict, the views and opinions included in this report. This report may not be reproduced in whole or in part without permission from QNBFS COPYRIGHT: No part of this document may be reproduced without the explicit written permission of QNBFS. 14