Global Investment House – Kuwait – Gulf Bank (GB) – Investment Update - Gulf Bank (GB) reported a healthy bottom-line growth of 23%YoY in 2007, standing at KD130.4mn (adjusted EPS: 104fils) for the said period. The growth came despite stagnancy in its top-line (Net interest income) which declined by 2%YoY. Buoyancy in Net profit growth was therefore maintained by a surge in Non-interest income which almost doubled in 2007 to stand at KD89mn. GB’s Net interest income for 2007 remained relatively unchanged over that of the previous year given a decline in Interest income in the fourth quarter of the year. In 4Q07, Interest income increased by a mere 8%YoY while Interest expense continuing its upward trend led to an overall decrease in Net interest income amounting to 43%YoY. In the overall year, vigorous growth exhibited in the earlier 3 quarters helped keep the Net interest income from sliding further.
Based on the current market price of KD1.44/share, GB is trading at 2008E P/E and P/BV multiple of 12.6x and 4.0x respectively. Our estimated value for this banking scrip is worked out to be KD1.450 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 0.5% over the closing price of KD1.440 per share (as of June 08, 2008). We therefore downgrade our recommendation on the scrip from BUY to HOLD.
Net interest income of the bank declined slightly due to a one-time charge to the Interest income in 4Q07 amounting to KD11.3mn. The charge was due to an adjustment to the loans portfolio that had their terms modified during the year in accordance with the instructions of the Central Bank of Kuwait, whereby estimates of future cash flows of interest income were revised (discounted at original rates of interest). While core interest based income did not contribute much to the net earnings, Non-interest income drove the bottom-line with a 95%YoY growth and increased its weight in total income to 46% from 30% in 2006 while the 4-yr (2003-2006) average weight of Non-interest income in total income stood at 33%.
GB's ROAE exhibited a marked improvement in 2007, growing from 32.7% in 2006 to 34.1%. ROAA however declined by 30pps over 2006 yet remained high at 3.1% in 2007. Catering for one-time adjustments in 2007 however leads to a marginal decline of 4pps in ROAA while ROAE increases further to 36.6%. GB’s total assets grew 25%YoY in 2007 after touching the highest 5-yr growth rate of 58%YoY in 2006. Loans and advances emerged as the major asset driver increasing their proportion in total assets from 69% in 2006 to 73% in 2007. This was a consequence of the fact that 91% of the incremental assets were comprised of gross Loans and advances.
GB reported a Net profit of KD32.2mn for 1Q08 (26fils) depicting a muted 7%YoY jump in profitability and a slow start to the new year. In the absence of any push coming from the core earnings which grew only 3%YoY, Non-interest income made its presence felt with a much higher 24%YoY growth. Increasing operating costs combined with high taxation, however offset that increase which failed to trickle down to a sizeable bottom-line thrust. Net interest income in 1Q08 grew by a subdued 3%YoY despite a 21%YoY increase in interest earning assets. The reason can broadly be attributed to shrinking spreads which tapered off by 45bps over 1Q07. On analyzing the shrinking spreads, we come to the conclusion that the shrinkage came about in a decreasing rates scenario with the yield on interest earning assets falling at a faster rate than the fall in the cost of funds. GB’s deposits base and loans grew by a stunted 1%YTD in 1Q08 unable to catch up with the overall sector growth. The local banking sector deposits (private sector deposits + government deposits) grew by 6.6%YTD and loans to residents grew by 6.1%YTD in 1Q08 portraying an annualized growth rate of over 24%YoY for both.
Gulf Bank has stood out as a major market player (amongst top 3) in Kuwait’s banking industry with a mid-tier profile. We expect the bank to defend its position without much hassle in an increasingly competitive market. The bank’s growth is anticipated to be mainly organic given the bank’s opportunistic stance in acquiring other financial institutions (mainly banks) locally or abroad. Further penetration through increase in branch network, into Kuwait and the ME region seems to be the only available viable option and can bear fruit in terms of deposit mobilization and consequently loans disbursement. The emerging key strength of GB can identified as its increased focus on identification of smaller relatively less-mainstream market segments for loans disbursement. Detection and subsequent exploitation of such and further such segments could unlock possible avenues for short to medium term revenue generation in addition to expected revenue generation from mainstream corporates. In addition, it could also make GB a significant presence in these segment enjoying first movers’ advantage until at least caught upon by competitors.
We believe that going forward, in a relatively optimistic scenario, the bank will overcome its recent sluggishness and report a 19%YoY growth in deposits in 2008 and a 2007-2011 CAGR of 16%. Loans and advances are therefore expected to grow by 11%YoY in 2008 and at a 2007-2011 CAGR of 13%. We believe that the bank will maintain a loans to total deposits ratio of approximately 78% going forward and the remaining liquidity is anticipated to be parked in investment securities, mostly equity. The bank’s equity investments are forecast to grow by 25%YoY in 2008 and at a 2007-2011 CAGR of 17%. GB is forecast to exhibit a net earnings growth of 10%YoY 2008 which is expected to pick-up in the following years. The profitability CAGR for the bank in the 2007 – 2011 period is therefore anticipated to stand at 14%.
© 2008 Al Bawaba (www.albawaba.com)
