• Global values National Bank of Kuwait at KD1.06 and downgrades its recommendation from BUY to HOLD
Global Investment House – Kuwait – National Bank of Kuwait (NBK) - National Bank of Kuwait (NBK) is the biggest bank in Kuwait by assets, loans and profitability. Being an international bank, it boasts a presence across 17 countries, quoting an extensive geographic foot-print. Controlling a market share of over 30% in Kuwait, it is a leader in retail banking and with a Kuwaiti market share well in excess of 40% in trade finance, it leads the banks in this segment as well. NBK is distinguished among Arab banks by its international network of branches, subsidiaries and representative offices located in the main international and regional financial centres. That coupled with a renowned brand, adds considerable franchise value to the bank, helping it to effectively mobilize low-cost deposits and to effectively disburse loans.
NBK staged a subdued performance in FY08 with a 7%YoY decline in its bottom-line which stood at KD255.3mn for the period under review. The bank however clearly outshone the sector performance which dived 26%YoY (ex-Gulf Bank) during 2008, making NBK stand out as one of the most resilient banks in Kuwait. NBK, which had exhibited a tremendous growth in its net interest income (NII), saw a severe tapering-off in its profits, attributed to harsh provisioning during the year. We understand that the worse for the bank is over, though the bank will still feel milder after-shock of the happenings of 2008. Further prudent provisioning is expected to keep profitability growth in strict check in 2009 while the bank copes with a decreasing interest rates scenario and that too amidst a time when banks in general, are weighing lending opportunities religiously against heightened perceived risks. Profitability growth is anticipated to jack up in 2010, despite a modest growth in the top-line, primarily on account of lower provisioning requirements and higher non-interest income. The bank is therefore expected to exhibit earnings CAGR of 16.9% over the 2008 – 2012 period.
Based on the current market price of KD1.16/share, NBK is trading at 2009E P/E and P/BV multiple of 12.1x and 2.1x respectively. Our estimated value for this banking scrip is worked out to be KD1.06 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers a downside of 8.9% over the closing price. We therefore downgrade our recommendation on the scrip from BUY to HOLD.
NBK survived the economic and financial crisis in 2008 that hit the world and then Kuwait exhibiting a small decline in profitability and that too on the back of excessive voluntary provisioning. The bank escaped the worst due to its prudent investment strategy, where equity investments formed a small proportion of the total assets in 2008, and by operating under a conservative lending policy where the bank’s exposure to the risky investment sector was less than 5% of the loans book. Moreover, an extensive retail loans portfolio which has so far maintained good quality (low delinquency) and which is also expected to do so in the near future, has and is anticipated to provide the required cushion to total loans in terms of loans deterioration emanating from the riskier corporate segment. Furthermore, the bank has a low exposure to financing for the purchase of shares. Albeit, this is one of the most risky segments, the fact that the exposure is minimal and that combined with the fact that the bank is adequately collateralized (200% collateral policy) against delinquencies in this segment. NPLs of the bank will therefore increase but the increase will be limited and the NPLs ratio is only expected to increase more than 20bps. Provisioning is nevertheless forecast to remain high at least for the next 2 years particularly due to high voluntary provisions coming as a prudent measure.
Profitability Trends
Source: Global researches and company’s reports
We believe that going forward into 2009 (and beyond), the spreads of the bank will resist any downwards pressure, remaining stable at or around current levels over the forecast period. Moreover, NBK plans to tap existing clients with very low risk profile for further loans growth and wants to be opportunistic in terms of new clients and projects. With a slowing down economy, sluggishness in demand is imminent and that combined with the cautious attitude of banks to lend, in this instance NBK, is expected to further decrease credit off-take in Kuwait. This leads us to assume that credit disbursement will increase at a muted rate of 5%YoY for 2009 and will remain 10%YoY over our forecast period.
With NII expected to grow at 10%YoY in 2009 and at a 2008 – 2012 CAGR of 11% over the forecast period, the contribution of the top-line to total operating income (before provisions) is estimated to remain high at over 71%. Going forward as a conservative measure we have kept the contribution of investment income to the bottom-line to stand significantly low when compared to the pre-2008 era; also reflecting the strategy of the bank which aims at focusing on core recurring income. Provisions against loans and impairments in investments are expected to decline in 2010 and following years, leading to peak in bottom line growth in 2010. Net profit is then onwards, estimated to decline to more realistic and sustainable levels. We believe that NBK will exhibit earnings CAGR of 17% for the 2008 – 2012 period.
