• Global values Commercial Bank of Kuwait at KD1.64 and recommends a BUY on the stock
Global Investment House – Kuwait – Commercial Bank of Kuwait (CBoK) -Commercial Bank of Kuwait (CBoK) mustered up a strong bottom-line growth of 20%YoY in 2007, reporting a net profit of KD120.4mn for the said period. While top-line lagged in congruence with most of the bank’s peers, declining 4%YoY, CBoK’s net profit still managed a decent upsurge. Bottom-line was given a much needed thrust by the Non-interest income which grew 42%YoY to stand at KD73mn for the year 2007. CBoK, like many of its conventional peers, ended 2007 with a 4%YoY decline in its top-line. Notwithstanding the fact that Interest income swelled by 31%YoY, Interest expense grew by a greater 71%YoY, thereby offsetting the surge in Interest income completely. The situation was exacerbated by a one-time charge to the Interest income in 4Q07 reducing the income by a hefty KD12mn which constitutes a drop of 5%. Our estimates reveal that in the absence of such a charge, CBoK’s top-line would have augmented by 9%YoY (instead of a 4%YoY decline) and net profit would have increased by an even greater 29 – 32%YoY as against a 20%YoY growth exhibited by the bank in actual.
Based on the current market price of KD1.48/share, CBoK is trading at 2008E P/E and P/BV multiple of 12.8x and 4.2x respectively. Our estimated value for this banking scrip is worked out to be KD1.64 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 11% over the closing price of KD1.48 per share (as of June 19, 2008). We therefore reiterate our BUY recommendation on the scrip.
Declining top-line and burgeoning earnings from non-interest based activities worked in unison to increase the contribution of Non-interest income in total income to 45% in 2007 from a 3-yr (2004-2006) average of 37%. Non-interest income rose 42%YoY, the highest growth seen since 2004, driven primarily by capital gains realized by the bank during the year. Fee and commissions, the largest contributor to Non-interest income, took a back seat in 2007, growing only 5%YoY after displaying a more aggressive 2003-2006 CAGR of 13%. Capital gains, just shy (in size) of Fee and commissions grew, 63%YoY and foreign exchange gains grew twofold.
CBoK’s cost to income ratio remained intact at 19% for 2007 with a marginal increase of 50bps over 2006. Excluding the one-time charge on Interest income, which shows a more accurate picture of the bank's efficiency, it is revealed that the efficiency of the bank in fact improved, exhibited by an 80bps decrease in the said efficiency indicator. This is further justified by a decline in cost to average assets ratio, which was reported at 0.9% in 2007, down from 1.0% in 2006.
CBoK’s ROAE exhibited a slight improvement in 2007, growing from 28.4% in 2006 to 29.2%. ROAA however declined by 50pps over 2006 yet still hovered high at 3.3% in 2007. Readjusting for the one-time charge on interest income leads to a higher ROAA that is still marginally lower than 2006 by 4pps while ROAE increases further to 31.7%. In 2007, the increase in CBoK’s ROAE is therefore driven primarily by the equity multiplier (average assets/average equity) which exhibits the bank’s enhanced leveraging efficiencies. The ROAA of the bank fell over 2006, due to lower asset utilization and lower profit margin, both of which declined as a consequence of the KD12mn charge on the Interest income.
CBoK’s total assets surged by a huge 47%YoY, reaching KD4.3bn in 2007 and exhibiting the highest growth rate achieved in the recent past. The growth in total assets was led exclusively by augmentation in loans & advances (surged 42%YoY) and in dues from banks and FIs which accounted for 52% and 49% of the incremental assets, respectively. The magnitude of this increase can be further gauged from the fact that the loans disbursed in 2007 alone, stood more what the bank had collectively disbursed in the 2002-2006 (5-year) period. The asset quality of CBoK improved considerably during 2007, gauged from its NPLs to gross loans ratio, which stood at 5.2% as against 7.0% in 2006. CBoK’s asset quality ratios still remain high when compared to its counterparts but that is not a cause of concern since a large portion (approximately 72%) of the bank’s NPLs comprise of legacy loans, that is, loans granted prior to the invasion of Kuwait in 1990. Assessing CBoK’s asset quality through incremental delinquencies, therefore, stands out as a more rational methodology.
CBoK reported a Net profit of KD34.1mn (EPS: 27fils) for 1Q08 generating a bottom-line surge of 22%YoY. While core interest earnings played their role in profitability growth, displaying a very healthy growth of 26%YoY, Non-interest income emerged as the major contributor to the bank’s bottom-line, exhibiting a 149%YoY growth. Higher provisions however offset that increase in total income, leading to smoothened earnings growth during the period under review.
CBoK has maintained its position amongst the top 5 banks of Kuwait by virtue of the size of its assets and deposits base. The bank has capitalized upon its positioning well, increasing its market share in sector deposits from 9.0% in 2005 to 12.2% in 2007, which is a milestone by any standards. The bank plans to grow aggressively through organic and inorganic means visible from its strategy to cover regional markets by means of increasing and/or introducing its branch network while at the same time, hawk eying for possible small acquisition targets. Egypt, Turkey, UAE, Qatar and Bahrain seem to be CBoK’s targeted regions for further penetration or initial coverage. CBoK lately (in 2007) made an attempt to acquire Al-Watany Bank of Egypt, which NBK got away with, in the final round. The bank is also contemplating increasing its stake in Cham Bank of Syria while a decision has been reached and work started on the acquisition of Yemen Gulf Bank.
CBoK is believed to exhibit healthy growth going forward. Top-line improvement is expected to be supported by strong NIMs that are anticipated to remain in the range of 2.8 - 2.9% over the next 4 years coupled with loans growth averaging at 18% over the same period. A 2007 – 2011 CAGR of 22% in the top-line is therefore expected to result in a CAGR of 15% in the bottom-line over the same period which coupled with a high payout of 82 - 85% explains our positive stance over the bank.
