• Global values National Bank of Kuwait at KD2.06 and recommends a BUY on the stock

Published June 4th, 2008 - 04:13 GMT

• Global values National Bank of Kuwait at KD2.06 and recommends a BUY on the stock

Global Investment House – Kuwait –  National Bank of Kuwait (NBK) – Investment Update - National Bank of Kuwait’s muted performance in FY07 with an 8%YoY growth in its bottom-line, which stood at KD273.6mn (adjusted EPS: KD0.11) for the period under review, underplays NBK’s true earning potential. This was a direct outcome of a drop in the bank’s Interest income which dropped significantly QoQ while remained stagnant YoY in the 4Q2007. The Interest income for the quarter was reduced by KD30.6mn given one time adjustments in its consumer portfolio arising from the revised estimates of future cash flows carried out by keeping the contractual interest rates unchanged while altering the terms of the performing loans. We believe that had such a adjustment not been incorporated, NBK would have reported a 18 - 20% growth in its profits.

Our estimated value for this banking scrip is worked out to be KD2.06 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 12% over the closing price of KD1.84 per share (as of June 01, 2008); we therefore recommend a BUY on the scrip.

The Interest income of NBK grew by 27%YoY in 2007 and that coupled with a 50%YoY increase in Interest expense led to a mere 8.4%YoY rise in the Net Interest Income (NII). This comes as a bottom-line dampener for the bank which had exhibited a 19%YoY increase in its NII in 2006 and an average growth of 29% for the 2003-2006 period. We believe that the drop in the top-line and consequentially the bottom-line does not reflect a true depiction of NBK’s earning potential given our estimates that reveal that had such an adjustment not been incorporated, NBK would have reported a 18 -20% growth in its profits. Furthermore, muted performance in 2007 bodes well for earnings growth figures of 2008 which might seem relatively attractive to investors.

NBK’s return ratios, as a consequence of a top-line unfavourable adjustment and a non-supporting Non-interest income, gave way to a decline and posted a ROAE and ROAA of 22.6% and 2.8% respectively, down from 32.2% and 3.6% respectively in 2006. Catering for the one-time adjustments in 2007 still leads to a decline, though a smaller one with estimated ROAE and ROAA at 24.5% and 3% respectively. 
 
NBK’s total assets grew a gargantuan 46%YoY in 2007 as compared to 27%YoY in 2006 and an average of 11% for the 2003-2006 period. Loans and advances, which form the greatest proportion of total assets and total earning assets grew by a remarkable 40%YoY beating the previous 4-year growth figures by a substantial margin. The bank made allocations to investments as well, including debt and equity, which collectively grew 43%YoY, while global acquisitions/increase in stakes in banks lead to a 133%YoY growth in Investments in associates.

During 2007, NBK acquired a 98% stake in Al Watany Bank of Egypt (AWB) for US$1bn, carrying out one of the most important transactions in Egypt during the year. AWB holds assets worth US$2.3bn  under its umbrella including net loans worth US$1.1bn. The bank has a deposit base of approximately US$1.8bn, has 29 branches and an employee base of over 1,200 professionals.

NBK also bought a 40% stake in the Turkish Bank for US$160mn and increased its stake in International Bank of Qatar from 20% in 2006 to 30% during the period under review. Moreover, during FY07, NBK acquired an 87% share capital in Kuwait Financial Brokerage Company, which was later (in April 2008) renamed to Watani Financial Brokerage Company.

NBK reported a Net profit of KD82.1mn for 1Q08 (EPS: KD0.03) depicting a 28%YoY jump in profitability. Support for bottom-line growth came from all fronts, including top-line improvement, escalation in Non-interest income and reduction in provisioning.

NBK’s top-line and bottom-line growth trajectory is dependent on its strategic geographic diversification within the MENA region and beyond it. The bank’s acquisition of Al Watany Bank of Egypt (AWB) comes as a strategic milestone as it paves the way for growth in one of the most attractive bankable markets with a dense under-banked population within the region. Furthermore, with approximately half a million (of a total population of 3.4mn) Egyptians resident in Kuwait having trade and other links with their country of origin, NBK plans to exploit the opportunity provided by these existing retail customers and corporate entities. Moreover, in the wake of unavailability of Islamic banking license in Kuwait, NBK has acquired an Islamic license in Egypt through its subsidiary which held an Islamic banking license at the time of acquisition. Focusing on making AWB a strategic success story, NBK is simultaneously expanding its foot-print organically and/or through acquisitions in Turkey, Qatar, Saudi Arabia (recent attempts at acquiring a prominent bank did not bear fruit) and Jordan.

Our assumptions state that a 20% growth in the customer deposits base cannot be ruled out for FY08 along with a similar CAGR for the 2007-2011 period. Growth in the customer deposits base is then expected to stimulate further loans disbursements, which according to our estimates will exhibit a 21%YoY growth in FY08 and portray a 2007-2011 CAGR of 19% and with the Loans to customer deposits ratio averaging at 106% for the next 4 years. This combined with NIMs (Net Interest Margins) moving in the narrow band of 3.1 – 3.3% over the forecasted period will fuel a Net interest income appreciation of 30%YoY in FY08 which is then expected to cool down and follow a 2007-2011 CAGR of 21%. Non-interest income is anticipated to play its role in the bottom-line pick-up, escalating as high as 45%YoY in FY08 and exhibiting a CAGR of 28% for the 2007-2011 period. Asset quality is expected to maintain status quo with NPLs to gross loans ratio to average at 1.9% for the next 4 years while total coverage (general and specific) expected to hover at around 150%. All this trickles down to a net profit growth of 26% in FY08 and a profitability CAGR of 24% for the 2007 – 2011 period and hence our positive stance on the bank.

Investment Indicators:
Price (May 20, 2008)  Shares in issue mn Market Cap KDmn 52 - week price range (KD)
KD1.840 2703.2 4973.9 1.76 - 2.13
Year Operating Income(KD mn) Net Profit (KD mn) EPS (fils) BVPS (fils) ROAA (%) ROAE (%) P/E (x) P/BV (x)
2009F 661.9 428.4 158 617 2.9% 26.5% 11.6 3.0
2008F 543.9 344.8 128 578 2.7% 22.5% 14.4 3.2
2007A 400.5 273.6 101 611 2.8% 22.6% 18.5 3.4
2006A 364.3 253.2 94 469 3.6% 32.2% 16.0 4.4
Source: Zawya, Global Research


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