• Global values Al Ahli Bank of Kuwait at KD1.11 and recommends a HOLD on the stock
Al Ahli Bank of Kuwait (ABK) - Al Ahli Bank of Kuwait (ABK) reported a healthy bottom-line growth of 27%YoY in 2007, standing at KD76mn (adjusted EPS: 69fils) for the said period. The growth came as a coupling impact of a rise in top-line (Net interest income) which increased by 12%YoY, unlike stagnancy seen in NIIs of most of its peers and a 15%YoY jump in Non-interest income. Net profit stood at KD76mn for 2007, exhibiting a very robust, sustainable growth. ABK’s top-line remained relatively unscathed by the charge levied on it 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). Our analysis reveals that Net interest income (NII) would have grown by a higher 15%YoY in the absence of the said one-off charge on the said head. In continuation from the previous year, ABK’s NII in 2007 was also driven by volumes. The only difference visible in 2007 was that the impact of volumes was much higher as compared to 2006 while the impact of spreads was negative, reducing the NII by KD10.6mn and partially offsetting the contribution of the volumes which added KD17.6mn to the top-line.
Based on the current market price, ABK is trading at 2008E P/E and P/BV multiple of 13.7x and 4.2x respectively. Our estimated value for this banking scrip is worked out to be KD1.11 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers a downside of 4.3% over the closing price of KD1.16 per share (as of June 24, 2008). We therefore downgrade our recommendation on the scrip from BUY to HOLD.
ABK's operating efficiencies which had made a 5-year high FY06, gauged from the lowest opex/average assets ratio of 3.52%, increased to 3.59% in FY07. Further substantiated by 300bps increase in the cost-income ratio in FY07 over FY06, we believe that the ratios, though on the higher side, are still under control. Unlike the situation with many of its counterparts where cost-income ratios grew on account of one-time charge on the top-line of the banks, the impact of the said charge on ABK’s cost-income ratio was marginal and hence the ratio was much less distorted by the one-time event.
ABK's ROAE exhibited a remarkable improvement in 2007, growing from 26.0% in 2006 to 30.5%. ROAA too, improved slightly by 12pps over 2006 and stood at 2.8% for 2007. Catering for one-time adjustments in 2007 however leads to a further improvement in both return raios with ROE jumping to 31.1% and ROA to 2.9%.
ABK’s total assets grew 22%YoY in 2007, the highest in the last 5 years, in continuation of a normalized growth trajectory exhibited by the bank in prior years. Loans and advances which grew 28%YoY, emerged as the major asset driver contributing 81% of the total incremental assets in 2007. The bank’s customer deposits exhibited a 40%YoY growth notwithstanding the fact that Money supply grew at a comparatively lower 19%YoY. The supernormal growth seems to be an outcome of an aggressive drive carried out by the bank to avoid exhausting its lending capacity in the wake of high demand for loans witnessed by the bank.
ABK reported a Net profit of KD23mn for 1Q08 (21fils) portraying a continued healthy growth with a 21%YoY surge in profits. While the Net interest income grew by a reasonable 11%YoY, Non-interest income grew by a staggering 85%. Reversal in provisions in the previous year, however lead to inflated figures for 2007 and hence shrunk the comparative bottom-line growth for the current year.
ABK stands amongst the top 5 banks of Kuwait by virtue of is size (assets) and deposits base. The bank has exhibited resilience in the face of tougher regulatory and operating environment, beating sector growth through effective deposit mobilization and loans disbursements emanating from a strong retail experience and an even stronger corporate floor. The bank is all set and ready to role out its expansion plans into the GCC region, the recent milestone in the process being, setting up a branch in Abu Dhabi. ABK eyes a stronger retail base, for the purpose of which, it is undergoing a transformation through Business Process Re-engineering (BPR) of its retail management process. The management envisions a wider retail product range, an effective and efficient sales team and further ease of product launch when done with the BPR.
ABK’s key strength remains the enticing dividend yield that the bank offers its shareholders, averaging at 4.6% over the last 5 years and the robust ROE, which stood at 30% in FY07 and is expected to average at 34% over the next 4 years, on account of high payouts and strong bottom-line growth. The bank is forecast to exhibit a net earnings growth of 22%YoY, while the profitability CAGR for the bank in the 2007 – 2011 period is anticipated to stand at 16%. Furthermore, ABK’s dividend stream is expected to grow at a healthy pace, exhibiting a 2007 – 2011 CAGR of 23%, in continuation of a 2003 - 2007 CAGR of 28%.
Price (June 24, 2008) KD Shares in issue mn Market Cap KDmn 52 - week price range KD
1.16 1,098 1,273.73 0.84 -1.28
Year Operating Income KD mn Net Profit KDmn EPS
fils BVPS
fils ROAA
(%) ROAE
(%) P/E
(x) P/BV
(x)
2009F 144 105 95.7 300.3 2.8% 33.3% 12.1 3.9
2008F 129 93 84.6 274.0 2.9% 32.3% 13.7 4.2
2007A 107 76 69.3 249.5 2.8% 30.5% 17.5 4.9
2006A 84 60 54.7 204.8 2.7% 26.0% 11.4 3.0
Source: Zawya, Global Research
Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the KSE as of June 24, 2008
