CBoK has a conscious strategy to strengthen its position as one of the leading banks in Kuwait. The bank intends to emphasize on segments like private banking, project finance and corporate finance by leveraging on its current and prospective client base. It intends to build a strong retail franchise by increasing its network within Kuwait and leverage upon a complete array of products and services. It plans to pursue cross-selling opportunities across its corporate and retail clients.
Based on the current market price of 1,180fils, the stock is trading at a 14.7x 2005 earnings and 3.9x 2005 book value. On a one-year forward basis, the stock is trading at 14.7x 2006F earnings and 3.7x 2006F book value. Strong fundamentals, improving asset quality, one of the lowest cost ratios, adequate capitalization and increasing return ratios are likely to support premium valuations. Based on our valuation methods, we recommend a BUY on the stock with a price target of 1,351fils, an upside of 14.5%from current levels. On our target price, the stock will trade at an implied PE multiple of 16.7x and implied PB multiple of 4.2x on 2006F earnings and book value, respectively.
Financial Performance Review - 2005
During the last three years i.e. 2002-2005, the bank's external funding grew at a CAGR of 6.0%. As at end 2005, the total external funding was KD1.9bn constituting 81% of the total balance sheet size of the bank. The funding mix during the period changed resulting in higher concentration of customer deposits. This has resulted in the contribution of deposits from banks / FI's and other long term borrowings to decline during this period. In 2002, the share of customer deposits to total funding (i.e. customer deposits, deposits from banks and FI's, long term borrowings and subordinated loans) was 48.2%. With the increase in branch network and ability to provide superior customer services, the bank's share of customer deposits increased to 67.9% by 2005. Contribution of these deposits to the overall asset size has increased from 41.6% in 2002 to 54.9% in 2005.
Interest earning assets grew at a CAGR of 7.2% during the period 2002-2005. Gross loans grew by 6.7% CAGR during the same period. However, due to the introduction of the "80:20" loan to deposit ratio in 2004, banks were forced to reduce their lending portfolio. Most banks were faced with shrinking asset size in 2004 and CBoK was no exception.
In 2004, the bank's balance sheet declined by 17.0% as compared to 2003. With the introduction of this norm, banks started increasing the deposit franchise in order to support loan growth. This is evident from the fact that the deposit growth in 2004 and 2005 for CBoK was 31.8% and 33.6% respectively. However, the gross loan growth was -0.3% and 16.6% in 2004 and 2005 respectively. Clearly the thrust was on mobilizing customer deposits in order to support the strong growth in credit.
The blended cost of average customer deposits declined from 2.4% in 2002 to 2.2% in 2005, despite increase in overall interest rates. This has been due to the higher proportion of current account and demand deposits as a percentage of total customer deposits. The percentage of these deposits increased from 15.5% in 2002 to 22.1% in 2005. The contribution of these deposits to total funding also improved from 7.5% in 2002 to 15.0% in 2005.
Yield on interest earnings assets has increased from 4.1% in 2003 to 5.9% in 2005. The improvement in yields on the earning assets has been due to lower proportion of low-risk, low-yielding Government Debt Bonds and deploying it to higher-risk, higher-yielding assets.
The combined effect of the above has resulted in the margins improvement. Margins have increased from 2.4% in 2003 to 3.8% in 2005. Going forward, we believe margins to improve marginally to 3.81% in 2006F. In 2007F, we expect margins to further increase by 4bps to 3.85% and by 10bps to 3.95% in 2008F.
CBoK's gross NPLs ratio has reduced from 11.6%in 2002 to 8.2%in 2005. In absolute terms the gross NPLs have declined from KD126.4mn in 2002 to KD109.2mn in 2005. The overall coverage ratio as at end 2005 was 148.8%,a comforting signal to cover higher delinquency going forward in case that happens.
During the period 2002-2005, fee income grew at a CAGR of 15.2%. During 2005, however, fee income growth slowed down marginally to 13.5%. The bank has taken a number of initiatives to shore up its fee income. The bank also intends to increase its revenue stream by further capturing trade finance business. It plans to provide value added services to customers with increasing need in transaction banking services.
In terms of branch expansion, 2 new branches were opened in 2005 and 1 branch was opened in the January 2006, taking the total branch strength to 43. These new branches were opened in targeted areas so as to make a meaningful contribution to the existing network.
These new branches are a part of the bank's strategy to provide its customers with easy access to branches for their personal banking requirements. Over the next two years, the bank intends to increase the number of branches to 50.
In order to diversify operations, the bank intends to increase its geographical presence by opening up branches overseas after doing a thorough due diligence. The bank got permission from the Central Bank of Iraq to open a branch in northern Iraq. The cost of this branch is likely to be around $2.0mn with a headcount of 6 to 10 people to start off with.
Recent Development
During the first quarter of 2006, CBoK agreed to a rights issue of approximately KD45mn. This issue will dilute equity to the extent of 9%. The issue is priced at par value of 100fils and a premium of 400fils per share. We have incorporated this equity dilution in our earnings estimate.
According to the management, the objective of raising funds is to increase the investment limits to top-rated borrowers. As per the Central Bank of Kuwait's guidelines, maximum deployment to a single borrower is capped at 15% of total capital funds. We believe that, increasing the capital funds further is likely to increase the per obligor limit as well as raise the investment capacity of the bank. This will increase the per obligor limit by KD6.75mn to a single borrower.
Investment Indicators
|
Price (Fils) (April 23, 2006) |
Shares in issue (Nos.'000) |
Market Cap ( KD mn) |
52-week price range (Fils) (April 23, 2006) | ||||
|
1,180 |
1,159,346 |
1,368 |
700-1,300 | ||||
|
Year |
Operating Income (KD ' 000) |
Net Profit (KD ' 000) |
EPS (Fils) |
Book Value per Share (Fils) # |
ROAE (%) |
P/E |
P/BV # |
|
2007 F |
142,888 |
108,955 |
94.0 |
325.3 |
29.3 |
12.6 |
3.6 |
|
2006 F |
121,471 |
93,042 |
80.3 |
315.9 |
27.7 |
14.7 |
3.7 |
|
2005 A |
105,745 |
81,159 |
76.3 |
286.5 |
30.2 |
14.7 |
3.9 |
|
2004 A |
83,441 |
62,297 |
58.6 |
219.2 |
25.6 |
12.1 |
3.2 |
Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Kuwait Stock Exchange as on April 23, 2006.
# Book Value is ex-dividend
Source : Reuters & Global Research
Based on the current market price of 1,180fils,the stock is trading at a 14.7x 2005 earnings and 3.9x 2005 book value. On a one-year forward basis, the stock is trading at 14.7x 2006F earnings and 3.7x 2006F book value. Strong fundamentals, improving asset quality, one of the lowest cost ratios, adequate capitalization and increasing return ratios are likely to support premium valuations. Based on our valuation methods, we recommend a BUY on the stock with a price target of 1,351fils, an upside of 14.5%from current levels. On our target price, the stock will trade at an implied PE multiple of 16.7x and implied PB multiple of 4.2x on 2006F earnings and book value, respectively.
