Equity Results Update- National Bank of Kuwait (NBK)- posted strong results in 9M06 on the back of impressive growth in both loans and advances and customer deposits. Primarily owing to a 47% increase in interest income, 31% increase in fee income and 117% increase in other income, NBK reported a net profit of KD190.9mn during the first 9 months of 2006. This represents a 22% growth when compared to the corresponding period in the previous fiscal.
We have revised our earlier bottom line projections downwards from the earlier KD273.2mn to KD253.4mn due to the rise in interest expense which increased to the current 46% from 33% a year earlier. We estimate a price target of KD2.094, which is 4.8% lower than the current market price. We maintain Hold recommendation on the stock.
Valuation:
It is worthwhile to note that since our last report on NBK, the discount rates have increased to reach 6.25% which has affected the valuations. The bank has performed exceptionally well because of factors such as a shift in assets to higher interest earning asset structure and an industry-low liability structure and it is likely to do well in the next couple of years as we expect a further hardening of interest rates.
The book value per share of NBK was at 463.7fils as of September 2006. At the current stock price of 2,200fils, it is quoting at a P/BV of 4.74, as against the industry P/BV of the Kuwait banking sector at 4.28. The estimated fair value of NBK’s stock works out to 2,094fils based on DDM and relative valuation method. This represents a discount of 4.8% as compared to the current market price. Our price target represents an implied 2006F P/E multiple of 14.1x and 2006F P/BV multiple of 6.02, based on the current price.
Recent developments and Outlook
The outlook for the banking sector in Kuwait is benign for the next couple of years. Central Bank of Kuwait, in order to stem explosive credit growth is increasing interest rates. The operating environment proved to be hugely beneficial for NBK where a rising interest rate environment helped the bank the most because of its significant low-cost deposit base. To that effect, we believe that revenue momentum will continue to be robust from the retail banking activities which is believed to contribute close to 55% of the total group bottom line. Also, as per the management, loan book is likely to drive growth rather than deposits.
With de-regulation in the banking sector in the booming GCC economies, NBK is increasing focusing on regional opportunities. After opening one branch in Saudi Arabia (in Jeddah), NBK is looking at suitable acquisition opportunities in the country to get a bigger foothold in the biggest economy in the region. The bank has presence in Jordan and Qatar and wants to increase its foothold in these markets in a big way if regulations permit. In terms of regional expansion, the bank is looking at Egypt and Syria. According to the management, Egypt is overcrowded – however there are more opportunities that can be explored. Syria is a virgin market and is likely to provide immense opportunities to the bank.
Due to the bank's strong corporate relationships, consumer lending is getting a fillip as these corporates keep employee salary accounts with the bank thereby providing the bank with captive customers for its various products. The bank's strength is its superior customer service and product innovation that aids in countering competition from pure Islamic banks and other banks in the country. The bank has ambitious plans to increase its Direct sales agent force which will help increase the banks cross-sell ratio and thereby increase contribution of fees and commission income. A large portion of the banks business is done through alternative delivery channels apart from branch banking.
Analysis of 9M06 Results
NBK showed excellent results during the first 3 quarters of 2006. The gross interest income of the bank increased by 47% during the 9M2006 to reach KD345.7mn as compared to KD235.9mn over the same period last year. In line with the hardening of interest rates, the interest expenses doubled to reach KD157.2mn during the same period.
This resulted in the net interest income during 9M2006 to increase by 20% to KD188.5mn as against KD157.3mn for the first 9 months of the previous fiscal. The increase in net interest income can be mainly attributed to sanguine growth in core commercial banking businesses and increased interest rate spreads in the present interest rate environment. Fees and commissions income were higher by 31% as compared to the same period last year. A significant portion of fee income was generated from the credit card business as the bank issues close to 52% of the total cards issued in Kuwait. By the end of 2006, NBK expects to issue 350,000 cards in Kuwait.
The ratio of operating expense to operating income also declined from 22.5% in 9M2005 to 24.8% in 9M2006. Staff expenses and other expenses increased significantly by 36% and 47% respectively. On the back of improved net interest income and non-interest income, coupled with increased operating expense, the operating profit after provisions increased by 23% to reach KD199.6mn.
The net profit attributable to shareholders was higher by 22% at KD190.9mn over the corresponding period of the last fiscal. The improved net income resulted in EPS moving up from 107fils in 9M2006 to 88fils in 9M2005.
NBK’s total assets stood at KD7bn at the end of 9M2006, representing an increase of 19.8% over 9M2005. Around 53.7% of the assets were deployed in loans and advances to customers and 7.7% of assets were investments in government securities. Deposits with banks and other FIs further constituted about 17.4% of the total assets base. The bank reported a growth of 24.3% y-o-y in total loans and advances (net) to reach KD3.76bn at the end of 9M2006. Despite the stiff competition, deposits from customers increased by 14.6% y-o-y to KD4.2bn at the end of 9M2006. The deposit growth was also aided by the hardening of interest rates resulting in an increase in deposit rates.
