EUR 239.98 For Business Accounts Only

Kuwait banks | Interesting value proposition; Favour KFH, NBK

Well-positioned in current macroeconomic backdrop. We view Kuwait positively, given its: i) eyed consumption recovery in 2019 (+3.5%) and continued growth in non-oil GDP (+3% in 2019-20e, double its 5-year historical average), ii) relatively low fiscal breakeven oil price (USD50/bbl, c30% discount to GCC average), iii) healthy financial buffers through KIA, safeguarding spending, and iv) prospect MSCI inflows, on the potential upgrade to EM in May-19 (likely to represent 0.3% of EM index, bringing +USD2.1bn in inflows, c3% of total market cap). Excluding Boubyan (outlier), Kuwait banks trade on a 2019 P/B of 1.86x, P/E of 14.8x, with a 2019-21e earnings CAGR of 10.5%, and a sustainable RoE of 14.4%, against 1.83x, 12.6x, 8.8%, and 16.3%, respectively, for MENA peers.

Favour Kuwait banks over GCC peers in the short-term. We expect Kuwait banks to deliver stronger RoE expansion compared to MENA peers over the next 2 years (+1.8pps vs.-9bps for GCC coverage). This will primarily be availed through efficiency improvements (eying average CTI of 32% by 2023e vs. 38% in 2018). Kuwait banks fare well vs. GCC peers in terms of asset quality (average NPL ratio for Kuwait coverage: 1.5% vs. 2.5% for GCC peers), while CoR levels are elevated (2018 CoR came in 1.5x GCC peers). We largely attribute this to the CBK’s strict provisioning requirements, rather than a reflection of deteriorating asset quality. An unmodeled upside would see CoR levels gravitating towards GCC levels, whereby a 10bps decline in average CoRs vs. our base case assumptions would reflect a c60bps increase in RoEs.

Initiate coverage on five Kuwaiti banks; KFH, NBK our top picks. We favour Kuwait Finance House (KFH), on: i) our conviction of bottled up value, on excessive provisioning on the bank’s property and investment books, which we expect to tail off (total CoR of 73bps in 2023e vs. 137bps in 2018), ii) capacity to report the largest RoE expansion (+7.8% in 2019-23e) on a standalone level and a further c2pps following the prospect merger with AUB, and iii) room for efficiency improvement (2023e CTI of 33% vs. 39% in 2018). We also like National Bank of Kuwait (NBK) for its: i) dominant local market position (MS >30%), ii) expected flows from MSCI upgrade (cUSD693mn; 33% of total), iii) strong ties with the government and large corporates in Kuwait, and iv) exposure to high growth operations (Islamic and Egypt). We assign a Neutral rating to: i) Gulf Bank, which we view as a successful turnaround story that is largely priced in, coupled with a limited growth outlook, given its full reliance on local operations, and ii) Burgan Bank, finding its cheap valuation justified, on weak market position and capitalisation, and increased risks from Turkey and Algeria. We hold an Underweight call on Boubyan Bank, given its stretched valuation; we prefer indirect exposure through NBK (owns c59% in the name).