EUR 35.83 For Business Accounts Only

Solid franchise, further rerating ahead; Maintain Overweight

Favourite name among Kuwaiti banks. NBK is a clean, well-funded, efficient bank, with strong corporate brand and government ties. The bank has exposure to the fast growing, highly profitable Egyptian market, as well as Islamic operations in Kuwait. We expect NBK to continue delivering healthy growth rates (2020-23e CAGR: +12.7% in net income, +8.3% in net loan), as CoR levels ease (80-85bp-s vs. 100bps+ historically), creating a buffer against NIM compression and upward pressure on operating costs. Our implied 2020e P/BV is at 2.8x vs. the trading multiple of 2.3x, on a sustainable RoE of 17.6% vs. 1.7x, and 16.3%, respectively, for MENA peers.

Raise TP by 13% to KWD1.30/share. We upgrade our valuation, as we: i) roll over our valuation to 2020e, ii) cut our CoR assumptions over 2020-23e (-20bps to 80bps, on average), ii) marginally increase our loan growth estimates by c40bps, on average, over the same period, while iv) lowering our NIM forecast by c25bps, on average, to reflect the discount rate cut in Oct-19 and the CBK’s increased liquidity requirements, and v) increasing operating costs, on higher costs in Saudi Arabia, the Islamic platform, and Europe, and establishment of a new data centre in Kuwait City. 

Islamic, Egypt operations support story. In addition to NBK’s favourable profile on a standalone level, its: i) 59%-owned Boubyan Bank [Underweight | TP KWD0.352] (2020-23e loan CAGR of 10%), and ii) Egypt operations (2020-23e loan CAGR of 17.5%) are also supportive to the growth story. Increasing NBK’s stake in Boubyan is a natural move, in our view, with the fragmented structure of the minority ownership being the main, and arguably only, impediment to its materialisation.

EM upgrade to trigger stock rerating. MSCI announced the upgrade of the Kuwait index to MSCI EM on 18 December, expected to trigger USD2.5-3.0bn in passive flows (besides additional active flows) with effective inclusion set for May-20. NBK is set to have the lion’s share of these flows (cUSD1.1bn, 39% of total), boding well for the stock to rerate, closing the gap with its MENA banks peers. NBK currently trades at a c15% discount to other MENA large cap banks, despite its higher EPS CAGR (c13.2% vs. c8% for peers). Less stringent CoR requirements by the CBK (materialising since 4Q18) will also be supportive of a stock rerating, as NBK’s RoE becomes more comparable to peers.