NBK (HOLD, TP KWD0.95) reported FY19 net profit to shareholders of KWD401.3mn, up 8% yoy, 3% below our KWD413.7mn estimate (Bloomberg consensus KWD389mn). Relative to our forecast, weaker net interest income and higher operating costs were partially offset by a lower loan impairment charge.
- Volume drivers were Islamic Banking in Kuwait (17% of group revenues) and International Banking (25%). Loans advanced 7% in 2019, as expected. By sector, the key drivers were financial institutions, manufacturing and retail.
- Valuation and outlook: NBK trades at 15.7x 2020f PE and 2.38x 2020f tangible PB and generates a prospective dividend yield of 3.5% with forecast ROTE at 14.7%. We think the stock is fully valued and see limited reason for a rally on the back of these numbers. There is a management call on Thursday; we may revisit our forecasts after this event.
- NBK benefits from its market leadership position in Kuwait, diversified international operations with good USD funding access, and conservative risk management with strong asset quality (1.1% NPL ratio, with 272% coverage). The strength of the Kuwaiti sovereign is also helpful, meaning the domestic environment is relatively cushioned from oil price fluctuations.
- NBK is exposed to geopolitical risk, given Kuwait borders Iraq and Saudi Arabia. Growth prospects seem modest in an EM context; loans grew 7% in 2019 while revenues increased only 1%. In addition, 2019 has seen signs of emerging pressure on both the net interest margin (driven by low US interest rates) and the operating margin (staff costs grew 10% yoy).
- We have a Hold recommendation, reflecting our view that NBK’s positive attributes are already reflected in its premium valuation. Although the share price has likely been buoyed by index-related inflows to the Kuwait market, we do not view these as sustainable.
FY 19 results review
- The loan impairment charge fell 28% yoy (we had forecast a 21% decline). The cost of risk fell from 106bps in 2018 to 72bps in FY19 (78bps forecast).
- The NPLs/ loans ratio fell from 1.4% in end-18 to 1.1% in end-19. Provisions coverage increased from 228% to 272% over the same period.
- NBK benefited from positive valuation changes in its investment portfolio; these gains could support future profitability.
- Net interest income (flat yoy) was lower than expected; asset yields declined faster than we had projected. The net interest margin fell from 2.58% in FY18 to 2.43% in FY19 (our forecast was 2.49%).
- Staff costs rose 10% yoy, above our 7% expectation. The cost/ income ratio rose from 31.2% in FY18 to 34.1% in FY19 (33.0% forecast).
- The cash dividend was flat yoy at 35 fils per share (plus 5 fils bonus share). Our expectation was 40 fils (Bloomberg consensus 37 fils).