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MENAFN - Arab Times - 26/12/2009

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(MENAFN - Arab Times) NBK was the first private national bank in Kuwait and the GCC region, having been established in 1952 by leading Kuwaiti merchant families. NBK is the largest bank in Kuwait. It has both the widest distribution network as well as a market share of 30% in most segments. NBK is also one of the most internationally diversified banks in the region with a presence in 17 countries (of which 10 MENA) other than Kuwait. And NBK is still expanding, especially in countries with high growths rates. Accordingly, around 22% of operating income is generated from outside Kuwait. The bank offers full-fledged banking services in addition to investment banking through its investment arm, NBK capital, which it aims to transform into a leading regional investment bank. The bank is solidly-capitalized with a Basel II CAR ratio of 15.8% and enjoys high asset quality with NPLs/Gross Loans at 2% as at June 2009.

Beating margin issues: Despite strong rate cuts by the CBoK and the subsequent margin pressures, NBK has managed to keep its margins at bay. This is likely to stem from good pricing techniques and NBK's enjoyment of relatively lower cost of funds (vs. Kuwaiti counterparts) on better access to cheaper government funds besides regional operations. NBK enjoys higher NIM and interest spread, compared to both CBK and Burgan.

Deepest penetration in Kuwait: NBK owns the largest branch network in Kuwait, with over 30% market share in most business lines. NBK is also the primary bank for the majority of local and foreign blue chips in Kuwait. The bank plans to maintain leadership in Kuwait capitalizing on its deep penetration.

Strong overseas expansion: Aside from Kuwait, NBK is present in 16 countries, 9 of which are in the MENA region. As of June 2009, around 22% of operating income was generated through international business. NBK is still seeking to widen expansions especially in high-growth countries.

Transforming NBKC to a regional leader: The bank strives to make NBK Capital (NBKC), its wholly owned full-fledged investment banking arm a leading regional investment bank. NBKC leverages on the bank's international network, and already has offices in Kuwait, Dubai and Turkey.

Valuation: Using a cost of equity of 11.5% and a perpetual growth rate of 3%, our DCF based valuation method yielded a LTFV of KWD1.55/share, and a TP of 1.32/share. This implies a 20% upside to market price. On this basis, we attach a Buy recommendation to the stock.

National Bank of Kuwait (NBK) was established by Amiri decree on May 19, 1952; and started operations in November of that same year. NBK is the first national bank in Kuwait and the Arab Gulf region. All founders and members of the board were renowned merchants of Kuwaiti origin.

Since its establishment, the bank was the leading financial institution in its country and the region. It has in excess of 30% market share across all major business sectors in Kuwait and has the largest local network of 69 branches and 200 ATMs/CDMs. Besides Kuwait, NBK also operates in other countries in the MENA region, including Bahrain, Lebanon, Jordan, Iraq, Qatar, Saudi Arabia, Egypt, and Dubai. Internationally, the bank has a presence in 7 countries in which it has established 8 offices including subsidiaries, branches or representative offices.

NBK's operations span across all banking functions. The bank is involved in retail, corporate, private, international, Islamic, and investment banking. It is the most profitable bank in Kuwait.

Reuters; Bloomberg: [NBKK.KW; NBK KK]
Recent price as of: 16-Dec-09 Fils 1,100.0
No. of O/S shares: 2,973.5 mn
Market cap: KWD3,270.9 mn
52-wk high/low Fils 1380/ Fils 736.36
Avg. daily volume/turnover 4750K/KWD5379.38K
Moody's: Outlook Stable, LT Bank Deposits Aa2
Fitch: Outlook Stable, LT Issuer Default Rating AA-
S&P's: Outlook Negative, LT Issuer Credit A
Merchant Kuwaiti Families: 80.00%
Free Float: 20.00%

Established in 1952 by the leading merchant families in the country, National Bank of Kuwait (NBK) is the first private national bank in the GCC region and the largest bank in Kuwait. As such, NBK has strong links with the Kuwaiti government. The bank holds leading domestic market positions, according to management, accounting for over 30% of the domestic retail and corporate banking market. It is also well diversified internationally, with presence in 10 MENA countries including Kuwait, and another 7 outside the region. In September 2009, NBK had assets of KWD12.2bn, reaching its current size through a series of internal and external expansions. Recent expansion activities include those acquisitions:

l Increased stake in Boubyan Bank - Kuwait (Islamic bank) from 14.3% to 27.5% in July 2009, then to 39.9% in October 2009.
l A 40% stake in Turkish Bank A.S. in 2008.
l A 96.04% stake in Al-Watany Bank of Egypt (AWB) in November 2007, later increased to 98.5%.
l An 86.7% interest in Kuwait Financial Brokerage K.S.C - renamed Al Watani Financial Brokerage Company (WFBC) and opened its first Kuwait Stock Exchange (KSE) brokerage trading hall in 2007.
l A license to operate a fully fledged branch in the UAE in March 2007 — opened in 2008.

NBK is a publicly traded company listed on the KSE, with around 80% of its shares owned by members of some affluent Kuwaiti merchant family, the majority of them are on the bank's Board of Directors (BoD). However, the shares are not concentrated among shareholders, with no individual shareholder holding more than 5% of the capital. In terms of market capitalization, NBK is one of the largest companies listed the exchange reaching KWD3.3bn (25-Nov-09).

The bank is the largest bank in Kuwait in terms of its loans portfolio and total assets, and the second (after Kuwait Finance House) in terms of customer deposits.
Lines of Business
NBK offers a wide array of services including retail and corporate banking, while its subsidiary NBK Capital offers investment banking and asset management services. NBK has grouped all these functions into five major business segments: Consumer Banking (includes private banking), Corporate Banking, International Operations, Investment Banking and Asset Management, and others. NBK derived around 72% of its 2008 operating income from NII (70% in 1H09), which mainly comprises activities in consumer and corporate banking. The remaining income came through non-interest income sources such as investment banking. Furthermore, the corporate and consumer banking operations together represent over half of the bank's operating income, followed by revenue from international affiliates with a 22% contribution in 2008 and 1H09.

Consumer Banking
NBK is the market leader in the consumer sector, controlling over 30% of the domestic consumer banking market. At the end of June 2009, the bank had 69 branches and more than 200 ATMs and CDMs across Kuwait. NBK is the largest local credit card issuer, with over 50% market share.

Consumer services are supported by a well-researched customer segmentation matrix, where the majority of customers are government and public sector employees. Tailor made products are available to younger generations, expatriates and retirees.

NBK has established one of the largest 24-hour call centres in the region -'Hala Watani'. It has also extended e-solutions to as many of its functions as possible, providing greater functionality through SMS services and offering customers real-time information. Priding itself on its ability to collect deposits using direct sales and kiosks in shopping malls and other heavy pedestrian locations, NBK also enjoys the lowest cost of funds amongst its Kuwaiti counterparts. Leveraging its recent acquisition of Kuwait Financial Brokerage, NBK has started to provide online and telephonic trading to its customers on KSE.

The bank has remained at the forefront of product innovation, launching several new products such as the 'Laki' package, which targets working women. Such initiatives, coupled with its widespread branch network, have helped NBK increase its retail loan book and customer deposit base at a respective 4-year CAGR of 24.5% and 14.3% until 2008. The consumer banking segment, including both private and retail, contributed 32% to NBK's operating income in 1H09.
In 1982, NBK launched private banking services. Recently, these have been categorized under the consumer banking division and a qualified team of experienced employees now serve the bank's HNIs. A comprehensive range of financial products are offered through NBK's international network and NBK Capital, capitalizing on the wealth management expertise of Banque Prive-Suisse.

Corporate Banking
NBK is focused on expanding its corporate banking segment and counts many corporate blue-chip customers, state institutions, and public companies in the Kuwait amongst its clients. With more than a 30% share of the domestic lending market, NBK is the leading bank for corporate customers in Kuwait. It captures the majority of blue-chip businesses, more than a 50% share of the SMEs market and over 40% of cross-border banking business lines, such as trade finance. The bank provides various services including working capital finance, medium-term finance, project finance, financial advisory, and treasury and cash management. Through the acquisition of Al-Watany Bank of Egypt (AWB) and an increase in its stake in Boubyan Bank - Kuwait, NBK had also increased its exposure to SMEs and Islamic banking.

NBK's cross-selling initiatives and strong online platform 'Watani Online Corporate Service', have aided the bank in retaining and developing its large corporate client base. NBK's corporate lending portfolio grew from 69% of total lending in 2006 to nearly 73% in 2008, increasing at a 4-year CAGR of 27.1%. The domestic corporate banking segment contributed 33% to operating income in 2008 and 30% in 1H09.

The bank's success in executing its corporate banking business earned the company the 'Best Bank in Kuwait and Middle East award' three years in a row between 2005 and 2008 from 'The Banker' international magazine. NBK has received numerous banking industry awards, including the 'Euromoney' magazine's awards for excellence "Best Bank in Kuwait" for 15 consecutive years (1994-2009). NBK is also the highest rated bank in the MENA region: Moody's (Aa2), S&P (A) and Fitch (AA-).

International Banking
NBK was one of the first GCC banks to expand overseas with 98 operational offices and branches across 16 countries — excluding Kuwait. The bank has a foothold in 9 MENA countries and continues to pursue an aggressive policy of external expansion into international markets. As of 1H09, International Banking contributed 21.5% of overall profit.
NBK is focusing on capitalizing its existing fundamental strengths, strong brand and extensive reach to create a regional platform.

It aims to expand into developing markets within and outside the MENA region, where it perceives long-term potential and competitive advantage, building on its previous successes and synergies. This is reflected in NBK's entry into the Egyptian and Turkish markets in 2007 and 2008 through its acquisitions of AWB and a stake in Turkish Bank (A.S). These markets are still relatively untapped with low retail penetration rates. In Turkey private lending forms 40% of GDP, whereas Egypt's retail lending/GDP stands at only 19.5%, implying huge potential for growth.

NBK's international branches and subsidiaries in London and New York support its international customers, and provide a full range of corporate, treasury, trade finance, and private banking services.

Investment Banking and Asset Management
NBK Capital (NBKC) is the bank's wholly owned subsidiary established in 2005 to provide investment services. The company's investment activities span across advisory, asset management, alternative investments, brokerage and research. NBKC has offices in Kuwait, Dubai, and Istanbul and employs over 115 professionals. NBKC leverages the bank's large regional and international network, targeting corporate blue-chips and HNIs for its diversified product offerings. NBKC handles assets under management worth over USD9bn, for the overall group. The asset management division under NBKC manages 44 funds, some of which are Islamic Sharia-compliant. In addition, alternative investment funds include private equity and mezzanine, and are focused on direct investment in the MENA region, such as the NBK Capital Equity Partners Fund and the GSC Group Mezzanine Fund.

With the recent acquisition of Kuwait Financial Brokerage K.S.C - renamed Al Watani Financial Brokerage Company (WFBC) - NBK now offers brokerage services to its client base, be they institutional, international, MENA or retail. Brokerage services include online access to GCC markets as well as trade executions in international markets. The brokerage is supported by a research department, comprising 10 sell-side analysts distributed over Kuwait and Dubai, covering large cap MENA stocks.

NBKC has advised on over USD7.4bn of financing transactions and USD2.5bn of M&A transactions over the last couple of years. The following are some of the large transactions completed by NBKC in 2008:
l Jazeera Airways IPO & listing, sole financial advisor.
l Visa Inc's IPO, co-manager and underwriter.
l Ikarus Petroleum Industries, listing.
l Kuwait International Bank sale of a 2.69% minority stake in Industrial Bank of Kuwait, financial advisor.
l Sahaab Aircraft Leasing Company, co-advisor and fund raiser.

NBK pursued a strategy of internal and external expansion in both domestic and international markets. One of the primary reasons is to diversify its investment and revenue opportunities, as well as its funding sources, leveraging on NBK's successful business model and international reach.

Domestically, the bank intends to maintain a leading market position across various business lines, both through organic growth and wider penetration.

The bank plans to build on its existing branch network, increasing the number of branches (currently 69). NBK follows a multi-dimensional strategy of adopting a strong customer-oriented approach while benefiting from cross selling opportunities. At the same time, it strives to improve customer satisfaction and further develop its fund management and other investment banking services.

Internationally, NBK has a near-term focus on Egypt, Qatar, Saudi Arabia, and Jordan. It also intends to bring risk management disciplines to the SME businesses in AWB Bank to both maintain and improve asset quality and continue developing corporate and private banking businesses across the region. The bank plans to leverage its existing corporate relationships and growing new relationships within the emerging blue chip sector in the MENA region.

NBK's strategic growth pillars also include plans to further expand international operations through acquisitions. A special focus is placed on the growing popularity of Islamic banking, evident in NBK's acquisition of AWB - this had an Islamic banking license - as well as its increased stake in Boubyan Bank - Kuwait to c.40% last October.
NBK aspires to make NBKC a leading regional investment bank offering comprehensive investment solutions. Ultimately, it aims to become the preferred business advisor for regional blue-chip clients.

Financial Performance - 2008
Balance Sheet Analysis
NBK's balance sheet is more leveraged than its peers in the Kuwaiti banking sector. This is reflected in a loan/core customer deposit ratio of 125.4% as of December 2008, compared to 91.9% and 88.3% for CBK and Burgan, respectively. Although the bank does not disclose details regarding its regulatory loan/deposit ratio, it is within the 85% regulatory limit set by the CBoK. The bank's reliance on inter-bank and OFI's for funding increased over the last few years as it witnessed faster growth in its loan portfolio than its core deposit base. Furthermore, NBK's balance sheet reflects a high base of productive assets, with interest earning assets comprising as much as 83% of total assets in 2008.

Loans & Advances
NBK's net loans portfolio increased at a 4-year CAGR of 26.2% until 2008. This was primarily driven both by the improving economic environment and the bank's rapid expansion, domestically and internationally. The 37.4% net loan growth in 2007 was primarily generated from Kuwaiti business. However, growth in loans and advances seems to have slowed down as reflected in the 17.5% growth in 2008.

Like all Kuwaiti banks, NBK's assets are concentrated in the domestic market, with Kuwait accounting for 66.9% of total assets of NBK in 2008. However, NBK's selective lending policy and its international diversification strategy, mitigate market concentration risks. On account of its prudent lending approach, the bank has managed to limit its real-estate exposure to 17%.

Related party loans and advances comprised 4.9% of gross loans and 22.4% of total equity at the end of December 2008. The 20 largest loans outstanding were 21% of gross loans in 2008 as compared to 19% in 2007. This is better than the regulatory requirement of a maximum exposure of 15% to a single counterparty or a group of related counterparties.

Asset Quality
Prior to 2007, NBK managed to maintain relatively higher asset quality compared to other banks in the country. However, following the acquisition of AWB in 2007, due to which NBK integrated nearly KWD55.9mn of NPLs, there was a significant reduction in asset quality. Nonetheless, the bank's NPLs represented 1.9% of Gross Loans and were 182.6% covered by provisions (specific and general) at the end of 2008.

Taking into consideration the intensifying economic slowdown, the bank may face a reduction in asset quality. Recognizing this, the bank increased its provisioning to 3.6% of gross loans in 2008 up from 2.9% in 2006.

As mentioned above, NBK's loan portfolio increased faster than its deposit base over the past 4 years registering a 4-year CAGR of 14.3% until 2008 (vs. 26.2% for loans). This triggered an increase in the bank's net loan/core customer deposit ratio, from 84.6% in 2004 to 125.4% as of December 2008. However, the regulatory loans/deposits ratio is still within the CBoK 85% requirement.

Going forward, we expect deposit mobilization to be somewhat pressured for Kuwaiti banks, especially since the rates have fallen significantly. Government institutions will play a vital role in stabilizing liquidity. NBK has access to a diversified source of funding including both governmental institutions as well as from the international markets.

Whilst NBK has several high net worth depositors, its customer base is adequately diversified to mitigate concentration risk. Moreover, NBK has varied its sources of funding over the last five years by increasing its retail deposit base.

With its CAR ratio standing at 15.3% at the end of 2008 and a marginal improvement to 15.8% in the 1H09, NBK is well above the 12% CAR benchmark required by CBoK.

Income Statement Analysis
Net interest income formed nearly 73% of total revenue in 2008; NII remains the key driver of NBK's revenue. The bank's domestic corporate and retail lending activities contributed nearly 62% to total operating revenue.

NIM and Spreads
The rate cuts by the CBoK in 2008 exerted downward pressure on yields. However, NBK benefits from lower cost of funds (three year average of 3.6%) relative to those of its peers. CBK measured 4% whilst Burgan Bank registered 4.7%. Accordingly, NBK managed to marginally increase spreads, maintaining an average of 3.9% in 2008, again ahead of its peers (average 3% for CBK and 2.7% for Burgan Bank).

Non-interest income mainly consists of recurring fees and commissions. This is due to the fact that NBK is not a large trader, making trading gains a small component of earnings. The bank has realised commission-based growth mainly on account of the development in its retail, asset management, and investment banking businesses. However, due to subdued capital markets and the slowdown in investment banking activity in the region, we do not expect net fee and commission income to rise significantly in the near future.

The bank's cost/income ratio stood at 30.8% in 2008, increasing from 26.9% last year. This was primarily due to an increase in staff expenses and other costs as a result of the consolidation of AWB's results with the bank's financials. The operating ratio also took a hit due to the excess provisioning made by the bank in the year. The bank's cost/average asset ratio of 1.3 is also relatively efficient. However, with NBK looking to expand its geographical footprint in the near future, the bank's operating costs and cost/income ratio are expected to escalate.

Provisional charges
Provisional charges as a percentage of net loans almost doubled since 2007, rising to 0.91% from 0.47%. The loan loss charge itself however rose to KWD58.6mn from KWD23.8mn a year earlier, consuming 16.8% of preprovision operating income. Due to the performance of pre-provision operating income, net profit only shed 6.4%.

NBK has one of the best regional track records in terms of high and sustained financial performance. Up until 2008, the bank enjoyed a ROE in excess of 25% over the last 10 years. Profitability had surged even higher in the past three years (2005-2007), mainly due to an efficient cost structure, expansion in retail banking, and supportive economic environment. However, the bank saw a decline in profitability in 2008, largely due to higher judgemental provisions booked to provide a cushion against any future losses stemming from the credit crisis.

NBK distributed c.46% of its profit to shareholders. This was a 36% decrease in total payout after net profit lost 6.5% YoY. The 2008 DPS reached Fils45, in addition to a 10% bonus shares.

Recent Results
NBK's 9M09 financial results showed a 17.5% YoY decline to KWD202.6mn. However on a quarterly basis, 3Q09 was solid at KWD75.8mn, with the bank posting a 20.5% QoQ increase and a 9.7% YoY increase, mainly on lower quarterly provisional charge and nil impairment losses from investment securities.

Highlights of 3Q09:
l Loans grew by 12.2% YoY but only 3.8% QoQ. This is still higher growth compared to average 2.2% growth in the first two quarters of 2009. This growth was driven by a 7.5% rise in deposits YoY and 0.4% QoQ.

l Earning assets' yields lost 189bps YoY and 12bps QoQ while the cost of funds declined by only 162bps and 14bps QoQ. This squeezed the bank's margins YoY yet showed a slight improvement QoQ, increasing by 4bps to 3.66%, due to a slightly wider decline in the cost of funds. The result was a 4% decrease in NII YoY and a 2.4% increase in NII QoQ.

l Non-interest income expanded 51.5% YoY as 3Q08 contained net losses from investment available for sale worth KWD15.3mn, but reduced 6.3% QoQ, mainly on some losses from fair value investments (KWD0.2mn) compared to gains in the preceding quarter coupled with lower dividend income.

l Total costs increased 4.5% to KWD40.6mn YoY yet came flat QoQ. Fortunately, cost/income ratio improved, losing 64bps QoQ to 30.9% and an even better 223bps YoY. This was due to cost rationalization particularly over the last two quarters.

l Provisional charges together with investment losses due to impairment decreased 16.6% YoY and shed 64.5% QoQ to reach KWD7.2mn in 3Q09. This boosted net profits after provisions (before tax) by 9.9% YoY and 19.7% QoQ.
l Based on the above, the bank's annualised RoAE improved 127bps YoY and 203bps QoQ, registering 18% in 3Q09.
l NBK's CAR reached 15.8% in 1H09, up from 15.3% at the end of December 2008.

Financial Outlook
Balance Sheet
Due to the worldwide economic slowdown, loan growth is expected at lower levels compared to high growth rates achieved in the past years, where NBK grew at a 4-year CAGR of 26.2%. Going forward we expect the total balance sheet to grow at a 10.4% 5-year CAGR to KWD19,655.7mn in 2013, mainly driven by a 12.2% CAGR for loans and advances over the same period. We expect net loans and advances to grow by 9.4% in 2009 and deposits by 10%. Deposits are thus also forecast to slow to a 5-year projected CAGR of 12.4% compared to a 4-year CAGR of 14.3% until 2008.

We expect a marginally higher NPLs/Loans ratio for 2009 and 2010, gradually improving thereafter.

Income generation
As at September 30, 2009, NII represented 73.7% of total revenue whilst noninterest income represented 26.3%. Though the interest income yield took a hit in 2008 NBK was able to reduce its cost of funds faster than both CBK and Burgan Bank helping in turn to save its spread relative to these two rivals. NBK's spread increased YoY in 2008 from 3.6% to 3.9%. Overall, we expect the yields in Kuwait to continue their decline until the end of 2010. This would certainly put pressure on bank spreads and margins, as the cost of funds lag in declining after the yield cuts.
Conservatively, we expect the bank's interest spread and NIM to tighten in 2009 and 2010 with an expected decline in yields.

Elsewhere, with regard to non-interest income, a slow down to a 5-year CAGR of 9.6% in the projected period (compared to an actual 4-year CAGR of 16% until 2008) is forecast. Trading income is expected to decline sharply in 2009 due to distressed equity markets, gradually improving thereafter. Net fees and commissions' income is expected to lose steam as well with an expected slowing in the balance sheet, to grow at a 5-year CAGR of 8.5%, compared to a 4-year CAGR of 16.2% until 2008.

NBK has been successful with its cost economising during the last two quarters. We project this to continue, with total costs slowing to a 5-year CAGR of 9.6% until 2013, compared to a 4-year CAGR of 28.8% until 2008. Accordingly, we expect cost/income to marginally increase until 2011 albeit at a slower pace of growth relative to 2008. It is expected to reach 33.6% and to improve thereafter to hit 32% by 2013.

Using the CAPM, incorporating a 4% risk free rate, a market risk premium of 7.5% to reflect the prevailing global uncertainty in the wake of the global financial crises, and a beta of 1, we arrived at a cost of equity of 11.5%. We used a perpetual growth rate of 3%.

We valued NBK's consolidated operations based on our DCF based method including both explicit and semi-explicit forecast. Our valuation yielded a LTFV of KWD1.55/share and a TP of KWD1.32/share. This implies an upside of 41% and 20% respectively. Based on our TP, we designate NBK stock's as a Buy recommendation with Moderate Risk.

Risks to Our Recommendation
Downside Risks
l Slower than expected operating results or larger than expected deterioration in asset quality.
l Weak stock market performance and absence of strong price appreciation triggers.


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