2Q19 net income down 15% Y-o-Y, up 33% Q-o-Q on strong revenue growth vs 1Q19; beats our estimate by 29%
Burgan Bank’s 2Q19 net income stood at KWD25.6mn, down 15% Y-o-Y from a high base last year, as 2Q18 results included exceptionally high non-interest income, in addition to: (i) weaker Turkish Lira Y-o-Y and (ii) inclusion of just two months of earnings from Burgan’s foreign subsidiaries in its 2Q19 group quarterly results (since 1Q19, the reporting of the subsidiaries is a month earlier vs group level). Earnings increased 33% Q-o-Q, 29% ahead of our estimate of KWD19.8mn. The earnings beat was driven by higher-than-expected net interest income (-4% Y-o-Y, +19% Q-o-Q), non-interest income (-33% Y-o-Y, 68% Q-o-Q) and lower-than-expected provisioning expenses (-53% Y-o-Y, +12% Q-o-Q); these were also the drivers behind the strong Q-o-Q earnings growth in 2Q19. 1H19 earnings of KWD44.8mn fell 11% Y-o-Y on lower net interest income (-12% Y-o-Y), non-interest income (-21% Y-o-Y), and despite lower operating costs (-11% Y-o-Y) and provisioning expenses (-39% Y-o-Y).
 
A mixed set of results. Key positives were: (i) strong rebound in net interest income Q-o-Q, most likely driven by the foreign subsidiaries as for most banks in Kuwait domestic margins have under some pressure Q-o-Q; (ii) decline in the cost of risk Y-o-Y. However, loan growth was weak, against our expectation of a pickup in volume growth as Burgan Bank strengthen its capital adequacy ratio last year following its rights issue in 4Q18.
 
Results highlights:
 
Weak Q-o-Q loan growth. Customer loans increased just 0.7% Q-o-Q and fell -1% Y-o-Y in 2Q19, likely on weak loan growth in Turkey, following a 2% Q-o-Q and 4% Y-o-Y drop in loans in 1Q19. Deposit growth, however, was strong in 2Q19, up 5% Q-o-Q and 7% Y-o-Y. 
 
Higher asset yields drive higher spreads Q-o-Q. Spreads fell Y-o-Y, but improved by 43bps Q-o-Q (-17bps Y-o-Y), driven by higher asset yields (+76bps Q-o-Q), which more than offset the 33bps Q-o-Q increase in funding costs. Net interest income fell 4% Y-o-Y and increased 19% Q-o-Q. Fee income growth was strong, up 5% Y-o-Y and 27% Q-o-Q. 
 
Large increase in operating expenses Q-o-Q. Burgan’s cost-to-income ratio increased to 42.3% in 2Q19 vs. 34.4% in 2Q18 and 41.8% in 1Q19, as operating costs increased 3% Y-o-Y and 33% Q-o-Q.
 
Lower provisioning costs Y-o-Y: Total provisioning costs fell 52% Y-o-Y (+12% Q-o-Q), from a high base in 2Q18. Measured as a percentage of net loans, loan loss provisioning fell Y-o-Y to 80bps in 2Q19, down from 167bps in 2Q18 and up from 71bps in 1Q19. (Elena Sanchez-Cabezudo, CFA, Ahmed El Shazly, Company)
 
Burgan Bank: KWD0.35 as of 25 July, Rating: Buy, TP: KWD0.35/share, MCap: USD2,986mn, BURG KK/BURG.KW