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Commercial Bank of Kuwait (CBKK.KW)

CMP KWD 1.20 Target KWD 1.41 Potential Upside 17.2%

MSCI GCC Index 423.44 Kuwait Stock Exchange 8806.90

Key Stock Data Sector Banking Reuters Code CBKK.KW Bloomberg Code CBK KK Equity No. of Shares (mn) 1272.02 Market Cap (KWD bn) 1.526 Market Cap (USD bn) 5.564 Avg. 12m Vol. (mn) 1.023 Volatility (30 day) 27.482 Volatility (180 day trend) 33.477

Stock Performance (%) 52 week high / low (KWD) 1.74/ 1.12

1M 3M 12M Absolute (%) 0.0% -1.6% -10.0% Relative (%) 3.0% -30.1% -28.5%

Shareholding Pattern (%)

Al Sharq Holding 23.11

Public 76.89

CBK and KSE Movement

Executive Summary Established in June 1960, Commercial Bank of Kuwait (CBK) provides commercial banking services, asset management, and stock brokerage services. CBK is Kuwait’s third largest bank in terms of total assets as of September 2008. It offers both domestic and international lending facilities to customers. The bank also offers investment services under the name of TIJARI funds. With a network of 53 full-fledged service branches and a ATM network spread across the country, the retail banking segment is the high-focus area. Total operating income surged 13% For the nine months ended September 30, 2008, CBK reported that its net profit increased13.8% to KWD 104.89 million from KWD 92.18 million in 9M07. As a result, the adjusted annualized earnings per share (EPS) improved to KWD 0.110 from KWD 0.097. During 9M08, the bank’s net interest income grew 24.6% to KWD 91.46 million from KWD 73.40 million. While interest income soared 19.6% to KWD 197.17 million in 9M08 driven by an increase in average interest earning assets, interest expenses rose 15.6% to KWD 105.71 million during the same period. However, CBK’s yield on average interest earning assets decreased to 6.5% from 7.1% in 9M07, even as cost of average interest bearing liabilities shrunk to 3.8% from 4.4%. Accordingly, both net spread and NIM dropped 6 and 15 bps to 2.7% and 3.0% from 2.8% and 3.2%, respectively. Supported by reduced cost of funds, cost-to-income ratio improved 22 bps Y-o-Y to 16.1% in 9M08.

Outlook and Valuation The banking sector in Kuwait registered a healthy growth during 9M08 with its aggregate assets surging 17.7% to KWD 39.16 billion. CBK plans to grow aggressively through organic and inorganic routes, as reflected by its strategy to cover regional markets by increasing its branch network while at the same time eyeing small banks. With a view to expand in the Middle East and Asian markets, it plans to open branches in Gulf regions as Bahrain, the UAE, and Qatar, while also looking for opportunities in Syria, Egypt, Lebanon and Asian markets like India. Furthermore, the bank remains focused at enhancing customer satisfaction through custom-made product offerings, technological upgradations to include online and SMS services and trading portal. Further, in a bid to diversify its income source, CBK raised its stake to 51% in Union Securities Brokerage Co. (USBC) in March 2008 keeping all options open for acquisition of further stake in near future. Currently, CBK’s stock is trading at a P/E multiple of 11.54x based on its 2008E earnings and at a P/B multiple of 2.99x on its 2008E BVPS; and at a P/E multiple of 11.07x based on its 2009E earnings and at a P/B multiple of 2.76x on its 2009E BVPS. The stock has lost 16.0% since the beginning of this year, as compared to the KSE index YTD negative return of 29.9%. On an equal weight basis (GGM – 50% and P/BV – 50%), we have arrived at a Fair Value per share of KWD 1.41, which represents a 17.2% upside from its closing price of KWD 1.20 (as on December 17, 2008). We initiate our coverage with an investment opinion of OVERWEIGHT on Commercial Bank of Kuwait.

KWD Million 2006A 2007A 2008E 2009E 2010E Total Op. Income 144.33 162.31 199.26 206.04 221.98 % Change YoY -99.9 12.5 22.8 3.4 7.7 Net Profit 100.01 120.36 132.24 137.93 149.94 % Change YoY -99.9 20.3 9.9 4.3 8.7 Net Spread (%) 3.5 2.2 2.8 2.8 2.9 Net Int. Margin (%) 3.9 2.7 3.1 3.1 3.2 Adj. EPS (KWD) 0.079 0.095 0.104 0.108 0.118 ROAE (%) 23.2 23.8 25.5 25.9 25.5

OVERWEIGHT

Background Established in June 1960, the Commercial Bank of Kuwait (CBK) has the second largest full-service branch network in Kuwait. As of September 2008, CBK registered the third largest asset base in the country, and offers commercial banking services, asset management and stock brokerage services. Meanwhile, in an attempt to convert into an Islamic Bank, it applied to the Central Bank of Kuwait in March 2008. The bank offers investment services under the name of TIJARI funds. The bank started offering services in Islamic Fundsfrom June 2006 with the Tijari Islamic Fund. Presently, it provides services through different investment vehicles such as: Tijari India Fund, Tijari Islamic Fund, Tijari Investment Fund, Tijari GCC Equity Fund, Tijari Money Market Fund and Tijari Islamic Money Market Fund. The bank was listed on the Kuwait Stock Exchange on September 29, 1984. Between 1974 and 1981 CBK was under a management contract, wherein Chase Manhattan Bank operated the bank. The Bank was later privatized and now the local public holds 76.89% stake, while rest is held by private firm Al Sharq holding. CBK offers both domestic and international lending facilities to its customers. With a network of 53 full-fledged service branches and a vast ATM coverage spread across the country, the retail banking segment is the high-focus area for the bank. The bank introduced state-of-the-art new Card Management System to provide Customer Service and Comprehensive Management Information System and Effective Collection Tracking Module and Credit Decision Making to enhance customer service satisfaction. The bank also offers its services through online and SMS banking facilities. During October 2008, Fitch Ratings rated the bank’s Long-term Issuer Default Rating (IDR) ‘A+’ and ‘F1’ on Short-term IDR, Individual ‘B/C’ and Support ‘1’. The rating outlook on the Long-term IDR remains ‘Stable’ and affirmed support rating floor at ‘A+’. In September 2008, Standard & Poor's also confirmed ‘A-’ counterparty credit rating to the bank. Moody’s rated bank’s Global local currency deposits and Global foreign currency deposits ‘Aa3/P-1’. Likewise, the outlook on the bank remains ‘Stable’. In a bid to grow aggressively through organic and inorganic routes, the bank has adopted a strategy to cater to regional markets by increasing its branch network while looking out for buying opportunities in smaller banks. With a view to expand in the Middle East and Asian markets, it plans to open branches in countries like Bahrain, the UAE, and Qatar, while also looking for opportunities in Syria, Egypt, and Lebanon. Recently, CBK completed the acquisition of Union Securities Brokerage Company (USBC), which will help it strengthen its brokerage and product services offerings. Business Model Commercial Bank of Kuwait has adopted the following business model: • The bank has tactically focused on both organic and inorganic growth, as reflected from its

aggressive branch expansion and acquisitions. • To boost its non-interest earnings growth, the bank has recently established CBK Capital to offer

services in Investment Banking. • To provide better technology to its customers, the bank launched Al-Tijari Bursa, an on-line

trading portal, and also started online banking and SMS service. • The bank is also strategically managing a wide range of diversified and non-correlated assets

such as Tijari funds, Islamic money market instruments and debt instruments such as Murabahas and Sukuks.

Subsidiaries/Affiliates of CBK CBK has a number of subsidiaries, affiliates and strategic investments.

SUBSIDIARIES / ASSOCIATES / AFFILIATES COUNTRY % SHARE

CBK Capital Kuwait 99.50

Union Securities Brokerage Company Kuwait 80.00

Source: Zawya.com

3rd largest bank in Kuwait by asset base and 2nd in branches Customer friendly initiatives Board of Directors • Chaired by Mr.

Abdulmajeed Haji Al Shatti

• Deputy Chairman - Mr. Abdul Razzak Khaled Al Wazzan

• Secretary To The Board - Mr. Fowzi Abdul Mohsen Al Ateeqi

• Mr. Khalid Ibrahim Al Raqum

• Mr. Abdul Fatah Mohammad Rafie Marafie

• Mr. Sadek Ibrahim Marafie

• Mr. Ahmad Mohammed Al Mishari

• Mr. Fouad Ismail Dashti Source: Company website

Nominal GDP grew at a relatively slower growth rate of 8.0% with decrease in crude oil and liquefied gas production Consolidated balance sheet of local banks continued its impressive growth in 9M 2008

Industry Scenario The banking sector in Kuwait comprises of 17 banks, which include 6 local conventional banks, 1 specialized bank (Industrial Bank of Kuwait (IBK)), 3 Islamic Shariah-compliant banks, and 7 branches of conventional foreign banks. The six local conventional banks are National Bank of Kuwait (NBK), Gulf Bank (GBK), Commercial Bank of Kuwait (CBK), Al Ahli Bank of Kuwait (ABK), The Bank of Kuwait & Middle East (BKME) and Burgan Bank (BURG). The Islamic Shariah-compliant banks include Kuwait Finance House (KFH), Boubyan Bank (BOUBYAN) and the recently converted Kuwait International Bank (KIB). In July 2007, KIB (formerly known as Kuwait Real Estate Bank) was listed under the new name in the CBK Islamic Banks Register and started its operations according to the provisions of Islamic Shariah. The seven foreign banks are Bank of Bahrain & Kuwait (BBK), BNP Paribas Bank, HSBC Bank Middle East Ltd., National Bank of Abu Dhabi, Citibank, Qatar National Bank (QNB); and Doha Bank. The institutional structure of the banking system in Kuwait has expanded, with local branch network of conventional and Islamic banks adding 31 additional branches during 2007, bringing the total number of local branches (excluding head offices) to 275 from 244 in 2006. Over 2003-2007 period, the consolidated balance sheet of the local banks in Kuwait advanced at a healthy 5-year CAGR of 17.2% to reach KWD 35.56 billion in 2007, on the back of impressive growth in private sector and foreign assets, accounting for 61.4% and 21.5% of the sector’s aggregate assets in 2007, respectively, as compared to 49.8% and 12.9% in 2003. The bulk of this growth was contributed by the healthy expansion in credit facilities to residents, which advanced at a 5-year CAGR of 24.4% during 2003-2007. The sector’s foreign assets more than tripled at a 5-year CAGR of 33.2% with growing exposure to foreign assets and investments, by increasing their deposits with foreign banks, foreign investments, and credit facilities to non-residents. Continuing its healthy growth momentum, the sector’s aggregate assets surged 17.7% to KWD 39.16 billion in 9M 2008, owing to a 23.4% jump in credit facilities to residents (accounting for 58.9% of the sector’s aggregate banking assets) and a 39.3% upsurge in foreign assets (23.6% of the sector’s aggregate banking assets).

Consolidated Balance Sheet of Local Banks in Kuwait (in KWD Millions) 2003 2004 2005 2006 2007 9M 07 9M 08 Assets: Cash 91 75 106 149 115 115 180 Sight Deposits with CBK 108 175 112 50 484 329 382 Time Deposits with CBK 348 126 440 926 813 1,665 45 CBK Bonds 0 0 124 356 591 645 436 Claims on Government: Public Debt Instruments 2,232 2,146 2,085 1,989 1,912 1,887 2,012 Debt Purchase Bonds 818 604 378 176 0 72 0 Total 3,050 2,750 2,463 2,165 1,912 1,959 2,012 Claims on Private Sector: Other Local Investments 959 1,019 1,109 1,215 1,683 1,525 1,816 Credit Facilities to Residents 8,419 9,867 11,827 14,934 20,139 18,689 23,055 Total 9,379 10,886 12,937 16,148 21,822 20,214 24,871 Foreign Assets 2,425 3,192 3,794 5,246 7,633 6,638 9,249 Local Interbank Deposits 2,914 1,405 1,014 1,291 1,390 960 951 Other Assets 498 535 622 659 797 736 1,037 Total Assets 18,814 19,144 21,612 26,990 35,555 33,261 39,163 Liabilities: Private Sector Deposits: Sight Deposits in KWD 2,117 2,643 3,149 2,894 3,505 3,426 4,001 Quasi Money 7,790 8,481 9,359 12,370 14,841 14,177 16,798 Total 9,907 11,124 12,508 15,264 18,346 17,603 20,798 Government Deposits 634 842 996 1,434 1,959 1,803 2,175 Foreign Liabilities 1,925 1,822 2,260 3,116 6,241 6,045 7,545 Own Funds 2,009 2,311 2,800 3,170 4,494 3,992 4,557 Local Interbank Deposits 2,561 1,369 853 1,302 1,374 960 870 Other Liabilities 1,778 1,676 2,195 2,703 3,142 2,858 3,218 Total Liabilities 18,814 19,144 21,612 26,990 35,555 33,261 39,163 Source: Central Bank of Kuwait

Total private sector deposits accelerated 18.2% in 9M 2008 as compared to 5-year CAGR of 16.7% over 2003-2007 Instalment loans and credit to real estate sector witnessed a relatively slower growth

In contrast to 5-year CAGR of 16.7% over 2003-2007, the total private sector deposits (both sight deposits in KWD and quasi-money deposits) witnessed an upsurge of 18.2% and its contribution to the sector’s total liabilities advanced to 53.1% in 9M 2008. Within private sector deposits, quasi-money deposits advanced 18.5% (as against 5-year CAGR of 17.5%) while its share in total private sector deposits grew to 80.8% in 9M 2008 from 80.5% in 9M 2007. Similarly, surpassing the 5-year CAGR of 14.6% over 2003-2007, the private sector foreign currency deposits soared 21.1% in 9M 2008, which marginally improved its proportion in the total private sector deposits to 9.2% in 9M 2008. On the contrary, the proportion of sight deposits in KWD to total private sector deposits declined somewhat to 19.2% in 9M 2008. However, the share of foreign liabilities in the sector’s total liabilities maintained its growth momentum, reaching 19.3% in 9M 2008 as compared to 18.2% in 9M 2007. This was partially attributable to the branches of foreign banks operating in the country, commencing their activities and their role in attracting non-resident deposits. Own funds reported relatively slower growth of 14.2% in 9M 2008 as against 5-year CAGR of 22.3% over 2003-2007, reducing the proportion of own funds in the sector’s total liabilities to 11.6% in 9M 2008. In particular, credit to personal facilities (mainly installment loans and purchase of securities), real estate, construction, industry sectors, and non-banking financial institutions spurred the strong growth in total credit facilities to residents. Together they constituted 84.1% of total credit facilities to residents in 2007, surging from 78.4% in 2003. However, the share of credit to these sectors marginally shrank to 84.0% in 9M 2008, on relatively slower growth in personal credit facilities (in particular installment loans) and credit to real estate sector. However, installment loans as a percentage of total credit facilities to residents declined to 17.2% in 9M 2008 as against 18.5% in 9M 2007 adversely impacted by the recent fundamental changes in consumer and installment loans instructions by the Central Bank of Kuwait in March 2008.

Sectoral Distribution of Balances of Utilized Cash Credit Facilities by Residents (in KWD Millions) 2003 2004 2005 2006 2007 9M 07 9M 08

Trade 1,072 1,276 1,371 1,702 1,900 1,918 2,180 Industry 442 447 468 609 1,071 946 1,332 Construction 633 592 770 1,070 1,367 1,363 1,757 Agriculture and Fishing 49 23 19 36 15 14 13 Non-Bank Financial Institutions 650 781 933 1,427 2,409 2,198 2,831 Personal Facilities: Consumer Loans 749 736 789 756 631 647 613 Installment Loans 1,558 2,075 2,448 3,154 3,891 3,449 3,977 Purchase of Securities 755 908 1,248 1,605 2,157 1,924 2,794 Other Loans 380 451 653 538 413 525 390 Total 3,443 4,169 5,138 6,052 7,093 6,544 7,773 Real Estate 1,434 2,030 2,539 3,288 5,002 4,664 5,673 Crude Oil & Gas 73 55 52 51 59 44 90 Public Services 1 0 5 5 3 4 1 Other 623 495 534 694 1,222 994 1,404 Total Credit Facilities to Residents 8,419 9,867 11,827 14,934 20,139 18,689 23,055 Source: Central Bank of Kuwait The Central Bank’s discount rate is a pivotal rate to which, within specific margins, the ceilings of KWD lending interest rates are linked. Accordingly, any cut in the discount rates automatically leads to proportionate in the maximum KWD lending interest rates in the domestic banking and financial units. In tandem with the 50 bps decrease in the discount rate to 5.75% from 6.25% in January 2008, the local banks have also lowered their lending rates; as a result the weighted average interest rate on credit facilities in KWD to residents and non-residents dropped to 7.98% in 9M 2008 from 8.48% in 9M 2007 and 8.54% in 2007. However, weighted average interest rate on private sector KWD deposits to residents and non-residents shrank at a relatively higher rate to 4.90% in 9M 2008 from 5.60% in 9M 2007 and 5.45% in 2007. Consequently, the sector’s net spread increased to 3.08% in 9M 2008 from 2.87% in 9M 2007 and was in line with 3.09% in 2007. However, in response to the prevailing global financial turmoil and liquidity crisis, the CBK has decided to cut discount rate by another 25 bps to 4.25% from 4.50% effective October 30, 2008 (after cutting 125 bps on October 08, 2008), to bolster confidence in the national economy and strengthen the role of the banking system in meeting the funding needs of the local economic sectors. Consequent to the total cut of 150 bps in

9M08 net spread improved to 3.08%, but likely to be under pressure on 150 bps decline in Central Bank of Kuwait discount rate in October 2008 Effective banking regulations

discount rate in October 2008, we expect that going forward the sector’s net spread is likely to decline, mainly on account of a likely 150 bps decrease in weighted average interest rate on credit facilities in KWD to residents and non-residents. However, the CBK’s decision to cut its repo rate (benchmark deposit rate) on October 8, 2008, by 100 bps to 2.50% from 3.50%, may reduce this net spread contraction.

Interest Rate Scenario 2003 2004 2005 2006 2007 9M 07 9M 08

Weighted Average Interest Rate on Credit Facilities in KWD to Residents & Non-Residents

5.42% 5.64% 7.50% 8.58% 8.54% 8.48% 7.98%

Weighted Average Interest Rate on Private Sector (Residents & Non-Residents) KWD-Deposits

2.42% 2.65% 3.47% 4.92% 5.45% 5.60% 4.90%

Net Spread 3.00% 2.98% 4.03% 3.65% 3.09% 2.87% 3.08% Source: Central Bank of Kuwait

On November 19, 2008, the Central Bank introduced two new Repo agreements with maturities of ‘overnight’ at 1.00% and 1-month at 3.00%, in addition to the already existing 1-week facility at 2.00%. These facilities can however only be used by banks on the reserves that are in excess to the 20%, according to the rules set by the CBK. On September 29, 2008, the CBK announced to inject funds into the banking system, in the form of 1-week and 1-month deposits. On October 5, 2008, the regulator announced to inject more funds into the system, in the form of 1-week, 1-month and overnight funds. On October 29, 2008, Kuwait's National Assembly passed a law to guarantee all forms of deposits at national and foreign banks operating in the country. On October 16, 2008, the CBK Board of Directors specified a number of resolutions, that include - raising of the maximum limit for the ratio of credit facilities to deposits to 85% from 80%, increasing the rate of growth set for bank credit portfolios during 2008 by 5% for each bank, and considering real estate as one of the acceptable items for the collateral qualified for inclusion in the calculation of the capital adequacy ratio. On March 23, 2008, the CBK made some fundamental changes to the consumer and installment loan instructions; such as (i) changing the method of charging interest by fixing the interest rate for 5 years from the date of the loan, to be then reviewed and revised by not more than 2%, instead of the current method of changing the interest rate whenever the discount rate changes; (ii) upfront charge of interest on consumer loans is prohibited. Effective March 30, 2008, these instructions are applicable only to new consumer and installment loans, and would curb excessive growth of these loans to the benefits of the citizen.

Financial Performance FY 2007 Driven by non-interest income, operating income surged 13% During FY 2007, CBK’s operating income increased 12.5% to KWD 162.31 million from KWD 144.33 million regardless of a decline in net interest income. The increase was mainly driven by a 41.6% surge in non-interest income owing to higher net gain from investment securities and trading in foreign currencies. Moreover, fees and commissions were marginally up by 3.2% to KWD 26.60 million as compared to KWD 25.78 million in 2006. Net interest income, which contributes 55.0% to total operating income, fell 3.8% to KWD 89.19 million from KWD 92.68 million during last year due to a combination of an increase in average cost of funds and decreased interest yield. Yield on average interest earning assets dwindled to 6.7% from 7.1% in 2006, while average cost of funds increased to 4.4% from 3.7% in the previous year. Despite the decrease in interest yield, the interest income increased by 30.5% to KWD 222.33 million owing to a 39.5% addition in average interest earning assets to KWD 4,020.66 million. Interest expenses increased 71.3% to KWD 133.14 million over KWD 77.73 million in 2006 led by a 41.5% jump in average interest bearing liabilities along with higher cost of funds. Meanwhile, operating expenses advanced 15.5% to KWD 30.79 million from KWD 26.67 million in 2006 due to increased staff and general and administrative expenses. Consequently, cost-to-income ratio grew 49 bps to 19.0% from 18.5%. Net Spread and NIM Net spread drastically fell 123 bps to 2.2% as compared with 3.5% last year. Subsequently, net interest margin (NIM) plummeted 120 bps to 2.7% from 3.9% during 2006 on account of expanded interest earning assets. Net Profit Steered by an upsurge in operating profit coupled with a reduction in impairments and provisions, net profit of the bank grew 20.3% to KWD 120.36 million as against KWD 100.01 million. Altogether, adjusted EPS soared to KWD 0.095 from KWD 0.079. The bank’s bottom-line advanced at a 2-year CAGR of 21.8% and over the last 2 years its total operating income increases at a CAGR of 15.9%. Return on average equity (ROAE) expanded to 23.8% from 23.2%, while return on average assets (ROAA) declined to 3.3% as compared to 3.8% in 2006. Enhanced Asset quality CBK’s asset quality improved significantly over the years as is evident from its NPL ratio, which improved to 5.2% in 2007 from 7.0% in 2006. Looking at the declining NPL ratio, the bank has slightly reduced the provision for its non-performing loans with loan loss coverage ratio at 136.3% as against 141.0% in 2006. On the other hand, bank’s C/D ratio dropped to 90.4% from 95.6% on increased liabilities related to customer deposits, which rose 50.6% to 2.64 billion in 2007. However, overall business volume reached KWD 5.02 billion as against KWD 3.42 billion a year ago. Size of the Company The salient points about the balance sheet of CBK are as follows:

CBK’s total asset base swelled 13.4% to KWD 4.34 billion boosted by an increase in domestic assets. Loans and advances, which constitute 56.3% of total assets, soared 15.4% to KWD 2.44 billion from KWD 2.12 billion during 9M07. In addition, contribution of due from banks & other financial institutions to total assets rose to 28.3% from 26.8%. However, cash and short-term funds reduced 32.8% to KWD 0.145 billion as more cash used in operating activities. Whereas, liquid assets to total assets ratio was marginally up to 36.4% from 36.1% over the same period last year.

For 9M08, shareholders’ equity was KWD 479.51 million, down 4.2% from KWD 500.71 million

over the corresponding period last year. The decline was primarily supported by an 11.0% decrease in reserves owing to the lowered fair valuation reserves and a surge in treasury shares.

The bank’s total liabilities increased by 16.0% to KWD 3.86 billion, on account of 19.2% rise in

customer deposits. Customer deposits, which contribute 62.2% to total assets, jumped to KWD 2.71 billion from KWD 2.27 billion in 9M07. Due to banks and other financial institutions was KWD 1.03 billion, up 8.1% from KWD 0.96 billion in the same period of last year. However, contribution to total assets - due to banks and other financial institutions - plummeted to 23.8% from 24.9%.

Operating income surged 12.5% to KWD 162 million Net spread declined 2.2% NPL ratio improved to 5.2% from 7.0%

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Chart Gallery

An upsurge in both loans & advances and customer deposits led to a 17.3% jump in overall business volume to KWD 5.15 billion in 9M 2008 as compared to KWD 4.39 billion in the corresponding period of the previous year. On the flip side, credit-to-deposit ratio contracted 301 bps to 90.4% from 93.4% in 9M07.

Financial Performance Analysis – 9M 2008 For the nine months period ended September 30, 2008, CBK’snet profit grew 13.8% to KWD 104.89 million as against KWD 92.18 million in the comparable period of the last year. As a result, the adjusted annualized earnings per share (EPS) improved to KWD 0.110 from KWD 0.097. During 9M08, the bank’s net interest income grew 24.6% to KWD 91.46 million from KWD 73.40 million. Despite declining interest yield, interest income soared 19.6% to KWD 197.17 million, driven by a 30.9% advance in average interest earning assets to KWD 4,023.43 million. On the other hand, driven by higher interest bearing liabilities, interest expenses increased 15.6% to KWD 105.71 million. However, CBK’s yield on average interest earning assets decreased to 6.5% from 7.1% in 9M07, even as cost of average interest bearing liabilities shrunk to 3.8% from 4.4%. Accordingly, both net spread and NIM dropped 6 bps and 15 bps to 2.7% and 3.0% from 2.8% and 3.2%, respectively. Supported by declined cost of funds its cost-to-income ratio improved 22 bps to 16.1% as compared to 16.3% over the comparable period of the last year. Meanwhile, the bank's net fees & commission income surged 30.5% to KWD 23.61 million. The bank’s total non-interest income grew 10.7% in 9M 2008 to KWD 67.12 million from KWD 60.64 million in the same period a year ago. Moreover, annualised return on average equity (ROAE) jumped to 27.8% from 24.9%, while return on average assets (ROAA) slid to 3.2% from 3.6% in 9M07.

Loans and advances soared 15% to KWD 2.4 billion Credit-to-deposit ratio contracted 301 bps EPS improved to KWD 0.110 from KWD 0.097

Peer Comparison In order to do a peer comparison of the commercial banks of Kuwait, we have considered National Bank of Kuwait, Gulf Bank, Al Ahli Bank of Kuwait, Burgan Bank and Commercial Bank of Kuwait.

Peer Analysis (in KWD' Millions) NBK GBK ABK BURG CBK 2007 9M '08 2007 9M '08 2007 9M '08 2007 9M '08 2007 9M '08 Net Interest Income 283.56 285.73 106.55 92.27 66.39 54.08 51.11 49.85 89.19 91.46 % YoY Growth 8.4 22.8 -1.8 2.1 11.8 3.6 23.7 13.1 -3.8 24.6 Total Operating Income 424.37 392.73 195.57 127.16 103.60 89.32 105.69 100.02 162.31 158.58 % YoY Growth 7.4 16.0 26.8 -11.8 -0.1 8.8 25.8 7.9 12.5 18.3 Net Profit 273.57 243.69 130.44 85.96 76.04 70.39 74.82 66.25 120.36 104.89 % YoY Growth 8.0 10.5 23.2 -18.2 26.7 0.5 31.5 9.4 20.3 13.8 Loans & Advances (Net) 5,920.31 6,712.68 3,306.79 3,516.10 1,870.01 2,133.60 1,421.10 2,092.37 2,214.22 2,444.70 % YoY Growth 37.4 27.4 27.9 15.5 30.4 17.1 50.2 62.2 46.7 15.4 Total Assets 11,539.42 12,363.24 5,082.91 5,186.64 2,961.16 3,116.21 2,847.55 3,816.27 4,289.29 4,344.26 % YoY Growth 46.1 26.2 25.2 5.8 22.1 9.9 28.8 34.7 47.0 13.4 Customers' Deposits 5,716.10 5,646.67 3,191.33 3,654.56 2,230.43 2,218.49 1,648.54 2,413.39 2,635.85 2,703.53 % YoY Growth 30.5 13.8 12.4 15.4 38.0 10.2 33.2 58.3 50.6 19.2 Shareholders' Equity 1,685.87 1,653.64 490.62 445.48 319.09 334.91 351.14 342.96 527.02 479.51 % YoY Growth 59.1 36.0 23.0 -6.0 21.2 7.8 34.9 2.6 8.8 -4.2

Yield on Average Interest Earning Assets 7.4% 7.0% 8.0% 7.3% 6.4% 6.3% 7.1% 6.7% 6.7% 6.5% Average Cost of Funds 4.0% 3.1% 5.2% 4.7% 4.7% 4.5% 5.4% 4.8% -4.4% -3.8% Net Spread 3.4% 3.9% 2.8% 2.6% 1.7% 1.9% 1.7% 1.9% 2.2% 2.7% Net Interest Margin 3.5% 3.9% 2.7% 2.7% 2.4% 2.4% 2.2% 2.2% 2.7% 3.0% Cost to Income Ratio -26.7% -29.3% -18.6% -20.8% 26.0% 24.4% 26.4% 19.8% 19.0% 16.1% Credit-Deposit (C/D) Ratio 107.1% 118.9% 106.3% 96.2% 88.4% 96.2% 88.7% 86.7% 90.4% 90.4% Loan Loss Reserve to Gross Loans & Advances Ratio 3.3% 0.0% 2.6% 0.0% 5.1% 0.0% 2.8% 0.0% 7.0% 0.0% Equity to Total Assets Ratio 14.6% 13.4% 9.7% 8.6% 10.8% 10.7% 12.3% 9.0% 12.3% 11.0% Capital Adequacy Ratio 17.9% NA 19.0% NA 14.0% NA 16.6% NA 14.6% NA ROAE 19.9% 19.5% 29.3% 24.5% 26.1% 28.7% 24.5% 25.5% 23.8% 27.8% ROAA 2.8% 2.7% 2.9% 2.2% 2.8% 3.1% 3.0% 2.7% 3.3% 3.2% # NBK = National Bank of Kuwait, GBK = Gulf Bank, ABK = Al Ahli Bank of Kuwait, BURG = Burgan Bank and CBK = Commercial Bank of Kuwait Source : Zawya.com, CBK financial statements and Capital IQ

Wide presence via 53 branches; growing organically and inorganically Diversifying income sources

New Projects and Strategy CBK is continuously looking to upgrade its services and increase its branch expansion to offset rising competition and reach more customers. To capitalize on the wealth in the oil-rich Arab Gulf region, CBK has set up an investment banking subsidiary, CBK Capital with a paid up capital of KWD 15 million to undertake investment banking, private equity, real estate and corporate advisory services in the MENA region. The bank is looking to raise its stake via buy back of shares up to 10% to minimise the risk of any takeover, as majority stake is held by public. Meanwhile, the bank is also scouting for opportunities in the Middle East and Asia, to take advantage of the fall in prices brought forth by the recent global financial crisis, thereby, reducing the cost of acquisition. On December 17, 2008, Kuwait’s Investment Dar sold a 19% stake in Islamic lender Boubyan Bank to CBK at 425 fils a share for KWD 94.103 million (USD 341.6 million). Recently, the bank along with the International Finance Corp. (IFC), the private arm of the World Bank Group, announced that it is planning to acquire 85% of Yemen Gulf Bank for approximately USD 30 million, with CBK owning the majority stake. CBK also intends to raise stake in Cham Bank from 10% at present, the possibility of which will enable it to diversify its presence beyond Kuwait. Eyeing on opening branches in Bahrain, the UAE, and Qatar, the bank is also seeking new opportunities in Syria, Egypt and Lebanon. Launching new custom-made products while ensuring clients’ preferences shows the bank’s constant pursuance of customer-centric strategy to stay ahead and surpass a highly competitive market. CBK introduced ‘Loan-over-the-phone’ service to provide flexible and easy access to loans on phone. On the path of technical upgradations, the bank launched CBK-Online service and SMS service, thereby, allowing its customers to follow up and manage their accounts. Besides, it also started an on-line trading portal ‘Al-Tijari Bursa’ – which is a fast, easy and comprehensive service for online trading on the Kuwait Stock Exchange. In 2007, the bank launched ‘My First Account’ for kids up to the age of 14 years, aiming at educating them to understand the value of money and savings as well as familiarizing them with current banking. In order to diversify its income, CBK raised its stake to 51% in Union Securities Brokerage Co. (USBC) in March 2008 keeping all options open for further acquisitions in near future. Further, it aimed at strengthening brokerage activities and product offerings in the Kuwaiti and Egyptian markets, in addition to providing more distinguished and unique services to clients. CBK also offers international brokerage services and online trading services. SWOT Analysis Strengths:

The bank has a healthy exposure to fee and fund-based activities and offers innovative products for diverse customer needs.

Established in 1960, CBK has a banking experience of nearly five decades. CBK has spread its investment portfolio by investing in several financial services companies

in Kuwait, Syria and Bahrain. Operates the second largest full service branch network in Kuwait with 53 branches. Reflecting its record financial performance across business activities, CBK is the second best

rated bank among local banks. Weaknesses:

The bank’s increased exposure to real estate sector may slowdown its bottom-line in the near future.

Operations in countries like Iraq, which are prone to political uncertainties, may hamper its growth.

Opportunities:

Focus on diversifying to a non-oil economy will pose ample opportunities of credit growth. Government initiatives to inject liquidity in the economy through regulatory changes would

present substantial opportunities to the banking sector. The bank is looking to open branches in GCC neighbours - Bahrain, UAE, and Qatar - while

also eyeing opportunities in Syria, Egypt, Lebanon and Asian markets like India. Threats:

Decline in net spread will adversely impact profitability. Intense competition on account of expansion initiatives by local and foreign banks.

Risks and Concerns:

The global financial turmoil and liquidity crisis has forced the central bank to cut discount rate by another 25 bps to 4.25%, effective October 30, 2008, subsequent to the 125 bps reduction on October8, 2008, to increase liquidity and bolster investor confidence. However, these measures keep the net spread of banks under pressure thereby negatively impacting profitability.

Decline in oil revenues is reducing investments from the infrastructure sector. According to speculations, around 60% of the projects in GCC have been shelved. This is likely to decrease credit requirements of the sector, hence limiting the bottom-line growth of the banks.

Oil revenues have plunged approximately 50% in a month wiping out the budget surplus of the country. According to CBK, there has been an 85% decline in the budget surplus during the month of September. Furthermore, only 14% of the state’s planned investments have been started or concluded. According to Reuters, the government is planning to invest funds to the tune of USD 3.7 billion in domestic stocks to restore confidence. However, effectiveness of these methods will depend on how the liquidity crunch shapes up moving ahead.

Cost of Equity: 8.02%

Valuation Methodology: We have used two valuation methods for arriving at the fair value of CBK, as discussed below:

I. Target P/BV approach based on the Gordon Growth Model (GGM), and II. TTM P/E valuation approach.

Target P/BV Multiple Approach using the Gordon Growth Model (GGM) The model uses the sustainable return on average equity (ROAE), cost of equity (Ke) and expected growth in earnings (g) to arrive at the target P/BV of the bank under review using the formula:

Target P/BV = (ROAE - g) / (Ke - g) Subsequently, we have multiplied the target P/BV multiple for 2008E with the 2008E BVPS to arrive at the fair value of the bank over a medium-term investment horizon. We have made the following assumptions to arrive at the target P/B multiple for 2008 of the bank:

i. For sustainable ROAE, we have considered the 5-year average return on average equity (ROAE) of the bank over 2008E-2012E.

ii. We have estimated the cost of equity (Ke) using Capital Asset Pricing Model (CAPM):

a. Risk free rate of return (Rf) of 2.53% b. Cost of Equity – 8.02%

iii. We have assumed a terminal growth rate (g) of 2.0%.

GGM Valuation Summary Sustainable ROAE 26.00% Cost of Equity (Ke) 8.02% Perpetual Growth Rate 2.00% Target P/BV Multiple for 2008E (x) 3.99 2008E BVPS (KWD) 0.402 Fair Value per Share using Target P/BV (KWD) 1.602 CMP (KWD) 1.200 Upside/(Downside) 33.46%

Sensitivity AnalysisThe tables below exhibits the sensitivity analysis for the estimated fair value per share based on various terminal growth rates, cost of equity and ROAE. The shaded area represents the most probable outcomes. Sensitivity Analysis - GGM (Ke vs. g) Terminal/Perpetual Growth Rate (g)

Cost of Equity (Ke)

1.00% 1.50% 2.00% 2.50% 3.00% 6.02% 1.999 2.176 2.397 2.680 3.058 7.02% 1.667 1.782 1.919 2.087 2.297 8.02% 1.431 1.509 1.602 1.710 1.841 9.02% 1.252 1.308 1.373 1.447 1.534 10.02% 1.113 1.155 1.201 1.255 1.315

Sensitivity Analysis - GGM (Ke vs. ROAE) Return on Average Equity (ROAE)

Cost of Equity (Ke)

24.00% 25.00% 26.00% 27.00% 28.00% 6.02% 2.197 2.297 2.397 2.497 2.597 7.02% 1.760 1.840 1.919 2.000 2.080 8.02% 1.468 1.535 1.602 1.668 1.735 9.02% 1.258 1.316 1.373 1.430 1.487 10.02% 1.101 1.152 1.201 1.252 1.302

Sensitivity Analysis - GGM (ROAE vs. g) Terminal Growth Rate (g)

Return on Average Equity (ROAE)

1.00% 1.50% 2.00% 2.50% 3.00% 24.00% 1.316 1.386 1.468 1.565 1.681 25.00% 1.373 1.448 1.535 1.638 1.761 26.00% 1.431 1.509 1.602 1.710 1.841 27.00% 1.488 1.571 1.668 1.783 1.921 28.00% 1.545 1.633 1.735 1.856 2.001

TTM P/E Multiple Based Valuation

TTM P/E Multiple Based Valuation Summary CBK's 2008E EPS (KWD) 0.104Target P/E (x) 11.66Fair Value per Share using Target P/E 1.212CMP (KWD) 1.200Upside/(Downside) 1.00%

Banks Outstanding

Shares (million)

# CMP (KWD)

Market Capitalization (KWD million)

EPS (TTM) (KWD)

P/E (TTM) (x)

National Bank of Kuwait (NBK) 2,692 1.480 3,984 0.110 13.42 Gulf Bank (GBK) 1,254 0.950 1,191 0.089 10.70 Commercial Bank of Kuwait (CBK) 1,272 1.200 1,526 0.105 11.47 Al Ahli Bank of Kuwait (ABK) 1,318 0.800 1,054 0.048 16.81 Burgan Bank (BURG) 947 0.770 729 0.085 9.06 The Bank of Kuwait & Middle East (BKME) 887 0.570 506 0.067 8.48 Average TTM P/E 11.66 Sources: Zawya and Banks' Financial Statements # CMP as on December 17, 2008

Weighted Average Fair Value On an equal weight basis (GGM – 50% and P/BV – 50%), we have arrived at a final fair value or target price of KWD 1.41, which provides a potential upside of 17.2% from its current market price of KWD 1.20 (as on December 17, 2008).

Weighted Average Fair Value (KWD)

Valuation Method

Fair Value per Share

(KWD) Weight Weighted Value per Share (KWD)

Target P/BV Multiple Method 1.602 50% 0.801TTM P/E Multiple Based Valuation Method 1.212 50% 0.606 1.41 1.20 17.23%

Investment Opinion The banking sector in Kuwait registered a healthy growth during 9M08 as the sector’s aggregate assets surged 17.7% to KWD 39.16 billion. However, instalment loans and credit to real estate sector witnessed a relatively slower growth due to the impending global turmoil, which has negatively impacted investments in the infrastructure and property sector. Despite this, the governments initiatives, such as reduction in the discount rate, introduction of two new Repo agreements with maturities of ‘overnight’ at 1.00% and 1-month at 3.00%, respectively and investments being planned to the tune of USD 3.7 billion (source Reuters) in domestic stocks, aim to restore confidence in the economy. CBK with the second largest full-service 53 branch network in Kuwait provides services across all verticals including commercial banking, asset management and stock brokerage. The bank remains committed towards enhancing customer satisfaction level through measures like state-of-the-art new Card Management System aimed at providing Customer Service and Comprehensive Management Information System and Effective Collection Tracking Module and Credit Decision Making. Other customer-centric strategy include ‘Loan-over-the-phone’ and technological upgradations in the form of online and SMS services and on-line trading accounts. Furthermore, in October 2008, Fitch Ratings rated the bank’s Long-term Issuer Default Rating (IDR) ‘A+’ and ‘F1’ on Short-term IDR, Individual ‘B/C’ and Support ‘1’. The rating outlook on the Long-term IDR remains ‘Stable’ and affirmed support rating floor at ‘A+’. These represent a healthy rating for the bank. Additionally, CBK continues to focus on expansion through organic and inorganic channels, which encompass increasing branch network, while looking for acquiring small banks. At the same time, the bank seeks opportunities in the Middle East and Asia, and anticipates to take up assets with an unprecedented fall in prices brought about by the recent global financial crisis, thereby, reducing the cost of acquisition. Furthermore, the bank’s loans to construction and real estate sector accounted for 24% of the loans and advances in 2007, which in the current scenario of subdued growth across the sector is a cause of concern. However, its expansion initiatives and efforts to enhance customer base is likely to offset any such negative impact. Currently, CBK’s stock is trading at a P/E multiple of 11.54x based on its 2008E earnings and at a P/B multiple of 2.99x on its 2008E BVPS; and at a P/E multiple of 11.07x based on its 2009E earnings and at a P/B multiple of 2.76x on its 2009E BVPS. The stock has lost 16.0% since the beginning of this year, as compared to the KSE index YTD negative return of 29.9%. On an equal weight basis (GGM – 50% and P/BV – 50%), we have arrived at a Fair Value per share of KWD 1.41, which represents a 17.2% upside from its closing price of KWD 1.20 (as on December 17, 2008). We initiate our coverage witn an investment opinion of OVERWEIGHT on Commercial Bank of Kuwait.

Fair Value: KWD 1.41 Investment Opinion: OVERWEIGHT

Financial Statements

CONSOLIDATED BALANCE SHEET (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E ASSETS Cash and short term funds 362,892 370,024 215,878 144,981 192,704 196,897 223,201 Treasury and Central Bank bonds 164,913 207,645 200,566 255,329 267,875 285,494 301,031 Due from banks and other financial institutions 537,569 1,205,261 1,028,050 1,228,232 1,334,334 1,399,077 1,463,033 Loans & Advances 1,673,909 2,381,536 2,119,186 2,444,695 2,480,418 2,600,769 2,726,959 Provisions -164,750 -167,315 0 0 -164,340 -180,116 -191,583 Certificates of deposit 94,767 0 0 0 0 0 0 Investment securities 208,011 240,985 227,994 169,186 193,697 212,338 248,260 Government debt bond 5,250 0 0 0 0 0 0 Premises and equipment 23,977 27,648 24,540 28,766 29,186 30,602 32,268 Goodwill and intangible assets 0 0 0 18,666 18,666 18,666 18,666 Other assets 10,695 23,509 16,123 54,407 55,202 57,880 51,284 Total assets 2,917,233 4,289,293 3,832,337 4,344,262 4,407,742 4,621,607 4,873,119 LIABILITIES AND SHAREHOLDER'S FUNDS LIABILITIES Due to banks and other financial institutions 569,091 1,009,496 955,243 1,033,002 1,048,097 1,075,843 1,129,518 Customer deposits 1,750,121 2,635,850 2,268,046 2,703,527 2,715,239 2,816,156 2,921,166 Long term borrowings 20,000 0 0 0 0 0 0 Subordinated loan 17,348 16,380 16,755 15,978 16,211 16,998 17,923 Other liabilities 76,082 100,551 91,587 111,422 116,602 158,004 182,345 Total liabilities 2,432,642 3,762,277 3,331,631 3,863,929 3,896,149 4,067,000 4,250,952 SHAREHOLDER'S FUNDS Share capital 115,376 121,145 121,145 127,202 127,202 127,202 127,202 Proposed bonus shares 5,769 6,057 0 0 0 0 0 Bank’s own shares -7,420 -7,223 -7,044 -27,988 -27,988 -27,988 -27,988 Reserves 248,930 260,131 258,934 230,334 238,107 258,904 297,359 Retained earnings 35,981 44,372 127,671 149,958 61,039 78,424 89,824 Proposed dividend 85,955 102,534 0 0 112,405 117,239 134,943 Total shareholder's fund 484,591 527,016 500,706 479,506 510,766 553,780 621,340 Minority interest 0 0 0 827 827 827 827 Total shareholder's fund and minority interest 484,591 527,016 500,706 480,333 511,593 554,607 622,167 Total liabilities and shareholder's fund 2,917,233 4,289,293 3,832,337 4,344,262 4,407,742 4,621,607 4,873,119

INCOME STATEMENT (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Interest Income 170,409 222,330 164,824 197,171 262,680 262,147 280,043 Interest Expense -77,726 -133,139 -91,426 -105,712 -137,743 -131,646 -138,590 Net Interest Income 92,683 89,191 73,398 91,459 124,937 130,501 141,453 Fees and commissions 25,782 26,603 18,097 23,612 24,475 24,720 25,214 Fund management fees 1,541 2,147 1,500 1,694 1,737 1,772 1,807 Dividend income 4,633 8,467 8,124 5,347 6,999 7,673 8,013 Net gain from dealing in foreign currencies 3,150 9,435 6,017 4,997 5,186 4,149 4,563 Net gain from investment securities 15,717 25,658 26,354 30,627 35,064 36,315 39,976 Other operating income 823 810 550 842 859 910 956 Operating income 144,329 162,311 134,040 158,578 199,257 206,039 221,982 Staff -13,819 -16,132 -11,939 -13,972 -17,556 -17,948 -19,114 General and administration -10,344 -12,655 -8,799 -9,812 -12,130 -12,337 -13,069 Depreciation -2,506 -2,007 -1,069 -1,674 -1,751 -1,775 -1,807 Operating expenses -26,669 -30,794 -21,807 -25,458 -31,437 -32,059 -33,991 Profit before provisions 117,660 131,517 112,233 133,120 167,820 173,980 187,991 Impairment and other provisions -13,931 -6,677 -16,625 -23,207 -29,256 -29,460 -30,893 Profit from operations 103,729 124,840 95,608 109,913 138,564 144,520 157,098 Taxes and contributions -3,504 -4,266 -3,262 -4,786 -6,034 -6,293 -6,841 Directors’ fees -218 -218 -163 -194 -245 -255 -277 Net profit for the year 100,007 120,356 92,183 104,933 132,285 137,972 149,980 Attributable to: Shareholder's of the Bank 100,007 120,356 92,183 104,889 132,241 137,928 149,936 Minority interest 0 0 0 44 44 44 44 Adj. EPS (KWD) 0.079 0.095 0.097 0.110 0.104 0.108 0.118

Cash Flow Statement (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Operating activities Profit from operations 103,729 124,840 95,608 109,913 138,564 144,520 157,098 Adjustments for : Provisions for loans and advances 9,614 3,618 10,333 20,866 29,256 29,460 30,893 Income from investment securities -20,350 -34,125 -34,478 -35,974 -35,064 -36,315 -39,976 Foreign exchange and other losses on investment securities 42 43 -101 736 736 0 0 Foreign exchange gain on financing activities -172 -968 -593 -402 -402 0 0 Depreciation 2,506 2,007 1,069 1,674 1,751 1,775 1,807 Other provisions and valuation adjustments 4,317 3,059 6,292 2,353 2,353 0 0 Operating profit before changes in operating assets and liabilities 99,686 98,474 78,130 99,166 137,194 139,440 149,822 Changes in operating assets and liabilities: Treasury and Central Bank bonds 145,994 -42,732 -35,653 -47,684 -60,230 -17,619 -15,537 Due from banks and other financial institutions -289,115 -667,692 -490,481 -22,249 -153,194 -64,742 -63,956 Loans and advances -345,630 -708,680 -620,360 -251,340 -101,857 -89,660 -68,248 Certificates of deposit -94,767 94,767 94,767 0 0 0 0 Government debt bond 19,202 5,250 5,250 0 0 0 0 Other assets 25,200 -12,918 -5,526 -30,154 -31,693 -2,678 6,596 Due to banks and other financial institutions 124,273 440,405 386,152 23,506 38,601 27,746 53,675 Customer deposits 462,797 885,729 517,925 67,677 79,389 100,917 105,010 Other liabilities -1,255 17,030 5,886 4,522 15,882 42,189 25,266 Net cash from/ (used in) operating activities 146,385 109,633 -63,910 -156,556 -75,908 135,591 192,628 Investing activities Purchase/sale of investment securities -72,244 -6,827 12,563 73,346 47,288 -18,641 -35,921 Acquisition of subsidiary 0 0 0 -21,622 -21,622 0 0 Dividend income from investment securities 4,633 8,467 8,124 5,347 6,999 7,673 8,013 Proceeds from disposal of premises and equipment 232 94 53 -29 -29 0 0 Acquisition of premises and equipment -2,859 -2,201 -1,685 -2,655 -3,290 -3,191 -3,472 Net cash from/ (used in) investing activities -70,238 -467 19,055 54,387 29,347 -14,159 -31,381 Financing activities Long term borrowings -127,600 -20,000 -20,000 0 0 0 0 Right shares issued 45,072 0 0 0 0 0 0 Purchase of own shares -15,019 -23,557 -20,235 -22,951 -20,765 0 0 Sale of own shares 60,840 27,699 24,252 2,411 2,411 0 0 Dividend paid -71,242 -86,176 -86,176 -102,334 -112,405 -117,239 -134,943 Net cash used in financing activities -107,949 -102,034 -102,159 -122,874 -130,759 -117,239 -134,943 Net increase/(decrease) in cash and short term funds -31,802 7,132 -147,014 -225,043 -177,320 4,193 26,304 Cash and short term funds at beginning of the year 394,694 362,892 362,892 370,024 370,024 192,704 196,897 Cash and cash equivalents at end of the year 362,892 370,024 215,878 144,981 192,704 196,897 223,201

Common-Size Financial Statements

COMMON-SIZE BALANCE SHEET 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E ASSETS Cash and short term funds 12% 9% 6% 3% 4% 4% 5% Treasury and Central Bank bonds 6% 5% 5% 6% 6% 6% 6% Due from banks and other financial institutions 18% 28% 27% 28% 30% 30% 30% Loans & Advances 57% 56% 55% 56% 56% 56% 56% Provisions -6% -4% 0% 0% -4% -4% -4% Certificates of deposit 3% 0% 0% 0% 0% 0% 0% Investment securities 7% 6% 6% 4% 4% 5% 5% Government debt bond 0% 0% 0% 0% 0% 0% 0% Premises and equipment 1% 1% 1% 1% 1% 1% 1% Goodwill and intangible assets 0% 0% 0% 0% 0% 0% 0% Other assets 0% 1% 0% 1% 1% 1% 1% Total assets 100% 100% 100% 100% 100% 100% 100% LIABILITIES AND SHAREHOLDER'S FUNDS LIABILITIES Due to banks and other financial institutions 20% 24% 25% 24% 24% 23% 23% Customer deposits 60% 61% 59% 62% 62% 61% 60% Long term borrowings 1% 0% 0% 0% 0% 0% 0% Subordinated loan 1% 0% 0% 0% 0% 0% 0% Other liabilities 3% 2% 2% 3% 3% 3% 4% Total liabilities 83% 88% 87% 89% 88% 88% 87% SHAREHOLDER'S FUNDS Share capital 4% 3% 3% 3% 3% 3% 3% Proposed bonus shares 0% 0% 0% 0% 0% 0% 0% Bank’s own shares 0% 0% 0% -1% -1% -1% -1% Reserves 9% 6% 7% 5% 5% 6% 6% Retained earnings 1% 1% 3% 3% 1% 2% 2% Proposed dividend 3% 2% 0% 0% 3% 3% 3% Total shareholder's fund 17% 12% 13% 11% 12% 12% 13% Minority interest 0% 0% 0% 0% 0% 0% 0% Total shareholder's fund and minority interest 17% 12% 13% 11% 12% 12% 13% Total liabilities and shareholder's fund 100% 100% 100% 100% 100% 100% 100%

COMMON-SIZE INCOME STATEMENT

2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Interest Income 118% 137% 123% 124% 132% 127% 126% Interest Expense -54% -82% -68% -67% -69% -64% -62% Net Interest Income 64% 55% 55% 58% 63% 63% 64% Fees and commissions 18% 16% 14% 15% 12% 12% 11% Fund management fees 1% 1% 1% 1% 1% 1% 1% Dividend income 3% 5% 6% 3% 4% 4% 4% Net gain from dealing in foreign currencies 2% 6% 4% 3% 3% 2% 2% Net gain from investment securities 11% 16% 20% 19% 18% 18% 18% Other operating income 1% 0% 0% 1% 0% 0% 0% Operating income 100% 100% 100% 100% 100% 100% 100% Staff -10% -10% -9% -9% -9% -9% -9% General and administration -7% -8% -7% -6% -6% -6% -6% Depreciation -2% -1% -1% -1% -1% -1% -1% Operating expenses -18% -19% -16% -16% -16% -16% -15% Profit before provisions 82% 81% 84% 84% 84% 84% 85% Impairment and other provisions -10% -4% -12% -15% -15% -14% -14% Profit from operations 72% 77% 71% 69% 70% 70% 71% Taxes and contributions -2% -3% -2% -3% -3% -3% -3% Directors’ fees 0% 0% 0% 0% 0% 0% 0% Net profit for the year 69% 74% 69% 66% 66% 67% 68% Attributable to: 0% 0% 0% 0% 0% 0% 0% Shareholder's of the Bank 69% 74% 69% 66% 66% 67% 68% Minority interest 0% 0% 0% 0% 0% 0% 0%

Financial Ratios

FINANCIAL RATIOS 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Profitability Return on Average Assets (ROAA) 3.8% 3.3% 3.6%* 3.2%* 3.0% 3.1% 3.2% Return on Average Equity (ROAE) 23.2% 23.8% 24.9%* 27.8%* 25.5% 25.9% 25.5% Net Interest Income / Total Operating Income 64.2% 55.0% 54.8% 57.7% 62.7% 63.3% 63.7% Non-Interest Income / Total Operating Income 35.8% 45.0% 45.2% 42.3% 37.3% 36.7% 36.3% Dividend Payout Ratio -71.2% -71.6% -93.5% -97.6% -85.0% -85.0% -90.0% Margins Interest Expense / Interest Income 45.6% 59.9% 55.5% 53.6% 52.4% 50.2% 49.5% Interest Income / Average Interest Earning Assets 7.1% 6.7% 7.1%* 6.5%* 6.5% 6.3% 6.4% Interest Expense/ Average Interest Bearing Liabilities -3.7% -4.4% -4.4%* -3.8%* -3.7% -3.4% -3.5% Net Spread 3.5% 2.2% 2.8% 2.7% 2.8% 2.8% 2.9% Net Interest Margin 3.9% 2.7% 3.2%* 3.0%* 3.1% 3.1% 3.2% Total Operating Expenses to Total Operating Income Ratio 18.5% 19.0% 16.3% 16.1% 15.8% 15.6% 15.3% Staff Expense to Total Operating Income 9.6% 9.9% 8.9% 8.8% 8.8% 8.7% 8.6% Liquidity & Assets Quality Credit to Deposit (C/D) Ratio 95.6% 90.4% 93.4% 90.4% 91.4% 92.4% 93.4% Customers' Deposits to Shareholders' Equity 361.2% 500.1% 453.0% 563.8% 531.6% 508.5% 470.1% Loans & Advances to Banks / Due to Banks 94.5% 119.4% 107.6% 118.9% 127.3% 130.0% 129.5% Loan Loss Reserve / Gross Loans & Advances 9.8% 7.0% 0.0% 0.0% 6.6% 6.9% 7.0% Capital Adequacy Shareholders' Equity to Total Assets 16.6% 12.3% 13.1% 11.0% 11.6% 12.0% 12.8% Shareholders' Equity to Gross Loans & Advances 28.9% 22.1% 23.6% 19.6% 20.6% 21.3% 22.8% Operating Performance % Change in Interest Income 49.7% 30.5% NA 19.6% 18.1% -0.2% 6.8% % Change in Non-interest Income 49.7% 30.5% NA 19.6% 18.1% -0.2% 6.8% % Change in Total Operating Income 19.4% 12.5% NA 18.3% 22.8% 3.4% 7.7% % Change in Net Profit 23.2% 20.3% NA 13.8% 9.9% 4.3% 8.7% Valuation Ratios Outstanding Shares ('000) 1,146,063 1,211,450 1,211,450 1,272,020 1,272,020 1,272,020 1,272,020 Adj. EPS (KWD) 0.079 0.095 0.097* 0.110* 0.104 0.108 0.118 Adj. BVPS (KWD) 0.381 0.414 0.394 0.377 0.402 0.435 0.488 P/E (x) 15.26 12.68 12.42 10.91 11.54 11.07 10.18 P/BV (x) 3.15 2.90 3.05 3.18 2.99 2.76 2.46 CMP (KWD) 1.20 1.20 1.20 1.20 1.20 1.20 1.20

*Annualised EPS has been adjusted for years 2006 & 2007with the current outstanding shares.

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