National Bank of Kuwait has obtained central bank approval to raise its authorised capital to KWD600 million. This means that its paid-in capital can increase from KWD504 million reported in December 2015 (and from KWD529 million adjusted for the proposed KWD25 million bonus shares, which still needs AGM approval) to KWD600 million. NBK gets every year central bank approval to increase authorised capital due to the issuance of bonus shares. However, the approval this year is for a higher amount, as the paid-in capital increase linked to bonus shares is only KWD25 million.   We believe that this announcement gives an indication of the following: i) That NBK might be looking at increasing common equity via a rights issue at some point during this year. The increase in authorised capital needs approval by the upcoming AGM. After this approval, we understand that, according to Kuwait’s new commercial law, NBK could approve the rights issue via a Board of Directors decision; ii)It also gives some indication of the potential size of such rights issue. Post-proposed 2015 bonus shares, NBK’s paid-in capital will increase to KWD529 million. This suggests that the new paid-in capital that could be raised via a rights issue would be KWD70.8 million. At par value per share of KWD0.1, that would imply issuing 708 million shares. Kuwait banks tend to do rights issues at a discount to the share price. Assuming a 40% discount to the current share price of KWD0.73, issuing 708 million shares would imply raising KWD310 million in common equity. The rights issue could be however smaller than this, depending on the final share price and/or as NBK could issue a smaller number of shares.   A potential rights issue by NBK is in line with our view that the bank would be raising common equity tier 1 capital (CET1) this year due to the implementation of Basel III (see our note published on 22 November 2015).  The minimum CET1 ratio was 9% by the end of 2015, and it will increase to 9.5% by end of 2016. NBK needs to add a 2% buffer (D-SIB) as part of CET1, leading to a minimum CET1 ratio of 11.5% by the end of this year. As of December 2015, NBK had a CET1 ratio of 13.2%, above the regulatory minimum. We believe however that NBK is likely to add further common equity due to sustained loan growth as well as its focus on maintaining a buffer above the regulatory minimum. We estimate that a KWD200 million rights issue could result in a short-term dilution to ROE of c1% (ROAE estimate in 2016 is 11.4%). (Company, Elena Sanchez-Cabezudo, CFA)   National Bank of Kuwait: KWD0.73 as of 7 February 2016, Rating: Buy, FV: KWD0.97 per share, MCap: USD12,263 million, NBK KK / NBKK.KW