NBK - Pillar Two - At Least USD 180 Mn of Additional Taxes in 2025

Information about the National Bank of Kuwait (NBK) is at https://www.nbk.com/about-nbk-group/who-we-are.html

Auditors' Reports to the shareholders of the National Bank of Kuwait S.A.K.P. & its subsidiaries on the Consolidated Financial Statements for the year ended December 31, 2024 were signed yesterday - 28 January 2025. These reports are available at: https://www.nbk.com/financial-reports.html

I was curious to see what effect Pillar Two had had on the Bank in 2024 and what effect it is likely to have in 2025.

Note 9 to the Consolidated Financial Statements deals with Taxation and its third paragraph states:

[Note: The complete Note 9 on Taxation is at the end of this article.]

So, for 2024, no Pillar Two top-up tax exposure.

This is an extract from the Consolidated Statement of Income for the years 2024 and 2023:

Thus, the Effective Tax Rate (ETR) in 2024 was 8.24% (57,443/696,773) since the bank has significant operations in the low-tax jurisdictions of Kuwait, Bahrain and the UAE referred to in Note 9, above. In 2023 it was 7.55% (48,097/637,240).

These percentages are almost half of the minimum 15% ETR required by the Global Minimum Tax (GMT - 2024 - 55% and 2023 - 50.33%). Thus, in 2025 the ETR should at least almost double from its current level. Hence the statement in the Note above: "The Group’s effective tax rate is expected to increase significantly in 2025 due to applicability of the Pillar 2 legislation in low tax jurisdictions such as Kuwait, Bahrain, and UAE."

[Note: In the Consolidated Financial Statements, "Taxation" includes the "Contribution to the Kuwait Foundation for the Advancement of Sciences" as shown below. This Contribution amounts to less than 1% of the Operating profit above and has not been excluded from "Taxation" for the purposes of this calculation. If it is excluded the estimated increase in 2025 should be even larger.

What will be the impact in Kuwaiti Dinars & USD?

In 2024 Operating profit before taxation and directors' remuneration increased by 9.3% from 2023 ((696,773 - 637,240)/637.240).

Assumption 1 - Assuming that it increases by another 5% in 2025, the corresponding figure in 2025 would be KD 731,612k and the Tax Charge at a minimum ETR of 15% would be KD 109,742k.

Assumption 2 - Assuming that the Operating profit in 2025 increases by another 10% in 2025, the corresponding figure in 2025 would be KD 766,450k and the Tax Charge at a minimum ETR of 15% would be KD 114,967k.

Thus, assuming a growth in Operating profit in 2025 of between 5% and 10% from 2024 levels, at an overall minimum ETR of 15%, the estimated Tax Charge for 2025 should range between KD 110 Mn and KD 115 Mn or 192% to 200% of the tax charge for 2024. These percentages are consistent with the current ETR being almost half of the minimum 15%, as calculated above.

This would represent an increase ranging between KD 53 Mn to 58 Mn or an average increase of KD 55.50 Mn. At an exchange rate of KD 1 =USD 3.24, this amounts to almost USD 180 Mn.

This increase is slightly more than a fifth of the Bank's Staff Expenses in 2024 (21.97%), a third of its Other administrative expenses in 2024 (33.27%) and more than the Bank's total depreciation charge for 2024. These expenses are in the below extract from the Consolidated Statement of Income.

Note that a 15% overall ETR is the base-case scenario. However, since there are many jurisdictions where the Bank already has an ETR (in those jurisdictions) well-above the minimum 15% (as mentioned in the third paragraph of Note 9, above) it is probable that the Bank's combined ETR at the Group level at the end of 2025 shall be well above 15%. The table below looks at the additional tax charge in 2025 at various possible overall ETR levels in that year:

What'll be the per-share impact?

Note 10 on Earnings per Share tells us that for 2024:

Thus, an increase of the minimum KD 55,500k in the Tax Charge would amount to 6.66 Fils per share or almost 10% of the Bank's basic EPS of 69 Fils above. (A Kuwaiti Dinar is divided into 1,000 Fils). At an exchange rate of KD 1 =USD 3.24, this amounts to a minimum impact of almost 2.16 US cents per share [6.66/1000 x 3.24 x 100].

Where are the Bank's Subsidiaries located?

Note 24 to the Consolidated Financial Statements informs us that the Bank has subsidiaries in the Cayman Islands, Kuwait, Egypt, France, Iraq, Lebanon, Saudi Arabia, Switzerland and the United Kingdom.

Thus far we have only looked at the additional tax charge and not considered the additional tax compliance cost. The introduction of Pillar Two should significantly increase the Bank's compliance costs in almost all the jurisdictions in which it operates, but that's a story for another article :)

P.S. The Kuwait Times of February 3, 2025 has an article titled "NBK achieved record profits, leveraging a strategic expansion, says Al-Sager". This article also contains the group CEO's views on the DMTT, highlighting its defensive nature:

"Multinational corporate tax

Commenting on Kuwait’s recent enactment of the Domestic Minimum Top-Up Taxes (DMTT) on multinational enterprises (MNEs), effective 2025, Al-Sager explained that this corporate tax follows a global standard already in place in many countries where NBK Group operates. He emphasized that its local implementation would benefit Kuwait by ensuring these revenues stay within the country, rather than flowing to other nations. In response to a question regarding the potential impact of the tax implementation on the bank’s profits, Al-Sager stated: “Naturally, there will be an impact on our profits in 2025, with an anticipated increase in the tax applied to the Group’s profits by approximately 8 to 15 percent. However, this impact is expected to be temporary, as the base year 2025 marks the introduction of the tax.”

The "approximately 8" percent is a reference to the 2024 ETR of 8.24% computed above.

Note: This is the complete Note 9 on Taxation in the Consolidated Financial Statements: