Burgan Bank K.P.S.C. (BURG.KW) Q2 FY2025 Earnings Call Transcript & Summary

Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to Burgan Bank's Second Quarter 2025 earnings call. I would like to hand over the call to Mr. Hamad Al Bader, Senior Manager, Investor Relations, to begin with the presentation. Hamad, please go ahead.

Thank you, Elena. Great to catch up with you. Welcome, everyone. Good afternoon, and welcome to the Burgan Bank First half of 2021 Earnings Call. Thank you very much for taking the time to attend this call. Joining from our side are Mr. Khalid Al Zouman, the Chief Financial Officer; Mr. Gaurav Handa, AGM within the Finance Group; Mr. Animesh Aseem, Executive Manager, within the finance and specifically towards the Strategic Solutions part and myself, IR. We shall cover the slides over the next 20 minutes or so, as usual. And at the end, we'll open the door for the Q&A once the presentation has been covered. With that, we can start moving to Page #9, Slide #9. So starting here with slide that provides the performance overview of the period. I'll walk you through guys, the performance update, and then I'll hand over to my colleagues to cover the financial performance in details. The bank has delivered a stable financial performance. Revenues reached around KWD 126 million, representing a 14% increase year-on-year. The bottom line net income reached around KWD 21 million. The asset growth remains resilient and sustaining the upward trajectory. The total assets for the group increased by 14% year-on-year to around KWD 8.7 billion. The loan portfolio also expanded by 4% year-on-year during the first half of 2025, while the deposit base grew by around 16% to reach KWD 5.4 billion and this highlights the robust balance sheet supported by improving loans and a solid funding base. On the capital and liquidity front, we maintain strong buffers that comfortably exceed the regulatory requirements. I think that takes Burgan in a solid position to support any future goal. Finally, I think the H1 '25 results, they really reflect sustained operational momentum and a steady performance across the core business segments. With that, I'll hand over to Gaurav, who will walk us through the group's key financial performance highlights in a bit more detail.

Thank you, Hamad, and good afternoon, everyone. Let's move to Slide #11 for a detailed review of P&L metrics. During H1, the group's revenue reached KWD 126 million, representing a 14% increase year-on-year. This growth was primarily driven by higher net interest income which rose 16% year-on-year to KWD 83 million. Burgan's noninterest income also grew by 9% year-on-year to KWD 43 million largely reflecting the contribution from UGB, United Gulf Bank, whose P&L was consolidated into our financials starting this quarter. Backed by a robust top line, Burgan recorded an operating profit of KWD 49 million and a net income of KWD 21 million, remaining relatively stable compared to same period last year. Burgan's cost-to-income ratio saw a slight increase year-on-year, primarily due to higher expenses in Turkey, driven by persistent inflation along with ongoing investment in digital initiatives at the group level. Burgan's cost of credit remained at an acceptable level of 60 basis points at the end of H1 2025. Let's now move to Slide #12. During the first half, our NPL ratios increased -- NPL balance increased to KWD 165 million and accordingly, this was reflected in our NPL ratio as well. This increase in the quarter was primarily due to a large customer in Kuwait. However, this exposure was fully collateralized by our commercial property. The bank proactively classified this account as NPL to apply greater pressure on the client and encourage negotiations toward an optimal resolution. Our provision coverage remains strong at 180%. Our buffers against ECL continue to be healthy. Moving on to Slide #13. Our asset base continues to expand with resilient year-on-year growth of about 14%, reaching KWD 8.7 billion. The growth momentum remained robust, primarily driven by our operations in Kuwait, where assets grew 9% year-on-year. The overall asset growth was supported by a 4% increase in our loan portfolio, which reached KWD 4.6 billion. The bank also maintained a solid liquidity position with liquid assets accounting for 28% of total assets for the first half. Loan staging showed year-on-year improvement in both Stage 1 and Stage 2 classification. The increase in Stage 3 exposure as mentioned earlier, was driven by a specific development involving a single client during the quarter. Nevertheless, we continue to maintain a proactive risk management approach to preserve the strength of our credit profile. I'll now hand over to my colleague, Animesh to take us through the next few slides.

Thank you, Gaurav, and good afternoon, everyone. Now moving to Slide 14, which provides an overview of group's deposit and liquidity metrics. Our deposit base remains strong at KWD 5.4 billion, marking a significant 16% year-over-year increase and further strengthening our liquidity position. The deposit mix has stayed largely stable with CASA levels maintained at almost 30%. Burgan's loan-to-deposit ratio stands at 75%, comfortably below the regulatory cap of 90%. Key Basel III liquidity ratios continue to be robust with the NCR at 225% and the NSFR at 113%, both well above the 100% regulatory minimums. Now let's turn to Slide 15 for a detailed look at our regulatory capital position. For the first half of 2025, our CET1 and CAR ratios were 11.7% and 17.4%, respectively, providing comfortable buffers of 120 basis points and 340 basis points above the regulatory minimums of 10.5% and 14%, respectively. This strong capital position supports the continuation of our growth momentum. Let's now proceed to Slide 16 for a brief overview of KPIs of our subsidiaries. Kuwait operations remains the core pillar of our group. Kuwait business continues to be the backbone of our group, representing approximately 72% of the total asset base. In H1 2025, we delivered a stable performance across all key metrics. A notable highlight was the improvement in the cross-sell ratio, which rose significantly from 38.5% sorry, which rose significantly to 38.5% from 25.8% in the prior year driven by a stronger emphasis on foreign exchange and fee-based income. International operations demonstrated strengthening momentum. BBT net margins improved from 4.5% in H1 '24 to 7.3% in H1 2025. NPA ratio declined by 20 basis points year-over-year, reflecting better asset quality. UGB remains primarily an investment-focused entity with no significant client lending activity at the moment. As such, traditional credit-related metrics are not meaningful and thus excluded from this chart. The gross sale performance is largely attributed to the contributions from Kamco. Our operations in Algeria and Tunisia remained stable during the period with no material changes across the key financial indicators. I will now hand over to Hamad to conclude the presentation.

Thank you, Animesh and Gaurav. I think as we conclude the presentation, let's move on to Slide #18 for a brief summary of performance drivers and some key focus areas. Starting with the growth momentum continues with sustained asset growth, revenue improvements and strategic focus on diversification and risk management. Burgan's capital levels remain robust with healthy buffers exceeding both the regulatory requirements and the group historical levels, hence, providing a solid foundation to support ongoing asset growth. Burgan continues its ongoing investments in our digital capabilities, particularly in Kuwait and Turkey. I think with a strong focus on maintaining the leadership in innovation. A notable achievement, as we continue to demonstrate the commitment to ESG, we probably are listed now in the FTSE4Good Index, which serves as an external recognition of the efforts that are happening in-house. The bank is also 1 of only 5 Kuwaiti organizations honored by the FTSE Russell for the dedication to sustainability. I think that concludes the presentation overall. I'll hand it over back to you, Elena, to lead the Q&A session.

[Operator Instructions] We have the first question from Chiro Ghosh.

Perfect. This is Chiro Ghosh from SICO Bahrain. I have a few questions. The first 1 is related to your balance sheet. I see it's a fairly liquid balance sheet, roughly around 75%, maybe better than most banks in the region. So I want to get a sense that what is the strategy of having such a liquid balance sheet. Do you believe that if you leverage up your balance sheet that will impact your capital side. Is that the strategy? That is my first question. Second is your cost-to-income ratio is slightly on the higher side, around 61%. So what -- how should we see it? Where do you see it towards the end of the year? Or going forward, what is it on that side? And any other guidance which you can give on the margin side and the cost of risk side. Yes. These are my 3 questions.

I'll answer the first 1 and ask my colleagues to comment on the remaining questions. I think what we actually did was because recently, there was a geopolitical situation there and we want to be liquid. That's one thing. Also, we are there for our subsidiaries in case of need. So that we need to be also very well solid in that case. Our customers' deposit, if you see, there's an increase because they are now up and so much behind it first. We have a long-standing customer relationship, which we would like to service them. We are trying to extend our maturity of our deposits. And that's what lasts. Also if you see on the other side of the balance sheet, you'll see we are doing a lot of treasury activities where we make small margins.

Moving on to your second question on cost to income. Yes, we -- as we mentioned earlier, on the slide, there has been an impact from our Turkish entity, where the inflation is quite high and has been high for the last 3 years, plus our investment into our digital banking proposition across the group. So there is a huge transformation, which is going on within the bank, where we are changing our core banking system and are digitalizing a lot of products and propositions. And this investment has been planned for the year. We do -- in terms of guidance, this year, we expect that it would remain in high 50s at least in 2025. When it comes to margins, we did mention this in our previous call as well for Q1. On an average, our margin in 2024 was at 2.3%. And we expect to maintain this margin at the group level in 2025 as well. In Q1, we had positive one-offs in the margin side. Q2, we were negatively impacted. But on an average, we see that we should be able to maintain 2.3% for full year 2025.

Cost of risk?

Cost of risk on -- usually, our normalized cost of risk at the group level is at around 50 basis points. Last year, we had some reversals in Turkey because of the collateral that we have against the NPL had appreciated in value because of inflation. And this resulted in positive cost of credit, a reversal in a provision charge in Turkey last year. This year, we have seen a normalized level, the usual GP and specific provision in line with the business growth. And as a precautionary measure, what we are doing is whatever recoveries that we show or we recovered during the year, we are building precautionary provisions against those recoveries. So as a precaution for future. So we keep building reserves as and when we recover from the previously written off accounts.

We'll take the next question from Rakesh Tripathi.

I had a few questions around the performance. And please correct me if I am wrong here, but the way I'm seeing it, I see your Q2 numbers overall are not presenting really a good picture. I'm looking at your loan book that contracted a little bit. In the second quarter, the net loans and deposit base contracted about 1%, NPL ratio you mentioned was up almost doubled in Kuwait because of that 1 large customer. At the same time, I believe the investment book was also a little down. Overall, there's not a lot of positives that I really see coming out from Q2. And I wanted to understand what really has happened here? I understand one customer facing some pressures. This has pretty much become a trend now that we've seen in Burgan for the last 2, 3 years. Every year, typically, Q2 or Q3 is when there's a spike in the NPL ratios and it normally settles down kind of by the year end usually. Please correct me if that's not the expected case this year. But generally, that's my expectation now that this is how it plays out. And by the end of the year, it should settle down in a normal range of close to 2% or just under that. But a lot of that has happened in the second quarter itself. Secondly -- that's about the performance. The second thing is, I believe you used to provide a breakdown of your Kuwait versus international loan base, deposit base that used to be there in the presentation. I saw it last quarter. I don't think it's there this quarter. So maybe you can clarify on that. And lastly, if you can give some sense of how are things happening with retail, which has been your focus area. So retail book, one, how has -- how are you seeing growth playing out there? And when you talk about the overall loan growth, net loan growth or gross loan growth for the first half of this year, I would like to hear your thoughts in the context of what we've seen for other Kuwaiti banks as well. Generally, Kuwaiti banks have declared very strong growth in the first half, high single-digit kind of numbers on the back of strong corporate lending activity. That doesn't seem to be the case here for Burgan, which has a reasonable capital room. So if you can just talk about these things.

Okay. Thanks for all these questions. I will answer the overall, and I will let my colleagues to cover whatever I missed. In terms of our performance, I see it differently. Maybe it's not as much as the investor expected because I saw EFGM's opinion a couple of days ago. But if you see our P&L line by line, there is improvement in terms of our real performance. So it's not. But however, yes, as we rightly said, the NPL is a function of one major customer. This major -- this customer, I told my colleagues, I'm going to answer this. This customer is not about cash liquidity. It's not about the market he is working on, he's not cooperating. The bank has helped him in the past in building his all businesses. But now I think he's not cooperating and he's asking for the discount and that's why the bank has taken an action against this customer. And I'm sure it happened before with different customers last year. We started the year, we've taken an action. Our NPL goes up a little bit, but I'm sure by the end of the year when he see a real serious action from the bank, he will come and negotiate with the bank. Because Burgan Bank is always there for its customers. During corona time, we did a lot with the customer, whether we extend the repayment, reduce interest rates, but a customer who has the capability, the cash flow just because he doesn't want to compare, it's not acceptable to us. So that's one. In terms of our loan growth, I think one of the things that I can disclose this to you, we have some concentration that we would like to give up. So there are some cuts on our choice actually, and that we want to -- don't have a bigger concentration in some areas. So that's in a nutshell. Have I missed anything, Gaurav, anything other areas?

I think on the investment, you had 1 question, but this is usually from the majority of the bonds, it can -- it happens -- it's just a coincidence that it happened in Q2. But there was 1 bond, which we had invested in, I think, maybe 2 years ago, and we were making good margins on that, which had a maturity. I think it was 3 years ago, which had a maturity in Q2, which resulted in some drop in investment securities, but there's no other such movement in the portfolio there. In terms of loan growth, yes, Q1, actually, we saw very good loan growth in the group, especially in Kuwait operations, which did not repeat in Q2. And hence, the movement was not so much. But if you look at year-to-date, 6 months, we still have a 3% growth achieved in the first half. And in line with our guidance of mid-single-digit growth, we do intend to report around 5% to 6% growth in 2025 at the group level.

Yes, if I may. So that was my question, like you mentioned that perhaps Kuwait was one of the reasons why there wasn't that stronger growth in the second quarter or rather a degrowth in the second quarter. But that's what I wanted to understand because other banks have seen good growth come through both the quarters, which is why there is high single digit and corporate sector is seeing good activity, good lending activity, lending loan demand typically. So I wanted to understand why Burgan has not been able to achieve this, first of all, when others are kind of getting to high single-digit figures, why we are behind? And secondly, on the -- just a follow-up on the NPLs. You mentioned that this is, again, a proactive action because customer has been a little noncooperative, and I think it was a different customer, but similar kind of a scenario last year where some covenants were not being adhered to by the customer last year as well. So is this like -- generally, I understand that you would have relationships with these large customers. So is there something going wrong in the way the underwriting is happening if this is happening, say, with large exposures year-on-year every single year with a different customer, but something that's happening quite frequently. Do you see something missing there the way these agreements are being either set up or the way these clients are being vetted.

I think in the previous years, our bank was very close to these customers trying to service them and try to help them -- and I told you this customer that I'm talking about, he grow, his business grew and his network grew with Burgan Bank. But I think he's pushing too much because I sit on the bad bank committee as a CFO, and I listen to what the recent discussion happening and if he had a real tight issue or something, believe me, Burgan would or the bank will be standing beside him and help, I told you there are a couple of customers this has happened to before. But this person, he has the cash. He has liquidity. And I think he's going for a big discount which the bank is not providing, saying what for the big discount. So that's why he is not cooperating with us. I think it's supporting the management in their decision. And believe me the moment, he will see a serious action from the management, he will come and try to -- now already he's talking to our CEO, Kuwait and trying to find out what is happening, where he sits and put a genuine plan for his repayment, the bank would never listen to him, by the way. That's my information. So unfortunately, it's not about the second half, but it's not about the economy. It's not the -- he is rich and I know him. I'm citizen, I know this person, but sometimes some customers, they take things for granted, and we should stand up for this behavior. I think you talked about some breakdowns we used to do and not anymore, that's in the past, I think a long time ago, if not mistaken. And we're trying to evolve our presentation and show more ratios and more thoughts about our performance, and we keep improving our presentation over the period. Also, you mentioned about retail. Now my colleagues reminded me. I think retail is moving forward. Yes, it's a long-term strategy. It's a mass business. It means a lot of investment, there are some changes at the level of the retail banking in terms of new people join our retail banking. And we are -- I saw some fees and commission improved in the car business, I see some loans also been booked regularly, but also there are some costs, which is we understand that's the cost of the business because Burgan Bank was in the previously known as a corporate bank and now the focus is to go more into retail and reduce the risk, the NPL risk in our loan portfolio. So it's not -- this is just the beginning. It means start to evolve. But is there some numbers? Yes, I see some numbers improving in retail banking.

I just want to add on your questions on the NPL last 2, 3 years, you mentioned that you are seeing the fluctuation which you are right, in the quarters, we do see this fluctuation. But if you look at our cost of credit for last 3 years at the group level or at the Kuwait level, it has been in the range of 30 to 40 basis points. So although we have NPL, we have a strong legal and recovery process as well. So we have been recovering also from those where we have been netting it off against our charge that comes in on the new clients. So if you see, our 30 basis point cost of credit is a really good indicator of the performance of the bank for Kuwait operations.

All right. We'll take some questions now from the chat. One of them is, how do you expect the CET1 ratio to go from here in Q3 2025 and Q4 2025?

Yes. So on the capital side, we -- as we mentioned in the presentation also that we currently maintain comparable buffer over the minimum regulatory requirements. Historically, the bank has operated with a buffer of around 50 basis points only. So our current present capital levels are adequate and provide sufficient headroom to support the further growth of our bank. That said, based on our strategic planning, if the capital will be anticipated in the future, the bank would assess it proactively. As in the past, we remain confident that our shareholders will continue to extend their support to ensure that the bank remains well capitalized.

There is also a question on the cost-to-income ratio, that you partly answered, but the question is also asking what are your plans to contain that or to lower your cost-to-income ratio going forward?

I think we already answered the cost-to-income ratio, and we gave our guidance on that. But on a long term, yes, the scale, the growth especially in the retail business and the revenue that we are going to make from digital proposition in Turkey is definitely on a longer term, going to reduce our cost to income ratio with operational efficiency that would come in.

And a follow-up on the CET1 ratio, what is your target buffer on CET1. Historically, the bank had stated it was near 100 basis points. Does it remain the same or it has changed?

Yes. So currently, our CET1 ratio stands at 11.7%, which is -- which represents 120 basis points of buffer over the regulatory payment.

And your target is around 120 basis points?

Yes, 120 basis points currently. And one important point is that in Kuwait, the interim profits are not allowed to be added between the quarters. So it's -- the profit comes in only in the Q4, right? So basically, we expect to end the year almost at a similar level, maybe 10 basis points here and there, but we expect to end the year around the same levels.

All right. A few other questions from the chat, what was the contribution from UGB to fee income and profit in Q2?

So UGB contributed almost KWD 9 million to our top line this quarter. And the bottom line contribution was close to KWD 300,000. But I just want to also add one other thing is that UGB, as we have mentioned, does not have an active client lending business at the moment, but this is in progress. So the revenue contribution that has come from UGB is predominantly reflecting Kamco's performance. And UGB owns 40% of the Kamco. So obviously, the top line has 100% of the revenues, but bottom line contribution is only 60% that we get.

Okay. A question on NIMs. The NIM in Kuwait was 1.1% in the first half. Is it down from last year? Is it subject to pressure due to deposit pricing or other factors?

So as we mentioned earlier, there was a negative one-off in our NIMs in this quarter, especially in Q2. So you would have seen that there is a drop in net interest income if we compare Q1 versus Q2. A normalized NIM in Kuwait operations is at around 1.3%. And unless until there is a rate cut during the year, we expect to maintain these levels of NIM throughout the year for 2025.

All right. Another question on tax. Can you give guidance on your effective tax rate for full year 2025?

So we have started applying the DMTT tax as well for Q2. You can see the disclosure in our financials. However, we don't expect a material charge from that. So our tax charge for the full year should be in line with what we have reported for the 6 months ending 30th June.

Another question on Tier 2 capital. Will you call your Tier 2 bonds next year?

So the call for Tier 2 is due in Q3 '26, that is next year. And we will evaluate and address this matter closer to that date. Unfortunately, due to the regulatory constraints, we are not in a position to provide any forward-looking guidance at this stage.

There is a follow-up question, I believe, from Chiro Ghosh.

No, sorry. Answer just one quick question on the Turkey operation. So there is high inflation there. Aren't you able to pass it on in the sense, is it reflecting on the revenue side of it? So I just want to get a sense on the Turkey business.

See, the lending is not linked to inflation. Although the policy rates are quite high in Turkey, it's at around 45% -- 43% now. It just got reduced slightly in July. So you do charge your customers that high rate, 43% plus. But at the same time, the cost of fund is also in that range. So your revenue is linked to the NIMs that you make on lending and borrowing, whereas your cost expenses are linked to the inflation in the country. So they both are not interconnected. So your revenue might not increase in line with the inflation. Plus there are restrictions that are placed by the regulator to protect the economy. They restrict your growth levels, they restrict your margins levels and which restricts the revenue growth and which is always below the inflation for the last 3 years is what we have seen.

No, I'm saying the borrowing demand, say person who was borrowing 100 units of loan this year, won't he borrow 150 because there is inflation or that's not how it happens?

No. Even though if he borrows 150, I need to have 150 of deposits as well, right? So my cost of fund also increases in the same proportion as my lending increases. Although we are making good NIMs there now, which has improved as compared to last year, but the inflation is much higher than the NIMs that you make on your lending and borrowing.

So unless inflation comes down, it's a tricky situation. Is that how...

The major impact that we are getting from inflation is the IAS 29 charge, the net monetary loss that you see in our financials, which is for the 6 months have been KWD 10 million. So that's the negative impact of the inflation that hits our bottom line. And if you remove that KWD 10 million, our bottom line would have been much higher than what it is currently being reported. But what we have seen when this IAS 29 started, the inflation was 70%, then it came down to 45% last year. This year, the expectation is it's going to be 30%. And in the coming next 2 years, it's going to further reduce. That's the plan that we see from the government and it's been announced publicly there in Turkey. So as and when the inflation goes down, the charge from IAS 29 will also go down and will increase our profits as well.

We'll take the next question from Rakesh Tripathi.

Just wanted to request something rather than clarify at this point. The breakdown that I was talking about earlier. So Q1, I believe Q1 investor presentation had this breakdown of Kuwait versus international operations, what were the total assets, what was the loan book? How was the loan book divided? How was the deposit base divided -- deposits divided between the two? That gives us a good understanding of how Kuwait is progressing vis-a-vis the international business. And then again, in the financials or the presentation anywhere, a breakdown of retail versus corporate. Again, to get a sense of how retail has been performing. I understand and I appreciate the color that we have been provided on the call regarding the retail book, but it's very helpful to be able to look at a few numbers and see how the actual progress is happening in terms of, say, the loan book on the retail side, the deposit base on the retail side, both places. So these disclosures are very helpful, especially during periods like these when there's some variations in performance, so to say, like this quarter. That's all from my side.

I think, Rakesh, on the financials, there is a segmentation that provides a breakdown. But I think we're more than happy to take this offline, and we'll share with you ASAP the required data. We have it available in hand. So we'll share it with you one-on-one. More than happy to do that.

All right. We have no further questions at this point. And therefore, we can conclude the call. I would like to thank the management team of Burgan Bank for the presentation and for all the answers they have provided today in the Q&A. And also thank you to all the participants for joining the call. And I'll hand it over to Hamad and the rest of the management team for any closing remarks that you would like to make. Thank you.

Thank you. Sincere appreciation and many thanks to all the attendees. Again, the team is more than happy to address any questions going forward. Do you know how to reach us via email or phone calls, and we are more than happy to address. We're always available here.

Thank you. Thank you very much, and see you in the next quarter.

Thank you.

Thank you, everyone.

Thank you.