Burgan Bank K.P.S.C. (BURG) 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 Full Year 2022 Earnings Call. At this point, I would like to hand over the call to Mr. Hamad Adel Al Bader, Group Strategy, Capital Management and Investor Relations Manager. He will be introducing the rest of the speakers of today's call, and he can also begin with the presentation. Mr. Hamad, please go ahead. Thank you.

Thank you, Elena. Good afternoon, everyone. It's a pleasure to catch up again with all of you, and welcome to the Burgan Bank Group Full Year 2022 Results Call. Thank you very much for taking the time to attend the call. Joining this call from Burgan is Mr. Khalid Zouman, our Group Chief Financial Officer; and Mr. Naveen Rajanala, Group Head of Strategy, Capital Management and Investor Relations. First of all, I'd like to highlight that Slides 4, 5 and 6 are highlighting Burgan Bank Group's key details, including a key overview of the bank and the strategy. With that, I can start with Slide #8, which highlights the key business updates. As we noticed over the last few quarters, our retail transformation in Kuwait has been underway over the last 18 months, and these efforts are providing results. In 2022, the client acquisition numbers are up given the strong sales focus and successful product enhancements. The key impact of this is directly on revenues with a 25% increase year-on-year and a 22% increase year-on-year loan growth. And also the deposit balances have also grown. Another key progress has been a strong turnaround in BBT's performance. Our strategy of lower loan growth, tighter underwriting and focused efforts on recoveries have started yielding results, and the key impact of BBT as a stand-alone in terms of the operating performance, revenues increased 71% year-on-year. The net income increased by 472% year-on-year and '22's ROE is at 54%. In terms of asset quality, the credit -- the cost of credit is at 0.2% versus FY '21 at negative 4%. And the NPL ratio for the year is at 4.2% versus 6.7% in '21. Coming to the final item, BoB sale with regard to inform me that the regulatory approvals are in place at the moment with a sale consideration of USD 125 million. All of the transaction terms are agreed, and we expect to complete the Iraqi Stock Exchange requirements over the next few weeks. The key impacts of the BoB sale would be an improvement of 70 basis points on our CET1 ratio and the protection of around 60% on the -- 16 basis points on the NPA ratio. With that, I will hand over to Mr. Khalid Zouman.

Thank you, Hamad. Moving on to Slide #9, with some performance highlights, and let me start with for year 2022. Burgan's margins have improved by 30 basis points year-on-year to 2.4%. The CBK rate highs held at supported along with improved margins in Turkey. Credit costs improved significantly to 60 basis points for the year end 2022, down 130 basis year-on-year. International operation performance was very good on credit cost front, especially Turkey. For year end '22, net income increased by 15% to reach KWD 52.1 million. And Q4 '22 net income grew significantly year-on-year to reach KWD 11 million. The recommended cash dividend for the year is KWD 0.08 per share. And we move to Slide #11, which capture all the key P&L items. The group's revenues have been stable at KWD 232 million for the year end '22. The revenue has been driven by the net interest income growth of 15% year-on-year. This growth has been offset by fall in investment income, mostly securities gain. The net interest income growth was a result of 30 basis points improvement in net interest margin. In Kuwait, margins improved by 10 basis points. The group's operating profit for year end 2022 is at KWD 125 million, fell due to expense growth in Kuwait and in Turkey. The group's net income grew with a CAGR of 24% to reach KWD 52 million for the year 2022. Cost-to-income ratio in weakness has been increased to 46.1% for the group and 44.6% for Kuwait due to lower investment income and slight increase in operating expenses. With our ongoing prudent risk practices across the group, cost of credit has been significantly reduced to 60 basis points for the group and 50 basis points for Kuwait. This is largely attributable to the improved performance of Turkey. Having said that, we will move to Slide #12, if you don't mind. Actually, in this slide, we have added this slide to give a true sense of the bottom line generated by the bank. The normalized income generated by the bank is around KWD 77 million, which is a pre-IAS 29 impact. The IAS 29 impact on bank has been brought down the reported net income to KWD 52 million. And then we'll move to my slide, which is #13 and this which reflects the group's stable asset quality metrics actually. The group's NPLs for the year end 2022 stood at KWD 88 million, decreasing by 34% over the past 2 years, driven by a fall in BBT NPLs and increased recoveries. Also, there is a reduction in the group of Kuwait NPL ratio are at 1.9% and 1.4%, respectively, for the year 2022. Significant reduction of the group's provision charges by 43% over past 2 years, down to now KWD 25 million for the year end 2022. Our coverage ratio for the group and Kuwait continues to be healthy. The provision coverage ratio is at 279.2% for Kuwait and 205.7% for the group. Collateral benefits are on the top of the provision and other matter included in this ratio. And having said that, I now hand over to my colleague, Mr. Naveen, who will cover the rest of the presentation.

Thank you, Mr. Khalid. Good afternoon, everyone. Moving on to Slide 14 to show the progression of assets over the last 3 years and also give a little bit of flavor on credit exposures by stages because over the past few quarter calls, there were a few questions on loan savings, and we've included those details. So firstly, let me start with the assets. The group's total assets are stable at around the KWD 7.2 billion mark. The group loans for the year is KWD 4.2 billion, where, again, as we've said in the past, a large portion of that more than 75% of that exposure sits within Kuwait. If you look at the sectoral exposure, there is no major movement in the sector concentration. It remains similar as we've seen in the past quarters. Now looking at the bottom left chart, which is the loans by stages. It's trending in the right direction. The portion of Stage 1 loans is improving. The portion of Stage 2 has reduced as has the Stage 3 proportion. Further, if we drill down into the '22 figures, the split between Kuwait and international sort of shows the portion of Stage 2 that Kuwait has, which is down to 14.1%. The key point to note here, obviously, is the classification of these staging is as per CBK IFRS 9 rules, and these rules are applied both not just in Kuwait, but across our international operations as well. Moving on to Slide #15. Again, the key messages on this slide, let me start with customer deposits. Now though -- which is on the top left chart, now though you can see that there's a drop in customer deposit level, but this is due to a conscious optimization of our funding costs, especially in this rising rate environment, we are proactively looking at replacing and reducing expensive deposits with other liquidity sources. As we have said over the last few calls, our focus remains to improve the proportion of CASA balances. We continue to focus on maintaining and growing these balances. The CASA balances as of end of year is at 36% of total deposits. And if we look at the trend, it sort of is continuing to trend upwards. Sometime last year, it used to be about 32%, 31%, 32%. So it's going in the right direction. In terms of regulatory ratios, the bottom 2 charts, no surprises here, LDR, NSFR, LCR, they all continue to be well above the required levels from a regulation point of view. Moving on to Slide 16, which captures the group's capital position. The group's CET1 ratio fell marginally at the end of the year to 10.8%, but this is a temporary blip. We expect that to sort of go back to 11.3% to 11.5% levels once the BoB sale transaction materializes. And the other important point to note here is the regulatory minimum capital requirements, obviously, will sort of move back to the pre-COVID levels from first quarter '23. Moving on to the Slide #17, which sort of captures the key metrics of our international operations. Now before I get into specific entities, at an overall level, the metrics across our international operations are positive across most of them. NIMs continue to be high across markets. And in terms of group's asset proportion, these international operations constitute about 24%. We're obviously excluding BoB from this chart. And the contribution of the international operations, specifically in year 2022 to the group's bottom line also has been quite strong. If I look at Turkey, Turkey as Hamad had highlighted in one of earlier slides, has been a remarkable year for '22 for BBT on a stand-alone basis. Now as you can see, all of the Turkey's metrics are trending positively. The key numbers, obviously, are the cost of credit and the asset quality metrics where NPL ratio continues to trend downwards. Cost of credit also is trending downwards year-on-year. Algeria again, continues to be a profitable franchise with high margins, low credit cost, return on equity has been stable over the last many years. Tunisia, small but profitable business and less than 2% or about 2% of group's assets. But again, 2022, it's been a stable performance from them as well. Moving on to Slide 18, we just want to give a quick update on Q4 numbers. Again, revenue growth has sort of been there in Q4, largely driven by the performance of our international franchise. From a net income point of view, again, a strong performance in Q4 '22, where net income grew to KWD 11 million. And if you look at the NIMs, I think the critical number here is the NIMs, where NIMs for both group and Kuwait, you can see that they've gone up to 2.8% and 2%, respectively, which largely reflects the full impact of the rate hikes. Obviously, there are certain -- a couple of rate hikes that came towards the end of the year. But you can see that from a trend point of view, these numbers are sort of going up. With that, I'll hand it back to Mr. Khalid to conclude the presentation.

Thank you, Naveen. And we'll come to the summary. And actually, what we'd like to say that we have made significant progress in key strategic initiatives in the year. As mentioned by earlier by my colleague, Hamad, we expect margins to be stable and the credit cost to also normalize. We don't see any surprises at this stage. However, macro headwinds and risks still remain. For example, likelihood of a global recession could impact credit cost. Also, we have been hearing about recessionary fears, and if this happens, they will embark credit costs across the banking system. Also Turkey will remain volatile, especially in the run up to the elections in May. And lastly, I would like to conclude, I want to say that Burgan's prayers and thoughts are with the families and individuals who have been impacted by the recent tragic earthquake in South Turkey and Syria. And with that, I conclude the presentation, and I will now hand over back to Ms. Elena. Thank you for your listening.

Thank you very much for the presentation. We will now move to the Q&A.

If you have a question, you have 2 options. Either you can write it in the Q&A designated area or you can click on the raise hand icon and I will unmute your microphone. We already received a few questions here in the Q&A chat. So I will start reading some of them. One of them is, do you have a target retail loans contribution to total loans driven by your new retail strategy?

Actually, this -- you saw our growth in 2022. And we expect to grow again in '23. We have made the decision here within the management that today, our CBK discount rate at its highest. And we have to grab this opportunity. Why? Because as you know, the retail loans in Kuwait, they are fixed at 5 years. So if we expect there will be a slowdown. And by '24, maybe CBK discount rate will be going down that means we have a healthy loan book with a good margins, locked for 5 years. So yes, we're going to continue this year in '23 growing and retail loans. I can give you more flavor. This really till now is not like a hazard or something. We have a scoring model. The scoring model is under the supervision of risk management. However, that's our investment, which we started even from '21.

Thank you, Mr. Khalid. I will move on to the next question. Please let us know if you intend to call the AT1 bond at the first call date in July 2023?

So one thing, obviously, is the Tier 1, the first call date is 2024, not 2023. So we are still a good 15 to 18 months away from that event. Obviously, this has not been discussed. But again, we will sort of look and discuss and our action will be reflected based on market practice. So again, I know it's a vague answer, but unfortunately, it's too early to get into the discussion of how much will be called and what price it will be called, et cetera. So -- but again, I think the recent practice has been that all banks are calling back, and we sort of will take the call, and we expect to sort of not deviate from market practice.

Thank you, Naveen. Next question, can you provide some guidance on NIMs and cost of risk for 2023? How should we be thinking about loan growth in 2023 as well? And also -- sorry, it's a lot of questions in one question. Any guidance on the net monetary loss from Turkey for 2023, given the current situation?

I can take this. Going back to the NIMs, we expect that it will be stable for '23. That's our expectation. And for the loan growth, Burgan always a conservative bank in terms of our loan growth because also we have to look at our CET1 ratio. So we always want to have a cushion with our CET1 ratio. In terms of the IAS 29, yes, we expect it will come in '23. Is it the same as our expectation when we build up the scenarios with our economist? It should be, not in the same level as '22. But what happened lately, I think it's too early to comment. We need to wait and see, we need to identify and quantify and then we can come back again with how this will affect our results.

Thank you, Mr. Khalid. A question on capital. What is your minimum internal level for CET1 and CAR compared to the regulatory requirement?

Yes. So as we have said in the past, I think we typically aim for about 100 basis points of buffer over CET1. The CET1 ratio of minimum is expected to go up to -- go back up to 10.5% for Burgan. We expect to have around the -- or we aim to have around 100 basis points buffer over that. But obviously, during the year -- as I explained in the past, during the year, as there is growth in RWAs, this ratio keeps falling. But at the end of the year, once the profits are added back, our retained earnings are added back, we tend to be around the 11.5% mark. And we've done that very successfully over the last 6 to 7 years, and we continue to aim to do that. At the total capital level, which the minimum will jump to 14%, we aim to -- we typically aim to have about 200, 250 basis points of buffer at total capital level.

Okay. Next question, what is the normalized cost of risk for the bank?

In the past, we used to have around 1%. However, if you see in '22, I think what we did and the conservative approach, what we did in '21 has been reflected in our performance for '22. So historically, it's 1%, but lately, we have been noticing a drop down in our cost of credit.

Okay. What is the current percentage of CASA accounts, total deposits? And what is the percentage of USD denominated deposits and loans at the group level?

So CASA is 36% at group level of total deposits. We don't have the exact figure of dollar -- what is the dollar deposit percentage. But effectively, what -- I mean, it's again driven by the fact that what is our balance sheet -- our asset requirement on the other side. Most of our dollar deposits are funded either by syndicated loans or some of the international operations that we have, they have access to dollar deposits. But again, it's, again, a conscious choice to sort of use the syndicated route because the costs are a lot more effective than borrowing it directly from customers.

Thank you, Naveen. A few questions on credit quality and cost of risk. What is driving the increase in -- sorry, on cost-to-income ratio, what is driving the increase in cost-to-income ratio from Kuwait operations on a year-on-year basis?

Yes. I can answer this on behalf of my colleagues. If you -- I think we mentioned also in the slides, I think my colleague, Hamad. We have been investing in our retail banking. And that's why we have increased our sales force. That's our focus. We have been investing in our digital banking also. And that's why it has been driven our operating costs and staff costs.

Thank you, Mr. Khalid. Also on for Kuwait, what is driving the increase in absolute NPLs in Kuwait in 2022?

It was only one customer actually. And we took decision that we earlier this -- in '22 that we take a hard stand with this customer. And at year end, we wrote it off.

Okay, thanks. And questions on capital adequacy, apart from the sale of BoB, what are the other -- what is the other strategy to boost capital buffers?

Yes. So I think once BoB sales settles down, as I said, there'll be plus 70, we are looking at other potential solutions. Like in the past, we've done some RWA optimization. We'll continue to look at those and sort of make sure that our capital levels are at the levels that, as we mentioned earlier. So to ensure that enough buffers above CBK minimum continues to be there for the foreseeable future, factoring in our growth plans.

Okay. Do you have a target for the KIPCO entities lending exposure reduction from 24% in 2021?

Actually, this is a question supposed to be answered by Naveen actually. He's the coordinator in terms of this restructuring with our parent company. Yes, there is a plan to reduce the RPTs.

What is the percentage of Kuwaiti dinar-denominated corporate loans at the end of 2022?

So in Kuwait, our corporate banking book, I'm assuming you're asking about corporate banking book. So most of our corporate book is Kuwaiti dinar-denominated. I mean, if I were to give a split of corporate in terms of KD FC would be close to 85-15 in favor of KD. Retail book is completely KD, and we also have a private banking book, which is also 90%, 95% is Kuwaiti dinar-denominated. The key difference, as Mr. Khalid had pointed out, retail is fixed, whereas the other 2 portfolios are CBK discount rate linked, and they reprice pretty much the very next day if there is a hike or drop.

Thank you, Naveen. I can share a lot of questions on NIMs even if you already indicated your guidance. But one of the -- just I will try to summarize them all together. One of the questions is whether the spike that we saw in the NIM in Q4 2022 is sustainable? Another question around whether NIMs can be sustained in 2023 despite the assumption of NIM contraction in Turkey? And also, how do you expect the higher rates to impact your NIM? So I think it's all incorporated in the guidance you have given, but if you could elaborate a little bit more, I think that would be helpful. Thank you.