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

Good afternoon, everyone. This is Ahmed El-Shazly from EFG Hermes, and I would like to welcome you all to the Burgan Bank Group Q2 2023 Earnings Call. I'd like to hand over the call to Mr. Hamad Al Bader from Burgan to kick off the call.

Thank you, Ahmed. Good afternoon, everyone, and welcome to the Burgan Bank Group H1 '23 Earnings Call. Thank you very much for taking the time to attend this call. Joining from Burgan are Mr. Khalid Zouman, Chief Financial Officer; and Mr. Naveen Rajanala, Deputy General Manager of Finance Group; and myself, Hamad Al Bader, Manager, Investor Relations. We shall cover the slides over the next 20 minutes or so, and would welcome your questions at the end once the presentation has been covered. With that, let me hand over to Mr. Naveen to start the presentation with Slide #8.

Thank you, Hamad. Good afternoon, everyone. So as usual, we'll sort of kick off with updates on what progress we've made on our digital front. So as we've said over the past few quarters, we made a lot of progress on our digital front both in terms of investments and also results from those investments. I want to give a flavor on what is happening both in our Turkish franchise as well as Kuwait franchise. On Kuwait, the customer onboarding continues at a good pace. We have about 90,000 clients that are onboarded digitally with active ones going up by 5,000 to 65,000 in the first half of this year. And more importantly, the transactional activity also has spiked on our digital platform. And the uptick is a healthy 50% when we compare it for the last 6 months with the 6 months last year. And more importantly, I think it's not just the transactions which are going through on the digital platform. We are seeing true business volumes also being sort of brought in by our digital platform. CASA balances have gone up and it is -- it's good early sign in terms of growing our demand deposit base. More than 1,000 CASA accounts have been opened on our digital channels. Lastly, as we've said, so we've made a lot of good progress in our Kuwait franchise. And that's sort of reflected in our app rating, both on iOS and Android. Our rating is a very high 4.6 which has been consistently there amongst the top 2 banks in Kuwait. Moving on to Turkey. Again, we've touched upon Turkey's digital platform ON. Again, the platform has had a very good start. The platform was launched back in Q4 '21. Since then, it's been performing well. It's award-winning. The rate of customer onboarding on that is much higher. Obviously, it's a bigger market. So in the first 6 months of 2023, the onboard -- we've onboarded 157,000 clients. And most importantly, true business volumes on the platform are there to be seen both on the deposits and the asset sides, the volumes continue to go up. The team there is also, in the background, continues to add new features, which sort of will bring in business in the future. So FX as well as overdraft features have been added and there are some more bells and whistles that are expected for the rest of the year. With that, I would hand it over to Mr. Khalid who will sort of kick off the financial review section.

Thank you, Naveen, and good afternoon for everybody. And I'll start from Slide #10. And before going through these details, I just want to highlight that in '21 and '22, BoB numbers included in our P&L. And as it was classified as an asset held for sale. Hence, we have carved out BoB numbers in light blue color, to give a better understanding of the underlying numbers and provide an accurate comparison for H1 2023 financials with prior period figures. Accordingly, for comparisons with the prior year, we would be referring to BoB adjusted numbers throughout this presentation. So I start from the Group's revenues, increased by 8% year-on-year to KWD 108 million driven by strong noninterest income of KWD 47 million, which increased by 28% year-on-year and net interest income of KWD 61 million. And next, we see the Group's operating profit for first half of '23, was at KWD 54 million, in line with the level seen last year. The Group's net income stood at KWD 18 million in the first half of '23. Growth bottom line results were impacted primarily due to IAS 29 as you are aware, which has been implemented last year, higher expenses and a proactive provisioning. Adjusted for these factors, our normalized profit are in the KWD 28 million to KWD 30 million. So they will be in the range of KWD 28 million, if we normalize it to KWD 30 million. In terms of KPIs, net interest margin remained stable at 1.9% despite low interest rate situation in Turkey during the first half of '23. The cost income ratio is higher for the group in the first half of '23, largely attributable to higher staff expenses, mainly in Kuwait and Turkey. We are focused on optimizing expenses over the coming period. The credit costs were slightly higher in the first half of '23 at 90 basis points primarily to proactive provisioning by the bank on certain exposures. Having said that, we'll move to Slide #11, which reflects the group's asset quality metrics. The group's NPLs for half year '23 decreased significantly over the past 2 years from a high of KWD 214 million in first half of '21, down to KWD 91 million in the first of '23 and has been contributed -- BBT contributed a big reason for this improvement. The Group's nonperforming loan ratio reduced by 250 basis points over the past 2 years and it's stable at 2% over the past few quarters. As discussed earlier, provision charge is higher in the first half '23 due to proactive provisioning and the provision coverage ratio for the Group continued its upward trajectory with half year of '23, provision coverage ratio standing strong at more than 200% plus. And by concluding this, I'll move to Slide #12 in this case. And the key message on this slide are as follows: Group's assets grew year-on-year to KWD 7.1 billion in the first half of '23. The Group's loans were at KWD 4 billion for the first half of '23 and continue to be well diversified. Also importantly, there was no major movement in the sector concentration year-on-year or quarter-to-quarter. We continue to hold healthy levels of liquid assets in our books as reflected in the bottom chart. Liquid assets to total assets ratio stood at 25% for the first half of '23. And lastly, the Stage 2, Stage 3 proportion continues to improve. As highlighted in the past, the staging criteria as per CBK IFRS 9 guidelines and are very quite conservative. And now by concluding with this, I will hand over to my colleague, Mr. Naveen, again, to take you throughout the presentation.

Thank you, Mr. Khalid. So just to sort of cover off liquidity. So the bank's liquidity continues to be stable, which is also reflected in the environment in Kuwait and also in the markets that we operate. So customer deposits, if you look at customer deposits, it's gone up by 5%. Again, usually tracks our loan growth and asset growth. CASA balances continues to be stable at around 32%. Obviously, in a rising rate environment, it's a little challenging to sort of grow this proportion, but we've continued to maintain this at more than 30%. In terms of regulatory ratios, both the LDR and the Basel III liquidity metrics, which are the NSFR and LCR, we continue to be comfortably above the regulatory requirements. With that, if we move on to cover our capital on Page 14. So on capital, I think the critical message here is our CET1 ratio continues to be stable and improving given that the minimum requirements this year has gone back to pre-pandemic levels of 10.5%. We continue to maintain 100 basis points or so of buffer over that. At the total CAR level, our CAR is -- continues to be healthy at about almost 18%. The minor drop in the RWAs is essentially the impact of sale of Bank of Baghdad where Bank of Baghdad numbers were sort of removed from Q1 this year onwards. Moving on to next slide, Slide 15. Just to sort of cover off the critical moving pieces in each business. Starting with Kuwait, obviously, H1 has been slightly difficult first half for Kuwait. But we continue to see -- as we look ahead, we might see some little upside in our margins or at least stabilizing given the recent rate hike decision by Central Bank of Kuwait, whereby the central CBK [ DR ] was increased from 4% to 4.5%. As Mr. Khalid pointed out, we're looking at sort of improving our cost-to-income ratio, and that sort of -- will sort of come over the next few quarters or over the next year or so. There is a minor blip on the cost of credit, but largely due to a proactive provision on a couple of exposures as Mr. Khalid pointed out. NPL ratio continues to be below 2% at Kuwait level, and we expect to sort of ensure that this is trending below 2% by the end of the year. Coming to Turkey. Turkey, largely has been a good story. They're -- given that their top line has been strong, the cost-to-income ratio continues to be low, mid-30s. The margins have fallen, but it was largely the impact of the interest rate environment that was there in the first quarter and early part of second quarter. But we expect the margins to sort of -- margin story in Turkey to improve as the year progresses. Cost of credit, again, they continue to be extremely good. They've been making a lot of recoveries, and that's how its reflected in these positive cost of credit. And their NPL ratio continues to come down from the peaks where at the peak, they were close to 15%, and they've been coming down since then given the recovery efforts and a lot of the debt asset swap efforts. Algeria and Tunisia, I won't go too much into it. But again, these -- both these franchises are stable, some minor movements on a quarterly basis or a half yearly basis. But they are producing returns which are -- Algeria continues to produce returns, which is double digits, close to 12% to 14% and Tunisia is also stable producing returns of around 8% to 10%. With that, I will hand it back to Mr. Khalid to summarize and close the presentation.

Thank you, Naveen. Thank you very much. Well, to conclude, in summary, Group's asset quality, capital position and liquidity levels continues to be healthy. Going forward, we anticipate that the Kuwait performance would improve especially in light of the recent rate hike in Kuwait. Also, the actions from the Turkish Central Bank and the authorities there, postelection who are committed and ensuring further stability in Turkey are expected to contribute positively to Turkey's performance. With that, I will conclude my presentation, and I'll hand it over to my colleague, Hamad, to coordinate the Q&A session with...

Thank you Mr. Khalid, Mr. Naveen. Back to you, Ahmed for the Q&A session.

[Operator Instructions] We already received a few questions, so we'll start with reading the first one. Are you planning to call the AT1 bond next July? And if so, how can you replace it given Burgan's relatively weak Tier 1 ratio?

Okay. I'll ask my colleague, Mr. Naveen to comment, but this has been also asked in the last quarter. And our question was it was too early to decide. Still, we have another 1 year, yes. There is a discussion in management. And I think maybe in the coming quarters, we'll make up our mind. Definitely we have -- yes, we have to start early, we understand. There is a lot of process from legal or regulatory. But this question, I think, raised earlier before, I think even Naveen can answer it. Go ahead, Naveen.

No, absolutely. I think you've covered it. So basically, it's a little too early. So again, as for Basel III, we cannot communicate something that sort of creates expectations around these instruments. But this is something that once the decision is made at the right levels at the bank and also a post discussion with the regulators, we will communicate. But as you can see from our capital structure, Tier 1 is something that the bank would need. So that's something that -- to keep in mind. But beyond that, it's too early to sort of comment on this.

All right. Thank you. Another question at what interest rate did Burgan raise a 3-year $800 million syndicated facility from regional and international banks in late April?

All in, the pricing was so far plus 120 basis points.

Okay. Thank you. A few other questions. Can you please share some color on the drivers of the decline in Stage 2? Is it because of BoB sale or other factors?

No. So the decline in Stage 2 -- no, it's not due to BoB, but it's been continuous improvement post the pandemic, the receding of the impact of pandemic. And also in Kuwait, there's a little bit of lag where Stage 2 -- because every time we want to move anything from Stage 2 to Stage 1, we have to go through a curing period and Central Bank's approval. So there's sometimes a time lag, but it is -- it's something that's purely due to improvement in our portfolio.

Thank you. Another question. Can you please share your strategy or approach to boost CET1 buffers and what is your target? Is it 150 basis points or less?

I think also this has been asked earlier and been answered. We always wanted to have 100 basis points above the regulatory requirements. We have been successful in the past in doing some optimization assignment and actions. So that's our target. You want to add up, Naveen?

No, no, I think you've covered it.

Can you comment on how has the related-party exposure changed Q-on-Q?

So at a total level, as we've communicated earlier, so at a quarter-on-quarter, there would be some minor movements. But I think as we communicated earlier, there is a broad overall plan where over time, we expect this related-party exposure to sort of come down. It's a little more complex. And so I don't think we should read too much into quarter-on-quarter movement. But definitely, there's a plan whereby year-on-year, you would start seeing some tangible sort of reduction in these exposures.

Thank you, Mr. Naveen. I see we have a few raised hands. We'll take the first question from [ Rakesh Tripathi ].

I had a few questions, so I'll start one by one. My first question was around your loan growth basically in H1. The contraction that we've seen, I mean, I understand that Kuwait has seen little credit growth overall in the first half of the year. But we've seen most banks doing a lot better in the corporate segment. It's the retail where growth has been kind of muted and still you've had, on average, about 1%, 1.5% kind of credit growth for the sector as a whole. So what is driving the contraction at Burgan and what do you expect basically going forward?

I will comment high level and I'll ask my colleague, Mr. Naveen to comment in details if he wants. So the overall, there is growth in Kuwait. However, as you mentioned, the contraction is coming from Turkey. Turkey, there are 2 things, 2 have -- actions taken with our supervision and decision. First is the devaluation of the currency, that's something out of the hand. The second, recently, we saw there are some negative spreads in the [ prior ] loans. So we opted to close certain loans. So it's a combination of closing some loans and the devaluation. But the growth happened in Kuwait.

Okay. I believe you used to provide -- up until sometime last year, you used to provide the breakdown of what used to be the loans and deposits for Kuwait and international overall. So if you start disclosing that information, again, it will be helpful for us to see what the domestic business is doing and how the rest of the business is doing.

No, sure. Noted. I think we can sort of look at -- start disclosing those specifics.

My second question was around the increase in Kuwait NPL ratio. So Kuwait, just Kuwait, overall, it was like 10 basis points increase in NPL ratio from year-end to end of H1. So not significant, but just talking about Kuwait, the NPL ratio increased about 50 basis points from close to 1.5% to now 1.9%, like it's there in the latest presentation. And this is something that we've been noticing for the last couple of years, 2, 3 years, in fact, that every year kind of Q1, Q2, we see a spike and then it kind of levels out either by the end of the year or the first quarter of the next year. So what's driving this increase? Why the deterioration in Kuwait? Is it just 1 account? I know it's -- that's been the case in the past couple of years that it's been 1 or 2, a handful of corporate accounts that have deteriorated. But this is sort of a consistent thing that's happening every year, so just wanted to understand what's happened here?

I will ask -- allow me -- I will answer this question. As you rightly said, it's not a significant amount. It is 1 customer. And the customer, honestly, I'll tell you because I was working closely with the business unit. The business unit decided to classify this customer. He's paying his interest, he has some collateral but the decision was that there is some certain action that the management of the bank asked the customer to do, he didn't fulfill. So the business unit and the management approval, they decide to be hard on this customer. Nothing else. For example, this customer might be by year-end or by end of Q3, he will disappear, simply. So it's not -- he pays his interest. This customer during COVID-19, yes, he had some liquidity, which the bank supported him a lot because at that time, we -- he was a good customer. But lately, recently, there was certain action. Management asked him to do, he didn't fulfill, so we took hard. However, his interest never was due and he is fully collateralized and not significant.

Okay. Thirdly, and this is -- I understand this is a trend across Kuwait, across the rest of GCC as well. In fact, most places right now because of the higher interest rates, that there is a migration from CASA to time deposits. I believe in your case, there has been sizable deposit growth and CASA ratio at the same time has come down to what, 32% now from close to 36%, I believe, from end of the year. So the growth predominantly is being driven by time deposits. With that happening as it is, how do you plan to manage NIMs, manage your overall ROE also considering that your cost-to-income ratio is significantly up now, 50% of your operating income being consumed by the OpEx that the business needs? So that significantly hinders your capital generation as well.

Yes, fair points. So I think there are 2 things. One is, let me cover the CASA piece. So yes, I mean, as we would expect in a rising interest rate environment, there would be some impact on CASA balances. And as a result, there's been about 400 basis points of drop off in the CASA proportion. I don't think there is any -- it's reached a stage where it's -- there is alarm bells kind of stage. I think it's natural and we've sort of planned for it. At the same time, if you remember, sometime last year and also in maybe Q2, Q3 last year, when there was a lot of pressure on cost of funds, that pressure has sort of gone away. So when the interest rate hike happened now, which is the very recent one, we don't expect that to sort of impact the cost to fund too much. And so I think we would still expect to capture some positive spread there. Though as the migration from CASA to time deposit happens, it's going to impact our overall cost. But we are very mindful of that. So as we said, our margins should be around the 2% level. The pickup at a group level on the margins is going to come from the expected positive movements that's happening in Turkey. So Turkey margins historically were 3.5% plus. It's come down to the low 2s. We expect that to sort of start migrating towards the 3% by the end of the year and sort of move up from there. So that should provide the much needed margin pickup. Now coming to...