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 9-Month 2023 Earnings Call. I would like to hand over the call now to Hamad Al Bader, Manager, Investor Relations, that he can kick off with the presentation. Hamad, please go ahead.

Thank you, Elena. Good afternoon, everyone, and welcome to the Burgan Bank Group 9 months '23 earnings call. Thank you for your time to attend this call. Joining from Burgan is Mr. Khalid Zouman, Chief Financial Officer; and Mr. Naveen Rajanala, Deputy General Manager, Finance Group; and myself. We should cover the slides over the next 20 minutes or so, and would welcome the questions at the end of the presentation. With that, I'll hand over to Mr. Khalid to start the presentation on the key performance highlights on Slide #8.

Okay. Thank you, Hamad. Thank you very much, and thanks to Elena and everybody who attended the call. First of all, good afternoon, and thank you for your time, and let me kick off the presentation with the key performance highlights for the franchise in the 9 months period for the year. And then this will be in the Slide #8, where we start with the strong revenue growth headline. The bank revenue grew by 17% year-on-year, mainly driven by improved fee income, FX income and recoveries. The bank's operating profit also grew by 21% year-on-year, indicating some operating efficiencies kicking in. On the right top, we say stable asset quality. The bank continues its stable asset quality. NPL ratio continues to be around 2% mark with a healthy provision coverage ratio at 200% plus ratio. In the bottom of -- also before we move to the bottom, the cost of credit for the 9-month period is at 20 basis points if we net of one-off recoveries. Then we go to the bottom left, which is the headline, resilient franchise. Kuwait franchise has started growing again. Loans and deposits grew by 5% and 28% year-on-year, respectively. Turkish franchise continues to outperform with the revenue increasing by 65% year-on-year. And net income grew by 1.5x. If you see the bottom line on the right hand, the headline is capital and liquidity. We said Burgan Bank's capital and liquidity levels remain resilient, where CET1 ratio at 11.3% and CAR at 17.6%. And NSFR and LCR both remain well above the regulatory minimum required, which is 100%. This is a quick summary of the key highlights during the 9 months of 2023. The numbers will be covered in greater detail in the next section. So now let's move to Slide #10, which says the first diagram, the revenues increased by 17% year-on-year to KWD 195 million, driven by strong noninterest income of KWD 104 million, which is up 71% year-on-year and net interest income of KWD 91 million. The bank's net interest income was impacted by lower margins in our Turkish franchise, but we expect margins in Turkey to be [ clubbed ] from Q4 '23 onwards, given the rate hikes happened lately, which we see a good sign for things improving there. Net interest margin for the group in Kuwait are at 1.9% and 1.6%, respectively. We expect this to improve over the next 2 quarters. The group operating profit for 9 months '23 grew by 21% to KWD 109 million as top line growth [ out based ] growth and expenses. The group's net income stood at KWD 30 million in 9 months for this year. Group bottom line results were impacted by IAS 29, which is -- that's something which we are carrying on from the second quarter of last year. Adjusted for this factor, bank's normalized net income is around KWD 54 million. The group's cost-to-income ratio grew to 43.8% in the 9 months and a significant improvement in Kuwait to reach 41%. The credit cost of the group are at 20 basis points. And as I mentioned earlier, please note that the cost credit is a net of the one-off recovery. Having said that, we'll move to Slide #11. Slide #11, which reflect the group's asset quality metrics. And in the first diagram, we see the group NPLs continues. It's a downward trend, and its NPL stock decreased significantly over the past 2 years from a high of KWD 210 million and 9 months of '21, down to KWD 92 million in the 9 months of '23. The group NPL ratio is stable around 2% level. Our provision charge is higher in the 9 months due to proactive provision booking from the recoveries that the bank made. And the provision coverage ratio continues to be strong at 215% plus as of third quarter. And now I will hand over to my colleague, Mr. Hamad, to take over the next few slides.

Thank you, Mr. Khalid. Moving on to Slide #12. Group assets grew to KWD 7 billion in 9M '23, and Kuwait driving the growth as Kuwait grew by 9% year-on-year to reach around KWD 5.8 billion. The group's loans continue to be well diversified. Also importantly, there was no major movement in the sector consideration either year-on-year or quarter-over-quarter. The bank continues to have healthy levels of liquid assets, and its books as reflected in the bottom-left chart, the liquid asset ratio stood at 22.7% for the current period. And lastly, the Stage 2, Stage 3 proportion continues to be stable. As highlighted in the past, the staging criteria is as per CBK IFRS 9 guidelines. Moving to Slide 13. The group deposit levels have increased by 17% year-on-year to reach KWD 4.4 billion, and mainly due to a 28% growth in Kuwait's deposits. We continue to be well within the described maximum loan-to-deposit ratio of 90%. Furthermore, our CASA balances continue to be at healthy levels. The CASA balances are around 32% of total deposits. And our liquidity ratios, NSFR and LCR are also well above the regulatory minimums. Moving to Slide 14. The group's CET1 ratio and CAR ratio continued to trend positively and higher compared to previous year. CET1 ratio currently is at 11.3% with Tier 1 ratio at 13.9% and CAR ratio of 17.6%, all well above the regulatory requirements. I think with that, I will hand over to Mr. Naveen to cover the rest of the presentation.

Thanks, Hamad, and good afternoon, gentlemen and ladies. Let me just continue the presentation and look at the performance by entities. A lot of the Kuwait metrics have already been covered by my colleagues. But just to sort of cover a couple of directional comments on the Kuwait business one, as Mr. Khalid mentioned, Kuwait margins also are expected to sort of improve though marginally, they expected to improve and should add to group's margins. And NPL ratio, we expect that to sort of hover around 2% and continue to be below 2%. And from a cost of credit point of view, we expect to be around below 1%. It could be around 80 to 100 basis points or slightly lower than that. Looking at -- let me start with Turkey. As Mr. Khalid mentioned, Turkish business has been performing well, and they're sort of -- the turnaround started from second half of '21, and they've been continuing to deliver as a franchise. Unfortunately, IAS 29 is impacting their contribution at group level. Now one of the things -- let me start with NIMs. The NIMs are impacted this year so far, primarily because of the interest rate situation that was there in -- especially in the local currency in Turkey in the first half of the year, and that's had quite a negative impact on overall NIMs in Turkey. But as Mr. Khalid pointed out, the recent rate hikes in Turkey and increasingly normalized situation so far in the rates environment in Turkey, we expect the positive impact on NIM to start sort of showing up from Q4 this year. And the bank on the back of it, all the improvements that we've seen sort of continues across their cross-sell, they're improving asset quality, enforcing recoveries and all this is also reflecting in their efficiency as we can see. The cost-to-income ratio continues to improve. Cost of credit is a positive -- so negative 2.3% is a positive number. And NPL ratio, which at the peak of pandemic was high double digit is down to 1.2%. So all in all, it's a good story in Turkey, and we don't see any surprises over the next few quarters. Coming to Algeria and Tunisia. Again, these are franchises, which continue to be solid and profitable. Margins in Algeria are sort of coming down a bit, largely because of regulations change rather than any challenges on the funding side or pricing side. This is largely regulation, which sort of impacts all the banks in Algeria. Cost-to-income ratio, as we've discussed in the past, is largely due to depreciation of the headquarters coming in. But I think over time, this will sort of normalize given that it sort of came into their books starting sometime last year. And Tunisia, just to sort of cover off Tunisia, continues to be a small part of the group. The only point that I would cover here is the NIMs continue to be strong. They are helped by the fact that the yields are increasing as the rates environment is increasing with the underlying benchmark rates going up. A lot of their funding is CASA based, so they are able to sort of get more margins. The cost of credit increase is a minor blip. It's largely -- it's not a true cost of credit increase, but it's more a reflection of -- given the downgrade in Tunisia -- since these numbers are calculated at a group level, our model sort of shows a slightly -- requires a slightly higher provision, but there's no true provision charge there in terms of any underperformance by client. With that, if we can move to Slide 17. Yes, just to give a little bit of a rundown on the quarterly numbers. So as we've sort of discussed the top line went up in Q3, largely because of the one-off recoveries that came through in Q3. But otherwise, even if we sort of remove that on a normalized basis, it's trending like-for-like in terms of top line. Once the margin situation improves, especially in Turkey, I think there is a little bit of growth that should come in starting next quarter. And the same one-off recovery sort of flowing through in operating profit. Clearly, from a normalized point of view, we've done a decent job on net income. But given the IAS 29 impact in Q3 and due to the change in CPI, which sort of came through after the post elections, the inflation has had an impact. And that's what has dropped out reported net income to KWD 12 million. We've covered NIMs and cost-to-income ratio. And as we said, cost of credit is down this quarter largely due to a recovery efforts. Sort of summarizing our presentation. As we've said in the past, the bank has started to continue -- has started to grow. We have said at the beginning of the year, we expect the group growth to be around 4%, 5%. We are on track to sort of hit those numbers. Kuwait is leading the growth. And as we've said in the past, Turkey is largely -- we're sort of making sure that they are sort of flattish on a hard currency basis. Underlying net income levels, pre-IAS 29 continued to be healthy. We obviously are sort of pushing, and we expect that to sort of continue to go up as we move along. And lastly, international operations as we sort of covered it entity by entity, the performance continues to be stable. We don't see any surprises in the near future. So -- and that's quite hardening given the kind of volatility we've seen in the international operations, especially during COVID times. With that, we conclude the presentation, and I'll hand it back to Elena.

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

[Operator Instructions] We have a question that came just now from [ Izza Buhechi ]. He has a question.

Yes. I just have a question on the provisioning. I don't seem to understand the quarterly decline in cost of credit, negative 0.2%. If I understand you took a provisioning charge of KWD 17.2 million during the quarter, which is, I think, equivalent to 160 bps on an annualized basis. So I just want to understand that why...

Yes. I think during my presentation from my slide, I said a few net of the recoveries because if you see on the other income, we put the recoveries. If we net these recoveries from the provision, we provided the proactive, which the management has taken but they -- then we will reach the 20% -- 20 basis point I said about.

Okay. So your book recoveries and other income?

Yes, yes. Why we said this because we did -- we said it so if you can compare to other banks in the market in Kuwait, so you have to compare apple to apple because they net of the other banks, they net of the recoveries from provision, we show each one separately. So at least for comparison for your own analysis.

All right. But this is not recurring recovery.

Not recurring any sense in the amount, but we have a return of debts in the previous years. We have NPL stock in our -- in the group bank book. And this will be recovered as we go along -- part of our continued operation and efforts to recover written off debt or nonperforming loans.

All right. All right, clear. On the monetary losses, if I recall, your guidance before was things will go down. And then you see a spike in Q3. So just want to understand what's driving this?

Yes. There's a volatility. If you recall, in the Q2, we didn't record much of IAS 29. However, during August and part of July, we saw some movement -- volatility movement, which impacted our highest net monetary loss. So it's a reflection of what's happening in the market as simple as this.

All right. So going forward, I don't know if you can maybe give us like an outlook for these both provisioning the monetary losses, how...

Okay. Despite -- it's hard to predict going forward. However, what we see lately in Turkey that the government or the system has been moving to the orthodox. And now lately, there you'll see the policy rate has improved or increased in Turkey. And we expect that we'll not be exposed too much -- or will not be exposed to high volatility in the future. Does this continue? I think, yes, it will continue in the '24. That's our plan. But as a long-range plan? No, I think it will discontinue at some point of time.

We will take now a question from [ Rakesh Tripathi ].

Yes. I had a few questions. I think part of it has been already covered. One was basically on why the other income was so far, we didn't have a breakdown. You mentioned that it's due to the recoveries. Can you give us some sense of the quantum of these recoveries? How much was this component within the other income?

Yes. In Q3, it was about KWD 20 million.

Right. And secondly, about the provisions you briefly touched upon what drove that. I know there was some asset quality deterioration, one-off deterioration in Q2, and that led to the provisioning increases in the second quarter. Third quarter, again, we've seen a higher number. So was this related to the same asset that deteriorated in Q2? Or is this something new? How much of this is precautionary provisioning vis-a-vis specific provisions against assets where you see increased risks?

Yes. It's largely -- I mean, as Mr. Khalid pointed out doing during his -- so what we've done is we've used the opportunity of -- since we've had this large recovery, sort of proactively provision. It's not the same asset, but we sort of -- looking ahead, we took this opportunity to book the [indiscernible].

Yes, because we have this good recovery had took place in Q3, we decided internally our workout committee. We take some -- these specific provision on certain customers, which they are not nonperforming. They are -- some of them are Stage 2. And that's why it's just a proactive.

Right. And about the asset that did deteriorate in the second quarter. What are you seeing with respect to that? When should we -- should we expect a regularization of the asset anytime soon?

Yes, definitely. First of all, not regularization. By the way, Stage 2 is -- we see it also as a regular. But again, some -- for example, there is one account, although in the pure accounting or CBK rule is regular. However, because the internal rating because we have methodology when we apply IFRS 9. So can -- because the rating of this customer, a little deteriorated, so we classified as stage 2.

Yes. But there was an increase in the absolute NPLs from Kuwait year-to-date, right? About KWD 11 million, I believe, from 83 to about 94 [indiscernible].

That's NPL you're talking about. We covered it in the Q2 financials. I remember, I said in that meeting, there was a customer which -- we opted and we classified NPL, we put him under pressure, because he didn't follow certain covenants. There are certain covenants, which he didn't adhere to. We wish him to nonperformer loan. It's not significant and fully collateralized. That's in Q2, not in Q3.

Yes, that is the one basically that I was asking on. If there was any update like where are you in your discussions with the...

Okay. Yes, the latest update, because I sit on the workout committee, I'm part of the workout committee, there is an expectation that this customer might be restructured in Q4. There is a possibility.

Okay. Right. The next question was -- just 2 more. One was on your capital base. I understand that the interim earnings are not included in the capital levels that we see right now, and that loan growth has not been very high in recent times or not even recent times. I mean if I were to be honest, looking at your net loans in the last 5 years, there's not much positive movement, right, from 2018 when the loan book used to be about KWD 4.3 billion. Right now, it is close to KWD 4.2 billion. So it's -- net-net, it's a little down, if I were talking about the net loan numbers. So a couple of interrelated questions. One is what are your plans for growth what kind of growth should we expect medium-term kind? I know right now, you have an increased focus on retail, and retail is not really growing in Kuwait because of where the interest rates are. Given those challenges, what are your expectations on growth first of all? And secondly, if you are looking at a 5%, 7% kind of growth levels, do you see the capital as adequate to support it? If not, are there any plans to increase the capital base, I mean the Tier 1, CET1, basically?

Yes. So let me just cover the growth question first. If you look at group level, yes, it looks flat. But obviously, you need to sort of adjust for 2 factors. One is we had BoB in '18, which is out now. And secondly, the Turkish lira depreciation has taken away some of the -- in hard currency terms, some of the balance sheet out. Having said that, we sort of maintained that at a group level. We continue to sort of plan for a 5% to 6% growth, largely driven from Kuwait. Turkey probably is flattish to a little bit on the hard currency basis. Obviously, it's driven by -- it will be driven a lot by what's the -- where lira goes moving ahead, especially given the sort of move to normalization of the rate regime there. We expect Algeria to sort of continue around 6%, 7%. So that's on the growth side. Now where would we sort of get the capital from. I mean if you look at historically, we've always been around the 11.5% mark, especially by the end of the year. We -- as I said on the last quarter's call as well, we are looking at some optimization solutions and on capital level. And once that sort of lands -- and as and when that lands, that also should give us some capital space. Are we looking at capital increase through rights issue, et cetera? Nothing is on the table at the moment. So that's not on the table. I don't know if I've answered all your questions.

Yes. Just a follow-up on the on the loan growth. So Kuwait as well, like you mentioned 5% to 6% group level growth, you would expect. Turkey, I understand it's pretty much the case for most of the banks with Turkish subsidiaries, the ones in Kuwait, the ones in Turkey or even Qatar -- in UAE or even Qatar for that matter. But Kuwait as well has seen kind of limited growth. We haven't seen large increases partly because the retail sector itself is not growing that much. But do you expect this 5%, 6% level to be achieved? I believe this year will be a little difficult. But next year, do you expect to see -- what kind of growth do you see in Kuwait overall? It was 2.4%, I believe, year-to-date in Kuwait itself, the loan growth.

Yes. So I think we still expect -- the one challenge that we have is obviously at a net loan level, we also are writing off some of the NPLs, right? So as you -- because net of that, the growth rate is slightly depressed, though that's the right picture. So we -- in terms of the growth outlook, we still think retail, there is opportunity. Obviously, it's a smaller base, and the market has sort of stopped growing or slowed down its growth in terms of retail credit. But we continue to outpace the market. But obviously, we are at a smaller base. We expect our retail franchise to sort of -- be close to the double digits in terms of growth in this -- even in this slow market. And we expect that to be one of the key growth engines for Kuwait as we move along. The bank is also sort of embarking on sort of a new strategy with the change in personnel where the focus is on sort of growing corporate. Corporate expected to grow at about 4% to 5%. Obviously, a lot is dependent on the activity, especially on the contracting side. We obviously have our current book, but we expect to drive a lot of the future growth from the future contracting activity. And there is expectation of that sort of continuing. But though it slowed down a bit, but we expect that to sort of pick up again. So these 2 areas are largely the growth driver. We're also in the midst of sort of building up our wealth management proposition, especially in Kuwait. We've got the infrastructure, the people, the licenses are in place now, and we expect that also to start streaming in from next year onwards. So a combination of all these 3, we safely can predict that Kuwait should be 5% or thereabouts.

Right. That's a detailed answer. Just last thing on the [ perp ] that is scheduled for its first call next year. I know it's quite early right now. I just wanted to -- I understand that a final decision may not be there right now, but just wanted to understand what could be the possible options for replacing this capital if you were to decide to go ahead and call it.

Yes. I mean, as I said last time as well, we hopefully will come out with an announcement as and when the decision is taken and sort of the decision gets regulatory blessing. But yes, I mean, we are looking at it. We're not taken a stand either ways as in we are not saying, "Oh, we're not going to call it which just going to roll it over." And we're not even -- it's not a done deal that we will call it back. So this discussion is happening. Unfortunately, I cannot say anything that sort of creates expectations in the market. But in due course, and when I say due course, it's not -- I'm not talking in 3 months' time or 4 months' time. But fairly within 2023, we should make an announcement in terms of what our next step is going to be.

Yes, that's fair. I just wanted to understand what could be if you were to take that step, hypothetically speaking? Or in general, if I were to just talk, what would be the potential options for refinancing that would be there? Would you -- do you see the markets as open enough where you can come out and replace it with a new instrument? Or would you look to just redeem and close it? And do you feel that capital levels would still be healthy enough to continue even if you were not to replace the instrument altogether? What could be some of the local markets? What could be the potential options if you were to take that decision, suppose?

Well, redemption without reissuance is probably not an option for us given that, obviously, we need to meet Tier 1 and I don't think that we have that much excess equity that sort of also will fulfill Tier 1. So we definitely need a Tier 1 capital or AT1 capital in place. Now the question is -- if the markets are open, the current market backdrop and in the current political environment, it's a challenging market. But again, we are looking at potential windows, which are end of Q1 or sometime in Q2. I think we are pretty confident that if we were to take a decision to reissue, we are pretty confident that we will be able to place. Obviously, the question then boils down to the economics of the decision, would it be at the right price, et cetera. But I think that's something will -- that will be driven by the market at that point in time. But as I said, it's -- either ways we've not decided, but clearly, the option of just redeeming and not reissuing is not on the table.

We will take our next question now from [ Brian Nunez ].

Yes. Yes. Okay. So I just -- we're a bondholder. And what I've noticed in the last few months, there's been a number of leadership changes taken place at a very senior level. And I just wanted to understand the impetus for these changes, which have happened in stages and whether it signal the change in strategy? Or what's driving these changes? And do we expect any future changes, say, in the next 6 to 12 months?

I'll ask -- I will answer this, if my colleagues allow me. You see it may be big changes. We don't see it at all as big changes because our group CEO, he is someone in the market. He's known. He was ex MBK. He was head of Corporate in MBK. Then he went to Gulf Bank, and he become a group CEO over there, and he came to us. So he knows us. He knows the market. He is not new. Mr. [ Daher ], our previous CEO, he retired. Actually, it was optional from his side. What happened in terms of our [ treasurer ], yes, there are 2 things. One, because he has some medical issues and -- but [ Abdela Marafi ], who is our -- he has been with the bank for the last maybe 9 years as deputy. So a continuation in terms of giving the second line chance to grow in the organization. For example, CEO Kuwait, [ Mr. Fadhel ]. He has been in this bank for the last 22 years -- 23 years. He was Head of corporate. He was now acting CEO Kuwait. Mr. [ Mohammad Al-Zanki ], he was AGM Corporate. Now he has been promoted as Head of Corporate. He has been with us, I think 10 years if I'm not mistaken. So there are some names change, but they are within the organization. It's not changes. Now coming back to your question, is this because the strategy is definitely. And I think we have appointed a consultant, and they are looking at -- to look at all the practices and -- for the business line. And we're introducing some initiatives to be more competitive in the market.

Okay. Okay. So it's just to -- it's mainly succession with -- from within [ turning ] outside expertise and then your consultant, it's really just to help you become more competitive. No further questions.