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 Q1 2024 Earnings Call. I would like to hand over the call now to Mr. Hamed Al Bader, Manager of Investor Relations. Hamad, please go ahead.

Elena, thank you very much. Good afternoon, everyone, and welcome to the Burgan Bank Group Q1 '24 Earnings Call. Thank you very much for taking the time to attend the call. Joining from our side is Mr. Khalid Al Zouman, Chief Financial Officer; Mr. Gaurav Handa, the Assistant General Manager within the Finance Group; and Mr. [indiscernible], Senior Manager within the Finance group and myself. We should cover the slides over the next 20 minutes or so, and we'd welcome the questions at the end once the presentation has recovered. With that, I'll kick off the presentation starting on Page #8, with the key highlights. During the quarter, we witnessed the decent growth in our loan book, which has been led by Kuwait. Kuwait's loan book has reached KD 3.5 billion, increasing by 6% year-on-year, while the group's loan book increased by 3% year-on-year to reach KD 4.3 billion. I think our P&L, our key P&L operating metrics for the quarter have been robust. Our revenues increased by 7% year-on-year to reach KD 54 million, and our bottom line grew by 34% to reach KD 10 million. The Group's capital levels remain very strong. Our CET1 ratio was at 13.2%. Our CAR stood at 19.5%, both well above the regulatory requirements and with substantial buffers. The Group continued to remain very liquid, both NSFR and LCR, trailing well above the minimum regulatory requirements. With that, I will hand over to Mr. Khalid Al Zouman to cover the financial review.

Thank you, Hamad. Good afternoon, everyone. Moving on to Slide #10. Covering the financial review for the quarter, Q1 2024 revenues increased by 7% year-on-year to KD 54 million, driven by strong noninterest income of KD 20 million, which increased by 27% year-on-year, and stable net interest income of KD 34 million. Net interest margin for the Group was more or less stable at 2%. And due to higher revenues and a stable cost base, the Group's operating profit for the quarter is KD 24 million, which is up by 14% year-on-year. The Group's cost-to-income ratio improved to 55.6% in Q1 2024 as compared to 58.1% reported in Q1 of 2023 last year. The cost of credit for the Group, net of recoveries remained low at 30 basis points as cost of credit is considered as crucial forward-looking growth indicator, such low ratio, we are creating inherent strength of our portfolio. Accordingly, Burgan's net income in Q1 '24 increased by 34% year-on-year to KD 10 million. By saying that, we will move to Slide #11 and -- which reflects the Group's healthy asset quality metrics. The Group's nonperforming loans were slightly higher year-on-year. This increase driven mainly from Kuwait and a little bit from Algeria. However, the bank is already working with a few of these customers, particularly in Kuwait for resolution. And we think this temporary increase would be normalized over the next few quarters. Despite the increase, the group NPL ratio still remains very healthy at 2.6%. Our NPL coverage ratio continued to be very strong at 170% and our ECL buffers of our ECL requirements are in excess of KD 100 million. Provident charge net of recoveries for the quarter was just quoted KD 3 million. And having said that, we'll move for the next quarter -- the next slide and Slide #12, then the key messages on this slide are as follows. Group assets grew to around KD 7.8 billion in Q1 '24, with Kuwait driving the growth. Kuwait grew by 7% year-on-year to reach to KD 6.3 billion. The bank continues to hold a healthy level of liquid assets and its books are reflected in the bottom chart. Liquid assets ratio reached 27.3% in Q1 '24. The Group's loan book was robust at KD 4.3 billion plus, primarily driven by its Kuwait book, which increased by 6% year-on-year. Low sector concentration continues to be well diversified. Also importantly, there was no major movement in the sector concentration year-on-year. The staging of loan also remained more or less stable, of course, the Stage 3 uptick in the case -- the slight increase in our NPL, which we discussed earlier. And now I would like to hand over to Mr. Gaurav Handa, my colleague, to cover the next few slides.

Thank you, Mr. Khalid. Good afternoon, everyone. We'll move on to Slide #13. I want to highlight the key messages on the liquidity profile. The Group's deposit base expanded by 23% year-on-year and stood at KD 5.1 billion at the end of Q1 '24. Our CASA percentage was lower year-on-year, but mainly due to increase in the customer time deposit base. The key liquidity ratios, both NSFR and LCR were well within the regulatory requirements. Moving on to the next slide, #14. Our capital levels continue to be strong and healthy with considerable buffers. This is expected to strengthen and support our growth momentum, particularly in our core market Kuwait operations. Our CET1 was at 13.2% and CAR at 19.5% at the end of Q1 '24. Moving on to the next slide, #15, is an update on our recent AT1 issuance. The bank has just concluded the first ever KD denominated perpetual bond issuance in the local market with an issue size of KD 150 million. The issuance has been very successful, which demonstrate in investor confidence in Burgan's credit. This issuance entitles fixed and floating tranches equally split 50%, 50%. The floating tranche is expected to reduce our overall cost when the expected rate cuts are executed. Moving on to the next Slide #16. This slide basically provides a bird's eye view highlighting performance of our key subsidiaries. Kuwait continues to be the largest asset contributor, and there has not been any material change in the asset mix year-on-year. The numbers are highlighted with variance as compared to last year. As apparent, our franchises are stable with most of the metrics trending in the right direction with no major surprises. I'll now hand over to Mr. Khalid to conclude this presentation.

Thank you, Gaurav. Thank you very much. And so that's the summary slide. As usual, we conclude our presentation. And here, we'd like to say that stable financial performance underscores Burgan's resilient business model, the Group's high capital levels enables it to deliver consistent growth. Kuwait will continue to remain the key growth driver for the group. With that, I will conclude our presentation, and I will hand it back to Ms. Elena to coordinate the Q&A session.

Thank you very much for the presentation. [Operator Instructions] We have a question from Rakesh Tripathi.

A few questions from my side. First one, if you can talk a little bit more -- give us a bit more granularity on the NPL increase in the first quarter in Kuwait. Was this in the corporate segment or the retail segment, 1 or 2 large accounts or there were more? Was it concentrated to any particular sector? Is that linked -- are you seeing any signs of stress in any particular area of the economy? That's on the asset quality side. Secondly, if you could talk a little bit about the NIMs as well, the NIMs declined relative to where they were in the last quarter. And in parallel, there was an increase in the -- there was an increase in time deposits. As you mentioned earlier, with CASA ratio declining from 32%, I believe, at the end of last year. From there to 28% now. So is that -- has that driven the higher funding cost and NIM decline? What do you expect for the rest of the year? Thirdly, if you can talk a little bit about your growth expectations for the full year for this quarter, particularly, what I understand is that Kuwait so called growth around 3.7%, 3.8% year-to-date in the first quarter, but it was the international segment where the loan book contracted. Part of it would have been Turkey, but what else can you tell us? What is the kind of sense that you're getting? What is your growth expectation now that your capital levels are quite strong? And last question is, if you could talk a little bit about your progress on the retail strategy. How are we progressing on the loans and deposits?

Okay. I'll touch on the NPL questions, and maybe my colleague, Mr. Gaurav, will talk about NIMs. And then later, we'll conclude about the retail strategy, and there is other question about the growth also on the loan book. So the NPL mainly is not a cash flow issue. I can assure you, these 2 customers, I think if I recall because I sit on the Burg Bank committee, which talks about the restructured account. They don't have a cash flow. These 2 customers are rich. They are able, but they have a little bit not collaborative with the bank. And we took a hard decision to take them to legal. And I can tell you these -- in the coming quarters, if it's not this quarter, there will be a solution for this. It's not a cash flow issue. I know these 2 customers very well. Although I am the finance, I'm not in business. So they have their real estate business. They have their investment activities business even outside Kuwait. It's just not collaborative so the Management has the decision to take them into legal. But I can assure you, in the coming quarters, this will be normalized.

If I may just check a bit more. I believe we have seen similar kind of NPL formation in the past as well. I believe in 2022, again, first or second quarter, is it?

Okay. Do you remember that customer, which we -- because he was not adhering to certain covenants. Same thing, same thing. So -- but these people, they're not just --they're not taking it seriously. So now the bank has decided to take a decision to take them to [ MBS ] and go with the legal procedure. The moment we go for letter signing, a warning letter to them, we have to [indiscernible] at Legal. If we take a legal procedure. That's our internal policy. So I'm telling you, I can assure you that within coming a couple of quarters, this will be -- might be more or less normalized. The amount is not big. They have assets, it's fully collateralized. Both accounts are fully collateralized. It's just some they've taken it easy. That's the -- that's the only thing I can say about these 2 customers.

Right. And is this also reported under Stage 3? Because in that case, you might be able to move it out of NPL, but not out of Stage 3, I believe, for the next 12 months, the curing period that is required, right?

The moment we do a restructured deal, the moment we can move to Stage 2.

Okay, okay. So, you can move it to Stage 2, but not from Stage 2 to 1 for another 12 months?

No, no. No, we're doing -- okay. But the moment we do restructuring, we move them to Stage 2. And my colleague, Gaurav, will touch up on the NIMs.

Yes, sure. So if you look at our NIMs, past 3 -- year-on-year comparatively, we have always maintained it at 2.1% or 2% levels. So that's our usual NIMs at the group level. Q4 last year, there were one-offs. We hold inflation-linked bonds in Turkey, where the return, the interest income is linked to the inflation in the country, and we had recorded substantial income last year in Q4 from these bonds as the inflation had touched 60%, 65% in 2023. So that -- there was a one-off in Q4 last year. And hence, you see a drop in Q1 as compared to Q4. But if you compare Q1 to Q1, we are at that 2% or 2.1% levels.

And should we expect this level to be maintained kind of over the rest of the year, assuming no cuts?

Yes. So in our planning, we were anticipating that there could be a rate cut somewhere in June. But however, as of now, it doesn't looks likely. Probably it may happen only by end of this year. And we also -- it's also uncertain whether Central Bank would follow that Fed cut because if you look back, Central Bank was not following the Fed increase like-to-like. So it's currently uncertain. So we expect at least this year 2024, we expect the NIMs to be stable at around 2% or 2.1% levels. Moving on to your next questions on the CASA. Yes, although you see a percentage drop, but our CASA balance had remained at the same level because of the increase in time deposit, the ratio has come down. Again, the increase in time deposit is being offset. If you look at our liability section in the balance sheet, there is a drop in other balances where we are borrowing lower amounts from banks and OFIs, and we have also reduced our other borrowed funds. And these have been compensated by increase in customer time deposits.

If I may ask, can you give us some clarity on a comparison of the funding cost when it comes to, say, borrowing in the interbank market, from banks or other financial institutions vis-a-vis the cost of these time deposits, which one is essentially cheaper for banks?

See, it keeps fluctuating. Actually, it's difficult to say which is cheaper. But as we stand today, when you borrow interbank, we were borrowing dollars, which is more expensive than borrowing KDs currently. So we are able to borrow from customers at local KD deposits, which is cheaper than borrowing a local -- foreign dollar deposits. So our treasury actively keeps on managing the funding profile based on the interest rates in the market and of course, the liquidity situation in the market as well.

That's fair. On the growth side?

Yes. So loan growth, we have seen a good decent growth in Q1. Kuwait operations has grown by 4% in Q1. And in our planning, we were expecting a mid-single-digit around 5% to 6%. At the group level, we would still see a growth of 5% to 6%, but we anticipate it would grow higher. Both corporate and retail growth is going to be higher than the market average this year in 2024.

Do you like -- are you confident about that guidance given where we are right now? I believe the international book is weighing down a little bit on the overall group growth numbers, right? The impact that you would be seeing from some of the international operations?

Yes. So when I'm talking about the growth, it's net of the currency devaluation because as of now, we don't know how the Turkish lira would move by end of the year. But if there is a higher devaluation, yes, it will be difficult to achieve that growth targets. But in terms of real growth, we are expecting that 5% at the group level. And on the last question of -- on your -- on the retail strategy, as we have highlighted to you in the past, we continue growing our retail book, both on the asset and liability side. The unit is working on introducing new products. There are a lot of cross-sell initiatives. We are selling more credit cards. The loan growth is higher than the market. We are also increasing the salary accounts. So the strategy is in line with the expectations that were built during the beginning of the year, and we expect to continue that strategy going forward.

Just a follow-up on this one. On the retail portion. There's a lot of Kuwaiti banks from whom we've heard commentary. And I know Burgan has talked about this strategy for a long time now. This is not something new that we are hearing from Burgan, but we started hearing this commentary from a lot of Kuwaiti banks, even the smaller-sized banks, banks that are significantly smaller than Burgan, where everybody is talking about looking to capture the retail market, looking to capture the youth, trying to capture college students as they get into their careers. We've got one of the incumbents, the largest one, which already has a significant retail market share, including share of youth. You are trying to grow in this segment. There's other smaller banks that are trying to grow, and we are hearing reports of increasing market share. So how is this working out? What kind of competition do you see? Is the market itself growing? Is there room for a lot of players? Or do you expect a significant rise in the competitive intensity there that could impact the performance or, say, the return numbers?

There is no doubt that all the banks -- the other banks are doing the same thing. Now we're not doubting. They are also -- they have their own strategy, but it's all about also attractive marketing tactics action moving from our digital channels to our sales force to getting better customer service, trying to reach out. Remember, Burgan has a very limited branch network. Now we are trying to increase it. We're not going to double our branches, network, no, but we're trying to increase our network. There is a new residential areas in Kuwait, which we would like to be exist. So all of that, we expect that we'll get -- we will have get our market share. We are monitoring this. It's not something also we talk and we don't know we do it. We do market share analysis on a monthly basis. When we sit and review with the Group CEO about the retail performance, we have the CBK sign data, CBK data. We see where we're going. So I understand it's yes, that's true. There are banks. But I think also -- what's your -- how are your tactics, what you're trying to achieve? Or how you want to do it? I hope I give you the right explanation.

Yes, yes, very detailed indeed. I just have one more question, more on the macro side. But if it's too many from one person, I could go to the back of the line and come back.

Yes, I think -- Rakesh, I think we can do that. We'll allow other participants to ask and then you can ask later on. Yes. Next question is from Konstantin Rozantsev.

Thanks for the presentation, very detailed -- and I had 3 brief questions that I wanted to ask. The first one, so you mentioned that the bank has raised perpetual bonds in Kuwaiti dinars recently. I just wanted to check, do you make any disclosure what do you provide commentary on the fact who would the investors into these perpetual bonds, who would these bonds placed with? You mentioned in the local market, but any additional color, I would appreciate. The second question, what is the bank's target buffer for the operation for the CET1 above the minimum? And the last one, also just a quick check. You mentioned in past that there was a plan to reduce the size of related party lending. Could you please update us on your thoughts in this area as of now?

Thank you for the questions. I will take maybe 2 points and other point, I'll leave it for my colleagues to answer. For AT1, unfortunately, I cannot disclose the name of the investors, but I can tell you it's a KD local issue. That's that I can't say, okay? So the KD local issue. The second is about related party, yes, that's something we are working on it, and it takes time, definitely. But let's step back and think about even at our owner's level, you'll see that they are restructuring their investment. They are selling in. They are merging some companies, which has an impact on also their exposure with us. So give us some time, you will see some reduction because there is a plan. There is underneath even the supervision of our Board of Directors, and you will see coming the reduction in related party transaction. And I think you talk about CET buffers. I'll ask my colleagues to answer you.

So in terms of CET1, as we mentioned earlier, we are at 13.2% with a very decent amount of buffers as compared to minimum, which is 10.5%. The planned growth during the year is going to reduce the ratio a little bit, but then we are not going to be anywhere close to the minimum. So the target is to be at around 12% to 12.5% level. So we will maintain those ratios above 12% with the planned growth for this year and even 2025.

Okay. So on a sustainable basis going forward, you see this 12% to 12.5% as indicative rate. That's the CET ratio for you.

That's right.

And just about -- so one previous question. So you said that the fact that the holding is restructuring, some of its investments and businesses, it has -- it affects to an extent, the process of reducing related party exposures. Did I get you correct on that? And does this mean that subject to this restructuring at the holding level, we can see a steep kind of reduction in exposure. So I cannot make such?

Yes, yes. I would like to reconfirm, yes, yes. If I understand correctly, I said what happens in our -- the owner's level by downsizing their investment and merging some companies, it might have [indiscernible]. I agree. Yes. That's -- I think that's what I said.

Okay. We'll take a few questions now that were sent to the Q&A chat. One of them is about the AT1. Was there a request from the Central Bank to issue your new AT1 in Kuwaiti dinar? All issuances of AT1 capital by Kuwait banks have been in USD.

No, there was no request from Central Bank. It was the internal -- it was the bank's treasury decision that we can go locally in KD market, and we will be able to subscribe -- we'll be able to have investors who would be interested in the KD market. And this was the first perpetual that was issued locally in KD [indiscernible]. But there's no requirement or request from Central Bank to do that.

Okay. Another question on AT1. When are you planning to redeem the AT1 bonds issued in 2019?

Yes, so I can answer that. We have already the Central Bank of Kuwait's. [Technical Difficulty] So we have received the Central Bank of Kuwait's approval, and it has been disclosed. However, we still can't comment on our intention. That decision has still been contemplated, and it will be disclosed as the final decision is taken and the bond holders are notified. So once that happens, we will make the required disclosures.