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 H1 2020 Earnings Call. Thank you very much for taking the time to attend this conference call. And I'd like to inform you that today's call is being recorded. With that, I'd like to hand over to Mr. Animesh Aseem from Burgan Bank to kick over the call.

Thank you, Ahmed. Good afternoon, everyone, and welcome to Burgan Bank Group's H1 '24 Earnings Call. Thank you very much for taking the time to attend this call. Joining this call from Burgan are Mr. Khalid Al Zouman, Chief Financial Officer; Mr. Sanket Mokashi, Deputy General Manager Finance Group; Mr. Gaurav Handa, Assistant General Manager, Finance Group; and myself, Animesh Aseem, Senior Manager, Strategy and Capital Management. We shall cover the slides over the next 20 minutes or so. And we would come back -- we will welcome your questions at the end when the presentation is covered. With that, let me kickoff today's presentation with key developments this quarter, as highlighted on the Slide #8. Sorry, we can continue.

Yes. Yes, please go ahead. We can hear you now.

All right. Correct. So like I was saying, this was part of the bank's overall funding strategy, which included a new issuance of KD 150 million AT1 bonds in May 2024 and subsequent redemption of this USD AT1 bonds. The second one relates to Burgan's plan to acquire 100% stake in UGB from United Gulf Holdings subsidiary of KIPCO, subject to final regulatory approvals in Kuwait and in Bahrain. Burgan received an initial CBK approval in June 24 to start engaging with regulatory authorities in Bahrain. This transaction, when executed, would help build new revenue streams, create cross-sell opportunities and generate integration synergies for Burgan. Thirdly, Burgan continues its relentless effort to further enhance its digital infrastructure. In this context, the bank has appointed Tata consultancy services to upgrade its core banking system. Also, the bank emerged as one of the earliest Kuwaiti banks to join the GCC real-time payment platform, AFAQ. The fourth point is a testament to Burgan's unwavering commitment to service excellence as it was voted the best domestic bank in Kuwait under the best service category in the 2024 Euromoney Trade Finance Survey. With that, I will hand over to our CFO, Mr. Khalid, to cover the next few slides.

Thank you. Thank you very much. Good afternoon, everyone. Let me start with the first half of '24 performance highlights on Slide #10. And Slide #10, Burgan reported the quite robust financial performance during the first half of 2024, with significant improvement from last year. The group's revenues reached KD 111 million, translating into an impressive growth of 19% year-on-year. Accordingly, group's bottom line also increased significantly by 17% year-on-year. Our reported net income for the first half of 2024 reached KD 21 million. Burgan's strategic focus on growth is apparent with our loan book increasing by 10% year-on-year to reach KD 4.4 billion in the first half of 2024. This growth was predominantly led by our Kuwait franchise, which grew by 8% year-on-year to reach KD 3.6 billion. Our capital levels remained very strong with a CET1 of 13% and a CAR, capital adequacy ratio of 19.3%. These ratios are well above the regulatory requirements with sufficient capital buffers, which [ provide ] ambitious for bank's future growth. Let me move and go over to the financial review and starting from Slide #12 here, which covers the financial indicators for the period in [ granular ] details. First, as already highlighted, the bank's revenue for the first half of 2024, increased by 19% year-on-year to reach KD 111 million. This increase in revenues was primarily driven by higher net interest income of KD 71 million, up 17% year-on-year and robust noninterest income of KD 39 million, which is up 24% year-on-year. The below diagram, higher net interest income was supported by a 20 basis point year-on-year improvement in the net interest margin of the bank, which increased to 2.1% in the first half of 2024 from 1.9% during the first half of 2023. Top diagram in the middle, driven by higher revenues, Burgan boosted solid operating profit of KD 48 million, marking a significant growth of 24% year-on-year. Accordingly, group cost-to-income ratio also improved by 170 basis points from 58.3% in first half of '23 to 56.6% in the first half of 2024. In the bottom and the top right, again, in the right, program net income remained resilient at KD 21 million for the first half of 2024, with an impressive 17% year-on-year growth. And the bottom line, the cost of credit for the group net of recoveries remained very low at mere 30 basis points, such low ratio reiterates inherent strength of our credit portfolio. Now I said that, we move to Slide #13, which reflects the group's asset quality metrics as shown in the screen. And on the top left, the group NPL ratio increased year-on-year. We already discussed this temporary increase in NPL during our last quarter update call. And the same is now reflected in the half year of 2024 numbers as well. However, if you look at sequentially on a quarter-on-quarter basis, you would note that our NPL ratio has improved from 2.6% in Q1 '24 to 2.5% in Q2 '24. We are working on improving our NPL ratios further, and we are very hopeful that this temporary increase will normalize coming -- expect maybe in Q3. That's our own first -- our first forecast. So our NPL coverage ratio stood at 174% and our ECL buffers over the ECL requirements were KD 116 million, which reassures Burgan's strong coverage profile. Provision charge net of recoveries for the [ period ] of KD 6 million, that translates to 30 basis points of our portfolio, which is not significant. With having said that, I will now hand over to my colleague, Mr. Sanket to cover the next few slides.

Thank you, Mr. Khalid. Moving on to Slide #14. The key messages on this slide are as follows: Burgan's asset base increased by 8% year-on-year and stood at KD 7.6 billion at the end of first half 2024. Burgan's loan book grew by 10% year-to-year to KD 4.4 billion, predominantly driven by strong growth, demonstrated by our Kuwait franchise, which saw its loan portfolio grew by 8% year-on-year to reach KD 83.6 billion. The bank continues to be well diversified in terms of its exposure to different sectors and there are no material concentrations. Also, it is noteworthy to highlight that there has not been any major movements in the sector concentration year-on-year. The bank continues to hold healthy levels of liquid assets to its books -- in its books as reflected by its liquid assets to total asset ratio of 24.2%. The staging of loans also remained more or less stable. The slight uptick in Stage 3 portfolio indicates the increase in our NPLs, which was discussed earlier. Moving on to Slide #15. The key highlights on this slide are as follows: the group's deposit base grew by 7% year-on-year and stood at KD 4.6 billion at the end of first half 2024. Our CASA balances remained stable and healthy at 32%. Our key liquidity ratios, NSFR and LCR remained very strong and are well above the regulatory requirements. Moving to Slide 16. This talks about our capital positions Burgan's capital levels are strong and healthy with significant buffer over regulatory minimums. This is expected to support our growth momentum. Our CET1 ratio is at 13% and the total CAR ratio is at 19.3% at the end of first half 2024. Moving on to Slide 17. This slide provides a bird's eye view of the KPIs relating to our key franchises. As evident, which continues to be the largest contributor to the group's asset base. Overall, leading indicators across the group remains stable with most of the metrics trending in the right direction with no major surprises. Asset quality remains healthy with adequate coverage. Cross-selling remains one of the key focus for the group. I will now hand it back to our CFO, Mr. Khalid, to conclude this presentation.

Well, thank you very much. Thanks, and thanks for listening. Now we are moving to Slide #18. And in summary, to conclude this presentation, we'd like to say that Burgan delivered a strong all-around performance with all core metrics of the bank trending in the right direction. Focus remains on growth backed by strong capital levels. Burgan remains committed to continue accelerating its dedicated technology evolution and digital transformation strategy. And with that, I will conclude my -- our presentation, and I'll hand it back over to our colleague, Mr. Ahmed to coordinate the Q&A session.

Thank you. Thank you for the presentation. We will now start the Q&A session. [Operator Instructions] We have our first question from [indiscernible]. Chiro, can you hear us?

Can you hear me?

Yes. Okay.

This is Chiro Ghosh from SICO Bahrain. I have a couple of questions. The first one is related to the asset quality. So the gross cost of risk was quite low this quarter. So just wanted to get a sense of what is the reason? Or is it related to the settlement, which you are in discussions with a few of your accounts, your clients, which you referred in your last conference call, is it related to that? And also if you can give some color on the asset quality of the other regions? That's my first question. Second one, I saw that the deposit rose in first quarter and then again came back in the second quarter. And the CASA appeared to have improved. So can you give some color on the deposit side?

Yes, sure. So we'll start with the asset quality. Although there is an increase in our NPL ratio, which happened in Q1, but these customers were fully collateralized. So we didn't have to take any provisions on these customers. So that's the result that we didn't take. But however, we are quite cautious, and we are adopting our conservative provisioning policies. So whatever recoveries that are happening since last 1 year, we have not been taking those to PR. We are actually building precautionary provisions against those. So despite that, our net COC is 30 bps, which has been quite low since last 1 year or so. That's on the asset quality. The second question on the deposits, yes, we have been managing our deposit base. But as you know, we had a perpetual issuance also. We had KD 150 million perpetual issuance, and we also had a legacy $500 million perpetual as of June. So we were carrying 2 perpetuals. So we did not need so many deposits. So -- and as and when the expensive deposits matured, we did not renew them. But in Q3, we have -- recently in July, we have repaid the legacy $500 million perpetual as well. So there is this temporary movement which keeps happening in deposits. Plus, you will see on the other side, there is an increase in due from OFI -- due to OFIs. So we have -- sometimes you borrow from OFIs and sometimes it is the customer deposits, which fund our growth.

And what will be the impact on the margin because of this going ahead?

So the margins have actually improved. If you would have noticed that. So we have -- one is the loan growth that we have had strong growth in loan volumes plus the high interest rate environment, both in Kuwait as well as Turkey. So these have supported our margins. And our expectation is that we would remain at this 2%, 2.1% level for the year, even if there is a rate cut, which we expect only in September or maybe end of the year.

So it won't have any significant impact.

Not this year. This year, no, we don't expect that this year. But yes, 2025, if there are multiple rate cuts that happen, if the Fed does and CBK follows, then there could be some impact on the margins.

Negative side?

Negative side, yes.

Thank you, Chiro. We will now take some questions from the Q&A box. The first one is, could you explain the drivers of margin expansion? I think you addressed this, but just to make sure if you'd like to expand. Could you explain the drivers of margin expansion during Q2 on a Q-on-Q basis? Is it coming from Turkey CPI linkers or repricing for rate hikes? And what is your outlook for margins in the second half?

I'll reiterate or repeat what my colleague Mr. Gaurav said, is mainly in Kuwait, we have again improved our margins because we get improved in our interest rate increases. In Turkey, there is an improvement in margins compared to last year. Nothing to do with the CPI linkers. It's just the improvement happened in our lending book. How would it's going to be evolved? I think Gaurav just said -- told you that we expect it to remain stable during the -- for the remaining of the year.

All right. Thank you. The next question. The personal loans in the presentation appears to be very different from the retail loans published in the financial report. Can you please clarify the difference? And also, what is your outlook for retail loan growth in Kuwait?

Yes. So the personal loan category is actually a category defined by the Central Bank of Kuwait. So it does not just include the retail loans, but private banking loans are also included there, plus the loans given to holding companies, which have diversified business in various industries also get classified there because they've been classified as investment companies. So this has always been the -- Ahmed, could you hear us? We had answered the previous question.

I think you got cut. Your voice was cut during the latest part of the -- last part of your answer.

Okay. I'll just repeat what I said earlier. This personal loan sector is a definition from Central Bank of Kuwait. So this includes -- in our case, it includes the retail portfolio. It includes the private banking portfolio. And if we are funding to any holding companies, they are closely held -- closely held companies, which invest in various companies under various industries. So these also get classified under personal category. And...

Yes. I think your voice got cut off again.

Okay. We're just getting this recording message again and again, probably there is some technical issue there.

I think you're getting disconnected and then reconnected. That's why you got -- you can hear the message again. Okay. So we'll move on to the next question. What will be the impact on capital ratios from the acquisition of UGB? And what is the rationale of acquiring UGB as the strategy remains to exit noncore assets.

Ahmed, Can you hear us?