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

This meeting is being recorded.

Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to Burgan Bank's Third Quarter 2024 Results Call. I would like to hand over the call now to Mr. Hamad Al Bader, Investor Relations. He will be introducing the speakers for today's call, and he will begin also with the presentation. Hamad, please go ahead. Thank you.

Thank you, Elena. Good afternoon, everyone, and welcome to the Burgan Bank Group 9M '24 Earnings Call. Nice to meet you all again, and thank you very much for taking the time to attend this call. Joining from our end are Mr. Khalid Zouman, our Group Chief Financial Officer; and Mr. Gaurav Handa, AGM in our Finance Group; Mr. Animesh Aseem, Executive Manager within the Finance Group handling strategy and capital management; and myself, managing Investor Relations. We shall cover the slides in the next 20 minutes or so, and we would welcome your questions at the end once the presentation has been covered. With that, I'll kick off starting in Page #8. Let's start with the key developments. Starting with an update on the acquisition of UGB, United Gulf Bank. As mentioned last quarter, we have received an initial CBK approval in June '24, to start engaging with the regulatory authorities in Bahrain. Following the approval, we approached also the Central Bank of Bahrain and received their approval in August '24. The next steps going forward are to finalize the negotiations and obtain the required and final regulatory approvals. And we will keep you updated through our disclosures on material developments along the way. Moving ahead, we wanted to highlight some strategic progress across some key business units in Kuwait. Recently, Burgan signed an MoU with the Korea Finance for Construction, KFINCO, making Burgan the sole representing bank in Kuwait for this institution. And I think this is a reflection of Burgan's continued efforts and to actively contribute to Kuwait's economic growth and development by facilitating foreign investments and business cooperation across all sectors and industries. Also during this quarter, the bank revamped and relaunched its private banking and wealth management offering. The range of offerings were expanded to include comprehensive financial services, family wealth management, investment planning, real estate advisory and cash flow optimization. We also enhanced some of our product offerings in the retail segment this quarter as well. Moving to the digitalization front, we continue the relentless efforts to further enhance the digital infrastructure. Recently launched the WAMD, which is the instant solution within our mobile app. The bank has also launched a central hub for innovation and transformation calling it Burgan Lab. Last but not least, we wanted to update you all on some of the key recognitions received by Burgan this quarter. Burgan has been ranked among The Banker's Top 100 Arab banks in 2024. Crowning the bank's efforts and its commitment to sustainability, a LEED Gold Certification has been awarded for our head office building. The bank has also been awarded the Brandon Hall Gold Award for Excellence in L&D, Learning and Development. And apart from the above recognitions, another crucial achievement was that our Turkish subsidiary, Burgan Bank Turkey, received a 2-notch upgrade from Fitch this quarter. This was driven by an improvement in the bank stand-alone rating and Turkey's country rating upgrade. With that, I will hand over to Mr. Khalid, our Group CFO, to cover the next slide.

Thank you, Hamad. Good afternoon, everyone. Let me start with the 9 months '24 performance highlights on Slide #10. The group reported robust financial performance during the 9 months' period of 2024 with significant improvements year-on-year. The group's revenues reached KD 165 million, translating into a growth of 5% year-on-year. This strong performance was largely driven by a higher net interest income, supported by better net interest margins. Further details would be covered in the following slides. Burgan's bottom line for the period was robust at KD 33 million, increasing significantly by 10% year-on-year. This growth was largely organic and was achieved predominantly due to higher revenues. We continued our growth momentum this quarter as well. Kuwait's asset base increased by an impressive 7% year-on-year and group assets grew by a notable 11% year-on-year growth. Growth in our asset base was predominantly driven by higher loan volumes, which increased by 6% year-on-year, both at the group as well as Kuwait level. In terms of asset quality, there was a considerable improvement this quarter. You might remember we had mentioned this during our last call as well that we were expecting improvement in our asset quality metrics and for this quarter, our NPL, nonperforming loan, ratio at a group level and Kuwait level dropped by 60 basis points and 70 basis points quarter-over-quarter. Also, our cost of credit at group level and Kuwait level remained very low at 20 basis points and 10 basis points for the period. This is extremely positive for the bank as cost of credit is a crucial forward-looking indicator for the asset quality. And lastly, we are glad to report that our regulatory capital levels remain very strong with CET1 of 12.9% and a CAR of 19%. These ratios are well above the regulatory requirements with sufficient capital buffers, which provide impetus for the bank's future growth. Now I'll hand over to our Mr. Gaurav, our colleague, to cover the next few slides. Please go ahead, Gaurav.

Thank you, Mr. Khalid. Good afternoon, everyone. We will now move to Slide #12, the P&L metrics. Bank's revenue has increased by 5% year-on-year, reaching KD 165 million. This increase in revenue was primarily driven by higher net interest income that has reached KD 112 million, supported by expansion in our margins from 1.9% to 2.2%. Our NIM expansion was largely driven by high interest rate environment in Turkey. Our operating profits were more or less stable at KD 69 million and the bottom line net income grew by 10% year-on-year to reach KD 33 million. The cost of credit, as you can see in the bottom-right, was very low at 20 bps for the group. Moving on to Slide #13. As Mr. Khalid mentioned, we saw a considerable improvement in our NPL ratio quarter-on-quarter, which has reached 1.9%, approx 60 bps improvement as compared to Q2. The coverage ratio was also quite healthy at 218%. In addition, we had a decent level of cushions of KD 123 million as compared to the legacy CBK requirements. Our provision charge for the 9-month period as highlighted before was only 20 bps. That translates to KD 7 million for the period. Moving on to Slide #14. Our asset base increased to KD 7.8 billion from KD 7 billion last year translating to a growth of 11% year-on-year. The loan book grew by 6% year-on-year to KD 4.4 billion, predominantly driven by our growth in Kuwait operations. In terms of sector concentration, the bank continues to be well diversified in terms of exposure to different sectors. The IFRS 9 staging profile remains more or less stable and in line with last year. Moving on to Slide #15, liquidity profile. As evident on this slide, Burgan's liquidity position remains extremely solid. Our deposit base remains robust at KD 85 billion with a growth of 14% year-on-year. Our deposit mix remains largely stable. LDR also remains healthy at 78% and below the regulatory requirement of 90%. Both LCR and NSFR remains very strong at 150% and 115%, respectively, which is well above the regulatory requirement of 100%. Moving on to Slide #16. As apparent from the presented chart, our capital levels are extremely healthy with significant buffers over regulatory minimums. This is expected to continue to support our growth momentum. Moving on to the next slide, #17. This slide provides a bird's eye view and our earning diversification for the group through different lines of business. Our Kuwait franchisee continues to be the largest contributor to the group's asset base. Kuwait business remains robust with low cost of credit and strong asset quality metrics. As far as international operations are concerned, all leading indicators remain stable with no major surprises. I will now hand over to Mr. Khalid to conclude the presentation.

Thanks a lot for this explanation. And now we are reaching the Slide #19, which is the summary, obviously. And what I'm trying to say here is that Burgan delivered a strong and consistent performance with all KPIs landing positively. Burgan's healthy capital position to continue to support its prudent and organic and inorganic growth plans. Burgan continues to focus on Kuwait, while remaining cautiously optimistic in its international operations. And with that, I will conclude our presentation, and I will hand over back to Ms. Elena to coordinate the Q&A session. Thanks to you all.

Thank you very much for the presentation. We'll move now to the Q&A. [Operator Instructions] We have a question now from Chiro Ghosh. Chiro, can you hear me?

Yes, I can hear you. Can you hear me?

Yes, we can hear you. Please go ahead.

This is Chiro Ghosh from SICO Bahrain. I have a couple of questions. First is on the asset quality. So asset quality has remained quite robust. But with the interest rate cycle so high in Turkey and also a very high significant part of your loan book in the retail segment, how do you see the asset quality going forward? Would you be able to manage these kind of low asset quality and cost of risk -- would you be able to manage it? That's my first question. And the second one is on the cost-to-income ratio, which is relatively weaker than your peers in Kuwait and in the region. So what is your strategy? And where do you aim to take your cost-to-income ratio over the next year?

I will be -- I didn't hear very well the second question, but I'll leave it for Gaurav here. For your first question, yes, we expect that we maintain it very well. So far, so good. And since our new group CEO joined the bank last year, we have the committee BURG Bank looking at all our clients other than the Provision Committee, which, this is mandatory by Central Bank of Kuwait. We have a BURG Bank Committee, which sits on weekly basis with the business and we established a remedial unit in the bank, which looks at all the watch list, the pre-watch list, even provision accounts and try to resolve. And if you see -- previously, you see some recoveries and whenever we have recoveries, we used to build some provisions too, in case have any NPLs coming that will be reactive, so we don't affect our nonperforming loan ratio. So that's the practice has been started last year, and we are continuing throughout '24. And we are -- so far, we are optimistic that things will continue the same level.

Yes. I just want to add on your specific question with respect to Turkey. Yes, although we have seen the interest rates environment is quite high and has reached 50%, but you would also know that the inflation is quite high there. Last year, it was 70%. So even if you're -- if a client is borrowing at 50% or 55% or 60%, you're still borrowing at below the inflation levels and you're benefiting from that. And we have not seen any defaults coming in for the last 2 to 3 years. Our NPL ratio has been below 1% in Turkey. And for the NPLs that we had previously, we used to have collaterals in the form of real estate and other forms. The value of those collaterals have significantly appreciated with the inflation of 70% and we have been actually reversing those provisions or keeping those as buffers or cushions for future requirements. So we have maintained quite robust provisions there.

So this kind of cost of risk is sustainable?

Usually, we plan for a higher cost of risk. But since last 2 years, we have been in this 20 to 30 bps range. When we do our planning at the group level, we anticipate around 40 to 45 bps of cost of credit for the group.

And the cost-to-income ratio is my next question.

Yes. So again, it's also linked to the inflation in Turkey. With the 70% inflation that we have seen in the last year 2023, there is an increase in expenses across all the banking sector and for the staff, for your digital contracts, your IT sector. So we have seen that 70% increase in cost. And also, we have been investing in our digital front. We have a brand called ON, which we have established. Since last year, we have gained around 1 million digital customers under this brand. So there has been a lot of investment that has gone into this. The rewards of this would be generated in the future. Currently, our cost to income is around 58%. In short term, at least for next 1 year, we expect it to be in the high 50s level. But on a medium to longer range, definitely our target would be to reach at 50% levels.

We have a question now from Konstantin.

Could you please confirm if you can hear me?

Yes, we do.

Yes, we can.

I'm Konstantin. I'm from JPMorgan Research. I had three questions that I wanted to ask. The first one is on the cost of credit, cost of risk outlook for the bank. So you mentioned that in the budget planning you're looking for focus of credit in the range of like 40, 45 bps. So first quick one, is it before the recoveries? Is it after recoveries? And if you could maybe highlight, specifically for the fourth quarter of this year and for the full of 2025, where should we expect the cost of risk to be for the bank at the group level? Then related to that, what I was also wondering, so the bank recognized quite decent recoveries in the past about a year or so from my understanding. And my sense, that drove particularly low cost of credit in Kuwait specifically. It was next to 0 pretty much for the past year or so. So could you please maybe share some thoughts on what drove those recoveries, which sectors, which borrower types resulted into those recoveries? And what's the outlook? Should we expect these recoveries to continue or not? And two quick factual questions in addition. So first, you've got a Tier 2 bond, which is in dollars, which is callable in 2026. Is there some guidance? Should we expect a call of that bond? And second, United Gulf Bank acquisition, what impact should we expect on the CET1?

Okay. I'll answer some of your questions, and maybe Gaurav can help me if I miss something there. I think in my earlier answer, I said also that we expect that this will continue at the same level of our cost of credit. So that's why we -- at least in the medium -- at least in the near future, we don't expect any -- something -- any surprises because we have all these accounts has been reviewed, and we are talking to our customers before they get deteriorated. So let's hope to continue the same thing. In terms of the recoveries, yes, it's seasonal. Some of them, that's sometimes after negotiated with the customer, sometimes with the legal action. But we expect that yes, maybe in the beginning of the year, we didn't have too much to cover previously. But as I said earlier, this committee is on a weekly basis what we meet. And we expect something to happen in Q4. There are some recoveries there in Q4, but as our strategy since last year that any recoveries will use these recoveries to allocate them to certain customers. So we don't have any disturbance. That's our decision or that's the way we manage it. So we don't have like jumps in our nonperforming loan ratios. You asked about UGB. I think we disclosed in the market that we had no objection from Central Bank of Bahrain. We have submitted our study to Central Bank of Kuwait. It's under the study with CBK. We have done all the required regulatory requirements with regards to CBK, CBA, the competition, our competition the public authority. So we are in the process. I hope we -- I don't see it concluded now this year, but maybe in Q1, if thing goes well. I can't speak on behalf of our regulator.

Understood. Yes. And have you disclosed anything on the impact on CET1 or CAR from this UGB acquisition? And second quick question about the perpetual call -- not perpetual, sorry, the Tier 2 bond, which is coming to a call in 2026, should we expect a call?

Okay. I'll answer about the UGB impact. If I understand your question correctly, I can't disclose it, but I can tell you that the buffers we have today in CET1 will give us a good cushion and it will not have a big impact on us.

And just to add on the Tier 2 impact, I think it's still too early. It's somewhere -- we complete somewhere in mid-2026, so we haven't decided on that. There's not been any but as and when there is some decision, we will make appropriate disclosures. But I think at this level, it's too early to comment on the Tier 2 bond of maturing in 2026.

We'll take a question now from Fatima.

This is Fatima Mansoor from SICO Bank. I have two questions. My first question is regarding Burgan Turkey. I can see that it contributes around 12% to the assets of the group. I tried calculating the contribution to the operating profit in the first half of 2024. And from my calculations, it's around 20%, Burgan Turkey contributes around 20% in the growth -- operating growth. But can you confirm if it's not in line with the actual numbers? And my second question is, why your-loan-to-deposit ratio reducing?