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 2025 Earnings Call. I would like to hand over the call now to Mr. Hamad Al Bader, Manager, Investor Relations. Mr. Hamad, please go ahead.

Thank you, Elena. Good afternoon, everyone, and welcome to the Burgan Bank Group Q1 '25 Earnings Call. Thank you for taking the time to attend. Joining from our side are Mr. Gaurav Handa, AGM within our Finance Group; Mr. Animesh Aseem, Executive Manager from the Strategy and Capital Management side; and myself. We shall cover the slides over the next 20 minutes or so and would welcome, as usual, all the questions at the end once the presentation has been covered. With that, we can turn directly to Slide #8. This slide provides an overview of the key highlights and some strategic developments for the quarter. To begin with, Burgan has delivered a strong financial performance. Our revenues reached KWD 58 million, representing an 8% increase year-on-year, while our bottom line rose to around KWD 11 million, reflecting a 5% growth over the same period. This performance was primarily driven by solid net interest income, supported by a 50 basis point expansion in our net interest margins, along with a continued low cost of credit. I think turning to the balance sheet now. The bank maintained its positive business momentum, assets growing by 11% year-on-year. At the same time, asset quality remains sound with NPL ratio held at a low level of 1.8%. In terms of capital and liquidity, the bank continues to demonstrate strength, maintaining substantial buffers that are well above the regulatory requirements. This positions Burgan well to support future growth and navigate evolving market conditions. Now, moving down to the business updates for the quarter. I think, firstly, we should mention that the acquisition of UGB was successfully completed during the quarter and resulting in an immediate capital impact of around 60 basis points. It's also important to note that while UGB's balance sheet has been consolidated in our Q1 '25 results, its profit and loss statement will be included starting from the second quarter of the year. Our focus now mainly shifts to implementing the strategic operating model for UGB, I think with a clear emphasis on driving onshore revenues, better serving the Bahraini client base, enhancing value for our existing customers through a wider range of products and services. Next, I think a key milestone this quarter was the launch of our $500 million CD program. This initiative is an important step in diversifying our funding base, strengthening liquidity resilience and ensuring continued alignment with Basel III liquidity requirements. In addition, worth mentioning that we were recognized with the 2024 Visa Award for the Best-in-Class Premium Active Cards Growth in Kuwait. And I think this reflects the continued commitment from Burgan through the innovation and customer engagement within the retail banking space, mainly in Kuwait. I think lastly, on the sustainability front, we have published our full year 2024 sustainability report, becoming the first bank in Kuwait to release this year's edition. I think it's also important to say that it highlights our key achievements in the ESG areas, demonstrating how sustainability is integrated into our strategy, operations and stakeholder engagement. The full report is available on our website under the Sustainability section. Please, if you have the chance to review it at your convenience, that would be great. Now I'll hand over to Gaurav who will take us through the key financial highlights of the group. Gaurav?

Thank you, Hamad, and good afternoon, everyone. We move on to Slide #10 for a closer look at the P&L metrics. The group's revenue reached KWD 58 million with an increase of 8% year-on-year. This growth was driven by a robust increase in our net interest income. Our NIMs improved by 50 basis points year-on-year, rising from 2% to 2.5%. This increase was mainly supported by increase in volumes and higher margins in Turkey. The cost-to-income ratio marginally increased to 57%, resulting in 3% increase in operating profits. The net income grew by 5%, reaching KWD 10.7 million for the quarter. Just to highlight, there was no impact of UGB consolidation on the income statement. Only the balance sheet was consolidated at the end of Q1. We will start seeing the impact on the income statement starting from Q2. Moving on to Slide #11 that provides an overview of group's asset quality. Our NPL exposure decreased from KWD 126 million in Q1 '24 to KWD 95 million in Q1 2025. As a result, the group's NPL ratio improved to 1.8%, making an 80 basis point improvement compared to Q1 last year. We also maintained a strong provision coverage of 170%, along with healthy ECL buffers of KWD 66 million above the required levels. Let's move on to Slide #10 -- 12, highlighting the key balance sheet indicators. We maintained our growth momentum this quarter with our asset book expanding by approximately 11% year-on-year, reaching around KWD 8.6 billion. This growth was primarily driven by operations in Kuwait, where our asset base increased by 7% year-on-year, reaching approximately KWD 6.8 billion. Just to note, and as highlighted earlier, our Q1 asset base includes UGB asset contribution of about around KWD 240 million, which represents around 3% of our total asset book. The bank also continued to hold healthy level of liquid assets, which is reflected in the bottom right chart on the slide. Our loan book grew by 8% year-on-year, reaching KWD 4.7 billion with the Kuwait franchisee loan book growing by 6% year-on-year, totaling approximately KWD 3.7 billion. Lastly, the staging of loans improved significantly year-on-year with the increase in Stage 1 exposure and decline in both Stage 2 and Stage 3 exposure. This reinforces our proactive risk management approach and the overall strength of our credit profile. I will now hand it over to Animesh to take us through the next slides.

Thank you, Gaurav, and good afternoon, everyone. Let's now turn to Slide 13, which provides an overview of the group's deposit and liquidity metrics. Burgan's liquidity position remains exceptionally strong. Our deposit base has remained robust, standing at KWD 5.4 billion, reflecting a 7% increase year-on-year. Specifically, deposits volume in our Kuwaiti operations grew by 5% year-over-year, reaching KWD 4.1 billion. The deposit mix remains stable with CASA levels around 27%. Burgan maintained an optimal regulatory loan-to-deposit ratio of 80%, well below the regulatory maximum of 90%. Key Basel III liquidity ratios, including both LCR and NSFR continue to remain strong at 181% and 113%, respectively, compared to the regulatory minimums of 100%. Let's now move to Slide 14, where we will review the details of our regulatory capital position. Our CET1 and CAR ratio for the quarter stood at 11.7% and 17.5%, respectively. This indicates comfortable buffer of 120 basis points and 350 basis points over the required regulatory minimums of 10.5% for CET1 and 14% for CAR. The capital levels are optimal, providing us with ample room to sustain our growth momentum and deliver enhanced returns to our shareholders. It is also important to note that the impact of UGB acquisition has now been fully reflected in our Q1 '25 capital ratios. Let's now move to Slide 15, which provides a breakdown of performance by entity. Our Kuwait operations remains the cornerstone of Burgan Bank Group's continuing to represent the largest contribution to the asset base. The Kuwait business delivered a strong performance in Q1 '25 with solid net interest margins, improved cross-sell ratios and a notable reduction in both cost of credit and NPL ratio. On the international front, BBT posted significant improvement in net interest margins from 3.8% in Q1 '24 to 7.2% in Q1 '25, driven by high interest rate environment and ongoing asset growth. BBT also maintained a low cost of credit and stable asset quality metrics. As for our Algerian and Tunisian operations, performance remains stable with key indicators broadly in line with expectations and no material surprises. With this, I will now hand it back to Hamad to conclude this presentation.

Thank you, Animesh, very much. Let's move to Slide #17 for a quick summary on the Q1 performance. Again, we have started the year on a strong note, consistent improvements across key metrics and business franchises. And I think that is reaffirming to the resilience of our operating model. Our asset quality remains healthy, supported by minimal credit costs. And finally, we continue to deliver solid asset growth and are well positioned to sustain this momentum backed by our strong capital base. With that, I will conclude our presentation for today and hand it over to Elena to facilitate the Q&A session. Thank you.

[Operator Instructions] We have a question from Chiro Ghosh.

This is Chiro Ghosh from SICO Bahrain. I have 3 questions. The first one is related to the noninterest income. So if you can give some clarity on what you believe is a sustainable noninterest income because it dipped a little bit in this quarter, so -- and some color on why it dipped, especially on the other operating income part of it and the FX part of it? That would be my first question. Second one is, we are seeing an overall improvement in asset quality across basically. So coverage has also improved. So what would be an ideal cost of risk to look forward to? I know Algeria business has not done that great, but all others have shown fairly good improvement. So what would be an ideal cost of risk we can look forward for the rest of the year? And third is a slightly longer-term question. The cost-to-income ratio, where do -- when do you expect it to reach or breach the 50% mark? When will it go below that, so -- because that is eating away out of the profitability? So these are my 3 questions.

Yes, sure. So I think we'll start in the same sequence, starting with the noninterest income. Now the main fluctuation or the movement that you had seen in the noninterest income is coming in under other income. So the other incomes are usually the one-offs income that you record here that are classified as other income. Sometimes you have recoveries in terms of -- from sale of debt asset swap or there could be some exceptional income, which cannot be recorded as a banking income. That is what you classify as other. So this fluctuates every year. So there is no specific guidance that we can give what would be the quantum of other income for the year. So last year, we had a better Q1. This year, there was a drop. We had lower recoveries, especially in Turkey. But I -- it wouldn't be prudent to give a guidance on what this number be for the full year 2025.

And what's the FX income?

Sorry, come again?

The FX income?

The FX income, yes, usually, we make a decent amount of FX income in Kuwait operations, which we continue to do. In Turkey, we had some losses in Q1 from some derivative positions that the bank was holding, which may not continue for rest of the year, but there was some one-off loss. Hence the overall FX income was more or less flattish for the group. Coming on to the second question on the asset quality. Usually when we do our planning, 40 basis point to 50 basis point is the cost of credit that we estimate. Again, there are sometimes one-offs, which results in increase in this ratios. But on a normalized level, BIU level, 40 basis point to 50 basis point is the guidance that we have for 2025. And this 50 basis point what we report is including the general provision and the specific provision net of recoveries. On the cost-to-income ratio, yes, as we have also mentioned previously, we do have a target to reach 50%. However, that's the medium-term target. I think we would still need a year or 2 to reach at those levels. Currently, we are at around 57%. And the main reason for that is the inflation effect in Turkey, which is quite significant as compared to the overall operating expenses growth.

Okay.

One thing to add to what Gaurav has said is I think when it comes to derivatives, it's a forward-looking derivative. So it's the U.S. dollars against the lira. So it's mainly [ plain vanilla ] derivatives.

So this is related to other income. This is in reference to the other income?

No, I think Hamad is commenting on the FX income.

We will take a question now from [ Solena Gloagin. ]

I've got 3 questions. First, if you could confirm which minimum buffer you like to maintain towards your minimum required capital levels? The second question is that on the Tier 2 call next year, could you provide a bit more color whether or not you will call that Tier 2 and how you actually intend to refinance it going forward? And the final question is on the mortgage law in Kuwait, if there is any update there?

Thank you for your questions. So let me answer them sequentially. Regarding the minimum buffers, currently, we are sitting at a comfortable buffer of about 120 basis points if we talk about the CET1 levels. Historically, the bank has operated with a buffer of about 50 basis points to 100 basis points. And that is something that we have been comfortable with in the past because that helps us enhance the return on equity ultimately. So these are the historical trends that we have maintained over the past few years. Given our current growth, we expect to be around the same levels of the capital. And I think we should still maintain a good 100 basis points buffer over the required minimum. That would be our internal target. Regarding the Tier 2 call, so that is due next year in Q3. Unfortunately, because of the -- as you would know that because of the regulatory compulsions, we cannot provide any guidance with respect to what would be the bank strategy, whether the call will be made or not. We are not -- we cannot sort of disclose our strategy beforehand. Of course, when the call becomes due, and then we will make the disclosures accordingly. I think your third question on mortgage law.

Yes, I think, to tap in on the mortgage law question, I think as we've reiterated in the past, it's a huge opportunity for the banking sector. I think for Burgan and even our peers have addressed this. In general, the banks benefit from a stable, well-regulated market and are very liquid. Hence, the mortgage law could provide new opportunities for credit growth and also, I mean, complements both the mortgage law and the debt law. If we have both into context of discussion since the debt law has been already issued. But when it comes to the mortgage law, I think the quantum and the quantity of applicants that are there, the expectation that the queue increases by 10% year-on-year when it comes to pending applications. I think the importance of that law comes into light when we discuss that issue. So I think it's unclear when this is going to be passed. But I think if we say from a personal view, it's very imminent and soon, and it provides a huge market that is completely untapped in Kuwait. So I think we'll give more guidance probably in our Q2 call when we understand the overall outcome and the time line for the mortgage law to be passed from the government side.

We'll take the next question from Rakesh Tripathi.

Yes. Can you hear me?