Gulf Bank K.S.C.P. (GBK) Earnings Call Transcript & Summary

Good afternoon and good morning, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to the Gulf Bank Q3 2020 Results Conference Call. It is a great pleasure to have with us on the call today Mr. Tony Daher, CEO; Mr. Kevin Smith, CFO; and Ms. Dalal Al Dousari, Head of Investor Relations at Gulf Bank. The call will begin with a presentation from management on the key highlights of Q3 2020, and then we will open the call for the Q&A session. I will now turn the call over to Dalal. Thank you.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's Third Quarter 2020 Financial Results Conference Call. We will start the call today with the key highlights and updates on the operating environments of Gulf Bank during the first 9 months of 2020, presented by the Chief Executive Officer, Mr. Tony Daher, followed by a detailed presentation of our financial results by the Chief Financial Officer, Mr. Kevin Smith. All amounts in the presentation are shown in millions of Kuwaiti Dinars and have been rounded to simplify the chart. During our presentation, we will try not to repeat the currency when discussing specific amounts unless that amount is in a currency other than Kuwaiti Dinars. After the presentation, we will open the floor for Q&A received through the webcast facility. Feel free to type any of your question at any time during the call. The presentation will be available at our corporate website and will be disclosed towards Kuwait. Please note, that we can only comment on inquiries and information that are disclosed publicly. I would like to draw your attention to the disclosure on Page 8 of the presentation with respect to forward-looking statements and confidential information. Please feel free to reach out to our Investor Relations team and if you have any questions. Now I would like to hand over the call to Mr. Tony Daher, Gulf Bank's CEO. Tony?

Thank you, Dalal. Before we cover the detailed financials, I will make a few brief points. The first 9 months of 2020 has been challenging and exceptional with the COVID-19 pandemic, which resulted in low interest rates, slow economic growth and lots of uncertainty. However, Gulf Bank still recorded a net profit of KWD 18 million for the first 9 months of 2020. These results were achieved by the bank's prudent and persistent funding cost and operating expense initiatives. In addition, our Kuwait-focused strategy has enabled Gulf Bank's Consumer Banking segment to continue outperforming the industry. Finally, we continue adapting to the consequences of the COVID-19 pandemic and remain committed to servicing and supporting our clients during these difficult times. During the third quarter of 2020, we reopened all of our branch network while maintaining operations under strict health protocols throughout our offices and branches. Additionally, we continue to serve our customers through our digital channels. We're also progressing on our digital transformation with slight delays due to the COVID-19 pandemic. However, we are expecting to start to see results in 2021. Turning to Page 2. You can see Gulf Bank continues to maintain its A rating from all 4 leading credit rating agencies, and here's where we stand today. Moody's Investors Service maintained its long-term deposit rating of A3 with a stable outlook. Fitch Ratings affirmed its long-term issuer default rating of A+ with a stable outlook. S&P Global Ratings affirmed its issuer credit rating at A- with a negative outlook. Capital Intelligence affirmed its long-term foreign currency rating of A+ with a stable outlook. With that backdrop, I'll turn it over to our CFO, Kevin Smith, who will cover the financials over the first 9 months of 2020. Kevin?

Yes. Thanks, Tony. Tony, can you hear me okay?

Yes, yes. You're on.

Okay. Great. Okay. Page 3 shows the income statement line items for the most recent 3 quarters and the first 9 months compared with the prior year. Starting with net profit on line 13 all the way to the right, you can see our net profit for the first 9 months was KWD 18.4 million, a decline of KWD 18.8 million compared with KWD 37.1 million net profit in 2019. Most of that decline came from interest income, line 1, which is shown in the red box in the second to last column, down KWD 30 million due to the lower interest rate environment; and line 4, fee and FX income, was down KWD 6 million due to lower loan volume and lower economic activity from our customer base. The good news is we've been able to offset nearly 2/3 of that decline with lower cost of funds, shown on line 2, down KWD 13 million and lower operating expenses, shown on line 7, down KWD 11 million. Credit costs, line 9, were up only 2% from KWD 44 million to KWD 45 million. On line 10, over the first 9 months, we contributed KWD 5 million of additional general provisions. The quarterly trend is also favorable for many of the same line items. Interest expense, line 2, has fallen nearly 40% from KWD 29 million in the first quarter to KWD 18 million in the third quarter. Fee and FX income, line 4, is up 19% in the most recent quarter. Operating expenses, line 7, are down 25% from KWD 19 million in the first quarter to KWD 14 million in the third quarter. And credit cost, line 9, fell 21% from KWD 21 million in the second quarter to KWD 17 million in the third quarter. Page 4 shows the balance sheet at the end of September 2020 compared with the end of September 2019. On line 5, as a result of the relaxed liquidity ratios by the Central Bank of Kuwait, you can see that we've been able to shrink the portion of liquid assets held from 28% at the end of September 2019 to 20% at the end of September 2020. This helps mitigate the impact on interest income from a lower interest rate environment. On line 6, net loans grew by KWD 254 million or 6% and at the end of September 2020 compared with the end of September 2019 to reach KWD 4.4 billion. On line 22, our nonperforming loan ratio stands at 1.5%. The ratio had doubled from 1.1% at the end of last year to 2.2% at the end of June, but it came down by nearly 1/3 over the last 3 months. The Consumer business is the major driver as nonperforming loans in that segment had also doubled in the first 6 months of this year, but it declined by more than half over the last 3 months and is now actually below where we were at the end of 2019. Similarly, the coverage ratio on our nonperforming loans, line 23, has -- had increased from 325% at the end of June 2020 to 462% at the end of September. And again, adding KWD 5 million of general provisions in the first 9 months has also helped that ratio. Turning to Page 5. Our regulatory Tier 1 and total capital ratios remained strong and have improved by roughly 100 basis points since paying the dividend in March. If our year-to-date profits of KWD 18 million were included, these ratios would have improved by another 40 basis points. As of 30 September 2020, our Tier 1 ratio of 13.9% was roughly 440 basis points above the regulatory minimum of 9.5%. And our capital adequacy ratio of 17.3% was roughly 580 basis points above the regulatory minimum of 11.5%. It's worth mentioning that our new minimum Tier 1 ratio has been reduced from 12% to 9.5%, and our new minimum capital adequacy ratio has been lowered from 14% to 11.5%. These minimums are effective until 31st of December 2020 and will be reviewed by the Central Bank of Kuwait prior to that date. On the bottom right, our leverage ratio ended at 9.6%, higher than the end of September 2019 and well above the 3% minimum. Page 6, shows our key liquidity ratios. On the left side, you can see our average daily liquidity coverage ratio has declined from 304% as of 30th September 2019 to 265% as of 30 September 2020, but still well above the minimum of 80%. On the right side of the page, our NSFR ratio as of September 30, 2020, was 111%, in line with the prior year and adequate cushion above the 80% minimum. It's worth noting that both the LCR and NSFR regulatory minimums were reduced from 100% to 80% by the Central Bank of Kuwait until the 31st of December. Now I'd like to turn it back over to Dalal for the Q&A session.

Thank you, Kevin. We are ready now for Q&A. If you wish to ask a question, please submit your question and to the designated questions text area. We will pause for few minutes to receive most of your questions. Okay. We'll go through our questions right now. Will the decline in NIM stabilize or it will continue to be under pressure? Kevin?