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

Ladies and gentlemen, welcome to the bank earnings year-end 2020 call. My name is Bethany, and I'll be coordinating this call for you today. [Operator Instructions] I will now hand over to your host, Janany Vamadeva to begin. Janany, please go ahead.

Thank you, Bethany. Good afternoon, and good morning, everyone. This is Janany Vamadeva on behalf of Arqaam Capital. I would like to welcome you all to the Gulf Bank Year-End 2020 Earnings Conference Call. It's a great pleasure to have with us on the call. Mr. Tony Daher, CEO of Gulf Bank; Mr. Kevin Smith, CFO of Gulf Bank; and Ms. Dalal Al Dousari, Head of Investor Relations at Gulf Bank. The call will begin with the presentation from management on the key highlights of year-end 2020, and then we'll open the call for the Q&A session. I'll now turn the call over to Dalal. Dalal, over to you.

Thank you, Janany. Good afternoon, and welcome to Gulf Bank's Year-End 2020 Earnings Conference Call. We will start the call today with the key highlights and updates on the operating environment of Gulf Bank during the year 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 charts. 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 in your question anytime 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 11 of the presentation with respect to forward-looking statements and confidential information. Please feel free to reach out to our Investor Relations team if you have any questions. Now I would like to hand over the call to Mr. Tony Daher, Gulf Bank's CEO. Tony, over to you.

Thank you, Dalal. Good afternoon, everyone. Before we cover the detailed financials, I'd like to make a few brief points about 2020. 2020 was truly an unprecedented year as our everybody lives -- sorry, everyday lives were upended by the global pandemic. As a result, the operating environment for most of 2020 was met with historically low interest rates, low economic activity and lots of uncertainty. However, our financial performance and our ability to serve our customers through these tough times, highlighted the strength and resilience of the bank. With that backdrop, I'd like to summarize our 2020 results with 6 key messages shown on Page 2. First, we remained profitable, reporting a net profit of KWD 28.8 million in 2020 compared to a net profit of KWD 63.6 million in 2019. Second, our earnings per share was 10 fils and the Board of Directors is recommending a 5 fils cash dividend. If approved at the AGM in March 2021, this will be the sixth year in a row where we have paid out cash dividends and the fourth year in a row where we have paid out at least 50% of our earnings to shareholders. Third, our portfolio quality remains strong as our nonperforming loan ratio at year-end 2020 stood at 1.1%, no change from the prior year-end ratio. In addition, we provided 100% for all our consumer loans more than 90 days past due and wrote off those loans on accounting perspective. So that segment ended with a 0 NPL ratio to start off the new year. Fourth, we ended 2020 with KWD 112 million in provisions in excess of the IFRS 9 requirements. This is the third straight year since the accounting standard was implemented that we have ended the year in excess of KWD 100 million in excess provisions. These excess provisions represent nearly 40% of our total provisions. Fifth, to support, stress and position ourselves for future growth, we increased our capital buffers by more than 100 basis points compared with the levels at the end of 2019. Even when measured against the pre-COVID regulatory minimums, our Tier 1 ratio has a buffer of 285 basis points, that's 14.85% versus 12%. And our capital adequacy ratio, CAR has a buffer of 425 basis points, that's 18.25% versus 14%. And six, the bank maintained its A ratings from the 4 major credit rating agencies. And here's where we stand today. Moody's Investor Service maintained the long-term deposits rating of A3 with a positive outlook. Fitch Ratings affirmed the bank's long-term issuer default rating of A plus with a negative outlook. S&P Global ratings affirmed the bank issuer credit rating at A minus, with a negative outlook. Capital Intelligence affirmed Gulf Bank's long-term foreign currency rating of A plus with a stable outlook. So even though 2020 was an extremely challenging year, we have put ourselves in a position of strength going into 2021. And that will allow us to continue tackling the headwinds while supporting the growth needs of our customers. With that, I'll turn it over to our CFO, Kevin Smith, who will cover the financials of 2020 in more depth. Kevin, go ahead.

Thanks, Tony. Before I begin Dalal, I just wanted to check the line to make sure that you can hear me clearly.

Yes. Go ahead, Kevin.

Okay. Great. Thanks, Tony, again. Page 3 shows the year-over-year changes in operating margin. Before I go through the slide, please keep in mind that we have excluded the nonrecurring income and expenses that were publicly disclosed in 2019 and 2020. So you can see the true underlying operating margin. These are shown in the footnotes in the lower left. The biggest one is the KWD 19.7 million of interest income from the Fahaheel land settlement that was recorded in the fourth quarter of 2019. In addition, we also had a onetime expense of KWD 2.8 million in 2019, and you can see also onetime expense credits of KWD 4.6 million in 2020. So starting with the blue bar on the far left, we generated KWD 113 million of operating margin in 2019. The blue bar on the far right shows that we generated KWD 90 million of operating margin in 2020, a drop of KWD 23 million or 20%. In terms of the composition of that decline, in the first red bar, you can see our interest income drop by KWD 47 million, mainly from the repricing of corporate loans and other assets due to the low interest rate environment, which began with the CBK decision in March of 2020 to reduce its discount rate by 125 basis points. This immediately repriced roughly 2/3 of the gross consumer loans on our balance sheet. The second red bar shows that fee and foreign exchange income dropped by KWD 8 million, primarily due to the lower loan volume we saw as well as overall lower economic activity. Other income, the third red bar was down by KWD 2 million. Without any mitigation, these 3 items would have cut our operating profit approximately in half over the course of 1 year. However, the favorable liquidity environment and relaxed regulatory ratios helped us lower our interest expense by KWD 27 million. In addition, we reduced our operating expenses by KWD 7 million. So a combination of lower interest expense and lower operating expenses offset roughly 60% of the revenue shock and helped us turn a 50% potential reduction in operating margin into a 20% reduction in operating margin. Moving to Page 4. Page 4 shows the income statement line items for the last 4 quarters and the full year of 2020 compared with the prior full year in 2019. On the previous slide, I discussed operating margin, and that is shown on Line 8. If you include the nonrecurring items, our reported operating margin was down KWD 35 million or 27% and these figures are shown in the last columns to the far right. Since there were essentially no major variances in credit cost provisions and impairments, the KWD 35 million lower operating margin fell through to the bottom line causing our net profit, Line 13 to also decline by KWD 35 million compared to 2019. On the previous page, I described the year-over-year variances in operating margins, so I want to focus the discussion on the quarterly trends that we're seeing and saw for each one of the line items. So let me start with interest income, Line 1, you can see the impact that came from the lower interest rate environment, but the rate of decline slowed in the fourth quarter. Interest expense line too, fell by nearly half from KWD 29 million in the first quarter to KWD 15 million in the fourth quarter. With this favorable cost of funds trend, you can actually see that our net interest income, Line 3, actually increased in the fourth quarter and has been relatively stable over the last 3 quarters. Fee and foreign exchange income shown on Line 4 is up 44% in the fourth quarter compared to the second quarter, when economic activity in Kuwait was at its lowest point in the year. You can see it's gone from KWD 6.3 million in the second quarter up to KWD 9.1 million in the fourth quarter. You can also see on Line 7 that we were able to reduce our operating expenses significantly in the second and third quarter while the fourth quarter pace has picked up in line with economic activity in Kuwait. And credit cost, Line 9, fell by 1/3 from KWD 21 million in the second quarter to KWD 14 million in the fourth quarter. Moving on to Page 5. Page 5 is the balance sheet and shows how the individual line items have moved from the 31st December 2019 to the 31st of December 2020. The page also shows the mix of assets and how that has changed over the last 12 months. So first, just to focus on the total asset number, which is shown on the top half of the slide, line items 1 through 14. Over the course of the last 12 months, our total assets shrank by KWD 133 million or 2% to KWD 6.1 billion, from KWD 6.245 billion, the year before. This was largely driven by KWD 122 million or 3% decline in gross consumer loan -- sorry, gross customer loans, which is shown on Line 6. Even though we continue to see strong growth in retail loans, which grew by 6% or nearly KWD 100 million. This was more than offset by lower loan demand we saw from our Corporate customers. In terms of the broad asset categories, you can see the mix is essentially unchanged from a year ago. The broad asset categories I'm referring to would include liquid assets, which is on Line 5, net loans on Line 9, investment securities on Line 10 and other assets on Line 13. On line items, 15, 16 and 17, you can see that nearly all of our funding comes from -- due to banks, deposits from financial institutions and customer deposits. As a result of growing our customer deposits and attracting more short-term bank funding, we were able to reduce the deposit mix coming from financial institutions, which is on Line 16. Our debt-to-equity ratio remained roughly around 9:1, similar to the prior year. At the bottom, you can see that our nonperforming loan ratio, as Tony mentioned earlier, shown on Line 25, declined from 1.5% at the end of September of 2020 to 1.1% at the end of December 2020. And our coverage ratio, Line 26 improved from 462% at the end of September 2020 to 568% at the end of December 2020. Before I move to the next page, I'd like to draw your attention to the total loan provisions as of the 31st of December 2020, which were KWD 269 million. You can see that on Line 8 roughly in the middle of the page, that minus KWD 269 million would be our total provisions. So on Page 6, with that in mind, you can see that same number of KWD 269 million on the top right, under provisions on cash facilities as of 31st December 2020. On top of that, we have KWD 15 million of provisions on noncash facilities, which are included in other liabilities on our balance sheet. So the total provisions we have on our balance sheet, both assets and liabilities are 200 -- were KWD 284 million at the end of the year. When you compare those total provisions of KWD 284 million, with our IFRS 9 requirements of KWD 172 million, we ended 2020 with KWD 112 million of excess provisions, an increase of KWD 6 million compared with the year ago level of KWD 106 million. So a very healthy balance sheet going into 2021. Page 7 shows that our 2020 year-end regulatory capital ratios, as Tony mentioned earlier, remain well above our current minimums and what we're calling our pre-COVID-19 minimums, the old minimums. On the top left, our Tier 1 ratio reached 14.85%, 535 basis points above our current regulatory minimum of 9.5% and 285 basis points above our old minimum -- regulatory minimum of 12%. On the bottom left, our capital adequacy ratio of 18.25% was 675 basis points above our current regulatory minimum of 11.5% and 425 basis points above our pre-COVID-19 regulatory minimum of 14%. Our risk-weighted assets shown on the top right, fell by nearly 5%, mainly due to the reduction in the gross customer loans, as I mentioned earlier. And that contributed favorably to both capital ratios. On the bottom right, our leverage ratio ended the year in 2020 at 9.9%, higher than the end of December 2019 and well above the 3% minimum. Moving to Page 8. Page 8 shows our key liquidity ratios. On the left side, you can see slight declines in our average daily liquidity coverage ratio and net stable funding ratios, but both are still well above their respective minimums of 80%. It's worth noting that both of these regulatory minimums were reduced from 100% to 80% by the Central Bank of Kuwait in April of 2020. On Page 9, shows that the bank maintained our A ratings from the 4 major credit rating agencies, as Tony mentioned earlier. And with that, I'd like to turn it back over to Dalal for the Q&A session.

[Operator Instructions] Okay. We will go through the questions. First question, there was a small improvement in NIMs in Q4 versus Q3 on cost of funds. Do you find these sustainable into 2021? Kevin, would you like to comment?

Yes, yes. Letty -- sorry, Dalal. I just wanted to make sure that you can hear me as well.

Yes, yes. I can hear you.

Okay. So regarding the question, unfortunately, there are many factors, and it's just too difficult right now to predict how they'll all play out on our 2021 net interest margins. Assuming the Central Bank discount rate stays where it is, which we think it will for at least this year, we will continue to see downward pressure as existing retail loans written at higher rates are replaced with new loans at much lower rates and new loans are priced 125 basis points lower than they were just 9 months ago. As was mentioned in the question, cost of funds went down in Q4 versus Q3, and they've actually gone down a bit more in January '21 -- January 2021, which certainly we were glad to see. But there's a limit to that. And as we're already below 1%, we're already -- there are actually already signs of rising liquidity pressures in the market. If we can continue growing retail loans faster than corporate loans, which we've been very successful at doing over the last 3-plus years, we'll get a favorable mix impact from that. So that could help. I think the best we can hope for is to mitigate these external pressures with things within our control, like the mix between retail and corporate growth and -- as well as optimizing fee income, which was obviously the low point in 2020, and operating expenses associated with the growth mix between corporate and retail.

Okay. Thanks. The next question, what is the amount received in grant from the government towards staff expenses? And your view on operating expenses in 2020 and your expectations for 2021. Kevin?

We were very happy with how we managed expenses in 2020. The actual grant from the government towards staff expenses was the KWD 4.6 million that was booked in staff cost subsidies, and that was shown as a nonrecurring item for 2020. Even if you exclude the nonrecurring expenses in 2019 as well as these subsidies in 2020, our underlying operating expenses fell from KWD 75 million in 2019 to slightly less than KWD 70 million, actually KWD 69 million in 2020, which was a decline of almost 10%. Nearly 90% of that reduction actually came from the staff cost line item. At least in the short term, while interest rates remained low and with so much uncertainty out there, we're going to continue to tightly manage our expenses. It's a really important initiative for us. To the extent we need to invest in certain cost categories to grow our 2 business segments, we'll attempt to offset these investments with productivity gains in the same year, so we can limit this growth in annual operating expenses.

Great. Next question. Could you throw some color on the significant improvement in consumer impaired loans, which was a decline from KWD 1.8 million, from KWD 19.4 million in 2019? And even in the past due, our impaired consumer increase is reasonable, but Corporate has increased 2.4x. Is this related to COVID-19 delays from your corporate book? And if I can add another question, has the Corporate deferral ended completely by the end of December 2020 and there is movement in staging now? Or are you still offering deferral on a case-by-case basis to corporates, loans into 2021 as well, Kevin?

There's a lot there. So let me try to take it one step at a time. Tony mentioned earlier that we decided to fully provide for all consumer impaired loans at the end of 2020 and completely write them off from an accounting perspective. So that is the reason why we saw a significant improvement -- one of the reasons we saw a significant improvement in the consumer impaired loans. Regardless of the delinquency bucket, whereas the provision rules actually only require 20% provision for accounts 91 to 180 days past due and 50% for accounts 181 to 365 days past due, so we wrote them all off. We provided form and wrote them off. So if we receive cash on any of those accounts, they'll be booked straightaway as recoveries in 2021. As was hinted in the question, we were encouraged, in fact, the past due did not impair. Bucket for consumer was up only modestly 14% from KWD 74 million to KWD 85 million, as was pointed out in the question even though the installment deferral actually ended at the end of September 2020. On the Corporate side, yes, the past due not impaired category increased. The numbers I've got approximately KWD 9.5 million at the end of 2019 to KWD 23 million at the end of 2020. That's the 2x number, I think. However, the majority of that increase, fortunately, has already shifted to the neither past due nor impaired category early in 2021. So that's actually not a concern for us right now, and it's good news. To answer the last question about the Corporate deferral program. That program ended at the end of September 2020 without any subsequent deferral program that's been offered to our clients since then. The past due but not impaired disclosure, I just mentioned, I think, give you an early read on the portfolio quality of both our Consumer and Corporate business segments as of the end of December 2020.