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

Good afternoon, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to the Gulf Bank's First Quarter 2021 Results Conference Call. It is a great pleasure to have with us on the call today Mr. Tony Daher, CEO; Mr. David Challinor, 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 Q1 2021, and then we will open the floor 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 First Quarter 2021 Earnings Conference Call. We will start the call today with the key highlights and updates on the operating environment of Gulf Bank during the first quarter 2021, presented by the Chief Executive Officer, Mr. Tony Daher; followed by a detailed presentation of our financial results by the Chief Financial Officer, Mr. David Challinor. 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 questions at any time during the call. The presentation will be available at our corporate website and will be disclosed to Boursa 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?

Thank you, Dalal, and good afternoon, everyone. Before we cover the detailed financials, please allow me first to introduce our new CFO, David Challinor, who has joined Gulf Bank this April. David has over 20 years' experience in the financial services industry and has held various leadership and executive positions in the U.K., Australia, Canada and Qatar. He has spent the last 13 years as CFO of Doha Bank in Qatar. Welcome on board, David. Now back to the presentation. I would like to make a few brief points in terms of the operating environment in Kuwait for the first 3 months of 2021. We started the year with a new surge in COVID cases and, unfortunately, daily fatalities. This has led health care officials and government to increase the precautionary measures to control the situation from further deterioration. The partial curfew and further restrictions on businesses were imposed in addition to closure of Kuwait Airport to foreign travelers since February. Despite the continuous challenges that we are still facing as a result of the pandemic, Gulf Bank started the year 2021 positively, with an increase of 39% in our first quarter net profit compared to the same period last year. We managed to grow our business in both the Corporate and Consumer segments. The quality of our portfolio continued to be resilient as our credit cost remains low. I'm happy to share with you that Gulf Bank has launched its upcoming 5-year strategy, which will focus on promoting growth in the Corporate Banking segment by increasing product offerings and focusing on small and medium business enterprises; increasing the bank's market share in the retail banking sector and targeting youth and affluent client segments; developing the bank's digital banking platforms to increase competitiveness in the industry. We are digitally transforming most of the bank's major activities in a way that increases efficiencies, enhances the bank's performance and strengthens corporate controls. We anticipate that our technological advancements will facilitate smoother operations for both our customers and the bank. And we are continuously enhancing our security levels to elevate Gulf Bank's customer protection and increase competitiveness amongst leading banks. Turning on to Page 2. I would like to summarize our first quarter 2021 results with 5 key messages. First, our net profit grew by 39% for the first quarter 2021 to reach KWD 12 million in comparison to KWD 8.6 million reported in the first quarter of 2020. Second, our reported operating income reached KWD 41.5 million for the first quarter 2021, growing by 8% compared to the first quarter of 2020. This growth was driven primarily by a significant decline in cost of funds that exceeded the decline in interest income. Third, our asset quality remained resilient as our nonperforming loan ratio in the first quarter of 2021 stood at 1.5%, no change from the prior year ratio. In addition, we have ample provisions with a coverage ratio of 419%. Fourth, the relaxed capital regulatory minimums that were introduced in 2020 remain in place, allowing the bank to have additional buffers over the minimums. Our Tier 1 ratio has a buffer of 485 basis points, 14.3% versus 9.5%. And our capital adequacy ratio, CAR, has a buffer of 621 basis points, 17.7% versus 11.5%. With these comfortable buffers in place, we have obtained Central Bank of Kuwait's approval to exercise the call option for the redemption of the KWD 100 million subordinated Tier 2 bonds that mature by the end of May and the issuance of a new Tier 2 compliant bond for a maximum of KWD 50 million. We have just obtained the Capital Market Authority's, CMA's, approval for the issuance of these bonds with an objective to support the bank's capital adequacy ratio as per CBK and Basel requirements. Fifth, the bank maintained its A ratings for the -- from the 4 major credit rating agencies, and here's where we stand today. Moody's Investor Service affirmed the long-term deposit rating of A3 with a stable outlook. Fitch Ratings affirm the bank's long-term issuer default rating of A+ with a negative outlook. S&P Global Ratings affirmed the bank's issuer credit rating at A- with a negative outlook. Capital Intelligence affirmed the bank's long-term foreign currency rating at A+ with a stable outlook. We continue to operate in challenging times. However, the bank has built a solid foundation to continue tackling the headwinds while supporting the growth needs of our customers. With that, I will turn it over to our CFO, David Challinor, who will cover the financials for the first quarter of 2021 in more depth. David?

Thanks, Tony, and I'm delighted to have joined Gulf Bank. Turning to Page 3, you can see a more detailed breakdown on a quarterly basis of the income statement line items. On the far right, line 1, interest income was down KWD 12.8 million or 22% and mainly due to repricing of assets and booking new loans at a lower rate after the CBK lowered its discount rate by 125 basis points back in March of 2020. The good news is that the liquidity conditions remain favorable with fixed deposits continuing to reprice at lower rates. And as a result of that, you can see in the green boxes, on line 2, that our interest expense has continued to decline on a quarterly basis starting from the first quarter of 2020. The interest expense declined by KWD 16.5 million or 57% from KWD 29.1 million in the first quarter of 2020 to KWD 12.6 million in the first quarter of 2021. On line 6, operating income grew by 8% to KWD 41.5 million compared to KWD 38.3 million in the first quarter of 2020 as a result of the decline in interest expense, which outpaced the decline in interest income. On line 7, operating expenses have increased by KWD 1.7 million or 9% year-on-year. We continue to invest in our business, and we focus on our digital transformation strategy going forward. On line 9, you can see credit costs have marginally increased from KWD 7.3 million in the first quarter of 2020 to KWD 8.3 million in the first quarter of 2021. As you can see over the past year, we have managed to reduce our credit costs significantly each successive quarter as they declined from a peak of KWD 21 million in Q2 2020 to KWD 16.6 million in Q3 2020 and to KWD 14 million in Q4 2020 and, finally, to the current level of KWD 8.3 million in Q1 2021. Turning to Page 4, we see the balance sheet and how the individual line items have moved from the 31st of March 2020 to the 31st of March '21. This page also shows the mix of assets and how that has changed over the last 12 months. So first, I'd like to focus on assets, which is shown on the top half of the slide, line items 1 to 14. Over the course of the last 12 months, our total assets shrank by KWD 161 million or 3% to KWD 6.3 billion compared to KWD 6.4 billion the year before. This was largely driven by a KWD 77 million or 5% decline in liquid assets, as shown on line 5, and a KWD 57 million or 1% decline in net loans, shown on line 9. However, on a year-to-date basis, net loans grew KWD 103 million or 2%, and total assets grew by KWD 159 million or 3%, reflecting a pickup in overall economic activity. In terms of the major components of total assets, which are bolded, you can see that the mix is essentially unchanged from a year ago. On line items 15, 16 and 17, you can see that nearly all 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 nonperforming loan ratio, shown on line 25, increased from 1.1% at the end of December 2020 to 1.5% at the end of March 2021. And our coverage ratio, line 26, exceeded 400% to reach 419% at the end of March 2021. Now turning to Page 5. You can see in the charts on the left that as at 31 March 2021, our total provisions reached KWD 293 million with our IFRS 9 ECL requirements at KWD 197 million. This allowed us to have KWD 96 million of excess provisions, representing 33% of the total provisions. In the table on the right, the total provisions as at 31 March 2021 of KWD 293 million is broken up into 2 sections: provisions on cash facilities, which reached KWD 276 million and KWD 17 million in provisions on noncash facilities, which are included in other liabilities on our balance sheet. Turning to Page 6. Starting from the first quarter of 2021, all banks in Kuwait were required to disclose stage-wise breakup of gross loans in ECL. This page provides more detail on our gross loans Stages 1, 2 and 3. The pie charts on the top of the page, you can see that the loan stages are fairly stable, with Stage 1 loans moving from 90.6% as of 31 March 2020 to 90.5% for 31 March 2021; while Stage 2 moved from 7.9% to 5.9%; and Stage 3 remained the same at 1.6% for the same periods. The charts on the bottom left of the page shows the IFRS 9 ECL stages composition. Stage 1 reached 21% as of 31 March 2021, moving from 17% a year ago. Stage 2 is in a declining trend, moving from 51% a year ago to 40% in the most recent quarter. And Stage 3 reached 40%, moving from 33% a year ago. The charts on the bottom right of the page shows the IFRS 9 ECL coverage for gross loans and contingent liabilities and commitments. As of 31 March 2021, coverage was 0.6% for Stage 1; Stage 2 coverage, 19.5%; and Stage 3 coverage, 85%. However, our overall coverage is much higher since we have provisions of KWD 96 million over the IFRS 9 ECL requirement of KWD 197 million. For further information, please refer to Note 14 of the financial statements. Turning to Page 7. Our 31 March 2021 regulatory capital ratios, as Tony mentioned earlier, remained well above our current minimums and our pre-COVID-19 minimums. On the top left, our Tier 1 ratio reached 14.3%, 485 basis points above our current regulatory minimum of 9.5% and 235 basis points above our pre-COVID-19 regulatory minimum of 12%. On the bottom left, our capital adequacy of 17.7% was 621 basis points above our current regulatory minimum of 11.5% and 371 basis points above our pre-COVID-19 regulatory minimums of 14%. Our risk-weighted assets, shown on the top right, fell by nearly 4% mainly due to the reduction in our gross customer loans driven by the corporate book and the sale of approximately KWD 106.8 million of our treasury shares since March 2020, which has contributed favorably to both capital ratios. On the bottom right, our leverage ratio as of 31 March 2021, reached 9.4%, which was higher than 8.6% for the same period of last year and well above the 3% regulatory minimum. Turning to Page 8. We can see our key liquidity ratios. On the left side, you can see our average daily liquidity coverage ratio which reached 278% as on March 31, 2021. And on the right side, the net stable funding ratio, which reached 110% for the same period. Worth noting that both ratios are still well above their respective new minimums of 80% and pre-COVID minimums of 100%. Turning to Page 9, we see the bank's credit ratings. We maintained our A ratings from the 4 major credit rating agencies, as Tony mentioned earlier. However, 3 of the outlooks has changed in comparison to last 12 months primarily due to the sovereign rating and outlook downgrades rather than bank-specific creditworthiness. I'd like to turn now back to Dalal for the Q&A session.

Thank you, David. We are now ready for Q&A. [Operator Instructions] We will pause for a few minutes to receive most of your questions. Okay. I will go through the questions. We'll group as we see necessary. First question, could you highlight on NIM's trend and outlook for 2021? We have seen improvement on cost of funds. How sustainable is it for the rest of the year? And do you see pressure on asset yields? David, can you take this question?

Yes, sure. I mean the net interest margin has remained broadly stable at around 2.1% for the past 4 quarters. We saw an improving trend in net interest income over the same period primarily due to a continued reduction in the cost of funds that outpaced the reductions in interest income. This cost of funds decline was primarily due to the pricing down of our liabilities, a continuation of lower regulatory liquidity requirements and also a stabilization in the level of CASA. But going forward, we do see some pressure on asset yields.

Okay. Next, could you provide more color around your loan growth in the quarter and expectations for 2021? David?

Yes. We saw in 2020 that the loan book reduced by 3% for the full year, which was primarily driven by the Corporate segment. However, we did return to positive loan growth in Q1, growing by almost 3%. This growth was driven by both segments, Consumer and Corporate. Going forward, we'll look to increase our market share in our target markets in line with our strategy.

Okay. Thank you. What is the normalized run rate we should assume for the operating expenses for the next quarter in 2021 as there was an increase in operating expenses in Q1 '21 compared to Q4 2020? And another question, did the government grants towards staff expenses continued in Q1 2021? David?

Okay. Let me start with the staff subsidy. The staff expense grant from the government ended in Q4 2020. And at this stage, we don't have any visibility as to whether it will recommence. Now answering the question on operating expenses, as you know, 2020 was an exceptional year. We faced an economic slowdown, and we have also received a staff subsidy from the government, both of which contributed towards lowering our operating expenses. Moving on to Q1 2021, operating expenses were impacted by the annual staff performance cycle and also certain lumpy expenses. Having said that, we are seeing a slight pickup in economic activities, and we will continue investing in certain cost categories to grow our business segments and continue with the digital transformation journey, which is in line with our strategy.

Thanks, David. I think we'll take another pause for a few minutes to receive some more questions. Okay. Since this quarter was the first quarter you disclosed the stages of your loans, the increase and movement between stages, was it driven by Corporate or Consumer segment? And another question, did you need to book additional ECL allowances for that? David?

Yes. I mean from Q1 2021, the CBK requested that all banks disclose gross loan stages in order to provide a higher degree of transparency. We can see that Stage 1 increased from 90.6% in Q1 2020 to 92.5% in Q1 2021, which is positive. Stage 2 also shows a positive trend, reducing from 7.9% in Q1 2020 to 5.9% in Q1 2021. Stage 3 has ticked up slightly from 1.5% to 1.6% year-on-year, and this was primarily driven by the Consumer segment post the ending of the moratorium. However, overall Stage 3 remains low. It's well covered and below the banking system average.

A related question. Has COVID-19-related NPL formation been fed into the books yet? And what are the payments behavior in corporate and retail books after the deferral ended? David?

Yes. The new NPL formation in Q1 was primarily driven by the Consumer segment as a result of the ending of the deferral program at the end of September 2020. However, we did see the formation slowdown during the quarter. And for Kuwaiti customers, there will be another 6-month deferral program that's been approved by the Parliament and is currently underway. On the Corporate side, the majority of the increase we saw in the past due but not impaired category at year-end has now shifted back to the neither past due or impaired category, which is also positive news.

Another question. The Kuwait Parliament members has voted to have a second payment holiday for Kuwaiti individual borrowers. Has this been implemented? And if so, who will bear the cost of the second payment holiday since the first one was borne by the banks? How would this additional deferral impact the quality of the loan portfolio? Tony, would you like to take that question?

Yes, sure. The key differences between the 2 deferral programs is that in the first one, the bank took the cost through the modification loss. But this time, the government will bear the cost, although the precise mechanism of how this compensation will work has not been disclosed at this stage. Also, the second scheme is available to Kuwaitis only. So overall, we think this is a positive development for the Consumer segment, and it will also have the side benefit of building up the bank's CASA balances.

Okay. Thank you, Tony. One more question, probably this is to you, Tony. Could you give us an update on the home financing to a potential mortgage loan [ in Kuwait ]? Tony?

Yes. The existing subsidized structure to finance housing by Kuwait Credit Bank has actually worked historically. However, it's becoming more challenging to meet growing demand for residential housing and the limited supply of land causing a long waiting list and appreciated -- and appreciation in home prices here in Kuwait. The new law, if passed, would allow local banks to provide the eligible locals with the loan that would have been originally provided by the Kuwait Credit Bank, while the government will compensate the banks for the interest service. And the execution will be done through the banks as well to ensure a faster process. As for the mortgage law here in Kuwait, this is still in preliminary stages with no updates so far. So overall, we believe that any development on consumer real estate lending would be a good step in the right direction towards encouraging home financing and homeownership here in Kuwait.

Thanks, Tony. We'll take another pause to receive more questions. Could you remind us of how long the reduced minimums for CAR, LCR and FSR are in place? Tony?

Yes, they are in place until the end of June, as per Central Bank -- communication with the banking sector here in Kuwait. However, we think that it'll probably be extended until the end of the year given that the pandemic is not resolved yet.

Okay. Thank you, Tony and David. I believe we have covered the majority of topics and questions that were raised during the call. The remaining questions are either already covered during the presentation or are forward-looking. And with that, we would like to conclude our call for today. If you have any further questions, you may visit our Investor Relations page at our website. You can also reach us at our dedicated Investor Relations email. Thank you all very much for your participation.