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

Good morning, and 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 Half 2021 Earnings Conference Call. It is a great pleasure to have with us on the call the following speakers from Gulf Bank; Mr. Ahmad AlDuwaisan, GM Corporate Banking and acting CEO; Mr. David Challinor, CFO; and Ms. Dalal Al Dousari, Head of Investor Relations. The call will begin with a presentation from management on the key highlights of the first half 2021, 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 first half 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 half of 2021. Since Mr. Tony Daher, Gulf Bank's CEO, is on annual leave, the key highlights will be presented by the General Manager of Corporate Banking and currently acting CEO, Mr. Ahmad AlDuwaisan, 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 the 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 also 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 12 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. Ahmad Duwaisan. Ahmad?

Thank you, Dalal. Good morning, and good afternoon, everyone. Before we cover the detailed financial performance of the bank, I would like to make a few brief points in terms of our operating environment in Kuwait. We started the quarter with partial curfew and further restrictions on business and travel for local and foreigners. However, by the month of May, most of these restrictions were lifted, helped by the acceleration and the rollout of vaccination efforts. Starting 1st of August, vaccinated foreigners are now allowed to enter Kuwait. Growth prospects have improved with the lifting of most restrictions. Consumer sentiment is more upbeat, and increased demand has boosted consumer spending growth. Despite all of these shifting waves between open and restrictive environment, Gulf Bank have weathered it well and we continue to support the clients through our seamless and optimized omnichannel services, assisted by bank's digital transformation of most of its major activities. During the quarter, as part of Gulf Bank's ongoing digital transformation plan, Gulf Bank successfully launched its new MX.3 system in partnership with Murex, a world-leading provider of financial technology solutions for the development and automation of the bank's capital markets and treasury platforms. The integrated solutions will offer a robust technological infrastructure that meets the evolving requirements of today's customers and provide an even more seamless workflow and better risk management. Moreover, the launch of the new treasury system seeks to make the most of our ongoing digital transformation, transforming Gulf Bank into a fully integrated digital bank. Despite the challenges that we continue to face as a result of COVID-19 pandemic, Gulf Bank has successfully completed the redemption of its existing KWD 100 million subordinated Tier 2 bond, and the issuance of a new KWD 50 million subordinated Tier 2 bond, which was oversubscribed. This issuance optimized the bank's capital adequacy in compliance with Basel III framework, and supports our overall investment plan towards making Gulf Bank the leading bank of the future. Now turning to Page 2. I would like to summarize our first half 2021 results with 5 key messages. First, our net profit grew by 40% in the first half of 2021 to reach KWD 16.5 million in comparison to KWD 11.8 million reported first half of 2020. Second, our reported operating income reached KWD 83.2 million for the first half 2021, growing by 8% compared to the first half of 2020. The growth was driven primarily by significant decline in the cost of funds that exceeded the decline in interest income, an improvement in fees and commission income. Third, our asset quality remained resilient as our nonperforming loans ratio in the second quarter of 2021 stood at 1.4%, an improvement when compared to some period of last year -- of the same period of last year of 2.2%. In addition, we have ample provisions with coverage ratio of 443%. 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 480 basis points, 14.3% versus 9.5%. And our capital adequacy ratio has a buffer of 510 basis points, 16.6% versus 11.5%. With these comfortable buffers in place, and as I have mentioned earlier, we are able to exercise the call option for the redemption of the KWD 100 million subordinated Tier 2 bond that matured in May and issued a new Tier 2 compliant bond at a maximum of KWD 50 million at a favorable rate. And fifth, the bank remains an A-rated bank from 3 major rating agencies and here where we stand today. Moody's Investors Service maintained the long-term deposit rating of A3 with a stable outlook. Fitch rating affirms the bank's long-term issuer default rate of A+ with a negative outlook. Capital Intelligence affirmed the bank's long-term foreign currency rating of A+ with a stable outlook. In addition, S&P Global Rating has recently changed the bank's issuer credit rating to BBB+ from A- and revised the negative outlook to stable. This most most recent rating action followed the S&P downgrade of Kuwait sovereign rating from AA- to A+ with a negative 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'll turn it over to our CFO, David Challinor, who will cover the financials of the first half 2021 in more depth. David?

Thanks, Ahmad. Turning to Page 3, we can see the major variances from the first half 2020 profit of KWD 11.8 million to the first half 2021 profit of KWD 16.5 million. The increase in profit of KWD 4.8 million was driven by 3 positive factors: First, we had higher interest -- net interest income of KWD 4 million as a result of continued decline in cost of funds. Second, as economic activity regained momentum, so did our fees and foreign exchange income, which improved by KWD 2.6 million. And third, our cost of credit improved by KWD 5.4 million. However, these positive drivers were partially offset by a KWD 6.7 million increase in operating expenses, which I will cover later on. You can also see our return on equity improve by 1.5 percentage points from the first half of 2020 to the first half of '21. Turning to Page 4, we have a more detailed breakdown of our income statement line items. On the far right of line 1, net interest income was down KWD 22 million or 19%, mainly due to repricing of assets and booking new loans at a lower rate following the 125 basis point rate cut in March 2020. The good news is that liquidity conditions remain favorable, and you can see in the green boxes on line 2, that our interest expense declined by KWD 26 million or 50% from KWD 52 million in the first half of 2020 to KWD 25.9 million in the first half of 2021. On Line 6, operating income grew by 8% to KWD 83.2 million compared to KWD 77.2 million in the first half of 2020. This was due to interest expense falling more than interest income and also an improvement in the fees and foreign exchange income of KWD 2.6 million. On line 7, operating expenses have increased by KWD 6.7 million or 20% year-on-year. However, they reduced by 4% compared to the first quarter. The year-on-year increase is predominantly driven by the continued investment in our digital transformation strategy, and low operating expense base reported in the same period last year due to the low economic activity and complete lockdown. There were also some lumpy nonrecurring items in the first half of 2021 that we do not expect to recur in the second half. In the green boxes on Line 9, you can see our credit cost decline from KWD 28.4 million in the first half of 2020 to KWD 24.8 million in the first half of 2021. Turning to Page 5, we can see the balance sheet and how the individual line items have moved from 30 June 2020 to 30 June '21. This page also shows the mix of assets and how that has changed over the last 12 months. First, I'd like to focus on assets, which are shown on the top half of the slide. Over the last 12 months, our total assets increased by KWD 266 million or 4% to KWD 6.3 billion compared to KWD 6 billion the year before. This was largely driven by KWD 160 million or 12% increase in liquid assets shown on Line 5, and KWD 123 million or 3% increase in net loans shown on Line 9. While on a year-to-date basis, net loans grew KWD 210 million or 5%, and total assets grew by KWD 179 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. On line item 18. In May of this year, we fully redeemed KWD 100 million subordinated Tier 2 bond and replaced it with a KWD 50 million subordinated Tier 2 bond at lower rates. In addition, we secured KWD 100 million of medium-term funding. Moving on to asset quality, our nonperforming loan ratio shown on Line 25 increased from 1.1% at the end of December 2020 to 1.4% at the end of June 2021, however, was down from 2.2% at the end of June 2020. Our coverage ratio on Line 26 is very strong and reached 443% at the end of June 2021. Now turning to Page 6, you can see in the chart on the left that as at 30 June 2021, our total provisions were KWD 298 million and our IFRS 9 ECL requirements were KWD 191 million. So we had KWD 107 million of excess provisions, representing 36% over and above total provisions. Turning to Page 7, this shows our gross loans by Stages 1, 2 and 3. Looking at the pie charts on the top of the page, you can see that our Stage 1 loans are above 90% for the 3 periods, while Stage 2 declined from 7.7% at the end of June 2020 to 5.6% at the end of June 2021. Stage 3 also improved from 2.2% to 1.5% for the same period. The chart on the bottom left side of the page shows the IFRS 9 ECL stages composition. Stage 1 reached 21.8% as of 30 June 2021, moving from 14.7% a year ago. Stage 2 is in a declining trend, moving from 44.2% a year ago to 38.5% as at 30 June 2021. Stage 3 reached 39.6% moving from 41% a year ago. The chart on the bottom right of the page shows the IFRS 9 ECL coverage for gross loans and contingent liabilities and commitments. As at 30 June 2021, it was 0.6% for Stage 1, Stage 2 was 19.4% and Stage 3 was 85.1%. However, our overall coverage is much higher since we have provisions of KWD 107 million over the IFRS 9 ECL requirement of KWD 191 million. Turning to Page 8, our 30 June 2021 regulatory capital ratios remain well above both our current minimums and our pre-COVID-19 minimums. On the top left, our Tier 1 ratio reached 14.3%, which is 480 basis points above our current regulatory minimum of 9.5% and 230 basis points above our pre-COVID-19 regulatory minimum of 12%. On the bottom left, our capital adequacy ratio of 16.6% was 510 basis points above our current regulatory minimum of 11.5% and 260 basis points above our pre-COVID-19 regulatory minimum of 14%. Our risk-weighted assets shown on the top right, fell by nearly 0.3%, mainly due to increasing collaterals and a reduction in market risk in comparison to the same period of last year. On the bottom right, our leverage ratio as of 30 June 2021 reached 9.5%, which was higher than 9.2% for the same period of last year and well above the 3% regulatory minimum. Turning to Page 9, we can see our key liquidity ratios. On the left side, you can see our average daily liquidity coverage ratio, which reached 324% as at 30 June 2021. And on the right side, the net stable funding ratio, which reached 109% for the same period. It's worth noting that both ratios are still well above their respective new minimums of 80% and and pre-COVID minimums of 100%. Turning to Page 10, we can see the bank's credit ratings. We remain rated A, from 3 major credit rates and agencies, as Ahmad mentioned earlier. Now I'd like to turn it back over to Dalal for the Q&A session.

Thank you, David. We are now ready for Q&A. [Operator Instructions] Okay, we have a number of questions on provisions. So why did the loan provision in Q2 2021 increase when compared to Q1 of the same year? David, would you like to take this one?

Yes, thanks, Dalal. I mean if we start with Q1, we saw a fairly low credit cost of KWD 8.3 million, which translates into a cost of risk for Q1 of 76 basis points. I mean this is much lower than what we've seen for the full year 2020, where the cost of risk was 131 points. We've previously stated that we think a more normalized level of cost of risk is around 100 basis points, and we probably wouldn't get there during 2021 itself. The timing of provisions often lead to some lumpiness from quarter-to-quarter, but we're confident that the second quarter level, which was primarily driven by increasing coverage on existing NPLs, isn't going to be indicative of any adverse long-term credit cost trend. When you look at the first half of 2021, we have a cost of risk of 112 basis points, which is much lower than both the full year '20 and full year 2019. So despite an uptick in Q2, we are still on track at this stage to be lower than the previous 2 years. I think it's also important to point out that not only did our NPL percentage drop from Q1 to Q2, it's now at 1.4%. But we also increased our total coverage, which stands at . Also, when you look at the percentage of our loan book which is in Stage 2, we saw that decrease from Q1 to Q2, and it's now only 5.6%.

Okay. Thank you, David. We have another question. What is the latest update on the bank's recent announcement regarding receiving a judgment from the Court of Cassation, which restore the bank's right to complete the execution measures related to one of its clients. Ahmad, you'd like to take that?

Yes, sure, Dalal. As we have mentioned, in previous earning calls and disclosures, the Court of Cassation issued a judgment which restored Gulf Bank's right to complete the execution measurement. The impact of this judgment and the financial position of the bank will be determined upon completion of the execution measures. The timing of the execution is dependent on multiple variables as stated above. However, based on past experience, this is an unpredictable time line and is likely a medium- to long-term process, depending on the nature of the assets being attached and claims, if any, of other creditors. This exposure was fully provided for and written off in prior years. Accordingly, any recoveries would be recorded through income statement depending on the completion of the execution measures.