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 Gulf Bank's Q3 2021 Earnings Webcast. It is a pleasure to have with us today the following speakers from Gulf Bank: Mr. Tony Daher, CEO; Mr. David Challinor, CFO; and Ms. Dalal AlDousari, Head of Investor Relations. I would like to hand over the call now to Ms. Dalal AlDousari to begin with the presentation. Thank you.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's Third Quarter 2021 Earnings Call. We'll start our call today with a key highlights and updates on the operating environment of Gulf Bank during the third quarter 2021 presented by our 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 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 another currency -- in another 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 publicly disclosed. I would also like to draw your attention to the disclosure on Page 11 of the presentation with respect to forward-looking statement 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. Tony?

Thank you, Dalal, and good afternoon, everyone. Before we cover the detailed financial performance of the bank, I would like to make a few points about the operating environment here in Kuwait. Resumption of economic activities with businesses returning to full capacity and oil prices rising has, in turn, improved confidence and the economic outlook, and it boosted consumer spending and growth prospects here in Kuwait. The rising consumer spending remains one of the main drivers of Kuwait's economic recovery, supported by a second 6-month loan deferral program for Kuwaiti borrowers and a recent pickup in consumer loans. Spending remained strong, and we have seen good progress on vaccinations. And we have also seen a significant drop in the infection rates. This, in turn, has helped to eliminate many restrictions, especially on travel. As of August, vaccinated foreigners were allowed to enter Kuwait, and airport arrival capacity increased from 5,000 passengers in early July to 10,000 passengers as of early September, allowing easier travel to and from Kuwait. Recently, the Kuwait Council of Ministers announced the return of cautious normal life in the country, entering the fifth and final phase of the plan to return to normal life and easing restrictions, especially for those who are vaccinated and reopening Kuwait airport to full capacity. Moving on to Gulf Bank. We managed to grow our business in both the corporate and consumer segments without hindering the quality of our portfolio which remained resilient. This was broadly achieved by our strategy that focuses on: one, promoting selective growth in the corporate banking and SME segments by expanding the product range and enhancing services; two, growing consumer banking market share while targeting youth and affluent client segments; and three, developing the bank's digital banking platforms in order to improve services and increase competitiveness. On the service front, we continue to support our clients through all of our channels -- throughout all of our channels assisted by the digitization of most of our major activities. We are in the process of a major digital transformation that will touch most of the bank's activities in order to increase efficiencies, improve services, enhance the bank's performance and strengthen our corporate control. We recently announced a new feature in our mobile application, enabling customers to open a bank account in just under 1 minute. The launch of this new feature marks the beginning of a new digital era for Gulf Bank's customers. Opening an account in Gulf Bank is now the simplest and fastest account opening process in Kuwait. We anticipate that our technological enhancements will increasingly facilitate banking services for our customers and improve our operations. In addition, we are continuously enhancing our security levels to elevate customer protections. Moving on to sustainability. Sustainability is an important and integral part of our strategy. We are committed towards our stakeholders, community and the overall economy. In this respect, we are proud to announce that Gulf Bank will very soon be issuing its first official sustainability report. The baseline report will provide a consolidated view of Gulf Bank's contribution to sustainability development in the financial sector. The report provides a road map on how we plan to take this initiative to the next level. Our approach has been based on several sustainability-related frameworks, including Global Reporting Initiative, UN Sustainable Development Goals and Kuwait Boursa sustainability disclosures. Now turning to Page 2. I would like to summarize our financial results with 5 key messages. First, Our net profit grew by 50% for the first 9 months of 2021 to reach KWD 27.5 million in comparison to KWD 18.4 million reported in the same period last year. Second, our reported operating income reached KWD 125.5 million for the first 9 months of 2021, growing by 8% compared to the same period of 2020. The improvement was mainly driven by a 6% or KWD 5.8 million increase in net interest income, a 14% or KWD 3.4 million improvement in noninterest income and a decline of 24% or KWD 12 million in total provisions. Third, our asset quality remained resilient. As our nonperforming loans, NPL ratio in the third quarter of 2021 stood at 1.3%, an improvement when compared to the same period last year of 1.5%. Additionally, we have taken ample provisions and now have a coverage ratio of 472%. 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 441 basis points, 13.9% versus 9.5%. And our capital adequacy ratio has a buffer of 467 basis points, 16.2% versus 11.5%. These comfortable buffers have allowed the bank to grow its business in line with its strategy. And fifth, the bank remains an A-rated bank by 3 major credit rating agencies. Our current position stands as follows: Moody's Investors Service maintained the long-term deposit rating of A3 with a stable outlook. Fitch Ratings affirmed the bank's long-term issuer default rating 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 Ratings has recently changed the bank issuer credit rating to BBB+ from A- and revised the negative outlook to stable. This most recent rating action followed the S&P downgrade of Kuwait sovereign rating from AA- to A+ with a negative outlook. With that, I will turn over to our CFO, David Challinor, who will cover the financials of the first 9 months of 2021 in more depth. David?

Thanks, Tony. Turning to Page 3. We can see the evolution of net profit for the first 9 months of 2020 of KWD 18.4 million to the first 9 months of 2021 of KWD 27.5 million. The increase of KWD 9.1 million was driven by 3 positive factors. First, we had a higher net interest income of KWD 5.8 million as a result of loan growth and declining cost of funds. Second, as economic activity regained momentum so did our fees and foreign exchange income which improved by KWD 3.7 million. And third, our total provisions reduced by KWD 12 million. However, these positive drivers were partially offset by an KWD 11.5 million increase in operating expenses, which I'll cover later on. You can also see our return on equity improved by 1.8 percentage points over the same period. Turning to Page 4. We've got a more detailed breakdown of our income statement by line items. On the far right of line 1, interest income was down KWD 24.6 million or 15% mainly due to repricing of assets and booking new loans at a lower rate following the 125 point cuts in March 2020 and lower yields on liquid assets. On line 2, our interest expense declined by KWD 30.4 million or 44% from KWD 69.8 million in the first 9 months of 2020 to KWD 39.4 million in 2021. This was the result of favorable liquidity conditions as well as the full redemption of our KWD 100 million subordinated Tier 2 bond and replacing it with a lower rate bond and medium-term borrowing. On line 6, operating income grew by 8% to KWD 125.5 million compared to KWD 116.4 million in the first 9 months of 2020. This was due to the outpaced decline in interest expense in comparison to interest income and also an improvement in the fees and foreign exchange income of KWD 3.7 million or 16% driven by the full resumption of economic activities. On line 7, operating expenses have increased by KWD 11.5 million or 24% year-on-year. However, they decreased 4% compared to the second quarter of this year. 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 lower economic activity and receiving of government subsidy. There are 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 declined from KWD 45 million in the first 9 months of 2020 to KWD 35.3 million for the same period in 2021, resulting in a year-to-date cost of risk of 104 basis points. Turning to Page 5. We can see the balance sheet and how the individual line items have moved from 30 September 2020 to 30 September 2021. 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 KWD 395 million or 7% to KWD 6.3 billion compared to KWD 5.9 billion the year before. This was largely driven by KWD 147 million or 12% increase in liquid assets shown on line 5 and a KWD 268 million or 6% increase in net loans shown on line 9. While on a year-to-date basis, net loans grew KWD 360 million or 8% and total assets grew by KWD 217 million or 4%, reflecting a pickup in overall economic activity. In terms of the major components of total assets shown in bold, 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 over the last 12 months which is on line 16. On line item 18, in May of this year, we fully redeemed our KWD 100 million subordinated Tier 2 bond and replaced it with a KWD 50 million subordinated Tier 2 bond at a lower rate. In addition, we secured KWD 100 million of medium-term funding. Moving on to asset quality. Our nonperforming loan ratio, shown on line 25, reached 1.3% at the end of September 2021, down from 1.5% at the same period of last year. Our coverage ratio on line 26 remained strong, reaching at 472% at the end of September 2021. Now turning to Page 6. You can see in the chart on the left, as of 30 September 2021, our total provisions were KWD 297 million, and our IFRS 9 ECL requirements were KWD 183 million. So we had KWD 114 million of excess provisions, representing 38% 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 September 2020 to 5.6% at the end of September 2021. Stage 3 also improved from 1.6% to 1.4% 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 September 2021, moving from 17.1% a year ago. Stage 2 is in a declining trend, moving from 48.4% a year ago to 43.9% as of 30 September 2021. And Stage 3 reached 34.3%, moving from 34.4% a year ago. The chart on the bottom right of the page shows the IFRS 9 ECL coverage for our total credit facilities. As of 30 September 2021, it was 0.6% for Stage 1. Stage 2 was 20%, and Stage 3 was 73.1%. However, our overall coverage is much higher since we have provisions of KWD 114 million over the IFRS 9 ECL requirement of KWD 183 million. Turning to Page 8. Our 30 September 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 13.9%, which is 441 basis points above our current regulatory minimum of 9.5% and 191 basis points above our pre-COVID-19 regulatory minimum of 12%. On the bottom left, our capital adequacy ratio of 16.2% was 467 basis points above our current regulatory minimum of 11.5% and 217 basis points above our pre-COVID-19 regulatory minimum of 14%. Our risk-weighted assets, shown on the top right, grew by 4% mainly driven by year-on-year growth in the loan book. On the bottom right, our leverage ratio, as of 30 September 2021, reached 9.4%, which was lower than 9.6% 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 to 279% as of 30 September 2021. And on the right side, net stable funding ratio, which reached 106% for the same period. It's worth noting that both ratios are still well above their respective new minimums of 80% and pre-COVID minimums of 100%. Also, I'd like to update that the CBK has recently communicated that it will gradually start withdrawing the relaxed regulatory limits for the liquidity ratio and capital adequacy ratio and restore them back to the pre-COVID levels by the beginning of 2023. Now I'd like to turn back to Dalal for the Q&A session.

Thank you, David. We are now ready for Q&A. [Operator Instructions] Okay. I received a question on credit costs. What is the expected run rate or normalized level, David?

Yes. Thanks, Dalal. Look, I'm happy with credit costs for Q3. We saw a fall from the Q2 number of 146 basis points, which I'd indicate wasn't going to be any indicative of any adverse trend, and it wasn't. When you look year-to-date, we've got a cost of risk of 104 points, which is much lower than what we saw for 2020 and 2019 years and certainly much lower than the stand-alone number for Q2. So I think things are now trending in the right direction. I said in Q2 that I thought the long-term normalized cost of risk is around 100 basis points. But from quarter-to-quarter, you can have variations. So I think it's best to look at cost of risk on a year-to-date basis rather than individual quarters. I think we also need to look at recoveries, and they're often lumpy. They can impact the cost of risk number. I think with recoveries, we should expect to see an improvement in the coming quarters. If we have any significant recoveries, we may even look to them, provide further on other accounts to keep the underlying cost of risk relatively stable, whilst improving coverage elsewhere. So overall, I think asset quality is moving in the right direction. Our NPL ratio came down again this quarter. We had new formation of KWD 14 million and write-offs of KWD 16 million. Total coverage remains exceptionally strong. When you look at the Stage 2 percentage, that continues to be very low. It's only 5.6%. The provision buffer of our IFRS 9 requirements also increased. It's now KWD 114 million. So I think overall, I'm comfortable where we're at.

Okay. We have questions on loan growth for the bank and expectations for the rest of the year. David?

Okay. The growth in our gross loans has been strong this year, 7.2% year-to-date. Q2 was a bit slow, but we saw a rebound in Q3 as activity recommenced after the summer and the country opened up. We're still tracking ahead of the market which grew 3.9%. That was to the end of August. So I'm pleased we're maintaining the lead. I think full year, we're looking at high single-digit growth, and we'd look to continue that trajectory into 2020 -- 2022 also. We're growing well across both retail and corporate. So it's a balanced growth. We've got ample liquidity, the capital position is solid. And I also think the recent CBK circular around the capital and liquidity ratios not coming back to the pre-COVID levels until 2023 is definitely a positive for growth.

Thanks, David. We've received a question on liquidity in the system and if you're seeing any pressure on margins? David?

Sure. I mean the margins have held up well. We're now on the sixth consecutive quarter effectively, it's been flat. In Q2, it was 209 basis points, same number again in Q3. But yes, there are some pressures. We've seen the loan growth in the system outpaced the deposit growth, which obviously causes some level of pressure. We've seen our own cost of funds rise slightly, particularly on the KD side, which is most of our book, but we've managed to offset that to keep a stable NIM. I think as I've said before, there isn't any catalysts, material catalysts in the near future. They're going to shift it either way. So I think the best guess is really for the rest of this year and probably for the most of next year, the NIM is likely to be broadly stable.

Thanks, David. We will pause for a few minutes to receive more questions. Okay. There are a couple of questions related to operating expenses. What would be the appropriate normalized run rate assumption for the operating expenses in the coming year, David?

Thanks, Dalal. Look, the expenses came down again this quarter, which I said in Q2, they would. So we've seen expenses fall each consecutive quarter this year. I said in the first half, there were several one-offs that were not going to repeat. And I think the Q3 number is a better reflection than what we saw in the first 2 quarters of the year. On a year-to-date basis, though, year-on-year, the cost growth is very high. But 2020 was artificially suppressed, not just because of the lack of activity, but also the government subsidy that was paid to us. We got KWD 2.3 million in Q3, and again, the same amount in Q4. So 2020 isn't a useful base. But when we look at 2019 full year, the cost of KWD 78 million, I think this year, we aim to be lower than that and would look again to be lower for 2022. When we look at the cost to income ratio, I think, given the strong loan growth and stable margin, there's some upside with fees. I think when you combine this with a further expected drop in costs for 2022, we should expect a meaningful improvement in the cost to income for next year. It might not get to prepandemic-type levels in 2022 alone, but certainly, we'll move much closer in that direction. I think the other thing is, as a bank, we're in the middle of a major digital transformation. And I think also there's going to be opportunities for extracting cost efficiencies once this is all implemented.

Great. I believe we've covered most of the topics and questions that were raised today during the call. The remaining questions are either 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 or reach out to us at our dedicated Investor Relations e-mail. Thank you all very much for your participation today.