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

Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I welcome you all to Gulf Bank's Full year 2021 earnings webcast. It is a pleasure to have with us in the call 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. Please go ahead.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's year-end 2021 Earnings Call. We will start our call today with key highlights and updates on the operating environments of Gulf Bank during the year 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 in another currency other than Kuwaiti dinars. After the presentation, we will open the floor for Q&A received through the webcast platform. Please 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 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. Tony?

Good morning, 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. During the year 2021, we have seen a gradual improvement in the overall economic environment. We started off this year with surge in COVID-19 cases and restrictions on travel and overall business environment. However, almost all the restrictions were lifted towards the end of the year, as the government vaccination efforts increased, reaching about 80% of the population. This in turn allows things to steadily go back to normal which, in turn, improve confidence, boosted consumer spending and growth prospects in Kuwait. We continue to accomplish significant progress against our 2025 strategy of being the leading Kuwaiti bank of the future. We aim to provide customers simple and innovative services to enable sustainable growth for the bank. As the first step in our digital transformation journey, we have successfully launched our new MX.3 system in partnership with Murex for the development and automation of the bank's capital markets and treasury platforms. The platform implementation is a transformative step towards developing and automating our treasury and capital market systems. In addition, this would help us unlock opportunities, navigate capital markets, and better serve our customers. On the service front, we continue to support our clients through our seamless omnichannel services, assisted by the digitization of most of our major activities. The new feature was introduced in our mobile application and online banking, enabling customers to open a bank account in just under 1 minute. In addition, we have launched tailored products and services to our customers. Each of these products is specifically designed to offer distinctive features for our targeted segments, including women, youth, and affluent customers. Our local footprint is one of the largest in Kuwait. In addition to the opening of our modern flagship branch in Crystal Tower, inaugurated a new branch at Kuwait International Airport, bringing the number of our branches covering various regions of Kuwait to 53. Our presence at the airport throughout the year as part of our strategy to provide the best and the easiest service for our customers. Moving on to sustainability. We are proud to -- we are proud of our first official published sustainability report for the year 2020. As a responsible bank, we are committed towards our stakeholders, community, and the overall economy. We will continue to integrate ESG principles across the business, strategies, and the way we operate the bank. Now, turning on to Page 2. I would like to summarize our financial results with 5 key messages. First, our net profit grew by 46% for the year 2021, reached KWD 42 million in comparison to KWD 29 million reported in 2020. Second, our earnings per share is up 40%, [ KWD 0.40 ] and the Board of Directors is recommending a distribution of cash dividend of [ KWD 0.07 ] per share, representing a 50% cash payout, in addition to 5% bonus shares for shareholders' approval at the Annual General Meeting to be held in March 2022. Third, our gross customer loans reached another all-time high, reaching [ KWD 84.8 billion ], an increase of KWD 454 million or 10% compared to the end of 2020. This growth in Tier 1 came from both our corporate and consumer segment. Fourth, our asset quality remained resilient. As our nonperforming loan ratio NPL in 2021 stood at 0.9%, an improvement when compared to the last year's NPL of 1.1%. Additionally, we've taken ample provisions and now have a coverage ratio of 615%. Fifth, the relaxed capital regulatory minimums that were introduced in 2020 remained in place until 31st December 2021, allowing the bank to have additional buffers over the minimums. Our Tier 1 ratio has a buffer of 496 basis points. And our capital adequacy ratio, CAR has a buffer of 522 basis points. These comfortable buffers have allowed the bank to grow its business in line with its strategy. I would like to mention here that during 2021, we successfully completed the redemption of our existing KD 100 million subordinated Tier 2 bonds and issued a new KD 60 million subordinated bonds, which was oversubscribed. This issuance optimizes the bank's capital adequacy in compliance with the Basel 3 framework. And it supports our overall investment plans towards making Gulf the leading brand -- Gulf Bank the leading brands of the future. And sixth, the bank remains an A-rated bank by 3 major credit trailing agencies. Our current position stands as follows: Moody's Investor Service maintain the long-term deposit rating of A3 with a stable outlook. Capital Intelligence, affirm the bank's long-term foreign currency rating of A+ with a stable outlook. Recently, Fitch Ratings has changed the bank's long-term issuer default rating to A from A+ and revised the negative outlook to stable in February 2022. In addition, S&P Global Ratings has changed the bank's issuer credit rating through BBB+ from A- and revised the negative outlook to stable during 2021. Both rating downgrades of S&P Global and Fitch followed the downgrade of Kuwait solvent rating by these credit trading agencies and is not related to Gulf Banks' viability position or credit quality. With that, I will turn it over to our CFO, David Challinor, who will cover the financials of the year 2021 in more depth. Thank you, David.

Thanks, Tony. Turning to Page 3, see the evolution of net profit from 28.9 to 42.1. The increase of 13.3 was driven by 3 positive facts. Firstly, higher net interest income of 7.5 as a result of loan growth and declining cost of funds. Second, as our economic activity regained momentum, so did our fees and foreign exchange income, which improved by 4.9. Third, our total provisions reduced by 16.5. However, these positive drivers were partially offset by a 14.3 increase in operating expenses, which I will cover later on. You can also see our return on equity improved by nearly 2 percentage points over the same period. Turning to Page 4. We have a more detailed breakdown of our income statement by line item. On the far right of Line 1, interest income was down 23.4 or 11%, mainly due to repricing of assets and booking new loans at a lower rate following 125 basis point rate cut in March 2020, lower yields on liquid assets. On line 2, our interest expense declined by 30.9 or 37% from 84.6 in 2020, 53.7 in 2021. This was the result of repricing liability book as well as the full redemption of our 100 million subordinated Tier 2 bond and replacing half of it with a lower cost. On Line 6, operating income grew by 7% to 170.1 compared to 158.3 million in 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 4.9 or 16%, driven by the resumption of economic activities. Line 7. Operating expenses have increased by 14.3 or 22% year-on-year. However, they only increased by 1% when compared to the third quarter. Furthermore, the cost-to-income ratio about each successive quarter during the year. The year-on-year increase is predominantly driven by the continued investment in our digital transformation strategy and allowed operating expense base reported in 2020 due to the reduced economic activity and receiving of the government subsidies. There were also some nonrecurring items in the first half 2021. The green boxes on line 9, you can see our credit cost declined from 59 in 2020 to 43.9 in 2021, resulting in a full year cost of risk 95 basis points. Turning to Page 5. You can see the balance sheet, how the individual line item has moved from 2020 to 2021. This page also shows the mix of assets and how that's changed over the last 12 months. First, I'd like to focus on assets, which are shown in the top half of the slide. Over the last 12 months, our total assets increased by 443 or 7% to reach KWD 6.6 billion compared to KWD 6.1 billion the year before. This was largely driven by KWD 528 million or 12% increase in net loans. Turn on line 9. When compared to the third quarter, net loans grew 168 or 4%. Total assets grew by 226, 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 lending 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 as well. We were able to marginally improve the CASA ratio of 37.4% in 2020 to 38.5% in 2021, which is on Line 27. On line item 18, in May 2021, we fully redeemed our 100 million subordinated Tier 2 bond requested with a 50 million subordinated Tier 2 bond at a lower rate. In addition, we secure KWD 165 million of medium-term funded. Moving on to asset quality. Our nonperforming loan ratio shown on Line 25, 0.9% at the end of December 2021, down from 1.1% the same period last year. Coverage ratio on Line 26 remains exceptionally strong, reaching 615% at the end of December 21. Turning to Page 6. You see in the chart on the left, that as of 31 December 2021, the bank has KWD 112 million of excess provisions representing 37% over-and-above total provisions. This is the fourth consecutive year-end since IFRS 9 was introduced, where the bank's excess credit provisions exceeded KWD 100 million. Looking at the pie charts on the top right of the page, you can see that our Stage 1 loans are about 90% for both years, while Stage 2 and Stage 3 remained around similar levels in both periods. Stage 2 being 6.2% for 2021, while for Stage 3, it was 1%. First chart on the bottom right-hand side of the page shows the IFRS 9 ECL stages composition. Stage 1 was 22.1%, moving from 23.8% a year ago. Stage 2 increased from 43.7% a year ago to 51% as of 31 December 2021. Stage 3 reached 26.8% moving from 32.5% a year ago. Second chart on the bottom right of the page shows the IFRS 9 ECL coverage for our total credit facilities. As of 31 December 2021, it was 0.6% at Stage 1. Stage 2 was 18.7%. Stage 3 was 73.4%. However, our overall coverage is much higher since we have provisions of KWD 112 million over the IFRS 9 ECL [indiscernible] Turning to Page 7. On the top left, our Tier 1 ratio was 14.5%, which is well above our current regulatory minimum of 9.5%, our pre-COVID-19 regulatory minimum 12%. On the bottom left, our capital adequacy ratio of 16.7%, is well above our current regulatory minimum of 11.5% and our pre-COVID-19 regulatory minimum 14%. Our risk-weighted assets shown on the top right, grew by 5%, mainly driven by year-on-year growth in the loan book. The bottom right, our leverage ratio at the end of 2021 reached 9.5%. It was lower than 9.9% for the same period of last year, well above the 3% regulatory minimum. Turning to Page 8, in liquidity ratios. On the left side, you can see our average daily liquidity coverage ratio was 222% as of 31 December 2021. And on the right side, net stable funding ratio was 107% for the same period. It's worth noting that both ratios are still well above their respective current minimum of 80% and pre-COVID minimums of 100%. Also, during the fourth quarter of 2021, Central Bank of Kuwait has communicated that it will gradually start withdrawing the relaxed regulatory limit of the liquidity ratios and capital adequacy ratio and restore them back to the pre-COVID levels by the beginning of 2023. With that, I'd like to turn it back over to Dalal for the Q&A session.

[Operator Instructions] Okay. We'll go through the questions. We saw loan growth was strong in 2021. Can you provide some color on the drivers of the growth? And what is the outlook for 2022?

Yes. So that growth was very strong in 2021, particularly in Q4, which is the high spread quarter in the year. I was guiding high single digits earlier in the year and we came in at 10.4%. When you look at the [ little ] growth between corporate and consumer, it was fairly balanced, but obviously, corporate is a larger part of our 14-percentage share. We saw consumer grow faster, just over 12%, which almost mirrored the market growth for that sector. Total, the market grew 6.6%, and we grew 10.4%. Looking at the sector growth in the market, we saw consumer growth just over 13% and corporate just over 3%. And in terms of how we were faced, we grow almost in line with the market consumer to grow almost 3x the market in corporate. So in corporate, we were successful in building back about half of the market share that we lost in 2020. When you look at where the growth came from in our corporate business, in terms of the loan book mix, we saw increases in oil and gas, manufacturing, financial sectors and the decreases in both real estate and construction. So together, the real estate and construction were 21.6% approach loans in 2020. Now, they've reduced to 19.6%. I think during 2021, the second deferral scheme, the pent-up demand, and record-low rates to work to enhance the system growth. I think looking forward into 2022, I think growth will probably slow in the system, particularly in the retail sector, for the potential mortgage loan could be a game changer. However, the timing of this is uncertain.

Thanks, David. There is just a few questions on asset quality. What's the outlook for credit cost from here? And what was the level of write-offs you did during the year? I see that the past due but net impaired number has increased from KWD 107 million to KWD 157 million. David?

I was very pleased with the performance of the portfolio this year. Credit costs came in at KWD 44 million, down from KWD 59 million last year. If you look at the cost of risk, we saw 110 points in the first half drop to 80 for the second. I said after the spike in credit costs that we saw in Q2, that a normalized number is probably around 100 points when we came in at 95 for the full year. We also saw the NPL percentage come down to under 1% for the first time. Look at write-offs, which were done in the year, there were KWD 43 million of write-offs. So even without any write-offs, the NPL percentage would have only been around 1.75%, which is still very low and below our target of keeping under 2%. So the underlying NPL generation is low and slowed down from what we saw in 2020. When you look at 2020, we had KWD 8 million in write-offs. So even though our write-off level is half from 1 year to the next, we still managed to get under 1%, which is a very strong results. I think it's also worth mentioning that the accounts written off are treated the same in terms of the recovery efforts and the EBIT status. Picking 2022, we'd like to see more recoveries. They were relatively flat from 1 year to the next. Do you think we have the possibility of working credit costs to lower than the long-term normalized for 100 points? In terms of the past due for impaired category, yes. We saw that move of KWD 30 million, and that was primarily in the retail space. But when you look at the 60- to 90-day bucket, in other words, the pre-NPL stage, we only have KWD 12 million in that this year versus KWD 32 million last year. So I'm relatively comfortable with that position coming in for 2022.

Thanks, David. We'll pause for a few minutes to receive more questions. Okay. What's the outlook for them and the impact on the bank of a 25-basis point rise? Do you think the CDK will follow the Fed with the rate raises, David?

Yes. Thanks. I've said a few times in 2021 that I think the outlook for them is going to be broadly stable. That's what we saw last year. Q2 and Q3 were both stable quarters, 209 points. We only lost 1 basis point from Q3 and Q4. But what we are seeing is the expectation of risers, rate guys is causing some of the pressure on rates, which is obviously being into our cost of funds. And the dynamics seem to gather some pace in Q4. So I think that need to lose 1 point from Q3 to Q4 was a very good outcome. I think for Q1 '22, if this pressure continues, I think we may do, we could lose some more. So I think some short-term downside is possible before any rate rises, which will then kick off a new cycle of expanding NIM. In terms of will the CBK follow the Fed, that's not for me to speculate, but when you look at history, I think we can see that in most cases, this has been what's happened. But certainly, rate prices would be good for the bank's earnings, then we're very well positioned. Corporate book would reprice immediately on all new retail loans. In terms of the impact which we disclosed, for each 25-basis point rise and the total impact to 2 NII is around KD 3 million annually.

Thanks, David. I believe we have covered the majority of the topics and questions that were raised today during the call. Having said -- having said that, I would like to draw your attention to Page 10. Since we get asked a lot about some guidance, we decided to present the guidance slide that summarizes some of the points that we have already covered during the Q&A session as follows: for loan growth, our strategy is to grow faster than the market; for our margins, we expect a short [indiscernible]; the cost of risk would likely be under the normalized level of 100 basis points; and finally, nonperforming loans ratio is expected to remain under 2%. And with that, we would like to conclude our call for today. If you have any questions, you may visit our Investor Relations page at our website or reach us at our dedicated Investor Relations e-mail. Thank you all very much for your participation today.