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 Q1 2023 Results Webcast. We have the following speakers from Gulf Bank, Mr. Waleed Mandani, Deputy CEO and Acting CEO; Mr. David Challinor, CFO; and Ms. Dalal AlDousari, Head of Investor Relations. At this point, I would like to hand over the call to Ms. Dalal AlDousari. Please go ahead. Thank you.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's First Quarter 2023 Earnings Call. We will start our call today with key highlights and updates on the operating environment of Gulf Bank during the first quarter of 2023, presented by our Deputy Chief Executive Officer and Acting CEO, Mr. Waleed Mandani, 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. 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 10 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. Waleed Mandani. Waleed?

Thank you, Dalal. Good morning, and good afternoon, everyone. Despite the challenging start of the year 2023, with the world economic uncertainty, political tensions and tight monetary policy, the Kuwaiti economic environment remained stable. Through the first quarter of this year, the Central Bank of Kuwait has raised the discount rate by another 50 basis points, bringing the discount rate to 4%, which is higher than the pre-COVID level of 3%. This most recent move and previous rate actions by the Central Bank of Kuwait were not in tandem with the U.S. Fed interest rate hikes, indicating the independence and the resilience of the Kuwait economy, supported by its stable and strong fundamentals. This plays out well with Gulf Bank's Kuwait-focused strategy and is evident from our first quarter results for 2023. We have demonstrated excellent progress in our strategy to drive growth and maintain good asset quality. Our loan book is performing well, and it remains the core driver of the bank's growth. This growth is supported by low cost of risk, robust asset quality and comfortable capital position. Our loan book is performing well, and it remains the core driver of the bank's growth. This growth is supported by low-cost for risk, robust asset quality and comfortable capital position. We made excellent progress on our digital transformation initiative, focusing on enhancing the customer experience. So far, we have achieved major milestones within our 5-year strategy, and we are anticipating further significant accomplishments toward the end of 2025. Recently, we have launched the bank's brand new smartphone application that provides unique features presented in a fast, secure and simple customer interface. In addition, the recent adaptation of the latest version of IVR system at the bank's call center contributes to meeting customers increasing demand for digital services. On the ground, Gulf Bank has one of the largest local branch networks with over 50 branches covering vital locations across Kuwait. This prominent presence resulted the bank in reducing the average transaction time for the in-branch customers, which ultimately leads to enhancing customer service and satisfaction. Part of Gulf Bank's 2025 strategy of expanding the bank's offering to cater for the high net worth individuals, the Wealth Management division provides exclusive products to meet the wealth customers' aspirations. These offerings include the WISE investment service, the bank's flagship digital advisory and portfolio management platform, in addition to several alternative investments. With the completion of the establishment and independent investment subsidiary, the bank will be able to offer a full suite of investment products and services. During the first quarter of 2023, Gulf Bank had partnered with Kamco Invest as a lead manager in the issuance of United Real Estate Company's KD 80 Million Bonds. This was the largest Kuwaiti dinar-denominated bond issuance within the real estate sector. Now turning to Page 2, I would like to summarize our financial results with 6 key messages. First, our net profit grew by 15% for the first quarter of 2023 to reach KD 17.3 million in comparison to KD 15 million reported in the first quarter of 2022. Second, our return on average equity increased to 9.9% for the first quarter of 2023, up from 9.2% at the same period last year. Third, our gross customer loans reached KD 5.1 billion, an increase of KD 286 million or 6% compared to the first quarter of 2022. This growth was mainly supported by our consumer segment. Fourth, the quality of our loan book remains resilient as our nonperforming loan ratio NPL for the first quarter of 2023 is at 0.8%, together with a strong NPL coverage ratio of 692% including total provisions and collaterals. Fifth, the relaxed capital regulatory minimums that were introduced in 2020 are now completely restored to their pre-COVID levels starting from 1st of January 2023. With that, at the end of the first quarter of 2023, our Tier 1 ratio had a buffer of 187 basis points and our capital adequacy ratio had a buffer of 207 basis points. These buffers have allowed the bank to grow its business in line with its strategy. And sixth, the bank remains an A-rated bank by major credit rating agencies. Our current position stands as follows: Moody's Investor Service maintained the long-term deposit rating of A3 with a stable outlook. Capital Intelligence affirmed the bank's long-term foreign currency rating of A+ with a stable outlook. Fitch Ratings affirmed the bank's long-term issuer default rating at A with a stable outlook with viability rating of BBB-. So we have started the year with a positive note in terms of our performance for the first quarter, which will provide a good foundation for a sustainable growth for the remainder of the year. With that, I'll turn it over to our CFO, Mr. David Challinor, who will cover the financials of the first 3 months of 2023 in more depth. Thank you. David, over to you.

Thanks, Waleed. Turning to Page 3. We can see the movement of net profit from KD 15 million to KD 17.3 million. The increase of KD 2.3 million, mainly driven by an increase of KD 2.6 million in net interest income due to strong loan growth from last year, coupled with the impact of the rate hikes, also higher noninterest income of KD 2.3 million due to improved fee and dividend income. This was offset by an increase in operating expenses of KD 1.6 million and total provisions and impairments of KD 0.9 million. You can also see our return on equity improve by 0.7% to reach 9.9%. It's also worth noting that Q1 2023 represented the seventh consecutive quarter of profit expansion. Turning to Page 4. We've got a detailed breakdown of our income statement. On Line 1, interest income was up KD 38.9 million or 83% in 2023 compared to the same period of last year. This was due to a 6% growth in the loan book, coupled with 8 CBK discount rate hikes totaling 250 basis points over the last 12 months. On Line 2, our interest expense increased by KD 36.3 million or 252%. The cost of funds is rising faster than the increase in asset yields. Despite this, we were still able to generate an expansion in net interest income, which grew 8% on a year-on-year basis. On Line 4, our noninterest income increased by KD 2.3 million or 24% compared to the same period last year, driven by a strong pickup in fees. On Line 5, operating income increased by KD 4.9 million or 12%. On Line 6, operating expenses have increased by KD 1.6 million or 8% year-on-year, mainly driven by inflation adjusted increments in staff costs and the ongoing investment in the bank's digital transformation. Notably, operating expenses fell by KD 1.9 million or 8% from Q4 and are now below Q2 2022 levels. The cost-to-income ratio was 46.1% for first quarter of '23, down from 47.7% in the same period of last year. On Line 7, operating profit has increased by KD 3.2 million or 15% for the first quarter of 2023 compared to the same period of last year. This compares very favorably to the 3% growth in operating profits we saw for the full year 2022. On Line 8, you can see our credit costs increased by KD 2.1 million from 5.1% in first quarter 2022 to KD 7.2 million in first quarter 2023. Our cost of risk for the first quarter of 2023 was 56 basis points versus 43 basis points in the same period of last year. This low level of cost of risk is a result of exceptional quality of our loan book that continues to remain resilient in the higher rate environment. Turning to Page 5. We can see the balance sheet. Our total assets increased by KD 328 million, 5% to reach KD 6.8 billion. This was largely driven by a KD 257 million or 5% increase in net loans. Loans and advances to customers grew by KD 286 million or 6% year-on-year, supported by both our corporate and consumer segments, although at a much faster pace from the consumer segment as we recorded a very strong growth of 12% year-on-year. On Line 17, customer deposits declined by 2% year-on-year to reach KD 4.2 billion. We saw our CASA ratio decline to 35.3% in the first quarter of 2023 versus 41% of last year. However, it remains stable in comparison to December 2022. The decline is due to the migration to term deposits due to the higher rate environment. On Line item 18, we've increased our medium-term borrowings by [ 120% ] year-on-year, which resulted in further diversification of our funding profile and improvement in the overall duration. Moving on to asset quality. Our nonperforming loan ratio, shown on Line 25, was 0.8% at the end of March 2023, down from 1% in the same period of last year. This is one of the lowest nonperforming loan ratios the bank has ever seen and additionally, the bank continues to have significant NPL coverage ratio of 692% including total provisions and collaterals. Turning to Page 6. You can see in the chart on the left, that as of 31 March 2023, the bank has KD 139 million of excess provisions, representing 46% of total provisions, and this excess provision is the highest ever since the start of the implementation of IFRS 9. Looking at the pie charts on the top right of the page, you can see that our Stage 1 loans are relatively stable at 94.4%, Stage 2 has increased slightly to 4.8%, Stage 3 declined to 0.8%. The chart on the bottom right side of the page shows the evolution of Stage 2 and Stage 3 percentage historically. We can see that both our Stage 2 and Stage 3 remain very low and stable, and that Stage 3 is at its lowest levels when compared to previous quarters. Turning to Page 7. On the top left, our Tier 1 ratio was 13.9%, which is above our regulatory of 12%. On the bottom left, our capital adequacy ratio of 16.1% is well above our regulatory minimum of 14%. Our risk-weighted assets shown on the top right, grew by 6%, mainly driven by the year-on-year growth in our loan book. On the bottom right, our leverage ratio as of 31 March 2023, was 9.3%, which is at similar levels to the same period of last year and well above the 3% regulatory minimum. Turning to Page 8. We can see our key liquidity ratios. The chart on the left side shows our quarterly average daily liquidity coverage ratio, which was 279%. And on the right side, you can see the net stable funding ratio was 109%, but both ratios are still well above our regulatory minimums of 100%. Also, the previous relaxed regulatory minimums for the liquidity ratios and the capital adequacy ratios have now been completely restored back to the pre-COVID levels at the start of Q1 2023. Now I'll turn it back over to Dalal for the Q&A session.

Thank you, David. We are now ready for Q&A. [Operator Instructions] We received most of the questions. We have a few questions on margins. And we are seeing pressures due to increasing funding cost. And also a question about CASA. David, would you like to take this one?

Yes. Thanks, Dalal. I mean the NIM was pressured in Q1, and we saw a drop on a consecutive quarterly basis, even though year-on-year, it's increased. In Q1, all the various regulatory liquidity ratios were reinstated at pre-COVID levels. So for example, the loan-to-deposit ratio, which was at 95% for the full year '22 was lowered to the pre-COVID maximum of 90%. This caused upward pressure on the cost of deposits, particularly the 1-year tenor as banks in the market offered very attractive rates to customers to move to the new regulatory ratios. I mean the good news is we did see the monthly growth in interest expense slow during the quarter. So our view would be we're potentially getting close to a top in the cost of funds at current discount rate. There hasn't been a CBK discount rate increase since January. So it remains to be seen whether there will be more increases in 2023. We've got our retail book continuing to reprice for loans moving past the 5-year tenor. So that will act to increase the overall asset yield of the portfolio and support margin expansion. And also our CASA levels have remained stable this quarter at 35%. So I think as I said on the Q4 call, we should expect to see some level of margin expansion in 2023, but the exact quantum and sort of specific timing across the quarters, it's going to be very difficult to say in this environment.

Thanks, David. I can see a few questions related to loan book growth. Can you give us some color on loan growth this quarter? And do you expect the pace of growth to slow down with the rate hikes?

Yes. Sure. Thanks, Dalal. I think it's useful to discuss the retail and corporate book separately. On the retail side, we grew our book by 0.8% in Q1 against a system that showed zero growth. So clearly, the higher rate environment is curtailing growth in the market. But our strategy remains, which is to grow faster than the market in retail, which we did in 2022, and we're continuing this trend in 2023. So our outlook is that we expect to continue to outperform the market in retail, albeit at a lower headline pace than what we saw in 2022 due to a slowing market. On the corporate side, we saw limited drawdowns from existing customers and given where rates are at, some customers paid down existing debt. I've said before, the strategy with corporate is more one of optimization. So we're looking to improve the overall return on the book, including generating more fee income, which we did in the quarter.

Okay. We have a question on credit cost and asset quality. What is the driver of the improvement? And are you seeing any pressure on previous -- on provisions due to rate hikes? David?