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

Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to Gulf Bank's Full Year 2023 Earnings Webcast. It is a pleasure to have with us in the call the following speakers from Gulf Bank, Mr. Waleed Mandani, acting CEO; Mr. David Challinor, CFO; and Ms. Dalal AlDousari, Head of Investor Relations. I would like to hand over the call now to Mr. AlDousari. Please go ahead.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's Year End 2023 Earnings Call. We will start our call today with key highlights and updates on the operating environment of Gulf Bank during the year-end 2023, presented by the acting Chief Executive Officer; 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. So 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. Waleed Mandani. Waleed?

Thank you, Dalal. Good morning, and good afternoon, everybody. Our 2023 performance demonstrate excellent progress with Gulf Bank delivering strong net profit and growth momentum. We made tremendous strides towards our key strategic priorities centered around digital transformation initiatives to improve the customer experience, accelerate development and drive operational efficiencies. We remain focused on generating strong and sustainable long-term value to our stakeholders. During the year, the Kuwaiti economy continued to show resilience despite a challenging global market and an uncertain economic outlook. These challenges included high inflation levels, tighter monetary policy and geopolitical disputes, amongst others. However, the local economy remains stable, supported by good oil prices, accelerated governmental projects, awards and overall recovery of economic activity. On local macroeconomic front, the Central Bank of Kuwait has continued to tighten monetary policy, albeit at a relatively slower pace compared to the U.S. Fed. Since the beginning of the year 2023, the Central Bank of Kuwait has raised its key discount rate 2x, resulting in a 75 basis points increase, bringing the discount rate to 4.25%. During the year, credit growth slowed down to 2.2% compared to an overall credit growth of 8.6% for the prior year according to the latest industry data published by the Central Bank of Kuwait. One of the key milestones during the year 2023 was the implementation of Phase 1 of the new core banking system. This milestone represents a major leap in the bank's digital transformation journey. It empowers the bank to provide enhanced services, improve efficiency and deliver seamless customer experiences. The new systems deployment showcases Gulf Bank's commitment to better serve its valued customers using cutting-edge technology. Another major achievement for the bank during the year was the launch of the latest version of its mobile application. The new version of the app incorporates advanced security features to safeguard customer data and financial transactions while providing a seamless user experience. In addition, the bank has obtained the necessary final regulatory approvals to set up Gulf Capital investment company known as Invest GB to operate officially as a wholly owned investment subsidiary of the bank. The activities of Invest GB will be focused on asset management and advisory services, complementing the bank's core business while enhancing customer offerings predominantly for our private and corporate banking clients. We believe these complementary services will positively enhance the fees and commissions of the bank in the future. Furthermore, during the fourth quarter of 2023, Gulf Bank has successfully completed a capital increase totaling KD 60 million. This was approximately 7x oversubscribed. The significant subscription reflects shareholders' confidence in Gulf Bank's potential capabilities. The increase aims to strengthen the bank's capital base, enhance regulatory capital ratios and enable the pursuit of future growth opportunities aligned with the bank's long-term strategy. Now turning to Page 2. I would like to summarize our financial results with 6 key messages. First, our net profit grew by 15.2% for the year 2023 to reach KD 71.2 million in comparison to KD 61.8 million reported in 2022. Second, our earnings per share is up 13.2% to KD 0.21, and the Board of Directors is recommending a distribution of cash dividend of KD 0.12 per share, representing a 57.4% cash payout in addition to 5% bonus shares for the shareholders' approval at the Annual General Meeting to be held in March 2024. Third, our gross loans and advances reached KD 5.5 billion, an increase of KD 68 million or 1.2% compared to the end of 2022. This growth was supported by both our corporate and consumer segments, although at a faster pace for consumer segment. Fourth, the portfolio continued to be resilient as our nonperforming loans ratio, NPL ratio for the year-end 2023 stood at 1.2%, together with a strong NPL coverage ratio of 466%, including total provisions and collaterals. Fifth, as of 31st of December 2023, our Tier 1 ratio was 15.8%, achieving a buffer of 384 basis points above regulatory minimums of 12%. And our capital adequacy ratio was 18%, achieving a buffer of 402 basis points above regulatory minimums of 14%. And sixth, the bank remain an A-rated bank by major credit rating agencies, our current position stands as follows: Moody's Investor Services has affirmed the A3 long-term deposit rating of Gulf Bank and changed the outlook to positive from stable. Fitch Ratings has affirmed the bank's long-term issuer default rating at A with a stable outlook and a viability rating of BBB-. Capital Intelligence affirmed the bank's long-term foreign currency rating of A+ with a stable outlook. So our performance during the year has further strengthened the bank's fundamentals. Looking forward, Gulf Bank is very well positioned to deliver superior shareholder returns and will continuing to grow in a sustainable way into the future. So with that, I'll turn it over to our CFO, David Challinor, who will cover the financials of the year 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 61.8 million to KD 71.2 million. The increase was mainly driven by KD 8.2 million in net interest income due to asset growth and margin expansion. In addition, there was an improvement of KD 1.4 million in total provisions and impairments and KD 1 million in noninterest income, which was partially offset by an increase in operating expenses of KD 0.6 million. However, the operating expenses increased by only 0.7% year-on-year. You can also see return on equity improved by 0.6% to reach 9.6%. Turning to Page 4. We have a detailed breakdown of our income statement. On line 1, interest income was up KD 125.5 million or 51% for 2023 compared to last year. This was primarily due to CBK discount rate hikes, coupled with asset growth. On line 2, our interest expense increased by KD 117.3 million or 115%. We're continuing to see cost of fund increases but believe we may be coming close to a peak. On line 3, net interest income grew 6% to reach KD 150.4 million and Q4 grew by 3% when compared to Q3. This represents the third consecutive quarterly growth in net interest income. On line 4, our noninterest income increased by KD 1 million or 2% compared to last year, and Q4 grew by 11% when comparing to Q3. So this is the second consecutive quarterly growth in noninterest income. On line 5, operating income increased by KD 9.2 million or 5%. On line 6, operating expenses have increased by KD 0.6 million or 1% for the full year 2023, while the cost-to-income ratio has improved significantly, down 2% to 45.6% from 47.6% last year. In addition, the 2023 results have shown positive jaws as the operating income growth has exceeded the operating expense growth by 4 percentage points. On line 7, operating profit before provisions and impairments has increased by KD 8.6 million or 9%. And in fact, the Q4 operating profit of KD 28.2 million is the highest operating profit since 2019. On line 8, you can see our credit costs increased by KD 4.2 million from KD 24.9 million in 2022 to KD 29.2 million in 2023. So our cost of risk was 54 basis points this year versus 47 basis points last year, and this low level of cost of risk is a result of our prudent risk management and the quality of our loan book that continues to remain resilient in this higher rate environment. On line 11, our full year 2023 net profit reached KD 71.2 million, which is a historic high for the bank since the global financial crisis and represents an increase of 15.2% year-on-year. Looking at the ratios at the bottom from line 12 to 16, we can see that we had improvements in ROA, ROE, cost-to-income ratio at NIM and cost of risk was only 8 basis points higher than 2022 and remains very low. Turning to Page 5. We can see the balance sheet. On line 8, net loans and advances of KD 5.2 billion as at 31 December 2023, increased by 1% year-on-year. We've seen a significant slowdown in credit growth for 2023 in the system but believe 2024 will be stronger. On line 13, total assets increased 5% year-on-year to reach KD 7.2 billion. Lines 15 and 16, total deposits of $5.4 billion increased by KD 346 million or 7% year-on-year. We did see our CASA ratio decline to 29.7% versus 35.2% last year. We've seen a significant decline in CASA in the system due to the higher rate environment, but we've maintained our market share. On line 17, we've increased our medium-term borrowings by 15% year-on-year, which resulted in further diversification of our funding profile and improvement in overall duration. Moving on to asset quality. Our nonperforming loan ratio shown on line 24 was 1.2% at the end of December 2023, which is only slightly higher than the same period last year, 1.1%. Also, we continue to have significant NPL coverage ratio of 466% that includes total provisions and collaterals. Turning to Page 6. We can see in the chart on the left, as at 31 December 2023, we have KD 125 million of excess provisions, representing 40% of total provisions. Looking at the pie charts on the top right of the page, you can see that our Stage 1 loans have increased to 94.1%. Stage 2 has declined to 4.6%, and Stage 3 remains the same at 1.2% when compared to last year. 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 Stage 2 and Stage 3 remain very low and stable compared to previous quarters, which is a very pleasing outcome given the higher rate environment. Turning to Page 7. On the top left, our Tier 1 ratio was 15.8%, which is well above our regulatory minimum of 12%. On the bottom left, our capital adequacy ratio of 18% was well above our regulatory minimum of 14%. Both ratios were significantly enhanced in Q4 due to the proceeds of the rights issue and the inclusion of the full year profits, less applicable deductions towards capital. Our risk-weighted assets shown on the top right are almost flat when compared to last year. On the bottom right, our leverage ratio as at 31 December 2023 was 10.2% in comparison to 9.7% last year and well above the 3% regulatory minimum. Turning to Page 8. We can see our key liquidity ratios. Chart on the left side shows our quarterly average daily liquidity coverage ratio, which is 271%. And on the right side, you can see the net stable funding ratio is 109%. Both ratios continue to be well above regulatory minimums of 100%. So now I'll turn it back over to Dalal for the Q&A session.

Thank you, David. [Operator Instructions] Okay. We can see questions related to margins and trends going forward. David, would you like to comment?

Yes. Thanks, Dalal. I mean for Q4, we continue to see the margin expand but at a slower pace than for Q2 and Q3. And for the full year, 2023, our net interest margin was 217 points versus the prior year, which was 210. And this increase was in line with the guidance that we gave at the beginning of the year. As you know, the margin dynamics are very complex. There's many variables. But what we did see is cost of fund pressures accentuate in Q4. The system has seen a significant drop in CASA, particularly in the second half of the year. In the first half, the system for CASA dropped KD 440 million or 2.5%. But in the second half, it fell a further KD 1.3 billion, which was 7.7%. So this fall is causing upward pressure on the cost of funds as banks must replace with more expensive fixed deposits. And this too in a quarter where banks are focused on year-end ratio management. So whilst we've maintained our market share in CASA, the overall drop in the size of the market still impacted our cost of funds negatively. However, we do think that the expectations around the level of future rates has dampened so new term deposits are now being priced lower than earlier in the year. And as such, we believe that Q4 cost of funds may be nearing a peak. So we may see cost of fund pressure start to ease throughout 2024, which will be positive for margin. However, the unknown as to whether the local discount rate will drop in 2024. And if so, what would be the impact on the screen rates for deposits. So it's very difficult at this stage to provide some meaningful guidance around where the margin is headed.

There are a few questions on loan growth. And what segment drove this growth, David?

Yes. I mean if we look first at Q4, we saw a growth of KD 40 million, which was a good turnaround from the degrowth of KD 17 million that we saw in Q3. For the full year, we had overall growth of 1.2% with retail dominating, leading to another year of market share gains for the retail business. In terms of the system, 2023 was a slow year with only 2.2% growth, which is much less than the 8.6% we saw in 2022. And as I've said before, I think the higher rates curtailed growth coupled with an overhang from such a strong 2022. If we look at the system for the first half, we saw 0 growth in retail and 1.6% growth in corporate. However, what we've seen in the second half is increased momentum in retail which has shown a growth of 1.5% in the second half. So we think that's a good sign for 2024, and we believe the retail space will return to decent growth. We're aiming to continue gaining market share, which we've done in both 2022 and 2023. So we think this second half trend will play nicely into our strategic goals for next year. On the corporate side, we saw decent growth in Q4 and have a strong pipeline. We also believe that the market will be more active in 2024 and have seen signs of positive movement in the project space locally. So all in all, I think we should expect an improvement in loan growth next year, more in line with the long-term system average, there seems to be around mid-single digits.

Thank you, David. On asset quality and cost of risk, are the levels seen in 2023 sustainable going forward. David?

For 2023, the credit costs were KD 29 million, which translated to a cost of risk of 54 basis points. 2022, that was slightly lower at KD 25 million, which is a cost of risk of 47 basis points. So we've had 2 consecutive years now where credit costs have been historically very low. And for at least the last year, we've had interest rates at elevated levels. So I'm very pleased with this continued low level of credit costs considering where rates are at. In Q4, we did see a tick up from Q3 in both specific provision and net credit costs. The main driver of this increase was in the retail book. We've seen strong growth in this book in recent years as compared to corporate, so it makes sense that new NPL formation is more likely going to come from this segment. However, the good news is that the underlying new NPL formation in the retail book for 2023 was slightly lower than in 2022. And when you also look at the past due but not impaired bucket for retail, you can see that it's broadly similar from 1 year to the next, which is also very encouraging. On the corporate side, we've seen very little in the way of new NPL generation in 2023, and we've had some decent recoveries, especially in the first half. When we look at all the asset quality indicators, we continue to see very low stage 2 percentage. It's only 4.6% of the whole book, which compares very favorably to all the banks in the system and is a testament to our conservative underwriting policy. And our NPL percentage continues to be very low at 1.2%, which is broadly similar from a year ago. So looking forward to 2024, my view at this stage will be we're likely to see credit costs higher than in 2023. And I would expect the full year charge to land somewhere in the 50 to 70 basis point range. However, we often see variability in credit costs from quarter-to-quarter due to provisioning requirements as NPLs age and also recoveries can be material to the quarterly number. But I think for the full year, we could nonetheless expect to land in this range.

Thanks, David. [Operator Instructions] Okay. We received the questions on OpEx. And if we have a midterm target for cost-to-income ratio. David?

Yes. I mean the total cost growth was under 1% year-on-year, which is a strong outcome and demonstrates our prudent approach to cost control during 2023. We saw staff costs drop around KD 1.7 million and other expenses increased by around the same amount. And a key driver of the other expenses was IT costs related to our transformation program. Looking at the cost-to-income ratio, I mean there's been a meaningful drop of 2%, and it now stands at 45.6%, down from 47.6% a year ago. And for the fourth quarter [indiscernible], the number is 43.8%, which is the lowest quarterly ratio in the last 2 years, which is a very positive result. We've also seen an improvement in the jaws ratio, where the total income growth percentage is greater than the total cost growth percentage, and it's widened to 4%, which is a strong turnaround from the negative jaws that we saw for 2022. So looking forward, I mean, we have embarked on a journey to bring down the cost-to-income ratio over time, and we'll be targeting further falls for 2024.

Thanks, David. We received an additional question on fee income -- noninterest income. How can it be improved from current levels?

Yes. Thanks, Dalal. I mean we saw an improvement in noninterest income in Q4. It was a second consecutive quarter of positive growth. For the full year, we're up 2%, which is double the loan growth. So we'd expect this to keep growing, especially given our more positive outlook on loan growth for next year, particularly on the corporate side. We're very focused on improving noninterest income and product developments and elements of our ongoing transformation, we believe, will assist in this.

Okay. Thanks, David. We received a question on -- there are any updates on the home financing law? Well, it's been nearly 2 years since the first announcement of the draft law of real estate financing for the private housing in Kuwait. We have renewed confidence that the law will ultimately materialize as an alternative financing option through local banks. We are optimistic about the potential mortgage loan in Kuwait and its positive impact on the overall credit market. And we believe that the law aligns well with our bank's retail-focused strategy. And we are in a good position to benefit from this market opportunity. I believe we have covered the majority of topics and questions raised today during the call. Now I would like to move to Page 10 to provide guidance on some key indicators. For loan growth, our strategy remains unchanged, that is to grow faster than the market in retail. We had achieved this as our retail loans grew 2.5% versus the system growth of 1.5%, resulting in additional market share gains. For the year 2024, we aim to grow more in line with the long-term system average that seems to have been around mid-single digits. Second, we have also guided earlier that the cost-to-income ratio is expected to decrease. This was achieved during the year, and it's at lower levels compared to last year. We expect this declining trend to continue. Third, we have guided earlier that the cost of risk will likely be under 100 basis points. This was achieved throughout 2023, as our cost of risk has been below 100 basis points for the past 8 quarters. We continue to proactively managed our balance sheet, and we expect at this stage, the full year charge to land somewhere in the 50 to 70 basis points range. Fourth, and finally, the nonperforming loan ratio was expected to remain under 2%. This was achieved as our NPL ratio remained near the 1% levels over the previous quarters. We aim to keep our NPL ratio under the 2% mark due to our prudent risk management approach. 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 out at our dedicated Investor Relations email. Thank you all very much for your participation today.