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 First Half 2024 Results Call. We have with us in the call from Gulf Bank, Mr. Sami Mahfouz, Deputy CEO; Mr. David Challinor, CFO; and Mr. Youssef Dib, Investor Relations. I would like to hand over the call now to Mr. Youssef Dib to begin with the presentation. Thank you.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's First Half 2024 Earnings Call. We'll start our call today with key highlights and updates on the operating environment of Gulf Bank during the first half of the year, presented by the Deputy Chief Executive Officer, Mr. Sami Mahfouz, 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. Sami Mahfouz. Sami?

Thank you, Youssef. Good morning and good afternoon, everyone, and thank you for joining us today for our first half 2024 earnings call. Allow me to start with a brief preview of our operating environment to provide context on the economic landscape within which we operate. As we navigate through 2024, we are witnessing significant economic development, both globally and locally. On the global front, the world economy is showing signs of resilience with increased stability in financial markets, improved consumer confidence and a gradual rise in international trade activities. However, challenges such as spikes and inflationary pressures and geopolitical tensions continue to influence the global economic landscape. Additionally, the anticipation of interest rate movements by the Federal Reserve is a key factor with implications on borrowing costs, investment decisions and the global economic growth trajectories. Locally, in Kuwait, the economy is benefiting from the relative stability in oil prices at current levels, bolstered by ongoing government initiatives aimed at diversifying the economy and fostering sustainable growth. The recent economic reforms and re-emergence of investments in infrastructure projects have enhanced business confidence and are expected to drive future economic expansion. Against this backdrop, the bank has positioned itself to capitalize on any emerging opportunities that will arrive domestically through supporting its clients and being at the forefront to capture its share of future economic expansion. Moving on to Gulf Bank's second quarter results of the 2024. We continue to exhibit a robust operational performance, reinforced by strong top line growth and sound financial position metrics. We continue to face headwinds with our credit costs, which resulted in a drop of our net profit growth during the first half of the year compared to the same period of last year. However, we remain confident in the bank's future potential. Having said that, we have seen our loan book expand during the first half of the year, reflecting the success of our strategic initiatives in meeting our clients' evolving needs. This growth in loans display our capacity to navigate and excel in dynamic market conditions, reinforcing our prominent position in the Kuwait banking sector. To update you on our core banking transformation, I am very pleased to announce the successful completion of Phase II of our core banking system, a significant milestone in our journey towards advancing customer centricity. This achievement strengthens our operational capabilities and reaffirms our focus to meet the evolving needs of our clients in a digitally driven area. We are ready to leverage these technological foundational changes to drive operational efficiencies and transform our branches into relationship and experience centers, aiming to provide a personalized and seamless banking experiences to our clients. Moreover, I would like to stress on Gulf Bank's readiness to support Kuwait's developmental projects, in line with the principles of transparency, achievement and sustainability. We provide diverse financing plan that meet the evolving needs of this phase. Gulf Bank has played, and will continue to play, a significant role in Kuwait's urban and economic development, and our contribution varies between direct funding and partnership with other financial institution. So far, we have already financed multiple initiatives crucial to Kuwait's Vision 2035, particularly in sectors such as oil, construction and infrastructure, emphasizing our essential role in Kuwait's ongoing progress and prosperity. Lastly, and more recently, we have disclosed today that Gulf Bank and Boubyan Bank have presented a proposal for a strategic opportunity for growth and expansion through the merger of the 2 banks, whereby creating one entity compliant with the provisions of Islamic Shariah. This proposal was presented to Gulf Bank's Board of Directors at its meeting held on the 30th of July yesterday and was approved. Moreover, the Board issued its directives and recommendations to move forward to carry out the needful actions to commence the initial feasibility study and necessary due diligence for the merger after obtaining the necessary approvals in this regard. Accordingly, Gulf Bank informed the Central Bank of Kuwait yesterday, 30th of July, with the above, and in return, received from the Central Bank the necessary guidelines to be followed for the merger process. Based on that, Gulf Bank will commence communications with Boubyan Bank to sign a memorandum of understanding and confidentiality agreement in preparation for the initial feasibility study. Now turning to Page 2, I would like to summarize our financial results with 6 key messages. First, we have recorded a net profit of KWD 28.2 million for the first half of '24, a decline of KWD 7.6 million or 21.3% compared to 2023 first half net profit of KWD 35.8 million. Second, our operating profit before provisions have increased to KWD 52.6 million, representing a healthy growth of 6.6% compared to the first half of 2023. Thirdly, our gross loans and advances reached KWD 5.8 billion, a year-to-date increase of KWD 318 million or 5.8% compared to 31st December 2023. This growth came primarily from the Corporate Banking segment. Fourth, the portfolio continued to be resilient, as our nonperforming loan ratio, as of the 30th of June '24, stood at 1.2% with a strong NPL coverage ratio of 390%, including total provisions and collaterals. Fifth, as of 30th of June, our Tier 1 ratio was at 14.23%, with a buffer of 223 basis points above regulatory minimum of 12%, and our capital adequacy ratio was at 16.35%, with a buffer of 235 basis points above regulatory minimum of 14%. Lastly, the bank continues as an A-rated bank by major credit rating agencies. Our current position stands as follows: Moody's Investor Service has affirmed the A3 long-term deposit rating of Gulf Bank with a positive outlook. Fitch Ratings has affirmed the bank's long-term issuer default rating at A with a stable outlook and a viability rating of BBB minus. Capital Intelligence affirmed the bank's long-term foreign currency rate, A+ with a stable. So looking forward, we remain committed to driving sustainable growth and delivering value to all our stakeholders. With that, I'll turn it over to our CFO, David, who will cover the financials of the first half of 2024 in more depth. Thank you. David, over to you.

Thanks, Sami. Turning to Page 3. We can see the movement in net profit from KWD 35.8 million to KWD 28.2 million. The decline of KWD 7.6 million is mainly attributed to higher credit costs of KWD 8.6 million, which primarily came from the retail book. We also had much lower recoveries, mainly from our Corporate business, than we had in H1 '23. There was an increase of KWD 2.6 million relating to the general provision, driven by loan growth, which is very strong in H1 '24 versus H1 '23. In addition, there was an increase in net interest income of KWD 6 million due to asset growth and margin expansion. There was also a decrease in noninterest income of KWD 1.4 million and an increase in operating expenses of KWD 1.4 million. Turning to Page 4. We've got a detailed breakdown of our income statement. On line 1, interest income was up KWD 25.5 million or 15% for H1 '24 compared to last year. This was primarily due to a combination of margin expansion and 7% asset growth year-on-year. On line 2, interest expense increased by KWD 19.5 million or 19%. It's worth noting that the growth in interest expense has slowed significantly from the full year 2023, where we saw a 115% increase. On line 3, net interest income grew 8% year-on-year to reach KWD 77.6 million, and this compares favorably to the full year 2023 growth of 6%. On line 4, noninterest income decreased by KWD 1.4 million or 7% compared to H1 '23, primarily due to a one-off in our Cards business in Q1 '23. However, the Q2 '24 level for noninterest income is a 4% improvement over Q2 '23. Line 5, operating income increased by KWD 4.6 million or 5%. On line 6, operating expenses have increased by KWD 1.4 million or 3% versus H1 '23. You can see across Slide 6 that operating expenses over the last 6 quarters have been kept in a relatively narrow range from KWD 21.4 million to KWD 22.6 million as we continue to control costs. In addition, the cost-to-income ratio for H1 '24 has declined by 0.8 percentage points from the same period last year. Also, the operating results show positive jaws as the operating income growth has exceeded the operating expense growth by 2 percentage points. On line 7, operating profit has increased by KWD 3.3 million or 7%. On line 8, you can see our credit costs increased by KWD 8.6 million to reach KWD 20.6 million in H1 '24. The majority of the credit cost increase has come from the retail book, but the level of recoveries, which act to net against the specific provision, is also much lower than in H1 '23. On line 9, general provisions increased by KWD 2.6 million due to very strong loan growth in H1 '24 versus a flat loan book in H1 '23. And a 1% charge is required to be taken as a general provision, as per CBK regulations, mainly against nongovernment loans booked in the quarter. On line 12, looking across the quarters, we can see that the Q2 '24 profit of KWD 15.3 million is the second lowest in the last 6 quarters, and this has been primarily due to the elevated level of credit costs on account of the retail book, coupled with the higher general provision due to very strong loan growth. However, there's been a 19% sequential growth in quarterly net profit from Q1 '24. Turning to Page 5, we can see the balance sheet. On line 8, net loans and advances of KWD 5.6 billion increased by both 7% year-on-year and year-to-date. The strong growth achieved this year is predominantly coming from our Corporate segment, as opposed to last year, where Corporate showed a degrowth of 1%. On line 13, total assets increased by 7% year-on-year to reach KWD 7.4 billion and 4% year-to-date. On lines 15 and 16, total deposits of KWD 5.6 billion increased by KWD 381 million or 7% year-on-year and 4% year-to-date. We did see our CASA ratio decline to 28.5% versus 34.8% last year. However, there's been a system-wide decline in CASA due to the higher rate environment. On line 17, we've increased our medium-term borrowings by 14% year-on-year, which resulted in further diversification of our funding profile and improvement in overall duration. And moving on to asset quality, our nonperforming loan ratio, shown on line 24, was 1.2% at the end of June '24, which was higher than the same period last year, but in line with the level as at Q4 '23. Also, we continue to have a significant total coverage ratio of 390% that includes total provisions and collaterals. Now turning to Page 6, you can see in the chart on the left, as at 30 June 2024, total provisions of KWD 274 million, which is a decrease of KWD 33 million from a year ago. And the decrease was primarily related to a release following regulatory approval of excess general provision. The release was in relation to a corporate borrower, whose facilities moved from Stage 2 to Stage 3 during Q2, and were then fully provided for and subsequently written off. However, despite this release, the excess of total provisions over IFRS 9 continues to be very healthy at 42%, which is even higher than the excess of 40% a year ago. Looking at the pie charts on the top right of the page, you can see that our Stage 1 loans have increased to 95.6%, Stage 2 has declined to 3.1% and Stage 3 increased to 1.3% when compared to the same period of last year. The chart on the bottom right side of the page shows the evolution of Stage 2 and Stage 3 percentages historically. We can see that Stage 2 declined to 3.1% in Q2 2024, primarily due to the corporate borrower whose facilities were downgraded to Stage 3 and then subsequently written off after they were fully provided for. Stage 3 continues to remain very low and relatively stable, which is a very pleasing outcome given the higher rate environment. Turning to Page 7. On the top left, our Tier 1 ratio was 14.2%, which is well above our regulatory minimum of 12%. On the bottom left, our capital adequacy ratio of 16.4% was well above our regulatory minimum of 14%. And it's worth noting that both ratios don't include H1 '24 profits and are after the payment of the annual dividend. Our risk-weighted assets, shown on the top right, increased by 8% year-on-year. On the bottom right, our leverage ratio as of 30 June 2024 is 9.2%, slightly higher than last year's level of 9% and well above the 3% regulatory minimum. Now 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 is 249%. And on the right side, you can see the net stable funding ratio, which is 109%. And both ratios continue to be well above the regulatory minimums of 100%. Now I'll turn it back over to Youssef for the Q&A session.

Thank you, David. We are now ready for Q&A session. [Operator Instructions] Okay. We will go through the questions now. We have a few questions related to loan growth. Does the pickup -- how much was the corporate loan growth year-to-date in 2024? And what are the drivers of growth this quarter? And how sustainable beyond this point? David?

Yes. I mean, in Q2, we saw, yes, another very strong quarter for loan growth. Total gross loans and advances grew KWD 142 million in the quarter, which followed a very strong Q1, where we grew KWD 177 million. So this brings year-to-date loan growth for the first half to 5.8%. And this compares very favorably to the full year 2023 loan growth, which was 1.2%. Now in terms of the composition, the growth in Q2 was almost entirely dominated by Corporate Lending, which is what we also saw in Q1. The market continues to be muted on the Retail side and has shown less than 1% growth to the end of May, according to the CBK data. And our view is this trend may continue until we start to see rates come down. When we look at the year-to-date Corporate growth, around 2/3 of it has been in the form of foreign currency lending to nonresidents. And we can see from the CBK system data to the end of May that around half of the total system growth of KWD 1.5 billion has been lending to nonresidents. But we anticipate that local market activity may start to strengthen in the second half given the renewed optimism. In looking forward, I'd expect the second half loan growth to be slower than the first, but still dominated by Corporate and with the focus being more on local resident lending.

Thank you, David. Okay. We received a question, on the pickup of OpEx in Q2 '24, does it indicate an income spend? Or is it just a one-off? David?