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 Full Year 2024 Results Call. We have with us in the call 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 Ms. Dalal AlDousari. Please go ahead. Thank you.

Thank you, Elena. Good afternoon and welcome to Gulf Bank's Year-end 2024 Earnings Call. We will start our call today with key highlights and updates on the operating environment of Gulf Bank during the year 2024, 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. [Operator Instructions] 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 like to draw your attention to the disclosure on Page 12 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. As we look back on 2024, I am proud to highlight Gulf Bank's notable milestones and the strides we have made in advancing our vision. However, before delving into our achievements, let us first consider the broader economic context that has shaped our journey this year. The global economic landscape in 2024 experienced considerable fluctuations. Central banks worldwide started to recalibrate monetary policies to address shifting financial conditions. Here in Kuwait, the Central Bank of Kuwait took a measured approach following the U.S. Federal Reserve's first interest rate cut, with a 25-basis-point reduction in the discount rate in September versus the U.S. Fed cut of 50 basis points. This deliberate step was aimed at fostering economic growth and fortifying financial stability. Kuwait's financial system continues to demonstrate resilience, supported by stable oil prices, ambitious government initiatives towards economic diversification and the commitment to fiscal reform. Against this backdrop, Gulf Bank has played a key role in supporting Kuwait's economic development and Vision 2035 aspirations. We have actively participated in financing major infrastructure, oil and construction projects critical to the nation's growth. Yet, our contribution extends well beyond traditional banking. Gulf Bank is deeply committed to fostering social and economic progress, demonstrated by our support for small- and medium-sized enterprise and our efforts to promote financial inclusion across the community. Operationally, we have achieved remarkable progress in enhancing the efficiency and elevating customer experiences. A key milestone was the successful completion of phase 2 of our core banking system, a cornerstone of our digital transformation journey. This upgrade has empowered us to deliver seamless, personalized banking experiences to our customer, while redefining our branches as a customer-centric relationship hub. Our digital transformation efforts have been further reinforced by the launch of a new mobile banking application designed to provide a secure and intuitive platform that caters to the diverse needs of our clients. Additionally, we made strategic partnerships, which helped us introduce an array of innovative digital products and services, all aimed at delivering convenience and accessibility in an increasing dynamic banking environment. Additionally, Invest GB, our fully owned investment arm, started its operation this year with a capital of KWD 10 million, managing assets exceeding USD 3.2 billion. This strategic move aims to leverage Invest GB's expertise and resources to provide clients with streamlined and sophisticated solutions that address their unique financial goals and aspiration. In parallel, we have meaningful progress in improving operational efficiency by embedding a culture of continuous improvement across the organization. We have streamlined processes and achieved sustainable results, which will remain integral to our strategic approach. In 2024, we launched our 2030 sustainability strategy, which outlines our commitment to achieving a resilient future. This strategy includes initiatives aimed at reducing our environmental footprint, enhancing social responsibility and ensuring robust governance practices. In line with this strategy, we have recently unveiled our newly opened and redesigned branches across Kuwait, thoughtfully designed with sustainability in mind. These eco-friendly branches incorporate energy-efficient technologies and sustainable materials, reflecting our commitment to environmental responsibility. For our private banking clients, we introduced a new identity that redefines the concept of wealth management, focusing 3 core pillars: long-term wealth growth, asset protection to ensure financial security and facilitating the smooth transfer of wealth in line with clients' personal aspirations. This comprehensive approach reflects our dedication to delivering exceptional, bespoke experiences for our valued private banking clientele. At Gulf Bank, we recognize that our success is driven by our people. Investing in our workforce remains a top priority as we strive to foster a culture of continuous learning, professional growth and support career growth, including promoting talent from within the organization. Throughout the year, we implemented a range of initiatives to support the development and well-being of our employees, ensuring they are equipped to thrive in an ever-evolving landscape. Looking ahead to 2025, we remain steadfast in pursuing our strategic goals. A key focus will be the continued exploration of the feasibility of transforming Gulf Bank into a Shariah-compliant institution. Simultaneously, we will work to expand our product offerings, enhance our competitive position and maintain a robust financial performance. So with a clear vision and unwavering determination, we are confident in our ability to achieve sustainable growth and deliver long-term value to our stakeholders. Now turning to Page 3. I would like to summarize our financial results with the 6 key messages. First, our net profit declined by 15.5% for the full year 2024 to reach KWD 60.2 million and compared to KWD 71.2 million reported in 2023. Second, our earnings per share reached 16 fils for the year ending 31st of December 2024. Accordingly, the Board of Directors is recommending a distribution of cash dividend of 10 fils per share, representing a 63% cash payout in addition to 5% bonus shares. These recommendations are subject to shareholders' approval at the general -- at the Annual General Meeting to be held in March 2025. Third, our gross loans and advances reached KWD 5.7 billion, an increase of KWD 215 million or 3.9% compared to 31st of December 2023. This growth came from our corporate banking segment. Fourth, the portfolio continued to be resilient as our nonperforming loan ratio, NPL ratio, as of 31st of December '24 stood at 1.3%, together with a strong NPL coverage ratio of 340%, including total provisions and collaterals. Fifth, as of 31st of December 2024, our Tier 1 ratio was 15.2%, achieving a buffer of 323 basis points above regulatory minimums of 12%. And our capital adequacy ratio was 17.3%, achieving a buffer of 335 basis points above regulatory minimums of 14%. And sixth, the bank remains an A-rated bank by major credit rating agencies. Our current position stands as follows: Moody's Investor Service has affirmed the AAA 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-. 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 continue to grow in a sustainable way into the future. With that, I'll turn it over to our CFO, David Challinor, who will cover the financials of the year 2024 in more depth. Thank you. David, over to you.

Thanks, Waleed. Turning to Page 4. We can see the movement in net profit from KWD 71.2 million to KWD 60.2 million, which is a decline of KWD 11 million or 15%. It's worth noting that the decline of year-to-date Q3 was 25%, so we've increased profitability in the last quarter. And looking across the components, we can see the biggest driver of the decline is a KWD 13.3 million increase in credit costs, followed by a KWD 5.7 million increase in operating expenses, which was mainly driven by the other expense category. In addition, there was an increase of KWD 1.6 million relating to the general provision, which was driven by higher loan growth than last year. And on the positive side, we saw an increase in net interest income of KWD 5.8 million, primarily due to asset growth, but also an increase in noninterest income of KWD 3.3 million. So turning to Page 5. We've got a detailed breakdown of our income statement. So on line 1, interest income was up KWD 33.5 million or 9% for the year compared to the same period last year, and this was primarily due to a combination of 4% asset growth and yield expansion in our retail business. Line 2, interest expense increased by KWD 27.7 million or 13%. And it's worth noting that the growth in interest expense has slowed down from year-to-date Q3, where the growth was 17%. On line 3, net interest income grew 4% year-on-year to reach KWD 156.2 million. On line 4, noninterest income increased by KWD 3.3 million or 8%. And you can see that there was a significant increase in Q4, which was driven by profit on sale of repossessed collateral, which amounted to KWD 3.6 million. However, excluding the impact of the sale, the underlying noninterest income for Q4 was the highest of any quarter in the 2024 year. On line 5, operating income increased by KWD 9.1 million or 5%. On line 6, operating expenses have increased by KWD 5.7 million or 7% and we saw a 9% increase sequentially from Q3 to Q4, which was largely driven by the other expense category and, in particular, various consultant advisory fees, combined with IT transformation expenses. On line 7, operating profit before total provisions and impairments has increased by KWD 3.3 million or 3%. Line 8, you can see credit costs increase by KWD 13.3 million to reach KWD 42.5 million for the full year 2024. And it's worth noting that the increase was KWD 15.5 million for year-to-date Q3, and that the Q4 credit cost was the lowest of any quarter during the 2024 year, which was supported by a good level of corporate recoveries. On line 9, general provisions increased by KWD 1.6 million due to stronger loan growth here versus last year, 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. Line 12, you can see the Q4 net profit of KWD 20 million was the highest of any of the quarters. And in fact, it was the highest profit the bank has posted since Q4 2019. So if we turn to Page 6, we can see the balance sheet. Line 8, net loans and advances of KWD 5.5 million increased by 5% year-on-year. And the growth achieved this year came from our corporate business, particularly in the financial trade and real estate sectors. Line 13, total assets increased 4% year-on-year to reach KWD 7.5 billion. Lines 15 and 16, total deposits of KWD 5.6 billion increased KWD 233 million or 4% year-on-year. I mean we can see our CASA ratio decline to 27.7% versus 29.7% last year. However, there's been a system-wide decline in CASA when compared to last year, albeit it's a slower pace in recent quarters. Line 17, other borrowed funds declined by 9% year-on-year due to some prepayments of medium-term borrowings. However, this was more than offset by an increase in customer deposits. Moving on to asset quality. Our nonperforming loan ratio, shown on line 24, was 1.3% at the end of December 2024. And this was up only 0.1% from last year. And we also continue to have a significant total coverage ratio of 340% that includes total provisions and collaterals. Now turning to Page 7. So you can see in the chart on the left that as at 31 December 2024, total provisions of KWD 270 million, which is a decrease of 42% from a year ago. Now the decrease was primarily related to releases following regulatory approval of excess general provision in both the second and third quarters. And the releases were in relation to 2 corporate borrowers. These facilities moved from stage 2 to stage 3 and were then fully provided and subsequently written off. Now, however, despite these 2 releases, the excess of total provisions over IFRS 9 continues to be very healthy at 35%. Now looking at the pie chart on the top right of the page, you can see that our Stage 1 loans have increased to 95.8%, Stage 2 has declined to 2.8% and Stage 3 slightly increased to 1.4% when compared to the same period of last year. And the chart on the bottom right side of the page shows the evolution of Stage 2 and Stage 3 percentages historically. And we can see that Stage 2 declined to 2.8% in Q4 '24 from 4.6% for the same period last year. And Stage 3 continues to remain very low and stable. So if we turn to Page 8. On the top left, Tier 1 ratio was 15.2%, which is well above our minimum of 12%, our regulatory minimum. And it's worth noting that all of our Tier 1 is CET1. On the bottom left, our capital adequacy ratio of 17.3% is well above our regulatory minimum of 14%. And our risk-weighted assets, shown on the top right, increased by 5% year-on-year. On the bottom right, our leverage ratio as of 31 December 2024 is 9.8%, slightly lower than last year's level of 10.2%, but well above the 3% regulatory minimum. So turning to Page 9. We're going to see our key liquidity ratios. The chart on the left side shows our quarterly average daily liquidity coverage ratio, which is 258%. On the right side, you can see the net stable funding ratio is 111% and both ratios continue to be well above the regulatory minimums of 100%. And now I'll turn it back over to Dalal for the Q&A session.

Thank you, David. We're ready now for Q&A session. [Operator Instructions] Okay. So there's a question regarding the conversion to a Shariah-compliant bank, and any updates with the deal with Warba. David, would you like to take that question?

Yes. Thanks, Dalal. So regarding the potential conversion to Islamic banking, I'd like to refer back to our announcement on June 11, 2024. And we disclosed that our Board had authorized the engagement of an international consultant to conduct a feasibility study on converting Gulf Bank to operate in accordance with Islamic Shariah principles. And the Central Bank of Kuwait has granted its no objection for the commencement of the study. Now currently, the feasibility study is underway. And upon completion, the findings will be presented to the Board and then to the Central Bank of Kuwait. So ultimately, the decision will be brought to our shareholders at the AGM for their approval.

Next, we have received a question on OpEx, operating expense. David, would you like to take that?

Yes. Thanks, Dalal. I mean in terms of the cost-to-income percentage, we guided at the beginning of the year that we look to move this lower in 2024. And when you look at this ratio for the first 9 months of the year, it was in line when compared to the 2023 level. But in Q4, we did see a step-up in the quarterly costs, which meant for the full year 2024, our cost-to-income ratio exceeded where it was in 2023. And the main driver of the Q4 step-up was in the other expense category. And specifically, in this category, we had significant costs relating to our transformation program, the potential merger transition with Boubyan and consulting fees. And we do have further costs coming through in relation to the merger, which was called off earlier this year. And we've also signaled to the market we're moving forward with our Shariah-compliant banking feasibility journey. So we may have elevated levels in the other expense category for a while longer. However, when you look at staff costs, which represent almost 60% of our cost base, they've reduced in 2024 by around 1% and occupancy costs reduced by around 7%. So we've been working hard to optimize the core business-as-usual cost base. So I think it's important to recognize that even though reported costs are up in Q4, our core costs are being well controlled. And when we compare to other banks, our total operating expense growth of 6.6% in 2024 is the lowest of all the banks that have reported so far. Now looking forward into 2025, we're going to continue our cost optimization journey and we are targeting a fall in the full year cost-to-income ratio. But as I said, we may experience elevated levels in the other expense category for a while. And I think we need to be cognizant that we're moving forward with our Shariah-compliant feasibility. So it's really a question of whether the ongoing optimization of our BAU cost base outweighs the additional cost of the feasibility and potential conversion, which is obviously subject to the relevant approvals.

Okay. We have a question on credit costs and expectations for next year. David?

Yes. Thanks, Dalal. I mean in 2024, there's been a lot of dynamics and complexity at play when we look at the bank's credit costs. Just to recap, they were higher by KWD 13.3 million, 46% than in 2023. Now our full year cost of risk for 2024 is 75 basis points, which exceeded the top end of the guidance we gave at the start of the year of 70 basis points. But to fully understand the credit cost dynamics, we need to look at corporate and retail separately. Now on the corporate side, 2024 represented a cleanup year of many old legacy accounts. In fact, in each quarter in 2024, we reached full provision and subsequent write-off of one material corporate account. And this is why our Stage 2 percentage was from 4.6% at the end of '23 to 2.8% at the end of '24. And not only is this the lowest the bank has seen since the introduction of IFRS 9, but it's lowest of any bank in Kuwait. So we're very comfortable with the asset quality status of the corporate book. And now, of course, we've already passed the point of peak interest rates and have moved into an easing cycle, which gives me more confidence around the quality of the book. Also, for 2 of the large corporate accounts, we were able to utilize our excess general provisions in both Q2 and Q3 to significantly buffer the potential P&L hits arising from moving to 100% provision. And this utilization of excess general provision is really a testament to the bank's very strong provisioning levels. On the retail side, I've said before that the credit costs have been elevated each quarter this year. And in Q4, we saw a continuation of a similar trend. And whilst we've strengthened collection mechanisms and we ceased underwriting in the segments where we identified poor assets quality outcomes, it could take some more time before we start to see the retail credit costs normalize. I mean looking forward into 2025, I think the credit cost may be lower than what we saw in 2024. I'd expect the corporate book to perform better given that many of the legacy accounts are now behind us. However, retail may remain elevated for some time. So I think on balance, an annual credit cost in the 60 to 70 basis point range could be achievable for 2025.

Thank you, David. We'll pause for a few minutes to receive more questions. Okay. So we have a few questions related to loan growth. David, would you like to comment on that?

Yes. Thanks, Dalal. I mean gross loans and advances have grown 4% this year. We did give guidance at the start of the year, the full year loan growth would be around mid-single digits, and we've achieved this. And the growth this year has been dominated by our corporate book, which grew almost 10%. And this is a significant turnaround from 2023, where we saw a degrowth in the corporate book of 1%. Now in terms of the market growth, we saw corporate grow by around 9.3%. So we've outperformed the market in corporate. And I've said before, we're shifting focus more towards local deals as we expect activity to pick up in this space. So in Q4, we did see a degrowth as we reposition the book by reducing exposure to foreign currency loans. And our local pipeline is strong. which reflects renewed activity in the market. So I'd expect to see good loan growth in corporate space going forward. On the retail side, I mean, the market has been slow, which is a function of the higher rate environment as, obviously, the retail loans are fixed rate. However, we did see a pickup in the second half in the system level, and we're keen to resume our growth in retail, but this will have a dependency on the timing and size of local rate cuts. Looking forward into 2025, I'd expect full year loan growth to be around mid-single digits again, but with a return to growth in our retail business and with more focus on local deals within the corporate business.

Thanks, David. We have a question on NIMs. How should we be thinking about NIMs for the next 2 quarters, considering the September rate cut of 25 basis points by CBK, as well as a potential new rate cut of 25 basis points in the first half of 2025?

Yes. Thanks, Dalal. I mean if we look at the first 9 months of 2024, we held our margin versus the same period 2023, and we were sitting at a year-to-date margin of around 214 basis points. Now we saw the CBK cut rates by 25 points for the end of Q3, but we've also seen multiple cuts in dollar rates in Q3 and into Q4. So whilst we did see the cost of funds continue to fall in Q4, and it's the third successive quarter fall in the year, however, given the immediate repricing impact due to the rate cuts, we did see a fall in margin in Q4. So for the full year 2024, our margin is now sitting at 212 basis points. Now clearly, the biggest driver of margin going forward will be the timing and size of rate cuts. We've disclosed in our financial statements the impact of a 25-basis-point change to our net interest income. And for our KWD book, this is KWD 1.5 million. And for our USD book, it's KWD 1.1 million, which gives a total of KWD 2.6 million for every 25 basis points. And this also assumes a parallel shift across both sides of the balance sheet. So in 2025, I think we'll likely to see further margin reductions driven by benchmark rate cuts. But to provide guidance on the quantum of such reductions given the uncertainties around size and timing is very difficult.

Okay. Since we have no further questions. I believe we have covered the majority of topics and questions raised today during the call. You may refer to Page 11 of the presentation for 2025 guidance summary. 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 email. Thank you all very much for your participation today.