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 2025 earnings call. We have with us in the call from Gulf Bank, Mr. Waleed Mandani, Acting CEO; Mr. David Challinor, CFO; and Mr. Dalal AlDousari, Head of Investor Relations. I would like to hand over the call now to Mr. Dalal AlDousari. Please go ahead. Thank you. Dalal, you need to unmute your microphone, please?

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's First Quarter 2025 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 2025 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. [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 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, everybody. Gulf Bank's financial performance in the first quarter of 2025 reflects the ongoing challenges facing the financial sector. Despite the headwinds, Gulf Bank's underlying fundamentals remain strong, supported by a resilient balance sheet, sound risk management and a clear strategic direction. While net profit of KWD 9.4 million and operating income of KWD 44 million in the first quarter of 2025 were lower than the same period last year. This was driven by systemic factors, including a declining interest rate environment, which continued to exert pressure on net interest margin's, overall profitability. The global economic landscape remains volatile, geopolitical tensions, newly imposed tariffs and ongoing trade restrictions are weighing on market confidence. These recent developments may affect government capital spending, particularly on development projects, which could slow credit demand and investment momentum. Locally, recent government reforms present a promising outlook for national development. The approval of long anticipated public liquidity and finance law, with a public borrowing ceiling of KWD 30 billion will enable the government to finance strategic infrastructure initiatives and support efforts to diversify revenue sources beyond the oil sector. This measure is expected to stimulate overall activity and create new opportunities for growth within the banking industry. Furthermore, the proposed real estate financing law is designed to ease existing difficulties in the public housing segment by permitting commercial banks to provide housing finance solutions thereby opening a new revenue and growth stream for local banks. These legislative among other advancements align with Kuwait's Vision 2035 and are expected to boost investor confidence and support long-term prosperity. As we reflect on our performance in the first quarter of 2025, we remain focused on delivering long-term value despite the pressures of the macroeconomic landscape. While our financial performance was impacted by sector-wide factors, we made meaningful progress on several strategic fronts that reinforce the bank's underlying strength and long-term direction. During the quarter, Gulf Bank successfully closed its debut international syndicated loan transaction, raising $650 million through a senior unsecured term facility. The transaction, which was significantly oversubscribed, attracted strong participation from both regional and global institution underscoring investor confidence in the bank's credit profile and strategic vision. This diversifies our funding base, enhances financial flexibility and positions us to support future growth opportunities more effectively. In parallel, we continued to invest in our most valuable asset, our people. During the quarter, we continued to invest in the long term strength of our leadership team by advancing experienced professionals into key executive roles. This reflects our commitment to developing national talent and building leadership from within. By nurturing internal capabilities, we promote continuity, reinforce our culture and enhance our ability to navigate a dynamic and evolving market landscape. Looking ahead, we remain committed to supporting our clients, driving operational excellence and executing on our strategic initiatives as we navigate the evolving economic landscape with the resilience and purpose. As we progress through 2025, Gulf Bank remains focused on executing its strategic priorities with discipline and resilience. In line with our long-term vision for sustainable growth, we have initiated the ground work for the potential conversion to a Shariah-compliant institution, of course, subject to obtaining relevant regulatory approvals, an important step aligned with our long-term vision for sustainable growth. Now turning to Page 2. I would like to summarize our financial results with 6 key messages. First, we recorded a net profit of KWD 9.4 million for the first 3 months of 2025, a decline of KWD 3.5 million or 27.3% compared to 2024's first 3 months net profit of KWD 12.9 million. Second, our operating income reached KWD 44 million, a decline of KWD 4.3 million or KWD 8.9 million compared to the first quarter of 2024. Third, our gross loans and advances reached KWD 5.9 billion, a year-to-date increase of KWD 158 million or 2.8% compared to 31st of December 2024. This growth came mainly from our Corporate Banking segment. Fourth, although the nonperforming loans, NPL ratio rose to 1.5% as of 31st of March 2025. The portfolio continued to demonstrate strength underpinned by a robust NPL coverage ratio of 305% that reflects comprehensive provisioning and collateral support. Fifth, as of 31st of March 2025, our Tier 1 ratio was 14.9%, achieving a buffer of 290 basis points above regulatory minimums of 12%. And our capital adequacy ratio was 17%, achieving a buffer of 304 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 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 the viability rating of BBB-. Capital Intelligence affirmed the bank's long-term foreign currency rating of A+ with a stable outlook. This quarter's financial performance reflect pressures across several key indicators underscoring the need for continued vigilance and careful management across the business. While we recognize the challenges, the sustained growth momentum in our loan portfolio and stable capital levels provide a degree of resilience as we navigate this period. Looking ahead, we remain focused on strengthening asset quality, enhancing operational efficiency and maintaining a strong capital position to support our business and clients. And with that, I'll turn it over to our CFO, David Challinor, who will cover the financials for the first 3 months of 2025 in more depth. Thank you. David, over to you.

Thanks, Waleed. Turning to Page 3. We can see the movement in net profit from KWD 12.9 million to KWD 9.4 million, which is a decline of KWD 3.5 million or 27%. Looking at the components, we can see the biggest decline is a KWD 6 million decrease in interest income followed by a KWD 1.5 million increase in operating expenses which was mainly driven by the other expense category. In addition, there was a decline of KWD 1 million relating to noninterest income, which was driven by lower net fees and commissions. We also saw a decrease in interest expense of KWD 2.7 million, a decrease in credit cost of KWD 1.3 million and a decrease of KWD 0.8 million in general provisions. Turning to Page 4. We have a detailed breakdown of our income statement. So on line 1, interest income was down KWD 6 million or 6% in the first quarter compared to the same period last year. This was primarily driven by the repricing impacts of the 25 basis point cuts in the KWD rate and the 100 basis point cut in the USD rate from September to December last year. These reductions in benchmark rates led to lower interest income in our corporate and treasury books, which also had a growing portion of USD assets over the last year. And additionally, we saw an asset allocation shift towards corporate that added to the overall margin pressures. On line 2, interest expense decreased by KWD 2.7 million or 5% compared to the same period last year. However, the fall in interest expense did not match the fall in interest income, which reflects, in some part, the slower nature of liability repricing. Line 3, net interest income of KWD 35.1 million declined by 9% year-on-year. On line 4, noninterest income declined by KWD 1 million or 10%, to reach 8.9% in Q1, primarily driven by a decline in net fees and commissions. Line 5, operating income decreased by KWD 4.3 million or 9%. On line 6, operating expenses rose by KWD 1.5 million or 7%. However, expenses declined by KWD 2.1 million or 8% compared to Q4 reflecting a disciplined approach to expense management. On line 7, operating profit before total provisions and impairments has decreased by KWD 5.7 million or 22% to reach KWD 20.9 million. On line 8, you can see credit costs declined by KWD 1.3 million to KWD 10.1 million in the first quarter. The retail business accounted for the vast majority of the credit costs during the period. On line 9, general provisions decreased by KWD 0.8 million due to a lower portion of loan growth, attracting general provisions 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. So if we turn to Page 5, we can see the balance sheet. So on line 8, net loans and advances are now at KWD 5.6 billion, increased by 4% year-on-year and 3% year-to-date. And our corporate business remains the current growth engine of our loan book. On line 13, total assets increased by 4% year-on-year and 1% year-to-date to reach KWD 7.5 billion. Line 15 & 16. Total deposits stood at KWD 5.5 billion, an increase of KWD 80 million or 1% year-on-year. We observed an improvement in our CASA ratio which rose from 27.7% at the end of Q4 to 29.2% as at Q1. And the increase in CASA this year reflects a system-wide trend. However, the bank's CASA growth outpaced the overall system indicating stronger performance in attracting low cost-funding. On line 17, other borrowed funds grew by 17% year-on-year and 39% year-to-date. This was due to raising KWD 650 million through a senior unsecured term facility during Q1. Moving on to asset quality. On nonperforming loan ratio shown on line 24 was 1.5% at the end of Q1, up 0.3% from last year. And we continue to have a significant total coverage ratio of 305% which includes total provisions and collaterals. Now turning to Page 6. You can see in the chart on the left, as of 31 March 2025, we have KWD 94 million of excess provisions representing 34% 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 96.5%, Stage 2 has declined to 1.9% and Stage 3 increased to 1.6% when compared to 31 December 2024. The main driver of the increase in Stage 3 relates to retail loans. 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 1.9% in Q1 '25 and Stage 3 continued to remain low. So turning to Page 7. On the top left, our Tier 1 ratio was 14.9% which is well above our regulatory minimum of 12%. And it's worth noting that all our Tier 1 is CET1. On the bottom left, our capital adequacy ratio of 17% was well above our regulatory minimum of 14%, and both ratios don't include Q1 '25 profits and after accounting for the 2024 dividend. Our risk-weighted assets shown on the top right, decreased by 2% year-to-date. On the bottom right, our leverage ratio as of 31 March 2025 is 9.4% which is slightly lower than the 31 December 2024 level of 9.8%, but well above the 3% regulatory minimum. Now turning to Page 8, we can see our key liquidity ratios. Chart on the left side shows our quarterly average daily liquidity ratio, which is 313%. And 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%. Now I'll turn it back over to Dalal for the Q&A session.

Thank you, David. We are now ready for Q&A session. [Operator Instructions]. I will go through the questions now. We have received questions on the drivers of the decline in NIMs and the outlook for second quarter, David?

I mean in Q1, we did see downward pressure in the bank's net interest margin. There's obviously a lot of dynamics at play, but I'll start with the main driver, which was the drop in income yields. Now that these were significantly impacted by asset repricing in both the corporate and treasury books due to the rate cuts we saw throughout September to December benchmark rates fell 25 basis points for KWD and 100 basis points for USD. And over the past year, we've been growing in corporate as opposed to retail. So the asset mix has moved away from the higher-margin retail business due to muted market growth in retail and also the currency composition of the balance sheet has seen an increase in USD over the last year. So there was an increase in assets that were impacted by the 100 basis point cuts. There was also an increase in the level of noninterest earning assets held with the Central Bank although we're encouraged by the passing of debt law that may allow us in the future to deploy liquidity into more assets that are interest earning. Now to further exacerbate these impacts we did have a one-off negative adjustment to interest income and almost all our loan growth in Q1, which was strong, was booked at the end of the quarter. So the incremental interest income booked on that growth was negligible, but that income will obviously flow through for the entire period in Q2. Now if we now turn to the cost of funds, we did see this fall in Q1. But given the slower nature of liability repricing meant that the reduction was less than the income side. And we also raised $650 million in syndicated borrowings. So for a portion of our Q1, our loan-to-deposit ratio moved lower than the usual levels which added some additional pressure to interest expense. Now clearly, many of the factors that I've talked about relate to timing issues. So going into Q2, and as long as there's no reduction in benchmark rates, we'd expect an increase in net interest margin, which will obviously have a positive impact on top line income and work to restore overall profitability.

Next, we have received a couple of questions on OpEx, David?

I mean total operating expenses were up 7% or KWD 1.5 million year-on-year and as I said, the biggest driver of the increase was in the other expense category. But we did manage to reduce the cost by KWD 2.1 million or 8% when compared to Q4 2024. And that was after booking various consulting costs relating to the potential merger with Boubyan, which was canceled earlier in the quarter. So we're seeing our core business as usual costs being well controlled, and we're now back to the same level of total operating expenses as we saw in Q3 2024. Now clearly, the cost-to-income ratio stepped up in Q1, but this was primarily due to the drop in margin. And as I said earlier, I expect the margin to increase in Q2. So combined with relatively stable costs, we should expect an improvement in the cost-to-income ratio from current levels.

Thanks, David. We have questions related to credit cost and the outlook for the remainder of the year, David?

Yes. The credit cost came in for Q1 at KWD 10.1 million which represented a year-on-year decrease of KWD 1.3 million or 11%. Now I've said several times before that the retail credit costs have been elevated. We saw a continuation of this during Q1 as almost all the credit costs in Q1 related to retail. I also said on the Q4 call that we expected retail credit cost to be elevated for some time. And our view hasn't changed on this. In terms of corporate, we're in excellent shape after the significant cleanup of legacy accounts we undertook in 2024. And if we look at the percentage of loans classified as Stage 2, we saw a further fall, and we're now at 1.9% which is the lowest ever since the introduction of IFRS 9 and the lowest in the Kuwaiti banking system. So we're very comfortable with the overall asset quality of our corporate book. Now in terms of the outlook, our full year 2025 guidance for credit cost was in the 60 to 70 basis point range and Q1 came in around the top end of that range. So even though we think that retail credit costs could be elevated for some time, we still think that the full year guidance remains appropriate.

I also have a few questions related to loan growth. Would you like to take that?

I mean we had loan growth in Q1 of 2.8% year-to-date or almost KWD 160 million, which was a very strong start to the year. Although most of the growth was booked late in the quarter, which impacted margin. And like we've seen in recent quarters, all the growth is in the corporate space. And we saw more local deals being booked, which is a focus area for the bank. However, the retail growth in the system continues to be very slow. And according to the CBK data, the growth was only 0.4% for the first quarter. And in total, the system grew 1.4% for the first quarter versus our growth of 2.8%. So in Q1, we've managed to grow double the system. Now in terms of the outlook for the full year 2025, we'd guided mid-single-digit loan growth and we continue to see that as being achievable but with the potential scope to exceed it.

Thank you, David. We will pause for a few minutes to receive more questions. I believe we have covered the majority of the topics and questions raised today during the call. If you have any further questions, you may visit our Investor Relations page at the site or reach us at our dedicated Investor Relations email. Thank you all very much for your participation today. And with that, we conclude the call.