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 Second Quarter 2025 Earnings Call. We have with us in the call from Gulf Bank, David Challinor, CFO; and Youssef Dib from the Investor Relations team. I would like to hand over the call now to Youssef. Please go ahead. Thank you.

Thank you, Elena. Good afternoon, and welcome to Gulf Bank's First Half 2025 Earnings Call. We will start our call today with key highlights and updates on the operating environment of Gulf Bank during the first half of 2025 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. I would like to draw your attention that there has been an upgrade to the Webex application. And now questions can be posted on the chatbox instead of the designated Q&A option that was available earlier. And therefore, questions and comments will be visible to all participants. Feel free to type in your questions at any time during the call, and we will address them once we open the Q&A session. Please note that we can only comment on questions and information that are publicly disclosed. I would like to draw your attention to the disclosure on Page 9 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. David Challinor. David?

Thank you, Youssef. Good morning and good afternoon, everybody. The first half of 2025 was marked by a dynamic operating environment and rising geopolitical tensions, and oil price fluctuations have added volatility to regional markets and shifted government priorities. These factors have also influenced market sentiment, creating a more cautious investment landscape. Locally, fiscal policy developments have also played a role in shaping market conditions. The most recent local government day issuances estimated at KWD 600 million and planned international issuances of USD 6 billion are expected to support government spending on capital development projects across vital sectors, including infrastructure, housing and logistics. These will accelerate economic activity and enable faster participation by banks in financing national initiatives. Moreover, such instruments could provide banks with added flexibility in managing their balance sheets and responding to emerging financing opportunities. In line with this momentum, the total value of contracts awarded in H1 2025 reached approximately KWD 1 billion, marking a 30% increase year-on-year. And growth was primarily driven by infrastructure investments concentrated in the modernization of the oil and gas, power and water and transportation sectors. Against this backdrop and despite continued pressure on margins across the sector, our financial performance reflects strong execution and a prudent approach to managing our operations. We continue to maintain a balanced approach between credit expansion and asset quality, ensuring the resilience of our loan book. Our low nonperforming loan ratio and high coverage levels underscore the effectiveness of our risk management framework and our ongoing commitment to financial stability. We're also advancing our internal readiness for a potential Islamic Sharia-compliant conversion, subject to being granted with the necessary regulatory and shareholder approvals. The essential systems, governance frameworks and talent are currently being explored, and we are carefully assessing all operational and market implications to ensure we would be well prepared, subject to obtaining the necessary approvals. We view this potential strategic move as an opportunity to broaden our offerings and better serve a growing client segment in the local markets. In addition, we've recently signed a memorandum of understanding with Warba Bank, stating the basis of cooperation in assessing a proposed merger between both banks independently ensuring the best interest of all the bank shareholders in line with all regulations. Following that, we announced yesterday that we obtained approval from the Central Bank of Kuwait to engage and appoint a group of specialized consultancy firms with the necessary qualifications and expertise to carry out the feasibility study and due diligence for a potential merger. Now in terms of Gulf Bank's financial strength and operational resilience, during the year, we were affirmed by leading credit rating agencies. Fitch Ratings assigned a long-term issuer default rating of A with a stable outlook. Moody's rated long-term deposits at A3 with a positive outlook. Capital Intelligence affirmed a long-term foreign currency rating of A+ with a stable outlook, all further highlighting the bank's stability and sound risk management practices. Finally, we continue to advance initiatives that align with our customers' evolving needs and expectations. During the quarter, Gulf Bank was proud to receive the award for Best Mobile Banking application and experience by MEED Business Intelligence. This recognition reflects our continued investment in digital innovation and our efforts to deliver a seamless, secure and accessible banking experience across all channels. Now I'll move into the details of the bank's financial performance for the first half of 2025. So turning to Page 2. We can see the movement in net profit from KWD 28.2 million to KWD 24 million, which is a decline of KWD 4.2 million or 15%, and this marks an improvement from Q1 where the decline was 27%. Looking at the components, we can see the biggest decline is a KWD 13.7 million decrease in interest income followed by a KWD 2.6 million increase in operating expenses, which was mainly driven by the other expense category. This was offset by a decrease in interest expense of KWD 8.8 million, a decrease in credit costs of KWD 3.1 million and a decrease of KWD 0.3 million in general provisions. Turning to Page 3. We've got a detailed breakdown of our income statement. So on line 1, interest income declined by KWD 13.7 million or 7% in the first half of 2025 compared to the same period last year. And this was primarily driven by the repricing effects of the 25 basis point cuts in the KD rate and the 100 basis point cuts in the USD rates between September and December last year. However, interest income improved from Q1 2025 by KWD 2 million or 2%, reaching KWD 94.6 million. On line 2, interest expense decreased by KWD 8.8 million or 7% in the first half of 2025 compared to the same period last year. And on a quarterly basis, interest expense declined by KWD 0.5 million or 1% in Q2 as compared to Q1. And this marks the third consecutive quarterly decline in interest expense since its peak in Q3 2024, which is a positive development. Line 3, net interest income amounted to KWD 72.7 million, representing a decline of 6% in the first half of 2025 compared to the same period last year. However, on a quarterly basis, net interest income rose KWD 2.5 million or 7% compared to Q1. Line 4, noninterest income fell by KWD 0.2 million or 1% to KWD 19 million in the first half of 2025 primarily due to lower gains from foreign currency. However, net fees and commissions recorded a growth of 2% over the same period. On line 5, operating income for the first half of 2025 decreased by KWD 5.1 million or 5% to KWD 91.8 million, however, Q2 operating income improved by KWD 3.8 million or 9% compared to Q1. At line 6, operating expenses increased by KWD 2.6 million or 6% and year-on-year in the first half of 2025. And this growth was mainly driven by higher other expenses. On line 7, operating profit before provisions and impairments declined by KWD 7.7 million or 15%, reaching KWD 44.9 million in the first half of 2025. However, increased by KWD 3.2 million or 15% in Q2 compared to Q1. On Line 8, credit costs were KWD 17.6 million in the first half of 2025, reflecting a decline of KWD 3.1 million or 15% compared to last year. This improvement was largely due to higher recoveries in our corporate business, and on a quarterly basis, credit costs decreased by KWD 2.6 million or 26% compared to Q1. On Line 9, general provisions declined by KWD 0.3 million in the first half of 2025 primarily due to slower loan growth compared to last year. And as per CBK regulations, a 1% general provision charges required mainly against nongovernment loans booked during the quarter. So turning to Page 4. We can see the balance sheet. Line 7, net loans and advances of KWD 5.7 billion increased by 2% year-on-year and 4% year-to-date and our corporate business remains the current growth engine of the loan book. Line 12, total assets decreased by 2% both year-on-year and year-to-date to reach KWD 7.3 billion. The year-to-date, a drop is primarily due to a lower balance of cash and cash equivalents. On lines 14 and 15, total deposits were KWD 5.4 billion. representing a decline of KWD 184 million or 3% year-on-year. We also saw an improvement in our CASA ratio, which rose from 27.7% to 28.5% at Q2. This improvement outperformed the market, which saw the ratio move from 30% at Q4 to 30.2% at the end of May. On Line 16, other borrowed funds increased by 23% year-on-year and 46% year-to-date, primarily due to the successful issuance of a $650 million senior unsecured term facility during Q1. Now moving on to asset quality. Our nonperforming loan ratio shown on line 23 stood at 1.4% at the end of Q2 '25, up 0.2% from the same period last year. And we continue to maintain a strong total coverage ratio of 317% which includes both provisions and collateral coverage. Now turning to Page 5. You can see in the chart on the left, as at 30 June 2025, we have KWD 96 million of excess provisions, representing 35% of total provisions. Looking at the pie chart on the top right hand of the page, you see that our Stage 1 loans have declined to 95.4%, Stage 2 has increased to 3.2% and Stage 3 increased to 1.4% when compared to 31 December 2024, and the majority of Stage 3 loans comprised of retail. The chart on the bottom right side of the page shows the evolution of Stage 2 and Stage 3 loans. We can see that Stage 2 loans ticked up from an all-time low of 1.9% but continue to be much lower when compared historically. Stage 3 loans continue to remain low and stable. Turning to Page 6. On the top left, our Tier 1 capital ratio was 14.6%, which is well above the regulatory minimum of 12% and it's worth noting that all of our Tier 1 is common equity Tier 1. On the bottom left, our capital adequacy ratio of 16.8% was well above our regulatory minimum of 14% and both ratios don't include interim profits for the first half of 2025. On the top right, our risk-weighted assets decreased by 0.1% year-to-date. On the bottom right, our leverage ratio as at 30 June 2025 was 9.6%, slightly lower than the 9.8% reported on 31 December 2024 but still well above the 3% regulatory minimum. So turning to Page 7. We can see our key liquidity metrics. The chart on the left shows our quarterly average daily liquidity coverage ratio at 221%, while the chart on the right displays our net stable funding ratio at 108%. And both key ratios remain well above the regulatory minimum of 100%, reflecting our strong liquidity and funding profile. So to conclude the second quarter's performance reflects our continued focus on credit discipline and operational control. And as we enter the second half of the year, we remain committed to managing risks, executing on our priorities and supporting client needs. 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 question now. We have received a question on NIMs. Could you explain the drivers of the margin trend during Q2 on a sequential basis? David?

Yes. Thanks, Youssef. So during the Q1 investor call, I mentioned that we could expect a margin increase in Q2, and that indeed was the case and the margin expanded very strongly by a total of 14 basis points from Q1. So we're now at 204 basis points, which is broadly in line with the Q4 level. And the expansion was driven primarily by a sequential fall in the cost of funds of 9 basis points, primarily due to continued repricing down of liabilities as they fell due and there is also an improvement in the overall income yields of 4 basis points from quarter-to-quarter. Now even though we saw a fall in the cost of funds during Q2, the market has recently become very competitive which is causing the cost of new deposits to rise. And if this dynamic continues to persist, then we could be faced with some margin pressure even in the absence of cuts to benchmark rates. And as we have previously disclosed, the impact of a 25 basis point reduction in benchmark rates to net interest income is circa KWD 2.5 million, and that assumes a parallel shift across both sides of the balance sheet.

Thank you, David. We have a question related to credit cost and bank's asset quality. David?

Thanks, Youssef. Credit costs dropped 15% from H1 '24 to H1 '25. And we also saw a drop of around 26% sequentially from Q1 to Q2 '25. And as I've mentioned on previous investor calls for at least a year now, the vast majority of the bank's credit costs are coming from the retail book, and this trend continued into Q2. However, the Q2 credit cost for retail were the lowest since Q3 2023, which is an encouraging sign, although I think it's probably too early to conclude that the Q2 levels represent a new baseline for future trends. But nonetheless, it was a positive outcome for Q2. On the corporate side, the book continues to perform exceptionally well within significant new NPLs. The bank had a significant cleanup during 2024 of legacy corporate accounts, which has placed the book in a very strong position from an asset quality perspective. In the quarter, we did see a small tick up in our Stage 2 percentage, which was mainly driven by a downgrade in the credit rating of a corporate borrower. However, we do our full collateral for the facility. So if the exposure did move to Stage 3, then there would be 0 credit cost impact. And our current Stage 2 percentage of 3.2% continues to be very low, both historically and as compared to all the banks in the system. And overall, the NPL percentage continues to be very low at 1.4%. We've got significant total coverage including collaterals of 317%. In terms of the guidance we gave at the beginning of the year, we said that the FY '25 credit costs are likely to fall in the 60 to 70 basis point range, which was down significantly from the 75 basis points for FY '24. So for the first half of 2025, we're sitting at 61 basis points. So I think the full year guidance of 60 to 70 bps continues to be appropriate at this stage.