Gulf Bank K.S.C.P. (GBK) Q4 FY2025 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 Q4 2025 Earnings Call. We have the pleasure to have with us in the call, Mr. Sami Mahfouz, 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, Elena. Good afternoon, and welcome to Gulf Bank's Year-end 2025 Earnings Call. We will start our call today with key highlights and updates on the operating environment of Gulf Bank during the year 2025, presented by acting CEO, Mr. Sami Mahfouz, followed by a detailed presentation of our financial results by CFO, 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] Please note that we can only comment on questions 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, Dalal, and good afternoon to everyone. And I thank you for joining us today to discuss Gulf Bank's results for the year-end 2025. I will begin with a brief overview of Gulf Bank's overall position and the economic context in which we operated during 2025 before we move into a more detailed discussion of our financial performance and outlook. The operating environment in 2025 remained challenging globally, shaped by geopolitical tensions, tariff threats and elevated volatility, while locally Kuwait's economic landscape showed signs of improvement, supported by fiscal reform and renewed development activity. The approval of the public debt law, progress on real estate and housing legislation and an increased government capital spending improved the domestic economic momentum. And in line with the global easing in interest rates, the Central Bank of Kuwait adopted a supportive stance, reducing the discount rate to 3.5%, helping to sustain credit demand and business confidence. Against this backdrop, Gulf Bank delivered solid performance while strengthening its operating platform. During the year, we concluded our 2025 5-year strategy, completing several foundational initiatives, including the core banking transformation, enhancements to digital and omnichannel capabilities and the continued expansion of our investment on Invest GB. These efforts improved efficiency, service delivery and our ability to support clients across key segments. Building on this progress, we launched our new 5-year strategy for 2030, which centers on reinforcing our market position, driving sustainable growth across core businesses and completing our transition to a Sharia-compliant bank. During the year, we received the Central Bank of Kuwait's initial approval to proceed with the conversion, marking an important milestone. In parallel, we continue to assess strategic opportunities, including the potential merger with Warba Bank in close coordination with the regulators. Now turning to Page 2. Allow me to summarize our financial results with 6 key messages. First, we recorded a net profit of KWD 52.4 million for the full year of 2025, a decline of KWD 7.8 million or 13% compared to 2024's full year net profit of KWD 60.2 million. Second, our earnings per share reached 13 fils for the year ending 31st December '25. Accordingly, the Board of Directors is recommending a distribution of cash dividend of 9 fils per share, representing a 68% cash payout in addition to 5% bonus share. These recommendations are subject to shareholders' approval at the Annual General Meeting expected to be held in March 2026. Third, our gross loans and advances reached KWD 6.1 billion, an increase of KWD 392 million or 7% compared to 31st December '24. This growth came primarily from the corporate segment. Fourth, our asset quality indicators remained strong with the nonperforming loan ratio at 1.1% and a comprehensive NPL coverage ratio of 370%, factoring in total provisions and collateral, demonstrating the effectiveness of our credit and risk management practices. Fifth, as of 31st December '25, our Tier 1 ratio was 14.8% with a buffer of 278 basis points above regulatory minimum of 12%. And our capital adequacy ratio was 16.9% with a buffer of 285 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: A3 long-term deposit ratings of Gulf Bank with a stable outlook by Moody's Investor Services. Long-term issuer default rating at A with a stable outlook and a viability rating of BBB- by Fitch rating. Long-term foreign currency rating of A+ with a stable outlook by Capital Intelligence. Overall, Gulf Banks entered 2026 from a position of financial strength and operational readiness. Our focus remains on executing our strategy with rigor, maintaining asset quality and advancing our Sharia conversion while continuing to support our customers and a focus on consistent execution. With that, I'll turn it over to the CFO, David Challinor, who will cover the financials of the year-end 2025 in more. Thank you. David, over to you.

Thanks, Sami. Turning to Page 3. We can see the movement in net profit from KWD 60.2 million to KWD 52.4 million, which is a decline of 7.8% or 13%. Looking at the components, the largest driver of the decline was a KWD 23.1 million decrease in interest income, which was partially offset by a decrease in interest expense of KWD 12.9 million, which resulted in year-on-year margin compression. Noninterest income was relatively flat, and there was a KWD 1.7 million increase in operating expenses, which represented only a 2% growth over the prior year, which reflects our ongoing cost optimization program. Credit costs improved by KWD 6.3 million on account of the corporate book, and we also saw general provisions increased by KWD 2 million due to the loan growth differential. So turning to Page 4. We've got a detailed breakdown of our income statement. On line 1, interest income declined by KWD 23.1 million or 6% compared to last year. This was primarily driven by repricing impacts resulting from a 25 basis point cut in the KD rate and 100 basis point cut in the USD rate during 2024 and a further 50-point cut in KD rates and 75 points in USD rates in the latter part of 2025. And despite the year-on-year decline, interest income has shown improvement on a quarterly basis during 2025, reflecting the growth in interest-earning assets. On Line 2, interest expense decreased by KWD 12.9 million or 5% in 2025 compared to last year. Line 3, net interest income was KWD 146 million, representing a decline of 7% in 2025 compared to last year, which in the main was due to the slower nature of liability repricing as compared to assets. And in addition, the market witnessed an overall fall in CASA and saw continued strong competition amongst banks in local deposit pricing despite the fall in rates. Line 4, noninterest income was relatively flat, showing a slight decline of KWD 0.2 million or 1% to reach KWD 42.9 million for 2025. And it's worth noting that in Q4 '24, we had a KWD 3.6 million one-off sale of land, which was part of other income. But when we look at just fees and commissions only, they increased by KWD 2.7 million or 10%. And this is an encouraging development as growth in fees and commissions income remains a key strategic focus area for the bank. Line 5, operating income for the full year 2025 decreased by KWD 10.4 million or 5%. Line 6, operating expenses increased by KWD 1.7 million or 2% year-on-year for 2025, and this growth was mainly driven by the other expense category and depreciation. And Q4 operating expenses of KWD 22.8 million were the lowest of any quarter in the year. Line 7, operating profit before total provisions and impairments declined by KWD 12.2 million or 11%, reaching KWD 94.6 million in 2025. However, Q4 operating profit of KWD 25.6 million was the highest level of operating profit of any quarter during the year. Line 8, credit costs were KWD 36.2 million for 2025, reflecting a decline of KWD 6.3 million or 15% compared to last year, and this improvement was largely driven by improved performance in the corporate business. On Line 9, general provisions were KWD 3.1 million in '25 in comparison to KWD 1.1 million last year. As per CBK regulations, a 1% general provision charge is required mainly against nongovernment loans booked during the quarter. Turning to Page 5. We can see the balance sheet. On Line 7, net loans and advances of KWD 5.9 billion increased by 7% year-on-year and 3% during the quarter. And our corporate business remains the growth engine of the loan book where it grew by 13% year-on-year. Line 12, total assets increased by 3% year-on-year to reach KWD 7.7 billion, and the increase is primarily due to the growth in net loans and advances and Kuwait government bonds. On Lines 14 and 15, total deposits were KWD 5.7 billion, representing an increase of KWD 123 million or 2.2% year-on-year. Our CASA ratio stood at 24.4% at Q4 2025, lower than the Q4 2024 level of 27.7%, and this declining trend in CASA is a systemic feature as the market saw a decrease from 30% in Q4 2024 to 27.5% by the end of December 2025, due mainly to the shift in deposit mix from current accounts to time deposits during the year. On line 16, other borrowed funds increased by 50% year-on-year, primarily due to the successful issuance of a KWD 650 million senior unsecured term facility during Q1. Moving on to asset quality. Our nonperforming loan ratio shown on line 23 stood at 1.1% at the end of Q4 2025, down 0.2% from the same period last year. We continue to maintain a significant total coverage ratio of 370%, which includes both total provisions and collaterals. Now turning to Page 6. You can see in the chart on the left that as at 31 December 2025, we have KWD 90 million of excess provisions, representing 35% of total provisions. And looking at the pie charts on the top right of the page, you can see that our Stage 1 loans increased to 96%, while Stage 2 and Stage 3 exposures decreased to 2.7% and 1.2%, respectively. And our Stage 3 loans are predominantly composed of retail accounts. 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 have increased slightly from the all-time low of 1.9%, yet remains significantly below historical levels. And Stage 3 loans continue to remain stable and very low. So turning to Page 7. On the top left, our Tier 1 capital ratio was 14.8%, 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 16.9% was well above our regulatory minimum of 14%. On the top right, our risk-weighted assets increased by 5.6% year-on-year, primarily driven by loan growth year-on-year. On the bottom right, our leverage ratio as at 31 December 2025 was 9.7%, slightly lower than the 9.8% reported on 31 December 2024, but still well above the 3% regulatory minimum. So turning to Page 8. We can see our key liquidity metrics. The chart on the left shows our quarterly average daily liquidity coverage ratio at 249% 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. I'll turn it over to Dalal now for the Q&A session.

Thank you, David. We are now ready for Q&A. [Operator Instructions] We will wait for a few minutes to receive most of your questions and we will try to group them by topic. We have questions on NIMs. A few questions actually on NIMs. David, would you like to cover that?

Yes. Thanks, Dalal. So I said on the Q3 earnings call that the outlook for the margin in the short term was to the downside. And in Q4, we saw the margin drop by 4 basis points. Benchmark rates were cut between September and December, and this led to a corporate asset repricing, which reduced the income yields. And whilst the cost of funds did, in fact, move lower in Q4, it wasn't enough to offset the asset yield drops, which then led to the margin compression. Now year-on-year, we saw the margin decline by 18 basis points, which is primarily driven by the repricing impacts on the asset side, while liabilities repriced lower and the levels have remained relatively sticky for local currency deposits despite benchmark rate cuts. We also saw CASA balances decline in the overall market, which has further pressured cost of funds leading to margin contraction. Now looking forward into 2026, the biggest negative impact to margin will be further benchmark rate cuts and the impact of a 25 basis point cut is KWD 3.3 million to net interest income which translates to around 4 to 5 basis points of margin. Having said that, we do anticipate several dynamics that potentially could mitigate any margin compression due to potential rate cuts. The first is an expectation that CASA levels in the market will start to increase in 2026. And the second is the fact that a portion of our retail book is due to reprice from historically low levels. Specifically loans written 5 years ago during 2021 at 4.5% will reprice upwards during the 2026 year. And also in our corporate business, we're actively targeting higher-margin transactions. Although in the short term, we may see margin continue to fall due to the full quarter impact of the rate cuts we saw in mid-December. So given the number of variables at play, and the uncertainty around size and timing of potential benchmark cuts, it's difficult at this stage to give reliable guidance. But we do remain hopeful that there are several mitigants that may offset the impact of any future cuts.

Thanks, David. We also have a couple of questions on loan growth. Would you like to take that, David?

Yes. Thanks, Dalal. I mean we had a very strong loan growth of circa KWD 150 million in Q4, which brings the full year growth to 7%. Our guidance at the beginning of the year was mid-single digit. So that was comfortably achieved. As I've said in previous quarters, the growth this year has been dominated by the corporate segment and Q4 was no different. And when we look specifically at customer loan growth, which excludes banks, our corporate segment grew around 13% versus the market growth of 11%. So we gained market share. And in fact, 2025 is the second consecutive year of market share gains in corporate. We've got a very strong corporate franchise and a healthy pipeline. And given the increased project activity in Kuwait, we could expect this sort of momentum to continue into 2026 and beyond. Now when we look at retail, the growth environment continues to be challenging for us, although we could expect improved conditions if benchmark rates were to fall further in 2026. But internally, we've been actively expanding our product range. We've been targeting new customer segments, which should support a return to growth. So looking ahead into 2026, I'd expect corporate to continue its strong growth momentum, whilst also seeing a pickup in our retail activity. So overall, I think high single-digit loan growth is going to be achievable for 2026.

Okay. Thank you, David. We also have a few questions on asset quality or credit cost. Would you like to answer these questions, David?

Yes. Year-to-date credit costs were down 15% versus last year. And when we split the components between retail and corporate, we saw that retail was relatively flat compared to last year and corporate was significantly down, the latter driven by lower specific provisions and higher recoveries. And in Q4 specifically, almost all the credit costs came from the retail book, which is also the case in Q3. The full year cost of risk came in at 61 basis points versus 75% last year. And at the beginning of the year, we gave guidance of 60 to 70 points. So we landed at the bottom end of our range, which is encouraging. Our Stage 2 percentage continues to fall in Q4 and now stands at only 2.7%. And our NPL percentage also fell in Q4 and now stands at only 1.1%. And looking forward into 2026, we'd expect corporate credit costs to remain low and retail credit cost to start normalizing closer to historical levels at some point. We think given the changes made to underwriting, coupled with enhanced recovery efforts that we could start to see some positive developments in this space. So in terms of full year guidance for 2026, we'd estimate that credit costs in the 50 to 60 point range may be achievable.

Okay. We also have a few questions on operating expenses. David?

Sure. Total operating expenses grew only 2% for the full year, which is the lowest cost growth the bank has seen since 2020. And this was achieved despite additional costs relating to both our Islamic conversion and potential merger. And also, we had an 8% increase in depreciation, which relates to the completion of our digital transformation in prior years. So I've said before that we previously embarked on a comprehensive cost optimization program, and it's clearly delivered strong results in our BAU cost base this year. Now when we look at the cost-to-income ratio for Q4, it was 47.1%, which was the lowest level of any quarter during 2025. But on a full year basis, it's 49.9% which is an increase of 3.5 percentage points from 2024. And the increase is due largely to the 5% drop in operating income driven mainly by asset repricing. Now going forward, I'd expect BAU costs to continue to be optimized and managed well, but we expect a ramp-up in Islamic conversion costs and potential merger costs as well. So the absolute cost growth for 2026 could be around the mid- to high single-digit range, although the cost-to-income ratio may remain relatively stable year-on-year as the increased cost growth should be matched by expected income improvements.

Thank you, David. We will pause for a few minutes to receive more of your questions. Another question. Do you have any updates on time line for Sharia conversion and the M&A that you could share with us? Sami?

Let me -- sure. Thank you, Dalal. Let me cover the Sharia compliant conversion. We continue to advance our strategic transformation towards becoming a Sharia-compliant institution following the most recent Central Bank of Kuwait's preliminary approval to begin Sharia compliant conversion activities. We have established dedicated governance structures and cross-functional teams to manage the conversion process across all operational, legal and product-related areas. We are also investing in employee training to build the required competencies and are working closely with our technology partners to ensure systems readiness in line with the Central Bank of Kuwait framework and time lines. This program is progressing well to meet the stipulated time lines with a focus on maintaining business continuity and customer service excellence throughout the preparations for this transition. Now as far as the potential merger with Warba, and what to expect in terms of process and time line. I would like to comment that we have commenced the due diligence process and continue to evaluate the potential merger with Warba Bank. Independent financial and legal advisers have been hired by both sides and are working currently on a comprehensive assessment under the supervision of the Board of Directors and the relevant regulatory authority. Any future developments will be communicated in accordance with disclosure requirements. Thank you, Dalal.

Thanks, Sami. We'll take another pause to receive any additional questions. We received a few questions on the mortgage loan. Sami, would like to comment on that?

Well, yes, actually, a very short comment on this matter. We are awaiting further updates from the authorities on that matter. And internally, we are preparing ourselves for this. However, this is completely basically a regulatory matter in terms of when it is launched and stuff like that. So there is nothing further to add from our side.

Okay. Great. Thank you, Sami. I believe we have covered the majority of the topics and questions raised today during the call. And with that, we would like to conclude our call for today. If you have any further questions, you may visit our Investor Relations page at our website or reach us at our dedicated Investor Relations e-mail. Thank you all very much for your participation today.