Gulf Bank K.S.C.P. (GBK) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Gulf Bank's 2Q '26 Earnings Call. This is Ahmed El-Shazly from EFG Hermes. It's a pleasure to have with us on the call today from Gulf Bank's management, Mr. Sami Mahfouz, acting CEO; Mr. David Challinor, CFO; and Ms. Dalal AlDousari, Head of Investor Relations. I will now hand the call over to Dalal. Thank you.

Thank you, Ahmed. Good afternoon, and welcome to Gulf Bank's First Half 2026 Earnings Call. We will start our call today with the key highlights and updates on the operating environment of Gulf Bank during the second quarter of 2026, presented by acting CEO, Mr. Sami Mahfouz; followed by a detailed presentation of our financial results by the CFO, Mr. David Challinor. All amounts in the presentation are in millions of Kuwaiti dinars and have been rounded to simplify the chart. 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. Questions can be posted on the chat box and will be visible to all participants. Feel free to type any of questions at anytime during the call and we'll 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 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 Ahmed. Good morning and good afternoon, everyone, and thank you for joining us today to discuss Gulf Bank's results for the first half of 2026. I will begin with a brief overview of the operating environment and our business priorities during the first half of the year before handing over to David for a detailed review of our financial performance. The first half of 2026 was marked by elevated geopolitical tensions and heightened regional uncertainty. While these developments have weighed on sentiment across parts of the region, Kuwait has continued to demonstrate resilience, supported by strong sovereign fundamentals and the stability of the financial sector. The country's credit profile remains robust, while continued access to both domestic and international funding markets reinforces confidence in Kuwait's financial position and funding flexibility. At the same time, the announced state budget for fiscal year 2026-2027 reaffirm the government's commitment to infrastructure development and capital investment with significant allocations directed towards strategic projects. These investments are expected to support credit demand and economic activity, creating opportunities across multiple sectors. As implementation of the development agenda progresses, we believe the banking sector will continue to play an important role in financing these projects and facilitating broader economic growth. From a banking sector perspective, conditions remained broadly favorable during the first half of the year. The unchanged benchmark interest rates provided greater stability for businesses and better visibility for borrowers. Moreover, the sector continued to benefit from strong capitalization, healthy liquidity levels and sound regulatory oversight. Against this backdrop, Gulf Bank delivered a strong performance during the first half of the year. We achieved growth in profitability, expanded our lending portfolio and maintained robust asset quality. These results underscore the resilience of our business model, the strength of our risk management framework and the disciplined execution of our strategic priorities. Beyond our financial performance, a key area of focus during the first half was advancing our planned transition to Islamic banking. We continue to make progress across multiple work streams, including governance, products, systems, policies and processes, further strengthening our operational readiness for the transition as we move through the necessary regulatory and shareholder approval process. Equally important, we invested significantly in human capital development through specialized training and capability building programs to ensure that our employees are well prepared for the transition and equipped with the knowledge and skills required to support the bank's future operating model. The conversion remains one of the most important strategic initiatives in the bank's history, and we are committed to executing it in a disciplined and well-managed manner. Now turning to Page 2 of the presentation. Allow me to summarize our financial results with 6 key messages. First, we recorded a net profit of KWD 27.4 million for the first half of '26, an increase of 14.1% compared to the first half of 2025 net profit of KWD 24 million. Second, our operating income reached KWD 94.3 million, an increase of KWD 2.5 million or 2.7% compared to the first half of 2025. Third, our gross loans and advances reached KWD 6.5 billion, a year-to-date increase of KWD 444 million or 7.3% compared to 31st December 2025. This growth came mainly from our Corporate Banking segment. Fourth, our asset quality metrics remain strong, underpinned by disciplined risk management and prudent underwriting practices. The nonperforming loan ratio stood at 1.2% as of 30th June 2026, while our NPL coverage ratio remained robust at 312%, inclusive of total provisions and collateral. These metrics underscore the soundness of our credit profile and the resilience of our balance sheet. Fifth, as of 30 June 2026, our Tier 1 ratio was 13.8%, achieving a buffer of 277 basis points above the new regulatory minimums of 11%, and our capital adequacy ratio was 15.8%, achieving also a buffer of 280 basis points above the new regulatory minimum of 13%. Lastly, the bank continues as an A-rated bank by major credit rating agencies. Our current position stands as follows: A3 long-term deposit rating of Gulf Bank with a stable outlook by Moody's Investor Service, long-term issuer default rating at A with a stable outlook and a viability rating of BBB- by Fitch Ratings. Long-term foreign currency rating of A+ with a stable outlook by Capital Intelligence. Overall, we are pleased with our performance during the first half of the year. Looking ahead, we remain focused on executing our strategic priorities and advancing the initiatives that will position Gulf Bank for its next phase of growth while delivering sustainable long-term value for all stakeholders. With that, I'll turn it over to the CFO, Mr. David Challinor, who will cover the financials for the first half of 2026 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 24 million to KWD 27.4 million, representing an increase of KWD 3.4 million or 14% and a sequential improvement in net profit of KWD 8.6 million compared with Q1 2026. Looking at the underlying components, the net profit growth was driven by a KWD 6.1 million increase in interest income, a KWD 1.8 million increase in non-interest income and a KWD 5.7 million reduction in credit costs. And these positives were partially offset by a KWD 5.4 million increase in interest expense higher operating expenses of KWD 3.8 million and a KWD 1.1 million increase in general provisions, which reflects the impact of very strong loan growth for the first half compared to last year. Turning to Page 4. We've got a detailed breakdown of our income statement. On line 1, interest income increased by KWD 6.1 million or 3% in the first half of 2026 compared to the same period last year and by KWD 4.1 million or 4% sequentially from Q1 2026. And the growth was driven by strong loan book expansion and higher interest income from recent government issuances. Line 2, interest expense increased by KWD 5.4 million or 5% in the first half of 2026 compared to the same period last year. On Line 3, net interest income reached KWD 73.4 million, up 1% in H1 2026 compared to the same period last year and 8% sequentially versus Q1 2026. And the increase was primarily driven by strong growth in interest-earning assets. Line 4, non-interest income rose to KWD 20.8 million in the first half of 2026, up 10% year-on-year and 13% sequentially, and growth was mainly driven by strong fees and commission income, which was up 13% year-on-year, underscoring solid business momentum. Line 5, operating income for the first half of 2026 reached KWD 94.3 million, an increase of KWD 2.5 million or 3% year-on-year and a growth of 9% when compared to Q1 2026. On Line 6, operating expenses increased by KWD 3.8 million or 8% year-on-year in the first half of 2026, and this growth was mainly driven by higher other expenses. On Line 7, operating profit before total provisions and impairments declined by KWD 1.3 million or 3%, reaching KWD 43.6 million in the first half of 2026. However, Q2 operating profit improved by KWD 0.3 million or 1% from Q1. On Line 8, credit costs were KWD 11.9 million in the first half of 2026, declining by KWD 5.7 million or 32% compared to the same period last year and decreased by KWD 6.8 million or 73% sequentially versus Q1. On Line 9, general provisions were KWD 2.9 million in the first half of 2026 and KWD 2 million in the same period last year, reflecting stronger loan growth during the first half of 2026. And as per CBK regulations, a 1% general provision is required mainly against non-government loans booked during the year. So turning to Page 5. We can see the balance sheet. So on line 7, net loans and advances of KWD 6.3 billion increased by 11% year-on-year and 8% year-to-date. Growth was driven by the corporate segment. Line 12, total assets increased by 11% year-on-year to reach KWD 8.1 billion, and this increase reflects continued growth in net loans and advances, coupled with an increase in exposure to Kuwait government bonds. On Lines 14 and 15, total deposits were KWD 6 billion as on 30 June 2026, and this represents an increase of KWD 616 million or 11% year-on-year and KWD 273 million or 5% year-to-date. And our CASA ratio stood at 23.4% at the end of Q2 2026. It was lower than the same period last year of 28.5%, but the decline in CASA reflects a broader market trend with the market ratio decreasing from 30.1% at the end of June 2025 to 27.2% by the end of June 2026. And this has been primarily driven by a shift in the deposit mix from current accounts to time deposits during the period. But looking ahead, we expect this trend to gradually improve through expanding and diversifying our funding sources. On 16, other borrowed funds increased by 13% year-on-year and 10% year-to-date. Moving on to asset quality. Our non-performing loan ratio shown on line 23 stood at 1.2% at the end of Q2 '26 and down 0.2% from the same period last year, and we continue to maintain a significant total coverage ratio of 312%, which includes both total provisions and collaterals. Now turning to Page 6. You can see in the chart on the left that as of 30 June 2026, we have KWD 74 million excess of total provisions over IFRS 9, representing 30% of total provisions. As shown in the pie charts on the top right of the page, Stage 1 loans increased to 96.5%. Stage 2 loans have declined to 2.3% and Stage 3 loans increased to 1.3% when compared to 31 December 2025. And the majority of Stage 3 loans comprise of retail accounts. The chart on the bottom right of the page shows the evolution of Stage 2 and Stage 3 loans. Stage 2 loans are at one of their lowest levels historically, and Stage 3 loans remain stable and very low. So turning to Page 7. On the top left, -- our Tier 1 capital ratio was 13.8%, which is well above the current regulatory minimum of 11%. 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 15.8% was well above our current regulatory minimum of 13%, and both ratios don't include first half 2026 profits. Now on 26th of March 2026, the Central Bank of Kuwait announced a stimulus package for local banks, reducing the capital conservation buffer by 1%, resulting in lower minimum regulatory capital requirements. On the top right, our risk-weighted assets have increased by 3% year-to-date, primarily driven by strong loan growth. And on the bottom right, our leverage ratio as of 30 June 2026 was 9%, lower than the 9.7% reported on 31 December 2025, 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 217%, while the chart on the right shows our net stable funding ratio at 104%, and both key ratios remain well above the regulatory minimum of 80%, reflecting our strong liquidity and funding profile. And as previously noted, and in line with the stimulus package announced by the Central Bank of Kuwait in March, the regulatory minimums for the liquidity coverage ratio and net stable funding ratio were reduced from 100% to 80%, supporting liquidity and stability in the local banking sector. So now I'll turn it back to Dalal for the Q&A session.

Thank you, David. We are now ready for Q&A. [Operator Instructions] A number of questions on margins and NIMs. David, would you like to take that, please?

Yes, sure. Thanks, Dalal. I mean we saw the margin expand in Q2 by 8 basis points from the Q1 level. And this expansion was driven by a decrease in the cost of funds combined with an increase in income yields. And the cost of funds fell by 6 basis points in Q2 after falling 5 basis points in Q1, and this primarily reflected the repricing following the December rate cuts. Now on the income yield side, we've seen continued upward repricing in a portion of the retail book. And we've also benefited from increased holdings of Kuwait government bonds. Looking ahead, I mean, obviously, the key driver of margin movements are changes in benchmark rates and the general consensus is that rate cuts are significantly less likely now than they were at the start of the year, which is positive for the margin outlook. And we'd also expect CASA levels to start increasing, which will work to put downward pressure on the cost of funds. And in our corporate business, we're very focused on optimizing the overall yield on the book. So we think that the second half could be positive for margin levels.

Thanks, David. We have a question on -- if there are any updates on the conversion to Islamic Banking and on the potential merger with Warba Bank. Sami, would you like to take that question?

Sure. Thank you, Dalal. As mentioned earlier, on the Sharia-compliant conversion, the bank continues to make measured progress in line with the regulatory framework following the Central Bank of Kuwait's preliminary approval. Implementation efforts are advancing across core work streams with dedicated teams overseeing the transition across business, operations and technical area. Focus remains on ensuring readiness in a structured manner while maintaining consistency in service delivery. As for the potential merger with Warba Bank, process is progressing in an orderly manner and any material updates will be communicated in line with disclosure requirements.