Kuwait Finance House K.S.C.P. (KFH.KW) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Kuwait Finance House 2Q 2025 Results Call. This is Ahmed El-Shazly from EFG Hermes, and it's a pleasure to have with us on the call today from KFH, Mr. Khaled Al-Shamlan, Group CEO; Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer; and Mr. Yameen Abdul Sattar, Acting Group CFO and General Manager of Investments, Planning and Reporting. We will start the call as usual with the presentation for the next 10 to 15 minutes, and then we'll open the floor for questions. [Operator Instructions] I'd like to mention that some of the statements that might be made today may be forward-looking. Such statements are based on the company's current expectations, predictions and estimates. There are no guarantees of future performance, achievements or results. And now I'll hand the mic over to Mr. Fahad to start with the presentation.

Thank you, Ahmed, and good afternoon, everyone. Welcome to Kuwait Finance House's H1 2025 Earnings Call. I'm Fahad Al-Mukhaizeem, Group Chief Strategy Officer. Today, I will provide insights into Kuwait's economic landscape and KFH's strategic progress during the first half of the year. Global real GDP growth is forecasted to reach 2.8% in 2025, down from prior estimates of 3.3% with modest recovery to 3% expected in 2026. This slowdown reflects rising trade tensions, policy uncertainty, and geopolitical risks affecting major economies like the U.S. and China. Kuwait's economy remains robust with real GDP growth projected at 1.9% in 2025, rebounding from a 2.8% contraction in 2024. This growth is driven by increased oil production and steady non-oil sector expansion, supported by diversification efforts and growing private sector participation. Stable sovereign credit ratings of A+ by S&P, A1 by Moody's and AA- by Fitch ratings underscore confidence in Kuwait, fiscal and institutional strength. Kuwait's project market excelled in H1 2025, with awarded contracts surging almost 37.5% year-on-year to USD 3.3 billion, driven by increased investments in key sectors such as transport, power and our revival in the upstream oil projects. This momentum is expected to continue in H2 2025 as the government advances strategic projects aligned with Kuwait Vision 2035. Several high-value tenders in oil projects are in progress and are anticipated to be awarded. Annual inflation rate eased to almost 2.3% in June 2025, down from an average of 2.9% in 2024, reflecting the Central Bank of Kuwait's prudent monetary policy. The Central Bank of Kuwait has maintained the discount rate at 4%, unchanged since September of 2024, ensuring a balanced approach to economic stability. Kuwait's banking sector remains strong, underpinned by robust regulation and ample liquidity. KFH delivered exceptional financial results in H1 2025, driven by its diversified business model with solid capital, innovative digital capabilities and an expanding regional presence. KFH is well positioned to support Kuwait's long-term economic vision while reinforcing its leadership in Islamic banking. On the innovation and technology front, KFH is dedicated to adopting innovative fintech solutions to enhance operational efficiency and customer experience. The group is strongly committed to fostering synergy across its international branches, prioritizing seamless integration, knowledge sharing and unified strategies to drive operational excellence and reinforce its global network. With the Central Bank of Kuwait issuing a draft, the regulatory framework for open banking, KFH is well positioned given its digital track record and market leadership, building on its success of offering innovative services and seamless digital onboarding platforms. KFH continues to expand its global Sharia-compliant banking footprint, capitalizing on its regional presence post acquisition and seizing strategic opportunities to enhance its presence in key markets and solidify its status as a leading International Islamic financial institution. From a legislative standpoint, the implementation of the real estate developer law is expected to boost private sector involvement in housing and infrastructure and help ease the housing backlog, while the proposed mortgage law is expected to streamline property processes and expand access to long-term Sharia-compliant housing finance. These reforms foster a transparent and inclusive development model. Kuwait's Capital Markets sustained strong momentum in H1 with the market capitalization of all listed companies in Boursa Kuwait increasing 23.2% year-on-year to KWD 50.5 billion and traded volume recording 25.2 billion shares in Q2 2025, nearly doubling versus Q2 2024. KFH, the largest listed company, saw its market cap grow by nearly 23% to KWD 14.4 billion, reflecting strong investor confidence in its strategy and performance. Aligned with Kuwait's economic diversification agenda, KFH leverages its global network to facilitate cross-border investments and trade through fintech partnerships and innovative digital banking solutions. KFH drives economic integration while maintaining its leadership in Sharia-compliant financial services. With that, I'll now hand the mic to our Group Chief Executive Officer, Mr. Khaled Al-Shamlan.

Thank you, Fahad. Good day, ladies and gentlemen. It's my pleasure to welcome you all to Kuwait Finance House H1 2025 analyst call. Let me begin by highlighting the bank's financial performance during the first half of 2025. By the grace of Allah, KFH has reported a net profit for the shareholders of KWD 342.1 million for H1 2025. Earnings per share reached 19.23 fils for H1 2025. Net financing income for the H1 2025 reached KWD 607.3 million, reflecting a growth of 8.7% compared to the same period last year. Total operating income also saw a significant rise, reaching KWD 876 million with an increase of 6.4% compared to H1 2024. Additionally, net operating income for the first half of the year reached KWD 566.7 million, an increase of 7.6% compared to the same period last year. the cost-to-income ratios for H1 2025 improved to 35.3% compared to 36.2% for the same period last year. Financing receivables at the end of the first half of 2025 reached KWD 20.4 billion, an increase of 7.1% compared to the end of last year. Total assets at the end of the first half of 2025 amounted to KWD 38.5 billion, an increase of 4.9% compared to the end of last year. Shareholder equity increased to reach KWD 5.6 billion and deposit accounts totaled KWD 19.7 billion, an increase of 2.7% compared to the end of the last year. Additionally, our capital adequacy ratios remained strong at 18.01%, well above regulatory requirements, emphasizing the strength of financial -- of our financial position. KFH continued to lead the bank sector and the Kuwait market and profitability. We are proud of this achievement since it comes despite the challenges of operating environment and geopolitical tensions in the region. Our success teams carefully implemented plans that ensure sustainable profits and maintain the highest financial indicators while upholding a solid financial position and performance. A key focus area has been enhancing integrations across all group banks. The KFH Group service center, which currently provides centralized support for our operations in Turkey and Egypt has been instrumental in driving operations -- operational efficiencies and improving customer service. We plan to expand this model to additional markets in the near future, creating further synergies across our network. Our brand unification strategy reached an important milestone with the successful rebranding of Ahli United Bank Bahrain as the Kuwait Finance House Bahrain. This move complements a series of achievements realized under the new brand identity beyond the horizons across our major markets, including Kuwait, the United Kingdom and Egypt. This initiative is a part of KFH's expansion strategy as a global leader in Islamic banking. This launch marked the beginning of a new chapter of integration and excellence in banking services. In the domestic market, we continue to play a leading role in financing Kuwait's economic development. Our diverse Sharia-compliant financing solutions support projects across all sectors from large infrastructure development to SME growth initiatives. We maintain our positions as a preferred partner for major syndicated financing deals, leveraging our expertise in structuring innovative Islamic financing solutions. Our commitment to sustainability remains solid. KFH has been recognized with an A rating from MSCI for our ESG performance and inclusion in the well-known FTSE4Good Index. We continue to pioneer green financing solutions in the region and have established clear frameworks for measuring and reporting on our environmental impact, including our annual sustainability reports and carbon footprint reports. Digital innovation continues to be a key differentiation for KFH. The launch of Fahad, Kuwait's first AI-powered virtual bank assistant represents a significant milestone in our digital transformation journey. We have also greatly enhanced our KFH online app, which now offers our customers access to over 200 digital banking services, one of the most comprehensive digital offering in the region. Our achievements have been recognized by the industry's most award and rankings. KFH was named the Middle East Best Islamic Banks and Kuwait's Best Bank by Euromoney, while Global Finance recognized us as best bank for financial institutions in the Middle East for 2025. Additionally, we maintained our top positions among Kuwait banks in The Banker's 2025 top 1,000 global banks ranking and our inclusion in Forbes Global 200 list of the world's largest public companies. Looking ahead, we remain focused on executing our strategy of sustainable growth through synergies, AI-driven digital innovation and value creation for our stakeholders, especially our customers. Our strong financial positions, diversified business model and talented team positions us well to capitalize on emerging opportunities while navigating potential challenges in the economic environment. With this, let me pass the mic to my colleague, Mr. Yameen Abdul Sattar, Acting Group Chief Financial Officer and General Manager of Investment Planning and Reporting. Thank you.

Thank you, Mr. Shamlan. Good day, everyone. I'll be presenting the financial performance of KFH Group for the first half of 2025. The group has achieved net profit after tax attributable to shareholders for the 6 months ended 30th June 2025 of KWD 342.1 million, higher by KWD 1 million or 0.3% compared to H1 2024 of KWD 341.2 million. Before we get into the details, it's important to highlight that last year in May, KFH Group sold its investment in KFH Bahrain, resulting in a net gain on sale of KWD 70.13 million. Despite the significant gain recorded in the comparative period, KFH Group has achieved solid growth during 2025 in its operating income, driven largely by solid growth in core banking activity. Now getting back to the current period results, increase in net profit after tax attributable to shareholders is mainly from increase in total operating income and decrease in net monetary loss, which is partly offset by increase in operating expenses, provision charge and taxes. We will cover the details later in this presentation. Financing income has increased by KWD 47.3 million or 3.3% compared to same period last year, mainly due to increase in both average profit earning assets and yield on average profit earning assets. Net financing income at KWD 607.2 million is increased by KWD 48.5 million or 8.7% compared to same period last year, mainly due to increase in financing income by KWD 47.3 million and decrease in finance cost and distribution to depositors by KWD 1.3 million. Net operating income at KWD 566.7 million increased by KWD 41.3 million or 7.9% compared to same period last year, mainly from increase in net financing income by KWD 48.5 million, increase in fee and commission income by KWD 29 million, increase in investment income by KWD 17.5 million and increase in other income by KWD 16.7 million, which is partly offset by a decrease in net gain from foreign currencies by KWD 59.1 million and increase in total operating expenses by KWD 11.3 million. Looking at the total operating income profile, contribution of net financing income to total operating income increased from 67.86% in H1 2024 to 69.33% in H1 2025, mainly driven by increase in net financing income. Moving on to the next slide. nonfinancing income at KWD 268.7 million is KWD 4 million or 1.5% higher compared to same period last year, mainly due to increase in fee and commission income, investment income and other income, which is partly offset by a decrease in net gain from foreign currencies. Increase in fee and commission income by KWD 29 million is mainly due to increase in transaction fee as there's an increase in volumes and margins. Increase in investment income by KWD 7.5 million is mainly due to net loss incurred in H1 2024 on Islamic derivative transaction entered by our subsidiary, Kuveyt Turk to fund Turkish lira short position, which was partly offset by net gain on sale of KFH Bahrain of KWD 70.13 million. During H1 2025, Kuveyt Turk did not incur losses on Islamic derivative transactions as bank did not need additional Turkish lira funding. Additionally, group realized gain of KWD 20.3 million, net of estimated tax on sale of Ahli Bank Oman. Decrease in net gain from foreign currencies by KWD 59.1 million is mainly due to lower FX trading income, mainly from Kuveyt Turk and FX revaluation gain recorded in the comparative period from KFH Egypt. Total operating expenses at KWD 309.2 million is KWD 11.3 million or 3.8% higher than same period last year, mainly due to impact of inflation in Turkey. Cost-to-income ratio for H1 2025 is 35.3% compared to 36.19% for H1 2024. Decrease in cost-to-income ratio is mainly due to increase in operating income by KWD 52.5 million, partly offset by an increase in operating expenses by KWD 11.3 million. Moving on to the next slide on the financial performance. Average profit yielding asset is higher by 0.8% compared to both December and June 2024, mainly from increase in average financing receivable and average investment in debt securities. It is worth to note that the comparative period average yielding assets include KFH Bahrain balances, which was sold in May 2024. Group NFM for H1 2025 at 3.19% is higher by 17 basis points compared to H1 2024, which is mainly due to improvement in average yield by 17 basis points, while average cost of fund remained almost at the same level. Looking at provisions and impairment, group total impairment charge increased by KWD 7.5 million compared to H1 2024. ECL and other impairment charge was KWD 8.9 million in H1 2025 compared to a reversal of KWD 18.8 million in the comparative period. This was mainly due to increase in portfolio and impact of changes in macroeconomic variables. Net impairment charge on financing receivable for H1 2025 was KWD 5 million, lower by KWD 20.2 million compared to H1 2024, mainly due to higher reversal and recoveries of written-off debts. KFH's cautious approach towards provisioning has contributed to financing provision balance exceeding ECL required as per CBK of IFRS 9 by KWD 494 million as of 30th June 2025. Moving on to net monetary loss, application of IAS 29 on the financial statement of Kuveyt Turk resulted in recognition of net monetary loss of KWD 71.2 million in the current period, lower by KWD 15.6 million compared to H1 2024 due to lower inflation rate in Turkey. Moving on to the next slide, showing the financial position. Total assets at KWD 38.5 billion increased by KWD 1.8 billion or 4.9% in June 2025 compared to December 2024. Net financing receivables at KWD 20.4 billion increased by KWD 1.4 billion or 7.1% compared to December 2024, mainly on account of increase in corporate portfolio. Investment in debt securities at KWD 7.4 billion has increased by KWD 560 million or 8.1% compared to December 2024. Deposits for H1 2025 at KWD 19.7 billion have increased by KWD 510 million or 2.7% compared to December 2024, mainly due to increase in CASA deposits. The contribution of CASA deposits to total group customer deposits as of 30th June 2025 is 45.7%. And on an overall basis, group continues to benefit from large pool of low-cost deposits. Looking at the funding mix, contribution of customer deposits to total funding as of 30th June 2025 is 64.6%, followed by due to banks and FIs at 30.5%. In the last 2 slides, looking at the key financial ratios, return on average tangible equity declined from 23.26% in H1 2024 to 21.62% in H1 2025 due to increase in average tangible equity. Return on average equity decreased slightly from 12.92% to 12.49% due to increase in average shareholder equity as well. Return on average assets increased from 1.92% to 2.08%, mainly due to increase in net profits. Cost-to-income ratio improved from 36.19% to 35.30% due to increase in operating income, as explained earlier. Earnings per share increased from 19.19 fils to 19.23 fils due to increase in profit attributable to shareholders. Group capital adequacy ratio as of 30th June 2025 is 18.01% compared to 19.89% as at December 2024. CET1 ratio and Tier 1 ratio for H1 2025 were 14.18% and 16.16%, respectively. Group nonperforming financing ratio as of 30th June is 1.78% with provision coverage ratio of 253%. This concludes our presentation. We will now wait for the questions, and we'll provide our response.