Kuwait Finance House K.S.C.P. (KFH.KW) Q4 FY2025 Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Kuwait Finance House 4Q 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. Abdulkarim Al-Samdan, Group CFO; and Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer. As usual, we'll start the call with the management 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, and 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.

Thank you, Ahmed, and good afternoon, everyone. Welcome to Kuwait Finance House's Year-end 2025 Earnings Call. I'm Fahad Al-Mukhaizeem, Group Chief Strategy Officer. Today, I'll share with you insights into Kuwait's economic landscape and KFH's strategic progress during the year. Global economic growth remains resilient in 2025 amid persistent trade tensions, elevated geopolitical uncertainty and the restraining effects of relatively tight financing conditions on demand and investment. Global GDP growth is estimated at 3.3% in 2025 and expected to remain stable at 3.3% in 2026, supported by technology-driven investment in advanced economies. Global inflation is projected to moderate to 4.1% in 2025 and further to 3.8% in 2026, reflecting moderating demand and easing energy prices. The outlook remains subject to downside risk related to supply chain disruptions, commodity price volatility and rising fiscal and sovereign debt pressures in several major economies. The Kuwait economy is experiencing gradual recovery driven by non-oil sector growth despite continued adherence to OPEC+ production limits. Following a contraction of 2.6% in real GDP in 2024, growth is expected to reach around 2.6% in 2025 and accelerate to 3.9% in 2026, supported by stronger non-oil activity, resilient domestic demand and sustained momentum in government capital spending. In 2025, Kuwait delivered a standout performance in the project market, recording over 16% growth on an annual basis in awarded contract values to USD 10.2 billion, the highest level in 9 years, supported by projects aligned with the Vision 2035 and accelerated investment in the energy, oil and gas, power and transport sectors. Signaling a clear shift from the planning to execution. This momentum has supported financing opportunities for KFH, reinforcing its role in structuring and funding large-scale projects across key strategic sectors. The CBK continued to recalibrate its monetary stance amid the benign inflation environment. Annual inflation remained contained at 2.5% in September 2025, with full year inflation projected to ease to approximately 2.2%, down from an average of 2.9% in 2024. The CBK cut its discount rate by 25 basis points in December of 2025 to 3.5%, reflecting a measured easing approach aimed at supporting economic activity while preserving price stability and broader macro financial balance. The mortgage law draft remains in review. Its approval could generate significant demand for mortgage financing affecting the banking sector and housing markets. Ongoing discussions signal progress towards a new mortgage regulatory framework, supportive of a long-term banking sector growth with implementation and impact dependent on the final law and the implementing regulations. KFH remains Kuwait's largest listed company in Boursa Kuwait by market cap with a market value of approximately KWD 14.6 billion as of the end of December 2025, up 17.4% year-on-year versus the end of 2024 and accounting for around 27.4% of total listed market capitalization, which stood at KWD 53.2 billion, up 22% over the same period. This reflects sustained investor confidence in KFH's earnings viability, balance sheet strength and disciplined execution, highlighting its role as a core defensive and core and growth anchor in the Kuwaiti equity market, supported by strong results from its diversified business model and market leadership. KFH concluded 2025 with exceptional achievements, securing more than 58 prestigious regional and international awards across banking excellence, digital transformation, sustainability, innovation in Islamic finance and service quality. This recognition reflects a strong international confidence in KFH's strategy execution, operational strength and governance, reinforcing its position as a leading Islamic financial institution, both regionally and globally and its ability to deliver sustainable value in a competitive banking landscape. KFH has advanced its digital transformation by shifting from basic digitization to value-driven technology adoption. KFH has expanded use of technology across frontline channels, deploying solutions to enhance customer engagement and service efficiency. At the same time, enhancements to the KFH mobile application have strengthened digital journeys and increased migration to scalable, efficient channels supported by stronger digital governance, cyber risk management and fraud prevention. KFH has reiterated its focus on institutional partnerships and embedding sustainability at the core of its business model while leveraging advanced digital capabilities to support long-term competitiveness. This is reflected in its role as a strategic partner in international economic forums and the integration of ESG consideration into client engagement, particularly through the targeted SME programs. This underscores the disciplined approach to growth, resilience and long-term value creation. In closing, KFH enters 2026 from a position of strength, supported by disciplined execution, a resilient balance sheet and clear strategic priorities. Our diversified model, digital progress and sustainability focus position us well for sustainable growth and long-term value creation. With that, I'll now hand the mic over to our Group Chief Executive Officer, Mr. Khaled Al-Shamlan.

Thank you, Fahad. Good day, ladies and gentlemen. It's a pleasure to welcome you to Kuwait Finance House Full Year 2025 Earnings Call. I would like to begin by highlighting our financial performance for fiscal year 2025. With the grace of Allah, KFH reported a net profit of KWD 632.1 million for the year, reflecting an increase of 5% compared to 2024. This achievement marked the highest profit within the Kuwait banking sector. Earnings per share reached 35.64 fils, up to 5.8% from the previous year. Our net financial income also saw significant growth, totaling KWD 1.3 billion, an increase of 11.5%. Net operating income increased to KWD 1.2 billion, a 10.7% increase. Financing receivables reaching KWD 9.8 billion increased by 14.4% compared to the last year. Our total assets reached KWD 42.8 billion for the year 2025, an increase of KWD 6.1 billion or 16.5% compared to the last year -- 16.5% compared to the last year. Our capital adequacy ratio stands at 19.81%, exceeding the minimum regulatory requirement, which underscores KFH's strong capital base. The Board of Directors considered the distributions of cash dividends to shareholders of 24%, including 10% in H1 2025 and a proposed 14% cash dividend for the year-end. The Board of Directors also considered the distribution of bonus shares of 7% after the approval of the general assembly and the relevant authorities. KFH's solid fiscal year 2025 performance reaffirms our commitments to sustainable growth. Our strategic road map focuses on enhancing liquidity, capital and risk management while aiming to position KFH among the world's top 100 banks. The record profit reflect our market leadership and resilience during global economic fluctuation. As a leading global economic entity, KFH benefits from a vast international network of over 600 branches. This geographic diversity and our wide revenue streams have significantly supported our operational performance, delivering strong results for both shareholders and customers. In 2025, we successfully expanded our private banking and wealth management services and invested in modern banking technology. Our focus on digitalization and innovative product development enhances customers' experience and solidifies our competitive edge in the rapidly evolving banking landscape. KFH continues to play a pivotal role in supporting economic growth and aligning with the state's visions for a more prosperous financial future. We are committed to diversifying the national economy and achieving sustainable development in line with Kuwait's Vision 2035. Our efforts include financing mega projects in infrastructure, energy, oil and gas and urban development as well as providing credit facilities to Kuwaiti corporates and SMEs. Recently, KFH signed, KWD 1.5 billion credit facilities agreement with the Kuwait Petroleum Corporation, the largest KD-dominated deals of its kind of which KWD 675 million is allocated to Islamic finance with KFH contributing KWD 405 million as the lead strategic partner. Our commitment to the community remains strong, highlighted by KWD 15 million donations for a specialized heart disease center, the opening of a tenth award at the Addiction Treatment Center, and support for the development of Al Wataniya areas in Kuwait City. Additionally, we released our fifth sustainability report and third carbon footprint reports, showcasing our proactive social responsibility efforts and environmental impact. In 2025, we successfully issued USD 1 billion in senior unsecured Sukuk as a part of our USD 4 billion Sukuk program aimed at strengthening long-term funding sources and supporting our operations. Our digital transformation accelerated in 2025, enhancing our value propositions and partnerships. Key milestones, including global remittances initiatives with the Western Union and Afaq systems and expanding digital services on the e-Corp mobile app. Our smart branch services increased, bringing the total number of digital services on the KFH online applications to over 200. In 2025, our customers completed over 600 million digital banking transactions, underscoring their confidence in us and reinforcing our leadership in delivering innovative financial solutions. As a testament to our success, KFH received 85 awards in 2025, including World Best Islamic Bank by Global Finance and Bank of the Year -- Kuwait by The Banker along with the award of the Most Innovative Islamic Bank in Kuwait and Best Islamic Private Bank -- Digital Innovations in 2025. We look forward to continuing our journey of growth and innovations, driving positive change in the banking sector and contributing to Kuwaiti's economic vision. With this, let me pass the mic to my colleague, Mr. Abdulkarim Al-Samdan, Group Chief Financial Officer. Thank you.

Thank you, Mr. Al-Shamlan. Good afternoon, everyone. I'll be presenting the financial performance of KFH Group for the year ended 31st December 2025. KFH Group has achieved solid growth in its core banking activities during 2025. Key financial performance highlights are as follows: The group has achieved net profit after tax attributable to the shareholders for the year ended 31st December 2025 of KWD 632.1 million higher by 5% in comparison to the year 2024 or KWD 30.3 million. Net financing income stood at KWD 1,279.2 million, representing an increase of 11.5%. Net operating income stood at KWD 1.209 billion, representing an increase of 10.7%. Cost-to-income ratio stood at 34.06% in comparison to 35.46% for the year 2024, while the EPS have increased 5.8%, representing 35.64 fils for the year 2025. Finance income increased by KWD 364.1 million, representing 12.6% in comparison to the previous year due to the increase in both average balance of profit earning assets and yields by 38 basis points. Net financing income stood at KWD 1,279.2 million, representing an increase of 11.5%, mainly due to the increase in financing income as explained, offset by the increase in finance cost and distribution to depositors by KWD 231.8 million, representing an increase of 38 basis points due to the increase in average balance of profit-bearing liabilities and cost of funds. Therefore, the net financing margin for the year 2025 remained at the same level, 3.12%. Net operating income stood at KWD 1.209 billion, representing an increase of 10.7% compared to the previous year due to the increase in net financing income, the increase in fees and commission by KWD 52.2 million, the increase in investment income by KWD 23.9 million and the increase in other from foreign currency of KWD 84.5 million and increase in operating expenses by KWD 24.4 million. Total operating income have increased by KWD 141.2 million or 8.3%. Looking at the total operating income profile, there is increased contribution of net financing income to the total operating income from 67.8% in 2024 to 69.8% in 2025. Further, contribution of fees and commission income have increased from 10.5% to 12.5%. This represents enhancement and strength of our core banking. Moving to the next slide. Net financing income reached KWD 554.1 million, which is KWD 8.9 million higher than the previous year, representing 1.6% mainly due to the increase in fees and commission income, investment income and other income and partly offset by the decrease in net gain from foreign currency. Increase in fees and commission by KWD 52.2 million is mainly due to the increase in transaction fee income resulting from higher volume and improved margins during the year. Increase in investment income by KWD 23.9 million is mainly due to the net losses incurred in 2024 on Islamic financing -- on Islamic derivative transactions entered by our subsidiary, Kuwait Turk to fund the Turkish lira short position, which was offset by the net gain on sale of KFH Bahrain of KWD 70.1 million last year. During the current year 2025, Kuwait Turk did not incur such losses on the derivative transactions as the bank did not need to fund the Turkish lira. Additionally, the group realized a gain of KWD 20.3 million, net of estimated tax on the sale of the associate Ahli Bank of Oman. Decrease in net gain from foreign currency by KWD 84.5 million is primarily driven by the lower FX trading income from Kuwait Turk. Fees and commission contribution to the total nonfinancing income increased from 32.5% in 2024 to 41.4% in 2025, whereas there is a decline in net gain from foreign currency contribution from 28.2% to -- sorry, to 12.5%. This indicates improvement in the overall sustainable nonfinancing income. Total expenses stood at KWD 624.3 million, which is higher only by 4.1%. This is important to note that the expenses in Turkey have increased by 16%, mainly driven by the inflation, while all other group locations combined decreased by 3%, leading to the overall marginal increase of 4%. This is a testament of the value creation through operational efficiency embedded within the group. Moving to the next slide. Average profit yielding assets is higher by 6% compared to 2024, driven by the increase in financing receivable and investments in debt securities. Group net financing margin for the year 2025, as we discussed earlier, stood at 3.12%, similar to the levels in 2024 due to the increase in yields by 38 basis points and the increase of the corresponding cost of funds by the same basis points. Looking at the provisions and impairment, the group total impairment charge increased by KWD 41.4 million compared to 2024 due to the higher provision charge by KWD 40.6 million, partly offset by higher recoveries from written-off debt by KWD 19.8 million. ECL and other impairment charge was KWD 69.3 million in 2025 compared to KWD 48.7 million in 2024. This was mainly due to the higher ECL on debt securities resulting from portfolio growth and impact of macroeconomic variables and increase in estimated loss in outstanding claims and claims incurred but not reported and [indiscernible] insurance subsidiaries during 2025. As of December 2025, the provision as per CBK instructions exceeds the ECL based on CBK guidelines by KWD 527 million compared to KWD 539 million in 2024. This provides the group -- this provides the group with a very comfortable buffer to withstand possible negative effect of prevailing uncertainties on the ECL provision requirements. Moving to the net monetary loss as application of the IAS 29 on the financial statements of Kuwait Turk. This resulted in recognition of net monetary loss of KWD 135.4 million in 2025, lower by almost KWD 20 million in comparison to the year 2024 due to the lower rate of inflation in Turkey. Moving to the next slide. Total assets reached KWD 42.8 billion, representing an increase of KWD 6.06 billion or 16.5%. Net financing receivable increased to KWD 21.8 billion, representing an increase of KWD 2.7 billion or 14.4% compared to 2024 due to the increase in both corporate and retail portfolio. Investment securities is at KWD 7.6 billion, representing an increase of KWD 712 million or 10.4% in comparison to the year 2024. Deposits for the year 2025 have increased by KWD 1.8 billion or 9.4% in comparison to the year 2024. The contribution from CASA deposits to the total group deposits as of the year 2025 represents 46.8%. And on the overall basis, the group continues to benefit from a large pool of low-cost deposits. Looking at the funding mix, contribution of customer deposits to the total funding for the year 2025 is 61.6%, followed by due to banks and financial institutions, 34.3%. Moving to the next slide. Return on average tangible equity declined slightly from 19.95% in 2024 to 19.43% in 2025. Although the profitability have increased, the return on average tangible equity declined due to the higher tangible equity. Return on average equity increased from 11.22% to 11.32%, mainly to the profit during the year. Return on average assets increased from 1.74% to 1.84%, similarly, mainly to the increase in net profit. Cost-to-income ratio improved from 34.46% to 34.06% mainly to the value creation through operational efficiency. EPS increased from 33.68 fils to 35.64 fils due to the increase in profit to the shareholders. Group CAR ratio for the year 2025 is 19.8% in comparison to the year 2024, 19.89%. KFH is well above the limited -- KFH is well above the limit required by the regulators, which confirms the solid capital base of KFH. CET1 and Tier 1 ratio for the year 2025 were 15.05% and 18.02%, respectively. The group NPF ratio for the year 2025 is 1.5% with a provision coverage ratio of 287%. With this, we conclude the 2025 financial results part of this presentation. Thank you.

Good afternoon, ladies and gentlemen. This is Bashayer Alotaibi, Investor Relations at Kuwait Finance House. I will be taking your questions. The first question is in 2025, loans increased by 14% with Turkey contributing significantly. Turkey's total assets grew from KWD 7.9 billion to KWD 10.5 billion. Do you see this momentum continuing in 2026?

Yes, we did -- we see this momentum continuing in 2026. However, we note that the 2025 loan growth came from all major jurisdictions with major contribution from Kuwait and Turkey. Both corporate and retail segments contributed towards loan growth. However, the contribution from corporate was more significant.

In 2025, operating expenses increased by 4%. Can we expect a similar discipline going forward?

We expect the same discipline going forward, and I have addressed this in the presentation.

Looking at the current geopolitical tensions and USD devaluation, will KFH exposure in USD have any effect?

We try to minimize open exposure in any foreign currency, and this will continue in the future.

Was there a reclassification of income and expense from other operating income to impairment charges during 2025? It looks like 2024 has also been restated.

Yes. As disclosed in Note 5 of the consolidated financial statements, KWD 71.1 million related to the estimated loss of Takaful Insurance contracts liabilities of the Takaful subsidiaries was included under other provision charge, while these were previously netted off against other income. Comparative information has also been adjusted by reclassifying KWD 61.5 million to provision and impairment from other income to confirm with the current year presentation.

Can you talk about the drivers of high double-digit growth in fee income in 2025 and whether this level of growth is expected to continue in 2026?

Yes, we expect the same level of growth to continue in 2026. The overall increase in 2025 was mainly attributable to the growth in transaction volume and margins across business lines and geographies, but with particular emphasis in Kuwait and Turkey.

The net financing margin fell Q-on-Q in Q4 2025, but improved in full year 2025 versus full year 2024 in our calculation. Can you elaborate on drivers? All Kuwaiti banks saw NIM pressure in 2025. Was your full year 2025 NIM expansion versus full year 2024 driven by Turkey? How is the bank positioned for lower interest rates in Turkey?

Year-on-year gross yield increased by 38 basis points, while the cost of funds also increased by similar basis points, 38 basis points, and this resulted in no change in NFM. We noted a reduction in Kuwait Turk NFM in 2025 due to the reduction in Central Bank of Turkey policy rate. However, this impact was partly offset with the change in funding mix and increase in CASA. For Kuwait NFM, it remained broadly flat in 2025. On the quarter-on-quarter NFM, there was a reduction from 3.15% in Q3 to 3.01% in Q4. NFM, as we said in the -- for the entire year, remained at 3.12%.

Can you provide the contribution of Turkey to loans, deposits, assets, net operating income and net profit?

Turkey contribution is 21.1% to the financing portfolio, 31.7% to the deposits, 24.4% to the total assets, 17.5% to profit attributable to the shareholders.

Why was the full year 2025 tax rate flat at 21% despite the adoption of minimum top-up tax in Kuwait and Bahrain?

Let me explain this. The effective tax rate for 2025 was 20.9%. This includes tax in certain subsidiaries, which are not impacted by Pillar 2 regulation. As disclosed in Note 6 of the consolidated financial statements, taxation related to the overseas subsidiaries, including Turkey, have declined in 2025 in comparison to 2024, while the tax charge for KFH Group increased in 2025 due to the implementation of Pillar 2 regulation. While Turkey contribution to the group profitability increased in 2025, it is worth to highlight that due to the lower taxable income of the Turkish entity in 2025, this has contributed to lower effective tax rate for the KFH Group. Current tax charge for Turkish subsidiary is calculated based on locally reported taxable income in local currency, which is not adjusted for the inflation numbers, which is higher since it doesn't consider losses recorded at KFH Group level from the application of inflation accounting and certain other adjustments related to provision and impairments. Taking into consideration these adjustments, taxable income for Kuwait Turkey in 2025 was lower compared to 2024, which contributed to mitigating the impact of incremental tax resulting from the application of Pillar 2 in 2025.

Can you provide full year 2025 guidance for net interest margin, fee income, cost-to-income, cost of risk and loan growth?

We expect negative impact due to the rate cuts on the net financing income, but we will mitigate it by the increase in volume and favorable product and funding mix. On the fee income, we expect double-digit growth for 2026. And then for the cost-to-income ratio, we will strive to maintain the same discipline in 2026. In 2025, it was 43 basis points. We expect this to remain in this range. To be more specific, we expect 2026 to be between 40 basis points to 50 basis points. On the loan growth, we expect low double-digit growth.

What would be KFH CASA ratio?

I think we covered this in the presentation, 46%.

So with this, we conclude our earnings call for today. Since similar questions were already answered and covered within our presentation. Thank you very much for attending. Now I'll leave the mic to Ahmed to conclude.

Thank you, Bashayer. I'd like to thank management for taking the time today, and I'd like to thank everyone for joining, and have a good day, everyone. Thank you.