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

Good afternoon, ladies and gentlemen, and welcome to the Kuwait Financial's Full Year 2020 Results Webcast. This is Ahmed El-Shazly from EFG Hermes, and it's a pleasure to have with us on the call today Mr. Abdulwahab Al-Rushood, Acting Group CEO and Group Chief Treasury Officer; Mr. Shadi Zahran, Group CFO; and Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer. We're also joined today by attendees from the following institutions: NBK Capital; Al Rayan Investment; CI Capital; SICO; ADIA; Abu Dhabi Commercial Bank; Franklin Templeton; Arqaam; Fiera Capital, among other institutions as well. So thanks, everyone, for joining us today. We'll start the call with the management presentation for the next 10 to 15 minutes, and then this will be followed by the Q&A session. [Operator Instructions] I would also 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 over the mic to Mr. Fahad to start with the presentation.

Thank you, Ahmed, and good afternoon, ladies and gentlemen. We are glad to welcome you to the year-end 2020 earnings call for Kuwait Finance House Group. I'm Fahad Al-Mukhaizeem, Group Chief Strategy Officer. Today, we'll be covering the highlights of the Kuwaiti operating environment, with an overview on KFH. We'll also share with you KFH's strategy as well as the year-end 2020 results. In 2020, the world witnessed many events that our generation had not witnessed before, such as the repercussions of the COVID-19 virus, from general lockdown and negative oil prices. The State of Kuwait was not immune to the repercussions of the pandemic as the lockdown was carried out from March to September, and Kuwaiti banks postponed loan payment a period of 6 months as a contribution to revive the economy and reduce burdens of citizens and residents. For interest rates, the CBK kept the interest rate at 1.5% after the last cut of 100 basis points on the 16th of March 2020. On the other hand, according to the IMF's latest forecast, GDP growth is expected to witness a decrease in 2020 compared to a slight growth in 2019. Boursa Kuwait completed the Kuwaiti capital market's inclusion into the MSCI Emerging Market Indices with the successful implementation of the first tranche of index inclusion at the end of November. Boursa Kuwait has received also approval from the Capital Markets Authority to restructure its promotion requirements for its premier market. The new parameters are expected to raise transparency and increase the issuer base in the premier market by potentially increasing the number of mid- to large-sized companies in it, all of which will reflect positively on the development of the Kuwaiti capital market and benefit its investors. Further, KFH enjoys a high creditworthiness. Fitch Ratings affirmed Kuwait Finance House's long-term issuer default rating at A+ with a stable outlook. And Moody's assigned A2 long-term deposit rating with a stable outlook as well. In addition, KFH Group has recently been named #1 Safest Islamic Bank in the GCC by Global Finance Magazine. KFH announced the successful launch of the digital service, opening a bank account online for new customers, citizens and residents within minutes without having to visit the branch. KFH inaugurates revamped Hateen and Airport branches, featuring the digital platforms display screens, tablets and self-service interactive solutions. The efficiency of KFH's digital services as transactions completed by its customers through online and KFH online on the website or mobile app exceeded 140 million transactions in 2020. This emphasizes the successful digital transformation strategy of KFH and its keenness to provide innovative banking solutions via mobile and alternative channels to enable customers to complete their transactions around the clock from anywhere, easily and safely. Furthermore, KFH continued supporting the national economy, financing mega projects such as oil and gas and contributing to the development plans of -- and projects in Kuwait and the region. With this, let me hand over the mic to our Acting Group CEO, Mr. Abdulwahab Al-Rushood.

Thank you, Fahad. Good day, ladies and gentlemen. It's my pleasure to welcome you all to our 2020 earnings call. Let me highlight the bank's financial performance. CapEx has, by the grace of Allah, reported net profit attributable to the shareholders of the bank of KWD 148.4 million for the year ended 2020, a decrease of 40.9% compared to last year. Net finance income for the year ended 2020 reached KWD 614.22 million, representing an increase of 15.8% compared to last year. Total operating expenses for the year 2020 reached KWD 296.04 million, a decrease of 2.7% compared to last year. Due to the negative economic outlook resulting from the coronavirus pandemic, investment income for the year decreased by 105% compared to last year. Consequently, net operating income decreased to KWD 499.56 million for the year ended 2020, a decrease of 2.1% compared to last year. Cost-to-income ratio has improved to reach 37.2% for the year ended 2020 compared to 37.4% for last year. Also, earnings per share for the year ended 2020 reached 19.52 fils, a decrease of 41.1% compared to last year. The Board of Directors has proposed 10% cash dividends to shareholders and 10% bonuses -- 10% bonus share, subject to general assembly and concerned authorities' approval. Shareholders' equity reached KWD 1.936 billion at the end of year 2020. Total assets increased to reach KWD 21.502 billion, an increase of KWD 2.111 billion or 10.9% compared to the end of last year. Financing portfolio reached KWD 10.748 billion, an increase of KWD 1.274 billion or 13.4% compared to end of last year. Investment in Sukuk reached KWD 2.742 billion, an increase of KWD 450 million, a growth of 19.6% compared to end of last year. Depositors' accounts reached KWD 15.317, an increase of KWD 1.765 billion or 13% compared to the end of last year. In addition, the capital adequacy ratio reached 17.53%, which is above the minimum required limit. The percentage confirms the solid financial position of KFH. Deposits -- sorry, despite the negative economic impact of coronavirus, the recent financial results confirm the successful strategy of KFH, its solid financial position, high worthiness and efficient capability to handle the exceptional conditions. Profit rates fell in 2020 because of the additional precautionary provisions taken by KFH in the face of coronavirus repercussions and to maintain good levels of asset quality and strong capital base. KFH led the arrangement and marketing of KWD 400 million Islamic tranche in a mega KWD 1 billion syndicated credit facility for KPC, in cooperation with Kuwaiti banks, where KFH contributed KWD 304 million in financing. KFH succeeded in amending several Sukuk issuance for many local and international banks as well as governments, noting that KFH Group has led KWD 500 million Sukuk for First Abu Dhabi Bank; KWD 150 million Sukuk for Warba Bank the, first Kuwaiti dinar-dominated Sukuk issuance for a Kuwaiti Bank in Kuwait. In addition, KFH was involved in arranging deals, including USD 700 million Sukuk for Boubyan; USD 500 million Sukuk for Bahrain Mumtalakat Holding Company; and $1 billion Sukuk for Dubai Islamic Bank; $500 million Sukuk for Sharjah Islamic Bank; and $50 million Sukuk for KFH-Turkey. For more details regarding the acquisition, we have disclosed to the regulatory authorities and the market the latest development in this regard. All these disclosures were published via the official website of Boursa Kuwait, and any new development will be updated and -- as and when it becomes available. Now I will hand over the mic to Group's Financial -- sorry, to the Group's Chief Financial Officer, Mr. Shadi Zahran, and he will present the financial results up to year-end 2020 in details and answer any of your questions afterwards. Thank you.

Thank you, Abdulwahab. [Foreign Language], and good day, everyone. As usual, I will be presenting the financial performance of KFH Group for 2020. The group has achieved net profit after tax attributable to shareholders for the year ended 31 December 2020 of KWD 148.4 million, lower by KWD 102.6 million or 40.9% compared to last year 2019 of KWD 251 million. The lower profit is mainly due to lower investment income and higher provisions, higher provisions and impairments. We will cover the details on these 2 items later in the presentation. Net financing income has increased by KWD 84 million or 15.8% compared to last year mainly due to lower financing -- lower finance costs in Kuwait and Turkey. The decrease in finance cost is mainly due to decrease in benchmark rates across the globe, improvement in CASA deposits at the Kuwait and the group level and lower distributable profits impacting distribution to depositors mainly Mudarabah depositors. Net operating income at KWD 499.6 million decreased by KWD 10.5 million or 2.1% compared to last year. The decrease is mainly from investment income by KWD 136.7 million and fees and commission by KWD 6 million as a result of lower business and investment activities due to COVID-19 lockdown during 2020, offset by the increase in net financing income by KWD 84 million and net gain from foreign currencies by KWD 35.9 million and lower operating expenses by KWD 8.2 million. The decrease in investment income by KWD 136 million, actually KWD 136.7 million, is mainly due to lower gains on sale of investments due to the adverse economic environment in 2020, in addition to loss on Islamic derivative transactions mainly currency and commodity swaps entered by our subsidiary, Kuveyt Turk. Kuveyt Turk Participation Bank enters into swaps in order to obtain Turkish lira funding, while the associated cost is recorded under other investment income in accordance with the IFRS. However, for our internal performance analysis and management reporting, we consider this cost as part of financing cost. The other nonyielding income contribution increased from 19% to 24% with the impact of the COVID-19-related government support of KWD 7.8 million reported under other income. As a result, the nonfinancing income dropped from KWD 284.1 million last year to KWD 181.4 million, lower by 36.2 million -- 36.2%, sorry. The operating expenses at KWD 296 million has decreased by KWD 8.2 million or 2.7% compared to prior year. The decrease is mainly due to lower staff costs by KWD 10 million. The reduction in operating income, offset by the reduction in operating cost, leading to cost-to-income ratio maintained at the same level of 37.21%, last year was 37.36%. Average yielding assets is up by 9% compared to 2019 and 16.3% compared to 2018, resulting from the growth in both financing receivables and Sukuk. Average financing receivables is up by KWD 0.8 billion, and average Sukuk is up by KWD 0.6 billion. Group net financing margin at 3.27% shows 17 basis points increase over 2019 average of 3.10%. Average yield decreased by 80 basis points due to the drop in discount rate by the Central Bank of Kuwait and Fed rates. However, average cost of funds declined by 97 basis points due to increasing CASA deposits in the major entities of the group and drop in distributable profits for Mudarabah deposits. Now with regards to provisions. The group total provisions and impairment charge increased by KWD 87.2 million or 44.3% to reach KWD 284.1 million for 2020. Credit provisions charge net of recoveries for the year at KWD 159 million was at the same level as 2019, although, last year, KFH recorded KWD 60 million additional general provisions against financing receivables of our subsidiary in Turkey in view of adverse economic outlook. This provision is still maintained in our books. In 2020, the negative impact of COVID-19 was considered as part of KFH's prudent approach towards provisioning. Also, in addition to recording specific provision against customer segments, the charge of the general provisions amounted to KWD 63 million includes a significant precautionary general provisions charge over and above the minimum general provision requirement of CBK. Here, I would like to highlight that the current credit provisions level in KFH Group books exceeds the ECL, expected credit loss, required as per Central Bank of Kuwait IFRS 9 by KWD 227.5 million as of December 2020. With regards to impairments against investments and others, the charge of KWD 125 million was higher by KWD 86.9 million compared to last year 2019. In the view of potential deterioration of banks' assets quality and expected delay in economic recovery, prolonged adverse impact of COVID-19, the group investments and other impairment charge of KWD 125 million includes impairment on investments in associates and others of KWD 69.6 million, whose operations were impacted in 2020 due to COVID-19 and government-enforced lockdowns. The impairment charge also include ECL on Sukuk, Expected Credit Loss on the Sukuk portfolio, of KWD 28.4 million, which is mainly due to the increase in portfolio and downgrades in sovereign ratings of Turkey and Bahrain during 2020, considering the majority of our investment in Sukuk is issued by sovereign. And impairment of real estate of KWD 27 million includes precautionary impairment loss of KWD 15 million over and above impairment losses recorded based on recent properties' valuation. Looking at the right side of the slide, banking entities contribution to net operating income before provisions increased by 4% to form 99%, and that reflects the higher impact of COVID-19 on the group's nonbanking entities operations. Total assets at KWD 21.5 billion increased by KWD 2.1 billion or 10.9% in 2020. Financing receivables at KWD 10.7 billion increased by 13.4%. Growth in financing receivables witnessed in both corporate and retail banking and was mainly contributed with double-digit growth from Kuwait, Turkey and Bahrain, while other demonstrated slower growth, with focus on asset quality. Investments in Sukuk at KWD 2.7 billion increased by KWD 0.5 billion or 19.6% compared to last year 2019, with major growth contribution from Kuveyt Turk Participation in sovereign Sukuk. The growth in financing receivables and Sukuk portfolio followed similar positive growth in deposits in all markets which we operate in. The growth in deposits for 2020 was KWD 1.8 billion or 13%, reflecting depositors' confidence in KFH Group. Additionally, the favorable deposits mix continues to show very healthy contribution from CASA deposits, which now represents 53.3% of total group deposits as at the end of 2020 compared to 44.3% as at the end of 2019. It's also worth to mention that KFH Kuwait dominates the saving accounts, with market share of 40.4% as per CBK's latest published reports, November '20. Customer deposits as a percentage of total funding at 82.4% reflected healthy funding mix and showed robust liquidity. In this slide, looking at the key performance ratios which reflects the lower profitability due to COVID-19 impact, return on average equity dropped from 13% to 7.63%; return on average assets dropped by -- from 1.4% to 0.9%; cost-to-income ratio improved slightly from 37.36% to 37.21%; and EPS dropped from 33.12 fils to 19.52 fils; NPL ratio increased to reach 2.2% as per CBK calculation in 2020 compared to 1.88% for 2019; provisions coverage ratio for the group at 223% for 2020 compared to 231.5% for 2019. Thank you.

[Operator Instructions] We'll start with the first question. Can you please talk a bit about the capitalization versus the regulatory minimum and asset quality at the Turkish subsidiary? And also, what are your growth plans for the Turkish subsidiary in 2021?

Yes. Our NPL for our subsidiary in Turkey increased to reach 3.71% for 2020. However, it's still much better than the market, the growth in 2021 also expected to be maintained within same levels in 2020 for KTPB, for Kuveyt Turk.

Okay. And also, the capitalization of the Turkish subsidiary versus the regulatory minimum, capital adequacy?

The Kuveyt Turk still maintains very solid CAR and higher than the regulatory requirement. Unfortunately, the number is not in front of me, but it's still at the same level that was maintained before and higher than regulatory requirements.

Okay. The next question. The Kuwait government envisages an increase in CapEx spending in 2021. What are your expectations for growth in domestic financing assets?

We expect the growth for the financing to be, for the group and including Kuwait and other entities, to be high single digits for 2021.

Okay. You have another question. Can you elaborate on the drivers of financing asset growth during 2020 of 11% year-on-year? And what was the financing assets growth in Kuwait and in Turkey in 2020?

The growth for 2020 in financing was mainly due to bilateral financing with banks in Kuwait, the oil and gas sector in Kuwait, personal financing, which includes the postponement of 6 months installments in Kuwait and Bahrain. For Kuveyt Turk, we witnessed growth from all segments, with increase in foreign trade financing, export financing, in both the Turkish lira and foreign currency as well as in financial leasing in foreign currency.

Okay. The next question, are you still offering deferrals to corporates, or did the scheme end in Q4 2020? And how has the payment behavior been in your corporate book?

Would you repeat the question, please?

Yes. Are you still offering the deferrals for corporates, or did the scheme end in 2020? And how has the behavior been in your corporate book, the payment behavior?

We -- actually, we don't see the increase in that. The deferring was mainly in the last -- in the third quarter, actually, for the corporate book. And then what is -- the other part is the NPL, you mentioned, real impact on NPL?

Yes. Also, the real impact of COVID-related NPL formation, are you expecting -- when are you expecting it to get to show on your books?

Although business and economic activities have significantly resumed, as you know, the pandemic is not yet over. And the other side, the vaccination rollout, is expected to take longer. Hence, we are of the opinion not -- of the opinion that it's not prudent to give a guidance on cost of risk or NPLs. But there is the other part, the increase in NPL, the increase for 2020, there is part of the increase is due to the precautionary provisions on certain accounts due to impacted sectors. So although the accounts are regular, but because we took provisions on them, that also increased the NPL for 2020 and gives some buffer for the coming years.

Okay. Our next question is KFH booked other provisions of KWD 125 million in 2020. Could you elaborate on which assets these were provisions -- these were provisions for?

Actually, I provided the breakup of this in my presentation in details, if you refer back to the presentation. For the KWD 125 million, the breakdown is KWD 69.6 million was on the impairment on investments in associates and others, which also include others -- include the other -- the nonbanking subsidiaries, which are impacted by the COVID-19 lockdown; and KWD 28.4 million on the ECL and Sukuk; and KWD 27 million on real estate; out of that, KWD 15 million is over and above the impairments on the recent properties' valuation. That's the breakdown of the KWD 125 million.

Okay. Our next question is what was the main driver for loan growth in 4Q?

In Q4, the growth -- the loan growth was in, as I mentioned, in both sectors, retail and corporate. Both actually, we witnessed a growth significant in Q4 and from almost all subsidiaries, mainly Kuwait and Kuveyt Turk.

Okay. We have another question on the cost of risk. I think you answered that, but just in case you would like to add, do you expect cost of risk to improve in 2021 compared to 2020 levels?

I think my answer before was sufficient. It covers this.

Okay. The next question is when can we expect the completion of the new due diligence process for the merger with AUB?

I think we have declared on Boursa Kuwait in which KFH Kuwait's Board of Directors had decided to postpone the commencement of the update in the studies of the acquisition in terms of feasibility and time frame and to assign a global consultant to conduct the same as well. So in that, we have no information at all. The information has been disclosed. We will definitely make a prompt disclosure and -- as and when we have any updates. Everything -- so to summarize, everything has been postponed.

Okay. Our next question is why did the IFRS-to-CBK buffer increase in 2020?

That -- I think part of it is already answered due to precautionary provisions or additional provisions that we took, and that started heavily in 2018 and was disclosed when we had provisions in 2018 and '19, when we took KWD 60 million on the -- our portfolio in Turkey as general provision and then, in this year, more general provision. And in the other side, our ECL also shows that our asset quality, better than others in the market. So the buffer is mainly due to increasing -- increased precautionary provisions that KFH Group's maintaining.

Okay. When -- so yes, we only have time for one last question. It's a question on the outlook on the net interest margin.

Net financing margin, the net financing margin increased in 2020. Part of the increase, as I said, the cost -- the drop in the cost of fund, part of it was due to increase in CASA. We always maintain a very good percentage of CASA deposits, however increased further, and that we witnessed it in all subsidiaries. And that we expect to be maintained and to have the same impact. And the other part is due to the drop of the distributable profits to Mudarabah deposits because of drop in the profit. So that part, we expect that will increase if our profit [Foreign Language] back to normal and increase. So then the cost of funds should reflect that part, and our NFM will be back to the normalized level, which is 2019, I would say.

Okay. I'm afraid we reached the end of the allocated time for the call today. If you have any further questions, you can e-mail them to [email protected]. So I would like to thank everyone for joining today, and have a good day.