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

Good afternoon, ladies and gentlemen, and welcome to the Kuwait Finance House Full Year 2023 Results Conference 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. Abdulwahab Al-Rushood, Acting Group CEO; Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer; and Mr. Jamal Al-Humairi, Acting Group CFO and General Manager, Financial Control and Regulatory Report. As usual, we will start the call with a management presentation for around 10 to 15 minutes. And then this will be followed by the Q&A session. [Operator Instructions] I'd 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 the mic over to Mr. Fahad to start with the presentation.

Good afternoon. Welcome to the year-end 2023 [indiscernible] 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...

Excuse me, Mr. Fahad. I'm sorry, can you get a little bit closer to the mic? [Technical Difficulty]

Okay, thank you. I'll just start where I left off. Starting off in 2023, Kuwait Central Bank increased its discount rate by 75 basis points to 4.25% as part of its efforts to preserve monetary and financial stability, boost the growth of the various economic sectors, especially the non-oil sector, contain local inflationary pressures and maintain the competitiveness and attractiveness of the national currency. Furthermore, Kuwait's GDP is estimated to reach KWD 39.6 billion in 2023 and increase to KWD 40.4 billion in 2024 according to the most recent IMF report released in October last year. It's also expected that the annual average inflation rate to decline to 3.4% in 2023 with crude oil price stood at USD 79.60 per barrel as of the end of December 2023, down almost 0.72% from the same period last year. Kuwait's economic development in 2023 was driven by its diversification efforts, structural investments and commitment to sustainability. As the country continues to work on attracting foreign investment, fostering non-oil sectors and prioritizing practices, Kuwait is well positioned to achieve long-term economic prosperity. The leadership shifted smoothly after the passing of Nawaf Al-Ahmad Al-Jaber Al-Sabah, may Allah have mercy on his soul, to His Highness, Emir of Kuwait, Sheikh Mishal Al-Ahmad Al-Jaber Al-Sabah in December of 2023, may Allah protect him. This contributes to the stability of the local environment in addition to the formation of a new government led by His Highness, the Prime Minister Sheikh Dr. Mohammed Sabah Al-Salem Al-Sabah to complete the development path. Nevertheless, it's imperative for Kuwait to continue to work on environment and investing in human capital to ensure sustainable growth. With the right strategies in place, Kuwait can successfully navigate the dynamic global economic landscape and emerge as a model for economic development in the region. KFH's long-term credit rating stands at A by Fitch with stable outlook and at A2 by Moody's with a stable outlook. Furthermore, KFH successfully achieved the key goals of group strategy, strengthened its leading position and overcame different challenges and operating difficulties. Additionally, high liquidity ratio, solid capital base and strong operating performance resulted in growth in operating income, profit, financing portfolio and all key financial indicators. Lastly, KFH won 26 prestigious awards, such as the World's’ Best Islamic Financial Institution 2023 award from Global Finance and Bank of the Year Kuwait from The Banker. Moreover, Euromoney magazine has ranked Kuwait Finance House as a market leader in Kuwait in five categories: digital solutions, corporate banking, corporate social responsibility, investment banking and Islamic finance. The awards were an appreciation of KFH's excellence, innovation and its advanced services and products. KFH ranks first among the largest listed companies in Boursa Kuwait in terms of market cap, approximately KWD 10.6 billion as of the end of December 2023. 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 Kuwait Financial House Q4 2023 Analyst Call. Let me start by highlighting the bank's financial performance during Q4 2023. By the grace of Allah, KFH has reported a record net profit for shareholders of KWD 584.5 million up to the end of Q4 2023, an increase of 63.4% compared to the same period of last year. Earnings per share reached 38.49 fils, an increase of 29.6% compared to the same period last year. KFH's remarkable performance in 2023 was crowned by record annual financial results. KFH reported the best profit rates and the highest ratios in all key indicators, improved asset quality, operating profits and diversified the revenues. These achieved financial solidity and sustainable growth. KFH's services expanded to include the new strategic countries, including U.K., Egypt and others, following the acquisition of AUB Bahrain during its first year. We also successfully completed the conversion of AUB Bahrain's conventional banking services to be compliant with Sharia principles. The bank officially received the approval from Central Bank of Bahrain, CBB, as licensed Islamic bank. Additionally, KFH enjoyed strong credit rating, high liquidity ratios and a healthy capital buffer to support business growth both locally and globally. In addition, KFH grew transactions exceeding USD 13 billion in the primary and secondary markets. Also, Group Treasury continued to maintain its position as the main market leader in the short-term Sukuk IILM market. KFH continues strong to provide financing to corporates and mega projects, especially in the region. These mega deals confirm the high financing capability and financial strength of KFH. KFH plays a significant role in supporting and financing SMEs as a strategic partner in society. Leading the competition in expansion in its customer base and market share in [ dedicated ] banking sector, KFH is moving forward with its digital transformation strategy, launching innovative digital financial solutions through KFH online, XTMs and KFH go. KFH launched Tam, the first Islamic digital bank in Kuwait, and Zaheb digital platform in addition to several innovative banking solutions. Moreover, KFH continued its efforts in sustainability and promoting green financing projects at both the retail and corporate levels. It's also played an important role in ESG by linking its financial transactions to sustainability. Additionally, KFH participated in the 2023 United Nations Climate Change Conference, COP28, in Dubai. KFH continues to play exceptional role in social commitment and executing strategic community initiatives inside and outside Kuwait. With this, let me leave the mic with my colleague, Mr. Jamal Al-Humairi, General Manager of Financial Control and Regulatory Reporting and Acting Group CFO. Thank you.

Thank you. [indiscernible]

Mr. Jamal, we can't hear your voice. It's very far, it's not very clear. [Technical Difficulty]

Cost-to-income ratio for '23 was 35.28% compared to 32.55% for '22. Increase in cost ratio is mainly due to increase in operating expense by KWD 166.5 million partially offset by increase in operating income by KWD 388.6 million. Average yield asset is up by 25.9% compared to '22 and 69.6% compared to '21, mainly from growth in financing receivables and debt security. Average financing receivables is up by KWD 3.8 billion and debt security by KWD 2.1 billion compared to '22 million and KWD 8.1 billion and KWD 3.8 billion, respectively, compared to '21. Group NFM for '23 at 2.68% is lower by 68 basis points compared to '22. During the current year, financing income from [ CBK-linked ] Sukuk was reported as a part of net monetary loss. If you exclude this impact, group NFM for '23 was 3.14%, was increase in average yield by 146 basis points and the average cost of finance by 168 basis points compared to '22. This was the result of both rate hikes and repricing of assets and liabilities during the period. If we look at provision and the impairment, group total impairment charge for '23 at KWD 44.4 million decreased by KWD 17.7 million or KWD 28.5 million compared to last year. Gross credit provision charge for '23 amounted to KWD 78.4 million, higher by KWD 39.3 million compared to KWD 39.1 million in '22. This was mainly due to higher specific provision recorded during '23 against certain nonperforming customers. Impairments related to investment and other, including ECL on debt securities for '23, amounted to KWD 44.3 million, a decrease of KWD 15 million compared to '22. This decline is mainly due to higher ECL on debt securities recorded in '22. Recoveries of write-off debts in '23 was KWD 78.3 million, an increase of KWD 42 million compared to '22. KFH's cautious approach towards provisioning has contributed to credit provision balance exceeding the ECL required as per CBK IFRS 9 by KWD 548 million as of 31 December '23. Moving to the net monetary loss. Application of IAS 29 on the financial statement of Kuveyt Turk resulted in recognition of net monetary loss of KWD 72.8 million on the current year. If we move to financial position, our total assets reached KWD 38 billion, increased by KWD 1.04 billion or 2.8% in '23. Our net financing receivables at KWD 19.4 billion increased by KWD 625 million or 3.3%. If we exclude impact of Turkish lira devaluation during the current year, growth in financing receivables was 6.5%. Investment in debt security at KWD 7 billion has increased by KWD 921 million or 15.1%. Additionally, our deposits for '23 at KWD 21.8 billion are higher by KWD 782 million or 3.7% compared to '22. If we exclude impact of the Turkish lira devaluation during the current year, growth in depositors' accounts was 7.6%. The contribution from cash deposits to total group customer deposit at the end of '23 is 42.1%. And on overall basis, group continues to benefit from large pool of low-cost deposits. Contribution of customer deposits to total funding is 71.7% compared to 71.4% in '22. In last slide, we look to the key ratios, which mainly reflecting improvement in profitability, except for return on equity, which declined due to increase in average balance of equity from issuance of shares to acquire AUB, and cost-to-income ratio, which increased due to increase in operating expense as explained earlier. Return on average tangible equity moved from 16.48% to 20.51%; return on average equity from 13.19% to 11.08%; return on average assets from 1.69% to 1.82%; cost-to-income ratio from 32.55% to 35.28%. Earnings per share reached 38.49 fils from 29.70 fils. Group NPL ratio reached 1.5% calculation in '23 compared to 1.32% for '22. Provision coverage ratio for the group is 308% in '23 compared to 341% for '22. This concludes my presentation. We'll take a while to receive your questions and respond to it.

Good afternoon, gentlemen. This is Bashayer Alotaibi, KFH Investor Relations specialist. We'll start with your questions. The first question is margin compressed in Q4 on a Q-to-Q basis, was driven by Turkey. If you could give some color on margin trends for 2024, given Kuwait and Turkey and different rate regimes.

Our expectation for NFM for '24 depend on external factors, include reduction in Fed and CBK discount rate. While we expect expansion of NFM in '24, we believe that baseline case NFM to be maintained at the current level.

The second question, it would be helpful if you could give an update on housing law and the political state in Kuwait.

Well, there is a discussion still in the parliament. However, nothing yet materialized. Of course, if passed, I mean, banking sector could be enhanced and would, of course, include CBK -- KFH.

How should we look at credit cost going into 2024 as recoveries have reported cost of risk in 2022, 2023? Is it coming from Kuwait or Turkey?

Well, our cost of risk for '23, excluding recoveries, was around 50 basis points. And I think we will keep this level in '24. And most recovery come from Kuwait.

Okay. The third question is how should we think about investment income and gain from real estate going forward? Given their impact in 2023, how much of core -- of non-core investments are still left to be sold?

Well, as you see from our financials, we are concentrating in our core. However, still, we have non-core investments in the bank. And yes, we have some plans to sell some items. And of course, it would be appear in the investment income in '24.

CI shot up over 40% in Q4 2023. How should we think about it going forward?

Well, maybe during the fourth quarter, it become higher. But we are going to maintain it at the same level of 35% [Foreign Language].

Outlook on cost of risk and while the percentage of Stage 2 loans increased in Q4 2023.

Is it included? Well, the cost of finance -- cost of risk is still at 50 basis points and Stage 2 is just increased during the fourth quarter. And it would be maintained during the first quarter -- coming first quarter for '24.

What is the current split of corporate and retail loans? What is the current share of Kuwait loan book?

It's 50-50 for corporate and retail.

Can you provide an update to the planned cost synergies? This should be now higher after the plans to integrate AUB Kuwait.

Well, we have not announced our revised target for synergy on a conservative basis, taking into consideration current inflationary environment. However, we expect synergy to increase mainly because the merger by combination with AUB Kuwait in addition to accelerating integration and progress.

Okay. Can you provide any views on corporate tax adoption in Kuwait in 2024 or 2025?

Of course, as a group, expected to be subject to global minimum tax under Pillar 2 starting from the '25. Minister of Finance of Kuwait prepared the corporate tax law, which we expect it to be in line with the requirement of Pillar 2 with effective tax rate of 15%. Of course, also KFH is currently in process to finalize our assessment of its impact on the group.

Can we expect more recoveries from Kuwait?

Of course, we are working that. And we have a good team to work with our defaulting customers. And we're expecting this recovery during this year.

So some of the questions were covered. And with this, we conclude our webcast. Thank you so much for attending.