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

Good afternoon, ladies and gentlemen, and welcome to the Kuwait Finance House 2Q 2024 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 Reporting. We'll start the call with the management presentation for the next 10 to 15 minutes, and then we'll open the floor for your questions. [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. Thank you.

Thank you, Ahmed, and good afternoon, ladies and gentlemen. Welcome to the H1 2024 Earnings Call for Kuwait Finance House Group. I'm Fahad Al-Mukhaizeem, Group Chief Strategy Officer. Today, we will be covering the highlights of the Kuwait operating environment with an overview on KFH. We'll also share with you KFH's strategy as well as H1 2024 results. During 2024, the Central Bank of Kuwait has maintained the discount rate at the level of 4.25% after an increase of 75 basis points during 2023. Furthermore, inflation is moderating, where Kuwait's annual inflation rate based on average consumer prices is forecasted to decline to 3.2% in 2024 compared to 3.6% and in 2023, according to the latest IMF outlook report. Additionally, Kuwait's GDP is estimated to reach KWD 39.7 billion in 2024 and to increase further in the coming years, according to the most recent IMF report, with crude oil price increased to USD 87.9 per barrel as of the end of June 2024 with an increase of 13% from the same period last year. Moody's rating agency has recently affirmed the government of Kuwait's long-term local and foreign currency issuer ratings at A1 with a stable outlook. Similarly, in June, Standard & Poor's also reaffirmed Kuwait's sovereign rating at A+ with a stable outlook. We expect for Kuwait long-term economic prosperity with signals of stability in the local environment and a commitment to advancing the development path. Kuwait has implemented a range of economic reforms with the goal of diversifying its economy and reducing its reliance on oil revenue. These reforms encompass areas such as economic diversification, foreign investment promotion, fiscal reforms and public-private partnerships. Their aim is to establish a more resilient and diversified economy, attract foreign investment and faster sustainable economic growth in Kuwait. However, there are certain challenges associated with these reforms in addition to external factors, including volatility in oil prices and production as well as spillovers from regional conflicts. Kuwait has solid economic fundamentals due to improved financial balances as well as increased foreign investments and anticipate more opportunities in 2024, notably in terms of diversification, strategic investments and financial and structural changes. Kuwait improve financial and external balances mean that its financial prospects are still favorable overall. Lastly, Kuwait Finance House was recognized for its leading position in the Islamic banking sector by winning 5 prestigious awards at Euromoney's Middle East Award for Excellence 2024. Additionally, KFH Capital, the investment arm of KFH Group, won the Islamic Finance Deal of the Year Award in Türkiye for its role in the Republic of Turkey's USD 2.5 billion sukuk. Winning these awards further recognizes KFH's successes and achievements and its pursuit of becoming one of the 100 largest banks globally. KFH is also committed to leaving a clear mark by supporting development and economic growth in Kuwait. With this, let me hand over the mic to our acting Group CEO, Mr. Abdul Al-Rushood.

Thank you, Fahad. Good day, ladies and gentlemen. It's my pleasure to welcome you to Kuwait Finance's first half 2024 analysis call. Let me start by highlighting the bank's financial performance during the first half of 2024. [indiscernible], KFH has reported a record net profit for shareholders of KWD 341.2 million up at the end of the first half of 2024, an increase of 2.3% compared to the same period of last year. Earnings per share reached 20.73 fils, an increase of 2.6% compared to the same period of last year. The financial statements demonstrate a solid capital base, high liquidity ratios and robust operational performance, we drove growth in all key financial indicators. KFH ranked first among the largest listed companies and banks in Kuwait in terms of market capitalization, which exceeded KWD 12 billion. Additionally, KFH claimed 3rd place among the top 20 major banks by market cap, according to the latest S&P Global Intelligence analysis. KFH implemented the strategies to strengthen its expansion and solvency developed in its operation and keep pace with technology and digital banking updates. Additionally, KFH Group signed the final agreement with Al Salam Bank to acquire a return for cash consideration, the entire share of KFH Group in KFH Bahrain. KFH is the first strategic partner for major development plans. The bank offers comprehensive financing solutions across various projects, sectors with a particular focus on petrochemical, oil and gas, water and energy, renewable energy and infrastructure as well as SMEs. KFH is committed to providing top-notch digital financial services and solutions. The bank successfully transitioned numerous crosses and functions from manual systems to automated systems using robotic process automation, RPA. This improved production efficiency, reduced service time for customers and increased their satisfaction level. Furthermore, KFH has decided -- KFH is dedicated towards investing in green finance projects and integrating sustainable development growth and ESG principle across all its operations. KFH was recently included in the FTSE4Good Index series created by global -- created by the global index and data provider FTSE Russel. KFH also released the first of its kind in Kuwait, in the Kuwaiti banking sector, carbon footprint report. Additionally, KFH signed the Global Takaful Alliance agreement with the United Nations Development Program, UNDP. This alliance aims to provide Takaful Insurance to 100 million farmers worldwide. Moreover, KFH succeeded in attaining the key goals of its strategy overcoming the challenges on the operational environment, KFH maintained its long-term credit rating at A by Fitch with a stable outlook and A2 by Moody's with a stable outlook. KFH has got many local and global awards. The awards confirm KFH's reputation, diversified capabilities in the strong finance sector, brand excellence and robust operational performance. These awards include Kuwait's Best Bank for Sustainable Finance by Global Finance Magazine. KFH also received His Highness Sheikh Salem Al-Ali Al-Sabah Informatics Award under the patronage and presence of His Highness the Amir Sheikh Mishal Al-Ahmad Al-Jaber Al-Sabah for the category of Excellence in digital transformation and digital financial solutions, in addition to winning several awards in different categories. Thank you. And with this, let me leave the mic with my colleague, Mr. Jamal Al-Humairi, General Financial Control and Regulatory Reporting and Acting Group Chief Financial Officer.

Thank you, Abdul. [Foreign Language]. Good afternoon, ladies and gentlemen. I will present the financial performance of KFH for the first half of 2024. The group has achieved the net profit after tax attributable to shareholders for the first 6 months ended 30 June 2024 of KWD 341.2 million, higher by KWD 7.8 million or 2.3% compared to H1 '23 of KWD 333.4 million. The higher profit is mainly from increase in total operating income and lower provision, partially offset by higher net monetary loss that resulted from application of IAS 29 financial reporting in hyperinflationary economy on the financial statement of KTPB and increase in operating expense. Financing income has increased by KWD 424.6 million or 42.9% compared to the same period last year, mainly due to increase in yield. Net financing income at KWD 558.8 million increased by KWD 100.3 million or 21.9% compared to the same period last year, mainly due to increase in financing income by KWD 424.6 million, offset by increase in finance cost and the distribution to depositors by KWD 324.3 million. Net operating income at KWD 525.5 million increased by KWD 36.4 million or 7.4% compared to the same period last year, mainly from increase in net financing income by KWD 100.3 million and increase in fees and commission by KWD 22.3 million offset mainly by a decrease in investment income by KWD 20.3 million, other income by KWD 14 million and increase in operating expense by KWD 52.7 million. If we look to operating income profile, contribution of net financing income to operating income increased from 62.4% in H1 '23 to 67.9% in H1 '24 due to increase in net financing income and decline in investment income. If we move to the next slide, non-financing income at KWD 264.7 million, it's KWD 11.2 million or 4.1% lower compared to the same period last year, mainly due to decrease in investment income and other income, offset by increase in fees and commission. Decrease in investment income by KWD 20.3 million is mainly due to losses incurred on Islamic derivative transaction entered by our subsidiary Kuwait Turk to fund TL short position and prior year H1 '23, gain on sale of debt security and the increase in market value of investment carried at fair value through profit and loss, partially offset by gain on sale of KFH Bahrain. Decrease in other income by KWD 14 million is mainly due to lower income from a nonbanking entity in H1 '24 compared to H1 '23. Increase in fees and commission by KWD 22.3 million is mainly related to increase in transaction fee -- in transaction fee income due to increase in card income and the increase in arrangement fee. Total operating expense at KWD 298 million is KWD 52.7 million or 21.5% higher than the same period last year, primarily due to high inflation mainly in Turkey. Cost-to-income ratio for H1 '24 was 36.19% compared to 33.4% for H1 '23. Increase in cost-to-income ratio is mainly due to increase in operating expense by KWD 52.7 million and partially offset by increase in operating income by KWD 89.1 million. Average yield on assets is lower by 1.1% compared to fiscal year 2023 and 0.8% compared to H1 '23 mainly from the decrease in financing receivable. Average financing receivable is down by KWD 0.3 billion compared to 2023 and by KWD 0.7 billion compared to H1 '23, mainly on account of sale of KFH Bahrain. However, offset by debt security average maintained at 2023 level and increased by KWD 0.4 billion compared to H1 '23. Group NFM for H1 '24 at 3.02% is higher by 40 basis points compared to H1 '23. Average yield improved by 255 basis points, while average cost of finance also increased by 215 basis points. This was the result of both rate hikes and the repricing of assets and liabilities during the period. Looking at provision and impairment, group total impairment charge decreased of KWD 19.5 million compared to H1 '23. Gross provision on financing receivables for H1 '24 amounted to KWD 33.5 million, lower by KWD 28.2 million compared to KWD 61.6 million in H1 '23. Reduction in provision on credit compared to the same period last year is mainly due to higher progressionary provision recorded in H1 '23, in view of high recovery of written-off financing receivable. Recoveries of write-off debt in H1 '24 was KWD 8.3 million compared to KWD 60.8 million in H1 '23. Impairment related to investment and the other for H1 '24 was reversal of KWD 18.8 million, a decrease of KWD 43.9 million compared to H1 '23. This decline is mainly due to higher contingent provision recorded in prior period and the reversal of ECL of debt securities during the current period resulting from improvement in macroeconomic variables. KFH's cautious approach towards provisioning have contributed to financing provision balance exceed ECL required as per CBK IFRS 9 by KWD 544 million as of 30 June 2024. Moving to Net Monetary Loss, application of IAS on the financial statement of KTPB resulted in recognition of net monetary loss of KWD 86.8 million in the current period an increase of KWD 77.6 million compared to H1 '23 due to increased inflation and significant maturity of CPI linked sukuk. If we move to the financial position, total assets at KWD 36.4 billion, decreased by KWD 1.6 billion or 4.2% in H1 '24. Our net financing receivable at KWD 19 billion decreased by KWD 423.2 million or 2.2%, mainly due to sale of KFH Bahrain and foreign currency volatility during the period. If we exclude this impairment, Group net financing receivable increased in H1 '24 by 4.5%. Investment in debt security at KWD 6.1 billion has decreased by KWD 922.8 million or 13.2% mainly due to impact of KFH Bahrain, foreign currency volatility and the sale of certain debt security during the period. Additionally, deposit for the H1 '24 at KWD 19.5 billion are lower by KWD 2.3 billion or 10.4% compared to fiscal year '23. Due to sale of KFH Bahrain impact on deposits account is KWD 848 million and the foreign currency volatility during the period. Excluding this impact, group depositors account declined by approximately 3.8% during the current period due to liquidity management and optimization. The contribution from cash and deposits to total group customer deposits as at the end of H1 '24 is 42.8%, and on an overall basis, group continued to benefit from large pool of lower-cost deposits. Contribution of customer deposit to total fund is 67.6% compared to 71.7% in '23. In the last slide, looking at the key financial picture. Return on average tangible equity declined marginally from 23.62% to 23.26% due to increase in average tangible equity. Return on average equity increased from 12.72% to 12.92%. Return on average assets declined from 2.15% to 1.91% due to reduction in profit for the period. Cost-to-income ratio increased from 33.4% to 33.19% due to increase in operating expense, as explained earlier. Earnings per share increased from 20.21 fils to 20.73 fils due to increase in profit attributable to shareholders. Group NPL ratio reached 1.77% as per CBK calculation in H1 '24 compared to 1.51% for '23. The increase in NPL is mainly in corporate in Kuwait. Provision coverage ratio is -- for the group is 266% in H1 '24 compared to 308% for '23. This concludes my presentation. We will hold a little bit until we receive your question and then we will answer.

Good afternoon, ladies and gentlemen. This is Bashayer Al-Otaibi, KFH Investor Relations Specialist. We'll start with your questions. The first question is, can you elaborate on the drivers of net financing margin expansion year-on-year and Q-on-Q?

Our increase in net financing margin is primarily comes from the rate hikes and the repricing of assets and liabilities during the period.

The second question. What was the share of current account, savings account to total deposits in June 2024?

It's almost for the -- level of the Group, 42.8% and it was 42.1% in December '23. Kuwait's contribution was 41.4%.

What drove the strong increase in operating expenses in the first half of 2024?

The increase in operating expense is primarily due to high inflation mainly in Turkey.

When do you expect to book cost synergies from the acquisition of AUB? And can you please quantify them?

For the '24, synergy is minimum. However, we expect a significant net positive impact of synergy starting from '25.

Why did the tax rate in 2024 increase versus 2023?

Just because of Türkiye. It's the tax there, it's very high, and it's almost contribution here was [ 85%. ]

Can we attribute the drop in minority interest to the sale of KFH Bahrain?

No. It is because of the Türkiye's [indiscernible].

With this, we end the Q&A session and similar questions were already answered, and we conclude our webcast. Thank you so much for attending and see you in the next webcast. I'll hand the mic to Ahmed.

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