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

Good afternoon, ladies and gentlemen, and welcome to the Kuwait Finance House Third Quarter of '24 Results Conference Call. This is Ahmed Moataz from EFG Hermes. And it's a pleasure to have with us on the call today from KFH, Dr. Shadi Zahran, Senior Deputy Group CEO; Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer; and Mr. Jamal Al-Humairi, Acting Group CFO and General Manager of Financial Control and Regulatory Reporting. We will 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 would like to also 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 and results. And now I will hand over the mic to Dr. -- or Mr. Fahad, sorry, to start the presentation. Thank you.

Good afternoon, ladies and gentlemen. Welcome to the Q3 2024 Earnings Call for Kuwait Finance House Group. I'm Fahad Al-Mukhaizeem, Group Chief Strategy Officer. Today, we will discuss the key highlights of the current operating environment in Kuwait, along with an overview of KFH, our strategic direction and the results of the third quarter of 2024. According to the latest issued data, Kuwait saw an easing of the headline inflation rate, driven by reductions in housing and transportation costs. By the end of September 2024, the Kuwaiti crude oil price stood at USD 74.3 a barrel, reflecting a decrease of over 24% compared to the same period last year. Nevertheless, the current development suggests the potential for economic recovery and stabilization in the coming year, where GDP growth is expected to reach 3.8% in 2025. The Central Bank of Kuwait has announced a reduction in the discount rate of 25 basis points, lowering it from 4.25% to 4% effective September 19, 2024. This decision comes as a result of careful observation of both domestic and international economic conditions and marks the conclusion of the monetary tightening cycle that began in March 2022 by many global central banks. In terms of credit ratings, Kuwait maintains a robust profile with an A+ rating and a stable outlook from Standard & Poor's and an A1 rating from Moody's and an AA- rating from Fitch, all with stable outlooks. Kuwait has an opportunity to implement key economic reforms that can lead to a more diverse and resilient economy. Possible actions include enhancing the business environment, simplifying regulations, improving transparency and diversifying revenue sources. This will have a positive impact, which will attract foreign investment and stimulate private sector growth, paving the way to a more dynamic economy that thrives beyond oil dependency. Within the banking sector, Kuwait Finance House also continues to strengthen its position with a long-term credit rating of A from Fitch and A2 from Moody's, both with stable outlooks. We are proud to announce that KFH has been recently recognized as Kuwait's Best Bank and Kuwait's Best Digital Bank by Euromoney. Additionally, Kuwait Finance House has been awarded an A rating by MSCI for its exemplary performance in environmental, social and governance practices. This rating underscores KFH's commitment to sustainable finance and its leadership in integrating ESG principles into its operations and strategic initiatives. As of the end of Q3 2024, KFH ranks first among the large listed companies on Boursa Kuwait with market cap of approximately KWD 11.9 billion. This solid performance underscores our commitment to delivering value to our shareholders and clients alike. With this, let me hand over the mic to our Senior Deputy Group CEO, Finance, Dr. Shadi Zahran.

Thank you, Fahad. Good day, ladies and gentlemen. It's my pleasure to welcome you all to Kuwait Finance House Third Quarter 2024 Analyst Call. Let me start by highlighting the bank's financial performance during Q3 2024. By the grace of Allah, Alhamdulillah, KFH has achieved a net profit for its shareholders of KWD 482.9 million, reflecting an increase of 4.6% compared to the same period last year. This remarkable performance marks the highest-ever quarterly profits in KFH history and in the Kuwaiti banking sector. KFH earnings per share up to the end of the Q3 2024 reached 29.62 fils, representing an increase of 4.8% compared to the same period last year. Return on average equity increased from 11.72% to 12.11% and return on average assets stood at 1.85%. Net financing income up to the end of the third quarter 2024 reached KWD 835.1 million, an increase of 17% compared to the same period last year. And net operating income up to the end of third quarter 2024 increased to reach KWD 754 million, an increase of 1.9% compared to the same period last year. KFH has achieved record financial results by the end of the third quarter of 2024 with the growth in most of the key financial indicators. This success is attributed to the strong performance and disciplined implementation of KFH's strategy, along with cautious approach to risk management. The bank has also focused on diversifying the financing portfolio, improving the quality of assets along with capital optimization, enhancing the capital base and to ensure KFH's ongoing financial strength and solid creditworthiness. Furthermore, achieving these outstanding financial results was in line with completing the merger of KFH and formerly AUB-Kuwait. This marks the beginning of a new successful phase for KFH. The merger has become a successful model in the region, creating a major financial entity in the Islamic finance industry locally, regionally and globally. It solidified KFH's position as a benchmark in the industry and sets the stage for its goal to be listed among the top 100 banks in the world. In the third quarter of this year, KFH successfully finalized the largest merger in Kuwait's banking history between KFH and AUB-Kuwait. The integration of operations was accomplished in 6 months, the shortest time frame among similar transactions in the region, while maintaining a high level of efficiency. This achievement supports KFH's role as a leading benchmark for banks in Kuwait and the region. The significant merger has resulted in the establishment of a major financial entity within the Islamic finance sector, extending its influence across local, regional and global markets. The process of merging and integrating these 2 institutions has been a notable success, ensuring a seamless transition for customers, employees and shareholders without compromising the customer experience. Also during third quarter 2024, KFH Group completed the conversion of AUB-Egypt and AUB-UK successfully to Sharia-compliant banks. KFH Group has demonstrated its capability in advancing the future of Islamic finance worldwide by the accelerated and successful conversion of the operations of AUB Group to Sharia-compliant banking services, which supports KFH Group's strategy to contribute to expanding the Islamic finance sector on a local, regional and global scale. Additionally, KFH's commitment to sustainability is exemplified by the transparent framework aimed at creating a more sustainable banking model that incorporates environmental, social and governance, ESG aspects. KFH is continuously progressing on sustainability initiatives [indiscernible] focusing on achieving new milestones and further integrating sustainable practices into operations. KFH's recent inclusion in the FTSE4Good Index Series and our A rating on the MSCI ESG Index underscore KFH's dedication to ESG standards. KFH's support for Kuwaiti businesses and development plan stems from its significant national role and distinguished economic position as Kuwait's largest bank by market capitalization and the world's second-largest Islamic bank. Our financing activities have diversified across various sectors, including oil, petrochemicals, energy projects, infrastructure start-ups, environmentally friendly ventures and real estate development. KFH have been a strategic partner in funding all major development projects. Moreover, KFH is committed to upholding its role as a leading example of social responsibility, actively participating in strategic community projects that fulfill our social purpose. As a major bank entity, KFH operates approximately 617 branches across 9 countries, surpassing all other Kuwaiti banks in terms of market capitalization, which reached KWD 11.8 billion. With regards to digital transformation, KFH has made remarkable steps achieving goals global -- achieving a global recognition for its efforts. A key focus of its digital development has been the implementation of artificial intelligence across several critical areas, including cybersecurity and risk management as well as robotic process automation. This has been accomplished through collaborations with fintech companies to enhance systems, security, efficiency and products and services. Additionally, KFH has invested in the infrastructure of flexible smart systems and programs designed to provide customers with a seamless banking experience. The success of Tam Bank, Kuwait's first Sharia-compliant digital bank, along with the digital payment platform, Zaheb for merchants, proves KFH's commitment to delivering leading-edge digital financial solutions. KFH continues to receive esteemed international rating and awards, confirming its position as a top financial institution in the region. KFH have been awarded Kuwait's Best Bank, Kuwait's Best Digital Bank - tam digital bank and Kuwait's Best Bank for ESG by Euromoney. Furthermore, KFH were recognized as the top listed company in Kuwait and ranked tenth in the Middle East by Forbes Middle East in their 2024 ranking of the Top 100 Listed Companies. KFH has also ranked first in the Kuwaiti banking sector in terms of growth and return on risk for this year's Top 100 Arab Banks ranking from The Banker. These accomplishments, along with numerous other international awards, further establish KFH's significant role in the Islamic finance industry. Thank you. With this, let me leave the mic with my colleague, Mr. Jamal Al-Humairi. Acting Group Chief Financial Officer and General Manager of Financial Control and Regulatory Reporting.

Thank you, Dr. Shadi. [Foreign Language] Good day, ladies and gentlemen. I will present financial performance of KFH Group for the 9-month period ended September '24. The group has achieved net profit after tax attributable to shareholders for the first 9 months ended 30 September '24 of KWD 482.9 million, higher by KWD 21.4 million, or 4.6% compared to 9 months '23 of KWD 461.5 million. The higher profit is mainly from increase in net operating income and lower provisions, partly offset by higher net monetary loss that resulted from the application of IAS 29 financial reporting in hyperinflationary economy on the financial statement of Kuveyt Turk Participation Bank and increase in operating expense. The detail later in this presentation. If we look to financing income, has increased by KWD 558.3 million, or 35.5% compared to the same period last year, mainly due to increase in yield. Net financing income at KWD 835.1 million increased by KWD 121.2 million, or 17% compared to the same period last year, mainly due to increase in financing income by KWD 558.3 million, offset by increase in financing cost and distribution to depositors by KWD 437.1 million. Net operating income at KWD 754 million increased by KWD 14.2 million, or 1.9% compared to the same period last year, mainly from increase in net financing income by KWD 121.2 million and increase in fees and commission by KWD 26.3 million, offset mainly due -- offset mainly by decrease in investment income by KWD 62.8 million, other income by KWD 5.5 million and a net gain from foreign currency by KWD 2.4 million and the increase in operating expense by KWD 62.6 million. Looking at operating income profit, contribute of net financing income to operating income increased from 64% in 9 months '23 to 70% in 9 months '24 due to increase in net financing income and decline in investment income. Moving to next slide. Nonfinancing income at KWD 357.5 million is KWD 44.4 million, or 11% lower compared to the same period last year, mainly due to decrease in investment income, net gain from foreign currency and other income, offset by increase in fees and commission. Decrease in investment income by KWD 62.8 million is mainly due to losses incurred on Islamic derivative, transaction entered by our subsidiary, Kuveyt Turk, to fund the TL short position and prior year 9 months '23 gain on sale of debt security and 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 5.5 million is mainly due to lower income from nonbanking entity in 9 months '24 compared to 9 months '23. Increase in fees and commission by KWD 26.3 million is mainly related to increase in transaction fee income from our subsidiary in Turkey. Our total operating expense at KWD 438.5 million is KWD 62.6 million, or 16.6% higher than the same period last year, primarily due to high inflation mainly in Turkey. Cost-to-income ratio for 9 months '24 was 36.77% compared to 33.7% for 9 months '23. Increase in cost-to-income ratio is mainly due to increase in operating expense by KWD 62.6 million, partly offset by increase in operating income by KWD 76.8 million. Moving to next slide. Average yield assets is lower by 1.8% compared to the financial year '23 and 0.5% compared to 9 months '23, mainly from decrease in financing receivable. Average financing receivable is down by KWD 0.7 billion compared to both '23 and 9 months '23, mainly on account of sale of KFH Bahrain. However, offset by debt security average increased by KWD 0.2 billion and KWD 0.5 billion compared to '23 and 9 months '23. If we look to our group NFM for 9 months '24 at 2.97% is higher by 28 basis points compared to 9 months '23. Average yield improved by 225 basis points, while average cost of finance also increased by 197 basis points. This was the result of both rate hike and repricing of assets and liability during the period. Looking at the provision and impairment. Group total impairment charge decrease of KWD 17.3 million compared to 9 months '23. Gross provision on financing receivable for 9 months '24 amounted to KWD 35.8 million, lower by KWD 28.8 million compared to KWD 64.6 million in 9 months '23. Reduction in provision on credit compared to the same period last year is mainly due to higher precautionary provision reported in 9 months '23 in view of high recovery of written-off financing results. Recoveries of written-off debt in 9 months '24 was KWD 13.7 million compared to KWD 71.5 million in 9 months '23. Impairment related to investment and other for 9 months '24 was net reversal of KWD 15.8 million, a decrease of KWD 46.3 million compared to 9 months '23. This decline is mainly due to a higher contingent provision recorded in prior period and reversal of ECL on 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 by CBK IFRS 9 by KWD 514 million as of 30 September 2024. Moving to net monetary loss application of IAS 29 on the financial statement of the Kuveyt Turk, resulting in recognition of net monetary loss of KWD 117.8 million in the current period, an increase of KWD 38.6 million compared to the 9 months '23 due to inflation and significant maturity of CBI-linked Sukuk during the last quarter of '23. Next slide, moving to financial position. Total assets at KWD 36.3 billion decreased by KWD 1.8 billion, or 4.6% in 9 months '24. Net financing receivable at KWD 19.1 billion decreased by KWD 289.5 million, or 1.5%, mainly due to sale of KFH Bahrain and foreign currency volatility during the period. Excluding this impact, group net financing receivable increased in 9 months '24 by 5.6%. Investment in debt security at KWD 6.4 billion has decreased by KWD 592.5 million, or 8.5%, mainly due to impact of the KFH Bahrain, foreign currency volatility and the sale of certain debt security during the period. Additionally, deposits of 9 months '24 at KWD 19.9 billion are lower by KWD 1.9 billion, or 8.9%, compared to fiscal year of '23 due to sale of KFH Bahrain. Impact on deposits account is KWD 848 million and foreign currency volatility during the period. Excluding this impact, group deposits account declined by approximately 1.9% during the current period due to liquidate management and optimization. The contribution from CASA deposits to total group customer deposits as at the end of 9 months '24 is 42.8%. And on an overall basis, group continued to benefit from the large pool of low-cost deposits. Contribution of customer deposit to total funding is 79.6% compared to 71.7% in '23. In the last 2 slides, looking at the key financial ratios. Return on tangible assets declined marginally from 21.78% to 21.7% due to increase in average tangible equity. Return on average equity increased from 11.72% to 12.11%. Return on average assets declined marginally from 1.88% to 1.85% due to reduction in profit for the period. Cost-to-income ratio increased from 33.7% to 36.77% due to increase in operating expense, as explained earlier. Earnings per share increased from 28.26 fils to 29.62 fils due to increase in profit attributed to shareholders. Group CAR ratio as of 30 September '24, was 17.68%, compared to 18.18% as of 30 December '23. Tier 1 at 15.87%, CET1 is 13.3%. Group NPL ratio reached 1.86% as per CBK calculation in 9 months '24 compared to 1.5% for 2023. Provision coverage ratio for group is 257% in 9 months '24 compared to 308% for '23. This concludes my presentation. We'll wait a while until we receive your questions and we'll answer it.

Good afternoon, ladies and gentlemen. This is Bashayer Alotaibi, KFH's Senior Investor Relations Specialist. I'll be taking your questions. The first question is, is the deposit drag related to nonresidents outlook?

It is because of sale of KFH Bahrain and the volatility in the ForEx and optimization of our liquidity. That's it.

What are the drivers behind subdued lending growth? And what is your guidance for 2025?

If you look to our finance receivable, it's a reduction. However, that because of the sale of the KFH Bahrain and volatility of the currency. If we ignore this, our growth is 5.6%. And our expectation for the coming year is one digital number.

Profit attributable to noncontrolling interest was in 3% to 4% range in Q1, Q2, but it has jumped to 10% in Q3, further...

Yes. This is actually due to improvement of our subsidiary in Turkey, Kuveyt Turk improvement of their performance in third quarter.

The cost-to-income ratio has significantly gone up. What is your target for next year? Or what would you see as a normalized level?

Yes. Compared to the second quarter or to the last year, we can see it's significantly gone up but still within the acceptable range that we had before '22. This is mainly due to two factors: one, the inflation in our subsidiary in Turkey that increased significantly the operating expenses at their level and contributed to this increase to cost-to-income ratio. The second thing, the acceleration of integration of AUB-Kuwait that involves spending faster for the integration, but at the same time, faster capturing of synergies, which we will see the effect in next year, Inshallah.

Continued strong recovery by the bank. Can you please shed some color, including sectors and geographies?

It's mainly from Kuwait and Bahrain, and we'll keep working on this to collect all the money.

Why did the cost-to-income ratio rose from 33% to 37%? Main drivers behind this jump.

I explained this actually. Again, it's -- as I said, the -- our subsidiary, the inflation in Turkey besides the acceleration of integration in Kuwait, but we expect we will go back to the normalized level, which is around 35% for many reasons, mainly the -- enjoying the synergies and impact in 2025, Inshallah.

Could you please provide NPL ratio for this quarter and last quarter? How much cost synergies do you expect from AUB-Kuwait integration in 2025 and in 2026? What is your latest sensitivity to rates?

Well, our NPL for this quarter is 1.86%. And for the previous quarter was 1.8%. And we'll work and keep our NPL always between 1.5% to 2% as central bank direction. What's the rest of the question early? Our synergy till now, it's immaterial. However, mostly, it would be in '25.

Given the high rate environment in Turkey, what sort of impact should we expect on group cost of risk and NPL formation in the coming quarters?

Well, our cost of risk in the level of the group is 40 basis points. And in Turkey, we're expecting it will be the same level.

What is the outlook on taxes that are meant to be introduced in 2025? Will it be calculated on local profits as well?

Okay. Given to the BEPS Pillar 2, 15 basis point -- 15% to global minimum tax will be applicable on MENA group with a turnover of more than EUR 750 million and is expected to [ arrive there ] from next year. KFH has footprint jurisdiction with effective tax rate above 15%, where the impact will be minimal. At the same time, for the other jurisdiction with the effective tax rate below 15%, new legislation had been introduced or expected to be released soon, which affects the tax charge for KFH Group. For example, Bahrain introduced domestic minimum top-up 15% of net profit. And the Kuwait is expected to release the same at the end of '24.

Any updates on the mortgage law? Do you expect it to be a significant source of loan growth going forward?

Of course, if it's approved, it will give opportunity for the banks in Kuwait to increase in their portfolio. However, we have to wait until it will be released.

And we expect KFH to be one of those most benefiting from this mortgage law, Inshallah, having the -- considering the size and our large customer base in Kuwait.

So with this,, similar questions were covered already. And with this, we conclude our webcast. Thank you so much for attending.

Thank you.

Thank you.

I'll leave the mic to Ahmed to conclude the webcast. Thank you so much.

Thank you very much to KFH management and to everyone. Have a good rest of the day. This concludes today's earnings call.