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

Good afternoon, and good morning, ladies and gentlemen, and welcome to the Kuwait Finance House 4Q 2024 Earnings 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. Shadi Zahran, Senior Deputy Group CEO; and Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer. We'll start the call with the management presentation as usual for the next 10 to 15 minutes, and then we'll open the floor for 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.

Good afternoon gentlemen. Welcome to the year-end 2024 earnings call for Kuwait Finance House Group. I'm Fahad Al-Mukhaizeem, Group Chief Strategy Officer. Today, we'll be covering highlights of the Kuwait's operating environment with an overview on KFH. We'll also share with you KFH's strategy as well as full year 2024 results. In light of the evolving monetary policy landscape, the Central Bank of Kuwait has implemented a measured and balanced strategy to align with local economic conditions to uphold macroeconomic stability and promote sustainable growth. Consequently, during 2024, CBK has reduced the discount rate by 25 basis points, bringing it down to 4% effective September 19, 2024. At the macroeconomic level, Kuwait's GDP is forecasted to reach KWD 39.4 billion in 2024 according to the most recent International Monetary Fund report released in October 2024. Additionally, the average inflation rate reached or declined to 2.9% during the year 2024 according to the latest issued data from the Central Statistical Bureau. Kuwait's crude oil price reached USD 74.2 per barrel as of the end of December 2024, down 6.7% from the same period last year. In 2024, Kuwait's economic development is marked by a strategic focus on diversification and resilience in the face of global economic challenges. The government is actively implementing initiatives aimed at reducing reliance on oil revenues by promoting sectors such as finance, technology and tourism. Investments in infrastructure development are also a priority with significant projects underway to enhance transportation and connectivity. Additionally, the Central Bank of Kuwait's monetary policy, including adjustments to the discount rate are designed to foster a stable economic environment conducive to growth. As a result, Kuwait is positioning itself to achieve sustainable development and attract foreign investment, ultimately aiming for a more balanced and robust economy. 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. KFH's long-term credit rating stands at A by Fitch with stable outlook and at A2 by Moody's with stable outlook. Furthermore, KFH continued its efforts to achieve financial solidity and sustainable growth, capitalizing on the flexible business model, strong asset quality, abundant liquidity, continuous diversification of financing and a wide geographical spread in different markets worldwide, most prominently Kuwait, Bahrain, Turkey, Egypt, the United Kingdom and Germany. Additionally, KFH ranked the first among the largest listed companies in Boursa Kuwait in terms of market capitalization approximately KWD 12.4 billion as of the end of December 2024 according to Boursa Kuwait. Lastly, Kuwait Finance House concluded the year 2024 with 43 distinguished awards and 4 prestigious group-wide rankings from various global and regional entities, solidifying its leadership position and successful journey in the Islamic banking sector. With this, let me leave the mic with KFH's Group CEO, Mr. Khaled Al-Shamlan.

Thank you, Fahad. Good day, ladies and gentlemen. It's my pleasure to welcome you all to Kuwait Finance House 2024 Earnings Call. Let me start by highlighting the bank's financial performance throughout the year 2024. KFH has reported historic net profit of KWD 601.8 million attributable to the shareholders of the bank for the year ended 2024, an increase of 3% compared to 2023. Earnings per share reached KWD 36.37 fils for the year 2024, an increase of 3% compared to 2023. Net financing income for the year ended 2024 reached KWD 1.147 billion, an increase of KWD 18.7% compared to 2023. The Board of Directors considered the distributions of cash dividends to shareholders of 22%, including 10% in the first half of 2024. The Board of Directors also proposed distribution of bonus shares of 8% subject to the approval of the general assembly and the [indiscernible] bank authorities. During 2024, KFH successfully achieved a strong financial performance, reporting record annual financial results. KFH also demonstrated growth in operating income, profits and all key financial indicators. The bank also succeeded in achieving the strategic objectives and enhancing the group's leading standing after the completion of the largest ever merger project in the Kuwait banking sector and the successful integration of operation with formerly Ahli United Bank, Kuwait as a part of its landmark cross-border acquisitions of Ahli United Bank, Bahrain, one of the largest deals in the region. The [Audio Gap] KFH completed the successful issuance of 5 years senior secured -- sorry, senior unsecured Sukuk of USD 1 billion, the second issuance under KFH 4 billion Sukuk program. The aim of the Sukuk issuance is to enhance KFH's long-term financing funding sources in addition to financing its overall operations. Additionally, KFH increased its investments in green Sukuk to USD 653.2 million in 2024, a 162.3% increase compared to last year investment of USD 249 million in 2023. KFH continued its endeavors in building a sustainable banking model within the ESG framework, noting that the inclusion of KFH in the FTSE4Good Index series, KFH was also awarded A rating by MSCI ESG Index. Furthermore, KFH participated in the 16 sessions of conferences of the parties COP16 to the United Nations Convention to Combat Desertification (UNCCD). The bank also signed the first of its kind Global Takaful Alliance agreement with the United Nations Development Programs (UNDP) and release of the first of its kind carbon footprint report in Kuwaiti's banking sector. KFH continues to issue its sustainability reports, reflecting its commitment to environmental leadership and responsible banking. Additionally, KFH played a prominent role in supporting the local economy and contributed to the development of infrastructure by financing large-scale projects across various sectors. KFH also strengthened its role as a strategic partner for small and medium-sized enterprises, SMEs within the Kuwaiti banking sector. Many of these SMEs bring their success story by securing financing from KFH's. KFH continued to innovatively developing digital financing solutions tailored to the needs of the aspirations of its customers. The bank also implemented numerous projects related to the services, product and financial solutions. It developed its technological infrastructure, enhanced cybersecurity defense and embraced AI technology. Additionally, KFH succeeded in launching value-added community initiatives that is created for various segments of society. These initiatives encompass supporting communities capabilities, caring for individuals with the special needs, launching awareness campaigning, safeguarding the environment, supporting sustainable practices, empowering the youth in addition to supporting innovations and various health and sports initiatives. The commencement of the reconstruction projects for the damaged area in Al Mubarakiya has started within the estimated cost approximately KWD 8 million. The contract signed with the projects contractor and Kuwaiti municipality involves reconstructing approximately 17 buildings and developing some [indiscernible] holding structures, KFH efforts also encompassed various strategic initiatives in social responsibility. In appreciation of its exceptional efforts, KFH received 43 awards and 4 ranking at the group level from the different global and regional entities. Most notable of these awards are World's Best Islamic Financial Institutions award from Global Finance Magazine, Kuwait's Best Bank and Kuwait's best bank for ESG from Euromoney. In addition, KFH was named Bank of the Year Kuwait by the Banker and was awarded with the Corporate Social Responsibility Middle East awarded from EMEA Finance Magazine. With this, let me leave the mic with my colleague, Dr. Shadi Ahmed Zahran, Senior Deputy Group CEO of Finance. Thank you.

Thank you Al-Shamlan and good day, everyone. I'll be presenting the financial performance of KFH Group for the year ended 31st December 2024. The group has achieved net profit after tax attributable to shareholders for the year ended 31st December 2024 of KWD 601.8 million, higher by KWD 17.3 million or 3% compared to last year of KWD 584.5 million. The higher profit is mainly from increase in total operating income, partly offset by higher net monetary loss that resulted from the application of IAS 29, financial reporting in hyperinflationary economies on the financial statements of the group subsidiary in Turkey, Kuveyt Türk Participation Bank and the increase in operating expenses. We will cover the details later in this presentation. Financing income has increased by KWD 692.3 million or 31.6% compared to the last year, mainly due to the increase in gross yield. Net financing income at KWD 1.147 billion increased by KWD 181 million or 18.7% compared to last year, mainly due to increase in financing income by KWD 692.3 million, offset by increase in financing costs and distribution to depositors by KWD 511.2 million. Net operating income at KWD 1,030.7 billion increased by KWD 85.3 million or 9% compared to the last year, mainly from increase in net financing income by KWD 181 million, increase in fees and commissions by KWD 40.8 million and net gain from foreign currencies by KWD 13.6 million, offset by the decrease in investment income by KWD 46.4 million, other income by KWD 19.2 million and increase in operating expenses by KWD 84.5 million. Looking at the operating income profile, contribution of net financing income to operating income increased from 66% in 2023 to 70% in 2024 due to increase in net financing income and decline in investment income. Moving on to the next slide, nonfinancing income at KWD 483.7 million is KWD 11.2 million or 2.3% lower compared to the last year, mainly due to a decrease in investment income and other income, offset by increase in fees and commissions and net gain from foreign currencies. Decrease in investment income by KWD 46.4 million is mainly due to losses incurred on Islamic financial transactions, Islamic derivative transactions and the prior year 2023 gain on sale of debt securities besides the increase in market value of investments carried at fair value through P&L, partly offset by gain on sale of KFH Bahrain. Decrease in other income by KWD 19.2 million is mainly due to lower income from nonbanking entities in 2024 compared to 2023. Increase in fees and commissions by KWD 40.8 million is mainly related to increase in transaction fee within transaction fee income. Total operating expenses at KWD 600 million is KWD 84.5 million or 16.4% higher than last year, primarily due to high inflation in Turkey. Cost-to-income ratio for 2024 was 36.8% compared to 35.3% for 2023. Increase in cost-to-income ratio is mainly due to increase in operating expenses by KWD 84.5 million, driven by inflation in Turkey, offset by the increase in operating income by KWD 169.8 million. Average yielding assets is lower by 1% compared to last year, mainly from the decrease in financing receivables on account of sale of KFH Bahrain, partly offset by increase in debt securities. Group NFM for 2024 at 3.12% is higher by 44 bps compared to 2023. Average yield was improved by 227 bps, while average cost of fund also increased by 183 bps. This was the result of both full year impact of rate changes and repricing of assets and liabilities during the year. Looking at the provisions and impairments, group total impairment charge increased of KWD 14.1 million compared to 2023. Gross provision on financing receivables for 2024 amounted to KWD 94.5 million, higher by KWD 16.1 million compared to KWD 78.4 million in 2023. Increase in provision on credit compared to last year is mainly due to higher general provision recorded in 2024. Recoveries of written-off debts in 2024 was KWD 23.2 million compared to KWD 78.3 million in 2023. Impairment related to investments and others for 2024 was net reversal of KWD 12.8 million compared to a charge of KWD 44.3 million in 2023, mainly due to higher contingent provisions recorded in prior year. Net reversal of KWD 12.8 million in 2024 was on account of higher reversal of ECL on investments, debt securities due to further improvement in macroeconomic variables and reversal of impairment provision on investments and others on account of collections and recoveries. KFH's cautious approach towards provisioning have contributed to financing provision balance exceeding ECL required as per CBK IFRS 9 by KWD 539 million as of 31st December 2024. Moving to the net monetary loss. Application of IAS 29 on the financial statements of Kuveyt Turk Participation Bank resulted in recognition of net monetary loss of KWD 155.3 million in the current year with an increase of KWD 82.5 million compared to last year due to the continued inflation and significant maturity of CPI-linked Sukuk during last quarter of 2023. Moving to financial position. Total assets at KWD 36.7 billion decreased by KWD 1.3 billion or 3.4% 2024. Net financing receivables at KWD 19.1 billion decreased by KWD 355.5 million or 1.8%, mainly due to sale of KFH Bahrain in addition to foreign currency volatility during the year. Excluding these impacts, group net financing receivable would be higher in 2024 by 5.5%. Investments in securities at KWD 6.9 billion has decreased by KWD 141.5 million or 2%, mainly due to impact of sale of KFH Bahrain during the year. On the other hand, deposits for 2024 at KWD 19.2 billion was lower by KWD 2.6 billion or 11.9% compared to last year 2023 due to the sale of KFH Bahrain and foreign currency volatility during the year. Excluding these impacts, group depositors accounts declined by approximately 4.5% during current year due to liquidity management and optimization. The contribution from CASA deposits to total group customers deposits improved at the end of 2024 to reach 44.4%. Contribution of customer deposits to total funding is 66.5%. In the last 2 slides, now looking at the key financial ratios, return on average tangible equity declined slightly from 20.551% in 2023 to 19.95% in 2024 due to increase in average tangible equity. However, return on average equity increased from 11.08% to 11.22%, return on average assets at 1.74% compared to 1.82% for last year. Cost-income ratio increased from 35.28% to 36.79% due to the increase in operating expenses as explained earlier. EPS increased from 35.31 fils to 36.37 fils due to increase in profit attributable to shareholders. Group capital adequacy ratio as of 31st December 2024 continued to improve to 19.89% after proposed dividends for 2024 compared to 18.18% as of 31st December 2023. Tier 1 improved to 18.05% and CET1 improved to 15.48%, both after the proposed dividends for 2024. Group NPL ratio reached 1.74% as per CBK calculation in 2024 compared to 1.51% in 2023 and provisions coverage ratio for the group at 275% for 2024. This concludes my presentation. We will now wait for some time for your questions to come in before we provide our response. Thank you.

Good afternoon, ladies and gentlemen. This is Bashayer Alotaibi, Senior Investor Relations Specialist at Kuwait Finance House. Thank you for attending our earnings call. I'll be taking your questions. The first question is, what does the loss of KWD 60.6 million reported under investment income in the financial statements Note 5 represents?

This is the -- as we referred to in the presentation, the Islamic derivatives under our subsidiary, mainly in Turkey for funding the Turkish lira financing.

The second question is what are the guidance you can share for full year 2025? What loan growth, net interest margin, cost of risk and cost-to-income ratio expectations do you have for 2025?

Thank you. For the financing receivables and customer deposits, excluding the impact of currency depreciation and our initiatives as well, financing receivables and customer deposits are expected to grow at mid-single digit for 2025. For the cost of risk, cost of risk for 2024 was 35 bps. For 2025, we expect to remain in the range between 35 to 40 bps. For the net financing margin, as you know, the expectation depends on external factors, including reduction in Fed and CBK discount rates, the benchmark interest rates are expected to decline in 2025. For 2025, we expect the group NFM to be maintained at current levels. What's the -- I think cost-income ratio, what's left, we expect to be maintained at the same level for 2025.

How are you placed if the mortgage law is passed?

I will discuss about the mortgage law. I mean the mortgage law is not yet, I mean, finalized or approved. It is within the government currently. There is the coordination and discussions in this regard. And also, it's worth to mention that this is only for the beneficiaries of the residential care and those on the waiting list at the credit risk. But noting that the KFH has the biggest market share or one of the biggest market share in the Kuwait and definitely, once that it is implemented, it will be a positive for KFH.

The bank's asset quality has remained stable, but the gross provisioning before recoveries significantly rose. Can you shed some light on it?

Our asset quality is even improving and stable, and that's just because of our precautionary provisions, our policy for conservative and then maintaining more provisions.

As Bahrain and Kuwait will be subject to 15% tax in 2025, can you provide an estimate for the effective tax rate for the KFH Group in 2025?

Yes, we have a high-level calculation on estimate for this and the impact of tax [indiscernible] 15% is global minimum tax on KFH Group. Based on 2024 results, I can say it's estimated to result in increase in tax charge around 25% to 28%.

Can you talk about your inorganic expansion plans? Is Saudi Arabia a key market for KFH? Are there any other markets you are considering for inorganic expansion?

Inorganic growth is part of our strategy and remains part of our strategy. GCC is our target market, and we will update the market as and when we have any development that are required to be disclosed.

Can you provide an update on targeted cost savings from the merger with AUB? And when will we see these cost savings being reflected on the income statement of the bank?

Honda, our integration was concluded in the 2024 very successfully and was actually remarkable in terms of achievement in a very short and better than planned time line. Overall, the impact of synergies on net profit attributable to shareholders in 2024 was positive, but was not all of it reflected. However, as a run rate, we achieved during 2024, more than 70% of the planned synergies, which then should be reflected in 2025.

Does the recent sale of KFH's 35% stake in Oman and United Bank have any material impact on earnings?

As we announced today, there's no material impact on our financials.

Could you please share your expectations regarding 2025 loan growth, net interest margin, cost income, cost of risk and effective tax rate?

As I recall, all of these were answered already.

What is the reason for weak loan growth in 2024? And do you expect improved growth in 2025?

Yes. Actually, the first part is mainly, as I mentioned, is the 2 things. The devaluation related to the fluctuation of foreign currency for the mainly Turkish lira that has impact on the overall consolidated growth and the sale of KFH Bahrain during the year. Excluding that, our growth was above 5%, as I recall. Now for next year, it will be improved and will remain, as I mentioned, the mid- to high single-digit growth.

So with this, we end the Q&A session as similar questions were already answered and explained. Thank you so much for attending, and we hope to see you next time.

Thank you.