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

[indiscernible] ladies and gentlemen, and welcome to KFH 3Q 2026 Earnings Call. This is Ahmed El-Shazly from EFG Hermes, and it's a pleasure to have with us on the call Mr. Fahad Al-Mukhaizeem, Group Chief Strategy Officer and Acting Group Chief International Banking Officer; Mr. Abdulkarim Al-Samdan, Group CEO. 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'd like to mention that some of the statements that might today may forward looking. Such statements are beyond the company's current expectations, predictions, 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. Welcome to KFH's Q3 2026 Earnings Call. I'm Fahad Al-Mukhaizeem, Group Chief Strategy and Acting Group Chief International Banking Officer. KFH entered the final quarter of 2026 [indiscernible] remaining the largest listed capitalization at 30th of September. I will briefly cover the economic backdrop and our key strategic actions. The global economy remains resilient. In October, the IMF raised the 2026 GDP growth forecast to 3.1%, maintaining [ '27 ] at 3.4%, supported by AI. Kuwait outlook reflects temporary pressure from the regional conditions and [indiscernible] projects a 2026 GDP construction, followed by a strong rebound in 2027 with a GDP growth forecast of 17.1% and energy production and onward are expected to normalize. Kuwait, USD 122.7 million line of land and unawarded projects offered significant longer-term financing potential. In Q3, that represented more than 80% of project awards. Inflation in Kuwait remained at 2.19% in July 2026. The IMF projects on average moderate inflation of 2.2% and in [indiscernible] in 2027. The Central Bank of Kuwait maintain the 3.5% in September. The new government [indiscernible] which is a framework that can diversify sovereign, broad investor base and support Asharia compliant yield curve. The mortgage -- the new bank participation allows eligible beneficiaries to combine subsidized and unsubsidized financing for turn up to 25 years. Both frameworks create promising opportunities for KFH as implementation progresses. The opening of [indiscernible] brought our group service centers in Kuwait, strengthening service centers for customers across the region -- our regional network. We continue to advance our digital capabilities through KFH online, smart branches [indiscernible] and the enhanced eco platform for corporate customers. And also demonstrated strong digital progress, reporting a [indiscernible] year-on-year increase in active customers through digital channels and having successfully automated more than 150 banking services, bringing the total number of digital banking services to over 100. These initiatives strengthen group integration, customer experience and efficiency. The bank recognizes this progress by ranking by Fitch as the best performing bank in Kuwait as top 100 [indiscernible] '26 Rankings. KFH continues to support national initiatives of strategic impact, including a USD 13 million contribution to the Kuwait Emergency Response Fund and an additional USD 6 million plant contribution to support power station infrastructure needs. KFH to earn international recognition, including #1 [indiscernible] Kuwait and the Bankers '26 Top 100 airbands [indiscernible] awards for management, ESG and digital banking. World [indiscernible] finance and its digital bank in Kuwait by me. Q3 demonstrated the strength of KFH diversified franchise by continued execution. Our priorities remain clear: focus on customer centricity, deviation, accelerate digital adoption and pursue quality growth with discipline and liquidity management. We remain confident to deliver sustainable shareholder value, support our customers and contribute to Kuwait's long-term development. With that, I will now hand over the mic to our Group Chief Financial Officer, Mr. Abdulkarim Al-Samdan.

Thank you. Good afternoon, everyone. The 9 months [indiscernible] stronger operating earnings base, reflecting financing, fee income by lower expenses. Income, [indiscernible] with cost to income at 30.8%. Shareholders' product increased by 6.2% to KWD 523.4 million with higher provisions and noncontrolling interest absorbing [indiscernible] improvement. [indiscernible] distribution on perpetual Tier 1 also explained why earnings per share grew more [indiscernible] profit. In Q3, lower funding costs through effective funding deployment helped margin recover and net financing and fee income both improved from Q2. Investment in foreign currency income were lower, however, were the less than shareholders' profit declined to KWD 160.3 million from KWD 186.5 million in Q2. The financing portfolio is now 7.5% above the year-end, reflecting continued deployment of liquidity to customer financing. We have maintained our operating guidance and revised our cost of risk expectation and growth expectations related to net fees and commission income to reflect the business dynamics we have seen through September. For the final quarter, our focus is on sustaining the progress in core earnings, while pricing growth for the cost of funding and credit cost. The group's recent performance provides a useful context for its current earnings capacity. Between 2023 and 2025, the group's operating income compounded at 13.1% a year, an average return on tangible equity was 20%. The corresponding figure for 2015 to 2021 were 4.5% and 10.7%, respectively, while the 2026 return on average tangible equity is 20.42% based on the 9-month period results. Turning to the 9-month earnings bridge, I would separate average into 3 layers. First, financing and fees, provided most of the income increase over the 9-month period. Net financing income reached KWD 989.5 million, up 4.8%, while the net fees and commission income of KWD 200.2 million was 20.6% higher. Together, they contributed KWD 79.5 million to the year-on-year improvement. Expense savings added another KWD 14 million. These are the more repeatable sources of earnings momentum. Second, the remaining nonfunded income lines contributed a further KWD 12.2 million to the year-on-year increase. Higher investment and foreign currency income more than offset the decline in [ Ederington ]. These lines include disposal gains, valuation effect, which we assess separately, were considering the recurring earnings base. The third layer covers provisions, accounting effects and profit attribution. Higher provisions and impairment absorbed KWD 50.2 million of the improvement generated by the first 2 layers. A smaller IAS 29 net monetary loss provided KWD 16.2 million benefit, while the tax charge increased by almost KWD 5 million. The result was an 11.8% increase in total profit to KWD 630.7 million. Of that amount, KWD 107.3 million was attributable to noncontrolling interest compared to KWD 71.3 million a year earlier. This higher allocation accounts for slower growth in KFH shareholders' profit, which rose by 6.2% to KWD 523.4 million. On the quarterly bridge, the principal reason of the sequential decline in reported profit was the nonrecurring KWD 40.5 million Saudi real estate disposal gain recorded in Q2 that did not recur in Q3. Compared to the Q2, net financing income rose 7.1% to KWD 340.1 million and net fees and commission income rose by 5.2% to KWD 72.7 million. The combined increase was KWD 26.2 million. Kuwait Turk also recorded lower foreign currency valuation gains across investment, foreign currency and other income, the combined decline was KWD 58.6 million. Lower expenses, net monetary loss and taxation pushing part of the income decline, while provision charges increased. Therefore, the total profit moved from KWD 215 million in Q2 to KWD 196.6 million. Shareholders' profit was [ KWD 163 million ] against KWD 186.5 million with more profit attributable to noncontrolled interest. The group's earning is geographically diversified. The international business accounted for 57.9% of the shareholders' profit over 9 months. At September, they represented 38.6% of the group's financing and 49.6% of the deposit. Rates contribution were 27.3% of shareholders' profit, 21.4% of the financing and 32.1% of the deposit. The the Q3 margin recovery is consistent with the moderation and pressure that we anticipated at H1 earnings call. Margin recovered from [ 2.7% ] to 3.09% in Q3. Lower funding costs contributed 140 basis points to the movement, more than offsetting the 104 basis points drag from lower asset yields. That lifted the 9-month margin to 2.92% compared with 2.84% at H1 but still below 3.16% in the same period of 2025. Without Kuwait Turk, the cumulative margin increased to -- from 2.09% at H1 to [ 2.14% ] at September. We retained a stable margin outlook. The extent to Q3 improvement carries into the final quarter will depend on the relative pace of the asset and funding repricing. Alongside competition for deposit and business mix. We are managing funding maturities and currencies while protecting the customer deposit base. Finally, the benchmark rate sensitivity indicates a group margin effect of approximately 5 basis points for a parallel 25 basis points movement in the benchmark rates as showing no other changes. Customer behavior and changes in the balance sheet can utter the actual effect. The growth in fees and commission income for the 9 months and the 3-month periods were mainly supported by banking service and investment-related activity at Kuwait Turk, and we revised our guidance to reflect our growth expectation of the net fees and commission income to be above 18%. 9-month nonfunded income totaled KWD 462.7 million, an increase of 11.1% over the same period last year. The gap between income and expense growth remains favorable. Compared with the same 9-month period last year, operating income was 6.7% higher while expenses fell by 3% to KWD 447.5 million, creating a spread of approximately 9.7 percentage points. As a result, cost-to-income ratio improved by 3.1 percentage points to 30.8%. The quarterly ratio moved in the opposite direction, from 29.7% in Q2 to 31.4% in Q3. Expenses fell to KWD 144.8 million, but the operating income declined more sharply as investment in foreign currency contributing fell during the quarter. Efficiency measures so far have focused mainly on discretionary nonstaff expenditure. At the same time, we continue to invest in high-performing teams, technology and customer experience. In fact, we currently expect a full year IT-related expenditure to be approximately 15%, above the 2025 level. Our full year cost-to-income guidance remains below 32%. The asset bridge shows continued redeployment into financing and debt securities alongside the effect of currency translation. The September balance sheet stood at [ KWD 43.8 billion ], 2.4% above the year-end. Business growth added [ KWD 3.53 billion ], which was partly offset by KWD 1.69 billion reduction in cash and bank balances and financial institutions and approximately KWD 800 million from foreign currency translation. Financing receivables and debt securities both grew faster than the total assets with debt securities increasing by 9.1%. By September, the financing portfolio stood at KWD 23.4 million, 7.5% above the year-end compared with a growth of 4.4% at H1. Most of the financing portfolio is in Kuwait, followed by Kuwait Turk and Bahrain. Personnel financing accounts for 27% of the portfolio, and real estate account for 17%, making them the largest sector categories. We monitor these concentrations within each market as business volume increase. We retain our low double digit growth expectation while reserving underwriting standards and risk-adjusted returns. At September, the nonperforming financing ratio was 1.89% against 1.82% in June and 1.51% at end. Impaired financing increased from KWD 433.9 million in June to KWD 462.2 million, and coverage fell 227%. The increase in NPS during Q3 was concentrated mainly in KFH Kuwait and Turkey rather than reflecting broad-based deterioration across the group. In KFH Kuwait, a new NPS formation was principally within real estate and personnel financing, while Turkey's addition were more diversified across trade SME financing, manufacturing and certain other exposures. This was partly of sell collections and write-offs. It is important to distinguish the movements in EMEA from the overall provision and impairment charge. The 9-month charge includes specific provision against identified exposure and KWD 28 million of precautionary provision of the precautionary amount, KWD 20 million related to credit exposures. The full precautionary charge was reported in the first half of the year, while the third quarter charge reflected the updated assessment of the identified exposure with no additional precautionary over we recorded. Separately, KWD 49 million of the 9-month period provision and impairment charge relates to the group's [indiscernible] insurance activities, and therefore, it is distinct from the provisioning against the banking financing portfolio. The regulatory provision balance remains above the IFRS 9 expected credit loss balance. Against the expected credit loss balance of KWD 549.8 million, provisions under the Central Bank of Kuwait Regulation stood at KWD 1.497 billion. The resulting buffer was KWD 499.9 million, slightly down from the KWD 504 million in June. This remains a substantial potential reserve, although future impairment charges will continue to depend on exposure specific developments and updated economic scenarios. The IFRS 9 staging measures show different portfolio dynamics. Although Stage 2 balances increased modestly to approximately KWD 2.8 billion, their share of gross financing fell from 12% at year-end to 11.35% at September, as the total portfolio grew faster. However, Stage 3 increase from KWD 509 million to KWD 606.2 million, with its ratio rising from 2.24% to 2.48%. The Stage 3 NPF measures have different classification bases. Customer deposits represented 64.7% of the group's KWD 35.1 billion funding base, excluding other liabilities. Banks and other financial institutions represented 30.8% with [indiscernible] financing accounting for 4.5%. The customer deposit balance was approximately KWD 22.7 billion. Current and saving accounts made up 47.1%, broadly unchanged from H1. Kuwait Turk provided 32.1% of the group deposit, up from 29.8% at June. September liquidity ratio remained comfortably above the current regulatory minimums. LCR of 137% and NSFR of 120.7% were above their minimum 80% minimum. Kuwait financing-to-deposit ratio was 84.3% below the 100% saving. LCR declined from 228.3% at year-end, primarily reflecting the deployment excess of liquidity to financing growth and the non-renewal of selected wholesale funding, while NSFR and Kuwait financing to deposit ratio of change dilutive. As financing grows, we assess the available liquidity against the expected funding needs and stress requirements. The reported September capital ratios captured the distributed interim dividend and exclude interim profit under the applicable regulatory treatment. On that basis, CET1 was 13.5%, tier 1 was 15.4%, and the total capital adequacy was 17.2%. The corresponding current requirements were 10.5%, 12% and 14%, respectively. Higher risk-weighted assets accounted for approximately 110 basis points of the movement from the year-end capital ratio of 19.8%. The reduction in Tier 1 [indiscernible] and the interim dividend accounted for a further 70 basis points and 80 basis points, respectively. This leaves approximately 320 basis points of headroom above the current total capital requirements. Kuwait Turk's underlying operating contribution remained strong, although it's translation into the group's shareholding earnings continues to be affected by the exchange rate movements, hyperinflation accounting, taxation and noncontrolling interest. Kuwait Turk's net gain from foreign currency related to precious metal deposits that are swapped into U.S. or euro, U.S. dollar or euro to support asset growth and that represents approximately 70% of the group's net gain from foreign currencies. The IAS 29 monetary loss for the 9 months was KWD 86.9 million compared with KWD 103 million a year earlier. The conversion factor was 1.24% against 1.25%. Changes in the net monetary position also affect the chart. Finally, our year-end inflation estimate is still close to [ 30% ]. Operating guidance remains unchanged except for the cost of risk and net fees and commission income, which we have revised to reflect the business dynamics up to September and our current expectation of the fourth quarter. We continue to expect low double-digit financing growth for the full year. The financing outlook is supported by the business pipeline with continued pricing and underwriting discipline. For the full year, we expect net financing margin to remain broadly stable relative to the 9-month 2026 level of 2.92%. This outlook reflects our current expectation for asset yields, funding costs and balance sheet mix subject to market conditions. Our cost-to-income expectation remains below 32%, including continued investment in business and the effect of inflation in Turkey. However, we revised our guidance to reflect the growth expectation of net fees and commission income to be above 18%. Finally, based on current portfolio developments and our expected fourth quarter run rate, we anticipate the full year cost of risk of approximately 60 to 65 basis points before recoveries and approximately 35 to 40 basis points after recoveries. The final outcome remains subject to the timing of recoveries and any further credit developments. Our priorities for the remainder of the year are to sustain core earnings momentum, maintain disciplined growth and manage credit, capital and liquidity preventively. Thank you. I will now return the call to our Investor Relations team for the Q&A session.

Thank you, Mr. Abdulkarim, and good afternoon, everyone. My name is Bashayer Alotaibi, Investor Relations Manager at Kuwait Finance House. Thank you all for joining us today. And I will open the floor for the Q&A session. The first question is, do you anticipate funding costs and pressure in Kuwait in Q4 2026 as competition for deposits tend to increase at year-end?

I think with the continued geopolitical development in the region, we continue to see some pressure on the funding cost. If you have noticed that during Q3, we have achieved a great market recovery, but we don't expect momentum to continue. We expect to maintain NIM at 2.92%.