Tony Daher

KUWAIT: Gulf Bank held its investors webcast to review and discuss the bank's financial performance during the first nine months of the year 2021 on October 28, 2021. The conference call was organized by EFG Hermes and presented by Tony Daher, Chief Executive Officer of Gulf Bank, and David Challinor, Chief Financial Officer of Gulf Bank. The discussion was moderated by Dalal Al-Dousari, Head of Investor Relations at Gulf Bank.

Tony Daher commenced the webcast with key updates regarding Gulf Bank's operating environment during the first nine months of the year 2021. Daher commented, "The resumption of economic activities with businesses returning to full capacity and oil prices rising, has in turn improved the confidence and the economic outlook and boosted consumer spending and growth prospects here in Kuwait. The rising consumer spending remains one of the main drivers of Kuwait's economic recovery, supported by a second six-month loan deferral program for Kuwaiti borrowers and a recent pick-up in consumer loans."

Profound strategy

Daher Stated: "We managed to grow our business in both the corporate and consumer segments without hindering the quality of our portfolio which remained resilient. This was broadly achieved by our strategy that focuses on:

1. Promoting selective growth in the corporate banking and SME segment by expanding product range and enhancing services;

2. Growing consumer banking market share, while targeting youth and affluent client segments; and

3. Developing the Bank's digital banking platforms in order to improve services and increase competitiveness."

Sustainability initiatives

Daher also touched on the Bank's ongoing sustainability initiatives, commenting: "Sustainability is an important and integral part of our strategy. We are committed towards our stakeholders, community, and the overall economy. In this respect, we are proud to announce that Gulf Bank will very soon be issuing its first official sustainability report.

The baseline report will provide a consolidated view of Gulf Bank's contribution to sustainability development in the financial sector. The report provides a road map on how we plan to take this initiative to the next level. Our approach has been based on several sustainability-related frameworks including Global Reporting Initiative (GRI), UN Sustainable Development Goals (SDGs), and Kuwait Boursa sustainability disclosures."

Sound financial performance

Daher summarized Gulf Bank's first nine months results for 2021 with five key messages:

1. Net profit grew by 50 percent for the first nine months of 2021, to reach KD 27.5 million in comparison to KD 18.4 million reported in the same period last year.

2. Reported operating income reached KD 125.5 million for the first nine months of 2021, growing by 8 percent compared to the same period of 2020. The improvement was mainly driven by a 6 percent or 5.8 million increase in net interest income, a 14 percent or 3.4 million improvement in non-interest income and a decline of 24 percent or 12 million in total provisions.

3. Asset quality remained resilient, as our non-performing loan (NPL) ratio in the third quarter of 2021 stood at 1.3 percent, an improvement when compared to same period last year of 1.5 percent. Additionally, we have taken ample provisions and now have a coverage ratio of 472 percent.

4. Relaxed capital regulatory minimums that were introduced in 2020 remain in place, allowing the Bank to have additional buffers over the minimums. Our Tier 1 ratio has a buffer of 441 basis points (13.9 percent vs. 9.5 percent) and our capital adequacy ratio has a buffer of 467 basis points (16.2 percent vs. 11.5 percent). These comfortable buffers have allowed the Bank to grow its businesses in line with its strategy.

5. Gulf Bank remains an 'A' rated bank by three major credit rating agencies. Our current position stands as follows:

a. Moody's Investors Service maintained the Long-Term Deposits Rating of "A3" with a "Stable" outlook.

b. Fitch Ratings affirmed the Bank's Long-term Issuer Default Rating of "A+" with a "Negative" outlook.

c. Capital Intelligence affirmed the Bank's Long-term Foreign Currency Rating of "A+" with a "Stable" outlook.

d. In addition, S&P Global Ratings has recently changed the Bank Issuer Credit Rating to "BBB+" from "A-"and revised the "Negative outlook to "Stable". This most recent rating action followed the S&P downgrade of Kuwait Sovereign rating from "AA-"to "A+" with a "Negative" outlook.

Increasing profitability

Gulf Bank's CFO, David Challinor, discussed Gulf Bank's Q3 results of 2021 in more detail. He noted three positive factors: "First, net interest income is up KD 5.8 million as a result of loan growth and decline in cost of funds. Second, as economic activity regained momentum so did the Bank's fees and foreign exchange income which improved by 3.7 million, and third, the Bank's total provisions reduced by 12 however, these positive drivers were partially offset by a 11.5 million increase in operating expenses." Challinor highlighted that the return on equity improved by 1.8 percentage points over the same period.

On Operating income, Challinor commented: "Operating income grew by 8 percent to 125.5 compared to 116.4 in the first nine months of 2020, this was due to the outpace decline in interest expense in comparison to interest income and also, an improvement in the fees and foreign exchange income of 3.7 or 16 percent driven by the full resumption of economic activities." He also added:" Operating expenses have increased by 11.5 or 24 percent year-on-year, however, they decreased by 4 percent compared to the second quarter of this year.

The year-on-year increase is predominantly driven by the continued investment in our digital transformation strategy and low operating expense base reported in the same period last year due to the low economic activity and receiving of government subsidy." Challinor also pointed out that credit costs declined from 45 in the first nine months of 2020 to 35.3 for the same period in 2021, resulting in a year-to-date Cost of Risk of 104 basis points.

Gulf Bank's financial position

Challinor also presented Gulf Bank's financial position. He also presented the Bank's mix of assets and highlighted its changes over the last 12 months, by saying: "Over the last 12 months, Gulf Bank's assets increased by 395 or 7 percent to 6.3 billion compared to 5.9 billion the year before. This was largely driven by a 147 or 12 percent increase in Liquid Assets, and a 268 or 6 percent increase in Net Loans. While, on a year-to-date basis, net loans grew 360 or 8 percent and total assets grew by 217 or 4 percent, reflecting a pick-up in overall economic activity." He continued, "In terms of the major components of total assets, the mix is essentially unchanged from a year ago."

As for Gulf Bank's funding, Challinor indicated that nearly all of Gulf Bank's funding comes from Due to Banks, Deposits from Financial Institutions, and Customer Deposits. As a result of growing its customer deposits and attracting more short-term bank funding, Gulf Bank was able to reduce the deposit mix coming from financial institutions. The bank's non-performing loan ratio also reached 1.3 percent at the end of September 2021, down from 1.5 percent at same period of last year and its coverage ratio remains strong reaching 472 percent at the end of September 2021.

Prudent financial management

Challinor also indicated that as of 30 September 2021, Gulf Bank's total provisions reached KD 297 million with IFRS 9 ECL requirements at KD 183 million, allowing the bank KD 114 million in excess provisions, representing 38 percent over and above total provisions.

In addition, Gulf Bank's loan stages are fairly stable with Stage 1 loans are above 90 percent for the three periods, while Stage 2 declined from 7.7 percent at the end of September 2020 to 5.6 percent at the end of September 2021. Stage 3 also improved from 1.6 percent to 1.4 percent for the same period.

As for Gulf Bank's IFRS 9 ECL Stages composition, Challinor indicated that Stage 1 reached 21.8 percent as of 30 September 2021, moving from 17.1 percent a year ago, Stage 2 is in a declining trend moving from 48.4 percent a year ago to 43.9 percent as of 30 September 2021 and Stage 3 reached 34.3 percent moving from 34.4 percent a year ago. Challinor also highlighted that: "As of 30 September 2021, the IFRS 9 ECL coverage for total credit facilities was: 0.6 percent for Stage 1, 20 percent for Stage 2, and 73.1 percent for Stage 3. Overall coverage, however, is much higher since the Bank has provisions of KD 114 million over the IFRS 9 ECL requirement of KD 183 million."

On Gulf Bank's capital, Challinor said: "Gulf Bank's regulatory capital ratios remain well above both our current minimums and our pre-COVID-19 minimums. Our Tier 1 ratio reached 13.9 percent, which is 441 basis points above our current regulatory minimum of 9.5 percent and 191 basis points above our pre-COVID-19 regulatory minimum of 12 percent. Our Capital Adequacy Ratio of 16.2 percent was 467 basis points above our current regulatory minimum of 11.5 percent and 217 basis points above our pre-COVID 19 regulatory minimum of 14 percent."

He continued: "Our risk weighted assets grew by 4 percent mainly driven by year-on-year growth in the loan book." He continued, "Our leverage ratio as of 30 September 2021 reached 9.4 percent, which was lower than 9.6 percent for the same period of last year, and well above the 3 percent regulatory minimum." Regarding the Bank's key liquidity ratios, average daily Liquidity Coverage Ratio reached 279 percent as of September 30, 2021, and Net Stable Funding Ratio also reached 106 percent for the same period. Both ratios are still well above their respective new minimums of 80 percent and pre-COVID minimums of 100 percent.

Q&A

Following the management presentation of Gulf Banks's performance during the first nine months of 2021, the webcast was open for participants questions. Dalal Al-Dousari, head of Investor Relations at Gulf Bank, moderated the Q&A session.

Credit cost

When asked about Credit Cost, Challinor commented: "We saw a fall from the Q2 number of 146 basis points which I'd indicated was not going to be indicative of any adverse trend, and it wasn't. When you look year to date, we've got a cost of risk of 104 basis points which is much lower than what we saw for the 2020 and 2019 years ,and certainly much lower than the standalone number for Q2, so I think things are now trending in the right direction. I said in Q2 that I thought the long-term normalized cost of risk is around 100 basis points.

But from quarter to quarter, you can have variations, so I think it's best to look at cost of risk on a year-to-date basis rather than individual quarters. I think also we need to look at recoveries and they are often lumpy and can impact the cost of risk number. I think with recoveries we should expect to see an improvement in the coming quarters. If we have any significant recoveries, we may look to then provide further on other accounts to keep the underlying cost of risk relatively stable, whilst improving coverage elsewhere."

He continued: "Overall, I think asset quality is moving in the right direction. Our NPL ratio came down again this quarter as we had a new formation of 14 million and write offs of 16 million. The total coverage remained exceptionally strong. When you look at the stage 2 percentage that continues to be very low, its 5.6 percent. And our provision buffer over IFRS9 requirements also increased. It's now 114. So, I'm comfortable where we are at."

Loan growth

Another inquiry was related to loan growth and expectations. Challinor responded: "The growth of our gross loans to customers has been strong this year, were it increased by 7.2 percent year to date. Q2 was a bit slow but we saw a rebound in Q3 as activity recommenced after the summer and the country opened up. We're still tracking ahead of the market which grew 3.9 percent to the end of August so I'm pleased we are maintaining this lead. I think full year we are looking at high single digit growth and we'd look to continue that trajectory into 2022 as well. We're growing well across both retail and corporate so it's a balanced growth. We've got ample liquidity; our capital position is solid, and I think also the recent CBK circular around the capital and liquidity ratios not coming back to the pre-COVID levels until 2023 is definitely a positive for growth."

Margins

When asked about Liquidity and pressures on margins, Challinor commented:" The margin has held up well - we're now on the sixth consecutive quarter where effectively it's been flat. In Q2 it was 209 basis points and the same again in Q3. But yes, there are some pressures. We've seen the loan growth in the system outpace the deposit growth which obviously causes some level of pressure. We've seen our own cost of funds rise slightly, particularly on the KD side, which is most of our book, but we've managed to offset that to keep a stable NIM. I think, as I've said before, there isn't any catalysts in the near future that are going to shift it either way, so best guess is that for the rest of the year and probably for most of next year the NIM will be broadly stable."

Operating expenses

The last question during the discussion was related to the Bank's operating expense, Challinor commented: "The expenses came down again this quarter which I said in Q2 they would. So, we've seen expenses fall each consecutive quarter this year. I said in the first half there were several one offs that were not going to repeat and I think the Q3 number is a better reflection than what we saw in the first two quarters of the year. On a year-on-year basis though, the cost growth is very high, but 2020 was artificially suppressed, not just because of lack of activity but also the government subsidy that was paid to us, we got 2.3 million in Q3 and again in Q4. So, 2020 isn't a useful base. But when we look at the 2019 full year cost of 78, I think this year we aim to be lower than that and would look again to be lower for 2022."

He continued: "When we look at cost to income ratio, I think given the strong loan growth and stable margin and some upside with fees, when you combine this with a further expected drop in costs for 2022, we should expect a meaningful improvement in the cost to income for next year. It might not get to pre-pandemic type levels in 2022 alone, but certainly will move much closer in that direction. I think the other thing is, as a bank we are in the middle of a major digital transformation, and I think also there will be opportunities for extracting cost efficiencies once this is all implemented." Dalal Al-Dousari concluded the conference by thanking the participants and invited analysts to visit the Investor Relations page on Gulf Bank's website for any further inquiries.