Management presents overview of Kuwait's operating environment

KUWAIT: KFH management team during the conference call

KUWAIT: Kuwait Finance House (KFH) held a webcast on its earnings on July 30 in which speakers from KFH executive management Mazin Al-Nahedh, Group Chief Executive Officer, Shadi Zahran, Group Chief Financial Officer and Fahad Al-Mukhaizeem, Group Chief Strategy Officer attended. Fawaz Al-Sirri moderated the conference.

While welcoming the participants to the second quarter 2018 earnings conference call for Kuwait Finance House Group, Fahad Al-Mukhaizeem highlighted the Kuwait operating environment with an overview of KFH and the second quarter business highlights.

"We'll also share with you KFH's strategy, as well as the second quarter financial results," he said.

Looking at Kuwait economic indicators the GDP value is expected to slightly increase by year end with expectations of higher growth in 2019 especially with oil prices closing near the 75-dollar range almost 18 percent above last year's close. Central Bank of Kuwait held its benchmark interest rates at a 3 percent following the last US Federal reserve rate hike. Fitch also affirmed Kuwait's sovereign rating at AA, he said.


As an overview of Kuwait Finance House Group, the bank maintains either the top or second position between competitors within the local or regional markets. Being the first and largest Sharia-compliance bank in Kuwait, it is the second largest in the world by assets. In terms of our geographical diversification, we have 399 branches in Turkey, 59 in Kuwait, 14 in Malaysia, 10 in Bahrain, 5 in Germany and 1 in Saudi Arabia.

As part of KFH strengths going forward in addition to the long relationship and large customer base, we have long-term agreements with key partners such as Microsoft to keep our system up to date and to gain the latest technology solutions which reflect positively on our customer service delivery. And this is in line with a variety of other contracts with international IT solution providers.

For the key business highlights, we've launched a variety of services to benefit the Youth segment in Kuwait, who are considered to be the driving force for the future success of Kuwaiti society. In addition to upgrading the group level websites for our subsidiaries including Bahrain, using the latest technologies. KFH continues its strong support and sponsorship for its CSR activities.

Financial performance

Highlighting the financial performance for the first half 2018 of KFH, Group CEO Mazin Al-Nahedh said net profits to shareholders reached KD 95.22 million for the first half of 2018 compared to KD 81.64 million for the same period last year an increase of 16.6 percent. Y-o-Y.

Total financing income for H1 this year reached KD 424.14 million a growth of 22.2 percent compared to the same period last year.

Net financing income for H1 this year reached KD 277.8 million a growth of 32 percent compared to the same period last year.

The cost to income ratio decreased to 39.5 percent for the first half of 2018, compared to 41.6 percent for the same period last year.

Earnings per share for the first half of 2018 reached 15.23 fils, compared to 13.06 fils for the same period last year i.e. an increase of 16.6 percent.

In terms of our strategy, we are focusing on the quality of assets and improving our competencies within the bank, and we have seen a remarkable improvement during the period. The focus on moving forward will be with investment in technology and digital transformation of the bank. At KFH we look forward to a customer-centric approach through adoption of technology development. We invested heavily in this, whether internally or through investments in VCs, to provide fundamentally the latest technologies that benefit our customers.

Islamic finance

Islamic finance can take advantage of technology to provide more efficient and accurate services to customers, helping to meet their banking needs that go beyond their expectations.

One of the most important aspects is to focus on human resources and customers by ensuring that our employees are highly committed to the organization, which is reflected in their performance in providing the best services to our customers

In regards to our strategy in supporting the national economy and achieving the comprehensive development, KFH financed different mega projects in Kuwait and the countries where it operates including financing of terminal II building for Kuwait International Airport and the construction of Canakkale Bridge in Turkey.

KFH enjoys a leadership position in the Sukuk market and the Islamic financial services in general. The vast experience of KFH Group in the Sukuk issuance has positioned it as a trustworthy and highly recognized organization by major corporates and governments globally.

Finally, the positive ratings as mentioned by my Colleague Fahad, by international rating agencies are considered as a positive indicator on the soundness and success of set plans.

Financial performance

KFH's Group's Chief Financial Officer Shadi Zahran presented the financial performance of KFH Group for the first half 2018.

The Group Net Profit After Tax (NPAT) attributable to shareholders at KD 95.2 million has increased by KD 13.6 million or 16.6 percent compared to June 2017 resulting mainly from an increase in net finance income by KD 67.0 million, offset by a decrease in investment income by KD (26.1) million, increase in Provisions by KD 14.9 million, besides an increase in Operating Expenses by KD (11.2) million. And we will explain each part separately in the coming slides, however, I'd like to highlight that despite the increase in provisions for the first half compared to last year the group profit improved from the core stable activities with drop in investment income.

Net Financing Income at KD 277.8 million has increased by KD 67.0 million or 31.8 percent compared to June 2017 mainly on account of increase in Financing income, primarily due to increase in average yielding portfolios from all banking subsidiaries by KD 1.1 billion or 8.7 percent which was further supported by increase in local and international profit rates.

Accordingly, the Total Operating income at KD 389.9mn increased by KD 46.7 million or 13.6 percent resulted from an increase in net finance income by KD 67.0mn contributing 71.3 percent to the total operating income higher than comparative period last year by almost 10 percent (H1-17: 61.4 percent), accordingly the non-financing income contribution has dropped by 10.4 percent to reach 28.7 percent on account of lower investment income that resulted from less divestment of non-core assets due to unfavorable market conditions. And timing differences.

Non-Financing Income Fees & Commissions remained at same level for the group of last year at KD 49mn, however investment income decreased by KD 26.1 million (from KD 55.9 million to KD 29.8 million) as a result of less divestment gain (KD 1.8 million vs. KD 20.8 million same period 2017); accordingly total non-financing income dropped from KD 132 million to KD 112 million. Investment income contribution dropped from 42 percent to 27 percent.

With Regards to Total Operating Expenses at KD 154.1 million increased by KD 11.2 million, an increase of 7.8 percent. We look at the components -

Staff cost - The increase in staff cost is mainly from Kuwait Parent Company and due to impact of labor law amendments besides the annual increment of salaries and staff benefits, in addition to the increase in headcounts mainly in Turkey subsidiary as a result of high growth and expansion of banking operations.

Other expenses (G&A & Others) increased marginally by KD 0.7 million or 1.7 percent as the Group maintained its stringent policy towards cost optimization.

Net Operating income at KD 235.8 million increased by KD 35.5 million or 17.7 percent compared to H1-17.

Although operating expenses have increased by 7.8 percent and that's mainly attributable to support the growth in Kuwait and international banking operations as well translated to the increase in operating income by 13.6 percent. This proves continuous efficiency in group operations reflected in further reduction in C/I ratio which has reached 39.5 percent for H118 at a Group level compared to 42.8 percent for 2017 coming from 51 percent for 2014

Furthermore, at KFH-Kuwait, C/I ratio is maintained at 34.3 percent which is below both the local Islamic Banks average of 37.5 percent and local conventional Banks average of 35.3 percent for Kuwait as published for Q1-18.

Average Profit Earning Assets volume is up by 8.6 percent, vs. 2.7 percent growth in total balance sheet increasing yielding assets contribution trend. This is an evidence of efficient balance sheet that focuses on sustainability of earnings and also reflected in the improved NFI. As we said the 67 million growth, he pointed out.

Group NFM at 3.30 percent shows a 49bps increase over last year of 2.81 percent. The yield increased from financing and MM placements as a result of higher profit rates (in both local & international markets) and optimized balance sheet.

Provisions and Impairments increased on account of more conservative impairment against legacy real estate investments in GCC due to negative outlook. (KD 63.7 million out of total provision charge of KD 98.0 million taken in H1-18)

It worth to mention that Central Bank of Kuwait has still not fully adopted IFRS 9, and requirements for ECL on financing facilities have been replaced by CBK existing credit loss requirements. However, we have implemented internally IFRS 9 completely for the entire group entities and generated ECL numbers on financing facilities which are materially lower than current provisions.

Operating Profit from banking activities still at 92 percent of total Operating income of the Group and this is being maintained as part of overall Group Strategy and reflecting the contribution of the core banking activities to the group.

Total assets

Total assets at KD 17.6 billion increased by KD 458mn or 2.7 percent over a 12 month (H118 vs. H117) .

Financing receivables at KD 9.6 billion is the main contributor to the balance sheet growth as increased by 7.3 percent over a 12 months (H118 vs. H117) period. Growth in financing receivables came from all banking entities and business units, driven largely by Corporate Banking. Growth in financing portfolio compared to December 2017 is 3.7 percent despite the devaluation in TRL. Growth without TRL devaluation is 8.8 percent.

Depositors' Accounts at KD 11.9 billion increased by KD 492.1 million or 4.3 percent over a 12 month (H118 vs. H117) period from KD 11.5 billion in Jun-17 (YoY increase in CASA is KD 287 million. Our CASA forms 48 percent of total deposits as of H118). As Compared to December 2017 our Depositors' accounts increased by 3.0 percent. If we take into account growth without TL devaluation is 7.4 percent.

Customer deposits as a percentage of total deposits at 80.3 percent remains at a very healthy funding mix. It is worth to mention that KFH Kuwait dominates the market in saving accounts at market share of 42.5 percent.

Q2 2018 highlights

Profit attributable to shareholders for Q-2 2018 was KD 51.2 million representing KD 8.2 million or 18.6 percent increase as compared to Q-2 2017. And that resulted from improved operating income by 14.9 percent while keeping operating expenses at marginally higher than comparative period at KD 75 million with increase of 2.7 percent only higher than last year.

Profit attributable to shareholders for Q-2 2018 was higher by KD 7.3 million or 16.6 percent increase as compared to Q-1 2018 and that resulted from improved operating income by 6 percent with lower operating expenses by 5 percent, offset by higher provision by 6 percent.

Group C/I ratio for Q2-2018 three months period was only 37.5 percent as compared to 41.7 percent for Q118 and 42.8 percent for 2017 full year. This shows the continuation of improved efficiency.