• Gulf Bank started the half positively, with an increase of 40% in its first half net profit compared to the same period of last year.
• The launch of the new treasury system seeks to make most of the Bank’s ongoing digital transformation into a fully integrated digital bank.

 

Kuwait, 05 August 2021: Gulf Bank held a virtual analyst conference call to review and discuss the Bank's financial performance during the first half of the year 2021 on Tuesday, August 3, 2021. The conference call was organized by EFG Hermes and attended by Ahmad AlDuwaisan, GM Corporate Banking and Acting CEO 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.

 

On behalf of Gulf Bank CEO Mr. Tony Daher, Ahmad AlDuwaisan commenced the virtual analyst call with key updates regarding Gulf Bank’s operating environment during the second quarter of the year 2021. AlDuwaisan commented, “We started the quarter with partial curfew and further restrictions on businesses and travel for locals and foreigners, however by the month of May, most of these restrictions were lifted helped by the acceleration in the rollout of vaccination efforts which reached on average 20,000 doses a day. Starting first of August, vaccinated foreigners are now allowed to enter Kuwait. Growth prospects have improved with the lifting of most restrictions. Consumer sentiment is more upbeat and increased demand has boosted consumer spending growth.”

 

Strong Capital

 

Al Duwaisan also announced the completion of issuance of Tier 2 Compliant Subordinated Bonds of KD 50 million: “Despite the challenges that we continue to face as a result of the Covid 19 pandemic, Gulf Bank has successfully completed the redemption of its existing KD 100 million subordinated Tier 2 bonds, and the issuance of new KD 50 million Subordinated Tier 2 Bonds which was oversubscribed. This issuance optimizes the Bank’s capital adequacy, in compliance with Basel III frameworks, and supports our overall investment plans towards making Gulf Bank the leading Bank of the Future.”

 

Partnership with Murex

 

As part of Gulf Bank’s ongoing digital transformation plan, AlDuwaisan indicated that Gulf Bank is happy to launch the new treasury system after an 18-month partnership with Murex. The integrated solutions will offer a robust technological infrastructure that meets the evolving requirements of today’s customers and provide an even more seamless workflow and better risk management. Moreover, the launch of the new treasury system seeks to make most of the Bank’s ongoing digital transformation, transforming Gulf Bank into a fully integrated digital bank.

 

Sound Financial Performance

 

AlDuwaisan summarized Gulf Bank’s first-half results for 2021 with five key messages:

1. Net profit grew by 40% for the first half 2021, to reach 16.5 million in comparison to 11.8 million reported in first half of 2020.
2. Reported operating income reached 83.2 million for first half 2021, growing by 8% compared to the first half of 2020. This growth was driven primarily by a significant decline in the cost of funds that exceeded the decline in interest income and improvement in fees and commission income.
3. Asset quality remained resilient, as Gulf Bank’s non-performing loan ratio in the second quarter of 2021 stood at 1.4%, an improvement when compared to same period of last year of 2.2%. In addition, Gulf Bank has ample provisions with a coverage ratio of 443%.
4. Relaxed capital regulatory minimums that were introduced in 2020 remain in place, allowing the Bank additional buffers over the minimums. Gulf Bank’s Tier 1 ratio has a buffer of 480 basis points (14.3% vs. 9.5%) and capital adequacy ratio has a buffer of 510 basis points (16.6% vs. 11.5%). With these comfortable buffers in place, Gulf Bank exercised the call option for the redemption of the KD 100 million subordinated tier 2 bonds that matured in May and issued a new tier 2 compliant bond at a maximum of KD 50 million at favorable rates.
5. Gulf Bank maintained its ‘A’ ratings from the three major credit rating agencies, noting its ratings as of today:

        -Moody’s Investors Service maintained the Long-Term Deposits Rating of “A3” with a “Stable” outlook.

        -Fitch Ratings affirmed the Bank Long-term Issuer Default Rating of “A+” with a “Negative” outlook.

        -Capital Intelligence affirmed Gulf Bank’s Long-term Foreign Currency Rating of “A+” with a “Stable” outlook.

        -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.

 

AlDuwaisan also noted that although the Bank continues to operate in challenging times, it has also built a solid foundation to continue tackling the headwinds while supporting the growth needs of its customers.

 

Increasing Profitability

 

Gulf Bank’s CFO, David Challinor, discussed Gulf Bank’s H1 results of 2021 in more detail, noting three positive factors. First, net interest income is up KD 4 million, due to the continued decline in cost of funds. Second, as economic activity regained momentum so did the Bank’s fees and foreign exchange income which improved by 2.6 million, and third, the Bank’s cost of credit improved by 5.4 million. however, these positive drivers were partially offset by a 6.7 million increase in operating expenses.

 

Challinor highlighted that liquidity conditions remained favorable, and that the Bank’s interest expense declined by 26 million or 50%, from 52 million in the first half of 2020 to 25.9 million in the first half of 2021.

 

Operating income grew by 8% to KD 83.2 million compared to KD 77.2million during the first half of 2020. This was due to interest expense falling more than interest income.

 

Operating expenses has increased by KD 6.7million or 20% year on year. Gulf Bank continues to invest in its business as it focuses on its digital transformation strategy going forward.

 

Challinor also pointed out that credit costs have declined from KD 28.4 million during the first half of 2020 to KD 24.8 million during the first half of 2021.

 

Gulf Bank’s Financial Position

 

Challinor also presented Gulf Bank’s financial position, indicating how individual line items have moved from 30th of June 2020 to 30th of June 2021. Challinor also presented the Bank’s mix of assets and highlighted its changes over the last 12 months. He said: “over the last 12 months, Gulf Bank’s total assets increased by 266 million or 4% to 6.3 billion compared to 6.0 billion the year before. This was largely driven by a 160 million or 12% increase in Liquid Assets, and a 123 million or 3% increase in Net Loans, While, on a year-to-date basis, Net Loans grew 210 million or 5% and total assets grew by 179 million or 3%, 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 increased from 1.1% at the end of December 2020 to 1.4% at the end of June 2021, and its coverage ratio exceeded 443% at the end of June 2021.

 

Prudent Financial Management

 

Challinor also indicated that as of 30 June 2021, Gulf Bank’s total provisions reached KD 298 million with IFRS 9 ECL requirements at KD 191 million, allowing the Bank KD 107 million in excess provisions, representing 36% of total provisions.

 

In addition, Gulf Bank’s loan stages are fairly stable with Stage 1 loans are above 90% for the three periods, while Stage 2 declined from 7.7% at the end of June 2020 to 5.6% at the end of June 2021. Stage 3 also improved from 2.2% to 1.5% for the same period.

 

As for Gulf Bank’s IFRS 9 ECL Stages composition, Challinor indicated that Stage 1 reached 21.8% as of 30 June 2021, moving from 14.7% a year ago, Stage 2 is in a declining trend moving from 44.2% a year ago to 38.5% as of 30 June 2021 and Stage 3 reached 39.6% moving from 41% a year ago.

 

Challinor also highlighted that, as of 30 June 2021, the IFRS 9 ECL coverage for gross loans and contingent liabilities and commitments was: 0.6% for Stage 1, 19.4% for Stage 2, and 85.1% for Stage 3. Overall coverage, however, is much higher since the Bank has provisions of KD 107 million over the IFRS 9 ECL requirement of KD 191 million.

 

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 14.3%, 480 basis points above our current regulatory minimum of 9.5%, and 230 basis points above our pre-Covid-19 regulatory minimum of 12%. Our Capital Adequacy Ratio of 16.6% was 510 basis points above our current regulatory minimum of 11.5% and 260 basis points above our pre-Covid-19 regulatory minimums of 14%.”

 

He continued: “Our risk weighted assets fell by nearly 0.3% mainly due to increase in collaterals and reduction in market risk in comparison to the same period of last year.” He continued, “Our leverage ratio as of 30 June 2021 reached 9.5%, which was higher than 9.2% for the same period of last year, and well above the 3% regulatory minimum.”

 

Regarding the Bank’s key liquidity ratios, average daily Liquidity Coverage Ratio reached 324% as of June 30, 2021, and Net Stable Funding Ratio also reached 109% for the same period. It is also worth noting that both ratios are still well above their respective new minimums of 80% and pre-Covid-19 minimums of 100%.

 

Q&A

 

Following the management presentation of Gulf Banks’s performance during the first half of 2021, the virtual call was open for participants questions. Dalal AlDousari, head of Investor Relations at Gulf Bank moderated the Q&A session.

 

When asked about loan provisions, Challinor commented: “If we start first with Q1, we saw a fairly low credit cost of 8.3 million which translated into a cost of risk of 76 basis points. This was much lower than what we’d seen for the full year 2020 where the cost of risk was 131 basis points. We’ve previously stated that we think a more normalized level of cost of risk is around 100 basis points and that we probably wouldn’t return to a normalized level during 2021. The timing of provisions can often lead to some lumpiness from quarter to quarter but we’re confident that this second quarter level, which was primarily driven by increasing coverage on existing NPL’s, isn’t indicative of any adverse long term credit cost trend. When you look at the first half of 2021, we have a cost of risk of 112 basis points which is much lower than both the full year 2020 and full year 2019. So, despite an uptick in Q2, we are still on track, at this stage, to be lower than the previous 2 years.”

 

He continued “I think it’s also important to point out that not only did our NPL percentage drop from Q1 to Q2, its now at 1.4%, but that we also increased our total coverage which stands at 443%. Also, when you look at the percentage of our loan book that’s in stage 2, we saw that decrease from Q1 to Q2 and its’ now only 5.6%.”

 

Another inquiry was related to receiving a judgment from the Court of Cassation, AlDuwaisan responded: “As we have mentioned in previous earnings calls and disclosures, the court of Cassation issued a judgment which restored Gulf Bank’s right to complete the execution measurement. The impact of this judgement and the financial position of the Bank will be determined upon completion of the execution measures. The timing of the execution is dependent on multiple variables as stated above. However, based on past experience this is an unpredictable timeline and is likely a medium to long term process depending on the nature of the assets being attached and claims if any of other creditors. This exposure was fully provided for and written off in prior years, accordingly recoveries if any would be recorded through income statement depending on the completion of the execution measures.”

 

When asked about NIM’s and the trends over the past quarters and the expectation for the rest of the year. Challinor commented:” On the NIM, we’ve seen this has remained broadly stable now for the last 5 quarters at around 2.1%. We are probably at the end of any further cost of funds reductions and there may be some asset yield pressure going forward. To offset this, we are very focused on CASA and also the extension of the regulatory liquidity concessions from CBK until the end of this year should help. The refinancing of our Tier 2 bond in Q2 will also help. We don’t see any underlying interest rate moves in 2021 so the best guess is margin will likely remain broadly stable for the rest of this year.”

 

Another question was related to the expected normalized run rate for operating expenses for the year 2021, Challinor commented: “The good news is we saw operating expenses fall from the Q1 level of 20.5 million to Q2 of 19.7 million. Having said that, the headline year on year growth is still 20% when comparing first half 2021 to same period last year. This is due to a combination of a number of things. First, the low base effect of the pandemic year, second a continued investment in our digital transformation program and third the presence of some lumpy items in the first half that we are not expecting to recur in the second half of the year. So, we think the costs could reduce in the second half of the year and given the income growth we are expecting, we should see some improvement in the Bank’s cost to income ratio.”

 

The last question during the discussion was related to the Bank’s loan growth drivers, Challinor commented: “I’m pleased with loan growth and this is a positive story for the Bank. We saw strong growth in the first half of the year of 181 million which brings the half year percentage loan growth to 4.1% which is more than double the system. The growth was driven by both the consumer and corporate segments, but we did see consumer slow due to the second deferral program in the second quarter. Going forward we will look increasing market share in our target segments in line with our strategy.”

 

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.