Daher:

• During the third quarter, we maintained solid growth across the Bank’s activities, with a strategic focus on digitization to support the needs and requirements of our customers.
• The successful execution of our strategy is demonstrated by the strong financial position and robust loan growth, with our net customer loans reaching KD 5 billion and our total assets crossing KD 7 billion.
• Kuwait’s economy continued to show resilience and positive signals, despite overall challenging global market and an uncertain economic outlook globally.

Challinor:

• Gulf Bank delivered market share gains every single quarter this year which is very pleasing given this is core to the Bank’s strategy.
• For our Credit Risk, we have no real concerns and are very pleased with the way the portfolio continues to perform.
• We are continuing with our digital transformation journey and human capital investment but believe there are cost efficiencies to be extracted once transformation is complete.

Gulf Bank held its investors webcast to present and discuss the Bank's financial performance for Q3-2022 on Thursday, October 26, 2022. 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.

Operating Environment

Mr. Tony Daher commenced the webcast with key updates regarding Gulf Bank’s operating environment for Q3-2022. Daher stated, “We continue our positive momentum for the year 2022. I am pleased to report that Gulf Bank has achieved a net profit of KD 45.7 million for the first nine months of 2022, an increase of 66% over the same period of last year. During the third quarter, we maintained solid growth across the Bank’s activities, with a strategic focus on digitization to support the needs and requirements of our customers. The successful execution of our strategy is demonstrated by the strong financial position and robust loan growth, with our net customer loans reaching KD 5 billion and our total assets crossing KD 7 billion.” Said Daher.

Daher added: “Kuwait’s economy continued to show resilience and positive signals, despite overall challenging global market and an uncertain economic outlook globally. These challenges include high inflation, tighter monetary policy, and the war in Ukraine, amongst others. However, the local economic stability is supported by good oil prices, recovery of economic activity specifically in the private sector, and ongoing structural reforms.”

Macroeconomic Front

On the latest development regarding the local macroeconomics, Mr. Daher commented: “The Central Bank of Kuwait has continued to tighten monetary policy, albeit at a relatively slower pace compared to the US Fed. Since the beginning of the year, the Central Bank of Kuwait has raised its key discount rate 6 times, 25 basis points each, bringing the discount rate to its pre-covid level at 3%. The slower rate hike policy adopted by Central Bank of Kuwait in comparison to US Fed, is providing additional support for the local economy.” He continued: “Despite the interest rate hikes, the consumer spending remained strong in Kuwait, reflected in the year-to-date customer loan growth of around 7% according to the latest industry data published by the Central Bank of Kuwait.”

Political Development

Mr. Daher also touched on the domestic political front, commenting: “The elections of a new parliament were concluded on 29th of September, and a new government was formed on the 18th of October. We are hopeful to see cooperation between the government and the parliament on major reforms and legislations in favor of Kuwait’s development aspirations.”

Kuwait-focused Strategy

On the latest developments regarding Kuwait-focus strategy. Mr. Daher commented: “On the Bank front, we are reaping the benefit of our Kuwait-focused strategy, and we are proactively meeting the changing needs of our customers through digital innovation and solutions. We continue to conduct several initiatives to provide our employees and community with a new skillset and opportunities specifically in the field of data science and cyber solutions, with the aim to help future generations achieve local development goals, strengthen the economy, and contribute to our community.” Daher added.

Solid Financial Performance

Mr. Daher summarized Gulf Bank’s Q3-2022 results with six key messages:

• Net profit grew by 66% for the first nine months of 2022, to reach KD 45.7 million in comparison to KD 27.5 million in 2021.
• Return on average equity increased to reach 9.0% for first nine months of 2022 from 5.7 % at same period last year.
• Gross customer loans reached KD 5.3 billion, an increase of KD 562 million or 12% compared to the first nine months of 2021. This growth was supported by both our Corporate and Consumer segments although at a faster pace from the latter.
• The quality of our portfolio continued to be resilient as our non-performing loan ratio (NPL) in third quarter 2022 stood at 1.2%, an improvement when compared to last year’s (NPL) of 1.3%. Additionally, we continue to have ample provisions achieving an NPL coverage ratio of 450% including total provisions and collaterals.
• Relaxed capital regulatory minimums that were introduced in 2020 were partially restored in January 2022 and will remain at current levels for the remainder of the year. With that, our Tier 1 ratio has a buffer of 247 basis points, and our capital adequacy ratio has a buffer of 263 basis points.
• Gulf Bank remains an ‘A’ rated bank by major credit rating agencies. Our current position stands as follows:
  • Moody’s Investors Service maintained the Long-Term Deposits Rating of “A3” with a “Stable” outlook.
  • Capital Intelligence affirmed the Bank’s Long-Term Foreign Currency Rating of “A+” with a “Stable” outlook.
  • Fitch Ratings has upgraded the Viability Rating of the Bank from ‘bb+’ to ‘bbb-‘during the year and affirmed the Bank’s Long-Term Issuer Default Rating at “A” with a “Stable” outlook.

Increasing Profitability

Gulf Bank’s CFO, David Challinor, discussed Gulf Bank’s third quarter 2022 results in details: “We can see the movement of net profit from 27.5 to 45.7. The increase of 18.2 in the first nine months was mainly driven by the decline of 16.1 in total provisions. The Cost of Risk was only 43 basis points compared to 104 last year which shows the overall improvement in the quality of our book. We also saw higher net-interest income of 4.5 supported by loan book growth and impact of recent rate hikes, as well as higher non-interest income of 2.2”

Mr. Challinor highlighted that the Return on Equity improved by nearly 3.3 percentage points over the same period.

On the breakdown of the income statement, Mr. Challinor commented: “Interest income was up 28.2 or 20% for the first nine months 2022 in comparison to the same period of last year. We saw a significant jump of 28% in interest income from Q2 to Q3 reflecting the 3 rate rises from the CBK in the quarter.” He continued: “Our interest expense increased by 23.7 or 60%. The cost of funds is rising faster than increases in asset yields but despite this we were still able to generate an expansion in net interest income which grew 12% from Q2 to Q3 and 5% year to date versus last year.” He also Added: “Operating income increased by 6.8 or 5%. This was mainly due to the increase in net-interest income of 5% and non-interest income of 8%, mainly driven by fees and foreign exchange income. Operating expenses have increased by 3.8 or 6% year-on-year. The cost to income ratio fell for the second consecutive quarter in 2022 and stands at 46% for Q3. We are continuing with our digital transformation journey and human capital investment but believe there are cost efficiencies to be extracted once transformation is complete.”

Mr. Challinor also pointed out that credit costs declined from 35.3 in first nine months of 2021 to 16.1 in 2022. And the cost of risk was 43 basis points in the first nine months of 2022, declining from 104 basis points for the same period last year.

Gulf Bank’s Financial Position

Mr. 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 year, our total assets increased by 726 or 11% to reach 7.1 billion. This was largely driven by a 601 or 13% increase in Net Loans, reflecting a pick-up in economic activity in comparison to last year.” He continued: “Loans and Advances to customers grew 12% year on year and 423 million year to date or 9% which is the strongest loan growth the bank has experienced in recent history.”

On Customer deposits, Mr. Challinor stated: “Customer Deposits grew 8% year on year to reach 4.5 billion.”

On medium term borrowing, Mr. Challinor stated: “We have increased our medium term borrowing from banks by 114% year on year which improves our overall duration.

Improved Assets Quality

On assets quality, Mr. Challinor stated: “Our non-performing loan ratio was 1.2% at the end of September 2022, down from 1.3% for the same period last year. Our coverage ratio remains exceptionally strong reaching 450% at the end of September 2022.”

Mr. Challinor also indicated that as of 30 September 2022, Gulf Bank has 109 of excess provisions, representing 35% of total provisions.

In addition, Gulf Bank’s Stage 1 loans increased to 93.7% while Stage 2 declined to 5.0% and Stage 3 also declined to 1.3%.

And on the evolution of Stage 2 and 3 loans percentages over the past 5 quarters, Mr. Challinor highlighted: “We can see that both our Stage 2 and stage 3 remain very low and stable.”

Regulatory Capital

On Gulf Bank’s capital, Mr. Challinor said: “Our Tier 1 ratio was 13.0%, which is well above our current regulatory minimum of 10.5%. Our Capital Adequacy Ratio of 15.1% was well above our current regulatory minimum of 12.5%.”

Mr. Challinor also indicated that as of 30 September 2022, the Bank’s risk weighted assets grew by 11%, mainly driven by year-on-year growth in the loan book.

In addition, Gulf Bank’s leverage ratio as of 30 September 2022 was 8.7%, which was lower than 9.4% for the same period of last year, but well above the 3% regulatory minimum.

Regarding the liquidity ratios, Mr. Challinor stated: " You can see our Liquidity Coverage Ratio was 220%, and Net Stable Funding Ratio was 104% as of 30 September 2022. It’s worth noting that both ratios are still well above their respective current minimums of 90% and pre-covid minimums of 100%.”

Q&A

Following the management presentation of Gulf Bank’s performance for the third quarter of 2022, the call was open for participants questions. Ms. Dalal AlDousari, head of Investor Relations at Gulf Bank, moderated the Q&A session.

Net Interest Margins

The Q&A session started with a question on the key drivers for NIM’s movement and if there is any pressure going forward. Mr. Challinor responded: “I said in the Q2 call we should expect an expansion in margin in Q3 and that’s what we saw. The Q2 margin was 201bp and this expanded to 213bp in Q3 which was pleasing. But we are seeing a lot of upward pressure on cost of funds, particularly at the longer tenors. In effect, liabilities have priced by more than assets. We’ve also seen a fall in our CASA percentage, which has contributed to the pressure, but such falls are to be expected in a sharply rising rate environment. However, in terms of absolute levels of CASA we are flat to where we were a year ago. Going forward, our view is potentially 2 more 25bp hikes for the remainder of the year.”

Loan Growth

A question was raised on loan growth and the driving factors for outperforming the system, Mr. Challinor commented: “We saw a 2% loan growth, which was almost 100m, in Q3. So, this brings the year-to-date growth to 9%. The system, to the end of August, was 7%. The guidance we gave at the start of the year was that we would outperform the system, and so far, we’ve achieved this.” Mr. Challinor added: “Retail continues to grow very strongly. And most of our growth in Q3 came from retail. We grew about 80 million in Q3 which was 4%. So far retail has grown nearly 13% year to date versus a system number of 7% to the end of August. So almost double the system. And we’ve delivered market share gains every single quarter this year which is very pleasing given this is core to our strategy. So, we’d be looking to continue this sort of momentum into Q4, but we’re cognizant that the market remains very competitive and there are signs that at the total system level things are starting to slow down. So, if we look from the end of May to the end of August the total system grew just 1%. So, the rapid growth we saw in the earlier part of the year has dissipated. This makes sense given the higher cost of borrowing. The CBK discount rate is now at 3% which is double where it was at the start of the year.”

Cost of Risk

A question was raised regarding the sustainability of the current levels of Cost of Risk are. Mr. Challinor commented: “Credit costs were 8 million for the quarter which brings them to 16 million year to date. This translates to a 43 bp cost of risk versus last year which was 104bp. We have no real concerns and are very pleased with the way the portfolio continues to perform. I think credit costs should stay low for a while, but from quarter to quarter we can see some variability. So, whilst the second half will be higher than the first, as I said on the Q2 call, there won’t be any cause for concern, and we will continue to remain well below the normalized number of 100bp.” He continued: “But obviously in a sharply rising rate environment some stresses will inevitably surface but we think we’re well positioned to manage these given the current shape of the balance sheet, which is excellent. We look at stage 2 formation very closely and that’s continuing to remain very low at 5%. It was 5.6% a year ago. The system average is closer to double digit. And then when you look at coverage, its exceptionally strong. We’re at 450%. NPLs’ have continued to remain very low and stable. We are at 1.2%, which was in line with the number a year ago, and well below the 2% ceiling we gave for the guidance at the beginning of the year. So, all the metrics continue to trend very well.”

Operating Expense

The last question raised was regarding guidance on operating expenses and digital transformation. Mr. Challinor commented: “Total operating expenses were up 6% year on year, but they remained flat from Q2 to Q3. And because we saw an increase in operating income (which was largely margin driven), we saw the Cost to Income ratio fall from 49% to 46%. This is still above where we want to be, but we have made a significant investment in our staff, and we are still on our transformation journey.” He also added: “There’s also been exceptional growth in our retail business, and this has a variable cost element. I think there will be opportunities to reset the cost base once the digital transformation is complete later next year and we start seeing the return on the investment.”

Ms. Al-Dousari concluded the Webcast by thanking the participants and invited investors and analysts to visit the Investor Relations page of Gulf Bank's website for any further inquiries.