• Gulf Bank started the year positively, with an increase of 39% in its first quarter net profit compared to the same period last year
• Gulf Bank is continuously enhancing security levels to elevate its customer security and increase competitiveness among leading banks

 

Kuwait, 05 May 2021: Gulf Bank held a virtual analyst conference call to review and discuss the Bank's financial performance during the first quarter of the year 2021 on Tuesday, May 4, 2021. The conference call was attended 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 virtual analyst call with key updates regarding Gulf Bank’s operating environment during the first quarter of the year 2021. Daher commented, “We started the year with a new surge in Covid-19 cases and, unfortunately, daily fatalities. This has led healthcare officials and the government to increase precautionary measures to control the situation from further deterioration. A partial curfew and further restrictions on businesses were imposed, in addition to the closure of Kuwait Airport to foreign travelers since February. Despite the continuous challenges that we are still facing as a result of the pandemic, Gulf Bank started the year 2021 positively, with an increase of 39% in our first quarter’s net profit compared to the same period last year. We managed to grow our business in both the corporate and consumer segments, and the quality of our portfolio continues to be resilient as our credit cost remains low.”

 

A New Strategy

 

Daher also announced Gulf Bank’s new five-year strategy, which will focus on:

• Promoting growth in the corporate banking segment by increasing product offerings and focusing on small and medium-sized enterprises;
• Increasing the Bank’s market share in the retail banking sector, and targeting youth and affluent client segments; and
• Developing the Bank’s digital banking platforms to increase competitiveness in the banking industry

 

Digital Transformation

 

Daher also indicated that Gulf Bank is digitally transforming most of its major activities in a way that increases efficiency, enhances the Bank’s performance, and strengthens its corporate governance. The Bank anticipates that its diligent technological enhancements will facilitate daily operations for both its customers and the Bank and is continuously enhancing security levels to elevate Gulf Bank’s customer protection and increase competitiveness among leading banks.

 

Solid Financial Performance

 

Daher summarized Gulf Bank’s first-quarter results for 2021 with five key messages:

1. Net profit grew by 39% during the first quarter of 2021 and reached KD 12 million, in comparison to KD 8.6 million reported during the first quarter of 2020.
2. Reported operating income reached KD 41.5 million during the first quarter of 2021, growing by 8% compared to the first quarter of 2020. This growth was driven primarily by a significant decline in the cost of funds that exceeded the decline in interest income.
3. Asset quality remained resilient, as Gulf Bank’s non-performing loan ratio in the first quarter of 2021 stood at 1.5%, with no change from last year’s ratio. In addition, the Bank has ample provisions with a coverage ratio of 419%.
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 485 basis points (14.3% vs. 9.5%) and its capital adequacy ratio (CAR) has a buffer of 621 basis points (17.7% vs. 11.5%). With these comfortable buffers in place, Gulf Bank has obtained the Central Bank of Kuwait’s approval to exercise the call option for the redemption of the KD 100 million subordinated tier 2 bonds that mature by the end of May, as well as the issuance of new tier 2 compliant bonds at a maximum of KD 50 million. The Bank has also recently obtained the Capital Markets Authority’s approval for the issuance of these bonds with an objective to support the Bank's capital adequacy ratios as per CBK Basel III regulations.
5. Gulf Bank maintained its ‘A’ ratings from the four 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.
  • S&P Global Ratings maintained the Bank Issuer Credit Rating at “A-” with a “Negative” outlook.
  • Capital Intelligence maintained Gulf Bank’s Long-term Foreign Currency Rating of “A+” with a “Stable” outlook.

 

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

 

Increasing Profitability

 

Gulf Bank’s CFO, David Challinor, discussed Gulf Bank’s Q1 results of 2021 in more detail, noting that interest income is down KD 12.8 million, or 22%, mainly due to a re-pricing of assets and booking new loans at lower rates after the Central Bank of Kuwait lowered its discount rate by 125 basis points in March 2020.

 

Challinor highlighted that liquidity conditions remained favorable, with fixed deposits continuing to re-price at lower rates. As a result, interest expenses continued to decline on a quarterly basis starting during the first quarter of 2020. The interest expense declined by KD 16.5 million (or 57%) from an initial KD 29.1 million during the first quarter of 2020 to KD 12.6 million during the first quarter of 2021.

 

Operating income grew by 8% to KD 41.5 million compared to KD 38.3 million during the first quarter of 2020 as a result of the decline in interest expense, which outpaced the decline in interest income.

 

Operating expenses have increased by KD 1.7 million or 9% 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 marginally increased from KD 7.3 million during the first quarter of 2020 to KD 8.3 million during the first quarter of 2021. Gulf Bank also managed to reduce its credit costs significantly each successive quarter, with credit costs declining from a peak of KD 21 million in Q2 2020, to KD 16.6 million in Q3 2020, to KD 14 million in Q4-2020, and finally to the current level of KD 8.3 million in Q1 2021.

 

A Strong Financial Position

 

Challinor also presented Gulf Bank’s balance sheet, indicating how individual line items have moved from the 31st of March 2020 to the 31st of March 2021. Challinor also presented the Bank’s mix of assets and highlighted its changes over the last 12 months. He said: “Over the course of the last 12 months, Gulf Bank’s total assets shrank by KD 161 million or 3% to KD 6.3 billion compared to KD 6.4 billion the year before. This was largely driven by a KD 77 million or 5% decline in Liquid Assets, and a KD 57 million or 1% decline in Net Loans. However, on a year-to-date basis, Net Loans grew by KD 103 million or 2% and total assets grew by KD 159 million or 3%, reflecting a pick-up in overall economic activity. 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 1.5% at the end of March 2021, and its coverage ratio exceeded 400% to reach 419% at the end of March 2021.

 

Prudent Financial Management

 

Challinor also indicated that as of 31 March 2021, Gulf Bank’s total provisions reached KD 293 million with IFRS 9 ECL requirements at KD 197 million, allowing the Bank KD 96 million in excess provisions, representing 33% of total provisions.

 

As of 31 March 2021, Gulf Bank’s total provisions of KD 293 million are divided into two sections: ‘provisions on cash facilities’ which reached KD 276 million, and ‘provisions on non-cash facilities’ which reached KD 17 million and are included in ‘other liabilities’ on Gulf Bank’s balance sheet.

 

In addition, Gulf Bank’s loan stages are fairly stable with Stage 1 loans moving from 90.6% as of 31 March 2020 to 92.5% for 31 March 2021, while Stage 2 loans moved from 7.9% to 5.9% and Stage 3 remained the same at 1.6% for both periods.

 

As for Gulf Bank’s IFRS 9 ECL Stages composition, Challinor indicated that Stage 1 reached 21% as of 31 March 2021, moving from 17% a year ago. Stage 2 is in a declining trend, moving from 51% a year ago to 40% in the most recent quarter, and Stage 3 reached 40%, moving from 33% a year ago.

 

Challinor also highlighted that, as of 31 March 2021, the IFRS 9 ECL coverage for gross loans and contingent liabilities and commitments was: 0.6% for Stage 1, 19.5% for Stage 2, and 85% for Stage 3. Overall coverage, however, is much higher since the Bank has provisions of KD 96 million over the IFRS 9 ECL requirement of KD 197 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%, 485 basis points above our current regulatory minimum of 9.5%, and 235 basis points above our pre-Covid-19 regulatory minimum of 12%. Our Capital Adequacy Ratio of 17.7% was 621 basis points above our current regulatory minimum of 11.5% and 371 basis points above our pre-Covid-19 regulatory minimums of 14%.”

 

He continued: “Our risk weighted assets fell by nearly 4% mainly due to the reduction in gross customer loans driven by the corporate book and the sale of approximately KD 106.8 million of our treasury shares since March 2020 which has contributed favorably to both capital ratios. On the bottom right, our leverage ratio as of 31 March 2021 reached 9.4%, which was higher than the 8.6% ratio for the same period last year, and well above the 3% regulatory minimum.”

 

Regarding the Bank’s key liquidity ratios, average daily Liquidity Coverage Ratio reached 278% as of March 31, 2021, and Net Stable Funding Ratio also reached 110% 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%.

 

Commenting on the Bank’s credit ratings, Challinor said: “Gulf Bank maintained its ‘A’ ratings from the four major credit rating agencies. However, three of the outlooks have changed in comparison to the last 12 months, primarily due to sovereign ratings and outlook downgrades rather than bank-specific creditworthiness.”

 

Q&A

 

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

 

On a question related to Gulf Bank’s Net Interest Margin, Challinor commented: “Net Interest Margin has remained broadly stable at around 2.1% for the past 4 quarters. We saw an improving trend in Net Interest Income over the same period due to a continued reduction in the cost of funds that outpaced the reductions in interest income. This decline in the cost of funds was primarily due to the repricing of our liabilities, a continuation of lower regulatory liquidity requirements and a stabilization in the level of CASA. Going forward, we see some pressure on the asset yields.”

 

When asked about the Bank’s loan growth drivers, he continued: “In 2020, we saw that the loan book reduced by 3% for the full year, driven by the corporate segment. However, we returned to positive loan growth in Q1, growing by almost 3%. This growth was driven by both consumer and corporate segments. Going forward, we will look to increase market share in our targeted markets in line with our strategy.”

 

Answering another question regarding the expected normalized run rate for operating expenses during the upcoming quarters in 2021 and whether the government grants towards staff expenses will continue in Q1 2021, Challinor commented: “Let me start with the staff subsidy. The staff expense grant from the government ended in Q4 of 2020. At this stage we don’t have any visibility as to whether it will recommence.”

 

He continued, “Regarding operating expense, as we all know, 2020 was an exceptional year, as we have faced an economic slowdown and we have also received staff subsidy from the government both of which have contributed towards lowering our operating expenses. Moving on to Q1 2021, operating expenses in Q1 were impacted by the annual staff performance cycle and certain lumpy expenses. Having said that, we are seeing a slight pickup in economic activities, and we will continue investing in certain cost categories to grow our business segments and digital transformation journey in line with our strategy.”

 

When asked: “Were the increases and movements between loan stages driven by the corporate or consumer segment? And did Gulf Bank need to book additional ECL allowances for that?” Challinor answered, “As of Q1 2021, the CBK requested all banks to disclose gross loan stages in order to provide a higher degree of transparency.”

 

He continued, “We can see that Stage 1 has increased from 90.6% in Q1 2020 to 92.5% in Q1 2021 which is positive. Stage 2 also shows a positive trend, reducing from 7.9% in Q1 2020 to 5.9% in Q1 2021. Stage 3 has ticked up slightly from 1.5% to 1.6%, year on year, and this was primarily driven by the consumer segment after the ending of the moratorium. However, the overall Stage 3 remains low, well-covered, and below the banking system average.”

 

To answer a question on Gulf Bank’s new NPL formation, Challinor said, “The new NPL formation in Q1 was primarily driven by the consumer segment as a result of the ending of the deferral program at the end of September 2020. However, we saw this formation slow down during the quarter, and for Kuwaiti customers there will be another 6-month deferral program that has been approved by the parliament and is currently underway. On the corporate side, the majority of the increase we saw in the ‘past due but not impaired’ category at year end has now shifted back to the ‘neither past due or impaired’ category, which is positive news.”

 

In response to another inquiry related to the new 6 months loan installment deferral program, Daher responded, “The key difference between the two deferral programs is that during the first one, the Bank took the cost through the modification loss. This time, however, the government will bear the cost, although the precise mechanism of how this compensation will work has not been disclosed at this stage. Also, the second scheme is available to Kuwaitis only. So overall, we think this is a positive development for the consumer segment and it will also have the benefit of building up the Bank’s CASA balances.”

 

To answer another question regarding home financing and the potential mortgage law in Kuwait, Daher responded: “The existing subsidized structure to finance housing by Kuwait Credit Bank has worked historically. However, it is becoming more challenging to meet growing demand for residential housing, with the limited supply of land causing a long waiting list and appreciation in the home prices in Kuwait.”

 

He continued: “The new law, if passed, would allow local banks to provide eligible locals with the loan that would have been originally provided by the Kuwait Credit Bank whilst the government will compensate the banks for the interest service. The execution will be done through the banks as well to ensure a faster process. As for a mortgage law, this is still in preliminary stages with no updates so far. So overall, we believe that any development on consumer real estate lending would be a good step in the right direction towards encouraging home financing and home ownership in Kuwait.”

 

The last question of the discussion touched on the duration of the reduced minimums for CAR, LCR, and NSFR. Daher commented, “They are in place until the end of June as per the Central Bank of Kuwait’s communication with the banking sector in Kuwait. However, we think that it will probably be extended until the end of year given that the pandemic has not yet been resolved.”

 

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.