• Daher : We aim to provide customers with simple and innovative services to enable a sustainable growth for the Bank.
• Challinor : This is the fourth consecutive year end since IFRS 9 was introduced where the Bank’s excess credit provisions exceeded KD 100 million.
• Aldousari : we expect a short-term downside in our margins, until interest rate hike materializes, then Margins will expand.

Kuwait, 20 February 2022: Gulf Bank held its investors webcast to review and discuss the Bank's financial performance for the year-end 2021 on Wednesday, February 16, 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.

Mr. Tony Daher commenced the webcast with key updates regarding Gulf Bank’s operating environment for the year-end 2021. Daher commented, “During the year 2021, we have seen a gradual improvement in the overall economic environment. We started last year with a surge in covid-19 cases and restrictions on travel and overall business environment, however, almost all restrictions were lifted towards the end of the year as the government vaccination efforts increased reaching about 80% of the population. This in turn allowed things to steadily go back to normal, which in turn, improved confidence, boosted consumer spending and growth prospects here in Kuwait.”

Stable Strategy

Mr. Daher Stated: “We continue to accomplish significant progress against our 2025 strategy of being the leading Kuwaiti Bank of the future. We aim to provide customers with simple and innovative services to enable a sustainable growth for the Bank.”

Digital Transformation

Mr. Daher commented “Gulf Bank have successfully launched its new MX.3 system in partnership with Murex for the development and automation of the Bank’s capital markets and treasury platforms. The platform implementation is a transformative step towards developing and automating our treasury and capital markets systems. In addition, this will help us unlock opportunities, navigate capital markets and better serve our customers.”

Sustainability Issuance

Mr. Daher also touched on the Bank’s first sustainability report, commenting: “We are proud of publishing our first official sustainability report for the year 2020. As a responsible Bank, we are committed towards our stakeholders, community, and the overall economy. We will continue to integrate ESG principles across the business strategies and the way we operate the Bank.”

Sound Financial Performance

Mr. Daher summarized Gulf Bank’s year-end 2021 results with six key messages:

1. Net profit grew by 46% for the year 2021, to reach KD 42 million in comparison to KD 29 million reported in 2020.
2. Earnings per share is up 40% to 14 fils and the Board of Directors is recommending a distribution of cash dividend of 7 fils per share, representing a 50% cash payout ratio, in addition to 5% bonus shares, for shareholders’ approval at the Annual General Meeting to be held in March 2022.
3. Gross customer loans reached another all-time high reaching KD 4.8 billion, an increase of KD 454 million or 10% compared to the end of 2020. This growth in 2021 came from both our Corporate and Consumer segments.
4. Asset quality remained resilient, as our non-performing loan ratio in 2021 stood at 0.9%, an improvement when compared to last year of 1.1%. Additionally, we have taken ample provisions and now have a coverage ratio of 615%.
5. Relaxed capital regulatory minimums that were introduced in 2020 remain in place until 31 December 2021, allowing the Bank to have additional buffers over the minimums. Our Tier 1 ratio has a buffer of 496 basis points and our capital adequacy ratio has a buffer of 522 basis points. These comfortable buffers have allowed the Bank to grow its businesses in line with its strategy.
6. Gulf Bank remains an ‘A’ rated bank by three 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.
  • Recently, Fitch Ratings has changed the Bank’s Long-term Issuer Default Rating to “A” from “A+” and revised the “Negative” outlook to Stable in February 2022.
  • In addition, S&P Global Ratings has changed the Bank Issuer Credit Rating to “BBB+” from “A-“and revised the “Negative outlook to “Stable” during 2021.

 

Both credit ratings downgrades of S&P Global Ratings and Fitch Ratings followed the downgrade of Kuwait Sovereign ratings by these credit rating agencies and is not related to Gulf Bank’s Viability position or credit quality.

Increasing Profitability

Gulf Bank’s CFO, David Challinor, discussed Gulf Bank’s year-end 2021 results in more detail. He noted three positive factors: “First, net interest income is up KD7.5 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 4.9 million, and third, the Bank’s total provisions reduced by 16.5 however, these positive drivers were partially offset by a 14.3 million increase in operating expenses.”

Mr. Challinor highlighted that the Return on Equity improved by nearly 2 percentage points over the same period.

On Operating income, Mr. Challinor commented: “Operating income grew by 7% to 170.1 compared to 158.3 in 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 4.9 or 16% driven by the resumption of economic activities.” He also added:” Operating expenses have increased by 14.3 or 22% year-on-year, however, they increased by 1% when compared to the third quarter. The year-on-year increase is predominantly driven by the continued investment in our digital transformation strategy and low operating expense base reported in 2020 due to the reduced economic activity and receiving of government subsidy.”

Mr. Challinor also pointed out that credit costs declined from 59 in 2020 to 43.9 in 2021, resulting in a year-to-date Cost of Risk of 95 basis points.

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 12 months, Gulf Bank’s total assets increased by 443 or 7% to reach 6.6 billion compared to 6.1 billion the year before. This was largely driven by a 528 or 12% increase in Net Loans. While, compared to third quarter, Net Loans grew 168 or 4% and total assets grew by 226, reflecting a pick-up in overall economic activity.”

He continued: “In terms of the major components of total asset, you can see that the mix is essentially unchanged from a year ago.”

As for Gulf Bank’s funding, Mr. 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 0.9% at the end of December 2021, down from 1.1% at same period of last year and its coverage ratio remains exceptionally strong reaching 615% at the end of December 2021.

Prudent Financial Management

Mr. Challinor also indicated that as of 31 December 2021, Gulf Bank’s Bank has 112 of excess provisions, representing 37% over and above total provisions. This is the fourth consecutive year end since IFRS 9 was introduced where the Bank’s excess credit provisions exceeded KD 100 million.

In addition, Gulf Bank’s Stage 1 loans are above 90% for both years, while Stage 2 and Stage 3 remained around similar levels in both periods, with Stage 2 reaching 6.2% for 2021, while for Stage 3 it was 1.0%.

As for Gulf Bank’s IFRS 9 ECL Stages composition, Mr. Challinor indicated that Stage 1 reached 22.1% as of 31 December 2021, moving from 23.8% a year ago, Stage 2 increased to move from 43.7% a year ago to 51.0% as of 31 December 2021 and Stage 3 reached 26.8% moving from 32.5% a year ago.

Mr. Challinor also highlighted that: “As of 31 December 2021, the IFRS 9 ECL coverage for total credit facilities was 0.6% for stage 1, stage 2 was 18.7% and stage 3 was 73.4%. However, our overall coverage is much higher since we have provisions of 112 over the IFRS 9 ECL requirement of 189."

On Gulf Bank’s capital, Mr. Challinor said: “Our Tier 1 ratio was 14.5%, which is above our current regulatory minimum of 9.5% and our pre-COVID-19 regulatory minimum of 12%. Our Capital Adequacy Ratio of 16.7% was well above our current regulatory minimum of 11.5% and our pre-COVID 19 regulatory minimum of 14%.”

He continued: “Our risk weighted assets grew by 5% mainly driven by year-on-year growth in the loan book.” He continued, “Our leverage ratio as at the end of 2021 reached 9.5%, which was lower than 9.9% 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 222% as of 31 December 2021, and Net Stable Funding Ratio also reached 107% for the same period. Both ratios are still well above their respective new minimums of 80% and pre-covid minimums of 100%.

As for the regulatory limits for the Liquidity and Capital Adequacy Ratios, during the fourth quarter of 2021 the Central Bank of Kuwait has communicated that it will gradually start withdrawing the relaxed regulatory limits for both ratios and restore them back to the pre-covid levels by beginning of 2023.

Q&A

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

Loan Growth

When asked about loan growth and expectations in 2022, Mr. Challinor commented: “loan growth was very strong in 2021 particularly in Q4 which was the highest growth quarter in the year. I was guiding high single digits earlier in the year and we came in at 10.4%. When you look at the split of growth between corporate and consumer it was fairly balanced but obviously corporate is a larger part of our book so in percentage terms, we saw consumer grow faster, just over 12%, which almost mirrored the market growth for the sector. In total, the market grew 6.6% and we grew 10.4%.” He continued: “Looking at the sector growth in the market, we saw consumer grow just over 13% and corporate just over 3%. And, in terms of how we were placed, we grew almost in line with the market in consumer but grew almost 3 times the market in corporate. So, in corporate we were successful in building back about half of the market share that we lost in 2020. When you look at where the growth came from in our corporate business. In terms of the loan book mix, we saw increases in the oil and gas, manufacturing and financial sectors and decreases in both real estate and construction. So together real estate and construction were 21.6% of gross loans in 2020 and now they have reduced to 19.6%. I think during 2021, the second deferral scheme, pent up demand and record low rates enhanced the system growth. Looking forward into 2022, I think growth will slow in the system, particularly in the retail sector, but again, the potential mortgage law could be a game changer, however the timing is uncertain.”

Asset Quality

Few questions were raised regarding the asset quality and the outlook of credit costs, Mr. Challinor commented:” I was really pleased with the performance of the portfolio this year. The credit costs came in at 44 million down from 59 million last year. And if you look at the cost of risk, we saw 110 points in the first half drop to 80 for the second. I said after the Q2 spike in credit costs that a normalized number is probably around 100 points, and we came in at 95 for the full year.” He continued: “We also saw the NPL% come down to under 1% for the first time. And when we look at write offs which were done in the year, they were 43 million. So even without any write offs the NPL% would have only been around 1.75% which is still very low and below our target of keeping under 2%. So, the underlying NPL generation was low and has slowed down from what we saw in 2020. When you look at 2020, we had 81 million in write offs. So even though our write off level has halved from one year to the next we still managed to get under 1%, which is a strong result. It’s worth mentioning that the accounts written off are treated the same in terms of the recovery effort and their legal status. I think in 2022 we’d like to see more recoveries as they were relatively flat from one year to the next. And I think we have the possibility of booking credit costs in 2022 at lower than the long-term normalized rate of 100 points.” Mr. Challinor also added: “In terms of the past due but not impaired category. Yes, we saw that move up 30 million and that was primarily in the retail space. But when you look at the 60-90 day bucket, in other words the pre-NPL stage, we only have 12 million in that this year versus 32 million last year. So, I’m relatively comfortable with that position coming into 2022.”

Outlook for NIMs

The last question during the discussion was related to the outlook for net interest margins and the impact on the bank of a 25bp rise, Mr. Challinor commented: “I’ve mentioned a few times in 2021 that I think the outlook for NIMs was going to be broadly stable. And that’s what we saw last year. Q2 and Q3 were both stable quarters at 209 points, and we only lost 1 basis point from Q3 to Q4. But what we are seeing is the expectation of rate rises is causing some upward pressure on rates and this is obviously feeding into our cost of funds. And that dynamic seemed to gather some pace in Q4, so I think to lose only 1 point from Q3 to Q4 was a very good outcome. I think for Q1 22, if this pressure continues, which I think it may do, we could lose more. So, I think some short-term downside is possible before any rate rises which will then kick off a new cycle of expanding NIMs.” He continued: “In terms of will the CBK follow the Fed? That’s not for me to speculate. But when you look at history, I think we can see that in most cases this has been what’s happened. And certainly, rate rises would be good for the banks’ earnings, and we are very well positioned. The corporate book will reprice immediately and all new retail loans also. In terms of the impact, which we disclose, for each 25bp rise the total impact to NII is around 3 million KD annually.”

Ms. Al-Dousari concluded the conference by thanking the participants and presented a guidance slide that summarizes some of the points that have been covered during the Q&A session:

1. For loan growth, our strategy is to grow faster than the market.
2. For our Margins, we expect a short-term downside, until interest rate hike materializes. Then Margins will expand.
3. Our cost to income ratio is expected to improve.
4. The cost of risk will likely be under the normalized level of 100 basis points.
5. And finally, non-performing loans ratio is expected to remain under 2%.

Ms. Al-Dousari also invited analysts to visit the Investor Relations page of Gulf Bank's website for any further inquiries.