• Daher : Going forward, we hope to see more positive impacts on the overall economy in Kuwait with the improvement in business activities, ongoing recovery of government spending.
• Challinor : Customer loan growth for Q1 was flat year to date, however, consumer loans, grew strongly by 3% for the quarter, in line with our pace of growth last year.
• Aldousari : We expect the cost of risk to be under the normalized level of 100 basis points while NPL ratio is expected to remain under 2%.

Kuwait, 10 May 2022: Gulf Bank held its investors webcast to review and discuss the Bank's financial performance for Q1-2022 on Monday, May 9, 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 Q1-2022. Daher stated, “We started the year 2022 positively, with an increase of 26% in our first quarter net profit compared to the same period of last year. During the quarter, the Central Bank of Kuwait raised the discount rate by 25 basis points to 1.75% from its historically low level of 1.5%. The interest rate hike will have a positive impact on the topline, however we have also seen some pressure on the cost of funds building up gradually prior to the actual hike in anticipation of future hikes. Having said that, we do not see the increase in interest rates affecting consumer spending in Kuwait significantly. This was reflected in the good performance of the Bank’s retail portfolio as it continued with the upward trajectory momentum. Going forward, given the high level of oil prices, we hope to see more positive impacts on the overall economy in Kuwait with the improvement in business activities, ongoing recovery of government spending and in the same time inflation staying somewhat under control.” Said Daher.

Digital Transformation

On the latest development regarding the digital transformation journey Mr. Daher commented: “We continue achieving notable milestones of our digital transformation strategy. We are happy to announce that we have successfully launched our new mobile application that provides fast, easy and safe customer experience. In addition, launched phase I of our upgraded contact center in the end of 2021 including the call center and the IVR, we aim to move forward with completing Phase II of the upgrade during this year.”

Sustainability

Mr. Daher also touched on the Bank’s sustainability reporting, commenting: “We are expanding on our commitment to drive sustainable growth and will continue to integrate ESG principles across the business and operations of the Bank. I am looking forward to publishing our second Sustainability report this year and start measuring ourselves against the targets that we have set.”

Sound Financial Performance

Mr. Daher summarized Gulf Bank’s Q1-2022 results with six key messages:

• Return on average equity increased to reach 9.2% for first quarter 2022 from 7.6% at same period last year.
• Gross customer loans reached KD 4.8 billion, an increase of KD 335 million or 7% compared to the first quarter 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 first quarter 2022 stood at 1.0%, an improvement when compared to last year (NPL) of 1.5%. Additionally, we continue to have ample provisions achieving an NPL coverage ratio of 548%.
• Relaxed capital regulatory minimums that were introduced in 2020 were partially restored starting from first of January 2022 and will remain for the remainder of the year. With that, our Tier 1 ratio has a buffer of 358 basis points, and our capital adequacy ratio has a buffer of 384 basis points. These comfortable buffers have allowed the Bank to continue its growth trajectory and supporting the needs of its customers in line with its strategy.
• 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 maintained the Bank’s Long-term Foreign Currency Rating of “A+” with a “Stable” outlook.
  • Recently, Fitch Ratings has upgraded the Viability Rating of the Bank from ‘bb+’ to ‘bbb-‘ and affirmed the Bank’s Long-term Issuer Default Rating at “A” with a “Stable” outlook.
  • S&P Global Ratings has maintained the Bank Issuer Credit Rating at “BBB+” with a “Stable” outlook.

 

Increasing Profitability

Gulf Bank’s CFO, David Challinor, discussed Gulf Bank’s Q1-2022 results in details. He noted three positive factors: “First, we had a higher non-interest income of 0.4 as a result of the resumption of economic activities in comparison to a very restrictive environment in first quarter of 2021. Second, managing expenses efficiently without hindering our transformation program allowed us to lower our operating expense by 0.7, and third, our total provisions reduced by 2.6.”

Mr. Challinor highlighted that the Return on Equity improved by nearly 1.6 percentage points over the same period.

On the breakdown of the income statement, Mr. Challinor commented: “Operating income remained flat reaching 41.5 in first quarter 2022, this was due to the decline in net interest income that was almost set off by an increase in non-interest income. The non-interest income improvement is mainly driven by an increase in the fees and foreign exchange income of 0.3 or 4%, due to the full resumption of economic activities.” He also added: “Operating expenses have declined by 0.7 or 3% year-on-year, with Cost to Income Ratio of 47.7%. We continue to invest in our digital transformation strategy and attracting new and seasoned professionals, while advancing our human capital.”

Mr. Challinor also pointed out that credit costs declined from 8.3 in first quarter 2021 to 5.1 in 2022.

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, our total assets increased by 221 or 4% to reach 6.5 billion compared to 6.3 billion the year before. This was largely driven by a 440 or 10% increase in Net Loans, reflecting a pick-up in overall economic activity in comparison to the prior period. While, compared to the yearend 2021, Net Loans were almost flat as a result of settlements in corporate book, despite the continued growth in the consumer segment.”

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.

Improved Assets Quality

On assets quality, Mr. Challinor stated: “The Bank’s non-performing loan ratio also was 1% at the end of March 2022, down from 1.5% for the same period last year and its coverage ratio remains exceptionally strong reaching 548% at the end of March 2022.”

Mr. Challinor also indicated that as of 31 March 2022, Gulf Bank has 116 of excess provisions, representing 39% of total provisions. This was as a result of a decline in the IFRS 9 ECL by 17 to 180 as of 31 March 2022 in comparison to 197 at the same period of last year.

In addition, Gulf Bank’s Stage 1 loans are above 90% for both periods, while Stage 2 declined from 5.9% to 4.5% as of 31 March 2022 and Stage 3 declined from 1.6% to 1.0%.

As for Gulf Bank’s IFRS 9 ECL Stages composition, Mr. Challinor indicated that Stage 1 increased to 22.9%, from 20.5% a year ago, Stage 2 increased from 39.7% a year ago to 47.0% as of 31 March 2022 and Stage 3 reached 30.1% improved from 39.8% a year ago.

And on IFRS 9 ECL coverage for total credit facilities Mr. Challinor highlighted: “Our overall coverage is much higher since we have provisions of 116 over the IFRS 9 ECL requirement of 180.”

Regulatory Capital

On Gulf Bank’s capital, Mr. Challinor said: “our Tier 1 ratio was 14.1%, which is well above our current regulatory minimum of 10.5% and our pre-COVID-19 regulatory minimum of 12%. Our Capital Adequacy Ratio of 16.3% was well above our current regulatory minimum of 12.5% and our pre-COVID 19 regulatory minimum of 14%.”

Also, during the fourth quarter of 2021 the Central Bank of Kuwait communicated that it will gradually start withdrawing the relaxed regulatory limits for the Liquidity Ratios and Capital Adequacy Ratio 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 Q1-2022, 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 the pipeline for 2022, Mr. Challinor commented:” If we look at the customer loan growth for Q1 we can see it was flat year to date. However, what we saw was strong growth in the consumer book that was offset by a contraction on the corporate side.” He continued: “In terms of consumer, we saw a 3% growth for the quarter which was very strong and in line with our pace of growth we saw last year. When you compare our growth to the system, as per the CBK data, we saw to the end of February a 1.2% growth. So, we’re trending ahead of the market in the consumer segment and would expect this to continue.” Mr. Challinor also added: “With corporate, there were some major settlements, one of which was deferred from fourth quarter, and these caused the book to contract despite doing some fresh deals in the quarter. Most of those accounts were sitting in stage 2, so the good news is these settlements were a positive for our overall asset quality. Having said that, we’ve seen that the system growth in corporate was exceptionally strong for the first 2 months, and we have a healthy pipeline of deals and are expecting to return to growth in the second quarter.”

Trend on NIM’s

The Q&A session started with a question on net interest margin trends and cost of funds. Mr. Challinor commented: “As I said on the yearend 2021 investor call, we expected a margin drop in Q1 and that’s what we saw. The cost of funds rose during the quarter as expectations of future rate rises fed through. And also, we saw top line yield pressure as the market continues to be very competitive, particularly on the retail side, where we are seeing some very tight pricing dynamics play out.” He continued: “In terms of the rate rise, yes that had some positive impact, but as you know it came late in the quarter, so we won’t see the full impact of this one until Q2.”

Credit Cost

Another question was related to the decrease of credit cost and the future expectations. Mr. Challinor responded: “Credit costs were very low and translated to only a 43 basis-point cost of risk. To put that in perspective we had 95 for the full year 2021, and 131 for the year before, so everything is moving in the right direction. I think from quarter to quarter we can see some variability, but the overall trend is that we are confident we could remain below the normalized level of 1% for the remainder of this year.” He continued: “Looking at NPLs. The percentage remained broadly stable at 1% at the end of Q1, and we’ve seen a reduction in the percentage of accounts in stage 2, its only 4.5% now, which is very low when you compared to other banks in the system. So, all the asset quality indicators are very positive, which is why we think 2022 will be a sub-normalized cost of risk year.” Mr. Challinor concluded: “In terms of recoveries, we did have some solid recoveries in the quarter, but in terms of P&L presentation these were reduced by write-offs we took on settlements.”

Repricing of Retail Book

On the retail book side, a question was raised during the discussion about what percentage of retail book would reprice within 3 to 6 months, Mr. Challinor commented: “When you look at the rate movements in the repricing on the corporate side it reprices straight away. On the retail side, we would be repricing all the new business and also any loan on the book that was greater than 5 years old.”

Investment Subsidiary

On the latest announcement made regarding the Central Bank of Kuwait approval for Gulf Bank to establish and investment subsidiary, Mr. Daher commented: Sure. During the 2021 AGM, Gulf Bank obtained the approval of the shareholders to add to its activities the ability to be an investment advisor and practice all advisory services in accordance with the laws and regulations of the Central Bank of Kuwait and the Capital Markets Authority the CMA. Subsequently, the Bank obtain the CBK approval to establish the fully owned investment subsidiary. Now, we are in the process of obtaining the CMA approval, and then will proceed with the rest of the establishment procedures.”

Mr. Daher added: “So, the investment subsidiary activities will be focused on asset management and advisory services, both will be complementary activities to the Bank, where it will enhance customer offerings predominantly towards the private banking clients and the corporate segment. We believe this complementary business will improve the fees and commission income overtime for the Bank. However, it’s still early in the process and will initially have no material impact on the Bank’s financials.”

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:

• For loan growth, our strategy is to grow faster than the market.
• For our Margins, we expect a short-term downside, until interest rate hike fully materializes. Then Margins will expand.
• Our cost to income ratio is expected to improve.
• The cost of risk will likely be under the normalized level of 100 basis points.
• 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.