• Waleed Khaled Mandani:
  • Despite the Challenging start of the year 2023 with the world economic uncertainty, political tensions and tight monetary policies, the Kuwaiti economic environment remained stable.
  • Our loan book is performing well, and it remains the core driver of the Bank’s growth. This growth is supported by low cost of risk, robust asset quality and comfortable capital position.
  • During the first quarter of 2023, Gulf Bank had partnered with KAMCO Invest, as a lead manager, in the issuance of United Real Estate Company’s KD 80 million bonds. This was the largest Kuwaiti Dinar denominated bond issuance within the real estate sector.

• David Challinor:
  • The low level of cost of risk was a result of exceptional quality of our loan book that continues to remain resilient in a higher rate environment.
  • The significant tightening and refinement of our credit policy during COVID and beyond has placed the Bank in a very strong position in this higher rate environment.
  • We continue to optimize the cost and revenue base in order to help drive meaningful improvements in operating profits.

Gulf Bank held its investors webcast on Tuesday, May 02, 2023, to present and discuss the Bank's financial performance for Q1-2023. The webcast was organized by EFG Hermes and presented by Waleed Khaled Mandani, Deputy and Acting 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. Waleed Khaled Mandani commenced the webcast with key updates regarding Gulf Bank’s operating environment for Q1-2023. Mandani stated, “During the first Quarter of this year, the Central Bank of Kuwait has raised the discount rate by another 50 basis points, bringing the discount rate to 4%, which is higher than the pre-covid level of 3%. This most recent move and previous rate actions by the Central Bank of Kuwait were not in tandem with the US Fed interest rate hikes, indicating the independence and resilience of the Kuwait economy, supported by its stable and strong fundamentals. This plays out well with Gulf Bank’s Kuwait-focused strategy and is evident from our first quarter results for 2023. We have demonstrated excellent progress in our strategy to drive growth and maintain good asset quality.”

Mandani added: “We have demonstrated excellent progress in our strategy to drive growth and maintain good asset quality. Our loan book is performing well, and it remains the core driver of the Bank’s growth. This growth is supported by low cost of risk, robust asset quality and comfortable capital position.”

It is also worth noting that during the first quarter of 2023, Gulf Bank had partnered with KAMCO Invest, as a lead manager, in the issuance of United Real Estate Company’s KD 80 million bonds. This was the largest Kuwaiti Dinar denominated bond issuance within the real estate sector.

Solid Financial Performance

Mr. Mandani summarized Gulf Bank’s Q1-2023 results with six key messages:

• Net profit grew by 15% for the first quarter of 2023, to reach KD 17.3 million in comparison to KD 15 million reported in the first quarter of 2022.
• Return on average equity increased to 9.9% for the first quarter of 2023 up from 9.2% at the same period last year.
• Gross customer loans reached KD 5.1 billion, an increase of KD 286 million or 6% compared to the first quarter of 2022. This growth was mainly supported by our Consumer segment.
• The quality of our loan book remains resilient, as our non-performing loan ratio (NPL) for the first quarter of 2023 is at 0.8%, together with a strong NPL coverage ratio of 692% including total provisions and collaterals.
• The relaxed capital regulatory minimums that were introduced in 2020 are now completely restored to their pre-covid levels starting from first of January 2023. With that, at the end of the first quarter of 2023, our Tier 1 ratio had a buffer of 187 basis points, and our capital adequacy ratio had a buffer of 207 basis points. These buffers have allowed the Bank to grow its businesses in line with its strategy.
• 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 affirmed the Bank’s Long-Term Issuer Default Rating at “A” with a “Stable” outlook, with Viability Rating of ‘bbb-‘.

Increasing Profitability

Gulf Bank’s CFO, Mr. David Challinor, discussed Gulf Bank’s Q1-2023 results in details by saying: “Net profit grew from 15.0 to 17.3. The increase of 2.3 was mainly driven by an increase of 2.6 in net interest income which was driven by strong loan growth from last year coupled with the impact of the rate hikes. Also, higher non-interest income of 2.3 due to improved fee and dividend. This was offset by an increase in our operating expenses of 1.6 and total provisions and impairments of 0.9.”

Mr. Challinor highlighted on the Return on Equity and said: “Return on Equity improved by 0.7% to reach 9.9%. It’s also worth noting that Q1 2023 represented the 7th consecutive quarter of profit expansion.”

Gulf Bank’s Financial Position

Mr. Challinor also explained Gulf Bank’s financial position. He presented the Bank’s mix of assets and highlighted its changes over the last 12 months by saying: “Our total assets increased by 328 or 5% to reach 6.8 billion. This was largely driven by a 257 or 5% increase in Net Loans.” He continued: “Loans and Advances to customers grew by a 286 or 6% year on year, supported by both our Corporate and Consumer segments although at a much faster pace from the Consumer segment as we recorded very strong growth of 12% year on year.”

On Customer deposits, Mr. Challinor stated: “Customer Deposits declined by 2% year on year to reach 4.2 billion. We saw our CASA ratio decline to 35.3% in first quarter of 2023 versus 41% of last year, however, remains stable in comparison to December 2022. The decline is due to migration to term deposits due to the higher rate environment.”

On medium-term borrowing, Mr. Challinor said: “We have increased our medium-term borrowings by 120% year on year which resulted in further diversification of our funding profile and improvement in overall duration.”

Regulatory Capital

On Gulf Bank’s capital, Mr. Challinor said: “Our Tier 1 ratio was 13.9%, which is above our regulatory minimum of 12%. Our Capital Adequacy Ratio of 16.1% is well above our regulatory minimum of 14%.”

Mr. Challinor also indicated that as of 31 March 2023, the Bank’s risk weighted assets grew by 6%, mainly driven by year-on-year growth in the loan book.

On the Bank’s leverage ratio, Mr. Challinor said: “Our leverage ratio as of 31 March 2023 was 9.3%, which is at similar levels to same period of last year, and well above the 3% regulatory minimum.”

Regarding the liquidity ratios, Mr. Challinor stated: " Our quarterly average daily Liquidity Coverage Ratio, which was 279%, and the Net Stable Funding Ratio was 109%. It’s worth noting that both ratios are still well above regulatory minimums of 100%.” He also added: “Also, the previous relaxed regulatory minimums for the Liquidity Ratios and Capital Adequacy Ratio have now been completely restored back to the pre-covid levels at the start of Q1 2023.”

Q&A

Following the management presentation of Gulf Bank’s performance for Q1-2023, the call was open for participants questions. Ms. Dalal AlDousari, head of Investor Relations at Gulf Bank, moderated the Q&A session.

Margins

The Q&A session started with a question about margins and if there is any pressure to increasing funding cost and CASA Mr. Challinor responded: “The NIM’s was pressured in Q1, and we saw a drop on a consecutive quarterly basis, even though year on year its increased. In Q1, all the various regulatory liquidity ratios were reinstated to their pre-Covid levels. So, for example, the Loan to Deposit ratio, which was at 95% for the full year 2022, was lowered to the pre-Covid maximum of 90%. This caused upward pressure on the cost of deposits, particularly at the one-year tenure, as banks in market offered very attractive rates to customers to move to the new regulatory ratios” Mr. Challinor added: “The good news is we did see the monthly growth in interest expense slow during the quarter so our view would be we are potentially getting close to a top in the cost of funds, at current discount rate levels. There hasn’t been a CBK discount rate increase since January, so it remains to be seen whether there will be more increases in 2023. We have our retail book continuing to reprice for loans moving past the 5-year tenure so that will act to increase the overall asset yield of the portfolio and support margin expansion. Also, our CASA levels have remained stable this quarter at 35%.” He also added: “I think, as I said on the Q4 2022 call, we should expect to see some level of margin expansion in 2023 but the exact quantum and specific timing across quarters is very difficult to say in this environment.”

Loan Book Growth

A question was raised regarding the loan book growth and whether to expect the pace of growth to slow down with the rate hikes Mr. Challinor commented: “I think it’s useful to discuss the retail and corporate books separately.” Mr. Challinor added: “On the retail side, we grew our book by 0.8% in Q1 against a system that showed zero growth. Clearly the higher rate environment is curtailing growth in the market. But our strategy remains, which is to grow faster than the market in retail, which we did in 2022, and we are continuing this trend into 2023. So, our outlook is that we expect to continue to outperform the market in retail, albeit at a lower headline pace than what we saw in 2022 due to a slowing market.” He also Added: “On the corporate side, we saw limited drawdowns from existing customers, and given where rates are at, some customers paid down existing debt. I’ve said before the strategy with corporate is one of optimization, so we’re looking to improve the overall return on the book including generating more fee income which we did in the quarter.”

Improved Asset Quality

A question was raised regarding credit cost and asset quality and the driver of the improvement and if there is any pressure on provisions. Mr. Challinor commented: “In Q1 we took total specific provision of KD14.2m and had strong recoveries of KD7m which resulted in a net credit cost of KD7.2m. This translates into a cost of risk of 56 basis points. So, the net credit costs continue to be very low and the trend from 2022, where we saw a full year 50 basis point cost of risk, is continued.” Mr. Challinor continued: “Now, in terms of the Specific Provision of KD14.2m about half related to provisioning requirements in respect of the ageing of existing NPL’s. The other half related to additional conservative measures we decided to take given the uncertainty of the higher rate environment. So specifically, we fully provided all impaired retail loans that were currently in the 50% provision bucket and wrote them off from an accounting perspective. But clearly any collections on these in the future will be booked as recoveries. And we also increased coverage on a corporate loan. So, the important point is the KD14.2m in Q1 is not indicative of what I would see as the future run rate for the quarterly specific provision, as half of it related to what I believe were one-off conservative measures.” He also continued: “When we look at how the loan book is currently performing, the good news is, despite the higher rate environment, the quality of the loan portfolio continues to remain very resilient. Not only are all the asset quality metrics in excellent shape, but the underlying NPL generation in Q1 was only KD6m, which on a portfolio of KD5.2bn of customer loans, and given where rates now are, is an exceptional great result. In fact, this level of quarterly NPL generation is lower than any time in at least the last 3 years and is half the average quarterly generation for the 2022 year. Also, the stage 2 percentage also continues to be very low at only 4.8%. And our buffer over IFRS 9 provisioning requirements of KD139m or 46% is now the highest it’s ever been since the introduction of IFRS 9.”

Operating Expense

A question was raised regarding cost to income ratio trend. Mr. Challinor commented: “Operating expenses were up 8% year on year, but they were down 8% from Q4 2022. In fact, the Q1 23 number of KD21.4m is lower than what we saw in Q2 22.” He continued: “The cost to income ratio is currently at 46%. Which is down from the fourth quarter 2022 level of 47.8%. We’re likely to have less volume related costs in 2023 but we still have the transformation ongoing. I’ve said before, following the completion of the transformation we will look to extract cost and efficiency benefits. Having said that, we continue to optimize the cost and revenue base in order to help drive meaningful improvements in operating profits.”

Business Collaboration

A question was raised on the latest update on proposed business collaboration with ABK. Mr. Mandani commented: “The most recent disclosures Gulf Bank made in relation to the potential collaboration between Gulf Bank and ABK was on November 23, 2022. The disclosure stated that Gulf Bank obtained the approval of the Central Bank of Kuwait regarding the engagement of McKinsey & Company as the Bank's consultant to carry out the feasibility study.” He added: “We will disclose any future material information in this regard as and when it becomes available.”