National Bank of Kuwait K P : Transcript of the Analysts Conference

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1Q 2024 National Bank of Kuwait Earnings Call

Sunday, 28 April 2024

Edited transcript of National Bank of Kuwait earnings conference call that took place on Thursday, 25 April 2024 at 3:00 pm Kuwait time.

Corporate participants:

Mr. Isam Al-Sager - Vice-Chairman and Group CEO, NBK

Mr. Sujit Ronghe - Group CFO, NBK

Mr. Amir Hanna - Head of Investor Relations and Communications, NBK

Chairperson:

Elena Sanchez - EFG Hermes

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In the GCC region, growth for the year is forecasted to remain solid on the back of higher energy prices that will support public finances and boost domestic demand, while the execution of public economic diversification programs and strong capital inflows should further support the outlook.

As for Kuwait, the economy ended the quarter on a relatively soft note. In terms of historical trends, credit growth stood low while real estate activity weakened. Inflation has also eased and is trending lower on the back of cooling private demand. We expect GDP growth to witness a low-single-digit contraction on the back of oil production cuts and at a growth rate of around 2.5% in the non-oil sector.

Likewise, project activity declined significantly following an improved 2023. This could be partly explained by seasonal effects in addition to the unexpected downturn in domestic politics in the absence of a parliament. The project awards outlook for the remainder of 2024 should be better with a pipeline of KD 6.3 billion worth of projects to be awarded.

As for NBK, we continue recording solid performance and building on past years' momentum as we advance in executing our diverse strategy and leveraging our flexible business model throughout the challenging macroeconomic landscape. We reported net profits of KD 146.6 million in the first quarter of the year, growing by 9.2%.

Driven mainly by growth in core banking income, our revenue stream stems from a diverse operational mix that proved successful in mitigating risks and optimizing performance. We achieved a growth of 11.2% year on year in net operating income to reach KD 309 million.

Our success is underscored by the strategic investments that are aimed at achieving sustainable growth, enhancing customer experience, and creating long-term value to shareholders which is evident in our performance measures. Our return on average assets for the reporting period reached 1.55% whereas our return on average equity reached 15.2%.

The ongoing investments by the Group in innovation and technology will support our ability to meet the evolving needs and expectations of our clients. By such, we will further strengthen our leading franchise across all business sectors and continue to build on our trust-based relationship with stakeholders.

Our approach in Kuwait remains centered on strengthening our market position in key segments, growing our clientele through digital products, and providing exceptional customer service. From a corporate banking standpoint, we continue to lead Kuwait's infrastructure program and are well-positioned for any revival of infrastructure spend.

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Furthermore, our Islamic banking arm, Boubyan Bank, along with our international operations both continue to expand their contribution to the Group aiding in our diversification strategy.

Also, and notably in wealth management, we will endorse our position and brand presence through a global network of operations with the launch of NBK Wealth. We will further solidify our value proposition in providing innovative solutions and services towards a best-in-class wealth management experience.

Similarly, as a frontrunner in the ESG space, we will continue to play a role in fostering the sustainable advancement in the communities where we operate and in being a key partner in the sustainable financing endeavors of our clients.

With that, I will conclude my comments and leave you with my colleague Sujit Ronghe, our Group CFO, to cover quarterly results in more details.

Please go ahead Sujit.

Hello everyone and welcome.

I am very pleased for the opportunity to take you through the financial results in respect of the opening quarter of 2024.

We have announced a net profit of KD146.6m for 1Q24, a 9.2% increase over the corresponding quarter of 2023. These results stem from a strong operating performance by the Group and demonstrate the continued growth in our business.

Before going on to details of our financial results, I would first like to say a few words regarding the overall operating environment during the current quarter.

The continued higher interest rate regime and an overall stable operating environment in Kuwait have benefitted the Bank in general. Inflationary conditions in the USA and some other advanced economies have gradually improved, although bench-mark interest rates are generally expected to decrease only in the later quarters of the year. At the same time, geo-political developments in the region and beyond have affected the global operating environment unfavorably.

Now turning to the financial results for 1Q24.

As shown at the top left of this slide, net profit at KD146.6m reflects a yoy growth of KD12.4m i.e. 9.2%. Underlying drivers for the robust bottom-line performance are a combination of yoy growth in business volumes, higher interest rates, and a stronger operating performance. Group loans and advances grew by 5.7% year on year. Investment securities also contributed strongly to Group assets with a growth of 15.6% v March 23.

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The top right chart reflects operating surplus i.e. profit before provisions and tax for the current quarter at KD197.5m, a growth of KD21.1m, +12% over 1Q23. Net operating income increased by KD31.1m, +11.2% whilst operating expenses grew by KD10m, +9.9% over last year.

1Q24 net profit at KD146.6m, +13.2% over the previous quarter, benefited from a 5.8% growth in operating surplus and lower impairment losses.

The operating income mix profiled at the bottom right hand continues to show a healthy mix with 23% coming from non-interest income sources.

I will go into the main drivers behind movements in income, margins and costs shortly.

Moving on now to the next slide.

We now will look at net interest income and drivers behind its performance.

The chart at top left reflects the net interest income of KD238.1m for 1Q24, a growth of 12.4% over the first quarter of 2023. NII largely benefited from higher interest rates and growth in loans and investment securities across geographies and segments. You would also note from the chart at the top right that Average earning assets grew by KD1.6bn i.e. 4.5% from March 23, to reach KD36.2bn.

We see from the chart at the bottom left, that average NIM for 1Q24 at 2.64% reflects an improvement of 16bps over 1Q23 driven by a higher yield, despite increased funding cost. Group yield and funding cost for the current quarter was 6.25% and 4.07% respectively. The higher funding cost results from the repricing of deposits at increased market rates, a limited migration of lower cost deposits to time deposits and longer tenor funding sourced by the Group. At the same time, an overall sticky and stable base of retail customer deposits continues to benefit the Group.

At the bottom right of this slide, we can see drivers behind the 16bps yoy increase in NIM from 2.48% in 1Q23 to 2.64% in 1Q24. Loans and other interest earning assets backed by a strong year on year growth in volumes and interest rates, contributed a net increase of 79bps and 17bps to the NIM respectively. Higher funding cost negatively affected the NIM by 80bps.

Moving on now to the next slide.

As we can see at the top left of this slide, total non-interest income at KD70.9m for 1Q24 was KD4.7m higher than the comparable period in 2023. Fees and commissions income was strong at KD53.2m; reflecting robust contributions across different lines of business and geographies. Fx contributed KD10.2m benefiting from higher transaction volumes and favorable currency movements. Other non-interest income sources (mainly investment income) contributed KD7.4m, benefiting from improved valuations.

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Our fees and commissions income are from a well-diversified pool of geographies and lines of business. Also, major sources of non-interest income are core banking activities in respect of business-related factors.

Turning now to operating expenses reflected in the top right-hand of this slide.

Total operating expenses for 1Q24 at KD111.5m, were 9.9% higher than 1Q23. The cost growth reflects increased activity levels at Kuwait and across the Group's network as well as investments in key businesses initiatives, digital technologies, and processes. This enables the Group to offer best-in-class service to its customers and optimize resources to improve operational efficiency.

NBK's digital channels and products continue to play a vital role in attracting and servicing customers, with increased volume of electronic transactions. We also continue to press ahead with selective product offerings in certain geographies e.g. through our global wealth management business known as NBK Wealth, Islamic banking through Boubyan Bank and by leveraging our overseas network.

As a result of the marked growth in operating income and controlled cost growth, the 1Q24 cost to income ratio was at 36.1% compared to 36.5%, one year ago.

Moving on to provisions and impairments profiled on the bottom right-hand side of the slide.

Total credit provisions and impairment losses for 1Q24 amounted to KD25.5m, a decrease of KD2.6m over 1Q23. KD25.3m of the current quarter's charge was for provisions for credit facilities whereas the remainder related to other impairment losses and ECL. Specific provision of KD22.7m was in course of normal business activities at Kuwait and overseas locations, whereas KD2.5m was towards general provisions. The Group remains committed to its conservative approach in managing credit exposures.

The cost of risk for 1Q24 was 44bps compared to 53bps in 1Q23.

It is worth noting that the Group's Balance Sheet remains strong with a stable credit quality. NBK's capital base along with the ability to generate healthy operating profits provides a strong credit loss-absorption capacity.

Moving now to the next slide.

On this slide, I would like to expand on the matter of earnings diversification of the

Group through different lines of business.

NBK Group continues to benefit from its unique position amongst Kuwaiti banks in terms of geographical spread through International Banking and the ability to conduct business in both Conventional and Islamic Banking.

We recently enhanced the segmental analysis information (note 9 in 1Q24 financial statement) to reflect Consumer Banking results separately. Similarly, NBK Wealth,

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being an area of key focus, is disclosed as a separate business segment. NBK Wealth provides asset management, brokerage, lending, deposits and other customized and innovative offerings to high-net-worth individuals and institutional clients, further advancing the Group's diversification agenda.

You would note that NBK's Consumer Banking contributed 20% and 17% to the Group's net operating income and profit respectively. Similarly, Corporate Banking contributed 13% and 21% to the Group's net operating income and profit.

International Banking contributed 24% to net operating income and 21% to the

Group's profit, reflecting a strong operating performance.

The Group's Islamic banking subsidiary Boubyan Bank delivered a net profit of KD25m, up 21.2% on 1Q23 boosted by a strong growth of 15.2% in operating surplus and lower provisions for credit losses.

NBK Wealth contributed to 9% and 11% of the Group operating income and profit respectively.

NBK's business segments serve as main pillars of diversification, providing a strong competitive advantage and a significant degree of resilience to Group earnings.

Finally, chart at the bottom right corner, you will note that International Banking and Boubyan Bank contributed 41% and 23% respectively to Group's total assets enforcing the diversification agenda of the Group.

Moving to the next slide.

Here we will look at some of the movements in key volumes during the period.

As profiled on the chart at top left, the Group total assets reached KD38.3bn as of March 24, a 5.1% increase over March 2023. The recent devaluation of EGP has adversely affected the KD value of balance sheet items and resulted in lower growth percentages, especially for 1Q24.

Group loans and advances at KD22.4bn registered a growth of KD1.2bn i.e. 5.7% from March 23 and 0.5% during the current quarter. Loan growth was achieved at Kuwait in both conventional and Islamic sectors and at International operations. Similarly, investment securities reflected a yoy growth of 15.6%, to reach KD6.9bn.

Customer Deposits, i.e. non-bank and non-FI deposits at KD22.3bn, reflect a strong yoy growth of 9%. The Group has continued to benefit from its strong base of core, franchise retail deposits. As can be expected in a rising interest rate scenario, we noted a limited migration from lower cost deposits to time deposits during the period.

NBK's stable deposit base reflects a sustained focus on the deposit gathering aspects of our business, leveraging our longstanding ability to capitalize on the Group's strong brand, customer appeal and credit ratings.

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Customer deposits comprise a healthy 69% of total funding mix of the Group.

I want to highlight that the Group continues to maintain healthy liquidity levels & comfortably exceeds the minimum requirements of Basel III ratios.

Moving now to the next slide.

We will now look at the impact 1Q24 financial results had on certain key performance metrics.

The Return on Average Equity for the current quarter improved to 15.2%. Similarly,

Return on Average Assets now stands at 1.55% compared to 1.50% in 1Q23.

At 17.2%, total capital adequacy ratio remained strong and stable, well above the regulatory minimum. CET1 and Tier1 ratios at 12.9% and 14.9% respectively, remained stable similar to Dec 23 levels.

As regards asset quality, NPL ratio stands at 1.51% compared to 1.38% as at Dec 23.

Loan loss coverage ratio is at 248%, reflecting conservative provisioning policy of the

Group.

Moving to the next slide.

On this slide, I would like to discuss Expected Credit Losses (ECL) on credit facilities as per 'IFRS 9 calculated in accordance with CBK Guidelines'. As per the regime adopted by CBK, Banks calculate the credit provisions required (i.e. the amount in the balance sheet) as per CBK instructions and compare it with the ECL on credit facilities as per 'IFRS 9 in accordance with CBK guidelines'. Consequently, the charge to income statement is based on the higher of the two balance-sheet amounts.

It is important to note here that CBK guidelines for calculating ECL on credit facilities as per IFRS 9 are on a more conservative basis compared to the original accounting standard.

The key chart on this slide at the bottom right reflects that ECL provision required as of March 24 was KD597m, slightly lower than Dec 23 levels.

Although IFRS 9 ECL and CBK provisions are two different regimes and should not be compared as such, as of March 24, the balance sheet provision as per CBK instructions exceeds the ECL by KD315m. This provides ample cushion for the Group to withstand any possible adverse effect of prevailing uncertainties on ECL provision requirements.

Now to the final slide in this section.

Before concluding, allow me to summarize our financial performance in 1Q24.

As mentioned earlier, a strong operating performance combined with a healthy balance sheet, comfortable liquidity levels and a strong capital base were features of NBK's 1Q24 results.

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