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Edited Transcript of NBK.KW earnings conference call or presentation 17-Oct-19 12:00pm GMT

Q3 2019 National Bank of Kuwait SAKP Earnings Call

Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of National Bank of Kuwait SAKP earnings conference call or presentation Thursday, October 17, 2019 at 12:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Amir Hanna

National Bank of Kuwait S.A.K.P. - Head of IR

* Jim Murphy

National Bank of Kuwait S.A.K.P. - Group CFO

* Elena Sanchez-Cabezudo

EFG Hermes Holding S.A.E., Research Division - MD & Head of Financials Equity Research




Operator [1]


Good day, and welcome to the National Bank of Kuwait Investor Presentation Third Quarter 2019 Earning Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Elena Sanchez. Please go ahead, madam.


Elena Sanchez-Cabezudo, EFG Hermes Holding S.A.E., Research Division - MD & Head of Financials Equity Research [2]


Thank you. Good afternoon, and good morning, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to National Bank of Kuwait's Q3 2019 Results Call and Webcast. The call will be attended by Jim Murphy, Group CFO; and Amir Hanna, Head of Investor Relations and Corporate Communications.

I would like to hand over the call now to Amir Hanna. Thank you.


Amir Hanna, National Bank of Kuwait S.A.K.P. - Head of IR [3]


Thank you, Elena. Good afternoon, everyone. We're glad to have you with us today on our third quarter 2019 earnings webcast. Before we start, I would like to bring to your attention that certain comments in this presentation may constitute forward-looking statements. These comments reflect the bank's expectations and are subject to change, and risks and uncertainties that may cause actual results to differ materially and may adversely affect the outcome and financial effects of the plans described herein. You are cautioned not to rely on such forward-looking statements. The bank does not assume any obligation to update its views of such risks and uncertainties or to publicly announce the results of any revisions to these forward-looking statements made herein.

Also, I would like to refer you to the full disclaimer in our presentation for today's call. After concluding our presentation, we will start addressing all your questions, but feel free to type them in at any time during the call. You can also send any follow-up questions to our Investor Relations e-mail address. Finally, and for your convenience, today's presentation is already available on our Investor Relations website.

Now let me hand over the call to Jim -- to Mr. Jim Murphy, our group CFO, to run you through the third quarter and the 9 months results in detail. Jim?


Jim Murphy, National Bank of Kuwait S.A.K.P. - Group CFO [4]


Thank you, Amir. Hello, everyone, and welcome. I'm very pleased to have this opportunity to take you through our results in respect of the 9 months period ending September 2019. We have announced a profit of KWD 302.2 million for the full 9 months to September 2019. This is a 10.9% increase in bottom-line profit over the comparable period last year. The profit for quarter 3 of this year was KWD 93.1 million. This compares with a quarter 2 profit of KWD 101.4 million, a decrease of 8.2%. Profit for the current quarter was, however, 7.6% ahead of the corresponding quarter last year.

Before going into the details behind our results, I would first, however, like to say a few words as to the overall operating environment so far this year. Conditions have remained broadly favorable. That said, whilst good business opportunities were to be had, competition has been strong and keenness in pricing is the feature of the market. However, overall, the general trend is encouraging, and the current period demonstrates positive momentum.

Progress continues as regards implementation of the government's multiyear development plan. Although the pace of project awards has been below expectation so far this year, we nonetheless remain of the view that this is a matter of time shifting to future periods. The implication for the banking sector remains, therefore, that the direct financing and the cascade or ripple through effect associated with the execution of the plan will continue to offer solid business opportunities going forward.

Returning now to the operating performance and financial results for the period. Solid growth in levels of business activity was had at our Kuwait and at our international operating units and across the multiple lines of business. We saw continued strong growth at our Islamic banking subsidiary, Boubyan Bank. Boubyan Bank delivered 12.2% year-on-year increase in profits to KWD 45.2 million for the opening 9 months of the year. Our international businesses continue to perform strongly. We will see later in this presentation the materiality and the importance of our fuller diversification agenda when looking at the contributions to total group earnings made by the various banking footprints enjoyed by the group.

The group's operating surplus, that is the pre-provision pretax earnings, was KWD 451 million, a 1.9% reduction on last year. Income growth during the period was 1.7%, whilst growth in cost was 9.8%. The 10.9% growth in profit, therefore, was driven essentially by a lowered cost of risk with loan provisions totaling KWD 101.3 million as compared to KWD 136.9 million last year.

As regards quarterly performance, the operating surplus for the third quarter of this year was KWD 144.9 million. This was lower than Q2 '19's operating surplus, primarily due to lower noninterest income and higher cost. The KWD 144.9 million Q3 '19 operating surplus compares to a higher KWD 152.6 million operating surplus in Q3 '18. These lower numbers were due to subdued period-on-period income growth and higher costs.

As regards operating income, the operating income for the first 9 months of this year was KWD 672.8 million. This compares to KWD 661.8 million in September 2018, a 1.7% increase. The drivers behind the year-on-year growth in operating income were net interest income, fee income, FX income and other noninterest income sources. The operating income in respect of the September '19 quarter was KWD 220.9 million. This is down on the KWD 226.3 million reported in Q2 '19, but 0.6% ahead of the comparable quarter last year. I will go into the main drivers behind the movement in income margins and costs in our later charts.

The operating income mix is profiled at the bottom right hand side of this first slide. 77% of total operating income is in respect of net interest income and 23% from other -- sorry, from other -- from noninterest income sources. This compares with a mix of 78% and 22% last year.

Moving to Chart #2. Here, we will look at net interest income and the growth drivers behind its performance. Net interest income of KWD 517 million in the 9 months to September 2019 compares to KWD 515 million in 2018. Whilst net interest income benefited from strong growth in loan and investment volumes, the outcome, however, was adversely impacted by attrition in the net interest income margin -- net interest margin.

Net interest income for the September '19 quarter at KWD 172.6 million was in line with the preceding quarter put down on Q3 '18. Interest-earning assets averaged KWD 26.7 billion in the opening 9 months of this year. This is a year-on-year increase of 4.6%. The growth in interest-earning assets essentially reflected strong growth in the lending and investment portfolios, the details of which we will look at shortly.

We experienced, however, a contraction in our net interest margin vis-à-vis last year. This was in part due to the timing effect on our book in respect of the increase in the local discount rate that occurred in Q1 2018. Our margins typically boost relatively quickly in a rising interest rate cycle due to the repricing characteristics of our book whilst awaiting the light impact on funding cost to take effect.

If you look at the bottom left hand side of this chart, you will see that the net interest margin during the 9 months averaged 2.59%. This compares to an average margin of 2.7% in the September '18, 9 months. The group's funding cost averaged 2.15% during the opening 9 months of this year as compared to 1.64% in the comparable period last year.

The group's yield averaged 4.5% in the period. This compared to a yield of 4.17% last year. On the bottom right hand side of this slide, you will see the constituent drivers that moved the average NIM downwards by 11 basis points, from 2.7% in September '18, 9-month period, to 2.59% this year.

The NIM was impacted favorably by 33 basis points due to the combined movements attaching to loans and other assets whilst the higher cost of deposits impacted the NIM to the extent of 44 basis points.

Now moving to Chart 3. I will speak here about the group's noninterest income. Total noninterest income in the 9 months to September 2019 was KWD 155.8 million. This is 6.1% ahead of the comparable period last year. The composition of the KWD 155.8 million total noninterest income is KWD 116.8 million in respect to fees and commissions, KWD 31 million in respect to foreign exchange activities, and a net KWD 7.9 million from other noninterest income sources.

Fees and commission income was 2.1% ahead of this time last year. Total noninterest income for the September '19 quarter was KWD 48.3 million. This was down on Q2 '19, primarily due to lower fee and commissions income, noting that Q2 '19 was a particularly strong quarter, and due to the negative valuation movements impacting on the investment and trading income line.

Total noninterest income is, however, 16.7% ahead of quarter 3 last year. I would like to mention here that the sources of fees and commission income remain well spread across our various business lines and geographies. Business lines including lending, credit cards, trade finance, asset management and brokerage continued to produce strong fee income on the back of very solid operating performances. As always, the bulk of our noninterest income comes from what we consider as core banking activities. The group's noninterest income is sourced primarily from fees and commissions and from foreign exchange activities. Earnings in respect of trading and investment income remains very small at just 1% of total income.

Turning now to operating expenses. Total operating expenses in the 9 months to September 2019 was KWD 221.8 million. This is 9.8% ahead of last year. There are a number of factors at play explaining the increase in costs, and I would like to take time to elaborate on some of these. One such reason is the selective additional investment into a number of our businesses and geographies. We commenced new wealth management operations in Saudi Arabia at the end of last year, and we also embarked upon a modest enlargement of our commercial banking footprint in that country. In addition, we continued to press ahead for expansion of our Islamic banking operations at Boubyan Bank and at our operations at NBK Egypt.

During the year, we also incurred Brexit-related costs on [further] converting our former branch in France into a full subsidiary of the group as it means a safeguarding business continuity post-Brexit. Some of these costs were once-off whilst others will endure, given the no-change status of our presence in that country. In addition to driving forward with the normal business of the bank, we, of course, remain committed to maintaining appropriate and additional investment into those areas of operation that drive long-term and sustained value to the group.

We continued our ongoing program of investment into IT and advancing the group's digital banking agenda. The global banking model is facing significant challenges, not least from digital disruption from established industry players, but also from the rapidly evolving fintech sector. We must respond appropriately to these challenges and such responses require elevated levels of investment.

In this regard, NBK invests heavily in: One, selectively developing and deploying the latest business enabling technology solutions; two, in refreshing its IT platform and infrastructures; and three, to ensuring first-class cybersecurity resilience and capabilities. We remain focused on directing investment equally towards technologies that serve to improve the banking services that customers experience and also into technologies that improve the long-term efficiency and effectiveness of our back-office operations. In this regard, we are investing heavily into robotic process automation focused on improving efficiency and customer service levels and in time expect to see some cost-saving opportunities emerge.

We recently reinforced the bank's executive bandwidth by way of onboarding a number of additional senior technology personnel. With this comes the commitment to ramping up the associated investment into additional manpower resources and the related IT expenditures. And whilst on the subject of IT, I can advise that we have commissioned the group's new modular data center in Kuwait City. The data center is state-of-the-art, complete with a full Tier 3 certification.

Staying on the subject of costs, a new accounting standard took effect on January 1 this year, IFRS 16. The standard impacts on the accounting treatment for leases. This new standard requires an entity to recognize leases on balance sheet at amounts that recognize or value the right-of-use to an asset for the term of each lease together with the associated liability in respect of future lease payments.

The salient part of the standard as regards to its impact on our financial -- on our income statement is the recognition of the depreciation and interest expense associated with the relevant stock of leases in lieu of rental expenses being included in our administrative expenses. The substantive impact has been an increase in depreciation and a reduction in other administrative expenses of approximately KWD 6.9 million, essentially, therefore, a reclassification between expense categories.

So to conclude, on the subject of costs, I can say that whilst our cost-to-income ratio of 33% has trended slightly upwards of late in response to the various cost and investment programs that add long-term health and resilience to the group, we remain satisfied with what is still a very low ratio by international industry standards.

Moving on to provisions and impairments. Total provisions and impairments in the opening 9 months of this year amounted to KWD 104.7 million. This compares to a total charge of KWD 145.4 million last year. Note that KWD 8.5 million of last year's charge was in respect of impairment losses, reinvestments and associates primarily held through our subsidiaries. The relevant charge for the September '19 quarter was KWD 37.5 million. This compares to a charge of KWD 35.7 million in Q2 '19 and to KWD 51.5 million in Q3 '18.

Further provisions in the 9 months to September '19, therefore, amounted to 22.5% of the group's operating surplus, significantly below last year's level. This is naturally a very welcome development.

I will take this opportunity for me to remind you that the Central Bank of Kuwait had earlier determined that the provisioning regime applicable to banks in Kuwait is such that the provision for losses on credit facilities be determined as the higher of expected credit losses under IFRS 9 as per the CBK guidelines and provisions as computed in accordance with CBK rules and instructions.

After that have prevailed, we therefore computed an ECL charge in respect of noncredit financial assets only, the income statement impact of which was immaterial.

Moving now to Chart #4. I would like to return to the matter of earnings diversification at the group. NBK is unique amongst Kuwaiti banks in terms of its geographical spread of operations and also because of its ability to conduct business in both conventional banking and Islamic banking. This diversification gives a significant degree of resilience to our group earnings and provides what we consider a strong competitive advantage to the group. As mentioned earlier, we established a new CMA-regulated wealth management company in KSA late last year and opened 2 additional commercial banking branches in that country. This is significant as it gives NBK a presence and enhanced reach in 3 cities, Jeddah, Riyadh and Al-Khobar.

We have also recently reinforced our private banking capabilities by creating an overarching group-level private banking structure that is tasked to grow and coordinate our private banking businesses across our international network. And as mentioned earlier, the group has not escaped the headaches in costs associated with Brexit. In order to best protect our business presence in Europe, we converted our operation in France into a fully fledged subsidiary of the group from its earlier status as a branch of our U.K. subsidiary, NBK International London.

Returning now to the chart. The purpose of this chart is to demonstrate the impact of our diversification agenda on the group's financial results. Looking firstly at diversification by geography. The operating income at our international operations at KWD 164.4 million grew by 5.8% as compared to the prior year. Profit contribution from our international operations, however, was 3.3% below last year's corresponding number. A large part of disconnect is due to the increased investments and associated costs into our international businesses, as already mentioned.

You will see from the pie chart at the top right hand side that the contribution to group operating income from our international operations was 24%, slightly up on the 23% of last year. The contribution to group profits, however, in respect of our international operations reduced to 28% from 32% last year, essentially due to the falling cost of risk at Kuwait.

NBK is currently present in 14 countries outside of Kuwait, including, of course, in Egypt. NBK Egypt increased its number of branches in the period from 48 to 50. The group's Islamic banking subsidiary, Boubyan Bank, continues to perform strongly and delivered profits of KWD 45.2 million in the opening 9 months of this year. This compares favorably to a KWD 40.3 million profit last year, representing as it does a strong year-on-year increase of 12.2%.

And finally, on this chart, we can see that the profile of assets was such that 47% of group assets were at our conventional domestic operations in Kuwait, 36% at our international operations, and 17% at Boubyan Bank.

Now moving to the next chart. On this slide, we will look at some of the movements in key volumes during the period. Total assets reached KWD 28.9 billion. This is a 6.6% increase on the comparable period last year. And as mentioned previously, the increase was driven primarily by strong growth in lending and investments. Group lending increased to KWD 16.4 billion, an increase of KWD 1 billion in the 12-month period to September 2019, representing as it does a very strong year-on-year growth of 6.2%. A significant part of this 12-month loan growth occurred in the calendar year 2019. The loan book grew by 5.5% since the end of 2018.

Customer deposits of KWD 15.8 billion are 12.2% ahead of September '18 and show a 9.7% growth in the 9 months to September 2019. And just for purposes of clarity, please note that customer deposits as defined here do not include deposits taken by the group from financial institutions. This is in keeping with the presentation of customer deposits in our financial -- published financial statements.

An important message here is that within the headline numbers, we continue to see a favorable movement in the group's overall funding mix. We experienced very strong growth in core franchise deposits, noting, in particular, excellent growth in deposits at the retail banking arms of the group in Kuwait, both conventional and Islamic. We were just able to retire deposits of a more wholesale nature. The growth in retail deposits reflects a sustained focus on the deposit gathering aspects of our business in recent times, leveraging NBK's long-standing ability to capitalize on the group's strong brand, customer appeal and credit ratings.

The group's overall funding mix is profiled on the bottom right hand of this chart. Customer deposits comprise 65% of the total mix, which is higher than earlier periods, as shown on this chart.

Moving now to the next chart. Here, we will look at the impact that our financial results had on certain key performance metrics. The return on average equity in the 9 months to September '19 was 12.6%. This compares to a 11.9% last year and to 12% for the fuller year 2018. Return on average assets was 1.45%, the comparable returns being 1.36% last year and 1.38% for the fuller year 2018.

The total capital adequacy ratio at September was 15.8%. This compares to 17.2% at the year-end December '18, noting that the current year earnings are not factored into the computation of interim period ratios. The September ratio also reflects the impact of revised CPK-prescribed risk weightings attaching to certain claims on sovereigns and public sector enterprises.

The Tier 1 capital ratio at September '19 was 13.9%, whilst the CET1 ratio was 12.6%. As regards to asset quality ratios, the NPL ratio was 1.37% with coverage at 227.4%. These ratios are very much in keeping with earlier periods and accordingly remain comfortable.

Before concluding, allow me to make a few comments as to how we expect the remainder of 2019 to unfold. So on this final chart, generally speaking, we expect the momentum and trends that we have seen so far this year to continue, specifically as regards to loan growth. Loan growth in the 9 months to September '19 was 5.5%. We expect to see out this year with high mid- to high single-digit growth for the fuller 12-month period.

The net interest margin averaged 2.59% in the 9-month period. Going forward, cognizant of the expectations for lower international interest rates and the likely implications for local benchmark rates, we expect to see continued pressure on margins. This [ally] to ongoing pricing competition can be expected to result in some further margin attrition.

Turning now to the cost-to-income ratio, which averaged 33% in the 9 months to September 2019. We expect this ratio to remain broadly in line with existing levels whilst noting an element of upward pressure due to the ongoing costs associated with our digitization and selective expansion agendas.

The cost of risk has been falling from earlier periods to 82 basis points in the opening 9 months of this year. We are assuming for now the charge for the fuller year to remain in this general territory. Therefore, aggregating all relevant factors and assuming the reasonableness of the above, we currently expect full year earnings to broadly follow the year-to-date trend.

This brings an end to my presentation. But before handing back to Amir, I will summarize by saying that all things considered, we are satisfied with the results so far this year. Solid and sustained business growth continued throughout the group, albeit in conditions characterized by changed interest rate conditions and aggressive competitions leading to pressure on margins. It is against this backdrop that low growth in income was recorded.

The income statement importantly, however, also reflects the progressive and future-looking cost investment agenda that I touched upon earlier. The group continues with its strategy of investing in its people and in emerging technologies, and selectively into reinforcing its geographic footprint in order to best protect the bank into the future. The lowered provisioning levels are continued positive. And as always, it is reassuring to see the ongoing benefits of our diversified earnings base work to support the fuller group performance.

Looking ahead, we are hopeful that the momentum will continue notwithstanding the various challenges and uncertainties. So that's it.

Thank you very much for your time, and I'll now hand back to Amir.


Amir Hanna, National Bank of Kuwait S.A.K.P. - Head of IR [5]


Thank you, Jim, and thank you, everyone, for listening to the presentation. We'll just pause for a minute, waiting for questions to come in, and then we'll start answering the questions one by one.


Questions and Answers


Amir Hanna, National Bank of Kuwait S.A.K.P. - Head of IR [1]


Hello, we've got a few questions to answer here. First question is asking about the weakness in noninterest income and how much of that is seasonality -- seasonally and also requesting some explanation of reasons behind the continued increase in operational costs. We've covered most of it, but Jim will add a few words on both topics.


Jim Murphy, National Bank of Kuwait S.A.K.P. - Group CFO [2]


Yes. Like, as regards to fee income, I think it's been a very good 9 months as regards to fee income. We appear to be a modest 2.1% up on last year. But you have to bear in mind that the businesses have been very -- in very good shape of late. So we had a very good performance last year, and I think this year is a very good performance building on last year.

Like within our fee income -- within our noninterest income, fees and commissions are the main driver, and this is where we look at in our lines of business; the credit card business, the asset management business, the trade finance business, the asset management business and I think we mentioned the brokerage business. All these businesses are doing well. Good business activity levels, good momentum. So I think I would feel pretty comfortable and confident in saying that fee income has performed very strongly and FX income performed very strongly, 6% ahead of last year. So I think that there's a good story to tell there.

In terms of cost, I think, I have gone through that. We are investing in the business. We've had a couple of expansion undertakings in certain of our overseas locations. So increasing the footprint slightly, and we are investing very heavily in IT. And to be honest, I don't really think this is a matter of -- it's not a cost matter as much as an investment matter. And really, we have to spend today to safeguard the interest of the bank going forward. So I feel very comfortable in saying that noninterest income is performing solidly and our cost line is well under control and it's been very wisely taken care of.

Right, we've been asked to talk about NIMs, guidance on NIMs. Our NIMs are contracting. And if you trend down through the quarters of this year, you will see that NIMs have been tightening. We are expecting the Central Bank to follow the Fed in terms of pricing downwards, probably within the coming month or 2. That will impact on us. It will tighten NIMs. It affects net interest income to the tune broadly of about $10 million per 25 basis points quoted in the discount rate. So between a lot of competition on both sides of the balance sheet as regards to pricing and the lowering of benchmark pricing rates, we will see the attrition continue going forward.


Amir Hanna, National Bank of Kuwait S.A.K.P. - Head of IR [3]


A couple of questions on the changes and the recent changes in the risk weights from the Central Bank and impact on CAR, Jim?


Jim Murphy, National Bank of Kuwait S.A.K.P. - Group CFO [4]


Yes. Like, the Central Bank laid down some new guidelines attaching to risk weights. So the risk weights attaching to some of the sovereign exposures and the public sector enterprises. The risk weights are more onerous than previously. We had a more favorable risk weighting attachment to these exposures up to now. So the change came into effect in September, which culminated in the -- that had an adverse impact, of course, on the ratio, culminating in the fact that the interim earnings are not taking into the computation. So that's sort of primarily the 2 factors together account for the -- for what appears to be the reduction in the cap ad ratio.


Amir Hanna, National Bank of Kuwait S.A.K.P. - Head of IR [5]


There's a question on guidance, but actually that's fully covered in the slide. So all the guidance details are -- that are in public domain are included in the slide -- in the presentation we shared and that presentation is available on the website. I think that's most of the questions now. We'll just give another minute, if we get more questions.

Got a question on the macro picture and how -- what scenes do we see in Kuwait in 2019 and onwards. And basically, we're -- we have the same outlook continuing with us, basically, capital spending should continue as we had in our opening remarks. We've seen some slower award activity. But that said, the pipeline is very strong in terms of tendering and we're expecting relatively around KWD $7 billion to be awarded this year.

But as we speak, there is more than KWD 3.5 billion, KWD 4 billion in the tendering pipeline and those are key projects -- key infrastructure projects. So despite the volatility in the award activity, we do think that longer-term, the awards will continue to be strong and that will lead to a general improved non-oil GDP activity in 2019 and 2020. So there hasn't been any change in the outlook and that what should be driving some banking activity going forward.

One more question on funding, about the split or the contribution of the USD-based funding in our balance sheet.


Jim Murphy, National Bank of Kuwait S.A.K.P. - Group CFO [6]


Yes. I think the point to make here is about half of our balance sheet tends to be in non-KWD, that is in foreign currency, and the substantial part of that net will be in dollars. So therefore, the impact of movement -- tied into this is a question on the impact of lower LIBOR. We don't form positions. So we're not really that sensitive to -- earnings are not that sensitive to movements in LIBOR per se. What's of interest to us is how the Central Bank responds to movements in the Fed rate. The pricing -- pricing benchmark of the discount rate is all important to us. And that's really the variable that we need to look at in terms of the impact on earnings going forward.


Amir Hanna, National Bank of Kuwait S.A.K.P. - Head of IR [7]


With that and considering with time limitation, I think we'll conclude the call for today. If you have any follow-up questions, as I said earlier, please send it to our IR e-mail address and we'll respond in due course. Thank you very much for listening today.


Operator [8]


That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.