Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to National Bank of Kuwait's Q1 2025 results call. It is a pleasure to have with us in the call Mr. Isam Al-Sager, Vice Chairman and Group CEO, Mr. Sujit Ronghe, Group CFO, and Mr. Amir Hanna, Head of Investor Relations and Communications. I would like to hand over the call now to Mr. Amir Hanna. Please go ahead.
Thank you, Elena. Good afternoon, everyone, and thank you all for joining us today for the first quarter 2025 webcast. We will start the call with our usual disclaimer, as 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 risks and uncertainties that may cause actual results to differ materially and may adversely affect the outcome and the financial effects of the plans described herein. The bank does not assume any obligation to update its views of such risks and uncertainties or to publicly announce the result of any revisions to the forward-looking statements made herein. Please also refer to the full disclaimer in our presentation for today's call.
Our Vice Chairman and Group CEO, Mr. Isam Al-Sager, will start the call by giving some opening remarks on the operating environment and the highlights of the reporting period. Then Mr. Sujit Ronghe, our Group CFO, will go through the financials in more details. Following the presentation, there will be a Q&A session. Also, if you have any follow-up questions after the call, please direct it to our investor relations email address and we will respond to your inquiries at the earliest. Today's presentation is also available on our website for your convenience. Now, let me hand over the call to Mr. Isam for his opening remarks. Mr. Isam?
Thank you, Amir. Good afternoon, everyone. I am glad to join you today for NBK's first quarter 2025 earnings call. In recent months, the global economy continued to navigate a complex landscape marked by shifting monetary policies and escalating geopolitical tensions. Moreover, the recent trade war and the tariff imposed by the U.S. administration, with its expected repercussions, will likely cause inflation to raise the economic growth to slow down, adding more uncertainty to the world's economic outlook. For the GCC region, these developments present a mixed outlook supported by strong fiscal buffers, a strategic reform plan, robust project pipeline, and healthy demand. GCC economies are likely to uphold a relatively strong performance throughout 2025. Moreover, tighter global financial conditions could weigh on investing and trade flows, borrowing costs, and definitely oil demand and prices.
In Kuwait, although headlines activity were relatively subdued in 2024, the near-term outlook implies a strong rebound in 2025, with an expected unwinding and voluntary production cut by OPEC+. A moderate recovery in consumer spending, a credit growth project and award, and a possible raise in public investment, GDP growth in Kuwait could recover to reach 3% in 2025. Following a robust year for project market activity in 2024, the momentum slowed down to some extent in the first quarter of 2025. More than KD 400 million worth of projects were awarded during the first quarter of the year, while the outlook remains very strong, with estimate of over KD 10 billion worth of projects in the pipeline. This further affirms the government's commitment to accelerate the pace with its development and reform plans.
Moving on to our quarter performance, NBK reported net profits of KD 134.1 million for the three months ended 31st of March 2025, compared to KD 146.6 million in the corresponding period of 2024. The reported 8.5% year-to-year drop in attributed profit is mainly the result of the effective implementation of the Domestic Minimum Top-up Tax on multinational enterprises, which led to increasing our effective tax rate to 16.3% in first quarter 2025, up from 9.2% in first quarter 2024. If we look beyond the impact of the newly implemented tax, our profit before tax line grew by 0.8% year-on-year, reaching KD 173.4 million in first quarter 2025. Our returns remain strong despite the impact of the new tax regime, with return on average assets for the period reaching 1.33%, while our return on average equity reached 13.1%.
At NBK, we are confident in our ability to adapt and lead domestically by staying agile, investing in technology and innovation, and upholding high standards of serving the evolving needs of our clients. We will not only weather the challenges in the domestic scene, but also will emerge stronger. Our regional and international presence will continue to be a key factor in managing risks, stabilizing returns while optimizing operational costs. Our aim is to continue maximizing the benefits we generated from cross-selling our service across locations. Similarly, our wealth management business will leverage its expertise in delivering a holistic approach to portfolio management, advisory, and investment opportunities, while our Islamic banking arm will remain, distinguishing our unique domestic position and further diversifying our profitability streams. NBK remains strong commitment to sustainability and the advancement of its sustainable finance agenda.
A key milestone in this journey was the successful issuance of the bank's first green bond, which attracted strong international investor interest and underscored market confidence in NBK's ESG strategy. The bank continued to make rebounds, progress in integrating climate considerations into our operation, with the practice focus on portfolio, decarbonization, and climate risk management. This effect aligns with global best practice and reinforce NBK's role in supporting Kuwait's carbon neutrality commitment, positioning the bank as a key enabler of the country's low carbon transition. With that, I will conclude my commitment and leave you with my colleague, Sujit Ronghe, our Group CFO, to cover quarterly and full-year results in more details. Please go ahead, Sujit.
Thank you, Mr. Isam. Hello, everyone, and welcome. I am very pleased for the opportunity to take you through the financial results in respect of the first quarter of 2025. We have announced a net profit of KD 134.1 million for 1Q 2025, an 8.5% decrease over the corresponding quarter in 2024. You would note that the profit before tax and non-controlling interest reflects a small year-on-year increase. The imposition of Domestic Minimum Top-up Tax, DMTT, of 15%, mainly in Kuwait and Bahrain from 1st January , 2025, has negatively affected the first quarter 2025 bottom line. However, the operating engine of the group remains solid with strong growth in business volumes, particularly loans and investments. Before going on to details of our financial results, I would first like to say a few words regarding the overall operating environment.
Although global and regional geopolitical situation remain unstable, overall operating environment in Kuwait and the fuller GCC remains stable. However, developments during the last few weeks have increased macroeconomic uncertainties and heightened concerns regarding implications of a possible tariff war, which are affecting global operating environments adversely. Now turning to the financial results for 1Q 2025. As shown on the top left of this slide, net profit of KD 134.1 million reflects a year-on-year decrease of KD 12.5 million, that is 8.5%, significantly impacted by 15% DMTT applicable in Kuwait, Bahrain, and U.A.E., which increased from 9% to 15%. Net operating income at KD 310.7 million was marginally higher than previous year due to higher non-interest income, partially set off by lack of growth in net interest income, the reasons for which we will discuss shortly.
However, business volumes, particularly loans and investments, reflected a continuation of the growth trajectory witnessed during 2024. The top right of this slide reflects that profit before tax at KD 173.4 million was KD 1.4 million higher than 1Q 2024, benefiting from contained cost growth and the release towards expected credit losses on non-credit facilities. Resulting from the changes in tax laws, the effective tax rate has increased to 16.3% in the current period from 9.2% in 1Q 2024. 1Q 2025 net profit at KD 134.1 million was 6.3% lower than the previous quarter, primarily driven by increased tax charge, partly softened by a lower provision charge on credit losses and impairment losses. The operating income mix profiled at the bottom right-hand continues to show a healthy mix of 24% coming from non-interest income sources. I will go into the main drivers behind movements of income, margins and costs shortly.
Moving to the next slide. We will now look at the net interest income and drivers behind its performance. The chart at the top left reflects that net interest income and income from Islamic financing of KD 236.8 million was almost flat compared to the first quarter 2024. 1Q 2025 NII benefited from an 8.1% year-on-year growth in interest-earning assets, namely loans and investment securities across the Group. However, an unfavorable change in mix of different categories of assets maintained with the Central Bank of Kuwait, year-on-year effect of Egyptian pound devaluation in the last year, and relatively lower benchmark interest rates adversely impacted the net interest income and NIM for the current quarter. With the recent passage of Public Debt Law in Kuwait, we are hopeful of sovereign debt issuances during the year, allowing the Bank to deploy liquidity into interest-earning assets.
We see in the bottom left chart that average NIM for 1Q 2025 dropped to 2.45%, reflecting a decline of 19 basis points over 1Q 2024, driven by a steeper decrease in yield for the reasons explained earlier, compared to the funding cost. Group yield and funding cost for the current quarter were 5.75% and 3.71% respectively. The Group continues to source deposits efficiently, balancing cost and regulatory requirements while diversifying the funding base. Also, 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 19 basis points year-on-year decrease in NIM to 2.45% in 1Q 2025. Loans and other interest-earning assets affected by lower interest rates and an unfavorable asset mix contributed a net decrease of 14 basis points and 35 basis points to the NIM respectively.
Lower funding costs positively affected the NIM by 30 basis points. Moving to the next slide. As we can see at the top left of this slide, total non-interest income at KD 73.9 million for first quarter 2025 was KD 3.1 million, higher than the comparable period in 2024. Fees and commissions income was strong at KD 55.3 million, reflecting robust contributions across different lines of business and geographies. FX contributed KD 11.3 million, benefiting from higher transaction volumes and favorable currency movements. Other non-interest income sources, mainly investment income, contributed KD 7.3 million, benefiting from improved valuations. Turning now to operating expenses reflected at the top right hand of this slide. Total operating expenses for 1Q 2025 at KD 115.7 million were 3.8% higher than 1Q 2024. The modest growth in cost reflects, in part, Group's efforts to harness efficiencies, favorable effect of EGP devaluation, and certain timing differences.
The Group continues to invest in key business initiatives, digital technologies, and processes which enable us to offer best-in-class service to customers and optimize resources to improve operational efficiency. As a result of a flattish operating income and a controlled cost growth, the 1Q 2025 cost income ratio was 37.3% compared to 36.1% one year ago. Moving on to provisions and impairments profiled on the bottom right hand of this slide. Total credit provisions and impairment losses for 1Q 2025 amounted to KD 21.5 million, a decrease of KD 4 million over 1Q 2024. KD 24.5 million of current quarter charge was for provisions for credit losses, whereas a lower requirement for ECL on non-credit facilities resulted in a release of KD 3.2 million. Specific provision of KD 17 million was in course of normal business activities, whereas KD 7.5 million was towards general provisions.
The Group remains committed to its conservative approach in managing credit exposures. The cost of risk for first quarter 2025 was 40 basis points compared to 44 basis points in 1Q 2024. 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 to the next slide. On this slide, I would like to elaborate 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 and the ability to conduct business in both conventional and Islamic banking. NBK's business segments serve as main pillars of diversification and a significant degree of resilience to the Group earnings.
This strong competitive advantage enables us to offer selective products and services to customers in different geographies. For example, in global wealth management through NBK Wealth, Islamic banking through Boubyan Bank, and by further leveraging our Group's overseas network. The chart at the left reflects that operating income is well spread across all key business segments with International Banking at 26%, Islamic at 22%, Consumer at 12%, Corporate 12%, and NBK Wealth at 9%. The Group similarly benefits from well-diversified contributions to net profit from International Banking at 27%, Islamic 19%, Corporate 17%, Consumer 16%, and 10% from NBK Wealth. At a standalone level, Boubyan Bank delivered a net profit of KD 26.5 million, up 6% on 1Q 2024, reflecting a strong growth of 9.8% in operating surplus and lower provisions for credit losses.
Finally, you will note from the chart at the right bottom that International Banking and Boubyan Bank contributed 44% and 23% respectively to the Group's total asset, 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 year. As profiled on the chart at top left, the Group total assets reached KD 41.6 billion as of March 2025, an 8.7% increase over March 2024. Group loans and advances at KD 24.6 billion registered a strong growth of KD 2.2 billion, that is 9.9% from March 2024 and 3.8% during the current quarter. Loan growth was accrued at Kuwait in both conventional and Islamic sectors and at international operations. Similarly, investment securities reflected a year-on-year growth of 19.9% to reach KD 8.3 billion.
Customer deposits, that is non-bank and non-FI deposits, at KD 23.5 billion reflect a year-on-year growth of 5.6%. Similarly, certificates of deposit at KD 1.7 billion reflect a strong increase of 15.9% during the current quarter and 5.9% year-on-year, further diversifying the funding base. The Group continues to benefit from its strong base of core franchise retail deposits. CASA deposit levels have been stable during the last year, with March 2025 volumes exceeding that of March 2024 and December 2024. The Group continues to benefit from a strong base of its retail deposits. NBK's stable deposit base reflects a sustained focus on the deposit gathering aspects of our business, leveraging our long-standing ability to capitalize on the Group's strong brand, customer appeal, and credit ratings. As reflected by the bottom right chart, customer deposits comprise a healthy 66% of the total funding mix of the Group.
I want to highlight that the Group continues to maintain healthy levels and comfortably exceeds the minimum requirements of Basel III ratios. Moving to the next slide. We will now look at the impact 1Q 2025 financial results had on key performance metrics. The increase in tax charge in Kuwait, Bahrain, and in part at U.A.E. has adversely affected the net profit and consequently, return ratios of the Group. The return on average equity for the current quarter dipped to 13.1%, and the return on average assets now stands at 1.33%. At 16.6%, the total capital adequacy ratio remained strong and steady, well above the regulatory minimum. CET1 and Tier 1 ratios at 12.6% and 14.5% respectively. Interim capital ratios tend to be lower than the year-end ratios as they are negatively affected by the growth in risk-weight assets, whereas interim profit is not included in regulatory capital.
As regards asset quality, NPL ratio stands at 1.38%, compared to 1.34% at December 2024. Loan loss coverage ratio is at 251%, reflecting conservative provisioning policy of the Group. Moving to the next slide. On this slide, I would like to discuss ECL, that is expected credit losses 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, that is the amount in the balance sheet, as per CBK instructions and compare it with the ECL on credit facilities as per IFRS 9. 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 2025 was KD 689 million. Although IFRS 9 ECL and CBK provisions are two different regimes and should not be compared as such, as of March 2025, the balance sheet provision as per CBK instructions exceeded the ECL by KD 240 million. 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 the first quarter 2025. As mentioned earlier, a change in the composition of interest earning asset mix and implementation of the new tax law in Kuwait have negatively affected the 1Q 2025 bottom line, in spite of a healthy growth in balance sheet, comfortable liquidity levels, and a strong capital base.
Looking forward, ongoing regional and international geopolitics, ambiguity regarding implications of tariffs levied by U.S.A. and response from affected countries, possibility of recession, and an uncertain interest rate scenario are likely to result in a macroeconomic environment which is less conducive to growth. We, however, remain cautiously optimistic that the overall operating environment, although challenging, stabilizes in due course during 2025. Now turning to the guidance for the year ahead. As regards loan growth, the group continues to enjoy a strong pipeline of approved credits, and although we have a strong growth in the current quarter, given recent concerns regarding the macroeconomic situation, we continue to guide the overall loan growth for 2025 to be in the mid-single digit range.
However, any positive changes to the prevailing global uncertainty, pace of project activity, or passage of housing finance law, that is the mortgage law in Kuwait, would benefit the loan growth in general. Turning to the NIM, given the uncertainty with macroeconomic situation, interest rate outlook, the changed CBK asset mix mentioned earlier, and increased competition, we are expecting the NIM to be under pressure during the year, as reflected in the first quarter 2025 NIM of 2.45%. Coming to operating expenses, the 1Q 2025 year-on-year cost growth was lower than normal at 3.8%, which is not indicative of the fuller year expectation. While the group works to harness efficiencies, we continue to invest in human resources and digital technologies. Hence, we expect the annual cost growth to be circa 10% and cost-to-income ratio to be in the high 30s%.
The cost of risk was 40 basis points during the current quarter. Given the current global macroeconomic uncertainty, we are cautiously optimistic of an overall stable general operating environment and expect the full year's cost of risk to range at a similar level. As regards the recently introduced DMTT in Kuwait, it is important to note that relevant executive regulations are expected to be issued within six months of the date of issue of the law. In absence of fuller regulations, the current estimates indicate the effective tax rate for the full year 2025 to range between 16%-17% of pre-tax profit. However, it would not be prudent to give specific guidance on earnings, capital adequacy in the current environment. We are hopeful of maintaining capital adequacy ratios in line with our internal targets above the regulatory minimum. That ends my presentation. Thank you. Back to Amir.
Thank you, Sujit. Thank you, Mr. Isam. As we always do, we will pause for 30 seconds. All the questions come in the webcast platform, and then we will come back to start taking the questions one by one. Okay, everyone. Thank you for waiting. We will start with the questions. We got a few questions on different topics. First question is asking, how do you see funding side development or liquidity to support huge projects of pipeline, Sujit?
Yeah. As regards the liquidity and funding to support the project pipeline, NBK is very well-placed as a market leader to attract deposits. In fact, at times, we have let go deposits when it did not suit our requirements. So we have a very geographically diverse network of different locations which serve as deposit gathering units for us as well. We also have diversified sources in terms of deposits from customers, interbank activity. We also have a CD and an ECP program, all of which together help us to have a very sound and stable funding base for the group. As such, we do not see any concerns with respect to funding the project pipeline. Mind you, the project pipeline is not expected to emerge over a short period of time.
We are looking at the loans or the credit facilities related to the projects to emerge over the short to medium term, which will also give us flexibility in deciding our funding sources.
The second part of the question, what is the minimum oil price you may see to downgrade for your growth outlook?
Well, for the oil outlook in short term, as the government continues to focus on the implementation of the development plan, we believe oil prices volatility will be less relevant to capital expenditure. Today, CapEx is about 10% of the total budget spending, which makes it less likely to any potential budget savings in case oil revenues are pressured. Additionally, the first couple of years of CapEx spending mainly targets closing the infrastructure gap and to provide the basic service for the growing population. So a full change in direction is unlikely.
Moving on, there are a few questions on the asset mix and its impact on margins and the outlook for margins going forward. How material is the impact of change in asset mix at CBK and devaluation on margin compression in Q1 2025?
Okay. As I mentioned earlier, the first quarter 2025 NIM at 2.45% was adversely affected by an unfavorable change in mix of different categories of CBK assets. At the same time, there was a year-on-year effect of EGP devaluation and relatively lower benchmark interest rates. When we look at the Q1 NIM versus the last quarter, we see that the full impact of the change in CBK asset mix did not impact the last quarter's NIM. We are seeing the full impact in this quarter. So a large part of the drop you see from the last quarter, that is Q4, is coming from the change in CBK asset mix. Of course, there are other reasons that there were some one-off recoveries in terms of interest, which benefited the Q4 that were not repeated in the first quarter 2025.
You can expect the larger component of the decline to be attributed to the full impact of CBK mix.
A continuation or a follow-up on the same question. What is your expectation of these drivers during the rest of the year?
There is no visibility into what stand the CBK would take going forward. Although we are hopeful that with the passage of the Public Debt Law, there would be an opportunity for the bank to redeploy these assets in interest-yielding instruments. So that would probably, depending on the timing and the volume of issuances, that would help us improve the NIM for the fuller year. However, under the assumption that things remain status quo for a longer period of time, we expect our full-year NIM to be around the current levels.
Changing subjects, a question on the updates for the mortgage law.
Well, on the mortgage law, actually it is both the mortgage law and the Public Debt Law. As we know, the Public Debt Law has been recently approved, allowing the government to be more flexible by issuing debt to KD 30 billion . On the mortgage law, as the mortgage law, it has witnessed serious meetings recently to approve the law. Meetings has taken place with the Public Authority for Housing Welfare in signing consultancy services contracts with the real estate developers. As we all say, the approval of the housing finance law is expected, considering its importance. There are more than 100,000 outstanding housing applications. The young demographics of Kuwait, with an additional 10,000 new applications on yearly basis.
The strong liquidity position of the bank sector allowing it to play a key role in solving the residential housing problem in Kuwait. We expect in a short period of time, it will be approved soon.
There is a question on our approach to our AT1s and Tier 2 call options, since both are callable this year. Do you intend to take other factors other than economics into account when making your call decision?
Well, the decision to call AT1s or Tier 2 is one that would be taken keeping in mind the capital needs for the group at different levels of regulatory capitals. At the same time, historically, the bank has taken actions that are investor-friendly, and we intend to continue with that approach in the coming issuances as well.
On the same topic, question on CET1 buffers. Where would you ideally like to see your CET1 buffer over minimum requirement by the year-end, and how do you plan to achieve it?
As I had mentioned in my previous interactions, the bank aims to have an overall capital ratio of 1.5% minimum over the regulatory minimum at the end of the year. The capital buffer can be achieved by way of internal profit generation and also taking into account all aspects with respect to risk weight asset optimization, or also in case of dividends, et cetera, which are typically taken at the year-end by the board.
There is a question on loan growth to date. What drove the strong loan growth of first quarter? Then there is also a follow-up on how does this compare to our guidance of mid-single digit for the year?
Yes. When we look at the loan growth, the first quarter of 2025 achieved a very strong loan growth of 3.8%. This growth was seen in Kuwait and across the international network. In Kuwait, we are seeing growth from retail to be very muted because we are at a higher interest rate environment, and the appetite for consumer loans for the sector is not as what it used to be a few years ago. So a big bulk of the loan growth is coming from corporates in Kuwait, conventional and Islamic, and across our diversified network, both in our regional operations as well as international operations.
There is another question on what the impact of oil prices on spending cash. I think we covered that already.
Yes.
Same questions on same topics. Again, on asset yields.
X mixture.
How much of first quarter loan growth was driven by international business? If you can provide some thoughts on the progress of the mortgage law. I think mortgage law was covered.
70/30. Well, I would say that 70% of the loans are from Kuwait, and 30% is coming from our international presence so far. The mixture.
You want to say a couple comments on the growth itself for the-
Yeah. 70/30 is the typical ratio of loans internationally and those in Kuwait. From a growth point of view, we saw that a majority of the growth came from international locations. At the same time, we are seeing a good pickup in growth in Kuwait, specifically from the Islamic operations side.
Yeah. Again, more questions on the asset mix and margins. Why did the bank increase their CDs meaningfully in Q1, nearly 15%? Is it in anticipation of growing activity in Kuwait?
The certificates of deposit are mainly issued through our branch in New York, and we had witnessed a big drop in CDs at the beginning of the war in Gaza in the last quarter of 2023. Over a period of time, we saw these CDs come back to us. It is in this quarter that we saw a meaningful increase, which has taken us to slightly more level than what we were at before the October of 2023.
We have another question more specific on NIMs. Why did asset yields come down so much when discount rate has been more stable? I think we made a clear reference to the change in asset mix and the devaluation in Egypt. So that has been covered as well.
Correct.
These are all the questions that we have so far. If we don't get any questions for the next 15, 20 seconds, we'll conclude the call for the quarter. Are you seeing any impact of global economic environment tariffs on trade flows related to income?
The recent events have brought in a lot of uncertainty with respect to the global operating environment, and the tariffs have complicated matters for many countries. But the GCC is charged with 10% of tariff and probably less impacted than some other countries. As such, we are not seeing, at this stage, any impact of the global economic uncertainty. However, it is early in the time to comment on the long-term impact of what's happening in the States.
I think that is it for today's call. Thank you all very much for joining us. Elena, back to you.
I would like to thank the management team of National Bank of Kuwait for the presentation and all the answers provided, and also thank you to all the attendees for joining the call.
Thank you.
Bye.