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 Third Quarter 2024 Results Call. We have with us from National Bank of Kuwait, Isam Al-Sager, Vice Chairman and Group CEO, Sujit Ronghe, Group CFO, and Amir Hanna, Head of Investor Relations and Communications. I would like to hand over the call now to Amir Hanna to begin with the presentation. Amir, back to you. Thank you.
Thank you, Elena. Good afternoon, everyone, and thank you for joining us for today's webcast. We will start the call with our usual disclaimer. 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 expectation and are subject to 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. 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 the forward-looking statements made herein. Please also refer to the full disclaimer in our presentation for today's call. As we always do, today's call will follow our usual agenda.
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 R onghe , our Group CFO, will go through the financials in more details. After the presentation, there will be a Q&A session through the Webex platform. If you have any follow-up questions after the call, please direct it all to our investor relations email address, and we will answer these questions at our earliest possible. Today's presentation is also available on our website for your convenience. Now, I will hand over the call to Mr. Isam for his opening remarks. Mr. Isam.
Thank you, Amir. Good afternoon, everyone. I am pleased to join you today for our third quarter and first nine months earnings call for 2024. On a global scale, uncertainty continues to shadow the economic outlook as major central banks shift their attention from raising prices and inflation toward potential recession challenges. The sluggish demand and increased geopolitical tension added to the uncertainty of the outlook. In the GCC region, performance across market witnessed relatively positive economic developments with strong non-oil growth and looming uncertainties. On the other hand, the challenging geopolitical sense and oil price volatility will continue to have an economic impact on GCC economies. Likewise, in Kuwait, economic indicators points to a subdued pace of growth, but not far from a rebound.
Inflation, on the other hand, softened marginally to 2.9% as of August 2024 and extended to continue to trend lower to remain on track for an average annual rate of 3% compared to 3.6% recorded in 2023. Similarly, latest provisional data showed that non-oil GDP grew modestly in second quarter 2024. Meanwhile, all GDP contracted on lower crude production. On a positive note, project activity remained its momentum and remained solid in the third quarter 2024, with power and water sector constituting three quarters of the value awarded during the period. Activity is likely to pick up for the remainder of the year, in line with government development plan priorities, with around KWD 3.3 billion worth of awards expected for the next couple of quarters.
In the face of uncertain economic cycle, NBK continues to prove its resilience against shifting operating conditions, its prudent approach to risk management, and its ability to sustain growth from diversified income streams. We reported net profit of KWD 457 million for the first nine months of the year, growing by 6% on an annual base. As for the three months ended September 2024, net profit reached KWD 164.6 million, posting a growth of 5.7% year-to-year. Our diversified business portfolio across geographies and business segments has further driven growth while capturing opportunities, even in volatile market conditions. We reached growth of 7.8% year-to-year in net operating income to reach KWD 931 million for the first nine months period.
In line with our evolving needs of our clients, we continue to excel in digital innovation and deliver a holistic banking experience that reflects positively on operational efficiency while reinforcing our commitment toward long-term value creation to both stakeholders and customer. Accordingly, our return on average assets for the reporting period reached 1.6%, whereas our return on average equity reached 15.4%. Our strategic initiative continued to contribute to the leadership position that the bank is recognizing in Kuwait. We will continue advancing our technological and digital investment and growing our products and services portfolio in the market. Furthermore, by deepening the relationship with existing clients and activities, seeking new business opportunities, we will endorse the group as a trusted financial partner. Moreover, we will remain focused on leveraging our unique competitive advantage domestically as the only bank in Kuwait with access to both conventional and Islamic banking markets.
Our subsidiary, Boubyan Bank, continues to support the group in diversifying our client base and income streams. Meanwhile, NBK Wealth will solidify its positioning and offering best-in-class wealth management experience in the market. Similarly, our international operation remains vital for bank's stability and growth prospect. At NBK, ESG principles remain a cornerstone for our operation and lending philosophy. Our robust government framework is central to every strategic decision that we continue to intend to make. This affirms our dedication to ESG stewardship, our commitment to transition to a lower carbon economy, and our carbon neutrality pledge. With that, I will conclude my comments and leave you with my colleague, Sujit R onghe , our Group CFO, to cover the quarterly and nine months results in more details. Please go ahead, Sujit.
Thank you, Mr. Isam. Hello, everyone, and welcome. I am very pleased to take the opportunity to take you through financial results in respect of nine months of 2024. We have announced a profit of KWD 457 million for nine months 2024, a 6% increase over the corresponding period of 2023. These results stem from a strong operating performance by the group and demonstrate continued growth in our business. Before going into details of our financial results, a few words regarding the overall operating environment during the current reporting period. The higher interest rate regime for a significant part of the reporting period and an overall stable operating environment in Kuwait have generally benefited the bank. Last month's benchmark interest rates cuts appears to have set the tone for upcoming quarters. At the same time, recent geopolitical events in the region and beyond continue to adversely affect global operating environment.
Now turning to the financial results for nine months 2024. As shown at the top left of this slide, net profit at KWD 457 million reflects a year-on-year growth of KWD 25.9 million, that is 6%. Underlying drivers for the robust bottom line performance are a combination of year-on-year growth in business volumes, relatively high interest rates, culminating in a strong operating performance. Group loans and advances grew by 6.2%. Investment securities also contributed strongly to the group assets with a growth of 17.3% vis-à-vis September 2023. The top right chart reflects operating surplus, that is, profit before provisions and taxes for the current nine months period at KWD 588.5 million, a growth of KWD 34.9 million, that is 6.3% over nine months 2023. Net operating income increased by KWD 67.3 million, up 7.8%, while operating expenses grew by KWD 32.3 million, 10.4% over last year.
Third quarter 2024 net profit at KWD 164.6 million was 12.9% more than the previous quarter, driven by stronger operating performance and lower provisions. The operating income mix profile at the bottom right-hand continues to show a healthy mix with 21% coming from non-interest income sources. I will go into the main drivers behind movements in income margins and costs shortly. On to the next slide. On this slide, we will look at the net interest income and drivers behind its performance. The chart at the top left reflects the net interest income of KWD 733.7 million for nine months 2024, a growth of 10.2% over 2023. NII largely benefited from higher average interest rates compared to nine months 2023 and a 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 KWD 1.8 billion, that is 5.2%, over September 2023 to reach KWD 36.4 billion. We see from the chart at the bottom left that average NIM for nine months 2024 at 2.69% reflects an improvement of 12 basis points over nine months 2023, driven by a higher yield despite increased funding cost. Group yield and funding cost for the current nine months were 6.23% and 3.99% respectively. The higher funding cost relative to nine months 2023 results from repricing of deposits at increased market rates and a limited migration of lower cost deposits to time deposits. However, an overall sticky and stable base of retail customer deposits continues to benefit the group.
At the bottom right-hand of this slide, we can see drivers behind the 12 basis points year-on-year increase in NIM from 2.57% in nine months 2023 to 2.69% in nine months 2024. Loans and others backed by a strong year-on-year growth in volumes and relatively higher average interest rates contributed net 45 basis points to the NIM. Higher funding cost negatively affected the NIM by 42 basis points. Moving to the next slide. As we can see at the top left of this slide, total non-interest income of KWD 197.3 million was similar to that of the last year. Fees and commissions income was strong at KWD 151.7 million, reflecting robust contributions across different lines of business and geographies.
FX income at KWD 24.8 million was lower than nine months 2023, despite stronger underlying performance, mainly due to the negative swing of currency movements on assets related to our dollar AT1 bond issuances. Other non-interest income sources at KWD 20.8 million was slightly higher than the previous year. 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 at the top right-hand side of the slide. Total operating expenses for nine months 2024 at KWD 342.5 million were 10.4% higher than the previous year. The cost growth reflects increasing activity levels across the group's network and investments in key businesses, initiatives, digital technologies, and resources.
This enables the group to offer best-in-class service to its customers and optimize resources to improve operational efficiency. NBK's focus on digital channels and product offerings continues to play a vital role in attracting and servicing customers with increased volumes of electronic transactions. We continue to press ahead with selective product offerings in certain geographies. For example, through our global wealth management business, that is NBK Wealth, Islamic banking through Boubyan Bank, and by further leveraging our overseas network. As a result, the nine month 2024 cost-to-income ratio was at 36.8% compared to 35.9% for nine months 2023 and 36.6% for the full year 2023. Moving on to provisions and impairments profiled at the bottom right-hand of this slide. Total credit provisions and impairment losses for nine months 2024 were KWD 56.3 million, a decrease of KWD 9.5 million over the last year.
Specific provision of KWD 44.8 million was in course of normal business activities at Kuwait and overseas locations. KWD 15.4 million was towards general provisions, which included a component of precautionary provisions. The group remains committed to its conservative approach in managing credit exposures. The group wrote back a net amount of KWD 3.8 million towards ECL and other impairment losses due to lower net provisions requirement towards non-credit financial assets. The cost of risk for nine months 2024 was 34 basis points compared to 40 basis points in nine months 2023. 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 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. NBK's business segments serve as main pillars of diversification, providing a strong competitive advantage and a significant degree of resilience to group earnings. 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 19% to the group's net operating income and profit. International banking contributed 24% to net operating income and 23% to the group's net profit, reflecting strong operating performance.
The group's Islamic banking subsidiary, Boubyan Bank, delivered a net profit of KWD 73.5 million, up 20.3% on nine months 2023, boosted by a strong growth of 10.2% in operating surplus and lower provisions for credit losses. NBK Wealth contributed 10% and 11% to the group's operating income and profit respectively. 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. Finally, the chart at bottom right corner, you would note that International Banking and Boubyan Bank contributed 42% and 23% respectively to the 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 year. As profiled on the chart at top left, group total assets reached KWD 39.2 billion at September 2024.
A 6.3% year-on-year net growth includes the adverse effect of EGP devaluation in March 2024. Group loans and advances at KWD 23.2 billion registered a growth of KWD 1.4 billion, that is 6.2% from September 2023, and 3.9% during the current year. Loan growth was achieved at Kuwait and international locations, both in conventional and Islamic banking. Similarly, investment securities reflected a year-on-year growth of 17.3% to reach KWD 7.4 billion. Customer deposits, that is non-bank and non-FI deposits at KWD 22.4 billion reflect a year-on-year growth of 7.1%. As can be expected in a higher interest rate scenario, some low-cost deposits moved to relatively higher cost time deposits. However, CASA deposits at the end of the current quarter are at a level similar to December 2023. The group continues to benefit from a strong base of core franchise retail deposits.
NBK's stable deposit and the fuller funding base reflects a sustained focus on the deposit-gathering aspect of our business, the group's strong brand, customer appeal, and credit ratings. Customer deposits comprise a healthy 68% of the total funding mix of the group. I want to highlight that the group continues to maintain healthy liquidity levels and comfortably exceeds the minimum requirements of Basel III ratios. Moving to the next slide. We will look at the impact nine months 2024 financial results had on certain key performance metrics. The return on average equity for nine months 2024 remains steady at 15.4%. Similarly, return on average assets increased to 1.6% compared to 1.58% in nine months 2023. At 16.5%, the total capital adequacy ratio remains strong and stable, well above the regulatory minimum, with CET1 and Tier 1 ratios at 12.2% and 14.2% respectively.
It is important to note here that regulatory capital does not include interim profits, but the interim dividend of KWD 83 million at 10 fils a share is deducted for the purpose of capital adequacy ratio calculations. As regards asset quality, NPL ratio remains stable at 1.39%, similar to December 2023 levels. Loan loss coverage ratio at 263%, reflecting the conservative provisioning policy of the group. On 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 regimen adopted by CBK, banks calculate the credit provisions required, that is the amount in the balance sheet as per the 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 is at the bottom right, reflecting that ECL provision required as at September 2024 was KWD 600 million, slightly lower than December 2023. Although IFRS 9 ECL and CBK provisions are two different regimes and should not be compared as such, the current balance sheet provision as per CBK instructions exceeds the ECL by KWD 326 million. This provides ample cushion for the group to withstand any possible adverse effect of the prevailing uncertainties on ECL provision requirements. Now to the final slide in this section.
Before concluding, allow me to summarize our financial performance in nine months 2024. NBK's strong operating performance with a healthy balance sheet, comfortable liquidity, and a strong capital base continued in nine months 2024. In light of the ongoing regional and international geopolitics, we remain cautiously optimistic that the overall operating environment, although challenging, will remain generally stable in the coming quarter. Now turning to the guidance for remainder of the year. As regards to loan growth, given the current geopolitical and general macroeconomic situation, we continue to expect the overall loan growth for 2024 to be in the mid-single digit range. Now turning to the NIM. The expectation at large is that benchmark interest rates, especially the U.S. Fed, would continue to decrease in coming months and quarters. The nine-month 2024 NIM of 2.69% benefited from stronger volumes and higher interest rates.
The interest rate cuts in fourth quarter of 2024 will have a limited impact on the full year 2024 NIM, and we expect to close the year similar to nine months 2024 level. As regards to operating expenses, the nine months 2024 year-on-year cost growth was 10.4%. As the group continues to invest in human resources, digital technologies, we expect the annual cost growth to be below 10% and the cost income ratio to be in high 30s. The cost of risk was 34 basis points during nine months 2024. We are cautiously optimistic of an overall stable operating environment and expect the full year cost of risk to be in the 35-40 basis points range. However, given the overall geopolitical and macroeconomic uncertainties, it would not be prudent to give a specific guidance on earnings and capital adequacy.
We are hopeful of maintaining capital adequacy ratios in line with our internal targets above the regulatory minimum. That ends my presentation. Thank you for your time. Amir?
Thank you, Sujit. Thank you, Mr. Isam. We will pause for a few seconds to get all the questions, the platform, and then we will come back to start answering the questions based on topic. Hello, everyone. We will start taking questions. There are many questions on NIMs, NIM direction, impact on rate cuts, sensitivity. We will just cover that topic, through one of the general questions. Basically, I have got a question here that says margins improved Q on Q in Q2 and Q3, but with rate cuts, how do you see the trend? What percent of your book, is USD? Can you remind us of the impact on NII from a 25 basis point rate cut? Sujit?
You are right. The margins did improve between the second and the third quarter, and the group margin for the nine-month period was at 2.69%. We generally expect that the benchmark interest rates would continue to decrease in coming months, although at this stage, the size of each rate cut remains uncertain, both in the Kuwait context and the international context as well. In such a scenario, we do not expect a significant impact on the NIM in the fourth quarter. The full-year NIM, as I said before, is expected to be similar to that of the nine months NIM.
On a sensitivity side, I would expect that the annualized impact of a parallel shift of 25 basis points, that is both on the asset side and liability side, when you take the net interest income for one year, for CBK rate and the international benchmark rates, it would be in the range of 3 to 4 basis points. Depending on the frequency and the size of rate cuts, we could forecast the impact on the net interest income movement.
Okay. Also a few questions on loan growth this year and the guidance for next year. Basically, how do you see loan growth evolving in Q4 and into next year against the backdrop of government initiatives and lower rates? Where do you see growth coming from? When do you expect the project spend to accelerate in line with government priorities? Also, a continuation of the same question. How do the indicators in Kuwait translate into loan growth outlook next year and in the medium term?
Yeah. So, a couple of things with respect to the loan growth. The loan growth that we noted in the last nine months has primarily come from Kuwait and our international network. It is more on the corporate side because the demand for consumer loan in Kuwait was a bit muted. We expect this to change in the coming year when the interest rates decline. Similarly, on the point of view of growth on the basis of projects which are declared by the government. Historically, if you look at the project life cycle, the loan growth has translated on the books after four to six quarters when the projects are awarded. So we would first expect some movement in the trade finance-related activity, followed by on-balance sheet loan growth. So we are a bit far away from loan growth related to projects in the immediate few quarters.
At the same time, we remain very optimistic that the significant project activity would lead to first non-cash business in relations with letter of guarantees, LCs, et cetera, and then later translate into a loan growth. Our base scenario loan growth guidance for the next year would remain in the mid-single digit. However, as the project activity progresses, we could see the loan growth going up to high single digit. But of course, it depends on the timing of the projects and the roll downs by corporate.
Okay, a question on corporate tax and how should we model that going forward?
Yeah. As we know, the Pillar Two or the global minimum tax is applicable for companies with a turnover of more than EUR 750 million. It is expected to be levied from the next year. In most of the countries where we operate, we would have this tax to be paid recently. Even Bahrain has come out with a minimum domestic top-up tax. It is only Kuwait where we are expecting a tax law to be enacted before the beginning of next year. From a point of view of estimating the tax charge, although we do not have any specific information from the Kuwait tax point of view, it would be fair to estimate that our tax bill would double and reach the level of 15%-17% as a tax charge on the pre-tax profits.
Okay. Another question on asset quality. The bank reported a very healthy asset quality improvement. Can you shed some light on the sector and the region?
All right. The improvement in asset quality that we saw has not come from any specific sector or region. We have seen an overall improvement in the NPLs that were classified as such in the previous period. The asset quality is well within our range of 1.5%-2% that we expect as a normal level for the group.
A question on trading income. Third quarter 2024 was high. How much of it are one-off in nature?
The trading income, typically the bank does not have a lot of activity in the trading book. Most of the trading income that came in was a result of better valuations in the third quarter compared to the second quarter. There are no one-off instances in the trading book.
On Saudi, have you been placing deposits into the Saudi Arabia banking system at SAIBOR? Can you comment on your Saudi strategy? Is it part of syndicated loans to the corporate or GRE sector?
As regards the Saudi or any other international branch or subsidiary that we operate, these are mainly self-funded. Any deposits that have been placed in SAIBOR are funded from the local operations in Saudi Arabia. As regards the strategy to increase our presence in the wealth management business, that has been an ongoing strategy for the last two years, and we are very much focused on increasing our competency in offering wealth management services to private banking individuals beyond Kuwait, and Saudi is a very focused market for us. With respect to corporate banking, we are looking at having credit facilities and other trade finance activities with different companies, some of them GRE, some of them very high-quality corporates, keeping in mind our conservative approach to credit that has resulted in lower NPLs for the group.
A couple of questions on the mortgage law and the increase in the backlog of housing applications and the government plans. Start off.
Well, this has been the case for a long time. It is very much related to the mortgage law. The previous parliament canceled previous housing-related laws and initiatives that positioned the law closer to getting passed. But the political scene, of course, has changed now. Given the growing number of housing applications, which reached, as mentioned, 97,000 and more as of September 2024, there is an increased likelihood that this law will be passed to address this financing mechanism issue going forward. I would say that, looking at the political scene recently in Kuwait, I think there is no solution but to pass this law, and the sooner, the better.
Okay. Are financial institution deposits very different in nature from customer deposits? Why are they disclosed separately? Are financial institution deposits shorter term and from outside Kuwait? Sujit.
Okay. When you look at our acceptances and deposits, they come from three main drivers. One is interbank acceptances, the second is customer deposits, and deposits from financial institutions. These are non-banking financial institutions. While customer deposits base is very much of a retail nature for the bank, it also includes a set of government-related entities and private corporates across our network. Financial institution deposits are shown separately in the balance sheet for better disclosure because some of the analysts want to see the pure customer deposits, which is non-bank and non-financial deposits, separately. We think it is one of the best practice to show bank financial deposits and customer deposits separately. The financial institution deposits are in nature of a medium to long-term and comprise both Kuwaiti and overseas financial institutions.
Okay. More questions on loan growth this year and expectations next year. I think we have covered.
We covered that comprehensively.
Could you please add some color on what segments are driving the increasing credit demand and what do you see in coming quarters that makes you think momentum will continue? I think with the exception of the sectors, we covered that as well.
Yeah, it was covered.
The sectors.
From the sectors point of view, the demand that we saw in the nine months of this year mainly came from corporate relationships in Kuwait and throughout our network, be it regional branches and subsidiaries or those in Europe, U.S., and the U.K.
Can you please comment on how you think to approach the AT1 call option that is coming in August next year?
The AT1 call option is coming in the second half of next year. It is a bit too early to have a definite answer on that. But one important aspect is that historically, the bank has been very market-friendly when it comes to call options, and we don't think there is a reason to change this in future.
A question on capital. Is your buffer over CET1 by year-end 2024 of approximately 150 basis points a comfortable level considering that credit demand could improve in 2025?
As we assess our internal buffer over CET1, 150 basis points is what we are comfortable with, and it is within our risk appetite as such. Of course, this buffer is reviewed periodically, but for now, the bank is comfortable with 150 basis points.
Mortgage low is covered. Can we expect OpEx to grow at the current rate in 2025 as well?
Yes. Given our continued investments in digital banking and the resources that are required to roll out different kind of offerings, we would expect a circa 10% increase in the cost in the coming year as well.
Last question we have on the list. Can you maintain the current cost of risk level next year too?
We have given a guidance of a cost of risk between 35-40 basis points. As things stand currently, there is a lot of uncertainty with respect to geopolitical situation or macroeconomic environment. From a guidance point of view, we would aim to have a cost of risk in the region of 40 basis points.
Another question came in. What is the impact roughly of interim profits on your CET1 ratio in the nine months?
The interim profits are not included in the CET1, right? We have an issue with that. The way I would answer this is that at the end of the year, we would see our CET1 ratio going back more towards 13% after we declare our results and the full year's dividend.
These are all the questions we have today. Thank you very much for joining us for today's call. Elena, back to you.
Yes. I would like to thank the management team of National Bank of Kuwait for the presentation and all the responses provided. Thank you as well to all the participants for joining today.
Thank you.
Thank you.
Thank you.