Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to National Bank of Kuwait's second quarter 2024 results call. We have with us in the call from National Bank of Kuwait, 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 so that he can begin with the presentation. Thank you.
Thank you, Elena. Good afternoon, everyone, and thank you for joining us. As we always do, 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 expectations are subject to risks and uncertainties that may cause actual results to differ materially and may adversely affect the outcomes 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 as on the screen. Today's call will follow our usual agenda and structure. Our Vice Chairman and Group CEO, Mr. Isam Al-Sager, will start the call by giving some opening remarks on the operating environment in Kuwait and globally, as well as giving some 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 them to our investor relation email address and we will answer them as soon as possible. Today's presentation is also available on our website for your convenience and reference. Now, let me hand over the call to Mr. Isam for his opening remarks.
Thank you, Amir. Good afternoon, everyone. I am pleased to join you today for our second quarter and first-half earnings call for 2024. In light of the recent divergence in economic performance globally, market expectation for the global economic outlook have varied. Higher than expected level of inflation still exists while geopolitical tension are accelerating, including cautious approach to monetary easing for the remainder of the year. Regionally, growth in GCC area is expected to remain solid as oil prices continue to feed physical positions of GCC governments and supporting strides in its diversification agendas and capital expenditure plan.
In Kuwait, inflation remains stable as consumer spending, business credit, and project activity recorded mandated growth. We forecasted a modern deceleration of inflation to 3% on average for a year as inflexibility in some price areas persist. GDP growth, on the other hand, is to witness muted growth on back of oil production cut mandates, mandated by OPEC+ members, while improvement thus far of consumer spending, business credit, real estate projects activity may provide ground for optimism to non-oil growth ahead.
Furthermore, project activity rebounded significantly in the second quarter, growing at fivefold quarter-on-quarter. This is driven mainly by activity related to infrastructure work in the construction, transportation, and power and water sector. The project award outlook for the remainder of 2024 is promising with project values at around KD 7 billion in the pipeline for the year. As for NBK, we continue implementing our diversification strategy and utilizing our adaptable business model against the volatile macroeconomic environment to maintain our strong performance. We reported net profit of KD 292.4 million in the first half of the year, growing by 6.2%.
As for the three months ending June 2024, NBK posted year-on-year growth of 3.3% in net profit to reach KD 145.8 million. Moreover, NBK's Board of Directors has approved its third semi-annual cash dividend distribution of KD 0.010 per year. Growing core banking income continues to boost our performance and is well diversified across our business segments. Our diversification strategy continues to prove its success and effectiveness in mitigating risk and maximizing efficiency.
We achieved a growth of 8.2% year-on-year in net operating income to reach KD 612.4 million. As we continue to stride fast our commitment toward long-term value creation for stakeholders and tailored customer experience to our clients. We continue to leverage our strong fundamental and strategic investment in technology and innovation to maximize return and optimize cost. Our return on average asset for the reporting period reached 1.55%, whereas our return on average equity reached 15%.
In Kuwait, we continued to focus on optimizing our market position in key sectors, expanding our customer base with digital products, and offering excellent customer service. Leading Kuwait Infrastructure program is our top priority as we expect financing national mega projects. Moreover, our Islamic banking arm, Boubyan Bank, along with our international operation, both continue to support our diversification strategy with their growing contribution to the group. Additionally, our wealth management business continued expanding globally to position itself as a major player in the wealth management industry.
Our leadership in the ESG space was further strengthened with the recent issuance of $500 million green bond, the first green bond issuance from a Kuwaiti financial institution. We will continue contributing to the sustainable development of our commitments and providing the support for our clients' sustainable and transition finance initiatives. With that, I will conclude my comments and leave you with my colleague, Sujit Ronghe, our group CFO, to cover quarter and mid-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 second quarter and the first six months of 2024. We have announced a net profit of KD 292.4 million for the first half of 2024, a 6.2% increase over the corresponding period of 2023. These results stem from a strong operating performance by the group and demonstrate the continued growth of our business. Before going into the details of financial results, I would first like to say a few words regarding the overall operating environment during the current reporting period.
The continued higher interest rate regime and an overall stable operating environment in Kuwait have benefited the bank in general. Inflationary conditions in the U.S.A. and some other advanced economies have improved over time, although benchmark interest rates are generally expected to decrease only in the later months of the year. At the same time, geopolitical developments in the region and beyond have affected the global operating environment unfavorably.
Now turning to financial results for first half of 2024. As shown on the top left of this slide, net profit at KD 292.4 million reflects a year-on-year growth of KD 17.1 million, that is 6.2%. Underlying drivers for the robust bottom-line performance are a combination of year-on-year growth in business volumes, relatively higher interest rates, and a stronger operating performance. Group loans and advances grew year-on-year by 5.4%. Investment securities also contributed strongly to group assets with a growth of 12.3% versus June 2023.
The top right chart reflects operating surplus, that is profit before provisions and tax, for the current half year at KD 385.8 million, a growth of KD 26.6 million, +7.4% over 1H 2023. Net operating income increased by KD 46.5 million, 8.2%+, whilst operating expenses grew by KD 19.9 million, +9.6% over the last year. The second quarter 2024 net profit at KD 145.8 million was at par with the previous quarter. 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 cost shortly. Moving to the next slide. We will now look at the net interest income and drivers behind its performance. The chart at top left reflects the net interest income of KD 482.3 million for 1H 2024, a growth of 11.6% over 2023. NII largely benefited from higher interest rates, 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 KD 1.6 billion, that is 4.5% from June 2023 to reach KD 36.1 billion. We can see from the chart at bottom left that average NIM for 1H 2024 at 2.69% reflects an improvement of 17 basis points over 1H 2023, driven by a higher yield despite increased funding costs. Group yield and funding cost for the current half year were 6.25% and 4.02% respectively. The higher funding cost relative to 1H 2023 results from repricing of deposits at increased market rates and a limited migration of lower cost deposits to time deposits.
However, funding cost has trended downwards recently when compared to the last two quarters. Also, 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 17 basis points year-on-year increase in NIM from 2.52%- 2.69% in 1H 2024. Loans and other interest-earning assets backed by a stronger year-on-year growth in volumes and interest rates contributed 75 basis points to the NIM. Higher funding costs negatively affected the NIM by 58 basis points.
Moving to the next slide. As we can see on the top left of this slide, total non-interest income at KD 130.1 million for first half of 2024 was KD 3.7 million lower than the comparable period in 2023. Fees and commission income was strong at KD 101.1 million, reflecting robust contributions across different lines of business and geographies. FX income was stable at KD 17.5 million, whereas other non-interest income sources, mainly investment income at KD 11.5 million, reflected a year-on-year decrease due to lower valuations relative to the previous year.
Our fees and commission income are from a well-diversified pool of geographies and lines of business. Also, major sources of non-interest income are core banking activities in respect of business-related factors. Turning now to operating expenses reflected in the top right hand of the slide. Total operating expenses for 1H 2024 at KD 226.6 million were 9.6% higher than the previous year. The cost growth reflects increased activity levels at Kuwait and across the group's network, as well as investments in key business initiatives, digital technologies, and processes.
This enables the group to offer best-in-class service to its customers and optimize resources to improve operational efficiency. NBK's digital channels and products continue to play a vital role in attracting and servicing customers with increased volume of electronic transactions. We also continue to press ahead on selective product offerings in certain geographies through our global wealth management business, now known as NBK Wealth, and Islamic banking through Boubyan Bank and by leveraging our overseas network.
As a result of the marked growth in operating income and controlled cost growth, the 1H cost-to-income ratio was at 37% compared to 36.5% 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 1H 2024 amounted to KD 42.7 million, a decrease of KD 5.3 million over 1H 2023. KD 46.6 million of the current six months' charge was for provisions for credit facilities.
Specific provision of KD 36 million was in course of normal business activities at Kuwait and overseas locations. KD 10.7 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 KD 4 million towards ECL and other impairment losses due to lower net provision requirement for non-credit financial assets. The cost of risk for 1H 2024 was 40 basis points compared to 44 basis points in 1H 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 profit, provides a strong credit loss absorption capacity. Moving to the next slide. On this slide, I would like to expand on the matter of earnings diversification of the Group through different lines of business. NBK Group continues to benefit from its unique position amongst Kuwaiti banks in terms of geographical spread through international banking and its ability to conduct business in both conventional and Islamic banking.
NBK's business segments serve as main pillars of diversification, providing strong competitive advantage and a significant degree of resilience to Group earnings. You would note that NBK's consumer banking contributed 20% and 16% 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 profit, reflecting a strong operating performance.
The Group's Islamic banking subsidiary, Boubyan Bank, delivered a net profit of KD 49.6 million, up 20.2% on 1H 2023, boosted by a strong growth of 10.5% in operating surplus and lower provisions for credit losses. NBK Wealth contributed 9% and 11% of 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, chart at the bottom right corner, you would note that International Banking and Boubyan Bank contributed 40% and 24% respectively to the Group's total assets, enforcing 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 37.7 billion as of June 2024, a 4.4% year-on-year growth.
The recent devaluation of EGP, that is Egyptian pound, in March 2024, has adversely affected the KD value of balance sheet items and resulted in lower growth percentage. Group loans and advances at KD 22.7 billion registered a growth of KD 1.2 billion, that is 5.4% from June 2023 and 2% during the current half year. Loan growth was achieved at Kuwait and at international locations in both conventional and Islamic banking. Similarly, investment securities reflected a year-on-year growth of 12.3% to reach KD 6.9 billion. Customer deposits, that is non-bank and non-FI deposits, at KD 21.8 billion reflect a growth of 7.6%.
The Group has continued to benefit from its strong base of core financial retail deposits. As can be expected in a rising interest rate scenario, we noted a limited migration from lower cost deposits to time deposits. NBK's stable deposit base reflects a sustained focus on deposit gathering aspects of our business, leveraging our long-standing ability to capitalize on the Group's strong brand, customer appeal, and credit ratings. Customer deposits comprise a healthy 68% of total funding mix of the Group.
I want to highlight that the Group continues to maintain healthy liquidity levels and comfortably exceeds the minimum requirement of Basel III ratios. Moving to the next slide. We will now look at the impact 1H 2024 financial results had on certain key performance metrics. The return on average equity for the first half 2024 remains steady at 15%. Similarly, return on average assets now stands at 1.55% compared to 1.53% in the first half of 2023. At 16.8%, the total capital adequacy ratio remains strong and stable well above the regulatory minimum, with CET1 and tier one ratios at 12.5% and 14.5% respectively.
It is important to note that the regulatory capital does not include interim profits, but the interim dividend of KD 83 million, that is KD 0.010 per share, is deducted for capital adequacy ratio calculation. As regards asset quality, NPL ratio stands at 1.52% compared to 1.38% as of December 2023. Loan loss ratio, coverage ratio is at 248%, reflecting conservative provisioning policy of the Group. On to the next slide. On this slide, I would like to discuss expected credit losses, that is ECL, on credit facilities as per IFRS 9, calculated in accordance with CBK guidelines.
As per the regime adopted by CBK, banks calculate the credit provisions required, that is the amount in the balance sheet as per CBK instructions, and compare it with 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 here to note that CBK guidelines for calculating ECL on credit facilities are as per IFRS 9, are on a more conservative basis compared to the original accounting standard.
The key chart on this slide at bottom right reflects that ECL provision required as at June 2024 was KD 617 million, similar to December 2023. Although IFRS 9 ECL and CBK provisions are two different regimes and should not be compared as such, currently, the balance sheet provision as per CBK instructions exceeds the ECL by KD 314 million. This provides ample cushion to 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 1H 2024.
As mentioned earlier, NBK's strong operating performance with a healthy balance sheet, comfortable liquidity levels and a strong capital base continued in H1 2024. However, in light of the ongoing regional and international geopolitics, we remain cautiously optimistic that the overall operating environment, although challenging, will remain generally stable during the remainder of 2024. Now turning to the guidance for the year ahead. 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 mid-single digit range.
As regards NIM, as mentioned earlier, 1H 2024 NIM has improved to 2.69%, benefiting from stronger volumes and higher interest rates compared to 1H 2023. The general expectation is that benchmark interest rates, especially the U.S. Fed, will start declining from September 2024. In such an environment, we expect the full year 2024 NIM to be stable, possibly a few basis points above the 2023 NIM of 2.59%. Coming to the operating expenses, the first half of 2024 year-on-year cost growth was 9.6%. This is a good indication of the expected rate of increase for the full year 2024 as the Group continues to invest in human resources and digital technologies.
Consequently, we should expect the 2024 cost-to-income ratio to be in high- 30s. The cost of risk was 40 basis points during the current half year. We are cautiously optimistic of an overall stable operating environment and as such, expect the full year cost of risk to be between 40 basis points and 50 basis points. However, given the overall geopolitical and macroeconomic uncertainties, it would not be prudent to give 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. This ends my presentation. Thank you very much. Amir?
Thank you, Sujit. We will put the call on hold for a few seconds, to allow people to write their questions in the Q&A area. We will come back once we receive some questions for responses. Okay. We will start with the questions. The first question talks about international operations. Can you share some more information on your international operations, such as Egypt, and how do you see them perform going forward? We will start with Egypt and then cover the rest of the questions. Isam?
I will answer that. The Egyptian economy benefited recently with the government closing several foreign investment deals and reaching ground, the IMF program. This reflected positively on the effort to restore some of the confidence in the Egyptian economy and specifically on the currency. Reforms, including sale of government assets, are going in the right direction and an effort to continue attracting future foreign inflow to the country. In the domestic terms, operation performance in our Egyptian subsidiary remains among the most profitable with promising returns. It is worth to mention that we maintain and committed to grow organically in Egypt, which also would seize the opportunity to grow its contribution to the group, which currently stands at less than 5% of our total assets.
As regard the international operations, the international operations of NBK have been a very important pillar for the bank's diversification strategy, as I mentioned in my earlier discussion. International banking contributes about 24%, 25% of the total income, and a similar amount typically for the net profit. As regards to the assets, the international banking group contributes to about 40% of the total assets. All in all, it is very much an area of focus. Our presence in the region or in Europe or in the U.S. is very important driver, not only from the point of view of booking assets, but also serves as an important franchise for collection of deposits and funding. Overall, we see that international as a growing contributor to the group's assets and profits.
Okay. Second question is on NIMs. Based on your guidance, you expect 10 basis point decline in NIMs in second half of 2024. Is that solely driven by lower USD rates? How many rate cuts do you assume, both by the Fed and by the CBK?
Yeah. I mentioned in my discussion that the NIM is expected to be stable and possibly a few basis points above the 2.59%, 2.6% that we saw in the last year. In this projection we are expecting probably one to two interest rate cuts, both on the U.S. side and the CBK side. But one thing to note is that on its way up, the Central Bank discount rate did not match the increases that we saw in the Fed. That is why there is a bit of uncertainty with respect to the way the Central Bank of Kuwait would reduce the interest rates or the pace of reduction. The exact impact of this remains to be seen in coming quarters.
Question on capital. How do you look at the group excess capital buffer, and what is your internal minimum level?
We think that we are adequately capitalized in terms of our regulatory requirement and also our internal buffer. Typically, we consider 1.5%-2% buffer at a total CAR level as a normal buffer, especially at the year-end.
Are you seeing any change in trends with regards to retail lending demand?
The demand or the customer appetite for retail loans remains to be a bit muted, and we are not seeing a change because the interest rates have not moved. It is possible that once the interest rates start declining, we could see uptick in the retail credit demand.
I missed a part of a previous question. Do you foresee more active international expansions?
Well, NBK will continue to be competitive in the domestic market. On the international scene, outside Kuwait, MENA, and specifically the GCC remain our focus market, especially in Saudi Arabia. We are tapping the Saudi market at all fronts as we are committed to growing our operation there with the opportunities that aligns with our strategic goals. Similarly, I would mention that wealth management business is of great importance for our strategic ambitions as we continue to expand with the launch of NBK Wealth brands also.
On the cost side, the cost to income ratio is the highest for NBK across Gulf peers. Part of it is driven by strategic investments in technology. Do you have any medium-term target when the efficiency is expected to show improvement trend?
As regards to the cost to income ratio, I think, it has got two aspects. One is the income growth, and one is the cost growth. A lot of our cost spend is basically to improve the digitization of the bank and offer more digital products across our network. So the focus is more towards additional capabilities in terms of customer service, and they may not necessarily bring in the efficiency component, as much in the short run, at least. So in the medium term, we are expecting our cost to income ratio to be in the similar range, especially when we see that the income could be impacted by lower interest rate cycle.
A question on government projects. With regards to large government projects, do you expect some of these to be initiated in 2024 or more in 2025?
Well, I would say, what I mentioned before, project activities rebounded significantly in the second quarter, and we feel that it will continue in 2024 and 2025. After solving the parliament, the decision-making is in the hand of the government. It made the decision-making much easier. This has driven implementing and pushing the mega projects significantly. We felt that recently in various sectors. The projects award outlook for the remainder of 2024 is promising, with project value, as I mentioned, to KD 7 billion in the pipeline until the end of the year. There will be further award in 2025 also. Maybe it is too early to give certain numbers at this point of time.
Okay. Does international segment include loans and assets by branches in the GCC, U.A.E., Bahrain, and Saudi Arabia?
Yeah, that is right. International segment includes loans and assets through our branches in the GCC and our international operations in U.K., France, U.S., Singapore, China, et c.
Okay. Are there any updates on the debt law and mortgage law and corporate taxes?
Well, speaking on the debt law, no material development on the topic took place. But the government acknowledged its importance while focusing more on reform and budget as a step to adjust imbalances. Mortgage law, the late parliament passes underlying laws and initiatives on that law. We see more chances for this law to be passed within outstanding housing applications approaching more than 100,000, putting more pressure on the need for housing finance to be implemented.
Okay. Question on the corporate tax side. Sujit, you want to-
Yeah. On the corporate tax side, as you would know, Kuwait has signed up to be a part of the inclusive framework of the OECD, and as we understand from our discussions with the Ministry of Finance, a corporate tax law of some kind is actively being drafted, and we are expecting something to be in place by the end of this year.
Okay. Fee income in the first half was broadly flat versus first half 2023. Specific drivers for the slowdown?
Yes. During the current six-month period, we noted that although fee income remains a strong contributor to the top line, the year-on-year growth was somewhat muted. The lower growth rate can be attributed to some timing differences, certain one-off fees in the previous years, and also a lower retail spending that we have noted during the first six months. We are, however, hopeful that the fee income would reflect a mid-single-digit growth for the full year of 2024.
Okay. There's another question on projects. I think we answered most of that. But then the follow-up on it is mainly on use of capping expenditure. But I think the point here is that we do believe that the capping of the expenditure would mostly focus on current expenditure rather than CapEx. We see the government is awarding large mega projects. So hopefully, what we would see forward is more capping on the current side and an expansion on the CapEx side, which definitely would feed into a non-Oil GDP growth outcome. What is your target loan growth rate in Saudi Arabia or any target as share total business activities? Sujit?
Well, Saudi Arabia remains an important location in terms of our international operations. We are, as usual, very conservative and very specific with respect to the areas that we want and the companies we would want to lend in Saudi Arabia. So, it would be in keeping with our risk management practices. Also, in Saudi Arabia, we are also focusing on the growth of our wealth management business through NBK Wealth. We have a subsidiary, a commercial banking subsidiary in Saudi Arabia, and we are expecting to conduct more business with respect to offering funds and other wealth management services in Saudi Arabia.
As the government may look at fiscal reforms and potential cuts to current spending, do you see this as potential negative to consumer spending and consumer credit?
I think there are different aspects of this question. When you come to consumer spending, it may not be directly impacted to the government's potential cuts to spending. In fact, we are seeing with the project award is the spending could increase, and there could be a trickle-down effect along the way. Similarly, it would give rise to increased consumer credit, but we would expect that to happen down the line.
Okay. At this point, we do not have any more questions. We have answered all the questions that we received through the platform. Thank you very much for attending the call. Back to Elena.
I would like to thank the management team for the presentation and for all the responses provided today. Also, thank you to all the participants for joining the call today.
Thanks.
Have a good day.
Thank you.
Thank you.